<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

                                       or

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

                          Commission File No. 1-10968

                        MARINER POST-ACUTE NETWORK, INC.
             (Exact Name of Registrant as Specified in its Charter)

                   Delaware                                   74-2012902
        (State or Other Jurisdiction of                   (I.R.S. Employer
         Incorporation or Organization)                  Identification No.)

          One Ravinia Drive, Suite 1500                          30346
                Atlanta, Georgia                              (Zip Code)
     (Address of Principal Executive Office)

                                  (678) 443-7000
               (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
                                              ----    ----

  There were 73,695,081 shares of Common Stock of the registrant issued and
outstanding as of August 11, 1999, including approximately 102,072 shares
issuable upon the exchange of certificates formerly representing the common
stock of predecessor corporations acquired by the registrant.
<PAGE>

               Mariner Post-Acute Network, Inc. and Subsidiaries

                                   FORM 10-Q
                               TABLE OF CONTENTS
                                 June 30, 1999

<TABLE>
<CAPTION>

                                                                                                                     PAGE
                                                                                                                     ----
Part I - FINANCIAL INFORMATION


<S>                 <C>                                                                                              <C>
     Item 1.        Condensed Consolidated Financial Statements and Notes                                              1

     Item 2.        Management's Discussion and Analysis of Financial                                                 18
                    Condition and Results of Operations

     Item 3.        Quantitative and Qualitative Disclosure About Market                                              38
                    Risk

Part II - OTHER  INFORMATION

     Item 1.        Legal Proceedings                                                                                 39

     Item 2.        Changes in Securities and Use of Proceeds                                                         40

     Item 3.        Defaults Upon Certain Securities                                                                  40

     Item 4.        Submission of Matters to a Vote of Security Holders                                               40

     Item 5.        Other Information                                                                                 40

     Item 6.        Exhibits and Reports on Form 8-K                                                                  41

SIGNATURE PAGE                                                                                                        42
</TABLE>
<PAGE>

PART 1  FINANCIAL INFORMATION
Item 1.  Condensed Consolidated Financial Statements

               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per share amounts)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                             Three Months                Nine Months
                                                                             Ended June 30,             Ended June 30,
                                                                           1999         1998            1999          1998
                                                                        -----------  ----------      ----------    ----------
<S>                                                                      <C>          <C>            <C>           <C>
Net Revenues
    Nursing home revenue:
     Net patient services, including reduction due to change in
      estimate of $94,433 for the three and nine months ended
      June 30, 1999 (see Note 6).......................................  $ 365,277    $363,220       $1,338,662    $1,031,599

     Other.............................................................      7,887       4,300           20,910         9,462
    Non-nursing home revenue:
     Pharmacy services.................................................     68,325      56,739          216,241       163,588
     Therapy services..................................................     35,253      45,618          164,805       125,877
     Home health, hospital services, and other.........................     10,393      24,188           33,907        72,306
                                                                         ----------------------------------------------------
                                                                           487,135     494,065        1,774,525     1,402,832
Costs and Expenses:
    Salaries and wages.................................................    264,041     183,898          802,428       522,574
    Employee benefits..................................................     49,055      36,877          159,342       105,596
    Nursing, dietary and other supplies................................     32,229      21,670           96,109        65,709
    Ancillary services.................................................     92,304     111,699          323,487       313,349
    General and administrative.........................................     65,779      45,359          199,357       127,007
    Insurance expense..................................................     19,790       9,156           52,698        33,933
    Rent...............................................................     26,955      21,087           80,674        60,229
    Depreciation and amortization......................................     33,636      17,787           96,745        51,113
    Provision for bad debts............................................     12,816       5,596           91,439        18,995
    Recapitalization, indirect merger, restructuring, and other
      expenses.........................................................     17,622      11,208           24,736        65,829
    Loss on disposal of assets.........................................    231,549         ---          231,549           ---
                                                                         ----------------------------------------------------
                                                                           845,776     464,337        2,158,564     1,364,334
                                                                         ----------------------------------------------------
    Income (loss) from operations......................................   (358,641)     29,728         (384,039)       38,498
Other Income and Expense:
    Interest expense...................................................     51,487      31,564          147,559        83,598
    Interest and dividend income.......................................     (3,524)     (3,437)          (8,383)       (8,181)
                                                                         ----------------------------------------------------
                                                                            47,963      28,127          139,176        75,417
    Income (loss) before income taxes, minority interest, and
     extraordinary loss................................................   (406,604)      1,601         (523,215)      (36,919)
Provision (Benefit) for Income Taxes...................................        ---       1,596            1,000        (3,232)
                                                                         ----------------------------------------------------
    Income (loss) before minority interest and extraordinary loss......   (406,604)          5         (524,215)      (33,687)
Minority Interest......................................................        880        (247)             715          (546)
                                                                         ----------------------------------------------------
    Loss before extraordinary loss.....................................   (405,724)       (242)        (523,500)      (34,233)
Extraordinary Loss on Early Extinguishment of Debt, net of $6,034
 Income Tax Benefit....................................................        ---         ---              ---       (11,275)
                                                                         ----------------------------------------------------
Net Loss...............................................................  $(405,724)   $   (242)      $ (523,500)   $  (45,508)
                                                                         =========    ========       ==========    ==========

Loss Per Share:
    Basic and Diluted..................................................  $   (5.51)   $  (0.01)      $    (7.13)   $    (1.04)
                                                                         =========    ========       ==========    ==========
Weighted Average Common Shares Outstanding:
    Basic and Diluted..................................................     73,581      42,223           73,380        43,698
                                                                         =========    ========       ==========    ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       1
<PAGE>

               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     (thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                                             (unaudited)
                                                                                               June 30,      September 30,
                                                                                                 1999             1998
                                                                                           -------------------------------
<S>                                                                                          <C>             <C>
                                           ASSETS
Current Assets:
    Cash and cash equivalents..............................................................  $   103,308        $    3,314
    Receivables (less allowances of $103,723 and $68,581)..................................      415,998           617,380
    Receivable from  asset sale............................................................       54,521                --
    Supplies...............................................................................       30,722            31,516
    Income tax refund receivable...........................................................        2,189            57,323
    Deferred income taxes..................................................................       42,251            58,875
    Prepaid expenses and other current assets..............................................       49,835            39,515
                                                                                             -----------------------------
     Total current assets..................................................................      698,824           807,923
Property and Equipment:
    Land, buildings and improvements.......................................................      881,086           863,451
    Furniture, fixtures and equipment......................................................      242,683           231,682
    Leased property under capital leases...................................................       89,367            89,718
                                                                                             -----------------------------
                                                                                               1,213,136         1,184,851
    Less accumulated depreciation..........................................................      321,435           257,698
                                                                                             -----------------------------
                                                                                                 891,701           927,153
Goodwill, net..............................................................................      807,646         1,084,473
Restricted Investments.....................................................................       74,589            88,467
Notes Receivable, net......................................................................       19,522            20,861
Other Assets...............................................................................      103,379           107,774
                                                                                             -----------------------------
                                                                                             $ 2,595,661        $3,036,651
                                                                                             ===========        ==========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Notes payable and current maturities of long-term debt.................................  $ 1,384,385        $   46,250
    Accounts payable.......................................................................      129,510           165,484
    Accrued payroll and related expenses...................................................      114,889           127,774
    Accrued interest.......................................................................       30,994            35,057
    Other accrued expenses.................................................................       76,485            83,142
                                                                                             -----------------------------
     Total current liabilities.............................................................    1,736,263           457,707
Long-Term Debt, net of current maturities..................................................      822,250         1,977,865
Long-Term Insurance Reserves...............................................................       42,689            61,310
Deferred Income Taxes and Other Noncurrent Liabilities.....................................      122,680           142,755
Commitments and Contingencies
Stockholders' (Deficit) Equity:
    Preferred stock, par value $.01; 5,000,000 shares authorized; none issued..............           --                --
    Common stock, par value $.01; 500,000,000 shares authorized;
     73,695,081 shares issued..............................................................          737               733
    Capital surplus........................................................................      980,952           980,142
    Accumulated deficit....................................................................   (1,106,611)         (583,111)
    Accumulated other comprehensive loss...................................................       (3,299)             (750)
                                                                                             -----------------------------
     Total stockholders' (deficit)  equity.................................................     (128,221)          397,014
                                                                                             -----------------------------
                                                                                             $ 2,595,661        $3,036,651
                                                                                             ===========        ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       2
<PAGE>

               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                                 (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>


                                                                                         Accumulated
                                               Common Stock                                 Other
                                              --------------   Capital    Accumulated   Comprehensive
                                              Shares  Amount   Surplus      Deficit          Loss          Total
                                              ------  ------  ---------  -------------  --------------  -----------
<S>                                           <C>     <C>     <C>        <C>            <C>             <C>
Balance, September 30, 1998.................  73,277    $733   $980,142   $  (583,111)     $  (750)      $ 397,014
      Net loss..............................      --      --         --      (523,500)          --        (523,500)
      Funding of employee benefit plan......     369       4        683            --           --             687
      Issuance of common stock..............      49      --        127            --           --             127
      Unrealized losses on available-for-
           sale securities..................      --      --         --            --       (2,549)         (2,549)
                                              --------------------------------------------------------------------
Balance, June 30, 1999......................  73,695    $737   $980,952   $(1,106,611)     $(3,299)      $(128,221)
                                              ======    ====   ========   ===========      =======       =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       3
<PAGE>

               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (in thousands)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                         Nine Months
                                                                                       Ended June 30,
                                                                                ----------------------------
                                                                                     1999           1998
                                                                                 -------------  ------------
<S>                                                                              <C>            <C>
Cash Flows From Operating Activities:
    Net loss...................................................................     $(523,500)    $ (45,508)
    Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization.............................................        96,745        51,113
     Interest accretion on Senior Notes........................................        15,819        12,318
     Income taxes deferred.....................................................            --         2,038
     Equity earnings/minority interest.........................................          (715)          546
     Provision for bad debts...................................................        91,439        18,995
     Change in estimate related to reduction in revenue........................        94,433            --
     Loss on disposal of assets................................................       231,549            --
    Changes in noncash working capital:
     Receivables...............................................................       (17,805)      (43,564)
     Supplies..................................................................           794          (207)
     Prepayments and other current assets......................................        57,001        (9,502)
     Accounts payable..........................................................       (35,974)      (30,181)
     Accrued expenses and other current liabilities............................       (19,812)       12,290
    Changes in long-term insurance reserves....................................       (18,853)          364
    Other......................................................................        (8,662)        2,246
                                                                                    ------------------------
Net Cash Used In Operating Activities..........................................       (37,541)      (29,052)

Cash Flows Used In Investing Activities:
    Acquisitions and investments...............................................            --       (54,041)
    Purchases of property and equipment........................................       (55,796)      (32,344)
    Disposals of property, equipment and other assets..........................        11,090         2,252
    Restricted investments.....................................................        11,329         1,736
    Net collections on notes receivable........................................         3,390        20,622
    Other......................................................................         9,017       (12,639)
                                                                                    -----------------------
Net Cash Used In Investing Activities..........................................       (20,970)      (74,414)

Cash Flows From Financing Activities:
    Issuance of shares to Apollo Management, L.P...............................            --       232,750
    Proceeds from Senior Credit Facility.......................................            --       740,000
    Proceeds from Senior Notes.................................................            --       448,871
    Net draws under credit line................................................       205,470         5,000
    Repayment of long-term debt................................................       (43,131)     (565,560)
    Repurchase of shares in recapitalization...................................            --      (735,223)
    Deferred financing fees....................................................        (3,838)      (30,178)
    Other......................................................................             4         5,848
                                                                                    -----------------------
Net Cash Provided By Financing Activities......................................       158,505       101,508
                                                                                    -----------------------
Increase (Decrease) in Cash and Cash Equivalents...............................        99,994        (1,958)
Cash and Cash Equivalents, beginning of period.................................         3,314        14,355
                                                                                    -----------------------
Cash and Cash Equivalents, end of period.......................................     $ 103,308     $  12,397
                                                                                    =========     =========
</TABLE>
         The accompanying notes are an integral part of these financial
          statements.

                                       4
<PAGE>

               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

NOTE 1.  Organization and Basis of Presentation

 Organization

     Mariner Post-Acute Network, Inc. (the "Company") changed its name
effective August 1, 1998 from its former name, Paragon Health Network, Inc.
("Paragon"), following the consummation of the merger (the "Mariner Merger")
with Mariner Health Group, Inc. ("Mariner Health") on July 31, 1998 pursuant
to an agreement and plan of merger dated as of April 13, 1998 (the "Mariner
Merger Agreement"). (See Note 4.) The Company had previously changed its name
from Living Centers of America, Inc. ("LCA") to Paragon on November 4, 1997.
At the time of the Mariner Merger, Mariner Health operated long-term health care
facilities that provided skilled nursing and residential care services in 16
states and comprehensive rehabilitation services. Paragon was formed in November
1997 through the recapitalization by merger of LCA with a newly-formed entity
owned by certain affiliates of Apollo Management, L.P. (together with its
affiliates, "Apollo") and certain other investors (the "Recapitalization
Merger"), and the subsequent merger of GranCare, Inc. ("GranCare") with a
wholly-owned subsidiary of LCA (the "GranCare Merger" and collectively with
the Recapitalization Merger, the "Apollo/LCA/GranCare Mergers") pursuant to an
agreement and plan of merger dated as of May 7, 1997, as amended and restated as
of September 17, 1997 (the "GranCare Merger Agreement"). (See Notes 3 and 4.)
At the time of the GranCare Merger, GranCare operated long-term health care
facilities that provided skilled nursing and residential care services in 15
states, a specialty hospital geriatric services company, and home health
operations. The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries and all significant intercompany
accounts and transactions have been eliminated in consolidation.

 Basis of Presentation

  The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission.  Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for annual financial statements.  In the opinion of
management, all adjustments (which include normal recurring adjustments)
considered necessary for a fair presentation have been included.  Operating
results for the three and nine months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended September 30,
1999.  These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended September
30, 1998 included in the Company's Annual Report filed with the Securities and
Exchange Commission on Form 10-K, file No. 1-10968.

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

 Recent Accounting Pronouncements

     In June 1997 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires public
business enterprises to report information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997 and is
applicable to interim periods in the second year of application. Comparative
information for earlier years is required to be restated in the initial year of
application.

     In February 1998 the Financial Accounting Standards Board adopted Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits--an amendment of FASB Statements No.
87, 88, and 106" ("SFAS 132"). SFAS 132 standardizes disclosure requirements
for pensions and other postretirement benefits, requires additional information
on changes in the benefit obligations and fair values of plan assets, and
eliminates certain existing disclosure requirements. SFAS 132 is effective for
fiscal years beginning after December 15, 1997.

                                       5
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

     SFAS Nos. 131, and 132 become effective in the Company's fiscal year ending
September 30, 1999. The adoption of these statements is not expected to have a
material impact on the Company's financial statements.

     In June 1998 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. In
June 1999 the Financial Accounting Standards Board deferred the effective date
of SFAS 133 for one year which is now   effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.  SFAS No. 133 will become effective
in the Company's fiscal year ending September 30, 2001. The adoption of this
statement is not expected to have a material impact on the Company's financial
statements.

     In March 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance as to whether certain
costs for internal-use software should be capitalized or expensed when incurred.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998, but
earlier application is encouraged. The Company does not expect the adoption of
SOP 98-1 to have a material impact on its financial statements.

     In June 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
provides guidance on the financial reporting of start-up costs. It requires
costs of start-up activities to be expensed as incurred. SOP 98-5 is effective
for fiscal years beginning after December 15, 1998, but earlier application is
encouraged. The Company does not expect the adoption of SOP 98-5 to have a
material impact on its financial statements.


NOTE 2.  Issues Effecting Liquidity

     Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility (see Note 9)
and the Mariner Health Term Loan Facility (see Note 9) as of March 31, 1999, and
June 30, 1999.  The Company has been operating without a waiver of noncompliance
for these credit facilities and paying a default rate of interest of  200 basis
points above the credit facility rates.  The maturity date of the Mariner Health
Senior Credit Facility and the Mariner Health Term Loan Facility is January 3,
2000, and therefore such debt is classified as a current obligation of the
Company at June 30, 1999.  Mariner Health is actively engaged in discussions
with the agent and the lenders of these credit facilities to address the
maturity date and credit restructuring alternatives.  Due to the covenant
violations, the Company is not permitted to borrow additional cash under the
Mariner Health Senior Credit Facility.  At June 30, 1999, Mariner Health had
invested cash of $24.3 million for supporting its operations.

     The Company obtained a waiver under the Senior Credit Facility (see Note 9)
with respect to certain financial covenant defaults existing at March 31, 1999.
However, at June 30, 1999, the Company was not in compliance with certain
financial covenants under the Senior Credit Facility, and such default has not
been waived.  The Company intends to operate without a waiver and is actively
engaged in discussions with the Senior Credit Facility agent and lenders to
address a permanent amendment for, or restructuring of, the Senior Credit
Facility.  Due to the covenant violations, the Company is not permitted to
borrow additional cash under the Senior Credit Facility.  At June 30, 1999, the
Company had invested cash of $70.2 million for supporting operations covered by
the Senior Credit Facility.

     In the event that the Company is unable to obtain permanent amendments, or
restructure the credit, the lenders under the Senior Credit Facility, Mariner
Health Senior Credit Facility and Mariner Health Term Loan Facility are
entitled, at their discretion, to exercise certain remedies, including
acceleration of the outstanding borrowings.  There can be no assurance that
these lenders will provide the Company with permanent amendments or credit
restructurings, or will not seek to declare an event of default.  In addition,
certain other remaining portions of the Company's debt including the Senior
Subordinated Notes and the Mariner Notes contain provisions which

                                       6
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

allow the creditors to accelerate their debt and seek certain other remedies if
the Company has a payment default under its senior debt instruments or if the
obligations thereunder have been accelerated.

     If the Company's or Mariner Health 's senior lenders, or the holders of the
Notes or the Mariner Notes, elect to exercise their right to accelerate the
obligations under the Company's or Mariner Health 's senior debt instruments,
the Notes or the Mariner Notes, such events would have a material adverse effect
on the Company's or Mariner Health 's liquidity and financial position.
Furthermore, if such obligations were to be accelerated, in whole or in part,
management does not believe that it would currently be successful in identifying
or consummating financing necessary to satisfy such obligations.

     The Company has engaged financial advisors and legal counsel to assist in
preparing biweekly cash forecasts for its lenders and reviewing its capital
restructuring alternatives.  There can be no assurance that the invested cash
will be sufficient to provide for all the liquidity necessary to sustain
operations and to meet all of the Company's interest and principal obligations
on the Company's debt as they become due.

     The Company received final notices of program reimbursement ("NPR's") on
approximately 50 Mariner Health facilities.  The NPR's resulted in an adjustment
to the Mariner Health facilities' cost reports receivables to reflect an
estimated liability of $15.9 million which must be repaid over 12 months (see
Notes 6 and 14).

     The Company's annual premium cost for general and professional liability
coverage was increased by approximately $4.4 million effective July 1999, and
the actuarial cost of general and professional liability claims is expected to
increase by approximately $26 million per year (see Note 14).


NOTE 3.  Recapitalization Merger

     During 1997 the Company entered into the Recapitalization Merger which was
completed effective November 1, 1997 for accounting purposes. In connection with
the Recapitalization Merger, certain affiliates of Apollo and certain other
investors (the "Apollo Investors") invested $240 million to purchase
approximately 17.8 million shares of newly issued common stock of LCA.
Concurrent with the Recapitalization Merger, LCA changed its name to Paragon
Health Network, Inc.

     On November 4, 1997 the Company sold $275 million of its 9.5% Senior
Subordinated Notes due 2007, at a price of 99.5% of face value and $294 million
of its 10.5% Senior Subordinated Discount Notes due 2007, at a price of 59.6% of
face value (collectively, the "Notes"), in a private offering to institutional
investors. Concurrent with the private Notes offering, the Company entered into
a new Senior Credit Facility which is composed of $740 million in Term Loans and
a Revolving Credit Facility which provides for borrowings of up to an additional
$175 million.  (See Note 9)

     The Company used the $240 million invested by the Apollo Investors and the
$1.189 billion of net proceeds provided by the Notes offering and the Term Loans
to (i) purchase approximately 90.5% of the issued and outstanding common stock
of the Company for a per share price of $13.50, (ii) to repay substantially all
amounts outstanding under the Company's and under GranCare's (see Note 4 for a
description of the GranCare Merger) previous credit facilities and (iii) pay for
certain costs associated with the Apollo/LCA/GranCare Mergers.

NOTE 4.  GranCare Merger

     Effective November 1, 1997 for accounting purposes, and subsequent to the
Company's recapitalization, the Company completed the acquisition by merger of
GranCare pursuant to the GranCare Merger Agreement. In the GranCare Merger
approximately 17.4 million shares of the Company's common stock were exchanged
for GranCare common stock and approximately 1.3 million options to purchase
shares of the Company's common stock were exchanged for options to purchase
GranCare common stock. The Company's total purchase price of the acquisition was
approximately $250.6 million including legal, consulting and other direct costs.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of GranCare's operations are included in

                                       7
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

the Company's consolidated financial statements since the date of acquisition.
The assets and liabilities of GranCare have been recorded at fair market value
based on the total purchase price allocation as follows (in thousands):

<TABLE>
<S>                                                                                    <C>
     Current assets..................................................................  $ 225,617
     Property and equipment..........................................................    215,455
     Goodwill........................................................................    370,120
     Restricted investments..........................................................     40,987
     Other long-term assets..........................................................     40,066
     Current liabilities.............................................................   (117,827)
     Long-term debt..................................................................   (369,871)
     Other non-current liabilities...................................................   (153,988)
                                                                                       ---------
     Total purchase price............................................................  $ 250,559
                                                                                       =========
</TABLE>

     In the quarter ended June 30, 1998, an adjustment was made to record
GranCare's property and equipment at its fair value, assign a purchase price to
unfavorable operating leases for property and equipment and other unfavorable
contract rights, and assign a value to identifiable intangible assets. The
unfavorable operating lease obligation in the amount of $36.4 million is
amortized over the lives of the respective leases and is reflected in the
accompanying consolidated balance sheet as other liabilities. Goodwill resulting
from the GranCare Merger is being amortized on a straight-line basis over 30
years.  The Omega Note (see Note 9) assumed by the Company in the GranCare
Merger has been recorded at its fair value with the excess of fair value over
the principle being amortized over the remaining life of the mortgage notes.
Such amount is being amortized using the effective interest method over the
expected life of the note. Amortization, which was approximately $0.9 million
and $2.8 million for the three and nine month periods ended June 30, 1999,
respectively, was recorded as a reduction to interest expense.

NOTE 5.  Mariner Merger

     Effective July 31, 1998 the Company completed the acquisition by merger of
Mariner Health pursuant to the terms of the Mariner Merger Agreement. In the
Mariner Merger approximately 29.6 million shares of the Company's common stock
were exchanged for Mariner Health common stock. The Company's total purchase
price of the acquisition was approximately $535.7 million including cash
payments for options, legal, consulting and other direct costs. The acquisition
was accounted for under the purchase method of accounting and, accordingly, the
results of Mariner Health's operations are included in the Company's
consolidated financial statements since the date of acquisition. The assets and
liabilities of Mariner Health have been recorded at fair market value based on a
total purchase price allocation. The total purchase price has been allocated as
follows (in thousands):

<TABLE>
<S>                                                                                    <C>
     Current assets..................................................................  $ 213,862
     Property and equipment..........................................................    420,047
     Goodwill........................................................................    564,566
     Restricted investments..........................................................      3,227
     Other long-term assets..........................................................     36,378
     Current liabilities.............................................................    (55,853)
     Long-term debt..................................................................   (600,202)
     Other non-current liabilities...................................................    (46,344)
                                                                                       ---------
     Total purchase price............................................................  $ 535,681
                                                                                       =========
</TABLE>

NOTE 6.    Change in Accounting Estimates

     In the three months ended June 30, 1999, the Company recorded $94.4 million
of adjustments to reduce the estimated amount due from third-party payors, of
which $11.7 million was recorded to reduce the estimated amount receivable from
cost reports filed or settled during the period.

     The remaining $82.7 million of adjustments was  recorded to reflect amounts
due to the Medicare program for previously received reimbursement and to reduce
the estimated amount receivable from all Medicare cost report

                                       8
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

appeal items and primarily pertains to related party adjustments (the potential
for which had been previously disclosed) asserted by Medicare intermediaries
(and disputed by the Company) through the intermediaries' May 1999 reopening of
certain Mariner Health Medicare cost reports for 1995, 1996, and 1997. These
reopenings were to incorporate adjustments that reduced the allowable cost of
rehabilitation therapy services that were provided to Mariner Health facilities
by Mariner Health's rehabilitation subsidiaries. At June 30, 1999, Mariner
Health had received revised notices of program reimbursement ("NPRs") for
certain of the cost reports on approximately 50 of its facilities that require
Mariner Health to repay approximately $15.9 million to the Medicare program (see
Note 14), net of outstanding cost report receivables. The current intermediary
has notified Mariner Health that it intends to issue revised NPRs for the
remaining facility cost reports through 1998/1999 during fiscal year 2000. The
amount of estimated liability remaining, net of outstanding cost report
receivables, is not expected to exceed $4.0 million and has been included in
this change in estimate. The Company is vigorously disputing the intermediaries'
overpayment determinations through the appeal process; however, a favorable
outcome can not be assured at this time.

     The loss per share of this $94.4 million change in estimate was
approximately ($1.28) and ($1.29) for the three and nine months ended June 30,
1999, respectively.


NOTE 7.  Recapitalization, Indirect Merger, Restructuring and Other Expenses

     For the three and nine month periods ended June 30, 1999, the Company
recognized and paid charges for indirect merger, restructuring and other costs
of approximately $17.6 million and $24.7 million, respectively, related to the
Mariner Merger, the restructuring plan to reduce overhead and other operating
costs, and exit activities resulting from the termination of contracts to
provide therapy services and the closure of its therapy business.  For the three
and nine month periods ended June 30, 1998, the Company recognized and paid
charges for recapitalization, indirect merger and other costs of approximately
$11.2 million and $65.8 million, respectively, related to the
Apollo/LCA/GranCare Merger. The costs incurred are as follows (in thousands):


<TABLE>
<CAPTION>

                                                                               Three Months Ended       Nine Months Ended
                                                                                      June 30,              June 30,
                                                                     -------------------------------------------------------
                                                                          1999          1998          1999          1998
                                                                       -----------  ------------  ------------  ------------

<S>                                                                    <C>          <C>           <C>           <C>
Change of control, severance and retention                                 $ 7,441       $ 4,872       $11,105       $23,146
Bridge financing fees                                                           --            --            --         8,139
Investment banking, accounting and legal fees                                1,977           155         3,053         4,878
Closure of therapy business                                                  3,473            --         3,473            --
Other                                                                        4,731         6,181         7,105        29,666
                                                                     -------------------------------------------------------
                                                                           $17,622       $11,208       $24,736       $65,829
                                                                           =======       =======       =======       =======
</TABLE>

NOTE 8.    Loss on Disposal of Assets

     On June 30, 1999 the Company completed the previously announced sale of the
assets of its outpatient rehabilitation clinics to HealthSouth Corporation which
resulted in a loss on sale of $2.5 million.  The net proceeds of $54.5 million
were recorded as a receivable from asset sale at June 30, 1999 (see Note 14).

     The Company terminated all of its contracts to provide therapy services,
other than contracts to provide therapy services to hospitals, to both
unaffiliated third-parties and to the Company's skilled nursing facilities
effective May 31, 1999.  As a result of the contract terminations and the
closure of the therapy business, the Company recorded a loss on the disposal of
the goodwill associated with the therapy business of $228.5 million.  The
Company also disposed of a portion of its home health operations in June 1999
and recorded a loss on disposal of $0.5 million.

                                       9
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

NOTE 9.    Debt

     Long-term debt at June 30, 1999 is summarized in the following table (in
thousands):

<TABLE>
<CAPTION>
<S>                                                                      <C>
     Senior Debt:
     Senior Credit Facility:
          Revolving Credit Facility................................... $   166,350
          Term Loans..................................................     789,852
       Mariner Health Senior Credit Facility..........................     208,000
       Mariner Health Term Loan.......................................     207,419
       Mortgage notes.................................................      53,767
       Other notes payable............................................      83,814

     Subordinated Debt:
       Senior Subordinated Notes (due 2007)...........................     273,978
       Senior Subordinated Discount Notes (due 2007)..................     204,433
       Mariner Health Senior Subordinated Notes (due 2006)............     149,774
                                                                       -----------
                                                                         2,137,387
     Obligations under capital leases.................................      69,248
                                                                       -----------
                                                                         2,206,635
     Less short-term notes payable and current portion................  (1,384,385)
                                                                       -----------
     Total long-term debt............................................. $   822,250
                                                                       ===========
</TABLE>

Senior Credit Facility

     As of June 30, 1999, outstanding indebtedness under the Revolving Credit
Facility was $166.4 million (out of a possible $175.0 million) which excluded
$8.6 million of letters of credit. In addition, $292.9 million of the Tranche A
Term Loan Facility, $248.5 million of the Tranche B Term Loan Facility, and
$248.5 million of the Tranche C Term Loan Facility were outstanding.

     In connection with the July 1998 Amendments, aggregate amortization of the
Term Loans increased to the following approximate quarterly amounts: $8.4
million (formerly $6.6 million), $15.8 million (formerly $12.3 million), $16.6
million (formerly $12.9 million), $16.6 million (formerly $12.9 million), $18.2
million (formerly $14.1 million), $48.5 million (formerly $46.5 million), $59.8
million (unchanged) and $20.0 million (unchanged) in fiscal years 1999 through
2006, respectively.

     Interest on outstanding borrowings under the Revolving Credit Facility
accrue, at the option of the Company, at the Alternate Base Rate (the "ABR") of
The Chase Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate (the
"Eurodollar Rate") plus, in each case, an Applicable Margin.  The term
"Applicable Margin" means a percentage that will vary in accordance with a
pricing matrix based upon the respective term loan tenor and the Company's
leverage ratio.

     Prior to the effectiveness of the December 22, 1998 amendment to the Senior
Credit Facility (the "December Amendment"), the Applicable Margins for the
Revolving Credit Facility and the Tranche A Term Loan Facility in the pricing
matrix ranged from 0% to 1.25% for ABR loans and 0.08% to 1.25% for loans under
the Eurodollar rate. The applicable interest rate margin for Tranche B Term
Loans was 1.50% for loans under the ABR and 2.50% for Eurodollar loans.  The
applicable interest rate margin for Tranche C Term Loans was 1.75% for loans
under the ABR and 2.75% for Eurodollar loans.  Immediately prior to the
Amendment, the Applicable Margins for ABR Loans and Eurodollar Loans under the
Revolving Credit Facility and the Tranche A Term Loan Facility were 1.25% and
2.25%, respectively.

     Following the December Amendment, the Applicable Margins in the pricing
matrix pertaining to the Revolving Credit Facility and Tranche A Term Loans
range from 0.25% to 1.25% for ABR loans and 1.75% to

                                       10
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

2.75% for loans under the Eurodollar. The applicable interest rate margin for
Tranche B Term Loans is 2.25% for loans under the ABR and 3.25% for Eurodollar
loans. The applicable interest rate margin for Tranche C Term Loans is 2.25% for
loans under the ABR and 3.50% for Eurodollar loans. As of December 31, 1998, the
Applicable Margins for ABR Loans and Eurodollar Loans under the Revolving Credit
Facility and the Tranche A Term Loan Facility were 1.25% and 2.75%,
respectively.

     In connection with the May 11, 1999 amendment (the "May 1999 Amendment") to
the Senior Credit Facility (see discussion in Item 2. Management's Discussion
And Analysis Of Financial Condition And Results Of Operations--Liquidity and
Capital Resources of the Company"), all of the Applicable Margins were increased
by 50 basis points.  Following the May 1999 Amendment, the Applicable Margins in
the pricing matrix pertaining to Revolving Loans and Tranche A Term Loans range
from 0.75% to 1.75% for ABR loans and 2.25% to 3.25% for loans under the
Eurodollar. The applicable interest rate margin for Tranche B Term Loans is
2.75% for loans under the ABR and 3.75% for Eurodollar loans.  The applicable
interest rate margin for Tranche C Term Loans is 3.00% for loans under the ABR
and 4.00% for Eurodollar loans.  The resultant interest rates under the Senior
Credit Facility (in each case first for ABR Loans and then for Eurodollar Loans)
as of June 30, 1999 were as follows: for Revolving Loans and Tranche A Term
Loans, 9.50% and 8.49%; for Tranche B Term Loans, 10.50% and 8.99%; and for
Tranche C Term Loans, 10.75% and 9.24%.

     The Senior Credit Facility contains customary covenants which, among other
things, require maintenance of certain financial ratios and limit amounts of
additional debt and repurchases of common stock.  The Company obtained a waiver
under the Senior Credit Facility with respect to certain financial covenant
defaults existing at March 31, 1999.  At June 30, 1999, the Company was in
violation of certain of these financial covenants.  Based on the financial
covenant default and  the Company's current projected operating results for the
next fiscal quarter ended September 30, 1999 indicating continued non-compliance
with certain financial covenants, the Senior Credit Facility continues to be
classified as current at June 30, 1999.  The Company is in active discussions
with the Administrative Agent under the Senior Credit Facility regarding either
an amendment that would provide more permanent relief from such financial
covenants, or possibly a restructuring of the indebtedness under the Senior
Credit Facility.

     Due to the covenant violations, the Company is not permitted to borrow
additional cash under the Senior Credit Facility.  At June 30, 1999, the Company
had $70.2 million of invested cash for funding operations and satisfying
obligations under the Senior Credit Facility. There can be no assurance that
such invested cash will be sufficient to finance the Company's liquidity needs
during the requested waiver period or that an extension of such waiver or other
arrangements to permit the Company to continue to borrow will be obtained.


Mariner Health Senior Credit Facility and Mariner Health Term Loan Facility

     As of June 30, 1999, approximately $208.0 million of loans and $27.0
million of letters of credit were outstanding under the Mariner Health Senior
Credit Facility, and $207.4 million of loans were outstanding under the Mariner
Health Term Loan Facility. Both the Mariner Health Senior Credit Facility and
the Mariner Health Term Loan Facility have a maturity date of January 3, 2000
and accordingly are classified as a current liability at June 30, 1999.

     For prime-based borrowings under the $460.0 million Mariner Health Senior
Credit Facility that existed prior to December 23, 1998, applicable interest
rate margins originally ranged between 0% and 0.25% for prime-base borrowings,
and between 0.50% and 1.75% for Eurodollar based advances.  As of December 22,
1998, the applicable margins were 0% for prime-based revolving loans and 1.25%
for Eurodollar-based loans.  After giving effect to the Mariner Health Senior
Credit Facility Amendment and the Mariner Health Term Loan Facility, the
applicable interest rate margins range from 0.25% to 1.25% for prime-based
loans, and from 1.75% to 2.75% for Eurodollar-based advances.  The applicable
margins were 0.75% for prime-based revolving loans and 2.25% for Eurodollar-
based loans under each of the Mariner Health Senior Credit Facility and the
Mariner Health Term Loan Facility as of June 30, 1999.  As of June 30, 1999, an
additional applicable margin of 2.0% is applied to both prime-based and
Eurodollar-based loans as a result of being in default of certain financial
covenants within the Mariner

                                       11
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

Health Senior Credit Facility and Mariner Health Term Loan Facility. As a
result, the applicable interest rates on prime-based loans under those credit
facilities was 11.0%, and for Eurodollar-based advances, 9.99%, as of June 30,
1999.

     The Mariner Health Senior Credit Facility contains customary covenants
which, among other things, require maintenance of certain financial ratios and
limit amounts of additional debt and repurchases of common stock.  Mariner
Health was not in compliance with certain of these financial covenants as of
March 31, 1999 and June 30, 1999.  Mariner Health has thus far been unsuccessful
in obtaining a waiver of such financial covenant defaults from the Mariner
Agent, the Mariner Health Lenders and the Term Lenders on terms acceptable to
Mariner Health. See Managements Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources. However, Mariner
Health continues to engage in active discussions with such creditors regarding
more permanent relief from such financial covenants or a possible restructuring
of the indebtedness outstanding under those credit facilities.

     Due to the covenant violations, the Company is not permitted to borrow
additional cash under the Mariner Health Senior Credit Facility.  At June 30,
1999, Mariner Health had $24.3 million of invested cash for funding operations
and satisfying obligations under the Mariner Health Senior Credit Facility.
There can be no assurance that such invested cash will be sufficient to finance
Mariner Health's liquidity needs during the requested waiver period or that an
extension of such waiver or other arrangements to permit Mariner Health to
continue to borrow will be obtained.

Senior Subordinated Notes

     In connection with the Apollo/LCA/GranCare Mergers, on November 4, 1997 the
Company completed a private offering to institutional investors of $275 million
of its 9.5% Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes"), at a price of 99.5% of face value and $294 million of its 10.5% Senior
Subordinated Discount Notes due 2007, at a price of 59.6% of face value
(collectively, the "Notes").  Interest on the Senior Subordinated Notes is
payable semi-annually.  Interest on the Senior Subordinated Discount Notes will
accrete until November 1, 2002 at a rate of 10.57% per annum, compounded semi-
annually, and will be cash pay at a rate of 10.5% per annum thereafter.  The
Notes will mature on November 1, 2007.  The net proceeds from this offering,
along with proceeds from the Senior Credit Facility, were used to fund a portion
of the Recapitalization Merger, refinance a significant portion of LCA's and
GranCare's pre-merger indebtedness and to pay costs and expenses associated with
the Apollo/LCA/GranCare Mergers.  Pursuant to the terms of the indenture with
respect to the Notes, in March 1998, the Company completed an exchange offer
with respect to the Notes whereby Notes registered under the Securities Act of
1933, as amended, were exchanged for unregistered Notes.  The terms of the
exchange Notes are identical to the original Notes.  Mariner Health and its
subsidiaries are "restricted subsidiaries" under the indenture pursuant to which
the Notes were issued.  The Company does not know if it will be able to, or if
its senior lenders will permit it to, make the next scheduled interest payment
of approximately $13.1 million due in November 1999.

Mariner Health Senior Subordinated Notes.

     Mariner Health is also the issuer of certain 9 1/2% Senior Subordinated
Notes due 2006 (the "Mariner Notes") which were issued pursuant to that
certain Indenture dated as of April 4, 1996 (the "Mariner Indenture") with
Mariner Health as issuer and State Street Bank and Trust Company as trustee, and
are outstanding in the aggregate principal amount of $150.0 million. The Mariner
Notes are unsecured senior subordinated obligations of  Mariner Health and, as
such, are subordinated  in  right of  payment  to all existing  and  future
senior indebtedness of Mariner Health, including indebtedness under the Mariner
Health Senior Credit Facility and the Mariner Health Term Loan Facility. The
Company does not know if Mariner Health will be able to, or if its senior
lenders will permit it to, make the next scheduled interest payment of
approximately $7.1 million due in October 1999.



                                       12
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

Other Significant Indebtedness.

     A wholly-owned subsidiary of the Company, Professional Health Care
Management, Inc. ("PHCMI"), is the borrower under a $58.8 million mortgage
note executed on August 14, 1992 (the "Omega Note") in favor of Omega, and
(the "Omega Loan Agreement"). All $58.8 million was outstanding as of June 30,
1999.

     The Omega Note bears interest at a rate which is adjusted annually based on
either (i) changes in the Consumer Price Index or (ii) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by $58.8 million, whichever is higher, but in any event subject to a
maximum rate not to exceed 105% of the interest rate in effect for the Omega
Note for the prior calendar year.  The current interest rate is 15.5% per annum
which is paid monthly.  Additional interest accrues on the outstanding principal
of the Omega Note at the rate of 1% per annum and totaled $4.2 million at June
30, 1999.   Such interest is compounded annually and is due and payable on a pro
rata basis at the time of each principal payment or prepayment.

     In addition to the interest on the Omega Note described in the preceding
paragraph, and as a condition to obtaining Omega's consent to a February 1997
transaction between Vitalink Pharmacy Services, Inc. and GranCare, PHCMI agreed
to pay additional interest to Omega in the amount of $20,500 per month, through
and including July 1, 2002.  If the principal balance of the Omega Note for any
reason becomes due and payable prior to that date, there will be added to the
indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus (ii) interest
thereon at 11% per annum to the prepayment date; less (iii) the amount of such
additional interest paid to Omega prior to the prepayment date.

     The Company periodically enters into interest rate swap agreements (the
"Swap Agreements") to manage interest rate risk. The Swap Agreements
effectively convert a portion of the Company's floating interest rate debt to
fixed interest rate debt. Notional amounts of interest rate agreements are used
to measure interest to be paid or received relating to such agreements and do
not represent an amount of exposure to credit loss. As of June 30, 1999, the
Company had Swap Agreements in effect totaling $60.0 million notional amount of
which $40.0 million will mature in July 2005 and $20.0 million will mature in
November 2005. Under the Swap Agreements, the Company pays interest at an
average fixed rate of 6.79% and receives interest at a rate of three-month
LIBOR. At June 30, 1999, the fair market value of the Swap Agreements would
represent a loss of approximately $3.0 million for the Company. Additionally, in
September 1998 the Company entered into a total return swap agreement relating
to approximately $40.7 million par value of Mariner Notes (the "Total Return
Swap Agreement") and has since amended the Total Return Swap Agreement to
increase such notional amount to $46.7 million. The Total Return Swap Agreement
provides for the Company to receive 9.5% interest on approximately $46.7 million
of Mariner Notes and to pay interest at one-month LIBOR plus 2.25%.  See Note
14,  Management's Discussion and Analysis of  Financial Condition and Results Of
Operations--Liquidity and Capital Resources and Item 3. Quantitative and
Qualitiative Disclosure About Market Risks.


NOTE 10.  Provision for Bad Debts

     During the three months ended December 31, 1998, management reviewed
Mariner Health's allowance for doubtful accounts and concluded that an
additional charge was necessary. As a result, included in the provision for bad
debts is a charge of approximately $24.3 million.

     The Company recorded an additional $29.6 million provision for bad debts
during the three months ended March 31, 1999 in response to management's
detailed review of the Company's other accounts receivable in non-core
businesses, related principally to the Mariner Merger.

NOTE 11.  Income Taxes

  The Company has established a valuation allowance which completely offsets
all net deferred tax assets generated from the Company's losses.

                                       13
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

NOTE 12.  Earnings per Common Share

     The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data) in accordance with
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"):


<TABLE>
<CAPTION>
                                                                                                          Nine Months
                                                                                  Three Months Ended         Ended
                                                                                       June 30,             June 30,
                                                                     -------------------------------------------------------
                                                                           1999          1998          1999          1998
                                                                       ------------  ------------  ------------  ------------
<S>                                                                    <C>           <C>           <C>           <C>
     Numerator for Basic and Diluted Earnings Per Share:
       Net income (loss) before extraordinary item...................    $(405,724)      $  (242)    $(523,500)     $(34,233)
       Extraordinary item............................................           --            --            --       (11,275)
                                                                         ---------       -------     ---------      --------
       Net income (loss).............................................    $(405,724)      $  (242)    $(523,500)     $(45,508)
                                                                         =========       =======     =========      ========
     Denominator:
       Denominator for basic earnings per share-weighted
        average shares...............................................       73,581        42,223        73,380        43,698
       Effect of dilutive securities--Stock options..................           --            --            --            --
                                                                         ---------       -------     ---------      --------
       Denominator for diluted earnings per share-adjusted
        weighted-average shares and assumed conversions..............       73,581        42,223        73,380        43,698
                                                                         =========       =======     =========      ========
     Basic and Diluted Earnings (Loss) Per Share:
       Net income (loss) before extraordinary item...................    $   (5.51)      $ (0.01)    $   (7.13)     $  (0.78)
       Extraordinary item............................................           --            --            --         (0.26)
                                                                         ---------       -------     ---------      --------
       Net income (loss) per common share............................    $   (5.51)      $ (0.01)    $   (7.13)     $  (1.04)
                                                                         =========       =======     =========      ========
</TABLE>

     The effect of dilutive securities for the three and nine months ended June
30, 1999 and 1998, respectively, has been excluded because the effect is
antidilutive as a result of the net loss for the period.

NOTE 13.  Commitments and Contingencies

     The Company has entered into a $100 million leasing program (the "Synthetic
Lease") to be used as a funding mechanism for future assisted living and skilled
nursing facility construction, lease conversions, and other facility
acquisitions. The Sythetic Lease is an unconditional "triple net" lease for a
period of seven years (beginning in September 1996) with the annual lease
obligation a function of the amount spent by the lessor to acquire or construct
the project, a variable interest rate, and commitment and other fees. The
Company guarantees a minimum of approximately 83% of the residual value of the
leased property and also has an option to purchase the properties at any time
prior to the maturity date at a price sufficient to pay the entire amount
financed, accrued interest, and certain expenses. At June 30, 1999 approximately
$63.6 million of the Synthetic lease was utilized. The Synthetic Lease is
accounted for as an operating lease. The Synthetic Lease was amended on December
23, 1998 to mirror certain changes made to the Senior Credit Facility and
subsequently amended in May 1999 to reduce the commitment from $100 million to
$80 million.  The Synthetic Lease Facility contains customary covenants which,
among other things, require maintenance of certain financial ratios and limit
amounts of additional debt and repurchases of common stock.  At June 30, 1999,
the Company was in violation of certain of these financial covenants and as a
result cannot currently make additional borrowings under the Synthetic Lease
Facility.  The ability to borrow under the Synthetic Lease Facility in the
future is subject to the outcome of the Company's efforts to amend the Senior
Credit Facility.

     As is typical in the healthcare industry, the Company is and will be
subject to claims that its services have resulted in resident injury or other
adverse effects, the risks of which will be greater for higher acuity residents
receiving services from the Company than for other long-term care residents. The
Company is, from time to time, subject to such negligence claims and other
litigation. In addition, resident, visitor, and employee injuries will also
subject the Company to the risk of litigation. The Company has experienced an
increasing trend in the number and severity of litigation claims asserted
against the Company. Management believes that this trend is endemic to the long-
term care industry and is a result of the increasing number of large judgments,
including large punitive damage awards, against long-term care providers in
recent years resulting in an increased awareness by plaintiff's lawyers of
potentially large recoveries.  In certain states in which the  Company has
significant operations, including

                                       14
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

California and Florida, insurance coverage for the risk of punitive damages
arising from general and professional liability litigation is not available due
to state law public policy prohibitions. There can be no assurance that the
Company will not be liable for punitive damages awarded in litigation arising in
states for which punitive damage insurance coverage is not available. The
Company also believes that there has been, and will continue to be, an increase
in governmental investigations of long-term care providers, particularly in the
area of Medicare/Medicaid false claims as well as an increase in enforcement
actions resulting from the investigation. While the Company believes that it
provides quality care to the patients in its facilities and materially complies
with all applicable regulatory requirements, an adverse determination in a legal
proceeding or governmental investigation, whether currently asserted or arising
in the future, could have a material adverse effect on the Company.

     From time to time, the Company and its subsidiaries have been parties to
various legal proceedings in the ordinary course of their respective businesses.
In the opinion of management, except as described below, there are currently no
proceedings which, individually or in the aggregate, if determined adversely to
the Company and after taking into account the insurance coverage maintained by
the Company, would have a material adverse effect on the Company's financial
position or results of operations.

     On August 26, 1996, a class action complaint was asserted against GranCare
in the Denver, Colorado District Court, Salas, et al. v. GranCare, Inc., and AMS
Properties, Inc., d/b/a Cedars Health Care Center, Inc. Case No. 96 CV 4449,
asserting five claims for relief, including third-party beneficiary, tortious
interference and negligence per se causes of action arising out of quality of
care issues at a healthcare facility formerly owned by GranCare. Pursuant to the
Third Amended Complaint, the class claims were finally identified as third-party
beneficiary of contract; breach of contract; tortious interference with
contract; fraud; and negligence per se. In addition to the class claims, the
named plaintiffs each asserted claims for promissory estoppel and violation of
the Colorado Consumer Protection Act.

     On March 15, 1998, the court entered an order in which it certified a class
action in the matter. The court has only certified the class with respect to the
issue of liability and the various class rights to restitution. The court
determined that emotional distress damages are of such an individualized and
personal nature that the class-wide request for emotional distress damages was
not appropriate for class treatment. On May 7, 1998, plaintiff's counsel orally
dismissed promissory estoppel claims on behalf of the named plaintiffs. In
response to the Company's Motion to Dismiss All Claims and Motion for Summary
Judgment Precluding Recovery of Medicaid Funds, on October 30, 1998, the court
partially granted the Company's motions, dismissing the claims of all plaintiffs
who were at all times during the class period Medicare/Medicaid patients, for
lack of jurisdiction. The court further dismissed all restitution claims for the
remaining plaintiffs, except those relating to emotional distress for the period
beginning with their stay at defendants' facility and ending at the moment that
they first received any Medicare/Medicaid benefits. No restitution claims of any
sort were allowed on the claims for tortuous interference, fraud and negligence
per se. In its order, the court requested a conference relative to whether the
class was large enough to justify continuing the case as a class action. After
this order, at the request of plaintiffs' counsel, the court stayed all activity
and allowed plaintiffs to file a Motion for Reconsideration. Plaintiffs' Motion
for Reconsideration was filed, as ordered, on November 16, 1998, and the court
denied plaintiffs' motion on November 19, 1998. On December 10, 1998, the court
certified as a final judgment that portion of its order of October 30, 1998
dismissing for lack of jurisdiction all the claims of plaintiffs who were at all
relevant times Medicare or Medicaid patients. The court further stayed all
remaining proceedings pending resolution of any appeal of the certified final
judgment, and vacated the trial which had been scheduled for March 15, 1999. The
plaintiffs are currently appealing the court's October 30, 1998 order.  The
Company continues to vigorously contest the remaining alleged claims, the
certification of the various classes and plaintiff's appeal.

     The Company received a letter dated September 5, 1997 from an Assistant
United States Attorney ("AUSA") in the United States Attorney's Office for the
Eastern District of Texas (Beaumont) advising that the office was involved in an
investigation of allegations that services provided at some of the Company's
facilities may violate the Civil False Claims Act. The AUSA informed the Company
that the investigation was the result of a qui tam complaint filed under seal
against the Company.  The Company has recently been advised that the government
has declined to intervene in this matter.  The Company will vigorously contest
the alleged claims if the complaint is pursued by the private plaintiffs.

                                       15
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

     On May 18, 1998, a class action complaint was asserted against the Company,
certain of its predecessor entities and affiliates and certain other parties in
the Tampa, Florida Circuit Court, Wilson, et al, v. Mariner Post-Acute Network,
Inc., et al., case no. 98-03779, asserting seven claims for relief, including
breach of contract, breach of fiduciary duty, unjust enrichment, violation of
Florida Civil Remedies for Criminal Practices Act, violation of Florida
Racketeer and Corrupt Organization Act, false advertising and common-law
conspiracy arising out of quality of care issues at a health care facility
formerly operated by the Brian Center Health and Rehabilitation/Tampa, Inc. and
later by a subsidiary of LCA as a result of the Brian Center Corporation merger.
The Company removed this case to Federal Court on June 10, 1998 and the matter
is currently pending in the United States District Court for the Middle District
of Florida, Tampa division, case no. 98-1205-CIV-T23B.

     The plaintiffs filed a motion to remand on June 22, 1998 and the Company
filed a motion to dismiss on June 30, 1998. The Company is currently awaiting
the outcome of these motions. The Company continues to vigorously contest the
request for class certification as well as all alleged claims made by the
plaintiffs.

     On August 25, 1998, a complaint was filed by the United States against the
Company's GranCare and International X-Ray subsidiaries and certain other
parties under the Civil False Claims Act and in common law and equity. The
lawsuit, U.S. v. Sentry X-Ray, Ltd., et al., civil action no. 98-73722, was
filed in United States District Court for the Eastern District of Michigan.
Valley X-Ray operates a mobile X-Ray company in Michigan. A Company subsidiary,
International X-Ray, owns a minority partnership interest in defendant Valley X-
Ray. The case asserts five claims for relief, including two claims for violation
of the Civil False Claims Act, two alternative claims of common law fraud and
unjust enrichment, and one request for application of the Federal Debt
Collection Procedures Act. The two primary allegations of the complaint are:
that the X-Ray company received Medicare overpayments for transportation costs
in the amount of $657,767; and that the X-Ray company "upcoded" Medicare
claims for EKG services in the amount of $631,090. The United States has
requested treble damages as well as civil penalties of $5,000 to $10,000 for
each of the alleged 388 submitted Medicare claims. The total damages sought
varies from $5.3 to $7.2 million. The Company is vigorously contesting all
claims and filed two motions to dismiss on behalf of its subsidiaries on
November 23, 1998. The United States has agreed to the motion to dismiss
GranCare as a party.  The court recently heard the motion to dismiss the Civil
False Claims Act and other claims against International X-Ray.  The Company is
awaiting the court's decision.

     On September 18, 1998, the Company was served with an administrative
subpoena issued by the OIG. The subpoena was addressed to "Paragon Health
Network, Inc." The subpoena seeks, among other things, certain records of
twenty specified current or former LCA nursing facilities. The Company has been
advised that the investigation is civil in nature and focuses on nursing
facilities and nurse aide services. The government has not disclosed the origin
of this civil administrative investigation or its intended scope. The Company is
cooperating with the investigation and has retained experienced counsel to
assist in responding to the subpoena and to advise it with respect to this
investigation. This investigation is still in its preliminary stages; therefore,
the Company is unable to predict the outcome of this matter.

     On October 1, 1998, a class action complaint was asserted against certain
of the Company's predecessor entities and affiliates and certain other parties
in the Tampa, Florida, Circuit Court, Ayres, et al v. Donald C. Beaver, et al,
case no 98-7233.  The complaint asserted three claims for relief, including
breach of fiduciary duty against one group of defendants, breach of fiduciary
duty against another group of defendants, and civil conspiracy arising out of
issues involving facilities previously operated by the Brian Center Corporation
or one of its subsidiaries, and later by a subsidiary of LCA, as a result of the
merger with Brian Center Corporation.  A motion to dismiss was filed on November
30, 1998 and is scheduled for hearing on September 15, 1999.

NOTE 14.  Subsequent Events

     On July 27, 1999, Mariner Health reached agreement with the Health Care
Financing Administration to extend the repayment of the $15.9 million net
liabilities resulting from the issuance of the revised NPR's with respect to the
Mariner Health facilities (see Note 6).  The extended repayment plan requires a
payment of $1.8 million per month from July through December 1999, and $1.5
million per month from January through May 2000,

                                       16
<PAGE>
               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)

including principal and interest at the statutory rate of approximately 13.5%.
Any amounts remaining, including the net estimated additional liabilities of up
to $4.0 million will be due in a lump sum in June 2000, or will require a
request for additional extension.

     In June 1999, the Company received a 90-day cancellation notice from its
general and professional liability ("GL/PL") carrier, Royal Surplus Lines
("Royal").  In July 1999 the Company binded a replacement GL/PL policy with AIG,
which resulted in a $4.4 million increase in annual premium and elimination of
the Royal policy's aggregate retention limit.  The elimination of the aggregate
retention limit is expected to increase the actuarial cost of general and GL/PL
claims by approximately $26.0 million per year.  This increased exposure will
have a delayed effect on operating cash flow as claims develop over the next
several years.

     In August 1999, the Company reached agreement with the counterparty to the
$46.7 million Total Return Swap Agreement (see Notes 2 and 9).  In the
agreement, the counterparty will draw the $15.0 million letter of credit on the
Mariner Health Senior Credit Facility and the $5.0 million of cash collateral.
The counterparty sold the $46.7 million of Mariner Notes in the open market for
approximately $0.7 million.  The deficiency balance of approximately $26.5
million will become a Deficiency Note under the Paragon capital structure and
will be pari passu to the Senior Credit Facility.  The agreement, once approved
by the lenders under the Senior Credit Facility, will effectively restructure
the deficiency liability pursuant to the Total Return Swap Agreement.  See
Management's Discussion and Analysis of  Financial Condition and Results Of
Operations--Liquidity and Capital Resources.

     The Company received the $54.5 million proceeds from the sale of the
outpatient rehabilitation clinics (see Note 8) in July 1999.  The previously
announced sale of the hospital rehabilitation management contract business to
National Rehab Partners, Inc., was completed on July 29, 1999 for approximately
$9.6 million.

     The Company is reviewing its operations and has engaged financial advisors
to assist in preparing cash forecasts. The Company is in the process of
evaluating the impact of its future cash flows on the Company's long-lived
assets in accordance with the provisions of Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Company expects to complete its review
of operations and its evaluation of future cash flows during the fourth fiscal
quarter ending September 30, 1999.

                                       17
<PAGE>

    ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS

Overview

     Effective July 31, 1998, the Company acquired Mariner Health Group, Inc.
("Mariner Health") in a stock for stock merger (the "Mariner Merger")
pursuant to which: (i) Mariner Health became a wholly-owned subsidiary of the
Company; and (ii) the Company changed its name to "Mariner Post-Acute Network,
Inc." The Mariner Merger was accounted for under the purchase method of
accounting and, accordingly, the results of Mariner Health's operations have
been included in the Company's consolidated financial statements since the date
of acquisition.

     Effective November 1, 1997 for accounting purposes, the Company completed
two merger transactions. First, pursuant to an agreement and plan of merger
among Apollo Management, L.P. ("Apollo Management," and together with certain
of its affiliates, "Apollo"), Apollo LCA Acquisition Corp. (a corporation
owned by certain Apollo affiliates and other investors, "Apollo Sub") and
Living Centers of America, Inc. ("LCA"), Apollo Sub was capitalized with $240
million in cash and was merged with and into LCA (the "Recapitalization
Merger"). In the Recapitalization Merger, LCA was the surviving corporation and
was renamed "Paragon Health Network, Inc." Second, pursuant to an agreement
and plan of merger among LCA, GranCare, Inc. ("GranCare"), Apollo Management
and LCA Acquisition Sub, Inc., a wholly-owned subsidiary of the Company ("LCA
Sub"), GranCare merged with LCA Sub with GranCare surviving as a wholly-owned
subsidiary of the Company (the "GranCare Merger," and collectively with the
Recapitalization Merger, the "Apollo/LCA/GranCare Mergers"). The GranCare
Merger was accounted for under the purchase method of accounting and,
accordingly, the results of GranCare's operations have been included in the
Company's consolidated financial statements since the date of acquisition,
which, for accounting purposes, is November 1, 1997.

     The Company operates through various operating subsidiaries.  References
herein to the "Company" are intended to include its operating subsidiaries
unless otherwise indicated.  Additionally, unless otherwise indicated, the
information herein does not give pro forma effect to the Apollo/LCA/GranCare
Mergers or the Mariner Merger as if they had been completed as of the beginning
of the period presented.


Results of Operations

     As a result of the various non-nursing home businesses acquired in the
mergers and substantial impact of the change to PPS reimbursement the Company is
focusing only on its core businesses (inpatient, including LTAC, pharmacy and
corporate overhead support) going forward.  Non-core businesses have been
defined as those sold (outpatient rehabilitation clinics, hospital
rehabilitation management contract businesses and home health) and those to be
sold or closed by September 30, 1999 (remaining home health, hospital
geropsychiatric management contract business, etc.). For the quarter ended June
30, 1999, the operating losses from the third party therapy business of $6.1
million have been included in non-core businesses as this was the quarter when
the business was closed. No valuation allowances have been recorded on those
businesses to be sold/closed until sales proceeds are determinable on those
transactions.

     The following table reconciles Income (loss) from operations from the
Condensed Consolidated Statements of Income for each quarter of fiscal 1999 to
core business earnings before interest, taxes, depreciation and amortization and
unusual adjustments ("EBITDA").  Unusual adjustments recorded in each quarter
are added back to Income (loss) from operations.

                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                    For the three months ended (in thousands),

                                                December 31, 1998   March 31, 1999   June 30, 1999
                                                ------------------  ---------------  --------------
<S>                                             <C>                 <C>              <C>
Income (loss) from operations                            $  6,388         $(31,786)      $(358,641)
Unusual adjustments:
     Loss on disposal of assets (See note 8)                                               231,549
     Changes in estimates (See note 6)                                                      94,433
     Provision for bad debts (See note 10)                 24,311           29,573
     Other                                                                                   7,373
Recapitalization and merger costs                           2,015            5,099          17,622
Depreciation and anortization                              30,584           32,525          33,636
                                                         --------         --------       ---------
EBITDA                                                     63,298           35,411          25,972
Less EBITDA (loss) from non-core business                   1,699               28          (7,115)
                                                         --------         --------       ---------
EBITDA from core businesses                              $ 61,599         $ 35,383       $  33,087
                                                         ========         ========       =========
</TABLE>

     Revenues from nursing home operations accounted for $373.2 million and
$1,359.6 million of the Company's total net revenues of $487.1 million and
$1,774.5 million for the three and nine months ended June 30, 1999,
respectively.  Nursing home revenues are derived from the provision of routine
and ancillary services and are a function of occupancy rates and payor mix in
the Company's long-term care facilities. Weighted average occupancy, as
identified in the following table, increased by 1.1% and 2.3% over the
comparable three and nine month periods from 1998 to 1999.

<TABLE>
<CAPTION>
                                                                                                                 Nine Months
                                                                                  Three Months Ended                Ended
                                                                                       June 30,                    June 30,
                                                                     -------------------------------------------------------
                                                                           1999          1998          1999          1998
                                                                       ------------  ------------  ------------  ------------

<S>                                                                    <C>           <C>           <C>           <C>
Weighted average licensed bed count                                         48,139        37,640        48,141        35,871
Weighted average number of residents                                        40,808        31,502        41,456        30,049
Weighted average occupancy                                                    84.8%         83.7%         86.1%         83.8%
</TABLE>

     Payor mix is the source of payment for the services provided and consists
of private pay, Medicare and Medicaid. Private pay includes revenue from
individuals who pay directly for services without government assistance through
the Medicare and Medicaid programs, managed care companies, commercial insurers,
health maintenance organizations, Veteran's Administration contractual payments
and payments for services provided under contract management programs. Managed
care as a payor source to health care providers is expected to increase over the
next several years and the Company is increasing its managed care contracting
capabilities. However, revenue from managed care payors does not constitute a
significant portion of the Company's revenue at this time.

     Reimbursement rates from government sponsored programs, such as Medicare
and Medicaid, are strictly regulated and subject to funding appropriations from
federal and state governments. Changes in reimbursement rates, including the
implementation of the Prospective Payment System ("PPS") for the Medicare system
and fee screen schedules and therapy caps for Part B Medicare patients beginning
January 1, 1999, have adversely affected the Company resulting in significantly
lower Medicare revenues than the Company would have received under the old
payment methodology and the decision by the Company to terminate its contracts
to provide therapy services to unaffiliated third parties.  See "--Liquidity and
Capital Resources." Revenues derived from the Company's pharmacy and therapy
subsidiaries are also influenced by payor mix. The table below presents the
approximate percentage of the Company's net patient revenues, excluding the
reduction due to the change in estimate of $94.4 million recorded

                                       19
<PAGE>

in the three months ended June 30, 1999 (see Notes 6 and 14 to the Consolidated
Financial Statements), derived from the various sources of payment for the
periods indicated:


<TABLE>
<CAPTION>
                                                                                                                    Nine
                                                                                  Three Months Ended             Months Ended
                                                                                       June 30,                    June 30,
                                                                     -------------------------------------------------------
                                                                           1999          1998          1999          1998
                                                                       ------------  ------------  ------------  ------------

<S>                                                                    <C>           <C>           <C>           <C>
Private and other                                                             28.1%         29.7%         31.3%         28.9%
Medicare                                                                      23.7%         31.5%         25.3%         32.5%
Medicaid                                                                      48.2%         38.8%         43.4%         38.6%
</TABLE>

     The combined mix of private/other and Medicare revenue was 51.8% and 56.6%,
respectively, for the three and nine months ended June 30, 1999 as compared to
61.2% and 61.4%, respectively, for the three and nine months ended June 30,
1998. The net revenues from the non-nursing home operations are primarily
reimbursed by facility providers which are considered private pay sources. The
impact of increased therapy revenue resulting from the Mariner Merger has
increased the percentage of private revenue for the Company, which is not
expected to continue as the Company exited the business of providing contract
therapy services. As of June 30, 1999, all of the Company's nursing homes had
converted to PPS based Medicare payments which has influenced the comparison of
revenue mix between the three and nine month periods ended June 30, 1999 and
1998. See "--Liquidity and Capital Resources."

     The administrative procedures associated with the Medicare cost
reimbursement program, with respect to facilities and periods not subject to
PPS, generally preclude final determination of amounts due the Company until
annual cost reports are audited or otherwise reviewed and settled with the
applicable fiscal intermediaries  and administrative agencies. Certain Medicare
fiscal intermediaries have made audit adjustments to settle cost reports for
some of the Company's facilities that reduce the amount of reimbursement that
was previously received by the facilities. The Company believes that it has
properly recorded revenue under cost reimbursement programs based on the facts
and current regulations.  In May 1999 the Mariner Health fiscal Medicare
intermediary began reopening cost reports for years 1995 through 1999 (the
potential for which had been previously disclosed).  As a result of those
reopenings, management determined it was necessary to record adjustments of
$82.7 million to reflect amounts due to the Medicare program for previously
received reimbursement and to reduce the estimated amount receivable from all
Medicare cost report appeal items as of June 30, 1999 and primarily pertains to
related party adjustments asserted by Medicare intermediaries. If the Company
was to receive adverse adjustments that it had not contemplated in recording its
revenue in the past, the differences could be significant to the Company's
results of operations in the period of final determination. Beginning July 1,
1998, the Company's facilities began to be phased into the PPS System under
which nursing home providers are paid a fixed per diem rate for Medicare
patients based on their acuity level. Under PPS, the Company is not required to
file cost reports and the audit and settlement process is eliminated. See "--
Liquidity and Capital Resources."

     Various federal, state, and local regulations impose, depending on the
services provided, a variety of regulatory standards for the type, quality and
level of personnel required to provide care or services. These regulatory
requirements have an impact on staffing levels, as well as the mix of staff, and
therefore impact salaries, wages and employee benefits. The cost of ancillary
services, which includes pharmaceuticals and therapy, is also effected by the
level of service provided and patient acuity. General and administrative
expenses include the indirect administrative costs associated with operating the
Company and its lines of business. Insurance expense includes the costs of the
various insurance programs such as automobile, general and professional
liability and workers' compensation.


Seasonality

     The Company's revenues and operating income generally fluctuate from
quarter to quarter. This seasonality is related to a combination of factors
which include the timing of third party payment rate changes, the number of work
days in the period and seasonal census cycles, particularly Medicare admissions.

                                       20
<PAGE>

 Third Quarter of Fiscal 1999 Compared to Third Quarter of Fiscal 1998

     Net revenues comprising nursing home and non-nursing home operations
totaled $487.1 million for the three months ended June 30, 1999, including the
$94.4 million reduction due to the change in estimate described below.  The
decrease of $6.9 million or 1.4%, as compared to the same period for fiscal 1998
would have been an increase of $87.5 million or 17.7% without the change in
estimate. Revenue from nursing home operations increased by $5.7 million which
included a reduction in revenue of $94.4 million as a result of a change in
estimate to reduce the estimated amount due from third-party payors. This change
in estimate included $11.7 million to reduce the estimated amount receivable
from cost reports filed or settled during the period.  The remaining $82.7
million was recorded to reflect amounts due to the Medicare program for
previously received reimbursement and to reduce the estimated amount receivable
from all Medicare cost report appeal items and primarily pertains to related
party adjustments asserted by Medicare intermediaries through the May 1999
reopening of certain Mariner Health Medicare cost reports for 1995, 1996, and
1997. See Notes 6 and 14 to the Consolidated Financial Statements and
--Liquidity and Capital Resources. Excluding the change in estimate, nursing
home revenues increased by $100.1 million which included $118.3 million
related to the acquisition of Mariner Health effective July 31, 1998.

     Revenue from non-nursing home operations decreased by $12.6 million,
consisting of an increase of $11.6 million for pharmacy services, a decrease of
$10.4 million for therapy services, and a decrease of $13.8 million from home
health, hospital services and other. The increase in pharmacy net revenues was
primarily attributable to the Mariner Health acquisition. Therapy net revenues,
which included $14.9 million attributable to the Mariner Health acquisition,
were adversely impacted by changes in reimbursement rates, including the
implementation of PPS, fee screen schedules, and therapy caps for Part B
Medicare patients, which resulted in the decision to terminate its contracts to
provide therapy services to unaffiliated third parties effective May 31, 1999.
As a result of the closure of the therapy business and the completion of the
previously announced sale of the assets of its outpatient rehabilitation clinics
on June 30, 1999, the Company does not expect to have significant net revenues
from the provision of therapy services to third parties in the future.  The
decrease in home health, hospital services, and other revenue was the result of
the Company's September 1998 divestiture of the majority of its hospice entities
and the closure or sale of several home health agencies during 1999. The
Company's remaining home health agencies are expected to be divested prior to
September 30, 1999.

     Indirect merger, restructuring, and other expenses totaled $17.6 million
for the three months ended June 30, 1999, all which were paid as of June 30,
1999 and related to the Mariner Merger, the restructuring plan to reduce
overhead and other operating costs, and exit activities resulting from the
termination of contracts to provide therapy services and the closure of its
therapy business. The Company anticipates recording additional charges during
fiscal year 1999 to close an existing shared service center acquired in the
Mariner Merger and to continue the implementation of its restructuring plan and
therapy closure. Loss on disposal of assets included $2.5 million resulting from
the previously announced sale of the assets of the Company's outpatient
rehabilitation clinics to HealthSouth Corporation which was completed June 30,
1999 and the disposal of a portion of its home health operations in June 1999
for a loss of $0.5 million. As a result of the contract terminations to provide
therapy services and the closure of the therapy business effective May 31, 1999,
the Company recorded a loss on the disposal of the goodwill associated with the
therapy business of $228.5 million.

     Costs and expenses excluding indirect merger, restructuring, and other
expenses and loss on disposal of assets totaled $596.6 million for the three
months ended June 30, 1999, an increase of $143.5 million or 31.7% as compared
to the same period for fiscal 1998. The increase was primarily the result of
costs for payroll and employee benefits which increased by $92.3 million, while
general and administrative expenses, insurance, and depreciation/amortization
expense increased by $20.4 million, $10.6 million, and $15.8 million,
respectively. The increase in these cost categories was primarily attributable
to the acquisition of Mariner Health.  Ancillary services decreased by $19.4
million which reflects the reduction in therapy services and closure of the
therapy business in May 1999 and reduced ancillary services provided in the
Company's inpatient facilities which were partially offset by higher costs as a
result of the Mariner Health acquisition.

                                       21
<PAGE>

     The provision for bad debts increased by $7.2 million for the three months
ended June 30, 1999 as compared to the same period for fiscal 1998 which was
primarily related to the acquisition of Mariner Health.

     Interest expense totaled $51.5 million for the three months ended June 30,
1999, an increase of $19.9 million as compared to the same period for fiscal
1998.  The acquisition of Mariner Health contributed $14.9 million of the
increase, while the increased borrowings under the Company's revolver and term
loans and increased interest rates associated with the December Amendment and
noncompliance with certain of the financial covenants contained in the Mariner
Health Senior Credit Facility and the Mariner Health Term Loan Facility
contributed to the remaining $5.0 million increase.

 Fiscal 1999 Year To Date Compared to Fiscal 1998 Year To Date

     Net revenues comprising nursing home and non-nursing home operations
totaled $1,774.5 million for the nine months ended June 30, 1999, an increase of
$371.7 million or 26.5%, as compared to the same period for fiscal 1998; without
the $94.4 million change in estimate described below, the increase would have
been $466.1 million or 33.2% respectively. Revenue from nursing home operations
increased by $318.5 million which included a reduction in revenue of $94.4
million as a result of a change in estimate to reduce the estimated amount due
from third-party payors.  This change in estimate included $11.7 million to
reduce the estimated amount receivable from cost reports filed or settled during
the period.  The remaining $82.7 million was recorded to reflect amounts due to
the Medicare program for previously received reimbursement and to reduce the
estimated amount receivable from all Medicare cost report appeal items and
primarily pertains to related party adjustments asserted by Medicare
intermediaries through the May 1999 reopening of certain Mariner Health Medicare
cost reports for 1995, 1996, and 1997. See Notes 6 and 14 to the Consolidated
Financial Statements and --Liquidity and Capital Resources. Excluding the change
in estimate, nursing home revenues increased by $412.9 million which included
$368.9 million related to the acquisition of Mariner Health effective July 31,
1998.

     Revenue from non-nursing home operations increased by $53.2 million,
consisting of an increase of $52.7 million for pharmacy services, an increase of
$38.9 million for therapy services, and a decrease of $38.4 million from home
health, hospital services and other. The increase in pharmacy and therapy net
revenues were primarily attributable to the Mariner Health acquisition.  The
decrease in home health, hospital services, and other revenue was the result of
the Company's September 1998 divestiture of the majority of its hospice entities
and the closure or sale of several home health agencies during 1999. The
Company's remaining home health agencies are expected to be divested prior to
September 30, 1999.

     Indirect merger, restructuring, and other expenses totaled $24.7 million
for the nine months ended June 30, 1999, all which were paid as of June 30, 1999
and related to the Mariner Merger, the restructuring plan to reduce overhead and
other operating costs, and exit activities resulting from the termination of
contracts to provide therapy services and the closure of its therapy business.
The Company anticipates recording additional charges during fiscal year 1999 to
close an existing shared service center acquired in the Mariner Merger and to
continue the implementation of its restructuring plan and therapy closure.

     Costs and expenses excluding indirect merger, restructuring, and other
expenses and loss on disposal of assets totaled $1,902.3 million for the three
months ended June 30, 1999, an increase of $603.8 million or 46.5% as compared
to the same period for fiscal 1998. The increase was primarily the result of
costs for payroll and employee benefits which increased by $333.6 million, while
general and administrative expenses, insurance, and depreciation/amortization
expense increased by $72.4 million, $18.8 million, and $45.6 million,
respectively. The increase in these cost categories was primarily attributable
to the acquisition of Mariner Health.

     The provision for bad debts increased by $72.4 million for the nine months
ended June 30, 1999. The increase was the result of a $24.3 million bad debt
charge taken by the Company in the first fiscal quarter ended December 31, 1998
and a $29.6 million bad debt charge taken by the Company in the second fiscal
quarter ended March 31, 1999.  The $24.3 million bad debt charge was recorded as
a result of management's review of Mariner

                                       22
<PAGE>

Health's allowance for doubtful accounts at December 31, 1998, and management's
conclusion that an additional charge of $24.3 million was necessary for Mariner
Health as of December 31, 1998. The additional charge conformed to the Company's
reserve policy. The Company continued to review the collectability of its
accounts receivable other than inpatient, and recorded an additional provision
for bad debts of $29.6 million during the quarter ended March 31, 1999, as a
result of uncollectable accounts receivable in non-core businesses, related
principally to the Mariner Merger. The Company will continue to review the
collectability of its accounts receivable which may result in increased
provision for bad debts in the future.

     Interest expense totaled $147.6 million for the nine months ended June 30,
1999, an increase of $64.0 million as compared to the same period for fiscal
1998.  The acquisition of Mariner Health contributed $42.7 million of the
increase, while the interest expense on the debt entered into on November 3,
1997 in conjunction with the Apollo/LCA/GranCare Merger, increased borrowings
under the Company's revolver and term loans and increased interest rates
associated with the December Amendment and noncompliance with certain of the
financial covenants contained in the Mariner Health Senior Credit Facility and
the Mariner Health Term Loan Facility contributed to the remaining $21.3 million
increase.



The Year 2000 Issue

     In connection with the coming of the Year 2000, the Company is in the final
stages of addressing issues that the Company believes could arise in connection
with the potential inability of computer programs to recognize dates that follow
December 31, 1999 (the "Year 2000 Issue"). The Year 2000 Issue presents
potential problems not only for computer hardware and software but also for
devices that incorporate embedded chips, such as critical medical devices
utilized in the Company's facilities.

     To address issues inherent in operating disparate information systems
utilized by the Company's predecessor corporations, following the
Apollo/LCA/GranCare Mergers the Company decided to complete the installation of
a new client-server based financial and payroll/human resources software
package. The installation of the new system is complete with the exception of
the payroll/human resources package in the Company's Mariner Health subsidiary
facilities.  The current applications utilized by Mariner Health will be Year
2000 ("Y2K") remediated and compliant prior to the end of the calendar year and
will be replaced with the Company's Y2K compliant systems following January 1,
2000. The Company expects that its business systems exposure to the Year 2000
Issue will be eliminated by approximately October 1999, at which time the
Company's non-Y2K compliant systems will have been upgraded or replaced. The
Company has received assurances from the providers of any new systems that they
are Y2K compliant.  The Company is also in the process of remediating all local
area networks ("LANs"), operating software and individual computers and
anticipates that the process will be substantially complete by October 1999.

     The Company has in place a committee with members from the IT, operations,
purchasing, legal, accounting, payroll, and risk management areas of the Company
(the "Year 2000 Committee"). This committee reports to the Company's senior
management and is responsible for identifying those business line specific Year
2000 Issues. The Company has additionally established a corporate Y2K Office
responsible for project coordination.

     The Company has completed its research and confirmation of  the Y2K status
of mission critical embedded chip equipment in both the facilities' physical
plant and medical devices.  The need for some amount of upgrading of equipment
and systems was identified.  Remediation of equipment is underway and is
expected to be complete by October 1999.

     The Company has also contacted its suppliers to gain assurance that they
will be Y2K compliant. This process is essentially complete; most suppliers have
indicated that they expect to be Y2K compliant in a timely fashion. In addition,
face-to-face meetings are being held with key suppliers of pharmaceuticals,
medical supplies and food.

                                       23
<PAGE>

     The Company has established a patient-focused contingency planning process
geared toward the development of action plans for potential failures to mission
critical systems and equipment.  A set of guidelines are being utilized by each
facility to develop local plans.  These plans are expected to be completed by
October 1999, with final drills and contingency preparations completed in
November and December 1999.

     To date, the Company has expended $4.7 million to remedy problems
associated with the Year 2000 Issue and estimates that it will expend an
additional approximately $4.8 million in the future. This amount does not
include funds necessary to remedy Year 2000 Issues in the Company's facilities.
The Company believes that the costs associated therewith, together with the
costs of remedying issues with respect to embedded chips, will approximate $3.0
million.

     With respect to the Company's customers, the largest source of the
Company's revenues is the state and federal governments through the Medicaid and
Medicare programs, respectively. The Company is reimbursed under these programs
through fiscal intermediaries and state agencies.  Virtually all of the
Company's Medicaid agencies and Medicare fiscal intermediaries have responded to
Y2K inquiries, indicating that they are now or will be Y2K  compliant before
December 1999.  Most have not, however, shared their contingency plans for
paying providers should there be Y2K-related failures.  The Company continues to
make contact with these entities to obtain further assurance that workable
contingency plans are in place.  The August 4, 1999 Federal Register contains a
notice from HCFA about Y2K readiness that asserts that HCFA and its "75 mission
critical claims processing systems operated by Medicare carriers and fiscal
intermediaries are fully ready to handle all appropriately formatted claims" on
January 1, 2000.  64 Fed. Reg. 42403, Aug. 4, 1999.  Because the Company has no
control over these entities, in the event the fiscal intermediaries and the
state and federal governments are not Year 2000 compliant, the timely receipt of
the Company's receivables may be adversely affected. A significant delay in the
receipt of its receivables would have a material adverse effect on the Company's
financial condition and results of operations.

     The Company believes that the principal risk for the Company from the Year
2000 Issue is from the potential for delay in the receipt of payment from third-
party payors. The Company has minimal access to credit facilities and its
operating resources are limited to invested cash, liquidating working capital
and proceeds from asset sales not required to be applied to bank debt. With the
Company's current liquidity sources, a delay in receipt from third party payors
could have a material adverse effect on the Company's operations.


     Liquidity and Capital Resources of the Company

     Cash and cash equivalents were $103.3 million at June 30, 1999. Working
capital was negative $1,037.4 million, a decrease of $1,387.7 million during the
nine months ended June 30, 1999, due to the current maturity of a large portion
of the Company's debt. See Notes 2 and 9 to the Consolidated Financial
Statements. Cash used in operations for the nine months ended June 30, 1999 was
$37.5 million, which was net of approximately $24.7 million in payments for
indirect merger and other expenses. Receivables increased by $17.8 million due
in part to payment remittance issues with fiscal intermediaries. Other current
assets decreased by $57.0 million primarily as a result of income tax refunds
the Company received from federal and state taxing authorities. Accounts payable
decreased by $36.0 million, primarily as a result of timing differences on
invoice payment terms.

     Cash used in investing activities was $21.0 million in the nine month
period ended June 30, 1999, as compared to $74.4 million for the same period in
fiscal 1998.  Investing activities included the use of $55.8 million related to
capital expenditures. Capital expenditures are expected to be funded in the
future by cash from operations and proceeds from asset sales.

     Cash provided by financing activities was $158.5 million in the nine month
period ended June 30, 1999, as compared to $101.5 million for the same period in
fiscal 1998.  Cash provided by financing activities included $205.5 million in
net draws under the Company's credit line of which approximately $94.5 million
is invested cash at June 30, 1999, $43.1 million in principal repayments on
long-term debt, and $3.8 million in payments for financing fees associated with
certain amendments to the Company's long-term debt agreements.

                                       24
<PAGE>

     The Company receives payment for nursing facility services based on rates
that are set by individual state Medicaid programs.  Although payment cycles for
these programs vary, payments generally are made within 30 to 60 days after
services are provided.  For Medicare cost reporting periods beginning July 1,
1998 and after, the federal Medicare program converted to PPS for skilled
nursing facility services.  As of June 30, 1999 all of the Company's skilled
nursing facilities are reimbursed under PPS.  The prospective payment system
provides acuity-based rates that are established at the beginning of the
Medicare reporting year.  Under PPS, claims are filed monthly and clean claims
are paid 14 days after submission.

     For cost reporting periods that ended before the start of PPS, the
facilities were reimbursed under Medicare on the basis of reasonable and
necessary cost as determined from annual cost reports.  This retrospective
settlement system resulted in final cost report settlements that generally were
not finally settled until two years after the end of the cost reporting period
and that could be further delayed by appeals and litigation.

     During the first quarter of fiscal 1999, the Company conformed reserve for
bad debts policies and related calculation of the allowance for doubtful
accounts for the Mariner Health facilities to the Company's established reserve
methodology, which resulted in a charge of $24.3 million.  The Company continued
to review the collectability of its accounts receivable for other than inpatient
operations and recorded an additional provision for bad debts of $29.6 million
during the second quarter of fiscal 1999, primarily as a result of uncollectable
accounts receivable that were acquired in the Mariner Health merger.  The
Company will continue to review the collectability of its accounts receivable,
which could result in increased provisions for bad debts in the future.

     The Company provides certain services and supplies between subsidiary
companies, some of which are charged at cost and others of which are charged at
market rates. Subject to certain exceptions, Medicare's "related organization
principle" generally requires that services and supplies furnished to nursing
facilities by related entities be included in the nursing facility's
reimbursable cost at the cost of the supplying entity. The Company believes that
the services and supplies furnished to nursing facilities at market rates
qualify for exception to the related organization principle. Certain of the
Company's Medicare fiscal intermediaries have taken the position that the
related party transactions do not qualify for this exception to the related
party rules and have made adjustments that reduce Medicare allowable cost to the
cost of the supplying entity. During the third quarter of fiscal 1999, the
intermediaries for the Mariner Health facilities reopened previously settled
cost reports to impose such related party adjustments for services furnished to
the facilities by Mariner Health's rehabilitation subsidiary. All related party
adjustments have been or will be appealed to the Provider Reimbursement Review
Board and through the full appeal process as is warranted. The adjustments
effect only periods during which the facilities were reimbursed for Medicare on
the basis of reasonable and necessary cost; there would not be any impact for
periods that are reimbursed under PPS following transition.

     To the extent that Notices of Program Reimbursement (which include related
party adjustments) have been issued to Mariner Health facilities, adjustments
have been recorded during the third quarter of fiscal 1999 to reflect the
reduction in reimbursable cost of approximately $16.9 million. For subsequent
periods during which similar transactions existed, a change in estimate was
recorded during the third quarter of fiscal 1999 to reflect the potential
reduction in reimbursable cost of approximately $50.0 million. With respect to
repayments that are required for the adjustments (including the related party
adjustments) that were included in the reopened cost reports, the Company has
reached an agreement with HCFA for an extended repayment period. The remaining
balance (after recoupments through withholding from current payments) of
approximately $15.9 million will be repaid over a period of one year beginning
in July 1999. The first monthly payment of $1.8 million, including interest, has
been made.

     An additional change in estimate of approximately $15.4 million was
recorded during the third quarter of fiscal 1999 for related party adjustments
that previously were imposed on LCA cost reports. The Company will continue to
evaluate the collectability of Medicare and Medicaid retroactive settlement
receivables and will make adjustments in future periods as deemed appropriate.

                                       25
<PAGE>

     In addition to the related party adjustments and cost report settlements
discussed above, significant items that will affect the Company's liquidity in
the future include the ability of the Company to reach an accomodation with its
lenders under the Senior Credit Facility, Mariner Health Senior Credit Facility,
Mariner Health Term Loan Facility, to refinance the Mariner Health Senior Credit
Facility and Mariner Health Term Loan Facility on or before January 3, 2000 and
make interest payments under the Notes and the Mariner Notes.  The failure by
the Company to meet these requirements, or refinance the indebtedness when it
becomes due, would have a material adverse affect on the Company.

     The Company has engaged financial advisors and legal counsel to assist in
preparing biweekly cash forecasts for its lenders and reviewing its capital
restructuring alternatives.  There can be no assurance that the Company's or
Mariner Health's invested cash will be sufficient to provide for all the
liquidity necessary to sustain operations and to meet all of the Company's or
Mariner Health's interest and principle obligations on their debt as they become
due.

     In addition, the Company is in the process of evaluating the impact of its
future cash flows on the Company's long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" during the fourth fiscal quarter ending September 30, 1999.

     Senior Credit Facility.  In connection with the Recapitalization Merger,
the Company entered into the Senior Credit Facility, which originally consisted
of a $150.0 million revolving credit facility (the "Revolving Credit Facility"),
and three term loan credit facilities: a 6  1/2 year term loan facility in an
aggregate principal amount of $240.0 million (the "Tranche A Term Loan
Facility"), a 7 1/2 year term loan facility in an aggregate principal amount of
$250.0 million (the "Tranche B Term Loan Facility"), and an 8 1/2 year term loan
facility in an aggregate principal amount of $250.0 million (the "Tranche C Term
Loan Facility").  Loans made under the Tranche A Term Loan Facility ("Tranche A
Term Loans"), the Tranche B Term Loan Facility ("Tranche B Term Loans") and the
Tranche C Term Loan Facility ("Tranche C Term Loans") are collectively referred
to herein as "Term Loans."  Advances under the Revolving Credit Facility are
sometimes referred to as "Revolving Loans."  The proceeds from borrowings under
the Term Loans were used, along with the proceeds of the Notes (defined below)
offering, to fund a portion of the Recapitalization Merger, refinance a
significant portion of LCA's and GranCare's pre-merger indebtedness and to pay
costs and expenses associated with the Apollo/LCA/GranCare Mergers.

     In July 1998 the Revolving Credit Facility was increased to $175.0 million
and the Tranche A Term Loan Facility to $315.0 million in connection with the
Mariner.  The proceeds of the $75.0 million increase in the Tranche A Credit
Facility and of certain Revolving Credit Loans were used to pay various costs
and expenses incurred in connection with the Mariner Merger.  As of June 30,
1999, there was $166.4 million borrowed under the Revolving Credit Facility and
approximately $8.6 million in letters of credit outstanding.

     The obligations of the Company under the Senior Credit Facility are
guaranteed by substantially all of the Company's subsidiaries other than Mariner
Health and its subsidiaries, and are secured by substantially all of the
otherwise unencumbered owned assets of the Company and such subsidiaries.

     Principal amounts outstanding under the Revolving Credit Facility will be
due and payable in April 2005.  The Term Loans are amortized in quarterly
installments which increase over the term of those loans (see Note 7 to the
Consolidated Financial Statements).  Interest on outstanding borrowings under
the Senior Credit Facility accrue, at the option of the Company, at the
Alternate Base Rate (the "ABR") of The Chase Manhattan Bank ("Chase") or at a
reserve-adjusted Eurodollar Rate (the "Eurodollar Rate"), plus, in each case, an
Applicable Margin.  The term "Applicable Margin" means a percentage that will
vary in accordance with a pricing matrix based upon the respective term loan
tenor and the Company's leverage ratio (see Note 9 to the Consolidated Financial
Statements).

     The Senior Credit Facility is subject to prepayment, in whole or in part,
at the Company's option and in certain minimum increments from time to time, and
is also subject to mandatory prepayment from the net cash proceeds received from
certain transactions.  Those transactions include the sale or issuance of equity
by the

                                       26
<PAGE>

Company, the incurrence of certain indebtedness by the Company, and the
sale of certain assets where the net cash proceeds are not reinvested in the
Company's business within 12 months (6 months in certain cases).  The Company
must also make annual prepayments to the extent of 75% of its excess cash flow
for each fiscal year (reduced to 50% of excess cash flow once the Company's
leverage ratio as of the last day of any fiscal year is less than or equal to
4.50 to 1.00).  Mandatory prepayments will be applied pro rata to the unmatured
installments of the Term Loans; provided, however, that holders of Tranche B
Term Loans or Tranche C Term Loans may refuse any such mandatory prepayment
otherwise allocable to them, in which case the amount so refused will be applied
as an additional prepayment of the Tranche A Term Loans.  Amounts applied as
prepayments of the Revolving Credit Facility may be reborrowed; amounts prepaid
under the Term Loans may not be reborrowed.

     The covenants contained in the Senior Credit Facility, among other things,
require the Company to maintain certain financial ratios and restrict the
ability of the Company to dispose of assets, repay other indebtedness or amend
other debt instruments, pay dividends, make investments, and make acquisitions.
The Company received the consent of the requisite lenders under the Senior
Credit Facility to permit the Mariner Merger and certain covenants in the Senior
Credit Facility were modified to accommodate the Mariner Merger.  By amendment
effective December 22, 1998, certain of the Senior Credit Facility's financial
and operating covenants were amended to provide the Company with additional
flexibility, in return for which the Applicable Margins were increased.  (See
Note 9 to the Consolidated Financial Statements.)

     In May 1999, the Senior Credit Facility was further amended in order to
waive non-compliance by the Company with certain financial covenants as of March
31, 1999, to increase loan pricing (see Note 9 to the Consolidated Financial
Statements) and, among other things, (i) to prohibit acquisitions, (ii) to
eliminate the Company's ability to defer mandatory prepayments with the proceeds
from asset sales and other transactions by reinvesting such proceeds in other
capital assets, and (iii) to restrict the Company's right to sell assets without
administrative agent or lender approval, incur capital expenditures other than
for maintenance and repair purposes, or make investments in Mariner Health and
the Mariner Health subsidiaries.

     As of June 30, 1999, the Company was in violation of certain of these
financial covenants and as a result cannot make additional borrowings under the
Senior Credit Facility. To date the Company has not obtained a waiver of the
June 30, 1999 financial covenant defaults under the Senior Credit Facility;
however, the Company is in active discussions with the Administrative Agent
under the Senior Credit Facility regarding either an amendment that would
provide more permanent relief from such financial covenants, or possibly a
restructuring of the indebtedness under the Senior Credit Facility. No
assurances can be given regarding the prospects for such an amendment or
restructuring being completed or the timing thereof. Until the Company is in
compliance with the financial covenants under the Senior Credit Facility or the
Senior Credit Facility is restructured to provide more permanent relief from the
existing financial covenants, the Company's ability to borrow funds under the
Revolving Credit Facility to finance its operations has been suspended.  In
addition, if the Company is unable to refinance, restructure or obtain an
amendment to the Senior Credit Facility to provide more permanent relief from
the existing financial covenants, the lenders thereunder may exercise certain
remedies including, without limitation, accelerating the indebtedness thereunder
and exercising their rights with respect to the pledged collateral.


     Senior Subordinated Notes.  In connection with the Apollo/LCA/GranCare
Mergers, on November 4, 1997 the Company completed a private offering to
institutional investors of $275 million of its 9.5% Senior Subordinated Notes
due 2007 (the "Senior Subordinated Notes"), at a price of 99.5% of face value
and $294 million of its 10.5% Senior Subordinated Discount Notes due 2007, at a
price of 59.6% of face value (collectively, the "Notes").  Interest on the
Senior Subordinated Notes is payable semi-annually.  Interest on the Senior
Subordinated Discount Notes will accrete until November 1, 2002 at a rate of
10.57% per annum, compounded semi-annually, and will be cash pay at a rate of
10.5% per annum thereafter.  The Notes will mature on November 1, 2007.  The net
proceeds from this offering, along with proceeds from the Senior Credit
Facility, were used to fund a portion of the Recapitalization Merger, refinance
a significant portion of LCA's and GranCare's pre-merger indebtedness and to pay
costs and expenses associated with the Apollo/LCA/GranCare Mergers.  Pursuant to
the terms of the indenture with respect to the Notes, in March 1998, the Company
completed an exchange offer with respect to the Notes whereby Notes registered
under the Securities Act of 1933, as amended, were exchanged for unregistered
Notes.

                                       27
<PAGE>

The terms of the exchange Notes are identical to the original Notes.
Mariner Health and its subsidiaries are "restricted subsidiaries" under the
indenture pursuant to which the Notes were issued.  The Company made its last
semi-annual interest payment under the Senior Subordinated Notes.  The Company
does not know if it will be able to, or if its senior lenders will permit it to,
make the next scheduled interest payment of approximately $13.1 million due in
November 1999.  If interest on the Notes is not paid when due, and such failure
to pay is not cured within 30 days, holders of the Notes could accelerate the
Notes and take other remedial action, subject to applicable subordination
provisions.

     Other Significant Indebtedness and Commitments. The Company, through
various of its GranCare subsidiaries, is a party to various agreements between
GranCare and Health and Retirement Properties Trust ("HRPT").   HRPT is the
lessor with respect to certain facilities leased by two subsidiaries of GranCare
(the "Tenant Entities").  In connection with obtaining HRPT's consent to the
Apollo/LCA/GranCare Mergers, GranCare and HRPT executed a Restructure and Asset
Exchange Agreement dated October 31, 1997 pursuant to which HRPT and GranCare
restructured their relationship (the "HRPT/GranCare Restructuring").  As a part
of the HRPT/GranCare Restructuring, HRPT consented to the consummation of the
Apollo/LCA/GranCare Mergers and the transactions related thereto, and HRPT
received an unlimited guaranty by the Company and all subsidiaries of the
Company having an ownership interest in Tenant Entities which guaranty is
secured by a cash collateral deposit of $15 million, the earned interest on
which is retained by HRPT.  The performance by the Tenant Entities of their
respective obligations to HRPT continues to be secured by a pledge of one
million shares of HRPT common stock beneficially owned by GranCare and, as part
of the HRPT/GranCare Restructuring, GranCare agreed to waive the ability to
request a release of such collateral upon the attainment of certain financial
conditions.  Accordingly, the Company does not have the ability to sell these
shares to meet any capital requirements.    An unwaived event of default under
the Senior Credit Facility could result in HRPT exercising its rights with
respect to this collateral. In addition, an unwaived event of default under the
Senior Credit Facility could result in the default and acceleration of other
obligations to which the Company and its subsidiaries are party.

     In connection with the GranCare Merger, the Company became a party to an
agreement between GranCare and Omega Healthcare Investors, Inc. ("Omega").  A
wholly-owned subsidiary of the Company, Professional Health Care Management,
Inc. ("PHCMI"), is the borrower under a $58.8 million mortgage note executed
on August 14, 1992 (the "Omega Note") in favor of Omega, and under the related
Michigan loan agreement dated as of June 7, 1992 as amended (the "Omega Loan
Agreement"). All $58.8 million was outstanding as of June 30, 1999.

     The Omega Note bears interest at a rate which is adjusted annually based on
either (i) changes in the Consumer Price Index or (ii) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by $58.8 million, whichever is higher, but in any event subject to a
maximum rate not to exceed 105% of the interest rate in effect for the Omega
Note for the prior calendar year. The current interest rate is 15.5% per annum
which is paid monthly. Additional interest accrues on the outstanding principal
of the Omega Note at the rate of 1% per annum and totaled $4.2 million at June
30, 1999. Such interest is compounded annually and is due and payable on a pro
rata basis at the time of each principal payment or prepayment.

     In addition to the interest on the Omega Note described in the preceding
paragraph, and as a condition to obtaining Omega's consent to a February 1997
transaction between Vitalink Pharmacy Services, Inc. and GranCare, PHCMI agreed
to pay additional interest to Omega in the amount of $20,500 per month, through
and including July 1, 2002.  If the principal balance of the Omega Note for any
reason becomes due and payable prior to that date, there will be added to the
indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus (ii) interest
thereon at 11% per annum to the prepayment date; less (iii) the amount of such
additional interest paid to Omega prior to the prepayment date.

     Mariner Health Senior Credit Facility and Mariner Health Term Loan
Facility.  At the time of the Mariner Merger, Mariner Health was the borrower
under a $460.0 million revolving credit facility (the "Mariner Health Senior
Credit Facility"), by and among Mariner Health, the lenders signatory thereto
(the "Mariner Health Lenders"), and PNC Bank, National Association ("PNC Bank"),
as agent for the Mariner Health Lenders (the "Mariner Agent").  The Mariner
Health Senior Credit Facility expires on January 3, 2000. However, no assurance
can be given that financing will be available on terms that are acceptable to
the Company.

                                       28
<PAGE>

     Outstanding advances under the Mariner Health Senior Credit Facility bear
interest based, at the borrower's option, either on PNC Bank's prime rate or on
a Eurodollar-based rate, in each case plus an applicable margin which
fluctuates based on a pricing matrix related to Mariner Health's leverage ratio.
The Mariner Health Senior Credit Facility contains covenants which, among other
things, require Mariner Health and its subsidiaries to maintain certain
financial ratios and impose certain limitations or prohibitions on Mariner
Health with respect to the incurrence of indebtedness, liens and capital leases;
the payment of dividends on, and the redemption or repurchase of, its capital
stock; investments and acquisitions, including acquisitions of new facilities;
the merger or consolidation of Mariner Health with any person or entity; and the
disposition of any of Mariner Health's properties or assets.

     Effective December 23, 1998, Mariner Health amended the Mariner Health
Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment")
(a) to reduce the amount of the revolving commitment from $460.0 million to
$250.0 million, (b) to provide additional financial covenant flexibility for
Mariner Health and its subsidiaries, (c) to modify certain of the financial and
operating covenants referred to in the immediately preceding paragraph, (d) to
increase the applicable interest rate margins (see Note 9 to the Consolidated
Financial Statements) and (e) to expand the amount and types of collateral
pledged to secure the Mariner Health Senior Credit Facility.

     Mariner Health's obligations under the Mariner Health Senior Credit
Facility are guaranteed by substantially all of its subsidiaries and are secured
by substantially all of the otherwise unencumbered assets of Mariner Health and
such subsidiary guarantors.

     Contemporaneously with the effectiveness of the Mariner Health Senior
Credit Facility Amendment, Mariner Health entered into a term loan agreement
dated as of December 23, 1998 (the "Mariner Health Term Loan Facility") with PNC
Bank, as administrative agent, First Union National Bank, as syndication agent,
and the financial institutions signatory thereto as lenders (the "Term
Lenders"), pursuant to which the Term Lenders made a $210.0 million senior
secured term loan to Mariner Health (the "Mariner Health Term Loan").  Proceeds
of the Mariner Term Loan were applied to reduce outstanding amounts under the
Mariner Health Senior Credit Facility in connection with the Mariner Health
Senior Credit Facility Amendment.  The interest rate pricing and covenants
contained in the Mariner Health Term Loan Agreement are substantially similar to
the corresponding provisions of the Mariner Health Senior Credit Facility, as
amended by the Mariner Health Senior Credit Facility Amendment.  The Mariner
Health Term Loan matures on January 3, 2000, is guaranteed by the same
subsidiary guarantors as the Mariner Health Senior Credit Facility, and is
cross-defaulted and cross-collateralized with the Mariner Health Senior Credit
Facility.  The Company plans to refinance the outstanding indebtedness under the
Mariner Health Senior Credit Facility prior to December 31, 1999.  However, no
assurance can be given that financing will be available.

     As of June 30, 1999, approximately $208.0 million of loans and $27.0
million of letters of credit were outstanding under the Mariner Health Senior
Credit Facility, and $207.4 million of the Mariner Health Term Loan was
outstanding.

     Mariner Health and its subsidiaries are treated as unrestricted
subsidiaries under the Senior Credit Facility.  Unlike other subsidiaries of the
Company (the "Non-Mariner Subsidiaries"), Mariner Health and its subsidiaries
neither guarantee the Company's obligations under the Senior Credit Facility nor
pledge their assets to secure such obligations.  Correspondingly, the Company
and the Non-Mariner Subsidiaries do not guarantee or assume any obligations
under the Mariner Health Senior Credit Facility or the Mariner Health Term Loan
Facility.  Mariner Health and its subsidiaries are not subject to the covenants
contained in the Senior Credit Facility, and the covenants contained in the
Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility
are not binding on the Company and the Non-Mariner Subsidiaries.  Mariner Health
and the Mariner Health subsidiaries are obligated to continue to comply with the
covenants contained in the Mariner Health Senior Credit Facility and the Mariner
Health Term Loan Facility without taking into account the revenues, expenses,
net income, assets or liabilities of the Company and the Non-Mariner
Subsidiaries.  The converse is true with respect to the Company, which (together
with its Non-Mariner Subsidiaries) must continue to comply with the covenants
contained in its Senior Credit Facility without taking into account the
revenues, expenses, net income, assets or liabilities of Mariner Health and its
subsidiaries.

                                       29
<PAGE>

     Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility and in the
Mariner Health Term Loan Facility as of March 31, 1999 and also as of June 30,
1999 and as a result cannot make additional borrowings under the Mariner Health
Senior Credit Facility.  Mariner Health has thus far been unsuccessful in
obtaining a waiver of such financial covenant defaults from the Mariner Agent,
the Mariner Health Lenders and the Term Lenders.  However, Mariner Health
continues to engage in active discussions with such creditors regarding more
permanent relief from such financial covenants or a possible restructuring of
the indebtedness outstanding under those credit facilities.  No assurances can
be given regarding the likelihood of being able to arrange such an amendment or
restructuring, or the timing thereof.  So long as Mariner Health's noncompliance
with the financial covenants remains unwaived, Mariner Health is not permitted
to borrow undrawn amounts under the Mariner Health Senior Credit Facility and
the Mariner Lenders and the Term Lenders have the right to exercise remedies
under their loan documents.  In addition, the existence and continuation of such
noncompliance could afford certain other lenders or lessors of Mariner Health
and its subsidiaries the right to exercise remedies under their own loan or
lease documents.

     Mariner Health Senior Subordinated Notes.  Mariner Health is also the
issuer of $150.0 million of 9 1/2% Senior Subordinated Notes due 2006 (the
"Mariner Notes") which were issued pursuant to an indenture dated as of April 4,
1996 (the "Mariner Indenture") with Mariner Health as issuer and State Street
Bank and Trust Company as trustee (the "Mariner Trustee").  The Mariner Notes
are obligations solely of Mariner Health and are not guaranteed by the Company
or any of its subsidiaries (other than Mariner Health). Because of the existing,
unwaived financial covenant defaults under the Mariner Health Senior Credit
Facility and the Mariner Health Term Loan Facility, and Mariner Health's current
projected operating results for the next fiscal quarter ended September 30,
1999, Mariner Health does not know if it will be able to, or if its senior
lenders will permit it to make the next scheduled interest payment of
approximately $7.1 million due in October 1999.

     As a consequence of the Mariner Merger and the resulting change of control
at Mariner Health, the holders of the Mariner Notes had the right under the
Mariner Indenture to require that their Mariner Notes be purchased (the "Change
of Control Purchase") at a purchase price equal to 101% of the outstanding
principal amount of the Mariner Notes purchased.  Effective on September 11,
1998, Mariner Health and the Mariner Trustee entered into an amendment to the
Mariner Indenture which permitted Mariner Health to designate a third-party to
purchase any Mariner Notes tendered pursuant to the Change of Control Purchase.
Mariner Health designated NationsBank, N.A. (n/k/a Bank of America, N.A., and
herein referred to as "Bank of America") as a third-party purchaser, and on
September 21, 1998 Bank of America acquired all $40,661,000 of the Mariner Notes
tendered in connection with the Change of Control Purchase (the "Tendered
Mariner Notes").  In agreeing to act as third-party purchaser, Bank of America
required the Company to enter into a total return swap agreement (the "Total
Return Swap"), with the financial institution as counterparty.  See
"Quantitative and Qualitative Disclosures about Market Risk." As of June 30,
1999, the Tendered Mariner Notes remained outstanding and were owned and
controlled by Bank of America.  The Company's obligations under the Total Return
Swap are guaranteed by Mariner Health and substantially all of the subsidiaries
of Mariner Health.  During the quarter ended December 31, 1998, an additional
$6.0 million of the Mariner Notes were acquired by Bank of America and made a
part of the Total Return Swap.

     The scheduled termination date of the Total Return Swap is August 16, 1999,
and Bank of America was unwilling to extend that date.  Based on the bids for
the Tendered Mariner Notes solicited by Bank of America pursuant to the Total
Return Swap Agreement, the market value of the Tendered Mariner Notes for
purposes of unwinding the Total Return Swap was determined to be approximately
$700,000, resulting in capital depreciation of approximately $46.5 million being
owed by the Company. Mariner Post-Acute Network, Inc. was the winning bidder in
the auction for the Tendered Mariner Notes.  On the August 16, 1999 termination
date, Bank of America applied $15.0 million drawn by it under a letter of credit
issued pursuant to the Mariner Health Senior Credit Facility and applied $5.0
million of cash collateral previously posted by Mariner Health, to satisfy $20.0
million of the total amount owed to Bank of America under the Total Return Swap,
leaving a net deficiency of approximately $26.5 million (the "Net Total Return
Swap Deficiency").

     Effective August 16, 1999, Bank of America and the Company have agreed to
incorporate the Total Return Swap Deficiency into a promissory note (the
"Deficiency Note") which will generally mature and be payable as to

                                       30
<PAGE>

principal and interest on the same terms as the notes evidencing the Revolving
Loans. The guarantee of the Total Return Swap obligations of the Company by
Mariner Health and its subsidiary guarantors will remain in place. Bank of
America has also waived any default arising from any failure to be paid the Net
Deficiency on the termination date of the Total Return Swap. Such waiver will
expire, however, if payments under the Deficiency Note are not made in a timely
manner or if the requisite lenders under the Senior Credit Facility shall not
have adopted, on or before September 16, 1999, an amendment to the Senior Credit
Facility acknowledging the Deficiency Note as permitted indebtedness and as an
"Obligation" that is secured on a pari passu basis with the indebtedness
outstanding under the Senior Credit Facility. The Administrative Agent has
indicated to the Company that they will vote in favor of such amendment. No
assurances can be given, however, that such amendment will ultimately be
approved by the requisite lenders under the Senior Credit Facility. If the Bank
of America waiver expires, a payment default will exist under the Deficiency
Note. Such payment default, together with any cross-defaults to other
obligations of the Company that may result, could have materially adverse
consequences for the Company. Additionally, the $46.7 of Mariner Notes acquired
in connection with the Total Return Swap remain outstanding and as an obligation
of Mariner Health.

     Healthcare Regulatory Matters.  The Balanced Budget Act enacted in August
1997 (the "BBA"), contains numerous changes to the Medicare and Medicaid
programs with the intent of slowing the growth of payments under these programs
by $115.0 billion and $13.0 billion, respectively, through the year ended 2002.
Approximately 50% of the savings were to be achieved through a reduction in the
growth of payments to providers and physicians.   These cuts have had, and will
continue to have, a material adverse effect on the Company.

     The BBA amended the Medicare program by revising the payment system for
skilled nursing services.  Historically, nursing homes were reimbursed by the
Medicare program based on the actual costs of services provided.  However, the
BBA required the establishment of a PPS system for nursing homes for cost
reporting periods beginning on or after July 1, 1998.  Under PPS, nursing homes
receive a fixed per diem rate for each of their Medicare Part A patients which,
during the first three years, is based on a blend of facility specific rates and
Federal acuity adjusted rates.  Thereafter, the per diem rates will be based
solely on Federal acuity adjusted rates.  Subsumed in this per diem rate are
ancillary services, such as pharmacy and rehabilitation services, which
historically have been provided to many of the Company's nursing facilities by
the Company's pharmacy and therapy subsidiaries.  The inclusion of ancillary
services in the PPS per diem has resulted in significantly lower margins in the
Company's pharmacy and therapy operations as a result of increased pricing
competition and a change in buying patterns by customers.

     As a result of significantly lower margins, during the third quarter in
fiscal 1999, the Company decided to discontinue providing contract
rehabilitation services to both related and nonrelated nursing facilities, and
employed therapists to provide services in the Company's facilities.  In
addition, the Company sold its rehabilitation clinic and hospital contract
therapy operations.  See Note 14 to the Consolidated Financial Statements.

     On May 12, 1998, HCFA published the "Interim Final Rule" for the skilled
nursing facility PPS along with the acuity adjusted federal PPS rates for Part A
Medicare patients and the facility specific inflation factors effective from
July 1, 1998 through September 30, 1999 and the inflation factors that are used
to adjust the facility specific base period cost to the payment rates for
periods beginning July 1, 1998 through periods beginning September 1, 1999.  On
July 30, 1999, HCFA published the "Final Rule" for PPS along with acuity
adjusted federal PPS rates that are effective October 1, 1999 through September
30, 2000, and the inflation factors that are used to adjust the specific
facility specific base period cost to payment rates for periods beginning
October 1, 1999 through periods beginning September 1, 2000. The acuity adjusted
federal PPS rates and facility specific inflations factor that are published
along with the Final Rule follow the guidance included in the Interim Final Rule
and do not provide any substantial relief from the overall effect of PPS on
Medicare revenue decreases. As of July 1, 1999, all of the Company's skilled
nursing facilities are receiving Medicare payment through PPS, although
transition PPS rates vary from facility to facility depending on each facility's
base period cost that comprises the facility specific component of the rates and
the facility's geographic location that defines the wage adjuster that is
applied to the acuity adjusted federal component of the rates. For most of the
Company's facilities, the facility specific base period cost is higher than the
base period cost that was used to develop the acuity adjusted federal rates. The
trend of decreasing Medicare revenues is expected to continue as facilities
transition from rates that include a higher
                                       31
<PAGE>

percentage of the facility specific rate component to rates that include a
higher percentage of the acuity adjusted federal rate component. Any relief from
the revenue decrease will be dependent upon facilities' ability to reduce costs
to the magnitude of the reduced rates.

     The BBA also repealed the Boren Amendment ("Boren"), which had required
state Medicaid programs to reimburse nursing facilities for the costs that are
incurred by efficiently and economically operated providers in order to meet
quality and safety standards.  Because of the repeal of Boren, states now have
considerable flexibility in establishing Medicaid payment rates.  In addition,
Boren provided a dispute resolution mechanism whereby providers could challenge
Medicaid rates set by the various states, the repeal of which will now make it
more difficult to challenge these rates in the future.  While the Company is not
aware of any states that have adopted changes to their Medicaid programs having
an adverse effect on the Company following the repeal of Boren, no assurances
can be given that states will not adopt such changes in the future.

     On January 30, 1998, HCFA issued its new salary equivalency guidelines
which change Medicare reimbursement rates for contracted therapy services.
Under salary equivalency, the Company is reimbursed for contracted therapy
services based on the time spent on the premises by the contract therapist times
a fixed rate, depending on the service provided.  While the new rates for
physical therapy represent an increase over what the Company previously received
for such services, the new rates for occupational therapy and speech language
pathology represent decreases from what the Company previously received.  The
salary equivalency guidelines are no longer in effect as of July 1, 1999, the
date on which PPS was implemented at all skilled nursing facilities.  The
Company believes that while salary equivalency had a slight adverse effect on
its therapy revenue, the Company does not believe that salary equivalency has
had a material adverse effect on the Company's consolidated revenues.

     The BBA also revised the reimbursement methodology for therapy services
under Medicare Part B.  Historically, Medicare Part B therapy services were
reimbursed based on the cost of the services provided, subject to prudent buyer
and salary equivalency restrictions.  In November 1998, certain fee screen
schedules were published setting forth the amounts that can be charged for
specific therapy services.  Additionally, the BBA set forth maximum per
beneficiary limits of $1,500 per provider for physical therapy and speech
pathology and $1,500 per provider for occupational therapy.  Both the fee
screens and per beneficiary limits were effective for services rendered
following December 31, 1998.  The imposition of fee screens, together with the
inclusion of ancillary services in the Federal per diem, has had a material
adverse effect on the Company's therapy business resulting in the decision by
the Company to terminate its contracts to provide therapy services.

     In the process of finalizing certain Medicare cost reports or reopening
previously finalized cost reports filed by various of the Company's Medicare
provider facilities, certain Medicare fiscal intermediaries have issued NPRs,
which include significant audit adjustments that reduce the amount of
reimbursement that previously was received by the facilities.  The adjustments
are based, for the most part, on denials of exception to the related
organization principles with regard to services and supplies furnished to the
facilities by the Company's pharmacy and rehabilitation companies and reductions
to costs claimed for therapy services under the prudent buyer principles.

     The prudent buyer principle states, in part, "the prudent and cost-
conscious buyer not only refuses to pay more than the going price for an item or
service, he also seeks to economize by minimizing cost."  Certain of the fiscal
intermediaries have alleged that the Company was not prudent in its purchase of
occupational therapy and speech pathology services prior to HCFA's establishing
salary equivalency guidelines, effective April 1998.  Fiscal intermediaries
calculated facilities' costs to provide services through employed therapists and
reduced costs claimed on the cost reports for providing services through
contracts and adjusted the cost reports accordingly.  Appeals were filed with
the PRRB and resulted in a favorable outcome.  However, on review the Social
Security Administrator reversed the PRRB and restored the intermediaries'
adjustments.  The Company believes that it has substantial arguments to support
its position that the contested costs are allowable and the issue is being
appealed through judicial review, pursued through the appropriate legal
processes.  Another unrelated provider received a favorable judicial decision on
its prudent buyer appeal based on similar facts.  The Company currently is

                                       32
<PAGE>

negotiating a settlement with HCFA for all of its prudent buyer appeals and
believes that it will have a favorable outcome.  However, until the settlement
is finalized, there can be no assurance that the Company will prevail or that it
will not have to expend significant amounts to complete the appeal process.
Contracts between facilities and therapy providers generally provide for the
therapy provider to indemnify the nursing facility in the event of denials or
cost report disallowances.  There can be no assurance that the therapy providers
will not contest the triggering of the indemnity provisions of the contracts or
that they will be able to fund the indemnity provisions.

     The related organization principle states, in part, "a provider's allowable
cost for services, facilities, and supplies furnished by a party related to the
provider are the costs the related party incurred in furnishing the items in
question." The regulations provide for an exception to the related organization
principle if certain requirements are met and the Company believes that it meets
these requirements with respect to services its facilities receive from related
pharmacy and rehabilitation companies.  Some fiscal intermediaries have denied
the request for exception and have made adjustments to reduce the allowable cost
that is included in nursing facility cost reports to the cost of the related
organization.  The Company has requested PRRB appeals for these adjustments, but
the appeals have not yet been heard.  There can be no assurance that the Company
will prevail in the appeal process.

     During the third quarter of fiscal 1999, the Medicare fiscal intermediaries
for the subsidiaries operated by Mariner Health Group, Inc. reopened certain
1995 and 1996 cost reports and issued revised NPRs imposing prudent buyer or
related party adjustments and applying an administrative resolution related to
the cost report treatment of admissions cost.  The reopenings resulted in
reductions in reimbursable cost of approximately $16.9 million. The Company
believes that it has substantial arguments for both issues and will appeal the
adjustments to the PRRB.

     In lieu of recoupment by the fiscal intermediary, the Company has reached
an agreement with HCFA and the intermediary and has implemented an extended
repayment plan. The balance as of the date of the agreement was approximately
$15.9 million, which will be repaid over a period of one year.  The first
monthly payment of $1.8 million, including interest, has been made.

     Other Factors Effecting Liquidity and Capital Resources. In addition to
principal and interest payments on its long-term indebtedness, the Company has
significant rent obligations relating to its leased facilities.  The Company's
estimated principal payments, cash interest payments, and rent obligations for
fiscal year 1999 are approximately $299.0 million.

     The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate the
addition of specialty medical services, and to improve the physical appearance
of its facilities for marketing purposes. In addition, there are capital
expenditures required for completion of certain existing facility expansions and
new construction projects in process as well as supporting non-nursing home
operations and Year 2000 compliance. The Company estimates that total capital
expenditures for the year ending September 30, 1999 will be approximately $79.3
million, however stricter spending guidelines have been implemented which may
reduce this estimate.  Through June 30, 1999 approximately $55.8 million has
been spent in capital expenditures.

                                       33
<PAGE>

     In addition to the Senior Credit Facility, the Company has a lease
arrangement providing for up to $100.0 million to be used as a funding mechanism
for future skilled nursing facility construction, lease conversions, and other
facility acquisitions (the "Synthetic Lease").  This leasing program allows the
Company to complete these projects without committing significant financing
resources.  The lease is an unconditional "triple net" lease for a period of
seven years with the annual lease obligation a function of the amount spent by
the lessor to acquire or construct the project, a variable interest rate, and
commitment and other fees.  The Company guarantees a minimum of approximately
83% of the residual value of the leased property and also has an option to
purchase the properties at any time prior to the maturity date at a price
sufficient to pay the entire amount financed, accrued interest, and certain
expenses.  At June 30, 1999, approximately $63.6 million of this leasing
arrangement was utilized.  The leasing program is accounted for as an operating
lease.  The Synthetic Lease was amended on December 23, 1998 to mirror certain
changes made to the Senior Credit Facility and subsequently amended effective
March 31, 1999 to reduce the commitment to $80 million.  At June 30, 1999, the
Company was in violation of certain of these financial covenants and as a result
cannot currently make additional borrowings under the Synthetic Lease Facility.
The ability to borrow under the Synthetic Lease Facility in the future is
subject to the outcome of the company's efforts to amend the Senior Credit
Facility.

     The Company has experienced an increasing trend in the number and severity
of litigation claims asserted against the Company.  Management believes that
this trend is endemic to the long-term care industry and is a result of the
increasing number of large judgments against long-term care providers in recent
years resulting in an increased awareness by plaintiff's lawyers of potentially
large recoveries.  The Company also believes that there has been, and will
continue to be, an increase in governmental investigatory activity of long-term
care providers, particularly in the area of false claims.  While the Company
believes that it provides quality care to the patients in its facilities and
materially complies with all applicable regulatory requirements, an adverse
determination in a legal proceeding or governmental investigation, whether
currently asserted or arising in the future, could have a material adverse
effect on the Company.  See "Legal Proceedings."

     The Company currently maintains two captive insurance subsidiaries to
provide for reinsurance obligations under workers' compensation, general and
professional liability, and automobile liability for periods ended prior to
April 1, 1998.  These obligations are funded with long-term, fixed income
investments which are not available to satisfy other obligations of the Company.

     By letter dated June 1999, the Company received a 90-day cancellation
notice from its general and professional liability ("GL/PL") carrier, Royal
Surplus Lines ("Royal").  In June, the Company binded a replacement GL/PL policy
with AIG, which resulted in a $4.4 million increase in annual premium and
elimination of the Royal policy's aggregate retention limit.  The elimination of
the aggregate retention limit is expected to increase the actuarial cost of
general and professional liability claims by approximately $26.0 million per
year.  This increased exposure will have a delayed effect on operating cash flow
as claims develop over the next several years.  The Company is examining its
alternatives with respect to its former insurer.

     The Mariner Health Senior Credit Facility generally prohibits Mariner
Health from paying dividends or making distributions to the Company, except as
follows: (a) Mariner Health can make a one-time dividend (which has not yet been
utilized) to the Company in an amount not to exceed Mariner Health's
consolidated net income for the most recent 12 fiscal months subject to the
absence of any default under the Mariner Health Senior Credit Facility or the
Mariner Health Term Loan Facility, and subject further to demonstrating pro
forma compliance with certain financial covenants; and (b) Mariner Health may
reimburse the Company for ordinary course of business expenses paid by the
Company on behalf of Mariner Health or its subsidiaries.  By amendments
effective as of January 19, 1999, the Mariner Health Senior Credit Facility and
the Mariner Health Term Loan Facility were each amended to allow Mariner Health
also to make a dividend or distribution of up to $25.0 million to the Company to
enable the Company to purchase Mariner Notes pursuant to the Total Return Swap
or to otherwise satisfy the Company's obligations under the Total Return Swap,
subject to the absence of any default under the Mariner Health Senior Credit
Facility or the Mariner Health Term Loan Facility, and subject further to
demonstrating pro forma compliance with certain financial covenants thereunder.
In the judgment of the Company's senior management, these restrictions have not
had a material effect on the ability of the Company to meet its obligations.

                                       34
<PAGE>

     The Company is unable to predict at this time if it will have sufficient
cash flow generated from its operations and cash on hand to fund its working
capital needs, anticipated capital expenditures, debt service requirements and
other operating expenses in the immediate future.  The ability of the Company to
fund such requirements will depend, among other things, on future economic
conditions and on financial, business and other factors, many of which are
beyond the Company's control, including the ability of the Company to consummate
certain planned divestitures and benefit from the resulting reduction in
leverage and increase in liquidity.  As of August 13, 1999 the Company had $95.5
million in cash to fund its working capital needs. Due to the existence of
financial covenant defaults under the Senior Credit Facility as of June 30,
1999, the Company is not presently able to satisfy the borrowing conditions
under the Revolving Credit Facility, though less than $1.0 million remains
undrawn under the Revolving Credit Facility. At June 30, 1999, the Company had
$70.2 million of invested cash for funding operations and servicing debt under
the Senior Credit Facility. Mariner Health had $24.3 million in cash available
as of such date to fund its working capital needs and is also currently not able
to borrow under the Mariner Health Senior Credit Facility due to the financial
covenant defaults. In order to improve its cash position and leveraged capital
structure, the Company is evaluating alternatives with respect to certain of its
facilities and product groups, which the Company believes will result in the
divestiture of certain assets during fiscal 1999. The proceeds from any
divestiture generally would be used to pay down the Company's indebtedness and
fund working capital requirements. No material cash was received from asset
dispositions during the quarter ended June 30, 1999. Cash from asset
dispositions subsequent to the quarter end was applied to reduce the Company's
debt and to fund working capital. See Note 14 to the Consolidated Financial
Statements. Proceeds of such sale allocated to Mariner Health have been either
applied to pay down the Mariner Health Term Loan Facility or placed in cash
collateral accounts with PNC Bank, pending application to the Mariner Health
Term Loan Facility or such other application as may be consented to by the
lenders under the Mariner Health Senior Credit Facility and the Mariner Health
Term Loan Facility.

     The Mariner Indenture contains a restriction which, with the exception of
certain indebtedness that is expressly excluded from the incurrence test
described in this paragraph ("Permitted Mariner Health Debt"), only permits
Mariner Health and its subsidiaries to incur indebtedness if, after giving pro
forma effect to such incurrence, Mariner Health's consolidated coverage ratio
would equal or exceed 2.25 to 1.00 for the most recently completed four fiscal
quarter period.  This test is not a financial condition which Mariner Health is
required to maintain under the terms of the Mariner Indenture but rather is a
condition to incurring additional debt.  Mariner Health's consolidated coverage
ratio for the four fiscal quarters ended December 31, 1998 was less than 2.25 to
1.00.  Accordingly, until its consolidated coverage ratio for the four trailing
fiscal quarters once again equals or exceeds 2.25 to 1.00, Mariner Health and
its subsidiaries will not be permitted under the Mariner Health Indenture to
incur indebtedness other than Permitted Mariner Health Debt.  Since indebtedness
now or hereafter incurred under the Mariner Health Senior Credit Facility
constitutes Mariner Health Permitted Debt, Mariner Health can continue to obtain
advances thereunder (subject to the other funding conditions contained therein);
consequently, the inability of Mariner Health and its subsidiaries to incur debt
other than Mariner Health Permitted Debt is not, in and of itself, expected to
have a material adverse affect on the liquidity of Mariner Health and its
subsidiaries. However, no assurances can be given in this regard to the extent
that Mariner Health's noncompliance with the June 30, 1999 financial covenants
continues unwaived, rendering Mariner Health unable, on a continuing basis, to
access its remaining availability under the Mariner Health Senior Credit
Facility.

     In addition, so long as Mariner Health's consolidated coverage ratio for
the trailing four-quarter period is less than 2.25 to 1.00, Mariner Health will
not be allowed to make dividends or distributions to the Company, except for
certain restricted payments expressly permitted under the Mariner indenture.  As
a result thereof, all or a portion of the net income (loss) of Mariner Health
and its subsidiaries may have to be excluded from the Company's consolidated net
income for purposes of determining compliance with the consolidated coverage
incurrence test contained in the indenture pursuant to which the Notes were
issued (the "Company Indenture").  As of June 30, 1999, the Company's
consolidated coverage ratio did not meet the 1.75 to 1.00 incurrence test.
Because the incurrence of certain indebtedness is not subject to such incurrence
test, any resulting restriction against the incurrence of additional debt is not
expected to have a material adverse impact on the ability of the Company to
conduct its business and to fulfill its projected liquidity needs.

                                       35
<PAGE>

     Impact of Inflation.  The health care industry is labor intensive.  Wages
and other labor-related costs are especially sensitive to inflation.  Increases
in wages and other labor-related costs as a result of inflation or the increase
in minimum wage requirements without a corresponding increase in Medicaid and
Medicare reimbursement rates would adversely impact the Company.   In certain of
the markets where the Company operates there is a labor shortage that could have
an adverse effect upon the Company's ability to attract or retain sufficient
numbers of skilled and unskilled personnel at reasonable wages.  Accordingly,
rising wage rates could have an adverse effect on the Company in certain of its
markets.


Cautionary Statements

     Information provided herein by the Company contains, and from time to time
the Company may disseminate materials and make statements which may contain
"forward-looking" information, as that term is defined by the Private
Securities Litigation Reform Act of 1995 (the "Act"). In particular, the
information contained in "Management's Discussion and Analysis of Financial
Position and Results of Operations--Liquidity and Capital Resources" contains
information concerning the ability of the Company to service its debt
obligations and other financial commitments as they come due; and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000" contains information concerning management's belief regarding the
Company's and third parties' readiness to face the Year 2000 issue. The
aforementioned forward looking statements, as well as other forward looking
statements made herein, are qualified in their entirety by these cautionary
statements, which are being made pursuant to the provisions of the Act and with
the intention of obtaining the benefits of the "safe harbor" provisions of the
Act.

     The Company cautions investors that any forward-looking statements made by
the Company are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors, including, but not limited to, the following:


    (i)    There can be no assurance that the Company's creditors will not
           accelerate the indebtedness owing by the Company due to the financial
           covenant defaults by the Company that have occurred and are
           anticipated to occur in the future.

    (ii)   The Company's available cash may not be sufficient to fund the
           Company's working capital needs for an extended period of time.

    (iii)  In recent years, an increasing number of legislative proposals have
           been introduced or proposed by Congress and in some state
           legislatures which would effect major changes in the healthcare
           system. However, the Company cannot predict the type of healthcare
           reform legislation which may be proposed or adopted by Congress or by
           state legislatures. Accordingly, the Company is unable to assess the
           effect of any such legislation on its business. There can be no
           assurance that any such legislation will not have a material adverse
           impact on the future growth, revenues and net income of the Company.

    (iv)   The Company derives substantial portions of its revenues from third-
           party payors, including government reimbursement programs such as
           Medicare and Medicaid, and some portions of its revenues from
           nongovernmental sources, such as commercial insurance companies,
           health maintenance organizations and other charge-based contracted
           payment sources. Both government and non government payors have
           undertaken cost-containment measures designed to limit payments to
           healthcare providers. There can be no assurance that payments under
           governmental and nongovernmental payor programs will be sufficient to
           cover the costs allocable to patients eligible for reimbursement,
           especially with the implementation of PPS and fee screens with
           respect to therapy services. The Company cannot predict whether or
           what proposals or cost-containment measures will be adopted in the
           future or, if adopted and implemented, what effect, if any, such
           proposals might have on the operations of the Company.

                                       36
<PAGE>

    (v)    The Company is subject to extensive federal, state and local
           regulations governing licensure, conduct of operations at existing
           facilities, construction of new facilities, purchase or lease of
           existing facilities, addition of new services, certain capital
           expenditures, cost-containment and reimbursement for services
           rendered. The failure to obtain or renew required regulatory
           approvals or licenses, the failure to comply with applicable
           regulatory requirements, the delicensing of facilities owned, leased
           or operated by the Company or the disqualification of the Company
           from participation in certain federal and state reimbursement
           programs, or the imposition of harsh enforcement sanctions could have
           a material adverse effect upon the operations of the Company.

    (vi)   There can be no assurance that the Company will be able to divest
           certain of its operations in order to fund working capital
           requirements and repay its long term debt.

    (vii)  With respect to the year 2000 disclosure contained in Management's
           Discussion and Analysis of Financial Position and Results of
           Operations-Year 2000, management is unable to predict the extent to
           which its third-party payors will be affected by the Year 2000 Issue
           or the extent to which it will be able to remedy issues associated
           with embedded chips in critical medical devices located in the
           Company's facilities, which may malfunction as a result of the Year
           2000 Issue.

    (viii) There can be no assurance that an adverse determination in a legal
           proceeding or governmental investigation, whether currently asserted
           or arising in the future, will not have a material adverse effect on
           the Company.

                                       37
<PAGE>

Item 3.     Quantitative and Qualitative Disclosure About Market Risk

     The Company periodically enters into interest rate swap agreements (the
"Swap Agreements") to manage its interest rate risk. The Swap Agreements
effectively convert a portion of the Company's floating interest rate debt to
fixed interest rate debt. Notional amounts of interest rate agreements are used
to measure interest to be paid or received relating to such agreements and do
not represent an amount of exposure to credit loss. As of June 30, 1999, the
Company had Swap Agreements in effect totaling $60.0 million notional amount.
On August 13, 1999 two Swap Agreements totalling $40.0 million notional amount
were terminated at a loss to the Company of $100,000.

     Additionally, in September 1998 the Company entered into a total return
swap agreement relating to approximately $40.7 million face amount of Mariner
Notes, subsequently amended to $46.5 million face amount of Mariner Notes (the
"Total Return Swap Agreement").  The Total Return Swap Agreement was
restructured subsequent to June 30, 1999 resulting in capital depreciation
payable by the Company of approximately $46.5 million, of which amount $20.0
million was satisfied from collateral previously provided by Mariner Health and
the balance of which has been incorporated into a promissory note.  See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Mariner Health Senior Subordinated
Notes."

                                       38
<PAGE>

PART II.    OTHER INFORMATION

Item 1.     Legal Proceedings

     As is typical in the healthcare industry, the Company is and will be
subject to claims that its services have resulted in resident injury or other
adverse effects, the risks of which will be greater for higher acuity residents
receiving services from the Company than for other long-term care residents. The
Company is, from time to time, subject to such negligence claims and other
litigation. In addition, resident, visitor and employee injuries will also
subject the Company to the risk of litigation. The Company has experienced an
increasing trend in the number and severity of litigation claims asserted
against the Company. Management believes that this trend is endemic to the long-
term care industry and is a result of the increasing number of large judgments
against long-term care providers in recent years resulting in an increased
awareness by plaintiff's lawyers of potentially large recoveries. The Company
also believes that there has been, and will continue to be, an increase in
governmental investigations of long-term care providers, particularly in the
area of Medicare/Medicaid false claims, as well as an increase in enforcement
actions resulting from the investigations. While the Company believes that it
provides quality care to the patients in its facilities and materially complies
with all applicable regulatory requirements, an adverse determination in a legal
proceeding or governmental investigation, whether currently asserted or arising
in the future, could have a material adverse effect on the Company.

     From time to time, the Company and its subsidiaries have been parties to
various legal proceedings in the ordinary course of their respective businesses.
In the opinion of management, except as described below, there have been no
material developments in the litigation matters set forth in the Company's
Annual Report on Form 10-K for the year ended September 30, 1998 and, except as
described therein and herein, there are currently no proceedings which,
individually or in the aggregate, if determined adversely to the Company and
after taking into account the insurance coverage maintained by the Company,
would have a material adverse effect on the Company's financial position or
results of operations.

                                       39
<PAGE>

Item 2.   Changes in Securities and Use of Proceeds

          None.

Item 3.   Defaults Upon Certain Securities

          None.

Item 4.   Submission of Matters to a Vote of Security Holders

          None.

Item 5.   Other Information

     On May 3, 1999, the Company received a letter from the New York Stock
Exchange, Inc. (the "NYSE") notifying the Company that it was not in compliance
with certain of the NYSE's continued listing requirements and alerting the
Company that delisting proceedings would be imposed unless the Company submitted
a plan setting forth how the Company would bring itself into compliance.  The
Company responded to the NYSE's letter and submitted a plan to the NYSE
detailing how the Company would be brought into compliance with the NYSE's
listing requirements.  The plan was approved, subject to quarterly monitoring of
compliance by the NYSE.  The Company received a subsequent letter from the NYSE
dated August 5, 1999 stating that the Securities and Exchange Commission had
approved new listing criteria for the NYSE with which the Company was in
compliance and that quarterly monitoring of compliance would no longer be
required.  The Company may receive a notice in the future that it is not in
compliance with one of the NYSE's newly adopted listing requirements, which
requires a company to have a minimum share price of one dollar over a 30 trading
day period.  If the Company receives such a notice, the Company will have six
months in which to improve its stock price or it will be automatically delisted
from the NYSE.

                                       40
<PAGE>

Item 6.   Exhibits and Reports on Form 8-K

     (a)  Exhibits

          10.1    Letter agreement between Mariner Health and Empire Medical
                  Services dated July 20, 1999 regarding Medicare extended
                  repayment plan.

          27      Financial Data Schedule

     (b)  Reports on Form 8-K

          None

                                       41
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

                                MARINER POST-ACUTE NETWORK, INC.
                                (Registrant)


                                By:  /s/ George D. Morgan
                                    -----------------------
                                    George D. Morgan
                                    Executive Vice President and Chief Financial
                                    Officer


                                By:  /s/ Ronald W. Fleming
                                    ------------------------
                                    Ronald W. Fleming
                                    Vice President, Controller and Chief
                                    Accounting Officer


Date: August 16, 1999

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