UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K
(Mark One)

[X]               ANNUAL  REPORT   PURSUANT  TO  SECTION  13  OR  15(d)  OF  THE
                         SECURITIES EXCHANGE ACT OF 1934
 For the  fiscal  year  ended   December 31, 1999
                                -----------------
                                       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     333-64679
                                         -------------

                        Harborside Healthcare Corporation
             (Exact name of registrant as specified in its charter)

                  Delaware                                 04-3307188
--------------------------------------------------------------------------------
(State or other  jurisdiction of              (IRS Employer Identification No.)
 incorporation  or  organization)


One Beacon Street, Boston, Massachusetts                     02108
--------------------------------------------------------------------------------
(Address of principal executive offices)                  (Zip Code)

(Registrant's telephone number, including area code)    (617) 646-5400
                                                     -----------------

Securities registered pursuant to Section 12 (b) of the Act:

                                                      Name of each exchange
Title of each class                                    On which registered
-------------------                                    -------------------
11% Senior Subordinated Discount
  Notes due 2008

13 1/2% Exchangeable Preferred Stock Mandatorily
  Redeemable 2010 ("Preferred Stock")

13 1/2% Subordinated Exchange Debentures due 2010

Common Stock, par value $.01 per share

Securities registered pursuant to Section 12 (g) of the Act:  None

     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  (or for such  shorter  period  that the
registrant was required to file such reports),  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 Regulation S-K
is not contained herein, and will not be contained,  to the best of registrant's
knowledge,  in  definitive  proxy  or  information  statements  incorporated  by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [].

At March  30,  2000,  the  registrant  had  7,261,332  shares  of  Common  Stock
outstanding.

Documents incorporated by reference:


<PAGE>


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-K, including  information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations",  constitute  "Forward-Looking  Statements" within the meaning of
the Private  Securities  Litigation  Reform Act of 1995 (the "Reform Act").  The
Company  desires to take  advantage of certain "safe  harbor"  provisions of the
Reform Act and is  including  this  special note to enable the Company to do so.
Forward-looking  statements included in this Form 10-K, or hereafter included in
other  publicly  available  documents  filed with the  Securities  and  Exchange
Commission,  reports to the Company's  stockholders and other publicly available
statements  issued or released by the Company  involve known and unknown  risks,
uncertainties, and other factors which could cause the Company's actual results,
performance  (financial or operating) or achievements to differ  materially from
the  future  results,  performance  (financial  or  operating)  or  achievements
expressed or implied by such  forward-looking  statements.  The Company believes
the following important factors could cause such a material difference to occur:

1.   The Company's  ability to grow through the  acquisition  and development of
     long-term care facilities or the acquisition of ancillary businesses.

2.   The  Company's  ability to identify  suitable  acquisition  candidates,  to
     consummate or complete  construction  projects, or to profitably operate or
     successfully integrate enterprises into the Company's other operations.

3.   The  occurrence  of changes in the mix of payment  sources  utilized by the
     Company's patients to pay for the Company's services.

4.   The  adoption of cost  containment  measures by private pay sources such as
     commercial insurers and managed care  organizations,  as well as efforts by
     governmental reimbursement sources to impose cost containment measures.

5.   Changes  in the  United  States  healthcare  system,  including  changes in
     reimbursement  levels and the method of  reimbursement,  under Medicaid and
     Medicare, and other changes in applicable government regulations that might
     affect the profitability of the Company.

6.   The  Company's   continued  ability  to  operate  in  a  heavily  regulated
     environment  and to  satisfy  regulatory  authorities,  thereby  avoiding a
     number of  potentially  adverse  consequences,  such as the  imposition  of
     fines,  temporary suspension of admission of patients,  restrictions on the
     ability to acquire  new  facilities,  suspension  or  decertification  from
     Medicaid  or  Medicare  programs,  and in extreme  cases,  revocation  of a
     facility's  license or the closure of a facility,  including as a result of
     unauthorized activities by employees.

7.   The  Company's  ability to secure the capital and the related  cost of such
     capital  necessary  to fund  its  future  growth  through  acquisition  and
     development, as well as internal growth.

8.   Changes in certificate of need laws that might increase  competition in the
     Company's  industry,  including,  particularly,  in the states in which the
     Company currently operates or anticipates operating in the future.

9.   The Company's ability to staff its facilities  appropriately with qualified
     healthcare personnel, including in times of shortages of such personnel and
     to maintain a satisfactory relationship with labor unions.

10.  The level of  competition  in the  Company's  industry,  including  without
     limitation,  increased competition from acute care hospitals,  providers of
     assisted  and  independent  living and  providers  of home  healthcare  and
     changes in the regulatory system in the state in which the Company operates
     that facilitate such competition.

11.  The continued availability of insurance for the inherent risks of liability
     in the healthcare industry.

12.  Price increases in  pharmaceuticals,  durable  medical  equipment and other
     items.

13.  The Company's  reputation for delivering  high-quality care and its ability
     to attract and retain  patients,  including  patients with  relatively high
     acuity levels.

14.  Changes in general  economic  conditions,  including  changes that pressure
     governmental  reimbursement  sources  to  reduce  the  amount  and scope of
     healthcare coverage.

The  foregoing  review  of  significant  factors  should  not  be  construed  as
exhaustive or as an admission  regarding the adequacy of disclosures  previously
made by the Company.





                                       2
<PAGE>





                                TABLE OF CONTENTS
<TABLE>
<CAPTION>


                                                                           PAGE

                                     PART I

<S>                                                                           <C>
ITEM 1. BUSINESS                                                               4

ITEM 2. PROPERTIES                                                            11

ITEM 3. LEGAL PROCEEDINGS                                                     13

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                   13



                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS                                                  14

ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA                    15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS                                  17

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                           24

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE                                  51

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                   51

ITEM 11. EXECUTIVE COMPENSATION                                               53

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT                                                         55

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                       56

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
           FORM 8-K                                                           58

SIGNATURES                                                                    64
</TABLE>



                                       3
<PAGE>



ITEM 1. BUSINESS

GENERAL OVERVIEW

  Harborside Healthcare  Corporation (the "Company" or "Harborside") was created
in March 1996, in  anticipation  of an initial public  offering (the "IPO"),  in
order to combine  under its control the  operations  of various  long-term  care
facilities  and ancillary  businesses  (the  "Predecessor  Entities")  which had
operated since 1988.  The Company  completed the IPO on June 14, 1996 and issued
3,600,000 shares of common stock at $11.75 per share.  Immediately  prior to the
IPO the owners of the Predecessor  Entities  contributed their interests in such
Predecessor  Entities  to the  Company  and  received  4,400,000  shares  of the
Company's common stock (the "Reorganization").

  On  April  15,  1998,  Harborside  entered  into a  Merger  Agreement  with HH
Acquisition  Corp.  ("MergerCo"),  an entity  organized  for the sole purpose of
effecting a merger on behalf of Investcorp  S.A.,  certain of its affiliates and
certain other international investors (the "New Investors"). On August 11, 1998,
MergerCo  merged with and into  Harborside,  with  Harborside  as the  surviving
corporation.  As a  result  of the  transaction,  and  pursuant  to  the  Merger
Agreement,  the New  Investors  acquired  approximately  91% of the  post-merger
common stock of Harborside. The remaining 9% of the common stock was retained by
existing  shareholders,  including  management.  As  a  result  of  the  merger,
Harborside shares were de-listed from the New York Stock Exchange.

  The merger  was  approved  by a majority  of  Harborside's  shareholders  at a
special  meeting  held on August 11,  1998.  Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million.  Holders of outstanding stock options of
the  Company  converted  the  majority  of their  options  into  cash at $25 per
underlying  share (less  applicable  exercise price and withholding  taxes) with
aggregate payments of approximately $8 million.

  In connection with the transaction and prior to the Merger,  the New Investors
made cash common equity  contributions of $158.5 million, net of issuance costs,
to MergerCo,  and MergerCo  obtained gross proceeds of $99.5 million through the
issuance of 11% Senior  Subordinated  Discount Notes ("Discount Notes") due 2008
and $40 million  through  the  issuance of 13.5%  Exchangeable  Preferred  Stock
("Preferred  Stock")  mandatorily  redeemable in 2010.  In  connection  with the
Merger,  Harborside also entered into a new $250 million  collateralized  credit
facility.  In the third quarter of 1998,  Harborside recorded a charge to income
from  operations  of $37 million ($29 million  after taxes) for direct and other
costs related to the merger  transaction.  In connection with the Merger and the
related   refinancings,   the  Company  exercised  purchase  options  for  seven
facilities which had been financed through synthetic leases.

  Harborside  provides  high quality  long-term  care,  subacute  care and other
specialty medical services in four principal regions:  the Southeast  (Florida),
the Midwest (Ohio and Indiana),  New England  (Connecticut,  Massachusetts,  New
Hampshire and Rhode  Island),  and the  Mid-Atlantic  (New Jersey and Maryland).
Within these regions,  as of December 31, 1999, the Company operated 50 licensed
long-term care  facilities (22 owned, 27 leased and one managed) with a total of
6,124  licensed  beds.  From December 31, 1994 to December 31, 1999, the Company
increased its overall patient capacity by approximately  3,759 licensed beds, or
approximately 160%.

  The  Company  provides  traditional  skilled  nursing  care,  a wide  range of
subacute care programs (such as orthopedic,  CVA/stroke,  cardiac, pulmonary and
wound  care),  as  well  as  distinct  programs  for  the  provision  of care to
Alzheimer's and hospice patients. As part of its subacute services,  the Company
provides physical,  occupational and speech  rehabilitation  therapy services at
Company-operated  facilities.  Through September 1999, the Company also provided
rehabilitation  therapy services under contracts with  non-affiliated  long-term
care facilities through a wholly-owned  subsidiary.  During the third quarter of
1999, the Company  terminated its contracts with  non-affiliated  facilities and
ceased providing therapy services to non-affiliated facilities.

PATIENT SERVICES

Basic Patient Services

  Basic patient services are those traditionally provided to elderly patients in
long-term  care  facilities to assist with the activities of daily living and to
provide general medical care. 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 an  on-site  licensed
administrator  who is  responsible  for the overall  operation of the  facility,
including  the  quality of care  provided.  The medical  needs of  patients  are
supervised  by a  medical  director,  who  is  a  licensed  physician.  Although
treatment of patients is the  responsibility of their own attending  physicians,
who are not employed by the Company,  the medical director  monitors all aspects
of delivery of care.  The Company  also  provides  support  services,  including
dietary  services,   therapeutic  recreational   activities,   social  services,
housekeeping  and laundry  services,  pharmaceutical  and medical  supplies  and
routine rehabilitation therapy.

 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 and volunteer
and other programs that encourage community interaction.

Specialty Medical Services

  Specialty  medical  services  are those  provided to patients  with  medically
complex needs, who generally require more extensive treatment and a higher level
of skilled nursing care.  These services  typically  generate higher net patient
service  revenues  per  patient day than basic  patient  services as a result of
increased levels of care and the provision of ancillary services.

  Subacute Care. Subacute care is goal-oriented, comprehensive care designed for
an individual who has had an acute illness, injury, or exacerbation of a disease
process.  Subacute care is typically rendered  immediately after, or instead of,
acute  hospitalization in order to treat one or more specific,  active,  complex
medical  conditions or in order to administer  one or more  technically  complex
treatments.  The Company provides subacute care services at substantially all of


                                       4
<PAGE>

its existing  facilities  in such areas as complex  medical,  cardiac  recovery,
digestive,  immuno-suppressed  disease,  post-surgical,  wound, CVA/stroke care,
hemodialysis, infusion therapy, and diabetes and pain management.

  In facilities that have shown strong demand for subacute services, the Company
has developed distinct subacute units. Each distinct unit contains 20 to 60 beds
and is  specially  staffed and  equipped  for the  delivery  of  subacute  care.
Patients in these units  typically  range in age from late teens to the elderly,
and  typically  require  high  levels  of  nursing  care  and  the  services  of
physicians,   therapists,  dietitians,  clinical  pharmacists  or  psycho/social
counselors.  Certain  patients  may also  require  life  support  or  monitoring
equipment. Because patient goals are generally rehabilitation-oriented,  lengths
of stay in distinct  subacute  units are  generally  expected to be less than 30
days each.

 The Company has designed clinical pathways for these distinct subacute units in
the areas of orthopedic  rehabilitation,  CVA/stroke recovery, cardiac recovery,
pulmonary rehabilitation and wound care management.  These clinical pathways are
designed  to  achieve  specified   measurable   outcomes  in  an  efficient  and
cost-effective  manner.  The Company's  subacute units and the clinical pathways
used in these units are  designed to attract  commercial  insurance  and managed
care  organizations,  such as HMOs and PPOs. The Company has personnel dedicated
to actively  market its subacute  units to commercial  insurers and managed care
organizations. The Company will continue to develop additional clinical pathways
based on market opportunities.

  Alzheimer's  Care. The Company has also developed  distinct units that provide
care for patients with Alzheimer's disease. As of December 31, 1999, the Company
operated dedicated Alzheimer's units at eight facilities.

OPERATIONS

  Facilities.  Each of the  Company's  facilities  is  supervised  by a licensed
facility  administrator  who is  responsible  for all aspects of the  facility's
operations.  The facility  administrator  oversees (i) a director of nursing who
supervises a staff of registered nurses, licensed practical nurses and certified
nursing aides,  (ii) a director of admissions who is responsible  for developing
local  marketing  strategies  and programs and (iii) various other  departmental
supervisors.  The Company also contracts with one or more licensed physicians at
each facility to serve as medical  directors for the purpose of supervising  the
medical  management of patients.  Facilities with subacute or specialty  medical
units or programs  may also  contract  with  physician  specialists  to serve as
rehabilitation or specialty program medical directors in areas such as physiatry
(physical medicine), neurology or gero-psychology. Facilities may also employ or
contract for additional  clinical  staff such as case  managers,  therapists and
program directors.  Department  supervisors at each of the Company's  facilities
oversee  personnel  who provide  dietary,  maintenance,  laundry,  housekeeping,
therapy  and social  services.  In  addition,  a business  office  staff at each
facility routinely performs administrative functions, including billing, payroll
and accounts  payable  processing.  The Company's  corporate and regional  staff
provide  support  services  such  as  quality  assurance,  management  training,
clinical  consultation  and  support,   management   information  systems,  risk
management,  human  resource  policies  and  procedures,   operational  support,
accounting and reimbursement expertise.

  Regions.  The  Company  seeks to cluster  its  long-term  care  facilities  in
selected  geographic regions to establish a strong competitive  position as well
as to position  the Company as a  healthcare  provider of choice to managed care
and private payors in these markets.  The Company's  facilities  currently serve
four principal geographic regions:  the Southeast  (Florida),  the Midwest (Ohio
and Indiana), New England (Connecticut,  Massachusetts,  New Hampshire and Rhode
Island),  and the Mid-Atlantic (New Jersey and Maryland).  The Company maintains
regional  operating  offices in Palm  Harbor,  Florida;  Indianapolis,  Indiana;
Topsfield,  Massachusetts;  West Hartford,  Connecticut;  and Peterborough,  New
Hampshire.  Each region is supervised by a regional  director of operations  who
directs  the  efforts of a team of  professional  support  staff in the areas of
clinical  services,  marketing,  bookkeeping,  human resources and  engineering.
Other Company staff, who are principally  based in the regions,  provide support
and  assistance  to all of the  Company's  facilities  in the areas of  subacute
services,  managed care contracting,  reimbursement  services,  risk management,
data processing and training.  Financial control is maintained through financial
and  accounting  policies  established  at the  corporate  level for use at each
facility.  The Company has  standardized  operating  policies and procedures and
continually monitors operating  performance to assure consistency and quality of
operations.

  Continuous Quality Improvement Program. The Company has developed a continuous
quality improvement  program which is designed to monitor,  evaluate and improve
the delivery of patient care. The program is supervised by the Company's  Senior
Vice  President  of Clinical  Services and  consists of the  standardization  of
policies  and  procedures,  routine  site visits and  assessments  and a quality
control system for patient care and physical plant  compliance.  Pursuant to its
quality  control  system,  the  Company  routinely  collects   information  from
patients, family members, referral sources,  employees and state survey agencies
which is then compiled, analyzed and distributed throughout the Company in order
to monitor the quality of care and services provided.

  The  Company's   continuous  quality  improvement  program  is  modeled  after
guidelines for long-term care and subacute  facilities  promulgated by the Joint
Commission on Accreditation of Healthcare  Organizations ("JCAHO"), a nationally
recognized   accreditation   agency   for   hospitals   and   other   healthcare
organizations.  The Company  believes that JCAHO  accreditation  is an important
factor in gaining provider contracts from managed care and commercial  insurance
companies.  Accordingly,  in late  1995  the  Company  began a  program  to seek
accreditation from JCAHO for the Company's facilities.  As of December 31, 1999,
34 of the Company's facilities had received accreditation.

MARKETING

  The Company's  marketing program is designed to attract patients who will have
a favorable  impact on the  Company's  profits and quality mix of revenues.  The
Company  establishes  monthly  occupancy  and  revenue  goals  for  each  of its
facilities and maintains  marketing  objectives to be met by each facility.  The
Company's  Senior Vice  President of Marketing  and Managed Care is  principally
responsible for the development and  implementation  of the Company's  marketing
program.   Regional   marketing   directors   provide  routine  support  to  the
facility-based  admissions  directors  through the development of facility-based
marketing strategies, competitive assessments and routine visits.

  The Company uses a decentralized  marketing approach in order to capitalize on
each facility's strengths and reputation in the community it serves.  Admissions


                                       5
<PAGE>

staff at each facility are  primarily  responsible  for marketing  basic medical
services and developing  semi-annual  marketing plans in  consultation  with the
Company's  regional  marketing and operations staff.  Basic medical services are
marketed to area physicians,  hospital discharge planning personnel,  individual
patients and their families and community  referral sources.  Facility personnel
also market the Company's specialty medical services to these sources. Corporate
and  regional  personnel  who  specialize  in subacute  care,  managed  care and
reimbursement also assist in the marketing of specialty medical services.

 The Company believes its marketing program has demonstrated its  effectiveness.
The Company's average annual occupancy rates for the fiscal years ended December
31,  1997,  1998  and  1999  were  92.3%,  92.3%  and  90.9%,  respectively.  In
comparison,  a study of approximately 1,500 nursing facilities  conducted by the
U.S.  Department  of  Health  and  Human  Services  found  that in 1995  nursing
facilities operated at approximately 87% of capacity.

 SOURCES OF REVENUES

  The Company  derives its revenues  primarily  from  private pay  sources,  the
Federal  Medicare  program for certain  elderly and disabled  patients and state
Medicaid programs for indigent  patients.  The Company's revenues are influenced
by a  number  of  factors,  including  (i)  the  licensed  bed  capacity  of its
facilities,  (ii) the occupancy rates, (iii) the payor mix of its facilities and
the rates of reimbursement among payor categories  (private and other,  Medicare
and Medicaid) and (iv) the extent to which subacute and other specialty  medical
and  ancillary  services  are  utilized  by the  patients  and  paid  for by the
respective  payment  sources.   The  Company  employs   specialists  to  monitor
reimbursement  rules,  policies and related developments in order to comply with
all   reporting   requirements   and  to  assist  the   Company   in   receiving
reimbursements.

  The  following  table  identifies  the  Company's  percentage  of net revenues
attributable to each of its payor sources for the periods indicated:

                                        PERCENTAGE OF NET REVENUES BY PAYOR (1)
                                                YEAR ENDED DECEMBER 31,
                                                ----------------------
<TABLE>
<CAPTION>
<S>                                        <C>             <C>             <C>
                                           1997            1998            1999
                                         ------          ------          ------

Private and other ..............           34.1%           30.2%           28.9%
Medicare .......................           25.9            27.7            21.8
Medicaid .......................           40.0            42.1            49.3
                                         ------          ------          ------
  Total ........................          100.0%          100.0%          100.0%
                                         ======          ======          ======

</TABLE>

(1)  Total net revenues exclude net revenues of the Larkin Chase Center which is
     owned by the Bowie Center Limited  Partnership  ("Bowie L.P."). The Company
     owns a 75% partnership interest in Bowie L.P. but records its investment in
     Bowie L.P. using the equity method.

  Private  and Other.  Private  and other net  revenues  include  payments  from
individuals who pay directly for services  without  governmental  assistance and
payments  from  commercial  insurers,  HMOs,  PPOs,  Blue  Cross  organizations,
workers'  compensation  programs,  hospice  programs and other  similar  payment
sources.  The Company's rates for private pay patients are typically higher than
rates for patients  eligible for assistance under state Medicaid  programs.  The
Company's  private pay rates vary from  facility to facility and are  influenced
primarily by the rates charged by other providers in the local market and by the
Company's  ability  to  distinguish  its  services  from those  provided  by its
competitors.   Although  private  pay  rates  are  generally  established  on  a
facility-specific  fee  schedule,  rates charged for  individual  cases may vary
widely  because,  in the case of managed care,  they are either  negotiated on a
case-by-case  basis with the payor or are fixed by  contract.  Rates  charged to
private pay patients are not subject to regulatory  control in any of the states
in which the Company operates.

  Medicare.  Medicare is a federally  funded and  administered  health insurance
program  primarily  designed  for  individuals  who are  age 65 or over  and are
entitled to receive Social Security  benefits.  The Medicare program consists of
two parts.  The first  part,  Part A, covers  inpatient  hospital  services  and
certain services furnished by other institutional healthcare providers,  such as
long-term  care  facilities.  The second  part,  Part B, covers the  services of
doctors, suppliers of medical items and services and various types of outpatient
services. Part B services include physical,  speech and occupational therapy and
durable medical  equipment and other ancillary  services of the type provided by
long-term care or acute care facilities. Part A coverage, as applied to services
delivered  in a  long-term  care  facility,  is limited to skilled  nursing  and
rehabilitative  care  related  to a recent  hospitalization  and is limited to a
specified term (generally 100 days per calendar year), requires beneficiaries to
share some of the cost of covered  services  through the payment of a deductible
and a co-insurance payment and requires beneficiaries to meet certain qualifying
criteria.  Prior to  December  31,  1998  there  were no limits on  duration  of
coverage for Part B services, but there was a co-insurance  requirement for most
services covered by Part B.  Substantially  all of the Company's  facilities are
certified Medicare providers.

     The method used in determining  Medicare  reimbursement for  rehabilitation
therapy  services  furnished in the Company's  facilities  used to depend on the
type of therapy  provided.  Prior to December  31, 1998,  the  Medicare  program
applied  salary  equivalency  guidelines  to determine  the  reasonable  cost of
physical  therapy  services  and  respiratory  therapy  services  provided  on a
contract  basis,  which is the cost that would be incurred if the therapist were
employed at the facility, plus an amount designed to compensate the provider for
certain general and administrative  overhead costs. With respect to occupational
therapy and speech  language  pathology  and prior to April 10,  1998,  Medicare
provided  reimbursement for services on a reasonable cost basis,  subject to the
so-called  "prudent buyer" rule for evaluating the  reasonableness of the costs.
As of  April  10,  1998,  the  Health  Care  Financing  Administration  ("HCFA")
implemented  new rules which  established new guidelines for  reimbursement  for
rehabilitation therapy services provided at skilled nursing facilities.  Through
December 31, 1998, these new guidelines revised the salary equivalency rules for
physical  and  respiratory   therapies  and  extended  the  salary   equivalency
methodology to speech and occupational therapy services as well.



                                       6
<PAGE>

  Through December 31, 1998, these new guidelines revised the salary equivalency
rules for physical and respiratory therapies and extended the salary equivalency
methodology  to  speech  and  occupational  therapy  services  as well.  Through
December 31, 1998,  the Medicare Part A program  reimbursed the Company under an
existing cost-based  reimbursement  system for its allowable direct costs (which
consisted of nursing and  ancillary)  plus an allocation  of allowable  indirect
costs  including  (capital  costs,  and  administrative  and general  expenses).
Through  December  31,  1998,  the total of  routine  costs  and the  respective
allocated  overhead was subject to a regional routine cost limit. As the Company
has expanded its subacute care and other specialty medical  services,  the costs
of care for these  patients  generally  exceeded  these  regional  reimbursement
routine  cost  limits.  Prior to January 1, 1999,  the Company  was  required to
submit  routine cost limit  exception  requests to recover the excess costs from
the Medicare program. There can be no assurance that the Company will be able to
recover such excess costs under any pending or future  requests.  The failure to
recover these excess costs in the future could  materially  adversely affect the
Company. Additionally,  until January 1, 1999, regulations allowed new long-term
care  facilities  in certain  limited  circumstances,  to apply for a three year
exemption from routine cost limits. The Company has applied for, been denied and
is now appealing  such  exemptions for two of its  facilities.  Unless and until
such  exemptions  are granted,  these  facilities  can only recover excess costs
through routine cost limit exception requests.

  The  Balanced  Budget Act (the  "BBA") was  enacted  in August  1997.  The BBA
significantly amended the reimbursement  methodology of the Medicare program and
eliminated  the  process  of  applying  for and  receiving  routine  cost  limit
exceptions  and  exemptions.  In addition to offering new  Medicare  health plan
options and increasing the penalties  related to healthcare fraud and abuse, the
BBA provided for a prospective  payment  system (the "PPS") for skilled  nursing
facilities to be implemented for cost report periods  beginning on or after July
1, 1998.  The BBA also  mandated a 10% reduction in Part B therapy costs for the
period January 1, 1998 through December 31, 1998. Subsequent to January 1, 1999,
skilled nursing  facilities were reimbursed for Part B therapy  services through
fee schedules  established by HCFA. The BBA further  limited  reimbursement  for
Part B therapy  services by  establishing  annual  limitations on Part B therapy
charges per beneficiary.

  Since  the  Medicare  prospective  payment  system is all  inclusive,  the BBA
required skilled nursing  facilities to institute  "consolidated  billing" for a
variety of  services  and  supplies.  Under  consolidated  billing,  the skilled
nursing  facility  must submit all Medicare  claims for virtually all the Part A
services and supplies that its residents receive,  with the exception of certain
services,  including  those provided by physicians.  Payments for these services
and supplies  billed on a  consolidated  basis are made  directly to the skilled
nursing  facility,  whether or not the  services  are  provided  directly by the
skilled nursing facility or by others under a contractual arrangement. Among the
services and goods which the skilled  nursing  facility is now  responsible  for
billing are: physical therapy,  occupational therapy, speech therapy, laboratory
services,  diagnostic x-rays, medical supplies,  surgical dressings,  prosthetic
devices/ostomy, colostomy, enteral/parenteral nutrition, orthotics, limbs, EKGs,
vaccines,  certain  ambulance  services and  psychological  services by a social
worker.  Consolidated  billing for Part B services  will not be effective  until
January  2001.  Examples  of Part B services  and goods  which are not billed by
skilled nursing facilities are physicians' services,  physician assistants under
physician supervision, nurse practitioners, certified nurse-midwives,  qualified
psychologists, certified registered nurses, anesthetists, home dialysis supplies
and  equipment,  self-care  home  dialysis  support  services and  institutional
dialysis services and supplies,  erythropoietin  for certain dialysis  patients,
hospice care related to a beneficiary's  terminal illness,  an ambulance trip to
the skilled  nursing  facility  from the initial  admission  or from the skilled
nursing facility following a final discharge.

  Interim regulations regarding Medicare PPS were published on May 12, 1998. The
regulations  included (i) the unadjusted federal per diem rates to be applied to
days of covered skilled nursing  facility  services  furnished during the fiscal
year, (ii) the case mix classification system to be applied with respect to such
services  during the fiscal  year and (iii) the  factors to be applied in making
area wage  adjustments  with  respect to such  services.  The  regulations  also
contained  provisions  for  skilled  nursing  facility  consolidated  billing of
Medicare  Part A and certain  services  and items  furnished to residents of the
skilled nursing facility under Part B. Final  regulations were published on July
30, 1999. The final regulations had no material affect on the Company.

  On November 29, 1999,  the  "Consolidated  Appropriations  Act  (the"CAA") was
signed into law.  The CAA was  designed  to mitigate  some of the effects of the
BBA. The CAA allowed skilled nursing  facilities to elect transition to the full
federal per diem rate at the beginning of their cost reporting  periods for cost
periods beginning on or after January 1, 2000. Using the election allowed by the
CAA, the Company chose to move fourteen  facilities to the full federal per diem
rate  effective  January 1, 2000.  As a result,  the  Company  now uses the full
federal  per diem rate to  calculate  Medicare  revenue at  twenty-three  of its
skilled nursing facilities.  Additionally, the CAA will temporarily increase the
federal per diem rates by 20% for fifteen acuity  categories  beginning on April
1,  2000.  These  increased  rates  will stay in  effect  until the later of (a)
October 1, 2000 or (b) the date HCFA  implements  a revised PPS system that more
accurately  reimburses the costs of caring for medically complex  patients.  The
CAA also provides for a four percent  increase in the federal per diem rates for
all acuity  categories for a two-year period beginning  October 1, 2000. The CAA
also  excluded  costs for  certain  supplies  and  services  that were  formerly
required to be reimbursed by a skilled nursing facility's PPS rate. The CAA also
eliminated  the  annual  provider  limitations  on Part B  therapy  charges  per
beneficiary  for fiscal  2000 and 2001.  As a result of the number of  variables
involved  (including  facility specific  occupancy,  the acuity  distribution of
Medicare patients, and the length of time the temporary increases in the federal
per diem rate  stay in  effect),  the  Company  cannot  at this time  accurately
quantify the dollar  impact of the CAA on the Company's  financial  positions or
the results of its operations.

  Medicaid.  The  Medicaid  program  includes  the  various   state-administered
reimbursement  programs for indigent  patients created by federal law.  Although
Medicaid  programs vary from state to state,  they are  partially  subsidized by
federal  funds,  provided that the state has submitted an acceptable  state plan
for medical  assistance.  Although  reimbursement  rates are  determined  by the
state,  the  federal  government  retains  the right to  approve  or  disapprove
individual  state  plans.  For  Medicaid   recipients,   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
allowable  Medicaid  payment.  Substantially  all  of the  Company's  facilities
participate in the Medicaid program of the states in which they are located.

  Under  the  Boren  Amendment,   a  federal  Medicaid   statute,   and  related
regulations,  state  Medicaid  programs were  required to provide  reimbursement
rates  that were  reasonable  and  adequate  to cover the  costs  that  would be
incurred by efficiently and  economically  operated  facilities  while providing
services in conformity with state and federal laws,  regulations and quality and
safety standards. Furthermore, payments were required to be sufficient to enlist
enough  providers so that services under a state's  Medicaid plan were available
to  recipients  at least to the extent that those  services are available to the
general   population.   In  the  past,  several  states'   healthcare   provider
organizations and providers have initiated  litigation  challenging the Medicaid
reimbursement   methodologies   employed   in  such   states,   asserting   that
reimbursement  payments are not adequate to  reimburse an  efficiently  operated
facility for the costs of providing Medicaid covered services.  The BBA repealed
the Boren Amendment  effective October 1, 1997 and allowed the states to develop
their own standards for  determining  Medicaid  payment rates.  The BBA provides


                                       7
<PAGE>

certain  procedural  restrictions on the states' ability to amend state Medicaid
programs by requiring that the states use a public process to establish  payment
methodologies  including a public comment and review process.  The repeal of the
Boren  Amendment  provides states with greater  flexibility to amend  individual
state programs and potentially reduce state Medicaid payments to skilled nursing
facilities.

  The  Medicaid  programs in the states in which the Company  operates pay a per
diem rate for providing  services to Medicaid  patients  based on the facility's
reasonable  allowable  costs  incurred in  providing  services,  subject to cost
ceilings  applicable to patient care,  other  operating and capital costs.  Some
state  Medicaid  programs  in which the  Company  currently  operates  currently
include  incentive  allowances  for providers  whose costs are less than certain
ceilings and who meet other requirements.

  There are generally two types of Medicaid  reimbursement rates:  retrospective
and  prospective,  although  many  states  have  adopted  plans  that  have both
retrospective and prospective features. A retrospective rate is determined after
completion of a cost report by the service provider and is designed to reimburse
expenses.  Typically,  an interim rate,  based upon  historical cost factors and
inflation  is paid by the state  during  the cost  reporting  period  and a cost
settlement is made following an audit of the filed cost report. Such adjustments
may result in additional  payments  being made to the Company or in  recoupments
from the Company,  depending on actual performance and the limitations within an
individual state plan.

  The more  prevalent  type of Medicaid  reimbursement  rate is the  prospective
rate.  Under a  prospective  plan,  the state sets its rate of  payment  for the
period before services are rendered. Actual costs incurred by operators during a
period are used by the state to establish the  prospective  rate for  subsequent
periods.  The provider must accept the  prospective  rate as payment in full for
all services rendered. Although there is usually no settlement based upon actual
costs  incurred  subsequent  to the cost report  filing,  subsequent  audits may
provide a basis for the state program to retroactively recoup monies.

  To date,  adjustments  from  Medicaid  audits have not had a material  adverse
effect  on  the  Company.  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.

MANAGEMENT INFORMATION SYSTEMS

  Effective January 1, 1999, all of the Company's  facilities are supported by a
centralized,  integrated  financial  reporting system which processes  financial
transactions  and which  enables  Company  personnel to monitor and respond on a
timely basis to key  operating  and  financial  data and budget  variances.  The
Company  expects  all newly  acquired  facilities  to  utilize  the  centralized
financial  reporting  system  beginning  with, or shortly  after,  their date of
acquisition.  Additionally,  the Company utilizes a payroll  processing  service
company to process payroll for all of its facilities.

GOVERNMENTAL 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
payment rates by  governmental  payor sources,  the development and operation of
long-term  care  facilities  and the  provision of long-term  care  services are
subject to  federal,  state and local  licensure  and  certification  laws which
regulate with respect to a facility,  among other  matters,  the number of beds,
the services provided, the distribution of pharmaceuticals,  equipment, staffing
requirements,   patients'  rights,  operating  policies  and  procedures,   fire
prevention  measures,  environmental  matters and  compliance  with building and
safety  codes.  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.

  All of the facilities  operated by the Company are licensed  under  applicable
state  laws  and  possess  the  required   Certificates  of  Need  ("CON")  from
responsible state authorities.

  Substantially  all of the  Company's  facilities  are certified or approved as
providers  under the  Medicaid  and  Medicare  programs.  Both the  initial  and
continuing  qualification  of a long-term  care facility to  participate in such
programs  depend  upon  many  factors,   including  accommodations,   equipment,
services,  non-discrimination  policies against indigent patients, patient care,
quality of life, patients' rights, safety,  personnel,  physical environment and
adequacy of policies,  procedures  and controls.  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 program or the Medicare  program,  offset of
amounts due against future billings to the Medicare or Medicaid programs, denial
of payments under the state Medicaid  program 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 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.
However,  in the ordinary course of its business,  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.
Although the Company has been subject to some fines,  statements  of  deficiency
and other  corrective  actions  have not had a  material  adverse  effect on the
Company.  There can be no  assurance  that  future  agency  inspections  and the
actions taken by the reviewing  agency based upon such inspections will not have
a material adverse effect on the Company.

  Certificates of Need. All but one of the states in which the Company  operates
have  adopted CON or similar  laws that  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


                                       8
<PAGE>

changes, the incurrence of certain capital expenditures, and, in certain states,
the approval of certain  acquisitions and changes in ownership or the closure of
a  facility.  Indiana's  CON  program  expired  as of June 30,  1998.  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.

  Medicare and  Medicaid.  The BBA was enacted in August 1997 and  significantly
amends the  reimbursement  methodology of the Medicare  program.  In addition to
offering new Medicare  health plan options and increasing the penalties  related
to healthcare fraud and abuse, the BBA provides for a prospective payment system
for  skilled  nursing  facilities  to be  implemented  for cost  report  periods
beginning  on or after July 1, 1998.  The BBA also  mandated a 10%  reduction in
Part B therapy costs for the period  January 1, 1998 through  December 31, 1998.
Subsequent to January 1, 1999,  skilled  nursing  facilities  are reimbursed for
Part B therapy services through fee schedules  established by HCFA. The BBA also
requires  uniform coding  specified by HCFA for skilled nursing  facility Part B
bills.  The BBA further  limited  reimbursement  for Part B therapy  services by
establishing annual limitations on Part B therapy charges per beneficiary.

  The BBA also required  skilled nursing  facilities to institute  "consolidated
billing" for a variety of services and supplies. Under consolidated billing, the
skilled  nursing  facility  must submit all  Medicare  claims for all the Part A
services and supplies that its residents receive,  with the exception of certain
services,  including  those provided by physicians.  Payments for these services
and supplies  billed on a  consolidated  basis are made  directly to the skilled
nursing  facility,  whether or not the services  were  provided  directly by the
skilled  nursing  facility or by others  under a  contractual  arrangement.  The
skilled nursing  facility is responsible for paying the provider of the services
or the supplier.  The payment to the skilled nursing facility for these services
and supplies is based upon the amounts allowable to the skilled nursing facility
based on the Medicare PPS law and regulations.  However, subsequent developments
have delayed the implementation of "consolidated billing" for Part B services.

  Medicare  PPS is being phased in over a period of four years,  beginning  with
skilled nursing facility cost reporting periods ending on or after July 1, 1998.
"New  facilities,"  which first received Medicare payment on or after October 1,
1995,  moved to the federal per diem rate effective with the cost report periods
beginning on or before July 1, 1998 and do not have a transitional  period.  All
other  facilities  are being  "phased-in"  by a formula  effective with the cost
report period  beginning on or after July 1, 1998 and through which Medicare PPS
will blend  together  facility-specific  rates and  federal  industry  per diems
according to the  following  schedule:  Year One -- 75%  facility-specific,  25%
federal per diem; Year Two -- 50% each; Year Three -- 25% facility-specific, 75%
federal per diem;  Year Four -- 100%  federal per diem.  As a result of Medicare
PPS  being  effective  for cost  reports  beginning  on or after  July 1,  1998,
Medicare PPS did not directly impact the Company's Medicare  reimbursement until
the fiscal year beginning January 1, 1999. When fully implemented,  Medicare PPS
will result in each skilled nursing facility being reimbursed on a per diem rate
basis with  acuity-based  per diem rates being  established as applicable to all
Medicare Part A beneficiaries who are residents of the skilled nursing facility.
The per diem  rates  will be all-  inclusive  rates  through  which the  skilled
nursing  facility is reimbursed  for its routine,  ancillary and capital  costs.
During the transition  period, the per diem rates for each facility consist of a
blending of  facility-specific  costs and federal per diem rates. The unadjusted
federal per diem rates to be applied to days of covered skilled nursing facility
services furnished during the first year, the case mix classification  system to
be applied  with  respect  to such  services,  and the  factors to be applied in
making area wage adjustments with respect to such services,  are included in the
Medicare PPS regulations.  The federal Medicare PPS rates were developed by HCFA
based on a blend of allowable costs from hospital-based and freestanding skilled
nursing facility cost reports for reporting  periods beginning in Federal Fiscal
Year 1995  (i.e.,  October  1, 1994 --  September  30,  1995).  The data used in
developing  the federal  rates  incorporate  an estimate of the amounts  payable
under Part B for covered  skilled nursing  facility  services  furnished  during
Federal  Fiscal Year 1995 to  individuals  who were  residents of a facility and
receiving  Part A covered  services.  HCFA  updated  costs to the first  year of
Medicare PPS using a skilled nursing  facility market basket index  standardized
for facility  differences  in case-mix and for  geographic  variations in wages.
Providers that received "new provider"  exemptions  from the routine cost limits
were excluded from the database used to compute the federal  payment  rates.  In
addition,  costs  related to payments for  exceptions to the routine cost limits
are excluded from the database used to compute the federal  payment  rates.  The
facility-specific  portion is based on each facility's  Medicare cost report for
cost reporting periods beginning in Federal Fiscal Year 1995,  including routine
cost limit  exception  and  exemption  payments up to 150% of the  routine  cost
limit,  the  allowable  costs to be updated  under  Medicare PPS for the skilled
nursing  facility  market  basket  minus 1%  through  1999 and the full  skilled
nursing  facility  market basket after 1999. A variety of other  adjustments are
made  in  developing  the  Medicare  PPS  rates  pursuant  to the  BBA  and  the
regulations. As noted, except in the case of "new facilities," in the first year
of the transition to Medicare PPS, the per diem rates will consist of a blend of
25%  federal per diem rates and 75%  facility-specific  costs.  Thereafter,  the
facility-specific cost portion will decrease by 25% per year until in the fourth
year, the rate will be 100% federal per diem rates. "New facilities" are on 100%
federal per diem rates for cost reporting  periods beginning on or after July 1,
1998.

  On November 29, 1999,  the  "Consolidated  Appropriations  Act  (the"CAA") was
signed into law.  The CAA was  designed  to mitigate  some of the effects of the
BBA. The CAA allowed skilled nursing  facilities to elect transition to the full
federal per diem rate at the beginning of their cost reporting  periods for cost
periods beginning on or after January 1, 2000. Using the election allowed by the
CAA, the Company chose to move fourteen  facilities to the full federal per diem
rate  effective  January 1, 2000.  As a result,  the  Company  now uses the full
federal  per diem rate to  calculate  Medicare  revenue at  twenty-three  of its
skilled nursing facilities.  Additionally, the CAA will temporarily increase the
federal per diem rates by 20% for fifteen acuity  categories  beginning on April
1,  2000.  These  increased  rates  will stay in  effect  until the later of (a)
October 1, 2000 or (b) the date HCFA  implements  a revised PPS system that more
accurately  reimburses the costs of caring for medically complex  patients.  The
CAA also provides for a four percent  increase in the federal per diem rates for
all acuity  categories for a two-year period beginning  October 1, 2000. The CAA
also  excluded  costs for  certain  supplies  and  services  that were  formerly
required to be reimbursed by a skilled nursing facility's PPS rate. The CAA also
eliminated  the  annual  provider  limitations  on Part B  therapy  charges  per
beneficiary  for fiscal  2000 and 2001.  As a result of the number of  variables
involved  (including  facility specific  occupancy,  the acuity  distribution of
Medicare patients, and the length of time the temporary increases in the federal
per diem rate  stay in  effect),  the  Company  cannot  at this time  accurately
quantify the dollar  impact of the CAA on the Company's  financial  positions or
the results of its operations.

  Fee Splitting and Referrals.  The Company is also subject to federal and state
laws that govern financial and other arrangements between healthcare  providers.
Federal laws, as well as the laws of certain states, prohibit direct or indirect


                                       9
<PAGE>

payments or fee splitting  arrangements  between  healthcare  providers that are
designed  to  induce  or   encourage   the  referral  of  patients  to,  or  the
recommendation  of, a  particular  provider for medical  products and  services.
These laws include the federal "anti-kickback law" which prohibits,  among other
things, the offer, payment,  solicitation or receipt of any form of remuneration
in return for the referral of Medicare and  Medicaid  patients.  A wide array of
relationships and arrangements,  including  ownership  interests in a company by
persons in a position to refer patients and personal  service  agreements  have,
under certain circumstances,  been alleged to violate these provisions.  Certain
discount arrangements may also violate these laws. Because of the broad reach of
these laws, the federal  government has published  certain "safe harbors," which
set  forth  the  requirements  under  which  certain  relationships  will not be
considered  to violate such laws. A violation of the federal  anti-kickback  law
could result in the loss of  eligibility to participate in Medicare or Medicaid,
or in criminal  penalties.  Violation of state  anti-kickback laws could lead to
loss of licensure, significant fines and other penalties.

 Various  federal and state laws regulate the  relationship  between  healthcare
providers  and  physicians,   including  employment  or  service  contracts  and
investment relationships.  These laws include the broadly worded fraud and abuse
provisions  of the  Medicaid  and  Medicare  statutes,  which  prohibit  various
transactions  involving  Medicaid or Medicare covered  patients or services.  In
particular,  the Omnibus Budget  Reconciliation Act of 1993 ("OBRA 93") contains
provisions which greatly expand the federal  prohibition on physician  referrals
to entities with which they have a financial relationship.  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 physical therapy, occupational therapy, 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.  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.

  Each of the  Company's  long-term  care  facilities  has at least one  medical
director that is a licensed  physician.  The medical  directors may from time to
time refer  their  patients to the  Company's  facilities  in their  independent
professional judgment. The physician anti-referral restrictions and prohibitions
could,  among  other  things,  require  the  Company to modify  its  contractual
arrangements  with its medical  directors or prohibit its medical directors from
referring  patients to the  Company.  From time to time,  the Company has sought
guidance  as to the  interpretation  of these  laws.  However,  there  can be no
assurance that such laws will  ultimately be interpreted in a manner  consistent
with the practices of the Company.

  Potential  Healthcare Reform. In addition to extensive  existing  governmental
healthcare regulation,  there are numerous legislative and executive initiatives
at the federal and state levels for comprehensive  reforms affecting the payment
for and availability of healthcare  services.  It is not clear at this time what
proposals,  if any, will be adopted or, if adopted,  what effect such  proposals
would have on the  Company's  business.  Aspects of certain of these  proposals,
such as  reductions  in funding of the Medicare and Medicaid  programs,  interim
measures  to  contain  healthcare  costs such as a  short-term  freeze on prices
charged by healthcare  providers or changes in the administration of Medicaid at
the state level,  could materially  adversely affect the Company.  Additionally,
the BBA repealed the Boren  Amendment  effective  October 1, 1997 and allows the
states to develop their own standards for  determining  Medicaid  payment rates.
The BBA provides certain procedural restrictions on the states' ability to amend
state  Medicaid  programs by requiring  that the states use a public  process to
establish payment  methodologies  including a public comment and review process.
The repeal of the Boren Amendment  provides  states with greater  flexibility to
amend individual state programs and potentially  reduce state Medicaid  payments
to skilled nursing facilities. There can be no assurance that currently proposed
or future  healthcare  legislation  or other  changes in the  administration  or
interpretation  of  governmental  healthcare  programs  will not have an adverse
effect on the Company.

COMPETITION

  The long-term care industry is highly  competitive.  The Company competes with
other  providers  of  long-term  care on the basis of the scope and  quality  of
services offered, the rate of positive medical outcomes,  cost-effectiveness and
the reputation and appearance of its long-term care facilities. The Company also
competes  in  recruiting  qualified  healthcare  personnel,   in  acquiring  and
developing  additional  facilities and in obtaining CONs. The Company's  current
and potential  competitors  include national,  regional and local long-term care
providers, some of whom have substantially greater financial and other resources
and may be more established in their  communities than the Company.  The Company
also faces  competition  from  assisted  living  facility  operators  as well as
providers of home healthcare.  In addition,  certain competitors are operated by
not-for-profit  organizations  and similar  businesses which can finance capital
expenditures  and  acquisitions  on a  tax-exempt  basis or  receive  charitable
contributions unavailable to the Company.

  In general,  consolidation  in the long-term care industry has resulted in the
Company  being  faced with  larger  competitors,  many of whom have  significant
financial  and  other  resources.  The  Company  expects  that  this  continuing
consolidation may increase the competition for the acquisition of long-term care
facilities.

  The Company believes that state  regulations  which require a CON before a new
long-term care facility can be  constructed  or additional  licensed beds can be
added to existing  facilities reduce the possibility of overbuilding and promote
higher utilization of existing facilities. CON legislation is currently in place
in all states in which the  Company  operates  or  expects  to operate  with the
exception of Indiana where the CON program expired as of June 30, 1998.  Several
of the states in which the Company  operates  have  imposed  moratoriums  on the
issuance of CONs for new skilled nursing facility beds.  Connecticut has imposed
a moratorium on the addition of any new skilled nursing facility beds, including
chronic and  convalescent  nursing facility beds and rest home beds with nursing
supervision,  until the year 2002. Massachusetts has imposed a moratorium on the
addition of any new skilled nursing facility beds until May 1, 2003, except that
an existing  facility can add up to 12 beds without being subject to CON review.
New Hampshire  has imposed an  indefinite  moratorium on the addition of any new
beds to skilled nursing  facilities,  intermediate care homes and rehabilitation
homes.  Ohio has imposed a moratorium until June 30, 2001 on the addition of any
new skilled  nursing  facility  beds.  Rhode  Island has  imposed an  indefinite


                                       10
<PAGE>

moratorium  on the  issuance of any new  initial  licenses  for skilled  nursing
facilities  and on the  increase in the  licensed  bed  capacity of any existing
licensed skilled nursing facility, except that an existing facility may increase
its  licensed  bed  capacity to the greater of 10 beds or 10% of the  facility's
licensed bed capacity.  The other states in which the Company conducts  business
do not  currently  have a moratorium  on new skilled  nursing  facility  beds in
effect.  Although New Jersey does not have a "moratorium" on new skilled nursing
facility beds, with the exception of the Add-a-bed  program (in which a facility
may request  approval from the state licensure agency to increase total licensed
skilled  nursing beds,  including  hospital based subacute care beds, by no more
than 10 beds or 10% of its licensed bed capacity  (every five years),  whichever
is less,  (every five years) without  obtaining CON  approval),  New Jersey only
accepts applications for a CON for additional skilled nursing facility beds when
the state CON  agency  issues a call for beds.  There is  presently  no call for
additional  beds,  and no call is  expected  to be made in the  near  future.  A
relaxation  of CON  requirements  could lead to an increase in  competition.  In
addition,  as cost  containment  measures have reduced  occupancy rates at acute
care  hospitals,  a number of these  hospitals have converted  portions of their
facilities  into subacute  units.  In the states in which the Company  currently
operates,  these  conversions are subject to state CON regulations.  The Company
believes  that the  application  of the new  Medicare  PPS rules  have made such
conversions less desirable.  New Jersey recently enacted legislation  permitting
acute care  hospitals  to offer  subacute  care  services  under their  existing
hospital  licenses,  subject to first  obtaining  CON  approval  pursuant  to an
expedited CON review process.

EMPLOYEES

  As  of  December  31,  1999,   the  Company   employed   approximately   8,100
facility-based personnel on a full- and part-time basis. The Company's corporate
and regional staff consisted of 141 persons as of such date.  Approximately  650
employees  at  eight of the  Company's  facilities  are  covered  by  collective
bargaining  agreements.  Although the Company  believes  that it maintains  good
relationships  with its employees and the unions that  represent  certain of its
employees,  it  cannot  predict  the  impact of  continued  or  increased  union
representation or organizational activities on its future operations.

  The Company  believes that the attraction and retention of dedicated,  skilled
and experienced  nursing and other professional staff has been and will continue
to be a critical  factor in the  successful  growth of the Company.  The Company
believes  that its wage  rates  and  benefit  packages  for  nursing  and  other
professional staff are commensurate with market rates and practices.

  The  Company  competes  with other  healthcare  providers  in  attracting  and
retaining  qualified or skilled  personnel.  The long-term care industry has, at
times,  experienced  shortages of qualified  personnel.  A shortage of nurses or
other trained personnel or general economic  inflationary  pressures may require
the Company to enhance its wage and  benefits  package in order to compete  with
other  employers.  There can be no assurance that the Company's labor costs will
not increase or, if they do, that they can be matched by corresponding increases
in private-payor revenues or governmental reimbursement.  Failure by the Company
to attract  and retain  qualified  employees,  to control  its labor costs or to
match increases in its labor expenses with  corresponding  increases in revenues
could have a material adverse effect on the Company.

INSURANCE

  The Company carries general liability,  professional liability,  comprehensive
property damage and other insurance coverages that management considers adequate
for the protection of its assets and operations based on the nature and risks of
its business,  historical  experience  and industry  standards.  There can be no
assurance,  however,  that the coverage limits of such policies will be adequate
or that insurance  will continue to be available to the Company on  commercially
reasonable  terms in the  future.  A  successful  claim  against the Company not
covered  by, or in excess  of,  its  insurance  coverage  could  have a material
adverse effect on the Company.  Claims against the Company,  regardless of their
merit or  eventual  outcome,  may also  have a  material  adverse  effect on the
Company's business and reputation,  may lead to increased insurance premiums and
may require the  Company's  management  to devote time and  attention to matters
unrelated to the Company's  business.  The Company is  self-insured  (subject to
contributions  by covered  employees)  with  respect  to most of the  healthcare
benefits and workers'  compensation  benefits  available to its  employees.  The
Company believes that it has adequate resources to cover any self-insured claims
and the  Company  maintains  excess  liability  coverage  to  protect it against
unusual  claims in these  areas.  However,  there can be no  assurance  that the
Company will continue to have such resources available to it or that substantial
claims will not be made against the Company.




ITEM 2. PROPERTIES

The  following  table  summarizes  certain  information  regarding the Company's
facilities as of December 31, 1999:

SUMMARY OF FACILITIES
<TABLE>
<CAPTION>
<S>                               <C>                  <C>       <C>                <C>
LICENSED                                                YEAR    OWNED/           LICENSED
FACILITY                         LOCATION             ACQUIRED   LEASED/MANAGED    BEDS
-------------------------------  ------------------   --------   --------------   -----
SOUTHEAST REGION
 Florida

<
  Brevard .....................  Rockledge                1994   Leased             100
  Clearwater ..................  Clearwater               1990   Owned              120
  Gulf Coast ..................  New Port Richey          1990   Owned              120
  Naples ......................  Naples                   1989   Leased             120
  Ocala .......................  Ocala                    1990   Owned              180
  Palm Harbor .................  Palm Harbor              1990   Owned              120
  Pinebrook ...................  Venice                   1989   Leased             120
  Sarasota ....................  Sarasota                 1990   Leased             120
  Tampa Bay ...................  Oldsmar                  1990   Owned              120
                                                                                  -----
                                                                                  1,120


                                       11
<PAGE>

MIDWEST REGION
 Ohio
  Defiance ....................  Defiance                 1993   Leased             100
  Northwestern Ohio ...........  Bryan                    1993   Leased             189
  Swanton .....................  Swanton                  1995   Leased             100
  Perrysburg ..................  Perrysburg               1990   Owned              100
  Troy ........................  Troy                     1989   Leased             195
  Beachwood ...................  Beachwood                1996   Owned (1)          274
  Broadview ...................  Broadview Heights        1996   Owned (1)          159
  Westlake I ..................  Westlake                 1996   Owned (1)          153
  Westlake II .................  Westlake                 1996   Owned (1)          106
  Dayton ......................  Dayton                   1997   Owned              100
  Laurelwood ..................  Dayton                   1997   Owned              115
  New Lebanon .................  New Lebanon              1997   Owned              126
  Point Place .................  Toledo                   1998   Owned               98
  Sylvania ....................  Sylvania                 1998   Owned              150
 Indiana
  Decatur .....................  Indianapolis             1988   Owned               88
  Indianapolis ................  Indianapolis             1988   Leased             104
  New Haven ...................  New Haven                1990   Leased             120
  Terre Haute .................  Terre Haute              1990   Owned              120
                                                                                  -----
                                                                                  2,397
NEW ENGLAND REGION
Connecticut
 Arden House ..................  Hamden                   1997   Leased             360
 Governor's House .............  Simsbury                 1997   Leased              73
 Madison House ................  Madison                  1997   Leased              90
 The Reservoir ................  West Hartford            1997   Leased              75
 Willows ......................  Woodbridge               1997   Leased              90
 Glen Hill ....................  Danbury                  1998   Owned (2)          100
 Glen Crest ...................  Danbury                  1998   Owned (2)           49
Massachusetts
  Maplewood ...................  Amesbury                 1997   Leased             120
  Cedar Glen ..................  Danvers                  1997   Leased             100
  Danvers-Twin Oaks ...........  Danvers                  1997   Leased             101
  North Shore .................  Saugus                   1997   Leased              80
  The Stone Institute .........  Newton Upper Falls       1997   Managed            106
New Hampshire
  Applewood ...................  Winchester               1996   Leased              70
  Crestwood ...................  Milford                  1996   Leased              82
  Milford .....................  Milford                  1996   Leased              52
  Northwood ...................  Bedford                  1996   Leased             147
  Pheasant Wood ...............  Peterborough             1996   Leased              99
  Westwood ....................  Keene                    1996   Leased              87
Rhode Island
 Greenwood ....................  Warwick                  1998   Owned              136
 Pawtuxet .....................  Warwick                  1998   Owned              131
                                                                                  -----
                                                                                  2,148

MID-ATLANTIC REGION
Maryland
 Harford Gardens ..............  Baltimore                1997   Leased             163
 Larkin Chase Center ..........  Bowie                    1994   Owned (3)          120
 New Jersey
  Woods Edge ..................  Bridgewater              1988   Leased             176
                                                                                  -----
                                                                                    459

                                                                     Total        6,124
                                                                                  =====

</TABLE>

(1)  Indicates an owned  facility,  the  acquisition of which has been accounted
     for as a capital lease.
(2)  Indicates an owned facility financed through a synthetic lease.
(3)  Owned by Bowie L.P. The Company's  interest in Bowie L.P. is pledged to the
     facility's  mortgage lender. The Company has guaranteed the indebtedness of
     Bowie L.P.

                                       12
<PAGE>

  The  Company  maintains  its  Corporate  offices in Boston as well as regional
offices   in   Palm   Harbor,   Florida;   Indianapolis,   Indiana;   Topsfield,
Massachusetts;  West Hartford, Connecticut; and Peterborough, New Hampshire. The
Company considers its properties to be in good operating  condition and suitable
for the purposes for which they are being used.

ITEM 3. LEGAL PROCEEDINGS

  The  Company is a party to claims and legal  actions  arising in the  ordinary
course of business. Management does not believe that unfavorable outcomes in any
such matters,  individually or in the aggregate,  would have a material  adverse
effect on the Company's financial condition, results of operations or liquidity.

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

  No matters were submitted to a vote of the Company's  stockholders  during the
last quarter of the Company's fiscal year ended December 31, 1999.




                                       13
<PAGE>



                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS

The Company  completed its initial  public  offering and shares began trading on
June 14,  1996.  The  Company's  common  stock was  listed on the New York Stock
Exchange under the symbol "HBR". The following table sets forth, for the periods
indicated,  the high and low sale price per share of the Company's  common stock
as reported on the New York Stock Exchange composite tape.

<TABLE>
<CAPTION>

                                                    1997                   1998
<S>                                         <C>         <C>         <C>         <C>
                                               High       Low         High        Low

First quarter ......................        $ 12.87     $ 11.00     $ 24.00     $ 18.000
Second quarter .....................          14.37       11.12       24.06       20.250
Third quarter ......................          18.75       14.25       24.87       23.813
Fourth quarter .....................          21.75       16.75

</TABLE>

  As a result of the August 11, 1998 Merger noted in the General  Overview,  the
Company's  common stock was de-listed from the New York Stock Exchange on August
11, 1998.

  The Company has never declared or paid any dividends on its common stock since
its formation in 1996. The Company does not anticipate  paying cash dividends on
its Common  Stock for the  foreseeable  future and  intends to retain all of its
earnings for  reinvestment in the operations and activities of the Company.  Any
future  decision as to the payment of dividends will be at the discretion of the
Company's  Board of Directors.  The  Company's  ability to pay dividends is also
limited  by the terms of  current  (and  possibly  future)  lease and  financing
arrangements  that  restrict,  among other things,  the ability of the Company's
subsidiaries to distribute funds to the Company.





                                       14
<PAGE>



ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

  The following  table sets forth selected  consolidated  financial data for the
Company.  The selected  historical  consolidated  financial data for each of the
years in the five year period ended December 31, 1999 have been derived from the
Company's  consolidated  financial  statements,   which  have  been  audited  by
PricewaterhouseCoopers LLP, our independent accountants.  The financial data set
forth  below  should  be read in  conjunction  with the  Consolidated  Financial
Statements and the Notes thereto,  and "Management's  Discussion and Analysis of
Financial  Condition  and  Results of  Operations"  included  elsewhere  in this
filing.

             SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (1)
             (in thousands, except share, per share and other data)
<TABLE>
<CAPTION>

                                                                                                YEAR ENDED DECEMBER 31,
<S>                                                       <C>            <C>            <C>            <C>           <C>
                                                              1995           1996           1997           1998          1999
                                                          -----------    -----------    -----------    -----------   -----------
Statement of operations data:

 Total net revenues ....................................  $   109,425    $   165,412    $   221,777    $   311,044   $   300,615
                                                          -----------    -----------    -----------    -----------   -----------

Expenses:
 Facility operating ....................................        89,378       132,207        176,404        246,000       248,795
 General and administrative ............................        5,076          7,811         10,953         15,422        17,808
 Service charges paid to  affiliate ....................          700            700            708          1,291         1,173
 Amortization of prepaid management fee ................         --             --             --              500         1,200
 Special compensation and other ........................         --            1,716           --             --            --
 Depreciation and amortization .........................        4,385          3,029          4,074          6,350        10,249
 Facility rent .........................................        1,907         10,223         12,446         22,412        22,394
 Merger costs ..........................................         --             --             --           37,172          --
 Restructuring costs ...................................         --             --             --             --           5,745
                                                          -----------    -----------    -----------    -----------   -----------
Total expenses .........................................      101,446        155,686        204,585        329,147       307,364
                                                          -----------    -----------    -----------    -----------   -----------

 Income (loss) from operations .........................        7,979          9,726         17,192        (18,103)       (6,749)

Other:
 Interest expense, net .................................        5,107          4,634          5,853          11,271       20,895
 Other expense (income) ................................          114            263            189           (167)          261
 Gain on sale of facilities, net .......................       (4,869)          --             --             --            --
 Minority interest in net income .......................        6,393           --             --             --            --
                                                          -----------    -----------     -----------   -----------   -----------

Income (loss) before income taxes and
 extraordinary loss ....................................        1,234          4,829         11,150        (29,207)      (27,905)
Income tax expense (benefit) ...........................         --              809          4,347         (5,020)      (10,304)
                                                          -----------    -----------     -----------    -----------   -----------
Income (loss) before extraordinary loss ................        1,234          4,020          6,803        (24,187)      (17,601)
Extraordinary loss on early
 retirement of debt, net of tax ........................         --           (1,318)          --             --            --
                                                          -----------    -----------    -----------     -----------  -----------
Net income (loss) ......................................  $     1,234    $     2,702    $     6,803     $  (24,187   $   (17,601)

Preferred stock dividends .........................              --             --             --           (2,296)       (6,004)
                                                          -----------    -----------    -----------     -----------  -----------
Earnings (loss) available for common shares......         $     1,234    $     2,702    $     6,803    $   (26,483)  $   (23,605)
                                                          ===========    ===========    ===========    ===========   ===========
Earnings (loss) per common share:
                             Basic .................                                    $      0.85    $     (3.42)  $     (3.25)
                                                                                        ===========    ===========   ===========
                             Diluted ................                                   $      0.84    $     (3.42)  $     (3.25)
                                                                                        ===========    ===========   ===========

Pro forma data:
Historical income before income
   taxes and extraordinary loss ........................  $     1,234    $     4,829
Pro forma income taxes .................................          481            799
                                                          -----------    -----------
Pro forma income before
    extraordinary loss .................................          753          4,030
Extraordinary loss, net of tax .........................         --           (1,318)
                                                          -----------    -----------
Pro forma net income ...................................  $       753    $     2,712
                                                          ===========    ===========

Pro forma earnings per common share
 (basic and diluted):
Pro forma income before extraordinary loss .............  $      0.17    $      0.63
Extraordinary loss .....................................         --             0.21
                                                          -----------    -----------
Pro forma earnings per common share ....................  $      0.17    $      0.42
                                                          ===========    ===========

Weighted average number of common shares
 used in per share computations (2):
    Basic ..............................................    4,425,000      6,396,000    8,037,000       7,742,000     7,261,000
    Diluted ............................................    4,425,000      6,396,000    8,139,000       7,742,000     7,261,000


                                       15
<PAGE>

</TABLE>


         SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (continued)
                             (DOLLARS IN THOUSANDS)


                                                      YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
<S>                                        <C>            <C>            <C>            <C>            <C>
                                                   1995           1996           1997           1998           1999
                                            -----------    -----------    -----------    -----------    -----------
Operational data (as of end of year) (3):

 Facilities .............................            20             30             45             50             50
 Licensed beds ..........................         2,471          3,700          5,468          6,120          6,124

Average occupancy rate (4) ..............          92.5%          92.6%          92.3%          92.3%          90.9%

Patient days (5):
Private and other .......................       261,488        335,363        394,151        503,234        489,074
Medicare ................................        90,107        108,229        138,023        196,222        219,924
Medicaid ................................       437,325        653,222        834,637      1,169,258      1,240,228
                                            -----------    -----------    -----------    -----------    -----------
Total ...................................       788,920      1,096,814      1,366,811      1,868,714      1,949,226
                                            ===========    ===========    ===========    ===========    ===========

Sources of total net revenues:
Private and other (6) ...................          35.1%          35.5%          34.1%          30.2%          28.9%
Medicare ................................          31.7%          26.3%          25.9%          27.7%          21.8%
Medicaid ................................          33.2%          38.2%          40.0%          42.1%          49.3%

Balance sheet data:
Working capital .........................   $    10,735    $    16,826    $    22,621    $    36,403    $    36,536
Total assets ............................        92,632        141,799        168,562        264,536        283,233
Total debt ..............................        43,496         18,208         33,642        134,680        171,245
Capital lease obligation ................          --           57,277         56,285         55,531         54,700
Stockholders' equity (deficit) (7) ......         4,130         44,880         51,783             83        (23,522)
</TABLE>

(1)  Financial  and  operating  data combine the  historical  results of various
     legal entities (the  "Predecessor  Entities")  that became  subsidiaries of
     Harborside Healthcare  Corporation (the "Company") through a reorganization
     (the  "Reorganization")  that occurred  immediately  prior to the Company's
     initial  public  offering  on June  14,  1996  (the  "IPO").  Prior  to the
     Reorganization,   the  Predecessor  Entities  (primarily  partnerships  and
     subchapter S  corporations)  were not directly  subject to Federal or state
     income  taxation.  A pro forma  income tax expense has been  reflected  for
     periods presented, prior to the IPO, as if the Company had always owned the
     Predecessor Entities.
(2)  Through the IPO, the Company issued  3,600,000  shares of common stock. Pro
     forma net income per share for 1995 is  calculated  based on the  4,400,000
     shares of common  stock  issued  through the  Reorganization.  For 1996 the
     calculation is based upon 4,400,000 shares  outstanding for the entire year
     and the appropriate weighting for shares issued through the IPO.
(3)  Includes  two managed  facilities  with 178  licensed  beds in 1997 and one
     managed facility with 106 licensed beds in 1998 and 1999.
(4)  "Average  occupancy  rate" is computed by dividing the number of billed bed
     days by the total number of available  licensed bed days during each of the
     periods indicated. This calculation includes all facilities operated by the
     Company excluding managed facilities.
(5)  "Patient Days" includes billed bed days for the facilities  operated by the
     Company  excluding  billed  bed  days  of  managed  facilities  and the one
     facility accounted for using the equity method.
(6)  Consists  primarily  of revenues  derived  from  private  pay  individuals,
     managed care organizations,  HMO's, hospice programs,  commercial insurers,
     management  fees from  managed  facilities,  and  through  September  1999,
     rehabilitation therapy revenues from non-affiliated facilities.
(7)  In accordance with  Securities and Exchange  Commission  requirements,  the
     book value of the Company's  Exchangeable  Preferred Stock is excluded from
     total  stockholders'  equity.  As of December  31, 1998 and 1999,  the book
     value of the Company's  Exchangeable  Preferred  Stock was  $42,293,000 and
     $48,277,000, respectively.


                                       16
<PAGE>



ITEM 7.

                           MANAGEMENT'S DISCUSSION AND
                       ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

OVERVIEW

  Harborside  Healthcare  Corporation,  ("Harborside"  or  the  "Company")  is a
leading provider of high-quality  long-term care and specialty  medical services
in the eastern United  States.  The Company has focused on  establishing  strong
local market positions with high-quality  facilities in four principal  regions:
the  Southeast   (Florida),   the  Midwest  (Ohio  and  Indiana),   New  England
(Connecticut,   Massachusetts,   New   Hampshire   and  Rhode  Island)  and  the
Mid-Atlantic  (New Jersey and  Maryland).  As of December 31, 1999,  the Company
operated 50  facilities  (22 owned,  27 leased and one managed)  with a total of
6,124  licensed  beds.  As  described  in  Note  A to the  audited  consolidated
financial  statements  of the Company  included  elsewhere in this  filing,  the
Company  accounts for its  investment in one of its owned  facilities  using the
equity  method.  The  Company  provides a broad  continuum  of medical  services
including:  (i)  traditional  skilled  nursing care and (ii)  specialty  medical
services,  including  a variety of subacute  care  programs  such as  orthopedic
rehabilitation,  CVA/stroke care, cardiac recovery, pulmonary rehabilitation and
wound  care,  as  well  as  distinct  programs  for  the  provision  of  care to
Alzheimer's and hospice patients. As part of its subacute services,  the Company
provides physical,  occupational and speech  rehabilitation  therapy services at
Company-operated  facilities.  Through September 1999, the Company also provided
rehabilitation  therapy services under contracts with  non-affiliated  long-term
care facilities through a wholly-owned  subsidiary.  During the third quarter of
1999, the Company  terminated its contracts with  non-affiliated  facilities and
ceased providing therapy services to non-affiliated  facilities.  (See Note P to
the  Company's  consolidated  financial  statements  included  elsewhere in this
report).

  The Company was created in March 1996, in  anticipation  of an initial  public
offering (the "IPO"),  in order to combine  under its control the  operations of
various  long-term care facilities and ancillary  businesses  (the  "Predecessor
Entities") which had operated since 1988. The Company  completed the IPO on June
14, 1996 and issued  3,600,000  shares of common stock at $11.75 per share.  The
owners  of  the  Predecessor   Entities  contributed  their  interests  in  such
Predecessor  Entities  to the  Company  and  received  4,400,000  shares  of the
Company's common stock.

  The  Company's  financial  statements  for periods  prior to the IPO have been
prepared by combining the  historical  financial  statements of the  Predecessor
Entities,  similar  to  a  pooling  of  interests  presentation.  The  Company's
financial statements prior to the date of the IPO do not include a provision for
Federal or state  income  taxes  because  the  Predecessor  Entities  (primarily
partnerships and subchapter S corporations) were not directly subject to Federal
or state income  taxation.  The  Company's  combined  financial  statements  for
periods  prior to the date of the IPO include a pro forma income tax expense for
each  period  presented,  as if the  Company  had always  owned the  Predecessor
Entities.

  One of the  Predecessor  Entities  was the general  partner of the Krupp Yield
Plus  Limited  Partnership  ("KYP"),  which owned seven  facilities  (the "Seven
Facilities")  until  December  31,  1995.  The Company held a 5% interest in KYP
while  the  remaining  95%  was  owned  by the  limited  partners  of  KYP  (the
"Unitholders"). Effective December 31, 1995, KYP sold the Seven Facilities and a
subsidiary of the Company began leasing the facilities from the buyer.  Prior to
December 31, 1995 the accounts of KYP were  included in the  Company's  combined
financial  statements  and the  interest of the  Unitholders  was  reflected  as
minority  interest.  The net gain of $4,869,000  recognized by KYP in connection
with the sale of the Seven  Facilities was allocated to the KYP  Unitholders and
is  reflected  in  "minority  interest  in net  income."  In March  of  1996,  a
liquidating distribution was paid to the Unitholders.

  On  April  15,  1998,  Harborside  entered  into a  Merger  Agreement  with HH
Acquisition  Corp.  ("MergerCo"),  an entity  organized  for the sole purpose of
effecting a merger on behalf of Investcorp  S.A.,  certain of its affiliates and
certain other international investors (the "New Investors"). On August 11, 1998,
MergerCo merged with and into Harborside, with Harborside Healthcare Corporation
as the surviving  corporation.  As a result of the transaction,  and pursuant to
the  Merger  Agreement,  the New  Investors  acquired  approximately  91% of the
post-merger common stock of Harborside. The remaining 9% of the common stock was
retained  by existing  shareholders,  including  management.  As a result of the
merger, Harborside shares were de-listed from the New York Stock Exchange.

  The merger was  approved  by a majority  of the  Company's  shareholders  at a
special  meeting  held on August 11,  1998.  Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million.  Holders of outstanding stock options of
the  Company  converted  the  majority  of their  options  into  cash at $25 per
underlying  share (less  applicable  exercise price and withholding  taxes) with
aggregate payments of approximately $8 million.

  In connection with the transaction and prior to the merger,  the New Investors
made cash common equity  contributions of $158.5 million, net of issuance costs,
to MergerCo,  and MergerCo  obtained gross proceeds of $99.5 million through the
issuance of 11% Senior  Subordinated  Discount Notes ("Discount Notes") due 2008
and $40 million  through  the  issuance of 13.5%  Exchangeable  Preferred  Stock
("Preferred  Stock")  mandatorily  redeemable in 2010.  In  connection  with the
merger,  Harborside also entered into a new $250 million  collateralized  credit
facility.  In the third quarter of 1998,  Harborside recorded a charge to income
from operations of approximately  $37 million  (approximately  $29 million after
taxes)  for  direct  and other  costs  related  to the  Merger  transaction.  In
connection with the merger and the related  refinancings,  the Company exercised
purchase options for seven facilities which had been financed through  synthetic
leases.

REVENUES

  The Company's  total net revenues  include net patient service  revenues,  and
beginning in 1995,  rehabilitation  therapy service revenues from contracts with
non-affiliated  long-term care  facilities  until the third quarter of 1999 when
these  contracts  were  terminated.  (See Note P to the  Company's  consolidated
financial statements included elsewhere in this report). The Company derives its
net patient  service  revenues  primarily from private pay sources,  the federal
Medicare  program for certain  elderly and disabled  patients and state Medicaid
programs for indigent patients.  The Company's total net revenues are influenced
by a  number  of  factors,  including:  (i) the  licensed  bed  capacity  of its
facilities;  (ii) the occupancy rates; (iii) the payor mix of its facilities and
the rates of reimbursement among payor categories  (private and other,  Medicare


                                       17
<PAGE>

and Medicaid); and (iv) the extent to which subacute and other specialty medical
and  ancillary  services  are  utilized  by the  patients  and  paid  for by the
respective payment sources. Private net patient service revenues are recorded at
established  per  diem  billing  rates.  Net  patient  service  revenues  to  be
reimbursed under contracts with third-party  payors,  primarily the Medicare and
Medicaid programs,  are recorded at amounts estimated to be realized under these
contractual   arrangements.   The  Company   employs   specialists   to  monitor
reimbursement  rules,  policies and related developments in order to comply with
all   reporting   requirements   and  to  assist  the   Company   in   receiving
reimbursements.

  The table set forth below identifies the percentage of the Company's total net
revenues  attributable  to each of its  payor  sources  for each of the  periods
indicated.  The  increase in  Medicaid  revenues  as a  percentage  of total net
revenues  during  fiscal 1999 is primarily  the result of a decrease in Medicare
revenues  as a result  of the  implementation  of the new  Medicare  Prospective
Payment System ("PPS") effective January 1, 1999, as well as a decrease in other
revenues  derived from contracts to provide  rehabilitation  therapy services to
non-affiliated  long-term care facilities.  Implementation  of PPS was effective
for all of the  Company's  facilities  beginning  January 1, 1999 and caused the
Company's  average Part A per diem rate to decrease from $397 per day in 1998 to
$286 per day in 1999.  During the third quarter of 1999, the Company  terminated
its  contracts  to provide  rehabilitation  therapy  services to  non-affiliated
long-term care facilities.

                        TOTAL NET REVENUES (1)
<TABLE>
<CAPTION>
<S>                   <C>       <C>       <C>
                      1997      1998      1999
                    ------    ------    ------


Private and other     34.1%     30.2%     28.9%
Medicare ........     25.9      27.7      21.8
Medicaid ........     40.0      42.1      49.3
                    ------    ------    ------
  Total .........    100.0%    100.0%    100.0%
                    ======    ======    ======
</TABLE>

(1)  Total net revenues exclude net revenues of the Larkin Chase Center which is
     owned by Bowie Center Limited  Partnership ("Bowie L.P."). The Company owns
     a 75%  partnership  interest in Bowie L.P.  but records its  investment  in
     Bowie  L.P.  using  the  equity  method  of  accounting.  See Note A to the
     Company's  consolidated  financial  statements  included  elsewhere in this
     filing.

 OPERATING EXPENSES

  The Company's  facility  operating  expenses consist  primarily 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  the cost of  rehabilitation
therapy services, medical and pharmacy supplies, food, utilities,  insurance and
taxes.  The  Company's  general and  administrative  expenses  include all costs
associated with its regional and corporate operations.



                                       18
<PAGE>



                           MANAGEMENT'S DISCUSSION AND
                       ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

 Total Net Revenues.  Total net revenues  decreased by $10,429,000 or 3.4%, from
$311,044,000  in 1998 to  $300,615,000  in 1999. The reduction in total revenues
from 1998 to 1999 was primarily the result of lower  occupancy and lower average
revenues per patient day at the Company's  facilities and the termination of the
Company's contracts to provide rehabilitation therapy services to non-affiliated
long-term  care  facilities.  These factors were  partially  offset by increased
revenues  from  facilities  acquired by the Company in 1998 and  operated by the
Company during all of 1999. The Company's  revenues increased by $2,115,000 as a
result of the  acquisition  of two North Toledo  facilities  (the "North  Toledo
Facilities")  on April 1, 1998;  $4,738,000  from the  acquisition  of two Rhode
Island facilities (the "Rhode Island Facilities") on May 8, 1998, and $7,571,000
from the  acquisition  of two  Danbury,  Connecticut  facilities  (the  "Danbury
Facilities")  on December  1, 1998.  The  average  occupancy  rate at all of the
Company's  facilities  decreased from 92.3% for the year ended December 31, 1998
to 90.9% for the year ended  December  31,  1999.  Average net  patient  service
revenues per patient day at "same store"  facilities  decreased from $159.74 for
the year ended  December  31,  1998 to $153.08 for the year ended  December  31,
1999. This decrease in average net patient service  revenues per patient day was
a result of the  implementation of the new Medicare  Prospective  Payment System
("PPS") which became effective at all of the Company's  facilities on January 1,
1999.  Implementation  of PPS caused the Company's  average  Medicare Part A per
diem rate to  decrease  from $397 per  Medicare  patient  day for the year ended
December 31, 1998 to $286 per Medicare  patient day for the year ended  December
31, 1999.  For the year ended  December 31, 1999,  the Company also  experienced
reduced revenues  generated through the provision of Medicare Part B services to
residents  at  its  facilities.  This  reduction  was  due  partially  to  lower
productivity by Company  therapists during the first quarter as they adjusted to
the  newly  implemented  Medicare   reimbursement  system.   Additionally,   PPS
established  certain  annual  per  patient  limitations  on the amount of Part B
therapy that is reimbursable  through the Medicare program.  Management believes
that the  introduction of these annual limits  resulted in reduced  revenues for
the  year  ended  December  31,  1999 as  affected  parties  adapted  to the new
regulatory environment. Implementation of PPS also caused a decrease in revenues
generated  by  providing   rehabilitation  therapy  services  to  non-affiliated
long-term  care  facilities.  In  response  to  reduced  reimbursement  from the
Medicare  program,  non-affiliated  facilities  reduced  the  amount of  therapy
services provided at their facilities. Additionally, during the third quarter of
1999,  the Company  terminated its contracts to provide  rehabilitation  therapy
services at  non-affiliated  facilities.  The Company's  quality mix of private,
Medicare and insurance  revenues was 57.9% for the year ended  December 31, 1998
as compared to 50.7%  during the same period of 1999.  This  decrease in quality
mix of revenues was  primarily  the result of the decrease in Medicare  revenues
caused by the implementation of PPS.

  Facility  Operating   Expenses.   Facility  operating  expenses  increased  by
$2,795,000,  or 1.1%, from $246,000,000 in 1998 to $248,795,000 in 1999. Of this
increase,  $1,758,000 was due to the operations of the North Toledo  Facilities,
$4,300,000  was  due to the  operations  of the  Rhode  Island  Facilities,  and
$6,242,000 was due to the operations of the Danbury Facilities.  These increases
in operating  expenses  were  substantially  offset by reductions in expenses at
"same store"  facilities in 1999, which were initiated by management in response
to the  revenue  decline  noted  above.  Expense  reductions  included  wage and
staffing reductions related to the delivery of rehabilitative  therapy services,
reduced indirect nursing support and the renegotiation of vendor contracts.  The
Company  experienced an increased  reliance on outside nurse agency personnel in
1999,  which offset the effects of some of these  savings.  Outside nurse agency
personnel are more costly than the Company's  employees;  however,  their use is
necessary to maintain adequate staffing levels in the Company's  facilities when
the Company  cannot  recruit or retain  sufficient  employees.  Strong  economic
conditions  in the  Company's  markets in 1999 made it  difficult to maintain or
expand the Company's employee base.

 General and  Administrative;  Service  Charges Paid to  Affiliate.  General and
administrative  expenses  increased by $2,386,000 or 15.5%,  from $15,422,000 in
1998 to $17,808,000 in 1999. As a percentage of total net revenues,  general and
administrative  expenses  increased  from  5.0% in 1998  to 5.9% in  1999.  This
increase  resulted  from an increase in salaries,  consulting  and other related
expenses  associated  with the  development  of the  Company's  data  processing
capabilities,  efforts to streamline the Company's business processes,  training
initiatives supporting  facility-based  personnel, and increased legal expenses.
The Company  reimburses  a former  affiliate  for certain  data  processing  and
administrative   services   provided  to  the   Company.   During   1998,   such
reimbursements totaled $1,291,000 as compared to $1,173,000 in 1999.

  Amortization of Prepaid  Management Fees.  Amortization of prepaid  management
fees (paid in  connection  with the Merger) was  $500,000 in 1998 as compared to
$1,200,000  in  1999.  (See  Note  O to  the  Company's  consolidated  financial
statements included elsewhere in this report).

  Depreciation and  Amortization.  Depreciation  and  amortization  increased by
$3,899,000  from  $6,350,000 in 1998 to $10,249,000 in 1999 primarily due to the
amortization of costs related to the leveraged recapitalization and the exercise
of purchase options for seven  facilities which were financed through  synthetic
leases prior to the leveraged  recapitalization.  The exercise of these purchase
options was funded through  financing  arranged in connection with the leveraged
recapitalization.

  Facility Rent.  Facility rent expense decreased by $18,000 from $22,412,000 in
1998 to  $22,394,000  in 1999.  The  decrease in rent expense is the result of a
reduction  in rent  expense  related  to the  exercise  of  purchase  options on
previously leased facilities  partially offset by the acquisition of the Danbury
Facilities by means of a synthetic lease.

  Restructuring  Costs. In connection with  restructuring  the Company's therapy
services business, the Company incurred restructuring costs of $5,745,000 during
the third quarter of 1999. (See Note P to the Company's  consolidated  financial
statements included elsewhere in this report).

  Interest Expense,  net. Interest expense,  net,  increased from $11,271,000 in
1998 to $20,895,000 in 1999.  This net increase is primarily due to the issuance
of $99,500,000 of 11% Senior Subordinated  Discount Notes (the "Discount Notes")
during  the  third   quarter   of  1998  in   connection   with  the   leveraged
recapitalization,  as well as increased  utilization of the Company's  revolving
credit  facility  in 1999.  The  interest  associated  with the  Discount  Notes
accretes until August 1, 2003 and then becomes payable in cash, semi-annually in
arrears, beginning on February 1, 2004.

                                       19
<PAGE>

   Income  Tax  Benefit.  As a result of the losses  incurred  in 1998 and 1999,
income tax benefits of $5,020,000 and $10,304,000, respectively, were recognized
for those years.

  Net  Loss.  Net  loss  was  $17,601,000  in  1999  as  compared  to a loss  of
$24,187,000 in 1998.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

  Total Net Revenues. Total net revenues increased by $89,267,000 or 40.3%, from
$221,777,000 in 1997 to $311,044,000 in 1998. This increase  resulted  primarily
from the  acquisition  of the Harford  Gardens  facility on March 1, 1997,  four
Massachusetts  facilities  (the  "Massachusetts  Facilities") on August 1, 1997,
three Dayton,  Ohio facilities  (the "Dayton  Facilities") on September 1, 1997,
the five Connecticut  facilities (the  "Connecticut  Facilities") on December 1,
1997, two North Toledo, Ohio facilities (the "North Toledo Facilities") on April
1, 1998, two Rhode Island  facilities (the "Rhode Island  Facilities") on May 8,
1998 and two Danbury,  Connecticut  facilities  (the  "Danbury  Facilities")  on
December  1,  1998.  Of such  increase,  $1,022,000,  or  1.1% of the  increase,
resulted from the operation of the Harford  Gardens  facility;  $11,986,000,  or
13.4%  of the  increase,  resulted  from  the  operation  of  the  Massachusetts
Facilities;  $10,758,000,  or 12.1% of the increase, resulted from the operation
of the Dayton Facilities;  $43,916,000,  or 49.2% of the increase, resulted from
the  operation  of  the  Connecticut  Facilities;  $8,469,000;  or  9.5%  of the
increase,   resulted  from  the  operation  of  the  North  Toledo   Facilities;
$7,626,000,  or 8.5% of the  increase,  resulted from the operation of the Rhode
Island  Facilities;  and $692,000,  or 0.8% of this increase,  resulted from the
operation   of  the  Danbury   Facilities.   Revenues   generated  by  providing
rehabilitation  therapy  services to  non-affiliated  long-term care  facilities
decreased by  $2,671,000,  from  $17,628,000 in 1997 to $14,957,000 in 1998. The
remaining  $7,469,000,  or 8.4% of such increase,  was largely  attributable  to
higher  average net patient  service  revenues per patient day at the  Company's
"same store"  facilities,  primarily  resulting  from  increased  levels of care
provided to patients  with  medically  complex  conditions.  Average net patient
service  revenues per patient day at "same store"  facilities  increased by 3.0%
from $150.85 in 1997 to $155.44 in 1998.  Contributing  to the increase in total
net revenues was an increase in occupancy at "same store"  facilities from 92.0%
in 1997 to 92.3% in 1998.  The average  occupancy  rate at all of the  Company's
facilities  was 92.3% in 1997 and 1998.  The  Company's  quality mix of private,
Medicare and insurance  revenues was 60.0% for the year ended  December 31, 1997
as compared to 57.9% for the year ended  December 31, 1998.  The decrease in the
quality  mix  percentage  was  primarily  due to  dilution  resulting  from  the
acquisition of new facilities.

  Facility  Operating   Expenses.   Facility  operating  expenses  increased  by
$69,596,000 or 39.5%,  from  $176,404,000  in 1997 to  $246,000,000 in 1998. The
operation of the Harford Gardens facility  accounted for $1,659,000,  or 2.4% of
this  increase;  the  operation of the  Massachusetts  Facilities  accounted for
$10,959,000,  or 15.8% of this increase;  the operation of the Dayton Facilities
accounted  for  $7,881,000,  or 11.3% of this  increase;  the  operation  of the
Connecticut Facilities accounted for $35,308,000, or 50.7% of this increase; the
operation of the North Toledo  Facilities  accounted  for  $6,653,000 or 9.6% of
this  increase;  the  operation of the Rhode  Island  Facilities  accounted  for
$6,741,000 or 9.7%; of this increase and the operation of the Danbury Facilities
accounted for $479,000 or 0.7% of this increase.  Operating expenses  associated
with rehabilitation  therapy services provided to non-affiliated  long-term care
facilities decreased as a result of fewer therapy contracts.  Operating expenses
associated with these  contracts  decreased by $6,795,000 from 1997 to 1998. The
decrease in contracts  resulted  from the  Company's  decision to eliminate  low
profit  contracts.  The  remaining  $6,711,000  increase in  facility  operating
expenses was primarily due to increases in the costs of labor,  medical supplies
and rehabilitation therapy services purchased from third-parties at "same store"
facilities.

  General and  Administrative;  Service  Charges Paid to Affiliate.  General and
administrative  expenses  increased by $4,469,000 or 40.8%,  from $10,953,000 in
1997 to $15,422,000 in 1998. As a percentage of total net revenues,  general and
administrative  expenses  increased  from  4.9% in 1997  to 5.0% in  1998.  This
increase  resulted from the  acquisition of new  facilities  that resulted in an
increase in regional and corporate support,  and additional  travel,  consulting
and systems development  expenses.  The Company reimbursed an affiliate for rent
and other expenses related to its corporate  headquarters as well as for certain
data  processing and  administrative  services  provided to the Company.  During
1997, such  reimbursements  totaled  $708,000 as compared to $1,291,000 in 1998.
The increased  reimbursement  related  primarily to additional  data  processing
services.

  Amortization of Prepaid  Management Fees.  Amortization of prepaid  management
fees (paid in connection  with the Merger) was $500,000 in 1998.  (See Note O to
the  Company's  consolidated  financial  statements  included  elsewhere in this
report).

  Depreciation and  Amortization.  Depreciation  and  amortization  increased by
$2,276,000  from  $4,074,000 in 1997 to $6,350,000 in 1998  primarily due to the
acquisition  of new  facilities  and the  amortization  of costs  related to the
Merger.

  Facility Rent.  Facility rent expense increased by $9,966,000 from $12,446,000
in 1997 to  $22,412,000  in 1998.  The  increase  in rent  expense is due to the
acquisition  of new facilities  partially  offset by a reduction of rent expense
resulting  from the  exercise  of  purchase  options  on seven  facilities.  The
exercise of these purchase options was funded through Merger-related financings.

  Merger costs. In connection with the Merger  completed on August 11, 1998, the
Company  incurred  merger  costs  of  $37,172,000.  Merger  costs  consisted  of
transaction  fees and  expenses  associated  with  the  Merger  and the  related
refinancings  and the  elimination of deferred  financing  costs related to debt
retired in connection with these events.

  Interest Expense,  net. Interest  expense,  net,  increased from $5,853,000 in
1997 to $11,271,000  in 1998.  This increase is primarily due to the issuance of
$99,500,000 of 11.0% Senior  Subordinated  Discount Notes in connection with the
Merger.  The interest  associated with these notes accretes until August 1, 2003
and then  becomes  payable  in cash,  semi-annually  in  arrears,  beginning  on
February 1, 2004.

   Income Taxes  (Benefit).  As a result of the loss incurred in 1998, an income
tax benefit of $5,020,000 was recognized for that year as compared to income tax
expense of $4,347,000 for 1997.

  Net Income (Loss).  Net income was $6,803,000 in 1997 as compared to a loss of
$24,187,000 in 1998

                                       20
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

 The Company's  primary cash needs are for acquisitions,  capital  expenditures,
working capital,  debt service and general corporate  purposes.  The Company has
historically  financed  these  requirements  primarily  through a combination of
internally  generated cash flow,  mortgage  financing and operating  leases,  in
addition to funds borrowed  under a credit  facility.  In addition,  in 1996 the
Company financed the acquisition of four facilities  located in Ohio by means of
leases  which are  accounted  for as  capital  leases  for  financial  reporting
purposes.  The Company's  existing leased  facilities are leased from either the
owner of the facilities, from a real estate investment trust which has purchased
the  facilities  from the owner,  or through  synthetic  lease  borrowings.  The
Company's  existing  facility leases generally  require it to make monthly lease
payments and pay all property operating costs. The Company generally  negotiates
leases which provide for extensions  beyond the initial lease term and an option
to  purchase  the leased  facility.  In some cases,  the option to purchase  the
leased  facility is at a price based on the fair market value of the facility at
the time the option is  exercised.  In other  cases,  the lease for the facility
sets forth a fixed purchase option price which the Company  believes is equal to
the fair market value of the facility at the inception date of such lease,  thus
allowing the Company to realize the value  appreciation  of the  facility  while
maintaining financial flexibility.

  In  connection  with the  leveraged  recapitalization  completed on August 11,
1998, the Company  obtained gross proceeds of $99.5 million through the issuance
of 11% Senior  Subordinated  Discount Notes (the "Discount  Notes") due 2008 and
$40 million  through the  issuance of 13.5%  Exchangeable  Preferred  Stock (the
"Preferred  Stock")  mandatorily  redeemable  in 2010.  Interest on the Discount
Notes accretes at 11% per annum until August 1, 2003 and then becomes payable in
cash, semi-annually in arrears,  beginning on February 1, 2004. Dividends on the
Preferred Stock are payable,  at the option of the Company, in additional shares
of the Preferred Stock until August 1, 2003.  After that date dividends may only
be paid in cash. The Company also entered into a new $250 million collateralized
credit  facility  (the  "New  Credit  Facility").  The  terms of the New  Credit
Facility  provide  up to  $75  million  on a  revolving  credit  basis  plus  an
additional $175 million initially funded on a revolving basis that converts to a
term loan on an annual  basis on each  anniversary  of the  closing.  During the
first  four  years of the  facility,  any or all of the  full  $250  million  of
availability  under the facility  may be used for  synthetic  lease  financings.
Proceeds  of loans  under the  facility  may be used for  acquisitions,  working
capital purposes, capital expenditures and general corporate purposes.  Interest
is based on either  LIBOR or prime rates of interest  (plus  applicable  margins
determined by the Company's leverage ratio) at the election of the Company.  The
New Credit Facility contains various  financial and other restrictive  covenants
and limits aggregate borrowings under the New Credit Facility to a predetermined
multiple of EBITDA.

  As noted  above,  the Company,  through a  wholly-owned  limited  partnership,
leases and operates four facilities in Ohio (the "Cleveland  Facilities")  which
it acquired in 1996 through  capital  leases.  Each lease is  guaranteed  by the
Company.  The guaranty  provides that failure by the Company to have a specified
minimum  consolidated net worth at the end of any two consecutive quarters is an
event of default under the guaranty,  which in turn would be an event of default
under each lease.  During the third quarter of 1999, the Company recorded a $5.7
million   restructuring   charge  to   terminate   its   contracts   to  provide
rehabilitation therapy services to non-affiliated long-term care facilities.  As
a result of this restructuring  charge, the Company's  consolidated net worth as
of  September  30, 1999 (as  calculated  for purposes of this  requirement)  had
fallen  below the required  level.  The Company  anticipated  that its net worth
would  continue to be below the required level at December 31, 1999, as a result
of which the Company  would have been in default  under each of these leases and
could have faced the loss of these  operations.  Such a default  could also have
triggered  cross-defaults  under the Company's other lease and debt obligations.
In  December  of 1999,  the  Company  paid $5  million  to the  landlord  of the
Cleveland  Facilities and obtained an option (the "New Option") to acquire these
facilities. The Company borrowed $5 million from an affiliate of Investcorp S.A.
to fund this  payment.  The  Company  already  held an option to  acquire  these
facilities during a limited period beginning July 1, 2001. The New Option allows
the Company to exercise its right to purchase the Cleveland Facilities as of the
date of the New Option. If the Company does not exercise the New Option by March
31, 2000, but has taken certain steps to obtain  financing for this  acquisition
(as detailed in the agreement), the Company may extend its right to exercise the
New Option until June 30,  2000,  with  closing  required  prior to December 31,
2000. The New Option  provides a waiver of the net worth  requirement  until the
earlier of the lapse of the New Option or December 31, 2000. The Company intends
to extend the New Option  through  June 30, 2000 and  exercise the New Option by
June 30, 2000.  The Company  then  intends to assign its  purchase  rights to an
affiliate  of  Investcorp  and enter into an  operating  lease of the  Cleveland
Facilities by December 31, 2000.  The $5 million  payment made to obtain the New
Option will be applied to the purchase price of the facilities,  or forfeited if
the acquisition is not completed. If the Company cannot complete the refinancing
of the  Cleveland  Facilities  by December 31, 2000,  the Company  would also be
required to make an additional  payment of  $3,000,000 to the landlord,  and the
Company could potentially face the loss of the Cleveland Facilities. Although no
assurances  can be given in this regard,  the Company  believes  that it will be
able to complete the refinancing of the Cleveland Facilities within the required
time period.

   During the first quarter of 1999, the Company determined that its anticipated
financial  results  for  that  quarter  would  cause  the  Company  to be out of
compliance  with certain  financial  covenants of the New Credit  Facility.  The
Company's  reduced  level  of  EBITDA  during  the  first  quarter  of 1999  was
attributable to transitional  difficulties associated with the implementation of
the new Medicare prospective payment system which became effective at all of the
Company's facilities on January 1, 1999. Such transitional difficulties resulted
in lower than expected  revenues,  primarily due to fewer than expected Medicare
patient  days,  lower  Medicare  Part A rates,  reduced  revenues  from  therapy
services  provided to  non-affiliated  long-term care centers and a reduction in
revenues  from the  provision of Medicare  Part B services at the  Company's own
facilities. In response, during the first quarter of 1999, the Company initiated
additional   facility-based   training   directed   towards  the   documentation
requirements  of the revised  Medicare  reimbursement  system.  The Company also
continued to refine its admission and assessment  protocols in order to increase
patient  admissions  and  introduced a series of targeted  initiatives  to lower
operating  expenses.  Such  initiatives  included  wage and staffing  reductions
(primarily  related to the  delivery  of  rehabilitative  therapy  services  and
indirect nursing support), renegotiation of vendor contracts and ongoing efforts
to reduce the Company's  reliance on outside nurse agency personnel.  All of the
staffing reductions were implemented,  on or prior to, April 1, 1999.  Effective
March 30, 1999,  the Company  obtained an  amendment to the New Credit  Facility
which  limits  borrowings  under the New  Credit  Facility  to an  aggregate  of
$58,500,000  (exclusive of undrawn letters of credit outstanding as of March 30,
1999) and which  modified  certain  financial  covenants.  Access to  additional
borrowings for acquisitions and general corporate  purposes under the New Credit
Facility are  permitted  to the extent the Company  achieves  certain  financial
targets.  The  amendment  allows the Company  access to the entire $250  million
facility  if  the  Company's  operating  performance  returns  to the  level  of
compliance  contemplated by the original financial covenants. As of December 31,
1999,  total  borrowings  under the New Credit  Facility  (exclusive  of undrawn
letters  of  credit  outstanding  as  of  March  30,  1999)  were  approximately
$49,483,000  and consisted of  $32,750,000  of revolver  loans,  $13,700,000  of


                                       21
<PAGE>

synthetic leasing loans and $3,033,000 of undrawn letters of credit issued after
March  30,  1999.  As of  December  31,  1999,  the  Company  had  approximately
$9,000,000  of  funding  available  under  the New  Credit  Facility  and was in
compliance with the financial covenants of the New Credit Facility.

  The Company's  operating  activities in 1998 used net cash of  $39,447,000  as
compared  to  providing  net  cash  of  $752,000  in  1999,  an  improvement  of
$40,199,000.  The  improvement in cash flows from operations was the result of a
lower  net loss and  higher  levels  of  non-cash  expenses  in 1999,  including
depreciation,  amortization and accretion of interest on the Company's  Discount
Notes.  Additionally,  the Company was required to prepay a five-year $6,000,000
management fee in 1998 and also  experienced a $17,530,000  increase in accounts
receivable during 1998. In comparison, the Company's accounts receivable balance
as of December 31, 1999 was approximately  equal to the prior year balance,  and
the prepaid  management  fee is being  amortized as a non-cash  expense over the
related five year period.

  Net cash used by investing  activities was $78,664,000 during 1998 as compared
to  $20,762,000  used in 1999.  The primary use of cash for  investing  purposes
during 1998 was to fund the payment of deferred  financing fees and the addition
of property and equipment in connection  with the exercise of certain options to
purchase  long-term care facilities,  which had been financed through  synthetic
leases  prior to the  leveraged  recapitalization.  The  primary use of cash for
investing  purposes  during 1999 was to fund additions to property and equipment
associated  with the  maintenance of the Company's  existing  facilities and the
development of its data processing capabilities. As discussed above, the Company
also paid  $5,000,000  to the landlord of the  Cleveland  Facilities in order to
obtain the New Option.

  Net cash provided by financing activities was $110,260,000 in 1998 as compared
to $20,500,000 provided in 1999. During 1998, the New Investors made cash equity
contributions  of $165  million  ($158.5  million,  net of  issuance  costs)  to
MergerCo prior to its merger with and into Harborside. During 1998, these funds,
as  well as the  proceeds  from  the  issuance  of the  Discount  Notes  and the
Preferred  Stock,  and  borrowings  totaling  $12,750,000  under the New  Credit
Facility were used to purchase shares of the Company's common stock not retained
by shareholders subsequent to the Merger and to repay the outstanding balance on
the previous  credit  facility.  The Company  acquired  7,349,832  shares of its
common stock for cash payments  aggregating  approximately  $184 million  during
1998.  During  1999,  the  Company  borrowed  $20,000,000  under the New  Credit
Facility to fund its operations. The Company has not drawn on the facility since
July 7, 1999.  As  discussed  above,  the Company  borrowed  $5 million  from an
affiliate of Investcorp S.A..

     In addition to the Discount Notes, as of December 31, 1999, the Company had
two mortgage loans outstanding  totaling $17,648,000 and $32,750,000 in advances
on its New Credit  Facility.  One  mortgage  loan had an  outstanding  principal
balance of  $16,110,000 of which  $15,140,000  is due at maturity in 2004.  This
loan bears interest at an annual rate of 10.65% plus  additional  interest equal
to 0.3% of the  difference  between  the annual  operating  revenues of the four
mortgaged  facilities and actual revenues during the  twelve-month  base period.
The Company's  other mortgage loan,  which encumbers a single  facility,  had an
outstanding  principal  balance of  $1,538,000  at December 31,  1999,  of which
$1,338,000 is due in 2010.

  Harborside  expects  that  its  capital   expenditures  for  2000,   excluding
acquisitions  of new long-term care  facilities,  will  aggregate  approximately
$4,200,000.   Harborside's   expected  capital   expenditures   will  relate  to
maintenance capital  expenditures,  systems  enhancements,  special construction
projects  and other  capital  improvements.  Harborside  expects that its future
facility  acquisitions  will be financed  with  borrowings  under the New Credit
Facility, direct operating leases or assumed debt. Harborside may be required to
obtain  additional  equity financing to finance any significant  acquisitions in
the future.

  On November 29, 1999,  the  "Consolidated  Appropriations  Act  (the"CAA") was
signed into law.  The CAA was  designed  to mitigate  some of the effects of the
BBA. The CAA allowed skilled nursing  facilities to elect transition to the full
federal per diem rate at the beginning of their cost reporting  periods for cost
periods beginning on or after January 1, 2000. Using the election allowed by the
CAA, the Company chose to move fourteen  facilities to the full federal per diem
rate  effective  January 1, 2000.  As a result,  the  Company  now uses the full
federal  per diem rate to  calculate  Medicare  revenue at  twenty-three  of its
skilled nursing facilities.  Additionally, the CAA will temporarily increase the
federal per diem rates by 20% for fifteen acuity  categories  beginning on April
1,  2000.  These  increased  rates  will stay in  effect  until the later of (a)
October 1, 2000 or (b) the date HCFA  implements  a revised PPS system that more
accurately  reimburses the costs of caring for medically complex  patients.  The
CAA also provides for a four percent  increase in the federal per diem rates for
all acuity  categories for a two-year period beginning  October 1, 2000. The CAA
also  excluded  costs for  certain  supplies  and  services  that were  formerly
required to be reimbursed by a skilled nursing facility's PPS rate. The CAA also
eliminated  the  annual  provider  limitations  on Part B  therapy  charges  per
beneficiary  for fiscal  2000 and 2001.  As a result of the number of  variables
involved  (including  facility specific  occupancy,  the acuity  distribution of
Medicare patients, and the length of time the temporary increases in the federal
per diem rate  stay in  effect),  the  Company  cannot  at this time  accurately
quantify the dollar  impact of the CAA on the Company's  financial  positions or
the results of its operations.

Seasonality

  Harborside's  earnings  generally  fluctuate  from  quarter to  quarter.  This
seasonality is related to a combination  of factors which  include,  among other
things,  the timing of Medicaid rate  increases,  seasonal census cycles and the
number of calendar days in a given quarter.

INFLATION

  The  healthcare  industry is labor  intensive.  Wages and other labor  related
costs are  especially  sensitive to inflation.  Shortages in the labor market or
general inflationary pressure could have a significant effect on the Company. In
addition,  suppliers  attempt to pass along  rising  costs to the Company in the
form of higher prices. When faced with increases in operating costs, the Company
has generally increased its charges for services. The Company's operations could
be adversely  affected if it is unable to recover future cost increases or if it
experiences   significant  delays  in  Medicare  and  Medicaid  revenue  sources
increasing their rates of reimbursement.

                                       22
<PAGE>

THE YEAR 2000 ISSUE

  The Company  undertook a  comprehensive  effort to evaluate and address  risks
that could have arisen in connection with the inability of computer  programs to
recognize  dates that followed  December 31, 1999 (the "Year 2000  Issue").  The
Company  has  not  observed  any  significant   problems  with  its  information
technology systems or equipment.  The Company has noted no problems with similar
systems operated by third parties doing business with the Company, including its
suppliers,  state Medicaid  agencies and fiscal  intermediaries  responsible for
administering payments on behalf of the Medicare program.



                                       23
<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES:
Report of Independent Accountants........................................     25
Consolidated Balance Sheets as of December 31, 1998 and 1999.............     26
Consolidated Statements of Operations for the years ended December 31,
 1997, 1998 and 1999.....................................................     27
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
 for the years ended December 31, 1997, 1998 and 1999....................     28
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999......................................................     29
Notes to Consolidated Financial Statements...............................     30



                                       24
<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Stockholders and Board of Directors of
Harborside Healthcare Corporation

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated   statements  of  operations,   changes  in  stockholders'   equity
(deficit),  and  cash  flows  present  fairly,  in all  material  respects,  the
financial  position of Harborside  Healthcare  Corporation and its  subsidiaries
(the  "Company")  at  December  31,  1999 and  1998,  and the  results  of their
operations  and their  cash flows for the three  years then ended in  conformity
with  accounting  principles  generally  accepted  in the United  States.  These
financial  statements are the  responsibility of the Company's  management;  our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing standards  generally accepted in the United States,  which require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates made by management,  and evaluating the overall financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for the opinion expressed above.





/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 16, 2000




                                       25
<PAGE>



               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
           (dollars in thousands, except share and per share amounts)

                               AS OF DECEMBER 31,

<TABLE>
<CAPTION>
<S>                                                                                <C>          <C>
                                                                                        1998         1999
                                                                                   ---------    ---------
        ASSETS
Current assets:

  Cash and cash equivalents ....................................................   $     896    $   1,386
  Accounts receivable, net of allowances for doubtful
     accounts of $2,864 and $3,098 respectively ................................      49,946       50,168
  Prepaid expenses and other ...................................................      10,934       19,940
  Prepaid income taxes .........................................................       3,873        2,608
  Deferred income taxes (Note K) ...............................................       4,084        2,400
                                                                                   ---------    ---------
    Total current assets .......................................................      69,733       76,502

Restricted cash (Note C) .......................................................       2,110        2,420
Property and equipment, net (Note D) ...........................................     160,504      166,326
Deferred financing and other non-current assets, net (Note E) ..................      18,173       15,546
Other assets, net (Note O) .....................................................       4,300        3,100
Note receivable (Note F) .......................................................       7,487        7,487
Deferred income taxes (Note K) .................................................       2,229       11,852
                                                                                   ---------    ---------
    Total assets ...............................................................   $ 264,536     $283,233
                                                                                   =========    =========

        LIABILITIES
Current liabilities:
  Current maturities of long-term debt (Note H) ................................   $     207    $     227
  Current portion of capital lease obligation (Note I) .........................       4,278        4,633
  Note payable to affiliate (Note O) ...........................................        --          5,000
  Accounts payable .............................................................       7,401        9,328
  Employee compensation and benefits ...........................................      13,220       14,021
  Other accrued liabilities ....................................................       7,485        5,508
  Accrued interest .............................................................          62          572
  Current portion of deferred income ...........................................         677          677
                                                                                   ---------    ---------
    Total current liabilities ..................................................      33,330       39,966

Long-term portion of deferred income (Note G) ..................................       3,104        2,427
Long-term debt (Note H) ........................................................     134,473      166,018
Long-term portion of capital lease obligation (Note I) .........................      51,253       50,067
                                                                                   ---------    ---------
    Total liabilities ..........................................................     222,160      258,478
                                                                                   ---------    ---------

Commitments and contingencies (Notes G and M)

Exchangeable  preferred  stock,  redeemable,  $.01 par value with a  liquidation
  value of $1,000 per share; 500,000 shares authorized; 42,293 and
  48,277 issued and outstanding, respectively (Note L) .........................      42,293       48,277
                                                                                   ---------    ---------

        STOCKHOLDERS' EQUITY (DEFICIT) (Note L)
Common stock, $.01 par value, 19,000,000 shares
 authorized, 7,261,332 shares issued and outstanding ...........................         146          146
Additional paid-in capital .....................................................     204,607      198,603
Less common stock in treasury, at cost, 7,349,832 shares .......................    (183,746)    (183,746)
Accumulated deficit ............................................................     (20,924)     (38,525)
                                                                                   ---------    ---------
    Total stockholders' equity (deficit) .......................................          83      (23,522)
                                                                                   ---------    ---------
 Total liabilities and stockholders' equity (deficit) ..........................   $ 264,536    $ 283,233
                                                                                   =========    =========
</TABLE>









         The accompanying notes are an integral part of the consolidated
                             financial statements.

                                       26
<PAGE>

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (dollars in thousands, except per share amounts)

                        FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
<S>                                                   <C>         <C>          <C>
                                                         1997         1998       1999
                                                      ---------    ---------    -------


Total net revenues ................................   $ 221,777   $ 311,044    $ 300,615
                                                      ---------    ---------    --------

Expenses:
  Facility operating ..............................     176,404     246,000      248,795
  General and administrative ......................      10,953      15,422       17,808
  Service charges paid to former affiliate (Note O)         708       1,291        1,173
  Amortization of prepaid management fee (Note O) .        --           500        1,200
  Depreciation and amortization ...................       4,074       6,350       10,249
  Facility rent ...................................      12,446      22,412       22,394
  Merger costs (Note B) ...........................        --        37,172         --
  Restructuring costs (Note P) ....................        --          --          5,745
                                                      ---------    ---------   ---------
   Total expenses .................................     204,585     329,147      307,364
                                                      ---------    ---------   ---------

 Income (loss) from operations ....................      17,192     (18,103)      (6,749)

Other:
Interest expense, net .............................       5,853      11,271       20,895
  Other expense (income) ..........................         189        (167)         261
                                                      ---------    ---------   ---------
Income (loss) before income taxes .................      11,150     (29,207)     (27,905)

Income tax expense (benefit) (Note K) .............       4,347      (5,020)     (10,304)
                                                      ---------    ---------   ---------

Net income (loss) .................................       6,803     (24,187)     (17,601)

Preferred stock dividends .........................        --        (2,296)      (6,004)
                                                      ---------    ---------   ---------
Earnings (loss) available for common shares........   $   6,803    $(26,483)   $ (23,605)
                                                      =========    =========   =========

Earnings (loss) per common share (Note L):
         Basic ....................................   $    0.85    $  (3.42)   $   (3.25)
                                                      =========    =========   =========
         Diluted ..................................   $    0.84    $  (3.42)   $   (3.25)
                                                      =========    =========   =========
</TABLE>


         The accompanying notes are an integral part of the consolidated
                             financial statements.



                                       27
<PAGE>



               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                             (dollars in thousands)

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 and 1999

<TABLE>
<CAPTION>
<S>                                                        <C>        <C>         <C>          <C>            <C>

                                                                       Additional
                                                             Common    Paid-in     Treasury      Accumulated
                                                             Stock     Capital        Stock      Deficit        Total
                                                            ---------  ---------    --------     ---------    ---------

Stockholders' equity, December 31, 1996 ................   $      80   $  48,340         --      $  (3,540)   $  44,880

Net income for the year ended December 31, 1997 ........        --          --           --          6,803        6,803
Exercise of stock options ..............................        --           100         --           --            100
                                                            ---------  ---------    --------     ---------    ---------

Stockholders' equity, December 31, 1997 ................          80      48,440         --          3,263       51,783

Net loss for the year ended December 31, 1998 ..........        --          --           --        (24,187)     (24,187)

Exercise of stock options ..............................        --            29         --           --             29

Issuance of common stock, net (6,600,000 shares) .......          66     158,434         --           --        158,500

Purchase of treasury stock (7,349,832 shares) ..........        --          --      $(183,746)        --       (183,746)

Preferred stock dividends ..............................        --        (2,296)        --           --         (2,296)
                                                            ---------  ---------    ---------    ---------    ---------

Stockholders' equity, December 31, 1998 ................         146     204,607     (183,746)     (20,924)          83

Net loss for the year ended December 31, 1999 ..........        --          --           --        (17,601)     (17,601)

Preferred stock dividends ..............................        --        (6,004)        --           --         (6,004)
                                                           ---------   ---------    ---------    ---------    ---------

Stockholders' equity (deficit), December 31, 1999  .....   $     146   $ 198,603    $(183,746)   $ (38,525)   $ (23,522)
                                                           =========   =========    =========    =========    =========

</TABLE>






         The accompanying notes are an integral part of the consolidated
                             financial statements.

                                       28
<PAGE>

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                 (dollars in thousands)
<TABLE>
<CAPTION>

                                            FOR THE YEARS ENDED DECEMBER 31,
<S>                                                             <C>          <C>          <C>
                                                                    1997        1998         1999
                                                                ---------    ---------    ---------
Operating activities:
Net income (loss) ..............................................$   6,803    $ (24,187)   $ (17,601)
Adjustments to reconcile net income (loss) to net
  cash provided (used) by operating activities:
Depreciation of property and equipment .........................    3,589        4,973        7,173
Amortization of deferred financing and other
 non-current assets ............................................      485        1,377        3,076
             Amortization of prepaid management fee ............     --            500        1,200
Amortization of deferred income ................................     (449)        (550)        (677)
Prepayment of management fees ..................................     --         (6,000)        --
Accretion of senior subordinated discount notes ................     --          4,583       11,771
Amortization of loan costs
  and fees (included in rental and interest expense) ...........      257           56          156
Accretion of interest on capital lease obligation ..............    2,952        3,185        3,443
Non-cash restructuring charge ..................................     --           --          1,852
Merger costs not requiring cash ................................     --           (350)        --
                                                                 ---------    ---------    ---------
                                                                   13,637      (16,413)      10,393
Changes in operating assets and liabilities:
 (Increase) in accounts receivable .............................   (9,432)     (17,530)        (222)
 (Increase) in prepaid expenses and other ......................   (2,885)      (3,202)      (4,006)
 (Increase) in deferred income taxes ...........................     (265)      (4,092)      (7,939)
 Increase in accounts payable ..................................    1,264          126        1,927
 Increase in employee compensation and benefits ................    2,102        2,479          801
 Increase (decrease) in accrued interest .......................      232         (189)         510
 Increase (decrease) in other accrued liabilities ..............    2,240        3,068       (1,977)
 Increase (decrease) in income taxes payable ...................   (1,272)      (3,694)       1,265
                                                                ---------    ---------    ---------
  Net cash provided (used) by operating activities .............    5,621      (39,447)         752
                                                                ---------    ---------    ---------

Investing activities:
 Additions to property and equipment ...........................   (5,274)     (68,605)     (13,197)
 Additions to deferred financing and other
  non-current assets ...........................................   (6,301)     (13,494)      (2,255)
 Transfers (to) from restricted cash, net ......................   (1,794)       3,435         (310)
 Payment of purchase deposit ...................................     --           --         (5,000)
 Receipt of note receivable ....................................   (7,487)        --           --
 Repayment of demand note from limited partnership .............    1,369         --           --
                                                                 ---------   ---------    ---------
  Net cash used by investing activities ........................  (19,487)     (78,664)     (20,762)
                                                                ---------    ---------    ---------

Financing activities:
 Borrowings under revolving line of credit .....................   15,600       17,150       20,000
 Issuance of note payable to affiliate .........................     --           --          5,000
 Repaid on revolving line of credit ............................     --        (20,000)        --
 Payment of long-term debt .....................................     (166)        (191)        (206)
 Proceeds from issuance of senior subordinated discount notes ..     --         99,493         --
 Proceeds from issuance of exchangeable preferred stock ........     --         40,000         --
 Purchase of treasury stock ....................................     --       (183,746)        --
 Proceeds from sale of common stock ............................     --        158,500         --
 Principal payments of capital lease obligation ................   (3,944)      (3,939)      (4,274)
 Receipt of cash in connection with lease ......................    1,301        2,964         --
 Dividends paid on exchangeable preferred stock ................     --           --            (20)
 Exercise of stock options .....................................      100           29         --
                                                                ---------    ---------    ---------
  Net cash provided by financing activities ....................   12,891      110,260       20,500
                                                                ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents ...........     (975)      (7,851)         490
Cash and cash equivalents, beginning of year ...................    9,722        8,747          896
                                                                ---------    ---------    ---------
Cash and cash equivalents, end of year .........................$   8,747    $     896    $   1,386
                                                                =========    =========    =========

Supplemental Disclosure:
  Interest paid ................................................$   3,371    $   3,636    $   5,911
  Income taxes paid ............................................$   5,783    $   3,047    $     243
  Accretion of preferred dividends..............................$       -    $   2,293    $   5,584
</TABLE>










         The accompanying notes are an integral part of the consolidated
                             financial statements.



                                       29
<PAGE>



               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A. NATURE OF BUSINESS

  Harborside Healthcare Corporation and its subsidiaries (the "Company") operate
long-term care facilities and, until  September  1999,  provided  rehabilitation
therapy services to non-affiliated long-term care facilities (See Note P). As of
December  31,  1999,   the  Company  owned   twenty-two   facilities,   operated
twenty-seven   additional  facilities  under  various  leases  and  managed  one
facility.  The Company  accounts for its  investment  in one 75% owned  facility
using the equity method of accounting.

B. BASIS OF PRESENTATION

  The Company was incorporated as a Delaware  corporation on March 19, 1996, and
was formed as a holding  company,  in anticipation of an initial public offering
(the "IPO"), to combine under the control of a single corporation the operations
of various business entities (the  "Predecessor  Entities") which were all under
the majority control of several related stockholders.

  On April 15, 1998, the Company entered into a Merger  Agreement (the "Merger")
with HH Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose
of effecting a merger on behalf of Investcorp  S.A.,  certain of its  affiliates
and  certain  other  international  investors  (the  "New  Investors").  The New
Investors made common equity cash  contributions  totaling $165 million  ($158.5
million,  net of issuance costs).  On August 11, 1998,  MergerCo merged with and
into the  Company,  with  Harborside  Healthcare  Corporation  as the  surviving
corporation.  As a  result  of the  transaction,  and  pursuant  to  the  Merger
Agreement,  the New  Investors  acquired  approximately  91% of the  post-merger
common stock of the Company.  The  remaining 9% of the common stock was retained
by existing shareholders,  including management.  As a result of the Merger, the
Company's shares were de-listed from the New York Stock Exchange.

  The Merger was  approved  by a majority  of the  Company's  shareholders  at a
special  meeting  held on August 11,  1998.  Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million.  The converted shares (7,349,832 shares)
were  recorded at cost as  treasury  stock and  represent  a deduction  from the
Company's  stockholders'  equity.  Holders of  outstanding  stock options of the
Company  converted the majority of their options into cash at $25 per underlying
share (less  applicable  exercise  price and  withholding  taxes) with aggregate
payments of approximately $8 million.

  In connection with the transaction and prior to the Merger,  the New Investors
made cash common equity  contributions of $158.5 million, net of issuance costs,
to MergerCo,  and MergerCo  obtained gross proceeds of $99.5 million through the
issuance of 11% Senior  Subordinated  Discount Notes ("Discount Notes") due 2008
and $40 million  through  the  issuance of 13.5%  Exchangeable  Preferred  Stock
("Preferred  Stock")  mandatorily  redeemable in 2010.  In  connection  with the
Merger,  Harborside also entered into a new $250 million  collateralized  credit
facility.  In the third quarter of 1998,  Harborside recorded a charge to income
from  operations  of $37 million ($29 million  after taxes) for direct and other
costs related to the Merger  transaction.  In connection with the Merger and the
related   refinancings,   the  Company  exercised  purchase  options  for  seven
facilities which had been previously financed through synthetic leases.

C. SIGNIFICANT ACCOUNTING POLICIES

  The Company uses the following  accounting  policies for  financial  reporting
purposes:

Principles of Consolidation

  The consolidated  financial statements include the accounts of the Company and
its subsidiaries.  All significant  intercompany  transactions and balances have
been eliminated in consolidation.

Total Net Revenues

  Total net revenues include net patient service revenues,  management fees from
managed facilities and the facility accounted for using the equity method,  and,
through September 1999,  rehabilitation  therapy service revenues from contracts
to provide  rehabilitation  therapy  services to  non-affiliated  long-term care
facilities.

  Net patient service revenues  payable by patients at the Company's  facilities
are recorded at established  billing rates.  Net patient service  revenues to be
reimbursed  by contracts  with  third-party  payors,  primarily the Medicare and
Medicaid  programs,  are recorded at the amount  estimated to be realized  under
these  contractual  arrangements.   Revenues  from  Medicare  and  Medicaid  are
generally based on reimbursement of the reasonable  direct and indirect costs of
providing services to program  participants or a prospective payment system. The
Company  separately  estimates  revenues due from each third-party with which it
has a contractual  arrangement and records  anticipated  settlements  with these
parties in the  contractual  period  during which  services were  rendered.  The
amounts  actually  reimbursable  under  Medicare and Medicaid are  determined by
filing cost reports which are then audited and generally  retroactively adjusted
by the payor.  Legislative changes to state or Federal reimbursement systems may
also retroactively  affect recorded revenues.  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.  Such  adjustments and final  settlements  with third-party
payors,  which could materially and adversely affect the Company,  are reflected
in operations at the time of the adjustment or settlement.  Beginning on January
1, 1999,  all of the  Company's  facilities  which  participate  in the Medicare
program began to be reimbursed in accordance with the provisions of the Balanced
Budget Act of 1997 (the "Balanced Budget Act"). The Balanced Budget Act provides


                                       30
<PAGE>

for the  reimbursement  of Medicare  funded skilled  nursing  facility  services
through a Prospective Payment System which when fully implemented will reimburse
the Company's  facilities  based upon a per diem rate adjusted for the acuity of
each patient and the geographic location of each facility.  Accounts receivable,
net,  at  December  31,  1998 and 1999  includes  $22,388,000  and  $12,838,000,
respectively,   of  estimated   settlements  due  from  third-party  payors  and
$8,445,000  and  $4,465,000,  respectively,  of  estimated  settlements  due  to
third-party payors.

Prior to the  effective  date of the Balanced  Budget Act,  direct and allocated
indirect costs  reimbursed  under the Medicare  program were subject to regional
limits. The Company's costs generally exceeded those limits and accordingly, the
Company was required to submit exception  requests to recover such excess costs.
The Company  believes it will be  successful in  collecting  these  receivables,
however,  the failure to recover these costs in the future could  materially and
adversely affect the Company.

 Concentrations

  A significant  portion of the Company's revenues are derived from the Medicare
and Medicaid programs.  There have been, and the Company expects that there will
continue  to be, a number  of  proposals  to limit  reimbursement  allowable  to
long-term care facilities under these programs.  Approximately 66%, 70%, and 71%
of the  Company's  net revenues in the years ended  December 31, 1997,  1998 and
1999,  respectively,  are from the Company's  participation  in the Medicare and
Medicaid  programs.   As  of  December  31,  1998  and  1999,   $26,461,000  and
$29,774,000, respectively, of net accounts receivable were due from the Medicare
and Medicaid programs.

 Facility Operating Expenses

  Facility  operating  expenses  include  expenses  associated  with the  normal
operations of a long-term care facility.  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: the cost of
rehabilitation  therapies,  medical and pharmacy  supplies,  food and utilities.
Through September 1999, facility operating expenses included expenses associated
with rehabilitation  therapy services rendered by the Company under contracts to
provide  rehabilitation  therapy  services  to  non-affiliated   long-term  care
facilities.  (See  Note P to the  Company's  consolidated  financial  statements
included elsewhere in this report).

 Provision for Doubtful Accounts

  Provisions for uncollectible accounts receivable of $1,188,000, $1,418,000 and
$1,655,000  are  included in  facility  operating  expenses  for the years ended
December 31, 1997,  1998 and 1999,  respectively.  Individual  patient  accounts
deemed to be  uncollectible  are written off against the  allowance for doubtful
accounts.

 Use of Estimates

  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 the  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
revenues and expenses  during the period  reported.  Actual results could differ
from those estimates.  Estimates are used when accounting for the collectibility
of receivables, depreciation and amortization, employee benefit plans, taxes and
contingencies.

Property and Equipment

  Property and equipment are stated at cost.  Expenditures that extend the lives
of affected assets are capitalized, while maintenance and repairs are charged to
expense as incurred.  Upon the  retirement or sale of an asset,  the cost of the
asset and any related  accumulated  depreciation  are  removed  from the balance
sheet, and any resulting gain or loss is included in net income (loss).

  Depreciation  expense  includes  the  amortization  of  capital  assets and is
estimated using the straight-line  method.  These estimates are calculated using
the following estimated useful lives:

     Buildings and improvements                     31.5 to 40 years
     Furniture and equipment                         5   to 10 years
     Leasehold improvements                         over the life of the lease
     Land improvements                               8   to 40 years

Deferred Financing and Other Non-Current Assets

  Deferred  financing  costs  consist of costs  incurred in obtaining  financing
(primarily  loans and  facility  leases).  These costs are  amortized  using the
straight-line  method (which  approximates the interest method) over the term of
the related financial obligation (See Notes E and H).

  In connection with each of its  acquisitions,  the Company reviewed the assets
of the acquired  facility and assessed its relative  fair value in comparison to
the purchase  price.  Covenants  not-to-compete  are being  amortized  using the
straight-line  method over the period during which  competition  is  restricted.
Goodwill  resulted  from  the  acquisition  of  certain  assets  for  which  the
negotiated  purchase prices exceeded the allocations of the fair market value of
identifiable  assets.  The  Company's  policy is to  evaluate  each  acquisition
separately and identify an appropriate amortization period for goodwill based on
the  acquired  property's  characteristics.  Goodwill  is  amortized  using  the
straight-line method over a 15 to 40 year period.

Assessment of Long-Lived Assets

  The Company  periodically  reviews the carrying value of its long-lived assets
(primarily  property and equipment and deferred  financing and other non-current
assets) to assess the  recoverability of these assets;  any impairments would be


                                       31
<PAGE>

recognized in operating  results if a diminution in value considered to be other
than temporary were to occur.  As part of this  assessment,  the Company reviews
the expected future net operating cash flows from its facilities, as well as the
values included in appraisals of its facilities,  which have  periodically  been
obtained in connection with various financial arrangements.  The Company has not
recognized  any  adjustments as a result of these  assessments  except for those
noted with regard to the termination of the Company's  contract therapy business
(See Note P).

 Cash and Cash Equivalents

  Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at the date of their acquisition by the Company.

  Restricted Cash

  Restricted  cash consists of cash set aside in escrow  accounts as required by
several of the Company's leases and other financing arrangements.

  Income Taxes

  The  Company  determines  deferred  taxes  in  accordance  with  Statement  of
Accounting Financial Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), which requires that deferred tax assets and liabilities be computed based
on the difference between the financial statement and income tax bases of assets
and  liabilities  using the  enacted  marginal  tax rate.  Deferred  income  tax
expenses or credits are based on the changes in the assets or  liabilities  from
period to period.

  Reclassification of Prior Period Amounts

  Certain amounts have been reclassified to conform with the 1999 presentation.

 New Accounting Pronouncements

  The Financial  Accounting Board has issued  Statement of Financial  Accounting
Standards  No.  133,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities",  (SFAS  No.  133) as  amended,  which is  effective  for  financial
statements  issued  for  periods  beginning  after June 15,  2000.  SFAS No. 133
establishes  accounting and reporting  standards for derivative  instruments and
for hedging activities.  It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial  position and measure
those  instruments  at fair value.  The Company  does not expect SFAS No. 133 to
have an effect on the  financial  statements  as the  Company  currently  has no
derivative financial instruments.

D. PROPERTY AND EQUIPMENT

  The  Company's  property and  equipment  are stated at cost and consist of the
following as of December 31:
<TABLE>
<CAPTION>
<S>                                   <C>            <C>
                                              1998           1999
                                      ------------   ------------


Land ..............................   $  7,238,000   $  7,238,000
Land improvements .................      3,538,000      3,625,000
Buildings and improvements ........     85,398,000     88,780,000
Leasehold improvements ............      4,520,000      4,520,000
Equipment, furnishings and fixtures     17,760,000     26,997,000
Assets under capital lease ........     63,532,000     63,481,000
                                      ------------   ------------
                                       181,986,000    194,641,000
Less accumulated depreciation .....     21,482,000     28,315,000
                                      ------------   ------------
                                      $160,504,000   $166,326,000
                                      ============   ============
</TABLE>

E. DEFERRED FINANCING AND OTHER NON-CURRENT ASSETS

  Deferred financing and other non-current assets are stated at cost and consist
of the following as of December 31:
<TABLE>
<CAPTION>
<S>                             <C>           <C>
                                       1998          1999
                                -----------   -----------

Deferred financing costs ....   $16,648,000   $18,760,000
Covenant not-to-compete .....     1,200,000     1,200,000
Goodwill ....................     2,861,000       569,000
Other .......................       380,000       256,000
                                -----------   -----------
                                 21,089,000    20,785,000
Less accumulated amortization     2,916,000     5,239,000
                                -----------   -----------
                                $18,173,000   $15,546,000
                                ===========   ===========
</TABLE>


                                       32
<PAGE>



F. NOTE RECEIVABLE

 In connection with the acquisition of five  Connecticut  facilities on December
1, 1997 (See Note G), the Company  received a note receivable from the owners in
the amount of  $7,487,000.  Interest is earned at the rate of 9% per annum,  and
payments are due monthly, in arrears,  commencing January 1, 1998 and continuing
until November 30, 2010, at which time the entire principal  balance is due. The
proceeds of the note were used by the owner to repay certain  indebtedness.  The
note is collateralized by various mortgage interests and other collateral.

G. OPERATING LEASES

  In March 1993, a subsidiary  of the Company  entered into an agreement  with a
non-affiliated  entity to lease two long-term  care  facilities in Ohio with 289
beds for a period of ten years. The lease  agreement,  which became effective in
June 1993, provides for fixed annual rental payments of $900,000.  At the end of
the ten-year  period,  the Company has the option to acquire the  facilities for
$8,500,000, or to pay a $500,000 termination fee and relinquish the operation of
the facilities to the lessor. On the effective date of the lease, the subsidiary
paid  $1,200,000  to the lessor for a covenant  not-to-compete  which remains in
force through June 2003.

  Effective  October  1, 1994,  a  subsidiary  of the  Company  entered  into an
agreement  with a related  party to lease a 100 bed  long-term  care facility in
Florida  for a period of ten  years.  The lease  agreement  provides  for annual
rental  payments  of  $551,250  in the  initial  twelve-month  period and annual
increases  of 2%  thereafter.  The  Company  has  the  option  to  exercise  two
consecutive five-year lease renewals. The Company also has the right to purchase
the facility at fair market value at any time after the fifth anniversary of the
commencement  of the lease.  The lease  agreement  also  required the Company to
escrow funds equal to three months' base rent.

  Effective April 1, 1995, a subsidiary of the Company entered into an agreement
with  Meditrust to lease a 100-bed  long-term care facility in Ohio for a period
of ten years.  The lease  agreement  provides  for  annual  rental  payments  of
$698,400 in the initial  twelve-month  period.  The Company is also  required to
make additional  rental  payments  beginning April 1, 1996 in an amount equal to
5.0%  of the  difference  between  the  facility's  operating  revenues  in each
applicable year and the operating revenues in the twelve-month base period which
commenced on April 1, 1995. The annual  additional  rent payment will not exceed
$14,650.  At the end of the initial lease period,  the Company has the option to
exercise two consecutive  five-year lease  renewals.  The Company's  obligations
under the lease are  collateralized  by, among other things,  an interest in any
property  improvements  made by the  Company  and by a  second  position  on the
facility's accounts  receivable.  The Company also has the right to purchase the
facility at its fair market value on the eighth and tenth  anniversary  dates of
the commencement of the lease and at the conclusion of each lease renewal.

  Effective  January  1, 1996,  a  subsidiary  of the  Company  entered  into an
agreement with Meditrust to lease seven facilities with a total of 820 beds. The
lease agreement provides for annual rental payments of $4,582,500 in the initial
twelve-month  period and annual increases based on changes in the consumer price
index  thereafter.  The  lease  has an  initial  term  of  ten  years  with  two
consecutive  five-year renewal terms  exercisable at the Company's  option.  The
Company's obligations under the lease are collateralized by, among other things,
an interest  in any  property  improvements  made by the Company and by a second
position on the related facilities' accounts receivable. In conjunction with the
lease,  the  Company  was  granted  a right of first  refusal  and an  option to
purchase the  facilities as a group,  which option is  exercisable at the end of
the eighth year of the initial term and at the  conclusion of each renewal term.
The purchase  option is  exercisable  at the greater of the fair market value of
the facilities at the time of exercise or Meditrust's original investment.

  Effective  January  1, 1996,  a  subsidiary  of the  Company  entered  into an
agreement with Meditrust to lease six long-term care  facilities with a total of
537 licensed  beds in New  Hampshire.  The lease  agreement  provides for annual
rental  payments of  $2,324,000  in the initial  twelve-month  period and annual
rental  increases based on changes in the consumer price index  thereafter.  The
lease has an initial term of ten years with two  consecutive  five-year  renewal
terms exercisable at the Company's option.  The Company's  obligations under the
lease are  collateralized  by, among other  things,  an interest in any property
improvements  made  by the  Company  and by a  second  position  on the  related
facilities' accounts receivable.  In conjunction with the lease, the Company was
granted a right of first  refusal and an option to purchase the  facilities as a
group,  which is  exercisable  at the end of the eighth year of the initial term
and at the conclusion of each renewal term.  The purchase  option is exercisable
at the greater of 90% of the fair market value of the  facilities at the time of
exercise or Meditrust's original investment.  In connection with this lease, the
Company  received a cash payment of $3,685,000 from Meditrust which was recorded
as deferred income and is being  amortized over the ten-year  initial lease term
as a reduction of rental expense.

  The  Meditrust  leases  contain   cross-default  and   cross-collateralization
provisions.  A default by the Company under one of these leases could  adversely
affect a significant number of the Company's  properties and result in a loss to
the Company of such  properties.  In addition,  the leases  permit  Meditrust to
require the Company to purchase the facilities upon the occurrence of a default.

  Effective  March  1,  1997,  the  Company  entered  into an  agreement  with a
non-affiliated  party to lease  one  long-term  care  facility  with 163 beds in
Baltimore,  Maryland for a period of ten years. The lease agreement provides for
fixed  annual  rental  payments of $900,000 for the first three years and annual
increases based on changes in the consumer price index thereafter.  From July 1,
1999 through August 28, 2000, the Company has the option to acquire the facility
for  $10,000,000.  After  August 28,  2000,  the  purchase  price  escalates  in
accordance with a schedule. On the effective date of the lease, the Company paid
$1,000,000  to the lessor in  exchange  for the  purchase  option.  This  option
payment is being amortized over the life of the lease.

  As of August 1, 1997, the Company acquired four long-term care facilities with
401 beds in  Massachusetts.  The Company  financed this  acquisition  through an
operating  lease with a real estate  investment  trust (the  "REIT").  The lease
provides for annual rental  payments of  $1,576,000 in the initial  twelve-month
period  and  annual  increases  based on changes  in the  consumer  price  index
thereafter.  The lease has an initial term of ten years with,  at the  Company's
option,  eight  consecutive  five-year  renewal terms.  In conjunction  with the
lease,  the  Company  was  granted  a right of first  refusal  and an  option to
purchase the  facilities as a group,  which option is  exercisable at the end of


                                       33
<PAGE>

the initial lease term and at the  conclusion of each renewal term. The purchase
option is  exercisable at the fair market value of the facilities at the time of
exercise.

  On August 28,  1997,  the  Company  obtained  a  five-year  synthetic  leasing
facility (the "Leasing Facility") from the same group of banks that provided the
"Credit  Facility"  (See Note H).  The  Company  used  $23,600,000  of the funds
available   through  the  Leasing  Facility  to  acquire  three  long-term  care
facilities with 341 beds in Dayton,  Ohio in September 1997.  Acquisitions  made
through the Leasing Facility were accounted for financial  reporting purposes as
operating  leases  with an initial  lease term which  would have  expired at the
expiration  date of the leasing  facility.  Annual rent for properties  acquired
through the Leasing  Facility was determined  based on the purchase price of the
facilities  acquired and an interest rate factor which varied with the Company's
leverage  ratio (as defined) and which was based on LIBOR,  or at the  Company's
option, the agent bank's prime rate.

  As of December 1, 1997, the Company  acquired five  long-term care  facilities
with 684 beds in Connecticut.  The Company financed this acquisition  through an
operating lease from the seller. The lease provides for an initial annual rental
payment of $7,491,000  and,  beginning in the third lease year,  certain  annual
rent increases  based on changes in the consumer price index,  but not to exceed
$30,000  per year.  The  lease has an  initial  term of ten years  with,  at the
Company's option, three one-year extensions.  In conjunction with the lease, the
Company  was  granted  an  option  to  purchase  the  facilities  as a group  at
predetermined  purchase  prices  between eight and thirteen years post the lease
commencement.

 On April 1, 1998,  the Company  acquired two  facilities  with 248 beds in Ohio
through  the  Leasing  Facility,  and on May 8, 1998 the  Company  acquired  two
facilities  with 267 beds in Rhode  Island  through  the Leasing  Facility.  The
Company  used a total of  $35,650,000  of funds  available  through  the Leasing
Facility to acquire these four facilities.

  In connection  with the Merger on August 11, 1998,  the Company  exercised its
rights to  purchase  all seven of the  facilities  it had  acquired  through the
Leasing Facility for an aggregate amount equal to $59,250,000.

 Under the terms of each of the facility leases  described above, the Company is
responsible  for the payment of all real estate and personal  property taxes, as
well as other reasonable costs required to operate,  maintain, insure and repair
the facilities.

 Future minimum rent commitments  under the Company's  non-cancelable  operating
leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S>          <C>              <C>            <C>
              Real Estate      Equipment          Total


      2000   $ 21,508,000   $  1,668,000   $ 23,176,000
      2001     21,694,000      1,403,000     23,097,000
      2002     21,883,000        505,000     22,388,000
      2003     21,626,000        167,000     21,793,000
      2004     20,840,000           --       20,840,000
Thereafter     37,598,000           --       37,598,000
             ------------   ------------   ------------
             $145,149,000   $  3,743,000   $148,892,000
             ============   ============   ============
</TABLE>

H. LONG-TERM DEBT

  The Company has a mortgage  payable to Meditrust in the amount of  $16,110,000
at December 31, 1999. The Meditrust debt is  cross-collateralized  by the assets
of four of the Company's facilities (the "Four Facilities").  The Meditrust debt
bears interest at the annual rate of 10.65%.  Additional  interest  payments are
also required in an amount equal to 0.3% of the difference between the operating
revenues  of the Four  Facilities  in each  applicable  year  and the  operating
revenues  of the  Four  Facilities  during  a  twelve-month  base  period  which
commenced  October 1, 1995. The loan  agreement  with  Meditrust  places certain
restrictions on the Four Facilities;  among them, the agreement  restricts their
ability to incur additional debt or to make significant  dispositions of assets.
The Four Facilities are also required to maintain a debt service  coverage ratio
of at least 1.2 to 1.0 (as defined in the loan agreement) and a current ratio of
at least 1.0 to 1.0. The Meditrust Loan agreement  contains a prepayment penalty
calculated in accordance with a formula.

  A subsidiary of the Company  assumed a first mortgage note (the "Note") with a
remaining  balance of $1,775,000 as part of the  acquisition of a long-term care
facility in 1988.  The Note  requires the annual  retirement of principal in the
amount of $20,000.  The  Company  pays  interest  monthly at the rate of 14% per
annum on the outstanding  principal  amount until maturity in October 2010, when
the  remaining  unpaid  principal  balance  of  $1,338,000  is due.  The Note is
collateralized by the property and equipment of the facility.

  In April of 1997,  the Company  obtained a  three-year  $25,000,000  revolving
credit facility (the "Credit  Facility")  from a commercial  bank. On August 28,
1997, the Company amended the Credit Facility to add additional banks as parties
to the Credit  Facility,  extended  the  maturity to five years and made certain
additional  amendments  to the terms of the  agreement.  Borrowings  under  this
facility were  collateralized  by patient  accounts  receivable and certain real
estate. The assets which  collateralized the Credit Facility also collateralized
the Company's obligation under the Leasing Facility.  The facility was scheduled
to mature in  September  2002 and  provided  for prime and LIBOR  interest  rate
options which varied with the Company's leverage ratio (as defined).

  On August 11, 1998, in connection with the Merger,  the Company entered into a
new,  six year  $250,000,000  collateralized  credit  facility  (the "New Credit
Facility").  The terms of the New Credit Facility provide up to $75 million on a
revolving  credit basis plus an additional  $175 million  initially  funded on a
revolving  basis  that  convert  to a term  loan  on an  annual  basis  on  each
anniversary of the closing.  If for any year beginning  after December 31, 1999,
the Company  shall  generate  Excess Cash Flow (as defined),  then,  50% of such
Excess Cash Flow shall be applied toward the repayment of outstanding borrowings
under the New  Credit  Facility.  During  the first four years of the New Credit
Facility,  up to  $250,000,000  may be used in connection  with synthetic  lease
financing.  Proceeds  of the  loans  may be used for  working  capital,  capital
expenditures,  acquisitions  and  general  corporate  purposes.  The New  Credit


                                       34
<PAGE>

Facility  is  collateralized  by  substantially  all  of the  Company's  patient
accounts receivable, certain real estate and a first or second priority interest
in the capital stock of certain of the Company's subsidiaries. Interest is based
on either LIBOR or prime rates of interest (plus applicable  margins  determined
by the leverage ratio), at the election of the Company, and ranged from 8.70% to
10.0% at December 31, 1999.  The New Credit  Facility  requires that the Company
maintain  an  interest/rent  coverage  ratio  which  varies by year,  and limits
aggregate  borrowings under the New Credit Facility to a predetermined  multiple
of EBITDA.  The New Credit Facility  contains a number of restrictive  covenants
that,  among other things,  restrict the Company's  ability to incur  additional
indebtedness,  prohibit the disposition of certain  assets,  limit the Company's
ability to make  capital  expenditures  in excess of  pre-determined  levels and
limits the ability of the Company to declare and pay certain dividends.

  During the first quarter of 1999, the Company  determined that its anticipated
financial  results  for  that  quarter  would  cause  the  Company  to be out of
compliance  with  certain  financial  covenants  of  the  New  Credit  Facility.
Accordingly,  the  Company  obtained  an  amendment  to the New Credit  Facility
effective March 30, 1999 which limits  borrowings  under the New Credit Facility
to  an  aggregate  of  $58,500,000  (exclusive  of  undrawn  letters  of  credit
outstanding  as  of  March  30,  1999)  and  which  modifies  certain  financial
covenants.   Access  to  additional  borrowings  for  acquisitions  and  general
corporate purposes under the New Credit Facility are permitted to the extent the
Company achieves  certain  financial  targets.  The amendment allows the Company
access  to  the  entire  $250  million  facility  if  the  Company's   operating
performance  returns to the level of  compliance  contemplated  by the  original
financial  covenants.  As of December  31,  1999,  the  Company had  outstanding
$32,750,000 in revolving loans and  $13,700,000 in synthetic  lease  financings,
and had $8,967,000 of remaining availability under the New Credit Facility.

  In  connection  with the  Merger  on  August  11,  1998,  the  Company  issued
$170,000,000  principal  amount at  maturity  (approximately  $99,500,000  gross
proceeds)  of 11% Senior  Subordinated  Discount  Notes Due 2008 (the  "Discount
Notes").  Each Discount  Note was issued with a principal  amount at maturity of
$1,000 and an original  issue price of $585.25.  Interest on the Discount  Notes
accretes in accordance  with a predetermined  formula on a semi-annual  basis on
February  1, and August 1, of each year.  Cash  interest  will not accrue on the
Discount Notes until August 1, 2003. Thereafter,  interest on the Discount Notes
will be paid  semi-annually  in arrears  in cash on  February 1 and August 1, of
each year commencing  February 1, 2004. The Discount Notes will be redeemable in
whole or in part,  at the option of the Company on or after August 1, 2003 based
on a predetermined  redemption schedule which begins on August 1, 2003 at 105.5%
and which  declines  incrementally  to 100% on August 1, 2006. In addition,  the
Company may redeem up to 35% of the aggregate  outstanding accreted value of the
Discount Notes at a redemption price of 111% of accreted value at any time prior
to August  1,  2001 with the  proceeds  of a public  offering  of common  stock,
provided that the redemption  occurs within 60 days of the closing of the public
offering and that at least 65% of the aggregate principal amount of the Discount
Notes remains outstanding  immediately after such redemption.  At any time on or
prior to August 1, 2003,  the Discount Notes may be redeemed in whole but not in
part at the option of the Company upon the occurrence of a Change of Control (as
defined) in accordance  with the  prescribed  procedures  and the payment of any
Applicable Premium (as defined). The Discount Notes must be redeemed in whole on
August 1, 2008.

  Upon any voluntary or involuntary  liquidation of the Company,  holders of the
Discount Notes will be entitled to be paid in full 100% of principal and accrued
interest out of the assets  available for  distribution  after holders of senior
debt  have  been  paid in full.  The debt  evidenced  by the  Discount  Notes is
unsecured,  subordinate  to existing and future senior debt of the Company,  but
senior in right with all existing and future  subordinated  debt of the Company.
Certain of the subsidiaries of the Company have jointly and severally guaranteed
the Company's  payment  obligations  (subject to maximum amounts per subsidiary)
under the Discount  Notes (See Note Q). Each  Discount  Note  guaranteed by such
subsidiary is  subordinated  to any Senior Debt of such  guarantor.  The Company
derives substantially all of its income from operations through its subsidiaries
and  consequently,  the  Discount  Notes  are  effectively  subordinated  to the
potential  claims  of  creditors  of  all  of the  subsidiaries  of the  Company
irrespective of subsidiary  guarantees.  The Discount Notes also contain certain
restrictive  covenants  which  limit the  ability of the  Company to incur debt,
issue preferred stock, merge or dispose of substantially all of its assets.

  Interest  expense charged to operations for the years ended December 31, 1997,
1998 and 1999 was $6,681,000, $12,447,000 and $21,678,000, respectively.

  As of December 31, 1998 and 1999, the Company's long-term debt,  excluding the
current portion, consisted of the following:
<TABLE>
<CAPTION>
<S>                                     <C>             <C>
                                             1998             1999
                                        -------------   -------------


Senior subordinated discount notes .... $ 104,076,000   $ 115,847,000
Mortgages payable .....................    17,647,000      17,421,000
Credit facility .......................    12,750,000      32,750,000
                                        -------------   -------------
                                        $ 134,473,000   $ 166,018,000
</TABLE>


  As of December 31, 1999, future long-term debt maturities  associated with the
Company's debt are as follows:
<TABLE>
<CAPTION>
           <S>              <C>
           2000           $      227,000
           2001                  247,000
           2002                  273,000
           2003                  302,000
           2004               47,910,000
           Thereafter        117,286,000
                             -----------
                            $166,245,000
</TABLE>

  Substantially all of the Company's assets are subject to liens under long-term
debt or operating lease agreements.



                                       35
<PAGE>

I.  CAPITAL LEASE OBLIGATION

  On July 1, 1996, a subsidiary of the Company began leasing four long-term care
facilities in Ohio (the "Cleveland Facilities"). These leases were accounted for
as capital leases as a result of a bargain  purchase  option  exercisable at the
end of the lease.  The  initial  term of the leases is five years and during the
final six months of the initial term,  the Company  could  exercise an option to
purchase  the  Cleveland  Facilities  for a total price of  $57,125,000.  If the
Company exercised the purchase option but was unable to obtain financing for the
acquisition,  the lease could be extended for up to two additional years, during
which time the Company would have to obtain  financing and complete the purchase
of the facilities.  The annual rent under the agreement is $5,000,000 during the
initial  term and  $5,500,000  during the  extension  term.  The Company is also
responsible for facility  expenses such as taxes,  maintenance and repairs.  The
Company agreed to pay $8,000,000 for an option to purchase these facilities.  Of
this amount,  $5,000,000  was paid prior to the closing on July 1, 1996, and the
remainder,  $3,000,000,  was due at the end of the initial lease term whether or
not the Company exercised its purchase option. Upon the exercise of the purchase
option, the option payments would be applied towards the purchase price.

  Each of these leases is guaranteed by the Company.  The guaranty provides that
failure by the Company to have a specified minimum consolidated net worth at the
end of any two  consecutive  quarters is an event of default under the guaranty,
which in turn would be an event of default  under each  lease.  During the third
quarter of 1999,  the Company  recorded a $5.7 million  restructuring  charge to
terminate  its  contracts  to  provide   rehabilitation   therapy   services  to
non-affiliated  long-term  care  facilities  (See  Note P).  As a result of this
restructuring  charge, the Company's  consolidated net worth as of September 30,
1999 (as  calculated  for  purposes of this  requirement)  had fallen  below the
required level. The Company  anticipated that its net worth would continue to be
below the required  level at December 31, 1999, as a result of which the Company
would  have been in  default  under  each of the leases and could have faced the
loss of these operations.  Such default could also have triggered cross-defaults
under the Company's other lease and debt obligations.

  In  December  of 1999,  the  Company  paid $5 million to the  landlord  of the
Cleveland  Facilities and obtained an option (the "New Option") to acquire these
facilities. The Company borrowed $5 million from an affiliate of Investcorp S.A.
to fund this payment. The New Option allows the Company to exercise its right to
purchase  the  Cleveland  Facilities  as of the date of the New  Option.  If the
Company  does not  exercise  the New  Option  by March 31,  2000,  but has taken
certain  steps to obtain  financing  for this  acquisition  (as  detailed in the
agreement),  the Company may extend its right to exercise  the New Option  until
June 30, 2000, with closing  required prior to December 31, 2000. The New Option
provides a waiver of the net worth requirement until the earlier of the lapse of
the New Option or  December  31,  2000.  The  Company  intends to extend the New
Option  through June 30, 2000 and exercise the New Option by June 30, 2000.  The
Company then intends to assign its purchase rights to an affiliate of Investcorp
S.A. and enter into an operating  lease of the Cleveland  Facilities by December
31, 2000.  The $5 million  payment made to obtain the New Option will be applied
to the purchase price of the  facilities,  or farfeited if the acquistion is not
completed.  If the Company  cannot  complete the  refinancing  of the  Cleveland
Facilities  by December 31, 2000,  the Company would also be required to make an
additional  payment  of $3  million  to the  landlord,  and  the  Company  could
potentially  face the loss of the Cleveland  Facilities.  Although no assurances
can be  given  in this  regard,  the  Company  believes  that it will be able to
complete the  refinancing of the Cleveland  Facilities  within the required time
period.

  The following is a schedule of future minimum lease payments  required by this
lease together with the present value of the minimum lease payments:
<TABLE>
<CAPTION>
              <S>                                         <C>
              2000                                         $   5,000,000
              2001                                            57,625,000
                                                             -----------
                                                              62,625,000
Less amount representing interest                             (7,925,000)
                                                             -----------
                                                              54,700,000
Less current portion                                         (4,633,000)
                                                             -----------
Long-term portion of capital lease obligation                $50,067,000
                                                             ===========
</TABLE>

J. RETIREMENT PLANS

  The Company  maintains  an employee  401(k)  defined  contribution  plan.  All
employees  who have worked at least one thousand  hours and have  completed  one
year of continuous  service are eligible to participate in the plan. The plan is
subject to the  provisions  of the Employee  Retirement  Income  Security Act of
1974.  Employee  contributions  to this plan may be matched at the discretion of
the Company.  The Company contributed  $365,000 and $475,000 to the plan in 1997
and 1998. There were no contributions made to the plan in 1999.

  In September 1995, the Company established a Supplemental Executive Retirement
Plan (the "SERP") to provide  benefits to key employees.  Participants may defer
up to 25% of their compensation which is matched by the Company at a rate of 50%
(up to 10% of base salary). Vesting in the matching portion occurs in January of
the second year following the plan year in which contributions were made.

K. INCOME TAXES

  As required by SFAS No. 109, the Company  annually  evaluates the positive and
negative evidence bearing upon the realizability of its deferred tax assets. Thc
Company has  considered  the recent and  historical  results of  operations  and
concluded,  in accordance with the applicable accounting methods that it is more
likely than not that a certain  portion of the  deferred  tax assets will not be
realizable.  To the extent  that an asset will not be  realizable,  a  valuation
allowance is established.  The tax effects of temporary  differences giving rise
to deferred tax assets as of December 31,1998 and 1999 are as follows:


                                       36
<PAGE>

<TABLE>
<CAPTION>
<S>                                     <C>           <C>
                                               1998          1999
                                        -----------   -----------
Deferred tax assets:

     Reserves .......................   $ 4,024,000   $ 2,288,000
     Rental payments ................       703,000       770,000
     Interest payments ..............     1,578,000     6,007,000
     Net operating loss carryforwards          --       5,778,000
     Other ..........................         8,000        23,000
     Valuation allowance.............          --        (614,000)
                                        -----------   -----------
Total deferred tax assets ...........   $ 6,313,000   $14,252,000
                                        ===========   ===========
</TABLE>

Significant components of the provision (benefit) for income taxes for the years
ended December 31, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
<S>                                       <C>           <C>
                                                1998            1999
                                                ----            ----
Current:

     Federal                              $   (781,000) $   (2,784,000)
     State                                    (146,000)         418,000
                                           ------------  --------------
Total current                                 (927,000)     (2,366,000)
                                           ------------  --------------

Deferred:
     Federal                                (3,447,000)     (6,277,000)
     State                                    (646,000)     (1,661,000)
                                          ------------  ---------------
Total deferred                              (4,093,000)     (7,938,000)
                                           ------------ ---------------

Total income tax expense (benefit)        $ (5,020,000)  $ (10,304,000)
                                          =============  ==============
</TABLE>

  The  reconciliation  of income tax computed at  statutory  rates to income tax
(benefit) for the years ended December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
                                                              1998                1999
                                                              ----                ----


<S>                                              <C>              <C>      <C>            <C>
Statutory rate                                   $(10,222,000)    (35.0)%  $ (9,767,000)  (35.0)%
State income tax, net of federal benefit             (515,000)     (1.8)       (808,000)   (2.9)
Permanent differences                                  59,000       0.2          41,000     0.2
Net operating loss - rate differential                     -         -          230,000     0.8
Nondeductible merger costs - permanent              5,658,000      19.4             -        -
                                                 --------------   ------   ------------  --------

                                                 $  (5,020,000)  (17.2)%   $(10,304,000)  (36.9)%
                                                 ==============  =======   ============  ========
</TABLE>

L.  CAPITAL STOCK

Common Stock

  On August 11,  1998,  as a result of the Merger,  the Company  authorized  the
issuance of 500,000 shares of preferred stock with a par value of $.01 per share
(the  "Preferred  Stock") and 19,000,000  shares  (comprised of five classes) of
common stock, each with a par value of $.01 per share,  consisting of Harborside
Class A Common Stock, Harborside Class B Common Stock, Harborside Class C Common
Stock,   Harborside  Class  D  Common  Stock  and  Common  Stock   (collectively
"Harborside Common Stock").

  The numbers of shares of Harborside Common Stock authorized and outstanding as
of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
<S>                                                   <C>                <C>
Title                                           Authorized Shares   Outstanding Shares

Harborside Class A Common Stock ..............        1,200,000          661,332
Harborside Class B Common Stock ..............        6,700,000        5,940,000
Harborside Class C Common Stock ..............        1,580,000          640,000
Harborside Class D Common Stock ..............           20,000           20,000
Common Stock .................................        9,500,000             --
                                                     ----------       ----------
     Total ...................................       19,000,000        7,261,332
                                                     ==========       ==========
</TABLE>

  Holders of shares of  Harborside  Class A Common  Stock and  Common  Stock are
entitled  to one vote per share on all matters as to which  stockholders  may be
entitled to vote  pursuant  to  Delaware  General  Corporate  Law ("the  DGCL").
Holders of shares of  Harborside  Class D Common Stock are entitled to 330 votes
per  share on all  matters  as to which  stockholders  may be  entitled  to vote
pursuant  to the DGCL.  This  number of votes per share  results  in  holders of
Harborside  Class D Common Stock, as of December 31, 1999, being entitled in the
aggregate to a number of votes equal to the total number of  outstanding  shares
of  Harborside  Class B  Common  Stock,  Harborside  Class C  Common  Stock  and
Harborside  Class D Common Stock as of December 31, 1999.  Holders of Harborside
Class B Common Stock or Harborside Class C Common Stock will not have any voting
rights,  except  that the  holders of the  Harborside  Class B Common  Stock and
Harborside  Class C Common  Stock  will have the right to vote as a class to the
extent required under the laws of the State of Delaware.

                                       37
<PAGE>

  Upon the occurrence of a sale of 100% of the outstanding  equity securities or
substantially  all of the assets of the  Company,  a merger as a result of which
the ownership of the  Harborside  Common Stock is changed to the extent of 100%,
or a public  offering of any equity  securities  of the  Company,  each share of
Harborside  Class A Common Stock,  Harborside  Class B Common Stock,  Harborside
Class C Common Stock and  Harborside  Class D Common Stock will convert into one
share of Common Stock of the Company.

Preferred Stock

  In connection  with the Merger on August 11, 1998,  the Company  issued 40,000
shares of 13.5%  Exchangeable  Preferred  Stock  (the  "Preferred  Stock").  The
holders  of the  Preferred  Stock are  entitled  to receive  quarterly  dividend
payments in arrears beginning November 1, 1998. Dividends are payable in cash or
in additional  shares of Preferred  Stock,  at the option of the Company,  until
August 1, 2003. After August 1, 2003, dividends may be paid only in cash. During
the years ended December 31, 1998 and 1999, all dividends  except for fractional
shares  amounting to $3,000 and $20,000,  respectively,  were paid in additional
shares. The Preferred Stock may be redeemed for cash by the Company, in whole or
in part,  at the  option of the  Company,  in  accordance  with a  predetermined
redemption  premium  schedule  which  begins on August 1, 2003 at 106.75% of the
liquidation  preference  of the Preferred  Stock at the date of  redemption  and
which  declines  to 100% on August 1, 2006.  In  addition,  at any time prior to
August 1, 2001 the  Company  may  redeem up to 35% of the  Preferred  Stock at a
redemption price equal to 113.5% of the liquidation  preference of the Preferred
Stock at the date of redemption with the proceeds of a public offering of common
stock, provided that the redemption occurs within 60 days of the closing of such
offering.  At any time  prior to  August 1,  2003,  the  Preferred  Stock may be
redeemed by the  Company,  in whole but not in part,  upon the  occurrence  of a
change in control (as defined) and in accordance with prescribed  procedures and
the  payment  of a  premium  based  upon  a  formula.  The  Preferred  Stock  is
exchangeable  in whole but not in part,  on any dividend  date, at the option of
the Company, into 13.5% Exchange Debentures due in 2010 subject to such exchange
being  permitted  by (1) the  terms of the  Indenture  and (2) the  terms of the
Company's Credit Facility. The Company is required to redeem the Preferred Stock
in whole on August 1, 2010.

  Upon any voluntary or involuntary  liquidation of the Company,  holders of the
Preferred  Stock will be  entitled  to be paid out of the assets  available  for
distribution,  the liquidation  preference per share plus an amount equal to all
accumulated and unpaid dividends, before any distribution is made to the holders
of Harborside Common Stock. Holders of the Preferred Stock have no voting rights
except those provided by law and as set forth in the  Certificate of Designation
(the "Certificate").  The Certificate provides that if the Company fails to meet
certain  obligations  associated  with the  Preferred  Stock,  then the Board of
Directors  shall be  adjusted  to allow the  holders of a  majority  of the then
outstanding  Preferred  Stock,  voting  separately  as a  class,  to  elect  two
directors.  Voting rights  associated  with the failure to meet Preferred  Stock
obligations will continue until either the obligation is satisfied or a majority
of the holders of the then outstanding Preferred Stock waive the satisfaction of
the obligation. The Certificate also contains certain restrictive covenants that
limit the Company's  restricted  subsidiaries  from making  certain  payments or
investments and which limit the Company's ability to incur debt, issue preferred
stock, merge or dispose of substantially all of its assets.

  As of December  31,  1999,  Preferred  Stock  dividends  accrete  based on the
following schedule:

         2000      $6,857,000
         2001       7,830,000
         2002       8,942,000
         2003       5,782,000

 Earnings (Loss) per Common Share Computation

  In February 1997, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards  (SFAS No. 128),  "Earnings  Per Share",  which
revised the methodology of calculating  earnings per share.  The Company adopted
SFAS No. 128 in the fourth quarter of 1997. All earnings (loss) per common share
amounts  for all periods  have been  presented  in  accordance  with,  and where
appropriate  have been restated to conform with,  the  requirements  of SFAS No.
128.

  Basic  earnings  (loss) per common  share is computed  by dividing  net income
(loss) less Preferred Stock  dividends by the weighted  average number of common
shares outstanding.  The computation of diluted earnings per share is similar to
that of basic  earnings  per share  except  that the number of common  shares is
increased to reflect the number of additional common shares that would have been
outstanding if the dilutive  potential  common shares had been issued.  Dilutive
potential common shares for the Company consist of shares issuable upon exercise
of the Company's stock options.

                                       38
<PAGE>


 The following  table sets forth the  computation of basic and diluted  earnings
(loss) per common share for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
<S>                                                                         <C>            <C>             <C>
                                                                                    1997           1998            1999
                                                                            ------------   ------------    ------------
Numerator:

     Net income (loss) ..................................................   $  6,803,000   $(24,187,000)   $(17,601,000)
     Preferred Stock dividends ..........................................           --       (2,296,000)     (6,004,000)
                                                                            ------------   ------------    ------------
     Income (loss) available for common shares ..........................   $  6,803,000   $(26,483,000)   $(23,605,000)
                                                                            ============   ============    ============

Denominator:
     Denominator for basic earnings (loss) per common share -
     weighted average shares ............................................      8,037,026      7,742,000       7,261,000
     Effect of dilutive securities - employee stock options .............        101,767           --              --
                                                                            ------------   ------------    ------------

     Denominator for diluted earnings (loss) per common share -
     Adjusted weighted - average shares and assumed conversions                8,138,793      7,742,000       7,261,000
                                                                            ============   ============    ============

     Basic earnings (loss) per common share .............................   $       0.85   $      (3.42)   $      (3.25)
     Diluted earnings (loss) per common share ...........................   $       0.84   $      (3.42)   $      (3.25)
</TABLE>

  For the  years  ended  December  31,  1998  and  1999,  675,499  and  637,226,
respectively,  of stock options were not included in the  computation of diluted
EPS because to do so would have been antidilutive.

Stock Option Plans

   During 1996, the Company  established two stock option plans,  the 1996 Stock
Option  Plan for  Non-employee  Directors  (the  "Director  Plan")  and the 1996
Long-Term Stock Incentive Plan (the "Stock Plan").  Directors of the Company who
were not employees,  or affiliates of the Company,  were eligible to participate
in the  Director  Plan.  On the date of the IPO,  each of the four  non-employee
directors was granted  options to acquire 15,000 shares of the Company's  common
stock at the IPO price.  On January 1 of each year, each  non-employee  director
received an  additional  grant for 3,500  shares at the fair market value on the
date of grant.  Options issued under the Director Plan became exercisable on the
first  anniversary of the date of grant and  terminated  upon the earlier of ten
years  from date of grant or one year from date of  termination  as a  director.
Through the Directors Retainer Fee Plan,  non-employee  directors of the Company
could also elect to receive all or a portion of their director fees in shares of
the Company's  common stock.  The Stock Plan was  administered by the Stock Plan
Committee of the Board of Directors which was composed of outside  directors who
were not eligible to  participate  in this plan.  The Stock Plan  authorized the
issuance  of  non-qualified  stock  options,   incentive  stock  options,  stock
appreciation  rights,  restricted stock and other  stock-based  awards.  Options
granted  during the years ended  December  31, 1996 and 1997,  were granted with
exercise  prices  equal to or greater than the fair market value of the stock on
the date of grant.  Options  granted  under the stock plan  during 1996 and 1997
vested over a three-year  period and had a maximum term of ten years.  A maximum
of 800,000 shares of common stock were reserved for issuance in connection  with
these plans.

  In  connection  with the  Merger,  all holders of options  issued  through the
Director  Plan and the Stock  Plan had the right to retain  their  options or to
have their options  converted into cash at $25.00 per underlying  share less the
applicable  exercise  price (and taxes  required to be withheld by the Company).
Holders of options  representing  options to  purchase  109,994  shares of stock
retained  their  options  while the  remainder  (representing  648,923  options)
exercised their right to convert their options into cash. The Company recognized
a  compensation  charge of $8,011,066  in connection  with the exercise of these
options into cash. This charge was included as part of the Merger Costs recorded
by the Company in 1998 (See Note B).

  In connection with the Merger,  the Company adopted the Harborside  Healthcare
Corporation  Stock  Incentive Plan (the "Stock Option  Plan").  The Stock Option
Plan is  administered  by the Board of Directors  of the  Company.  The Board of
Directors  designates which employees of the Company will be eligible to receive
awards under the Stock Option Plan, and the amount,  timing, and other terms and
conditions applicable to such awards. Options will expire on the date determined
by the  Board of  Directors,  which  will not be later  than 30 days  after  the
seventh anniversary of the grant date. Optionees will have certain rights to put
to the  Company,  and the  Company  will  have  certain  rights to call from the
optionee,  vested stock options upon  termination of the  optionee's  employment
with the Company prior to an initial public offering.  All options granted under
the Stock Option Plan during 1998 were  granted with an exercise  price equal to
$25.00,  equal  to the fair  market  value  of the  stock on the date of  grant.
Options  granted  under the Stock  Option  Plan during 1998 vest at the end of a
seven year period or earlier if certain financial  performance criteria are met.
In the case of a public offering of the Company's common stock, unvested options
as of the date of such a public  offering  would continue to vest ratably over a
three year period.  A maximum of 806,815  shares have been reserved for issuance
in connection with the Stock Option Plan.


                                       39
<PAGE>




  Information with respect to options granted under the Director Plan, the Stock
Plan and the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
<S>                                 <C>          <C>                <C>
  Options Outstanding:                Number       Exercise Price    Weighted-Average
                                      of Shares        Per Share      Exercise Price

Balance at December 31, 1996         499,000      $  8.15 - $11.75        $11.14
--------------------------------------------------------------------------------
Granted                              227,500      $ 11.69 - $18.69        $12.66
Exercised                            (8,665)      $ 11.75                 $11.75
Cancelled                           (52,334)      $ 11.75 - $12.00        $11.80
--------------------------------------------------------------------------------
Balance at December 31, 1997         665,501      $  8.15 - $18.69        $11.59
Granted                              704,246      $ 19.50 - $25.00        $21.41
Exercised                           (651,422)     $  8.15 - $21.69        $12.87
Cancelled                            (42,826)     $ 11.75 - $25.00        $23.35
Balance at December 31, 1998         675,499      $  8.15 - $25.00        $23.06
--------------------------------------------------------------------------------
Granted                                    -              -                  -
================================================================================
Exercised                                  -              -                  -
Cancelled                            (38,273)     $ 25.00                 $25.00
================================================================================
Balance at December 31, 1999         637,226      $  8.15 - $25.00        $22.94
================================================================================
</TABLE>

  As of December 31, 1996 no options to purchase shares of the Company's  common
stock were exercisable.  As of December 31, 1997, there were 187,000 exercisable
options at a weighted-average  exercise price of $11.20. As of December 31, 1998
and 1999 there were 109,994 exercisable  options at a weighted-average  exercise
price of $13.07.

  In 1996,  the  Company  adopted  SFAS No.  123,  "Accounting  for  Stock-Based
Compensation."   SFAS  No.  123  requires  that   companies   either   recognize
compensation  expense  for  grants of stock,  stock  options,  and other  equity
instruments  based on fair value, or provide pro forma  disclosure of net income
and earnings per share in the notes to the financial statements. The Company has
adopted the  disclosure  provisions of SFAS No. 123, and has applied  Accounting
Principles  Board Opinion No. 25 and related  interpretations  in accounting for
its plans.  Accordingly,  no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's  stock-based  compensation
plans been  determined  based on the fair value at the grant dates as calculated
in accordance  with SFAS No. 123, the  Company's  unaudited pro forma net income
and pro forma net income per share for the years ended  December 31, 1997,  1998
and 1999 would have been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
<S>          <C>           <C>            <C>              <C>             <C>              <C>
                1997             1997            1998           1998            1999           1999
                ----             ----            ----           ----            ----           ----
                             Earnings                     Earnings (loss)                  Earnings (loss)
           Earnings          Available    Earnings (loss)    Available    Earnings (loss)      Available
          Available for     Per Common     Available for    Per Common      Available for    Per Common
          Common Shares    Share Diluted  Common Shares    Share Diluted   Common Shares    Share Diluted
          -------------    -------------  -------------    -------------   -------------    -------------

      As
Reported     $6,803,000    $ 0.84         $(26,483,000)    $(3.42)         $(23,605,000)    $(3.25)

     Pro
   Forma     $5,733,000    $ 0.70         $(29,300,000)    $(3.78)         $(24,027,000)    $(3.31)
</TABLE>

  The weighted  average fair value of options granted was $5.63 and $6.28 during
1997 and 1998,  respectively.  The fair value for each stock option is estimated
on the date of grant  using  the  Black-Scholes  option-pricing  model  with the
following  weighted-average  assumptions:  an expected  life of five  years,  no
dividend yield, and a risk-free interest rate of 6.2% and 5.4% for 1997 and 1998
respectively.  Expected  volatility of 40% and 0% (except for 109,994 in options
held by senior  management;  such options have an assumed volatility of 40%) was
assumed for the years ended December 31, 1997 and 1998, respectively.

M. CONTINGENCIES

  The Company is involved in legal actions and claims in the ordinary  course of
its  business.  It is the  opinion of  management,  based on the advice of legal
counsel,  that such  litigation  and claims  will be resolved  without  material
effect on the Company's consolidated  financial position,  results of operations
or liquidity.

  The Company  self-insures  for health  benefits  provided to a majority of its
employees.  The Company  maintains  stop-loss  insurance such that the Company's
liability for losses is limited. The Company recognizes an expense for estimated
health benefit claims incurred but not reported at the end of each year.

  The Company  self-insures for most workers'  compensation  claims. The Company
maintains  stop-loss  insurance such that the Company's  liability for losses is
limited. The Company accrues for estimated workers' compensation claims incurred
but not reported at the end of each year.

  The Company owns a 75% interest in a partnership which owns one facility.  The
Company accounts for its investment in this partnership using the equity method.
The Company  has  guaranteed  a loan of  approximately  $6,400,000  made to this
partnership  to refinance a loan which funded the  construction  of the facility
and provided  working  capital.  The loan is also  collateralized  by additional
collateral  pledged by the  non-affiliated  partner.  The Partnership  agreement
states that each partner will  contribute  an amount in respect of any liability
incurred by a partner in connection with a guarantee of the partnership's  debt,
so that partners each bear their  proportionate  share of any liability based on
their percentage ownership of the partnership.

                                       40
<PAGE>

N. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

  The methods and  assumptions  used to estimate the fair value of each class of
financial  instruments,  for those  instruments  for which it is  practicable to
estimate that value, and the estimated fair values of the financial  instruments
are as follows:

 Cash and Cash Equivalents

  The carrying  amount  approximates  fair value because of the short  effective
maturity of these instruments.

Note Receivable

 The  carrying  value  of the note  receivable  approximates  its fair  value at
December 31, 1998 and 1999, based on the yield of the note and the present value
of expected cash flows.

 Long-term Debt

  The fair value of the Company's  fixed rate long-term debt is estimated  based
on the quoted  market  prices for the same or similar  issues or on the  current
rates  offered to the  Company  for debt of the same  remaining  maturities.  At
December 31, 1999,  the fair market value of the Company's  Senior  Subordinated
Debt was  approximately  $50,150,000.  The book  value of the  Company's  Senior
Subordinated Debt was $115,847,000. The Company estimates that the fair value of
its remaining fixed rate debt approximates its fair value.

O. RELATED PARTY TRANSACTIONS

 Until  December  31, 1998, a former  affiliate of the Company  provided  office
space,  legal,  tax, data  processing and other  administrative  services to the
Company  in  return  for  a  monthly  fee.  Total  service  charges  under  this
arrangement were $708,000 and $1,291,000,  for the years ended December 31, 1997
and 1998, respectively. Beginning January 1, 1999, the former affiliate provided
only data  processing  and tax services to the Company.  Total  service  charges
under this arrangement were $1,173,000 in 1999.

 At the time of the Merger,  Investcorp International Inc. received a $6,000,000
management  advisory  and  consulting  service fee which is being  expensed on a
straight  line  basis  over the life of the  related  five year  agreement.  The
expense  recognized by the Company in connection with this management  agreement
during the years ended  December 31, 1998 and 1999 was $500,000 and  $1,200,000,
respectively.  As of December 31, 1999,  $1,200,000  of the  unamortized  fee is
classified  in "Prepaid and other  expenses"  while  $3,100,000 is classified as
"Other assets, net".

 In December  1999, an affiliate of Investcorp  S.A.,  provided the Company with
$5,000,000 in financing  under a credit  agreement.  The funds were provided for
purposes  of making an  acquisition  deposit  on  certain  facilities  currently
financed  through a capital  lease (See Note I).  The loan is  payable  one year
after its issuance or earlier (as stipulated in the agreement). Interest is paid
quarterly at current market rates ("Eurodollar base rate").

  As of December 31, 1998 and 1999, the net receivable due from Bowie,  L.P. was
approximately $1.2 million and $2.6 million, respectively.

P. RESTRUCTURING COSTS

 During the third  quarter of 1999,  the Company  terminated  its  contracts  to
provide  rehabilitation  therapy  services  to  non-affiliated   long-term  care
facilities.  The  Company,  through  a  wholly-owned  subsidiary,  had  provided
physical,  speech and occupational  services to  non-affiliated  skilled nursing
facilities since 1995.  Significant  changes in the contract  therapy  business,
primarily  related to reductions in Medicare  reimbursement for therapy services
caused by the  Balanced  Budget Act of 1997 led to this  decision.  The  Company
continues to provide rehabilitation therapy services to nursing facilities which
it owns.

 The Company's therapy services  restructuring  plan required the termination of
approximately sixty rehabilitation therapy services employees and the closure of
two regional  offices.  During the third quarter of 1999,  the Company  recorded
restructuring  charges of  approximately  $5.7 million under this plan,  most of
which  were  non-cash  in  nature.   The   restructuring   charge  consisted  of
approximately $2.5 million of uncollectible accounts receivable, $1.5 million of
unamortized goodwill, $0.7 million of employee costs and $1.0 million due to the
write-off of other assets. As of December 31, 1999, the Company's  restructuring
reserve was approximately $0.5 million.

  The  components  of the  restructuring  reserve  consist of the  following  at
December 31, 1999:
<TABLE>
<CAPTION>

<S>                                                         <C>           <C>            <C>
                                              Cash/Non-cash   Charge       Activity      Liability


Employee costs ...............................   cash       $   700,000   $  (418,000)   $   282,000
Other assets .................................   non-cash     1,045,000      (831,000)       214,000
Unamortized goodwill .........................   non-cash     1,517,000    (1,517,000)          --
Accounts receivable ..........................   non-cash     2,483,000    (2,483,000)          --
                                                            -----------   -----------    -----------
                                                            $ 5,745,000   $(5,249,000)   $   496,000
                                                            ===========   ===========    ===========
</TABLE>

                                       41
<PAGE>



Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Certain of the Company's  subsidiaries are precluded from  guaranteeing the debt
of the parent  company (the  "Non-Guarantors"),  based on current  agreements in
effect.  The  Company's  remaining   subsidiaries  (the  "Guarantors")  are  not
restricted from serving as guarantors of the parent company debt. The Guarantors
are comprised of Harborside  Healthcare  Limited  Partnership,  Belmont  Nursing
Center Corp., Orchard Ridge Nursing Center Corp.,  Oakhurst Manor Nursing Center
Corp.,  Riverside  Retirement  Limited  Partnership,  Harborside  Toledo Limited
Partnership,  Harborside Connecticut Limited Partnership,  Harborside of Florida
Limited  Partnership,   Harborside  of  Ohio  Limited  Partnership,   Harborside
Healthcare  Baltimore  Limited  Partnership,  Harborside  of  Cleveland  Limited
Partnership,  Harborside of Dayton Limited Partnership, Harborside Massachusetts
Limited Partnership,  Harborside of Rhode Island Limited Partnership, Harborside
North  Toledo  Limited  Partnership,   Harborside  Healthcare  Advisors  Limited
Partnership,  Harborside  Toledo  Corp.,  KHI  Corporation,  Harborside  Danbury
Limited  Partnership,  Harborside  Acquisition Limited Partnership V, Harborside
Acquisition Limited  Partnership VI, Harborside  Acquisition Limited Partnership
VII, Harborside  Acquisition Limited  Partnership VIII,  Harborside  Acquisition
Limited  Partnership IX, Harborside  Acquisition Limited Partnership X, Sailors,
Inc.,  New  Jersey  Harborside  Corp.,   Bridgewater   Assisted  Living  Limited
Partnership, Maryland Harborside Corp., Harborside Homecare Limited Partnership,
Harborside  Rehabilitation  Limited Partnership,  Harborside  Healthcare Network
Limited Partnership and Harborside Health I Corporation.

The information  which follows  presents the condensed  consolidating  financial
position as of December 31, 1998 and 1999; the condensed  consolidating  results
of  operations  for the years ended  December 31, 1997,  1998 and 1999;  and the
condensed  consolidating  cash flows for the years ended December 31, 1997, 1998
and  1999 of (a) the  parent  company  only  ("the  Parent"),  (b) the  combined
Guarantors, (c) the combined Non-Guarantors, (d) eliminating entries and (e) the
Company on a consolidated basis.



                                       42
<PAGE>



Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                      Condensed Consolidating Balance Sheet
                             As of December 31,1998
                             (dollars in thousands)
<TABLE>
<CAPTION>

                                                         Parent      Guarantors Non-Guarantor Elimination  Consolidated
                                                        ---------    ---------- ------------- -----------  ------------
ASSETS
Current assets:
<S>                                                     <C>         <C>        <C>          <C>          <C>
   Cash and cash equivalents .......................    $      51   $      99  $      746   $        -   $      896
   Receivables, net of allowance ...................        --         36,485      15,733       (2,272)      49,946
   Intercompany receivable .........................     116,555         --          --       (116,555)        --
   Prepaid expenses and other ......................       1,268        7,291       2,804         (429)      10,934
   Prepaid income taxes ............................       3,873         --          --           --          3,873
   Deferred income taxes ...........................       2,150        1,934        --           --          4,084
                                                       ---------    ---------    ---------    ---------   ---------
Total current assets ...............................     123,897       45,809      19,283     (119,256)      69,733

Restricted cash ....................................        --          2,162         472         (524)       2,110
Investments in limited partnerships ................      15,584         --         4,044      (19,628)        --
Property and equipment, net ........................        --        142,383      18,595         (474)     160,504
Deferred financing and other
 non-current assets, net ...........................      10,532        6,176       1,642         (177)      18,173
Other assets, net ..................................       4,300         --          --           --          4,300
Note receivable ....................................        --          7,487        --           --          7,487
Deferred income taxes ..............................          71        2,158        --           --          2,229
                                                      ---------    ---------    ---------    ---------    ---------
Total assets .......................................   $ 154,384    $ 206,175   $  44,036    $(140,059)   $ 264,536
                                                      =========    =========    =========    =========    =========

LIABILITIES
Current liabilities:
   Current maturities of long-term debt ............   $      -     $      22   $     185    $    --      $     207
   Current portion of capital lease
   obligation ......................................        --          4,278        --           --          4,278
   Accounts payable ................................        --          5,010       3,159         (768)       7,401
   Intercompany payable ............................        --         91,467       8,923     (100,390)        --
   Employee compensation and benefits ..............        --          9,853       3,367         --         13,220
   Other accrued liabilities .......................       3,254        3,306         925         --          7,485
   Accrued interest ................................       1,385        3,260        --         (4,583)          62
   Current portion of deferred income ..............        --           --          --            677          677
                                                       ---------    ---------   ---------    ---------    ---------
Total current liabilities ..........................       4,639      117,196      16,559     (105,064)      33,330
Long-term portion of deferred income ...............        --          1,202       2,579         (677)       3,104
Long-term debt .....................................     112,243        1,538      16,109        4,583      134,473
Long-term  portion of capital lease obligation .....        --         54,348        --         (3,095)      51,253
                                                       ---------    ---------   ---------    ---------    ---------
Total liabilities ..................................     116,882      174,284      35,247     (104,253)     222,160
                                                       ---------    ---------    ---------    ---------   ---------

Exchangeable  preferred  stock,  redeemable,
 $.01 par value with a  liquidation value of
 $1,000 per share; 500,000 shares authorized;
 42,293 issued and outstanding .....................      42,293         --          --           --         42,293
                                                       ---------    ---------    ---------    ---------   ---------

STOCKHOLDERS'  EQUITY (DEFICIT)
Common stock, $.01 par value,  19,000,000
shares authorized, 7,261,332 shares issued
and outstanding ....................................         146        2,569       3,885       (6,454)         146
Additional paid-in capital .........................     204,381         --          --            226      204,607
Treasury stock .....................................    (183,746)        --          --           --       (183,746)
Retained earnings (deficit) ........................     (25,572)       4,567      (2,170)       2,251      (20,924)
Partners' equity ...................................        --         24,755       7,074      (31,829)        --
                                                       ---------    ---------    ---------    ---------   ---------
Total stockholders' equity (deficit) ...............      (4,791)      31,891       8,789      (35,806)          83
                                                       ---------    ---------    ---------    ---------   ---------
Total liabilities and stockholders'
equity (deficit) ...................................   $ 154,384    $ 206,175   $  44,036    $(140,059)   $ 264,536
                                                       =========    =========    =========    =========   =========
</TABLE>




                                       43
<PAGE>



Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                      Condensed Consolidating Balance Sheet
                             As of December 31,1999
                             (dollars in thousands)
<TABLE>
<CAPTION>
<S>                                                   <C>          <C>           <C>         <C>           <C>
                                                         Parent     Guarantors  Non-Guarantors Elimination  Consolidated
                                                        ---------    ---------- -------------- -----------  ------------
ASSETS
Current assets:

   Cash and cash equivalents .......................  $     --     $      355    $   1,031   $     --      $   1,386
   Receivables, net of allowance ...................        --         34,423       15,745         --         50,168
   Intercompany receivable .........................     137,614         --           --       (137,614)        --
   Prepaid expenses and other ......................       3,590       14,096        2,254         --         19,940
   Prepaid income taxes ............................       2,608         --           --           --          2,608
   Deferred income taxes ...........................       2,150          250         --           --          2,400
                                                       ---------    ---------    ---------    ---------    ---------
Total current assets ...............................     145,962       49,124       19,030     (137,614)      76,502

Restricted cash ....................................        --          1,826          594         --          2,420
Investments in limited partnerships ................      15,584         --          4,044      (19,628)        --
Property and equipment, net ........................        --        146,976       19,350         --        166,326
Deferred financing and other
 non-current assets, net ...........................      10,749        3,416        1,381         --         15,546
Other assets, net ..................................       3,100         --           --           --          3,100
Note receivable ....................................        --          7,487         --           --          7,487
Deferred income taxes ..............................          71       11,781         --           --         11,852
                                                       ---------    ---------    ---------    ---------    ---------
Total assets .......................................   $ 175,466    $ 220,610    $  44,399    $(157,242)   $ 283,233
                                                       =========    =========    =========    =========    =========

LIABILITIES
Current liabilities:
   Current maturities of long-term debt  ..........    $    --      $      22    $     205    $    --      $     227
   Current portion of capital lease
     obligation ....................................        --          4,633         --           --          4,633
   Note payable to affiliate .......................       5,000         --           --           --          5,000
   Accounts payable ................................        --          6,879        2,449         --          9,328
   Intercompany payable ............................        --        109,511       11,766     (121,277)        --
   Employee compensation and benefits ..............        --         10,687        3,334         --         14,021
   Other accrued liabilities .......................        --          4,663          845         --          5,508
   Accrued interest ................................       4,342       12,584         --        (16,354)         572
   Current portion of deferred income ..............        --            --          --            677          677
                                                       ---------    ---------    ---------    ---------    ---------
Total current liabilities ..........................       9,342      148,979       18,599     (136,954)      39,966
Long-term portion of deferred income ...............        --            893        2,211         (677)       2,427
Long-term debt .....................................     132,243        1,517       15,904       16,354      166,018
 .Long-term  portion of capital lease obligation ....        --         50,067         --           --         50,067
                                                       ---------    ---------    ---------    ---------    ---------
Total liabilities ..................................     141,585      201,456       36,714     (121,277)     258,478
                                                       ---------    ---------    ---------    ---------    ---------

Exchangeable  preferred  stock,  redeemable,
  $.01 par value with a  liquidation value of
 $1,000 per share; 500,000 shares authorized;
 48,277 issued and outstanding .....................      48,277         --           --           --         48,277
                                                       ---------    ---------    ---------    ---------    ---------

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 19,000,000
  shares authorized, 7,261,332 shares issued
  and outstanding ..................................         146        2,569        3,885       (6,454)         146
Additional paid-in capital .........................     198,377         --           --            226      198,603
Treasury stock .....................................    (183,746)        --           --           --       (183,746)
Retained earnings (deficit) ........................     (29,173)      (8,170)      (3,274)       2,092      (38,525)
Partners' equity ...................................        --         24,755        7,074      (31,829)        --
                                                       ---------    ---------    ---------    ---------    ---------
Total stockholders' equity (deficit) ...............     (14,396)      19,154        7,685      (35,965)     (23,522)
                                                       ---------    ---------    ---------    ---------    ---------
Total liabilities and stockholders'
equity (deficit) ...................................   $ 175,466    $ 220,610    $  44,399    $(157,242)   $ 283,233
                                                       =========    =========    =========    =========    =========
</TABLE>




                                       44
<PAGE>



Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                 Condensed Consolidating Statement of Operations
                      For the year ended December 31, 1997
                             (dollars in thousands)


<TABLE>
<CAPTION>
<S>                                                    <C>         <C>        <C>        <C>         <C>
                                                       Parent  Guarantors Non-Guarantors Elimination Consolidated


Total net revenues .................................   $   --      $152,476   $101,480   $(32,179)   $221,777
                                                       --------    --------   --------   --------    --------

Expenses:
   Facility operating ..............................       --       113,686     83,595    (20,877)    176,404
   General and administrative ......................        612       9,499         37        805      10,953
   Service charges paid to former affiliate ........       --           708       --         --           708
   Depreciation and amortization ...................         70       2,599      1,405       --         4,074
   Facility rent ...................................       --         4,209      8,237       --        12,446
   Management fees paid to affiliates ..............       --         6,039      6,085    (12,124)       --
                                                       --------    --------   --------   --------    --------
Total expenses .....................................        682     136,740     99,359    (32,196)    204,585
                                                       --------    --------   --------   --------    --------

Income (loss) from operations ......................       (682)     15,736      2,121         17      17,192

Other:
   Interest expense, net ...........................       (108)      5,488        473       --         5,853
   Other expense ...................................       --           189       --         --           189
                                                       --------    --------   --------   --------    --------

Income (loss) before income taxes ..................       (574)     10,059      1,648         17      11,150
Income tax expense (benefit) .......................       (224)      3,927        644       --         4,347
                                                       --------    --------   --------   --------    --------
Net income (loss) ..................................   $   (350)   $  6,132   $  1,004   $     17    $  6,803
                                                       ========    ========   ========   ========    ========
</TABLE>



               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                 Condensed Consolidating Statement of Operations
                      For the year ended December 31, 1998
                             (dollars in thousands)
<TABLE>
<CAPTION>
<S>                                                    <C>          <C>          <C>         <C>          <C>
                                                         Parent   Guarantors Non-Guarantors Elimination  Consolidated


Total net revenues .................................   $    --      $ 234,672    $ 104,280   $ (27,908)   $ 311,044
                                                       ---------    ---------    ---------   ---------    ---------

Expenses:
   Facility operating ..............................        --        187,849       86,059     (27,908)     246,000
   General and administrative ......................         150       15,272         --          --         15,422
   Service charges paid to former affiliate ........        --          1,291         --          --          1,291
   Amortization of prepaid management fee ..........         500         --           --          --            500
   Depreciation and amortization ...................         624        4,150        1,576        --          6,350
   Facility rent ...................................        --         14,110        8,302        --         22,412
   Merger costs ....................................      27,047        9,874          251        --         37,172
   Management fees paid to affiliates ..............        --         (6,203)       6,203        --           --
                                                       ---------    ---------    ---------   ---------    ---------
Total expenses .....................................      28,321      226,343      102,391     (27,908)     329,147
                                                       ---------    ---------    ---------   ---------    ---------

Income (loss) from  operations .....................     (28,321)       8,329        1,889        --        (18,103)

Other:
   Interest expense, net ...........................       2,015        7,687        1,569        --         11,271
   Other income ....................................        --           --           --          (167)        (167)
                                                       ---------    ---------    ---------   ---------    ---------

Income (loss) before income taxes ..................     (30,336)         642          320         167      (29,207)
Income tax expense (benefit) .......................      (5,101)         250          223        (392)      (5,020)
                                                       ---------    ---------    ---------   ---------    ---------

Net income (loss) ..................................   $ (25,235)   $     392    $      97   $     559    $ (24,187)
                                                       =========    =========    =========   =========    =========
</TABLE>


                                       45
<PAGE>




Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                 Condensed Consolidating Statement of Operations
                      For the year ended December 31, 1999
                             (dollars in thousands)

<TABLE>
<CAPTION>
<S>                                                    <C>          <C>          <C>          <C>          <C>
                                                       Parent      Guarantors Non-GuarantorsElimination  Consolidated


Total net revenues .................................   $      24    $ 217,818    $  96,498    $ (13,725)   $ 300,615
                                                       ---------    ---------    ---------    ---------    ---------

Expenses:
   Facility operating ..............................        --        181,995       80,525      (13,725)     248,795
   General and administrative ......................          65       17,743         --           --         17,808
   Service charges paid to former affiliate ........        --          1,173         --           --          1,173
   Amortization of prepaid management fee ..........       1,200         --           --           --          1,200
   Depreciation and amortization ...................       1,718        6,720        1,811         --         10,249
   Facility rent ...................................        --         13,890        8,504         --         22,394
   Restructuring costs .............................        --          5,745         --           --          5,745
   Management fees paid to affiliates ..............        --         (5,757)       5,757         --           --
                                                       ---------    ---------    ---------    ---------    ---------
Total expenses .....................................       2,983      221,509       96,597      (13,725)     307,364
                                                       ---------    ---------    ---------    ---------    ---------

Loss from  operations ..............................      (2,959)      (3,691)         (99)        --         (6,749)

Other:
   Interest expense, net ...........................       2,945       16,241        1,709         --         20,895
   Other expense ...................................        --           --           --            261          261
                                                       ---------    ---------    ---------    ---------    ---------

Loss before income taxes ...........................      (5,904)     (19,932)      (1,808)        (261)     (27,905)
Income tax benefit .................................      (2,303)      (7,195)        (704)        (102)     (10,304)
                                                       ---------    ---------    ---------    ---------    ---------

Net loss ...........................................   $  (3,601)   $ (12,737)   $  (1,104)   $    (159)   $ (17,601)
                                                       =========    =========    =========    =========    =========
</TABLE>



                                       46
<PAGE>



Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                 Condensed Consolidating Statement of Cash Flows
                      For the year ended December 31, 1997
                             (dollars in thousands)
<TABLE>
<CAPTION>
<S>                                                     <C>       <C>        <C>           <C>         <C>
                                                         Parent  Guarantors Non-Guarantors Elimination Consolidated
Operating activities:

Net cash provided (used) by operating activities ...    $   455   $   6,102  $   (1,135)   $    199    $  5,621
                                                       --------    --------     --------    --------    --------

Investing activities:
     Additions to property and equipment ...........       --        (3,543)     (1,731)       --        (5,274)
     Additions to deferred financing and
      other non-current assets .....................       (341)     (5,884)        (20)        (56)     (6,301)
     Receipt of note receivable ....................       --        (7,487)       --          --        (7,487)
     Transfers to restricted cash, net .............       --        (1,588)        (34)       (172)     (1,794)
     Repayment of demand note from limited
        partnership ................................       --         1,369        --          --         1,369
                                                       --------    --------    --------    --------    --------
Net cash  (used) by investing activities ...........       (341)    (17,133)     (1,785)       (228)    (19,487)
                                                       --------    --------    --------    --------    --------

Financing activities:
          Borrowing under the revolving  line of
             credit ................................       --        15,600        --          --        15,600
     Payment of long-term debt .....................       --           (22)       (144)       --          (166)
     Principal payments of capital lease obligation        --        (3,952)          8        --        (3,944)
     Receipt of cash in connection with lease ......       --         1,301        --          --         1,301
     Exercise of stock options .....................        100        --          --          --           100
     Other .........................................         21        --          --           (21)       --
                                                       --------    --------    --------    --------    --------
Net cash provided (used) by financing activities ...        121      12,927        (136)        (21)     12,891
                                                       --------    --------    --------    --------    --------

Net increase (decrease) in cash and cash equivalents        235       1,896      (3,056)        (50)       (975)
Cash and cash equivalents, beginning of year .......        463       2,482       6,727          50       9,722
                                                       --------    --------    --------    --------    --------
Cash and cash equivalents, end of year .............   $    698    $  4,378    $  3,671    $   --      $  8,747
                                                       ========    ========    ========    ========    ========

Supplemental Disclosure:
Interest paid ......................................   $   --      $  3,104    $    267    $   --      $  3,371
                                                       ========    ========    ========    ========    ========
Income taxes paid ..................................   $  5,783    $   --      $   --      $   --      $  5,783
                                                       ========    ========    ========    ========    ========
</TABLE>



                                       47
<PAGE>



Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                 Condensed Consolidating Statement of Cash Flows
                      For the year ended December 31, 1998
                             (dollars in thousands)
<TABLE>
<CAPTION>
<S>                                                      <C>          <C>          <C>          <C>          <C>
                                                           Parent   Guarantors  Non-Guarantors Elimination  Consolidated
                                                         ----------   ----------   ---------    ---------    --------
Operating activities:

Net cash provided (used) by operating activities ......  $ (110,038)  $   77,121   $  (3,033)   $  (3,497)   $ (39,447)
                                                         ----------   ----------   ---------    ---------    ---------

Investing activities:
     Additions to property and equipment ..............        --        (68,817)      (2,591)      2,803      (68,605)
     Additions to deferred financing and
      other non-current assets ........................      (4,885)      (8,613)           4        --        (13,494)
     Transfers to restricted cash, net ................        --            212        2,529         694        3,435
                                                         ---------    -----------   ---------    ---------    ---------
Net cash  provided (used) by investing activities .....      (4,885)     (77,218)         (58)      3,497      (78,664)
                                                         ---------    -----------   ---------    ---------    ---------

Financing activities:
     Borrowings under the revolving line of
             credit ...................................        --         17,150         --           --         17,150
     Repaid on revolving line of credit     ...........        --        (20,000)        --           --        (20,000)
     Payment of long-term debt ........................        --           (357)         166         --           (191)
     Proceeds from issuance of senior
      subordinated discount notes .....................      99,493         --           --           --         99,493
     Proceeds from issuance of exchangeable
          preferred stock .............................      40,000         --           --           --         40,000
     Purchase of treasury stock .......................    (183,746)        --           --           --       (183,746)
     Proceeds from sale of common stock ...............     158,500         --           --           --        158,500
     Principal payments of capital lease obligation ...        --         (3,939)        --           --         (3,939)
     Receipt of cash in connection with lease .........        --          2,964         --           --          2,964
     Exercise of stock options ........................          29         --           --           --             29
                                                           ---------  ----------    ---------    ---------    ---------
Net cash provided (used) by financing activities ......     114,276       (4,182)         166         --        110,260
                                                           ---------  -----------   ---------    ---------    ---------
Net decrease in cash and cash equivalents .............        (647)      (4,279)      (2,925)        --         (7,851)
Cash and cash equivalents, beginning of year ..........         698        4,378        3,671         --          8,747
                                                           ---------  -----------   ---------    ---------    ---------
Cash and cash equivalents, end of year ................   $      51    $      99    $     746    $    --      $     896
                                                           =========  ===========   =========    =========    =========

Supplemental Disclosure:
Interest paid .........................................   $     650    $   2,480    $     506    $    --      $   3,636
                                                          =========    ==========   =========    =========    =========
Income taxes paid .....................................   $   3,047    $     --     $     --     $    --      $   3,047
                                                          =========    ==========   =========    =========    =========
Accretion of preferred dividends.......................   $   2,293    $     --     $     --     $    --      $   2,293
                                                          =========    ==========   =========    =========    =========

</TABLE>











                                       48
<PAGE>



Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

               HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                 Condensed Consolidating Statement of Cash Flows
                      For the year ended December 31, 1999
                             (dollars in thousands)
<TABLE>
<CAPTION>

<S>                                                         <C>         <C>          <C>          <C>        <C>
                                                             Parent    Guarantors Non-Guarantors Elimination Consolidated
Operating activities:

Net cash provided (used) by operating activities .......... $  (23,096) $   19,958   $   2,892    $    998   $    752
                                                              --------    --------    --------    --------   --------

Investing activities:
     Additions to property and equipment ..................       --       (10,435)     (2,288)       (474)    (13,197)
     Additions to deferred financing and
      other non-current assets ............................     (1,935)       (308)        (12)       --        (2,255)
                                Payment of purchase deposit       --        (5,000)       --          --        (5,000)
     Transfers to (from) restricted cash, net .............       --           336        (122)       (524)       (310)
                                                               --------    --------    --------    --------   --------
Net cash  (used) by investing activities ..................     (1,935)    (15,407)     (2,422)       (998)    (20,762)
                                                               --------    --------    --------    --------   --------

Financing activities:
     Borrowings under the revolving line of
          credit ..........................................     20,000        --          --          --        20,000
     Issuance of note payable to affiliate                       5,000        --          --          --         5,000
     Payment of long-term debt ............................       --           (21)       (185)       --          (206)
     Principal payments of capital lease obligation .......       --        (4,274)       --          --        (4,274)
     Dividends paid on exchangeable preferred stock                (20)       --          --          --           (20)
                                                              --------    --------   --------      --------   --------
Net cash provided (used) by financing activities ..........     24,980      (4,295)       (185)       --        20,500
                                                              --------    --------    --------    --------    --------
Net increase (decrease) in cash and cash equivalents ......        (51)        256         285        --           490
Cash and cash equivalents, beginning of year ..............         51          99         746        --           896
                                                              --------    --------    --------    --------    --------
Cash and cash equivalents, end of year ....................   $   --      $    355    $  1,031    $   --      $  1,386
                                                              ========    ========    ========    ========    ========

Supplemental Disclosure:
Interest paid .............................................   $    834    $  4,594    $    483    $   --      $  5,911
                                                              ========    ========    ========    ========    ========
Income taxes paid .........................................   $    243    $    --     $    --     $    --     $    243
                                                              ========    ========    ========    ========    ========
Accretion of preferred dividends...........................   $  5,984    $    --     $    --     $    --     $  5,984
                                                              ========    ========    ========    ========    ========
</TABLE>






                                       49
<PAGE>



R.  SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

        The Company's unaudited quarterly financial information follows:

                          Year Ended December 31, 1997
<TABLE>
<CAPTION>
<S>                            <C>               <C>                 <C>              <C>            <C>
                                     First              Second              Third            Fourth
                                    Quarter             Quarter            Quarter          Quarter         Total


Total net revenues             $  47,384,000     $  50,292,000       $  57,964,000    $  66,137,000  $  221,777,000
Income from operations             3,822,000         4,069,000           4,455,000        4,846,000      17,192,000

Income before taxes                2,461,000         2,613,000           2,773,000        3,303,000      11,150,000
Income taxes                         959,000         1,020,000           1,081,000        1,287,000       4,347,000
Net income                         1,502,000         1,593,000           1,692,000        2,016,000       6,803,000

Earnings per common share:
  Basic                        $        0.19     $        0.20       $        0.21    $        0.25  $         0.85
  Diluted                      $        0.19     $        0.20       $        0.21    $        0.24  $         0.84
</TABLE>

                          Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S>                           <C>                 <C>                 <C>              <C>            <C>
                                     First              Second              Third            Fourth
                                    Quarter             Quarter            Quarter          Quarter         Total


Total net revenues            $   72,454,000      $   76,186,000      $  78,697,000    $  83,707,000  $  311,044,000
Income (loss) from operations      4,754,000           4,869,000        (32,786,000)       5,060,000     (18,103,000)

Income (loss) before
 income taxes                      3,073,000           3,276,000        (36,360,000)         804,000     (29,207,000)
Income taxes (benefit)             1,198,000           1,278,000         (7,460,000)         (36,000)     (5,020,000)
Net income (loss)                  1,875,000           1,998,000        (28,900,000)         840,000     (24,187,000)
Preferred stock dividends                  -                   -           (915,000)      (1,381,000)     (2,296,000)
Earnings (loss) available for
common shares                      1,875,000           1,998,000        (29,815,000)        (541,000)    (26,483,000)

Earnings (loss) per
 common share:
   Basic                       $         0.23     $         0.25     $        (3.93)   $       (0.07) $        (3.42)
   Diluted                     $         0.23     $         0.24     $        (3.93)   $       (0.07) $        (3.42)
</TABLE>

                          Year Ended December 31, 1999
<TABLE>
<CAPTION>
<S>                            <C>                 <C>               <C>               <C>             <C>
                                     First              Second              Third            Fourth
                                    Quarter             Quarter            Quarter          Quarter         Total


Total net revenues             $   71,704,000      $   75,016,000    $   77,590,000    $  76,305,000   $ 300,615,000
Income (loss) from operations      (4,541,000)             347,000       (3,972,000)       1,417,000     (6,749,000)

Loss before
 income taxes                      (9,404,000)         (4,976,000)       (9,241,000)      (4,284,000)    (27,905,000)
Income tax benefit                 (3,668,000)         (1,940,000)       (3,604,000)      (1,092,000)    (10,304,000)
Net loss                           (5,736,000)         (3,036,000)       (5,637,000)      (3,192,000)    (17,601,000)
Preferred stock dividends          (1,427,000)         (1,475,000)       (1,525,000)      (1,577,000)     (6,004,000)
Loss available for
common shares                      (7,163,000)         (4,511,000)       (7,162,000)      (4,769,000)    (23,605,000)

Loss per
 common share:
   Basic and Diluted           $        (0.99)    $         (0.62)   $        (0.99)    $      (0.58)  $       (3.25)
</TABLE>




                                       50
<PAGE>





ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
                                 FINANCIAL DISCLOSURE
None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The Company pays no remuneration to its employees or to executives of Investcorp
for serving as directors.

The  following  table  sets  forth the names  and ages of each  Director  of the
Company,  their  principal  offices with the company,  their term of office as a
Director and any periods during which they have served as such:

Name and Principal Offices with the Company

 NAME                               AGE                           POSITION
 ----                               ---                           --------
Stephen L. Guillard      50    Chairman, President, Chief Executive Officer
                               and Director
Damian N. Dell'Anno      40    Executive Vice President, Chief Operating Officer
                               and Director
William H. Stephan       43    Senior Vice President, Chief Financial Officer
                               and Director
Christopher J. O'Brien   41    Director
Charles J. Philippin     48    Director
Lars  C. Haegg           34    Director
Edward G. Lord III       51    Director
James O. Egan            51    Director
Charles J. Marquis       57    Director

  Stephen L. Guillard has served as President and Chief Executive Officer of the
Company  since March 21, 1996 and of the  predecessors  of the Company since May
1988 and as a  Director  and  Chairman  of the  Board of the  Company  since its
incorporation.  Mr. Guillard previously served as Chairman,  President and Chief
Executive  Officer of  Diversified  Health  Services  ("DHS"),  a long-term care
company which Mr. Guillard co-founded in 1982. DHS operated  approximately 7,500
long-term care and assisted living beds in five states. Mr. Guillard has a total
of 26 years of  experience  in the  long-term  care  industry  and is a licensed
Nursing Home Administrator.

  Damian N.  Dell'Anno has served as Executive  Vice  President of Operations of
the Company since March 21, 1996 and its  predecessors  since 1994. From 1993 to
1994, he served as the head of the specialty services group for the predecessors
of the Company and was  instrumental in developing the Company's  rehabilitation
therapy  business.  From  1989 to 1993,  Mr.  Dell'Anno  was Vice  President  of
Reimbursement  for the  predecessors  of the  Company.  From  1988 to 1989,  Mr.
Dell'Anno  served as Director of Budget,  Reimbursement  and Cash Management for
The Mediplex Group, Inc.  ("Mediplex"),  a long-term care company. Mr. Dell'Anno
has a total of 16 years of experience in the long-term care industry.

  William H.  Stephan has served as Senior Vice  President  and Chief  Financial
Officer since March 21, 1996 and its  predecessors  since joining the Company in
1994.  From 1986 to 1994,  Mr. Stephan was a Manager in the health care practice
of Coopers & Lybrand LLP. His clients there included  long-term care facilities,
continuing  care  retirement   centers,   physician  practices  and  acute  care
hospitals.  Mr.  Stephan is a Certified  Public  Accountant  and a member of the
Healthcare Financial Management Association.

  Christopher J. O'Brien has been an executive of Investcorp, its predecessor or
one or more of its  wholly-owned  subsidiaries  since  December  1993.  Prior to
joining  Investcorp,  he was a Managing Director of Mancuso & Company, a private
New  York-based  merchant  bank. He is a director of Falcon  Building  Products,
Inc., Simmons Holdings,  Inc., Star Markets Holdings, Inc., CSK Auto Corporation
and The William Carter Company.

  Charles  J.  Philippin  has  been a  member  of the  Management  Committee  of
Investcorp since July 1994. From 1982 until he joined Investcorp,  Mr. Philippin
was a partner in the firm of Coopers & Lybrand LLP,  responsible  for the Firm's
U.S.  mergers & acquisitions  business.  Mr. Philippin is a director of Burnham,
Carvel  Corporation,  CSK Auto  Corporation.,  Falcon Building  Products,  Inc.,
Harborside  Healthcare,  Saks  Fifth  Avenue,  Stratus  Computer,  Star  Markets
Company, Inc., Werner Holding Co., and The William Carter Company.

  Lars C. Haegg has been an executive of Investcorp,  its  predecessor or one or
more of its wholly-owned  subsidiaries since 1998. Prior to joining  Investcorp,
Mr. Haegg worked with  McKinsey & Company where he was  responsible  for leading
consulting teams for media, retail and electronics clients. Mr. Haegg previously
worked with Strategic Planning Associates (now Mercer Management  Consulting) in
the  telecommunications  and consumer goods sectors. Mr. Haegg holds a Master of
Businees Administration degree from Harvard Business School and Bachelor of Arts
degree from the University of Texas at Austin.

  Edward  G.  Lord  joined  Investcorp  in 1994 as a  member  of the  Management
Committee and is the senior partner of the  Investcorp  Real Estate Team. A real
estate  executive  for 25 years,  Mr.  Lord has served as a  Director  and Chief
Operating Officer (Tehran, Jeddah, New York) for the Kettaneh Group; a Corporate
Officer for The Mutual Life Insurance  Company of New York and Managing Director
of Dean Witter Realty. His professional specialty and work experience are in the
equity investment and asset management of commercial property.  Mr. Lord holds a
Master of Business  Administration  degree from  Harvard  Business  School and a
Bachelor of Arts degree from Middlebury College.

                                       51
<PAGE>

  James O. Egan has been an executive of Investcorp,  its  predecessor or one or
more of its  wholly-owned  subsidiaries  since  January  1999.  Prior to joining
Investcorp, he was employed by KPMG, an accounting firm, as a Partner; Riverwood
International,  a paperboard,  packaging and machinery  company,  as Senior Vice
President and Chief Financial Officer;  and Coopers & Lybrand LLP, an accounting
firm, as a Partner.  He is a director of Falcon Building Products,  Inc., Werner
Holding Co. (DE), Inc. and Stratus Computer System International.

  Charles K. Marquis has been an executive of  Investcorp  or one or more of its
wholly-owned  subsidiaries since January 1999. Prior to joining Investcorp,  Mr.
Marquis  was a partner  in the law firm of  Gibson,  Dunn &  Crutcher  LLP.  Mr.
Marquis is a director of CSK Auto  Corporation,  Stratus  Computer and Tiffany &
Co.
EXECUTIVE OFFICERS

The following table sets forth certain information with respect to the executive
officers of the Company:


NAME                     AGE                           POSITION
----                     ---                           --------

Stephen L. Guillard       50   Chairman, President, Chief Executive Officer
                               and Director
Damian N. Dell'Anno       40   Executive Vice President, Chief Operating Officer
                               and Director
William H. Stephan        43   Senior Vice President, Chief Financial Officer
                               and Director
Bruce J. Beardsley        36   Senior Vice President of Acquisitions
Steven Raso               35   Senior Vice President of Operations

Information on Mr. Guillard, Mr. Dell'Anno and Mr. Stephan appears above.

  Bruce J. Beardsley has served as Senior Vice President of  Acquisitions  since
March 21, 1996 and its  predecessors  since 1994. From 1992 to 1994, he was Vice
President of Planning and Development of the Company with responsibility for the
development  of specialized  services,  planning and  engineering.  From 1990 to
1992, he was an Assistant  Vice  President of the Company  responsible  for risk
management and administrative  services. From 1988 to 1990, Mr. Beardsley served
as Special  Projects  Manager of the  Company.  Prior to joining  the Company in
1988, Mr. Beardsley was a commercial and residential real estate appraiser.

 Steven V. Raso has served as Senior Vice  President of  Operations  since 1998.
From 1994 to 1998, he served as Vice President of Reimbursement  for the Company
and he served as Director of  Reimbursement  and Budgets  from 1989 to 1994.  In
these  capacities,  Mr. Raso has been responsible for various aspects of Company
Operations,  including the Medicare and Medicaid  reimbursement  cost  reporting
functions,  including audits,  appeals,  licensing and rate determinations.  Mr.
Raso also oversees the budgeting, accounts receivable and compliance departments
within the Company.


                                       52
<PAGE>




ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
<S>                   <C>      <C>               <C>         <C>         <C>         <C>         <C>    <C>
                                    Annual Compensation                Long Term Compensation
                                                                              Awards          Payouts
                                                     Other                   Securities
                                                     Annual      Restricted  Underlying         All Other
Name and              Year      Salary      Bonus    Compen-     Stock        Options/     LTIP       Compen-
Principal Position               ($)         ($)     sation($)(1)Award(s)     SARs #      Payouts    sation ($)(2)(3)
                      ----   ---------   ---------   ---------   ---------   ---------   ---------   ----------------


Stephen L. Guillard   1999     345,000           0           0           0           0           0      14,440
Chairman, President   1998     348,579     300,000   1,854,500           0     184,904           0     761,419
And Chief Executive   1997     300,300     232,500           0           0      55,000           0      16,250
Officer

Damian N. Dell'Anno   1999     225,000           0           0           0           0           0       9,000
Executive Vice ....   1998     225,344     100,000     916,643           0     117,666           0     349,150
President of ......   1997     192,115     117,000           0           0      27,000           0       7,578
Operations

Bruce J. Beardsley    1999     200,000           0           0           0           0           0      10,000
Senior Vice .......   1998     195,227      40,000     435,370           0      80,641           0     210,195
President of ......   1997     151,153      70,000           0           0      17,000           0       8,178
Acquisitions

William H. Stephan    1999     190,000           0           0           0           0           0       9,500
Senior Vice .......   1998     186,230      40,000     432,505           0      80,641           0     199,007
President and .....   1997     146,154      60,000           0           0      16,000           0       7,346
Chief Financial
Officer

Steven V. Raso ....   1999     140,000           0           0           0           0           0       7,000
Senior Vice .......   1998     138,462     220,000     278,780           0      55,771           0     147,442
President of ......   1997     111,153      35,000           0           0      18,000           0       5,923
Operations
</TABLE>

(1) Includes stock options  exercised on August 11, 1998 in connection  with the
Merger.

(2) Includes matching  contributions  made by the Company under its Supplemental
Executive Retirement Plan and 401(k) Plan.

(3) Includes "Change in Control"  payments made and forgiveness of loans used to
purchase stock, as provided in the Employee Agreements referred to below.

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
<S>                        <C>              <C>           <C>                   <C>
                                                              NUMBER OF
                                                              SECURITIES         VALUE OF
                                                              UNDERLYING         UNEXERCISED
                                                              UNEXERCISED        IN-THE MONEY
                                                              OPTIONS/SARS AT    OPTIONS/SARS AT
                                                              FISCAL YEAR END    FISCALYEAR END ($)
                           SHARES
                           ACQUIRED ON      VALUE             EXERCISABLE/           EXERCISABLE/
       NAME                EXERCISE (#)     REALIZED ($)      UNEXERCISABLE    UNEXERCISABLE (1)
       ----                ------------     ------------      -------------    -----------------


Stephen L. Guillard                   0                0             0/160,904                 0
Damian N. Dell'Anno                   0                0        10,560/104,666                 0
Bruce J. Beardsley                    0                0         39,162/72,641                 0
William H. Stephan                    0                0         38,332/72,641                 0
Steven V. Raso                        0                0         21,940/50,771                 0
</TABLE>

(1) Underlying  shares are not publicly  traded and are subject to repurchase by
the Company under certain  circumstances  at the employee's  cost or at the then
current value of the underlying  share,  as determined by the Company's Board of
Directors upon the  termination of the employee's  employment  with the Company.
None of these options are classified as in-the-money for purposes of this table.
The Company has not established any recent valuations for such shares.


                                       53
<PAGE>



EMPLOYMENT AGREEMENTS

  The Company has entered into  employment  agreements  with  Messrs.  Guillard,
Dell'Anno,   Stephan,   Beardsley  and  Raso   (collectively,   the  "Employment
Agreements").  Under the terms of the Employment Agreements, Mr. Guillard serves
as President and Chief  Executive  Officer of the Company and receives a minimum
base  salary  payable at an annual rate of  $345,000,  Mr.  Dell'Anno  serves as
Executive Vice President and Chief Operating Officer of the Company and receives
a minimum base salary payable at an annual rate of $225,000,  Mr. Stephan serves
as Senior Vice President and Chief Financial Officer of the Company and receives
a minimum  base salary  payable at an annual  rate of  $190,000,  Mr.  Beardsley
serves as Senior Vice  President of  Acquisitions  of the Company and receives a
minimum base salary payable at an annual rate of $200,000 and Mr. Raso serves as
Senior Vice  President of  Operations of the Company and receives a minimum base
salary payable at an annual rate of $140,000. The salaries of Messrs.  Guillard,
Dell'Anno,  Stephan,  Beardsley  and  Raso  were to be  increased  to  $375,000,
$240,000,  $200,000,  $215,000 and $150,000,  respectively,  effective  April 1,
1999. Through December 31, 1999, Messrs. Guillard, Dell'Anno, Stephan, Beardsley
and Raso elected to forgo the  scheduled  compensation  adjustments.  In January
2000, the amounts of compensation due to these  individuals as a result of these
elective  deferrals  were paid by the  Company,  and as of January 1, 2000,  the
salaries  of Messrs.  Guillard,  Dell'Anno,  Stephan,  Beardsley,  and Raso were
increased to $375,000, $270,000, $200,000, $215,000 and $170,000,  respectively.
Under the terms of these  Employment  Agreements,  the  salaries of each officer
will be subject to further  adjustment  at the  discretion  of the  Compensation
Committee of the Board of Directors of the Company.

  The Employment  Agreements  also provide (i) for an annual bonus to be paid to
Messrs. Guillard,  Dell'Anno, Stephan, Beardsley and Raso, part of which will be
based upon achievement of specific performance targets and part of which will be
discretionary,  in  maximum  amounts  of 120% of base  salary in the case of Mr.
Guillard, 96% of base salary in the case of Mr. Dell'Anno and 78% of base salary
in the  cases of  Messrs.  Stephan,  Beardsley  and  Raso,  and (ii)  that  upon
termination of employment prior to an initial public offering,  the Company will
have certain rights to call from such officers shares of Harborside Common Stock
owned by such  officers  (including  shares  underlying  then-exercisable  stock
options),  and such officers  will have certain  rights to put such shares to an
affiliate  of  Investcorp  (subject to a right of first  refusal in favor of the
Company).

  Each officer has the right to terminate  his  Employment  Agreement on 30 days
notice.  The Company has the right to terminate an Employment  Agreement without
obligation  for  severance  only for Good Cause (as  defined  in the  Employment
Agreements). The Employment Agreements provide for severance benefits to be paid
in the event an officer's  employment is terminated if such  termination  is, in
the case of termination by the Company,  without Good Cause,  or, in the case of
termination  by an  officer,  for Good  Reason  (as  defined  in the  Employment
Agreements). If the Company terminates the employment of an officer without Good
Cause or the officer terminates his employment for Good Reason, the officer will
be entitled to receive severance  benefits which will include (i) the vesting of
the pro rata  portion of stock  options  subject to vesting in the then  current
year attributable to the part of the year that the officer was employed,  if the
applicable  performance  targets are met,  (ii) the  ability to exercise  vested
stock  options for the period ending on the earlier of the date that is 180 days
from the date his  employment  is  terminated  or the specific  expiration  date
stated in the  options,  and (iii) in the case of Mr.  Guillard,  for the period
ending 24 months  after  termination,  and in the  cases of  Messrs.  Dell'Anno,
Stephan,  Beardsley and Raso, for the period ending 12 months after termination,
payment  of the  officer's  compensation  at the rate most  recently  in effect;
subject to such officer's  compliance with  noncompetition  and  nonsolicitation
covenants for such 12 or 24 month period, as applicable.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

  Effective September 15, 1995, Harborside  established a Supplemental Executive
Retirement  Plan ("SERP") to provide  benefits for key employees of  Harborside.
Participants  may  defer up to 25% of their  salary  and bonus  compensation  by
making  contributions  to the SERP.  Amounts  deferred  by the  participant  are
credited to his or her account and are always fully vested.  Harborside  matches
50% of  amounts  contributed  until  10% of base  salary  has been  contributed.
Matching  contributions  made by Harborside become vested as of January 1 of the
second  year  following  the end of the plan year for which  contributions  were
credited,  provided the employee is still employed with Harborside on that date.
In addition,  participants  will be fully vested in such  matching  contribution
amounts in the case of death or permanent  disability  or at the  discretion  of
Harborside.  Participants  are eligible to receive benefits  distributions  upon
retirement  or in certain  pre-designated  years.  Participants  may not receive
distributions prior to a pre-designated year, except in the case of termination,
death or disability or demonstrated financial hardship. Only amounts contributed
by the  employee may be  distributed  because of  financial  hardship.  Although
amounts  deferred and Company matching  contributions  are deposited in a "rabbi
trust," they are subject to risk of loss. If Harborside becomes  insolvent,  the
rights  of  participants  in the SERP  would be  those of an  unsecured  general
creditor of Harborside.

STOCK INCENTIVE PLAN

  Immediately   following  the  Merger,   the  Company  adopted  the  Harborside
Healthcare   Corporation   Stock  Incentive  Plan  (the  "Stock  Option  Plan").
Initially,  806,815  shares were made  available  to be awarded  under the Stock
Option  Plan,  representing  approximately  10% of the shares of common stock of
Harborside  outstanding  immediately after the Effective Time,  determined after
giving effect to the exercise of the options  issued or issuable under the Stock
Option Plan.  Options to purchase  approximately 7.7% of such shares (determined
on such  basis)  were  granted  to  members  of the  Company's  management  upon
consummation of the Merger. Options for the remaining  approximately 2.3% of the
shares of capital stock of the Company  (determined on such basis) were reserved
for grant to current or future officers and employees of the Company.

  The Stock Option Plan is administered by the Company's Board of Directors. The
Board  designates  which employees of the Company are eligible to receive awards
under the  Stock  Option  Plan,  and the  amount,  timing  and  other  terms and
conditions  applicable to such awards.  Future  options will be  exercisable  in
accordance  with the terms  established by the Board and will expire on the date
determined by the Board,  which will not be later than 30 days after the seventh
anniversary  of the grant date. An optionee  will have certain  rights to put to
the Company, and the Company will have certain rights to call from the optionee,
vested stock  options  issued to the  optionee  under the Stock Option Plan upon
termination  of the optionee's  employment  with the Company prior to an initial
public offering.

                                       54
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

  The Company is  authorized  to issue shares of five  classes of common  stock,
each with a par value of $0.01,  consisting of Class A Common Stock ("Harborside
Class A  Common  Stock"),  Class B  Common  Stock  ("Harborside  Class B  Common
Stock"),  Class C Common  Stock  ("Harborside  Class C Common  Stock"),  Class D
Common  Stock  ("Harborside  Class D Common  Stock") and Common  Stock  ("Common
Stock")  (collectively  "Harborside  Common Stock").  Harborside  Class A Common
Stock,  Harborside Class D Common Stock and Common Stock are the only classes of
the  Company's  common stock that have the power to vote.  Holders of Harborside
Class B Common Stock and Harborside  Class C Common Stock do not have any voting
rights,  except  that  the  holders  of  Harborside  Class B  Common  Stock  and
Harborside  Class C Common Stock have the right to vote as a class to the extent
required under the laws of the State of Delaware.

  As of March 30, 2000,  there were 661,332 shares of Harborside  Class A Common
Stock,  20,000 shares of Harborside Class D Common Stock and no shares of Common
Stock  outstanding.  Holders of shares of  Harborside  Class A Common  Stock and
Common Stock of the Company are entitled to one vote per share on all matters as
to which  stockholders may be entitled to vote pursuant to the DGCL.  Holders of
Harborside  Class D Common  Stock as of the  Effective  Time are entitled to 330
votes per share on all matters as to which  stockholders may be entitled to vote
pursuant to the DGCL.

As a result of the  consummation of the Merger,  the New Investors  beneficially
own  all of the  outstanding  Harborside  Class  D  Common  Stock,  constituting
approximately 91% of the outstanding voting stock of the Company, and pre-Merger
stockholders,  including certain members of management,  beneficially own all of
the outstanding Harborside Class A Common Stock,  constituting  approximately 9%
of the outstanding voting stock of the Company.  In addition,  the New Investors
own 5,940,000  shares of Harborside  Class B Common Stock and 640,000  shares of
Harborside Class C Common Stock.

  The following  table sets forth certain  information  regarding the beneficial
ownership  of the voting  stock of the Company as of March 30,  2000.  The table
sets  forth,  as of that date,  (i) each  person  known by the Company to be the
beneficial  owner of more than 5% of any class of voting  stock of the  Company,
(ii) each person who was a director of the Company or a named executive  officer
of the Company who beneficially  owned shares of voting stock of the Company and
(iii) all  directors of the Company and  executive  officers of the Company as a
group.  None of the  Company's  directors or officers  own shares of  Harborside
Class D Common Stock. Unless otherwise indicated, each of the stockholders shown
in the table  below has sole  voting and  investment  power with  respect to the
shares beneficially owned.

                         HARBORSIDE CLASS A COMMON STOCK
                              (9% Of Voting Power)
<TABLE>
<CAPTION>
<S>                                     <C>       <C>       <C>     <C>
Name and address                         Number of Number of         Percent of
Beneficial Owner (1)                     Shares(2) Options   Total   (Class (4)
--------------------                     -------   -------   -------   ----


George Krupp (5) ......................   194,162      --     194,162     29.4
Douglas Krupp (5) .....................   194,163      --     194,163     29.4
Stephen L. Guillard ...................   177,688      --     177,688     26.9
Damian N. Dell'Anno ...................    47,563    10,560    58,123      8.7
Bruce J. Beardsley ....................      --      39,162    39,162      5.6
William H. Stephan ....................       400    38,332    38,732      5.5
Steven V. Raso ........................      --      21,940    21,940      3.2
All directors and executive officers as
a group, including certain of the
persons named above (10 persons) ......   225,561   109,994   335,555     43.5
</TABLE>



                        HARBORSIDE CLASS D COMMON STOCK
                                          (91% Of Voting Power)

<TABLE>
<CAPTION>
<S>                                                   <C>        <C>
                                                      Number of  Percent of
Name and address of Beneficial Owner                  Shares(2)  Class
------------------------------------                  ------     -----

<
INVESTCORP S.A. (6)(7) ............................   20,000     100.0
SIPCO Limited (8) .................................   20,000     100.0
CIP Limited (9)(10) ...............................   18,400      92.0
Ballet Limited (9)(10) ............................    1,840       9.2
Denary Limited (9)(10) ............................    1,840       9.2
Gleam Limited (9)(10) .............................    1,840       9.2
Highlands Limited (9)(10) .........................    1,840       9.2
Nobel Limited (9)(10) .............................    1,840       9.2
Outrigger Limited (9)(10) .........................    1,840       9.2
Quill Limited (9)(10) .............................    1,840       9.2
Radial Limited (9)(10) ............................    1,840       9.2
Shoreline Limited (9)(10) .........................    1,840       9.2
Zinnia Limited (9)(10) ............................    1,840       9.2
INVESTCORP Investment Equity Limited (7) ..........    1,600       8.0
</TABLE>

                                       55
<PAGE>

(1)      The  address  of  each  person  listed  in the  table  as a  holder  of
         Harborside   Class  A  Common  Stock  is  c/o   Harborside   Healthcare
         Corporation, One Beacon Street, Boston, Massachusetts 02108.
(2)      As used in the table above, a beneficial  owner of a security  includes
         any person who, directly or indirectly, through contract,  arrangement,
         understanding,  relationship,  or otherwise has or shares (i) the power
         to vote,  or direct the voting of,  such  security  or (ii)  investment
         power which includes the power to dispose, or to direct the disposition
         of, such security.
(3)      Includes shares of stock that are subject to options exercisable within
         60 days of March 31, 1999. The options granted upon consummation of the
         Merger  pursuant to the Issuer's new Stock Option Plan are not included
         in this table because they are not exercisable  within 60 days of March
         31, 1999.
(4)      Reflects the percentage such shares and options represent of the number
         of outstanding  shares of such class of the Issuer's common stock after
         giving  effect  to the  exercise  of  options  owned by such  person or
         persons.
(5)      The shares  beneficially  owned by George  Krupp are owned of record by
         The George Krupp 1994 Family Trust  ("GKFT").  The shares  beneficially
         owned by Douglas  Krupp are owned of record by The  Douglas  Krupp 1994
         Family Trust ("DKFT").  The trustees of both GKFT and DKFT are Lawrence
         I. Silverstein,  Paul Krupp and M. Gordon Ehrlich (the "Trustees"). The
         Trustees  share control over the power to dispose of the assets of GKFT
         and DKFT and thus  each may be deemed to  beneficially  own the  shares
         held  by  GKFT  and  DKFT;  however,  each  of the  Trustees  disclaims
         beneficial ownership of all of such shares.
 (6)     Investcorp does not directly own any stock in the Issuer. The number of
         shares shown as owned by Investcorp includes all of the shares owned by
         INVESTCORP  Investment Equity Limited (See note (7) below).  Investcorp
         owns no  stock  in  Ballet  Limited,  Denary  Limited,  Gleam  Limited,
         Highlands Limited,  Noble Limited,  Outrigger  Limited,  Quill Limited,
         Radial Limited, Shoreline Limited, Zinnia Limited, or in the beneficial
         owners  of these  entities  (See note (10)  below).  Investcorp  may be
         deemed to share beneficial ownership of the shares of voting stock held
         by these  entities  because the entities  have  entered into  revocable
         management   services  or  similar  agreements  with  an  affiliate  of
         Investcorp,  pursuant  to which each such  entities  has  granted  such
         affiliate  the  authority to direct the voting and  disposition  of the
         Issuer voting stock owned by such entity for so long as such  agreement
         is in effect.  Investcorp is a Luxembourg  corporation with its address
         at 37 rue Notre-Dame, Luxembourg.
(8)      INVESTCORP  Investment Equity Limited is a Cayman Islands  corporation,
         and a wholly-owned  subsidiary of Investcorp,  with its address at P.O.
         Box  1111,  West Wind  Building,  George  Town,  Grand  Cayman,  Cayman
         Islands.
(9)      SIPCO Limited may be deemed to control Investcorp through its ownership
         of a majority of a company's  stock that  indirectly owns a majority of
         Investcorp's  shares.  SIPCO  Limited's  address is P.O. Box 1111, West
         Wind Building, George Town, Grand Cayman, Cayman Islands.
(10)     CIP Limited  ("CIP") owns no stock in the Issuer.  CIP indirectly  owns
         less than 0.1% of the stock in each of Ballet Limited,  Denary Limited,
         Gleam Limited,  Highlands  Limited,  Noble Limited,  Outrigger Limited,
         Quill Limited,  Radial  Limited,  Shoreline  Limited and Zinnia Limited
         (See note (10) below). CIP may be deemed to share beneficial  ownership
         of the  shares  of voting  stock of the  Issuer  held by such  entities
         because  CIP  acts as a  director  of such  entities  and the  ultimate
         beneficial  stockholders  of each of those entities have granted to CIP
         revocable  proxies in companies that own those entities' stock. None of
         the  ultimate  beneficial  owners of such  entities  beneficially  owns
         individually more than 5% of the Issuer's voting stock.
(11)     Each of CIP Limited,  Ballet Limited,  Denary  Limited,  Gleam Limited,
         Highlands Limited,  Noble Limited,  Outrigger  Limited,  Quill Limited,
         Radial  Limited,  Shoreline  Limited  and  Zinnia  Limited  is a Cayman
         Islands  corporation  with its  address  at P.O.  Box  2197,  West Wind
         Building, GeorgeTown, Grand Cayman, Cayman Islands.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  In December of 1999,  the Company  borrowed $5 million  from an  affiliate  of
Investcorp  S.A.  to  fund a  payment  of $5  million  to the  landlord  of four
facilities in Ohio. In return for the payment, the Company received an option to
acquire  the four  facilities.  Interest  on this loan is payable  quarterly  in
arrears and is based on a ninety-day LIBOR rate plus 275 basis points.  The loan
is due on the earlier of December 31, 2000 or the acquisition of the facilities.

  On the date of the  Merger,  the  Company  received  $165.0  million of common
equity  capital  provided by the New  Investors.  An affiliate of Investcorp was
paid by the Company a fee of $6.5 million for services  rendered  outside of the
United  States in  connection  with the raising of the equity  capital  from the
international investors. In connection with the Merger, the Company paid III, an
affiliate of the Company and of Investcorp,  a loan finance advisory fee of $4.0
million and Invifin S.A., an affiliate of Investcorp,  a fee of $1.5 million for
providing  a standby  commitment  to fund the $99.5  million  of Old  Notes.  In
connection with the closing of the Merger, the Company entered into an agreement
for management  advisory and consulting  services for a five-year term with III,
pursuant to which the Company prepaid III $6.0 million upon such closing.

  Pursuant  to the  Merger  Agreement,  at the date of the  Merger  the  Company
entered  into a  master  rights  agreement  for  the  benefit  of The  Berkshire
Companies  Limited  Partnership,  a Massachusetts  limited  partnership that was
affiliated with Harborside prior to the date of the Merger ("BCLP"),  certain of
its  affiliates   (BCLP  and  such  affiliates   collectively,   the  "Berkshire
Stockholders")  and the New Investors,  which  agreement  provides,  among other
things,  for the following:  (i) the New Investors  have demand and  "piggyback"
registration   rights;   (ii)  the  Berkshire   Stockholders   have  "piggyback"
registration   rights  entitling  them  (subject  to  certain   limitations)  to
participate  pro  rata  in  Company  registration   statements  filed  with  the
Commission;  (iii) unless otherwise  agreed by the New Investors  holding voting
common  stock  and the  Berkshire  Stockholders,  if any new  equity  securities
(subject  to certain  exceptions)  are to be issued by the  Company  prior to an
initial  public  offering by the Company at a price below fair market value,  as
determined  in good faith by the Board of Directors of the Company,  the Company
will give all holders of the then outstanding  common stock (not including stock
options) the right to participate  pro rata in such equity  financing;  and (iv)
the  Berkshire   Stockholders  are  entitled  to  receive  periodic  information
concerning the Company (subject to certain limitations). The terms of the master
rights agreement may be modified or terminated by agreement of the Company,  the
New Investors and the Berkshire Stockholders.

                                       56
<PAGE>

  Pursuant  to the Merger  Agreement,  the Company has agreed that for six years
after  the  date of the  Merger,  it  will  indemnify  all  current  and  former
directors,  officers,  employees and agents of the Company and its  subsidiaries
and will,  subject to certain  limitations,  maintain for six years a directors'
and  officers'  insurance  and  indemnification   policy  containing  terms  and
conditions which are not less  advantageous  than the policy in effect as of the
date of the Merger Agreement.

  Harborside entered into a Non-Compete  Agreement,  dated as of April 15, 1998,
with each of Douglas Krupp,  a director of Harborside  prior to the Merger and a
beneficial   stockholder  of  the  Company,   and  George  Krupp,  a  beneficial
stockholder of the Company,  pursuant to which each such individual agreed for a
one-year  period  commencing  at the date of the Merger not to engage in certain
business  activities or to own certain equity  interests in any person or entity
that  engages  in  such  business  activities.   Pursuant  to  such  agreements,
Harborside paid $250,000 to each of such individuals at the date of the Merger.

  In  1995,  Mr.  Guillard   subscribed  for  equity  interests  in  certain  of
Harborside's  predecessors.  The aggregate subscription price of $438,000, equal
to the fair market value of such equity  interests as of December 31, 1995,  was
paid by Mr.  Guillard in 1996 with the proceeds of a special bonus equal to such
purchase  price.  To pay  taxes  due with  respect  to the  purchase  of  equity
interests  and  this  bonus,  Mr.  Guillard  received  a loan  from  Harborside,
evidenced by a note maturing  April 15, 2001,  and bearing  interest at 7.0% per
annum.  In connection  with the IPO  Reorganization,  such equity  interests and
Messrs.  Guillard's and Dell'Anno's  interests in Harborside  Healthcare Limited
Partnership  were  exchanged  for an aggregate of 307,724  shares of  Harborside
Common Stock. Under his prior employment agreement,  Mr. Dell'Anno also received
an  additional  18,037  shares of  Harborside  Common Stock  pursuant to a bonus
payment in  connection  with the IPO (with a value of $212,000).  Mr.  Dell'Anno
also received a loan from Harborside at an interest rate of prime plus 1% to pay
income tax liabilities that resulted from such bonus payment.

  In connection with the IPO, Harborside entered into a Reorganization Agreement
(the  "Reorganization  Agreement") with certain  individuals,  including but not
limited to Messrs.  Guillard and  Dell'Anno  (the  "Contributors"),  pursuant to
which the Contributors  received  4,400,000 shares of Harborside Common Stock in
exchange  for  their  ownership  interests  in  Harborside's  predecessors.  The
reorganization  contemplated  by  the  Reorganization  Agreement  was  completed
immediately prior to completion of the IPO.

  Harborside  adopted an  Executive  Long-Term  Incentive  Plan (the  "Executive
Plan") effective July 1, 1995. Eligible participants, consisting of Harborside's
department heads and regional  directors,  were entitled to receive payment upon
an initial public offering or sale of Harborside  above a baseline  valuation of
$23,000,000  within two years of the effective  date of the plan.  The Executive
Plan terminated  upon completion of the IPO. The payments to Messrs.  Beardsley,
Stephan and Raso totaled $185,250, $150,250 and $75,000, respectively.

  Pursuant to certain Change In Control  Agreements dated as of January 15, 1998
between Harborside and each of Messrs. Guillard,  Dell'Anno,  Stephan, Beardsley
and  Raso,  which  were  entered  into  prior  to the  execution  of the  Merger
Agreement,  at the date of the Merger,  each of such officers received a payment
equal to his annual salary, except for Mr. Guillard who received a payment equal
to 1.5 times his annual  salary.  The amounts of such  payments were as follows:
Mr. Guillard,  $517,500;  Mr. Dell'Anno,  $225,000;  Mr. Stephan,  $190,000; Mr.
Beardsley,  $200,000;  and Mr. Raso,  $140,000.  In addition,  pursuant to these
agreements,  all  outstanding  loans made by Harborside to such officers for the
purchase of stock were forgiven as of the date of the Merger. The forgiven loans
were to Messrs.  Guillard and Dell'Anno and had a remaining  balance of $229,350
and  $112,520,  respectively,  as of the date of the Merger.  The purpose of the
Change In Control Agreements was to induce such officers to remain in the employ
of  Harborside  and to assure them of fair  severance  should  their  employment
terminate  in  specified   circumstances   following  a  change  in  control  of
Harborside.  Such officers  were  entitled to the payments and loan  forgiveness
described  above because the Merger  constituted a "change in control" under the
terms of the Change In Control Agreements. The Change In Control Agreements also
provided for certain  payments if the employment  with Harborside of any of such
officers is terminated  by Harborside  for any reason other than cause within 12
months  following a change in  control.  The Change In Control  Agreements  were
terminated  by mutual  agreement  of the  parties as of the date of the  Merger,
except  that  Harborside  complied  with its  obligations  under the  provisions
described in the first sentence of this paragraph.




                                       57
<PAGE>



                                     PART IV

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



(a)


         1.       Financial Statements:


                  See Index to  Consolidated  Financial  Statements in Item 8 of
this annual report.


         2.       Financial Statement Schedules:


                  None.


         3.       Exhibits


The exhibits listed in the  accompanying  index to exhibits are  incorporated by
reference herein or are filed as part of this annual report.




        Exhibit
        Number           Description of Exhibit


2.1** Agreement and Plan of Merger dated as of April 15, 1998

2.2** Stockholder Agreement dated as of April 15, 1998

3.1(a)****# Amended and Restated Certificate of Incorporation of the Registrant


3.1(b)****  Certificate of  Designation  of the  Registrant  with respect to the
     Exchangeable Preferred Stock

3.1(c)** Amended and Restated By-laws of the Registrant


3.1(d)**** Form of  Certificate  of  Incorporation  of certain  registrants,  as
     amended


3.2(a)**** Certificate of Incorporation of Sailors, Inc.

3.2(b)****  Form A of  Articles  of  Organization,  Articles  of  Amendment  and
     Articles of Merger of certain registrants

3.2(c)**** Form B of Articles of Organization of certain registrants


3.2(d)**** Form of First  Amendment to and  Restatement  of Agreement of Limited
     Partnership of certain registrants

3.2(e)**** Form of Agreement of Limited Partnership of certain registrants


3.2(f)**** Amended and Restated  Agreement of Limited  Partnership of Harborside
     Healthcare  Limited  Partnership,  dated as of May 12, 1987, as amended and
     restated as of July 1, 1995

3.2(g)**** Agreement of Limited  Partnership of KHC Partners,  Limited Partners,
     dated as of May 28, 1987, as amended

3.2(h)**** Form A of Certificate of Limited Partnership of certain registrants


3.2(i)**** Form B of Certificate of Limited Partnership of certain registrants

3.2(j)****  Certificate of Limited  Partnership of Bridgewater  Assisted  Living
     Limited Partnership


3.2(k)****  First  Amendment  to  and  Restatement  of  Certificate  of  Limited
     Partnership of KHC Partners  Limited  Partnership  (now known as Harborside
     Healthcare Advisors Limited Partnership)

3.2(l)****  First  Amendment  to  and  Restatement  of  Certificate  of  Limited
     Partnership of Harborside  Acquisition Limited Partnership IV (now known as
     Harborside Danbury Limited Partnership)


3.2(m)****  Certificate  of Formation  and Agreement of Limited  Partnership  of
     Riverside Retirement Limited Partnership, as amended

3.2(n)**** Certificate of Limited  Partnership of Harborside  Healthcare Limited
     Partnership

                                       58
<PAGE>


3.2(o)**** Form A of By-laws of certain registrants

3.2(p)**** Form B of By-laws of certain registrants

4.1**** Indenture  between MergerCo and the Trustee,  dated as of July 31, 1998,
     with respect to the Notes


4.2**** Supplemental  Indenture  between the Registrant,  the Guarantors and the
     Trustee, dated as of August 11, 1998

4.3****# Form of New Note


4.4****  Registration  Rights  Agreement,  dated  July  31,  1998,  between  the
     Registrant (as successor to MergerCo) and the Placement Agents, relating to
     the Old Notes


4.5****  Certificate  of  Designation  of the  Registrant  with  respect  to the
     Exchangeable Preferred Stock (filed as Exhibit 3.1.2)


4.6**** Form of Stock Certificate representing New Preferred Stock


4.7****  Registration  Rights  Agreement,  dated  July  31,  1998,  between  the
     Registrant (as successor to MergerCo) and the Placement Agents, relating to
     the Old Preferred Stock (filed as Exhibit 1.3)
      4.8****            Form of Letter of Transmittal (filed as Exhibit 1.4)


10.1(a)*  Facility  Lease  Agreement,  dated as of December  31,  1995,  between
     Meditrust  Tri-States,   Inc.  and  HHCI  Limited  Partnership  (New  Haven
     Facility)

10.1(b)*  Facility  Lease  Agreement,  dated as of December  31,  1995,  between
     Meditrust  Tri-States,  Inc.  and HHCI  Limited  Partnership  (Indianapolis
     Facility)


10.1(c)*  Facility  Lease  Agreement,  dated as of December  31,  1995,  between
     Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy Facility)

10.1(d)*  Facility  Lease  Agreement,  dated as of December  31,  1995,  between
     Meditrust of Florida, Inc. and HHCI Limited Partnership (Sarasota Facility)


10.1(e)*  Facility  Lease  Agreement,  dated as of December  31,  1995,  between
     Meditrust  of  Florida,  Inc.  and  HHCI  Limited  Partnership   (Pinebrook
     Facility)


10.1(f)*  Facility  Lease  Agreement,  dated as of December  31,  1995,  between
     Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples Facility)

10.1(g)*  Facility  Lease  Agreement,  dated as of December  31,  1995,  between
     Meditrust  of New Jersey,  Inc. and HHCI  Limited  Partnership  (Woods Edge
     Facility)


10.1(h)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and between Meditrust Tri-States, Inc. and HHCI Limited Partnership (New
     Haven Facility)


10.1(i)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and between  Meditrust  Tri-States,  Inc. and HHCI  Limited  Partnership
     (Indianapolis Facility)


10.1(j)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and between  Meditrust of Ohio, Inc. and HHCI Limited  Partnership (Troy
     Facility)


10.1(k)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and between  Meditrust of Florida,  Inc.  and HHCI  Limited  Partnership
     (Sarasota Facility)

10.1(l)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and between  Meditrust of Florida,  Inc.  and HHCI  Limited  Partnership
     (Pinebrook Facility)


10.1(m)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and between  Meditrust of Florida,  Inc.  and HHCI  Limited  Partnership
     (Naples Facility)


10.1(n)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and between Meditrust of New Jersey,  Inc. and HHCI Limited  Partnership
     (Woods Edge Facility)

10.2(a)* Loan  Agreement,  dated  October 13,  1994,  among  Meditrust  Mortgage
     Investments, Inc. and Bay Tree Nursing Center Corporation,  Belmont Nursing
     Center  Corporation,  Countryside Care Center  Corporation,  Oakhurst Manor
     Nursing  Center  Corporation,  Orchard  Ridge Nursing  Center  Corporation,
     Sunset  Point  Nursing   Center   Corporation,   West  Bay  Nursing  Center
     Corporation and Harborside Healthcare Limited Partnership.

                                       59
<PAGE>


10.2(b)* Guaranty,  dated October 14, 1994, to Meditrust  Mortgage  Investments,
     Inc. from Harborside Healthcare Limited Partnership

10.2(c)* Environmental Indemnity Agreement, dated October 13, 1994, by and among
     Bay Tree Nursing Center  Corporation,  Belmont Nursing Center  Corporation,
     Countryside  Care  Center   Corporation,   Oakhurst  Manor  Nursing  Center
     Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing
     Center  Corporation,  West Bay Nursing  Center  Corporation  and Harborside
     Healthcare Limited Partnership and Meditrust Mortgage Investments, Inc.


10.2(d)* Consolidated and Renewed  Promissory Note, dated October 13, 1994, from
     Bay Tree Nursing Center  Corporation,  Belmont Nursing Center  Corporation,
     Countryside  Care  Center   Corporation,   Oakhurst  Manor  Nursing  Center
     Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing
     Center  Corporation,  West Bay Nursing  Center  Corporation  and Harborside
     Healthcare Limited Partnership and Meditrust Mortgage Investments, Inc.


10.2(e)* Negative Pledge Agreement, dated October 13, 1994, by and among Douglas
     Krupp, George Krupp, Bay Tree Nursing Center  Corporation,  Belmont Nursing
     Center  Corporation,  Countryside Care Center  Corporation,  Oakhurst Manor
     Nursing  Center  Corporation,  Orchard  Ridge Nursing  Center  Corporation,
     Sunset  Point  Nursing   Center   Corporation,   West  Bay  Nursing  Center
     Corporation  and Harborside  Healthcare  Limited  Partnership and Meditrust
     Mortgage Investments, Inc.

10.2(f)* Affiliated Party  Subordination  Agreement,  dated October 13, 1994, by
     and among Bay Tree  Nursing  Center  Corporation,  Belmont  Nursing  Center
     Corporation,  Countryside Care Center  Corporation,  Oakhurst Manor Nursing
     Center Corporation,  Orchard Ridge Nursing Center Corporation, Sunset Point
     Nursing  Center  Corporation,  West  Bay  Nursing  Center  Corporation  and
     Harborside   Healthcare   Limited   Partnership   and  Meditrust   Mortgage
     Investments, Inc.

10.2(g)* First  Amendment to Loan  Agreement,  dated May 17, 1996,  by and among
     Meditrust   Mortgage   Investments,   Inc.  and  Bay  Tree  Nursing  Center
     Corporation,  Belmont Nursing Center  Corporation,  Countryside Care Center
     Corporation,  Oakhurst  Manor  Nursing  Center  Corporation,  Orchard Ridge
     Nursing Center Corporation,  Sunset Point Nursing Center Corporation,  West
     Bay  Nursing  Center   Corporation   and  Harborside   Healthcare   Limited
     Partnership


10.2(h)*  Credit  Agreement,  dated  as of  April  14,  1997,  among  Harborside
     Healthcare  Corporation  and the other  Borrowers  specified  therein,  the
     Lenders party thereto and the Chase Manhattan Bank, as Administrative Agent


10.2(i)*** First Amendment to Revolving Credit Agreement,  dated as of August 1,
     1997, among Harborside  Healthcare and other borrowers  specified  therein,
     the Lenders party thereto and Chase Manhattan Bank, Administrative Agent


10.2(j)***  Second  Amendment  to  Revolving  Credit  Agreement,   dated  as  of
     August 28,  1997, among Harborside Healthcare and other borrowers specified
     therein, the Lenders party thereto and Chase Manhattan Bank, Administrative
     Agent

10.3(a)*  Facility  Lease  Agreement,  dated  as of  January  1,  1996,  between
     Meditrust  of New  Hampshire  Inc. and  Harborside  New  Hampshire  Limited
     Partnership (Westwood Facility)


10.3(b)*  Facility  Lease  Agreement,  dated  as of  January  1,  1996,  between
     Meditrust  of New  Hampshire  Inc. and  Harborside  New  Hampshire  Limited
     Partnership (Pheasant Wood Facility)

10.3(c)*  Facility  Lease  Agreement,  dated  as of  January  1,  1996,  between
     Meditrust  of New  Hampshire  Inc. and  Harborside  New  Hampshire  Limited
     Partnership (Crestwood Facility)


10.3(d)*  Facility  Lease  Agreement,  dated  as of  January  1,  1996,  between
     Meditrust  of New  Hampshire  Inc. and  Harborside  New  Hampshire  Limited
     Partnership (Milford Facility)

10.3(e)*  Facility  Lease  Agreement,  dated  as of  January  1,  1996,  between
     Meditrust  of New  Hampshire  Inc. and  Harborside  New  Hampshire  Limited
     Partnership (Applewood Facility)

10.3(f)*  Facility  Lease  Agreement,  dated as of December  31,  1996,  between
     Meditrust  of New  Hampshire  Inc. and  Harborside  New  Hampshire  Limited
     Partnership (Northwood Facility)

10.3(g)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and  between  Meditrust  of  New  Hampshire,  Inc.  and  Harborside  New
     Hampshire Limited Partnership (Westwood Facility)

10.3(h)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and  between  Meditrust  of  New  Hampshire,  Inc.  and  Harborside  New
     Hampshire Limited Partnership (Pheasant Wood Facility)


10.3(i)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and  between  Meditrust  of  New  Hampshire,  Inc.  and  Harborside  New
     Hampshire Limited Partnership (Crestwood Facility)

                                       60
<PAGE>

10.3(j)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and  between  Meditrust  of  New  Hampshire,  Inc.  and  Harborside  New
     Hampshire Limited Partnership (Milford Facility)


10.3(k)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and  between  Meditrust  of  New  Hampshire,  Inc.  and  Harborside  New
     Hampshire Limited Partnership (Applewood Facility)

10.3(l)* First Amendment to Facility Lease Agreement,  dated as of May 17, 1996,
     by and  between  Meditrust  of  New  Hampshire,  Inc.  and  Harborside  New
     Hampshire Limited Partnership (Northwood Facility)

10.4(a)* Facility Lease Agreement, dated as of March 31, 1995, between Meditrust
     of Ohio,  Inc.  and  Harborside  of  Toledo  Limited  Partnership  (Swanton
     Facility)


10.4(b)* First Amendment to Facility Lease  Agreement,  dated as of December 31,
     1995, by and between Harborside Toledo Limited Partnership and Meditrust of
     Ohio, Inc. (Swanton Facility)


10.4(c)* Second Amendment to Facility Lease Agreement, dated as of May 17, 1996,
     by and between  Meditrust  of Ohio,  Inc.  and  Harborside  Toledo  Limited
     Partnership (Swanton Facility)


10.5*Amended and  Restated  Agreement  of Limited  Partnership  of Bowie  Center
     Limited Partnership, dated April 7, 1993


10.6*Agreement of Lease,  dated March 16, 1993, between Bryan Nursing Home, Inc.
     and Harborside of Ohio Limited Partnership  (Defiance and Northwestern Ohio
     Facilities)


10.7*First  Amendment to Agreement of Lease,  dated June 1, 1993, by and between
     Bryan Nursing Home, Inc. and Harborside Ohio Limited Partnership

10.8*Option to Purchase  Agreement,  dated March 16, 1993,  by and between Bryan
     Nursing Home, Inc. and Harborside Ohio Limited Partnership


10.9(a)*  Lease,   dated  September  30,  1994,  between  Rockledge  T.  Limited
     Partnership  and  Harborside  of  Florida  Limited   Partnership   (Brevard
     Facility)

10.9(b)* Lease  Guaranty,  dated  September  30,  1994,  to Rockledge T. Limited
     Partnership from Harborside Healthcare Limited Partnership


10.9(c)* Indemnity  Agreement,  dated September 30, 1994,  between  Rockledge T.
     Limited Partnership,  Harborside of Florida Limited Partnership, Harborside
     Healthcare Limited Partnership and Southtrust Bank of Alabama


10.9(d)*  Assignment  and Security  Agreement,  dated  September  30,  1994,  to
     Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership
     and Southtrust Bank of Alabama

10.9(e)*  Subordination  Agreement  (Lease),  dated September 30, 1994,  between
     Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership
     and Southtrust Bank of Alabama


10.9(f)* Subordination Agreement (Management),  dated September 30, 1994, by and
     among  Rockledge  T. Limited  Partnership,  Harborside  of Florida  Limited
     Partnership,  Harborside Healthcare Limited Partnership and Southtrust Bank
     of Alabama

10.10(a)****+  Employment  Agreement,  dated as of August 11, 1998,  between the
     Registrant and Stephen L. Guillard

10.10(b)****+  Employment  Agreement,  dated as of August 11, 1998,  between the
     Registrant and Damian Dell'Anno


10.10(c)****+  Employment  Agreement,  dated as of August 11, 1998,  between the
     Registrant and Bruce Beardsley


10.10(d)****+  Employment  Agreement,  dated as of August 11, 1998,  between the
     Registrant and William Stephan


10.10(e)****+  Employment  Agreement,  dated as of August 11, 1998,  between the
     Registrant and Steven Raso

10.11(a)****+ Management Stock Incentive Plan,  established by the Registrant as
     of August 11, 1998


10.11(b)****+  Form of  Stock  Option  Agreement  pursuant to  Management  Stock
     Incentive Plan

10.12(a)*+ 1996 Long-Term Stock Incentive Plan


10.12(b)*+  Form of  Nonqualified  Stock Option  Agreement  pursuant to the 1996
     Long-Term Stock Incentive Plan


10.13****+  Form of  Put/Call  Agreement,  dated  August 11,  1998,  between the
     Registrant and each of Messrs. Guillard, Dell'Anno,  Beardsley, Stephan and
     Raso

                                       61
<PAGE>


10.14*+ Supplemental Executive Retirement Plan of the Registrant

10.15*  Administrative  Services  Agreement,  dated April 15, 1988,  between the
     Registrant and The Berkshire Companies Limited Partnership ("BCLP")

10.16* Agreement to Lease, dated as of May 3, 1996, among Westbay Manor Company,
     Westbay Manor II Development Company, Royal View Manor Development Company,
     Beachwood  Care  Center  Limited  Partnership,   Royalview  Manor  Company,
     Harborside   Health I   Corporation  and  Harborside   Healthcare   Limited
     Partnership

10.17* Guaranty by Harborside in favor of Westbay Manor  Company,  Westbay Manor
     II Development  Company,  Royalview Manor Development Company and Beachwood
     Care Center Limited Partnership


10.18**** Master Rights Agreement, dated as of August 11, 1998, by and among the
     Registrant, BCLP, certain affiliates of BCLP and the New Investors

10.19(a)****  Credit  Agreement,   dated  as  of  August  11,  1998,  among  the
     Registrant,  Chase  Securities,  Inc., as Arranger,  Morgan  Stanley Senior
     Funding,  Inc. and BT Alex. Brown  Incorporated,  as Co-Arrangers,  Bankers
     Trust Company, as Documentation Agent, Morgan Stanley Senior Funding, Inc.,
     as Syndication  Agent, The Chase Manhattan Bank, as  Administrative  Agent,
     and the lenders party thereto (the "Lenders")

10.19(b) First Amendment to Credit Agreement,  dated as of March 30, 1999, among
     the  Registrant,  Morgan Stanley Senior  Funding,  Inc. and BT Alex.  Brown
     Incorporated,  as  Co-Arrangers,  Bankers Trust Company,  as  Documentation
     Agent,  Morgan Stanley Senior Funding Inc., as Syndication Agent, The Chase
     Manhattan Bank, as Administrative Agent, and the Lenders


10.20****  Collateral  Agreement,  dated as of August 11, 1998,  in favor of The
     Chase Manhattan Bank, as administrative agent, together with the Lenders

10.21**** HHC 1998-1 Trust Credit Agreement, $238,125,000 Credit Facility, dated
     as of August 11, 1998,  among the  Registrant,  Chase  Securities  Inc., as
     Arranger,   Morgan  Stanley  Senior  Funding,   Inc.  and  BT  Alex.  Brown
     Incorporated,  as  Co-Arrangers,  Bankers Trust Company,  as  Documentation
     Agent, Morgan Stanley Senior Funding, Inc., as Syndication Agent, The Chase
     Manhattan Bank, as Administrative Agent, and the lenders party thereto

10.22**** Participation Agreement, dated as of August 11, 1998, among Harborside
     of Dayton  Limited  Partnership,  as Lessee,  HHC 1998-1 Trust,  as Lessor,
     Wilmington  Trust  Company,  BTD  Harborside  Inc.,  Morgan  Stanley Senior
     Funding,  Inc. and CSL Leasing,  Inc.,  as Investors,  The Chase  Manhattan
     Bank, as Agent, and the lenders party thereto

10.23**** Lease, dated August 11, 1998, between HHC 1998-1 Trust, as Lessor, and
     Harborside of Dayton Limited Partnership, as Lessee

10.24**** Accounts Receivable Intercreditor Agreement (Leased Facilities), dated
     as  of  August  11,  1998,   among  (i)  The  Chase   Manhattan   Bank,  as
     administrative  agent, (ii) HHC 1998-1 Trust, (iii) CSL Leasing,  Inc., BTD
     Harborside, Inc. and Morgan Stanley Senior Funding, Inc. and (iv) Meditrust
     Company LLC

10.25**** Accounts Receivable  Intercreditor  Agreement (Mortgaged  Facilities),
     dated as of  August  11,  1998,  among  (i) The Chase  Manhattan  Bank,  as
     administrative  agent, (ii) HHC 1998-1 Trust, (iii) CSL Leasing,  Inc., BTD
     Harborside, Inc. and Morgan Stanley Senior Funding, Inc. and (iv) Meditrust
     Mortgage Investments, Inc.

10.26****  Financing  Advisory  Agreement,  dated August 11,  1998,  between the
     Registrant  (as successor to MergerCo) and  Investcorp  International  Inc.
     ("III")

10.27**** Agreement for Management  Advisory,  Strategic Planning and Consulting
     Services,  dated August 11, 1998,  between the  Registrant (as successor to
     MergerCo) and III


10.28**** Second Amendment to Loan Agreement, Consent to Merger and Confirmation
     of  Guaranties,  dated as of July 31,  1998,  by and among Bay Tree Nursing
     Center Corp.,  Countryside  Cave Center Corp.,  Sunset Point Nursing Center
     Corp.,  West  Bay  Nursing  Center  Corp.,  Harborside  Healthcare  Limited
     Partnership,  Harborside  Healthcare  Corporation  and  Meditrust  Mortgage
     Investments, Inc.

10.29**** Omnibus Amendment to Facility Lease Agreements,  Consent to Merger and
     Confirmation  of  Guaranties,  dated  as of July  31,  1998,  by and  among
     Harborside  New Hampshire  Limited  Partnership,  Harborside  Bledo Limited
     Partnership,  HHCI  Limited  Partnership,   Harborside  Healthcare  Limited
     Partnership, Harborside Healthcare Corporation and Meditrust Company LLC


21.1 Subsidiaries of the Registrant

27.1 Financial Data Schedule

                                       62
<PAGE>

*    Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-1 (Registration No. 333-3096)


**   Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-4 (Registration No. 333-51633)


***  Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 1997 (File No. 01-14538)


**** Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-4 (Registration No. 333-64679)

#    Replaces previously filed exhibit


+    Management  contract or  compensation  plan or  arrangement  required to be
     filed as an exhibit.


(b)  Reports on Form 8-K:
     None



                                       63
<PAGE>


















































SIGNATURES

  Pursuant  to the  requirements  of Section 13 or 15(d) of the  Securities  and
Exchange Act of 1934,  the  registrant  has duly caused this report to signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 30th day of
March, 2000.
                                      HARBORSIDE HEALTHCARE CORPORATION

                                        By   /s/ Stephen L. Guillard
                                             Chairman of the Board,
                                             President and Chief
                                             Executive Officer

Pursuant to the  requirements  of the Securities and Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated



/s/ Stephen L. Guillard        Chairman, President, Chief Executive Officer
-----------------------         and Director
                               (Principal Executive Officer)

/s/ Damian N. Dell'Anno        Executive Vice President of Operations
-----------------------         and Director


/s/ William H. Stephan         Senior Vice President, Chief Financial Officer
----------------------          and Director
                               (Principal Financial and Accounting Officer)

/s/ Christopher J. O'Brien     Director


/s/ Charles J. Philippin       Director


/s/ Lars C. Haegg              Director
-----------------


/s/ Edward G. Lord III         Director
----------------------


/s/ James O. Egan              Director
-----------------


/s/ Charles Marquis            Director
-------------------


                                       64
<PAGE>
















                        Harborside Healthcare Corporation
                                One Beacon Street
                                Boston, MA 02210


March 30, 2000




Securities and Exchange Commission
450 Fifth Avenue, N.W.
Washington, D.C.  20549



Ladies and Gentlemen:

     In  accordance  with Item  601(b)(4)(iii)  of  Regulation  S-K,  Harborside
Healthcare  Corporation  (the  "Company")  has not filed herewith any instrument
with  respect to long term debt not being  registered  where the total number of
securities  authorized thereunder does not exceed ten percent (10%) of the total
assets of the Company and its subsidiaries on a consolidated  basis. The Company
hereby  agrees to furnish a copy of any such  agreement  to the  Securities  and
Exchange Commission upon request.

                                               Very truly yours,

                                               HARBORSIDE HEALTHCARE CORPORATION

                                               By: /s/ William H. Stephan
                                                       ------------------
                                                      Chief Financial Officer














                                       65
<PAGE>











<PAGE>



Exhibit 21.1

Subsidiaries of Harborside Healthcare Corporation as of December 31, 1999:
<TABLE>
<CAPTION>
<S>                                          <C>                           <C>
                                               Jurisdiction of
                                               Incorporation or
                           Name                Organization                Doing Business As


1.  Bay Tree Nursing Center Corporation          Massachusetts             Harborside Healthcare -Palm Harbor

2.  Belmont Nursing Center Corporation           Massachusetts             Harborside Healthcare -Toledo

3.  Bowie Center Limited Partnership             Maryland                  Larkin Chase Nursing and
                                                                           Restoration Center

4.  Countryside Care Center Corporation          Massachusetts             Harborside Healthcare -Terre Haute

5.  Harborside of Cleveland Limited Partnership  Massachusetts             Harborside Healthcare - Beachwood
                                                                           Rehabilitation and Nursing Center
                                                                           Harborside Healthcare - Broadview Heights
                                                                           Rehabilitation and Nursing
                                                                           Center
                                                                           Harborside Healthcare - Westlake I
                                                                           Rehabilitation and Nursing Center
                                                                           Harborside Healthcare - Westlake II
                                                                           Rehabilitation and Nursing Center

6.  Harborside of Florida Limited Partnership    Florida                   Harborside Healthcare - Brevard

7.  Harborside of Ohio Limited Partnership       Massachusetts             Harborside Healthcare - Northwest Ohio
                                                                           Harborside Healthcare - Defiance

8.  Harborside Funding Limited Partnership       Massachusetts

9.  Harborside Health I Corporation              Delaware                  Harborside Nursing Homes, Inc.

10. Harborside Healthcare Advisors               Massachusetts
      Limited Partnership

11. Harborside Healthcare Limited                Massachusetts             Allicor
      Partnership                                                          Harborside Healthcare Management
                                                                           Limited Partnership
12. Harborside Healthcare Network                Florida
      Limited Partnership

13. Harborside Homecare Limited                  Massachusetts             Behavioral Health Care
      Partnership

14. Harborside New Hampshire                     Massachusetts             Harborside Nursing Facilities Limited
      Limited Partnership                                                  Partnership
                                                                           Harborside Healthcare - Applewood
                                                                           Rehabilitation and Nursing Center
                                                                           Harborside Healthcare - Crestwood
                                                                           Rehabilitation and Nursing Center
                                                                           Harborside Healthcare - Milford
                                                                           Rehabilitation and Nursing Center
                                                                           Harborside Healthcare - Northwood
                                                                           Rehabilitation and Nursing Center
                                                                           Harborside Healthcare - Pheasantwood
                                                                           Rehabilitation and Nursing Center
                                                                           Harborside Healthcare - Westwood
                                                                           Rehabilitation and Nursing Center

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15. Harborside Rehabilitation Limited            Massachusetts             Theracor Rehabilitation Services
      Partnership

16. Harborside Toledo Corporation                Massachusetts

17. Harborside Toledo Limited Partnership        Massachusetts             Harborside Healthcare - Swanton

18. HHCI Limited Partnership                     Massachusetts             Harborside Healthcare - Naples
                                                                           Harborside Healthcare - Sarasota
                                                                           Harborside Healthcare - Pinebrook
                                                                           Harborside Healthcare - New Haven
                                                                           Harborside Healthcare - Woods Edge
                                                                           Harborside Healthcare - Indianapolis
                                                                           Harborside Healthcare - Troy
19. KHI Corporation                              Delaware

20. Maryland Harborside Corporation              Massachusetts

21. Oakhurst Manor Nursing Center                Massachusetts             Harborside Healthcare - Ocala
      Corporation

22. Orchard Ridge Nursing Center                 Massachusetts             Harborside Healthcare - Gulf Coast
      Corporation

23. Riverside Retirement Limited Partnership     Massachusetts             Harborside Healthcare - Decatur

24. Sunset Point Nursing Center Corporation      Massachusetts             Harborside Healthcare - Clearwater

25. West Bay Nursing Center Corporation          Massachusetts             Harborside Healthcare - Tampa Bay

26. Harborside Healthcare Baltimore Limited
      Partnership                                Massachusetts             Harborside Healthcare -Harford Gardens

27. Harborside Massachusetts
          Limited Partnership                    Massachusetts             Harborside Healthcare - North Shore
                                                                           Harborside Healthcare -Maplewood
                                                                           Harborside Healthcare - Cedar Glen
                                                                           Harborside Healthcare - Danvers
28. Harborside of Dayton
          Limited Partnership                    Massachusetts             Harborside Healthcare - Laurelwood
                                                                           Harborside Healthcare - New Lebanon
                                                                           Harborside Healthcare - Dayton
29. Harborside Connecticut
          Limited Partnership                    Massachusetts             Harborside Healthcare - Arden House
                                                                           Harborside Healthcare - Governor's
                                                                           Harborside Healthcare - Willows
                                                                           Harborside Healthcare - Madison House
                                                                           Harborside Healthcare - Reservoir

30. Harborside Rhode Island
       Limited Partnership                       Massachusetts             Harborside Healthcare - Greenwood
                                                                           Harborside Healthcare - Pawtuxet Village

31. Harborside North Toledo
       Limited Partnership                       Massachusetts             Harborside Healthcare - Sylvania
                                                                           Harborside Healthcare - Point Place

32. Harborside Danbury
       Limited Partnership                       Massachusetts             Harborside Healthcare - Glen Hill
                                                                           Harborside Healthcare - Glen Crest
</TABLE>

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