Document:

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                                                                   EXHIBIT 10.97
                                                                       EXHIBIT B
                                                                              to
                                                                Revolving Credit
                                                                             and
                                                              Guaranty Agreement

                         SECURITY AND PLEDGE AGREEMENT

     SECURITY AND PLEDGE AGREEMENT (the "Agreement"), dated as of January 18,
                                         ---------
2000 by  and between MARINER POST-ACUTE NETWORK, INC., a Delaware corporation
(the "Borrower"), and each of the direct or indirect subsidiaries of the
      --------
Borrower party hereto (together with the Borrower, the "Grantors"), each a
                                                        --------
debtor and debtor-in-possession under Chapter 11 of the Bankruptcy Code, and THE
CHASE MANHATTAN BANK, as agent (in such capacity, the "Agent") for the financial
                                                       -----
institutions and other lenders (the "Banks") party to the Credit Agreement (as
                                     -----
hereinafter defined).

     WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Agent, the Banks and the Grantors are entering into a Revolving
Credit and Guaranty Agreement dated as of the date hereof (as amended, modified
or supplemented from time to time, the "Credit Agreement"); and
                                        ----------------

     WHEREAS, unless otherwise defined herein, terms defined in the Credit
Agreement are used herein as therein defined; and

     WHEREAS, it is a condition precedent to the making of Loans and the
issuance of Letters of Credit that the Grantors shall have granted a security
interest, pledge and lien on (x) all cash maintained in the Letter of Credit
Account pursuant to Section 364(c)(2) of the Bankruptcy Code and (y) certain of
the Grantors' assets and properties and the proceeds thereof pursuant to
Sections 364(c)(2), 364(c)(3) and 364(d)(1) of the Bankruptcy Code; and

     WHEREAS, the grant of such security interest, pledge and lien has been
authorized pursuant to Sections 364(c)(2), 364(c)(3) and 364(d)(1) of the
Bankruptcy Code by the First Day Order, and, after the entry thereof, will have
been so authorized by the Interim Order and the Final Order (collectively, the
"Orders"); and
-------

     WHEREAS, to supplement the Orders without in any way diminishing or
limiting the effect of the Orders or the security interest, pledge and lien
granted thereunder, the parties hereto desire to more fully set forth their
respective rights in connection with such security interest, pledge and lien;
and

     WHEREAS, this Agreement has been approved by the Orders;

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     NOW, THEREFORE, in consideration of the premises and in order to induce the
Banks to make Loans and issue Letters of Credit, the Grantors hereby agree with
the Agent as follows:

     SECTION 1.   Grant of Security and Pledge.  Each of the Grantors hereby
                  -----------------------------
transfers, grants, bargains, sells, conveys, hypothecates, assigns, pledges and
sets over to the Agent for its benefit and the ratable benefit of the Banks and
hereby grants to the Agent for its benefit and the ratable benefit of the Banks,
a perfected pledge and security interest in all of the Grantors' right, title
and interest in and to the following (the "Collateral") which pledge and
                                           ----------
security interest shall have the priorities set forth in Orders and shall be
subject to the Carve-Out:

          (1)  all present and future accounts, accounts receivable and other
rights of each of the Grantors to payment for goods sold or leased or for
services rendered (except those evidenced by instruments or chattel paper),
whether now existing or hereafter arising and wherever arising, and whether or
not they have been earned by performance (collectively, the "Accounts");
                                                             --------

          (2)  all goods and merchandise now owned or hereafter acquired by each
of the Grantors wherever located, whether in the possession of a Grantor or of a
bailee or other person for sale, storage, transit, processing, use or otherwise
consisting of whole goods, components, supplies, materials, or consigned,
returned or repossessed goods) which are held for sale or lease or to be
furnished (or have been furnished) under any contract of service or which are
raw materials, work-in-process, finished goods or materials used or consumed in
such Grantor's business or processed by or on behalf of any Grantor
(collectively, the "Inventory");
                    ---------

          (3)  all machinery, all manufacturing, distribution, selling, data
processing and office equipment, all furniture, furnishings, appliances,
fixtures and trade fixtures, tools, tooling, molds, dies, vehicles, vessels,
aircraft and all other goods of every type and description (other than
Inventory), in each instance whether now owned or hereafter acquired by each of
the Grantors and wherever located (collectively, the "Equipment");
                                                      ---------

          (4)  all works of art now owned or hereafter acquired by each of the
Grantors, including, without limitation, paintings, sketches, drawings, prints,
sculptures, crafts, tapestries, porcelain, carvings, artifacts, renderings and
designs;

          (5)  all rights, interests, choses in action, causes of action, claims
and all other intangible property of each of the Grantors of every kind and
nature (other than Accounts, Trademarks, Patents and Copyrights), in each
instance whether now owned or hereafter acquired by such Grantor, including,
without limitation, all general intangibles, but excluding causes of action
under the Bankruptcy Code (it being understood and agreed, however, that the
proceeds of any such causes of action shall be available to repay the
Obligations); all corporate and other business records; all loans, royalties,
and other obligations receivable; all inventions, designs, trade secrets,
computer programs, software, printouts and other computer materials, goodwill,
registrations, copyrights, licenses, franchises, customer lists, credit files,
correspondence, and advertising materials (to the extent the same are
assignable); all customer and supplier contracts, firm sale orders, rights under
license and franchise agreements (including all license agreements with any
other Person in

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connection with any of the Patents and Trademarks or such other Person's names
or marks, whether such Grantor is a licensor or licensee under any such license
agreement but only to the extent such license agreements are assignable), and
other contracts and contract rights; all interests in partnerships and joint
ventures; all tax refunds and tax refund claims; all right, title and interest
under leases, subleases, licenses and concessions and other agreements to the
extent assignable relating to real or personal property; all payments due or
made to each of the Grantors in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of any property by any person or
governmental authority; all deposit accounts (general or special) with any bank
or other financial institution; all credits with and other claims against
carriers and shippers; all rights to indemnification; all reversionary interests
in pension and profit sharing plans and reversionary, beneficial and residual
interest in trusts; all proceeds of insurance of which each of the Grantors is
beneficiary; and all letters of credit, guaranties, liens, security interest and
other security held by or granted to each of the Grantors; and all other
intangible property, whether or not similar to the foregoing (collectively, the
"General Intangibles");
 -------------------

          (6)  all chattel paper, all instruments, all notes and debt
instruments and all payments thereunder and instruments and other property from
time to time delivered in respect thereof or in exchange therefor, and all bills
of lading, warehouse receipts and other documents of title and documents, in
each instance whether now owned or hereafter acquired by each of the Grantors;

          (7)  all property or interests in property now or hereafter acquired
by each of the Grantors which may be owned or hereafter may come into the
possession, custody or control of the Agent or any agent or affiliate of the
Agent in any way or for any purpose (whether for safekeeping, deposit, custody,
pledge, transmission, collection or otherwise), and all rights and interests of
each of the Grantors, now existing or hereafter arising and however and wherever
arising, in respect of any and all (i) notes, drafts, letters of credits,
stocks, bonds, and debt and equity securities, whether or not certificated, and
warrants, options, puts and calls and other rights to acquire or otherwise
relating to the same; (ii) money (including all cash and cash equivalents held
in the Letter of Credit Account (as defined and referred to in the Credit
Agreement)); (iii) proceeds of loans, including, without limitation, Loans made
under the Credit Agreement; and (iv) insurance proceeds and books and records
relating to any of the property covered by this Agreement; together, in each
instance, with all accessions and additions thereto, substitutions therefor, and
replacements, proceeds and products thereof;

          (8)  all trademarks, trade names, trade styles, service marks, prints
and labels on which said trademarks, trade names, trade styles and service marks
have appeared or appear, designs and general intangibles of like nature, now
existing or hereafter adopted or acquired, and all registrations and recordings
thereof, including, without limitation, applications, registrations and
recordings in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof, or any other country
or political subdivision thereof (except for "intent to use" applications for
trademark or service mark registrations filed pursuant to Section 1(b) of the
Lanham Act, unless and until an Amendment to Allege Use or a Statement of Use
under Sections 1(c) and 1(d) of said Act has been filed), all whether now owned
or hereafter acquired by

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each of the Grantors, including, but not limited to, those described in Schedule
3 annexed hereto and made a part hereof, and all reissues, extensions or
renewals thereof and all licenses thereof (together, in each case, with the
goodwill of the business connected with the use of, and symbolized by each such
trademark, service mark, trade name and trade dress, all of the foregoing being
herein referred to as the "Trademarks");
                           ----------

          (9)  all letters patent of the United States or any other country, and
all registrations and recordings thereof, including, without limitation,
applications, registrations and recordings in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country or any political subdivision thereof, all
whether now owned or hereafter acquired by each of the Grantors, including, but
not limited to, those described in Schedule 4 annexed hereto and made a part
hereof, and (ii) all reissues, continuations, continuations-in-part or
extensions thereof and all licenses thereof (all of the foregoing being herein
referred to as the "Patents");
                    -------

          (10) all copyrights of the United States, or any other country, and
all registrations and recordings thereof, including, without limitation,
applications, registrations and recordings in the United States Copyright Office
or in any similar office or agency of the United States, any State thereof, or
any other country or political subdivision thereof, all whether now owned or
hereafter acquired by each of the Grantors, including, but not limited to, those
described in Schedule 5 hereto and all renewals and extensions thereof and all
licenses thereof (all of the foregoing being herein referred to as the
"Copyrights");
-----------

          (11) all books, records, ledger cards and other property at any time
evidencing or relating to the Accounts, Equipment, General Intangibles,
Trademarks, Patents or Copyrights;

          (12) (i) all the shares of capital stock owned by each Grantor, as
applicable, listed on Schedule 6 hereto of the issuers listed thereon
(individually, an "Issuer", and collectively, the "Issuers") and all shares of
                   ------                          -------
capital stock of any Issuer obtained in the future by such Grantor and the
certificates representing or evidencing all such shares (the "Pledged Shares");
                                                              --------------
all other property which may be delivered to and held by the Agent in respect of
the Pledged Shares pursuant to the terms hereof; (iii) subject to Section 9
below, all dividends, cash, instruments and other property from time to time
received, receivable or otherwise distributed, in respect of, in exchange for or
upon the conversion of the securities referred to in clauses (i) and (ii) above;
and (iv) subject to Section 9 below, all rights and privileges of each Grantor,
as applicable, with respect to the securities and other property referred to in
clauses (i), (ii) and (iii) (the items referred to in clauses (i) through (iv)
being collectively called the "Pledged Collateral");
                               ------------------

          (13) all other personal property of each of the Grantors, whether
tangible or intangible, and whether now owned or hereafter acquired; and

          (14) all proceeds and products of any of the foregoing, in any form,
including, without limitation, any claims against third parties for loss or
damage to or destruction of any or all of the foregoing and to the extent not
otherwise included, all (i) payments under insurance (whether

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or not the Agent is the loss payee thereof), or any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with respect to
any of the foregoing Collateral and (ii) cash.

Notwithstanding anything contained herein to the contrary, the total amount of
shares of capital stock or other ownership interests of any Person pledged
pursuant to this Agreement that is not incorporated or organized in the United
States shall in no event exceed sixty-six percent (66%) of the total outstanding
shares of capital stock or such other ownership interests thereof.

     SECTION 2.  Security for Obligations.  This Agreement and the Collateral
                 ------------------------
secure the payment of all obligations of each of the Grantors, now or hereafter
existing, under the Credit Agreement and the other Loan Documents (and any other
documents in respect of such obligations), and in respect of Indebtedness
permitted by Section 6.03(vi) of the Credit Agreement, whether for principal,
interest, fees, expenses or otherwise, and all obligations of each of the
Grantors now or hereafter existing under or in respect of this Agreement (all
such obligations of the Grantor being herein called the "Obligations").
                                                         -----------

     SECTION 3.  Delivery of Pledged Collateral; Other Action. Upon written
                 --------------------------------------------
 request by the Agent (and without further order of the Bankruptcy Court), all
 certificates or instruments representing or evidencing the Pledged Collateral
 not subject to a pledge in favor of any Real Estate Financier shall be
 delivered to and held by the Agent pursuant hereto and shall be accompanied by
 duly executed instruments of transfer or assignment in blank, all in form and
 substance satisfactory to the Agent. All such certificates or instruments
 previously delivered by the Grantors to the Pre-Petition Agent shall be deemed
 to be held by the Agent. Upon the occurrence and during the continuance of any
 Event of Default, the Agent shall have the right (for the ratable benefit of
 the Banks), at any time in its discretion and upon giving notice to the
 Grantors of its intent to exercise such rights, to transfer to or to register
 in the name of the Agent or any of its nominees any or all of the Pledged
 Collateral.

     SECTION 4.  Representations and Warranties. Each Grantor, jointly and
                 ------------------------------
severally, represents and warrants (but only with regard to itself) as follows:

            (1)  All of the Inventory and/or Equipment is located at the places
specified in Schedule 1 hereto. The chief places of business and chief executive
offices of each of the Grantors and the offices where each Grantor keeps its
records concerning any Accounts and all originals of all chattel paper which
evidence any Account are located at the places specified in Schedule 2 hereto.
All trade names under which each of the Grantors have sold and will sell
Inventory are listed on Schedule 3 hereto.

            (2)  Each of the Grantors owns the Collateral free and clear of any
lien, security interest, charge or encumbrance except for the security interest
created by this Agreement and except as permitted under Section 6.01 of the
Credit Agreement. No effective financing statement or other instrument similar
in effect covering all or any part of the Collateral is on file in any recording
office, except (x) such as may have been filed in favor of the Agent relating to
this Agreement and (y) in favor of any holder of a Lien permitted under Section
6.01 of the Credit Agreement.

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          (3)  As of the Filing Date, no Grantor owns any material Trademarks,
Patents or Copyrights or has any material Trademarks, Patents or Copyrights
registered in, or the subject of pending applications in, the United States
Patent and Trademark Office or any similar office or agency in any other country
or any political subdivision thereof, other than those described in Schedules 3,
4 and 5 hereto. The registrations for the Collateral disclosed on such Schedules
3, 4 and 5 hereto are valid and subsisting and in full force and effect. None of
the material Patents or Copyrights have been abandoned or dedicated.

          (4)  The Pledged Shares have been duly authorized and validly issued
and are fully paid and non-assessable.

          (5)  Each Grantor, as the case may be, is the legal and beneficial
owner of the Pledged Shares as described on Schedule 6 free and clear of any
lien, security interest, option or other charge or encumbrance, except for the
security interest created by this Agreement and the Orders and Liens permitted
under Section 6.01.

          (6)  Except as disclosed on Schedule 6, the Pledged Shares described
in Section 1(l) hereof constitute all of the issued and outstanding shares of
stock of each of the Issuers and no Issuer is under any contractual obligation
to issue any additional shares of stock or any other securities, rights or
indebtedness.

          (7)  Except for the Orders, no authorization, approval or other action
by, and no notice to or filing with, any governmental authority or regulatory
body is required for the grant and pledge by each of the Grantors of the
security interests granted hereby or for the execution, delivery or performance
of this Agreement by each of the Grantors.

     SECTION 5.  Further Assurances.
                 ------------------

          (1)  Each of the Grantors agrees that from time to time, at the
expense of the Grantors, it will promptly execute and deliver all further
instruments and documents, and take all further action, that may be necessary,
or that the Agent may reasonably request, in order to perfect and protect any
security interest granted or purported to be granted hereby or to enable the
Agent to exercise and enforce any of its rights and remedies hereunder with
respect to any Collateral. Without limiting the generality of the foregoing, and
without further order of the Bankruptcy Court, each of the Grantors will execute
and file such financing or continuation statements, or amendments thereto, and
such other instruments or notices, as may be necessary, or as the Agent may
reasonably request, in order to perfect and preserve the security interests
granted or purported to be granted hereby.

          (2)  Each Grantor hereby authorizes the Agent to file one or more
financing or continuation statements, and amendments thereto, relative to all or
any part of the Collateral without the signature of such Grantor where permitted
by law.

          (3)  Each Grantor will furnish to the Agent from time to time
statements and schedules further identifying and describing the Collateral and
such other reports in connection with

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the Collateral as the Agent may reasonably request in connection with any
prospective sale of Collateral pursuant to Section 15 hereof, all in reasonable
detail.

     SECTION 6.  As to Equipment and Inventory.  Each Grantor shall:
                 -----------------------------

          (1)  Keep the Equipment and Inventory (other than Inventory sold in
the ordinary course of business) at the places specified therefor in Schedule 1
hereto or, upon 30 days' written notice to the Agent following any transfer
thereof to a different jurisdiction, at other places in jurisdictions where all
action required by Section 5 shall have been taken to assure the continuation of
the perfection of the security interest of the Agent (for its benefit and the
ratable benefit of the Banks) with respect to the Equipment and Inventory.

          (2)  Subject to provisions of the Credit Agreement, maintain or cause
to be maintained in good repair, working order and condition, excepting ordinary
wear and tear and damage due to casualty, all of the Equipment, and make or
cause to be made all appropriate repairs, renewals and replacements thereof, to
the extent not obsolete and consistent with past practice of such Grantor, as
quickly as practicable after the occurrence of any loss or damage thereto which
are necessary or reasonably desirable to such end, except where the failure to
do any of the foregoing would not result in a Material Adverse Effect.

          (3)  Until satisfaction in full of the Obligations, at any time when
an Event of Default has occurred and is continuing: (i) each Grantor will
perform any and all reasonable actions requested by the Agent to enforce the
Agent's security interest in the Inventory and all of the Agent's rights
hereunder, such as subleasing warehouses to the Agent or its designee (to the
extent such subleases are not prohibited), placing and maintaining signs,
appointing custodians, transferring Inventory to warehouses, and delivering to
the Agent warehouse receipts and documents of title in the Agent's name; (ii) if
any Inventory is in the possession or control of any of the Grantors' agents,
contractors or processors or any other third party, each such Grantor will
notify the Agent thereof and will notify such agents, contractors or processors
or third party of the Agent's security interest therein and, upon request,
instruct them to hold all such Inventory for the Agent and such Grantor's
account, as their interests may appear, and subject to the Agent's instructions;
(iii) the Agent shall have the right to hold all Inventory subject to the
security interest granted hereunder; and (iv) the Agent shall have the right to
take possession of the Inventory or any part thereof and to maintain such
possession on such Grantor's premises or to remove any or all of the Inventory
to such other place or places as the Agent desires in its sole discretion. If
the Agent exercises its right to take possession of the Inventory, such Grantor,
upon the Agent's demand, will assemble the Inventory and make it available to
the Agent at such Grantor's premises at which it is located.

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     SECTION 7.  As to Accounts.
                 --------------

          (1)    Each Grantor shall keep its chief place of business and chief
executive office and the offices where it keeps its records concerning the
Accounts, and the offices where it keeps all originals of all chattel paper
which evidence Accounts, at the location or locations therefor specified in
Section 4(a) or, upon 15 days' prior written notice to the Agent, at such other
locations in a jurisdiction where all actions required by Section 5 shall have
been taken with respect to the Accounts. Each Grantor will hold and preserve
such records and chattel paper and will permit representatives of the Agent, at
any time during normal business hours and upon reasonable prior written notice,
to inspect and make abstracts from such records and chattel paper in accordance
with Section 5.08 of the Credit Agreement.

          (2)    Except as otherwise provided in this subsection (b), each
Grantor shall continue to collect in accordance with its customary practice, at
its own expense, all amounts due or to become due to such Grantor under the
Accounts and, prior to the occurrence and continuance of an Event of Default,
such Grantor shall have the right to adjust, settle or compromise the amount or
payment of any Account, or release wholly or partly any account debtor or
obligor thereof, or allow any credit or discount thereon, all in accordance with
its customary practices. In connection with such collections, the Grantors may,
upon the occurrence and during the continuation of an Event of Default, take
(and at the direction of the Agent shall take) such action as the Grantors or
the Agent may reasonably deem necessary or advisable to enforce collection of
the Accounts; provided, that upon written notice by the Agent to any Grantor,
              --------
following the occurrence and during the continuation of an Event of Default, of
its intention so to do but subject to subsection (c) below, the Agent shall have
the right to notify the account debtors or obligors under any Accounts of the
assignment of such Accounts to the Agent and to direct such account debtors or
obligors to make payment of all amounts due or to become due to such Grantor
thereunder directly to the Agent and, upon such notification and at the expense
of such Grantor, to enforce collection of any such Accounts, and to adjust,
settle or compromise the amount or payment thereof, in the same manner and to
the same extent as such Grantor might have done. After receipt by such Grantor
of the notice referred to in the proviso to the preceding sentence, and unless
                                 -------
and until such notice is rescinded by the Agent by written notice to such
Grantor (i) all amounts and proceeds (including instruments) received by such
Grantor in respect of the Accounts shall be received in trust for the benefit of
the Agent (for the ratable benefit of the Banks) hereunder, shall be segregated
from other funds of the Grantors and shall be forthwith paid over to the Agent
in the same form as so received (with any necessary endorsement) to be held as
cash collateral and either (A) released to the Grantors if such Event of Default
shall have been cured or waived or (B) if such Event of Default shall be
continuing, applied as provided by Section 15, and (ii) the Grantors shall not
adjust, settle or compromise the amount or payment of any Account, or release
wholly or partly any account debtor or obligor thereof, or allow any credit or
discount thereon.

          (3)    Notwithstanding the provisions of Section 7, the Agent shall
not collect or enforce payment of any Account, the Account Debtor of which is a
Governmental Authority (a "Governmental Account") if and to the extent that such
                           --------------------
collection or enforcement is prohibited under 42 U.S.C. (S)(S)1395(g) or 1396(a)
or under any comparable provision of federal or state law. To the

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extent the Agent's rights as to any Governmental Account are limited pursuant to
this Section 7, upon the occurrence and during the continuation of an Event of
Default, each Grantor will (i) use its reasonable and diligent best efforts to
collect and enforce payment of such Governmental Account, (ii) immediately
deposit in the exact form received, duly indorsed by such Grantor to the Agent
if required, in a collateral account maintained under the sole dominion and
control of the Agent, subject to withdrawal by the Agent for the account of the
Banks only as provided in Section 16, and until so turned over, shall be held by
such Grantor in trust for the Agent and the Banks, segregated from other funds
of such Grantor and (iii) upon written demand by the Agent at any time and from
time to time, remit (and cause the depository bank for such collateral account
to remit) directly to the Agent, as proceeds of the Collateral and for
application to the payment of the Obligations pursuant to Section 16, all
finally collected funds on deposit in such collateral account.

     SECTION 8.  As to Trademarks, Patents and Copyrights.
                 ----------------------------------------

          (1)  Each Grantor shall, either itself or through licensees, continue
to use the Trademarks as each is currently used in the Grantor's business in
order to maintain the Trademarks in full force free from any claim of
abandonment for nonuse and each such Grantor will not (and will not permit any
licensee thereof to) do any act or knowingly omit to do any act whereby any
Trademark may become invalidated, unless such failure to use a Trademark is not
reasonably likely to have a material adverse effect on the condition (financial
or otherwise), operation or properties of the Grantors taken as a whole.

          (2)  No Grantor will do any act, or omit to do any act, whereby the
Patents or Copyrights may become abandoned or dedicated and each such Grantor
shall notify the Agent immediately if it knows of any reason or has reason to
know that any application or registration may become abandoned or dedicated,
unless such abandonment or dedication is not reasonably likely to have a
material adverse effect on the condition (financial or otherwise), operations or
properties of the Grantors taken as a whole.

          (3)  No Grantor will, either itself or through any agent, employee,
licensee or designee, (i) file an application for the registration of any Patent
or Trademark with the United States Patent and Trademark Office or any similar
office or agency in any other country or any political subdivision thereof or
(ii) file any assignment of any patent or trademark, which such Grantor may
acquire from a third party, with the United States Patent and Trademark Office
or any similar office or agency in any other country or any political
subdivision thereof, unless such Grantor shall, within 30 days after the date of
                     ------
such filing, notify the Agent thereof, and, upon request of the Agent, execute
and deliver any and all assignments, agreements, instruments, documents and
papers as the Agent may request to evidence the Agent's interest in such Patent
or Trademark and the goodwill and general intangibles of such Grantor relating
thereto or represented thereby, and such Grantor hereby constitutes the Agent
its attorney-in-fact to execute and file all such writings for the foregoing
purposes, all lawful acts of such attorney being hereby ratified and confirmed;
such power being coupled with an interest is irrevocable until the Obligations
are paid in full.

          (4)  Each Grantor will take all necessary steps in any proceeding
before the United States Patent and Trademark Office, the United States
Copyright Office or any similar office or

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<PAGE>

agency in any other country or any political subdivision thereof, to maintain in
all material respects each application and registration of all material
Trademarks, Patents and Copyrights, including, without limitation, filing of
renewals, affidavits of use, affidavits of incontestability and opposition,
interference and cancellation proceedings.

          (5)  Each Grantor will, without further order of the Bankruptcy Court,
perform all acts and execute and deliver all further instruments and documents,
including, without limitation, assignments for security in form suitable for
filing with the United States Patent and Trademark Office, and the United States
Copyright Office, respectively, reasonably requested by the Agent at any time to
evidence, perfect, maintain, record and enforce the Agent's interest in all
material Trademarks, Patents and Copyrights or otherwise in furtherance of the
provisions of this Agreement, and each Grantor hereby authorizes the Agent to
execute and file one or more accurate financing statements (and similar
documents) or copies thereof or of this Security Agreement with respect to
material Patents, Trademarks and Copyrights signed only by the Agent.

          (6)  Each Grantor will, upon acquiring knowledge of any use by any
person of any term or design likely to cause confusion with any material
Trademark, promptly notify the Agent of such use, and if requested by the Agent,
shall join with the Agent, at such Grantor's expense, in such action as the
Agent, in its reasonable discretion, may deem advisable for the protection of
the Agent's interest in and to the Trademarks.

     SECTION 9.  As to the Pledged Collateral; Voting Rights; Dividends; Etc.
                 ------------------------------------------------------------

          (1)  So long as no Event of Default shall have occurred and be
continuing and no written notice thereof shall have been given by the Agent to
the Grantors revoking all of the following rights pursuant to Section 9(b)(i)
hereof:

               (1) the Grantors (as applicable) shall be entitled to exercise
          any and all voting and other consensual rights pertaining to the
          Pledged Collateral or any part thereof for any purpose not
          inconsistent with the terms of this Agreement;

               (2)  notwithstanding the provisions of Section 1 hereof, such
          Grantors shall be entitled to receive and retain any and all dividends
          and other distributions paid in respect of the Pledged Collateral;
          provided, that any and all
          --------

               (A) dividends paid or payable other than in cash in respect of,
                   and instruments and other property received, receivable or
                   otherwise distributed in respect of, or in exchange for, any
                   Pledged Collateral, and

               (B) dividends and other distributions paid or payable in cash in
                   respect of any Pledged Collateral in connection with a
                   partial or total liquidation or dissolution or in connection
                   with a reduction of capital, capital surplus or paid-in-
                   surplus,

                                      10
<PAGE>

            (C)  cash paid, payable or otherwise distributed in respect of, or
                 in redemption of, or in exchange for, any Pledged Shares;

    shall be, and shall be forthwith delivered to the Agent, to hold as Pledged
    Collateral and shall, if received by any of the Grantors, be received in
    trust for the benefit of the Agent, be segregated from the other property or
    funds of such Grantor, and be forthwith delivered to the Agent as Pledged
    Collateral in the same form as so received (with any necessary endorsement);
    and

            (3)  the Agent shall execute and deliver (or cause to be executed
       and delivered) to the Grantors (as applicable) all such proxies and other
       instruments as the Grantors (as applicable) may reasonably request for
       the purpose of enabling such Grantor to exercise the voting and other
       rights which it is entitled to exercise pursuant to paragraph (i) above
       and to receive the dividends which it is authorized to receive and retain
       pursuant to paragraph (ii) above;

       (2)  Upon the occurrence and during the continuance of an Event of
Default:

            (1)  upon written notice from the Agent to the Grantors (as
       applicable) to such effect, all rights of such Grantors (as applicable)
       to exercise the voting and other consensual rights which it would
       otherwise be entitled to exercise pursuant to Section 9(a)(i) and to
       receive the dividends which it would otherwise be authorized to receive
       and retain pursuant to Section 9(a)(ii) shall cease, and all such rights
       shall thereupon become vested in the Agent, who shall thereupon have the
       sole right to exercise such voting and other consensual rights and to
       receive and hold as Pledged Collateral any such dividends; and

            (2)  all dividends which are received by such Grantors contrary to
       the provisions of paragraph (i) of this Section 9(b) shall be received in
       trust for the benefit of the Agent, shall be segregated from other funds
       of the Grantors and shall be forthwith paid over to the Agent as Pledged
       Collateral in the same form as so received (with any necessary
       endorsement).

     SECTION 10. Insurance.  Upon the occurrence and during the continuance of
                 ---------
any Event of Default, all insurance payments in respect of Inventory and
Equipment shall be held, applied and paid to the Agent as specified in Section
15 hereof.

     SECTION 11. Transfers to Others; Liens; Additional Shares.  Each Grantor
                 ---------------------------------------------
shall not:

            (1)  Sell, assign (by operation of law or otherwise) or otherwise
dispose of any of the Collateral, except for dispositions otherwise permitted by
the Credit Agreement.

            (2)  Create or suffer to exist any lien, security interest or other
charge or encumbrance upon or with respect to any of the Collateral to secure
any obligation of any person or

                                      11
<PAGE>

entity, except for the security interest created by this Agreement and the
Orders, or except as otherwise permitted by the Credit Agreement.

          (3)  Each of the Grantors (as applicable) agrees that it will (i)
cause each of the Issuers that are wholly-owned Subsidiaries not to issue any
stock or other securities in addition to or substitution for the Pledged Shares
issued by such Issuer, except to the respective Grantor and (ii) pledge
hereunder, immediately upon its acquisition (directly or indirectly) thereof,
any and all such additional shares of stock or other securities of each Issuer
of the Pledged Shares.

     SECTION 12.   Agent Appointed Attorney-in-Fact. Each Grantor hereby
                   --------------------------------
irrevocably appoints the Agent such Grantor's attorney-in-fact (which
appointment shall be irrevocable and deemed coupled with an interest), with full
authority in the place and stead of such Grantor and in the name of such Grantor
or otherwise, from time to time in the Agent's discretion, upon and during the
occurrence and continuation of an Event of Default, to take any action and to
execute any instrument which the Agent may deem necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation:

                   (1) to obtain and adjust insurance required to be paid to the
        Agent pursuant to Section 10,

                   (2) to ask, demand, collect, sue for, recover, compound,
        receive and give acquittance and receipts for moneys due and to become
        due under or in respect of any of the Collateral,

                   (3) to receive, endorse, and collect any drafts or other
        instruments, documents and chattel paper, in connection with clause (i)
        or (ii) above,

                   (4) to receive, endorse and collect all instruments made
        payable to the Grantors representing any dividend or other distribution
        in respect of the Pledged Collateral or any part thereof and to give
        full discharge for the same, and

                   (5) to file any claims or take any action or institute any
        proceedings which the Agent may deem necessary or desirable for the
        collection of any of the Collateral or otherwise to enforce the rights
        of the Agent with respect to any of the Collateral.

     SECTION 13.   Agent May Perform. If any Grantor fails to perform any
                   -----------------
agreement contained herein, the Agent may itself perform, or cause performance
of, such agreement, and the reasonable expenses of the Agent incurred in
connection therewith (as to which invoices have been furnished) shall be payable
by the Grantors under Section 16(b).

     SECTION 14.   The Agent's Duties. The powers conferred on the Agent
                   ------------------
hereunder are solely to protect its interest and the interests of the Banks in
the Collateral and shall not impose any duty upon it to exercise any such
powers. Except for the safe custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, the Agent shall have no

                                      12
<PAGE>

duty as to any Collateral or as to the taking of any necessary steps to preserve
rights against prior parties or any other rights pertaining to any Collateral,
including, without limitation, ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relative to
any Pledged Collateral, whether or not the Agent has or is deemed to have
knowledge of such matters.

     SECTION 15.   Remedies.  If any Event of Default shall have occurred and be
                   --------
continuing, and subject to the provisions of Section 7 of the Credit Agreement:

          (1)  The Agent may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to it,
and without application to or order of the Bankruptcy Court, all the rights and
remedies of a secured party on default under the Uniform Commercial Code and
also may (i) require each Grantor to, and each Grantor hereby agrees that it
will at its expense and upon request of the Agent forthwith, assemble all or
part of the Collateral as directed by the Agent and make it available to the
Agent at a place to be designated by the Agent which is reasonably convenient to
both parties and (ii) without notice except as specified in the following
sentence, sell the Collateral or any part thereof in one or more parcels at
public or private sale, at any of the Agent's offices or elsewhere, for cash, on
credit or for future delivery, and at such price or prices and upon such other
terms as the Agent may deem commercially reasonable.  Each Grantor agrees that,
to the extent notice of such sale shall be required by law, at least ten days'
notice to the Grantors of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification.  The Agent shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given.  The Agent may adjourn any
public or private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.

          (2)  The Agent may instruct the Grantors not to make any further use
of the Patents, Copyrights or Trademarks or any mark similar thereto for any
purpose to the extent that such use would be inconsistent with the exercise by
the Agent of any other remedies under this Section.

          (3)  The Agent may license, whether general, special or otherwise, and
whether on an exclusive or nonexclusive basis, any of the Trademarks, Patents or
Copyrights throughout the world for such term or terms, on such conditions, and
in such manner, as the Agent shall in its sole discretion determine; provided,
                                                                     --------
however, that any such license shall not conflict with any existing license or
sublicense.

          (4)  The Agent may (without assuming any obligations or liability
thereunder), at any time, enforce (and shall have the exclusive right to
enforce) against any licensee or sublicensee all rights and remedies of the
Grantors in, to and under any one or more license agreements with respect to the
Collateral, and take or refrain from taking any action under any thereof, and
each of the Grantors hereby releases the Agent from, and agrees to hold the
Agent free and harmless from and against any claims arising out of, any action
taken or omitted to be taken with respect to any such license agreement except
claims involving gross negligence, willful misconduct or bad faith of the Agent.

                                      13
<PAGE>

          (5)  In the event of any such license, assignment, sale or other
disposition of the Collateral, or any of it, each Grantor shall supply its know-
how and expertise relating to the Trademarks, Patents or Copyrights, and its
customer lists and other records relating to the Trademarks, Patents or
Copyrights to the Agent or its designee.

          (6)  In order to implement the assignment, sale or other disposal of
any of the Trademarks, Patents or Copyrights, the Agent may, at any time,
pursuant to the authority granted in Section 12 hereof, execute and deliver on
behalf of the Grantors, one or more instruments of assignment of the Trademarks,
Patents or Copyrights (or any application of registration thereof), in form
suitable for filing, recording or registration in any country.

          (7)  All cash proceeds received by the Agent in respect of any sale
of, collection from, or other realization upon all or any part of the Collateral
may, in the discretion of the Agent, be held by the Agent as collateral for, and
then or at any time thereafter applied (after payment of any amounts payable to
the Agent pursuant to Section 16 hereof) in whole or in part against, all or any
part of the Obligations in such order as the Agent shall elect. Any surplus of
such cash or cash proceeds held by the Agent and remaining after payment in full
of all the Obligations shall be paid over to the Grantors or to whomsoever may
be lawfully entitled to receive such surplus.

          (8)  If at any time when the Agent shall determine to exercise its
right to sell all or any part of the Pledged Collateral pursuant to this Section
15, such Pledged Collateral or the part thereof to be sold shall not be
effectively registered under the Securities Act of 1933, as amended, and as from
time to time in effect, and the rules and regulations thereunder (the
"Securities Act"), the Agent is hereby expressly authorized to sell such Pledged
 --------------
Collateral or such part thereof by private sale in such manner and under such
circumstances as the Agent may deem necessary or advisable in order that such
sale may legally be effected without such registration.  Without limiting the
generality of the foregoing, in any such event the Agent, in compliance with
applicable securities laws, (a) may proceed to make such private sale
notwithstanding that a registration statement for the purpose of registering
such Pledged Collateral or such part thereof shall have been filed under such
Securities Act, (b) may approach and negotiate with a restricted number of
potential purchasers to effect such sale and (c) may restrict such sale to
purchasers as to their number, nature of business and investment intention
including without limitation to purchasers each of whom will represent and agree
to the satisfaction of the Agent that such purchaser is purchasing for its own
account, for investment, and not with a view to the distribution or sale of such
Pledged Collateral, or part thereof, it being understood that the Agent may
cause or require each Grantor, and each Grantor hereby agrees upon the written
request of the Agent, to cause (i) a legend or legends to be placed on the
certificates to be delivered to such purchasers to the effect that the Pledged
Collateral represented thereby have not been registered under the Securities Act
and setting forth or referring to restrictions on the transferability of such
securities; and (ii) the issuance of stop transfer instructions to such Issuer's
transfer agent, if any, with respect to the Pledged Collateral, or, if such
Issuer transfers its own securities, a notation in the appropriate records of
such Issuer.  In the event of any such sale, each Grantor does hereby consent
and agree that the Agent shall incur no responsibility or liability for selling
all or any part of the Pledged Collateral at a price which the Agent may deem
reasonable

                                      14
<PAGE>

under the circumstances, notwithstanding the possibility that a substantially
higher price might be realized if the sale were public and deferred until after
registration as aforesaid.

     SECTION 16.   Indemnity and Expenses.
                   ----------------------

          (1)  Each Grantor, jointly and severally, agrees to indemnify the
Agent from and against any and all claims, losses and liabilities growing out of
or resulting from this Agreement (including, without limitation, enforcement of
this Agreement), except claims, losses or liabilities directly arising from the
Agent's own gross negligence, willful misconduct or bad faith.

          (2)  The Grantors will upon demand pay to the Agent the amount of any
and all reasonable expenses (as to which invoices have been furnished),
including the reasonable fees and disbursements of its counsel and of any
experts and agents, which the Agent may incur in connection with (i) the
administration of this Agreement, (ii) the custody, preservation, use or
operation of, or the sale of, collection from, or other realization upon, any of
the Collateral, (iii) the exercise or enforcement of any of the rights of the
Agent hereunder or (iv) the failure by any of the Grantors to perform or observe
any of the provisions hereof.

          (3)  The Grantors assume all responsibility and liability arising from
the use of the Trademarks, Patents and Copyrights.

          (4)  Each of the Grantors agrees that the Agent does not assume, and
shall have no responsibility for, the payment of any sums due or to become due
under any agreement or contract included in the Collateral or the performance of
any obligations to be performed under or with respect to any such agreement or
contract by any of the Grantors, and except as the same may have resulted from
the gross negligence, willful misconduct or bad faith of the Agent, each of the
Grantors hereby jointly and severally agree to indemnify and hold the Agent
harmless with respect to any and all claims by any person relating thereto.

     SECTION 17.   Security Interest Absolute. All rights of the Agent and
                   --------------------------
security interests hereunder, and all obligations of each of the Grantors
hereunder, shall be absolute and unconditional, irrespective of any circumstance
which might constitute a defense available to, or a discharge of, any guarantor
or other obligor in respect of the Obligations.

     SECTION 18.   Amendments; Etc. No amendment or waiver of any provision of
                   ---------------
this Agreement, nor any consent to any departure by any of the Grantors
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the party against whom enforcement is sought, and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.

     SECTION 19.   Addresses for Notices. All notices and other communications
                   ---------------------
provided for hereunder shall be in writing and shall be given in accordance with
the applicable provisions of the Credit Agreement.

                                      15
<PAGE>

     SECTION 20.   Continuing Security Interest.  This Agreement shall create a
                   ----------------------------
continuing security interest in the Collateral and shall (i) remain in full
force and effect until payment in full of the Obligations, (ii) be binding upon
each of the Grantors, their successors and assigns and (iii) inure, together
with the rights and remedies of the Agent hereunder, to the benefit of the Agent
and each of the Banks and their respective successors, transferees and assigns.
Upon the payment in full of the Obligations, the security interest granted
hereby shall terminate and all rights to the Collateral shall revert to the
Grantors subject to any existing liens, security interests or encumbrances on
such Collateral.  Upon any such termination, the Agent will, at the Grantor's
expense, execute and deliver to the Grantors such documents as the Grantors
shall reasonably request to evidence such termination.

     SECTION 21.   Governing Law. This Agreement shall be governed by and
                   -------------
construed in accordance with the laws of the State of New York, except as
required by mandatory provisions of law and except to the extent that the
validity or perfection of the security interest hereunder, or remedies
hereunder, in respect of any particular Collateral are governed by the laws of a
jurisdiction other than the State of New York and by Federal law (including,
without limitation, the Bankruptcy Code) to the extent the same has pre-empted
the law of the State of New York or such other jurisdiction.

     SECTION 22.   Headings. Section headings in this Agreement are included
                   --------
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.

                           [SIGNATURE PAGES FOLLOW]

     IN WITNESS WHEREOF, each of the Grantors and the Agent have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.

                         GRANTORS:

                         MARINER POST-ACUTE NETWORK, INC.

                         By:__________________________________
                              Name:
                              Title:

                         AMERICAN MEDICAL INSURANCE BILLING SERVICES, INC.
                         AMERICAN PHARMACEUTICAL SERVICES, INC.
                         AMERICAN REHABILITY SERVICES, INC.
                         AMERICAN-CAL MEDICAL SERVICES, INC.
                         AMERRA PROPERTIES, INC.
                         AMS GREEN TREE, INC.

                                      16
<PAGE>

                         AMS PROPERTIES, INC.
                         APS HOLDING COMPANY, INC.
                         APS PHARMACY MANAGEMENT, INC.
                         BRIAN CENTER HEALTH &
                         RETIREMENT/ALLEGHANY, INC.
                         BRIAN CENTER HEALTH &
                         RETIREMENT/BASTIAN, INC.
                         BRIAN CENTER HEALTH &
                         RETIREMENT/TAMPA, INC.
                         BRIAN CENTER HEALTH &
                         RETIREMENT/WALLACE, INC.
                         BRIAN CENTER MANAGEMENT CORPORATION
                         BRIAN CENTER NURSING CARE/AUSTELL, INC.
                         BRIAN CENTER NURSING CARE/FINCASTLE, INC.
                         BRIAN CENTER NURSING CARE/HICKORY, INC.
                         BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC.
                         BRIAN CENTER OF ASHEBORO, INC.
                         BRIAN CENTER OF CENTRAL COLUMBIA, INC.
                         CAMBRIDGE BEDFORD, INC.
                         CAMBRIDGE EAST, INC.
                         CAMBRIDGE NORTH, INC.
                         CAMBRIDGE SOUTH, INC.
                         CLINTONAIRE NURSING HOME, INC.
                         CONNERWOOD HEALTHCARE, INC.
                         CORNERSTONE HEALTH MANAGEMENT COMPANY
                         CRESTMONT HEALTH CENTER, INC.
                         DEVCON HOLDING COMPANY
                         EH ACQUISITION CORP.
                         EH ACQUISITION CORP. II
                         EH ACQUISITION CORP. III
                         EVERGREEN HEALTHCARE LTD., L.P.
                         EVERGREEN HEALTHCARE,  INC.
                         FRENCHTOWN NURSING HOME, INC.
                         GC SERVICES, INC.
                         GCI BELLA VITA, INC.
                         GCI CAMELLIA CARE CENTER, INC.
                         GCI COLTER VILLAGE, INC.

                                      17
<PAGE>

                         GCI EAST VALLEY MEDICAL & REHABILITATION CENTER,  INC.
                         GCI FAITH NURSING HOME, INC.
                         GCI HEALTH CARE CENTERS, INC.
                         GCI JOLLEY ACRES, INC.
                         GCI PALM COURT, INC.
                         GCI PRINCE GEORGE, INC.
                         GCI REHAB, INC.
                         GCI SPRINGDALE VILLAGE, INC.
                         GCI THERAPIES, INC.
                         GCI VILLAGE GREEN, INC.
                         GCI-CAL THERAPIES COMPANY
                         GCI-WISCONSIN PROPERTIES, INC.
                         GRANCARE HOME HEALTH SERVICES, INC.
                         GRANCARE OF MICHIGAN, INC.
                         GRANCARE OF NORTH CAROLINA, INC.
                         GRANCARE OF NORTHERN CALIFORNIA, INC.
                         GRANCARE SOUTH CAROLINA, INC.
                         GRANCARE, INC.
                         HAWK'S-PERIMETER, INC.
                         HERITAGE NURSING HOME, INC.
                         HERITAGE OF LOUISIANA, INC.
                         HMI CONVALESCENT CARE, INC.
                         HOSPICE ASSOCIATES OF AMERICA, INC.
                         HOSTMASTERS, INC.
                         INTERNATIONAL HEALTH CARE MANAGEMENT, INC.
                         INTERNATIONAL X-RAY, INC.
                         LC MANAGEMENT COMPANY
                         LCA OPERATIONAL HOLDING COMPANY
                         LCR, INC.
                         LIVING CENTERS - EAST, INC.
                         LIVING CENTERS - PHCM, INC.
                         LIVING CENTERS - ROCKY MOUNTAIN, INC.
                         LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION
                         LIVING CENTERS - SOUTHEAST, INC.
                         LIVING CENTERS DEVELOPMENT COMPANY
                         LIVING CENTERS HOLDING COMPANY

                                      18
<PAGE>

                         LIVING CENTERS LTCP DEVELOPMENT COMPANY
                         LIVING CENTERS OF TEXAS, INC.
                         MADONNA NURSING CENTER, INC.
                         MED-THERAPY REHABILITATION SERVICES, INC.
                         MIDDLEBELT NURSING HOME, INC.
                         MIDDLEBELT-HOPE NURSING HOME, INC.
                         NAN-DAN CORP.
                         NATIONAL HERITAGE REALTY, INC.
                         NIGHTINGALE EAST NURSING CENTER, INC.
                         OMEGA/INDIANA CARE CORP.
                         PROFESSIONAL HEALTH CARE MANAGEMENT, INC.
                         PROFESSIONAL RX SYSTEMS, INC.
                         REHABILITY HEALTH SERVICES, INC.
                         RENAISSANCE MENTAL HEALTH CENTER, INC.
                         ST. ANTHONY NURSING HOME, INC.
                         SUMMIT HOSPITAL HOLDINGS, INC.
                         SUMMIT HOSPITAL OF EAST GEORGIA, INC.
                         SUMMIT HOSPITAL OF SOUTHEAST ARIZONA, INC.
                         SUMMIT HOSPITAL OF SOUTHEAST TEXAS, INC.
                         SUMMIT HOSPITAL OF SOUTHWEST LOUISIANA, INC.
                         SUMMIT HOSPITAL OF WEST GEORGIA, INC.
                         SUMMIT INSTITUTE FOR PULMONARY MEDICINE AND
                          REHABILITATION, INC.
                         SUMMIT INSTITUTE OF AUSTIN, INC.
                         SUMMIT INSTITUTE OF WEST MONROE, INC.
                         SUMMIT MEDICAL HOLDINGS, LTD.
                         SUMMIT MEDICAL MANAGEMENT, INC.

                         By:  _______________________________
                                Name:
                                 Title:

                                      19
<PAGE>

                          THE CHASE MANHATTAN BANK
                             as Agent

                          By:_____________________________
                               Name:
                               Title:

                                      20<PAGE>

                                                                   EXHIBIT 10.98

                              SECURITY AGREEMENT

     SECURITY AGREEMENT dated as of January 20, 2000 ("Agreement") among MARINER
HEALTH GROUP, INC. ("MHG") and the OTHER BORROWERS (this and other capitalized
terms used in this introduction and the recitals below are defined in Section 1
hereof), each as debtor and debtor-in-possession, PNC BANK, NATIONAL
ASSOCIATION, as Collateral Agent and for purposes of Section 6 hereof, First
Union National Bank.

     WHEREAS, the Borrowers are entering into the Credit Agreement described in
Section 1 below, pursuant to which the Borrowers intend to borrow funds and
obtain letters of credit, all on the terms and conditions set forth therein;

     WHEREAS, the Borrowers are willing to secure their obligations under the
Credit Agreement and the other Financing Documents by granting Liens on their
respective assets to the Collateral Agent as provided in this Agreement and the
other Collateral Documents;

     WHEREAS, the Lenders and the LC Issuing Bank are not willing to make loans
or maintain, issue or participate in letters of credit under the Credit
Agreement unless the foregoing obligations of the Borrowers are secured by Liens
on their assets as provided in the Collateral Documents; and

     WHEREAS, upon any foreclosure or other enforcement of the Collateral
Documents, the net proceeds of the relevant Collateral are to be received by or
paid over to the Collateral Agent and applied as provided in Section 15 of this
Agreement;

     NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

     SECTION 1.  Definitions. Terms defined in the Credit Agreement and not
otherwise defined herein have, as used herein, the respective meanings provided
for therein. The following additional terms, as used herein, have the following
meanings:

     "Accounts" means, with respect to any Grantor, all " accounts" (as defined
in the UCC) now owned or hereafter acquired by such Grantor, and also means and
includes all Medicare Receivables, Medicaid Receivables, VA Receivables,
accounts receivable, contract rights, book debts, notes, drafts and other
obligations or indebtedness owing to such Grantor arising from the performance
of services by it and/or the sale, lease or exchange of goods or other property
by it (including, without limitation, any such obligation or indebtedness which
might be characterized as an account, contract right or general intangible under
the Uniform Commercial Code in effect in any applicable jurisdiction) and all of
such Grantor's rights in, to and under all contracts or purchase orders for
goods, services or other property, and all of such Grantor's rights to any
goods, services or other property represented by any of the foregoing and all
monies due to or to become due to such Grantor under all contracts for the
performance of services by it and/or the sale, lease or exchange of goods or
other property by it (whether or not yet earned by performance on the part of
such Grantor), in each case whether now existing or hereafter arising

<PAGE>

or acquired, including, without limitation, the right to receive the proceeds of
said contracts and purchase orders and all collateral security and guarantees of
any kind given by any Person with respect to any of the foregoing.

     "Borrowers" means Mariner Health Group, Inc. and each of its Subsidiaries
party as a "Borrower" to the Credit Agreement.

     "Cash Distributions" means dividends, interest and other payments and
distributions made in cash upon or with respect to the Collateral.

     "Cash Management System" means the cash management system of the Borrowers
described in the Credit Agreement.

     "Cash Proceeds Account" has the meaning set forth in Section 7(d).

     "Casualty Proceeds Account" has the meaning set forth in Section 7(b).

     "Collateral" means all property, whether now owned or hereafter acquired,
in which a security interest or other Lien is granted or purported to be granted
to the Collateral Agent pursuant to the Collateral Documents. When used with
respect to a specific Grantor, the term "Collateral" means all such property in
which such a security interest or other Lien is granted or purported to be
granted to the Collateral Agent by such Grantor.

     "Collateral Accounts" means the Casualty Proceeds Accounts, the Cash
Proceeds Accounts and the LC Collateral Account.

     "Collateral Agent" means PNC Bank, National Association, in its capacity as
Collateral Agent for the holders of the Secured Obligations under the Collateral
Documents, and its successors in such capacity.

     "Collateral Documents" means this Agreement, the Mortgages and all other
supplemental or additional security agreements, mortgages or similar instruments
delivered pursuant hereto or thereto.

     "Concentration Account Bank" has the meaning set forth in Section 6(a).

     "Concentration Accounts" has the meaning set forth in Section 6(a).

     "Contingent Secured Obligation" means, at any time, any Secured Obligation
(or portion thereof) that is contingent in nature at such time, including
(without limiting the generality of the foregoing):

          (i)   any obligation to reimburse a bank for drawings not yet made
     under a letter of credit issued by such bank, or any Guarantee of any such
     obligation;

          (ii)  any obligation to provide collateral to or for the benefit of a
     bank to secure reimbursement obligations arising from drawings not yet made
     under a letter of credit issued by such bank, or any Guarantee of any such
     obligation; and

                                       2
<PAGE>

          (iii) any other Secured Obligation which is contingent in nature at
     the time of determination.

     "Copyright License" means any agreement now or hereafter in existence
granting to any Grantor, or pursuant to which any Grantor has granted to any
other Person, any right to use, copy, reproduce, distribute, prepare derivative
works, display or publish any records or other materials on which a Copyright is
in existence or may come into existence.

     "Copyrights" means all the following: (i) all copyrights under the laws of
the United States or any other country (whether or not the underlying works of
authorship have been published), all registrations and recordings thereof, all
copyrightable works of authorship (whether or not published), and all
applications for copyrights under the laws of the United States or any other
country, including, without limitation, registrations, recordings and
applications in the United States Copyright Office or in any similar office or
agency of the United States, any State thereof or any other country or any
political subdivision thereof, (ii) all renewals thereof, (iii) all claims for,
and rights to sue for, past or future infringements of any of the foregoing, and
(iv) all income, royalties, damages and payments now or hereafter due or payable
with respect to any of the foregoing, including, without limitation, damages and
payments for past or future infringements thereof.

     "Credit Agreement" means the Debtor-In-Possession Credit Agreement dated as
of January 20, 2000 among the Borrowers, the Lenders, First Union National Bank,
as Syndication Agent, PNC Capital Markets, Inc. and First Union Securities,
Inc., as Co-Arrangers and PNC Bank, National Association, as Collateral Agent
and Administrative Agent, and as an issuing bank for Letters of Credit
thereunder, as amended from time to time.

     "Documents" means, with respect to any Grantor, all "documents" (as defined
in the UCC) or other receipts covering, evidencing or representing goods, now
owned or hereafter acquired by such Grantor.

     "Enforcement Notice" means a notice delivered to the Collateral Agent by
the Administrative Agent pursuant to Section 8.03 of the Credit Agreement
directing the Collateral Agent to exercise one or more specific rights or
remedies under the Collateral Documents.

     "Equipment" means, with respect to any Grantor, all "equipment" (as defined
in the UCC) now owned or hereafter acquired by it, wherever located.

     "Equity Interest" means (i) in the case of a corporation, any shares of its
capital stock, (ii) in the case of a limited liability company, any membership
interest therein, (iii) in the case of a partnership, any partnership interest
(whether general or limited) therein, (iv) in the case of any other business
entity, any participation or other interest in the equity or profits thereof or
(v) any warrant, option or other right to acquire any Equity Interest described
in the foregoing clauses (i), (ii), (iii) and (iv).

     "General Intangibles" means, with respect to any Grantor, all "general
intangibles" (as defined in the UCC) now owned or hereafter acquired by such
Grantor, including, without limitation, (i) all obligations or indebtedness
owing to such Grantor (other than Accounts) from whatever source arising, (ii)
all Intellectual Property, goodwill, trade names, service marks, trade

                                       3
<PAGE>

secrets, permits and licenses, (iii) all rights or claims in respect of refunds
for taxes paid and (iv) all rights in respect of any pension plan or similar
arrangement maintained for employees of any member of the ERISA Group.

     "Goods" means, with respect to any Grantor, all "goods" (as defined in the
UCC) now owned or hereafter acquired by it, wherever located.

     "Grantor" means any Borrower.

     "Instruments" means, with respect to any Grantor, all "instruments",
"chattel paper" or "letters of credit" (each as defined in the UCC) evidencing,
representing, arising from or existing in respect of, relating to, securing or
otherwise supporting the payment of, any Account or other obligation or
indebtedness owing to such Grantor, including (but not limited to) promissory
notes, drafts, bills of exchange and trade acceptances, now owned or hereafter
acquired by such Grantor.

     "Intellectual Property" means (i) Patents, (ii) Patent Licenses, (iii)
Trademarks, (iv) Trademark Licenses, (v) Copyrights and (vi) Copyright Licenses,
and all rights in or under any of the foregoing.

     "Inventory" means, with respect to any Grantor, all "inventory" (as defined
in the UCC), now owned or hereafter acquired by it, wherever located.

     "LC Collateral Account" has the meaning set forth in Section 7(e).

     "Liquid Investments" has the meaning set forth in Section 7(g).

     "Medicaid Receivable" means any Account with respect to which the obligor
is a state governmental authority (or agent thereof) obligated to pay, pursuant
to federal or state Medicaid program statutes or regulations, for services
rendered to eligible beneficiaries thereunder.

     "Medicare Receivable" means any Account with respect to which the obligor
is a federal governmental authority (or agent thereof) obligated to pay,
pursuant to federal Medicare program statutes or regulations, for services
rendered to eligible beneficiaries thereunder.

     "Non-Contingent Secured Obligation" means at any time any Secured
Obligation (or portion thereof) that is not a Contingent Secured Obligation at
such time.

     "Notice of Redirection" has the meaning set forth in Section 6.

     "Patent License" means any agreement now or hereafter in existence granting
any Grantor, or pursuant to which any Grantor has granted to any other Person,
any right with respect to any Patent or any invention now or hereafter in
existence, whether patentable or not, whether a patent or application for patent
is in existence on such invention or not, and whether a patent or application
for patent on such invention may come into existence or not.

     "Patents" means (i) all letters patent and design letters patent of the
United States or any other country and all applications for letters patent and
design letters patent of the United States

                                       4
<PAGE>

or any other country, including, without limitation, applications in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, any State thereof or any other country or any political
subdivision thereof, (ii) all reissues, divisions, continuations, continuations-
in-part, revisions and extensions thereof, (iii) all claims for, and rights to
sue for, past or future infringements of any of the foregoing and (iv) all
income, royalties, damages and payments now or hereafter due or payable with
respect to any of the foregoing, including, without limitation, damages and
payments for past or future infringements thereof.

     "Perfection Certificate" means, with respect to any Grantor, a certificate
substantially in the form of Exhibit A hereto, completed and supplemented with
                             ---------
the schedules and attachments contemplated thereby to the satisfaction of the
Collateral Agent, and duly executed by a duly authorized officer of such
Grantor.

     "Permitted Liens" means (i) the Security Interests and (ii) the other Liens
on the Collateral permitted to be created or assumed or to exist pursuant to
Section 7.02 of the Credit Agreement.

     "Personal Property Collateral" means at any time, with respect to any
Grantor, all its property included in the Collateral at such time, other than
its Real Property Collateral.

     "Personal Property Security Interests" means the security interests in
Personal Property Collateral granted by the Grantors under the Collateral
Documents.

     "Pledged Equity Interests" means at any time all Equity Interests included
in the Collateral at such time.

     "Pledged Equity Securities" means at any time all "certificated securities"
(as such term is defined in Article 8 of the UCC) that evidence or represent
Pledged Equity Interests at such time.

     "Pledged Instruments" means at any time all Instruments included in the
Collateral at such time.

     "Pledged LLC Interest" means at any time any membership interest or similar
interest in a limited liability company that is included in the Pledged Equity
Interests at such time.

     "Pledged Partnership Interest" means at any time any partnership interest
(whether general or limited) that is included in the Pledged Equity Interests at
such time.

     "Post-Petition Interest" means any interest which accrues after the
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of the Borrowers, whether or not such interest is
allowed or allowable as a claim in any such proceeding.

     "Proceeds" means, with respect to any Grantor, all proceeds of, and all
other profits, products, rents or receipts, in whatever form, arising from the
collection, sale, lease, exchange, assignment, licensing or other disposition
of, or other realization upon, its Collateral, including without limitation all
claims of such Grantor against third parties for loss of, damage to or

                                       5
<PAGE>

destruction of, or for proceeds payable under, or unearned premiums with respect
to, policies of insurance in respect of, any of its Collateral, and any
condemnation or requisition payments with respect to any of its Collateral, in
each case whether now existing or hereafter arising.

     "Real Property Collateral" means at any time, with respect to any Grantor,
all its real property (including leasehold interests in real property) included
in the Collateral at such time.

     "Real Property Security Interests" means the security interests in Real
Property Collateral granted by the Grantors under the Mortgages and the other
Collateral Documents.

     "Secured Obligations" means the Obligations including, without limitation,
Obligations arising under this Agreement.

     "Secured Parties" means the holders from time to time of the Secured
Obligations.

     "Secured Parties Requesting Notice" means, at any time, each Secured Party
which has, at least five Business Days prior thereto, delivered to the
Collateral Agent a written notice (a) stating that it holds one or more Secured
Obligations and wishes to receive copies of the notices referred to in Section
16(i) and (b) setting forth its address or facsimile number to which copies of
such notices should be sent.

     "Security Interests" means the Personal Property Security Interests and the
Real Property Security Interests.

     "Trademark License" means any agreement now or hereafter in existence
granting to any Grantor, or pursuant to which any Grantor has granted to any
other Person, any right to use any Trademark.

     "Trademarks" means: (i) all trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles, service
marks, logos, brand names, trade dress, prints and labels on which any of the
foregoing have appeared or appear, package and other designs, and any other
source or business identifiers, and general intangibles of like nature, and the
rights in any of the foregoing which arise under applicable law, (ii) the
goodwill of the business symbolized thereby or associated with each of them,
(iii) all registrations and applications in connection therewith, including,
without limitation, registrations and applications in the United States Patent
and Trademark Office or in any similar office or agency of the United States,
any State thereof or any other country or any political subdivision thereof,
(iv) all renewals thereof, (v) all claims for, and rights to sue for, past or
future infringements of any of the foregoing and (vi) all income, royalties,
damages and payments now or hereafter due or payable with respect to any of the
foregoing, including, without limitation, damages and payments for past or
future infringements thereof.

     "UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of New York; provided that if, by reason of mandatory provisions of
law, the perfection or the effect of perfection or non-perfection of any
Security Interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than New York, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or non-
perfection.

                                       6
<PAGE>

     "VA Receivable" means any Account with respect to which the obligor is the
Veterans' Administration or any successor thereto (or any agent thereof).

     SECTION 2.  Representations and Warranties.  Each Grantor represents and
warrants that:

     (a)  As of the Closing Date, such Grantor owns the Equity Interests listed
as being owned by it in Schedule 3 to the Credit Agreement, free and clear of
any Lien other than Permitted Liens. All shares of capital stock identified in
such Schedule as being beneficially owned by such Grantor have been duly
authorized and validly issued, are fully paid and non-assessable, and are
subject to no option to purchase or similar right of any Person.  Such Grantor
is not and will not become a party to or otherwise bound by any agreement, other
than the Financing Documents and the Organizational Documents of the issuer of
such Pledged Equity Interests, which restricts in any manner the rights of any
present or future holder of any Pledged Equity Interest with respect thereto.

     (b)  Such Grantor has good and marketable title to all of its Collateral,
free and clear of any Liens other than Permitted Liens.  Such Grantor has taken
all actions necessary under the UCC to perfect its interest in any Accounts
purchased or otherwise acquired by it, as against its assignors and creditors of
its assignors.

     (c)  Other than granting Permitted Liens, such Grantor has not performed
any acts that might prevent the Collateral Agent from enforcing any of the
provisions of the Collateral Documents or that would limit the Collateral Agent
in any such enforcement. No financing statement, security agreement, mortgage or
similar or equivalent document or instrument covering all or any part of the
Collateral owned by it is on file or of record in any jurisdiction in which such
filing or recording would be effective to perfect or record a Lien on such
Collateral, except financing statements, mortgages or other similar or
equivalent documents with respect to Permitted Liens. After the Closing, no
Collateral owned by it will be in the possession of any Person (other than such
Grantor) asserting any claim thereto or security interest therein (except
Permitted Liens), except that (i) the Collateral Agent or its designee may have
possession of Collateral as contemplated hereby and (ii) cash and Temporary Cash
Investments may be held in the Concentration Accounts or in other accounts to
the extent permitted by Section 7.13 of the Credit Agreement.

     (d)  Such Grantor has delivered a Perfection Certificate to the Collateral
Agent.  The information set forth therein is correct and complete as of the
Closing Date.

     (e)  The Security Interests constitute valid security interests in all
Collateral owned by such Grantor, thereby securing its Secured Obligations, and,
upon entry of the Interim Borrowing Order or the Borrowing Order, constitute
security interests therein prior to all other Liens other than Liens permitted
under the Credit Agreement to be senior in priority to the liens of the Lenders.

     (f)  Such Grantor's Collateral is insured in accordance with, and to the
extent required by, the requirements of the Credit Agreement.

                                       7
<PAGE>

     SECTION 3.  The Security Interests.

     (a)  In order to secure the full and punctual payment of its Secured
Obligations in accordance with the terms thereof, each Grantor hereby pledges
and assigns to the Collateral Agent and grants to the Collateral Agent for the
benefit of the Secured Parties a continuing security interest in and to all
right, title and interest of such Grantor in, to and under all of the following
property of such Grantor, whether now owned or existing or hereafter acquired or
arising and regardless of where located:

          (i)    all Accounts;

          (ii)   all Documents;

          (iii)  all Equipment;

          (iv)   all General Intangibles;

          (v)    all Goods;

          (vi)   all Instruments;

          (vii)  all Inventory;

          (viii) all Equity Interests in other Persons now or hereafter
beneficially owned by such Grantor, all rights and privileges of such Grantor
with respect to such Equity Interests, and all dividends, distributions and
other payments with respect thereto;

          (ix)   all Real Property;

          (x)    all books and records (including, without limitation, customer
lists, credit files, computer programs, printouts and other computer materials
and records) of such Grantor pertaining to any of its Collateral;

          (xi)   such Grantor's ownership interest in all Deposit Accounts in
the Cash Management System including, without limitation, the Collateral
Accounts, all cash deposited therein from time to time, all Liquid Investments
made with amounts on deposit therein and all of such Grantor's other monies and
property of any kind in the possession or under the control of the Collateral
Agent; and

          (xii)  all Proceeds of the collateral described in the foregoing
clauses (i) through (xi).

     (b)  The Security Interests are granted as security only and shall not
subject the Collateral Agent or any other Secured Party to, or transfer or in
any way affect or modify, any obligation or liability of any Grantor with
respect to any of the Collateral or any transaction in connection therewith.

                                       8
<PAGE>

     Notwithstanding the foregoing, the security interest granted under clause
(xi) shall be subject to rights in favor of any bank administering any account
in the Cash Management System under any applicable order of the Court or under
Applicable Law.

     SECTION 4.  Delivery of Certain Collateral. (a) On the Closing Date, each
Grantor is delivering to the Collateral Agent as Collateral hereunder all stock
certificates or other certificates representing Equity Interests in other
Persons then owned by it and not previously delivered to the "Collateral Agent"
under the Existing Credit Facilities. All such previously delivered certificates
held on the Closing Date by such "Collateral Agent" shall be deemed held by the
Collateral Agent hereunder.

     (b)  After the Closing Date, if any Grantor receives (i) any stock
certificate or other certificate representing Equity Interests in another Person
then owned by it or (ii) any Instrument, in which a security interest is granted
pursuant to Section 3 hereof, such Grantor will immediately deliver such
certificate or Instrument to the Collateral Agent to be held by it as Collateral
hereunder.

     (c)  Notwithstanding the foregoing, so long as no Event of Default shall
have occurred and be continuing, each Grantor may retain for collection in the
ordinary course any Instruments received by it in the ordinary course of
business, and the Collateral Agent shall, promptly upon request by such Grantor,
make appropriate arrangements for making any other Instrument pledged by such
Grantor hereunder available to it for purposes of presentation, collection or
renewal (any such arrangement to be effected, to the extent deemed appropriate
by the Collateral Agent, against trust receipt or like document).

     (d)  All Pledged Equity Securities delivered to the Collateral Agent
hereunder will be delivered in suitable form for transfer by delivery, or
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to the Collateral Agent. All Pledged
Instruments delivered to the Collateral Agent hereunder will be endorsed to the
order of the Collateral Agent, or accompanied by duly executed instruments of
assignment, all in form and substance satisfactory to the Collateral Agent.

     SECTION 5.  Further Assurances; Covenants. Each Grantor covenants as
follows:

     (a)  It will not change its name, identity or corporate structure in any
manner unless permitted by Section 7.03 of the Credit Agreement and unless such
Grantor shall have given the Collateral Agent prior notice thereof and delivered
an updated Perfection Certificate.

     (b)  It will not change (i) the location of its chief executive office or
principal place of business or (ii) the locations where it keeps or holds any
Collateral or any records relating thereto from the applicable locations
described in its Perfection Certificate (after the delivery of such Perfection
Certificate), unless such Grantor shall have given the Collateral Agent prior
notice thereof.  It will not in any event change the location of any Collateral
owned by it if such change would cause the Security Interests in such Collateral
to lapse or, if perfected prior to such change of location, cease to be
perfected.

     (c)  It will, from time to time, at its expense, execute, deliver, file and
record any statement, assignment, instrument, document, agreement or other paper
and take any other action

                                       9
<PAGE>

(including, without limitation, any Intellectual Property Filings and any
filings of financing or continuation statements under the UCC) that from time to
time may be reasonably necessary or desirable, or that the Collateral Agent may
reasonably request, in order to create, preserve, perfect, confirm or validate
the Security Interests in such Grantor's Collateral or to enable the Collateral
Agent and the other Secured Parties to obtain the full benefits of the
Collateral Documents, or to enable the Collateral Agent to exercise and enforce
any of its rights, powers and remedies thereunder with respect to any of such
Grantor's Collateral. To the extent permitted by applicable law, such Grantor
authorizes the Collateral Agent to execute and file such financing statements or
continuation statements without such Grantor's signature appearing thereon. Such
Grantor agrees that a carbon, photographic, photostatic or other reproduction of
this Agreement or of a financing statement is sufficient as a financing
statement. Such Grantor shall pay the costs of, or incidental to, any recording
or filing of any such financing or continuation statements in which it is named
as the debtor. Such Grantor hereby constitutes the Collateral Agent its
attorney-in-fact to execute and file all Intellectual Property Filings required
or so requested for the foregoing purposes, all acts of such attorney being
hereby ratified and confirmed; and such power, being coupled with an interest,
shall be irrevocable until such Grantor's Collateral is released pursuant to
Section 18.

     (d)  At least 30 days before it takes any action contemplated by Section
5(a) or 5(b), such Grantor will, at its expense, cause to be delivered to the
Collateral Agent an officer's certificate, in form and substance satisfactory to
the Collateral Agent, to the effect that all financing statements and amendments
or supplements thereto, continuation statements and other documents required to
be recorded or filed in order to perfect and protect the Security Interests
against all creditors of and purchasers from such Grantor (except any
continuation statements specified in such officer's certificate that are to be
filed more than six months after the date thereof) have been filed in each
filing office necessary for such purpose and that all filing fees and taxes, if
any, payable in connection with such filings have been paid to the Collateral
Agent or otherwise paid in full.

     (e)  If any of its Collateral is at any time in the possession or control
of any warehouseman, bailee or agent, such Grantor will notify such
warehouseman, bailee or agent of the Security Interests and instruct it to hold
all such Collateral for the Collateral Agent's account subject to the Collateral
Agent's instructions.

     (f)  It shall keep full and accurate books and records relating to its
Collateral, and stamp or otherwise mark such books and records in such manner as
the Collateral Agent may reasonably request in order to reflect the Security
Interests.

     (g)  It shall use its best efforts, consistent with past practices, to
cause to be collected from its account debtors, as and when due, any and all
amounts owing under or on account of each of its Accounts (including, without
limitation, Accounts which are delinquent, such Accounts to be collected in
accordance with lawful collection procedures) and shall apply forthwith upon
receipt thereof all such amounts as are so collected to the outstanding balance
of such Accounts. Subject to the rights of the Collateral Agent and the other
Secured Parties hereunder if an Event of Default shall have occurred and be
continuing, such Grantor may allow in the ordinary course of business as
adjustments to amounts owing under its Accounts (i) an extension or renewal of
the time or times of payment, or settlement for less than the total unpaid

                                       10
<PAGE>

balance, which such Grantor finds appropriate in accordance with sound business
judgment and (ii) refunds or credits, all in accordance with such Grantor's
ordinary course of business consistent with its historical collection practices.
The reasonable costs and expenses (including, without limitation, attorney's
fees) of collection, whether incurred by such Grantor or the Collateral Agent,
shall be borne by such Grantor.

     (h)  If an Enforcement Notice is in effect, such Grantor will, consistent
with the terms of the Credit Agreement, the Interim Borrowing Order and the
Borrowing Order, if requested to do so by the Collateral Agent, promptly notify
(and such Grantor hereby authorizes the Collateral Agent so to notify) each
account debtor in respect of any of its Accounts or Instruments that such
Collateral has been assigned to the Collateral Agent hereunder, and that any
payments due or to become due in respect of such Collateral are to be made
directly to the Collateral Agent or its designee.

     (i)  Such Grantor will not sell, lease, exchange, assign or otherwise
dispose of, or grant any option with respect to, any of its Collateral; provided
that, unless an Enforcement Notice is in effect, such Grantor may sell, lease or
exchange its Inventory and surplus or worn-out Equipment in the ordinary course
of business and such Grantor may sell any of its Collateral if (x) the sale
thereof does not violate any covenant in the Credit Agreement and (y) in the
case of an Asset Sale, the Net Cash Proceeds thereof are applied to prepay Loans
if required by and as provided in Section 2.08 of the Credit Agreement.
Concurrently with any sale or exchange permitted by the foregoing proviso, the
Security Interests in the assets sold or exchanged (but not in any Proceeds
arising from such sale or exchange) shall cease immediately without any further
action on the part of the Collateral Agent or any other Secured Party. Upon any
such release of the Security Interests with respect to particular Collateral,
the Collateral Agent will, at the expense of the relevant Grantor, execute and
deliver to such Grantor such documents as such Grantor shall reasonably request
to evidence the release of such Security Interests.

     (j)  Such Grantor will, promptly upon request, provide to the Collateral
Agent all information and evidence it may reasonably request concerning its
Collateral to enable the Collateral Agent to enforce the provisions of the
Collateral Documents.

     (k)  Such Grantor shall notify the Collateral Agent promptly if it knows
that any application or registration relating to any material Intellectual
Property owned or licensed by it may become abandoned or dedicated, or of any
adverse determination or development (including, without limitation, the
institution of, or any such determination or development in, any proceeding in
the United States Copyright Office, the United States Patent and Trademark
Office or any court) regarding such Grantor's ownership of such material
Intellectual Property, its right to register or patent the same, or its right to
keep and maintain the same. If any of such Grantor's rights to any material
Intellectual Property are infringed, misappropriated or diluted by a third
party, such Grantor shall notify the Collateral Agent within 30 days after it
learns thereof and shall, unless such Grantor shall reasonably determine that
any such action would be of negligible value, economic or otherwise, promptly
sue for infringement, misappropriation or dilution and to recover any and all
damages for such infringement, misappropriation or dilution, and take such other
actions as such Grantor shall reasonably deem appropriate under the
circumstances to protect such Intellectual Property.

                                       11
<PAGE>

     SECTION 6.  Concentration Accounts. (a)  MHG shall establish one or more
accounts (collectively, the "Concentration Accounts") which shall be maintained
under the sole dominion and control of the Collateral Agent with First Union
National Bank (in such capacity, the "Concentration Account Bank") and into
which all deposits and collected cash owned by the Borrowers shall be deposited
from time to time.

     (b)  In relationship to the Concentration Bank and all persons and entities
other than the Borrowers, and notwithstanding designation of any of the
Concentration Accounts as in the name of MHG, the Collateral Agent, for the
benefit of itself and the Lenders, shall possess sole dominion and control over
all of the items from time to time on deposit in the Concentration Accounts and
their proceeds, and the Concentration Bank shall be the Collateral Agent's agent
for the purpose of holding and collecting such items and their proceeds.  The
Borrowers hereby expressly acknowledge and agree that, except as expressly
provided in clause (c) of this Section 6, the Borrowers do not have any dominion
or control over the use of, or any right or power to withdraw any funds
contained in, to direct any payment from, or to debit, the Concentration
Accounts.  The Collateral Agent hereby acknowledges for the benefit of the
Borrowers that the Collateral Agent holds all amounts on deposit from time to
time in the Concentration Accounts, and all proceeds thereof, as collateral
security for the obligations of the Borrowers under the Financing Documents.

     (c)  Subject to clause (d) of this Section 6, the Collateral Agent hereby
delegates to MHG, prior to delivery by the Collateral Agent to the Concentration
Bank and MHG of written notice substantially in the form of Exhibit B annexed
                                                            ---------
hereto (any such notice a "Notice of Redirection"), the exclusive right to
instruct the Concentration Bank with respect to matters relating to the
operation and administration of the Concentration Accounts and to withdraw funds
contained in, to direct payments from, and to debit the Accounts; provided that,
                                                                  --------
upon the delivery by the Collateral Agent to the Concentration Bank and the
Company of a Notice of Redirection, such delegation shall terminate, in which
case the Collateral Agent shall thereafter have the exclusive right with respect
to all such matters relating to the Concentration Accounts and to take all such
actions with respect thereto, unless and until the Collateral Agent notifies the
Concentration Bank to the contrary; and provided further, that nothing in this
                                        -------- -------
Agreement shall affect the obligation of the Borrowers to maintain the Cash
Management System as required under the Credit Agreement. The Concentration Bank
may rely on all instructions given to it by MHG in accordance with this clause
(c) as fully as if such instructions were given by the Collateral Agent.  The
Concentration Bank may rely upon any Notice of Redirection and any other
instructions received from the Collateral Agent without independent
determination of whether the Lenders have authorized issuance of such notice or
other instructions or whether such notice or other instructions are otherwise
validly given, and shall have no liability or responsibility to the Borrowers,
the Collateral Agent, any Lender or any other party by reason of any action
taken in conformity with any such Notice of Redirection or other instruction
received from the Collateral Agent.

     (d)  The Borrowers hereby agree that except as the Collateral Agent and the
Concentration Bank may otherwise agree in advance, no funds and deposits in the
Concentration Accounts shall be invested except pursuant to (i) the "Amended and
Restated CashPivot Agreement" (the "CashPivot Agreement"), a copy of which is
attached as Exhibit C or (ii) the "Repurchase Master Agreement" (the "Repurchase
            ---------
Agreement"), a copy of which is attached

                                       12
<PAGE>

as Exhibit D, in either case, only upon the approval of the Court. The Borrowers
   ---------
hereby assign to the Collateral Agent, as additional collateral for the
Obligations, a security interest in the Borrowers' interest in (i) the CashPivot
Trust Account and the MMA Account, as each is defined in the CashPivot
Agreement, as well as in any other funds that may from time to time be the
subject of investments pursuant to the CashPivot Agreement and (ii) the
Securities, as defined in the Repurchase Agreement.

     (e)  The Concentration Bank shall deliver its regular bank statements with
respect to the Accounts to the Borrowers and the Collateral Agent at their
notice addresses specified in Section 9.

     (f)  If an Enforcement Notice is in effect, the Collateral Agent may,
consistent with the terms of the Interim Borrowing Order and the Borrowing
Order, (i) instruct the Concentration Account Bank to retain, in any
Concentration Account, the CashPivot Trust Account or the MMA Account maintained
by it, all cash or other funds and deposits then held by it in the Concentration
Account, the CashPivot Trust Account or the MMA Account, (ii) instruct the
Concentration Account Bank to cease investing any funds and deposits in the
Concentration Account pursuant to the Cash Payout Agreement and/or (iii)
withdraw any amounts held in any Concentration Account, the CashPivot Trust
Account or the MMA Account and apply such amounts in the manner specified in
Section 15.

     (g)  The Concentration Bank shall in no event be liable or otherwise
responsible to the Borrowers, the Collateral Agent, any Lender or any other
person, firm or corporation for any action taken or any omission under or with
respect to this Agreement in the absence of the Concentration Bank's own gross
negligence or willful misconduct. The Borrowers agree to indemnify, pay and hold
the Concentration Bank and its officers, directors, employees and agents
(collectively the "Indemnitees") harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of counsel
for Indemnitees in connection with any investigative, administrative or judicial
proceeding, whether or not such Indemnitees shall be designated a party thereto)
which may be imposed on, incurred by, or asserted against such Indemnitees, in
any manner relating to or arising out of this Agreement or the Concentration
Accounts (the "Indemnified Liabilities"); provided that the Borrowers shall not
                                          --------
have any obligations to an Indemnitee hereunder with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of such
Indemnitee. Nothing in this Agreement shall be construed to limit any right of
the Concentration Bank to close or terminate the Concentration Account or any
other account in the Cash Management System or otherwise to terminate its
relationship with any Borrower.

     SECTION 7.  Collateral Accounts.

     (a)  Promptly after the Collateral Agent determines that any Casualty
Proceeds are to be deposited pursuant to Section 5.08 of the Credit Agreement
with respect to property of any Grantor, the Collateral Agent shall establish an
account (such Grantor's "Casualty Proceeds Account") with the Collateral Agent,
in the name and under the exclusive control of the

                                       13
<PAGE>

Collateral Agent, into which all Casualty Proceeds to be deposited with respect
to property of such Grantor shall be deposited from time to time.

     (b)  So long as no Enforcement Notice is in effect, Casualty Proceeds to be
released from a Casualty Proceeds Account pursuant to Section 5.08(a)(i) of the
Credit Agreement shall be distributed by the Collateral Agent to the relevant
Grantor at such times and in such amounts as such Grantor shall request for the
purpose of restoring, repairing, replacing or rebuilding the asset in respect of
which such Casualty Proceeds were received. Any such request shall be
accompanied by a certificate of a Financial Officer describing in reasonable
detail the restoration, repair, replacement or rebuilding for which such funds
have been or will be expended and the date (which shall not be later than 30
days after the date of such certificate) by which such Grantor is obligated to
make such payment, provided that no such certificate shall be required if the
aggregate Casualty Proceeds requested for the restoration, repair, replacement
or rebuilding of the relevant asset is less than $100,000 with respect to any
Casualty Event. If immediately available cash on deposit in any Grantor's
Casualty Proceeds Account is not sufficient to make any such distribution to it,
the Collateral Agent shall cause to be liquidated, as promptly as practicable,
such Liquid Investments in such Casualty Proceeds Account as shall be required
to obtain sufficient cash to make such distribution and, notwithstanding any
other provision of this Section 7, such distribution shall not be made until
such liquidation has taken place.

     (c)  So long as no Enforcement Notice is in effect, the Collateral Agent
shall distribute to the Administrative Agent, at its request from time to time,
the amounts on deposit in the Casualty Proceeds Account which are required to be
applied to prepay Loans in accordance with Section 2.08(e) of the Credit
Agreement.

     (d)  Promptly after the Collateral Agent determines that any cash proceeds
of any Grantor's Collateral are to be realized upon any exercise of remedies
pursuant to the Collateral Documents, the Collateral Agent shall establish an
account with respect to such Grantor (such Grantor's "Cash Proceeds Account")
with the Collateral Agent, in the name and under the exclusive control of the
Collateral Agent, into which all such cash proceeds of such Grantor's Collateral
shall be deposited from time to time (unless required to be deposited in another
Collateral Account). This subsection (e) shall not apply to any cash proceeds
that are deposited in a Concentration Account and are not required to be
deposited in any Collateral Account.

     (e)  Promptly after the Collateral Agent determines that any cash
collateral is to be deposited to secure LC Reimbursement Obligations pursuant to
Section 8.04 of the Credit Agreement or in the event any prepayment amounts are
applied pursuant to Section 2.08 of the Credit Agreement to reduce the Tranche A
Commitments below the aggregate amount of the LC Exposure, the Collateral Agent
shall establish a cash collateral account (the "LC Collateral Account") with the
Collateral Agent, in the name and under the exclusive control of the Collateral
Agent, into which all cash collateral deposited pursuant to said Section 2.08(h)
or 8.04 shall be deposited. If and when any LC Issuing Bank pays a draft drawn
under any outstanding Letter of Credit on which any deposit in the LC Collateral
Account was based, the amount so paid by it (but not more than the amount in the
LC Collateral Account at the time) shall, promptly after such LC Issuing Bank
notifies the Collateral Agent of such payment, be withdrawn by the Collateral
Agent from the LC Collateral Account and paid to the relevant LC

                                       14
<PAGE>

Issuing Bank or the Lenders, as appropriate. If at any time the amount in the LC
Collateral Account exceeds the aggregate amount then required to pay all
unreimbursed drawings under, and to cover all possible subsequent drawings
under, all outstanding Letters of Credit on which any deposits in the LC
Collateral Account were based, the excess amount shall, so long as no
Enforcement Notice is in effect, be withdrawn by the Collateral Agent and paid
to the Borrowers. If immediately available cash on deposit in the LC Collateral
Account is not sufficient to make any distribution referred to in this
subsection (e), the Collateral Agent shall cause to be liquidated, as promptly
as practicable, such Liquid Investments in the LC Collateral Account as shall be
required to obtain sufficient cash to make such distribution and,
notwithstanding any other provision of this Section 7, such distribution shall
not be made until such liquidation has taken place.

     (f)  Amounts on deposit in any Collateral Account shall be invested and re-
invested from time to time in such Liquid Investments as MHG, as agent or
attorney-in-fact for the relevant Grantor shall direct. Any income received with
respect to the balance from time to time standing to the credit of any
Collateral Account, including any interest or capital gains on Liquid
Investments, shall remain, or be deposited, in such Collateral Account. All
right, title and interest in and to the cash amounts on deposit from time to
time in any Collateral Account together with any Liquid Investments from time to
time made pursuant to this subsection (f) shall vest in the Collateral Agent,
shall constitute part of the relevant Grantor's Collateral hereunder and shall
not constitute payment of its Secured Obligations until applied thereto as
provided in Section 15. If an Enforcement Notice is in effect, any amounts held
in any Collateral Account shall be retained in such Collateral Account and, if
and when requested by the Administrative Agent, shall be withdrawn by the
Collateral Agent and applied in the manner specified in Section 15.

     (g)  For purposes hereof, "Liquid Investments" means any Temporary Cash
Investment that (i) matures within 30 days after it is acquired by or for the
account of the Collateral Agent and (ii) in order to provide the Collateral
Agent, for the benefit of the Secured Parties, with a perfected security
interest therein, either:

          (i)  is issued in the name of the Collateral Agent or a financial
     intermediary acting for its account or is evidenced by a negotiable
     certificate or instrument which (together with any appropriate instrument
     of transfer) is delivered to, and held by, the Collateral Agent or an agent
     thereof (which shall not be any Grantor or any of its Affiliates) in a
     State where possession thereof perfects the Security Interest therein; or

          (ii) if not so issued or evidenced, is a Temporary Cash Investment
     which is subject to pledge under applicable law and regulations and as to
     which (in the opinion of counsel to the Collateral Agent) appropriate
     measures shall have been taken to perfect the relevant Security Interest.

     (h)  For the purposes hereof, any accounts presently existing pursuant to
the Existing Credit Facilities that correspond to accounts which are required to
be created pursuant to the provisions of this Section 7 shall be deemed to be
the same accounts as are required to be created for the purposes of this Section
7; provided, that the terms of such accounts shall be deemed to be governed
exclusively by the provisions of the Financing Documents and all amounts therein

                                       15
<PAGE>

shall be applied as set forth herein until all the Commitments shall have
expired or been terminated, all Letters of Credit shall have expired or been
canceled or been secured with cash collateral in an amount and on terms
satisfactory to the relevant LC Issuing Bank, and all outstanding Secured
Obligations shall have been paid in full, whereupon any amounts remaining in
such accounts shall be governed by and distributed in accordance with the
provisions of the Existing Credit Facilities.

     SECTION 8.  Record Ownership of Pledged Equity Securities. If directed to
do so by the Required Lenders at any time when an Event of Default has occurred
and is continuing, the Collateral Agent shall cause the Pledged Equity
Securities (or any portion thereof specified in such directions) to be
transferred of record into the name of the Collateral Agent or its nominee.
Promptly upon receiving any such directions, the Collateral Agent will notify
each relevant Grantor thereof. Each Grantor will promptly give to the Collateral
Agent copies of any notices and other communications received by it with respect
to Pledged Equity Securities registered in its name, and the Collateral Agent
will promptly give to such Grantor copies of any notices and other
communications received by the Collateral Agent with respect to such Grantor's
Pledged Equity Securities registered in the name of the Collateral Agent or its
nominee. So long as no Enforcement Notice is in effect, the Collateral Agent
shall pay over to each relevant Grantor all Cash Distributions received by the
Collateral Agent upon or with respect to any Pledged Equity Securities held of
record in the name of the Collateral Agent or its nominee.

     SECTION 9.  Right to Vote Pledged Equity Securities. (a) Unless an
Enforcement Notice directing the Collateral Agent to vote the Pledged Equity
Securities is in effect, each Grantor shall have the right, from time to time,
to vote and to give consents, ratifications and waivers with respect to the
Pledged Equity Securities owned by it, and the Collateral Agent shall, upon
receiving a written request from such Grantor, deliver to such Grantor or as
specified in such request such proxies, powers of attorney, consents,
ratifications and waivers in respect of any of such Pledged Equity Securities
which are registered in the name of the Collateral Agent or its nominee as shall
be specified in such request and be in form and substance satisfactory to the
Collateral Agent. Unless an Enforcement Notice directing the Collateral Agent to
do so is in effect, the Collateral Agent shall have no right to take any action
which the owner of a Pledged Partnership Interest or Pledged LLC Interest is
entitled to take with respect thereto, except the right to receive and retain
payments and other distributions to the extent provided in Section 10.

     (b)  If an Enforcement Notice directing the Collateral Agent to do so is in
effect, the Collateral Agent shall have the right to the extent permitted by law
(and, in the case of a Pledged Partnership Interest or Pledged LLC Interest, by
the relevant partnership agreement, operating agreement or other governing
document) and each Grantor shall take all such action as may be necessary or
appropriate to give effect to such right, to vote and to give consents,
ratifications and waivers, and take any other action with respect to any or all
of the Pledged Equity Interests with the same force and effect as if the
Collateral Agent were the absolute and sole owner thereof.

     SECTION 10. Right to Receive Distributions on Collateral. Subject to
Section 18, the Collateral Agent shall have the right to receive and to retain
as Collateral hereunder all dividends, interest and other payments and
distributions made upon or with respect to the Pledged Equity Interests and each
Grantor shall take all such action as the Collateral Agent may

                                       16
<PAGE>

reasonably deem necessary or appropriate to give effect to such right; provided
that, unless an Enforcement Notice is in effect, this sentence shall not apply
to Cash Distributions. All such dividends, interest and other payments and
distributions which are received by any Grantor (except Cash Distributions
received when no Enforcement Notice is in effect) shall be received in trust for
the benefit of the Secured Parties and shall be segregated from other assets of
such Grantor and shall, promptly upon such Grantor's receipt thereof, be
delivered or paid over to the Collateral Agent in the same form as received
(with any necessary endorsements or executed assignments in blank), together
with a statement identifying the source of such Collateral and stating that it
is being delivered to the Collateral Agent to be held as Collateral under this
Agreement. If an Enforcement Notice is withdrawn pursuant to Section 21 (and no
other Enforcement Notice is then in effect), the Collateral Agent's right to
retain Cash Distributions under this Section 10 shall cease and the Collateral
Agent shall pay over to the relevant Grantor(s) any Cash Distributions retained
by it during the continuance of such Enforcement Notice.

     SECTION 11.  General Authority. Each Grantor hereby irrevocably appoints
the Collateral Agent its true and lawful attorney, with full power of
substitution, in the name of such Grantor, any Secured Party or otherwise, for
the sole use and benefit of the Secured Parties, but at the expense of such
Grantor, to the extent permitted by law to exercise, at any time and from time
to time while an Enforcement Notice directing it to do so is in effect, all or
any of the following powers with respect to all or any of such Grantor's
Collateral:

          (i)   to demand, sue for, collect, receive and give acquittance for
     any and all monies due or to become due upon or by virtue thereof,

          (ii)  to settle, compromise, compound, prosecute or defend any action
     or proceeding with respect thereto,

          (iii) to sell, transfer, assign or otherwise deal in or with the same
     or the proceeds or avails thereof, as fully and effectually as if the
     Collateral Agent were the absolute owner thereof, and

          (iv)  to extend the time of payment of any or all thereof and to make
     any allowance and other adjustments with reference thereto;

provided that the Collateral Agent shall give such Grantor not less than ten
days' prior written notice of the time and place of any sale or other intended
disposition of any Personal Property Collateral owned by such Grantor and such
other notices as may be required by the Credit Agreement, the Interim Borrowing
Order and the Borrowing Order, except any such Personal Property Collateral
which threatens to decline speedily in value or is of a type customarily sold on
a recognized market. The Collateral Agent and each Grantor agree that such
notice constitutes "reasonable notification" within the meaning of Section 9-
504(3) of the UCC.

     SECTION 12.  Remedies Upon Enforcement Notice. (a) Upon being instructed to
do so in an Enforcement Notice or in written instructions given by the Required
Lenders at any time while an Enforcement Notice is in effect, the Collateral
Agent may exercise (or cause its co-

                                       17
<PAGE>

agents and co-trustees, if any, to exercise) any or all of the remedies
available to it (or to such co-agents or co-trustees) under the Collateral
Documents.

     (b)  Upon being instructed to do so in an Enforcement Notice or in written
instructions given by the Required Lenders at any time while an Enforcement
Notice is in effect, the Collateral Agent may exercise on behalf of the Secured
Parties all the rights of a secured party under the UCC (whether or not in
effect in the jurisdiction where such rights are exercised) with respect to any
Collateral and, in addition, the Collateral Agent may, without being required to
give any notice, except as provided in the Credit Agreement, the Interim
Borrowing Order and the Borrowing Order or herein or as may be required by
mandatory provisions of law, withdraw all cash and Temporary Cash Investments
held in any of the Collateral Accounts or Concentration Accounts and apply such
cash and Temporary Cash Investments and other cash, if any, then held by it as
Collateral as specified in Section 15 and, if there shall be no such cash or if
such cash shall be insufficient to pay all the Secured Obligations in full, sell
the Collateral or any part thereof at public or private sale or at any broker's
board or on any securities exchange, for cash, upon credit or for future
delivery, and at such price or prices as the Required Lenders shall have advised
the Collateral Agent are satisfactory. Any Secured Party may be the purchaser of
any or all of the Collateral so sold at any public sale (or, if the Collateral
is of a type customarily sold in a recognized market or is of a type which is
the subject of widely distributed standard price quotations, at any private
sale). The Collateral Agent is authorized, in connection with any such sale, if
it deems it advisable so to do, to restrict the prospective bidders on or
purchasers of any of the securities included in the Collateral to a limited
number of sophisticated investors who will represent and agree that they are
purchasing for their own account for investment and not with a view to the
distribution or sale of any of such securities, to cause to be placed on any
security included in the Collateral a legend to the effect that such security
has not been registered under the Securities Act of 1933 and may not be disposed
of in violation of the provisions of said Act, and to impose such other
limitations or conditions in connection with any such sale as the Collateral
Agent deems necessary or advisable in order to comply with said Act or any other
law. Each Grantor agrees that it will execute and deliver such documents and
take such other action as the Collateral Agent deems necessary or advisable in
order that any such sale may be made in compliance with law. Upon any such sale
the Collateral Agent shall have the right to deliver, assign and transfer to the
purchaser thereof the Collateral so sold. Each purchaser at any such sale shall
hold the Collateral so sold absolutely and free from any claim or right of
whatsoever kind, including any equity or right of redemption of any Grantor
which may be waived, and each Grantor, to the extent permitted by law, hereby
specifically waives all rights of redemption, stay or appraisal which it has or
may have under any law now existing or hereafter adopted. Notice of any such
sale shall be given to the relevant Grantor(s) as required by Section 11
(including, as required by the Credit Agreement, the Interim Borrowing Order and
the Borrowing Order) and shall in case of a public sale, state the time and
place fixed for such sale, in case of sale at a broker's board or on a
securities exchange, state the board or exchange at which such sale is to be
made and the day on which the Collateral, or the portion thereof so being sold,
will first be offered for sale at such board or exchange, and in case of a
private sale, state the day after which such sale may be consummated. Any such
public sale shall be held at such time or times within ordinary business hours
and at such place or places as the Collateral Agent may fix in the notice of
such sale. At any such sale the Collateral may be sold in one lot as an entirety
or in separate parcels, as the Collateral Agent may determine. The Collateral
Agent shall not be obligated to make any such sale pursuant to any such notice.
The Collateral Agent may, without notice or

                                       18
<PAGE>

publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Collateral on credit or
for future delivery, the Collateral so sold may be retained by the Collateral
Agent until the selling price is paid by the purchaser thereof, but the
Collateral Agent shall not incur any liability in case of the failure of such
purchaser to take up and pay for the Collateral so sold and, in case of any such
failure, such Collateral may again be sold upon like notice. Upon being
instructed to do so by the Required Lenders in an Enforcement Notice or in
written instructions given at any time while an Enforcement Notice is in effect,
the Collateral Agent, instead of exercising the power of sale herein conferred
upon it, may proceed by a suit or suits at law or in equity to foreclose the
Security Interests and sell the Collateral, or any portion thereof, under a
judgment or decree of a court or courts of competent jurisdiction. The foregoing
provisions of this subsection shall apply to Real Property Collateral only to
the extent permitted by applicable law and the provisions of any applicable
Mortgage or other document.

     (c)  For the purpose of enforcing any and all rights and remedies under
this Agreement, the Collateral Agent may (i) require each Grantor to, and each
Grantor agrees that it will, at its expense and upon the request of the
Collateral Agent, forthwith assemble all or any part of its Personal Property
Collateral as directed by the Collateral Agent and make it available at a place
designated by the Collateral Agent which is, in its opinion, reasonably
convenient to the Collateral Agent and such Grantor, whether at the premises of
such Grantor or otherwise, (ii) to the extent permitted by applicable law,
enter, with or without process of law and without breach of the peace, any
premises where any of the Personal Property Collateral is or may be located, and
without charge or liability to it seize and remove such Personal Property
Collateral from such premises, (iii) have access to and use such Grantor's books
and records relating to its Collateral and (iv) prior to the disposition of its
Personal Property Collateral, store or transfer it without charge in or by means
of any storage or transportation facility owned or leased by such Grantor,
process, repair or recondition it or otherwise prepare it for disposition in any
manner and to the extent the Collateral Agent deems appropriate and, in
connection with such preparation and disposition, use without charge any
trademark, trade name, copyright, patent or technical process used by such
Grantor. The Collateral Agent may also render any or all of such Personal
Property Collateral unusable at such Grantor's premises and may dispose of such
Personal Property Collateral on such premises without liability for rent or
costs. The foregoing provisions of this subsection shall apply to Real Property
Collateral only to the extent permitted by applicable law and the provisions of
any applicable Mortgage or other document.

     (d)  Without limiting the generality of the foregoing, if an Enforcement
Notice is in effect,

          (i)   the Collateral Agent may, upon proper notice as provided in
     Section 11 hereof, license, or sublicense, whether general, special or
     otherwise, and whether on an exclusive or non-exclusive basis, any
     Intellectual Property included in the Collateral throughout the world for
     such term or terms, on such conditions and in such manner as the Collateral
     Agent shall in its sole discretion determine; provided that such licenses
     do not conflict with any existing licenses or sublicenses;

                                       19
<PAGE>

          (ii)  the Collateral Agent may, upon proper notice as provided in
     Section 11 hereof (without assuming any obligations or liability
     thereunder), at any time and from time to time, in its sole and reasonable
     discretion, enforce (and shall have the exclusive right to enforce) against
     any licensee or sublicensee all rights and remedies of any Grantor in, to
     and under any of its Intellectual Property and take or refrain from taking
     any action under any thereof, and each Grantor hereby releases the
     Collateral Agent and each of the other Secured Parties from, and agrees to
     hold the Collateral Agent and each of the other Secured Parties free and
     harmless from and against any claims and expenses arising out of, any
     lawful action so taken or omitted to be taken with respect thereto, except
     for claims and expenses arising from the Collateral Agent's or such Secured
     Party's gross negligence or willful misconduct; and

          (iii) upon request by the Collateral Agent (which shall not be
     construed as implying any limitation on the rights or powers of the
     Collateral Agent), each Grantor will execute and deliver to the Collateral
     Agent a power of attorney, in form and substance satisfactory to the
     Collateral Agent, for the implementation of any lease, assignment, license,
     sublicense, grant of option, sale or other disposition of an Intellectual
     Property owned by such Grantor or any action related thereto. In the event
     of any such disposition pursuant to this Section, subject to
     confidentiality restrictions imposed on such Grantor in any license or
     similar agreement, and upon request by the Collateral Agent, such Grantor
     shall supply its know-how and expertise relating to or the products or
     services made or rendered in connection with Patents, and its customer
     lists and other records relating to such Intellectual Property and to the
     distribution of said products or services, to the Collateral Agent.

     SECTION 13.  Fees and Expenses; Indemnification. The Borrowers agree that
they will forthwith upon demand pay to the Collateral Agent:

          (i)   the amount of any taxes which the Collateral Agent may have been
     required to pay by reason of the Security Interests or to free any of the
     Collateral from any Lien thereon;

          (ii)  the amount of any and all reasonable out-of-pocket expenses,
     including transfer taxes and reasonable fees and disbursements of counsel
     and of any other experts, which the Collateral Agent may incur in
     connection with (w) the administration or enforcement of this Agreement,
     including such expenses as are incurred to preserve the value of the
     Collateral and the validity, perfection, rank and value of any Security
     Interest, and all insurance expenses and all expenses of protecting,
     storing, warehousing, appraising, insuring, handling, maintaining and
     shipping any Collateral, (x) the collection, sale or other disposition of
     any Collateral, (y) the exercise by the Collateral Agent of any of the
     rights or powers conferred upon it hereunder or (z) any Enforcement Notice;

          (iii) the amount of any fees that the Borrowers shall have agreed in
     writing to pay to the Collateral Agent and that shall have become due and
     payable in accordance with such written agreement; and

                                       20
<PAGE>

     (iv) the amount required to indemnify the Collateral Agent for, or hold it
harmless and defend it against, any loss, liability or expense (including the
reasonable fees and expenses of its counsel and any experts or co-agents
appointed hereunder) incurred or suffered by the Collateral Agent in connection
with this Agreement, except to the extent that such loss, liability or expense
arises from the Collateral Agent's gross negligence or willful misconduct or a
breach of any duty that the Collateral Agent has under this Agreement (after
giving effect to Sections 14 and 16).

Any such amount not paid to the Collateral Agent on demand shall bear interest
for each day until paid at a rate per annum equal to the Tranche A Default Rate.

     SECTION 14.  Limitation on Duty of Collateral Agent in Respect of
Collateral.  Beyond the exercise of reasonable care in the custody and
preservation thereof, the Collateral Agent shall have no duty as to any
Collateral in its possession or control or in the possession or control of any
agent or bailee or any income thereon or as to the preservation of rights
against prior parties or any other rights pertaining thereto.  The Collateral
Agent shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if such Collateral is accorded
treatment substantially equal to that which it accords its own property, and
shall not be liable or responsible for any loss or damage to any of the
Collateral, or for any diminution in the value thereof, by reason of any act or
omission of any agent or bailee selected by the Collateral Agent in good faith
or by reason of any act or omission by the Collateral Agent pursuant to
instructions from the Required Lenders (including, without limitation, any
voting instruction pursuant to Section 9), except to the extent that such
liability arises from the Collateral Agent's gross negligence or willful
misconduct.

     SECTION 15.  Application Of Proceeds.  (a) Upon being instructed to do so
in an Enforcement Notice or in written instructions given by the Required
Lenders at any time while an Enforcement Notice is in effect, the Collateral
Agent shall apply  the proceeds of any sale of, or other realization upon, all
or any part of the Collateral,  any cash held in the Cash Proceeds Accounts and
any cash withdrawn by it from the Concentration Accounts in the following order
of priorities:

     first, to pay the expenses of such sale or other realization, including
     reasonable compensation to agents of and counsel for the Collateral Agent,
     and all expenses, liabilities and advances incurred or made by the
     Collateral Agent in connection with the Collateral Documents, and any other
     amounts then due and payable to the Collateral Agent pursuant to Section 13
     hereof and to the other Agents pursuant to Section 11.03 of the Credit
     Agreement;

     second, to pay the unpaid principal of the Secured Obligations ratably (or
     provide for the payment thereof pursuant to subsection (b) of this
     Section), until payment in full of the principal of all Secured Obligations
     shall have been made (or so provided for);

     third, to pay all interest (including Post-Petition Interest) on the
     Secured Obligations and all letter of credit fees and commitment fees
     payable under the Credit Agreement ratably, until payment in full of all
     such interest and fees shall have been made;

                                       21
<PAGE>

     fourth, to pay all other Secured Obligations ratably (or provide for the
     payment thereof pursuant to subsection (b) of this Section), until payment
     in full of all such other Secured Obligations shall have been made (or so
     provided for); and

     finally, to pay to the relevant Grantor or its successors or assigns, or as
     a court of competent jurisdiction may direct, any surplus then remaining
     from the proceeds of the Collateral owned by it.

The Collateral Agent may make such distributions hereunder in cash or in kind
or, on a ratable basis, in any combination thereof.

     (b)  If at any time any portion of any monies collected or received by the
Collateral Agent would, but for the provisions of this subsection (b), be
payable pursuant to subsection (a) of this Section in respect of a Contingent
Secured Obligation, the Collateral Agent shall not apply any monies to pay such
Contingent Secured Obligation but instead shall request the holder thereof, at
least 10 days before each proposed distribution hereunder, to notify the
Collateral Agent as to the maximum amount of such Contingent Secured Obligation
if then ascertainable (e.g., in the case of a letter of credit, the maximum
amount available for subsequent drawings thereunder).  If the holder of such
Contingent Secured Obligation does not notify the Collateral Agent of the
maximum ascertainable amount thereof at least two Business Days before such
distribution, such holder shall not be entitled to share in such distribution.
If such holder does so notify the Collateral Agent as to the maximum
ascertainable amount thereof, the Collateral Agent will allocate to such holder
a portion of the monies to be distributed in such distribution, calculated as if
such Contingent Secured Obligation were outstanding in such maximum
ascertainable amount.  However, the Collateral Agent shall not apply such
portion of such monies to pay such Contingent Secured Obligation, but instead
shall hold such monies or invest such monies in Liquid Investments at the
direction of MHG as agent and attorney-in-fact for the relevant Grantor.  The
Collateral Agent shall hold all such monies and all such Liquid Investments and
the net proceeds thereof in trust until such time as all or part of such
Contingent Secured Obligation becomes a Non-Contingent Secured Obligation,
whereupon the Collateral Agent at the request of the relevant Secured Party
shall apply the amount so held in trust to pay such Non-Contingent Secured
Obligation; provided that, if the other Secured Obligations theretofore paid
pursuant to the same clause of subsection (a) (i.e., clause second or fourth)
were not paid in full, the Collateral Agent shall apply the amount so held in
trust to pay the same percentage of such Non-Contingent Secured Obligation as
the percentage of such other Secured Obligations theretofore paid pursuant to
the same clause of subsection (a).  If (i) the holder of such Contingent Secured
Obligation shall advise the Collateral Agent that no portion thereof remains in
the category of a Contingent Secured Obligation and (ii) the Collateral Agent
still holds any amount held in trust pursuant to this subsection (b) in respect
of such Contingent Secured Obligation (after paying all amounts payable pursuant
to the preceding sentence with respect to any portions thereof that became Non-
Contingent Secured Obligations), such remaining amount shall be applied by the
Collateral Agent in the order of priorities set forth in subsection (a) of this
Section.

     (c)  In making the payments and allocations required by this Section, the
Collateral Agent may rely upon information supplied to it pursuant to Section
16(f).  All distributions made by the Collateral Agent pursuant to this Section
shall be final (except in the event of manifest

                                       22
<PAGE>

error) and the Collateral Agent shall have no duty to inquire as to the
application by the Secured Parties of any amount distributed to them.

     SECTION 16.  Concerning The Collateral Agent.  (a) The Collateral Agent is
authorized to take all such action as is provided or permitted to be taken by it
as Collateral Agent under the Collateral Documents and all other action
reasonably incidental thereto.  As to any matters not expressly provided for
herein or in an Enforcement Notice or in written requests, directions or
instructions given as expressly provided in Section 6, 7, 9, 12 or 15 ,
including, without limitation, the timing and methods of realization upon the
Collateral, the Collateral Agent shall act or refrain from acting in accordance
with written instructions from the Required Lenders or, in the absence of such
instructions, in accordance with its discretion (subject to Section 16(c));
provided that the Collateral Agent shall not be obligated to comply with any
such instructions that are inconsistent with the provisions of the Collateral
Documents.

     (b)  The Collateral Agent shall not be responsible for the existence,
genuineness or value of any Collateral or for the validity, perfection, priority
or enforceability of the Security Interests in any Collateral, whether impaired
by operation of law or by reason of any action or omission to act on its part
under the Collateral Documents.  The Collateral Agent shall have no duty to
ascertain or inquire as to the performance or observance of any of the terms of
this Agreement, the Credit Agreement or any other agreement relating to the
Secured Obligations.

     (c)  The obligations of the Collateral Agent under the Collateral Documents
are only those expressly set forth therein. In any case in which the Collateral
Agent is authorized to exercise any power or discretion, the Collateral Agent
may refrain from such exercise unless directed in writing by the Required
Lenders to act in the manner specified in such direction. Without limiting the
generality of the foregoing, the Collateral Agent shall not be required to take
any action with respect to any Enforcement Notice, except as expressly provided
in Sections 12 and 15.

     (d)  The Collateral Agent may:

          (i)  consult with legal counsel (who may be counsel for any MHG
     Company) and

          (ii) to the extent that the Collateral Agent in good faith deems it
     appropriate in connection with its duties hereunder to do so, consult with
     independent public accountants and other experts selected by it in
     connection with any matter arising under the Collateral Documents and shall
     not be liable for any action taken or omitted to be taken by it in good
     faith in accordance with the advice of such counsel, accountants or
     experts.

     (e)  Neither the Collateral Agent nor any of its directors, officers,
agents, or employees shall be liable for any action taken or not taken by it in
connection with any Collateral Document in accordance with directions set forth
in an Enforcement Notice or with the consent or at the request of the Required
Lenders or in the absence of its own gross negligence or willful misconduct.
However, nothing in this subsection (e) shall affect any rights any Grantor may
have (x) against the Required Lenders for requesting the Administrative Agent to
give the

                                       23
<PAGE>

directions set forth in an Enforcement Notice or (y) against the Required
Lenders for giving any other consent, request, notice or instruction. Neither
the Collateral Agent nor any of its directors, officers, agents or employees
shall be responsible for or have any duty to ascertain, inquire into or verify
(i) any statement, warranty or representation made in connection with any
Collateral Document, (ii) the performance or observance of any of the covenants
or agreements of any Grantor or (iii) the validity, effectiveness or genuineness
of any Collateral Document or any other instrument or writing furnished in
connection therewith. The Collateral Agent shall not incur any liability by
acting in reliance upon any notice, consent, certificate, statement or other
writing (which may be a bank wire, telex, facsimile or similar writing) believed
by it to be genuine or to be signed by the proper party or parties.

     (f)  For all purposes of the Collateral Documents, including without
limitation determining from time to time the amounts of the Secured Obligations,
whether a Secured Obligation is a Contingent Secured Obligation or not, or
whether any notice, direction or instruction has been given by the Required
Lenders or any other Secured Party or Secured Parties entitled to give the same
under any provision of the Collateral Documents, the Collateral Agent shall be
entitled to rely upon information from the following sources (and may refrain
from acting on the basis of such information until two Business Days after it
receives all such information required to enable it to take such action):

          (i)    the Administrative Agent for information as to the Lender
     Parties and their respective Secured Obligations outstanding under the
     Credit Agreement (including whether any action has been taken or
     instruction given by the Required Lenders);

          (ii)   any Secured Party for information as to itself and its Secured
     Obligations, to the extent that the Collateral Agent has not received such
     information from the Administrative Agent; and

          (iii)  any Grantor for information as to any Secured Party and its
     Secured Obligations, to the extent that the Collateral Agent has not
     received such information from the sources referred to in clauses (i) and
     (ii) above.

     (g)  The Collateral Agent shall have no liability to any Grantor or any
Secured Party for actions taken in reliance on such information, except to the
extent that such liability arises from the Collateral Agent's gross negligence
or willful misconduct.

     (h)  The Collateral Agent may resign at any time (effective upon acceptance
by a successor Collateral Agent of its appointment hereunder) by giving written
notice thereof to the Administrative Agent, each of the Secured Parties
Requesting Notice and the Borrowers. Upon any such resignation, the Required
Lenders shall have the right to appoint a successor Collateral Agent. If no
successor Collateral Agent shall have been so appointed by the Required Lenders,
and shall have accepted such appointment, within 30 days after the retiring
Collateral Agent gives notice of resignation, the retiring Collateral Agent may,
on behalf of the Secured Parties, appoint a successor Collateral Agent, which
shall be a commercial bank organized or licensed under the laws of the United
States or of any State thereof and having a combined capital and surplus of at
least $100,000,000. Upon the acceptance of its appointment as Collateral Agent
hereunder by a successor Collateral Agent, such successor Collateral Agent shall
thereupon

                                       24
<PAGE>

succeed to and become vested with all the rights and duties of the retiring
Collateral Agent, and the retiring Collateral Agent shall be discharged from its
duties and obligations hereunder. After any retiring Collateral Agent's
resignation hereunder as Collateral Agent, the provisions of this Section and
Sections 13 and 14 shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was the Collateral Agent.

     (i)  Within two Business Days after it receives or sends any notice
referred to in this subsection (i), the Collateral Agent shall send to the
Administrative Agent and each of the Secured Parties Requesting Notice, copies
of any Enforcement Notice received by the Collateral Agent, any notice
withdrawing an Enforcement Notice received by the Collateral Agent pursuant to
Section 21 and any other notice given by the Collateral Agent to any Grantor, or
received by it from any Grantor, pursuant to Section 11, 12, 15 or 18. The
Collateral Agent shall also send to the Grantors copies of any Enforcement
Notice or any notice withdrawing an Enforcement Notice received by the
Collateral Agent.

     (j)  The Collateral Agent may refuse to act on any notice, direction or
instruction from the Administrative Agent, the Required Lenders or any Secured
Party, or any agent, trustee or similar representative thereof which, in the
Collateral Agent's opinion, is contrary to law or the provisions of any
Collateral Document, is unduly prejudicial to Secured Parties not joining in
such notice, direction or instruction or may expose the Collateral Agent to
liability (unless the Collateral Agent shall have been adequately indemnified
for such liability by the Secured Parties that gave, or instructed the
Administrative Agent to give, such notice, direction or instruction).

     SECTION 17.  Appointment of Co-Collateral Agents.  At any time or times, in
order to comply with any legal requirement in any jurisdiction, the Collateral
Agent may appoint another bank or trust company or one or more other persons,
either to act as co-agent or co-agents, jointly with the Collateral Agent, or to
act as separate agent or agents on behalf of the Secured Parties with such power
and authority as may be necessary for the effectual operation of the provisions
of any Collateral Document and may be specified in the instrument of appointment
(which may, in the discretion of the Collateral Agent, include provisions for
the protection of such co-agent or separate agent similar to the provisions of
Section 16).

     SECTION 18.  Termination of Security Interests; Release of Collateral.  (a)
When (i) all the Commitments shall have expired or been terminated,  (ii) all
Letters of Credit shall have expired or been canceled or been secured with cash
collateral in an amount and on terms satisfactory to the relevant LC Issuing
Bank, and (iii) all outstanding Secured Obligations shall have been paid in
full, the Security Interests shall terminate and all rights to each item of
Collateral shall revert to the Grantor that owns such item of Collateral.

     (b)  At any time before the Security Interests terminate pursuant to
subsection (a) of this Section,  so long as an Enforcement Notice is not in
effect, the Collateral Agent shall, upon the written request of the Borrowers
and the approval of the Court (to the extent that such Court approval is
required pursuant to an order of the Court or the Bankruptcy Code), release any
of the Collateral (but not all or substantially all of the Collateral) with the
prior written consent of the Required Lenders. Upon any such termination of the
Security Interests or release of Collateral, the Collateral Agent will, at the
expense of the relevant Grantor, execute and deliver

                                       25
<PAGE>

to such Grantor such documents as such Grantor shall reasonably request to
evidence the termination of the Security Interests or the release of such
Collateral, as the case may be.

     SECTION 19.   [** Reserved **]

     SECTION 20.   Notices.  All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission or
similar writing) and shall be given to such party in the manner set forth in the
Credit Agreement.

     SECTION 21.   Withdrawal of Enforcement Notice. An Enforcement Notice, once
given, shall remain in effect unless and until the Required Lenders notify the
Collateral Agent that they wish to withdraw such Enforcement Notice, no monies
have been applied to pay any Secured Obligations pursuant to Section 15 (except
pursuant to clause first thereof) as a result of such Enforcement Notice and the
Collateral Agent determines that the withdrawal of such Enforcement Notice will
not result in any liability or unreimbursed loss to the Collateral Agent by
reason of actions taken by it in reliance thereon.

     SECTION 22.   Waivers, Remedies Not Exclusive.  No failure on the part of
the Collateral Agent to exercise, and no delay in exercising and no course of
dealing with respect to, any right or remedy under any Collateral Document shall
operate as a waiver thereof; nor shall any single or partial exercise by the
Collateral Agent of any right or remedy under the Credit Agreement or any
Collateral Agreement preclude any other or further exercise thereof or the
exercise of any other right or remedy.  The rights and remedies specified in the
Collateral Documents and the Credit Agreement are cumulative and are not
exclusive of any other rights or remedies provided by law.

     SECTION 23.   Successors And Assigns.  This Agreement is for the benefit of
the Collateral Agent and the Secured Parties and their respective successors and
assigns, and in the event of an assignment of all or any of the Secured
Obligations, the rights of the holder thereof hereunder, to the extent
applicable to the indebtedness so assigned, shall be deemed transferred with
such indebtedness.  This Agreement shall be binding on the Grantors and their
respective successors and assigns.

     SECTION 24.   Changes In Writing.  Neither this Agreement nor any provision
hereof may be amended, waived, discharged or terminated except in accordance
with Section 11.05 of the Credit Agreement.

     SECTION 25.   NEW YORK LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE BANKRUPTCY CODE (WITH RESPECT ONLY TO THOSE PROVISIONS
OF THE AGREEMENT WHICH, BY THEIR EXPRESS TERMS, ARE GOVERNED BY THE BAKRUPTCY
CODE) AND, EXCEPT WITH RESPECT TO CONCENTRATION ACCOUNTS AND OTHER CASH
MANAGEMENT SYSTEM ACCOUNTS (WHICH SHALL CONTINUE TO BE GOVERNED BY THE LAW OF
JURISDICTION(S) SPECIFIED IN AGREEMENTS EXECUTED WITH RESPECT TO SUCH ACCOUNTS),
THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO

                                       26
<PAGE>

CONFLICTS OF LAWS PRINCIPLES, EXCEPT AS OTHERWISE REQUIRED BY MANDATORY
PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT REMEDIES PROVIDED BY THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK ARE GOVERNED BY THE LAWS OF
SUCH JURISDICTION.

     SECTION 26.   Severability.  If any provision of any Collateral Document is
invalid or unenforceable in any jurisdiction, then, to the fullest extent
permitted by law, the other provisions of the Collateral Documents shall remain
in full force and effect in such jurisdiction and shall be liberally construed
in favor of the Collateral Agent and the Secured Parties in order to carry out
the intentions of the parties thereto as nearly as may be possible; and the
invalidity or unenforceability of any provision thereof in any jurisdiction
shall not affect the validity or enforceability of such provision in any other
jurisdiction.

                 [Remainder of page intentionally left blank]

                                       27
<PAGE>

    IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.

BORROWERS:
---------

                              Mariner Health Group, Inc.
                              Aid & Assistance, Inc.
                              Beechwood Heritage Retirement Community, Inc.
                              Bride Brook Nursing & Rehabilitation Center, Inc.
                              Compass Pharmacy Services, Inc.
                              Compass Pharmacy Services of Maryland, Inc.
                              Compass Pharmacy Services of Texas, Inc.
                              Cypress Nursing Facility, Inc.
                              Long Ridge Nursing and Rehabilitation Center, Inc.
                              Long Wood Rehabilitation Center, Inc.
                              Mariner Health at Bonifay, Inc.
                              Mariner Health Care, Inc.
                              Mariner Health Care of Atlantic Shores, Inc.
                              Mariner Health Care of Deland, Inc.
                              Mariner Health Care of Fort Wayne, Inc.
                              Mariner Health Care of Great Laurel, Inc.
                              Mariner Health Care of Inverness, Inc.
                              Mariner Health Care of Lake Worth, Inc.
                              Mariner Health Care of MacClenny, Inc.
                              Mariner Health Care of Metrowest, Inc.
                              Mariner Health Care of Nashville, Inc.
                              Mariner Health Care of North Hills, Inc.
                              Mariner Health Care of Orange City, Inc.
                              Mariner Health Care of Palm City, Inc.
                              Mariner Health Care of Pinellas Point, Inc.
                              Mariner Health Care of Port Orange, Inc.
                              Mariner Health Care of Southern Connecticut, Inc.
                              Mariner Health Care of Toledo, Inc.
                              Mariner Health Care of Tuskawilla, Inc.
                              Mariner Health Care of West Hills, Inc.
                              Mariner Health Central, Inc.
                              Mariner Health Home Care, Inc.
                              Mariner Health of Florida, Inc.
                              Mariner Health of Jacksonville, Inc.
                              Mariner Health of Maryland, Inc.
                              Mariner Health of Orlando, Inc.
                              Mariner Health of Palmetto, Inc.
                              Mariner Health of Seminole County, Inc.
                              Mariner Health of Tampa, Inc.
                              Mariner Health Resources, Inc.
                              Mariner Physician Services, Inc.
                              Mariner Practice Corporation

                                      S-1

<PAGE>

                              Mariner - Regency Health Partners, Inc.
                              MarinerSelect Staffing Solutions, Inc.
                              Mariner Supply Services, Inc.
                              MedRehab, Inc.
                              MedRehab of Indiana, Inc.
                              MedRehab of Louisiana, Inc.
                              MedRehab of Missouri, Inc.
                              Merrimack Valley Nursing & Rehabilitation Center,
                               Inc.
                              Methuen Nursing & Rehabilitation Center, Inc.
                              MHC Rehab. Corp.
                              MHC Transportation, Inc.
                              Mystic Nursing & Rehabilitation Center, Inc.
                              National Health Strategies, Inc.
                              Park Terrace Nursing & Rehabilitation Center, Inc.
                              Pendleton Nursing & Rehabilitation Center, Inc.
                              Pinnacle Care Corporation
                              Pinnacle Care Corporation of Huntington
                              Pinnacle Care Corporation of Nashville
                              Pinnacle Care Corporation of Seneca
                              Pinnacle Care Corporation of Sumter
                              Pinnacle Care Corporation of Williams Bay
                              Pinnacle Care Corporation of Wilmington
                              Pinnacle Care Management Corporation
                              Pinnacle Pharmaceuticals, Inc.
                              Pinnacle Pharmaceutical Services, Inc.
                              Pinnacle Rehabilitation, Inc.
                              Pinnacle Rehabilitation of Missouri, Inc.
                              Prism Care Centers, Inc.
                              Prism Health Group, Inc.
                              Prism Home Care Company, Inc.
                              Prism Home Care, Inc.
                              Prism Home Health Services, Inc.
                              Prism Hospital Ventures, Inc.
                              Prism Rehab Systems, Inc.
                              Regency Health Care Center of Seminole County,
                               Inc.
                              Sassaquin Nursing & Rehabilitation Center, Inc.
                              Tampa Medical Associates, Inc.
                              The Ocean Pharmacy, Inc.
                              Tri-State Health Care, Inc.
                              Windward Health Care, Inc.

                              By:  ____________________________________
                                   Boyd P. Gentry
                                   Vice President for each of the foregoing
                                   Borrowers

                                      S-2
<PAGE>

                         IHS Rehab Partnership, Ltd.

                         By:  Mariner Health Care Of Nashville, Inc., its
                              General Partner

                              By:___________________________________
                              Name:
                              Title:

                         Mariner Health Properties IV, Ltd.

                         By:  Mariner Health Of Florida, Inc., its General
                              Partner

                              By:___________________________________
                              Name:
                              Title:

                         Mariner Health Properties VI, Ltd.

                         By:  Mariner Health Of Florida, Inc., its General
                              Partner

                              By:___________________________________
                              Name:
                              Title:

                         Seventeenth Street Associates Limited Partnership

                         By:  Tri-state Health Care, Inc., its General Partner

                              By:___________________________________
                              Name:
                              Title:

                                      S-3
<PAGE>

                                   Allegis Health and Living Center at Heritage
                                     Harbour, L.L.C.

                                   By:  Mariner Health of Maryland, Inc., its
                                        Managing Member

                                        By:___________________________________
                                        Name:
                                        Title:

                                      S-4
<PAGE>

                                   PNC Bank, National Association,
                                   as Collateral Agent

                                   By:  _________________________________
                                   Name:
                                   Title:

                                      S-5
<PAGE>

LIMITED JOINDER. First Union National Bank ("First Union") joins in this
---------------
Security Agreement for the sole purpose of evidencing its agreement to serve as
"Concentration Bank" subject to the terms, provisions and protections of Section
6; neither execution nor any term or provision of this Security Agreement shall
be interpreted or construed as a representation, warranty or other affirmation
by First Union as to the validity or priority of any security interest or
agreement between and among the Borrowers, the Collateral Agent, and Lenders or
any other party, or to impose upon First Union any obligation or responsibility
except as expressly provided in Section 6 of the Security Agreement.

                                   First Union National Bank,
                                   as Concentration Bank

                                   By:  _________________________________
                                   Name:
                                   Title:

                                      S-6
<PAGE>

                                                                       EXHIBIT A
                                                           to Security Agreement

                            PERFECTION CERTIFICATE

     The undersigned, an authorized officer of [NAME OF GRANTOR], a
[jurisdiction of incorporation] corporation/1/ (the "Company"), hereby certifies
with reference to the Security Agreement dated as of January __,2000 among the
Company, the other Grantors and PNC Bank, National Association, as Collateral
Agent (terms defined therein being used herein as therein defined), to the
Collateral Agent and each other Lender Party as follows:

     1.   Names/1/ (a) The exact corporate name of the Company as it appears in
its certificate of incorporation is as follows:

          (b)  Set forth below is each other corporate name the Company has had
     since its organization, together with the date of the relevant change.

          (c)  Except as set forth in Schedule 1, the Company has not changed
     its identity or corporate structure in any way within the past five years.

          [Changes in identity or corporate structure would include mergers,
     consolidations and acquisitions, as well as any change in the form, nature
     or jurisdiction of corporate organization. If any such change has occurred,
     include in Schedule 1 the information required by paragraphs 1, 2 and 3 of
     this certificate as to each acquiree or constituent party to a merger or
     consolidation.]

          (d)  The following is a list of all other names (including trade names
     or similar appellations) used by the Company or any of its divisions or
     other business units at any time during the past five years:

     2.   Current Locations. (a) The chief executive office of the Company is
located at the following address:

          (b)  The following are all the locations where the Company maintains
     any books or records relating to any Accounts:

          (c)  The following are all the places of business of the Company not
     identified above:

_______________
/1/ Modify as needed for any Grantor that is not a corporation.

                                      A-1
<PAGE>

          (d)  The following are all the locations where the Company maintains
     any Inventory not identified above:

          (e)  The following are the names and addresses of all Persons other
     than the Company which have possession of any of the Company's Inventory:

     3.   Prior Locations. (a) Set forth below is the information required by
subparagraphs 2(a), 2(b) and 2(c) above with respect to each location or place
of business maintained by the Company at any time during the past five years:

          (b)  Set forth below is the information required by subparagraphs 2(d)
     and 2(e) above with respect to each location or bailee where or with whom
     Inventory has been lodged at any time during the past four months:

     4.   Unusual Transactions. Except as set forth in Schedule 4, all Accounts
have been originated by the Company and all Inventory and Equipment has been
acquired by the Company in the ordinary course of its business.

     5.   File Search Reports. Attached hereto as Schedule 5(A) is a true copy
of a file search report from the Uniform Commercial Code filing officer in each
jurisdiction identified in paragraph 2 or 3 above with respect to each name set
forth in paragraph 1 above. Attached hereto as Schedule 5(B) is a true copy of
each financing statement or other filing identified in such file search reports.

     6.   UCC Filings. A duly signed financing statement on Form UCC-1 in the
form required by Collateral Agent pursuant to the Security Agreement has been
provided to the Collateral Agent for due filing in the Uniform Commercial Code
filing office in each jurisdiction identified in paragraph 2 hereof.

                                      A-2
<PAGE>

     IN WITNESS WHEREOF, the undersigned has executed this Perfection
Certificate this __ day of __________, 2000.

                                   By: ____________________________
                                   Name:
                                   Title:

                                      A-3
<PAGE>

                                   EXHIBIT B
                                      to
                              Security Agreement

                       [Letterhead of Collateral Agent]

                             Notice of Redirection

                             _______________, 2000

First Union National Bank
NC0737
301 South College Street, TW5
Charlotte, NC 28288-0737

Attn:  __________

     Re:  ________________, Account Nos. _____________ (the "Accounts")

Ladies and Gentlemen:

          Reference is made to that certain Security Agreement dated as of
January ___, 2000 (the "Security Agreement") among you, us, as Collateral Agent,
and Mariner Health Group, Inc. and the other borrowers party thereto pursuant to
which we, for our benefit and for the benefit of Lenders (as defined in the
Security Agreement), were given exclusive dominion and control over the
Accounts. This notice is given in accordance with the terms of the Security
Agreement.

          Effective immediately and continuing until we shall authorize you in
writing to do otherwise, we hereby (i) give you notice of our sole control over
the Accounts and all financial assets credited thereto and instruct you not to
accept any direction, instructions or entitlement order with respect to the
Accounts or the financial assets credited thereto from any person other than the
undersigned, and (ii) direct you to transfer, by wire transfer of immediately
available funds not later than 3:00 p.m. E.S.T. on each banking day, all
collected funds contained in the Accounts in accordance with the following
transfer instructions:

                  [insert appropriate transfer instructions]

                                             Very truly yours,

                                             PNC BANK, NATIONAL ASSOCIATION,
                                             as Collateral Agent

                                             By:________________________________
                                             Title:_____________________________

                                      B-1
<PAGE>

                                   Exhibit C

                                [See Attached]

                                      C-1
<PAGE>

                                   Exhibit D

                                [See Attached]

                                      D-1

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