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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For annual and transition reports pursuant to sections 13 or 15 (d) of the
Securities Exchange Act of 1934.
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-22771
CENTENNIAL HEALTHCARE CORPORATION
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1839701
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 770-698-9040
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
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Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
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|
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 1999 was approximately $69.0 million. As of
March 31, 1999, the registrant had 11,923,618 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
Part I
Page
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Item 1. Business....................................................
Item 2. Properties..................................................
Item 3. Legal Proceedings...........................................
Item 4. Submission of Matters to a Vote of Security Holders.........
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.........................................
Item 6. Selected Financial Data.....................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..
Item 8. Financial Statements and Supplementary Data.................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................
Part III
Item 10. Directors and Executive Officers of the Registrant..........
Item 11. Executive Compensation......................................
Item 12. Security Ownership of Certain Beneficial Owners
and Management..............................................
Item 13. Certain Relationships and Related Transactions..............
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.........................................
Signatures...........................................................
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Item 1. BUSINESS.
Certain statements in this Form 10-K under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in certain documents incorporated by reference herein constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). 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 (included as Exhibit 99.1 to this Form 10-K), which
statements are hereby incorporated 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, 1998, Centennial operated 101 owned, leased and managed skilled
nursing facilities with 10,780 licensed available beds in 20 states and the
District of Columbia, 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,
infusion therapy, wound care, home health care and other subacute and specialty
services. As components of its specialty services, at December 31, 1998,
Centennial provided rehabilitation therapy services on a contract basis to
third-party owned and Company-operated skilled nursing facilities in 23 states
pursuant to 132 contracts and provided home health care services, 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 pursues 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 $357.6 million,
$304.3 million and $233.0 million for the years ended December 31, 1998, 1997
and
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1996, respectively. Operating income was $8.6 million, $25.5 million, and
$14.5 million for the fiscal years ended December 31, 1998, 1997 and
1996, respectively. Licensed available beds increased from 8,113 to 10,780
during the same period. The Company's revenue quality mix (Medicare, private
pay, management fees and other) improved from 57.2% for the fiscal year ended
December 31, 1996 to 66.6% for the fiscal year ended December 31, 1998, and the
Company's revenues from specialty services increased from 33.7% for the fiscal
year ended December 31, 1996 to 43.5% for the fiscal year ended December 31,
1998, 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, 1998, 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 3 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 19 management agreements for skilled nursing facilities totaling
2,665 licensed available beds, and the management of a 52-bed rural acute care
hospital located in Florida.
1998 ACQUISITIONS AND LEASE TRANSACTIONS
In August 1998, the Company began leasing four skilled nursing facilities
totaling 349 licensed available beds, located in Mississippi, North Carolina,
Arkansas and Wisconsin. One of these facilities was previously managed by the
Company. In October 1998, the Company began leasing six skilled nursing
facilities totaling 608 licensed available beds, located in Florida, Arkansas,
Kansas and Wisconsin.
In November 1998, the Company began leasing four skilled nursing facilities
totaling 675 licensed available beds, located in Florida and Missouri.
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 16 facilities as
of December 31, 1998, 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, 1998 the
Company provided rehabilitation services pursuant to 132 contracts in 23 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.
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In December 1997, the Company acquired a 58-bed long-term care facility in
Florida that had been managed by the Company since 1991.
1998 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 1998, the company added 9
managed skilled nursing facilities to its portfolio, totaling 1,157 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 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
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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 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
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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 rehabilitation
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
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.
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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, 1998 the Company had
contracted to provide rehabilitation therapy services to patients in 132
facilities, 41 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, 1998, Centennial operated 16 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 14 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 nurse consultants with responsibility for providing
guidance on patient care issues, conducting quality assurance audits, training
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 and other key personnel 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 vice president 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,
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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 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, as of December 31, 1998, the Company leased or owned 19
facilities that it previously managed.
FACILITIES
At December 31, 1998, Centennial operated 101 owned, leased and managed
skilled nursing facilities with 10,780 beds in 20 states and the District of
Columbia. Of this number, Centennial owned 9 facilities with 897 beds, leased 59
facilities with 6,352 beds and managed 33 facilities with 3,531 beds. Since
December 31, 1998, the Company has added 6 leased skilled nursing facilities
with 795 beds in the state of Massachusetts. At December 31, 1998, the Company's
facilities had an average of 107 beds and an average occupancy rate of 89.8%.
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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, 1998:
Facilities
Number of ------------------------------
State Beds Owned Leased Managed Total Occupancy %(1)
- ----- --------- ----- ------ ------- ----- --------------
Arkansas 337 - 4 - 4 72.4
DC 296 - 1 - 1 96.0
Florida 585 1 3 3 7 86.5
Georgia 157 - 1 - 1 94.9
Idaho 166 - 2 - 2 87.1
Indiana 1,149 - 12 - 12 88.3
Kansas 458 - 3 2 5 79.0
Kentucky 356 1 2 - 3 92.3
Louisiana 376 1 3 - 4 88.1
Michigan 1,262 3 7 3 13 90.9
Mississippi 689 - 6 1 7 97.0
Missouri 440 - 2 - 2 84.3
Montana 99 - 1 - 1 87.5
North Carolina 3,202 2 9 18 29 91.3
Nebraska 158 1 - - 1 85.5
New Mexico 119 - - 1 1 91.9
Tennessee 119 - - 1 1 97.4
Texas 107 - 1 - 1 94.5
Virginia 174 - - 2 2 94.6
Washington 104 - - 1 1 68.0
Wisconsin 427 - 2 1 3 80.5
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Totals 10,780 9 59 33 101 89.8%
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(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 1998, which include Lafayette Healthcare
Center (Florida); Crystal Oaks of Pinellas (Florida) and Mountain Ridge Wellness
Center (North Carolina).
LEASED FACILITIES. At December 31, 1998, the Company leased 59 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.
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, 1998, the Company operated 33 facilities under long-term
management contracts with third parties. Revenues from management contracts
accounted for approximately 4.3% of the Company's total revenues for the fiscal
year ended December 31, 1998. Pursuant to these management contracts, the
Company
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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 1998, two third-party owned facilities for which the Company
provided management services were sold and the Company terminated management
agreements on these sold facilities.
CONTRACT REHABILITATION SERVICES. At December 31, 1998, Centennial
provided contract rehabilitation services under 132 contracts in facilities in
23 states. Forty-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.
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
<PAGE>
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:
Years Ended Years Ended
December 31, May 31,
--------------------------- -------------
1998 1997 1996 1995 1995 1994
------ ------ ------ ------ ------ ------
Percentage of total revenues:
Medicare.......................... 23.9% 23.8% 25.4% 18.2% 15.0% 6.9%
Private pay, management fees
and other (1)..................... 42.7 39.6 31.8 23.7 20.5 19.4
----- ----- ----- ----- ----- -----
66.6 63.4 57.2 41.9 35.5 26.3
Medicaid.......................... 33.4 36.6 42.8 58.1 64.5 73.7
----- ----- ----- ----- ----- -----
Total............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
- ------------
(1) Private pay includes payments from third parties pursuant to contract
rehabilitation therapy services.
MEDICARE PRIOR TO 1998. All of the Company's facilities currently in
operation 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
higher than rates
<PAGE>
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
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.
<PAGE>
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.
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
<PAGE>
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.
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 ("PPS") for
skilled services. Under the Act, PPS will be phased in over three cost reporting
periods beginning on or after July 1, 1998. Generally, 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, nor can the Company give assurance that it will be able to obtain
sufficient cost reductions to offset the reduction in revenues under PPS.
Decreases in the level of payments or failure to reduce costs could have a
material adverse effect on the company.
The Medicare prospective payment system begins for cost reporting periods
starting on or after July 1, 1998. For the majority of the Company's facilities,
the Initial Year of the four-year phase in period will begin January 1, 1999.
For facilities acquired by the Company in fiscal 1998, the Initial Year for the
PPS system will be from the date of acquisition through December 31, 1998. Year
Two of the PPS system will be fiscal 1999 for these nursing centers. The Initial
Year blended rate will be based 75% on the facility-specific rate and 25% on the
federal per diem rate. The Year Two prospective rate will be based 50% on the
facility-specific rate and 50% on the federal per diem rate. The Year Three
blended rate will be based 25% on the facility-specific rate and 75% on the
federal per diem rate. The Year Four 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. For the year ended December 31, 1998,
the Company derived approximately 22% 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. For the year ended
<PAGE>
December 31, 1998, the Company derived approximately 33% of its revenues from
Medicaid 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. Under the IPS, home health agencies, in
general, 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 agency's twelve month
cost reporting period during fiscal year 1994 and 25% on 98% of the
standardized regional average of these costs in the agency's
census region.
The Act also provides that cost limits and per beneficiary limits must be
reduced by 15% from the amount that would otherwise be in effect on September
30, 1999, regardless of whether the new prospective payment system is ready for
implementation on October 1, 1999.
Implementation of these new limits will effectively reduce reimbursement
15-20% according to industry experts. For the year ended December 31, 1998
Centennial derived 7% of its revenues from home health care.
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 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 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 long-term adverse effect on the Company. During 1998, the
Company derived 14% of its revenue from third-party contract therapy services.
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
<PAGE>
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
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
<PAGE>
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.
PERSONNEL
As of December 31, 1998, the Company employed, directly or indirectly,
approximately 10,000 persons, including approximately 8,000 full-time and 2,000
part-time employees. As of December 31, 1998, collective bargaining agreements
were in effect related to 10 facilities covering approximately 662 employees and
negotiations were in progress with bargaining units at six 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 guaranteed cost
insurance program 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 against 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
Prior to December 1, 1998, 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. Under an amendment
to the lease agreement effective December 1, 1998, the company leased an
additional 6,500 square feet of office space in the same location. 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
<PAGE>
Company has entered into subleases for the entire space for the remaining term
of the primary lease.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1998, 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.
On March 26, 1999, the Company received an investigatory subpoena from the
Department of Health & Human Services, Office of the Inspector General
requesting records in connection with an investigation of possible or otherwise
improper claims for payment under Title XVIII (Medicare) of the Social Security
Act. The request relates to records for the period January 1, 1994 to the
present concerning certain of the Company's internal policies and relates to
four long-term care facilities operated by the Company. The Company is not aware
of the origin of the investigation or its scope but intends to provide all
requested records and cooperate fully with the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
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 during 1998 are shown below:
1998 High Low
---- ---- ---
First quarter .. .. .. .. .. .. .. .. 25.125 19.625
Second quarter .. .. .. .. .. .. .. .. 25.00 16.4375
Third quarter .. .. .. .. .. .. .. .. 20.375 7.50
Fourth quarter .. .. .. .. .. .. .. .. 15.50 7.375
At March 31, 1999, the last reported sale price of the Common Stock was $8.875
per share and there were approximately 64 record holders of Common Stock.
<PAGE>
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.
None
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, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, is derived from the audited
financial statements included elsewhere herein The selected consolidated
financial data set forth below for the seven months ended December 31, 1995 and
for the years ended May 31, 1995 and 1994 has been derived from financial
statements not included elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
Seven Months
For the year ended Ended For the year
December 31, December 31, ended May 31,
-------------------------------------------- ------------ -----------------
1998 1997 1996 1995(1) 1995 1995 1994
-------- -------- -------- -------- ------------ ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenues.................. $342,203 $296,321 $227,387 $ 71,862 $ 42,103 $ 61,856 $ 38,115
Management fee and other revenues............. 15,442 7,952 5,661 3,364 2,108 3,362 3,384
-------- -------- -------- -------- ------- -------- --------
Total revenues............................. 357,645 304,273 233,048 75,226 44,211 65,218 41,499
Facility operating expenses................... 275,489 234,259 183,324 58,565 35,262 48,872 29,510
Lease expense................................. 22,946 21,740 18,777 7,702 4,651 6,901 4,823
Corporate administrative costs................ 21,515 16,055 11,400 5,027 3,526 3,396 2,927
Depreciation and amortization................. 9,292 6,760 5,012 738 429 290 82
Loss on closure of nursing facility........... 4,010 - - - - - -
Provision for asset revaluation............... 12,152 - - - - - -
Terminated merger transaction costs........... 3,619 - - - - - -
-------- -------- -------- -------- ------- -------- --------
Operating income before net interest
expense and equity in income (loss) of
unconsolidated partnerships.............. 8,622 25,459 14,535 3,194 343 5,759 4,157
Interest income (expense), net................ (7,154) (8,022) (9,373) (176) (116) 57 131
Equity in income (loss) of
unconsolidated partnerships................. - - (108) 448 25 (28) 1,733
-------- -------- -------- -------- ------- -------- --------
Income before income taxes,
minority interest and extraordinary item.. 1,468 17,437 5,054 3,466 252 5,788 6,021
Provision for income taxes..................... 1,504 6,800 2,092 1,389 328 2,106 2,230
-------- -------- -------- -------- ------- -------- --------
Income (loss) before minority
interest and extraordinary item............ (36) 10,637 2,962 2,077 (76) 3,682 3,791
Minority interest in net income of
subsidiary, net of income taxes............ (279) (252) (183) (201) (82) (207) -
-------- -------- -------- -------- ------- -------- --------
Net income (loss) before extraordinary item.... (315) 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)............................. $ (315) $ 9,848 $ 2,779 $ 1,876 $ (158) $ 3,725 $ 5,389
======== ======== ======== ======== ======= ======== ========
Per common share information:
Diluted:
Income (loss) before extraordinary item....... $ (0.03) $ 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)......................... $ (0.03) $ 0.48 $ 0.12 $ 0.72 $ (0.06) $ 1.45 $ 2.28
======== ======== ======== ======== ======= ======== ========
Weighted average number of common and common
stock equivalents outstanding.............. 12,078 8,462 4,782 2,601 2,601 2,576 2,363
======== ======== ======== ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of May 31,
------------------------------------------------- -------------------
1998 1997 1996 1995 1995 1994
-------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............................ $ 56,575 $ 33,097 $ 8,702 $ 3,984 $ 4,805 $ 5,540
Total assets............................... 288,372 243,649 193,448 155,018 25,499 14,172
Long-term debt and subordinated debt,
less current maturities................. 112,849 78,913 107,795 83,559 4,558 676
Preferred stock (3)........................ - - 21,305 19,455 9,187 4,300
Net shareholders' equity................... 113,683 113,104 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 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.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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, 1998.
GENERAL
Centennial HealthCare Corporation ("Centennial" or the "Company") provides a
broad range of long-term healthcare services to meet the medical needs of
elderly and post-acute patients. The Company provides these services through
geographically concentrated networks located in metropolitan and secondary
markets throughout the United States. The Company was organized in 1989 as a
Georgia corporation and conducts business through its operating subsidiaries.
The Company currently operates 101 owned, leased and managed skilled nursing
facilities with approximately 10,780 licensed available beds in 20 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 December 31, 1998,
Centennial provided rehabilitation therapy services on a contract basis to
third-party owned and Company-operated skilled nursing facilities in 23 states
pursuant to 132 contracts and provided home health care services through 16
licensed home health offices.
On October 22, 1998 Centennial announced that its Board of Directors had
approved the sale of the Company for $16.00 per share in cash to a new company,
(Centennial HealthCare Holdings Corporation), formed by Welsh, Carson, Anderson
& Stowe, whose affiliates currently hold approximately 23% of the Company's
common stock, (the "Proposed Merger").
On April 2, 1999, Centennial HealthCare Holdings Corporation notified the
Company that it was terminating the definitive merger agreement. Accordingly, in
its December 31, 1998 Consolidated Financial Statements, the Company has
expensed approximately $3.6 million in terminated merger transaction costs.
In August 1998, the Company began leasing four skilled nursing facilities
totaling 349 licensed available beds, located in Mississippi, North Carolina,
Arkansas and Wisconsin. One of these facilities was previously managed by the
Company. In October 1998, the Company began leasing six skilled nursing
facilities totaling 608 licensed available beds, located in Florida, Arkansas,
Kansas, and Wisconsin. In November 1998, the Company began leasing four skilled
nursing facilities totaling 675 licensed available beds, located in Florida and
Missouri. Together, these transactions are hereafter referred to as the "New
Facility Leases".
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 Company's merger with
Transitional Health Services, Inc., (the "THS Merger"), would be less than
expected. In addition, the Company has experienced continued declines in revenue
at Total Care Consolidated, 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 facilities of approximately $3.4
million and $7.6 million, respectively. In addition, the Company wrote off
approximately $1.2 million of goodwill associated with TC.
In December 1995, as part of 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
was unable to recertify this facility for Medicaid, and management determined
that the best course of action was to close the facility. The facility was
closed in 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 continues to market the
facility for sale with disposition expected by the second quarter of 1999. As of
December 31, 1998, the carrying value of the facility was approximately $1.8
million. The Company suspended depreciation of these assets in August of 1998.
Depreciation on these assets would have approximated $25,000 during the last
five months of 1998.
<PAGE>
In April 1998, the Company entered into management agreements for two skilled
nursing facilities, with a total of 174 licensed available beds, located in
Virginia.
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. 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.
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 with
First Union National Bank ("First Union"), NationsBank, N.A., ("NationsBank"),
as agents and lenders and the other lenders named therein, (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.
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
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
Years Ended December 31, 1998 and 1997
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from $296.3
million in 1997 to $342.2 million in 1998, an increase of $45.9 million or
15.5%. For the year ended December 31, 1998, the Company recorded a $2.0 million
reserve related to the recording of therapy costs paid to Paragon
Rehabilitation, Inc., the Company's subsidiary providing therapy services. The
Company's intermediary has denied these costs and the Company has appealed the
adjustment. The Company requested an expedited hearing on this matter and a
hearing has been set for September, 1999. The Company will aggressively pursue
its appeal of this matter.
Total revenues associated with the New Facility Leases approximated $13.3
million in 1998. Revenues for the Florida Facility approximated $3.3 million
during 1998, and revenues from the Hospitals added approximately $3.1 million to
revenues during the year ended December 31, 1998. Revenues associated with the
acquisition of TC and the acquisition of the CCI contracts added approximately
$9.0 million and $10.7 million, respectively, to revenues during 1998. Same
store revenues from home health services for the period from acquisition (May
1997), through December 31, 1997 and the corresponding period in 1998, decreased
approximately $3.2 million compared to the prior year 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 $4.2 million during 1998 over the prior year due to
increased volume from existing contracts and the expansion of services provided
to
<PAGE>
both the Company's managed nursing facilities and other third parties. Revenues
from existing facilities increased approximately $6.2 million in 1998 when
compared to 1997, due primarily to 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. Revenues at the Company's
subsidiary providing therapy services increased approximately $1.3 million in
1998 due primarily to growth in existing contract revenues. This 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
acquisition.
<PAGE>
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues increased
from $8.0 million in 1997 to $15.4 million in 1998, an increase of $7.4 million,
or 94.2%, which was primarily attributable to the Company's addition of facility
management agreements during 1998 and the performance of additional
fee-generating services to existing managed facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $234.3
million in 1997 to $275.5 million in 1998, an increase of $41.2 million or
17.6%, resulting from both acquisitions and same store growth. Operating
expenses for the New Facility Leases approximated $11.2 million during 1998.
Operating expenses from the Florida Facility approximately $2.5 million during
1998, and operating expenses for the Hospitals added approximately $2.7 million
to operating expenses during 1998 compared to the prior year. The acquisition of
TC and the acquisition of the CCI therapy contracts added approximately $8.3
million and $8.0 million, respectively, to operating expenses during 1998. Same
store operating expenses from home health services for the period from
acquisition (May 1997), through December 31, 1997 and the corresponding period
in 1998, decreased approximately $2.2 million during 1998 when compared to the
prior year, due to a decline in home health visits in 1998 and cost reductions
in the Company's delivery of care. Operating expenses at PTS increased $3.7
million over 1997 due to increased volume from existing contracts and the
expansion of services provided to the Company's managed facilities and other
third parties. The remaining increase of approximately $7.3 million in 1998 when
compared to 1997 was due primarily to increases in operating expenses at
existing facilities. This increase was due primarily to providing care for
higher acuity patients as well as costs associated with training nursing and
support staff on the Company's PPS systems and procedures.
LEASE EXPENSE. Lease expense increased from $21.7 million in 1997 to $22.9
million in 1998, an increase of $1.2 million, or 5.5%, due primarily to the New
Facility Leases.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$16.1 million in 1997 to $21.5 million in 1998, an increase of $5.4 million, or
34.0%, which was primarily attributable to additional overhead to accommodate
the expansion in therapy services contracts, including the acquisition of the
CCI contracts, the addition of long-term care facility management agreements,
the acquisition of TC, the Hospitals and the New Facility Leases.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $6.8
million in 1997 to $9.3 million in 1998, an increase of $2.5 million, or 37.5%,
which was primarily attributable to acquisitions and additional depreciation
expense incurred as a result of fixed asset purchases during 1997 and 1998.
LOSS ON CLOSURE OF NURSING FACILITY. During the third quarter of 1998, the
Company recorded an estimated loss of $4.0 million associated with the closure
of THS of Southbend and the relocation of the facility's residents.
PROVISION FOR ASSET REVALUATION. During the third quarter of 1998, the Company
recorded write-downs of certain long-lived assets at its nursing facilities and
at TC of $11.0 million and $1.2 million, respectively.
TERMINATED MERGER TRANSACTION COSTS. During the fourth quarter of 1998, the
Company recorded approximately $3.6 million of expenses associated with the
dissolution of the Proposed Merger.
INTEREST INCOME. Interest income increased from approximately $636,000 in 1997
to $2.1 million in 1998, an increase of approximately $1.4 million due to
interest revenue recorded on working capital advances to managed nursing
facilities.
INTEREST EXPENSE. Interest expense increased from $8.7 million in 1997 to $9.2
million in 1998, an increase of approximately $507,000 or 5.9%, which was
primarily attributable to the increase in debt of approximately $37.7 million
during 1998 related to borrowings for working capital, net of the reduction of
debt by approximately $60.4 million in the third and fourth quarters of 1997 as
a result of the initial public offering.
<PAGE>
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
39.0% in 1997 to 102.5% in 1998, an increase in the rate of 63.5%, due to an
increase in permanent tax differences associated with the write off of non-
deductible goodwill.
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.
Revenues from TC and CCI were approximately $18.6 million and $6.1 million,
respectively, in 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 patient revenue mix from Medicaid resources to higher
margin Medicare and commercial payors, greater increases in Medicaid rates than
experienced in 1996, and favorable settlements of prior year open cost reports.
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.
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 $234.3 million in 1997, an increase of $51.0 million or
27.8%, of which approximately $16.4 million was attributable to the addition of
the operations of three long-term care facilities and two hospitals. TC 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 $3.1 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 $21.7
million in 1997, an increase of $3.0 million, or 15.8%, of which approximately
$1.2 million was attributable to the addition of one leased long-term care
facility and the Hospitals. The remaining $1.8 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 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 Company's completion of the initial public offering, net of the
additional expense incurred as a result of borrowings for the acquisition of two
long-term care facilities.
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during 1998 was borrowings under
its Senior Credit Facility. Cash has been used by Centennial for capital
improvements at several existing facilities, acquisitions, 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
utilizing cash from operations (through anticipated reductions of accounts
receivable) and 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.
<PAGE>
Working capital increased from $33.1 million at December 31, 1997 to $56.6
million at December 31, 1998, primarily due to increases in patient accounts
receivable, and increases in accounts payable and accrued liabilities. Patient
accounts receivable increased from $72.2 million at December 31, 1997 to $99.9
million at December 31, 1998, an increase of $27.7 million. This increase was
comprised of approximately $20.7 million associated with the Company's long-term
care facilities, approximately $4.5 million resulting from increases in
rehabilitation therapy contract receivables, and approximately $2.5 million
related to PTS. Approximately $7.0 million of the increase in patient accounts
receivable at the Company's long-term care facilities relates to the New
Facility Leases, and approximately $3.5 million of the increase relates to the
December 31, 1998 acquisition of certain accounts receivable from six nursing
centers previously owned by the Flatley Company (the "Flatley Facilities"). The
remaining 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 collect a significant portion of its settlement receivables
from 1996 through 1998 during the first and second quarters of 1999. 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. The increase in PTS receivables relates
primarily to expansion of services provided to the Company's managed facilities
and other third parties. Accounts payable and accrued expenses increased
approximately $6.8 million in 1998. Approximately $3.6 million of this increase
relates to the New Facility Leases, and approximately $4.4 million of the
increase relates to the acquisition of the Flatley Facilities.
The Company continued to invest in its leased and owned facilities through
capital expenditures of approximately $8.0 million or approximately $1,300 per
bed. These expenditures include the expansion of existing facilities, and the
selected rehabilitation of certain facilities.
In July 1998, the Company expanded its Senior Credit Facility through
syndication with an expanded bank group led by NationsBank and First Union as
agents. Under the expansion, the Company's maximum aggregated advance limit was
increased from $125.0 million to $160.0 million, the term was extended to July
31, 2003 and a $40.0 million portion (the "Lease Facility") of the total $160.0
million commitment was designated for use in financing certain Company lease
transactions. The remaining $120.0 million portion (the "Revolver") of the
commitment was made available for financing existing indebtedness under the
previous Senior Credit Facility, acquisitions, capital expenditures, working
capital and general corporate purposes.
In August 1998, the Company financed three skilled nursing facilities under the
Lease 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.
In October 1998, the Company increased amounts available under the Lease
Facility to $70.0 million with a corresponding decrease in commitments available
under the Revolver to $90.0 million.
In the fourth quarter of 1998, the Company financed six nursing facilities under
the Lease 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
<PAGE>
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 were leased by the Company effective November 1, 1998.
In December 1998, the Company expanded total commitments available through the
Lease Facility by $65.0 million to accommodate the Company's lease of the
Flatley Facilities. Following the increase, the Company's total Senior Credit
Facility commitment was $225.0 million, of which $90.0 million was reserved for
the Revolver and the remaining balance of $135.0 million allocated for use
through the Lease Facility.
During 1998, the Company borrowed a net of $37.7 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 December 31, 1998, the Company had $79.0 million outstanding and
approximately $4.3 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, primarily through the anticipated
collection of settlement receivables, 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 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. Under the Act, PPS will be phased in over three cost reporting
periods beginning on or after July 1, 1998. Generally, 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, nor can the
Company give assurance that it will be able to obtain sufficient cost reductions
to offset the reduction in revenues under PPS. Decreases in the level of
payments or failure to reduce costs could have a material adverse effect on the
Company. For the year ended December 31 1998, the Company derived approximately
22% 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. Under the IPS, home health agencies, in general, 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
<PAGE>
. 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 and 25% on 98% of the standardized
regional average of these costs in the agency's census region.
The Act also provides that cost limits and per beneficiary limits must be
reduced by 15% from the amount that would otherwise be in effect on September
30, 1999, regardless of whether the new prospective payment system is ready for
implementation on October 1, 1999.
Implementation of these new limits will effectively reduce reimbursement 15-20%
according to industry experts. For the year ended December 31, 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
location 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 and 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 year ended December 31, 1998, the Company
derived approximately 14% of its revenues from third-party contract therapy
services.
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.
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 substantially complete, and
priorities for all Business Systems that may require remediation or replacement
have been established.
<PAGE>
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. As of December 31, 1998, Business Systems ranked highest in
priority have been remediated or replaced. The Company's objective is to
complete substantially all remediation and replacement of internal Business
Systems by March 31, 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 $150,000 to $200,000, of which approximately
$120,000 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 $350,000), substantially all of which has been 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 businesses in
the ordinary course for a period of time after January 1, 2000.
Concurrently with the Plan described above, the Company is developing a
contingency plan intended to mitigate the possible disruption in business
operations that may result from the Year 2000 Issue, and is developing cost
estimates for this plan. Once developed, the contingency plan and related cost
estimates will be continually refined as additional information becomes
available. Management expects that the contingency plan will be in place by 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.
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 PricewaterhouseCoopers LLP, dated April 5, 1999, begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors of the Company
J. Stephen Eaton (age 48) is Chairman of the Board of the Company and has served
as its President and Chief Executive Officer since founding the Company in 1989.
From 1982 to 1988, Mr. Eaton served in various executive positions (including
Vice President) at Consolidated Resources Corporation of America and its
successors ("CRCA"). When the Company acquired CRCA in 1990, CRCA served as the
general partner of private and public limited partnerships that owned in excess
of 31 long-term care and assisted living facilities. Mr. Eaton also serves as a
director of Saint Joseph's Mercy Care Corporation, a non-profit corporation
based in Atlanta, Georgia which provides mobile health services to the homeless
and other underserved populations, and of Saint Joseph's Health System, a major
tertiary care hospital and health system in Atlanta, Georgia. Mr. Eaton's term
as a Director runs until the Annual Meeting of the Shareholders of the Company
in 2001.
Alan C. Dahl (age 38) 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 of the
Company. Mr. Dahl has been involved in health care finance for the past 13
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.
Mr. Dahl's term as a Director runs until the Annual Meeting of the Shareholders
of the Company in 2000.
Andrew M. Paul (age 43) has served as a Director of the Company since
January 1996. Mr. Paul serves as a general partner of the sole general partner
of Welsh, Carson, Anderson & Stowe, VI, L.P. ("WCAS VI"), a private equity
investment fund. Prior to joining WCAS VI in 1984, Mr. Paul was an associate in
Hambrecht & Quist's venture capital group. From 1978 to 1981, he was a systems
engineer and later a marketing representative for International Business
Machines Corporation. Mr. Paul serves as a director of Lincare Holdings, Inc.
Mr. Paul's term as a Director runs until the Annual Meeting of the Shareholders
of the Company in 2001.
James B. Hoover (age 44) has served as a Director of the Company since
January 1996. Mr. Hoover has served as a general partner of the sole general
partner of WCAS VI since 1992. From 1984 to 1992, Mr. Hoover served as a general
partner of Robertson, Stephens & Co. ("RS&Co."), an investment banking firm
specializing in the financing of emerging growth companies, with particular
emphasis in the health care industry. Prior to joining RS&Co., Mr. Hoover was
vice president of the Investment Management Group of Citibank, N.A., from 1977
to 1984. Mr. Hoover serves as a director of Housecall Medical Resources, Inc.
and U.S. Physical Therapy, public traded companies, as well as five private
companies. Additionally, Mr. Hoover is a member of the Special Projects
Committee of Memorial Sloan-Kettering Cancer Center which raises funds and
evaluates funding proposals from physicians interested in pursuing cancer
research projects. Mr. Hoover's term as a Director runs until the Annual Meeting
of the Shareholders in 1999.
Bertil D. Nordin (age 64) has served as a Director of the Company since
March 1997. Mr. Nordin is currently an investor and advisor. From 1990 to 1994,
Mr. Nordin served as chairman of the board of Digital Communications Associates,
Inc. ("DCA"), a telecommunications company. Mr. Nordin was also president and
chief executive officer of DCA from 1981 to 1990. Mr. Nordin serves as a
director for TechForce Corporation, a public company, and the Atlanta Symphony
Orchestra. Mr. Nordin's term as a Director runs until the Annual Meeting of the
Shareholders in 1999.
Robert A. Ortenzio (age 41) has served as a Director of the Company since
January 1996. Mr. Ortenzio has served as president and director of Select
Medical Corporation, a private health company based in Mechanicsburg,
Pennsylvania, since 1996. From 1986 to 1996, Mr. Ortenzio was employed by
Continental Medical Systems, Inc., a nationwide provider of rehabilitation
services, as its president and chief
<PAGE>
executive officer. Mr. Ortenzio also serves as a director of American Oncology
Resources, Inc. and Concentra Managed Care, Inc. Mr. Ortenzio's term as a
Director runs until the Annual Meeting of Shareholders in 2000.
W. Scott Miller (age 35) has served as a Director of the Company since
October 1998. Mr. Miller has served as Managing Director of Lovett Miller & Co.,
Incorporated since 1997, a venture capital and private equity Investment
Company. From 1991 to 1997, Mr. Miller was with South Atlantic Venture Funds,
which provided venture capital to various entities. Mr. Miller's term as a
Director runs until the Annual Meeting of the Shareholders in 1999.
Charles D. Nash (age 56) has served as a Director of the Company since
October 1998. Mr. Nash has served as Managing Director of Nash Equity Capital,
Inc., a capital markets and strategic corporate advisor company, since 1997.
>From 1991 to 1997, Mr. Nash was Managing Director and Corporate Finance
Executive for Interstate/Johnson Lane, an investment banking company where his
focus was on initial public offerings, mergers and acquisitions, and other
public and private debt and equity transactions. Mr. Nash's term as a Director
runs until the Annual Meeting of the Shareholders in 1999.
With the exception of Messrs. Eaton and Dahl, none of the directors are,
or have been, employed by any parent, subsidiary or other affiliate of the
Company. There are no family relationships between any directors or executive
officers.
Compensation of Directors
All members of the Board of Directors are reimbursed for their reasonable
out-of-pocket expenses incurred in connection with attendance at Board and
committee meetings. Non-Employee Directors (as defined pursuant to Rule 16b-3
under the Exchange Act) receive $8,000 annually (paid in four quarterly
installments) and $1,000 for each meeting of the Board or any committee of the
Board (except for telephonic meetings and committee meetings held on the same
day as a full Board meeting) for their services as Non-Employee Directors.
Pursuant to the Company's 1997 Stock Plan, Non-Employee Directors receive
automatic grants of options to purchase 10,345 shares of Common Stock upon their
election to the Board and Non-Employee Directors who are serving as such on July
1 of each year receive automatic grants of options to purchase 2,069 shares of
Common Stock. Options issued to Non-Employee Directors under such Plan become
exercisable on the first anniversary of the date of the grant. All options
granted to Non-Employee Directors are non-qualified stock options and are
exercisable for ten years from the date of each grant. The exercise price is
equal to the average closing bid price for the 20 trading days before the date
of the Company's annual meeting of shareholders preceding the grant date.
Executive Officers of the Company
The Company's executive officers and key employees are as follows:
OFFICERS Age Position
- -------- -------- -------------------------------------
J. Stephen Eaton 48 Chairman of the Board, President and
Chief Executive
Kent C. Fosha, Sr. 57 Executive Vice President of Operations
Alan C. Dahl 37 Executive Vice President, Chief
Financial Officer, Treasurer and Director
Lawrence W. Lepley, Jr. 54 President of Paragon Rehabilitation, Inc.
KEY EMPLOYEES
- -------------
Wayne H. Mayo 55 Senior Vice President of Operations -
Eastern Division
Clay F. Crosson 41 Senior Vice President of Operations -
Western Division
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 24 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 13 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.
Lawrence 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 33 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 Senior 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.
Clay F. Crosson has served as Western Division Senior Vice President of
---------------
the Company since February 1997. Prior to joining the Company in 1997, Mr.
Crosson as 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. Mr. Crosson has a masters of
business administration degree and 19 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 Chairman of ACHCA and is a Board member of
Georgia's Nursing Home Administrators Licensure Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires executive officers and
directors of the Company and person who own more than ten percent of the
Company's Common Stock to file with the Securities and Exchange Commission
certain reports, and to furnish copies thereof to the Company, with respect to
each such person's beneficial ownership of the Company's equity securities.
Based solely upon a review of the copies of such reports furnished to the
Company and certain representations of such persons, the Company believes that
all filing were timely.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the
compensation paid to the Company's Chief Executive Officer and each of the Named
Executive Officers whose salary and bonus compensation for the year ended
December 31, 1998 exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
- -------------------------------------------------------------------------------- ----------------------------
Securities
Name and Annual Underlying All Other
Principal Position Year Salary($)(1) Bonus($)(2) Compensation($) Options(#) Compensation($)
- ------------------ ---- ------------ ----------- --------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
J. Stephen Eaton 1998 $ 350,000 $ 120,000 11,846(4) - $ -
President and Chief 1997 309,000 - 6,931(4) 34,485 -
Executive Officer 1996 224,631 50,000 324,359(3)(4) - -
Kent C. Fosha, Sr. 1998 211,985 72,000 5,309(4) 50,000 -
Executive Vice 1997 180,250 - 3,059(4) 17,242 -
President 1996 175,000 25,000 163,041(3)(4) - -
Alan C. Dahl
Executive Vice 1998 211,985 75,000 7,903(4) 50,000 -
President and Chief 1997 180,250 - 10,118(4) 17,242 -
Financial Officer 1996 175,000 35,000 158,498(3)(4) - -
Lawrence W. Lepley, Jr. 1998 182,685 69,000 7,202(5) 50,000 -
President of Paragon 1997 158,295 116,000 9,392(5) 4,028 -
Rehabilitation, Inc. 1996 132,341 65,575 6,794(5) 6,316 -
</TABLE>
- ---------------
(1) Represents annual salary, including compensation deferred by the Named
Executive Officers pursuant to the Company's 401(k) Plan.
(2) Represents annual bonuses earned by the Named Executive Officers for the
period indicated.
(3) Represents the difference between the exercise price for stock options
exercised and the fair market value of the shares received.
(4) Includes insurance for Messrs. Eaton, Fosha and Dahl which provides for
reimbursement for health and dental costs in excess of the amount payable
under the Company's group health and dental plan.
(5) Includes $794, $677 and $ 1,202 as matching 401(k) contribution and an
automobile allowance of $6,000, $8,715 and $ 6,000 for 1996, 1997 and
1998 respectively.
<PAGE>
Options Grants in Last Fiscal Year
The following table sets forth information regarding stock option grants
for the year ended December 31, 1998 to the Chief Executive Officer and each of
the Named Executive Officers. No stock appreciation rights were granted during
such year.
<TABLE>
<CAPTION>
Individual Grants for Option Term(1)
----------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options Exercise
Underlying Granted to or Base
Options Employees in Price Per Expiration
Granted Fiscal 1998 Share Date 5% ($) 10% ($)
------- ----------- ----- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
J. Stephen Eaton -- -- -- -- -- --
Kent C. Fosha, Sr 50,000 9.4% $ 20.625 2/1/08 $ 648,548 $1,643,547
Alan C. Dahl 50,000 9.4% $ 20.625 2/1/08 648,548 1,643,547
Lawrence W. Lepley, Jr 50,000 9.4% $ 20.625 2/1/08 648,548 1,643,547
</TABLE>
- ----------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC. There can be no assurance provided to
any executive officer or any other holder of the Company's securities that
the actual stock price appreciation over the term will be at the assumed
5% and 10% levels or at any other defined level. Unless the market price
of the Common Stock appreciates over the option term, no value will be
realized from the option grants made to the Chief Executive Officer or the
Named Executive Officers.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
The following table sets forth certain information concerning option
holdings for the fiscal year ended December 31, 1998 with respect to the Chief
Executive Officer and each of the Named Executive Officers of the Company. No
options or stock appreciation rights were exercised during such year and no
stock appreciation rights were outstanding at the end of such year.
<PAGE>
<TABLE>
<CAPTION>
Securities Underlying Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at FY-End (#) at FY-End ($)(1)
------------- ----------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
J. Stephen Eaton 97,706 51,727 126,730 42,243
Kent C. Fosha, Sr 45,979 71,074 130,410 14,081
Alan C. Dahl 34,484 71,074 42,243 14,081
Lawrence W. Lepley, Jr 9,001 51,343 42,696 --
</TABLE>
- ----------
(1) Based on a closing price of $15.50 per share of Common Stock on December
31, 1998.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
On December 31, 1995, the Company entered into employment agreements with
Messrs. Eaton, Dahl and Fosha (the "Employment Agreements"). The Employment
Agreements provide for a base salary, an annual bonus, and an amount for fees
incurred for legal, accounting or other professional advice. The base salaries
for Messrs., Eaton, Dahl and Fosha total $300,000, $175,000 and $175,000
respectively. These base salaries are reviewed at least once annually on May 1
by the Compensation Committee of the Board of Directors to determine whatever
increase may be merited, with the minimum annual increase equal to the increase
in the Consumer Price Index as published by the U.S. Department of Labor, Bureau
of Labor Statistics, for the period since the last annual review ("Consumer
Price Index"). In addition, each of these employees is eligible to participate
in the 1996 Executive Stock Plan, management incentive programs, retirement,
welfare and other benefit plans or programs of the Company, including, at the
Company's sole expense, health, dental and hospitalization insurance coverage.
Unless earlier terminated as provided therein, the Employment Agreements
continue until December 31, 1998 (or 1999 for Mr. Eaton), and extend
automatically each day for an additional day so that the remaining term
continues to be two years for Mr. Eaton and one year for Messrs. Dahl and Fosha.
The Company can terminate such agreements upon the death or disability of
an employee or for cause as defined therein. Each employee may terminate his
employment for any reason within a 90-day period beginning on the 30th day after
a Change in Control of the Company (as defined below) or within a 90-day period
beginning on the one-year anniversary of a Change in Control. If the Company
terminates an Employment Agreement, or if an employee terminates his employment
for Good Reason (as defined below) upon a Change in Control, then the Company
must pay the employee (or, in the case of death, the employee's estate) for 12
consecutive months thereafter (24 months in the case of Mr. Eaton) the greater
of one-twelfth of his salary at the rate in effect on his termination date or at
the highest rate in effect at any time during the 90-day period prior to a
Change in Control, as well as all amounts of his base salary that are deferred
under the Company's qualified and non-qualified employee benefit plans or any
other agreement or arrangement. In addition, the restrictions on the employee's
outstanding incentive awards, including stock options, would lapse and such
incentive awards would immediately vest. Under each of the Employment
Agreements, the employee agrees to maintain the confidentiality of the Company's
trade secrets and agrees, for a period of one year following termination, not to
compete with or solicit employees or customers of the Company. For the purposes
of the Employment Agreements, Good Reason includes an occurrence after a Change
in Control such as an adverse change
<PAGE>
in the employee's status, title, position or responsibilities; reduction in base
salary or other compensation or benefits; or a material breach of the terms of
the Employment Agreements. A Change in Control includes an acquisition of the
Company's voting securities of 40% or more; a merger, consolidation or
reorganization involving the Company unless at least two-thirds of the combined
voting power of the corporation resulting from the merger, consolidation or
reorganization is owned in substantially the same proportion as before such
merger, consolidation or reorganization and the person serving as directors
before such merger, consolidation or reorganization constitute at least
two-thirds of the directors of the surviving corporation; a complete liquidation
or dissolution of the Company; or an agreement for the sale or disposition of
all or substantially all of the Company's assets.
Effective January 1, 1998, Paragon Rehabilitation, Inc., a subsidiary of
the Company ("Paragon"), entered into an Amended and Restated Employment
Agreement with Lawrence W. Lepley, Jr., who serves as president of Paragon (the
"Lepley Agreement"). The Lepley Agreement provides for an annual base salary of
$184,000 reviewable annually on January 1 and subject to annual increases (as
described above with respect to the Employment Agreements) and annual bonus. The
Lepley Agreement allows participation in the Company's stock option plans and
provides health, dental and short and long-term disability insurance and an
automobile allowance. The initial term ends on December 31, 2000, but beginning
on the second anniversary of the effective date extends automatically each day
for an additional day so that the remaining term continues to be two years.
Paragon may terminate the Lepley Agreement upon the death or disability of
Mr. Lepley or for cause as defined therein, or after the vote of a majority of
the Company's Board of Directors in favor of termination. Mr. Lepley may
terminate his employment for Good Reason (as defined below) within a 90-day
period beginning on the 30th day after a Change in Control of the Company (as
defined above) or within a 90-day period beginning on the one-year anniversary
of a Change in Control of the Company. If Paragon terminates the Lepley
Agreement for reasons other than for cause, of if Mr. Lepley terminates his
employment for Good Reason, then Paragon must pay Mr. Lepley (or, in the case of
death, his estate) for 12 consecutive months thereafter one-twelfth of his
salary at the rate in effect on his termination date. If the Lepley Agreement is
terminated due to death or disability, or by Mr. Lepley for Good Reason, then
the restrictions on any outstanding incentive awards, including stock options,
would lapse and such incentive awards would immediately vest. Mr. Lepley agrees
to maintain the confidentiality of Paragon's trade secrets and agrees, for a
period of one year following termination, not to compete with or solicit
employees or customers of Paragon. For the purposes of the Lepley Agreement,
Good Reason includes an occurrence after a Change in Control such as an adverse
change in the employee's status, title, position or responsibilities' reduction
in base salary or other compensation or benefits; or a material breach of the
terms of the Lepley Agreement.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Board of Directors are J.
Stephen Eaton, Andrew M. Paul and Robert A. Ortenzio. Neither Mr. Paul nor Mr.
Ortenzio is or has been an officer or employee of the Company or any of its
subsidiaries. Mr. Eaton is the Chariman of the Board, President and Chief
Executive Officer of the Company.
Transactions with Mr. Paul and Affiliates. Mr. Paul, an affiliate of
Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS VIII"), Welsh, Carson,
Anderson & Stowe Capital Partners III, L.P. ("WCAS CP III"), WCAS Healthcare
Partners, L.P. ("Healthcare Partners"), Welsh, Carson, Anderson & Stowe VI, L.P.
and Welsh, Carson, Anderson & Stowe Capital Partners II, L.P. is a director of
the Company and the chairman of the Compensation Committee.
On October 22, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Centennial HealthCare Holdings Corporation,
a
<PAGE>
Delaware corporation ("Holdings"), whereby the Company will merge with Cougar
Acquisition Corporation ("Acquisition"), with the Company being the surviving
corporation. Acquisition is wholly owned by Holdings. Holdings is currently
wholly owned by WCAS VIII. If the transaction contemplated by the Merger
Agreement is completed, the Company will become wholly owned by Holdings and
Holdings will be owned by WCAS VIII, WCAS CP III, Healthcare Partners, Mr. Paul
and other individuals, including Messrs. Eaton, Dahl, Fosha and Lepley. On
April 2, 1999 Holdings notified the Company it was terminating the Merger
Agreement.
Transactions with Mr. Ortenzio and Affiliates. The Company did not enter
into any transactions with Mr. Ortenzio or any of his affiliates during fiscal
year ending December 31, 1998.
Transactions with Mr. Eaton and Affiliates. As described above, should the
merger occur between the Company and Acquisition pursuant to the terms of the
Merger Agreement, Mr. Eaton will own common stock of Holdings, which will own
all of the shares of Common Stock of the Company. Other transactions involving
Mr. Eaton and his affiliates are described in the following section entitled
"Certain Transactions"
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for ensuring that a proper
system of short and long-term compensation is in place to provide
performance-oriented incentive to management.
The Compensation Committee administers the Company's executive
compensation program, including determination of salary and bonus compensation
for the Chief Executive Officer and the Named Executive Officers and
determination of the nature, time and amounts of options grants to such
executive officers under the Company's Stock Plans. The Compensation Committee's
report for 1998 is as follows:
Compensation Policy
Generally, the Company's executive compensation is designed to be
competitive with compensation offered by other companies against which the
Company competes for executive resources. The executive compensation plans are
designed to attract and retain highly qualified executives critical to the
Company's long-term success. The Compensation Committee intends for the
executive compensation program to satisfy the following guidelines:
. Recognize and reward high performance and extraordinary results.
. Have a portion of total compensation bear a direct relationship to
the Company's operating performance and achievement of short-term
and long-term goals.
. Provide opportunity to acquire additional direct ownership in the
Company and provide motivation to build shareholder value by
aligning executives' interests with shareholder interests.
Executive compensation is composed of base salary, bonus awards and
long-term incentive compensation.
Base Salary
In the case of Messrs. Eaton, Dahl and Fosha base salary is paid pursuant
to the Employment Agreements or the Lepley Agreement in the case of Mr. Lepley;
in the case of all other executive officers, base salary is determined and fixed
by management based on the policies of the Compensation Committee. The
Employment Agreements require the Compensation Committee to review base salaries
of the executives who are parties thereto on May 1 (or January 1 with respect to
Mr. Lepley) of each year and provide for an annual increase as determined by the
<PAGE>
Compensation Committee, but not less than the increase in the Consumer Price
Index. The Compensation Committee reviews the individual contributions and
performance of each such executive officer and takes into account various
qualitative and quantitative factors in determining the increases in base
salaries. In particular, the Compensation Committee considers several financial
performance measures, including business development, earnings growth and stock
price, as well as the individual's work experience, level of responsibility and
contribution to the Company's long-term success. The Compensation Committee does
not, however, apply any specific quantitative formula in making compensation
decisions with respect to base salary, annual bonus awards or long-term
incentive compensation.
Bonus Awards
Bonus payments are awarded to the Company's executives at the discretion
of the Compensation Committee, which considers the achievement of certain
performance targets and new business development.
Long-Term Incentive Compensation
The Company's long-term incentive compensation strategy is focused on the
grant or award of (i) options to purchase shares of Common Stock, (ii) stock
appreciation rights, (iii) reload options and (iv) restricted stock pursuant to
the Stock Plans. Except for grants to Non-Employee Directors pursuant to the
1997 Stock Plan, the Compensation Committee determines who receives grants or
awards, the grant or award date, the number of shares subject to the grant or
award, the exercise price (based on the closing price of the Common Stock on the
date of grant or award), the vesting schedule and other matters as specified in
the Stock Plans. The Compensation Committee believes that these grants or awards
reward executive officers for their efforts in improving long-term performance
of the Common Stock and creating value for the Company's shareholders, thereby
aligning the financial interests of such executives with those of the Company's
shareholders.
Chief Executive Officer Compensation
Based on its assessment of the performance of the Company and Mr. Eaton's
performance during 1998, the Compensation Committee (composed of Messrs. Paul
and Ortenzio for this purpose) increased Mr. Eaton's base salary from $309,000
to $350,000.
Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows tax
deduction by a public company for compensation in excess of $1,000,000 paid to
the company's chief executive officer and four other most highly compensated
executive officers. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. The Compensation intends to
attempt to structure future compensation of the Company's Chief Executive
Officer and Named Executive Officers so as to preserve the deductibility of such
compensation under Section 162(m).
COMPENSATION COMMITTEE
Andrew M. Paul, Chairman
Robert A. Ortenzio
J. Stephen Eaton
STOCK PERFORMANCE GRAPH
The following line graph compares the yearly percentage in cumulative
shareholders return on the Common Stock with (a) the performance of a broad
equity market indictor, and (b) the performance of a peer group index. The graph
compares the percentage change in the return of the Common Stock since July 2,
1997 with the cumulative total return on the NASDAQ Index and the Peer Group
indentified by the Company (which group includes Beverly Health Services, Inc.,
Genesis Health Ventures, Inc., Health Care and Retirement Corp., Integrated
Health Services, Inc., Mariner Post-Acute Network, Inc., Sun Healthcare Group
Inc., Vencor, Inc., Advocat Inc., National Healthcare L.P. and Manor Care Inc.)
over such period. The Peer Group companies include the long-term care
organizations most similar to the Company, and most of the other publicly traded
long-term care organizations. The commencement date for this comparison is the
date on which the Company's Common Stock was first publicly traded. The stock
price performance graph assumes an investment of $100 in the Company on July 2,
1997 and an investment of $100 in the two indexes on July 2, 1997 and further
assumes the reinvestment of all dividends. The stock price performance,
presented monthly for the period from July 2, 1997 through December 31, 1998 is
not necessarily indicative of future results. Information used in this graph was
obtained from Zack's Investment Research, a source believed to be reliable, but
the Company is not responsible for errors or omissions in such information.
[GRAPH]
7/2/97 1997 1998
------ ------- -------
Centennial $100 $142.19 $ 96.87
Nasdaq $100 $109.63 $154.11
Peer Group $100 $100.38 $ 49.78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
<PAGE>
COMMON STOCK OWNERSHIP BY MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of March 27, 1999 for (i) directors of the Company, (ii) the
Chief Executive Officer and each of the three most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers"), (iii)
the directors and executive officers of the Company as a group and (iv) each
person who is a shareholder of the Company holding more than a five percent
interest in the Company.
<TABLE>
<CAPTION>
Number of Percent of
Shares of Common Stock
Common Stock Beneficially
Name of Beneficial Owner Beneficially Owned (1) Owned
- ------------------------ ---------------------- -----
<S> <C> <C>
Welsh, Carson, Anderson & Stowe VI, L.P. (2) 2,520,193 21.1%
WCAS Capital Partners II, L.P. (3) 246,896 2.1
WCAS Healthcare Partners, L.P. (4) 81,384 *
J. Stephen Eaton (5) 1,213,077 10.1
The Goldman Sachs Group, L.P. (6) 609,400 5.1
Dresdner RCM Global Investors LLC (7) 1,198,920 10.0
South Atlantic Venture Fund II,
Limited Partnership (8) 798,963 6.7
Lawrence W. Lepley, Jr. (9) 92,226 *
Alan C. Dahl (10) 93,976 *
Kent C. Fosha, Sr. (11) 53,949 *
Andrew M. Paul (12) 12,707 *
Bertil D. Nordin (13) 11,845 *
James B. Hoover (14) 13,464 *
Robert A. Ortenzio (15) 1,299 *
W. Scott Miller (16) 0 (16 *
Charles D. Nash (17) 0 (17 *
All other executive officers
and directors as a
group (10 persons) 1,482,198 12.4
</TABLE>
- ----------
* Less than 1.0%
(1) Based on an aggregate of 11,923,619 shares of Common Stock issued and
outstanding as of March 26, 1999. Includes shares of Common Stock that may
be acquired upon the exercise of stock options exercisable within 60 days.
Each person named above has sole voting and dispositive power with respect
to all shares listed opposite such person's name, except as otherwise
noted.
(2) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815.
(3) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815.
(4) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815.
(5) Includes 97,706 shares purchasable upon exercise of stock options that are
currently exercisable or will be come 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.
(6) Based on Schedule 13G of shareholder filed on February 14, 1999. The
shareholder's address is 85 Broad Street, New York, New York 10004.
(7) Based on Schedule 13G/A of shareholder filed on February 12, 1999. The
shareholder's address is Four Embarcadero Center, San Francisco,
California 94111.
<PAGE>
(8) The shareholder's address is 614 West Bay Street, Suite 200, Tampa,
Florida 33606-2704.
(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 34,484 shares purchasable upon 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. 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.
(11) 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.
(12) Excludes 2,520,193 shares of Common Stock owned by Welsh, Carson, Anderson
& Stowe VI, L.P. ("WCAS VI"), 246,896 shares of Common Stock owned by WCAS
Capital Partners II, L.P. ("WCAS CP II") and 81,384 shares of Common Stock
owned by WCAS Healthcare Partners, L.P. ("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. Does not include
options to acquire 2,069 shares that are not exercisable within 60 days.
(13) Includes options to acquire 10,345 shares that are currently exercisable.
Does not include options to acquire 2,069 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.
(14) Includes shares held by Mr. Hoover or by the James B. Hoover IRA. Does not
include 2,767,089 shares held by WCAS VI and WCAS CP II, of which Mr.
Hoover serves as a general partner of the sole general partner or limited
partner of the sole general partner. Mr. Hoover disclaims beneficial
ownership of these shares. Does not include options to acquire 2,069
shares that are not exercisable within 60 days. The shareholder's address
is Dauphin Capital Partners, 108 Forest Avenue, Locast Valley, New York
11560.
(15) Does not include 39,719 shares held by Horizon Investment Associates II,
of which Mr. Ortenzio's farther 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. Does not
include options to acquire 2,069 shares that are not exercisable within 60
days. The shareholder's address is 4718 Old Gettysburg Road,
Mechanicsburg, Pennsylvania 17055.
(16) Does not include options to acquire 10,345 shares that are not exercisable
within 60 days. Does not include 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.
(17) Does not include options to acquire 10,345 shares that are not exercisable
within 60 days.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
Mr. Eaton owns 100% of the common stock of Centennial Employee Management
Corporation ("CEMC"). The Company leases its facility-based employees at cost
from CEMC on a pass through basis. CEMC was set up to take advantage of reduced
workers' compensation and group health insurance rates and passes on these
insurance costs savings to the Company. Mr. Eaton receives no economic benefit
from his ownership of this entity.
Ashton Woods Rehabilitation Center ("AWRC"), which is leased by the
Company, is owned by Ashton Woods Limited Partnership. Mr. Dahl owns all of the
outstanding stock of the corporate general partner of this partnership. Mr. Dahl
receives no economic benefit from his ownership of this entity. Mr. Dahl is
Executive Vice President, Chief Financial Officer, Treasurer and director of the
Company.
See Item 11. Executive Compensation - Compensation Committee Interlocks
and Insider Participation.
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
Exhibit 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 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).
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 -- 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)
10.6 -- Amended and Restated Employment Agreement between Paragon
Rehabilitation, Inc. and Laurence W. Lepley, Jr. dated as of January
1, 1998 (incorporated by reference to Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the Fiscal Year ended December 31,
1997).
<PAGE>
10.7 -- 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)
10.8 -- 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)
10.9 -- 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)
10.10 -- Second Amended and Restated Lease Agreement by and between EBT
Healthcare Properties, L.P. and CHPC dated October 1, 1998
(incorporated by reference to Exhibit 10.13 of the Company's
Quarterly Report on Form 10-Q for quarter ended September 30, 1998).
10.11 -- Second Amendment to Certain Operative Agreements by and among the
Company, certain subsidiaries of the Company as Guarantors, First
Security Band, National Association, as Owner Trustee, the various
banks and lending institutions named therein as the Lenders, First
Union Capital Markets, as Syndication Agent and Nationsbank, N.A.,
as agent.
10.12 -- Amendment No.2 to the Third Amended and Restated Credit Agreement by
and among the Company and its subsidiaries and the Lenders
identified therein dated as of December 30, 1998.
<PAGE>
10.13 -- 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)
10.14 -- 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)
10.15 -- 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)
10.16 -- 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)
10.17 -- 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
27.1 -- Financial Data Schedule
99.1 -- Cautionary Statements Regarding Forward-Looking 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, Anserson
& Stowe, whose affiliates currently own approximately 23% of the Company's
outstanding stock.
<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 April 7, 1999.
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 April 7,
1999.
SIGNATURES
/s/ J. Stephen Eaton Chairman, President and Chief Executive Officer
- --------------------------
J. Stephen Eaton
/s/ Alan C. Dahl Executive 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
/s/ W. Scott Miller Director
- --------------------------
W. Scott Miller
/s/ Charles D. Nash Director
- --------------------------
Charles D. Nash
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants................................................ F-2
Consolidated Balance Sheets at December 31,1998 and 1997 ........................ F-3
Consolidated Statements of Operations for the years ended December 31, 1998,
1997 and 1996.................................................................. F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996................................................................. F-6
Notes to Consolidated Financial Statements....................................... F-7
Quarterly Consolidated Financial Information (Unaudited)......................... F-30
Financial Statement Schedules (a):
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996............................................... F-31
</TABLE>
- ----------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Centennial HealthCare Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Centennial HealthCare Corporation and its subsidiaries (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
April 7, 1999
F-2
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 8,087 $ 4,011
Patient accounts receivable and third-party payor settlements, net
of allowance for doubtful accounts of approximately
$5,000 and $3,000 .................................................. 99,910 72,222
Other receivables ................................................... 4,382 2,149
Deferred income taxes ............................................... 3,738 2,511
Prepaid expenses and other current assets ........................... 2,250 1,259
--------- ---------
Total current assets ............................................ 118,367 82,152
Property and equipment, net ......................................... 74,813 74,379
Notes and advances receivable, net .................................. 36,189 23,764
Refundable deposits, including amounts due from affiliates of $2,875 4,297 4,399
Intangible assets less accumulated amortization of $4,240 and $2,642 40,104 51,331
Other assets ........................................................ 14,602 7,624
--------- ---------
Total assets .................................................... $ 288,372 $ 243,649
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................................ $ 3,534 $ 1,576
Accounts payable and accrued expenses ............................... 32,096 25,253
Accrued payroll ..................................................... 12,467 11,773
Accrued lease payable ............................................... 4,413 3,759
Terminated merger transaction costs ................................. 3,248 --
Estimated merger closure costs ...................................... -- 3,391
Other liabilities ................................................... 6,034 3,303
--------- ---------
Total current liabilities ....................................... 61,792 49,055
Long-term debt, less current maturities ............................... 112,849 78,913
Other long-term liabilities ........................................... 48 2,577
--------- ---------
174,689 130,545
Commitments and contingencies
Shareholders' equity:
Common stock with par value of $.01; 50,000,000 shares
authorized; 11,923 and 11,862 shares issued and outstanding ... 119 119
Paid-in capital ..................................................... 102,015 101,299
Retained earnings ................................................... 11,899 12,214
--------- ---------
114,033 113,632
Note receivable from shareholder ...................................... (350) (528)
--------- ---------
Net shareholders' equity ........................................ 113,683 113,104
--------- ---------
Total liabilities and shareholders' equity ...................... $ 288,372 $ 243,649
========= =========
</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,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net patient service revenues ....................... $ 342,203 $ 296,321 $ 227,387
Management fees and other revenues ................. 15,442 7,952 5,661
--------- --------- ---------
Total revenues ................................... 357,645 304,273 233,048
--------- --------- ---------
Expenses:
Facility operating expenses:
Salaries, wages and benefits ................... 182,801 154,841 107,038
Other operating expenses ....................... 92,688 79,418 76,286
Lease expense ...................................... 22,946 21,740 18,777
Corporate administrative costs ..................... 21,515 16,055 11,400
Depreciation and amortization ...................... 9,292 6,760 5,012
Loss on closure of nursing facility ................ 4,010 -- --
Provision for asset revaluation .................... 12,152 -- --
Terminated merger transaction costs ................ 3,619 -- --
--------- --------- ---------
Total operating expenses ........................ 349,023 278,814 218,513
--------- --------- ---------
8,622 25,459 14,535
--------- --------- ---------
Other income (expense):
Interest income ................................... 2,011 636 695
Interest expense .................................. (9,165) (8,658) (10,068)
Equity in loss of unconsolidated
partnerships ................................. -- -- (108)
--------- --------- ---------
Total other expense ............................ (7,154) (8,022) (9,481)
--------- --------- ---------
1,468 17,437 5,054
Provision for income taxes ........................... 1,504 6,800 2,092
--------- --------- ---------
Income (loss) before minority interest and
extraordinary loss ................................. (36) 10,637 2,962
Minority interest in net income of subsidiary,
net of income taxes ................................ (279) (252) (183)
--------- --------- ---------
Income (loss) before extraordinary loss .............. (315) 10,385 2,779
Extraordinary loss on extinguishment of debt, net of
income tax benefit ................................. -- (537) --
--------- --------- ---------
Net income (loss) .............................. (315) 9,848 2,779
Dividends and accretion on preferred stock ........... -- 5,874 2,192
--------- --------- ---------
Income (loss) applicable to common stock ............. $ (315) $ 3,974 $ 587
========= ========= =========
Net income (loss) per common and common equivalent share:
Basic:
Income (loss) applicable to common stock before
extraordinary loss ............................... $ (0.03) $ 0.54 $ 0.12
Extraordinary loss on extinguishment of debt ....... 0.00 (0.06) 0.00
--------- --------- ---------
Income (loss) applicable to common stock ......... $ (0.03) $ 0.48 $ 0.12
========= ========= =========
Diluted:
Income (loss) applicable to common stock before
extraordinary loss ............................... $ (0.03) $ 0.54 $ 0.12
Extraordinary loss on extinguishment of debt ....... 0.00 (0.06) 0.00
--------- --------- ---------
Income (loss) applicable to common stock ......... $ (0.03) $ 0.48 $ 0.12
========= ========= =========
Weighted average number of common stock and
common stock equivalents outstanding
Basic .............................................. 11,906 8,289 4,742
========= ========= =========
Diluted ............................................ 12,078 8,462 4,782
========= ========= =========
</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
Common Stock Common Stock
------------------ ------------------- Paid-In Retained Treasury
Shares Amount Shares Amount Capital Earnings Stock
-------- -------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,601 18 2,941 -- 5,213 7,653 (1,487)
Dividends paid on
Series A and B
preferred stock ........ -- -- -- -- -- (341) --
Dividends accrued on
Series C preferred
stock ................... -- -- -- -- -- (1,470) --
Exercise of stock
options ................. 203 2 -- -- 170 -- --
Exercise of special voting
stock options ............ -- -- 1 -- 6 -- --
Tax benefit on options
exercised ................ -- -- -- -- 318 -- --
Accretion of preferred
stock to estimated
redemption value ........ -- -- -- -- -- (381) --
Net income ................. -- -- -- -- -- 2,779 --
--------- --------- ---------- ---------- --------- --------- ---------
Balance at December 31, 1996 1,804 20 2,942 -- 5,707 8,240 (1,487)
Dividends paid on
Series A, B and E
preferred stock ........ -- -- -- -- -- (462) --
Dividends accrued on
Series C preferred
stock ................... -- -- -- -- -- (865) --
Exercise of stock
options ................. 3 -- 1 -- 36 -- --
Accretion of preferred
stock to estimated
redemption value ........ -- -- -- -- -- (106) --
Issuance of common
shares .................. 64 1 -- -- 777 -- --
Public offering of
common stock ............ 4,600 44 -- -- 66,917 -- 1,487
Offering costs for
common stock ............ -- -- -- -- (1,679) -- --
Conversion of special
voting common stock
due to Offering ......... 2,943 29 (2,943) -- (29) -- --
Redemption of Series E
preferred stock ......... -- -- -- -- -- (715) --
Conversion of Series A, B,
C and D preferred stock . 2,532 25 -- -- 30,912 (3,726) --
Repurchase of Series C
preferred stock ......... (84) -- -- -- (1,342) -- --
Net income ................. -- -- -- -- -- 9,848 --
--------- --------- ---------- ---------- --------- --------- ---------
Balance at December 31, 1997 11,862 119 -- -- 101,299 12,214 --
Exercise of stock
options ................. 61 -- -- -- 294 -- --
Proceeds from shareholder
note receivable ......... -- -- -- -- -- -- --
Tax benefit on options
exercised................ -- -- -- -- 422 -- --
Net loss ................... -- -- -- -- -- (315) --
--------- --------- ---------- ---------- --------- --------- ---------
Balance at December 31, 1998 11,923 $ 119 -- $ -- $ 102,015 $ 11,899 $ --
========= ========= ========== ========== ========= ========= =========
<CAPTION>
Note
Receivable
From
Shareholder Net
----------- --------
<S> <C> <C>
Balance at December 31, 1995 (528) 10,869
Dividends paid on
Series A and B
preferred stock ........ -- (341)
Dividends accrued on
Series C preferred
stock ................... -- (1,470)
Exercise of stock
options ................. -- 172
Exercise of special voting
stock options ............ -- 6
Tax benefit on options
exercised ................ -- 318
Accretion of preferred
stock to estimated
redemption value ........ -- (381)
Net income ................. -- 2,779
--------- ---------
Balance at December 31, 1996 (528) 11,952
Dividends paid on
Series A, B and E
preferred stock ........ -- (462)
Dividends accrued on
Series C preferred
stock ................... -- (865)
Exercise of stock
options ................. -- 36
Accretion of preferred
stock to estimated
redemption value ........ -- (106)
Issuance of common
shares .................. -- 778
Public offering of
common stock ............ -- 68,448
Offering costs for
common stock ............ -- (1,679)
Conversion of special
voting common stock
due to Offering ......... -- --
Redemption of Series E
preferred stock ......... -- (715)
Conversion of Series A, B,
C and D preferred stock . -- 27,211
Repurchase of Series C
preferred stock ......... -- (1,342)
Net income ................. -- 9,848
--------- ---------
Balance at December 31, 1997 (528) 113,104
Exercise of stock
options ................. -- 294
Proceeds from shareholder
note receivable ......... 528 528
Note receivable from
shareholder ............. (350) (350)
Tax benefit on options
exercised ............... -- 422
Net loss ................... -- (315)
--------- ---------
Balance at December 31, 1998 $ (350) $ 113,683
========= =========
</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,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) ........................................................ $ (315) $ 9,848 $ 2,779
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................ 9,292 6,760 5,012
Provision for asset revaluation ...................................... 12,152 -- --
Amortization of discount on subordinated debt ........................ -- 62 114
Extraordinary loss on extinguishment of debt ......................... -- 880 --
Deferred income taxes ................................................ (2,830) 3,881 1,698
Consulting expenses offset against note receivable ................... 125 78 125
Equity in income of unconsolidated partnerships ...................... -- -- (145)
Minority interest .................................................... 458 413 305
Provision for doubtful accounts ...................................... 1,432 863 852
Loss on sale of equipment ............................................ 4 -- 25
Loss on sale of investment in unconsolidated partnerships ............ -- -- 253
Change in assets and liabilities:
Accounts receivable ............................................... (24,412) (29,167) (15,733)
Prepaid expenses and other assets ................................. (4,646) (1,525) 1,364
Refundable deposits ............................................... (105) (28) (29)
Accounts payable, accrued liabilities and other current liabilities 9,246 (935) 11,322
Other ............................................................. (1,568) (140) 165
-------- -------- --------
Cash provided by (used in) operating activities ............... (1,167) (9,010) 8,107
-------- -------- --------
Investing Activities:
Purchases of property and equipment ...................................... (8,033) (7,567) (6,686)
Proceeds from the sale of equipment ...................................... 15 -- 600
Notes and advances receivable, net of repayments ......................... (12,449) (8,232) (13,381)
Acquisitions, net of cash acquired ....................................... (7,392) (17,355) (9,100)
Other .................................................................... (2,506) 3,127 (1,763)
-------- -------- --------
Cash used in investing activities ............................. (30,365) (30,027) (30,330)
-------- -------- --------
Financing Activities:
Proceeds from the exercise of stock options .............................. 294 36 178
Proceeds from issuance of preferred stock ................................ -- 10,000 --
Proceeds from borrowings ................................................. 37,700 28,750 47,047
Public offering of Common Stock .......................................... -- 68,448 --
Payment of stock offering costs .......................................... -- (1,679) --
Distributions paid to minority partners .................................. (296) (494) (299)
Payments of dividends to preferred shareholders .......................... -- (462) (341)
Payments on amounts due to related party ................................. (691) (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 ..................................... (1,399) (35,410) (22,865)
-------- -------- --------
Cash provided by financing activities ......................... 35,608 37,018 23,359
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....................... 4,076 (2,019) 1,136
Cash and cash equivalents, beginning of period ............................. 4,011 6,030 4,894
-------- -------- --------
Cash and cash equivalents, end of period ................................... $ 8,087 $ 4,011 $ 6,030
======== ======== ========
Supplemental disclosure:
Income taxes paid ........................................................ $ 4,329 $ 1,289 $ 1,058
Interest paid ............................................................ $ 8,019 $ 9,236 $ 9,840
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
F-6
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 long-term
care setting. At December 31, 1998, subsidiaries of the Company operated 101
owned, leased and managed long-term care facilities with approximately 10,780
beds in 20 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
132 contracts, as well as home health services through 16 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.
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 that are reimbursed by 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
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
F-7
<PAGE>
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, 1998 and 1997 includes $61.9
million and $44.4 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. Retroactive settlement adjustments in
any year could be material to the consolidated financial statements.
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 $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. 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
57%, 60%, and 68% of the Company's total revenues for the years ended December
31, 1998, 1997 and 1996, respectively, are from the Medicare and Medicaid
programs. While the Company operates long-term care facilities in 20 states and
the District of Columbia, 33 of its 68 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.
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
F-8
<PAGE>
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.
During 1998, the Company recorded a provision for asset revaluation (see Note
7). As of December 31, 1998, the Company does not believe there is any
indication that the amortization period of its long-lived assets needs to be
adjusted.
Earnings 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 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share", (see Note 21).
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.
Newly Adopted Accounting Pronouncement
In 1998, Centennial adopted Statement of Financial Accounting Standards ("SFAS")
131, "Disclosures about Segments of an Enterprise and Related Information". SFAS
131 supersedes FAS 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position, (see "Segment Information" note).
Reclassifications
Certain amounts in the 1997 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
Offering price of $16.00 per share. This option was exercised and closed in July
F-9
<PAGE>
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, which accrued
interest at 10.8% and 11.7% per annum, 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 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").
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 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 for approximately $1.3 million.
Centennial repaid the two subordinated promissory notes during the third
quarter of 1997, resulting in a loss on early extinguishment of debt of
approximately $537,000, net of income tax benefit of approximately $343,000.
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 was converted into Common Stock.
3. Mergers and Acquisitions
On October 22, 1998, Centennial announced that its Board of Directors had
approved the sale of the Company for $16.00 per share in cash to a new company
(Centennial HealthCare Holdings Corporation) formed by Welsh, Carson, Anderson &
Stowe ("WCAS"), whose affiliates currently hold approximately 23% of the
Company's common stock, (the "Proposed Merger").
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 or WCAS or its affiliates, and
other customary closing conditions. The definitive merger agreement contains no
financing contingencies. The Company anticipates that the transaction will be
accounted for under the purchase method.
On April 2, 1999 Centennial HealthCare Holdings Corporation notified the Company
that it was terminating the definitive merger agreement. Accordingly, in its
December 31, 1998 Consolidated Financial Statements, the Company has expensed
approximately $3.6 million in terminated merger transaction costs. The Company
has incurred additional terminated merger transaction costs in 1999. The total
additional costs incurred in 1999 are estimated to be $1.0 million and will be
expensed as incurred.
In October 1998, the Company entered into a management agreement for a skilled
nursing facility with 68 nursing home beds and 22 hospital beds, located in
Mississippi.
F-10
<PAGE>
In August 1998, the Company began leasing four skilled nursing facilities
totaling 349 licensed available beds, located in Mississippi, North Carolina,
Arkansas and Wisconsin. One of these facilities was previously managed by the
Company. In October 1998, the Company began leasing six skilled nursing
facilities totaling 608 licensed available beds, located in Florida, Arkansas,
Kansas, and Wisconsin. In November 1998, the Company began leasing four skilled
nursing facilities totaling 675 licensed available beds, located in Florida and
Missouri.
In April 1998, Centennial entered into management agreements for two skilled
nursing facilities totaling 174 licensed available beds, located in Virginia.
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. 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.
In May 1997, the Company acquired by merger Total Care Consolidated, Inc.,
("TC"), 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 TC 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 TC and CCI, respectively. During 1998,
the Company wrote off $1.2 million of the goodwill related to TC.
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. 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 Florida 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.
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. The Company's Consolidated
Financial Statements include the hospitals from the effective date of the
transactions.
F-11
<PAGE>
4. Operating Leases
At December 31, 1998, the Company operated 53 long-term care facilities and two
hospitals under operating leases. Fourteen of the leases represent new leases
that the Company entered into during 1998. 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 $3.0 million, $3.2 million, and $3.3 million for the years
ended December 31, 1998, 1997 and 1996 respectively. In connection with one of
the leases, the Company paid the affiliated lessor a deposit of $2.9 million,
which is refundable upon the termination of the lease. The Company has a net
payable to the other affiliated lessor of approximately $1.6 million and $2.3
million at December 31, 1998 and 1997, respectively.
Twenty-two of the long-term care facility leases in effect at December 31, 1998
were obtained in connection with the Company's 1995 merger with Transitional
Health Services, Inc. Fourteen of 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.
During 1998, the Company financed nine skilled nursing facilities under the
lease component of its Senior Credit Facility. Five of the leases were for
facilities that were previously leased by the Company, and one of the leases was
for a facility that was previously managed by the Company. These leases have
three-year terms, and provide the Company with an option to renew the leases
after the initial lease term.
Total rent expense under the long-term care facility and hospital operating
lease agreements approximated $20.6 million, $19.9 million, $17.7 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
Minimum future rent payments under the facility leases and related equipment and
office space are summarized as follows (in thousands):
Year Amount
- ---- ------
1999 .................................................. $ 25,669
2000 .................................................. 25,742
2001 .................................................. 24,309
2002 .................................................. 20,673
2003 .................................................. 17,426
Thereafter ............................................ 94,862
--------
$208,681
========
5. Total Revenue
The distribution of total revenue by class of payor for the years ended
December 31, 1998, 1997 and 1996 was as follows (in thousands):
F-12
<PAGE>
Year ended December 31,
-----------------------------------
Class of Payor 1998 1997 1996
- --------------------------------------------------------------------------------
Private pay, management fee and
other ................................. $152,564 $120,371 $ 74,075
Medicaid ................................ 119,559 111,380 99,803
Medicare ................................ 85,522 72,522 59,170
-------- -------- --------
$357,645 $304,273 $233,048
======== ======== ========
The above revenue amounts are net of third-party contractual allowances of
$59.8 million, $54.2 million and $44.7 million for the years ended December 31,
1998, 1997 and 1996, respectively.
Included in other operating expenses is bad debt expense of approximately
$1.4 million, $863,000, and $852,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
6. Property and Equipment
Property and equipment consisted of the following at December 31, 1998 and
1997, (in thousands):
1998 1997
-------- --------
Land $ 4,595 $ 4,595
Buildings and improvements 68,042 63,681
Furniture and equipment 17,312 15,633
Construction in progress - improvements to facilities 1,056 1,087
-------- --------
91,005 84,996
Less accumulated depreciation (16,192) (10,617)
-------- --------
$ 74,813 $ 74,379
======== ========
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
totaled $5.8 million, $4.5 million and $3.2 million, respectively.
7. Certain 1998 Transactions
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 1995 merger with Transitional
Health Services, Inc. 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
Medicare reimbursement for home health services. Accordingly, during 1998 the
Company recorded write-downs of property and equipment and goodwill at its
nursing centers of approximately $3.4 million and $7.6 million, respectively. In
addition, the Company wrote off approximately $1.2 million of goodwill
associated with TC.
In December 1995, as part of the Company's merger with THS, 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
F-13
<PAGE>
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 was unable to sell the facility, and as a result,
management determined that the best course of action was to close the facility.
The facility closed in 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 continues to market the facility for sale, with
disposition expected by the second quarter of 1999. As of December 31, 1998, the
carrying value of the facility was approximately $1.8 million. The Company
suspended depreciation of these assets in August of 1998. Depreciation on these
assets would have approximated $25,000 during the last five months of 1998.
8. 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 year ended December 31,1996,
the Company recognized income from its share of the partnerships' operations of
approximately $145,000. On January 30, 1997, the Company sold its stock in the
corporate general partners in most of the limited partnerships to a corporation
affiliated with 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.
9. Long-Term Debt
Long-term debt consists of the following at December 31, 1998 and 1997 (in
thousands):
1998 1997
-------- --------
Bank credit facilities $ 78,950 $ 41,250
Mortgage notes payable 17,563 17,792
Other notes 2,663 2,650
-------- --------
99,176 61,692
Capital lease obligations 17,207 18,797
-------- --------
116,383 80,489
Current maturities of long-term debt 3,534 1,576
-------- --------
$112,849 $ 78,913
======== ========
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 could be used for acquisitions, capital expenditures, working capital
and general corporate purposes.
In July 1998, the Company expanded its Senior Credit Facility through a third
amendment to its existing second amended and restated credit agreement. Through
this amendment, the Company's maximum aggregated advance limit was
F-14
<PAGE>
increased from $125.0 million to $160.0 million, the term was extended to July
31, 2003 and a $40.0 million portion (the "Lease Facility") of the total $160.0
million commitment was designated for use in financing certain Company lease
transactions. The remaining $120.0 million portion (the "Revolver") of the
commitment was made available for financing existing indebtedness under the
previous Senior Credit Facility, acquisitions, capital expenditures, working
capital and general corporate purposes.
In October 1998, the Company increased amounts available under the Lease
Facility to $70.0 million with a corresponding decrease in commitments available
under the Revolver to $90.0 million to accommodate the Company's lease of two
facilities located in Missouri.
In December 1998, the Company expanded total commitments available through the
Lease Facility by $65.0 million to accommodate the Company's lease of six
properties located in Massachusetts. Following the increase, the Company's total
Senior Credit Facility commitment was $225.0 million, of which $90.0 million was
reserved for the Revolver and the remaining balance of $135.0 million allocated
for use through the Lease Facility.
Centennial'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. The Company had approximately $79.0 million and
$41.3 million outstanding under the Senior Credit Facility at December 31, 1998
and 1997, respectively, as well as issued standby letters of credit totaling
approximately $6.7 million and $7.0 million respectively.
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 First Union National Bank'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, 1998 was approximately
6.5%.
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 July 31, 2003, 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 of 0.25% 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, 1998, the Company
was in compliance with all of its debt covenants.
At December 31, 1998 and 1997, the Company had $17.6 million and $17.8
million, respectively, of mortgage debt outstanding, including a current portion
of approximately $ 277,000 and $259,000 respectively. The mortgage debt requires
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, 1998, interest
F-15
<PAGE>
rates on the mortgages range from 7.33% to 10.50%. These debts are
collateralized by real property.
Future maturities of mortgage debt are summarized as follows (in
thousands):
1999 $ 277
2000 304
2001 334
2002 367
2003 402
Thereafter 15,879
---------
$ 17,563
=========
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.
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, 1998 (in thousands):
Nursing
Year ending December 31 Equipment Facilities Total
------- ------- -------
1999 $ 83 $ 2,468 $ 2,551
2000 -- 2,468 2,468
2001 -- 2,468 2,468
2002 -- 2,468 2,468
2003 -- 2,468 2,468
Thereafter -- 18,507 18,507
------- ------- -------
Total minimum lease payments 83 30,847 30,930
Less amount representing interest 2 13,721 13,723
------- ------- -------
Present value of minimum lease payments 81 17,126 17,207
Current portion 81 778 859
------- ------- -------
Noncurrent portion $ -- $16,348 $16,348
======= ======= =======
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 12.10%, respectively.
10. 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").
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-
F-16
<PAGE>
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 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 Company's
Board of Directors.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options outstanding-beginning of
period ........................................ 526,782 $ 13.47 355,160 $ 12.09
Granted ......................................... 517,280 20.41 183,340 16.00
Exercised ....................................... (86,231) (10.61) (4,115) (8.74)
Forfeited ....................................... (62,389) (16.03) (7,603) (11.68)
------- -------
Options outstanding-end of period ............... 895,442 $ 17.58 526,782 $ 13.47
======= ========= ======= =========
Weighted average fair value of options
granted during the period....................... $ 12.23 $ 6.40
</TABLE>
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:
1998 1997
---- ----
Expected volatility ............................. 66.4% 41.0%
Risk-free interest rate ......................... 5.32% 6.15%
Expected term ................................... 5 4
Dividend yield .................................. 0% 0%
The following table summarizes information about outstanding and exercisable
stock options at December 31, 1998:
F-17
<PAGE>
<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 .................... 40,412 3.5 years 40,412 $ 7.83
8.74 .................... 11,728 7.0 years 11,728 8.74
14.03 .................... 191,580 7.1 years 167,634 14.03
16.00 .................... 150,442 8.0 years 57,258 16.00
14.75 .................... 10,000 9.5 years -- 14.75
18.16 .................... 8,280 9.5 years -- 18.16
18.63 .................... 15,000 9.5 years -- 18.63
20.63 .................... 468,000 9.1 years -- 20.63
</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, 1998, 1997 and
1996 would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Pro forma net income (loss) (in thousands)......... $(1,709) $9,582 $2,650
Pro forma income (loss) applicable to common stock:
Basic ......................................... $ (0.14) $ 0.45 $ 0.10
Diluted ....................................... $ (0.14) $ 0.44 $ 0.10
</TABLE>
11. Income Taxes
The components of the income tax provision for the years ended December
31, 1998, 1997 and 1996 are as follows (in thousands):
Year ended December 31,
1998 1997 1996
------- ------- -------
Current
Federal .................. $ 3,302 $ 525 $ 103
State .................... 1,032 2,394 291
------- ------- -------
4,334 2,919 394
------- ------- -------
Deferred
Federal .................. (2,002) 4,849 1,781
State .................... (828) (968) (83)
------- ------- -------
(2,830) 3,881 1,698
------- ------- -------
Total provision .............. $ 1,504 $ 6,800 $ 2,092
------- ------- -------
F-18
<PAGE>
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, 1998, 1997 and 1996 are as follows, (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rate ............. $ 499 $ 5,929 $1,719
State income taxes ..................... 396 598 202
Goodwill amortization ................. 546 253 142
Other .................................. 63 20 29
------- ------- ------
Provision for income taxes ......... $ 1,504 $ 6,800 $2,092
======= ======= ======
</TABLE>
Deferred tax assets and liabilities are comprised of the following at
December 31, 1998 and 1997, (in thousands):
1998 1997
------- -------
Current deferred income tax assets:
Allowances for uncollectible receivables ............. $ 326 $ (542)
Liabilities not deductible for tax purposes .......... 3,412 3,053
------- -------
Current deferred income taxes ..................... $ 3,738 $ 2,511
======= =======
Noncurrent deferred income tax assets:
Net operating loss carryforwards...................... 1,815 845
Tax basis receivables in excess of book .............. -- 2,167
Net effects of capital leases ........................ 1,539 1,394
------- -------
3,354 4,406
------- -------
Noncurrent deferred income tax liabilities:
Temporary goodwill ................................... 1,875 (693)
Purchase adjustments to property and equipment........ (2,034) (1,848)
Other, including depreciation ........................ -- (110)
Tax losses from investment in unconsolidated
partnerships in excess of book .................... -- (163)
------- -------
(159) (2,814)
------- -------
Net noncurrent deferred income tax assets....... $ 3,195 $ 1,592
======= =======
As of December 31, 1998, the Company had approximately $1.8 million of
federal net operating loss carryforwards available to offset future taxable
income through 2010.
12. Management Agreements
As of December 31, 1998, the Company provided operational management
services for 33 facilities and one hospital under long-term management contracts
having remaining effective terms ranging from 5 to 18 years. Twenty-three of
these agreements are with third-party owners and are noncancelable
F-19
<PAGE>
without cause. The management agreements provide for the Company to receive
annual fees ranging from 6.0% 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. The agreements also may include provisions for
additional fees for management services outside the scope of regular operational
services performed.
The Company recorded fees totaling approximately $145,000 and $142,000
during the years ended December 31, 1997 and 1996, respectively, as a result of
a management agreement with an affiliate; the related facility was purchased by
the Company in December 1997. Five management agreements, (three of which were
active during the year ended December 31, 1998), with fees totaling
approximately $172,000, $898,000 and $939,000 during the years ended December
31, 1998, 1997 and 1996, respectively, 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 in the fourth quarter of 1997.
The Company also 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, 1998
and 1997 were $19.7 million and $11.6 million, respectively, and are included in
notes and advances receivable, net 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.
13. Transactions with Related Parties
At December 31, 1998, the Company had employment agreements with five
officers which provide for salary continuation and non-competition with the
Company, subject to certain conditions.
The Company leased two long-term care facilities from affiliated lessors.
During the year ended December 31, 1998, the Company managed four
long-term care facilities for affiliated limited partnerships in which the
Company serves as a general partner.
Centennial leases its facilities' employees from an affiliated company
which is owned by the president of the Company. The total payroll costs and
reimbursements from the Company totaled $49.1 million, $37.2 million and $29.2
million for the years ended December 31, 1998, 1997 and 1996, respectively. Such
costs are billed by the related entity at cost.
14. Commitments and Contingencies
F-20
<PAGE>
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.
The Company is exposed to credit loss in the event of nonperformance by First
Union, NationsBank, and/or Credit Lyonnais Americas. However, the Company does
not anticipate nonperformance by these parties, and no material loss would be
expected from their nonperformance. The fair value of the interest rate swap
agreements was not recognized in the consolidated financial statements since
they are accounted for as hedges. At December 31, 1998, the estimated fair value
of the interest rate swap agreements, based on current market rates,
approximated a net payable of $822,000.
Prior to 1998, Centennial self-insured for workers' compensation claims
and health benefits for its employees. The Company maintained stop-loss
insurance such that the Company's liability for losses was limited. Centennial
recognized as an expense and accrued for estimated workers' compensation and
health benefit claims incurred but not reported as of December 31, 1998 and
1997. Beginning January 1998, the Company entered into a guaranteed cost
insurance program for workers compensation.
15. 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.
16. 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. The Company may at its
discretion, match a portion of the employee contribution. The Company funded
approximately $161,000, $363,000 and $92,000 during the years ended December 31,
1998, 1997 and 1996, respectively, as a match to the employee contributions.
17. 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
F-21
<PAGE>
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 and Advances Receivable
The carrying amount approximates fair value for the notes and advances
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 Credit Agreement approximates fair value since
the Credit Agreement 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.
Interest Rate Swaps
At December 31, 1998, the estimated fair value of the interest rate swap
agreements, based on current market rates, approximated a net payable of
$822,000.
18. Healthcare Legislation
As previously noted, 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 $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. Under the Act,
PPS will be phased in over three cost reporting periods beginning on or after
July 1, 1998. Generally, 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 free-standing (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, or that the Company will be able to obtain sufficient cost reductions
to offset the reduction in revenues. Decreases in the level of payments or
failure to reduce costs could have a material adverse effect on the Company. For
the year ended December 31, 1998, the Company derived approximately 22% of its
revenue from Medicare at its long-term care facilities.
F-22
<PAGE>
The Act has also targeted the Medicare home health program for reductions in
spending of approximately $16.2 billion over the next five years, also primarily
through the implementation of a prospective payment system. An interim payment
system ("IPS") will remain in effect until the new prospective payment system is
implemented for cost reporting periods beginning on or after 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, in general, 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 and 25% on 98% of the
standardized regional average of these costs in the agency's census
region.
The Act also provides that cost limits and per beneficiary limits must be
reduced by 15% from the amount that would otherwise be in effect on September
30, 1999, regardless of whether the new prospective payment system is ready for
implementation on October 1, 1999.
Implementation of these new limits will effectively reduce reimbursement 15-20%
according to industry experts. For the year ended December 31, 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 reducing the amount of reimbursement for an hour of
occupational or speech therapy and increasing the amount of reimbursement for
and 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 year ended December 31, 1998, the Company derived
approximately 14% of its revenues from third-party contract therapy services.
19. Recently Issued Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued. This
statement requires that all derivatives be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The effect on the financial
statements upon adoption of SFAS 133 has not been determined.
20. Segment Information
In 1998, Centennial adopted SFAS 131. The Company has determined that its
reportable segments are those that are based on the Company's method of internal
reporting, which disaggregates its business by services provided. The Company's
reportable segments are management services/corporate, long-term care facilities
and rehabilitative therapy services. Management fee revenues and all corporate
expenses and overhead are recorded in the management services/corporate segment.
The long-term care facilities segment provides basic healthcare services to
patients in a long-term care setting, including skilled nursing and support,
housekeeping, laundry, dietary, recreational and social services. The
rehabilitative therapy services segment provides specialty healthcare services,
including comprehensive rehabilitation therapy, respiratory therapy and infusion
therapy. The "All Other" category represents the Company's hospital services,
home health services, and the Company's subsidiary providing intravenous therapy
and other services.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies," except that income tax expense is
F-23
<PAGE>
allocated to the segments by an application of the company-wide effective
rate to the profit/loss of each segment. Centennial evaluates the performance of
F-24
<PAGE>
its segments and allocates resources to them based on earnings before interest,
taxes, depreciation, and amortization (EBITDA).
The tables below presents information about EBITDA and total assets used by the
chief operating decision maker of Centennial as of and for the years ended
December 31, 1998 and 1997:(1)
<TABLE>
<CAPTION>
1998:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
------------------------------------------------------------------------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 15,842 248,007 72,255 50,265 (28,724)(2) 357,645
EBITDA (11,321) 15,931 9,045 4,259 - 17,914
Total Assets 128,007 143,290 24,684 25,002 (32,611)(3) 288,372
1997:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
------------------------------------------------------------------------------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 8,237 228,490 52,603 31,174 (16,231)(2) 304,273
EBITDA (3,593) 23,877 6,764 5,171 - 32,219
Total Assets 109,206 126,130 16,267 18,222 (26,176)(3) 243,649
</TABLE>
(1) It was impracticable for the Company to present segment information for
fiscal year 1996.
(2) Represents elimination of intersegment revenues
(3) Represents elimination of intersegment receivables and unallocated corporate
purchase adjustments
Specified items included in segment profit/loss for the years ended December 31,
1998, and 1997: (1)
F-25
<PAGE>
<TABLE>
<CAPTION>
1998:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All
Corporate Facilities Services Other Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue 1,672 88 160 91 2,011
Interest expense (2,294) (5,541) (630) (700) (9,165)
Depreciation and amortization (2,560) (4,516) (1,745) (471) (9,292)
Income tax benefit/(expense) 5,835 (2,325) (2,664) (2,350) (1,504)
Minority interest (net of tax) (279) - - - (279)
Net income (expense) (9,126) 3,637 4,167 1,007 (315)
</TABLE>
<TABLE>
<CAPTION>
1997:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All
Corporate Facilities Services Other Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue 467 56 81 32 636
Interest expense (3,050) (4,883) (263) (462) (8,658)
Depreciation and amortization (1,631) (3,998) (858) (273) (6,760)
Income tax benefit/(expense) 3,204 (5,870) (2,233) (1,901) (6,800)
Minority interest (net of tax) (252) - - - (252)
Extraordinary loss (net of tax) (537) - - - (537)
Net income (expense) (5,798) 9,181 3,492 2,973 9,848
</TABLE>
The majority of the Company's revenues come from contracts with third-party
payors, primarily Medicare and Medicaid programs. The tables below represent a
summary of the Company's revenues from Medicare and Medicaid programs by
reporting segment for the years ending December 31, 1998 and 1997: (1)
<TABLE>
<CAPTION>
1998:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All % of Total
Corporate Facilities Services Other Total Revenues
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from:
Medicare -- 77,012 -- 8,510 87,522 23.9%
Medicaid -- 119,559 -- -- 119,559 33.2%
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
1997:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All % of Total
Corporate Facilities Services Other Total Revenues
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from:
Medicare -- 68,296 -- 4,226 72,522 23.8%
Medicaid -- 111,380 -- -- 111,380 36.6%
</TABLE>
21. Earnings per Share
In 1997, Centennial adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", ("SFAS 128"). Prior year amounts have been restated in
accordance with SFAS 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 (in thousands, except per share
amounts):
F-27
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before extraordinary loss .................... $ (315) $ 10,385 $ 2,779
Deduct: dividends and accretion of preferred stock ....... -- 5,874 2,192
-------- -------- --------
<C>
Income (loss) applicable to common stock ................... (315) 4,511 587
before extraordinary loss
Extraordinary loss on extinguishment
of debt ................................................ -- (537) --
-------- -------- --------
Income (loss) applicable to common stock ................... (315) 3,974 587
Average common shares outstanding ........................ 11,906 8,289 4,742
Basic earnings per common share:
Income (loss) applicable to common stock
before extraordinary loss .............................. $ (0.03) $ 0.54 $ 0.12
Extraordinary loss on extinguishment
of debt ................................................ -- (0.06) --
-------- -------- --------
Basic earnings loss per common share ..................... $ (0.03) $ 0.48 $ 0.12
======== ======== ========
Income (loss) applicable to common stock
before extraordinary loss .............................. (315) 4,511 587
Add: Interest savings on convertible debt ................ -- 65 --
-------- -------- --------
(315) 4,576 587
Extraordinary loss on extinguishment
of debt ................................................ -- (537) --
-------- -------- --------
Income (loss) applicable to common stock ................... (315) 4,039 587
Average common shares outstanding ........................ 11,906 8,289 4,742
Add: options ............................................ 172 173 40
-------- -------- --------
Average diluted common shares outstanding................. 12,078 8,462 4,782
Diluted earnings per common share:
Income (loss) applicable to common stock
before extraordinary loss .............................. $ (0.03) $ 0.54 $ 0.12
Extraordinary loss on extinguishment
of debt ................................................ -- (0.06) --
-------- -------- --------
Diluted earnings (loss) per common share ................. $ (0.03) $ 0.48 $ 0.12
======== ======== ========
</TABLE>
22. Subsequent Events
On January 1, 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts.
In January 1999, the Company acquired a leasehold interest in Hunter Woods
Nursing and Rehabilitation Center, a 130-bed facility located in Charlotte,
North Carolina. This facility was previously managed by the Company.
In January 1999, the Company acquired a leasehold interest in Choctaw
County Medical Center, a facility with 68 nursing home beds and 22 hospital
beds, located in Ackerman, Mississippi. This facility was previously managed by
the Company.
On March 26, 1999, the Company received an investigatory subpoena from the
Department of Health & Human Services, Office of the Inspector General
requesting records in connection with an investigation of possible or otherwise
improper claims for payment under Title XVIII (Medicare) of the Social Security
Act. The request relates to records for the period January 1, 1994 to the
present concerning certain of the Company's internal policies and relates to
four long-term care facilities operated by the Company. The Company is not aware
of the origin of the investigation or its scope but intends to provide all
requested records and cooperate fully with the investigation.
F-28
<PAGE>
23. Quarterly Financial Information (Unaudited)
The table below sets forth summarized quarterly financial data for the
years ended December 31, 1998 and 1997, (in thousands, except per share
amounts):
F-29
<PAGE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues ............................. $ 87,072 $ 87,900 $ 89,585 $ 93,088
Net income (loss) .......................... 3,826 3,834 (7,363) (612)
Net income (loss) applicable to common
shareholders ............................ $ 3,826 $ 3,834 $ (7,363) $ (612)
======== ======== ======== ========
Net income (loss) applicable to common stock
per common and common equivalent share:
Basic: .................................. $ 0.32 $ 0.32 $ (0.62) $ (0.05)
======== ======== ======== ========
Diluted: ................................ $ 0.31 $ 0.32 $ (0.62) $ (0.05)
======== ======== ======== ========
Weighted average number of common
stock and common stock equivalents
outstanding:
Basic ................................... 11,866 11,910 11,924 11,924
Diluted ................................. 12,202 12,215 11,942 11,944
Common stock market prices:
High .................................... $ 25.125 $ 25.000 $ 20.375 $ 15.500
Low ..................................... $ 19.625 $ 16.438 $ 7.500 $ 7.375
<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 (loss) applicable to common stock 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
======== ======== ======== ========
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
Common stock market prices:
High ..................................... N/A N/A $ 23.000 $ 25.125
Low ...................................... N/A N/A $ 16.000 $ 18.125
</TABLE>
Net income for the fourth quarter of 1998 was reduced by approximately $1.2
million to establish a $2.0 million reserve against 1996 related party income
under appeal with the Company's Medicare intermediary.
F-30
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
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, 1998
Allowance for doubtful
accounts (deducted
from accounts
receivable) .......... $ 2,998 $ 1,432 $(1,874)(1) $ 2,407(4) $ 4,963
========== ========== ======= ========== =======
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
========== ========== ========== ========== =======
</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) Allowance on accounts receivable purchased during 1998 in connection with
several nursing facility acquisitions.
F-31
<PAGE>
Exhibit Index
Exhibit 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 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).
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 -- 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).
10.6 -- Amended and Restated Employment Agreement between Paragon
Rehabilitation, Inc. and Laurence W. Lepley, Jr. dated as of January
1, 1998 (incorporated by reference to Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
10.7 -- 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).
10.8 -- Lease between Grant Park Nursing Home L.P. and WelCare Acquisition
Corp. n/k/a Centennial Acquisition Corporation ("CAC") commencing on
January 1, 1998 (incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1, Registration No. 333-
24267, as amended).
10.9 -- Amended and Restated Lease Agreement by and between Aston 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).
10.10 -- Second Amended and Restated Lease Agreement by and between SBT
Healthcare Properties, L.P. and CHPC dated October 1, 1998
(incorporated by reference to Exhibit 10.13 of the Company's
Quarterly Report on Form 10-Q for quarter ended September 30, 1998)
10.11 -- Second Amendment to Certain Operative Agreements by and among the
Company, certain subsidiaries of the Company as Guarantors, First
Security Bond, National Association, as Owner Trustee, the various
banks and lending institutions named therein as the Lenders, First
Union Capital Markets, as Syndication Agent and Nations Bank, N.A.,
as agent.
10.12 -- Amendment No. 2 to the Third Amended and Restated Credit Agreement by
and among the Company and its subsidiaries and the lenders identified
therein dated as of December 30, 1998
10.13 -- 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)
10.14 -- 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 TMP 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)
10.15 -- Lease Agreement by and between House Investments - Nursing Homes
Partners T and THP dated November 1, 1993 (incorporated by reference
to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.16 -- Operating Lease by and between HCPI Charlotte, Inc. and TMP 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).
10.17 -- 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
27.1 -- Financial Data Schedule
99.1 -- Cautionary Statements Regarding Forward-Looking Statements
<PAGE>
EXHIBIT 10.11
SECOND AMENDMENT TO CERTAIN OPERATIVE AGREEMENTS
THIS SECOND AMENDMENT TO CERTAIN OPERATIVE AGREEMENTS (this Amendment)
dated as of December 30, 1998 is by and among CENTENNIAL HEALTHCARE CORPORATION,
a Georgia corporation (the Lessee or the Construction Agent); the various
parties listed on the signature pages hereto as guarantors (subject to the
definition of Guarantors in Appendix A to the Participation Agreement referenced
below, individually, a Guarantor and collectively, the Guarantors); FIRST
SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not
individually but solely as the Owner Trustee under the Centennial Real Estate
Trust 1998-1 (the Owner Trustee or the Lessor); the various banks and other
lending institutions listed on the signature pages hereto as holders of
certificates issued with respect to the Centennial Real Estate Trust 1998-1
(subject to the definition of Holders in Appendix A to the Participation
Agreement referenced below, individually, a Holder and collectively, the
Holders); the various banks and other lending institutions listed on the
signature pages hereto as lenders with respect to the Centennial Real Estate
Trust 1998-1 (subject to the definition of Lenders in Appendix A to the
Participation Agreement referenced below, individually, a Lender and
collectively, the Lenders); FIRST UNION CAPITAL MARKETS, A DIVISION OF WHEAT
FIRST SECURITIES, INC., a Virginia corporation, as syndication agent (the
Syndication Agent); and NATIONSBANK, N.A., a national banking association, as
the agent for the Lenders and respecting the Security Documents, as the agent
for the Lenders and the Holders, to the extent of their interests (in such
capacity, the Agent). Capitalized terms used in this Amendment but not otherwise
defined herein shall have the meanings set forth in Appendix A to the
Participation Agreement (hereinafter defined).
W I T N E S S E T H
WHEREAS, the parties to this Amendment are parties to that certain
Participation Agreement dated as of July 29, 1998 (as amended, modified,
supplemented, restated and/or replaced from time to time, the Participation
Agreement), certain of the parties to this Amendment are parties to that certain
Credit Agreement dated as of July 29, 1998 (as amended, modified, supplemented,
restated and/or replaced from time to time, the Credit Agreement), certain of
the parties to this Amendment are parties to that certain Trust Agreement dated
as of July 29, 1998 (as amended, modified, supplemented, restated and/or
replaced from time to time, the Trust Agreement), certain of the parties to this
Amendment are parties to that certain Security Agreement dated as of July 29,
1998 (as amended, modified, supplemented, restated and/or replaced from time to
time, the Security Agreement), certain of the parties to this Amendment are
parties to that certain First Amendment to Certain Operative Agreements dated as
of October 23, 1998 (as amended, modified, supplemented, restated and/or
replaced from time to time, the First Amendment) and certain of the parties to
this Amendment are parties to the other Operative Agreements relating to a $70
million synthetic lease facility (the Facility) that has been established in
favor of the Lessee;
WHEREAS, the Lessee has requested certain modifications to the
Participation Agreement, the Credit Agreement, the Trust Agreement, the Security
Agreement and the other Operative Agreements in connection with the Facility;
WHEREAS, the Financing Parties which are signatories hereto have agreed to
the requested modifications on the terms and conditions set forth herein;
<PAGE>
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Participation Agreement.
(a) Section 5.16 is added to the Participation Agreement as follows:
5.16.Lender Commitments and Holder Commitments Constituting the
Flatley Commitment are Available Solely for Advances
regarding the Flatley Property.
Notwithstanding any other provision of any Operative
Agreement, (a) those portions of the Lender Commitments and
Holder Commitments which constitute the Flatley Commitment are
available solely for Advances regarding the Flatley Property and
(b) all Advances regarding the Flatley Property shall be made
with the Tranche A Lenders funding eighty-six percent (86%) of
such amount from the aggregate Flatley Commitment, the Tranche B
Lenders funding eleven percent (11%) of such amount from the
aggregate Flatley Commitment and the Holders funding three
percent (3%) from the aggregate Flatley Commitment. Each Advance
requested by the Construction Agent regarding the Flatley
Property shall be set forth in a Requisition that does not
include any entry for any Property other than the Flatley
Property.
(b) Section 10.1 of the Participation Agreement is amended by
deleting the first two sentences thereof and replacing them with the
following:
Each Lender may participate, assign or transfer all or a
portion of its interest hereunder and under the other Operative
Agreements in accordance with Sections 9.7 and 9.8 of the Credit
Agreement; provided, each participant, assignee or transferee
must obtain the same ratable interest in Tranche A Loans,
Tranche A Commitments, Tranche B Loans and Tranche B Commitments
and to the extent the selling Lender is also a Holder, each such
participant, assignee or transferee must also obtain the same
percentage interest (regarding the percentage interest sold by
the selling Lender in and to the Tranche A Loans, Tranche A
Commitments, Tranche B Loans and Tranche B Commitments) of the
applicable Holders ratable interest in and to the Trust Estate);
provided, further, except after the occurrence and during the
continuation of any Event of Default, no participant, assignee
or transferee shall be a Person in a Permitted Line of Business;
provided, further, that each Lender that assigns or transfers
all or a portion of its interest hereunder and under the other
Operative Agreements shall deliver to the Agent a copy of each
Assignment and Acceptance (as referenced in Section 9.8 of the
Credit Agreement) for purposes of maintaining the Register. The
Holders may, directly or indirectly, assign, convey or otherwise
transfer any of their right, title or interest in and to the
Trust Estate and the Trust Agreement with the prior written
consent of the Agent and the Lessee (which consent shall not be
unreasonably withheld or delayed) and in accordance with the
terms of Section 11.8(b) of the Trust Agreement; provided, to
the extent the selling Holder is also a Lender, each such
assignee, receiver of a conveyance or other transferee must also
obtain the same percentage interest (regarding the percentage
interest sold by the selling Holder in and to the Trust Estate
and the Trust Agreement) of the applicable Lenders ratable
<PAGE>
interest in and to the Tranche A Loans, Tranche A Commitments,
Tranche B Loans and Tranche B Commitments; provided, further,
except after the occurrence and during the continuation of any
Event of Default, no assignee, receiver of a conveyance or other
transferee shall be a Person in a Permitted Line of Business.
(c) Exhibit A to this Amendment is hereby added as Schedule 1 to the
Participation Agreement.
(d) Appendix A to the Participation Agreement shall be amended in the
following respects:
(i) The definition of Applicable Percentage is amended by
deleting the pricing grid and replacing it with the following:
i. PRICING GRID FOR LOANS, HOLDER ADVANCES AND UNUSED FEES FROM THE INITIAL
CLOSING DATE TO AND INCLUDING MARCH 30, 1999 BUT IN ALL CASES EXCLUDING
LOANS, HOLDER ADVANCES AND UNUSED FEES IN CONNECTION WITH THE FLATLEY
PROPERTY
<TABLE>
Applicable
Applicable Percentage Applicable Applicable Applicable
Percentage Applicable for Percentage Percentage Percentage
Pricing Ratio of for Percentage Eurodollar for ABR for for
Level Adjusted Eurodollar for ABR Holder Holder Lender Holder
Total Loans Loans Advances Advances Unused Fee Unused Fee
Debt/Adjusted
EBITDAR
<S> <C> <C> <C> <C> <C> <C> <C>
Tier I Less than or 0.950% 0.075% 1.450% 0.575% 0.200% 0.200%
equal to 3.50 to
1.00
Tier II Less than or 1.200% 0.075% 1.700% 0.575% 0.250% 0.250%
equal to 4.00 to
1.00 but greater
than 3.50 to 1.00
Tier III Less than or 1.450% 0.075% 1.950% 0.575% 0.250% 0.250%
equal to 4.50 to
1.00 but greater
than 4.00 to 1.00
Tier IV Greater than 4.50 1.700% 0.200% 2.200% 0.700% 0.375% 0.375%
to 1.00
</TABLE>
<PAGE>
ii. PRICING GRID FOR LOANS, HOLDER ADVANCES AND UNUSED FEES IN
CONNECTION WITH FLATLEY PROPERTY TO AND INCLUDING MARCH 30, 1999
<TABLE>
Applicable
Applicable Percentage Applicable Applicable Applicable
Percentage Applicable for Percentage Percentage Percentage
for Percentage Eurodollar for ABR for for
Eurodollar for ABR Holder Holder Lender Holder
Loans Loans Advances Advances Unused Fee Unused Fee
<S> <C> <C> <C> <C> <C> <C>
2.750% 1.250% 3.250% 1.750% 0.50% 0.50%
</TABLE>
iii. PRICING GRID FOR LOANS, HOLDER ADVANCES AND UNUSED FEES FROM MARCH
31, 1999 AND IN ALL CASES INCLUDING LOANS, HOLDER ADVANCES AND UNUSED FEES
IN CONNECTION WITH THE FLATLEY PROPERTY
<TABLE>
Applicable
Ratio of Applicable Percentage Applicable Applicable Applicable
Adjusted Percentage Applicable for Percentage Percentage Percentage
Total for Percentage Eurodollar for ABR for for
Pricing Debt/Adjusted Eurodollar for ABR Holder Holder Lender Holder
Level EBITDAR Loans Loans Advances Advances Unused Fee Unused Fee
<S> <C> <C> <C> <C> <C> <C>
Tier I Less than or 2.25% 1.25% 2.75% 1.75% 0.375% 0.375%
equal to 3.50 to
1.00
Tier II Less than or 2.50% 1.50% 3.00% 2.00% 0.50% 0.50%
equal to 4.00 to
1.00 but greater
than 3.50 to 1.00
Tier III Less than or 3.00% 2.00% 3.50% 2.50% 0.50% 0.50%
equal to 4.75 to
1.00 but greater
than 4.00 to 1.00
Tier IV Greater than 4.75 3.00% 2.00% 3.50% 2.50% 0.50% 0.50%
to 1.00
</TABLE>
<PAGE>
(ii) The definition of Applicable Percentage is further amended
by adding the following sentence at the end of such definition:
Notwithstanding the foregoing and prior to March 31, 1999, the
Applicable Percentage for Loans, Holder Advances and Unused Fees
in connection with the Flatley Commitments shall be calculated
pursuant to the pricing grid referenced above in subsection (ii)
and shall not adjust based on the ratio of Adjusted Total Debt
to Adjusted EBITDAR.
(iii) The definition of Flatley Commitments and Flatley Property
are added to Appendix A to the Participation Agreement after the
definition of Fixtures as follows:
Flatley Commitments shall mean, in each case committed amounts
which are available for funding solely with respect to the
Flatley Property, the sum of (a) $63,050,000.00 of Lender
Commitments plus (b) $1,950,000.00 of Holder Commitments.
Flatley Property shall mean the Property described in Schedule 1
to the Participation Agreement.
(iv) The definition of Holder Commitments is amended by deleting
the reference to $2,100,000.00 and replacing it with a reference to
$4,050,000.00.
(v) The definition of Lender Commitments is amended by deleting
the reference to $67,900,000.00 and replacing it with a reference to
$130,950,000.00.
(vi) The definition of Maximum Residual Guarantee Amount is
deleted in its entirety and replaced by the following:
Maximum Residual Guarantee Amount shall mean an amount equal to
the product of (a) with regard to all Properties other than the
Flatley Property, the aggregate Property Cost for all such
Properties (excluding the aggregate Property Cost for the
Flatley Property) times eighty-eight percent (88%) and (b) with
regard to the Flatley Property, the aggregate Property Cost for
the Flatley Property times eighty-six percent (86%).
2. Credit Agreement. Schedule 1.1 to the Credit Agreement is deleted in
its entirety and replaced by the following:
Schedule 1.1
[A. LENDER COMMITMENTS EXCLUDING
THE FLATLEY COMMITMENT AVAILABLE FOR LOANS]
Tranche A Tranche B
Commitment Commitment
Name and Address of Lenders Amount Percentage Amount Percentage
<PAGE>
First Union National Bank
301 South College Street
Charlotte, North Carolina
28288
Attn.: Matt MacIver
Telephone: (704) 374-4187
Facsimile: (704) 383-9144
NationsBank, N.A.
Atlanta Plaza Building
600 Peachtree Street, NE,
19th Floor
Atlanta, Georgia 30308
Attn.: J. Walter Bland
Telephone: (404) 607-5861
Facsimile: (404) 607-6338
AmSouth Bank
SONAT - 7th Floor
1900 Fifth Avenue, North
Birmingham, Alabama 35203
Attn.: Ken DiFatta
Telephone: (205) 801-0103
Facsimile: (205) 326-4790
Credit Lyonnais New York
Branch
1301 Avenue of the Americas
New York, New York
10019-6022
Attn.: Henry Reukauf
Telephone: (212) 261-7791
Facsimile: (212) 261-3440
RaboBank Nederland New
York Branch
245 Park Avenue, 37th Floor
New York, New York 10167
Attn.: Corporate Services
Telephone: (212) 916-7800
Facsimile: (212) 888-0233
Comerica Bank
500 Woodward Avenue, 9th
Floor
Detroit, Michigan 48226
Attn.: Manager, Health
Education Group
Telephone: (313) 222-7542
Facsimile: (313) 222-3420
National City Bank of
Kentucky
101 South 5th Street, 8th
Floor
Louisville, Kentucky 40202
Attn.: Roderic Brown
Telephone: (502) 581-4369
Facsimile: (502) 581-4424
<PAGE>
Wachovia, N.A.
191 Peachtree Street, 30th
Floor
Atlanta, Georgia 30303
Attn.: Gary Gaskill
Telephone: (404) 332-6519
Facsimile: (404) 332-6920)
Scotiabanc, Inc.
600 Peachtree Street,
Suite 2700
Atlanta, Georgia 30308
Attn.: Carolyn Calloway
Telephone: (404) 877-1507
Facsimile: (404) 888-0998
TOTAL *$61,600,000 100.000000% *6,300,000 100.000000%
- --------------
* As such amounts and percentages may be increased or reduced from time to time
in accordance with the provisions of the Operative Agreements.
B. LENDER COMMITMENTS CONSTITUTING
THE FLATLEY COMMITMENT AVAILABLE FOR LOANS
Tranche A Tranche B
Commitment Commitment
Name and Address of Lenders Amount Percentage Amount Percentage
First Union National Bank
301 South College Street
Charlotte, North Carolina
28288
Attn.: Matt MacIver
Telephone: (704) 374-4187
Facsimile: (704) 383-9144
NationsBank, N.A.
Atlanta Plaza Building
600 Peachtree Street, NE,
19th Floor
Atlanta, Georgia 30308
Attn.: J. Walter Bland
Telephone: (404) 607-5861
Facsimile: (404) 607-6338
TOTAL $55,900,000 100.000000 $7,150,000 100.000000%
[The aggregate Lender Commitment (including without limitation
the Flatley Commitment available for Loans) equals $130,950,000.]
3. Trust Agreement. Schedule 1 to the Trust Agreement is deleted in its
entirety and replaced by the following:
<PAGE>
SCHEDULE I
HOLDER COMMITMENTS
A. HOLDER COMMITMENTS EXCLUDING THE FLATLEY COMMITMENT
AVAILABLE FOR HOLDER ADVANCES
Holder Commitment
Name of Holder Amount Percentage
FIRST UNION NATIONAL BANK
301 South College Street
Charlotte, North Carolina 28288
Attn.: Matt MacIver
Telephone: (704) 374-4187
Facsimile: (704) 383-9144
NATIONSBANK, N.A.
Atlanta Plaza Building
600 Peachtree Street, NE, 17th
Floor
Atlanta, Georgia 30308
Attn.: J. Walter Bland
Telephone: (404) 607-5861
Facsimile: (404) 607-6338
AMSOUTH BANK
SONAT - 7th Floor
1900 Fifth Avenue, North
Birmingham, Alabama 35203
Attn.: Ken DiFatta
Telephone: (205) 801-0103
Facsimile: (205) 326-4790
WACHOVIA BANK, N.A.
191 Peachtree Street, 30th Floor
Atlanta, Georgia 30303
Attn.: Gary Gaskill
Telephone: (404) 332-6519
Facsimile: (404) 332-6920
SCOTIABANC INC.
600 Peachtree Street, Suite 2700
Atlanta, Georgia 30308
Attn.: Carolyn Calloway
Telephone: (404) 877-1507
Facsimile: (404) 888-0998
TOTAL *$2,1000,00 *100.000000%
- ----------------
*As such amounts and percentages may be increased or reduced from time to time
in accordance with the provisions of the Operative Agreements.
<PAGE>
[B. HOLDER COMMITMENTS CONSTITUTING
THE FLATLEY COMMITMENT AVAILABLE FOR HOLDER ADVANCES]
Holder Commitment
Name of Holder Amount Percentage
First Union National Bank
301 South College Street
Charlotte, North Carolina 28288
Attn.: Matt MacIver
Telephone: (704) 374-4187
Facsimile: (704) 383-9144
NationsBank, N.A.
Atlanta Plaza Building
600 Peachtree Street, NE,
19th Floor
Atlanta, Georgia 30308
Attn.: J. Walter Bland
Telephone: (404) 607-5861
Facsimile: (404) 607-6338
TOTAL $1,950,000 100.000000%
[The aggregate Holder Commitment (including without limitation the Flatley
Commitment available for Holder Advances) equals $4,050,000.]
4. Security Agreement. The first paragraph of the Preliminary
Statement in the Security Agreement is amended in the following respects:
(a) The reference to $67,900,000 is amended by deleting the reference
to $67,900,000 and replacing it with a reference to $130,950,000.
(b) The reference to $2,100,000 is amended by deleting the reference
to $2,100,000 and replacing it with a reference to $4,050,000.
5. Conditions Precedent. This Amendment shall be effective upon
satisfaction of the following conditions:
(a) execution of this Amendment by the Credit Parties, the Agent and
the Majority Secured Parties;
(b) receipt by the Agent of legal opinions of counsel to the Credit
Parties relating to this Amendment and resolutions from the board of
directors of each of the Credit Parties authorizing the provisions of this
Amendment, in each case in form and substance reasonably satisfactory to
the Agent; and
(c) receipt by the Agent of a commitment fee of one-eighth of one
percent (0.125%) on the Flatley Commitments payable pro rata to the
Lenders and Holders providing the Flatley Commitments.
6. Costs and Expenses. The Lessee agrees to pay all reasonable costs and
expenses of the Agent in connection with the preparation, execution and delivery
of this Amendment, including without limitation the reasonable fees and expenses
of Moore & Van Allen, PLLC.
7. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original and it shall not be necessary in making proof of this Amendment to
<PAGE>
produce or account for more than one such counterpart.
8. Continued Effectiveness of Operative Agreements. Except as modified
hereby, all of the terms and conditions of the Operative Agreements shall remain
in full force and effect.
9. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of North Carolina.
[The remainder of this page has been intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
to be duly executed and delivered as of the date first above written.
CONSTRUCTION AGENT
AND LESSEE: CENTENNIAL HEALTHCARE CORPORATION,
as the Construction Agent and as the Lessee
By:/s/ Alan C. Dahl
Name: Alan C. Dahl
Title:EVP
GUARANTORS: CENTENNIAL/ASHTON PROPERTIES CORPORATION, a Georgia corporation
By: /s/Alan C. Dahl
Name:Alan C. Dahl
Title: EVP
CENTENNIAL HEALTHCARE PROPERTIES CORPORATION, a Georgia corporation
By: /s/ Alan C. Dahl
Name:Alan C. Dahl
Title: EVPy:
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION, a Georgia corporation
By: /s/ Alan C. Dahl
Name:Alan C. Dahl
Title: EVP
CENTENNIAL ACQUISITION CORPORATION,a Georgia corporation
By: /s/ Alan C. Dahl
Name:Alan C. Dahl
Title: EVP
<PAGE>
CENTENNIAL PROFESSIONAL THERAPY SERVICES CORPORATION, a Georgia
corporation
By: /s/ Alan C. Dahl
Name:Alan C. Dahl
Title: EVP
CENTENNIAL HEALTHCARE INVESTMENT CORPORATION, a Georgia corporation
By: /s/ Alan C. Dahl
Name:Alan C. Dahl
Title: EVP
CENTENNIAL HEALTHCARE HOSPITAL CORPORATION, a Georgia corporation
By: /s/ Alan C. Dahl
Name:Alan C. Dahl
Title: EVP
TRANSITIONAL HEALTH SERVICES, INC., a Delaware corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
TRANSITIONAL FINANCIAL SERVICES, INC., a Delaware corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
PARAGON REHABILITATION, INC., a Delaware corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
THS PARTNERS I, INC., a Delaware corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
THS PARTNERS II, INC., a Delaware corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
<PAGE>
TRANSITIONAL HEALTH PARTNERS d/b/a TRANSITIONAL HEALTH SERVICES, a
Delaware general partnership
By: THS PARTNERS I, INC., its general partner
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
By: THS PARTNERS II, INC., its general partner
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
PARKVIEW PARTNERSHIP, a Delaware general partnership
By: THS PARTNERS I, INC., its general partner
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
By: THS PARTNERS II, INC., its general partner
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
TOTAL CARE CONSOLIDATED, INC., a North Carolina corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
TOTAL CARE, INC., a North Carolina corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
TOTAL HEALTH CARE SERVICES, INC., a North Carolina corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
[Signature Pages Continue]
<PAGE>
TOTAL CARE OF THE CAROLINAS, INC., a North Carolina corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
HCC HOME HEALTH OF LOUISIANA, INC., a Louisiana corporation
By: /s/ Alan C. Dahl
Name: Alan C. Dahl
Title: EVP
[Signature Pages Continue]
<PAGE>
OWNER TRUSTEE AND
LESSOR: FIRST SECURITY BANK, NATIONAL
ASSOCIATION, not individually,
except as expressly stated herein,
but solely as the Owner Trustee
under the Centennial Real Estate
Trust 1998-1
By:/s/ Val T. Orton
Name: Val T. Orton
Title: V.P.
[Signature Pages Continue]
<PAGE>
SYNDICATION AGENT: FIRST UNION CAPITAL MARKETS, A
DIVISION OF WHEAT FIRST SECURITIES,
INC., as the Syndication Agent
By: /s/ Paul Hogan
Name: Paul Hogan
Title: Director
[Signature Pages Continue]
<PAGE>
AGENT AND LENDERS: NATIONSBANK, N.A., as an Agent and as a Lender
By: /s/ J. Walter Bland
Name: J. Walter Bland
Title: Vice President
[Signature Pages Continue]
<PAGE>
AMSOUTH BANK, as a Lender
By:/s/ J. Ken Difata
Name: J. Ken Difata
Title: Assistant V.P.
[Signature Pages Continue]
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH, as a Lender
By:/s/ F. Tavangar
Name: Farboud Tavangar
Title: First V.P.
[Signature Pages Continue]
<PAGE>
COOPERATIVE CENTRALE
RAIFFEISEN-BOERENLEENBANK, B.A.
RABOBANK NEDERLAND, NEW YORK BRANCH, as a Lender
By:/s/ M. Christina Debler
Name: M Christina Debler
Title: V.P.
By:/s/ W. Peter C Kodde
Name: W. Peter C. Kodde
Title: V.P.
[Signature Pages Continue]
<PAGE>
COMERICA BANK, as a Lender
By:/s/ Craig F. Durno
Name: Craig F. Durno
Title: Assistant V.P.
[Signature Pages Continue]
<PAGE>
SCOTIABANC INC., as a Lender
By: /s/ Carolyn A. Calloway
Name: Carolyn A. Calloway
Title: Relationship Manager
[Signature Pages Continue]
<PAGE>
HOLDERS: FIRST UNION NATIONAL BANK, as a Holder
By:/s/ J. Matt MacIver, Jr.
Name: J. Matt MacIver, Jr.
Title: V.P.
[Signature Pages Continue]
<PAGE>
NATIONSBANK, N.A., as a Holder
By:/s/ J. Walter Bland
Name: J. Walter Bland
Title: V.P.
[Signature Pages Continue]
<PAGE>
AMSOUTH BANK, as a Holder
By:/s/ J. Ken Diafata
Name: J. Ken Diafata
Title: Assistant V.P
[Signature Pages Continue]
<PAGE>
SCOTIABANC INC., as a Holder
By: /s/ Carolyn Calloway
Name: Carolyn Calloway
Title: Relationship Manager
[Remainder of Page Intentionally Left Blank]
<PAGE>
EXHIBIT A
Schedule 1
(Description of Flatley Property)
OMITTED
<PAGE>
AMENDMENT NO. 2
THIS AMENDMENT NO. 2 (this "Amendment") dated as of December 30, 1998, to
that Third Amended and Restated Credit Agreement referenced below, is by and
among CENTENNIAL HEALTHCARE CORPORATION, a Georgia corporation (the "Company"),
the subsidiaries of the Company that are borrowers under the Credit Agreement,
the Lenders identified herein, FIRST UNION NATIONAL BANK, as Administrative
Agent, and NATIONSBANK, N.A., as Syndication Agent. Terms used but otherwise
defined shall have the meanings provided in the Credit Agreement.
W I T N E S S E T H
WHEREAS, a revolving credit facility has been established in favor of the
Company and the other Borrowers identified therein pursuant to the terms of that
Third Amended and Restated Credit Agreement dated as of July 31, 1998 (as
amended and modified, the "Credit Agreement") among the Borrowers, the lenders
identified therein, First Union National Bank, as administrative agent, and
NationsBank, N.A., as syndication agent;
WHEREAS, the Company has made plans to acquire those properties more
particularly described in Exhibit A hereto (the "Flatley Acquisition") and has
requested certain modifications to the Credit Agreement in connection therewith;
WHEREAS, the Lenders have agreed to make the requested modifications on the
terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1.1 The pricing grid in the definition of "Applicable Margin" in
Section 2.6 is amended to read as follows:
<TABLE>
<CAPTION>
Applicable Margin Applicable Margin
Prior to on and after
March 31, 1999 March 31, 1999
Ratio of Adjusted Total Base Rate Libor Base Rate
Libor Level
Debt to Adjusted EBITDAR Portions Portions Portions
Portions
<S> <C> <C> <C> <C>
I less than or equal to 3.5 to 1 0.00% 0.875% 1.25%
2.25%
II less than or equal to 4.00 to 1 0.00% 1.125% 1.50%
2.50%
but greater than 3.50 to 1
</TABLE>
Page 1
<PAGE>
III less than or equal to 4.50 to 1 0.00% 1.375% 1.75%
2.75%
but greater than 4.00 to 1
IV less than or equal to 4.75 to 1 0.125% 1.625% 1.75%
2.75%
but greater than 4.50 to 1
V greater than 4.75 to 1 0.125% 1.625% 2.00%
3.00%
1.2 The pricing grid for the commitment fee in Section 2.12 is
amended to read as follows:
<TABLE>
<CAPTION>
Commitment Fee Commitment Fee
Rate prior to Rate on and after
March 31, 1999 March 31, 1999
<S> <C> <C>
Ratio of Adjusted Total
Debt to Adjusted EBITDAR
less than or equal to 3.5 to 1 0.200% 0.375%
less than or equal to 4.00 to 1
but greater than 3.50 to 1 0.250% 0.50%
less than or equal to 4.50 to 1
but greater than 4.00 to 1 0.250% 0.50%
less than or equal to 4.75 to 1
but greater than 4.50 to 1 0.250% 0.50%
greater than 4.75 to 1 0.375% 0.50%
</TABLE>
1.3 Sections 5.15 and 5.16 are amended to read as follows:
5.16 Adjusted Total Debt to Adjusted EBITDAR. Maintain as of the
last day of each fiscal quarter set forth in the left hand column below a
ratio of Adjusted Total Debt to Adjusted EBITDAR for the Company and its
Consolidated Subsidiaries of no more than the applicable ratio set forth in
the right hand column below:
Fiscal Quarter Ended Required Ratio
December 31, 1998 and March 31, 1999 5.0:1
June 30, 1999 and thereafter 4.50:1
5.15 Funded Debt to Capital Ratio. Maintain as of the last day of
each fiscal quarter of Funded Debt to Capital of not more than:
Fiscal Quarter Ended Required Ratio
December 31, 1998 and March 31, 1999 0.75:1
Page 2
<PAGE>
June 30, 1999 and thereafter 0.60:1
1.4 In the first sentence of Section 6.4, the "and" immediately preceding
clause (ix) is deleted and a new clause (x) is added at the end of the sentence
to read as follows:
; and (x) liens and security interests to secure the Additional
Working Capital Facility referenced in Section 6.1(vii), provided that any
such collateral pledged or securing the Additional Working Capital Facility
shall also secure the loans and obligations hereunder and such liens and
security interests shall be shared among the Lenders hereunder and the
lenders under the Additional Working Capital Facility on a pari passu
basis."
1.5 In Section 6.1, clause (vii) is renumbered as (viii) and a new clause
(vii) is inserted immediately following clause (vi), to read as follows:
(vii) other secured senior revolving credit indebtedness in an
aggregate principal amount of up to $5 million (the "Additional Working
Capital Facility") extended by banks and financial institutions consisting
exclusively of Lenders hereunder or their affiliates; and
1.6 Section 6.5 is amended to add at the end of the first sentence
thereof:
", except as relates to the Additional Working Capital Facility"
1.7 Consent is hereby given to the Flatley Acquisition, such consent being
required as a result of the $35 million acquisition limit contained in Section
6.8(a)(vi); provided, however, such consent is conditioned on compliance by the
Company with each of the following conditions:
(i) the total acquisition price (including indebtedness assumed
and the fair value of assets distributed) therefor, including transaction
expenses, shall not exceed $65 million; and
(ii) the Company shall otherwise comply with the provisions of
Section 6.8(a)(vi) relating to Permitted Acquisitions.
1.8 Lenders acknowledge the proposed Flatley Acquisition and consent to
the additional financing to be provided under the Lease Financing Facility in
connection therewith. Consent is further given hereby to postpone the date by
which the Company must secure additional interest rate protection coverage
pursuant to the requirements of Section 5.22 until March 31, 1999.
1.9 The clause at the end of the first sentence of Section 10.2 which
reads "; and any such assignment must be accompanied by a pro rata assignment of
the assigning Lender's participation as a Lease Financing Lender and as a Holder
under the Lease Financing Facility" is deleted.
1.10 The Lenders, by consent of the Required Lenders, authorize and direct
the Agent to enter into intercreditor agreements and other agreements and to
execute other agreements and documents as may be necessary or appropriate to
give effect to the collateral sharing provisions of Section 6.4(x) relating to
the Additional Working Capital Facility.
2. This Amendment shall be effective upon satisfaction of the following
Page 3
<PAGE>
conditions:
(a) execution of this Amendment by the Borrowers and the Required
Lenders; and
(b) receipt by the Agent of corporate resolutions, incumbency
certificates, corporate documents and legal opinions in form and substance
reasonably satisfactory to the Agent and the Required Lenders.
3. Except as modified hereby, all of the terms and provisions of the Credit
Agreement (including Schedules and Exhibits) shall remain in full force and
effect.
4. The Borrowers agree to pay all reasonable costs and expenses of the
Agent in connection with the preparation, execution and delivery of this
Amendment, including without limitation the reasonable fees and expenses of
Moore & Van Allen, PLLC.
6. This Amendment may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original and it shall
not be necessary in making proof of this Amendment to produce or account for
more than one such counterpart.
7. This Amendment shall be deemed to be a contract made under, and for all
purposes shall be construed in accordance with the laws of the Commonwealth of
Pennsylvania.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment No. 2 to be duly executed and delivered as of the
date first above written.
<TABLE>
<S> <C>
CENTENNIAL HEALTHCARE TRANSITIONAL FINANCIAL SERVICES, INC.
CORPORATION PARAGON REHABILITATION, INC.
CENTENNIAL/ASHTON PROPERTIES THS PARTNERS I, INC.
CORPORATION THS PARTNERS II, INC.
CENTENNIAL HEALTHCARE TRANSITIONAL HEALTH PARTNERS
PROPERTIES CORPORATION BY: THS PARTNERS I, INC and THS
CENTENNIAL HEALTHCARE PARTNERS II, INC., its general partners
MANAGEMENT CORPORATION PARKVIEW PARTNERSHIP
CENTENNIAL ACQUISITION BY: THS PARTNERS I, INC., and THS
CORPORATION PARTNERS II, INC., its general partners
CENTENNIAL PROFESSIONAL TOTAL CARE CONSOLIDATED, INC.
THERAPY SERVICES CORPORATION TOTAL CARE, INC.
CENTENNIAL HEALTHCARE TOTAL HEALTH CARE SERVICES, INC.
INVESTMENT CORPORATION TOTAL CARE OF THE CAROLINAS, INC.
CENTENNIAL HEALTHCARE HOSPITAL HCC HOME HEALTH OF LOUISIANA, INC.
CORPORATION
TRANSITIONAL HEALTH SERVICES, INC.
</TABLE>
Attest:
Page 4
<PAGE>
By: /s/ Tracy C. Cosby By: /s/ Alan C. Dahl
Name: Tracy C. Cosby Name: Alan C. Dahl
Title: Assistant Secretary Title: Vice President
FIRST UNION NATIONAL BANK, for itself
and as Agent
By: /s/ J. Matt MacIver, Jr.
Name: J. Matt MacIver, Jr.
Title: Vice President
NATIONSBANK, N.A., for itself and as
Syndication Agent
By: /s/ J. Walter Bland
Name: J. Walter Bland
Title: Vice President
AMSOUTH BANK
By: /s/ J. Ken Difata
Name: J. Ken Difata
Title: Assistant V.P.
NATIONAL CITY BANK OF KENTUCKY
By: /s/ Roderic M. Brown
Name: Roderic M. Brown
Title: Vice President
COOPERATIVE CENTRALE RAIFFEISEN
BOERENLEENBANK B.A.
"RABOBANK NEDERLAND,"
NEW YORK BRANCH
By: /s/ M. Christina Debler
Name: M. Christina Debler
Title: V.P.
By: /s/ W. Peter C. Kodde
Name: W. Peter C. Kodde
Title: V.P.
Page 5
<PAGE>
EXHIBIT A
(Legal Descriptions for Flatley Properties)
OMITTED
Page 6
<PAGE>
EXHIBIT 11.1
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
--------- ----------- -------------
<S> <C> <C> <C>
Income (loss) before dividends and accretion on preferred
stock......................................................... $ (315) $ 10,385 $ 2,779
Dividends and accretion of preferred stock...................... - (5,874) (2,192)
--------- ----------- --------------
Income (loss) applicable to common stock before
extraordinary loss............................................ (315) 4,511 587
Extraordinary loss on extinguishment of debt (net of tax)....... - (537) -
-------- --------- ----------
Income (loss) applicable to common stock........................ $ (315) $ 3,974 $ 587
Weighted average common shares outstanding...................... 11,906 8,289 4,742
Basic earnings (loss) per common share:
Income applicable to common stock before
extraordinary loss............................................ $ (0.03) $ 0.54 $ 0.12
Extraordinary loss on extinguishment of debt.................... - (0.06) -
-------- --------- ----------
Basic Earnings (loss) Per Common Share.......................... $ (0.03) $ 0.48 $ 0.12
======== ========= ==========
Income (loss) applicable to common stock before
extraordinary loss............................................ $ (315) $ 4,511 $ 587
Interest savings on convertible debt (net of tax)............... - 65 -
Extraordinary loss on extinguishment of debt (net of tax)....... - (537) -
-------- --------- ----------
Income (loss) applicable to common stock........................ $ (315) $ 4,039 $ 587
Weighted average common shares outstanding...................... 11,906 8,289 4,742
Dilutive effect of stock options................................ 172 48 40
Conversion of convertible debt.................................. - 125 -
-------- --------- ----------
Average diluted common shares outstanding....................... 12,078 8,462 4,782
Diluted earnings (loss) per common share:
Income applicable to common stock before
extraordinary loss............................................ $ (0.03) $ 0.48 $ 0.12
Extraordinary loss on extinguishment of debt.................... - (0.06) -
-------- --------- ----------
Diluted Earnings (loss) Per Common Share........................ $ (0.03) $ 0.48 $ 0.12
======== ========= ==========
</TABLE>
<PAGE>
EXHIBIT 21.1
CENTENNIAL HEALTHCARE CORPORATION
Subsidiaries of Centennial HealthCare Corporation
- -------------------------------------------------
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION
A Georgia corporation
CENTENNIAL HEALTHCARE PROPERTIES CORPORATION
A Georgia corporation
CENTENNIAL/ASHTON PROPERTIES CORPORATION
A Georgia corporation
CENTENNIAL PROFESSIONAL THERAPY SERVICES CORPORATION
A Georgia corporation
CENTENNIAL ACQUISITION CORPORATION
A Georgia corporation
CENTENNIAL HEALTHCARE HOSPITAL CORPORATION
A Georgia corporation
TRANSITIONAL HEALTH SERVICES, INC.
A Georgia corporation
Subsidiaries of Centennial HealthCare Properties Corporation
- ------------------------------------------------------------
CENTENNIAL HEALTHCARE INVESTMENT CORPORATION
A Georgia corporation
Subsidiaries of Centennial Acquisition Corporation
- --------------------------------------------------
CENTENNIAL SERVICE CORPORATION - GRANT PARK
A Georgia corporation
CENTENNIAL SERVICE CORPORATION - MONTCLAIR
A Georgia corporation
<PAGE>
Subsidiaries of Transitional Health Services, Inc.
- --------------------------------------------------
THS PARTNERS I, INC.
A Delaware corporation
THS PARTNERS II, INC.
A Delaware corporation
PARAGON REHABILITATION, INC.
A Delaware corporation
TRANSITIONAL FINANCIAL SERVICES, INC.
A Delaware corporation
Subsidiaries of Paragon Rehabilitation, Inc.
- --------------------------------------------
TOTAL CARE CONSOLIDATED, INC.
A Georgia corporation
Subsidiaries of Total Care Consolidated, Inc.
- ---------------------------------------------
TOTAL CARE, INC.
A North Carolina corporation
TOTAL HEALTH CARE SERVICES, INC.
A North Carolina corporation
HCC HOME HEALTH OF LOUISIANA, INC.
A Louisiana corporation
Subsidiaries of Total Health Care Services, Inc.
- ------------------------------------------------
TOTAL CARE OF THE CAROLINAS, INC.
A North Carolina corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K PERIOD
ENDING DECEMBER 31,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,087
<SECURITIES> 0
<RECEIVABLES> 109,292
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 118,367
<PP&E> 91,005
<DEPRECIATION> (16,192)
<TOTAL-ASSETS> 288,372
<CURRENT-LIABILITIES> (61,792)
<BONDS> (112,849)
0
0
<COMMON> (119)
<OTHER-SE> (113,564)
<TOTAL-LIABILITY-AND-EQUITY> (288,372)
<SALES> 0
<TOTAL-REVENUES> (357,645)
<CGS> 0
<TOTAL-COSTS> 347,591
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,432
<INTEREST-EXPENSE> 9,165
<INCOME-PRETAX> 1,468
<INCOME-TAX> 1,504
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 315
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,011
<SECURITIES> 0
<RECEIVABLES> 77,371
<ALLOWANCES> 3,000
<INVENTORY> 0
<CURRENT-ASSETS> 82,152
<PP&E> 84,996
<DEPRECIATION> (10,617)
<TOTAL-ASSETS> 243,649
<CURRENT-LIABILITIES> (49,055)
<BONDS> (78,913)
0
0
<COMMON> (119)
<OTHER-SE> (112,985)
<TOTAL-LIABILITY-AND-EQUITY> (243,649)
<SALES> 0
<TOTAL-REVENUES> (304,273)
<CGS> 0
<TOTAL-COSTS> 277,951
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 863
<INTEREST-EXPENSE> 8,658
<INCOME-PRETAX> (17,437)
<INCOME-TAX> 6,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 537
<CHANGES> 0
<NET-INCOME> (9,848)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
<PAGE>
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including information set forth under the
captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", constitute "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "1934 Act"). The Company desires to take advantage of certain "safe
harbor" provisions of the 1933 Act and 1934 Act and is including this special
note to enable the Company to do so. Forward-looking statements included in
this Form 10-K or in documents incorporated by reference, or hereafter included
in other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following risks, uncertainties and other factors could cause such material
differences to occur:
1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates or to
profitably operate or successfully integrate acquired operations into the
Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States health care system, including the Balanced
Budget Act of 1997, changes in reimbursement levels under Medicaid and Medicare,
and other changes in applicable government regulations that might affect the
profitability of the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a number of
potentially adverse consequences, such as the imposition of fines, temporary
suspension of admission of patients, restrictions on the ability to acquire new
facilities, suspension or decertification from Medicaid or Medicare programs,
and in extreme cases, revocation of a facility's license or the closure of a
facility, including as a result of unauthorized activities by employees.
<PAGE>
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and development,
as well as internal growth.
8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the Company
currently operates or anticipates operating in the future.
9. Changes in federal or state legislation or budgetary controls that may
negatively impact the amount and method of Medicaid payments, especially in
North Carolina, Michigan and Indiana, in which states a majority of the
Company's facilities are located.
10. The Company's ability to staff its facilities appropriately with qualified
health care personnel (including administrators), including in times of
shortages of such personnel and to maintain a satisfactory relationship with
labor unions.
11. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and changes in
the regulatory system in the states in which the Company operates that
facilitate such competition.
12. The continued availability of insurance for the inherent risks of liability
of providing services in the health care industry.
13. Price increases in medical supplies, durable medical equipment and other
items.
14. The Company's reputation for delivering high-quality care and its ability
to attract and retain patients, including patients with relatively high acuity
levels.
15. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of health care
coverage.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
