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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For annual and transition reports pursuant to sections 13 or 15 (d) of the
Securities Exchange Act of 1934.
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-22771
CENTENNIAL HEALTHCARE CORPORATION
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1839701
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 770-698-9040
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
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Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
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this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 2000 was approximately $61.9 million. As of March 31,
2000, the registrant had 11,923,618 shares of Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
Part I
Page
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Item 1. Business.................................................... 5
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters......................................... 23
Item 6. Selected Consolidated Financial Data........................ 24
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations........................ 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 34
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures........................ 34
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 43
Item 13. Certain Relationships and Related Transactions.............. 45
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 46
Signatures........................................................... 48
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Item 1. BUSINESS.
Certain statements in this Form 10-K under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in certain documents incorporated by reference herein constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). Those statements include
statements regarding the intent, belief or current expectations of Centennial
HealthCare Corporation and members of its management team. Management cautions
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements are set forth in
the Safe Harbor Compliance Statement included as Exhibit 99.1 to this Form 10-K,
and are hereby incorporated herein by reference. Centennial HealthCare
Corporation undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
Centennial HealthCare Corporation ("Centennial" or the "Company") provides a
broad range of long-term healthcare services to meet the medical needs of
elderly and post-acute patients. The Company provides these services through
geographically concentrated networks located in metropolitan and secondary
markets throughout the United States. The Company was organized in 1989 as a
Georgia corporation and conducts business through its operating subsidiaries. At
December 31, 1999, Centennial operated 100 owned, leased and managed skilled
nursing facilities with 10,663 licensed available beds in 21 states and the
District of Columbia, with its largest concentration of facilities in North
Carolina, Indiana and Michigan. The Company provides basic and specialty
healthcare services. Basic services include skilled nursing and support,
housekeeping, laundry, dietary, recreational and social services. Specialty
services include comprehensive rehabilitation therapy, respiratory therapy,
infusion therapy, wound care, home health care and other subacute and specialty
services. As components of its specialty services, at December 31, 1999,
Centennial provided rehabilitation therapy services on a contract basis to
third-party owned and Company-operated skilled nursing facilities in 21 states
and the District of Columbia pursuant to 130 contracts and provided home health
care services through home healthcare offices located primarily in North
Carolina. References to the Company or Centennial also include the Company's
subsidiaries unless the context indicates otherwise.
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COMPANY GROWTH
As part of its growth strategy, the Company has regularly reviewed possible
acquisitions within the long-term care continuum. Effective December 31, 1995,
the Company completed an important strategic acquisition by merging with
Transitional Health Services, Inc. ("THS") which operated 36 skilled nursing
facilities with 3,776 licensed available beds in Arkansas, North Carolina,
Indiana, Kentucky and Michigan and a contract rehabilitation therapy business
(the "THS Merger"). Since the THS Merger, through December 31, 1999, the Company
continued to expand its operations through the acquisition of a company
providing home health care services, the acquisition of a contract
rehabilitation therapy company providing therapy services to affiliated and
third-party skilled nursing facilities, the lease of 17 skilled nursing
facilities, and the lease of two rural acute-care hospitals which are located in
markets where the Company operates skilled nursing centers. Additionally, the
Company added a net 11 management agreements for skilled nursing facilities
totaling 1,668 licensed available beds, and the management of a rural acute care
hospital located in Florida.
On February 25, 2000, Centennial entered into a merger agreement with
Hilltopper Holding Corp. ("Holding"), a wholly-owned subsidiary of Warburg,
Pincus Equity Partners, L.P. ("WPEP"), and Holding's wholly-owned subsidiary,
Hilltopper Acquisition Corp. ("Acquisition"). Pursuant to the merger
agreement, Acquisition commenced an all cash tender offer for all of the
outstanding shares of Centennial's common stock (the "Common Stock") on March
17, 2000. On April 14, 2000, Acquisition extended the tender offer until May 1,
2000 to allow Centennial to obtain certain required consents and approvals to
the transaction.
The merger agreement provides that, after the consummation of the tender
offer, Acquisition will merge with and into Centennial with Centennial surviving
and becoming a wholly-owned subsidiary of Holding. The transaction will result
in Centennial becoming a privately held company and no longer subject to the
disclosure requirements of the Securities Exchange Act of 1934, as amended
("Exchange Act"). On March 17, 2000, Centennial, Holding, Acquisition and
members of Centennial's senior management filed a Schedule TO with the
Securities and Exchange Commission that describes the proposed transaction in
detail and the reasons for the transaction and provides other information about
the transaction. Five significant shareholders of Centennial, seven general
partners of the general partner of one of these shareholders and four members of
Centennial's senior management are contributing all or some portion of their
shares of Common Stock for shares of Holding preferred stock and will continue
to have an equity interest in Centennial after the transaction. In addition,
the members of senior management will enter into employment agreements with the
surviving corporation and receive stock options to acquire Holding common stock.
1999 ACQUISITIONS, DISPOSITIONS AND LEASE TRANSACTIONS
On January 1, 1999, the Company acquired a leasehold interest in six skilled
nursing facilities with 795 beds located in Massachusetts and one, 68-bed
skilled nursing facility located in Mississippi. The latter facility also has 22
licensed acute care hospital beds.
Also on January 1, 1999, the Company acquired a leasehold interest in a 130-bed
nursing facility located in Mississippi. This facility was previously managed
by the Company.
In June 1999, the Company terminated its lease agreement on a 81-bed skilled
nursing facility in Kansas.
In December 1999, the Company transferred three skilled nursing facilities with
243 beds located in Florida and Michigan and terminated its lease on a 117 bed
skilled nursing facility located in North Carolina. The Company retained
management on these facilities. (See Item 13)
1998 ACQUISITIONS AND LEASE TRANSACTIONS
In August 1998, the Company began leasing four skilled nursing facilities
totaling 349 licensed available beds, located in Mississippi, North Carolina,
Arkansas and Wisconsin. One of these facilities was previously managed by the
Company. In October 1998, the Company began leasing six skilled nursing
facilities totaling 608 licensed available beds, located in Florida, Arkansas,
Kansas and Wisconsin.
In November 1998, the Company began leasing four skilled nursing facilities
totaling 675 licensed available beds, located in Florida and Missouri.
1997 ACQUISITIONS AND LEASE TRANSACTIONS
Effective May 1, 1997, the Company acquired by merger Total Care Consolidated,
Inc., a provider of home health care services in North Carolina, where the
Company operated 11 facilities as of December 31, 1999, as well as South
Carolina and Louisiana.
In August 1997, the Company acquired substantially all of the business and
assets of Complex Care, Inc., a provider of physical, occupational, and speech
therapy services through rehabilitation contracts with third-party long-term
care facilities in Connecticut and Rhode Island. Combined with the Company's
existing contract rehabilitation therapy business, at December 31, 1999 the
Company provided rehabilitation services pursuant to 130 contracts in 22 states
and the District of Columbia, to Company-operated and third-party-owned
facilities.
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In March 1997, the Company assumed the management of a 29-bed rural, acute-
care hospital in northern Florida where the Company currently operates a nursing
home facility and another rural hospital. Following the receipt of necessary
consents and approvals, the management of this facility was converted into a
lease of the facility retroactive to the date of the original management
agreement.
In December 1997, the Company acquired a 58-bed long-term care facility in
Florida that had been managed by the Company since 1991.
As a result of the acquisitions referenced above, Centennial has increased its
range of services in markets in which the Company already has a strong operating
presence.
MANAGEMENT AGREEMENTS
The Company's growth strategy has also included the management of long-term
care facilities for third-party owners. Most management agreements provide for a
management fee equal to 6% of the facility's gross revenues with terms ranging
from 5 to 20 years, including renewal options. Additionally, the Company
generally has a right of first refusal or option to purchase its managed
facilities. This strategy has allowed the Company to evaluate the operations of
potential acquisition candidate facilities prior to acquisition. During 1999,
the Company added two and terminated seven skilled nursing facility management
contracts with 188 and 917 licensed available beds, respectively. During 1998,
the Company added nine skilled nursing facility management contracts, totaling
1,157 licensed available beds. During 1997, the Company added eight skilled
nursing facility management contracts, totaling 783 licensed available beds.
THE LONG-TERM CARE INDUSTRY
The long-term care industry provides a broad range of services to postacute
patients and patients with medically complex and special needs who do not
require treatment in an acute care hospital setting. Long-term care facilities
offer basic services, which include skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. In addition, long-term care
facilities may provide a broad range of specialty services such as comprehensive
rehabilitation therapy (including physical, occupational and speech therapy),
respiratory therapy, ventilator care, infusion therapy, wound care, home health
care, tracheostomy care, pharmaceutical services, Alzheimer's care and other
specialty services. Long-term care facilities are increasingly becoming an
integral part of community-based, vertically-integrated, extended care delivery
systems that are capable of providing a full range of traditional basic and
specialty services.
In recent years, long-term care services have experienced significant growth.
According to industry sources, revenues in the long-term care industry have
increased from approximately $18 billion in 1980 to approximately $80 billion in
1995. However, in 1999, changes in the Medicare program to a prospective payment
system caused a severe financial impact on long-term care providers.
Implementation of this new prospective payment system resulted in spending
reductions under the Medicare program of approximately $16 billion.
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INDUSTRY CONSOLIDATION
The long-term care industry is undergoing consolidation as providers seek to
build market share and compete more effectively. Current ownership of long-term
care facilities is highly fragmented, with approximately 70% of all facilities
owned by independent providers or companies operating less than 20 facilities.
The increased burdens of various cost-containment measures, increasing acuity of
long-term care patients and increasing complexity of government regulation pose
significant challenges to long-term care providers. In addition, there is a
limited supply of long-term care facilities due to the following factors: (i)
state Certificate of Need ("CON") legislation, which restricts the number of
facilities that can be constructed within a market; (ii) high construction
costs; (iii) limitations on government reimbursement for the full cost of
construction; and (iv) extensive start-up expenses. As a result of these
factors, providers that have a strong reputation within the community for
providing high quality service have become attractive acquisition targets for
providers seeking to reach critical mass.
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PATIENT SERVICES
The Company provides basic and specialty health care services as described
below.
BASIC SERVICES
Basic services are those traditionally provided to elderly patients in long-
term care facilities, including skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. The Company provides 24-hour
skilled nursing care by registered nurses, licensed practical nurses and
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certified nursing aides in all of its facilities. Each facility is managed by a
licensed administrator who is responsible for the day-to-day operation of the
facility. Although treatment of patients is the responsibility of their own
attending physicians, who are not employed by the Company, each facility engages
a physician medical director who monitors the delivery of care. In addition,
each facility offers a number of individualized therapeutic activities designed
to enhance the quality of life of its patients. These activities include
entertainment events, musical productions, trips, arts and crafts, volunteer and
other programs that encourage social interaction among patients as well as
community involvement.
SPECIALTY SERVICES
Specialty services are those provided to patients with medically complex
needs, who generally require more complex treatment and a higher level of
skilled nursing care. These services typically generate higher revenues per
patient day than basic services as a result of the higher costs associated with
treating a higher-acuity patient. Set forth below are descriptions of some of
the specialty services offered by the Company.
REHABILITATION THERAPY. The Company provides a broad range of rehabilitation
therapy services to its facilities and other third-party providers. These
services include physical, occupational and speech therapy in the long-term care
facility setting. As of December 31, 1999 the Company had contracted to provide
rehabilitation therapy services to patients in 130 facilities, 61 of which are
owned or leased by the Company.
SUBACUTE CARE. Within certain of its long-term care facilities, the Company
provides subacute care services that are dedicated to the care of medically
complex residents who do not require the services of an acute care hospital.
Subacute services provided or arranged by the Company's facilities include, but
are not limited to, ventilator care, respiratory care, traumatic injury
recuperation, post-cardiac rehabilitation, IV therapy, wound care, post- stroke
care, hospice care, post-surgical orthopedic rehabilitation and peritoneal
dialysis services.
HOME HEALTH CARE. At December 31, 1999, Centennial operated home health care
offices in North Carolina, South Carolina and Louisiana, affording the
recipients of such care an alternative to a hospital or long-term care facility
setting. Such services delivered into the home setting include skilled nursing,
physical, occupational and speech therapy and subacute care. In addition,
personal care services are available from home health care aides who assist
patients with their activities of daily living. Centennial provides home health
care primarily in markets where it has long-term care facilities.
OPERATIONS
The Company's facilities are organized into operating regions and the
Company's organizational structure and operations support staff provide its
facilities with the resources needed to operate effectively in these regions.
Each region has nurse consultants with responsibility for providing guidance on
patient care issues, conducting quality assurance audits, training in clinical
software and assuring compliance with applicable state and federal regulations.
The Company provides additional operational support through a corporate team of
professionals in financial accounting, reimbursement, managed care pricing,
quality assurance, human resources, regulatory compliance, marketing, health
systems development and other areas.
For all of its facilities, the Company actively manages personnel costs, which
represent the largest expense incurred in the operation of a long-term care
facility. The Company emphasizes attracting and retaining quality personnel,
including administrators and skilled nursing staff, through a number of programs
which include on-going training and education classes, employee recognition
programs, and competitive wages and benefits. In addition, the Company has an
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incentive program for administrators and other key personnel based on the
achievement of certain Company goals related to quality of care and financial
performance.
ACQUISITIONS
The Company has maintained an acquisition program in order to increase its
penetration of existing regions and to capitalize on the consolidation trends in
the long-term care industry. During 1999, the Company's limited access to
capital placed significant restrictions on its ability to pursue acquisitions.
The Company evaluates potential acquisitions on the basis of existing
profitability, long-term profit potential, specialty services opportunities,
facility location, payor mix and patient census. Specifically, the Company
targets facilities that have the capacity to be leading providers of higher-
acuity services in their respective markets and that represent opportunities for
the Company to realize additional operating leverage through regional economies
of scale and provide more profitable specialty services. In addition, the
Company enters management agreements with certain facilities that generally
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include a right of first refusal to acquire these facilities. In many cases
managed facilities have presented acquisition opportunities. As of December 31,
1999, the Company leased or owned 16 facilities that it previously managed.
FACILITIES
At December 31, 1999, Centennial operated owned, leased and managed skilled
nursing facilities with 10,663 licensed available beds in 21 states and the
District of Columbia. Of this number, Centennial owned 6 facilities with 654
beds, leased 64 facilities with 7,008 licensed available beds and managed 30
facilities with 3,001 licensed available beds. At December 31, 1999, the
Company's facilities had an average of 104 beds and an average occupancy rate of
86.1%.
The following table lists the Company's owned, leased and managed facilities
by location, including the number of licensed available beds and the occupancy
rate as of December 31, 1999:
<TABLE>
<CAPTION>
Facilities
Number of -------------------------- Occupancy
State Beds Owned Leased Managed Total % (1)
- ----- --------- ----- ------ ------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Arkansas 337 4 - 4 64.1%
District of Columbia 296 1 - 1 96.5%
Florida 598 3 4 7 89.0%
Georgia 157 1 - 1 94.0%
Idaho 165 2 - 2 77.9%
Indiana 1,150 12 - 12 85.1%
Kansas 365 2 2 4 84.1%
Kentucky 356 1 2 - 3 89.9%
Louisiana 376 1 3 - 4 83.1%
Massachusetts 795 6 - 6 93.9%
Michigan 1,270 1 7 5 13 89.6%
Missouri 440 2 - 2 81.8%
Mississippi 696 7 - 7 96.2%
Montana 99 1 - 1 93.5%
North Carolina 2,355 2 8 13 23 81.8%
Nebraska 158 1 - - 1 80.2%
New Mexico 119 - - 1 1 93.6%
Tennessee 119 - - 1 1 97.9%
Texas 107 1 - 1 92.9%
Virginia 174 - - 2 2 95.8%
Washington 104 - - 1 1 59.1%
Wisconsin 427 2 1 3 78.2%
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Totals 10,663 6 64 30 100 86.1%
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</TABLE>
(1) Occupancy is computed by dividing actual patient day census by actual
patient days available in licensed available operating beds and does not
include facilities in the start-up phase during 1999, which include two
managed facilities located in Indiana, Jennings Healthcare and Owen Valley
Healthcare.
LEASED FACILITIES. At December 31, 1999, the Company leased 64 skilled nursing
facilities pursuant to long-term leases with various lessors. The Company's
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lease arrangements are "triple net" leases, requiring the Company, at its own
expense, to maintain the premises and pay taxes, utilities and insurance. In
most cases, the leases are subordinate to certain security interests in the
facilities granted by the lessors to third-party lenders. Centennial has a right
of first refusal or options to purchase most of the leased facilities.
These leases generally have initial terms of ten to 20 years with options to
extend, and lease rates with annual increases tied to fixed schedules, the
Consumer Price Index, or changes in the interest rates.
In 1999, the Company terminated leases at a 117 bed skilled nursing facility
in North Carolina and a 81 bed skilled nursing facility in Kansas. The Company
continued to manage the North Carolina facility.
MANAGED FACILITIES
At December 31, 1999, the Company operated 30 facilities under long-term
management contracts with third parties. Revenues from management contracts
accounted for approximately 2.6% of the Company's total revenues for the fiscal
year ended December 31, 1999. Pursuant to these management contracts, the
Company performs day-to-day management functions and provides certain corporate
services, including group contract purchasing, employee training and
development, quality assurance audits, human resource management, assistance in
obtaining third-party reimbursement, financial and accounting functions, policy
development, system design and development, and marketing support. The Company's
information system monitors certain key data for each managed facility, such as
payroll, admissions and discharges, cash collections, net patient service
revenues, staff trend analysis, and measurement of operational data on a per
patient day basis. These management agreements typically have initial terms
ranging from five to 20 years and that can be terminated only for cause. Each
such management agreement provides for monthly fees generally at six percent of
gross revenues. Certain of the agreements provide for the subordination of the
management fees to the payment of the owner's debt service. The Company has a
right of first refusal to acquire certain of these managed facilities.
During 1999, the Company terminated management agreements on six facilities
that it managed for third parties. These six facilities were leased by these
third parties and the leases were terminated.
CONTRACT REHABILITATION SERVICES. At December 31, 1999, Centennial provided
contract rehabilitation services under 130 contracts in facilities in 22 states
and the District of Columbia. Sixty one of the agreements are with the Company's
owned or leased facilities. Most of these agreements have initial terms of five
years with automatic renewal provisions for five successive additional terms of
five years each, unless terminated earlier upon 90 days prior notice, and are
subject to termination without cause upon 60 days prior written notice. Pursuant
to these agreements, the Company provides comprehensive rehabilitation services,
including physical, occupational and speech therapy. In addition, the Company
provides administrative services including policy formulation, licensure
compliance, training, staffing, quality control, financial report preparation
and patient census preparation. The Company bills for these services at rates
set forth in the therapy services agreement. The rate may be in the form of (1)
per diem rates based upon a specified percentage of the therapy component of the
RUG rate, (2) a per minute charge, (3) a percent of HCFA established fee
schedules, or (4) other negotiated fee structure.
COMPETITION
The Company expects that it will face increasing levels of competition with
respect to its operations and the services it provides. The Company competes for
patients with other long-term care facilities and, to a lesser extent, with
acute care hospitals, physician practice groups, home health care providers,
community-based service programs, retirement communities and assisted living
<PAGE>
centers. In addition, competition may grow from new market entrants, including
companies focusing primarily on specific components of the Company's various
services. Certain competing companies have greater financial and other resources
and may be more established in their respective communities than the Company.
Competition for subacute care patients is increasing by virtue of market entry
of other health care providers, such as acute care hospitals, rehabilitation
hospitals and other specialty service providers. The competitive factors that
distinguish subacute providers include the degree of acuity for which care can
be provided. The Company believes that its subacute care facilities are
characterized by a high level of acuity in patient care provided. Other
important competitive factors include the reputation of the facility in the
community, the services offered, the availability of qualified nurses, local
physicians, hospital support, rehabilitation therapists and other personnel, the
appearance of the facility and the cost of services.
SOURCE OF REVENUES AND PAYOR MIX
The Company derives its revenues primarily from various state Medicaid
programs for indigent patients, the Medicare program for certain elderly and
disabled patients, private pay sources, rehabilitation therapy services offered
to third-party long-term care facilities and management fees. The Company
employs reimbursement specialists and retains outside reimbursement consultants
to monitor reimbursement rules, policies and related developments in order to
comply with reporting requirements and to assist the Company in receiving
reimbursements.
The following table sets forth the percentage of total revenues by payor
source for the Company for the periods indicated:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------
Percentage of Total Revenues 1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Medicare................................................... 21.2% 23.9% 23.8% 25.4% 18.2%
Private pay, management fees and other (1)................. 35.2% 42.7% 39.6% 31.8% 23.7%
----- ----- ----- ----- -----
56.4% 66.6% 63.4% 57.2% 41.9%
Medicaid................................................... 43.6% 33.4% 36.6% 42.8% 58.1%
----- ----- ----- ----- -----
Total...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
____________
(1) Private pay includes payments from third parties pursuant to contract
rehabilitation therapy services.
MEDICARE (PRIOR TO JANUARY 1, 1999). The Medicare program consists of two
parts. Part A covers inpatient hospital services and certain services furnished
by other institutional providers, such as skilled nursing and long-term acute
care facilities. Part B covers the services of doctors, suppliers of medical
items, various types of outpatient services including physical, speech and
occupational therapy, pharmaceuticals and medical supplies, certain intensive
rehabilitation and psychiatric services and ancillary services of the type
provided by long-term care or acute care facilities. Medicare does not provide
reimbursement for community-based, intermediate-care nursing facilities.
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Under the Medicare Part A program, the Company is reimbursed for its direct
costs plus an allocation of indirect costs up to a facility specific limit (the
"routine cost limit"). As the Company has expanded its post-acute care and other
specialty services, the costs of care for these patients have exceeded the
reimbursement routine cost limits. Under current regulations, new long-term care
facilities are, in certain limited circumstances, able to apply for a three-year
exemption from routine cost limits. Unless and until such exemptions are
granted, these facilities can recover excess costs only through routine cost
limit exception requests. There can be no assurance that the Company will be
able to recover such excess costs under any pending or future requests. Payment
for Medicare Part B services depends on the nature of the services provided.
Some services are reimbursed at cost, much like Part A services. Other services,
particularly parenteral and enteral nutrition therapy, are reimbursed on a fee
schedule.
MEDICARE (SUBSEQUENT TO JANUARY 1, 1999).
Under provisions of the Balanced Budget Act of 1997, reimbursement under
Medicare Part A and B were transformed through the implementation of a
Prospective Payment System ("PPS"). The Medicare PPS is based upon standardized
payments for 45 separate classifications of patients. Patients are classified
based upon acuity and specialty service needs as documented on the Minimum Data
Set ("MDS"). Periodic reassessment of patients is required on a set schedule to
determine whether the patient is in the correct Resource Utilization Group
("RUG")category as well as when a Medicare resident's condition changes. A
facility receives payment under Medicare based upon each patient's RUG category.
As a result, accurate classification of each patient into his or her appropriate
RUG category is crucial to the facility receiving the appropriate payment for
services provided to that patient.
The PPS rates, which reimburse for routine service, ancillary and capital costs,
are established through a blend of (i) a facility-specific payment rate derived
from each facility's 1995 cost report, adjusted by an inflation factor and (ii)
a federal per diem rate derived from all hospital-based and free-standing
(skilled nursing facility) 1995 cost reports, adjusted to remove geographic,
wage-related, inflationary and case mix differences between facilities. Based
upon resource utilization weights established by HCFA, each of the 45 categories
is adjusted to reflect the average anticipated cost associated with the
resources utilized.
The Medicare prospective payment system began for cost reporting periods
starting on or after July 1, 1998. For the majority of the Company's facilities,
the Initial Year of the four-year phase in period began January 1, 1999. For
facilities acquired by the Company in fiscal 1998, the Initial Year for the PPS
system began from the date of acquisition through December 31, 1998. Year Two
of the PPS system was fiscal 1999 for these nursing centers. The Initial Year
blended rates were based 75% on the facility-specific rate and 25% on the
federal per diem rate. The Year Two prospective rates are based 50% on the
facility-specific rate and 50% on the federal per diem rate. The Year Three
blended rates are based 25% on the facility-specific rate and 75% on the federal
per diem rate. The Year Four prospective rate is 100% of the standardized
federal per diem rates. Overall, the rates received by the Company at its
facilities under PPS are less than rates previously received by the Company
under the "cost based" reimbursement system, and the per diem rates paid for a
patient in a particular RUG category may not necessarily cover the cost of care
for that patient.
MEDICARE (SUBSEQUENT TO JANUARY 1, 2000).
The Balanced Budget Relief Act of 1999 ("BBRA") revised certain provisions of
the Medicare PPS to provide relief to SNFs. Effective with cost reporting
periods beginning on or after December 31, 1999, SNFs may elect an immediate
transition to PPS Year Four, 100% federal per diem rates. This election
positively impacts SNFs with 1995 base year costs that are below the average
federal per diem rates. Centennial elected this immediate transition at 21
Managed and 36 Owned or Leased facilities.
<PAGE>
In addition to the full federal transition, the BBRA provides for additional
funding for certain nontherapy ancillary services. Effective April 1, 2000, 15
of the 45 Resource Utilization Groups (RUG) federal rates will be temporarily
increased by 20% to account for the high costs of these nontherapy ancillaries.
HCFA has continued to study this issue and is expected to issue revisions to the
regulations and RUG model to permanently address the nontherapy ancillaries.
These regulations are anticipated to be issued in the second quarter of 2000
with an effective date of October 1, 2000.
The BBRA also addressed concerns that the inflation factors utilized to roll
1995 costs forward to current rate periods were lower than the actual cost
increases over the same time period. As a result, all 45 federal RUG rates will
receive an additional 4% rate increase, above anticipated inflation,
effective October 1, 2000.
PRIVATE PAY, MANAGEMENT FEES AND OTHER. Private pay and other revenues include
payments from individuals who pay directly for services without governmental
assistance and payments from commercial insurers, HMOs, PPOs, insurance
organizations, workers' compensation programs, hospice programs and other
similar payment sources. The Company's rates for private pay patients are higher
than rates for patients eligible for assistance under state Medicaid programs.
These private pay rates are established on a facility-specific basis in
accordance with market factors, including rates charged by other providers in
the local market.
MEDICAID. Medicaid includes the various state-administered reimbursement
programs for indigent patients created by federal law. Although reimbursement
rates vary from state to state, the federal government retains the right to
approve or disapprove individual state plans. Providers must accept
reimbursement from Medicaid as payment in full for the services rendered,
because the provider may not bill the patient for more than the amount of the
Medicaid payment received. Criteria for Medicaid eligibility varies from state
to state, subject to guidelines from the federal government for determining
whether a person qualifies as medically indigent and subject to changes in state
and federal regulations.
Many of the residents at the Company's facilities who initially have services
paid by Medicare, private pay or insurance sources are later covered by Medicaid
as their benefits and financial resources are depleted to a level of financial
net worth and income which makes them eligible for Medicaid.
With the exception of two facilities, all of the facilities operated by the
Company participate in state Medicaid programs. Basic long-term care services
are provided to Medicaid patients, including nursing, dietary, housekeeping and
laundry, restorative health care services, room and board and medications.
Medicaid does not cover the cost of private rooms, private-duty nurses and other
costs, or amounts in excess of the Medicaid reimbursement rates. The Balanced
Budget Act of 1997 requires states to use a public notice and comment process in
determining rates for hospital services, nursing facility services and services
of intermediate care facilities and services for the mentally retarded (but not
for home and community care). Under this process, states will be required to
publish in proposed and final form the rates, rate methodologies, and
justifications for the rates of hospitals, nursing facilities, and intermediate
care facilities and for the services for the mentally retarded. Likewise, states
must furnish interested parties with a reasonable opportunity to comment on the
proposed rates, rate methodologies, and justifications. States also must take
into account during the hospital rate-setting process the situation of hospitals
which serve a disproportionate number of low-income patients with special needs.
Furthermore, payments must be sufficient to enlist enough providers so that
services under the state's Medicaid plan are available to recipients at least to
the extent that those services are available to the general population.
Reimbursement rates generally are determined by the state from "cost reports"
filed annually by each facility, on both a prospective and retrospective basis.
There can be no assurance, however, that payments under Medicaid programs will
be sufficient
<PAGE>
to cover the costs allocable to patients eligible for reimbursement pursuant to
such programs.
Cost reports are subject to routine audits by government regulatory bodies on
an annual or periodic basis and several of the Company's facilities are
currently involved in the audit process. In the event of a determination by such
a regulatory body that the amount of reimbursement exceeded allowable
reimbursement levels, the Company may be required to repay any excess amount.
Although the Company believes it has adequately provided for any repayment
obligations, there can be no assurance that such provisions will be adequate.
CONTRACT REHABILITATION SERVICES. In general, the Company classifies payments
for rehabilitation therapy services received directly from third-party long-term
care facilities as private pay. Revenues from rehabilitation therapy services
provided to Company-operated facilities are included in the Medicare, Medicaid
and private pay sources of revenues of the Company. The Company's charges to
non-affiliates, though not directly regulated, are effectively limited by
regulatory reimbursement policies imposed on the long-term care facilities that
receive these services, as well as competitive market factors.
HOME HEALTH SERVICES. The BBA mandated a change in the payment methodology for
Medicare Home Health services. Currently, Medicare covered Home Health Services
are reimbursed on an Interim Payment System ("IPS"). For cost reporting periods
beginning on or after October 1, 1997, the Act requires home health agencies to
be reimbursed the lesser of (1) actual costs, (2) per visit limits, reduced to
105% of the national median, or (3) a new blended agency-specific per
beneficiary annual limit applied to the agency's unduplicated census count of
Medicare patients, and based on 98% of 1994 costs, trended forward and phased in
over four years, (similar to long-term care provisions).
Effective on October 1, 2000 the IPS is expected to be replaced with a
prospective system based upon a per case assessment classification payment.
Payment will be made for a fixed coverage period of 60 days and be based upon
patient assessment data ("OASIS"). The OASIS data will classify patients into
one (1) of eighty (80) acuity based patient classifications based upon resources
needed ("HHRG"). Each HHRG classification has a related case rate that will be
paid to cover all home health services provided during a beneficiary's coverage
period.
Payment rates under the new prospective system will be set using federal rates.
The federal rates will be established using costs for all home health agencies
from cost reports ending in federal fiscal year 1997. These federal rates will
be adjusted by inflation and labor indices to reflect differences in local wage
costs. Currently, the federal government has not provided sufficient regulations
and guidelines to allow for a reasonable analysis of the effect of this new
prospective reimbursement system.
For the year ended December 31, 1999 Centennial derived 7.1% of its revenues
from home health care.
MEDICARE AND MEDICAID. The Medicare and Medicaid programs are subject to
various statutory and regulatory changes which may adversely affect the
Company's business. There can be no assurance that payments for services and
supplies under governmental reimbursement programs will remain comparable to
present levels.
Various state Medicaid programs periodically experience budgetary shortfalls
which may result in Medicaid payment delays to the Company. In addition, the
failure, even inadvertent, of the Company to comply with applicable
reimbursement regulations could adversely affect the Company's business.
Although there can be no assurance that future adjustments will not have a
material adverse effect on the Company, the Company believes that it has
properly applied the various payment formulas and that it is not likely that
audit adjustments would have a material adverse effect on the Company. In 1990
and 1993, Congress passed legislation ("OBRA" and "OBRA 93") revising Medicare
<PAGE>
nursing standards and reimbursement and methods for nursing homes. Although the
Company believes that it is in substantial compliance with the current
requirements of OBRA and OBRA 93, it is unable to predict how future
interpretation and enforcement of regulations promulgated under OBRA and OBRA 93
by the state and federal governments could affect the Company in the future.
Effective July 1, 1995, the Health Care Financing Administration ("HCFA")
promulgated new survey, certification and enforcement rules governing long-term
care facilities participating in the Medicare and Medicaid programs, which
impose significant new requirements on long-term care facilities. The breadth of
the new rules creates uncertainty over the manner in which the rules will be
implemented, the ability of any long-term care facility to comply with them and
the effect of the new rules on the Company.
Under the rules, unannounced standard surveys of facilities must be conducted
at least once every 15 months with a statewide average of 12 months. In addition
to the standard survey, survey agencies have the authority to conduct surveys as
frequently as necessary to determine whether facilities comply with
participation requirements, to determine whether facilities have corrected past
deficiencies and to monitor care if a change occurs in the ownership or
management of a facility. Furthermore, the state survey agency must review all
complaint allegations and conduct a standard or an abbreviated survey to
investigate such complaints if a review of the complaint shows that a deficiency
in one or more of the Federal requirements may have occurred and that only a
survey will determine whether a deficiency or deficiencies exist. If a facility
has been found to furnish substandard care, it is subject to an extended survey.
The extended survey is intended to identify the policies and procedures that
caused a facility to deliver substandard care.
HCFA's rules substantially revise provisions regarding the enforcement of
compliance requirements and remedies for long-term care facilities with
deficiencies. At a minimum, the following remedies are available: termination of
provider agreement; temporary management; denial of payment for new admissions;
civil money penalties; closure of the facility in emergencies or transfer of
patients or both; and on-site state monitoring. States may also adopt optional
remedies. The rules divide remedies into three categories. Category I remedies
include directed plans of correction, state monitoring and directed in-service
training. Category 2 remedies include denial of payments for new admissions,
denial of payments for all individuals (imposed only by HCFA) and civil money
penalties of $50 to $3,000 per day. Category 3 remedies include temporary
management, immediate termination or civil money penalties of $3,050 to $10,000
per day. The rules define situations in which one or more of the penalties must
be imposed. The rules also allow for the immediate imposition of remedies,
including civil monetary penalties, without opportunities to correct
deficiencies if a facility has been cited for a deficiency at or about a level
"G" in more than one survey in less than a twelve month period.
FEE SPLITTING AND REFERRALS. The Company is also subject to federal and state
laws that govern financial and other arrangements between providers. Federal
laws, as well as the laws of certain states, prohibit payments or fee splitting
arrangements between providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. These laws include the federal "anti-kickback
law" which prohibits, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients.
Effective January 1, 1995, OBRA 93 prohibits any physician with a financial
relationship (defined as a direct or indirect ownership or investment interest
or compensation arrangement) with an entity from making a referral for
"designated health services" to that entity and prohibits that entity from
billing for such services. "Designated health services" do not include skilled
nursing services but do include many services which long-term care facilities
<PAGE>
provide to their patients, including, but not limited to, infusion therapy and
enteral and parenteral nutrition. Various exceptions to the application of this
law exist, including one, which protects the payment of fair market compensation
for the provision of personal services, so long as various requirements are met.
Violations of these provisions may result in civil or criminal penalties for
individuals or entities and/or exclusion from participation in the Medicaid and
Medicare programs. Various state laws contain analogous provisions, exceptions
and penalties. Violation of these state laws could lead to loss of licensure,
significant fines and other penalties. The Company believes that in the past it
has been, and in the future it will be, able to arrange its business
relationships so as to comply with these provisions. Failure to comply with such
laws could subject the Company to civil fines, possible exclusion from
government reimbursement programs and, in certain cases, criminal prosecution.
GOVERNMENT REGULATION
The federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
rates by governmental payor sources, the development and operation of long-term
care facilities and the provision of long-term care services are subject to
federal, state and local licensure and certification laws which regulate with
respect to a facility, among other matters, the number of beds, the services
provided, the distribution of pharmaceuticals, equipment, staffing requirements,
patients' rights, operating policies and procedures, fire prevention measures,
environmental matters and compliance with building and safety codes. Home health
care providers are also subject to extensive government regulations. The trend
over the past several years has been to increase regulatory pressure at both the
state and federal level. There can be no assurance that federal, state or local
governmental regulations will not change or be subjected to new interpretations
that impose additional restrictions which might adversely affect the Company's
business.
Licensing, certification and other applicable standards vary from jurisdiction
to jurisdiction and are revised periodically. State agencies survey or inspect
all long-term care facilities on a regular basis to determine whether such
facilities are in compliance with the requirements for participation in
government-sponsored third-party payor programs. In some cases or upon repeat
violations, the reviewing agency has the authority to take various adverse
actions against a facility, including the imposition of fines, temporary
suspension of admission of new patients to the facility, suspension or
decertification from participation in the state Medicaid or the Medicare
program, offset of amounts due against future billings to the Medicare or
Medicaid programs, denial of payments under Medicaid for new admissions,
reduction of payments, restrictions on the ability to acquire new facilities
and, in extreme circumstances, revocation of a facility's license or closure of
a facility. The compliance history of a prior provider may be used by state or
federal regulators in determining possible action against a successor provider.
The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements. In
the ordinary course of its business, however, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
There can be no assurance that future agency inspections will not have a
material adverse effect on the Company.
CERTIFICATES OF NEED. A majority of the states in which the Company operates
have adopted CON or similar laws which generally require that a state agency
determine that a need exists prior to the construction of new facilities, the
addition or reduction of licensed beds or services, the implementation of other
changes, the incurrence of certain capital expenditures, the approval of certain
acquisitions and changes in ownership or, in certain states, the closure of a
<PAGE>
facility. State CON approval is generally issued for a specific project or
number of beds, specifies a maximum expenditure, is sometimes subject to an
inflation adjustment, and requires implementation of the proposal within a
specified period of time. Failure to obtain the necessary state approval can
result in the inability of the facility to provide the service, operate the
facility or complete the acquisition, addition or other change and can also
result in adverse reimbursement action or the imposition of sanctions or other
adverse action on the facility's license.
ENVIRONMENTAL AND OTHER. The Company is subject to a wide variety of federal,
state and local environmental and occupational health and safety laws and
regulations. Among the types of regulatory requirements faced by providers are:
air and water quality control requirements, waste management requirements,
specific regulatory requirements applicable to asbestos, polychlorinated
biphenyls and radioactive substances, requirements for providing notice to
employees and members of the public about hazardous materials and wastes and
certain other requirements.
In its role as owner and/or operator of properties or facilities, the Company
may be subject to liability for investigating and remedying any hazardous
substances that have come to be located on the property, including such
substances that may have migrated off of, or emitted, discharged, leaked,
escaped or been transported from, the property. The Company's operations may
involve the handling, use, storage, transportation, disposal and/or discharge of
hazardous, infectious, toxic, radioactive, flammable and other hazardous
materials, wastes, pollutants or contaminants. Such activities may harm
individuals, property or the environment; may interrupt operations and/or
increase their costs; may result in legal liability, damages, injunctions or
fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance. The cost
of any required remediation or removal of hazardous or toxic substances could be
substantial and the liability of an owner or operator for any property is
generally not limited under applicable laws and could exceed the property's
value. Although the Company is not aware of any material liability under any
environmental or occupational health and safety laws, there can be no assurance
that the Company will not encounter such liabilities in the future, which could
have a material adverse effect on the Company.
PERSONNEL
As of December 31, 1999, the Company employed, directly or indirectly,
approximately 11,206 persons, including approximately 8,404 full-time and 2,802
part-time employees. As of December 31, 1999, collective bargaining agreements
were in effect related to 14 facilities covering approximately 1,083 employees
and negotiations were in progress with bargaining units at 1 additional
facility. The Company believes that it has a satisfactory relationship with
these employees and strives to maintain this relationship by offering
competitive benefit packages, training programs and opportunities for
advancement.
INSURANCE
The Company maintains property, liability, and professional liability
insurance policies in amounts and with such coverage and deductibles that are
deemed appropriate by management, based upon historical claims, industry
standards and the nature and risks of its business. The Company also requires
that physicians practicing at its facilities carry medical professional
liability insurance to cover their respective individual professional
liabilities. The Company directly and indirectly maintains a guaranteed cost
insurance program for workers' compensation. This program covers employees as
required by state law. In certain states, the Company participates in state
approved programs. Contractors who provide services to the Company must
demonstrate adequate insurance prior to commencing work. There can be no
assurance that any claims against the Company will not be successful, or, if
successful, will not exceed the limits of available coverage or reserves, or
that
<PAGE>
such coverage will continue to be available at acceptable rates.
ITEM 2. PROPERTIES
OFFICE LEASES
As of December 31, 1999, Centennial's corporate headquarters occupy
approximately 41,700 square feet of office space in a commercial building
located in Atlanta, Georgia, under a lease agreement which terminates on
September 30, 2001 and allows one five-year renewal option. The Company believes
that such office space is adequate for its current requirements.
THS leases approximately 18,000 square feet of office space in Louisville,
Kentucky, which was THS's corporate headquarters prior to the THS Merger. The
lease term expires January 31, 2002. The Company has entered into subleases for
the entire space for the remaining term of the primary lease.
ITEM 3. LEGAL PROCEEDINGS
On February 28, 2000, a complaint was filed in the Superior Court of Fulton
County by Crandon Capital Partners, as a purported class action, against
Centennial and each of its directors. The complaint, styled Crandon Capitol
Partners v. Eaton, et al, seeks compensatory damages and injunctive relief
arising from the merger agreement among Centennial, Holding and Acquisition. The
complaint alleges the individual defendants breached their fiduciary duties in
connection with the merger by, among other things, failing to conduct an auction
or other suitable market check, failing to consider other strategic alternatives
and accpting insufficient consideration. Centennial believes that the claims are
without merit and will defend vigorously.
On March 26, 1999, the Company received an investigatory subpoena from the
Department of Health and Human Services, Office of the Inspector General,
requesting records in connection with an investigation of possible or otherwise
improper claims for payment under Title XVIII (Medicare) of the Social Security
Act. The request relates to records for the period January 1, 1994 to the
present concerning certain of the Company's internal policies. The Company is
providing all requested records and is cooperating fully with the investigation.
There can be no certainty at this time that this matter will be resolved and
resolution of this matter could have a material adverse effect on the business
and operations of the Company.
On December 3, 1999, a Missouri facility that the Company has leased and
operated since October 31, 1999, received a subpoena from the United States
Attorney's Office for the Western District of Missouri. The subpoena sought
records for five individuals who resided in the Missouri facility during the
period January 1, 1998 through the date of the subpoena, and billing and
staffing records related to these residents and the facility. The facility has
provided the requested records and the Company is cooperating with the
government's review.
As of December 31, 1999, the Company did not have any other pending legal
proceedings that separately, or in the aggregate, if adversely determined, would
have a material adverse effect on the Company. The Company is, and may be, from
time to time, party to litigation or administrative proceedings which arise in
the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock is traded on The Nasdaq Stock Market's
National Market System under the symbol "CTEN." The high and low bids for the
Company's Common Stock as reported on The Nasdaq Stock Market during each
quarter for the two most recent years and for the year to date 2000 are as
follows:
<TABLE>
<CAPTION>
2000 High Low
---- ---- ---
<S> <C> <C>
First quarter............... 5.2812 4
Second quarter (to April 10) 5.325 4.5938
1999 High Low
---- ---- ---
<S> <C> <C>
First quarter............... 15.563 8.000
Second quarter.............. 10.000 1.000
Third quarter............... 5.531 2.625
Fourth quarter.............. 3.563 2.218
1998 High Low
---- ---- ---
<S> <C> <C>
First quarter............... 25.125 19.625
Second quarter.............. 25.000 16.4375
Third quarter............... 20.375 7.500
Fourth quarter.............. 15.50 7.375
</TABLE>
At April 10, 2000, the last reported sale price of the Common Stock was $5.25
per share and there were approximately 64 record holders of Common Stock.
The Company has not declared any cash dividends on its Common Stock. The
Company expects that future earnings, if any, will be retained for the growth
<PAGE>
and development of the Company's business and, accordingly, the Company does not
anticipate that any dividends will be declared or paid on the Common Stock for
the foreseeable future. The declaration, payment and amount of future dividends,
if any, will depend upon the future earnings, results of operations, financial
position and capital requirements of the Company, among other factors, and are
limited by the Company's Credit Agreement with CoreStates Bank, N.A. and
NationsBank, N.A. as agents for the lenders named therein.
Recent Sales of Unregistered Securities.
- ---------------------------------------
None
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data has been derived from the Company's
Consolidated Financial Statements. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere herein. The selected consolidated financial data set forth
below for the Company as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999, is derived from the audited
financial statements included elsewhere herein. The selected consolidated
financial data set forth below for the year ended December 31, 1996 and 1995 has
been derived from financial statements not included elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997 (1) 1996 (1) 1995
-------- -------- ---------- ---------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenues..................... $368,655 $342,203 $296,321 $227,387 $71,862
Management fee and other revenues................ 9,874 15,442 7,952 5,661 3,364
-------- -------- -------- -------- -------
Total revenues.............................. 378,529 357,645 304,273 233,048 75,226
Facility operating expenses...................... 322,051 275,489 234,259 183,324 58,566
Lease expense.................................... 33,309 22,946 21,740 18,777 7,701
Corporate administrative costs................... 26,445 21,515 16,055 11,400 5,027
Depreciation and amortization.................... 12,588 9,292 6,760 5,012 738
Loss on closure of nursing facility.............. - 4,010 - - -
Provision for asset revaluation.................. 14,530 12,152 - - -
Terminated merger transaction costs.............. (2,583) 3,619 - - -
-------- -------- -------- -------- --------
Operating income (loss) before net interest
expense and equity in income of unconsolidated
partnerships.................................. (27,811) 8,622 25,459 14,535 3,194
Interest expense, net........................... (10,571) (7,154) (8,022) (9,373) (177)
Equity in income (loss) of
unconsolidated partnerships................. - - - (108) 449
-------- -------- ------- ------- -------
Income (loss) before income taxes, minority
interest, extraordinary item and cumulative
effect of change in accounting method....... (38,382) 1,468 17,437 5,054 3,466
Provision (benefit) for income taxes........... (13,165) 1,504 6,800 2,092 1,389
-------- -------- ------- ------- -------
Income (loss) before minority interest,
extraordinary item and cumulative
effect of change in accounting method (25,217) (36) 10,637 2,962 2,077
Minority interest in net income of
subsidiary, net of taxes.................... (226) (279) (252) (183) (201)
-------- -------- ------- ------- -------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting method........................... (25,443) (315) 10,385 2,779 1,876
Extraordinary item - loss on extinguishment
of debt, net of taxes....................... - - (537) - -
Cumulative effect of change in accounting
method, net of taxes........................ (427) - - - -
-------- ------- ------- ------- -------
Net income (loss).............................. $(25,870) $ (315) $ 9,848 $ 2,779 $ 1,876
-------- ------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Per common share information (diluted):
Income (loss) before extraordinary item and
cumulative effect of change in accounting
method.................................... (2.13) (0.03) 0.54 0.12 0.72
Extraordinary item - loss on extinguishment
of debt, net of taxes..................... (0.06)
Cumulative effect of change in accounting
method, net of taxes...................... (0.04) - - - -
-------- ---------- -------- -------- -------
Net income (loss) ........................... (2.17) (0.03) 0.48 0.12 0.72
======== ========== ======== ======== =======
Weighted average number of common
and common stock equivalents
outstanding (diluted)..................... 11,923 12,078 8,462 4,782 2,601
======== ========== ======== ======== =======
As of December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except per share data)
Balance Sheet Data:
Working capital.............................. $ 25,698 $ 57,125 $ 33,097 $ 8,702 $ 3,984
Total assets................................. 264,345 285,332 243,649 193,448 155,018
Long-term debt and subordinated debt,
less current maturities................... 108,076 112,849 78,913 107,795 83,559
Preferred stock (2).......................... - - - 21,305 19,455
Net shareholders' equity..................... 87,813 113,683 113,104 11,952 10,869
- ------------------------------------------------------------------
</TABLE>
(1) Net income (loss) per common share for the fiscal years ended December
31, 1997 and 1996 excludes dividends and accretion on preferred stock of
$5.9 million and $2.2 million, respectively.
(2) Carried at estimated redemption value with accretion of dividends
charged against shareholders' equity.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
Consolidated Statements of Operations for the year ended December 31, 1999.
GENERAL
Centennial 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 100 owned, leased and managed
skilled nursing facilities with approximately 10,663 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
December 31, 1999, Centennial provided rehabilitation therapy services on a
contract basis to third-party owned and Company-operated skilled nursing
facilities in 22 states pursuant to 130 internal and external contracts and
provided home health care services through licensed home health offices
primarily in North Carolina .
In January, 1999, the Company acquired a leasehold interest in six skilled
nursing facilities, totaling 795 licensed available beds located in
Massachusetts. Also in January, 1999, the Company acquired interests in two
facilities that were previously managed by the Company: Hunter Woods Nursing and
Rehabilitation Center, a 130-bed facility located in North Carolina, and Choctaw
County Medical Center, a facility with 68 nursing home beds and 22 hospital
beds, located in Mississippi. Collectively, the transactions are hereafter
referred to as the "1999 Leases".
In June 1999, the Company terminated its lease on and management of a 81-bed
skilled nursing facility in Kansas. In December, 1999, the Company transferred
three skilled nursing facilities, one in Florida and two in Michigan, and
terminated its lease of a fourth facility in North Carolina (See Item 13). The
Company retained management of these four facilities.
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
Leases".
In January 1998, the Company entered into management agreements for six skilled
nursing facilities, with a total of 836 licensed available beds, located in
North Carolina. These agreements were terminated in September 1999. In
February, 1998, the Company entered into a management agreement for a 59-bed
rural hospital in northern Florida. 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 North
Carolina, through a sublease 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 Indiana, which is currently held for sale. In December,
1998,
<PAGE>
the Company terminated its lease of Maple Heights of Hiawatha ("Hiawatha"), an
81-bed facility located in Kansas.
In December 1997, Centennial acquired a 58-bed skilled nursing facility in St.
Petersburg, Florida (the "Florida Facility"), which had previously been managed
by the Company since June 1991. The Florida Facility was formerly owned by an
affiliate of the president of the Company.
In August 1997, Centennial acquired substantially all of the business and assets
of Complex Care, Inc. ("CCI"), a provider of physical, occupational and speech
therapy services, through 45 contracts with long-term care facilities.
In May 1997, the Company acquired by merger Total Care Consolidated, Inc.
("Total Care"), a provider of home health services, with 25 home health offices.
In March 1997, the Company acquired a leasehold interest in a 29-bed rural
hospital located in Florida. In June 1997, the Company acquired a leasehold
interest in a second rural hospital with 36 beds also located in Florida. The
above hospital leases together are hereafter referred to as the "Hospitals."
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 significantly less than amounts
projected in 1998. Accordingly, the Company 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, during 1999. In addition, the Company wrote off approximately $2.7
million of goodwill associated with Paragon.
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 require
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, operating cash flow at
several of the Company's managed facilities, primarily in North Carolina,
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.
The Company provides management support for certain facilities that may, in the
future, require additional cash flow advances for operational needs. There can
be no assurances as to the future financial stability of these nursing
facilities or their respective owners. Due to the changing nature of the long-
term care industry, management can make no assurances as to the timing of
ultimate collection of these advances or the ultimate amount to be collected. As
of December 31, 1999, the carrying value of advances has been adequately stated
in the financial statements.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from $342.2
million in 1998 to $368.6 million in 1999, an increase of $26.4 million or 7.7%,
resulting from both acquisitions and same store growth. Total revenues
associated with the 1998 and 1999 Leases amounted to $104.2 during the year
ended December 31, 1999 compared to $13.3 million during the prior period, an
increase of $91 million. Revenues from Wellington, South Bend and Hiawatha
decreased from $9.1 million in 1998 to $135,000 in 1999, a decrease of $9
million. During 1999, the Company recorded charges to revenue totaling
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approximately $11.2 million associated with reserves on its prior year cost
report settlement receivables and trade accounts receivable for its skilled
nursing facilities. Same store nursing facility revenue decreased approximately
$10.8 million in 1999 when compared to 1998 due primarily to the decrease in
Medicare revenues associated with the advent of PPS that 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. Occupancy decreased slightly during 1999, falling from
89.6% for the year ended December 31, 1998 to 88% for 1999. Revenues from the
Paragon, the Company's subsidiary providing rehabilitation services, decreased
by approximately $30 million during 1999 as compared to 1998 due primarily to
the loss of 35 therapy contracts subsequent to December 31, 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 Total Care
increased $2.7 million during 1999 as compared to the prior period due to an
increase in home health visits during 1999 and increases in Medicare
reimbursement rates that went into effect January 1, 1999. Revenues from the
Company's two leased rural hospitals decreased from $11.6 million in 1998 to
$4.2 million in 1999, a decrease of $7.4 million, attributable primarily to
reserves recorded in 1999 on hospital trade accounts receivable.
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
decreased from $15.4 million in 1998 to $9.8 million in 1999, a decrease of $5.6
million, or 36.1% which was primarily attributable to the Company's termination
of eight facility management agreements during 1998 and 1999 and the
performance of additional fee-generating services to existing managed facilities
during 1998.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $275.5
million in 1998 to $322.1 million in 1999, an increase of $46.6 million or
16.9%, resulting from both acquisitions and same store growth. Operating
expenses for the 1998 and 1999 Facility Leases totaled approximated $86
million in 1999 as compared to $11.2 million during 1998, an increase of $74.8
million. Wellington, South Bend and Hiawatha operating expenses declined from
$10.4 million in 1998 to $905,000 in 1999, a $9.5 million decrease. During
1999, the Company recorded nonrecurring charges to operating expenses totaling
$12.1 million associated with increases in the allowance for bad debt and
various accrued liabilities. Same store nursing facility operating expenses
declined approximately $11.1 million during 1999 as compared to the prior
period, primarily resulting from decreases in therapy and other ancillary costs
associated with the renegotiation 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 third quarter of 1999 at the Company's
nursing facilities. Operating expenses from Paragon decreased $22.4 million in
1999 as compared to the prior period, due to cost-cutting measures put in place
by management in response to the decrease in revenue associated with PPS.
Expenses from Total Care increased by approximately $1.9 million associated with
an increase in home health visits over 1998.
LEASE EXPENSE. Lease expense increased from $22.9 million in 1998 to $33.3
million in 1999, an increase of $10.4 million, or 45.2%, due primarily to the
1998 and 1999 Facility Leases as well as increases in rent associated with
expansion of the Company headquarters office space in 1999.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$21.5 million in 1998 to $26.4 million in 1999, an increase of $4.9 million, or
22.9%, which was primarily attributable to additional overhead to accommodate
the 1998 and 1999 Facility Leases as well as training and transition costs
related to the implementation of PPS.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$9.3 million in 1998 to $12.6 million in 1999, an increase of $3.3 million, or
35.4%. This increase is primarily attributable to additional depreciation
expense incurred as a result of fixed asset purchases and amortization of
management contract and acquisition costs.
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PROVISION FOR ASSET REVALUATION. During the third quarter of 1998, the Company
recorded write-downs of certain long-lived assets at its nursing facilities and
at Total Care of $11.0 million and $1.2 million, respectively. 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 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 $9.2 million in 1998 to $12.1
million in 1999, an increase of approximately $2.9 million or 31.5%, which was
primarily attributable to an increase in the Company's average borrowing rate
under its Senior Credit Facility during 1999.
PROVISION FOR INCOME TAXES. Prior to nonrecurring losses in 1998 and 1999 of
$21.7 million and $44.5 million, respectively, the Company's effective tax rate
increased from 39% in 1998 to 41.5% in 1999, an increase in the rate of 2.5%,
due to an increase in the Company's average state tax rate due to the Company's
expansion into several new states resulting from the 1998 and 1999 Facility
Leases and proportional increase in the effect of nondeductible expenses.
Years Ended December 31, 1998 and 1997
NET PATIENT SERVICE REVENUES. Net patient service revenues increased from
$296.3 million in 1997 to $342.2 million in 1998, an increase of $45.9 million
or 15.5%, resulting from both acquisitions and same store growth. Total revenues
associated with the New Facility Leases approximated $13.3 million in 1998.
Revenues for the Florida Facility approximated $3.3 million during 1998, and
revenues from the Hospitals added approximately $3.1 million to revenues during
the year ended December 31, 1998. Revenues associated with the acquisition of
TC and the acquisition of the CCI contracts added approximately $9.0 million and
$10.7 million, respectively, to revenues during 1998. Same store revenues from
home health services for the period from acquisition (May 1997), through
December 31, 1997 and the corresponding period in 1998, decreased approximately
$3.2 million compared to the prior year due to a decline in home health visits
and Medicare rate decreases implemented in 1998. Revenues from PTS, the
Company's subsidiary providing intravenous therapy and other services, increased
approximately $4.2 million during 1998 over the prior year due to increased
volume from existing contracts and the expansion of services provided to both
the Company's managed nursing facilities and other third parties. Revenues from
existing facilities increased approximately $6.2 million in 1998 when compared
to 1997, due primarily to an increase in the quality revenue mix of the
facilities due to increasing admissions of higher acuity patients and from an
increase in the delivery of specialty services. Revenues at the Company's
subsidiary providing therapy services increased approximately $1.3 million in
1998 due primarily to growth in existing contract revenues. This growth was
primarily the result of favorable salary equivalency rate changes in certain
states in which the Company operates as well as improvements in productivity of
the CCI contracts following a short downturn in volume subsequent to the 1997
acquisition.
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MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues
increased from $8.0 million in 1997 to $15.4 million in 1998, an increase of
$7.4 million, or 94.2%, which was primarily attributable to the Company's
addition of facility management agreements during 1998 and the performance of
additional fee-generating services to existing managed facilities.
FACILITY OPERATING EXPENSES. Facility operating expenses increased from $234.3
million in 1997 to $275.5 million in 1998, an increase of $41.2 million or
17.6%, resulting from both acquisitions and same store growth. Operating
expenses for the New Facility Leases approximated $11.2 million during 1998.
Operating expenses from the Florida Facility approximately $2.5 million during
1998, and operating expenses for the Hospitals added approximately $2.7 million
to operating expenses during 1998 compared to the prior year. The acquisition of
TC and the acquisition of the CCI therapy contracts added approximately $8.3
million and $8.0 million, respectively, to operating expenses during 1998. Same
store operating expenses from home health services for the period from
acquisition (May 1997), through December 31, 1997 and the corresponding period
in 1998, decreased approximately $2.2 million during 1998 when compared to the
prior year, due to a decline in home health visits in 1998 and cost reductions
in the Company's delivery of care. Operating expenses at PTS increased $3.7
million over 1997 due to increased volume from existing contracts and the
expansion of services provided to the Company's managed facilities and other
third parties. The remaining increase of approximately $7.3 million in 1998
when compared to 1997 was due primarily to increases in operating expenses at
existing facilities. This increase was due primarily to providing care for
higher acuity patients as well as costs associated with training nursing and
support staff on the Company's PPS systems and procedures.
LEASE EXPENSE. Lease expense increased from $21.7 million in 1997 to $22.9
million in 1998, an increase of $1.2 million, or 5.5%, due primarily to the New
Facility Leases.
CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$16.1 million in 1997 to $21.5 million in 1998, an increase of $5.4 million, or
34.0%, which was primarily attributable to additional overhead to accommodate
the expansion in therapy services contracts, including the acquisition of the
CCI contracts, the addition of long-term care facility management agreements,
the acquisition of TC, the Hospitals and the New Facility Leases.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $6.8
million in 1997 to $9.3 million in 1998, an increase of $2.5 million, or 37.5%,
which was primarily attributable to acquisitions and additional depreciation
expense incurred as a result of fixed asset purchases during 1997 and 1998.
TERMINATED MERGER COSTS. During the fourth quarter of 1998, the Company recorded
approximately $3.6 million of expenses associated with the dissolution of the
Proposed Merger.
LOSS ON CLOSURE OF NURSING FACILITY. During the third quarter of 1998, the
Company recorded an estimated loss of $4.0 million associated with the closure
of THS of Southbend and the relocation of the facility's residents.
PROVISION FOR ASSET REVALUATION. During the third quarter of 1998, the Company
recorded write-downs of certain long-lived assets at its nursing facilities and
at TCC of $11.0 million and $1.2 million, respectively.
INTEREST INCOME. Interest income increased $1.4 million from approximately
$636,000 in 1997, to $2.1 million in 1998. The increase related to interest
revenue recorded on working capital advances to managed nursing facilities.
INTEREST EXPENSE. Interest expense increased from $8.7 million in 1997 to $9.2
million in 1998, an increase of approximately $507,000 or 5.9%, which was
primarily attributable to the increase in debt of approximately $37.7 million
during 1998 related to borrowings for working capital, net of the reduction of
debt by approximately $60.4 million in the third and fourth quarters of 1997 as
a result of the initial public offering.
<PAGE>
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from 39%
in 1997 to 47% in 1998, an increase in the rate of 8%, due to an increase in
permanent tax differences associated with the write off of nondeductible
goodwill.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash during 1999 was cash flow from operations
and borrowings under its Senior Credit Facility with First Union National Bank
and NationsBank N.A., as agents and lenders and other lenders named therein (the
"Senior Credit Facility"). Cash was used by the Company for capital improvements
at several existing facilities, advances under management contracts with certain
third parties, principal payments on long-term debt, acquisitions of skilled
nursing facilities and payment of loan costs. The Company anticipates utilizing
cash from operations and borrowings under its Senior Credit Facility to meet its
liquidity requirements in 2000.
During the year ended December 31, 1999, the Company generated $15.9 million in
cash flow from operating activities. This was comprised of operating cash before
noncash charges and changes in assets and liabilities of approximately $8.7
million combined with positive cash flows associated with a decrease in accounts
receivable of $5.9 million, a decrease in prepaid expenses of $600,000 and an
increase in accounts payable of $300,000. Included in operating cash flow before
noncash charges and changes to assets and liabilities are reserves and other
charges to revenue of approximately $19.4 million for the Company's nursing
facilities and hospitals associated with increased reserves on prior year cost
report settlements and trade receivables. The decrease in accounts receivable of
$5.9 million is associated with interim payments on prior year cost reports and
exception requests.
The Company used approximately $26.8 million in cash for investing activities.
Notes and other receivables from certain third-party owners increased by
approximately $10.7 million during the year ended December 31, 1999 associated
with cash advances for working capital needs at certain of the Company's managed
nursing centers. The Company continued to invest in its leased and owned
facilities through capital expenditures of approximately $8.1 million or
approximately $1,000 per bed for the period ended December 31, 1999. These
expenditures included the expansion of existing facilities and the selected
rehabilitation of certain facilities. During 1999, the Company paid
approximately $3.8 million in acquisition costs associated with the purchase of
the leasehold interests and accounts receivable for the Flatley Facilities. Also
during the period, the Company paid $4.1 million for loan fees associated with
the refinancing of the Senior Credit Facility.
During 1999, the Company utilized approximately $7.6 million in cash flow from
financing activities. This included $9.1 million in proceeds from the transfer
of certain nursing facilities to Five Star Healthcare LLC under a profit-sharing
arrangement entered into in December 1999. The Company also had net borrowings
of approximately $1 million during 1999 under its Senior Credit Facility and
repayments on its long-term debt of approximately $3.1 million, inclusive of
repayment of $2 million in seller notes associated with the Total Care
acquisition.
During the year ended December 31, 1998, the Company used $4.8 million in cash
for operating activities. This was comprised of cash flow before noncash charges
and changes in assets and liabilities of approximately $23.5 million combined
with a $28.3 million increase in working capital. The working capital change is
primarily the result of an increase in accounts receivable of $24.4 million
attributable to increases in Medicare settlements and routine cost limit
exception requests for the 1998 cost reporting year and a buildup in trade
receivables associated with 1998 nursing facility acquisitions. The Company used
$30.3 million in cash for investing activities in 1998 comprised of capital
expenditures of $8 million, advances of $12.4 million to certain of its managed
facilities for working capital needs and acquisitions of $7.3 million. The
Company financed its operating and investing activities through net borrowings
under its Senior Credit Facility of $37.7 million and paid $1.4 million in
principal reductions on its long-term debt.
During the year ended December 31, 1997, the Company used $9 million in cash
for operating activities. This was comprised of cash flow before noncash
charges and changes in assets and liabilities of approximately $22.7 million
combined with a $31.8 million increase in working capital. The working capital
change is primarily the result of an increase in accounts receivable of $29.1
million attributable to increases in Medicare settlements and routing cost limit
exception requests for the 1997 cost reporting year and a buildup in trade
receivables associated with the acquisition of Total Care and Complex Care
during May 1997 and August 1997, respectively. The Company used $30 million in
cash for investing activities in 1997 comprised of capital expenditures of $7.5
million, advances of $8.2 million to certain of its managed facilities for
working capital needs and acquisitions of $17.3 million. During 1997, the
Company generated $37 from its financing activities including net borrowings
under its Senior Credit Facility of $28.7 million, proceeds from issuance of
preferred stock of $10 million, net proceeds from issuance of common stock
through its initial public offering of $66.7 million and paid $60.7 million in
principal reductions on its long-term and subordinated debt.
<PAGE>
As of December 31, 1999, the Company had $74.9 million outstanding under its
Senior Credit Facility, net of issued standby letters of credit of approximately
$6.7 million, and $8.4 million available on this facility. 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 reductions in availability under the Senior Credit
Facility of approximately $5.7 million, $6 million, $12 million and $12
million during each of the years ended December 31, 1999, 2000, 2001 and 2002,
respectively. In addition, the Company is required to fund escrow deposits under
the revolver portion of the Senior Credit Facility totaling $6 million, $10
million and $10 million during the years ended December 31, 2000, 2001 and
2002, respectively.
The debt covenants as amended become more restrictive after the first quarter
2001. Management believes it will remain in compliance with its debt covenants
through December 2000.
In January 1999, the Company obtained a $5 million Line of Credit from Bank of
America, N.A. ("Bank of America"), which bears interest at Bank of America's
prime rate or 3% over LIBOR for selected portions and matured on December 31,
1999. This obligation was repaid with $2 million in January 2000 and $3
million in March 2000.
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 nor 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.
The Company's ability to generate positive cash flow from operations depends on
a number of internal and external factors affecting the long-term care industry,
including the timing of payments under governmental and third party payor
programs, many of which are beyond the Company's control. In the opinion of
management, the Company anticipates meeting its long-term debt repayment
obligations, escrow funding, normal operating cash requirements and projected
capital expenditures through borrowings under the Senior Credit Facility and
cash generated from the operation of the Company's business.
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging Activities," was
issued and then superseded by SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". These statements require 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 Nos.
133 and 137. SFAS Nos. 133 and 137 are effective for fiscal years beginning
after June 15, 2000. The effect on the financial statements upon adoption of
SFAS Nos. 133 and 137 has not been determined.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Interest Rate Risk
The Company's cash and cash equivalents consist of highly liquid investments
with a maturity of less than three months. As a result of the short-term nature
of the Company's cash instruments, a hypothetical 10% change in interest rates
would have no impact on the Company's future earnings and cash flows related to
these instruments. A hypothetical 10% change in interest rates would also have
an immaterial impact on the fair values of these instruments. Approximately
$20.5 million of the Company's notes receivable bear interest at variable rates.
Because these rates are variable, a hypothetical 10% change in interest rates
would result in a related increase or decrease in interest income of $170,000.
A hypothetical 10% change in interest rates would have an immaterial impact
related to the fair value of these instruments. As of December 31, 1999, $44.9
million of the Company's long-term debt bears interest at variable rates.
Because these rates are variable, a hypothetical 10% change in interest rates
would result in a related increase or decrease in interest expense of
approximately $427,000. A hypothetical 10% change in interest rates would have
an immaterial impact related to the fair value of these instruments. The
remaining $70.4 million of long-term debt bears interest at fixed rates.
Because these rates are fixed, a hypothetical 10% change in interest rates would
have no impact on interest expense or the fair value of these instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, together with the reports
begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
PricewaterhouseCoopers LLP ("PWC") audited the accounts of the Company and its
subsidiaries for fiscal year 1998. On July 13, 1999, the Company informed PWC
that it would no longer be engaged as the principal accountant to audit the
Company's financial statements for the fiscal year ending December 31, 1999 and
terminated the relationship. On July 13, 1999, the Company engaged Arthur
Andersen LLP ("Arthur Andersen") as its new independent accountants, effective
July 13, 1999.
PWC's reports on the financial statements for fiscal years 1997 and 1998 did
not contain any adverse opinions or disclaimers of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with its audits for the fiscal year ended December 31, 1998 and
during the subsequent interim period, there were no disagreements with PWC,
except as described below, on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. There were no
disagreements with PWC during its audits for the years ended December 31, 1998
and 1997, and during the interim period subsequent to 1998, except as described
below. During the process of PWC's audit of the December 31, 1998 fiscal year,
PWC and the Company had a disagreement regarding the level of reserves required
for certain amounts which the Company disputed with its fiscal intermediary. The
Company disputed the fiscal intermediary's conclusions and filed an
administrative appeal to these conclusions. PWC held the position that the
Company should record a $2.5 million reserve against the approximately $4
million in dispute. The Company believed that no additional reserve was
required. This matter resulted in several prolonged discussions between PWC and
senior management of the Company, with the Company ultimately recording a
reserve for $2 million. During 1998 and 1997, PWC advised the Company that it
believed that significant deficiencies existed in the design and operation of
the Company's internal control structure that could adversely affect the
Company's ability to record, process, summarize and report financial information
on an accurate and timely basis.
At the Company's request, PWC furnished a letter addressed to the Securities
and Exchange Commission stating it agreed with the statements made by the
Company in response to Item 304 of Regulation S-K under the Exchange Act in the
Company's Form 8-K dated July 13, 1999.
The decision to change accountants was recommended by the Company's
management and approved by the Company's board of directors. During fiscal year
1998 and through July 13, 1999, the Company had not consulted with Arthur
<PAGE>
Andersen concerning its financial statements, including the following items: an
audit of the Company's financial statements as the principal accountant, an
audit of a significant subsidiary as an independent accountant, the application
of accounting principles to a specified transaction or the type of audit opinion
that might be rendered on the Company's financial statements or any matter which
concerned a disagreement or "reportable event" with the previous accountants.
The Company did, however, consult with Arthur Andersen in May 1999 and June 1999
concerning acting as the Company's independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors of the Company
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J. Stephen Eaton (age 49) is Chairman of the Board of the Company and has
served as its President and Chief Executive Officer since founding the Company
in 1989. From 1982 to 1988, Mr. Eaton served in various executive positions
(including Vice President) at Consolidated Resources Corporation of America and
its successors ("CRCA"). When the Company acquired CRCA in 1990, CRCA served as
the general partner of private and public limited partnerships that owned in
excess of 31 long-term care and assisted living facilities. Mr. Eaton also
serves as a director of Saint Joseph's Mercy Care Corporation, a non-profit
corporation based in Atlanta, Georgia which provides mobile health services to
the homeless and other underserved populations, and of Saint Joseph's Health
System, a major tertiary care hospital and health system in Atlanta, Georgia.
Mr. Eaton's term as a Director runs until the Annual Meeting of the Shareholders
of the Company in 2001.
Alan C. Dahl (age 39) has served as Executive Vice President, Chief Financial
Officer, Treasurer and Director of the Company since January 1996. From
February 1991 to December 1995, he served as Senior Vice President of the
Company. Mr. Dahl has been involved in health care finance for the past 14
years. Mr. Dahl was previously senior vice president of Southmark Public
Syndications, Inc., a subsidiary of Southmark Corporation. Mr. Dahl, a
certified public accountant, also worked in the tax department at Arthur Young &
Company. Mr. Dahl's term as a Director runs until the Annual Meeting of the
Shareholders of the Company in 2000.
Andrew M. Paul (age 44) has served as a Director of the Company since January
1996. Mr. Paul serves as a general partner of the sole general partner of
Welsh, Carson, Anderson & Stowe, VI, L.P. ("WCAS VI"), a private equity
investment fund. Prior to joining WCAS VI in 1984, Mr. Paul was an associate in
Hambrecht & Quist's venture capital group. From 1978 to 1981, he was a systems
engineer and later a marketing representative for International Business
Machines Corporation. Mr. Paul serves as a director of Accredo Health, Inc., a
provider of specialized contract pharmacy and related services to patients with
chronic diseases. Mr. Paul's term as a Director runs until the Annual Meeting
of the Shareholders of the Company in 2001.
James B. Hoover (age 45) has served as a Director of the Company since
January 1996. Mr. Hoover has served as a general partner of the sole general
partner of WCAS VI since 1992. From 1984 to 1992, Mr. Hoover served as a
general partner of Robertson, Stephens & Co. ("RS&Co."), an investment banking
firm specializing in the financing of emerging growth companies, with particular
emphasis in the health care industry. Prior to joining RS&Co., Mr. Hoover was
vice president of the Investment Management Group of Citibank, N.A., from 1977
to 1984. Mr. Hoover serves as a director of Housecall Medical Resources, Inc.
and U.S. Physical Therapy, public traded companies, as well as five private
companies. Additionally, Mr. Hoover is a member of the Special Projects
Committee of Memorial Sloan-Kettering Cancer Center which raises funds and
evaluates funding proposals from physicians interested in pursuing cancer
research projects. Mr. Hoover's term as a Director runs until the Annual
Meeting of the Shareholders in 2002.
Bertil D. Nordin (age 65) has served as a Director of the Company since March
1997. Mr. Nordin is currently an investor and advisor. From 1990 to 1994, Mr.
Nordin served as chairman of the board of Digital Communications Associates,
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Inc. ("DCA"), a telecommunications company. Mr. Nordin was also president and
chief executive officer of DCA from 1981 to 1990. Mr. Nordin serves as a
director for TechForce Corporation, a public company, and the Atlanta Symphony
Orchestra. Mr. Nordin's term as a Director runs until the Annual Meeting of the
Shareholders in 2002.
Charles D. Nash (age 56) has served as a Director of the Company since
October 1998. Mr. Nash has served as Managing Director of Nash Equity Capital,
Inc., a capital markets and strategic corporate advisor company, since 1997.
From 1991 to 1997, Mr. Nash was Managing Director and Corporate Finance
Executive for Interstate/Johnson Lane, an investment banking company where his
focus was on initial public offerings, mergers and acquisitions, and other
public and private debt and equity transactions. Mr. Nash's term as a Director
runs until the Annual Meeting of the Shareholders in 2002.
Bob L. Wood (age 55) has served as a Director of the Company since January
2000. Mr. Wood serviced as president and chief executive officer of Nations
Healthcare, Inc., a home-health company, from 1995 to 1999. From 1993 to 1995,
Mr. Wood was an independent healthcare consultant working with troubled
healthcare companies in all aspects of operational and financial management. Mr.
Wood's term as a Director runs until the annual meeting of the shareholders in
2000.
With the exception of Messrs. Eaton and Dahl, none of the directors are, or have
been, employed by any parent, subsidiary or other affiliate of the Company.
There are no family relationships between any directors or executive officers.
Meetings and Committees
During 1999, the Board met six times (including regularly scheduled and
special meetings). All of the directors attended at least 75% of all meetings
of the Board and the committees on which they served in 1999.
Audit Committee. The Board has established an Audit Committee that
consists of Messrs. Nash and Nordin. Mr. Nordin is chairman and Mr. Eaton is an
ex-officio, non-voting member of the Audit Committee. The Audit Committee is
responsible for (a) recommending to the Board the firm to be employed as
independent auditors of the Company, and (b) meeting with the Company's
independent auditors at least annually to review (i) the scope of audit and non-
audit assignments and related fees, (ii) accounting principles used by the
company in financial reporting, and (iii) the adequacy of the Company's internal
control procedures. During 1999, the Audit Committee held two meetings.
Compensation Committee. The Board has established a Compensation Committee
that consists of Messrs. Eaton and Paul and, until his resignation from the
Board in September 1999, Mr. Robert Ortenzio. Mr. Paul is chairman of the
Compensation Committee. The Compensation Committee is responsible for (a)
reviewing, approving, recommending and reporting to the Chief Executive Officer
and the Board matters regarding the compensation of the Company's executive
officers and other key employees and compensation levels or plans affecting the
compensation of the Company's other employees and (b) administering the
Company's 1994 Stock Option Plan, 1996 Executive Stock Plan, 1996 Employee Stock
Option Plan and 1997 Stock Plan (collectively, the "Stock Plans"). During 1999,
the Compensation Committee acted by unanimous written consent in lieu of a
meeting on one occasion and did not grant any stock options.
Nominations for directors are made by the Board. The Bylaws require an
advance notice procedure for the nomination, other than by or at the direction
of the Board or a committee thereof, of candidates for election as directors
(the "Nomination Procedure"). Notice to the Company from a shareholder who
proposes to nominate a person at a meeting for election as a director generally
must be given not less than 120 nor more than 150 days prior to the anniversary
of the date that notice of the annual meeting of shareholders was given in the
preceding year and must contain: (i) the name and record address of the
shareholder who intends to make the nomination; (ii) the name, age and residence
address of the nominee; (iii) the principal occupation or employment of the
nominee; (iv) the class, series and number of shares held of record,
beneficially and by proxy, by the shareholder and the nominee as of the record
date of such meeting (if such record date is publicly available) and as of the
date of such notice; and (v) such other information relating to the nominee
proposed by such shareholder as is required to be included if the Company is
then subject to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including the written consent of each nominee to
be named in the proxy statement and to serve as a director of the Company if so
elected. The presiding officer of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the Nomination Procedure.
Although the advance notice provisions do not give the Board any power to
approve or disapprove shareholder nominations by the Company, they may have the
effect of precluding a contest for the election of directors if the procedures
established by the Bylaws are not followed and the effect of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors, without regard to whether consideration of such nominees
might be harmful or beneficial to the Company and its shareholders.
Compensation of Directors
- -------------------------
All members of the Board are reimbursed for their reasonable out-of-pocket
expenses incurred in connection with attendance at Board and committee meetings.
Non-Employee Directors (as defined pursuant to Rule 16b-3 under the Exchange
Act) receive $8,000 annually (paid in four quarterly installments) and $1,000
for each meeting of the Board or any committee of the Board (except for
telephonic meetings and committee meetings held on the same day as a Board
meeting) for their services as Non-Employee Directors. Pursuant to the Company's
1997 Stock Plan, Mr. Nash, Mr. Paul and Mr. Hoover each received an automatic
grant of 2,069 options to purchase the Company's Common Stock in 1999. During
1999, the 1997 Stock Plan was amended and directors are now eligible for grants
of non-qualified stock options at the discretion of the Compensation Committee,
instead of receiving automatic grants of options.
Executive Officers of the Company
- ---------------------------------
EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and key employees are as follows:
OFFICERS Age Position
- -------- --- ----------------------------------------------
J. Stephen Eaton 49 Chairman of the Board, President and Chief
Executive
Kent C. Fosha, Sr. 58 Executive Vice President of Operations
Alan C. Dahl 39 Executive Vice President, Chief Financial
Officer, Treasurer and Director
Lawrence W. Lepley, Jr. 55 President of Paragon Rehabilitation, Inc.
KEY EMPLOYEES
- -------------
Wayne H. Mayo 56 Senior Vice President of Operations -
Eastern Division
Clay F. Crosson 42 Senior Vice President of Operations -
Western Division
Kent C. Fosha, Sr. has served as Executive Vice President of Operations
------------------
since January 1996 and also serves as President of Centennial HealthCare
Management Corporation. He joined the Company in 1990 and served as the
Company's senior vice president of operations until January 1996. Mr. Fosha has
over 25 years experience in all aspects of nursing home management, including
the supervision of multistate operations for National Heritage, Inc. and
Beverly Enterprises. Mr. Fosha, a licensed nursing home administrator, has
served as president of the Georgia Healthcare Association and has served on
several long-term care related committees.
Lawrence W. Lepley, Jr., has served as President of Paragon Rehabilitation
------------------------
Inc., a subsidiary of the Company ("Paragon"), since its inception in 1989. Mr.
Lepley has 34 years of experience in the health care industry, having previously
served as vice president of development and general counsel for a corporation
specializing in head injury rehabilitation. Mr. Lepley has also served as vice
president, corporate attorney and lobbyist for the Tennessee Hospital
Association. Mr. Lepley began his health care career as a pharmacist in both
hospital and retail settings, and he maintains licenses in pharmacy and law in
the state of Tennessee.
Wayne H. Mayo has served as Eastern Division Senior Vice President of
-------------
the Company since January 1997. Prior to becoming the Eastern Division Vice
President, Mr. Mayo served as Regional Vice President from 1991 to 1996, and he
was responsible for the Company's Eastern region of facilities. Mr. Mayo was
previously regional vice president of operations for Vantage Healthcare
Corporation and also served as regional vice president of operations for Medco
Centers, Inc. for seven years. Mr. Mayo has 26 years of experience and is a
member of the American College of Health Care Administrators.
Clay F. Crosson has served as Western Division Senior Vice President of
---------------
the Company since February 1997. Prior to joining the Company in 1997, Mr.
Crosson as vice president of operations and a member of the board of directors
for CareMore, Inc. for five years. Previous to that, Mr. Crosson served 11 years
at National HealthCorp, L.P. in various capacities. Mr. Crosson has a master
of business administration degree and 20 years of experience in long-term care,
subacute care, home health care, managed care and assisted living. Mr. Crosson
is a Fellow of the American College of Health Care Administrators, and holds
certifications in SubAcute Administration and Nursing Home Administration. He
presently serves as National Chairman of ACHCA and is a board member of
Georgia's Nursing Home Administrators Licensure Board.
Information concerning Messrs. Eaton and Dahl is included above under "Directors
of the Company."
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Exchange Act requires executive officers and directors
of the Company and persons who own more than ten percent of the Company's common
stock to file with the Securities and Exchange Commission certain reports, and
to furnish copies thereof to the Company, with respect to each such person's
beneficial ownership of the Company's equity securities. Based solely upon a
review of the copies of such reports furnished to the Company and certain
representations of such persons, the Company believes that all filings were
timely.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the
compensation paid to the Company's Chief Executive Officer and each of the Named
Executive Officers whose salary and bonus compensation for the year ended
December 31, 1999 exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------------------------------------- ----------------------
Securities
Name and Annual Underlying All Other
Principal Position Year Salary($)(1) Bonus($)(2) Compensation($) Options(#) Compensation($)
-------------------- -------- -------------- ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
J. Stephen Eaton 1999 $367,500 - 13,998(3) - -
President and Chief 1998 350,000 120,000 11,846(3) - -
Executive Officer 1997 309,000 - 6,931(3) 34,485 -
Kent C. Fosha, Sr. 1999 228,979 - 6,818(3) - -
Executive Vice 1998 211,985 72,000 5,309(3) 50,000 -
President 1997 180,250 - 3,059(3) 17,242 -
Alan C. Dahl 1999 233,015 - 7,496(4) - -
Executive Vice 1998 211,985 75,000 7,903(4) 50,000 -
President and Chief 1997 180,250 - 10,118(4) 17,242 -
Financial Officer
Lawrence W. Lepley, Jr. 1999 199,800 53,400 8,181(4) - -
President of Paragon 1998 182,685 69,000 7,202(4) 50,000 -
Rehabilitation, Inc. 1997 158,295 116,000 9,392(4) 4,028 -
</TABLE>
__________________________
(1) Represents annual salary, including compensation deferred by the Named
Executive Officers pursuant to the Company's 401(k) Plan.
(2) Represents annual bonuses earned by the Named Executive Officers for the
period indicated.
(3) Includes insurance for Messrs. Eaton, Fosha and Dahl which provides for
reimbursement for health and dental costs in excess of the amount payable
under the Company's group health and dental plan.
(4) Includes $677, $1,202 and $1,211 as matching 401(k) contribution and an
automobile allowance of $8,715, $6,000 and $6,970 for 1997, 1998 and 1999
respectively.
<PAGE>
Options Grants in Last Fiscal Year
- ----------------------------------
No stock options or appreciation rights were granted to the Chief Executive
Officer and each of the named Executive Officers for the year ended December 31,
1999.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
- -------------------------------------------------------------------------------
The following table sets forth certain information concerning option holdings
for the fiscal year ended December 31, 1999 with respect to the Chief Executive
Officer and each of the Named Executive Officers of the Company. No options or
stock appreciation rights were exercised during such year and no stock
appreciation rights were outstanding at the end of such year.
<PAGE>
<TABLE>
<CAPTION>
Securities Underlying Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at FY-End (#) at FY-End ($)(1)
------------- ----------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
J. Stephen Eaton 149,433 - - -
Kent C. Fosha, Sr. 117,083 - - -
Alan C. Dahl 105,488 - - -
Lawrence W. Lepley, Jr. 60,344 - - -
</TABLE>
_____________________________
(1) Based on a closing price of $3.00 per share of Common Stock on December 31,
1999.
Employment Contracts, Termination of Employment and Change-in-Control
- ---------------------------------------------------------------------
Arrangements
- ------------
On December 31, 1995, the Company entered into employment agreements with
Messrs. Eaton, Dahl and Fosha (the "Employment Agreements"). The Employment
Agreements provide for a base salary, an annual bonus, and an amount for fees
incurred for legal, accounting or other professional advice. The base initial
salaries for Messrs., Eaton, Dahl and Fosha total $300,000, $175,000 and
$175,000 respectively. These base salaries are reviewed at least once annually
on May 1 by the Compensation Committee of the Board of Directors to determine
whatever increase may be merited, with the minimum annual increase equal to the
increase in the Consumer Price Index as published by the U.S. Department of
Labor, Bureau of Labor Statistics, for the period since the last annual review
("Consumer Price Index"). In addition, each of these employees is eligible to
participate in the 1996 Executive Stock Plan, management incentive programs,
retirement, welfare and other benefit plans or programs of the Company,
including, at the Company's sole expense, health, dental and hospitalization
insurance coverage. Unless earlier terminated as provided therein, the
Employment Agreements continue until December 31, 1998 (or 1999 for Mr. Eaton),
and extend automatically each day for an additional day so that the remaining
term continues to be two years for Mr. Eaton and one year for Messrs. Dahl and
Fosha.
The Company can terminate such agreements upon the death or disability of
an employee or for cause as defined therein. Each employee may terminate his
employment for any reason within a 90-day period beginning on the 30th day after
a Change in Control of the Company (as defined below) or within a 90-day period
beginning on the one-year anniversary of a Change in Control. If the Company
terminates an Employment Agreement, or if an employee terminates his employment
for Good Reason (as defined below) upon a Change in Control, then the Company
must pay the employee (or, in the case of death, the employee's estate) for 12
consecutive months thereafter (24 months in the case of Mr. Eaton) the greater
of one-twelfth of his salary at the rate in effect on his termination date or at
the highest rate in effect at any time during the 90-day period prior to a
Change in Control, as well as all amounts of his base salary that are deferred
under the Company's qualified and non-qualified employee benefit plans or any
other agreement or arrangement. In addition, the restrictions on the employee's
outstanding incentive awards, including stock options, would lapse and such
incentive awards would immediately vest. Under each of the Employment
Agreements, the employee agrees to maintain the confidentiality of the Company's
trade secrets and agrees, for a period of one year following termination, not to
compete with or solicit employees or customers of the Company. For the purposes
of the Employment Agreements, Good Reason includes an occurrence after a Change
<PAGE>
in Control such as an adverse change in the employee's status, title, position
or responsibilities; reduction in base salary or other compensation or benefits;
or a material breach of the terms of the Employment Agreements. A Change in
Control includes an acquisition of the Company's voting securities of 40% or
more; a merger, consolidation or reorganization involving the Company unless at
least two-thirds of the combined voting power of the corporation resulting from
the merger, consolidation or reorganization is owned in substantially the same
proportion as before such merger, consolidation or reorganization and the person
serving as directors before such merger, consolidation or reorganization
constitute at least two-thirds of the directors of the surviving corporation; a
complete liquidation or dissolution of the Company; or an agreement for the sale
or disposition of all or substantially all of the Company's assets.
Effective January 1, 1998, Paragon Rehabilitation, Inc., a subsidiary of
the Company ("Paragon"), entered into an Amended and Restated Employment
Agreement with Lawrence W. Lepley, Jr., who serves as president of Paragon (the
"Lepley Agreement"). The Lepley Agreement provides for an annual base salary of
$184,000 reviewable annually on January 1 and subject to annual increases (as
described above with respect to the Employment Agreements) and annual bonus.
The Lepley Agreement allows participation in the Company's stock option plans
and provides health, dental and short and long-term disability insurance and an
automobile allowance. The initial term ends on December 31, 2000, but beginning
on the second anniversary of the effective date extends automatically each day
for an additional day so that the remaining term continues to be two years.
Paragon may terminate the Lepley Agreement upon the death or disability of
Mr. Lepley or for cause as defined therein, or after the vote of a majority of
the Company's board of directors in favor of termination. Mr. Lepley may
terminate his employment for Good Reason (as defined below) within a 90-day
period beginning on the 30th day after a Change in Control of the Company (as
defined above) or within a 90-day period beginning on the one-year anniversary
of a Change in Control of the Company. If Paragon terminates the Lepley
Agreement for reasons other than for cause, or if Mr. Lepley terminates his
employment for Good Reason, then Paragon must pay Mr. Lepley (or, in the case of
death, his estate) for 12 consecutive months thereafter one-twelfth of his
salary at the rate in effect on his termination date. If the Lepley Agreement
is terminated due to death or disability, or by Mr. Lepley for Good Reason, then
the restrictions on any outstanding incentive awards, including stock options,
would lapse and such incentive awards would immediately vest. Mr. Lepley agrees
to maintain the confidentiality of Paragon's trade secrets and agrees, for a
period of one year following termination, not to compete with or solicit
employees or customers of Paragon. For the purposes of the Lepley Agreement,
Good Reason includes an occurrence after a Change in Control such as an adverse
change in the employee's status, title, position or responsibilities' reduction
in base salary or other compensation or benefits; or a material breach of the
terms of the Lepley Agreement.
After the consummation of the tender offer by Acquisition, the Company or
Paragon intend to enter into new employment agreements with Messrs. Eaton, Dahl,
Fosha and Lepley that provide for an annual base salary, an annual target bonus
of 25% of base salary, severance payments following termination without "Cause"
or with "Good Reason" (as such terms are defined in the new agreements) and, in
the case of Mr. Eaton, a stock repurchase requirement.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the board of directors are J.
Stephen Eaton, Andrew M. Paul and Robert A. Ortenzio (until his resignation in
September 1999). Mr. Paul is or has been an officer or employee of the Company
or any of its subsidiaries and Mr. Ortenzio was not an officer or employee. Mr.
Paul is a general partner of the general partner of Welsh, Carson Anderson &
Stowe VI, L.P., a significant shareholder of Centennial. Mr. Eaton is the
Chairman of the Board, President and Chief Executive Officer of the Company.
<PAGE>
Transactions involving Mr. Eaton and his affiliates are described in Item
13 "Certain Relationships and Related Transactions"
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for ensuring that a proper system
of short and long-term compensation is in place to provide performance-oriented
incentive to management.
The Compensation Committee administers the Company's executive compensation
program, including determination of salary and bonus compensation for the Chief
Executive Officer and the Named Executive Officers and determination of the
nature, time and amounts of options grants to such executive officers under the
Company's Stock Plans. The Compensation Committee's report for 1999 is as
follows:
Compensation Policy
Generally, the Company's executive compensation is designed to be
competitive with compensation offered by other companies against which the
Company competes for executive resources. The executive compensation plans are
designed to attract and retain highly qualified executives critical to the
Company's long-term success. The Compensation Committee intends for the
executive compensation program to satisfy the following guidelines:
. Recognize and reward high performance and extraordinary results.
. Have a portion of total compensation bear a direct relationship to the
Company's operating performance and achievement of short-term and long-
term goals.
. Provide opportunity to acquire additional direct ownership in the Company
and provide motivation to build shareholder value by aligning executives'
interests with shareholder interests.
Executive compensation is composed of base salary, bonus awards and long-
term incentive compensation.
Base Salary
In the case of Messrs. Eaton, Dahl and Fosha base salary is paid pursuant
to the Employment Agreements or the Lepley Agreement in the case of Mr. Lepley;
in the case of all other executive officers, base salary is determined and fixed
by management based on the policies of the Compensation Committee. The
Employment Agreements require the Compensation Committee to review base salaries
of the executives who are parties thereto on May 1 (or January 1 with respect to
Mr. Lepley) of each year and provide for an annual increase as determined by the
Compensation Committee, but not less than the increase in the Consumer Price
Index. The Compensation Committee reviews the individual contributions and
performance of each such executive officer and takes into account various
qualitative and quantitative factors in determining the increases in base
<PAGE>
salaries. In particular, the Compensation Committee considers several financial
performance measures, including business development, earnings growth and stock
price, as well as the individual's work experience, level of responsibility and
contribution to the Company's long-term success. The Compensation Committee does
not, however, apply any specific quantitative formula in making compensation
decisions with respect to base salary, annual bonus awards or long-term
incentive compensation.
Bonus Awards
Bonus payments are awarded to the Company's executives at the discretion of
the Compensation Committee, which considers the achievement of certain
performance targets and new business development.
Long-Term Incentive Compensation
The Company's long-term incentive compensation strategy is focused on the
grant or award of (i) options to purchase shares of Common Stock, (ii) stock
appreciation rights, (iii) reload options and (iv) restricted stock pursuant to
the Stock Plans. Except for grants to Non-Employee Directors pursuant to the
1997 Stock Plan, the Compensation Committee determines who receives grants or
awards, the grant or award date, the number of shares subject to the grant or
award, the exercise price (based on the closing price of the Common Stock on the
date of grant or award), the vesting schedule and other matters as specified in
the Stock Plans. The Compensation Committee believes that these grants or
awards reward executive officers for their efforts in improving long-term
performance of the Common Stock and creating value for the Company's
shareholders, thereby aligning the financial interests of such executives with
those of the Company's shareholders.
Chief Executive Officer Compensation
Based on its assessment of the performance of the Company and Mr. Eaton's
performance during 1999, the Compensation Committee (composed of Messrs. Paul
and Ortenzio for this purpose) increase Mr. Eaton's base salary from $350,000 to
$367,000.
Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows tax
deduction by a public company for compensation in excess of $1,000,000 paid to
the company's chief executive officer and four other most highly compensated
executive officers. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. The Compensation intends
to attempt to structure future compensation of the Company's Chief Executive
Officer and Named Executive Officers so as to preserve the deductibility of such
compensation under Section 162(m).
COMPENSATION COMMITTEE
Andrew M. Paul, Chairman
J. Stephen Eaton
STOCK PERFORMANCE GRAPH
The following line graph compares the yearly percentage in cumulative
shareholders return on the Common Stock with (a) the performance of a broad
equity market indicator, and (b) the performance of a peer group index. The
<PAGE>
graph compares the percentage change in the return of the Common Stock since
July 2, 1997 with the cumulative total return on the NASDAQ Index and the Peer
Group identified by the Company (which group includes Beverly Enterprises, Inc.,
Genesis Health Ventures, Inc., Integrated Health Services, Inc., Mariner Post-
Acute Network, Inc., Sun Healthcare Group Inc., Vencor, Inc., Advocat Inc.,
National Healthcare L.P. and Manor Care Inc.) over such period. The Peer Group
companies include the long-term care organizations most similar to the Company,
and most of the other publicly traded long-term care organizations. The
commencement date for this comparison is the date on which the Company's Common
Stock was first publicly traded. The stock price performance graph assumes an
investment of $100 in the company on July 2, 1997 and an investment of $100 in
the two indexes on July 2, 1997 and further assumes the reinvestment of all
dividends. The stock price performance, presented monthly for the period from
July 2, 1997 through December 31, 1999 is not necessarily indicative of future
results. Information used in this graph was obtained from Zack's Investment
Research, a source believed to be reliable, but the Company is not responsible
for errors or omissions in such information.
[GRAPH]
<TABLE>
<CAPTION>
7/2/97 1997 1998 1999
------ ------- ------- -------
<S> <C> <C> <C> <C>
Centennial $100 $142.19 $ 96.87 $ 18.75
Nasdaq $100 $109.63 $154.11 $278.75
Peer Group $100 $100.38 $ 49.78 $ 28.04
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
COMMON STOCK OWNERSHIP BY MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of shares of Common
Stock as of March 31, 2000 for (i) directors of the Company, (ii) the Chief
Financial Officer and each of the four most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers"), (iii)
the directors and executive officers of the Company as a group and (iv) each
person who is a shareholder of the Company holding more than a five percent
interest in the Company.
<TABLE>
<CAPTION>
Number of Percent of
Shares of Common Stock
Common Stock Beneficially
Name of Beneficial Owner Beneficially Owned (1) Owned
- ------------------------ ---------------------- ------------
<S> <C> <C>
Welsh, Carson, Anderson & Stowe VI, L.P. 2,520,193 (2) 21.1%
WCAS Capital Partners II, L.P. 246,896 (3) 2.1
WCAS Healthcare Partners, L.P. 81,384 (4) *
J. Stephen Eaton 1,264,804 (5) 10.6
Goldman Sachs Asset Management 1,473,000 (6) 12.4
South Atlantic Venture Fund II,
Limited Partnership 798,963 (7) 6.7
Lawrence W. Lepley, Jr. 196,569 (8) 1.6
Alan C. Dahl 198,280 (9) 1.6
Kent C. Fosha, Sr. 126,023 (10) *
Andrew M. Paul 16,845 (11) *
</TABLE>
<PAGE>
Bertil D. Nordin 21,983 (12) *
James B. Hoover 17,602 (13) *
Charles D. Nash 12,414 (14) *
Bob L. Wood 0 (15) *
All other executive officers and directors
as a group (9 persons) 1,809,090 15.2
______________________________________
* Less than 1.0%
(1) Based on an aggregate of 11,923,618 shares of Common Stock issued and
outstanding as of March 31, 2000. Includes shares of Common Stock that may
be acquired upon the exercise of stock options exercisable within 60 days.
Each person named above has sole voting and dispositive power with respect
to all shares listed opposite such person's name, except as otherwise
noted.
(2) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815.
(3) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815.
(4) The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
York 10022-6815.
(5) Includes 149,433 shares purchasable upon exercise of stock options that are
currently exercisable or will be come exercisable within 60 days. The
shareholder's address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
Georgia 30346.
(6) Based on Schedule 13GVA of shareholder filed on February 9, 1999. The
shareholder's address is 85 Broad Street, New York, New York 10004.
(7) The shareholder's address is 614 West Bay Street, Suite 200, Tampa, Florida
33606-2704.
(8) Includes 60,344 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days, and 26,500
shares beneficially owned by Mr. Lepley's wife, of which Mr. Lepley
disclaims beneficial ownership. The shareholder's address is 400 Perimeter
Center Terrace, Suite 650, Atlanta, Georgia 30346.
(9) Includes 105,558 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days. The
shareholder's address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
Georgia 30346.
(10) Includes 117,053 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days. The
shareholder's address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
Georgia 30346.
(11) Includes 4,138 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days. Excludes
2,520,193 shares of Common Stock owned by Welsh, Carson, Anderson & Stowe
VI, L.P. ("WCAS VI"), 246,896 shares of Common Stock owned by WCAS Capital
Partners II, L.P. ("WCAS CP II") and 81,384 shares of Common Stock owned by
WCAS Healthcare Partners, L.P. ("Healthcare Partners"). Mr. Paul, as a
general partner of the respective sole general partners of each of WCAS VI,
WCAS CP II and Healthcare Partners may be deemed to beneficially own the
shares owned by WCAS VI, WCAS CP II and Healthcare Partners. Mr. Paul
disclaims beneficial ownership of such shares. The shareholders address is
320 Park Avenue, New York, New York 10022-6815.
(12) Includes options to acquire 14,483 shares that are currently exercisable or
will become exercisable within 60 days. Does not include 206,214 shares
held by South Atlantic Venture Fund III, Limited Partnership ("South
Atlantic") of which Mr. Nordin is a special limited partner. Mr. Nordin
disclaims beneficial ownership of the shares owned by South Atlantic. The
shareholder's address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
Georgia 30346.
(13) Includes 4,138 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days and shares
held by Mr. Hoover or by the James B. Hoover IRA. Does not include
2,767,089 shares held by WCAS VI and WCAS CP II, of which Mr. Hoover serves
as a general partner of the sole general partner or limited partner of the
sole general partner. Mr. Hoover disclaims beneficial ownership of these
<PAGE>
shares. The shareholder's address is Dauphin Capital Partners, 108 Forest
Avenue, Locast Valley, New York 11560.
(14) Includes 12,414 shares purchasable upon exercise of stock options that are
currently exercisable or will become exercisable with in 60 days. The
shareholders address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
Georgia 30346.
(15) Mr. Wood's address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
Georgia 30346.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS
Mr. Eaton owns 100% of the common stock of Centennial Employee Management
Corporation ("CEMC"). The Company leases its facility-based employees at cost
from CEMC on a pass through basis. CEMC was set up to take advantage of reduced
workers' compensation and group health insurance rates and passes on these
insurance costs savings to the Company. Mr. Eaton receives no economic benefit
from his ownership of this entity.
Ashton Woods Rehabilitation Center ("AWRC"), which is leased by the
Company, is owned by Ashton Woods Limited Partnership. Mr. Dahl owns all of the
outstanding stock of the corporate general partner of this partnership. Mr. Dahl
receives no economic benefit from his ownership of this entity. Mr. Dahl is
Executive Vice President, Chief Financial Officer, Treasurer and director of the
Company.
On June 22, 1999, Messrs. Eaton and Dahl acquired 100% of the capital stock
of EBT Healthcare, Inc., general partner of EBI Healthcare, Ltd.("EBT"), as well
as all limited partnership interests in EBT. The Company currently leases twelve
facilities from EBT pursuant to leases entered into prior to the acquisition of
EBT by Messrs. Eaton and Dahl.
On December 1, 1999, the Company sold three skilled nursing facilities
owned by it to entities owned by Five Star Healthcare LLC ("Five Star"). The
Company also terminated a lease, which was then purchased by an entity owned by
Five Star. Five Star is wholly-owned by entities wholly-owned by Messrs. Eaton
and Dahl and their respective spouses. The Company continues to manage these
facilities pursuant to management agreements. Under these management agreements,
the Company has agreed to indemnify the owners against certain of the Company's
acts or omissions.
The Company and each of the Five Star entities entered into Indemnity
Agreements whereby the Company agreed to indemnify and hold these entities
harmless from any loss or liability asserted against amounts due such entities
for services provided to Medicare or Medicaid patients on or after December 1,
1999 as a result of the pending investigation of the Company by the Department
of Health and Human Services, Office of Inspector General.
See Item 11. Executive Compensation - Compensation Committee Interlocks and
Insider Participation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Listed on the Index to the Financial Statements and Schedules on page
F-1 of this Report.
(2) Financial Statement Schedules
Listed on the Index to the Financial Statements and Schedules on page
F-1 of this Report.
<PAGE>
Exhibit Index
Exhibit Description
- ------- --------------------------------------------------------------------
3.1 -- Third Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-1
Registration No. 333-24267, as amended).
4.1 -- Third Amended and Restated Articles of Incorporation of the Company,
including, without limitation Article III and Article VII
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
10.1 -- WelCare International, Inc. 1994 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
10.2 -- WelCare International, Inc. 1996 Executive Stock Plan (incorporated
by reference to Exhibit 10.2 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended).
10.3 -- WelCare International, Inc. 1996 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
10.4 -- Centennial HealthCare Corporation 1997 Stock Plan (incorporated by
reference to Exhibit 10.4 of the Company's Registration Statement on
Form S-1, Registration No. 333-24267, as amended).
10.5 -- Second Amended and Restated Credit Agreement dated December 16, 1997
by and among Centennial HealthCare Corporation and the Borrowers
named therein, the Lenders named therein, and Core States Bank, N.A.
and NationsBank, N.A., as lenders and agents for the lenders named
therein
10.6 -- Amended and Restated Employment Agreement between Welcare
International, Inc. and J. Stephen Eaton dated December 31, 1995
(incorporated by reference to Exhibit 10.6 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
10.7 -- Amended and Restated Employment Agreement between Paragon
Rehabilitation, Inc. and Laurence W. Lepley, Jr. dated as of January
1, 1998 (incorporated by reference to Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
10.8 -- Lease between Grant Park Nursing Home L.P. and WelCare Acquisition
Corp. n/k/a Centennial Acquisition Corporation ("CAC") commencing on
January 1, 1998 (incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1, Registration No. 333-
24267, as amended).
10.9 -- Amended and Restated Lease Agreement by and between Aston Woods
Limited Partnership and WelCare/Ashton Properties, Inc. n/k/a
Centennial/Ashton Properties Corporation ("CAPC"), dated December
20, 1994 (incorporated by reference to Exhibit 10.11 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
<PAGE>
10.10 -- [Amended and Restated Lease Agreement by and between EBT Healthcare
Properties, L.P. and CHPC dated July 6, 1994 (incorporated by
reference to Exhibit 10.12 of the Company's Registration Statement on
Form S-1, Registration No. 333-24267, as amended)]
10.11 -- Operating Lease by and between Health Care Property Investors, Inc.
and Cardinal of Indiana, Inc., as amended by that certain Amendment
to Operating Lease dated November 1, 1993, as amended by that certain
Second Amendment to Operating Lease dated April 1, 1994, as amended
by that certain Third Amendment to Operating Lease dated March 31,
1995, as amended by that certain Fourth Amendment to Operating Lease
dated January 1, 1996, as assigned (incorporated by reference to
Exhibit 10.13 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.12 -- Lease Agreement by and between Healthcare Realty Trust Incorporated
and Cardinal Development Co., Inc. ("Cardinal"), as amended by that
certain Amendment Number One to Lease Agreement dated November 1,
1993, as assigned to TMP pursuant to that certain Lease Agreement,
Consent and Release dated March 1, 1994 (incorporated by reference to
Exhibit 10.16 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.13 -- Lease Agreement by and between House Investments - Nursing Homes
Partners T and THP dated November 1, 1993 (incorporated by reference
to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-24267, as amended)
10.14 -- Operating Lease by and between HCPI Charlotte, Inc. and TMP dated
June 19, 1995 (incorporated by reference to Exhibit 10.20 of the
Company's Registration Statement on Form S-1, Registration No. 333-
24267, as amended).
10.15 -- Amended and Restated Management Agreement by and between Montclair
Medical Investors, Ltd., and CHMC dated January 1, 1995 (incorporated
by reference to Exhibit 10.28 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended)
10.16 -- Purchase Option Agreement dated as of December 1, 1999 by and between
Centennial HealthCare Management Corporation and Cypress Investors,
LLC, Dolphins View Investors, LLC, Hilltop Manor Investors, LLC,
Kannapolis Investors, LLC and Mather Investors, LLC.
10.17 -- Long Term Care Facility Management Agreement dated December 1, 1999,
by and between Hilltop Manor Investors, LLC and CHMC, regarding the
management of Hilltop Manor Health Care Center.
10.18 -- Indemnity Agreement dated December 1, 1999, by and between Centennial
HealthCare Corporation and Hilltop Manor Investors, LLC, regarding
Hilltop Manor Health Care Center.
10.19 -- Indemnity Agreement dated December 1, 1999, by and between Centennial
HealthCare Corporation and Cypress Investors, LLC, regarding Cypress
Manor Health and Rehabilitation Center.
10.20 -- Indemnity Agreement dated December 1, 1999, by and between Centennial
HealthCare Corporation and Dolphins View Investors, LLC, regarding
Cypress Manor Health and Rehabilitation Center.
10.21 -- Indemnity Agreement dated December 1, 1999, by and between Centennial
HealthCare Corporation and Mather Investors, LLC, regarding Mather
Nursing Center.
10.22 -- Indemnity Agreement dated December 1, 1999, by and between Centennial
HealthCare Corporation and Kannapolis Investors, LLC, regarding THS
of Kannapolis.
21.1 -- List of Subsidiaries
27.1 -- Financial Data Schedule
99.1 -- Cautionary Statements Regarding Forward-Looking Statements
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the
Company has duly caused this Form 10-K to be signed on behalf of the
undersigned, thereunto duly authorized, on April 14, 2000.
CENTENNIAL HEALTHCARE CORPORATION
/s/ J. Stephen Eaton
By:-----------------------------------------------
J. Stephen Eaton
Chairman, President and Chief Executive Officer
Pursuant to the Requirements of the 1934 Act, this Form 10-K has been
signed below by the following persons in the capacities indicated on April 14,
2000.
SIGNATURES
/s/ J. Stephen Eaton Chairman, President and Chief April 14, 2000
- ----------------------------- Executive Officer
J. Stephen Eaton
/s/ Alan C. Dahl Executive Vice President, Chief April 14, 2000
- ----------------------------- Financial Officer and Director
Alan C. Dahl
/s/ Andrew M. Paul Director April 14, 2000
- -----------------------------
Andrew M. Paul
/s/ Bob L. Wood Director April 14, 2000
- -----------------------------
Bob L. Wood
/s/ Bertil D. Nordin Director April 14, 2000
- -----------------------------
Bertil D. Nordin
/s/ Charles D. Nash Director April 14, 2000
- -----------------------------
Charles D. Nash
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
-----
Report of Independent Public Accountants.......................... F-2
Report of Independent Accountants................................. F-3
Consolidated Balance Sheets at December 31, 1999 and 1998......... F-4
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997.......................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................ F-7
Notes to Consolidated Financial Statements........................ F-8
Quarterly Consolidated Financial Information (Unaudited).......... F-29
Financial Statement Schedules (a):
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1999, 1998 and 1997.................... F-30
- ----------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Centennial HealthCare Corporation:
We have audited the accompanying consolidated balance sheet of Centennial
HealthCare Corporation (a Georgia corporation) and subsidiaries as of December
31, 1999 and the related consolidated statements of operations, shareholders'
equity and cash flows for the year ended December 31, 1999. These financial
statements and schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Centennial HealthCare Corporation and subsidiaries as of December 31, 1999 and
the consolidated results of their operations and their cash flows for the year
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 31, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Centennial HealthCare Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Centennial
HealthCare Corporation and its subsidiaries (the "Company") at December 31,
1998, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
April 7, 1999
F-3
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,790 $ 5,047
Patient accounts receivable and third-party payor settlements,
net of allowance for doubtful accounts of approximately $6,426
and $4,963 in 1999 and 1998, respectively....................... 71,220 99,910
Other receivables................................................ 3,420 4,382
Deferred income taxes............................................ 6,986 3,738
Prepaid expenses and other current assets........................ 1,491 2,250
-------- --------
Total current assets............................................ 84,907 115,327
Property and equipment, net...................................... 75,524 74,813
Notes and advances receivable, net............................... 39,915 37,893
Intangible assets, net of accumulated amortization of $7,184 and
$4,240 in 1999 and 1998, respectively........................... 41,145 42,804
Deferred income taxes............................................ 14,297 3,496
Other assets..................................................... 8,557 10,999
-------- --------
Total assets.................................................... $264,345 $285,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................. $ 7,263 $ 3,534
Checks issued against future deposits............................ 10,815 6,403
Accounts payable and accrued expenses............................ 16,871 22,653
Accrued payroll.................................................. 12,225 12,467
Accrued lease payable............................................ 3,937 3,863
Estimated merger dissolution costs............................... - 3,248
Other liabilities................................................ 8,098 6,034
-------- --------
Total current liabilities....................................... 59,209 58,202
Long-term debt, less current maturities........................... 108,076 112,849
Other long-term liabilities....................................... 9,247 598
-------- --------
176,532 171,649
Commitments and contingencies
Shareholders' equity:
Common stock with par value of $.01; 50,000,000 shares
authorized; 11,923 shares issued and outstanding................ 119 119
Paid-in capital.................................................. 102,015 102,015
Retained (deficit) earnings...................................... (13,971) 11,899
-------- --------
88,163 114,033
Note receivable from shareholder.................................. (350) (350)
-------- --------
Net shareholders' equity........................................ 87,813 113,683
-------- --------
Total liabilities and shareholders' equity...................... $264,345 $285,332
======== ========
</TABLE>
See accompanying notes to consolidated balance sheets.
F-4
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the year ended
December 31
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Net patient service revenues................................ $368,655 $342,203 $296,321
Management fees and other revenues.......................... 9,874 15,442 7,952
-------- -------- --------
Total revenues............................................ 378,529 357,645 304,273
-------- -------- --------
Expenses:
Facility operating expenses:
Salaries, wages and benefits.............................. 208,455 182,801 154,841
Other operating expenses.................................. 113,596 92,688 79,418
Lease expense............................................... 33,309 22,946 21,740
Corporate administrative costs.............................. 26,445 21,515 16,055
Depreciation and amortization............................... 12,588 9,292 6,760
Loss on closure of nursing facility......................... - 4,010 -
Provision for asset revaluation............................. 14,530 12,152 -
Terminated merger transaction costs......................... (2,583) 3,619 -
-------- -------- --------
Total operating expenses.................................. 406,340 349,023 278,814
-------- -------- --------
(27,811) 8,622 25,459
-------- -------- --------
Other income (expense):
Interest income............................................. 1,479 2,011 636
Interest expense............................................ (12,050) (9,165) (8,658)
-------- -------- --------
Total other expense....................................... (10,571) (7,154) (8,022)
-------- -------- --------
(38,382) 1,468 17,437
Provision (benefit) for income taxes.......................... (13,165) 1,504 6,800
-------- -------- --------
Income (loss) before minority interest, extraordinary loss
and cumulative effect of change in accounting method....... (25,217) (36) 10,637
Minority interest in net income of subsidiary,
net of income taxes......................................... (226) (279) (252)
-------- -------- --------
Income (loss) before extraordinary loss and cumulative
effect of change in accounting method....................... (25,443) (315) 10,385
Extraordinary loss on extinguishment of debt, net of
income tax benefit.......................................... - - (537)
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting method........................................... (25,443) (315) 9,848
Cumulative effect of change in accounting method, net of
income tax benefit.......................................... (427) - -
-------- -------- --------
Net income (loss)............................................. (25,870) (315) 9,848
Dividends and accretion on preferred stock.................... - - 5,873
-------- -------- --------
Net income (loss) applicable to common stock.................. $(25,870) $ (315) $ 3,975
======== ======== ========
Net income per common share data:
Basic:
Income (loss) applicable to common stock before
extraordinary loss and cumulative effect of change in
accounting method......................................... $ (2.13) $ (0.03) $ 0.54
Extraordinary loss on extinguishment of debt................ - - (0.06)
Cumulative effect of change in accounting method............ (0.04) - -
-------- -------- --------
Net income (loss) applicable to common stock................ $ (2.17) $ (0.03) $ 0.48
======== ======== ========
Diluted:
Income (loss) applicable to common stock before
extraordinary loss and cumulative effect of change in
accounting method......................................... $ (2.13) $ (0.03) $ 0.54
Extraordinary loss on extinguishment of debt................ - - (0.06)
Cumulative effect of change in accounting method............ (0.04) - -
-------- -------- --------
Net income (loss) applicable to common stock and equivalents $ (2.17) $ (0.03) $ 0.48
======== ======== ========
Weighted average common shares outstanding:
Basic....................................................... 11,923 11,906 8,289
======== ======== ========
Diluted..................................................... 11,923 12,078 8,462
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Special Voting Note
Common Stock Common Stock Retained Receivable
--------------- ---------------- Paid-In Earnings Treasury From
Shares Amount Shares Amount Capital (Deficit) Stock Shareholder Net
------ ------ ------ ------ ------- --------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.. 1,804 $ 20 2,942 $ - $5,707 $8,240 $(1,487) $(528) $11,952
Dividends paid on Series A, B
and E preferred stock....... - - - - - (462) - - (462)
Dividends accrued on Series C
preferred stock............. - - - - - (865) - - (865)
Exercise of stock options..... 3 - 1 - 36 - - - 36
Accretion of preferred
stock to estimated
redemption value........... - - - - - (106) - - (106)
Issuance of common
shares..................... 64 1 - - 777 - - - 778
Public offering of
common stock............... 4,600 44 - - 66,917 - 1,487 - 68,448
Offering costs for
common stock............... - - - - (1,679) - - - (1,679)
Conversion of special
voting common stock
due to Offering............ 2,943 29 (2,943) - (29) - - - -
Redemption of Series E
preferred stock............ - - - - - (715) - - (715)
Conversion of Series
A, B, C and D preferred
stock...................... 2,532 25 - - 30,912 (3,726) - - 27,211
Repurchase of Series C
preferred stock............ (84) - - - (1,342) - - - (1,342)
Net income.................... - - - - - 9,848 - - 9,848
------ ---- ------ ---- -------- -------- ------- ----- --------
Balance at December 31, 1997.. 11,862 119 - - 101,299 12,214 - (528) 113,104
Exercise of stock options..... 61 - - - 294 - - - 294
Proceeds from shareholder
note receivable............ - - - - - - - 528 528
Note receivable from
shareholder................ - - - - - - - (350) (350)
Tax benefit on options
exercised.................. - - - - 422 - - - 422
Net loss...................... - - - - - (315) - - (315)
------ ---- ------ ---- -------- -------- ------- ----- --------
Balance at December 31, 1998.. 11,923 119 - - 102,015 11,899 - (350) 113,683
Net loss...................... - - - - - (25,870) - - (25,870)
------ ---- ------ ---- -------- -------- ------- ----- --------
Balance at December 31, 1999.. 11,923 $119 - $ - $102,015 $(13,971) $ - $(350) $ 87,813
====== ==== ====== ==== ======== ======== ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the year ended
December 31
-----------------------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)...................................... $ (25,870) $ (315) $ 9,848
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization........................ 12,588 9,292 6,760
Provision for asset revaluation...................... 14,530 12,152 -
Terminated merger transaction costs.................. (2,583) 3,248 -
Cumulative effect of change in accounting method...... 427 - -
Amortization of discount on subordinated debt........ - - 62
Extraordinary loss on extinguishment of debt......... - - 880
Deferred income taxes................................ (13,747) (2,830) 3,881
Consulting expenses offset against note receivable... 125 125 78
Minority interest.................................... 226 458 413
Additional contractual reserves on accounts
receivable......................................... 19,400 - -
Provision for doubtful accounts...................... 3,605 1,432 863
Loss on sale of equipment............................ - 4 -
Change in assets and liabilities:
Accounts receivable................................ 5,934 (24,412) (29,167)
Prepaid expenses and other assets.................. 634 (4,646) (1,525)
Refundable deposits................................ 354 (105) (28)
Accounts payable, accrued liabilities and other
current liabilities.............................. 301 2,408 (935)
Other.............................................. (24) (1,568) (140)
-------- ---------- ---------
Cash provided by (used in) operating activities.. 15,900 (4,757) (9,010)
-------- ---------- ---------
Investing Activities:
Purchases of property and equipment.................... (8,187) (8,033) (7,567)
Proceeds from the sale of equipment.................... - 15 -
Notes and advances receivable, net of repayments....... (10,696) (12,449) (8,232)
Acquisitions, net of cash acquired..................... (3,789) (7,392) (17,355)
Other.................................................. (4,119) (2,506) 3,127
-------- ---------- ---------
Cash used in investing activities.................... (26,791) (30,365) (30,027)
-------- ---------- ---------
Financing Activities:
Proceeds from the exercise of stock options............ - 294 36
Proceeds from issuance of preferred stock.............. - - 10,000
Proceeds from borrowings............................... 10,930 37,700 28,750
Public offering of common stock........................ - - 68,448
Payment of stock offering costs........................ - - (1,679)
Distributions paid to minority partners................ (148) (296) (494)
Payments of dividends to preferred shareholders........ - - (462)
Payments on amounts due to related party............... - (141) (528)
Redemption of Series E Preferred Stock................. - - (5,000)
Repurchase of Series C Preferred Stock................. - - (1,343)
Principal payments on subordinated debt................ - - (25,300)
Principal payments on long-term debt................... (3,148) (1,399) (35,410)
-------- ---------- ---------
Cash provided by financing activities.................. 7,634 36,158 37,018
-------- ---------- ---------
Net change in cash and cash equivalents.................. (3,257) 1,036 (2,019)
Cash and cash equivalents, beginning of year............. 5,047 4,011 6,030
-------- ---------- ---------
Cash and cash equivalents, end of year................... $ 1,790 $ 5,047 $ 4,011
======== ========== =========
Supplemental disclosure:
Income taxes paid...................................... $ 470 $ 4,329 $ 1,289
Interest paid.......................................... $ 11,182 $ 8,019 $ 9,236
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies Reporting Entity
Centennial HealthCare Corporation ("Centennial" or the "Company") (formerly
known as WelCare International, Inc.) was incorporated in February 1989 under
the laws of the State of Georgia. The Company's principal business is to provide
basic and specialty healthcare services to patients in a long-term care setting.
At December 31, 1999, subsidiaries of the Company operated 100 owned, leased and
managed long-term care facilities with approximately 10,663 beds in 21 states
and the District of Columbia. In addition, through its subsidiaries, the Company
provided comprehensive contract rehabilitation services to Company-owned and
third-party long-term care facilities pursuant to 130 contracts, as well as home
health services through licensed home health offices primarily in North
Carolina.
In July 1997, Centennial completed an initial public offering of 4,000,000
shares of the Company's common stock (the "Offering"). In connection with the
Offering, the Company granted the underwriters an option to purchase up to
600,000 additional shares of the Company's common stock. This option was
exercised and closed in July 1997.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, and a majority-owned (55%) affiliated limited
partnership.
All significant intercompany accounts have been eliminated.
Revenues
Revenues that are reimbursed by patients at Centennial's long-term care
facilities are recorded at established billing rates. Revenues to be reimbursed
by contracts with third-party payors, primarily Medicare and Medicaid programs,
are recorded at the amount estimated to be realized under these contractual
arrangements. Revenues from the management of long-term care facilities and
acute care hospitals are recognized over the period during which the services
are rendered. Revenues from Medicare and Medicaid are generally based on
reimbursement of allowable costs of providing services to program beneficiaries.
The Company estimates amounts due from third-party payors and records the
revenue in the period services are rendered. Amounts ultimately payable by
Medicare and Medicaid are determined based on annual cost reports which are
subject to audit and retroactive adjustment by the payor. Changes in estimated
revenues due in connection with Medicare and Medicaid may be recorded by the
Company subsequent to the year of origination and prior to final settlement
based on improved estimates. Differences between estimated amounts due from the
Medicare and Medicaid programs and ultimate settlements with these programs are
recognized in the year of final settlement. Retroactive adjustments are
considered in the recognition of revenue on an estimated basis in the period the
related services are rendered, and such amounts are adjusted in future periods
as adjustments become known or as years are no longer subject to such audits,
reviews, and investigations.
Costs reimbursed under the Medicare program are subject to regional limits.
The costs at certain of the Company's facilities have frequently exceeded these
limits and, accordingly, the Company is required to submit exception requests to
cover such excess costs. The accompanying balance sheets include amounts
estimated to be recoverable under such exception requests.
F-8
<PAGE>
Accounts receivable, net, at December 31, 1999 and 1998 includes $42.7
million and $61.9 million, respectively, of amounts due from Medicare and
Medicaid programs.
Concentrations
A significant portion of the Company's revenues are received from Medicare,
Medicaid, private insurance and managed care payors as well as other long-term
care facilities which utilize the Company's contract therapy services. The
health care industry is experiencing the effects of the federal and state
governments trend toward cost containment, as government and other third-party
payors seek to impose lower reimbursement and utilization rates and negotiate
reduced payment schedules with providers. These cost containment measures,
combined with the increasing influence of managed care and competition for
patients, generally have resulted in reduced rates of reimbursement for services
to be provided by the Company. In recent years, several significant actions have
been taken with respect to Medicare and Medicaid reimbursement. These include
the adoption of the Medicare Prospective Payment System ("PPS") pursuant to the
Balanced Budget Act of 1997, as modified by the Medicare Balanced Budget
Refinement Act; and the repeal of the "Boren Amendment" federal payment standard
for Medicaid payments to nursing facilities. In addition to the above actions,
there have been, and the Company expects that there will continue to be, a
number of additional proposals to limit reimbursements to long-term care
facilities under the Medicare and Medicaid programs. Centennial cannot predict
whether any of these additional proposals will be adopted, or if adopted and
implemented, what effect such proposals would have on the Company.
Approximately 65%, 57% and 60% of the Company's total revenues for the years
ended December 31, 1999, 1998 and 1997, respectively, are from the Medicare and
Medicaid programs. While the Company operates long-term care facilities in 21
states and the District of Columbia, 30 of its 70 owned or leased facilities
are located in North Carolina, Indiana and Michigan. Laws and regulations
governing the Medicare and Medicaid programs are extremely complex and subject
to interpretation. As a result, there is at least a reasonable possibility that
recorded estimates will change by a material amount in the near term.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. Centennial has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Facility Operating Expenses
Facility operating expenses include direct operating costs at the facility
level. The majority of these costs consist of payroll and employee benefits
related to nursing, housekeeping and dietary services provided to patients, as
well as maintenance and administration of the facilities. Other significant
facility operating expenses include medical and pharmacy supplies, food,
utilities, and the cost of rehabilitation therapies. Also included in facility
operating expenses is the provision for doubtful accounts of approximately $3.6
million, $1.4 million and $863,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
Income Taxes
Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". Deferred taxes are provided for the differences between the tax
and accounting bases of the Company's assets and liabilities. For federal income
tax purposes, the Company and its subsidiaries file a consolidated income tax
return.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-9
<PAGE>
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of five to ten years for equipment, five to 15 years for furniture and 25
to 30 years for buildings and improvements.
Intangible Assets
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities, and are amortized using the
straight-line method, primarily over a 30- to 40-year period. Amortization
expense was $5.5 million, $3.5 million and $2.3 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
Assessment of Long-Lived Assets
The Company periodically reviews the carrying values of its long-lived assets
(primarily property and equipment and intangible assets) whenever events or
circumstances provide evidence that suggest that the carrying amount of long-
lived assets may not be recoverable. If this review indicates that long-lived
assets may not be recoverable, the Company reviews the expected undiscounted
future net operating cash flows from its facilities, as well as valuations
obtained in connection with various refinancings. Any permanent impairment in
value is recognized as a charge against earnings in the statements of
operations. As of December 31, 1999, the Company does not believe there is any
indication that the amortization period of its long-lived assets needs to be
adjusted nor recognition of any one-time impairment. During the years ended
December 31, 1999 and 1998, the Company recorded write-downs associated with
impairment of certain of its long lived assets (see Note 7).
Earnings per Share
In June 1997, the board of directors and shareholders of the Company approved
a reverse stock split of .6897 for one. All references to shares and weighted
shares outstanding used in the calculation of net income per share and per share
amounts have been retroactively adjusted to reflect this reverse stock split.
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," (see Note
18).
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 established new rules for the reporting and display of comprehensive
income and its components. Comprehensive income (loss) equals net income (loss)
for the Company.
Recently Issued Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued and then superseded by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133."
F-10
<PAGE>
These statements require 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 Nos. 133 and 137. SFAS Nos. 133
and 137 are effective for fiscal years beginning after June 15, 2000. The effect
on the financial statements upon adoption of SFAS Nos. 133 and 137 has not been
determined.
Effective January 1, 1999, the Company adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 provides guidance on
the financial reporting of start-up and organization costs and required such
costs to be expensed as incurred. The total amount of deferred start-up and
organization costs reported as a cumulative effect of a change in accounting
method is approximately $427,000, net of tax benefits of $230,000.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
2. Initial Public Offering
In July 1997, Centennial completed an initial public offering of 4,000,000
shares of the Company's common stock at a price of $16.00 per share. In
connection with the Offering, the Company granted the underwriters an option to
purchase up to 600,000 additional shares of the Company's common stock at the
Offering price of $16.00 per share. This option was exercised and closed in
July 1997. Proceeds to Centennial from the Offering and the exercise of the
underwriters' option totaled approximately $66.8 million, net of underwriting
discounts and commissions and approximately $1.7 million in Offering expenses.
The net proceeds of the Offering available to the Company were used to repay
two subordinated promissory notes aggregating $25.3 million, which accrued
interest at 10.8% and 11.7% per annum, to redeem the Series E Redeemable
Preferred Stock for $5.0 million, to repurchase approximately 84,000 shares of
Common Stock, which were received by the former holders of the Company's Series
C Preferred Stock, for approximately $1.3 million, and to repay approximately
$35.1 million outstanding under the Company's Senior Credit Facility with First
Union National Bank ("First Union") and NationsBank, N.A. ("NationsBank"), as
agents and lenders and the other lenders named therein (the "Senior Credit
Facility").
After the closing of the Offering, with the net proceeds of the exercise of
the underwriters overallotment option, Centennial offered the former holders of
the Company's Series C Preferred Stock pro rata repurchase of their shares of
common stock received upon the conversion of their Series C Preferred Stock at
the Offering price of $16.00 per share. The Company made this repurchase offer
as consideration for the agreement by these former holders to the conversion of
the Series C Preferred Stock into common stock. Holders of approximately 84,000
shares of the approximately 1.3 million shares available for pro rata repurchase
elected to have such shares repurchased by Centennial. Centennial repurchased
the 84,000 shares of common stock for approximately $1.3 million.
Centennial repaid the two subordinated promissory notes during the third
quarter of 1997, resulting in a loss on early extinguishment of debt of
approximately $537,000, net of income tax benefit of approximately $343,000.
Concurrent with the closing of the Offering, the Company's Series A, B, C
and D Preferred Stock were converted into approximately 2.5 million shares of
common stock, net of the stock repurchase noted above; the Company's special
voting common stock was converted into common stock; and Centennial's Treasury
Stock was converted into common stock.
F-11
<PAGE>
3. Mergers and Acquisitions
On October 22, 1998, Centennial announced that its Board of Directors had
approved the sale of the Company for $16.00 per share in cash to a new company,
("Centennial HealthCare Holdings Corporation"), formed by Welsh, Carson,
Anderson & Stowe, 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. During 1998,
the Company expensed approximately $3.6 million in transaction costs associated
with the terminated merger. An additional $600,000 of merger costs were expensed
during 1999. In 1999, the Company settled several of these liabilities for
amounts less than were originally accrued and recorded a reduction in expense
of $3.1 million which is included in terminated merger transaction costs in the
December 1999 consolidated statement of operations.
In January, 1999, the Company acquired a leasehold interest in six skilled
nursing facilities, totaling 795 licensed available beds, located in
Massachusetts (the "Flatley Facilities"). The Company paid total consideration
of $4.2 million in cash and assumed liabilities for the leasehold interest as
well as the patient accounts receivable of the previous owner. 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 North Carolina ("Hunter Woods"), and
Choctaw County Medical Center, a facility with 68 nursing home beds and 22
hospital beds, located in Mississippi ("Choctaw"). The Company paid $3.7 million
and $1.4 million in cash and assumed liabilities for the leasehold interests in
Hunter Woods and Choctaw, respectively. The Company recorded intangible assets
associated with its leasehold interests in the Flatley Facilities, Hunter Woods
and Choctaw totaling $6.5 million which are included in intangible assets in the
accompanying 1999 consolidated balance sheet.
In October 1998, the Company discontinued its operations of Wellington Nursing
and Rehabilitation Center ("Wellington") a 140-bed facility located in North
Carolina, through a sublease 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 Indiana, which is currently held for sale. In December 1998,
the Company converted its lease of Maple Heights of Hiawatha ("Hiawatha"), a 81-
bed facility located in Kansas, to a management contract until the sale of this
facility in June 1999.
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
Leases."
In January 1998, the Company entered into management agreements for six skilled
nursing facilities, with a total of 836 licensed available beds, located in
North Carolina. These agreements were terminated in September 1999. In
February 1998, the Company entered into a management agreement for a 59-bed
rural hospital in northern Florida. 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 December 1997, Centennial acquired a 58-bed skilled nursing facility in St.
Peterburg, Florida (the "Florida Facility"), which had previously been managed
by the Company since June 1991. Total consideration of approximately $3.3
million included borrowings under the Senior Credit Facility of approximately
F-12
<PAGE>
$1.1 million, and the reduction of a note receivable to the Company from the
Florida Facility of approximately $2.2 million.
In August 1997, Centennial acquired substantially all of the business and assets
of Complex Care, Inc. ("CCI"), a provider of physical, occupational and speech
therapy services through 45 contracts with long-term care facilities in
Connecticut and Rhode Island. The Company paid total consideration of $7.0
million, utilizing borrowings under its Senior Credit Facility. Additional
consideration of up to $500,000 may be paid by the Company under an earn-out
agreement. In 1998, certain conditions of the earn-out had been met and the
Company paid out approximately $250,000 to the previous owner of CCI. The
remaining $250,000 of contingent consideration was written off to intangible
assets recorded in the purchase of CCI.
In May 1997, the Company acquired by merger Total Care Consolidated, Inc.
("Total Care"), a provider of home health services, with 25 home health offices
located primarily in North Carolina. Total consideration of $8.0 million
consisted of $6.0 million in cash, which was funded under the Senior Credit
Facility, and $2.0 million in the form of a convertible promissory note which
was paid in full in June 1999.
In March 1997, the Company acquired a leasehold interest in a rural hospital
located in northern Florida. In October 1996, the Company entered into a
management agreement and a lease agreement with the owner of a hospital and
three licensed home health care offices, located in northern Florida. The
agreement provided that the Company would manage the hospital until all
necessary approvals and licenses were obtained, at which time the Company would
operate the hospital under a long-term lease. The Company accounted for the
transaction as a management agreement beginning in October 1996; in June 1997,
all necessary approvals and licenses were obtained, and the Company has operated
the hospital under a long-term lease since that date. The Company's consolidated
financial statements include the hospitals from the effective date of the
transactions.
4. Operating Leases
At December 31, 1999, the Company operated 64 long-term care facilities and two
hospitals under operating leases with various expiration dates through 2012.
The Company entered into eight new lease agreements in 1999 and fourteen new
leases in 1998.
During 1999 and 1998, the Company financed fifteen skilled nursing facilities
under the lease component of its Senior Credit Facility (the "Lease Facility").
Five of the leases were for facilities that were previously leased by the
Company, and one of the leases was for a facility that was previously managed by
the Company. These leases have three-year term and provide the Company with
an option to renew the leases after the initial lease term. Under the terms of
the Lease Facility, the Company is required to fund escrow deposits of $5.0
million on December 31, 2000 and $10.0 million on December 31, 2001 and 2002.
As of December 31, 1999, fifteen of the long-term care facility leases are with
affiliated entities, of which the Company or an affiliate of one of the
Company's officers serves as a general partner. At December 31, 1998 and 1997,
the Company leased two facilities from affiliated entities. The leases with
affiliated entities expire at various dates through 2006. Total lease expense to
the Company as a result of these affiliated leases was $5.0 million, $3.0 and
$3.2 million for the years ended December 31, 1999, 1998 and 1997, respectively.
In connection with one of the leases, the Company paid the affiliated lessor a
deposit of $2.9 million, which is refundable upon the termination of the lease.
F-13
<PAGE>
In 1999, the Company determined that the carrying value of this deposit was
impaired due to declines in the performance of the leased facility and reduced
the value to $1.4 million. The Company had net payables to the affiliated
lessors of approximately $2.1 million and $1.6 million at December 31, 1999 and
1998, respectively.
Minimum future rent payments under the facility leases and related equipment and
office space are summarized as follows (in thousands):
Year Amount
- ---- --------
2000 $ 33,947
2001 31,983
2002 21,063
2003 17,866
2004 16,836
Thereafter 80,451
--------
$202,146
--------
5. Total Revenue
The distribution of total revenue by class of payor for the years ended
December 31, 1999, 1998 and 1997 was as follows (in thousands):
Year ended December 31
--------------------------
Class of Payor 1999 1998 1997
- -------------- ------- -------- --------
Private pay, management fee and other $133,415 $152,564 $120,371
Medicaid 164,853 119,559 111,380
Medicare 80,261 85,522 72,522
-------- -------- --------
$378,529 $357,645 $304,273
-------- -------- --------
The above revenue amounts are net of third-party contractual allowances of
$47.1 million, $59.8 million and $54.2 million for the years ended December 31,
1999, 1998 and 1997, respectively.
Included in other operating expenses is provision for bad debt of
approximately $3.6 million, $1.4 million and $863,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
6. Property and Equipment
Property and equipment consisted of the following at December 31, 1999 and
1998 (in thousands):
1999 1998
-------- --------
Land $ 4,595 $ 4,595
Buildings and improvements 69,523 69,098
Furniture and equipment 23,320 17,312
-------- --------
97,438 91,005
Less accumulated depreciation (21,914) (16,192)
-------- --------
$ 75,524 $ 74,813
======== ========
F-14
<PAGE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
totaled $7.1 million, $5.8 million and $4.5 million, respectively.
7. Provision for Asset Revaluation
Year Ended December 31, 1999:
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 require
additional funding for personnel and other operating costs prior to
stabilization. The advances are to be repaid from available cashflow 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 cashflow 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, operating cashflow at
several 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.
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 significantly 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 as of
December 31,1999 associated with Paragon and the nursing facilities was
approximately $9.8 million and $19.6 million, respectively.
Year Ended December 31, 1998:
During the third quarter of 1998, the Company completed its review of the
effects of the upcoming prospective payment system ("PPS") on its operations.
Based upon the Company's projections of future revenue and expense changes
associated with the phase-in of PPS, the Company determined that profitability
at certain of its nursing centers acquired in the 1995 merger with Transitional
Health Services, Inc. would be less than expected. In addition, the Company has
experienced continued declines in revenue at Total Care due to decreases in
Medicare reimbursement for home health services. Accordingly, during 1998 the
Company recorded write-downs of property and equipment and goodwill at its
nursing centers of approximately $3.4 million and $7.6 million, respectively.
In addition, the Company wrote off approximately $1.2 million of goodwill
associated with Total Care.
In December 1995, as part of the Company's merger with THS, the Company assumed
operations of THS of South Bend, a 191-bed skilled nursing facility located in
South Bend, Indiana. Prior to its acquisition by the Company, this facility had
a history of operating losses, had received negative state licensure surveys,
and was in jeopardy of losing its license. At the time of the acquisition, the
Company recorded a $3.0 million reserve against a future loss on the disposition
of the facility, which the Company intended to complete within two years. The
Company was unable to sell the facility, and as a result, management determined
that the best course of action was to close the facility. The facility closed
in November 1998.
F-15
<PAGE>
During the third quarter of 1998, the Company recorded an estimated loss of
$4.0 million associated with the closure of this facility and the relocation of
its residents. The Company continues to market the facility for sale, with
disposition expected by the second quarter of 1999. As of December 31, 1999,
the carrying value of the facility was approximately $1.8 million. The Company
suspended depreciation of these assets in August of 1998.
8. Sale of Certain Facilities
In December 1999, the Company transferred three skilled nursing centers for net
cash proceeds of approximately $9.1 million to Five Star HealthCare Investors,
LLC ("Five Star"). Five Star was and is currently owned by the Company's chief
executive officer, Mr. Eaton, and its chief financial officer, Mr. Dahl, and
their respective spouses. The proceeds from the Five Star sale were utilized
principally to repay debt obligations of the Company. The Company continues to
manage these facilities pursuant to management agreements with Five Star which
provide for the Company to receive annual management fees equal to 6% of the
respective facility's gross revenues, payable in monthly installments. The
Company and Five Star also entered into a purchase option agreement which
provides the Company with the right to repurchase the facilities at any time
beginning one year from the sale date and ending on December 1, 2004 at a price
equal to Five Star's acquisition cost plus 4% per annum. If the option is
exercised prior to December 1, 2001, the purchase price is equal to Five Star's
acquisition cost plus 8%.
Because of the repurchase option, the transaction is accounted for as a profit-
sharing arrangement. No gain or loss was recorded on the transaction, and the
Company continues to maintain and depreciate the property and equipment of the
respective facilities on its balance sheet. The net proceeds received from Five
Star in the transaction was recorded as a deposit and is included in other
liabilities in the December 31, 1999 consolidated balance sheet.
9. Long-Term Debt
Long-term debt consists of the following at December 31, 1999 and 1998 (in
thousands):
1999 1998
-------- --------
Bank credit facilities $ 79,925 $ 78,950
Mortgage notes payable 17,242 17,563
Other notes 1,776 2,663
-------- --------
98,943 99,176
Capital lease obligations 16,396 17,207
-------- --------
115,339 116,383
Current maturities of long-term debt (7,263) (3,534)
-------- --------
$108,076 $112,849
-------- --------
Bank Credit Facilities:
In July 1998, the Company expanded its Senior Credit Facility through a third
amendment to its existing second amended and restated credit agreement. Through
this amendment, the Company's maximum aggregated advance limit was increased
from $125.0 million to $160.0 million, the term was extended to July 31, 2003
and a $40.0 million portion (the "Lease Facility") of the total $160.0 million
commitment was designated for use in financing certain Company lease
transactions. The remaining $120.0 million portion (the "Revolver") of the
commitment was made available for financing existing indebtedness under the
F-16
<PAGE>
previous Senior Credit Facility, acquisitions, capital expenditures, working
capital and general corporate purposes.
In October 1998, the Company increased amounts available under the Lease
Facility to $70.0 million with a corresponding decrease in commitments available
under the Revolver to $90.0 million to accommodate the Company's lease of two
facilities located in Missouri.
In December 1998, the Company expanded total commitments available through the
Lease Facility by $65.0 million to accommodate the Company's lease of six
properties located in Massachusetts. Following the increase, the Company's
total Senior Credit Facility commitment was $225.0 million, of which $90.0
million was reserved for the Revolver and the remaining balance of $135.0
million was allocated for use through the Lease Facility.
In June 1999, the Company amended its Senior Credit Facility to transfer $5.7
million of availability under the Lease Facility to the Revolver. The
amendment, coupled with previous 1998 amendments to the Lease Facility,
increased the Company's interest rate to 3.0% over LIBOR and calls for
amortization of principal, or reduction in availability, of $5.7 million on
December 31, 1999, $6.0 million on December 31, 2000, and $12 million during
each of the years ending December 31, 2001 and 2002.
As of December 31, 1999, the Company had $74.9 million outstanding under its
Senior Credit Facility, net of issued standby letters of credit of approximately
$6.7 million, with remaining availability of $8.4 million.
Interest accrues at varying rates dependent upon underlying interest rates
and the Company's selection of loan amounts and periods. The Company can elect a
rate based on First Union National Bank's prime rate or LIBOR, each increased by
an applicable margin, as defined in the Senior Credit Facility, which varies
dependent upon the ratio of debt to earnings before interest, taxes,
depreciation, amortization and operating lease expense. The weighted average
interest rate on the Company's borrowings at December 31, 1999 was approximately
2.75% over LIBOR, or 9.2%. Interest is generally paid monthly on prime-based
borrowings and quarterly on LIBOR-based borrowings.
The Senior Credit Facility is collateralized by the stock of the Company's
subsidiaries. The Company is required to pay a fee on the average unused portion
of the commitment. With limited exceptions, proceeds from additional equity
issuances, sales of Company assets and other debt instruments must be used to
repay a portion of the outstanding borrowings under the Senior Credit Facility.
The Senior Credit Facility includes various negative covenants including
restrictions on additional loans and advances, guaranties, stock repurchases and
redemptions, and the payment of dividends. Terms of the Senior Credit Facility
require the Company to comply with certain financial and other covenants, the
violation of which could cause the amounts of outstanding principal, interest
and fees to be immediately due and payable. At December 31, 1999, the Company
was in compliance with all of its debt covenants.
In January 1999, the Company obtained a $5.0 million Line of Credit from Bank of
America, N.A. ("Bank of America"), which bears interest at Bank of America's
prime rate or 3.0% over Libor for selected portions and matured on December 31,
1999. This obligation was repaid $2.0 million in January 2000 and $3.0 million
in March 2000.
Mortgage Debt:
At December 31, 1999 and 1998, the Company had $17.2 million and $17.6 million,
respectively, of mortgage debt outstanding, including a current portion of
approximately $308,000 and $277,000, respectively. The mortgage debt requires
monthly payments of principal and interest of approximately $157,000. The debt
F-17
<PAGE>
agreements are for five to twenty-year periods with amortization periods
covering twenty to twenty-five years. At December 31, 1999, interest rates on
the mortgages range from 7.3% to 10.50%. These debts are collateralized by real
property.
Future maturities of mortgage debt are summarized as follows (in thousands):
2000 $ 308
2001 4,902
2002 6,369
2003 157
2004 170
Thereafter 5,336
-------
$17,242
=======
Capital Leases:
The following is a schedule of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of
December 31, 1999 (in thousands):
Nursing
Year ending December 31 Equipment Facilities Total
--------- ---------- -------
2000 $25 $ 2,468 $ 2,493
2001 25 2,468 2,493
2002 20 2,468 2,488
2003 - 2,468 2,468
2004 - 2,468 2,468
Thereafter - 16,038 16,038
--- ------- -------
Total minimum lease payments 70 28,378 28,448
Less amount representing interest 12 12,040 12,052
--- ------- -------
Present value of minimum lease payment 58 16,338 16,396
Current portion 17 857 874
--- ------- -------
Noncurrent portion $41 $15,481 $15,522
=== ======= =======
The capital lease agreements include rent escalation clauses based on
contingent factors such as increases in the consumer price index or annual
increases in a facility's revenues and have resulted in increased current and
future lease payments. The interest rate on the capital leases is based on the
Company's borrowing rate at the time a lease is executed. The average interest
rate on nursing facilities and equipment was 10.00% and 12.00%, respectively.
F-18
<PAGE>
10. Equity Transactions
The Company has stock options outstanding under the 1994 Stock Option Plan,
the 1996 Executive Stock Plan, the 1996 Employee Stock Option Plan, and the 1997
Stock Plan (collectively referred to as the "Stock Option Plans").
The 1994 Stock Option Plan and the 1996 Executive Stock Plan provide that
options may be granted to officers, directors and key employees; options vest
based upon either years of service, or at various intervals from 1996 through
2000. The 1996 Employee Stock Option Plan provides that options may be granted
to certain employees; options vest at various intervals through 1998. The 1997
Stock Plan provides that options may be granted to officers, non-employee, non-
affiliated directors and key employees at an exercise price and vesting schedule
to be determined by the compensation committee of the board of directors at the
time of grant. The options granted pursuant to the 1997 Stock Plan vest over
various schedules from 1998 through 2001.
All stock options have been granted with exercise prices equal to or greater
than the estimated fair market value of the common stock on the date of grant
and are exercisable for up to ten years, as determined by the Company's board of
directors.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--beginning of period............. 895,442 $17.58 526,782 $ 13.47 355,160 $ 12.09
Granted.............................................. 8,276 5.47 517,280 20.41 183,340 16.00
Exercised............................................ - - (86,231) (10.61) (4,115) (8.74)
Forfeited............................................ (50,000) 20.63 (62,389) (16.03) (7,603) (11.68)
------- ------- -------
Options outstanding-end of period.................... 853,718 $17.28 895,442 $ 17.58 526,782 $ 13.47
======= ====== ======= ======= ======= =======
Weighted average fair value of options granted
during the period................................. $ 5.47 $ 12.23 $ 6.40
</TABLE>
The fair value of each option is estimated on the grant date using the Black-
Scholes option pricing model with the following weighted average assumptions:
1999 1998 1997
---- ----- -----
Expected volatility................... 66.4 % 66.4 % 41.0 %
Risk-free interest rate............... 5.85% 5.32% 6.15%
Expected term......................... 5 5 4
Dividend yield........................ 0 % 0 % 0 %
The following table summarizes information about outstanding and exercisable
stock options at December 31, 1999:
F-19
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------- ------------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Exercise Prices Shares Life Shares Price
--------------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C>
$ 5.00-$10.00................... 68,956 2.5-9.5 yrs 60,680 $ 5.00-$10.00
10.01- 15.00................... 201,580 6.0-8.5 yrs 196,302 10.01- 15.00
15.01- 20.00................... 175,622 8.0-9.0 yrs 157,787 15.01- 20.00
20.01- 24.00................... 407,000 8.0-8.5 yrs 259,055 20.01- 24.00
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for fixed stock option plans. Accordingly, no compensation cost has
been recognized for the fixed stock option plans. Had compensation cost been
based on the estimated fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement No. 123, the net effect on
net income (loss) and income (loss) per share for the years ended December 31,
1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated
below:
1999 1998 1997
-------- ------- ------
Pro forma net income (loss) (in thousands) $(27,230) $(1,709) $9,582
-------- ------- ------
Pro forma income (loss) applicable to
common stock:
Basic.................................... $ (2.28) $ (0.14) $ 0.45
-------- ------- ------
Diluted.................................. $ (2.28) $ (0.14) $ 0.44
-------- ------- ------
11. Income Taxes
The components of the income tax provision (benefit) for the years ended
December 31, 1999, 1998 and 1997 are as follows (in thousands):
Year ended December 31
---------------------------
1999 1998 1997
-------- ------- ------
Current
Federal.................................... $ - $ 3,302 $ 525
State...................................... 582 1,032 2,394
-------- ------- ------
582 4,334 2,919
-------- ------- ------
Deferred
Federal.................................... (12,541) (2,002) 4,849
State...................................... (1,206) (828) (968)
-------- ------- ------
(13,747) (2,830) 3,881
-------- ------- ------
Total provision (benefit)..................... $(13,165) $ 1,504 $6,800
-------- ------- ------
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions (benefit) for income taxes for
the years ended December 31, 1999, 1998 and 1997 are as follows (in thousands):
Year ended December 31
---------------------------
1999 1998 1997
-------- ------- ------
Tax at U.S statutory rate..................... $(13,049) $ 499 $5,929
State income taxes............................ (1,919) 396 598
Goodwill amortization......................... 200 546 253
Increase in valuation reserve................. 700 - -
Other......................................... 903 63 20
-------- ------- ------
Provision (benefit) for more taxes......... $(13,165) $ 1,504 $6,800
======== ======= ======
F-20
<PAGE>
Deferred tax assets and liabilities are comprised of the following at December
31, 1999 and 1998 (in thousands):
1999 1998
-------- -------
Current deferred income tax assets:
Allowances for uncollectible receivables........... $ 3,852 $ 326
Liabilities not deductible for tax purpose......... 3,134 3,412
Accrued closing costs.............................. - -
------- -------
Current deferred income taxes.................... $ 6,986 $ 3,738
======= =======
Noncurrent deferred income tax assets (liabilities):
Temporary goodwill................................. $ 3,815 $ 1,875
Write-up of property and equipment................. (1,606) (2,034)
Net operating loss and tax credit carryforward..... 8,261 1,815
Tax basis receivables in excess of book............ 2,733 -
Net effects of capital leases...................... 1,539 1,539
Valuation allowance................................ (700) -
Other.............................................. 255 301
------- -------
Long-term deferred income taxes.................. $14,297 $ 3,496
------- -------
As of December 31, 1999, the Company had approximately $22.2 million of
federal net operating loss carryforwards available to offset future taxable
income through 2019. In addition, the Company had various state net operating
loss carryforwards and approximately $1.6 million of AMT credit carryforwards.
Due to some uncertainty surrounding the realization of the future benefit of
the deferred tax assets, the Company established a valuation allowance of
$700,000 against the deferred tax assets as of December 31, 1999.
12. Management Agreements
As of December 31, 1999, the Company provided operational management services
for 30 facilities under long-term management contracts having remaining
effective terms ranging from 5 to 17 years. The management agreements provide
for the Company to receive annual fees ranging from 6.0% to 6.5% of each
facility's gross revenues, payable on a monthly basis and may include additional
compensation based on achieving certain performance standards. The agreements
also may include provisions for additional fees for management services outside
the scope of regular operational services performed.
The Company recorded fees totaling approximately $145,000 during the year
ended December 31, 1997 as a result of a management agreement with an affiliate;
the related facility was purchased by the Company in December 1997. Five
management agreements, (three of which were terminated during 1998 and two of
which were terminated in 1997), with fees totaling approximately $172,000 and
$898,000 during the years ended December 31, 1998, 1997, respectively, were
with affiliated limited partnerships in which certain subsidiaries of the
Company served as general partner and can be terminated by either party without
cause given sixty days notice.
The Company also performs oversight management services for three facilities
in which it oversees the management of another management company. The Company
typically receives a fee of 1% of revenues for oversight management services.
F-21
<PAGE>
In connection with the Company's facility management agreements for several
facilities located primarily in North Carolina and Florida, the Company has made
certain advances for working capital needs. The majority of these centers are
start-up or development projects and require additional funding for personnel
and other operating costs prior to stabilization. The advances are to be repaid
from available cash flows from the respective facilities and from other funds
provided by the owners of the facilities and earn interest at varying rates
based on the prime lending rate. Advances outstanding as of December 31, 1999
and 1998 were $20.5 million and $19.7 million, respectively, (net of valuation
reserves of $9.3 million and $1.3 million in 1999 and 1998, respectively) and
are included in notes and advances receivable in the accompanying consolidated
balance sheets.
During 1996, the Company advanced approximately $10.0 million pursuant to two
promissory notes in the amounts of $5.5 million and $4.5 million to
unaffiliated owners of eight managed facilities in North Carolina. The advances
were utilized by the owners to purchase the related facilities or facility
leasehold interest with respect to these facilities that are managed by the
Company. The promissory notes are due on December 31, 2006 and earn interest at
the greater of a specified prime rate plus 3%, or 12%. Both notes are
collateralized by receivables and the pledge of the stock of the respective
owners and are included in notes and advances receivable in the accompanying
balance sheets.
13. Transactions with Related Parties
At December 31, 1999, the Company had employment agreements with four officers
which provide for salary continuation and noncompetition with the Company,
subject to certain conditions.
The Company leased fourteen long-term care facilities from affiliated lessors.
During the year ended December 31, 1998, the Company managed four long-term
care facilities for affiliated limited partnerships in which the Company serves
as a general partner.
Beginning December 1, 1999, the Company managed five facilities owned by two
of the Company's executive officers.
Centennial leases its facilities' employees from an affiliated company which
is owned by the president of the Company. The total payroll costs and
reimbursements from the Company totaled $98.1 million, $49.1 million and $37.2
million for the years ended December 31, 1999, 1998 and 1997, respectively. Such
costs are billed by the related entity at cost.
14. Commitments and Contingencies
Industry Risk
The health care industry is subject to numerous laws and regulations. The
subjects of such laws and regulations include, but are not limited to, matters
such as licensure, accreditation, government health care program participation
requirements, reimbursement for patient services, and Medicare and Medicaid
fraud and abuse. Recently, government activity has increased with respect to
investigations and/or allegations concerning possible violations of fraud and
abuse and false claims statutes and regulations by health care providers.
Entities that are found to have violated these laws and regulations may be
excluded from participating in government health care programs, subjected to
fines or penalties or required to repay amounts received from the government for
previously billed patient services.
F-22
<PAGE>
Litigation
On February 28, 2000, a complaint was filed in the Superior Court of Fulton
County by Crandon Capital Partners, as a purported class action, against
Centennial and each of its directors. The complaint, styled Crandon Capitol
Partners v. Eaton, et al, seeks compensatory damages and injunctive relief
arising from the merger agreement among Centennial, Holding and Acquisition.
The complaint alleges the individual defendants breached their fiduciary duties
in connection with the merger by, among other things, failing to conduct an
auction or other suitable market check, failing to consider other strategic
alternatives and accepting insufficient consideration. Centennial believes that
the claims are without merit and will defend vigorously.
On March 26, 1999, the Company received an investigatory subpoena from the
Department of Health and Human Services, Office of the Inspector General,
requesting records in connection with an investigation of possible or otherwise
improper claims for payment under Title XVIII (Medicare) of the Social Security
Act. The request relates to records for the period January 1, 1994 to the
present concerning certain of the Company's internal policies. The Company is
providing all requested records and is cooperating fully with the
investigation. There can be no certainty at this time that this matter will be
resolved. Resolution of this matter could have a material adverse effect on the
Company.
On December 3, 1999, a Missouri facility that the Company has leased and
operated since October 31, 1999 received a subpoena from the United States
Attorney's Office for the Western District of Missouri. The subpoena sought
records for five individuals who resided in the Missouri facility during the
period January 1, 1998 through the date of the subpoena and billing and
staffing records related to these residents and the facility. The facility has
provided the requested records and the Company is cooperating with the
government's review.
As of December 31, 1999, the Company did not have any other pending legal
proceedings that separately, or in the aggregate, if adversely determined, would
have a material adverse effect on the Company. The Company is, and may be, from
time to time, party to litigation or administrative proceedings which arise in
the normal course of business.
Other
Under the provisions of the Senior Credit Facility, Centennial is required to
hedge a portion of its floating rate debt outstanding under the Senior Credit
Facility. Effective April 20, 1998, the Company entered into an interest rate
swap agreement with First Union. Through the agreement, the Company has
exchanged its floating rate interest obligations on $18.0 million in principal
at a fixed rate of 5.65% per annum for a period of five years. First Union has
the option of canceling the agreement on April 19, 2001. The fixing of interest
rates for this period reduces in part the Company's exposure to the uncertainty
of floating interest rates. The differential paid or received on the interest
rate swap agreement is recognized as an adjustment to interest expense.
Effective October 1998, the Company entered into two additional interest rate
swap agreements, one with NationsBank and one with Credit Lyonnais Americas,
whereby the Company exchanged its floating rate interest obligations on a total
of $20.0 million in principal at a fixed rate of 5.57% per annum for a period of
five years. Both NationsBank and Credit Lyonnais Americas have the option of
canceling their respective agreements at the end of three years from the
effective dates.
The Company is exposed to credit loss in the event of nonperformance by First
Union, NationsBank, and/or Credit Lyonnais Americas. However, the Company does
not anticipate nonperformance by these parties, and no material loss would be
expected from their nonperformance. The fair value of the interest rate swap
agreements was not recognized in the consolidated financial statements since
they are accounted for as hedges. At December 31, 1999, the estimated fair
value of the interest rate swap agreements, based on current market rates,
approximated a net receivable of approximately $528,000.
Prior to 1998, Centennial self-insured for workers' compensation claims for
its employees. The Company maintained stop-loss insurance such that the
Company's liability for losses is limited. Beginning January 1998, the Company
entered into a guaranteed cost insurance program for workers' compensation.
Beginning in July 1999, the Company increased the deductible under its general
and professional liability insurance policies from $25,000 per occurrence to
$150,000 per occurrence with a $5.0 million aggregate limit. The Company is
self-insured for its employee group health program but carries excess insurance
with commercial carriers for losses above $75,000 per participant. The provision
for estimated workers' compensation, general liability and health insurance
claims includes estimates of the ultimate costs for both reported claims and
claims incurred but not reported ("IBNR"). The Company accrues for IBNR claims
for its general and professional liability and workers' compensation on a
discounted basis.
15. Employee Benefits
The Company has 401(k) savings plans available to substantially all employees
depending on their length of service. Employees may defer up to 15% of their
salary, subject to the maximum permitted by law. The Company may, at its
discretion, match a portion of the employee contribution. The Company
F-23
<PAGE>
funded approximately $27,000, $161,000 and $363,000 during the years ended
December 31, 1999, 1998 and 1997, respectively, as a match to the employee
contributions.
16. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
those instruments and includes restricted cash reflected on the balance sheet
under the caption "Other Assets."
Notes Receivable and Advances
The carrying amount approximates fair value for the notes receivable. The fair
value is estimated as the net present value of cash flows that would be received
on the notes over the remaining term of the notes using current market interest
rates rather than stated interest rates.
Long-Term Debt
The carrying amount of the Credit Agreement approximates fair value since the
Credit Agreement was recently renegotiated at market rates. The carrying amount
of mortgage notes approximates their values based on the net present value of
cash flows that would be paid on each note over the remaining note term using
the Company's current incremental borrowing rate rather than the stated interest
rates on the notes.
17. Segment Information
In 1998, Centennial adopted SFAS No. 131. The Company has determined that its
reportable segments are those that are based on the Company's method of internal
reporting, which disaggregates its business by services provided. The Company's
reportable segments are management services/corporate, long-term care facilities
and rehabilitative therapy services. Management fee revenues and all corporate
expenses and overhead are recorded in the management services/corporate segment.
The long-term care facilities segment provides basic healthcare services to
patients in a long-term care setting, including skilled nursing and support,
housekeeping, laundry, dietary, recreational and social services. The
rehabilitative therapy services segment provides specialty healthcare services,
including comprehensive rehabilitation therapy, respiratory therapy and infusion
therapy. The "All Other" category represents the Company's hospital services,
home health services, and the Company's subsidiary providing intravenous therapy
and other services.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies," except that income tax expense is
allocated to the segments by an application of the company wide effective rate
to the profit/loss of each segment. Centennial evaluates the performance of its
segments and allocates resources to them based on earnings before interest,
taxes, depreciation, and amortization ("EBITDA").
The tables below presents information about EBITDA and total assets used by
the chief operating decision maker of Centennial as of and for the years ended
December 31, 1999, 1998 and 1997:
F-24
<PAGE>
<TABLE>
<CAPTION>
1999: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 10,413 $309,219 $37,464 $46,717 $(25,284) $378,529
EBITDA (10,982) 10,974 1,320 (4,588) - (3,276)
Total Assets 130,649 124,762 16,282 18,784 (26,132) 264,345
1998: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 15,842 $248,007 $72,255 $50,265 $(28,724)(1) 357,645
EBITDA (11,321) 15,931 9,045 4,259 - 17,914
Total Assets 128,007 140,250 24,684 25,002 (32,611)(2) 285,332
1997: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All Reconciling
Corporate Facilities Services Other Items Total
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 8,237 $228,490 $52,603 $31,174 $(16,231) $304,273
EBITDA (3,593) 23,877 6,764 5,171 - 32,219
Total Assets 109,206 126,130 16,267 18,222 (26,176) 243,649
</TABLE>
1. Represents elimination of intersegment revenue
2. Represents elimination of intersegment receivables and unallocated corporate
purchase adjustments
F-25
<PAGE>
Specified items included in segment profit/loss for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All
Corporate Facilities Services Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest revenue $ 1,388 $ 45 $ 16 $ 30 $ 1,479
Interest expense (5,183) (5,615) (632) (620) (12,050)
Depreciation & amortization (4,626) (5,498) (1,899) (565) (12,588)
Income tax benefit 6,459 3,728 1,359 1,619 13,165
Terminated merger costs 2,583 - - - 2,583
Provision for asset
revaluation (1,285) (10,558) (2,687) - (14,530)
Minority interest (226) - - - (226)
Cumulative effect of
accounting change (427) - - - (427)
Net loss (12,300) (6,924) (2,522) (4,124) (25,870)
1998: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All
Corporate Facilities Services Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
Interest revenue $ 1,672 $ 88 $ 160 $ 91 $ 2,011
Interest expense (2,294) (5,541) (630) (700) (9,165)
Depreciation and amortization (2,560) (4,516) (1,745) (471) (9,292)
Income tax benefit/(expense) 5,835 (2,325) (2,664) (2,350) (1,504)
Minority interest (net of tax) (279) - - - (279)
Net income (expense) (9,126) 3,637 4,167 1,007 (315)
1997: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All
Corporate Facilities Services Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
Interest revenue $ 467 $ 56 $ 81 $ 32 $ 636
Interest expense (3,050) (4,883) (263) (462) (8,658)
Depreciation and amortization (1,631) (3,998) (858) (273) (6,760)
Income tax benefit (expense) 3,204 (5,870) (2,233) (1,901) (6,800)
Minority interest (net of tax) (252) - - - (252)
Extraordinary loss (net of tax) (537) - - - (537)
Net income (expense) (5,798) 9,181 3,492 2,973 9,848
</TABLE>
F-26
<PAGE>
The majority of the Company's revenues comes from contracts with third-party
payors, primarily Medicare and Medicaid programs. The tables below represent a
summary of the Company's revenues from Medicare and Medicaid programs by
reporting segment for the years ending December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All % of Total
Corporate Facilities Services Other Total Revenues
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from:
Medicare $ - $ 71,600 $ - $8,661 $ 80,261 21.2%
Medicaid - 164,853 - - 164,853 43.6%
</TABLE>
<TABLE>
<CAPTION>
1998: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All % of Total
Corporate Facilities Services Other Total Revenues
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from:
Medicare $ - $ 77,012 $ - $8,510 $ 87,522 23.9%
Medicaid - 119,559 - - 119,559 33.2%
</TABLE>
<TABLE>
<CAPTION>
1997: Rehabil-
(in thousands) Management Long-Term itative
Services/ Care Therapy All % of Total
Corporate Facilities Services Other Total Revenues
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from:
Medicare $ - $ 68,296 $ - $4,226 $ 72,522 23.8%
Medicaid - 111,380 - - 111,380 36.6%
</TABLE>
18. Earnings per Share
In 1997, Centennial adopted SFAS No. 128, "Earnings per Share." Prior year
amounts have been restated in accordance with SFAS No. 128. Basic earnings per
share are computed by dividing income applicable to common stock by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share are computed similarly but reflects the potential dilution that could
occur if options were exercised or convertible securities were converted into
common stock. The accretion and dividends accrued on Series A and B Preferred
Stock and the accretion and dividends on Series C Preferred Stock was deducted
from net income in the computation of net income applicable to common stock in
1997. The following table calculates basic earnings per share and diluted
earnings per share at December 31:
F-27
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
Income (loss) before extraordinary loss and cumulative effect of change in
accounting method................................................................ $(25,443) $ (315) $10,385
Deduct: dividends and accretion of preferred stock............................... - - 5,873
-------- ------- -------
Income (loss) applicable to common stock before extraordinary loss and cumulative
effect of change in accounting method............................................ (25,443) (315) 4,512
Extraordinary loss on extinguishment of debt..................................... - - (537)
Cumulative effect of change in accounting method................................. (427) - -
-------- ------- ------
Income (loss) applicable to common stock......................................... (25,870) (315) 3,975
Average common shares outstanding (in thousands)................................. 11,906 11,906 8,289
Basic earnings per common share:
Income (loss) applicable to common stock before extraordinary loss and cumulative
effect of change in accounting method............................................ $ (2.13) $ (0.03) $ 0.54
Extraordinary loss on extinguishment of debt..................................... - - (0.06)
Cumulative effect of change in accounting method................................. (0.04) - -
-------- ------- ------
Basic earnings (loss) per common share........................................... $ (2.17) $ (0.03) $ 0.48
======== ======= ======
Income (loss) before extraordinary loss and cumulative effect of change in
accounting method................................................................ $(25,443) $ (315) $4,511
Add: Interest savings on convertible debt........................................ - - 65
-------- ------- ------
(25,443) (315) 4,576
Extraordinary loss on extinguishment of debt..................................... - - (537)
Cumulative effect of change in accounting method................................. (427) - -
-------- ------- ------
Income (loss) applicable to common stock......................................... (25,870) (315) 4,039
Average common shares outstanding (in thousands)................................. 11,923 11,906 8,289
Add: options (in thousands)...................................................... - 172 173
-------- ------- ------
Average diluted common shares outstanding (in thousands)......................... 11,923 12,078 8,462
Diluted earnings (loss) per common share:
Income (loss) applicable to common stock before extraordinary loss and cumulative
effect of change in accounting method............................................ $ (2.13) $ (0.03) $ 0.54
Extraordinary loss on extinguishment of debt..................................... - - (0.06)
Cumulative effect of change in accounting method................................. (0.04) - -
-------- ------- ------
Diluted earnings (loss) per common share......................................... $ (2.17) $ (0.03) $ 0.48
======== ======= ======
</TABLE>
19. Subsequent Events
On February 25, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Hilltopper Acquisition Corp. (the "Acquisition") a
F-28
<PAGE>
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 percent 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 a financing contingency 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 percent 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.
20. Quarterly Financial Information (Unaudited)
The table below sets forth summarized quarterly financial data for the years
ended December 31, 1999 (amended) and 1998 (in thousands, except per share
data):
<TABLE>
<CAPTION>
1999
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues........................... $96,226 $98,042 $97,956 $ 86,305
Net loss................................. (1,753) (9,552) (1,092) (13,473)
Net loss applicable to
common shareholders................... $(1,753) $(9,552) $(1,092) $(13,473)
======= ======= ======= ========
Loss applicable to common stock and
equivalents:
Basic: $ (0.15) $ (0.80) $ (0.09) $ (1.13)
======= ======= ======= ========
Diluted: $ (0.15) $ (0.80) $ (0.09) $ (1.13)
======= ======= ======= ========
Weighted average common shares
outstanding:
Basic................................. 11,924 11,923 11,923 11,923
Diluted............................... 11,956 11,923 11,923 11,923
Common stock market prices:
High.................................. $ 15.56 $ 10.00 $ 5.53 $ 3.56
Low................................... $ 8.00 $ 1.00 $ 2.63 $ 2.22
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
1998
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues........................... $87,072 $87,900 $89,585 $93,088
Net income (loss)........................ $ 3,826 $ 3,834 $(7,363) $ (612)
Net income (loss) applicable to
common shareholders................... $ 3,826 $ 3,834 $(7,363) $ (612)
======= ======= ======= =======
Income (loss) applicable to common stock
and equivalents:
Basic: $ 0.32 $ 0.32 $ (0.62) $ (0.05)
======= ======= ======= =======
Diluted: $ 0.31 $ 0.32 $ (0.62) $ (0.05)
======= ======= ======= =======
Weighted average common shares
outstanding:
Basic................................. 11,866 11,910 11,924 11,924
Diluted............................... 12,202 12,215 11,942 11,944
Common stock market prices:
High.................................. $25.125 $25.000 $20.375 $15.500
Low................................... $19.625 $16.438 $ 7.500 $ 7.375
</TABLE>
F-30
<PAGE>
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Balance at Charged to Balances Balance at
Beginning of Cost and Written End of
Year Expense off Other Year
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1999
Allowance for doubtful
accounts (deducted from
accounts receivable).................... $4,963 $3,605 $(2,288) $ 146 (1) $6,426
December 31, 1998
Allowance for doubtful
accounts (deducted from
accounts receivable).................... $2,998 $1,432 $(1,874) $2,407 (1) $4,963
December 31, 1997
Allowance for doubtful
accounts (deducted from
accounts receivable).................... $2,472 $ 863 $ (637) $ 300 (2) $2,998
</TABLE>
- ----------------------------------------------------
(1) Allowance on accounts receivable purchased during the respective years
in connection with several nursing facility acquisitions.
(2) Allowance transferred from notes receivable.
F-31
<PAGE>
Exhibit Index
Exhibit Description
- ------- --------------------------------------------------------------------
3.1 -- Third Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-1
Registration No. 333-24267, as amended).
4.1 -- Third Amended and Restated Articles of Incorporation of the Company,
including, without limitation Article III and Article VII
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
10.1 -- WelCare International, Inc. 1994 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
10.2 -- WelCare International, Inc. 1996 Executive Stock Plan (incorporated
by reference to Exhibit 10.2 of the Company's Registration Statement
on Form S-1, Registration No. 333-24267, as amended).
10.3 -- WelCare International, Inc. 1996 Employee Stock Option Plan
(incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
10.4 -- Centennial HealthCare Corporation 1997 Stock Plan (incorporated by
reference to Exhibit 10.4 of the Company's Registration Statement on
Form S-1, Registration No. 333-24267, as amended).
10.5 -- Second Amended and Restated Credit Agreement dated December 16, 1997
by and among Centennial HealthCare Corporation and the Borrowers
named therein, the Lenders named therein, and Core States Bank, N.A.
and NationsBank, N.A., as lenders and agents for the lenders named
therein
10.6 -- Amended and Restated Employment Agreement between Welcare
International, Inc. and J. Stephen Eaton dated December 31, 1995
(incorporated by reference to Exhibit 10.6 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
10.7 -- Amended and Restated Employment Agreement between Paragon
Rehabilitation, Inc. and Laurence W. Lepley, Jr. dated as of January
1, 1998 (incorporated by reference to Exhibit 10.7 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
10.8 -- Lease between Grant Park Nursing Home L.P. and WelCare Acquisition
Corp. n/k/a Centennial Acquisition Corporation ("CAC") commencing on
January 1, 1998 (incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1, Registration No. 333-
24267, as amended).
10.9 -- Amended and Restated Lease Agreement by and between Aston Woods
Limited Partnership and WelCare/Ashton Properties, Inc. n/k/a
Centennial/Ashton Properties Corporation ("CAPC"), dated December
20, 1994 (incorporated by reference to Exhibit 10.11 of the Company's
Registration Statement on Form S-1, Registration No. 333-24267, as
amended).
<PAGE>
EXHIBIT 10.16
PURCHASE OPTION AGREEMENT
THIS AGREEMENT is made as of the 1st day of December, 1999, by and between
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION ("CHMC") and CYPRESS INVESTORS LLC
("Cypress Investors"), DOLPHINS VIEW INVESTORS LLC ("Dolphins View Investors"),
HILLTOP MANOR INVESTORS LLC ("Hilltop Investors"), KANNAPOLIS INVESTORS LLC
("Kannapolis Investors"), and MATHER INVESTORS LLC ("Mather Investors"; Cypress
Investors, Dolphins View Investors, Hilltop Investors, Kannapolis Investors and
Mather Investors are sometimes hereinafter collectively referred to as "Owner").
W I T N E S S E T H:
WHEREAS, CHMC manages on behalf of Cypress Investors that certain 63 bed
nursing center known as Cypress Manor Health and Rehabilitation Center ("Cypress
Manor") pursuant to a Long Term Care Facility Management Agreement dated as of
December 1, 1999; and
WHEREAS, CHMC manages on behalf of Dolphins View Investors that certain 58
bed nursing center known as The Health and Rehabilitation Centre at Dolphins
View ("Dolphins View") pursuant to a Long Term Care Facility Management
Agreement dated as of December 1, 1999; and
WHEREAS, CHMC manages on behalf of Hilltop Investors that certain 118 bed
nursing center known as Hilltop Manor Health Care Center ("Hilltop Manor")
pursuant to a Long Term Care Facility Management Agreement dated as of December
1, 1999; and
WHEREAS, CHMC manages on behalf of Kannapolis Investors that certain 117
bed nursing center knows as THS of Kannapolis ("Kannapolis") pursuant to a Long
Term Care Facility Management Agreement dated as of December 1, 1999; and
WHEREAS, CHMC manages on behalf of Mather Investors that certain 122 bed
nursing center known as Mather Nursing Center ("Mather") pursuant to a Long Term
Care Facility Management Agreement dated as of December 1, 1999; and
WHEREAS, Owner has agreed to grant to CHMC or its affiliates a right to
purchase Cypress Manor, Dolphins View, Hilltop Manor, Kannapolis and Mather
(Cypress Manor, Dolphins View, Hilltop Manor, Kannapolis and Mather collectively
referred to as the "Properties") pursuant to the terms of this Agreement;
NOW, THEREFORE, in consideration of the covenants, conditions and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties do hereby agree as
follows:
1. Option to Purchase. Owner hereby grants and conveys to CHMC for the
term hereof an exclusive and irrevocable option (the "Option") to purchase all
of the Properties upon the terms and conditions contained in this Agreement.
2. Term and Exercise of the Option. The term of the Option shall commence
on December 1, 2000 and shall terminate at midnight, Eastern Standard Time on
December 1, 2005. CHMC may exercise the Option only during its term and only by
delivery of written notice to Owner at the address set forth below. In the event
that the Option is exercised, the closing shall take place at such time as set
out in the notice of exercise of the Option at the offices of CHMC or such other
place as agreed by the parties. Upon exercise of the Option, Owner and CHMC
shall enter into a Purchase and Sale Agreement substantially in the form
<PAGE>
attached hereto as Exhibit "A".
3. Purchase Price. The total purchase price (hereinafter referred to as
the "Purchase Price") of the Properties shall be that amount equal to Owner's
basis in the Properties, being Owner's total acquisition costs of the
Properties, capital improvements, loan fees, closing costs and expenses and any
other costs related to Owner's acquisition of the Properties. The Purchase Price
shall increase by an amount equal to four percent (4%) per annum from December
1, 1999 until the date of closing; provided, however, that if CHMC exercises the
Option prior to December 1, 2001, the Purchase Price shall be increased by eight
percent (8%). The Purchase Price shall be paid in cash at closing, subject to
adjustments contained herein. CHMC shall pay all cost of closing of its
acquisition of the Properties, the intention being that Owner will receive an
annual return of four percent (4%) on its investment in the Properties.
4. Notices. All notices, demands or requests required or permitted to be
given pursuant to this Agreement shall be in writing and should be deemed to
have been properly given or served and shall be effective upon being deposited
in the United States mail, postpaid and registered or certified with return
receipt requested, provided, however, the time period in which a response to any
notice, demand or request must be given shall commence on the date of receipt by
the addressee thereof. Rejection or other refusal to accept or inability to
deliver because of changed address of which no notice has been given shall
constitute receipt of the notice, demand or request sent. Any such notice,
demand or request shall be sent to the following addresses:
To Owner: c/o Five Star Healthcare Properties, LLC
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attention: Alan Dahl
To CHMC: Centennial HealthCare Management Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attention: Daryl R. Griswold
5. Miscellaneous.
(a) Time is of the essence of this Agreement.
(b) This Agreement should be governed by and construed in accordance
with the laws of the State of Georgia.
(c) This Agreement may be executed in several counterparts, each of
which shall be deemed an original and all of which counterparts together shall
constitute one and the same instrument.
(d) Should any provision of this Agreement require judicial
interpretation, it is agreed that the court interpreting or construing the same
shall not apply a presumption that the terms hereof shall be more strictly
construed against one party by reason of the rule of construction that a
document is to be construed more strictly against the party who itself or
through its agent prepared the same, it being agreed that the agents of all
parties have participated in the preparation hereof.
(e) This Agreement supersedes all prior discussions and agreements
between Seller and Purchaser with respect to the conveyance of the Property and
all other matters contained herein and constitutes the sole and entire agreement
between Seller and Purchaser with respect thereto. This Agreement may not be
modified or amended unless such amendment is set forth in writing and signed by
<PAGE>
both Seller and Purchaser.
(f) This Agreement shall apply to, inure to the benefit of and be
binding upon and enforceable against Seller and Purchaser and their respective
heirs, legal representatives, successors and assigns, as the case may be. CHMC
may assigns its rights under this Agreement to any affiliated entity without the
consent of Owner.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
to the date first above written.
OWNER:
Cypress Investors, LLC
By: Five Star Healthcare Properties, LLC
Its: Sole Member
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
---------------------
Alan C. Dahl, Member
Dolphins View Investors, LLC
By: Five Star Healthcare Properties, LLC
Its: Sole Member
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
---------------------
Alan C. Dahl, Member
Hilltop Manor Investors, LLC
By: Five Star Healthcare Properties, LLC
Its: Sole Member
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
---------------------
Alan C. Dahl, Member
Kannapolis Investors, LLC
By: Five Star Healthcare Properties, LLC
Its: Sole Member
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
---------------------
Alan C. Dahl, Member
<PAGE>
Mather Investors, LLC
By: Five Star Healthcare Properties, LLC
Its: Sole Member
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
---------------------
Alan C. Dahl, Member
Centennial HealthCare Management Corporation
By: /s/ Kent C. Fosha, Sr.
------------------------------
Kent C. Fosha, Sr., President
<PAGE>
EXHIBIT "A"
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (the "Agreement"), made and entered into
as of this ___ day of ___________, 200___, by and between [_____________], LLC,
a Georgia limited liability company ("Seller"), and Centennial HealthCare
Management Corporation, a Georgia corporation ("Purchaser").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Seller has right, title and interest in and to real and personal
property comprising a ____-bed facility known as ______________________________
located at ___________________________ (such real property and personal property
and the business conducted thereon are hereinafter referred to as the
"Facility"); and
WHEREAS, Seller wishes to sell all of its right, title and interest in and
to the Facility, including the business thereof, to Purchaser and Purchaser
wishes to buy all of Seller's right, title and interest in and to the Facility,
subject to and upon the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
herein contained, and other good and valuable consideration, the receipt,
adequacy, and sufficiency of which are hereby acknowledged, Seller and Purchaser
hereby agree as follows:
SECTION 1. PURCHASE AND SALE; ASSIGNMENT.
Upon the terms and conditions set forth herein, Seller shall sell to
Purchaser and Purchaser shall purchase from Seller all of Seller's right, title
and interest in and to the following:
<PAGE>
(a) All of those certain tracts or parcels of real property situated at
____________ _____________________________, TOGETHER WITH all and singular
appurtenances now or hereafter belonging thereto, being more particularly
described in Exhibit "A" attached hereto and by reference made a part
hereof, and being hereinafter referred to as the "Land"; TOGETHER WITH all
the improvements and appurtenances thereon situated, and all fixtures and
furniture attached thereto or appurtenant thereto and used in connection
therewith, consisting, without limitation, of the Facility, all of which
conforms with the licenses granted, all plumbing, heating, lighting and
cooking fixtures, air conditioning fixtures and units, ranges,
refrigerators, dishwashers, disposals, trash mashers, hot water heaters and
equipment, boilers, bathroom and kitchen cabinets, antennae, and to the
extent located on the Land, mantels, door mirrors, venetian blinds, shades,
drapes, screens, awnings, window boxes, storm doors, ice makers, mail
boxes, weather vanes, flagpoles, pumps, shrubbery, outdoor statuary,
carpeting, and licenses and permits (said Land, improvements,
appurtenances, fixtures and property at the Facility being hereinafter
collectively referred to as the "Real Property"), TOGETHER WITH all right,
title and interest, if any, of Seller in and to any land lying in the bed
of any street, road or avenue, open or proposed, in front of or adjoining
said Land to the center line thereof, and together with all right, title
and interest of Seller in and to any award made or to be made in lieu
thereof, and in and to any unpaid award for damage to said Land by reason
of change of grade of any street; together with all right, title and
interest of Seller in and to any award made or to be made in lieu thereof,
together with all right, title and interest of Seller to the use of strips
and rights-of-way abutting or adjoining said Land, if any; and
(b) All licenses and permits (to the extent transferable), equipment,
furniture, furnishings, fixtures, inventory, supplies and all other
personal property located on the Real Property or used in connection with
the business of the Facility as going concerns and with the operation of
the Facility located thereon, including without limitation all of those
items of personal property set forth and described in Exhibit "B" attached
hereto (such personal property is hereinafter referred to as the "Personal
Property") but excluding personal property set forth and described in
Exhibit "C" attached hereto (the "Excluded Property").
SECTION 2. PURCHASE PRICE AND FINANCING.
2.01. Purchase Price. The purchase price payable by Purchaser to Seller
shall be ___________________ DOLLARS ($________________), plus the net balance
of the accounts outstanding receivable for the Facility. The purchase price
shall be payable all cash at Closing.
2.02. Compliance with Section 1060 of the Internal Revenue Code. Seller and
Purchaser agree that Exhibit "D", in which the parties have allocated the
Purchase Price among the assets purchased, has been jointly prepared by the
parties hereto. The parties agree that they shall fully comply with the
requirements of Section 1060 of the Internal Revenue Code of 1986, as amended,
and the regulations promulgated thereunder, relating to allocation rules for
certain applicable asset acquisitions, and the parties further agree to use
Exhibit "D" as the basis for completing Form 8594 entitled "Asset Acquisition
Statement Under Section 1060," which they shall both file on a timely basis with
the Internal Revenue Service.
<PAGE>
SECTION 3. SELLER'S REPRESENTATIONS, WARRANTIES AND COVENANTS.
As used in this Section and elsewhere in this Agreement the following terms
shall have the following meanings:
"Knowledge of Seller" or "Seller's Knowledge" shall mean the actual
knowledge of Seller and the actual knowledge of any general partner of
Seller.
"Knowledge of Purchaser" or "Purchaser's Knowledge" shall mean the
actual knowledge of any member or manager of the Purchaser.
"Material" or "Materially," when used with reference to any claim,
obligation, event, omission or other development, shall mean a claim,
obligation, event, omission or other development having a value or
potential financial impact in excess of $25,000.00, provided, however, that
the total value of all claims, obligations, events, omissions or other
developments deemed not to be Material pursuant to this definition shall
not exceed $100,000.00.
Seller hereby makes the following representations, warranties and covenants
to Purchaser, each of which shall be deemed to be Material to the transactions
contemplated by this Agreement:
3.01. Condition of Facility. To Seller's Knowledge, upon Closing, the
Facility will be in good condition, comparable, in all Material respects, to the
condition existing on the date of this Agreement, ordinary wear and tear
excepted. Except as may be disclosed in Exhibit "E", to Seller's Knowledge the
heating, air conditioning, sewer, plumbing, antennae, and electrical systems in
or relating to the Facility are in good working order in all Material respects,
the painted walls, window treatments, interior and exterior doors, plumbing,
roofs and carpeting of all of the buildings of the Facility are in good repair
in all Material respects and each building of the Facility is free from damage
by termite and insect infestations and the structural supports and members of
all buildings are sound and in good repair in all Material respects. There are
no latent defects in or to the Facility or any portion thereof of which Seller
has been notified. Upon the request of Purchaser, Seller will provide
information in its possession concerning the age of items described above.
Seller shall not remove any item of Personal Property from the Facility prior to
the Closing, except for the purpose of repair or replacement or in the ordinary
course of business, and any such item or its replacement, as the case may be,
shall be included in this transaction.
3.02. List of Patients. Seller will provide to Purchaser at the Facility a
schedule setting forth the name of each patient of the Facility, the status of
payment or level of care of each patient, and an accounting of security deposits
and patient funds, which accounting is true, complete and correct in all
Material respects. To Seller's Knowledge, the Facility's accounting of patient
funds, which accounting is maintained as a ledger book in the offices of the
Facility, is true, correct and complete in all Material respects, subject to
routine periods for posting of transactions and is available for inspection by
Purchaser in accordance with Section 8 hereof.
3.03. Financial Statements and Costs Reports. Seller has provided to
Purchaser copies of the following financial statements of the Facility: (i)
unaudited balance sheets as of the end of the Facility last two (2) fiscal years
which, in all Material respects, are true, complete and correct and accurately
reflect the financial condition of the Facility at the respective dates on such
balance sheets; and (ii) unaudited statements of operations for the Facility's
last two (2) fiscal years which, in all Material respects, are true, complete
and correct and accurately reflect its operations during such periods. Seller
will also provide to Purchaser copies of all cost reports and any audits of cost
reports under either Medicare or Medicaid for the two (2) years prior to the
<PAGE>
date hereof for the Facility, the Medicaid rate sheets for the last two (2)
years, and trial balances for the Facility for the year ended December 31, 1998.
Seller shall make available to Purchaser upon Purchaser's request any and all
unaudited balance sheets and statements of operations provided to them from a
comptroller's office and or Medicare intermediary and any internal accounting
working papers of the Seller used in preparing the above-referenced balance
sheets and statements of operations for the Facility. Except as set forth on
Exhibit "F", there have been no Material adverse changes in the financial
condition, business or properties of the Facility since their most recent fiscal
year end. Seller shall make available to Purchaser upon Purchaser's request all
internal accounting working papers prepared during the annual financial reviews
of the Facility for the last two (2) fiscal years and the current fiscal year.
3.04. Agreements, Contracts and Commitments. Seller has provided to
Purchaser at the Facility a list of all contracts and agreements with respect to
laundry Facility, food services, equipment, furniture, medical equipment,
management, grounds maintenance and other services of the Facility which require
more than 31 days notice for cancellation without penalty. Seller shall not
renew or extend any such contracts without Purchaser's consent, which shall not
be unreasonably withheld; provided, however, that Seller may in the ordinary
course of business renew without Purchaser's consent any contract involving an
amount which, when combined with amounts payable under all other contracts which
are renewed without Purchaser's consent, is not in excess of $5,000. Purchaser
shall assume the listed contracts and agreements or shall cause Seller to
terminate such contracts and agreements before Closing in accordance with
Purchaser's instructions to Seller on or before Closing. Seller shall use its
reasonable efforts to keep all insurance policies or renewals thereof
("Policies") affecting or covering the Facility and their operations in force
and effect up to and including the date of the Closing unless the reason for
such Policies ceases or such Policies are replaced in the ordinary course of
business. Seller shall deliver to Purchaser true and correct copies of all such
Policies in Seller's possession.
3.05. Discharge of Obligations. Except as may be disclosed in Exhibit "F",
to Seller's Knowledge, Seller has carried out, performed and complied with all
obligations imposed on Seller under any admission agreements, agreements with
patients or agreements with others.
3.06. Occupancy. To Seller's Knowledge, at the time of this Agreement, the
Facility has existing valid agreements with the patients occupying the Facility.
3.07. No Rebates or Allowances. Except as may be disclosed in Exhibit "G",
to Seller's Knowledge, none of the patients of the Facility have been given any
concession or consideration for the rental of any patient room, and none of the
patients of the Facility are entitled hereafter to any concessions, rebates,
and/or allowances of free occupancy for any period after the Closing.
3.08. Repair Requirements. To Seller's Knowledge, there are no outstanding
requirements or recommendations by any mortgagee or any insurance company,
requiring or recommending any repairs or work to be done on the Facility.
3.09. Litigation. Except as may be disclosed in Exhibit "G", to Seller's
Knowledge, there is no litigation or proceeding pending or threatened, other
than as normal or customary in the health care industry, which would Materially
adversely affect all or any part of the Facility, their assets, property or
business, and Seller has no reasonable grounds to know of any basis for any such
action.
3.10. No Condemnation Proceedings. To Seller's Knowledge, there are no
<PAGE>
pending or threatened condemnation or eminent domain proceedings which would
Materially adversely affect all or any part of the Facility.
3.11. Access Public Improvements. Except as may be disclosed in Exhibit
"G", to Seller's Knowledge, all curb cut and street opening permits or licenses
required for vehicular access to and from the Facility over presently existing
roads and driveways have been obtained and paid for and shall be in full force
and effect at the time of Closing. To Seller's Knowledge, no assessments for
public improvements have been made against the Facility which remain unpaid,
including, without limitation, those for construction of sewer and water lines
and mains, streets, sidewalks and curbs. To Seller's Knowledge, there are no
public improvements which have been ordered to be made and/or which have not
hereto been completed, assessed and paid.
3.12. No Liens Against Personal Property. Except as may be disclosed in
Exhibit "G", all fixtures and articles of Personal Property included in this
sale at Closing will be owned by Seller, free and clear of any conditional bills
of sale, chattel mortgages, security agreements, financing statements, other
security interests, liens or encumbrances of any kind, except for any personal
property taxes (ad valorem), which are liens not yet due and payable.
3.13. Compliance with Facility Laws. Except as may be disclosed in Exhibit
"G", to Seller's Knowledge the Facility, including without limitation, the
buildings and improvements included thereon, shall be, at the Closing Date, in
compliance in all Material respects with all laws, ordinances, codes,
regulations and requirements of the State of Florida and any political
subdivision or agency thereof, and the federal government and any political
subdivision or agency thereof, concerning and applicable to licensing of nursing
care facilities, together with such other laws, ordinances, codes, regulations
and requirements concerning and applicable to buildings and the Facility
generally, as shown by the licenses previously issued to the Seller, or its
predecessor, by the State of Florida or any other state or federal government or
political subdivision or agency thereof. The Facility is fully licensed by the
State of Florida and in good standing as healthcare providers under the Medicaid
and Medicare programs, as both programs are administered by the federal
government and the State of Florida. The Medicare and Medicaid cost reports for
the last two (2) fiscal years and the current portion of this fiscal year are
true and correct in all Material respects except as may be disclosed in
Exhibit "G".
3.14. Leased Property. Seller does not lease any personal property,
equipment or fixtures used in the business conducted at the Facility, except as
may be disclosed in Exhibit "G", or as may have been leased by Seller pursuant
to that certain power of attorney granted by Seller to Centennial HealthCare
Management Corporation.
3.15. Status of Land; Environmental Standards. To Seller's Knowledge, the
Land is legally occupied by the Facility and has been approved by all
governmental authorities having jurisdiction, and all approvals, permits and
certificates required to occupy and operate the Facility have been obtained. To
the Knowledge of Seller, the present use of the Land is in compliance in all
Material respects with all applicable zoning ordinances, building codes, fire
codes, life safety codes, or health department ordinances pertaining thereto,
except as may be disclosed in Exhibit "G". Seller has not received notice that
the Facility is not in compliance with all federal, state and local laws and
ordinances relating to clean air, water, waste disposal, toxic substances and
other environmental regulations. Seller has not received notice that the
Facility is not in compliance with all laws and ordinances relating to
occupational health and safety. To Seller's Knowledge, during the period of
Seller's ownership of the Facility, Seller has not caused or permitted the
Facility to be used to generate, manufacture, refine, transport, treat, store,
<PAGE>
handle, dispose, transfer, produce or process Hazardous Substances (as
hereinafter defined), or other dangerous or toxic substances, or solid waste,
except in compliance with all applicable federal, state, and local laws or
regulations or except for Hazardous Substances in non-reportable quantities. To
Seller's Knowledge, during the period of Seller's ownership of the Facility
there has been no Release (as hereafter defined) of any Hazardous Substances on
or off-site of the Facility. As used herein, (a) "Hazardous Substances" include
any pollutants, dangerous substances, toxic substances, hazardous wastes,
hazardous materials, or hazardous substances as defined in or pursuant to the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.) as
amended, the Comprehensive Environmental Response, Compensation and Liability
Act (42 U.S.C. Section 9601, et seq.) as amended, the Clean Water Act (33 U.S.C.
Section 1251, et seq.) as amended, or any other federal, state or local
environmental law, ordinance, rule or regulation, and (b) "Release" means
releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing or dumping. Except as may be disclosed
by an environmental audit of the Facility, to Seller's Knowledge, there has not
been incorporated into the Facility and the Facility does not contain any
asbestos products, urea-formaldehyde, and other known building products which
may be harmful or injurious to human health or constitute Hazardous Substances.
3.16. Compliance with Setback Requirements. Except as indicated on a survey
of the Real Property, to Seller's Knowledge, all of the improvements of the
Facility are located within the boundaries of the Land and comply with any
applicable zoning setback requirements unique to the Facility.
3.17. No Management Agreements. Except for the management agreements
between Seller and Centennial HealthCare Management Corporation, which will be
canceled at or after Closing, there is now and will be no management contract
for the Facility at the time of Closing, except as Seller and Purchaser may
agree in writing.
3.18. Union Agreements and Employee Relations. Except as may be disclosed
on Exhibit G, Seller is not a party to any union or collective bargaining
agreements, nor to the Knowledge of Seller, is there any pending or potential
attempt to unionize any of the employees of the Facility. To Seller's Knowledge,
during the period commencing two (2) years prior to the date hereof and ending
on the Closing Date, the employees of the Facility have not been the subject of
a union election. Seller will provide Purchaser copies of any grievances
received by Seller during the twelve month period immediately preceding the date
hereof.
To Seller's Knowledge, prior to the period of Seller's ownership of the
Facility, there have been no strikes, lockouts, or other work stoppages,
picketing or labor disputes (other than the negotiation of existing union
contracts, if any, which shall not be deemed to be a labor dispute for purposes
of this Agreement) in which the Facility are or were involved, and, to Seller's
Knowledge, no event has transpired which has or will have a Material adverse
effect on the relationship between Seller and its employees at the Facility.
Seller will provide to Purchaser at the Facility the name and current annual
salary and other compensation or the rate of compensation payable by Seller to
each employee at the Facility and the profit-sharing, bonus or other form of
extra compensation paid or payable by Seller to or for the benefit of each such
person for the Facility's current fiscal year. There are no oral or written
contracts, agreements or arrangements obligating Seller to increase the
compensation or benefits paid or payable to any of its employees now or at any
future time.
3.19. Real Property Taxes. The real estate and personal property tax
assessment on the Facility are as reflected on the real estate and personal
property tax bills for the Facility (the "Tax Bills") for 1998 and Seller will
<PAGE>
provide to Purchaser at the Facility evidence of the amount of taxes paid and
unpaid in connection with the Tax Bills.
3.20. Utilities. Seller will provide to Purchaser at the Facility
information concerning the total amounts for the Facility of: (i) water and
sewer bills; (ii) gas bills; (iii) electric bills; (iv) garbage and trash
removal; and (v) repairs and maintenance.
3.21. No Violations of Law. Seller has not received notice from any
governmental authority of any violation by or Materially adversely affecting the
Facility of any federal or state law or any municipal ordinance or order or
requirement of any governmental authority having jurisdiction over the Facility.
To Seller's Knowledge, there are no notices, suits or judgments relating to any
such violation, including without limitation, fire, zoning, life safety, air or
water pollution or health, food or drug code violations with respect to the
Facility.
3.22. Maintenance of Business Operations, Employees and Goodwill. Seller
will cooperate with Purchaser to preserve and maintain the Facility's business
operations intact, use its reasonable efforts to keep available to Purchaser the
services of its present employees, with consideration for turnover in the
ordinary course of business, and preserve to the extent reasonably possible the
goodwill of the Facility's business.
3.23. Inventories and Trade Payables. Seller currently maintains and shall
maintain as of the Closing Date, inventories and supplies reasonably sufficient
and adequate to satisfy state licensing requirements for the operation of the
Facility. All such inventories and supplies shall conform to trade standards for
marketable goods, subject to such spoilage, waste and obsolescence as is normal
in the Facility's ordinary course of business. At Closing, Seller shall certify
that there are no trade payables or other accounts payable incurred in
connection with the Facility, including payables for inventory, supplies and
other consumer goods in the ordinary course of the Facility's business, except
those incurred on Seller's behalf by Centennial HealthCare Management
Corporation as manager in the ordinary course of operations of the Facility (a
list of such payables shall be attached to a certificate furnished by Centennial
HealthCare Management Corporation at Closing). Any payables incurred by Seller
and not by Centennial HealthCare Management Corporation as manager of the
Facility, and any payables incurred by or on behalf of Seller which are not the
ordinary course of business shall be paid by Seller or from funds payable to
Seller at Closing.
3.24. Organization of Seller. Seller is a limited partnership formed and in
existence under the laws of the State of Georgia and Seller has the power and
authority to own its properties and to carry on its business as and where such
business is now conducted.
3.25. Due Authorization; No Default. The delivery and execution,
performance of this Agreement by Seller and all other agreements and instruments
to be executed by Seller in connection herewith or pursuant hereto and the
consummation of the sale contemplated hereby have been duly authorized by all
requisite action on the part of the general partner of Seller. When this
Agreement is executed and delivered by the general partners of Seller on behalf
of Seller, it shall constitute the legal, valid and binding obligation of
Seller. The transfer of Seller's right, title and interest in and to the
Facility to Purchaser will not violate in any Material respect any provision of
Seller's Amended and Restated Agreement of Limited Partnership ("Seller's
Partnership Agreement") or any laws governing Seller. Except as may be disclosed
in Exhibit "G", the execution, delivery or performance of this Agreement, or the
consummation of the transactions contemplated hereby, or compliance with any of
the terms or conditions hereof, will not result in the breach in any Material
<PAGE>
respect by Seller of any of the terms, conditions or provisions of any
agreements or instruments to which Seller is a party, or to which it or its
property is bound, or constitute a default in any Material respect under such
agreements or instruments.
3.26. Consents. Except as set forth in Exhibit "G" and for the agencies and
departments of the State of Florida necessary to issue licenses to operate the
Facility and authorize Medicare and Medicaid reimbursements, there are no
persons whose consent is necessary in order for Seller to consummate the
transactions contemplated by this Agreement, including, without limitation, any
such persons who are:
(a) the parties to any agreements to which the Seller is a party of or
by which it is bound; and
(b) any federal, state or local authorities or governmental regulatory
agencies having jurisdiction over the Seller (except to the extent any
licensing and Medicare/Medicaid reimbursement approval for the Facility is
necessary).
3.27. Notice as to Material Changes. Seller will promptly advise Purchaser
in writing of the occurrence of any Material events which come to the Knowledge
of Seller after the date of this Agreement and prior to Closing relating to any
of those matters which are the subject of the covenants, representations and
warranties of the Seller contained herein.
3.28. Accuracy of Information. No representations, warranties or covenants
by Seller or its general partners, nor any statement, list or certificate
furnished or to be furnished to Purchaser pursuant hereto, or in connection with
the transactions contemplated hereby, contains or will contain any Materially
untrue statement of fact or omits or will omit to state a Material fact
necessary to make the statements contained therein not Materially misleading in
light of the circumstances under which they were made.
3.29. Survival of Warranties and The Representations, Covenants.
warranties, representations and covenants of the Seller contained in this
Agreement shall be true and correct as of the Closing Date in all Material
respects with the same force and effect as if given and made on and as of the
date and time of Closing, and such representations, warranties and covenants
shall survive the Closing and the consummation of the transactions
contemplated this Agreement for the period set forth in Section 13.
SECTION 4. PURCHASER'S REPRESENTATIONS, WARRANTIES AND COVENANTS.
Purchaser makes the following representations, warranties and covenants to
Seller, each of which shall be deemed to be Material to the transactions
contemplated by this Agreement.
4.01. Organization of Purchaser. Purchaser is a limited liability company
formed and existing under the laws of the State of Georgia and is qualified to
do business in the State of Florida.
4.02. Due Authorization and Authority. This Agreement and its execution,
delivery and performance, have been authorized by all requisite action on the
part of Purchaser. The performance of this Agreement by Purchaser will not
result in violation of Purchaser's Operating Agreement, or any Material contract
or commitment to which Purchaser is a party or by which it is bound or any law,
statute, ordinance, regulation or decree of any governmental, regulatory or
judicial body or entity. The members of Purchaser have full power and authority
to make, execute, deliver and perform this Agreement and the transactions
contemplated hereby on behalf of Purchaser, and the execution, delivery and
<PAGE>
performance of this Agreement and the transactions contemplated herein by the
Purchaser have been duly authorized by all necessary corporate action of
Purchaser. When this Agreement is executed and delivered by the members of
Purchaser on behalf of Purchaser, it shall constitute the legal, valid and
binding obligation of Purchaser.
4.03. Litigation. To Purchaser's Knowledge, there is no litigation
proceeding pending, or threatened, against Purchaser in any court or before any
arbitration or governmental agency, domestic or foreign, which would Materially
adversely affect Purchaser's ability to perform its obligations under this
Agreement.
4.04. No Default. Neither the execution or delivery of this Agreement or
any agreement required hereby to be executed by Purchaser nor the performance of
Purchaser in compliance with their terms shall:
(a) Materially conflict with or result in a Material breach or
constitute or result in a Material default under:
(i) any judgment, order, injunction, statute, decree, regulation or
ruling of any court or governmental authority, domestic or foreign,
to which Purchaser is subject; and
(ii) any Material agreement, contract, or legally binding
commitment to which Purchaser is a party.
(b) give to any person any rights of termination, cancellation or
acceleration, in or with respect to any Material agreements, contracts,
indentures or legally binding commitments by which Purchaser is bound; or
(c) result in the creation or imposition of (or the obligation to
create or impose) any Material lien, charge or encumbrance upon any of the
property or assets of Purchaser pursuant to the terms of any indenture,
mortgage, deed of trust, lease, agreement or other instrument to which
Purchaser is a party or by which it may be bound.
4.05. Accuracy of Information. To Purchaser's Knowledge, no representation,
warranty or covenant by Purchaser or its officers or directors, nor any
statement, list or certificate furnished or to be furnished to Seller pursuant
hereto, or in connection with the transactions contemplated hereby, contains or
will contain any Materially untrue statement of fact or omits or will omit to
state a Material fact necessary to make the statements contained therein not
Materially misleading in the light of the circumstances under which they were
made.
4.06. Consents. Except for the agencies and departments of the State of
Florida necessary to issue licenses to operate the Facility and authorize
Medicare and Medicaid reimbursements, there are no persons whose consent is
necessary in order for Purchaser to consummate the transactions contemplated by
this Agreement, including, without limitation, any such persons who are:
(a) the parties to any material agreements to which the Purchaser is a
party of or by which it is bound; and
(b) any federal, state or local governmental authorities or regulatory
agencies having jurisdiction over the Purchaser (except to the extent any
licensing and Medicare/Medicaid reimbursement approval for the Facility is
necessary).
4.07. Survival of Representations, Warranties and Covenants. The
warranties, representations and covenants of the Purchaser contained in this
<PAGE>
Agreement shall be true and correct in all Material respects as of the Closing
with the same force and effect as if given and made on and as of the date and
time of Closing, and such representations, warranties and covenants shall
survive the Closing and the consummation of the transactions contemplated by
this Agreement for the period set forth in Section 13.
SECTION 5. CONVEYANCES AND TITLE.
5.01. Assignment and Bill of Sale. At Closing, conveyance of all of
Seller's right, title and interest in and to the Real Property and the Personal
Property shall be by special warranty deed and assignment and bill of sale,
respectively. Good, marketable and insurable title to the Real Property and good
and marketable title to the Personal Property shall be conveyed from Seller to
Purchaser free and clear of all liens, claims, charges and encumbrances of any
kind, subject only to taxes for the current year, and those other liens, claims,
charges, encumbrances or objections, if any, set forth in Exhibit "H" attached
hereto and by reference made a part hereof (such other liens, claims, charges,
encumbrances or objections are hereinafter referred to as "Permitted Title
Exceptions").
5.02. Title Defects. If examination of title reveals any legal defect to
title other than the Permitted Title Exceptions, Purchaser shall furnish Seller
with a written statement thereof on or before Closing and Seller shall have the
option to correct any legal defects, as set forth in Section 8.04.
5.03. Non-Waiver of Title Objections. Notwithstanding anything stated to
the contrary in this Agreement, nothing herein shall be deemed to be a waiver by
Purchaser of any title objections which appear at or after Purchaser's title
examination, and Purchaser shall have the right to raise any such objections and
require that Seller cure the same prior to Closing as a condition of Purchaser's
obligation to proceed with the Closing.
5.04. Prorations. The following items shall be adjusted on a pro rata basis
between Seller and Purchaser on the Closing Date:
(a) General real estate taxes and other taxes and assessments related
to the Facility;
(b) Charges for electricity, gas, water, sewer and other utilities to
be based on projections from most recent invoices or on recent meter
readings, if actual invoices are not available;
(c) All amounts due under the service contracts and other agreements
accepted by Purchaser pursuant to the provisions of this Agreement;
(d) Prepaid patient charges; and
(e) Accrued and/or earned fringe benefits of all employees of the
Facility, including without limitation vacation, sick pay or leave,
retirement benefits, disability benefits and other employee benefits.
5.05 Accounts Receivable. Seller shall transfer, convey and assign to
Purchaser at Closing all of Seller's right, title and interest in the accounts
receivable existing as of the Closing Date. Purchaser shall pay Seller the
outstanding balance of such accounts receivable, net of outstanding debt on such
accounts receivable and management fees due thereon. All payments received by
Seller from government agencies or other payors shall be remitted to Purchaser.
5.06 Inventory. Seller shall transfer and convey to Purchaser at Closing
all of Seller's right, title and interest in the inventory at the Facility.
Purchaser shall pay Seller the value of such inventory at Closing.
<PAGE>
SECTION 6. CLOSING.
6.01. Place, Time and Date of Closing. The payments and deliveries
contemplated by this Agreement (other than the post-closing payments
contemplated by this Agreement) shall be made at the offices of Purchaser at
10:00 a.m., local time, on _____________, 200___, or at such other place, time
and date as Purchaser and Seller shall agree. The date on which the last of such
payments and deliveries occurs is the "Closing Date," and such payments and
deliveries constitute the "Closing." The Closing shall not be deemed to have
occurred unless and until all of the conditions set forth in this Agreement have
been satisfied (or appropriately waived); and none of such actions shall be
deemed to have been taken unless and until all of them have been taken (or the
requirement that they be taken appropriately waived); provided, however, that if
all such actions are taken (or appropriately waived), then the Closing shall be
effective on the Closing Date. Failure to close the transactions contemplated by
this Agreement on the date specified in the first sentence of this Section 6.01
shall not in and of itself constitute a reason for a party to terminate this
Agreement, termination being governed by Section 9 of this Agreement, and so
long as this Agreement is not so terminated, the parties shall continue in good
faith to undertake to consummate the transactions contemplated in this Agreement
as soon as practicable.
6.02. Conveyance of Property Free and Clear of Liens. At Closing hereunder,
all of Seller's right, title and interest in and to the Real Property and
Personal Property and the Facility shall be conveyed free and clear of all
liens, encumbrances, restrictions, assessments (including, without limitation,
any assessments payable in installments, all of which installments have not been
paid), encroachments, and easements, except those set out in the Permitted Title
Exceptions and to which Purchaser has consented. Subject to the Permitted Title
Exceptions, Seller shall have satisfied and canceled of record all such
aforesaid assessments, liens and other encumbrances against said Real Property
and Personal Property, including, without limitation, any mortgage, indenture,
security agreement, or deed to secure debt outstanding on any portion of such
Real Property and Personal Property, unless assumed by Purchaser.
6.03. Deliveries by Seller. Seller hereby agrees to, and shall, deliver or
cause to be delivered to the Purchaser (unless Purchaser waives delivery of any
one or all) at the Closing the following, each of which shall be in form and
substance reasonably satisfactory to the Purchaser:
(a) Possession. Possession and occupancy of the Facility subject only
to any Permitted Title Exceptions;
(b) Deed. Special warranty deed conveying title to the Real Property to
Purchaser, duly witnessed and attested for recording in the State of
Georgia, free and clear of all liens, restrictions and encumbrances other
than the Permitted Title Exceptions;
(c) Title Binder; Survey. A title insurance policy (marked title policy
commitment) issued by a reputable title insurance company in an amount not
less than the portion of the Purchase Price allocated to the Real Property
with the costs of such title insurance to be borne by Purchaser, and a
survey of the Land on which the Facility is located with the cost of such
survey to be borne by Purchaser;
(d) Environmental Report; Engineering Report. An environmental report
for the Facility and an engineering report for the Facility with the costs
of such reports borne fully by Purchaser.
<PAGE>
(e) Assignment of Patient Contracts. An assignment of all patient
contracts, the originals of such contracts, all advance payments held by
Seller, and all patient property or patients' funds held by Seller and
complete accounting of same;
(f) Assignment of Warranties, Guarantees and Indemnities. An assignment
of any unexpired warranties, guarantees and indemnities now in effect with
respect to any part of the Real Property or Personal Property and/or any of
the mechanical systems in same;
(g) Assignment of Service Contracts. An assignment of all service
contracts not terminated prior to Closing;
(h) Assignment and Bill of Sale. A Limited Warranty Assignment and Bill
of Sale for all of Seller's right, title and interest in and to the
Personal Property and fixtures located in the Facility, including those
items described in Exhibit "B" attached hereto and by this reference made a
part hereof;
(i) Other Instruments. Such other endorsements, assignments and
instruments of transfer and conveyance as may be necessary to vest in the
Purchaser good and marketable title to the assets and business to be sold
hereunder and as shall be reasonably requested by Purchaser;
(j) Paid Tax Bill. A copy of the most recently paid real estate tax
bills;
(k) Certificates Regarding Mechanics' Liens and Other Matters.
Certificates or affidavits of Seller in form and substance reasonably
satisfactory to Purchaser regarding the status of mechanic's liens,
Seller's right to possession of the Facility, the authority and power of
the Seller to complete the transactions provided for herein, and the
accuracy, in all material of Seller's representations, and warranties and
covenants contained herein;
(l) Certificate Regarding Absence of Changes. Certificate or affidavit
of Seller in form and substance reasonably satisfactory to Purchaser that
there have been no Material changes made to the Facility since the date of
this Agreement;
(m) Title Insurance Company Documents. Such documents and instruments
as may be reasonably required by Purchaser or its title insurer to carry
out the intent of the parties to this Agreement;
(n) Admission Agreements; Employee Benefits. The lists and payments
required by Sections 14 and 15 hereof;
(o) Patient Records. The patient records and property described in
Section 16 hereof;
(p) Repair Records. All painting, repair and maintenance records
available to Seller;
(q) Plans and Specifications. The plans and specifications pursuant to
which the Facility were constructed, if same are available to Seller;
(r) As-Built Surveys. The most current "as-built" surveys of the
Facility, if available;
<PAGE>
(s) Trade Name Assignments. An assignment of the trade name "The Health
and Rehabilitation Centre at Dolphins View"; and
(t) Compliance at Closing with Facility Laws. The representation made
by Seller in Section 3.13 hereof shall be true and correct in all Material
respects as of the Closing Date.
6.04. Escrow Closing for Regulatory Delay and Other Conditions. If, on or
before the Closing Date, Purchaser has not received all approvals required by
any federal, state or local regulatory agency or authority with respect to the
transactions contemplated by this Agreement, or if other conditions of Closing
have not been satisfied or waived in writing, Purchaser and Seller shall have
the option to close the purchase in escrow with a mutually acceptable escrow
agent and pursuant to an escrow agreement reasonably acceptable to Purchaser and
Seller; provided, however, that Purchaser may waive its right to close in escrow
based upon applications filed and any formal or informal indications from
regulatory agencies or authorities that approval shall be forthcoming in
ordinary course.
6.05. Security Deposits, Patient Property and Patient Funds. All security
deposits, patient property and patient funds held by Seller shall be turned over
to the Purchaser at the Closing, together with evidence in form reasonably
satisfactory to Purchaser of Seller's compliance with all applicable laws with
respect to the collection and maintenance of such security deposits, property
and funds. Purchaser shall execute a receipt therefor. Before Closing, Seller
shall provide to Purchaser at the Facility a list of all such security deposits
and patient property and make available the ledger of patient funds as provided
in Section 3.02 hereof. Seller agrees to assist in any audit of such deposits,
property and funds. Seller and Purchaser hereby agree to reimburse and indemnify
and hold free and harmless the other party from any and all liability in
connection with any loss of deposits, patient property and patient funds
incurred by the other party's failure to comply with applicable laws or properly
to handle and account for same.
6.06. Conditions Precedent to Obligations of Purchaser. All of Purchaser's
obligations to make the deliveries and payments contemplated by Section 6 of
this Agreement are subject to the fulfillment prior to or at the Closing of each
of the following conditions, any one or more of which Purchaser may waive in
whole or in part (and at or prior to the Closing, Purchaser may request a
certificate of the general partner of Seller or such other evidence as Purchaser
reasonably requests concerning the fulfillment of the following conditions):
(a) Accuracy of Representations, Warranties and Covenants. The
representations and warranties of Seller contained in this Agreement shall
be true and correct in all Material respects as of the date when made and
shall be updated and true and correct in all Material respects as of the
Closing as though such representations and warranties were made again on
that date and Seller shall have performed and complied with all Material
obligations, covenants and agreements with which Seller is required by this
Agreement to perform or comply on or before the Closing.
(b) Deliveries. The delivery to Purchaser of those items listed in
Section 6.03 in form and substance reasonably satisfactory to Purchaser.
(c) Governmental Consents Obtained or Requirements Satisfied. All
authorizations, consents and approvals of any governmental or public unit,
agency, body, authority or governmental or public official or entity
necessary for the valid consummation of the transactions contemplated by
(and compliance with or performance under) this Agreement shall have been
obtained and shall be in full force and effect, including any required
consents. Without limiting the foregoing, the Purchaser and the Seller
<PAGE>
shall have filed, or will file, with the appropriate agencies of the State
of _______________ or subdivisions thereof, as applicable, for all
approvals necessary to permit the transfer of Seller's right, title and
interest in and to the Facility and the continued operation of the Facility
as nursing care facility under applicable _______________ laws. Purchaser
shall send Seller copies of all correspondence related to such applications
and notices and Purchaser shall use reasonable dispatch and make all
reasonable efforts to gain such approvals. Seller shall have responsibility
for providing to Purchaser any information reasonably required by Purchaser
and to otherwise cooperate with Purchaser, as reasonably requested, to gain
such approvals. If Purchaser has not received all approvals required by any
federal, state or local regulatory agency or authority with respect to the
transactions contemplated by this Agreement, Purchaser shall have the
option to require that the purchase be closed in escrow as provided in
Section 6.04 hereof.
(d) No Challenge to Transaction. No injunction (temporary or permanent)
shall have been issued against Seller or Purchaser enjoining the
consummation of the transactions contemplated by this Agreement, and no
action, proceeding, investigation, regulation or legislation shall have
been instituted, threatened or proposed by any governmental or public unit,
agency, body, authority or other governmental or public officer or entity
before any court, governmental or public unit, agency, body or authority or
legislative body that has not been withdrawn, dismissed, rescinded,
dissolved or otherwise eliminated on or before the Closing Date, to enjoin,
restrain, delay, prohibit or obtain Material damages (i) with respect to,
or which is related to, or arises out of, this Agreement or the
consummation of the transactions contemplated by this Agreement or (ii)
which, in the reasonable judgment of the Purchaser, would have a Materially
adverse effect on the business or financial condition of the Facility.
(e) Consents and Releases Received. Except as provided in (c) above,
all consents reasonably necessary to complete this transaction shall have
been obtained by Seller and Seller shall provide evidence thereof in form
and substance reasonably satisfactory to Purchaser. Except for the
Permitted Title Exceptions, all liens on the Real Property and Personal
Property shall have been released in full and UCC termination statements
shall have been filed or delivered for filing as appropriate. Purchaser
shall have received consents or agreements from all parties other than
Seller that all Material contractual arrangements with Seller shall
continue unaltered in all Material respects; provided, however, that such
consents shall be required only if the failure to obtain such consent
would, in the reasonable determination of Purchaser, have a Material
adverse effect on the business, financial condition or results of
operations of the Facility; provided, further, however, that none of such
consents or other assurances shall be given on terms that Materially
adversely affects the rights of Seller thereunder.
(f) Title Binder. Purchaser shall have obtained with respect to Real
Property (including, but not limited to, the Land) a commitment for an
owner's title insurance policy issued in the name of Purchaser and its
successors and assigns by such title insurer as Purchaser shall reasonably
select (i) insuring the title to such Real Property (in a total aggregate
amount equal to the Purchase Price allocated to the Real Property at
regular rates, including examination costs) as good, valid and marketable
title free and clear of all liens, encumbrances and exceptions other than
those that (A) involve imperfections of title that do not, individually or
in the aggregate, impair the marketability of the affected property, (B)
involve easements, covenants, restrictions or other encumbrances that do
not, individually or in the aggregate, detract from the value of such
<PAGE>
property, in its current use or interfere with such use of such property,
or (C) the Permitted Title Exceptions; and (ii) containing no survey
exceptions or exclusions from coverage that indicate that Purchaser will
not be able to operate the Facility after the Closing in the manner in
which it is currently being operated.
(g) Casualty Losses. On or prior to the time of Closing, the Facility
shall not have sustained any loss, whether or not insured, by reason of
physical damage to the Facility caused by fire, flood, accident, explosions
or other calamity which would Materially adversely affect the carrying on
of its business in the normal and regular course.
(h) Union Contract. Any union contract entered into regarding the
Facility prior to the Closing Date shall be in form and substance
reasonably satisfactory to Purchaser.
(i) Insurance. Policies of insurance relating to the Facility, in form
and substance reasonably satisfactory to Purchaser, shall have been
obtained by Purchaser. Purchaser agrees to use its reasonable efforts to
obtain appropriate insurance prior to the Closing Date.
(j) No Material Adverse Change. During the period prior to the Closing
Date, no information shall have come to the attention of Purchaser
reasonably indicating or suggesting that the financial information
regarding the Facility and Seller is in any Material respect incorrect or
incomplete. Without limiting the foregoing, any investigation of, or
information obtained with respect to, Seller or the Facility by Purchaser,
or any exhibit or schedule or any supplement hereto or any other document
delivered to Purchaser in connection with this Agreement, shall not have
revealed any facts or circumstances which, in the reasonable judgment of
Purchaser, reflect in a Materially adverse way on the financial condition,
assets, liabilities (absolute, accrued or contingent), reserves, business
or operations of the Facility.
(k) Financing. Purchaser shall have received financing on such terms as
are acceptable to Purchaser.
(l) Acquisition of Other Facilities. Purchaser shall have entered into
Purchase and Sale Agreements for the acquisition of those facilities
described on Exhibit "I" attached hereto on such terms as acceptable to
Purchaser and closing of such acquisition shall have occurred
simultaneously with the acquisition of the Facility.
6.07. Closing Costs. Purchaser shall pay all costs of Closing, including
the cost of recording any deed and any documentary stamps, transfer tax, or
other similar tax and fees and expenses of any attorneys.
6.08. Deliveries by Purchaser. Purchaser hereby agrees to, and shall,
deliver and pay or to cause to be delivered and paid to Seller the following,
each of which shall be in form or substance reasonably satisfactory to Seller:
(a) Purchase Price. The Purchase Price as set forth in Section 2.01
hereof.
(b) Other Documents. Such other documents, certificates and opinions as
the Seller may reasonably and timely request in order to document more
effectively the transactions contemplated by this Agreement or to evidence
the compliance by Purchaser with any condition of this Agreement.
6.09. Conditions Precedent to Obligations of Seller. All of the obligations
of Seller to make the deliveries contemplated by this Section 6 are
<PAGE>
subject to the fulfillment prior to or at the Closing of each of the following
conditions, any one or more of which Seller may waive in whole or in part (and
at or prior to the Closing, Seller may request a certificate of Purchaser or
such other evidence as it reasonably requests concerning the fulfillment of the
following conditions):
(a) Accuracy of Representations, Warranties and Covenants. The
representations and warranties of Purchaser in this Agreement shall be true
and correct in all Material respects as of the date when made, and shall be
updated and true and correct in all Material respects as of the Closing as
though such representations and warranties were made again on that date and
Purchaser shall have performed or complied with all Material obligations,
covenants and agreements with which Purchaser is required by this Agreement
to perform or comply on or before the Closing.
(b) Consents Obtained or Requirements Satisfied. All authorizations,
consents and approvals of any third party, including without limitation any
governmental or public unit, agency, body, authority or other governmental
or public official or entity necessary for the valid consummation of the
transactions contemplated by (and compliance with or performance under)
this Agreement shall have been obtained and shall be in full force and
effect. Notwithstanding the foregoing, Purchaser and Seller shall have
obtained or be in the process of obtaining from the appropriate agencies of
the State of _______________ or subdivisions thereof, as applicable, all
approvals necessary to permit a transfer of the Facility under applicable
_______________ laws.
(c) Purchase Price. Purchaser shall have delivered to Seller the
Purchase Price in the manner described in Section 6.09 hereof.
(d) Deliveries. The Purchaser shall have delivered to Seller those
other items listed in Section 6.08 hereof, in form and substance reasonably
satisfactory to Seller.
(e) No Challenge to Transaction. No injunction (temporary or permanent)
shall have been issued against Seller or Purchaser enjoining the
consummation of the transactions contemplated by this Agreement, and no
action, proceeding, investigation, regulation or legislation shall have
been instituted, threatened or proposed by any governmental or public unit,
agency, body, authority or other governmental or public officer or entity
before any court, governmental or public unit, agency, body or authority or
legislative body that has not been withdrawn, dismissed, rescinded,
dissolved or otherwise eliminated on or before the Closing Date, to enjoin,
restrain, delay, prohibit or obtain Material damages with respect to, which
is related to, or arises out of, this Agreement or the consummation of the
transactions contemplated by this Agreement.
(f) No Material Adverse Change. During the period prior to the Closing
Date, no information shall have come to the attention of Seller indicating
or suggesting that the ownership or operation of the Facility, in the
reasonable judgment of Seller, would be illegal or would make the Facility,
in the reasonable judgment of Seller, ineligible for Medicare or Medicaid
reimbursement if owned by Purchaser.
<PAGE>
SECTION 7. CONDEMNATION, RISK OF LOSS.
7.01. Condemnation. In the event of the imminent threat or institution of
any proceedings, judicial, administrative or otherwise, which shall relate to
the proposed taking of any substantial portion of the Facility by eminent domain
prior to Closing, Purchaser shall have the right and option to terminate this
Agreement at any time prior to Closing by giving the Seller written notice to
such effect. Seller hereby agrees to furnish Purchaser written notification with
respect to such events of taking within three (3) days from Seller's receipt of
any notification of such events. If Purchaser should decide to terminate this
Agreement, the parties hereto shall be released from respective their
obligations and liabilities hereunder. As used herein, a "substantial portion"
of the Facility shall be deemed to include without limitation, a taking which
would (i) close five (5%) percent or greater of the number of patient rooms or
licensed beds at either of the Facility, (ii) close any one entrance or exit of
either of the Facility, or (iii) cause a loss of future gross revenues in an
amount greater than ten (10%) percent of either of the Facility's most recent
annual gross revenues or a closing of the operations of either of the Facility.
In the event Purchaser does not elect to terminate this Agreement because
of such taking, at the Closing hereof, Seller shall assign to Purchaser all its
right, title and interest in and to any proceeds arising out of such taking.
7.02. Risk of Loss. Risk of loss with respect to the Facility is assumed by
Seller until Closing. In the event that either of the Facility is substantially
damaged by fire or other casualty prior to the Closing of this transaction,
Purchaser, at its option, may:
(a) Elect to terminate this Agreement upon giving written notice of
such termination to Seller, whereupon the parties hereto shall be released
from their respective obligations hereunder, or
(b) Elect to close the sale, whereupon Purchaser shall be entitled to
and shall receive an assignment of the proceeds of any insurance due to
Seller with respect to such fire or other casualty.
Aggregate damage of $50,000 or more shall be deemed substantial, without
excluding other damage that may be substantial.
In the event that the Closing occurs, unless the damages are repaired in
full by Seller prior to Closing, Purchaser shall be entitled to receive an
assignment of the proceeds of any insurance due to Seller (but only to the
extent of proceeds in excess of the amounts expended by Seller on any repairs
related to damage for which such proceeds are due to Seller) with respect to
fire or other casualty losses occurring between the date of this Agreement and
the Closing Date, notwithstanding the fact that such losses are not deemed
substantial.
<PAGE>
SECTION 8. INSPECTION.
8.01. Right to Inspect. The Purchaser, or its agents, shall have the right
to inspect the physical condition, environmental condition, structural
competency and good working order of the Facility (including, without
limitation, the heating, air conditioning, sewer, plumbing, antenna and
electrical systems contained therein) prior to Closing. Such right of inspection
and the exercise of such right shall not constitute a waiver by Purchaser of the
breach of any representation or warranty of Seller that might have been
disclosed by such inspection, unless such waiver is made in writing by
Purchaser.
8.02. Environmental Audits; Surveys. Commencing upon the date of this
Agreement and extending through Closing hereunder, Purchaser shall have the
right to enter the Facility personally or through agents, employees and
contractors for the purpose of making boundary line and topographical surveys of
same, making soil tests thereof and in general making tests, analyses and
investigations of the Facility.
8.03. Inspection of Records. Prior to Closing, all leases, books or records
of Seller pertaining to the Facility may be inspected by Purchaser at the
Facility, and Purchaser shall be supplied with copies thereof by Seller upon
request.
8.04. Seller's Options. Purchaser has heretofore inspected and approved the
physical condition of the Facility. Pursuant to Purchaser's right to inspect the
Facility as provided in Section 8.01, hereof, Purchaser shall endeavor to
furnish Seller, prior to the Closing Date, with a written list of all defects in
physical condition, structural competency or good working order which Purchaser
discovers (to the extent such defects are incurred or arise after the date of
this Agreement). Prior to Closing, Seller shall notify Purchaser in writing that
(i) Seller shall and does thereby agree to correct or cause to be corrected all
such defects prior to the Closing, (ii) instead of correcting or causing to be
corrected all such defects, Seller shall and does thereby agree to reduce the
Purchase Price by a specified amount, itemizing how much of that amount is
applicable to each defect, (iii) Seller shall and does thereby agree to correct
or cause to be corrected only certain specified defects prior to Closing, or
shall reduce the Purchase Price by a specified amount with respect to only
certain itemized defects, or both, or (iv) Seller shall not correct or cause to
be corrected any of the defects or agree to any reduction in the Purchase Price
on account thereof. Seller's failure timely to give Purchaser such written
notice prior to the Closing Date shall be deemed to be and shall constitute
Seller's notice as provided in (iv) above. In the event Seller notifies
Purchaser that Seller shall not correct or cause to be corrected all of such
defects prior to the Closing under the provisions of (ii), (iii) or (iv) above,
Purchaser may, at its option, after receiving such notice, terminate this
Agreement, whereupon this Agreement shall be of no further force or effect and
neither of the parties hereto shall have any liability or obligations each to
the other. If Seller agrees to cure such defects prior to Closing or if Seller
informs Purchaser that Seller shall not correct or cause to be corrected such
defects prior to Closing under the provisions of (ii), (iii) or (iv) above, and
Purchaser does not terminate this Agreement prior to Closing, then prior to
Closing, Seller must correct or cause to be corrected such defects or reduce the
Purchase Price, or both, and Seller's notification with respect to such list of
defects shall become part of this Agreement without any further action by the
parties hereto. Seller's obligations hereunder to correct or cause to be
corrected any defects shall survive the Closing.
8.05. Terms and Conditions of Inspections. Any inspections conducted
pursuant to this Section 8 shall be at any time subject to the following terms
and conditions:
(a) Seller shall have received reasonable advance notice thereof;
(b) No such inspection shall interfere with the normal day-to-day
operation of the Facility; and
(c) No due diligence objection to Closing shall be raised by Purchaser
after the Closing Date.
<PAGE>
SECTION 9. TERMINATION.
9.01. Circumstances of Termination. This Agreement may be terminated in
either of the following circumstances:
(a) The conditions to the Agreement in Section 5 and Section 8 are not
satisfied or the termination circumstances as set forth in Sections 7.01,
7.02 and 13 occur; or
(b) The Closing begins or would otherwise occur and Purchaser is not
obligated to close pursuant to Section 6.06 or Seller is not obligated to
close pursuant to Section 6.09.
9.02. Effect of Termination. If this Agreement is terminated pursuant to
Section 9.01, this Agreement shall be deemed thenceforth null and void and no
party hereto shall have any obligation or liability by reason of this Agreement
except as specifically provided herein.
9.03. Damages Upon Termination. If Purchaser fails to tender the Purchase
Price to Seller at the Closing or fails to perform as required herein or Seller
fails to perform as required herein, then either party shall have all rights or
remedies available to it under law or at equity, including, without limitation,
specific performance and such rights or remedies may be exercised by either
party concurrently or in such order as such party may elect.
<PAGE>
SECTION 10. BROKER'S COMMISSION.
Each of Purchaser and Seller warrants to the other that there are no
brokers, finders or other consultants acting on behalf of, or at the request of,
Purchaser or Seller in this transaction. Seller shall indemnify and hold
Purchaser harmless from and against the claims of all persons or entities who
claim commissions through Seller for real estate brokerage fees or commissions
or any other fees arising out of the sale and purchase of all of Seller's right,
title and interest in or to the Facility or the transactions contemplated
hereby. Purchaser shall indemnify and hold Seller harmless from and against the
claims of all persons or entities who claim commissions through Purchaser for
real estate brokerage fees or commissions or any other fees arising out of the
purchase or sale of all of Seller's right, title and interest in or to the
Facility or the transactions contemplated hereby.
SECTION 11. ASSIGNMENT AND APPROVAL.
Seller shall not assign its rights and obligations hereunder or any part
thereof to any person, firm, limited partnership or corporation, including a
corporation to be formed hereafter, or other entity, without the prior written
consent of Purchaser. Purchaser may assign its rights and obligations hereunder
without Seller's prior written consent.
SECTION 12. NOTICES.
All notices, demands or requests provided for or permitted to be given
pursuant to this Agreement must be in writing. If not otherwise provided
hereunder, all notices, demands or requests to be sent to any party hereto, or
any assignee or any party, shall be deemed to have been properly given or served
by delivering same personally to each party or by sending same by telecopy
(receipt confirmed) or overnight delivery addressed to such party at the
following addresses or telecopy number:
To Purchaser: Centennial HealthCare Management Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attention: Kent Fosha
Telecopy Number: (770) 730-1375
<PAGE>
With a copy to: Centennial HealthCare Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attention: Daryl Griswold
Telecopy Number: (770)730-1350
To Seller: c/o Five Star Healthcare Properties, LLC
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attention: Alan Dahl
Telecopy Number: (770) 730-1377
SECTION 13. MISCELLANEOUS.
This Agreement shall bind and inure to the benefit of the parties hereto
and their respective executors, administrators, legal representatives, and
permitted successors and assigns. All the terms and conditions of this Agreement
not performed at Closing shall survive the Closing for a period of one (1) year
hereunder and shall not be merged into any general assignment from Seller to
Purchaser. If all or any portion of any of the provisions of this Agreement
shall be declared invalid by laws applicable thereto, then the performance of
such offending provision shall be excused by the parties hereto; provided,
however, that, if the performance of such excused provision Materially affects
any aspect of this transaction, then the party for whose benefit such excused
provision was inserted in this Agreement shall have the right, exercisable by
written notice given to the other party within ten (10) days after such
provision is so declared invalid, to terminate this Agreement; whereupon this
Agreement shall be null and void. The titles or captions of the provisions of
this Agreement are merely descriptive and are not representations of matters
included in or excluded from such provisions. This Agreement and the agreements
contemplated herein constitute the sole and entire agreement between the parties
hereto with respect to the subject matter hereof, and no modification hereof
shall be binding unless set forth in writing, signed by all parties and attached
hereto. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Georgia (without regard to its rules of
conflicts of laws). Where the context so requires or permits, the use of the
singular form includes the plural, and the use of the plural form includes the
singular, and the use of any gender includes any and all genders.
SECTION 14. ASSUMPTION OF SELLER'S OBLIGATIONS TO THIRD PARTIES.
Purchaser shall assume the obligations of Seller to provide future care to
all current patients under any admission agreements or other contracts relating
to patients.
SECTION 15. SELLER'S OBLIGATION WITH RESPECT TO EMPLOYEES.
As of the Closing Date, Seller shall deliver to Purchaser a list of any and
all amounts for current wages due employees as of the Closing Date and taxes
with respect thereto, and all accrued and/or earned fringe benefits including,
without limitation, vacation, pay or sick leave, retirement benefits and
<PAGE>
disability benefits to which employees may be entitled as of the Closing Date,
certified by the general partner of Seller. Such benefits will be prorated in
accordance with the provisions of Section 5.04 of this Agreement.
SECTION 16. PATIENT RECORDS AND PATIENT FUNDS.
As of the Closing Date, Seller shall deliver to Purchaser all patient
records with respect to the business conducted in connection with the Facility,
which records Purchaser shall maintain and make reasonably available to Seller
for three (3) years after the Closing Date, and Seller shall provide Purchaser
with an updated accounting of all patient funds and other property of patients
held by Seller and shall deliver such funds and other property to Purchaser at
Closing.
SECTION 17. LIABILITIES.
Except as specifically provided in this Agreement, Purchaser shall assume
no liabilities of any kind or nature of Seller or any liabilities of any kind or
nature arising out of the business conducted with respect to the Facility prior
to the Closing Date. Purchaser shall assume all liabilities arising out of the
business conducted with respect to the Facility on or after the Closing Date and
Seller shall assume no liabilities of any kind or nature arising out of the
business conducted with respect to the Facility for the period after the Closing
Date.
Seller shall be responsible for satisfying the Facility's creditors and
trade suppliers in accordance with Section 3.23 hereof. Seller shall indemnify
and hold Purchaser harmless from and against any and all cost, loss, damage or
liability which Purchaser may incur as a result of any "employment loss" as used
in the Worker Adjustment and Retraining Notification Act of 1988 at the Facility
occurring on or after the Closing Date as a result of the transactions
contemplated hereby.
SECTION 18. TRANSFER OF THE TRADE NAME "THE HEALTH AND REHABILITATION CENTRE
AT DOLPHINS VIEW"
At Closing, Seller shall assign any and all of its right, title and
interest in and to the trade name "_________________________________".
SECTION 19. CASH AND CASH EQUIVALENTS INCLUDED.
Seller shall convey to Purchaser Seller's right, title and interest in and
to any cash or cash equivalents with respect to the Facility, except as
otherwise specifically provided herein.
SECTION 20. DELIVERY.
To the extent Seller is obligated to deliver records or other items to
Purchaser as of the Assignment and such items would be cumbersome or
unreasonable to remove from the Facility, such delivery may be made at the
Facility, regardless of the location of the remainder of the Closing.
SECTION 21. INDEMNIFICATION BY SELLER AFTER CLOSING.
21.01. Indemnification. If the transactions contemplated in this Agreement
are completed and closed and this Agreement is not terminated, Seller and
Purchaser shall indemnify and hold harmless each other against any loss, damage,
liability or expense (including without limitation legal and other fees)
incurred or sustained by that party as a result of or attributable to any
Material misrepresentation or Material breach of any covenant, warranty or
representation given or made by the other party and against any loss, damage,
<PAGE>
liability or expense (including without limitation legal and other fees) which
would not have been incurred or sustained by that party if such covenants,
representations and warranties had been true and correct in all Material
respects. Seller shall indemnify and hold harmless Purchaser against any claim
by any governmental entity for Medicare or Medicaid overpayment made by such
governmental entity prior to the Closing Date or for Medicare or Medicaid
recapture of depreciation resulting from the sale of the Real Property or
Personal Property or any other change giving rise to such recapture.
21.02. Tax Indemnification. Without limiting the requirements of the
foregoing Section 21.01, Seller will promptly indemnify and hold harmless
Purchaser against any and all liability for or with respect to taxes for any
taxable period ending on or before the Closing Date that is asserted or assessed
against the Facility. Notwithstanding anything in this Section 21 to the
contrary, any indemnity payable by Seller to Purchaser pursuant to the foregoing
sentence shall be paid within (i) ten days after Purchaser's request therefor or
(ii) ten days prior to the date on which the liability upon which the indemnity
is based is required to be satisfied by Purchaser or the Facility.
21.03. Limitations. The foregoing is subject to the following limitations:
(a) Each party shall promptly notify the other parties of any action,
claim, loss or potential action, claim or loss, in regard to which action,
claim or loss that party shall seek or may seek indemnification pursuant to
this Section 21, and in any event within thirty (30) days or such shorter
period as may be necessary to avoid a default thereof after that party has
actual knowledge of such action, claim or loss or potential action, claim
or loss, and, at such time, that party shall tender and permit the other
party to defend, at such other party's expense, any such action, claim or
loss.
(b) Claims under this Section 21, must be asserted within the following
time periods after the Closing Date:
Material misrepresentation or Material breach of any covenant,
warranty or representations - 1 year;
Any claim by any governmental entity for Medicare or Medicaid
overpayment made by such governmental entity prior to Closing - 5
years;
Recapture of depreciation resulting from the sale of the Real
Property or Personal Property or other change giving rise to such
recapture - 5 years.
Tax indemnification - later of 5 years or running of applicable
statute of limitations.
It is understood and agreed that any such claim may be validly asserted by
Purchaser or Seller during the applicable period if a claim has been
asserted or threatened during such period which could result in a loss,
liability, damage, cost or expense for which the Seller or Purchaser would
be liable pursuant to this Section 21; and
(c) Neither Seller nor Purchaser shall have rights as to any claim
pursuant to this Section 21 in the event this Agreement is terminated prior
to the consummation of the purchase and sale contemplated herein.
<PAGE>
SECTION 22. EXHIBITS.
The parties shall have until Closing to agree upon all information to be
filed as a part of the Exhibits to this Agreement.
SECTION 23. REMEDIES NOT LIMITED TO REAL AND PERSONAL PROPERTY.
The parties shall have all legal and equitable remedies available to the
for breach of this Agreement and shall not be limited to the collateral of the
Real Property and Personal Property.
IN WITNESS WHEREOF, the parties hereto have executed this Purchase and Sale
Agreement the day and year first hereinabove written.
"SELLER"
_______________________ INVESTORS, LLC
By: Five Star Healthcare Properties, LLC
Its: Sole Member
By: Southeast Capital, LLC
By:
---------------------------------
Alan C. Dahl, Member
By: Highland Healthcare Capital, LLC
By:
---------------------------------
J. Stephen Eaton, Member
<PAGE>
"PURCHASER"
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION
By:
---------------------------------
<PAGE>
EXHIBIT INDEX
Exhibit "A" REAL PROPERTY DESCRIPTION
- -----------
Exhibit "B" PERSONAL PROPERTY
- -----------
Exhibit "C" EXCLUDED PROPERTY
- -----------
Exhibit "D" PURCHASE PRICE ALLOCATION
- -----------
Exhibit "E" SCHEDULE OF DEFICIENCIES IN THE CONDITION OF THE FACILITY
- -----------
Exhibit "F" CHANGES IN FINANCIAL CONDITION OF THE FACILITY
- -----------
Exhibit "G" LIST OF EXCEPTIONS
- -----------
Exhibit "H" PERMITTED TITLE EXCEPTIONS
- -----------
Exhibit "I" LIST OF ADDITIONAL FACILITIES
- -----------
<PAGE>
EXHIBIT 10.17
LONG TERM CARE FACILITY
MANAGEMENT AGREEMENT
[Hilltop, Michigan]
THIS LONG TERM CARE FACILITY MANAGEMENT AGREEMENT (the "Agreement") made as
of the 1st day of December, 1999, by and between HILLTOP MANOR INVESTORS LLC, a
Georgia limited liability company ("Owner"), and CENTENNIAL HEALTHCARE
MANAGEMENT CORPORATION, a Georgia corporation ("Manager").
W I T N E S S E T H:
WHEREAS, Owner has agreed to acquire certain real and personal property
comprising a certain 118 bed nursing center located in Roscommon, Michigan (the
"Facility"); and
WHEREAS, Owner and Manager desire for Manager to provide its experience,
skill and supervision to manage the Facility on behalf of Owner after Owner
acquires the Facility under and subject to the terms of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual promises and
covenants of the parties contained herein and for such other good and valuable
consideration, the receipt, adequacy and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
ARTICLE I
MANAGEMENT DUTIES AND OBLIGATIONS
1.01 Control Retained by Owner. Owner shall at all times exercise overall
control over the assets and operations of the Facility, subject to the terms of
this Agreement, and Manager shall perform the duties herein required to be
performed by it as the agent of Owner and in accordance with the policies and
directives from time to time adopted by Owner.
1.02 Changes in Method of Operation. Manager shall not make substantial
changes in the method of operating the Facility unless Manager first notifies
Owner and Owner has given its approval, which approval shall not be unreasonably
withheld.
1.03 Management of Facility. During the term of this Agreement and subject
to the terms of this Agreement, Manager shall on behalf of Owner manage all
aspects of the operation of the Facility, including, but not limited to
staffing, accounting, billing, collections, setting of rates and charges and
general administration. In connection therewith, Manager (either directly or
through supervision of employees of the Facility) shall:
(a) Hire or lease on behalf of Owner and retain (to the extent such
personnel are reasonably available in the community in which the Facility is
located) an adequate staff of nurses, technicians, nurse aides, office and other
employees, including a qualified administrator (the "Administrator") and shall
promote, direct, assign and discharge all such employees on behalf of Owner at
Manager's reasonable discretion; provided, however, that leased employees shall
be subject to the direction and control of the lessor of such leased employees.
All employees shall be employees of or leased by the Owner and carried on the
payroll of the Facility and shall not be deemed employees or agents of Manager.
<PAGE>
(b) Institute and amend, from time to time general salary scales,
personnel policies and appropriate employee benefits for all employees on behalf
of Owner; provided, however, that leased employees shall be subject to the
general salary scales, personnel policies and employee benefit programs of the
lessor of such leased employees. Employee benefits may include pension and
profit sharing plans, insurance benefits, incentive plans for key employees and
holiday, vacation, personal leave and sick leave policies.
(c) Issue appropriate bills for services and materials furnished by
the Facility and use its reasonable best efforts to diligently collect accounts
receivable and monies owed to the Facility, design and maintain accounting,
billing, patient and collection records; and prepare and file insurance,
Medicare, Medicaid and any and all other necessary or desirable reports and
claims related to revenue production. Owner hereby grants Manager the right to
enforce Owner's rights as creditor under any contract or in connection with
rendering any services for purposes of collecting accounts receivable and monies
owed the Facility.
(d) Order, supervise and conduct a program of regular maintenance and
repair.
(e) Purchase food, beverage, medical, cleaning and other supplies,
equipment, furniture and furnishings for the account of Owner.
(f) Administer, supervise and schedule all patient and other services
of the Facility, including the operation of food, barber/beautician and other
ancillary services.
(g) Provide for the orderly payment (to the extent funds are
available therefor) of accounts payable, employee payroll, amounts due on short
and long-term indebtedness, taxes, insurance premiums, and all other obligations
of the Facility.
(h) Institute standards and procedures for admitting patients, for
charging patients for services, and for collecting the charges from the patients
or third parties.
(i) Obtain and maintain insurance coverage for the Facility naming
Owner, Manager and such other persons requested by Owner as insured
as provided in Section 5.01 hereof.
(j) Negotiate and enter into, in the name of and on behalf of Owner,
such agreements, contracts and orders as Manager may deem necessary or
advisable, for the furnishing of services, concessions and supplies for the
operation and maintenance of the Facility, including, without limitation,
agreements for the provision of therapy and rehabilitation services, and medical
supplies.
(k) After notice to Owner, negotiate on behalf of Owner (and in
conjunction with Owner's counsel) with any labor union lawfully entitled to
represent employees of Owner who work at the Facility, but any collective
bargaining agreement or labor contract must be submitted to Owner for its
approval and execution.
(l) As provided in Section
1.07(a), assist in maintaining all licenses and permits required for the
operation of the Facility, its contracts with third party payors and other
similar governmental and nongovernmental agencies and intermediaries.
(m) Make periodic evaluations of the performances of all
<PAGE>
departments of the Facility.
(n) Design, establish and maintain a suitable accounting system using
accounts and classifications consistent with those used in similar facilities.
(o) Advise and assist Owner in designing an adequate and appropriate
public relations program.
1.04 Reports to Owner.
(a) Manager shall prepare and deliver to Owner, within thirty (30)
days after the close of each calendar month, unaudited financial statements
covering the prior month and containing a balance sheet and statement of income
and expenses in reasonable detail. Manager shall also provide any required
assistance to the independent accountants for the Facility, who shall be
selected by Manager, in the preparation of audited annual financial statements
for the operation of the Facility. Such financial statements shall be prepared
at Owner's expense in accordance with generally accepted accounting principles
in the health care field consistently applied and delivered to Manager and Owner
within ninety (90) days after the end of each fiscal year of the Facility.
Manager shall prepare reports or provide information to Owner required by the
Lease and any loan documents of Lessor.
(b) Manager shall submit to Owner for its approval (which approval
will not be unreasonably withheld) each twelve (12) months its budget for the
operation of the Facility setting out anticipated income, expenses and capital
expenditures during the succeeding twelve (12) month period. Manager shall use
reasonable efforts to operate the Facility in accordance with the provisions of
the budget for the Facility as submitted to Owner. Such proposed budget for the
Facility shall be delivered to Owner prior to the commencement of the
operational fiscal year of the Facility.
(c) Manager shall schedule periodic management meetings to be
attended by representatives of both Manager and Owner no less frequently than
semiannually and shall furnish to Owner quarterly written progress reports
concerning the operation of the Facility.
1.05 Bank Accounts.
(a) All funds received under Federal and State reimbursement programs
from the operation of the Facility (the "Government Funds") shall be deposited
in a bank account or accounts of the Facility (the "Facility Depository
Accounts") established in Owner's name. All other funds received from the
operations of the Facility (the "Non-Government Funds" and together with
Government Funds, the "Facility Funds") shall be deposited in a bank account or
accounts of Manager or Manager's affiliate(s) (collectively referred to in this
Section 1.05 as Manager) established in Manager's name (the "Manager's Operating
Accounts"). Upon receipt in the Facility Depository Accounts, Owner shall
transfer or cause to be transferred all Facility Funds from the Facility
Depository Accounts to Manager's Operating Accounts. Manager shall segregate all
Facility Funds in an account(s) separate and apart from Manager's other
operating accounts (the "Segregated Facility Accounts"). Manager shall disburse
Facility Funds received from the Facility's operations in the manner and order
of priority described in subsection (b) below. Manager shall also deposit and
maintain personal funds of the Facility's residents into a separate trust
account established in Manager's name (the "Facility Trust Account"). Manager
shall designate the signatory or signatories required on all checks or other
documents of withdrawal for the Manager's Operating, Segregated Facility and
Facility Trust Accounts. Owner shall instruct all Federal and State payors to
send confirmation to Manager of all transfers of Government Funds. In addition,
Owner shall direct the Facility Depository Account bank to send all Facility
<PAGE>
Depository Account statements directly to Manager on a monthly basis.
(b) Flow of Facility Funds. All revenues and cash of the Facility
shall be disbursed by Manager in the following order of priority and, in each
case, in such amounts and at such times as Manager deems is required to be made
in connection with the payment of:
(i) the Facility's debt service payments for obligations secured
or collateralized by the Facility, its property or receivables, including
payments due under that certain promissory note dated November 30, 1999 from
Owner to GMAC Commercial Mortgage Corporation ("Lender") in the original
principal amount of $4,250,000 (the "Loan"), and all other costs and payments
due under the Loan;
(ii) the costs and expenses of operating the Facility, including
the reimbursable expenses of Manager;
(iii) all accrued and unpaid Management Fees (defined in Section
5.01) to the Manager; and
THEN, after retention by Manager of an adequate working capital reserve (such
reserve to be determined by Manager in its reasonable discretion, taking into
account lines of credit, and approved by Owner in connection with its approval
of the operating budget for the Facility (with such approval to be not
unreasonably withheld or delayed) and held in such subaccount of the Facility
Depository, Operating or Segregated Facility Accounts as Manager shall
determine);
(iv) the balance, if any, to Owner.
1.06 Access to Books, Records and Documents. If it is ultimately determined
that Section 952 of the Omnibus Budget Reconciliation Act of 1980 and final
regulations promulgated thereunder apply to this Agreement:
(a) Until the expiration of four (4) years after the furnishing of
services pursuant to this Agreement, Manager shall, as provided in Section 952,
make available, upon written request, to the Secretary of Health and Human
Services, or upon request, to the Comptroller General of the United States, or
any of their duly authorized representatives, this Agreement, and all books,
documents and records of Manager that are necessary to verify the nature of this
Agreement for which payment may be made under the Medicare program; and
(b) If Manager carries out any of the duties of this Agreement
pursuant to a subcontract or subcontracts with an aggregate value or cost of
$10,000 or more over a twelve (12) month period with a related organization,
such subcontract or subcontracts shall contain a clause to the effect that,
until the expiration of four (4) years after the furnishing of such services
pursuant to such subcontract or subcontracts, the related organization shall, as
provided in Section 952, make available, upon written request, to the Secretary
of Health and Human Services, or upon request, to the Comptroller General of the
Untied States, or any of their duly authorized representatives, the subcontract
or subcontracts, and all books, documents and records of such subcontractors for
which payment may be made under the Medicare program.
1.07 Licenses.
(a) Manager, as agent for Owner and on Owner's behalf, shall apply
for and seek to obtain and maintain all necessary licenses, permits,
certifications, consents, and approvals from all governmental agencies which
have jurisdiction over the operation of the Facility. Manager agrees that its
management and operation of the Facility shall materially and substantially
<PAGE>
comply with any representations made by the Lessor and/or Owner in the
Certificate of Need application for the Facility with the State of Michigan
licensing authority, to the extent disclosed in writing to Manager, as well as
all conditions placed upon such Certificate of Need and so disclosed in writing
to Manager. Manager, by applying for such licenses, permits, consents, and
approvals, does not in any way guarantee the approval of such applications and
shall have no liability with respect to any failure of the Facility to receive
any such license, permit, consent or approval.
(b) Neither Owner nor Manager shall knowingly take any action or fail
to take any action which may (1) cause any governmental authority having
jurisdiction over the operation of the Facility to institute any proceeding for
the rescission or revocation of any necessary license, permit, consent or
approval, or (2) adversely affect Owner's right to accept and obtain payments
under Medicare, Medicaid, or any other public or private third party medical
payment program.
(c) Manager shall, with the written approval of Owner, have the right
to contest by appropriate legal proceedings, diligently conducted in good faith
in the name of Owner, the validity or application of any law, ordinance, rule,
ruling, regulation, order or requirement of any governmental agency having
jurisdiction over the operation of the Facility. Owner, after having given its
written approval, shall pay attorneys' fees incurred with regard to the contest.
Counsel for any such contest shall be selected by Manager, with Owner's approval
which shall not be unreasonably withheld. Manager shall have the right, upon
notice to Owner but without the written consent of the Owner, to process all
third-party claims for the services of the Facility, including, without
limitation, the full right to contest to the exhaustion of all applicable
administrative proceedings or procedures, adjustment and denials by governmental
agencies or their fiscal intermediaries as third-party payors.
1.08 Administrator. Manager shall employ or lease for the Facility an
Administrator to serve as the chief executive officer of such Facility. The
Administrator shall be an employee of and shall be compensated by Owner, in
accordance with the approved operating budget for the Facility or as otherwise
approved by Owner, and Manager shall pay on Owner's behalf out of the Operating
Accounts of the Facility, in advance, on or before the fifth day of each month,
all such compensation, including salary, fringe benefits, bonuses and business
expense reimbursements approved by Manager, to the Administrator. The term
"fringe benefits" shall include, without limitation, employer's FICA payments,
unemployment compensation and other employment taxes, bonuses, vacation,
personal and sick leave benefits, workers' compensation, group life, health and
accident insurance premiums and disability and other benefits.
1.09 Taxes. Any federal, state or local taxes, assessments or other
governmental charges properly imposed on the Facility are the obligations of the
Owner, not of Manager, but all such obligations shall be paid by Manager on
Owner's behalf out of the Operating Accounts of the Facility. With the Owner's
prior written consent, Manager may contest the validity or amount of any such
tax or imposition on the Facility in the same manner as described in Section
1.07(c) hereof.
1.10 Use of Manager's Personnel. An authorized representative of Manager
shall visit the Facility as often as Manager deems necessary. The time spent by
such authorized representative of Manager during such visits and all out-of-
pocket expenses arising from travel and lodging connected with such visitations
shall not be charged separately to Owner.
1.11 Government Regulations. Manager agrees to operate and maintain the
Facility in substantial compliance with the requirements of any material
statute, ordinance, law, rule, regulation or order of any governmental or
<PAGE>
regulatory body having jurisdiction over the Facility and to comply with all
orders and requirements of the local board of fire underwriters or any other
body which may exercise similar functions; provided, however, that Manager shall
not be required to expend its separate funds in order to comply with any such
statutes, ordinances, laws, rules, regulations or orders, and to the extent any
funds are so required, it shall fulfill its obligations hereunder by notifying
Owner of the actions necessary in order to be in compliance therewith and
expending such funds of Owner as Owner may provide or as Manager may deem
available for such purpose.
1.12 Quality Controls. Manager shall activate and maintain on a continuing
basis a "Quality Assurance Program" in order to provide objective measurements
of the quality of health care provided at the Facility and, in connection
therewith, shall utilize such techniques as patient questionnaires and
interviews, physician questionnaires and interviews, and inspections.
1.13 Staff Specialists. In addition to the other managerial services
provided for herein, Manager shall make available to the Facility, for
consultation and advice, when Manager deems necessary or appropriate;
specialists in such fields as accounting, auditing, budgeting, dietary services,
operations, environmental control, management, maintenance, nursing, personnel,
pharmacy operations, public relations, purchasing, quality assurance, systems
and procedures, and third-party reimbursement.
1.14 Performance of Services by Manager. In the performance of its services
hereunder, Manager shall exercise the same standards and degree of care used by
reasonable and prudent managers of nursing homes of similar size, nature and
character as the Facility. Notwithstanding anything herein to the contrary,
Manager shall not be deemed in violation of this Agreement if Manager is
prevented from performing any of its obligations hereunder for reasons beyond
its reasonable control including, without limitation, strikes, walkouts or other
employee disturbances, acts of God, or the action or promulgation of any
statute, rule, regulation or order by any federal, state, or local governmental
or judicial agency or official, nor shall it be deemed in default hereunder or
otherwise liable for any error of judgment or act or omission in the performance
of its services hereunder, which is made in reasonable good faith.
1.15 Additional Services. Owner agrees that any specialized or additional
services recommended by Manager may be performed for a separate fee as agreed
upon by Owner in advance of the performance of such service. If Manager provides
such service, such fee shall not be in excess of such amount as would be charged
by a third party, negotiating at arm's length, for the performance of such
service.
1.16 Maintenance of Facility. Manager agrees to maintain the Facility in a
and serviceable condition, ordinary wear and tear and damage by fire or other
casualty or resulting from condemnation excepted, to the extent sufficient
revenues of the Facility are available for such purpose.
1.17 Civil Money Damages. Manager agrees that if any civil money penalties
are imposed by HCFA or the State of Michigan as a result of the nursing care
and/or treatment provided to residents of the Facility by employees of the
Facility, Manager will reimburse Owner for the amount of the civil money penalty
imposed; provided, however, that following termination of this Agreement Manager
must be notified immediately upon notice of the civil money penalty and/or any
Statement of Deficiencies issued by HCFA or the State of Michigan for a period
during which Manager served under this Agreement. Manager reserves the right to
appeal or waive appeal of any civil money penalty imposed by HCFA or the State
of Michigan. Manager further reserves the right to retain counsel to represent
the Facility in any appeal or settlement proceedings.
<PAGE>
1.18 Compliance with Loan Documents. Owner shall provide Manager with true
and correct copies of the loan documents evidencing and securing the Loan (the
"Loan Documents"). Manager agrees to comply with the terms of the Loan Documents
in the operation of the Facility during the term of this Agreement. In the event
of a conflict between a provision of the Loan Documents and this Agreement, the
Loan Documents shall prevail
ARTICLE II
TERM AND TERMINATION
2.01 Term. The term of this Agreement (the "Term") shall commence on the
date Owner acquires the Facility (the "Effective Date"), and shall continue
until the fifth anniversary thereof; provided, however, that at the end of such
five-year period, the Term shall be automatically extended on a month-to-month
basis unless either party gives the other party notice not less than thirty days
prior to the end of the current Term of its intention to not renew the Term.
2.02 Optional Termination by Manager.
(a) Manager has the option to terminate this Agreement, without
damage or penalty, upon ten (10) business days prior written notice to Owner,
upon the occurrence of either of the following events:
(i) The Facility or any material portion thereof is damaged or
destroyed to the extent that in the written opinion of an independent architect
or engineer reasonably acceptable to both parties (x) it is not practicable or
desirable to rebuild, repair or restore the Facility within a period of nine (9)
months to its condition immediately preceding such damage, or (y) the conducting
of normal operations of the Facility would be prevented for a period of nine (9)
months or more; or
(ii) Title to or the temporary use of all or substantially all
the Facility is taken under the exercise of the power of eminent domain by any
governmental authority or person, firm or corporation acting under governmental
authority which in the opinion of an independent architect or engineer
reasonably acceptable to both parties prevents or is likely to prevent the
conducting of normal operations at the Facility for a period of at least nine
(9) months.
Provided, however, that in either of such events, in addition to the rights of
Manager under Article V hereof, Manager shall have the right to rebuild, restore
or otherwise rearrange the Facility and recommence operations thereof, and
thereupon Manager shall continue to manage the Facility under the same terms,
conditions, and fees as provided herein.
(b) Manager shall have the option to terminate this Agreement without
damage or penalty upon ten (10) days prior written notice to the Owner following
the sale, transfer, assignment, or other disposition, in whole or in part, by
the Owner of its interest in the Facility. In the event Owner is a corporation,
limited liability company, or partnership, any dissolution, merger,
consolidation or other transfer of a substantial portion of the stock or
underlying ownership interests (as the case may be) of Owner shall constitute an
assignment of the Facility for all purposes of this Section 2.02(b). The term
"substantial portion" means the ownership of stock or underlying ownership
interests (as the case may be) possessing, and of the right of exercise, at
least fifty percent (50%) of the total combined voting power of such
corporation, limited liability company, or partnership, provided, however, that
this prohibition on stock transfer shall not apply to a "publicly traded
corporation," which term is hereby defined for all purposes under this Agreement
as a corporation whose shares of stock have been registered pursuant to the
<PAGE>
Securities Act of 1933, as amended.
On or before the Effective Date, Owner and Manager shall enter into a
purchase option agreement whereby Manager or its affiliates shall have the right
at any time after the second anniversary of the Effective Date but prior to the
fifth anniversary of the Effective Date to purchase the Facility in accordance
with the terms contained in such agreement. Owner hereby grants to Manager a
right of first refusal to purchase its interest in the Facility on the same
terms and conditions, including purchase price, acceptable to Owner pursuant to
the terms of a bona fide third party offer. Manager shall be furnished with
written notice of the terms of such third party offer and a period of not less
than fifteen (15) business days within which to exercise such right of first
refusal. Upon exercise, Owner and Manager shall close Manager's acquisition of
Owner's interest in the Facility within the greater of (i) thirty (30) days
thereafter or (ii) the time period, if any, specified in the terms of such third
party offer. The parties acknowledge and agree that any purported sale,
transfer, assignment or other disposition by Owner in violation of this Section
2.02(b) shall, at Manager's option, be null, void and of no force or effect, and
that equitable remedies, including the remedy of specific performance (to compel
rescission of any such sale, transfer, assignment or other disposition) and
injunctive relief (to prevent or restrain such prohibited actions) shall be
available to Manager, in addition to its rights and remedies at law and under
this Agreement.
In the event Manager elects not to exercise its right of first refusal
under this Section 2.02(b) and there shall occur a sale, transfer, assignment or
other disposition of Owner's interest in the Facility prior to the second
anniversary of this Agreement, this Agreement shall continue in full force and
effect and shall bind the purchaser (without releasing or otherwise affecting
Owner's primary liability for its obligations hereunder, which shall thereupon
be deemed joint and several with the liability of such purchaser); provided,
however, that in the event of such sale, transfer, assignment or other
disposition of Owner's interest pursuant to the foregoing. Owner shall have the
right and option to terminate this Agreement upon the thirtieth day following
payment and delivery to Manager of the following, said termination to become
effective upon the thirtieth day following Manager's receipt of the last of the
following:
(i) for a sale occurring prior to the second anniversary of this
Agreement, a termination fee equal to forty percent (40%) of the Facility's
"Average Monthly Fee" multiplied by the number of months remaining in the Term,
calculated from the date of such termination. "Average Monthly Fee" for the
Facility shall mean the average of the monthly Management Fees payable to
Manager under Article IV of this Agreement for each of the twelve (12) full
calendar months prior to such termination;
(ii) all amounts due under Article IV of this Agreement;
(iii)any other amounts due Manager under the provisions of this
Agreement or any other agreements between Owner and Manager or their affiliates;
and
(iv) evidence, satisfactory to Manager, that amounts have been
escrowed by Owner sufficient to pay all pending liabilities of Manager arising
during the term of this Agreement.
(c) Manager shall have the option to terminate this Agreement without
damage or penalty upon seven (7) days written notice to Owner following the
failure of Owner to transfer all Facility Funds in the Facility Depository
Account to Manager's Operating Accounts as provided in Section 1.05(a) of this
Agreement.
<PAGE>
ARTICLE III
DEFAULT AND REMEDIES
3.01 Events of Default. The following shall constitute events of default
("Events of Default" and each individually an "Event of Default") under this
Agreement:
(a) If Owner fails to do any of the following and the responsibility
and means (including any and all necessary funds) to pay or perform same has not
been delegated to Manager hereunder: (i) make or cause to be made any payment to
Manager required to be made by Owner, and such failure shall continue for as
much as thirty (30) days after notice thereof shall have been given to Owner,
(ii) perform its obligations under this Agreement in any material respect, and
such default shall continue for a period of thirty (30) days after notice
thereof shall have been given by the Manager to Owner, or (iii) make payments,
or keep any covenants owing to any third party and which would cause Owner to
lose possession of the Facility's buildings, equipment or properties;
(b) If Manager fails (i) to make or cause to be made any payment to
or on behalf of Owner required to be made by Manager, and such failure shall
continue for as much as thirty (30) days; after notice thereof shall have been
given to Manager, (ii) to perform its obligations under this Agreement in any
material respect, and such failure shall continue for a period of thirty (30)
days; after notice thereof shall have been given by the Owner to Manager, or
(iii) to make payments, or keep any covenants owing to any third party and which
would cause Owner to lose possession of the Facility's buildings, equipment or
properties;
(c) If, through no fault of Manager, the licenses required for the
operation of Facility are at any time suspended, terminated, or revoked, and
such suspension, termination or revocation shall continue unstayed and in effect
for a period of fourteen (14) consecutive days;
(d) If, due to Manager's failure to maintain the Facility in material
compliance with applicable laws, regulations or rules, the Facility (i) loses
its Medicaid or Medicare certification, (ii) loses its license to operate as a
nursing home, or (iii) is closed, and such event continues unstayed and in
effect for a period of fourteen (14) consecutive days;
(e) If, due to Manager's failure to maintain the Facility in material
compliance with applicable laws, regulations or rules, patient admissions are
suspended, and such event continues unstayed and in effect for the later of
ninety (90) days or the date on which occupancy decreases more than ten percent
(10%) from the occupancy level at the date of such suspension;
(f) If either Owner or Manager shall (i) be adjudicated bankrupt;
(ii) admit in writing its inability to pay its debts generally as they become
due; (iii) become insolvent in that its total assets are in the aggregate less
than all of its liabilities or it is unable to pay its debts generally as they
become due; (iv) make a general assignment for the benefit of creditors; (v)
file a petition, or admit (by answer, default or otherwise) the material
allegations of any petition filed against it, in bankruptcy under the federal
bankruptcy laws (as in effect on the date of this Agreement or as they may be
amended from time to time), or under any other law for the relief of debtors, or
for the discharge, arrangement or compromise of its debts; or (vi) consent to
the appointment of a receiver, conservator, trustee or liquidator of all or part
of its assets; or
(g) If a petition shall have been filed against Owner or Manager in
<PAGE>
proceedings under the federal bankruptcy laws (as in effect on the date of this
Agreement, or as they may be amended from time to time), or under any other laws
for the relief of debtors, or for the discharge, arrangement or compromise of
its debts, or an order entered by any court of competent jurisdiction appointing
a receiver, conservator, trustee or liquidator of all or part of Owner's or
Manager's assets, and such petition or order is not dismissed or stayed within
sixty (60) consecutive days after entry thereof.
3.02 Remedies Upon Default. If any Event of Default by either party shall
occur and be continuing, the other party may, in addition to any other remedy
available to it in law or equity on account of such Event of Default, forthwith
terminate this Agreement by giving written notice of such termination, and
neither party shall have any further obligations whatever under this Agreement;
provided, however, that as a condition to the effectiveness of Owner's
termination of this Agreement, Owner shall pay to Manager all payments due under
Article V.
ARTICLE IV
MANAGEMENT FEE
4.01 Management Fee. Commencing upon the Effective Date until the end of
the term hereof, Owner shall pay to Manager a monthly management fee equal to
six percent (6%) of the Facility's "Gross Revenues," as determined on an accrual
basis (the "Management Fees"). "Gross Revenues" shall mean, for the Facility,
total revenues of such Facility, including, without limitation, all ancillary
fees, charges, rentals and other revenue derived in any way from the operation
of such Facility, on an accrual basis, after deduction of allowances for
contractual adjustments as they relate to third-party payors and before
deduction of any and all expenses.
4.02 Adjustment. Within fifteen (15) days after the delivery of the annual
financial statements of the Facility, Owner shall pay to Manager or Manager
shall credit Owner such amount as is necessary to make the amount of the
Management Fees paid with respect to the year to which the financial statements
relate equal to the amount of Management Fees shown to be due by the annual
financial statements; provided, however, that amounts exceeding two (2) months'
Management Fees shall be paid to Owner in addition to such credit for such two
(2) month period.
ARTICLE V
INSURANCE
5.01 Insurance/Indemnity. During the term of this Agreement, Manager shall
at all times keep the Facility insured with the kinds and amounts of insurance
described below, which, at a minimum, shall be modified as necessary to satisfy
all requirements of any Facility mortgagee. This insurance shall be written by
companies authorized to do insurance business in the State of Michigan. The
policies will name Owner as additional insured, and name any mortgagee of the
Facility by way of standard form of mortgagee loss payee endorsement. Losses
shall be payable to Owner, in trust, as provided in Section 5.05 below. Any loss
adjustment shall require the written consent of Owner, Manager and each
mortgagee. Evidence of insurance shall be deposited with Owner and, if
requested, with any mortgagee(s). The policies on the Facility shall insure
against the following risks:
(a) Loss or damage by fire and such other risks as may be included in
the broadest form of extended coverage insurance from time to time available,
including but not limited to loss or damage from leakage of any sprinkler system
now or hereafter installed in the Facility, in amounts sufficient to prevent
<PAGE>
Owner or Manager from becoming a co-insurer within the terms of the applicable
policies and in any event in an amount not less than the full replacement value
of the Facility (as defined below in Section 5.02);
(b) Loss or damage by explosion of steam boilers, pressure vessels or
similar apparatus, now or hereafter installed in the Facility, in such limits
with respect to any one accident as may be reasonably agreed by Owner and
Manager from time to time;
(c) Claims for personal injury or property damage under a policy of
general public liability insurance with amounts not less than One Million
dollars ($1,000,000.00) per occurrence in respect of bodily injury, One Million
dollars ($1,000,000.00) aggregate per occurrence, and Three Hundred Thousand
dollars ($300,000.00) for property damage;
(d) Claims arising out of malpractice in an amount not less than One
Million dollars ($1,000,000.00) per person and per occurrence;
(e) Such other hazards and in such amounts as may be customary for
comparable properties in the area and is available from insurance companies
authorized to do business in the State of Michigan.
(f) Loss of rental under a rental value insurance policy covering a
risk of loss during the first six (6) months of reconstruction resulting from
the occurrence of any of the hazards described in subsections (a) and (b) of
this Section 5.01 in an amount sufficient to prevent Owner from becoming a co-
insurer; and
(g) Worker's compensation.
5.02 Replacement Cost. The term "full replacement value" of improvements
as used herein, shall mean the actual replacement cost thereof from time to
time.
5.03 Additional Insurance. In addition to the insurance described above,
Manager shall maintain such additional insurance as may be reasonably required
from time to time by any mortgagee of the Facility.
5.04 Waiver of Subrogation. Any provision in this Agreement to the
contrary notwithstanding, each party, to the extent it is permitted to do so by
the terms and provisions of any of the above policies, hereby waives any and all
rights it may have against the other, its agents, or employees, for any loss or
damage from risks ordinarily insured against under such policies, but only to
the extent that such loss or damage is in fact covered by such insurance and is
collectible by the insured party. Each party further covenants and agrees that
it will, upon request of the other, request each such insurance company to
attach to such policy or policies issued by it a waiver of subrogation with
respect to the other party, its agents or employees.
5.05 Insurance Proceeds. All proceeds payable by reason of any casualty
loss or damage to all or any part of the Facility and insured under any policy
of insurance required by Section 5.01 of this Agreement shall be paid to Owner
and held by Owner in trust (subject to the provisions of Section 5.06 and the
rights of the holders of mortgages relating to the Facility) and shall be made
available for reconstruction or repair, as the case may be, of any damage to or
destruction of the Facility, and shall be paid by Owner from time to time for
the reasonable costs of such work. Any excess proceeds of insurance remaining
after the completion of the restoration or reconstruction of the Facility shall
be returned, as applicable, to the insurer or Manager as their interests may
appear. All salvage resulting from any such loss covered by insurance shall
belong to Owner.
<PAGE>
5.06 Damage or Destruction. If, during the Term of this Agreement, the
Facility is totally or partially destroyed from a risk covered by the insurance
described in Section 5.01, Owner shall, as soon as practicable, and, if
permitted under the Lease, restore the Facility to substantially the same
condition as existed immediately before the destruction. Upon the commencement
of such work, Owner shall proceed with due diligence to complete such work
within a reasonable period of time. If the costs of the restoration exceed the
amount of proceeds received by Owner from the insurance required under Section
5.01, Manager shall have the right but not the obligation to pay the difference
between the amount of insurance proceeds and such cost of restoration.
5.07 Restoration of Manager's Property. If Owner is required to restore
the Facility as provided in Section 5.06, Owner shall not be required to restore
alterations made by Manager, or Manager's improvements, trade fixtures or
personal property, such excluded items being the sole responsibility of Manager
to restore. Owner shall, however, be required to restore the Facility's tangible
personal property owned by Owner.
5.08 Manager's Blanket Policy. Notwithstanding anything to the contrary
contained in this Article V, Manager's obligation to maintain insurance required
herein may be fulfilled by obtaining a blanket policy, carried and maintained by
Manager; provided, however, that the coverage afforded Owner will not be reduced
or diminished or otherwise differ from that which would exist under a separate
policy meeting all other requirements of this Agreement.
ARTICLE VI
COVENANTS OF OWNER
6.01 Licensing; Changes and Services. Subject to the terms of this
Agreement, Owner agrees to take or cause to be taken any and all actions
necessary to be taken by it as the overall supervisor of the assets and
operations of the Facility in order to maintain all required licenses, permits
for the operation of the Facility and the Facility's eligibility to participate
in all public or private third-party medical payment programs, including
providing sufficient funds to bring the Facility in compliance with all
applicable fire safety codes and other laws, regulations and orders, and to
correct all structural, maintenance, procedural and staffing deficiencies as
shown on the surveys and reports of governmental agencies; having jurisdiction
over the Facility. Owner agrees that it will not, through the exercise of its
overall supervisory powers, substantially change the services rendered by the
Facility during the term hereof without the prior written approval of Manager.
6.02 Transfer of Facility. Owner further acknowledges and agrees that upon
the transfer, lease, assignment, sale or other disposition or conveyance of all
or any part of its interest in and to the Facility, this Agreement shall remain
in full force and effect unless otherwise terminated as provided in Section
2.02(b). Subject to the foregoing and to the requirements of the Lease, Owner
covenants and agrees that in the event that it sells, assigns or otherwise
transfers its interest in and to the Facility at any time while this Agreement
is in effect, it will require the transferee to assume the obligations of the
Owner hereunder. The provisions of this Section 6.02 are in addition to, and do
not modify or abridge, the prohibitions against sale, transfer, assignment or
other disposition of the Facility, as set forth in Section 2.02(b) and elsewhere
in this Agreement.
6.03 Damage or Destruction. If the Facility or any portion thereof shall
be damaged or destroyed by fire or other casualty, Owner shall commence to
repair, restore, rebuild or replace any damage or destruction within sixty (60)
days after such fire or other casualty and shall proceed with due diligence to
<PAGE>
complete such work within a reasonable period of time.
6.04 Compliance with Loan Documents. Owner covenants and agrees to comply
at all times with the terms and provisions of the Loan Documents.
ARTICLE VII
MISCELLANEOUS COVENANTS
7.01 Binding Agreement. The terms, covenants, conditions, provisions and
agreements herein contained shall be binding upon and inure to the benefit of
the parties hereto, their successors and assigns.
7.02 Relationship of Parties. Nothing contained in this Agreement shall
constitute or be construed to be or to create a partnership, joint venture or
lease between Owner and Manager with respect to the Facility.
7.03 Notices. All notices, demands and requests contemplated hereunder by
either party to the other shall be in writing, and shall be delivered by hand,
transmitted by cable, telegram or telecopy (receipt confirmed), or mailed,
postage prepaid, registered, or certified mail return receipt requested:
(a) to Owner, by addressing the same to:
c/o Five Star Healthcare Investors LLC
400 Perimeter Center Terrace
Suite 650
Attn: Alan C. Dahl
Telecopier: (770) 730-1377
(b) to Manager, by addressing the same to:
Centennial HealthCare Management Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attn: Kent C. Fosha, President
Telecopier: (770) 730-1375
with a copy to:
Centennial HealthCare Corporation
400 Perimeter Center Terrace
Suite 650
Atlanta, Georgia 30346
Attn: Daryl R. Griswold, Senior Vice President and General
Counsel
Telecopier: (770) 730-1350
or to such other address or to such other person as may be designated by notice
given from time to time during the term of this Agreement by one party to the
other. Any notice hereunder shall be deemed given five (5) days after mailing,
if given by mailing in the manner provided above, or on the date delivered if
given by hand, cable, telegraph or telecopy (receipt confirmed).
7.04 Entire Agreement; Amendments. The Agreement contains the entire
agreement between the parties hereto, and no prior oral or written, and no
<PAGE>
contemporaneous oral representations or agreements between the parties with
respect to the subject matter of this Agreement shall be of any force and
effect. Any additions, amendments or modifications to this Agreement shall be of
no force and effect unless in writing and signed by both Owner and Manager.
7.05 Governing Law. This Agreement and all the terms and provisions hereof
and the rights and obligations of the parties hereto shall be governed by, and
construed and enforced in accordance with, the laws of the State of Georgia
without regard to its rules of conflicts of laws.
7.06 Captions and Headings. The captions and headings throughout this
Agreement are for convenience only and do not constitute a part hereof.
7.07 Disclaimer of Employment of Facility Employees. No person employed in
the operation of the Facility will be an employee of Manager, and Manager will
have no liability for payment of their wages, fringe benefits, payroll taxes and
other expenses of employment.
7.08 Costs and Expenses; Indemnity. All fees, costs and expenses arising
out of, relating to or incurred in the operation of the Facility, including,
without limitation, the fees, costs, and expenses of Manager and outside
consultants and professionals, shall be the sole responsibility of Owner and
shall be payable as operating expenses of the Facility. Except as otherwise
provided herein, Manager, by reason of the execution of this Agreement or the
performance of its services hereunder, shall not be liable for or deemed to have
assumed any liability for such fees, costs and expenses, or any other liability
or debt of Owner whatsoever, arising out of or relating to the Facility or
incurred at its operation, except the salary of Manager's employees and the
expenses and costs incurred at its central administrative offices in performance
of its obligations hereunder. Owner agrees to indemnify and hold Manager and its
officers, directors, agents and employees harmless from and against all losses,
claims, damages or other liabilities, including the costs and expenses incurred
in connection therewith, arising out of or relating to the ownership of the
Facility (except those resulting from the wilful misconduct or gross negligence
of Manager), including, without limitation, any liability asserted against
Manager or any of its officers, directors, employees or agents by reason of any
action taken by any of the foregoing while performing the duties of Manager
hereunder on behalf of Owner. Notwithstanding anything contained herein to the
contrary, Manager agrees that to the extent a deficiency remains under the Loan
following foreclosure (or conveyance in lieu thereof) and liquidation of the
Security (as defined in the Loan Documents), Manager shall indemnify Owner to
the extent of the actual loss, if any, incurred by Owner as a direct and
proximate result of the following, but only to the extent such loss was caused
by the acts or omissions of Manager and not the acts or omissions of J. Stephen
Eaton, Alan C. Dahl, Owner or Owner's members: (1) fraud or intentional
misrepresentation by Manager or Centennial HealthCare Corporation in connection
with the execution and delivery of the Loan Documents; (2) misapplication or
misappropriation of accounts receivable collected in advance, or received after
the occurrence of an event of default under the Loan Documents and the lapse of
any applicable cure period under the Loan Documents; (3) the misapplication or
misappropriation of insurance proceeds or condemnation awards; (4) failure to
pay taxes and insurance premiums, or charges for labor or materials or other
charges that can create liens encumbering the Facility; (5) failure to maintain,
repair and restore the Facility in accordance with the Loan Documents; (6)
failure to return or to reimburse Owner for any and all tangible personal
property (excluding proprietary employee and policy manuals, computer hardware
and software and items related thereto, to the extent owned by Manager) taken
from the Facility by or on behalf of Owner and not replaced with personal
property of the same utility and of the same or greater value; (7) any act of
actual waste or arson or criminal acts by Manager with respect to the Facility;
(8) failure to comply with covenants contained in the Loan Documents relating to
<PAGE>
the environmental conditions of the Facility; (9) failure to maintain, free of
all security interests and other encumbrances, all legal and beneficial
interests in any health care regulatory approvals necessary for the operation of
the Facility; or (10) any liability incurred as a result of any Federal Medicare
investigations related to the Facility.
7.09 Responsibility for Misconduct of Employees and Other Persons. Except
as otherwise provided in Section 7.08 of this Agreement, Manager will have no
liability whatsoever for damages suffered on account of the dishonesty,
misconduct or negligence of any employee of or employee leased by the Facility
or any officer, director, partner, stockholder, employee or agent of Owner.
Manager shall be liable to Owner in connection with damage or loss directly
sustained by Owner by reason of the dishonesty, wilful misconduct and gross
negligence of Manager's employees in the operation of the Facility during the
term of the Agreement.
7.10 Definition of Affiliate. For purposes of this Agreement, the term
"affiliate" shall mean any person or entity which Manager or Owner or their
respective stockholders or individual partners, directly or indirectly, through
one or more intermediaries, controls, is in common control with, or is
controlled by.
7.11 Authorization of Agreement. Manager and Owner represent and warrant,
each to the other, that the execution and delivery of this Agreement has been
duly authorized by all respective action, will not presently or with the passage
of time, the giving of notice, or both result in a default under or violate or
conflict with (i) the provisions of the articles of incorporation and bylaws of
Manager or Owner, or (ii) any other material agreement, mortgage, loan agreement
or other contract or instrument by which either party is bound or to which any
of its property or assets are subject, or (iii) any existing law, regulation,
court order or consent decree by which either party is bound or to which any of
its property or assets are subject.
7.12 Severability. If any one or more of the provisions of this Agreement
are held invalid or unenforceable, the validity and enforceability of all other
provisions of this Agreement shall remain in full force and effect, unless
enforcing the remainder of the provisions would not satisfy the original
intentions of the parties.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement through their duly authorized representatives, as of the day and year
first above written.
OWNER:
HILLTOP MANOR INVESTORS, LLC
By: Five Star Healthcare Properties, LLC
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
-----------------------------
Alan C. Dahl, Managing Member
MANAGER:
<PAGE>
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION
By: /s/ Daryl R. Griswold
---------------------
Vice President
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION ("CHMC") has entered into
management agreements substantially identical to Exhibit 10.1 as follows:
1. Long Term Care Facility Management Agreement dated December 1, 1999,
by and between Mather Investors, LLC and CHMC, regarding the
management of Mather Nursing Center.
2. Long Term Care Facility Management Agreement dated December 1, 1999,
by and between Dolphins View Investors, LLC and CHMC, regarding the
management of The Health and Rehabilitation Centre at Dolphins View.
3. Long Term Care Facility Management Agreement dated December 1, 1999,
by and between Cypress Investors, LLC and CHMC, regarding the
management of Cypress Manor Health and Rehabilitation Center.
4. Long Term Care Facility Management Agreement dated December 1, 1999,
by and between Kannapolis Investors, LLC and CHMC, regarding the
management of THS of Kannapolis.
<PAGE>
EXHIBIT 10.18
INDEMNITY AGREEMENT
THIS AGREEMENT is made as of the 1st day of December, 1999, by and between
CENTENNIAL HEALTHCARE CORPORATION ("CHC") and HILLTOP MANOR INVESTORS, LLC
("Owner").
W I T N E S S E T H:
WHEREAS, Owner is the owner of that certain 118-bed nursing facility
located at 1290 E. Michigan Road, Roscommon, Michigan (the "Facility"), having
acquired the Facility effective December 1, 1999; and
WHEREAS, Centennial HealthCare Management Corporation, a wholly-owned
subsidiary of CHC, managed the Facility prior to Owner acquiring the Facility
and currently manages the Facility on behalf of Owner;
NOW, THEREFORE, in consideration of the covenants, conditions and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties do hereby agree as
follows:
1. CHC agrees to indemnify and hold Owner harmless from and against any
loss, offset, claim, damage or liability raised or asserted against moneys due
Owner for services provided to Medicare or Medicaid patients of the Facility on
or after December 1, 1999 as a result of the currently pending investigation by
the Department of Health and Human Services, Office of Inspector General
pursuant to that certain investigatory subpoena dated March 16, 1999 (the
"Investigation") seeking reimbursement from the prior provider for services
rendered prior to December 1, 1999.
2. CHC acknowledges that Owner contemplates entering into a Loan and
Security Agreement with Heller Healthcare Finance, Inc. ("Heller") pursuant to
which Heller will be advancing funds secured by the accounts receivable of the
Facility. CHC acknowledges and consents to the assignment by Owner of its rights
under this Agreement to Heller. CHC further agrees that should an event occur
under which CHC has agreed to indemnify Owner pursuant to this Agreement, Heller
may directly enforce Owner's rights to indemnification under this Agreement.
3. Any claim for indemnification shall be in writing sent by first class
mail, postage prepaid or by overnight delivery service, sent to the following
address:
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attn: Daryl R. Griswold, Senior Vice President and General Counsel
4. This Agreement shall be governed by the laws of the State of Georgia.
This Agreement shall be binding upon the successors and assigns of the
respective parties.
IN WITNESS WHEREOF, the parties have set their hands and seals as of the
date above.
CENTENNIAL HEALTHCARE CORPORATION
<PAGE>
By: /s/ Daryl R. Griswold
---------------------
Daryl R. Griswold
Title: Senior Vice President
HILLTOP MANOR INVESTORS, LLC
By: Five Star Healthcare Properties, LLC
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
----------------
Alan C. Dahl
Title: Managing Member
<PAGE>
EXHIBIT 10.19
INDEMNITY AGREEMENT
THIS AGREEMENT is made as of the 1st day of December, 1999, by and
between CENTENNIAL HEALTHCARE CORPORATION ("CHC") and CYPRESS INVESTORS, LLC
("Owner").
W I T N E S S E T H:
WHEREAS, Owner is the owner of that certain 63-bed nursing facility located
at 1400 Poplar Street, Hancock, Michigan (the "Facility"), having acquired the
Facility effective December 1, 1999; and
WHEREAS, Centennial HealthCare Investment Corporation, a wholly-owned
subsidiary of CHC, owned the Facility prior to Owner acquiring the Facility and
Centennial HealthCare Management Corporation, a wholly-owned subsidiary of CHC,
currently manages the Facility on behalf of Owner;
NOW, THEREFORE, in consideration of the covenants, conditions and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties do hereby agree as
follows:
1. CHC agrees to indemnify and hold Owner harmless from and against any loss,
offset, claim, damage or liability raised or asserted against moneys due Owner
for services provided to Medicare or Medicaid patients of the Facility on or
after December 1, 1999 as a result of the currently pending investigation by the
Department of Health and Human Services, Office of Inspector General pursuant to
that certain investigatory subpoena dated March 16, 1999 (the "Investigation")
seeking reimbursement from the prior provider for services rendered prior to
December 1, 1999.
2. CHC acknowledges that Owner contemplates entering into a Loan and Security
Agreement with Heller Healthcare Finance, Inc. ("Heller") pursuant to which
Heller will be advancing funds secured by the accounts receivable of the
Facility. CHC acknowledges and consents to the assignment by Owner of its rights
under this Agreement to Heller. CHC further agrees that should an event occur
under which CHC has agreed to indemnify Owner pursuant to this Agreement, Heller
may directly enforce Owner's rights to indemnification under this Agreement.
3. Any claim for indemnification shall be in writing sent by first class mail,
postage prepaid or by overnight delivery service, sent to the following address:
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attn: Daryl R. Griswold, Senior Vice President and General Counsel
4. This Agreement shall be governed by the laws of the State of Georgia. This
Agreement shall be binding upon the successors and assigns of the respective
parties.
IN WITNESS WHEREOF, the parties have set their hands and seals as of the date
above.
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
By: /s/ Daryl R. Griswold
---------------------
Daryl R. Griswold
Title: Senior Vice President
CYPRESS INVESTORS, LLC
By: Five Star Healthcare Properties, LLC
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
----------------
Alan C. Dahl
Title: Managing Member
<PAGE>
EXHIBIT 10.20
INDEMNITY AGREEMENT
THIS AGREEMENT is made as of the 1st day of December, 1999, by and between
CENTENNIAL HEALTHCARE CORPORATION ("CHC") and DOLPHINS VIEW INVESTORS, LLC
("Owner").
W I T N E S S E T H:
WHEREAS, Owner is the owner of that certain 63-bed nursing facility
located at 1820 Shore Drive, South, St. Petersburg, Florida (the "Facility"),
having acquired the Facility effective December 1, 1999; and
WHEREAS, Centennial HealthCare Investment Corporation, a wholly-owned
subsidiary of CHC, owned the Facility prior to Owner acquiring the Facility and
Centennial HealthCare Management Corporation, a wholly-owned subsidiary of CHC,
currently manages the Facility on behalf of Owner;
NOW, THEREFORE, in consideration of the covenants, conditions and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties do hereby agree as
follows:
1. CHC agrees to indemnify and hold Owner harmless from and against any
loss, offset, claim, damage or liability raised or asserted against moneys due
Owner for services provided to Medicare or Medicaid patients of the Facility on
or after December 1, 1999 as a result of the currently pending investigation by
the Department of Health and Human Services, Office of Inspector General
pursuant to that certain investigatory subpoena dated March 16, 1999 (the
"Investigation") seeking reimbursement from the prior provider for services
rendered prior to December 1, 1999.
2. CHC acknowledges that Owner contemplates entering into a Loan and
Security Agreement with Heller Healthcare Finance, Inc. ("Heller") pursuant to
which Heller will be advancing funds secured by the accounts receivable of the
Facility. CHC acknowledges and consents to the assignment by Owner of its rights
under this Agreement to Heller. CHC further agrees that should an event occur
under which CHC has agreed to indemnify Owner pursuant to this Agreement, Heller
may directly enforce Owner's rights to indemnification under this Agreement.
3. Any claim for indemnification shall be in writing sent by first class
mail, postage prepaid or by overnight delivery service, sent to the following
address:
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attn: Daryl R. Griswold, Senior Vice President
and General Counsel
4.This Agreement shall be governed by the laws of the State of Georgia. This
Agreement shall be binding upon the successors and assigns of the respective
parties.
IN WITNESS WHEREOF, the parties have set their hands and seals as of the
date above.
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
By: /s/ Daryl R. Griswold
---------------------
Daryl R. Griswold
Title: Senior Vice President
DOLPHINS VIEW INVESTORS, LLC
By: Five Star Healthcare Properties, LLC
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
----------------
Alan C. Dahl
Title: Managing Member
<PAGE>
EXHIBIT 10.21
INDEMNITY AGREEMENT
THIS AGREEMENT is made as of the 1st day of December, 1999, by and between
CENTENNIAL HEALTHCARE CORPORATION ("CHC") and MATHER INVESTORS, LLC ("Owner").
W I T N E S S E T H:
WHEREAS, Owner is the owner of that certain 63-bed nursing facility located
at 435 Stoneville Road, Ishpeming, Michigan (the "Facility"), having acquired
the Facility effective December 1, 1999; and
WHEREAS, Centennial HealthCare Investment Corporation, a wholly-owned
subsidiary of CHC, owned the Facility prior to Owner acquiring the Facility and
Centennial HealthCare Management Corporation, a wholly-owned subsidiary of CHC,
currently manages the Facility on behalf of Owner;
NOW, THEREFORE, in consideration of the covenants, conditions and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties do hereby agree as
follows:
1. CHC agrees to indemnify and hold Owner harmless from and against any
loss, offset, claim, damage or liability raised or asserted against moneys due
Owner for services provided to Medicare or Medicaid patients of the Facility on
or after December 1, 1999 as a result of the currently pending investigation by
the Department of Health and Human Services, Office of Inspector General
pursuant to that certain investigatory subpoena dated March 16, 1999 (the
"Investigation") seeking reimbursement from the prior provider for services
rendered prior to December 1, 1999.
2. CHC acknowledges that Owner contemplates entering into a Loan and
Security Agreement with Heller Healthcare Finance, Inc. ("Heller") pursuant to
which Heller will be advancing funds secured by the accounts receivable of the
Facility. CHC acknowledges and consents to the assignment by Owner of its rights
under this Agreement to Heller. CHC further agrees that should an event occur
under which CHC has agreed to indemnify Owner pursuant to this Agreement, Heller
may directly enforce Owner's rights to indemnification under this Agreement.
3. Any claim for indemnification shall be in writing sent by first class
mail, postage prepaid or by overnight delivery service, sent to the following
address:
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attn: Daryl R. Griswold, Senior Vice President and General Counsel
4. This Agreement shall be governed by the laws of the State of Georgia.
This Agreement shall be binding upon the successors and assigns of the
respective parties.
IN WITNESS WHEREOF, the parties have set their hands and seals as of the
date above.
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
By: /s/ Daryl R. Griswold
---------------------
Daryl R. Griswold
Title: Senior Vice President
MATHER INVESTORS, LLC
By: Five Star Healthcare Properties, LLC
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
----------------
Alan C. Dahl
Title: Managing Member
<PAGE>
EXHIBIT 10.22
INDEMNITY AGREEMENT
THIS AGREEMENT is made as of the 1st day of December, 1999, by and between
CENTENNIAL HEALTHCARE CORPORATION ("CHC") and KANNAPOLIS INVESTORS, LLC
("Owner").
W I T N E S S E T H:
WHEREAS, Owner is the owner of that certain 63-bed nursing facility located
at 1810 Concord Lake Road, Kannapolis, North Carolina (the "Facility"), having
acquired the Facility effective December 1, 1999; and
WHEREAS, Transitional Health Services, a wholly-owned subsidiary of CHC,
leased the Facility prior to Owner acquiring the Facility and Centennial
HealthCare Management Corporation, a wholly-owned subsidiary of CHC, currently
manages the Facility on behalf of Owner; NOW, THEREFORE, in consideration of the
covenants, conditions and promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties do hereby agree as follows:
NOW, THEREFORE, in consideration of the covenants, conditions and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties do hereby agree as
follows:
1. CHC agrees to indemnify and hold Owner harmless from and against any
loss, offset, claim, damage or liability raised or asserted against moneys due
Owner for services provided to Medicare or Medicaid patients of the Facility on
or after December 1, 1999 as a result of the currently pending investigation by
the Department of Health and Human Services, Office of Inspector General
pursuant to that certain investigatory subpoena dated March 16, 1999 (the
"Investigation") seeking reimbursement from the prior provider for services
rendered prior to December 1, 1999.
2. CHC acknowledges that Owner contemplates entering into a Loan and
Security Agreement with Heller Healthcare Finance, Inc. ("Heller") pursuant to
which Heller will be advancing funds secured by the accounts receivable of the
Facility. CHC acknowledges and consents to the assignment by Owner of its rights
under this Agreement to Heller. CHC further agrees that should an event occur
under which CHC has agreed to indemnify Owner pursuant to this Agreement, Heller
may directly enforce Owner's rights to indemnification under this Agreement.
3. Any claim for indemnification shall be in writing sent by first class
mail, postage prepaid or by overnight delivery service, sent to the following
address:
Centennial HealthCare Corporation
400 Perimeter Center Terrace, Suite 650
Atlanta, Georgia 30346
Attn: Daryl R. Griswold, Senior Vice President and
General Counsel
4. This Agreement shall be governed by the laws of the State of Georgia.
This Agreement shall be binding upon the successors and assigns of the
respective parties.
IN WITNESS WHEREOF, the parties have set their hands and seals as of the
date above.
<PAGE>
CENTENNIAL HEALTHCARE CORPORATION
By: /s/ Daryl R. Griswold
---------------------
Daryl R. Griswold
Title: Senior Vice President
KANNAPOLIS INVESTORS, LLC
By: Five Star Healthcare Properties, LLC
By: Southeast Capital, LLC
By: /s/ Alan C. Dahl
----------------
Alan C. Dahl
Title: Managing Member
<PAGE>
EXHIBIT 21.1
CENTENNIAL HEALTHCARE CORPORATION
Subsidiaries of Centennial HealthCare Corporation
- -------------------------------------------------
CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION
A Georgia corporation
CENTENNIAL HEALTHCARE PROPERTIES CORPORATION
A Georgia corporation
CENTENNIAL/ASHTON PROPERTIES CORPORATION
A Georgia corporation
CENTENNIAL PROFESSIONAL THERAPY SERVICES CORPORATION
A Georgia corporation
CENTENNIAL ACQUISITION CORPORATION
A Georgia corporation
CENTENNIAL HEALTHCARE HOSPITAL CORPORATION
A Georgia corporation
TRANSITIONAL HEALTH SERVICES, INC.
A Georgia corporation
Subsidiaries of Centennial HealthCare Properties Corporation
- ------------------------------------------------------------
CENTENNIAL HEALTHCARE INVESTMENT CORPORATION
A Georgia corporation
Subsidiaries of Centennial Acquisition Corporation
- --------------------------------------------------
CENTENNIAL SERVICE CORPORATION - GRANT PARK
A Georgia corporation
CENTENNIAL SERVICE CORPORATION - MONTCLAIR
A Georgia corporation
<PAGE>
Subsidiaries of Transitional Health Services, Inc.
- --------------------------------------------------
THS PARTNERS I, INC.
A Delaware corporation
THS PARTNERS II, INC.
A Delaware corporation
PARAGON REHABILITATION, INC.
A Delaware corporation
TRANSITIONAL FINANCIAL SERVICES, INC.
A Delaware corporation
Subsidiaries of Paragon Rehabilitation, Inc.
- --------------------------------------------
TOTAL CARE CONSOLIDATED, INC.
A Georgia corporation
Subsidiaries of Total Care Consolidated, Inc.
- ---------------------------------------------
TOTAL CARE, INC.
A North Carolina corporation
TOTAL HEALTH CARE SERVICES, INC.
A North Carolina corporation
HCC HOME HEALTH OF LOUISIANA, INC.
A Louisiana corporation
Subsidiaries of Total Health Care Services, Inc.
- ------------------------------------------------
TOTAL CARE OF THE CAROLINAS, INC.
A North Carolina corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 1999 10-K
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 1,790 5,047
<SECURITIES> 0 0
<RECEIVABLES> 77,646 104,873
<ALLOWANCES> 6,426 4,963
<INVENTORY> 0 0
<CURRENT-ASSETS> 84,907 115,327
<PP&E> 97,438 91,005
<DEPRECIATION> 21,914 16,192
<TOTAL-ASSETS> 264,345 285,332
<CURRENT-LIABILITIES> 59,209 58,202
<BONDS> 0 0
0 0
0 0
<COMMON> 119 119
<OTHER-SE> (87,694) 113,564
<TOTAL-LIABILITY-AND-EQUITY> 264,345 285,332
<SALES> 368,655 342,203
<TOTAL-REVENUES> 380,008 359,656
<CGS> 0 0
<TOTAL-COSTS> 406,340 349,023
<OTHER-EXPENSES> 653 279
<LOSS-PROVISION> 3,605 1,432
<INTEREST-EXPENSE> 12,050 7,154
<INCOME-PRETAX> 39,035 1,189
<INCOME-TAX> (13,165) 1,504
<INCOME-CONTINUING> (25,870) (315)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (25,870) (315)
<EPS-BASIC> (2.17) (.03)
<EPS-DILUTED> (2.17) (.03)
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, including information set forth under the
captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" constitute "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "1934 Act"). The Company desires to take advantage of certain "safe harbor"
provisions of the 1933 Act and 1934 Act and is including this reference to
enable the Company to do so. Forward-looking statements included in this Form
10-K or in documents incorporated by reference, or hereafter included in other
publicly available documents filed with the Securities and Exchange Commission,
reports to the Company's stockholders and other publicly available statements
issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following risks, uncertainties and other factors could cause such material
differences to occur:
1. The Company's ability to 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.
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.
