<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CENTENNIAL HEALTHCARE
CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials:
Check box if any part of the fee is offset as provided by Exchange Act Rule
/ / 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
400 PERIMETER CENTER TERRACE, SUITE 650
ATLANTA, GEORGIA 30346
March 18, 1999
Dear Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Centennial HealthCare Corporation (the "Company" or
"Centennial") to be held on April 15, 1999, at 10:00 a.m., local time, at The
South Terraces Conference Center Classroom, 115 Perimeter Center Place, Atlanta,
Georgia 30346. The purpose of the Special Meeting is to consider and vote upon a
merger of Centennial (the "Merger"). If you vote to approve the Merger and the
Merger is consummated, you will receive $16.00 in cash for each share of
Centennial common stock, $.01 par value per share ("Common Stock"), that you own
at the effective time of the Merger. You will not have any other equity interest
in Centennial or the company created by the Merger.
Centennial HealthCare Holdings Corporation, a Delaware corporation (the
"Parent") formed Cougar Acquisition Corp., a Georgia corporation (the
"Acquiror"), to merge with and into Centennial. Centennial will be the surviving
corporation after the Merger and will be a wholly-owned subsidiary of the
Parent. Centennial will no longer have public shareholders, have its stock
quoted on the Nasdaq National Market or file periodic reports with the
Securities and Exchange Commission.
Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS VIII") formed and
currently owns all of the outstanding capital stock of the Parent. Welsh,
Carson, Anderson & Stowe VI, L.P. ("WCAS VI") is a Centennial shareholder that
with WCAS Capital Partners II, L.P. ("WCAS CP II") currently owns 23.2% of the
Common Stock. WCAS VIII's general partner is a limited liability company whose
managing members are also individual general partners of the general partner of
WCAS VI. WCAS Healthcare Partners, L.P. ("Healthcare Partners") is a current
Centennial shareholder, with the general partners of its general partner serving
as two of the general partners of the general partner of WCAS VI.
WCAS VIII and WCAS Capital Partners III, L.P. ("WCAS CP III") have agreed
with the individual managing members of the general partner of WCAS VIII
(including Andrew M. Paul, a director of Centennial), all of whom are employees
of WCA Management Corporation ("WCA Management"), and two other employees of WCA
Management, Healthcare Partners, and Alan C. Dahl, Kent C. Fosha, Sr., Lawrence
W. Lepley, Jr. and myself, officers of Centennial (and with respect to Alan C.
Dahl and myself, directors of Centennial) (collectively, the "Management
Group"), to acquire Centennial through the Merger by owning shares of common
stock of the Parent ("Parent Common Stock"). After the Merger, all of the Common
Stock will be owned by the Parent. WCAS VIII, WCAS CP III, Healthcare Partners,
these individual managing members of WCAS VIII (including Mr. Paul) and
employees of WCA Management (collectively, the WCAS Group") and the Management
Group (collectively the "Investor Group"), will own Parent Common Stock.
Immediately before the Merger is consummated, Messrs. Dahl, Fosha, Lepley
and myself will contribute a total of 508,852 shares of Common Stock to the
Parent in return for 4,070,816 shares of Parent Common Stock and will receive
$16.00 a share for Common Stock not contributed to the Parent. Healthcare
Partners will contribute all of its 81,384 shares of Common Stock for 651,072
shares of Parent Common Stock. The individual managing members of WCAS VIII and
employees of WCA Management, including Mr. Paul, will contribute shares of
Common Stock for shares of Parent Common Stock or purchase shares of Parent
Common Stock. WCAS VIII and WCAS CP III will purchase shares of Parent Common
Stock or subordinated notes of the Parent for approximately $250 million. These
funds will be used to purchase shares of Common Stock for $16.00 a share in the
Merger, to pay the costs and expenses of the transaction, repay debt and for
general corporate purposes after the Merger. WCAS VI and WCAS CP II will not
contribute any shares of Common Stock for Parent Common Stock and will receive
$16.00 a share for each share of Common Stock owned before the Merger.
Centennial will pay WCA Management $3 million for financial advisory services
provided to WCAS VIII and WCAS CP III in connection with the
<PAGE>
structuring of the Merger and the related financing transactions (including the
equity and subordinated debt financing of the Parent and the Acquiror and the
amendment of the Company's existing senior credit facility). This fee will be
credited against amounts otherwise payable to WCA Management by WCAS VIII and
WCAS CP III.
In the Merger, all Centennial option holders, including Messrs. Dahl, Fosha,
Lepley and myself, will receive cash for the difference between $16.00 a share
and the exercise price of their existing options, will receive new options to
purchase Parent Common Stock and bonus payments and will continue in their
management positions with Centennial after the Merger.
After the Merger, as shareholders of the Parent, the members of the Investor
Group will continue to have an equity interest in Centennial. The members of the
Investor Group want to continue to own Centennial because they believe that
Centennial's financial prospects over the long-term are good. As a private
company Centennial will be able to make decisions that will negatively affect
current quarter earnings but that will increase the value of the Company's
assets or earnings over the long-term. In a public company setting it is
difficult to make decisions that could negatively affect earnings knowing that
the result of those decisions that could negatively affect earnings knowing that
the result of those decisions could be a significant reduction in per share
price if analysts' short-term earnings expectations are not met or exceeded. If
the Merger is completed, the Investor Group will receive substantial benefits in
the future as long as Centennial is profitable or if Centennial is merged with
or its assets are sold to an acquiror for total consideration in excess of the
total consideration in the Merger. The members of the Investor Group have no
assurance that Centennial will continue to be profitable or that it will
continue to grow through acquisitions or otherwise. The Investor Group will,
however, be subject to the risks inherent in owning stock in a company subject
to changing governmental regulations that could materially and adversely effect
revenues and earnings and in holding stock of a private company with no market
for their shares. The Company projects revenue of $430.1 million and net income
of $16.0 million for 1999.
A special committee of the board of directors of Centennial (the "Special
Committee"), consisting of three directors who are not members of the Management
Group or the WCAS Group, was formed to consider and evaluate the Merger. As
discussed in the enclosed Proxy Statement, the Special Committee approved the
Merger transaction after negotiations with WCAS VIII and did not solicit any
other offers from parties that were not affiliated with management or the WCAS
Group. The Merger Agreement provides that Centennial and its affiliates are not
permitted to initiate or solicit discussions, offers or proposals from a third
party for an alternative transaction to the Merger, unless necessary to allow
the directors to satisfy their fiduciary duties to the shareholders. The Merger
Agreement allows the Company to terminate the Merger Agreement if necessary to
pursue an acquisition proposal with another party that is more favorable to
Centennial's shareholders than the Merger upon payment of a $3.0 million
"breakup" fee to WCAS VIII. The Special Committee has unanimously recommended to
Centennial's board of directors that the Merger and related agreements be
approved by the Company's shareholders. In connection with its evaluation of the
Merger, the Special Committee engaged J.P. Morgan Securities Inc. ("J.P.
Morgan") to act as its financial advisor. J.P. Morgan has rendered its opinion
dated October 22, 1998, and has reconfirmed its opinion as of the date of this
Proxy Statement, that based upon and subject to the assumptions, limitations and
qualifications set forth in such opinion, the cash merger consideration of
$16.00 per share to be received in the Merger is fair from a financial point of
view to the shareholders of the Company (other than the Parent, the Acquiror,
WCAS VI, WCAS CP II and the members of the Investor Group that are Centennial
shareholders). The written opinion of J.P. Morgan, dated as of the date of this
Proxy Statement, is attached as Appendix B to the enclosed Proxy Statement and
should be read carefully and in its entirety by you.
THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS (WITH MR. PAUL ABSTAINING)
BELIEVE THAT THE TERMS OF THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF
THE COMPANY'S SHAREHOLDERS AND RECOMMEND THAT THE SHAREHOLDERS APPROVE THE
MERGER.
Approval of the Merger at the Special Meeting will require the affirmative
vote of holders of (i) a majority of the outstanding shares of Common Stock
entitled to vote at the Special Meeting (the
<PAGE>
"Outstanding Shares Vote Requirement") and (ii) a majority of the shares voted
at the Special Meeting owned by shareholders other than the Investor Group that
are Centennial shareholders, WCAS VI, WCAS CP II, the Acquiror and the Parent
(the "Majority Vote Requirement"). The accompanying Proxy Statement provides a
summary of the proposed Merger and additional information about the parties
involved and their interests. A copy of the Merger Agreement is attached to the
Proxy Statement as Appendix A.
PLEASE GIVE ALL OF THIS INFORMATION YOUR CAREFUL ATTENTION. WHETHER OR NOT
YOU PLAN TO ATTEND, IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE
SPECIAL MEETING. A FAILURE TO VOTE WILL NOT COUNT AS A VOTE AGAINST THE MERGER
WITH RESPECT TO THE MAJORITY VOTE REQUIREMENT BUT WILL COUNT AS A VOTE AGAINST
THE MERGER WITH RESPECT TO THE OUTSTANDING SHARES VOTE REQUIREMENT. ACCORDINGLY,
YOU ARE REQUESTED TO PROMPTLY COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD
AND RETURN IT IN THE ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND. THIS
WILL NOT PREVENT YOU FROM VOTING YOUR SHARES IN PERSON IF YOU LATER CHOOSE TO
ATTEND THE SPECIAL MEETING. IF THE MERGER IS APPROVED BY THE SHAREHOLDERS, AS
SOON AS PRACTICABLE AFTER THE EFFECTIVENESS OF THE MERGER, YOU WILL RECEIVE
INSTRUCTIONS FOR SURRENDERING YOUR CENTENNIAL SHARE CERTIFICATES (IN EXCHANGE
FOR $16.00 IN CASH PER SHARE) AND A LETTER OF TRANSMITTAL TO BE USED FOR THIS
PURPOSE. YOU SHOULD NOT SUBMIT YOUR SHARE CERTIFICATES FOR EXCHANGE UNTIL YOU
HAVE RECEIVED SUCH INSTRUCTIONS AND THE LETTER OF TRANSMITTAL.
Sincerely,
/s/ J. STEPHEN EATON
J. Stephen Eaton
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
400 PERIMETER CENTER TERRACE, SUITE 650
ATLANTA, GEORGIA 30346
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 15, 1999
------------------------
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Centennial HealthCare Corporation, a Georgia corporation (the
"Company" or "Centennial"), will be held on April 15, 1999, at 10:00 a.m., local
time, at The South Terraces Conference Center Classroom, 115 Perimeter Center
Place, Atlanta, Georgia 30346 for the following purposes:
(1) To consider and vote upon a proposal to approve an Agreement and Plan of
Merger, dated as of October 22, 1998 (the "Merger Agreement") pursuant to
which Cougar Acquisition Corp., a newly formed Georgia corporation (the
"Acquiror") and wholly-owned subsidiary of Centennial HealthCare Holdings
Corporation (the "Parent"), will be merged (the "Merger") with and into
Centennial and each outstanding share of Centennial common stock, $.01
par value (the "Common Stock"), will be converted into the right to
receive $16.00 in cash (the "Cash Merger Consideration"), other than
shares held by shareholders who are entitled to and have perfected their
dissenters' appraisal rights and shares held by Centennial and its
subsidiaries, the Acquiror and the Parent (including shares contributed
immediately prior to the Merger to the Parent by members of Centennial's
management and managing members of the general partner of the current
shareholder of Parent and employees of a management company affiliated
with the Parent). A copy of the Merger Agreement is attached as Appendix
A to and is described in the accompanying Proxy Statement.
(2) To consider and act upon such other matters as may properly come before
the Special Meeting or any adjournment or adjournments thereof.
The Board of Directors of the Company has determined that only holders of
Common Stock of record at the close of business on February 26, 1999, will be
entitled to notice of, and to vote at, the Special Meeting or any adjournment or
adjournments thereof. A form of proxy and a Proxy Statement containing more
detailed information with respect to the matters to be considered at the Special
Meeting accompany and form a part of this notice.
<TABLE>
<S> <C> <C>
By order of the Board of Directors,
/s/ DARYL R. GRISWOLD
-----------------------------------------
DARYL R. GRISWOLD
ASSISTANT SECRETARY
</TABLE>
Atlanta, Georgia
March 18, 1999
<PAGE>
WHETHER OR NOT YOU ARE ABLE TO ATTEND THE MEETING, PLEASE SIGN, DATE AND
RETURN THE ACCOMPANYING PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. PLEASE DO NOT SEND IN ANY
CERTIFICATES FOR YOUR SHARES AT THIS TIME.
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
THE MERGER NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Any shareholder shall have the right to dissent from the Merger and to
receive payment of the "fair value" of his or her shares upon compliance with
the procedures set forth in Article 13 of the Georgia Business Corporation Code.
The Company will determine "fair value" for dissenting shares based on the value
of the shares immediately before the consummation of the Merger, excluding any
appreciation or depreciation in anticipation of the Merger. If the Company and
the dissenting shareholder cannot agree on the "fair value" for the holder's
shares, the Superior Court of DeKalb County, Georgia will determine the "fair
value". In order to comply with Article 13, a dissenting shareholder must
deliver written notice, before the Special Meeting, of his or her intent to
demand payment for his or her Common Stock. The payment demand must be mailed or
delivered to the attention of Secretary of the Company at 400 Perimeter Center,
Terrace, Suite 650, Atlanta, Georgia 30346. The written payment demand must
specify the shareholder's name and mailing address, the number of shares of
Common Stock owned, and that the shareholder is thereby demanding payment for
his or her shares. Voting against, abstaining from voting or failing to vote on
the Merger will not constitute the required demand for payment. See "RIGHTS OF
DISSENTING SHAREHOLDERS" in the Proxy Statement that accompanies this notice and
the full text of Article 13 of the Georgia Business Corporation Code, which is
attached as Appendix C and is described in the accompanying Proxy Statement.
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
400 PERIMETER CENTER TERRACE, SUITE 650
ATLANTA, GEORGIA 30346
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 15, 1999
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will happen in the Merger?
A: In the Merger, the Acquiror will be merged with and into Centennial with
Centennial being the surviving corporation (the "Surviving Corporation"). All
shareholders of Centennial at the time of the Merger, other than Centennial and
its subsidiaries, the Parent and the Acquiror and shareholders who exercise
their dissenters' appraisal rights, will receive a cash payment for their
outstanding shares of Common Stock. Immediately before the Merger is completed,
members of the Investor Group that are shareholders of Centennial before the
Merger will contribute some or all of their shares of Common Stock to the Parent
and receive Parent Common Stock in exchange and will not receive cash for the
shares that are contributed for Parent Common Stock. After the Merger,
Centennial will become a privately held company owned by the Investor Group. To
review the structure of the Merger in greater detail, see pages 38 through 42.
Q: What risks are associated with the Merger for shareholders who are not
members of the Investor Group?
A: Upon completion of the Merger, you will no longer have an equity interest in
Centennial and will no longer participate in any future earnings or growth of
Centennial. You may receive a greater return if Centennial remains a public
company rather than entering into the Merger transaction. A third party other
than the Investor Group might offer greater than $16.00 per share in a future
transaction. Also, the "fair value" of any dissenting shares has not been
determined and may be greater than $16.00 per share. To review the effects of
the Merger, see pages 34 through 35. To review the rights of dissenting
shareholders, see pages 44 through 45.
Q: Why is Centennial being acquired?
A: The Company's Board of Directors believes that the acquisition of Centennial
is in the best interests of shareholders of Centennial other than the Parent,
the Acquiror and the Investor Group and that as a private company, Centennial
will have greater operating flexibility to focus on enhancing value by
emphasizing growth and operating cash flow. To review the background and reasons
for the Merger in greater detail, see pages 13 through 19.
Q: Why was the Special Committee formed?
A: Because directors of Centennial who are members of the Management Group or
the WCAS Group have an interest in the Merger, the Centennial Board of Directors
(the "Board") appointed a special committee of directors who are not members of
management or managing members or general partners of the general partners of
WCAS VI, WCAS CP II, Healthcare Partners, WCAS VIII or WCAS CP III (the "Special
Committee") to review and evaluate the proposed transaction. The Special
Committee has determined that the Merger is fair to and in the best interests of
the Centennial shareholders, other than members of the Investor Group, WCAS VI
or WCAS CP II.
i
<PAGE>
Q: What will I receive in the Merger?
A: You will receive $16.00 in cash, without interest, for each share of
Centennial Common Stock that you own. This is the "Cash Merger Consideration."
For example: If you own 100 shares of Centennial Common Stock, upon completion
of the Merger you will receive $1,600.00 in cash.
Q: When do you expect the Merger to be completed?
A: We are working to complete the Merger by April 15, 1999.
Q: What are the tax consequences of the Merger to me?
A: The receipt of the Cash Merger Consideration by you will be a taxable
transaction for federal income tax purposes. To review the federal income tax
consequences to you in greater detail, see pages 43 through 44.
Your tax consequences will depend on your personal situation. You should consult
your tax advisors for a full understanding of the tax consequences of the Merger
to you.
Q: What am I being asked to vote upon?
A: You are being asked to approve and adopt the Merger Agreement, which provides
for the acquisition of Centennial by the Parent. After the Merger, Centennial
will become a privately held company and you will no longer own an equity
interest in Centennial.
The Special Committee has unanimously approved and adopted the Merger, and the
Board (with Mr. Paul abstaining) has approved and adopted the Merger, and the
Special Committee and the Board (with Mr. Paul abstaining) recommend voting FOR
the approval and adoption of the Merger Agreement.
Q: What do I need to do now?
A: Just indicate on your proxy card how you want to vote, sign, date and mail it
in the enclosed envelope as soon as possible, so that your shares will be
represented at the meeting.
Approval of the proposal requires the affirmative vote of (i) a majority of the
outstanding shares of Common Stock as the Outstanding Shares Vote Requirement
and (ii) a majority of the shares of Common Stock voted at the meeting other
than shares owned by members of the Investor Group who are shareholders of
Centennial, WCAS VI, WCAS CP II, the Parent and the Acquiror ("Non-Affiliated
Shareholders") as the Majority Vote Requirement. A failure to vote or a vote to
abstain will have the same legal effect as a vote against the Merger with
respect to the Outstanding Shares Vote Requirement but will have no effect with
respect to the Majority Vote Requirement.
The Special Meeting will take place on April 15, 1999 at 10:00 a.m., local time,
at The South Terraces Conference Center Classroom, 115 Perimeter Center Place,
Atlanta, Georgia 30346. You may attend the Special Meeting and vote your shares
in person, rather than voting by proxy. In addition, you may withdraw your proxy
up to and including the day of the Special Meeting and either change your vote
or attend the Special Meeting and vote in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares of Common Stock only if you provide
instructions on how to vote. You should instruct your broker how to vote your
shares, following the directions your broker provides. If you do not provide
instructions to your broker, your shares will not be voted and they will be
counted as votes against the proposal to approve and adopt the Merger Agreement
with respect to the Outstanding Shares Vote Requirement.
Q: Should I send in my stock certificates now?
A: No. After the Merger is completed we will send you written instructions for
exchanging your Common Stock certificates for the Cash Merger Consideration.
ii
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this document, or if you would like
to ask any additional questions about the Merger, you should contact:
Alan C. Dahl
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite
650
Atlanta, Georgia 30346
Telephone: 770-698-9040
iii
<PAGE>
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
THIS PROXY STATEMENT AND OTHER STATEMENTS MADE FROM TIME TO TIME BY
CENTENNIAL, THE PARENT, THE ACQUIROR OR THEIR REPRESENTATIVES CONTAIN
FORWARD-LOOKING STATEMENTS. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF CENTENNIAL, THE PARENT AND THE
ACQUIROR AND MEMBERS OF THEIR RESPECTIVE MANAGEMENT TEAMS, AS WELL AS THE
ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. SUCH FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT OF
CENTENNIAL, THE PARENT AND THE ACQUIROR THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THE RISKS DETAILED HEREIN AND THOSE FACTORS SET FORTH FROM TIME TO
TIME IN REPORTS OF CENTENNIAL FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE PROTECTION OF THE LIABILITY SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
CONTAINED IN THE PRIVATE SECURITIES REFORM ACT OF 1995 IS NOT APPLICABLE TO THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT OR IN STATEMENTS INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER................................................ i
WHO CAN HELP ANSWER YOUR QUESTIONS.................................................... iii
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION........................... iv
SUMMARY............................................................................... 1
The Companies..................................................................... 1
The Special Meeting............................................................... 1
Record Date; Voting Power......................................................... 1
Votes Required.................................................................... 2
Recommendations................................................................... 2
Opinion of Financial Advisor...................................................... 2
Terms of the Merger Agreement..................................................... 2
Share Ownership of the Parent following the Merger................................ 3
Accounting Treatment.............................................................. 4
Conflicts of Interest............................................................. 4
Regulatory Approvals.............................................................. 5
Dissenters' Appraisal Rights...................................................... 5
Members of the Investor Group..................................................... 6
Description of Ownership of Centennial Before and after the Merger................ 7
Historical Market Information..................................................... 8
Selected Consolidated Financial Data of the Company............................... 9
Company Projections............................................................... 11
SPECIAL FACTORS....................................................................... 13
Background of the Merger.......................................................... 13
The Special Committee's and the Board's Recommendation............................ 20
Opinion of Financial Advisor...................................................... 25
Purpose and Reasons of the Investor Group for the Merger.......................... 28
Position of the Investor Group, the Parent, the Acquiror and the Company as to
Fairness of the Merger........................................................... 29
Conflicts of Interest............................................................. 30
Certain Effects of the Merger..................................................... 35
Financing of the Merger........................................................... 36
Conduct of Centennial's Business After the Merger................................. 36
THE SPECIAL MEETING................................................................... 37
Date, Time and Place of the Special Meeting....................................... 37
Proxy Solicitation................................................................ 37
Record Date and Quorum Requirement................................................ 37
Voting Procedures................................................................. 37
Voting and Revocation of Proxies.................................................. 38
Effective Time of the Merger and Payment for Shares............................... 38
Other Matters to be Considered.................................................... 38
THE MERGER............................................................................ 39
Terms of the Merger Agreement..................................................... 39
Accounting Treatment.............................................................. 43
Estimated Fees and Expenses of the Merger......................................... 44
RIGHTS OF DISSENTING SHAREHOLDERS..................................................... 45
FEDERAL INCOME TAX CONSEQUENCES....................................................... 46
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
AND OTHERS.......................................................................... 48
CERTAIN INFORMATION CONCERNING THE PARENT, THE ACQUIROR
AND THE INVESTOR GROUP.............................................................. 51
PURCHASES OF COMMON STOCK BY CERTAIN PERSONS.......................................... 54
Transactions by the WCAS Group.................................................... 54
Transactions by Management Investors.............................................. 55
INDEPENDENT AUDITORS.................................................................. 56
WHERE YOU CAN FIND MORE INFORMATION................................................... 56
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 57
SHAREHOLDER PROPOSALS................................................................. 58
OTHER MATTERS......................................................................... 58
</TABLE>
<PAGE>
<TABLE>
<S> <C>
APPENDICES
APPENDIX A -- Agreement and Plan of Merger............................................ A-1
APPENDIX B -- Opinion of J.P. Morgan Securities Inc................................... B-1
APPENDIX C -- Text of Article 13 of the Georgia Business Corporation Code............. C-1
</TABLE>
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. For a more complete
understanding of the Merger and for a more complete description of the legal
terms of the Merger, you should read this entire document carefully, as well as
the additional documents to which we refer you, including the Merger Agreement.
See "Where You Can Find More Information" (page 55).
THE COMPANIES
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
(770) 698-9040
Centennial, through its subsidiaries, provides a broad range of long-term
health care services to meet the medical needs of elderly and post-acute
patients. The Company, through its subsidiaries, operates 108 owned, leased or
managed skilled nursing facilities, with approximately 11,200 licensed,
available beds, in 21 states and the District of Columbia. In addition, through
its subsidiaries, the Company provides comprehensive rehabilitation services to
Company-owned and third party nursing facilities pursuant to 134 contracts.
Centennial's subsidiaries provide home health care services through 30 licensed
locations.
Centennial HealthCare Holdings Corporation (formerly Cougar Holdings
Corporation)
Cougar Acquisition Corp.
320 Park Avenue
New York, New York 10022
(212) 893-9500
The Parent was organized by WCAS VIII. Before the Merger, all of its
outstanding shares are owned by WCAS VIII. WCAS VIII and WCAS CP III have
jointly agreed with Healthcare Partners, Messrs. Eaton, Dahl, Fosha and Lepley
and the individual managing members (including Mr. Paul) of the general partner
of WCAS VIII (each of whom is also an employee of WCA Management) and two other
employees of WCA Management, who are contributing shares of Common Stock for, or
are purchasing shares of, Parent Common Stock, to acquire the public stock of
Centennial through the Merger with the Acquiror. The Parent organized and owns
all of the outstanding shares of the Acquiror. WCAS VI and WCAS CP II, two
private investment partnerships, which are collectively the owners of
approximately 23.2% of the outstanding Common Stock, will receive the Cash
Merger Consideration for all of their shares of Common Stock and will not have
any interest in the Parent or receive any Parent Common Stock.
THE SPECIAL MEETING (PAGE 36)
The Special Meeting will be held on April 15, 1999, at 10:00 a.m., local
time, at The South Terraces Conference Center Classroom 115 Perimeter Center
Place, Atlanta, Georgia 30346. At the Special Meeting, Centennial shareholders
will be asked to consider and vote upon a proposal to approve and adopt the
Merger Agreement.
RECORD DATE; VOTING POWER (PAGE 36)
Holders of record of Centennial Common Stock at the close of business on
February 26, 1999 (the "Record Date") are entitled to notice of and to vote at
the Special Meeting. As of such date, there were 11,923,619 shares of Common
Stock issued and outstanding held by approximately 64 holders of record. Holders
of record of Common Stock on the Record Date are entitled to one vote per share
on any matter that may properly come before the Special Meeting.
1
<PAGE>
VOTES REQUIRED (PAGE 36)
Approval by the Centennial shareholders of the proposal to approve and adopt
the Merger Agreement will require the affirmative vote of (i) a majority of the
shares of Common Stock outstanding on the Record Date, as the Outstanding Shares
Vote Requirement and (ii) a majority of the shares voted at the Special Meeting
owned by Non-Affiliated Shareholders on the Record Date, as the Majority Vote
Requirement. A failure to vote or a vote to abstain will have the same legal
effect as a vote against the Merger with respect to the Outstanding Shares Vote
Requirement and no effect with respect to the Majority Vote Requirement.
RECOMMENDATIONS (PAGE 19)
Because the Centennial directors who are members of management or affiliated
with the WCAS Group will have a material financial interest in the Merger, the
Board appointed the Special Committee to review and evaluate the proposed
transaction. The Special Committee unanimously recommended to the Board that the
Merger Agreement be approved and that it be recommended to the shareholders of
the Company. Following the unanimous recommendation of the Special Committee,
the Board (with Mr. Paul abstaining) determined that the Merger, the Merger
Agreement and the transactions contemplated thereby were fair to and in the best
interests of the Non-Affiliated Shareholders and recommended that the
shareholders approve the Merger Agreement. The Special Committee and the Board
recommend that the Centennial shareholders vote "For" the approval of the Merger
Agreement. You also should refer to the reasons that the Special Committee and
the Board considered in determining whether to approve and adopt the Merger
Agreement beginning on page 20.
OPINION OF FINANCIAL ADVISOR (PAGE 24)
J.P. Morgan, a nationally recognized investment banking firm which served as
financial advisor to the Special Committee, has rendered an opinion dated
October 22, 1998, and has reconfirmed its opinion as of the date of this Proxy
Statement, to the Special Committee that the Cash Merger Consideration is fair
from a financial point of view to the Non-Affiliated Shareholders. A copy of the
fairness opinion, setting forth the information reviewed, assumptions made and
matters considered, is attached to this Proxy Statement as Appendix B. You
should read the fairness opinion of J.P. Morgan in its entirety.
TERMS OF THE MERGER AGREEMENT (PAGE 38)
The Merger Agreement is attached to this Proxy Statement as Appendix A. You
should read the Merger Agreement in its entirety. It is the legal document that
governs the Merger.
GENERAL. The Merger Agreement provides that the Acquiror will be merged
with and into Centennial, with Centennial being the Surviving Corporation. As a
result of the Merger, the shareholders of Centennial will receive $16.00 in
cash, without interest, for each share of Common Stock that they own, other than
shares held by shareholders who exercise their dissenters' appraisal rights and
shares held by Centennial, the Acquiror and the Parent (including shares
contributed to the Parent immediately prior to the Merger by members of the
Investor Group).
CONDITIONS TO THE MERGER. The completion of the Merger depends upon the
satisfaction of a number of conditions, including:
- approval of the Merger Agreement by the holders of a majority of the
outstanding shares of Common Stock and a majority of the shares of Common
Stock voted at the Special Meeting owned by Non-Affiliated Shareholders;
- receipt of all necessary orders and consents of governmental authorities
and the expiration of any regulatory waiting periods;
- accuracy of the representations and warranties of the parties;
2
<PAGE>
- absence of certain litigation;
- the aggregate number of shares of holders dissenting from the Merger not
constituting more than 15% of the number of shares of Common Stock
outstanding immediately prior to the effective time of the Merger
(calculated on a fully diluted basis); and
- absence of the occurrence of any event having a material adverse effect on
the business of Centennial.
Each party may, at its option, waive the satisfaction of any condition to such
party's obligations under the Merger Agreement. EVEN IF THE SHAREHOLDERS APPROVE
THE MERGER, THERE CAN BE NO ASSURANCE THAT THE MERGER WILL BE CONSUMMATED.
NO SOLICITATION. Until consummation or abandonment of the Merger,
Centennial and its affiliates are not permitted to initiate or solicit any
discussions, offers or proposals from or, subject to the Board's fiduciary
duties as advised by counsel, continue or participate in any negotiations or
discussions with, a third party with respect to a merger, consolidation, sale or
similar transaction involving Centennial or any of its subsidiaries (each an
"Acquisition Proposal").
TERMINATION. Either Centennial or the Parent may terminate the Merger
Agreement under certain circumstances, including if:
- the boards of Centennial and Parent consent;
- the Merger is not completed on or before March 31, 1999 (which date has
been extended by an amendment to the Merger Agreement to April 15, 1999);
- legal constraints or prohibitions prevent the consummation of the Merger;
- the Centennial shareholders do not approve the Merger Agreement; or
- the other party breaches in a material manner any of its representations,
warranties or covenants under the Merger Agreement and, if curable, such
breach is not cured within 30 days of notice.
In addition, if the Board determines in good faith by a majority vote, after
consulting with its financial advisors and based on the advice of outside legal
counsel to the Company, that an Acquisition Proposal with another party is more
favorable to Centennial's shareholders than the Merger, Centennial may terminate
the Merger Agreement if necessary to pursue the alternative Acquisition Proposal
or Centennial may terminate the Merger Agreement if the Board or the Special
Committee withdraws, or adversely modifies, its approval or recommendation of
the Merger. Upon such a termination, Centennial must pay the Acquiror a
"breakup" fee of $3.0 million.
FEES AND EXPENSES. Centennial and the Acquiror will pay their own fees,
costs and expenses incurred in connection with the Merger Agreement if the
Merger is not consummated. However, Centennial will pay the Acquiror the "break
up" fee of $3.0 million, under certain circumstances, including if Centennial
approves, enters into or consummates an Acquisition Proposal with another party
or if the Board or the Special Committee withdraws its recommendation of the
Merger. If the Merger is consummated, Centennial will pay, at the effective time
of the Merger, all of its own fees and expenses and fees and expenses incurred
by the Parent and the Acquiror, including the fees and expenses of counsel,
accountants, investment bankers and other advisors and experts.
SHARE OWNERSHIP OF THE PARENT FOLLOWING THE MERGER (PAGE 31)
- THE MANAGEMENT GROUP. J. Stephen Eaton, Chairman of the Board, President
and Chief Executive Officer of Centennial ("Eaton"); Alan C. Dahl,
Executive Vice President, Chief Financial Officer and Treasurer and a
director of Centennial ("Dahl"); Kent C. Fosha, Sr., Executive Vice
President of Centennial ("Fosha"); and Lawrence W. Lepley, Jr., President
of Centennial's Paragon Rehabilitation, Inc. subsidiary ("Lepley"), will
exchange an aggregate of 508,852 shares of Common Stock
3
<PAGE>
for shares of common stock, $.01 par value, of the Parent (the "Parent
Common Stock"). Shares of Common Stock not exchanged the Management Group
will be converted into the right to receive $16.00 per share in the
Merger. After the Merger, the Management Group will own an aggregate
common equity interest in the Parent of approximately 5.4% or 4,070,816
shares of Parent Common Stock. The Board will reserve 11,281,517 shares of
Parent Common Stock representing approximately 13% of the common equity of
the Parent (calculated on a fully diluted basis) at the closing of the
Merger for options to be granted to the members of the Management Group
and other officers and key employees of the Company.
- THE WCAS GROUP. WCAS VIII will invest $117,447,855 in cash in the Acquiror
in exchange for 58,723,926 shares of Parent Common Stock, at $2.00 per
share. After the Merger, WCAS VIII will own an aggregate common equity
interest in the Parent of approximately 77.8%. WCAS CP III will invest
$125 million in cash in exchange for $125 million of subordinated notes of
the Parent and 8,928,571 shares of Parent Common Stock. After the Merger,
WCAS CP III will own an aggregate common equity interest in the Parent of
approximately 11.8%. Other individuals who are managing members of the
general partner of WCAS VIII and employees of WCA Management, including
Andrew M. Paul, a director of Centennial, two other employees of WCA
Management and WCAS Healthcare Partners will contribute shares of Common
Stock to the Parent in exchange for shares of Parent Common Stock and/or
purchase shares of Parent Common Stock for cash. After the Merger, these
individual managing members, employees and Healthcare Partners will own
3,776,074 shares of Parent Common Stock or an aggregate common equity
interest in the Parent of approximately 5.0%.
ACCOUNTING TREATMENT (PAGE 42)
The Acquiror believes that the Merger will be accounted for as a "purchase"
under the purchase method in accordance with generally accepted accounting
principles.
CONFLICTS OF INTERESTS (PAGE 29)
- THE MANAGEMENT GROUP. Messrs. Eaton, Dahl, Fosha and Lepley have interests
in the Merger that are different from, or in addition to, yours as a
Centennial shareholder. They will continue to have an equity interest in
the Surviving Corporation through their ownership of Parent Common Stock
and the ultimate value of this interest could exceed $16.00 per share. If
the Merger is consummated, Messrs. Eaton and Dahl will be designated as
members of the board of directors of the Surviving Corporation and Messrs.
Eaton, Dahl, Fosha and Lepley will remain as senior management of the
Surviving Corporation pursuant to amended and restated employment
agreements that provide for two year rolling severance and noncompete
periods. If the Merger is consummated, the Company will pay Messrs. Eaton,
Dahl, Fosha and Lepley and other key employees an aggregate of
approximately $2.0 million in fees and bonuses in consideration for these
noncompete periods and as bonuses for remaining with the Company,
beginning within two months after the effective time of the Merger. In
addition, if the Merger is consummated, options to purchase Parent Common
Stock will be made available to Messrs. Eaton, Dahl, Fosha and Lepley and
other key employees. Indemnification arrangements and directors' and
officers' liability insurance for existing directors and officers of
Centennial will be continued by the Surviving Corporation after the
Merger.
- THE WCAS GROUP. WCAS VI and WCAS CP II hold 2,520,193 and 246,896 shares
of Common Stock, respectively, or approximately 21.1% and 2.1% of the
outstanding shares of Common Stock, respectively, and will receive
$40,323,088 and $3,950,336, respectively, as Cash Merger Consideration.
Mr. Paul, a director of the Company, and other individual members of the
WCAS Group are general partners of the respective sole general partners of
WCAS VI and WCAS CP II. In addition, the Company will pay WCA Management,
which employs the individual members of the WCAS Group and provides
management services to WCAS VI, WCAS CP II, WCAS VIII and WCAS CP
4
<PAGE>
III, a $3.0 million fee for financial advisory services rendered to WCAS
VIII and WCAS CP III in connection with the structuring of the Merger and
the related financing transactions (including the equity and subordinated
debt financing of the Parent and the Acquiror and the amendment of the
Company's existing senior credit facility). WCA Management is owned by
Patrick J. Welsh, Russell L. Carson and Bruce K. Anderson. See "Members of
the Investor Group" on page 6.
- THE SPECIAL COMMITTEE. Upon consummation of the Merger, the members of the
Special Committee will receive cash for the aggregate unrealized gain on
their stock options. Messrs. Scott Miller and Charles Nash will each
receive $75,631 for such unrealized gain. Because Mr. Bertil Nordin,
chairman of the Special Committee, will not receive any unrealized gain on
his stock options, the Company agreed to pay him $75,000 for his service
on the Special Committee. Each member of the Special Committee also
received reimbursement of out-of-pocket expenses and regular fees for
attending board or committee meetings. In addition, Mr. Nordin is a
limited partner of Information Partners, for which WCA Management provides
management services. Information Partners is a private investment
partnership with individual limited partners that coinvest with the WCAS
partnerships in investment in the information services industry. The
members of the Special Committee believe that the foregoing arrangements
do not affect their impartiality.
- OTHER DIRECTORS. Two other directors have interests in members of the
Investor Group. Robert Ortenzio, a director of Centennial is the residual
beneficiary of a trust which is a limited partner of WCAS VI. James B.
Hoover, a director of Centennial, is a former general partner and current
limited partner of the respective sole general partners of WCAS VI and
Welsh, Carson, Anderson & Stowe, VII, L.P., a private investment
partnership and a general partner of the sole general partners of WCAS CP
II and Welsh, Carson, Anderson & Stowe V, L.P., a private investment
partnership in which members of the Investor Group serve as general
partners.
REGULATORY APPROVALS (PAGE 39)
Centennial is required to make filings with or obtain approvals from
regulatory authorities in connection with the Merger. These consents and
approvals include approval of the Federal Trade Commission, the Department of
Justice, and certain state regulatory authorities. An application and notice was
filed with the Federal Trade Commission and the Department of Justice on
November 16, 1998. All other necessary applications and notices have been filed
or are in the process of being filed.
Centennial cannot predict whether or when the Company will obtain all
required regulatory approvals or the timing of these approvals.
DISSENTERS' APPRAISAL RIGHTS (PAGE 44)
Any shareholder of Centennial who does not vote in favor of the proposal to
approve the Merger Agreement and who strictly complies with the applicable
provisions of Article 13 of the Georgia Business Corporation Code has the right
to dissent and be paid cash for the "fair value" for such holder's shares of
Common Stock, which may be more than, the same as, or less than the Cash Merger
Consideration of $16.00 a share. "Fair value" will be determined based on the
value of the dissenting shares immediately before the effective time of the
Merger without any appreciation or depreciation in anticipation of the Merger.
If the Company and a dissenting shareholder are unable to agree upon the "fair
value" for the holder's shares of Common Stock, the Superior Court of DeKalb
County, Georgia will determine the "fair value". To perfect these appraisal
rights with respect to the Merger, you must follow the required procedures
precisely, which include the requirement to give written notice to Centennial
before the Special Meeting of your intent to demand payment. The applicable
provisions of Article 13 are attached to this Proxy Statement as Appendix C. The
Merger Agreement provides that the Parent and the Acquiror are not required to
consummate the Merger if holders of more than 15% of the shares of Common Stock
outstanding prior to the Merger exercise their right to dissent. Although the
Parent and the Acquiror may waive this requirement, they are not required to do
so. Messrs. Eaton, Dahl, Fosha and Lepley and WCAS VI have each agreed to waive
their right to dissent.
5
<PAGE>
MEMBERS OF THE INVESTOR GROUP
The following diagrams illustrate the members of the Investor Group and
their relationships:
[LOGO]
WCAS GROUP:
[LOGO]
The above diagram does not include WCAS Information Partners, L.P.
("Information Partners"), which is not a member of the WCAS Group. Information
Partners and Healthcare Partners are investment partnerships with primarily
individual limited partners that are much smaller than the other WCAS
partnerships and that coinvest with them in the information services and
healthcare industries, respectively. In addition the diagram does not reflect
the fact that three additional individuals, including James B. Hoover, a
director of the Company, remain general partners in the sole general partner of
WCAS CP II but have no active role in its activities.
6
<PAGE>
DESCRIPTION OF OWNERSHIP OF CENTENNIAL BEFORE AND AFTER THE MERGER
The following diagrams illustrate the ownership of the Acquiror and
Centennial before the Merger:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ACQUIROR: CENTENNIAL:
<S> <C> <C> <C> <C> <C>
WCAS VIII 100% Individual Managing Members of General Partner of WCAS VIII 1.4%
Centennial HealthCare 100% WCAS VI 21.1%
Holdings Corporation WCAS CP II 2.1%
Cougar Acquisition Corp. Healthcare Partners 0.7%
Management Group 10.6%
Non-Affiliated Shareholders 64.1%
</TABLE>
The following diagram illustrates the ownership of Centennial after the
Merger:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WCAS VIII 77.8%
<S> <C>
Healthcare Partners .9%
WCAS CP III 11.8%
Management Group 5.4%
Individual Managing Members of General Partner of WCAS VIII 4.1%
and Two employees of WCA Management
</TABLE>
7
<PAGE>
HISTORICAL MARKET INFORMATION
The Common Stock is traded on the Nasdaq National Market (symbol: CTEN). The
following table sets forth the high and low closing bid quotations for each
quarterly period since July 2, 1997, the date of the closing of Company's
initial public offering of the Common Stock, and for the current fiscal year to
date.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997:
Third quarter (from July 2, 1997)........................................................... 23.00 16.00
Fourth quarter.............................................................................. 25.125 18.125
1998:
First quarter............................................................................... 25.125 19.625
Second quarter.............................................................................. 25.00 16.4375
Third quarter............................................................................... 20.375 7.50
Fourth quarter.............................................................................. 15.50 7.375
1999:
First quarter (through March 16, 1999)...................................................... 15.4375 13.625
</TABLE>
On October 21, 1998, the last trading day prior to announcement of the
execution of the Merger Agreement, the closing price per share of Common Stock
as reported by the Nasdaq Stock Market ("Nasdaq") was $8.50. On March 16, 1999,
the high and low bid quotations per share of Common Stock as reported by Nasdaq
were $15.00 and $14.875.
Since its inception, the Company has not paid any cash dividends on its
Common Stock. Under the Merger Agreement, the Company has agreed not to pay any
dividends on the Common Stock prior to the closing of the Merger. Under the
Company's current senior credit facility, the distribution of dividends would
require lender consent. In addition, applicable laws generally limit the ability
of the Company's subsidiaries to pay dividends to the extent that required
regulatory capital would be impaired, which in turn further limits the Company's
ability to pay dividends.
In July 1997, Centennial completed an underwritten initial public offering
of 4,600,000 shares of Common Stock (including the underwriters' exercise of
their over-allotment option). The offering price per share was $16.00 and the
Company received net proceeds of approximately $66.8 million.
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
Certain selected consolidated historical financial data of the Company
derived from the audited financial statements of the Company are set forth
below. The selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Company, related notes and other
financial information incorporated by reference into this Proxy Statement.
<TABLE>
<CAPTION>
SEVEN MONTHS FOR THE YEAR ENDED
FOR THE YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MAY 31,
--------------------------------- ------------- --------------------
1997 1996 1995(1) 1995 1995 1994
--------- --------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net patient service revenues.................... $ 296,321 $ 227,387 $ 71,862 $ 42,103 $ 61,856 $ 38,115
Management fee and other revenues............... 7,952 5,661 3,364 2,108 3,362 3,384
--------- --------- ----------- ------------- --------- ---------
Total revenues.............................. 304,273 233,048 75,226 44,211 65,218 41,499
Facility operating expenses..................... 234,596 183,324 58,565 35,262 48,872 29,510
Lease expense................................... 21,403 18,777 7,702 4,651 6,901 4,823
Corporate administrative costs.................. 16,055 11,400 5,027 3,526 3,396 2,927
Depreciation and amortization................... 6,760 5,012 738 429 290 82
--------- --------- ----------- ------------- --------- ---------
Operating income before net interest expense
and equity in income of unconsolidated
partnerships.............................. 25,459 14,535 3,194 343 5,759 4,157
Interest income (expense), net.................. (8,022) (9,373) (176) (116) 57 131
Equity in income (loss) of unconsolidated
partnerships.................................. -- (108) 448 25 (28) 1,733
--------- --------- ----------- ------------- --------- ---------
Income (loss) before income taxes and
minority interest and extraordinary
item...................................... 17,437 5,054 3,466 252 5,788 6,021
Provision for income taxes...................... 6,800 2,092 1,389 328 2,106 2,230
--------- --------- ----------- ------------- --------- ---------
Income (loss) before minority interest and
extraordinary item............................ 10,637 2,962 2,077 (76) 3,682 3,791
Minority interest in net income of subsidiary,
net of income taxes........................... (252) (183) (201) (82) (207) --
--------- --------- ----------- ------------- --------- ---------
Net income (loss) before extraordinary item..... 10,385 2,779 1,876 (158) 3,475 3,791
Extraordinary item--forgiveness of debt, net of
income taxes.................................. -- -- -- -- 250 1,598
Extraordinary item--loss on extinguishment of
debt, net of income taxes..................... (537) -- -- -- -- --
--------- --------- ----------- ------------- --------- ---------
Net income (loss)............................... $ 9,848 2,779 1,876 $ (158) $ 3,725 $ 5,389
--------- --------- ----------- ------------- --------- ---------
--------- --------- ----------- ------------- --------- ---------
Per common share information (diluted):
Income (loss) before extraordinary item......... $ 0.54 $ 0.12 $ 0.72 $ (0.06) $ 1.35 $ 1.60
Extraordinary item--forgiveness of debt, net of
taxes......................................... -- -- -- -- 0.10 0.68
Extraordinary item--loss on extinguishment of
debt, net of income taxes..................... (0.06) -- -- -- -- --
--------- --------- ----------- ------------- --------- ---------
Net income (loss) (2)........................... $ 0.48 $ 0.12 $ 0.72 $ (0.06) $ 1.45 $ 2.28
--------- --------- ----------- ------------- --------- ---------
--------- --------- ----------- ------------- --------- ---------
Weighted average number of common and common
stock equivalents outstanding (diluted)....... 8,462 4,782 2,601 2,601 2,576 2,363
--------- --------- ----------- ------------- --------- ---------
--------- --------- ----------- ------------- --------- ---------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MAY 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................... $ 45,560 $ 8,702 $ 3,984 $ 4,805 $ 5,540
Total assets.................................................. 243,649 193,448 155,018 25,499 14,172
Long-term debt and subordinated debt, less current
maturities.................................................. 78,913 107,795 83,559 4,558 676
Preferred stock (3)........................................... -- 21,305 19,455 9,187 4,300
Net shareholders' equity...................................... 113,104 11,952 10,869 2,082 1,527
</TABLE>
- ------------------------
(1) During 1995, the Company changed its fiscal year from May 31 to December 31
resulting in a seven month transition period ending December 31, 1995.
(2) Net income (loss) per common share for the fiscal years ended December 31,
1997 and 1996 excludes dividends and accretion on preferred stock of $5.9
million and $2.2 million, respectively.
(3) Carried at estimated redemption value with accretion of dividends charged
against shareholders' equity.
RATIO OF EARNINGS TO FIXED CHARGES:
<TABLE>
<CAPTION>
12/31/96 12/31/97 9/30/98
------------ ------------ ------------
<S> <C> <C> <C>
Ratio of earnings to fixed charges...................................... 1.2 1.6 1.2
</TABLE>
BOOK VALUE PER SHARE:
<TABLE>
<CAPTION>
12/31/97 9/30/98
----------- -----------
<S> <C> <C>
Book value per common share outstanding....................................................... $ 9.53 $ 9.66
</TABLE>
10
<PAGE>
COMPANY PROJECTIONS
In connection with WCAS VIII's' review of the Company and in the course of
the negotiations between the Company and WCAS VIII described in "Special
Factors--Background of the Merger," the Company provided WCAS VIII with certain
non-public business and financial information. The non-public information
provided by the Company included certain projections developed over a period of
time by the Company of the future operating performance of the Company and
delivered in preliminary and final versions (the "Company Projections"). The
final Company Projections were prepared assuming that the Company made
acquisitions totaling $100 million each year and, alternatively, assuming that
no acquisitions were made. The Company Projections do not give effect to the
Merger or the financing thereof.
The Company does not as a matter of course publicly disclose projections as
to future revenues or earnings. The Company Projections were not prepared with a
view to public disclosure and the following summary thereof is included in the
Proxy Statement only because such information was made available to WCAS VIII in
connection with its due diligence investigation of the Company. Accordingly, it
is expected that there will be differences between actual and projected results,
and actual results may be materially different from those set forth below. The
Company Projections were not prepared with a view to compliance with the
published guidelines of the Commission regarding projections, nor were they
prepared in accordance with the guidelines established by the American Institute
of Certified Public Accountants for preparation and presentation of financial
projections. No independent accounting firm has compiled or examined the Company
Projections of total revenues and operating income for fiscal years 1999 through
2003 and no expression of assurance of any kind can be given with respect to the
Company Projections or the achievability of the Company Projections. These
forward-looking statements reflect numerous assumptions made by the Company's
management, which are not apparent on the face of the Company Projections. In
addition, factors such as industry performance, general business, economic,
regulatory and market and financial conditions, all of which are difficult to
predict, may cause the Company Projections or the underlying assumptions to be
inaccurate. Accordingly, there can be no assurance that the Company Projections
will be realized, and actual results may be materially greater or less than
those contained in the Company Projections.
The inclusion of the summary of the Company Projections should not be
regarded as an indication that WCAS VIII or the Company or their respective
financial advisors considered or consider the Company Projections to be a
reliable prediction of future events, and the Company Projections should not be
relied upon as such. None of the Company, WCAS VIII or any of their respective
financial advisors intends to update or otherwise revise the Company Projections
to reflect circumstances existing after the date when made or to reflect the
occurrence of future events even in the event that any or all of the assumptions
underlying the Company Projections are shown to be in error.
The Company provided to WCAS VIII the following preliminary Company
Projections: total revenue (assuming acquisitions) of $401.6 million, $427.3
million, $474.8 million, $546.6 million and $622.8 million; and net income of
$7.6 million, $9.7 million, $11.0 million, $13.6 million and $17.2 million for
fiscal years 1999 through 2003, respectively. The preliminary Company
Projections were prepared for initial discussions and were based upon limited
assumptions using industry averages rather than data specific to the Company.
The preliminary Company Projections also did not include any impact of the
proposed Medicare prospective payment system and were later refined in the final
version. In preparing the preliminary Company Projections, the Company made the
following material assumptions: revenues increased by 6% per year beginning in
2000 at the Company's existing facilities; management fees increased by 4% per
year beginning in 1999; third party management contracts for 1,000 beds were
added each year beginning in 1999; new facilities generating annual revenues of
$40 million were added beginning in 2000; corporate overhead increased by 5% per
year plus $1.25 million for each new 1,000 beds acquired or managed; and rent
expense increased by 3% per year beginning in 1999.
11
<PAGE>
The Company provided to WCAS VIII the following final Company Projections:
total revenue (assuming acquisitions of 2000 beds per year) of $467.8 million,
$566.8 million, $671.5 million, $780.3 million and $896.6 million, and net
income of $15.6 million, $22.5 million, $27.3 million, $32.0 million and $39.1
million for fiscal years 1999 through 2003, respectively, and total revenues
(assuming no acquisitions) of $430.1 million, $450.7 million, $473.9 million.
$497.8 million and $525.9 million, and net income of $16.0 million, $22.8
million, $26.6 million, $29.8 million and $34.7 million for fiscal years 1999
through 2003, respectively. The final Company Projections were based on
historical data specific to the Company and took into account the effect of the
new Medicare prospective payment system effective January 1, 1999 on revenues
(an approximate 18% reduction over 1998 revenues at the Company's skilled
nursing facilities and a 50% reduction in revenues at its therapy subsidiary),
as well as necessary reductions in expenses (a 55% reduction in expenses at the
Company's therapy subsidiary and a 45% reduction in expenses from third party
suppliers). In preparing the final Company Projections, the Company made the
following material assumptions: revenues for Medicare would be reduced by
approximately 18% over 1998 revenues for the time period of 1999-2000 as the
result of the implementation of the Medicare prospective payment system; revenue
per patient day increased at the rate of 5% per year for private pay, managed
care and VA, 3% per year for Medicaid beginning in 1999 and 2.5% for Medicare
beginning in 2003; average length of patient stay increased by 3.5 days
beginning in 1999; Medicaid census decreased by 3% in 1999; third party
management contracts for 1,000 beds were added each year beginning in 1999; 30
third party contracts for therapy services were added each year beginning in
1999; revenues from therapy contracts would decrease by 50% in 1999 from 1998
levels as a result of the implementation of the Medicare prospective payment
system; expenses at the Company's therapy subsidiary would be reduced by 55% in
1999 from 1998 levels as the result of the implementation of the Medicare
prospective payment system; corporate overhead was 5.4% of revenues; and rent
expense increased by 3% per year. WCAS VIII took this information included in
the final Company Projections together with its own analysis, into account in
determining whether to enter into the Merger Agreement.
Other than the preliminary Company Projections that were based on industry
standards, the Company did not and has not prepared any projections of revenue
or net income for the period 1999 through 2003 without considering the effect of
the new Medicare prospective payment system. If these projections were prepared
(using the same assumptions as used in the final Company Projections), it could
be reasonably expected that they would show higher revenues and net income for
most, if not all, of that time period than are shown in the final Company
Projections.
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SPECIAL FACTORS
BACKGROUND OF THE MERGER
GENERAL. In 1998, changes in the capital markets began to impede the
Company's growth strategy. The Company had historically grown in size and
profitability primarily through acquisitions. From the beginning of 1998,
acquisition prices increased and during the second half of the year, changes in
the capital markets made debt and equity financing more difficult to obtain.
Both of these factors made acquisitions more difficult.
In addition, the Company's growth strategy has been affected by a new
Medicare prospective payment system ("PPS") contained in the Balanced Budget Act
of 1997 enacted in August 1997. Prior to PPS, the Company's skilled nursing care
facilities have operated under a "cost plus" Medicare reimbursement system. PPS
is a program for implementing $9.5 billion of Medicare spending reductions over
the next five years for skilled nursing care facilities such as those operated
by the Company. PPS payments are based on per diem rates and cover all costs of
furnishing covered services to the residents of the facility. Under PPS, each
resident of the Company's facilities will be classified into 1 of 44 mutually
exclusive Resource Utilization Groups (RUG) categories based upon the resident's
clinical condition, extent of services need and functional status. Periodic
reassessment of residents is required on a set schedule to determine whether the
resident is in the correct RUG category, as well as when a resident's condition
changes. The facility will receive payment under Medicare based upon each
resident's RUG category, there being a separate rate for each RUG category. As a
result, accurate classification of each resident into his or her appropriate RUG
category is crucial to the facility receiving the appropriate payment for
services provided to that resident. Overall, the rates to be received by the
Company at its facilities under PPS are less than rates received by the Company
under the prior "cost plus" reimbursement system.
PPS was fully effective for the Company in January 1999. Management
initially believed that PPS would not have an adverse effect on earnings when
fully implemented because the decreased revenues under PPS would be offset by
anticipated cost reductions. These anticipated costs reductions will require the
Company to seek substantial cost savings from third party suppliers, as well as
its own subsidiaries providing rehabilitation therapy services to the Company's
skilled nursing care facilities.
In June 1998, management commenced a comprehensive internal study of the
effects of PPS on the Company's results for the first five months of 1998, on a
pro forma basis as if PPS was fully effective in 1998. The preliminary results
of that study, which were available in early August 1998, indicated that even if
the Company was successful in reducing ongoing costs to match revenue reductions
under PPS, the implementation of PPS would cause it to incur significant
additional training, implementation and other costs and expenses of
approximately $2.5 million in the last half of 1998 and approximately $3.0
million in the first half of 1999 that could not be recovered from revenues.
These costs and expenses include the need for additional staffing at the
facilities and corporate offices to assist in the classifying of residents into
the proper RUG category, travel costs associated with sending trainers to the
facilities and personnel from the facilities to the corporate offices of the
Company to provide and receive training in classifying residents into the proper
RUG category, training in the requirements of the new PPS system and
inefficiencies associated with implementation of a new, radically different
reimbursement program at both the facility and corporate office level.
This changing environment led management to evaluate various alternatives
for the future of the Company during the second and third quarters of 1998.
While it was expected that strategic acquisition opportunities would continue to
exist, such opportunities would require significant capital that would be more
expensive or dilutive in the current economic environment. Management noted that
as a public company being an aggressive acquiror during this period of
uncertainty might erode the Company's stock price. In addition, the prospective
impact of PPS on the nursing home industry was creating uncertainty concerning
the Company's ability to reduce costs sufficiently, even without taking into
account the additional costs indicated by the Company's study, and management
believed that this uncertainty might further depress the Company's stock price.
Each of these factors led management to the conclusion that it was in the best
interest of the Company's shareholders to consider strategic alternatives for
the Company.
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EVENTS LEADING TO THE MERGER. During May and June 1998, representatives of
WCAS VIII had informal discussions with senior management of the Company
(initiated by senior management of the Company) and representatives of BT Alex.
Brown Incorporated ("BT Alex. Brown"), with respect to a possible acquisition of
the Company that would be sponsored by WCAS VIII and include a significant
investment by management. BT Alex. Brown at the request of senior management of
the Company, reviewed with the Company the Company's preliminary analysis in
April 1998 of an acquisition by the Company of another entity in the long-term
care sector, as well as the Company "going private." This review assisted senior
management in evaluating strategic opportunities for the Company and led to the
Company formally engaging BT Alex. Brown on June 3, 1998 to assist the Company
in performing these evaluations. Senior management of the Company decided to
share this analysis reviewed by BT Alex. Brown with representatives of WCAS VIII
and led to the informal discussions between WCAS VIII and senior management in
May and June 1998. Senior management shared this analysis with the
representatives of WCAS VIII (some of whom were also representatives of WCAS VI,
the Company's largest shareholder) because of the resources (including
availability of capital) of WCAS VIII, which could be used by the Company in
pursuing the strategic opportunities for the Company outlined in the Company
analysis. These discussions included a visit by Messrs. Eaton and Dahl and
representatives of BT Alex. Brown on June 24, 1998 to the New York offices of
WCAS VIII. On July 10, 1998, WCAS VIII and the Company entered into a
confidentiality agreement, and subject thereto, the Company subsequently
provided WCAS VIII with the preliminary Company Projections.
BT Alex. Brown assisted senior management with the preparation of the
Company Projections by modeling the information received from the Company. BT
Alex. Brown provides investment banking services to public and private companies
in the healthcare industry. BT Alex. Brown acted as lead underwriter in the
Company's initial public offering in July 1997 and received approximately $2.0
million for these services. Based on BT Alex. Brown's reputation and expertise
in the industry, in June 1998 the Company engaged BT Alex. Brown to assist in
the evaluation of a potential acquisition in the long-term care industry. The
Company did not pay BT Alex. Brown any compensation in 1998 but will pay $3.0
million upon the completion of the Merger under the terms of the original
engagement. BT Alex. Brown has provided no services to any members of the WCAS
Group since October 1996 for which it received compensation. In the ordinary
course of business, BT Alex. Brown may actively trade the securities of the
Company for their own accounts or the accounts of customers and may at any time
hold long or short positions in such securities.
BT Alex. Brown input historical data and assumptions provided by the Company
to generate the Company Projections utilizing its proprietary software modeling
capabilities. BT Alex. Brown did not reach any findings or make any
recommendations in its work assisting in the generating of the Company
Projections; BT Alex. Brown was instructed to use these assumptions and this
data in generating the Company Projections. The Company limited the scope of the
work performed by BT Alex. Brown to generating the Company Projections through
its proprietary software modeling. BT Alex. Brown did not independently make any
changes to the data or assumptions provided by the Company. Any changes were
made at the direction of the Company.
The preliminary Company Projections include the following information: total
revenue (assuming acquisitions) of $401.6 million, $427.3 million, $474.8
million, $546.6 million and $622.8 million; and net income of $7.6 million, $9.7
million, $11.0 million, $13.6 million and $17.2 million for fiscal years 1999
through 2003, respectively. The preliminary Company Projections were prepared in
April 1998 for initial discussions and were based upon limited assumptions using
industry averages rather than data specific to the Company. The preliminary
Company Projections also did not include any impact of the proposed Medicare
prospective payment system and were later refined in the final version. In
preparing the preliminary Company Projections, the Company made the following
material assumptions: revenues increased by 6% per year beginning in 2000 at the
Company's existing facilities; management fees increased by 4% per year
beginning in 1999; third party management contracts for 1,000 beds were added
each year beginning in 1999; new facilities generating annual revenues of $40
million were added beginning
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in 2000; corporate overhead increased by 5% per year plus $1.25 million for each
new 1,000 beds acquired or managed; and rent expense increased by 3% per year
beginning in 1999.
The final Company Projections include the following information: total
revenue (assuming acquisitions of 2000 beds per year) of $467.8 million, $566.8
million, $671.5 million, $780.3 million and $896.6 million, and net income of
$15.6 million, $22.5 million, $27.3 million, $32.0 million and $39.1 million for
fiscal years 1999 through 2003, respectively, and total revenues (assuming no
acquisitions) of $430.1 million, $450.7 million, $473.9 million, $497.8 million
and $525.9 million, and net income of $16.0 million, $22.8 million, $26.6
million, $29.8 million and $34.7 million for fiscal years 1999 through 2003,
respectively. The final Company Projections were based on historical data
specific to the Company and took into account the effect of the new Medicare
prospective payment system effective January 1, 1999 on revenues (an approximate
18% reduction over 1998 revenues at the Company's skilled nursing facilities and
a 50% reduction in revenues at its therapy subsidiary), as well as necessary
reductions in expenses (55% reduction in expenses at the Company's therapy
subsidiary and a 45% reduction in expenses from third party suppliers). In
preparing the final Company Projections, the Company made the following material
assumptions: revenues for Medicare would be reduced by approximately 18% over
1998 revenues for the time period of 1999-2000 as the result of the
implementation of the Medicare prospective payment system; revenue per patient
day increased at the rate of 5% per year for private pay, managed care and VA,
3% per year for Medicaid beginning in 1999 and 2.5% for Medicare beginning in
2003; average length of patient stay increased by 3.5 days beginning in 1999;
Medicaid census decreased by 3% in 1999; third party management contracts for
1,000 beds were added each year beginning in 1999; 30 third party contracts for
therapy services were added each year beginning in 1999; revenues from therapy
contracts would decrease by 50% in 1999 from 1998 levels as a result of the
implementation of the Medicare prospective payment system; expenses at the
Company's therapy subsidiary would be reduced by 55% in 1999 from 1998 levels as
the result of the implementation of the Medicare prospective payment system;
corporate overhead was 5.4% of revenues; and rent expense increased by 3% per
year.
Commencing on July 11, 1998, WCAS VIII and its accounting advisors began
conducting a business and financial "due diligence" review of the Company at its
offices in Atlanta and at the WCAS VIII offices in New York, and on July 23,
1998, representatives of WCAS VIII traveled to the Company's Atlanta offices
where they met with members of the Company's senior management and
representatives of BT Alex. Brown and discussed the Company's financial
condition and the preliminary Company Projections that had been provided.
At the Board's July 28, 1998 regular quarterly meeting, management discussed
the preliminary results of its study of the anticipated effects of PPS on the
operations of the Company, and the Board unanimously determined to make public
disclosure as soon as possible. After the conclusion of the meeting, Mr. Eaton
also informed the Company's directors of management's discussions with
representatives of WCAS VIII.
On August 4, 1998, the Company issued a press release that stated that the
Company expected its financial results for the second quarter ended June 30,
1998 to meet the published consensus estimates. The Company also announced with
its second quarter earnings on August 4, 1998 that it expected to incur costs of
$1.0 million and $1.5 million for the third and fourth quarters of 1998,
respectively, related to training, implementation and other compliance costs to
prepare for PPS. On August 4, 1998, the date the Company announced its earnings
for second quarter, the per share price of the Company's Common Stock dropped
from $14.75 to $7.50.
During August 1998 the Company finalized its analysis of the potential
effects from PPS, and during September 1998, Mr. Eaton, other members of senior
management and representatives of BT Alex. Brown met several times with
representatives of WCAS VIII to discuss the possibility of acquiring the
Company. Prior to a meeting on September 17, 1998, the Company furnished to
representatives of WCAS VIII revised financial projections. The revisions
reflected the effect of the anticipated expense increases which had been
discussed at the July 28, 1998 Board meeting and publicly disclosed in the
August 4, 1998 press release. At this meeting, the revised and final Company
Projections were explained to the representatives of WCAS VIII and discussed
with members of the Company's accounting staff and senior management.
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On September 22, 1998, legal and special regulatory counsel for WCAS VIII
commenced a legal and regulatory "due diligence" review of the Company, and, on
September 25, 1998, WCAS VIII delivered to the Company a nonbinding written
expression of interest in pursuing a possible acquisition of the Company by a
new entity to be formed by WCAS VIII (the "Initial Proposal"). This Initial
Proposal expressed the interest of WCAS VIII in acquiring the Company through a
to-be-formed company in exchange for cash and was contingent on Messrs. Eaton,
Dahl, Fosha and Lepley, and potentially other members of management,
participating in the proposed acquisition as investors and officers of the
acquiror. The Initial Proposal did not make any reference to potential pricing
terms.
A special meeting of the Board was scheduled for September 28, 1998 to
discuss the Initial Proposal. At the special meeting, Andrew M. Paul, a member
of the Board, and a general partner of the sole general partner of WCAS VI, the
owner of approximately 23% of the Common Stock, outlined the provisions of the
Initial Proposal. At the special meeting, the Board discussed the likelihood
that management and Mr. Paul would have a continuing financial interest in any
transaction arising out of the Initial Proposal. The Board determined to
increase the number of directors by two members, who would not be members of
management or managing members or general partners of the general partners of
WCAS VI, WCAS CP II, Healthcare Partners, WCAS VIII or WCAS CP III or employees
of WCA Management and would serve as two of the three members of the Special
Committee. The Special Committee was authorized to engage advisors to assist in
evaluating relevant factors and review and evaluate the Initial Proposal, and,
if considered reasonable in light of all circumstances and the recommendation of
its advisors, to explore additional merger offers and to recommend to the Board
those actions that the Special Committee believed, in the exercise of its
business judgment, to be in the best interests of the Company and its
shareholders. The Board appointed W. Scott Miller and Charles D. Nash as
directors and named them as members of the Special Committee, together with
Bertil D. Nordin as Chairman, who was not employed by the Company and was not
participating in the proposed transaction. The Board further authorized the
Special Committee to establish such procedures, review such information and
engage such financial advisors and legal counsel as it deemed reasonable and
necessary to fully and adequately make determinations and to conduct
negotiations with WCAS VIII regarding the terms of the proposed transaction and
to otherwise fulfill its duties.
The Special Committee engaged Kilpatrick Stockton LLP ("Kilpatrick
Stockton") as its legal counsel to advise the Special Committee regarding its
duties in connection with a possible sale of the Company. The Special Committee
and its legal counsel discussed on several occasions the procedures to be
followed in analyzing any offer from WCAS VIII to acquire the Company. Counsel
advised the Special Committee concerning the Special Committee's legal
responsibilities and the legal principles applicable to, and the legal
consequences of, actions taken by the Special Committee with respect to the
offer by WCAS VIII.
The Special Committee selected J.P. Morgan to serve as its financial advisor
for the purpose of advising the Special Committee and assisting the Special
Committee in negotiations with WCAS VIII and to deliver a fairness opinion to
the Special Committee in connection with the proposed transaction. The Special
Committee instructed J.P. Morgan to commence its investigation and analysis of
the value of the Company and the Initial Proposal.
During the period from October 9 to October 19, 1998, J.P. Morgan reviewed
financial and other information concerning the Company, including the Company's
audited and interim financial statements, the Company Projections, and the
Company's internal study of the effects of PPS on the Company, and other
information concerning the Company described below in "--Opinion of Financial
Advisor." J.P. Morgan also met with members of the Company's management, as well
as the Company's independent auditors.
On October 10, 1998, the Special Committee received a preliminary draft of a
merger agreement from legal counsel to WCAS VIII, who indicated that the draft
was being circulated prior to delivery of any offer from WCAS VIII in order to
expedite the Special Committee's review of the agreement's basic terms and to
allow the Company time to prepare disclosure schedules should WCAS VIII
determine to make an offer. The draft merger agreement did not contain pricing
terms. Although the Initial Proposal and the draft merger agreement did not
contain pricing terms, the Special Committee evaluated the Initial
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Proposal based on the Special Committee's expectation that WCAS VIII would make
an offer at a price reflecting a premium to the then-current market price.
On October 13, 1998, the Special Committee met with the Company's
independent auditors, members of Company management, J.P. Morgan and Kilpatrick
Stockton to review the Company's financial position and financial statements.
Company management also discussed the financial and operating implications of
PPS. Company management indicated that moving from a "cost plus" Medicare
reimbursement system to PPS would require significant reengineering of the
manner in which companies in the Company's industry segment tracked reimbursable
activities at the point of care in nursing facilities. These efforts would
require significant training costs and information technology systems.
Management reported that the participants in this industry segment are perceived
by the financial community as facing significant operating and earnings
challenges in transitioning to PPS and this was affecting the market price of
the shares of these companies, including the Company. Management reported that
the results of the study of the effects of PPS on the operations of the Company
for the first five months of 1998 indicated that PPS would have a negative
effect of approximately $25 million on projected gross revenues of approximately
$350 million, but would be earnings neutral (that is, decreased revenues would
be offset by, decreased expenses resulting in no change in earnings), except for
costs allocable to the transition to PPS of $2.5 million in the last half of
1998 and $3 million in the first half of 1999. Management reported, however,
that even a relatively small variance of $200,000 to $300,000 in expenses or
revenues, as well as problems with Medicare implementing the PPS payment scheme,
would put the quarterly earnings and cash flows of the Company at substantial
risk in 1999 and 2000.
At the October 13 meeting, Mr. Eaton reported that the Company had engaged
SunTrust Equitable Securities in September 1998 to explore financing
alternatives for the potential acquisition of the Company. Mr. Eaton reported
that the Company had received a "highly confident" financing letter from a major
financial institution that expressed a willingness to provide debt financing for
the purchase of the Company. Mr. Eaton noted that the financing letter was
subject to conditions and was not a commitment to provide funds. Mr. Eaton
reported that this financing could be utilized by a group that had sufficient
equity to purchase the Company but needed financing to complete such a
transaction.
On October 16, 1998, the Special Committee met with Kilpatrick Stockton to
discuss the preliminary draft merger agreement. Kilpatrick Stockton delivered
the comments of the Special Committee and the Company to Reboul, MacMurray,
Hewitt, Maynard & Kristol ("Reboul MacMurray"), legal counsel for WCAS VIII, and
held further discussions with Reboul MacMurray on October 18 and 19, 1998
regarding the terms of the draft merger agreement.
The Special Committee discussed in detail the desirability of retaining the
flexibility to entertain competing offers from other interested potential
acquirors, should those acquirors approach the Company with a competing offer.
The Special Committee believed that this flexibility to entertain competing
offers would simulate an auction environment and encourage any interested
acquirors to come forward. In order to retain this flexibility, the Special
Committee directed Kilpatrick Stockton to seek terms in the Merger Agreement
which would minimize the termination fees the Company would have to pay if the
Company terminated the Merger Agreement to pursue a competing proposal, and
which would permit the Company to publicly announce its ability to entertain
competing proposals, even if the Company could not otherwise initiate or solicit
them. The Special Committee believed that if the Company were not permitted to
entertain competing offers or if the termination fees were high, potential
acquirors would be less likely to approach the Company with competing offers.
On October 19, 1998, J.P. Morgan held informal discussions with
representatives of WCAS VIII with regard to the timing and possible terms of a
formal offer to acquire the Company. Mr. Nordin met with J.P. Morgan and
Kilpatrick Stockton to discuss the results of those informal discussions. J.P.
Morgan reported to the Special Committee that, based on its conversations with
WCAS VIII, it expected that WCAS VIII would make an initial offer in the range
of $14 to $15 per share, but that J.P. Morgan believed that WCAS VIII might be
willing to offer as much as $16 per share.
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On October 20, 1998, J.P. Morgan met with the Special Committee and its
legal counsel to discuss general economic factors affecting the Company's
industry segment, the expected impact of PPS on the Company's financial and
operating results and the availability of capital in the public markets to
finance the Company's acquisition strategy. The Special Committee discussed
whether, in light of those and other factors, it should continue discussions
with WCAS VIII if the offer from WCAS VIII fell in the range of $14 to $16 per
share, as expected. The Special Committee determined that a fully financed cash
offer in that range could be in the best interests of the Company and its
shareholders, and resolved to continue discussions.
At the October 20 meeting, J.P. Morgan led a discussion addressing the
positives and negatives of soliciting alternative offers prior to entering into
a binding agreement as opposed to entering into an agreement with a market check
mechanism. J.P. Morgan stated that, so long as the Company retained the right to
accept unsolicited bids and could note this ability in the press release
announcing the transaction, it could effectively simulate an auction
environment. J.P. Morgan noted that the group of potential bidders was
relatively small and that it was reasonable to expect that all potential bidders
would be fully aware of the availability of the Company through such a press
release. J.P. Morgan noted that such a procedure might be preferable to an
auction prior to entering into a binding agreement because the failure of any
other buyer to meet or match a price in the range expected to be offered by WCAS
VIII might lead WCAS VIII to lower its offer, or even withdraw from the process
altogether. Given that affiliates of WCAS VIII already owned approximately 23%
of the Company, the Special Committee considered it quite possible that other
potential bidders in an open auction context would not materialize. The Special
Committee determined that if the bid were in the $14 to $16 per share range that
was anticipated, the Company could offer to accept a no-shop provision (which
would prevent the Company from soliciting or accepting competing bids or
alternative transactions), with a fiduciary out (which would allow the Board to
ignore the no-shop provision if the Board determined after consulting with legal
counsel that in order to satisfy their fiduciary duties to the Company and its
shareholders the Board had to consider or solicit competing bids or alternative
transactions), in exchange for a lower termination fee and minimal expense
reimbursement.
On October 21, 1998, Reboul MacMurray, Kilpatrick Stockton and Company
counsel continued negotiations with respect to the draft merger agreement, while
J.P. Morgan met with the Special Committee and its legal counsel in anticipation
of receiving an offer from WCAS VIII. After the market closed on October 21,
representatives of WCAS VIII met with the Special Committee to deliver its offer
to acquire the Company. The offer consisted of a fully financed, cash purchase
price of $15 per share, and a termination fee equal to 3% of the aggregate value
of the transaction, including debt assumed (approximately $9 million in the
aggregate), plus their out-of-pocket expenses. The representatives of WCAS VIII
stressed that they would agree to the Special Committee's demand from prior
discussions that there would be no financing condition, which they believed
would be a significant advantage in today's marketplace. The WCAS VIII
representatives stated that they thought that an auction of the entire Company
would be disruptive and would likely result in a price that was lower than WCAS
VIII would be willing to commit to pay at that time. They stated that their
intent was to offer a "preemptive price" that would be substantially higher than
any other bidder might reasonably be expected to offer, but that they would only
do so in a binding agreement prior to the implementation of any market checks
that would permit the Company to receive and consider offers from parties other
than WCAS VIII.
The Special Committee invited Mr. Eaton and Mr. Dahl into the meeting at
that time. The Special Committee inquired of Mr. Eaton and Mr. Dahl if
management would be in a position to initiate an alternative proposal based on
the "highly confident" financing letter the Company had previously obtained
through SunTrust Equitable Securities. Mr. Eaton responded that management was
not prepared at that time to make an alternative proposal, but that if a price
below $16 per share were likely to be accepted, management would reconsider. Mr.
Eaton and Mr. Dahl also described for the Special Committee the material terms
of management's individual employment and equity arrangements with WCAS VIII if
the proposed acquisition were to proceed.
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The Special Committee then met with Kilpatrick Stockton and J.P. Morgan to
discuss the proposal. Representatives of Kilpatrick Stockton reviewed again with
the members of the Special Committee their legal duties in connection with the
consideration of the offer. Representatives of J.P. Morgan discussed with the
Special Committee the analyses they had performed to produce a range of implied
values for the Company's Common Stock. The Special Committee also discussed with
J.P. Morgan its findings in connection with J.P. Morgan's investigation of the
Company and questioned J.P. Morgan concerning the assumptions made in connection
with its analyses and the facts on which these analyses were based. J.P. Morgan
explained to the Special Committee the assumptions, methodologies and relative
limits of its analyses. J.P. Morgan then provided the Special Committee with
materials outlining its valuation analyses.
After considerable discussion of the adequacy of the proposed purchase price
and the size and nature of the termination fee, the Special Committee directed
J.P. Morgan to seek to negotiate a price of at least $16 per share with a
meaningful market check and a lower termination fee. The Special Committee also
authorized Kilpatrick Stockton to continue to negotiate the terms of the
definitive Merger Agreement.
J.P. Morgan met with the WCAS VIII representatives to discuss the initial
offer of $15.00 per share, the amount of the termination fee and certain other
matters. The WCAS VIII representatives informed J.P. Morgan that they would
review their initial proposal and respond to J.P. Morgan. Later that evening,
the WCAS VIII representatives increased the offer to $16 per share, and lowered
the termination fee to a fixed fee of $6 million, inclusive of out-of-pocket
expenses. They stated that they were willing to increase the offer to $16 per
share because they recognized the significance of the Company's initial public
offering price, but that they were not willing to increase the offer any
further. The WCAS VIII representatives also agreed to condition the acquisition
on receipt of approval of a majority of the shares owned by shareholders
unaffiliated with the Investor Group and voted at a special meeting to approve
the Merger, and to allow any press releases announcing the transaction to
reference the Company's ability to entertain unsolicited alternative proposals.
The Special Committee then discussed in private with its advisors its desire
to cause some premium above the $16 per share level, which had been the initial
public offering price. After substantial discussion, it was decided that J.P.
Morgan representatives would make a proposal in the alternative to WCAS VIII,
offering the full $6 million termination fee for a per share price of $16.50 or
a lower termination fee for the per share price of $16. After receiving this
revised proposal, the WCAS VIII representatives indicated that $16 per share was
its "best and final offer," but that they were willing to decrease the
termination fee to a flat $3 million, inclusive of all expenses.
During the course of the Special Committee's meetings, the Special Committee
and its advisors again discussed in detail whether a full auction of the Company
would be a more advisable course of action than entering into a binding
commitment with market check features as was being proposed by WCAS VIII. The
Special Committee determined to negotiate a binding agreement with WCAS VIII
rather than pursuing an auction based on (i) the belief that conducting an
auction would cause WCAS VIII to withdraw its offer, (ii) concerns that a
vigorous auction might not materialize in any event, and (iii) the conclusion
that the fiduciary out provisions giving the Company the ability to discuss
unsolicited alternative proposals, announcement of such ability in the press
release, the relatively low termination fee, and the extended time during which
these provisions could operate, were effective means of simulating an auction
environment.
The Special Committee, together with representatives of J.P. Morgan and
Kilpatrick Stockton, met to consider the revised $16 per share cash offer by
WCAS VIII. J.P. Morgan indicated that based on the discussions with WCAS VIII
representatives, it believed that the $16.00 per share offer was the best offer
available from WCAS VIII. Because such price was consistent with and supported
by J.P. Morgan's valuation methodologies as a whole, J.P. Morgan indicated that
it would be able to deliver an opinion that the $16.00 per share price was fair
to the Public Shareholders from a financial point of view. The Special Committee
discussed the $16.00 per share offer in detail, and examined the advantages and
disadvantages of continuing to urge WCAS VIII to make an even higher offer,
including its ability to decline to proceed with the transaction if the Special
Committee insisted on a higher price, with the result that the Non-
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Affiliated Shareholders might not have the opportunity to consider a transaction
that offered a substantial premium for their shares.
Based in part on the J.P. Morgan opinion and the valuation analyses
presented by J.P. Morgan to the Special Committee during the October 21 meeting,
the Special Committee's belief that the $16.00 per share price was the best
offer available and the other factors described below in "SPECIAL FACTORS-- The
Special Committee's and Board's Recommendation," the Special Committee
unanimously decided to recommend the approval and adoption of the $16.00 per
share offer. Representatives of Kilpatrick Stockton, the Company, Reboul
MacMurray and WCAS VIII then held meetings during the late evening and early
morning of October 22 to resolve the remaining terms of the proposed Merger
Agreement, resulting in a Merger Agreement mutually satisfactory to WCAS VIII
and the Special Committee.
On October 22, 1998, prior to the opening of trading on Nasdaq, the Board
met to receive the report of the Special Committee. At this meeting, Mr. Nordin,
Chairman of the Special Committee, gave the report of the Special Committee in
which the Special Committee unanimously recommended to the Board that the Board
accept the $16.00 offer and approve and adopt the Merger Agreement. At the Board
meeting, J.P. Morgan also summarized its presentation given to the Special
Committee on October 21 for the full Board, and reaffirmed its opinion that the
$16.00 per share offer was fair to the Non-Affiliated Shareholders from a
financial point of view. After considerable discussion, the Board, with Mr. Paul
abstaining, approved the Merger Agreement and resolved to recommend the approval
of the Merger Agreement and the Merger to the shareholders of the Company.
At the conclusion of the October 22, 1998 meeting, the Company issued a
press release announcing that based on the unanimous recommendation of the
Special Committee, the Board (with Mr. Paul abstaining) had approved WCAS VIII's
merger proposal and the offer of $16.00 per share in cash. A majority of the
non-employee directors approved the merger proposal.
THE SPECIAL COMMITTEE'S AND THE BOARD'S RECOMMENDATION
The full Board formed the Special Committee, comprised of three directors,
to review and evaluate the proposed transaction because it appeared that all of
the directors except Mr. Nordin and the newly appointed members, Messrs. Miller
and Nash, would have a substantial financial interest in the proposed
transaction. The Special Committee unanimously recommended to the Board that the
Merger Agreement be approved and that it be recommended to the shareholders of
the Company. Following the unanimous recommendation of the Special Committee,
the Board (with Mr. Paul abstaining) approved the Merger Agreement and
recommended that the shareholders of the Company approve the Merger Agreement.
Although Mr. Paul disclosed his interest in the proposed Merger to the other
members of the Board and was entitled to vote to approve the Merger under
Georgia law, he chose to abstain to avoid any appearance of conflict of
interest. In connection with the foregoing, the Special Committee and the Board
(with Mr. Paul abstaining) determined that the Merger, the Merger Agreement and
the transactions contemplated thereby were fair and in the best interests of the
Non-Affiliated Shareholders. A majority of the non-employee directors approved
the Merger. In connection with their recommendations, the Special Committee and
the Board each adopted the analyses and findings of the Special Committee's
financial advisor, J.P. Morgan. See "SPECIAL FACTORS--Opinion of Financial
Advisor." THE SPECIAL COMMITTEE AND THE BOARD RECOMMEND THAT THE SHAREHOLDERS
VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT.
The Special Committee met on 8 occasions between October 1, 1998 and the
date of this Proxy Statement, in person or by telephone conference, to consider
developments relating to a possible sale of the Company. The Special Committee
was assisted in its deliberations by its financial advisor, J.P. Morgan, and its
legal counsel, Kilpatrick Stockton. At a meeting held on October 21, 1998, the
Special Committee determined that the Merger, the Merger Agreement and the
transactions contemplated thereby were fair and in the best interests of the
Non-Affiliated Shareholders of the Company and recommended that the full Board
approve the Merger Agreement. The Special Committee is unaware of any
development since its October 21, 1998 meeting that would affect its
determination, and, accordingly, the Special Committee reconfirms, as of the
date of this Proxy Statement, its determination that the Merger, the Merger
Agreement and the transactions contemplated thereby are fair and in the best
interests of the Non-Affiliated Shareholders of the Company. Based on the
foregoing, the Board also reconfirms, as of the date of this Proxy Statement,
its determination that the Merger, the Merger Agreement and the transactions
contemplated thereby are fair and in the best interests of the Non-Affiliated
Shareholders of the Company.
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The material factors the Special Committee evaluated in connection with the
Merger are described below. Except as noted below, the Special Committee
considered the following factors to be positive factors supporting its
determination that the Merger is fair and in the best interest of the
Non-Affiliated Shareholders. In arriving at its decision, the Special Committee
gave the most weight to:
(i) Its view that the new PPS coming into effect in 1998, 1999 and
future years for Medicare reimbursement could cause the Company's financial
results in the near term to fluctuate significantly, causing the value of
the shares of the Company, as well as other participants in the Company's
industry, to be reduced significantly in the public markets. Based on
interviews with Company management, a review of the Company's PPS study and
discussions with J.P. Morgan, the Special Committee believes that moving
from a cost-plus Medicare reimbursement system to PPS will require
significant re-engineering of the manner in which companies in the Company's
industry segment track reimbursable activities at the point of care in
nursing facilities. These efforts are expected to require significant
expenditures for training and information technology systems. The
participants in this industry segment are perceived by the financial
community as facing significant operating and earnings challenges in
transitioning to PPS, which is negatively affecting the market price of the
shares of these companies. Although the Company's study of the effects of
PPS predicts that PPS will ultimately be earnings neutral, these results are
dependent upon the Company achieving significant expense reductions, both
internally and from third party suppliers. Relatively small variances of
$200,000 to $300,000 in the Company's assumptions regarding revenues or
expenses would place the Company's earnings at substantial risk. Although
can also be no assurance that the Company will be able to obtain the
required reductions in expenses or reach the level of revenues necessary to
maintain its earnings at current levels, the Company currently believes it
will be successful.
(ii) Its view that the Company's acquisition strategy would be difficult
to implement as a public company due to the limited availability of
financing in the public markets at this time. The Company has grown
historically through acquisitions, and acquisitions remain a significant
component of the Company's growth strategy. The recent acquisition by the
Company of Flatley Rehabilitation & Nursing Centers required a modification
of the Company's existing credit facility. Only two of the eight
participating financial institutions in Centennial's existing credit
facility agreed to participate in this modification for the Flatley
acquisition and increased the interest rate by approximately 1.5%. The
Company will need additional debt and equity financing to pursue a growth
strategy through acquisitions. This reluctance by the Company's current
lenders to advance additional funds for acquisitions by the Company is
indicative of the difficulty that can be reasonably anticipated in arranging
this necessary additional debt and equity financing.
Historically, the minority of the Company's revenue growth has come from
its existing facilities. There is not a great potential for significant
increase in revenues at the Company's existing facilities. Acquisitions
represent the most viable method of increasing the Company's revenues.
Without acquisitions, it can be anticipated that the Company's revenues and
earnings will not grow significantly, or reflect, any increase in the
Company's share price.
The Special Committee was advised by J.P. Morgan that the availability
of debt and equity financing in the public markets may be limited as a
result of the disruption in the capital markets, and the Company's reduced
stock price would likely make acquisitions more expensive and dilutive to
earnings because the Company will have to issue a greater number of shares
to raise the same amount of equity necessary for its acquisitions. In this
connection, the Special Committee considered that the Company may be managed
more effectively as a private company not subject to pressures from public
shareholders and market professionals to maintain and grow earnings per
share. The Special Committee believes that as a private company the Company
would have greater flexibility to consider business strategies that have
long-term benefits (including acquisitions which are often dilutive in the
short term), but that would adversely impact earnings per share and the
market price of the Common Stock in the short term if the Company were
public. As a private company, the Company would also have greater
flexibility to wait for the financing markets to improve, because the
Company would not be
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subject to the pressures on a public company to maintain and grow revenues
on a quarterly and annual basis.
(iii) Its belief that it was unlikely another bidder would make a
definitive proposal that would result in a transaction providing greater
value to the Non-Affiliated Shareholders, and its conclusion that provisions
of the Merger Agreement permitting the Board, in the exercise of its
fiduciary duties, to consider competing bids, to announce its willingness to
consider such bids in a press release, and the reasonable termination fees
imposed on the Company if the Board were to accept an alternative proposal,
would facilitate any competing bid. In addition, the Special Committee
believed that the $16.00 per share price was the highest price that could be
obtained from WCAS VIII, and considered the possibility that WCAS VIII would
withdraw its bid if its proposal was used to attempt to generate higher bids
from third parties. The Special Committee was advised by J.P. Morgan that
the group of potential bidders for the Company was relatively small, and
that the ownership by WCAS VI and its affiliates of a significant portion of
the outstanding Common Stock (approximately 23%) could deter these bidders
from making competing offers.
(iv) J.P. Morgan's oral opinion delivered to the Special Committee on
October 21, 1998, reconfirmed in writing as of October 22, 1998, that the
$16.00 per share in cash to be received by the Non-Affiliated Shareholders
was fair to such holders from a financial point of view. The full text of
the written opinion of J.P. Morgan reaffirmed as of the date of this Proxy
Statement, which sets forth assumptions made, matters considered and
limitations on the review undertaken in connection with its opinion, is
attached hereto as Appendix B and is incorporated herein by reference. The
Special Committee and the Board adopted the analyses and findings of J.P.
Morgan in their determination that the Merger is fair to the Non-Affiliated
Shareholders. The Company's shareholders are urged to and should read such
opinion in its entirety. In reaching its opinion as to the fairness of the
Merger, J.P. Morgan employed generally accepted valuation methods. These
methods included an analysis of public company trading multiples, which
implied a value for the Company's stock of $8.50 to $12.00 per share; a
discounted cash flow analysis, which indicated a range of equity values
between $12.00 and $18.00 per share; and a selected transaction analysis,
which suggested an estimated range of equity values of between $20.00 and
$23.00 per share. These analyses are all more fully described in "--Opinion
of Financial Advisor." The Special Committee was aware that the values
suggested by J.P. Morgan's selected transaction analysis appeared to imply
that the Company's stock might be worth more than the price offered by WCAS
VIII, but the Special Committee noted that all of the transactions
underlying that analysis took place prior to the July 1998 downturn in the
long-term-care sector, and that, as a result, J.P. Morgan believed that the
valuations reflected in those transactions were less reliable as an
indicator of the Company's value after the downturn.
(v) The proposed terms and conditions of the Merger Agreement. In
particular, the Special Committee considered the fact that the Merger
Agreement does not provide for unreasonable termination fees and expense
reimbursement obligations which would have the effect of unreasonably
discouraging competing bids and that, subject to the satisfaction of
specified conditions, the Board would be able to withdraw or modify its
recommendation to the shareholders regarding the Merger and enter into an
agreement with respect to a more favorable transaction with a third party,
if such a transaction becomes available prior to the consummation of the
Merger. In addition, the Merger Agreement allows the Company to indicate in
its press release announcing the execution of the Merger Agreement that the
Company may respond to unsolicited proposals from alternative bidders, and
the lack of a time limit on the Board's ability to consider alternative
proposals allows the Board to effectively consider such proposals up until
the consummation of the Merger. See "THE MERGER."
(vi) The condition in the Merger Agreement that the Merger be approved
by a majority of the shares voted at the Special Meeting held by
Non-Affiliated Shareholders. Under the terms of the Merger Agreement, the
Merger must be approved by both a majority of the outstanding shares of
Common Stock and a majority of the shares voted at the Special Meeting by
Non-Affiliated Shareholders. The Special Committee believed the approval by
a majority of the shares voted at the
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Special Meeting by Non-Affiliated Shareholders, which is not required under
applicable law, was an important safeguard in light of the significant
percentage of shares held by the members of the Investor Group and their
respective affiliates.
(vii) The market price of the Common Stock, which Common Stock on October
15, 1998, one week prior to the announcement of the Merger, had closed at
$7.875 per share, and the premium over such price (as well as over the $8.50
closing per share market price on October 21, 1998) represented by the
$16.00 per share to be received by the Non-Affiliated Shareholders in the
Merger. In addition, the Special Committee considered J.P. Morgan's analyses
of the premiums paid in comparable merger transactions, which indicated that
the average premiums paid over the target stock prices one week prior to the
announcement date was 36%.
(viii) The financial ability and obligation of the Acquiror to consummate
the Merger. The Merger Agreement does not condition the Acquiror's
obligations to consummate the Merger on the Acquiror's ability to obtain
financing for the Merger. WCAS VIII has provided to the Company a commitment
letter dated October 22, 1998, from WCAS VIII and WCAS CP III pursuant to
which such parties have committed, subject only to the terms and conditions
of the Merger Agreement, to provide the Acquiror with up to an aggregate of
$210 million of financing and to ensure the performance of the Acquiror
under the Merger Agreement.
(ix) The ability of shareholders who may not support the Merger to
obtain "fair value" for their shares if they properly perfect and exercise
their appraisal rights under Georgia law. The Special Committee felt that it
was important that Georgia law provides shareholders with the opportunity to
exercise appraisal rights and to seek a determination in court of the fair
value of their shares if they are dissatisfied with the consideration
offered in the Merger.
(x) The only potentially negative factor considered by the Special
Committee was the actual or potential conflicts of interest to which Messrs.
Eaton, Dahl, Paul, Ortenzio and Hoover and their affiliates are subject in
connection with the Merger, as follows:
- The Special Committee considered that members of the Management Group will
own shares of Parent Common Stock, representing approximately 5.4% of the
Parent's outstanding capital stock and that the Parent will grant options
to Messrs. Eaton, Dahl, Fosha and Lepley and other current officers and
key employees of the Company to acquire shares of Parent Common Stock
representing an aggregate of approximately 12.3% of Parent's fully diluted
equity. The Special Committee further considered that the Management Group
will enter into employment agreements with the Surviving Corporation
amending their existing employment agreements with the Company, and that
such employment agreements will provide for the payment to them of base
salaries, possible annual cash bonuses and potential severance benefits.
- The Special Committee considered that WCAS VIII has given each member of
the Management Group an opportunity to roll over a substantial portion of
his equity investment in the Company into an investment in the Parent. The
Special Committee considered that the rollover of a substantial portion of
current equity investment in the Company would indicate a level of
confidence in the Company's prospects that might be inconsistent with the
Special Committee's assessment of the risks associated with the Company's
future, but the Special Committee noted that the Management Group believed
that the Company would likely have better access to capital as a private
Company controlled by a shareholder such as WCAS VIII with better access
to private capital. The Special Committee also considered that as a
private company Centennial could operate free from the pressures of public
shareholders and securities analysts to report predictable growth in
earnings from quarter to quarter. As discussed in factor (i) above, one of
the expected effects of PPS on Centennial is considerable fluctuation in
its financial results, causing the value of the stock of Centennial and
other companies in the industry to be reduced significantly in the public
markets.
In view of the variety of factors considered in connection with its
evaluation of the Merger Agreement, the Special Committee found it impracticable
to, and did not, quantify, rank or otherwise assign
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relative weights to the factors considered or determine that any factor was of
particular importance in reaching its determination that the Merger is fair to,
and in the best interests of, the Non-Affiliated Shareholders. Rather, the
Special Committee viewed its recommendations as being based upon its judgment,
in light of the totality of the information presented and considered, of the
overall effect of the Merger on the Non-Affiliated Shareholders compared to any
alternative transaction and the likely effect of rejecting the Merger proposal.
The Special Committee noted that approximately 35% of the outstanding shares
of Common Stock are held by persons who have expressed their intention or agreed
in writing to vote their shares of Common Stock in favor of the Merger,
including members of the Investor Group. The Special Committee also considered
that the obligation of the Company to consummate the Merger is conditioned upon
the favorable vote of a majority of the shares held by Non-Affiliated
Shareholders voting at the Special Meeting.
The Special Committee believes that the procedure that was followed in
determining the purchase price to be paid to the shareholders of the Company was
fair to the Non-Affiliated Shareholders. As described above, the eight person
Board (a majority of whom are members of the Management Group or affiliated with
the WCAS Group) appointed as the only members of the Special Committee three
non-employee directors who were not members of or affiliated with the Investor
Group and granted the Special Committee exclusive authority on behalf of the
Board to review, evaluate and negotiate the transaction proposed by management.
The Merger Agreement negotiated by the Special Committee contains provisions
that would enable the Board to withdraw or modify its recommendation to the
shareholders regarding the Merger and to enter into an agreement with respect to
a more favorable transaction with a third party, and contains provisions
(without which the Special Committee believes WCAS VIII would not have entered
into the Merger Agreement) imposing upon the Company termination fee and expense
reimbursement obligations that, in the view of the Special Committee, are
reasonable and would not have the effect of unreasonably discouraging competing
bids. Further, the shareholders of the Company may dissent from the Merger and
be paid cash for the "fair value" of their shares as determined in accordance
with Georgia law. In addition, the Merger is structured to require both the
approval of a majority of the outstanding shares of Common Stock and approval of
a majority of the shares held by Non-Affiliated Shareholders voting at the
Special Meeting, and the Special Committee believes, as of the date of this
Proxy Statement and for this and the reasons set forth above, that the Merger is
procedurally fair to the Non-Affiliated Shareholders.
The Special Committee believes that the merger transaction is procedurally
fair to the Non-Affiliated Shareholders because (i) the Special Committee
(comprised of directors who are not members of management or managing members or
general partners of the general partners of WCAS VIII, WCAS CP III, WCAS VI,
WCAS CP II or Healthcare Partners) was authorized to review, evaluate and
negotiate the proposed Merger; (ii) the Special Committee retained J.P. Morgan,
an unaffiliated financial advisor, to act solely on behalf of the Non-Affiliated
Shareholders and render an opinion as to the fairness of the Merger from a
financial point of view; (iii) the Merger Agreement allows the Board to withdraw
its recommendation to the shareholders and does not prohibit the Company from
entering into an alternative transaction; (iv) the Merger requires the approval
of a majority of the Non-Affiliated Shareholders voting at the Special Meeting;
and (v) a majority of the non-employee directors approved the Merger.
In considering the fairness of the Merger, the Special Committee and the
Board did not consider such factors as the Company's net book value or
liquidation value, which are not believed to be indicative of the value of the
Company as a going concern. The Company's tangible net book value per share and
net book value per share as of September 30, 1998 were $6.15 and $9.66,
respectively, both substantially below the $16.00 purchase price per share of
Common Stock to be paid by the Acquiror in the Merger. The Special Committee
further believes the Company's liquidation value, which takes into account the
appreciated value of the Company's assets, also would be substantially below
$16.00 per share.
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Based on the foregoing, the Special Committee unanimously determined that
the Merger, the Merger Agreement and the transactions contemplated thereby were
fair and in the best interests of the Non-Affiliated Shareholders and
recommended to the Board approval of the Merger Agreement and that it be
recommended to the shareholders of the Company. The Board, with only Mr. Paul
abstaining, approved the Merger on October 22, 1998 and has reconfirmed as of
the date of this Proxy Statement, that the Merger is fair and in the best
interests of the Non-Affiliated Shareholders.
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS APPROVE THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREIN.
OPINION OF FINANCIAL ADVISOR
Pursuant to an engagement letter dated October 12, 1998, the Special
Committee retained J.P. Morgan to act as its financial advisor in connection
with the consideration of the possible acquisition by the Acquiror and to render
to the Special Committee an opinion with respect to the fairness, from a
financial point of view, to the Non-Affiliated Shareholders of the Cash Merger
Consideration to be received in the Merger.
At the meeting of the Special Committee on October 21, 1998, J.P. Morgan
rendered its oral opinion to the Special Committee that, as of such date, the
Cash Merger Consideration to be paid to the Non-Affiliated Shareholders in the
proposed Merger was fair, from a financial point of view, to the Non-Affiliated
Shareholders. J.P. Morgan confirmed its October 21, 1998 oral opinion by
delivering its written opinions, dated as of October 22, 1998 and the date of
this Proxy Statement, to the Special Committee to the same effect. No
limitations were imposed by the Special Committee upon J.P. Morgan with respect
to the investigations made or procedures followed by it in rendering its
opinions.
The full text of the written opinion of J.P. Morgan dated as of the date of
this Proxy Statement, which sets forth the assumptions made, matters considered
and limits on the review undertaken, is attached as Appendix B to this Proxy
Statement and is incorporated herein by reference. The Company's shareholders
are urged to read the opinion in its entirety. J.P. Morgan's written opinion is
addressed to the Special Committee, is directed only to the Cash Merger
Consideration to be paid to the Non-Affiliated Shareholders and does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote at the Special Meeting. The summary of the opinion of
J.P. Morgan set forth in this Proxy Statement is qualified in its entirety by
reference to the full text of such opinion.
In arriving at its opinions, J.P. Morgan reviewed, among other things, the
Merger Agreement and, in the case of its opinion dated as of the date of this
Proxy Statement, this Proxy Statement; the audited financial statements of the
Company for the fiscal year ended December 31, 1997, and the unaudited financial
statements of the Company for the periods ended March 31 and June 30, 1998 and,
in the case of its opinion dated as of the date of this Proxy Statement, the
unaudited financial statements of the Company for the period ended September 30,
1998; current and historical market prices of the Company's common stock;
publicly available information including Form 10-Ks and Form 10-Qs concerning
other companies engaged in businesses comparable to those of the Company (such
as Beverly Enterprises, Extendicare Services and Genesis Health Ventures), and
the reported market prices for other companies' securities deemed comparable;
publicly available terms of transactions involving companies comparable to the
Company and the consideration paid for such companies (such as Paragon Health
Network/Mariner Health Group, Extendicare Inc./Arbor Health Care and Sun
Healthcare Group/Regency Health Services); the terms of other business
combinations deemed relevant by J.P. Morgan; the Company Projections and
agreements with respect to outstanding indebtedness or obligations of the
Company. J.P. Morgan also held discussions with members of the management of the
Company with respect to aspects of the Merger, the past and current operations
of the Company, the financial condition and future prospects and operations of
the Company, and other matters believed necessary or appropriate to J.P.
Morgan's inquiry. In addition, J.P. Morgan visited representative facilities of
the Company, and reviewed such other financial studies and analyses and
considered such other information as it deemed appropriate for the purposes of
its opinion.
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J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or that
was furnished to it by the Company or otherwise reviewed by J.P. Morgan, and
J.P. Morgan has not assumed any responsibility or liability therefor. J.P.
Morgan has not conducted any valuation or appraisal of any assets or
liabilities, nor have any valuations or appraisals been provided to J.P. Morgan.
In relying on financial analyses and forecasts provided to J.P. Morgan, J.P.
Morgan has assumed that they have been reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management as
to the expected future results of operations and financial condition of the
Company to which such analyses or forecasts relate. J.P. Morgan has also assumed
that the Merger will have the tax consequences described in this Proxy Statement
and in discussions with, and materials furnished to J.P. Morgan by,
representatives of the Company, and that the other transactions contemplated by
the Merger Agreement will be consummated as described in the Merger Agreement
and this Proxy Statement.
The Company Projections furnished to J.P. Morgan for the Company were
prepared by the management of the Company. The Company does not publicly
disclose internal management projections of the type provided to J.P. Morgan in
connection with J.P. Morgan's analysis of the Merger, and such projections were
not prepared with a view toward public disclosure. The Company Projections were
based on numerous variables and assumptions that are inherently uncertain and
may be beyond the control of management, including, without limitation, factors
related to general economic and competitive conditions and prevailing interest
rates. Accordingly, actual results could vary significantly from those set forth
in such projections. See "Company Projections."
J.P. Morgan's opinions are based on economic, market and other conditions as
in effect on, and the information made available to J.P. Morgan as of, the date
of such opinions. Subsequent developments may affect the written opinion dated
as of the date of this Proxy Statement and J.P. Morgan does not have any
obligation to update, revise, or reaffirm such opinion. J.P. Morgan expressed no
opinions as to the price at which the Company's common stock will trade at any
future time.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its opinion:
PUBLIC TRADING MULTIPLES. Using publicly available information, J.P. Morgan
compared selected financial data of the Company with similar data for selected
publicly traded companies engaged in businesses which J.P. Morgan judged to be
analogous to the Company. The companies selected by J.P. Morgan were Beverly
Enterprises, Extendicare Services, Genesis Health Ventures, Integrated Health
Services, Mariner Post-Acute Network, and Sun Healthcare Group. These companies
were selected, among other reasons, because they are in the same line of
business and are of substantially similar quality as the Company. For each
comparable company, publicly available financial performance for the quarter
ended closest to June 30, 1998 was measured and then converted to an annualized
basis. J.P. Morgan selected the mean and the median values for each multiple,
specifically: firm value to last-quarter annualized (LQA) Earnings before
interest taxes depreciation, amortization and rent (EBITDAR) and Earnings before
interest taxes depreciation and amortization (EBITDA), and equity value to 1998
and 1999 projected earnings. These multiples were then applied to the Company's
firm value and equity value respectively, yielding a range of implied trading
values for the Common Stock of approximately $8.50 to $12.00 per share.
DISCOUNTED CASH FLOW ANALYSIS. J.P. Morgan conducted a discounted cash flow
analysis for the purpose of determining the fully diluted equity value per share
for the Common Stock. J.P. Morgan calculated the unlevered free cash flows that
the Company is expected to generate during fiscal years 1999 through 2003 based
on the Company Projections and a sensitivity case adjusted by J.P. Morgan to
reflect more moderate growth in revenues as a result of lower adjusted
acquisition capital expenditures. These unlevered cash flows were ($78) million,
($79) million, ($71) million, ($61) million and ($51) million with full
acquisitions (as set out in the Company Projections), and ($25) million, ($26)
million, ($20) million,
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($15) million and ($9) million with more moderate growth. J.P. Morgan also
calculated a range of terminal values of the Company at the end of the five year
period ending 2003 by applying exit EBITDA multiples ranging from 5.0 to 7.0.
The unlevered free cash flows and the range of terminal EBITDA values were then
discounted to present values using a range of discount rates from 10 % to 13%,
which were chosen by J.P. Morgan based upon an analysis of the weighted average
cost of capital of the Company. The present value of the unlevered free cash
flows and the range of terminal asset values were then adjusted for the
Company's estimated June 30, 1998 excess cash, option exercise proceeds and
total debt. Based on the management's projections and adjusted management
projections and discount rate and EBITDA multiple sensitivities, the discounted
cash flow analysis indicated a range of equity values of between $12.00 and
$18.00 per share of the Common Stock on the basis of the Company as a
stand-alone entity.
SELECTED TRANSACTION ANALYSIS. Using publicly available information, J.P.
Morgan examined selected transactions with respect to precedent long-term care
industry acquisitions as well as going private transactions. Specifically, J.P.
Morgan reviewed the following transactions: Investcorp's acquisition of
Haborside Healthcare, Fountain View's acquisition of Summit Care Corporation,
Sun Healthcare Group's acquisition of Regency Health Services as well as the
Grancare-Living Centers of America transaction. Although a significant
datapoint, the value of these transactions in an evaluation of the Company
diminished because they were announced prior to the long-term-care sector market
correction which took place beginning July 1998. No appropriate transactions
occurred after this market downturn to include in this analysis. J.P. Morgan
applied a range of multiples derived from such analysis to the Company's
revenue, EBITDAR and earnings, and arrived at an estimated range of equity
values for the Common Stock of between $20.00 and $23.00 per share. While the
analysis performed using these selected transactions did not, standing alone,
support a finding of fairness, it was only one factor used by J.P. Morgan in
rendering its opinion.
The summary set forth above does not purport to be a complete description of
the analyses or data presented by J.P. Morgan but accurately summarizes the
procedures, findings and recommendations of J.P. Morgan. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. J.P. Morgan believes that the summary
set forth above and their analyses must be considered as a whole and that
selecting portions thereof, without considering all of its analyses, could
create an incomplete view of the processes underlying its analyses and opinion.
J.P. Morgan based its analyses on assumptions that it deemed reasonable,
including assumptions concerning general business and economic conditions and
industry-specific factors. The other principal assumptions upon which J.P.
Morgan based its analyses are set forth above under the description of each such
analysis. J.P. Morgan's analyses are not necessarily indicative of actual values
or actual future results that might be achieved, which values may be higher or
lower than those indicated. Moreover, J.P. Morgan's analyses are not and do not
purport to be appraisals or otherwise reflective of the prices at which
businesses actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. J.P. Morgan was selected to advise the Special Committee and
deliver a fairness opinion with respect to the Merger on the basis of such
experience.
For services rendered in connection with the Merger and the delivery of its
opinion, the Company paid J.P. Morgan a fee of $500,000 upon execution of its
engagement letter, dated October 12, 1998, and a fee of $1,500,000 upon the
delivery of its opinion. In addition, the Company has agreed to reimburse J.P.
Morgan for its expenses incurred in connection with its services, including the
fees and disbursements of counsel (such expenses not to exceed $50,000 without
the Company's written consent), and will indemnify J.P. Morgan against certain
liabilities, including liabilities arising under the Federal securities laws.
27
<PAGE>
J.P. Morgan has not provided other services to the Company prior to its
services in connection with the Merger. J.P. Morgan and its affiliates maintain
banking and other business relationships with WCAS and its affiliates, and have
advised, financed and undertaken capital markets transactions with such
entities, for which it receives customary fees. In 1997, J.P. Morgan served as
the dealer manager in connection with the acquisition of Control Data Systems,
Inc. by WCAS CP III, and other private investment partnerships affiliated with
certain of the WCAS Group, and provided the following other services: arranging
bank financing, providing credit, holding securities, arranging derivative swaps
and providing pension fund services. In 1998, J.P. Morgan provided the following
services: advising on sale of Control Data's software business, providing
credit, holding securities, arranging derivative swaps and providing pension
fund services. J.P. Morgan received less than $5 million in fees from its
relationships with the WCAS Group and other affiliated private investment
partnerships in each of 1997 and 1998. These fees were the result of arms'
length negotiations. J.P. Morgan has not acted as an advisor to the Company. In
the ordinary course of their businesses, affiliates of J.P. Morgan may actively
trade the debt and equity securities of the Company for their own accounts or
for the accounts of customers and, accordingly, they may at any time hold long
or short positions in such securities.
PURPOSE AND REASONS OF THE INVESTOR GROUP FOR THE MERGER
The purpose of the Investor Group for engaging in the transactions
contemplated by the Merger Agreement is to acquire 100% ownership of the
Company.
In making decisions with respect to the business of the Company, the Board
and the Company's management must currently consider the importance of steady
earnings growth to the market price of the Common Stock. The Investor Group
believes that, without the constraint of the public market's emphasis on
quarterly earnings, Centennial will have greater operating flexibility to focus
on enhancing long-term value by emphasizing growth (both internally and through
acquisitions) and operating cash flow. The Investor Group believes that an
emphasis on long-term growth rather than short-term earnings could eventually
result in greater business and capital markets opportunities than would be
available to a publicly-held Centennial. The Investor Group believes that as a
private company Centennial will be able to make decisions that will negatively
affect current quarter earnings but that will increase the value of the
Company's assets or earnings over the long-term. In a public company setting it
is difficult to make decisions that could negatively affect earnings knowing
that the result of those decisions could be a significant reduction in per share
price if analysts' short-term earnings expectations are not met or exceeded.
In addition, after the Merger, Centennial will no longer be subject to the
reporting requirements of the Exchange Act, which will allow the Company to
eliminate the time devoted by its management and certain other employees to
matters which relate exclusively to the Company being a public company.
"Going-private" will also reduce certain other costs which relate to being a
public company, including the costs of certain accounting, auditing and SEC
counsel activities, the cost of preparing, printing and mailing corporate
reports and proxy statements, the expense of a transfer agent and the cost of
investor relations activities.
These assessments by the Investor Group are based upon publicly available
information regarding the Company and the Investor Group's due diligence
investigation or knowledge of the Company and the Investor Group's experience in
investing in or managing companies in the healthcare industry and public
companies generally. While the Investor Group believes that there will be
significant opportunities associated with its investment in the Company, the
Investor Group realizes that there are also substantial risks that such
opportunities may not be fully realized. The primary risks to the Investor Group
relate to the currently unknown long-term effects of PPS and other possible
governmental healthcare spending reductions, the uncertainty concerning whether
the Company's growth strategy will succeed and the Company's substantial
indebtedness of approximately $293 million ($168 million of senior debt and $125
million of subordinated debt). The Investor Group's concern over PPS is
consistent with the Special Committee's finding that the effect of PPS on the
Company is one of the most significant positive factors in
28
<PAGE>
reaching its determination that the Merger was fair and in the best interest of
the Non-Affiliated Shareholders. The Special Committee found that PPS would
likely cause the Company's financial results to fluctuate significantly in the
near term, causing the value of the shares of the Company to be reduced
significantly in the public markets. The Investor Group has adopted the analyses
of the Special Committee, including its conclusions that the effect of PPS was a
significant positive factor in determining the Merger to be fair and in the best
interests of the Non-Affiliated Shareholders. However, the Investor Group
considered the effect of PPS to be a negative, but not significant, factor in
its decision to enter into the Merger Agreement because of its focus on the
long-term value of the Company. The Investor Group believes that the uncertainty
over PPS will be significantly reduced over the next year to year and a half
after the affects of PPS on earnings are fully known. Because of its long-term
focus, the Investor Group is less concerned than the Special Committee and the
Board (who are more concerned about value for the Company's shares in the public
market) about short-term fluctuations in the Company's financial results and its
short-term share value.
As a result of the Merger, WCAS VIII will acquire, for a cash investment of
$117,447,885, approximately 77.8% of the equity interests in the Parent; WCAS CP
III will acquire, for a cash investment of $125 million, 11.8% of the equity
interests in the Parent and $125 million principal amount of subordinated notes
of the Parent; the Management Group will acquire, for an investment of
approximately $8.1 million (through a contribution of a total of 508,852 shares
of Common Stock), approximately 5.4% of the equity interests in the Parent; and
the WCAS Group (other than WCAS VIII and WCAS CP III) will acquire, for an
investment of approximately $7.6 million (through a contribution of a total of
245,499 shares of Common Stock and a cash investment of approximately $3.6
million), approximately 5.0% of the equity interests in the Parent. Members of
the Investor Group will also receive the Cash Merger Consideration for the
remainder of their investment in the Company on the same terms as the other
shareholders and will receive a cash payment for the aggregate unrealized value
of their outstanding stock options. In addition, the Management Group will have
amended and restated employment agreements with the Surviving Corporation and
the Parent. After consummation of the Merger, the Management Group, as well as
other key employees, will receive fees and bonuses of approximately $2.0
million. Mr. Eaton will receive $1.4 million of these fees and bonuses. These
payments to the Management Group will be made for agreeing to amend their
existing employment agreements, to extend covenants not to compete and to
continuing their current employment. If the Merger is not consummated, these
fees and bonuses will not be paid because the employment agreements will not be
amended as described above.
WCAS VI and WCAS CP II hold 2,520,193 and 246,896 shares of Common Stock,
respectively, or approximately 21.1% and 2.1% of the outstanding shares of
Common Stock, respectively, and will receive $40,323,088 and $3,950,336,
respectively, for such shares in connection with the Merger. Mr. Paul, a
director of the Company, and eight and seven other individual members of the
WCAS Group are general partners of the sole general partner of WCAS VI and WCAS
CP II, respectively. The sole general partner of WCAS VI is WCAS VI Partners,
L.P. and the sole general partner of WCAS CP II is WCAS CP II Partners.
POSITION OF THE INVESTOR GROUP, THE PARENT, THE ACQUIROR AND THE COMPANY AS TO
FAIRNESS OF THE MERGER
The members of the Investor Group are WCAS VIII, WCAS CP III, Healthcare
Partners, eleven individuals who are employees of WCA Management and managing
members of the sole general partner of WCAS VIII (Mr. Paul and Patrick J. Welsh,
Russell L. Carson, Bruce K. Anderson, Thomas E. McInerney, Robert A. Minicucci,
Anthony J. de Nicola, Paul B. Queally, Lawrence B. Sorrel, Laura M. VanBuren and
Priscilla A. Newman), two other employees of WCA Management (D. Scott Mackesy
and Rudolph E. Rupert) and Messrs. Eaton, Dahl, Fosha and Lepley. Messrs. Paul,
Welsh, Carson, Anderson, McInerney, Minicucci, de Nicola, Queally and Ms. Van
Buren are also general partners of the general partners of WCAS VI and WCAS CP
II, which are receiving Cash Merger Consolidation for their Common Stock. Each
member of the Investor Group has considered the analyses and findings of the
29
<PAGE>
Special Committee and the Board (described in detail in "SPECIAL FACTORS--The
Special Committee's and the Board's Recommendation") with respect to the
fairness of the Merger to the Non-Affiliated Shareholders of the Company. As of
the date of this Proxy Statement, each member of the Investor Group, the Parent,
the Acquiror or the Company adopt the analyses and findings of the Special
Committee and the Board with respect to the fairness of the Merger and believe
that the Merger, the Merger Agreement and the transactions contemplated thereby
are fair to and in the best interests of the Non-Affiliated Shareholders;
provided that no opinion is expressed as to the fairness to any shareholder
making an investment in the Parent. None of the Investor Group, the Parent or
the Acquiror makes any recommendation as to how the Company's shareholders
should vote on the Merger Agreement. The members of the Investor Group have
financial interests in the Merger and the certain members of the Management
Group have financial and employment interests in the Merger. See "SPECIAL
FACTORS--Conflicts of Interest."
Each member of the Investor Group and the Parent, the Acquiror and the
Company believe that the Merger transaction is procedurally fair to the
Non-Affiliated Shareholders because (i) the Special Committee (comprised of
directors who are not members of management or managing members or general
partners of the general partners of WCAS VIII, WCAS CP III, WCAS VI, WCAS CP II
or Healthcare Partners) was authorized to review, evaluate and negotiate the
proposed Merger; (ii) the Special Committee retained J.P. Morgan, an
unaffiliated financial advisor, to act solely on behalf of the Non-Affiliated
Shareholders and render an opinion as to the fairness of the Merger from a
financial point of view; (iii) the Merger Agreement allows the Board to withdraw
its recommendation to the shareholders and does not prohibit the Company from
entering into an alternative transaction; (iv) the Merger requires the approval
of a majority of the Non-Affiliated Shareholders voting at the Special Meeting;
and (v) a majority of the non-employee directors approved the Merger.
CONFLICTS OF INTEREST
In considering the recommendations of the Board with respect to the Merger,
shareholders should be aware that officers and directors of Centennial, as well
as investors in Centennial, have interests in connection with the Merger which
may present them with actual or potential conflicts of interest as summarized
below. The Special Committee and the Board were aware of these interests and
considered them among the other matters described under "SPECIAL FACTORS--The
Special Committee's and the Board's Recommendation." The Special Committee
considered the Management Group's conflicts of interest to be a negative factor
in its determination that the Merger is fair to and in the best interests of the
Non-Affiliated Shareholders, even though the approximately $2.0 million in fees
and bonuses to be allocated among the members of the Management Group (and other
key employees) are intended to provide consideration for their agreement to
continue employment with the Company and to extend noncompete periods.
WCAS VI and WCAS CP II hold 2,520,193 and 246,896 shares of Common Stock,
respectively, or approximately 21.1% and 2.1% of the outstanding shares of
Common Stock, respectively, and will receive $40,323,088 and $3,950,336 for such
shares in connection with the Merger. Mr. Paul, a director of the Company, and
the other individual members of the WCAS Group are general partners of the sole
general partner of WCAS VI and WCAS CP II.
The Company will pay WCA Management $3.0 million for financial advisory
services rendered to WCAS VIII and WCAS CP III in connection with the
structuring of the Merger and the related financing transactions (including the
equity and subordinated debt financing of the Parent and the Acquiror and the
amendment of the Company's existing senior credit facility). WCAS VIII proposed
this fee be paid to WCA Management and this fee will be credited against amounts
otherwise payable by WCAS VIII and WCAS CP III to WCA Management. The Company
agreed to pay the fee to WCA Management. WCA Management is a New York
corporation, owned by Patrick J. Welsh, Russell L. Carson and Bruce K. Anderson,
that serves as the manager of WCAS VIII, WCAS CP III, Healthcare Partners, WCAS
VI and WCAS CP II and employs the individual members of the WCAS Group.
30
<PAGE>
Upon consummation of the Merger, the members of the Special Committee will
receive cash for the aggregate unrealized gain on their stock options. Messrs.
Scott Miller and Charles Nash will each receive $75,631 for such unrealized
gain. Because Mr. Bertil Nordin, chairman of the Special Committee, will not
receive any unrealized gain on his stock options, the Company agreed to pay him
$75,000 for his service on the Special Committee. Each member of the Special
Committee also received reimbursement of out-of-pocket expenses and regular fees
for attending board or committee meetings. In addition, Mr. Nordin is a limited
partner of Information Partners, for which WCA Management provides management
services. The members of the Special Committee believe that the foregoing
arrangements do not affect their impartiality.
Two other directors have interests in members of the Investor Group. Robert
Ortenzio, a director of Centennial is the residual beneficiary of a trust which
is a limited partner of WCAS VI. James B. Hoover, a director of Centennial, is a
former general partner and current limited partner of the respective sole
general partners of WCAS VI and Welsh, Carson, Anderson & Stowe, VII, L.P., a
private investment partnership and a general partner of the sole general
partners of WCAS CP II and Welsh, Carson, Anderson & Stowe V, L.P., a private
investment partnership in which members of the Investor Group serve as general
partners.
Messrs. Eaton, Dahl, Fosha and Lepley will continue to have an equity
interest in the Surviving Corporation through their ownership of Parent Common
Stock and the ultimate value of this interest could exceed $16.00 per share. If
the Merger is consummated, Messrs. Eaton and Dahl will be designated as members
of the board of directors of the Surviving Corporation and Messrs. Eaton, Dahl,
Fosha and Lepley will remain as senior management of the Surviving Corporation
pursuant to amended and restated employment agreements that provide for two year
rolling severance and noncompete periods. If the Merger is consummated, the
Company will pay Messrs. Eaton, Dahl, Fosha and Lepley and other key employees
an aggregate of approximately $2.0 million in fees and bonuses in consideration
for these noncompete periods and as bonuses for remaining with the Company,
beginning within two months after the effective time of the Merger. In addition,
if the Merger is consummated, options to purchase Parent Common Stock will be
made available to Messrs. Eaton, Dahl, Fosha and Lepley and other key employees.
Indemnification arrangements and directors' and officers' liability insurance
for existing directors and officers of Centennial will be continued by the
Surviving Corporation after the Merger.
SHAREHOLDERS AGREEMENT. On October 22, 1998, the Parent, the Acquiror, WCAS
VI and Messrs. Eaton, Dahl, Fosha and Lepley entered into a shareholders
agreement (the "Shareholders Agreement") which provides, among other things,
that WCAS VI and each of Messrs. Eaton, Dahl, Fosha and Lepley will vote their
shares of Common Stock (i) in favor of adoption and approval of the Merger
Agreement and the Merger and the approval of the terms thereof and each of the
other actions contemplated by the Merger Agreement and (ii) except as otherwise
agreed to in writing in advance by the Parent, against (other than the Merger
and the transactions contemplated by the Merger Agreement): (a) any
extraordinary corporate transaction, such as a merger, consolidation or other
business combination involving the Company or its subsidiaries; (b) any sale,
lease or transfer of a material amount of the assets of the Company or its
subsidiaries, or a reorganization, recapitalization, dissolution or liquidation
of the Company or its subsidiaries; (c)(1) any change in a majority of the
Board; (2) any material amendment of the Company's Amended and Restated Articles
of Incorporation or Amended and Restated Bylaws, or (3) any other action
involving the Company or its subsidiaries that has the effect of impeding,
interfering with, delaying, postponing, or impairing the ability of the Company
to consummate the Merger or the transactions contemplated by the Merger
Agreement. Pursuant to the Shareholders Agreement, WCAS VI and each of Messrs.
Eaton, Dahl, Fosha and Lepley agreed not to enter into any agreement or
understanding with any person or entity prior to the termination of the
Shareholders Agreement to vote in any manner inconsistent therewith.
Pursuant to the Shareholders Agreement, each of Messrs. Eaton, Dahl, Fosha
and Lepley agreed that while the Merger Agreement is in effect, and except as
contemplated by the Shareholders Agreement, not to (i) sell, transfer, pledge,
encumber, assign or otherwise dispose of or enter into any contract, option or
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<PAGE>
other arrangement with respect to or consent to the offer for sale, sale,
transfer, pledge, encumbrance, assignment or other disposition of, any of its
shares of Common Stock, or any interest therein, except to the Parent; (ii)
grant any proxies or powers of attorney, deposit any shares of Common Stock into
a voting trust or enter into a voting agreement with any entity other than the
Parent or the Acquiror; or (iii) take any action that would make any
representation or warranty of such person contained in the Shareholders
Agreement untrue or incorrect or have the effect of preventing or disabling
Messrs. Eaton, Dahl, Fosha or Lepley from performing such person's obligations
under the Shareholders Agreement. The Shareholders Agreement terminates, and no
party shall have any rights or obligations thereunder upon the earliest of the
effective time of the Merger or termination of the Merger Agreement
POST-MERGER OWNERSHIP AND CONTROL OF THE PARENT. It is anticipated that
immediately after the Merger the following individuals and entities will
beneficially own the number of shares of Parent Common Stock shown in the
following table.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF PARENT COMMON
STOCK PERCENTAGE OF PARENT
BENEFICIALLY COMMON STOCK
NAME OF BENEFICIAL OWNER OWNED BENEFICIALLY OWNED
- -------------------------------------------------------------------------- ----------------- ---------------------
<S> <C> <C>
J. Stephen Eaton.......................................................... 3,436,192 4.6%
Alan C. Dahl.............................................................. 237,968 *
Kent C. Fosha, Sr......................................................... 63,760 *
Lawrence W. Lepley........................................................ 332,896 *
WCAS VIII................................................................. 58,723,926 77.8%
WCAS CP III............................................................... 8,928,571 11.8%
Andrew M. Paul (1)........................................................ 430,598 *
Healthcare Partners....................................................... 651,071 *
WCAS Group (2)............................................................ 2,694,405 3.6%
</TABLE>
- ------------------------
* Less than 1%
(1) Excludes shares of Parent Common Stock owned by WCAS VIII, WCAS CP III and
Healthcare Partners which may be deemed to be beneficially owned by the
respective general partners of the general partners of these partnerships
who are members of the WCAS Group, including Mr. Paul, as a result of being
indirect general partners of such entities.
(2) Excludes shares of Parent Common Stock owned by WCAS VIII, WCAS CP III,
Healthcare Partners and Mr. Paul.
Following consummation of the Merger, the executive officers of Centennial
will continue as the executive officers of the Parent and the Surviving
Corporation, and Messrs. Eaton, Dahl, Paul, Sorrel, and Mackesy will serve on
the Board of Directors of the Parent and the Surviving Corporation. It is
anticipated that all current employees of Centennial and its subsidiaries will
continue in their same capacities after the Merger.
THE MANAGEMENT GROUP. After consummation of the Merger, each member of the
Management Group will own shares of Parent Common Stock and vested options to
purchase shares of Parent Common Stock (representing approximately 7.3% of such
shares expected to be then issued and outstanding assuming exercise of all
options then outstanding). Shares of Common Stock held by the Management Group
that are not exchanged for Parent Common Stock will be converted into the right
to receive the same Cash Merger Consideration as shares of Common Stock held by
other shareholders of the Company.
At the closing of the Merger, all outstanding options to purchase Common
Stock shall have vested and will be cashed out in accordance with the terms of
the Merger Agreement. All options that are not exercised will be canceled in
accordance with the terms of the Merger Agreement. See "THE MERGER-- Stock
Options." As of October 22, 1998, there were options outstanding to purchase an
aggregate of
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<PAGE>
925,580 shares of Common Stock at a weighted average exercise price of $17.00
per share, of which 274,409 have an exercise price per share of less than
$16.00.
The following table sets forth information as of the date of this Proxy
Statement as to the shares of Common Stock and the options to purchase shares of
Common Stock held by the Investor Group, WCAS VI and WCAS CP II for which Cash
Merger Consideration will be received upon consummation of the Merger.
<TABLE>
<CAPTION>
AMOUNT OF
SHARES NOT CASH TO BE
CONTRIBUTED RECEIVED FOR AMOUNT OF CASH TO
TO SHARES NOT BE RECEIVED FOR
INVESTOR GROUP PARENT CONTRIBUTED OPTIONS TERMINATED
- --------------------------------------------------------------- ------------- ------------- ------------------
<S> <C> <C> <C>
J. Stephen Eaton............................................... 685,847 $ 10,973,552 $ 226,448
Alan C. Dahl................................................... 29,746 475,938 75,483
Kent C. Fosha, Sr.............................................. 0 0 169,397
Lawrence W. Lepley, Jr......................................... 41,612 665,794 45,834
Andrew M. Paul................................................. 0 0 0
Welsh, Carson, Anderson & Stowe VI,L.P......................... 2,520,193 40,323,088 0
WCAS Capital Partners II, L.P.................................. 246,896 3,950,336 0
WCAS Healthcare Partners, L.P.................................. 0 0 0
</TABLE>
INITIAL MANAGEMENT OWNERSHIP. Pursuant to the Shareholders Agreement, at
the effective date of the Merger, (i) the Management Group will exchange 508,852
shares of Common Stock owned by them for shares of Parent Common Stock; (ii) the
Parent will grant to the Management Group and other members of management and
certain other key employees options (the "New Options") to purchase Parent
Common Stock representing approximately 12.3% of the fully diluted Parent Common
Stock which will be granted as either "Time Vesting Options" or "Performance
Vesting Options" as described below; and (iii) the Management Group and certain
other key employees will be given the opportunity to purchase additional shares
of the Parent Common Stock. The Parent will also reserve options to purchase
Parent Common Stock representing approximately 0.7% of the fully diluted Parent
Common Stock for future key employees of the Parent and/or Surviving
Corporation. The purchase price and option exercise price for shares of Parent
Common Stock granted to existing employees of the Company will be $2.00 per
share. Shares of Common Stock exchanged will be valued at the Cash Merger
Consideration for purposes of the exchange.
EXERCISABILITY OF OPTIONS. Time Vesting Options will be granted at the
effective time of the Merger representing approximately 7.45% of the fully
diluted Parent Common Stock, of which one-third will be immediately exercisable
and two-thirds will vest in installments of 25% on each of the first through
fourth anniversaries of the effective time of the Merger. Performance Vesting
Options will be granted at the effective time of the Merger representing
approximately 4.85% of the fully diluted Parent Common Stock, and will be
exercisable at any time after the eighth anniversary of the date of grant,
subject to (i) acceleration upon specified liquidity events if the
pre-determined performance targets based on the return on WCAS VIII's equity
investment are met and (ii) a potential restructuring if a public offering of
Parent Common Stock occurs before the fourth anniversary of the date of grant.
The Management Group (consisting of four individuals) will be granted New
Options for a total of 7,017,103 shares. Senior vice presidents of the Company
and its affiliates (a total of ten individuals) will be granted New Options for
a total of 1,703,509 shares.
AMENDED AND RESTATED EMPLOYMENT AGREEMENTS WITH THE MANAGEMENT
INVESTORS. Upon consummation of the Merger, the existing employment agreements
with Messrs. Eaton, Dahl, Fosha and Lepley will be amended and restated. The
principal terms of the amended employment agreements are the same as the
existing agreements except as summarized below:
- each agreement will provide for two-year rolling severance and noncompete
periods;
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<PAGE>
- the agreements with Messrs. Eaton, Dahl and Fosha will add the Parent as a
party and provide that employees will have the same title, duties and
responsibilities with the Parent that such employees have with the
Company; and
- It is anticipated Mr. Eaton's employment agreement will be amended to
provide that if following a change of control (as will be defined in the
employment agreement) he is not offered the opportunity to continue as
Chief Executive Officer of the Parent, and at that time the Parent's Board
of Directors, exercising reasonable judgment, determines that the value of
the Parent has reached an appropriate total value, the Parent will, at Mr.
Eaton's request (but subject to obtaining all consents required under its
loan agreements), repurchase up to 50% of the shares of Parent's Common
Stock acquired by Mr. Eaton at fair market value (as determined by the
Agreement of the Parent's Board of Directors and Mr. Eaton at that time),
unless the Parent is a public company at the time of such change of
control and the average daily volume for the Common Stock of Parent is
less than a number of shares to be determined. Mr. Eaton's employment
agreement is still being negotiated at this time.
Messrs. Eaton, Dahl, Fosha and Lepley (and other key employees) will be
entitled to an aggregate payment of approximately $2.0 million for agreeing to
amend the employment agreement, to extend a covenant not to compete or for
continuing employment. The amounts of such payments to be received either
immediately after or beginning within the two month period following
consummation of the Merger will be allocated $1.4 million to Mr. Eaton with the
remainder allocated to other key employees including Messrs. Dahl, Fosha and
Lepley.
INDEMNIFICATION AND INSURANCE. The Merger Agreement requires Centennial to
provide indemnification, to the full extent permitted by applicable law, to its
current and former officers and directors (including members of the Special
Committee) against liabilities (including reasonable attorneys' fees) relating
to actions or omissions arising out of their being a director, officer, employee
or agent of the Company at or prior to the closing of the Merger (including the
transactions contemplated by the Merger Agreement). In addition, Centennial is
obligated for a period of six years from the closing of the Merger to continue
in effect directors' and officers' liability insurance with respect to matters
occurring prior to the closing of the Merger, which insurance must contain terms
and conditions no less advantageous than are contained in the Company's current
directors' and officers' liability insurance policy; provided that the Company
is not obligated to expend annually more than 200% of the current cost of such
coverage.
WCAS AFFILIATE DIRECTOR. Andrew M. Paul, a director of the Company and a
general partner or managing member of the general partner of each of WCAS VI,
WCAS CP II, Healthcare Partners, WCAS VIII, WCAS CP III and an employee of WCA
Management, owns 12,707 shares of Common Stock. Mr. Paul intends to contribute
his 12,707 shares to the Parent in return for shares of Parent Common Stock and
will not receive the Cash Merger Consideration for his 12,707 shares of Common
Stock. Mr. Paul also intends to purchase an additional 328,942 shares of Parent
Common Stock for cash prior to the Merger. See "SPECIAL FACTORS--Conflicts of
Interest."
OTHER MEMBERS OF THE BOARD. Robert Ortenzio, a member of the Board, is the
residual beneficiary of a trust which is a limited partner of WCAS VI. James B.
Hoover, a member of the Board, is a former general partner and current limited
partner of the sole general partners of WCAS VI and Welsh, Carson, Anderson &
Stowe VII, L.P. and a general partner of the respective sole general partners of
WCAS CP II and Welsh, Carson, Anderson & Stowe V, L.P.
PAYMENT TO WCA MANAGEMENT. The Company will pay WCA Management $3.0 million
for financial advisory services rendered to the WCAS VIII and WCAS CP III in
connection with the structuring of the Merger and the related financing
transactions (including the equity and subordinated debt financing of the Parent
and the Acquiror and the amendment of the Company's existing senior credit
facility). WCA Management is a New York corporation, owned by Patrick J. Welsh,
Russell L. Carson and Bruce K. Anderson that serves as the manager of WCAS VIII,
WCAS CP III, Healthcare Partners, WCAS VI
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and WCAS CP II. The thirteen individual members of the WCAS Group are employees
of WCA Management.
The services performed by WCA Management in connection with the Merger were
different than those performed by J.P. Morgan. J.P. Morgan served as the
financial advisor to the Special Committee for the purpose of advising and
assisting the Special Committee in its negotiations with WCAS VIII. J.P. Morgan
also delivered a fairness opinion in connection the Merger. WCA Management did
not deliver any opinion or report in connection with the transaction. J.P.
Morgan was not involved in the financing for the Parent or the Acquiror.
SPECIAL COMMITTEE. The Special Committee met 8 times from October 1, 1998
through the date of this Proxy Statement and each member received compensation
of $1,000 for each meeting attended and reimbursement of out-of-pocket expenses
under Centennial's policy for payment of director's fees and expenses. Members
of the Special Committee will be entitled to certain indemnification rights
granted under the Merger Agreement to the current and former officers and
directors of the Company. Under the terms of the Merger Agreement, the options
held by the members of the Special Committee will be terminated and each holder
thereof will receive an amount in cash equal to the aggregate unrealized gain on
such options on the same basis as other holders of Centennial stock options.
Mr. Nordin has options to acquire 12,415 shares of Common Stock, Mr. Miller
has options to acquire 10,345 shares of Common Stock and Mr. Nash has options to
acquire 10,345 shares of Common Stock. Upon consummation of the Merger, the
members of the Special Committee will receive the following cash payments: Mr.
Nordin will not receive any consideration for the aggregate unrealized gain on
his stock options and will receive $75,000 for his service as Chairman of the
Special Committee, as well as $15,066 for meetings attended and expenses
reimbursed, for a total cash payment of $90,066. Mr. Miller will receive $75,631
for the aggregate unrealized gain on his stock options, as well as $9,612 for
meetings attended and expenses reimbursed, for a total cash payment of $85,243.
Mr. Nash will receive $75,631 for the aggregate unrealized gain on his stock
options, as well as $9,000 for meetings attended and expenses reimbursed, for a
total cash payment of $84,631. Mr. Nordin is a limited partner of Information
Partners, an investment partnership affiliated with the WCAS Group, with
primarily individual limited partners, that is much smaller than the other WCAS
partnerships but coinvests in investments in the information services industry.
WCA Management provides management services to Information Partners. Mr. Nordin
does not believe that his passive investment in Information Partners affects his
impartiality.
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the entire equity interest in the Company will be
owned by the Investor Group through their ownership of Parent Common Stock. The
Non-Affiliated Shareholders will no longer have any interest in, and will not be
shareholders of, Centennial, and therefore will not participate in Centennial's
future earnings and potential growth. Instead, the Non-Affiliated Shareholders
will have the right to receive $16.00 in cash, without interest, for each share
held (other than shares in respect of which appraisal rights have been
perfected).
The Special Committee believes that the principal benefits of the Merger to
the Non-Affiliated Shareholders arise from the opportunity to receive cash value
for the Common Stock, which is substantial in light of the market price of the
Common Stock one week prior to the announcement of the Merger and the
anticipated future difficulty in pursuing the Company's acquisition strategy.
See "SPECIAL FACTORS--The Special Committee's and the Board's Recommendation."
The Special Committee believes that the principal detriments of the Merger to
the Non-Affiliated Shareholders arise from their inability to participate in the
Company's future earnings and potential growth following the consummation of the
Merger, and from the expectation that the receipt of Cash Merger Consideration
for their shares of Common Stock in the Merger will be taxable transaction for
federal income tax purposes. To the extent that the Investor Group receives
shares of Parent Common Stock in exchange for their shares of Common Stock, they
will have the ability to participate in the Company's future earnings and
potential growth and will have the ability to benefit from any corporate
opportunities that may be pursued by the Company in
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the future. To the extent that the Investor Group receives shares of Parent
Common Stock in exchange for their shares of Common Stock, they will also bear
the risk of any decreases in the value of the Company. See "SPECIAL FACTORS--The
Special Committee's and the Board's Recommendation." The principal benefits of
the Merger to the Company are discussed under "SPECIAL FACTORS--The Special
Committee's and the Board's Recommendation."
An equity investment in the Parent following the Merger involves substantial
risk resulting from the limited liquidity of any such investment and the
leverage resulting from the future borrowings that will be required to purchase
the Common Stock from the Non-Affiliated Shareholders and to fund the capital
expenditures and acquisitions necessary to execute the Company's business
strategy. Nonetheless, if the Company successfully executes its business
strategy, the value of such an equity investment could be considerably greater
than the original cost thereof. See "SPECIAL FACTORS--Conflicts of Interest."
In addition, the Common Stock will no longer be traded on Nasdaq and price
quotations for sales of shares in the public market will no longer be available.
The registration of the Common Stock under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") will terminate and the Company will no longer
file periodic or annual reports. Centennial's officers, directors and the owners
of ten percent of the Common Stock will no longer be subject to the short-swing
profit provisions of Section 16(b) of the Exchange Act and Centennial will no
longer be subject to the going private disclosure obligations of Rule 13e-3 of
the Exchange Act.
FINANCING OF THE MERGER
It is estimated that approximately $204 million will be required to
consummate the Merger and pay related fees and expenses. The Merger is not
subject to a financing contingency, and WCAS VIII and WCAS CP III have committed
to make cash investments of up to an aggregate of $210 million for such purpose.
See "Special Committee's and the Board's Recommendation". It is currently
anticipated that the total investment of the WCAS Group will be approximately
$250 million, of which $125 million will be for Parent Common Stock and $125
million will be for $125 million principal amount of subordinated debt of the
Parent and 8,928,571 shares of Parent Common Stock. Approximately $204 million
of this investment by the WCAS Group will be used to consummate the Merger and
pay related fees and expenses. The balance of the WCAS Group investment will be
used to repay indebtedness currently outstanding under the Company's senior
credit facility. The subordinated notes will be unsecured obligations, will
mature on the tenth anniversary of issuance and will bear interest at 10% per
annum, payable quarterly. All financing provided by the WCAS VIII, WCAS CP III
and other members of the Investor Group purchasing Parent Common Stock in excess
of the amount required to consummate the Merger and pay related fees and
expenses will initially be used to repay indebtedness currently outstanding
under the Company's senior credit facility. After repayment, the Company will
have the right to reborrow under its amended senior credit facility. It is
currently contemplated such future borrowings will be used primarily to fund
acquisitions and for the general corporate purposes of Centennial and its
operating subsidiaries.
The Company is currently engaged in negotiations with respect to the
refinancing of the Company's existing senior credit facility and leasing
arrangements. A group of banks, for which NationsBank, N.A. would act as
administrative agent, will provide up to $300 million of senior secured bank
financing with Centennial as borrower and its material subsidiaries as
guarantors. These facilities are expected to take the form of (i) a $40 million
revolving credit facility, (ii) a $130 million lease financing facility and
(iii) a $130 million delayed draw term loan facility.
CONDUCT OF CENTENNIAL'S BUSINESS AFTER THE MERGER
The Investor Group is continuing to evaluate Centennial's business,
practices, operations, properties, corporate structure, capitalization,
management and personnel to determine what changes, if any, will be desirable.
Subject to the foregoing, the Investor Group expects that after the Merger the
day-to-day business and operations of Centennial will be conducted substantially
as they are currently being conducted by Centennial. The Investor Group does not
currently intend to dispose of any assets of Centennial other than in the
ordinary course of business. Additionally, the Investor Group does not currently
contemplate any material change in the composition of Centennial's current
management or employees, although after the Merger, the Board will consist of
Messrs. Eaton, Dahl, Paul, Sorrel and Mackesy.
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THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting will be held on April 15, 1999, at 10:00 a.m., local
time, at The South Terraces Conference Center Classroom, 115 Perimeter Center
Place, Atlanta, Georgia 30346.
PROXY SOLICITATION
Your proxy is being solicited by the Company pursuant to this Proxy
Statement. All expenses incurred in connection with solicitation of the enclosed
proxy will be paid by the Company. Officers, directors and regular employees of
the Company, who will receive no additional compensation for their services, may
solicit proxies by telephone or personal call. In addition, the Company has
retained Georgeson & Company to solicit proxies for a fee of $10,000 plus
expenses. The Company has requested brokers and nominees who hold stock in their
names to furnish this proxy material to their customers and the Company will
reimburse such brokers and nominees for their related out-of-pocket expenses.
This Proxy Statement and the accompanying proxy card are being mailed to
shareholders on or about March 18, 1999.
RECORD DATE AND QUORUM REQUIREMENT
The Common Stock is the only outstanding voting security of the Company. The
Board has fixed the close of business on February 26, 1999 as the Record Date
for the determination of shareholders entitled to notice of, and to vote at, the
Special Meeting and any adjournment or adjournments thereof. Each holder of
record of Common Stock at the close of business on the Record Date is entitled
to one vote for each share then held on each matter submitted to a vote of
shareholders. At the close of business on the Record Date, there were 11,923,619
shares of Common Stock issued and outstanding held by 64 holders of record.
The holders of a majority of the outstanding shares entitled to vote at the
Special Meeting must be present in person or represented by proxy to constitute
a quorum for the transaction of business. Abstentions are counted as present for
purposes of determining the presence or absence of a quorum for the transaction
of business.
VOTING PROCEDURES
Approval of the Merger Agreement, which is attached as Appendix A hereto,
will require the affirmative vote of (i) the holders of a majority of the
outstanding shares of Common Stock entitled to vote at the Special Meeting, as
the Outstanding Shares Vote Requirement and (ii) a majority of the shares held
by the Non-Affiliated Shareholders, voted at the Special Meeting as the Majority
Vote Requirement. A failure to vote or a vote to abstain will have the same
legal effect as a vote cast against approval with respect to the Outstanding
Shares Voting Requirement and no effect with respect to the Majority Vote
Requirement. Brokers and, in many cases, nominees will not have discretionary
power to vote on the proposal to be presented at the Special Meeting.
Accordingly, beneficial owners of shares should instruct their brokers or
nominees how to vote. A broker non-vote will have the same effect as a vote
against the Merger with respect to the Outstanding Shares Vote Requirement.
Under Georgia law, holders of Common Stock who do not vote in favor of the
Merger Agreement and who comply with certain notice requirements and other
procedures will have the right to dissent and to be paid cash for the "fair
value" of their shares as finally determined under such procedures, which may be
more or less than the consideration to be received by other shareholders of
Centennial under the terms of the Merger Agreement. Failure to follow such
procedures precisely may result in loss of appraisal rights. See "RIGHTS OF
DISSENTING SHAREHOLDERS."
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VOTING AND REVOCATION OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time before
it is exercised by (i) filing with the Secretary of Centennial an instrument
revoking it, (ii) submitting a duly executed proxy bearing a later date or (iii)
voting in person at the Special Meeting. Subject to such revocation, all shares
represented by each properly executed proxy received by the Secretary of
Centennial will be voted in accordance with the instructions indicated thereon,
and if no instructions are indicated, will be voted to approve the Merger and in
such manner as the persons named on the enclosed proxy card in their discretion
determine upon such other business as may properly come before the Special
Meeting or any adjournment thereof.
The shares represented by the accompanying proxy card and entitled to vote
at the Special Meeting will be voted if the proxy card is properly signed, dated
and received by the Secretary of the Company prior to the Special Meeting.
EFFECTIVE TIME OF THE MERGER AND PAYMENT FOR SHARES
The effective time of the Merger, which shall be the date and time of filing
of the Certificate of Merger with the Secretary of State of the State of Georgia
(the "Effective Time"), is currently expected to occur as soon as practicable
after the Special Meeting, subject to approval of the Merger Agreement at the
Special Meeting and satisfaction or waiver of the other terms and conditions of
the Merger Agreement. Detailed instructions with regard to the surrender of
Common Stock certificates, together with a letter of transmittal, will be
forwarded to shareholders by the Company's paying agent, ChaseMellon Shareholder
Services LLC (the "Paying Agent"), promptly after the Effective Time.
Shareholders should not submit their certificates to the Paying Agent until they
have received such materials. The Paying Agent will send payment of the Cash
Merger Consideration to shareholders as promptly as practicable following
receipt by the Paying Agent of their certificates and other required documents.
No interest will be paid or accrued on the cash payable upon the surrender of
certificates. Shareholders should not send any certificates at this time. See
"THE MERGER--Conditions."
OTHER MATTERS TO BE CONSIDERED
The Board is not aware of any other matter which will be brought before the
Special Meeting. If, however, other matters are presented, proxies will be voted
at the discretion of the holders of such proxies.
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THE MERGER
TERMS OF THE MERGER AGREEMENT
GENERAL. The Merger Agreement provides that subject to satisfaction of
certain conditions, the Acquiror will be merged with and into Centennial, and
that following the Merger, the separate existence of the Acquiror will cease and
Centennial will continue as the Surviving Corporation. At the Effective Time,
and subject to the terms and conditions set forth in the Merger Agreement, (i)
each issued and outstanding share of Common Stock, other than shares that are
entitled to and as to which appraisal rights are properly perfected and not
withdrawn ("Dissenting Shares") and other than shares held by Centennial or its
subsidiaries, the Parent (including shares contributed to the Parent by members
of the Investor Group immediately prior to the Merger) or the Acquiror, will, by
virtue of the Merger, be converted into the right to receive $16.00 in cash,
without interest and (ii) each outstanding share of common stock, $.01 par
value, of the Acquiror shall be converted into one share of common stock, $.01
par value, of the Surviving Corporation. As a result of the Merger, the Common
Stock will no longer be publicly traded and the equity of the Surviving
Corporation will be 100% owned by the Investor Group through their ownership of
the Parent Common Stock.
The terms of and conditions to the Merger are contained in the Merger
Agreement which is included in full as Appendix A to this Proxy Statement and is
incorporated herein by reference. The discussion in this Proxy Statement of the
Merger and the summary description of the principal terms of the Merger
Agreement are subject to and qualified in their entirety by reference to the
more complete information set forth in the Merger Agreement.
MERGER CONSIDERATION. Upon consummation of the Merger, each share of Common
Stock issued and outstanding immediately prior to the Effective Time (excluding
shares owned by Centennial or any of its subsidiaries, the Parent or the
Acquiror and the Dissenting Shares) will be converted into the right to receive
the Cash Merger Consideration, upon surrender and exchange of the certificate or
certificates which immediately prior to the Effective Time evidenced Common
Stock (the "Certificate(s)"). All such shares of Common Stock (the "Shares"),
when converted no longer will be outstanding and will automatically be canceled
and retired and will cease to exist, and each Certificate previously evidencing
the Shares will thereafter represent only the right to receive the Cash Merger
Consideration.
PAYMENTS FOR SHARES. Promptly after the Effective Time, the Paying Agent
will mail to each holder of record of a Certificate, a form of letter of
transmittal and instructions for use in effecting the surrender of such
Certificate in exchange for payment therefor. Upon surrender of a Certificate
for cancellation to the Paying Agent, together with such letter of transmittal
(duly executed) and any additional requested items, the holder of such
Certificate will be entitled to receive in respect thereof cash in an amount
equal to the product of (x) the number of shares of Common Stock represented by
such Certificate and (y) the Cash Merger Consideration, less any applicable
withholding tax.
STOCK OPTIONS. The Merger Agreement provides that, at the Effective Time,
each holder of an outstanding option, including options that are currently
vested and options that are not currently vested (the "Options") to purchase
shares of Common Stock under Centennial's 1994 Employee Stock Option Plan, 1996
Executive Stock Option Plan, 1996 Employee Stock Option Plan and 1997 Stock
Option Plan (collectively, the "Stock Option Plans") with an exercise price less
than the Cash Merger Consideration, will receive cash equal to the excess of the
Cash Merger Consideration over the per share exercise price of such Option
multiplied by the number of shares of Common Stock issuable upon exercise of
such Option, subject to any applicable withholding taxes (the "Option
Consideration"). Any outstanding Options that are not currently vested at the
Effective Time shall become vested and shall terminate as of the Effective Time.
Upon receipt of the Option Consideration, each Option will be canceled. Each
holder of an Option with an exercise price greater than the Cash Merger
Consideration shall not receive any consideration in cancellation or settlement
of such Option. The total number of Options which will be cashed out is
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274,409, and other Options totaling 651,171 will be canceled. The Merger
Agreement also provides that, prior to the Effective Time, the Company will not
grant any additional stock options or modify the provisions of the Stock Option
Plans and shall take all actions necessary to ensure that the Stock Option Plans
and all Options issued and outstanding thereunder shall terminate and be
canceled as of the Effective Time and all Options not exercised prior to the
Effective Time shall terminate and expire as of the Effective Time.
TRANSFER OF SHARES. At the Effective Time, the Company's stock transfer
books will be closed and there will be no further registration of transfers of
shares of Common Stock thereafter on the records of Centennial. On or after the
Effective Time, any Certificates presented to the Surviving Corporation or the
Paying Agent for any reason will be canceled and exchanged for the Cash Merger
Consideration.
CONDITIONS TO THE MERGER. Each party's respective obligation to effect the
Merger is subject to the expiration or termination, prior to the Closing Date,
of the waiting period (and any extension thereof), applicable to the Merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
no action shall have been instituted by the United States Department of Justice
or Federal Trade Commission challenging or seeking to enjoin the consummation of
the Merger.
The obligations of the Parent and the Acquiror to effect the Merger are
subject to the satisfaction of the following conditions, prior to the Closing
Date, unless waived by the Parent and the Acquiror: (i) the approval and
adoption of the Merger Agreement and the Merger in satisfaction of the
Outstanding Shares Vote Requirement and the Majority Vote Requirement; (ii)
there shall have been no order or injunction entered in any action or proceeding
before any governmental entity or other action taken, nor statute, rule,
regulation, legislation, interpretation, judgment or order enacted, entered,
enforced, promulgated, amended, issued or deemed applicable to Centennial, its
subsidiaries, the Merger or the Merger Agreement by any governmental entity that
would have the effect of making illegal, materially delaying or otherwise
directly or indirectly restraining or prohibiting the Merger or the transactions
contemplated thereby; (iii) all authorizations, consents, orders or approvals
of, or declarations or filings with or expirations of waiting periods imposed by
necessary governmental entities, other than the filing of the Merger Certificate
in accordance with the Georgia Code, shall have been obtained, except where the
failure to obtain such licenses, permits, consents, authorizations, approvals,
qualifications and orders, will not have a Material Adverse Effect (as defined
in the Merger Agreement) on Centennial; (iv) the Parent shall have received an
officers' certificate signed on behalf of Centennial to the effect that the
representations and warranties of Centennial in the Merger Agreement are true in
all material respects as of the date of the Merger Agreement and (except to the
extent such representations and warranties expressly relate to an earlier date)
as of the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by the Merger Agreement and except that, with respect to
representations and warranties otherwise qualified by Material Adverse Effect,
such representations and warranties shall be true and correct in all respects;
(v) the Parent shall have received an officers' certificate signed on behalf of
Centennial to the effect that Centennial shall have performed in all material
respects all obligations contained in the Merger Agreement required to be
performed at or prior to the Closing Date; (vi) Parent shall have received an
opinion of King & Spalding, counsel to the Company, with respect to certain
matters concerning the Merger; (vii) the aggregate number of dissenting shares
shall not constitute more than 15% of the number of shares of Common Stock
outstanding immediately prior to the Effective Time; and (viii) there shall not
have occurred a Material Adverse Effect on Centennial or any of its subsidiaries
prior to the Effective Time.
The obligations of Centennial to effect the Merger are subject to the
satisfaction of the following conditions, prior to the closing date, prior to
the closing date unless waived by Centennial: (i) the Merger Agreement and the
Merger shall be approved and adopted by the Outstanding Shares Vote Requirement
and by the Parent and the Acquiror; (ii) no preliminary or permanent injunction
or other order, decree or ruling issued by any court of competent jurisdiction
nor any statute, rule, regulation or other order entered, promulgated or enacted
by any governmental, regulatory or administrative agency or authority
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shall be in effect that would prevent the consummation of the Merger; (iii)
Centennial shall have received officer's certificates signed on behalf of the
Parent and the Acquiror to the effect that the representations and warranties of
the Parent and the Acquiror contained in the Merger Agreement are true in all
material respects as of the date of the Merger Agreement and (except to the
extent such representations and warranties expressly related to an earlier date)
as of the Closing Date, as though made on and as of the Closing Date, except as
otherwise contemplated by the Merger Agreement and except that, with respect to
representations and warranties otherwise qualified by Material Adverse Effect,
such representations and warranties shall be true and correct in all respects;
(iv) Centennial shall have received officers' certificates signed on behalf of
the Parent and the Acquiror to the effect that they have performed in all
material respects all obligations contained in the Merger required to be
performed at or prior to the Closing Date; and (v) no court of competent
jurisdiction or governmental entity shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, judgment, decree, injunction
or other order (whether temporary, preliminary or permanent) which is then in
effect and has the effect of preventing or prohibiting the consummation of the
transactions contemplated by the Merger Agreement or the effective operation of
the business of Centennial and the subsidiaries after the Effective Time.
EVEN IF THE SHAREHOLDERS APPROVE THE MERGER AS PROVIDED IN THE MERGER
AGREEMENT, THERE CAN BE NO ASSURANCE THAT THE MERGER WILL BE CONSUMMATED.
REPRESENTATIONS AND WARRANTIES. Centennial made representations and
warranties in the Merger Agreement, qualified in certain instances to the
occurrence of a Material Adverse Effect or as disclosed on the Disclosure
Schedule, regarding its organization and good standing; authority to enter into
the Merger Agreement and consummate the transactions contemplated thereby; the
noncontravention of the Merger Agreement to its Articles of Incorporation,
Bylaws, any contract or law; its capitalization and the capitalization of its
subsidiaries; its compliance with Commission filing requirements; its financial
statements; the absence of any undisclosed liabilities; the fairness of the
transaction as determined by the Special Committee on October 21, 1998; the
delivery of the fairness opinion by the Independent Advisor; the absence of
certain changes in the business of Centennial since June 30, 1998; requisite
governmental and other consents and approvals; compliance with all applicable
laws; absence of litigation to which Centennial is a party; title to real
property; condition of facilities and assets; brokers' and finders' fees;
requisite tax filings; absence of defaults under material contracts; ownership
of intangible rights and software; insurance; employee benefits; and its
compliance with Medicare and Medicaid statutes and environmental matters.
The Parent made customary representations and warranties in the Merger
Agreement regarding its organization and good standing; authority to enter into
the Merger Agreement and consummate the transactions contemplated thereby; the
noncontravention of the Merger Agreement to its Certificate of Incorporation,
Bylaws, any contract or law; the requisite governmental and other consents and
approvals; the accuracy of information supplied by the Parent for submission on
forms and reports required to be filed by Centennial with the Commission;
brokers' and finders' fees; and the sufficiency of funds to consummate the
transactions.
The Acquiror made customary representations and warranties in the Merger
Agreement regarding its organization and good standing; authority to enter into
the Merger Agreement and consummate the transactions contemplated thereby; the
noncontravention of the Merger Agreement to its Articles of Incorporation,
Bylaws, any contract or law; requisite governmental and other consents and
approvals; the accuracy of information supplied by the Acquiror for submission
on forms and reports required to be filed by Centennial with the Commission and
certain financing commitments.
The representations, warranties and agreements in the Merger Agreement or in
any instrument delivered pursuant to the Merger Agreement will expire at the
Effective Time.
COVENANTS. In the Merger Agreement, Centennial has agreed that prior to the
Effective Time, unless otherwise agreed to in writing by the Parent or as
otherwise expressly contemplated or permitted by the
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Merger Agreement, Centennial and each of its subsidiaries will, among other
things, conduct business only in the usual, regular and ordinary course
substantially consistent with past practice.
NONSOLICITATION COVENANT. The Merger Agreement provides that none of
Centennial, its subsidiaries nor any of their respective officers and directors
shall, and Centennial will cause its employees, agents and representatives not
to, initiate or solicit, directly or indirectly, any inquiries or the making of
any proposal with respect to a merger, consolidation, sale or similar
transaction involving Centennial or any of its subsidiaries or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to any Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; provided, however, that the foregoing shall not prohibit the Board
from furnishing information to, or entering into discussions or negotiations, or
otherwise facilitating any effort or attempt to make or implement an Acquisition
Proposal if, and to the extent, that the Board determines after consultation
with counsel and in good faith that failing to take such action would be
inconsistent with the Board's fiduciary duty under applicable law. Centennial
agreed to immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any third parties conducted heretofore with
respect to any of the foregoing. Centennial agreed to notify the Acquiror
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, Centennial, any of its subsidiaries,
or any of their respective officers, directors, or employees, agents or
representatives.
INDEMNIFICATION AND INSURANCE. The Merger Agreement provides that the
Articles of Incorporation and Bylaws of the Surviving Corporation shall contain
the same provisions in respect to indemnification and exculpation of liability
as are set forth in Centennial's Amended and Restated Articles of Incorporation
and Bylaws in effect on the date of the Merger Agreement. The Surviving
Corporation's Articles of Incorporation and Bylaws must contain such provisions,
without amendment, repeal or modification in any manner which would adversely
affect the rights of the individuals who were officers, directors or employees
of Centennial, unless required by law, for a period of six years from the
Effective Time. In addition, the Surviving Corporation is required to maintain
in effect, for a period of six years after the Effective Time, Centennial's
policies of directors' and officers' liability insurance (provided that the
Surviving Corporation may substitute therefor policies of at least the same
amounts and comparable coverage). However, in no event will the Surviving
Corporation be required to pay premiums for such insurance in excess of 200% of
the annual premiums paid currently by Centennial; provided that if the annual
premiums exceed such amount, the Surviving Corporation shall obtain a policy
with the greatest coverage available for a cost not exceeding such amount.
TERMINATION. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the Merger by the shareholders of Centennial: (a) by mutual action
of the Boards of Directors of Centennial and the Parent; (b) by either the
Parent or Centennial, if the conditions to its obligations under the Merger
Agreement have not been complied with or performed in any material respect and
the noncompliance or nonperformance has not been cured or eliminated by the
other party on or before April 15, 1999 (which has been extended from March 31,
1999), including, under certain circumstances, by reason of a vote of
shareholders disapproving the Merger; (c) by either the Parent or Centennial if
the Merger has not been effected prior to the close of business on April 15,
1999 (which has been extended from March 31, 1999); provided that the right to
terminate under (b) and (c) is not available to the party if the failure to
effect the Merger is a result of a failure by such party to comply with any
obligation of such party under the Merger Agreement; (d) by either the Parent or
Centennial, if any permanent injunction or action by any court or other
governmental entity or regulatory authority of competent jurisdiction preventing
the consummation of the transaction shall become final and nonappealable; (e) by
the Parent if (i) any of the representations of Centennial fail to be true and
correct in any material respect (ii) a material breach of any of the covenants
of agreements in the Merger Agreement by Centennial, (iii) the Board withdraws
or amends in an adverse manner to the Parent or the Acquiror, its recommendation
or approval of the transaction, makes a recommendation as to
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<PAGE>
an alternative transaction other than rejection of the alternative transaction,
enters into a definitive written agreement relating to an alternative
transaction or takes any material action that would be prohibited by Section
6.05 of the Merger Agreement; (f) by Centennial if there has been a material
breach of any representations or warranties of the Parent that would adversely
affect the ability of the parties to consummate the transaction or a material
breach of any covenant or agreement by the Parent which is not curable or is not
cured within thirty days after written notice of such breach or (g) by
Centennial, if the Board determines in good faith by a majority vote, after
consulting with its financial advisors and based on the advice of outside legal
counsel to the Company, that an alternative transaction is more favorable to the
shareholders of the Company than the transactions contemplated by the Merger
Agreement.
FEES AND EXPENSES. Except as otherwise provided in Section 6.05 of the
Merger Agreement and except with respect to claims for damages incurred as a
result of the breach of the Merger Agreement, Centennial shall pay all costs and
expenses incurred in connection with the consummation of the Merger Agreement
and the transactions contemplated therein. If the transactions contemplated by
the Merger Agreement are not consummated, all costs and expenses incurred in
connection with the negotiation, preparation and execution of the Merger
Agreement shall be paid by the party incurring such expenses. If the Merger
Agreement is terminated as a result of Centennial accepting an Acquisition
Proposal, Centennial must pay the Parent a $3.0 million fee in immediately
available funds upon the termination of the Merger Agreement under Sections
8.01(d) or (f) of the Merger Agreement or if any of the following events occur,
in which Centennial's shareholders receive cash securities or other
consideration in excess of the Cash Merger Consideration within twelve months
after the date of the Merger Agreement, other than a termination due to
governmental or regulatory requirements under Section 8.01(c) or a material
breach by the Parent or the Acquiror under Section 8.01(e), the Specified Fee
shall be paid to the Parent: (i) the Company is acquired by merger or otherwise
by a third party, (ii) a third party acquires more than 50% of the total assets
of Centennial and its subsidiaries, (iii) a third party acquires more than 50%
of the outstanding shares of Centennial and its subsidiaries or (iv) the Company
adopts and implements a plan of liquidation or share repurchase relating to more
than 50% of the outstanding shares or an extraordinary dividend relating to more
than 50% of the assets of Centennial and its subsidiaries.
AMENDMENT. The Merger Agreement may be amended, modified or supplemented by
written Agreement prior to the Effective Time and before adoption of the Merger
Agreement by the Centennial shareholders; provided, however, that after the
Merger Agreement is approved by the Centennial shareholders, no such amendment,
modification, or supplement shall be made which under applicable law requires
the approval of such shareholders, without the further approval of such
shareholders.
ACCOUNTING TREATMENT
The Acquiror believes that the Merger will be accounted for as a "purchase"
under the purchase method in accordance with generally accepted accounting
principles.
43
<PAGE>
ESTIMATED FEES AND EXPENSES OF THE MERGER
Estimated fees and expenses incurred or to be incurred by the Surviving
Corporation are approximately as follows:
<TABLE>
<S> <C>
Advisory fees and expenses (1)................................. $10,000,000
Legal fees and expenses (2).................................... 1,200,000
Accounting fees and expenses................................... 125,000
Hart-Scott-Rodino filing fee................................... 45,000
Paying Agent fees and expenses................................. 25,000
Proxy solicitation fees and expenses........................... 50,000
Securities and Exchange Commission filing fee.................. 38,347
Printing and mailing costs..................................... 100,000
Miscellaneous expenses......................................... 25,000
----------
Total...................................................... $11,608,347
</TABLE>
- ------------------------
(1) Includes the fees and expenses of $2.0 million to J.P. Morgan, $3.0 million
to BT Alex. Brown, $2.0 million to SunTrust Equitable Securities and $3.0
million to WCA Management.
(2) Includes the estimated fees and expenses of counsel for the Company, the
Special Committee and the WCAS Group.
44
<PAGE>
RIGHTS OF DISSENTING SHAREHOLDERS
Holders of shares of Common Stock are entitled to appraisal rights under
Article 13 of the Georgia Business Corporation Code. Article 13 is reprinted in
its entirety as Appendix C to this Proxy Statement. All references in Article 13
and in this summary to a "shareholder" are to the record holder or beneficial
owner of the shares of Common Stock as to which appraisal rights are asserted. A
person having a beneficial interest in shares of Common Stock that are held of
record in the name of another person, such as a broker or nominee, must act
promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect whatever appraisal rights the
beneficial owner may have.
The Merger Agreement provides that if holders of more than fifteen percent
of the shares of Common Stock outstanding prior to the Effective Time exercise
their dissenters' appraisal rights, the Parent and the Acquiror are not required
to consummate the Merger. Although the Acquiror and the Parent may waive this
requirement at their discretion, there can be no assurance that the Acquiror and
the Parent will do so.
The following discussion is not a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Appendix C.
THIS DISCUSSION AND APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO
WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE
RIGHT TO DO SO BECAUSE FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH
HEREIN AND THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
Each shareholder intending to elect appraisal rights as to the fair market
value of the shares must first demand "payment" for such shares from the
Company. Demanding payment for such shares shall constitute a request for
payment for the shares at a per share value that is different from the $16.00
consideration contemplated by the Merger Agreement. Each shareholder electing to
demand payment for his shares shall deliver to the Company, before the taking of
the vote on the Merger at the Special Meeting, written notice of the
shareholder's intent to demand payment for his shares of Common Stock. The
demand must reasonably inform the Company of the identity of the shareholder and
that the shareholder intends thereby to demand payment for the shares of the
Company's Common Stock. This written demand for payment for the shares of Common
Stock must be in addition to and separate from any proxy or vote against the
Merger. Voting against, abstaining from voting or failing to vote on the Merger
will not constitute a demand for payment within the meaning of Article 13.
However, any shareholder electing to demand payment will not be granted payment
under Article 13 if such shareholder has voted in favor of the Merger.
The payment demand must be mailed or delivered to the attention of Secretary
of the Company at 400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia
30346. The written payment demand must specify the shareholder's name and
mailing address, the number of shares of Common Stock owned, and that the
shareholder is thereby demanding payment for his or her shares.
If the Merger is approved by satisfying the Outstanding Shares Vote
Requirement and Majority Vote Requirement, shareholders who have demanded
payment will receive, no later than ten days after the Effective Time, a
dissenters' notice that states where a payment demand is to be sent, where and
when certificates for shares must be deposited, and will set the date by which
the Company must receive the payment demand. The date by which the Company must
receive the payment demand must be not fewer than thirty nor more than sixty
days after the delivery of the dissenters' notice. A shareholder must comply
with the terms of the dissenters' notice in order to receive payment for the
shares other than that contemplated by the Merger Agreement.
Within ten days from the later of the receipt of the payment demand or the
Effective Time, the Company must offer to each dissenter the amount the Company
has determined to be the fair market value of the shares. Fair market value will
be determined based on the value of the dissenting shares
45
<PAGE>
immediately before the effective time of the Merger without any appreciation or
depreciation in anticipation of the Merger. The shareholder will then have
thirty days to accept or decline the offer by the Company. Failure to respond to
the offer within such period is deemed an acceptance. If the shareholder accepts
the Company's offer by written notice to the Company within the thirty day
period, payment shall be made to the shareholder within sixty days of the later
of the making of the offer or the Effective Time. If the shareholder disagrees
with such value, including interest to be received, or the shareholder does not
receive his certificates or the release of transfer restrictions upon the
Company's failure to consummate the Merger, the shareholder may notify the
Company of his estimate of the fair value of the shares, including interest, in
writing.
If the demand for payment remains unsettled sixty days after the receipt of
the demand for payment by the Company, the Company shall file a petition in the
Superior Court of DeKalb County (the "Court") demanding a determination of the
value of the shares of Common Stock and accrued interest of the dissenting
shareholders. All dissenting shareholders shall be made parties to the
proceeding. If a petition for an appraisal is timely filed, the Court, in a
nonjury equitable proceeding, will appraise the shares of Common Stock owned by
the dissenting shareholders, determining the fair value of such shares of Common
Stock together with a fair rate of interest to be paid, if any, upon the amount
determined to be the fair value. If the Company does not timely file the
petition, the Company must pay to each dissenter whose demand remains unsettled
the amount demanded.
Shareholders considering seeking appraisal should be aware that the "fair
value" of their shares of Common Stock determined under Article 13 could be more
than, the same as or less than the Cash Merger Consideration, and that the
opinion of J.P. Morgan as to fairness, from a financial point of view, is not an
opinion as to fair value under Article 13. The cost of the appraisal proceeding
will be determined by the Court and may be assessed against the parties as the
Court deems equitable in the circumstances. The Court may order that all or a
portion of the attorneys' fees incurred by any dissenting shareholder in
connection with the appraisal proceeding be charged pro rata against the value
of all shares of the Company's Common Stock entitled to appraisal.
If the Company does not consummate the Merger within sixty days after the
date set by the Company for the demand for payment and the depositing of the
certificates, the Company must return the certificates and shall release any
transfer restrictions on any uncertificated shares.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of Common Stock. This discussion is based on currently existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury Regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences to the holders of
Common Stock as described herein. Special tax consequences not described below
may be applicable to particular classes of taxpayers, including financial
institutions, broker-dealers, persons who are not citizens or residents of the
United States or who are foreign corporations, foreign partnerships or foreign
estates or trusts, persons who will own stock of Centennial (actually or
constructively, under certain constructive ownership rules in the Internal
Revenue Code) after the Merger, and holders who acquired their stock through the
exercise of an employee stock option or otherwise as compensation.
The receipt of the Cash Merger Consideration in the Merger by holders of
Common Stock will be a taxable transaction for federal income tax purposes. Each
holder's gain or loss per share of Common Stock will be equal to the difference
between $16.00 and the holder's basis in that particular share of the Common
Stock. Such gain or loss generally will be a capital gain or loss. In the case
of individuals, trusts and estates, such capital gain will be subject to a
maximum federal income tax rate of 20% for shares of Common Stock held for more
than 12 months prior to the date of disposition.
46
<PAGE>
A holder of Common Stock may be subject to backup withholding at the rate of
31% with respect to Cash Merger Consideration received pursuant to the Merger,
unless the holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (b) provides a correct
taxpayer identification number ("TIN"), certifies concerning no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. To prevent the possibility of
backup federal income tax withholding on payments made with respect to shares of
Common Stock pursuant to the Merger, each holder must provide the Paying Agent
with his correct TIN by completing a Form W-9 or Substitute Form W-9. A holder
of Common Stock who does not provide Centennial with his or her correct TIN may
be subject to penalties imposed by the Internal Revenue Service (the "IRS"), as
well as backup withholding. Any amount withheld under these rules will be
creditable against the holder's federal income tax liability. Centennial (or its
agent) will report to the holders of Common Stock and the IRS the amount of any
"reportable payments," as defined in Section 3406 of the Code, and the amount of
tax, if any, withheld with respect thereto.
THE FOREGOING TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS
BASED UPON PRESENT LAW. THE FOREGOING DISCUSSION DOES NOT DISCUSS TAX
CONSEQUENCES UNDER THE LAWS OF STATES OR LOCAL GOVERNMENTS OR ANY OTHER
JURISDICTION OR TAX CONSEQUENCES TO CATEGORIES OF SHAREHOLDERS THAT MAY BE
SUBJECT TO SPECIAL RULES, SUCH AS FOREIGN PERSONS, TAX-EXEMPT ENTITIES,
INSURANCE COMPANIES, FINANCIAL INSTITUTIONS AND DEALERS IN STOCKS AND
SECURITIES. THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO A SHAREHOLDER WHO
ACQUIRED HIS OR HER SHARES OF COMMON STOCK PURSUANT TO THE EXERCISE OF STOCK
OPTIONS OR OTHERWISE AS COMPENSATION. EACH HOLDER OF COMMON STOCK SHOULD CONSULT
SUCH HOLDER'S OWN TAX ADVISOR CONCERNING THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO SUCH HOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE,
LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECT OF CHANGES IN SUCH TAX LAWS.
47
<PAGE>
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF
MANAGEMENT AND OTHERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 16, 1999 by: (i) each
person known to the Company to beneficially own more than 5% of the Common
Stock, (ii) each director of the Company, (iii) each of the Investor Group, (iv)
the chief executive officer and the four other most highly compensated executive
officers, and (v) all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE OF
NAME OF BENEFICIAL OWNER OWNERSHIP COMMON STOCK
- ---------------------------------------------------------------------------- ---------------------- ---------------
<S> <C> <C>
WCAS VI (1) (2)............................................................. 2,520,193 21.1%
WCAS CP II (1)(3)........................................................... 246,896 2.1
Healthcare (1)(4)........................................................... 81,384 *
Andrew M. Paul (1)(5)....................................................... 12,707 *
J. Stephen Eaton (1)(6)..................................................... 1,213,077 10.1
Kent C. Fosha, Sr. (1)(7)................................................... 53,949 *
Alan C. Dahl (1)(8)......................................................... 93,976 *
Lawrence W. Lepley, Jr. (1)(9).............................................. 92,226 *
Bertil D. Nordin (10)....................................................... 0 *
W. Scott Miller (11)........................................................ 0 *
Charles D. Nash (12)........................................................ 0 *
James B. Hoover (13)........................................................ 13,464 *
Robert Ortenzio (14)........................................................ 1,299 *
The Goldman Sachs Group, L.P.(15)........................................... 609,400 5.1
Dresdner RCM Global Investors LLC(16)....................................... 1,189,920 10.0
South Atlantic Venture Fund II, Limited Partnership (17).................... 798,963 6.7
All other executive officers and directors as a group (10 persons).......... 1,480,698 12.4
</TABLE>
- ------------------------
* Less than 1%
(1) Based on the Statement of Beneficial Ownership on Schedule 13D, dated
November 2, 1998 filed by the persons indicated, and WCAS VIII, WCAS CP III
and the respective general partners of WCAS VI, WCAS CP II, Healthcare
Partners, WCAS VIII and WCAS CP III (the "13D Statement"). The shares of
Common Stock shown in the table as beneficially owned by a person exclude
the shares shown as beneficially owned by other persons in the table and
each such person disclaims beneficial ownership of the shares owned by such
other persons. According to the 13D Statement, the following WCAS Investors,
directly own the following shares of Common Stock: Patrick J. Welsh (49,977
shares), Russell L. Carson (49,977 shares), Bruce K. Anderson (29,977
shares), Andrew M. Paul (12,707 shares), Thomas E. McInerney (10,000
shares), Robert A. Minicucci (10,772 shares), Anthony deNicola (5,000
shares) and Paul B. Queally (750 shares). Such persons, and Andrew M. Paul,
as general partners of the respective sole general partners of such
entities, may be deemed to beneficially own the shares owned by WCAS VI,
WCAS CP II and Healthcare Partners. Such persons disclaim beneficial
ownership of such shares.
(2) The principal executive offices of WCAS VI are located at 320 Park Avenue,
New York, New York 10022. The sole general partner of WCAS VI is WCAS VI
Partners, L.P., a Delaware limited partnership ("WCAS VI Partners"). WCAS VI
Partners and certain of the WCAS Investors, including Andrew M. Paul, who
serve as general partners of WCAS VI Partners may be deemed to beneficially
own the shares owned by WCAS VI. Such persons disclaim beneficial ownership
of such shares.
48
<PAGE>
(3) The principal executive offices of WCAS CP II are located at 320 Park
Avenue, New York, New York 10022. The sole general partner of WCAS CP II is
WCAS CP II Partners, a New Jersey general partnership ("WCAS CP II
Partners). WCAS CP II Partners and certain of the WCAS Investors, including
Andrew M. Paul, who serve as general partners of WCAS CP II Partners may be
deemed to beneficially own the shares owned by WCAS CP II. Such persons
disclaim beneficial ownership of such shares.
(4) The principal executive offices of Healthcare Partners are located at 320
Park Avenue, New York, New York 10022. The sole general partner of
Healthcare Partners is WCAS HP Partners, a Delaware partnership. WCAS HP
Partners and certain of the WCAS Investors, including Andrew M. Paul, who
serve as general partners of WCAS HP Partners may be deemed to beneficially
own the shares owned by Healthcare Partners. Such persons disclaim
beneficial ownership of such shares.
(5) Excludes 2,520,193 shares of Common Stock owned by WCAS VI, 246,896 shares
of Common Stock owned by WCAS CP II and 81,384 shares of Common Stock owned
by Healthcare Partners. Mr. Paul, as a general partner of the respective
sole general partners of each of WCAS VI, WCAS CP II and Healthcare Partners
may be deemed to beneficially own the shares owned by WCAS VI, WCAS CP II
and Healthcare Partners. Mr. Paul disclaims beneficial ownership of such
shares.
(6) Includes 97,706 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days. Does not
include options to acquire 51,727 shares that are not exercisable within 60
days. The shareholder's address is 400 Perimeter Center Terrace, Suite 650,
Atlanta, Georgia 30346.
(7) Includes 45,979 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days. Does not
include options to acquire 71,074 shares that are not exercisable within 60
days. The shareholder's address is 400 Perimeter Center Terrace, Suite 650,
Atlanta, Georgia 30346.
(8) Includes 34,484 shares purchasable upon the exercise of stock options that
are currently exercisable or will become exercisable within 60 days and
2,000 shares beneficially owned by Mr. Dahl's sons. Mr. Dahl disclaims
beneficial ownership of these shares. Does not include options to acquire
71,074 shares that are not exercisable within 60 days. The shareholder's
address is 400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346.
(9) Includes 9,001 shares purchasable upon exercise of stock options that are
currently exercisable. Does not include options to acquire 51,343 shares
that are not exercisable within 60 days. The shareholder's address is 400
Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346.
(10) Includes options to acquire 10,345 shares that are currently exercisable.
Does not include options to acquire 2,070 shares that are not exercisable
within 60 days. Does not include 206,214 shares held by South Atlantic
Venture Fund III, Limited Partnership ("South Atlantic") of which Mr. Nordin
is a special limited partner. Mr. Nordin disclaims beneficial ownership of
the shares owned by South Atlantic. The shareholder's address is 400
Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346.
(11) Does not include options to acquire 10,345 shares that are not exercisable
within 60 days. Does not includes 798,963 shares of South Atlantic Venture
Fund II, Limited Partnership of which Mr. Miller is a limited partner. Mr.
Miller disclaims beneficial ownership of these shares.
(12) Does not include options to acquire 10,345 shares that are not exercisable
within 60 days.
(13) Includes shares held by Mr. Hoover or by the James B. Hoover IRA. Does not
include 2,767,089 shares held by WCAS VI, WCAS CP II, of which Mr. Hoover
serves as a general partner of the sole general partner or limited partner
of the sole general. Mr. Hoover disclaims beneficial ownership of
49
<PAGE>
these shares. The shareholder's address is Dauphin Capital Partners, 108
Forest Avenue, Locust Valley, New York 11560.
(14) Does not include 39,719 shares held by Horizon Investment Associates II, of
which Mr. Ortenzio's father is an affiliate; 3,551 shares acquired pursuant
to a distribution by WCAS VI to its limited partners, in one of which Mr.
Ortenzio holds a remainderman interest in a life estate of which his father
is the life tenant; or 77 shares acquired pursuant to a distribution by WCAS
CP II to Camp Hill Associates, L.P., a limited partner of WCAS CP II, in
which Mr. Ortenzio has a 10% ownership interest. Mr. Ortenzio disclaims
beneficial ownership of all such shares. The shareholder's address is 4718
Old Gettysburg Road, Mechanicsburg, Pennsylvania 17055.
(15) Based on Schedule 13G of shareholder filed on February 14, 1999. The
shareholder's address is 85 Broad Street, New York, New York 10004.
(16) Based on 13G/A of shareholder filed on February 12, 1999. The shareholder's
address Four Embarcadero Center, San Francisco, California 94111.
(17) The shareholder's address is 614 West Bay Street, Suite 200, Tampa, Florida
33606-2704.
50
<PAGE>
CERTAIN INFORMATION CONCERNING THE PARENT, THE ACQUIROR
AND THE INVESTOR GROUP
THE PARENT. The Parent (formerly known as Cougar Holdings Corporation) is a
newly formed Delaware corporation organized by WCAS VIII. The principal
executive offices of the Parent are located at 320 Park Avenue, New York, New
York 10022. The current directors of the Parent are Lawrence B. Sorrel and D.
Scott Mackesy. The current officers of the Parent are Lawrence B. Sorrel,
President and Treasurer, and D. Scott Mackesy, Vice President and Secretary.
THE ACQUIROR. The Acquiror is a newly formed Georgia corporation organized
by WCAS VIII for the purpose of effecting the Merger. The principal executive
offices of the Acquiror are located at 320 Park Avenue, New York, New York
10022. The directors of the Acquiror are Lawrence B. Sorrel and D. Scott
Mackesy. The officers of the Acquiror are Lawrence B. Sorrel, President and
Treasurer, and D. Scott Mackesy, Vice President and Secretary.
WCAS VIII. The principal business of WCAS VIII, a Delaware limited
partnership, is that of a private investment partnership. The principal
executive offices of WCAS VIII are located at 320 Park Avenue, New York, New
York 10022. The sole general partner of WCAS VIII is WCAS VIII Associates LLC, a
Delaware limited liability company ("VIII Associates").
VIII ASSOCIATES. The principal business of VIII Associates is acting as the
sole general partner of WCAS VIII. Each managing member of VIII Associates is a
citizen of the United States. The principal occupation of each managing member
of VIII Associates is being a general partner or managing member of the
partnerships and limited liability companies which serve as the sole general
partners of the private investment partnerships which are affiliated with WCAS
VIII. The managing members of VIII Associates are Patrick J. Welsh, Russell L.
Carson, Bruce K. Anderson, Andrew M. Paul, Thomas E. McInerney, Laura M. Van
Buren, Priscilla A. Newman, Robert A. Minicucci, Anthony J. de Nicola, Paul B.
Queally, and Lawrence B. Sorrel.
The business address of each managing member of VIII Associates is 320 Park
Avenue, New York, New York 10022.
WCAS CP III. The principal business of WCAS CP III, a Delaware limited
partnership, is that of a private investment partnership. The principal
executive offices of WCAS CP III are located at 320 Park Avenue, New York, New
York 10022. The sole general partner of WCAS CP III is WCAS CP III Associates
L.L.C., a Delaware limited liability Company ("CP III Associates").
CP III ASSOCIATES. The principal business of CP III Associates is acting as
the sole general partner of WCAS CP III. Each managing member of CP III
Associates is a citizen of the United States. The principal occupation of each
managing member of CP III Associates is being a general partner or managing
member of the partnerships and limited liability companies which serve as the
sole general partners of private investment partnerships which are affiliated
with WCAS CP III. The managing members of CP III Associates are Patrick J.
Welsh, Russell L. Carson, Bruce K. Anderson, Andrew M. Paul, Thomas E.
McInerney, Laura M. Van Buren, Priscilla A. Newman, Robert A. Minicucci, Anthony
J. de Nicola, Paul B. Queally, and Lawrence B. Sorrel. The business address of
each managing member of CP III Associates is 320 Park Avenue, New York, New York
10022.
MANAGEMENT GROUP. The members of the Management Group are Messrs. Eaton,
Dahl, Fosha and Lepley and certain other members of management. The business
address for each member of the Management Group is the principal executive
offices of Centennial, 400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia
30346. Each member of the Management Group is a citizen of the United States.
51
<PAGE>
WCAS GROUP. The members of the WCAS Group, in addition to WCAS VIII and
WCAS CP III are Healthcare Partners, and 13 individuals who are managing members
of either VIII Associates or CP III Associates or employees of WCA Management
Corporation, including Andrew M. Paul, a director of the Company. The sole
general partner of Healthcare Partners is WCAS HP Partners, a Delaware
partnership.
The business address for each member of the WCAS Group is 320 Park Avenue,
New York, New York 10022. Each member of the WCAS Group who is a natural person
is a citizen of the United States, other than Mr. Mackesy who is a citizen of
Canada.
None of the Investor Group, the Parent, the Acquiror or any executive
officer, director or person controlling any member of the Investor Group, the
Parent or the Acquiror was during the last five years convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or was a party
to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or prohibiting activities
subject to, federal or state securities laws or finding any violation of such
laws.
D. Scott Mackesy is a citizen of Canada and his principal occupation is as
an employee of WCA Management. Mr. Mackesy's business address is 320 Park
Avenue, New York, New York, 10022. Prior to joining Welsh, Carson, Anderson &
Stowe ("WCAS") in 1998, Mr. Mackesy was employed from 1992 to 1998 by Morgan
Stanley, Dean Witter, Discover & Co., most recently as a Vice President in its
investment research department.
Prior to joining WCAS in 1993, Mr. Minicucci served as Senior Vice President
and Chief Financial Officer of First Data Corporation from 1992 to 1993. The
address of First Data Corporation is 401 Hackensack Avenue, Hackensack, New
Jersey 07601.
Prior to joining WCAS in 1994, Mr. de Nicola was employed from 1990 to 1994
by William Blair & Company, a private equity investment firm. The address of
William Blair & Company, L.L.C. is 222 West Adams Street, Chicago, Illinois
60606.
Prior to joining WCAS in February 1996, Mr. Queally held various positions,
including, most recently, General Partner, at The Sprout Group, Donaldson,
Lufkin & Jenrette Inc.'s private equity group from May 1987 to February 1996.
The address of Donaldson, Lufkin & Jenrette, Inc. is 277 Park Avenue, New York,
New York 10172.
Prior to joining WCAS in June 1998, Ms. Newman was employed as a Vice
President at AEA Investors, Inc. since 1996. The address of AEA Investors, Inc.
is 65 East 55th Street, New York, New York 10022. From 1993 to 1996, Ms. Newman
was employed as a Senior Vice President, Corporate Finance at Lehman Brothers.
Lehman Brothers address is Three World Financial Center, New York, New York,
10285.
Prior to joining WCAS in June 1998, Mr. Sorrel was employed as a senior
executive at Morgan Stanley, Dean Witter, Discover & Co. working in its private
equity investment business, most recently, as a Managing Director. Mr. Sorrel
joined Morgan Stanley & Co. in 1986. The address of Morgan Stanley, Dean Witter,
Discover & Co. is 1585 Broadway, New York, New York, 10036.
J. Stephen Eaton is a resident of the United States and his principal
occupation is Chairman of the Board, President, and Chief Executive Officer of
the Company, in which capacities he has served since founding the Company in
1989. Mr. Eaton's business address is 400 Perimeter Center Terrace, Suite 650,
Atlanta, Georgia 30346. From 1982 to 1988, Mr. Eaton served in various executive
positions, including Vice President, of Consolidated Resources Corporation of
America and its successors. When the Company acquired CRCA in 1990, CRCA served
as the general partner of private and public limited partnerships that owned in
excess of 31 long-term care and assisted living facilities. Mr. Eaton also
serves as a director of Saint Joseph's Mercy Care Corporation, a non-profit
corporation based in Atlanta, Georgia which
52
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provides mobile health services to the homeless and other underserved
populations, and of Saint Joseph's Health System, a major tertiary care hospital
and health system in Atlanta, Georgia.
Alan C. Dahl is a resident of the United States and his principal occupation
is Executive Vice President, Chief Financial Officer, Treasurer and Director of
the Company. Mr. Dahl has served in these capacities since January 1996. Mr.
Dahl's business address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
Georgia 30346. From February 1991 to December 1995, he served as senior vice
president. Mr. Dahl has been involved in health care finance for the past 12
years. Mr. Dahl was previously senior vice president of Southmark Public
Syndications, Inc., a subsidiary of Southmark Corporation. Mr. Dahl, a certified
public accountant, also worked in the tax department at Arthur Young &
Corporation.
Kent C. Fosha is a resident of the United States and his principal
occupation is Executive Vice President of Operations of the Company. His
principal business address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
Georgia 30346.
Lawrence W. Lepley, Jr. is a resident of the United States and his principal
occupation is President of Paragon Rehabilitation, Inc., an indirect wholly
owned subsidiary of the Company. His business address is 3100 West End Avenue,
Suite 470, Nashville, Tennessee, 37203.
53
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PURCHASES OF COMMON STOCK BY CERTAIN PERSONS
TRANSACTIONS BY THE WCAS GROUP
THS MERGER AND RELATED SETTLEMENT AGREEMENT.
In January 1996, pursuant to an Agreement and Plan of Merger (the "THS
Merger Agreement"), dated as of December 31, 1995, among the Company, WelCare
Transitional Acquirors, Inc., a wholly-owned subsidiary of the Company ("THS
Acquisition Sub"), and Transitional Health Services, Inc. ("THS"), THS
Acquisition Sub was merged (the "THS Merger") with and into THS. In the THS
Merger, each holder of capital stock of THS (the "THS Holders"), including WCAS
VI, WCAS CP II, Healthcare Partners, Patrick J. Welsh, Russell L. Carson, Bruce
K. Anderson, Richard H. Stowe, Thomas E. McInerney, Andrew M. Paul, Robert A.
Minicucci and Laura M. VanBuren (collectively, the "WCAS THS Holders"), received
(i) 0.235521068 shares of the Company's Special Voting Common Stock $.01 par
value per share ("Special Voting Common Stock") in exchange for each share of
THS common stock, par value $.01 per share, held by such stockholder and (ii)
one share of the Company's Series C Preferred Stock, $1.00 par value, ("Series C
Preferred Stock") in exchange for each share of THS preferred stock, par value
$1.00 per share, held by such stockholder. Collectively, the WCAS THS Holders
received 3,162,179 shares of Special Voting Stock and 121,982 shares of Series C
Preferred Stock in the THS Merger. In addition, at the closing of the THS
Merger, 351,318 shares of Special Voting Common Stock were deposited in an
escrow account (the "Escrow Account") on behalf of the WCAS THS Holders to
secure their portion of the indemnification obligations of the THS Holders under
the THS Merger Agreement.
JANUARY 31, 1997 TRANSACTIONS
Effective January 31, 1997, in settlement of all indemnification claims
brought under the THS Merger Agreement, the Company, Andrew M. Paul, as agent
for THS Holders, and J. Stephen Eaton, as agent for the shareholders of the
Company prior to the THS Merger (the "WelCare Holders"), entered into a
settlement agreement (the "Settlement Agreement"). Under the Settlement
Agreement, the WelCare Holders were entitled to receive shares of Special Voting
Common Stock from the Escrow Account; however, THS Holders had the option to
make payments of cash to the WelCare Holders in lieu of all or a portion of such
required stock transfer. In March 1997, as provided by the Settlement Agreement,
certain THS Holders (including each of the WCAS THS Holders) made cash payments
to the WelCare Holders in lieu of transferring to them certain shares of Special
Voting Common Stock. For such purposes, the agreed fair market value of shares
of Special Voting Common Stock was $8.40 per share. In connection with the
Settlement Agreement, the WCAS THS Holders made cash payments aggregating
approximately $1,421,578, transferred at total of 81,458 shares of Special
Voting Common Stock to the WelCare Holders and received an aggregate of 269,860
shares of Special Voting Common Stock from the Escrow Account.
Effective January 31, 1997, WCAS VI, Healthcare Partners, Patrick J. Welsh,
Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Andrew M. Paul, Robert
A. Minicucci, Thomas E. McInerney and Laura M. VanBuren acquired an aggregate of
approximately 86,978 shares (adjusted for a .6897-to-1 stock split (the "Reverse
Split") effected in connection with the Company's July 1997 initial public
offering of Common Stock (the "IPO")) of Common Stock from Messrs. Eaton
(approximately 76,633 shares for approximately $933,323) and Fosha
(approximately 10,346 shares for approximately $126,000) for an aggregate
purchase price of approximately $1,059,324, or approximately $12.00 per share.
Effective January 31, 1997, WCAS VI, Healthcare Partners, Patrick J. Welsh,
Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Andrew M. Paul, Robert
A. Minicucci, Thomas E. McInerney and Laura M. VanBuren purchased an aggregate
of 43,541 shares of the Company's Series D Preferred Stock, par value $1.00 per
share ("Series D Preferred Stock") from the Company, for an aggregate purchase
price of $4,354,100, or $100 per share. On July 18, 1997, in connection with the
closing of the IPO, each issued and outstanding share of Series D Preferred
Stock was converted into Common Stock at a conversion price of $16.00 per share.
54
<PAGE>
Effective January 31, 1997, WCAS CP II acquired 44,250 investment units
("Units") consisting of one share of the Company's Series E Redeemable Preferred
Stock, par value $1.00 per share, ("Series E Preferred Stock"), and 1.28 shares
(adjusted for the .6897-to-1 stock split effected in connection with the IPO) of
Common Stock (i.e., 44,250 shares of Series E Preferred Stock and 56,492 shares
of Common Stock) for an aggregate purchase price of $4,425,000, or $100 per
Unit.
THE JULY 1997 IPO
In July 1997, in connection with the closing of the IPO, (i) each issued and
outstanding share of the Special Voting Common Stock, was converted into .6897
shares of Common Stock (adjusted for the Reverse Split) and (ii) each issued and
outstanding share of the Series C Preferred Stock, was converted into Common
Stock at a conversion price of $16.00 per share, and (iii) each issued and
outstanding share of Series E Preferred Stock was redeemed at $100 a share.
In July 1997, the Company used proceeds from the IPO to repay a $16,833,000
10.8% senior subordinated note (the "10.8% Note") and a $7,500,000 11.7% senior
subordinated note (the "11.7% Note", and together with the 10.8% Note, the "WCAS
CP II Notes"), each of which was due October 30, 2002 and held by WCAS CP II.
The WCAS CP II Notes were issued in 1994 by a subsidiary of THS that was
acquired by Centennial in the THS Merger.
In July 1997, (i) Anthony J. deNicola, purchased 5,000 shares of Common
Stock (including shares held by an IRA account) and (ii) Andrew M. Paul
purchased 3,000 shares of Common Stock in the IPO at $16.00 per share.
In connection with the IPO, the Company made an offer to the former holders
of shares of Series C Preferred Stock (including the WCAS THS Holders), to
repurchase from such former holders, on a pro rata basis, that number of shares
of Common Stock which could be repurchased, at a per share price equal to the
price to the public in the IPO, with the net proceeds received by the Company in
connection with the exercise of the IPO underwriter's over-allotment option (the
"Repurchase Offer"). The Repurchase Offer was made as consideration for the
consent of these former holders to an amendment of the Company's Articles of
Incorporation to allow the automatic conversion of all shares of Series C
Preferred Stock into Common Stock upon the closing of the IPO. Holders of
approximately 84,000 shares (of the approximately 1.3 million shares available
for pro-rata repurchase) elected to have such shares repurchased by Centennial.
Messrs. Paul, Welsh, Stowe, Anderson, Carson, McInerney, and Minicucci elected
to have an aggregate of 13,171 shares of Common Stock repurchased at $16.00 a
share.
TRANSACTIONS BY MANAGEMENT INVESTORS
THS MERGER AND RELATED SETTLEMENT AGREEMENT
In the THS Merger, Lawrence W. Lepley, Jr. received 0.235521068 shares of
Special Voting Common Stock in exchange for each share of THS Common Stock. Mr.
Lepley elected to have 21,777 shares of Common Stock repurchased by Centennial
pursuant to the Repurchase Offer.
At the closing of the THS Merger, a stock dividend of 0.1111 shares of
Common Stock was issued on each outstanding share of Common Stock and the stock
dividend shares were deposited in the Escrow Account to secure a portion of the
indemnification obligations of the WelCare Holders under the THS Merger
Agreement.
On January 31, 1997, in connection with the Settlement Agreement, Messrs.
Eaton, Dahl and Fosha received all shares of Common Stock deposited on their
behalf into the Escrow Account. Mr. Dahl also received 5,881 shares of Special
Voting Common Stock.
55
<PAGE>
PURCHASES OF COMMON STOCK IN THE IPO
Mr. Eaton purchased 5,000 shares of Common Stock and Mr. Dahl purchased
2,000 shares of Common Stock at $16.00 a share in the IPO.
PURCHASES THROUGH OPTION EXERCISES
On January 15, 1996, Mr. Eaton exercised options to acquire 76,633 shares of
Common Stock, Mr. Dahl exercised options to acquire 38,316 shares of Common
Stock (adjusted for the Reverse Split) and Mr. Fosha exercised options to
acquire 38,316 shares of Common Stock (adjusted for the Reverse Split), at
$.2944 a share for an aggregate purchase price of $45,121.
On May 1, 1996, Mr. Dahl exercised an option to acquire 11,495 shares of
Common Stock (adjusted for the Reverse Split) at an exercise price of $7.83 a
share for an aggregate purchase price of $90,005.
PURCHASES THROUGH OPEN MARKET TRANSACTIONS
On December 9, 1997, Mr. Dahl purchased 2,000 shares of Common Stock in the
open market for $20.125 a share and an aggregate purchase price of $40,250.
INDEPENDENT AUDITORS
The consolidated balance sheets as of December 31, 1997 and December 31,
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997, incorporated by reference in this Proxy Statement have been audited by
Coopers & Lybrand L.L.P., (now known as PriceWaterhouseCoopers LLP), independent
auditors, as stated in their report. A representative of PriceWaterhouseCoopers
LLP will be at the Special Meeting to answer appropriate questions from
shareholders and will have the opportunity to make a statement if so desired.
WHERE YOU CAN FIND MORE INFORMATION
Centennial files annual, quarterly and current reports, proxy statements and
other information with the Commission. You may read and copy any reports,
statements or other information that Centennial files at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms. Centennial public filings are also available to the
public from commercial document retrieval services and at the Internet World
Wide Web site maintained by the Commission at http:// www.sec.gov. Reports,
proxy statements and other information concerning Centennial also may be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Commission allows Centennial to "incorporate by reference" information
into this document, which means that Centennial can disclose important
information to you by referring you to another document filed separately with
the Commission. The information incorporated by reference is deemed to be a part
of this document, except for any information superseded by information contained
directly in this document. This document incorporates by reference certain
documents that Centennial has previously filed with the Commission. These
documents contain important business information about Centennial and its
financial condition.
Centennial may have sent to you some of the documents incorporated by
reference, but you can obtain any of them through Centennial or the Commission
or the Commission's Internet World Wide Web site described above. Documents
incorporated by reference are available from Centennial without charge,
excluding all exhibits unless specifically incorporated by reference as an
exhibit to this document. Shareholders may obtain documents incorporated by
reference in this document by requesting them in writing or by telephone at the
following address:
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CENTENNIAL HEALTHCARE CORPORATION
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30076
Telephone: (770) 698-9040
Attention: Shareholder Relations
The Company, the Parent, the Acquiror, certain of the WCAS Investors and the
Management Investors have filed a Schedule 13E-3 with the Commission with
respect to the Merger. The Schedule 13E-3, including any amendments and exhibits
filed or incorporated by reference as a part thereof, as well as the final
Company Projections, is available for inspection or copying as set forth above.
Statements contained in this Proxy Statement or in any document incorporated
herein by reference as to the contents of any contract or other document
referred to herein or therein are not necessarily complete and in each instance
reference is made to such contract or other document filed as an exhibit to the
Schedule 13E-3 or such other document, and each such statement shall be deemed
qualified in its entirety by such reference.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM CENTENNIAL HEALTHCARE, PLEASE DO
SO AT LEAST FIVE BUSINESS DAYS BEFORE THE DATE OF THE SPECIAL MEETING IN ORDER
TO RECEIVE TIMELY DELIVERY OF SUCH DOCUMENTS PRIOR TO THE SPECIAL MEETING.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the Special Meeting.
Centennial has not authorized anyone to provide you with information that is
different from what is contained in this document. This document is dated
, 1999. You should not assume that the information contained in this
document is accurate as of any date other than that date, and the mailing of
this document to shareholders does not create any implication to the contrary.
This Proxy Statement does not constitute a solicitation of a proxy in any
jurisdiction where, or to or from any person to whom, it is unlawful to make
such proxy solicitation in such jurisdiction.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by Centennial
are incorporated by reference in this Proxy Statement:
(i) Centennial's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(ii) Centennial's Quarterly Report on Form 10-Q for quarter ended March
31, 1998;
(iii) Centennial's Quarterly Report on Form 10-Q for quarter ended June
30, 1998;
(iv) Centennial's Quarterly Report on Form 10-Q for quarter ended
September 30, 1998;
(v) Centennial's Quarterly Report on Form 10-Q/A for quarter ended
September 30, 1998;
(vi) Centennial's Current Report on Form 8-K filed on October 28, 1998;
(vii) Centennial's Current Report on Form 8-K filed on January 15, 1999;
and
(viii) Centennial's Current Report on Form 8-K/A filed on March18, 1999.
All documents filed by Centennial with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof and prior
to the date of the Special Meeting shall be deemed to be incorporated by
reference herein and shall be a part hereof from the date of filing of such
documents. Any statements contained in a document incorporated by reference
herein or contained in this Proxy Statement shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
(or in any other subsequently filed document which also is incorporated by
57
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reference herein) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof except as
so modified or superseded.
SHAREHOLDER PROPOSALS
If the Merger is not consummated for any reason, proposals of shareholders
intended to be presented at the 1999 Annual Meeting of Shareholders must be
received by the Company at its principal executive offices on or prior to
December 31, 1998 to be eligible for inclusion in the Company's Proxy Statement
and form of proxy relating to that meeting.
OTHER MATTERS
Management knows of no other business to be presented at the Special
Meeting. If other matters do properly come before the meeting, or any
adjournment or adjournments thereof, it is the intention of the persons named in
the proxy to vote on such matters according to their best judgment unless the
authority to do so is withheld in such proxy.
58
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
COUGAR HOLDINGS CORPORATION,
COUGAR ACQUISITION CORP.
AND
CENTENNIAL HEALTHCARE CORPORATION
DATED AS OF OCTOBER 22, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I
THE MERGER
Section 1.01 The Merger................................................................................ A-1
Section 1.02 Effect of the Merger...................................................................... A-2
Section 1.03 Consummation of the Merger................................................................ A-2
Section 1.04 Closing................................................................................... A-2
Section 1.05 Articles of Incorporation; By-Laws; and Directors and Officers of the Surviving
Corporation............................................................................. A-2
Section 1.06 Further Assurances........................................................................ A-2
Section 1.07 Company Actions........................................................................... A-2
ARTICLE II
CONVERSION OF SECURITIES
Section 2.01 Conversion of Securities.................................................................. A-3
Section 2.02 Stock Options............................................................................. A-3
Section 2.03 Payment for Shares........................................................................ A-3
Section 2.04 Dissenting Shares......................................................................... A-5
Section 2.05.. Dissenting Shares After Payment of Fair Value............................................. A-5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.01 Organization and Qualification............................................................ A-5
Section 3.02 Authorization and Validity of Agreement................................................... A-6
Section 3.03 Non-Contravention......................................................................... A-7
Section 3.04 Capital Stock; Subsidiaries............................................................... A-7
Section 3.05 SEC Filings............................................................................... A-8
Section 3.06 Financial Statements...................................................................... A-8
Section 3.07 Absence of Undisclosed Liabilities........................................................ A-9
Section 3.08 Governmental Approvals.................................................................... A-9
Section 3.09 Absence of Certain Changes or Events...................................................... A-9
Section 3.10 Title to Properties, Absence of Liens and Encumbrances.................................... A-10
Section 3.11 List of Properties, Contracts and Other Data.............................................. A-10
Section 3.12 Intangible Rights......................................................................... A-11
Section 3.13 Software.................................................................................. A-12
Section 3.14 Litigation................................................................................ A-13
Section 3.15 Governmental Authorizations and Regulations............................................... A-13
Section 3.16 Condition of Facilities................................................................... A-14
Section 3.17 Labor Matters............................................................................. A-14
Section 3.18 Insurance................................................................................. A-15
Section 3.19 Use of Real Property...................................................................... A-15
Section 3.20 Conditions of Assets...................................................................... A-15
Section 3.21 Employee Benefit Plans.................................................................... A-15
Section 3.22 Environmental Matters..................................................................... A-16
Section 3.23 Information In Proxy Statement............................................................ A-16
Section 3.24 Fraud and Abuse........................................................................... A-17
Section 3.25 Health Professional's Financial Relationships............................................. A-17
Section 3.26 Tax Matters............................................................................... A-18
Section 3.27 Transactions With Affiliates.............................................................. A-18
Section 3.28 Brokers and Finders....................................................................... A-19
Section 3.29 Opinion of Financial Advisor.............................................................. A-19
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Section 3.30 Statements True and Correct............................................................... A-19
Section 3.31 Knowledge of the Company.................................................................. A-19
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Section 4.01 Organization and Qualification............................................................ A-19
Section 4.02 Authority Relative to Agreement........................................................... A-19
Section 4.03 Non-Contravention......................................................................... A-20
Section 4.04 Governmental Approvals.................................................................... A-20
Section 4.05 Proxy and Schedule 13E-3 Information...................................................... A-20
Section 4.06 Brokers and Finders....................................................................... A-20
Section 4.07 Sufficient Funds.......................................................................... A-21
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUISITION SUB
Section 5.01 Organization and Qualification............................................................ A-21
Section 5.02 Authorization and Validity of Agreement................................................... A-21
Section 5.03 Non-Contravention......................................................................... A-21
Section 5.04 Governmental Approvals.................................................................... A-22
ARTICLE VI
CERTAIN AGREEMENTS
Section 6.01 Conduct of the Company's Business......................................................... A-22
Section 6.02 Stockholder Approval...................................................................... A-23
Section 6.03 Access to Information..................................................................... A-23
Section 6.04 Further Assurances........................................................................ A-24
Section 6.05 Inquiries and Negotiations; Certain Payments.............................................. A-24
Section 6.06 Notification of Certain Matters........................................................... A-25
Section 6.07 Indemnification........................................................................... A-25
ARTICLE VII
CONDITIONS TO THE MERGER
Section 7.01 Conditions to the Merger Relating to Parent and Acquisition Sub........................... A-26
Section 7.02 Conditions to the Merger Relating to the Company.......................................... A-27
ARTICLE VIII
TERMINATION AND ABANDONMENT
Section 8.01 Termination and Abandonment............................................................... A-28
Section 8.02 Effect of Termination..................................................................... A-29
ARTICLE IX
MISCELLANEOUS
Section 9.01 Nonsurvival of Representations and Warranties............................................. A-29
Section 9.02 Expenses, Etc............................................................................. A-29
Section 9.03 Publicity................................................................................. A-29
Section 9.04 Execution in Counterparts................................................................. A-29
Section 9.05 Notices................................................................................... A-29
Section 9.06 Waivers................................................................................... A-30
Section 9.07 Headings; Interpretation.................................................................. A-30
Section 9.08 Entire Agreement.......................................................................... A-31
Section 9.09 Governing Law............................................................................. A-31
Section 9.10 Severability.............................................................................. A-31
Section 9.11 Binding Effect, Benefits.................................................................. A-31
Section 9.12 Assignability............................................................................. A-31
Section 9.13 Amendments................................................................................ A-31
</TABLE>
ii
<PAGE>
INDEX TO EXHIBIT AND DISCLOSURE SCHEDULE
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------------
<C> <S>
A Form of Opinion of King & Spalding
B Form of Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol
</TABLE>
<TABLE>
<CAPTION>
DISCLOSURE
SCHEDULE
SECTION DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<S> <C>
3.01 Qualifications to do Business
3.03 Non-Contravention
3.04(a) Stock of Company and Corporate Subsidiaries
3.04(b) Options, Warrants, etc. of Company and Corporate Subsidiaries
3.04(c) Options, Warrants, etc. of Partnership Subsidiaries
3.04(d) Other Investments
3.08 Governmental Approvals (Company)
3.09 Certain Changes
3.10 Liens and Encumbrances
3.11 Properties, Contracts, etc.
3.12 Intangible Rights
3.14 Litigation
3.15 Governmental Authorizations
3.16 Condition of Facilities
3.17 Labor Matters
3.18 Insurance
3.19 Use of Real Property
3.20 Condition of Assets
3.21 Employee Benefits
3.22 Environmental Matters
3.26 Tax Matters
3.28 Transactions with Affiliates
3.31 Knowledge of the Company
4.04 Governmental Approvals (Parent)
5.04 Governmental Approvals (Acquisition Sub)
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of October 22, 1998, by and among
COUGAR HOLDINGS CORPORATION, a Delaware corporation ("Parent"), COUGAR
ACQUISITION CORP., a Georgia corporation and a wholly-owned subsidiary of Parent
("Acquisition Sub"), and CENTENNIAL HEALTHCARE CORPORATION, a Georgia
corporation (the "Company"). The Company and Acquisition Sub are hereinafter
sometimes referred to as the "Constituent Corporations" and the Company as the
"Surviving Corporation".
WHEREAS a special committee (the "Special Committee") comprised of three
independent directors of the Board of Directors of the Company (the "Company
Board") has unanimously determined that the terms of the proposed acquisition of
the Company by Parent pursuant to a merger of Acquisition Sub with and into the
Company, upon the terms and subject to the conditions hereinafter provided, are
fair to, and in the best interest of, the Company and the shareholders of the
Company (the "shareholders" or the "Public Shareholders"); and
WHEREAS the Special Committee has unanimously approved this Agreement and
Plan of Merger (the "Agreement") and has unanimously recommended that the
Company Board approve this Agreement and the merger, which recommendation is
based in part on a fairness opinion issued by J.P. Morgan Securities Inc. (the
"Independent Advisor"), independent financial advisors to the Special Committee,
that, as of the date of such opinion and based on the assump tions,
qualifications and limitations contained therein, the consideration to be
received by the Public Shareholders for their shares in the merger is fair to
the Public Shareholders from a financial point of view; and
WHEREAS the Company Board has granted full responsibility and authority on
behalf of the Company and the Board to the Special Committee to modify, amend or
otherwise change this Agreement, or any of its terms or provisions (including
modifications, amendments or changes subsequent to the Closing), to take all
action and to execute all documents necessary or desirable to consummate the
transactions contemplated by this Agreement, and to take all actions and to
execute all documents which may be necessary or desirable in connection
therewith, to give and receive consents and all notices on behalf of the Company
hereunder, to negotiate and settle claims on behalf of the Company hereunder,
and to perform any other act arising under or pertaining to this Agreement and
the transactions contemplated hereby on behalf of the Company; and
WHEREAS, the respective Boards of Directors of Parent and Acquisition Sub
and the Company Board have each (i) approved, upon the terms and subject to the
conditions hereinafter provided, and (ii) determined that the merger is fair to,
and deem it advisable and in the best interest of their respective shareholders
to consummate, the acquisition of the Company by Parent pursuant to a merger of
Acquisition Sub with and into the Company;
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, and in order to set forth
the terms and conditions of the Merger (as hereinafter defined) and the mode of
carrying the same into effect, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01 THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as hereinafter defined), in accordance
with this Agreement and the Georgia Business Corporation Code (the "Georgia
Code"), Acquisition Sub shall be merged with and into the Company (the
"Merger"), the separate existence of Acquisition Sub (except as it may be
continued by operation of law) shall cease, and the Company shall continue as
the surviving corporation in the Merger.
A-1
<PAGE>
SECTION 1.02 EFFECT OF THE MERGER. Upon the effectiveness of the Merger,
the Surviving Corporation shall succeed to and assume all the rights and
obligations of the Company and Acquisition Sub in accordance with the Georgia
Code and the Merger shall otherwise have the effects set forth in Section
14-2-1101 et seq. of the Georgia Code.
SECTION 1.03 CONSUMMATION OF THE MERGER. As soon as practicable (and in
any event within five (5) business days) after the satisfaction or waiver of the
conditions to the obligations of the parties to effect the Merger set forth
herein, provided that this Agreement has not been terminated previously, the
parties to this Agreement will cause the Merger to be consummated by filing with
the Secretary of State of the State of Georgia a properly executed certificate
of merger in accordance with Section 14-2-1105 of the Georgia Code, which shall
be effective upon filing or on such later date and time as the parties hereto
agree shall be specified in the Certificate of Merger (the time of such
effectiveness being hereinafter referred to as the "Effective Time").
SECTION 1.04 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place, at a location mutually agreed upon
by Parent and the Company, at 10:00 a.m. (local time) on the day on which the
Certificate of Merger is filed pursuant to Section 1.03 (the "Closing Date").
SECTION 1.05 ARTICLES OF INCORPORATION; BY-LAWS; AND DIRECTORS AND OFFICERS
OF THE SURVIVING CORPORATION. Subject to Section 6.07, the Articles of
Incorporation of Acquisition Sub in effect at the Effective Time shall be the
Articles of Incorporation of the Surviving Corporation, until thereafter amended
in accordance with the provisions thereof and as provided by the Georgia Code.
The By-Laws of Acquisition Sub in effect at the Effective Time shall be the
By-Laws of the Surviving Corporation, until thereafter amended in accordance
with the provisions thereof and the Articles of Incorporation of the Surviving
Corporation and as provided by the Georgia Code. From and after the Effective
Time and until their respective successors are duly elected or appointed and
qualified, (a) the directors of Acquisition Sub at the Effective Time shall be
the directors of the Surviving Corporation and (b) the officers of the Company
at the Effective Time shall be the officers of the Surviving Corporation.
SECTION 1.06 FURTHER ASSURANCES. If at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts are necessary, desirable or
proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation, its right, title or interest in, to or under any of the rights,
privileges, powers, franchises, properties or assets of either of the
Constituent Corporations or (b) otherwise to carry out the purposes of this
Agreement, the Surviving Corporation and its proper officers and directors or
their designees shall be authorized to execute and deliver, in the name and on
behalf of either of the Constituent Corporations, all such deeds, bills of sale,
assignments and assurances and do, in the name and on behalf of such Constituent
Corporations, all other acts and things necessary, desirable or proper to vest,
perfect or confirm its right, title or interest in, to or under any of the
rights, privileges, powers, franchises, properties or assets of such Constituent
Corporation or otherwise to carry out the purposes of this Agreement.
SECTION 1.07 COMPANY ACTIONS. The Company hereby approves of and consents
to the Merger and represents and warrants that its Board of Directors, at a
meeting duly called and held, and acting on the unanimous recommendation of the
Special Committee, has (i) unanimously determined that each of this Agreement
and the transactions contemplated hereby, including the Merger, are fair to and
in the best interests of the shareholders of the Company, (ii) unanimously
adopted this Agreement and the transactions contemplated hereby, including the
Merger and (iii) unanimously resolved to recommend that the shareholders of the
Company adopt this Agreement and the Merger, provided, however, that such
recommendation may be with drawn, modified or amended if, in the opinion of the
Board of Directors, after receipt of advice from outside legal counsel, failure
to withdraw, modify or amend such recommendation would result in the Board of
Directors violating its fiduciary duties to the Company's shareholders under
applicable law. The Company further represents that the Independent Advisor has
delivered to the
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Company's Board of Directors its written opinion that the Merger Consideration
(as hereinaf ter defined) is fair to the holders of Shares (as hereinafter
defined) from a financial point of view.
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.01 CONVERSION OF SECURITIES. By virtue of the Merger and without
any action on the part of either Constituent Corporation or any holder of the
capital stock thereof, at the Effective Time:
(a) each share of Common Stock, par value $.01 per share, of Acquisition
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable
share of Common Stock, par value $.01 per share, of the Surviving
Corporation;
(b) each share of Common Stock, par value $.01 per share, of the Company
("Company Common Stock") that is held in the treasury of the Company or of
any Subsidiary, or by Parent or any of its subsidiaries, shall be canceled
and retired and no consideration shall be paid or delivered in exchange
therefor; and
(c) each remaining share (each a "Share") of Company Common Stock issued
and outstanding immediately prior to the Effective Time (other than
Dissenting Shares) shall be converted into the right to receive an amount in
cash, without interest, equal to Sixteen Dollars ($16.00) per Share (the
"Merger Consideration").
SECTION 2.02 STOCK OPTIONS.
(a) At the Effective Time, each stock option outstanding under the Company's
1994 Employee Stock Option Plan, the Company's 1996 Executive Stock Plan, the
Company's 1996 Employee Stock Option Plan and/or the Company's 1997 Stock Plan
(collectively, the "Company Stock Option Plans") shall, to the extent not
theretofore vested, become vested and shall terminate as of the Effective Time.
Each holder of any such stock option having an exercise price less than the
Merger Consideration shall be entitled to receive from the Company, in
cancellation and settlement of such stock option, an amount in cash determined
by multiplying (x) the excess, if any, of the Merger Consideration over the per
share exercise price of each such option by (y) the number of shares of Company
Common Stock issuable upon exercise of such option, subject to applicable
withholding taxes, if any; and each holder of any such stock option having an
exercise price equal to or greater than the Merger Consideration shall not
receive any consideration in cancellation and settlement of such stock option.
(b) Prior to the Effective Time, the Company (x) shall not, without first
obtaining the consent of Parent, grant any additional stock options or modify
the provisions thereof or of any of the Company Stock Option Plans (except as
provided in this Section 2.02) and (y) shall take all necessary actions to
ensure that (1) the Company Stock Option Plans and all options issued and
outstanding thereunder shall terminate and be canceled as of the Effective Time,
(2) the provisions in any other plan, program, agreement or arrangement
providing for the issuance or grant of any other interest in respect of the
capital stock of the Company or any Subsidiary, shall be canceled as of the
Effective Time and (3) all Company options that are not exercised prior to the
Effective time will terminate and expire as of the Effective Time.
SECTION 2.03 PAYMENT FOR SHARES.
(a) Prior to the Effective Time, Parent shall designate a bank or trust
company to act as exchange agent (the "Exchange Agent") for the purpose of
exchanging certificates representing Shares for the Merger Consideration. At the
Effective Time, Parent and Acquisition Sub shall cause such funds as are
required for the conversion of the Shares pursuant to Section 2.01(c) (the
"Exchange Fund") to be deposited with the Exchange Agent.
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(b) Promptly after the Effective Time, Parent shall instruct the Exchange
Agent to mail to each holder of record of one or more Shares (i) a letter of
transmittal, which shall specify that delivery shall be effected, and risk of
loss and title to the certificates that immediately prior to the Effective Time
represented outstanding Shares (each, a "Certificate") shall pass, only upon
proper delivery of such Certificates to the Exchange Agent and have such other
provisions as Parent shall specify and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for the Merger Consideration.
Until surrendered as contemplated by this Section 2.03, each Certificate shall
be deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration. No interest will be paid or accrued on the
Merger Consideration.
(c) Upon surrender of a Certificate (duly endorsed as the Exchange Agent may
require) for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, and such other documents as may be required by the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor the
Merger Consideration payable in respect of the Shares previously represented by
such Certificate, after giving effect to any applicable withholding tax, and the
Certificate so surrendered shall forthwith be canceled. The Exchange Agent may
establish such other reasonable and customary rules and procedures in connection
with its duties as it may deem appropriate.
(d) If the Merger Consideration is to be paid to any person other than the
person in whose name the Certificates surrendered for conversion are registered,
it shall be a condition of payment that such Certificates be properly endorsed
and the signatures thereon properly guaranteed and otherwise in proper form for
transfer and that the person requesting such payment shall pay to the Exchange
Agent any transfer or other taxes required by reason of the delivery of such
consideration to a person other than the registered holder of such Certificate,
or shall establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not applicable.
(e) If any Certificate shall have been lost, stolen, mislaid or destroyed,
upon receipt of (i) an affidavit of that fact from the holder claiming such
Certificate to be lost, stolen, mislaid or destroyed, (ii) such bond, security
or indemnity as Parent and/or the Exchange Agent may require and (iii) any other
documents necessary to evidence and effect the bona fide exchange thereof, the
Exchange Agent shall deliver to such holder the Merger Consideration into which
the shares represented by such lost, stolen, mislaid or destroyed Certificate
have been converted.
(f) Any portion of the Exchange Fund held by the Exchange Agent for delivery
pursuant to this Section 2.03 and unclaimed at the end of six months after the
Effective Time shall be repaid or redelivered to Parent, upon demand, and any
holders of Certificates who have not theretofore complied with this Section 2.03
shall, subject to applicable law, thereafter look only to the Surviving
Corporation for payment of the Merger Consideration in respect of such holders'
Shares. Notwithstanding the foregoing, none of Parent, the Surviving Corporation
or the Exchange Agent shall be liable to any holder of Shares for any amount
paid to a public official pursuant to any applicable abandoned property, escheat
or similar law. Any amounts unclaimed by holders of Shares two years after the
Effective Time (or such earlier date immedi ately prior to such time as such
amounts would otherwise escheat to or become the property of any governmental
entity) shall, to the extent permitted by applicable law, become the property of
the Surviving Corporation free and clear of any claims or interest of any person
previously entitled thereto.
(g) At and after the Effective Time, the stock transfer books of the Company
shall be closed, and there shall be no further registrations of transfers of
shares of Company Common Stock thereafter on the records of the Company. If,
after the Effective Time, Certifi cates are presented to the Surviving
Corporation, Parent or the Exchange Agent for any reason, they shall be canceled
and exchanged for Merger Consideration as provided in this Section 2.03.
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SECTION 2.04 DISSENTING SHARES.
(a) Notwithstanding anything in this Agreement to the contrary, Shares that
are outstanding immediately prior to the Effective Time and that are held by any
shareholder who has delivered to the Company, prior to the vote of shareholders
required by Section 6.02 hereof, a written notice in accordance with Article 13
of the Georgia Code of such shareholder's intent to demand payment for such
shareholder's Shares if the Merger is effected and who shall have not voted such
Shares in favor of the approval and adoption of this Agreement (collectively,
the "Dissenting Shares") shall not be converted into the right to receive the
Merger Consideration, but the holders of such Dissenting Shares shall be
entitled to payment of the fair value of such Dissenting Shares in accordance
with the provisions of Article 13 of the Georgia Code, provided, however, that
if such shareholder shall waive such shareholder's right to demand payment under
Article 13 of the Georgia Code or a court of competent jurisdiction shall
determine that such shareholder is not entitled to the relief provided by said
Article 13, then the right of such holder of Dissenting Shares to be paid the
fair value of such shareholders Dissenting Shares shall cease and such
Dissenting Shares shall thereupon be deemed to have been converted into, as of
the Effective Time, the right to receive the Merger Consideration, without any
interest thereon.
(b) The Company shall give Parent and Acquisition Sub (i) prompt notice of
any notices or other instruments received by the Company pursuant to Article 13
of the Georgia Code and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for payment for Dissenting Shares. The
Company shall not, except with the prior written consent of Parent and
Acquisition Sub, voluntarily offer to make or make any payment with respect to
any demands for payment for Dissenting Shares or settle or offer to settle any
such demands.
Section 2.05 DISSENTING SHARES AFTER PAYMENT OF FAIR VALUE. Dissenting
Shares, if any, shall be canceled after payments of fair value in respect
thereto have been made to dissenting shareholders of the Company pursuant to the
Georgia Code.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Acquisition Sub as
follows:
SECTION 3.01 ORGANIZATION AND QUALIFICATION.
(a) The Company and each of its corporate Subsidiaries (the "Corporate
Subsidiaries") is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation, and is duly licensed
or qualified and in good standing to do business as a foreign corporation, and
is authorized to do business, in each other jurisdiction in which the character
or location of the properties owned, leased, managed or operated by such entity
or the nature of the business transacted by it makes such licensing or
qualification neces sary, except where the failure to be so licensed or
qualified could not reasonably be expected to have a Material Adverse Effect (as
hereinafter defined). The Company has heretofore delivered to Parent accurate
and complete copies of its Articles of Incorporation and By-laws and the charter
and By-laws of each of the Corporate Subsidiaries, all as currently in effect.
The Company and each Corporate Subsidiary has the requisite corporate power and
authority to own or lease and operate its properties and assets and to carry on
its business as currently conducted. As used in this Agreement, "Material
Adverse Effect" shall mean a material adverse effect on the business,
properties, results of operation or condition (financial or otherwise) of the
Company and its Subsidiaries, taken as a whole.
(b) Each of the Company's partnership Subsidiaries (the "Partnership
Subsidiaries") is a partnership or limited partnership duly organized and
validly existing under the laws of the state of its organization, and is duly
licensed or qualified and, to the extent applicable, in good standing, to do
business as a foreign partnership, and is authorized to do business, in each
other jurisdiction in which the character or location
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of the properties owned, leased, managed or operated by such entity or the
nature of the business transacted by it makes such licensing or qualification
necessary, except where the failure to be so licensed or qualified could not
reason ably be expected to have a Material Adverse Effect. The Company has
heretofore delivered to Parent accurate and complete copies of the partnership
agreement (and other organizational documents) of each of the Partnership
Subsidiaries, all as currently in effect. The Partnership Subsidiaries have the
requisite partnership power and authority to own or lease and operate their
respective assets and properties and to carry on their respective businesses as
currently conducted.
(c) Section 3.01 of the Disclosure Schedule sets forth a complete list of
the jurisdictions in which the Company and each of the Subsidiaries is licensed
or qualified to do business.
(d) As used herein, (x) the term "Subsidiaries" means all those corporations
and other business entities of which the Company (i) owns or controls 50% or
more of the outstanding equity securities either directly or through an unbroken
chain of entities as to each of which 50% or more of the outstanding equity
securities is owned directly or indirectly by its parent, or (ii) in the case of
partnerships, serves as a general partner, or (iii) in the case of a limited
liability company, serves as a managing member or (iv) otherwise has the ability
to elect a majority of the directors, trustees or managing members thereof, and
(y) the term "Facility" means any nursing home or other medical facility owned
or leased (a "Proprietary Facility") or managed (a "Managed Facility") by the
Company or any Subsidiary. Except as expressly provided herein, each reference
in this Agreement to the Company or a Subsidiary shall be deemed to include any
Proprietary Facility that is owned or leased by such entity, whether so
expressed or not, including, by way of example and not of limitation, references
to contracts and commitments entered into, or purported to be entered into, in
the name of any such Proprietary Facility and licenses or other property or
assets held by, or purported to be held by, any such Proprietary Facility.
SECTION 3.02 AUTHORIZATION AND VALIDITY OF AGREEMENT.
(a) The Company has the requisite corporate power and authority to execute
and deliver this Agreement and to perform its obligations hereunder. The
execution, delivery and performance by the Company of this Agreement, and the
consummation of the transactions contemplated hereby have been duly authorized
and approved by all requisite corporate action (including without limitation the
unanimous approval of the Special Committee), subject to the adoption of this
Agreement by the holders of a majority of the outstanding shares of Company
Common Stock, which is the only shareholder vote required for approval of this
Agreement and the consummation of the Merger. This Agreement has been duly
executed and delivered by the Company and, assuming due execution and delivery
by the other parties hereto and assuming that this Agreement constitutes a valid
and binding obligation of Parent and Acquisition Sub, constitutes the legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
(b) At a Special Committee meeting duly called and held on October 21, 1998,
the Special Committee, based in part upon the opinion of the Independent
Advisor, unanimously (i) determined that this Agreement and the Merger
contemplated hereby are fair to and in the best interest of the Public
Shareholders, (ii) approved, authorized and adopted this Agreement, the Merger
and the other transactions contemplated hereby, and (iii) resolved to recommend
the approval and adoption of this Agreement and the Merger by the shareholders
of the Company.
(c) At a Company Board meeting duly called and held on October 22, 1998, the
Company Board, based in part upon the approval and recommendation of the Special
Committee described in Section 3.02(b), (i) determined that this Agreement and
the Merger contemplated hereby are fair to and in the best interest of the
Public Shareholders, (ii) approved, authorized and adopted this Agreement, the
Offer, the Merger and the other transactions contemplated hereby, and (iii)
resolved to recommend the approval and adoption of this Agreement and the Merger
by the shareholders of the Company.
(d) The Independent Advisor has delivered to the Special Committee and to
the Company Board its written opinion, dated prior to or as of the date of this
Agreement, that based on the assumptions, qualifications and limitations
contained therein, the cash consideration to be received by the Public
Shareholders in the Merger is fair to such holders from a financial point of
view.
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SECTION 3.03 NON-CONTRAVENTION. Neither the execution and delivery of this
Agreement by the Company, nor the consummation of the transactions contemplated
hereby, nor compliance by the Company with any of the terms and provisions
hereof, will (i) violate, contravene, conflict with or result in a breach of any
provision of the Company's Articles of Incorporation or By-laws or the Articles
or Certificate of Incorporation or By-laws (or other equivalent organizational
documents) of any Subsidiary, (ii) except as set forth on Section 3.03 of the
Disclosure Schedule, result in any material respects in any breach or violation
of, conflict with, or constitute or result in a default or event of default or
event which, with notice or lapse of time or both, would constitute such a
default or event of default (or give rise to any right of termina tion,
cancellation, payment or acceleration, or any other right to materially diminish
the rights of, or materially increase the obligations or costs to, the Company
or any Subsidiary) under, or require any consent pursuant to, or result in the
creation or imposition of any lien, charge or encumbrance of any nature
whatsoever on any of the properties or assets owned, leased or managed by the
Company and/or any Subsidiary under the terms or provisions of, any material
note, bond, mortgage, license, franchise, permit, lease, indenture, agreement,
contract or other instrument or obligation to which the Company and/or any
Subsidiary is a party or to which any of the material properties or assets
owned, leased or managed by the Company or any Subsidiary are bound or otherwise
affected or (iii) contravene or violate in any material respects any law, rule,
regulation, licensing requirement, permit, order or decree of any court,
arbitrator or any other agency of government or authority by which the Company
or any Subsidiary is bound or by which any material properties or assets owned,
leased or managed by the Company or any Subsidiary are bound or otherwise
affected.
SECTION 3.04 CAPITAL STOCK; SUBSIDIARIES.
(a) The total number and par value of authorized shares of capital stock of
the Company and each of the Corporate Subsidiaries and the total number of
issued and outstanding shares of capital stock of the Company and each of the
Corporate Subsidiaries is set forth on Section 3.04(a) of the Disclosure
Schedule. All shares of capital stock of the Company and each of the Corporate
Subsidiaries are validly issued and outstanding, fully paid and nonassessable.
The total number of partnership (general or limited) units or other interests
authorized, and the total number of partnership (general or limited) units or
other interests outstanding of the Partnership Subsidiaries is set forth on
Section 3.04(a) of the Disclosure Schedule. All of such partnership units or
other interests are validly issued and outstanding, fully paid and
nonassessable. All of the outstanding shares of capital stock or partnership
(general or limited) units of each Subsidiary are directly owned, of record and
beneficially, by the persons (and in the relative ownership percentages) listed
on Section 3.04(a) of the Disclosure Schedule, free and clear of all pledges,
security interests, liens, claims, charges or other encumbrances of any nature
whatsoever, except for those pledges, security interests, liens, claims, charges
or other encumbrances set forth on Section 3.04(a) of the Disclosure Schedule.
None of the outstanding shares of capital stock or partnership units or other
interests of the Company or any Subsidiary are subject to, nor were any of them
issued in violation of, any pre-emptive or similar rights or any right of first
refusal or first offer or other similar right in favor of any person and there
are no proxies outstanding or restrictions on or agreements with respect to the
voting or transferability any of such shares or units or other interests.
(b) Except as set forth on Section 3.04(b) of the Disclosure Schedule, (i)
no subscription, warrant, option, convertible security or other right
(contingent or other) to purchase or acquire any shares of any class of capital
stock of the Company or any Corporate Subsidiary is authorized or outstanding,
(ii) there are no outstanding stock appreciation rights or phantom stock plans
of the Company, (iii) there is not any commitment on the part of the Company or
of any Corporate Subsidiary to issue any shares, warrants, options or other such
rights or to distribute to holders of any class of its capital stock any
evidences of indebtedness or assets and (iv) neither the Company nor any
Corporate Subsidiary has any obligation (contingent or other) to purchase,
redeem or otherwise acquire any shares of the capital stock of the Company or
the Corporate Subsidiaries or any interest therein or to pay any dividend or
make any other distribution in respect thereof.
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(c) Except as set forth on Section 3.04(c) of the Disclosure Schedule, (i)
no subscription, warrant, option, convertible security or other right
(contingent or other) to purchase or acquire any interest in any Partnership
Subsidiary is authorized or outstanding, (ii) there is not any commitment of any
Partnership Subsidiary to issue any partnership interests or other rights or to
distribute to its partners any evidences of indebtedness or assets and (iii) no
Partnership Subsidiary has any obligation (contingent or other) to purchase,
redeem or otherwise acquire any partnership interests or to pay or make any
other distribution in respect thereof.
(d) Other than the capital stock of the Corporate Subsidiaries and the
partnership (general or limited) units of the Partnership Subsidiaries, and
except as set forth on Section 3.04(d) of the Disclosure Schedule, neither the
Company nor any Subsidiary owns of record or beneficially, or has any right or
obligation to acquire, directly or indirectly, (i) any shares of outstanding
capital stock or securities convertible into or exchangeable for capital stock
of any other corporation or (ii) any participating interests in any partnership,
joint venture or other non-corporate business enterprise.
SECTION 3.05 SEC FILINGS
(a) The Company has timely filed and (except for preliminary materials) made
available to Parent all reports, statements, registration statements and other
documents (including all exhibits thereto) filed or required to be filed by the
Company with the Securities Exchange Commission (the "SEC") (such reports,
registration statements and other documents being referred to herein
collectively as the "Company SEC Filings"), including without limitation, (i)
the Company's Registration Statement on Form S-1 dated July 2, 1997, (ii) the
Annual Report of the Company on Form 10-K for the year ended 1997, (iii) the
Quarterly Reports of the Company on Form 10-Q for the three months ended March
31, 1998 and June 30, 1998, and (iv) its proxy or information statements
relating to meetings of, or actions taken without a meeting by, the shareholders
of the Company. The Company SEC Filings, including, without limitation, any
financial statements or schedules including therein or incorporated therein by
reference, (i) at the time filed, complied in all material respects with
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act") and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as the case may be, and other applicable laws, rules and
regulations and (ii) did not, at the time they were filed (or, if amended or
superseded by a filing prior to the date hereof, then on the date of such later
filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such Company SEC Filings or necessary in
order to make the statements in such Company SEC Filings, in light of the
circumstances under which they were made, not misleading. No Subsidiary is, or
has been, required to file any forms, reports or other documents with the SEC.
SECTION 3.06 FINANCIAL STATEMENTS. The financial statements of the Company
and its Subsidiaries contained in the Company SEC Filings or otherwise furnished
to Parent and Acquisition Sub, including (i) the consolidated balance sheets of
the Company and its Subsidiaries as of December 31, 1997 (the "Audited Balance
Sheet") and as of each of December 31, 1996 and December 31, 1995 and the
related statements of income, shareholders' equity and cash flows for the
respective years then ended, in each case certified by PricewaterhouseCoopers
LLP, the independent public accountants retained by the Company and (ii) the
unaudited consolidated balance sheets of the Company as of June 30, 1998 (the
"Interim Balance Sheet") and June 30, 1997, and the related statements of
operations, shareholders' equity and cash flows for the respective six-month
periods then ended, certified by the Chief Financial Officer of the Company, are
in accordance with the books and records of the Company and its Subsidiaries
(except as may be indicated in the notes thereto or in the case of unaudited
statements, as permitted by Rule 10- 01 of Regulation S-X promulgated by the
SEC) and present fairly (subject, in the case of unaudited statements, to
normal, recurring accruals, none of which individually or in the aggre gate will
be material), in all material respects, the consolidated financial position of
the Company as of such respective dates and the consolidated results of its
operations for the respective periods then ended in accordance with
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generally accepted accounting principles ("GAAP"), applied on a consistent basis
throughout the periods involved.
SECTION 3.07 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on,
and to the extent reflected in, the Interim Balance Sheet or the Company SEC
Filings or as may have been incurred since June 30, 1998 in the ordinary course
of business and consistent with past practice, neither the Company nor any
Subsidiary has incurred any liabilities or obligations of any kind or nature,
whether known or unknown or secured or unsecured (whether absolute, accrued,
contingent or otherwise, and whether due or to become due) of a nature
customarily accrued, reserved against or disclosed in a corporate balance sheet
(including the notes thereto) prepared in conformity with GAAP, including
without limitation any tax liabilities due or to become due.
SECTION 3.08 GOVERNMENTAL APPROVALS. Except as set forth in Section 3.08
of the Disclosure Schedule, no order, authorization, approval or consent from,
or filing with, any federal or state governmental or public body or other
authority having jurisdiction over the Company, any Subsidiary or any Facility
is required for the execution, delivery and performance of this Agreement by the
Company or is necessary in order to ensure the legality, validity, binding
effect or enforceability of this Agreement, other than (i) filings in connection
or compliance with the provisions of any federal or state securities laws and/or
the rules of the National Association of Securities Dealers, Inc. ("NASD"), (ii)
filings with the Federal Trade Commission and with the Antitrust Division of the
United States Department of Justice pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act), and the rules promulgated
thereunder, (iii) the filing of a Certificate of Merger with the Secretary of
State of the State of Georgia and related informational filings under applicable
laws of other states in which the Company is qualified to do or is doing
business, and (iv) such consents, approvals, orders or authorizations which if
not obtained, or registrations, declarations or filings which if not made, would
not, individually or in the aggregate, have a Material Adverse Effect or
materially delay or materially adversely affect the ability of the Company to
consummate the transactions contemplated hereby.
SECTION 3.09 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Since June 30, 1998, except (x) as otherwise set forth in Section 3.09
of the Disclosure Schedule, (y) as specifically disclosed in the Company SEC
Filings or (z) as otherwise specifically contemplated by this Agreement, neither
the Company nor any Subsidiary (excluding any Managed Facility) has:
(i) changed or amended its Articles or Certificate of Incorporation or
By-laws (or other governing documents); (ii) incurred any indebtedness for
borrowed money or guaranteed any indebtedness for borrowed money or incurred
any other material obliga tion or liability (whether fixed or contingent),
except normal trade or business obligations incurred in the ordinary course
of business and consistent with past practice; (iii) discharged or satisfied
any lien, security interest, charge or other encumbrance or paid any
obligation or liability (fixed or contingent), other than in the ordinary
course of business and consistent with past practice; (iv) mortgaged,
pledged or subjected to any lien, security interest, charge or other
encumbrance (other than Permitted Liens) any of its assets or properties;
(v) transferred, leased or otherwise disposed of any of its assets or
properties except for a fair consideration in the ordinary course of
business and consistent with past practice or, except for a fair
consideration in the ordinary course of business and consistent with past
practice, acquired any assets or properties; (vi) declared, set aside or
paid any dividend or other distribution (whether in cash, stock or property
or any combination thereof) in respect of its capital stock or otherwise
acquired any of its capital stock or split, combined or otherwise altered
its capital stock or authorized the creation or issuance of or issued or
sold any shares of its capital stock or any securities or obligations
convertible into or exchangeable for its capital stock or issued to any
person any other right to acquire any shares of its capital stock or any
stock appreciation or similar rights; (vii) made any investment of a capital
nature either by purchase of stock or securities, contributions to capital,
property transfers or otherwise, or by the purchase of any material property
or assets of any other
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individual, firm or corporation (other than transactions between or among
the Company and/or the Subsidiaries); (viii) canceled or compromised any
debt or claim other than in the ordinary course of business, consistent with
past practice; (ix) increased the rate or terms of compensation payable or
to become payable by the Company or the Subsidiaries to their directors,
officers or employees, or increased the rates or terms of any bonus,
insurance, pension, or other employee benefit plan, payment or arrangement;
(x) waived or released any rights of material value, including without
limitation, any Intangible Rights, except in the ordinary course of business
and consistent with past practice; (xi) transferred or granted any rights
under or with respect to any Intangible Rights, or permitted any license,
permit or other form of authorization relating to an Intangible Right to
lapse, except in the ordinary course of business and consistent with past
practice; (xii) made or granted any wage or salary increase applicable to
any group or classification of employees generally, entered into any
employment contract with, or made any loan to, or entered into any material
transaction of any other nature with, any officer or employee of the Company
or any Subsidiary; (xiii) entered into any transaction, contract or
commitment that, individually or in the aggregate, are material to the
Company and its Subsidiaries taken as a whole, except (x) contracts listed,
or which pursuant to the terms hereof are not required to be listed, on
Section 3.11 of the Disclosure Schedule, (y) this Agreement and the
transactions contemplated hereby and (z) as permitted by Section 6.01; (xiv)
suffered any casualty loss or damage (whether or not such loss or damage
shall have been covered by insurance) which affects in any material respect
its ability to conduct its business; or (xv) agreed in writing or otherwise
to take any of the actions listed in clauses (i) through (xiv) of this
Section 3.09 or caused or allowed any Managed Facility to take any of the
actions listed in clauses (ii) through (xiv) of this Section 3.09.
(b) Since June 30, 1998, the Company and its Subsidiaries have not suffered
a Material Adverse Effect.
SECTION 3.10 TITLE TO PROPERTIES, ABSENCE OF LIENS AND
ENCUMBRANCES. Except as reflected in the Audited Balance Sheet (including any
related notes thereto), as set forth in Section 3.10 of the Disclosure Schedule
or with respect to assets disposed of since December 31, 1997 in the ordinary
course of business and consistent with past practice, each of the Company and
the Subsidiaries (i) has good and marketable fee simple title to all real
property owned by it and (ii) has good and valid title to all its other assets
and properties, in each case free and clear of all liens, claims, charges,
security interests or other encumbrances, other than (x) liens for taxes not yet
delinquent, (y) mechanics, materialmen's and similar liens and encumbrances
which may have arisen in the ordinary course of business and which, in the
aggregate, would not be material to the assets, business, financial condition or
results of operations of the Company and the Subsidiaries taken as a whole, or
(z) security interests securing indebtedness not in default for the purchase
price of or lease rental payments on property purchased or leased under capital
lease arrangements in the ordinary course of business (the liens, charges,
security interests and other encumbrances described in clauses (x), (y) and (z)
above being referred to herein as "Permitted Liens"). Any real property and
buildings held under lease by the Company or any of the Subsid iaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and would not individually or in the aggregate have a Material
Adverse Effect on the Company and the Subsidiaries and do not interfere with the
use made and proposed to be made of such property and buildings.
SECTION 3.11 LIST OF PROPERTIES, CONTRACTS AND OTHER DATA.
(a) Annexed hereto as Section 3.11 of the Disclosure Schedule is a list
setting forth the following:
(i) a description of all real property owned by the Company or any
Subsidiary and (ii) all leases of real or personal property involving
payments in excess of $100,000 per annum (x) to which the Company or any
Subsidiary is a party, either as lessee or lessor or (y) that relate to any
real or personal property used in the business of the Company and/or the
Subsidiaries (the "Business"), in each case including a description of the
property to which each such lease relates;
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(ii) all collective bargaining agreements, employment and consulting
agree ments, executive compensation plans, bonus plans or arrangements,
severance plans or arrangements, deferred compensation agreements, employee
pension plains or retirement plans, employee profit sharing plans, employee
stock purchase and stock option plans, group life insurance, hospitalization
insurance or other similar plans or arrangements providing for benefits to
employees of, or independent contractors or other agents for, the Company or
any Subsidiary which have not been filed as exhibits to the Company SEC
Filings and which exceed $100,000 per annum; and
(iii) all contracts, understandings and commitments (including without
limitation mortgages, indentures and loan agreements) to which the Company
or any Subsidiary is a party, or to which the Company or any Subsidiary or
any of the assets or properties owned, leased or managed by the Company or
any of the Subsidiaries are subject and which are not specifically referred
to in clause (a)(i) or (a)(ii) above, provided that there need not be listed
in Section 3.11 of the Disclosure Schedule pursuant to this clause (a)(iii)
any contracts, understandings, or commitments filed as exhibits to the
Company SEC Filings or which are incurred in the ordinary course of business
and consistent with past practice, other than any such contract,
understanding or commitment which (A) is a contract or group of related
contracts which exceeds $100,000 in amount, (B) contains warranties by the
Company or any Subsidiary materially more burdensome than those customary in
the Business or (C) cannot be performed in the normal course within 365 days
after the Effective Time or canceled within such period by the Company or
any Subsidiary or its assignee, without breach or penalty.
(b) Except as set forth on Section 3.11 of the Disclosure Schedule or
disclosed in the Company SEC Filings, neither the Company nor any Subsidiary is
party to any agreement with any employee (i) the benefits of which (including,
without limitation, severance benefits) are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving the
Company or any Subsidiary of the nature of any of the transactions contemplated
by this Agreement or (ii) providing severance benefits in excess of those
generally available under the Company's severance policies as in effect on the
date hereof (which are described in Section 3.11 of the Disclosure Schedule), or
which are conditioned upon a change of control, after the termination of
employment of such employees regardless of the reason for such termination of
employment. Except as set forth on Section 3.11 of the Disclosure Schedule or
disclosed in the Company SEC Filings, neither the Company nor any Subsidiary is
a party to any employment agreement or compensation guarantee extending for a
period longer than one year from the date hereof.
True and complete copies of all documents and complete descriptions of all
oral understandings (if any) referred to in Section 3.11 of the Disclosure
Schedule have been provided or made available to Parent and its counsel. Except
as disclosed in Section 3.11 of the Disclosure Schedule, to its knowledge,
neither the Company nor any Subsidiary has been notified in writing of any claim
that any contract referred to in Section 3.11 of the Disclosure Schedule is not
valid and enforceable in accordance with its terms for the periods stated
therein, or that there is under any such contract any existing default or event
of default or event which with notice or lapse of time or both would constitute
such a default or event of default or that the consummation of the transactions
contemplated hereby would result in a default or any such condition which, in
either case, could reasonably be expected have a Material Adverse Effect.
SECTION 3.12 INTANGIBLE RIGHTS.
(a) Section 3.12 of the Disclosure Schedule lists (i) all patents,
trademarks and trade names, trademark and trade name registrations, logos,
service marks registrations, copy rights and copyright registrations, all
applications pending on the date hereof for patent or for trademark, trade name,
service mark or copyright registrations, and all other proprietary rights
(collectively "Intangible Rights") owned by the Company or any Subsidiary or
used by them in connection with the Business specifying the nature of its rights
therein, and (ii) all licenses granted by or to the Company or any Subsidiary
and all other agreements to which the Company or any Subsidiary is a party which
relate, in whole or in part, to any
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Intangible Rights mentioned in clause (i) above, whether owned b) the Company or
any Subsidiary or otherwise. Except as set forth in Section 3.12 of the
Disclosure Schedule and except where such noncompliance, absence of rights or
other failure, individually or in the aggregate, would not be reasonably likely
to have a Material Adverse Effect on the Company and the Subsidiaries, (w) the
Company and the Subsidiaries have complied with their respective contractual
obligations relating to the protection of such of the Intangible Rights used by
them pursuant to licenses or other contracts, (x) the Company and each of the
Subsidiaries has the right to use the Intangible Rights to provide, sell and
produce the services and products provided, sold and produced by it, and to
conduct its business as heretofore conducted, and the consummation of the
transactions contemplated hereby will not alter or impair any such rights, (y)
all such Intangible Rights are valid, enforceable and in good standing and no
claims have been asserted with respect to the use by the Company or the
Subsidiaries of any of the Intangible Rights or otherwise for patent, copyright
or trademark infringement, and (z) to the knowledge of the Company, no person is
infringing on or violating the Intangible Rights or know-how used by the Company
or any Subsidiary.
(b) Upon consummation of the transactions contemplated by this Agreement,
the Company and its Subsidiaries will continue to own and have the right to use
the Intangible Rights necessary to conduct the Business of the Company and the
Subsidiaries (other than any such rights, the absence of which would not have a
Material Adverse Effect, free and clear of all material claims, liens,
encumbrances, obligations and liabilities and, with respect to any agree ments
for the license of any licensed Intangible Rights which require consents or
other actions as a result of the consummation of the transactions contemplated
by this Agreement in order for the Company and its Subsidiaries to continue to
use and operate such Intangible Rights, the Company will have obtained such
consents or taken such other actions so required.
SECTION 3.13 SOFTWARE.
(a) The Company and each of the Subsidiaries has valid licenses to all
copies of all software that is not owned by it and is used by it in connection
with the conduct of its business ("Third Party Software"), and the use by the
Company or such Subsidiary of such Third Party Software, including without
limitation all modifications and enhancements thereto (whether or not created by
the Company), complies with such license (except for such noncompliance as could
not, individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect). The Company owns all right, title and interest in and to all
software or has obtained a third party license to all software that is marketed
or licensed by the Company and the Subsid iaries to customers or held for use or
in development for marketing and licensing to customers (collectively, the
"Proprietary Software").
(b) No claim or demand with respect to any such infringement or violation
has been made or, to the knowledge of the Company, threatened, with respect to
either the Proprietary Software or the Third Party Software.
(c) To the knowledge of the Company, there are no viruses in the Proprietary
Software and there are no defects in the Proprietary Software that would prevent
such software from performing in all material respects the tasks and functions
that it was intended to perform except those that can be cured without a
Material Adverse Effect.
(d) The Company has conducted an inventory of the Proprietary Software, as
well as the hardware and embedded microcontrollers in noncomputer equipment
(collectively, the "Computer Systems") used by the Company and its Subsidiaries
in connection with their respective Businesses in order to determine which parts
of the Computer Systems are not Year 2000 Compatible (as defined below) and to
estimate the cost of rendering such Computer Systems Year 2000 Compatible prior
to January 1, 2000 or such earlier date on which the Computer Systems may shut
down or produce incorrect calculations or otherwise malfunction without becoming
totally inoperable. "Year 2000 Compatible" means that the Computer Systems (i)
correctly perform date data century recognition, and calculations that
accommodate same century and multi-century formulas and date values; (ii)
operate or will operate in accordance with their
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specifications prior to, during and after the calendar year 2000 A.D.,
including, but not limited to, leap years; and (iii) shall not end abnormally or
provide invalid or incorrect results as a result of date data, specifically
including date data which represents or references different centuries or more
than one century. The Company has delivered to the Parent a copy of its findings
regarding "Year 2000 Compatible".
SECTION 3.14 LITIGATION.
(a) Section 3.14 of the Disclosure Schedule sets forth a complete list and
an accurate description of all claims, actions, suits, proceedings and (to the
knowledge of the Company) investigations pending or, to the knowledge of the
Company, threatened, by or against or involving the Company or any Subsidiary or
any Facility or any of the properties, rights or businesses owned, leased or
managed by the Company or any Subsidiary. Except as set forth in Section 3.14 of
the Disclosure Schedule, no such claims, actions, suits, proceedings or
investigations, if adversely determined, could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(b) There are no actions, suits, proceedings or claims pending before or by
any court, arbitrator or government agency against or affecting the Company, any
Subsidiary or any Facility which seek to enjoin or prevent the consummation of
the transactions contemplated by this Agreement.
SECTION 3.15 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS.
(a) To the knowledge of the Company, and except as set forth in Section 3.15
of the Disclosure Schedule, the Company and each Subsidiary has complied and is
currently in compliance with each, and is not in violation of any, law,
ordinance, or governmental or regula tory rule or regulation, whether federal,
state, local or foreign, to which such entity's business, operations, assets or
properties is subject ("Regulations"), except where such noncompliance could not
reasonably be expected to have a Material Adverse Effect. Except as set forth in
Section 3.15 of the Disclosure Schedule, the Company and each Subsidiary owns,
holds, possesses or lawfully uses in the operation of its business all material
franchises, licenses, permits, certificates of need ("CON"), provider agreements
and certifications under Subchapters XVIII and XIX of the Social Security Act
(the "Social Security Act"; the reimbursement programs promulgated under such
Subchapters are hereinafter referred to as the "Medicare and Medicaid Programs")
and any other applicable laws for reimbursement for long-term, skilled and
intermedi ate nursing care, or other type of care provided at each Facility,
easements, rights, applications, filings, registrations and other authorizations
("Authorizations") which are in any manner necessary for it to conduct its
business as now or previously conducted or for the ownership and use of the
assets owned or used by the Company and such Subsidiary or any Professional in
the conduct of the Business, free and clear of all liens, claims, charges,
restrictions and encumbrances and in substantial compliance with all
Regulations, other than any such Authorizations which, if not owned, held,
possessed or lawfully used by the Company and each Subsidiary, would not
individually or in the aggregate have a Material Adverse Effect. Neither the
Company nor any Subsidiary is in default, nor has the Company or any Subsidiary
received any notice of any claim of default, with respect to any such
Authorization. Except as set forth in Section 3.15 of the Disclosure Schedule,
neither the Company nor any Subsidiary has been informed in writing that any
action currently is pending by any governmental or regulatory official, body or
authority, either to revoke, withdraw or suspend any CON or any license to
operate any of the Facilities, or to terminate or decertify any participation of
any of the Facilities or Professionals in the Medicare and Medicaid Programs,
nor, to the knowledge of the Company, is there any decision not to renew any
provider agreement related to any Facility. As used herein, the term
"Professional" means any individual who is employed by or under contract with
the Company or any Subsidiary to provide health care services for which a
license or permit is required by any federal, state or local law.
(b) All cost reports ("Cost Reports") required to be filed by the Company or
any Subsidiary with respect to the Facilities under Subchapters XVIII and IX of
the Social Security Act, or any, other
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applicable governmental or private provider regulations for periods ended on or
prior to the date of this Agreement have been prepared and have been filed in
accordance with applicable laws, rules and regulations, and the Company and/or
the Subsidiaries have paid or made provision to pay through proper recordation
of any net liability reflected on or contained in all Notices of Program
Reimbursement received from the Medicare and Medicaid Programs and tentative
settlements for periods ended on or prior to the date of this Agreement and any
similar obligations with respect to the Medicare and Medicaid Programs. Section
3.15 of the Disclosure Schedule sets forth for each Facility the years for which
Cost Reports remain to be settled.
(c) Consistent with the Company's record keeping practices, Section 3.15 of
the Disclosure Schedule sets forth a complete and accurate statement of (i) the
bed categories for which each Facility is licensed or qualified to participate
under the Medicare and Medicaid Programs, (ii) the number of beds in each such
category, (iii) the number of beds in each such category that are available for
use in such Facility, and (iv) the number of patients as of October 16, 1998
admitted in each Facility (A) who qualify for Medicare, (B) who qualify for
Medicaid, (C) who qualify for neither Medicare nor Medicaid, (D) who qualify for
other governmental programs, including, but not limited to, programs
administered by the Veterans Administration, and (E) for whom reimbursement may
be obtained from a non-governmental third-party or from the patient.
SECTION 3.16 CONDITION OF FACILITIES. Except as set forth in Section 3.16
of the Disclosure Schedule, and to the knowledge of the Company, each of the
Facilities is in a good state of repair and condition, there are no dangerous
conditions or defects existing upon or in any of the Facilities, and there are
no (a) structural defects in any Facility that could adversely affect the
operation of such Facility as presently conducted and (b) life safety code
deficiency or other survey requirements which are not (i) subject to waiver or
(ii) currently the subject of a plan of correction which is being implemented.
SECTION 3.17 LABOR MATTERS.
(a) Except as set forth on Section 3.17 of the Disclosure Schedule, neither
the Company nor any Subsidiary is a party to any collective bargaining
agreement, and no such agreement is applicable to any employees of the Company
or any Subsidiary. Except as set forth in Section 3.17 of the Disclosure
Schedule, there are no controversies between the Company or any Subsidiary on
the one hand, and any of such employees, on the other hand, that could
reasonably be expected to have a Material Adverse Effect. To the knowledge of
the Company the Company and each of the Subsidiaries is in compliance in all
material respects with all federal, state or other applicable laws, domestic or
foreign, respecting employment and employment practices, terms and conditions of
employment and wages and hours, and no such entity has or is engaged in any
unfair labor practice. Except as set forth on Section 3.17 of the Disclosure
Schedule, there are no unresolved labor union grievances or unfair labor
practice or labor arbitration proceedings pending, or to the knowledge of the
Company, threatened, relating to the Business that could reasonably be expected
to have a Material Adverse Effect. To the knowledge of the Company, except as
set forth on Section 3.17 of the Disclosure Schedule, there are no
organizational efforts presently being made in respect of any of the employees
referred to above. Except as set forth in Section 3.17 of the Disclosure
Schedule, neither the Company nor any Subsidiary has received written notice of
any claim that the Company or any Subsidiary has failed to comply with any laws
relating to the employment of labor, including any provisions thereof relating
to wages, hours, collective bargaining, the payment of social security and
similar taxes, equal employment opportunity, employment discrimination and
employment safety, or that the Company or any Subsidiary is liable for any
arrears of wages or any taxes or penalties for failure to comply with any of the
foregoing.
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(b) Except as set forth in Section 3.17 of the Disclosure Schedule, there
are no proceedings pending before the National Labor Relations Board with
respect to any employees of the Company or any Subsidiary, nor are there any
discrimination charges (relating to sex, age, religion, race, national origin,
ethnicity, handicap or veteran status) pending before any federal or state
agency or authority against the Company or any Subsidiary, which, individually
or, in the aggregate could reasonably be expect to have a Material Adverse
Effect.
(c) No third party has claimed or notified the Company or any Subsidiary in
writing that any person employed by or otherwise affiliated with the Company or
any Subsidiary has, in respect of his or her activities to date, violated any of
the terms or conditions of his or her employment contract with any third party,
or disclosed or utilized any trade secrets or proprietary information or
documentation of any third party, or interfered in the employment relationship
between any third party and any of its employees, and to the knowledge of the
Company, no person employed by or otherwise affiliated with the Company or any
Subsidiary has employed any trade secrets or any information or documentation
proprietary to any former employer, or violated any confidential relationship
which such person may have had with any third party, in connection with the
development or sale of any products of the Company or any Subsidiary.
SECTION 3.18 INSURANCE. All policies of fire, liability, workers'
compensation, and other forms of insurance providing insurance coverage to or
for the Company or any Subsidiary or any Facility are listed in Section 3.18 of
the Disclosure Schedule and, except as set forth in said Section 3.18 of the
Disclosure Schedule, all premiums with respect thereto covering all periods up
to and including the date as of which this representation is being made have
been paid, and no notice of cancellation or termination has been received with
respect to any such policy. All such policies are in full force and effect and
provide insurance, including without limitation liability insurance, in such
amounts and against such risks or as disclosed in Section 3.18 of the Disclosure
Schedule to protect the employees, properties, assets and operations of the
Company and the Subsidiaries. Except as shown in Section 3.18 of the Disclosure
Schedule, all such policies will remain in full force and effect and will not in
any way be affected by, or terminate or lapse by reason of, any of the
transactions contemplated hereby.
SECTION 3.19 USE OF REAL PROPERTY. Except as set forth in Section 3.19 of
the Disclosure Schedule and except to the extent that non-compliance would not
be reasonably likely to have a Material Adverse Effect, the owned and leased
real properties listed in Section 3.11 of the Disclosure Schedule are used and
operated in material compliance with all applicable leases, contracts,
commitments, licenses and permits. Neither the Company nor any Subsidiary has
received written notice of any violation of any applicable zoning or building
regulation, ordinance or other law, order, regulation or requirement relating to
its operations or assets which violation could reasonably be expected to have a
Material Adverse Effect. To the knowledge of the Company, except as set forth in
Section 3.19 of the Disclosure Schedule, all buildings that are covered by
leases listed in Section 3.11 of the Disclosure Schedule conform in all material
respects with all applicable ordinances, codes, regulations and requirements,
and no law presently in effect or condition precludes or materially restricts
continuation of the present use of such properties.
SECTION 3.20 CONDITIONS OF ASSETS. To the knowledge of the Company, except
as set forth in Section 3.20 of the Disclosure Schedule, all tangible personal
property, fixtures and equipment which comprise the assets of the Company and
the Subsidiaries, or are otherwise used in connection with the Business, are in
a good state of repair (ordinary wear and tear excepted) and operating
condition.
SECTION 3.21 EMPLOYEE BENEFIT PLANS. Except as otherwise set forth in
Section 3.21 of the Disclosure Schedule:
(a) Section 3.21 of the Disclosure Schedule lists each "employee pension
benefit plan" (as such term is defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) maintained by
the Company or any Subsidiary or to which the Company or any Subsidiary
contributes or is required to contribute or in which any employee of the
Company or any Subsidiary participates (a "Plan"). The Company and each
Subsidiary have complied and currently are in
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compliance, both as to form and operation in all material respects, with the
applicable provisions of ERISA and the Internal Revenue Code of 1986, as
amended (the "Code"), respectively, with respect to each Plan.
(b) Each of the Plans which is intended to be "qualified" with the
meaning of Section 401(a) of the Code does so qualify and is exempt from
taxation pursuant to Section 501(a) of the Code.
(c) Neither the Company nor any Subsidiary has maintained, contributed
to or been required to contribute to a "multi-employer plan" (as defined in
Section 3(37) of ERISA). No amount is due or owing from the Company or any
Subsidiary on account of a "multi-employer plan" (as defined in Section
3(37) of ERISA) or on account of any withdrawal therefrom.
(d) Other than normal claims for benefits, there is no claim pending
against the Company or any Subsidiary under the Code, ERISA or other
applicable law with respect to any of the Plans. Full payment has been made,
or will be made in accordance with Section 404(a)(6) of the Code, of all
amounts that are required to be paid under the terms of each Plan and
Section 412 of the Code; and none of the Plans nor any trust established
thereunder has incurred any "accumulated funding deficiency" (as defined n
Section 302 of ERISA and 412 of the Code) whether or not waived. The Company
and the Subsidiaries have no current liability for plan termination or
withdrawal under Title IV of ERISA.
(e) The consummation of the transactions contemplated by this Agreement
will not (i) entitle any current or former employee or officer of either of
the Company or any Subsidiary to severance pay, unemployment compensation or
any other payment or (ii) accelerate the time of payment or vesting (except
as provided in Section 2.02), or increase the amount of compensation due any
such employee or officer.
(f) The Company has provided (or made available to) Parent with true and
complete copies of (i) summary plan descriptions for each of the Plans; (ii)
each trust agreement, insurance policy or other instrument relating to the
funding of each of the Plans; (iii) the two most recent Annual Reports (Form
5500 series) and accompanying schedules filed with the Internal Revenue
Service or United States Department of Labor with respect to each of the
Plans and (iv) the most recent audited financial statement for each of the
Plans.
SECTION 3.22 ENVIRONMENTAL MATTERS. Except as set forth in Section 3.22 of
the Disclosure Schedule, (i) the Company and the Subsidiaries conduct the
Business in material compliance with all applicable environmental laws,
ordinances and regulations, (ii) neither the Company nor any Subsidiary has
knowledge of or has received written notice of any claim, action, suit,
proceeding, hearing or investigation, based on or related to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling, or the emission, discharge, release or threatened release into the
environment, of any pollutant, contaminant, or hazardous or toxic material or
waste (collectively, an "Environmental Event") relating to the Business and
(iii) to the knowledge of the Company, no notice of any Environmental Event was
given to any person or entity that occupied the offices of the Company and the
Subsidiaries or any Facility prior to the date such offices or Facility were
occupied or used in the Business. Without limiting the generality of the
foregoing, to the knowledge of the Company, neither the Company nor any
Subsidiary has disposed of or placed on or in such offices or Facility any waste
materials, hazardous materials or hazardous substances in violation of law.
SECTION 3.23 INFORMATION IN PROXY STATEMENT. None of the information
included or incorporated by reference in the Proxy Statement (as hereinafter
defined), including any amendments or supplements thereto, will at the time the
Proxy Statement is first mailed to the shareholders of the Company or at the
time of the Special Meeting, contain any statement which, at such time and in
light of the circumstances under which it is made, is false or misleading with
respect to any material fact, or omit to state any material fact necessary in
order to make the statements therein not false or misleading. Notwithstanding
the
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foregoing, the Company does not make any representation or warranty with respect
to the information that has been or will be supplied by Parent or Acquisition
Sub or their respective representatives or Affiliates, for inclusion or
incorporation by reference into the Proxy Statement. The Proxy Statement and any
amendments or supplements thereto will comply in all material respects with the
applicable provisions of the Exchange Act and the rules and regulations
thereunder.
SECTION 3.24 FRAUD AND ABUSE. Neither the Company nor any Subsidiary or
affiliate thereof or any of their respective partners, officers and directors,
or, to the best knowledge of the Company, any person (including without
limitation Professionals) who provides professional services under agreements
with the Company, any Subsidiary or any affiliate has engaged in any activities
which are prohibited under federal Medicare and Medicaid statutes, including,
without limitation, 42 U.S.C. SectionSection 1320a-7, 1320a-7a and 1320a-7b, the
federal CHAMPUS statute, 10 U.S.C. Section1071 et seq., the Federal Civil False
Claims Act, 31 U.S.C. Section3729 et seq., or the regulations promulgated
pursuant to such statutes or related state or local statutes or regulations or
which are prohibited by rules of professional conduct, including but not limited
to the following:
(a) knowingly and willfully making or causing to be made false statement
or representation of a material fact in any application for any benefit or
payment;
(b) knowingly and willfully making or causing to be made any false
statement or representation of a material fact for use in determining rights
to any benefit or payment;
(c) presenting or causing to be presented a claim for services under
Medicare, Medicaid, CHAMPUS or other state health care program that is for
an item or service that is known or should be known to be (i) not provided
as claimed, or (ii) false or fraudulent;
(d) failing to disclose knowledge by a claimant of the occurrence of any
event affecting the initial or continued right to any benefit or payment on
its own behalf or on behalf of another, with intent to fraudulently secure
such benefit or payment;
(e) knowingly and willfully offering, paying, soliciting or receiving
any remuneration (including any kickback, bribe, or rebate), directly or
indirectly, overtly or covertly, in cash or in kind (i) in return for
referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or
in part by CHAMPUS, Medicare or Medicaid, or other state health care
program, or (ii) in return for purchasing, leasing, or ordering or arranging
for or recommending purchasing, leasing, or ordering any good, facility,
service, or item for which payment may be made in whole or in part by
CHAMPUS, Medicare or Medicaid or other state health care program; or
(f) knowingly and willfully making or causing to be made or inducing or
seeking to induce the making of any false statement or representation (or
omit to state a fact required to be stated therein or necessary to make the
statements contained therein not mislead ing) of a material fact with
respect to (i) the conditions or operations of a facility in order that the
facility may qualify for CHAMPUS, Medicare, Medicaid or other state health
care program certification, or (ii) information required to be provided
under Section 1124A of the Social Security Act (42 U.S.C. Section 1320a-3).
SECTION 3.25 HEALTH PROFESSIONAL'S FINANCIAL RELATIONSHIPS. The operations
of the Company and the Subsidiaries are in compliance with and do not otherwise
violate the federal Medicare and Medicaid statutes regarding health professional
self-referrals, 42 U.S.C. Section 1395nn and 42 U.S.C. Section 1396b, or the
regulations promulgated pursuant to such statute, or similar state or local
statutes or regulations.
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SECTION 3.26 TAX MATTERS.
(a) Except as set forth in Section 3.26 of the Disclosure Schedule, the
Company and the Subsidiaries have duly and timely filed or caused to be filed
all federal, state, local and foreign returns, declarations, reports, estimates,
information returns and statements (collectively, "Tax Returns") required to be
filed by them in respect of any Taxes (as hereinafter defined) for all years and
periods for which such Tax Returns have become due. All such Tax Returns were
correct as filed in all material respects and were not delinquent. Except as set
forth in Section 3.26 of the Disclosure Schedule, the Company and the
Subsidiaries have paid all taxes shown as due on such Tax Returns. Where payment
of any Taxes of the Company or the Subsidiaries with respect to any taxable
period ending on or prior to the Effective Time is not yet due, the Company and
the Subsidiaries have established, or will establish, consistent with past
practice, an adequate reserve on each such entity's books and records for the
payment of all such Taxes. For purposes of this Agreement, "Taxes" shall mean
all federal, state, local, foreign or other taxing authority net income,
franchise, sales, use, ad valorem, property, payroll, withhold-ing, excise,
severance, transfer, employment, alternative or add-on minimum, stamp,
occupation, premium, environmental or windfall profits taxes, and other taxes,
charges, fees, levies, imposts, customs, duties, licenses or other assessments,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority.
(b) Except as set forth in Section 3.26 of the Disclosure Schedule, (i) no
extensions of time have been granted to the Company or any Subsidiary to file
any Tax Return required by applicable law to be filed by it prior to or on the
Effective Time which have expired, or will expire, on or before the Effective
Time without such Tax Return having been filed, (ii) no deficiency or adjustment
for any Taxes has been proposed, asserted, or assessed against the Company or
any Subsidiary and no federal, state or local audits or other administrative
proceedings or court proceedings are presently pending with regard to any Taxes
and (iii) no waiver or consent extending any statute of limitation for the
assessment or collection of any Taxes, which waiver or consent remains in
effect, has been executed by the Company or any Subsidiary or on behalf of the
Company or any Subsidiary, nor are any requests for such waiver or consent
pending.
(c) Each Corporate Subsidiary has been an includible member of an
"affiliated group" (within the meaning of Section 1504 of the Code) in which
either the Company or Transitional Health Services, Inc. ("THS") is (in the case
of the Company) or was (in the case of THS (to the knowledge of the Company))
the parent since the date of such Corporate Subsidiary's incorporation; and for
all taxable periods following each such Corporate Subsidiary's incorporation,
each of either the Company or THS (to the knowledge of the Company), on the one
hand, and the Corporate Subsidiary, on the other hand, was entitled to report
its income on consolidated federal income Tax Returns filed on behalf of such
affiliated group. All federal income Tax Returns required to be filed by the
Company, THS (to the knowledge of the Company) and the Corporate Subsidiaries
have been duly and timely filed on behalf of the Company, THS (to the knowledge
of the Company) and the Subsidiaries on a consolidated basis. Except as shown on
Section 3.26 of the Disclosure Schedule, all other Tax Returns of the Company
and the Corporate Subsidiaries have been filed on a separate company,
non-combined, non-consolidated and non-unitary basis.
(d) Except as set forth on Section 3.26 of the Disclosure Schedule, neither
the Company nor any Subsidiary is a party to any tax-sharing or allocation
agreements.
(e) Except as set forth on Section 3.26 of the Disclosure Schedule, neither
the Company nor any Subsidiary is a party to any agreement, contract, or
arrangement that would result, by reason of the consummation of any of the
transactions contemplated herein, separately or in the aggregate, in the payment
of any "excess parachute payment" within the meaning of Section 280G of the
Code.
SECTION 3.27 TRANSACTIONS WITH AFFILIATES. Except as described in Section
3.28 of the Disclosure Schedule or in the Company SEC Filings, no shareholder,
director, officer or employee of the Company or any Subsidiary, or any member of
his or her immediate family or any other of its, his or her affiliates, (i) is
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or was during the period from July 2, 1997 through the date hereof the subject
of any material contract, agreement or understanding, business arrangement or
relationship with the Company or any Subsidiary (an "Affiliate Contract") or
(ii) owns or has a five percent or greater ownership interest in any corporation
or other entity which is or was during the three years preceding the date hereof
the subject of any Affiliate Contract.
SECTION 3.28 BROKERS AND FINDERS. Except for BT Alex. Brown and the fees
owed to J.P. Morgan Securities Inc. and Suntrust Equitable Securities in
connection with its engagement by the Company, neither the Company, nor any of
its officers, directors, employees, Subsidiaries or Affiliates has employed any
broker or finder or incurred any liability for any financial advisory fees,
investment bankers' fees, brokerage fees, commissions, finders' fees or similar
payments in connection with this Agreement or the transactions contemplated
hereby. True and correct signed copies of all agreements and engagement letters
between the Company and each of BT Alex. Brown, J.P. Morgan Securities Inc. and
Suntrust Equitable Securities have been delivered to Parent, which engagement
letters establish the total amount owed to each of them in connection with the
transactions contemplated hereby.
SECTION 3.29 OPINION OF FINANCIAL ADVISOR. The Special Committee has
received the opinion of J.P. Morgan Securities Inc. on October 21, 1998 to the
effect that, as of such date, the consideration to be received in the Merger by
the Public Shareholders is fair to such holders, from a financial point of view,
a signed copy of which has been delivered to Parent.
SECTION 3.30 STATEMENTS TRUE AND CORRECT. No representation or warranty or
statement contained in this Agreement or any certificate, exhibit, annex,
schedule, instrument or other writing furnished or to be furnished by the
Company or any Subsidiary or Affiliate of the Company to Parent pursuant to this
Agreement or any other documents, agreement or instrument referred to herein
contains or will contain any untrue statement of material fact or omits or will
omit to state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
SECTION 3.31 KNOWLEDGE OF THE COMPANY. Whenever used in this Article III,
"to the knowledge of the Company" (or similar language) shall mean the actual
knowledge of the senior managers of the Company listed on Section 3.31 of the
Disclosure Schedule after reasonable inquiry.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
SECTION 4.01 ORGANIZATION AND QUALIFICATION.
(a) Parent is a corporation duly incorporated and organized, validly
existing and in good standing under the laws of the State of Delaware, and is
duly licensed or qualified and in good standing to do business as a foreign
corporation, and is authorized to do business, in each other jurisdiction in
which the character or location of the properties owned or leased and operated
by it or the nature of the business transacted by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
could not reasonably be expected to have a material adverse effect on the
business, properties or condition (financial or other) of Parent and Acquisition
Sub. Parent has the requisite corporate power and authority to own or lease and
operate its properties and assets and to carry on its business as currently
conducted.
(b) Since the date of its incorporation, Parent has not engaged in any
activity other than in connection with or as contemplated by this Agreement and
the Merger or in connection with arranging financing in connection the
transactions contemplated hereby.
SECTION 4.02 AUTHORITY RELATIVE TO AGREEMENT. Parent has the requisite
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution, delivery and
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performance by Parent of this Agreement, and the consummation of the
transactions contemplated hereby have been duly authorized and approved by all
requisite corporate action (including, without limitation, all necessary action
of the Board of Directors and shareholders of Parent) and no other action of the
part of such persons is necessary to authorize the execution, delivery and
performance of this Agreement. This Agreement has been duly executed and
delivered by Parent and, assuming due execution and delivery by the other
parties hereto, constitutes the legal, valid and binding obligation of Parent,
enforceable against Parent in accordance with its terms.
SECTION 4.03 NON-CONTRAVENTION. Neither the execution and delivery of this
Agreement by Parent, nor the consummation of the transactions contemplated
hereby, nor compliance by Parent with any of the terms and provisions hereof,
will (i) violate, contravene, conflict with or result in a breach of any
provision of Parent's Certificate of Incorporation or By-laws or any resolution
adopted by the Board of Directors or shareholders of Parent, or (ii) result in
any breach or violation of, conflict with, or constitute or result in a default
or event of default or event which with notice or lapse of time or both would
constitute such a default or event of default under, or give rise to any right
of termination, cancellation, payment or acceleration, or require any consent
pursuant to, or result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever on any of the properties or assets owned,
leased or managed by Parent under the terms or provisions of any note, bond,
mortgage, license, franchise, permit, lease, indenture, agreement, contract or
other instrument or obligation to which Parent is a party or to which any of the
properties or assets owned or leased by Parent is bound or otherwise affected or
(iii) contravene or violate any law, rule, regulation, licensing requirement,
permit, order or decree of any court, arbitrator or any other agency of
government or authority by which Parent is bound or by which any properties or
assets owned or leased by Parent is bound or otherwise affected.
SECTION 4.04 GOVERNMENTAL APPROVALS. Except as set forth in Section 4.04
of the Disclosure Schedule, no order, authorization, approval or consent from,
or filing with, any federal or state governmental or public body or other
authority having jurisdiction over Parent is required for the execution,
delivery and performance of this Agreement by Parent or is necessary in order to
ensure the legality, validity, binding effect or enforceability of this
Agreement other than (i) filings with the Federal Trade Commission and with the
Antitrust Division of the United States Department of Justice pursuant to the
HSR Act, and the rules promulgated thereunder, (ii) the filing of a Certificate
of Merger with the Secretary of State of the State of Georgia and (iii) such
consents, approvals, orders or authorizations which if not obtained, or
registrations, declarations or filings which if not made, would not materially
delay or materially adversely affect the ability of Parent to consummate the
transactions contemplated hereby.
SECTION 4.05 PROXY AND SCHEDULE 13E-3 INFORMATION. None of the information
supplied or to be supplied by Parent or Acquisition Sub, or any of their
respective officers, directors, employees, representatives or agents for
inclusion or incorporation by reference in the Proxy Statement or the Schedule
13E-3 will (i) in the case of the definitive Proxy Statement, at the time such
definitive Proxy Statement is mailed to the Company's shareholders or at the
time of the Special Meeting and (ii) with respect to the Schedule 13E-3, at the
time of filing with the SEC and at the time of the Special Meeting, contain any
statement which, at such time and in light of the circumstances under which it
is made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
false or misleading. Notwithstanding the foregoing, neither Parent or
Acquisition Sub is making any representation or warranty with respect to the
information that has been supplied by the Company or any Subsidiary to its
officers, directors, employees, representatives or agents for inclusion or
incorporation by reference in the Proxy Statement or the Schedule 13E-3.
SECTION 4.06 BROKERS AND FINDERS. No person is entitled to any brokerage
or finder's fee or commission in connection with the transactions contemplated
by this Agreement as a result of any action taken by or on behalf of Parent or
Acquisition Sub.
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SECTION 4.07 SUFFICIENT FUNDS. The Company has received a copy of the
commitment letter dated October 22, 1998, from Welsh, Carson, Anderson & Stowe
VIII, L.P. ("WCAS VIII") and certain affiliates of WCAS VIII (collectively, the
"Financing Entities"), pursuant to which the Financing Entities have committed,
subject to the terms and conditions set forth herein, to provide Parent with up
to an aggregate $210 million of financing (the "Financing") and, subject to the
terms and conditions of this Agreement, to ensure the performance of Parent's
and Acquisition Sub's obligations hereunder. The aggregate proceeds of the
Financing should be sufficient to pay all amounts required to be paid pursuant
to the Merger, to pay all amounts required to be paid hereunder in respect of
outstanding options under the Company Stock Option Plans and to pay all related
fees and expenses required to be paid by Parent, Acquisition Sub and, together
with funds of the Company, the Company pursuant to this Agreement. Such commit
ment letter has not been withdrawn as of the date hereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUISITION SUB
Acquisition Sub represents and warrants to the Company as follows:
SECTION 5.01 ORGANIZATION AND QUALIFICATION.
(a) Acquisition Sub is a corporation duly incorporated and organized,
validly existing and in good standing under the laws of the State of Georgia,
and is duly licensed or qualified and in good standing to do business as a
foreign corporation, and is authorized to do business, in each other
jurisdiction in which the character or location of the properties owned or
leased and operated by it or the nature of the business transacted by it makes
such licensing or qualification necessary, except where the failure to be so
licensed or qualified could not reasonably be expected to have a material
adverse effect on the business, properties or condition (financial or other) of
Parent and Acquisition Sub. Acquisition Sub has the requisite corporate power
and authority to own or lease and operate its properties and assets and to carry
on its business as currently conducted.
(b) Since the date of its incorporation, Acquisition Sub has not engaged in
any activity other than in connection with or as contemplated by this Agreement
and the Merger or in connection with arranging financing in connection the
transactions contemplated hereby.
SECTION 5.02 AUTHORIZATION AND VALIDITY OF AGREEMENT. Acquisition Sub has
the requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and performance by
Acquisition Sub of this Agreement, and the consummation of the transactions
contemplated hereby have been duly authorized and approved by all requisite
corporate action (including, without limitation, all necessary action of the
Board of Directors and shareholders of Acquisition Sub) and no other action of
the part of such persons is necessary to authorize the execution, delivery and
perfor-mance of this Agreement. This Agreement has been duly executed and
delivered by Acquisition Sub and, assuming due execution and delivery by the
other parties hereto, constitutes the legal, valid and binding obligation of
Acquisition Sub, enforceable against Acquisition Sub in accor dance with its
terms.
SECTION 5.03 NON-CONTRAVENTION. Neither the execution and delivery of this
Agreement by Acquisition Sub, nor the consummation of the transactions
contemplated hereby, nor compliance by Acquisition Sub with any of the terms and
provisions hereof, will (i) violate, contravene, conflict with or result in a
breach of any provision of the Articles of Incorporation or By-laws of
Acquisition Sub or any resolution adopted by the Board of Directors or
shareholders of Acquisition Sub, or (ii) result in any breach or violation of,
conflict with, or constitute or result in a default or event of default or event
which with notice or lapse of time or both would constitute such a default or
event of default under, or give rise to any right of termination, cancellation,
payment or acceleration, or require any consent pursuant to, or result in the
creation or imposition of any lien, charge or encumbrance of any nature
whatsoever on any of the properties or assets owned, leased or managed by
Acquisition Sub under the terms or provisions of any
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note, bond, mortgage, license, franchise, permit, lease, indenture, agreement,
contract or other instrument or obligation to which Acquisition Sub is a party
or to which any of the properties or assets owned or leased by Acquisition Sub
is bound or otherwise affected or (iii) contravene or violate any law, rule,
regulation, licensing requirement, permit, order or decree of any court,
arbitrator or any other agency of government or authority by which Acquisition
Sub is bound or by which any properties or assets owned or leased by Acquisition
Sub is bound or otherwise affected.
SECTION 5.04 GOVERNMENTAL APPROVALS. Except as set forth in Section 5.04
of the Disclosure Schedule, no order, authorization, approval or consent from,
or filing with, any federal or state governmental or public body or other
authority having jurisdiction over Acquisition Sub is required for the
execution, delivery and performance of this Agreement by Acquisition Sub or is
necessary in order to ensure the legality, validity, binding effect or
enforceability of this Agreement other than (i) filings with the Federal Trade
Commission and with the Antitrust Division of the United States Department of
Justice pursuant to the HSR Act, and the rules promulgated thereunder, (ii) the
filing of a Certificate of Merger with the Secretary of State of the State of
Georgia and (iii) such consents, approvals, orders or authorizations which if
not obtained, or registrations, declarations or filings which if not made, would
not materially adversely affect the ability of Acquisition Sub to consummate the
transactions contemplated hereby.
ARTICLE VI
CERTAIN AGREEMENTS
SECTION 6.01 CONDUCT OF THE COMPANY'S BUSINESS. The Company covenants and
agrees that, after the date of this Agreement but prior to the Effective Time,
unless Parent shall otherwise consent in writing or as otherwise expressly
contemplated by this Agreement:
(a) neither the Company nor any Subsidiary shall take (or agree in
writing to take) any of the actions listed in clauses (i) through (xiv) of
Section 3.09 or cause or allow any Managed Facility to take (or agree in
writing to take) any of the actions listed in clauses (i) through (xiv) of
Section 3.09;
(b) neither the Company nor any Subsidiary shall take any action that
would make any representation or warranty of the Company hereunder
inaccurate in any material respect at, or as of any time prior to, the
Effective Time, or omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any material respect at
any such time;
(c) each of the Company and the Subsidiaries shall use its best efforts,
to the extent not prohibited by the foregoing provisions of this Section
6.01, to maintain its relationships with its suppliers, customers and third
party payors, and if and as requested by Parent or Acquisition Sub, (i) the
Company shall use its reasonable efforts to make reasonable arrangements for
representatives of Parent or Acquisition Sub to meet with suppliers,
customers and third party payors of the Company or any Subsidiary and (ii)
the Company shall schedule, and the management of the Company shall
participate in, meetings of representatives of Parent or Acquisition Sub
with employees of the Company or any Subsidiary; and
(d) the Company and its Subsidiaries shall properly complete and file
all reports required to be filed by them with the SEC and all other federal,
state or local governmental or regulatory authorities (including
self-regulatory authorities) having jurisdiction over the Company and/or the
Subsidiaries and shall deliver or make available to Parent copies of all
such reports promptly after the same are filed. If financial state ments are
contained in any such reports filed with the SEC, such financial statements
will fairly present the consolidated financial position of the entity filing
such statements as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity, and cash flows for the periods
then ended in accordance with GAAP. As of their respective dates, such
reports filed with the SEC will comply in all material respects with the
federal securities laws and will not contain any untrue statement of a
material fact or omit to state a material fact required to be
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stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. Any
financial statements contained in any other reports to another regulatory
authority shall be prepared in accordance with all laws applicable to such
reports.
SECTION 6.02 STOCKHOLDER APPROVAL.
(a) As promptly as practicable after the execution of this Agreement, the
Company shall, subject to its fiduciary duties as advised by counsel, take all
action necessary in accordance with all applicable laws and its Articles of
Incorporation and By-laws, to duly call, give notice of, convene and hold a
special meeting (the "Special Meeting") of its shareholders to consider and vote
upon the approval and adoption of this Agreement and the Merger and for such
other purposes as may be necessary or desirable. The Board of Directors of the
Company has determined that the Merger is advisable and in the best interests of
the shareholders of the Company and shall, subject to its fiduciary duties as
advised by counsel, recommend that the shareholders of the Company vote to
approve and adopt this Agreement and the Merger and any other matters to be
submitted to shareholders in connection therewith.
(b) As promptly as practicable following the date hereof, the Company shall
file with the SEC a preliminary proxy or information statement pertaining to the
Merger and this Agreement and use its best efforts (x) to obtain and furnish the
information required to be included by the SEC in the Proxy Statement (as
hereinafter defined) and, after consultation with Parent, to respond promptly to
any comments made by the SEC with respect to the preliminary proxy or
information statement (it being understood and agreed that the Company shall
notify Parent of the receipt of any such comments and of any requests by the SEC
for amendments or supplements to the Proxy Statement or for additional
information, and shall promptly supply Parent with copies of all correspondence
between the Company (or its representatives) and the SEC (or its staff) with
respect thereto) and cause a definitive proxy or information statement,
including any amendment or supplement thereto (the "Proxy Statement"), to be
mailed to its shareholders entitled to vote upon the Merger as promptly as
practicable thereafter, provided, that no amendment or supplement to the Proxy
Statement will be made by the Company without consultation with Parent and its
counsel, and (y) to obtain the necessary approvals of the Merger and this
Agreement by its shareholders.
(c) The Company, Parent and any person that may be deemed to be an affiliate
of the Company shall prepare and file with the SEC concurrently with the filing
of the preliminary proxy or information statement described in the first
sentence of Section 6.02(c) above a Statement on Schedule 13E-3 ("Schedule
13E-3") under the Exchange Act. If at any time prior to the Special Meeting any
event should occur which is required by applicable law to be set forth in an
amendment of, or supplement to, said Schedule 13E-3, the Company and such person
shall file such amendments or supplements.
(d) Each of the parties hereto agrees that if, at any time prior to the
Special Meeting, any event should occur relating to or affecting the Company,
Parent or Acquisition Sub, or to their respective officers or directors, which
event should be described in an amendment or supplement to the Proxy Statement,
the parties shall promptly inform one another and shall cooperate in promptly
preparing, filing and clearing with the SEC and, if required by applicable law,
distributing to the Company's shareholders such amendment or supplement.
SECTION 6.03 ACCESS TO INFORMATION.
(a) The Company shall, and shall cause the Subsidiaries and its and their
respective officers, directors, employees, representatives and agents to,
afford, from the date hereof to the Effective Time, the officers, employees,
representatives and agents of Parent reasonable access to its officers,
employees, agents, properties, books, records and workpapers, and shall promptly
furnish Parent all financial, operating and other information and data as
Parent, through its officers, employees or agents, may reasonably request.
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(b) Except as required by law, Parent shall hold, and will cause its
respective officers, employees, representatives and agents to hold, any
confidential information in accordance with the Confidentiality Agreement dated
July 10, 1998 between the Company and WCAS VIII (the "Confidentiality
Agreement").
(c) No investigation pursuant to this Section 6.03 shall affect, add to or
subtract from any representations or warranties of the parties hereto or the
conditions to the obligations of the parties hereto to effect the Merger.
SECTION 6.04 FURTHER ASSURANCES. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement,
including, without limitation, using all reasonable efforts to obtain all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings (including without limitation any necessary filings
under the HSR Act).
SECTION 6.05 INQUIRIES AND NEGOTIATIONS; CERTAIN PAYMENTS.
(a) From and after the date of this Agreement until the termination of this
Agreement pursuant to Section 8.01, the Company, the Subsidiaries and their
respective officers, directors, employees, representatives and other agents will
not, directly or indirectly, solicit or initiate any discussions, submissions of
proposals or offers or negotiations with (it being understood that the issuance
of the press release issued by the Company upon the execution of this Agreement
shall not be deemed to violate this provision) or, subject to the fiduciary
duties of the Company's Board of Directors as advised by counsel, continue or
participate in any negotiations or discussions with, or provide any information
or data of any nature whatsoever to, or otherwise cooperate in any other way
with, any Third Party in connection with any proposed merger, consolidation,
sale of any Subsidiary or division that is material to the business of the
Company and the Subsidiaries, sale of shares of capital stock or other equity
securities, tender or exchange offer, recapitalization, debt restructuring or
similar transaction involving the Company (such transactions being hereinafter
referred to as "Alternative Transactions").
(b) From and after the date of this Agreement until the termination of this
Agreement pursuant to Section 8.01, the Company shall immediately notify Parent
if any proposal, offer, inquiry or other contact is made or received by, any
information is requested from, or any discussions or negotiations are sought to
be initiated or continued with, the Company in respect of an Alternative
Transaction, and shall, in any such notice to Parent, indicate the identity of
the Third Party and the terms and conditions of any proposals or offers or the
nature of any inquiries or contacts, and thereafter shall keep Parent informed,
on a current basis, of the status and terms of any such proposals or offers and
the status of any such discussions or negotiations. Without limiting the
generality of the foregoing, the Company shall provide Parent with not less then
(i) two business days' notice prior to the execution by the Company of any
definitive agreement with respect to any Alternative Transaction and (ii) two
days' notice (or the longest notice legally permissible in the reasonable
determination of counsel for the Company, if less than two days) of any public
announcement relating to any Alternative Transaction. Prior to furnishing any
non-public information to, or entering into negotiations or discussions with,
any Third Party, the Company will obtain an executed confidentiality agreement
from such Third Party on terms substantially the same as, or no less favorable
to the Company in any material respect than, those contained in the
Confidentiality Agreement. The Company shall not release any Third Party from,
or waive any provision of, any such confidentiality agreement or any other
confidentiality or standstill agreement to which the Company is a party.
(c) If a Payment Event (as hereinafter defined) occurs, the Company shall
pay to Parent, within two business days following such Payment Event, a fee of
Three Million Dollars ($3,000,000) in cash. "Payment Event" means (i) the
termination of this Agreement by Parent pursuant to Section 8.01(d); (ii) the
termination of this Agreement by the Company pursuant to Section 8.01(f) or
(iii) the occurrence of any of the following events within twelve months after
the date of termination of this Agreement (other than a
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termination pursuant to Section 8.01(c) or (e)) whereby shareholders of the
Company receive, pursuant to such event, cash, securities or other consideration
having an aggregate value, when taken together with the value of any securities
of the Company or its subsidiaries otherwise held by the shareholders of the
Company after such event, in excess of Sixteen Dollars ($16.00) per Share: (w)
the Company is acquired by merger or otherwise by a Third Party; (x) a Third
Party acquires more than 50% of the total assets of the Company and the
Subsidiaries, taken as a whole; (y) a Third Party acquires more than 50% of the
outstanding Shares or (z) the Company adopts and implements a plan of
liquidation or share repurchase relating to more than 50% of the outstanding
Shares or an extraordinary dividend relating to more than 50% of the assets of
the Company and the Subsidiaries, taken as a whole.
(d) The Company acknowledges that the agreements contained in this Section
6.05 are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, Parent and Acquisition Sub would not enter
into this Agreement; accordingly, if the Company fails to promptly pay any
amount due pursuant to this Section 6.05, and, in order to obtain such payment,
Parent and/or Acquisition Sub commences a suit which results in a judgment
against the Company for the fee set forth in this Section 6.05, the Company
shall also pay to Parent and Acquisition Sub their costs and expenses incurred
in connection with such litigation. Notwithstanding the foregoing, each party
shall bear its own costs and expenses incurred in connection with any litigation
over the reasonableness and/or documentation of any expenses submitted for
reimbursement hereunder.
(e) This Section 6.05 shall survive any termination of this Agreement,
however caused.
SECTION 6.06 NOTIFICATION OF CERTAIN MATTERS. The Company shall give
notice as promptly as practicable to Parent and Acquisition Sub, and Parent and
Acquisition Sub shall give prompt notice to the Company, of (i) the occurrence,
or failure to occur, of any event that such party believes would be likely to
cause any of its representations or warranties contained in this Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time and (ii) any material failure of the Company, Parent or
Acquisition Sub, as the case may be, or any officer, director, employee,
representative or agent thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder,
provided, however, that failure to give such notice shall not constitute a
waiver of any defense that may be validly asserted.
SECTION 6.07 INDEMNIFICATION.
(a) The Articles of Incorporation and By-Laws of the Surviving Corporation
shall contain the provisions with respect to indemnification and exculpation
from liability set forth in the Company's Articles of Incorporation and By-laws
as in effect on the date hereof, which provisions shall not be amended, repealed
or otherwise modified for a period of six years from the Effective Time in any
manner that would adversely affect the rights thereunder of individuals who, on
or prior to the Effective Time, were directors, officers, employees or agents of
the Company (collectively, the "Indemnified Parties"), unless such modification
is required by law. Parent shall guarantee the obligations of the Surviving
Corporation with respect to indemnification of the Indemnified Parties under
such provisions and under the Company's indemnification agreements with its
directors and officers.
(b) For a period of six years after the expiration date of the Company's
current policy, the Surviving Corporation shall maintain officers' and
directors' liability insurance for periods prior to the Effective Time covering
those Indemnified Parties who are currently covered by the Company's directors'
and officers' liability insurance policy, a copy of which has heretofore been
delivered to Parent, on terms no less favorable than the terms of such current
insurance coverage, provided, however, that in no event shall the Surviving
Corporation be required to expend in any one year an amount in excess of 200% of
the annual premiums currently payable by the Company for such insurance,
provided, further, however, that if the annual premiums of such insurance
coverage exceed such amount, the Surviving Corporation shall obtain a policy
with the greatest coverage available for a cost not exceeding such amount.
A-25
<PAGE>
(c) Following the Merger, if the Company or the Surviving Corporation or any
of their respective successors or assigns (i) consolidates with or merges into
any other person and shall not be the continuing or surviving corporation or
entity of such consolidation or merger or (ii) transfers all or substantially
all of its properties and assets to any person, then, and in each such case,
proper provision shall be made so that the successors and assigns of the Company
or the Surviving Corporation, as the case may be, or at Parent's option, Parent,
shall assume the obligations set forth in this Section 6.07.
(d) This Section 6.07 shall survive the consummation of the Merger at the
Effective Time, is intended to benefit the Company, Parent, the Surviving
Corporation and the Indemnified Parties, and shall be binding on the successors
and assigns of the Surviving Corporation.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.01 CONDITIONS TO THE MERGER RELATING TO PARENT AND ACQUISITION
SUB. The obligation of Parent and Acquisition Sub to effect the Merger shall be
subject, at their option, to the fulfillment at or prior to the Effective Time
of the following conditions:
(a) this Agreement and the Merger shall have been approved and adopted
by (i) a majority of the shares voted with respect to the Merger that are
owned by persons not affiliated with, or owning equity in, Parent or
Acquisition Sub and (ii) the requisite vote of the shareholders of the
Company under the Georgia Code;
(b) the expiration or earlier termination of any waiting period under
the HSR Act shall have occurred, and no action shall have been instituted by
the United States Department of Justice or Federal Trade Commission
challenging or seeking to enjoin the consummation of this transaction, which
action shall not have been withdrawn or terminated;
(c) no preliminary or permanent injunction or other order, decree or
ruling issued by any court of competent jurisdiction nor any statute, rule,
regulation or order entered, promulgated or enacted by any governmental,
regulatory or administrative agency or authority shall be in effect that
would (i) restrain the effective operation of the business of the Company
and the Subsidiaries from and after the Effective Time or (ii) prevent the
consummation of the Merger as contemplated hereby;
(d) other than the filing of the Merger Certificate in accordance with
the Georgia Code, all authorizations, consents, waivers, orders or approvals
of, or declarations or filings with, or expirations of waiting periods
imposed by, any governmen tal or regulatory entity, the failure of which to
obtain, make or occur could reasonably be expected to have a material
adverse effect on the business, properties, results of operation or
condition (financial or other) at or after the Effective Time of the
Surviving Corporation or its Subsidiaries, shall have been obtained, been
filed or have occurred;
(e) all representations and warranties of the Company that are qualified
with reference to a Material Adverse Effect or materiality shall be true and
correct in all respects and all representations and warranties that are not
so qualified shall be true and correct in all material respects, in each
case (i) as of the date of this Agreement and (ii) as of the Effective Time,
except to the extent such representations and warranties speak as of an
earlier date, and Parent shall have received a certificate signed on behalf
of the Com pany by a proper officer of the Company to such effect;
(f) each of the Company and its Subsidiaries shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and Parent shall have received
a certificate signed on behalf of the Company by a proper officer of the
Company to such effect;
(g) Parent shall have received an opinion of King & Spalding, counsel to
the Company in the form attached hereto as Exhibit A;
A-26
<PAGE>
(h) the aggregate number of Dissenting Shares shall not constitute more
than 15% of the number of shares of Company Common Stock outstanding as of
immediately prior to the Effective Time (calculated on a fully diluted
basis);
(i) since the date of this Agreement, neither the Company nor any of its
Subsidiaries shall have suffered a Material Adverse Effect; and
(j) there shall be no action, suit, investigation, proceeding or claim
pending or, to the knowledge of the Company, threatened against or affecting
the Company or any Subsidiary or their respective properties or rights or
any Facility, before any governmental body or arbitration board or tribunal,
the outcome of which, either alone or together with similar actions, could
reasonably be expected to have a Material Adverse Effect.
SECTION 7.02 CONDITIONS TO THE MERGER RELATING TO THE COMPANY. The
obligation of the Company to effect the Merger shall be subject, at its option,
to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) this Agreement and the Merger shall have been approved and adopted
by the requisite vote of the shareholders of the Company and by Parent and
Acquisition Sub;
(b) the expiration or earlier termination of any waiting period under
the HSR Act shall have occurred, and no action shall have been instituted by
the United States Department of Justice or Federal Trade Commission
challenging or seeking to enjoin the consummation of this transaction, which
action shall not have been withdrawn or terminated;
(c) no preliminary or permanent injunction or other order, decree or
ruling issued by any court of competent jurisdiction nor any statute, rule,
regulation or order entered, promulgated or enacted by any governmental,
regulatory or administrative agency or authority shall be in effect that
would prevent the consummation of the Merger as contemplated hereby;
(d) all representations and warranties of Parent and Acquisition Sub
that are qualified with reference to a material adverse effect or
materiality shall be true and correct in all respects and all
representations and warranties that are not so qualified shall be true and
correct in all material respects, in each case (i) as of the date of this
Agreement and (ii) as of the Effective Time, except to the extent such
representations and warranties speak as of an earlier date, and the Company
shall have received a certificate signed on behalf of Parent and Acquisition
Sub by a proper officer of Parent and Acquisition Sub to such effect;
(e) each of Parent and Acquisition Sub shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and the Company shall have
received a certificate signed on behalf of Parent and Acquisition Sub by a
proper officer of Parent and Acquisition Sub to such effect;
(f) the Company shall have received an opinion of Reboul, MacMurray,
Hewitt, Maynard & Kristol, counsel to Parent and Acquisition Sub, in the
form attached hereto as Exhibit B; and
(g) there shall be no action, suit, investigation, proceeding or claim
pending or, to the knowledge of Parent, threatened against or affecting
Parent or Acquisition Sub or their respective properties or rights, before
any governmental body or arbitration board or tribunal, the outcome of
which, either alone or together with similar actions, could reasonably be
expected to have a material adverse effect on the business, properties,
results of operation or condition (financial or other) of Parent and
Acquisition Sub taken as a whole.
A-27
<PAGE>
ARTICLE VIII
TERMINATION AND ABANDONMENT
SECTION 8.01 TERMINATION AND ABANDONMENT. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, whether
before or after approval by the shareholders of the Company:
(a) by mutual action of the Boards of Directors of Parent and the
Company;
(b) by either Parent or the Company, if (i) the conditions to its
obligations under Section 7.01 or Section 7.02, as the case may be, shall
not have been complied with or performed in any material respect and such
noncompliance or nonperformance shall not have been cured or eliminated (or
by its nature cannot be cured or eliminated) by the other party on or before
March 31, 1999, including, without limitation (provided that there shall not
have occurred any event giving Parent the right of termination under Section
8.01(d)(iii) or (iv)) by reason of a vote of shareholders disapproving the
Merger or (ii) the Merger shall not have been effected on or prior to the
close of business on March 31, 1999, provided, however, that the right to
terminate this Agreement pursuant to this Section 8.01(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Effective
Time to occur before such date;
(c) by either Parent or the Company, if any permanent injunction or
action by any court or other governmental entity or regulatory authority of
competent jurisdiction preventing the consummation of the Merger shall have
become final and nonappealable, provided, however, that the party seeking to
terminate this Agreement pursuant to this Section 8.01(c) shall have used
all reasonable efforts to remove such injunction or overturn such action; or
(d) by Parent if (i) any of the representations and warranties of the
Company contained in this Agreement shall fail to be true and correct in any
material respect, in each case either as of when made or at any time
thereafter, (ii) there has been a breach in any material respect of any of
the covenants or agreements set forth in this Agreement on the part of the
Company, (iii) the Board of Directors of the Company (x) withdraws or amends
or modifies in a manner adverse to Parent or Acquisition Sub its
recommendation or approval in respect of this Agreement or the Merger, (y)
makes any recommendation with respect to an Alternative Transaction
(including making no recommendation or stating an inability to make a
recommendation), other than a recommendation to reject such Alternative
Transaction, or (z) takes any material action that would be prohibited by
Section 6.05 or (iv) the Company enters into a definitive written agreement
relating to an Alternative Transaction; or
(e) by the Company, if (i) there has been a breach of any
representations or warranties of Parent set forth herein the effect of which
breach could reasonably be expected to have a material adverse effect on the
ability of Parent and Acquisition Sub to consummate the transactions
contemplated by this Agreement or (ii) there has been a breach in any
material respect of any of the covenants or agreements set forth in this
Agreement on the part of Parent, which breach is not curable or, if curable,
is not cured within 30 days after written notice of such breach is given by
the Company to Parent; or
(f) by the Company, if such termination is necessary to allow the
Company to enter into an Alternative Transaction that its Board of Directors
has determined in good faith, by a majority vote after consultation with its
financial advisors and based upon the advice of outside legal counsel to the
Company, is more favorable to the shareholders of the Company than the
Merger contemplated by this Agreement (provided that the termination
described in this Section 8.01(f) shall not be effective unless and until
the Company shall have paid to Parent in full the fee described in Section
6.05).
A-28
<PAGE>
Any party desiring to terminate this Agreement pursuant to this Section 8.01
shall give notice to the other party in accordance with Section 9.05.
SECTION 8.02 EFFECT OF TERMINATION. Except as provided in Sections 6.05
and 9.02 hereof, in the event of the termination of this Agreement and the
abandonment of the Merger pursuant to Section 8.01, this Agreement shall
thereafter become void and have no effect, and no party hereto shall have any
liability to any other party hereto or its shareholders or directors or officers
in respect thereof, except that nothing herein shall relieve any party from
liability for any willful breach hereof.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant hereto shall survive the Effective Time, provided that this Section
9.01 shall not limit any covenant or agreement of the parties that by its terms
contemplates performance after the Effective Time.
SECTION 9.02 EXPENSES, ETC.
(a) In the event that the transactions contemplated by this Agreement are
not consummated, then, except as set forth in Section 6.05, neither the Company,
on the one hand, nor Parent and Acquisition Sub, on the other hand, shall have
any obligation to pay any of the fees and expenses of the other incident to the
negotiation, preparation and execution of this Agree ment, including the fees
and expenses of counsel, accountants, consultants, investment bankers and other
advisors and experts.
(b) In the event that the transactions contemplated by this Agreement are
consummated, the Company shall pay, at the Effective Time, all of its fees and
expenses incident to the negotiation, preparation and execution of this
Agreement, including the fees and expenses of counsel, accountants, consultants,
investment bankers and other advisors and experts, and the Company shall pay all
such fees and expenses incurred by Parent and Acquisition Sub.
SECTION 9.03 PUBLICITY. The Company and Parent agree that they will not
issue any press release or make any other public announcement concerning this
Agreement or the transactions contemplated hereby without the prior consent of
the other party, which consent shall not be unreasonably withheld, except that
the Company or Parent may make such public disclosure that it believes in good
faith to be required by law (in which event such party shall consult, to the
extent possible, with the other prior to making such disclosure).
SECTION 9.04 EXECUTION IN COUNTERPARTS. For the convenience of the
parties, this Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument, and may be delivered in person or by facsimile
transmission.
SECTION 9.05 NOTICES. All notices that are required or may be given
pursuant to the terms of this Agreement shall be in writing and shall be
sufficient in all respects if given in writing and delivered by hand or national
overnight courier service, transmitted by telecopy or mailed by registered or
certified mail, postage prepaid, as follows:
If to Parent or Acquisition Sub to it:
In care of Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, NY 10022
Facsimile No.: (212) 893-9575
Attention: Lawrence B. Sorrel
A-29
<PAGE>
with a copy to:
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, NY 10111
Facsimile No.: (212) 841-5725
Attention: William J. Hewitt, Esq.
If to the Company, to:
Centennial Healthcare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia
Facsimile No: (770) 730-1350
Attention: J. Stephen Eaton
Chairman of the Board, President and Chief Executive Officer
Bertil Nordin
Chairman of the Special Committee of the Board of Directors of
Centennial Healthcare Corporation
14 Ball Creek Way
Dunwoody, Georgia 30350
with copies to:
King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Facsimile No.: (404) 572-5100
Attention: Paul A. Quiros, Esq.
Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309-4530
Facsimile No.: (404) 815-6555
Attention: David A. Stockton, Esq.
or such other address or addresses as any party hereto shall have designated by
notice in writing to the other parties hereto.
SECTION 9.06 WAIVERS. The Company, on the one hand, and Parent and
Acquisition Sub, on the other hand, may, (i) extend the time for the performance
of any of the bligations or other actions of the other under this Agreement;
(ii) waive any inaccuracies in the representations or warranties of the other
contained in this Agreement or in any document delivered pursuant to this
Agreement; (iii) waive compliance with any of the conditions of the other
contained in this Agreement; or (iv) waive performance of any of the obligations
of the other under this Agreement. Any such extension or waiver shall be valid
only if set forth in an instrument in writing specifically referring to this
Agreement and signed on behalf of such party. Except as provided in the
preceding sentence, no action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.
SECTION 9.07 HEADINGS; INTERPRETATION. The headings contained in this
Agreement are for reference purposes only and shall not affect in any why the
meaning or interpretation of this Agreement. References in this Agreement to
Sections, Schedules, Exhibits or Articles mean a Section, Schedule, Exhibit or
A-30
<PAGE>
Article of this Agreement or the Disclosure Schedule unless otherwise indicated.
References to this Agreement shall be deemed to include all Exhibits and
Sections of the Disclosure Schedule, unless the context otherwise requires. The
term "person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, a governmental entity or an unincorporated
organization.
SECTION 9.08 ENTIRE AGREEMENT. This Agreement (including the Disclosure
Schedule and Exhibits hereto and other documents and instruments executed at the
Effective Time in connection herewith) and the Confidentiality Agreement
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral and written, among the parties hereto with respect to the subject matter
hereof.
SECTION 9.09 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia, without regard to
principles of conflict of laws.
SECTION 9.10 SEVERABILITY. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall be
made.
SECTION 9.11 BINDING EFFECT, BENEFITS. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective permitted
successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective permitted
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement, provided, however, that the provisions of
Section 6.07 hereof shall accrue to the benefit of, and shall be enforceable by,
each of the current and former directors and officers of the Company.
SECTION 9.12 ASSIGNABILITY. Neither this Agreement nor any of the parties'
rights hereunder shall be assignable by any party hereto without the prior
written consent of the other parties hereto.
SECTION 9.13 AMENDMENTS. At any time prior to the Effective Time, this
Agreement may be amended, modified or supplemented only by written agreement
(referring specifically to this Agreement) of Parent, Acquisition Sub and the
Company with respect to any of the terms contained herein, provided, however,
that after any approval and adoption of this Agreement by the shareholders of
the Company, no such amendment, modification or supplementation shall be made
which under applicable law requires the approval of such shareholders, without
the further approval of such shareholders.
A-31
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agree ment
and Plan of Merger as of the day and year first above written.
<TABLE>
<S> <C> <C>
COUGAR HOLDINGS CORPORATION
By
-----------------------------------------
Name:
Title:
COUGAR ACQUISITION CORP.
By
-----------------------------------------
Name:
Title:
CENTENNIAL HEALTHCARE CORPORATION
By
-----------------------------------------
Name:
Title:
</TABLE>
A-32
<PAGE>
INDEX TO DEFINED TERMS
THIS INDEX IS INCLUDED FOR CONVENIENCE ONLY AND
DOES NOT CONSTITUTE A PART OF THE AGREEMENT
<TABLE>
<CAPTION>
SECTION
TERM REFERENCE
- ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
"Acquisition Sub"............................................................................... Recitals
"Affiliate Contract"............................................................................ 3.28
"Agreement"..................................................................................... Recitals
"Alternative Transactions"...................................................................... 6.05(a)
"Audited Balance Sheet"......................................................................... 3.05
"Authorizations"................................................................................ 3.15(a)
"Business"...................................................................................... 3.11(a)(i)
"Certificate"................................................................................... 2.03(b)
"Closing"....................................................................................... 1.04
"Closing Date".................................................................................. 1.04
"Code".......................................................................................... 3.21(a)
"Company"....................................................................................... Recitals
"Company Board"................................................................................. Recitals
"Company Common Stock".......................................................................... 2.01(b)
"Company SEC Filings"........................................................................... 3.06(a)
"Company Stock Option Plans".................................................................... 2.02
"Computer Systems".............................................................................. 3.13(d)
"CON"........................................................................................... 3.15(a)
"Confidentiality Agreement"..................................................................... 6.03(b)
"Constituent Corporations"...................................................................... Recitals
"Corporate Subsidiaries"........................................................................ 3.01(a)
"Cost Reports".................................................................................. 3.15(b)
"Dissenting Shares"............................................................................. 2.04(a)
"Effective Time"................................................................................ 1.03
"Environmental Event"........................................................................... 3.22
"ERISA"......................................................................................... 3.21a)
"Exchange Act".................................................................................. 3.06(a)
"Exchange Agent"................................................................................ 2.03(a)
"Exchange Fund"................................................................................. 2.03(a)
"Facility"...................................................................................... 3.01(d)
"Financing"..................................................................................... 4.07
"Financing Entities"............................................................................ 4.07
"GAAP".......................................................................................... 3.06
"Georgia Code".................................................................................. 1.01
"HSR Act"....................................................................................... 3.08
"Indemnified Parties"........................................................................... 6.07(a)
"Independent Advisor"........................................................................... Recitals
"Intangible Rights"............................................................................. 3.12
"Interim Balance Sheet"......................................................................... 3.05
"Managed Facility".............................................................................. 3.01(d)
"Medicare and Medicaid Programs"................................................................ 3.15(a)
"Material Adverse Effect"....................................................................... 3.01(a)
"Merger"........................................................................................ 1.01
"Merger Consideration".......................................................................... 2.01(c)
</TABLE>
A-33
<PAGE>
<TABLE>
<CAPTION>
SECTION
TERM REFERENCE
- ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
"NASD".......................................................................................... 3.08
"Parent"........................................................................................ Recitals
"Partnership Subsidiaries"...................................................................... 3.01(b)
"Payment Event"................................................................................. 6.05(c)
"Permitted Liens"............................................................................... 3.10
"Plans"......................................................................................... 3.21(a)
"Professional".................................................................................. 3.15(a)
"Proprietary Facility".......................................................................... 3.01(d)
"Proprietary Software".......................................................................... 3.13(a)
"Proxy Statement"............................................................................... 6.02(b)
"Public Shareholders"........................................................................... Recitals
"Regulations"................................................................................... 3.15(a)
"SEC"........................................................................................... 3.06(a)
"Securities Act"................................................................................ 3.06(a)
"Schedule 13E-3"................................................................................ 6.02(c)
"Schedule 14D-9"................................................................................ 1.02(b)
"shareholders".................................................................................. Recitals
"Shares"........................................................................................ 2.01(c)
"Social Security Act"........................................................................... 3.15(a)
"Special Committee"............................................................................. Recitals
"Special Meeting"............................................................................... 6.02(a)
"Subsidiary".................................................................................... 3.01(d)
"Surviving Corporation"......................................................................... Recitals
"Third Party"................................................................................... 6.05(a)
"Third Party Software".......................................................................... 3.13(a)
"Taxes"......................................................................................... 3.26(a)
"Tax Returns"................................................................................... 3.26(a)
"THS"........................................................................................... 3.26(c)
"WCAS VIII"..................................................................................... 4.07
"Year 2000 Compatible".......................................................................... 3.13(d)
</TABLE>
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<PAGE>
APPENDIX B
OPINION OF J.P. MORGAN SECURITIES INC.
B-1
<PAGE>
APPENDIX B
March 18, 1999
Special Committee of the Board of Directors
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attention: Mr. Bertil D. Nordin
Chairman of the Special Committee
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of Centennial HealthCare Corporation (the "Company")
(other than (i) Cougar Holdings Corporation ("Parent"), a company formed at the
direction of Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS VIII"), and
Parent's wholly-owned subsidiary, Cougar Acquisition Corp. ("Acquisition Sub"),
(ii) WCAS VIII and (iii) certain investment limited partnerships affiliated with
WCAS VIII, certain individuals affiliated with WCAS VIII and such partnerships
and certain members of senior management of the Company, in each case that have
invested or propose to invest in Parent (said persons being herein collectively
referred to as the "Investor Group")) of the consideration to be paid to them in
connection with the proposed merger (the "Merger") of the Company with
Acquisition Sub. Pursuant to the Agreement and Plan of Merger, dated as of
October 22, 1998 (the "Agreement"), among the Company, Parent and Acquisition
Sub, Acquisition Sub will merge with and into the Company, and each share of
Common Stock, par value $0.01 per share, of the Company issued and outstanding
immediately prior to the effective time of the Merger (other than dissenting
shares and shares canceled pursuant to the Agreement) shall be converted into
the right to receive an amount in cash, without interest, equal to $16.00.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) the
Proxy Statement of the Company relating to the Merger (the "Proxy Statement");
(iii) certain publicly available information concerning the business of the
Company and of certain other companies engaged in businesses comparable to those
of the Company, and the reported market prices for certain other companies'
securities deemed comparable; (iv) publicly available terms of certain
transactions involving companies comparable to the Company and the consideration
received for such companies; (v) current and historical market prices of the
common stock of the Company; (vi) the audited financial statements of the
Company for the fiscal year ended December 31, 1997 and the unaudited financial
statements of the Company for the periods ended March 31, June 30 and September
30, 1998; (vii) certain agreements with respect to outstanding indebtedness or
obligations of the Company; (viii) certain internal financial analyses and
forecasts prepared by the Company and its management; and (ix) the terms of
certain other business combinations that we deemed relevant.
In addition, we have held discussions with certain members of the management
of the Company with respect to certain aspects of the Merger, the past and
current business operations of the Company, the financial condition and future
prospects and operations of the Company, the effects of the Merger on the
financial condition and future prospects of the Company, and certain other
matters we considered necessary or appropriate to our inquiry. We have visited
certain representative facilities of the Company, and reviewed such other
financial studies and analyses and considered such other information as we
deemed appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the
B-2
<PAGE>
Company or otherwise reviewed by us, and we have not assumed any responsibility
or liability therefor. We have not conducted any valuation or appraisal of any
assets or liabilities, nor have any such valuations or appraisals been provided
to us. In relying on financial analyses and forecasts provided to us, we have
assumed that they have been reasonably prepared based on assumptions reflecting
the best currently available estimates and judgments by management as to the
expected future results of operations and financial condition of the Company to
which such analyses or forecasts relate. We have also assumed that the Merger
will have the tax consequences described in the Proxy Statement and in
discussions with, and materials furnished to us by, representatives of the
Company, and that the other transactions contemplated by the Agreement will be
consummated as described in the Agreement and the Proxy Statement. We have
relied as to all legal matters relevant to rendering our opinion upon the advice
of counsel.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
It should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We have acted as financial advisor to the Special Committee of the Board of
Directors with respect to the proposed Merger and will receive a fee from the
Company for our services. We will also receive an additional fee if the proposed
Merger is consummated. Please be advised that we have no other financial
advisory or other relationships with the Company. J.P. Morgan and its affiliates
maintain an ongoing relationship with WCAS VIII and its affiliated investment
limited partnerships and have advised, financed and undertaken capital markets
transactions with such partnerships and their portfolio companies. In the
ordinary course of their businesses, our affiliates may actively trade the debt
and equity securities of the Company for their own account or for the accounts
of customers and, accordingly, they may at any time hold long or short positions
in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration to be paid to the Company's stockholders in
the proposed Merger is fair, from a financial point of view, to such
stockholders (other than the Investor Group).
This letter is provided to the Special Committee of the Board of Directors
of the Company in connection with and for the purposes of its evaluation of the
Merger. This opinion does not constitute a recommendation to any stockholder of
the Company as to how such stockholder should vote with respect to the Merger.
<TABLE>
<S> <C> <C>
Very truly yours,
J.P. MORGAN SECURITIES INC.
By:
-----------------------------------------
Name: John Fowler
Title: Managing Director
</TABLE>
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APPENDIX C
ARTICLE 13 OF THE GEORGIA BUSINESS CORPORATION CODE
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APPENDIX C
DISSENTERS' RIGHTS OF APPRAISAL
TITLE 14, CHAPTER 2
BUSINESS CORPORATIONS
STATE OF GEORGIA
ARTICLE 13
DISSENTERS' RIGHTS
PART 1
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
14-2-1301. Definitions.
As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporate action" means the transaction or other action by the
corporation that creates dissenters' rights under Code Section 14-2-1302.
(3) "Corporation" means the issuer of shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
(4) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Code Section 14-2-1302 and who exercises that right when
and in the manner required by Code Sections 14-2-1320 through 14-2-1327.
(5) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
(6) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under all
the circumstances.
(7) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(8) "Shareholder" means the record shareholder or the beneficial
shareholder.
14-2-1302. Right to dissent.
(1) A record shareholder of the corporation is entitled to dissent from, and
obtain payment of the fair value of his shares in the event of, any of the
following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
(A) If approval of the shareholders of the corporation is required
for the merger by Code Section 14-2-1103 or the articles of incorporation
and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its parent
under Code Section 14-2-1104;
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(2) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all or substantially all of
the property of the corporation if a shareholder vote is required on the
sale or exchange pursuant to Code Section 14-2-1202, but not including a
sale pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be distributed
to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any matter,
or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights;
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under Code Section 14-2- 604; or
(F) Cancels, redeems, or repurchases all or part of the shares of the
class; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent that Article 9 of this chapter, the articles of incorporation,
bylaws, or a resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain payment for their
shares.
(2) A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the corporate action fails to comply with procedural
requirements of this chapter or the articles of incorporation or bylaws of the
corporation or the vote required to obtain approval of the corporate action was
obtained by fraudulent and deceptive means, regardless of whether the
shareholder has exercised dissenter's right.
(3) Notwithstanding any other provision of this article, there shall be no
right of dissent in favor of the holder of shares of any class or series which,
at the record date fixed to determine the shareholders entitled to receive
notice of and to vote at a meeting at which a plan of merger or share exchange
or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the holders of
shares of the class or series are required under the plan of merger or share
exchange to accept for their shares anything except shares of the surviving
corporation or another publicly held corporation which at the effective date
of the merger or share exchange are either listed on a national securities
exchange or held of record by more than 2,000 shareholders, except for scrip
or cash payments in lieu of fractional shares; or
(2) The articles of incorporation or a resolution of the board of
directors approving the transaction provides otherwise.
14-2-1303. Dissent by nominees and beneficial owners.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one beneficial shareholder and
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notifies the corporation in writing of the name and address of each person on
whose behalf he asserts dissenters' rights. The rights of a partial dissenter
under this Code section are determined as if the shares as to which he dissents
and his other shares were registered in the names of different shareholders.
PART 2
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
14-2-1320. Notice of dissenters' rights.
(4) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
(5) If corporate action creating dissenters' rights under Code Section
14-2-1302 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Code Section
14-2-1322 no later than ten days after the corporate action was taken.
14-2-1321. Notice of intent to demand payment.
(6) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, a record
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action
is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(7) A record shareholder who does not satisfy the requirements of subsection
(a) of this Code section is not entitled to payment for his shares under this
article.
14-2-1322. Dissenters' notice.
(8) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Code Section 14-2-1321.
(9) The dissenters' notice must be sent no later than ten days after the
corporate action was taken and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date the
notice required in subsection (a) of this Code section is delivered; and
(4) Be accompanied by a copy of this article.
14-2-1323. Duty to demand payment.
(10) A record shareholder sent a dissenters' notice described in Code
Section 14-2-1322 must demand payment and deposit his certificates in accordance
with the terms of the notice.
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(11) A record shareholder who demands payment and deposits his shares under
subsection (a) of this Code section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(12) A record shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
14-2-1324. Share Restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under Code Section 14-2-1326.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
14-2-1325. Offer of payment.
(13) Except as provided in Code Section 14-2-1327, within ten days of the
later of the date the proposed corporate action is taken or receipt of a payment
demand, the corporation shall by notice to each dissenter who complied with Code
Section 14-2-1323 offer to pay to such dissenter the amount the corporation
estimates to be the fair value of his or her shares, plus accrued interest.
(14) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under Code
Section 14-2-1327; and
(5) A copy of this article.
(15) If the shareholder accepts the corporation's offer by written notice to
the corporation within 30 days after the corporation's offer or is deemed to
have accepted such offer by failure to respond within said 30 days, payment for
his or her shares shall be made within 60 days after the making of the offer or
the taking of the proposed corporate action, whichever is later.
14-2-1326. Failure to take action.
(16) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(17) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Code Section 14-2-1322 and repeat the payment demand
procedure.
14-2-1327. Procedure if shareholder dissatisfied with payment or offer.
(18) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate of the fair value of his shares and interest due, if:
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<PAGE>
(1) The dissenter believes that the amount offered under Code Section
14-2-1325 is less than the fair value of his shares or that the interest due
is incorrectly calculated; or
(2) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(19) A dissenter waives his or her right to demand payment under this Code
section and is deemed to have accepted the corporation's offer unless he or she
notifies the corporation of his or her demand in writing under subsection (a) of
this Code section within 30 days after the corporation offered payment for his
or her shares, as provided in Code Section 14-2-1325.
(20) If the corporation does not offer payment within the time set forth in
subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under subsection
(b) of Code Section 14-2-1325, and the corporation shall provide the
information to the shareholder within ten days after receipt of a written
demand for the information; and
(2) The shareholder may at any time, subject to the limitations period
of Code Section 14-2-1332, notify the corporation of his own estimate of the
fair value of his shares and the amount of interest due and demand payment
of his estimate of the fair value of his shares and interest due.
PART 3
JUDICIAL APPRAISAL OF SHARES
14-2-1330. Court action.
(21) If a demand for payment under Code Section 14-2-1327 remains unsettled,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the 60 day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(22) The corporation shall commence the proceeding, which shall be a nonjury
equitable valuation proceeding, in the superior court of the county where a
corporation's registered office is located. If the surviving corporation is a
foreign corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(23) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding, which
shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in the proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided by
law for the service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail or by publication,
or in any other manner permitted by law.
(24) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this Code section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them or in any amendment to it. Except as otherwise
provided in this chapter, Chapter 11 of Title 9, known as the "Georgia Civil
Practice Act," applies to any proceeding with respect to dissenters' rights
under this chapter.
(25) Each dissenter made a party to the proceeding is entitled to judgment
for the amount which the court finds to be the fair value of his shares, plus
interest to the date of judgment.
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14-2-1331. Court costs and counsel fees.
(26) The court in an appraisal proceeding commenced under Code Section
14-2-1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, but not
including fees and expenses of attorneys and experts for the respective parties.
The court shall assess the costs against the corporation, except that the court
may assess the costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Code Section
14-2-1327.
(27) The court may also assess the fees and expenses of attorneys and
experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of Code Sections 14-2-1320 through 14-2-1327; or
(2) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this article.
(28) If the court finds that the services of attorneys for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
14-2-1332. Limitation of actions.
No action by any dissenter to enforce dissenters' rights shall be brought
more than three years after the corporate action was taken, regardless of
whether notice of the corporate action and of the right to dissent was given by
the corporation in compliance with the provisions of Code Section 14-2-1320 and
Code Section 14-2-1322.
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PROXY
CENTENNIAL HEALTHCARE CORPORATION
400 PERIMETER CENTER TERRACE, SUITE 650
ATLANTA, GEORGIA 30346
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS TO
BE HELD ON APRIL 15, 1999 AT 10:00 A.M.
The undersigned hereby appoints Daryl R. Griswold and Alan B. Cosby, and
each of them, proxies, with full power of substitution and resubstitution, as
proxies for and in the name of the undersigned, to vote all shares of common
stock, par value $.01 per share, of Centennial HealthCare Corporation, held by
the undersigned at the close of business on February 26, 1999, which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders to be held on April 15, 1999 at 10:00 a.m., local time,
at The South Terrace Conference Center Classroom, 115 Perimeter Center Place,
Atlanta, Georgia 30346, and at any adjournment thereof, upon the matters
described in the accompanying Notice of Special Meeting of Shareholders and
Proxy Statement, receipt of which is hereby acknowledged, and upon any other
business that may properly come before the meeting or any adjournment thereof.
Said proxies are directed to vote on the matters described in the Notice of
Special Meeting of Shareholders and Proxy Statement as follows, and otherwise in
their discretion upon such other business as may properly come before the
meeting or any adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CENTENNIAL
HEALTHCARE CORPORATION. THE BOARD OF DIRECTORS RECOMMEND A VOTE FOR THE PROPOSAL
BELOW.
To approve the Agreement and Plan of Merger, dated as of October 22, 1998,
by and among Cougar Holdings Corporation, Cougar Acquisition Corporation and
Centennial HealthCare Corporation.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED FOR THE PROPOSAL LISTED ABOVE.
Dated: ___________________, 1999
________________________________
Signature
Please sign exactly as your
name(s) appear(s) hereon. Where
more than one owner is shown
above, each should sign. When
signing in a fiduciary or
representative capacity, please
add your full title as such. If
this proxy is submitted by a
corporation, it should be
executed in the full corporate
name by a duly authorized
officer. If a partnership,
please sign in partnership name
by authorized person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY.
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For annual and transition reports pursuant to sections 13 or 15 (d) of the
Securities Exchange Act of 1934.
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
-----------------
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-35118
CENTENNIAL HEALTHCARE CORPORATION
- --------------------------------------------------------------------------------
(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
------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
- - ----------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
- - ----------------------------------------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 27, 1998 was approximately $166.2 million. As of March
27, 1998, the registrant had 11,877,645 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 21, 1998 are incorporated by Reference in Part III.
<PAGE>
TABLE OF CONTENTS
Part I
Page
----
Item 1. Business....................................................
Item 2. Properties..................................................
Item 3. Legal Proceedings...........................................
Item 4. Submission of Matters to a Vote of Security Holders.........
Item 4A. Executive Officers of the Registrant........................
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.........................................
Item 6. Selected Financial Data.....................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..
Item 8. Financial Statements and Supplementary Data.................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................
Part III
Item 10. Directors and Executive Officers of the Registrant..........
Item 11. Executive Compensation......................................
Item 12. Security Ownership of Certain Beneficial Owners
and Management..............................................
Item 13. Certain Relationships and Related Transactions..............
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.........................................
Signatures...........................................................
<PAGE>
Item 1. BUSINESS.
Certain statements in this Form 10-K under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in certain documents incorporated by reference herein constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). Those statements include
statements regarding the intent, belief or current expectations of Centennial
HealthCare Corporation and members of its management team. Management cautions
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements are set forth in
the Safe Harbor Compliance Statement included as Exhibit 99.1 to this Form 10-K,
and are hereby incorporated herein by reference. Centennial HealthCare
Corporation undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
Centennial HealthCare Corporation ("Centennial" or the "Company") provides a
broad range of long-term healthcare services to meet the medical needs of
elderly and post-acute patients. The Company provides these services through
geographically concentrated networks located in metropolitan and secondary
markets throughout the United States. The Company was organized in 1989 as a
Georgia corporation and conducts business through its operating subsidiaries. At
December 31, 1997, Centennial operated 84 owned, leased and managed skilled
nursing facilities with 8,850 licensed available beds in 19 states, with its
largest concentration of facilities in North Carolina, Indiana and Michigan. The
Company provides basic and specialty healthcare services. Basic services include
skilled nursing and support, housekeeping, laundry, dietary, recreational and
social services. Specialty services include comprehensive rehabilitation
therapy, respiratory therapy, ventilator care, infusion therapy, wound care,
home health care and other subacute and specialty services. As components of its
specialty services, at December 31, 1997, Centennial provided rehabilitation
therapy services on a contract basis to third-party owned and Company-operated
skilled nursing facilities in 21 states pursuant to 128 contracts and provided
home health care services through 30 offices, primarily located in North
Carolina. References to the Company or Centennial also include the Company's
subsidiaries unless the context indicates otherwise.
COMPANY STRATEGY
Centennial's objective is to continue to enhance its market position as a
provider of long-term basic and specialty services in selected metropolitan and
secondary markets. The Company seeks to control significant components of the
non-acute health care system in its markets, thereby diversifying its sources of
revenue and positioning itself to respond to the requirements of a variety of
payors. In addition, the Company seeks to increase the range of services it
provides within its facilities and tailors its health care services to address
the specific needs within each of its markets. To meet its objective, the
Company is pursuing the following strategies: (i) achieve operating leverage
through the continued development of regionally concentrated networks; (ii)
implement market-specific business and network development plans in response to
the diverse needs of the Company's metropolitan and secondary markets; (iii)
continue to expand specialty services to enhance the Company's position as a
broad-based provider of health care services; (iv) manage operations through
sophisticated information systems that enhance efficiency; and (v) pursue
strategic acquisitions of additional long-term care facilities and related
service providers.
Over the last several years, the Company has grown its operating
base both through acquisitions and internal growth. Total revenues were
$75.2 million, $233.0 million and $304.3 million for the fiscal years ended
December 31, 1995, 1996 and 1997, respectively. Operating income was $3.2
million, $14.5 million, and $25.5 million for the fiscal years ended December
31, 1995, 1996 and 1997, respectively. Licensed available beds increased from
4,302 to 8,850 during the same period. The Company's revenue quality mix
(Medicare, private pay, management fees and other) improved from 41.9% for the
<PAGE>
fiscal year ended December 31, 1995 to 63.4% for the fiscal year ended December
31, 1997, and the Company's revenues from specialty services increased from
14.4% for the fiscal year ended December 31, 1995 to 42.1% for the fiscal year
ended December 31, 1997, reflecting the Company's focus on providing specialty
services to higher acuity patients.
COMPANY GROWTH
As part of its growth strategy, the Company regularly reviews possible
acquisitions within the long-term care continuum. Effective December 31, 1995,
the Company completed an important strategic acquisition by merging with
Transitional Health Services, Inc. ("THS") which operated 36 skilled nursing
facilities with 3,776 beds in Arkansas, North Carolina, Indiana, Kentucky and
Michigan and a contract rehabilitation therapy business (the "THS Merger").
Since the THS Merger, through December 31, 1997 the Company continued to expand
its operations through the acquisition of a company providing home health care
services, the acquisition of a contract rehabilitation therapy company providing
therapy services to affiliated and third-party skilled nursing facilities, the
acquisition of three skilled nursing facilities previously managed by the
Company, and the lease of two rural acute-care hospitals which are located in
markets where the Company operates skilled nursing centers. Additionally, the
Company added a net 13 management agreements for skilled nursing facilities
totaling 1,812 licensed available beds in 3 states.
1997 ACQUISITIONS AND LEASE TRANSACTIONS
Effective May 1, 1997, the Company acquired by merger Total Care Consolidated,
Inc., a provider of home health care services with 25 home health offices
located in North Carolina, where the Company operated 23 facilities as of
December 31, 1997, as well as South Carolina and Louisiana.
In August 1997, the Company acquired substantially all of the business and
assets of Complex Care, Inc., a provider of physical, occupational, and speech
therapy services through approximately 45 contracts with third-party long-term
care facilities in Connecticut and Rhode Island. Combined with the Company's
existing contract rehabilitation therapy business, at December 31, 1997 the
Company provided rehabilitation services pursuant to 128 contracts in 21 states,
to Company-operated and third-party-owned facilities.
In March 1997, the Company assumed the management of a 29-bed rural, acute-
care hospital in northern Florida where the Company currently operates a nursing
home facility and another rural hospital. Following the receipt of necessary
consents and approvals, the management of this facility was converted into a
lease of the facility retroactive to the date of the original management
agreement.
In December 1997, the Company acquired a 58-bed long-term care facility in
Florida that had been managed by the Company since 1991.
As a result of the acquisitions referenced above, Centennial has increased its
range of services in markets in which the Company already has a strong operating
presence.
1997 MANAGEMENT AGREEMENTS
The Company's growth strategy also includes the management of long-term care
facilities for third-party owners. Most management agreements provide for a
management fee equal to 6% of the facility's gross revenues with terms ranging
from 5 to 20 years, with renewal options. Additionally, the Company generally
has a right of first refusal or option to purchase its managed facilities. This
strategy allows the Company to evaluate the operations of potential acquisition
candidate facilities prior to acquisition. During 1997, the Company added 9
managed skilled nursing facilities to its portfolio, totaling 924 licensed
available beds.
THE LONG-TERM CARE INDUSTRY
The long-term care industry provides a broad range of services to post-acute
patients and patients with medically complex and special needs who do not
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<PAGE>
require treatment in an acute care hospital setting. Long-term care facilities
offer basic services, which include skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. In addition, long-term care
facilities may provide a broad range of specialty services such as comprehensive
rehabilitation therapy (including physical, occupational and speech therapy),
respiratory therapy, ventilator care, infusion therapy, wound care, home
health care, tracheostomy care, pharmaceutical services, Alzheimer's care and
other specialty services. Long-term care facilities are increasingly becoming an
integral part of community-based, vertically-integrated, extended care delivery
systems that are capable of providing a full range of traditional basic and
specialty services.
In recent years, long-term care services have experienced significant growth.
According to industry sources, revenues in the long-term care industry have
increased from approximately $18 billion in 1980 to approximately $80 billion in
1995. Continuing growth of the industry has been driven by a number of factors,
including: (i) aging of the population; (ii) cost-containment pressures that are
driving post-acute patients from acute care hospitals to lower-cost settings
such as long-term care facilities; (iii) advances in medical technology enabling
sophisticated long-term care providers to care for higher-acuity patients; and
(iv) demand for post-acute and specialty services in secondary markets.
AGING POPULATION. According to the U.S. Bureau of the Census, approximately
90% of all patients in long-term care facilities are persons over 65 years of
age, and this age group has been growing significantly faster than the overall
population. The over 65 age group experiences a greater incidence of chronic
illness and disabilities than other age groups and currently accounts for more
than two-thirds of total health care expenditures in the United States. As the
number of Americans over age 65 increases, the need for long-term care services
is also expected to increase. The U.S. Bureau of the Census estimates that the
U.S. population over age 65 will increase from approximately 31 million in 1990
to approximately 35 million in 2000. In particular, the segment of the U.S.
population over 85 years of age, which comprises 45% to 53% of residents at
long-term care facilities nationwide, is projected to increase by more than 33%,
from approximately 3 million in 1990, to more than 4 million in 2000.
COST-CONTAINMENT PRESSURES. In response to rising costs, government and
private pay sources have implemented cost-containment measures designed to
reduce lengths of stay in acute care hospitals. As a result, the average length
of hospital stays has been decreased, thereby increasing the number of patients
discharged from acute care hospital settings who require continuing medical
care. Long-term care facilities represent an attractive alternative setting for
these discharged patients because many of the post-acute services required by
patients can be provided on a cost-effective basis by clinically sophisticated
long-term care providers.
ADVANCES IN MEDICAL TECHNOLOGY. The increasing availability of advanced
medical technology has increased life expectancies and enhanced the ability of
long-term providers to offer, on a cost-effective basis, quality services
previously provided only by acute care hospitals. As a result, a growing number
of higher-acuity patients with specialized needs can be treated in long-term
care settings.
DEMAND FOR POST-ACUTE AND SPECIALTY SERVICES IN SECONDARY MARKETS. A major
challenge for persons requiring medical care in secondary markets is the
distance that often exists between a patient's home and regional centers that
offer primary care, rehabilitation therapy and other specialty services.
Individuals residing in secondary markets in need of services are often left
with the choice of temporarily or permanently relocating, spending extended
periods of time away from their families or commuting significant distances. As
a result, the provision of post-acute and specialty services in secondary
markets represents a significant opportunity for the long-term care industry to
grow and enhance profitability.
INDUSTRY CONSOLIDATION
The long-term care industry is undergoing consolidation as providers seek to
build market share and compete more effectively. Current ownership of long-term
care facilities is highly fragmented, with approximately 70% of all facilities
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<PAGE>
owned by independent providers or companies operating less than 20 facilities.
The increased burdens of various cost-containment measures, increasing acuity of
long-term care patients and increasing complexity of government regulation pose
significant challenges to long-term care providers that lack sophisticated
information systems, breadth of management experience and economies-of-scale.
In addition, there is a limited supply of long-term care facilities due to the
following factors: (i) state Certificate of Need ("CON") legislation, which
restricts the number of facilities that can be constructed within a market; (ii)
high construction costs; (iii) limitations on government reimbursement for the
full cost of construction; and (iv) extensive start-up expenses. As a result of
these factors, providers that have a strong reputation within the community for
providing high quality service have become attractive acquisition targets for
providers seeking to reach critical mass.
BUSINESS STRATEGY
Centennial's objective is to continue to enhance its position as a quality
provider of basic and specialty services in both metropolitan and secondary
markets within its established regions. To achieve this objective, the Company
will focus on the following strategies:
EXPAND NATIONALLY THROUGH REGIONAL DEVELOPMENT. The Company's
expansion efforts to date have been structured to integrate additional
facilities and services within eleven regions. By focusing on regional
development, the Company is well-positioned to manage facility operations,
allocate managerial and administrative costs over a larger revenue base,
capitalize on its reputation in existing markets, provide more effective
training of facility personnel and closely monitor the implementation of
facility specific operating plans. The Company's regional structure should
allow it to build the critical mass necessary to create networks for providing
specialty services on a direct basis and successfully contract with managed care
and other third-party payors.
IMPLEMENT MARKET-SPECIFIC BUSINESS AND NETWORK DEVELOPMENT PLANS. In its
metropolitan markets, the Company generally focuses on providing a specific
range of services and enhances market share by integrating its operations with
those of recognized delivery networks and other providers. In secondary markets,
the Company's goal is to play a leading role in local delivery of health care by
providing a broader range of services. The Company seeks, in certain secondary
markets, to provide many significant components of care within integrated health
care networks and to manage the flow of patients to the most appropriate, cost-
effective site of care.
CONTINUE TO EXPAND SPECIALTY SERVICES. The Company provides a broad range of
specialty services at certain of its facilities and continues to expand its
program of outpatient and home health care services. In addition, the Company
intends to emphasize growth and expansion of its third party physical,
occupational and speech therapy services to allow the Company's facilities to
serve as full-service providers of specialty services to patients in its
markets.
ENHANCE OPERATIONS THROUGH THE USE OF INFORMATION TECHNOLOGY. The Company has
expended significant resources in the development of management information
systems and has placed a high priority on developing systems to assess patient
care, track financial and operational controls, analyze labor utilization and
monitor reimbursement. In addition, the Company's information technology enables
it to integrate acquired facilities or operations on a timely and cost-effective
basis with minimal disruption to operations and positions the Company to
efficiently operate in a managed care environment.
PURSUE STRATEGIC ACQUISITIONS. The Company targets for acquisition
facilities, operating companies and related businesses that have the capacity to
be leading providers of health care services to higher-acuity patients in their
respective markets and that represent opportunities for the Company to realize
additional operating leverage through regional operating efficiencies. In
addition to outright purchases, the Company enters into lease or management
agreements with certain facilities which generally include a right of first
4
<PAGE>
refusal or option to purchase the facilities. In addition to facility
acquisitions, the Company seeks to expand the rehabilitation therapy services,
pharmacy and home health care segments of its operations through the purchase of
businesses offering such specialty services.
PATIENT SERVICES
The Company provides basic and specialty health care services as described
below.
BASIC SERVICES
Basic services are those traditionally provided to elderly patients in long-term
care facilities, including skilled nursing and support, housekeeping, laundry,
dietary, recreational and social services. The Company provides 24-hour skilled
nursing care by registered nurses, licensed practical nurses and certified
nursing aides in all of its facilities. Each facility is managed by a licensed
administrator who is responsible for the day-to-day operation of the facility.
Although treatment of patients is the responsibility of their own attending
physicians, who are not employed by the Company, each facility engages a
physician medical director who monitors the delivery of care. In addition, each
facility offers a number of individualized therapeutic activities designed to
enhance the quality of life of its patients. These activities include
entertainment events, musical productions, trips, arts and crafts, volunteer and
other programs that encourage social interaction among patients as well as
community involvement.
SPECIALTY SERVICES
Specialty services are those provided to patients with medically complex
needs, who generally require more complex treatment and a higher level of
skilled nursing care. These services typically generate higher revenues per
patient day than basic services as a result of the higher costs associated with
treating a higher-acuity patient. Set forth below are descriptions of the
specialty services offered by the Company.
REHABILITATION THERAPY. The Company provides a broad range of rehabilitation
therapy services to its facilities and other third-party providers. These
services include physical, occupational and speech therapy in the long-term care
facility setting. As of December 31, 1997 the Company had contracted to provide
rehabilitation therapy services to patients in 128 facilities, 21 of which are
owned or leased by the Company.
SUBACUTE CARE. The Company's subacute care program has distinct units within
certain of its long-term care facilities that are dedicated to the care of
medically complex patients who do not require the services of an acute care
hospital. Subacute services provided or arranged by the Company's facilities
include, but are not limited to, ventilator care, respiratory care, traumatic
injury recuperation, post-cardiac rehabilitation, IV therapy, wound care, post-
stroke care, hospice care, post-surgical orthopedic rehabilitation and
peritoneal dialysis services.
HOME HEALTH CARE. At December 31, 1997, Centennial operated 30 home health
care offices, affording the recipients of such care an alternative to a hospital
or long-term care facility setting. Such services delivered into the home
setting include skilled nursing, physical, occupational and speech therapy and
subacute care. In addition, personal care services are available from home
health care aides who assist patients with their activities of daily living.
Centennial provides home health care primarily in markets where it has long-term
care facilities.
OPERATIONS
GENERAL. The Company's facilities are organized into eleven operating regions
and the Company's organizational structure and operations support staff provide
its facilities with the resources needed to operate effectively in these
regions. Each region has a nurse consultant with responsibility for providing
guidance on patient care issues, conducting quality assurance audits, training
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<PAGE>
in clinical software and assuring compliance with applicable state and federal
regulations. The Company provides additional operational support through a
corporate team of professionals in financial accounting, reimbursement, managed
care pricing, quality assurance, human resources, regulatory compliance,
marketing, health systems development and other areas.
For all of its facilities, the Company actively manages personnel costs, which
represent the largest expense incurred in the operation of a long-term care
facility. The Company emphasizes attracting and retaining quality personnel,
including administrators and skilled nursing staff, through a number of programs
which include on-going training and education classes, employee recognition
programs, and competitive wages and benefits. In addition, the Company has an
incentive program for administrators based on the achievement of certain Company
goals related to quality of care and financial performance.
QUALITY ASSURANCE AND REGULATORY COMPLIANCE. The Company has developed a
comprehensive quality assurance program that is designed to monitor, evaluate
and improve the delivery of patient care. This program is supervised by a
registered nurse, who serves as the Company's director of professional services.
Pursuant to its quality control system, the Company routinely collects
information from patients, family members, employees and state survey agencies
that is then compiled, analyzed and distributed throughout the Company in order
to monitor the quality of care and services provided and the satisfaction of the
residents and their families with such services.
MARKETING. The Company's in-house marketing department works directly with
its facilities in their efforts to market services in their respective
communities. The emphasis of the Company's marketing department is to assist
each facility in achieving a desired quality mix of revenues through increased
Medicare, private and managed care census. The Company works with each facility
to establish monthly, quarterly and annual census and payor mix goals and each
facility is responsible for an on-going marketing plan.
The Company focuses on securing relationships with managed care organizations
and insurance carriers in the markets served by its facilities. At present, many
of the Company's facilities have contractual relationships with such
organizations.
MANAGEMENT INFORMATION SYSTEMS
The Company develops, implements and maintains a comprehensive system of
management and financial controls which is designed to enable the Company to
closely monitor operating costs and quickly distribute financial and other
operational information to appropriate levels of management. Each facility
utilizes PC-based, networked computer systems for processing operating data on a
"real-time" basis as well as financial and patient care data. The Company has
established an internal network linking its facilities, operating subsidiaries,
regional managers and nurse consultants with its corporate computer network.
The Company utilizes commercially available as well as internally developed
software in its information systems. The Company has established on-line
electronic billing with Medicare as well as with several state Medicaid
programs and produces interim cost reports for Medicare and certain state
Medicaid programs. In addition, at each facility, the system generates computer-
assisted medical records that allow for the creation of individualized care
plans, physician orders and administrative and observation records.
The Company's information systems are easily adaptable to newly acquired
facilities and related companies to enable management to impact each facility's
financial and operating performance within a short period of time.
ACQUISITIONS
The Company maintains an active acquisition program in order to increase its
penetration of existing regions and to capitalize on the consolidation trends in
the long-term care industry. The Company evaluates potential acquisitions on the
basis of existing profitability, long-term profit potential, specialty services
opportunities, facility location, payor mix and patient census. Specifically,
the Company targets facilities that have the capacity to be leading providers of
higher-acuity services in their respective markets and that represent
opportunities for the Company to realize additional operating leverage through
regional economies of scale and provide more profitable specialty services. In
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<PAGE>
addition, the Company enters into lease or management agreements with certain
facilities that generally include a right of first refusal. In many cases these
lease or management arrangements present acquisition opportunities. As evidence
of its ability to acquire previously managed facilities, the Company currently
leases or owns 18 facilities that it previously managed.
FACILITIES
At December 31, 1997, Centennial operated 84 owned, leased and managed skilled
nursing facilities with 8,850 beds in 19 states and the District of Columbia. Of
this number, Centennial owned nine facilities with 897 beds, leased 46
facilities with 4,452 beds and managed 29 facilities with 3,501 beds. Since
December 31, 1997, the Company has added six managed skilled nursing facilities
with 837 beds in the state of North Carolina. At December 31, 1997, the
Company's facilities had an average of 105 beds and an average occupancy rate of
90.7%.
The following table lists the Company's owned, leased and managed facilities
by location, including the number of licensed available beds and the occupancy
rate as of December 31, 1997:
<TABLE>
<CAPTION>
Facilities
Number of ------------------------------
State Beds Owned Leased Managed Total Occupancy% (1)
- - ----- --------- ----- ------ ------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Arkansas 70 - - 1 1 91.2
DC 448 - 1 1 2 95.8
Florida 259 1 - 3 4 96.2
Georgia 157 - 1 - 1 96.2
Idaho 166 - 2 - 2 89.0
Illinois 106 - - 1 1(2) 76.2
Indiana 1,315 - 13 - 13 89.0
Kansas 387 - 2 2 4 78.2
Kentucky 356 1 2 - 3 92.3
Louisiana 376 1 3 - 4 90.9
Michigan 1,270 3 7 3 13 92.3
Mississippi 539 - 5 - 5 88.3
Montana 99 - 1 - 1 89.0
North Carolina 2,385 2 8 13 23 92.1
Nebraska 158 1 - - 1 90.2
New Mexico 119 - - 1 1 90.0
Tennessee 119 - - 1 1 97.2
Texas 221 - 1 1 2 87.8
Washington 104 - - 1 1 73.3
Wisconsin 196 - - 1 1 87.3
----------------------------------------------------
Totals 8,850 9 46 29 84 90.7%
----------------------------------------------------
----------------------------------------------------
</TABLE>
(1) Occupancy is computed by dividing actual patient day census by actual
patient days available in licensed available operating beds. Does not include
facilities in the start-up phase during 1997, which include The Oaks at Sweeten
Creek (North Carolina); Lafayette Healthcare Center (Florida); Blountstown
Health & Rehabilitation Center (Florida); Crystal Oaks of Pinellas (Florida) and
Mountain Ridge Wellness Center (North Carolina).
(2) Facility management contract terminated as of December 31, 1997.
LEASED FACILITIES. At December 31, 1997, the Company leased 46 skilled nursing
facilities pursuant to long-term leases with various lessors. The Company's
lease arrangements are "triple net" leases, requiring the Company, at its own
expense, to maintain the premises and pay taxes, utilities and insurance. In
most cases, the leases are subordinate to certain security interests in the
facilities granted by the lessors to third-party lenders. Centennial has a right
of first refusal to purchase most of the leased facilities.
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These leases generally have initial terms of ten to 20 years with options to
extend, and lease rates with annual increases tied to fixed schedules, the
Consumer Price Index, or changes in the prime rate.
MANAGED FACILITIES
At December 31, 1997, the Company operated 29 facilities under long-term
management contracts with third parties. Revenues from management contracts
accounted for approximately 2.6% of the Company's total revenues for the fiscal
year ended December 31, 1997. Pursuant to these management contracts, the
Company performs day-to-day management functions and provides certain corporate
services, including group contract purchasing, employee training and
development, quality assurance audits, human resource management, assistance in
obtaining third-party reimbursement, financial and accounting functions, policy
development, system design and development, and marketing support. The Company's
information system monitors certain key data for each managed facility, such as
payroll, admissions and discharges, cash collections, net patient service
revenues, staff trend analysis, and measurement of operational data on a per
patient day basis. These management agreements typically have initial terms
ranging from five to 20 years and that can be terminated only for cause. Each
such management agreement provides for monthly fees generally at six percent of
gross revenues. Certain of the agreements provide for the subordination of the
management fees to the payment of the owner's debt service. The Company has a
right of first refusal to acquire certain of these managed facilities.
During 1997, five third-party owned facilities for which the Company provided
management services were sold. The Company terminated management agreements on
two of the sold facilities and obtained new management agreements on the other
three from the new owners.
CONTRACT REHABILITATION SERVICES. At December 31, 1997, Centennial provided
contract rehabilitation services under 128 contracts in facilities in 21 states.
Twenty-one of the agreements are with the Company's owned or leased facilities.
Most of these agreements have initial terms of five years with automatic renewal
provisions for five successive additional terms of five years each, unless
terminated earlier upon 90 days prior notice, and are subject to termination
without cause upon 60 days prior written notice. Pursuant to these agreements,
the Company provides comprehensive rehabilitation services, including physical,
occupational and speech therapy. In addition, the Company provides
administrative services including policy formulation, licensure compliance,
training, staffing, quality control, financial report preparation and patient
census preparation. Therapy services, except for physical therapy services, are
billed per unit of therapy service provided at rates set forth in the therapy
service agreement. Physical therapy services are billed at the Medicare
published salary equivalency rate. Non-therapy services are either billed per
unit of service provided or at a flat monthly rate set forth in the individual
therapy service agreement.
COMPETITION
The Company expects that it will face increasing levels of competition with
respect to its operations and the services it provides. The Company competes for
patients with other long-term care facilities and, to a lesser extent, with
acute care hospitals, physician practice groups, home health care providers,
community-based service programs, retirement communities and assisted living
centers. In addition, competition may grow from new market entrants, including
companies focusing primarily on specific components of the Company's various
services. Certain competing companies have greater financial and other resources
and may be more established in their respective communities than the Company.
Competition for subacute care patients is increasing by virtue of market entry
of other health care providers, such as acute care hospitals, rehabilitation
hospitals and other specialty service providers. The competitive factors that
distinguish subacute providers include the degree of acuity for which care can
be provided. The Company believes that its subacute care facilities are
characterized by a high level of acuity in patient care provided. Other
important competitive factors include the reputation of the facility in the
community, the services offered, the availability of qualified nurses, local
physicians, hospital support, rehabilitation therapists and other personnel, the
appearance of the facility and the cost of services.
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SOURCE OF REVENUES AND PAYOR MIX
The Company derives its revenues primarily from various state Medicaid
programs for indigent patients, the Medicare program for certain elderly and
disabled patients, private pay sources, rehabilitation therapy services offered
to third-party long-term care facilities and management fees. The Company
employs reimbursement specialists and retains outside reimbursement consultants
to monitor reimbursement rules, policies and related developments in order to
comply with reporting requirements and to assist the Company in receiving
reimbursements.
The following table sets forth the percentage of total revenues by payor
source for the Company for the periods indicated:
<TABLE>
<CAPTION>
Years Ended Years Ended
December 31, May 31,
--------------------- -----------------------
1997 1996 1995 1995 1994 1993
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Percentage of total revenues:
Medicare.......................... 23.8% 25.4% 18.2% 15.0% 6.9% 6.8%
Private pay, management fees
and other (1)..................... 39.6 31.8 23.7 20.5 19.4 40.5
----- ----- ----- ----- ----- -----
63.4 57.2 41.9 35.5 26.3 47.3
Medicaid.......................... 36.6 42.8 58.1 64.5 73.7 52.7
----- ----- ----- ----- ----- -----
Total............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
____________
(1) Private pay includes payments from third parties pursuant to contract
rehabilitation therapy services.
MEDICARE PRIOR TO 1998. All of the Company's facilities are certified Medicare
providers. The Medicare program consists of two parts. Part A covers inpatient
hospital services and certain services furnished by other institutional
providers, such as skilled nursing and long-term acute care facilities. Part B
covers the services of doctors, suppliers of medical items, various types of
outpatient services including physical, speech and occupational therapy,
pharmaceuticals and medical supplies, certain intensive rehabilitation and
psychiatric services and ancillary services of the type provided by long-term
care or acute care facilities. Medicare does not provide reimbursement for
community-based, intermediate-care nursing facilities.
Under the Medicare Part A program, the Company is reimbursed for its direct
costs plus an allocation of indirect costs up to a facility specific limit (the
"routine cost limit"). As the Company has expanded its post-acute care and
other specialty services, the costs of care for these patients have exceeded and
are expected to continue to exceed the reimbursement routine cost limits. Under
current regulations, new long-term care facilities are, in certain limited
circumstances, able to apply for a three-year exemption from routine cost
limits. Unless and until such exemptions are granted, these facilities can
recover excess costs only through routine cost limit exception requests. There
can be no assurance that the Company will be able to recover such excess costs
under any pending or future requests. Payment for Medicare Part B services
depends on the nature of the services provided. Some services are reimbursed at
cost, much like Part A services. Other services, particularly parenteral and
enteral nutrition therapy, are reimbursed on a fee schedule.
PRIVATE PAY, MANAGEMENT FEES AND OTHER. Private pay and other revenues
include payments from individuals who pay directly for services without
governmental assistance and payments from commercial insurers, HMOs, PPOs,
insurance organizations, workers' compensation programs, hospice programs and
other similar payment sources. The Company's rates for private pay patients are
typically higher than rates for patients eligible for assistance under state
Medicaid programs. These private pay rates are established on a facility-
specific basis in accordance with market factors, including rates charged by
other providers in the local market.
MEDICAID. Medicaid includes the various state-administered reimbursement
programs for indigent patients created by federal law. Although reimbursement
rates vary from state to state, the federal government retains the right to
approve or disapprove individual state plans. Providers must accept
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<PAGE>
reimbursement from Medicaid as payment in full for the services rendered,
because the provider may not bill the patient for more than the amount of the
Medicaid payment received. Criteria for Medicaid eligibility varies from state
to state, subject to guidelines from the federal government for determination
whether a person qualifies as medically indigent and subject to changes in state
and federal regulations.
Many of the residents at the Company's facilities who initially enter the
facilities as private pay or insurance patients are later covered by Medicaid as
their financial resources are depleted to a level of financial net worth and
income which makes them eligible for Medicaid.
With the exception of two facilities, all of the facilities operated by the
Company participate in state Medicaid programs. Basic long-term care services
are provided to Medicaid patients, including nursing, dietary, housekeeping and
laundry and restorative health care services, room and board and medications.
Medicaid does not cover the cost of private rooms, private-duty nurses and other
costs, or amounts in excess of the Medicaid reimbursement rates. The Balanced
Budget Act of 1997 requires states to use a public notice and comment process in
determining rates for hospital services, nursing facility services and services
of intermediate care facilities/mentally retarded (but not for home and
community care). Under this process, states will be required to publish in
proposed and final form the rates, rate methodologies, and justifications for
the rates of hospitals, nursing facilities, and intermediate care
facilities/mentally retarded. Likewise, states must furnish interested parties
with a reasonable opportunity to comment on the proposed rates, rate
methodologies, and justifications. States also must take into account during the
hospital rate-setting process the situation of hospitals which serve a
disproportionate number of low-income patients with special needs.
Furthermore, payments must be sufficient to enlist enough providers so that
services under the state's Medicaid plan are available to recipients at least to
the extent that those services are available to the general population.
Reimbursement rates generally are determined by the state from "cost reports"
filed annually by each facility, on both a prospective and retrospective basis.
There can be no assurance, however, that payments under Medicaid programs will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs.
Cost reports are subject to routine audits by government regulatory bodies on
an annual or periodic basis and several of the Company's facilities are
currently involved in the audit process. In the event of a determination by such
a regulatory body that the amount of reimbursement exceeded allowable
reimbursement levels, the Company may be required to repay any excess amount.
Although the Company believes it has adequately provided for any repayment
obligations, there can be no assurance that such provisions will be adequate.
CONTRACT REHABILITATION SERVICES. In general, the Company classifies payments
for rehabilitation therapy services received directly from third-party long-term
care facilities as private pay. Revenues from rehabilitation therapy services
provided to Company-operated facilities are included in the Medicare, Medicaid
and private pay sources of revenues of the Company. The Company's charges to
non-affiliates, though not directly regulated, are effectively limited by
regulatory reimbursement policies imposed on the long-term care facilities that
receive these services, as well as competitive market factors.
MEDICARE AND MEDICAID. The Medicare and Medicaid programs are subject to
various statutory and regulatory changes which may adversely affect the
Company's business. There can be no assurance that payments for services and
supplies under governmental reimbursement programs will remain comparable to
present levels. In fact, as discussed later in this section certain provisions
will change effective in 1998. The Company may be subject to rate reductions as
a result of federal budgetary legislation.
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Various state Medicaid programs periodically experience budgetary shortfalls
which may result in Medicaid payment delays to the Company. In addition, the
failure, even inadvertent, of the Company to comply with applicable
reimbursement regulations could adversely affect the Company's business.
Although there can be no assurance that future adjustments will not have a
material adverse effect on the Company, the Company believes that it has
properly applied the various payment formulas and that it is not likely that
audit adjustments would have a material adverse effect on the Company. In 1990
and 1993, Congress passed legislation ("OBRA" and "OBRA 93") revising Medicare
nursing standards and reimbursement and methods for nursing homes. Although the
Company believes that it is in substantial compliance with the current
requirements of OBRA and OBRA 93, it is unable to predict how future
interpretation and enforcement of regulations promulgated under OBRA and OBRA 93
by the state and federal governments could affect the Company in the future.
Effective July 1, 1995, the Health Care Financing Administration ("HCFA")
promulgated new survey, certification and enforcement rules governing long-term
care facilities participating in the Medicare and Medicaid programs, which
impose significant new requirements on long-term care facilities. The breadth of
the new rules creates uncertainty over the manner in which the rules will be
implemented, the ability of any long-term care facility to comply with them and
the effect of the new rules on the Company.
Under the rules, unannounced standard surveys of facilities must be conducted
at least once every 15 months with a statewide average of 12 months. In addition
to the standard survey, survey agencies have the authority to conduct surveys as
frequently as necessary to determine whether facilities comply with
participation requirements, to determine whether facilities have corrected past
deficiencies and to monitor care if a change occurs in the ownership or
management of a facility. Furthermore, the state survey agency must review all
complaint allegations and conduct a standard or an abbreviated survey to
investigate such complaints if a review of the complaint shows that a deficiency
in one or more of the Federal requirements may have occurred and that only a
survey will determine whether a deficiency or deficiencies exist. If a facility
has been found to furnish substandard care, it is subject to an extended survey.
The extended survey is intended to identify the policies and procedures that
caused a facility to deliver substandard care.
HCFA's new rules substantially revise provisions regarding the enforcement of
compliance requirements and remedies for long-term care facilities with
deficiencies. At a minimum, the following remedies are available: termination of
provider agreement; temporary management; denial of payment for new admissions;
civil money penalties; closure of the facility in emergencies or transfer of
patients or both; and on-site state monitoring. States may also adopt optional
remedies. The new rules divide remedies into three categories. Category I
remedies include directed plans of correction, state monitoring and directed in-
service training. Category 2 remedies include denial of payments for new
admissions, denial of payments for all individuals (imposed only by HCFA) and
civil money penalties of $50 to $3,000 per day. Category 3 remedies include
temporary management, immediate termination or civil money penalties of $3,050
to $10,000 per day. The rules define situations in which one or more of the
penalties must be imposed.
FEE SPLITTING AND REFERRALS. The Company is also subject to federal and state
laws that govern financial and other arrangements between providers. Federal
laws, as well as the laws of certain states, prohibit payments or fee splitting
arrangements between providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. These laws include the federal "anti-kickback
law" which prohibits, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients.
11
<PAGE>
Effective January 1, 1995, OBRA 93 prohibits any physician with a financial
relationship (defined as a direct or indirect ownership or investment interest
or compensation arrangement) with an entity from making a referral for
"designated health services" to that entity and prohibits that entity from
billing for such services. "Designated health services" do not include skilled
nursing services but do include many services which long-term care facilities
provide to their patients, including, but not limited to, infusion therapy and
enteral and parenteral nutrition. Various exceptions to the application of this
law exist, including one, which protects the payment of fair market compensation
for the provision of personal services, so long as various requirements are met.
Violations of these provisions may result in civil or criminal penalties for
individuals or entities and/or exclusion from participation in the Medicaid and
Medicare programs. Various state laws contain analogous provisions, exceptions
and penalties. Violation of these state laws could lead to loss of licensure,
significant fines and other penalties. The Company believes that in the past it
has been, and in the future it will be, able to arrange its business
relationships so as to comply with these provisions. Failure to comply with such
laws could subject the Company to civil fines, possible exclusion from
government reimbursement programs and, in certain cases, criminal prosecution.
HEALTH CARE REFORM
The Balanced Budget Act of 1997, ("the Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth of approximately
$9.5 billion for skilled nursing facilities over the next five years, primarily
through the implementation of a Medicare prospective payment system for skilled
nursing facility services. The Medicare prospective payment rate, which
reimburses for routine service, ancillary and capital costs, will initially be a
blended rate based on (i) a facility-specific payment rate derived from each
facility's 1995 cost report, adjusted by an inflation factor and (ii) a federal
per diem rate derived from all hospital-based and freestanding (skilled nursing
facility) 1995 cost reports, adjusted to remove geographic, wage-related,
inflationary and case mix differences between facilities. The blended rate will
be further adjusted by a facility-specific case mix (acuity) index. The exact
amount of these adjustments has not yet been determined by the Secretary of the
Department of Health and Human Services.
The Medicare prospective payment system begins for cost reporting periods
starting on or after July 1, 1998. For the Company's facilities, the initial
year of the four-year phase in period will begin January 1, 1999. In 1999, the
blended rate will be based 75% on the facility-specific rate and 25% on the
federal per diem rate. In 2000, the prospective rate will be based 50% on the
facility-specific rate and 50% on the federal per diem rate. In 2001, the
blended rate will be based 25% on the facility-specific rate and 75% on the
federal per diem rate. In the year 2002, the prospective rate will be 100% of
the federal per diem rate. Additionally, the Act imposes fee schedules or per
beneficiary limitations on outpatient supplies and services and requires
consolidated billing for all Medicare beneficiaries residing in a skilled
nursing facility. The Company has already taken steps to comply with the
consolidated billing requirements. The impact of per beneficiary limitations on
outpatient therapy services could adversely affect the Company's skilled nursing
facility revenue and its therapy revenue. Currently, the Company derives
approximately 21% of its revenue from Medicare at its long-term care facilities.
Additionally, the Congressional Budget Office has revised economic projections
which include Medicaid cuts of $1.2 billion to Medicaid long-term care providers
over the next five years. Currently, the Company derives approximately 36% of
its revenues from Medicaid at its long-term care facilities.
The Act provides that by October 1, 1999, home health care will be
reimbursed under a prospective payment system. Specifics of this system have not
yet been defined. For cost reporting periods beginning on or after October 1,
1997, the Act requires home health agencies to be reimbursed the lesser of:
. actual costs;
. per visit limits, reduced to 105% of the national median, or;
. a new blended agency-specific per beneficiary annual limit applied to the
agency's unduplicated census count of Medicare patients, and based on 98% of
1994 costs, trended forward and phased in over four years, (similar to long-
term care provisions).
For the year ended December 31, 1997 Centennial derived 6% of its revenues from
home health care.
12
<PAGE>
Management believes that, due to the cost structure at its facilities, the
Company's overall reimbursement rates should not be lower than current rates and
could possibly be higher. However, until the rates are ultimately determined
under the prospective payment system, the Company will not be able to determine
the exact nature or long term financial impact of the legislative changes. The
Company can give no assurance that payments under such programs in the future
will remain at a level comparable to the present level or increase, and
decreases in the level of payments could have a material adverse effect on the
Company.
Although management believes that a prospective pay system will benefit
companies, such as Centennial, that have sophisticated information systems
allowing them to track and document acuity levels and costs, there can be no
assurance that the Company will recognize any such benefits. The Company
currently operates in many states having Medicaid programs with acuity-based
reimbursements levels and incentives for efficient, quality operations. The
Company has effectively operated in these programs utilizing both its patient
care information systems, for the documentation of patient acuity levels for
maximum reimbursement, and its management information systems, to control
expenses. In many instances, the Company's revenues have increased under this
form of reimbursement, although there can be no assurance that such results will
be achieved under the payment systems described above. Prior to the enactment
of the Act, the Company anticipated that regulation and market changes would
result in a flattening of growth of its third party contract therapy business.
The latest legislative changes do not alter these views.
Effective April 1, 1998, regulations were adopted by Health Care Financing
Administration, which temporarily change the basis of reimbursement for
contract therapy services including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. During 1997, the Company
derived 7% of its revenue from third-party contract therapy services. These
regulations impose regionally-adjusted salary equivalency rates as reimbursement
caps for occupational, speech and physical therapy. In most locations the
reduced rates have the effect of reducing the amount of reimbursement for a unit
of occupational or speech therapy and increasing the amount of reimbursement for
a unit of physical therapy. The Company believes that such rate reductions will
be completely or partially offset by cost reductions and changes in the method
of delivering such services. Due to these changes in operations and cost
structure and the relative size of the Company's therapy business, the Company
does not expect these reimbursement changes to have a material adverse effect on
the Company.
GOVERNMENT REGULATION
The federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
rates by governmental payor sources, the development and operation of long-term
care facilities and the provision of long-term care services are subject to
federal, state and local licensure and certification laws which regulate with
respect to a facility, among other matters, the number of beds, the services
provided, the distribution of pharmaceuticals, equipment, staffing requirements,
patients' rights, operating policies and procedures, fire prevention measures,
environmental matters and compliance with building and safety codes. Home health
care providers are also subject to extensive government regulations. Regulators
recently announced plans to impose new regulations and to increase regulatory
enforcement activities. There can be no assurance that federal, state or local
governmental regulations will not change or be subjected to new interpretations
that impose additional restrictions which might adversely affect the Company's
business.
Licensing, certification and other applicable standards vary from jurisdiction
to jurisdiction and are revised periodically. State agencies survey or inspect
all long-term care facilities on a regular basis to determine whether such
facilities are in compliance with the requirements for participation in
government-sponsored third-party payor programs. In some cases or upon repeat
violations, the reviewing agency has the authority to take various adverse
actions against a facility, including the imposition of fines, temporary
suspension of admission of new patients to the facility, suspension or
decertification from participation in the state Medicaid or the Medicare
13
<PAGE>
program, offset of amounts due against future billings to the Medicare or
Medicaid programs, denial of payments under Medicaid for new admissions,
reduction of payments, restrictions on the ability to acquire new facilities
and, in extreme circumstances, revocation of a facility's license or closure of
a facility. The compliance history of a prior provider may be used by state or
federal regulators in determining possible action against a successor provider.
The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements. In
the ordinary course of its business, however, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
There can be no assurance that future agency inspections will not have a
material adverse effect on the Company.
CERTIFICATES OF NEED. A majority of the states in which the Company operates
have adopted CON or similar laws which generally require that a state agency
determine that a need exists prior to the construction of new facilities, the
addition or reduction of licensed beds or services, the implementation of other
changes, the incurrence of certain capital expenditures, the approval of certain
acquisitions and changes in ownership or, in certain states, the closure of a
facility. State CON approval is generally issued for a specific project or
number of beds, specifies a maximum expenditure, is sometimes subject to an
inflation adjustment, and requires implementation of the proposal within a
specified period of time. Failure to obtain the necessary state approval can
result in the inability of the facility to provide the service, operate the
facility or complete the acquisition, addition or other change and can also
result in adverse reimbursement action or the imposition of sanctions or other
adverse action on the facility's license.
ENVIRONMENTAL AND OTHER. The Company is subject to a wide variety of
federal, state and local environmental and occupational health and safety laws
and regulations. Among the types of regulatory requirements faced by providers
are: air and water quality control requirements, waste management requirements,
specific regulatory requirements applicable to asbestos, polychlorinated
biphenyls and radioactive substances, requirements for providing notice to
employees and members of the public about hazardous materials and wastes and
certain other requirements.
In its role as owner and/or operator of properties or facilities, the Company
may be subject to liability for investigating and remedying any hazardous
substances that have come to be located on the property, including such
substances that may have migrated off of, or emitted, discharged, leaked,
escaped or been transported from, the property. The Company's operations may
involve the handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The cost
of any required remediation or removal of hazardous or toxic substances could be
substantial and the liability of an owner or operator for any property is
generally not limited under applicable laws and could exceed the property's
value. Although the Company is not aware of any material liability under any
environmental or occupational health and safety laws, there can be no assurance
that the Company will not encounter such liabilities in the future, which could
have a material adverse effect on the Company.
14
<PAGE>
PERSONNEL
As of December 31, 1997, the Company employed, directly or indirectly,
approximately 10,100 persons, including approximately 8,100 full-time and 2,000
part-time employees. As of December 31, 1997, collective bargaining agreements
were in effect related to 11 facilities covering approximately 804 employees and
negotiations were in progress with bargaining units at seven additional
facilities. The Company believes that it has a satisfactory relationship with
these employees and strives to maintain this relationship by offering
competitive benefit packages, training programs and opportunities for
advancement.
INSURANCE
The Company maintains property, liability, and professional liability
insurance policies in amounts and with such coverage and deductibles that are
deemed appropriate by management, based upon historical claims, industry
standards and the nature and risks of its business. The Company also requires
that physicians practicing at its facilities carry medical professional
liability insurance to cover their respective individual professional
liabilities. The Company directly and indirectly maintains a self-insurance
program with appropriate reinsurance for workers' compensation. This program
covers employees as required by state law. In certain states, the Company
participates in state approved programs. Contractors who provide services to the
Company must demonstrate adequate insurance prior to commencing work. There can
be no assurance that any claims agianst the Company will not be successful, or
if successful will not exceed the limits of available coverage, or that such
coverage will continue to be available at acceptable rates.
ITEM 2. PROPERTIES
OFFICE LEASES
Centennial's corporate headquarters occupy approximately 35,000 square feet of
office space in a commercial building located in Atlanta, Georgia, under a lease
agreement which terminates on September 30, 2001 and allows one five-year
renewal option. The Company believes that such office space is adequate for its
current requirements.
Centennial also leases approximately 12,800 square feet of office space in
Atlanta, Georgia, which was the previous location of its corporate headquarters.
Centennial subleases the entire space to a subtenant and both the primary lease
and the sublease terminate on November 30, 1999. THS leases approximately 18,000
square feet of office space in Louisville, Kentucky, which was THS's corporate
headquarters prior to the THS Merger. The lease term expires January 31, 2002.
The Company has entered into a sublease for 6,350 square feet of this space for
the remaining term of the primary lease and is seeking a subtenant for the
balance of the space.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1997, the Company did not have any pending legal
proceedings that separately, or in the aggregate, if adversely determined, would
have a material adverse effect on the Company. The Company is, and may be, from
time to time, party to litigation or administrative proceedings which arise in
the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and key employees are as follows:
<TABLE>
<CAPTION>
OFFICERS Age Position
- - -------- ---------- -----------------------------------------------------
<S> <C> <C>
J. Stephen Eaton 46 Chairman of the Board, President and Chief Executive
Kent C. Fosha, Sr. 56 Executive Vice President of Operations
Alan C. Dahl 36 Executive Vice President, Chief Financial Officer,
Treasurer and Director
Randall J. Bufford 38 Executive Vice President of Business Development
Laurence W. Lepley, Jr. 53 President of Paragon Rehabilitation, Inc.
KEY EMPLOYEES
- - -------------
Wayne H. Mayo 54 Eastern Division Vice President
Clay F. Crosson 40 Western Division Vice President
John P. Cobb 67 Senior Vice President of Reimbursement
</TABLE>
16
<PAGE>
J. Stephen Eaton is Chairman of the Board and the founder of the Company
----------------
and has served as its President and Chief Executive Officer since founding the
Company in 1989. From 1982 and 1988, Mr. Eaton served in various executive
positions (including Vice President in 1988) at Consolidated Resources
Corporation of America and its successors ("CRCA"). When the Company acquired
CRCA in 1990, it served as the general partner of private and public limited
partnerships that owned in excess of 31 long-term care and assisted living
facilities. Mr. Eaton also serves as a director of Saint Joseph's Mercy Care
Corporation, a non-profit corporation based in Atlanta, Georgia which provides
mobile health services to the homeless and other underserved populations, and of
Saint Joseph's Health System, a major tertiary care hospital and health system
in Atlanta, Georgia.
Kent C. Fosha, Sr. has served as Executive Vice President of Operations
------------------
since January 1996 and also serves as President of Centennial International
Management Corporation. He joined the Company in 1990 and served as the
Company's senior vice president of operations until January 1996. Mr. Fosha has
over 23 years experience in all aspects of nursing home management, including
the supervision of multi-state operations for National Heritage, Inc. and
Beverly Enterprises. Mr. Fosha, a licensed nursing home administrator, has
served as president of the Georgia Healthcare Association and has served on
several long-term care related committees.
Alan C. Dahl has served as Executive Vice President, Chief Financial
------------
Officer, Treasurer and Director of the Company since January 1996. From February
1991 to December 1995, he served as senior vice president. Mr. Dahl has been
involved in health care finance for the past 12 years. Mr. Dahl was previously
senior vice president of Southmark Public Syndications, Inc., a subsidiary of
Southmark Corporation. Mr. Dahl, a certified public accountant, also worked in
the tax department at Arthur Young & Company.
Randall J. Bufford served as Executive Vice President-Business
------------------
Development of the Company from January 1996 until March 31, 1998, when he
resigned from such position. Mr. Bufford currently serves as a consultant to the
Company. From 1993 to December 1995, Mr. Bufford served as General Manager/Chief
Executive Officer of Transitional Health Services. Mr. Bufford served as an
officer of The Cardinal Group, Inc. from 1982 until 1993, and he organized and
led a management buy-out and recapitalization through which Transitional Health
Services purchased many of the assets of Cardinal. Mr. Bufford began his career
as an auditor at Arthur Young & Company.
Laurence W. Lepley, Jr., has served as President of Paragon
-----------------------
Rehabilitation Inc., a subsidiary of the Company ("Paragon"), since its
inception in 1989. Mr. Lepley has 32 years of experience in the health care
industry, having previously served as vice president of development and general
counsel for a corporation specializing in head injury rehabilitation. Mr. Lepley
has also served as vice president, corporate attorney and lobbyist for the
Tennessee Hospital Association. Mr. Lepley began his health care career as a
pharmacist in both hospital and retail settings, and he maintains licenses in
pharmacy and law in the state of Tennessee.
Wayne H. Mayo has served as Eastern Division Vice President of the
-------------
Company since January 1997. Prior to becoming the Eastern Division Vice
President, Mr. Mayo served as regional vice president from 1991 to 1996, and he
was responsible for the Company's Eastern region of facilities. Mr. Mayo was
previously regional vice president of operations for Vantage Healthcare
Corporation and also served as regional vice president of operations for Medco
Centers, Inc. for seven years. Mr. Mayo is a member of the American College of
Health Care Administrators.
17
<PAGE>
Clay F. Crosson has served as Western Division President of the Company
---------------
since February 1997. Prior to joining the Company in 1997, Mr. Crosson was vice
president of operations and a member of the Board of Directors for CareMore,
Inc. for five years. Previous to that, Mr. Crosson served 11 years at National
HeatlhCorp, L.P. in various capacities, including regional vice president. Mr.
Crosson has a masters of business administration degree and 18 years of
experience in long-term care, subacute care, home health care, managed care and
assisted living. Mr. Crosson is a Fellow of the American College of Health Care
Administrators, and holds certifications in SubAcute Administration and Nursing
Home Administration. He presently serves as National Treasurer of ACHCA and is a
Board member of Georgia's Nursing Home Administrators Licensure Board.
John P. Cobb joined the Company in 1991. He has served as Senior Vice
------------
President of Reimbursement since January 1995. He served as director of
reimbursement from 1991 to January 1995. Mr. Cobb has over 18 years of
experience in third-party reimbursement of long-term care facilities. Prior to
joining the Company, Mr. Cobb was director of reimbursement for Convalescent
Services, Inc. ("CSI"), where he was responsible for the preparation of over 48
Medicaid and Medicare cost reports for facilities in six states. Mr. Cobb has
also served as an auditor/investigator for the Medicaid Fraud Division of the
Arkansas Attorney General's office.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
(a) The Company's Common Stock is traded on The Nasdaq Stock Market's
National Market System under the symbol "CTEN." The high and low bids for the
Company's Common Stock as reported on The Nasdaq Stock Market during each
quarter from July 2, 1997 are shown below:
1997 High Low
---- ---- ---
Fourth Quarter 25.125 18.125
Third Quarter 23.000 16.000
At March 27, 1998, the last reported sale price of the Common Stock was
$23.00 per share and there were approximately 74 record holders of Common Stock.
Except for the payment of cash dividends to the holders of the Company's
preferred stock series, which were converted into shares of Common Stock or
18
<PAGE>
redeemed upon the completion of the Offering, the Company has not declared any
cash dividends on its Common Stock. The Company expects that future earnings, if
any, will be retained for the growth and development of the Company's business
and, accordingly, the Company does not anticipate that any dividends will be
declared or paid on the Common Stock for the foreseeable future. The
declaration, payment and amount of future dividends, if any, will depend upon
the future earnings, results of operations, financial position and capital
requirements of the Company, among other factors, and are limited by the
Company's Credit Agreement with CoreStates Bank, N.A. and NationsBank, N.A.
as agents for the lenders named therein.
Recent Sales of Unregistered Securities.
- - ---------------------------------------
The share numbers presented below do not reflect the conversion of such
shares into Common Stock or redemption thereof or the .6897-for-1.0 reverse
stock split that occurred on the effective date of the Offering with respect to
all shares of capital stock outstanding before the Offering.
The Company sold 50,000 shares of its Series D Preferred Stock, $1.00
par value per share, effective January 31, 1997, at a price of $100 per share,
for an aggregate cash purchase price of $5,000,000. These shares were acquired
by South Atlantic Venture Fund II Limited Partnership: South Atlantic Venture
Fund III Limited Partnership, Welsh, Carson, Anderson & Stowe VI, L.P.; WCAS
Healthcare Partners, L.P.; Horizon Investment Associates II and certain
individuals affiliated with these entities.
The Company sold, effective January 31, 1997, 50,000 shares of its
Series E Preferred Stock, $1.00 par value per share, in units of one share of
Series E Preferred Stock and 1.85102 shares of its Common Stock, $.01 par value
per share, for a per unit price of $100 and an aggregate cash purchase price of
$5,000,000. These shares were acquired by South Atlantic Venture Fund II Limited
Partnership; South Atlantic Venture Fund III Limited Partnership and WCAS
Capital Partners II, L.P.
Pursuant to a private placement memorandum dated December 31, 1995 (the
"PPM"), the Company issued an aggregate of 3,838,219 shares of Special Voting
Common Stock, no par value per share (the "Special Voting Common Stock"), and
144,086 shares of Series C Preferred Stock, $1.00 par value per share (the
"Series C Preferred Stock"), to the stockholders of THS in connection with the
THS merger with and into a wholly-owned subsidiary of the Company, with THS
surviving. At the effective time of the THS Merger, each outstanding share of
THS's common stock was converted into the right to receive .235521068 shares of
Special Voting Common Stock. The Special Voting Common Stock included 93,289
shares later issued pursuant to incentive stock options to certain former THS
option holders.
In addition, pursuant to the PPM, the Company issued 232,164 shares of
its Common Stock and 426,327 shares of Special Voting Common Stock pursuant to a
stock dividend declared effective January 5, 1996 as a condition to the THS
Merger. These shares were placed into an escrow account to be held as
indemnification for the settlement of post-closing purchase price adjustments
resulting from, imposed upon or incurred by either the Company or THS.
The Company's shareholders before the THS Merger (the "Centennial Holders")
placed 232,164 shares of Common Stock and the shareholders of THS before the THS
Merger ("THS Holders") placed 426,327 shares of Special Voting Common Stock into
the escrow. On January 31, 1997, Mr. Eaton as representative of the Centennial
Holders (the "Centennial Agent") and Mr. Paul as representative of the THS
Holders (the "THS Agent") entered into a settlement agreement (the "Settlement
Agreement") whereby the parties agreed to settle any and all claims for
indemnification by having the THS Holders transfer shares of Special Voting
Common Stock or cash in lieu thereof at a value of such
19
<PAGE>
purpose of $8.40 per share. The Centennial Holders received cash or shares of
Special Voting Common Stock as designated in the Settlement Agreement. The THS
Holders transferred 85,816 shares of Special Voting Common Stock to the
Centennial Holders and $1.83 million cash in lieu thereof to the Centennial
Holders.
On July 28, 1994, South Atlantic Venture Fund II Limited Partnership and
South Atlantic Venture Fund III Limited Partnership acquired 328,892 shares of
the Company's Series B Preferred Stock, $8.7377 par value per share, for an
aggregate purchase price of $2,873,760.
From December 31, 1995 through May 1, 1996, the Company sold a total of
419,442 shares of Common Stock to directors, key officers and consultants of the
Company. These sales were made pursuant to the exercise of options granted by
the Company under its Stock Option Plans to such directors, key officers and
consultants. The option exercise prices ranged from $.2944 to $5.40 per share.
The aggregate consideration received by the Company for these shares of Common
Stock was $531,778.76.
Each of these transactions was completed without registration of the
relevant security under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon the exemptions provided by Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder on the basis
that such transactions did not involve a public offering, the purchasers were
sophisticated with access to the kind of information registration would provide
and that such purchasers acquired the securities without a view toward the
distribution thereof.
The Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock were automatically converted into shares of Common Stock and
the Series E Preferred Stock was redeemed upon the completion of the
Offering.
20
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the Company's
Consolidated Financial Statements. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere herein. The selected consolidated financial data set forth
below for the Company as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997, is derived from the audited
financial statements included elsewhere herein, with the exception of the
proforma information which is unaudited. The selected consolidated financial
data set forth below for the seven months ended December 31, 1995 and for the
years ended May 31, 1995, 1994 and 1993 has been derived from financial
statements not included elsewhere herein.
<TABLE>
<CAPTION>
Seven Months
For the year ended Ended For the year ended
December 31, December 31, May 31,
-------------------------------- ------------ ---------------------------
1997 1996 1995(1) 1995 1995 1994 1993
-------- -------- -------- ------------ ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenues.................. $296,321 $227,387 $ 71,862 $ 42,103 $61,856 $ 38,115 $ 6,863
Management fee and other revenues............. 7,952 5,661 3,364 2,108 3,362 3,384 4,435
-------- -------- -------- -------- ------- -------- --------
Total revenues............................. 304,273 233,048 75,226 44,211 65,218 41,499 11,298
Facility operating expenses................... 234,596 183,324 58,565 35,262 48,872 29,510 5,331
Lease expense................................. 21,403 18,777 7,702 4,651 6,901 4,823 927
Corporate administrative costs................ 16,055 11,400 5,027 3,526 3,396 2,927 3,004
Depreciation and amortization................. 6,760 5,012 738 429 290 82 48
-------- -------- -------- -------- ------- -------- --------
Operating income before net interest
expense and equity in income (loss) of
unconsolidated partnerships.............. 25,459 14,535 3,194 343 5,759 4,157 1,988
Interest income (expense), net................ (8,022) (9,373) (176) (116) 57 131 32
Equity in income (loss) of
unconsolidated partnerships................. - (108) 448 25 (28) 1,733 (2,766)
-------- -------- -------- -------- ------- -------- --------
Income (loss) before income taxes and
minority interest and extraordinary item.. 17,437 5,054 3,466 252 5,788 6,021 (746)
Provision (benefit) for income taxes.......... 6,800 2,092 1,389 328 2,106 2,230 (160)
-------- -------- -------- -------- ------- -------- --------
Income (loss) before minority
interest and extraordinary item............ 10,637 2,962 2,077 (76) 3,682 3,791 (586)
Minority interest in net income of
subsidiary, net of income taxes............ (252) (183) (201) (82) (207) - -
-------- -------- -------- -------- ------- -------- --------
Net income (loss) before extraordinary item.... 10,385 2,779 1,876 (158) 3,475 3,791 (586)
Extraordinary item - forgiveness of
debt, net of income taxes.................. - - - - 250 1,598 -
Extraordinary item - loss on extinguishment
of debt, net of income taxes............... (537) - - - - - -
-------- -------- -------- -------- ------- -------- --------
Net income (loss)............................. $ 9,848 $ 2,779 $ 1,876 $ (158) $ 3,725 $ 5,389 $ (586)
======== ======== ======== ======== ======= ======== ========
Per common share information:
Diluted:
Income (loss) before extraordinary item....... $ 0.54 $ 0.12 $ 0.72 $ (0.06) $ 1.35 $ 1.60 $ (0.26)
Extraordinary item - forgiveness of
debt, net of taxes......................... - - - - 0.10 0.68 -
Extraordinary item - loss on extinguishment
of debt, net of income taxes............... (0.06) - - - - - -
-------- -------- -------- -------- ------- -------- --------
Net income (loss) (2)......................... $ 0.48 $ 0.12 $ 0.72 $ (0.06) $ 1.45 $ 2.28 $ (0.26)
======== ======== ======== ======== ======= ======== ========
Weighted average number of common and common
stock equivalents outstanding.............. 8,462 4,782 2,601 2,601 2,576 2,363 2,267
======== ======== ======== ======== ======= ======== ========
Proforma (unaudited) (4):
Net income.................................... $ 1.03 $ 0.53 N/A N/A N/A N/A N/A
======== ========
Weighted average number of common and
common stock-equivalents outstanding......... 11,993 11,420 N/A N/A N/A N/A N/A
======== ========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of May 31,
------------------------------------ ----------------------------------
1997 1996 1995 1995 1994 1993
-------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............................ $ 45,560 $ 8,702 $ 3,984 $ 4,805 $ 5,540 $ 4,208
Total assets............................... 243,649 193,448 155,018 25,499 14,172 4,392
Long-term debt and subordinated debt,
less current maturities................. 78,913 107,795 83,559 4,558 676 264
Preferred stock (3)........................ - 21,305 19,455 9,187 4,300 1,650
Net shareholders' equity (deficit)......... 113,104 11,952 10,869 2,082 1,527 (1,051)
----------------------------------------
</TABLE>
(1) During 1995, the Company changed its fiscal year from May 31 to December
31 resulting in a seven month transition period ending December 31, 1995.
(2) Net income (loss) per common share for the fiscal years ended December
31, 1997 and 1996 excludes dividends and accretion on preferred stock of
$5.9 million and $2.2 million, respectively.
(3) Carried at estimated redemption value with accretion of dividends
charged against shareholders' equity.
(4) Proforma assumes the Offering occurred as of the beginning of each period
presented, and reflects the estimated reduction in interest expense, net
of the related tax effect, and the reduction in preferred dividends and
accretion. Proforma also excludes the extraordinary loss on early
extinguishment of debt recorded in the third quarter of 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Consolidated Statements of Operations for the year ended December 31, 1997.
GENERAL
At December 31, 1997, the Company operated 84 long-term care facilities
(8,850 beds), two hospitals (65 beds), 30 home health offices and a contract
therapy business providing physical, speech and occupational rehabilitation
services under approximately 128 contracts. During 1997 the Company grew both
through same store growth and through acquisitions.
During the year the Company added 9 new facility management contracts,
acquired a provider of home health services in North Carolina where the Company
operated 23 facilities, acquired the assets of a therapy service provider and
began operating, through lease arrangements, two rural acute care hospitals.
During 1996, the Company grew through the acquisition of two facilities
previously managed by the Company and the acquisition of THS, which closed
effective December 31, 1995.
In August 1997, the Company acquired substantially all of the business and
assets of Complex Care, Inc. ("CCI"), a provider of physical, occupational and
speech therapy services through approximately 45 contracts with long-term care
facilities in Connecticut and Rhode Island. Total revenues associated with CCI
approximated $6.1 million during 1997. In May 1997, the Company acquired Total
Care Consolidated, Inc. ("TCC"), a provider of home health services, with 25
home health offices located primarily in North Carolina. Total revenues
associated with TCC approximated $18.6 million during 1997. During March and
June 1997, the Company began operating two rural hospitals providing acute care
services with a total of 65 beds. The hospitals are located in north Florida and
are operated under operating leases. In October 1996, the Company acquired two
previously managed long- term care facilities located in Michigan with a total
of 185 beds. Effective December 1995, the Company acquired all of the capital
stock of Transitional Health Services, Inc. ("THS") which operated 36 long-term
care facilities (3,776 beds) and provided therapy rehabilitation services
through its subsidiary Paragon Rehabilitation, Inc. under 35 contracts.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$227.4 million in 1996 to $296.3 million in 1997, an increase of $68.9 million
or 30.3%, of which approximately $20.7 million was attributable to the addition
of the operations of three long-term care facilities and two rural hospitals.
TCC and the CCI contracts added revenues of approximately $18.6 million and $6.1
million, respectively during the year ended December 31, 1997. The remaining
increase of $23.5 million was attributable to growth in existing facility
revenues and therapy services contract revenues. The increase in existing
facility revenues during 1997 of $14.9 million resulted primarily from a shift
in payor mix from Medicaid to Medicare resources and commercial payors,
increases in Medicaid rates over those experienced in 1996, and favorable
settlements of prior year open cost reports. During 1997, occupancy levels at
the Company's long-term care facilities remained consistent with 1996 at
approximately 92%. The increase in revenues at the Company's subsidiary
providing therapy services of $8.6 million, exclusive of the CCI contracts,
resulted from the net addition of 19 rehabilitation therapy services contracts
during 1997 as well as an overall increase in therapy revenue related to
existing contracts.
22
<PAGE>
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $5.7 million in 1996 to $8.0 million in 1997, an increase of $2.3
million, or 40.5%, which was primarily attributable to the Company's addition of
facility management agreements during 1997.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $183.3
million in 1996 to $234.6 million in 1997, an increase of $51.3 million or
28.0%, of which approximately $16.4 million was attributable to the addition of
the operations of three long-term care facilities and two hospitals. TCC and the
CCI therapy contracts added approximately $17.0 million and $5.2 million,
respectively, to operating expenses during 1997. The Company's expenses from
existing contract therapy services increased $9.3 million over the prior year
period related primarily to growth in therapy contracts during 1997. The
remaining $3.4 million was attributable primarily to an increase in costs at
existing long-term care facilities and to providing care for higher acuity
patients during the current year period.
LEASE EXPENSE. Lease expense increased from $18.8 million in 1996 to $21.4
million in 1997, an increase of $2.6 million, or 14.0%, of which approximately
$1.2 million was attributable to the addition of one leased long-term care
facility and two leased hospitals. The remaining $1.4 million increase was due
primarily to an expansion of the Company's corporate office lease, and rent
escalations in certain facility leases, which are tied to increases in operating
revenue and income.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$11.4 million in 1996 to $16.1 million in 1997, an increase of $4.7 million, or
40.8%, which was primarily attributable to additional overhead to accommodate
the expansion in therapy services contracts, including the acquisition of the 45
CCI contracts, the addition of long-term care facility management agreements and
the Company's new home health and hospital operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$5.0 million in 1996 to $6.8 million in 1997, an increase of $1.7 million, or
34.9%, which was primarily attributable to facility acquisitions during the
fourth quarter of 1996.
INTEREST EXPENSE. Interest expense decreased from $10.1 million in 1996 to $8.7
million in 1997, a decrease of approximately $1.4 million or 14.0%, which was
attributable to the reduction of debt by approximately $60.4 million as a result
of the Offering, net of the additional expense incurred as a result of
borrowings for the acquisition of two long-term care facilities.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased from
41.4% in 1996 to 39.0% in 1997, a decrease in the rate of 2.4%. This decrease
was attributable primarily to an expected decline in the Company's average state
tax rate and a proportional decrease in non-deductible expenses for federal tax
purposes.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$71.9 million in 1995 to $227.4 million in 1996, an increase of $155.5 million
or 216.3%, of which $148.3 million was attributable to the THS Merger,
$4.0 million was attributable to other facility acquisitions, and $3.2 million
was attributable to growth in existing facility revenues that resulted primarily
from a shift in payor mix from Medicaid to Medicare and general rate increases.
Occupancy levels at the Company's facilities decreased from 95.0% at December
31, 1995 to 92.7% at December 31, 1996 primarily as a result of the THS Merger.
Occupancy rates, excluding THS's facilities, were 95.0% at December 31, 1995
versus 94.0% at December 31, 1996.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $3.4 million in 1995 to $5.7 million in 1996, an increase of $2.3
million or 67.6%, of which approximately $500,000 was attributable to the
addition of two facility management agreements in 1996, one of which was
acquired in the THS Merger, and the addition of a management agreement
for a rural hospital, and $1.4 million was attributable to the recognition of
management fees for a portion of 1996 for seven facilities, as compared to only
two months of recognized management fees in 1995 for those facilities. The
remaining $400,000 increase resulted from increased revenues over the prior year
in the Company's existing managed facilities.
23
<PAGE>
FACILITIES OPERATING EXPENSES. Facility operating expenses increased from
$58.6 million in 1995 to $183.3 million in 1996, an increase of $124.7 million
or 212.8%, of which approximately $121.9 million was attributable to the
facilities added through the THS Merger, $3.1 million was attributable
to other facility acquisitions and $600,000 was attributable to an increase in
expenses at existing facilities. The increase in operating expenses was offset
in part by a $900,000 decrease in expenses attributable to certain unusual
charges related to reserves for patient accounts receivable and accrued expenses
related to employee benefits included in 1995.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased
from $5.0 million in 1995 to $11.4 million in 1996, an increase of $6.4 million
or 128.0%, of which approximately $3.5 million resulted from overhead related to
the Company's acquired rehabilitation contract therapy business and $3.9 million
was primarily attributable to the integration of THS and the addition of
corporate personnel. The increase in these costs was offset in part by a $1.0
million decrease attributable to certain unusual charges related to the
write-off of advances to a facility no longer managed by the Company and certain
transactional costs related to proposed financing activities during 1995.
LEASE EXPENSE. Lease expense increased from $7.7 million in 1995 to $18.8
million in 1996, an increase of $11.1 million or 144.2%, of which approximately
$10.3 million was attributable to the THS Merger, and a portion of the
remaining increase was attributable to the Company's relocation and expansion to
its new corporate offices and the net sublease cost of its previous space.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
from $738,000 in 1995 to $5.0 million in 1996, an increase of $4.3 million, of
which approximately $3.9 million was attributable to an increase in depreciation
and goodwill associated with the THS Merger. The remaining amount was
attributable to other acquisitions.
INTEREST EXPENSE. Interest expense increased from $590,000 in 1995 to $10.1
million in 1996, an increase of $9.5 million, of which approximately $8.4
million was attributable to the THS Merger (whereby the Company assumed
approximately $73.8 million in debt), and the remainder was attributable to
additional borrowings.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
40.1% in 1995 to 41.4% in 1996, an increase in the rate of 1.3%. This increase
was primarily attributable to the THS Merger and permanent differences relating
to the amortization of goodwill. These permanent differences will not change in
future periods but will vary as a percentage of pre-tax income or loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash have been proceeds from the sales of
its stock and borrowings under its Second Amended and Restated Credit Facility
with CoreStates Bank, N.A. and NationsBank, N.A., as agents and lender and the
other lenders named therein (the "Senior Credit Facility"). Cash has been used
by the Company for acquisitions, capital improvements at several existing
facilities and the day-to-day operations of the Company's business. The Company
anticipates using borrowings under the Senior Credit Facility to fund the growth
in operations of its existing facilities, the expansion and development of
specialty services, and the acquisition or management of additional long-term
care facilities and related service providers. As detailed below, the Company
used proceeds from the Offering to reduce debt and redeem its Series E
Redeemable Preferred Stock.
Working capital increased from $8.7 million at December 31, 1996 to $45.6
million at December 31, 1997, primarily due to increases in patient accounts
receivable. Patient accounts receivable increased from $39.9 million at December
31, 1996 to $72.2 million at December 31, 1997, an increase of $32.3 million,
of which $19.7 million was attributable to the Company's long-term care
facilities. Approximately $8.8 million of this increase relates to the addition
of the operations of three long-term care facilities and two rural hospitals
during 1997. The remaining increase in existing long-term care facility
receivables of $10.9 million was due primarily to a shift in payor mix toward
Medicare resources associated with the Company's continued expansion in
specialty services. Costs incurred under the Medicare program are reimbursed on
24
<PAGE>
a retroactive basis, which extends the collection time of these receivables.
Increases in accounts receivable associated with the Company's contract therapy
business totaled approximately $9.7 million and resulted from the net addition
of 64 rehabilitation therapy contracts (including the 45 contracts purchased
from CCI) as well as growth in existing contracts. The remaining $2.9 million
increase in accounts receivable relates primarily to receivables associated with
TCC.
The Company continued to invest in its leased and owned facilities through
capital expenditures of approximately $7.6 million or approximately $1,300 per
bed. These expenditures included the expansion of existing facilities, the
selected rehabilitation of certain facilities and ordinary repairs and
maintenance. In May, the Company acquired TCC for $8.0 million, consisting of
$6.0 million in cash, which was funded under the Senior Credit Facility, and
$2.0 million in the form of a convertible promissory note. In August, the
Company acquired the CCI contracts for total consideration of $7.0 million,
utilizing borrowings under its Senior Credit Facility. Additional consideration
of up to $500,000 may be paid by the Company under an earn-out agreement. In
December 1997, Centennial acquired a previously managed long-term care facility
located in Florida (the "Florida Facility") for approximately $3.3 million,
utilizing borrowings of $1.1 million under its Senior Credit Facility.
The Company financed its activities during 1997 with $10.0 million in proceeds
from the issuance of two series of preferred stock, $8.0 million in borrowings
for the TCC acquisition, including $6.0 million in borrowings under the Senior
Credit Facility, and $7.0 million and $1.1 million in borrowings for the
acquisition of the CCI therapy contracts and the acquisition of a previously
managed long-term care facility, respectively, from its Senior Credit Facility.
In addition, Centennial borrowed $14.5 million in working capital loans under
the Senior Credit Facility which were utilized primarily to finance capital
expenditures at existing facilities and to provide working capital. During the
third quarter, the Company completed its initial public offering (the
"Offering") through the issuance of 4.6 million shares of Common Stock
(including exercise of the underwriters overallotment option). The Company
received proceeds of approximately $66.8 million, net of underwriting discounts
and commissions and Offering expenses. These proceeds were used to repay two
subordinated promissory notes aggregating $25.3 million, to redeem the Series E
Redeemable Preferred Stock for $5.0 million, to repurchase approximately 84,000
shares of Common Stock, which were received by the former holders of the
Company's Series C Preferred Stock, for approximately $1.3 million, and to repay
approximately $35.1 million outstanding under the Company's Senior Credit
Facility. Amounts repaid under the Senior Credit Facility are available for re-
borrowing.
On December 16, 1997, the Company expanded its Senior Credit Facility through
an amendment to its existing Amended and Restated Credit Agreement. Through the
amendment, the Company's maximum aggregated advance limit was increased from
$65.0 million to $125.0 million. Company advances under the Senior Credit
Facility may be used for acquisitions, capital expenditures, working capital and
general corporate purposes. At December 31, 1997, the Company had $41.3 million
outstanding under its Senior Credit Facility. The Company's borrowing capacity
under the Senior Credit Facility is dependent upon its ability to satisfy
certain financial covenants that are impacted by its debt and capital structure.
At December 31, 1997, the Company was in compliance with all of its debt
covenants.
The Company believes that operating cash flow and availability under the
Senior Credit Facility will be sufficient to finance its activities and to fund
future acquisitions.
HEALTH CARE REFORM
The Balanced Budget Act of 1997, (the "Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth for skilled
nursing facilities over the next five years, primarily through the
implementation of a Medicare prospective payment system for skilled nursing
facility services. While the methodology for the prospective payment rates have
been generally established, actual rates have not been released.
25
<PAGE>
Management believes that, due to the cost structure at its facilities in 1995
and its costs as compared to other facilities in its markets, the Company's
overall reimbursement rates should not be lower than current rates and could
possibly be higher. However, until the rates are ultimately determined under the
prospective payment system, the Company will not be able to determine the exact
nature or long term financial impact of the legislative changes. The Company can
give no assurance that payments under such programs in the future will remain at
a level comparable to the present level or increase, and decreases in the level
of payments could have a material adverse effect on the Company.
Effective April 1, 1998, regulations were adopted by Health Care Financing
Administration, which temporarily change the basis of reimbursement for contract
therapy services including physical therapy, respiratory therapy, occupational
therapy and speech language pathology. During 1997, the Company derived 7% of
its revenue from third-party contract therapy services. These regulations impose
regionally-adjusted salary equivalency rates as reimbursement caps for
occupational, speech and physical therapy. In most locations the reduced rates
have the effect of reducing the amount of reimbursement for a unit of
occupational or speech therapy and increasing the amount of reimbursement for a
unit of physical therapy. The Company believes that such rate reductions will be
completely or partially offset by cost reductions and changes in the method of
delivering such services. Due to these changes in operations and cost structure
and the relative size of the Company's therapy business, the Company does not
expect these reimbursement changes to have a material adverse effect on the
Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of 1997, Centennial adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", (SFAS No. 128). Prior year
amounts have been restated in accordance with SFAS No. 128. Basic earnings per
share is computed by dividing income applicable to common stock by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed similarly but reflects the potential dilution that could
occur if options were exercised or convertible securities were converted into
common stock. The assumption of the conversion of Series A and B Preferred Stock
was anti-dilutive during 1996. The accretion and dividends accrued on Series A
and B Preferred Stock and the accretion and dividends on Series C Preferred
Stock was deducted from net income in the computation of net income applicable
to common stock in 1997 and 1996. See Note 20 to the Consolidated Financial
Statements for a computation of basic earnings per share and diluted earnings
per share.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Both Statements are
effective for fiscal years beginning after December 15, 1997. The Company has
not yet determined the effect, if any, of these statements on its consolidated
financial statements.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
coming millennium, any of the Company's computer programs that have two digit
data-sensitive software may interpret a date of "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
Management is in the process of evaluating the effect of the Year 2000 Issue
on the Company. Based on preliminary findings, the total cost of addressing the
Year 2000 Issue is not expected to have a material effect on the Company's
business, financial condition or results of operations. However, management is
in the process of completing its assessment of the potential impact of the Year
2000 Issue on the Company and the potential exposure of the Company to related
problems of its customers and supplies. There can be no assurance that such
exposures on the costs of remediating any problems associated therewith will not
materially affect the Company's future business, financial condition or results
of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, together with the report
thereon of Coopers & Lybrand L.L.P., dated March 27, 1998, begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the heading "Information Concerning
Directors" in the Company's definitive proxy statement for its annual meeting
of stockholders to be held on May 21, 1998 (the "1998 Proxy Statement") is
incorporated herein by reference. See Item 4A of Part I hereof for
information regarding the Company's executive officers.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" in
the 1998 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the headings "Information Concerning
Directors" and "Principal Stockholders" in the 1998 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" in
the 1998 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Listed on the Index to the Financial Statements and Schedules on page F-
1 of this Report.
(2) Financial Statement Schedules
Listed on the Index to the Financial Statements and Schedules on page F-
1 of this Report.
(3) Exhibits
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
- - ------- ---------------------------------------------------------------------------------
<S> <C>
3.1 -- Third Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, Registration No. 333-24267, as amended).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement on Form S-1 Registration No.
333-24267, as amended).
4.1 -- Third Amended and Restated Articles of Incorporation of the Company, including,
without limitation Article III and Articel VII (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended).
10.1 -- WelCare International, Inc. 1994 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.2 -- WelCare International, Inc. 1996 Executive Stock Plan (incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.3 -- WelCare International, Inc. 1996 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.4 -- Centennial HealthCare Corporation 1997 Stock Plan (incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
10.5 -- Second Amended and Restated Credit Agreement dated December 16, 1997 by and
among Centennial HealthCare Corporation and the Borrowers named therein, the
Lenders named therein, and Core States Bank, N.A. and NationsBank, N.A., as
lenders and agents for the Lenders
10.6 -- Amended and Restated Employment Agreement between WelCare International, Inc.
and J. Stephen Eaton dated December 31, 1995 (incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
10.7 -- Amended and Restated Employment Agreement between Paragon Rehabilitation, Inc. and Laurence
W. Lepley, Jr. dated as of January 1, 1998.
10.8 -- Registration Rights Agreement dated December 31, 1995 by and between the Company
and the Shareholders as defined therein, as amended (incorporated by reference
to Exhibit 10.8 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.9 -- Lease between Grant Park Nursing Home L.P. and WelCare Acquisition Corp. n/k/a
Centennial Acquisition Corporation ("CAC") commencing on January 1, 1993
(incorporated by reference to Exhibit 10.9 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.10 -- Amended and Restated Lease Agreement by and between Ashton Woods Limited
Partnership and WelCare/Ashton Properties, Inc. n/k/a Centennial /Ashton
Properties Corporation ("CAPC"), dated December 20, 1994 (incorporated by
reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.11 -- Amended and Restated Lease Agreement by and between EBT Healthcare Properties,
L.P. and CHPC dated July 6, 1994 (incorporated by reference to Exhibit 10.12 of the
Company's Registration Statement on Form S-1, Registration No. 333-24267, as
amended)
10.12 -- Operating Lease by and between Health Care Property Investors, Inc. and Cardinal
of Indiana, Inc., as amended by that certain Amendment to Operating Lease dated
November 1, 1993, as amended by that certain Second Amendment to Operating Lease
dated April 1, 1994, as amended by that certain Third Amendment to Operating
Lease dated March 31, 1995, as amended by that certain Fourth Amendment to
Operating Lease dated January 1, 1996, as assigned. (incorporated by reference
to Exhibit 10.13 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.13 -- Lease Agreement by and between Healthcare Realty Trust Incorporated and Cardinal
Development Co., Inc. ("Cardinal"), as amended by that certain Amendment Number
One to Lease Agreement dated November 1, 1993, as assigned to THP pursuant to
that certain Lease Agreement, Consent and Release dated March 1, 1994
(incorporated by reference to Exhibit 10.16 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
10.14 -- Lease Agreement by and between House Investments - Nursing Homes Partners I and
THP dated November 1, 1993 (incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement on Form S-1, Registration No. 333-24267, as
amended)
10.15 -- Operating Lease by and between HCPI Charlotte, Inc. and THP dated June 19, 1995
(incorporated by reference to Exhibit 10.20 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.16 -- Amended and Restated Management Agreement by and between Montclair Medical
Investors, Ltd., and CHMC dated January 1, 1995 (incorporated by reference to
Exhibit 10.28 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
11.1 -- Statement Regarding Computation of Per Share Earnings
21.1 -- List of Subsidiaries
23.1 -- Consent of Coopers & Lybrand, L.L.P.
27.1 -- Financial Data Schedule
27.2 -- Restated Financial Data Schedule (Annual)
27.3 -- Restated Financial Data Schedule (Quarterly)
99.1 -- Cautionary Statements Regarding Forward-Looking Statements
</TABLE>
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fourth
quarter of 1997.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the
Company has duly caused this Form 10-K to be signed on behalf of the
undersigned, thereunto duly authorized, on March 30, 1998.
CENTENNIAL HEALTHCARE CORPORATION
/s/ J. Stephen Eaton
By:____________________________________________
J. Stephen Eaton
Chairman, President and Chief Executive Officer
Pursuant to the Requirements of the 1934 Act, this Form 10-K has been
signed below by the following persons in the capacities indicated on March
30, 1998.
Signatures
/s/ J. Stephen Eaton Chairman, President and Chief Executive Officer
- - -----------------------------
J. Stephen Eaton
/s/ Alan C. Dahl Senior Vice President, Chief Financial
- - ----------------------------- Officer and Director
Alan C. Dahl
/s/ Andrew M. Paul Director
- - -----------------------------
Andrew M. Paul
/s/ James B. Hoover Director
- - -----------------------------
James B. Hoover
/s/ Robert A. Ortenzio Director
- - -----------------------------
Robert A. Ortenzio
/s/ Bertil D. Nordin Director
- - -----------------------------
Bertil D. Nordin
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----------
<S> <C>
Report of Independent Accountants.......................................................................
Consolidated Balance Sheets at December 31,1997 and 1996 ...............................................
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995.........................................................................................
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995........................................................................................
Notes to Consolidated Financial Statements..............................................................
Quarterly Consolidated Financial Information (Unaudited)................................................
Financial Statement Schedules (a):
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995......................................................................
- - ----------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Centennial HealthCare Corporation
We have audited the accompanying consolidated balance sheets of Centennial
HealthCare Corporation and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed on page F-1. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Centennial HealthCare Corporation and subsidiaries as of December 31, 1997 and
1996 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 27, 1998
F-2
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 4,011 $ 6,030
Patient accounts receivable and third-party payor settlements, net
of allowance for doubtful accounts of approximately $3,000 and $2,500.................... 72,222 39,854
Other receivables......................................................................... 14,612 5,986
Deferred income taxes..................................................................... 2,511 3,883
Prepaid expenses and other current assets................................................. 1,259 2,665
-------- --------
Total current assets.................................................................. 94,615 58,418
Property and equipment, net............................................................... 74,379 67,409
Notes and advances receivable, net........................................................ 11,301 11,152
Refundable deposits, including amounts due from affiliates of $2,875...................... 4,399 4,335
Intangible assets, less accumulated amortization of $2,642 and $1,110..................... 51,331 36,297
Other assets.............................................................................. 7,624 15,837
-------- --------
Total assets.......................................................................... $243,649 $193,448
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................................................... $ 1,576 $ 1,711
Accounts payable and accrued expenses..................................................... 25,253 27,120
Accrued payroll........................................................................... 11,773 8,269
Accrued lease payable..................................................................... 3,759 2,716
Estimated merger closure costs............................................................ 3,391 3,391
Other liabilities......................................................................... 3,303 6,509
-------- --------
Total current liabilities............................................................. 49,055 49,716
Long-term debt, less current maturities..................................................... 78,913 83,438
Subordinated debt, less current maturities.................................................. - 24,357
Other long-term liabilities................................................................. 2,577 2,680
-------- --------
130,545 160,191
Commitments and contingencies
Redeemable preferred stock.................................................................. - 21,305
Shareholders' equity:
Common stock with par value of $.01; 50,000,000 shares
authorized; 11,862,320 and 2,044,306 shares issued;
11,862,320 and 1,804,446 shares outstanding.............................................. 119 20
Special voting common stock with no par value; 5,000,000 shares
authorized; -0- and 2,941,325 shares issued and outstanding............................. - -
Paid-in capital........................................................................... 101,299 5,707
Retained earnings......................................................................... 12,214 8,240
Treasury stock, at cost; -0- and 239,860 shares of common stock.......................... - (1,487)
-------- --------
113,632 12,480
Note receivable from shareholder............................................................ (528) (528)
-------- --------
Net shareholders' equity.............................................................. 113,104 11,952
-------- --------
Total liabilities and shareholders' equity............................................ $243,649 $193,448
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the year ended
December 31,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Net patient service revenues........................................................ $296,321 $227,387 $71,862
Management fees and other revenues.................................................. 7,952 5,661 3,364
-------- -------- -------
Total revenues.................................................................... 304,273 233,048 75,226
-------- -------- -------
Expenses:
Facility operating expenses:
Salaries, wages and benefits.................................................... 154,841 107,038 31,651
Other operating expenses........................................................ 79,755 76,286 26,914
Lease expense....................................................................... 21,403 18,777 7,702
Corporate administrative costs...................................................... 16,055 11,400 5,027
Depreciation and amortization....................................................... 6,760 5,012 738
-------- -------- -------
Total operating expenses......................................................... 278,814 218,513 72,032
-------- -------- -------
25,459 14,535 3,194
-------- -------- -------
Other income (expense):
Interest income.................................................................... 636 695 414
Interest expense................................................................... (8,658) (10,068) (590)
Equity in income (loss) of unconsolidated partnerships............................. - (108) 448
-------- -------- -------
Total other expense............................................................. (8,022) (9,481) 272
-------- -------- -------
17,437 5,054 3,466
Provision for income taxes............................................................ 6,800 2,092 1,389
-------- -------- -------
Income before minority interest and extraordinary loss................................ 10,637 2,962 2,077
Minority interest in net income of subsidiary, net of income taxes.................... (252) (183) (201)
-------- -------- -------
Income before extraordinary loss...................................................... 10,385 2,779 1,876
Extraordinary loss on extinguishment of debt, net of income tax benefit............... (537) - -
-------- -------- -------
Net income...................................................................... 9,848 2,779 1,876
Dividends and accretion on preferred stock............................................ 5,874 2,192 -
-------- -------- -------
Income applicable to common stock..................................................... $ 3,974 $ 587 $ 1,876
Net income per common and common equivalent share:
Basic:
Income applicable to common stock before extraordinary loss......................... $ 0.54 $ 0.12 $ 1.25
Extraordinary loss on extinguishment of debt........................................ (0.06) - -
-------- -------- -------
Income applicable to common stock................................................. $ 0.48 $ 0.12 $ 1.25
======== ======== =======
Diluted:
Income applicable to common stock before extraordinary loss......................... $ 0.54 $ 0.12 $ 0.72
Extraordinary loss on extinguishment of debt........................................ (0.06) - -
-------- -------- -------
Income applicable to common stock................................................. $ 0.48 $ 0.12 $ 0.72
======== ======== =======
Weighted average number of common stock and common stock equivalents outstanding
Basic............................................................................... 8,289 4,742 1,506
======== ======== =======
Diluted............................................................................. 8,462 4,782 2,601
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Special Voting Note
Common Stock Common Stock Receivable
----------------- --------------- Paid-In Retained Treasury From
Shares Amount Shares Amount Capital Earnings Stock Shareholder Net
------- -------- ------ ------ --------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994... 1,505 $ 17 - $ - $ - $ 1,953 $(1,487) $ - $ 483
Dividends paid on Series A and
B preferred stock........... - - - - - (341) - - (341)
Exercise of stock options...... 96 1 - - 359 - - - 360
Special voting common stock
issued in connection with
merger....................... - - 2,941 - 4,854 - - (528) 4,326
Accretion of preferred stock to
estimated redemption value... - - - - - 4,165 - - 4,165
Net income..................... - - - - - 1,876 - - 1,876
------ ------- ------- ------ -------- ------- ------- ------ --------
Balance at December 31, 1995... 1,601 18 2,941 - 5,213 7,653 (1,487) (528) 10,869
Dividends paid on Series A and
B preferred stock.......... - - - - - (341) - - (341)
Dividends accrued on
Series C preferred stock.... - - - - - (1,470) - - (1,470)
Exercise of stock options...... 203 2 - - 170 - - - 172
Exercise of special voting
stock options................ - - 1 - 6 - - - 6
Tax benefit on options
exercised.................... - - - - 318 - - - 318
Accretion of preferred stock to
estimated redemption value.. - - - - - (381) - - (381)
Net income..................... - - - - - 2,779 - - 2,779
------ ------- ------- ------ -------- ------- ------- ------ --------
Balance at December 31, 1996... 1,804 20 2,942 - 5,707 8,240 (1,487) (528) 11,952
Dividends paid on Series A, B
and E preferred stock...... - - - - - (462) - - (462)
Dividends accrued on
Series C preferred stock.... - - - - - (865) - - (865)
Exercise of stock options...... 3 - 1 - 36 - - - 36
Accretion of preferred stock to
estimated redemption value.. - - - - - (106) - - (106)
Issuance of common shares...... 64 1 - - 777 - - - 778
Public offering of
common stock................ 4,600 44 - - 66,917 - 1,487 - 68,448
Offering costs for
common stock................ - - - - (1,679) - - - (1,679)
Conversion of special voting
common stock
due to Offering............. 2,943 29 (2,943) - (29) - - - -
Redemption of Series E
preferred stock............. - - - - - (715) - - (715)
Conversion of Series A, B,
C and D preferred stock..... 2,532 25 - - 30,912 (3,726) - - 27,211
Repurchase of Series C
preferred stock............. (84) - - - (1,342) - - - (1,342)
Net income..................... - - - - - 9,848 - - 9,848
------ ------- ------- ------ -------- ------- ------- ------ --------
Balance at December 31, 1997... 11,862 $ 119 - $ - $101,299 $12,214 $ - $ (528) $113,104
====== ======= ======= ====== ======== ======= ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the year ended
December 31,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Operating Activities:
Net income................................................................................... $ 9,848 $ 2,779 $ 1,876
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization............................................................ 6,760 5,012 738
Amortization of discount on subordinated debt............................................ 62 114 -
Extraordinary loss on extinguishment of debt............................................. 880 - -
Deferred income taxes.................................................................... 3,881 1,698 (1,096)
Consulting expenses offset against note receivable....................................... 78 125 125
Equity in income of unconsolidated partnerships.......................................... - (145) (449)
Minority interest........................................................................ 413 305 335
Provision for doubtful accounts.......................................................... 863 852 1,035
Loss on sale of equipment................................................................ - 25 -
Loss on sale of investment in unconsolidated partnerships................................ - 253 -
Change in assets and liabilities:
Accounts receivable................................................................... (29,167) (15,733) (6,315)
Prepaid expenses and other assets..................................................... (1,525) 1,364 2,645
Refundable deposits................................................................... (28) (29) -
Accounts payable, accrued liabilities and other current liabilities................... (935) 11,322 4,313
Other................................................................................. (140) 165 (534)
-------- -------- -------
Cash provided by (used in) operating activities................................... (9,010) 8,107 2,673
-------- -------- -------
Investing Activities:
Purchases of property and equipment.......................................................... (7,567) (6,686) (5,399)
Proceeds from the sale of equipment.......................................................... - 600 -
Notes and advances receivable, net of repayments............................................. (8,232) (13,381) (1,270)
Distributions received from unconsolidated partnerships...................................... - - 300
Acquisitions, net of cash acquired........................................................... (17,355) (9,100) 2,248
Other........................................................................................ 3,127 (1,763) (3,113)
-------- -------- -------
Cash used in investing activities................................................. (30,027) (30,330) (7,234)
-------- -------- -------
Financing Activities:
Proceeds from the exercise of stock options.................................................. 36 178 360
Proceeds from issuance of preferred stock.................................................... 10,000 - -
Proceeds from borrowings..................................................................... 28,750 47,047 6,750
Public offering of Common Stock.............................................................. 68,448 - -
Payment of stock offering costs.............................................................. (1,679) - -
Distributions paid to minority partners...................................................... (494) (299) (85)
Payments of dividends to preferred shareholders.............................................. (462) (341) (341)
Payments on amounts due to related party..................................................... (528) (361) -
Redemption of Series E Preferred Stock....................................................... (5,000) - -
Repurchase of Series C Preferred Stock....................................................... (1,343) - -
Principal payments on subordinated debt...................................................... (25,300) - -
Principal payments on long-term debt......................................................... (35,410) (22,865) (1,581)
-------- -------- -------
Cash provided by financing activities............................................. 37,018 23,359 5,103
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........................................... (2,019) 1,136 542
Cash and cash equivalents, beginning of period................................................. 6,030 4,894 4,352
-------- -------- -------
Cash and cash equivalents, end of period....................................................... $ 4,011 $ 6,030 $ 4,894
======== ======== =======
Supplemental disclosure:
Income taxes paid............................................................................ $ 1,289 $ 1,058 $ 1,363
Interest paid................................................................................ $ 9,236 $ 9,840 $ 533
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Centennial HealthCare Corporation ("Centennial" or the "Company")(formerly
known as WelCare International, Inc.) was incorporated in February 1989 under
the laws of the State of Georgia. The Company's principal business is to provide
basic and specialty healthcare services to patients in a post acute setting. At
December 31, 1997, subsidiaries of the Company operated 84 owned, leased and
managed long-term care facilities with 8,850 licensed available beds in 19
states and the District of Columbia. In addition, through its subsidiaries, the
Company provided comprehensive contract rehabilitation services to Company-owned
and third party long-term care facilities pursuant to 128 contracts, as well as
home health services through 30 licensed home health offices.
In July 1997, Centennial completed an initial public offering of 4,000,000
shares of the Company's Common Stock (the "Offering"). In connection with the
Offering, the Company granted the underwriters an option to purchase up to
600,000 additional shares of the Company's Common Stock. This option was
exercised and closed in July 1997, (see Note 2).
At December 31, 1996, certain subsidiaries of the Company held general partner
interests in certain public and private limited partnerships, the majority of
which own and operate long-term care facilities. Centennial's general partner
interests in those partnerships ranged from .49% to 3.992%. Certain subsidiaries
which owned these partnership interests were sold on January 30, 1997.
Effective December 31, 1995, the Company merged with Transitional Health
Services, Inc. ("THS"), a company that operated 36 nursing homes and provided
rehabilitation services in ten states. Prior to the merger with THS, the Company
operated 39 long-term care facilities through either management contracts, lease
agreements or direct ownership.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, and a majority-owned (55%) affiliated limited
partnership.
The Company accounted for its investments in certain other limited
partnerships in which the Company served as a general partner under the equity
method. The investments were recorded at cost and adjusted for Centennial's
share of earnings or losses and cash distributions.
All significant intercompany accounts have been eliminated.
REVENUES
Revenues to be received from patients at Centennial's long-term care
facilities are recorded at established billing rates. Revenues to be reimbursed
by contracts with third-party payors, primarily Medicare and Medicaid programs,
are recorded at the amount estimated to be realized under these contractual
arrangements. Revenues from the management of long-term care facilities and
acute care hospitals are recognized over the period during which the services
are rendered. Revenues from Medicare and Medicaid are generally based on
F-7
<PAGE>
reimbursement of allowable costs of providing services to program beneficiaries.
The Company estimates amounts due from third-party payors and records the
revenue in the period services are rendered. Amounts ultimately payable by
Medicare and Medicaid are determined based on annual cost reports which are
subject to audit and retroactive adjustment by the payor. Changes in estimated
revenues due in connection with Medicare and Medicaid may be recorded by the
Company subsequent to the year of origination and prior to final settlement
based on improved estimates. Differences between estimated amounts due from the
Medicare and Medicaid programs and ultimate settlements with these programs are
recognized in the year of final settlement.
Costs reimbursed under the Medicare program are subject to regional limits.
The costs at certain of the Company's facilities have frequently exceeded these
limits and, accordingly, the Company is required to submit exception requests to
cover such excess costs. The accompanying balance sheets include amounts
estimated to be recoverable under such exception requests.
Accounts receivable, net, at December 31, 1997 and 1996 includes $44.4 million
and $28.4 million, respectively, of amounts due from Medicare and Medicaid
programs.
The Company is not aware of any material claims, disputes, or other unsettled
matters related to third-party reimbursements, other than those reflected on its
balance sheets, and believes retroactive adjustments related to these
receivables will not be material.
CONCENTRATIONS
A significant portion of the Company's revenues are derived from the Medicare
and Medicaid programs. The Balanced Budget Act of 1997, ("the Act"), enacted in
August 1997, has targeted the Medicare program for reductions in spending growth
of approximately $49.2 billion for skilled nursing facilities over the next five
years, primarily through the implementation of a Medicare prospective payment
system for skilled services (see Note 19). In addition to the Act, there have
been, and the Company expects that there will continue to be, a number of
additional proposals to limit reimbursements to long-term care facilities under
the Medicare and Medicaid programs. Centennial cannot predict whether any of
these additional proposals will be adopted, or if adopted and implemented, what
effect such proposals would have on the Company. Approximately 60%, 68%, and 76%
of the Company's total revenues for the years ended December 31, 1997, 1996 and
1995, respectively, are from the Medicare and Medicaid programs. While the
Company operates long-term care facilities in 18 states and the District of
Columbia, 33 of its 55 owned or leased facilities are located in North Carolina,
Indiana and Michigan.
FACILITY OPERATING EXPENSES
Facility operating expenses include direct operating costs at the facility
level. The majority of these costs consist of payroll and employee benefits
related to nursing, housekeeping and dietary services provided to patients, as
well as maintenance and administration of the facilities. Other significant
facility operating expenses include medical and pharmacy supplies, food,
utilities, and the cost of rehabilitation therapies.
INCOME TAXES
Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred taxes are provided for the differences between the tax and
accounting bases of the Company's assets and liabilities. For Federal income tax
purposes, the Company and its subsidiaries file a consolidated income tax
return.
F-8
<PAGE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of five to ten years for equipment, five to 15 years for furniture and 30
to 40 years for buildings and improvements.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities, and are amortized using the
straight-line method, primarily over a 30 to 40 year period.
ASSESSMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying values of its long-lived assets
(primarily property and equipment and intangible assets) whenever events or
circumstances provide evidence that suggest that the carrying amount of long-
lived assets may not be recoverable. If this review indicates that long-lived
assets may not be recoverable, the Company reviews the expected undiscounted
future net operating cash flows from its facilities, as well as valuations
obtained in connection with various refinancings. Any permanent impairment in
value is recognized as a charge against earnings in the statement of operations.
As of December 31, 1997, the Company does not believe there is any indication
that the amortization period of its long-lived assets needs to be adjusted.
INCOME PER SHARE
In June 1997, the Board of Directors and Shareholders of the Company approved
a reverse stock split of .6897 for one. All references to shares and weighted
shares outstanding used in the calculation of net income per share and per share
amounts have been retroactively adjusted to reflect this reverse stock split.
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share". See Note 20 below.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified for
comparative purposes.
2. INITIAL PUBLIC OFFERING
In July 1997, Centennial completed an initial public offering of 4,000,000
shares of the Company's Common Stock at a price of $16.00 per share. In
connection with the Offering, the Company granted the underwriters an option to
purchase up to 600,000 additional shares of the Company's Common Stock at the
F-9
<PAGE>
Offering price of $16.00 per share. This option was exercised and closed in
July 1997. Proceeds to Centennial from the Offering and the exercise of the
underwriters' option totaled approximately $66.8 million, net of underwriting
discounts and commissions and approximately $1.7 million in Offering expenses.
The net proceeds of the Offering available to the Company were used to repay
two subordinated promissory notes aggregating $25.3 million, to redeem the
Series E Redeemable Preferred Stock for $5.0 million, to repurchase
approximately 84,000 shares of Common Stock, which were received by the former
holders of the Company's Series C Preferred Stock, for approximately $1.3
million (see Note 10), and to repay approximately $35.1 million outstanding
under the Company's Senior Credit Facility with CoreStates Bank N.A. as agent
(the "Senior Credit Facility", see Note 8).
Concurrently with the closing of the Offering, the Company's Series A, B, C
and D Preferred Stock were converted into approximately 2.5 million shares of
Common Stock, net of the stock repurchase noted above; the Company's Special
Voting Common Stock was converted into Common Stock; and Centennial's Treasury
Stock, discussed in Note 10, was converted into Common Stock.
3. MERGERS AND ACQUISITIONS
In May 1997, the Company acquired by merger Total Care Consolidated, Inc.,
("TCC"), a provider of home health services, with 25 home health offices located
primarily in North Carolina. Total consideration of $8.0 million consisted of
$6.0 million in cash, which was funded under the Senior Credit Facility, and
$2.0 million in the form of a convertible promissory note due April 30, 1999.
The transaction was accounted for under the purchase method and the Company's
Consolidated Financial Statements include TCC from the effective date of the
merger.
In August 1997, Centennial acquired substantially all of the business and
assets of Complex Care, Inc., ("CCI"), a provider of physical, occupational and
speech therapy services through 45 contracts with long-term care facilities in
Connecticut and Rhode Island. The Company paid total consideration of $7.0
million, utilizing borrowings under its Senior Credit Facility. Additional
consideration of up to $500,000 may be paid by the Company under an earn-out
agreement. The transaction was accounted for under the purchase method and the
Company's Consolidated Financial Statements include CCI from the effective date
of the acquisition.
The Company recorded intangible assets of approximately $8.0 million and $7.5
million related to the acquisitions of TCC and CCI, respectively.
In December 1997, Centennial acquired a 58-bed skilled nursing facility in St.
Petersburg, Florida, which had previously been managed by the Company since June
1991. The facility was formerly owned by an affiliate of the President of the
Company. Total consideration of approximately $3.3 million included borrowings
under the Senior Credit Facility of approximately $1.1 million, and the
reduction of a note receivable to the Company from the facility of
F-10
<PAGE>
approximately $2.2 million. The transaction was accounted for under the
purchase method and the Company's Consolidated Financial Statements include this
facility from the effective date of the acquisition.
During 1997, the Company acquired leasehold interests in two rural hospitals.
In October 1996, the Company entered into a management agreement and a lease
agreement with the owner of both a 36-bed hospital and three licensed home
health care offices, located in Northern Florida. The agreement provided that
the Company would manage the hospital until all necessary approvals and licenses
were obtained, at which time the Company would operate the hospital under a
long-term lease. The Company accounted for the transaction as a management
agreement beginning in October 1996; in June 1997, all necessary approvals and
licenses were obtained, and the Company has operated the hospital under a long-
term lease since that date. The Company's Consolidated Financial Statements
include the hospital from the effective date of the transaction. In March 1997,
the Company entered into another lease of a rural hospital, also located in
Northern Florida, having a term of ten years with two five-year renewal options.
In October 1996, the Company acquired two previously managed long-term care
facilities located in Michigan with a total of 185 beds. The purchase price,
totaling approximately $9.1 million, was financed with the Company's Senior
Credit Facility. Centennial had managed these facilities under long-term
management agreements since 1991.
Effective December 31, 1995, the Company acquired all of the capital stock of
THS, valued at $19.0 million, through the issuance of 2,940,639 shares of
Special Voting Common Stock and 144,086 shares of Series C Preferred Stock, (the
"THS Merger"). In connection with this transaction, the Company formulated a
plan to integrate the operations of THS. Such plan included the disposal of its
leasehold interests at two facilities which were not compatible with the
Company's operations. During the year ended December 31, 1996, the Company
disposed of one of the identified facility leases at its previously estimated
fair value. The Company was not successful in its efforts to dispose of the
remaining facility lease in 1997; however, based on improvements made to the
operations of the facility, the Company expects that it will be disposed of
during 1998. As of December 31, 1997 and 1996, remaining accrued merger closure
costs of $3.4 million included the accrual for the lease buyout and estimated
losses on the sublease of the THS headquarters facility. Any additional costs
incurred to operate and ultimately dispose of the remaining facility will be
charged to earnings.
Proforma information for the 1997 and 1996 acquisitions has not been
presented, as the effects of the acquisitions on the consolidated financial
statements was not considered significant.
4. OPERATING LEASES
The Company leases 39 long-term care facilities, as well as two hospitals,
which are accounted for as operating leases. The leases have various expiration
dates through 2014. Two of the long-term care facility leases are with
affiliated entities, of which the Company or an affiliate of one of the
Company's officers serves as a general partner.
The leases with affiliated entities expire in 2002 and 2008 with both having
two five-year extensions. Total lease expense to the Company as a result of
these two leases was $3.2 million, $3.3 million and $2.9 million for the years
ended December 31, 1997, 1996 and 1995 respectively. In connection with one
F-11
<PAGE>
lease, the Company paid the affiliated lessor a deposit of $2.9 million, which
is refundable upon the termination of the lease. The Company owed the other
affiliated lessor approximately $340,000 and $700,000 at December 31, 1997 and
1996, respectively.
Twenty-three of the long-term care facility leases were obtained in connection
with the THS Merger. These leases include provisions for increases in lease
payments. Certain of these leases provide the Company an option to renew the
lease after the initial lease term.
Total rent expense under the long-term care facility and hospital operating
lease agreements approximated $19.9 million, $17.7 million, and $7.4 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
Minimum future rent payments under the facility leases and related equipment
and office space are summarized as follows (in thousands):
Year Amount
---- -----------
1998............................................ $ 21,369
1999............................................ 21,517
2000............................................ 21,739
2001............................................ 21,675
2002............................................ 20,766
Thereafter...................................... 80,120
-----------
$187,186
-----------
5. TOTAL REVENUE
The distribution of total revenue by class of payor for the years ended
December 31, 1997, 1996 and 1995 was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
CLASS OF PAYOR 1997 1996 1995
- - ------------------------------------------------------ --------- -------
<S> <C> <C> <C>
Private pay, management fee and
other.................................... $ 120,371 $ 74,075 $17,798
Medicaid................................... 111,380 99,803 43,735
Medicare................................... 72,522 59,170 13,693
--------- --------- -------
$ 304,273 $ 233,048 $75,226
--------- --------- -------
</TABLE>
The above revenue amounts are net of third-party contractual allowances of
$54.2 million, $44.7 million and $7.6 million for the years ended December 31,
1997, 1996 and 1995, respectively.
Included in other operating expenses is bad debt expense of approximately
$863,000, $852,000, and $1.0 million for the years ended December 31, 1997, 1996
and 1995, respectively.
F-12
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997 and
1996, (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land................................................. $ 4,595 $ 4,243
Buildings and improvements........................... 63,681 55,166
Furniture and equipment.............................. 15,633 12,294
Construction in progress - improvements to
facilities......................................... 1,087 1,945
--------- ---------
84,996 73,648
Less accumulated depreciation ....................... (10,617) (6,239)
--------- ---------
$ 74,379 $ 67,409
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
totaled $4.5 million, $3.2 million, and approximately $548,000 respectively.
7. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
Certain subsidiaries of the Company acquired, in 1990, stock of the corporate
general partners of certain limited partnerships. These partnerships owned long-
term care facilities and retirement centers. Investments in partnerships in
which the Company's subsidiaries served as a general partner were accounted for
using the equity method. For the years ended December 31,1996 and 1995, the
Company recognized income from its share of the partnerships' operations of
approximately $145,000 and $448,000, respectively. On January 30, 1997, the
Company sold its stock in the corporate general partners in most of the limited
partnerships to a corporation affiliated to the president of the Company for
$100 and the assumption of all the liabilities of the corporate general
partners. For the year ended December 31, 1996, the Company recognized a loss,
totaling approximately $253,000, in connection with the sale of the corporate
general partners.
8. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Bank credit facilities...................... $ 41,250 $ 47,000
Mortgage notes payable...................... 17,792 17,427
Other notes................................. 2,650 697
-------- --------
61,692 65,124
Capital lease obligations................... 18,797 20,025
-------- --------
80,489 85,149
Current maturities of long-term debt........ 1,576 1,711
-------- --------
$ 78,913 $ 83,438
-------- --------
</TABLE>
F-13
<PAGE>
On December 16, 1997, the Company expanded its Senior Credit Facility with
CoreStates Bank, N.A. and NationsBank, N.A., as agents, through an amendment to
its existing amended and restated credit agreement. Through the amendment, the
Company's maximum aggregated advance limit was increased from $65.0 million to
$125.0 million. Company advances under the Senior Credit Facility may be used
for acquisitions, capital expenditures, working capital and general corporate
purposes. Centennial's borrowing capacity is dependent upon its ability to
satisfy certain financial covenants that are impacted by its debt and capital
structure. The Company had approximately $41.3 million outstanding under the
Senior Credit Facility at December 31, 1997, as well as issued standby letters
of credit totaling approximately $7.0 million.
Interest accrues at varying rates dependent upon underlying interest rates
and the Company's selection of loan amounts and periods. The Company can elect a
rate based on CoreStates Bank, N.A.'s prime rate or LIBOR, each increased by an
Applicable Margin, as defined in the Senior Credit Facility, which varies
dependent upon the ratio of debt to earnings before interest, taxes,
depreciation, amortization and operating lease expense. The weighted average
interest rate on the Company's borrowings at December 31, 1997 was approximately
1.58% over LIBOR or 7.2%.
Interest is generally paid monthly on prime based borrowings and quarterly
on LIBOR based borrowings. The Company's outstanding borrowings are due to be
repaid on December 16, 2000, upon termination of the Senior Credit Facility.
Under certain circumstances, proceeds from additional equity issuances, sales of
Company assets and other debt instruments must be used to repay a portion of the
outstanding borrowings under the Senior Credit Facility.
The Senior Credit Facility is collateralized by the stock of the Company's
subsidiaries. The Company is required to pay a fee on the average unused portion
of the commitment.
The Senior Credit Facility includes various negative covenants including
restrictions on additional loans and advances, guaranties, stock repurchases and
redemptions, and the payment of dividends. Terms of the Senior Credit Facility
require the Company to comply with certain financial and other covenants, the
violation of which could cause the amounts of outstanding principal, interest
and fees to be immediately due and payable. On December 31, 1997, the Company
was in compliance with all of its debt covenants.
At December 31, 1997 and 1996, the Company had $17.8 million and $17.4
million, respectively, of mortgage notes outstanding, including a current
portion of approximately $259,000 and $181,000 respectively. The mortgage notes
require monthly payments of principal and interest of approximately $157,000.
The debt agreements are for five to twenty-year periods with amortization
periods covering twenty to twenty-five years. At December 31, 1997, interest
rates on the mortgages range from 7.33% to 10.50%. These debts are
collateralized by real property.
Future maturities of mortgage notes are summarized as follows (in thousands):
1998 $ 259
1999 277
2000 304
2001 334
2002 367
Thereafter 16,251
-------
$17,792
-------
Rent escalation clauses in the capital facility leases are based on contingent
factors such as increases in the consumer price index or annual increases in a
facility's revenues, and have resulted in increased current and future lease
payments.
F-14
<PAGE>
The following is a schedule of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of
December 31, 1997 (in thousands):
Nursing
Year ending December 31 Equipment Facilities Total
---------- ---------- ----------
1998.................................... $ 661 $ 2,468 $ 3,129
1999.................................... 83 2,468 2,551
2000.................................... - 2,468 2,468
2001.................................... - 2,468 2,468
2002.................................... - 2,468 2,468
Thereafter.............................. - 21,086 21,086
---------- ---------- ----------
Total minimum lease payments............ 744 33,426 34,170
Less amount representing interest....... 43 15,330 15,373
---------- ---------- ----------
Present value of minimum lease payments. 701 18,096 18,797
Current portion......................... 620 697 1,317
---------- ---------- ----------
Noncurrent portion...................... $ 81 $ 17,399 $ 17,480
---------- ---------- ----------
The interest rate on the capital leases is based on the Company's borrowing
rate at the time a lease is executed. The average interest rate on nursing
facilities and equipment was 10.47% and 13.15%, respectively.
9. SUBORDINATED DEBT
At December 31, 1996, the Company had $25.3 million, carried net of
unamortized offering discounts of approximately $943,000, of subordinated debt.
This debt was issued to certain shareholders in two instruments, which were both
due on October 30, 2002 and had effective interest rates between 10.8% and
11.7%. These notes were repaid in 1997 using proceeds from the Offering, which
resulted in a loss on early extinguishment of debt of approximately $537,000,
net of income tax benefit of approximately $343,000.
10. REDEEMABLE PREFERRED STOCK
As of December 31, 1996, the Company had issued and outstanding 205,541 shares
of $11.0011 par value Series A Preferred Stock. The shares of Series A Preferred
Stock earned cumulative dividends of $.88 per share per annum and were
convertible to common at any time at the holder's option at a conversion
multiple of 2.9388. The shares were subject to mandatory conversion by the
Company in limited circumstances, and were converted into approximately 604,000
shares of common stock concurrently with the closing of the Offering in July
1997.
As of December 31, 1996, the Company had issued and outstanding 328,892
shares of $8.7377 par value Series B Preferred Stock. The shares of Series B
Preferred Stock earned cumulative dividends at $.49 per annum and were
convertible into .7663 share of Common Stock at the holder's option. The
shares were also subject to mandatory conversion in certain limited
circumstances, and were converted into approximately 252,000 shares of common
stock concurrently with the closing of the Offering in July 1997.
The Series A and B Preferred Stock was reflected on the December 31,1996
balance sheet at its estimated redemptive value, including accrued and unpaid
dividends.
As stated in Note 3, in connection with the THS Merger, the Company issued
144,086 shares of $1 par value Series C Preferred Stock. The shares of Series C
Preferred Stock earned cumulative dividends of $12 per share per annum. The
Company was obligated to redeem all of the shares of the Series C Preferred
Stock outstanding on December 31, 2003 at $100 per share, plus any accrued but
unpaid dividends. The Series C Preferred Stock was reflected on the
accompanying December 31, 1996 balance sheet at its fair value increased by
periodic accretions, using the interest method, so that the carrying amount
would equal the mandatory redemption amount at the mandatory redemption date.
F-15
<PAGE>
Accretion on the Series C Preferred Stock totaled approximately $259,000 for
the year ended December 31, 1996. As stated in Note 2, after the closing of
the Offering, with the net proceeds of the exercise of the underwriters
overallotment option, Centennial offered the former holders of the Company's
Series C Preferred Stock pro-rata repurchase to the extent of such proceeds
of their shares of Common Stock received upon the conversion of their Series
C Preferred Stock at the Offering price of $16.00 per share. The Company made
this repurchase offer as consideration for the agreement by these former
holders to the conversion of the Series C Preferred Stock into Common Stock.
Holders of approximately 84,000 shares of the approximately 1.3 million
shares available for pro-rata repurchase elected to have such shares
repurchased by Centennial. Centennial repurchased the 84,000 shares of common
stock during 1997 for approximately $1.3 million.
In January 1997, the Company issued 50,000 shares of $1 par value Series D
Preferred Stock and an aggregate 50,000 investment units, with each unit
being comprised of one share of $1 par value Series E Preferred Stock and
1.7873 shares of Common Stock of the Company for $10.0 million. The Series D
Preferred Stock was redeemable at the option of the holder at any time after
December 31, 2006 for the redemption price of $100 plus interest on the $100
per share at the rate of 10% per annum from the date of issuance of the
Series D Preferred Stock. Each share of Series D Preferred Stock was
convertible into 8.2106 shares of Common Stock, at the holder's option. All
outstanding shares of Series D Preferred Stock were converted into
approximately 411,000 shares of Common Stock concurrently with the closing of
the Offering in July 1997.
The Series E Preferred Stock was subject to 10% dividends and was redeemable
at any time at the option of the Company. The Series E Preferred Stock was
redeemed concurrently with the closing of the Offering in July 1997.
11. EQUITY TRANSACTIONS
The Company has stock options outstanding under the 1994 Stock Option Plan,
the 1996 Executive Stock Plan, the 1996 Employee Stock Option Plan, and the 1997
Stock Plan (collectively referred to as the "Stock Option Plans"). During 1996,
the Company's 1992 Stock Option Plan was terminated.
The 1994 Stock Option Plan and the 1996 Executive Stock Plan provide that
options may be granted to officers, directors and key employees; options vest
based upon either years of service, or at various intervals from 1996 through
2000. The 1996 Employee Stock Option Plan provides that options may be granted
to certain employees; options vest at various intervals through 1998. The 1997
Stock Plan provides that options may be granted to officers, non-employee, non-
affiliated directors and key employees at an exercise price and vesting schedule
to be determined by the compensation committee of the Board of Directors at the
time of grant. The options granted to date pursuant to the 1997 Stock Plan vest
over various schedules from 1998 through 2001.
All stock options have been granted with exercise prices equal to or greater
than the estimated fair market value of the common stock on the date of grant
and are exercisable for up to ten years, as determined by the compensation
committee.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- -------- --------
<S> <C> <C> <C> <C>
Options outstanding-beginning of period...... 355,160 $ 12.09 515,346 $ 8.13
Granted.................................... 183,340 16.00 64,330 8.74
Exercised.................................. (4,115) (8.74) (203,761) (0.88)
Forfeited.................................. (7,603) (11.68) (20,755) (13.08)
------- ------- -------- -------
Options outstanding-end of period............ 526,782 $ 13.47 355,160 $ 12.09
======= ======= ======== =======
Weighted average fair value of options
granted during the period.................... $6.40 $2.51
</TABLE>
F-16
<PAGE>
The fair value of each option is estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996
---------- ----------
Expected volatility......................... 41.0% 41.1%
Risk-free interest rate..................... 6.15% 5.33%
Expected term............................... 4 years 5 years
Dividend yield.............................. 0% 0%
The following table summarizes information about outstanding and exercisable
stock options at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------ ---------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Exercise Prices Shares Life Shares Price
- - --------------- ------- ----------- ------- --------
<S> <C> <C> <C> <C>
$ 7.83.................................................................. 58,236 4.5 years 58,236 $ 7.83
8.74.................................................................. 55,309 8.0 years 40,248 $ 8.74
14.03.................................................................. 229,897 8.1 years 114,949 $ 14.03
16.00.................................................................. 183,340 9.0 years 6,847 $ 16.00
</TABLE>
The Company applies APB Opinion 25 and related interpretations in accounting
for fixed stock option plans. Accordingly, no compensation cost has been
recognized for the fixed stock option plans. Had compensation cost been based on
the estimated fair value at the grant dates for awards under those plans
consistent with the method of FASB Statement No. 123, the net effect on net
income and income per share for the years ended December 31, 1997, 1996 and 1995
would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proforma net income (in thousands)............................................ $9,582 $2,650 $1,876
Proforma income applicable to common stock:
Basic....................................................................... $0.45 $0.10 $1.25
Diluted..................................................................... $0.44 $0.10 $0.72
</TABLE>
As of December 31, 1996, the Company had repurchased 239,860 shares of Common
Stock for $1.5 million. These shares were held as treasury stock at December 31,
1996 and were accounted for under the cost method. As noted in Note 2, these
shares were converted into Common Stock as a result of the Offering.
As previously mentioned, the Company issued Special Voting Common Stock in
connection with the THS Merger. The Special Voting Common Stock was similar to
the Company's Common Stock, except that each share of Special Voting Common
Stock carried 70% of the voting power of one share of Common Stock. As required
by the merger agreement, the Company declared a stock dividend in January 1996
increasing the number of issued and outstanding shares of both Special Voting
Common Stock and Common Stock by 11.11% (the "Stock Dividend"). The shares
issued by the
F-17
<PAGE>
Stock Dividend totaled 294,038 shares of Special Voting Common Stock and 160,124
shares of Common Stock. As noted in Note 2, the Special Voting Common Stock was
converted to Common Stock as a result of the Offering.
In connection with the THS Merger, the holders of Common Stock (the
"Centennial Holders") and the holders of Special Voting Common Stock (the "THS
Holders") entered into an escrow agreement whereby shares representing the Stock
Dividend were placed in escrow until the parties completed final due diligence
and certain contingencies were settled. The escrowed shares were to be released
to either the THS Holders or the Centennial Holders as determined by the
Centennial agent and THS agent, in order to adjust the proportionate ownership
interest each group of holders received in the combined entity.
In January 1997, the Centennial agent and the THS agent entered into a
Settlement Agreement which determined the distribution of the escrowed shares.
Under the terms of the Settlement Agreement, the equivalent of 293,735 shares of
the Special Voting Common Stock held in escrow were distributed to the
Centennial Holders and all remaining shares were released to the respective
parties. This settlement effectively reduced the purchase price paid for THS and
was recorded as a reduction in goodwill effective at the merger date with a
corresponding decrease to the value of the Special Voting Common Stock.
12. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1997, 1996 and 1995 are as follows (in thousands):
Year ended December 31,
1997 1996 1995
Current ------- ------- -------
Federal.................. $ 525 $ 103 $ 1,959
State.................... 2,394 291 526
------- ------- -------
2,919 394 2,485
------- ------- -------
Deferred
Federal.................. 4,849 1,781 (1,041)
State.................... (968) (83) (55)
------- ------- -------
3,881 1,698 (1,096)
------- ------- -------
Total provision............ $ 6,800 $ 2,092 $ 1,389
======= ======= =======
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions for income taxes for the years
ended December 31, 1997, 1996 and 1995 are as follows, (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rate........... $ 5,929 $ 1,719 $ 1,179
State income taxes................... 598 202 298
Goodwill amortization................ 253 142 -
Other................................ 20 29 (88)
-------- -------- --------
Provision for income taxes......... $ 6,800 $ 2,092 $ 1,389
-------- -------- --------
<PAGE>
Deferred tax assets and liabilities are comprised of the following at
December 31, 1997 and 1996, (in thousands):
1997 1996
-------- --------
Current deferred income tax assets:
Allowances for uncollectible receivables.......... $ (542) $ 1,814
Liabilities not deductible for tax purposes....... 3,053 2,069
-------- --------
Current deferred income taxes.................. $ 2,511 $ 3,883
======== ========
Noncurrent deferred income tax assets:
Net operating loss and tax credit carryforwards... $ 845 $ 4,456
Tax basis receivables in excess of book........... 2,167 2,549
Net effects of capital leases..................... 1,394 1,046
-------- --------
4,406 8,051
-------- --------
Noncurrent deferred income tax liabilities:
Temporary goodwill................................ (693) (353)
Write-up of property and equipment................ (1,848) (1,951)
Other, including depreciation..................... (110) (850)
Tax losses from investment in unconsolidated
partnerships in excess of book................. (163) (796)
-------- --------
(2,814) (3,950)
-------- --------
Net noncurrent deferred income tax assets... $ 1,592 $ 4,101
======== ========
</TABLE>
F-18
<PAGE>
As of December 31, 1997, the Company had approximately $455,000 of federal net
operating loss carryforwards available to offset future taxable income through
2010. In addition, the Company had $305,000 of federal targeted jobs tax credit
carryforwards, various state net operating loss carryforwards, and approximately
$385,000 of AMT credit carryforwards.
13. MANAGEMENT AGREEMENTS
As of December 31, 1997, the Company provided operational management services
for 29 facilities and two hospitals under long-term management contracts having
remaining effective terms ranging from 5 to 19 years. Twenty-five of these
agreements are with third-party owners and are noncancelable without cause. One
of these agreements, with fees totaling approximately $145,000, $142,000, and
$124,000 respectively, during the years ended December 31, 1997, 1996 and 1995
was with an affiliate; the facility was purchased by the Company in December
1997, (see Note 3). Five of the management agreements, with fees totaling
approximately $898,000, $939,000 and $995,000, respectively, during the years
ended December 31, 1997, 1996 and 1995 were with affiliated limited partnerships
in which certain subsidiaries of the Company served as general partner and can
be terminated by either party without cause given sixty days notice. Two of
these agreements were terminated during the fourth quarter while three of these
facilities were transferred to third party owners. The management agreements
provide for the Company to receive annual fees ranging from 6% to 6.5% of each
facility's gross revenues, payable on a monthly basis and may include additional
compensation based on achieving certain performance standards. Additionally, the
Company performs oversight management services for three facilities in which it
oversees the management of another management company. The Company typically
receives a fee of 1% of revenues for oversight management services.
In connection with the Company's facility management agreements for several
facilities located primarily in North Carolina and Florida, the Company has made
certain advances for working capital needs. The majority of these centers are
start-up or development projects and require additional funding for personnel
and other operating costs prior to stabilization. The advances are to be repaid
from available cash flows from the respective facilities and from other funds
provided by the owners of the facilities and earn interest at varying rates
based on the prime lending rate. Advances outstanding as of December 31, 1997
and 1996 were $11.3 million and $2.8 million, respectively, and are included in
other receivables in the accompanying balance sheets.
During 1996, the Company advanced approximately $10.0 million pursuant to two
promissory notes in the amounts of $5.5 million and $4.5 million, to
unaffiliated owners of eight managed facilities in North Carolina. The advances
were utilized by the owners to purchase the related facilities or facility
leasehold interest with respect to these facilities that are managed by the
Company. The promissory notes are due on December 31, 2006 and earn interest at
the greater of a specified prime rate plus 3%,or 12%. Both notes are
collateralized by receivables and the pledge of the stock of the respective
owners and are included in notes and advances receivable in the accompanying
balance sheets.
F-19
<PAGE>
14. TRANSACTIONS WITH RELATED PARTIES
At December 31, 1997 the Company had employment agreements with five officers
which provided for salary continuation and non-competition with the Company,
subject to certain conditions.
The Company leases two long-term care facilities from affiliated lessors (see
Note 4).
The Company managed five long-term care facilities for affiliated limited
partnerships in which the Company served as a general partner (see Note 13).
Centennial leases its facilities' employees on a total pass through basis from
an affiliated company which is owned by the president of the Company. The total
payroll costs and reimbursements from the Company totaled $37.2 million, $29.2
million, and $23.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Such costs are billed by the related entity at cost.
In December 1997, Centennial acquired a 58-bed skilled nursing facility in St.
Petersburg, Florida, which had previously been managed by the Company since June
1991. The facility was formerly owned by an affiliate of the President of the
Company. Total consideration of approximately $3.3 million included borrowings
under the Senior Credit Facility of approximately $1.1 million, and the
reduction of a note receivable to the Company from the facility of approximately
$2.2 million. The transaction was accounted for under the purchase method and
the Company's Consolidated Financial Statements include this facility from the
effective date of the acquisition.
15. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed a mortgage note up to $500,000 related to a long-
term care facility that it manages. The mortgage had an outstanding balance of
approximately $1.9 million at December 31, 1997. The market value of this
facility, based on an independent appraisal and the Company's estimate,
substantially exceeds the total amount of the mortgage note. All principal and
interest payments are paid currently by the obligors.
The Company has guaranteed $17.0 million of mortgage indebtedness of two
unrelated entities that lease five nursing facilities to the Company. The
outstanding principal balance of the debt was approximately $15.7 million at
December 31, 1997. All principal and interest payments are paid currently by the
obligors. Based on the Company's estimate, the market value of these facilities
exceeded the outstanding mortgage notes at December 31, 1997.
F-20
<PAGE>
Centennial self-insures for workers' compensation claims and health benefits
for its employees. The Company maintains stop-loss insurance such that the
Company's liability for losses is limited. Centennial recognized as an expense
and accrued for estimated workers' compensation and health benefit claims
incurred but not reported as of December 31, 1997 and 1996.
16. CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. Centennial has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
17. EMPLOYEE BENEFITS
The Company has 401(k) savings plans available to substantially all employees
depending on their length of service. Employees may defer up to 15% of their
salary, subject to the maximum permitted by law. In two of these plans the
Company matches employee contributions subject to a maximum limit. The Company
funded approximately $363,000 and $92,000 during the years ended
December 31, 1997 and 1996, respectively, as a match to the employee
contributions.
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of
those instruments, and includes restricted cash reflected on the balance sheet
under the caption "Other Assets."
NOTES RECEIVABLE
The carrying amount approximates fair value for the notes receivable. The fair
value is estimated as the net present value of cash flows that would be received
on the notes over the remaining term of the notes using current market interest
rates rather than stated interest rates.
LONG-TERM DEBT
The carrying amount of the Senior Credit Facility approximates fair value
since the Senior Credit Facility was recently renegotiated at market rates. The
carrying amount of mortgage notes approximates their values based on the net
present value of cash flows that would be paid on each note over the remaining
note term using the Company's current incremental borrowing rate rather than the
stated interest rates on the notes.
19. HEALTH CARE REFORM
The Balanced Budget Act of 1997, ("the Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth for skilled
nursing facilities over the next five years, primarily through the
implementation of a Medicare prospective payment system for skilled nursing
facility services. While the methodology for the prospective payment rates have
been generally established, actual rates have not been released.
F-21
<PAGE>
Management believes that, due to the cost structure at its facilities as
compared to other facilities in its markets, the Company's overall reimbursement
rates should not be lower than current rates and could possibly be higher.
However, until the rates are ultimately determined under the prospective payment
system, the Company will not be able to determine the exact nature or long term
financial impact of the legislative changes. The Company can give no assurance
that payments under such programs in the future will remain at a level
comparable to the present level or increase, and decreases in the level of
payments could have a material adverse effect on the Company.
Effective April 1, 1998 regulations were adopted by HealthCare Financing
Administration, which temporarily changes the basis of reimbursement for
contract therapy services including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. During 1997, the Company
derived 7% of its revenue from third-party contract therapy services. These
regulations impose regionally-adjusted salary equivalency rates as reimbursement
caps for occupational, speech and physical therapy. In most locations the
reduced rates have the effect of reducing the amount of reimbursement for a unit
of occupational or speech therapy and increasing the amount of reimbursement for
a unit of physical therapy. The Company believes that such rate reductions will
be completely or partially offset by cost reductions and changes in the method
of delivering such services. Due to these changes in operations and cost
structure and the relative size of the Company's therapy business, the Company
does not expect these reimbursement changes to have a material adverse effect on
the Company.
20. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of 1997, Centennial adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", (SFAS No. 128). Prior year
amounts have been restated in accordance with SFAS No. 128. Basic earnings per
share is computed by dividing income applicable to common stock by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed similarly but reflects the potential dilution that could
occur if options were exercised or convertible securities were converted into
common stock. The assumption of the conversion of Series A and B Preferred Stock
was anti-dilutive during 1996. The accretion and dividends accrued on Series A
and B Preferred Stock and the accretion and dividends on Series C Preferred
Stock was deducted from net income in the computation of net income applicable
to common stock in 1997 and 1996. The following table calculates basic earnings
per share and diluted earnings per share at December 31:
F-22
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income before extraordinary loss.......................... $ 10,385 $ 2,779 $ 1,876
Deduct: dividends and accretion of preferred stock........ 5,874 2,192 -
-------- -------- --------
Income applicable to common stock
before extraordinary loss............................... 4,511 587 1,876
Extraordinary loss on extinguishment
of debt................................................. (537) - -
-------- -------- --------
Income applicable to common stock......................... $ 3,974 $ 587 $ 1,876
Average common shares outstanding (in thousands).......... 8,289 4,742 1,506
Basic earnings per common share:
Income applicable to common stock
before extraordinary loss............................... $ 0.54 $ 0.12 $ 1.25
Extraordinary loss on extinguishment
of debt................................................. (0.06) - -
-------- -------- --------
BASIC EARNINGS PER COMMON SHARE........................... $ 0.48 $ 0.12 $ 1.25
======== ======== ========
Income applicable to common stock
before extraordinary loss............................... $ 4,511 $ 587 $ 1,876
Add: Interest savings on convertible debt................. 65 - -
-------- -------- --------
4,576 587 1,876
Extraordinary loss on extinguishment
of debt................................................. (537) - -
-------- -------- --------
Income applicable to common stock......................... $ 4,039 $ 587 $ 1,876
Average common shares outstanding (in thousands).......... 8,289 4,742 1,506
Add: options (in thousands).............................. 173 40 1,095
-------- -------- --------
Average diluted common shares outstanding (in thousands).. 8,462 4,782 2,601
Diluted earnings per common share:
Income applicable to common stock
before extraordinary loss............................... $ 0.54 $ 0.12 $ 0.72
Extraordinary loss on extinguishment
of debt................................................. (0.06) - -
-------- -------- --------
DILUTED EARNINGS PER COMMON SHARE......................... $ 0.48 $ 0.12 $ 0.72
======== ======== ========
</TABLE>
F-23
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Both Statements are
effective for fiscal years beginning after December 15, 1997. The Company has
not yet determined the effect, if any, of these statements on its consolidated
financial statements.
21. SUBSEQUENT EVENTS
In January 1998, the Company signed management contracts for six skilled
nursing facilities located in North Carolina, totaling 837 licensed available
beds. Also in January 1998, the Centennial signed a management contract for a
59-bed acute care hospital in Northern Florida.
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The table below sets forth summarized quarterly financial data for the years
ended December 31, 1997 and 1996, (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total revenues........................................ $ 64,235 $ 71,939 $ 81,946 $ 86,153
Income before extraordinary loss...................... 1,241 1,884 3,383 3,877
Extraordinary loss.................................... - - (537) -
Net income ........................................... 1,241 1,884 2,846 3,877
Net income (loss) applicable to common
shareholders........................................ $ 454 $ 1,452 $ (1,808) $ 3,877
======== ======== ======== =========
Net income per common and common
equivalent share:
Basic:
Income (loss) applicable to common stock
before extraordinary loss....................... $ 0.09 $ 0.30 $ (0.11) $ 0.33
Extraordinary loss on extinguishment of debt...... - - (0.05) -
-------- -------- -------- ---------
Income (loss) applicable to common stock.......... $ 0.09 $ 0.30 $ (0.16) $ 0.33
======== ======== ======== =========
Diluted:
Income (loss) applicable to common stock
before extraordinary loss...................... $0.09 $0.30 $ (0.10) $ 0.32
Extraordinary loss on extinguishment of debt..... - - (0.05) -
-------- -------- -------- ---------
Income (loss) applicable to common stock......... $ 0.09 $ 0.30 $ (0.15) $ 0.32
======== ======== ======== =========
Proforma(1):
Income applicable to common stock.............. $ 0.18 $ 0.23 $ 0.30 $ 0.32
======== ======== ======== =========
Weighted average number of common stock and
common stock equivalents outstanding:
Basic.............................................. 4,789 4,789 11,579 11,864
Diluted............................................ 4,827 4,828 11,870 12,188
Proforma(1)........................................ 11,738 11,876 12,026 12,186
Common stock market prices:
High............................................... N/A N/A $ 23.000 $ 25.125
Low................................................ N/A N/A $ 16.000 $ 18.125
<PAGE>
1996
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------
Revenues............................................. $ 55,935 $ 56,345 $ 58,341 $ 62,427
Net income (loss).................................... (105) 1,034 744 1,106
Net income (loss) applicable to common
shareholders....................................... $ (577) $ 562 $ 96 $ 506
======== ======== ======== =========
Net income per common and common
equivalent share:
Income (loss) applicable to common
stock--basic..................................... $ (0.12) $ 0.12 $ 0.02 $ 0.11
======== ======== ======== =========
Income (loss) applicable to common
stock--diluted................................... $ (0.12) $ 0.12 $ 0.02 $ 0.11
======== ======== ======== =========
Income applicable to common stock--
proforma(1)...................................... $ 0.06 $ 0.16 $ 0.14 $ 0.17
======== ======== ======== =========
Weighted average number of common stock and
common stock equivalents outstanding:
Basic.............................................. 4,734 4,742 4,746 4,746
Diluted............................................ 4,777 4,782 4,784 4,784
Proforma(1)........................................ 11,415 11,420 11,422 11,422
Common stock market prices:
High............................................... N/A N/A N/A N/A
Low................................................ N/A N/A N/A N/A
</TABLE>
- - ------------
(1) Proforma assumes the Offering took place at the beginning of each period
presented, and reflects the estimated reduction in interest expense, net of the
related tax effect, and the reduction in preferred dividends and accretion.
Proforma also excludes the extraordinary loss on early extinguishment of debt
recorded in the third quarter of 1997.
F-24
<PAGE>
<TABLE>
<CAPTION>
CENTENNIAL HEALTHCARE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COST AND OTHER END OF
DESCRIPTIONS YEAR EXPENSE ACCOUNTS OTHER YEAR
- - ---------------------------------------- ------------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1997
Allowance for doubtful
accounts (deducted
from accounts
receivable)........................... $ 2,472 $ 863 $ (637)(1) $ 300(2) $ 2,998
========= ========= ========= ========= =========
Year ended
December 31, 1996
Allowance for doubtful
accounts (deducted
from accounts
receivable)........................... $ 5,912 $ 851 $ (2,983)(1) $ (1,308)(3) $ 2,472
========= ========= ========= ========= =========
Year ended
December 31, 1995
Allowance for doubtful
accounts (deducted
from accounts
receivable)........................... $ 71 $ 1,035 $ (348)(1) $ 5,154(4) $ 5,912
========= ========= ========= ========= =========
</TABLE>
- - -----------------
(1) Accounts receivable that were previously reserved that were directly
written-off to allowance for doubtful accounts.
(2) Allowance transferred from notes receivable.
(3) Due to reclassification of accounts receivable to notes receivable and
related reserve.
(4) Reserve on December 31, 1995 balance sheet of Transitional Health Services,
Inc. which was consolidated with the Company as of December 31, 1995
totaling $5,491 and reclassification of account receivable to notes
receivable and stated reserve totaling $(337).
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- - ------- ---------------------------------------------------------------------------------
<S> <C>
3.1 -- Third Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, Registration No. 333-24267, as amended).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement on Form S-1 Registration No.
333-24267, as amended).
4.1 -- Third Amended and Restated Articles of Incorporation of the Company, including,
without limitation Article III and Articel VII (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended).
10.1 -- WelCare International, Inc. 1994 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.2 -- WelCare International, Inc. 1996 Executive Stock Plan (incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.3 -- WelCare International, Inc. 1996 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.4 -- Centennial HealthCare Corporation 1997 Stock Plan (incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
10.5 -- Second Amended and Restated Credit Agreement dated December 16, 1997 by and
among Centennial HealthCare Corporation and the Borrowers named therein, the
Lenders named therein, and Core States Bank, N.A. and NationsBank, N.A.,
as lenders and agents for the Lenders
10.6 -- Amended and Restated Employment Agreement between WelCare International, Inc.
and J. Stephen Eaton dated December 31, 1995 (incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
10.7 -- Amended and Restated Employment Agreement between Paragon Rehabilitation, Inc. and Laurence
W. Lepley, Jr. dated as of January 1, 1998.
10.8 -- Registration Rights Agreement dated December 31, 1995 by and between the Company
and the Shareholders as defined therein, as amended (incorporated by reference
to Exhibit 10.8 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.9 -- Lease between Grant Park Nursing Home L.P. and WelCare Acquisition Corp. n/k/a
Centennial Acquisition Corporation ("CAC") commencing on January 1, 1993
(incorporated by reference to Exhibit 10.9 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.10 -- Amended and Restated Lease Agreement by and between Ashton Woods Limited
Partnership and WelCare/Ashton Properties, Inc. n/k/a Centennial /Ashton
Properties Corporation ("CAPC"), dated December 20, 1994 (incorporated by
reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.11 -- Amended and Restated Lease Agreement by and between EBT Healthcare Properties,
L.P. and CHPC dated July 6, 1994 (incorporated by reference to Exhibit 10.12 of the
Company's Registration Statement on Form S-1, Registration No. 333-24267, as
amended)
10.12 -- Operating Lease by and between Health Care Property Investors, Inc. and Cardinal
of Indiana, Inc., as amended by that certain Amendment to Operating Lease dated
November 1, 1993, as amended by that certain Second Amendment to Operating Lease
dated April 1, 1994, as amended by that certain Third Amendment to Operating
Lease dated March 31, 1995, as amended by that certain Fourth Amendment to
Operating Lease dated January 1, 1996, as assigned. (incorporated by reference
to Exhibit 10.13 of the Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
10.13 -- Lease Agreement by and between Healthcare Realty Trust Incorporated and Cardinal
Development Co., Inc. ("Cardinal"), as amended by that certain Amendment Number
One to Lease Agreement dated November 1, 1993, as assigned to THP pursuant to
that certain Lease Agreement, Consent and Release dated March 1, 1994
(incorporated by reference to Exhibit 10.16 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.14 -- Lease Agreement by and between House Investments - Nursing Homes Partners I and
THP dated November 1, 1993 (incorporated by reference to Exhibit 10.18 of the
Company's Registration Statement on Form S-1, Registration No. 333-24267, as
amended)
10.15 -- Operating Lease by and between HCPI Charlotte, Inc. and THP dated June 19, 1995
(incorporated by reference to Exhibit 10.20 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.16 -- Amended and Restated Management Agreement by and between Montclair Medical
Investors, Ltd., and CHMC dated January 1, 1995 (incorporated by reference to
Exhibit 10.28 of the Company's Registration Statement on Form S-1, Registration No.
333-24267, as amended)
11.1 -- Statement Regarding Computation of Per Share Earnings
21.1 -- List of Subsidiaries
23.1 -- Consent of Coopers & Lybrand, L.L.P.
27.1 -- Financial Data Schedule
27.2 -- Restated Financial Data Schedule (Annual)
27.3 -- Restated Financial Data Schedule (Quarterly)
99.1 -- Cautionary Statements Regarding Forward-Looking Statements
</TABLE>
<PAGE>
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 March 31, 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 001-35118
---------
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
--------- ---------
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 May 5, 1998
<PAGE>
CENTENNIAL HEALTHCARE INC
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 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 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
ITEM I - FINANCIAL STATEMENTS
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31,
1998 1997
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 3,626 $ 4,011
Patient accounts receivable and
third-party payor settlements, net of
allowance for doubtful accounts of
approximately $3,100 and $3,000.................... 79,372 72,222
Other receivables ................................... 24,165 14,612
Deferred income taxes ............................... 2,511 2,511
Prepaid expenses and other current assets ........... 2,978 1,259
-------- --------
Total current assets .............................. 112,652 94,615
Property and equipment, net.......................... 75,592 74,379
Intangible assets, net .............................. 50,862 51,331
Notes receivable and other assets ................... 22,832 23,324
-------- --------
Total assets....................................... $261,938 $243,649
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............ $ 39,941 $ 40,785
Other current liabilities............................ 8,524 8,270
-------- --------
Total current liabilities.......................... 48,465 49,055
Long-term debt, less current maturities............... 93,892 78,913
Other long-term liabilities .......................... 2,531 2,577
-------- --------
144,888 130,545
Commitments and contingencies
Shareholders' equity:
Common stock with par value of $.01; 50,000,000
shares authorized; 11,877,645 and 11,862,320
shares issued and outstanding ..................... 119 119
Paid-in capital ..................................... 101,419 101,299
Retained earnings.................................... 16,040 12,214
-------- --------
117,578 113,632
Note receivable from shareholder...................... (528) (528)
-------- --------
Net shareholders' equity .......................... 117,050 113,104
-------- --------
Total liabilities and shareholders' equity ........ $261,938 $243,649
======== ========
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)
Three Months
Ended March 31,
--------------------
1998 1997
------- -------
Revenues:
Net patient service revenues.......................... $83,379 $62,372
Management fees and other revenues.................... 3,693 1,863
------- -------
Total revenues....................................... 87,072 64,235
------- -------
Expenses:
Facility operating expenses:
Salaries, wages and benefits......................... 41,572 33,273
Other operating expenses............................. 24,698 16,399
Lease expense......................................... 5,409 5,083
Corporate administrative costs ....................... 4,943 3,368
Depreciation and amortization ........................ 2,283 1,521
------- -------
Total operating expenses ............................ 78,905 59,644
------- -------
8,167 4,591
------- -------
Other income (expense):
Interest income ...................................... 121 148
Interest expense ..................................... (1,913) (2,629)
------- -------
Total other expense ................................. (1,792) (2,481)
------- -------
6,375 2,110
Provision for income taxes ............................ 2,486 796
------- -------
Income before minority interest
and extraordinary loss ............................. 3,889 1,314
Minority interest in net income
of subsidiary, net of income taxes ................. (63) (74)
------- -------
Net income .......................................... 3,826 1,240
Dividends and accretion on preferred stock............. - 786
------- -------
Income applicable to common stock...................... $ 3,826 $ 454
======= =======
Income applicable to common stock
per common stock and common stock
equivalent share:
Basic ................................................ $ 0.32 $ 0.09
======= =======
Diluted .............................................. $ 0.32 $ 0.09
======= =======
Weighted average number of common stock and
common stock equivalents outstanding:
Basic ................................................ 11,866 4,789
======= =======
Diluted .............................................. 12,202 4,827
======= =======
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, 1997.... 11,862 $119 $101,299 $12,214 $(528) $113,104
Exercise of stock options....... 15 - 120 - - 120
Net income...................... - - - 3,826 - 3,826
------ ---- -------- ------- ----- --------
Balance at March 31, 1998....... 11,877 $119 $101,419 $16,040 $(528) $117,050
====== ==== ======== ======= ===== ========
</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)
Three Months
Ended March 31,
--------------------
1998 1997
------- -------
Operating Activities:
Net income............................................ $ 3,826 $ 1,240
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization....................... 2,283 1,521
Amortization of discount on subordinated debt....... - 22
Deferred income taxes............................... - 690
Consulting expenses offset against
note receivable................................... 31 31
Minority interest .................................. 103 74
Provision for doubtful accounts..................... 152 146
Change in assets and liabilities:
Accounts receivable............................... (7,303) (3,843)
Prepaid expenses and other assets................. (5,206) 12
Accounts payable, accrued liabilities and
other current liabilities....................... (391) (3,348)
Other ............................................ (11) 165
------- -------
Cash used in operating activities............... (6,516) (3,290)
------- -------
Investing Activities:
Purchases of property and equipment................... (2,553) (876)
Notes and advances receivable, net of repayments ..... (6,046) -
Other ................................................ (220) (1,064)
------- -------
Cash used in investing activities .............. (8,819) (1,940)
------- -------
Financing Activities:
Proceeds from issuance of preferred stock ............ - 10,000
Proceeds from the exercise of stock options .......... 120 9
Proceeds from borrowings ............................. 15,200 -
Distributions paid to minority partners .............. (74) (74)
Payments of dividends to preferred shareholders....... - (85)
Borrowings from related party, net of repayments...... (75) 332
Principal payments on long-term debt.................. (221) (475)
------- -------
Cash provided by financing activities........... 14,950 9,707
------- -------
Net increase (decrease) in cash and cash equivalents... (385) 4,477
Cash and cash equivalents, beginning of period......... 4,011 6,030
------- -------
Cash and cash equivalents, end of period............... $ 3,626 $10,507
======= =======
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 results of operations for the three months ended March 31, 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 have been reclassified for
comparative purposes.
NOTE 2--MANAGEMENT AGREEMENTS
During the first quarter of 1998, Centennial HealthCare Corporation
("Centennial" or the "Company"), entered into management agreements
for six skilled nursing facilities, with a total of 836 licensed available beds,
located in North Carolina. The agreements each have a five-year term, and
provide the Company with a right of first refusal to purchase the related
facilities.
Also in the first quarter of 1998, the Company entered into a management
agreement for a 59-bed rural hospital in northern Florida. The agreement has an
initial term of three years with a subsequent renewal option and provides the
Company with a right of first refusal to purchase the facility. The Company has
also agreed to provide the lessor of the facility with a revolving working
capital line of credit of up to $500,000.
NOTE 3--EARNINGS PER SHARE
The calculation of earnings per share (EPS) is as follows (in thousands,
except per share amounts):
Three Months Ended
March 31,
1998 1997
------- ------
Income before dividends and accretion on preferred stock..... $ 3,826 $1,240
Deduct: dividends and accretion of preferred stock........... - 786
------- ------
Income applicable to common stock............................ 3,826 454
======= ======
Weighted average common shares outstanding................... 11,866 4,789
======= ======
BASIC EARNINGS PER COMMON SHARE.............................. $ 0.32 $ 0.09
======= ======
Income applicable to common stock............................ 3,826 454
Interest savings on convertible debt (net of tax)............ 24 -
------- ------
Income applicable to common stock............................ 3,850 454
======= ======
Weighted average common shares outstanding................... 11,866 4,789
Dilutive effect of stock options............................. 336 38
------- ------
Shares applicable to diluted EPS............................. 12,202 4,827
======= ======
DILUTED EARNINGS PER COMMON SHARE............................ $ 0.32 $ 0.09
======= ======
NOTE 4--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
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.
7
<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-month
period ended March 31, 1998 and 1997.
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.
RESULTS OF OPERATIONS
Centennial's revenues and earnings for the three-month period ended March 31,
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 MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from $62.4
million in the first quarter of 1997 to $83.4 million in the same period in
1998, an increase of $21.0 million or 33.7%. Total revenues associated with
Total Care Consolidated, Inc., ("TCC"), which the Company acquired in May 1997,
approximated $6.7 million during the first quarter of 1998. In August 1997, the
Company acquired substantially all of the business and assets of Complex Care,
Inc. ("CCI"), a provider of physical, occupational and speech therapy services
through approximately 45 contracts with long-term care facilities. Total
revenues associated with the CCI contracts approximated $4.2 million in the
first quarter of 1998. In March and June 1997, the Company began operating two
rural hospitals (the "Hospitals"), located in northern Florida. For the first
quarter of 1998, revenues associated with the Hospitals approximated $2.7
million. In December 1997, Centennial acquired a 58-bed skilled nursing
facility in Florida, (the "Florida Facility"), which had previously been managed
by the Company since June 1991. Total revenues associated with the Florida
Facility approximated $883,000 in the first quarter of 1998. The remaining
increase of $6.5 million was attributable to growth in existing facility
revenues and therapy contract revenues. The increase in existing facility
revenues during 1997 of approximately $4.3 million resulted primarily from an
increase in the quality revenue mix of the facilities due to increasing
admissions of higher acuity
8
<PAGE>
patients and from the 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 quarter of 1998 compared to the
same period in 1997. The increase in revenues at the Company's subsidiary
providing therapy services of approximately $2.2 million resulted from the net
addition of 17 rehabilitation therapy services contracts.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $1.9 million in the first quarter of 1997 to $3.7 million in the
first quarter of 1998, an increase of $1.8 million, or 98.2%, which was
attributable primarily to the addition of facility management agreements
subsequent to the first quarter of 1997 and revenue for the performance of
additional services to existing managed facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $49.7
million in the first quarter of 1997 to $66.3 million in the same period in
1998, an increase of $16.6 million or 33.4%, of which TCC and the CCI therapy
contracts added approximately $6.4 million and $3.1 million, respectively, in
the first quarter of 1998 compared to the same period in 1997. The Hospitals
and the Florida Facility added $2.2 million and approximately $665,000 to
operating expenses, respectively, during the first quarter of 1998 compared to
1997. The Company's expenses from existing contract therapy services increased
$1.4 million in the first quarter of 1998 over the prior year period due
primarily to growth in therapy contracts. The remaining $2.8 million was
attributable primarily to an increase in costs at existing long-term care
facilities and to providing care for higher acuity patients in the first quarter
of 1998 as compared to the prior year period.
LEASE EXPENSE. Lease expense increased from $5.1 million in 1997 to $5.4
million in 1998, an increase of approximately $326,000, or 6.4%. The Hospitals
added approximately $90,000 in the first quarter of 1998 compared to the first
quarter of 1997. The remaining increase of approximately $236,000 was due
primarily to rent escalations in certain facility leases, which are tied to
increases in operating revenue and income.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$3.4 million in 1997 to $4.9 million in 1998, an increase of $1.5 million, or
46.8%, which was due primarily to additional overhead incurred to accommodate
the expansion in therapy services contracts, including the acquisition of the
CCI contracts, the addition of long-term care facility management agreements,
and the acquisition of TCC and the Hospitals.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$1.5 million in the first quarter of 1997 to $2.3 million in the same period in
1998, an increase of approximately $762,000, or 50.1%, which was primarily
attributable to acquisitions and additional depreciation expense incurred as a
result of fixed asset purchases.
INTEREST EXPENSE. Interest expense decreased from $2.6 million in 1997 to $1.9
million in 1998, a decrease of approximately $716,000, or 27.2%, 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
Company's Second Amended and Restated Credit Facility with CoreStates Bank, N.A.
and NationsBank, N.A. as agents and lenders and the other lenders named therein
(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 $44.0 million
related to borrowings for acquisitions and working capital.
9
<PAGE>
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
37.7% in the first quarter of 1997 to 39.0% in the first quarter of 1998, an
increase in the rate of 1.3%. This increase was primarily attributable to an
anticipated increase in the Company's average state tax rate and a proportional
increase in non-deductible expenses for federal tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during the first quarter 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 $64.2
million at March 31, 1998 primarily attributable to increases in patient
accounts receivable, working capital advances under arrangements with certain of
the Company's managed facilities, and annual deposits for the Company's 1998
insurance contracts. Patient accounts receivable increased from $72.2 million
at December 31, 1997 to $79.4 million at March 31, 1998, an increase of $7.2
million. Of this increase, approximately $3.5 million was due primarily to
increases in Medicare reimbursement rates at many of the Company's long-term
care facilities associated with the Company's continued expansion of specialty
services. Costs incurred under the Medicare program are reimbursed on a
retroactive basis, which extends the collection time of these receivables. In
addition, during the first quarter of 1998, the Company experienced a general
slow-down in payments from Medicare and several Medicaid payors resulting from
Medicare's expanded review of long-term care billing practices, delays in the
processing of non-resident eligibility documentation in the District of Columbia
and increases in payment turnover from previous levels at the Company's
facilities in Michigan. These factors resulted in an increase of approximately
$3.0 million in patient accounts receivable during the first quarter of 1998.
The balance of approximately $700,000 relates to general increases at the
facilities. Working capital advances under arrangements with certain of the
Company's managed facilities increased by approximately $6.1 million, and annual
deposits related to the Company's insurance contracts increased by approximately
$1.7 million in the first quarter of 1998.
The Company continued to invest in its leased and owned facilities through
capital expenditures of approximately $2.6 million or approximately $439 per bed
for the three-month period. These expenditures included the expansion of
existing facilities and the selected renovation of certain facilities.
During the first quarter of 1998, the Company borrowed $15.2 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 March 31, 1998, the Company had $56.5 million outstanding and
approximately $61.5 million available under its Senior Credit Facility, net of
issued standby letters of credit of approximately $7.0 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.
10
<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 over the next five years, primarily
through the implementation of a Medicare prospective payment system for skilled
services. The Medicare prospective payment rate, which reimburses for routine
service, ancillary and capital costs, will initially be a blended rate based on
(i) a facility-specific payment rate derived from each facility's 1995 cost
report, adjusted by an inflation factor and (ii) a federal per diem rate derived
from all hospital-based and freestanding (skilled nursing facility) 1995 costs
reports, adjusted to remove geographic, wage-related, inflationary and case mix
differences between facilities. The blended rate will be further adjusted by a
facility-specific case mix (acuity) index. The exact amount of these adjustments
has not yet been released by the Secretary of the Department of Health and Human
Services.
Management believes that, due to the cost structure at its facilities in 1995
and its costs as compared to other facilities in its markets, the Company's
overall reimbursement rates should not be lower than current rates and could
possibly be higher. However, until the rates are ultimately determined under
the prospective payment system, the Company will not be able to determine the
exact nature or long term financial impact of the legislative changes. The
Company can give no assurance that payments under such programs in the future
will remain at a level comparable to the present level or increase, and
decreases in the level of payments could have a material adverse effect on the
Company. During the first quarter of 1998, the Company derived 20% of its
revenues from Medicare at its long-term care facilities.
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, 1999.
The interim payment system is effective for cost reporting periods beginning on
or after October 1, 1997. The Act requires home health agencies to be
reimbursed through IPS at the lesser 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 on 98% of
fiscal year 1994 reasonable costs.
Implementation of these new limits could effectively reduce reimbursement 15-20%
according to industry experts. During the first quarter of 1998, the Company
derived 8% of its revenues from home health care.
Effective April 10, 1998, regulations were adopted by Health Care Financing
Administration which temporarily change the basis of reimbursement for contract
therapy services, including physical therapy, respiratory therapy, occupational
therapy and speech language pathology. These regulations impose regionally-
adjusted salary equivalency rates as reimbursement caps for occupational, speech
and physical therapy. In most locations the reduced rates have the effect of
11
<PAGE>
reducing the amount of reimbursement for a unit of occupational or speech
therapy and increasing the amount of reimbursement for a unit of physical
therapy. The Company believes that such rate reductions will be completely or
partially offset by cost reductions, changes in the method of delivering such
services and the addition of new therapy contracts. This salary equivalency
rate methodology for reimbursement effectively phases out with the
implementation of the prospective payment system for skilled nursing facilities
as summarized above. 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. During the first quarter of 1998, the Company derived 14% of its
revenues contract therapy services.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of March 31, 1998, the Company did not have any pending legal
proceedings that separately or in the aggregate would be likely to
have a material adverse effect on the business or 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.
Effective January 1, 1998, Centennial entered into long-term
management agreements for six skilled nursing facilities, with a total
of 836 licensed available beds, located in eastern North Carolina.
Under the terms of these five year management agreements, the Company
will receive a management fee equal to 6.5% of each facility's
revenues. In addition, the Company entered into a management
agreement for a 59-bed rural hospital in northern Florida, where the
Company currently provides home health services and operates a nursing
home and two other rural hospitals.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Third Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, Registration
No. 333-24267, as amended)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1 Registration No. 333-24267, as
amended).
4.1 Third Amended and Restated Articles of Incorporation of the
Company, including without limitation Article III and
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).
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.
None.
13
<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: May 14, 1998 CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
----------------------------------------
J. Stephen Eaton, Chairman of the Board,
President and Chief Executive Officer
Date: May 14, 1998
By: /s/ Alan C. Dahl
----------------------------------------
Alan C. Dahl, Executive Vice President
and Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit No. 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 on Form S-1, Registration
No. 333-24267, as amended)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1 Registration No. 333-24267, as
amended).
4.1 Third Amended and Restated Articles of Incorporation of the
Company, including without limitation Article III and
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).
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (For SEC use only)
99.1 Cautionary Statements
15
<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
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 001-35118
---------
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
--------- -------
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 August 5, 1998
<PAGE>
CENTENNIAL HEALTHCARE INC
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
ITEM I - FINANCIAL STATEMENTS
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 5,756 $ 4,011
Patient accounts receivable and
third-party payor settlements, net of
allowance for doubtful accounts of
approximately $3,200 and $3,000..................... 86,987 72,222
Other receivables..................................... 25,737 14,612
Deferred income taxes................................. 2,511 2,511
Prepaid expenses and other current assets............. 2,615 1,259
-------- --------
Total current assets................................ 123,606 94,615
Property and equipment, net............................ 75,301 74,379
Intangible assets, net................................. 50,353 51,331
Notes receivable and other assets...................... 23,680 23,324
-------- --------
Total assets......................................... $272,940 $243,649
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............... $ 41,722 $ 40,785
Other current liabilities.............................. 9,471 8,270
-------- --------
Total current liabilities............................ 51,193 49,055
Long-term debt, less current maturities................. 99,360 78,913
Other long-term liabilities............................. 1,329 2,577
-------- --------
151,882 130,545
Commitments and contingencies (Note 3)
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...................................... 19,874 12,214
-------- --------
121,586 113,632
Note receivable from shareholder........................ (528) (528)
-------- --------
Net shareholders' equity............................ 121,058 113,104
-------- --------
Total liabilities and shareholders' equity.......... $272,940 $243,649
======== ========
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Net patient service revenues........................................ $ 84,042 $ 70,202 $167,421 $132,573
Management fees and other revenues.................................. 3,858 1,737 7,551 3,601
-------- -------- -------- --------
Total revenues..................................................... 87,900 71,939 174,972 136,174
-------- -------- -------- --------
Expenses:
Facility operating expenses:
Salaries, wages and benefits....................................... 43,348 34,988 84,920 68,261
Other operating expenses........................................... 23,281 20,392 47,979 36,791
Lease expense....................................................... 5,746 5,350 11,155 10,433
Corporate administrative costs...................................... 5,247 3,846 10,190 7,214
Depreciation and amortization....................................... 2,379 1,613 4,662 3,134
-------- -------- -------- --------
Total operating expenses........................................... 80,001 66,189 158,906 125,833
-------- -------- -------- --------
7,899 5,750 16,066 10,341
-------- -------- -------- --------
Other income (expense):
Interest income..................................................... 800 167 921 316
Interest expense.................................................... (2,316) (2,658) (4,229) (5,288)
-------- -------- -------- --------
Total other expense................................................ (1,516) (2,491) (3,308) (4,972)
-------- -------- -------- --------
6,383 3,259 12,758 5,369
Provision for income taxes........................................... 2,489 1,270 4,975 2,094
-------- -------- -------- --------
Income before minority interest...................................... 3,894 1,989 7,783 3,275
Minority interest in net income of subsidiary,
net of income taxes................................................. (60) (105) (123) (150)
-------- -------- -------- --------
Net income......................................................... 3,834 1,884 7,660 3,125
Dividends and accretion on preferred stock........................... - 432 - 1,219
-------- -------- -------- --------
Income applicable to common stock.................................... $ 3,834 $ 1,452 $ 7,660 $ 1,906
======== ======== ======== ========
Income applicable to common stock
per common stock and common stock equivalent share:
Basic............................................................... $0.32 $0.30 $0.64 $0.40
======== ======== ======== ========
Diluted............................................................. $0.32 $0.30 $0.63 $0.39
======== ======== ======== ========
Weighted average number of common stock and
common stock equivalents outstanding:
Basic............................................................... 11,910 4,789 11,888 4,799
======== ======== ======== ========
Diluted............................................................. 12,215 4,828 12,213 4,837
======== ======== ======== ========
</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, 1997.... 11,862 $ 119 $101,299 $12,214 $ (528) $113,104
Exercise of stock options....... 61 - 294 - - 294
Net income...................... - - - 7,660 - 7,660
------- ----- -------- ------- ------ --------
Balance at June 30, 1998........ 11,923 $ 119 $101,593 $19,874 $ (528) $121,058
======= ===== ======== ======= ====== ========
</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)
SIX MONTHS
ENDED JUNE 30,
------------------
1998 1997
------- -------
Operating Activities:
Net income............................................ $ 7,660 $ 3,125
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization....................... 4,662 3,134
Amortization of discount on subordinated debt....... - 58
Deferred income taxes............................... - 1,739
Consulting expenses offset against
note receivable................................... 62 62
Minority interest................................... 201 247
Provision for doubtful accounts..................... 684 297
Change in assets and liabilities:
Accounts receivable............................... (16,243) (8,932)
Prepaid expenses and other assets................. (8,100) (3,091)
Accounts payable, accrued liabilities and
other current liabilities....................... 2,337 168
Other............................................. (40) 161
-------- --------
Cash used in operating activities............... (8,777) (3,032)
-------- --------
Investing Activities:
Purchases of property and equipment................... (3,699) (2,030)
Notes and advances receivable, net of repayments...... (5,447) 114
Acquisitions, net of cash acquired.................... - (6,000)
(Increase) decrease in restricted cash................ (5) 4,680
Other................................................. (613) (764)
-------- --------
Cash used in investing activities............... (9,764) (4,000)
-------- --------
Financing Activities:
Proceeds from issuance of preferred stock............. - 10,000
Proceeds from the exercise of stock options........... 294 11
Proceeds from borrowings.............................. 21,200 6,000
Distributions paid to minority partners............... (148) (148)
Payments of dividends to preferred shareholders....... - (249)
Payments on amounts due to related party.............. (307) (192)
Principal payments on long-term debt.................. (753) (887)
-------- --------
Cash provided by financing activities........... 20,286 14,535
-------- --------
Net increase in cash and cash equivalents.............. 1,745 7,503
Cash and cash equivalents, beginning of period......... 4,011 6,030
-------- --------
Cash and cash equivalents, end of period............... $ 5,756 $ 13,533
======== ========
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The results of operations for
the six months ended June 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.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Income before dividends and accretion on preferred stock....... $ 3,834 $1,884 $ 7,660 $ 3,125
Dividends and accretion of preferred stock..................... - (432) - (1,219)
------- ------ ------- -------
Income applicable to common stock.............................. $ 3,834 $1,452 $ 7,660 $ 1,906
Weighted average common shares outstanding..................... 11,910 4,789 11,888 4,799
BASIC EARNINGS PER COMMON SHARE................................ $ 0.32 $ 0.30 $ 0.64 $ 0.40
======= ====== ======= =======
Income applicable to common stock.............................. $ 3,834 $1,452 $ 7,660 $ 1,906
Interest savings on convertible debt (net of tax).............. 24 - 48 -
------- ------ ------- -------
Income applicable to common stock.............................. $ 3,858 $1,452 $ 7,708 $ 1,906
Weighted average common shares outstanding..................... 11,910 4,789 11,888 4,799
Dilutive effect of stock options............................... 180 39 200 38
Conversion of convertible debt................................. 125 - 125 -
------- ------ ------- -------
Average diluted common shares outstanding...................... 12,215 4,828 12,213 4,837
DILUTED EARNINGS PER COMMON SHARE.............................. $ 0.32 $ 0.30 $ 0.63 $ 0.39
======= ====== ======= =======
</TABLE>
7
<PAGE>
NOTE 3--COMMITMENTS AND CONTINGENCIES
On December 16, 1997, the Company expanded its Senior Credit Facility with
CoreStates Bank, N.A., (now known as First Union National Bank (First Union)),
and NationsBank, N.A., (NationsBank), as agents and lenders and the other
lenders named herein, through an amendment to its existing credit agreement (the
"Senior Credit Facility"). The Company's maximum aggregated advance limit was
increased from $65.0 million to $125.0 million. Company advances under the
Senior Credit Facility may be used for acquisitions, capital expenditures,
working capital and general corporate purposes. Centennial's borrowing capacity
is dependent upon its ability to satisfy certain financial covenants that are
impacted by its debt and capital structure. The Senior Credit Facility was
further expanded in July 1998, (see Note 5).
Effective April 20, 1998, the Company entered into an interest rate swap
agreement with First Union. 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. Through the agreement, the Company has
exchanged its floating rate interest obligations on $18.0 million in principal
to 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.
The Company anticipates entering into additional interest rate swap agreements
during the remainder of 1998, in accordance with the provisions of the Senior
Credit Facility noted above.
NOTE 4--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 5--SUBSEQUENT EVENTS
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 to the Company. Two of the licenses transferred on
August 1, 1998, and the remaining facility licenses are expected to be
transferred by October 1998.
In July 1998, the Company refinanced and expanded the Senior Credit Facility
from $125 million to $160 million through a syndication with an expanded bank
group led by NationsBank and First Union as agents and lenders. Under the
expansion, an initial amount of $40.0 million has been reserved for leases of
existing and future facilities. The Company can expand the lease portion of the
commitment up to $80.0 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
facility, 82-bed Riley Nursing Center, is Centennial's sixth skilled nursing
facility in Mississippi. The total purchase price for these facilities was
$16.1 million.
In December 1995, as part of the Company's merger with Transitional Health
Services, Inc. ("THS"), the Company assumed operations of THS of South Bend, a
191-bed skilled nursing facility located in South Bend, Indiana. As previously
disclosed, 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
is currently marketing the facility for sale. The Company is in the process of
recertifying the facility for Medicaid and a hearing has been scheduled in
October 1998 related to the continued licensure of the facility. In addition,
the Company is preparing its response to an action filed by the local county
prosecutor's office. The Company believes that all of these matters will be
resolved successfully and that the previously established reserve should be
adequate to cover any loss on disposition.
8
<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 six
month periods ended June 30, 1998 and 1997.
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.
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.
Including eleven facilities, (1,106 beds), under contract but not being operated
as of June 30, 1998, the Company operated 101 owned, leased and managed skilled
nursing facilities with approximately 10,800 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, at
June 30, 1998, Centennial provided rehabilitation therapy services on a contract
basis to third-party owned and Company-operated skilled nursing facilities in 19
states pursuant to 134 contracts and provided home health care services through
30 licensed home health offices.
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.
9
<PAGE>
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
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. This June 1997 hospital
lease is hereafter referred to as the "Hospital". The above hospital leases
together are hereafter referred to as the "Hospitals".
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.
("TCC"), 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.
RESULTS OF OPERATIONS
Centennial's revenues and earnings for both the three-month and six-month
periods ended June 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 JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from $70.2
million in the second quarter of 1997 to $84.0 million in the same period in
1998, an increase of $13.8 million or 19.7%. Total revenues associated with TCC
approximated $6.2 million during the second quarter of 1998, an increase of $1.9
million over the same period in the prior year. Total revenues associated with
the CCI contracts approximated $4.8 million for the three months ended June 30,
1998. For the second quarter of 1998, total revenues associated with the
Hospital and the Florida Facility approximated $1.5 million and $742,000,
respectively. The remaining increase of $4.9 million was attributable to growth
in existing facility revenues and therapy contract revenues. Existing facility
revenues increased approximately $3.4 million during the second 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 and from the 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 second quarter of 1998 compared to the
same period in 1997. Revenues from the Company's subsidiary providing therapy
services increased approximately $1.5 million during the second quarter of 1998
compared to the same period in the prior year, resulting from the net addition
of 14 rehabilitation therapy services contracts.
10
<PAGE>
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $1.7 million in the second quarter of 1997 to $3.9 million in the
second quarter of 1998, an increase of $2.2 million, which was attributable
primarily to the addition of facility management agreements subsequent to the
second quarter of 1997 and the performance of additional fee-generating services
to existing managed facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $55.4
million in the second quarter of 1997 to $66.6 million in the same period in
1998, an increase of $11.2 million or 20.3%, of which TCC and the CCI therapy
contracts added approximately $1.8 million and $3.6 million, respectively, in
the second quarter of 1998 compared to the same period in 1997. The Hospital
and the Florida Facility added $1.1 million and approximately $645,000,
respectively, to operating expenses during the second quarter of 1998. The
Company's expenses from existing contract therapy services increased $1.2
million in the second quarter of 1998 over the prior year period due primarily
to growth in therapy contracts. The remaining balance of $2.9 million was
attributable primarily to an increase in costs at existing long-term care
facilities and to providing care for higher acuity patients in the second
quarter of 1998 as compared to the prior year period.
LEASE EXPENSE. Lease expense increased from $5.4 million in the second quarter
of 1997 to $5.7 million in 1998, an increase of approximately $396,000, or 7.4%.
TCC and the Hospital added approximately $37,000 and $60,000, respectively, in
the second quarter of 1998 compared to the second quarter of 1997. Approximately
$120,000 of the increase represents a correction of rent expense on TCC incurred
in the first quarter of 1998, which was recorded as operating expense. The
remaining overall increase of approximately $179,000 was due primarily to rent
escalations in certain facility leases, which are tied to increases in operating
revenue and income.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$3.8 million in 1997 to $5.2 million in 1998, an increase of $1.4 million, or
36.4%, which was due primarily to additional overhead incurred to accommodate
the expansion in therapy services contracts, including the acquisition of the
CCI contracts, the addition of long-term care facility management agreements,
and the acquisition of TCC and the Hospital, and costs incurred in preparing for
the Medicare prospective payment system.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$1.6 million in the second quarter of 1997 to $2.4 million in the same period in
1998, an increase of approximately $766,000, or 47.5%, which was primarily
attributable to acquisitions and additional depreciation expense incurred as a
result of fixed asset purchases.
INTEREST EXPENSE. Interest expense decreased from $2.7 million in 1997 to $2.3
million in 1998, a decrease of approximately $342,000, or 12.9%, 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 $44.0 million subsequent to the
second quarter of 1997 related to borrowings for acquisitions and working
capital.
PROVISION FOR INCOME TAXES. The Company's effective tax rate for both the
second quarters of 1998 and 1997 was 39.0%.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$132.6 million in the first six months of 1997 to $167.4 million in the same
period in 1998, an increase of $34.8 million or 26.3%. Total revenues associated
with TCC approximated $13.0 million during the first six months of 1998, an
increase of approximately $8.6 million over the same period in the prior year.
Total revenues from the CCI contracts approximated $9.0 million during the first
six months of 1998. Revenues associated with the Hospitals approximated $5.7
million in the first six months of 1998, an increase of approximately $4.1
million over the same period in the prior year. Total revenues for the Florida
Facility approximated $1.6 million for the first six months of 1998. The
remaining increase of $11.5 million was primarily attributable to growth in
existing facility revenues and therapy contract revenues. Revenues associated
with existing facilities increased by approximately $7.8 million during the
first six 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 six months of 1998 compared to the same period in 1997. The increase
in revenues at the Company's subsidiary providing therapy services of
approximately $3.7 million resulted from the net addition of 14 rehabilitation
therapy services contracts subsequent to the second quarter of 1997.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $3.6 million in the first six months of 1997 to $7.6 million in
the first six months of 1998, an increase of $4.0 million, which was
attributable primarily to the addition of facility management agreements
subsequent to the second quarter of 1997 and the performance of additional fee-
generating services to existing managed facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $105.1
million in the first six months of 1997 to $132.9 million in the same period in
1998, an increase of $27.8 million or 26.4%, of which TCC and the CCI therapy
contracts added approximately $8.1 million and $6.7 million, respectively, in
the first six months of 1998 compared to the same period in 1997. The Hospitals
and the Florida Facility added $3.4 million and $1.3 million, respectively, to
operating expenses during the first six months of 1998 compared to 1997. The
Company's expenses from existing contract therapy services increased $2.6
million in the first six months of 1998 over the prior year period due primarily
to growth in therapy contracts. The remaining $5.7 million was attributable
primarily to an increase in costs at existing long-term care facilities and to
providing care for higher acuity patients in the first six months of 1998 as
compared to the prior year period.
LEASE EXPENSE. Lease expense increased from $10.4 million in 1997 to $11.2
million in 1998, an increase of approximately $722,000, or 6.9%. TCC and the
Hospitals added approximately $157,000 and $176,000, respectively, in the first
six months of 1998 compared to the first six months of 1997. The remaining
increase of approximately $389,000 was due primarily to rent escalations in
certain facility leases, which are tied to increases in operating revenue and
income.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$7.2 million in 1997 to $10.2 million in 1998, an increase of $3.0 million, or
41.3%, which was due primarily to additional overhead incurred to accommodate
the expansion in therapy services contracts, including the acquisition of the
CCI contracts, the addition of long-term care facility management agreements,
and the acquisition of TCC and the Hospitals, and costs incurred in preparing
for the Medicare prospective payment system.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$3.1 million in the first six months of 1997 to $4.7 million in the same period
in 1998, an increase of approximately $1.6, or 48.8%, which was primarily
attributable to acquisitions and additional depreciation expense incurred as a
result of fixed asset purchases.
12
<PAGE>
INTEREST EXPENSE. Interest expense decreased from $5.3 million in 1997 to $4.2
million in 1998, a decrease of $1.1 million, or 20.0%, 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 $44.0 million subsequent to the second quarter
of 1997 related to borrowings for acquisitions and working capital.
PROVISION FOR INCOME TAXES. The Company's effective tax rate for both the first
six months of 1998 and for the same period in 1997 was 39.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during the first six 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 $72.4
million at June 30, 1998 primarily attributable to increases in patient accounts
receivable, working capital advances under arrangements with certain of the
Company's managed facilities, and annual deposits for the Company's 1998
insurance contracts. Patient accounts receivable increased from $72.2 million
at December 31, 1997 to $87.0 million at June 30, 1998, an increase of $14.8
million. This increase was comprised of $11.2 million associated with the
Company's long-term care facilities, with the remaining $3.6 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 expects to receive
a substantial interim payment from Medicare on its 1997 and 1998 settlement
receivables (up to the routine cost limits) during the third quarter of 1998. As
a result, receivables from existing facilities should decrease in the third
quarter of 1998. The increase in therapy receivables during 1998 relates
primarily to the addition of 13 new therapy contracts during 1998 which
typically extend payments during the start-up phase of operations. Working
capital advances under arrangements with certain of the Company's managed
facilities increased by approximately $7.1 million, and annual deposits related
to the Company's insurance contracts increased by approximately $1.0 million in
the first six months of 1998.
The Company continued to invest in its leased and owned facilities through
capital expenditures of approximately $3.7 million or approximately $635 per bed
for the six-month period. These expenditures included the expansion of existing
facilities and the selected renovation of certain facilities.
During the first six months of 1998, the Company borrowed $21.2 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 June 30, 1998, the Company had $62.5 million outstanding
and approximately $55.8 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 July 1998, the Company expanded the Senior Credit Facility from $125 million
to $160 million through a 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 can expand the lease portion of the commitment up to $80.0 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
facility, 82-bed Riley Nursing Center, is Centennial's sixth skilled nursing
facility in Mississippi. The total purchase price for these facilities was $16.1
million.
In June 1998 the Company signed an agreement to lease ten skilled nursing
facilities totaling 1,024 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 were transferred on August 1, 1998, and the remaining
licenses are expected to be transferred by October 1998. Centennial anticipates
using cash resources in the third and fourth quarters of 1998 to fund working
capital requirements under these leases.
13
<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 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 proper documentation of
minimum data sets (MDS) 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 second quarter and first six months of 1998, the
Company derived approximately 19% of its total revenues from Medicare at its
long-term care facilities. The Company will incur, over the next four quarters,
training costs, implementation costs and other costs in order to prepare for
PPS. For the remainder of 1998, the Company has increased its budgeted expenses
by $2.5 million related to these costs.
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, 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 lesser 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 both the second quarter and first six months
of 1998, the Company derived approximately 7% 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
14
<PAGE>
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 both the second
quarter and first six months of 1998, the Company derived approximately 15% of
its revenues from third-party contract therapy services.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
coming millennium, any of the Company's computer programs that have two digit
data-sensitive software may interpret a date of "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
Management is in the process of evaluating the effect of the Year 2000 Issue on
the Company. Based on current findings, the total cost of addressing the Year
2000 Issue is not expected to have a material effect on the Company's business,
financial condition or results of operations. There can be no assurance that
such exposures on the costs of remediating any problems associated therewith
will not materially affect the Company's future business, financial condition or
results of operations.
15
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of June 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 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.
The annual meeting of the shareholders was held on May 21, 1998. At
this meeting, the following matters were voted upon by the Company's
shareholders.
(a) Election of Class I Directors
J. Stephen Eaton and Andrew M. Paul were elected to serve as Class I
directors of the Company until the 2001 Annual Meeting of Stockholders
or until their successors are elected and qualified. The vote was as
follows:
Votes Cast in Votes Cast Abstentions
Name Favor Against or Withheld Non Votes
---- ------------- ------------------- -----------
J. Stephen Eaton 10,608,989 168,225 1,100,431
Andrew M. Paul 10,608,989 168,225 1,100,431
The following directors continued in office following the meeting:
Name Term Expires
---- ------------
James B. Hoover 1999
Bertil D. Nordin 1999
Alan C. Dahl 2000
Robert A. Ortenzio 2000
(b) Approval of Amendment to the 1997 Stock Plan
The shareholders of the Company approved an increase in the number of
shares of Common stock which may be issued subject to options granted
under the 1997 Stock Plan from 482,790 to 800,000 shares, subject to
certain anti-dilution provisions set forth in the Plan. The vote was
as follows:
Votes Cast in Votes Cast Against or Abstentions
Favor Withheld Non Votes
--------------------------------------------------------------------
10,690,166 52,979 1,134,500
(c) Ratification of Appointment of Independent Public Accountants
The shareholders of the Company ratified the appointment of
PricewaterhouseCoopers LLP by the Audit Committee to continue in the
capacity of auditor for the Company and its subsidiaries for fiscal
year 1998. The vote was as follows:
Votes Cast in Votes Cast Against or Abstentions
Favor Withheld Non Votes
--------------------------------------------------------------------
10,777,114 100 1,100,431
ITEM 5. OTHER INFORMATION.
None
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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 on Form S-1, Registration No. 333-24267, as amended)
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 of the Company's Registration Statement on Form S-1
Registration No. 333-24267, as amended).
4.1 Third Amended and Restated Articles of Incorporation of the Company,
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 Third Amended and Restated Credit Agreement by and among the Company and
its subsidiaries and the lenders identified therein dated as of July 31,
1998.
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (For SEC use only)
99.1 Cautionary Statements
Reports on Form 8-K.
None.
17
<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: August 13, 1998 CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
----------------------------------------
J. Stephen Eaton, Chairman of the Board,
President and Chief Executive Officer
Date: August 13, 1998
By: /s/ Alan C. Dahl
------------------------------------------
Alan C. Dahl, Executive Vice President and
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit No. 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 on Form S-1, Registration No. 333-24267,
as amended)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Registration Statement
on Form S-1 Registration No. 333-24267, as amended).
4.1 Third Amended and Restated Articles of Incorporation of the Company,
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 Third Amended and Restated Credit Agreement by and among the Company
and its subsidiaries and the lenders identified therein dated as of
July 31, 1998.
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule (For SEC use only)
99.1 Cautionary Statements
19
<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, 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 001-35118
---------------------
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
--- ---
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............... 30,411 23,324
-------- --------
Total assets................................... $273,303 $243,649
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities......... $ 40,077 $ 40,785
Other current liabilities........................ 14,216 8,270
-------- --------
Total current liabilities...................... 54,293 49,055
Long-term debt, less current maturities........... 101,641 78,913
Other long-term liabilities....................... 2,215 2,577
-------- --------
158,149 130,545
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................................ 13,442 12,214
-------- --------
115,154 113,632
Note receivable from shareholder.................. - (528)
-------- --------
Net shareholders' equity....................... 115,154 113,104
-------- --------
Total liabilities and shareholders' equity..... $273,303 $243,649
======== ========
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,
-------------------- --------------------
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................................. (4,054) 2,212 921 4,306
-------- ------- -------- --------
Income (loss) before minority interest..................... (6,341) 3,460 1,442 6,735
Minority interest in net income of subsidiary,
net of income taxes...................................... (91) (77) (214) (227)
-------- ------- -------- --------
Income (loss) before extraordinary loss.................... (6,432) 3,383 1,228 6,508
Extraordinary loss on extinguishment of debt, net of
income tax benefit....................................... - (537) - (537)
-------- ------- -------- --------
Net income (loss).................................... (6,432) 2,846 1,228 5,971
Dividends and accretion on preferred stock................. - 4,654 - 5,873
-------- ------- -------- --------
Income (loss) applicable to common stock................... $ (6,432) $(1,808) $ 1,228 $ 98
======== ======= ======== ========
Income (loss) applicable to common stock per common
stock and common stock equivalent share:
Basic.................................................... $ (0.54) $ (0.16) $ 0.10 $ 0.01
======== ======= ======== ========
Diluted.................................................. $ (0.54) $ (0.15) $ 0.10 $ 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
<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, 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..................................... - - - 1,228 - 1,228
------ --- -------- ------- ----- --------
Balance at September 30, 1998.................. 11,923 $119 $101,593 $13,442 $ - $115,154
====== ==== ======== ======= ===== ========
</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)
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1997
-------- --------
Operating Activities:
Net income............................................. $ 1,228 $ 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.............................. (3,100) 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..................... 4,370 (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
<PAGE>
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.................... $(6,432) $ 3,383 $ 1,228 $ 6,508
Dividends and accretion on preferred stock............ - (4,654) - (5,873)
------- ------- ------- -------
Income (loss) applicable to common stock
before extraordinary loss........................... (6,432) (1,271) 1,228 635
Extraordinary loss on extinguishment of
debt (net of tax)................................... - (537) - (537)
------- ------- ------- -------
Income (loss) applicable to common stock.............. $(6,432) $(1,808) $ 1,228 $ 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........................... $ (0.54) $ (0.11) $ 0.10 $ 0.09
Extraordinary loss on extinguishment of debt.......... - (0.05) - (0.08)
------- ------- ------- -------
Basic Earnings (Loss) Per Common Share................ $ (0.54) $ (0.16) $ 0.10 $ 0.01
======= ======= ======= =======
Income (loss) applicable to common stock
before extraordinary loss........................... $(6,432) $(1,271) $ 1,228 $ 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.............. $(6,432) $(1,784) $ 1,228 $ 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.................................. $ (0.54) $ (0.10) $ 0.10 $ 0.09
Extraordinary loss on extinguishment of debt.......... - (0.05) - (0.07)
------- ------- ------- -------
Diluted Earnings (Loss) Per Common Share.............. $ (0.54) $ (0.15) $ 0.10 $ 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. 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 certain
long-lived assets at its nursing facilities and TC of $11.0 million and $1.2
million, respectively.
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, 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
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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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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 for both the third
quarters of 1998 and 1997 was 39.0%.
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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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 for both the first
nine months of 1998 and for the same period in 1997 was 39.0%.
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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 $74.9
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.
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
21
<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
(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.
22
<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 16, 1998 CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
----------------------------------------
J. Stephen Eaton, Chairman of the Board,
President and Chief Executive Officer
Date: November 16, 1998
By: /s/ Alan C. Dahl
------------------------------------------
Alan C. Dahl, Executive Vice President and
Chief Financial Officer
23
<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>
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
---------------------
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
--- ---
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>
NOTE 3 -- CERTAIN THIRD QUARTER TRANSACTIONS, AMENDED AND RESTATED IN
ITS ENTIRETY AS FOLLOWS:
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 of 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 $3.8 million and $7.2 million, respectively. In addition, the
Company wrote off approximately $1.2 million of goodwill associated with
Total Care, Inc.
2
<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: March 17, 1999 CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
----------------------------------------
J. Stephen Eaton, Chairman of the Board,
President and Chief Executive Officer
Date: March 17, 1999
By: /s/ Alan C. Dahl
----------------------------------------
Alan C. Dahl, Executive Vice President and
Chief Financial Officer
3
