<PAGE>
 
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

For annual and transition reports pursuant to sections 13 or 15 (d) of the
Securities Exchange Act of 1934.

(Mark One)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the fiscal year ended       December 31, 1998
                                      -----------------
                                       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
                                                              ------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  None
----------------------------------------------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
----------------------------------------------------------

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 |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
<PAGE>
 
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 1999 was approximately $69.0 million. As of
March 31, 1999, the registrant had 11,923,618 shares of Common Stock 
outstanding.
<PAGE>
 
                       DOCUMENTS INCORPORATED BY REFERENCE

                           None
<PAGE>
 
                               TABLE OF CONTENTS

                                    Part I
                                                                       Page
                                                                       ----

Item 1.  Business....................................................
Item 2.  Properties..................................................
Item 3.  Legal Proceedings...........................................
Item 4.  Submission of Matters to a Vote of Security Holders.........

                                     Part II

Item 5.  Market for Registrant's Common Equity and Related
         Stockholder Matters.........................................
Item 6.  Selected Financial Data.....................................
Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..
Item 8.  Financial Statements and Supplementary Data.................
Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure.........................

                                    Part III

Item 10. Directors and Executive Officers of the Registrant..........
Item 11. Executive Compensation......................................
Item 12. Security Ownership of Certain Beneficial Owners
         and Management..............................................
Item 13. Certain Relationships and Related Transactions..............

                                     Part IV

Item 14. Exhibits, Financial Statement Schedules and
         Reports on Form 8-K.........................................

Signatures...........................................................
<PAGE>
 
Item 1. BUSINESS.

      Certain statements in this Form 10-K under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in certain documents incorporated by reference herein constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). 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 (included as Exhibit 99.1 to this Form 10-K), which
statements are hereby incorporated by reference. Centennial HealthCare
Corporation undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.

      Centennial HealthCare Corporation ("Centennial" or the "Company") provides
a broad range of long-term healthcare services to meet the medical needs of
elderly and post-acute patients. The Company provides these services through
geographically concentrated networks located in metropolitan and secondary
markets throughout the United States. The Company was organized in 1989 as a
Georgia corporation and conducts business through its operating subsidiaries. At
December 31, 1998, Centennial operated 101 owned, leased and managed skilled
nursing facilities with 10,780 licensed available beds in 20 states and the
District of Columbia, with its largest concentration of facilities in North
Carolina, Indiana and Michigan. The Company provides basic and specialty
healthcare services. Basic services include skilled nursing and support,
housekeeping, laundry, dietary, recreational and social services. Specialty
services include comprehensive rehabilitation therapy, respiratory therapy,
infusion therapy, wound care, home health care and other subacute and specialty
services. As components of its specialty services, at December 31, 1998,
Centennial provided rehabilitation therapy services on a contract basis to 
third-party owned and Company-operated skilled nursing facilities in 23 states
pursuant to 132 contracts and provided home health care services, primarily
located in North Carolina. References to the Company or Centennial also include
the Company's subsidiaries unless the context indicates otherwise.

COMPANY STRATEGY

      Centennial's objective is to continue to enhance its market position as a
provider of long-term basic and specialty services in selected metropolitan and
secondary markets. The Company seeks to control significant components of the
non-acute health care system in its markets, thereby diversifying its sources of
revenue and positioning itself to respond to the requirements of a variety of
payors. In addition, the Company seeks to increase the range of services it
provides within its facilities and tailors its health care services to address
the specific needs within each of its markets. To meet its objective, the
Company pursues the following strategies: (i) achieve operating leverage through
the continued development of regionally concentrated networks; (ii) implement
market-specific business and network development plans in response to the
diverse needs of the Company's metropolitan and secondary markets; (iii)
continue to expand specialty services to enhance the Company's position as a
broad-based provider of health care services; (iv) manage operations through
sophisticated information systems that enhance efficiency; and (v) pursue
strategic acquisitions of additional long-term care facilities and related
service providers.

      Over the last several years, the Company has grown its operating base both
through acquisitions and internal growth. Total revenues were $357.6 million,
$304.3 million and $233.0 million for the years ended December 31, 1998, 1997
and 

<PAGE>
 
1996, respectively. Operating income was $8.6 million, $25.5 million, and
$14.5 million for the fiscal years ended December 31, 1998, 1997 and 
1996, respectively. Licensed available beds increased from 8,113 to 10,780
during the same period. The Company's revenue quality mix (Medicare, private
pay, management fees and other) improved from 57.2% for the fiscal year ended
December 31, 1996 to 66.6% for the fiscal year ended December 31, 1998, and the
Company's revenues from specialty services increased from 33.7% for the fiscal
year ended December 31, 1996 to 43.5% for the fiscal year ended December 31,
1998, reflecting the Company's focus on providing specialty services to higher
acuity patients.

COMPANY GROWTH

      As part of its growth strategy, the Company regularly reviews possible
acquisitions within the long-term care continuum. Effective December 31, 1995,
the Company completed an important strategic acquisition by merging with
Transitional Health Services, Inc. ("THS") which operated 36 skilled nursing
facilities with 3,776 beds in Arkansas, North Carolina, Indiana, Kentucky and
Michigan and a contract rehabilitation therapy business (the "THS Merger").
Since the THS Merger, through December 31, 1998, the Company continued to expand
its operations through the acquisition of a company providing home health care
services, the acquisition of a contract rehabilitation therapy company providing
therapy services to affiliated and third-party skilled nursing facilities, the
acquisition of 3 skilled nursing facilities previously managed by the Company,
and the lease of two rural acute-care hospitals which are located in markets
where the Company operates skilled nursing centers. Additionally, the Company
added a net 19 management agreements for skilled nursing facilities totaling
2,665 licensed available beds, and the management of a 52-bed rural acute care
hospital located in Florida.

1998 ACQUISITIONS AND LEASE TRANSACTIONS

In August 1998, the Company began leasing four skilled nursing facilities
totaling 349 licensed available beds, located in Mississippi, North Carolina,
Arkansas and Wisconsin. One of these facilities was previously managed by the
Company. In October 1998, the Company began leasing six skilled nursing
facilities totaling 608 licensed available beds, located in Florida, Arkansas,
Kansas and Wisconsin.

In November 1998, the Company began leasing four skilled nursing facilities
totaling 675 licensed available beds, located in Florida and Missouri.

1997 ACQUISITIONS AND LEASE TRANSACTIONS

      Effective May 1, 1997, the Company acquired by merger Total Care
Consolidated, Inc., a provider of home health care services with 25 home health
offices located in North Carolina, where the Company operated 16 facilities as
of December 31, 1998, as well as South Carolina and Louisiana.

      In August 1997, the Company acquired substantially all of the business and
assets of Complex Care, Inc., a provider of physical, occupational, and speech
therapy services through approximately 45 contracts with third-party long-term
care facilities in Connecticut and Rhode Island. Combined with the Company's
existing contract rehabilitation therapy business, at December 31, 1998 the
Company provided rehabilitation services pursuant to 132 contracts in 23 states,
to Company-operated and third-party-owned facilities.

      In March 1997, the Company assumed the management of a 29-bed rural,
acute-care hospital in northern Florida where the Company currently operates a
nursing home facility and another rural hospital. Following the receipt of
necessary consents and approvals, the management of this facility was converted
into a lease of the facility retroactive to the date of the original management
agreement.
<PAGE>
 
      In December 1997, the Company acquired a 58-bed long-term care facility in
Florida that had been managed by the Company since 1991.

1998 MANAGEMENT AGREEMENTS

The Company's growth strategy also includes the management of long-term care
facilities for third-party owners. Most management agreements provide for a
management fee equal to 6% of the facility's gross revenues with terms ranging
from 5 to 20 years, with renewal options. Additionally, the Company generally
has a right of first refusal or option to purchase its managed facilities. This
strategy allows the Company to evaluate the operations of potential acquisition
candidate facilities prior to acquisition. During 1998, the company added 9
managed skilled nursing facilities to its portfolio, totaling 1,157 licensed
available beds.

THE LONG-TERM CARE INDUSTRY

      The long-term care industry provides a broad range of services to
post-acute patients and patients with medically complex and special needs who do
not require treatment in an acute care hospital setting. Long-term care
facilities offer basic services, which include skilled nursing and support,
housekeeping, laundry, dietary, recreational and social services. In addition,
long-term care facilities may provide a broad range of specialty services such
as comprehensive rehabilitation therapy (including physical, occupational and
speech therapy), respiratory therapy, ventilator care, infusion therapy, wound
care, home health care, tracheostomy care, pharmaceutical services, Alzheimer's
care and other specialty services. Long-term care facilities are increasingly
becoming an integral part of community-based, vertically-integrated, extended
care delivery systems that are capable of providing a full range of traditional
basic and specialty services.

      In recent years, long-term care services have experienced significant
growth. According to industry sources, revenues in the long-term care industry
have increased from approximately $18 billion in 1980 to approximately $80
billion in 1995. Continuing growth of the industry has been driven by a number
of factors, including: (i) aging of the population; (ii) cost-containment
pressures that are driving post-acute patients from acute care hospitals to
lower-cost settings such as long-term care facilities; (iii) advances in medical
technology enabling sophisticated long-term care providers to care for
higher-acuity patients; and (iv) demand for post-acute and specialty services in
secondary markets.

      AGING POPULATION. According to the U.S. Bureau of the Census,
approximately 90% of all patients in long-term care facilities are persons over
65 years of age, and this age group has been growing significantly faster than
the overall population. The over 65 age group experiences a greater incidence of
chronic illness and disabilities than other age groups and currently accounts
for more than two-thirds of total health care expenditures in the United States.
As the number of Americans over age 65 increases, the need for long-term care
services is also expected to increase. The U.S. Bureau of the Census estimates
that the U.S. population over age 65 will increase from approximately 31 million
in 1990 to approximately 35 million in 2000. In particular, the segment of the
U.S. population over 85 years of age, which comprises 45% to 53% of residents at
long-term care facilities nationwide, is projected to increase by more than 33%,
from approximately 3 million in 1990, to more than 4 million in 2000.

      COST-CONTAINMENT PRESSURES. In response to rising costs, government and
private pay sources have implemented cost-containment measures designed to
reduce lengths of stay in acute care hospitals. As a result, the average length
of hospital stays has been decreased, thereby increasing the number of patients
discharged from acute
<PAGE>
 
care hospital settings who require continuing medical care. Long-term care
facilities represent an attractive alternative setting for these discharged
patients because many of the post-acute services required by patients can be
provided on a cost-effective basis by clinically sophisticated long-term care
providers.

      ADVANCES IN MEDICAL TECHNOLOGY. The increasing availability of advanced
medical technology has increased life expectancies and enhanced the ability of
long-term providers to offer, on a cost-effective basis, quality services
previously provided only by acute care hospitals. As a result, a growing number
of higher-acuity patients with specialized needs can be treated in long-term
care settings.

      DEMAND FOR POST-ACUTE AND SPECIALTY SERVICES IN SECONDARY MARKETS. A major
challenge for persons requiring medical care in secondary markets is the
distance that often exists between a patient's home and regional centers that
offer primary care, rehabilitation therapy and other specialty services.
Individuals residing in secondary markets in need of services are often left
with the choice of temporarily or permanently relocating, spending extended
periods of time away from their families or commuting significant distances. As
a result, the provision of post-acute and specialty services in secondary
markets represents a significant opportunity for the long-term care industry to
grow and enhance profitability.

INDUSTRY CONSOLIDATION

      The long-term care industry is undergoing consolidation as providers seek
to build market share and compete more effectively. Current ownership of
long-term care facilities is highly fragmented, with approximately 70% of all
facilities owned by independent providers or companies operating less than 20
facilities. The increased burdens of various cost-containment measures,
increasing acuity of long-term care patients and increasing complexity of
government regulation pose significant challenges to long-term care providers
that lack sophisticated information systems, breadth of management experience
and economies-of-scale. In addition, there is a limited supply of long-term care
facilities due to the following factors: (i) state Certificate of Need ("CON")
legislation, which restricts the number of facilities that can be constructed
within a market; (ii) high construction costs; (iii) limitations on government
reimbursement for the full cost of construction; and (iv) extensive start-up
expenses. As a result of these factors, providers that have a strong reputation
within the community for providing high quality service have become attractive
acquisition targets for providers seeking to reach critical mass.

BUSINESS STRATEGY

      Centennial's objective is to continue to enhance its position as a quality
provider of basic and specialty services in both metropolitan and secondary
markets within its established regions. To achieve this objective, the Company
will focus on the following strategies:

      EXPAND NATIONALLY THROUGH REGIONAL DEVELOPMENT. The Company's expansion
efforts to date have been structured to integrate additional facilities and
services within eleven regions. By focusing on regional development, the Company
is well-positioned to manage facility operations, allocate managerial and
administrative costs over a larger revenue base, capitalize on its reputation in
existing markets, provide more effective training of facility personnel and
closely monitor the implementation of facility specific operating plans. The
Company's regional structure should allow it to build the critical mass
necessary to create networks for providing specialty services on a direct basis
and successfully contract with managed care and other third-party payors.

      IMPLEMENT MARKET-SPECIFIC BUSINESS AND NETWORK DEVELOPMENT PLANS. In its
metropolitan markets, the Company generally focuses on providing a specific
range of services and enhances market share by integrating its operations with
those of recognized delivery networks and other providers. In secondary markets,
the
<PAGE>
 
Company's goal is to play a leading role in local delivery of health care by
providing a broader range of services. The Company seeks, in certain secondary
markets, to provide many significant components of care within integrated health
care networks and to manage the flow of patients to the most appropriate,
cost-effective site of care.

      CONTINUE TO EXPAND SPECIALTY SERVICES. The Company provides a broad range
of specialty services at certain of its facilities and continues to expand its
program of outpatient and home health care services. In addition, the Company
intends to emphasize growth and expansion of its third party rehabilitation
services to allow the Company's facilities to serve as full-service providers of
specialty services to patients in its markets.

      ENHANCE OPERATIONS THROUGH THE USE OF INFORMATION TECHNOLOGY. The Company
has expended significant resources in the development of management information
systems and has placed a high priority on developing systems to assess patient
care, track financial and operational controls, analyze labor utilization and
monitor reimbursement. In addition, the Company's information technology enables
it to integrate acquired facilities or operations on a timely and cost-effective
basis with minimal disruption to operations and positions the Company to
efficiently operate in a managed care environment.

      PURSUE STRATEGIC ACQUISITIONS. The Company targets for acquisition
facilities, operating companies and related businesses that have the capacity to
be leading providers of health care services to higher-acuity patients in their
respective markets and that represent opportunities for the Company to realize
additional operating leverage through regional operating efficiencies. In
addition to outright purchases, the Company enters into lease or management
agreements with certain facilities which generally include a right of first
refusal or option to purchase the facilities. In addition to facility
acquisitions, the Company seeks to expand the rehabilitation therapy services,
pharmacy and home health care segments of its operations through the purchase of
businesses offering such specialty services.

PATIENT SERVICES

      The Company provides basic and specialty health care services as described
below.

BASIC SERVICES

Basic services are those traditionally provided to elderly patients in long-term
care facilities, including skilled nursing and support, housekeeping, laundry,
dietary, recreational and social services. The Company provides 24-hour skilled
nursing care by registered nurses, licensed practical nurses and certified
nursing aides in all of its facilities. Each facility is managed by a licensed
administrator who is responsible for the day-to-day operation of the facility.
Although treatment of patients is the responsibility of their own attending
physicians, who are not employed by the Company, each facility engages a
physician medical director who monitors the delivery of care. In addition, each
facility offers a number of individualized therapeutic activities designed to
enhance the quality of life of its patients. These activities include
entertainment events, musical productions, trips, arts and crafts, volunteer and
other programs that encourage social interaction among patients as well as
community involvement.

SPECIALTY SERVICES

      Specialty services are those provided to patients with medically complex
needs, who generally require more complex treatment and a higher level of
skilled nursing care. These services typically generate higher revenues per
patient day than basic services as a result of the higher costs associated with
treating a higher-acuity patient. Set forth below are descriptions of the
specialty services offered by the Company.
<PAGE>
 
      REHABILITATION THERAPY. The Company provides a broad range of
rehabilitation therapy services to its facilities and other third-party
providers. These services include physical, occupational and speech therapy in
the long-term care facility setting. As of December 31, 1998 the Company had
contracted to provide rehabilitation therapy services to patients in 132
facilities, 41 of which are owned or leased by the Company.

      SUBACUTE CARE. The Company's subacute care program has distinct units
within certain of its long-term care facilities that are dedicated to the care
of medically complex patients who do not require the services of an acute care
hospital. Subacute services provided or arranged by the Company's facilities
include, but are not limited to, ventilator care, respiratory care, traumatic
injury recuperation, post-cardiac rehabilitation, IV therapy, wound care,
post-stroke care, hospice care, post-surgical orthopedic rehabilitation and
peritoneal dialysis services.

      HOME HEALTH CARE. At December 31, 1998, Centennial operated 16 home health
care offices, affording the recipients of such care an alternative to a hospital
or long-term care facility setting. Such services delivered into the home
setting include skilled nursing, physical, occupational and speech therapy and
subacute care. In addition, personal care services are available from home
health care aides who assist patients with their activities of daily living.
Centennial provides home health care primarily in markets where it has long-term
care facilities.

OPERATIONS

      GENERAL. The Company's facilities are organized into 14 operating regions
and the Company's organizational structure and operations support staff provide
its facilities with the resources needed to operate effectively in these
regions. Each region has nurse consultants with responsibility for providing
guidance on patient care issues, conducting quality assurance audits, training
in clinical software and assuring compliance with applicable state and federal
regulations. The Company provides additional operational support through a
corporate team of professionals in financial accounting, reimbursement, managed
care pricing, quality assurance, human resources, regulatory compliance,
marketing, health systems development and other areas.

For all of its facilities, the Company actively manages personnel costs, which
represent the largest expense incurred in the operation of a long-term care
facility. The Company emphasizes attracting and retaining quality personnel,
including administrators and skilled nursing staff, through a number of programs
which include on-going training and education classes, employee recognition
programs, and competitive wages and benefits. In addition, the Company has an
incentive program for administrators and other key personnel based on the
achievement of certain Company goals related to quality of care and financial
performance.

      QUALITY ASSURANCE AND REGULATORY COMPLIANCE. The Company has developed a
comprehensive quality assurance program that is designed to monitor, evaluate
and improve the delivery of patient care. This program is supervised by a
registered nurse, who serves as the Company's vice president of professional
services. Pursuant to its quality control system, the Company routinely collects
information from patients, family members, employees and state survey agencies
that is then compiled, analyzed and distributed throughout the Company in order
to monitor the quality of care and services provided and the satisfaction of the
residents and their families with such services.

      MARKETING. The Company's in-house marketing department works directly with
its facilities in their efforts to market services in their respective
communities. The emphasis of the Company's marketing department is to assist
each facility in achieving a desired quality mix of revenues through increased
Medicare, private and managed care census. The Company works with each facility
to establish monthly,
<PAGE>
 
quarterly and annual census and payor mix goals and each facility is responsible
for an on-going marketing plan.

      The Company focuses on securing relationships with managed care
organizations and insurance carriers in the markets served by its facilities. At
present, many of the Company's facilities have contractual relationships with
such organizations.

MANAGEMENT INFORMATION SYSTEMS

      The Company develops, implements and maintains a comprehensive system of
management and financial controls which is designed to enable the Company to
closely monitor operating costs and quickly distribute financial and other
operational information to appropriate levels of management. Each facility
utilizes PC-based, networked computer systems for processing operating data on a
"real-time" basis as well as financial and patient care data. The Company has
established an internal network linking its facilities, operating subsidiaries,
regional managers and nurse consultants with its corporate computer network.

      The Company utilizes commercially available as well as internally
developed software in its information systems. The Company has established
on-line electronic billing with Medicare as well as with several state Medicaid
programs and produces interim cost reports for Medicare and certain state
Medicaid programs. In addition, at each facility, the system generates
computer-assisted medical records that allow for the creation of individualized
care plans, physician orders and administrative and observation records.

      The Company's information systems are easily adaptable to newly acquired
facilities and related companies to enable management to impact each facility's
financial and operating performance within a short period of time.

ACQUISITIONS

      The Company maintains an active acquisition program in order to increase
its penetration of existing regions and to capitalize on the consolidation
trends in the long-term care industry. The Company evaluates potential
acquisitions on the basis of existing profitability, long-term profit potential,
specialty services opportunities, facility location, payor mix and patient
census. Specifically, the Company targets facilities that have the capacity to
be leading providers of higher-acuity services in their respective markets and
that represent opportunities for the Company to realize additional operating
leverage through regional economies of scale and provide more profitable
specialty services. In addition, the Company enters into lease or management
agreements with certain facilities that generally include a right of first
refusal. In many cases these lease or management arrangements present
acquisition opportunities. As evidence of its ability to acquire previously
managed facilities, as of December 31, 1998, the Company leased or owned 19
facilities that it previously managed.

FACILITIES

      At December 31, 1998, Centennial operated 101 owned, leased and managed
skilled nursing facilities with 10,780 beds in 20 states and the District of
Columbia. Of this number, Centennial owned 9 facilities with 897 beds, leased 59
facilities with 6,352 beds and managed 33 facilities with 3,531 beds. Since
December 31, 1998, the Company has added 6 leased skilled nursing facilities
with 795 beds in the state of Massachusetts. At December 31, 1998, the Company's
facilities had an average of 107 beds and an average occupancy rate of 89.8%.
<PAGE>
 
      The following table lists the Company's owned, leased and managed
facilities by location, including the number of licensed available beds and the
occupancy rate as of December 31, 1998:

                                     Facilities
                Number of  ------------------------------
State             Beds     Owned   Leased Managed   Total    Occupancy %(1)
-----           ---------  -----   ------ -------   -----    --------------
Arkansas           337         -        4       -       4       72.4
DC                 296         -        1       -       1       96.0
Florida            585         1        3       3       7       86.5
Georgia            157         -        1       -       1       94.9
Idaho              166         -        2       -       2       87.1
Indiana          1,149         -       12       -      12       88.3
Kansas             458         -        3       2       5       79.0
Kentucky           356         1        2       -       3       92.3
Louisiana          376         1        3       -       4       88.1
Michigan         1,262         3        7       3      13       90.9
Mississippi        689         -        6       1       7       97.0
Missouri           440         -        2       -       2       84.3
Montana             99         -        1       -       1       87.5
North Carolina   3,202         2        9      18      29       91.3
Nebraska           158         1        -       -       1       85.5
New Mexico         119         -        -       1       1       91.9
Tennessee          119         -        -       1       1       97.4
Texas              107         -        1       -       1       94.5
Virginia           174         -        -       2       2       94.6
Washington         104         -        -       1       1       68.0
Wisconsin          427         -        2       1       3       80.5
                 ----------------------------------------------------

Totals          10,780         9       59      33      101      89.8%
                 ====================================================

(1) Occupancy is computed by dividing actual patient day census by actual
patient days available in licensed available operating beds. Does not include
facilities in the start-up phase during 1998, which include Lafayette Healthcare
Center (Florida); Crystal Oaks of Pinellas (Florida) and Mountain Ridge Wellness
Center (North Carolina).

      LEASED FACILITIES. At December 31, 1998, the Company leased 59 skilled
nursing facilities pursuant to long-term leases with various lessors. The
Company's lease arrangements are "triple net" leases, requiring the Company, at
its own expense, to maintain the premises and pay taxes, utilities and
insurance. In most cases, the leases are subordinate to certain security
interests in the facilities granted by the lessors to third-party lenders.
Centennial has a right of first refusal to purchase most of the leased
facilities.

      These leases generally have initial terms of ten to 20 years with options
to extend, and lease rates with annual increases tied to fixed schedules, the
Consumer Price Index, or changes in the prime rate.

MANAGED FACILITIES

      At December 31, 1998, the Company operated 33 facilities under long-term
management contracts with third parties. Revenues from management contracts
accounted for approximately 4.3% of the Company's total revenues for the fiscal
year ended December 31, 1998. Pursuant to these management contracts, the
Company
<PAGE>
 
performs day-to-day management functions and provides certain corporate
services, including group contract purchasing, employee training and
development, quality assurance audits, human resource management, assistance in
obtaining third-party reimbursement, financial and accounting functions, policy
development, system design and development, and marketing support. The Company's
information system monitors certain key data for each managed facility, such as
payroll, admissions and discharges, cash collections, net patient service
revenues, staff trend analysis, and measurement of operational data on a per
patient day basis. These management agreements typically have initial terms
ranging from five to 20 years and that can be terminated only for cause. Each
such management agreement provides for monthly fees generally at six percent of
gross revenues. Certain of the agreements provide for the subordination of the
management fees to the payment of the owner's debt service. The Company has a
right of first refusal to acquire certain of these managed facilities.

      During 1998, two third-party owned facilities for which the Company
provided management services were sold and the Company terminated management
agreements on these sold facilities.

      CONTRACT REHABILITATION SERVICES. At December 31, 1998, Centennial
provided contract rehabilitation services under 132 contracts in facilities in
23 states. Forty-one of the agreements are with the Company's owned or leased
facilities. Most of these agreements have initial terms of five years with
automatic renewal provisions for five successive additional terms of five years
each, unless terminated earlier upon 90 days prior notice, and are subject to
termination without cause upon 60 days prior written notice. Pursuant to these
agreements, the Company provides comprehensive rehabilitation services,
including physical, occupational and speech therapy. In addition, the Company
provides administrative services including policy formulation, licensure
compliance, training, staffing, quality control, financial report preparation
and patient census preparation. Therapy services, except for physical therapy
services, are billed per unit of therapy service provided at rates set forth in
the therapy service agreement. Physical therapy services are billed at the
Medicare published salary equivalency rate. Non-therapy services are either
billed per unit of service provided or at a flat monthly rate set forth in the
individual therapy service agreement.

COMPETITION

      The Company expects that it will face increasing levels of competition
with respect to its operations and the services it provides. The Company
competes for patients with other long-term care facilities and, to a lesser
extent, with acute care hospitals, physician practice groups, home health care
providers, community-based service programs, retirement communities and assisted
living centers. In addition, competition may grow from new market entrants,
including companies focusing primarily on specific components of the Company's
various services. Certain competing companies have greater financial and other
resources and may be more established in their respective communities than the
Company. Competition for subacute care patients is increasing by virtue of
market entry of other health care providers, such as acute care hospitals,
rehabilitation hospitals and other specialty service providers. The competitive
factors that distinguish subacute providers include the degree of acuity for
which care can be provided. The Company believes that its subacute care
facilities are characterized by a high level of acuity in patient care provided.
Other important competitive factors include the reputation of the facility in
the community, the services offered, the availability of qualified nurses, local
physicians, hospital support, rehabilitation therapists and other personnel, the
appearance of the facility and the cost of services.

SOURCE OF REVENUES AND PAYOR MIX

      The Company derives its revenues primarily from various state Medicaid
programs for indigent patients, the Medicare program for certain elderly and
disabled patients, private pay sources, rehabilitation therapy services offered
to third-party long-term care facilities and management fees. The Company
employs
<PAGE>
 
reimbursement specialists and retains outside reimbursement consultants to
monitor reimbursement rules, policies and related developments in order to
comply with reporting requirements and to assist the Company in receiving
reimbursements.

      The following table sets forth the percentage of total revenues by payor
source for the Company for the periods indicated:

                                               Years Ended          Years Ended
                                               December 31,           May 31,
                                       --------------------------- -------------
                                       1998    1997   1996   1995   1995   1994
                                       ------ ------ ------ ------ ------ ------

Percentage of total revenues:
   Medicare..........................  23.9%   23.8%  25.4%  18.2%  15.0%   6.9%
   Private pay, management fees
   and other (1).....................  42.7    39.6   31.8   23.7   20.5   19.4
                                      -----   -----  -----  -----  -----  -----
                                       66.6    63.4   57.2   41.9   35.5   26.3
   Medicaid..........................  33.4    36.6   42.8   58.1   64.5   73.7
                                      -----   -----  -----  -----  -----  -----
   Total............................. 100.0%  100.0% 100.0% 100.0% 100.0% 100.0%
                                      =====   =====  =====  =====  =====  =====

------------
(1) Private pay includes payments from third parties pursuant to contract
rehabilitation therapy services.

      MEDICARE PRIOR TO 1998. All of the Company's facilities currently in
operation are certified Medicare providers. The Medicare program consists of two
parts. Part A covers inpatient hospital services and certain services furnished
by other institutional providers, such as skilled nursing and long-term acute
care facilities. Part B covers the services of doctors, suppliers of medical
items, various types of outpatient services including physical, speech and
occupational therapy, pharmaceuticals and medical supplies, certain intensive
rehabilitation and psychiatric services and ancillary services of the type
provided by long-term care or acute care facilities. Medicare does not provide
reimbursement for community-based, intermediate-care nursing facilities.

      Under the Medicare Part A program, the Company is reimbursed for its
direct costs plus an allocation of indirect costs up to a facility specific
limit (the "routine cost limit"). As the Company has expanded its post-acute
care and other specialty services, the costs of care for these patients have
exceeded and are expected to continue to exceed the reimbursement routine cost
limits. Under current regulations, new long-term care facilities are, in certain
limited circumstances, able to apply for a three-year exemption from routine
cost limits. Unless and until such exemptions are granted, these facilities can
recover excess costs only through routine cost limit exception requests. There
can be no assurance that the Company will be able to recover such excess costs
under any pending or future requests. Payment for Medicare Part B services
depends on the nature of the services provided. Some services are reimbursed at
cost, much like Part A services. Other services, particularly parenteral and
enteral nutrition therapy, are reimbursed on a fee schedule.

      PRIVATE PAY, MANAGEMENT FEES AND OTHER. Private pay and other revenues
include payments from individuals who pay directly for services without
governmental assistance and payments from commercial insurers, HMOs, PPOs,
insurance organizations, workers' compensation programs, hospice programs and
other similar payment sources. The Company's rates for private pay patients are
higher than rates
<PAGE>
 
for patients eligible for assistance under state Medicaid programs. These
private pay rates are established on a facility-specific basis in accordance
with market factors, including rates charged by other providers in the local
market.

      MEDICAID. Medicaid includes the various state-administered reimbursement
programs for indigent patients created by federal law. Although reimbursement
rates vary from state to state, the federal government retains the right to
approve or disapprove individual state plans. Providers must accept
reimbursement from Medicaid as payment in full for the services rendered,
because the provider may not bill the patient for more than the amount of the
Medicaid payment received. Criteria for Medicaid eligibility varies from state
to state, subject to guidelines from the federal government for determination
whether a person qualifies as medically indigent and subject to changes in state
and federal regulations.

      Many of the residents at the Company's facilities who initially enter the
facilities as private pay or insurance patients are later covered by Medicaid as
their financial resources are depleted to a level of financial net worth and
income which makes them eligible for Medicaid.

      With the exception of two facilities, all of the facilities operated by
the Company participate in state Medicaid programs. Basic long-term care
services are provided to Medicaid patients, including nursing, dietary,
housekeeping and laundry and restorative health care services, room and board
and medications. Medicaid does not cover the cost of private rooms, private-duty
nurses and other costs, or amounts in excess of the Medicaid reimbursement
rates. The Balanced Budget Act of 1997 requires states to use a public notice
and comment process in determining rates for hospital services, nursing facility
services and services of intermediate care facilities/mentally retarded (but not
for home and community care). Under this process, states will be required to
publish in proposed and final form the rates, rate methodologies, and
justifications for the rates of hospitals, nursing facilities, and intermediate
care facilities/mentally retarded. Likewise, states must furnish interested
parties with a reasonable opportunity to comment on the proposed rates, rate
methodologies, and justifications. States also must take into account during the
hospital rate-setting process the situation of hospitals which serve a
disproportionate number of low-income patients with special needs. Furthermore,
payments must be sufficient to enlist enough providers so that services under
the state's Medicaid plan are available to recipients at least to the extent
that those services are available to the general population. Reimbursement rates
generally are determined by the state from "cost reports" filed annually by each
facility, on both a prospective and retrospective basis. There can be no
assurance, however, that payments under Medicaid programs will be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs.

      Cost reports are subject to routine audits by government regulatory bodies
on an annual or periodic basis and several of the Company's facilities are
currently involved in the audit process. In the event of a determination by such
a regulatory body that the amount of reimbursement exceeded allowable
reimbursement levels, the Company may be required to repay any excess amount.
Although the Company believes it has adequately provided for any repayment
obligations, there can be no assurance that such provisions will be adequate.

      CONTRACT REHABILITATION SERVICES. In general, the Company classifies
payments for rehabilitation therapy services received directly from third-party
long-term care facilities as private pay. Revenues from rehabilitation therapy
services provided to Company-operated facilities are included in the Medicare,
Medicaid and private pay sources of revenues of the Company. The Company's
charges to non-affiliates, though not directly regulated, are effectively
limited by regulatory reimbursement policies imposed on the long-term care
facilities that receive these services, as well as competitive market factors.

      MEDICARE AND MEDICAID. The Medicare and Medicaid programs are subject to
various statutory and regulatory changes which may adversely affect the
Company's business.
<PAGE>
 
There can be no assurance that payments for services and supplies under
governmental reimbursement programs will remain comparable to present levels. In
fact, as discussed later in this section certain provisions will change
effective in 1998. The Company may be subject to rate reductions as a result of
federal budgetary legislation.

      Various state Medicaid programs periodically experience budgetary
shortfalls which may result in Medicaid payment delays to the Company. In
addition, the failure, even inadvertent, of the Company to comply with
applicable reimbursement regulations could adversely affect the Company's
business. Although there can be no assurance that future adjustments will not
have a material adverse effect on the Company, the Company believes that it has
properly applied the various payment formulas and that it is not likely that
audit adjustments would have a material adverse effect on the Company. In 1990
and 1993, Congress passed legislation ("OBRA" and "OBRA 93") revising Medicare
nursing standards and reimbursement and methods for nursing homes. Although the
Company believes that it is in substantial compliance with the current
requirements of OBRA and OBRA 93, it is unable to predict how future
interpretation and enforcement of regulations promulgated under OBRA and OBRA 93
by the state and federal governments could affect the Company in the future.

      Effective July 1, 1995, the Health Care Financing Administration ("HCFA")
promulgated new survey, certification and enforcement rules governing long-term
care facilities participating in the Medicare and Medicaid programs, which
impose significant new requirements on long-term care facilities. The breadth of
the new rules creates uncertainty over the manner in which the rules will be
implemented, the ability of any long-term care facility to comply with them and
the effect of the new rules on the Company.

      Under the rules, unannounced standard surveys of facilities must be
conducted at least once every 15 months with a statewide average of 12 months.
In addition to the standard survey, survey agencies have the authority to
conduct surveys as frequently as necessary to determine whether facilities
comply with participation requirements, to determine whether facilities have
corrected past deficiencies and to monitor care if a change occurs in the
ownership or management of a facility. Furthermore, the state survey agency must
review all complaint allegations and conduct a standard or an abbreviated survey
to investigate such complaints if a review of the complaint shows that a
deficiency in one or more of the Federal requirements may have occurred and that
only a survey will determine whether a deficiency or deficiencies exist. If a
facility has been found to furnish substandard care, it is subject to an
extended survey. The extended survey is intended to identify the policies and
procedures that caused a facility to deliver substandard care.

      HCFA's new rules substantially revise provisions regarding the enforcement
of compliance requirements and remedies for long-term care facilities with
deficiencies. At a minimum, the following remedies are available: termination of
provider agreement; temporary management; denial of payment for new admissions;
civil money penalties; closure of the facility in emergencies or transfer of
patients or both; and on-site state monitoring. States may also adopt optional
remedies. The new rules divide remedies into three categories. Category I
remedies include directed plans of correction, state monitoring and directed
in-service training. Category 2 remedies include denial of payments for new
admissions, denial of payments for all individuals (imposed only by HCFA) and
civil money penalties of $50 to $3,000 per day. Category 3 remedies include
temporary management, immediate termination or civil money penalties of $3,050
to $10,000 per day. The rules define situations in which one or more of the
penalties must be imposed.

      FEE SPLITTING AND REFERRALS. The Company is also subject to federal and
state laws that govern financial and other arrangements between providers.
Federal laws, as well as the laws of certain states, prohibit payments or fee
splitting arrangements between providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for
<PAGE>
 
medical products and services. These laws include the federal "anti-kickback
law" which prohibits, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Medicare and
Medicaid patients.

      Effective January 1, 1995, OBRA 93 prohibits any physician with a
financial relationship (defined as a direct or indirect ownership or investment
interest or compensation arrangement) with an entity from making a referral for
"designated health services" to that entity and prohibits that entity from
billing for such services. "Designated health services" do not include skilled
nursing services but do include many services which long-term care facilities
provide to their patients, including, but not limited to, infusion therapy and
enteral and parenteral nutrition. Various exceptions to the application of this
law exist, including one, which protects the payment of fair market compensation
for the provision of personal services, so long as various requirements are met.
Violations of these provisions may result in civil or criminal penalties for
individuals or entities and/or exclusion from participation in the Medicaid and
Medicare programs. Various state laws contain analogous provisions, exceptions
and penalties. Violation of these state laws could lead to loss of licensure,
significant fines and other penalties. The Company believes that in the past it
has been, and in the future it will be, able to arrange its business
relationships so as to comply with these provisions. Failure to comply with such
laws could subject the Company to civil fines, possible exclusion from
government reimbursement programs and, in certain cases, criminal prosecution.

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 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. Generally, the PPS per diem, which
would cover routine service, ancillary and capital related costs, will initially
be 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 (skilled
nursing facility) 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 believes that revenues will be lower under PPS; however,
reductions in therapy costs, use of general purchasing agents and proper
documentation of minimum data sets ("MDS") should offset the effect of any rate
reductions. The Company can give no assurance that payments under such programs
in the future will remain at a level comparable to the present level or
increase, nor can the Company give assurance that it will be able to obtain
sufficient cost reductions to offset the reduction in revenues under PPS.
Decreases in the level of payments or failure to reduce costs could have a 
material adverse effect on the company.

      The Medicare prospective payment system begins for cost reporting periods
starting on or after July 1, 1998. For the majority of the Company's facilities,
the Initial Year of the four-year phase in period will begin January 1, 1999.
For facilities acquired by the Company in fiscal 1998, the Initial Year for the
PPS system will be from the date of acquisition through December 31, 1998. Year
Two of the PPS system will be fiscal 1999 for these nursing centers. The Initial
Year blended rate will be based 75% on the facility-specific rate and 25% on the
federal per diem rate. The Year Two prospective rate will be based 50% on the
facility-specific rate and 50% on the federal per diem rate. The Year Three
blended rate will be based 25% on the facility-specific rate and 75% on the
federal per diem rate. The Year Four prospective rate will be 100% of the
federal per diem rate. Additionally, the Act imposes fee schedules or per
beneficiary limitations on outpatient supplies and services and requires
consolidated billing for all Medicare beneficiaries residing in a skilled
nursing facility. The Company has already taken steps to comply with the
consolidated billing requirements. The impact of per beneficiary limitations on
outpatient therapy services could adversely affect the Company's skilled nursing
facility revenue and its therapy revenue. For the year ended December 31, 1998,
the Company derived approximately 22% of its revenue from Medicare at its long-
term care facilities. Additionally, the Congressional Budget Office has revised
economic projections which include Medicaid cuts of $1.2 billion to Medicaid
long-term care providers over the next five years. For the year ended

<PAGE>
 
December 31, 1998, the Company derived approximately 33% of its revenues from
Medicaid at its long-term care facilities.

     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:

      .     actual costs;

      .     per visit cost limits, reduced to 105% of the median per visit costs
            for freestanding home health agencies, or;

      .     a new blended agency-specific per beneficiary annual limit applied
            to the agency's unduplicated census count of Medicare patients, and
            based 75% on 98% of reasonable costs for agency's twelve month 
            cost reporting period during fiscal year 1994 and 25% on 98% of the 
            standardized regional average of these costs in the agency's 
            census region.

      The Act also provides that cost limits and per beneficiary limits 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. For the year ended December 31, 1998
Centennial derived 7% of its revenues from home health care.

      Although management believes that a prospective pay system will benefit
companies, such as Centennial, that have sophisticated information systems
allowing them to track and document acuity levels and costs, there can be no
assurance that the Company will recognize any such benefits. The Company
currently operates in many states having Medicaid programs with acuity-based
reimbursements levels and incentives for efficient, quality operations. The
Company has effectively operated in these programs utilizing both its patient
care information systems, for the documentation of patient acuity levels for
maximum reimbursement, and its management information systems, to control
expenses. In many instances, the Company's revenues have increased under this
form of reimbursement, although there can be no assurance that such results will
be achieved under the payment systems described above. Prior to the enactment of
the Act, the Company anticipated that regulation and market changes would result
in a flattening of growth of its third party contract therapy business. The
latest legislative changes do not alter these views.

      Effective April 10, 1998, regulations were adopted by Health Care
Financing Administration, which revise the methodology for determining the
reasonable cost for contract therapy services including physical therapy,
respiratory therapy, occupational therapy and speech language pathology. Under
the regulations, the reasonable costs for contract therapy services are limited
to geographically - adjusted salary equivalency guidelines. However, the revised
salary equivalency guidelines will no longer apply when the PPS system
applicable to the particular setting for contract therapy services (e.g. skilled
nursing facilities, home health agencies, etc.) goes into effect. In most
locations the reduced rates have the effect of reducing the amount of
reimbursement for an hour of occupational or speech therapy and increasing the
amount of reimbursement for an hour of physical therapy. The Company believes
that such rate reductions will be completely or partially offset by cost
reductions and changes in the method of delivering such services. Due to these
changes in operations and cost structure and the relative size of the Company's
therapy business, the Company does not expect these reimbursement changes to
have a material long-term adverse effect on the Company. During 1998, the
Company derived 14% of its revenue from third-party contract therapy services.

GOVERNMENT REGULATION

      The federal government and all states in which the Company operates
regulate various aspects of the Company's business. In addition to the
regulation of rates by governmental payor sources, the development and operation
of long-term care

<PAGE>
 
facilities and the provision of long-term care services are subject to federal,
state and local licensure and certification laws which regulate with respect to
a facility, among other matters, the number of beds, the services provided, the
distribution of pharmaceuticals, equipment, staffing requirements, patients'
rights, operating policies and procedures, fire prevention measures,
environmental matters and compliance with building and safety codes. Home health
care providers are also subject to extensive government regulations. Regulators
recently announced plans to impose new regulations and to increase regulatory
enforcement activities. There can be no assurance that federal, state or local
governmental regulations will not change or be subjected to new interpretations
that impose additional restrictions which might adversely affect the Company's
business.

      Licensing, certification and other applicable standards vary from
jurisdiction to jurisdiction and are revised periodically. State agencies survey
or inspect all long-term care facilities on a regular basis to determine whether
such facilities are in compliance with the requirements for participation in
government-sponsored third-party payor programs. In some cases or upon repeat
violations, the reviewing agency has the authority to take various adverse
actions against a facility, including the imposition of fines, temporary
suspension of admission of new patients to the facility, suspension or
decertification from participation in the state Medicaid or the Medicare
program, offset of amounts due against future billings to the Medicare or
Medicaid programs, denial of payments under Medicaid for new admissions,
reduction of payments, restrictions on the ability to acquire new facilities
and, in extreme circumstances, revocation of a facility's license or closure of
a facility. The compliance history of a prior provider may be used by state or
federal regulators in determining possible action against a successor provider.

      The Company believes that its facilities are in substantial compliance
with all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements. In
the ordinary course of its business, however, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
There can be no assurance that future agency inspections will not have a
material adverse effect on the Company.

      CERTIFICATES OF NEED. A majority of the states in which the Company
operates have adopted CON or similar laws which generally require that a state
agency determine that a need exists prior to the construction of new facilities,
the addition or reduction of licensed beds or services, the implementation of
other changes, the incurrence of certain capital expenditures, the approval of
certain acquisitions and changes in ownership or, in certain states, the closure
of a facility. State CON approval is generally issued for a specific project or
number of beds, specifies a maximum expenditure, is sometimes subject to an
inflation adjustment, and requires implementation of the proposal within a
specified period of time. Failure to obtain the necessary state approval can
result in the inability of the facility to provide the service, operate the
facility or complete the acquisition, addition or other change and can also
result in adverse reimbursement action or the imposition of sanctions or other
adverse action on the facility's license.

      ENVIRONMENTAL AND OTHER. The Company is subject to a wide variety of
federal, state and local environmental and occupational health and safety laws
and regulations. Among the types of regulatory requirements faced by providers
are: air and water quality control requirements, waste management requirements,
specific regulatory requirements applicable to asbestos, polychlorinated
biphenyls and radioactive substances, requirements for providing notice to
employees and members of the public about hazardous materials and wastes and
certain other requirements.

      In its role as owner and/or operator of properties or facilities, the
Company may be subject to liability for investigating and remedying any
hazardous substances that have come to be located on the property, including
such substances that may
<PAGE>
 
have migrated off of, or emitted, discharged, leaked, escaped or been
transported from, the property. The Company's operations may involve the
handling, use, storage, transportation, disposal and/or discharge of hazardous,
infectious, toxic, radioactive, flammable and other hazardous materials, wastes,
pollutants or contaminants. Such activities may harm individuals, property or
the environment; may interrupt operations and/or increase their costs; may
result in legal liability, damages, injunctions or fines; may result in
investigations, administrative proceedings, penalties or other governmental
agency actions; and may not be covered by insurance. The cost of any required
remediation or removal of hazardous or toxic substances could be substantial and
the liability of an owner or operator for any property is generally not limited
under applicable laws and could exceed the property's value. Although the
Company is not aware of any material liability under any environmental or
occupational health and safety laws, there can be no assurance that the Company
will not encounter such liabilities in the future, which could have a material
adverse effect on the Company.

PERSONNEL

      As of December 31, 1998, the Company employed, directly or indirectly,
approximately 10,000 persons, including approximately 8,000 full-time and 2,000
part-time employees. As of December 31, 1998, collective bargaining agreements
were in effect related to 10 facilities covering approximately 662 employees and
negotiations were in progress with bargaining units at six additional
facilities. The Company believes that it has a satisfactory relationship with
these employees and strives to maintain this relationship by offering
competitive benefit packages, training programs and opportunities for
advancement.

INSURANCE

      The Company maintains property, liability, and professional liability
insurance policies in amounts and with such coverage and deductibles that are
deemed appropriate by management, based upon historical claims, industry
standards and the nature and risks of its business. The Company also requires
that physicians practicing at its facilities carry medical professional
liability insurance to cover their respective individual professional
liabilities. The Company directly and indirectly maintains a guaranteed cost
insurance program for workers' compensation. This program covers employees as
required by state law. In certain states, the Company participates in state
approved programs. Contractors who provide services to the Company must
demonstrate adequate insurance prior to commencing work. There can be no
assurance that any claims against the Company will not be successful, or if
successful will not exceed the limits of available coverage, or that such
coverage will continue to be available at acceptable rates.

ITEM 2. PROPERTIES

OFFICE LEASES

      Prior to December 1, 1998, Centennial's corporate headquarters occupy
approximately 35,000 square feet of office space in a commercial building
located in Atlanta, Georgia, under a lease agreement which terminates on
September 30, 2001 and allows one five-year renewal option. Under an amendment
to the lease agreement effective December 1, 1998, the company leased an
additional 6,500 square feet of office space in the same location. The Company
believes that such office space is adequate for its current requirements.

      Centennial also leases approximately 12,800 square feet of office space in
Atlanta, Georgia, which was the previous location of its corporate headquarters.
Centennial subleases the entire space to a subtenant and both the primary lease
and the sublease terminate on November 30, 1999. THS leases approximately 18,000
square feet of office space in Louisville, Kentucky, which was THS's corporate
headquarters prior to the THS Merger. The lease term expires January 31, 2002.
The
<PAGE>
 
Company has entered into subleases for the entire space for the remaining term
of the primary lease.

ITEM 3. LEGAL PROCEEDINGS

      As of December 31, 1998, the Company did not have any pending legal
proceedings that separately, or in the aggregate, if adversely determined, would
have a material adverse effect on the Company. The Company is, and may be, from
time to time, party to litigation or administrative proceedings which arise in
the normal course of business.

     On March 26, 1999, the Company received an investigatory subpoena from the
Department of Health & Human Services, Office of the Inspector General
requesting records in connection with an investigation of possible or otherwise
improper claims for payment under Title XVIII (Medicare) of the Social Security
Act. The request relates to records for the period January 1, 1994 to the
present concerning certain of the Company's internal policies and relates to
four long-term care facilities operated by the Company. The Company is not aware
of the origin of the investigation or its scope but intends to provide all
requested records and cooperate fully with the investigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

<PAGE>
 

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

      (a) The Company's Common Stock is traded on The Nasdaq Stock Market's
National Market System under the symbol "CTEN." The high and low bids for the
Company's Common Stock as reported on The Nasdaq Stock Market during each
quarter during 1998 are shown below:

   1998                                    High         Low
   ----                                    ----         ---

 First quarter  .. .. .. .. .. .. .. ..   25.125      19.625
 Second quarter .. .. .. .. .. .. .. ..   25.00      16.4375
 Third quarter  .. .. .. .. .. .. .. ..   20.375        7.50
 Fourth quarter .. .. .. .. .. .. .. ..   15.50        7.375

At March 31, 1999, the last reported sale price of the Common Stock was $8.875 
per share and there were approximately 64 record holders of Common Stock.

<PAGE>
 
      The Company has not declared any cash dividends on its Common Stock. The
Company expects that future earnings, if any, will be retained for the growth
and development of the Company's business and, accordingly, the Company does not
anticipate that any dividends will be declared or paid on the Common Stock for
the foreseeable future. The declaration, payment and amount of future dividends,
if any, will depend upon the future earnings, results of operations, financial
position and capital requirements of the Company, among other factors, and are
limited by the Company's Credit Agreement with CoreStates Bank, N.A. and
NationsBank, N.A. as agents for the lenders named therein.

Recent Sales of Unregistered Securities.

      None

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data has been derived from the Company's
Consolidated Financial Statements. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere herein. The selected consolidated financial data set forth
below for the Company as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, is derived from the audited
financial statements included elsewhere herein The selected consolidated
financial data set forth below for the seven months ended December 31, 1995 and
for the years ended May 31, 1995 and 1994 has been derived from financial
statements not included elsewhere herein.
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                Seven Months
                                                            For the year ended                      Ended       For the year
                                                                December 31,                     December 31,   ended May 31,
                                                  --------------------------------------------   ------------ -----------------
                                                    1998        1997        1996       1995(1)       1995       1995     1994
                                                  --------    --------    --------    --------   ------------ -------  --------
                                                                         (in thousands, except per share data)
<S>                                               <C>         <C>         <C>         <C>         <C>        <C>       <C>
Statement of Operations Data:
 Net patient service revenues..................   $342,203    $296,321    $227,387    $ 71,862    $ 42,103   $ 61,856  $ 38,115
 Management fee and other revenues.............     15,442       7,952       5,661       3,364       2,108      3,362     3,384
                                                  --------    --------    --------    --------      -------  --------  --------
    Total revenues.............................    357,645     304,273     233,048      75,226      44,211     65,218    41,499
 Facility operating expenses...................    275,489     234,259     183,324      58,565      35,262     48,872    29,510
 Lease expense.................................     22,946      21,740      18,777       7,702       4,651      6,901     4,823
 Corporate administrative costs................     21,515      16,055      11,400       5,027       3,526      3,396     2,927
 Depreciation and amortization.................      9,292       6,760       5,012         738         429        290        82
 Loss on closure of nursing facility...........      4,010         -           -           -           -          -         -
 Provision for asset revaluation...............     12,152         -           -           -           -          -         -
 Terminated merger transaction costs...........      3,619         -           -           -           -          -         - 
                                                  --------    --------    --------    --------      -------  --------  --------
    Operating income before net interest
      expense and equity in income (loss) of
      unconsolidated partnerships..............      8,622      25,459      14,535       3,194         343      5,759     4,157
 Interest income (expense), net................     (7,154)     (8,022)     (9,373)       (176)       (116)        57       131
 Equity in income (loss) of
    unconsolidated partnerships.................       -           -          (108)        448          25        (28)    1,733
                                                  --------    --------    --------    --------      -------  --------  --------
    Income before income taxes,
      minority interest and extraordinary item..     1,468      17,437       5,054       3,466         252      5,788     6,021
 Provision for income taxes.....................     1,504       6,800       2,092       1,389         328      2,106     2,230
                                                  --------    --------    --------    --------      -------  --------  --------
 Income (loss) before minority
    interest and extraordinary item............        (36)     10,637       2,962       2,077         (76)     3,682     3,791
 Minority interest in net income of
    subsidiary, net of income taxes............       (279)       (252)       (183)       (201)        (82)      (207)       -
                                                  --------    --------    --------    --------      -------  --------  --------
 Net income (loss) before extraordinary item....      (315)     10,385       2,779       1,876        (158)     3,475     3,791
 Extraordinary item - forgiveness of
    debt, net of income taxes..................        -           -           -           -           -          250     1,598
 Extraordinary item - loss on extinguishment
    of debt, net of income taxes...............        -          (537)        -           -           -          -         -
                                                  --------    --------    --------    --------      -------  --------  --------
 Net income (loss).............................   $   (315)   $  9,848    $  2,779    $  1,876    $   (158)  $  3,725  $  5,389
                                                  ========    ========    ========    ========      =======  ========  ========
Per common share information:
Diluted:
 Income (loss) before extraordinary item.......   $  (0.03)   $   0.54    $   0.12    $   0.72    $  (0.06)  $   1.35  $   1.60
 Extraordinary item - forgiveness of
    debt, net of taxes.........................        -           -           -           -           -         0.10      0.68
 Extraordinary item - loss on extinguishment
    of debt, net of income taxes...............        -         (0.06)        -           -           -          -         -
                                                  --------    --------    --------    --------      -------  --------  --------
 Net income (loss) (2).........................   $  (0.03)   $   0.48    $   0.12    $   0.72    $  (0.06)  $   1.45  $   2.28
                                                  ========    ========    ========    ========      =======  ========  ========
 Weighted average number of common and common
    stock equivalents outstanding..............     12,078       8,462       4,782       2,601        2,601     2,576     2,363
                                                  ========    ========    ========    ========      =======  ========  ========
</TABLE>


<TABLE>
<CAPTION>
                                                              As of December 31,                     As of May 31,
                                             -------------------------------------------------    -------------------
                                               1998          1997          1996          1995       1995       1994
                                             --------       -------       -------      -------     -------    -------
                                                                            (in thousands)
<S>                                          <C>          <C>           <C>           <C>         <C>         <C>
Balance Sheet Data:
 Working capital............................ $  56,575    $ 33,097      $  8,702      $  3,984    $ 4,805     $ 5,540
 Total assets...............................   288,372     243,649       193,448       155,018     25,499      14,172
 Long-term debt and subordinated debt,
    less current maturities.................   112,849      78,913       107,795        83,559      4,558         676
 Preferred stock (3)........................       -            -         21,305        19,455      9,187       4,300
 Net shareholders' equity...................   113,683     113,104        11,952        10,869      2,082       1,527
</TABLE>

----------

(1)   During 1995, the Company changed its fiscal year from May 31 to December
      31 resulting in a seven month transition period ending December 31, 1995.

(2)   Net income per common share for the fiscal years ended December 31, 1997
      and 1996 excludes dividends and accretion on preferred stock of $5.9
      million and $2.2 million, respectively.

(3)   Carried at estimated redemption value with accretion of dividends charged
      against shareholders' equity.

<PAGE>
 
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
        OF OPERATIONS

      The following discussion should be read in conjunction with the
accompanying Consolidated Statements of Operations for the year ended December
31, 1998.

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 101 owned, leased and managed skilled nursing
facilities with approximately 10,780 licensed available beds in 20 states and
the District of Columbia. The Company provides basic and specialty healthcare
services. Basic services include skilled nursing and support, housekeeping,
laundry, dietary, recreational and social services. Specialty services include
comprehensive rehabilitation therapy, respiratory therapy, ventilator care,
infusion therapy, wound care, home health care and other subacute and specialty
services. As components of its specialty services, at December 31, 1998,
Centennial provided rehabilitation therapy services on a contract basis to
third-party owned and Company-operated skilled nursing facilities in 23 states
pursuant to 132 contracts and provided home health care services through 16
licensed home health offices.

On October 22, 1998 Centennial announced that its Board of Directors had
approved the sale of the Company for $16.00 per share in cash to a new company,
(Centennial HealthCare Holdings Corporation), formed by Welsh, Carson, Anderson
& Stowe, whose affiliates currently hold approximately 23% of the Company's
common stock, (the "Proposed Merger").

On April 2, 1999, Centennial HealthCare Holdings Corporation notified the
Company that it was terminating the definitive merger agreement. Accordingly, in
its December 31, 1998 Consolidated Financial Statements, the Company has 
expensed approximately $3.6 million in terminated merger transaction 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 "New
Facility Leases".

During the third quarter of 1998, the Company completed its review of the
effects of the upcoming prospective payment system ("PPS") on its operations.
Based upon the Company's projections of future revenue and expense changes
associated with the phase-in of PPS, the Company determined that profitability
at certain of its nursing centers acquired in the Company's merger with
Transitional Health Services, Inc., (the "THS Merger"), would be less than
expected. In addition, the Company has experienced continued declines in revenue
at Total Care Consolidated, Inc., ("TC"), the Company's subsidiary providing
home health services, due to decreases in home health visits during 1998 and
decreases in Medicare reimbursement for home health services. Accordingly,
during the third quarter of 1998, the Company recorded write-downs of property
and equipment and goodwill at its nursing facilities of approximately $3.4
million and $7.6 million, respectively. In addition, the Company wrote off
approximately $1.2 million of goodwill associated with TC.

In December 1995, as part of the THS Merger, the Company assumed operations of
THS of South Bend, a 191-bed skilled nursing facility located in South Bend,
Indiana. Prior to its acquisition by the Company, this facility had a history of
operating losses, had received negative state licensure surveys, and was in
jeopardy of losing its license. At the time of the acquisition, the Company
recorded a $3.0 million reserve against a future loss on the disposition of the
facility, which the Company intended to complete within two years. The Company
was unable to recertify this facility for Medicaid, and management determined
that the best course of action was to close the facility. The facility was
closed in November 1998. During the third quarter of 1998, the Company recorded
an estimated loss of $4.0 million associated with the closure of this facility
and the relocation of its residents. The Company continues to market the
facility for sale with disposition expected by the second quarter of 1999. As of
December 31, 1998, the carrying value of the facility was approximately $1.8
million. The Company suspended depreciation of these assets in August of 1998.
Depreciation on these assets would have approximated $25,000 during the last
five months of 1998.

<PAGE>
 
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.

During the first quarter of 1998, the Company entered into management agreements
for six skilled nursing facilities, with a total of 836 licensed available beds,
located in North Carolina. The agreements each have a five-year term, and
provide the Company with a right of first refusal to purchase the related
facilities. Also in the first quarter of 1998, the Company entered into a
management agreement for a 59-bed rural hospital in northern Florida.

In December 1997, Centennial acquired a 58-bed skilled nursing facility in St.
Petersburg, Florida, (the "Florida Facility") which had previously been managed
by the Company since June 1991. The Florida Facility was formerly owned by an
affiliate of the president of the Company. Total consideration of approximately
$3.3 million included borrowings under the Company's Senior Credit Facility with
First Union National Bank ("First Union"), NationsBank, N.A., ("NationsBank"),
as agents and lenders and the other lenders named therein, (the "Senior Credit
Facility"), of approximately $1.1 million, and the reduction of a note
receivable to the Company from the facility of approximately $2.2 million.

In August 1997, Centennial acquired substantially all of the business and assets
of Complex Care, Inc., ("CCI"), a provider of physical, occupational and speech
therapy services through 45 contracts with long-term care facilities. The
Company paid total consideration of $7.0 million, utilizing borrowings under its
Senior Credit Facility. The Company may pay additional consideration under an
earn-out agreement.

In May 1997, the Company acquired by merger Total Care Consolidated, Inc.,
("TC"), a provider of home health services, with 25 home health offices. Total
consideration of $8.0 million consisted of $6.0 million in cash, which was
funded under the Senior Credit Facility, and $2.0 million in the form of a
convertible promissory note due April 30, 1999.

In March 1997, the Company acquired a leasehold interest in a rural hospital
located in northern Florida. In October 1996, the Company entered into a
management agreement and a lease agreement with the owner of a hospital and
three licensed home health care offices, located in northern Florida. The
agreement provided that the Company would manage the hospital until all
necessary approvals and licenses were obtained, at which time the Company would
operate the hospital under a long-term lease. The Company accounted for the
transaction as a management agreement beginning in October 1996; in June 1997,
all necessary approvals and licenses were obtained, and the Company has operated
the hospital under a long-term lease since that date. The above hospital leases
together are hereafter referred to as the "Hospitals".

RESULTS OF OPERATIONS

Years Ended December 31, 1998 and 1997

NET PATIENT SERVICE REVENUES. Net patient service revenues increased from $296.3
million in 1997 to $342.2 million in 1998, an increase of $45.9 million or
15.5%. For the year ended December 31, 1998, the Company recorded a $2.0 million
reserve related to the recording of therapy costs paid to Paragon
Rehabilitation, Inc., the Company's subsidiary providing therapy services. The
Company's intermediary has denied these costs and the Company has appealed the
adjustment. The Company requested an expedited hearing on this matter and a
hearing has been set for September, 1999. The Company will aggressively pursue
its appeal of this matter.

Total revenues associated with the New Facility Leases approximated $13.3
million in 1998. Revenues for the Florida Facility approximated $3.3 million
during 1998, and revenues from the Hospitals added approximately $3.1 million to
revenues during the year ended December 31, 1998. Revenues associated with the
acquisition of TC and the acquisition of the CCI contracts added approximately
$9.0 million and $10.7 million, respectively, to revenues during 1998. Same
store revenues from home health services for the period from acquisition (May
1997), through December 31, 1997 and the corresponding period in 1998, decreased
approximately $3.2 million compared to the prior year due to a decline in home
health visits and Medicare rate decreases implemented in 1998. Revenues from
PTS, the Company's subsidiary providing intravenous therapy and other services,
increased approximately $4.2 million during 1998 over the prior year due to
increased volume from existing contracts and the expansion of services provided
to
<PAGE>
 
both the Company's managed nursing facilities and other third parties. Revenues
from existing facilities increased approximately $6.2 million in 1998 when
compared to 1997, due primarily to an increase in the quality revenue mix of the
facilities due to increasing admissions of higher acuity patients and from an
increase in the delivery of specialty services. Revenues at the Company's
subsidiary providing therapy services increased approximately $1.3 million in
1998 due primarily to growth in existing contract revenues. This growth was
primarily the result of favorable salary equivalency rate changes in certain
states in which the Company operates as well as improvements in productivity of
the CCI contracts following a short downturn in volume subsequent to the 1997
acquisition.
<PAGE>
 
MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues increased
from $8.0 million in 1997 to $15.4 million in 1998, an increase of $7.4 million,
or 94.2%, which was primarily attributable to the Company's addition of facility
management agreements during 1998 and the performance of additional
fee-generating services to existing managed facilities.

FACILITY OPERATING EXPENSES. Facility operating expenses increased from $234.3
million in 1997 to $275.5 million in 1998, an increase of $41.2 million or
17.6%, resulting from both acquisitions and same store growth. Operating
expenses for the New Facility Leases approximated $11.2 million during 1998.
Operating expenses from the Florida Facility approximately $2.5 million during
1998, and operating expenses for the Hospitals added approximately $2.7 million
to operating expenses during 1998 compared to the prior year. The acquisition of
TC and the acquisition of the CCI therapy contracts added approximately $8.3
million and $8.0 million, respectively, to operating expenses during 1998. Same
store operating expenses from home health services for the period from
acquisition (May 1997), through December 31, 1997 and the corresponding period
in 1998, decreased approximately $2.2 million during 1998 when compared to the
prior year, due to a decline in home health visits in 1998 and cost reductions
in the Company's delivery of care. Operating expenses at PTS increased $3.7
million over 1997 due to increased volume from existing contracts and the
expansion of services provided to the Company's managed facilities and other
third parties. The remaining increase of approximately $7.3 million in 1998 when
compared to 1997 was due primarily to increases in operating expenses at
existing facilities. This increase was due primarily to providing care for
higher acuity patients as well as costs associated with training nursing and
support staff on the Company's PPS systems and procedures.

LEASE EXPENSE. Lease expense increased from $21.7 million in 1997 to $22.9
million in 1998, an increase of $1.2 million, or 5.5%, due primarily to the New
Facility Leases.

CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$16.1 million in 1997 to $21.5 million in 1998, an increase of $5.4 million, or
34.0%, which was primarily attributable to additional overhead to accommodate
the expansion in therapy services contracts, including the acquisition of the
CCI contracts, the addition of long-term care facility management agreements,
the acquisition of TC, the Hospitals and the New Facility Leases.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $6.8
million in 1997 to $9.3 million in 1998, an increase of $2.5 million, or 37.5%,
which was primarily attributable to acquisitions and additional depreciation
expense incurred as a result of fixed asset purchases during 1997 and 1998.

LOSS ON CLOSURE OF NURSING FACILITY. During the third quarter of 1998, the
Company recorded an estimated loss of $4.0 million associated with the closure
of THS of Southbend and the relocation of the facility's residents.

PROVISION FOR ASSET REVALUATION. During the third quarter of 1998, the Company
recorded write-downs of certain long-lived assets at its nursing facilities and
at TC of $11.0 million and $1.2 million, respectively.

TERMINATED MERGER TRANSACTION COSTS. During the fourth quarter of 1998, the 
Company recorded approximately $3.6 million of expenses associated with the 
dissolution of the Proposed Merger.

INTEREST INCOME. Interest income increased from approximately $636,000 in 1997
to $2.1 million in 1998, an increase of approximately $1.4 million due to
interest revenue recorded on working capital advances to managed nursing
facilities.

INTEREST EXPENSE. Interest expense increased from $8.7 million in 1997 to $9.2
million in 1998, an increase of approximately $507,000 or 5.9%, which was
primarily attributable to the increase in debt of approximately $37.7 million
during 1998 related to borrowings for working capital, net of the reduction of
debt by approximately $60.4 million in the third and fourth quarters of 1997 as
a result of the initial public offering.
<PAGE>
 
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
39.0% in 1997 to 102.5% in 1998, an increase in the rate of 63.5%, due to an
increase in permanent tax differences associated with the write off of non-
deductible goodwill.

Years Ended December 31, 1997 and 1996

NET PATIENT SERVICE REVENUES. Net patient service revenues increased from $227.4
million in 1996 to $296.3 million in 1997, an increase of $68.9 million or
30.3%, of which approximately $20.7 million was attributable to the addition of
the operations of three long-term care facilities and two rural hospitals.
Revenues from TC and CCI were approximately $18.6 million and $6.1 million,
respectively, in 1997. The remaining increase of $23.5 million was attributable
to growth in existing facility revenues and therapy services contract revenues.
The increase in existing facility revenues during 1997 of $14.9 million resulted
primarily from a shift in patient revenue mix from Medicaid resources to higher
margin Medicare and commercial payors, greater increases in Medicaid rates than
experienced in 1996, and favorable settlements of prior year open cost reports.
The increase in revenues at the Company's subsidiary providing therapy services
of $8.6 million, exclusive of the CCI contracts, resulted from the net addition
of 19 rehabilitation therapy services contracts during 1997 as well as an
overall increase in therapy revenue related to existing contracts.

MANAGEMENT FEES AND OTHER REVENUES. Management fees and other revenues increased
from $5.7 million in 1996 to $8.0 million in 1997, an increase of $2.3 million,
or 40.5%, which was primarily attributable to the Company's addition of facility
management agreements during 1997.

FACILITY OPERATING EXPENSES. Facility operating expenses increased from $183.3
million in 1996 to $234.3 million in 1997, an increase of $51.0 million or
27.8%, of which approximately $16.4 million was attributable to the addition of
the operations of three long-term care facilities and two hospitals. TC and the
CCI therapy contracts added approximately $17.0 million and $5.2 million,
respectively, to operating expenses during 1997. The Company's expenses from
existing contract therapy services increased $9.3 million over the prior year
period related primarily to growth in therapy contracts during 1997. The
remaining $3.1 million was attributable primarily to an increase in costs at
existing long-term care facilities and to providing care for higher acuity
patients during the current year period.

LEASE EXPENSE. Lease expense increased from $18.8 million in 1996 to $21.7
million in 1997, an increase of $3.0 million, or 15.8%, of which approximately
$1.2 million was attributable to the addition of one leased long-term care
facility and the Hospitals. The remaining $1.8 million increase was due
primarily to an expansion of the Company's corporate office lease, and rent
escalations in certain facility leases, which are tied to increases in operating
revenue and income.

CORPORATE ADMINISTRATIVE COSTS. Corporate administrative costs increased from
$11.4 million in 1996 to $16.1 million in 1997, an increase of $4.7 million, or
40.8%, which was primarily attributable to additional overhead to accommodate
the expansion in therapy services contracts, including the acquisition of 45 CCI
contracts, the addition of long-term care facility management agreements and the
Company's new home health and hospital operations.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $5.0
million in 1996 to $6.8 million in 1997, an increase of $1.7 million, or 34.9%,
which was primarily attributable to facility acquisitions during the fourth
quarter of 1996.

INTEREST EXPENSE. Interest expense decreased from $10.1 million in 1996 to $8.7
million in 1997, a decrease of approximately $1.4 million or 14.0%, which was
attributable to the reduction of debt by approximately $60.4 million as a result
of the Company's completion of the initial public offering, net of the
additional expense incurred as a result of borrowings for the acquisition of two
long-term care facilities.
<PAGE>
 
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased from
41.4% in 1996 to 39.0% in 1997, a decrease in the rate of 2.4%. This decrease
was attributable primarily to an expected decline in the Company's average state
tax rate and a proportional decrease in non-deductible expenses for federal tax
purposes.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's principal source of cash during 1998 was borrowings under
its Senior Credit Facility. Cash has been used by Centennial for capital
improvements at several existing facilities, acquisitions, working capital
advances under arrangements with certain of the Company's managed facilities and
the day-to-day operations of the Company's business. The Company anticipates
utilizing cash from operations (through anticipated reductions of accounts
receivable) and borrowings under the Senior Credit Facility to fund the growth
in operations of its existing facilities, the expansion and development of
specialty services, and the acquisition or management of additional long-term
care facilities and related service providers.
<PAGE>
 
      Working capital increased from $33.1 million at December 31, 1997 to $56.6
million at December 31, 1998, primarily due to increases in patient accounts
receivable, and increases in accounts payable and accrued liabilities. Patient
accounts receivable increased from $72.2 million at December 31, 1997 to $99.9
million at December 31, 1998, an increase of $27.7 million. This increase was
comprised of approximately $20.7 million associated with the Company's long-term
care facilities, approximately $4.5 million resulting from increases in
rehabilitation therapy contract receivables, and approximately $2.5 million
related to PTS. Approximately $7.0 million of the increase in patient accounts
receivable at the Company's long-term care facilities relates to the New
Facility Leases, and approximately $3.5 million of the increase relates to the
December 31, 1998 acquisition of certain accounts receivable from six nursing
centers previously owned by the Flatley Company (the "Flatley Facilities"). The
remaining increase in receivables at the Company's long-term care facilities is
due primarily to increases in settlement receivables due from the Medicare
program associated with the Company's continued expansion of specialty services
during 1998. Costs incurred under the Medicare program are reimbursed on a
retroactive basis, which extends the collection time of these receivables. The
Company expects to collect a significant portion of its settlement receivables
from 1996 through 1998 during the first and second quarters of 1999. The
increase in therapy receivables during 1998 relates primarily to slowdown in
payments from skilled nursing facilities associated with increases in those
providers' Medicare settlements. As these settlements are collected, obligations
to the Company should be reduced. The increase in PTS receivables relates
primarily to expansion of services provided to the Company's managed facilities
and other third parties. Accounts payable and accrued expenses increased
approximately $6.8 million in 1998. Approximately $3.6 million of this increase
relates to the New Facility Leases, and approximately $4.4 million of the
increase relates to the acquisition of the Flatley Facilities.

      The Company continued to invest in its leased and owned facilities through
capital expenditures of approximately $8.0 million or approximately $1,300 per
bed. These expenditures include the expansion of existing facilities, and the
selected rehabilitation of certain facilities.

      In July 1998, the Company expanded its Senior Credit Facility through
syndication with an expanded bank group led by NationsBank and First Union as
agents. Under the expansion, the Company's maximum aggregated advance limit was
increased from $125.0 million to $160.0 million, the term was extended to July
31, 2003 and a $40.0 million portion (the "Lease Facility") of the total $160.0
million commitment was designated for use in financing certain Company lease
transactions. The remaining $120.0 million portion (the "Revolver") of the
commitment was made available for financing existing indebtedness under the
previous Senior Credit Facility, acquisitions, capital expenditures, working
capital and general corporate purposes.

In August 1998, the Company financed three skilled nursing facilities under the
Lease Facility. Royal Terrace Nursing and Rehabilitation Center, a 147-bed
facility located in Kansas, was previously leased by the Company. Chenal
Rehabilitation and Healthcare Center, a 70-bed facility located in Arkansas, was
previously managed by the Company. The third facility, 82-bed Riley Nursing
Center, is Centennial's sixth skilled nursing facility in Mississippi.

In October 1998, the Company increased amounts available under the Lease
Facility to $70.0 million with a corresponding decrease in commitments available
under the Revolver to $90.0 million.

In the fourth quarter of 1998, the Company financed six nursing facilities under
the Lease Facility. Lincoln Centers for Rehabilitation and Healthcare - East,
and Lincoln Centers for Rehabilitation and Healthcare - West, a 90-bed facility
and a 76-bed facility, respectively, both located in Connersville, Indiana, were
previously leased by the Company. Riverbend Health Care Center, a 78-bed
facility located in
<PAGE>
 
Fort Wayne, Indiana, and Sheridan Healthcare Center, an 80-bed facility located
in Sheridan, Indiana, were also previously leased by the Company. Ashton Court
Care and Rehabilitation Centre, a 140-bed facility located in Liberty, Missouri
and Woodbine Healthcare and Rehabilitation Centre, a 300-bed facility located in
Gladstone, Missouri were leased by the Company effective November 1, 1998.

In December 1998, the Company expanded total commitments available through the
Lease Facility by $65.0 million to accommodate the Company's lease of the
Flatley Facilities. Following the increase, the Company's total Senior Credit
Facility commitment was $225.0 million, of which $90.0 million was reserved for
the Revolver and the remaining balance of $135.0 million allocated for use
through the Lease Facility.

During 1998, the Company borrowed a net of $37.7 million in working capital
loans under the Senior Credit Facility which were utilized primarily to finance
capital expenditures at existing facilities and to provide working capital. As
of December 31, 1998, the Company had $79.0 million outstanding and
approximately $4.3 million available under its Senior Credit Facility, net of
issued standby letters of credit of approximately $6.7 million.

The Company believes that operating cash flow, primarily through the anticipated
collection of settlement receivables, and availability under the Senior Credit
Facility will be sufficient to finance its activities and to fund future
acquisitions.

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 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. Generally, the PPS per diem, which
would cover routine service, ancillary and capital related costs, will initially
be 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 (skilled
nursing facility) 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 believes that revenues will be lower under PPS; however, reductions
in therapy costs, use of general purchasing agents and proper documentation of
minimum data sets ("MDS") should offset the effect of any rate reductions. The
Company can give no assurance that payments under such programs in the future
will remain at a level comparable to the present level or increase, nor can the
Company give assurance that it will be able to obtain sufficient cost reductions
to offset the reduction in revenues under PPS. Decreases in the level of
payments or failure to reduce costs could have a material adverse effect on the
Company. For the year ended December 31 1998, the Company derived approximately
22% of its revenues from Medicare at its long-term care facilities.

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:

 .     Actual costs

 .     Per visit cost limits reduced to 105% of the median per visit costs for
      freestanding home health agencies; or
<PAGE>
 
 .     A new blended agency-specific per beneficiary annual limit applied to the
      agency's unduplicated census count of Medicare patients and based 75% on
      98% of reasonable costs for the agency's twelve-month cost reporting
      period ending during fiscal year 1994 and 25% on 98% of the standardized 
      regional average of these costs in the agency's census region.

The Act also provides that cost limits and per beneficiary limits 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. For the year ended December 31, 1998, the Company
derived approximately 7% of its revenues from home health care.

Effective April 10, 1998, regulations were adopted by Health Care Financing
Administration, which revise the methodology for determining the reasonable cost
for contract therapy services, including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. Under the regulations, the
reasonable costs for contract therapy services are limited to
geographically-adjusted salary equivalency guidelines. However, the revised
salary equivalency guidelines will no longer apply when the PPS system
applicable to the particular setting for contract therapy services (e.g. skilled
nursing facilities, home health agencies, etc.) goes into effect. In most
location the reduced rates have the effect of reducing the amount of
reimbursement for an hour of occupational or speech therapy and increasing the
amount of reimbursement for and hour of physical and respiratory therapy. The
Company believes that such rate reductions will be completely or partially
offset by cost reductions, changes in the method of delivering such services and
the addition of new therapy contracts. Due to these changes in operations and
cost structure and the relative size of the Company's therapy business, the
Company does not expect these reimbursement changes to have a material long-term
adverse effect on the Company. For the year ended December 31, 1998, the Company
derived approximately 14% of its revenues from third-party contract therapy
services.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging Activities," was
issued. 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 No. 133. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The effect on
the financial statements upon adoption of SFAS No. 133 has not been determined.

IMPACT OF THE YEAR 2000 ISSUE

Computer systems and other equipment, including biomedical equipment and
building controls, with embedded computer microchips or processors
(collectively, "Business Systems") may use only two digits to represent the
year, which could result in the inability to process accurately certain date
sensitive data or operations before, during or after the year 2000. Business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. This is commonly known as the Year 2000 Issue.
Problems associated with the Year 2000 Issue could affect many of Centennial's
financial and administrative operations as well as its voice and data
communication systems.

The Company is in the process of implementing a Year 2000 compliance plan (the
"Plan") with the objective of having all of its significant internal Business
Systems fully compliant with respect to the Year 2000 Issue before June 30,
1999.

The first component of the Plan is to identify the internal Business Systems of
the Company that are susceptible to processing errors or system failures as a
result of the Year 2000 Issue. This effort is substantially complete, and
priorities for all Business Systems that may require remediation or replacement
have been established.
<PAGE>
 
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 December 31, 1998, Business Systems ranked highest in
priority have been remediated or replaced. The Company's objective is to
complete substantially all remediation and replacement of internal Business
Systems by March 31, 1999 to allow time for testing and verification.

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. Management expects that the contingency plan will be in place by the
end of the second quarter of 1999.

The Company's Plan is an ongoing process and the estimates of costs and
completion dates for various components of the Plan described above are subject
to change.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The Company's Consolidated Financial Statements, together with the report
thereon of PricewaterhouseCoopers LLP, dated April 5, 1999, begin on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES

      None.
<PAGE>
 
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors of the Company

J. Stephen Eaton (age 48) is Chairman of the Board of the Company and has served
as its President and Chief Executive Officer since founding the Company in 1989.
From 1982 to 1988, Mr. Eaton served in various executive positions (including
Vice President) at Consolidated Resources Corporation of America and its
successors ("CRCA"). When the Company acquired CRCA in 1990, CRCA served as the
general partner of private and public limited partnerships that owned in excess
of 31 long-term care and assisted living facilities. Mr. Eaton also serves as a
director of Saint Joseph's Mercy Care Corporation, a non-profit corporation
based in Atlanta, Georgia which provides mobile health services to the homeless
and other underserved populations, and of Saint Joseph's Health System, a major
tertiary care hospital and health system in Atlanta, Georgia. Mr. Eaton's term
as a Director runs until the Annual Meeting of the Shareholders of the Company
in 2001.

      Alan C. Dahl (age 38) has served as Executive Vice President, Chief
Financial Officer, Treasurer and Director of the Company since January 1996.
From February 1991 to December 1995, he served as Senior Vice President of the
Company. Mr. Dahl has been involved in health care finance for the past 13
years. Mr. Dahl was previously senior vice president of Southmark Public
Syndications, Inc., a subsidiary of Southmark Corporation. Mr. Dahl, a certified
public accountant, also worked in the tax department at Arthur Young & Company.
Mr. Dahl's term as a Director runs until the Annual Meeting of the Shareholders
of the Company in 2000.

      Andrew M. Paul (age 43) has served as a Director of the Company since
January 1996. Mr. Paul serves as a general partner of the sole general partner
of Welsh, Carson, Anderson & Stowe, VI, L.P. ("WCAS VI"), a private equity
investment fund. Prior to joining WCAS VI in 1984, Mr. Paul was an associate in
Hambrecht & Quist's venture capital group. From 1978 to 1981, he was a systems
engineer and later a marketing representative for International Business
Machines Corporation. Mr. Paul serves as a director of Lincare Holdings, Inc.
Mr. Paul's term as a Director runs until the Annual Meeting of the Shareholders
of the Company in 2001.

      James B. Hoover (age 44) has served as a Director of the Company since
January 1996. Mr. Hoover has served as a general partner of the sole general
partner of WCAS VI since 1992. From 1984 to 1992, Mr. Hoover served as a general
partner of Robertson, Stephens & Co. ("RS&Co."), an investment banking firm
specializing in the financing of emerging growth companies, with particular
emphasis in the health care industry. Prior to joining RS&Co., Mr. Hoover was
vice president of the Investment Management Group of Citibank, N.A., from 1977
to 1984. Mr. Hoover serves as a director of Housecall Medical Resources, Inc.
and U.S. Physical Therapy, public traded companies, as well as five private
companies. Additionally, Mr. Hoover is a member of the Special Projects
Committee of Memorial Sloan-Kettering Cancer Center which raises funds and
evaluates funding proposals from physicians interested in pursuing cancer
research projects. Mr. Hoover's term as a Director runs until the Annual Meeting
of the Shareholders in 1999.

      Bertil D. Nordin (age 64) has served as a Director of the Company since
March 1997. Mr. Nordin is currently an investor and advisor. From 1990 to 1994,
Mr. Nordin served as chairman of the board of Digital Communications Associates,
Inc. ("DCA"), a telecommunications company. Mr. Nordin was also president and
chief executive officer of DCA from 1981 to 1990. Mr. Nordin serves as a
director for TechForce Corporation, a public company, and the Atlanta Symphony
Orchestra. Mr. Nordin's term as a Director runs until the Annual Meeting of the
Shareholders in 1999.

      Robert A. Ortenzio (age 41) has served as a Director of the Company since
January 1996. Mr. Ortenzio has served as president and director of Select
Medical Corporation, a private health company based in Mechanicsburg,
Pennsylvania, since 1996. From 1986 to 1996, Mr. Ortenzio was employed by
Continental Medical Systems, Inc., a nationwide provider of rehabilitation
services, as its president and chief
<PAGE>
 
executive officer. Mr. Ortenzio also serves as a director of American Oncology
Resources, Inc. and Concentra Managed Care, Inc. Mr. Ortenzio's term as a
Director runs until the Annual Meeting of Shareholders in 2000.

      W. Scott Miller (age 35) has served as a Director of the Company since
October 1998. Mr. Miller has served as Managing Director of Lovett Miller & Co.,
Incorporated since 1997, a venture capital and private equity Investment
Company. From 1991 to 1997, Mr. Miller was with South Atlantic Venture Funds,
which provided venture capital to various entities. Mr. Miller's term as a
Director runs until the Annual Meeting of the Shareholders in 1999.

      Charles D. Nash (age 56) has served as a Director of the Company since
October 1998. Mr. Nash has served as Managing Director of Nash Equity Capital,
Inc., a capital markets and strategic corporate advisor company, since 1997.
>From 1991 to 1997, Mr. Nash was Managing Director and Corporate Finance
Executive for Interstate/Johnson Lane, an investment banking company where his
focus was on initial public offerings, mergers and acquisitions, and other
public and private debt and equity transactions. Mr. Nash's term as a Director
runs until the Annual Meeting of the Shareholders in 1999.

      With the exception of Messrs. Eaton and Dahl, none of the directors are,
or have been, employed by any parent, subsidiary or other affiliate of the
Company. There are no family relationships between any directors or executive
officers.

Compensation of Directors

      All members of the Board of Directors are reimbursed for their reasonable
out-of-pocket expenses incurred in connection with attendance at Board and
committee meetings. Non-Employee Directors (as defined pursuant to Rule 16b-3
under the Exchange Act) receive $8,000 annually (paid in four quarterly
installments) and $1,000 for each meeting of the Board or any committee of the
Board (except for telephonic meetings and committee meetings held on the same
day as a full Board meeting) for their services as Non-Employee Directors.
Pursuant to the Company's 1997 Stock Plan, Non-Employee Directors receive
automatic grants of options to purchase 10,345 shares of Common Stock upon their
election to the Board and Non-Employee Directors who are serving as such on July
1 of each year receive automatic grants of options to purchase 2,069 shares of
Common Stock. Options issued to Non-Employee Directors under such Plan become
exercisable on the first anniversary of the date of the grant. All options
granted to Non-Employee Directors are non-qualified stock options and are
exercisable for ten years from the date of each grant. The exercise price is
equal to the average closing bid price for the 20 trading days before the date
of the Company's annual meeting of shareholders preceding the grant date.

Executive Officers of the Company

      The Company's executive officers and key employees are as follows:

OFFICERS                      Age                    Position
--------                   --------  -------------------------------------

J. Stephen Eaton              48     Chairman of the Board, President and
                                     Chief Executive

Kent C. Fosha, Sr.            57     Executive Vice President of Operations

Alan C. Dahl                  37     Executive Vice President, Chief
                                     Financial Officer, Treasurer and Director

Lawrence W. Lepley, Jr.       54     President of Paragon Rehabilitation, Inc.

KEY EMPLOYEES
-------------

Wayne H. Mayo                 55     Senior Vice President of Operations -
                                     Eastern Division

Clay F. Crosson               41     Senior Vice President of Operations -
                                     Western Division

      J. Stephen Eaton is Chairman of the Board and the founder of the Company
      ----------------
and has served as its President and Chief Executive Officer since founding the
Company in 1989. From 1982 and 1988, Mr. Eaton served in various executive
positions (including Vice President in 1988) at Consolidated Resources
Corporation of America and its successors ("CRCA"). When the Company acquired
CRCA in 1990, it served as the general partner of private and public limited
partnerships that owned in excess of 31 long-term care and assisted living
facilities. Mr. Eaton also serves as a director of Saint Joseph's Mercy Care
Corporation, a non-profit corporation based in Atlanta, Georgia which provides
mobile health services to the homeless and other underserved populations, and of
Saint Joseph's Health System, a major tertiary care hospital and health system
in Atlanta, Georgia.

      Kent C. Fosha, Sr. has served as Executive Vice President of Operations
      -----------------
since January 1996 and also serves as President of Centennial International
Management Corporation. He joined the Company in 1990 and served as the
Company's senior vice president of operations until January 1996. Mr. Fosha has
over 24 years experience in all aspects of nursing home management, including
the supervision of multi-state operations for National Heritage, Inc. and
Beverly Enterprises. Mr. Fosha, a licensed nursing home administrator, has
served as president of the Georgia Healthcare Association and has served on
several long-term care related committees.

      Alan C. Dahl has served as Executive Vice President, Chief Financial
      ------------
Officer, Treasurer and Director of the Company since January 1996. From February
1991 to December 1995, he served as senior vice president. Mr. Dahl has been
involved in health care finance for the past 13 years. Mr. Dahl was previously
senior vice president of Southmark Public Syndications, Inc., a subsidiary of
Southmark Corporation. Mr. Dahl, a certified public accountant, also worked in
the tax department at Arthur Young & Company.

      Lawrence W. Lepley, Jr., has served as President of Paragon Rehabilitation
      -----------------------
Inc., a subsidiary of the Company ("Paragon"), since its inception in 1989. Mr.
Lepley has 33 years of experience in the health care industry, having previously
served as vice president of development and general counsel for a corporation
specializing in head injury rehabilitation. Mr. Lepley has also served as vice
president, corporate attorney and lobbyist for the Tennessee Hospital
Association. Mr. Lepley began his health care career as a pharmacist in both
hospital and retail settings, and he maintains licenses in pharmacy and law in
the state of Tennessee.

      Wayne H. Mayo has served as Eastern Division Senior Vice President of the
      -------------
Company since January 1997. Prior to becoming the Eastern Division Vice
President, Mr. Mayo served as Regional Vice President from 1991 to 1996, and he
was responsible for the Company's Eastern region of facilities. Mr. Mayo was
previously regional vice president of operations for Vantage Healthcare
Corporation and also served as regional vice president of operations for Medco
Centers, Inc. for seven years. Mr. Mayo is a member of the American College of
Health Care Administrators.

      Clay F. Crosson has served as Western Division Senior Vice President of
      ---------------
the Company since February 1997. Prior to joining the Company in 1997, Mr.
Crosson as vice president of operations and a member of the Board of Directors
for CareMore, Inc. for five years. Previous to that, Mr. Crosson served 11 years
at National HeatlhCorp, L.P. in various capacities. Mr. Crosson has a masters of
business administration degree and 19 years of experience in long-term care,
subacute care, home health care, managed care and assisted living. Mr. Crosson
is a Fellow of the American College of Health Care Administrators, and holds
certifications in SubAcute Administration and Nursing Home Administration. He
presently serves as National Chairman of ACHCA and is a Board member of
Georgia's Nursing Home Administrators Licensure Board.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Exchange Act requires executive officers and
directors of the Company and person who own more than ten percent of the
Company's Common Stock to file with the Securities and Exchange Commission
certain reports, and to furnish copies thereof to the Company, with respect to
each such person's beneficial ownership of the Company's equity securities.
Based solely upon a review of the copies of such reports furnished to the
Company and certain representations of such persons, the Company believes that
all filing were timely.
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION.

                             EXECUTIVE COMPENSATION

Summary Compensation Table

      The following table sets forth certain information concerning the
compensation paid to the Company's Chief Executive Officer and each of the Named
Executive Officers whose salary and bonus compensation for the year ended
December 31, 1998 exceeded $100,000.

<TABLE>
<CAPTION>
                              Annual Compensation                                       Long-Term Compensation
--------------------------------------------------------------------------------    ----------------------------
                                                                                    Securities
  Name and                                           Annual                         Underlying       All Other
Principal Position        Year       Salary($)(1)   Bonus($)(2)  Compensation($)    Options(#)    Compensation($)
------------------        ----       ------------   -----------  ---------------    ----------    ----------------
<S>                       <C>       <C>             <C>          <C>                 <C>                <C>
J. Stephen Eaton          1998      $ 350,000       $ 120,000     11,846(4)               -             $     -
   President and Chief    1997        309,000              -       6,931(4)           34,485                  -
   Executive Officer      1996        224,631          50,000    324,359(3)(4)            -                   -

Kent C. Fosha, Sr.        1998        211,985          72,000      5,309(4)           50,000                  -
  Executive Vice          1997        180,250              -       3,059(4)           17,242                  -
  President               1996        175,000          25,000    163,041(3)(4)            -                   -
 
Alan C. Dahl
  Executive Vice          1998        211,985          75,000      7,903(4)           50,000                  -
  President and Chief     1997        180,250              -      10,118(4)           17,242                  -
  Financial Officer       1996        175,000          35,000    158,498(3)(4)            -                   -

Lawrence W. Lepley, Jr.   1998        182,685          69,000      7,202(5)           50,000                  -
  President of Paragon    1997        158,295         116,000      9,392(5)            4,028                  -
  Rehabilitation, Inc.    1996        132,341          65,575      6,794(5)            6,316                  -
</TABLE>
---------------
(1)   Represents annual salary, including compensation deferred by the Named
      Executive Officers pursuant to the Company's 401(k) Plan.
(2)   Represents annual bonuses earned by the Named Executive Officers for the
      period indicated.
(3)   Represents the difference between the exercise price for stock options
      exercised and the fair market value of the shares received.
(4)   Includes insurance for Messrs. Eaton, Fosha and Dahl which provides for
      reimbursement for health and dental costs in excess of the amount payable
      under the Company's group health and dental plan.
(5)   Includes $794, $677 and $ 1,202 as matching 401(k) contribution and an
      automobile allowance of $6,000, $8,715 and $ 6,000 for 1996, 1997 and
      1998 respectively.
<PAGE>
 
Options Grants in Last Fiscal Year

      The following table sets forth information regarding stock option grants
for the year ended December 31, 1998 to the Chief Executive Officer and each of
the Named Executive Officers. No stock appreciation rights were granted during
such year.

<TABLE>
<CAPTION>
                                         Individual Grants for Option Term(1)
                     ----------------------------------------------------------------------------------------------
                       Number of      Percent of
                      Securities     Total Options        Exercise
                      Underlying     Granted to           or Base
                        Options       Employees in        Price Per    Expiration
                        Granted       Fiscal 1998          Share          Date         5% ($)               10% ($)
                        -------       -----------          -----          ----         ------               -------
<S>                       <C>          <C>          <C>               <C>         <C>                 <C>
J. Stephen Eaton              --        --                  --             --              --                  --

Kent C. Fosha, Sr         50,000       9.4%         $   20.625         2/1/08      $  648,548          $1,643,547

Alan C. Dahl              50,000       9.4%         $   20.625         2/1/08         648,548           1,643,547

Lawrence W. Lepley, Jr    50,000       9.4%         $   20.625         2/1/08         648,548           1,643,547
</TABLE>

----------
(1)   The 5% and 10% assumed annual rates of compounded stock price appreciation
      are mandated by rules of the SEC. There can be no assurance provided to
      any executive officer or any other holder of the Company's securities that
      the actual stock price appreciation over the term will be at the assumed
      5% and 10% levels or at any other defined level. Unless the market price
      of the Common Stock appreciates over the option term, no value will be
      realized from the option grants made to the Chief Executive Officer or the
      Named Executive Officers.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value

      The following table sets forth certain information concerning option
holdings for the fiscal year ended December 31, 1998 with respect to the Chief
Executive Officer and each of the Named Executive Officers of the Company. No
options or stock appreciation rights were exercised during such year and no
stock appreciation rights were outstanding at the end of such year.
<PAGE>
 
<TABLE>
<CAPTION>
                            Securities Underlying                          Value of
                                 Number of                               Unexercised
                                Unexercised                            In-the-Money
                                 Options                                   Options
                               at FY-End (#)                          at FY-End ($)(1)
                               -------------                          ----------------
Name                     Exercisable   Unexercisable    Exercisable    Unexercisable
----                     -----------   -------------     ----------   ----------------
<S>                        <C>            <C>               <C>             <C>
J. Stephen Eaton           97,706         51,727            126,730         42,243

Kent C. Fosha, Sr          45,979         71,074            130,410         14,081

Alan C. Dahl               34,484         71,074             42,243         14,081

Lawrence W. Lepley, Jr      9,001         51,343             42,696             --
</TABLE>

----------
(1)   Based on a closing price of $15.50 per share of Common Stock on December
      31, 1998.

Employment Contracts, Termination of Employment and Change-in-Control
Arrangements

      On December 31, 1995, the Company entered into employment agreements with
Messrs. Eaton, Dahl and Fosha (the "Employment Agreements"). The Employment
Agreements provide for a base salary, an annual bonus, and an amount for fees
incurred for legal, accounting or other professional advice. The base salaries
for Messrs., Eaton, Dahl and Fosha total $300,000, $175,000 and $175,000
respectively. These base salaries are reviewed at least once annually on May 1
by the Compensation Committee of the Board of Directors to determine whatever
increase may be merited, with the minimum annual increase equal to the increase
in the Consumer Price Index as published by the U.S. Department of Labor, Bureau
of Labor Statistics, for the period since the last annual review ("Consumer
Price Index"). In addition, each of these employees is eligible to participate
in the 1996 Executive Stock Plan, management incentive programs, retirement,
welfare and other benefit plans or programs of the Company, including, at the
Company's sole expense, health, dental and hospitalization insurance coverage.
Unless earlier terminated as provided therein, the Employment Agreements
continue until December 31, 1998 (or 1999 for Mr. Eaton), and extend
automatically each day for an additional day so that the remaining term
continues to be two years for Mr. Eaton and one year for Messrs. Dahl and Fosha.

      The Company can terminate such agreements upon the death or disability of
an employee or for cause as defined therein. Each employee may terminate his
employment for any reason within a 90-day period beginning on the 30th day after
a Change in Control of the Company (as defined below) or within a 90-day period
beginning on the one-year anniversary of a Change in Control. If the Company
terminates an Employment Agreement, or if an employee terminates his employment
for Good Reason (as defined below) upon a Change in Control, then the Company
must pay the employee (or, in the case of death, the employee's estate) for 12
consecutive months thereafter (24 months in the case of Mr. Eaton) the greater
of one-twelfth of his salary at the rate in effect on his termination date or at
the highest rate in effect at any time during the 90-day period prior to a
Change in Control, as well as all amounts of his base salary that are deferred
under the Company's qualified and non-qualified employee benefit plans or any
other agreement or arrangement. In addition, the restrictions on the employee's
outstanding incentive awards, including stock options, would lapse and such
incentive awards would immediately vest. Under each of the Employment
Agreements, the employee agrees to maintain the confidentiality of the Company's
trade secrets and agrees, for a period of one year following termination, not to
compete with or solicit employees or customers of the Company. For the purposes
of the Employment Agreements, Good Reason includes an occurrence after a Change
in Control such as an adverse change
<PAGE>
 
in the employee's status, title, position or responsibilities; reduction in base
salary or other compensation or benefits; or a material breach of the terms of
the Employment Agreements. A Change in Control includes an acquisition of the
Company's voting securities of 40% or more; a merger, consolidation or
reorganization involving the Company unless at least two-thirds of the combined
voting power of the corporation resulting from the merger, consolidation or
reorganization is owned in substantially the same proportion as before such
merger, consolidation or reorganization and the person serving as directors
before such merger, consolidation or reorganization constitute at least
two-thirds of the directors of the surviving corporation; a complete liquidation
or dissolution of the Company; or an agreement for the sale or disposition of
all or substantially all of the Company's assets.

      Effective January 1, 1998, Paragon Rehabilitation, Inc., a subsidiary of
the Company ("Paragon"), entered into an Amended and Restated Employment
Agreement with Lawrence W. Lepley, Jr., who serves as president of Paragon (the
"Lepley Agreement"). The Lepley Agreement provides for an annual base salary of
$184,000 reviewable annually on January 1 and subject to annual increases (as
described above with respect to the Employment Agreements) and annual bonus. The
Lepley Agreement allows participation in the Company's stock option plans and
provides health, dental and short and long-term disability insurance and an
automobile allowance. The initial term ends on December 31, 2000, but beginning
on the second anniversary of the effective date extends automatically each day
for an additional day so that the remaining term continues to be two years.

      Paragon may terminate the Lepley Agreement upon the death or disability of
Mr. Lepley or for cause as defined therein, or after the vote of a majority of
the Company's Board of Directors in favor of termination. Mr. Lepley may
terminate his employment for Good Reason (as defined below) within a 90-day
period beginning on the 30th day after a Change in Control of the Company (as
defined above) or within a 90-day period beginning on the one-year anniversary
of a Change in Control of the Company. If Paragon terminates the Lepley
Agreement for reasons other than for cause, of if Mr. Lepley terminates his
employment for Good Reason, then Paragon must pay Mr. Lepley (or, in the case of
death, his estate) for 12 consecutive months thereafter one-twelfth of his
salary at the rate in effect on his termination date. If the Lepley Agreement is
terminated due to death or disability, or by Mr. Lepley for Good Reason, then
the restrictions on any outstanding incentive awards, including stock options,
would lapse and such incentive awards would immediately vest. Mr. Lepley agrees
to maintain the confidentiality of Paragon's trade secrets and agrees, for a
period of one year following termination, not to compete with or solicit
employees or customers of Paragon. For the purposes of the Lepley Agreement,
Good Reason includes an occurrence after a Change in Control such as an adverse
change in the employee's status, title, position or responsibilities' reduction
in base salary or other compensation or benefits; or a material breach of the
terms of the Lepley Agreement.

Compensation Committee Interlocks and Insider Participation

      The members of the Compensation Committee of the Board of Directors are J.
Stephen Eaton, Andrew M. Paul and Robert A. Ortenzio. Neither Mr. Paul nor Mr.
Ortenzio is or has been an officer or employee of the Company or any of its
subsidiaries. Mr. Eaton is the Chariman of the Board, President and Chief
Executive Officer of the Company.

      Transactions with Mr. Paul and Affiliates. Mr. Paul, an affiliate of
Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS VIII"), Welsh, Carson,
Anderson & Stowe Capital Partners III, L.P. ("WCAS CP III"), WCAS Healthcare
Partners, L.P. ("Healthcare Partners"), Welsh, Carson, Anderson & Stowe VI, L.P.
and Welsh, Carson, Anderson & Stowe Capital Partners II, L.P. is a director of
the Company and the chairman of the Compensation Committee.

      On October 22, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Centennial HealthCare Holdings Corporation,
a
<PAGE>
 
Delaware corporation ("Holdings"), whereby the Company will merge with Cougar
Acquisition Corporation ("Acquisition"), with the Company being the surviving
corporation. Acquisition is wholly owned by Holdings. Holdings is currently
wholly owned by WCAS VIII. If the transaction contemplated by the Merger
Agreement is completed, the Company will become wholly owned by Holdings and
Holdings will be owned by WCAS VIII, WCAS CP III, Healthcare Partners, Mr. Paul
and other individuals, including Messrs. Eaton, Dahl, Fosha and Lepley. On 
April 2, 1999 Holdings notified the Company it was terminating the Merger 
Agreement.

      Transactions with Mr. Ortenzio and Affiliates. The Company did not enter
into any transactions with Mr. Ortenzio or any of his affiliates during fiscal
year ending December 31, 1998.

      Transactions with Mr. Eaton and Affiliates. As described above, should the
merger occur between the Company and Acquisition pursuant to the terms of the
Merger Agreement, Mr. Eaton will own common stock of Holdings, which will own
all of the shares of Common Stock of the Company. Other transactions involving
Mr. Eaton and his affiliates are described in the following section entitled
"Certain Transactions"

                        REPORT ON EXECUTIVE COMPENSATION

      The Compensation Committee is responsible for ensuring that a proper
system of short and long-term compensation is in place to provide
performance-oriented incentive to management.

      The Compensation Committee administers the Company's executive
compensation program, including determination of salary and bonus compensation
for the Chief Executive Officer and the Named Executive Officers and
determination of the nature, time and amounts of options grants to such
executive officers under the Company's Stock Plans. The Compensation Committee's
report for 1998 is as follows:

Compensation Policy

      Generally, the Company's executive compensation is designed to be
competitive with compensation offered by other companies against which the
Company competes for executive resources. The executive compensation plans are
designed to attract and retain highly qualified executives critical to the
Company's long-term success. The Compensation Committee intends for the
executive compensation program to satisfy the following guidelines:

      .     Recognize and reward high performance and extraordinary results.

      .     Have a portion of total compensation bear a direct relationship to
            the Company's operating performance and achievement of short-term
            and long-term goals.

      .     Provide opportunity to acquire additional direct ownership in the
            Company and provide motivation to build shareholder value by
            aligning executives' interests with shareholder interests.

      Executive compensation is composed of base salary, bonus awards and
long-term incentive compensation.

Base Salary

      In the case of Messrs. Eaton, Dahl and Fosha base salary is paid pursuant
to the Employment Agreements or the Lepley Agreement in the case of Mr. Lepley;
in the case of all other executive officers, base salary is determined and fixed
by management based on the policies of the Compensation Committee. The
Employment Agreements require the Compensation Committee to review base salaries
of the executives who are parties thereto on May 1 (or January 1 with respect to
Mr. Lepley) of each year and provide for an annual increase as determined by the
<PAGE>
 
Compensation Committee, but not less than the increase in the Consumer Price
Index. The Compensation Committee reviews the individual contributions and
performance of each such executive officer and takes into account various
qualitative and quantitative factors in determining the increases in base
salaries. In particular, the Compensation Committee considers several financial
performance measures, including business development, earnings growth and stock
price, as well as the individual's work experience, level of responsibility and
contribution to the Company's long-term success. The Compensation Committee does
not, however, apply any specific quantitative formula in making compensation
decisions with respect to base salary, annual bonus awards or long-term
incentive compensation.

Bonus Awards

      Bonus payments are awarded to the Company's executives at the discretion
of the Compensation Committee, which considers the achievement of certain
performance targets and new business development.

Long-Term Incentive Compensation

      The Company's long-term incentive compensation strategy is focused on the
grant or award of (i) options to purchase shares of Common Stock, (ii) stock
appreciation rights, (iii) reload options and (iv) restricted stock pursuant to
the Stock Plans. Except for grants to Non-Employee Directors pursuant to the
1997 Stock Plan, the Compensation Committee determines who receives grants or
awards, the grant or award date, the number of shares subject to the grant or
award, the exercise price (based on the closing price of the Common Stock on the
date of grant or award), the vesting schedule and other matters as specified in
the Stock Plans. The Compensation Committee believes that these grants or awards
reward executive officers for their efforts in improving long-term performance
of the Common Stock and creating value for the Company's shareholders, thereby
aligning the financial interests of such executives with those of the Company's
shareholders.

Chief Executive Officer Compensation

      Based on its assessment of the performance of the Company and Mr. Eaton's
performance during 1998, the Compensation Committee (composed of Messrs. Paul
and Ortenzio for this purpose) increased Mr. Eaton's base salary from $309,000
to $350,000.

Section 162(m)

      Section 162(m) of the Internal Revenue Code generally disallows tax
deduction by a public company for compensation in excess of $1,000,000 paid to
the company's chief executive officer and four other most highly compensated
executive officers. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. The Compensation intends to
attempt to structure future compensation of the Company's Chief Executive
Officer and Named Executive Officers so as to preserve the deductibility of such
compensation under Section 162(m).

                           COMPENSATION COMMITTEE

                           Andrew M. Paul, Chairman
                           Robert A. Ortenzio
                           J. Stephen Eaton


                            STOCK PERFORMANCE GRAPH

     The following line graph compares the yearly percentage in cumulative
shareholders return on the Common Stock with (a) the performance of a broad
equity market indictor, and (b) the performance of a peer group index. The graph
compares the percentage change in the return of the Common Stock since July 2,
1997 with the cumulative total return on the NASDAQ Index and the Peer Group
indentified by the Company (which group includes Beverly Health Services, Inc.,
Genesis Health Ventures, Inc., Health Care and Retirement Corp., Integrated
Health Services, Inc., Mariner Post-Acute Network, Inc., Sun Healthcare Group
Inc., Vencor, Inc., Advocat Inc., National Healthcare L.P. and Manor Care Inc.)
over such period. The Peer Group companies include the long-term care
organizations most similar to the Company, and most of the other publicly traded
long-term care organizations. The commencement date for this comparison is the
date on which the Company's Common Stock was first publicly traded. The stock
price performance graph assumes an investment of $100 in the Company on July 2,
1997 and an investment of $100 in the two indexes on July 2, 1997 and further
assumes the reinvestment of all dividends. The stock price performance,
presented monthly for the period from July 2, 1997 through December 31, 1998 is
not necessarily indicative of future results. Information used in this graph was
obtained from Zack's Investment Research, a source believed to be reliable, but
the Company is not responsible for errors or omissions in such information.

                                    [GRAPH]

                          7/2/97            1997             1998
                          ------           -------          -------
Centennial                 $100            $142.19          $ 96.87

Nasdaq                     $100            $109.63          $154.11

Peer Group                 $100            $100.38          $ 49.78


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

<PAGE>
 
                      COMMON STOCK OWNERSHIP BY MANAGEMENT
                           AND PRINCIPAL SHAREHOLDERS

      The following table sets forth the beneficial ownership of shares of
Common Stock as of March 27, 1999 for (i) directors of the Company, (ii) the
Chief Executive Officer and each of the three most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers"), (iii)
the directors and executive officers of the Company as a group and (iv) each
person who is a shareholder of the Company holding more than a five percent
interest in the Company.
<TABLE>
<CAPTION>
                                                         Number of               Percent of
                                                         Shares of              Common Stock
                                                         Common Stock           Beneficially
Name of Beneficial Owner                              Beneficially Owned (1)       Owned
------------------------                              ----------------------       -----
<S>                                                   <C>                       <C>
Welsh, Carson, Anderson & Stowe VI, L.P. (2)             2,520,193                 21.1%
WCAS Capital Partners II, L.P. (3)                         246,896                  2.1
WCAS Healthcare Partners, L.P. (4)                          81,384                    *
J. Stephen Eaton (5)                                     1,213,077                 10.1
The Goldman Sachs Group, L.P. (6)                          609,400                  5.1
Dresdner RCM Global Investors LLC (7)                    1,198,920                 10.0
South Atlantic Venture Fund II, 
      Limited Partnership (8)                              798,963                  6.7
Lawrence W. Lepley, Jr. (9)                                 92,226                    *
Alan C. Dahl (10)                                           93,976                    *
Kent C. Fosha, Sr. (11)                                     53,949                    *
Andrew M. Paul (12)                                         12,707                    *
Bertil D. Nordin (13)                                       11,845                    *
James B. Hoover (14)                                        13,464                    *
Robert A. Ortenzio (15)                                      1,299                    *
W. Scott Miller (16)                                         0 (16                    *
Charles D. Nash (17)                                         0 (17                    *
All other executive officers
   and directors as a
   group (10 persons)                        1,482,198                 12.4

</TABLE>
----------
*     Less than 1.0%

(1)   Based on an aggregate of 11,923,619 shares of Common Stock issued and
      outstanding as of March 26, 1999. Includes shares of Common Stock that may
      be acquired upon the exercise of stock options exercisable within 60 days.
      Each person named above has sole voting and dispositive power with respect
      to all shares listed opposite such person's name, except as otherwise
      noted.
(2)   The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
      York 10022-6815.
(3)   The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
      York 10022-6815.
(4)   The shareholder's address is 320 Park Avenue, Suite 2500, New York, New
      York 10022-6815.
(5)   Includes 97,706 shares purchasable upon exercise of stock options that are
      currently exercisable or will be come exercisable within 60 days. Does not
      include options to acquire 51,727 shares that are not exercisable within
      60 days. The shareholder's address is 400 Perimeter Center Terrace, Suite
      650, Atlanta, Georgia 30346.
(6)   Based on Schedule 13G of shareholder filed on February 14, 1999. The
      shareholder's address is 85 Broad Street, New York, New York 10004.
(7)   Based on Schedule 13G/A of shareholder filed on February 12, 1999. The
      shareholder's address is Four Embarcadero Center, San Francisco,
      California 94111.
<PAGE>
 
(8)   The shareholder's address is 614 West Bay Street, Suite 200, Tampa,
      Florida 33606-2704.
(9)   Includes 9,001 shares purchasable upon exercise of stock options that are
      currently exercisable. Does not include options to acquire 51, 343 shares
      that are not exercisable within 60 days. The shareholder's address is 400
      Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346.
(10)  Includes 34,484 shares purchasable upon exercise of stock options that are
      currently exercisable or will become exercisable within 60 days and 2,000
      shares beneficially owned by Mr. Dahl's sons. Does not include options to
      acquire 71,074 shares that are not exercisable within 60 days. The
      shareholder's address is 400 Perimeter Center Terrace, Suite 650, Atlanta,
      Georgia 30346.
(11)  Includes 45,979 shares purchasable upon exercise of stock options that are
      currently exercisable or will become exercisable within 60 days. Does not
      include options to acquire 71,074 shares that are not exercisable within
      60 days. The shareholder's address is 400 Perimeter Center Terrace, Suite
      650, Atlanta, Georgia 30346.
(12)  Excludes 2,520,193 shares of Common Stock owned by Welsh, Carson, Anderson
      & Stowe VI, L.P. ("WCAS VI"), 246,896 shares of Common Stock owned by WCAS
      Capital Partners II, L.P. ("WCAS CP II") and 81,384 shares of Common Stock
      owned by WCAS Healthcare Partners, L.P. ("Healthcare Partners"). Mr. Paul,
      as a general partner of the respective sole general partners of each of
      WCAS VI, WCAS CP II and Healthcare Partners may be deemed to beneficially
      own the shares owned by WCAS VI, WCAS CP II and Healthcare Partners. Mr.
      Paul disclaims beneficial ownership of such shares. Does not include
      options to acquire 2,069 shares that are not exercisable within 60 days.
(13)  Includes options to acquire 10,345 shares that are currently exercisable.
      Does not include options to acquire 2,069 shares that are not exercisable
      within 60 days. Does not include 206,214 shares held by South Atlantic
      Venture Fund III, Limited Partnership ("South Atlantic") of which Mr.
      Nordin is a special limited partner. Mr. Nordin disclaims beneficial
      ownership of the shares owned by South Atlantic. The shareholder's address
      is 400 Perimeter Center Terrace, Suite 650, Atlanta, Georgia 30346.
(14)  Includes shares held by Mr. Hoover or by the James B. Hoover IRA. Does not
      include 2,767,089 shares held by WCAS VI and WCAS CP II, of which Mr.
      Hoover serves as a general partner of the sole general partner or limited
      partner of the sole general partner. Mr. Hoover disclaims beneficial
      ownership of these shares. Does not include options to acquire 2,069
      shares that are not exercisable within 60 days. The shareholder's address
      is Dauphin Capital Partners, 108 Forest Avenue, Locast Valley, New York
      11560.
(15)  Does not include 39,719 shares held by Horizon Investment Associates II,
      of which Mr. Ortenzio's farther is an affiliate; 3,551 shares acquired
      pursuant to a distribution by WCAS VI to its limited partners, in one of
      which Mr. Ortenzio holds a remainderman interest in a life estate of which
      his father is the life tenant; or 77 shares acquired pursuant to a
      distribution by WCAS CP II to Camp Hill Associates, L.P., a limited
      partner of WCAS CP II, in which Mr. Ortenzio has a 10% ownership interest.
      Mr. Ortenzio disclaims beneficial ownership of all such shares. Does not
      include options to acquire 2,069 shares that are not exercisable within 60
      days. The shareholder's address is 4718 Old Gettysburg Road,
      Mechanicsburg, Pennsylvania 17055.
(16)  Does not include options to acquire 10,345 shares that are not exercisable
      within 60 days. Does not include 798,963 shares of South Atlantic Venture
      Fund II, Limited Partnership of which Mr. Miller is a limited partner. Mr.
      Miller disclaims beneficial ownership of these shares.
(17)  Does not include options to acquire 10,345 shares that are not exercisable
      within 60 days.
<PAGE>
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

                              CERTAIN TRANSACTIONS

      Mr. Eaton owns 100% of the common stock of Centennial Employee Management
Corporation ("CEMC"). The Company leases its facility-based employees at cost
from CEMC on a pass through basis. CEMC was set up to take advantage of reduced
workers' compensation and group health insurance rates and passes on these
insurance costs savings to the Company. Mr. Eaton receives no economic benefit
from his ownership of this entity.

      Ashton Woods Rehabilitation Center ("AWRC"), which is leased by the
Company, is owned by Ashton Woods Limited Partnership. Mr. Dahl owns all of the
outstanding stock of the corporate general partner of this partnership. Mr. Dahl
receives no economic benefit from his ownership of this entity. Mr. Dahl is
Executive Vice President, Chief Financial Officer, Treasurer and director of the
Company.

      See Item 11.  Executive Compensation - Compensation Committee Interlocks 
and Insider Participation.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements

       Listed on the Index to the Financial Statements and Schedules on page F-1
       of this Report.

(2)    Financial Statement Schedules

       Listed on the Index to the Financial Statements and Schedules on page F-1
       of this Report.

(3)    Exhibits

Exhibit                                    Description
-------                                    -----------
2.1     --  Agreement and Plan of Merger between Cougar Holdings Corporation,
            Cougar Acquisition Corporation and the Company, dated October 22,
            1998 (incorporated by reference to Exhibit 2.1 of the Company's
            Current Report on Form 8-K filed on October 28, 1998.)


3.1     --  Third Amended and Restated Articles of Incorporation of the
            Company (incorporated by reference to Exhibit 3.1 of the Company's
            Registration Statement on Form S-1, Registration No. 333-24267, as
            amended).

3.2     --  Amended and Restated Bylaws of the Company (incorporated by
            reference to Exhibit 3.2 of the Company's Registration Statement on
            Form S-1 Registration No. 333-24267, as amended).

4.1     --  Third Amended and Restated Articles of Incorporation of the
            Company, including, without limitation Article III and Article VII
            (incorporated by reference to Exhibit 3.1 of the Company's
            Registration Statement on Form S-1, Registration No. 333-24267, as
            amended).

10.1    --  WelCare International, Inc. 1994 Employee Stock Option Plan
            (incorporated by reference to Exhibit 10.1 of the Company's
            Registration Statement on Form S-1, Registration No. 333-24267, as
            amended)

10.2    --  WelCare International, Inc. 1996 Executive Stock Plan
            (incorporated by reference to Exhibit 10.2 of the Company's
            Registration Statement on Form S-1, Registration No. 333-24267, as
            amended)

10.3    --  WelCare International, Inc. 1996 Employee Stock Option Plan
            (incorporated by reference to Exhibit 10.3 of the Company's
            Registration Statement on Form S-1, Registration No. 333-24267, as
            amended)

10.4    --  Centennial HealthCare Corporation 1997 Stock Plan (incorporated
            by reference to Exhibit 10.4 of the Company's Registration Statement
            on Form S-1, Registration No. 333-24267, as amended)


10.5    --  Amended and Restated Employment Agreement between WelCare
            International, Inc. and J. Stephen Eaton dated December 31, 1995
            (incorporated by reference to Exhibit 10.6 of the Company's
            Registration Statement on Form S-1, Registration No. 333-24267, as
            amended)

10.6    --  Amended and Restated Employment Agreement between Paragon
            Rehabilitation, Inc. and Laurence W. Lepley, Jr. dated as of January
            1, 1998 (incorporated by reference to Exhibit 10.7 of the Company's 
            Annual Report on Form 10-K for the Fiscal Year ended December 31, 
            1997).
<PAGE>
 
10.7    --  Registration Rights Agreement dated December 31, 1995 by and
            between the Company and the Shareholders as defined therein, as
            amended (incorporated by reference to Exhibit 10.8 of the Company's
            Registration Statement on Form S-1, Registration No. 333-24267, as
            amended)

10.8    --  Lease between Grant Park Nursing Home L.P. and WelCare
            Acquisition Corp. n/k/a Centennial Acquisition Corporation ("CAC")
            commencing on January 1, 1993 (incorporated by reference to Exhibit
            10.9 of the Company's Registration Statement on Form S-1,
            Registration No. 333-24267, as amended)

10.9    --  Amended and Restated Lease Agreement by and between Ashton Woods
            Limited Partnership and WelCare/Ashton Properties, Inc. n/k/a
            Centennial /Ashton Properties Corporation ("CAPC"), dated December
            20, 1994 (incorporated by reference to Exhibit 10.11 of the
            Company's Registration Statement on Form S-1, Registration No.
            333-24267, as amended)

10.10   --  Second Amended and Restated Lease Agreement by and between EBT
            Healthcare Properties, L.P. and CHPC dated October 1, 1998
            (incorporated by reference to Exhibit 10.13 of the Company's
            Quarterly Report on Form 10-Q for quarter ended September 30, 1998).

10.11   --  Second Amendment to Certain Operative Agreements by and among the
            Company, certain subsidiaries of the Company as Guarantors, First
            Security Band, National Association, as Owner Trustee, the various
            banks and lending institutions named therein as the Lenders, First
            Union Capital Markets, as Syndication Agent and Nationsbank, N.A.,
            as agent.

10.12   --  Amendment No.2 to the Third Amended and Restated Credit Agreement by
            and among the Company and its subsidiaries and the Lenders
            identified therein dated as of December 30, 1998.
<PAGE>
 
10.13   --  Operating Lease by and between Health Care Property Investors,
            Inc. and Cardinal of Indiana, Inc., as amended by that certain
            Amendment to Operating Lease dated November 1, 1993, as amended by
            that certain Second Amendment to Operating Lease dated April 1,
            1994, as amended by that certain Third Amendment to Operating Lease
            dated March 31, 1995, as amended by that certain Fourth Amendment to
            Operating Lease dated January 1, 1996, as assigned. (incorporated by
            reference to Exhibit 10.13 of the Company's Registration Statement
            on Form S-1, Registration No. 333-24267, as amended)

10.14   --  Lease Agreement by and between Healthcare Realty Trust
            Incorporated and Cardinal Development Co., Inc. ("Cardinal"), as
            amended by that certain Amendment Number One to Lease Agreement
            dated November 1, 1993, as assigned to THP pursuant to that certain
            Lease Agreement, Consent and Release dated March 1, 1994
            (incorporated by reference to Exhibit 10.16 of the Company's
            Registration Statement on Form S-1, Registration No. 333-24267, as
            amended)

10.15   --  Lease Agreement by and between House Investments - Nursing Homes
            Partners I and THP dated November 1, 1993 (incorporated by reference
            to Exhibit 10.18 of the Company's Registration Statement on Form
            S-1, Registration No. 333-24267, as amended)

10.16   --  Operating Lease by and between HCPI Charlotte, Inc. and THP dated
            June 19, 1995(incorporated by reference to Exhibit 10.20 of the
            Company's Registration Statement on Form S-1, Registration No.
            333-24267, as amended)

10.17   --  Amended and Restated Management Agreement by and between
            Montclair Medical Investors, Ltd., and CHMC dated January 1, 1995
            (incorporated by reference to Exhibit 10.28 of the Company's
            Registration Statement on Form S-1, Registration No.333-24267, as
            amended)

11.1    --  Statement Regarding Computation of Per Share Earnings

21.1    --  List of Subsidiaries

27.1    --  Financial Data Schedule

99.1    --  Cautionary Statements Regarding Forward-Looking Statements

      (b)   Reports on Form 8-K.

            On October 28, 1998, the Company filed a Form 8-K reporting a
proposed merger of the Company with a company founded by Welsh, Carson, Anserson
& Stowe, whose affiliates currently own approximately 23% of the Company's
outstanding stock.
<PAGE>
 
                                     SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the
Company has duly caused this Form 10-K to be signed on behalf of the
undersigned, thereunto duly authorized, on April 7, 1999.

                        CENTENNIAL HEALTHCARE CORPORATION

                                  /s/  J. Stephen Eaton
                              By:
                                 -----------------------------------------------
                                 J. Stephen Eaton
                                 Chairman, President and Chief Executive Officer

        Pursuant to the Requirements of the 1934 Act, this Form 10-K has been
signed below by the following persons in the capacities indicated on April 7,
1999.

SIGNATURES

/s/ J. Stephen Eaton         Chairman, President and Chief Executive Officer
--------------------------
J. Stephen Eaton

/s/ Alan C. Dahl             Executive Vice President, Chief Financial Officer 
--------------------------       and Director
Alan C. Dahl

/s/ Andrew M. Paul           Director
--------------------------
Andrew M. Paul

/s/ James B. Hoover          Director
--------------------------
James B. Hoover

/s/ Robert A. Ortenzio       Director
--------------------------
Robert A. Ortenzio

/s/ Bertil D. Nordin         Director
--------------------------
Bertil D. Nordin

/s/ W. Scott Miller          Director
--------------------------
W. Scott Miller

/s/ Charles D. Nash          Director
--------------------------
Charles D. Nash

<PAGE>
 
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<CAPTION>

                                                                                   Page
                                                                                   ----
<S>                                                                                <C>
Report of Independent Accountants................................................   F-2
Consolidated Balance Sheets at December 31,1998 and 1997 ........................   F-3
Consolidated Statements of Operations for the years ended December 31, 1998,
  1997 and 1996..................................................................   F-4
Consolidated Statements of Shareholders' Equity for the years
  ended December 31, 1998, 1997 and 1996.........................................   F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
   1997 and 1996.................................................................   F-6
Notes to Consolidated Financial Statements.......................................   F-7
Quarterly Consolidated Financial Information (Unaudited).........................   F-30
Financial Statement Schedules (a):
  Schedule II - Valuation and Qualifying Accounts for the years ended
  December 31, 1998, 1997 and 1996...............................................   F-31
</TABLE>

----------
(a)   All other schedules have been omitted because the required information is
      not present or not present in material amounts.


                                      F-1

<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Centennial HealthCare Corporation

      In our opinion, the accompanying consolidated balance sheets and the 
related consolidated statements of operations, shareholders' equity and cash 
flows present fairly, in all material respects, the financial position of 
Centennial HealthCare Corporation and its subsidiaries (the "Company") at 
December 31, 1998 and 1997, and the results of their operations and their cash 
flows for each of the three years in the period ended December 31, 1998, in 
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

                                       /s/ PricewaterhouseCoopers LLP

Atlanta, Georgia
April 7, 1999

                                      F-2
<PAGE>
 
               CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                     ------------
                                                                                1998              1997
                                                                                ----              ----
<S>                                                                          <C>            <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents ...........................................      $   8,087      $   4,011
  Patient accounts receivable and third-party payor settlements, net
   of allowance for doubtful accounts of approximately
   $5,000 and $3,000 ..................................................         99,910         72,222
  Other receivables ...................................................          4,382          2,149
  Deferred income taxes ...............................................          3,738          2,511
  Prepaid expenses and other current assets ...........................          2,250          1,259
                                                                             ---------      ---------
      Total current assets ............................................        118,367         82,152

  Property and equipment, net .........................................         74,813         74,379
  Notes and advances receivable, net ..................................         36,189         23,764
  Refundable deposits, including amounts due from affiliates of $2,875           4,297          4,399
  Intangible assets less accumulated amortization of $4,240 and $2,642          40,104         51,331
  Other assets ........................................................         14,602          7,624
                                                                             ---------      ---------
      Total assets ....................................................      $ 288,372      $ 243,649
                                                                             =========      =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt ................................      $   3,534      $   1,576
  Accounts payable and accrued expenses ...............................         32,096         25,253
  Accrued payroll .....................................................         12,467         11,773
  Accrued lease payable ...............................................          4,413          3,759
  Terminated merger transaction costs .................................          3,248             --
  Estimated merger closure costs ......................................             --          3,391
  Other liabilities ...................................................          6,034          3,303
                                                                             ---------      ---------
      Total current liabilities .......................................         61,792         49,055
Long-term debt, less current maturities ...............................        112,849         78,913
Other long-term liabilities ...........................................             48          2,577
                                                                             ---------      ---------
                                                                               174,689        130,545

Commitments and contingencies
Shareholders' equity:
  Common stock with par value of $.01; 50,000,000 shares
       authorized; 11,923 and  11,862 shares issued and outstanding ...            119            119
  Paid-in capital .....................................................        102,015        101,299
  Retained earnings ...................................................         11,899         12,214
                                                                             ---------      ---------
                                                                               114,033        113,632
Note receivable from shareholder ......................................           (350)          (528)
                                                                             ---------      ---------
      Net shareholders' equity ........................................        113,683        113,104
                                                                             ---------      ---------
      Total liabilities and shareholders' equity ......................      $ 288,372      $ 243,649
                                                                             =========      =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
               CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                         For the year ended
                                                                            December 31,
                                                            -----------------------------------------
                                                                1998          1997           1996
                                                            -----------    -----------    -----------
<S>                                                         <C>             <C>             <C>
Revenues:
  Net patient service revenues .......................      $ 342,203       $ 296,321       $ 227,387
  Management fees and other revenues .................         15,442           7,952           5,661
                                                            ---------       ---------       ---------
    Total revenues ...................................        357,645         304,273         233,048
                                                            ---------       ---------       ---------

Expenses:
  Facility operating expenses:
      Salaries, wages and benefits ...................        182,801         154,841         107,038
      Other operating expenses .......................         92,688          79,418          76,286
  Lease expense ......................................         22,946          21,740          18,777
  Corporate administrative costs .....................         21,515          16,055          11,400
  Depreciation and amortization ......................          9,292           6,760           5,012
  Loss on closure of nursing facility ................          4,010              --              --
  Provision for asset revaluation ....................         12,152              --              --
  Terminated merger transaction costs ................          3,619              --              --
                                                            ---------       ---------       ---------
     Total operating expenses ........................        349,023         278,814         218,513
                                                            ---------       ---------       ---------
                                                                8,622          25,459          14,535
                                                            ---------       ---------       ---------
Other income (expense):
   Interest income ...................................          2,011             636             695
   Interest expense ..................................         (9,165)         (8,658)        (10,068)
   Equity in loss of unconsolidated
        partnerships .................................             --              --            (108)
                                                            ---------       ---------       ---------
      Total other expense ............................         (7,154)         (8,022)         (9,481)
                                                            ---------       ---------       ---------
                                                                1,468          17,437           5,054

Provision for income taxes ...........................          1,504           6,800           2,092
                                                            ---------       ---------       ---------
Income (loss) before minority interest and 
  extraordinary loss .................................            (36)         10,637           2,962
Minority interest in net income of subsidiary,
  net of income taxes ................................           (279)           (252)           (183)
                                                            ---------       ---------       ---------

Income (loss) before extraordinary loss ..............           (315)         10,385           2,779
Extraordinary loss on extinguishment of debt, net of
  income tax benefit .................................             --            (537)             --
                                                            ---------       ---------       ---------
      Net income (loss) ..............................           (315)          9,848           2,779
Dividends and accretion on preferred stock ...........             --           5,874           2,192
                                                            ---------       ---------       ---------
Income (loss) applicable to common stock .............      $    (315)      $   3,974       $     587
                                                            =========       =========       =========

Net income (loss) per common and common equivalent share:

Basic:
  Income (loss) applicable to common stock before
    extraordinary loss ...............................      $   (0.03)     $     0.54      $     0.12
  Extraordinary loss on extinguishment of debt .......           0.00           (0.06)           0.00
                                                            ---------       ---------       ---------
    Income (loss) applicable to common stock .........      $   (0.03)     $     0.48      $     0.12
                                                            =========       =========       =========

Diluted:
  Income (loss) applicable to common stock before
    extraordinary loss ...............................      $   (0.03)     $     0.54      $     0.12
  Extraordinary loss on extinguishment of debt .......           0.00           (0.06)           0.00
                                                            ---------       ---------       ---------
    Income (loss) applicable to common stock .........      $   (0.03)     $     0.48      $     0.12
                                                            =========       =========       =========

Weighted average number of common stock and
  common stock equivalents outstanding
  Basic ..............................................         11,906           8,289           4,742
                                                            =========       =========       =========
  Diluted ............................................         12,078           8,462           4,782
                                                            =========       =========       =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
               CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                         Special Voting
                                   Common Stock           Common Stock
                                 ------------------    -------------------      Paid-In  Retained      Treasury
                                 Shares    Amount      Shares     Amount        Capital  Earnings       Stock
                                 --------  --------    --------  ---------      -------- ---------     ---------
<S>                             <C>         <C>         <C>        <C>         <C>         <C>         <C>
Balance at December 31, 1995      1,601          18       2,941          --      5,213       7,653      (1,487)
Dividends paid on
    Series A and B
    preferred stock ........         --          --          --          --         --        (341)         --
Dividends accrued on
   Series C preferred
   stock ...................         --          --          --          --         --      (1,470)         --
Exercise of stock
   options .................        203           2          --          --        170          --          --
Exercise of special voting
  stock options ............         --          --           1          --          6          --          --
Tax benefit on options
  exercised ................         --          --          --          --        318          --          --
Accretion of preferred
   stock to estimated
   redemption value ........         --          --          --          --         --        (381)         --
Net income .................         --          --          --          --         --       2,779          --
                              ---------   ---------  ----------  ----------  ---------   ---------   ---------

Balance at December 31, 1996      1,804          20       2,942          --      5,707       8,240      (1,487)
Dividends paid on
    Series A, B and E
    preferred stock ........         --          --          --          --         --        (462)         --
Dividends accrued on
   Series C preferred
   stock ...................         --          --          --          --         --        (865)         --
Exercise of stock
   options .................          3          --           1          --         36          --          --
Accretion of preferred
   stock to estimated
   redemption value ........         --          --          --          --         --        (106)         --
Issuance of common
   shares ..................         64           1          --          --        777          --          --
Public offering of
   common stock ............      4,600          44          --          --     66,917          --       1,487
Offering costs for
   common stock ............         --          --          --          --     (1,679)         --          --
Conversion of special
   voting common stock
   due to Offering .........      2,943          29      (2,943)         --        (29)         --          --
Redemption of Series E
   preferred stock .........         --          --          --          --         --        (715)         --
Conversion of Series A, B,
   C and D preferred stock .      2,532          25          --          --     30,912      (3,726)         --
Repurchase of Series C
   preferred stock .........        (84)         --          --          --     (1,342)         --          --
Net income .................         --          --          --          --         --       9,848          --
                              ---------   ---------  ----------  ----------  ---------   ---------   ---------

Balance at December 31, 1997     11,862         119          --          --    101,299      12,214          --
Exercise of stock
   options .................         61          --          --          --        294          --          --
Proceeds from shareholder
   note receivable .........         --          --          --          --         --          --          --
Tax benefit on options
   exercised................         --          --          --          --        422          --          --
Net loss ...................         --          --          --          --         --        (315)         --
                              ---------   ---------  ----------  ----------  ---------   ---------   ---------
Balance at December 31, 1998     11,923   $     119          --  $       --  $ 102,015   $  11,899   $      --
                              =========   =========  ==========  ==========  =========   =========   =========

<CAPTION>
                                 Note
                               Receivable
                                 From
                               Shareholder   Net
                               -----------  --------
<S>                             <C>          <C>
Balance at December 31, 1995       (528)     10,869
Dividends paid on
    Series A and B
    preferred stock ........         --        (341)
Dividends accrued on
   Series C preferred
   stock ...................         --      (1,470)
Exercise of stock
   options .................         --         172
Exercise of special voting
  stock options ............         --           6
Tax benefit on options
  exercised ................         --         318
Accretion of preferred
   stock to estimated
   redemption value ........         --        (381)
Net income .................         --       2,779
                              ---------   ---------

Balance at December 31, 1996       (528)     11,952
Dividends paid on
    Series A, B and E
    preferred stock ........         --        (462)
Dividends accrued on
   Series C preferred
   stock ...................         --        (865)
Exercise of stock
   options .................         --          36
Accretion of preferred
   stock to estimated
   redemption value ........         --        (106)
Issuance of common
   shares ..................         --         778
Public offering of
   common stock ............         --      68,448
Offering costs for
   common stock ............         --      (1,679)
Conversion of special
   voting common stock
   due to Offering .........         --          --
Redemption of Series E
   preferred stock .........         --        (715)
Conversion of Series A, B,
   C and D preferred stock .         --      27,211
Repurchase of Series C
   preferred stock .........         --      (1,342)
Net income .................         --       9,848
                              ---------   ---------

Balance at December 31, 1997       (528)    113,104
Exercise of stock
   options .................         --         294
Proceeds from shareholder
   note receivable .........        528         528
Note receivable from 
   shareholder .............       (350)       (350)
Tax benefit on options
   exercised ...............         --         422
Net loss ...................         --        (315)
                              ---------   ---------
Balance at December 31, 1998  $    (350)  $ 113,683
                              =========   =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>
 
               CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    For the year ended
                                                                                       December 31,
                                                                              ------------------------------
                                                                                1998       1997       1996
                                                                              --------   --------   --------
<S>                                                                           <C>        <C>        <C>
Operating Activities:
  Net income (loss) ........................................................  $   (315)  $  9,848   $  2,779
  Adjustments to reconcile net income (loss) to net cash provided by
      (used in) operating activities:
      Depreciation and amortization ........................................     9,292      6,760      5,012
      Provision for asset revaluation ......................................    12,152         --         --
      Amortization of discount on subordinated debt ........................        --         62        114
      Extraordinary loss on extinguishment of debt .........................        --        880         --
      Deferred income taxes ................................................    (2,830)     3,881      1,698
      Consulting expenses offset against note receivable ...................       125         78        125
      Equity in income of unconsolidated partnerships ......................        --         --       (145)
      Minority interest ....................................................       458        413        305
      Provision for doubtful accounts ......................................     1,432        863        852
      Loss on sale of equipment ............................................         4         --         25
      Loss on sale of investment in unconsolidated partnerships ............        --         --        253
      Change in assets and liabilities:
         Accounts receivable ...............................................   (24,412)   (29,167)   (15,733)
         Prepaid expenses and other assets .................................    (4,646)    (1,525)     1,364
         Refundable deposits ...............................................      (105)       (28)       (29)
         Accounts payable, accrued liabilities and other current liabilities     9,246       (935)    11,322
         Other .............................................................    (1,568)      (140)       165
                                                                              --------   --------   --------
             Cash provided by (used in) operating activities ...............    (1,167)    (9,010)     8,107
                                                                              --------   --------   --------
Investing Activities:
  Purchases of property and equipment ......................................    (8,033)    (7,567)    (6,686)
  Proceeds from the sale of equipment ......................................        15         --        600
  Notes and advances receivable, net of repayments .........................   (12,449)    (8,232)   (13,381)
  Acquisitions, net of cash acquired .......................................    (7,392)   (17,355)    (9,100)
  Other ....................................................................    (2,506)     3,127     (1,763)
                                                                              --------   --------   --------
             Cash used in investing activities .............................   (30,365)   (30,027)   (30,330)
                                                                              --------   --------   --------

Financing Activities:
  Proceeds from the exercise of stock options ..............................       294         36        178
  Proceeds from issuance of preferred stock ................................        --     10,000         --
  Proceeds from borrowings .................................................    37,700     28,750     47,047
  Public offering of Common Stock ..........................................        --     68,448         --
  Payment of stock offering costs ..........................................        --     (1,679)        --
  Distributions paid to minority partners ..................................      (296)      (494)      (299)
  Payments of dividends to preferred shareholders ..........................        --       (462)      (341)
  Payments on amounts due to related party .................................      (691)      (528)      (361)
  Redemption of Series E Preferred Stock ...................................        --     (5,000)        --
  Repurchase of Series C Preferred Stock ...................................        --     (1,343)        --
  Principal payments on subordinated debt ..................................        --    (25,300)        --
  Principal payments on long-term debt .....................................    (1,399)   (35,410)   (22,865)
                                                                              --------   --------   --------

             Cash provided by financing activities .........................    35,608     37,018     23,359
                                                                              --------   --------   --------

Net increase (decrease) in cash and cash equivalents .......................     4,076     (2,019)     1,136

Cash and cash equivalents, beginning of period .............................     4,011      6,030      4,894
                                                                              --------   --------   --------

Cash and cash equivalents, end of period ...................................  $  8,087   $  4,011   $  6,030
                                                                              ========   ========   ========

Supplemental disclosure:
  Income taxes paid ........................................................  $  4,329   $  1,289   $  1,058
  Interest paid ............................................................  $  8,019   $  9,236   $  9,840
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
 
                                      F-6

               CENTENNIAL HEALTHCARE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies Reporting Entity

      Centennial HealthCare Corporation ("Centennial" or the "Company")
(formerly known as WelCare International, Inc.) was incorporated in February
1989 under the laws of the State of Georgia. The Company's principal business is
to provide basic and specialty healthcare services to patients in a long-term
care setting. At December 31, 1998, subsidiaries of the Company operated 101
owned, leased and managed long-term care facilities with approximately 10,780
beds in 20 states and the District of Columbia. In addition, through its
subsidiaries, the Company provided comprehensive contract rehabilitation
services to Company-owned and third party long-term care facilities pursuant to
132 contracts, as well as home health services through 16 licensed home health
offices.

      In July 1997, Centennial completed an initial public offering of 4,000,000
shares of the Company's Common Stock (the "Offering"). In connection with the
Offering, the Company granted the underwriters an option to purchase up to
600,000 additional shares of the Company's Common Stock. This option was
exercised and closed in July 1997.

Basis of Presentation

      The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, and a majority-owned (55%) affiliated limited
partnership.

      The Company accounted for its investments in certain other limited
partnerships in which the Company served as a general partner under the equity
method. The investments were recorded at cost and adjusted for Centennial's
share of earnings or losses and cash distributions.

      All significant intercompany accounts have been eliminated.

Revenues

      Revenues that are reimbursed by patients at Centennial's long-term care
facilities are recorded at established billing rates. Revenues to be reimbursed
by contracts with third-party payors, primarily Medicare and Medicaid programs,
are recorded at the amount estimated to be realized under these contractual
arrangements. Revenues from the management of long-term care facilities and
acute care hospitals are recognized over the period during which the services
are rendered. Revenues from Medicare and Medicaid are generally based on
reimbursement of allowable costs of providing services to program beneficiaries.
The Company estimates amounts due from third-party payors and records the
revenue in the period services are rendered. Amounts ultimately payable by
Medicare and Medicaid are determined based on annual cost reports which are
subject to audit and retroactive adjustment by the payor. Changes in estimated
revenues due in connection with Medicare and Medicaid may be recorded by the
Company subsequent to the year of origination and prior to final settlement
based on improved estimates. Differences between estimated amounts due from the
Medicare and Medicaid programs and ultimate settlements with these programs are
recognized in the year of final settlement.

      Costs reimbursed under the Medicare program are subject to regional
limits. The costs at certain of the Company's facilities have frequently
exceeded these limits and, accordingly, the Company is required to submit
exception requests

                                      F-7
<PAGE>
 
to cover such excess costs. The accompanying balance sheets include amounts
estimated to be recoverable under such exception requests.

      Accounts receivable, net, at December 31, 1998 and 1997 includes $61.9
million and $44.4 million, respectively, of amounts due from Medicare and
Medicaid programs.

      The Company is not aware of any material claims, disputes, or other
unsettled matters related to third-party reimbursements, other than those
reflected on its balance sheets, and believes retroactive adjustments related to
these receivables will not be material. Retroactive settlement adjustments in 
any year could be material to the consolidated financial statements.

Concentrations

      A significant portion of the Company's revenues are derived from the
Medicare and Medicaid programs. 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
over the next five years, primarily through the implementation of a Medicare
prospective payment system ("PPS") for skilled services. In addition to the Act,
there have been, and the Company expects that there will continue to be, a
number of additional proposals to limit reimbursements to long-term care
facilities under the Medicare and Medicaid programs. Centennial cannot predict
whether any of these additional proposals will be adopted, or if adopted and
implemented, what effect such proposals would have on the Company. Approximately
57%, 60%, and 68% of the Company's total revenues for the years ended December
31, 1998, 1997 and 1996, respectively, are from the Medicare and Medicaid
programs. While the Company operates long-term care facilities in 20 states and
the District of Columbia, 33 of its 68 owned or leased facilities are located in
North Carolina, Indiana and Michigan.

Facility Operating Expenses

      Facility operating expenses include direct operating costs at the facility
level. The majority of these costs consist of payroll and employee benefits
related to nursing, housekeeping and dietary services provided to patients, as
well as maintenance and administration of the facilities. Other significant
facility operating expenses include medical and pharmacy supplies, food,
utilities, and the cost of rehabilitation therapies.

Income Taxes

      Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred taxes are provided for the differences between the tax and
accounting bases of the Company's assets and liabilities. For Federal income tax
purposes, the Company and its subsidiaries file a consolidated income tax
return.

Cash and Cash Equivalents

      The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.

Property and Equipment

      Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of five to ten years for equipment, five to 15 years for furniture and 30
to 40 years for buildings and improvements.

Intangible Assets

                                      F-8
<PAGE>
 
      Intangible assets consist primarily of costs in excess of the fair value
of identifiable net assets of acquired entities, and are amortized using the
straight-line method, primarily over a 30 to 40 year period.

Assessment of Long-Lived Assets

      The Company periodically reviews the carrying values of its long-lived
assets (primarily property and equipment and intangible assets) whenever events
or circumstances provide evidence that suggest that the carrying amount of long-
lived assets may not be recoverable. If this review indicates that long-lived
assets may not be recoverable, the Company reviews the expected undiscounted
future net operating cash flows from its facilities, as well as valuations
obtained in connection with various refinancings. Any permanent impairment in
value is recognized as a charge against earnings in the statement of operations.
During 1998, the Company recorded a provision for asset revaluation (see Note
7). As of December 31, 1998, the Company does not believe there is any
indication that the amortization period of its long-lived assets needs to be
adjusted.

Earnings per Share

      In June 1997, the Board of Directors and Shareholders of the Company
approved a reverse stock split of .6897 for one. All references to shares and
weighted shares outstanding used in the calculation of net income per share and
per share amounts have been retroactively adjusted to reflect this reverse stock
split.

      In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share", (see Note 21).

Use of Estimates in Financial Statements

      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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Newly Adopted Accounting Pronouncement

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, (see "Segment Information" note).

Reclassifications

      Certain amounts in the 1997 financial statements have been reclassified
for comparative purposes.

2. Initial Public Offering

      In July 1997, Centennial completed an initial public offering of 4,000,000
shares of the Company's Common Stock at a price of $16.00 per share. In
connection with the Offering, the Company granted the underwriters an option to
purchase up to 600,000 additional shares of the Company's Common Stock at the
Offering price of $16.00 per share. This option was exercised and closed in July

                                      F-9
<PAGE>
 
1997. Proceeds to Centennial from the Offering and the exercise of the
underwriters' option totaled approximately $66.8 million, net of underwriting
discounts and commissions and approximately $1.7 million in Offering expenses.

      The net proceeds of the Offering available to the Company were used to
repay two subordinated promissory notes aggregating $25.3 million, which accrued
interest at 10.8% and 11.7% per annum, to redeem the Series E Redeemable
Preferred Stock for $5.0 million, to repurchase approximately 84,000 shares of
Common Stock, which were received by the former holders of the Company's Series
C Preferred Stock, for approximately $1.3 million, and to repay approximately
$35.1 million outstanding under the Company's Senior Credit Facility with First
Union National Bank (First Union), and NationsBank, N.A., (NationsBank), as
agents and lenders and the other lenders named therein, (the "Senior Credit
Facility").

      After the closing of the Offering, with the net proceeds of the exercise
of the underwriters overallotment option, Centennial offered the former holders
of the Company's Series C Preferred Stock pro-rata repurchase of their shares of
Common Stock received upon the conversion of their Series C Preferred Stock at
the Offering price of $16.00 per share. The Company made this repurchase offer
as consideration for the agreement by these former holders to the conversion of
the Series C Preferred Stock into Common Stock. Holders of approximately 84,000
shares of the approximately 1.3 million shares available for pro-rata repurchase
elected to have such shares repurchased by Centennial. Centennial repurchased
the 84,000 shares of common stock for approximately $1.3 million.

      Centennial repaid the two subordinated promissory notes during the third
quarter of 1997, resulting in a loss on early extinguishment of debt of
approximately $537,000, net of income tax benefit of approximately $343,000.

      Concurrently with the closing of the Offering, the Company's Series A, B,
C and D Preferred Stock were converted into approximately 2.5 million shares of
Common Stock, net of the stock repurchase noted above; the Company's Special
Voting Common Stock was converted into Common Stock; and Centennial's Treasury
Stock was converted into Common Stock.

3. Mergers and Acquisitions

On October 22, 1998, Centennial announced that its Board of Directors had
approved the sale of the Company for $16.00 per share in cash to a new company 
(Centennial HealthCare Holdings Corporation) formed by Welsh, Carson, Anderson &
Stowe ("WCAS"), whose affiliates currently hold approximately 23% of the
Company's common stock, (the "Proposed Merger").

Under the definitive merger agreement, each outstanding share of the Company's
common stock, other than certain shares currently held by the Company's
management, will be converted into the right to receive $16.00 in cash. Certain
shares held by the Company's management will be converted into shares of the
surviving corporation so that management will maintain an equity interest in
such surviving corporation.

The proposed transaction is subject to certain conditions, including regulatory
approvals, approval by the Company's shareholders holding a majority of the
outstanding shares, as well as the approval of a majority of the shares voted by
disinterested shareholders other than those members of management converting
shares into shares of the surviving corporation or WCAS or its affiliates, and
other customary closing conditions. The definitive merger agreement contains no
financing contingencies. The Company anticipates that the transaction will be 
accounted for under the purchase method.

On April 2, 1999 Centennial HealthCare Holdings Corporation notified the Company
that it was terminating the definitive merger agreement. Accordingly, in its
December 31, 1998 Consolidated Financial Statements, the Company has expensed 
approximately $3.6 million in terminated merger transaction costs. The Company 
has incurred additional terminated merger transaction costs in 1999. The total 
additional costs incurred in 1999 are estimated to be $1.0 million and will be 
expensed as incurred.

In October 1998, the Company entered into a management agreement for a skilled
nursing facility with 68 nursing home beds and 22 hospital beds, located in
Mississippi.

                                      F-10
<PAGE>
 
      In August 1998, the Company began leasing four skilled nursing facilities
totaling 349 licensed available beds, located in Mississippi, North Carolina,
Arkansas and Wisconsin. One of these facilities was previously managed by the
Company. In October 1998, the Company began leasing six skilled nursing
facilities totaling 608 licensed available beds, located in Florida, Arkansas,
Kansas, and Wisconsin. In November 1998, the Company began leasing four skilled
nursing facilities totaling 675 licensed available beds, located in Florida and
Missouri.

In April 1998, Centennial entered into management agreements for two skilled
nursing facilities totaling 174 licensed available beds, located in Virginia.

During the first quarter of 1998, the Company entered into management agreements
for six skilled nursing facilities, with a total of 836 licensed available beds,
located in North Carolina. The agreements each have a five-year term, and
provide the Company with a right of first refusal to purchase the related
facilities. Also in the first quarter of 1998, the Company entered into a
management agreement for a 59-bed rural hospital in northern Florida.

      In May 1997, the Company acquired by merger Total Care Consolidated, Inc.,
("TC"), a provider of home health services, with 25 home health offices located
primarily in North Carolina. Total consideration of $8.0 million consisted of
$6.0 million in cash, which was funded under the Senior Credit Facility, and
$2.0 million in the form of a convertible promissory note due April 30, 1999.
The transaction was accounted for under the purchase method and the Company's
Consolidated Financial Statements include TC from the effective date of the
merger.

      In August 1997, Centennial acquired substantially all of the business and
assets of Complex Care, Inc., ("CCI"), a provider of physical, occupational and
speech therapy services through 45 contracts with long-term care facilities in
Connecticut and Rhode Island. The Company paid total consideration of $7.0
million, utilizing borrowings under its Senior Credit Facility. Additional
consideration of up to $500,000 may be paid by the Company under an earn-out
agreement. The transaction was accounted for under the purchase method and the
Company's Consolidated Financial Statements include CCI from the effective date
of the acquisition.

The Company recorded intangible assets of approximately $8.0 million and $7.5
million related to the acquisitions of TC and CCI, respectively. During 1998, 
the Company wrote off $1.2 million of the goodwill related to TC.

      In December 1997, Centennial acquired a 58-bed skilled nursing facility in
St. Petersburg, Florida, which had previously been managed by the Company since
June 1991. Total consideration of approximately $3.3 million included borrowings
under the Senior Credit Facility of approximately $1.1 million, and the
reduction of a note receivable to the Company from the Florida facility of
approximately $2.2 million. The transaction was accounted for under the purchase
method and the Company's Consolidated Financial Statements include this facility
from the effective date of the acquisition.

In March 1997, the Company acquired a leasehold interest in a rural hospital
located in northern Florida. In October 1996, the Company entered into a
management agreement and a lease agreement with the owner of a hospital and
three licensed home health care offices, located in northern Florida. The
agreement provided that the Company would manage the hospital until all
necessary approvals and licenses were obtained, at which time the Company would
operate the hospital under a long-term lease. The Company accounted for the
transaction as a management agreement beginning in October 1996; in June 1997,
all necessary approvals and licenses were obtained, and the Company has operated
the hospital under a long-term lease since that date. The Company's Consolidated
Financial Statements include the hospitals from the effective date of the
transactions.

                                      F-11
<PAGE>
 
4. Operating Leases

At December 31, 1998, the Company operated 53 long-term care facilities and two
hospitals under operating leases. Fourteen of the leases represent new leases
that the Company entered into during 1998. The leases have various expiration
dates through 2014.

Two of the long-term care facility leases are with affiliated entities, of which
the Company or an affiliate of one of the Company's officers serves as a general
partner.

The leases with affiliated entities expire in 2002 and 2008, with both having
two five-year extensions. Total lease expense to the Company as a result of
these two leases was $3.0 million, $3.2 million, and $3.3 million for the years
ended December 31, 1998, 1997 and 1996 respectively. In connection with one of
the leases, the Company paid the affiliated lessor a deposit of $2.9 million,
which is refundable upon the termination of the lease. The Company has a net
payable to the other affiliated lessor of approximately $1.6 million and $2.3
million at December 31, 1998 and 1997, respectively.

Twenty-two of the long-term care facility leases in effect at December 31, 1998
were obtained in connection with the Company's 1995 merger with Transitional
Health Services, Inc. Fourteen of these leases include provisions for increases
in lease payments. Certain of these leases provide the Company an option to
renew the lease after the initial lease term.

During 1998, the Company financed nine skilled nursing facilities under the
lease component of its Senior Credit Facility. Five of the leases were for
facilities that were previously leased by the Company, and one of the leases was
for a facility that was previously managed by the Company. These leases have
three-year terms, and provide the Company with an option to renew the leases
after the initial lease term.

Total rent expense under the long-term care facility and hospital operating
lease agreements approximated $20.6 million, $19.9 million, $17.7 million for
the years ended December 31, 1998, 1997 and 1996, respectively.

Minimum future rent payments under the facility leases and related equipment and
office space are summarized as follows (in thousands):

Year                                                           Amount
----                                                           ------
1999 ..................................................     $  25,669
2000 ..................................................        25,742
2001 ..................................................        24,309
2002 ..................................................        20,673
2003 ..................................................        17,426
Thereafter ............................................        94,862
                                                             --------
                                                             $208,681
                                                             ========

5. Total Revenue

      The distribution of total revenue by class of payor for the years ended
December 31, 1998, 1997 and 1996 was as follows (in thousands):

                                      F-12
<PAGE>
 
                                                     Year ended December 31,
                                             -----------------------------------
              Class of Payor                      1998         1997         1996
--------------------------------------------------------------------------------
Private pay, management fee and
  other .................................     $152,564     $120,371     $ 74,075
Medicaid ................................      119,559      111,380       99,803
Medicare ................................       85,522       72,522       59,170
                                              --------     --------     --------
                                              $357,645     $304,273     $233,048
                                              ========     ========     ========
                                            
      The above revenue amounts are net of third-party contractual allowances of
$59.8 million, $54.2 million and $44.7 million for the years ended December 31,
1998, 1997 and 1996, respectively.

      Included in other operating expenses is bad debt expense of approximately
$1.4 million, $863,000, and $852,000 for the years ended December 31, 1998, 1997
and 1996, respectively.

6. Property and Equipment

      Property and equipment consisted of the following at December 31, 1998 and
1997, (in thousands):

                                                           1998      1997
                                                        --------   --------
Land                                                    $  4,595   $  4,595
Buildings and improvements                                68,042     63,681
Furniture and equipment                                   17,312     15,633
Construction in progress - improvements to facilities      1,056      1,087
                                                        --------   --------
                                                          91,005     84,996
Less accumulated depreciation                            (16,192)   (10,617)
                                                        --------   --------
                                                        $ 74,813   $ 74,379
                                                        ========   ========

      Depreciation expense for the years ended December 31, 1998, 1997 and 1996
totaled $5.8 million, $4.5 million and $3.2 million, respectively.

7. Certain 1998 Transactions

During the third quarter of 1998, the Company completed its review of the
effects of the upcoming prospective payment system ("PPS") on its operations.
Based upon the Company's projections of future revenue and expense changes
associated with the phase-in of PPS, the Company determined that profitability
at certain of its nursing centers acquired in the 1995 merger with Transitional
Health Services, Inc. would be less than expected. In addition, the Company has
experienced continued declines in revenue at Total Care Inc., ("TC"), the
Company's subsidiary providing home health services, due to decreases in
Medicare reimbursement for home health services. Accordingly, during 1998 the
Company recorded write-downs of property and equipment and goodwill at its
nursing centers of approximately $3.4 million and $7.6 million, respectively. In
addition, the Company wrote off approximately $1.2 million of goodwill
associated with TC.

In December 1995, as part of the Company's merger with THS, the Company assumed
operations of THS of South Bend, a 191-bed skilled nursing facility located in
South Bend, Indiana. Prior to its acquisition by the Company, this facility had
a history of operating losses, had received negative state licensure


                                      F-13
<PAGE>
 
surveys, and was in jeopardy of losing its license. At the time of the
acquisition, the Company recorded a $3.0 million reserve against a future loss
on the disposition of the facility, which the Company intended to complete
within two years. The Company was unable to sell the facility, and as a result,
management determined that the best course of action was to close the facility.
The facility closed in November 1998.

      During the third quarter of 1998, the Company recorded an estimated loss
of $4.0 million associated with the closure of this facility and the relocation
of its residents. The Company continues to market the facility for sale, with
disposition expected by the second quarter of 1999. As of December 31, 1998, the
carrying value of the facility was approximately $1.8 million. The Company
suspended depreciation of these assets in August of 1998. Depreciation on these
assets would have approximated $25,000 during the last five months of 1998.

8. Investment in Unconsolidated Partnerships

      Certain subsidiaries of the Company acquired, in 1990, stock of the
corporate general partners of certain limited partnerships. These partnerships
owned long-term care facilities and retirement centers. Investments in
partnerships in which the Company's subsidiaries served as a general partner
were accounted for using the equity method. For the year ended December 31,1996,
the Company recognized income from its share of the partnerships' operations of
approximately $145,000. On January 30, 1997, the Company sold its stock in the
corporate general partners in most of the limited partnerships to a corporation
affiliated with the president of the Company for $100 and the assumption of all
the liabilities of the corporate general partners. For the year ended December
31, 1996, the Company recognized a loss, totaling approximately $253,000, in
connection with the sale of the corporate general partners.

9. Long-Term Debt

      Long-term debt consists of the following at December 31, 1998 and 1997 (in
thousands):

                                          1998      1997
                                      --------  --------
Bank credit facilities                $ 78,950  $ 41,250
Mortgage notes payable                  17,563    17,792
Other notes                              2,663     2,650
                                      --------  --------
                                        99,176    61,692
Capital lease obligations               17,207    18,797
                                      --------  --------
                                       116,383    80,489
Current maturities of long-term debt     3,534     1,576
                                      --------  --------
                                      $112,849  $ 78,913
                                      ========  ======== 
On December 16, 1997, the Company expanded its Senior Credit Facility through an
amendment to its existing amended and restated credit agreement. Through the
amendment, the Company's maximum aggregated advance limit was increased from
$65.0 million to $125.0 million. Company advances under the Senior Credit
Facility could be used for acquisitions, capital expenditures, working capital
and general corporate purposes.

In July 1998, the Company expanded its Senior Credit Facility through a third
amendment to its existing second amended and restated credit agreement. Through
this amendment, the Company's maximum aggregated advance limit was

                                      F-14
<PAGE>
 
increased from $125.0 million to $160.0 million, the term was extended to July
31, 2003 and a $40.0 million portion (the "Lease Facility") of the total $160.0
million commitment was designated for use in financing certain Company lease
transactions. The remaining $120.0 million portion (the "Revolver") of the
commitment was made available for financing existing indebtedness under the
previous Senior Credit Facility, acquisitions, capital expenditures, working
capital and general corporate purposes.

In October 1998, the Company increased amounts available under the Lease
Facility to $70.0 million with a corresponding decrease in commitments available
under the Revolver to $90.0 million to accommodate the Company's lease of two
facilities located in Missouri.

In December 1998, the Company expanded total commitments available through the
Lease Facility by $65.0 million to accommodate the Company's lease of six
properties located in Massachusetts. Following the increase, the Company's total
Senior Credit Facility commitment was $225.0 million, of which $90.0 million was
reserved for the Revolver and the remaining balance of $135.0 million allocated
for use through the Lease Facility.

Centennial's borrowing capacity under the Senior Credit Facility is dependent
upon its ability to satisfy certain financial covenants that are impacted by its
debt and capital structure. The Company had approximately $79.0 million and
$41.3 million outstanding under the Senior Credit Facility at December 31, 1998
and 1997, respectively, as well as issued standby letters of credit totaling
approximately $6.7 million and $7.0 million respectively.

      Interest accrues at varying rates dependent upon underlying interest rates
and the Company's selection of loan amounts and periods. The Company can elect a
rate based on First Union National Bank's prime rate or LIBOR, each increased by
an Applicable Margin, as defined in the Senior Credit Facility, which varies
dependent upon the ratio of debt to earnings before interest, taxes,
depreciation, amortization and operating lease expense. The weighted average
interest rate on the Company's borrowings at December 31, 1998 was approximately
6.5%.

      Interest is generally paid monthly on prime based borrowings and quarterly
on LIBOR based borrowings. The Company's outstanding borrowings are due to be
repaid on July 31, 2003, upon termination of the Senior Credit Facility. Under
certain circumstances, proceeds from additional equity issuances, sales of
Company assets and other debt instruments must be used to repay a portion of the
outstanding borrowings under the Senior Credit Facility.

      The Senior Credit Facility is collateralized by the stock of the Company's
subsidiaries. The Company is required to pay a fee of 0.25% on the average
unused portion of the commitment.

      The Senior Credit Facility includes various negative covenants including
restrictions on additional loans and advances, guaranties, stock repurchases and
redemptions, and the payment of dividends. Terms of the Senior Credit Facility
require the Company to comply with certain financial and other covenants, the
violation of which could cause the amounts of outstanding principal, interest
and fees to be immediately due and payable. On December 31, 1998, the Company
was in compliance with all of its debt covenants.

      At December 31, 1998 and 1997, the Company had $17.6 million and $17.8
million, respectively, of mortgage debt outstanding, including a current portion
of approximately $ 277,000 and $259,000 respectively. The mortgage debt requires
monthly payments of principal and interest of approximately $157,000. The debt
agreements are for five to twenty-year periods with amortization periods
covering twenty to twenty-five years. At December 31, 1998, interest

                                      F-15
<PAGE>
 
rates on the mortgages range from 7.33% to 10.50%. These debts are
collateralized by real property.

      Future maturities of mortgage debt are summarized as follows (in
thousands):

          1999                                   $ 277
          2000                                     304
          2001                                     334
          2002                                     367
          2003                                     402
          Thereafter                            15,879
                                              ---------
                                              $ 17,563
                                              ========= 

      Rent escalation clauses in the capital facility leases are based on
contingent factors such as increases in the consumer price index or annual
increases in a facility's revenues, and have resulted in increased current and
future lease payments.

    The following is a schedule of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as of
December 31, 1998 (in thousands):

                                                            Nursing
Year ending December 31                        Equipment  Facilities     Total
                                               -------     -------      -------
  1999                                         $    83     $ 2,468      $ 2,551
  2000                                              --       2,468        2,468
  2001                                              --       2,468        2,468
  2002                                              --       2,468        2,468
  2003                                              --       2,468        2,468
Thereafter                                          --      18,507       18,507
                                               -------     -------      -------
Total minimum lease payments                        83      30,847       30,930
Less amount representing interest                    2      13,721       13,723
                                               -------     -------      -------
Present value of minimum lease payments             81      17,126       17,207
Current portion                                     81         778          859
                                               -------     -------      -------
Noncurrent portion                             $    --     $16,348      $16,348
                                               =======     =======      =======

      The interest rate on the capital leases is based on the Company's
borrowing rate at the time a lease is executed. The average interest rate on
nursing facilities and equipment was 10.47% and 12.10%, respectively.

10. Equity Transactions

      The Company has stock options outstanding under the 1994 Stock Option
Plan, the 1996 Executive Stock Plan, the 1996 Employee Stock Option Plan, and
the 1997 Stock Plan (collectively referred to as the "Stock Option Plans").

      The 1994 Stock Option Plan and the 1996 Executive Stock Plan provide that
options may be granted to officers, directors and key employees; options vest
based upon either years of service, or at various intervals from 1996 through
2000. The 1996 Employee Stock Option Plan provides that options may be granted
to certain employees; options vest at various intervals through 1998. The 1997
Stock Plan provides that options may be granted to officers, non-employee, non-

                                      F-16
<PAGE>
 
affiliated directors and key employees at an exercise price and vesting schedule
to be determined by the compensation committee of the Board of Directors at the
time of grant. The options granted pursuant to the 1997 Stock Plan vest over
various schedules from 1998 through 2001.

      All stock options have been granted with exercise prices equal to or
greater than the estimated fair market value of the common stock on the date of
grant and are exercisable for up to ten years, as determined by the Company's
Board of Directors.

      Stock option transactions are summarized as follows:

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                       --------------------------------------------
                                                                  1998                 1997
                                                       ---------------------  ---------------------
                                                                    Weighted               Weighted
                                                                     Average                Average
                                                                    Exercise               Exercise
                                                        Shares        Price    Shares        Price
                                                        ------        -----    ------        -----
<S>                                                    <C>        <C>         <C>        <C>
Options outstanding-beginning of
  period ........................................      526,782    $   13.47   355,160    $   12.09
Granted .........................................      517,280        20.41   183,340        16.00
Exercised .......................................      (86,231)      (10.61)   (4,115)       (8.74)
Forfeited .......................................      (62,389)      (16.03)   (7,603)      (11.68)
                                                       -------                -------
Options outstanding-end of period ...............      895,442    $   17.58   526,782    $   13.47
                                                       =======    =========   =======    =========

Weighted average fair value of options
 granted during the period.......................                 $   12.23              $    6.40
</TABLE>
The fair value of each option is estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:

                                                      1998        1997
                                                      ----        ----
Expected volatility .............................     66.4%       41.0%
Risk-free interest rate .........................     5.32%       6.15%
Expected term ...................................        5           4
Dividend yield ..................................        0%          0%


The following table summarizes information about outstanding and exercisable
stock options at December 31, 1998:

                                      F-17
<PAGE>
 
<TABLE>
<CAPTION>
                                Options Outstanding                 Options Exercisable
                            ----------------------------         --------------------------
                                               Weighted                           
                                               Average                             Weighted
                                              Remaining                             Average
                                             Contractual                           Exercise
Exercise Prices             Shares              Life             Shares             Price
---------------             ------              ----             ------             -----
<S>                           <C>             <C>                <C>            <C>
$7.83 ....................    40,412          3.5 years          40,412         $    7.83
 8.74 ....................    11,728          7.0 years          11,728              8.74
14.03 ....................   191,580          7.1 years         167,634             14.03
16.00 ....................   150,442          8.0 years          57,258             16.00
14.75 ....................    10,000          9.5 years              --             14.75
18.16 ....................     8,280          9.5 years              --             18.16
18.63 ....................    15,000          9.5 years              --             18.63
20.63 ....................   468,000          9.1 years              --             20.63
</TABLE>

      The Company applies APB Opinion 25 and related interpretations in
accounting for fixed stock option plans. Accordingly, no compensation cost has
been recognized for the fixed stock option plans. Had compensation cost been
based on the estimated fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement No. 123, the net effect on
net income and income per share for the years ended December 31, 1998, 1997 and
1996 would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION> 
                                                                     Year ended December 31,
                                                               1998           1997             1996
                                                              ------         ------           ------
<S>                                                           <C>            <C>              <C> 
Pro forma net income (loss) (in thousands).........           $(1,709)        $9,582           $2,650
Pro forma income (loss) applicable to common stock:
    Basic .........................................           $ (0.14)        $ 0.45           $ 0.10
    Diluted .......................................           $ (0.14)        $ 0.44           $ 0.10
</TABLE> 

11. Income Taxes

      The components of the income tax provision for the years ended December
31, 1998, 1997 and 1996 are as follows (in thousands):

                                                Year ended December 31,
                                         1998            1997             1996
                                       -------         -------          -------
Current
    Federal ..................         $ 3,302         $   525          $   103
    State ....................           1,032           2,394              291
                                       -------         -------          -------
                                         4,334           2,919              394
                                       -------         -------          -------
Deferred
    Federal ..................          (2,002)          4,849            1,781
    State ....................            (828)           (968)             (83)
                                       -------         -------          -------
                                        (2,830)          3,881            1,698
                                       -------         -------          -------
Total provision ..............         $ 1,504         $ 6,800          $ 2,092
                                       -------         -------          -------

                                      F-18
<PAGE>
 
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions for income taxes for the years
ended December 31, 1998, 1997 and 1996 are as follows, (in thousands):

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                               ---------------------------------
                                                  1998          1997        1996
                                                  ----          ----        ----
<S>                                            <C>           <C>          <C>
Tax at U.S. statutory rate .............       $   499       $ 5,929      $1,719
State income taxes .....................           396           598         202
Goodwill amortization .................            546           253         142
Other ..................................            63            20          29
                                               -------       -------      ------
    Provision for income taxes .........       $ 1,504       $ 6,800      $2,092
                                               =======       =======      ======
</TABLE>

      Deferred tax assets and liabilities are comprised of the following at
December 31, 1998 and 1997, (in thousands):

                                                              1998       1997
                                                            -------    -------
Current deferred income tax assets:
    Allowances for uncollectible receivables .............  $   326    $  (542)
    Liabilities not deductible for tax purposes ..........    3,412      3,053
                                                            -------    -------
       Current deferred income taxes .....................  $ 3,738    $ 2,511
                                                            =======    =======

Noncurrent deferred income tax assets:
    Net operating loss carryforwards......................    1,815        845
    Tax basis receivables in excess of book ..............       --      2,167
    Net effects of capital leases ........................    1,539      1,394
                                                            -------    -------
                                                              3,354      4,406
                                                            -------    -------

Noncurrent deferred income tax liabilities:
    Temporary goodwill ...................................    1,875       (693)
    Purchase adjustments to property and equipment........   (2,034)    (1,848)
    Other, including depreciation ........................       --       (110)
    Tax losses from investment in unconsolidated
       partnerships in excess of book ....................       --       (163)
                                                            -------    -------
                                                               (159)    (2,814)
                                                            -------    -------

          Net noncurrent deferred income tax assets.......  $ 3,195    $ 1,592
                                                            =======    =======

      As of December 31, 1998, the Company had approximately $1.8 million of
federal net operating loss carryforwards available to offset future taxable
income through 2010.

12. Management Agreements

      As of December 31, 1998, the Company provided operational management
services for 33 facilities and one hospital under long-term management contracts
having remaining effective terms ranging from 5 to 18 years. Twenty-three of
these agreements are with third-party owners and are noncancelable

                                      F-19
<PAGE>
 
without cause. The management agreements provide for the Company to receive
annual fees ranging from 6.0% to 6.5% of each facility's gross revenues, payable
on a monthly basis and may include additional compensation based on achieving
certain performance standards. The agreements also may include provisions for
additional fees for management services outside the scope of regular operational
services performed.

      The Company recorded fees totaling approximately $145,000 and $142,000
during the years ended December 31, 1997 and 1996, respectively, as a result of
a management agreement with an affiliate; the related facility was purchased by
the Company in December 1997. Five management agreements, (three of which were
active during the year ended December 31, 1998), with fees totaling
approximately $172,000, $898,000 and $939,000 during the years ended December
31, 1998, 1997 and 1996, respectively, were with affiliated limited partnerships
in which certain subsidiaries of the Company served as general partner and can
be terminated by either party without cause given sixty days notice. Two of
these agreements were terminated in the fourth quarter of 1997.

The Company also performs oversight management services for three facilities in
which it oversees the management of another management company. The Company
typically receives a fee of 1% of revenues for oversight management services.

In connection with the Company's facility management agreements for several
facilities located primarily in North Carolina and Florida, the Company has made
certain advances for working capital needs. The majority of these centers are
start-up or development projects and require additional funding for personnel
and other operating costs prior to stabilization. The advances are to be repaid
from available cash flows from the respective facilities and from other funds
provided by the owners of the facilities and earn interest at varying rates
based on the prime lending rate. Advances outstanding as of December 31, 1998
and 1997 were $19.7 million and $11.6 million, respectively, and are included in
notes and advances receivable, net in the accompanying balance sheets.

During 1996, the Company advanced approximately $10.0 million pursuant to two
promissory notes in the amounts of $5.5 million and $4.5 million, to
unaffiliated owners of eight managed facilities in North Carolina. The advances
were utilized by the owners to purchase the related facilities or facility
leasehold interest with respect to these facilities that are managed by the
Company. The promissory notes are due on December 31, 2006 and earn interest at
the greater of a specified prime rate plus 3%, or 12%. Both notes are
collateralized by receivables and the pledge of the stock of the respective
owners and are included in notes and advances receivable in the accompanying
balance sheets.

13. Transactions with Related Parties

      At December 31, 1998, the Company had employment agreements with five
officers which provide for salary continuation and non-competition with the
Company, subject to certain conditions.

      The Company leased two long-term care facilities from affiliated lessors.

      During the year ended December 31, 1998, the Company managed four
long-term care facilities for affiliated limited partnerships in which the
Company serves as a general partner.

      Centennial leases its facilities' employees from an affiliated company
which is owned by the president of the Company. The total payroll costs and
reimbursements from the Company totaled $49.1 million, $37.2 million and $29.2
million for the years ended December 31, 1998, 1997 and 1996, respectively. Such
costs are billed by the related entity at cost.

14. Commitments and Contingencies

                                      F-20
<PAGE>
 
Under the provisions of the Senior Credit Facility, Centennial is required to
hedge a portion of its floating rate debt outstanding under the Senior Credit
Facility. Effective April 20, 1998, the Company entered into an interest rate
swap agreement with First Union. Through the agreement, the Company has
exchanged its floating rate interest obligations on $18.0 million in principal
at a fixed rate of 5.65% per annum for a period of five years. First Union has
the option of canceling the agreement on April 19, 2001. The fixing of interest
rates for this period reduces in part the Company's exposure to the uncertainty
of floating interest rates. The differential paid or received on the interest
rate swap agreement is recognized as an adjustment to interest expense.

Effective October 1998, the Company entered into two additional interest rate
swap agreements, one with NationsBank, and one with  Credit Lyonnais
Americas, whereby the Company exchanged its floating rate interest obligations
on a total of $20.0 million in principal at a fixed rate of 5.57% per annum for
a period of five years. Both NationsBank and Credit Lyonnais Americas have the
option of canceling their respective agreements at the end of three years from
the effective dates.

The Company is exposed to credit loss in the event of nonperformance by First
Union, NationsBank, and/or Credit Lyonnais Americas. However, the Company does
not anticipate nonperformance by these parties, and no material loss would be
expected from their nonperformance. The fair value of the interest rate swap
agreements was not recognized in the consolidated financial statements since
they are accounted for as hedges. At December 31, 1998, the estimated fair value
of the interest rate swap agreements, based on current market rates,
approximated a net payable of $822,000.

      Prior to 1998, Centennial self-insured for workers' compensation claims
and health benefits for its employees. The Company maintained stop-loss
insurance such that the Company's liability for losses was limited. Centennial
recognized as an expense and accrued for estimated workers' compensation and
health benefit claims incurred but not reported as of December 31, 1998 and
1997. Beginning January 1998, the Company entered into a guaranteed cost
insurance program for workers compensation.

15. Concentration of Credit Risk

      The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. Centennial has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.

16. Employee Benefits

      The Company has 401(k) savings plans available to substantially all
employees depending on their length of service. Employees may defer up to 15% of
their salary, subject to the maximum permitted by law. The Company may at its
discretion, match a portion of the employee contribution. The Company funded
approximately $161,000, $363,000 and $92,000 during the years ended December 31,
1998, 1997 and 1996, respectively, as a match to the employee contributions.

17. Disclosures About Fair Value of Financial Instruments

      The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and Cash Equivalents

                                      F-21
<PAGE>
 
The carrying amount approximates fair value because of the short maturity of
those instruments, and includes restricted cash reflected on the balance sheet
under the caption "Other Assets."

Notes and Advances Receivable

      The carrying amount approximates fair value for the notes and advances
receivable. The fair value is estimated as the net present value of cash flows
that would be received on the notes over the remaining term of the notes using
current market interest rates rather than stated interest rates.

Long-Term Debt

      The carrying amount of the Credit Agreement approximates fair value since
the Credit Agreement was recently renegotiated at market rates. The carrying
amount of mortgage notes approximates their values based on the net present
value of cash flows that would be paid on each note over the remaining note term
using the Company's current incremental borrowing rate rather than the stated
interest rates on the notes.

Interest Rate Swaps

At December 31, 1998, the estimated fair value of the interest rate swap
agreements, based on current market rates, approximated a net payable of
$822,000.

18. Healthcare Legislation

      As previously noted, a significant portion of the Company's revenues are
derived from the Medicare and Medicaid programs. 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 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. Generally, the PPS per diem, which would cover routine service,
ancillary and capital related costs, will initially be 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 free-standing (skilled nursing facility) 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 believes that revenues will be lower under PPS, however,
reductions in therapy costs, use of general purchasing agents and proper
documentation of minimum data sets ("MDS") should offset the effect of any rate
reductions. The Company can give no assurance that payments under such programs
in the future will remain at a level comparable to the present level or
increase, or that the Company will be able to obtain sufficient cost reductions
to offset the reduction in revenues. Decreases in the level of payments or
failure to reduce costs could have a material adverse effect on the Company. For
the year ended December 31, 1998, the Company derived approximately 22% of its
revenue from Medicare at its long-term care facilities.

                                      F-22
<PAGE>
 
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:

     .    Actual costs
     .    Per visit cost limits reduced to 105% of the median per visit costs 
          for freestanding home health agencies; or

     .    A new blended agency-specific per beneficiary annual limit applied to
          the agency's unduplicated census count of Medicare patients and based
          75% on 98% of reasonable costs for the agency's twelve-month cost
          reporting period ending during fiscal year 1994 and 25% on 98% of the
          standardized regional average of these costs in the agency's census
          region.

The Act also provides that cost limits and per beneficiary limits 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. For the year ended December 31, 1998, the Company
derived approximately 7% of its revenues from home health care.

Effective April 10, 1998, regulations were adopted by Health Care Financing
Administration, which revise the methodology for determining the reasonable cost
for contract therapy services, including physical therapy, respiratory therapy,
occupational therapy and speech language pathology. Under the regulations, the
reasonable costs for contract therapy services are limited to geographically-
adjusted salary equivalency guidelines. However, the revised salary equivalency
guidelines will no longer apply when the PPS system applicable to the particular
setting for contract therapy services (e.g. skilled nursing facilities, home
health agencies, etc.) goes into effect. In most locations the reduced rates
have the effect of reducing the amount of reimbursement for an hour of
occupational or speech therapy and increasing the amount of reimbursement for
and hour of physical and respiratory therapy. The Company believes that such
rate reductions will be completely or partially offset by cost reductions,
changes in the method of delivering such services and the addition of new
therapy contracts. Due to these changes in operations and cost structure and the
relative size of the Company's therapy business, the Company does not expect
these reimbursement changes to have a material long-term adverse effect on the
Company. For the year ended December 31, 1998, the Company derived
approximately 14% of its revenues from third-party contract therapy services.

19. Recently Issued Accounting Pronouncements

In June 1998, Statement of Financial Accounting Standards No. 133 ("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.

20. Segment Information

In 1998, Centennial adopted SFAS 131. The Company has determined that its
reportable segments are those that are based on the Company's method of internal
reporting, which disaggregates its business by services provided. The Company's
reportable segments are management services/corporate, long-term care facilities
and rehabilitative therapy services. Management fee revenues and all corporate
expenses and overhead are recorded in the management services/corporate segment.
The long-term care facilities segment provides basic healthcare services to
patients in a long-term care setting, including skilled nursing and support,
housekeeping, laundry, dietary, recreational and social services. The
rehabilitative therapy services segment provides specialty healthcare services,
including comprehensive rehabilitation therapy, respiratory therapy and infusion
therapy. The "All Other" category represents the Company's hospital services,
home health services, and the Company's subsidiary providing intravenous therapy
and other services.

The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies," except that income tax expense is

                                      F-23
<PAGE>
 
allocated to the segments by an application of the company-wide effective
rate to the profit/loss of each segment. Centennial evaluates the performance of

                                      F-24
<PAGE>
 
its segments and allocates resources to them based on earnings before interest,
taxes, depreciation, and amortization (EBITDA).

The tables below presents information about EBITDA and total assets used by the
chief operating decision maker of Centennial as of and for the years ended
December 31, 1998 and 1997:(1)

<TABLE>
<CAPTION>
1998:
(in thousands)              Management        Long-Term      Rehabilitative
                             Services/           Care            Therapy           All       Reconciling
                             Corporate        Facilities        Services          Other         Items                Total
                        ------------------------------------------------------------------------------------     --------------
<S>                          <C>                <C>               <C>             <C>        <C>               <C>
Revenues                     15,842             248,007           72,255          50,265         (28,724)(2)        357,645
EBITDA                      (11,321)             15,931            9,045           4,259               -             17,914
Total Assets                128,007             143,290           24,684           25,002        (32,611)(3)        288,372

1997:
(in thousands)              Management        Long-Term      Rehabilitative
                             Services/           Care            Therapy           All       Reconciling
                             Corporate        Facilities        Services          Other         Items                Total
                        ------------------------------------------------------------------------------------     --------------
<S>                            <C>             <C>               <C>            <C>          <C>     <C>            <C>
Revenues                       8,237           228,490           52,603         31,174       (16,231)(2)            304,273
EBITDA                        (3,593)           23,877            6,764          5,171             -                 32,219
Total Assets                 109,206           126,130           16,267         18,222       (26,176)(3)            243,649
</TABLE>

(1) It was impracticable for the Company to present segment information for
fiscal year 1996.
(2) Represents elimination of intersegment revenues
(3) Represents elimination of intersegment receivables and unallocated corporate
purchase adjustments

Specified items included in segment profit/loss for the years ended December 31,
1998, and 1997: (1)

                                      F-25
<PAGE>
 
<TABLE>
<CAPTION>
1998:
(in thousands)                              Management     Long-Term    Rehabilitative
                                            Services/        Care          Therapy          All
                                            Corporate     Facilities       Services        Other        Total
                                          -------------------------------------------------------------------
<S>                                           <C>              <C>             <C>          <C>         <C>
Interest revenue                              1,672            88              160          91          2,011
Interest expense                             (2,294)       (5,541)            (630)       (700)        (9,165)
Depreciation and amortization                (2,560)       (4,516)          (1,745)       (471)        (9,292)
Income tax benefit/(expense)                  5,835        (2,325)          (2,664)     (2,350)        (1,504)
Minority interest (net of tax)                 (279)            -                -           -           (279)
Net income (expense)                         (9,126)        3,637            4,167       1,007           (315)
</TABLE>

<TABLE>
<CAPTION>
1997:
(in thousands)                              Management     Long-Term    Rehabilitative
                                            Services/        Care          Therapy          All
                                            Corporate     Facilities       Services        Other        Total
                                          -------------------------------------------------------------------
<S>                                          <C>           <C>               <C>          <C>          <C>
Interest revenue                                467            56               81           32           636
Interest expense                             (3,050)       (4,883)            (263)        (462)       (8,658)
Depreciation and amortization                (1,631)       (3,998)            (858)        (273)       (6,760)
Income tax benefit/(expense)                  3,204        (5,870)          (2,233)      (1,901)       (6,800)
Minority interest (net of tax)                 (252)            -                -            -          (252)
Extraordinary loss (net of tax)                (537)            -                -            -          (537)
Net income (expense)                         (5,798)        9,181            3,492        2,973         9,848
</TABLE>

The majority of the Company's revenues come from contracts with third-party
payors, primarily Medicare and Medicaid programs. The tables below represent a
summary of the Company's revenues from Medicare and Medicaid programs by
reporting segment for the years ending December 31, 1998 and 1997: (1)

<TABLE>
<CAPTION>
1998:
(in thousands)      Management    Long-Term      Rehabilitative
                     Services/       Care            Therapy           All                     % of Total
                     Corporate    Facilities        Services          Other        Total        Revenues
                   -----------------------------------------------------------------------------------------
<S>                   <C>            <C>              <C>             <C>           <C>          <C>
Revenues from:
Medicare               --            77,012             --             8,510        87,522       23.9%
Medicaid               --           119,559             --                --       119,559       33.2%
</TABLE>

                                      F-26
<PAGE>
 
<TABLE>
<CAPTION>
1997:
(in thousands)      Management    Long-Term      Rehabilitative
                     Services/       Care            Therapy           All                        % of Total
                     Corporate    Facilities        Services          Other         Total          Revenues
                   ------------------------------------------------------------------------------------------
<S>                   <C>            <C>              <C>             <C>            <C>             <C>
Revenues from:
Medicare               --            68,296            --             4,226          72,522          23.8%
Medicaid               --           111,380            --                --         111,380          36.6%
</TABLE>

21. Earnings per Share

In 1997, Centennial adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", ("SFAS 128"). Prior year amounts have been restated in
accordance with SFAS 128. Basic earnings per share is computed by dividing
income applicable to common stock by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
similarly but reflects the potential dilution that could occur if options were
exercised or convertible securities were converted into common stock. The
assumption of the conversion of Series A and B Preferred Stock was anti-dilutive
during 1996. The accretion and dividends accrued on Series A and B Preferred
Stock and the accretion and dividends on Series C Preferred Stock was deducted
from net income in the computation of net income applicable to common stock in
1997 and 1996. The following table calculates basic earnings per share and
diluted earnings per share at December 31 (in thousands, except per share 
amounts):

                                      F-27
<PAGE>
 
<TABLE>
<CAPTION>
                                                                  1998           1997            1996
                                                               --------       --------        --------
<S>                                                            <C>            <C>             <C>
Income (loss) before extraordinary loss ....................   $   (315)      $ 10,385        $  2,779          
Deduct: dividends and accretion of preferred stock .......           --          5,874           2,192
                                                               --------       --------        --------
<C> 
Income (loss) applicable to common stock ...................       (315)         4,511             587 
  before extraordinary loss
Extraordinary loss on extinguishment
  of debt ................................................           --           (537)             --
                                                               --------       --------        --------
Income (loss) applicable to common stock ...................       (315)         3,974             587

Average common shares outstanding ........................       11,906          8,289           4,742

Basic earnings per common share:
Income (loss) applicable to common stock
  before extraordinary loss ..............................     $  (0.03)      $   0.54        $   0.12
Extraordinary loss on extinguishment
  of debt ................................................           --          (0.06)             --
                                                               --------       --------        --------

Basic earnings loss per common share .....................     $  (0.03)      $   0.48        $   0.12
                                                               ========       ========        ========

Income (loss) applicable to common stock
  before extraordinary loss ..............................         (315)         4,511             587
Add: Interest savings on convertible debt ................           --             65              --
                                                               --------       --------        --------
                                                                   (315)         4,576             587
Extraordinary loss on extinguishment
  of debt ................................................           --           (537)             --
                                                               --------       --------        --------
Income (loss) applicable to common stock ...................       (315)         4,039             587

Average common shares outstanding ........................       11,906          8,289           4,742
Add:  options ............................................          172            173              40
                                                               --------       --------        --------
Average diluted common shares outstanding.................       12,078          8,462           4,782

Diluted earnings per common share:
Income (loss) applicable to common stock
  before extraordinary loss ..............................     $  (0.03)      $   0.54        $   0.12
Extraordinary loss on extinguishment
  of debt ................................................           --          (0.06)             --
                                                               --------       --------        --------
Diluted earnings (loss) per common share .................     $  (0.03)      $   0.48        $   0.12
                                                               ========       ========        ========  
</TABLE>

22. Subsequent Events

      On January 1, 1999, Centennial acquired leasehold interests in six nursing
facilities, totaling 795 licensed available beds, located in Massachusetts.

      In January 1999, the Company acquired a leasehold interest in Hunter Woods
Nursing and Rehabilitation Center, a 130-bed facility located in Charlotte,
North Carolina. This facility was previously managed by the Company.

      In January 1999, the Company acquired a leasehold interest in Choctaw
County Medical Center, a facility with 68 nursing home beds and 22 hospital
beds, located in Ackerman, Mississippi. This facility was previously managed by
the Company.

      On March 26, 1999, the Company received an investigatory subpoena from the
Department of Health & Human Services, Office of the Inspector General
requesting records in connection with an investigation of possible or otherwise
improper claims for payment under Title XVIII (Medicare) of the Social Security
Act. The request relates to records for the period January 1, 1994 to the
present concerning certain of the Company's internal policies and relates to
four long-term care facilities operated by the Company. The Company is not aware
of the origin of the investigation or its scope but intends to provide all
requested records and cooperate fully with the investigation.





                                      F-28
<PAGE>
 
23. Quarterly Financial Information (Unaudited)

      The table below sets forth summarized quarterly financial data for the
years ended December 31, 1998 and 1997, (in thousands, except per share
amounts):

                                      F-29
<PAGE>
 
<TABLE>
<CAPTION>
                                                                              1998
                                                   ------------------------------------------------------
                                                    First        Second          Third           Fourth
                                                    Quarter      Quarter         Quarter         Quarter
                                                   ------------------------------------------------------
<S>                                                <C>            <C>            <C>             <C>
Total revenues .............................       $ 87,072       $ 87,900       $ 89,585        $ 93,088
Net income (loss) ..........................          3,826          3,834         (7,363)           (612) 
Net income (loss) applicable to common
   shareholders ............................       $  3,826       $  3,834       $ (7,363)       $   (612)
                                                   ========       ========       ========        ========
Net income (loss) applicable to common stock 
   per common and common equivalent share:
   Basic: ..................................       $   0.32       $   0.32       $  (0.62)       $  (0.05)
                                                   ========       ========       ========        ========
   Diluted: ................................       $   0.31       $   0.32       $  (0.62)       $  (0.05)
                                                   ========       ========       ========        ========
Weighted average number of common
   stock and common stock equivalents
   outstanding:
   Basic ...................................         11,866         11,910         11,924          11,924
   Diluted .................................         12,202         12,215         11,942          11,944
Common stock market prices:
   High ....................................       $ 25.125       $ 25.000       $ 20.375        $ 15.500
   Low .....................................       $ 19.625       $ 16.438       $  7.500        $  7.375

<CAPTION>
                                                                              1997
                                                   ------------------------------------------------------
                                                    First        Second          Third           Fourth
                                                    Quarter      Quarter         Quarter         Quarter
                                                   ------------------------------------------------------
<S>                                                <C>            <C>            <C>             <C>
Total revenues ..............................       $ 64,235       $ 71,939       $ 81,946        $ 86,153
Income before extraordinary loss ............          1,241          1,884          3,383           3,877
Extraordinary loss ..........................             --             --           (537)             --
Net income ..................................          1,241          1,884          2,846           3,877
Net income (loss) applicable to common
   shareholders .............................       $    454       $  1,452       $ (1,808)       $  3,877
                                                    ========       ========       ========        ========

Net income (loss) applicable to common stock per 
   common and common equivalent share:
   Basic:
     Income (loss) applicable to common stock
       before extraordinary loss ............       $   0.09       $   0.30       $  (0.11)       $   0.33
     Extraordinary loss on extinguishment of
       debt .................................             --             --          (0.05)             --
                                                    --------       --------       --------        --------
     Income (loss) applicable to common stock       $   0.09       $   0.30       $  (0.16)         $.0.33
                                                    ========       ========       ========        ========
   Diluted:
     Income (loss) applicable to common stock
       before extraordinary loss ............       $   0.09       $   0.30       $  (0.10)       $   0.32
     Extraordinary loss on extinguishment of
       debt .................................             --             --          (0.05)             --
                                                    --------       --------       --------        --------
     Income (loss) applicable to common stock       $   0.09       $   0.30       $  (0.15)       $   0.32
                                                    ========       ========       ========        ========

Weighted average number of common
   stock and common stock equivalents
   outstanding:
   Basic ....................................          4,789          4,789         11,579          11,864
   Diluted ..................................          4,827          4,828         11,870          12,188

Common stock market prices:
   High .....................................            N/A            N/A       $ 23.000        $ 25.125
   Low ......................................            N/A            N/A       $ 16.000        $ 18.125
</TABLE>

Net income for the fourth quarter of 1998 was reduced by approximately $1.2
million to establish a $2.0 million reserve against 1996 related party income
under appeal with the Company's Medicare intermediary.

                                      F-30

<PAGE>
 
                        CENTENNIAL HEALTHCARE CORPORATION
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS

                  Years Ended December 31, 1998, 1997 and 1996
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                   Balance at       Charged to     Charged to                            Balance at
                                  Beginning of       Cost and        Other                                End of
          Descriptions                Year           Expense        Accounts               Other           Year
          ------------            ------------      ----------      --------             ---------       ----------
<S>                               <C>              <C>              <C>                  <C>              <C>
Year ended
  December 31, 1998
  Allowance for doubtful
  accounts (deducted
  from accounts
  receivable) ..........          $    2,998       $    1,432       $(1,874)(1)          $    2,407(4)    $ 4,963
                                  ==========       ==========       =======              ==========       =======

Year ended
  December 31, 1997
  Allowance for doubtful
  accounts (deducted
  from accounts
  receivable) ..........          $    2,472       $      863         $(637)(1)          $      300(2)     $ 2,998
                                  ==========       ==========         =====              ==========        =======

Year ended
  December 31, 1996
  Allowance for doubtful
  accounts (deducted
  from accounts
  receivable) ..........          $    5,912       $      851       $(2,983)(1)          $   (1,308)(3)    $ 2,472
                                  ==========       ==========       ==========           ==========        =======
</TABLE>

(1)   Accounts receivable that were previously reserved that were directly
      written-off to allowance for doubtful accounts.
(2)   Allowance transferred from notes receivable
(3)   Due to reclassification of accounts receivable to notes receivable and
      related reserve.
(4)   Allowance on accounts receivable purchased during 1998 in connection with 
      several nursing facility acquisitions.

                                      F-31
<PAGE>
 
                                 Exhibit Index



Exhibit                           Description
-------    --------------------------------------------------------------------
 2.1   --  Agreement and Plan of Merger between Cougar Holdings Corporation,
           Cougar Acquisition Corporation and the Company, dated October 22,
           1998 (incorporated by reference to Exhibit 2.1 of the Company's
           Current Report on Form 8-K filed on October 28, 1998.)

 3.1   --  Third Amended and Restated Articles of Incorporation of the Company
           (incorporated by reference to Exhibit 3.1 of the Company's
           Registration Statement on Form S-1, Registration No. 333-24267, as
           amended).

 3.2   --  Amended and Restated Bylaws of the Company (incorporated by reference
           to Exhibit 3.2 of the Company's Registration Statement on Form S-1
           Registration No. 333-24267, as amended).

 4.1   --  Third Amended and Restated Articles of Incorporation of the Company,
           including, without limitation Article III and Article VII
           (incorporated by reference to Exhibit 3.1 of the Company's
           Registration Statement on Form S-1, Registration No. 333-24267, as
           amended).

10.1   --  WelCare International, Inc. 1994 Employee Stock Option Plan
           (incorporated by reference to Exhibit 10.1 of the Company's
           Registration Statement on Form S-1, Registration No. 333-24267, as
           amended).

10.2   --  WelCare International, Inc. 1996 Executive Stock Plan (incorporated
           by reference to Exhibit 10.2 of the Company's Registration Statement
           on Form S-1, Registration No. 333-24267, as amended).

10.3   --  WelCare International, Inc. 1996 Employee Stock Option Plan 
           (incorporated by reference to Exhibit 10.3 of the Company's
           Registration Statement on Form S-1, Registration No. 333-24267, as
           amended).

10.4   --  Centennial HealthCare Corporation 1997 Stock Plan (incorporated by
           reference to Exhibit 10.4 of the Company's Registration Statement on
           Form S-1, Registration No. 333-24267, as amended).

10.5   --  Amended and Restated Employment Agreement between Welcare 
           International, Inc. and J. Stephen Eaton dated December 31, 1995
           (incorporated by reference to Exhibit 10.6 of the Company's
           Registration Statement on Form S-1, Registration No. 333-24267, as
           amended).

10.6   --  Amended and Restated Employment Agreement between Paragon
           Rehabilitation, Inc. and Laurence W. Lepley, Jr. dated as of January
           1, 1998 (incorporated by reference to Exhibit 10.7 of the Company's
           Annual Report on Form 10-K for the fiscal year ended December 31,
           1997).

10.7   --  Registration Rights Agreement dated December 31, 1995 by and between
           the Company and the Shareholders as defined therein, as amended
           (incorporated by reference to Exhibit 10.8 of the Company's
           Registration Statement on Form S-1, Registration No. 333-24267, as
           amended).

10.8   --  Lease between Grant Park Nursing Home L.P. and WelCare Acquisition
           Corp. n/k/a Centennial Acquisition Corporation ("CAC") commencing on
           January 1, 1998 (incorporated by reference to Exhibit 10.9 of the
           Company's Registration Statement on Form S-1, Registration No. 333-
           24267, as amended).

10.9   --  Amended and Restated Lease Agreement by and between Aston Woods
           Limited Partnership and WelCare/Ashton Properties, Inc. n/k/a
           Centennial /Ashton Properties Corporation ("CAPC"), dated December
           20, 1994 (incorporated by reference to Exhibit 10.11 of the Company's
           Registration Statement on Form S-1, Registration No. 333-24267, as
           amended).

10.10  --  Second Amended and Restated Lease Agreement by and between SBT
           Healthcare Properties, L.P. and CHPC dated October 1, 1998
           (incorporated by reference to Exhibit 10.13 of the Company's
           Quarterly Report on Form 10-Q for quarter ended September 30, 1998)

10.11  --  Second Amendment to Certain Operative Agreements by and among the
           Company, certain subsidiaries of the Company as Guarantors, First
           Security Bond, National Association, as Owner Trustee, the various
           banks and lending institutions named therein as the Lenders, First
           Union Capital Markets, as Syndication Agent and Nations Bank, N.A.,
           as agent.

10.12  --  Amendment No. 2 to the Third Amended and Restated Credit Agreement by
           and among the Company and its subsidiaries and the lenders identified
           therein dated as of December 30, 1998

10.13  --  Operating Lease by and between Health Care Property Investors, Inc.
           and Cardinal of Indiana, Inc., as amended by that certain Amendment
           to Operating Lease dated November 1, 1993, as amended by that certain
           Second Amendment to Operating Lease dated April 1, 1994, as amended
           by that certain Third Amendment to Operating Lease dated March 31,
           1995, as amended by that certain Fourth Amendment to Operating Lease
           dated January 1, 1996, as assigned (incorporated by reference to
           Exhibit 10.13 of the Company's Registration Statement on Form S-1,
           Registration No. 333-24267, as amended)

10.14  --  Lease Agreement by and between Healthcare Realty Trust Incorporated
           and Cardinal Development Co., Inc. ("Cardinal"), as amended by that
           certain Amendment Number One to Lease Agreement dated November 1,
           1993, as assigned to TMP pursuant to that certain Lease Agreement,
           Consent and Release dated March 1, 1994 (incorporated by reference to
           Exhibit 10.16 of the Company's Registration Statement on Form S-1,
           Registration No. 333-24267, as amended)

10.15  --  Lease Agreement by and between House Investments - Nursing Homes 
           Partners T and THP dated November 1, 1993 (incorporated by reference
           to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
           Registration No. 333-24267, as amended)

10.16  --  Operating Lease by and between HCPI Charlotte, Inc. and TMP dated
           June 19, 1995 (incorporated by reference to Exhibit 10.20 of the
           Company's Registration Statement on Form S-1, Registration No. 333-
           24267, as amended).

10.17  --  Amended and Restated Management Agreement by and between Montclair
           Medical Investors, Ltd., and CHMC dated January 1, 1995 (incorporated
           by reference to Exhibit 10.28 of the Company's Registration Statement
           on Form S-1, Registration No. 333-24267, as amended)

11.1   --  Statement Regarding computation of Per Share Earnings

21.1   --  List of Subsidiaries

27.1   --  Financial Data Schedule

99.1   --  Cautionary Statements Regarding Forward-Looking Statements