<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 June 30, 1999
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 000-22771
------------
CENTENNIAL HEALTHCARE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1839701
-------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (identification No.)
400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 770-698-9040
------------
Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicated the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
There were 11,923,618 shares of Common Stock outstanding as of 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 and six month periods ended June 30, 1999 reduce pre-tax income (loss)
by $3,354,000 and $7,363,000, respectively, and are summarized as follows:
Three months Six months
ended June 30, ended June 30,
1999 1999
-------------- --------------
Increase in allowance for bad debts $ 513 $1,028
Increase in contractual allowance on
hospital receivables 2,265 4,529
Increase in accrued vacation and sick expenses 536 1,072
Cumulative effect of change in accounting
method - 656
Increase in other accrued expenses 40 78
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 1--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>
June 30, December 31,
1999 1998
-------------- --------------
(As Restated;
See Note 2)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 3,503 $ 5,047
Patient accounts receivable and third-party payor settlements, net
of allowance for doubtful accounts of approximately
$6,100 and $5,000........................................................ 97,243 99,910
Other receivables......................................................... 3,934 4,382
Deferred income taxes..................................................... 3,738 3,738
Prepaid expenses and other current assets................................. 3,303 2,250
-------- --------
Total current assets.................................................. 111,721 115,327
Property and equipment, net............................................... 73,717 74,813
Intangible assets, net.................................................... 38,902 42,804
Notes receivable and other assets......................................... 56,271 52,388
-------- --------
Total assets.......................................................... $280,611 $285,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................................. $ 44,909 $ 45,386
Other current liabilities................................................. 18,186 12,816
-------- --------
Total current liabilities............................................. 63,095 58,202
Long-term debt, less current maturities..................................... 114,707 112,849
Other long-term liabilities................................................. 431 598
-------- --------
178,233 171,649
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......................................................... 594 11,899
-------- --------
102,728 114,033
Note receivable from shareholder............................................ (350) (350)
-------- --------
Net shareholders' equity.............................................. 102,378 113,683
-------- --------
Total liabilities and shareholders' equity............................ $280,611 $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 Six Months
Ended June 30, Ended June 30,
----------------------- --------------------------
1999 1998 1999 1998
------------- ------- ------------ --------
(As restated; (As restated;
See Note 2) See Note 2)
<S> <C> <C> <C> <C>
Revenues:
Net patient service revenues......................... $ 95,894 $84,042 $189,727 $167,421
Management fees and other revenues................... 2,148 3,858 4,540 7,551
-------- ------- -------- --------
Total revenues...................................... 98,042 87,900 194,267 174,972
-------- ------- -------- --------
Expenses:
Facility operating expenses:
Salaries, wages and benefits....................... 51,024 43,348 99,547 84,920
Other operating expenses........................... 28,048 23,281 58,600 47,979
Lease expense........................................ 8,223 5,746 16,067 11,155
Corporate administrative costs....................... 5,975 5,247 11,921 10,190
Depreciation and amortization........................ 3,118 2,379 6,035 4,662
Terminated merger transaction costs.................. - - 600 -
Provision for asset revaluation...................... 14,530 - 14,530 -
-------- ------- -------- --------
Total operating expenses........................... 110,918 80,001 207,300 158,906
-------- ------- -------- --------
(12,876) 7,899 (13,033) 16,066
-------- ------- -------- --------
Other income (expense):
Interest income...................................... 429 800 903 921
Interest expense..................................... (2,910) (2,316) (5,408) (4,229)
-------- ------- -------- --------
Total other expense................................ (2,481) (1,516) (4,505) (3,308)
-------- ------- -------- --------
(15,357) 6,383 (17,538) 12,758
Provision (benefit) for income taxes.................. (5,863) 2,489 (6,797) 4,975
-------- ------- -------- --------
Income (loss) before minority interest and cumulative
effect of change in accounting method................ (9,494) 3,894 (10,741) 7,783
Minority interest in net income of subsidiary,
net of income taxes.................................. (58) (60) (137) (123)
-------- ------- -------- --------
Income (loss) before cumulative effect of change
in accounting method................................. (9,552) 3,834 (10,878) 7,660
Cumulative effect of change in accounting method,
net of income taxes.................................. - - (427) -
-------- ------- -------- --------
Net income (loss) applicable to common stock.......... $ (9,552) $ 3,834 $(11,305) $ 7,660
======== ======= ======== ========
Net income (loss) per share data:
Basic
Income (loss) applicable to common stock before
cumulative effect of change in accounting method.. $ (0.80) $ 0.32 $ (0.91) $ 0.64
Cumulative effect of change in accounting method.... - - (0.04) -
-------- ------- -------- --------
Net inome (loss) applicable to common stock......... $ (0.80) $ 0.32 $ (0.95) $ 0.64
======== ======= ======== ========
Diluted
Income (loss) applicable to common stock before
cumulative effect of change in accounting method.. $ (0.80) $ 0.32 $ (0.91) $ 0.63
Cumulative effect of change in accounting method.... - - (0.04) -
-------- ------- -------- --------
Net inome (loss) applicable to common stock......... $ (0.80) $ 0.32 $ (0.95) $ 0.63
======== ======= ======== ========
Weighted average number of common stock and
common stock equivalents outstanding:
Basic................................................ 11,924 11,910 11,924 11,888
======== ======= ======== ========
Diluted.............................................. 11,924 12,215 11,924 12,213
======== ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Note
Common Stock Receivable
--------------------------- Paid-In Retained From
Shares Amount Capital Earnings Shareholder Net
----------- ---------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998............ 11,924 $ 119 $102,015 $ 11,899 $(350) $113,683
Net loss (as Restated, see Note 2)...... - - - (11,305) - (11,305)
------- ----- -------- -------- ----- --------
Balance at June 30, 1999................ 11,924 $ 119 $102,015 $ 594 $(350) $102,378
======= ===== ======== ======== ===== ========
</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>
Six Months
Ended June 30,
----------------------------------
1999 1998
------------- --------
(As restated;
See Note 2)
<S> <C> <C>
Operating Activities:
Net income (loss).............................................................. $(11,305) $ 7,660
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................................ 6,034 4,662
Deferred income taxes........................................................ (8,163) -
Provision for asset revaluation.............................................. 14,530 -
Minority interest............................................................ 232 201
Provision for doubtful accounts.............................................. 2,069 684
Cumulative effect of change in accounting method............................. 427 -
Additional contractual reserves on accounts receivable....................... 4,529 -
Change in assets and liabilities:
Accounts receivable........................................................ (2,948) (16,243)
Prepaid expenses and other assets.......................................... (840) (8,100)
Accounts payable, accrued liabilities and other current liabilities........ 2,684 2,030
Other...................................................................... (323) 22
-------- --------
Cash provided by (used in) operating activities.......................... 6,926 (9,084)
-------- --------
Investing Activities:
Purchases of property and equipment........................................... (3,693) (3,699)
Notes and other receivables, net of repayments................................ (4,664) (5,447)
Payments for debt service reserves............................................ (336) -
Acquisitions, net of cash required............................................ (3,789) -
Payments for financing costs.................................................. (2,698) (618)
-------- --------
Cash used in investing activities........................................ (15,180) (9,764)
-------- --------
Financing Activities:
Proceeds from the exercise of stock options................................... - 294
Proceeds from borrowings...................................................... 8,432 21,200
Distributions paid to minority partners....................................... (148) (148)
Principal payments on long-term debt.......................................... (1,574) (753)
-------- --------
Cash provided by financing activities..................................... 6,710 20,593
-------- --------
Net change in cash and cash equivalents......................................... (1,544) 1,745
Cash and cash equivalents, beginning of period.................................. 5,047 4,011
-------- --------
Cash and cash equivalents, end of period........................................ $ 3,503 $ 5,756
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 - BASIS OF PRESENTATION AND OTHER INFORMATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the financial
statements reflect all adjustments considered necessary for a fair statement of
the results of operations and financial position for the interim periods
presented. All such adjustments are of a normal recurring nature. These
unaudited interim financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 1998
and notes thereto contained in Centennial HealthCare Corporation's Annual Report
on Form 10-K filed with the Securities and Exchange Commission (Commission File
No. 000-22771).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the year ending December 31, 1999
or any interim period.
Certain amounts in the 1998 financial statements have been reclassified for
comparative purposes.
NOTE 2 - 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 and six month
periods ended June 30, 1999 total $3,354,000 and $7,134,000, respectively.
Certain financial information, both before and after the effect of the
adjustments and certain reclassifications, is summarized as follows:
Three months ended Six months ended
June 30, 1999 June 30, 1999
------------------ ----------------
Loss before income taxes, minority
interest and cumulative effect of
change in accounting method (as
previously reported) $(12,003) $(10,831)
Adjustments
Increase in allowance for bad debts (513) (1,028)
Increase in contractual allowance on
hospital revenues (2,265) (4,529)
Increase in accrued vacation and sick
pay expenses (536) (1,072)
Increase in other operating expenses (40) (78)
-------- --------
Loss before income taxes, minority
interest and cumulative effect of
change in accounting method
(as restated) $(15,357) $(17,538)
-------- --------
Net loss (as previously reported) $ (7,573) $ (6,961)
Net loss (as restated) $ (9,552) $(11,305)
Net income per common share, diluted
(as previously reported) $ (0.64) $ (0.58)
Net loss per common share, diluted
(as restated) $ (0.80) $ (0.95)
June 30, 1999
Total shareholders' equity -------------
(as previously reported) $106,722
Total shareholders; equity
(as restated) $102,378
Total assets (as previously reported) $283,804
Total assets (as restated) $280,611
NOTE 3 - EARNINGS PER SHARE
The calculation of earnings per share is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------- ------------- -------
(As restated; (As restated;
See Note 2) See Note 2)
<S> <C> <C> <C> <C>
Income (Loss) applicable to common stock................... $ (9,552) $ 3,834 $(11,305) $ 7,660
Weighted average common shares outstanding................. 11,924 11,910 11,924 11,888
BASIC EARNINGS PER COMMON SHARE............................ $ (0.80) $ 0.32 $ (0.95) $ 0.64
======== ======= ======== =======
Income (Loss) applicable to common stock................... $ (9,552) $ 3,834 $(11,305) $ 7,660
Interest savings on convertible debt (net of tax).......... - 24 - 48
-------- ------- -------- -------
Income (Loss) applicable to common stock................... $ (9,552) $ 3,858 $(11,305) $ 7,708
Weighted average common shares outstanding................. 11,924 11,910 11,924 11,888
Dilutive effect of stock options........................... - 180 - 200
Conversion of convertible debt............................. - 125 - 125
-------- ------- -------- -------
Average diluted common shares outstanding.................. 11,924 12,215 11,924 12,213
DILUTED EARNINGS PER COMMON SHARE.......................... $ (0.80) $ 0.32 $ (0.95) $ 0.63
======== ======= ======== =======
</TABLE>
NOTE 4 - FACILITY ACQUISITIONS
In January 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts. The
total purchase price of $64.0 million was funded under the portion of the
Company's Senior Credit Facility with NationsBank, N.A., ("NationsBank") and
First Union National Bank, as agents and lenders and the other lenders named
therein, (the "Senior Credit Facility"), designated for use in financing certain
facility lease transactions, (the "Lease Facility").
Also in January 1999, the Company acquired leasehold interests in two facilities
that were previously managed by the Company: Hunter Woods Nursing and
Rehabilitation Center, ("Hunter Woods"), a 130-bed facility located in
Charlotte, North Carolina and Choctaw County Medical
<PAGE>
Center, ("Choctaw"), a facility with 68 nursing home beds and 22 hospital beds,
located in Ackerman, Mississippi. The Company paid a total purchase price of
$2.5 million for Hunter Woods; there were no lease acquisition costs associated
with Choctaw.
NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued.
This statement requires that all derivatives be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The effect on the financial
statements upon adoption of SFAS 133 has not been determined.
NOTE 6 - 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 includes specialty healthcare services, including comprehensive
rehabilitation therapy through the Company's subsidiary Paragon Rehabilitation,
Inc. ("Paragon"). The "All Other" category represents the Company's hospital
services, home health services, and PTS, Inc. ("PTS"), 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 and any noncash, nonrecurring charges (EBITDAR).
The tables below presents information about EBITDAR and total assets used by the
chief operating decision maker of Centennial as well as specific items included
in segment profit/loss as of and for the three and six month periods ended June
30, 1999 and 1998:
As of and for the six months ended June 30, 1999 (As Restated; See Note 2):
(in thousands)
<TABLE>
<CAPTION>
Management Long-Term Rehabilitation
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 4,835 157,866 19,722 25,319 (13,475) 194,267
EBITDAR (3,723) 28,453 145 (676) - 24,199
Total Assets 132,083 134,264 17,195 23,198 (26,129) 280,611
Interest revenue 844 19 21 19 - 903
Interest expense (2,199) (2,544) (315) (350) - (5,408)
Lease expense (809) (14,498) (265) (495) - (16,067)
Depreciation and Amortization (2,422) (2,433) (914) (266) - (6,035)
Minority Interest (net of tax) (137) - - - - (137)
Cumulative effect of change in
accounting method (427) - - - - (427)
Provision for Asset Revaluation (1,285) (10,558) (2,687) - - (14,530)
Terminated Merger Costs (600) - - - - (600)
Income tax benefit (expense) 3,907 562 1,538 790 - 6,797
Net (loss) (6,851) (1000) (2,477) (977) - (11,305)
</TABLE>
As of and for the six months ended June 30, 1998:
(in thousands)
<TABLE>
<CAPTION>
Management Long-Term Rehabilitation
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 7,740 119,588 37,368 10,276 (12,298) 174,972
EBITDAR 1,233 22,630 4,700 3,320 - 31,883
Total Assets 125,651 23,024 21,192 (29,367) 272,940
Interest revenue 807 13 65 36 - 921
Interest expense (888) (2,675) (315) (351) - (4,229)
Lease expense (648) (9,829) (228) (450) - (11,155)
Depreciation and Amortization (1,336) (2,157) (945) (224) - (4,662)
Minority Interest (net of tax) (123) - - - - (123)
Income tax benefit (expense) 325 (3,113) (1,278) (909) - (4,975)
Net income (loss) (630) 4,869 1,999 1,422 - 7,660
</TABLE>
For the three months ended June 30, 1999 (As Restated, See Note 2):
(in thousands)
<TABLE>
<CAPTION>
Management Long-Term Rehabilitation
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 2,291 80,474 9,684 11,695 (6,102) 98,042
EBITDAR (1,933) 14,855 527 (454) - 12,995
Interest revenue 419 - 1 9 - 429
Interest expense (1,274) (1,304) (158) (174) - (2,910)
Lease expense (416) (7,422) (130) (255) - (8,223)
Depreciation and Amortization (1,317) (1,211) (448) (142) - (3,118)
Minority Interest (net of tax) (58) - - - - (58)
Provision for Asset Revaluation (1,285) (10,558) (2,687) - - (14,530)
Income tax benefit (expense) 2,125 2,029 1,079 630 - 5,863
Net (loss) (3,738) (3,606) (1,816) (392) - (9,552)
</TABLE>
For the three months ended June 30, 1998:
(in thousands)
<TABLE>
<CAPTION>
Management Long-Term Rehabilitation
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 3,955 59,472 19,651 11,633 (6,811) 87,900
EBITDAR 582 10,881 2,511 2,050 - 16,024
Interest revenue 728 11 27 34 - 800
Interest expense (618) (1,365) (158) (175) - (2,316)
Lease expense (323) (4,935) (144) (344) - (5,746)
Depreciation and Amortization (681) (1,098) (484) (116) - (2,379)
Minority Interest (net of tax) (60) - - - - (60)
Provision for Asset Revaluation - - - - - -
Terminated Merger Costs - - - - - -
Income tax benefit (expense) 107 (1,363) (683) (550) - (2,489)
Net income (loss) (265) 2,131 1,069 899 - 3,834
</TABLE>
<PAGE>
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Effective May 28, 1999, the Company amended its Senior Credit Facility. As part
of the new agreement, the Company transferred $5.7 million of availability under
the Lease Facility to the revolver portion. The amendment, coupled with previous
1998 amendments to the Lease Facility, increased the Company's interest rate,
which at June 30, 1999 was at 3.0% over LIBOR, and calls for amortization of
principal, or reduction in availability, of $5.7 million on December 31, 1999,
$11.0 million on December 31, 2000, and $22 million during each of the years
ending December 31, 2001 and 2002. As of June 30, 1999, the Company had $82.3
million outstanding and approximately $6.8 million available under the Senior
Credit Facility, net of standby letters of credit of approximately $6.7 million.
The Company was in full compliance with all covenants of the Senior Credit
Facility as of June 30, 1999.
Under the provisions of the Senior Credit Facility, Centennial is required to
hedge a portion of its floating rate debt outstanding under the Senior Credit
Facility. Accordingly, the Company has entered into interest rate swap
agreements with certain lenders providing bank financing under the Senior Credit
Facility. Pursuant to the interest rate swap agreements, the Company has
exchanged its floating rate interest obligations on $38.0 million in principal
at an average fixed rate of 5.61% per annum for an average maturity of 4.25
years. The fixing of interest rates for this period reduces in part the
Company's exposure to the uncertainty of floating interest rates. The
differential paid or received on the interest rate swap agreements is recognized
as an adjustment to interest expense. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to the interest rate swap
agreements. However, the Company does not anticipate nonperformance by these
counterparties, and no material loss would be expected from their
nonperformance. The fair value of the interest rate swap agreements was not
recognized in the condensed consolidated financial statements since they are
accounted for as hedges. At June 30, 1999, the estimated fair value of the
interest rate swap agreements based on current market rates, approximated a net
receivable to the Company of $41,000.
In January 1999, the Company obtained a $5.0 million line of credit from
Nationsbank, which bears interest at NationsBank's Prime Rate or 3.0% over
LIBOR for selected portions, and expired in May 1999. During the second quarter
of 1999, the Company negotiated an amendment with Nationsbank which extends the
maturity date to December 31, 1999. As of June 30, 1999, the Company had $5.0
million outstanding under this agreement which is included in "other current
liabilities" in the Company's accompanying Condensed Consolidated Balance Sheets
at June 30, 1999.
On March 26, 1999 the Company received an investigatory subpoena from the
Department of Health and Human Services, Office of Inspector General ("OIG"),
requesting records in connection with an
<PAGE>
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 December 31, 1998 concerning certain of the
Company's internal policies and relates to four long-term care facilities
operated by the Company. The Company intends to provide all requested records
and cooperate fully with the OIG.
NOTE 8 - TERMINATED MERGER
On October 22, 1998, Centennial announced that its Board of Directors had
approved the sale of the Company for $16.00 per share in cash to a new company,
("Centennial HealthCare Holdings Corporation), formed by Welsh, Carson, Anderson
& Stowe, whose affiliates currently hold approximately 23% of the Company's
common stock.
On April 2, 1999, Centennial HealthCare Holdings Corporation notified the
Company that it was terminating the definitive merger agreement. As of June 30,
1999, the Company had expensed approximately $4.2 million in transaction costs
associated with the terminated merger. Approximately $600,000 of these costs
were expensed during 1999. The Company does not anticipate any further accruals
of merger costs.
NOTE 9 - PROVISION FOR ASSET REVALUATION
During the second quarter of 1999, the Company continued its evaluation of the
effects of the Medicare Prospective Payment System ("PPS") on the profitability
of its nursing centers and ancillary businesses. Based on operational results
through six months under PPS, the Company noted that profitability at certain of
its nursing centers as well as Paragon, were less than amounts projected in
1998. Accordingly, the Company has recorded write-downs of property and
equipment and intangible assets (primarily goodwill) at several of its nursing
centers, totaling approximately $1.2 million and $2.8 million, respectively. In
addition, the Company wrote-off approximately $2.7 million of goodwill
associated with Paragon. The total carrying value of goodwill after the write-
down associated with Paragon and the nursing facilities was approximately $17.0
million and $18.5 million, respectively. Amortization expense recorded during
the six months ended June 30, 1999, on the fixed assets and intangibles written-
off approximates $54,000.
In connection with the Company's facility management agreements for several
facilities, the Company has made certain advances for working capital needs. The
majority of these centers are start-up or development projects and required
additional funding for personnel and other operating costs prior to
stabilization. The advances are to be repaid from available cash flow and other
funds provided by the owners. It is the Company's policy to periodically review
the collectibility of its advances based upon several factors, including the
projected cash flow of the respective facility, the value of any collateral held
by the Company, the owner's financial position and the underlying asset value of
the nursing center. During the first six months of 1999, certain of the
Company's managed facilities, primarily in North Carolina, have declined due to
deterioration in census and payor mix. In June, 1999, the Company determined
that the operational declines noted during 1999 were unlikely to dissipate in
the near term and, as a result, the ability of the respective nursing facilities
to fully repay cash advanced by the Company was impaired. Accordingly, during
the second quarter of 1999, the Company increased its reserve for managed
facility advances by $7.8 million. The charge represents the carrying value of
advances made to the respective centers considered impaired.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying Unaudited Condensed Consolidated Statements of Operations for the
three and six month periods ended June 30, 1999, and 1998.
Certain statements in this Form 10-Q, including information set forth under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations", constitute "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements include
statements regarding the intent, belief or current expectations of Centennial
HealthCare Corporation and members of its management team. Management cautions
that a variety of factors could cause Centennial HealthCare's actual results to
differ materially from the anticipated results expressed in such forward-looking
statements. Important factors currently known to management that could cause
actual results to differ materially from those in forward-looking statements are
set forth in Centennial HealthCare's Cautionary Statements regarding Forward-
looking Statements (exhibit 99.1 to this report), which statements are
incorporated herein by reference.
GENERAL
Centennial HealthCare Corporation ("Centennial" or the "Company") provides a
broad range of long-term healthcare services to meet the medical needs of
elderly and post-acute patients. The Company provides these services through
geographically concentrated networks located in metropolitan and secondary
markets throughout the United States. The Company was organized in 1989 as a
Georgia corporation and conducts business through its operating subsidiaries.
The Company currently operates 108 owned, leased and managed skilled nursing
facilities with approximately 11,734 licensed available beds in 21 states and
the District of Columbia. The Company provides basic and specialty healthcare
services. Basic services include skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. Specialty services may
include comprehensive rehabilitation therapy, respiratory therapy, ventilator
care, infusion therapy, wound care, home healthcare and other subacute and
specialty services. As components of its specialty services, at June 30, 1999,
Centennial provided rehabilitation therapy services on a contract basis to
third-party owned and Company-operated skilled nursing facilities pursuant to
146 internal and external contracts and provided home healthcare services
through licensed home health offices primarily in North Carolina.
In January 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts, (the
"Flatley Facility Leases").
Also in January 1999, the Company acquired leasehold interests in two facilities
that were previously managed by the Company: Hunter Woods Nursing and
Rehabilitation Center, a 130-bed facility located in Charlotte, North Carolina,
and Choctaw County Medical Center, a facility with 68
<PAGE>
nursing home beds and 22 hospital beds, located in Ackerman, Mississippi.
Together, these two facilities are hereafter referred to as the "New Facility
Leases".
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% 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. As of June 30,
1999, the Company had expensed approximately $4.2 million in transaction costs
associated with the terminated merger. Approximately $600,000 of these costs
were expensed during 1999. The Company does not anticipate any further accruals
of merger costs.
In August 1998, the Company began leasing four skilled nursing facilities
totaling 349 licensed available beds, located in Mississippi, North Carolina,
Arkansas and Wisconsin. One of these facilities was previously managed by the
Company. In October 1998, the Company began leasing six skilled nursing
facilities totaling 608 licensed available beds, located in Florida, Arkansas,
Kansas, and Wisconsin. In November 1998, the Company began leasing four skilled
nursing facilities totaling 675 licensed available beds, located in Florida and
Missouri. Together, these transactions are hereafter referred to as the "1998
Facility Leases".
In April 1998, the Company entered into management agreements for two skilled
nursing facilities, with a total of 174 licensed available beds, located in
Virginia. In October 1998, the Company discontinued its operations of Wellington
Nursing and Rehabilitation Center, ("Wellington"), a 140-bed facility located in
Charlotte, North Carolina through a sub-lease to a third party operator. In
November 1998, the Company closed THS of South Bend, ("South Bend"), a 191-bed
skilled nursing facility located in South Bend, Indiana. The Company continues
to market the South Bend facility for sale and cannot at this time anticipate
when, if at any time, it will be successful in its efforts to sell this
facility.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998:
Net patient service revenues. Net patient service revenues increased from $84.0
million in the second quarter of 1998 to $95.9 million in the same period in
1999, an increase of $11.9 million or 14.2%. The 1998 Facility Leases
contributed approximately $13.4 million to revenues during the second quarter of
1999. The New Facility Leases and the Flatley Facility Leases contributed
<PAGE>
approximately $2.8 million and approximately $9.9 million, respectively, to
revenues during the first quarter of 1999. Wellington and South Bend contributed
approximately $1.1 million and $1.4 million, respectively, to revenues for the
quarter ended June 30, 1998. During the quarter ended June 30, 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
facilities and hospitals. Same store nursing facility revenues decreased by
approximately $2.5 million in the second 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 decrease
in its average Medicare Part A rates during the second quarter of 1999 as well
as a slight decrease in census as compared to the prior period on a same store
basis. Revenues from Paragon decreased by approximately $8.5 million in the
second quarter of 1999 compared to the prior year period, due to the loss of
sixteen external contracts subsequent to the second 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,
increased by approximately $600,000 due to increased volume from existing
contracts and the expansion of services provided to the Company's managed
nursing facilities.
Management fees and other revenues. Management fees and other revenues decreased
from $3.8 million in the second quarter of 1998 to $2.1 million in the second
quarter of 1999, a decrease of $1.7 million, or 44.3%. Approximately $330,000 of
this decrease was due to the loss of one management contract subsequent to the
second quarter of 1998, and approximately $213,000 of this decrease was due to
the conversion of three management contracts to leases subsequent to June 30,
1998. The remaining decrease was attributable to revenue recognized during the
second quarter of 1998 for performance of additional services to certain third
party owners and declines in 1999 revenues earned under certain management
agreements in which the Company's fee is based on facility profits.
Facility operating expenses. Facility operating expenses increased from $66.6
million in the second quarter of 1998 to $79.0 million in the same period in
1999, an increase of $12.4 million or 18.6%. The 1998 Facility Leases
contributed approximately $11.0 million to operating expenses during the second
quarter of 1999. The New Facility Leases and the Flatley Facility Leases
contributed approximately $2.4 million and approximately $7.8 million,
respectively, to operating expenses during the second quarter of 1999.
Wellington and South Bend contributed approximately $1.3 million and $1.4
million, respectively, to operating expenses for the prior year period ended
June 30, 1998. Same store nursing facility operating expenses decreased by
approximately $2.5 million in the second quarter of 1999 compared to the prior
year period, primarily resulting from decreases in therapy and other ancillary
costs associated with the re-negotiation of the Company's ancillary contracts
under the PPS methodology. These gains were offset in part by additional costs
associated with continued PPS training during the second quarter of 1999 at the
Company's nursing facilities. Operating expenses from Paragon decreased by
approximately $6.5 million in the second quarter of 1999 compared to the prior
year period, due to the cost-cutting measures put in place by management in
response to the decrease in revenues associated with PPS. Operating expenses
from PTS increased by approximately $500,000 due to increased volume from
existing contracts and the expansion of services provided to the Company's
managed nursing facilities.
<PAGE>
Lease expense. Lease expense increased from $5.7 million in the second quarter
of 1998 to $8.2 million in the second quarter of 1999, an increase of
approximately $2.5 million, or 43.0%. Lease expense from the 1998 Facility
Leases approximated $1.6 million during the second quarter of 1999, while lease
expense from the New Facility Leases and the Flatley Facility leases
approximated $185,000 and $1.3 million, respectively, in the second quarter of
1999. Wellington and South Bend contributed approximately $157,000 and $210,000
to lease expense during the prior year period ended June 30, 1998.
Corporate administrative costs. Corporate administrative costs increased from
$5.2 million in the second quarter of 1998 to $5.9 million in the second quarter
of 1999, an increase of $728,000, or 13.8%, which was due primarily to
additional overhead incurred to accommodate the 1998 Facility Leases, the New
Facility Leases, and the Flatley Facility Leases.
Depreciation and amortization. Depreciation and amortization increased from
$2.3 million in the second quarter of 1998 to $3.1 million in the same period in
1999, an increase of approximately $739,000, or 31.0%, which was primarily
attributable to additional depreciation expense incurred as a result of fixed
asset purchases and amortization of management contract and acquisition costs.
Provision for asset revaluation. During the second quarter of 1999, the Company
recorded a provision for asset revaluation of approximately $14.5 million. This
charge was comprised of a $7.8 million reserve for long-term advances and notes
receivable from managed facilities and a write-down of fixed assets and
intangible assets of $6.7 million related to certain of the Company's nursing
facilities and Paragon.
Interest expense. Interest expense increased from $2.3 million in the second
quarter of 1998 to $2.9 million in the second quarter of 1999, an increase of
approximately $594,000, or 25.6%, which was primarily attributable to the
increase in debt of approximately $24.9 million subsequent to the second 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 second quarter of 1998 to 41.0% in the second quarter of 1999
(gross of tax benefits associated with nonrecurring second quarter losses), 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.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998:
Net patient service revenues. Net patient service revenues increased from $167.4
million in the first six months of 1998 to $189.7 million in the same period in
1999, an increase of $22.3 million or 13.3%. The 1998 Facility Leases
contributed approximately $26.8 million to revenues during 1999. The New
Facility Leases and the Flatley Facility Leases contributed approximately $5.2
million and $19.8 million, respectively, to revenues during the first six months
of 1999. Wellington and South Bend contributed approximately $2.4 million and
$2.8 million, respectively, to revenues for the six months ended June 30, 1998.
During the six months ended June 30, 1999, the Company recorded charges to
revenue totaling approximately $4.5 million associated with reserves on prior
year cost reports and trade receivables at its nursing facilities and hospitals.
Same store nursing facility revenues decreased by
<PAGE>
approximately $7.4 million during 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 decrease in its average
Medicare Part A rates during the first half of 1999 as well as a slight decrease
in census as compared to the prior period on a same store basis. Revenues from
Paragon decreased by approximately $15.5 million for the first six months of
1999 compared to the prior year period, due to the loss of sixteen external
contracts subsequent to the second 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, increased by
approximately $2.0 million due to increased volume from existing contracts and
the expansion of services provided to the Company's managed nursing facilities.
Management fees and other revenues. Management fees and other revenues
decreased from $7.5 million during the first six months of 1998 to $4.5 million
for the same period of 1999, a decrease of $3.0 million, or 39.8%.
Approximately $660,000 of this decrease was due to the loss of one management
contract subsequent to the second quarter of 1998, and approximately $800,000 of
this decrease was due to the conversion of three management contracts to leases
subsequent to June 30, 1998. The remaining decrease includes approximately
$850,000 attributable to revenue recognized during the second quarter of 1998
for performance of additional services to certain third party owners as well as
decreases in 1999 revenues earned under certain management agreements in which
the Company's fee is based on facility profits.
Facility operating expenses. Facility operating expenses increased from $132.8
million during the first six months of 1998 to $158.1 million for the same
period in 1999, an increase of $25.3 million or 19.1%. The 1998 Facility Leases
contributed approximately $22.1 million to operating expenses during 1999. The
New Facility Leases and the Flatley Facility Leases contributed approximately
$4.5 million and approximately $15.3 million, respectively, to operating
expenses during the six months ended June 30, 1999. Wellington and South Bend
contributed approximately $2.8 million and $2.6 million, respectively, to
operating expenses for the prior year period ended June 30, 1998. Same store
nursing facility operating expenses decreased by approximately $5.3 million
during the first half of 1999 compared to the prior year period, primarily
resulting from decreases in therapy and other ancillary costs associated with
the re-negotiation of the Company's ancillary contracts under the PPS
methodology. These gains were offset in part by additional costs associated with
continued PPS training during 1999 at the Company's nursing facilities.
Operating expenses from Paragon decreased by approximately $10.6 million in the
first six months of 1999 compared to the prior year period, due to cost-cutting
measures put in place by management in response to the decrease in revenues
associated with PPS. Operating expenses from PTS increased by approximately $1.6
million due to increased volume from existing contracts and the expansion of
services provided to the Company's managed nursing facilities.
<PAGE>
Lease expense. Lease expense increased from $11.1 million during the six months
ended June 30, 1998 to $16.1 million during the same period in 1999, an increase
of approximately $4.9 million, or 44.0%. Lease expense from the 1998 Facility
Leases approximated $2.9 million during 1999, while lease expense from the New
Facility Leases and the Flatley Facility leases approximated $386,000 and $2.5
million, respectively, through June 30, 1999. Wellington and South Bend
contributed approximately $313,000 and $420,000 to lease expense during the
prior year period ended June 30, 1998.
Corporate administrative costs. Corporate administrative costs increased from
$10.2 million in 1998 to $11.9 million during the first six months of 1999, an
increase of $1.7 million, or 16.9%, which was due primarily to additional
overhead incurred to accommodate the 1998 Facility Leases, the New Facility
Leases, and the Flatley Facility Leases.
Depreciation and amortization. Depreciation and amortization increased from
$4.7 million during the six months ended June 30, 1998 to $6.0 million in the
same period in 1999, an increase of approximately $1.4 million, or 29.4%, which
was primarily attributable to additional depreciation expense incurred as a
result of fixed asset purchases and amortization of management contract and
acquisition costs.
Provision for asset revaluation. During the second quarter of 1999, the Company
recorded a provision for asset revaluation of approximately $14.5 million. This
charge was comprised of a $7.8 million reserve for long-term advances and notes
receivable from managed facilities and a write-down of fixed assets and
intangible assets of $6.7 million related to certain of the Company's nursing
facilities and Paragon.
Termination Merger Cost. During the first quarter of 1999, the Company accrued
$600,000 of transaction costs associated with the proposed merger.
Interest expense. Interest expense increased from $4.2 million in 1998 to $5.4
million in 1999, an increase of approximately $1.2 million, or 27.8%, which was
primarily attributable to the increase in debt of approximately $24.9 million
subsequent to the second quarter of 1998, related to borrowings for working
capital.
Provision for income taxes. The Company's effective tax rate increased from
39.0% for the first six months of 1998 to 41.0% for the same period of 1999
(gross of tax benefits associated with nonrecurring 1999 losses), 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 the Senior Credit Facility. Cash was used by the Company for
capital improvements at several existing facilities, notes and advances
receivable from certain third parties and payments of deferred costs. 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,
and the expansion and development of specialty services.
During the six months ended June 30, 1999, the Company generated $6.9 million in
cashflow from operating activities. This was comprised of operating cashflow
before noncash charges and changes in assets and liabilities of $8.3 million, an
increase in accounts receivable of approximately $2.9 million and an increase in
accounts payable of approximately $2.6 million. The increase in accounts
receivable is comprised of: (a) a $14.7 million increase in trade receivables at
the Company's long-term care facilities, (b) a $6.5 million decrease in nursing
facility settlement receivables associated with the collection of prior year
Medicare cost report receivables and exception requests and (c) a $4.8 million
decrease in Paragon receivables from third parties. The significant increase in
trade receivables during the period was due primarily to delays by the Company's
intermediary in processing change of ownership packages for the Flatley Facility
Leases and the 1998 Facility Leases. The Company was unable to receive any
Medicare payments or, in certain states, Medicaid payments, until this process
had been completed. By June 30, 1999 the intermediary had completed all change
of ownership processing and the Company was beginning to receive payments on
most of the facilities in question. As of June 30, 1999, the Company had
outstanding Medicaid and Medicare receivables associated with these buildings of
approximately $14.6 million. The Company anticipates that significant portions
of these balances should be collected during the remaining two quarters of 1999.
The decrease in account payable is due to the timing of payments to vendors,
leasors and compensation of employees.
Notes and other receivables from certain third party owners increased by
approximately $4.6 million during the first six months of 1999. The Company
continued to invest in its leased and owned facilities through capital
expenditures of approximately $3.7 million or approximately $460 per bed for the
six month period. These expenditures included the expansion of existing
facilities and the selected rehabilitation of certain facilities. During
the period, the Company paid $2.1 million for deferred costs including loan fees
associated with the refinancing of the Senior Credit Facility. Also, during
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 six months of 1999, the Company borrowed a net $3.4 million in
working capital loans under the Senior Credit Facility which were utilized
primarily to finance capital expenditures at existing facilities and other
investing activities. As of June 30, 1999, the Company had $82.3 million
outstanding and approximately $6.8 million available under its Senior Credit
Facility, net of issued standby letters of credit of approximately $6.7 million.
Effective May 28, 1999, the Company amended its Senior Credit Facility to
transfer $5.7 million of availability from the lease portion of its commitment
to the revolver. Also included in the amendment are required amortization of
principal, or reduction of availability, of approximately $5.7 million, $11.0
million , $22.0 million and $22.0 million during each of the years ended
December 31, 1999, 2000, 2001 and 2002, respectively.
In January 1999, the Company obtained a $5.0 million Line of Credit from
Nationsbank, which bears interest at Nationsbank's Prime rate or 3.0% over Libor
for selected portions. Through an amendment during the second quarter of 1999,
the Company extended the maturity date of this commitment to December 31, 1999.
As of June 30, 1999, the Company had $5.0 million outstanding under this
agreement.
The Company's Amended Senior Credit Facility restricts the Company's ability to
add new facilities through either acquisitions or leases. Due to these
restrictions, the Company is evaluating the market potential of establishing
management relationships with investor groups interested in acquiring nursing
facilities and outsourcing management. All discussions by the Company with any
investor groups are in a preliminary stage and the availability of such
management opportunities is uncertain.
<PAGE>
The Company anticipates meeting its cash flow requirements in the remaining two
quarters of 1999 through continued collection of current billings, Medicare
settlement receivables and collection of past due trade receivables associated
with the 1998 Facility Leases, the Flatley Facility Leases, and the New Facility
Leases. The Company is also evaluating a possible sale of certain assets to
provide additional liquidity for its day to day operations and required
principal reductions under its Senior Credit Facility.
Depending on the outcome, a settlement of the currently pending investigatory
subpoena from the Department of Health and Human Services, office of Inspector
General could result in a substantial liability for the Company. Neither the
amount or timing of any potential liability can, at this time, be estimated
with any reasonable certainty. It is, however, possible that resolution of this
investigation could have a material adverse effect on the Company's cash flow,
results of operations and consolidated financial position.
<PAGE>
HEALTH CARE REFORM
The Balanced Budget Act of 1997, (the "Act"), enacted in August 1997, has
targeted the Medicare program for reductions in spending growth of approximately
$9.5 billion for skilled nursing facilities ("SNF's") over the next five years,
primarily through the implementation of a Medicare prospective payment system
("PPS") for skilled services. Under the Act, PPS will be phased in over three
cost reporting periods beginning on or after July 1, 1998. Recent data from the
Congressional Budget Office indicates that the estimated reductions to SNF
payments resulting from the implementation of PPS actually approach $16.6
billion.
Generally, the PPS per diem, which covers routine service, ancillary and capital
related costs, has initially been a blended rate based on (i) a facility-
specific payment rate derived from each facility's 1995 cost report, adjusted by
an inflation factor and (ii) a federal per diem rate derived from all hospital-
based and freestanding SNF 1995 cost reports, adjusted for case mix and
geographic variations in labor costs. The blended rate will be further adjusted
by a facility-specific case mix (acuity) index.
Management previously indicated a belief that revenues would be lower under PPS,
but noted that reductions in ancillary service costs and proper Minimum Data Set
("MDS") documentation should offset the effect of rate reductions. The Company
can give no assurance that payments under the PPS program in the future will
remain at a level comparable to the present or increase, nor can the Company
give assurance that the trend in cost reductions or utilization remain
consistent with current levels.
Currently, there are legislative efforts underway to provide relief to SNF
providers and restore a portion of the savings estimated in excess of the
targeted $9.5 billion. There is no assurance as to the likelihood that these
legislative efforts will be successful or, if successful, the timing of their
implementation.
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.
IMPACT OF THE YEAR 2000 ISSUE
Computer systems and other equipment, including biomedical equipment and
building controls, with embedded computer microchips or processors
(collectively, "Business Systems") may use only two digits to represent the
year, which could result in the inability to process accurately certain date
sensitive data or operations before, during or after the year 2000. Business
and governmental entities are at risk for possible miscalculations or systems
failures causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. This is commonly known as the Year 2000 Issue.
Problems associated with the Year 2000 Issue could affect many of Centennial's
financial and administrative operations as well as its voice and data
communication systems.
The Company is in the process of implementing a Year 2000 compliance plan (the
"Plan") with the objective of having all of its significant internal Business
Systems fully compliant with respect to the Year 2000 Issue by October 1, 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 June 30, 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
$120,000 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.
The Company's Plan is an ongoing process and the estimates of costs and
completion dates for various components of the Plan described above are based on
Management's best estimates using assumptions of future events are subject to
change. There can be no assurances that these estimates will be achieved.
SUBSEQUENT EVENT
In July 1999, J. Stephen Eaton, Chief Executive Officer of the Company, and
Alan C. Dahl, Chief Financial Officer of the Company, acquired 100% of the
general and limited partnership interests in a limited partnership that owns
twelve nursing homes currently leased by the Company. These leases were
unchanged by this transaction and will remain in place under their existing
terms and conditions.
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
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 APR-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 3,503 3,503
<SECURITIES> 0 0
<RECEIVABLES> 103,343 103,343
<ALLOWANCES> (6,100) (6,100)
<INVENTORY> 0 0
<CURRENT-ASSETS> 111,721 111,721
<PP&E> 96,730 96,730
<DEPRECIATION> (23,013) (23,013)
<TOTAL-ASSETS> 280,611 280,611
<CURRENT-LIABILITIES> (63,095) (63,095)
<BONDS> (114,707) (114,707)
0 0
0 0
<COMMON> 119 119
<OTHER-SE> 102,259 102,259
<TOTAL-LIABILITY-AND-EQUITY> 102,378 102,378
<SALES> 194,267 98,042
<TOTAL-REVENUES> 194,267 98,042
<CGS> 0 0
<TOTAL-COSTS> (207,300) (110,918)
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (5,408) (2,910)
<INCOME-PRETAX> (17,538) (15,357)
<INCOME-TAX> 6,797 5,863
<INCOME-CONTINUING> (11,305) (9,552)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,305) (9,552)
<EPS-BASIC> (.95) (.80)
<EPS-DILUTED> (.95) (.80)
</TABLE>
