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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q



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(Mark One)

|                                              |  |                                                                                          
|--------------------------------------------- |  | -----------------------------------------------------------------------------------------
|x                                             |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. 
|                                              |  |                                                                                          
|For the quarterly period ended March 31, 2003
|                                              |  |                                                                                          
|OR                                           
|                                              |  |                                                                                          
|o                                             |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
|                                              |  |                                                                                          
|For the transition period from      to       

0-49813
(Commission file number)



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MARINER HEALTH CARE, INC.

(Exact name of registrant as specified in its charter)




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|                                                                                        |  |                                                
|--------------------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization)                 |  | 74-2012902
(I.R.S. Employer
Identification No.)
|                                                                                        |  |                                                
|One Ravinia Drive, Suite 1500
Atlanta, Georgia
(Address of principal executive offices) |  | 30346
(Zip code)                               

(678) 443-7000
(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
   
Yes   x   
No   o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
   
Yes   x   
No   o

There were 20,000,000 shares of Common Stock of the registrant outstanding
as of May 12, 2003.

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   x   
No   o



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                       
|ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II                                                                                      
|ITEM 1. LEGAL PROCEEDINGS                                                                    
|ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 5. OTHER INFORMATION                                                                    
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|EX-99.1 CERTIFICATION 906-CEO C. CHRISTIAN WINKLE                                            
|EX-99.2 CERTIFICATION 906-CFO MICHAEL E. BOXER                                               



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TABLE OF CONTENTS

|        |                   |                                                                                       |  |      |    | 
|------- | ----------------- | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |                   |                                                                                       |  | Page
|        |                   |                                                                                       |  |     
|Part I  |                   | FINANCIAL INFORMATION                                                                 |  |     
|Item 1. |                   | Condensed Consolidated Financial Statements                                           |  |      | 1  | 
|Item 2. |                   | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |      | 16 | 
|Item 3. |                   | Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 26 | 
|Item 4. |                   | Controls and Procedures                                                               |  |      | 28 | 
|Part II | OTHER INFORMATION |                                                                                       |  |      |   
|Item 1. |                   | Legal Proceedings                                                                     |  |      | 29 | 
|Item 2. |                   | Changes in Securities and Use of Proceeds                                             |  |      | 29 | 
|Item 3. |                   | Defaults Upon Senior Securities                                                       |  |      | 29 | 
|Item 4. |                   | Submission of Matters to a Vote of Security Holders                                   |  |      | 29 | 
|Item 5. |                   | Other Information                                                                     |  |      | 29 | 
|Item 6. |                   | Exhibits and Reports on Form 8-K                                                      |  |      | 29 | 





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##### Table of Contents






PART I




ITEM 1.          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |         |         |  | 
|-------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------- | ------------------- |  | - | ------------------- | ------- | ------- |  | 
|                                                                           |                                                                                               |                          |         |         | Reorganized Company |  |   | Predecessor Company
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                    
|                                                                           |                                                                                               |                          |         |         | Three Months Ended  |  |   | Three Months Ended 
|                                                                           |                                                                                               |                          |         |         | March 31, 2003      |  |   | March 31, 2002     
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                    
|Net revenue                                                                |                                                                                               | $                        | 431,777 |         |                     |  | $ | 454,619             |        
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                    
|Costs and expenses                                                         |                                                                                               |                          |         |         |                     |  |   |                     |        
|                                                                           | Operating expenses                                                                            |                          |         | 375,435 |                     |  |   |                     | 391,556 |        
|                                                                           | General and administrative                                                                    |                          |         | 41,503  |                     |  |   |                     | 41,479  |        
|                                                                           | Depreciation and amortization                                                                 |                          |         | 8,723   |                     |  |   |                     | 8,901   |        
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        
|                                                                           |                                                                                               | Total costs and expenses |         |         | 425,661             |  |   |                     |         | 441,936 | 
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        
|Operating income                                                           |                                                                                               |                          | 6,116   |         |                     |  |   | 12,683              |        
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                    
|Other income (expenses)                                                    |                                                                                               |                          |         |         |                     |  |   |                     |        
|                                                                           | Interest expense (contractual interest for the three months ended March 31, 2002 was $36,067) |                          |         | (8,283  | )                   |  |   |                     | (990    | )      
|                                                                           | Interest income                                                                               |                          |         | 828     |                     |  |   |                     | 782     |        
|                                                                           | Reorganization items                                                                          |                          |         |        |                     |  |   |                     | (48,496 | )      
|                                                                           | Other                                                                                         |                          |         | (50     | )                   |  |   |                     | 54      |        
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        
|Loss from continuing operations before income taxes                        |                                                                                               |                          | (1,389  | )       |                     |  |   | (35,967             | )      
|Income tax benefit                                                         |                                                                                               |                          | (557    | )       |                     |  |   |                    |        
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        
|Loss from continuing operations                                            |                                                                                               |                          | (832    | )       |                     |  |   | (35,967             | )      
|Discontinued operations                                                    |                                                                                               |                          |         |         |                     |  |   |                     |        
|                                                                           | Gain on sale of discontinued pharmacy
operations, net of income taxes of $2,400 and $0        |                          |         | 3,600   |                     |  |   |                     | 21,386  |        
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        
|Net income (loss)                                                          |                                                                                               | $                        | 2,768   |         |                     |  | $ | (14,581             | )      
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        
|Earnings (loss) per share  basic and diluted                              |                                                                                               |                          |         |         |                     |  |   |                     |        
|                                                                           | Loss from continuing operations                                                               |                          | $       | (0.04   | )                   |  |   | $                   | (0.49   | )      
|                                                                           | Gain on sale of discontinued pharmacy operations                                              |                          |         | 0.18    |                     |  |   |                     | 0.29    |        
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        
|                                                                           | Net income (loss) per share                                                                   |                          | $       | 0.14    |                     |  |   | $                   | (0.20   | )      
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        
|Weighted-average number of common and common
equivalent shares outstanding |                                                                                               |                          |         |         |                     |  |   |                     |        
|                                                                           |                                                                                               | Basic and diluted        |         |         | 20,000              |  |   |                     |         | 73,688  | 
|                                                                           |                                                                                               |                          |         |         |                     |  |   |                     |        

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

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MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)

|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |           | 
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | -------------- | --------- | ----------------- | ------- | ------- | --------- | 
|                                                                               |                                                                                                      |                                            |         | March 31, 2003 |           | December 31, 2002
|                                                                               |                                                                                                      |                                            |         |                |           |                  
|                                                                               |                                                                                                      |                                            |         | (unaudited)    |           |                   |         |        
|ASSETS                                                                         |                                                                                                      |                                            |         |                |           |                   |         |        
|Current assets                                                                 |                                                                                                      |                                            |         |                |           |                   |         |        
|                                                                               | Cash and cash equivalents                                                                            |                                            | $       | 47,430         |           |                   | $       | 38,618  |          
|                                                                               | Receivables, net of allowance for doubtful accounts of $75,492
and $72,996                           |                                            |         | 279,418        |           |                   |         | 264,092 |          
|                                                                               | Inventories                                                                                          |                                            |         | 7,413          |           |                   |         | 7,405   |          
|                                                                               | Prepaid expenses and other current assets                                                            |                                            |         | 33,260         |           |                   |         | 27,542  |          
|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |          
|                                                                               |                                                                                                      | Total current assets                       |         |                | 367,521   |                   |         |         | 337,657   | 
|                                                                              
|Property and equipment, net of accumulated depreciation of
$35,195 and $26,427 |                                                                                                      |                                            | 574,294 |                |           |                   | 567,260 |        
|Reorganization value in excess of amounts allocable to identifiable assets     |                                                                                                      |                                            | 201,388 |                |           |                   | 201,388 |        
|Goodwill, net of accumulated amortization of $970 and $970                     |                                                                                                      |                                            | 6,797   |                |           |                   | 6,797   |        
|Restricted investments                                                         |                                                                                                      |                                            | 29,034  |                |           |                   | 38,693  |        
|Other assets                                                                   |                                                                                                      |                                            | 28,239  |                |           |                   | 26,943  |        
|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |          
|                                                                               |                                                                                                      | Total assets                               |         | $              | 1,207,273 |                   |         | $       | 1,178,738 | 
|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |          
|LIABILITIES AND STOCKHOLDERS EQUITY                                           |                                                                                                      |                                            |         |                |           |                   |         |        
|Current liabilities                                                            |                                                                                                      |                                            |         |                |           |                   |         |        
|                                                                               | Current maturities of long-term debt                                                                 |                                            | $       | 9,753          |           |                   | $       | 9,793   |          
|                                                                               | Accounts payable                                                                                     |                                            |         | 69,190         |           |                   |         | 48,417  |          
|                                                                               | Accrued compensation and benefits                                                                    |                                            |         | 82,647         |           |                   |         | 68,444  |          
|                                                                               | Accrued insurance obligations                                                                        |                                            |         | 31,847         |           |                   |         | 28,650  |          
|                                                                               | Other current liabilities                                                                            |                                            |         | 56,185         |           |                   |         | 65,787  |          
|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |          
|                                                                               |                                                                                                      | Total current liabilities                  |         |                | 249,622   |                   |         |         | 221,091   | 
|                                                                              
|Long-term debt, net of current maturities                                      |                                                                                                      |                                            | 473,528 |                |           |                   | 474,969 |        
|Long-term insurance reserves                                                   |                                                                                                      |                                            | 193,491 |                |           |                   | 195,562 |        
|Other liabilities                                                              |                                                                                                      |                                            | 15,824  |                |           |                   | 14,044  |        
|Minority interest                                                              |                                                                                                      |                                            | 3,644   |                |           |                   | 4,677   |        
|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |          
|                                                                               |                                                                                                      | Total liabilities                          |         |                | 936,109   |                   |         |         | 910,343   | 
|                                                                              
|Stockholders equity                                                            |                                                                                                      |                                            |         |                |           |                   |         |        
|                                                                               | Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued or outstanding            |                                            |         |               |           |                   |         |        |          
|                                                                               | Common stock, $.01 par value; 80,000,000 shares authorized;
20,000,000 shares issued and outstanding |                                            |         | 200            |           |                   |         | 200     |          
|                                                                               | Warrants to purchase common stock                                                                    |                                            |         | 935            |           |                   |         | 935     |          
|                                                                               | Capital in excess of par value                                                                       |                                            |         | 358,977        |           |                   |         | 358,977 |          
|                                                                               | Accumulated deficit                                                                                  |                                            |         | (89,280        | )         |                   |         | (92,048 | )        
|                                                                               | Accumulated other comprehensive income                                                               |                                            |         | 332            |           |                   |         | 331     |          
|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |          
|                                                                               |                                                                                                      | Total stockholders equity                 |         |                | 271,164   |                   |         |         | 268,395   | 
|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |          
|                                                                               |                                                                                                      | Total liabilities and stockholders equity |         | $              | 1,207,273 |                   |         | $       | 1,178,738 | 
|                                                                               |                                                                                                      |                                            |         |                |           |                   |         |         |          

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

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MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |         |         |  
|------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------- | ------ | ------------------- | ------- | - | ------------------- | ------- | ------- | ------- | -
|                                                                                                 |                                                                                         |                                                            |                                                   |        | Reorganized Company |         |   | Predecessor Company
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                    
|                                                                                                 |                                                                                         |                                                            |                                                   |        | Three Months Ended  |         |   | Three Months Ended 
|                                                                                                 |                                                                                         |                                                            |                                                   |        | March 31, 2003      |         |   | March 31, 2002     
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                    
|Cash flows from operating activities                                                             |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |        
|                                                                                                 | Net income (loss)                                                                       |                                                            | $                                                 | 2,768  |                     |         |   | $                   | (14,581 | )      
|                                                                                                 | Adjustments to reconcile net income (loss) to net cash
provided by operating activities |                                                            |                                                   |        |                     |         |   |                     |         |        
|                                                                                                 |                                                                                         |                                                            | Depreciation and amortization                     |        |                     | 8,723   |   |                     |         |         | 8,901   |  
|                                                                                                 |                                                                                         |                                                            | Equity earnings/minority interest                 |        |                     | 50      |   |                     |         |         | (54     | )
|                                                                                                 |                                                                                         |                                                            | Reorganization items                              |        |                     |        |   |                     |         |         | 48,496  |  
|                                                                                                 |                                                                                         |                                                            | Provision for bad debts                           |        |                     | 4,052   |   |                     |         |         | 13,035  |  
|                                                                                                 |                                                                                         |                                                            | Income tax benefit                                |        |                     | (557    | ) |                     |         |         |        |  
|                                                                                                 |                                                                                         |                                                            | Gain on sale of discontinued pharmacy operations  |        |                     | (3,600  | ) |                     |         |         | (21,386 | )
|                                                                                                 | Changes in operating assets and liabilities                                             |                                                            |                                                   |        |                     |         |   |                     |         |        
|                                                                                                 |                                                                                         |                                                            | Receivables                                       |        |                     | (22,218 | ) |                     |         |         | (11,517 | )
|                                                                                                 |                                                                                         |                                                            | Inventories                                       |        |                     | (8      | ) |                     |         |         | (426    | )
|                                                                                                 |                                                                                         |                                                            | Prepaid expenses and other current assets         |        |                     | (5,718  | ) |                     |         |         | 5,079   |  
|                                                                                                 |                                                                                         |                                                            | Accounts payable                                  |        |                     | 20,773  |   |                     |         |         | (409    | )
|                                                                                                 |                                                                                         |                                                            | Accrued liabilities and other current liabilities |        |                     | 7,166   |   |                     |         |         | (1,060  | )
|                                                                                                 | Changes in long-term insurance reserves                                                 |                                                            |                                                   | (2,071 | )                   |         |   |                     | 10,010  |        
|                                                                                                 | Other                                                                                   |                                                            |                                                   | (599   | )                   |         |   |                     | (2,970  | )      
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        
|Net
cash provided by operating activities from
continuing operations before reorganization items |                                                                                         |                                                            | 8,761                                             |        |                     |         |   | 33,118              |        
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        
|Payment of reorganization items, net                                                             |                                                                                         |                                                            | (1,343                                            | )      |                     |         |   | (10,132             | )      
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        
|Cash flows from investing activities                                                             |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |        
|                                                                                                 |                                                                                         | Purchases of property and equipment                        |                                                   |        | (15,757             | )       |   |                     |         | (9,819  | )      
|                                                                                                 |                                                                                         | Proceeds from sale of property, equipment and other assets |                                                   |        | 6,132               |         |   |                     |         | 90,253  |        
|                                                                                                 |                                                                                         | Restricted investments                                     |                                                   |        | 9,660               |         |   |                     |         | (3,851  | )      
|                                                                                                 |                                                                                         | Insurance proceeds                                         |                                                   |        | 2,840               |         |   |                     |         |        |        
|                                                                                                 |                                                                                         | Other                                                      |                                                   |        |                    |         |   |                     |         | 69      |        
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        
|Net cash (utilized) provided by investing activities                                             |                                                                                         |                                                            | 2,875                                             |        |                     |         |   | 76,652              |        
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        
|Cash flows from financing activities                                                             |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |        
|                                                                                                 |                                                                                         | Repayment of long-term debt                                |                                                   |        | (1,481              | )       |   |                     |         | (92,247 | )      
|                                                                                                 |                                                                                         | Payment of deferred financing fees                         |                                                   |        |                    |         |   |                     |         | (500    | )      
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        
|Net cash utilized by financing activities                                                        |                                                                                         |                                                            | (1,481                                            | )      |                     |         |   | (92,747             | )      
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        
|Increase in cash and cash equivalents                                                            |                                                                                         |                                                            | 8,812                                             |        |                     |         |   | 6,891               |        
|Cash and cash equivalents, beginning of period                                                   |                                                                                         |                                                            | 38,618                                            |        |                     |         |   | 213,740             |        
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        
|Cash and cash equivalents, end of period                                                         |                                                                                         | $                                                          | 47,430                                            |        |                     |         | $ | 220,631             |        
|                                                                                                 |                                                                                         |                                                            |                                                   |        |                     |         |   |                     |         |        

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

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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1          NATURE OF BUSINESS

Reporting Entity

Mariner Health Care, Inc. and its subsidiaries (collectively, the Company)
provide post-acute healthcare services, primarily through the operation of
skilled nursing facilities (SNFs). All references to the Company herein
are intended to include the operating subsidiaries through which the services
described herein are directly provided. At March 31, 2003, the Companys
significant operations consisted of 297 nursing facilities, including 289 SNFs
and eight stand alone assisted living facilities and apartments (ALFs), in 23
states with 35,419 licensed beds and significant concentrations of facilities
and beds in five states and several metropolitan markets. Included in the
total SNFs are nine managed SNFs with 1,245 licensed beds. At March 31, 2003,
the Company also operated 13 owned, leased or managed long-term acute care
hospitals (LTACs) in four states with 683 licensed beds.

Nursing home services represents the Companys only reportable operating
segment (see Note 9 for financial information about the Companys reportable
segments).

Emergence from Bankruptcy

On March 25, 2002, the United States Bankruptcy Court for the District of
Delaware (the Bankruptcy Court) approved the Companys second amended and
restated joint plan of reorganization filed on February 1, 2002 (including all
modifications thereof and schedules and exhibits thereto, the Joint Plan).
On May 13, 2002 (the Effective Date), the Company and substantially all of
its subsidiaries emerged from proceedings under chapter 11 of title 11
(Chapter 11) of the United States Code (the Bankruptcy Code) pursuant to
the terms of the Joint Plan. In connection with its emergence from bankruptcy,
the Company changed its name to Mariner Health Care, Inc.

Discontinued Operations

In October 2001, the Company received the approval of the Bankruptcy Court to
sell its institutional pharmacy services business (the APS Division). The
Company consummated the sale of the APS Division on January 6, 2002.
Accordingly, the results of the APS Division have been treated as a
discontinued operation in accordance with accounting principles generally
accepted in the United States (see Note 5).

NOTE 2          BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). Certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. Accordingly, these financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 2002
included in the Companys Annual Report on Form 10-K filed with the SEC. In
the opinion of management, the financial information included herein reflects
all adjustments considered necessary for a fair presentation of interim results
and, except for the items described in Note 3, all such adjustments are of a
normal and recurring nature. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the entire year.

The Company emerged from bankruptcy effective May 1, 2002 for financial
reporting purposes, at which time it adopted the provisions of fresh-start
reporting in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code (SOP 90-7). Under fresh-start
reporting, a new entity is deemed to be created for financial reporting
purposes. In adopting the requirements of fresh-start reporting as of May 1,
2002, the provisions of the Companys Joint Plan were implemented, assets and
liabilities were adjusted to their estimated fair values and the accumulated
deficit for the Companys subsidiaries that were part of the Chapter 11 cases
was eliminated. The financial statements for all periods prior to May 1, 2002
reflect the financial position, results of operations and cash flows of

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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

the Companys predecessor entity (the Predecessor Company). The financial
statements for the three months ended March 31, 2003, reflect the consolidated
financial position, results of operations and cash flows of the reorganized
entity (the Reorganized Company). Unless stated otherwise as the Predecessor
Company or the Reorganized Company, all references to the Company include the
operations of both the Predecessor Company and Reorganized Company.

Since fresh-start reporting materially changed the amounts previously recorded
in the consolidated financial statements of the Predecessor Company, a black
line signifying the difference in presentation separates the financial data
pertaining to periods after the adoption of fresh-start reporting from the
financial data pertaining to periods prior to the adoption of fresh-start
reporting.

Between filing for protection under the Bankruptcy Code on January 18, 2000
(the Petition Date) and the Effective Date, the Company operated its business
as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
Accordingly, the Predecessor Companys consolidated financial statements
presented herein for periods prior to its emergence from bankruptcy are
presented in conformity with SOP 90-7 and were prepared on a going concern
basis, which assumes continuity of operations and realization of assets and
settlement of liabilities and commitments in the normal course of business.

The Reorganized Company adopted the accounting policies of the Predecessor
Company. In accordance with the fresh-start reporting provisions of SOP 90-7,
the Reorganized Company also adopted changes in accounting principles that were
required in the consolidated financial statements of the Reorganized Company
within the twelve month period subsequent to the Effective Date.

Comparability of Financial Information

The adoption of fresh-start reporting as of May 1, 2002 materially changed the
amounts previously recorded in the consolidated financial statements of the
Predecessor Company. With respect to reported operating results, management
believes that business segment operating income of the Predecessor Company is
generally comparable to that of the Reorganized Company, excluding divested
facilities. However, capital costs, such as interest, depreciation and
amortization, of the Predecessor Company generally are not comparable to those
of the Reorganized Company. In addition, the reported financial position and
cash flows of the Predecessor Company generally are not comparable to those of
the Reorganized Company.

In connection with the implementation of fresh-start reporting, the Company
recorded a gain of approximately $1.2 billion from the restructuring of its
debt in accordance with the provisions of the Joint Plan. Other significant
adjustments also were recorded to reflect the provisions of the Joint Plan and
the fair values of the assets and liabilities of the Reorganized Company. For
accounting purposes, these transactions are reflected in the operating results
of the Predecessor Company for the four months ended April 30, 2002.

Stock-Based Compensation

The Reorganized Company maintains two stock-based compensation plans that
provide for the granting of stock options to the Companys employees and
outside directors with exercise prices not less than the fair market value of
the shares at the date of grant. The Reorganized Company has stock option plans
authorizing the grant of stock options to purchase up to 2,153,022 shares of
common stock, par value $0.01 per share (the New Common Stock). At March 31,
2003, there were options to purchase 2,060,560 shares of common stock
outstanding at exercise prices ranging from $3.00 to $20.12, all of which were
equal to the fair market value of the common stock on the date of the grant.
There were options to purchase 190,210 shares of New Common Stock exercisable
at March 31, 2003.

The Predecessor Company had stock option plans for key employees and outside
directors which authorized the granting of incentive stock options and
nonqualified options. Upon the Companys emergence from bankruptcy, all the
Predecessor Company stock option plans and options granted were canceled.

5



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The Company accounts for stock options in accordance with Accounting Principles
Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, the Company recognizes no compensation
expense for stock option grants. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an Amendment of SFAS No. 123 (SFAS
148), the Companys pro forma net income (loss) and earnings (loss) per share,
assuming the election had been made to recognize compensation expense on
stock-based awards, are as follows (in thousands of dollars, except per share
amounts):

|                                     |                                                                                                                              |   |                     |      |   |                     |   |         |       |  
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------- | - | ------------------- | ---- | - | ------------------- | - | ------- | ----- | -
|                                     |                                                                                                                              |   | Reorganized Company |      |   | Predecessor Company
|                                     |                                                                                                                              |   |                     |      |   |                    
|                                     |                                                                                                                              |   | Three Months Ended  |      |   | Three Months Ended 
|                                     |                                                                                                                              |   | March 31, 2003      |      |   | March 31, 2002     
|                                     |                                                                                                                              |   |                     |      |   |                    
|Net income (loss)                    |                                                                                                                              | $ | 2,768               |      |   |                     | $ | (14,581 | )    
|                                     | Deduct: total stock-based employee compensation expense determined
under fair value based methods for all awards, net of tax |   |                     | (858 | ) |                     |   |         | (92   | )
|                                     |                                                                                                                              |   |                     |      |   |                     |   |         |      
|Pro forma net income (loss)          |                                                                                                                              | $ | 1,910               |      |   |                     | $ | (14,673 | )    
|                                     |                                                                                                                              |   |                     |      |   |                     |   |         |      
|Basic and diluted earnings per share |                                                                                                                              |   |                     |      |   |                     |   |         |      
|                                     | As reported                                                                                                                  |   | $                   | 0.14 |   |                     |   | $       | (0.20 | )
|                                     | Pro forma                                                                                                                    |   |                     | 0.10 |   |                     |   |         | (0.20 | )

The Company uses the Black-Scholes model to determine the fair value of options
on the date of the grant. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Companys stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.

For purposes of pro forma disclosures of net income (loss) and earnings per
share, the estimated fair value of the options is amortized to expense over the
options vesting period. The following weighted-average assumptions were used:

|                            |  |                     |  |  |                     |  |  |  | 
|--------------------------- |  | ------------------- |  |  | ------------------- |  |  |  | 
|                            |  | Reorganized Company |  |  | Predecessor Company
|                            |  |                     |  |  |                    
|                            |  | Three Months Ended  |  |  | Three Months Ended 
|                            |  | March 31, 2003      |  |  | March 31, 2002     
|                            |  |                     |  |  |                    
|Dividend yield              |  | 0.0%                |  |  | 0.0%               
|Expected volatility         |  | 0.51-0.68           |  |  | 0.42-1.21          
|Risk-free interest rate     |  | 3.11%-4.70%         |  |  | 4.61%-6.11%        
|Expected life in years      |  | 6                   |  |  | 3-8                
|Weighted-average fair value |  | 9.96                |  |  |                   

Recent Accounting Pronouncements

In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149), which is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The guideline should be applied prospectively. The Company
believes the adoption of SFAS 149 will not have a material impact on its
consolidated financial position, results of operations or cash flows.

In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation provides guidance with
respect to the identification of variable interest entities and when the
assets, liabilities, noncontrolling interests and results of operations of a
variable interest entity need to be included in a companys consolidated
financial statements. This interpretation did not have a material impact on
the consolidated financial position, results of operations or cash flows of the
Company.

6



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##### Table of Contents



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

In December 2002, FASB issued SFAS 148, which provides alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. The provisions of
this statement were effective December 31, 2002. Management currently intends
to continue to account for stock-based compensation under the intrinsic value
method set forth in APB Opinion 25 Accounting for Stock Issued to Employees,
and related interpretations. For this reason, the transition guidance of SFAS
148 did not have a material impact on the consolidated financial position,
results of operations or cash flows. SFAS 148 does amend existing guidance with
respect to required disclosures, regardless of the method of accounting used.

In November 2002, FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements under certain
guarantees that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The disclosure
requirements of this interpretation were effective as of December 31, 2002 and
require disclosure of the nature of the guarantee, the maximum potential amount
of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantors
obligations under the guarantee. The recognition requirements of this
interpretation were effective beginning January 1, 2003. This interpretation
did not have a material impact on the consolidated financial position, results
of operations or cash flows.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current
period financial statement presentation.

Reorganization Items

In accordance with SOP 90-7, the Predecessor Company recorded all expenses
incurred as a result of the bankruptcy filings as reorganization items. A
summary of the principal categories of reorganization items for the three
months ended March 31, 2002 follows (in thousands of dollars):

|                                                                      |                      |   |        |        | 
|--------------------------------------------------------------------- | -------------------- | - | ------ | ------ | 
|Professional fees                                                     |                      | $ | 28,041 |       
|DIP financing fees                                                    |                      |   | 376    |       
|Other reorganization costs                                            |                      |   | 7,783  |       
|Net loss on divestitures                                              |                      |   | 12,775 |       
|Interest earned on accumulated cash resulting from Chapter 11 filings |                      |   | (479   | )     
|                                                                      |                      |   |        |       
|                                                                      | Reorganization items |   | $      | 48,496 | 
|                                                                      |                      |   |        |       

NOTE 3          FRESH-START REPORTING

In accordance with SOP 90-7, the Company adopted fresh-start reporting because
holders of voting shares immediately before filing and confirmation of the
Joint Plan received less than 50% of the voting shares of the emerging entity,
and its reorganization value is less than its postpetition liabilities and
allowed claims, as shown below (in thousands of dollars):

|                                                        |                                                 |   |           |           | 
|------------------------------------------------------- | ----------------------------------------------- | - | --------- | --------- | 
|Postpetition liabilities                                |                                                 | $ | 268,942   |          
|Liabilities deferred pursuant to Chapter 11 proceedings |                                                 |   | 2,167,277 |          
|                                                        |                                                 |   |           |          
|Total postpetition liabilities and allowed claims       |                                                 |   | 2,436,219 |          
|Reorganization value                                    |                                                 |   | 816,800   |          
|                                                        |                                                 |   |           |          
|                                                        | Excess of liabilities over reorganization value |   | $         | 1,619,419 | 
|                                                        |                                                 |   |           |          

In adopting the requirements of fresh-start reporting, the Company engaged an
independent financial advisor to assist in the determination of the
reorganization value, or fair value, of the emerging entity. The independent

7



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

financial advisor determined an estimated reorganization value of approximately
$816.8 million before considering any long-term debt or other obligations
assumed in connection with the Joint Plan. This estimate was based upon
various valuation methods, including discounted projected cash flow analysis,
selected comparable market multiples of publicly traded companies and other
applicable ratios and economic industry information relevant to the operations
of the Company, as well as through negotiations with the various creditor
parties in interest. The estimated total equity value of the Reorganized
Company aggregating approximately $326.2 million was determined after taking
into account the values of the obligations assumed in connection with the Joint
Plan.

After consideration of the Companys debt capacity and other capital structure
considerations, such as industry norms, projected earnings to fixed charges,
earnings before interest and taxes to interest, free cash flow to interest,
free cash flow to debt service and other applicable ratios, and after extensive
negotiations among parties in interest, it was agreed that the Companys
reorganization capital structure would be as follows (in thousands of dollars):

|                                        |  |   |           |  
|--------------------------------------- |  | - | --------- | -
|Postpetition current liabilities        |  | $ | 268,942   |  
|Senior Credit Facility-term loan        |  |   | 212,000   |  
|Second Priority Notes                   |  |   | 150,000   |  
|Non-recourse indebtedness of subsidiary |  |   | 59,688    |  
|Mortgage note payable and capital lease |  |   | 68,955    |  
|Long-term insurance reserves            |  |   | 177,270   |  
|Other long-term liabilities             |  |   | 26,246    |  
|New Common Stock                        |  |   | 200       |  
|Warrants to purchase New Common Stock   |  |   | 935       |  
|Capital in excess of par                |  |   | 358,977   |  
|Accumulated deficit                     |  |   | (33,734   | )
|Accumulated other comprehensive loss    |  |   | (174      | )
|                                        |  |   |           |  
|                                        |  | $ | 1,289,305 |  
|                                        |  |   |           |  

The following reconciliation of the Predecessor Companys consolidated balance
sheet as of April 30, 2002 to that of the Reorganized Company as of May 1, 2002
was prepared to present the adjustments that give effect to the reorganization
and fresh-start reporting.

The adjustments entitled Reorganization reflect the consummation of the Joint
Plan, including the elimination of existing liabilities subject to compromise
and consolidated stockholders deficit, and reflect the aforementioned $816.8
million reorganization value, which includes the establishment of $265.0
million of reorganization value in excess of amounts allocable to net
identifiable assets.

The adjustments entitled Fresh-Start Adjustments reflect the adoption of
fresh-start reporting, including the adjustments to record property and
equipment and identifiable intangible assets at their fair values. The assets
and liabilities have been recorded at their estimated fair values. Management
estimated the fair value of the Companys assets and liabilities by using both
independent appraisals and commonly used discounted cash flow valuation
methods. The reorganization value on the Effective Date included in the Joint
Plan was based upon various valuation methods, including discounted projected
cash flows, and assumed continued increases in the Medicare reimbursement rates
that expired on October 1, 2002.

Certain of the Companys wholly owned subsidiaries and consolidated joint
ventures did not file for protection under Chapter 11. The non-filing
subsidiaries were not subject to the fresh-start reporting provisions under SOP
90-7 and, consequently, their balance sheets are reflected in the consolidated
balance sheet at historical carrying value.

8



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

A reconciliation of fresh-start reporting recorded as of May 1, 2002 follows
(in thousands of dollars):

|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |   |         |         | 
|-------------------------------------------------------------------------- |  | ----------------------------------------------------- | ------------------------- | - | ----------- | ------- | -------------- | ---- | ----------- | -------- | ----------------- | ---- | ------- | ---- | ------ | ---- | -------- | ------- | ----------- | - | ------- | ------- | 
|                                                                           |  |                                                       |                           |   | Predecessor |         |                |      |             |          |                   |      |         |      |        |      |          |         | Reorganized
|                                                                           |  |                                                       |                           |   | Company     |         |                |      |             |          |                   |      |         |      |        |      |          |         | Company    
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |        
|                                                                           |  |                                                       |                           |   | April 30,   |         |                |      |             |          | Fresh-Start       |      |         |      |        |      | May 1,  
|                                                                           |  |                                                       |                           |   | 2002        |         | Reorganization |      | Adjustments |          | Reclassifications |      | 2002   
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |        
|Current assets                                                             |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |  
|                                                                           |  | Cash and cash equivalents                             |                           | $ | 202,338     |         |                | $    | (111,078    | )(a)     |                   | $    |        |      |        | $    |         |         |             | $ | 91,260  |        
|                                                                           |  | Receivables                                           |                           |   | 232,162     |         |                |      | 3,640       | (b)      |                   |      |        |      |        |      |         |         |             |   | 235,802 |        
|                                                                           |  | Inventories                                           |                           |   | 7,631       |         |                |      |            |          |                   |      |        |      |        |      |         |         |             |   | 7,631   |        
|                                                                           |  | Other current assets                                  |                           |   | 28,918      |         |                |      |            |          |                   |      |        |      |        |      |         |         |             |   | 28,918  |        
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |   |         |        
|                                                                           |  |                                                       | Total current assets      |   |             | 471,049 |                |      |             | (107,438 | )                 |      |         |     |        |      |          |        |             |   |         | 363,611 | 
|Property and equipment, net                                                |  |                                                       | 416,369                   |   |             |         |               |      |             |          | 160,353           | (m)  |         |      |       |      |          |         | 576,722     |  
|Reorganization value in
excess of amounts allocable
to identifiable assets |  |                                                       |                          |   |             |         | 264,954        | (c)  |             |          |                  |      |         |      |       |      |          |         | 264,954     |  
|Goodwill                                                                   |  |                                                       | 186,543                   |   |             |         |               |      |             |          | (179,746          | )(n) |         |      |       |      |          |         | 6,797       |  
|Restricted investments                                                     |  |                                                       | 34,054                    |   |             |         | 16,453         | (d)  |             |          |                  |      |         |      |       |      |          |         | 50,507      |  
|Other assets                                                               |  |                                                       | 29,251                    |   |             |         | 5,924          | (e)  |             |          | (8,461            | )(o) |         |      |       |      |          |         | 26,714      |  
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |   |         |        
|                                                                           |  | $                                                     | 1,137,266                 |   |             | $       | 179,893        |      |             | $        | (27,854           | )    |         | $    |       |      |          | $       | 1,289,305   |  
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |   |         |        
|Current liabilities                                                        |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |  
|                                                                           |  | Current maturities of
long-term debt                  |                           | $ |            |         |                | $    |            |          |                   | $    |        |      |        | $    | 6,220    | (q)     |             | $ | 6,220   |        
|                                                                           |  | Accounts payable                                      |                           |   | 54,100      |         |                |      |            |          |                   |      |        |      |        |      |         |         |             |   | 54,100  |        
|                                                                           |  | Accrued compensation
and benefits                     |                           |   | 90,776      |         |                |      |            |          |                   |      |        |      |        |      |         |         |             |   | 90,776  |        
|                                                                           |  | Accrued insurance
obligations                         |                           |   | 24,826      |         |                |      |            |          |                   |      |        |      |        |      |         |         |             |   | 24,826  |        
|                                                                           |  | Other current liabilities                             |                           |   | 110,229     |         |                |      | 7,162       | (f)      |                   |      |        |      |        |      | (16,250  | )(q)    |             |   | 101,141 |        
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |   |         |        
|                                                                           |  |                                                       | Total current liabilities |   |             | 279,931 |                |      |             | 7,162    |                   |      |         |     |        |      |          | (10,030 | )           |   |         | 277,063 | 
|Liabilities subject to
compromise                                          |  |                                                       | 2,167,277                 |   |             |         | (2,167,277     | )(g) |             |          |                  |      |         |      |       |      |          |         |            |  
|Long-term debt, net of
current maturities                                  |  |                                                       | 59,688                    |   |             |         | 430,955        | (h)  |             |          |                  |      |         |      | (6,220 | )(q) |          |         | 484,423     |  
|Long-term insurance reserves                                               |  |                                                       | 119,002                   |   |             |         | 58,268         | (i)  |             |          |                  |      |         |      |       |      |          |         | 177,270     |  
|Other liabilities                                                          |  |                                                       | 18,497                    |   |             |         |               |      |             |          | (10,402           | )(o) |         |      | 16,250 | (q)  |          |         | 24,345      |  
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |   |         |        
|                                                                           |  |                                                       | 2,644,395                 |   |             |         | (1,670,892     | )    |             |          | (10,402           | )    |         |      |       |      |          |         | 963,101     |  
|Stockholders equity (deficit)                                             |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |  
|                                                                           |  | Reorganized Company
common stock                      |                           |   |            |         |                |      | 200         | (j)      |                   |      |        |      |        |      |         |         |             |   | 200     |        
|                                                                           |  | Predecessor Company
common stock                      |                           |   | 737         |         |                |      | (737        | )(k)     |                   |      |        |      |        |      |         |         |             |   |        |        
|                                                                           |  | Reorganized Company
warrants to purchase
common stock |                           |   |            |         |                |      | 935         | (j)      |                   |      |        |      |        |      |         |         |             |   | 935     |        
|                                                                           |  | Capital in excess of
par value                        |                           |   | 980,952     |         |                |      | 359,714     | (j,k)    |                   |      |        |      |        |      | (981,689 | )(r)    |             |   | 358,977 |        
|                                                                           |  | Retained earnings
(accumulated deficit)               |                           |   | (2,488,644  | )       |                |      | 1,490,673   | (1)      |                   |      | (17,452 | )(p) |        |      | 981,689  | (r)     |             |   | (33,734 | )      
|                                                                           |  | Accumulated other
comprehensive loss                  |                           |   | (174        | )       |                |      |            |          |                   |      |        |      |        |      |         |         |             |   | (174    | )      
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |   |         |        
|                                                                           |  | $                                                     | 1,137,266                 |   |             | $       | 179,893        |      |             | $        | (27,854           | )    |         | $    |       |      |          | $       | 1,289,305   |  
|                                                                           |  |                                                       |                           |   |             |         |                |      |             |          |                   |      |         |      |        |      |          |         |             |   |         |        

9



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



|(a) |  | To record the payment of cash in connection with the discharge of
indebtedness and settlement of prepetition liabilities according to
the terms of the Joint Plan.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  |                                                                                                                                                                   

|                                               |  |   |        |  
|---------------------------------------------- |  | - | ------ | -
|Note (b1)                                      |  | $ | 5,376  |  
|Note (b2)                                      |  |   | (1,736 | )
|                                               |  |   |        |  
|Total receivables reorganization adjustment(b) |  | $ | 3,640  |  
|                                               |  |   |        |  



|(b1) |  | To adjust the settlement receivable for Medicaid payors related to the
Companys settlement with various state Medicaid programs in connection
with the Joint Plan.                            
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(b2) |  | To write-off management fee receivables related to the settlement of
certain contractual disputes with a leaseholder in connection with the
Joint Plan.                                        
|    
|(c)  |  | To record the reorganized value of the Company in excess of amounts
allocable to identified assets.                                                                                            
|    
|(d)  |  | To record cash collateralization of various letters of credit required by
the terms of the Joint Plan.                                                                                         
|    
|(e)  |  | To record deferred financing costs incurred in connection with the Senior
Credit Facility (as defined herein).                                                                                 
|    
|(f)  |  | To record a liability for the settlement of unsecured claims according to
the terms of the Joint Plan and to record payment of professional fees
including success fees to bankruptcy advisors.
|    
|(g)  |  | To record the discharge of liabilities subject to compromise according to
the terms of the Joint Plan as follows:                                                                              

|                                                    |  |   |           |  
|--------------------------------------------------- |  | - | --------- | -
|Prepetition senior credit facilities and term loans |  | $ | 1,217,638 |  
|Prepetition senior subordinated debt                |  |   | 597,328   |  
|Other prepetition debt                              |  |   | 134,708   |  
|Accounts payable and other accrued liabilities      |  |   | 169,897   |  
|Accrued interest                                    |  |   | 79,959    |  
|Unamortized deferred financing costs                |  |   | (32,253   | )
|                                                    |  |   |           |  
|Total liabilities subject to compromise             |  | $ | 2,167,277 |  
|                                                    |  |   |           |  



|(h) |  | To record the issuance of the Term Loans (as defined herein) under the
Senior Credit Facility, to record the issuance of the Second Priority
Notes (as defined herein), and to record various mortgages and capital
leases entered into or renegotiated pursuant to the terms of the Joint
Plan.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(i) |  | To record estimated settlement of prepetition insurance claims previously
accrued for as liabilities subject to compromise.                                                                                                                                                                     
|   
|(j) |  | To record issuance of New Common Stock and warrants to purchase New Common
Stock.                                                                                                                                                                                                               
|   
|(k) |  | To eliminate the common stock of the Predecessor Company.                                                                                                                                                                                                                                       
|   
|(l) |  |                                                                                                                                                                                                                                                                                                 

|                                                                        |  |   |           |  
|----------------------------------------------------------------------- |  | - | --------- | -
|Reorganization adjustment (a)                                           |  | $ | (111,078  | )
|Reorganization adjustment (b)                                           |  |   | 3,640     |  
|Reorganization adjustment (c)                                           |  |   | 264,954   |  
|Reorganization adjustment (d)                                           |  |   | 16,453    |  
|Reorganization adjustment (e)                                           |  |   | 5,924     |  
|Reorganization adjustment (f)                                           |  |   | (7,162    | )
|Reorganization adjustment (g)                                           |  |   | 2,167,277 |  
|Reorganization adjustment (h)                                           |  |   | (430,955  | )
|Reorganization adjustment (i)                                           |  |   | (58,268   | )
|Reorganization adjustments (j)(k)                                       |  |   | (360,112  | )
|                                                                        |  |   |           |  
|Total retained earnings (accumulated deficit) reorganization adjustment |  | $ | 1,490,673 |  
|                                                                        |  |   |           |  



|(m) |  | To adjust property and
equipment to fair value and to write-off previously
recorded accumulated depreciation.                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(n) |  | To write-off historical goodwill of the Predecessor Company, excluding
certain subsidiaries of the Company that were not part of the bankruptcy
proceedings.                                                                                                        
|   
|(o) |  | To write-off the Companys leasehold rights and over-market lease valuation
accounts.                                                                                                                                                                               
|   
|(p) |  | To adjust property, equipment, goodwill, leasehold rights and over-market
lease liabilities to fair value.                                                                                                                                                          
|   
|(q) |  | Entries to record the current and long-term classification of long-term
debt and reorganization fees to be settled in subsequent periods.                                                                                                                           
|   
|(r) |  | Entry to close out Predecessor Companys retained earnings to additional
paid in capital according to the terms of the Joint Plan (the remaining
accumulated deficit is related to certain subsidiaries that were not part
of the Companys bankruptcy proceedings).

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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Pro Forma Information

The condensed consolidated pro forma effect of the Joint Plan assuming that the
Effective Date occurred on January 1, 2002 follows (in thousands of dollars,
except per share amounts):

|                                                 |  |                     |         | 
|------------------------------------------------ |  | ------------------- | ------- | 
|                                                 |  | Predecessor Company
|                                                 |  |                    
|                                                 |  | Three Months Ended 
|                                                 |  | March 31, 2002     
|                                                 |  |                    
|Revenue                                          |  | $                   | 454,619 | 
|                                                 |  |                     |         | 
|Gain from continuing operations                  |  | $                   | 3,265   | 
|Gain on sale of discontinued pharmacy operations |  |                     | 21,386  | 
|                                                 |  |                     |         | 
|Net income                                       |  | $                   | 24,651  | 
|                                                 |  |                     |         | 
|Earnings per share                               |  |                     |         | 
|Gain from continuing operations                  |  | $                   | 0.16    | 
|Gain on sale of discontinued pharmacy operations |  |                     | 1.07    | 
|                                                 |  |                     |         | 
|Net income                                       |  | $                   | 1.23    | 
|                                                 |  |                     |         | 

The condensed consolidated pro forma results exclude reorganization items
recorded prior to May 1, 2002. The condensed consolidated pro forma results
include estimates for depreciation expense, interest expense and the related
income tax effect prior to May 1, 2002. The number of shares outstanding has
also been adjusted. The condensed consolidated pro forma results are not
necessarily indicative of the financial results that might have resulted had
the Effective Date of the Joint Plan actually occurred on January 1, 2002.

NOTE 4          REVENUE

Net revenue is recorded based on estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors, and is recognized in the period in which the services are
provided. Revenue is recorded net of provisions for discount arrangements with
commercial payors and contractual allowances with third-party payors, primarily
Medicare and Medicaid. Net revenue realizable under third-party payor
agreements are subject to change due to examination and retroactive adjustment.
Estimated third-party payor settlements are recorded in the period the related
services are rendered. The methods of making such estimates are reviewed
periodically, and differences between the net amounts accrued and subsequent
settlements or estimates of expected settlements are reflected in the current
period results of operations.

The following is a summary of approximate net revenue by payor type for the
periods indicated (in thousands of dollars):

|                  |             |   |                     |         |  |                     |   |         |         | 
|----------------- | ----------- | - | ------------------- | ------- |  | ------------------- | - | ------- | ------- | 
|                  |             |   | Reorganized Company |         |  | Predecessor Company
|                  |             |   |                     |         |  |                    
|                  |             |   | Three Months Ended  |         |  | Three Months Ended 
|                  |             |   | March 31, 2003      |         |  | March 31, 2002     
|                  |             |   |                     |         |  |                    
|Medicaid          |             | $ | 205,357             |         |  |                     | $ | 217,254 |        
|Medicare          |             |   | 146,435             |         |  |                     |   | 156,839 |        
|Private and other |             |   | 79,985              |         |  |                     |   | 80,526  |        
|                  |             |   |                     |         |  |                     |   |         |        
|                  | Net revenue |   | $                   | 431,777 |  |                     |   | $       | 454,619 | 
|                  |             |   |                     |         |  |                     |   |         |        

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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 5          DIVESTITURES

Discontinued Operations

On January 6, 2002, the Company consummated the sale of its APS Division to
Omnicare, Inc. and its wholly owned affiliate, APS Acquisition LLC
(collectively, Omnicare). During the quarter ended December 31, 2001, the
Company received the approval of the Bankruptcy Court to sell the APS Division,
subject to an auction and overbidding process under the supervision of the
Bankruptcy Court. As a result, an auction of the assets comprising the APS
Division was held on December 4, 2001, at which time, following competitive
bidding at the auction, Omnicare was determined to have made the highest and
best bid for the assets of the APS Division. On December 5, 2001, the
Bankruptcy Court approved the sale of the APS Division to Omnicare for a cash
closing price of $97.0 million and up to $18.0 million in future payments,
depending upon certain post-closing operating results of the APS Division.
These payments, if earned, would be received in each of 2003, 2004 and 2005.
During the three months ended March 31, 2003, the Company earned and received
the first payment of $6.0 million. During the three months ended March 31,
2002, the Company realized a gain on the sale of the APS Division of $21.4
million. In April 2002, the Company recognized an additional gain of $7.7
million on the sale of the APS Division.

Other Divestitures

During the three months ended March 31, 2002, the Company completed the sale or
divestiture of approximately ten owned or leased facilities and certain other
assets, which resulted in a net loss of approximately $2.5 million and is
included in net loss on divestitures within reorganization items. In addition,
effective April 3, 2002, the Company divested itself of six facilities, which
resulted in a net loss of approximately $10.3 million and is included in net
loss on divestitures within reorganization items for the three months ended
March 31, 2002 (see Note 2). These 16 facilities reported net revenue of
approximately $10.6 million for the three months ended March 31, 2002.

NOTE 6          COMPREHENSIVE INCOME

Comprehensive income (loss) includes
net income (loss), as well as charges and
credits to stockholders equity (deficit) not included in
net income (loss).
The components of comprehensive income (loss), net of income taxes, consist of
the following (in thousands of dollars):

|                                                     |  |                     |       |   |                     |  |   |         |  
|---------------------------------------------------- |  | ------------------- | ----- | - | ------------------- |  | - | ------- | -
|                                                     |  | Reorganized Company |       |   | Predecessor Company
|                                                     |  |                     |       |   |                    
|                                                     |  | Three Months Ended  |       |   | Three Months Ended 
|                                                     |  | March 31, 2003      |       |   | March 31, 2002     
|                                                     |  |                     |       |   |                    
|Net income (loss)                                    |  | $                   | 2,768 |   |                     |  | $ | (14,581 | )
|Net unrealized loss on available-for-sale securities |  |                     | (1    | ) |                     |  |   | (431    | )
|                                                     |  |                     |       |   |                     |  |   |         |  
|Comprehensive income (loss)                          |  | $                   | 2,767 |   |                     |  | $ | (15,012 | )
|                                                     |  |                     |       |   |                     |  |   |         |  

12



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 7          EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings
per share for the periods indicated in accordance with SFAS No. 128, Earnings
per Share (in thousands, except per share data):

|                                                                                                           |                                                  |   |                     |       |   |                     |   |        |         |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | - | ------------------- | ----- | - | ------------------- | - | ------ | ------- | -
|                                                                                                           |                                                  |   | Reorganized Company |       |   | Predecessor Company
|                                                                                                           |                                                  |   |                     |       |   |                    
|                                                                                                           |                                                  |   | Three Months Ended  |       |   | Three Months Ended 
|                                                                                                           |                                                  |   | March 31, 2003      |       |   | March 31, 2002     
|                                                                                                           |                                                  |   |                     |       |   |                    
|Numerator for basic and diluted income (loss)
per share                                                    |                                                  |   |                     |       |   |                     |   |        |        
|                                                                                                           | Loss from continuing operations                  |   | $                   | (832  | ) |                     |   | $      | (35,967 | )
|                                                                                                           | Discontinued operations                          |   |                     |       |   |                     |   |        |         |  
|                                                                                                           | Gain on sale of discontinued
pharmacy operations |   |                     | 3,600 |   |                     |   |        | 21,386  |  
|                                                                                                           |                                                  |   |                     |       |   |                     |   |        |         |  
|                                                                                                           | Net income (loss)                                |   | $                   | 2,768 |   |                     |   | $      | (14,581 | )
|                                                                                                           |                                                  |   |                     |       |   |                     |   |        |         |  
|Denominator
for basic income (loss) per
share weighted-average shares                                     |                                                  |   | 20,000              |       |   |                     |   | 73,688 |        
|Effect of dilutive
securities  stock options                                                              |                                                  |   |                    |       |   |                     |   |       |        
|                                                                                                           |                                                  |   |                     |       |   |                     |   |        |         |  
|Denominator for diluted income (loss) per
share  adjusted weighted-average shares and assumed conversions |                                                  |   | 20,000              |       |   |                     |   | 73,688 |        
|                                                                                                           |                                                  |   |                     |       |   |                     |   |        |         |  
|Earnings (loss) per share  basic and diluted                                                              |                                                  |   |                     |       |   |                     |   |        |        
|Loss from continuing operations                                                                            |                                                  | $ | (0.04               | )     |   |                     | $ | (0.49  | )      
|                                                                                                           | Discontinued operations                          |   |                     |       |   |                     |   |        |         |  
|                                                                                                           | Gain on sale of discontinued pharmacy operations |   |                     | 0.18  |   |                     |   |        | 0.29    |  
|                                                                                                           |                                                  |   |                     |       |   |                     |   |        |         |  
|                                                                                                           | Net income (loss) per share                      |   | $                   | 0.14  |   |                     |   | $      | (0.20   | )
|                                                                                                           |                                                  |   |                     |       |   |                     |   |        |         |  

The effect of dilutive securities for all periods presented has been excluded
because the effect is antidilutive.

NOTE 8          CONTINGENCIES

From time to time, the Company has been party to various legal proceedings in
the ordinary course of business. As is typical in the healthcare industry, the
Company is and expects to remain subject to claims that its services have
resulted in resident injury or other adverse effects. In addition, resident,
visitor and employee injuries will also subject the Company to the risk of
litigation. The healthcare industry in general continues to experience an
increasing trend in the frequency and severity of litigation and claims.

On June 11, 2001, one of the Companys prior liability insurance carriers,
Royal Surplus Lines Insurance Company (Royal), commenced an adversary
proceeding in the Bankruptcy Court, styled Royal Surplus Lines Insurance
Company v. Mariner Health Group et al., Adversary Proceeding No. A-01-4626
(MFW). In its complaint, Royal sought among other things, declaratory
judgments that it would not be required to insure some claims falling under two
professional and general liability insurance (PL/GL) policies issued to one
of the Companys subsidiaries by Royal. One of the Companys prior liability
insurance carriers, Northfield Insurance Company (Northfield), moved to
intervene in the Royal adversary proceeding on July 25, 2001. The Company did
not oppose the motion to intervene, and it was subsequently granted.

Prior to the parties engaging in any significant discovery, they agreed to
mediate the issues arising out of the Royal adversary proceeding. After the
mediation, Royal agreed to dismiss its complaint without prejudice, the Company
agreed to dismiss its counterclaim without prejudice, and Royal and the Company
agreed to work together to resolve claims in an alternative dispute resolution
procedure. Northfield did not agree to dismiss its complaint in intervention.
Accordingly, Northfield and the Company are currently engaging in discovery.

In August 2002, the Company filed a complaint in the State Court of Fulton
County, Georgia against PricewaterhouseCoopers, LLP (PWC) and several former
officers of MHG (the Individual Defendants). The Fulton County action
asserts claims for fraud and breach of fiduciary duty against the Individual
Defendants and claims for fraud, professional negligence, negligent
misrepresentation and aiding and abetting breach of fiduciary duty against PWC.
Many of these claims arise from the July 1998 acquisition of MHG by Paragon
Health Network,

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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Inc. (Paragon). Other claims arise from duties that the Company believes the
Individual Defendants breached as officers of MHG and MPAN, Paragons successor
following the MHG acquisition. In the Fulton County action, the Company is
seeking actual damages, including compensatory, consequential and punitive
damages in an amount to be determined at trial. Discovery is in the early
stages.

In response to the action the Company commenced in Fulton County, the
Individual Defendants filed an action in Chancery Court in Delaware in
September 2002 styled Stratton et al. v. Mariner Health Care, Inc., United
States Bankruptcy Court for the District of Delaware. Chapter 11 Case Nos.
00-00113 (MFW) and 00-00215 (MFW), Adversary Nos 02-5604 and 02-5606. In the
Chancery Court action, the Individual Defendants generally claim they are not
liable for the claims asserted in the Fulton County action and that the Company
is contractually and statutorily obligated to indemnify them against the claims
in the Fulton County action. The Company removed the Chancery Court action to
the Bankruptcy Court. After removal, the Company answered the complaint and
filed counterclaims. The Individual Defendants moved to remand the action back
to the Chancery Court. The Company opposed the motion, which is pending.

After the Individual Defendants filed the Chancery Court action, the Company
also filed an adversary proceeding in the Bankruptcy Court styled Mariner
Health Care, Inc. v. Stratton et al.,United States Bankruptcy Court for the
District of Delaware, Chapter 11 Case Nos. 00-00113 (MFW) and 00-00215 (MFW),
Adversary No. 02-05598 (consolidated with Adversary No. 02-05599). In this
enforcement action (the Enforcement Action), the Company generally alleged
that it does not have any obligation to indemnify the Individual Defendants.
The Individual Defendants filed counterclaims generally alleging that the
Company has an obligation to indemnify them against the claims in the Fulton
County action and that the Company is estopped from asserting those claims.
The Company moved to dismiss the Individual Defendants estoppel counterclaim.
The Individual Defendants opposed the motion, and on April 10, 2003 the
Bankruptcy Court granted the motion to dismiss.

After the Company filed the Fulton County action, former members of MHGs board
of directors filed an action in the Superior Court of Cobb County, Georgia
against PWC and the Individual Defendants based on claims arising out of MHGs
acquisition of Convalesant Services, Inc. in 1995 because of the Individual
Defendants and PWCs alleged misrepresentations. This action is William R.
Bassett, et al. v. PricewaterhouseCoopers, LLP, et al., Superior Court of Cobb
County, Georgia, Case No. 02-1-8314-35. The plaintiffs in the Cobb County
action seek damages in excess of $200 million. The Individual Defendants added
the Company as a third-party defendant in the Cobb County action seeking to
recover on indemnification claims similar to those made by them in the Chancery
Court action, and which are now pending, and subject to resolution before the
Bankruptcy Court in the Enforcement Action. The Cobb County action is in the
early stages of discovery.

NOTE
9      SEGMENT INFORMATION

As previously disclosed, the Company has one reportable segment, nursing home
services, which provides long-term healthcare through the operation of skilled
nursing and assisted living facilities in the United States. The Other
category includes the Companys non-reportable segments, primarily its LTAC
hospitals, corporate items not considered to be an operating segment and
eliminations.

The Company primarily evaluates segment performance and allocates resources
based on operating margin, which basically represents revenue less operating
expenses. Operating margin does not include interest income, interest expense,
reorganization items, income taxes or extraordinary items. Gains or losses on
sales of assets and certain items, including impairment of assets, legal and
regulatory matters and restructuring costs are also excluded from operating
margin and not considered in the evaluation of segment performance. The
Company does not have any intersegment revenue. Asset information by segment,
including capital expenditures, and net income (loss) beyond operating margins
are not provided to the Companys chief operating decision maker.

14



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##### Table of Contents



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following tables summarize operating results by business segment, excluding
the results of the APS Division, for the Reorganized Company for the three
months ended March 31, 2003 and for the Predecessor Company for the three
months ended March 31, 2002 (in thousands of dollars):

|                                  |  |              |         |       |  |       |         |   |  |   |         | 
|--------------------------------- |  | ------------ | ------- | ----- |  | ----- | ------- | - |  | - | ------- | 
|                                  |  | Nursing Home |         |       |  |       |         |   |  |  
|                                  |  | Services     |         | Other |  | Total
|                                  |  |              |         |       |  |      
|Reorganized Company               |  |              |         |       |  |       |         |   |  |   |         | 
|Three Months Ended March 31, 2003 |  |              |         |       |  |       |         |   |  |   |         | 
|Revenue from external customers   |  | $            | 402,315 |       |  | $     | 29,462  |   |  | $ | 431,777 | 
|Operating margin                  |  |              | 33,075  |       |  |       | (18,235 | ) |  |   | 14,840  | 
|Depreciation and amortization     |  |              | 7,883   |       |  |       | 840     |   |  |   | 8,723   | 
|                                 
|Predecessor Company               |  |              |         |       |  |       |         |   |  |   |         | 
|Three Months Ended March 31, 2002 |  |              |         |       |  |       |         |   |  |   |         | 
|Revenue from external customers   |  | $            | 426,915 |       |  | $     | 27,704  |   |  | $ | 454,619 | 
|Operating margin                  |  |              | 35,137  |       |  |       | (13,553 | ) |  |   | 21,584  | 
|Depreciation and amortization     |  |              | 8,046   |       |  |       | 855     |   |  |   | 8,901   | 

15



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##### Table of Contents






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

Overview

Mariner Health Care, Inc. through its operating subsidiaries, is one of the
largest providers of long-term healthcare services in the United States, based
on net revenue and the number of nursing homes owned, leased and managed. We
provide these services primarily through the operation of skilled nursing
facilities, or SNFs, and long-term acute care hospitals, or LTACs. As of March
31, 2003, we operated 297 owned, leased or managed facilities in 23 states,
including 289 SNFs and eight stand along assisted living facilities and
apartments, or ALFs, with 35,419 licensed beds, as well as 13 LTACs in four
states with 683 licensed beds. Included in the total number of SNFs are nine
managed SNFs with 1,245 licensed beds. As of March 31, 2003, we
owned 192 of
our facilities, and 13 of our facilities were leased under capital leases. We
have significant facility concentrations in five states and several
metropolitan markets. As used in this report, references to we, us, our,
Mariner or similar terms include Mariner Health Care, Inc. and its operating
subsidiaries.

Inpatient services provided at our SNFs, ALFs and LTACs are our primary service
offering and have historically accounted for over 90% of our revenue and cash
flows. Through our SNFs, we provide 24-hour care to patients requiring skilled
nursing services, including assistance with activities of daily living, therapy
and rehabilitation services. Our LTACs accommodate the relatively high acuity
needs of patients discharged from short-term, acute-care hospitals when the
patients condition warrants more intensive care than can be provided in a
typical nursing facility.

Emergence from Bankruptcy and Fresh-Start Reporting

On May 13, 2002, or the Effective Date, we emerged from proceedings under
chapter 11 of title 11 of the Bankruptcy Code pursuant to the terms of our
second amended and restated joint plan of reorganization, filed with the
Bankruptcy Court on February 1, 2002, including all modifications thereof and
schedules and exhibits thereto, the Joint Plan. In connection with our
emergence from bankruptcy, we changed our name to Mariner Health Care, Inc.

Upon our emergence from bankruptcy, we reflected the terms of the Joint Plan in
our consolidated financial statements by adopting the principles of fresh-start
reporting in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7 Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code, or SOP 90-7. For accounting
purposes, the adjustments for fresh-start reporting have been recorded as of
May 1, 2002, the effective date of our Joint Plan for financial reporting
purposes. Under fresh-start reporting, a new entity is deemed to be created for
financial reporting purposes. In adopting the requirements of fresh-start
reporting as of May 1, 2002, the provisions of the Joint Plan were implemented,
assets and liabilities were adjusted to their estimated fair values and the
accumulated deficit for our subsidiaries that were part of the Chapter 11 cases
was eliminated.

Comparability of Financial Information

The adoption of fresh-start reporting as of May 1, 2002 materially changed the
amounts previously recorded in our consolidated financial statements. With
respect to operating results, we believe that the business segment operating
income of Mariner before we emerged from bankruptcy, or the Predecessor
Company, is generally comparable to that of Mariner after we emerged from
bankruptcy, or the Reorganized Company, excluding facilities that have been
divested. While there have been no material changes in our strategy or the
operation of our business, capital costs of our Predecessor Company that were
based on prepetition contractual agreements and historical costs are not
comparable to those of the Reorganized Company as a result of the divestiture
of under-performing facilities and the extinguishment of a significant amount
of indebtedness. Rent expense of our Predecessor Company was partially derived
from leases that were terminated before our emergence from bankruptcy and are
not obligations of the Reorganized Company. Interest expense of our Predecessor
Company was based upon the terms of our prepetition long-term debt obligations
and was materially different from that of the Reorganized Company as a result
of the extinguishment of debt in bankruptcy. Depreciation expense of our
Predecessor Company was based upon the historical cost of property and
equipment. Depreciation expense of the Reorganized Company is based upon the
fair value of property and equipment as of May 1, 2002, adjusted for impairment
recorded in the last three months of

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##### Table of Contents



2002. For these reasons, the reported financial position and cash flows of our
Predecessor Company generally are not comparable to those of the Reorganized
Company.

Critical Accounting Policies and Estimates

General.The unaudited condensed consolidated financial statements are based on
the application of critical accounting policies and estimates, which require
management to make significant estimates and assumptions. There was no initial
adoption of any accounting policies during the three months ended March 31,
2003 other than those listed under Recent Accounting Pronouncements in the
notes to the accompanying unaudited condensed consolidated financial
statements. We believe that some of the more critical judgment areas in the
application of accounting policies that affect our financial condition and
results of operations are estimates and assumptions pertaining to (a) revenue
recognition, (b) collectibility of accounts receivable, (c) insurance and
professional liability risks, (d) income taxes and (e) derivative market value.

Revenue Recognition.We have agreements with third-party payors that provide
for payments to our SNFs. These payment arrangements may be based upon
prospective rates, reimbursable costs, established charges, discounted charges
or per diem payments. Revenue is reported at the estimated net realizable
amounts from Medicare, Medicaid, other third-party payors and individual
patients for services rendered. Retroactive adjustments that are likely to
result from future examinations by third-party payors are accrued on an
estimated basis in the period the related services are rendered and adjusted as
necessary in future periods based on final settlements. There is at least a
possibility that recorded estimates may change by a material amount. Consistent
with healthcare industry accounting practices, changes to these third-party
revenue estimates are recorded in the year of change or at the time the
adjustment becomes known.

Collectibility of Accounts Receivable.Accounts receivable consist primarily of
amounts due from the Medicare and Medicaid programs, other government programs,
managed care health plans, commercial insurance companies and individual
patients. Estimated provisions for doubtful accounts are recorded to the extent
it is probable that a portion or all of a particular account will not be
collected. In evaluating the collectibility of accounts receivable, we consider
a number of factors, including the age of the accounts, changes in collection
patterns, the composition of patient accounts by payor type, the status of
ongoing disputes with third-party payors and general industry conditions.
Changes in these estimates are charged or credited to the results of operations
in the period of the change. If circumstances such as economic downturn, higher
than expected defaults or denials, reduced collections or change in our payor
mix change, our estimates of the recoverability of our receivables could be
reduced by a material amount. Our provision for bad debts represented 0.9% and
2.9% of net revenue for the three months ended March 31, 2003 and 2002,
respectively. Our allowance for doubtful accounts represented 21.3% and 21.7%
of accounts receivable at March 31, 2003 and December 31, 2002, respectively.

Insurance and Professional Liability Risks.We currently purchase professional
and general liability insurance, or PL/GL, through a third-party insurance
company, maintaining an unaggregated $1.0 million self-insured retention per
claim, except in Colorado, where we maintain first dollar coverage. Loss
provisions for professional liability risks, including incurred but not
reported losses, are provided on an undiscounted basis in the period of the
related coverage. These provisions are based on internal and external
evaluations of the merits of individual claims, analysis of claim history and
independent actuarially determined estimates. The methods of making these
estimates and establishing the resulting accrued liabilities are reviewed
frequently by management with any material adjustments resulting from that
review reflected in current earnings. Although management believes that the
current provision for loss is adequate, the ultimate liability may be in excess
of or less than the amounts recorded.

Accounting for Income Taxes.The provision for income taxes is based upon our
estimate of taxable income or loss for each respective accounting period. We
recognize an asset or liability for the deferred tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements. These temporary differences will result in
taxable or deductible amounts in future years when the reported amounts of
assets are recovered or liabilities are settled. We also recognize as deferred
tax assets the future tax benefits from net operating and capital loss carry
forwards.

We have limited operating experience as a Reorganized Company. Furthermore,
there are significant uncertainties with respect to future Medicare payments to
both our SNFs and LTACs that could affect materially the realization of

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some of our deferred tax assets. Accordingly, a valuation allowance is provided
for deferred tax assets because the reliazability of the deferred tax assets is
uncertain.

If all or a portion of the pre-reorganization deferred tax asset is realized in
the future, or considered more likely than not to be realized by us, the
reorganization intangible recorded in connection with fresh-start reporting
will be reduced accordingly. If the reorganization intangible is eliminated in
full, other intangible assets will then be reduced, with any excess treated as
an increase to capital in excess of par value.

Derivative Market Value.We have non-recourse indebtedness of a subsidiary
that includes an option to allow us to extend the term on the loan. This
term-extending option meets the definition of an embedded derivative instrument
according to the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Therefore, this derivative is accounted
for as a purchased option, or more specifically a payer swaption. Fair value
of the payer swaption should increase if interest rates rise because the
probability of exercising this option at a future date increases. The payer
swaption has been bifurcated from the related debt and recorded as an asset at
its estimated fair market value of $3.2 million as of March 31, 2003.

An estimate of the fair value was determined using the Black model. The Black
model is similar to the Black-Scholes model used for valuing stock options.
This market value calculation is very sensitive to changes in interest rates
and the estimate of the volatility of interest rates. An increase in these
variables, with other variables held constant, will cause the value of the
payer swaption to increase. Prior to maturity of the debt, at the option of the
debtor, a wholly-owned subsidiary of ours, the debt can be prepaid only between
February 1, 2005 and July 31, 2005 or six months prior to maturity. In the
event the debt is prepaid, the payer swaption will become worthless and we will
recognize an expense for the current market value.

Recent Accounting Pronouncements

In April 2003, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance should be
applied prospectively. We believe the adoption of SFAS No. 149 will not have a
material impact on our consolidated financial position, results of operations
or cash flows.

In January 2003, FASB issued FASB Interpretation No. 46,
Consolidation of
Variable Interest Entities. This interpretation provides guidance with respect
to the identification of variable interest entities and when the assets,
liabilities, noncontrolling interests and results of operations of a variable
interest entity need to be included in a companys consolidated financial
statements. This interpretation is not expected to have a material
impact on our
consolidated financial position, results of operations or cash flows.

In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosures, and Amendment of SFAS
No. 123. As
described above, SFAS No. 148 provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation. The provisions of this statement were
effective December 31, 2002. Management currently intends to continue to
account for stock-based compensation under the intrinsic value method set forth
in Accounting Principles Board Opinion 25 and related interpretations. For this
reason, the transition guidance of SFAS No. 148 does not have a material impact
on our consolidated financial position, results of operations or cash flows.
This statement does amend existing guidance with respect to required
disclosures, regardless of the method of accounting used.

In November 2002, FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements under certain
guarantees that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The disclosure
requirements of this interpretation are effective and were adopted by us as of
December 31, 2002, and require disclosure of the nature of any guarantee, the
maximum potential amount of future payments that the guarantor could be
required to make under the guarantee and the current amount of the liability,
if any, for the guarantors obligations under the guarantee. The recognition

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requirements of this interpretation were effective beginning January 1, 2003.
This interpretation did not have a material impact on our consolidated
financial position, results of operations or cash flows.

Occupancy Data

We calculate aggregate occupancy percentages for all of our nursing facilities
by dividing the total number of beds occupied by the total number of licensed
beds available for use during the periods indicated. Licensed beds refer to
the number of beds for which a license has been issued, which may vary in some
instances from licensed beds available for use. The average occupancy rate for
our nursing facilities was 86.0% for the three months ended March 31, 2003 and
86.4% for the three months ended March 31, 2002. We do not believe there is a
consistent industry standard as to how occupancy is measured; for this reason,
this information may not be comparable among long-term care providers.
Occupancy percentages should not be relied upon alone to determine the
profitability of a facility. Other factors affecting profitability include the
sources of payment, terms of reimbursement and the acuity level for each of the
patients in the facilities. The following table provides certain occupancy
data for our nursing facilities as of the dates indicated.

|                                                 |  |                     |        |   |                     |  |  |        |  
|------------------------------------------------ |  | ------------------- | ------ | - | ------------------- |  |  | ------ | -
|                                                 |  | Reorganized Company |        |   | Predecessor Company
|                                                 |  |                     |        |   |                    
|                                                 |  | Three Months Ended  |        |   | Three Months Ended 
|                                                 |  | March 31, 2003      |        |   | March 31, 2002     
|                                                 |  |                     |        |   |                    
|Total average residents                          |  |                     | 30,074 |   |                     |  |  | 31,429 |  
|Weighted-average licensed beds
available for use |  |                     | 34,976 |   |                     |  |  | 36,391 |  
|Weighted-average occupancy                       |  |                     | 86.0   | % |                     |  |  | 86.4   | %

Sources of Revenue

Reimbursement rates from government sponsored programs, such as Medicare and
Medicaid, are strictly regulated and subject to funding appropriations from
federal and state governments. Ongoing efforts of third-party payors to
contain healthcare costs by limiting reimbursement rates, limiting eligibility
to participate in healthcare programs, increasing case management review and
negotiating reduced contract pricing continue to affect our revenue and
profitability. Changes in reimbursement rates, including the implementation of
PPS, have adversely affected us, resulting in significantly lower Medicare
revenue than we would have received under the previous cost-based payment
methodology.

Reorganized Company Three Months Ended March 31, 2003 Compared to the Predecessor Company Three Months Ended March 31, 2002

Net Revenue.Net revenue totaled $431.8 million for the three months ended
March 31, 2003, a decrease of $22.8 million, or 5.0%, compared to the three
months ended March 31, 2002. After adjusting for the effect of the 27
facilities that were divested between January 1, 2002 to March 31, 2003, net
revenue increased $5.5 million, or 1.3%, in the three months ended March 31,
2003 compared to the three months ended March 31, 2002.

Net revenue from nursing home services accounted for $402.3 million, or 93.2%,
of total net revenue for the three months ended March 31, 2003 compared to
$426.9 million, or 93.9%, of total net revenue for the three months ended March
31, 2002. Revenue was derived from the provision of routine and ancillary
services and is a function of occupancy rates, payor mix and acuity levels of
the patients in our facilities. The following table provides the percentage of
our net patient revenue derived from the various sources of payment for the
periods indicated.

|                  |             |  |                     |       |   |                     |  |      |       |  
|----------------- | ----------- |  | ------------------- | ----- | - | ------------------- |  | ---- | ----- | -
|                  |             |  | Reorganized Company |       |   | Predecessor Company
|                  |             |  |                     |       |   |                    
|                  |             |  | Three Months Ended  |       |   | Three Months Ended 
|                  |             |  | March 31, 2003      |       |   | March 31, 2002     
|                  |             |  |                     |       |   |                    
|Medicaid          |             |  | 47.6                | %     |   |                     |  | 47.8 | %    
|Medicare          |             |  | 33.9                | %     |   |                     |  | 34.5 | %    
|Private and other |             |  | 18.5                | %     |   |                     |  | 17.7 | %    
|                  |             |  |                     |       |   |                     |  |      |      
|                  | Net revenue |  |                     | 100.0 | % |                     |  |      | 100.0 | %
|                  |             |  |                     |       |   |                     |  |      |      

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Net revenue from nursing home services decreased $24.6 million, or 5.8%;
however, net revenue from nursing home services, excluding facilities that were
divested, increased by $3.7 million, or 0.9%, to $402.3 million for the three
months ended March 31, 2003 compared to $398.6 million for the three months
ended March 31, 2002. This increase was the result of an average increase in
revenue per patient day of $2.16, or 1.5%, partially offset by a slight
decrease in the total number of patient days.

These increases in revenue were partially offset by a $8.8 million decrease in
revenue in the three months ended March 31, 2003 due to the impact of the
October 1, 2002 expiration of certain temporary increases in the Medicare
reimbursement rates, referred to as the Medicare Reimbursement Cliff. We
estimate that the impact of the Medicare Reimbursement Cliff could result in a
loss of revenue and operating income of up to approximately $37.0 million in
2003 and annually thereafter, assuming no further legislative relief and a
consistent patient census.

Costs and Expenses.Costs and expenses for the three months ended March 31,
2003 were $425.7 million, a decrease of $16.2 million, or 3.7%, compared to
$441.9 million of costs and expenses for the three months ended March 31, 2002.
After adjusting for the costs and expenses of facilities that have been
divested, costs and expenses for the three months ended March 31, 2003 were
$425.7 million, an increase of $15.8 million, or 3.9%, compared to $409.9
million of costs and expenses for the three months ended March 31, 2002.

The increase in costs and expenses after adjusting for divested facilities was
attributable to an increase in operating expenses, which were partially offset
by a decrease in the provision for bad debts. Operating expenses for the three
months ended March 31, 2003 were $375.4 million, a decrease of $16.2 million,
or 4.1%, compared to $391.6 million for the three months ended March 31, 2002.
After adjusting for the operating expenses of facilities that have been
divested, operating expenses for the three months ended March 31, 2003 were
$375.4 million, an increase of $12.7 million, or 3.5%, compared to $362.7
million of operating expenses for the three months ended March 31, 2002. The
increase in operating expenses was primarily due to a higher Medicare census
and rising acuity levels for the patients in the facilities.

Operating Income.Operating income for the three months ended March 31, 2003
was $6.1 million, compared to operating income of $12.7 million for the three
months ended March 31, 2002, a decrease of $6.6 million, or 52.0%. After
adjusting for divested facilities, operating income for the three months ended
March 31, 2003 was $6.1 million, while operating income was $16.4 million for
the three months ended March 31, 2002, a decrease of $10.3 million, or 62.8%.
The decrease in operating income resulted from the net effect of the 1.3%
increase in net revenue and the 3.9% increase in costs and expenses explained
above.

Interest Expense.Interest expense for the three months ended March 31, 2003
was $8.3 million. Interest expense for the three months ended March 31, 2002
was $1.0 million, an increase of $7.3 million. The increase in interest
expense was due to our new capital structure upon emergence from bankruptcy.

Reorganization Items.Reorganization items, which consisted of income,
expenses and other gains and losses incurred as a result of the bankruptcy
filings, resulted in a $48.5 million loss for the three months ended March 31,
2002, which consisted primarily of $28.0 million in professional fees and a
$12.8 million of net loss on divestitures of certain facilities and other
assets. There were no reorganization items reflected in our results of
operations in the comparable three month period ended March 31, 2003 since we
emerged from bankruptcy effective on May 13, 2002.

Discontinued Operation.During the three months ended December 31, 2001, we
received the approval of the Bankruptcy Court to sell our institutional
pharmacy services business, or the APS Division, subject to an auction and
overbidding process under the supervision of the Bankruptcy Court. Following
competitive bidding at the auction, Omnicare Inc. and its affiliates,
collectively referred to as Omnicare, were determined to have made the highest
and best bid for the assets of the APS Division. On December 5, 2001, the
Bankruptcy Court approved the sale of the APS Division to Omnicare for a cash
closing price of $97.0 million, subject to adjustments as provided in the
purchase agreement, and up to $18.0 million in future payments, depending upon
post-closing operating results of the APS Division, which, if earned, would be
received in each of 2003, 2004 and 2005. On January 6, 2002, we completed the
sale and realized a gain of $21.4 million, net of applicable income taxes,
which is reflected as
discontinued operations. In the first quarter of 2003, we earned and received
$6.0 million from Omnicare, which was recorded net of applicable income taxes,
or a $3.6 million gain, which is reflected as discontinued operations.

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Income Taxes. We recorded $1.8 million of income tax expense on income
generated in the three months ended March 31, 2003. Of this amount, $2.4
million of income tax expense was allocable to the gain on sale of discontinued
pharmacy operations, and is reported net of the gain on the statement of
operations. The remaining $0.6 million of income tax benefit is allocable to
the losses generated from continuing operations. We had sufficient tax loss
carry forwards to offset current period income. However, the income tax benefit
of utilizing pre-emergence deferred tax assets is first applied to reduce
reorganization value recorded in connection with fresh-start reporting pursuant
to SOP 90-7 as the tax loss deferred tax asset had a valuation allowance
recorded against it at the Effective Date. No tax provision was recorded for
the three months ended March 31, 2002 as the loss carry forwards were offset with
a valuation allowance because we believe the deferred tax asset would not be
recognizable under the more likely than not standard.

Liquidity and Capital Resources of the Company

|                              |                  |                                         |         |                        |         |                  |        |           |       |           |        |               |        |   |        |        |       |   |         |        |         | 
|----------------------------- | ---------------- | --------------------------------------- | ------- | ---------------------- | ------- | ---------------- | ------ | --------- | ----- | --------- | ------ | ------------- | ------ | - | ------ | ------ | ----- | - | ------- | ------ | ------- | 
|                              |                  |                                         |         | Payments due by Period
|                              |                  |                                         |         |                       
|                              |                  |                                         |         | Total                  |         | Less Than 1 Year |        | 1-3 Years |       | 4-5 Years |        | After 5 Years
|                              |                  |                                         |         |                        |         |                  |        |           |       |           |        |              
|Contractual obligations       |                  |                                         |         |                        |         |                  |        |           |       |           |        |               |        |   |        |        |       |   |         |       
|                              | Long-term debt   |                                         |         |                        |         |                  |        |           |       |           |        |               |        |   |        |        |       |   |         |        |        
|                              |                  | Term Loans                              |         | $                      | 209,880 |                  |        | $         | 2,120 |           |        | $             | 4,240  |   |        | $      | 4,240 |   |         | $      | 199,280 | 
|                              |                  | Second priority notes                   |         |                        | 150,000 |                  |        |           |      |           |        |               |       |   |        |        |      |   |         |        | 150,000 | 
|                              |                  | Non-recourse indebtedness of
subsidiary |         |                        | 59,688  |                  |        |           |      |           |        |               |       |   |        |        |      |   |         |        | 59,688  | 
|                              |                  | Mortgage notes payable                  |         |                        | 11,383  |                  |        |           | 154   |           |        |               | 352    |   |        |        | 419   |   |         |        | 10,458  | 
|                              |                  | Capital leases                          |         |                        | 52,330  |                  |        |           | 7,479 |           |        |               | 25,085 |   |        |        | 8,756 |   |         |        | 11,010  | 
|                              | Operating leases |                                         |         | 184,173                |         |                  |        | 34,365    |       |           |        | 54,748        |        |   |        | 34,903 |       |   |         | 60,157 |        
|                              | Other            |                                         |         | 2,144                  |         |                  |        | 145       |       |           |        | 246           |        |   |        | 156    |       |   |         | 1,597  |        
|                              |                  |                                         |         |                        |         |                  |        |           |       |           |        |               |        |   |        |        |       |   |         |       
|Total contractual obligations |                  | $                                       | 669,598 |                        |         | $                | 44,263 |           |       | $         | 84,671 |               |        | $ | 48,474 |        |       | $ | 492,190 |       
|                              |                  |                                         |         |                        |         |                  |        |           |       |           |        |               |        |   |        |        |       |   |         |       

|                             |                   |   |        |                                            |  |                  |        |           |  |           |   |               |  |   |   |   |  |   |       |       |  | 
|---------------------------- | ----------------- | - | ------ | ------------------------------------------ |  | ---------------- | ------ | --------- |  | --------- | - | ------------- |  | - | - | - |  | - | ----- | ----- |  | 
|                             |                   |   |        | Amount of Commitment Expiration per Period
|                             |                   |   |        |                                           
|                             |                   |   |        | Total                                      |  | Less Than 1 Year |        | 1-3 Years |  | 4-5 Years |   | After 5 Years
|                             |                   |   |        |                                            |  |                  |        |           |  |           |   |              
|Commercial commitments       |                   |   |        |                                            |  |                  |        |           |  |           |   |               |  |   |   |   |  |   |       |      
|                             | Letters of credit |   | $      | 22,563                                     |  |                  | $      | 22,563    |  |           | $ |              |  |   | $ |  |  |   | $     |      | 
|                             | Guarantees        |   |        | 5,100                                      |  |                  |        |          |  |           |   |              |  |   |   |  |  |   |       | 5,100 | 
|                             |                   |   |        |                                            |  |                  |        |           |  |           |   |              
|Total commercial commitments |                   | $ | 27,663 |                                            |  | $                | 22,563 |           |  | $         |  |               |  | $ |  |   |  | $ | 5,100 |      
|                             |                   |   |        |                                            |  |                  |        |           |  |           |   |              

Working Capital and Cash Flows

At March 31, 2003, we had working capital of $117.9 million and cash and cash
equivalents of $47.4 million, compared to working capital of $116.6 million and
cash and cash equivalents of $38.6 million at December 31, 2002. For the three
months ended March 31, 2003, net cash provided by operating activities of
continuing operations before reorganization items was $8.8 million. Net cash
provided by operating activities of continuing operations before reorganization
items was $33.1 million for the three months ended March 31, 2002.

Purchases of property and equipment were $15.8 million for the three months
ended March 31, 2003 and $9.8 million for the three months ended March 31,
2002, both of which were financed through internally generated funds. Capital
expenditures for the three months ended March 31, 2003 included $3.9 million
related to certain facilities that were damaged by floods for which insurance
proceeds of $2.9 million were received in the three months ended March 31,
2003. Our operations require capital expenditures for renovations of existing
facilities in order to continue to meet regulatory requirements, upgrade
facilities for the treatment of sub-acute patients, accommodate the addition of
specialty medical services and improve the physical appearance of facilities
for marketing purposes. In addition, capital expenditures are required for
completion of certain facility expansions, new construction projects and
supporting non-nursing home operations.

We anticipate spending a portion of our planned capital expenditures for the
twelve months ending December 31, 2003 to complete additions to our information
systems, which include a new centralized clinical billing function and
enhancements to other accounting and human resource systems. Some of the costs
associated with these enhancements may qualify as capital expenditures in
accordance with American Institute of Certified Public

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Accountants Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.

During the three months ended
March 31, 2002, we received net proceeds from the disposition of
assets of $90.3 million, which primarily related to the sale of the
APS Division.

During the three months ended March 31, 2003, we made aggregate principal
repayments of long-term debt of $1.5 million. During the three months ended
March 31, 2002, we made aggregate principal repayments of prepetition long-term
debt of $92.2 million.

We believe that our cash generated from operations, together with available
borrowings under or Senior Credit Facility, are sufficient to fund our working
capital needs for the foreseeable future.

Capital Resources

Senior Credit Facility.Effective March 31, 2003, we amended our $297.0
million Senior Credit Facility with a syndicate of lenders (the Senior Credit
Facility). This amendment, among other things, adjusted the terms of the
financial covenants for the two year period through December 31, 2004 and
increased our interest rates.

Outstanding loans under the Senior Credit Facility bear interest, at our
election, using either a base rate or eurodollar rate, plus an applicable
margin which ranges from 2.25%-3.25% for base rate loans and 3.25%-4.25% for
eurodollar rate loans. These margins are subject to quarterly adjustment
depending upon our total debt leverage ratio. Within the range indicated
above, adjustments may increase or reduce the applicable margins, as the case
may be.

Borrowings under a $212.0 million six-year term loan facility (the Term
Loans) were used to fund our obligations under the Joint Plan and to pay in
cash all or a portion of certain claims of prepetition senior credit facility
lenders and mortgage lenders. At March 31, 2003, the interest rate was 4.63%
and $209.9 million in borrowings that were outstanding on the Term Loans.
Additional amounts cannot be borrowed under the Term Loans. The Term Loans
amortize in quarterly installments at a rate of 0.25% of the original principal
balance, or $0.5 million, payable on the last day of each fiscal quarter
beginning June 30, 2002, and mature on May 13, 2008. The Term Loans can be
prepaid at our option without penalty or premium. In addition, the Term Loans
are subject to mandatory prepayment in certain events such as some asset or
securities sales or our receipt of certain insurance proceeds.

The Term Loans are also subject to annual mandatory prepayment to the extent of
75% of our consolidated excess cash flow. Any mandatory prepayment of our Term
Loans will reduce our remaining financial flexibility by reducing our available
cash balance. While we are currently unable to quantify the extent to which
this will affect our future operations, it is possible that it will make it
more difficult or impossible for us to fund future operations, which could
impair our operating results.

Borrowings under an $85.0 million revolving credit facility (the Revolving
Credit Facility) may be used for general corporate purposes, including working
capital and permitted acquisitions. Usage under the Revolving Credit Facility,
which matures on May 13, 2007, is subject to a borrowing base based upon both a
percentage of our eligible accounts receivable and a percentage of the real
property collateral value of substantially all of our SNFs. No borrowings were
outstanding under the Revolving Credit Facility as of March 31, 2003; however,
approximately $22.6 million of letters of credit issued under the Revolving
Credit Facility were outstanding on that date. Also as of March 31, 2003,
$62.4 million remained available for future borrowings.

The Senior Credit Facility is guaranteed by substantially all of our
subsidiaries and is secured by liens and security interests on substantially
all of our real property and personal property assets. In addition to those
described above, covenants negotiated in the Senior Credit Facility restrict
our ability to borrow funds in the event we maintain a cash book balance in
excess of $25.0 million and also require us to maintain compliance with certain
financial and non-financial covenants, including minimum fixed charge coverage ratios, minimum
consolidated adjusted EBITDA (as defined in the Senior Credit Facility),
maximum total leverage and senior leverage ratios, as well as maximum capital
expenditures.

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Second Priority Notes.The principal amount of newly issued secured debt in
the amount of $150.0 million (the Second Priority Notes) bear interest at a
3-month LIBOR, adjusted quarterly, plus 550 basis points. At March 31, 2003,
the interest rate payable under the Second Priority Notes was 6.9%. The Second
Priority Notes mature on May 13, 2009, and are subject to redemption without
premium or penalty at any time, at our option. The Indenture covering these
notes includes affirmative and negative covenants customary for similar
financings, including, restrictions on additional indebtedness, liens,
restricted payments, investments, asset sales, affiliate transactions and the
creation of unrestricted subsidiaries. Liens and security interests in the
same collateral as that pledged to secure the Senior Credit Facility secure
these obligations. However, the liens and security interests benefiting the
Second Priority Note holders and trustee rank immediately junior in priority
behind the liens and security interests securing the Senior Credit Facility.

Non-Recourse Indebtedness of Unrestricted Subsidiary.Professional Health Care
Management, Inc., or PHCMI, a wholly owned subsidiary of ours, is the borrower
under an approximately $59.7 million mortgage loan from Omega Healthcare
Investors, Inc., or Omega , that was restructured as part of the Chapter 11
cases. The loan, or the Omega Loan, bears interest at a rate of 11.57% per
annum, is guaranteed by all the subsidiaries of PHCMI and is secured by liens
and security interests on all or substantially all of the real property and
personal property of PHCMI and its subsidiaries, or the PHCMI Entities,
including nine SNFs located in Michigan and three others in North Carolina,
collectively referred to as the Omega Facilities. Omega is also entitled to
receive an annual amendment fee equal to 25% of the free cash flow from the
Omega Facilities.

The Omega Loan provides for interest only payments until its scheduled maturity
on August 31, 2010. The maturity date of the Omega Loan may be extended at
PHCMIs option until August 31, 2021. Prior to maturity, the Omega Loan is not
subject to prepayment without the consent of Omega except (a) between February
1, 2005 and July 31, 2005, at 103% of par, and (b) within six months prior to
the scheduled maturity date, at par, in each case plus accrued and unpaid
interest.

The Omega Loan constitutes non-recourse indebtedness to the rest of the legal
entities of Mariner excluding PHCMI. None of the MHC Entities have guaranteed
the Omega Loan or pledged assets to secure the Omega Loan, other than the
pledge of PHCMIs issued and outstanding capital stock. In addition, none of
the PHCMI Entities have guaranteed either the Senior Credit Facility or the
Second Priority Notes, nor have they pledged their assets for those
indebtednesses. The Omega Loan restricts the extent to which PHCMI can incur
other indebtedness, including intercompany indebtedness from PHCMIs
shareholders.

Other Factors Affecting Liquidity and Capital Resources.Due to the impact of
the Medicare Reimbursement Cliff, we are currently receiving a lower rate of
Medicare reimbursement for services provided after September 30, 2002 than we
did before that date. The remaining increases in Medicare reimbursement for
high-acuity patients provided for under the Medicare Balanced Budget Refinement
Act of 1999, and the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 are expected to terminate when the Centers for Medicare
& Medicaid Services, or CMS, implements a resource utilization group
refinement. CMS recently announced that it was delaying the implementation of
any further refinements to the reimbursement rates until October 1, 2004, at
the earliest. Based solely on the impact of the Medicare Reimbursement Cliff,
and not accounting for other factors, such as pending refinements to the
Medicare reimbursement system, potential Medicaid cuts and increased labor
costs more fully described below, and assuming that additional mitigating
legislation is not enacted by Congress and our patient census remains stable,
the Medicare Reimbursement Cliff resulted in a loss of revenue of $8.8 million
for the quarter ended March 31, 2003. The Medicare Reimbursement Cliff is expected to result in a
loss of revenue of $28.2 million in the last nine months of 2003 and up to approximately $37.0 million annually, thereafter.
The impact, and expected continued impact, of the Medicare Reimbursement Cliff
is expected to materially adversely affect our cash flows for the indefinite
future.

We also are reimbursed for services, such as rehabilitation therapy services,
provided to SNF patients under the Medicare Part B benefit. The Balanced
Budget Act of 1997, or the Balanced Budget Act, changed the reimbursement
methodology for Medicare Part B therapy services from cost based to fee screen
payments. It also imposed annual limits per beneficiary of $1,500 for physical
therapy and speech language pathology combined and $1,500 for occupational
therapy. Subsequent moratoria on imposition of the therapy limits expired on
December 31,
2002; however, CMS instructed Medicare contractors to continue to pay claims
without limits until they developed a system to monitor the volume of services
provided to beneficiaries. The per beneficiary limits are to be imposed
beginning July 1, 2003 and will be $1,590 for physical therapy and speech
language pathology combined and $1,590 for occupational therapy through the end
of calendar year 2003. New limits will be established for calendar year

23



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##### Table of Contents



2004
and will be adjusted by a Medicare economic index. We are unable to quantify
whether the reinstatement of limits on reimbursement for Part B therapy
services will have an impact on our business or the extent of the possible
impact, as this will be a function of the number of patients receiving therapy
and the level of therapy they require.

Upon our emergence from bankruptcy, we had ten Medicare fiscal intermediaries
through which Medicare claims were paid and cost reports were filed and
settled. In order to streamline the Medicare billing and cost reporting
process, we requested that all of our facilities be converted to one fiscal
intermediary, Mutual of Omaha, or Mutual, starting with Medicare years
beginning after September 30, 2002. The primary dates for conversion were
October 1, 2002, January 1, 2003 and April 1, 2003. Due to reasons beyond our
control, such as the disparity between the Mutual billing system and those of
the other fiscal intermediaries, delays in Mutual receiving Tie-In Notices from
CMS approving them as the fiscal intermediary for some facilities and issues
with respect to paying for patients who were at a facility prior to its
conversion to Mutual, the October 1, 2002 and January 1, 2003 conversions have
resulted in a slow-down in cash collections for services rendered to Medicare
patients. We estimate that we are currently owed approximately $10.0 million
from Mutual for Medicare services previously rendered. We are working closely
with Mutual to resolve the slow-down in collections. Failure to reach a
satisfactory resolution of the slow-down in cash collections from Mutual could
have an adverse effect on our liquidity.

The Balanced Budget Act also repealed the federal payment standard for Medicaid
reimbursement levels for hospitals and nursing facilities. By repealing this
standard, the Balanced Budget Act removed previously existing impediments on
the ability of states to reduce their Medicaid reimbursement levels. Many
states in which we maintain significant operations are proposing and/or have
implemented reductions in their Medicaid reimbursement levels or decreased the
ability to become eligible for Medicaid benefits. These modifications could
materially adversely affect our revenue.

Due to a decrease in the number of people entering the nursing profession and
an increased demand for nurses in the healthcare industry, we have experienced,
and are continuing to experience, a significant increase in our labor costs
over the course of the last year in certain markets in which we maintain
operations. While this has not yet had a material adverse effect on our
operations, there can be no assurance that further increases in nursing staff
wages will not have such an effect. We have also experienced, and are
continuing to experience, increased staffing requirements in order to maintain
compliance with various Medicare and Medicaid programs. We anticipate that the
nursing staff shortage will accelerate, especially in light of a demographic
review indicating that a significant percentage of people engaged in the
nursing profession are nearing retirement age with no significant group of
nursing staff candidates to fill anticipated vacancies.

Insurance related costs in the long-term care industry continue to rise at a
dramatic rate. This primarily includes PL/GL, workers compensation and
directors and officers liability programs. Significant increases in the
frequency and severity of PL/GL claims also continues. Insurance markets have
responded to this significant increase by severely restricting the availability
of PL/GL insurance coverage. As a result of these changes, fewer companies are
engaged in insuring long-term care companies for PL/GL losses, and those that
do offer insurance coverage do so at a very high cost. These increases have
already had an adverse effect on our operations. No assurance can be given
that our PL/GL costs will not continue to rise, or that PL/GL coverage will be
available to us in the future. In the event that PL/GL insurance coverage
becomes cost prohibitive to maintain, or unavailable in some markets, we may be
forced to re-evaluate our continued operations in those markets.

In some states in which we have significant operations, insurance coverage for
the risk of punitive damages arising from PL/GL claims and/or litigation may
not, in certain cases, be available due to state law prohibitions or
limitations of availability. We cannot assure you that we will not be liable
for punitive damage awards that are either not covered by, or are in excess of,
our insurance policy limits. We also believe 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.
Insurance is not available to cover such losses, and any adverse determination
in a legal proceeding or governmental investigation, whether currently asserted
or arising in the future, could have a material adverse effect on our financial
condition.

Due to the rising cost and limited availability of PL/GL insurance, we
currently purchase excess PL/GL liability insurance only and maintain an
unaggregated $1.0 million self-insured retention per claim, in all states
except Colorado, where we maintain first dollar coverage. Additionally, we
currently self insure the first $0.5 million of

24



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##### Table of Contents



each employee injury claim.
Because we are largely self-insured on both of these programs, there is no
limit on the maximum number of claims or amount for which we can be liable in
any policy period. Although we base our loss estimates on independent
actuarial analyses using the information we have to date, the amount of the
losses could exceed our estimates. In the event our actual liability exceeds
our estimates for any given period, our results of operations and financial
condition could be materially adversely impacted.

Loss provisions in our financial statements for self-insured programs are
provided on an undiscounted basis in the relevant period. These provisions are
based on internal and external evaluations of the merits of individual claims
and analysis of claims history. The external analysis is completed by a
certified actuary with extensive experience in the long-term care industry.
The methods of determining these estimates and establishing the resulting
accrued liabilities are reviewed frequently by our management with any material
adjustments resulting therefrom being reflected in current earnings. Although
we believe our provisions for self-insured losses in our financial statements
are adequate, the ultimate liability may be more or less than the amounts
recorded. In the event the provision for loss reflected in our financial
statements is inadequate, our financial condition and results of operations may
be materially adversely affected.

We maintain two captive insurance subsidiaries to provide for reinsurance
obligations under workers compensation, PL/GL and automobile liability for
losses that occurred prior to April 1, 1998. These obligations are funded with
long-term, fixed income investments, which are not available to satisfy other
obligations.

We anticipate an increase in employee benefits expenses throughout the 2003
fiscal year due to the rising cost of employee health insurance. The higher
cost of insurance is due to an increase in the participation rate among
employees, an increase in the cost of insurance per employee and an increase in
the total number of employees.

We have significant rent obligations relating to our leased facilities. Total
rent expense was $11.6 million and $11.8 million for the three months ended
March 31, 2003 and three months ended March 31, 2002, respectively.

The Health Insurance Portability and Accountability Act of 1996 established
privacy regulations to improve the efficiency and effectiveness of the health
care system by standardizing the electronic transmission of certain
administrative and financial transactions. HIPAA seeks to protect the security
and privacy of identifiable health information for individual patients. HIPAA
regulations require that electronic transactions, claims information, plan
eligibility, referral certification and authorization, claims status, plan
enrollment and disenrollment and payment and remittance advice, be transmitted
electronically and uniformly. This new method of submitting information,
including payment information, to our fiscal intermediaries is required under
HIPAA to be implemented on October 16, 2003. While we believe that we and the
Medicare program will be HIPAA compliant by such date, there is a significant
risk that many of the state Medicaid programs from which we receive Medicaid
reimbursement will not, particularly in light of the budget deficits many of
them are facing.

In the event that a state is unable to process our HIPAA compliant requests for
payment, our liquidity could be adversely affected. We are in the process of
evaluating the extent of the problem, and program testing of the new data
submission requirements began on April 16, 2003. Following October 16, 2003,
it will be a violation of HIPAA to submit data in any format other than that
prescribed by HIPAA. We are in the process of developing contingency plans to
address this potential issue, but no assurance can be given that our liquidity
will not be adversely affected following the October 16, 2003 implementation of
the new HIPAA electronic transactions and code sets standards if the state
Medicaid programs are not compliant.

Impact of Inflation

The healthcare 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, and have, adversely impacted us. In some of our
markets there is a labor shortage that could have an adverse effect upon our
ability to attract or retain sufficient numbers of skilled and unskilled
personnel at reasonable wages. Accordingly, rising wage rates have had an
adverse effect on us in some of our markets.

25



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Cautionary Statements

Statements contained in this quarterly report that are not historical facts may
be forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Any such forward-looking statements reflect our
beliefs and assumptions and are based on information currently available to us.
Forward-looking statements are only predictions and involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. For additional information regarding factors
that may cause our results of operations to differ materially from those
presented herein, please see Risk Factors contained in our annual report on
Form 10-K for the fiscal year ended December 31, 2002.

You can identify forward-looking statements as those that are not historical in
nature, particularly those that use terminology such as may, will,
should, expect, anticipate, contemplate, estimate, believe, plan,
project, predict, potential or continue, or the negative of these, or
similar terms. In evaluating these forward-looking statements, you should
consider the following factors, as well as others contained in our public
filings from time to time, which may cause our actual results to differ
materially from any forward-looking statement:



| |  |  | our existing and future indebtedness;                                                                   
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | changes in Medicare, Medicaid and certain private payors reimbursement levels;                         
|
| |  |  | existing government regulations and changes in, or the failure to
comply with, governmental regulations;
|
| |  |  | the ability to control costs and implement measures designed to enhance operating efficiencies;         
|
| |  |  | legislative proposals for health care reform;                                                           
|
| |  |  | competition;                                                                                            
|
| |  |  | the ability to attract and retain qualified personnel at a reasonable cost;                             
|
| |  |  | changes in current trends in the cost and volume of general and professional liability claims;          
|
| |  |  | possible investigations or proceedings against us initiated by states or the federal government;        
|
| |  |  | state regulation of the construction or expansion of health care providers;                             
|
| |  |  | litigation;                                                                                             
|
| |  |  | unavailability of adequate insurance coverage on reasonable terms; and                                  
|
| |  |  | an increase in senior debt or reduction in cash flow upon our purchase or sale of assets.               

Any subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth or referred to above, as well as the risk
factors contained in our annual report on Form 10-K for the fiscal year ended
December 31, 2002. Except as required by law, we disclaim any obligation to
update such statements or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.




ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates and
commodity prices. Our primary exposure to market risk is interest rate risk
associated with borrowings under our Senior Credit Facility and interest
payments on our Second Priority Notes, each of which
bear interest based on variable rates. If market interest rates rise, so will
our required interest payments on these borrowings.

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##### Table of Contents



General Interest Rate Risk

The following discussion of our exposure to interest rate risk has been
prepared using assumptions considered reasonable in light of information
currently available to us. Given the unpredictability of interest rates as
well as other factors, actual results could differ materially from those
projected.

At March 31, 2003, we had exposure to interest rate risk related to changes in
LIBOR, which affects the interest paid on our variable rate borrowings and the
fair value of our fixed rate borrowings. The following table provides
information about our financial instruments that are sensitive to changes in
interest rates, including principal cash flows and related weighted-average
interest rates by expected maturity for the periods indicated (dollars in
thousands):

|                                                  |                       |  |                     |       |        |  |        |       |               |  |        |        |            |  |       |       |                |  |   |       |   |  |   |         |   |  |   |         |  |  |   |         | 
|------------------------------------------------- | --------------------- |  | ------------------- | ----- | ------ |  | ------ | ----- | ------------- |  | ------ | ------ | ---------- |  | ----- | ----- | -------------- |  | - | ----- | - |  | - | ------- | - |  | - | ------- |  |  | - | ------- | 
|                                                  |                       |  | Expected Maturities |       |        |  |        |       |               |  |       
|                                                  |                       |  |                     |       |        |  |        |       | Fair Value at
|                                                  |                       |  | Year 1              |       | Year 2 |  | Year 3 |       | Year 4        |  | Year 5 |        | Thereafter |  | Total |       | March 31, 2003
|                                                  |                       |  |                     |       |        |  |        |       |               |  |        |        |            |  |       |       |               
|Liabilities                                       |                       |  |                     |       |        |  |        |       |               |  |        |        |            |  |       |       |                |  |   |       |   |  |   |         |   |  |   |         |  |  |   |        
|Long-term debt,
including amounts
due in one year |                       |  |                     |       |        |  |        |       |               |  |        |        |            |  |       |       |                |  |   |       |   |  |   |         |   |  |   |         |  |  |   |        
|                                                  | Fixed rate            |  | $                   | 7,633 |        |  | $      | 6,763 |               |  | $      | 18,674 |            |  | $     | 7,927 |                |  | $ | 1,248 |   |  | $ | 81,156  |   |  | $ | 123,401 |  |  | $ | 126,378 | 
|                                                  | Average interest
rate |  |                     | 9.3   | %      |  |        | 9.4   | %             |  |        | 9.6    | %          |  |       | 10.2  | %              |  |   | 10.5  | % |  |   | 10.6    | % |  |   |         |  |  |   |         | 
|                                                  | Variable rate         |  | $                   | 2,120 |        |  | $      | 2,120 |               |  | $      | 2,120  |            |  | $     | 2,120 |                |  | $ | 2,120 |   |  | $ | 349,280 |   |  | $ | 359,880 |  |  | $ | 359,880 | 

The interest rates on the variable rate portions of our long-term debt vary.
Loans under the Senior Credit Facility bear interest, at our election, using
LIBOR or a eurodollar rate, plus a margin that ranges from 2.25%-3.25% for base
rate loans and 3.25%-4.25% for eurodollar rate loans. The Second Priority
Notes bear interest at 3-month LIBOR, reset quarterly, plus 550 basis points.
While we do not currently employ interest rate hedges, we are in the process of
evaluating alternatives for the conversion of some or all of our indebtedness
from variable rate to fixed rate, as required by our Senior Credit Facility.
These alternatives may include entering into interest rate swap arrangements,
refinancing existing variable rate debt with fixed rate debt or managing the
mix of our long-term variable and fixed rate borrowings. We cannot assure you
that any of these alternatives will successfully hedge our interest rate risk,
and adverse changes in market interest rates could have a material adverse
effect on our financial condition.

Derivative Instrument

PHCMI is the borrower under an approximately $59.7 million mortgage loan from
Omega that was restructured as part of the Chapter 11 cases. The Omega Loan
bears interest at a rate of 11.57% per annum and provides for interest-only
payments until its scheduled maturity on August 31, 2010. The maturity date of
the Omega Loan may be extended at PHCMIs option until August 31, 2021. This
term-extending option meets the definition of an embedded derivative
instrument. This derivative is accounted for as a purchased option, or more
specifically a payer swaption. The fair market value of the payer swaption
was bifurcated from the Omega Loan and recorded as an asset with a current
market value of $3.2 million on March 31, 2003. Prior to maturity, the Omega
Loan can not be prepaid without the consent of Omega except between February 1,
2005 and July 31, 2005, at 103% of par, or within six months prior to the
scheduled maturity date, at par, in each case plus accrued and unpaid interest.
In the event the debt is prepaid, the payer swaption will become worthless and
we will recognize an expense for the current market value.

The current market value was determined using the Black model. The selection
of this model is subjective and we believe it gives an accurate estimate of the
fair value for this derivative instrument. Like all models used to estimate
the fair value of a transaction of this nature, the resulting market value is
very sensitive to changes in the assumptions. The assumptions used in the
model as of March 31, 2003 were as follows: 11.57% strike price; 7.4 years
until the swap begins; 11 year term of the swap; notional value of $59.7
million; standard deviation of the forward rate 14.3%; and market par yield
plus 500 basis points. The market value calculation is most sensitive to
changes in the standard deviation of the forward rate and the market par yield
(both the change in the level of
interest rates and the shape of the interest rate curve). An increase in these
variables, with other variables held constant, will cause the value of the
payer swaption to increase.

We do not purchase or hold any derivative financial instruments for trading
purposes.

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##### Table of Contents






ITEM 4.   CONTROLS AND PROCEDURES

We currently have in place systems relating to disclosure controls and
procedures with respect to the accurate and timely recording, processing,
summarizing and reporting of information required to be disclosed in our
Exchange Act reports. We periodically review and evaluate these disclosure
controls and procedures systems to ensure this information is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions about required
disclosure. In completing our review and evaluation in connection with the
preparation of this quarterly report within 90 days prior to the date of the
report, management necessarily applied its judgment in assessing the costs and
benefits of these controls and procedures which, by their nature, can provide
only reasonable assurance regarding managements control objectives.

Also, in connection with the audit of our financial statements for the fiscal
year ended December 31, 2002, our independent auditor reported to senior
management and the audit committee that they concluded we had, during the
period covered by that audit, an insufficient number of corporate accounting
personnel with the appropriate experience for their responsibilities and the
accurate assessment and application of accounting principles. Since our
emergence from bankruptcy, we have been addressing and continue to address this
issue through the hiring of additional qualified accounting and finance
personnel. Notwithstanding the foregoing, the Chief Executive Officer and
Chief Financial Officer believe our internal controls and procedures are
effective, in all material respects. There have been no significant changes in
our internal controls or in other factors that could significantly affect our
internal controls, other than the hiring of additional personnel, which we will
continue to do. We understand the SEC may be promulgating additional rules
relating to internal controls. We cannot provide assurance that our current
internal controls will not change in the future to reflect potential new rules
of the SEC.

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##### Table of Contents






PART II



















|        |  |                                                    
|------- |  | ---------------------------------------------------
|ITEM 1. |  | LEGAL PROCEEDINGS                                  
|        |  |                                                    
|        |  | Not applicable.                                    
|        |  |                                                    
|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS          
|        |  |                                                    
|        |  | Not applicable.                                    
|        |  |                                                    
|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES                    
|        |  |                                                    
|        |  | Not applicable.                                    
|        |  |                                                    
|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|        |  |                                                    
|        |  | Not applicable.                                    
|        |  |                                                    
|ITEM 5. |  | OTHER INFORMATION                                  
|        |  |                                                    
|        |  | Not applicable.                                    
|        |  |                                                    
|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K                   

(a)     Exhibits

|        |  |                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                       
|Number  |  | Description of Exhibit                                                                                                
|        |  |                                                                                                                       
|99.1    |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|99.2    |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002



---

(b)     Reports on Form 8-K

Not Applicable.

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##### Table of Contents



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 HEALTH CARE, INC.                                
|                  
|                   |  | By: |  | /s/ C. Christian Winkle                                  
|                   |  |     |  |                                                          
|                   |  |     |  | C. Christian Winkle
President and Chief Executive Officer
|                   |  |     |  |                                                          
|Date: May 12, 2003 |  |     |  |                                                          

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

|                                            |  |                                                                                            |  |             
|------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ------------
|Signature                                   |  | Title                                                                                      |  | Date        
|                                            |  |                                                                                            |  |             
|/s/ C. Christian Winkle
C. Christian Winkle |  | President, Chief Executive Officer and Director (Principal Executive Officer)              |  | May 12, 2003
|                                           
|/s/ Michael E. Boxer
Michael E. Boxer       |  | Executive Vice President and Chief Financial Officer (Principal
Financial Officer)         |  | May 12, 2003
|                                           
|/s/ William C. Straub
William C. Straub     |  | Senior Vice President, Controller, Chief Accounting Officer (Principal Accounting Officer) |  | May 12, 2003

30



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##### Table of Contents



CERTIFICATION

I, C. Christian Winkle, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Mariner Health
Care, Inc.;                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

|                   |  |                                                                                        
|------------------ |  | ---------------------------------------------------------------------------------------
|Date: May 12, 2003 |  |                                                                                        
|                   |  |                                                                                        
|                   |  | /s/ C. Christian Winkle                                                                
|                   |  |                                                                                        
|                   |  | C. Christian Winkle
President and
Chief Executive Officer (Principal
Executive Officer)

31



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##### Table of Contents



CERTIFICATION

I, Michael E. Boxer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Mariner Health
Care, Inc.;                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

|                   |  |                                                                                                    
|------------------ |  | ---------------------------------------------------------------------------------------------------
|Date: May 12, 2003 |  |                                                                                                    
|                   |  |                                                                                                    
|                   |  | /s/ Michael E. Boxer                                                                               
|                   |  |                                                                                                    
|                   |  | Michael E. Boxer
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer)

32