<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to
Commission file number 000-22771
---------------------
CENTENNIAL HEALTHCARE CORPORATION
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1839701
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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
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 770-698-9040
-------------
Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicated the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
There were 11,923,618 shares of Common Stock outstanding as of April 14, 2000
<PAGE>
In connection with reporting its results for the twelve months ended December
31, 1999, Centennial HealthCare Corporation recorded certain adjustments to its
previously reported interim results for 1999. The adjustments that affect the
quarterly period ended March 31, 1999 reduce pre-tax income by $4,009,000 and
are summarized as follows:
Increase in allowance for doubtful accounts $ 513
Increase in contractual allowance on hospital receivables 2,265
Increase in accrued vacation and sick expenses 536
Cumulative effect of change in accounting method 656
Increase in other operating expenses 39
This report on Form 10-QA reflects the effect of these adjustments and certain
balance sheet reclassifications. The following items are amended and restated in
their entirety hereby:
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition, Part II -- Other Information, Item 6. Exhibits and Reports on Form
8-K is amended to include Exhibit 27.1 -- Financial Data Schedule.
<PAGE>
ITEM I - FINANCIAL STATEMENTS
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(As restated;
see Note 2)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 2,991 $ 5,047
Patient accounts receivable and third-party payor settlements, net
of allowance for doubtful accounts of approximately
$5,413 and $5,000........................................................... 98,154 99,910
Other receivables............................................................ 4,011 4,382
Deferred income taxes........................................................ 3,738 3,738
Prepaid expenses and other current assets.................................... 3,393 2,250
---------- ------------
Total current assets..................................................... 112,287 115,327
Property and equipment, net.................................................. 74,802 74,813
Intangible assets, net....................................................... 42,304 42,804
Notes receivable and other assets............................................ 56,427 52,388
---------- ------------
Total assets............................................................. $ 285,820 $ 285,332
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................................... $ 41,607 $ 45,386
Other current liabilities.................................................... 18,297 12,816
---------- ------------
Total current liabilities................................................ 59,904 58,202
Long-term debt, less current maturities........................................ 113,579 112,849
Other long-term liabilities.................................................... 407 598
---------- ------------
173,890 171,649
Commitments and contingencies
Shareholders' equity:
Common stock with par value of $ 01; 50,000,000 shares
authorized; 11,923,618 shares issued
and outstanding......................................................... 119 119
Paid-in capital.............................................................. 102,015 102,015
Retained earnings............................................................ 10,146 11,899
---------- ------------
112,280 114,033
Note receivable from shareholder............................................... (350) (350)
---------- ------------
Net shareholders' equity................................................. 111,930 113,683
---------- ------------
Total liabilities and shareholders' equity............................... $ 285,820 $ 285,332
========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------
1999 1998
------------- ---------
(As Restated;
see Note 2)
<S> <C> <C>
Revenues:
Net patient service revenues ............................... $ 93,833 $ 83,379
Management fees and other revenues ......................... 2,393 3,693
-------- --------
Total revenues ........................................... 96,226 87,072
-------- --------
Expenses:
Facility operating expenses:
Salaries, wages and benefits ........................... 48,524 41,572
Other operating expenses ............................... 30,551 24,698
Lease expense .............................................. 7,845 5,409
Corporate administrative costs ............................. 5,946 4,943
Depreciation and amortization .............................. 2,917 2,283
Terminated merger transaction costs ........................ 600 --
-------- --------
Total operating expenses ................................ 96,383 78,905
-------- --------
(157) 8,167
-------- --------
Other income (expense):
Interest income ........................................... 473 121
Interest expense .......................................... (2,498) (1,913)
-------- --------
Total other expense .................................... (2,025) (1,792)
-------- --------
(2,182) 6,375
Provision (benefit) for income taxes ......................... (935) 2,486
-------- --------
Income (loss) before minority interest and cumulative effect
of change in accounting method.............................. (1,247) 3,889
Minority interest in net income of subsidiary,
net of income taxes ........................................ (79) (63)
-------- --------
Income (loss) before cumulative effect of change in
accounting method........................................... $ (1,326) $ 3,826
Cumulative effect of change in accounting
method, net of income taxes................................ $ (427) $ --
-------- --------
Net income (loss)............................................. $ (1,753) $ 3,826
======== ========
Net income (loss) per common share data:
Basic:
Income applicable to common stock before
cumulative effect of change in accounting method........... $ (0.11) $ 0.32
Cumulative effect of change in accounting method............ (.04) --
-------- --------
Net income (loss) applicable to common stock................ $ (0.15) $ 0.32
======== ========
Diluted:
Income applicable to common stock before
cumulative effect of change in accounting method........... $ (0.11) $ 0.32
Cumulative effect of change in accounting method............ (.04) --
-------- --------
Net income (loss) applicable to common stock................ $ (0.15) $ 0.32
======== ========
Weighted average number of common stock and
common stock equivalents outstanding
Basic ....................................................... 11,924 11,866
======== ========
Diluted ..................................................... 11,956 12,202
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE
------------------------------ PAID-IN RETAINED FROM
SHARES AMOUNT CAPITAL EARNINGS SHAREHOLDER NET
-------------- ------------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998............ 11,923 $ 119 $ 102,015 $ 11,899 $ (350) $113,683
Net loss (as restated, see Note 2)...... - - - (1,753) - (1,753)
-------------- ------------- ----------- ---------- ------------ --------
Balance at March 31, 1999............... 11,923 $ 119 $ 102,015 $ 10,146 $ (350) $111,930
============== ============= =========== ========== ============ ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------
1999 1998
------------- ----------
(As Restated;
see Note 2)
<S> <C> <C>
Operating Activities:
Net income (loss)............................................................. $ (1,753) $ 3,826
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................... 2,917 2,283
Deferred income taxes ................................................... (1,415) --
Consulting expenses offset against note receivable ...................... 31 31
Minority interest ....................................................... 134 103
Provision for doubtful accounts ......................................... 875 152
Cumulative effect of change in accounting method......................... 427 --
Additional contractual reserves on accounts receivable................... 2,265 --
Change in assets and liabilities:
Accounts receivable .................................................. (403) (7,303)
Prepaid expenses and other assets .................................... (1,008) (4,876)
Accounts payable, accrued liabilities and other current liabilities .. (1,769) (466)
Other ................................................................ 51 (11)
-------- --------
Cash provided by (used in) operating activities................... 352 (6,261)
-------- --------
Investing Activities:
Purchases of property and equipment ......................................... (1,666) (2,553)
Notes receivable and other assets, net of repayments ........................ (2,664) (6,376)
Acquisitions, net of cash acquired........................................... (2,526) --
Other ....................................................................... (1,208) (220)
-------- --------
Cash used in investing activities ................................ (8,064) (9,149)
-------- --------
Financing Activities:
Proceeds from the exercise of stock options ................................. -- 120
Proceeds from borrowings .................................................... 6,000 15,200
Distributions paid to minority partners ..................................... (74) (74)
Principal payments on long-term debt ........................................ (270) (221)
-------- --------
Cash provided by financing activities ............................ 5,656 15,025
-------- --------
Net decrease in cash and cash equivalents ..................................... (2,056) (385)
Cash and cash equivalents, beginning of period ................................ 5,047 4,011
-------- --------
Cash and cash equivalents, end of period ...................................... $ 2,991 $ 3,626
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
NOTE 1 - BASIS OF PRESENTATION AND OTHER INFORMATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the financial
statements reflect all adjustments considered necessary for a fair statement of
the results of operations and financial position for the interim periods
presented. All such adjustments are of a normal recurring nature. These
unaudited interim financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 1998
and notes thereto contained in Centennial HealthCare Corporation's Annual Report
on Form 10-K filed with the Securities and Exchange Commission (Commission File
No. 000-22771).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999 or any interim period.
Certain amounts in the 1998 financial statements of Centennial HealthCare
Corporation ("Centennial" or the "Company") have been reclassified for
comparative purposes.
NOTE 2 - RESTATEMENT
In connection with reporting its results for the year ended December 31, 1999,
the Company recorded certain adjustments to its previously reported interim
results for 1999. The adjustments that affect the quarterly period ended March
31, 1999 total $4,009,000. Certain financial information, both before and after
the effect of the adjustments and certain reclassifications, is summarized as
follows:
<TABLE>
<CAPTION>
Three months ended
March 31, 1999
------------------
<S> <C>
Income before income taxes, minority interest and cumulative effect
of change in accounting method (as previously reported) $ 1,171
Adjustments:
Increase in allowance for doubtful accounts (513)
Increase in contractual allowance on hospital revenues (2,265)
Increase in accrued vacation and sick pay expenses (536)
Increase in other operating expenses (39)
--------
Loss before income taxes, minority interest and cumulative effect of
change in accounting method (as restated) $ (2,182)
--------
Net income (as previously reported) $ 612
Net loss (as restated) $ (1,753)
Net income per common share, diluted (as previously reported) $ .05
Net loss per common share, diluted (as restated) $ (.15)
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
Total shareholders' equity (as previously reported) $114,295
Total shareholders' equity (as restated) 111,930
Total assets (as previously reported) 287,612
Total assets (as restated) 285,820
</TABLE>
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company adopted Statement of Position ("SOP") No.
98-5, "Reporting on the Costs of Start-Up Activities". SOP No. 98-5, issued by
the Accounting Standards Executive Committee, requires that the cost of start-up
activities be expensed as these costs are incurred. Start-up activities include
one-time activities and organization costs. Upon adoption, the Company incurred
a pre-tax charge to income of $656,000 ($427,000 net of tax), representing the
write off of all previously deferred balances. This write off has been reported
as the cumulative effect of a change in accounting method in the accompanying
interim condensed consolidated statement of operations.
NOTE 4 - EARNINGS PER SHARE
The calculation of earnings per share is as follows (in thousands, except per
share amounts):
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Net income (loss)............................................ $ (1,753) $ 3,826
Weighted average common shares outstanding................... 11,924 11,866
Basic Earnings Per Common Share.............................. $ (0.15) $ 0.32
======== ========
Net income (loss)............................................ $ (1,753) $ 3,826
Interest savings on convertible debt (net of tax)............ - 24
-------- --------
Income (loss) applicable to common stock..................... (1,753) 3,850
Weighted average common shares outstanding................... 11,924 11,866
Dilutive effect of stock options............................. 32 336
-------- --------
Average diluted common shares outstanding.................... 11,956 12,202
Diluted Earnings Per Common Share............................ $ (0.15) $ 0.32
======== ========
</TABLE>
NOTE 5 - FACILITY ACQUISITIONS
Effective January 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts.
Also effective January 1999, the Company acquired leasehold interests in two
facilities that were previously managed by the Company: Hunter Woods Nursing and
Rehabilitation Center ("Hunter Woods"), a 130-bed facility located in Charlotte,
North Carolina and Choctaw County Medical Center ("Choctaw"), a facility with 68
nursing home beds and 22 hospital beds, located in Ackerman, Mississippi.
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
8
<PAGE>
In June 1998, Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued.
This statement requires that all derivatives be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The effect on the financial
statements upon adoption of SFAS 133 has not been determined.
NOTE 7 - SEGMENT INFORMATION
In 1998, Centennial adopted Statement of Financial Accounting Standards ("SFAS")
131, "Disclosures about Segments of an Enterprise and Related Information".
SFAS 131 supersedes FAS 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position.
The Company has determined that its reportable segments are those that are based
on the Company's method of internal reporting, which 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.
Centennial evaluates the performance of its segments and allocates resources to
them based on earnings before interest, taxes, depreciation, amortization, and
rent (EBITDAR).
The tables below presents information about EBITDAR and total assets used by the
chief operating decision maker of Centennial as of and for the three months
ended March 31, 1999 and 1998:
9
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999:
(in thousands) Management Long-Term Rehabilitative
(As Restated; Services/ Care Therapy All Reconciling
see Note 2) Corporate Facilities Services Other Items Total
---------------------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 2,544 77,393 10,038 13,624 (7,373)(1) 96,226
EBITDAR (1,789) 13,597 (382) (221) - 11,205
Total Assets 129,580 138,414 20,418 24,463 (27,055)(2) 285,820
March 31, 1998:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
---------------------------------------------------------------------------- ---------------
Revenues 3,784 60,116 17,717 10,942 (5,487)(1) 87,072
EBITDAR 675 11,749 2,190 1,245 - 15,859
Total Assets 122,706 128,296 18,798 19,571 (27,433)(2) 261,938
</TABLE>
(1) Represents elimination of intersegment revenues
(2) Represents elimination of intersegment receivables and unallocated
corporate purchase adjustments
Specified items included in segment profit/loss for the three months ended March
31, 1999 and 1998:
<TABLE>
<CAPTION>
March 31, 1999:
(in thousands) Management Long-Term Rehabilitative
(As Restated; Services/ Care Therapy All
see Note 2) Corporate Facilities Services Other Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue 426 14 20 13 473
Interest expense (925) (1,241) (158) (174) (2,498)
Depreciation and amortization (1,105) (1,221) (465) (126) (2,917)
Rent expense (393) (7,076) (135) (240) (7,844)
Cumulative effect of change in
accounting method (427) - - - (427)
Terminated merger costs (600) - - - (600)
Income tax benefit/(expense) 1,781 (1,466) 459 161 935
Minority interest (net of tax) (79) - - - (79)
Net income (expense) (3,112) 2,607 (661) (587) (1,753)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All
Corporate Facilities Services Other Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue 79 3 38 1 121
Interest expense (269) (1,311) (158) (175) (1,913)
Depreciation and amortization (655) (1,059) (461) (108) (2,283)
Income tax benefit/(expense) 194 (1,751) (595) (334) (2,486)
Minority interest (net of tax) (63) - - - (63)
Net income (expense) (366) 2,738 931 523 3,826
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As of March 31, 1999, the Company had $80.0 million outstanding and
approximately $3.2 million available under its Senior Credit Facility with First
Union National Bank, NationsBank, N.A., as agents and lenders and the other
lenders named therein, (the "Senior Credit Facility"), net of issued standby
letters of credit of approximately $6.8 million.
By agreement dated May 14, 1999, the Company obtained a waiver of compliance
with the financial covenant in Section 5.16 (Adjusted Total Debt to Adjusted
EBITDAR) of the Senior Credit Facility. With this waiver, the Company is in full
compliance with all covenants of the Senior Credit Facility.
Under the provisions of the Senior Credit Facility, Centennial is required to
hedge a portion of its floating rate debt outstanding under the Senior Credit
Facility. Accordingly, the Company has entered into interest rate swap
agreements with certain lenders providing bank financing under the Senior Credit
Facility. Pursuant to the interest rate swap agreements, the Company has
exchanged its floating rate interest obligations on $38.0 million in principal
at an average fixed rate of 5.61% per annum for an average maturity of 4.25
years. The fixing of interest rates for this period reduces in part the
Company's exposure to the uncertainty of floating interest rates. The
differential paid or received on the interest rate swap agreements is recognized
as an adjustment to interest expense. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to the interest rate swap
agreements. However, the Company does not anticipate nonperformance by these
counterparties, and no material loss would be expected from their
nonperformance. The fair value of the interest rate swap agreements was not
recognized in the condensed consolidated financial statements since they are
accounted for as hedges. At March 31, 1999, the estimated fair value of the
interest rate swap agreements based on current market rates, approximated a net
payable of $347,000.
On March 26, 1999 the Company received an investigatory subpoena from the
Department of Health and Human Services, Office of Inspector General, requesting
records in connection with an investigation of possible or otherwise improper
claims for payment under Title XVIII (Medicare) of the Social Security Act. The
request 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 cooperating in this
investigation and is currently providing the requested records.
NOTE 9 - SUBSEQUENT EVENTS
On October 22, 1998, Centennial announced that its Board of Directors had
approved the sale of the Company for $16.00 per share in cash to a new company,
(Centennial HealthCare Holdings Corporation), formed by Welsh, Carson, Anderson
& Stowe, whose affiliates currently hold approximately 23% of the Company's
common stock. The Company entered into an Agreement and Plan of Merger with
Centennial HealthCare Holdings Corporation (the "Merger Agreement") on October
22, 1998.
On April 2, 1999, Centennial HealthCare Holdings Corporation notified the
Company that it was terminating the Merger Agreement with the Company. Through
March 31, 1999, the Company had expensed approximately $4.2 million in
transaction costs associated with the terminated merger of which $600,000 were
expensed during the first quarter of 1999. The Company does not anticipate any
further accruals of merger costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Unaudited Condensed Consolidated Statements of Operations for the three-month
period ended March 31, 1999 and 1998.
<PAGE>
Certain statements in this Form 10-Q, including information set forth under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations", constitute "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements include
statements regarding the intent, belief or current expectations of Centennial
HealthCare Corporation and members of its management team. Management cautions
that a variety of factors could cause Centennial HealthCare's actual results to
differ materially from the anticipated results expressed in such forward-looking
statements. Important factors currently known to management that could cause
actual results to differ materially from those in forward-looking statements are
set forth in Centennial HealthCare's Cautionary Statements regarding Forward-
looking Statements (Exhibit 99.1 to this report), which statements are
incorporated herein by reference.
GENERAL
Centennial HealthCare Corporation ("Centennial" or the "Company") provides a
broad range of long-term healthcare services to meet the medical needs of
elderly and post-acute patients. The Company provides these services through
geographically concentrated networks located in metropolitan and secondary
markets throughout the United States. The Company was organized in 1989 as a
Georgia corporation and conducts business through its operating subsidiaries.
The Company currently operates 108 owned, leased and managed skilled nursing
facilities with approximately 11,695 licensed available beds in 21 states and
the District of Columbia. The Company provides basic and specialty healthcare
services. Basic services include skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. Specialty services 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 March 31, 1999,
Centennial provided rehabilitation therapy services on a contract basis to
third-party owned and Company-operated skilled nursing facilities pursuant to
155 internal and external contracts and provided home health care services
through 24 licensed home health offices.
Effective January 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts, (the
"Flatley Facility Leases").
Effective January 1999, the Company acquired leasehold interests in two
facilities that were previously managed by the Company: Hunter Woods Nursing and
Rehabilitation Center, a 130-bed facility located in Charlotte, North Carolina,
and Choctaw County Medical Center, a facility with 68 nursing home beds and 22
hospital beds, located in Ackerman, Mississippi. Together, these two facilities
are hereafter referred to as the "New Facility Leases".
<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. Together, these transactions are hereafter referred to as the "1998
Facility Leases".
In April 1998, the Company entered into management agreements for two skilled
nursing facilities, with a total of 174 licensed available beds, located in
Virginia.
In October 1998, the Company discontinued its operation of the Wellington
Nursing and Rehabilitation Center, ("Wellington"), a 100-bed facility located in
Charlotte, North Carolina, through a sub-lease agreement with another operator.
The terms of the sublease agreement are consistent with the Company's
obligations under its current lease agreement; however, the Company remains
obligated under that lease agreement.
In December 1995, as part of the Company's December 31, 1995 merger with
Transitional Health Services, Inc., the Company assumed operations of
THS of South Bend, ("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. 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. The
Company continues to market the facility for sale.
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 and Stowe, whose affiliates currently hold approximately 23% if the
Company's common stock (the "Proposed Merger"). The Company entered into an
Agreement and Plan of Merger with Centennial HealthCare Holdings Corporation
(the "Merger Agreement") on October 22, 1998.
On April 2, 1999, Centennial HealthCare Holdings Corporation notified the
Company that it was terminating the Merger Agreement. Through March 31, 1999,
the Company had expensed approximately $4.2 million in transaction costs
associated with the terminated merger of which $600,000 were expensed during the
first quarter of 1999. The Company does not anticipate at this time any further
merger costs.
RESULTS OF OPERATIONS
GENERAL
During the third quarter of 1998 and into the first quarter of 1999, the Company
made its transition from the cost based Medicare system to the prospective
payment system ("PPS"). Under PPS, the Company will be paid a flat rate per
patient day adjusted for patient acuity levels and geographical disparities as
opposed to the previous cost reimbursed methodology. As anticipated, the advent
of PPS has had the effect of reducing Medicare revenue at the Company's nursing
facilities on a same store basis during the first quarter of 1999. Likewise, the
PPS system had reduced revenue at Paragon Rehabilitation, Inc. ("Paragon") the
Company's subsidiary providing rehabilitation therapy to nursing centers, as its
customers have sought to re-negotiate therapy contracts under the new Medicare
payment criteria. These losses were mitigated to a large degree through various
cost cutting measures, increases in efficiency and re-negotiation of nursing
center contracts to be more in line with PPS. A more thorough discussion of PPS
and other reimbursement changes affecting the Company's current and future
operations is included in Management's Discussion and Analysis of Financial
Condition and Results of Operations under "Health Care Reform; Reimbursement
Issues".
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from $83.4
million in the first quarter of 1998 to $93.8 million in the same period in
1999, an increase of $10.4 million or 12.5%. The 1998 Facility Leases
contributed approximately $13.4 million to revenues during the first quarter of
1999. The New Facility Leases and the Flatley Facility Leases contributed
approximately $2.4 million and $9.9 million, respectively, to revenues during
the first quarter of 1999. Wellington and South Bend contributed approximately
$1.3 million and $1.5 million, respectively, to revenues for the quarter ended
March 31, 1998. During the first quarter of 1999, the Company recorded charges
to revenue totaling approximately $2.2 million associated with reserves on prior
year cost reports and trade receivables at its nursing homes and hospitals. Same
store nursing facility revenues decreased by approximately $5.6 million in the
first quarter of 1999 compared to the prior year period due primarily to
decreases in Medicare revenues associated with the advent of the Medicare
prospective payment system ("PPS"), which went into effect for the majority of
the Company's owned and leased nursing facilities on January 1, 1999. Payor mix
at the Company's nursing facilities remained consistent during 1999 as compared
to 1998. The Company experienced a 20% decrease in its Medicare part A rates and
a slight decrease in census on a same store basis during the first quarter of
1999 compared to the prior year period. Revenues from Paragon, the Company's
subsidiary providing therapy services, decreased by approximately
<PAGE>
$7.0 million in the first quarter of 1999 compared to the prior year period, due
in part to the loss of six rehabilitation contracts subsequent to the first
quarter of 1998 and a general decrease in average revenue per contract. The
decrease in revenue per contract is associated primarily with the pass through
effect of Medicare PPS rate decreases affecting Paragon's nursing center
customers. Revenues from PTS, the Company's subsidiary providing intravenous
therapy and other services, increased by approximately $1.5 million due to
increased volume from existing contracts and the expansion of services provided
to both the Company's managed nursing facilities and other third parties.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues decreased
from $3.7 million in the first quarter of 1998 to $2.4 million in the first
quarter of 1999, a decrease of $1.3 million, or 35.2%. Approximately $330,000 of
this decrease was due to the loss of one management contract subsequent to the
first quarter of 1998, and approximately $700,000 of this decrease was due to
revenue recognized in the first quarter of 1998 for the performance of
additional services to certain third party owners during that period.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $66.3
million in the first quarter of 1998 to $79.1 million in the same period in
1999, an increase of $12.8 million or 19.3%. The 1998 Facility Leases
contributed approximately $11.1 million to operating expenses during the first
quarter of 1999. The New Facility Leases and the Flatley Facility Leases
contributed approximately $2.1 million and approximately $7.5 million,
respectively, to operating expenses during the first quarter of 1999. Wellington
and South Bend contributed approximately $1.5 million and $1.2 million,
respectively, to operating expenses for the prior year period ended March 31,
1998. Same store nursing facility operating expenses decreased by approximately
$3.6 million in the first quarter of 1999 compared to the prior year period,
primarily resulting from decreases in therapy and other ancillary costs
associated with the re-negotiation of the Company's ancillary contracts under
the PPS methodology, offset in part by additional costs incurred in 1999
associated with PPS training at the Company's nursing facilities. Operating
expenses from Paragon decreased by approximately $4.2 million in the first
quarter of 1999 compared to the prior year period, due to the cost-cutting
measures put in place by management in response to the anticipated loss of
revenue associated with PPS. Operating expenses from PTS increased by
approximately $1.1 million due to increased volume from existing contracts and
the expansion of services provided to both the Company's managed nursing
facilities and other third parties.
LEASE EXPENSE. Lease expense increased from $5.4 million in the first quarter of
1998 to $7.8 million in the first quarter of 1999, an increase of approximately
$2.4 million, or 45.0%. Lease expense from the 1998 Facility Leases approximated
$1.4 million during the first quarter of 1999, while lease expense from the New
Facility Leases and the Flatley Facility leases approximated $201,000 and $1.3
million, respectively, in the first quarter of 1999. Wellington and South Bend
contributed approximately $156,000 and $210,000, respectively, to lease expense
during the prior year period ended March 31, 1998.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$4.9 million in the first quarter of 1998 to $5.9 million in the first quarter
of 1999, an increase of $1.0 million, or 20.3%, which was due primarily to
additional overhead incurred to accommodate the 1998 Facility Leases, the New
Facility Leases, the Flatley Facility Leases and training and transition to PPS.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$2.3 million in the first quarter of 1998 to $2.9 million in the same period in
1999, an increase of approximately
<PAGE>
$634,000, or 27.8%, which was primarily attributable to additional depreciation
expense incurred as a result of fixed asset purchases and amortization of
management contract acquisition costs.
TERMINATED MERGER TRANSACTION COSTS. During the quarter ended March 31, 1999,
the Company recorded $600,000 in expenses associated with the termination of the
Proposed Merger.
INTEREST EXPENSE. Interest expense increased from $1.9 million in the first
quarter of 1998 to $2.5 million in the first quarter of 1999, an increase of
approximately $585,000, or 30.6%, which was primarily attributable to the
increase in debt of approximately $28.5 million subsequent to the first quarter
of 1998, related to borrowings for working capital.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
39.0% in the first quarter of 1998 to 42% in the first quarter of 1999, an
increase in the rate of 2.0%. This increase was primarily attributable to an
anticipated increase in the Company's average state tax rate due to the
Company's expansion into several new states resulting from the Flatley Facility
Leases and the 1998 Facility Leases.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during the first quarter of 1999 was
borrowings under its Senior Credit Facility with First Union National Bank,
NationsBank, N.A., ("NationsBank"), as agents and lenders and the other lenders
named therein, (the "Senior Credit Facility"). Cash was used by the Company for
capital improvements at several existing facilities, notes receivable and other
assets 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 anticipated 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.
During the first quarter of 1999, the Company generated $352,000 in cash flow
from its operating activities. This was comprised of cashflow before non-cash
charges and changes in assets and liabilities of approximately $3.4 million, an
increase in accounts receivable of approximately $403,000, an increase in
prepaid expenses of approximately $1.0 million and a decrease in accounts
payable and accrued expenses of approximately $1.8 million. The decrease in
accounts payable is due to the timing of payments to lessors and compensation of
employees.
Notes receivable and other assets increased by approximately $2.7 million during
the first quarter of 1999, approximately $1.5 million of which relates to
advances to managed facilities. The Company continued to invest in its leased
and owned facilities through capital expenditures of approximately $1.7 million
or approximately $200 per bed for the three-month period. These expenditures
included the expansion of existing facilities and the selected rehabilitation of
certain facilities. Also during the first quarter of 1999, the Company paid
approximately $2.5 million in acquisition costs associated with the purchase of
the leasehold interest and accounts receivable for the Flatley Facilities.
During the first quarter of 1999, the Company borrowed a net $1.0 million in
working capital loans under the Senior Credit Facility which were utilized
primarily to finance capital expenditures at existing facilities and to provide
working capital. As of March 31, 1999, the Company had $80.0 million outstanding
and approximately $3.2 million available under its Senior Credit Facility, net
of issued standby letters of credit of approximately $6.8 million. With a waiver
of one provision of the Company's Senior Credit Facility, the Company is in full
compliance with all covenants of the Senior Credit Facility.
In January 1999, the Company obtained a $5.0 million line of credit from
NationsBank, which bears interest at NationsBank's Prime Rate or 2.75% over
Libor for selected portions. The line of credit expires May 31, 1999, and has
been included in "other current liabilities" in the Company's accompanying
Condensed Consolidated Balance Sheets at March 31, 1999. As of March 31, 1999,
the Company had $5.0 million outstanding under this agreement.
<PAGE>
The Company anticipates meeting its cash flow requirements in the remaining
three quarters of 1999 through continued collection of Medicare settlement
receivables (which approximated $12.0 million at March 31, 1999), collection of
past due trade receivables associated with the 1998 Facility Leases, the Flatley
Facility Leases, and the New Facility Leases, and borrowings under its Senior
Credit Facility. The Company is also evaluating the possible sale of its
interests in certain assets to provide additional liquidity for its day to day
operations and future acquisitions.
<PAGE>
HEALTH CARE REFORM; REIMBURSEMENT ISSUES
The Balanced Budget Act of 1997, (the "Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth of approximately
$9.5 billion for skilled nursing facilities ("SNF's") over the next five years,
primarily through the implementation of a Medicare prospective payment system
("PPS") for skilled services. Under the Act, PPS will be phased in over three
cost reporting periods beginning on or after July 1, 1998. Recent data from the
Congressional Budget Office indicates that the estimated reductions to SNF
payments resulting from the implementation of PPS actually approach $16.6
billion.
Generally, the PPS per diem, which covers routine service, ancillary and capital
related costs, has initially been a blended rate based on (i) a facility-
specific payment rate derived from each facility's 1995 cost report, adjusted by
an inflation factor and (ii) a federal per diem rate derived from all hospital-
based and freestanding SNF 1995 cost reports, adjusted for case mix and
geographic variations in labor costs. The blended rate will be further adjusted
by a facility-specific case mix (acuity) index.
Management previously indicated a belief that revenues would be lower under PPS,
but noted that reductions in ancillary service costs and proper Minimum Data Set
("MDS") documentation should offset the effect of rate reductions. The actual
impact of PPS on the Company is dependent on numerous variables, including
Medicare census, length of patient stay and patient acuity. The Company can give
no assurance that payments under the PPS program in the future will remain at a
level comparable to the present or increase, nor can the Company give assurance
that the trend in cost reductions or utilization will remain consistent with
current levels or improve.
Currently, there are legislative efforts underway to provide relief to SNF
providers and restore a portion of the savings estimated in excess of the
targeted $9.5 billion. The Company can give no assurance that any of these
legislative reforms will be implemented or that additional funds will be
provided to SNF providers under Medicare.
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 (i) actual costs, (ii) per visit cost limits reduced
to 105% of the median per visit costs for freestanding home health agencies; or
(iii) a blended agency-specific per beneficiary annual limit ("PBL") applied to
the agency's unduplicated census count of Medicare patients.
The Act also provides that cost limits and PBL's must be reduced by 15% from the
amount that would otherwise be in effect on September 30, 1999, regardless of
whether the new prospective
<PAGE>
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.
Provisions of the Act also include limitations on coverage for outpatient
therapy services and the inclusion of inpatient therapy services in a per diem
payment rate based on an acuity measurement tool which classifies patients into
several intensity-based levels of care. The outpatient therapy limits are
$1,500 per year for the combination of physical and speech therapy and a
separate $1,500 for occupational therapy. For payment purposes, inpatient
services are based upon minutes of care delivered and range from 45 minutes per
week to a maximum of 720 minutes per week.
The Company continues to be adversely impacted by a lengthening of time between
the submission and payment of claims under the Medicare program. Further, the
complex statutory framework of Medicare and Medicaid gives rise to substantial
areas of administrative rulings and interpretations that may affect payments
received by the Company under these programs. The Company can give no assurance
that budget constraints and other factors may not also lead states to reduce
Medicaid reimbursement to SNF providers or to lengthen the time period between
submission of claims and payment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. This
statement requires that all derivatives be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The effect on the financial
statements upon adoption of SFAS 133 has not been determined.
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. 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 March 31, 1999, substantially all remediation and
replacement of internal Business Systems has been completed.
Significant governmental entities, service providers, vendors and suppliers that
are believed to be critical to business operations after January 1, 2000, have
been identified and steps are being undertaken in an attempt to reasonably
ascertain their stage of Year 2000 compliance through questionnaires,
interviews, and other available means.
It is currently estimated that the aggregate cost of the Company's Year 2000
efforts will be approximately $150,000 to $200,000, of which approximately
$180,000 has been spent to date. These costs are being expensed as they are
incurred and are being funded through operating cash
<PAGE>
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 third 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.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 -- Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: April 26, 2000 CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
------------------------------------------
J. Stephen Eaton, Chairman of the Board,
President and Chief Executive Officer
Date: April 26, 2000 By: /s/ Alan C. Dahl
------------------------------------------
Alan C. Dahl, Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule (for SEC use only)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
10Q PERIOD ENDING MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,991
<SECURITIES> 0
<RECEIVABLES> 103,567
<ALLOWANCES> (5,413)
<INVENTORY> 0
<CURRENT-ASSETS> 112,287
<PP&E> 96,140
<DEPRECIATION> (21,338)
<TOTAL-ASSETS> 285,820
<CURRENT-LIABILITIES> 59,904
<BONDS> 113,579
0
0
<COMMON> 119
<OTHER-SE> 111,811
<TOTAL-LIABILITY-AND-EQUITY> 285,820
<SALES> 0
<TOTAL-REVENUES> 96,226
<CGS> 0
<TOTAL-COSTS> (96,383)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,498)
<INCOME-PRETAX> (2,182)
<INCOME-TAX> 935
<INCOME-CONTINUING> (1,753)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,753)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
