<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 DECEMBER 31, 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      No  X
                                               ---     ---
     There were 73,695,081 shares of Common Stock of the registrant issued and
outstanding as of February 22, 2000.

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  Yes    No    N/A X (Due to the
                          ---   ---    ---
<PAGE>

recent nature of the filings made by the registrant and its subsidiaries under
Chapter 11 of the Bankruptcy Code, no plan of reorganization has been confirmed
by a bankruptcy court.)
<PAGE>

               Mariner Post-Acute Network, Inc. and Subsidiaries

                                   FORM 10-Q


                               December 31, 1999


                               TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

Part I - FINANCIAL INFORMATION

 Item 1. Condensed Consolidated Financial Statements and Notes                1

 Item 2. Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                 23

 Item 3. Quantitative and Qualitative Disclosure About Market
         Risk                                                                46

Part II - OTHER  INFORMATION

 Item 1. Legal Proceedings                                                   47

 Item 2. Changes in Securities and Use of Proceeds                           47

 Item 3. Defaults Upon Certain Securities                                    47

 Item 4. Submission of Matters to a Vote of Security Holders                 47

 Item 5. Other Information                                                   48

 Item 6. Exhibits and Reports on Form 8-K                                    48

 SIGNATURE PAGE                                                              49

<PAGE>

PART 1   FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

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

                                                        Three months
                                                     Ended December 31,
                                                     ------------------
                                                      1999        1998
                                                      ----        ----
Net Revenues
 Nursing home revenue:
  Net patient services...........................   $462,270    $498,664
  Other..........................................      5,679       7,860
 Non-nursing home revenue:
  Pharmacy services..............................     65,843      77,736
  Therapy services...............................         --      76,180
  Home health, hospital services, and other......      3,414      12,240
                                                    --------    --------
                                                     537,206     672,680
Costs and Expenses:
 Salaries and wages..............................    257,740     276,672
 Employee benefits...............................     49,435      48,102
 Nursing, dietary and other supplies.............     33,421      33,352
 Ancillary services..............................     64,646     127,520
 General and administrative......................     60,611      65,141
 Insurance expense...............................     26,236      19,426
 Rent............................................     22,689      26,996
 Depreciation and amortization...................     10,830      30,584
 Provision for bad debts.........................      8,400      36,484
 Indirect merger and other expenses..............      7,995       2,015
 Loss on disposal of assets......................        923          --
                                                    --------    --------
                                                     542,926     666,292
                                                    --------    --------
 Income (loss) from operations...................     (5,720)      6,388
                                                    --------    --------
Other Income and Expense:
 Interest expense................................     57,243      46,729
 Interest and dividend income....................     (4,132)     (2,443)
                                                    --------    --------
                                                      53,111      44,286
                                                    --------    --------
 Loss before income taxes and minority interest..    (58,831)    (37,898)
Provision for Income Taxes.......................         --         500
                                                    --------    --------
 Loss before minority interest...................    (58,831)    (38,398)
Minority Interest................................        790        (625)
                                                    --------    --------
 Net loss........................................   $(58,041)   $(39,023)
                                                    ========    ========
Loss Per Share:
 Basic and Diluted...............................     $(0.79)     $(0.53)
                                                    ========    ========
Weighted Average Common Shares Outstanding:
 Basic and Diluted...............................     73,695      73,277
                                                    ========    ========

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

                                       1
<PAGE>

               MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                 (dollars in thousands, except share amounts)
                                  (unaudited)
<TABLE>
<CAPTION>

                                                                             December 31,   September 30,
                                                                                 1999            1999
                                                                             ------------   -------------
<S>                                                                          <C>            <C>
                                        ASSETS
Current Assets:
       Cash and cash equivalents..........................................    $    76,975     $    71,817
       Receivables (less allowances of $91,307 and $87,066)...............        312,727         307,571
       Notes receivable, net..............................................          3,229           3,259
       Supplies...........................................................         22,974          22,866
       Income tax refund receivable.......................................          1,943           1,943
       Prepaid expenses and other current assets..........................         37,409          34,200
                                                                              -----------     -----------
Total current assets......................................................        455,257         441,656
Property and Equipment:
       Land, buildings and improvements...................................        544,336         532,589
       Furniture, fixtures and equipment..................................        192,547         196,875
       Leased property under capital leases...............................         63,833          63,797
                                                                              -----------     -----------
                                                                                  800,716         793,261
       Less accumulated depreciation......................................        340,214         333,708
                                                                              -----------     -----------
                                                                                  460,502         459,553
Goodwill, net.............................................................        243,160         247,353
Restricted Investments....................................................         52,379          69,188
Notes Receivable, net.....................................................         16,667          16,792
Other Assets..............................................................         38,283          40,429
                                                                             ------------     -----------
                                                                             $  1,266,248     $ 1,274,971
                                                                             ============     ===========
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
       Notes payable and current maturities of long-term debt.............    $ 2,043,931     $ 2,028,226
       Accounts payable...................................................        133,513         134,829
       Accrued payroll and related expenses...............................        127,474         111,395
       Accrued interest...................................................         80,748          49,317
       Other accrued expenses.............................................         68,117          63,804
                                                                              -----------     -----------
         Total current liabilities........................................      2,453,783       2,387,571
Long-Term Debt, net of current maturities.................................        111,149         113,618
Long-Term Insurance Reserves..............................................         73,337          80,899
Deferred Income Taxes and Other Noncurrent Liabilities....................         72,235          78,902
Commitments and Contingencies
Stockholders' Equity (Deficit):
       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             737
       Capital surplus....................................................        980,952         980,952
       Accumulated deficit................................................     (2,419,434)     (2,361,393)
       Accumulated other comprehensive loss...............................         (6,511)         (6,315)
                                                                              -----------     -----------
         Total stockholders' deficit......................................     (1,444,256)     (1,386,019)
                                                                              -----------     -----------
                                                                              $ 1,266,248     $ 1,274,971
                                                                              ===========     ===========
</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' EQUITY (DEFICIT)
                       (dollars and shares in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                             Accumulated
                                                                                               Other
                                                Common Stock       Capital    Accumulated   Comprehensive
                                              Shares    Amount     Surplus      Deficit         Loss          Total
                                             -------    ------     -------      -------     -------------     -----
<S>                                          <C>       <C>        <C>         <C>            <C>           <C>

Balance, September 30, 1999................   73,695   $    737    $980,952   $(2,361,393)     $(6,315)    $(1,386,019)
Comprehensive loss:
  Net loss.................................       --         --          --       (58,041)          --         (58,041)
  Unrealized losses on available-for-sale
     securities............................       --         --          --            --         (196)           (196)
                                                                                                           -----------
Comprehensive loss.........................       --         --          --            --           --         (58,237)
                                              ------   --------    --------   -----------      -------     -----------
Balance, December 31, 1999.................   73,695   $    737    $980,952   $(2,419,434)     $(6,511)    $(1,444,256)
                                              ======   ========    ========   ===========      =======     ===========
</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
                            (dollars in thousands)
                                  (unaudited)
                                                             Three Months
                                                          Ended December 31,
                                                          ------------------
                                                            1999       1998
                                                            ----       ----
Cash Flows From Operating Activities:
  Net loss..............................................  $(58,041)  $(39,023)
  Adjustments to reconcile net loss to net cash used in
   operating activities:
    Depreciation and amortization.......................    10,830     30,584
    Interest accretion on Senior Notes..................     5,593      4,981
    Income taxes deferred...............................        --        500
    Equity earnings/minority interest...................      (790)       625
    Provision for bad debts.............................     8,400     36,484
    Loss on disposal of assets..........................       923         --
  Changes in noncash working capital:
    Receivables.........................................   (13,556)   (36,348)
    Supplies............................................      (108)    (3,557)
    Prepayments and other current assets................    (3,209)    23,751
    Accounts payable....................................    (1,316)    (5,458)
    Accrued expenses and other current liabilities......    57,036    (27,825)
  Changes in long-term insurance reserves...............    (7,562)    (9,707)
  Other.................................................    (5,398)   (12,840)
                                                          --------   --------
Net Cash Used In Operating Activities...................    (7,198)   (37,833)

Cash Flows From Investing Activities:
  Purchases of property and equipment...................   (11,910)   (15,921)
  Disposals of property, equipment and other assets.....     5,068         --
  Restricted investments................................    16,613      8,484
  Net collections on notes receivable...................       155      4,063
  Other.................................................        --     (7,367)
                                                          --------   --------
Net Cash Provided By (Used In) Investing Activities.....     9,926    (10,741)

Cash Flows From Financing Activities:
  Net draws under credit line...........................    12,702     67,000
  Repayment of long-term debt...........................   (10,272)    (8,689)
  Deferred financing fees...............................        --     (7,313)
  Other.................................................        --       (435)
                                                          --------   --------
Net Cash Provided By Financing Activities...............     2,430     50,563
                                                          --------   --------
Increase in Cash and Cash Equivalents...................     5,158      1,989
Cash and Cash Equivalents, Beginning of Period..........    71,817      3,314
                                                          --------   --------
Cash and Cash Equivalents, End of Period................  $ 76,975   $  5,303
                                                          ========   ========
   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"). 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. The Company 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. 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"). 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 unaudited condensed 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 have
been prepared assuming that the Company will continue as a going concern. The
Company has experienced significant losses, has a working capital deficiency of
approximately $2.0 billion, and has a capital deficit of approximately $1.4
billion at December 31, 1999. In addition, the Company has violated certain
covenants of various loan agreements. On January 18, 2000, the Company, Mariner
Health and certain of their respective subsidiaries filed separate voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (referred to
herein as the "Chapter 11 Filings"). See Note 2.

     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 months ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended September 30,
2000. These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended September
30, 1999 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 2000 presentation.

                                       5
<PAGE>

 Goodwill, net

     Goodwill represents the excess of purchase price over fair market value of
assets acquired in various purchase transactions and is amortized on a straight-
line basis. The Company periodically reviews the goodwill and it is adjusted if
necessary. During the three months ended December 31, 1999, the Company revised
its estimate of the useful life of existing goodwill from 30 and 40 to 20 years.
The net effect of such change was a charge of $1.3 million or $0.02 per share,
which is included in the income statement classification "Depreciation and
Amortization Expense."

 Recent Accounting Pronouncements

     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.
The Company adopted SOP 98-1 effective October 1, 1999. The adoption of SOP 98-1
did not affect results of operations or financial position.

     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. The Company adopted SOP 98-5
effective October 1, 1999. The adoption of SOP 98-5 did not effect results of
operations or financial position.

     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 issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133" ("SFAS 137").
SFAS 137 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.

NOTE 2.  Going Concern and Issues Effecting Liquidity

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant losses, has a working capital deficiency of
approximately $2.0 billion, and has a capital deficit of approximately $1.4
billion at December 31, 1999. In addition, as more fully described below, the
Company has violated certain covenants of various loan agreements. On January
18, 2000, the Company, Mariner Health and certain of their respective
subsidiaries filed separate voluntary petitions for relief under Chapter 11 of
the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in the District of
Delaware. These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management is in the process
of developing a plan of reorganization that will be submitted to the U.S.
Bankruptcy Court, the Company's and Mariner Health's creditors for their
approval. In the event the plan of reorganization is accepted, continuation of
the business thereafter is dependent on the Company's ability to achieve
successful future operations.

     Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility (see Note 4)
and the Mariner Health Term Loan Facility (see Note 4) as of March 31, 1999,
June 30, 1999, September 30, 1999 and December 31, 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

                                       6
<PAGE>

Term Loan Facility was January 3, 2000, and therefore such debt is classified as
a current obligation of the Company at September 30, 1999 and December 31, 1999.
Mariner Health did not make the interest payments due on the Mariner Health
Senior Credit Facility and the Mariner Health Term Loan Facility (see Note 4).
Mariner Health did not make the interest payment due October 1, 1999 on the
Mariner Notes (see Note 4).

     The Company obtained a waiver under the Senior Credit Facility (see Note 4)
with respect to certain financial covenant defaults existing at March 31, 1999.
However, at June 30, 1999, September 30, 1999 and December 31, 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 did not make the
scheduled interest and principal payments due on or subsequent to November 19,
1999 on its Senior Credit Facility (see Note 4). Due to the covenant violations,
the Company is not permitted to borrow additional cash under the Senior Credit
Facility. The Company did not make the interest payment due November 1, 1999 on
the Senior Subordinated Note (see Note 4).

     The Company has also defaulted on certain covenants relating to the
Deficiency Note, Omega Note and various agreements with HRPT (see Note 4).

     Except as may be otherwise determined by the Bankruptcy Court overseeing
the Chapter 11 Filings, the automatic stay protection afforded by the Chapter 11
Filings prevents any creditors or other third parties from taking any action in
connection with any defaults under prepetition obligations of the Company and
those of its subsidiaries which are debtors in the Chapter 11 Filings. In
connection with the Chapter 11 Filings, the Company must develop a plan of
reorganization that will be approved by its creditors, including those described
above and confirmed by the Bankruptcy Court overseeing the Company's Chapter 11
Filings.

     In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession ("DIP") financing (the
"Company DIP Financing") from a group of banks led by The Chase Manhattan Bank.
On January 28, 2000 the Bankruptcy Court approved an interim order (the "Company
Interim DIP Order") approving up to $50.0 million of the Company DIP Financing.
Another hearing was scheduled on February 16, 2000 for consideration of a final
order (the "Final Company DIP Order,") approving the full $100.0 million amount
of the Company DIP Financing. The final hearing was adjourned until March 20,
2000, to allow additional time for the Company and certain of its creditors to
resolve technical issues relating to the Company DIP Financing. Also as of
February 16, 2000, the Company had made no borrowings under the Company DIP
Credit Agreement. Mariner Health also obtained a commitment for $50 million in
DIP financing from a group of banks led by PNC Bank (the "Mariner Health DIP
Financing"; together with the Company DIP Financing, the "DIP Financings").
After a final hearing on February 16, 2000 the Bankruptcy Court entered an order
granting final approval of the full $50.0 million of the Mariner Health DIP
Financing (the "February 16 Mariner Health DIP Order", and together with the
Mariner Health Initial DIP Order, the Mariner Health DIP Orders").

     The accompanying unaudited condensed consolidated financial statements have
been prepared on the basis of accounting principles applicable to going concerns
and contemplate the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The financial statements do not
include adjustments, if any, to reflect the possible future effects on the
recoverability and classification of recorded assets or the amounts and
classifications of liabilities that may result from the outcome of these
uncertainties. In addition, since the Company filed for protection under the
Bankruptcy Code subsequent to December 31, 1999, the accompanying condensed
consolidated financial statements have not been prepared in accordance with SOP
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code," ("SOP 90-7") and do not include disclosures of liabilities subject to
compromise. Financial statements prepared subsequent to the filings under
Chapter 11 will be prepared reflecting such amounts subject to compromise.

                                       7
<PAGE>

NOTE 3.  Indirect Merger and Other Expenses

     For the three months ended December 31, 1999, indirect merger and other
costs total approximately $8.0 million and include approximately $5.5 million of
costs incurred to outside professionals related to the Company's defaults in
connection with its indebtedness, approximately $1.8 million of costs incurred
and paid related to the Mariner Health Merger and $0.7 million of other
expenses.

     For the three months ended December 31, 1998, indirect merger and other
costs total approximately $2.0 million related to the Mariner Health Merger.

NOTE 4.  Debt

     Long-term debt at December 31, 1999 is summarized in the following table
(in thousands):

<TABLE>
<S>                                                      <C>
Senior Debt:
 Senior Credit Facilities:
  Revolving Credit Facility.............................  $  168,732
  Term Loans............................................     743,000
  Mariner Health Senior Credit Facility.................     233,813
  Mariner Health Term Loan Facility.....................     192,439
 Deficiency Note........................................      26,486
 Mortgage notes (6% to 11% due through 2014)............      47,778
 Other notes payable (8% to 10% due through 2008).......      82,469

Subordinated Debt:
 Senior Subordinated Notes (due 2007)...................     274,039
 Senior Subordinated Discount Notes (due 2007)..........     215,285
 Mariner Health Senior Subordinated Notes (due 2006)....     103,130
                                                          ----------
                                                           2,087,171
Obligations under capital leases........................      67,909
                                                          ----------
                                                           2,155,080
Less short-term notes payable and current portion.......   2,043,931
                                                          ----------
Total long-term debt....................................  $  111,149
                                                          ==========
</TABLE>

Senior Credit Facility

     The Senior Credit Facility consists of four components: a 6 1/2 year term
loan facility in an aggregate principal amount of $315 million (the "Tranche A
Term Loan Facility"); a 7 1/2 year term loan facility in an aggregate principal
amount of $250 million (the "Tranche B Term Loan Facility"); an 8 1/2 year term
loan facility in an aggregate principal amount of $250 million (the "Tranche C
Term Loan Facility"); and a 6 1/2 year revolving credit facility in the maximum
amount of $175 million (the "Revolving Credit 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 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.

     As of December 31, 1999, outstanding indebtedness under the Revolving
Credit Facility was $168.7 million which excluded $5.5 million of letters of
credit. In addition, $271.4 million of the Tranche A Term Loan Facility, $235.8
million of the Tranche B Term Loan Facility, and $235.8 million of the Tranche C
Term Loan Facility were outstanding.

                                       8
<PAGE>

     The aggregate principal amounts of the Tranche A Term Loans and the
Revolving Credit Facility reflect increases to those facilities of $75.0 million
and $25.0 million, respectively, as part of the First Amendment to the Senior
Credit Facility effective on July 31, 1998 (the "July 1998 Amendments"), in
connection with the consummation of the Mariner Merger. As a result of 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. Principal
amounts outstanding under the Revolving Credit Facility will be due and payable
in April 2005.

     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 1998 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 December
1998 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 1998 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 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.

     In connection with the May 11, 1999 amendment (the "May 1999 Amendment") to
the Senior Credit Facility, 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 ranged
from 0.75% to 1.75% for ABR loans and 2.25% to 3.25% for Eurodollar based loans.
The applicable interest rate margin for Tranche B Term Loans was 2.75% for loans
under the ABR and 3.75% for Eurodollar loans. The applicable interest rate
margin for Tranche C Term Loans was 3.00% for loans under the ABR and 4.00% for
Eurodollar loans.

     As a result of certain continuing defaults, all loans made under the Senior
Credit Facility converted to ABR based loans during the three month period
ending December 31, 1999.  Additionally, as of December 31, 1999, the interest
rates for loans made under the Senior Credit Facility were as follows: for
Revolving Loans and Tranche A Term Loans, 10.25%; for Tranche B Term Loans,
11.25%; and for Tranche C Term Loans, 11.75%.

     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 December 31, 1999, the Company was in
violation of all financial covenants. In addition, in order to conserve its
liquidity, the Company did not make the November 1999 interest payments due on
the Senior Credit Facility.  The lenders under the Senior Credit Facility signed
a forbearance agreement, pursuant to which they agreed not to take any remedial
action with respect to events of default (including acceleration of their debt),

                                       9
<PAGE>

subject to no new events of default occurring.  The forbearance agreement did
not waive any events of default, and it expired by its terms.  Based on the
financial covenant defaults and Chapter 11 Filings described in Note 2 the
Senior Credit Facility is classified as a current obligation at December 31,
1999.  Due to the covenant violations, the Company is not permitted to borrow
additional cash under the Senior Credit Facility.

Senior Subordinated Notes

     Also 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, 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 were to be cash pay at a rate of
10.5% per annum thereafter. The Notes will mature on November 1, 2007. The
Company did not make the scheduled interest payment of approximately $13.2
million due on the Senior Subordinated Notes in November 1999 and such default
was not cured within the applicable grace period. Due to the defaults and the
Chapter 11 Filings described in Note 2, the Senior Subordinated Notes and Senior
Subordinated Discount Notes are classified as current obligations at December
31, 1999.

Mariner Health Senior Credit Facility and Mariner Health Term Loan Facility

     Mariner Health was the borrower under a $460.0 million senior secured
revolving loan 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, as agent for the Mariner Health
Lenders (the "Mariner Health Agent"). The borrowing availability and rate of
interest varied depending upon specified financial ratios, with applicable
interest rate margins ranging between 0% and 0.25% for prime-base borrowings,
and between 0.50% and 1.75% for Eurodollar-based advances. As a result of
certain continuing defaults, all loans made under the Mariner Health Senior
Credit Facility have converted to ABR based loans from Eurodollar based loans
and accrue interest at the default rate of interest. As of December 31, 1999,
the interest rate for loans made under the Mariner Health Senior Credit Facility
was 11.75%.

     Effective December 23, 1998, Mariner Health amended the Mariner Health
Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment")
to (a) reduce the amount of the revolving commitment from $460 million to $250
million, (b) to provide additional financial covenant flexibility for Mariner
Health and its subsidiaries, (c) to increase the applicable interest rate
margins so that they range from 0.25% to 1.25% for prime-based loans, and from
1.75% to 2.75% for Eurodollar-based advances, (d) to modify certain of the
operating covenants referred to in the immediately preceding paragraph, and (e)
to expand the amount and types of collateral pledged to secure the Mariner
Health Senior Credit Facility. Immediately after giving effect to the Mariner
Health Senior Credit Facility Amendment, the applicable interest rate margin for
prime-based advances increased to 0.75%, and the applicable interest rate margin
for Eurodollar-based borrowings increased to 2.25%. Accordingly, the applicable
interest rates on prime-based loans were initially 7.8%, and for Eurodollar-
based advances, 7.6%. The Mariner Health Senior Credit Facility terminated on
January 3, 2000, without the scheduled maturity payment being made.

     Mariner Health's obligations under the Mariner Health Senior Credit
Facility are guaranteed by substantially all of its subsidiaries. The Mariner
Health Senior Credit Facility and related guarantees are secured by pledges of
the stock of substantially all of Mariner Health's direct and indirect
subsidiary guarantors, by mortgages on all wholly owned, unencumbered inpatient
facilities of Mariner Health and its subsidiaries, by leasehold mortgages on
certain inpatient facilities leased by Mariner Health or its subsidiaries, and
by security interests in substantially all other property and assets of Mariner
Health and its subsidiaries. As the owner of 100% of the capital stock of
Mariner Health, the Company has pledged such capital stock to Chase as
additional

                                       10
<PAGE>

collateral to secure the Company's obligations in connection with the Senior
Credit Facility and the Synthetic Lease.

     Contemporaneously with the effectiveness of the Mariner Health Senior
Credit Facility Amendment, Mariner Health entered into a term loan agreement
dated as of the same date (the "Mariner Term Loan Agreement") 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 million senior secured term loan
to Mariner Health (the "Mariner Health Term Loan"). Proceeds of the Mariner
Health Term Loan were applied to reduce loan 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 matured 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. As of December 31, 1999, approximately $233.8 million of loans and
$8.1 million of letters of credit were outstanding under the Mariner Health
Senior Credit Facility, and $192.4 million of the Mariner Health Term Loan was
outstanding. The Mariner Health Senior Credit Facility matured on January 3,
2000.

     Mariner Health and its subsidiaries are treated as unrestricted
subsidiaries under the Senior Credit Facility. Unlike subsidiaries of the
Company other than Mariner Health and its subsidiaries (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. Mariner Health and its subsidiaries are not subject to
the covenants contained in the Senior Credit Facility, and the covenants
contained in the Mariner Senior Credit 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 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 Health 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.

     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 again as of June 30,
1999, September 30, 1999 and December 31, 1999. In addition, Mariner Health
failed to make its October 1, 1999 interest payments due on the Mariner Health
Senior Credit Facility and on the Mariner Health Term Loan Facility within the
applicable grace period, although it was ultimately able to satisfy such
obligations through amendments to those credit facilities which permitted cash
collateral held by the Collateral Agent to be applied for such purpose. Finally,
Mariner Health did not make the required payments with regard to the Mariner
Health Term Loan and Mariner Health Senior Credit Facility at their respective
January 3, 2000 maturity dates.

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, the agents under such facilities gave notice to Mariner Health and the
Mariner Trustee that they were instituting a 179-day payment blockage period,
during which no payments of debt service on the Mariner Notes could be made.
Accordingly, Mariner Health did not make the scheduled $7.1 million interest
payment due on the Mariner Notes on October 1, 1999.

                                       11
<PAGE>

The 30-day grace period having expired without such interest being paid, an
event of default exists under the Mariner Indenture. The Mariner Health Senior
Subordinated Notes are classified as current obligations at December 31, 1999.
Approximately $46.7 million of the Mariner Notes are owned by the Company. See
"-Deficiency Note" below.

Deficiency Note

     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." The Company's obligations under
the Total Return Swap were 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 Total Return Swap terminated by its terms on August 16, 1999. 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 $0.7 million, resulting in capital depreciation of approximately
$46.5 million being owed by the Company. The Company 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 incorporated the
Net Total Return Swap Deficiency into a promissory note (the "Deficiency Note")
which generally matures and is payable as to 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 remains in place. Bank of America also waived any default arising
from any failure to be paid the Net Deficiency on the termination date of the
Total Return Swap, in return for the lenders under the Senior Credit Facility
amending the Senior Credit Facility to acknowledge 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
$46.7 of Mariner Notes acquired by Mariner Post-Acute Network, Inc. in
connection with the unwinding of the Total Return Swap remain outstanding as an
obligation of Mariner Health.

     The Company did not make the scheduled November 1999 interest payments due
under the Deficiency Note. The terms of the Deficiency Note provide that the
forbearance by the lenders under the Senior Credit Facility with respect to the
failure to pay interest and certain other defaults under the Senior Credit
Facility automatically bind the holder of the Deficiency Note as well. The
forbearance period expired on January 14, 2000. The Deficiency Note is
classified as a current obligation at December 31, 1999.

                                       12
<PAGE>

Other Significant Indebtedness

     The Company and its GranCare, Inc. subsidiary are parties to an agreement
with 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 a loan agreement dated as of June 7,
1992 as amended (the "Omega Loan Agreement"). All $58.8 million was outstanding
as of December 31, 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. 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.

     Beginning October 1, 2002, quarterly amortizing installments of principal
in the amount of $1.5 million will also become due and payable on the first day
of each calendar quarter. The entire outstanding principal amount of the Omega
Note is due and payable on August 13, 2007. The Omega Note may be prepaid
without penalty during the first 100 days following August 14, 2002.

     The Omega Loan Agreement obligates PHCMI, among other things, to maintain a
minimum tangible net worth of at least $10 million, which may be increased or
decreased under certain circumstances but may not be less than $10 million. The
Company's subsidiary GranCare, Inc. must contribute additional equity to PHCMI,
if and when necessary, to assure that such minimum tangible net worth test is
met. PHCMI and GranCare received notice from Omega asserting that PHCMI was in
default of its obligation to maintain its required minimum tangible net worth.
Omega demanded that such default be cured within 30 days, either by PHCMI or by
GranCare under its guaranty of PHCMI's compliance with such minimum tangible net
worth test, or else an event of default would exist under the Omega loan
documents. The Company received notice in late December 1999, declaring an event
of default as a result of the alleged breach of the tangible net worth covenants
contained in the Omega Loan Documents and accelerating all amounts due under
obligations to Omega. Effective January 2000, PHCMI ceased making its monthly
interest payments on the Omega Note. Omega subsequently initiated foreclosure
proceedings on three skilled nursing facilities located in North Carolina.
Hearings on the foreclosures were scheduled for February 3, 2000, but were not
held as a result of the automatic stay resulting from the Chapter 11 Filings. At
December 31, 1999, the Omega Note is classified as a current obligation.

     The Company, through 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"). HRPT has 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. The Company does not have the ability to sell these shares to
meet any capital requirements. During the Fall of 1999, HRPT spun off its health
care portfolio,

                                       13
<PAGE>

including the facilities operated by the Tenant Entities, into a new publicly-
traded company, SPTMNR Properties Trust ("SPTMNR"), which has succeeded to the
interests of HRPT under the HRPT Agreements. References to HRPT herein are
deemed to include SPTMNR in such capacity.

Debtor-in-Possession Financing for the Company.

     Among the orders entered by the Bankruptcy Court on the Petition Date in
the Company's Chapter 11 case were orders approving on an interim basis (a) the
use of cash collateral by the Company and those of its subsidiaries which had
filed petitions for reorganization under Chapter 11 of the Bankruptcy Code
(excluding Mariner Health and the direct and indirect subsidiaries of Mariner
Health, the "Company Debtors"), and (b) the funding of up to $25.0 million in
principal amount at any time outstanding under a debtor-in-possession financing
arrangement (the "Company DIP Financing") established pursuant to that certain
Revolving Credit and Guaranty Agreement dated as of January 18, 2000 (the
"Petition Date") (as amended from time to time, the "Company DIP Credit
Agreement") by and among the Company, as borrower, the other Company Debtors, as
guarantors, the lenders signatory thereto as lenders (the "Company DIP
Lenders"), and The Chase Manhattan Bank, as Administrative Agent, Documentation
Agent and Collateral Agent (the "Company DIP Agent"). On January 28, 2000 the
Bankruptcy Court approved an interim order (the "Company Interim DIP Order") to
increase the approved portion of the Company DIP Financing to $50.0 million.
Another hearing is scheduled on March 8, 2000 for consideration of a final order
(the "Final Company DIP Order,") approving the full $100.0 million amount of the
Company DIP Financing. The final hearing was adjourned until March 20, 2000, to
allow additional time for the Company and certain of its creditors to resolve
technical issues relating to the Company DIP Financing. As of February 16, 2000
the Company had made no borrowings under the Company DIP Credit Agreement.

     The Company DIP Credit Agreement establishes a one-year, $100.0 million
secured revolving credit facility to provide funds for working capital and other
lawful corporate purposes for use by the Company and the other Company Debtors;
provided, however, that amounts outstanding under the Company DIP Financing may
not at any time exceed the maximum borrowing amounts established for the Company
under the initial DIP order (the "Company Initial DIP Order"), the Company
Interim DIP Order or the Final DIP Order (collectively, the "Company DIP
Orders"), as the case may be, or the Company's borrowing base of eligible
accounts receivable (the "Company Borrowing Base"). Up to $10.0 million of the
Company DIP Financing may be utilized for the issuance of letters of credit as
needed in the businesses of the Company Debtors. Interest accrues on the
principal amount outstanding under the Company DIP Financing at a per annum rate
of interest equal to the ABR of Chase, plus three percent (3%) and is payable
monthly in arrears. During the existence and continuation of a default in the
payment of any amount due and payable by the Company Debtors under the Company
DIP Credit Agreement, interest will accrue at the default rate of ABR plus five
percent (5%) per annum.

     The outstanding principal of the Company DIP Financing, together with all
accrued and unpaid interest and all other obligations thereunder, are due and
payable one year from the Petition Date or, if earlier, on the Prepayment Date.
The term, "Prepayment Date," was originally defined as the first business day
which is at least 30 days after the entry of the Company First Day DIP Order, if
the Company Final DIP Order has not been entered, but was amended to March 22,
2000 to accommodate the adjournment of the hearing on the Final Company DIP
Order to March 20, 2000. The Company must also prepay principal to the extent
that the principal amount outstanding under the Company DIP Financing at any
time exceeds the Borrowing Base then in effect. To the extent proceeds of loans
under the Company DIP Financing are used to complete the construction of certain
healthcare facilities that are part of the Synthetic Lease (which proceeds are
not permitted to exceed $8.8 million), proceeds from the sale of any such
properties must be used first to repay any portion of the loans made pursuant to
the Company DIP, with 75% of any remaining net cash proceeds to be applied as an
adequate protection payment to the lenders under the Senior Credit Facility, and
the remaining 25% of such excess net cash proceeds to be retained by the Company
or its applicable subsidiary as additional working capital. Pursuant to the
terms of the Initial DIP Order, 75% of the net cash proceeds of other asset
sales approved by the Bankruptcy Court and the requisite Company DIP Lenders are
to be applied as an adequate protection payment to the lenders under the

                                       14
<PAGE>

prepetition Senior Credit Facility. The Company has the right to make optional
prepayments in increments of $1.0 million, and to reduce the commitment under
the Company DIP Credit Agreement in increments of $5.0 million.

     The obligations of the Company under the Company DIP Credit Agreement are
jointly and severally guaranteed by each of the other Company Debtors pursuant
to the Company DIP Agreement. Under the terms of the Initial Company DIP Order,
the obligations of the Company Debtors under the Company DIP Credit Agreement
(the "Company DIP Obligations") constitute allowed superpriority administrative
expense claims pursuant to Section 364(c)(1) of the Bankruptcy Code (subject to
a carve-out for certain professional fees and expenses incurred by the Company
Debtors). The Company DIP Obligations will be secured by perfected liens on all
or substantially all of the assets of the Company Debtors (excluding bankruptcy
causes of action), the priority of which liens (relative to prepetition
creditors having valid, non-avoidable, perfected liens in those assets and to
any "adequate protection" liens granted by the Bankruptcy Court) is established
in the Initial Company DIP Order and the related cash collateral order entered
by the Bankruptcy Court (the "Initial Company Cash Collateral Order"). The
Bankruptcy Court has also granted certain prepetition creditors of the Company
Debtors replacement liens and other rights as "adequate protection" against any
diminution of the value of their existing collateral that may result from
allowing the Company Debtors to use cash collateral in which such creditors had
valid, non-avoidable and perfected liens as of the Petition Date. The discussion
contained in this paragraph is qualified in its entirety by reference to the
Interim Company DIP Order, the Initial Company Cash Collateral Order, and
related stipulations, and reference should be made to such orders (which are
available from the Bankruptcy Court) and stipulations for a more complete
description of such terms.

     The Company DIP Credit Agreement contains customary representations,
warranties and covenants of the Company Debtors, as well as certain financial
covenants relating to minimum EBITDA, maximum capital expenditures, and minimum
patient census.  The breach of such representations, warranties or covenants, to
the extent not waived cured within any applicable grace or cure periods, could
result in the Company being unable to obtain further advances under the Company
DIP Financing and possibly the exercise of remedies by the Company DIP Lenders,
either of which events could materially impair the ability of the Company to
successfully reorganize in Chapter 11.

Debtor-in-Possession Financing for Mariner Health.

     Among the orders entered by the Bankruptcy Court on the Petition Date in
the Chapter 11 cases of Mariner Health and its subsidiaries (the "Mariner Health
Debtors"), were orders approving (a) the use of cash collateral by the Mariner
Health Debtors, and (b) the funding of up to $15.0 million in principal amount
at any time outstanding under a debtor-in-possession financing arrangement (the
"Mariner Health DIP Financing" and together with the Company DIP Financing, the
"DIP Financings") pursuant to that certain Debtor-in-Possession Credit Agreement
dated as of January 20, 2000 (as amended from time to time, the "Mariner Health
DIP Credit Agreement") by and among Mariner Health and each of the other Mariner
Health Debtors, as co-borrowers thereunder, the lenders signatory thereto as
lenders (the "Mariner Health DIP Lenders"), First Union National Bank, as
Syndication Agent, PNC Capital Markets, Inc. and First Union Securities, Inc.,
as co-arrangers, and PNC Bank, National Association, as Administrative Agent and
Collateral Agent. After a final hearing on February 16, 2000 the Bankruptcy
Court entered an order granting final approval of the full $50.0 million of the
Mariner Health DIP Financing (the "February 16 Mariner Health DIP Order," and
together with the Mariner Health Initial DIP Order, the "Mariner Health DIP
Orders").

     The Mariner Health DIP Credit Agreement establishes a one-year, $50.0
million secured revolving credit facility, which is divided into two tranches -
a $40.0 million tranche A commitment, and a $10.0 million tranche B commitment.
The tranche B loan commitment is not activated unless and until the holders of
at least 75% of the Mariner Health DIP Financing loans or commitments so
approve. Advances under the Mariner Health DIP Financing may be used by the
Mariner Health Debtors (and to a limited degree, by certain joint venture
subsidiaries of Mariner Health that are not debtors in the Mariner Health
Chapter 11 cases) for working capital and other lawful corporate purposes.
Amounts outstanding under the Mariner Health DIP Financing may not at any

                                       15
<PAGE>

time exceed the maximum borrowing amounts established for the Mariner Health
Debtors under the initial DIP order (the "Mariner Health Initial DIP Order") or
the DIP order entered on February 16, 2000 by the Bankruptcy Court (the
"February 16 Mariner Health DIP Order," and collectively with the Initial
Mariner Health DIP Order, the "Mariner Health DIP Orders"), as the case may be.
Up to $5.0 million of the Mariner Health DIP Financing may be utilized for the
issuance of letters of credit as needed in the businesses of the Mariner Health
Debtors. As of February 22, 2000 $1.0 million was outstanding under the
Mariner Health DIP Financing.

     Interest accrues on the principal amount outstanding under the Mariner
Health DIP Financing at a per annum rate of interest equal to the "base rate" of
PNC Bank (i.e., the higher of the PNC Bank prime rate or a rate equal to the
federal funds rate plus 50 basis points) plus the applicable spread, which is
250 basis points for tranche A and 300 basis points for tranche B. Such interest
is due and payable monthly in arrears. During the existence and continuation of
any event of default under the Mariner Health DIP Credit Agreement, the interest
rates normally applicable to tranche A loans and tranche B loans under the
Mariner Health DIP Financing will be increased by another 250 basis points per
annum.

     The outstanding principal of the Mariner Health DIP Financing, together
with all accrued and unpaid interest and all other obligations thereunder, are
due and payable in one year or, if earlier, on the Commitment Termination Date.
The term, "Commitment Termination Date," is defined as the first to occur of the
following: (i) the first anniversary of the Petition Date, (ii) the effective
date of a joint plan of reorganization for the Mariner Health Debtors, (iii) the
date of termination of the exclusivity rights of the Mariner Health Debtors to
file a plan of reorganization, (iv) the filing by the Mariner Health Debtors of
any plan of reorganization (or the modification of any such plan previously
filed with the Bankruptcy Court) not previously approved by the holders of at
least 66-2/3% of the outstanding loans or commitments under the Mariner Health
DIP Financing, (v) the date of termination of the commitments under the Mariner
Health DIP Credit Agreement during the continuation of an event of default
thereunder, (vi) 30 days after the Petition Date if the February 16 Mariner
Health DIP Order has not been entered (which deadline is subject to extension at
the discretion of the holders of at least 66-2/3% of the outstanding loans or
commitments under the Mariner Health DIP Financing), or (vii) the date on which
all or substantially all of the assets or stock of the Mariner Health Debtors is
sold or otherwise transferred. The Mariner Health Debtors must also prepay
principal to the extent that the principal amount outstanding under the Mariner
Health DIP Financing at any time exceeds the Borrowing Base then in effect. The
Mariner Health Borrowing Base for any month is an amount equal to $7.5 million
in excess of the "Working Capital Facility" borrowings projected for such month
in Mariner Health's year 2000 DIP budget. The Mariner Health DIP Credit
Agreement also provides for mandatory prepayments under the following
circumstances: (i) with net cash proceeds from asset sales, the incurrence of
certain debt, the issuance of new equity, the receipt of tax refunds exceeding
$100,000 in the aggregate, and the receipt of casualty proceeds in excess of
$100,000 that are not applied within 60 days after receipt to the repair,
rebuilding, restoration or replacement of the assets damaged or condemned (or
committed within such period of time to be so applied); and (ii) on each
business day, the amount of cash held by the Mariner Health Debtors in excess of
the sum of $5.0 million plus the aggregate sum of the minimum amount required by
depositary banks to be kept in deposit accounts, concentration accounts and
other with such banks. Amounts prepaid pursuant to clause (i) of the immediately
preceding sentence will permanently reduce the amount of the Mariner Health DIP
Financing commitments on a dollar-for-dollar basis (first tranche A, and then
tranche B). Amounts prepaid pursuant to clause (ii) of the same sentence will
not permanently reduce such commitments. The Mariner Health Debtors have the
right to make optional prepayments in the minimum principal amount of $1.0
million, and in increments of $100,000 in excess thereof, and, on three business
days' notice, to reduce the commitments under the Mariner Health DIP Credit
Agreement in the minimum amount of $5.0 million, or in increments of $1.0
million in excess thereof.

     Under the terms of the Mariner Health DIP Orders, the obligations of the
Mariner Health Debtors under the Mariner Health DIP Credit Agreement (together
with certain potential cash management system liabilities secured on a pari
passu basis therewith, the "Mariner Health DIP Obligations") constitute allowed
superpriority administrative expense claims pursuant to Section 364(c)(1) of the
Bankruptcy Code (subject to a carve-out for certain professional fees and
expenses incurred by the Mariner Debtors).  The Mariner Health DIP Obligations
will

                                       16
<PAGE>

be secured by perfected liens on all or substantially all of the assets of the
Mariner Health Debtors (excluding bankruptcy causes of action), the priority of
which liens (relative to prepetition creditors having valid, non-avoidable,
perfected liens in those assets and to any "adequate protection" liens granted
by the Bankruptcy Court) is established in the Initial Mariner Health DIP Orders
and the related cash collateral orders entered by the Bankruptcy Court. The
Bankruptcy Court has also granted certain prepetition creditors of the Mariner
Health Debtors replacement liens and other rights as "adequate protection"
against any diminution of the value of their existing collateral that may result
from allowing the Mariner Health Debtors to use cash collateral in which such
creditors had valid, non-avoidable and perfected liens as of the Petition Date.
The discussion contained in this paragraph is qualified in its entirety by
reference to the Mariner Health DIP Orders, the related Mariner Health Cash
Collateral Orders, and related stipulations, and reference should be made to
such orders (which are available from the Bankruptcy Court) and stipulations for
a more complete description of such terms.

     The Mariner Health DIP Credit Agreement contains customary representations,
warranties and covenants of the Mariner Health Debtors, as well as certain
financial covenants relating to minimum EBITDAR, minimum patient census, minimum
eligible accounts receivable, maximum variations from Mariner Health's year 2000
DIP budget and maximum capital expenditures. The breach of such representations,
warranties or covenants, to the extent not waived or cured within any applicable
grace or cure periods, could result in the Mariner Health Debtors being unable
to obtain further advances under the Mariner Health DIP Financing and the
possible exercise of remedies by the Mariner Health DIP Lenders, either of which
events could materially impair the ability of the Mariner Health Debtors to
successfully reorganize in Chapter 11.

     Among its other restrictive covenants, the Mariner Health DIP Credit
Agreement limits affiliate transactions with the Company Debtors, but does
contemplate weekly overhead payments to the Company equal to 1.25% of projected
net inpatient revenues for such month, subject to a monthly "true-up," such that
the payments for such month equal 5% of actual net inpatient revenues of the
Mariner Health Debtors. Such payments may be suspended by the Mariner Health
Debtors if certain defaults specified in the Mariner Health Credit Agreement
occur and are continuing, though such fees will still accrue and will become due
and payable if and when the subject default has been cured or waived.

     Except as may be otherwise determined by the bankruptcy court overseeing
the Chapter 11 Filings, the automatic stay protection afforded by the Chapter 11
Filings prevents any lenders or other third parties from taking any action in
connection with any defaults under prepetition obligations of the Company and
those of its subsidiaries which are debtors in the Chapter 11 Filings. In
connection with the Chapter 11 Filings, the Company must develop a plan of
reorganization that will be approved by its creditors, including those described
above and confirmed by the Bankruptcy Court overseeing the Company's Chapter 11
Filings.

     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. Two Swap Agreements with a
notional amount of $40.0 million were terminated in fiscal year 1999. The
Company's one remaining Swap Agreement with a notional amount of $20.0 million
was terminated effective October 27, 1999 at no cost to the Company.

NOTE 5.  Income Taxes

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

                                       17
<PAGE>

NOTE 6.  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''):

                                                         Three Months
                                                            Ended
                                                         December 31,
                                                      -----------------
                                                      1999         1998
                                                      ----         ----
Numerator for Basic and Diluted Loss Per Share:
 Net loss...........................................$(58,041)   $(39,023)
                                                    ========    ========
 Denominator:
   Denominator for basic loss per share-weighted
   Average shares..................................   73,695      73,277
   Effect of dilutive securities--Stock options....       --          --
                                                    ========    ========
   Denominator for diluted loss per share-adjusted
   Weighted-average shares and assumed conversions..  73,695      73,277
                                                    ========    ========
Basic and Diluted Loss Per Share:
   Net loss per common share........................ $ (0.79)  $   (0.53)
                                                    ========   =========

     The effect of dilutive securities for the three months ended December 31,
1999 and 1998, respectively, has been excluded because the effect is
antidilutive as a result of the net loss for the period.

NOTE 7.  Commitments and Contingencies

Litigation

     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. 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 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 these investigations. While the
Company believes that it provides quality care to the patients in its facilities
and materially complies with all applicable regulatory requirements, given the
Company's current financial difficulties and lack of liquidity, 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, 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. Although the Company believes that any of the proceedings

                                       18
<PAGE>

not discussed below will not individually have a material adverse impact on the
Company if determined adversely to the Company, given the Company's current
financial condition, lack of liquidity and change in the Company's GL/PL
insurance policy, settling a large number of cases within the Company's $1
million self-insured retention limit could have a material adverse effect on the
Company.

     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 Healthcare Center, Inc., case no. 96-CV-4449. On
March 15, 1998, the Court entered an Order in which it certified a class action
in the matter. On June 10, 1998, the Company filed a Motion to Dismiss all
claims and Motion for Summary Judgment Precluding Recovery of Medicaid Funds and
these motions were partially granted by the Court on October 30, 1998.
Plaintiffs' Motion for Reconsideration was denied by the Court on November 19,
1998, the Court's decision was certified as a final judgment on December 10,
1998, and plaintiffs then filed a writ with the Colorado Supreme Court and an
appeal with the Colorado Court of Appeal. This Supreme Court writ has been
denied, the Court of Appeal matter has been briefed and Oral Argument has been
set for January 18, 2000. In accordance with the Company's voluntary filing
under Chapter 11 of the United States Bankruptcy Code and more particularly,
(S) 362 of that Code, this matter was stayed on January 18, 2000. The Company
will continue in its opposition to all appeals and further intends to vigorously
contest the remaining allegations of class status.

     On March 18, 1998, a complaint was filed under seal by a former employee
against the Company, certain of its predecessor entities and affiliates in the
United States District Court for the Northern District of Alabama, alleging,
inter alia, employment discrimination, wrongful discharge, negligent hiring,
violation of the Federal False Claims Act, and retaliation under the False
Claims Act.  The action is titled Powell, et al. v. Paragon Health Inc., et al.,
civil action No. CV-98-0630-S. The complaint has been unsealed and the Company
has been advised that the government has declined to intervene in this matter
under the Federal False Claims Act.  The Company is vigorously contesting the
alleged claims.

     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
has heard a motion to dismiss the Civil False Claims Act and other claims
against International X-Ray. The Company is awaiting the Court's decision.

     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. All defendants submitted Motions to
Dismiss which were heard by the Court on September 15, 1999. The Court granted
Defendant, Donald C. Beaver's, Motion to Dismiss on December 6, 1999. Very
little discovery has been conducted and accordingly, this case is not in a
position to be evaluated in regard to the probability of a favorable outcome or
in regard to the range of potential loss. In accordance with the Company's
voluntary filing under

                                       19
<PAGE>

Chapter 11 of the United States Bankruptcy Code and more particularly, (S) 362
of that Code, this matter was stayed on January 18, 2000. The Company intends to
vigorously contest the request for class certification, as well as all alleged
claims made.

     On November 16, 1998, a complaint was filed under seal by a former employee
against the Company, certain of its predecessor entities and affiliates in the
United States District Court for the Southern District of Texas, alleging
violation of the Federal False Claims Act. The action is titled United States ex
rel. Nelius, et al., v. Mariner Health Group, Inc., et al., civil action No.
H-98-3851.  The complaint which was unsealed, has been recently amended to add
additional relators and allegations under the Federal False Claims Act.  The
Company has been advised that the government is evaluating its decision not to
intervene with regard to the amended complaint and relators. The Company will
vigorously contest the alleged claims. In addition, a three judge panel of the
United States Court of Appeals for the Fifth Circuit recently held that qui tam
lawsuits in which the government does not intervene are unconstitutional under
the Take Care Clause of Article II of the United States Constitution. The Court
declined to rule whether qui tam suits in which the government does intervene
are unconstitutional.  The full bench of the U.S. Court of Appeals for the Fifth
Circuit agreed November 15, 1999, to review this decision. Riley v. St. Luke's
Episcopal Hospital, No. 97-20948, rehearing en banc granted (5th Cir., 1999),
but has since stayed hearing pending the outcome of another matter which is
presently pending before the United States Supreme Court. The outcome of these
cases could favorably effect this action.  In response to the Notice of Stay
submitted under 11 U.S.C. (S) 362, the District Court, on January 26, 2000,
dismissed the plaintiffs' claims against defendants subject to reinstatement
within thirty (30) days after the stay is discontinued.  The Company intends to
vigorously contest the alleged claims herein.

     On approximately June 8, 1999, the OIG issued a subpoena duces tecum to
Mariner of Catonsville.  The subpoena requests medical records pertaining to
eighteen residents.  The subpoena also requests other broad categories of
documents. The Company has produced a substantial amount of documents responsive
to the Subpoena.  The Company is cooperating with the investigation and has
retained experienced counsel to assist in responding to the subpoena and to
advise the Company 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 27, 1999, the Company was served with a Complaint in United
States ex rel. Cindy Lee Anderson Rutledge and Partnership for Fraud Analysis
and State of Florida ex rel. Cindy Lee Anderson Rutledge Group, Inc., ARA Living
Centers, Inc. and Living Centers of America, Inc., No. 97-6801, filed in the
United States District Court for the Eastern District of Pennsylvania. This
action originally was filed under seal on November 5, 1997, by relators Cindy
Lee Anderson Rutledge and the Partnership for Fraud Analysis under the Federal
False Claims Act and the Florida False Claims Act. The Complaint alleges that
the Company is liable under the Federal False Claims Act and the Florida False
Claims Act for alleged violations of regulations pertaining to the training and
certification of nurse aides at former LCA facilities. After conducting an
investigation in which the Company cooperated by producing documents responsive
to an administrative subpoena and allowing certain employee interviews, the
United States Department of Justice elected not to intervene. The district court
unsealed the Complaint on October 15, 1999. On December 14, 1999, the Company
filed a motion to dismiss the relators' complaint. The Company intends
vigorously to defend this action.

     On November 10, 1999, suit was filed in the United States District Court
for the Western District of Tennessee against the Company and its subsidiary,
National Heritage Realty, Inc. ("National Heritage") by Mid-South Healthcare
Associates, L.L.C. ("Mid-South"), civil action No. 99-299-MIA. Mid-South in its
complaint seeks declaratory judgment and injunctive relief related to Mid-
South's contention that two leases, currently held by National Heritage, for
twelve nursing home facilities in Tennessee and Mississippi expire on January
31, 2000, and Mid-South's contention that the nursing home facilities have not
been maintained to the levels required by the leases. Mid-South also seeks
unspecified damages. On December 16, 1999, the Company and National Heritage
answered the complaint and counterclaims were asserted on behalf of National
Heritage seeking a declaratory judgment that it properly exercised certain
options to extend the leases for five year periods (through January 31, 2005),
seeking injunctive relief to prevent interference with its right of possession
and seeking damages for Mid-

                                       20

<PAGE>

South's breach of its duty of good faith and fair dealing. The dispute involves
the interpretation of language in certain lease amendments and whether or not
Mid-South, by failing to renew certain ground leases upon which three of the
twelve leased facilities are built, can unilaterally extinguish National
Heritage's options to extend the leases for an additional five year term.

     On January 13, 2000, the Company, National Heritage and Mid-South entered
into a Lease Amendment Agreement (the "Agreement") to settle and resolve all of
the claims pending in the subject litigation. The Agreement requires, inter
alia, all parties to release and dismiss their respective claims and
counterclaims. In addition, Mid-South will agree that the leases on the
Facilities have been extended through January 31, 2005 (with an option term
through January 31, 2010), will invest up to $3.0 million in capital
improvements to certain of the Facilities and will provide certain consulting
services in connection therewith. The Company will pay Mid-South a consulting
fee of $1.7 million per year and additional rent contingent on the level of
capital expenditures actually made by Mid-South. The Company will also make
certain capital improvements to the Facilities. The Company will file the
necessary motion with the Bankruptcy Court seeking approval to assume this
contract on a post-petition basis.

     On approximately January 20, 2000, the OIG issued subpoenas duces tecum to
Mariner Post-Acute Network, Inc. and Summit Medical Management (a subsidiary of
the Company). The subpoenas request documents relating to the purchase of Summit
Medical Management and other subsidiaries.  In addition, the subpoenas request
other broad categories of documents.  The Company is cooperating with the
investigation and has retained experienced counsel to assist in responding to
the subpoenas and advise the Company 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.

                                       21
<PAGE>

NOTE 8. Segment Information

     The following tables exhibit the segment reporting of the Company for the
three months ended December 31, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                       Inpatient
                                        Nursing                                     Therapy
                                         Home         Pharmacy         All         (Segment
            1999                       Services       Services        Other       Disposed Of)    Total
            ----                       ---------      --------     -----------   -------------  ---------
<S>                                    <C>           <C>          <C>           <C>             <C>
Revenues from external customers...... $442,985      $ 65,843      $ 27,151      $      --      $  535,979
Intersegment revenues.................       --        13,341            71             --          13,412
Segment net income (loss).............   33,732        (2,711)         (109)          (948)         29,964
Segment total assets..................  743,526       104,280       154,610         30,277       1,032,693
</TABLE>

<TABLE>
<CAPTION>
                                       Inpatient
                                        Nursing                                     Therapy
                                         Home         Pharmacy         All         (Segment
            1998                       Services       Services        Other       Disposed Of)    Total
            ----                       ---------      --------     -----------   -------------  ---------
<S>                                    <C>           <C>          <C>           <C>             <C>
Revenues from external customers...... $485,420      $77,736       $31,380       $75,098        $669,634
Intersegment revenues.................       --        9,891         2,576        40,321          52,788
Segment net income (loss).............   24,235        7,119         2,215          (641)         32,928
</TABLE>

     The following tables reconcile the Company's segment reporting to the
totals on the Company's consolidated financial statements for the three months
ended December 31, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                     Three Months Ended
                                                         December 31,
                                                  -----------------------
                                                     1998          1998
                                                   ----------   ---------
<S>                                                <C>          <C>
Revenues:
External revenues for reportable segments.......... $ 535,979    $ 669,634
Intersegment revenues for reportable segments......    13,412       52,788
Corporate overhead.................................     1,227        3,046
Elimination of intersegment revenue................   (13,412)     (52,788)
                                                    ---------    ---------
Consolidated revenues.............................. $ 537,206    $ 672,680
                                                    =========    =========

Net income (loss):
Net income for reportable segments................. $  29,964    $  32,928
Corporate overhead.................................   (88,005)     (71,951)
                                                    ---------    ---------
Consolidated net income (loss)..................... $ (58,041)   $ (39,023)
                                                    =========    =========
</TABLE>


<TABLE>
<CAPTION>
                                                  December 31,
                                                  ------------
                                                     1999
                                                  ------------
<S>                                               <C>
Assets:
Assets for reportable segments..................  $ 1,032,693
Corporate overhead assets.......................    1,506,442
Elimination of intersegment assets..............   (1,272,887)
                                                  -----------
Consolidated assets.............................  $ 1,266,248
                                                  ===========
</TABLE>

                                       22
<PAGE>

NOTE 9.  Subsequent Events

     On January 18, 2000, the Company and substantially all of its subsidiaries,
including Mariner Health and its subsidiaries, filed voluntary petitions in the
United States Bankruptcy Court for the District of Delaware under Title 11 of
the United States Code, 11 U.S.C. (S)(S) 101, et seq. (the Bankruptcy Code").
While this action will likely constitute a default under the Company's and such
subsidiaries various financing arrangements, Section 362 of the Bankruptcy Code
imposes an automatic stay that will generally preclude the creditors and other
interested parties under such arrangements from taking any remedial action in
response to any such resulting default without prior Bankruptcy Court approval.
The Company's need to seek relief afforded by the Bankruptcy Code is due, in
part, to the significant financial pressure created by the Balanced Budget Act
of 1997 and its implementation, which reduced the Company's Medicare
reimbursement rate by approximately $115 per resident per day.

     As discussed in Notes 2 and 4, in connection with the Chapter 11 Filings,
the Company obtained a commitment for $100 million in debtor-in-possession
financing from a group of banks led by The Chase Manhattan Bank. Mariner Health
also obtained a commitment for $50 million in DIP financing from a group of
banks led by PNC Bank.


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.

     On January 18, 2000, the Company and substantially all of its subsidiaries,
including Mariner Health and its subsidiaries, filed voluntary petitions (the
"Chapter 11 Filings") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") under Title 11 of the United States Code,
11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code").  While this action will
likely constitute a default under the Company's and such subsidiaries various
financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic
stay that will generally preclude the creditors and other interested parties
under such arrangements from taking any remedial action in response to any such
resulting default without prior Bankruptcy Court approval. The Company's need
to seek relief afforded by the Bankruptcy Code is due, in part, to the
significant financial pressure created by the Balanced Budget Act of 1997
("Balanced Budget Act") and its implementation, which reduced the Company's

                                       23
<PAGE>

Medicare reimbursement rate by approximately $115 per resident, per day, and had
a substantial negative effect on its ancillary businesses.

     In connection with the Chapter 11 Filings, the Company obtained a
commitment for $100 million in debtor-in-possession ("DIP") financing (the
"Company DIP Financing") from a group of banks led by The Chase Manhattan Bank.
Mariner Health also obtained a commitment for $50 million in DIP financing from
a group of banks led by PNC Bank (the "Mariner Health DIP Financing"; together
with the Company DIP Financing, the "DIP Financings"). For a description of the
principal terms of the DIP Financings, see "Management's Discussion and Analysis
of Operations - Liquidity and Capital Resources." After having given interim
approval to the Company DIP Financing and the Mariner Health DIP Financing, the
Bankruptcy Court held final hearings on those financings on February 16, 2000,
and thereafter entered orders granting final approval on the Mariner Health DIP
Financing in its full amounts, but adjourned the final hearing on the Company
DIP Financing until March 20, 2000, to allow time for the Company and certain of
its creditors to resolve technical issues pertaining to the Financing.

     On January 28, 2000 the Office of the United States Trustee appointed an
official committee to represent the unsecured creditors in connection with the
Chapter 11 Filings.


General

     The Company is one of the nation's largest providers of post-acute health
care services, primarily through the operation of its skilled-nursing
facilities. As of December 31, 1999, the Company's significant operations
consist of (i) over 400 inpatient and assisted living facilities containing
approximately 47,000 beds, (ii) 37 institutional pharmacies servicing more than
1,000 long term care centers and (iii) 14 long-term acute care hospitals
("LTACs") with approximately 700 licensed beds. In addition, the Company has
limited home health, physician management and hospital contract management
operations, the majority of which the Company plans to exit in the near future.
The Company operates in 29 states with significant concentrations of facilities
and beds in seven states and several metropolitan markets.

     Historically, the Company also (i) operated a large contract rehabilitation
therapy business that provided comprehensive therapy programs and services, on a
contractual basis, to over 1,200 inpatient healthcare facilities throughout the
United States, (ii) operated approximately 170 outpatient rehabilitation therapy
clinics in eighteen states, (iii) managed specialty medical programs in acute-
care hospitals through more than 100 hospital relationships in nineteen states
(the Company was out of this line of business as of December 31, 1999), and (iv)
operated more than thirty home health, hospice and private duty nursing branches
in seven states (only two of which are still operated by the Company and are in
the process of being divested).  Primarily as a result of changes in Medicare
reimbursement effected under the Balanced Budget Act of 1997 (the "Balanced
Budget Act"), these businesses began to generate, or were anticipated to
generate, significant operating losses and negative cash flow and have been or
are being divested or closed.

     The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain healthcare costs by limiting reimbursement rates,
increasing case management review and negotiating reduced contract pricing. The
Company's percentage of total net patient revenues derived from Medicare and
Medicaid programs were 24.4% and 50.1%, respectively, for the quarter ended
December 31, 1999.  Government payors, such as state-administered Medicaid
programs and, to a lesser extent, the federal Medicare program, generally
provide more restricted coverage and lower reimbursement rates than private pay
sources. Private payors accounted for 25.5% of the Company's total net patient
revenues for the quarter ended December 31, 1999.

     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

                                       24
<PAGE>

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 (see "--Results of Operations"). The Company believes that it has
properly recorded revenue under cost reimbursement programs based on the facts
and current regulations. 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 still required to file cost reports; however, the audit and
settlement process of Medicare cost reports is not expected to have a material
impact on total Medicare revenue. See "--Liquidity and Capital Resources." As
part of the bankruptcy process the Company, Mariner Health and their
subsidiaries are engaged in discussions with the HealthCare Financing
Administration ("HCFA") to potentially settle some or all matters related to
historical cost reimbursement. It is not possible to estimate as yet whether
this process will result in material differences of amounts already recorded or
the effects on future cash flows.

Results of Operations

     Revenues from nursing home operations accounted for $467.9 million of the
Company's $537.2 million total revenues for the three months ended December 31,
1999.  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 decreased by 1.2% over the comparable period from 1998 to
1999.

<TABLE>
<CAPTION>

                                                  Three Months
                                               Ended December 31,
                                               -------------------
                                                 1999      1998
                                               --------   -------
<S>                                            <C>        <C>
       Weighted average licensed bed count     47,189     48,169
       Weighted average number of residents    39,973     41,385
       Weighted average occupancy                84.7%      85.9%
</TABLE>

     Payor mix is the source of payment for the services provided and consists
of private pay, Medicare and Medicaid. Private pay includes revenues 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 nursing home operators is likely to increase over the
next several years and the Company's infrastructure is preparing for more
managed care contracting. 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. These Medicare charges drove the Company's decision to
terminate its contracts to provide therapy services during the third fiscal
quarter of 1999 and to liquidate that line of business. In June of 1999 the
Company's nursing homes were able to internally employ therapists to provide
services which were previously contracted. See "Liquidity and Capital
Resources". The table below presents the approximate percentage of the Company's
net patient revenues derived from the various sources of payment for the periods
indicated.

                                       25
<PAGE>

<TABLE>
<CAPTION>

                                                 Three Months
                                               Ended December 31,
                                              -------------------
                                                1999       1998
                                              --------    -------
<S>                                           <C>         <C>
       Private and other                      25.5%       32.2%
       Medicare                               24.4%       27.3%
       Medicaid                               50.1%       40.5%
</TABLE>

     The combined mix of private/other and Medicare revenue was 49.9% for the
three months ended December 31, 1999 as compared to 59.5% for the same period in
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 decreased therapy revenue resulting from the Company exiting the
business of providing therapy services to unaffiliated third parties has
decreased the percentage of private revenue for the Company. 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
month periods ended December 31, 1998 and 1999. 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 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. 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".

     Costs and expenses, excluding depreciation, amortization and indirect
merger and other expenses, primarily consists of salaries, wages, and employment
benefits. 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. The 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 affected 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.

First Quarter of Fiscal 2000 Compared to First Quarter of Fiscal 1999

     Net revenues comprising nursing home and non-nursing home operations
totaled $537.2 million for the quarter ended December 31, 1999, a decrease of
$135.5 or 20.2%, as compared to the same period for fiscal 1999. Nursing home
operations accounted for $38.6 million of the revenue decrease mainly as a
result of implementing the Prospective Payment System ("PPS") beginning
July 1, 1998, causing significantly reduced Medicare

                                       26
<PAGE>

revenues. Also a decline in average census, and facilities being closed or
divested during the past year contributed to the revenue decrease.

     Non-nursing home operations revenues decreased by $96.9 million consisting
of $85.0 million as a result of the termination of all contracts to provide
therapy services to unrelated third parties effective May 31, 1999 and the
divestiture or closure of the Company's outpatient rehabilitation clinics,
hospital rehabilitation management contract business, and substantially all home
health operations. In addition there was a $11.9 million revenue decrease for
pharmacy services compared to the same period for fiscal 1999. The pharmacy
revenue decrease was also influenced significantly by the implementation of PPS
by the external customer base starting in July 1998. The inability of the
pharmacy business to reduce expenses to match the revenue decline has caused a
decline in net income resulting from the pharmacy business.

     Costs and expenses excluding depreciation and amortization expenses and
indirect merger and other expenses totaled $524.1 million for the quarter ended
December 31, 1999, a decrease of $109.6  million or 17.3 % as compared to the
same period for fiscal 1999.  The decrease was primarily the result of costs for
payroll and employee benefits which decreased by $17.6 million, while ancillary
expenses decreased by $ 62.9 million.  The decrease in these two cost categories
was primarily attributable to the Company exiting the unrelated third party
therapy services, the clinic and hospital rehabilitation and home health
services businesses. Provision for bad debts totaled $8.4 million, a decrease of
$28.1 million or 77.0% for the quarter ended December 31, 1999. The decrease is
attributed to a charge of approximately $24.3 million in the quarter ended
December 31, 1998 to increase the reserve of the Mariner Health subsidiary
receivables.

     For the three months ended December 31, 1999, depreciation and amortization
costs were $10.8 million a decrease of $19.8 million from the prior year quarter
ended December 31,1998.  This decrease was principally the result of the Company
recording an impairment charge of $995.9 million in the fourth quarter of fiscal
year 1999.

     For the three months ended December 31, 1999, indirect merger and other
costs total approximately $8.0 million and include approximately $5.5 million of
costs incurred to outside professionals related to the Company's defaults in
connection with its indebtedness, approximately $1.8 million of costs incurred
and paid related to the Mariner Health Merger and $0.7 million of other
expenses.

     For the three months ended December 31, 1999, interest expense totaled
approximately $57.2 million, an increase of $10.5 million or 22%. This increase
was principally the result of incurring default rates on the Company's
indebtedness.

The Year 2000 Issue

     Year 2000 ("Y2K") issues or problems observed within the Company were
minimal.  No problems were seen in patient equipment, life safety systems,
information technology infrastructure or utilities. Problems seen included
isolated issues with phone and voice mail systems and minor discrepancies with
business applications which were repaired within hours of identification.  No
Y2K related supply issues have been observed and there is no evidence to date of
payor or fiscal intermediary issues.

     Exclusive of expenditures relating to the conversion of corporate
financial, payroll and human resource systems, approximately $6.9 million was
spent to remedy potential problems associated with Y2K issues.

     The Company believes that the principal risk for the Company from Y2K
issues is from the potential for delay in the receipt of payments from third-
party payors. Currently, the Company's primary source of liquidity is the DIP
Financings.  If the amounts available under the DIP Financings become exhausted
or unavailable, the Company will have minimal access to credit facilities and
its operating resources would be limited to invested cash, working capital and
proceeds from asset sales not required to be applied to satisfy obligations
under the plan of reorganization to be approved in connection with the Company's
Chapter 11 Filings.  Given the Company's current and future liquidity sources, a
delay in receipts from third-party payors could have a material adverse effect
on the Company's financial condition and results of operations.

                                       27
<PAGE>

Liquidity and Capital Resources of the Company

     Cash and cash equivalents were $77.0 million at December 31, 1999. Working
capital, at December 31, 1999, was a deficit of approximately $2.0 million,
primarily due to continuing defaults which required substantially all of the
Company's debt to be reflected as current obligations, and is consistent with
the working capital deficit at September 30, 1999. (See Note 2 and 4 to the
Condensed Consolidated Financial Statements.) Cash used in operating activities
was $7.2 million in the three months ended December 31, 1999, as compared to
$37.8 million used in operating activities for the three months ended December
31, 1998. Receivables increased by $13.6 million, primarily as a result of
increased revenues during the three months ended December 31, 1999 as compared
to the three months ended September 30, 1999. Prepayments and other current
assets increased by $3.2 million, primarily as a result of additional cash pre-
payments on insurance and other expenses. Accrued expenses and other current
liabilities increased by $57.0 million, primarily as a result of the nonpayment
of interest on the senior credit facilities and subordinated debt during the
three months ended December 31, 1999.

     Cash provided by investing activities was $9.9 million in the three months
ended December 31, 1999, as compared to $10.7 million used in investing
activities for the three months ended December 31, 1998. Investing activities
included the use of $6.8 million related to capital expenditures.

     Cash provided by financing activities was $2.4 million in the three months
ended December 31, 1999, as compared to $50.6 million for the three months ended
December 31, 1998. Cash provided by financing activities included $12.7 million
in net draws under the Company's credit line, principal repayments of $10.3
million.

     The primary source of revenues for the Company are the State Medicaid
programs and federal Medicare program. 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 December 31, 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 (and to the extent final cost reports for prior periods are not
settled, still are) 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.

     PPS has had a material adverse effect on the Company's financial condition.
While the effects of PPS have been somewhat ameliorated by recent legislation,
PPS is in large part responsible for the inability of the Company to operate
under its existing capital structure. See "Business--Regulation" and
"--Healthcare Regulatory Matters."

     PPS reduced the cash flows of pharmacy's and therapy's customers which
resulted in an increased aging and uncollectable accounts in both pharmacy's and
therapy's accounts receivable.  In addition, the Company's accounts receivable
continued to deteriorate during the three months ended December 31, 1999 due to
the multiple complexities involved with the change to Medicare PPS billing.  The
Company's facilities were phased into PPS based upon their cost report years
(approximately 20 facilities during the fourth quarter of 1998; approximately
115 facilities during the first quarter of 1999; approximately 135 facilities
during the second quarter of 1999; and approximately 85 facilities during the
third quarter of 1999).  At December 31, 1999, all facilities were being paid
by Medicare under PPS, and as such, revenue recorded for the prior three months
consists of the aggregate payments expected from Medicare for individual claims
at the appropriate payment rates.  The PPS billing methodology is extremely
complex and its implementation is resource intensive.  The claims amendment
process lacks procedures and the coordination of certain policies.  The Company
has a commitment to training and compliance and has established procedures to
address PPS issues as they arise.

                                       28
<PAGE>

     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.

     In the third quarter of fiscal 1999, Mariner Health 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. On July 20, 1999, Mariner
Health reached agreement with HCFA to extend repayment of the $15.9 million net
liabilities resulting from the issuance of the revised NPRs. The extended
repayment plan requires payment of $1.8 million per month from July through
December 1999, and $1.5 million per month from January through May 2000. At
December 31, 1999, the Company had made approximately $10.8 million in payments
under the extended repayment plan. The current intermediary has notified Mariner
Health that it intends to issue revised NPRs for the remaining 1997 facility
cost reports during fiscal year 2000. Should the revised NPRs result in a
substantial repayment requirement, the Company and Mariner Health would seek to
enter into an extended repayment plan with HCFA at that time. The Company is
vigorously disputing the intermediaries' overpayment determinations through the
appeal process; however, a favorable outcome cannot be assured at this time.

     In addition to the related party adjustments and cost report settlements
discussed above, any plan of reorganization confirmed by the Bankruptcy Court in
connection with the Company's Chapter 11 Filings will affect the Company's
liquidity in the future and could have a material adverse effect on the Company.

     Mariner Health did not make the October 1, 1999 interest payment on the
Mariner Notes (defined below, see "- Mariner Health Senior Subordinated Notes"),
and the Company did not make the November 1, 1999 interest payment on the Senior
Subordinated Notes (defined below, see "- Senior Subordinated Notes"), did not
pay November, December or January rent under the Synthetic Lease (defined below,
see "- Other Factors Affecting Liquidity and Capital Resources"), and did not
make or any principal or interest payments on the Senior Credit Facility coming
due after November 1, 1999 (defined below, see "- Senior Credit Facility").
Also, the Mariner Health Senior Credit Facility and Mariner Health Term Loan
Facility (defined below, see "- Mariner Health Senior Credit Facility and
Mariner Health Term Loan Facility") matured on January 3, 2000, and Mariner
Health did not make the required payments in connection with those obligations.
The inability of the Company and Mariner Health to service or restructure their
respective debt and other obligations culminated in the Chapter 11 Filings on
January 18, 2000. Except as may be otherwise determined by the Bankruptcy Court
overseeing the Chapter 11 Filings, the automatic stay protection afforded by the
Chapter 11 Filings prevents any action from being taken by creditors with regard
to any defaults under the prepetition obligations of the Company and those of
its subsidiaries which are debtors in the Chapter 11 Filings.

     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

                                       29
<PAGE>

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 Merger. 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
December 31, 1999, there was $168.7 million borrowed under the Revolving Credit
Facility and approximately $5.5 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 were
originally due and payable in April 2005. The Term Loans are amortized in
quarterly installments which increase over the term of those loans. (see Note 4
to the Condensed 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 4 to the
Condensed 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 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. Subject to compliance
with customary borrowing conditions, 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 4 to the Condensed Consolidated Financial Statements.)

                                       30
<PAGE>

     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 4 to the Condensed 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, and again as of September 30, 1999 and December 31,
1999, the Company was in violation of certain of these financial covenants and
as a result has not been able to make additional borrowings under the Senior
Credit Facility. The Company was unable to obtain waivers of the June 30, 1999,
September 30, 1999 or December 31, 1999 financial covenant defaults under the
Senior Credit Facility. In addition, in order to conserve its liquidity and
facilitate a restructuring of its indebtedness and other obligations, the
Company did not made the interest payments due on the Senior Credit Facility
after October, 1999. The lenders under the Senior Credit Facility signed a
forbearance agreement, pursuant to which they temporarily agreed (but without
waiving any events of default) not to take any remedial action with respect to
such events of default (including acceleration of their debt), subject to no new
events of default occurring. The forbearance agreement expired by its terms.
However, the automatic stay protection afforded by the Chapter 11 Filings
prevents any action from being taken with regard to any of the defaults under
the Senior Credit Facility, except as otherwise may be determined by the
Bankruptcy Court.

     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 mature on November 1, 2007.  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 did not make its
scheduled November 1, 1999 semi-annual interest payment on the Senior
Subordinated Notes, and such default was not cured within the applicable grace
period.  Although the Company is in default with respect to the Notes, unless
otherwise determined by the Bankruptcy Court, the automatic stay protection
afforded by the Chapter 11 Filings prevents any action from being taken with
regard to such defaults.

     Other Significant Indebtedness and Commitments. The Company, through
various of its GranCare subsidiaries, is a party to various agreements
(collectively, the "HRPT 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 has 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. The Company does not have the ability to sell these shares to meet any
capital requirements. During the Fall of 1999, HRPT spun off its health care
portfolio, including the Facilities operated by the Tenant Entities into a
publicly

                                       31
<PAGE>

traded company, SPTMNR Properties Trust ("SPTMNR"), which succeeded to the
interests of HRPT under the HRPT Agreements. References to HRPT herein are
deemed to include SPTMNR in such capacity. Unless otherwise determined by the
Bankruptcy Court, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken by HRPT with regard to any defaults
that may exist under the HRPT Agreements.

     In connection with the GranCare Merger, the Company and its GranCare
subsidiary became parties 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 December 31, 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.  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.

     Subsequent to September 30, 1999, PHCMI and GranCare received notice from
Omega asserting that PHCMI was in default of its obligation to maintain its
required minimum tangible net worth.  Omega demanded that such default be cured
within 30 days, either by PHCMI or by GranCare under its guaranty of PHCMI's
compliance with such minimum tangible net worth test, or else an event of
default would exist under the Omega loan documents.  The Company received notice
in late December 1999, declaring an event of default as a result of the alleged
breach of the tangible net worth covenants contained in the Omega Loan Documents
and accelerating all amounts due under obligations to Omega.  Effective January,
2000 PHCMI ceased making its monthly interest payments on the Omega Note. Omega
subsequently initiated foreclosure proceedings on three skilled nursing
facilities located in North Carolina.  Hearings on the foreclosures were
scheduled for February 3, 2000; however, unless otherwise determined by the
Bankruptcy Court, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken by Omega with regard to any
defaults that may exist under the Omega Loan Documents.

     Debtor-in-Possession Financing for the Company. Among the orders entered by
the Bankruptcy Court on the Petition Date in the Company's Chapter 11 case were
orders approving on an interim basis (i) the use of cash collateral by the
Company and those of its subsidiaries which had filed petitions for
reorganization under Chapter 11 of the Bankruptcy Code (excluding Mariner Health
and the direct and indirect subsidiaries of Mariner Health, the "Company
Debtors"), and (ii) the funding of up to $25.0 million in principal amount at
any time outstanding under a debtor-in-possession financing arrangement (the
"Company DIP Financing") established pursuant to that certain Revolving Credit
and Guaranty Agreement dated as of January 18, 2000 (the "Petition Date") (as
amended from time to time, the "Company DIP Credit Agreement") by and among the
Company, as borrower, the other Company Debtors, as guarantors, the lenders
signatory thereto as lenders (the "Company DIP Lenders"), and The Chase
Manhattan Bank, as Administrative Agent, Documentation Agent and Collateral
Agent

                                       32
<PAGE>

(the "Company DIP Agent"). Following a hearing on January 28, 2000, the
Bankruptcy Court entered an interim order (the "Company Interim DIP Order") to
increase the approved portion of the Company DIP Financing to $50.0 million, and
scheduled a final hearing on February 16, 2000, for consideration of a final
order (the "Final Company DIP Order") approving the full $100.0 million amount
of the Company DIP Financing. The final hearing, however, was adjourned to March
20, 2000, to allow the Company and certain of its creditors to resolve technical
issues related to the Financing.

     The Company DIP Credit Agreement establishes a one-year, $100.0 million
secured revolving credit facility to provide funds for working capital and other
lawful corporate purposes for use by the Company and the other Company Debtors;
provided, however, that amounts outstanding under the Company DIP Financing may
not at any time exceed the maximum borrowing amounts established for the Company
under the initial DIP order (the "Company Initial DIP Order"), the Company
Interim DIP Order or the Final Company DIP Order (collectively, the "Company DIP
Orders"), as the case may be, or the Company's borrowing base of eligible
accounts receivable (the "Company Borrowing Base").  Up to $10.0 million of the
Company DIP Financing may be utilized for the issuance of letters of credit as
needed in the businesses of the Company Debtors. Interest accrues on the
principal amount outstanding under the Company DIP Financing at a per annum rate
of interest equal to the ABR of Chase, plus three percent (3%) and is payable
monthly in arrears.  During the existence and continuation of a default in the
payment of any amount due and payable by the Company Debtors under the Company
DIP Credit Agreement, interest will accrue at the default rate of ABR plus five
percent (5%) per annum.  As of February 16, 2000, no borrowings were outstanding
under the Company DIP Financing.

     The outstanding principal of the Company DIP Financing, together with all
accrued and unpaid interest and all other obligations thereunder, are due and
payable one year from the Petition Date or, if earlier, on the Prepayment Date.
The term, "Prepayment Date," was originally defined as the first business day
which is at least 30 days after the entry of the Company Initial DIP Order, if
the Final Company DIP Order has not been entered, but was amended to March 22,
2000, to accommodate the adjournment of a hearing on the Final Company DIP
Order.  The Company must also prepay principal to the extent that the principal
amount outstanding under the Company DIP Financing at any time exceeds the
Company Borrowing Base then in effect.  To the extent proceeds of loans under
the Company DIP Financing are used to complete the construction of certain
healthcare facilities that are part of the Synthetic Lease (which proceeds are
not permitted to exceed $8.8 million), proceeds from the sale of any such
properties must be used first to repay any portion of the loans made pursuant to
the Company DIP Financing, with 75% of any remaining net cash proceeds to be
applied as an adequate protection payment to the lenders under the Senior Credit
Facility, and the remaining 25% of such excess net cash proceeds to be retained
by the Company or its applicable subsidiary as additional working capital.
Pursuant to the terms of the Company DIP Orders, 75% of the net cash proceeds of
other asset sales approved by the Bankruptcy Court and the requisite Company DIP
Lenders are to be applied as an adequate protection payment to the lenders under
the prepetition Senior Credit Facility.  The Company has the right to make
optional prepayments in increments of $1.0 million, and to reduce the commitment
under the Company DIP Credit Agreement in increments of $5.0 million.

     The obligations of the Company under the Company DIP Credit Agreement are
jointly and severally guaranteed by each of the other Company Debtors pursuant
to the Company DIP Agreement. Under the terms of the Company DIP Orders, the
obligations of the Company Debtors under the Company DIP Credit Agreement (the
"Company DIP Obligations") constitute allowed superpriority administrative
expense claims pursuant to Section 364(c)(1) of the Bankruptcy Code (subject to
a carve-out for certain professional fees and expenses incurred by the Company
Debtors). The Company DIP Obligations will be secured by perfected liens on all
or substantially all of the assets of the Company Debtors (excluding bankruptcy
causes of action), the priority of which liens (relative to prepetition
creditors having valid, non-avoidable, perfected liens in those assets and to
any "adequate protection" liens granted by the Bankruptcy Court) is established
in the Company DIP Orders and the related cash collateral orders entered by the
Bankruptcy Court (the "Company Cash Collateral Orders"). The Bankruptcy Court
has also granted certain prepetition creditors of the Company Debtors
replacement liens and other rights as "adequate protection" against any
diminution of the value of their existing collateral that may result from
allowing the Company Debtors to use cash collateral in which such creditors had
valid, non-avoidable and

                                       33
<PAGE>

perfected liens as of the Petition Date. The discussion contained in this
paragraph is qualified in its entirety by reference to the Company DIP Orders,
the Company Cash Collateral Orders, and related stipulations, and reference
should be made to such orders (which are available from the Bankruptcy Court)
and stipulations for a more complete description of such terms.

     The Company DIP Credit Agreement contains customary representations,
warranties and covenants of the Company Debtors, as well as certain financial
covenants relating to minimum EBITDA, maximum capital expenditures, and minimum
patient census. The breach of such representations, warranties or covenants, to
the extent not waived cured within any applicable grace or cure periods, could
result in the Company being unable to obtain further advances under the Company
DIP Financing and possibly the exercise of remedies by the Company DIP Lenders,
either of which events could materially impair the ability of the Company to
successfully reorganize in Chapter 11.

     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").

     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 Facility 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.

                                       34
<PAGE>

     As of December 31, 1999, approximately $233.8 million of loans and $8.1
million of letters of credit were outstanding under the Mariner Health Senior
Credit Facility, and $192.4 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.

     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 again as of June 30,
1999, September 30, 1999 and December 31, 1999. Mariner Health was unable to
obtain a waiver of such financial covenant defaults from the Mariner Agent, the
Mariner Health Lenders and the Term Lenders. Mariner Health failed to make its
October 1, 1999 interest payments due on the Mariner Health Senior Credit
Facility and in the Mariner Health Term Loan Facility within the applicable
grace period, although it subsequently made such payment with cash collateral
previously delivered to the collateral agent for the Mariner Health Lenders,
pursuant to amendments to the Mariner Health Senior Credit Facility and the
Mariner Health Term Loan Facility. Finally, Mariner Health did not repay the
Mariner Health Term Loan and Mariner Health Senior Credit Facility when they
matured by their terms on January 3, 2000. As a result, events of default exist
with respect to both the Mariner Health Term Loan and the Mariner Health Senior
Credit Facility. However, the automatic stay protection afforded by the Chapter
11 Filings by the Mariner Health Debtors (defined below, see "Debtor-in-
Possession Financing for Mariner Health") prevents any action from being taken
by the Mariner Health Lenders and the Term Lenders with regard to any such
events of default unless otherwise determined by the Bankruptcy Court.

     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, the agents under such
facilities gave notice to Mariner Health and the Mariner Trustee that they were
instituting a 179-day payment blockage period, during which no payments of debt
service on the Mariner Notes could be made. Accordingly, Mariner Health did not
make the scheduled $7.1 million interest payment due on the Mariner Notes on
October 1, 1999. The 30-day grace period having expired without such interest
being paid, an event of default exists under the Mariner Indenture. Unless
otherwise determined by the Bankruptcy Court, the automatic stay protection
afforded by the Chapter 11 Filings prevents any action from being taken by the
Mariner Trustee and any holders of the Mariner Notes with regard to any defaults
that may exist under the Mariner Indenture.

     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

                                       35
<PAGE>

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 $40.7 million 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." 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 three months 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 Total Return Swap terminated by its terms on August 16, 1999. 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. The Company 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 incorporated the
Net Total Return Swap Deficiency into a promissory note (the "Deficiency Note")
which generally matures and is payable as to 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 remains in place. Bank of America also waived any default arising
from any failure to be paid the Net Deficiency on the termination date of the
Total Return Swap, in return for the lenders under the Senior Credit Facility
amending the Senior Credit Facility to acknowledge 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
$46.7 million of Mariner Notes acquired by Mariner Post-Acute Network, Inc. in
connection with the unwinding of the Total Return Swap remain outstanding as an
obligation of Mariner Health.

     The Company did not make the scheduled interest payments due under the
Deficiency Note coming due and payable after October 1999 and is in default
under the Deficiency Note. Unless otherwise determined by the Bankruptcy Court,
however, the automatic stay protection afforded by the Chapter 11 Filings
prevents any action from being taken by Bank of America with regard to any
defaults that may exist under the Total Return Swap, the Deficiency Note or the
related guaranty of the Mariner Health Debtors.

     Debtor-in-Possession Financing for Mariner Health. Among the orders entered
by the Bankruptcy Court on the Petition Date in the Chapter 11 cases of Mariner
Health and its subsidiaries (the "Mariner Health Debtors"), were (a) an order
(the "Initial Mariner Health Cash Collateral Order") approving the use of cash
collateral by the Mariner Health Debtors, and (b) an order (the "Initial Mariner
Health DIP Order") approving the funding of up to $15.0 million in principal
amount at any time outstanding under a debtor-in-possession financing
arrangement (the "Mariner Health DIP Financing" and together with the Company
DIP Financing, the "DIP Financings") pursuant to that certain Debtor-in-
Possession Credit Agreement dated as of January 20, 2000 (as amended from time
to time, the "Mariner Health DIP Credit Agreement") by and among Mariner Health
and each of the other Mariner Health Debtors, as co-borrowers thereunder, the
lenders signatory thereto as lenders (the "Mariner Health DIP Lenders"), First
Union National Bank, as Syndication Agent, PNC Capital Markets, Inc. and First
Union Securities, Inc., as co-arrangers, and PNC Bank, National Association, as
Administrative Agent and Collateral Agent. After a final hearing on February 16,
2000, the Bankruptcy Court entered the February 16 Mariner Health DIP Order
granting the full $50.0 million of the Mariner Health DIP Financing.

                                       36
<PAGE>

     The Mariner Health DIP Credit Agreement establishes a one-year, $50.0
million secured revolving credit facility, which is divided into two tranches -
a $40.0 million tranche A commitment, and a $10.0 million tranche B commitment.
The tranche B loan commitment is not activated unless and until the holders of
at least 75% of the Mariner Health DIP Financing loans or commitments so
approve. Advances under the Mariner Health DIP Financing may be used by the
Mariner Health Debtors (and to a limited degree, by certain joint venture
subsidiaries of Mariner Health that are not debtors in the Mariner Health
Chapter 11 cases) for working capital and other lawful corporate purposes.
Amounts outstanding under the Mariner Health DIP Financing may not at any time
exceed the maximum borrowing amounts established for the Mariner Health Debtors
under the February 16 Mariner Health DIP Order (and collectively with the
Initial Mariner Health DIP Order, the "Mariner Health DIP Orders"). Up to $5.0
million of the Mariner Health DIP Financing may be utilized for the issuance of
letters of credit as needed in the businesses of the Mariner Health Debtors. As
of February 22, 2000, approximately $1.0 million was outstanding under the
Mariner Health DIP Financing.

     Interest accrues on the principal amount outstanding under the Mariner
Health DIP Financing at a per annum rate of interest equal to the "base rate" of
PNC Bank (i.e., the higher of the PNC Bank prime rate or a rate equal to the
federal funds rate plus 50 basis points) plus the applicable spread, which is
250 basis points for tranche A and 300 basis points for tranche B. Such interest
is due and payable monthly in arrears. During the existence and continuation of
any event of default under the Mariner Health DIP Credit Agreement, the interest
rates normally applicable to tranche A loans and tranche B loans under the
Mariner Health DIP Financing will be increased by another 250 basis points per
annum.

     The outstanding principal of the Mariner Health DIP Financing, together
with all accrued and unpaid interest and all other obligations thereunder, are
due and payable in one year or, if earlier, on the Commitment Termination Date.
The term, "Commitment Termination Date," is defined as the first to occur of the
following: (i) January 19, 2001, (ii) the effective date of a joint plan of
reorganization for the Mariner Health Debtors, (iii) the date of termination of
the exclusivity rights of the Mariner Health Debtors to file a plan of
reorganization, (iv) the filing by the Mariner Health Debtors of any plan of
reorganization (or the modification of any such plan previously filed with the
Bankruptcy Court) not previously approved by the holders of at least 66-2/3% of
the outstanding loans or commitments under the Mariner Health DIP Financing, (v)
the date of termination of the commitments under the Mariner Health DIP Credit
Agreement during the continuation of an event of default thereunder, (vi) 30
days after the Petition Date if the February 16 Mariner Health DIP Order has not
been entered (which deadline is subject to extension at the discretion of the
holders of at least 66-2/3% of the outstanding loans or commitments under the
Mariner Health DIP Financing), or (vii) the date on which all or substantially
all of the assets or stock of the Mariner Health Debtors is sold or otherwise
transferred. The Mariner Health Debtors must also prepay principal to the extent
that the principal amount outstanding under the Mariner Health DIP Financing at
any time exceeds the Borrowing Base then in effect. The Mariner Health Borrowing
Base for any month is an amount equal to $7.5 million in excess of the "Working
Capital Facility" borrowings projected for such month in Mariner Health's year
2000 DIP budget. The Mariner Health DIP Credit Agreement also provides for
mandatory prepayments under the following circumstances: (a) with net cash
proceeds from asset sales, the incurrence of certain debt, the issuance of new
equity, the receipt of tax refunds exceeding $100,000 in the aggregate, and the
receipt of casualty proceeds in excess of $100,000 that are not applied within
60 days after receipt to the repair, rebuilding, restoration or replacement of
the assets damaged or condemned (or committed within such period of time to be
so applied); and (b) on each business day, the amount of cash held by the
Mariner Health Debtors in excess of the sum of $5.0 million plus the aggregate
sum of the minimum amount required by depositary banks to be kept in deposit
accounts, concentration accounts and other with such banks. Amounts prepaid
pursuant to clause (a) of the immediately preceding sentence will permanently
reduce the amount of the Mariner Health DIP Financing commitments on a dollar-
for-dollar basis (first tranche A, and then tranche B). Amounts prepaid pursuant
to clause (b) of the same sentence will not permanently reduce such commitments.
The Mariner Health Debtors have the right to make optional prepayments in the
minimum principal amount of $1.0 million, and in increments of $100,000 in
excess thereof, and, on three business days' notice, to reduce the commitments
under

                                       37
<PAGE>

the Mariner Health DIP Credit Agreement in the minimum amount of $5.0 million,
or in increments of $1.0 million in excess thereof.

     Under the terms of the Mariner Health DIP Orders, the obligations of the
Mariner Health Debtors under the Mariner Health DIP Credit Agreement (together
with certain potential cash management system liabilities secured on a pari
passu basis therewith, the "Mariner Health DIP Obligations") constitute allowed
superpriority administrative expense claims pursuant to Section 364(c)(1) of the
Bankruptcy Code (subject to a carve-out for certain professional fees and
expenses incurred by the Mariner Health Debtors). The Mariner Health DIP
Obligations will be secured by perfected liens on all or substantially all of
the assets of the Mariner Health Debtors (excluding bankruptcy causes of
action), the priority of which liens (relative to prepetition creditors having
valid, non-avoidable, perfected liens in those assets and to any "adequate
protection" liens granted by the Bankruptcy Court) is established in the Mariner
Health DIP Orders and the related cash collateral orders entered by the
Bankruptcy Court (the "Mariner Health Cash Collateral Orders"). The Bankruptcy
Court has also granted certain prepetition creditors of the Mariner Health
Debtors replacement liens and other rights as "adequate protection" against any
diminution of the value of their existing collateral that may result from
allowing the Mariner Health Debtors to use cash collateral in which such
creditors had valid, non-avoidable and perfected liens as of the Petition Date.
The discussion contained in this paragraph is qualified in its entirety by
reference to the Mariner Health DIP Orders, the Mariner Health Cash Collateral
Orders, and related stipulations, and reference should be made to such orders
(which are available from the Bankruptcy Court) and stipulations for a more
complete description of such terms.

     The Mariner Health DIP Credit Agreement contains customary representations,
warranties and covenants of the Mariner Health Debtors, as well as certain
financial covenants relating to minimum EBITDAR, minimum patient census, minimum
eligible accounts receivable, maximum variations from Mariner Health's year 2000
DIP budget and maximum capital expenditures. The breach of such representations,
warranties or covenants, to the extent not waived or cured within any applicable
grace or cure periods, could result in the Mariner Health Debtors being unable
to obtain further advances under the Mariner Health DIP Financing and the
possible exercise of remedies by the Mariner Health DIP Lenders, either of which
events could materially impair the ability of the Mariner Health Debtors to
successfully reorganize in Chapter 11.

     Among its other restrictive covenants, the Mariner Health DIP Credit
Agreement limits affiliate transactions with the Company Debtors, but does
contemplate weekly overhead payments to the Company equal to 1.25% of projected
net inpatient revenues for the then-current month, subject to a monthly "true-
up," such that the payments for such month equal 5% of actual net inpatient
revenues of the Mariner Health Debtors. Such payments may be suspended by the
Mariner Health Debtors if certain defaults specified in the Mariner Health DIP
Credit Agreement occur and are continuing, though such fees will still accrue
and will become due and payable if and when the subject default has been cured
or waived.

     Healthcare Regulatory Matters. The Balanced Budget Act 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 Balanced Budget Act 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 Balanced Budget Act 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

                                       38
<PAGE>

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 operations as a result of increased pricing competition, a change in
buying patterns by customers and the decision by the Company to exit certain
businesses previously operated by the Company such as its third party therapy,
home health and hospital contract management businesses.

     On May 12, 1998, HCFA published the "Interim Final Rule" for the skilled
nursing facility ("SNF") 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 inflation factor that
are published along with the Final Rule follow the guidance included in the
Interim Final Rule and do not provide any long-term relief from the overall
effect of PPS on Medicare revenue decreases. On November 29, 1999, President
Clinton signed into law H.R. 3194, the "Consolidated Appropriations Act" (the
"CAA") (P.L. 106-113), legislation designed to mitigate the effects of the
Balanced Budget Act. While the CAA is expected to ameliorate somewhat the
adverse effects of the Balanced Budget Act, the Company has not yet evaluated
what effect the CAA will have on its operating results. However, the Company
does not believe the CAA will have a material positive effect on its operating
results. See "Business--Regulation."  The CAA, however, temporarily increases
the acuity adjusted PPS rates by 20 percent for 15 acuity categories. As
evidenced by the language of the CAA, this payment increase is intended to
compensate SNFs for the provision of care to medically complex patients, pending
appropriate refinements to the PPS system. SNFs providing care to patients
falling within every non-rehabilitation acuity category above the presumptive
(rebuttable) Medicare eligibility line will benefit from this increase. Three
acuity categories falling within the "high" and "medium" rehabilitation category
also are subject to the increase. The increased payments will begin on April 1,
2000, and end before the later of (A) October 1, 2000, or (B) the date HCFA
implements a refined PPS system that better accounts for medically-complex
patients. Neither the CAA nor the accompanying Conference Report provides HCFA
with specific directions regarding such refinements to the PPS system. In
addition, the CAA provides for a four percent increase in the federal per diem
payment rates for all acuity categories in both fiscal years 2001 and 2002. This
increase will not be built into the base payment rates, however, and therefore
future updates to the federal payment rates will be calculated from the initial
base rate.

     As of July 1, 1999, all of the Company's SNFs 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. For some facilities, however, the
facility base period cost is lower than the base period cost used to develop the
PPS rates. The CAA allows SNFs to elect transition to the full federal rate at
the beginning of their cost reporting periods beginning on or after January 1,
2000. SNFs may make the election up to 30 days after the start of their cost
reporting period. The Company will take advantage of this waiver where
appropriate.

     The Balanced Budget Act 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. At least
one state, North Carolina, is proposing to change its Medicaid payment rates
and/or payment methodology. However, it is unclear how the procedural
protections imposed by the Balanced Budget Act will constrain these types of
changes. Pending the publication of

                                       39
<PAGE>

a final rule implementing the procedural limitations of the Balanced Budget Act,
the Company anticipates that other states may attempt to change their payment
rate methodologies, and that such changes could result in a reduction in
payments to nursing facilities.

     The Balanced Budget Act 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 Balanced Budget Act 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. The CAA
temporarily mitigates the Balanced Budget Act limitations by providing that the
therapy caps will not apply in 2000 and 2001. The CAA requires the Secretary of
Health and Human Services (the "Secretary") to conduct focused medical reviews
of therapy services during 2000 and 2001, with an emphasis on claims for
services provided to residents of SNFs. The CAA also requires the Secretary to
study and to submit recommendations to Congress on therapy utilization patterns
in 2000 compared to those in 1998 and 1999.

     The CAA also excludes certain items and services from the formerly all-
inclusive SNF per diem rates. Specifically, the following items and services
will become separately reimbursable outside of the PPS rates:  (1) ambulance
services furnished to an individual in conjunction with renal dialysis services;
(2) chemotherapy items and administration services (as identified by certain
HCFA Common Procedure Coding System ("HCPCS") codes); (3) radioisotope services
(as identified by certain HCPCS codes); and (4) customized prosthetic devices
(artificial limbs) and other custom prostheses if provided to a SNF resident and
intended to be used after discharge (as identified by certain HCPCS codes and
other instances chosen by HCFA). Payment for such items and services, which are
"passed-through" the per diem payment rates, will be made under Part B, in
conformance with Part B payment rules. Although these items are separately
reimbursed from the PPS rate, the CAA also directs HCFA to make appropriate
adjustments to the PPS payments rates to reflect the fact that certain items and
services have been excluded, and to ensure budget neutrality. Thus, HCFA is
directed to make an appropriate proportional reduction in PPS payments at that
time.

     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
Provider Reimbursement and Review Board ("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 negotiating a settlement with HCFA for all of its
prudent

                                       40
<PAGE>

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 previously received
from related pharmacy and rehabilitation subsidiaries. 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 reopened approximately 50 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 six
monthly payments of $1.8 million, including interest, have been made. The
intermediary has notified Mariner Health that it intends to issue revised NPRs
for the remaining facility cost reports (1997 through 1999) starting in fiscal
year 2000. As part of the Chapter 11 process, Mariner Health entered into a
stipulation with the U.S. Department of Health and Human Services ("DHHS")
whereby, among other things, HCFA will not recoup certain pre-petition
overpayments for other than the current cost reporting years for the pendancy of
Mariner Health's DIP obligations. Accordingly, repayment obligations which may
arise from the issuance of revised NPRs may be stayed for an interim period.
Should the revised NPRs result in a repayment requirement not within the purview
of the stipulation, or after the pendancy of the DIP obligations, the Company
and Mariner Health would seek to enter into an extended repayment plan with HCFA
at that time.

     Other Factors Affecting 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. Without giving
any effect to any potential restructuring of current rent obligations, the
Company's total estimated rent obligations for fiscal year 2000 are
approximately $90 million, of which approximately $22.7 million was paid in the
three months ended December 31, 1999.  In connection with its review of its
portfolio of facilities, the Company anticipates divesting itself of under-
performing facilities, which will have a favorable impact on the Company's rent
obligations.

     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, 2000 will be approximately $38
million, of which approximately $11.9 million was paid in the three months ended
December 31, 1999.

                                       41
<PAGE>

     The Company has a lease arrangement, originally 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 historically has allowed 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 December 31, 1999,
approximately $66.6 million of this leasing arrangement was utilized. The
leasing program is accounted for as an operating lease under GAAP.  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, September 30, 1999
and December 31, 1999, the Company was in violation of certain of these
financial covenants and ceased making rent payments under the Synthetic Lease in
November 1999.  Notwithstanding the expiration of the temporary forbearance by
the lessor and its lenders against exercising remedies with respect to such
events of default, the automatic stay protection afforded by the Chapter 11
Filings prevents any action from being taken with respect to any defaults that
may existing under the Synthetic Lease. One consequence of the defaults under
the Synthetic Lease documents was that the lessor under the Synthetic Lease,
FBTC Leasing Corp., has been unable to make additional borrowings under the
related credit facility and make such proceeds available for the completion of
the five facilities currently under construction.  Under the terms of the
Company DIP Financing, the Company is permitted to borrow and spend up to $8.8
million to complete such facilities.  FBTC Leasing Corp., the Company and the
Agent for the Synthetic Lenders signed and filed a stipulation agreeing that the
Synthetic Lease transaction will be treated as a secured financing rather than a
true lease for purposes of the reorganization of the Company Debtors.

     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 former general and professional liability ("GL/PL") carrier. In
June, the Company binded a replacement GL/PL policy, effective July 31, 1999,
which resulted in a $4.4 million increase in annual premium and elimination of
the Royal policy's aggregate retention limit under the former policy. The
elimination of the aggregate retention limit is expected to increase the
actuarial cost of general and professional liability claims by approximately
$42.6 million in fiscal year 2000. This increased exposure will have a delayed
negative effect on operating cash flow as claims develop over the next several
years. See "Business - Insurance." 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

                                       42
<PAGE>

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. All such dividends or
distributions other than the reimbursement of the Company for ordinary course of
business expenses paid by the Company on behalf of Mariner Health or its
subsidiaries have since been prohibited by subsequent amendments to the Mariner
Health Senior Credit Facility and the Mariner Health Term Loan Facility, due to
Mariner Health's noncompliance with various financial covenants.

     The Mariner Health DIP Credit Agreement also limits the ability of the
Mariner Debtors from engaging in affiliate transactions and making restricted
payments, specifically including payments to the Company Debtor. However, the
Mariner Health DIP Credit Agreement permits, among other things, weekly overhead
payments to the Company (see "- Mariner Health Debtor-in-Possession Financing"
above), the purchase of pharmaceutical goods and services from certain Company
Debtors, the allocation to, and payment by, the Mariner Health Debtors of their
share of certain taxes, insurance obligations and employee benefit obligations
paid for and administered on a consolidated basis by the Company, and certain
ordinary course transactions which are on terms no less favorable to the subject
Mariner Health Debtors than the terms obtainable from a non-affiliate, and for
which the approval of the requisite Mariner Health DIP Lenders and the
Bankruptcy Court have been obtained.

     There can be no assurance that the amounts available to the Company Debtors
from the Company DIP Financing and cash collateral will be sufficient to fund
the operations of the Company Debtors until such time as the Company Debtors are
able to take the steps necessary to structure a plan of reorganization that will
be acceptable to creditors and confirmed by the Bankruptcy Court. Furthermore,
the Company is unable to predict whether the Company Debtors will have
sufficient cash flow generated from their operations and cash on hand to fund
their working capital needs, anticipated capital expenditures, rent, debt
service requirements and other operating expenses in the event the amounts
available under the Company DIP Financing are exhausted prior to obtaining
confirmation of a plan of reorganization. Finally, there can be no assurance
that any plan of reorganization confirmed in connection with the Chapter 11
Filings of the Company Debtors will allow the Company Debtors to operate
profitably under PPS or give the Company Debtors sufficient liquidity to meet
their operational needs. The ability of the Company Debtors 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 control
of the Company Debtors.

     There can be no assurance that the amounts available to the Mariner Health
Debtors from the Mariner Health DIP Financing and cash collateral will be
sufficient to fund the operations of the Mariner Health Debtors until such time
as the Mariner Health Debtors are able to take the steps necessary to structure
a plan of reorganization that will be acceptable to creditors and confirmed by
the Bankruptcy Court. Furthermore, the Company and the Mariner Health Debtors
are unable to predict whether the Mariner Health Debtors will have sufficient
cash flow generated from their operations and cash on hand to fund their working
capital needs, anticipated capital expenditures, rent, debt service requirements
and other operating expenses in the event the amounts available under the
Mariner Health DIP Financing are exhausted prior to obtaining confirmation of a
plan of reorganization. Finally, there can be no assurance that any plan of
reorganization confirmed in connection with the Chapter 11 Filings of the
Mariner Health Debtors will allow the Mariner Health Debtors to operate
profitably under PPS or give the Mariner Health Debtors sufficient liquidity to
meet their operational needs. The ability of the Mariner Health Debtors 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
control of the Mariner Health Debtors.

                                       43
<PAGE>

     Due to the existence of financial covenant defaults under the Senior Credit
Facility as of June 30, 1999, September 30, 1999 and December 31, 1999, and the
payment defaults referred to above, the Company has not been able to satisfy the
borrowing conditions under the Revolving Credit Facility. Under the terms of the
Company DIP Orders and the Company DIP Financing, up to $50.0 million (subject
to increase to $100.0 million upon entry of the Final Company DIP Order) is
available to fund the Company operations of the Company Debtors, subject to
satisfaction of the conditions set forth in the documents pertaining to the
Company DIP Financing, including borrowing base requirements.

     The revolving loan commitment under the Mariner Health Senior Credit
Facility terminated, and the Mariner Health Senior Credit Facility and Mariner
Health Term Loan Facility matured on January 3, 2000. Under the terms of the
Mariner Health DIP Orders and the Mariner Health DIP Financing, up to $40.0
million is available under the tranche A loan commitment to fund Mariner
Health's operations, subject to increase to $50 million if, as and when the
tranche B loan commitment is activated up supermajority vote of the Mariner
Health DIP Lenders (i.e., holders of 75% or more of the outstanding credit
exposure under the Mariner Health DIP Credit Agreement) and upon satisfaction of
the conditions set forth in the documents pertaining to the Mariner Health DIP
Financing, including borrowing base requirements. No assurance can be given
regarding the timing or likelihood that the Bankruptcy Court will approve the
February 16 Mariner Health DIP Order, or the terms on which such approval may be
conditioned.

     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 Condition and
Results of Operations--Liquidity and Capital Resources" contains information
concerning the Company's plan to restructure its debt obligations and other
financial commitments; and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000" contains information concerning
management's belief regarding the impact of 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 amounts available to the Company
          through the DIP Financings will be sufficient to fund the operations
          of the Company until such time as the Company is able to propose a
          plan of reorganization that will be acceptable to creditors and
          confirmed by the court overseeing the Company's Chapter 11 Filings.

                                       44
<PAGE>

     (ii)    There can be no assurance that any plan of reorganization
             confirmed in connection with the Chapter 11 Filings will allow the
             Company to operate profitably under PPS or give the Company
             sufficient liquidity to meet its operational needs.

     (iii)   There can be no assurance regarding the future availability or
             terms of financing in light of the Company's Chapter 11 Filings.

     (iv)    There can be no assurance regarding any adverse actions which may
             be taken by creditors or landlords of the Company which may have
             the effect of preventing or unduly delaying confirmation of a plan
             of reorganization in connection with the Company's Chapter 11
             Filings.

     (v)     The Company may have difficulty in attracting patients or labor
             as a result of its Chapter 11 Filings.

     (vi)    The Company may be subject to increased regulatory oversight as a
             result of its Chapter 11 Filings.

     (vii)   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.

     (viii)  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 governmental and non-governmental
             payors have undertaken cost-containment measures designed to limit
             payments to healthcare providers. There can be no assurance that
             payments under governmental and non-governmental 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 and financial condition of the Company.

     (ix)    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 managed 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
             and financial condition of the Company.

     (x)     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.

                                       45
<PAGE>

     (xi)    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's financial position.

     In addition, the Company's Chapter 11 Filings may disrupt its operations
and may result in a number of other operational difficulties, including the
following:

     (i)     The Company's ability to access capital markets will likely be
             limited;

     (ii)    The Company's senior management may be required to expend a
             substantial amount of time and effort structuring a plan of
             reorganization, which could have a disruptive impact on
             management's ability to focus on the operation of the Company's
             business;

     (iii)   The Company may be unable to retain top management and other key
             personnel;

     (iv)    The Company may experience a reduction in the census at its skilled
             nursing facilities and hospitals; and

     (v)     Suppliers to the Company may stop providing supplies or services to
             the Company or provide such supplies or services only on "cash on
             delivery," "cash on order" or other terms that could have an
             adverse impact on the Company's cash flow.


Item 3. Quantitative and Qualitative Disclosure About Market Risk

     The Company has in the past entered 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. On August 13, 1999, two Swap Agreements,
each with a notional amount of $20 million, were terminated at a loss to the
Company of $100,000. The Company's one remaining Swap Agreement with a notional
amount of $20.0 million was terminated effective October 27, 1999 at no cost to
the Company.

     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 in
August 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 "Management's Discussion and
Analysis of Financial Condition and Results of  Operations--Liquidity and
Capital Resources--Mariner Health Senior Subordinated Notes."  Accordingly, as
of December 31, 1999, the Company did not have any Swap Agreements outstanding.

                                       46
<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, other than as set forth 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, 1999. As a result of
the Chapter 11 Filings, all matters described in the Company's Annual Report on
Form 10-K for the year ended September 30, 1999 were stayed on January 18, 2000.

     On approximately January 20, 2000, the OIG issued subpoenas duces tecum to
Mariner Post-Acute Network, Inc. and Summit Medical Management (a subsidiary of
the Company). The subpoenas request documents relating to the purchase of Summit
Medical Management and other subsidiaries.  In addition, the subpoenas request
other broad categories of documents.  The Company is cooperating with the
investigation and has retained experienced counsel to assist in responding to
the subpoenas and advise the Company 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.

Item 2.  Changes in Securities and Use of Proceeds

     None.

Item 3.  Defaults Upon Certain Securities

     The Company made the Chapter 11 Filings on January 18, 2000. As a result of
the Chapter 11 Filings, no principal or interest payments will be made on
certain indebtedness incurred by the Company prior to January 18, 2000,
including, among others, the Senior Credit Facility, the Senior Subordinated
Notes, the Mariner Health Senior Credit Facility, the Mariner Health Term Loan
Facility and the Mariner Health Senior Subordinated Notes until a plan of
reorganization defining the payment terms has been approved by the Bankruptcy
Court. Additional information regarding the Chapter 11 Filings is set forth
elsewhere in this Form 10-Q, including Notes 2 and 4 to the Condensed
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

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

     None.

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<PAGE>

Item 5.  Other Information

     From November 4, 1997 through July 1, 1998, the Company's common stock was
traded on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "PGN."
On August 1, 1998, the Company's symbol on the NYSE was changed to "MPN."  On
November 2, 1999, trading in the Company's common stock was suspended on the
NYSE and the common stock commenced trading on the OTCBB under the symbol
"MPAN."

Item 6.  Exhibits and Reports on Form 8-K

 (a) Exhibits

      10.1     Interim Order Authorizing Debtors to Obtain Post-Petition
               Financing Pursuant to 11 U.S.C. (S)(S) 105, 361, 362, 363,
               364(c)(1), 364(c)(2), 364(c)(3) and 364(d)(1), and to Utilize
               Cash Collateral Pursuant to 11 U.S.C. (S) 363 and Granting
               Adequate Protection to Pre-Petition Secured Parties

      10.2     Stipulation re: Disposition of "Objection by SouthTrust Bank,
               National Association, to Debtors' Motion for Order Authorizing
               Postpetition Financing and Authorizing Debtors' Use of Cash
               Collateral; and Order Thereon

      10.3     Final Order (i) Authorizing Postpetition Financing Pursuant to 11
               U.S.C. (S) 364, (ii) Granting Senior Liens and Superiority
               Administrative Expense Claim Status Pursuant to 11 U.S.C. (S)(S)
               105, 364, 503(b) and 507, (iii) Authorizing Use of Cash
               Collateral Pursuant to 11 U.S.C. (S) 363, and (iv) Granting
               Adequate Protection Pursuant to 11 U.S.C. (S)(S) 363 and 364

      27       Financial Data Schedule


 (b) Reports on Form 8-K

     None

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<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,
                                             Chief Financial Officer

                                        By:  /s/ William C. Straub
                                             --------------------------------
                                             Vice President, Controller, and
                                             Chief Accounting Officer



Date: February 22, 2000

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