<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-22771
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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
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(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 May 10,
1999
<PAGE>
CENTENNIAL HEALTHCARE INC
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
ITEM I - FINANCIAL STATEMENTS
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 1,024 $ 1,790
Patient accounts receivable and third-party payor settlements, net
of allowance for doubtful accounts of approximately
$6,986 and $6,426 ............................................................. 72,274 71,220
Other receivables .............................................................. 3,819 3,420
Deferred income taxes .......................................................... 7,009 6,986
Prepaid expenses and other current assets ...................................... 1,851 1,491
--------- ---------
Total current assets ....................................................... 85,977 84,907
Property and equipment, net .................................................... 75,011 75,524
Intangible assets, net ......................................................... 40,553 41,145
Notes receivable and other assets .............................................. 62,396 62,769
--------- ---------
Total assets ............................................................... $ 263,937 $ 264,345
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ....................................... $ 38,957 $ 39,911
Other current liabilities ...................................................... 13,940 19,298
--------- ---------
Total current liabilities .................................................. 52,897 59,209
Long-term debt, less current maturities .......................................... 114,032 108,076
Other long-term liabilities ...................................................... 9,015 9,247
--------- ---------
175,944 176,532
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
Deficit ........................................................................ (13,791) (13,971)
--------- ---------
88,343 88,163
Note receivable from shareholder ................................................. (350) (350)
--------- ---------
Net shareholders' equity ................................................... 87,993 87,813
--------- ---------
Total liabilities and shareholders' equity ................................. $ 263,937 $ 264,345
========= =========
</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,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Net patient service revenues ......................... $ 94,119 $ 93,833
Management fees and other revenues ................... 1,855 2,393
-------- --------
Total revenues ..................................... 95,974 96,226
-------- --------
Expenses:
Facility operating expenses:
Salaries, wages and benefits ..................... 47,157 48,524
Other operating expenses ......................... 27,852 30,551
Lease expense ........................................ 8,436 7,845
Corporate administrative costs ....................... 5,939 5,946
Depreciation and amortization ........................ 3,031 2,917
Terminated merger transaction costs .................. -- 600
-------- --------
Total operating expenses ......................... 92,415 96,383
-------- --------
3,559 (157)
-------- --------
Other income (expense):
Interest income ...................................... 250 473
Interest expense ..................................... (3,203) (2,498)
-------- --------
Total other expense .............................. (2,953) (2,025)
-------- --------
606 (2,182)
Provision for income taxes (income tax benefit) ........ 364 (935)
-------- --------
Income (loss) before minority interest and cumulative
effect of change in accounting method ................ 242 (1,247)
Minority interest in net income of subsidiary,
net of income taxes .................................. (62) (79)
-------- --------
Income (loss) before cumulative effect of change in
accounting method .................................... 180 (1,326)
Cumulative effect of change in accounting method, net of
income taxes ......................................... -- (427)
-------- --------
Net income (loss) ...................................... $ 180 $ (1,753)
======== ========
Net income (loss) per common share data:
Basic:
Income (loss) applicable to common stock before
cumulative effect of change in accounting method .. $ 0.02 $ (0.11)
Cumulative effect of change in accounting method ..... -- (0.04)
-------- --------
Net income (loss) .................................... $ 0.02 $ (0.15)
======== ========
Diluted:
Income (loss) applicable to common stock before
cumulative effect of change in accounting method .. $ 0.02 $ (0.11)
Cumulative effect of change in accounting method ..... -- (0.04)
-------- --------
Net income (loss) .................................... $ 0.02 $ (0.15)
======== ========
Weighted average number of common stock and
common stock equivalents outstanding .................
Basic .................................................. 11,924 11,924
======== ========
Diluted ................................................ 11,924 11,956
======== ========
</TABLE>
4
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Note
Common Stock Receivable
------------------- Paid-In From
Shares Amount Capital Deficit Shareholder Net
------ -------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999... 11,924 $ 119 $102,015 $(13,971) $ (350) $ 87,813
Net income .................... -- -- -- 180 -- 180
------ -------- -------- -------- -------- --------
Balance at March 31, 2000 ..... 11,924 $ 119 $102,015 $(13,791) $ (350) $ 87,993
====== ======== ======== ======== ======== ========
</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,
--------------------
2000 1999
--------- --------
<S> <C> <C>
Operating Activities:
Net income (loss)........................................................... $ 180 $(1,753)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization .......................................... 3,031 2,917
Deferred income taxes .................................................. 223 (1,415)
Consulting expenses offset against note receivable ..................... -- 31
Minority interest ...................................................... 107 134
Provision for doubtful accounts ........................................ 375 875
Cumulative effect of change in accounting method ....................... -- 427
Additional contractual reserves on accounts receivable ................. -- 2,265
Change in assets and liabilities:
Accounts receivable ................................................. (2,245) (403)
Prepaid expenses and other assets ................................... (782) (1,008)
Accounts payable, accrued liabilities and other current liabilities . (1,310) (1,769)
Other ............................................................... (217) 51
--------- --------
Cash provided by (used in) operating activities ................. (638) 352
--------- --------
Investing Activities:
Purchases of property and equipment ........................................ (1,173) (1,666)
Notes and other receivables, net of repayments ............................. 687 (2,664)
Acquisitions, net of cash acquired ......................................... -- (2,526)
Other ...................................................................... (257) (1,208)
--------- --------
Cash used in investing activities ............................... (743) (8,064)
--------- --------
Financing Activities:
Proceeds from borrowings ................................................... 6,225 6,000
Distributions paid to minority partners .................................... (339) (74)
Principal payments on long-term debt ....................................... (5,271) (270)
--------- --------
Cash provided by financing activities ........................... 615 5,656
--------- --------
Net decrease in cash and cash equivalents .................................... (766) (2,056)
Cash and cash equivalents, beginning of period ............................... 1,790 5,047
--------- --------
Cash and cash equivalents, end of period ..................................... $ 1,024 $ 2,991
========= ========
</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, 2000
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, 1999
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, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000 or any interim period.
Certain amounts in the 1999 financial statements have been reclassified for
comparative purposes.
NOTE 2 - EARNINGS PER SHARE
The calculation of earnings per share is as follows (in thousands, except per
share amounts):
7
<PAGE>
Three Months Ended
March 31,
2000 1999
---------- ----------
Net income (loss).................................... $ 180 $ (1,753)
Weighted average common shares outstanding........... 11,924 11,924
Basic Earnings Per Common Share...................... $ 0.02 $ (0.15)
========== ==========
New income........................................... $ 180 $ (1,753)
Interest savings on convertible debt (net of tax).... - -
---------- ----------
Income applicable to common stock.................... 180 (1,753)
Weighted average common shares outstanding........... 11,924 11,924
Dilutive effect of stock options..................... - 32
---------- ----------
Average diluted common shares outstanding............ 11,924 11,956
Diluted Earnings Per Common Share.................... $ 0.02 $ (0.15)
---------- ----------
NOTE 3 - PENDING MERGER
On February 25, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Hilltopper Acquisition Corp. ("Acquisition") a
wholly owned subsidiary of Hilltopper Holding Corp., ("Holding") which is a
wholly owned subsidiary of Warburg, Pincus Equity Partnership, L.P. ("Warburg").
Pursuant to the terms of the Merger Agreement, Acquisition began a cash tender
offer for all outstanding shares of the Company at $5.50 per share. Warburg must
beneficially own a minimum of 68.5% of the shares (on a fully diluted basis) as
a condition to the consummation of the tender offer. The tender offer is not
subject to contingencies but is subject to the approval of certain lenders,
lessors and governmental authorities and other conditions. A special committee
of independent directors of the Company recommended that the merger and tender
offer transactions be approved by the Board of Directors of the Company. The
Board of Directors approved the merger and tender offer transactions and
recommended that the shareholders approve the merger and tender their shares
pursuant to the tender offer. The Company's executive management and certain
private equity shareholders representing about 39.5 % of the Company's
outstanding shares will become shareholders of Holding and have agreed to vote
their shares in favor of the transaction. J. Stephen Eaton will remain as the
Company's chairman and chief executive. On May 2, 2000, Acquisition accepted
6,179,862 shares for purchase pursuant to the tender offer, representing
approximately 51.8% of the outstanding shares of the Company's common stock.
Holding also contributed $15.0 million to the Company upon the closing of
the tender offer.
8
<PAGE>
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. This
statement requires that all derivatives be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The effect on the financial
statements upon adoption of SFAS 133 has not been determined.
NOTE 5 - SEGMENT INFORMATION
In 1998, Centennial adopted Statement of Financial Accounting Standards ("SFAS")
131, "Disclosures about Segments of an Enterprise and Related Information". SFAS
131 supersedes FAS 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position.
The Company has determined that its reportable segments are those that are based
on the Company's method of internal reporting, which 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, 2000 and 1999:
9
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues 1,936 78,052 9,130 12,839 (5,983) (1) 95,974
EBITDAR (2,412) 13,896 1,526 2,016 - 15,026
Total Assets 125,979 131,194 18,517 19,277 (31,030) (2) 263,937
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues 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
</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, 2000:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All
Corporate Facilities Services Other Total
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue 241 6 - 3 250
Interest expense (1,488) (1,367) (159) (189) (3,203)
Rent (361) (7,700) (127) (248) (8,436)
Depreciation and amortization (1,075) (1,390) (418) (148) (3,031)
Income tax benefit/(expense) 3,322 (2,171) (516) (999) (364)
Minority interest (net of tax) (62) - - - (62)
Net income (loss) (1,835) 1,275 303 437 180
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999:
(in thousands) Management Long-Term Rehabilitative
Services/ Care Therapy All
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 (394) (7,076) (135) (240) (7,845)
Terminated merger costs (600) - - - (600)
Cumulative effect of change
in accounting method (427) - - - (427)
Income tax benefit/(expense) 1,781 (1,466) 459 161 935
Minority interest (net of tax) (79) - - - (79)
Net income (loss) (3,112) 2,607 (661) (587) (1,753)
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
As of March 31, 2000, the Company had $81.2 million outstanding and
approximately $2.0 million available under its Senior Credit Facility with First
Union National Bank, 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.
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 3.25
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 expenses. 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
counterparities, 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, 2000, the estimated fair value of the
interest rate swap agreements based on current market rates, approximated a net
receivable of $620,000.
<PAGE>
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.
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 periods ended March 31, 2000 and 1999.
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.
As of March 31, 2000, the Company operated 100 owned, leased and managed skilled
nursing facilities with approximately 11,663 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, 2000, Centennial provided rehabilitation therapy services on a
contract basis to third-party owned and Company-operated skilled nursing
facilities in 22 states pursuant to 135 internal and external contracts and
provided home health care services through licensed home health offices
primarily in North Carolina.
<PAGE>
On February 25, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Hilltopper Acquisition Corp. ("Acquisition") a
wholly owned subsidiary of Hilltopper Holding Corp., ("Holding") which is a
wholly owned subsidiary of Warburg, Pincus Equity Partnership, L.P. ("Warburg").
Pursuant to the terms of the Merger Agreement, Acquisition began a cash tender
offer for all outstanding shares of the Company at $5.50 per share. Warburg must
beneficially own a minimum of 68.5% of the shares (on a fully diluted basis) as
a condition to the consummation of the tender offer. The tender offer is not
subject to contingencies but is subject to the approval of certain lenders,
lessors and governmental authorities and other conditions. A special committee
of independent directors of the Company recommended that the merger and tender
offer transactions be approved by the Board of Directors of the Company. The
Board of Directors approved the merger and tender offer transactions and
recommended that the shareholders approve the merger and tender their shares
pursuant to the tender offer. The Company's executive management and certain
private equity shareholders representing about 39.5 % of the Company's
outstanding shares will become shareholders of Holding and have agreed to vote
their shares in favor of the transaction. J. Stephen Eaton will remain as the
Company's chairman and chief executive. On May 2, 2000, Acquisition accepted
$6,179,862 shares for purchase pursuant to the tender offer, representing
approximately 51.8% of the outstanding shares of the Company's common stock.
Holding also contributed $15.0 million to the Company upon the closing of
the offer.
In January 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts, (the
"Flatley Facility Leases').
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 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% if 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 March 31,
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 the first quarter of 1999. The Company does not anticipate
any further accruals of merger costs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net patient service revenues. Net patient service revenues increased from $93.8
million in the first quarter of 1999 to $94.1 million in the same period in
2000, an increase of $300,000 or .3%. Revenues from the Company's nursing
facility segment increased from $77.3 million for the first quarter of 1999 to
$78.1 million in 2000, an increase of $800,000 or 1.0%. Occupancy decreased
from 88.5% to 84.8% and payor mix remained relatively constant
<PAGE>
during the periods ended March 31,1999 and 2000, respectively. The Company's
average revenue per patient day increased during the first quarter of 2000 as
compared to the prior period due to Medicaid rate increases in several states.
Revenues from Paragon Rehabilitation, Inc. ("Paragon"), the Company's subsidiary
providing therapy services, decreased by approximately $898,000 in the first
quarter of 2000 compared to the prior year period, due to the termination of
twenty primarily unprofitable external contracts subsequent to the first quarter
of 1999 offset in part by an increase in the average revenue per contract.
Management fees and other revenues. Management fees and other revenues decreased
from $2.3 million in the first quarter of 1999 to $1.8 million in the first
quarter of 2000, a decrease of $500,000, or 21.7%. Approximately $330,000 of
this decrease was due to the loss of six management contracts subsequent to the
first quarter of 1999. The remaining decrease was due to revenue recognized in
the first quarter of 1999 for the performance of additional services to managed
facilities during that period.
Facility operating expenses. Facility operating expenses decreased from $79.1
million in the first quarter of 1999 to $75.1 million in the same period in
2000, an decrease of $4.0 million or 5.0%. Same store nursing facility operating
expenses increased by approximately $300,000 in the first quarter of 1999
compared to the prior year period as a result of decreased costs, primarily
ancillaries, offset by increased labor costs. Operating expenses from Paragon
decreased by approximately $2.7 million in the first quarter of 2000 compared to
the prior year period, due to the continued cost-cutting measures put in place
by management in response to the decrease in revenues associated with the loss
of twenty external contracts subsequent to the first quarter of 1999 and
decreases in revenues from existing customers associated with contract
repricing.
Lease expense. Lease expense increased from $7.8 million in the first quarter of
1999 to $8.4 million in the first quarter of 2000, an increase of approximately
$600,000, or 7.6%, associated primarily with incremental increases in certain
facility lease agreements many of which fluctuate with changing interest rates.
Terminated merger transaction costs. During the quarter ended March 31, 1999,
the Company recorded approximately $600,000 in expenses associated with the
termination of the Proposed Merger.
Interest expense. Interest expense increased from $2.4 million in the first
quarter of 1999 to $3.2 million in the first quarter of 2000, an increase of
approximately $800,000, or 33.3%, which was primarily attributable to a 2.5%
increase in the average interest rate on the Senior Credit Facility.
Provision for income taxes. The Company's effective tax rate increased from
42.0% in the first quarter of 1999 to 60.0% in the first quarter of 2000, an
increase in the rate of 18.0%. This increase was primarily attributable to the
proportional increase in the effect of permanent differences on the Company's
pre-tax income.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during the first quarter of 2000 was
borrowings under its Senior Credit Facility with First Union National Bank and
Bank of America, N.A. ("Bank of America"), as agents and lenders and the other
lenders named therein, (the "Senior Credit Facility"). The Company anticipates
utilizing cash from operations 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 2000, the Company used $638,000 in cash to fund its
operating activities. This was comprised of cashflow before non-cash charges and
changes in assets and liabilities of approximately $3.9 million, an increase in
accounts receivable of approximately $2.2 million , an increase in prepaid
expenses of $782,000 and a decrease in accounts payable and accrued expenses of
$1.3 million. The increase in accounts receivable was primarily attributable to
increases in contract therapy and home health receivables. The decrease in
accounts payable and accrued expenses is primarily associated with the timing of
payments to lessors and compensation of employees.
Notes and other receivables from certain third party owners decreased by
approximately $687,000 million during the first quarter of 2000 related
primarily to repayment of managed facility advances. The Company continued to
invest in its leased and owned facilities through capital expenditures of
approximately $1.2 million or approximately $125 per bed for the three-month
period. These expenditures included the expansion of existing facilities and the
selected rehabilitation of certain facilities.
During the first quarter of 2000, the Company borrowed a net $6.2 million in
working capital loans under the Senior Credit Facility which were utilized
primarily to repay short term debt, finance capital expenditures at existing
facilities and to provide working capital. As of March 31, 2000, the Company had
$81.2 million outstanding and approximately $2.0 million available under its
Senior Credit Facility, net of issued standby letters of credit of approximately
$6.8 million.
In January 1999, the Company obtained a $5.0 million Line of Credit from Bank of
America, which bears interest at Bank of America's Prime rate or 2.75% over
Libor for selected portions. As of December 31, 1999, $5.0 million was
outstanding under this agreement. The Line of Credit with Bank of America
expired during the first quarter of 2000 and the outstanding balance was repaid.
The Company anticipates meeting its cash flow requirements in the remaining
three quarters of 2000 through the operation of its business, collection of past
due accounts receivable and borrowings under the Senior Credit Facility.
In connection with the Company's closing of the tender offer on May 2, 2000,
the Company received $15.0 million in cash contributions from Holding.
<PAGE>
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of March 31, 2000, the Company did not have any pending legal
proceedings that, based on current information and beliefs, separately
or in the aggregate, would be likely to have a material adverse effect
on the business or the results of operations of the Company. The
Company is, and may be in the future, party to litigation or
administrative proceedings which arise in the normal course of its
business.
On March 26, 1999, the Company received an investigatory subpoena from
the Department of Health & Human Services, Office of Inspector General,
requesting records in connection with an investigation of possible or
otherwise improper claims for payment under Title XVIII (Medicare) of
the Social Security Act. The request relates to records for the period
January 1, 1994 to present and relates to four long-term care
facilities operated by the Company. The Company is cooperating with the
investigation and is currently providing the requested records.
On February 28, 2000, Crandon Capital Partners filed a complaint in the
Superior Court of Fulton County, Georgia requesting certification as a
class action suit, for compensatory damages and injunctive relief
arising from that certain Agreement and Plan of Merger dated as of
February 25, 2000 between Hilltopper Holding Corp., Hilltopper
Acquisition Corp. and the Company. The complaint alleges that the
Company and its directors breached their fiduciary duty in connection
with the proposed merger by failing to conduct an auction or other
suitable market check, failing to consider other strategic alternatives
and accepting insufficient consideration. The Company has answered this
complaint, denying all allegations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
<PAGE>
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger between Hilltopper Holding Corp.,
Hilltopper Acquisition Corp. and the Company dated as of February 25,
2000 (incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form. 8-K filed March 10, 2000)
3.1 Third Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement of Form S-1, Registration No. 333-24267, as amended).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended).
4.1 Third Amended and Restated Articles of Incorporation of the Company,
included without limitation Article III and Article VII (incorporated
by reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1, Registration No. 333-24267, as amended).
27.1 Financial Data Schedule (for SEC use only)
99.1 Cautionary Statements
(b) Reports on Form 8-K
On March 10, 2000, the Company filed a Form 8-K reporting that the Company had
entered into an Agreement and Plan of Merger with Hilltopper Acquisition Corp.,
a wholly owned subsidiary of Hilltopper Holding Corp., which is an affiliate of
E.M. Warburg, Pincus & Co. , LLC. The Company also reported in this Form 8-K
that it had received a complaint that was filed in the Superior court of Fulton
County, Georgia by Crandon Capital Partners, requesting certification as a class
action suit, for compensatory damages and injunctive relief arising from the
Merger Agreement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 12, 2000 CENTENNIAL HEALTHCARE CORPORATION
By: /s/ J. Stephen Eaton
--------------------
J. Stephen Eaton, Chairman of the Board,
President and Chief Executive Officer
Date: May 12, 2000 By: /s/ Alan C. Dahl
----------------
Alan C. Dahl, Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger between Hilltopper Holding Corp.,
Hilltopper Acquisition Corp. and the Company dated as of February 25,
2000 (incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form. 8-K filed March 10, 2000)
3.1 Third Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement of Form S-1, Registration No. 333-24267, as amended).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended).
4.1 Third Amended and Restated Articles of Incorporation of the Company,
included without limitation Article III and Article VII (incorporated
by reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1, Registration No. 333-24267, as amended).
27.1 Financial Data Schedule (for SEC use only)
99.1 Cautionary Statements
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,024
<SECURITIES> 0
<RECEIVABLES> 79,260
<ALLOWANCES> (6,986)
<INVENTORY> 0
<CURRENT-ASSETS> 85,977
<PP&E> 102,072
<DEPRECIATION> (27,061)
<TOTAL-ASSETS> 263,937
<CURRENT-LIABILITIES> 52,897
<BONDS> 114,032
0
0
<COMMON> 119
<OTHER-SE> 88,224
<TOTAL-LIABILITY-AND-EQUITY> 87,993
<SALES> 95,974
<TOTAL-REVENUES> 95,974
<CGS> 0
<TOTAL-COSTS> (92,415)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,203)
<INCOME-PRETAX> 606
<INCOME-TAX> (364)
<INCOME-CONTINUING> 180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180
<EPS-BASIC> 0
<EPS-DILUTED> 0.02
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" constitute "Forward-Looking Statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "1933 Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act").
The Company desires to take advantage of certain "safe harbor" provisions of the
1933 Act and 1934 Act and is including this reference to enable the Company to
do so. Forward-looking statements included in this Form 10-Q or in documents
incorporated by reference, or hereafter included in other publicly available
documents filed with the Securities and Exchange Commission, reports to the
Company's stockholders and other publicly available statements issued or
released by the Company involve known and unknown risks, uncertainties, and
other factors which could cause the Company's actual results, performance
(financial or operating) or achievements to differ materially from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward-looking statements. The Company believes the following
risks, uncertainties and other factors could cause such material differences to
occur:
1. The Company's ability to continue to grow through the acquisition and
development of long-term care facilities or the acquisition of ancillary
businesses.
2. The Company's ability to identify suitable acquisition candidates or to
profitably operate or successfully integrate acquired operations into the
Company's other operations.
3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.
4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.
5. Changes in the United States health care system, including the Balanced
Budget Act of 1997, changes in reimbursement levels under Medicaid and Medicare,
and other changes in applicable government regulations that might affect the
profitability of the Company.
6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a number of
potentially adverse consequences, such as the imposition of fines, temporary
suspension of admission of patients, restrictions on the ability to acquire new
facilities, suspension or decertification from Medicaid or Medicare programs,
and in extreme cases, revocation of a facility's license or the closure of a
facility, including as a result of unauthorized activities by employees.
<PAGE>
7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and development,
as well as internal growth.
8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the Company
currently operates or anticipates operating in the future.
9. Changes in federal or state legislation or budgetary controls that may
negatively impact the amount and method of Medicaid payments, especially in
North Carolina, Michigan and Indiana, in which states a majority of the
Company's facilities are located.
10. The Company's ability to staff its facilities appropriately with qualified
health care personnel (including administrators), including in times of
shortages of such personnel and to maintain a satisfactory relationship with
labor unions.
11. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home health care and changes in
the regulatory system in the states in which the Company operates that
facilitate such competition.
12. The continued availability of insurance for the inherent risks of liability
of providing services in the health care industry.
13. Price increases in medical supplies, durable medical equipment and other
items.
14. The Company's reputation for delivering high-quality care and its ability
to attract and retain patients, including patients with relatively high acuity
levels.
15. Changes in general economic conditions, including changes that pressure
governmental reimbursement sources to reduce the amount and scope of health care
coverage.
16. The Company's ability to achieve required reductions in expenses or reach
required levels of revenue as PPS is fully implemented.
17. The assertion of liabilities and claims against the Company, including the
outcome of the pending investigation by the Department of Health and Human
Services, office of Inspector General.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
