# UNITED STATES

# SECURITIES AND EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

# FORM 10-Q

## (Mark One)

## [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

## For the quarterly period ended September 30, 2002

# OR

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

# For the transition period fromto

# Commission file number          333-64679

# Harborside Healthcare Corporation

|Delaware(State or other jurisdiction of incorporation or organization)           | 04-3307188(IRS employer identification no.)
|-------------------------------------------------------------------------------- | -------------------------------------------
|                                                                                
|One Beacon Street, Boston, Massachusetts(Address of principal executive offices) | 02108(Zip Code)                            

# (617) 646-5400

# (Registrant's telephone number, including area code)

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      Not Applicable

## Number of shares of common stock, par value $0.01 per share outstanding as of November 11, 2002:  7,877,166.

---

`HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
                                 Table of Contents


                                                                                Page
                                                                                ----

Part I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets
            as of December 31, 2001 and September 30, 2002                      3

         Condensed Consolidated Statements of Operations
            for the Three Months and Nine Months ended
            September 30, 2001 and 2002                                         4

         Condensed Consolidated Statement of Changes
            in Stockholders' Deficit for the Nine Months
            ended September 30, 2002                                            5

         Condensed Consolidated Statements of Cash Flows
            for the Nine Months ended September 30, 2001 and 2002               6

         Notes to Condensed Consolidated Financial Statements                   7

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                    15

Item 3.  Quantitative and Qualitative Disclosures about Market Risk             24

Item 4.  Controls and Procedures                                                24

Part II  OTHER INFORMATION                                                      25

         Signatures                                                             26

         Certifications                                                         27`

# 2

---

# PART I.  FINANCIAL INFORMATION

# Item 1.  FINANCIAL STATEMENTS

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# CONDENSED CONSOLIDATED BALANCE SHEETS

# (dollars in thousands, except share amounts)

`December 31,  September 30,
                                                                                    2001         2002
                                                                                 ---------    ---------
            ASSETS .............................................................              (unaudited)
Current assets:
  Cash and cash equivalents .................................................... $   9,249    $  20,424
  Accounts receivable, net of allowances for doubtful
  accounts of $3,979 and $5,894, respectively ..................................    45,502       47,620
  Prepaid expenses and other ...................................................    11,628       12,405
                                                                                 ---------    ---------
    Total current assets .......................................................    66,379       80,449

Restricted cash ................................................................     5,898        6,418
Property and equipment, net ....................................................   108,989      117,892
Deferred financing and other intangibles, net ..................................     3,916        8,612
Other assets, net ..............................................................       700          170
Note receivable ................................................................     7,487        7,487
                                                                                 ---------    ---------
    Total assets ............................................................... $ 193,369    $ 221,028
                                                                                 =========    =========

          LIABILITIES
Current liabilities:
  Current maturities of long-term debt ......................................... $   2,776    $     297
  Accounts payable .............................................................    14,711       14,595
  Employee compensation and benefits ...........................................    19,270       24,388
  Other accrued liabilities ....................................................     6,878        7,974
  Accrued interest .............................................................       147          325
  Current portion of deferred income ...........................................       521          395
                                                                                 ---------    ---------
    Total current liabilities ..................................................    44,303       47,974

Claims reserve .................................................................     1,467        5,353
Long-term portion of deferred income ...........................................     1,487          992
Long-term debt .................................................................   113,878      140,712
Long-term accrued interest .....................................................    47,115       43,108
                                                                                 ---------    ---------
    Total liabilities ..........................................................   208,250      238,139
                                                                                 ---------    ---------

13% Convertible exchangeable preferred stock, redeemable, $.01 par value
  with a liquidation value of $1,000 per share; 100,000 shares authorized;
  16,286 and 17,926 shares issued and outstanding, respectively ................    16,286       17,926

        STOCKHOLDERS' DEFICIT
Common stock, $.01 par value, 40,700,000 shares
  authorized and 15,275,664 shares issued ......................................       153          153
Additional paid-in capital .....................................................   187,976      186,336
Common stock in treasury, at cost, 7,379,165 and
 7,398,498 shares, respectively ................................................  (183,746)    (183,746)
Accumulated other comprehensive loss ...........................................      --           (159)
Accumulated deficit ............................................................   (35,550)     (37,621)
                                                                                 ---------    ---------
    Total stockholders' deficit ................................................   (31,167)     (35,037)
                                                                                 ---------    ---------
    Total liabilities and stockholders' deficit ................................ $ 193,369    $ 221,028
                                                                                 =========    =========`

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

# 3

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# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

# (Unaudited)

# (dollars in thousands, except per share amounts)

`HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

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


                                                       For the three months     For the nine months
                                                      ended September 30,        ended September 30,
                                                     ----------------------    ----------------------

                                                          2001         2002         2001         2002
                                                     ---------    ---------    ---------    ---------


Total net revenues ...............................   $  88,210    $ 103,756    $ 256,423    $ 299,278
                                                     ---------    ---------    ---------    ---------

     Expenses:
          Facility operating .....................      71,209       85,690      207,384      245,994
          General and administrative .............       4,805        5,154       14,424       15,142
          Service charges paid to former affiliate         250          189          801          573
          Amortization of prepaid management fee .         300          300          900          900
          Depreciation and amortization ..........       2,117        2,443        6,548        7,098
          Facility rent ..........................       7,186        7,783       21,560       23,017
          Financial restructuring costs ..........        --           --          9,045         --
          Facility reorganization costs ..........         750         --            750         --
          Financing costs (Note E) ...............        --          2,835         --          2,835
                                                     ---------    ---------    ---------    ---------

          Total expenses .........................      86,617      104,394      261,412      295,559
                                                     ---------    ---------    ---------    ---------

 Income (loss) from operations ...................       1,593         (638)      (4,989)       3,719

      Other:
          Interest expense, net ..................       2,097        1,948        9,774        5,763
          Other income ...........................         (49)        (237)        (138)        (153)
                                                     ---------    ---------    ---------    ---------

Loss before income taxes .........................        (455)      (2,349)     (14,625)      (1,891)
Income tax expense ...............................        --             60         --            180
                                                     ---------    ---------    ---------    ---------
      Net loss ...................................   $    (455)   $  (2,409)   $ (14,625)   $  (2,071)
                                                     =========    =========    =========    =========

Loss applicable to common shares:
          Net loss ...............................   $    (455)   $  (2,409)   $ (14,625)   $  (2,071)
          Preferred stock dividends ..............        (497)        (564)      (3,262)      (1,640)
                                                     ---------    ---------    ---------    ---------
Loss applicable to common shares .................   $    (952)   $  (2,973)   $ (17,887)   $  (3,711)
                                                     =========    =========    =========    =========

Loss per common share (Note C):
          Basic and diluted ......................   $   (0.13)   $   (0.39)   $   (2.44)   $   (0.49)
                                                     =========    =========    =========    =========`

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

# 4

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# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

# (Unaudited)

# (dollars in thousands)

`Accumulated
                                                          Additional                    Other
                                               Common       Paid-In      Treasury   Comprehensive Accumulated
                                                Stock      Capital        Stock         Loss        Deficit      Total
                                             ----------   ----------    ---------    -------      -------    ----------


Stockholders' deficit, December 31, 2001 ..  $       153    $ 187,976    $(183,746)        --      $ (35,550)   $ (31,167)

Preferred stock dividends .................          --        (1,640)        --           --           --         (1,640)

Comprehensive loss:
   Net loss for the nine months ended
     September 30, 2002 ...................          --          --           --           --         (2,071)      (2,071)
   Unrealized loss on derivative instrument          --          --           --           (159)        --           (159)
                                              -----------   ---------    ---------    ---------    ---------    ---------
     Total comprehensive loss .............          --          --           --           (159)      (2,071)      (2,230)
                                              -----------   ---------    ---------    ---------    ---------    ---------

Stockholders' deficit, September 30, 2002 .   $       153   $ 186,336    $(183,746)   $    (159)   $ (37,621)   $ (35,037)
                                              ===========   =========    =========    =========    =========    =========`

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

# 5

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# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

# (Unaudited)

# (dollars in thousands)

`For the nine months ended September 30,
                                                                         ---------------------------------------
                                                                                            2001        2002
                                                                                        --------    --------
Operating activities:
  Net loss ..........................................................................   $(14,625)   $ (2,071)
  Adjustments to reconcile net loss to net cash provided
    by operating activities:
    Depreciation of property and equipment ..........................................      5,603       6,356
    Amortization of deferred financing and other non-current assets .................        945         742
    Amortization of prepaid management fee ..........................................        900         900
    Amortization of deferred income .................................................       (388)       (391)
    Accretion of senior subordinated discount notes .................................      8,279       6,794
    Amortization of long-term accrued interest ......................................     (1,793)     (4,007)
    Amortization of loan costs and fees (included in rental and interest expense)....        107        108
    Noncash charges related to refinancing ..........................................       --           436
    Noncash charges related to financial restructuring ..............................      4,896        --
                                                                                        --------    --------
                                                                                           3,924       8,867
  Changes in operating assets and liabilities:
   (Increase) decrease in accounts receivable .......................................      3,741      (2,118)
   (Increase) decrease in prepaid expenses and other ................................         74        (977)
   Increase (decrease) in accounts payable ..........................................      1,931        (116)
   Increase in employee compensation and benefits ...................................      2,181       5,118
   Increase (decrease) in accrued interest ..........................................        (28)
                                                                                                         178
   Increase in other accrued liabilities ............................................        232       1,096
   Increase in claims reserve accrual ...............................................        418       3,886
                                                                                        --------    --------
    Net cash provided by operating activities .......................................     12,473      15,934
                                                                                        --------    --------

Investing activities:
  Additions to property and equipment ...............................................     (8,195)    (15,259)
  Additions to deferred financing and other
   intangible assets ................................................................       (200)     (6,212)
  Transfers to restricted cash, net .................................................       (851)       (520)
  Purchase of interest rate cap .....................................................       --          (329)
                                                                                        --------    --------
    Net cash (used) by investing activities .........................................     (9,246)    (22,320)
                                                                                        --------    --------

Financing activities:
  Repayment of revolving line of credit .............................................     (4,000)    (25,250)
  Borrowings under secured credit facility ..........................................       --        43,015
  Issuance of preferred stock .......................................................     15,000        --
  Payment to holders of subordinated debt ...........................................    (15,000)       --
  Receipt in connection with lease ..................................................        102        --
  Payments of long-term debt ........................................................       (182)       (204)
    Dividends paid on exchangeable preferred stock ..................................         (6)       --
                                                                                        --------    --------
    Net cash provided (used) by financing activities ................................     (4,086)     17,561
                                                                                        --------    --------

Net increase (decrease) in cash and cash equivalents ................................       (859)     11,175
Cash and cash equivalents, beginning of period ......................................     10,724       9,249
                                                                                        --------    --------
  Cash and cash equivalents, end of period ..........................................   $  9,865    $ 20,424
                                                                                        ========    ========

Supplemental Disclosure:
  Interest paid .....................................................................   $  4,179    $  3,445
                                                                                        ========    ========
    Income taxes paid ...............................................................   $    112    $    206
                                                                                        ========    ========
  Accretion of preferred stock dividends ............................................   $  3,256    $  1,640
                                                                                        ========    ========`

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

# 6

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# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

# (Unaudited)

## A. General

Harborside Healthcare Corporation, through its
subsidiaries, (on a consolidated basis, the "Company" or "Harborside") provides
high quality long-term care, subacute care and other specialty medical services
in 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). Within these regions,
as of September 30, 2002, the Company operated 55 long-term care facilities (18
owned, 36 leased and one managed) with a total of 6,761 licensed beds. The
Company accounts for its investment in one 75% owned facility using the equity
method of accounting.

## B.       Basis of Presentation

The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's filing on Form 10-K for
the year ended December 31, 2001. In the opinion of management, the accompanying
unaudited financial statements reflect all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the Company's financial
position as of September 30, 2002, the results of its operations for the
three-month and nine-month periods ended September 30, 2001 and 2002 and its
cash flows for the nine-month periods ended September 30, 2001 and 2002. The
results of operations for the three-month and nine-month periods ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the full year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report.

## C.  Loss Per Common Share

The following  table sets forth the  computation  of basic and diluted loss per common share for the periods  ended  September 30, 2001
and September 30, 2002:

`Three Months Ended          Nine Months Ended
                                                                      September 30,              September 30,
                                                                    2001           2002         2001         2002
                                                                    ----           ----         ----         ----
Numerator:
Net loss .................................................   $   (455,000)   $ (2,409,000)   $(14,625,000)   $ (2,071,000)
Preferred stock dividends ................................       (497,000)       (564,000)     (3,262,000)     (1,640,000)
                                                             ------------    ------------    ------------    ------------
Loss applicable to common shares .........................   $   (952,000)   $ (2,973,000)   $(17,887,000)   $ (3,711,000)
                                                             ============    ============    ============    ============

Denominator (for basic and diluted loss per common share):
Weighted average common shares outstanding ...............      7,911,825       7,877,420       7,917,839       7,886,348
Adjustment for non-vested restricted shares ..............       (577,326)       (336,088)       (583,440)       (344,931)
                                                             ------------    ------------    ------------    ------------
Adjusted weighted-average shares .........................      7,334,499       7,541,332       7,334,499       7,541,417
                                                             ============    ============    ============    ============

Basic and diluted loss per common share ..................   $      (0.13)   $      (0.39)   $     (2.44)    $      (0.49)
                                                             ============    ============    ============    ============`

For the  three-month  and  nine-month  periods ended  September  30, 2001 and 2002,  the  weighted-average  shares  outstanding  for the
following  potentially  dilutive  securities were excluded from the computation of diluted loss per common share because the effect would
have been antidilutive:

`Three Months Ended        Nine Months Ended
                                                        September 30,             September 30,
                                                      2001           2002         2001         2002
                                                      ----           ----         ----         ----

Options to purchase common stock                      109,994       995,739      109,994        993,919
Non-vested shares of restricted stock                 577,326       336,088      583,440        344,931
Conversion rights of convertible preferred stock    2,293,637     2,603,951    1,201,519      2,457,506
Warrants to purchase common stock                   4,326,641     4,326,641    2,282,184      4,326,641
                                                   ----------     ---------    ---------      ---------
                                                    7,307,598     8,262,419    4,177,137      8,122,997
                                                   ==========    ==========    =========      =========`

## D.   Recent Acquisition

Effective March 1, 2002, the Company entered into an
operating lease for four skilled nursing facilities with 487 licensed beds
located in Massachusetts. In connection with this acquisition, the Company did
not assume any operating assets or liabilities from the prior
operator.

## E. Secured Credit Facility, Financing Costs and
Interest Rate Cap Agreement

On September 13, 2002, the Company entered into a new
three-year collateralized credit facility (the "Secured Credit Facility") that
provides access to a maximum of $100 million. Borrowings under the Secured
Credit Facility were used to repay all amounts owed in connection with the
termination of the Company's previous Credit Facility (including amounts
outstanding in connection with a $13,700,000 synthetic lease obligation) as well
as related closing costs and expenses. The terms of the Secured Credit Facility
provide a maximum of $25 Million on a revolving credit basis and a maximum of
$75 Million in the form of a term loan. Proceeds from the Secured Credit
Facility can be used for the acquisition of additional healthcare facilities
(including required working capital), joint venture investments, letters of
credit, and general corporate purposes. The Secured Credit 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 on the
revolving credit facility is payable monthly in arrears at a rate of LIBOR plus
4.25% (or Prime plus 1.25%) at the election of the Company. The terms of the
Secured Credit Facility initially limit availability through the term loan to
$60 million, but this amount may be increased to $75 Million at the election of
the Company after the occurrence of certain events. Interest on the term loan is
payable monthly in arrears at the rate of LIBOR plus 4.1% with a minimum
interest rate of 7%. The Secured Credit Facility contains a number of
restrictive covenants that, among other things, restrict the Company's ability
to dispose of certain assets, limits the Company's ability to declare and pay

# 7

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certain dividends, and requires the Company to maintain a minimum occupancy, as
well as predetermined levels of fixed charge coverage and debt service coverage
as defined in the loan agreement. As of September 30, 2002, the Company had
borrowed approximately $43.0 Million through the Secured Credit Facility (in the
form of a term loan) and issued letters of credit totaling approximately $19.1
Million.

In connection with entering into the Secured Credit
Facility, the Company incurred non-recurring Financing Costs totaling
$2,835,000. This non-recurring charge includes $1,700,000 recorded in connection
with the termination of a synthetic lease for two of the Company's facilities
(the "Synthetic Lease Properties") made through the Company's prior Credit
Facility. The Company was obligated to purchase the Synthetic Lease Properties
at a pre-determined price ($13,700,000) upon the occurrence of certain events
including a termination of the prior Credit Facility. The carrying value of the
Synthetic Lease Properties was recorded at the purchase price ($13,700,000),
less a charge of $1,700,000 to reflect uncertainties related to the value of
these properties in connection with the expiration of a significant portion of
Medicare reimbursement effective October 1, 2002. (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".) Additionally, the Company wrote off un-amortized deferred
financing coats associated with the prior Credit Facility ($666,000), recognized
bonus payments to executive officers for securing the replacement financing
(totaling $350,000) and incurred certain other professional and recording
costs.

In connection with obtaining the Secured Credit Facility,
the Company purchased an interest rate cap on $40 million notional principal
amount that matures on September 1, 2005. This interest rate cap is intended to
provide the Company partial protection from exposure to the floating interest
rate associated with $40 million of term loan borrowings. The entire amount of
this interest rate cap has been designated an effective cash flow hedge to limit
possible increases in interest payments on its term loan. The interest rate cap
limits the Company's exposure to an increase in the underlying LIBOR rate to (a)
5.23% if LIBOR is less than 6.23% or (b) 6.23% if LIBOR increases above
6.23%.

Changes in the fair market value of a derivative that is
highly effective and is designated and qualifies as a cash flow hedge, are
reported as "Accumulated Other Comprehensive Income or Loss" ("AOCIL") in the
"Stockholders' Deficit" section of the Company's consolidated balance sheet. On
September 30, 2002, the fair market value of the interest rate cap was $170,000
which amount was included in "Other Assets, net". A loss of $159,000 was charged to
AOCIL for the three months ended September 30, 2002. None of the losses in AOCIL
related to the interest rate cap are expected to be reclassified into interest
expense as a yield adjustment of the hedged debt obligation during the next
twelve months.

## F. 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 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, Harborside Health I Corporation, 1501 SE 24th Road, LLC,
4927 Voorhees Road, LLC, 1775 Huntington Lane, LLC, Florida Holdings I, LLC,
Florida Administrative Services, LLC, Harborside Administrative Services, LLC,
Harborside Healthcare Management, LLC, 4602 Northgate Court, LLC, 1240 Pinebrook
Road, LLC, 2900 Twelfth Street North, LLC, 2600 Highlands Boulevard North, LLC,
1980 Sunset Point Road, LLC, 3865 Tampa Road, LLC, Florida Holdings II, LLC,
Florida Holdings III, LLC, Massachusetts Holdings I, LLC, Mashpee Healthcare,
LLC, Wakefield Healthcare, LLC, Falmouth Healthcare, LLC, Westfield Healthcare,
LLC, Ohio Holdings I, LLC and Marietta Healthcare, LLC.

The information which follows presents the condensed
consolidating financial position as of December 31, 2001 and September 30, 2002;
the condensed consolidating results of operations for the three-month and
nine-month periods ended September 30, 2001 and 2002; and the consolidating cash
flows for the nine-month periods ended September 30, 2001 and 2002 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.

## 8

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## F. Condensed Consolidating Financial Information (continued)

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# Condensed Consolidating Balance Sheet

# As of December 31, 2001

# (Unaudited)

# (dollars in thousands)

`Parent    Guarantors  Non-Guarantors Elimination  Consolidated
                                                               --------    ----------  -------------- ------------ ----------------
ASSETS
Current assets:
  Cash and cash equivalents ................................   $    --      $   7,886   $    1,363   $     --     $   9,249
  Accounts receivable, net of allowance for
   doubtful accounts .......................................        --         32,531       12,971         --         45,502
  Intercompany receivable ..................................     141,929         --           --       (141,929)        --
  Prepaid expenses and other ...............................       1,400        9,308          920         --         11,628
                                                               ---------    ---------    ---------   ---------    ----------
   Total current assets ....................................     143,329       49,725       15,254     (141,929)      66,379

Restricted cash ............................................        --          5,130          768         --          5,898
Investments in limited partnerships ........................      15,584         --          4,044      (19,628)        --
Property and equipment, net ................................        --         87,815       21,174         --        108,989
Deferred financing and other
 non-current assets, net ...................................         677        2,330          909         --          3,916
Other assets, net ..........................................         700         --           --           --            700
Note receivable ............................................        --          7,487         --           --          7,487
                                                               ---------    ---------    ---------    ---------    ---------
   Total assets ............................................   $ 160,290    $ 152,487    $  42,149    $(161,557)   $ 193,369
                                                               =========    =========    =========    =========    =========

LIABILITIES
Current liabilities:
  Current maturities of long-term debt .....................   $   2,500    $      22    $     254    $    --      $   2,776
  Accounts payable .........................................        --         12,514        2,197         --         14,711
  Intercompany payable .....................................        --        112,416       13,567     (125,983)        --
  Employee compensation and benefits .......................        --         16,153        3,117         --         19,270
  Other accrued liabilities ................................        --          5,800        1,078         --          6,878
  Accrued interest .........................................         147         --           --           --            147
  Current portion of deferred income .......................        --           --           --            521          521
                                                               ---------    ---------    ---------    ---------    ---------
   Total current liabilities ...............................       2,647      146,905       20,213     (125,462)      44,303

Claims Reserve .............................................        --          1,467         --           --          1,467
Long-term portion of deferred income .......................        --            534        1,474         (521)       1,487
Long-term debt .............................................      96,975        1,481       15,422         --        113,878
Long-term accrued interest .................................      47,115         --           --           --         47,115
                                                               ---------    ---------    ---------    ---------    ---------
   Total liabilities .......................................     146,737      150,387       37,109     (125,983)     208,250
                                                               ---------    ---------    ---------    ---------    ---------

13% Convertible exchangeable preferred stock,
 redeemable, $.01 par value with a liquidation
 value of $1,000 per share; 100,000 shares
 authorized; 16,286 issued and outstanding .................      16,286         --           --           --         16,286

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 40,700,000
  shares authorized, 15,275,664 shares issued ..............         153        2,569        3,885       (6,454)         153
Additional paid-in capital .................................     187,748         --           --            228      187,976
Common stock in treasury, at cost, 7,379,165 shares             (183,746)        --           --           --       (183,746)
Retained earnings (accumulated deficit) ....................      (6,888)     (25,224)      (5,919)       2,481      (35,550)
Partners' equity ...........................................        --         24,755        7,074      (31,829)        --
                                                               ---------    ---------    ---------    ---------    ---------
   Total stockholders' equity (deficit) ....................      (2,733)       2,100        5,040      (35,574)     (31,167)
                                                               ---------    ---------    ---------    ---------    ---------
   Total liabilities and stockholders' equity (deficit) ....   $ 160,290    $ 152,487    $  42,149    $(161,557)   $ 193,369
                                                               =========    =========    =========    =========    =========`

## 9

---

## F. Condensed Consolidating Financial Information (continued)

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# Condensed Consolidating Balance Sheet

# As of September 30, 2002

# (Unaudited)

# (dollars in thousands)

`Parent   Guarantors   Non-Guarantors  Elimination  Consolidated
                                                          ------   ----------   --------------  -----------  ------------
ASSETS
Current assets:
  Cash and cash equivalents ...........................   $    --      $  19,093   $    1,331   $     --      $  20,424
  Accounts receivable, net of allowance for
   doubtful accounts ..................................        --         37,496       10,124         --         47,620
  Intercompany receivable .............................     117,841         --           --       (117,841)        --
  Prepaid expenses and other ..........................       1,235       10,202          968         --         12,405
                                                          ---------    ---------    ---------    ---------    ---------
   Total current assets ...............................     119,076       66,791       12,423     (117,841)      80,449

Restricted cash .......................................        --          5,856          562         --          6,418
Investments in limited partnership ....................      15,584         --          4,044      (19,628)        --
Property and equipment, net ...........................        --         97,048       20,844         --        117,892
Deferred financing and other
  intangibles, net ....................................        --          7,878          734         --          8,612
Other assets, net .....................................         170         --           --           --            170
Note receivable .......................................        --          7,487         --           --          7,487
                                                          ---------    ---------    ---------    ---------    ---------
   Total assets .......................................   $ 134,830    $ 185,060    $  38,607    $(137,469)   $ 221,028
                                                          =========    =========    =========    =========    =========
LIABILITIES
Current liabilities:
  Current maturities of long-term debt ................   $    --      $      22    $     275    $    --      $     297
  Accounts payable ....................................           2       12,952        1,641         --         14,595
  Intercompany payable ................................        --         88,764       13,284     (102,048)        --
  Employee compensation and benefits ..................        --         21,938        2,450         --         24,388
  Other accrued liabilities ...........................        --          7,055          919         --          7,974
  Accrued interest ....................................        --            325         --           --            325
  Current portion of deferred income ..................        --           --           --            395          395
                                                          ---------    ---------    ---------    ---------    ---------
   Total current liabilities ..........................           2      131,056       18,569     (101,653)      47,974

Claims reserve ........................................        --          4,950          403         --          5,353
Long-term portion of deferred income ..................        --            189        1,198         (395)         992
Long-term debt ........................................      81,019       44,480       15,213         --        140,712
Long-term accrued interest ............................      43,108         --           --           --         43,108
                                                          ---------    ---------    ---------    ---------    ---------
   Total liabilities ..................................     124,129      180,675       35,383     (102,048)     238,139
                                                          ---------    ---------    ---------    ---------    ---------

13% Convertible exchangeable preferred stock,
   redeemable,  $.01 par value with a liquidation
   value of $1,000 per share; 100,000 shares
   authorized; 17,926 shares issued and outstanding ...      17,926         --           --           --         17,926

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; 40,700,000
    shares authorized; 15,275,664 shares issued .......         153        2,569        3,885       (6,454)         153
Additional paid-in capital ............................     186,108         --           --            228      186,336
Common stock in treasury, at cost, 7,398,498 shares ...    (183,746)        --           --           --       (183,746)
Accumulated other comprehensive loss ..................        (159)        --           --           --           (159)
Retained earnings (accumulated deficit) ...............      (9,581)     (22,939)      (7,735)       2,634      (37,621)
Partners' equity ......................................        --         24,755        7,074      (31,829)        --
                                                          ---------    ---------    ---------    ---------    ---------

   Total stockholders' equity (deficit) ...............      (7,225)       4,385        3,224      (35,421)     (35,037)
                                                          ---------    ---------    ---------    ---------    ---------
   Total liabilities and stockholders' equity (deficit)   $ 134,830    $ 185,060    $  38,607    $(137,469)   $ 221,028
                                                          =========    =========    =========    =========    =========`

## 10

---

## F. Condensed Consolidating Financial Information (continued)

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# Condensed Consolidating Statement of Operations

# For the three months ended September 30, 2001

# (Unaudited)

# (dollars in thousands)

`Parent   Guarantors  Non-Guarantors Elimination Consolidated
                                             ------   ----------- -------------- ----------- --------------

Total net revenues .......................   $   --      $ 63,466    $ 26,493    $ (1,749)   $ 88,210
                                             --------    --------    --------    --------    --------


Expenses:
  Facility operating .....................       --        51,030      21,928      (1,749)     71,209
  General and administrative .............         21       4,784        --          --         4,805
  Service charges paid to former affiliate       --           250        --          --           250
  Amortization of prepaid management fee .        300        --          --          --           300
  Depreciation and amortization ..........         52       1,522         543        --         2,117
  Facility rent ..........................       --         4,953       2,233        --         7,186
  Facility reorganization costs ..........       --           750        --          --           750
  Management fees paid to affiliates .....       --        (1,550)      1,550        --          --
                                             --------    --------    --------    --------    --------
   Total expenses ........................        373      61,739      26,254      (1,749)     86,617
                                             --------    --------    --------    --------    --------
Income (loss) from operations ............       (373)      1,727         239        --         1,593
                                                                                                  815

Other:
  Interest expense, net ..................        278       1,316         503        --         2,097
  Other income ...........................       --          --          --           (49)        (49)
                                             --------    --------    --------    --------    --------

Income (loss) before income taxes ........       (651)        411        (264)         49        (455)
Income tax expense .......................       --          --          --          --          --
                                             --------    --------    -------     --------    --------
  Net income (loss) ......................   $   (651)   $    411    $   (264)   $     49    $   (455)
                                             ========    ========    ========    ========    ========`

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# Condensed Consolidating Statement of Operations

# For the three months ended September 30, 2002

# (Unaudited)

# (dollars in thousands)

`Parent   Guarantors   Non-Guarantors Elimination Consolidated
                                              ------   ------------ -------------- -----------  -----------

Total net revenues .......................   $    --      $  87,346    $  18,825    $  (2,415)   $ 103,756
                                             ---------    ---------    ---------    ---------    ---------


Expenses:
  Facility operating .....................        --         72,600       15,505       (2,415)      85,690
  General and administrative .............          35        5,119         --           --          5,154
  Service charges paid to former affiliate        --            189         --           --            189
  Amortization of prepaid management fee .         300         --           --           --            300
  Depreciation and amortization ..........          75        1,795          573         --          2,443
  Facility rent ..........................        --          6,198        1,585         --          7,783
  Financing costs ........................         450        2,385         --           --          2,835
  Management fees paid to affiliates .....        --         (1,217)       1,217         --           --
                                             ---------    ---------    ---------    ---------    ---------
   Total expenses ........................         860       87,069       18,880       (2,415)     104,394
                                             ---------    ---------    ---------    ---------    ---------
Loss from operations .....................        (860)         277          (55)        --           (638)

Other:
  Interest expense, net ..................         285        1,228          435         --          1,948
  Other income ...........................        --           --           --           (237)        (237)
                                             ---------    ---------    ---------    ---------    ---------

Income (loss) before income taxes ........      (1,145)        (951)        (490)         237       (2,349)
Income tax expense .......................          60         --           --           --             60
                                             ---------    ---------    ---------    ---------    ---------
  Net income (loss) ......................   $  (1,205)   $    (951)   $    (490)   $     237    $  (2,409)
                                             =========    =========    =========    =========    =========`

# 11

---

## F. Condensed Consolidating Financial Information (continued)

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# Condensed Consolidating Statement of Operations

# For the nine months ended September 30, 2001

# (Unaudited)

# (dollars in thousands)

`Parent    Guarantors  Non-Guarantors Elimination  Consolidated
                                              ------   ------------ -------------- -----------  --------------

Total net revenues .......................   $    --      $ 181,868    $  78,976    $  (4,421)   $ 256,423
                                             ---------    ---------    ---------    ---------    ---------


Expenses:
  Facility operating .....................        --        146,067       65,738       (4,421)     207,384
  General and administrative .............          57       14,367         --           --         14,424
  Service charges paid to former affiliate        --            801         --           --            801
  Amortization of prepaid management fee .         900         --           --           --            900
  Depreciation and amortization ..........         473        4,514        1,561         --          6,548
  Facility rent ..........................        --         14,981        6,579         --         21,560
  Financial restructuring costs ..........       8,645          400         --           --          9,045
  Facility reorganization costs ..........        --            750         --           --            750
  Management fees paid to affiliates .....        --         (4,682)       4,682         --           --
                                             ---------    ---------    ---------    ---------    ---------
   Total expenses ........................      10,075      177,198       78,560       (4,421)     261,412
                                             ---------    ---------    ---------    ---------    ---------
Income (loss) from operations ............     (10,075)       4,670          416         --         (4,989)

Other:
  Interest expense, net ..................       2,000        6,463        1,311         --          9,774
  Other income ...........................        --           --           --           (138)        (138)
                                             ---------    ---------    ---------    ---------    ---------

Income (loss) before income taxes ........     (12,075)      (1,793)        (895)         138      (14,625)
Income tax expense .......................        --           --           --           --           --
                                             ---------    ---------    ---------    ---------    ---------
  Net income (loss) ......................   $ (12,075)   $  (1,793)   $    (895)   $     138    $ (14,625)
                                             =========    =========    =========    =========    =========`

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# Condensed Consolidating Statement of Operations

# For the nine months ended September 30, 2002

# (Unaudited)

# (dollars in thousands)

`Parent   Guarantors   Non-Guarantors Elimination Consolidated
                                              ------   ------------ -------------- ----------- --------------

Total net revenues .......................   $    --      $ 252,024    $  54,349    $  (7,095)   $ 299,278
                                             ---------    ---------    ---------    ---------    ---------


Expenses:
  Facility operating .....................        --        208,079       45,010       (7,095)     245,994
  General and administrative .............          85       15,057         --           --         15,142
  Service charges paid to former affiliate        --            573         --           --            573
  Amortization of prepaid management fee .         900         --           --           --            900
  Depreciation and amortization ..........         227        5,177        1,694         --          7,098
  Facility rent ..........................        --         18,375        4,642         --         23,017
  Financing costs ........................         450        2,385         --           --          2,835
  Management fees paid to affiliates .....        --         (3,523)       3,523         --           --
                                             ---------    ---------    ---------    ---------    ---------
   Total expenses ........................       1,662      246,123       54,869       (7,095)     295,559
                                             ---------    ---------    ---------    ---------    ---------
Income (loss) from operations ............      (1,662)       5,901         (520)        --          3,719

Other:
  Interest expense, net ..................         851        3,616        1,296         --          5,763
  Other income ...........................        --           --           --           (153)        (153)
                                              ---------   ---------    ---------    ---------    ---------

Income (loss) before income taxes ........      (2,513)       2,285       (1,816)         153       (1,891)
Income tax expense .......................         180         --           --           --            180
                                             ---------   ---------    ---------    ---------    ---------
  Net income (loss) ......................   $  (2,693)   $   2,285    $  (1,816)   $     153    $  (2,071)
                                             =========    =========    =========    =========    =========`

## 12

---

## F. Condensed Consolidating Financial Information (continued)

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# Condensed Consolidating Statement of Cash Flows

# For the nine months ended September 30, 2001

# (Unaudited)

# (dollars in thousands)

`Parent   Guarantors  Non-Guarantors  Elimination    Consolidated
                                                        ------   ----------  --------------  ------------   ------------
Operating activities:
   Net cash provided by operating activities:$ .....      3,904    $  4,594    $  3,975      $     --       $ 12,473
                                                       --------    --------    --------      ------------   --------

Investing activities:
  Additions to property and equipment ..............       --        (5,050)     (3,145)           --         (8,195)
  Additions to deferred financing and other
    non-current assets .............................       --          (200)       --              --           (200)
  Transfers to restricted cash, net ................       --          (806)        (45)           --           (851)
                                                       --------    --------    --------      ------------   --------
   Net cash (used) by investing activities .........       --        (6,056)     (3,190)           --         (9,246)
                                                       --------    --------    --------      ------------   --------

Financing activities:
  Repayment of revolving line of credit ............     (4,000)       --          --              --         (4,000)
  Issuance of preferred stock ......................     15,000        --          --              --         15,000
  Payment to holders of subordinated debt ..........    (15,000)       --          --              --        (15,000)
  Receipt in connection with lease .................        102        --          --              --            102
  Payments of long-term debt .......................       --           (13)       (169)           --           (182)
  Dividends paid on exchangeable preferred stock ...         (6)       --          --              --             (6)
                                                                                                            --------
   Net cash (used) by financing activities .........     (3,904)        (13)       (169)           --         (4,086)
                                                       --------    --------    --------      ------------   --------

Net increase (decrease) in cash and cash equivalents       --        (1,475)        616            --           (859)
Cash and cash equivalents, beginning of period .....       --         9,317       1,407            --         10,724
                                                                   --------    --------      ------------   --------
  Cash and cash equivalents, end of period $ .......       --      $  7,842    $  2,023      $       --     $  9,865
                                                       ========    ========    ========      ============   ========

Supplemental Disclosure:
  Interest paid ....................................   $    855    $  2,763    $    561      $       --     $  4,179
                                                       ========    ========    ========      ============   ========
  Income taxes paid ................................   $    112    $   --      $   --        $       --     $    112
                                                       ========    ========    ========      ============   ========
  Accretion of preferred stock dividends ...........   $  3,256    $   --      $   --        $       --     $  3,256
                                                       ========    ========    ========      ============   ========`

## 13

---

## F. Condensed Consolidating Financial Information (continued)

# HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

# Condensed Consolidating Statement of Cash Flows

# For the nine months ended September 30, 2002

# (Unaudited)

# (dollars in thousands)

`Parent   Guarantors  Non-Guarantors    Elimination  Consolidated
                                                         ------   ----------  --------------    -----------  ------------
Operating activities:
   Net cash provided (used) by operating activities:$    25,579$    (10,852)   $   1,207        $      --     $ 15,934
                                                        --------    --------   --------         -----------   --------

Investing activities:
  Additions to property and equipment ...............       --       (14,001)     (1,258)              --      (15,259)
  Additions (to) deferred financing and other
   non-current assets ...............................       --        (6,212)       --                 --       (6,212)
  Transfers to restricted cash, net .................       --          (726)        206               --         (520)
  Purchase of interest rate cap .....................       (329)       --          --                 --         (329)
                                                        --------    --------    --------        -----------   --------
   Net cash (used) by investing activities ..........       (329)    (20,939)     (1,052)              --      (22,320)
                                                        --------    --------    --------        -----------   --------

Financing activities:
    Repayment of revolving line of credit ...........    (25,250)       --          --                 --      (25,250)
   Borrowings under secured credit facility .........       --        43,015        --                 --       43,015
   Payments of long-term debt .......................       --           (17)       (187)              --         (204)
                                                        --------    --------    --------        -----------   --------

   Net cash (used) by financing activities ..........    (25,250)     42,998        (187)              --       17,561
                                                        --------    --------    --------        -----------   --------

Net increase (decrease) in cash and cash equivalents        --        11,207         (32)                         --
                                                                                                                11,175
Cash and cash equivalents, beginning of period ......       --         7,886       1,363               --        9,249
                                                        --------    --------    --------        -----------   --------
Cash and cash equivalents, end of period   ..........   $   --      $ 19,093    $  1,331        $      --     $ 20,424
                                                        ========    ========    ========        ===========   ========

Supplemental Disclosure:
  Interest paid .....................................   $    509    $  2,161    $    775    $          --     $  3,445
                                                        ========    ========    ========    ===============   ========
  Income taxes paid .................................   $    206    $   --      $   --      $          --     $    206
                                                        ========    ========    ========    ===============   ========
  Accretion of preferred stock dividends $ ..........      1,640    $   --      $   --      $          --     $  1,640
                                                        ========    ========    ========    ===============   ========`

## 14

---

# Item 2.

# MANAGEMENT'S DISCUSSION AND

# ANALYSIS OF FINANCIAL CONDITION AND

# RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
including those concerning Management's expectations regarding future financial
performance and future events. These forward-looking statements involve
significant risk and uncertainties, including those described herein and
included under "Special Note Regarding Forward-Looking Statements" below. Actual
results may differ materially from those anticipated by such forward-looking
statements.

## OVERVIEW

Harborside Healthcare Corporation, through its
subsidiaries, is a leading provider of high-quality long-term care, subacute
care and other 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 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). As of September 30, 2002, the Company operated 55 facilities (18
owned, 36 leased and one managed) with a total of 6,761 licensed beds. As
described in Note A to the unaudited condensed consolidated financial statements
included elsewhere in this report, the Company accounts for its investment in
one of its owned facilities using the equity method of accounting. 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.

## CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of the financial condition and
results of operations of the Company are based on the Company's condensed
consolidated financial statements, included elsewhere within this report, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the use of estimates and judgments that affect the reported amounts and
related disclosures of commitments and contingencies. We rely on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances to make judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ materially from these estimates.

## REVENUE RECOGNITION

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. 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.

## PROVISION FOR DOUBTFUL ACCOUNTS

Accounts receivable consist primarily of amounts due from
third party payors (the Medicare and Medicaid programs, other governmental
programs, managed care companies and commercial insurance companies) as well as
amounts due from private individuals. Estimated provisions for doubtful accounts
are recorded to the extent that it is probable that a portion or all of a
particular account receivable will not be collected. We estimate the provision
for doubtful accounts based on a number of factors including payor type,
historical collection patterns and the age of the receivable. Changes in
estimates for particular accounts receivable are recorded in the period in which
the change occurs.

## IMPAIRMENT OF PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS

The Company reviews the carrying value of its property and
equipment and intangible assets on a quarterly basis. The Company's review is
undertaken to determine if current facts and circumstances suggest that the
assets have been impaired or that the life of the asset needs to be changed. As
part of its review, the Company considers a number of factors including local
market developments, changes in the regulatory environment, historical financial
performance, recent operating results and projected future cash flows. Any
impairment would be recognized in operating results if a diminution in value
considered to be other than temporary were to occur.

## INSURANCE RESERVES

The Company retains a significant amount of self-insurance
risk for its employee health benefits and workers compensation programs, and
beginning on September 1, 2001, its general liability and professional liability
risks. The Company maintains stop-loss insurance such that the Company's
liability for health insurance and workers' compensation losses is limited. At
the end of each accounting period, the Company records an accrued expense for
(a) estimated health benefit claims incurred but not reported and (b) estimated
workers' compensation claims incurred but not reported. The Company estimates
these accruals based on a number of factors including historical experience,
industry trends, recent claims history, programs implemented to control claims,
and actuarial reports. These accruals are by necessity based on estimates and
are subject to ongoing revision as conditions change and as new data presents
itself. Adjustments to estimated liabilities are recorded in the accounting
period in which the change in estimate occurs.

During the year ended December 31, 1998, the Company
implemented a general and professional liability insurance program which, for
the period from September 1, 1998 to August 31, 2001, limited the Company's
self-retention risk for this program to a maximum of $25,000 per year. The
long-term care industry has seen the cost of maintaining traditional
professional liability insurance increase significantly over the past two years,
especially in the State of Florida. Most insurance companies are unwilling to
underwrite new professional liability policies in the State of Florida. In May
2001, tort reform legislation was enacted in Florida. This legislation provides
caps on punitive damages, limits to add-on legal fees, stricter rules of

# 15

---

evidence and a shorter statute of limitations period. Given
the tremendous increase in professional liability premiums and the tort reform
legislation that was enacted in the State of Florida in May 2001, the Company
concluded that it would be more cost effective to assume a higher level of
retained risk for professional liability claims. As a result, the Company
implemented a new general and professional liability program, effective
September 1, 2001, which resulted in the Company maintaining an unaggregated
self-insured retention of $2,000,000 per occurrence for locations outside of
Florida and completely retaining risk at the Florida facilities. The Company
maintains an accrual for incurred but not reported claims. The amount of the
accrual is determined through an estimation process that uses information from
both the Company's records as well as industry data. The Company uses an
independent actuary to help estimate the required general and professional
liability accrual. Factors reviewed include the frequency of expected claims,
the average cost per claim, emerging industry trends, changes in regulatory
environment (such as the recently enacted Florida tort reform legislation) and
the expected effect of various operational and risk management initiatives. The
Company will continue to evaluate its insurance accrual requirements on a
quarterly basis. Required adjustments to the Company's general and professional
liability accrual will be recorded in the accounting period in which the change
in estimate occurs.

## NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). Companies are
required to adopt SFAS 143 in their fiscal year beginning after June 15, 2002.
SFAS 143 requires that obligations associated with the retirement of a tangible
long-lived asset be recorded as a liability when these obligations are incurred,
with the amount of the liability initially measured at fair value. Upon
recognizing a liability, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset, accrete the
liability over time to its present value each period, and depreciate the
capitalized cost over the useful life of the related asset. Upon settlement of
the liability, the obligation is either settled for its recorded amount or a
gain or loss is recognized. The Company does not believe that the adoption of
SFAS 143 will have a material impact on its financial position, results of
operations, or cash flows.

In July 2002, the FASB issued SFAS No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
replaces Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity". SFAS
146 requires the recognition of costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.

## OPERATING DATA

The following table sets forth the number of facilities and
the number of licensed beds operated by the Company:

`As of September 30,
                             ---------------------------------
                                                         2001             2002
                                                         ----             ----

Facilities operated (1)                                    50               55
Licensed beds (1)                                       6,124            6,761

  The following table sets forth certain operating data for the periods indicated:

                              For the three months ended September 30,  For the nine months ended September 30,
                              ----------------------------------------  --------------------------------------

                                           2001          2002              2001         2002
                                           ----          ----              ----         ----
                Patient days (2):
                  Private and other       105,083       98,033            313,113      296,032
                  Medicare                 73,749       88,524            217,259      266,030
                  Medicaid                301,602      337,153            898,624      970,501
                                          -------      -------            -------      -------
                  Total                    480,434     523,710          1,428,996    1,532,563
                                          =======      =======          =========    =========

                Total net revenues:
                  Private and other          22.5%       19.0%              22.8%         19.9%
                  Medicare                   30.8%       33.4%              30.6%         33.7%
                  Medicaid                   46.7%       47.6%              46.6%         46.4%
                                           -------     -------            ------        -------
                Total                       100.0%      100.0%             100.0%        100.0%
                                            ======      ======            ======         ======

                Average occupancy rate (3)   88.8%       87.7%              89.0%         87.8%
                Quality mix (4)              53.3%       52.4%              53.4%         53.6%

(1)  Includes one managed facility with 106 licensed beds on September 30, 2001
     and September 30, 2002.
(2)  "Patient days" includes billed bed days for the facilities operated by the
     Company excluding billed bed days of the managed facility and the facility
     accounted for using the equity method of accounting.
(3)  "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 the managed facility.
(4)  "Quality mix" consists of the percentage of the Company's total net
     revenues that are derived from sources other than state Medicaid programs.`

# 16

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## RESULTS OF OPERATIONS

The Company's total net revenues include net patient
service revenues and other revenues. 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. 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's facility operating expenses consist primarily
of payroll and employee benefits related to nursing, rehabilitation therapy
services, 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 medical and pharmacy supplies, food,
utilities, insurance and taxes. The Company's general and administrative
expenses include costs associated with its regional and corporate
operations.

## Three Months Ended September 30, 2001
Compared to Three Months Ended September 30, 2002

Total Net Revenues. Total net revenues increased by
$15,546,000 or 17.6%, from $88,210,000 in the third quarter of 2001 to
$103,756,000 in the third quarter of 2002. The increase in total revenues, from
2001 to 2002, was primarily due to the operation of five additional facilities.
The Company began operating a leased skilled nursing facility in Marietta, Ohio
on November 1, 2001, and four leased skilled nursing facilities in Massachusetts
on March 1, 2002. Approximately, $8,400,000 of the increase in revenues from
2001 to 2002 resulted from the operation of these five new facilities. The
remainder of the revenue increase was attributable to higher average revenues
per patient day at the Company's "same store" facilities. The average occupancy
rate at all of the Company's facilities decreased from 88.8% during the third
quarter of 2001 to 87.7% during the third quarter of 2002; however, average net
patient service revenues (including ancillary services) per patient day at the
Company's "same store" facilities increased from approximately $181 in the third
quarter of 2001 to approximately $197 in the third quarter of 2002, or 8.9%. The
Company's "same store" average Medicare Part A per diem rate increased from
approximately $344 per Medicare patient day in the third quarter of 2001 to
approximately $357 per Medicare patient day in the third quarter of 2002, while
the Company's "same store" average per diem Medicaid rate increased from
approximately $136 in the third quarter of 2001 to approximately $147 in the
third quarter of 2002. The Balanced Budget Refinement Act of 1999 ("BBRA")
temporarily increased the Federal per diem Medicare Part A rates by 20% for
fifteen resource utilization groups ("RUG") categories (three rehabilitative
therapy RUG categories, twelve non-rehabilitative RUG categories) beginning on
April 1, 2000. These increased rates will stay in effect until the date on which
the Centers for Medicare and Medicaid Services ("CMS") implements a revised
prospective payment system ("PPS") that more accurately reimburses the costs of
caring for medically complex patients. The BBRA also provided for a four percent
temporary increase in the Federal per diem Medicare Part A rates for all RUG
categories for a two-year period beginning October 1, 2000. In December 2000,
the Medicare, Medicaid, and State Child Health Insurance Program Benefits
Improvement and Protection Act of 2000 ("BIPA") was enacted. BIPA temporarily
increased the existing nursing rate component of the Federal per diem Medicare
Part A rate, for each RUG category, by 16.66% effective April 1, 2001 through
September 30, 2002. In addition, BIPA eliminated the 20% add-ons (provided by
the BBRA) for the three rehabilitative therapy RUG categories and substituted
6.7% add-ons for all fourteen rehabilitative therapy RUG categories.

The Company's quality mix of private, Medicare and
insurance revenues was 53.3% for the three months ended September 30, 2001 as
compared to 52.4% for the three months ended September 30, 2002.

Facility Operating Expenses. Facility operating expenses
increased by $14,481,000 or 20.3%, from $71,209,000 in the third quarter of 2001
to $85,690,000 in the third quarter of 2002. Approximately $7,821,000, or 54.0%,
of this increase resulted from the operation of five additional facilities. The
remainder of the increase in operating expenses in 2002 was primarily the result
of higher expenditures for employee wages and benefit costs at "same store"
facilities. Consistent with other long-term care providers, the Company
continues to find it difficult to recruit and retain employees, most notably
nursing personnel. As a result of these difficulties, the Company has been
forced to rely more heavily on temporary nursing personnel.

General and Administrative; Service Charges Paid to Former
Affiliate. General and administrative expenses increased by $349,000, from
$4,805,000 in the third quarter of 2001 to $5,154,000 in the third quarter of
2002. The Company reimburses a former affiliate for data processing services
provided to the Company. During the third quarter of 2001, such reimbursements
totaled $250,000 compared to $189,000 during the third quarter of
2002.

Amortization of Prepaid Management Fees. Amortization of
prepaid management fees was $300,000 during the third quarter of 2001 and the
third quarter of 2002.

Depreciation and Amortization. Depreciation and
amortization increased from $2,117,000 in the third quarter of 2001 to
$2,443,000 in the third quarter of 2002.

Facility Rent. Facility rent expense increased by $597,000
from $7,186,000 in the third quarter of 2001 to $7,783,000 in the third quarter
of 2002. Most of the increase in rent expense was associated with the leasing of
the new Ohio facility and the four new Massachusetts facilities.

Financing Costs. On September 13, 2002, the Company entered
into a new three-year collateralized credit facility (the "Secured Credit
Facility") that provides access to a maximum of $100 million. Borrowings under
the Secured Credit Facility were used to repay all amounts owed in connection
with the termination of the Company's previous Credit Facility (including
amounts outstanding in connection with a $13,700,000 synthetic lease obligation)
as well as related closing costs and expenses. In connection with entering into
the Secured Credit Facility, the Company incurred non-recurring Financing Costs
totaling approximately $2,835,000. This non-recurring charge includes a charge
of $1,700,000 recorded in connection with the termination of a synthetic lease
for two of the Company's facilities made through the Company's prior Credit
Facility. The significant terms of the Secured Credit Facility and the
components of the non-recurring Financing Costs are described in Note E to the
unaudited condensed consolidated financial statements included elsewhere in this
report.

Interest Expense, net. Interest expense, net, decreased
from $2,097,000 in the third quarter of 2001 to $1,948,000 in the third quarter
of 2002.

Income Tax Expense. Income tax expense (all relating to
state income taxes) was $60,000 for the third quarter of 2002.

# 17

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Net Loss. The Company incurred a net loss of $455,000
during the third quarter of 2001 compared to a net loss of $2,409,000 during the
third quarter of 2002.

## Nine Months Ended September 30, 2001
Compared to Nine Months Ended September 30, 2002

Total Net Revenues. Total net revenues increased by
$42,855,000 or 16.7%, from $256,423,000 in the first nine months of 2001 to
$299,278,000 in the first nine months of 2002. The increase in total revenues,
from 2001 to 2002, was primarily the result of higher average revenues per
patient day at the Company's "same store" facilities. Additionally, the Company
began operating a leased skilled nursing facility in Marietta, Ohio on November
1, 2001, and four leased skilled nursing facilities on March 1, 2002.
Approximately, $20,871,000, or 48.7%, of the increase in revenues from 2001 to
2002 resulted from the operation of these five new facilities. The average
occupancy rate at all of the Company's facilities decreased from 89.0% during
the first nine months of 2001 to 87.8% during the first nine months of 2002;
however, average net patient service revenues (including ancillary services) per
patient day at the Company's "same store" facilities increased from
approximately $177 in the first nine months of 2001 to approximately $194 in the
first nine months of 2002, or 9.7%. The Company's "same store" average Medicare
Part A per diem rate increased from approximately $338 per Medicare patient day
in the first nine months of 2001 to approximately $351 per Medicare patient day
in the first nine months of 2002, while the Company's "same store" average per
diem Medicaid rate increased from approximately $133 in the first nine months of
2001 to approximately $144 in the first nine months of 2002. The Balanced Budget
Refinement Act of 1999 ("BBRA") temporarily increased the Federal per diem
Medicare Part A rates by 20% for fifteen resource utilization groups ("RUG")
categories (three rehabilitative therapy RUG categories, twelve
non-rehabilitative RUG categories) beginning on April 1, 2000. These increased
rates will stay in effect until the date on which the Centers for Medicare and
Medicaid Services ("CMS") implements a revised prospective payment system
("PPS") that more accurately reimburses the costs of caring for medically
complex patients. The BBRA also provided for a four percent temporary increase
in the Federal per diem Medicare Part A rates for all RUG categories for a
two-year period beginning October 1, 2000. In December 2000, the Medicare,
Medicaid, and State Child Health Insurance Program Benefits Improvement and
Protection Act of 2000 ("BIPA") was enacted. BIPA temporarily increased the
existing nursing rate component of the Federal per diem Medicare Part A rate,
for each RUG category, by 16.66% effective April 1, 2001 through September 30,
2002. In addition, BIPA eliminated the 20% add-ons (provided by the BBRA) for
the three rehabilitative therapy RUG categories and substituted 6.7% add-ons for
all fourteen rehabilitative therapy RUG categories.

The Company's quality mix of private, Medicare and
insurance revenues was 53.4% for the nine months ended September 30, 2001 as
compared to 53.6% for the nine months ended September 30, 2002.

Facility Operating Expenses. Facility operating expenses
increased by $38,610,000 or 18.6%, from $207,384,000 in the first nine months of
2001 to $245,994,000 in the first nine months of 2002. Approximately
$18,902,000, or 49.0%, of this increase resulted from the operation of five
additional facilities. The remainder of the increase was primarily the result of
higher expenditures for employee wages and benefit costs. Consistent with other
long-term care providers, the Company continues to find it difficult to recruit
and retain employees, most notably nursing personnel. As a result of these
difficulties, the Company has been forced to rely more heavily on temporary
nursing personnel.

General and Administrative; Service Charges Paid to Former
Affiliate. General and administrative expenses increased by $718,000, from
$14,424,000 in the first nine months of 2001 to $15,142,000 in the first nine
months of 2002. The Company reimburses a former affiliate for data processing
services provided to the Company. During the first nine months of 2001, such
reimbursements totaled $801,000 compared to $573,000 during the first nine
months of 2002.

Amortization of Prepaid Management Fees. Amortization of
prepaid management fees was $900,000 during the first nine months of 2001 and
the first nine months of 2002.

Depreciation and Amortization. Depreciation and
amortization increased from $6,548,000 in the first nine months of 2001 to
$7,098,000 in the first nine months of 2002.

Facility Rent. Facility rent expense increased by
$1,457,000 from $21,560,000 in the first nine months of 2001 to $23,017,000 in
the first nine months of 2002. Most of the increase in rent expense was
associated with the leasing of the new Ohio facility and the four new
Massachusetts facilities.

Financial Restructuring Costs. In connection with an
amendment to the Company's bank credit facility and the Financial Restructuring
completed in the first half of 2001, the Company recorded non-recurring charges
totaling approximately $9.1 million. The charges resulted from the write-off of
unamortized deferred financing costs, related to obtaining the Company's bank
credit facility and issuing its Discount Notes, and the recognition of various
investment advisory, legal and other fees associated with completing the
amendment to the bank credit facility and the Financial
Restructuring.

Facility Reorganization Costs. During the third quarter of
2001, the Company incurred a non-recurring charge of $750,000 in connection with
its decision to revise the marketing approach for facilities operated through
subsidiaries in Florida. The Company determined that a local community-based
marketing approach would better serve the needs of these facilities. The
marketing approach stresses ties to the local community and required renaming
these facilities in order to emphasize this approach. In connection with this
effort, the Company also restructured certain of its subsidiaries effective
October 1, 2001. In order to implement this strategy, the Company incurred
non-recurring marketing, legal and other expenses.

Financing Costs. On September 13, 2002, the Company entered
into a new three-year collateralized credit facility (the "Secured Credit
Facility") that provides access to a maximum of $100 million. Borrowings under
the Secured Credit Facility were used to repay all amounts owed in connection
with the termination of the Company's previous Credit Facility (including
amounts outstanding in connection with a $13,700,000 synthetic lease obligation)
as well as related closing costs and expenses. In connection with entering into
the Secured Credit Facility, the Company incurred non-recurring Financing Costs
totaling approximately $2,835,000. This non-recurring charge includes a charge
of $1,700,000 recorded in connection with the termination of a synthetic lease
for two of the Company's facilities made through the Company's prior Credit
Facility. The significant terms of the Secured Credit Facility and the
components of the non-recurring Financing Costs are described in Note E to the
unaudited condensed consolidated financial statements included elsewhere in this
report.

Interest Expense, net. Interest expense, net, decreased
from $9,774,000 in the first nine months of 2001 to $5,763,000 in the first nine
months of 2002. This decrease is primarily the result of the restructuring of
the Company's Discount Notes completed in May 2001. The restructuring of the
Discount Notes reduced both the carrying amount of the debt and its effective
interest rate.

Income Tax Expense. Income tax expense (all relating to
state income taxes) was $180,000 for the first nine months of 2002.

# 18

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Net Income (loss). The Company incurred a net loss of
$14,625,000 during the first nine months of 2001 compared to a net loss of
$2,071,000 during the first nine months of 2002.

## 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. The
Company's existing leased facilities are leased from either the owner of the
facilities, from an investment entity that 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 that 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 was to accrete at 11% per annum until August 1, 2003 and then
become payable in cash, semi-annually in arrears, beginning on February 1, 2004.
Dividends on the Preferred Stock were payable, at the option of the Company, in
additional shares of the Preferred Stock until August 1, 2003. After that date
dividends were required to be paid in cash. In August 1998, the Company also
entered into a new $250 million collateralized credit facility (the "Credit
Facility"). The terms of the Credit Facility originally provided up to $75
million on a revolving credit basis plus an additional $175 million initially
funded on a revolving basis that would convert 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 Credit Facility
could be used for synthetic lease financings. Interest was 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 Credit Facility contained
various financial and other restrictive covenants and limited aggregate
borrowings under the Credit Facility to a predetermined multiple of earnings
before interest, taxes, depreciation and amortization ("EBITDA").

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 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 (the "First Amendment") to the
Credit Facility which limited borrowings under the 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. Beginning
with the first quarter of 1999, the First Amendment replaced the original
financial covenants with one new financial covenant, a minimum cumulative amount
of EBITDA. The original financial covenants provided maximum ratios of total
indebtedness to EBITDA and senior indebtedness to EBITDA, and a minimum debt
service coverage ratio. The First Amendment required minimum amounts of EBITDA,
measured quarterly, but calculated on a rolling twelve-month basis, through
December 31, 2000. As long as the Company met or exceeded the required minimum
cumulative amounts of EBITDA, the Company could access the Credit Facility for
general corporate purposes, subject to the reduced amount of
availability.

Until September 27, 2000, the Company, through a
wholly-owned limited partnership, leased and operated four facilities in Ohio
(the "Cleveland Facilities") which it acquired in 1996 through capital leases.
Each of the four leases contained an option to purchase the facility beginning
July 1, 2001 and each lease was guaranteed by the Company. The guaranty provided
that failure by the Company to have a specified minimum consolidated net worth
at the end of any two consecutive quarters would be 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, which would have resulted in an
event of default under each of these leases with the Company potentially facing
the loss of these operations. Such default could also have triggered
cross-defaults under the Company's other lease and debt obligations. In December
1999, the Company paid $5 million to its landlord and obtained an option (the
"New Option") to acquire the Cleveland Facilities. The Company borrowed $5
million from an affiliate of Investcorp S.A. to fund this payment. The New
Option allowed the Company to exercise its right to purchase the Cleveland
Facilities beginning as of the date of the New Option, required the Company to
complete the acquisition prior to December 31, 2000 and provided a waiver of the
net worth covenant through that date. The Company exercised the New Option on
June 30, 2000 and on September 27, 2000 the Company terminated the Cleveland
Facilities capital leases and assigned its purchase rights for these facilities
to an investment entity (organized by Investcorp S.A.) for $5.0 million, which
acquired the Cleveland Facilities on September 27, 2000. On that date, the
Company entered into new operating leases for each of the Cleveland Facilities
with combined annual rent expense of approximately $5.9 million. The Company
also repaid the $5.0 million loan from an affiliate of Investcorp S.A. As a
result of the capital lease termination, the Company recorded a non-recurring
charge of $8.9 million. The principal components of this charge included the
write-off of capital leased assets in excess of the related capital lease
obligation ($5.7 million) and the write-off of deferred financing costs ($1.8
million) originally incurred in obtaining the Company's Credit Facility. In
order to complete the Cleveland Facility leasing transaction, the Company was
required to obtain the release of certain collateral held by the bank group that
provides the Credit Facility. The Company obtained the release of the collateral
as part of an amendment (the "Second Amendment") to the Credit Facility, which
also resulted in a permanent reduction of the Company's maximum borrowings under
the Credit Facility from $250 million to $150 million and an increase in the
Company's borrowing rate. As a result of the permanent reduction in funds
available through the Credit Facility, the Company was required to write off a
proportionate amount of the deferred financing costs incurred when the Credit
Facility was originally obtained.

On March 28, 2001, the Company obtained an additional
amendment (the "Third Amendment") to the Credit Facility. The Third Amendment
resulted in a permanent reduction of the Company's maximum borrowings under the
Credit Facility from $150 million to $60 million, revised certain financial

# 19

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covenants, changed the maturity date of the Credit Facility
to March 31, 2004 and increased the Company's borrowing rate. The Third
Amendment also required the Company to repay, on an annual basis, the greater of
$5.0 million or 50% of the Company's excess cash flow (as defined). As a result
of the permanent reduction in funds available through the Credit Facility,
during the three months ended March 31, 2001, the Company was required to write
off approximately $2.2 million of deferred financing costs incurred when the
Credit facility was originally obtained.

In March 2001, the Company entered into an agreement (the
"Restructuring Agreement") with Investcorp S.A. and the holders of more than a
majority in interest of the Company's Discount Notes and Preferred Stock for
purposes of implementing a restructuring of the Discount Notes and Preferred
Stock. The Restructuring Agreement contemplated that the Company would offer to
exchange for each $1,000 amount at maturity of outstanding Discount Notes a
combination of the following: (1) 0.5899118 of a new 12% Senior Subordinated
Discount Note due 2007 (the "New Notes") each having a principal amount at
maturity equal to $1,000 and an original issue price of $685.67 (assuming that
the New Notes were issued on May 4, 2001), (2) $88.2353 in cash and (3) common
stock purchase warrants for approximately 10.9 shares of its Class A Common
Stock. The Company would also offer to exchange common stock purchase warrants
for approximately 10.7 shares of its Class A Common Stock for each $1,000
liquidation preference of Preferred Stock (based on the aggregate liquidation
preference to be outstanding on May 1, 2001) plus any dividends accrued on such
Preferred Stock after May 1, 2001. In conjunction with the restructuring
proposal, the Company would solicit consents from holders of outstanding
Discount Notes and Preferred Stock to amendments to the Indenture governing the
Discount Notes and to the Certificate of Designation governing the Preferred
Stock that would eliminate or modify certain restrictive covenants and other
provisions contained in the Indenture and the Certificate of Designation and
would substantially eliminate the preferences of the Preferred Stock, including
the reduction of the liquidation preference from $1,000 to $0.01 per share and
the elimination of the right of holders to be paid dividends on shares of
Preferred Stock. Also, the Company would issue to Investcorp S.A. (or one or
more of its affiliates or designees) up to 15,000 shares of a new series of 13%
convertible exchangeable preferred stock (the "New Preferred Stock") and
1,854,422 common stock purchase warrants for a total purchase price of up to
$15,000,000.

On April 6, 2001, the Company initiated the exchange offer
and consent solicitation contemplated by the Restructuring Agreement. On May 10,
2001, the Company completed the exchange offer and consent solicitation, thereby
implementing  each of the elements of the  Restructuring  Agreement.  All of the
outstanding  Discount  Notes and  99.96% of the shares of  Preferred  Stock were
tendered and exchanged in the exchange offer.  As a result of the exchange,  (1)
the Company had an aggregate principal amount at maturity of $100,276,000 of New
Notes outstanding and an aggregate liquidation  preference of $15,000,000 (as of
May 10, 2001) of New Preferred  Stock  outstanding,  (2) warrants were issued to
holders of Discount Notes, to holders of Preferred Stock, and to Investcorp S.A.
representing  the right to purchase an  aggregate of  approximately  15%, 5% and
15%, respectively, of the total number of shares of all classes of the Company's
common stock on a fully diluted basis (excluding shares issuable upon conversion
of the New  Preferred  Stock,  which is  convertible  into 150 shares of Class A
Common  Stock),  and (3)  the  Company  paid  $15,000,000  in  cash  as  partial
consideration for the tendered Discount Notes.

The reduction in the liquidation preference of the
Preferred Stock was completed on May 10, 2001, as contemplated by the
Restructuring Agreement, the carrying amount of the Preferred Stock was reduced
from $57,595,000 to $576 and the amount of the reduction, net of unamortized
deferred financing costs related to the issuance of the Preferred Stock
(approximately $1,011,000 at May 10, 2001), was directly transferred to the
Company's Accumulated Deficit account. With the exchange of the New Notes for
the Discount Notes (the "Note Exchange"), the carrying value of the accreted
principal of the Discount Notes was reduced to $68,890,000, and the amount of
the reduction, net of the aggregate cash payment of $15,000,000, was directly
transferred to the Company's Long-term Accrued Interest account. Subsequent to
their issuance, the carrying amount of the New Notes increases as the result of
accretion and results in a corresponding decrease in the carrying amount of
Long-term Accrued Interest. Interest expense on the New Notes is recognized such
that a constant effective interest rate is applied to the aggregate carrying
amount of the New Notes and Long-term Accrued Interest for all periods between
the issuance date and the maturity date of the New Notes.

In connection with the Third Amendment to the Credit
Facility and the implementation of the Restructuring Agreement, the Company
incurred a non-recurring charge of $9,045,000. The charge resulted from the
write-off of approximately $1,500,000 of unamortized deferred financing costs
incurred when the Credit Facility was obtained, the write-off of approximately
$3,400,000 of unamortized deferred financing costs related to the issuance of
the Discount Notes, and the recognition of various investment advisory, legal
and other fees associated with these events approximating $4,100,000.

The New Notes were issued at a discount and interest on the
New Notes accretes until August 1, 2004. Cash interest payments will be paid
semi-annually in arrears beginning on February 1, 2005 based on the fully
accreted value of the New Notes and a 12% cash interest payment rate. The New
Notes mature on August 1, 2007. The New Preferred Stock is mandatorily
redeemable on February 1, 2008. The holders of the New Preferred Stock are
entitled to dividends quarterly in arrears beginning August 1, 2001 and payable
in additional shares of New Preferred Stock. Warrants to purchase a total of
4,326,641 shares of common stock at $0.01 per share were issued on May 10,
2001.

On September 13, 2002, the Company entered into a new
credit facility (the "Secured Credit Facility"). Borrowings under the Secured
Credit Facility were used to repay all amounts owed in connection with the
Credit Facility (including the $13,700,000 purchase obligation associated with a
synthetic lease made through the Credit Facility) and the Credit Facility was
terminated. As a result of the termination of the Credit Facility, the Company
wrote off approximately $666,000 of unamortized deferred financing costs
incurred when the Credit facility was obtained, recognized a $1,700,000 charge
in connection with the termination of the synthetic lease and $469,000 of other
costs related to the termination of the Credit Facility. The significant terms
of the Secured Credit Facility are described in Note E to the unaudited
condensed consolidated financial statements included elsewhere in this
report.

As of September 30, 2002, total borrowings under the
Secured Credit Facility were approximately $62,100,000 and consisted of
borrowings under the term loan of approximately $43,000,000 and $19,100,000 of
undrawn letters of credit. As of September 30, 2002, the Company had
approximately $22,900,000 of funding available under the Secured Credit
Facility.

The Company's operating activities during the first nine
months of 2001 provided net cash of $12,473,000 as compared to providing net
cash of $15,934,000 during the first nine months of 2002.

Net cash used by investing activities was $9,246,000 during
the first nine months of 2001 as compared to $22,320,000 used during the first
nine months of 2002. The primary use of cash for investing purposes during the
first nine months of 2001 was to fund additions of property and equipment
associated with the maintenance of the Company's long-term care facilities. The
primary use of cash for investing purposes during the first nine months of 2002
was to fund additions to property and equipment. During the nine months ended
September 30, 2002, $13,700,000 of cash was used to fund the termination of a
synthetic lease for two of the Company's properties. During the period the
synthetic lease was in effect, the operating results of these facilities were
included with the operating results of the Company; however, in accordance with
accounting for synthetic leases, the fixed assets of these properties and the
related debt of $13,700,000, were not included in the Company's consolidated
balance sheet. Rather than recognizing interest on the $13,700,000 purchase
commitment then outstanding, as well as depreciation on the fixed assets of the
two facilities, the Company recognized as rent expense the payments made in

# 20

---

connection with the synthetic lease. The Company's
"Additions to Property and Equipment" for the nine months ended September 30,
2002 include approximately $9,609,000 with respect to the termination of the
synthetic lease and acquisition of the two properties. Most of the remainder of
the cash used during 2002 to fund additions of property and equipment was
associated with the maintenance of the Company's long-term care facilities. The
Company used approximately $6,212,000 to fund additions to deferred financing
and other intangibles. Of this amount, approximately $2,391,000 reflected the
recording of goodwill in connection with the acquisition of two properties that
the Company had previously leased by means of a synthetic lease. Additionally,
the Company incurred approximately $3,821,000 of deferred financing costs in
connection with obtaining the Secured Credit Facility.

Net cash used by  financing  activities  was  $4,086,000
during  the  first  nine  months of 2001 as  compared  to net cash  provided  by
financing  activities of  $17,561,000  during the first nine months of 2002. The
financing  activities  during the first  nine  months of 2001  consisted  of the
issuance of $15,000,000 of New Preferred  Stock, a payment of $15,000,000 to the
holders of the  Discount  Notes and a  repayment  of  $4,000,000  of  borrowings
outstanding under the Credit Facility. The financing activities during the first
nine months of 2002  consisted of  $43,015,000  of borrowings  under the Secured
Credit    Facility   and   the   repayment    of all    amounts    ($25,250,000,
including $23,250,000  paid  at  termination)  due  under the  Credit  Facility,
excluding the $13,700,000 purchase obligation associated with a synthetic lease.

As of September 30, 2002, in addition to borrowings
outstanding under the Secured Credit Facility and the Discount Notes (which had
an accreted balance of $81,019,000), the Company had two mortgage loans
outstanding totaling $16,975,000. One mortgage loan had an outstanding principal
balance of $15,488,000 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 operating revenues of the four mortgaged
facilities in each applicable year and operating revenues during the
twelve-month base period. The Company's other mortgage loan, which encumbers a
single facility, had an outstanding principal balance of $1,487,000 at September
30, 2002, of which $1,338,000 is due in 2010.

Harborside expects that its capital expenditures for 2002
will aggregate not more than $7,000,000, excluding the $9,609,000 paid with
respect to the termination of the synthetic lease and the acquisition of those
two properties and any additional acquisitions of long-term care facilities.
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 primarily through operating leases or assumed debt. Harborside
may be required to obtain additional equity financing to finance any significant
acquisitions in the future, to refinance the New Notes when they mature on
August 1, 2007 or to refinance the New Preferred Stock when it becomes
mandatorily redeemable on February 1, 2008. The Company continues to evaluate
additional sources of capital funding to support its acquisition
program.

The Company owns a 75% interest in a partnership that owns
one facility. The Company accounts for its investment in this partnership using
the equity method. The Company has guaranteed a loan of approximately $5,600,000
made to this partnership to refinance a loan that 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 loan matures on
November 15, 2002 and the Company expects to extend the existing maturity date
and then refinance the loan on comparable terms. 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.

The Company is highly leveraged, which makes it vulnerable
to changes in general economic conditions. The Company's ability to repay or
refinance its debt will depend on, among other things, financial, business,
market, competitive and other conditions, many of which are beyond the control
of the Company. The Company believes that, taken together, its current cash
balances, internally generated cash flow and availability under its credit
facilities should result in the Company having adequate cash resources to meet
its debt service and other financial obligations for at least the next twelve
months.

## CONTRACTUAL OBLIGATIONS

The following table provides information about the Company's contractual
obligations as of September 30, 2002, excluding current liabilities except for
the current portion of long-term debt.

`Payments due by Years
                                                        Total        Remaining 2002   2003 and 2004  2005 and 2006     After 2006

Long-term debt                                     $ 141,009,000       $   297,000       $15,249,000    $ 43,051,000   $  82,412,000

Operating leases (1)                                 211,250,000         7,244,000        58,229,000      49,676,000      96,101,000
                                                   -------------        ----------       -----------    ------------   -------------
Total contractual and cash obligations             $ 352,259,000       $ 7,541,000       $73,478,000    $ 92,727,000   $ 178,513,000
                                                   =============       ===========       ===========    ============   =============`

The Company issued $15,000,000 of New Preferred Stock on
May 10, 2001. As long as the Company's New Notes remain outstanding, the New
Preferred Stock is entitled to dividends at a rate of 13% per annum compounded
quarterly and payable in additional shares of New Preferred Stock. The New
Preferred Stock is mandatorily redeemable on February 1, 2008.

During the year ended December 31, 1998, the Company
implemented a general and professional liability insurance program that, for the
period from September 1, 1998 to August 31, 2001, limited the Company's
self-retention risk for this program to a maximum of $25,000 per year. The
long-term care industry has seen the cost of maintaining traditional
professional liability insurance increase significantly over the past two years,
especially in the State of Florida. Most insurance companies are unwilling to
underwrite new professional liability policies in the State of Florida. In May
2001, tort reform legislation was enacted in Florida. This legislation provides
caps on punitive damages, limits to add-on legal fees, stricter rules of
evidence and a shorter statute of limitations period. Given the tremendous
increase in professional liability premiums and the tort reform legislation that
was enacted in the State of Florida in May 2001, the Company concluded that it
would be more cost effective to assume a higher level of retained risk for
professional liability claims. As a result, the Company implemented a new
general and professional liability program, effective September 1, 2001, which
resulted in the Company maintaining an unaggregated self-insured retention of
$2,000,000 per occurrence for locations outside of Florida and completely
retaining risk at the Florida facilities. As of September 30, 2002, the Company
maintained a Claims Reserve in the amount of $5,353,000 for incurred but not
reported claims. The amount of the reserve was determined through an estimation
process that used information from both the Company's records as well as
industry data. The Company uses an independent actuary to help estimate the
required general and professional liability reserve. Factors reviewed include

# 21

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the  frequency  of expected  claims,  the average cost per
claim, emerging industry trends,  changes in regulatory environment (such as the
recently  enacted  Florida tort reform  legislation)  and the expected effect of
various operational and risk management  initiatives.  At this time, the Company
estimates that,  effective  September 1, 2001, its annual cost for  professional
and general  liability  insurance  for existing  facilities  will  increase from
approximately  $2,500,000  under the prior program to  $7,000,000  under the new
program.   The  Company  will  continue  to  evaluate  its   insurance   reserve
requirements on a quarterly basis. Required adjustments to the Company's general
and professional  liability reserve will be recorded in the accounting period in
which the  change in  estimate  occurs.  There can be no  assurances  the recent
Florida tort reform  legislation will have a positive impact on claims activity,
that the coverage limits of the Company's  insurance program will be adequate or
that insurance  will continue to be available to the Company in the future.  The
Company  extended  its existing  general and  professional  liability  insurance
through  December 1, 2002.  The Company is  currently  obtaining  quotes for the
policy year effective December 1, 2002 through November 30, 2003.

Certain of the increases in Medicare reimbursement for
skilled nursing facilities provided for under the BBRA and BIPA expired on
October 1, 2002. Unless Congress enacts new legislation, the loss of revenues
associated with this occurrence could have a material adverse effect on the
Company. If new legislation is not enacted, the Company estimates that its
revenues for the quarter ended December 31, 2002 would be reduced by
approximately $37 per Medicare Part A patient day. Various proposals have been
presented in Congress that would restore significant, but varying amounts of
funding, that statutorily expired on October 1, 2002. However, as of the date of
this filing, Congress has not approved any one of these proposals. Congress
could approve a measure that applies retroactively to October 1, 2002; however,
there is no assurance that such a measure will be approved or that it will be
applied retroactively to any date from the date of enactment. The Company cannot
provide assurances that Congress will act to renew the expired legislation;
however, the Company does anticipate that it would take actions to reduce costs
to offset a portion of this revenue reduction if funding is not restored. At
this time, the Company cannot predict the course of action likely to be selected
by Congress or the impact of this issue on the Company's net income for the year
ended December 31, 2002.

The Health Insurance  Portability and Accountability Act of
1996 ("HIPAA") broadened the scope of fraud and abuse laws to include all health
plans,  whether or not they are reimbursed  under Federal  programs.  HIPAA also
mandated  the  adoption  of  federal  regulations  designed  to (a)  standardize
transaction  formats and billing  codes for  documenting  health care  services,
determining  eligibility and processing claims for payment;  and (b) protect the
privacy and security of  individually  identifiable  health  information.  Final
HIPAA regulations that standardize transactions and code sets were issued during
the  third  quarter  of 2000.  The  ultimate  compliance  date was  subsequently
modified by  legislation  to require  health care  providers and health plans to
either comply with the HIPAA transaction code set standards beginning in October
of 2002 or submit a written  plan to the federal  government  by October of 2002
describing  specific plans for compliance by October of 2003. The regulations do
not require healthcare providers to submit claims electronically, but do require
standard  formatting  for those that do so. The Company  currently  submits most
claims  electronically  and  expects  to  continue  to do so.  The  Company  has
submitted  the required  documentation  describing  its plans for  compliance by
October of 2003.

Final HIPAA privacy regulations were published during the
fourth quarter of 2000. However, on March 27, 2002, the U.S. Department of
Health and Human Services published in the Federal Register a proposed rule
which if finally adopted would modify the regulations published during 2000. In
general, the regulations apply to "protected health information", which is
defined as individually identifiable health information transmitted or
maintained in any form or medium, excluding certain education records and
student medical records. The privacy regulations seek to limit the use and
disclosure of most paper and oral communications, as well as those in electronic
form, regarding an individual's past, present or future physical or mental
health or condition, or relating to the provision of health care to the
individual or payment of that health care. The regulations further impose
requirements on health care providers to contractually obligate certain of their
contractors who may receive protected health care information during the course
of rendering services on behalf of such health care provider to abide by certain
privacy requirements as well. In addition, the current HIPAA regulations provide
that certain state privacy laws may not be preempted by HIPAA. Accordingly, the
Company, in certain instances, will remain subject to various state privacy laws
in jurisdictions in which it currently operates facilities. HIPAA provides for
the imposition of civil and criminal penalties if protected health information
is improperly disclosed. The Company must comply with the privacy regulations by
April of 2003. Given the issuance of the recent proposed rulemaking, it is
uncertain the extent to which the regulations that were published in 2000 will
change. The Company is continuing to evaluate the impact of the privacy
regulations on its operations.

HIPAA's security regulations have not been finalized. The
proposed security regulations specify administrative procedures, physical
safeguards, and technical services and mechanisms designed to ensure that
protected health information remains secure. The proposed security rules
contemplate a compliance date of 24 months after the effective date of the final
rule published in the Federal Register, although it is possible that such
compliance date will differ and could align with the compliance date for the
privacy regulations depending on when the security regulations are ultimately
finalized.

The Company is currently working in conjunction with its
software vendors to evaluate the impact of HIPAA regulations on the Company's
systems and operating procedures. The Company has not yet completed its analysis
or its estimate of the expected costs of compliance with the HIPAA regulations.
There can be no assurances that compliance with HIPAA regulations will not have
an adverse effect on the Company's results of operations, cash flows or its
financial position.

## SEASONALITY

The Company's earnings generally fluctuate from quarter to
quarter. This seasonality is related to a combination of factors, which include
the timing and amount of Medicaid rate increases, seasonal census cycles, and
the number of days in a given fiscal quarter.

## INFLATION

The healthcare industry is labor intensive.  Wages and other labor related costs are especially sensitive to inflation.  Certain of the
Company's  other expense items,  such as supplies and real estate costs are also sensitive to  inflationary  pressures.  Shortages in the
labor market or general  inflationary  pressure could have a significant effect on the Company. In addition,  suppliers pass along rising
costs to the Company in the form of higher prices.  When faced with increases in operating  costs, the Company has sought to increase its
charges for services and its requests for  reimbursement  from government  programs.  The Company's private pay customers and third party
reimbursement  sources  may be less able to absorb  increased  prices for the  Company's  services.  The  Company's  operations  could be
adversely  affected  if it is unable to  recover  future  cost  increases  or  experiences  significant  delays  in  increasing  rates of
reimbursement of its labor or other costs from Medicare and Medicaid revenue sources.

# 22

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## SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-Q, including information
set forth under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations, constitute
Forward-Looking Statements within the meaning of 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-Q, 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  occurrence  of changes in the mix of payment  sources  utilized by the
     Company's patients to pay for the Company's services.

2.   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.

3.   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.

4.   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.

5.   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.

6.   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.

7.   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.

8.   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  systems  in the  states in which  the  Company
     operates that facilitate such competition.

9.   The continued  availability and pricing of insurance for the inherent risks
     of liability in the healthcare  industry.  Claims activity  associated with
     the Company's self-insured risk programs.

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

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

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

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

# 23

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# Item 3.QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Most of the Company's debt obligations bear interest at
fixed rates and are not affected by changes in market interest rates; however,
borrowings under the Company's Secured Credit Facility are sensitive to changes
in interest rates. Under the Secured Credit Facility, interest is based on
either LIBOR or prime rates of interest, at the Company's election, plus
applicable margins, and, for the term loan, subject to a floor of 7%. As the
prime and LIBOR rates of interest increase, interest expense associated with the
Company's borrowings under the Secured Credit Facility would also increase,
subject to existing floors and the impact of any hedging activities. An increase
of 1% in the applicable rate would increase the Company's annual interest cost
by approximately $430,000.

The Company did not experience significant changes in
interest rates during the nine months ended September 30, 2002. As part of the
Company's risk management program, the Company continuously reviews its overall
exposure to interest rate risk and evaluates the benefits of interest rate
hedging through the use of derivative instruments, such as interest rate swaps
or caps. By entering into an interest rate swap or caps, the Company can
effectively transform variable rate debt into fixed rate debt. The Company did
not have any interest rate swap arrangements outstanding during the nine-month
period ending September 30, 2001. As described in Note E to the unaudited
condensed consolidated financial statements included elsewhere in this report,
the Company purchased a $40,000,000 interest rate cap effective September 1,
2002.

# Item 4. CONTROLS AND
PROCEDURES

Our management, including our Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended) within 90 days of the
date of filing this quarterly report on Form 10-Q. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion.

There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls,
subsequent to the date our Chief Executive Officer and Chief Financial Officer
completed their evaluation.

# 24

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# PART II -
OTHER INFORMATION

`Item 6.      Exhibits and Reports on Form 8-K

(a)      Exhibits

              None.


(b)      Reports on 8-K

         The Company filed an 8-K on September 30, 2002 regarding the entering
         into a Loan and Security  Agreement with Heller Healthcare
         Finance, Inc.`

# 25

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# SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

`Harborside Healthcare Corporation



                         By:    /s/ Stephen L. Guillard
                               -------------------------
                               Stephen L. Guillard
                               Chairman and Chief Executive Officer


                         By:   /s/ William H. Stephan
                               ----------------------
                               William H. Stephan
                               Senior Vice President and Chief Financial Officer




DATE:   November 14, 2002`

## 26

---

# CERTIFICATIONS

`I, Stephen L. Guillard, certify that:


1.   I have reviewed this quarterly report on Form 10-Q of Harborside Healthcare
     Corporation;

2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of Harborside Healthcare Corporation as of, and for, the periods
     presented in this quarterly report;

4.   Harborside Healthcare Corporation's other certifying officer and I are
     responsible for establishing and maintaining disclosure controls and
     procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
     Harborside Healthcare Corporation and we have:


a)        designed such disclosure controls and procedures to ensure that
          material information relating to Harborside Healthcare Corporation,
          including its consolidated subsidiaries, is made known to us by others
          within these entities, particularly during the period in which this
          quarterly report is being prepared;

b)        evaluated the effectiveness of Harborside Healthcare Corporation's
          disclosure controls and procedures as of a date within 90 days prior
          to the filing date of this quarterly report (the "Evaluation Date");
          and

c)        presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   Harborside Healthcare Corporation's other certifying officer and I have
     disclosed, based on our most recent evaluation, to Harborside Healthcare
     Corporation's auditors and the audit committee of Harborside Healthcare
     Corporation's board of directors:


a)        all significant deficiencies in the design or operation of internal
          controls which could adversely affect Harborside Healthcare
          Corporation's ability to record, process, summarize and report
          financial data and have identified for Harborside Healthcare
          Corporation's auditors any material weaknesses in internal controls;
          and


b)        any fraud, whether or not material, that involves management or other
          employees who have a significant role in Harborside Healthcare
          Corporation's internal controls; and

6.   Harborside Healthcare Corporation's other certifying officer and I have
     indicated in this quarterly report whether or not there were significant
     changes in internal controls or in other factors that could significantly
     affect internal controls subsequent to the date of our most recent
     evaluation, including any corrective actions with regard to significant
     deficiencies and material weaknesses.


Date:    November 14, 2002

                                          /s/ Stephen L. Guillard
                                         --------------------------------
                                         Stephen L. Guillard,
                                         Chairman and Chief Executive Officer`

## 27

---

`I, William H. Stephan, certify that:


1.   I have reviewed this quarterly report on Form 10-Q of Harborside Healthcare
     Corporation;


2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;


3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of Harborside Healthcare Corporation as of, and for, the periods
     presented in this quarterly report;

4.   Harborside Healthcare Corporation's other certifying officer and I are
     responsible for establishing and maintaining disclosure controls and
     procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
     Harborside Healthcare Corporation and we have:


a)        designed such disclosure controls and procedures to ensure that
          material information relating to Harborside Healthcare Corporation,
          including its consolidated subsidiaries, is made known to us by others
          within these entities, particularly during the period in which this
          quarterly report is being prepared;

b)        evaluated the effectiveness of Harborside Healthcare Corporation's
          disclosure controls and procedures as of a date within 90 days prior
          to the filing date of this quarterly report (the "Evaluation Date");
          and

c)        presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   Harborside Healthcare Corporation's other certifying officer and I have
     disclosed, based on our most recent evaluation, to Harborside Healthcare
     Corporation's auditors and the audit committee of Harborside Healthcare
     Corporation's board of directors:


a)        all significant deficiencies in the design or operation of internal
          controls which could adversely affect Harborside Healthcare
          Corporation's ability to record, process, summarize and report
          financial data and have identified for Harborside Healthcare
          Corporation's auditors any material weaknesses in internal controls;
          and
b)        any fraud, whether or not material, that involves management or other
          employees who have a significant role in Harborside Healthcare
          Corporation's internal controls; and

6.   Harborside Healthcare Corporation's other certifying officer and I have
     indicated in this quarterly report whether or not there were significant
     changes in internal controls or in other factors that could significantly
     affect internal controls subsequent to the date of our most recent
     evaluation, including any corrective actions with regard to significant
     deficiencies and material weaknesses.

Date:    November 14, 2002

                                          /s/ William H. Stephan
                                          ------------------------------
                                          William H. Stephan,
                                          Senior Vice President and Chief
                                          Financial Officer`

## 28