-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qq5cPENzH/SCaqlS4gJksK3EyKOI407XAUjUaT9Ntv7ZbzNkBYFNnkECkfk+3j5K ck7wfUgKepPUroPfZuNg4g== 0001021408-99-001431.txt : 19990817 0001021408-99-001431.hdr.sgml : 19990817 ACCESSION NUMBER: 0001021408-99-001431 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL HEALTHCARE CORP CENTRAL INDEX KEY: 0001035118 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 581839701 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22771 FILM NUMBER: 99693966 BUSINESS ADDRESS: STREET 1: 400 PERIMETER CENTER TERRACE STREET 2: SUITE 650 CITY: ATLANTA STATE: GA ZIP: 30346 BUSINESS PHONE: 7706989040 MAIL ADDRESS: STREET 1: 400 PERIMETER CENTER TERRACE STREET 2: SUITE 650 CITY: ATLANTA STATE: GA ZIP: 30346 10-Q 1 FORM 10-Q FOR PERIOD ENDED JUNE 30, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission file number 000-22771 ------------ CENTENNIAL HEALTHCARE CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Georgia 58-1839701 ------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) (identification No.) 400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 770-698-9040 ------------ Indicate by check mark whether the registrant, (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicated the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. There were 11,923,618 shares of Common Stock outstanding as of August 13, 1999 CENTENNIAL HEALTHCARE INC FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 INDEX PART I - FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 24
ITEM I - FINANCIAL STATEMENTS CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30, December 31, 1999 1998 -------------- -------------- ASSETS Current assets: Cash and cash equivalents................................................. $ 3,503 $ 8,087 Patient accounts receivable and third-party payor settlements, net of allowance for doubtful accounts of approximately $5,100 and $5,000........................................................ 102,798 99,910 Other receivables......................................................... 3,934 4,382 Deferred income taxes..................................................... 3,738 3,738 Prepaid expenses and other current assets................................. 3,303 2,250 -------- -------- Total current assets.................................................. 117,276 118,367 Property and equipment, net............................................... 73,717 74,813 Intangible assets, net.................................................... 35,493 40,104 Notes receivable and other assets......................................... 57,318 55,088 -------- -------- Total assets.......................................................... $283,804 $288,372 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities.................................. $ 43,837 $ 48,976 Other current liabilities................................................. 17,107 12,816 -------- -------- Total current liabilities............................................. 60,944 61,792 Long-term debt, less current maturities..................................... 115,707 112,849 Other long-term liabilities................................................. 431 48 -------- -------- 177,082 174,689 Commitments and contingencies Shareholders' equity: Common stock with par value of $.01; 50,000,000 shares authorized; 11,923,618 shares issued and outstanding....................................................... 119 119 Paid-in capital........................................................... 102,015 102,015 Retained earnings......................................................... 4,938 11,899 -------- -------- 107,072 114,033 Note receivable from shareholder............................................ (350) (350) -------- -------- Net shareholders' equity.............................................. 106,722 113,683 -------- -------- Total liabilities and shareholders' equity............................ $283,804 $288,372 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Six Months Ended June 30, Ended June 30, -------------------- ----------------------- 1999 1998 1999 1998 -------- ------- -------- -------- Revenues: Net patient service revenues......................... $ 97,712 $84,042 $193,364 $167,421 Management fees and other revenues................... 2,148 3,858 4,540 7,551 -------- ------- -------- -------- Total revenues...................................... 99,860 87,900 197,904 174,972 -------- ------- -------- -------- Expenses: Facility operating expenses: Salaries, wages and benefits....................... 50,488 43,348 98,475 84,920 Other operating expenses........................... 27,048 23,281 56,602 47,979 Lease expense........................................ 8,223 5,746 16,067 11,155 Corporate administrative costs....................... 5,975 5,247 11,921 10,190 Depreciation and amortization........................ 3,118 2,379 6,035 4,662 Terminated merger transaction costs.................. - - 600 - Provision for asset revaluation...................... 14,530 - 14,530 - -------- ------- -------- -------- Total operating expenses........................... 109,382 80,001 204,230 158,906 -------- ------- -------- -------- (9,522) 7,899 (6,326) 16,066 -------- ------- -------- -------- Other income (expense): Interest income...................................... 429 800 903 921 Interest expense..................................... (2,910) (2,316) (5,408) (4,229) -------- ------- -------- -------- Total other expense................................ (2,481) (1,516) (4,505) (3,308) -------- ------- -------- -------- (12,003) 6,383 (10,831) 12,758 Provision (benefit) for income taxes.................. (4,488) 2,489 (4,007) 4,975 -------- ------- -------- -------- Income (loss) before minority interest................ (7,515) 3,894 (6,824) 7,783 Minority interest in net income of subsidiary, net of income taxes.................................. (58) (60) (137) (123) -------- ------- -------- -------- Income (loss) applicable to common stock.............. $ (7,573) $ 3,834 $ (6,961) $ 7,660 ======== ======= ======== ======== Income (loss) applicable to common stock per common stock and common stock equivalent share: Basic................................................ $ (0.64) $ 0.32 $ (0.58) $ 0.64 ======== ======= ======== ======== Diluted.............................................. $ (0.64) $ 0.32 $ (0.58) $ 0.63 ======== ======= ======== ======== Weighted average number of common stock and common stock equivalents outstanding: Basic................................................ 11,924 11,910 11,924 11,888 ======== ======= ======== ======== Diluted.............................................. 11,924 12,215 11,924 12,213 ======== ======= ======== ========
See accompanying notes to condensed consolidated financial statements. 4 CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
Note Common Stock Receivable --------------------------- Paid-In Retained From Shares Amount Capital Earnings Shareholder Net ----------- ---------- ------- -------- ----------- -------- Balance at December 31, 1998............ 11,924 $ 119 $102,015 $11,899 $(350) $113,683 Net loss................................ - - - (6,961) - (6,961) ------- ----- -------- ------- ----- -------- Balance at June 30, 1999................ 11,924 $ 119 $102,015 $ 4,938 $(350) $106,722 ======= ===== ======== ======= ===== ========
See accompanying notes to condensed consolidated financial statements. 5 CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Six Months Ended June 30, ---------------------------------- 1999 1998 -------- -------- Operating Activities: Net income (loss).............................................................. $ (6,961) $ 7,660 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................................................ 6,034 4,662 Deferred income taxes........................................................ (5,373) - Provision for asset revaluation.............................................. 14,530 - Minority interest............................................................ 232 201 Provision for doubtful accounts.............................................. 1,042 684 Change in assets and liabilities: Accounts receivable........................................................ (2,948) (16,243) Prepaid expenses and other assets.......................................... (840) (8,100) Accounts payable, accrued liabilities and other current liabilities........ (4,961) 2,337 Other...................................................................... (323) 22 -------- -------- Cash provided by (used in) operating activities.......................... 432 (8,777) -------- -------- Investing Activities: Purchases of property and equipment........................................... (3,693) (3,699) Notes and other receivables, net of repayments................................ (4,664) (5,447) Acquisition of leasehold interest............................................. (500) - Payments for debt service reserves............................................ (336) - Payments for financing and other deferred costs............................... (2,198) (618) -------- -------- Cash used in investing activities........................................ (11,391) (9,764) -------- -------- Financing Activities: Proceeds from the exercise of stock options................................... - 294 Proceeds from borrowings...................................................... 12,432 21,200 Distributions paid to minority partners....................................... (148) (148) Borrowings from related party, net of repayments.............................. (335) (307) Principal payments on long-term debt.......................................... (5,574) (753) -------- -------- Cash provided by financing activities..................................... 6,375 20,286 -------- -------- Net change in cash and cash equivalents......................................... (4,584) 1,745 Cash and cash equivalents, beginning of period.................................. 8,087 4,011 -------- -------- Cash and cash equivalents, end of period........................................ $ 3,503 $ 5,756 ======== ========
See accompanying notes to condensed consolidated financial statements. 6 CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 NOTE 1 - BASIS OF PRESENTATION AND OTHER INFORMATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, the financial statements reflect all adjustments considered necessary for a fair statement of the results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1998 and notes thereto contained in Centennial HealthCare Corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission (Commission File No. 000-22771). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999 or any interim period. Certain amounts in the 1998 financial statements have been reclassified for comparative purposes. NOTE 2 - EARNINGS PER SHARE The calculation of earnings per share is as follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 -------- ------- -------- ------- Income (Loss) applicable to common stock................... $(7,573) $ 3,834 $(6,961) $ 7,660 Weighted average common shares outstanding................. 11,924 11,910 11,924 11,888 BASIC EARNINGS PER COMMON SHARE............................ $ (0.64) $ 0.32 $ (0.58) $ 0.64 ======= ======= ======= ======= Income (Loss) applicable to common stock................... $(7,573) $ 3,834 $(6,961) $ 7,660 Interest savings on convertible debt (net of tax).......... - 24 - 48 ------- ------- ------- ------- Income (Loss) applicable to common stock................... $(7,573) $ 3,858 $(6,961) $ 7,708 Weighted average common shares outstanding................. 11,924 11,910 11,924 11,888 Dilutive effect of stock options........................... - 180 - 200 Conversion of convertible debt............................. - 125 - 125 ------- ------- ------- ------- Average diluted common shares outstanding.................. 11,924 12,215 11,924 12,213 DILUTED EARNINGS PER COMMON SHARE.......................... $ (0.64) $ 0.32 $ (0.58) $ 0.63 ======= ======= ======= =======
NOTE 3 - FACILITY ACQUISITIONS In January 1999, Centennial acquired leasehold interests in six nursing facilities, totaling 795 licensed available beds, located in Massachusetts. The total purchase price of $64.0 million was funded under the portion of the Company's Senior Credit Facility with NationsBank, N.A., ("NationsBank") and First Union National Bank, as agents and lenders and the other lenders named therein, (the "Senior Credit Facility"), designated for use in financing certain facility lease transactions, (the "Lease Facility"). Also in January 1999, the Company acquired leasehold interests in two facilities that were previously managed by the Company: Hunter Woods Nursing and Rehabilitation Center, ("Hunter Woods"), a 130-bed facility located in Charlotte, North Carolina and Choctaw County Medical Center, ("Choctaw"), a facility with 68 nursing home beds and 22 hospital beds, located in Ackerman, Mississippi. The Company paid a total purchase price of $2.5 million for Hunter Woods; there were no lease acquisition costs associated with Choctaw. NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. This statement requires that all derivatives be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS 133. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The effect on the financial statements upon adoption of SFAS 133 has not been determined. NOTE 5 - SEGMENT INFORMATION In 1998, Centennial adopted Statement of Financial Accounting Standards ("SFAS") 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 supersedes FAS 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect results of operations or financial position. The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which disaggregates its business by services provided. The Company's reportable segments are management services/corporate, long-term care facilities and rehabilitative therapy services. Management fee revenues and all corporate expenses and overhead are recorded in the management services/corporate segment. The long-term care facilities segment provides basic healthcare services to patients in a long-term care setting, including skilled nursing and support, housekeeping, laundry, dietary, recreational and social services. The rehabilitative therapy services segment includes specialty healthcare services, including comprehensive rehabilitation therapy through the Company's subsidiary Paragon Rehabilitation, Inc. ("Paragon"). The "All Other" category represents the Company's hospital services, home health services, and PTS, Inc. ("PTS"), the Company's subsidiary providing intravenous therapy and other services. Centennial evaluates the performance of its segments and allocates resources to them based on earnings before interest, taxes, depreciation, amortization and rent and any noncash, nonrecurring charges (EBITDAR). The tables below presents information about EBITDAR and total assets used by the chief operating decision maker of Centennial as well as specific items included in segment profit/loss as of and for the three and six month periods ended June 30, 1999 and 1998: As of and for the six months ended June 30, 1999: (in thousands)
Management Long-Term Rehabilitation Services/ Care Therapy All Reconciling Corporate Facilities Services Other Items Total ---------------------------------------------------------------------------------------- Revenues 4,835 157,866 19,722 28,956 (13,475) 197,904 EBITDAR (3,723) 30,379 145 4,105 - 30,906 Total Assets 129,720 135,040 17,195 27,978 (26,129) 283,804 Interest revenue 844 19 21 19 - 903 Interest expense (2,199) (2,544) (315) (350) - (5,408) Lease expense (809) (14,498) (265) (495) - (16,067) Depreciation and Amortization (2,422) (2,433) (914) (266) - (6,035) Minority Interest (net of tax) (137) - - - - (137) Provision for Asset Revaluation (1,285) (10,558) (2,687) - - (14,530) Terminated Merger Costs (600) - - - - (600) Income tax benefit (expense) 4,275 (572) 1,538 (1,234) - 4,007 Net income (loss) (6,056) (207) (2,477) 1,779 - (6,961)
As of and for the six months ended June 30, 1998: (in thousands)
Management Long-Term Rehabilitation Services/ Care Therapy All Reconciling Corporate Facilities Services Other Items Total ---------------------------------------------------------------------------------------- Revenues 7,740 119,588 37,368 10,276 (12,298) 174,972 EBITDAR 1,233 22,630 4,700 3,320 - 31,883 Total Assets 125,651 132,440 23,024 21,192 (29,367) 272,940 Interest revenue 807 13 65 36 - 921 Interest expense (888) (2,675) (315) (351) - (4,229) Lease expense (648) (9,829) (228) (450) - (11,155) Depreciation and Amortization (1,336) (2,157) (945) (224) - (4,662) Minority Interest (net of tax) (123) - - - - (123) Income tax benefit (expense) 325 (3,113) (1,278) (909) - (4,975) Net income (loss) (630) 4,869 1,999 1,422 - 7,660
For the three months ended June 30, 1999: (in thousands)
Management Long-Term Rehabilitation Services/ Care Therapy All Reconciling Corporate Facilities Services Other Items Total ---------------------------------------------------------------------------------------- Revenues 2,291 80,474 9,684 13,513 (6,102) 99,860 EBITDAR (1,875) 15,826 5,277 1,871 - 16,349 Interest revenue 419 - 1 9 - 429 Interest expense (1,274) (1,304) (158) (174) - (2,910) Lease expense (416) (7,422) (130) (255) - (8,223) Depreciation and Amortization (1,317) (1,211) (448) (142) - (3,118) Minority Interest (net of tax) (58) - - - - (58) Provision for Asset Revaluation (1,285) (10,558) (2,687) - - (14,530) Income tax benefit (expense) 2,409 1,492 1,079 (492) - 4,488 Net income (loss) (3,397) (3,177) (1,816) 817 - (7,573)
For the three months ended June 30, 1998: (in thousands)
Management Long-Term Rehabilitation Services/ Care Therapy All Reconciling Corporate Facilities Services Other Items Total ---------------------------------------------------------------------------------------- Revenues 3,955 59,472 19,651 11,633 (6,811) 87,900 EBITDAR 582 10,881 2,511 2,050 - 16,024 Interest revenue 728 11 27 34 - 800 Interest expense (618) (1,365) (158) (175) - (2,316) Lease expense (323) (4,935) (144) (344) - (5,746) Depreciation and Amortization (681) (1,098) (484) (116) - (2,379) Minority Interest (net of tax) (60) - - - - (60) Provision for Asset Revaluation - - - - - - Terminated Merger Costs - - - - - - Income tax benefit (expense) 107 (1,363) (683) (550) - (2,489) Net income (loss) (265) 2,131 1,069 899 - 3,834
NOTE 6 - COMMITMENTS AND CONTINGENCIES Effective May 28, 1999, the Company amended its Senior Credit Facility. As part of the new agreement, the Company transferred $5.7 million of availability under the Lease Facility to the revolver portion. The amendment, coupled with previous 1998 amendments to the Lease Facility, increased the Company's interest rate, which at June 30, 1999 was at 3.0% over LIBOR, and calls for amortization of principal, or reduction in availability, of $5.7 million on December 31, 1999, $11.0 million on December 31, 2000, and $22 million during each of the years ending December 31, 2001 and 2002. As of June 30, 1999, the Company had $82.3 million outstanding and approximately $6.8 million available under the Senior Credit Facility, net of standby letters of credit of approximately $6.7 million. The Company was in full compliance with all covenants of the Senior Credit Facility as of June 30, 1999. Under the provisions of the Senior Credit Facility, Centennial is required to hedge a portion of its floating rate debt outstanding under the Senior Credit Facility. Accordingly, the Company has entered into interest rate swap agreements with certain lenders providing bank financing under the Senior Credit Facility. Pursuant to the interest rate swap agreements, the Company has exchanged its floating rate interest obligations on $38.0 million in principal at an average fixed rate of 5.61% per annum for an average maturity of 4.25 years. The fixing of interest rates for this period reduces in part the Company's exposure to the uncertainty of floating interest rates. The differential paid or received on the interest rate swap agreements is recognized as an adjustment to interest expense. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by these counterparties, and no material loss would be expected from their nonperformance. The fair value of the interest rate swap agreements was not recognized in the condensed consolidated financial statements since they are accounted for as hedges. At June 30, 1999, the estimated fair value of the interest rate swap agreements based on current market rates, approximated a net receivable to the Company of $41,000. In January 1999, the Company obtained a $5.0 million line of credit from Nationsbank, which bears interest at NationsBank's Prime Rate or 3.0% over LIBOR for selected portions, and expired in May 1999. During the second quarter of 1999, the Company negotiated an amendment with Nationsbank which extends the maturity date to December 31, 1999. As of June 30, 1999, the Company had $5.0 million outstanding under this agreement which is included in "other current liabilities" in the Company's accompanying Condensed Consolidated Balance Sheets at June 30, 1999. On March 26, 1999 the Company received an investigatory subpoena from the Department of Health and Human Services, Office of Inspector General ("OIG"), requesting records in connection with an investigation of possible or otherwise improper claims for payment under Title XVIII (Medicare) of the Social Security Act. The request relates to records for the period January 1, 1994 to December 31, 1998 concerning certain of the Company's internal policies and relates to four long-term care facilities operated by the Company. The Company intends to provide all requested records and cooperate fully with the OIG. NOTE 7 - TERMINATED MERGER On October 22, 1998, Centennial announced that its Board of Directors had approved the sale of the Company for $16.00 per share in cash to a new company, ("Centennial HealthCare Holdings Corporation), formed by Welsh, Carson, Anderson & Stowe, whose affiliates currently hold approximately 23% of the Company's common stock. On April 2, 1999, Centennial HealthCare Holdings Corporation notified the Company that it was terminating the definitive merger agreement. As of June 30, 1999, the Company had expensed approximately $4.2 million in transaction costs associated with the terminated merger. Approximately $600,000 of these costs were expensed during 1999. The Company does not anticipate any further accruals of merger costs. NOTE 8 - PROVISION FOR ASSET REVALUATION During the second quarter of 1999, the Company continued its evaluation of the effects of the Medicare Prospective Payment System ("PPS") on the profitability of its nursing centers and ancillary businesses. Based on operational results through six months under PPS, the Company noted that profitability at certain of its nursing centers as well as Paragon, were less than amounts projected in 1998. Accordingly, the Company has recorded write-downs of property and equipment and intangible assets (primarily goodwill) at several of its nursing centers, totaling approximately $1.2 million and $2.8 million, respectively. In addition, the Company wrote-off approximately $2.7 million of goodwill associated with Paragon. The total carrying value of goodwill after the write- down associated with Paragon and the nursing facilities was approximately $17.0 million and $18.5 million, respectively. Amortization expense recorded during the six months ended June 30, 1999, on the fixed assets and intangibles written- off approximates $54,000. In connection with the Company's facility management agreements for several facilities, the Company has made certain advances for working capital needs. The majority of these centers are start-up or development projects and required additional funding for personnel and other operating costs prior to stabilization. The advances are to be repaid from available cash flow and other funds provided by the owners. It is the Company's policy to periodically review the collectibility of its advances based upon several factors, including the projected cash flow of the respective facility, the value of any collateral held by the Company, the owner's financial position and the underlying asset value of the nursing center. During the first six months of 1999, certain of the Company's managed facilities, primarily in North Carolina, have declined due to deterioration in census and payor mix. In June, 1999, the Company determined that the operational declines noted during 1999 were unlikely to dissipate in the near term and, as a result, the ability of the respective nursing facilities to fully repay cash advanced by the Company was impaired. Accordingly, during the second quarter of 1999, the Company increased its reserve for managed facility advances by $7.8 million. The charge represents the carrying value of advances made to the respective centers considered impaired. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying Unaudited Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 1999, and 1998. Certain statements in this Form 10-Q, including information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", constitute "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include statements regarding the intent, belief or current expectations of Centennial HealthCare Corporation and members of its management team. Management cautions that a variety of factors could cause Centennial HealthCare's actual results to differ materially from the anticipated results expressed in such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements are set forth in Centennial HealthCare's Cautionary Statements regarding Forward- looking Statements (exhibit 99.1 to this report), which statements are incorporated herein by reference. GENERAL Centennial HealthCare Corporation ("Centennial" or the "Company") provides a broad range of long-term healthcare services to meet the medical needs of elderly and post-acute patients. The Company provides these services through geographically concentrated networks located in metropolitan and secondary markets throughout the United States. The Company was organized in 1989 as a Georgia corporation and conducts business through its operating subsidiaries. The Company currently operates 108 owned, leased and managed skilled nursing facilities with approximately 11,734 licensed available beds in 21 states and the District of Columbia. The Company provides basic and specialty healthcare services. Basic services include skilled nursing and support, housekeeping, laundry, dietary, recreational and social services. Specialty services may include comprehensive rehabilitation therapy, respiratory therapy, ventilator care, infusion therapy, wound care, home healthcare and other subacute and specialty services. As components of its specialty services, at June 30, 1999, Centennial provided rehabilitation therapy services on a contract basis to third-party owned and Company-operated skilled nursing facilities pursuant to 146 internal and external contracts and provided home healthcare services through licensed home health offices primarily in North Carolina. In January 1999, Centennial acquired leasehold interests in six nursing facilities, totaling 795 licensed available beds, located in Massachusetts, (the "Flatley Facility Leases"). Also in January 1999, the Company acquired leasehold interests in two facilities that were previously managed by the Company: Hunter Woods Nursing and Rehabilitation Center, a 130-bed facility located in Charlotte, North Carolina, and Choctaw County Medical Center, a facility with 68 nursing home beds and 22 hospital beds, located in Ackerman, Mississippi. Together, these two facilities are hereafter referred to as the "New Facility Leases". On October 22, 1998, Centennial announced that its Board of Directors had approved the sale of the Company for $16.00 per share in cash to a new company, ("Centennial HealthCare Holdings Corporation"), formed by Welsh, Carson, Anderson and Stowe, whose affiliates currently hold approximately 23% of the Company's common stock, (the "Proposed Merger"). On April 2, 1999, Centennial HealthCare Holdings Corporation notified the Company that it was terminating the definitive merger agreement. As of June 30, 1999, the Company had expensed approximately $4.2 million in transaction costs associated with the terminated merger. Approximately $600,000 of these costs were expensed during 1999. The Company does not anticipate any further accruals of merger costs. In August 1998, the Company began leasing four skilled nursing facilities totaling 349 licensed available beds, located in Mississippi, North Carolina, Arkansas and Wisconsin. One of these facilities was previously managed by the Company. In October 1998, the Company began leasing six skilled nursing facilities totaling 608 licensed available beds, located in Florida, Arkansas, Kansas, and Wisconsin. In November 1998, the Company began leasing four skilled nursing facilities totaling 675 licensed available beds, located in Florida and Missouri. Together, these transactions are hereafter referred to as the "1998 Facility Leases". In April 1998, the Company entered into management agreements for two skilled nursing facilities, with a total of 174 licensed available beds, located in Virginia. In October 1998, the Company discontinued its operations of Wellington Nursing and Rehabilitation Center, ("Wellington"), a 140-bed facility located in Charlotte, North Carolina through a sub-lease to a third party operator. In November 1998, the Company closed THS of South Bend, ("South Bend"), a 191-bed skilled nursing facility located in South Bend, Indiana. The Company continues to market the South Bend facility for sale and cannot at this time anticipate when, if at any time, it will be successful in its efforts to sell this facility. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998: Net patient service revenues. Net patient service revenues increased from $84.0 million in the second quarter of 1998 to $97.7 million in the same period in 1999, an increase of $13.6 million or 16.3%. The 1998 Facility Leases contributed approximately $13.4 million to revenues during the second quarter of 1999. The New Facility Leases and the Flatley Facility Leases contributed approximately $2.8 million and approximately $9.9 million, respectively, to revenues during the first quarter of 1999. Wellington and South Bend contributed approximately $1.1 million and $1.4 million, respectively, to revenues for the quarter ended June 30, 1998. Same store nursing facility revenues decreased by approximately $2.5 million in the second quarter of 1999, compared to the prior year period due primarily to decreases in Medicare revenues associated with the advent of the Medicare prospective payment system ("PPS"), which went into effect for the majority of the Company's owned and leased nursing facilities on January 1, 1999. Payor mix at the Company's nursing facilities remained consistent during 1999 as compared to 1998. The Company experienced a decrease in its average Medicare Part A rates during the second quarter of 1999 as well as a slight decrease in census as compared to the prior period on a same store basis. Revenues from Paragon decreased by approximately $8.5 million in the second quarter of 1999 compared to the prior year period, due to the loss of sixteen external contracts subsequent to the second quarter of 1998 and a general decrease in average revenue per contract. The decrease in revenue per contract is associated primarily with the pass through effect of Medicare PPS rate decreases affecting Paragon's nursing center customers. Revenues from PTS, increased by approximately $600,000 due to increased volume from existing contracts and the expansion of services provided to the Company's managed nursing facilities. Management fees and other revenues. Management fees and other revenues decreased from $3.8 million in the second quarter of 1998 to $2.1 million in the second quarter of 1999, a decrease of $1.7 million, or 44.3%. Approximately $330,000 of this decrease was due to the loss of one management contract subsequent to the second quarter of 1998, and approximately $213,000 of this decrease was due to the conversion of three management contracts to leases subsequent to June 30, 1998. The remaining decrease was attributable to revenue recognized during the second quarter of 1998 for performance of additional services to certain third party owners and declines in 1999 revenues earned under certain management agreements in which the Company's fee is based on facility profits. Facility operating expenses. Facility operating expenses increased from $66.6 million in the second quarter of 1998 to $77.5 million in the same period in 1999, an increase of $10.9 million or 16.3%. The 1998 Facility Leases contributed approximately $11.0 million to operating expenses during the second quarter of 1999. The New Facility Leases and the Flatley Facility Leases contributed approximately $2.4 million and approximately $7.8 million, respectively, to operating expenses during the second quarter of 1999. Wellington and South Bend contributed approximately $1.3 million and $1.4 million, respectively, to operating expenses for the prior year period ended June 30, 1998. Same store nursing facility operating expenses decreased by approximately $2.5 million in the second quarter of 1999 compared to the prior year period, primarily resulting from decreases in therapy and other ancillary costs associated with the re-negotiation of the Company's ancillary contracts under the PPS methodology. These gains were offset in part by additional costs associated with continued PPS training during the second quarter of 1999 at the Company's nursing facilities. Operating expenses from Paragon decreased by approximately $6.5 million in the second quarter of 1999 compared to the prior year period, due to the cost-cutting measures put in place by management in response to the decrease in revenues associated with PPS. Operating expenses from PTS increased by approximately $500,000 due to increased volume from existing contracts and the expansion of services provided to the Company's managed nursing facilities. Lease expense. Lease expense increased from $5.7 million in the second quarter of 1998 to $8.2 million in the second quarter of 1999, an increase of approximately $2.5 million, or 43.0%. Lease expense from the 1998 Facility Leases approximated $1.6 million during the second quarter of 1999, while lease expense from the New Facility Leases and the Flatley Facility leases approximated $185,000 and $1.3 million, respectively, in the second quarter of 1999. Wellington and South Bend contributed approximately $157,000 and $210,000 to lease expense during the prior year period ended June 30, 1998. Corporate administrative costs. Corporate administrative costs increased from $5.2 million in the second quarter of 1998 to $5.9 million in the second quarter of 1999, an increase of $728,000, or 13.8%, which was due primarily to additional overhead incurred to accommodate the 1998 Facility Leases, the New Facility Leases, and the Flatley Facility Leases. Depreciation and amortization. Depreciation and amortization increased from $2.3 million in the second quarter of 1998 to $3.1 million in the same period in 1999, an increase of approximately $739,000, or 31.0%, which was primarily attributable to additional depreciation expense incurred as a result of fixed asset purchases and amortization of management contract and acquisition costs. Provision for asset revaluation. During the second quarter of 1999, the Company recorded a provision for asset revaluation of approximately $14.5 million. This charge was comprised of a $7.8 million reserve for long-term advances and notes receivable from managed facilities and a write-down of fixed assets and intangible assets of $6.7 million related to certain of the Company's nursing facilities and Paragon. Interest expense. Interest expense increased from $2.3 million in the second quarter of 1998 to $2.9 million in the second quarter of 1999, an increase of approximately $594,000, or 25.6%, which was primarily attributable to the increase in debt of approximately $24.9 million subsequent to the second quarter of 1998, related to borrowings for working capital. Provision for income taxes. The Company's effective tax rate increased from 39.0% in the second quarter of 1998 to 41.0% in the second quarter of 1999 (gross of tax benefits associated with nonrecurring second quarter losses), an increase in the rate of 2.0%. This increase was primarily attributable to an anticipated increase in the Company's average state tax rate due to the Company's expansion into several new states resulting from the Flatley Facility Leases and the 1998 Facility Leases. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998: Net patient service revenues. Net patient service revenues increased from $167.4 million in the first six months of 1998 to $193.3 million in the same period in 1999, an increase of $25.9 million or 15.5%. The 1998 Facility Leases contributed approximately $26.8 million to revenues during 1999. The New Facility Leases and the Flatley Facility Leases contributed approximately $5.2 million and $19.8 million, respectively, to revenues during the first six months of 1999. Wellington and South Bend contributed approximately $2.4 million and $2.8 million, respectively, to revenues for the six months ended June 30, 1998. Same store nursing facility revenues decreased by approximately $7.4 million during 1999 compared to the prior year period due primarily to decreases in Medicare revenues associated with the advent of the Medicare prospective payment system ("PPS"), which went into effect for the majority of the Company's owned and leased nursing facilities on January 1, 1999. Payor mix at the Company's nursing facilities remained consistent during 1999 as compared to 1998. The Company experienced a decrease in its average Medicare Part A rates during the first half of 1999 as well as a slight decrease in census as compared to the prior period on a same store basis. Revenues from Paragon decreased by approximately $15.5 million for the first six months of 1999 compared to the prior year period, due to the loss of sixteen external contracts subsequent to the second quarter of 1998 and a general decrease in average revenue per contract. The decrease in revenue per contract is associated primarily with the pass through effect of Medicare PPS rate decreases affecting Paragon's nursing center customers. Revenues from PTS, increased by approximately $2.0 million due to increased volume from existing contracts and the expansion of services provided to the Company's managed nursing facilities. Management fees and other revenues. Management fees and other revenues decreased from $7.5 million during the first six months of 1998 to $4.5 million for the same period of 1999, a decrease of $3.0 million, or 39.8%. Approximately $660,000 of this decrease was due to the loss of one management contract subsequent to the second quarter of 1998, and approximately $800,000 of this decrease was due to the conversion of three management contracts to leases subsequent to June 30, 1998. The remaining decrease includes approximately $850,000 attributable to revenue recognized during the second quarter of 1998 for performance of additional services to certain third party owners as well as decreases in 1999 revenues earned under certain management agreements in which the Company's fee is based on facility profits. Facility operating expenses. Facility operating expenses increased from $132.8 million during the first six months of 1998 to $155.1 million for the same period in 1999, an increase of $22.2 million or 16.7%. The 1998 Facility Leases contributed approximately $22.1 million to operating expenses during 1999. The New Facility Leases and the Flatley Facility Leases contributed approximately $4.5 million and approximately $15.3 million, respectively, to operating expenses during the six months ended June 30, 1999. Wellington and South Bend contributed approximately $2.8 million and $2.6 million, respectively, to operating expenses for the prior year period ended June 30, 1998. Same store nursing facility operating expenses decreased by approximately $5.3 million during the first half of 1999 compared to the prior year period, primarily resulting from decreases in therapy and other ancillary costs associated with the re-negotiation of the Company's ancillary contracts under the PPS methodology. These gains were offset in part by additional costs associated with continued PPS training during 1999 at the Company's nursing facilities. Operating expenses from Paragon decreased by approximately $10.6 million in the first six months of 1999 compared to the prior year period, due to cost-cutting measures put in place by management in response to the decrease in revenues associated with PPS. Operating expenses from PTS increased by approximately $1.6 million due to increased volume from existing contracts and the expansion of services provided to the Company's managed nursing facilities. Lease expense. Lease expense increased from $11.1 million during the six months ended June 30, 1998 to $16.1 million during the same period in 1999, an increase of approximately $4.9 million, or 44.0%. Lease expense from the 1998 Facility Leases approximated $2.9 million during 1999, while lease expense from the New Facility Leases and the Flatley Facility leases approximated $386,000 and $2.5 million, respectively, through June 30, 1999. Wellington and South Bend contributed approximately $313,000 and $420,000 to lease expense during the prior year period ended June 30, 1998. Corporate administrative costs. Corporate administrative costs increased from $10.2 million in 1998 to $11.9 million during the first six months of 1999, an increase of $1.7 million, or 16.9%, which was due primarily to additional overhead incurred to accommodate the 1998 Facility Leases, the New Facility Leases, and the Flatley Facility Leases. Depreciation and amortization. Depreciation and amortization increased from $4.7 million during the six months ended June 30, 1998 to $6.0 million in the same period in 1999, an increase of approximately $1.4 million, or 29.4%, which was primarily attributable to additional depreciation expense incurred as a result of fixed asset purchases and amortization of management contract and acquisition costs. Provision for asset revaluation. During the second quarter of 1999, the Company recorded a provision for asset revaluation of approximately $14.5 million. This charge was comprised of a $7.8 million reserve for long-term advances and notes receivable from managed facilities and a write-down of fixed assets and intangible assets of $6.7 million related to certain of the Company's nursing facilities and Paragon. Termination Merger Cost. During the first quarter of 1999, the Company accrued $600,000 of transaction costs associated with the proposed merger. Interest expense. Interest expense increased from $4.2 million in 1998 to $5.4 million in 1999, an increase of approximately $1.2 million, or 27.8%, which was primarily attributable to the increase in debt of approximately $24.9 million subsequent to the second quarter of 1998, related to borrowings for working capital. Provision for income taxes. The Company's effective tax rate increased from 39.0% for the first six months of 1998 to 41.0% for the same period of 1999 (gross of tax benefits associated with nonrecurring 1999 losses), an increase in the rate of 2.0%. This increase was primarily attributable to an anticipated increase in the Company's average state tax rate due to the Company's expansion into several new states resulting from the Flatley Facility Leases and the 1998 Facility Leases. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash during the first quarter of 1999 was borrowings under the Senior Credit Facility. Cash was used by the Company for capital improvements at several existing facilities, notes and advances receivable from certain third parties and payments of deferred costs. The Company anticipates utilizing cash from operations (through anticipated reductions of accounts receivable) and anticipated borrowings under the Senior Credit Facility to fund the growth in operations of its existing facilities, and the expansion and development of specialty services. During the six months ended June 30, 1999, the Company generated $432,000 in cashflow from operating activities. This was comprised of operating cashflow before noncash charges and changes in assets and liabilities of $9.5 million, an increase in accounts receivable of $2.9 million and decrease in accounts payable of $4.9 million. The increase in accounts receivable is comprised of: (a) a $14.7 million increase in trade receivables at the Company's long-term care facilities, (b) a $6.5 million decrease in nursing facility settlement receivables associated with the collection of prior year Medicare cost report receivables and exception requests and (c) a $4.8 million decrease in Paragon receivables from third parties. The significant increase in trade receivables during the period was due primarily to delays by the Company's intermediary in processing change of ownership packages for the Flatley Facility Leases and the 1998 Facility Leases. The Company was unable to receive any Medicare payments or, in certain states, Medicaid payments, until this process had been completed. By June 30, 1999 the intermediary had completed all change of ownership processing and the Company was beginning to receive payments on most of the facilities in question. As of June 30, 1999, the Company had outstanding Medicaid and Medicare receivables associated with these buildings of approximately $14.6 million. The Company anticipates that significant portions of these balances should be collected during the remaining two quarters of 1999. The decrease in account payable consists of $3.6 million of payments on accounts receivable purchased for the Flatley Facility Leases as of December 31, 1999 and decreases in accrued group health insurance outstanding due to a reduction in turnaround time on processing and payment of health claims. Notes and other receivables from certain third party owners increased by approximately $4.6 million during the first six months of 1999. The Company continued to invest in its leased and owned facilities through capital expenditures of approximately $3.7 million or approximately $460 per bed for the six month period. These expenditures included the expansion of existing facilities and the selected rehabilitation of certain facilities. Also during the period, the Company paid $2.1 million for deferred costs including loan fees associated with the refinancing of the Senior Credit Facility. During the first six months of 1999, the Company borrowed a net $7.4 million in working capital loans under the Senior Credit Facility which were utilized primarily to finance capital expenditures at existing facilities and other investing activities. As of June 30, 1999, the Company had $82.3 million outstanding and approximately $6.8 million available under its Senior Credit Facility, net of issued standby letters of credit of approximately $6.7 million. Effective May 28, 1999, the Company amended its Senior Credit Facility to transfer $5.7 million of availability from the lease portion of its commitment to the revolver. Also included in the amendment are required amortization of principal, or reduction of availability, of approximately $5.7 million, $11.0 million , $22.0 million and $22.0 million during each of the years ended December 31, 1999, 2000, 2001 and 2002, respectively. In January 1999, the Company obtained a $5.0 million Line of Credit from Nationsbank, which bears interest at Nationsbank's Prime rate or 3.0% over Libor for selected portions. Through an amendment during the second quarter of 1999, the Company extended the maturity date of this commitment to December 31, 1999. As of March 31, 1999, the Company had $5.0 million outstanding under this agreement. The Company's Amended Senior Credit Facility restricts the Company's ability to add new facilities through either acquisitions or leases. Due to these restrictions, the Company is evaluating the market potential of establishing management relationships with investor groups interested in acquiring nursing facilities and outsourcing management. All discussions by the Company with any investor groups are in a preliminary stage and the availability of such management opportunities is uncertain. The Company anticipates meeting its cash flow requirements in the remaining two quarters of 1999 through continued collection of current billings, Medicare settlement receivables and collection of past due trade receivables associated with the 1998 Facility Leases, the Flatley Facility Leases, and the New Facility Leases. The Company is also evaluating a possible sale of certain assets to provide additional liquidity for its day to day operations and required principal reductions under its Senior Credit Facility. Depending on the outcome, a settlement of the currently pending investigatory subpoena from the Department of Health and Human Services, office of Inspector General could result in a substantial liability for the Company. Neither the amount or timing of any potential liability can, at this time, be estimated with any reasonable certainty. It is, however, possible that resolution of this investigation could have a material adverse effect on the Company's cash flow, results of operations and consolidated financial position. HEALTH CARE REFORM The Balanced Budget Act of 1997, (the "Act"), enacted in August 1997, has targeted the Medicare program for reductions in spending growth of approximately $9.5 billion for skilled nursing facilities ("SNF's") over the next five years, primarily through the implementation of a Medicare prospective payment system ("PPS") for skilled services. Under the Act, PPS will be phased in over three cost reporting periods beginning on or after July 1, 1998. Recent data from the Congressional Budget Office indicates that the estimated reductions to SNF payments resulting from the implementation of PPS actually approach $16.6 billion. Generally, the PPS per diem, which covers routine service, ancillary and capital related costs, has initially been a blended rate based on (i) a facility- specific payment rate derived from each facility's 1995 cost report, adjusted by an inflation factor and (ii) a federal per diem rate derived from all hospital- based and freestanding SNF 1995 cost reports, adjusted for case mix and geographic variations in labor costs. The blended rate will be further adjusted by a facility-specific case mix (acuity) index. Management previously indicated a belief that revenues would be lower under PPS, but noted that reductions in ancillary service costs and proper Minimum Data Set ("MDS") documentation should offset the effect of rate reductions. The Company can give no assurance that payments under the PPS program in the future will remain at a level comparable to the present or increase, nor can the Company give assurance that the trend in cost reductions or utilization remain consistent with current levels. Currently, there are legislative efforts underway to provide relief to SNF providers and restore a portion of the savings estimated in excess of the targeted $9.5 billion. There is no assurance as to the likelihood that these legislative efforts will be successful or, if successful, the timing of their implementation. The Act has also targeted the Medicare home health program for reductions in spending of approximately $16.2 billion over the next five years, also primarily through the implementation of a prospective payment system. An interim payment system ("IPS") will remain in effect until the new prospective payment system is implemented for cost reporting periods beginning on or after October 1, 1999. The interim payment system is effective for cost reporting periods beginning on or after October 1, 1997. Under the IPS, home health agencies, in general, are reimbursed at the lessor of (i) actual costs, (ii) per visit cost limits reduced to 105% of the median per visit costs for freestanding home health agencies; or (iii) a blended agency-specific per beneficiary annual limit ("PBL") applied to the agency's unduplicated census count of Medicare patients. The Act also provides that cost limits and PBL's must be reduced by 15% from the amount that would otherwise be in effect on September 30, 1999, regardless of whether the new prospective payment system is ready for implementation on October 1, 1999. Implementation of these new limits will effectively reduce reimbursement 15-20% according to industry experts. Provisions of the Act also include limitations on coverage for outpatient therapy services and the inclusion of inpatient therapy services in a per diem payment rate based on an acuity measurement tool which classifies patients into several intensity-based levels of care. The outpatient therapy limits are $1,500 per year for the combination of Physical and Speech therapy and a separate $1,500 for Occupational therapy. For payment purposes, inpatient services are based upon minutes of care delivered and range from 45 minutes per week to a maximum of 720 minutes per week. IMPACT OF THE YEAR 2000 ISSUE Computer systems and other equipment, including biomedical equipment and building controls, with embedded computer microchips or processors (collectively, "Business Systems") may use only two digits to represent the year, which could result in the inability to process accurately certain date sensitive data or operations before, during or after the year 2000. Business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. This is commonly known as the Year 2000 Issue. Problems associated with the Year 2000 Issue could affect many of Centennial's financial and administrative operations as well as its voice and data communication systems. The Company is in the process of implementing a Year 2000 compliance plan (the "Plan") with the objective of having all of its significant internal Business Systems fully compliant with respect to the Year 2000 Issue by October 1, 1999. The first component of the Plan is to identify the internal Business Systems of the Company that are susceptible to processing errors or system failures as a result of the Year 2000 Issue. This effort is substantially complete, and priorities for all Business Systems that may require remediation or replacement have been established. Those Business Systems considered most critical to continuing operations and resident care are being given the highest priority. The second component of the Plan involves the actual remediation and replacement of Business Systems. As of June 30, 1999, substantially all remediation and replacement of internal Business Systems has been completed. Significant governmental entities, service providers, vendors and suppliers that are believed to be critical to business operations after January 1, 2000, have been identified and steps are being undertaken in an attempt to reasonably ascertain their stage of Year 2000 compliance through questionnaires, interviews, and other available means. It is currently estimated that the aggregate cost of the Company's Year 2000 efforts will be approximately $150,000 to $200,000, of which approximately $120,000 has been spent to date. These costs are being expensed as they are incurred and are being funded through operating cash flow. These amounts do not include any costs associated with the implementation of contingency plans, which are in the process of being developed. The costs associated with the replacement of computerized systems, hardware or equipment (currently estimated to be approximately $350,000), substantially all of which has been capitalized, are not included in the above estimates. The Company does not expect the costs relating to Year 2000 remediation to have a material effect on Centennial's results of operations or financial condition. Because of the interdependent nature of Business Systems, the Company could be materially adversely affected if federal and state agencies that administer Medicare and/or Medicaid or private businesses with which the Company does business or that provide essential services are not Year 2000 compliant. The business and results of operations of the Company could be materially adversely affected by a temporary inability of the Company to conduct its businesses in the ordinary course for a period of time after January 1, 2000. Concurrently with the Plan described above, the Company is developing a contingency plan intended to mitigate the possible disruption in business operations that may result from the Year 2000 Issue, and is developing cost estimates for this plan. Once developed, the contingency plan and related cost estimates will be continually refined as additional information becomes available. The Company's Plan is an ongoing process and the estimates of costs and completion dates for various components of the Plan described above are based on Management's best estimates using assumptions of future events are subject to change. There can be no assurances that these estimates will be acheived. SUBSEQUENT EVENT In July 1999, J. Stephen Eaton, Chief Executive Officer of the Company, and Alan C. Dahl, Chief Financial Officer of the Company, acquired 100% of the general and limited partnership interests in a limited partnership that owns twelve nursing homes currently leased by the Company. These leases were unchanged by this transaction and will remain in place under their existing terms and conditions. PART II- OTHERINFORMATION ITEM 1. LEGAL PROCEEDINGS. As of June 30, 1999, the Company did not have any pending legal proceedings that, based on current information and beliefs, separately or in the aggregate, would be likely to have a material adverse effect on the business or the results of operations of the Company. The Company is, and may be in the future, party to litigation or administrative proceedings which arise in the normal course of its business. On March 26, 1999, the Company received an investigatory subpoena from the Department of Health & Human Services, Office of Inspector General, requesting records in connection with an investigation of possible or otherwise improper claims for payment under Title XVIII (Medicare) of the Social Security Act. The request relates to records for the period January 1, 1994 to present and relates to four long-term care facilities operated by the Company. The Company is cooperating in this investigation and is currently providing the requested records. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibit Number 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 of Form S-1, Registration No. 333-24267, as amended). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1, Registration No. 333-24267, as amended). 4.1 Third Amended and Restated Articles of Incorporation of the Company, included without limitation Article III and Article VII (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, Registration No. 333-24267, as amended). 10.1 Amendment No. 3 to the Third Amended and Restated Credit Agreement by and among the Company and its subsidiaries and the Lenders identified therein dated as of May 29, 1999. 10.2 Third Amendment to the Certain Operative Agreements dated as of May 28, 1999 by and among the Company, certain subsidiaries of the Company as guarantors, First Security Bank National Association, as owner trustee, the various banks and lending institutions named therein as Lenders, First Union Capital Markets, as Syndication Agents, and NationsBank, N.A., as agents. 10.3 Security Agreement dated as of May 28, 1999 by and among the Company, certain subsidiaries of the Company and First Union National Bank, as agent for the Lenders identified therein. 27.1 Financial Data Schedule (for SEC use only) 99.1 Cautionary Statements (b) Reports on Form 8-K On July 20, 1999, the Company filed a Form 8-K concerning changing the Company's independent accountants from PricewaterhouseCoopers, LLP to Arthur Andersen, LLP. On August 3, 1999, the Company filed a Form 8-K/A, amending its previously filed Form 8-K on July 20, 1999, to provide the required letter from PricewaterhouseCoopers, LLP related to the change in the Company's independent accountants. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 16, 1999 CENTENNIAL HEALTHCARE CORPORATION By: /s/ J. Stephen Eaton -------------------- J. Stephen Eaton, Chairman of the Board, President and Chief Executive Officer Date: August 16, 1999 By: /s/ Alan C. Dahl ---------------- Alan C. Dahl, Executive Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit Number 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 of Form S-1, Registration No. 333-24267, as amended). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1, Registration No. 333-24267, as amended). 4.1 Third Amended and Restated Articles of Incorporation of the Company, included without limitation Article III and Article VII (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, Registration No. 333-24267, as amended). 10.1 Amendment No. 3 to the Third Amended and Restated Credit Agreement by and among the Company and its subsidiaries and the Lenders identified therein dated as of May 29, 1999. 10.2 Third Amendment to the Certain Operative Agreements dated as of May 28, 1999 by and among the Company, certain subsidiaries of the Company as guarantors, First Security Bank National Association, as owner trustee, the various banks and lending institutions named therein as Lenders, First Union Capital Markets, as Syndication Agents, and NationsBank, N.A., as agents. 10.3 Security Agreement dated as of May 28, 1999 by and among the Company, certain subsidiaries of the Company and First Union National Bank, as agent for the Lenders identified therein. 27.1 Financial Data Schedule (for SEC use only) 99.1 Cautionary Statements EX-10.1 2 AMEND NO. 3 TO THE THIRD AMENDED AND RESTATED AMENDMENT NO. 3 THIS AMENDMENT NO. 3 (this "Amendment") dated as of May 28, 1999, to that Third Amended and Restated Credit Agreement referenced below, is by and among CENTENNIAL HEALTHCARE CORPORATION, a Georgia corporation (the "Company"), the subsidiaries of the Company that are borrowers under the Credit Agreement, the Lenders identified herein, FIRST UNION NATIONAL BANK, as administrative agent (the "Agent"), and NATIONSBANK, N.A., as Syndication Agent. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. W I T N E S S E T H WHEREAS, a revolving credit facility has been established in favor of the Company and the other Borrowers identified therein pursuant to the terms of that Third Amended and Restated Credit Agreement dated as of July 31, 1998 (as amended and modified, the "Credit Agreement") among the Borrowers, the lenders identified therein, First Union National Bank, as administrative agent, and NationsBank, N.A., as syndication agent; WHEREAS, the Company has requested certain modifications to the Credit Agreement; WHEREAS, the Lenders have agreed to make the requested modifications on the terms and conditions set forth herein; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1.1 The following definitions in Section 1.1 of the Credit Agreement are amended and modified, or added, to read as follows: "Adjusted Fixed Charges" shall mean the sum of (i) interest expense, operating lease expense and taxes for the Company and its Consolidated Subsidiaries for the most-recently ended Rolling Period, plus (ii) current maturities of Funded Debt for the Company and its Consolidated Subsidiaries as of the last day of such period; provided, that (A) in the event that any Permitted Acquisition has been consummated during such Rolling Period and the pro forma results of the business so acquired are included in the calculation of Adjusted EBITDAR, the Adjusted Fixed Charges for such Rolling Period shall be calculated for the Company and its Consolidated Subsidiaries including such Permitted Acquisition based on such pro forma combined historical financial statements and (B) "Adjusted Fixed Charges" shall not include (i) scheduled commitment reductions occurring hereunder within one year of the date of determination or (ii) scheduled commitment reductions and/or sinking fund payments, or the like, under the Lease Financing Facility occurring within one year of the date of determination. "Business Day" shall mean any day not a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina, New York, New York or [______], Pennsylvania are authorized or required by law to close. "Capital Expenditures" shall mean expenditures for any fixed assets or improvements, replacements, substitutions or additions thereto, which have a useful life of more than one (1) year, including direct or indirect acquisition of such assets; provided that as used herein "Capital Expenditures" shall not include (i) Permitted Acquisitions or (ii) expenditures of proceeds of insurance settlements, condemnation awards and other settlements in respect of lost, destroyed, damaged or condemned assets, equipment or other property. "Collateral Security Documents" shall mean collectively, this Agreement, the Pledge Agreements, the Security Agreement, the Mortgages, and related stock certificates and stock powers and financing statements, the Intercreditor Agreement, if any, and any additional documents granting security to Agent for the ratable benefit of the Secured Parties. "Commitment" shall mean the maximum aggregate principal amount up to which the Lenders, on a several basis, have agreed to make Advances under Section 2 hereof and/or participate in the issuance of Letters of Credit under Section 2A hereof, being NINETY MILLION DOLLARS ($90,000,000) on the date hereof, as such maximum aggregate principal amount may be decreased from time to time pursuant to Paragraph 2.8 hereof, but shall not include the Tranche B Commitment under Section 2.1A hereof. "Consolidated Proforma Fixed Charge Coverage Ratio" shall mean, as of any date of determination, the ratio of Adjusted EBITDAR to Proforma Adjusted Fixed Charges. "Eligible Assignee" means (i) a lender hereunder; (ii) an Affiliate of a lender hereunder or any fund that invests in bank loans and is managed by an investment advisor to a Lender; and (iii) any other Person (other than a Person in a Permitted Line of Business) approved by the Administrative Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 10.2, the Borrowers (such approval by the Administrative Agent or the Borrowers not to be unreasonably withheld or delayed and such approval to be deemed given by the Borrowers if no objection is received by the assigning lender and the Administrative Agent from the Borrowers within two Business Days after notice of such proposed assignment has been provided by the assigning lender to the Borrower); provided, however, that neither the Borrowers nor an Affiliate of any Borrower shall qualify as an Eligible Assignee. "Intercreditor Agreement" means any Intercreditor Agreement entered into by the Secured Parties relating to the Collateral Security Documents. "Maximum Tranche B Principal Amount" shall mean the maximum principal amount of the Tranche B Commitment up to which the applicable Tranche B Lender has agreed to lend funds, as set forth in Schedule 2 attached hereto. "Mortgages" means those mortgages, deeds of trust, security deeds or like instruments given by the Borrowers to secure the Secured Obligations referenced therein, as amended and modified. "Proforma Adjusted Fixed Charges" shall mean the sum of (i) Adjusted Fixed Charges, plus (ii) scheduled commitment reductions hereunder occurring within one year of the date of determination, plus (iii) scheduled commitment reductions and/or sinking fund payments, or the like, under the Lease Financing Facility occurring within one year of the date of determination. "Secured Parties" shall mean, individually and collectively, Agent, the Lenders, the Tranche B Lenders, the Lease Financing Lenders, and, as defined in the Lease Financing Rules of Usage and Definitions, the Holders, the Lessor, the Owner Trustee, in its capacity as trustee, NationsBank, N.A., as holder of that $5 million promissory note dated as of May 28, 1999, as amended and modified, the Agent and the Syndication Agent. "Security Agreement" means the security agreement dated as of May 28, 1999 given by the Borrowers to secure the Secured Obligations referenced therein, as amended and modified. "Tranche B Advance" shall mean an advance of funds by the Tranche B Lenders under the Tranche B Commitment. "Tranche B Advance Request Form" shall mean a certificate in substantially the same form as the Advance Request Form with appropriate modifications to reference Tranche B Advances. "Tranche B Commitment" shall mean the maximum aggregate principal amount up to which the Tranche B Lenders, on a several basis, have agreed to make Tranche B Advances under Section 2.1A hereof, being FIVE MILLION EIGHT HUNDRED SIXTY-NINE THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($5,869,500) on May 28, 1999 (being the date of Amendment No. 3), as such maximum aggregate principal amount may be decreased from time to time hereunder. "Tranche B Lenders" shall mean individually and "Tranche B Lenders" shall mean individually and collectively, the institutions identified on Schedule 2 attached hereto and their respective successors and assigns in accordance with Paragraph 10.2 hereof (which as provided therein, requires the prior written consent of the Borrowers under certain circumstances), so long as such institution retains any portion of the Tranche B Commitment or Tranche B Loan hereunder. "Tranche B Loan" shall mean the outstanding principal balance of indebtedness advanced under the Tranche B Commitment, together with interest accrued on and fees and expenses incurred in connection with any of the foregoing. "Tranche B Note" shall mean individually, and "Tranche B Notes" shall mean individually and collectively the Tranche B Notes in substantially the form of the Notes shown in Exhibit C attached hereto, to be delivered by the Borrowers to the Tranche B Lenders pursuant to Section 2.1A(b) hereof, as the same may be amended, modified, extended, consolidated or restated from time to time. "Tranche B Pro Rata Share" shall mean, as to a Tranche B Lender at any time, the ratio which the outstanding principal balance of its portion of the Tranche B Loan outstanding at such time hereunder bears to the aggregate outstanding principal balance of the Tranche B Loan at such time. "Tranche B Required Lenders" shall mean those Tranche B Lenders (which may include the Agent in its capacity as a Lender) holding Tranche B Pro Rata Shares of the Tranche B Loan in excess of fifty percent (50%). "Tranche B Termination Date" shall mean the earlier of (i) December 31, 1999 or (ii) the date on which the Tranche B Commitment may have been terminated hereunder. 1.2 A new Section 2.1A is inserted immediately following Section 2.1 to read as follows: 2.1A Tranche B Commitment. (a) Tranche B Commitment. From time to time prior to the Tranche B Termination Date, subject to the provisions below, each Tranche B Lender severally agrees to make Tranche B Advances to Borrowers up to such Tranche B Lender's Maximum Tranche B Principal Amount as set forth on Schedule 2 attached hereto, and borrowers may repay at the offices of Agent and reborrow under the Tranche B Commitment, up to an aggregate principal amount not to exceed at any time outstanding the amount of the Tranche B Commitment as from time to time in effect. The obligations of the Borrowers hereunder are and shall be joint and several. Each of the Borrowers hereby irrevocably authorizes and requests that the Company execute all Tranche B Advance Request Forms, make all elections as to interest rates and take any other actions required or permitted of Borrowers hereunder, on its respective behalf, in each case with the same force and effect as if such Borrower had executed such Tranche B Advance Request form, made such election or taken such other action itself. (b) Tranche B Promissory Notes. The indebtedness of the Borrowers to each Tranche B Lender under the Tranche B Loans will be evidenced by a Tranche B Note executed by the Borrowers, jointly and severally, in favor of such Lender. The original principal amount of each Tranche B Lender's Tranche B Note will be the amount identified in Schedule 2 attached hereto as its Maximum Tranche B Principal Amount; provided, however, that notwithstanding the face amount of each such Note, the Borrowers' liability under each of such Note shall be limited at all times to the actual indebtedness, principal, interest, fees and expenses, then outstanding to such Tranche B Lender under the Tranche B Loan. (c) Tranche B Lenders' Participation. The Tranche B Lenders shall participate in the Tranche B Loan in the Maximum Tranche B Principal Amounts and Tranche B Pro Rata Shares set forth in Schedule 2 attached hereto. (d) Use of Proceeds. Tranche B Advances under the Tranche B Commitment may be used for the same purposes provided in Section 2.4 for Advances. (e) Repayment. The aggregate outstanding principal balance of the Tranche B Loan shall be due and payable in full on the Tranche B Termination Date; provided, however, that notwithstanding the foregoing, the entire outstanding balance of the Tranche B Loan shall be payable in full on the date of acceleration of the Tranche B Loan as provided herein. (f) Interest. The Tranche B Loan shall bear interest at the same rates and as provided in Section 2.8 for Advances. (g) Tranche B Advances. Tranche B Advances shall be made as provided in Section 2.9 for Advances (with appropriate modifications to refer to the Tranche B Advances). (h) Adjustments to Tranche B Commitment. (i) Optional Reduction by Borrowers. Borrowers shall have the right at any time and from time to time, upon three (3) Business Days' prior written notice to Agent, to reduce the Tranche B Commitment in whole or in part pro rata among the Tranche B Lenders in increments of $1,000,000, without penalty or premium, provided that on the effective date of such reduction Borrowers shall make a payment to the Agent for the account of the Tranche B Lenders in an amount, if any, by which the aggregate outstanding principal balance of the Tranche B Loan exceeds the amount of the Tranche B Commitment, as then so reduced, together with accrued interest on the amount so prepaid, and, if a portion is paid prior to the last day of an Interest Period, any amounts which may be due pursuant to Paragraph 2.10 hereof. (ii) Termination by Lenders. Pursuant to Paragraph 8.2 hereof, Tranche B Required Lenders shall have the right to terminate the Tranche B Commitment at any time, in their sole discretion and upon notice to Borrowers, upon the occurrence of any Event of Default hereunder. Any payment following the occurrence of any Event of Default, acceleration and demand for payment shall include the payment of any amounts due pursuant to Paragraph 2.10 hereof. (iii) Pro Rata Reductions in Maximum Tranche B Principal Amounts; Restoration Only with Consent. Any termination or reduction of the Tranche B Commitment shall result in pro rata reduction in each Tranche B Lender's Maximum Tranche B Principal Amount, and shall be permanent; and the commitment and respective Maximum Principal Amounts cannot thereafter be restored or increased without the written consent of all Tranche B Lenders. (i) Voluntary Prepayments. Voluntary prepayments may be made on the Tranche B Loan as provided in Section 2.9(a) for Advances. (j) Funding Costs and Loss of Earnings. The provisions of Section 2.10 shall apply with equal effect to the Tranche B Loan. (k) Payments. The provisions of Section 2.11 shall apply with equal effect to the Tranche B Loan. (l) Tranche B Commitment Fee. Borrowers shall pay to the Agent, for the benefit of the Tranche B Lenders, a non-refundable commitment fee on the average unused portion of each Tranche B Lender's Maximum Tranche B Principal Amount as from time to time in effect from the date hereof through the Tranche B Termination Date at the applicable rate, and payable as, provided in Section 2.12 for the Commitment based on the ratio of Adjusted Total Debt to Adjusted EBITDAR for the Company and its Consolidated Subsidiaries. (m) Regulatory Changes in Capital Requirements. The provisions of Section 2.16 shall apply with equal effect to the Tranche B Loan. (n) Taxes. The provisions of Section 2.17 shall apply with equal effect to the Tranche B Loan. (o) Representations and Warranties. The representations and warranties in Section 3 shall be extended also to the Tranche B Lenders and apply with equal effect to the Tranche B Loan. (p) Conditions to Tranche B Advances. The provisions of Sections 4.2 and 4.3 shall apply with equal effect to the Tranche B Advances. (q) Covenants. The affirmative covenants of Section 5 and the negative covenants of Section 6 shall be extended also to the Tranche B Lenders and shall remain in effect until the Tranche B Loan is paid in full and the Tranche B Commitment has been terminated. (r) Collateral and Rights of Set-Off. The provisions of Section 7 shall be extended also to the Tranche B Lenders and apply with equal effect to the Tranche B Loan. 1.3 In Section 2.8 of the Credit Agreement, subsection (b) is amended in its entirety to read as follows: (b) Scheduled Permanent Reductions in Commitments. The Commitments hereunder shall be permanently reduced on the dates and in the amounts shown below: Date of Reduction Scheduled Commitment Reduction Amount December 31, 2000 $ 6,000,000 December 31, 2001 $12,500,000 December 31, 2002 $12,500,000 1.4A Section 2.9(b)(i) is hereby amended and restated to read as follows: (i) Asset Dispositions. Prior to January 1, 2000 in connection with each Sale of Material Assets approved by Lenders pursuant to Paragraph 6.7 hereof and on and after January 1, 2000 in connection with any sale of assets (whether or not a Sale of Material Assets subject to approval pursuant to Section 6.7 hereof), the Net Cash Proceeds to the seller of such transaction shall be paid directly to Agent for the account of Lenders and applied to the Loan as set forth in subparagraph (iv) below. 1.4 The last sentence of subclause (iv) of clause (b) of Section 2.9 is amended in its entirety to read as follows: Prepayments made under clauses (ii) in respect of the incurrence of additional Indebtedness or (iii) in respect of equity issuances above prior to the Termination Date shall not reduce the Commitment and may be reborrowed in accordance with this Agreement. Prepayments made under clause (i) shall serve to reduce the Commitment hereunder on a dollar-for- dollar basis by the amount of prepayment required thereunder. 1.5 The following sentence is added to the end of Section 4.3 of the Credit Agreement: Each request for an Advance (including extensions and conversions of an Advance) or a Letter of Credit and each acceptance by the Borrower of an Advance (including extensions and conversions of an Advance) or a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower as of the date of such request or acceptance of an Advance or Letter of Credit that the applicable conditions set forth in the foregoing sentence have been satisfied. 1.6 Section 5.2 is amended to read as follows: (a) Quarterly Financial Statements. Furnish Lenders within forty-five (45) days of the end of each of the first three fiscal quarters of each fiscal year with unaudited quarterly consolidated and consolidating financial statements of the Company and its Consolidated Subsidiaries, in form and substance as reasonably required by Lenders, including a balance sheet, a consolidated statement of income and a statement of cash flows, and a certificate signed by the chief financial or chief executive officer of Borrowers stating that the financial statements fairly present the financial condition of the Company and its Consolidated Subsidiaries as of the date and for the periods covered and were prepared in accordance with GAAP consistently applied, subject to normal year-end audit adjustments. (b) Monthly Financial Statements. Furnish Lenders within thirty (30) days of the end of each fiscal month with unaudited company-prepared consolidated and consolidating financial statements of the Company and its Consolidated Subsidiaries, in form and substance as reasonably required by Lenders, including a balance sheet, a consolidated statement of income and a statement of cash flows, and a certificate signed by the chief financial or chief executive officer of Borrowers stating that the financial statements fairly present the financial condition of the Company and its Consolidated Subsidiaries as of the date and for the periods covered in accordance with GAAP consistently applied excluding footnotes and narrative disclosures and subject to normal quarterly and year-end audit adjustments and accruals. 1.7 Section 5.12 of the Credit Agreement is amended to read as follows: 5.12 Additional Collateral Documentation, Etc. (a) The Borrowers shall, within 45 days from the date of Amendment No. 3, in the case of unencumbered properties, and within 90 days from the date of Amendment No. 3, in the case of encumbered properties, deliver to the Agent, with respect to all real property owned by the Borrowers, Mortgages and such other documents, instruments and other items of the types required by the Agent, including, but not limited to, appropriate UCC-1 financing statements, real estate title insurance policies, environmental reports, landlord's waivers and favorable opinions of counsel, all in form, content and scope reasonably satisfactory to the Agent. (b) As soon as practicable and in any event within 30 days after any Person becomes a direct or indirect Subsidiary of any Borrower, the Borrowers shall provide the Agent with written notice thereof setting forth information in reasonable detail describing all of the assets of such Person and shall (i) if such Person is a Domestic Subsidiary, cause such Person to execute a joinder agreement, in form and substance satisfactory to the Agent, relating to this Credit Agreement, the Notes, the Security Agreement and the Pledge Agreement, (ii) if such Person is a Domestic Subsidiary, cause 100% of the issued and outstanding capital stock (or other ownership interest) of such Person to be delivered to the Agent (together with undated stock powers signed in blank) and pledged to the Agent pursuant to an appropriate pledge agreement(s) in substantially the form of the Pledge Agreement and otherwise in form acceptable to the Agent, (iii) if such Person is a direct Foreign Subsidiary of any Borrower, cause 65% (or such greater percentage which would not result in material adverse tax consequences) of the issued and outstanding capital stock (or other ownership interest) entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and 100% of the issued and outstanding capital stock (or other ownership interest) not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) of such Person to be delivered to the Agent (together with undated stock powers signed in blank (unless, with respect to a Foreign Subsidiary, such stock powers are deemed unnecessary by the Agent in its reasonable discretion under the law of the jurisdiction of incorporation of such Person)) and pledged to the Agent pursuant to an appropriate pledge agreement(s) in substantially the form of the Pledge Agreement and otherwise in form acceptable to the Agent and (iv) cause such Person to (A) if such Person is a Domestic Subsidiary which has any real property, deliver to the Agent, with respect to such real property, Mortgages and such other documents, instruments and other items of the types required by the Agent all in form, content and scope reasonably satisfactory to the Agent and (B) deliver such other documentation as the Agent may reasonably request in connection with the foregoing, including, without limitation, appropriate UCC-1 financing statements, real estate title insurance policies, environmental reports, landlord's waivers, certified resolutions and other organizational and authorizing documents of such Person, favorable opinions of counsel to such Person (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to above and the perfection of the Agent's liens thereunder), all in form, content and scope reasonably satisfactory to the Agent. (c) If a Borrower shall (a) acquire any intellectual property, securities, instruments, chattel paper or other personal property required to be pledged to the Agent hereunder or under any of the Collateral Security Documents or (b) acquire or lease any real property, the Borrowers shall promptly notify the Agent of same. Each Borrower shall take such action at its own expense as requested by the Agent to ensure that the Agent has a first priority perfected lien to secure the obligations of the Borrowers under the Loan Documents in (i) all owned real property and personal property of the Borrowers located in the United States, and (ii) to the extent deemed to be material by the Agent in its sole reasonable discretion, all other owned real and personal property of the Borrowers. (d) The Borrowers shall promptly execute and deliver at its expense all further instruments and documents and take all further action that may be necessary and desirable or that the Agent may reasonably request in order to (i) perfect and protect the security interest created under the Collateral Security Documents in the Collateral (as defined in the Collateral Security Documents) and (ii) enable the Agent to exercise and enforce its rights and remedies under the Loan Documents in respect of the Collateral (as defined in the Collateral Security Documents). 1.8 Sections 5.15, 5.16 and 5.17 are amended, and a new Section 5.17A is added, to read as follows: 5.15 Funded Debt to Capital Ratio. Maintain as of the last day of each fiscal quarter of Funded Debt to Capital of not more than: Fiscal Quarter Ended Required Ratio March 31, 1999 0.75:1 June 30, 1999 0.75:1 September 30, 1999 0.75:1 December 31, 1999 0.75:1 March 31, 2000 0.70:1 June 30, 2000 0.70:1 September 30, 2000 0.70:1 December 31, 2000 0.65:1 March 31, 2001 and thereafter 0.60:1 5.16 Adjusted Total Debt to Adjusted EBITDAR. Maintain as of the last day of each fiscal quarter set forth in the left hand column below a ratio of Adjusted Total Debt to Adjusted EBITDAR for the Company and its Consolidated Subsidiaries of no more than the applicable ratio set forth in the right hand column below: Fiscal Quarter Ended Required Ratio March 31, 1999 5.80:1 June 30, 1999 5.80:1 September 30, 1999 5.80:1 December 31, 1999 5.60:1 March 31, 2000 5.50:1 June 30, 2000 5.25:1 September 30, 2000 5.25:1 December 31, 2000 5.00:1 March 31, 2001 and thereafter 4.50:1 5.17 Fixed Charge Coverage Ratio. Maintain as of the last day of each fiscal quarter a Consolidated Fixed Charge Coverage Ratio of not less than: Fiscal Quarter Ended Required Ratio March 31, 1999 1.35:1 June 30, 1999 through December 31, 2000 1.35:1 March 31, 2001 and thereafter 1.50:1 5.17A Proforma Fixed Charge Coverage Ratio. Maintain as of the last day of each fiscal quarter a Consolidated Proforma Fixed Charge Coverage Ratio of not less than 1.0:1. 1.9 Any requirement for additional interest rate protection under Section 5.22 is hereby waived. 1.10 In Section 6.1, clause (i) is amended in its entirety to read as follows: (i) Indebtedness pursuant to the Lease Financing Facility, pursuant to the Loan from the Lenders hereunder and pursuant to the Tranche B Loan from the Tranche B Lenders hereunder; 1.11 In Section 6.2, the "and" immediately preceding clause (iv) is deleted and a new clause (v) is added at the end of clause (iv) to read as follows: and (v) guaranties by Borrowers of the Tranche B Loan. 1.12 In Section 6.4, clause (i) is amended in its entirety to read as follows: (i) liens in favor of the Lenders in respect of the Loan hereunder, in favor of the Tranche B Lenders in respect of the Tranche B Loan hereunder and in favor of the Lease Financing Lenders and the Holders in respect of the Lease Financing Facility, as security for the Loan, the Tranche B Loan and the Lease Financing Facility; 1.13 Section 6.8(a)(iv), and all language thereafter until the beginning of 6.8(b), is hereby deleted and replaced with a new Section 6.8(a)(iv) to read as follows: "(iv) any other acquisition approved in writing by the Required Lenders and by the Tranche B Required Lenders". 1.14 In Section 8.1, new subsections (m), (n) and (o) are added, to read as follows: (m) if Borrowers shall fail to pay (i) any installment of principal on the Tranche B Loan when due; or (ii) any payment of interest or any other sum payable to the Tranche B Lenders hereunder or otherwise within three (3) days of when due; (n) if any Borrower shall default in the performance of any other agreement or covenant contained herein (other than as provided in subparagraphs (a), (b), (d) or (m) hereof) or in any document executed or delivered in connection herewith, including without limitation any Collateral Security Document and such default shall continue uncured for twenty (20) days after notice thereof to any Borrower given by Agent pursuant to the direction of the Tranche B Required Lenders; (o) if any event or condition shall occur or exist with respect to any activity or substance regulated under the Environmental Control Statutes and as a result of such event or condition, Borrowers have incurred or in the opinion of Tranche B Required Lenders are reasonably likely to incur a liability or liabilities in excess of Five Hundred Thousand Dollars ($500,000) during any consecutive twelve (12) month period. 1.15 In Section 8.2, the existing paragraph is renumbered as clause "(i)" and a new clause (ii) is added to read as follows: (ii) Upon the happening of any Event of Default and at any time thereafter, at the election of Tranche B Required Lenders, and by notice by Agent to Borrowers (except if an Event of Default described in Paragraph 8.l(j) shall occur in which case acceleration shall occur automatically without notice), the Tranche B Required Lenders may declare the entire unpaid balance, principal, interest and fees, of all Indebtedness of Borrowers to the Tranche B Lenders, hereunder or otherwise, to be immediately due and payable. Upon such declaration, the Tranche B Commitment shall immediately and automatically terminate and Tranche B Lenders shall have no further obligation to make any Tranche B Advance and, subject only to the terms of the Intercreditor Agreement, if any, or the terms of the Collateral Security Documents, they shall have the immediate right to enforce or realize on any Collateral in a commercially reasonable manner in any manner or order they deem expedient without regard to any equitable principles of marshaling or otherwise. Whether such a declaration has been made by Tranche B Required Lenders that the Indebtedness is due and payable following an Event of Default, the Tranche B Required Lenders may terminate the Tranche B Commitment at any time following an Event of Default by notice thereof by Agent to Borrowers. In addition to any rights granted hereunder or in any documents delivered in connection herewith, including without limitation, the Collateral Security Documents, Tranche B Lenders shall have all the rights and remedies granted by any applicable law, all of which shall be cumulative in nature, subject only to the terms of the Intercreditor Agreement, if any, or the terms of the Collateral Security Documents. 1.16 In Section 9.1, the existing paragraph is renumbered as clause "(i)", the phrase in the second line of clause (i) "to Lenders on the basis" is amended to read "in respect of the Loan to the Lenders on the basis" and a new clause (ii) is added to read as follows: (ii) Agent shall apply all payments of principal, interest, commitment fee or other amounts hereunder made to Agent by or on behalf of Borrowers, in respect of the Tranche B Loan to the Tranche B Lenders on the basis of their Tranche B Pro Rata Shares of the outstanding principal balance of the Tranche B Loan, except for (a) the fees payable under Paragraph 2.14 hereof, which shall be paid solely to Agent. Such distribution of payments shall be made promptly in federal funds immediately available at the office of each Lender set forth above. 1.17 In Section 9.2, the existing paragraph is renumbered as clause "(i)" and a new clause (ii) is added to read as follows: (ii) In the event a Tranche B Lender, by exercise of its right of set-off, or otherwise, receives any payment of Indebtedness owing to it, hereunder or otherwise, in an amount greater than its Tranche B Pro Rata Share of such payment based upon the Tranche B Lenders' respective shares of principal Indebtedness outstanding hereunder immediately before such payment, such Tranche B Lender shall purchase a portion of the Indebtedness hereunder owing to each other Tranche B Lenders so that after such purchase each Tranche B Lender shall hold its Tranche B Pro Rata Share of all the Indebtedness then outstanding hereunder, provided that if all or any portion of such excess payment is thereafter recovered from such Tranche B Lender, such purchase shall be rescinded and the purchase price restored to the extent of any such recovery, with each Tranche B Lender paying its Tranche B Pro Rata Share of any interest which the Tranche B Lender from which such recovery is obtained is required to pay. 1.18 In Section 9.3, the existing paragraph is renumbered as clause "(i)" and a new clause (ii) is added to read as follows: (ii) No modification or amendment hereof, consent hereunder or waiver of any Event of Default shall be effective except by written consent of the Tranche B Required Lenders; provided, however, that the written consent of each of the Tranche B Lenders directly affected thereby shall be required to (i) modify, amend, waive, discharge, terminate or suspend compliance with (A) any rate of interest applicable to the Tranche B Loan to the extent it is proposed to be decreased, (B) the amount of the Tranche B Commitment, to the extent it is proposed to be increased, and the Tranche B Lenders' respective shares thereof; (C) the dates or amounts of payment of the Tranche B Loan, (D) the commitment fee set forth in Section 2.1A(l) hereof or other amounts payable by Borrowers in respect of the Tranche B Loan hereunder or dates on which they are paid except if payable solely to the Agent, to the extent any such amount is proposed to be postponed or decreased, (E) the definition of Tranche B Required Lenders, or (F) this clause (ii) of this Paragraph 9.3; or (ii) the release of any Borrower having net equity value in excess of $500,000 or the release of any Collateral valued in excess of $500,000 in the aggregate in any calendar year other than in the ordinary course of business. 1.19 In Section 9.4, the existing paragraph is renumbered as clause "(i)" and a new clause (ii) is added to read as follows: (ii) The obligations of the Tranche B Lenders hereunder are several, and each Tranche B Lender hereunder shall not be responsible for the obligations of the other Tranche B Lenders hereunder, nor will the failure of one Tranche B Lender to perform any of its obligations hereunder relieve the other Tranche B Lenders from the performance of their respective obligations hereunder. 1.20 The provisions of Sections 9.5 through 9.18, and all of the provisions of Section 10, shall apply with equal effect to the Tranche B Lenders and the Tranche B Loan. 1.21 Section 10.2 is amended to read as follows: 10.2 Participations and Assignments. (a) Each Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Loans, its Notes, and its Commitment); provided, however, that (i) each such assignment shall be to an Eligible Assignee; (ii) except in the case of an assignment to another Lender, an Affiliate of an existing Lender or any fund that invests in bank loans and is advised or managed by an investment advisor to an existing Lender or an assignment of all of a Lender's rights and obligations under this Credit Agreement, any such partial assignment shall be in an amount at least equal to $5,000,000 (or, if less, the remaining amount of the Commitment being assigned by such Lender) or an integral multiple of $1,000,000 in excess thereof; (iii) any such assignment shall be of a constant, not varying, percentage of (A) all of the Obligations and Commitments hereunder and (B) all of the Tranche B Loans and Tranche B Commitments hereunder; and (iv) the parties to such assignment shall execute and deliver to the Agent for its acceptance an Assignment and Acceptance in the form of Exhibit K hereto, together with any Note subject to such assignment and a processing fee of $3,500. Upon execution, delivery, and acceptance of such Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of such assignment, have the obligations, rights, and benefits of a Lender hereunder and the assigning Lender shall, to the extent of such assignment, relinquish its rights and be released from its obligations under this Credit Agreement. Upon the consummation of any assignment pursuant to this Section 10.2(a), the assignor, the Agent and the Borrowers shall make appropriate arrangements so that, if required, new Notes are issued to the assignor and the assignee. If the assignee is not a United States person under Section 7701(a)(30) of the Code, it shall deliver to the Borrower, the Guarantors and the Agent certification as to exemption from deduction or withholding of Taxes. (b) The Agent shall maintain a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Credit Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. Any assignment of any Loan or other obligations shall be effective only upon an entry with respect thereto being made in the Register. (c) Upon its receipt of an Assignment and Acceptance executed by the parties thereto, together with any Note subject to such assignment and payment of the processing fee, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit K hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the parties thereto. (d) Each Lender may sell participations to one or more Persons in all or a portion of its rights, obligations or rights and obligations under this Credit Agreement (including all or a portion of its Commitment or its Loans); provided, however, that (i) such Lender's obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participant shall be entitled to the benefit of the yield protection provisions contained in Section 2.10, Section 2.16 and Section 2.17, and the right of set-off contained in Section 7, and (iv) the Borrowers shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Credit Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrowers relating to the Loans and other obligations owing to such Lender and to approve any amendment, modification, or waiver of any provision of this Credit Agreement (other than amendments, modifications, or waivers decreasing the amount of principal of or the rate at which interest is payable on such Loans or Notes, extending any scheduled principal payment date or date fixed for the payment of interest on such Loans or Notes, or extending its Commitment). (e) Notwithstanding any other provision set forth in this Credit Agreement, any Lender may at any time assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. (f) Any Lender may furnish any information concerning the members of the Consolidated Group in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 10.2 hereof. 1.22 Schedule 2 to the Credit Agreement is (i) updated to reflect updated information regarding the Lenders, their respective Maximum Principal Amounts and Percentages of Commitment, and (ii) amended and restated to include the Tranche B Lenders, their respective Maximum Tranche B Principal Amounts and Percentages of Tranche B Commitment, as attached. 1.23 The Borrowers will, in consideration of the establishment of the Tranche B Commitment hereby, permanently terminate commitments under the Lease Financing Facility in an aggregate amount equal to the aggregate Tranche B Commitment promptly upon the effectiveness of this Amendment and establishment of the Tranche B Commitment hereunder. 1.24 The Lenders, by action of the Required Lenders, acknowledge and consent to the terms of, and authorize and direct the Agent to take appropriate action to enter into, the Security Agreement and the First Amendment to Pledge Agreement, forms of which have been provided to the Lenders. 1.25 The Borrowers covenant and agree that they will deliver Mortgages on those property locations agreed upon with the Agent and the Required Lenders (i) within 45 days of the date hereof, in the case of unencumbered properties, and (ii) within 90 days of the date hereof, in the case of encumbered properties, together with, in each case certificates of insurance evidencing flood hazard insurance (for improvements located in areas having "special flood hazards"), casualty insurance (including builders' risk and all-risk permanent policies) and liability conforming to the requirements of this Credit Agreement and the other Credit Documents, showing the Agent as sole loss payee with respect to the flood hazard and casualty insurance and as additional insured with respect to liability insurance, together with evidence of payment of premiums thereon. Failure to provide the Mortgages and related items in a timely manner will constitute an Event of Default under the Credit Agreement. 2. This Amendment shall be effective upon satisfaction of the following conditions: (a) execution of this Amendment by the Borrowers and the Required Lenders; (b) Receipt of the entire amount of the Tranche B Commitments and execution of this Amendment by all of the Tranche B Lenders and delivery of executed Tranche B Notes; (c) receipt by the Agent of corporate resolutions, incumbency certificates, corporate documents and legal opinions in form and substance reasonably satisfactory to the Agent and the Required Lenders; (d) receipt by the Agent of the Security Agreement, the First Amendment to Pledge Agreement and UCC financing statements relating thereto, in each case duly executed by the Borrowers; (e) receipt by the Agent of certificates of insurance on personal property; (f) receipt by the Agent of (i) a waiver fee of twelve and one-half basis points (0.125%) on the Commitments of the Lenders consenting to the Waiver dated May 15, 1999 and an amendment fee of thirty-seven and one- half basis points (0.375%) on the Commitments of Lenders consenting to this Amendment, and (ii) a commitment fee of thirty-seven and one-half basis points (0.375%) on the Tranche B Commitments of the Tranche B Lenders; and (g) receipt by the Agent if a copy of the executed Amendment to the Lease Financing Facility providing, among other things, for the scheduled annual escrow payments, and evidence of payment to the lenders and holders thereunder of a waiver fee of twelve and one-half basis points (0.125%) on the Commitments thereunder (after giving effect to the reduction of commitments contemplated in Section 1.24 hereof) and an amendment fee of thirty-seven and one-half basis points (0.375%) on the commitments thereunder (after giving effect to the reduction of commitments contemplated in Section 1.24 hereof). 3. Except as modified hereby, all of the terms and provisions of the Credit Agreement (including Schedules and Exhibits) shall remain in full force and effect. 4. The Borrowers agree to pay all reasonable costs and expenses of the Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen, PLLC. 5. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 6. This Amendment shall be deemed to be a contract made under, and for all purposes shall be construed in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment No. 3 to be duly executed and delivered as of the date first above written. CENTENNIAL HEALTHCARE TRANSITIONAL FINANCIAL SERVICES, INC. CORPORATION PARAGON REHABILITATION, INC. CENTENNIAL/ASHTON PROPERTIES THS PARTNERS I, INC. CORPORATION THS PARTNERS II, INC. CENTENNIAL HEALTHCARE TRANSITIONAL HEALTH PARTNERS PROPERTIES CORPORATION BY: THS PARTNERS I, INC. and THS CENTENNIAL HEALTHCARE PARTNERS II, INC., its general partners MANAGEMENT CORPORATION PARKVIEW PARTNERSHIP CENTENNIAL ACQUISITION BY: THS PARTNERS I, INC. and THS CORPORATION PARTNERS II, INC., its general partners CENTENNIAL PROFESSIONAL TOTAL CARE CONSOLIDATED, INC. THERAPY SERVICES CORPORATION TOTAL CARE, INC. CENTENNIAL HEALTHCARE TOTAL HEALTH CARE SERVICES, INC. INVESTMENT CORPORATION TOTAL CARE OF THE CAROLINAS, INC. CENTENNIAL HEALTHCARE HOSPITAL HCC HOME HEALTH OF LOUISIANA, INC. CORPORATION TRANSITIONAL HEALTH SERVICES, INC. Attest: By:/s/ Daryl Griswold By:/s/ Alan C. Dahl Name: Daryl Griswold Name: Alan C. Dahl Title:Asst. Secretary Title: EVP FIRST UNION NATIONAL BANK, for itself and as Agent By:/s/ J. Matt Maclver Name:J. Matt Maclver, Jr. Title:Vice President NATIONSBANK, N.A., for itself and as Syndication Agent By:/s/J. Walter Bland Name:J. Walter Bland Title:Vice President AMSOUTH BANK By:/s/ J. Ken Difatta Name:J. Ken Difatta Title:Asst. Vice President CREDIT LYONNAIS NEW YORK BRANCH By:/s/ Farhood Tavanqar Name:Farhood Tavanqar Title:Senior Vice President NATIONAL CITY BANK OF KENTUCKY By:/s/ Roderic M. Brown Name:Roderic M. Brown Title:Vice President WACHOVIA BANK, N.A. By:/s/ Gary C.Gaskill Name:Gary C Gaskill Title:Vice President SCOTIABANK INC. By:/s/ Carolyn A. Calloway Name:Carolyn A. Calloway Title:Relationship Manager COMERICA BANK By:/s/ Craig F. Durno Name:Craig F. Durno Title:Asst. V.P. Schedule 2 Schedule of Lenders and respective Maximum Principal Amounts and Percentages of Commitments Existing Commitments Tranche B Commitments Maximum Maximum Tranche B Principal Amount Percent Principal Amount Percent NationsBank, N.A. $15,750,000 17.50% $1,174,062.50 21.81% Atlanta Plaza Building 600 Peachtree Street NE GA1-006-19-22 Atlanta, GA 30303 Attn: Melinda Bergbom Tel: (404) 607-4761 Fax: (404) 607-6343 First Union National Bank $15,750,000 17.50% $1,174,062.50 21.81% 301 South College Street One First Union Center, TW-5 Charlotte, NC 28288 Attn: Matt MacIver Tel: (704) 374-4187 Fax: (704) 383-9144 AmSouth Bank $11,250,000 12.50% $812,500.00 15.10% 1900 Fifth Avenue North SONAT - 7th Floor Birmingham, AL 35203 Attn: Ken DiFatta Tel: (205) 801-0103 Fax: (205) 326-4790 Credit Lyonnais $11,250,000 12.50% $788,125.00 14.64% 1301 Avenue of the Americas New York, NY 10019-6022 Attn: Marty Golden / Henry Reukauf Tel: (212) 261-7791 (Mr. Golden) Fax: (212) 261-3440 RaboBank $9,000,000 10.00% $0 0% 1201 West Peachtree Street Suite 3450 Atlanta, GA 30309-3450 Attn: Terrell Boyle Tel: (404) 877-9106 Fax: (404) 877-9150 Comerica Bank $6,750,000 7.50% $472,875.00 8.79% 500 Woodward Avenue 9th Floor Detroit, MI 48226 Attn: Craig Durno Tel: (313) 222-7542 Fax: (313) 222-3420 National City Bank of $6,750,000 7.50% $472,875.00 8.79% Kentucky 101 South Fifth Street Louisville, KY 40202 Attn: Roderic M. Brown Tel: (502) 581-4369 Fax: (502) 581-4424 Scotiabanc Inc. $6,750,000 7.50% $487,500.00 9.06% 600 Peachtree Street, N.E. Suite 2700 Atlanta, GA 30308 Attn: Carolyn Calloway Tel: (404) 877-1507 Fax: (404) 888-8998 Wachovia Bank, N.A. $6,750,000 7.50% $0 .0% MC: GA212 191 Peachtree Street NE Atlanta, GA 30303-1757 Attn: Gary Gaskill Tel: (404) 332-6519 Fax: (404) 332-6920 ------------- -------- ------------ --------- TOTAL $90,000,000 100.00% $5,382,000.00 100.00% EX-10.2 3 THIRD AMEND TO THE CERTAIN OPERATIVE AGREEMENTS THIRD AMENDMENT TO CERTAIN OPERATIVE AGREEMENTS THIS THIRD AMENDMENT TO CERTAIN OPERATIVE AGREEMENTS (this "Amendment") dated as of May 28, 1999 is by and among CENTENNIAL HEALTHCARE CORPORATION, a Georgia corporation (the "Lessee" or the "Construction Agent"); the various parties listed on the signature pages hereto as guarantors (subject to the definition of Guarantors in Appendix A to the Participation Agreement referenced below, individually, a "Guarantor" and collectively, the "Guarantors"); FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually but solely as the Owner Trustee under the Centennial Real Estate Trust 1998-1 (the "Owner Trustee" or the "Lessor"); the various banks and other lending institutions listed on the signature pages hereto as holders of certificates issued with respect to the Centennial Real Estate Trust 1998-1 (subject to the definition of Holders in Appendix A to the Participation Agreement referenced below, individually, a "Holder" and collectively, the "Holders"); the various banks and other lending institutions listed on the signature pages hereto as lenders with respect to the Centennial Real Estate Trust 1998-1 (subject to the definition of Lenders in Appendix A to the Participation Agreement referenced below, individually, a "Lender" and collectively, the "Lenders"); FIRST UNION CAPITAL MARKETS, A DIVISION OF WHEAT FIRST SECURITIES, INC., a Virginia corporation, as syndication agent (the "Syndication Agent"); and NATIONSBANK, N.A., a national banking association, as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests Page 1 (in such capacity, the "Agent"). Capitalized terms used in this Amendment but not otherwise defined herein shall have the meanings set forth in Appendix A to the Participation Agreement (hereinafter defined). W I T N E S S E T H WHEREAS, the parties to this Amendment are parties to that certain Participation Agreement dated as of July 29, 1998 (as amended, modified, supplemented, restated and/or replaced from time to time, the "Participation Agreement"), certain of the parties to this Amendment are parties to that certain Credit Agreement dated as of July 29, 1998 (as amended, modified, supplemented, restated and/or replaced from time to time, the "Credit Agreement"), certain of the parties to this Amendment are parties to that certain Trust Agreement dated as of July 29, 1998 (as amended, modified, supplemented, restated and/or replaced from time to time, the "Trust Agreement"), certain of the parties to this Amendment are parties to that certain Security Agreement dated as of July 29, 1998 (as amended, modified, supplemented, restated and/or replaced from time to time, the "Security Agreement"), certain of the parties to this Amendment are parties to that certain First Amendment to Certain Operative Agreements dated as of October 23, 1998 (as amended, modified, supplemented, restated and/or replaced from time to time, the "First Amendment"), certain of the parties to this Amendment are parties to that certain Second Amendment to Certain Operative Agreements dated as of December 30, 1998 (as amended, modified, supplemented, restated and/or replaced from time to time, the "Second Amendment"), and certain of the parties to this Amendment are parties to the other Operative Agreements relating to a $135,000,000.00 synthetic lease facility (the "Facility") that has been established in favor of the Lessee; Page 2 WHEREAS, the Lessee has requested certain modifications to the Participation Agreement, the Credit Agreement, the Lease Agreement, the Security Agreement, the Trust Agreement and the other Operative Agreements in connection with the Facility; WHEREAS, the Financing Parties which are signatories hereto have agreed to the requested modifications on the terms and conditions set forth herein; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Participation Agreement. The Participation Agreement is amended as follows. (a) Section 8.7(a) is deleted in its entirety and replaced with the following: "(a) Each Credit Party has agreed pursuant to Section 5.8 and otherwise in accordance with the terms of this Agreement to pay to (i) the Agent any and all Rent and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to any Person (excluding Excepted Payments) and (ii) each Person as appropriate the Excepted Payments. Promptly after receipt, the Agent shall apply and allocate, in accordance with the terms of this Section 8.7, such amounts received from any Credit Party and all other payments, receipts and other consideration of any kind whatsoever received by the Agent pursuant to the Security Agreement or otherwise received by the Agent, the Holders or any of the Lenders in connection with the Collateral, the Security Documents or any of the other Operative Agreements. Ratable distributions among the Lenders and the Holders under this Section 8.7 shall be made based Page 3 on (in the case of the Lenders) the ratio of the outstanding Loans to the aggregate Property Cost and (in the case of the Holders) the ratio of the outstanding Holder Advances to the aggregate Property Cost. Ratable distributions among the Tranche A Lenders under this Section 8.7 shall be made based on the ratio of the individual Tranche A Lender's outstanding Tranche A Loans to the aggregate of all the outstanding Tranche A Loans. Ratable distributions among the Tranche B Lenders under this Section 8.7 shall be made based on the ratio of the individual Tranche B Lender's outstanding Tranche B Loans to the aggregate of all the Tranche B Loans. Ratable distributions among the Lenders (in situations where the Tranche A Lenders are not differentiated from the Tranche B Lenders) shall be made based on the ratio of the individual Lender's outstanding Loans to the aggregate of all the Lenders' outstanding Loans. Ratable distributions among the Holders under this Section 8.7 shall be based on the ratio of the individual Holder's Holder Amount to the aggregate of all the Holder Amounts." (b) Section 8.7(b)(iv) is deleted in its entirety and replaced with the following: "(iv)Subject to Section 8.7(c), an amount equal to (A) any such payment identified as a payment pursuant to Section 22.1(b) of the Lease (or otherwise) of the Maximum Residual Guarantee Amount (and any such lesser amount as may be required by Section 22.1(b) of the Lease) in respect of the Properties, (B) any other amount payable upon any exercise of remedies after the occurrence of an Event of Default not covered by Sections 8.7(b)(i) or 8.7(b)(iii) above (including without limitation any amount received in connection Page 4 with an Acceleration which does not represent proceeds from the sale or liquidation of the Properties), (C) any other amount payable by any Guarantor pursuant to Section 6B and (D) any other amount that is a Cash Collateral Payment shall be applied and allocated by the Agent first, ratably, to the payment of the principal and interest balance of Tranche A Loans then outstanding, second, ratably to the payment of the principal and interest balance of the Tranche B Loans then outstanding, third, ratably to the payment of the principal balance of all Holder Advances plus all outstanding Holder Yield with respect to such outstanding Holder Advances, fourth, to the payment of any other amounts owing to the Lenders hereunder or under any of the other Operative Agreement, and fifth, to the extent moneys remain after application and allocation pursuant to clauses first through fourth above, to the Owner Trustee for application and allocation to Holder Advances and Holder Yield and any other amounts owing to the Holders or the Owner Trustee as the Holders shall determine." (c) Section 8.9 is added to the Participation Agreement as follows: "8.9.Collateralized Principal Payment Account. The Lessee shall as of each date listed below make a deposit into a cash collateral account (a "Cash Collateral Account") (to be created on terms and conditions reasonably satisfactory to the Agent). All deposits shall be immediately available funds in United States Dollars. The Agent shall be entitled to draw on any and all amounts in the Cash Collateral Account and apply such amounts in accordance with the terms of the Page 5 Operative Agreements upon the occurrence and during the continuation of any Event of Default and upon any election of the Sale Option by the Lessee with respect to which (a) there is any Deficiency Balance and/or (b) Lessor has retained any Property in accordance with the second sentence of the second paragraph of Section 22.1(a) of the Lease. Date Amount December 31, 2000 $5,000,000.00 December 31, 2001 $10,000,000.00 December 31, 2002 $10,000,000.00 The Agent shall invest all such amounts held in the Cash Collateral Account in Permitted Investments at the direction of the Lessee. Any and all gains from such amounts in Permitted Investments shall remain in the Cash Collateral Account as additional amounts, but such gains shall not affect the amounts to be deposited by the Lessee as set forth above. In the event there is a loss regarding such amounts in Permitted Investments that causes the total amount in the Cash Collateral Account to be less than the aggregate of the deposits paid or scheduled to be paid on or prior to such date, then the Lessee shall, upon notice from the Agent, promptly deposit an amount equal to the deficit of the funds in the Cash Collateral Amount minus the aggregate of the deposits paid or scheduled to be paid on or prior to such date." (d) Section 10.1 of the Participation Agreement is amended by adding the following after the first sentence of Section 10.1: "(As an example, if a Lender holds under the Lessee Page 6 Credit Agreement, a commitment percentage of 12.5% of each facility thereunder and under the Credit Agreement a commitment percentage of 12.0% regarding each of the Tranche A Commitments and the Tranche B Commitments and if such Lender desires to sell an assignment of 20.0% of its interests under the Lessee Credit Agreement and the Credit Agreement, then such Lender shall sell under the Lessee Credit Agreement an interest of 2.5% of all available commitments and of all outstandings thereunder, assuming all other requirements are met thereunder, and under the Credit Agreement an interest of 2.4% of all of the Available Commitments for Tranche A Loans and all outstanding Tranche A Loans and an interest of 2.4% of all of the Available Commitments for Tranche B Loans and all outstanding Tranche B Loans.)" (e) Appendix A to the Participation Agreement shall be amended in the following respects: (i) The following definitions shall be added in the appropriate alphabetical order: ""Cash Collateral Account" shall have the meaning set forth therefore in Section 8.9 of the Participation Agreement."; ""Cash Collateral Payment" shall mean any payment to the Agent made from the deposits or proceeds of such deposits in the Cash Collateral Account." and ""Permitted Investments" shall mean any one or more of the following types of investments: (a) marketable obligations of the United States, the full and timely payment of which are backed by the full faith and Page 7 credit of the United States of America and that have a maturity of not more than 270 days from the date of acquisition; (b) marketable obligations, the full and timely payment of which are directly and fully guaranteed by the full faith and credit of the United States and that have a maturity of not more than 270 days from the date of acquisition; (c) bankers' acceptances and certificates of deposit and other interest-bearing obligations (in each case having a maturity of not more than 270 days from the date of acquisition) denominated in dollars and issued by any bank with capital, surplus and undivided profits aggregating at least $100,000,000, the short-term obligations of which are rated of least A-1 by S&P and P-1 by Moody's; (d) repurchase obligations with a term of not more than ten days for underlying securities of the types described in clauses (a), (b) and (c) above entered into with any bank of the type described in clause (c) above; (e) commercial paper rated at least A-1 by S&P and P-1 by Moody's; and, (f) demand deposits, time deposits or certificates of deposit (having original maturities of no more than 365 days) of depository institutions or trust companies incorporated under the laws of the United States of America or any state thereof (or domestic branches of any foreign bank) and subject to supervision and examination by federal or state banking or depository institution authorities; provided, however that at Page 8 the time such investment, or the commitment to make such investment, is entered into, the short-term debt rating of such depository institution or trust company shall be at least A-1 by S&P and P-1 by Moody's." (ii) The definition of "Holder Commitments" is amended by deleting it in its entirety and replacing it with the following: ""Holder Commitments" shall mean the aggregate committed amount set forth in Schedule I to the Trust Agreement as such Schedule I may be amended and replaced from time to time in accordance with the provisions of the Operative Agreements; the Holder Commitment of each Holder shall be as set forth in Schedule I to the Trust Agreement as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements." (iii) The definition of "Lender Commitments" is amended by deleting it in its entirety and replacing it with the following: ""Lender Commitments" shall mean the aggregate committed amount set forth in Schedule 1.1 to the Credit Agreement as such Schedule 1.1 may be amended and replaced from time to time in accordance with the provisions of the Operative Agreements; the Lender Commitment of each Lender shall be as set forth in Schedule 1.1 to the Credit Agreement as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements." Page 9 (iv) The definition of "Maximum Residual Guarantee Amount" is amended by deleting it in its entirety and replacing it with the following" ""Maximum Residual Guarantee Amount" shall mean an amount equal to the product of the aggregate Property Cost for all Properties multiplied by eighty-six (86%)." 2. Credit Agreement. Pursuant to Section 9.1(b) of the Participation Agreement and Section 2.5(a) of the Credit Agreement (except as noted below), the Lessee (on behalf of the Owner Trustee) hereby elects to reduce the Tranche A Commitments by $5,720,000 and to reduce the Tranche B Commitments by $585,000. With regard to such election by the Lessee, Schedule 1.1 to the Credit Agreement is deleted in its entirety and replaced by the following and the parties to the Amendment agree to the terms of this Section 2 notwithstanding the provisions of Section 2.5(a) of the Credit Agreement which require reductions in Lender Commitments to be in even multiples of $1,000,000: Schedule 1.1 A. LENDER COMMITMENTS EXCLUDING THE FLATLEY COMMITMENT AVAILABLE FOR LOANS Tranche A Tranche B Commitment Commitment Name and Address of Amount Percentage Amount Percentage Lenders First Union National Bank $9,779,000 17.500000% $1,000,125 17.500000% 301 South College Street Charlotte, North Carolina 28288 Attn.: Matt MacIver Telephone: (704) 374-4187 Facsimile: (704) 383-9144 Page 10 NationsBank, N.A. $9,779,000 17.500000% $1,000,125 17.500000% Atlanta Plaza Building 600 Peachtree Street, NE, 19th Floor Atlanta, Georgia 30308 Attn.: J. Walter Bland Telephone: (404) 607-5861 Facsimile: (404) 607-6338 AmSouth Bank $6,985,000 12.500000% $714,375 12.500000% SONAT - 7th Floor 1900 Fifth Avenue, North Birmingham, Alabama 35203 Attn.: Ken DiFatta Telephone: (205) 801-0103 Facsimile: (205) 326-4790 Credit Lyonnais New York $6,985,000 12.500000% $714,375 12.500000% Branch 1301 Avenue of the Americas New York, New York 10019-6022 Attn.: Henry Reukauf Telephone: (212) 261-7791 Facsimile: (212) 261-3440 RaboBank Nederland New $5,588,000 10.00000% $571,500 10.00000% York Branch 245 Park Avenue, 37th Floor New York, New York 10167 Attn.: Corporate Services Telephone: (212) 916-7800 Facsimile: (212) 888-0233 Comerica Bank $4,191,000 7.500000% $428,625 7.500000% 500 Woodward Avenue, 9th Floor Detroit, Michigan 48226 Attn.: Manager, Health Education Group Telephone: (313) 222-7542 Facsimile: (313) 222-3420 Page 11 National City Bank of $4,191,000 7.500000% $428,625 7.500000% Kentucky 101 South 5th Street, 8th Floor Louisville, Kentucky 40202 Attn.: Roderic Brown Telephone: (502) 581-4369 Facsimile: (502) 581-4424 Wachovia, N.A. $4,191,000 7.500000% $428,625 7.500000% 191 Peachtree Street, 30th Floor Atlanta, Georgia 30303 Attn.: Gary Gaskill Telephone: (404) 332-6519 Facsimile: (404) 332-6920) Scotiabanc, Inc. $4,191,000 7.500000% $428,625 7.500000% 600 Peachtree Street, Suite 2700 Atlanta, Georgia 30308 Attn.: Carolyn Calloway Telephone: (404) 877-1507 Facsimile: (404) 888-0998 TOTAL *$55,880,000 100.000000% *5,715,000 100.000000% - -------------- * As such amounts and percentages may be reduced from time to time in accordance with the provisions of the Operative Agreements. B. LENDER COMMITMENTS CONSTITUTING THE FLATLEY COMMITMENT AVAILABLE FOR LOANS Tranche A Tranche B Commitment Commitment Name and Address of Amount Percentage Amount Percentage Lenders First Union National $27,950,000 50.000000% $3,575,000 50.000000% Bank 301 South College Street Charlotte, North Carolina 28288 Attn.: Matt MacIver Telephone: (704) 374-4187 Facsimile: (704) 383-9144 Page 12 NationsBank, N.A. $27,950,000 50.000000% $3,575,000 50.000000% Atlanta Plaza Building 600 Peachtree Street, NE, 19th Floor Atlanta, Georgia 30308 Attn.: J. Walter Bland Telephone:(404)-607-5861 Facsimile:(404)-607-6338 TOTAL $55,900,000 100.000000% $7,150,000 100.000000% [The aggregate Lender Commitment (including without limitation the Flatley Commitment available for Loans) equals $124,645,000.] 3. Lease Agreement. Section 17.1 of the Lease Agreement is amended by adding subsection 17.1(w) as follows: "(w) Lessee shall fail to make a deposit into the Cash Collateral Account in accordance with Section 8.9 of the Participation Agreement within three (3) days after the same has become due;". 4. Security Agreement. The Security Agreement is amended as follows. (a) The first paragraph of the Preliminary Statement in the Security Agreement is amended in the following respects: (i) The reference to "$130,950,000" is amended by deleting such reference and replacing it with a reference to "the aggregate Lender Commitments from time to time" and (ii) The reference to "$4,050,000" is amended by deleting such reference and replacing it with a reference to "the aggregate Holder Commitments from time to time". Page 13 (b) Section 2 of the Security Agreement is amended by (i) deleting the subsection heading "(p)" and replacing it with a subsection heading "(q)", (ii) deleting the "; and" from subsection "(o)" and replacing it with ";" and (iii) adding the following as subsection (p): "(p) all right, title and interest of the Borrower in and to the Cash Collateral Account; and". 5. Trust Agreement. The amended Schedule I to the Trust Agreement referenced below evidences a reduction of $195,000 in the Holder Commitments (excluding the Flatley Commitment available for Holder Advances). Schedule I to the Trust Agreement is amended by deleting it in its entirety and replacing it with the following and the Holders executing this Amendment agree to the terms of this Section 5: SCHEDULE I HOLDER COMMITMENTS A. HOLDER COMMITMENTS EXCLUDING THE FLATLEY COMMITMENT AVAILABLE FOR HOLDER ADVANCES Holder Commitment Name of Holder Amount Percentage FIRST UNION NATIONAL BANK $690,562.50 36.250000% 301 South College Street Charlotte, North Carolina 28288 Attn.: Matt MacIver Telephone: (704) 374-4187 Facsimile: (704) 383-9144 NATIONSBANK, N.A. $690,562.50 36.250000% Atlanta Plaza Building 600 Peachtree Street, NE, 17th Floor Atlanta, Georgia 30308 Attn.:J. Walter Bland Telephone: (404) 607-5861 Facsimile: (404) 607-6338 AMSOUTH BANK $238,125.00 12.500000% SONAT - 7th Floor 1900 Fifth Avenue, North Birmingham, Alabama 35203 Attn.: Ken DiFatta Telephone: (205) 801-0103 Facsimile: (205) 326-4790 Page 14 WACHOVIA BANK, N.A. $142,875.00 7.500000% 191 Peachtree Street, 30th Floor Atlanta, Georgia 30303 Attn.: Gary Gaskill Telephone: (404) 332-6519 Facsimile: (404) 332-6920 SCOTIABANC INC. $142,875.00 7.500000% 600 Peachtree Street, Suite 2700 Atlanta, Georgia 30308 Attn.: Carolyn Calloway Telephone: (404) 877-1507 Facsimile: (404) 888-0998 TOTAL $1,905,000. *100.000000% - ---------------- *As such amounts and percentages may be reduced from time to time in accordance with the provisions of the Operative Agreements." B. HOLDER COMMITMENTS CONSTITUTING THE FLATLEY COMMITMENT AVAILABLE FOR HOLDER ADVANCES Holder Commitment Name of Holder Amount Percentage First Union National Bank $975,000 50.000000% 301 South College Street Charlotte, North Carolina 28288 Attn.: Matt MacIver Telephone: (704) 374-4187 Facsimile: (704) 383-9144 NationsBank, N.A. $975,000 50.000000% Atlanta Plaza Building 600 Peachtree Street, NE, 19th Floor Atlanta, Georgia 30308 Attn.: J. Walter Bland Telephone: (404) 607-5861 Facsimile: (404) 607-6338 TOTAL $1,950,000 100.000000% Page 15 [The aggregate Holder Commitment (including without limitation the Flatley Commitment available for Holder Advances) equals $3,855,000.] 6. Conditions Precedent. This Amendment shall be effective as of May 28, 1999 upon satisfaction of the following conditions: (a) execution of this Amendment by the Credit Parties, the Agent and the Majority Secured Parties; (b) receipt by the Agent of legal opinions of counsel to the Credit Parties relating to this Amendment and resolutions from the board of directors of each of the Credit Parties authorizing the provisions of this Amendment, in each case in form and substance reasonably satisfactory to the Agent; (c) receipt by the Agent of a waiver fee of twelve and one-half basis points (0.125%) on the Commitments (as such have been adjusted pursuant to this Amendment) such waiver fee is payable pro rata to the Lenders and Holders providing the Commitments; and (d) receipt by the Agent of an amendment fee of thirty-seven and one- half basis points (0.375%) on the Commitments (as such have been adjusted pursuant to this Amendment) payable pro rata to the Lenders and Holders providing the Commitments to the extent, but only to the extent, such Lender and Holders have executed this Amendment. 7. Amendment to UCC Financing Statements. The Lessee shall cause each and every UCC Financing Statement filed to be amended to include the Cash Collateral Account as Collateral set forth in the UCC Financing Statements (unless the Agent determines that any one or more such UCC Financing Statements does not require such an amendment) and Lessee shall cause the amended UCC Financing Statements to be filed in the appropriate jurisdiction by June 15, 1999. Page 16 8. Costs and Expenses. The Lessee agrees to pay all reasonable costs and expenses of the Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen, PLLC. 9. Counterparts. This Amendment may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 10. Continued Effectiveness of Operative Agreements. Except as modified hereby, all of the terms and conditions of the Operative Agreements shall remain in full force and effect. 11. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of North Carolina. [The remainder of this page has been intentionally left blank.] Page 17 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed and delivered as of the date first above written. CONSTRUCTION AGENT AND LESSEE: CENTENNIAL HEALTHCARE CORPORATION, as the Construction Agent and as the Lessee By: /s/Alan Dahl Name:Alan Dahl Title:EVP GUARANTORS: CENTENNIAL/ASHTON PROPERTIES CORPORATION, a Georgia corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP CENTENNIAL HEALTHCARE PROPERTIES CORPORATION, a Georgia corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP CENTENNIAL HEALTHCARE MANAGEMENT CORPORATION, a Georgia corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP CENTENNIAL ACQUISITION CORPORATION, a Georgia corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP CENTENNIAL PROFESSIONAL THERAPY SERVICES CORPORATION, a Georgia corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP Page 18 CENTENNIAL HEALTHCARE INVESTMENT CORPORATION, a Georgia corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP CENTENNIAL HEALTHCARE HOSPITAL CORPORATION, a Georgia corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP TRANSITIONAL HEALTH SERVICES, INC., a Delaware corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP TRANSITIONAL FINANCIAL SERVICES, INC., a Delaware corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP PARAGON REHABILITATION, INC., a Delaware corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP THS PARTNERS I, INC., a Delaware corporation Page 19 By:/s/Alan Dahl Name:Alan Dahl Title:EVP THS PARTNERS II, INC., a Delaware corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP TRANSITIONAL HEALTH PARTNERS d/b/a TRANSITIONAL HEALTH SERVICES, a Delaware general partnership By: THS PARTNERS I, INC., its general partner By:/s/Alan Dahl Name:Alan Dahl Title:EVP By: THS PARTNERS II, INC., its general partner By:/s/Alan Dahl Name:Alan Dahl Title:EVP PARKVIEW PARTNERSHIP, a Delaware general partnership By: THS PARTNERS I, INC., its general partner By:/s/Alan Dahl Name:Alan Dahl Title:EVP By: THS PARTNERS II, INC., its general partner By:/s/Alan Dahl Name:Alan Dahl Title:EVP Page 20 TOTAL CARE CONSOLIDATED, INC., a North Carolina corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP TOTAL CARE, INC., a North Carolina corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP TOTAL HEALTH CARE SERVICES, INC., a North Carolina corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP TOTAL CARE OF THE CAROLINAS, INC., a North Carolina corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP HCC HOME HEALTH OF LOUISIANA, INC., a Louisiana corporation By:/s/Alan Dahl Name:Alan Dahl Title:EVP OWNER TRUSTEE AND LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee Page 21 under the Centennial Real Estate Trust 1998-1 By:/s/ Val T. Orton Name:Val T. Orton Title:V.P. SYNDICATION AGENT: FIRST UNION CAPITAL MARKETS, A DIVISION OF WHEAT FIRST SECURITIES, INC., as the Syndication Agent By:/s/ Matt McIver Name:Matt McIver Jr. Title:V.P. AGENT AND LENDERS: NATIONSBANK, N.A., as an Agent and as a Lender By:/s/ J. Walter Bland Name:J. Walter Bland Title:SR. V.P. FIRST UNION NATIONAL BANK, as a Lender By:/s/ Matt McIver Name:J. Matt McIver Jr. Title:V.P. AMSOUTH BANK, as a Lender By:/s/ J/ Ken Diafata Name:Asst. V.P. Title: CREDIT LYONNAIS NEW YORK BRANCH, as a Lender Page 22 By:/s/Martin Golden Name:Martin Golden Title:V.P. COOPERATIVE CENTRALE RAIFFEISEN-BOERENLEENBANK, B.A. "RABOBANK NEDERLAND", NEW YORK BRANCH, as a Lender By: COMERICA BANK, as a Lender By:/s/ Craig Durno Name:Craig Durno Title:Asst. V.P. NATIONAL CITY BANK OF KENTUCKY, as a Lender By:/s/Roderic M. Brown Name:Roderic M. Brown Title:V.P. WACHOVIA BANK, N.A., as a Lender By:/s/ Gary Gaskill Name:Gary Gaskill Title:V.P. SCOTIABANC INC., as a Lender By:/s/ Carolyn A. Calloway Name:Carolyn A. Calloway Title:Relationship Manager Page 23 HOLDERS: FIRST UNION NATIONAL BANK, as a Holder By:/s/ J. Matt McIver Name:J. Matt McIver Title:V.P NATIONSBANK, N.A., as a Holder By:/s/ J. Walter Bland Name:J. Walter Bland Title:Sr. V.P. AMSOUTH BANK, as a Holder By:/s/ J. Ken Diafata Name:J. Ken Diafata Title:Asst. V.P. WACHOVIA BANK, N.A., as a Holder By:/s/ Gary C. Gaskill Name:Gary C. Gaskill Title:V.P. SCOTIABANC INC., as a Holder By:/s/ Carolyn A. Calloway Name:Carolyn A. Calloway Title:Relationship Manager Page 24 Receipt of the original counterpart of the foregoing Amendment is hereby acknowledged on this ___ day of _____, 1999. 1 NATIONSBANK, N.A., as Agent By: Name: Title: Page 25 EX-10.3 4 SECURITY AGREEMENT DATED MAY 28, 1999 SECURITY AGREEMENT SECURITY AGREEMENT dated as of May 28, 1999 (as amended and modified, the "Security Agreement" or this "Agreement") by and among CENTENNIAL HEALTHCARE ------------------ --------- CORPORATION, a Georgia corporation (the "Company"), the subsidiaries of the ------- Company that are identified on the signature pages attached hereto (the "Subsidiaries" and collectively with the Company, the "Credit Parties"), and - ------------- -------------- FIRST UNION NATIONAL BANK, as agent (in such capacity, the "Administrative -------------- Agent" or "Agent") for the Lenders identified hereinbelow. - ----- ----- W I T N E S S E T H WHEREAS, (i) a $96.5 million revolving credit facility has been established in favor of the Company and certain subsidiaries pursuant to the terms of the Credit Documents, (ii) a $128.5 million lease financing facility has been established in favor of the Company pursuant to the terms of the TROL Transaction Documents and (iii) a $5 million additional working capital loan has been made to the Company pursuant to the terms of, and as evidenced by, the Additional Working Capital Note; WHEREAS, the Lenders have made this Security Agreement a condition to further extensions of credit under the Credit Agreement and the TROL Transaction Documents; NOW, THEREFORE, in consideration of the premises and to induce the Lenders to make their respective loans and extensions of credit thereunder, the Credit Parties hereby agree with the Administrative Agent, for the ratable benefit of the Lenders, as follows: 1. Defined Terms. ------------- 1.1 Definitions. (a) Unless otherwise defined herein, terms defined ----------- in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms which are defined in the Uniform Commercial Code in effect in the State of Georgia on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm Products, Fixtures, General Intangibles, Instruments, Inventory, Investment Property and Proceeds. (b) The following terms shall have the following meanings: "Agency Agreement": such term as referenced and defined in Appendix A ---------------- of the Participation Agreement. "Collateral": as defined in Section 2 of this Agreement; provided ---------- -------- that Collateral shall not include any property which is subject to a Lien permitted under Section 6.4 of the Credit Agreement securing Indebtedness permitted under Section 6.1 of the Credit Agreement to the extent that the grant of a security interest hereunder would be prohibited by such Lien or by the terms of such Indebtedness. "Collateral Account": any collateral account established by the ------------------ Administrative Agent as provided in subsection 3.3 hereof or subsection 7.2 hereof. "Contracts": all other contracts and agreements to which a Credit --------- Party is a party, as each may be amended, supplemented or otherwise modified from time to time, including, without limitation, (i) all rights of a Credit Party to receive moneys due and to become due to it thereunder or in connection therewith, (ii) all rights of a Credit Party to damages arising out of or for breach or default in respect thereof and (iii) all rights of a Credit Party to exercise all remedies thereunder. "Copyright Licenses": any written agreement, naming any Credit Party ------------------ as licensor, granting any right under any Copyright including, without limitation, any thereof referred to in Schedule 3 hereto. ---------- "Copyrights": (i) all United States copyrights in all Works, now ---------- existing or hereafter created or acquired, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Copyright office including, without limitation, any thereof referred to in Schedule 3 hereto, and (ii) all renewals thereof including, without ---------- limitation, any thereof referred to in Schedule 3 hereto. ---------- "Credit Agreement": that Third Amended and Restated Credit Agreement ---------------- dated as of July 31, 1998, as amended, modified, supplemented, extended, renewed or replaced, among the Company and the subsidiaries and affiliates identified therein, as Borrowers, the lenders identified therein and First Union National Bank, as administrative agent. "Credit Documents": the Loan Documents as referenced and defined in ---------------- the Credit Agreement, including the Credit Agreement, the Notes, the Pledge Agreement, the Security Agreement, the Mortgages and the other Collateral Security Documents, in each case as amended, modified, supplemented, extended, renewed or replaced. Terms used but not otherwise defined have the meanings provided in the Credit Agreement. "Credit Facility": the revolving credit facility established in favor --------------- of the Company pursuant to the terms of the Credit Agreement. "Guarantors": the Persons which give a guaranty in respect of any of ---------- the Secured Obligations. "Lease Agreements": such term as referenced and defined in Appendix A ---------------- of the Participation Agreement. "Lease Finance Facility": the lease financing facility established in ---------------------- favor of the Company pursuant to the terms of the TROL Transaction Documents. "Lenders": the holders of the Secured Obligations. ------- "Operative Agreements": such term as referenced and defined in -------------------- Appendix A of the Participation Agreement. "Participation Agreement": that Participation Agreement dated as of ----------------------- July 29, 1998, as amended, modified, supplemented, extended, renewed or replaced, among the Company, the Guarantors identified therein, First Security Bank, National Association, as Owner Trustee under the Centennial Real Estate Trust 1998-1, the Lenders and Holders identified therein and from time to time party thereto, First Union Capital Markets, a division of Wheat First Securities, Inc., as Syndication Agent and NationsBank, N.A., as Agent. "Patent License": all agreements, whether written or oral, providing -------------- for the grant by or to a Credit Party of any right to manufacture, use or sell any invention covered by a Patent, including, without limitation, any thereof referred to in Schedule 4 hereto. ---------- "Patents": (a) all letters patent of the United States or any other ------- country and all reissues and extensions thereof, including, without limitation, any thereof referred to in Schedule 4 hereto, and (b) all ---------- applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including, without limitation, any thereof referred to in Schedule 4 ---------- hereto. "Secured Obligations": the collective reference to the following: ------------------- (i) all unpaid principal of and interest on (including interest accruing after maturity and after the commencement of bankruptcy or insolvency proceedings) the loans and other obligations owing under the Credit Agreement, and all other indebtedness, liabilities and obligations owing thereunder or under the other Credit Documents, whether now existing or hereafter arising, and whether primary, secondary, direct, contingent, or joint and several; 2 (ii) any and all obligations now existing or hereafter arising, owing by the Company, the Guarantors and/or any of their affiliates under or pursuant to the TROL Transaction Documents, including specifically without limitation all obligations and liabilities of the Company, the Guarantors and their affiliates under or with respect to the Participation Agreement, the Lease Agreement, the Agency Agreement and each of the other Operative Agreements; (iii) all unpaid principal of and interest on (including interest accruing after maturity and after the commencement of bankruptcy or insolvency proceedings) the loans and other obligations owing under the Additional Working Capital Note, and all other indebtedness, liabilities and obligations owing thereunder or under any other documents executed in connection therewith, whether now existing or hereafter arising, and whether primary, secondary, direct, contingent, or joint and several; (iv) the net amount of liabilities and obligations, now existing or hereafter arising, owing by the Company, any Guarantor or any Credit Party to any Lender or any affiliate of a Lender arising under interest rate protection agreements and/or foreign currency exchange agreements to the extent permitted under the Credit Agreement; and (v) all indebtedness, liabilities and obligations of any kind or nature, now existing or hereafter arising, owing by the Credit Parties to any Lender or the Administrative Agent, arising under this Security Agreement, any mortgages, deeds of trust, deeds to secure debt or security deeds, or any of the other Credit Documents, TROL Transaction Documents, the Additional Working Capital Note or any documents relating to the Hedging Obligations "Security Documents": such term as referenced and defined in Appendix ------------------ A of the Participation Agreement. "Trademark License": any agreement, written or oral, providing for ----------------- the grant by or to a Credit Party of any right to use any Trademark, including, without limitation, any thereof referred to in Schedule 5 ---------- hereto. "Trademarks": (a) all trademarks, trade names, corporate names, ---------- company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, including, without limitation, any thereof referred to in Schedule 5 hereto, and (b) all renewals ---------- thereof. "TROL Transaction Documents": collectively, the Participation -------------------------- Agreement, the Lease Agreement, the Agency Agreement and each of the other Operative Agreements, in each case as amended, modified, supplemented, extended, renewed or replaced. "Uniform Commercial Code": the Uniform Commercial Code as from time ----------------------- to time in effect in the State of Georgia. "Work": any work which is subject to copyright protection pursuant to ---- Title 17 of the United States Code. 1.2 Other Definitional Provisions. (a) The words "hereof," "herein" ----------------------------- and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and paragraph references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 3 2. Grant of Security Interest. As collateral security for the prompt -------------------------- and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations, each of the Credit Parties hereby grants to the Administrative Agent, for the ratable benefit of the Lenders, a security interest in all of the following property now owned or at any time hereafter acquired by such Credit Party or in which such Credit Party now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): ---------- (a) all Accounts; (b) all Chattel Paper; (c) all Contracts; (d) all Copyrights; (e) all Copyright Licenses; (f) all Documents; (g) all Equipment; (h) all Fixtures; (i) all General Intangibles, including Contracts; (j) all Instruments; (k) all Inventory; (l) all Investment Property; (m) all Patents; (n) all Patent Licenses; (o) all Trademarks; (p) all Trademark Licenses; (q) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks, and related data processing software (owned by such Credit Party or in which it has an interest) that at any time evidence or contain information relating to any Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (r) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing; provided that this Agreement shall not constitute an assignment of, or a grant - -------- of a security interest in or lien on, any fixtures, contract, lease or other agreement to which any Credit Party is a party if such assignment or grant of a security interest or lien is prohibited by the terms of such contract, lease or agreement. This Agreement shall create a continuing security interest in the Collateral which shall remain in effect until all the Secured Obligations (other than unasserted indemnity claims), now existing or hereafter arising, have been paid in full, the commitments relating thereto have been terminated and the Credit Agreement, the Security Documents or the TROL Transaction Document shall no longer be in effect. 4 3. Provisions Relating to Accounts. ------------------------------- 3.1 Credit Parties Remain Liable under Accounts. Anything herein to ------------------------------------------- the contrary notwithstanding, each of the Credit Parties shall remain liable under each of the Accounts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account. Neither the Administrative Agent nor any Lender shall have any obligation or liability under any Account (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any Lender of any payment relating to such Account pursuant hereto, nor shall the Administrative Agent or any Lender be obligated in any manner to perform any of the obligations of a Credit Party under or pursuant to any Account (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 3.2 Analysis of Accounts. The Administrative Agent shall have the -------------------- right, once during each calendar year or at any time after the occurrence of an Event of Default, to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Credit Parties shall furnish all such assistance and information as the Administrative Agent may require in connection with such test verifications. At any time after the occurrence, and during the continuance of, an Event of Default, upon the Administrative Agent's request and at the expense of the Credit Parties, the Credit Parties shall cause independent public accountants or others satisfactory to the Administrative Agent to furnish to the Administrative Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. The Administrative Agent in its own name or in the name of others may communicate with account debtors on the Accounts to verify with them to the Administrative Agent's satisfaction the existence, amount and terms of any Accounts. 3.3 Collections on Accounts. (a) The Administrative Agent hereby ----------------------- authorizes the Credit Parties to collect the Accounts, provided that the -------- Administrative Agent may curtail or terminate said authority at any time after the occurrence of an Event of Default. If required by the Administrative Agent at any time after the occurrence of an Event of Default, any payments of Accounts, when collected by the Credit Parties, (i) shall be forthwith (and, in any event, within two Business Days) deposited by the Credit Parties in a Collateral Account maintained under the sole dominion and control of the Administrative Agent, subject to withdrawal by the Administrative Agent for the account of the Lenders only as provided in Section 7.3 hereof, and (ii) until so turned over, shall be held by the Credit Parties in trust for the Administrative Agent and the Lenders, segregated from other funds of the Credit Parties. (b) Each such deposit of Proceeds of Accounts shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. (c) At the Administrative Agent's request after the occurrence of an Event of Default, the Credit Parties shall deliver to the Administrative Agent copies of documents in its possession or control (or as to which they have a right or ability to get) evidencing, and relating to, the agreements and transactions which gave rise to the Accounts which are necessary for collection of such Accounts by the Administrative Agent. 4. Provisions Relating to Contracts. -------------------------------- 4.1 Credit Parties Remain Liable under Contracts. Anything herein to -------------------------------------------- the contrary notwithstanding, each of the Credit Parties shall remain liable under each of the Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with and pursuant to the terms and provisions of each Contract. Neither the Administrative Agent nor any Lender shall have any obligation or liability under any Contract by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any such Lender of any payment relating to such Contract pursuant hereto, nor shall the Administrative Agent or any Lender be obligated in any manner to perform any of the obligations of a Credit Party under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by 5 it or as to the sufficiency of any performance by any party under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 4.2 Communication with Contracting Parties. The Administrative Agent -------------------------------------- in its own name or in the name of others, at any time after the occurrence of an Event of Default or in connection with any audit of a Contract by the Administrative Agent or any other Person designated by the Administrative Agent, may communicate with parties to the Contracts to verify with them to the Administrative Agent's satisfaction the existence, amount and terms of any Contract. 5. Representations and Warranties. Each Credit Party hereby ------------------------------ represents and warrants that: 5.1 Title; No Other Liens. Except for Permitted Liens, the Credit --------------------- Party owns each item of the Collateral free and clear of any and all Liens or claims of others. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Administrative Agent, for the ratable benefit of the Lenders, pursuant to this Agreement or as are permitted pursuant to the Credit Agreement or the TROL Transaction Documents. 5.2 Perfected First Priority Liens. Except as otherwise expressly ------------------------------ provided in this Agreement, the security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 2 attached hereto, and possession of such Collateral with respect to - ---------- which perfection is acquired by possession, will constitute perfected security interests in the Collateral in favor of the Administrative Agent, for the ratable benefit of the Lenders, (b) are prior to all other Liens on the Collateral in existence on the date hereof except for Permitted Liens and (c) are enforceable as such against (i) all creditors of and purchasers from the Credit Party (except purchasers of Inventory in the ordinary course of business) and (ii) any Person having any interest in the real property where any of the Equipment is located. 5.3 Inventory and Equipment. The Inventory and the Equipment of the ----------------------- Credit Party are kept at the locations listed on Schedule 1 hereto. ---------- 5.4 Chief Executive Office. The Credit Party's chief executive ---------------------- office and chief place of business, and the place where it keeps its books and records, is located at the address shown on Schedule 1 hereto. ---------- 5.5 Farm Products. None of the Collateral constitutes, or is the ------------- Proceeds of, Farm Products. 5.6 Representations and Warranties Relating to Contracts. (a) No ---------------------------------------------------- consent of any party (other than the Credit Party) to any Contract is required, or purports to be required, in connection with the execution, delivery and performance of this Agreement. (b) Each Contract is in full force and effect and constitutes a valid and legally enforceable obligation of the parties thereto, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (c) No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of any of the Contracts by any party thereto other than those which have been duly obtained, made or performed, are in full force and effect and do not subject the scope of any such Contract to any material adverse limitation, either specific or general in nature. (d) Neither the Credit Party nor (to the best of the Credit Party's knowledge) any other party to any Contract is in default or is likely to become in default in any material respects in the performance or observance of any of the terms thereof. 6 (e) The Credit Party has fully performed in all material respects all its obligations under each Contract. (f) The right, title and interest of the Credit Party in, to and under each Contract are not subject to any defense, offset, counterclaim or claim which would materially adversely affect the value of such Contract as Collateral, nor have any of the foregoing been asserted or alleged against the Credit Party as to any Contract which would materially adversely affect the value of such Contract. (g) No amount payable to the Credit Party under or in connection with any Contract is evidenced by any Instrument or Chattel Paper which has not been delivered to the Administrative Agent. (h) Except as set forth on Schedule 6 hereto, none of the parties to ---------- any Contracts is a Governmental Authority. 5.7 Copyrights, Patents and Trademarks. (a) Schedule 3 hereto ---------------------------------- ---------- includes all Copyrights and Copyright Licenses owned by the Credit Party in its own name as of the date hereof. Schedule 4 hereto includes all Patents and ---------- Patent Licenses owned by the Credit Party in its own name as of the date hereof. Schedule 5 hereto includes all Trademarks and Trademark Licenses owned by the - ---------- Credit Party in its own name as of the date hereof. (b) To the best of the Credit Party's knowledge, each Copyright registration, issued Patent and Trademark registration of the Credit Party is valid, subsisting, unexpired, enforceable and has not been abandoned. (c) Except as set forth in either Schedule 4 hereto or Schedule 5 ---------- ---------- hereto, no Copyright registration, issued Patent and Trademark registration of the Credit Party is the subject of any licensing or franchise agreement. (d) No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of any Copyright registration, issued Patent or Trademark registration of the Credit Party. (e) No action or proceeding is pending seeking to limit, cancel or question the validity of any Copyright registration, issued Patent or Trademark registration of the Credit Party, or which, if adversely determined, would have a material adverse effect on the value of any Copyright registration, issued Patent or Trademark registration. 6. Covenants. Each Credit Party covenants and agrees with the --------- Administrative Agent and the Lenders that, from and after the date of this Agreement until the Secured Obligations (other than unasserted indemnity claims) have been satisfied in full and the Commitments have been terminated: 6.1 Delivery of Instruments and Chattel Paper. If any amount payable ----------------------------------------- under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement. 6.2 Marking of Records. The Credit Party will mark its books and ------------------ records pertaining to the Collateral to evidence this Agreement and the security interests created hereby. 6.3 Maintenance of Perfected Security Interest; Further Documentation. (a) --------------------------------------------------- The Credit Party shall maintain the security interest created by this Agreement as a perfected security interest subject only to Permitted Liens and shall defend such security interest against claims and demands of all Persons whomsoever. (b) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of the Credit Parties, the Credit Party will promptly and duly execute and deliver such further instruments and documents and take such further action (including without limitation all actions required under the Federal Assignment of Claims Act or any similar state statute) as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein 7 granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interests created hereby. 6.4 Changes in Locations, Name, etc. The Credit Party will not: ------------------------------- (a) permit any of the Inventory or Equipment to be kept at a location other than those listed on Schedule 1 hereto, unless it shall have given ---------- the Administrative Agent and the Lenders at least 30 days' prior written notice of such change and any filings required under the Uniform Commercial Code in effect in the affected jurisdiction to maintain the perfected security interest granted pursuant to this Agreement shall have been made, except that Equipment may be moved from such location for a reasonable period of time for purposes of repair of such Equipment or for testing in the ordinary cause of business; (b) change the location of its chief executive office and chief place of business or the location at which it maintains its books and records from that specified on Schedule 1 hereto, unless it shall have given the ---------- Administrative Agent and the Lenders at least 30 days' prior written notice of such change and any filings required under the Uniform Commercial Code in effect in the affected jurisdiction to maintain the perfected security interest granted pursuant to this Agreement shall have been made; or (c) change its name, identity or corporate structure to such an extent that any financing statement filed by the Administrative Agent in connection with this Agreement would become seriously misleading, unless it shall have given the Administrative Agent and the Lenders at least 30 days' prior written notice of such change and any filings required under the Uniform Commercial Code in effect in the affected jurisdiction to maintain the perfected security interest granted pursuant to this Agreement shall have been made. 6.5 Further Identification of Collateral. The Credit Party will furnish to ------------------------------------ the Administrative Agent and the Lenders from time to time upon request, but prior to the occurrence and during the continuance of an Event of Default, not more than once in any calendar year, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Administrative Agent may reasonably request, all in reasonable detail. 6.6 Indemnification. The Credit Parties agree to pay, and to save the --------------- Administrative Agent and the Lenders harmless from, any and all liabilities, costs and expenses (including, without limitation, reasonable legal fees and expenses) (i) with respect to, or resulting from any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, any delay in complying with any Requirement of Law applicable to any of the Collateral and (iii) in connection with any of the transactions contemplated by this Agreement, except for any such liabilities which result from the gross negligence or willful misconduct of the Administrative Agent. In any suit, proceeding or action brought by the Administrative Agent or any Lender under any Account for any sum owing thereunder, the Credit Parties will save, indemnify and keep the Administrative Agent and such Lender harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor thereunder, arising out of a breach by any Credit Party of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or its successors from any Credit Parties. 6.7 Covenants Relating to Accounts Upon Default. At any time after the ------------------------------------------- occurrence of an Event of Default: (a) the amount represented by the Credit Party to the Lenders from time to time as owing by each account debtor or by all account debtors in respect of the Accounts will at such time be the correct amount and believed by the Credit Party to be actually owing by such account debtor or debtors thereunder; 8 (b) the Credit Party will not amend, modify, terminate or waive any agreement giving rise to an Account in any manner which would reasonably be expected to materially adversely affect the value of the Accounts as Collateral; (c) the Credit Party will not fail to exercise promptly and diligently each and every material right which it may have under each agreement giving rise to an Account (other than any right of termination); (d) the Credit Party will not fail to deliver to the Administrative Agent a copy of each material demand, notice or document received by it relating in any way to any agreement giving rise to an Account; and (e) other than in the ordinary course of business as generally conducted by the Credit Party, the Credit Party will not grant any extension of the time of payment of any of the Accounts, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partially, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon. 6.8 Covenants Relating to Contracts. (a) The Credit Party will perform and ------------------------------- comply in all material respects with all its obligations under the Contracts and all its other Contractual Obligations relating to the Collateral. (b) The Credit Party will promptly provide upon request to the Administrative Agent copies of particular Contracts and each material demand, notice or document relating thereto. (c) In any suit, proceeding or action brought by the Administrative Agent or any Lender under any Contract for any sum owing thereunder, or to enforce any provisions of any Contract, the Credit Party will save, indemnify and keep the Administrative Agent and such Lenders harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the Credit Party thereunder, arising out of a breach by the Credit Party of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such obligor or its successors from the Credit Party except for any such expense, loss or damage which results from the gross negligence of the willful misconduct of the Administrative Agent or such Lender. 6.9 Covenants Relating to Copyrights. (a) The Credit Party will employ the -------------------------------- Copyright for each Work with such notice of copyright as may be required by law to secure copyright protection. (b) The Credit Party will not do any act or knowingly omit to do any act whereby any material Copyright may become invalidated and (i) will not do any act, or omit to do any act, whereby any material Copyright may become injected into the public domain; (ii) shall notify the Administrative Agent immediately if it knows, or has reason to know, that any material Copyright may become injected into the public domain or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any court or tribunal in the United States or any other country) regarding the Credit Party's ownership of any such Copyright or its validity; (iii) will take all necessary steps as it shall deem appropriate under the circumstances, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of each material Copyright owned by the Credit Party including, without limitation, filing of applications for renewal where necessary; and (iv) will promptly notify the Administrative Agent of any material infringement of any material Copyright of the Credit Party of which it becomes aware and will take such actions as it shall reasonably deem appropriate under the circumstances to protect such Copyright, including, where appropriate, the bringing of suit for infringement, seeking injunctive relief and seeking to recover any and all damages for such infringement. 6.10 Covenants Relating to Patents and Trademarks. (a) The Credit -------------------------------------------- Party (either itself or through licensees) will, except with respect to any Trademark that the Credit Party shall reasonably determine is of negligible economic value to it, (i) continue to use each Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such 9 Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) employ such Trademark with the appropriate notice of registration, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Administrative Agent, for the ratable benefit of the Lenders, shall obtain a perfected security interest in such mark pursuant to this Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (b) The Credit Party will not, except with respect to any Patent that the Credit Party shall reasonably determine is of negligible economic value to it, do any act, or omit to do any act, whereby any Patent may become abandoned or dedicated. (c) The Credit Party will notify the Administrative Agent and the Lenders immediately if it knows, or has reason to know, that any application or registration relating to any Patent or Trademark may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding the Credit Party's ownership of any Patent or Trademark or its right to register the same or to keep and maintain the same. (d) Whenever the Credit Party, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, the Credit Party shall report such filing to the Administrative Agent and the Lenders within five Business Days after the last day of the fiscal quarter in which such filing occurs. Upon request of the Administrative Agent, the Credit Party shall execute and deliver any and all agreements, instruments, documents and papers as the Agent may request to evidence the Administrative Agent's and the Lenders' security interest in any Patent or Trademark and the goodwill and general intangibles of the Credit Party relating thereto or represented thereby. (e) The Credit Party will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the Patents and Trademarks, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (f) In the event that any Patent or Trademark included in the Collateral is infringed, misappropriated or diluted by a third party, the Credit Party shall promptly notify the Administrative Agent and the Lenders after it learns thereof and shall, unless the Credit Party shall reasonably determine that such Patent or Trademark is of negligible economic value to the Credit Party which determination the Credit Party shall promptly report to the Administrative Agent and the Lenders, promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as the Credit Party shall reasonably deem appropriate under the circumstances to protect such Patent or Trademark. 6.11 Covenants Relating to Inventory and Equipment --------------------------------------------- (a) The Credit Party will, upon ten (10) days' written notice from the Administrative Agent, provide a physical history of Inventory and/or Equipment on a quarterly basis or, after the occurrence of an Event of Default, more frequently . (b) The Credit Party shall, at its own expense, maintain insurance with respect to the Equipment and Inventory in such amounts, against such risks, in such form and with such insurers, as shall be reasonably satisfactory to the Administrative Agent from time to time. Each policy for liability insurance shall provide for all losses to be paid on behalf of the Administrative Agent and the Credit Party as their interests may appear, and each policy for property damage insurance shall provide for all losses (except for losses of less than $_____ per occurrence) to be paid directly to the Administrative Agent. Each such policy shall in addition (i) name the Credit Party and the Administrative Agent as insured parties thereunder (without any representation or warranty by or 10 obligation upon the Administrative Agent) as their interests may appear, (ii) contain the agreement by the insurer that any loss thereunder shall be payable to the Administrative Agent notwithstanding any action, inaction or breach of representation or warranty by the Credit Party, (iii) provide that there shall be no recourse against the Administrative Agent for payment of premiums or other amounts with respect thereto and (iv) provide that at least thirty (30) days' prior written notice of cancellation or lapse shall be given to the Administrative Agent by the insurer. The Credit Party shall, if so requested by the Administrative Agent, deliver to the Administrative Agent original or duplicate policies of such insurance and, as often as the Administrative Agent may reasonably request, a report of a reputable insurance broker with respect to such insurance. Further, the Credit Party shall, at the request of the Administrative Agent, duly exercise and deliver instruments of assignment of such insurance policies to comply with the requirements of Section 6.3 hereof and cause the insurers to acknowledge notice of such assignment. (c) In the case of any loss involving damage to Equipment or Inventory of the Credit Party, the Credit Party shall make or cause to be made the necessary repairs to or replacements of such Equipment or Inventory, and any proceeds of insurance properly received by or released to the Credit Party shall be used by the Credit Party, except as otherwise required or permitted hereunder or by the Credit Agreement, to pay or as reimbursement for the costs of such repairs or replacements. (d) So long as no Event of Default shall have occurred, all insurance payments received by the Administrative Agent in connection with any loss, damage or destruction of any Inventory or Equipment shall be released by the Administrative Agent to the Credit Party for the repair, replacement or restoration thereof. To the extent that (i) the amount of any such insurance payments exceeds the cost of any such repair, replacement or restoration, or (ii) such insurance payments are not otherwise required by the Credit Party to complete any such repair, replacement or restoration required hereunder, the Administrative Agent shall not be required to release the amount thereof to the Credit Party and may hold or continue to hold such amount in a Collateral Account as additional security for the Secured Obligations (except that any such amount shall be released by the Administrative Agent to the Credit Party if no Event of Default has occurred). If an Event of Default has occurred, the Administrative Agent may elect, in its sole and absolute discretion, to release any such insurance payments for the purposes set forth in the first sentence of this Section 6.11(d), or to hold such insurance payments as additional Collateral hereunder or apply the same in the order set forth is Section 3.14(b) of the Credit Agreement. 7. Remedies. Notwithstanding anything contained herein to the -------- contrary, an exercise of remedies under this Security Agreement shall be made only by direction of Lenders holding a majority in interest of the Secured Obligations. 7.1 Notice to Account Debtors and Contract Parties. Upon the request ---------------------------------------------- of the Administrative Agent at any time after the occurrence of an Event of Default, the Credit Parties shall notify account debtors on the Accounts and parties to the Contracts that the Accounts and the Contracts have been assigned to the Administrative Agent for the ratable benefit of the Lenders and that payments in respect thereof shall be made directly to the Administrative Agent. 7.2 Proceeds to be Turned Over To Administrative Agent. In addition -------------------------------------------------- to the rights of the Administrative Agent and the Lenders specified in Section 3.3 hereof with respect to payments of Accounts, after the occurrence of an Event of Default all Proceeds received by the Credit Parties consisting of cash, checks and other near-cash items shall be held by the Credit Parties in trust for the Administrative Agent and the Lenders, segregated from other funds of the Credit Parties, and shall, forthwith upon receipt by the Credit Parties, be turned over to the Administrative Agent in the exact form received by the Credit Parties (duly indorsed by the Credit Parties to the Administrative Agent in a manner satisfactory to the Administrative Agent, if required by the Administrative Agent) and held by the Administrative Agent in a Collateral Account maintained under the sole dominion and control of the Administrative Agent. All Proceeds while held by the Administrative Agent in a Collateral Account (or by the Credit Parties in trust for the Administrative Agent and the Lenders) shall continue to be held as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in subsection 7.3 hereof. 11 7.3 Application of Proceeds. At such intervals as may be agreed ----------------------- upon by the Credit Parties and the Administrative Agent or at any time after an Event of Default shall have occurred, at the Administrative Agent's election, the Administrative Agent may apply all or any part of Proceeds held in any Collateral Account in ratable payment of the Secured Obligations, and any part of such funds which the Administrative Agent elects not so to apply and deems not required as collateral security for the Secured Obligations shall be paid over from time to time by the Administrative Agent to the Credit Parties or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Secured Obligations shall have been satisfied in full and the Commitments shall have been terminated shall be paid over to the Credit Parties or to whomsoever may be lawfully entitled to receive the same. 7.4 Code Remedies. At any time after an Event of Default shall have ------------- occurred, the Administrative Agent, on behalf of the Lenders, may exercise, in addition to all other rights and remedies granted in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Credit Parties or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Administrative Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in a Credit Party, which right or equity is hereby waived and released. The Credit Parties further agree, at the Administrative Agent's request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at the respective Credit Party's premises or elsewhere. The Administrative Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in the order set forth in the Credit Agreement, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Uniform Commercial Code, need the Administrative Agent account for the surplus, if any, to each of the Credit Parties. To the extent permitted by applicable law, each Credit Party waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if received by the Credit Parties at least 20 days before such sale or other disposition. 7.5 Deficiency. The Credit Parties shall remain liable for any ---------- deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by the Administrative Agent or any Lender to collect such deficiency. 8. Administrative Agent's Appointment as Attorney-in-Fact; Administrative ------------------------------------------------------- Agent's Performance of Credit Parties' Obligations. - --------------------------------------------------- 8.1 Powers. Each Credit Party hereby irrevocably constitutes and ------ appoints the Administrative Agent and any officer or agent of the Administrative Agent, with full power of substitution, as its true and lawful attorney-in-fact with fully irrevocable power and authority in the place and stead of such Credit Party and in the name of such Credit Party or in the name of the Administrative Agent, from time to time in the Administrative Agent's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to secure the Secured Obligations and grant security interests in the Collateral as contemplated by this Agreement, and, without limiting 12 the generality of the foregoing, each Credit Party hereby gives the Administrative Agent the power and right, on behalf of such Credit Party, without notice to or assent by such Credit Party, to do the following: (a) in the case of any Account, at any time when the authority of such Credit Party to collect the Accounts has been curtailed or terminated pursuant to Section 3.3(a) hereof, or in the case of any other Collateral, at any time after an Event of Default has occurred, in the name of such Credit Party or in the name of the Administrative Agent, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account, Instrument or General Intangible or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Administrative Agent for the purpose of collecting any and all such moneys due under any Account, Instrument or General Intangible or with respect to any other Collateral whenever payable; (b) in the case of any Copyrights, Patents or Trademarks, at any time after an Event of Default has occurred, to execute and deliver any and all agreements, instruments, documents, and papers as the Administrative Agent may request to evidence the Administrative Agent's and the Lenders' security interest in any Copyright, Patent or Trademark and the goodwill and general intangibles of such Credit Party relating thereto or represented thereby; (c) at any time after an Event of Default has occurred, to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, to effect, any repairs or any insurance called for by the terms all or any part of the premiums therefor and the costs thereof; (d) to execute, in connection with the sale provided for in Section 7.4 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (e) at any time after an Event of Default has occurred, (i) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (ii) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (iii) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (iv) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (v) to defend any suit, action or proceeding brought against the Credit Party with respect to any Collateral; (vi) to settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, to give such discharges or releases as the Administrative Agent may deem appropriate; (vii) to assign or grant licenses, any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Administrative Agent shall in its sole discretion determine; and (viii) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and to do, at the Administrative Agent's option and such Credit Party's expense, at any time, or from time to time, all reasonable acts and things which the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agent's and the Lenders' security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Credit Party might do. The Administrative Agent agrees that, except after the occurrence of an Event of Default, it will forbear from exercising the power of attorney or any rights granted to the Administrative Agent pursuant to this Section 8.1. 8.2 Performance by Administrative Agent of Credit Parties' Obligations. If ------------------------------------------------------------------- the Credit Parties fail to perform or comply with any of their agreements contained herein, the Administrative Agent, at its option, but 13 without any obligation to do so, may perform or comply, or otherwise cause performance or compliance, with such agreement. 8.3 Credit Parties' Reimbursement Obligation. The expenses of the ---------------------------------------- Administrative Agent incurred in connection with actions undertaken as provided in this Section 8, together with interest thereon at the post-default rate per annum set forth in the Credit Agreement for Base Rate Loans from the date of payment by the Administrative Agent to the date reimbursed by the Credit Parties, shall be payable by the Credit Parties to the Administrative Agent on demand. 8.4 Ratification; Power Coupled With An Interest. The Credit Parties -------------------------------------------- hereby ratify all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until the Secured Obligations have been satisfied in full and the Commitments have been terminated. 9. Duty of Administrative Agent. The Administrative Agent's sole ---------------------------- duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar property for its own account, except that the Administrative Agent shall have no obligation to invest funds held in any Collateral Account and may hold the same as demand deposits. Neither the Administrative Agent, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Credit Party or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the Lenders hereunder are solely to protect the Administrative Agent's and the Lenders' interests in the Collateral and shall not impose any duty upon the Administrative Agent or any Lender to exercise any such powers. The Administrative Agent and the Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to the Credit Parties for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 10. Execution of Financing Statements. Pursuant to Section 9-402 of --------------------------------- the Uniform Commercial Code, each Credit Party authorizes the Administrative Agent to file financing statements with respect to the Collateral without the signature of such Credit Party in such form and in such filing offices as the Administrative Agent reasonably determines appropriate to perfect the security interests of the Administrative Agent and the Lenders under this Agreement. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 11. Authority of Administrative Agent. Each Credit Party acknowledges that --------------------------------- the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and the TROL Transaction Documents, and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and such Credit Party, the Administrative Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and such Credit Party shall be under no obligation, or entitlement, to make any inquiry respecting such authority. 12. Notices. All notices shall be given or made in accordance with ------- Section 11.1 of the Credit Agreement. 13. Severability. Any provision of this Agreement which is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14 14. Amendments in Writing; No Waiver; Cumulative Remedies. ----------------------------------------------------- 14.1 Amendments in Writing. None of the terms or provisions of this --------------------- Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Administrative Agent and the Credit Parties directly affected thereby; provided that any provision of this Agreement may be -------- waived by the Administrative Agent and the Lenders in a letter or agreement executed by the Administrative Agent or by facsimile transmission from the Administrative Agent. 14.2 No Waiver by Course of Conduct. Neither the Administrative ------------------------------ Agent nor any Lender shall by any act (except by a written instrument pursuant to Section 14.1 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Lender would otherwise have on any future occasion. 14.3 Remedies Cumulative. The rights and remedies herein provided are ------------------- cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 15. Section Headings. The section and subsection headings used in ---------------- this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. Successors and Assigns. This Agreement shall be binding upon the ---------------------- successors and assigns of the Credit Parties and shall inure to the benefit of the Administrative Agent and the Lenders and their successors and assigns, provided that the Credit Parties may not assign any of their rights or - -------- obligations under this Agreement without the prior written consent of the Administrative Agent and any such purported assignment without such prior written consent shall be null and void. 17. Term of Agreement. This Agreement and the security interests ----------------- granted hereunder shall remain in full force and effect until the Secured Obligations have been satisfied in full and the Commitments have been terminated, at which time the Administrative Agent shall release and terminate the security interests granted to it hereunder. Upon such release and termination, (i) the Credit Parties shall be entitled to the return, at the Credit Parties' expense, of any and all funds in the Collateral Account and such of the Collateral held by the Administrative Agent as shall not have been sold or otherwise applied pursuant to the terms hereof and (ii) the Administrative Agent will, at the Credit Parties' expense, execute and deliver to the Credit Parties such UCC termination statements and other documents as the Credit Parties shall reasonably request to evidence such release and termination. 18. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF ------------- THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA. [Remainder of Page Intentionally Left Blank] 15 IN WITNESS WHEREOF, the undersigned have caused this Security Agreement to be duly executed and delivered as of the date first above written. CREDIT PARTIES: CENTENNIAL HEALTHCARE TRANSITIONAL FINANCIAL SERVICES, INC. CORPORATION PARAGON REHABILITATION, INC. CENTENNIAL/ASHTON PROPERTIES THS PARTNERS I, INC. CORPORATION THS PARTNERS II, INC. CENTENNIAL HEALTHCARE TRANSITIONAL HEALTH PARTNERS PROPERTIES CORPORATION BY: THS PARTNERS I, INC. and THS CENTENNIAL HEALTHCARE PARTNERS II, INC., its general partners MANAGEMENT CORPORATION PARKVIEW PARTNERSHIP CENTENNIAL ACQUISITION BY: THS PARTNERS I, INC. and THS CORPORATION PARTNERS II, INC., its general partners CENTENNIAL PROFESSIONAL TOTAL CARE CONSOLIDATED, INC. THERAPY SERVICES CORPORATION TOTAL CARE, INC. CENTENNIAL HEALTHCARE TOTAL HEALTH CARE SERVICES, INC. INVESTMENT CORPORATION TOTAL CARE OF THE CAROLINAS, INC. CENTENNIAL HEALTHCARE HOSPITAL HCC HOME HEALTH OF LOUISIANA, INC. CORPORATION TRANSITIONAL HEALTH SERVICES, INC. Attest: By:/s/ Daryl R. Griswold By:/s/ Alan Dahl Name: Daryl R. Griswold Name: Alan Dahl Title: Asst. Secretary Title: EVP ADMINISTRATIVE FIRST UNION NATIONAL BANK, AGENT: for itself and as Agent By: /s/ J. Matt MacIver, Jr. Name:J. Matt MacIver, Jr. Title:V.P. ADMINISTRATIVE AGENT: FIRST UNION NATIONAL BANK, as Administrative Agent By: /s/ J. Matt McIver, Jr. Name:J. Matt McIver, Jr. Title:V.P. Schedule 1 ---------- CChief Executive Office and Locations of Collateral Schedule Omitted Schedule 2 ---------- Filings and Actions required to Perfect Security Interests Schedule Omitted Schedule 3 ---------- Copyrights and Copyright Licenses Schedule Omitted Schedule 4 ---------- Patents and Patent Licenses Schedule Omitted Schedule 5 ---------- Trademarks and Trademark Licenses Schedule Omitted Schedule 6 ---------- Contracts with Governmental Authorities Schedule Omitted EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1000 6-MOS 3-MOS DEC-31-1999 DEC-31-1999 JAN-01-1999 APR-01-1999 JUN-30-1999 JUN-30-1999 3,503 3,503 0 0 107,898 107,898 (5,100) (5,100) 0 0 117,276 117,276 96,730 96,730 (23,013) (23,013) 283,804 283,804 (60,944) (60,944) (115,707) (115,707) 0 0 0 0 (119) (119) (106,603) (106,603) (106,722) (106,722) (197,904) (99,860) (197,904) (99,860) 0 0 203,464 109,011 0 0 0 0 5,408 2,910 10,968 12,061 (4,007) (4,488) 6,961 7,573 0 0 0 0 0 0 6,961 7,573 .58 .64 .58 .64
EX-99.1 6 CAUTIONARY STATEMENTS EXHIBIT 99.1 CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q, including information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Company desires to take advantage of certain "safe harbor" provisions of the 1933 Act and 1934 Act and is including this reference to enable the Company to do so. Forward-looking statements included in this Form 10-Q or in documents incorporated by reference, or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve known and unknown risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ materially from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. The Company believes the following risks, uncertainties and other factors could cause such material differences to occur: 1. The Company's ability to continue to grow through the acquisition and development of long-term care facilities or the acquisition of ancillary businesses. 2. The Company's ability to identify suitable acquisition candidates or to profitably operate or successfully integrate acquired operations into the Company's other operations. 3. The occurrence of changes in the mix of payment sources utilized by the Company's patients to pay for the Company's services. 4. The adoption of cost containment measures by private pay sources such as commercial insurers and managed care organizations, as well as efforts by governmental reimbursement sources to impose cost containment measures. 5. Changes in the United States health care system, including the Balanced Budget Act of 1997, changes in reimbursement levels under Medicaid and Medicare, and other changes in applicable government regulations that might affect the profitability of the Company. 6. The Company's continued ability to operate in a heavily regulated environment and to satisfy regulatory authorities, thereby avoiding a number of potentially adverse consequences, such as the imposition of fines, temporary suspension of admission of patients, restrictions on the ability to acquire new facilities, suspension or decertification from Medicaid or Medicare programs, and in extreme cases, revocation of a facility's license or the closure of a facility, including as a result of unauthorized activities by employees. 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. 17. The assertion of claims against the Company, including the outcome of the pending investigation by the Department of Health and Human Services, office of Inspector General. -----END PRIVACY-ENHANCED MESSAGE-----