HARBORSIDE HEALTHCARE CORP, 10-K, 2000-03-31

HARBORSIDE HEALTHCARE CORP
10-K, 2000-03-31
SKILLED NURSING CARE FACILITIES

Previous: FOOTSTAR INC, 10-K, 2000-03-31

Next: PRENTISS PROPERTIES TRUST/MD, DEF 14A, 2000-03-31

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
-----------------
OR

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

For the transition period from to
------------- -----------

Commission file number 333-64679
-------------

Harborside Healthcare Corporation
(Exact name of registrant as specified in its charter)

Delaware 04-3307188
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

One Beacon Street, Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(Registrant's telephone number, including area code) (617) 646-5400
-----------------

Securities registered pursuant to Section 12 (b) of the Act:

Name of each exchange
Title of each class On which registered
- ------------------- -------------------
11% Senior Subordinated Discount
Notes due 2008

13 1/2% Exchangeable Preferred Stock Mandatorily
Redeemable 2010 ("Preferred Stock")

13 1/2% Subordinated Exchange Debentures due 2010

Common Stock, par value $.01 per share

Securities registered pursuant to Section 12 (g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No --- --- Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [].

At March 30, 2000, the registrant had 7,261,332 shares of Common Stock
outstanding.

Documents incorporated by reference:

<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-K, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Company desires to take advantage of certain "safe harbor" provisions of the
Reform Act and is including this special note to enable the Company to do so.
Forward-looking statements included in this Form 10-K, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes
the following important factors could cause such a material difference to occur:

1. The Company's ability to grow through the acquisition and development of
long-term care facilities or the acquisition of ancillary businesses.

2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.

3. The occurrence of changes in the mix of payment sources utilized by the
Company's patients to pay for the Company's services.

4. The adoption of cost containment measures by private pay sources such as
commercial insurers and managed care organizations, as well as efforts by
governmental reimbursement sources to impose cost containment measures.

5. Changes in the United States healthcare system, including changes in
reimbursement levels and the method of reimbursement, under Medicaid and
Medicare, and other changes in applicable government regulations that might
affect the profitability of the Company.

6. The Company's continued ability to operate in a heavily regulated
environment and to satisfy regulatory authorities, thereby avoiding a
number of potentially adverse consequences, such as the imposition of
fines, temporary suspension of admission of patients, restrictions on the
ability to acquire new facilities, suspension or decertification from
Medicaid or Medicare programs, and in extreme cases, revocation of a
facility's license or the closure of a facility, including as a result of
unauthorized activities by employees.

7. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.

8. Changes in certificate of need laws that might increase competition in the
Company's industry, including, particularly, in the states in which the
Company currently operates or anticipates operating in the future.

9. The Company's ability to staff its facilities appropriately with qualified
healthcare personnel, including in times of shortages of such personnel and
to maintain a satisfactory relationship with labor unions.

10. The level of competition in the Company's industry, including without
limitation, increased competition from acute care hospitals, providers of
assisted and independent living and providers of home healthcare and
changes in the regulatory system in the state in which the Company operates
that facilitate such competition.

11. The continued availability of insurance for the inherent risks of liability
in the healthcare industry.

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

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

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

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

2
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>

PAGE

PART I

<S> <C>
ITEM 1. BUSINESS 4

ITEM 2. PROPERTIES 11

ITEM 3. LEGAL PROCEEDINGS 13

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 14

ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 51

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 51

ITEM 11. EXECUTIVE COMPENSATION 53

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 55

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 56

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 58

SIGNATURES 64
</TABLE>

3
<PAGE>

ITEM 1. BUSINESS

GENERAL OVERVIEW

Harborside Healthcare Corporation (the "Company" or "Harborside") was created
in March 1996, in anticipation of an initial public offering (the "IPO"), in
order to combine under its control the operations of various long-term care
facilities and ancillary businesses (the "Predecessor Entities") which had
operated since 1988. The Company completed the IPO on June 14, 1996 and issued
3,600,000 shares of common stock at $11.75 per share. Immediately prior to the
IPO the owners of the Predecessor Entities contributed their interests in such
Predecessor Entities to the Company and received 4,400,000 shares of the
Company's common stock (the "Reorganization").

On April 15, 1998, Harborside entered into a Merger Agreement with HH
Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose of
effecting a merger on behalf of Investcorp S.A., certain of its affiliates and
certain other international investors (the "New Investors"). On August 11, 1998,
MergerCo merged with and into Harborside, with Harborside as the surviving
corporation. As a result of the transaction, and pursuant to the Merger
Agreement, the New Investors acquired approximately 91% of the post-merger
common stock of Harborside. The remaining 9% of the common stock was retained by
existing shareholders, including management. As a result of the merger,
Harborside shares were de-listed from the New York Stock Exchange.

The merger was approved by a majority of Harborside's shareholders at a
special meeting held on August 11, 1998. Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million. Holders of outstanding stock options of
the Company converted the majority of their options into cash at $25 per
underlying share (less applicable exercise price and withholding taxes) with
aggregate payments of approximately $8 million.

In connection with the transaction and prior to the Merger, the New Investors
made cash common equity contributions of $158.5 million, net of issuance costs,
to MergerCo, and MergerCo obtained gross proceeds of $99.5 million through the
issuance of 11% Senior Subordinated Discount Notes ("Discount Notes") due 2008
and $40 million through the issuance of 13.5% Exchangeable Preferred Stock
("Preferred Stock") mandatorily redeemable in 2010. In connection with the
Merger, Harborside also entered into a new $250 million collateralized credit
facility. In the third quarter of 1998, Harborside recorded a charge to income
from operations of $37 million ($29 million after taxes) for direct and other
costs related to the merger transaction. In connection with the Merger and the
related refinancings, the Company exercised purchase options for seven
facilities which had been financed through synthetic leases.

Harborside provides high quality long-term care, subacute care and other
specialty medical services in four principal regions: the Southeast (Florida),
the Midwest (Ohio and Indiana), New England (Connecticut, Massachusetts, New
Hampshire and Rhode Island), and the Mid-Atlantic (New Jersey and Maryland).
Within these regions, as of December 31, 1999, the Company operated 50 licensed
long-term care facilities (22 owned, 27 leased and one managed) with a total of
6,124 licensed beds. From December 31, 1994 to December 31, 1999, the Company
increased its overall patient capacity by approximately 3,759 licensed beds, or
approximately 160%.

The Company provides traditional skilled nursing care, a wide range of
subacute care programs (such as orthopedic, CVA/stroke, cardiac, pulmonary and
wound care), as well as distinct programs for the provision of care to
Alzheimer's and hospice patients. As part of its subacute services, the Company
provides physical, occupational and speech rehabilitation therapy services at
Company-operated facilities. Through September 1999, the Company also provided
rehabilitation therapy services under contracts with non-affiliated long-term
care facilities through a wholly-owned subsidiary. During the third quarter of
1999, the Company terminated its contracts with non-affiliated facilities and
ceased providing therapy services to non-affiliated facilities.

PATIENT SERVICES

Basic Patient Services

Basic patient services are those traditionally provided to elderly patients in
long-term care facilities to assist with the activities of daily living and to
provide general medical care. The Company provides 24-hour skilled nursing care
by registered nurses, licensed practical nurses and certified nursing aides in
all of its facilities. Each facility is managed by an on-site licensed
administrator who is responsible for the overall operation of the facility,
including the quality of care provided. The medical needs of patients are
supervised by a medical director, who is a licensed physician. Although
treatment of patients is the responsibility of their own attending physicians,
who are not employed by the Company, the medical director monitors all aspects
of delivery of care. The Company also provides support services, including
dietary services, therapeutic recreational activities, social services,
housekeeping and laundry services, pharmaceutical and medical supplies and
routine rehabilitation therapy.

Each facility offers a number of individualized therapeutic activities designed
to enhance the quality of life of its patients. These activities include
entertainment events, musical productions, trips, arts and crafts and volunteer
and other programs that encourage community interaction.

Specialty Medical Services

Specialty medical services are those provided to patients with medically
complex needs, who generally require more extensive treatment and a higher level
of skilled nursing care. These services typically generate higher net patient
service revenues per patient day than basic patient services as a result of
increased levels of care and the provision of ancillary services.

Subacute Care. Subacute care is goal-oriented, comprehensive care designed for
an individual who has had an acute illness, injury, or exacerbation of a disease
process. Subacute care is typically rendered immediately after, or instead of,
acute hospitalization in order to treat one or more specific, active, complex
medical conditions or in order to administer one or more technically complex
treatments. The Company provides subacute care services at substantially all of

4
<PAGE>

its existing facilities in such areas as complex medical, cardiac recovery,
digestive, immuno-suppressed disease, post-surgical, wound, CVA/stroke care,
hemodialysis, infusion therapy, and diabetes and pain management.

In facilities that have shown strong demand for subacute services, the Company
has developed distinct subacute units. Each distinct unit contains 20 to 60 beds
and is specially staffed and equipped for the delivery of subacute care.
Patients in these units typically range in age from late teens to the elderly,
and typically require high levels of nursing care and the services of
physicians, therapists, dietitians, clinical pharmacists or psycho/social
counselors. Certain patients may also require life support or monitoring
equipment. Because patient goals are generally rehabilitation-oriented, lengths
of stay in distinct subacute units are generally expected to be less than 30
days each.

The Company has designed clinical pathways for these distinct subacute units in
the areas of orthopedic rehabilitation, CVA/stroke recovery, cardiac recovery,
pulmonary rehabilitation and wound care management. These clinical pathways are
designed to achieve specified measurable outcomes in an efficient and
cost-effective manner. The Company's subacute units and the clinical pathways
used in these units are designed to attract commercial insurance and managed
care organizations, such as HMOs and PPOs. The Company has personnel dedicated
to actively market its subacute units to commercial insurers and managed care
organizations. The Company will continue to develop additional clinical pathways
based on market opportunities.

Alzheimer's Care. The Company has also developed distinct units that provide
care for patients with Alzheimer's disease. As of December 31, 1999, the Company
operated dedicated Alzheimer's units at eight facilities.

OPERATIONS

Facilities. Each of the Company's facilities is supervised by a licensed
facility administrator who is responsible for all aspects of the facility's
operations. The facility administrator oversees (i) a director of nursing who
supervises a staff of registered nurses, licensed practical nurses and certified
nursing aides, (ii) a director of admissions who is responsible for developing
local marketing strategies and programs and (iii) various other departmental
supervisors. The Company also contracts with one or more licensed physicians at
each facility to serve as medical directors for the purpose of supervising the
medical management of patients. Facilities with subacute or specialty medical
units or programs may also contract with physician specialists to serve as
rehabilitation or specialty program medical directors in areas such as physiatry
(physical medicine), neurology or gero-psychology. Facilities may also employ or
contract for additional clinical staff such as case managers, therapists and
program directors. Department supervisors at each of the Company's facilities
oversee personnel who provide dietary, maintenance, laundry, housekeeping,
therapy and social services. In addition, a business office staff at each
facility routinely performs administrative functions, including billing, payroll
and accounts payable processing. The Company's corporate and regional staff
provide support services such as quality assurance, management training,
clinical consultation and support, management information systems, risk
management, human resource policies and procedures, operational support,
accounting and reimbursement expertise.

Regions. The Company seeks to cluster its long-term care facilities in
selected geographic regions to establish a strong competitive position as well
as to position the Company as a healthcare provider of choice to managed care
and private payors in these markets. The Company's facilities currently serve
four principal geographic regions: the Southeast (Florida), the Midwest (Ohio
and Indiana), New England (Connecticut, Massachusetts, New Hampshire and Rhode
Island), and the Mid-Atlantic (New Jersey and Maryland). The Company maintains
regional operating offices in Palm Harbor, Florida; Indianapolis, Indiana;
Topsfield, Massachusetts; West Hartford, Connecticut; and Peterborough, New
Hampshire. Each region is supervised by a regional director of operations who
directs the efforts of a team of professional support staff in the areas of
clinical services, marketing, bookkeeping, human resources and engineering.
Other Company staff, who are principally based in the regions, provide support
and assistance to all of the Company's facilities in the areas of subacute
services, managed care contracting, reimbursement services, risk management,
data processing and training. Financial control is maintained through financial
and accounting policies established at the corporate level for use at each
facility. The Company has standardized operating policies and procedures and
continually monitors operating performance to assure consistency and quality of
operations.

Continuous Quality Improvement Program. The Company has developed a continuous
quality improvement program which is designed to monitor, evaluate and improve
the delivery of patient care. The program is supervised by the Company's Senior
Vice President of Clinical Services and consists of the standardization of
policies and procedures, routine site visits and assessments and a quality
control system for patient care and physical plant compliance. Pursuant to its
quality control system, the Company routinely collects information from
patients, family members, referral sources, employees and state survey agencies
which is then compiled, analyzed and distributed throughout the Company in order
to monitor the quality of care and services provided.

The Company's continuous quality improvement program is modeled after
guidelines for long-term care and subacute facilities promulgated by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), a nationally
recognized accreditation agency for hospitals and other healthcare
organizations. The Company believes that JCAHO accreditation is an important
factor in gaining provider contracts from managed care and commercial insurance
companies. Accordingly, in late 1995 the Company began a program to seek
accreditation from JCAHO for the Company's facilities. As of December 31, 1999,
34 of the Company's facilities had received accreditation.

MARKETING

The Company's marketing program is designed to attract patients who will have
a favorable impact on the Company's profits and quality mix of revenues. The
Company establishes monthly occupancy and revenue goals for each of its
facilities and maintains marketing objectives to be met by each facility. The
Company's Senior Vice President of Marketing and Managed Care is principally
responsible for the development and implementation of the Company's marketing
program. Regional marketing directors provide routine support to the
facility-based admissions directors through the development of facility-based
marketing strategies, competitive assessments and routine visits.

The Company uses a decentralized marketing approach in order to capitalize on
each facility's strengths and reputation in the community it serves. Admissions

5
<PAGE>

staff at each facility are primarily responsible for marketing basic medical
services and developing semi-annual marketing plans in consultation with the
Company's regional marketing and operations staff. Basic medical services are
marketed to area physicians, hospital discharge planning personnel, individual
patients and their families and community referral sources. Facility personnel
also market the Company's specialty medical services to these sources. Corporate
and regional personnel who specialize in subacute care, managed care and
reimbursement also assist in the marketing of specialty medical services.

The Company believes its marketing program has demonstrated its effectiveness.
The Company's average annual occupancy rates for the fiscal years ended December
31, 1997, 1998 and 1999 were 92.3%, 92.3% and 90.9%, respectively. In
comparison, a study of approximately 1,500 nursing facilities conducted by the
U.S. Department of Health and Human Services found that in 1995 nursing
facilities operated at approximately 87% of capacity.

SOURCES OF REVENUES

The Company derives its revenues primarily from private pay sources, the
Federal Medicare program for certain elderly and disabled patients and state
Medicaid programs for indigent patients. The Company's revenues are influenced
by a number of factors, including (i) the licensed bed capacity of its
facilities, (ii) the occupancy rates, (iii) the payor mix of its facilities and
the rates of reimbursement among payor categories (private and other, Medicare
and Medicaid) and (iv) the extent to which subacute and other specialty medical
and ancillary services are utilized by the patients and paid for by the
respective payment sources. The Company employs specialists to monitor
reimbursement rules, policies and related developments in order to comply with
all reporting requirements and to assist the Company in receiving
reimbursements.

The following table identifies the Company's percentage of net revenues
attributable to each of its payor sources for the periods indicated:

PERCENTAGE OF NET REVENUES BY PAYOR (1)
YEAR ENDED DECEMBER 31,
----------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1998 1999
------ ------ ------

Private and other .............. 34.1% 30.2% 28.9%
Medicare ....................... 25.9 27.7 21.8
Medicaid ....................... 40.0 42.1 49.3
------ ------ ------
Total ........................ 100.0% 100.0% 100.0%
====== ====== ======

</TABLE>

(1) Total net revenues exclude net revenues of the Larkin Chase Center which is
owned by the Bowie Center Limited Partnership ("Bowie L.P."). The Company
owns a 75% partnership interest in Bowie L.P. but records its investment in
Bowie L.P. using the equity method.

Private and Other. Private and other net revenues include payments from
individuals who pay directly for services without governmental assistance and
payments from commercial insurers, HMOs, PPOs, Blue Cross organizations,
workers' compensation programs, hospice programs and other similar payment
sources. The Company's rates for private pay patients are typically higher than
rates for patients eligible for assistance under state Medicaid programs. The
Company's private pay rates vary from facility to facility and are influenced
primarily by the rates charged by other providers in the local market and by the
Company's ability to distinguish its services from those provided by its
competitors. Although private pay rates are generally established on a
facility-specific fee schedule, rates charged for individual cases may vary
widely because, in the case of managed care, they are either negotiated on a
case-by-case basis with the payor or are fixed by contract. Rates charged to
private pay patients are not subject to regulatory control in any of the states
in which the Company operates.

Medicare. Medicare is a federally funded and administered health insurance
program primarily designed for individuals who are age 65 or over and are
entitled to receive Social Security benefits. The Medicare program consists of
two parts. The first part, Part A, covers inpatient hospital services and
certain services furnished by other institutional healthcare providers, such as
long-term care facilities. The second part, Part B, covers the services of
doctors, suppliers of medical items and services and various types of outpatient
services. Part B services include physical, speech and occupational therapy and
durable medical equipment and other ancillary services of the type provided by
long-term care or acute care facilities. Part A coverage, as applied to services
delivered in a long-term care facility, is limited to skilled nursing and
rehabilitative care related to a recent hospitalization and is limited to a
specified term (generally 100 days per calendar year), requires beneficiaries to
share some of the cost of covered services through the payment of a deductible
and a co-insurance payment and requires beneficiaries to meet certain qualifying
criteria. Prior to December 31, 1998 there were no limits on duration of
coverage for Part B services, but there was a co-insurance requirement for most
services covered by Part B. Substantially all of the Company's facilities are
certified Medicare providers.

The method used in determining Medicare reimbursement for rehabilitation
therapy services furnished in the Company's facilities used to depend on the
type of therapy provided. Prior to December 31, 1998, the Medicare program
applied salary equivalency guidelines to determine the reasonable cost of
physical therapy services and respiratory therapy services provided on a
contract basis, which is the cost that would be incurred if the therapist were
employed at the facility, plus an amount designed to compensate the provider for
certain general and administrative overhead costs. With respect to occupational
therapy and speech language pathology and prior to April 10, 1998, Medicare
provided reimbursement for services on a reasonable cost basis, subject to the
so-called "prudent buyer" rule for evaluating the reasonableness of the costs.
As of April 10, 1998, the Health Care Financing Administration ("HCFA")
implemented new rules which established new guidelines for reimbursement for
rehabilitation therapy services provided at skilled nursing facilities. Through
December 31, 1998, these new guidelines revised the salary equivalency rules for
physical and respiratory therapies and extended the salary equivalency
methodology to speech and occupational therapy services as well.

6
<PAGE>

Through December 31, 1998, these new guidelines revised the salary equivalency
rules for physical and respiratory therapies and extended the salary equivalency
methodology to speech and occupational therapy services as well. Through
December 31, 1998, the Medicare Part A program reimbursed the Company under an
existing cost-based reimbursement system for its allowable direct costs (which
consisted of nursing and ancillary) plus an allocation of allowable indirect
costs including (capital costs, and administrative and general expenses).
Through December 31, 1998, the total of routine costs and the respective
allocated overhead was subject to a regional routine cost limit. As the Company
has expanded its subacute care and other specialty medical services, the costs
of care for these patients generally exceeded these regional reimbursement
routine cost limits. Prior to January 1, 1999, the Company was required to
submit routine cost limit exception requests to recover the excess costs from
the Medicare program. There can be no assurance that the Company will be able to
recover such excess costs under any pending or future requests. The failure to
recover these excess costs in the future could materially adversely affect the
Company. Additionally, until January 1, 1999, regulations allowed new long-term
care facilities in certain limited circumstances, to apply for a three year
exemption from routine cost limits. The Company has applied for, been denied and
is now appealing such exemptions for two of its facilities. Unless and until
such exemptions are granted, these facilities can only recover excess costs
through routine cost limit exception requests.

The Balanced Budget Act (the "BBA") was enacted in August 1997. The BBA
significantly amended the reimbursement methodology of the Medicare program and
eliminated the process of applying for and receiving routine cost limit
exceptions and exemptions. In addition to offering new Medicare health plan
options and increasing the penalties related to healthcare fraud and abuse, the
BBA provided for a prospective payment system (the "PPS") for skilled nursing
facilities to be implemented for cost report periods beginning on or after July
1, 1998. The BBA also mandated a 10% reduction in Part B therapy costs for the
period January 1, 1998 through December 31, 1998. Subsequent to January 1, 1999,
skilled nursing facilities were reimbursed for Part B therapy services through
fee schedules established by HCFA. The BBA further limited reimbursement for
Part B therapy services by establishing annual limitations on Part B therapy
charges per beneficiary.

Since the Medicare prospective payment system is all inclusive, the BBA
required skilled nursing facilities to institute "consolidated billing" for a
variety of services and supplies. Under consolidated billing, the skilled
nursing facility must submit all Medicare claims for virtually all the Part A
services and supplies that its residents receive, with the exception of certain
services, including those provided by physicians. Payments for these services
and supplies billed on a consolidated basis are made directly to the skilled
nursing facility, whether or not the services are provided directly by the
skilled nursing facility or by others under a contractual arrangement. Among the
services and goods which the skilled nursing facility is now responsible for
billing are: physical therapy, occupational therapy, speech therapy, laboratory
services, diagnostic x-rays, medical supplies, surgical dressings, prosthetic
devices/ostomy, colostomy, enteral/parenteral nutrition, orthotics, limbs, EKGs,
vaccines, certain ambulance services and psychological services by a social
worker. Consolidated billing for Part B services will not be effective until
January 2001. Examples of Part B services and goods which are not billed by
skilled nursing facilities are physicians' services, physician assistants under
physician supervision, nurse practitioners, certified nurse-midwives, qualified
psychologists, certified registered nurses, anesthetists, home dialysis supplies
and equipment, self-care home dialysis support services and institutional
dialysis services and supplies, erythropoietin for certain dialysis patients,
hospice care related to a beneficiary's terminal illness, an ambulance trip to
the skilled nursing facility from the initial admission or from the skilled
nursing facility following a final discharge.

Interim regulations regarding Medicare PPS were published on May 12, 1998. The
regulations included (i) the unadjusted federal per diem rates to be applied to
days of covered skilled nursing facility services furnished during the fiscal
year, (ii) the case mix classification system to be applied with respect to such
services during the fiscal year and (iii) the factors to be applied in making
area wage adjustments with respect to such services. The regulations also
contained provisions for skilled nursing facility consolidated billing of
Medicare Part A and certain services and items furnished to residents of the
skilled nursing facility under Part B. Final regulations were published on July
30, 1999. The final regulations had no material affect on the Company.

On November 29, 1999, the "Consolidated Appropriations Act (the"CAA") was
signed into law. The CAA was designed to mitigate some of the effects of the
BBA. The CAA allowed skilled nursing facilities to elect transition to the full
federal per diem rate at the beginning of their cost reporting periods for cost
periods beginning on or after January 1, 2000. Using the election allowed by the
CAA, the Company chose to move fourteen facilities to the full federal per diem
rate effective January 1, 2000. As a result, the Company now uses the full
federal per diem rate to calculate Medicare revenue at twenty-three of its
skilled nursing facilities. Additionally, the CAA will temporarily increase the
federal per diem rates by 20% for fifteen acuity categories beginning on April
1, 2000. These increased rates will stay in effect until the later of (a)
October 1, 2000 or (b) the date HCFA implements a revised PPS system that more
accurately reimburses the costs of caring for medically complex patients. The
CAA also provides for a four percent increase in the federal per diem rates for
all acuity categories for a two-year period beginning October 1, 2000. The CAA
also excluded costs for certain supplies and services that were formerly
required to be reimbursed by a skilled nursing facility's PPS rate. The CAA also
eliminated the annual provider limitations on Part B therapy charges per
beneficiary for fiscal 2000 and 2001. As a result of the number of variables
involved (including facility specific occupancy, the acuity distribution of
Medicare patients, and the length of time the temporary increases in the federal
per diem rate stay in effect), the Company cannot at this time accurately
quantify the dollar impact of the CAA on the Company's financial positions or
the results of its operations.

Medicaid. The Medicaid program includes the various state-administered
reimbursement programs for indigent patients created by federal law. Although
Medicaid programs vary from state to state, they are partially subsidized by
federal funds, provided that the state has submitted an acceptable state plan
for medical assistance. Although reimbursement rates are determined by the
state, the federal government retains the right to approve or disapprove
individual state plans. For Medicaid recipients, providers must accept
reimbursement from Medicaid as payment in full for the services rendered,
because the provider may not bill the patient for more than the amount of the
allowable Medicaid payment. Substantially all of the Company's facilities
participate in the Medicaid program of the states in which they are located.

Under the Boren Amendment, a federal Medicaid statute, and related
regulations, state Medicaid programs were required to provide reimbursement
rates that were reasonable and adequate to cover the costs that would be
incurred by efficiently and economically operated facilities while providing
services in conformity with state and federal laws, regulations and quality and
safety standards. Furthermore, payments were required to be sufficient to enlist
enough providers so that services under a state's Medicaid plan were available
to recipients at least to the extent that those services are available to the
general population. In the past, several states' healthcare provider
organizations and providers have initiated litigation challenging the Medicaid
reimbursement methodologies employed in such states, asserting that
reimbursement payments are not adequate to reimburse an efficiently operated
facility for the costs of providing Medicaid covered services. The BBA repealed
the Boren Amendment effective October 1, 1997 and allowed the states to develop
their own standards for determining Medicaid payment rates. The BBA provides

7
<PAGE>

certain procedural restrictions on the states' ability to amend state Medicaid
programs by requiring that the states use a public process to establish payment
methodologies including a public comment and review process. The repeal of the
Boren Amendment provides states with greater flexibility to amend individual
state programs and potentially reduce state Medicaid payments to skilled nursing
facilities.

The Medicaid programs in the states in which the Company operates pay a per
diem rate for providing services to Medicaid patients based on the facility's
reasonable allowable costs incurred in providing services, subject to cost
ceilings applicable to patient care, other operating and capital costs. Some
state Medicaid programs in which the Company currently operates currently
include incentive allowances for providers whose costs are less than certain
ceilings and who meet other requirements.

There are generally two types of Medicaid reimbursement rates: retrospective
and prospective, although many states have adopted plans that have both
retrospective and prospective features. A retrospective rate is determined after
completion of a cost report by the service provider and is designed to reimburse
expenses. Typically, an interim rate, based upon historical cost factors and
inflation is paid by the state during the cost reporting period and a cost
settlement is made following an audit of the filed cost report. Such adjustments
may result in additional payments being made to the Company or in recoupments
from the Company, depending on actual performance and the limitations within an
individual state plan.

The more prevalent type of Medicaid reimbursement rate is the prospective
rate. Under a prospective plan, the state sets its rate of payment for the
period before services are rendered. Actual costs incurred by operators during a
period are used by the state to establish the prospective rate for subsequent
periods. The provider must accept the prospective rate as payment in full for
all services rendered. Although there is usually no settlement based upon actual
costs incurred subsequent to the cost report filing, subsequent audits may
provide a basis for the state program to retroactively recoup monies.

To date, adjustments from Medicaid audits have not had a material adverse
effect on the Company. Although there can be no assurance that future
adjustments will not have a material adverse effect on the Company, the Company
believes that it has properly applied the various payment formulas and that it
is not likely that audit adjustments would have a material adverse effect on the
Company.

MANAGEMENT INFORMATION SYSTEMS

Effective January 1, 1999, all of the Company's facilities are supported by a
centralized, integrated financial reporting system which processes financial
transactions and which enables Company personnel to monitor and respond on a
timely basis to key operating and financial data and budget variances. The
Company expects all newly acquired facilities to utilize the centralized
financial reporting system beginning with, or shortly after, their date of
acquisition. Additionally, the Company utilizes a payroll processing service
company to process payroll for all of its facilities.

GOVERNMENTAL REGULATION

The federal government and all states in which the Company operates regulate
various aspects of the Company's business. In addition to the regulation of
payment rates by governmental payor sources, the development and operation of
long-term care facilities and the provision of long-term care services are
subject to federal, state and local licensure and certification laws which
regulate with respect to a facility, among other matters, the number of beds,
the services provided, the distribution of pharmaceuticals, equipment, staffing
requirements, patients' rights, operating policies and procedures, fire
prevention measures, environmental matters and compliance with building and
safety codes. There can be no assurance that federal, state or local
governmental regulations will not change or be subjected to new interpretations
that impose additional restrictions which might adversely affect the Company's
business.

All of the facilities operated by the Company are licensed under applicable
state laws and possess the required Certificates of Need ("CON") from
responsible state authorities.

Substantially all of the Company's facilities are certified or approved as
providers under the Medicaid and Medicare programs. Both the initial and
continuing qualification of a long-term care facility to participate in such
programs depend upon many factors, including accommodations, equipment,
services, non-discrimination policies against indigent patients, patient care,
quality of life, patients' rights, safety, personnel, physical environment and
adequacy of policies, procedures and controls. Licensing, certification and
other applicable standards vary from jurisdiction to jurisdiction and are
revised periodically. State agencies survey or inspect all long-term care
facilities on a regular basis to determine whether such facilities are in
compliance with the requirements for participation in government-sponsored
third-party payor programs. In some cases, or upon repeat violations, the
reviewing agency has the authority to take various adverse actions against a
facility, including the imposition of fines, temporary suspension of admission
of new patients to the facility, suspension or decertification from
participation in the state Medicaid program or the Medicare program, offset of
amounts due against future billings to the Medicare or Medicaid programs, denial
of payments under the state Medicaid program for new admissions, reduction of
payments, restrictions on the ability to acquire new facilities and, in extreme
circumstances, revocation of a facility's license or closure of a facility.

The Company believes that its facilities are in substantial compliance with
all statutes, regulations, standards and requirements applicable to its
business, including applicable Medicaid and Medicare regulatory requirements.
However, in the ordinary course of its business, the Company from time to time
receives notices of deficiencies for failure to comply with various regulatory
requirements. In most cases, the Company and the reviewing agency will agree
upon corrective measures to be taken to bring the facility into compliance.
Although the Company has been subject to some fines, statements of deficiency
and other corrective actions have not had a material adverse effect on the
Company. There can be no assurance that future agency inspections and the
actions taken by the reviewing agency based upon such inspections will not have
a material adverse effect on the Company.

Certificates of Need. All but one of the states in which the Company operates
have adopted CON or similar laws that generally require that a state agency
determine that a need exists prior to the construction of new facilities, the
addition or reduction of licensed beds or services, the implementation of other

8
<PAGE>

changes, the incurrence of certain capital expenditures, and, in certain states,
the approval of certain acquisitions and changes in ownership or the closure of
a facility. Indiana's CON program expired as of June 30, 1998. State CON
approval is generally issued for a specific project or number of beds, specifies
a maximum expenditure, is sometimes subject to an inflation adjustment, and
requires implementation of the proposal within a specified period of time.
Failure to obtain the necessary state approval can result in the inability of
the facility to provide the service, operate the facility or complete the
acquisition, addition or other change and can also result in adverse
reimbursement action or the imposition of sanctions or other adverse action on
the facility's license.

Medicare and Medicaid. The BBA was enacted in August 1997 and significantly
amends the reimbursement methodology of the Medicare program. In addition to
offering new Medicare health plan options and increasing the penalties related
to healthcare fraud and abuse, the BBA provides for a prospective payment system
for skilled nursing facilities to be implemented for cost report periods
beginning on or after July 1, 1998. The BBA also mandated a 10% reduction in
Part B therapy costs for the period January 1, 1998 through December 31, 1998.
Subsequent to January 1, 1999, skilled nursing facilities are reimbursed for
Part B therapy services through fee schedules established by HCFA. The BBA also
requires uniform coding specified by HCFA for skilled nursing facility Part B
bills. The BBA further limited reimbursement for Part B therapy services by
establishing annual limitations on Part B therapy charges per beneficiary.

The BBA also required skilled nursing facilities to institute "consolidated
billing" for a variety of services and supplies. Under consolidated billing, the
skilled nursing facility must submit all Medicare claims for all the Part A
services and supplies that its residents receive, with the exception of certain
services, including those provided by physicians. Payments for these services
and supplies billed on a consolidated basis are made directly to the skilled
nursing facility, whether or not the services were provided directly by the
skilled nursing facility or by others under a contractual arrangement. The
skilled nursing facility is responsible for paying the provider of the services
or the supplier. The payment to the skilled nursing facility for these services
and supplies is based upon the amounts allowable to the skilled nursing facility
based on the Medicare PPS law and regulations. However, subsequent developments
have delayed the implementation of "consolidated billing" for Part B services.

Medicare PPS is being phased in over a period of four years, beginning with
skilled nursing facility cost reporting periods ending on or after July 1, 1998.
"New facilities," which first received Medicare payment on or after October 1,
1995, moved to the federal per diem rate effective with the cost report periods
beginning on or before July 1, 1998 and do not have a transitional period. All
other facilities are being "phased-in" by a formula effective with the cost
report period beginning on or after July 1, 1998 and through which Medicare PPS
will blend together facility-specific rates and federal industry per diems
according to the following schedule: Year One -- 75% facility-specific, 25%
federal per diem; Year Two -- 50% each; Year Three -- 25% facility-specific, 75%
federal per diem; Year Four -- 100% federal per diem. As a result of Medicare
PPS being effective for cost reports beginning on or after July 1, 1998,
Medicare PPS did not directly impact the Company's Medicare reimbursement until
the fiscal year beginning January 1, 1999. When fully implemented, Medicare PPS
will result in each skilled nursing facility being reimbursed on a per diem rate
basis with acuity-based per diem rates being established as applicable to all
Medicare Part A beneficiaries who are residents of the skilled nursing facility.
The per diem rates will be all- inclusive rates through which the skilled
nursing facility is reimbursed for its routine, ancillary and capital costs.
During the transition period, the per diem rates for each facility consist of a
blending of facility-specific costs and federal per diem rates. The unadjusted
federal per diem rates to be applied to days of covered skilled nursing facility
services furnished during the first year, the case mix classification system to
be applied with respect to such services, and the factors to be applied in
making area wage adjustments with respect to such services, are included in the
Medicare PPS regulations. The federal Medicare PPS rates were developed by HCFA
based on a blend of allowable costs from hospital-based and freestanding skilled
nursing facility cost reports for reporting periods beginning in Federal Fiscal
Year 1995 (i.e., October 1, 1994 -- September 30, 1995). The data used in
developing the federal rates incorporate an estimate of the amounts payable
under Part B for covered skilled nursing facility services furnished during
Federal Fiscal Year 1995 to individuals who were residents of a facility and
receiving Part A covered services. HCFA updated costs to the first year of
Medicare PPS using a skilled nursing facility market basket index standardized
for facility differences in case-mix and for geographic variations in wages.
Providers that received "new provider" exemptions from the routine cost limits
were excluded from the database used to compute the federal payment rates. In
addition, costs related to payments for exceptions to the routine cost limits
are excluded from the database used to compute the federal payment rates. The
facility-specific portion is based on each facility's Medicare cost report for
cost reporting periods beginning in Federal Fiscal Year 1995, including routine
cost limit exception and exemption payments up to 150% of the routine cost
limit, the allowable costs to be updated under Medicare PPS for the skilled
nursing facility market basket minus 1% through 1999 and the full skilled
nursing facility market basket after 1999. A variety of other adjustments are
made in developing the Medicare PPS rates pursuant to the BBA and the
regulations. As noted, except in the case of "new facilities," in the first year
of the transition to Medicare PPS, the per diem rates will consist of a blend of
25% federal per diem rates and 75% facility-specific costs. Thereafter, the
facility-specific cost portion will decrease by 25% per year until in the fourth
year, the rate will be 100% federal per diem rates. "New facilities" are on 100%
federal per diem rates for cost reporting periods beginning on or after July 1,
1998.

Fee Splitting and Referrals. The Company is also subject to federal and state
laws that govern financial and other arrangements between healthcare providers.
Federal laws, as well as the laws of certain states, prohibit direct or indirect

9
<PAGE>

payments or fee splitting arrangements between healthcare providers that are
designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products and services.
These laws include the federal "anti-kickback law" which prohibits, among other
things, the offer, payment, solicitation or receipt of any form of remuneration
in return for the referral of Medicare and Medicaid patients. A wide array of
relationships and arrangements, including ownership interests in a company by
persons in a position to refer patients and personal service agreements have,
under certain circumstances, been alleged to violate these provisions. Certain
discount arrangements may also violate these laws. Because of the broad reach of
these laws, the federal government has published certain "safe harbors," which
set forth the requirements under which certain relationships will not be
considered to violate such laws. A violation of the federal anti-kickback law
could result in the loss of eligibility to participate in Medicare or Medicaid,
or in criminal penalties. Violation of state anti-kickback laws could lead to
loss of licensure, significant fines and other penalties.

Various federal and state laws regulate the relationship between healthcare
providers and physicians, including employment or service contracts and
investment relationships. These laws include the broadly worded fraud and abuse
provisions of the Medicaid and Medicare statutes, which prohibit various
transactions involving Medicaid or Medicare covered patients or services. In
particular, the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") contains
provisions which greatly expand the federal prohibition on physician referrals
to entities with which they have a financial relationship. Effective January 1,
1995, OBRA 93 prohibits any physician with a financial relationship (defined as
a direct or indirect ownership or investment interest or compensation
arrangement) with an entity from making a referral for "designated health
services" to that entity and prohibits that entity from billing for such
services. "Designated health services" do not include skilled nursing services
but do include many services which long-term care facilities provide to their
patients, including physical therapy, occupational therapy, infusion therapy and
enteral and parenteral nutrition. Various exceptions to the application of this
law exist, including one which protects the payment of fair market compensation
for the provision of personal services, so long as various requirements are met.
Violations of these provisions may result in civil or criminal penalties for
individuals or entities and/or exclusion from participation in the Medicaid and
Medicare programs. Various state laws contain analogous provisions, exceptions
and penalties. The Company believes that in the past it has been, and in the
future it will be, able to arrange its business relationships so as to comply
with these provisions.

Each of the Company's long-term care facilities has at least one medical
director that is a licensed physician. The medical directors may from time to
time refer their patients to the Company's facilities in their independent
professional judgment. The physician anti-referral restrictions and prohibitions
could, among other things, require the Company to modify its contractual
arrangements with its medical directors or prohibit its medical directors from
referring patients to the Company. From time to time, the Company has sought
guidance as to the interpretation of these laws. However, there can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with the practices of the Company.

Potential Healthcare Reform. In addition to extensive existing governmental
healthcare regulation, there are numerous legislative and executive initiatives
at the federal and state levels for comprehensive reforms affecting the payment
for and availability of healthcare services. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
would have on the Company's business. Aspects of certain of these proposals,
such as reductions in funding of the Medicare and Medicaid programs, interim
measures to contain healthcare costs such as a short-term freeze on prices
charged by healthcare providers or changes in the administration of Medicaid at
the state level, could materially adversely affect the Company. Additionally,
the BBA repealed the Boren Amendment effective October 1, 1997 and allows the
states to develop their own standards for determining Medicaid payment rates.
The BBA provides certain procedural restrictions on the states' ability to amend
state Medicaid programs by requiring that the states use a public process to
establish payment methodologies including a public comment and review process.
The repeal of the Boren Amendment provides states with greater flexibility to
amend individual state programs and potentially reduce state Medicaid payments
to skilled nursing facilities. There can be no assurance that currently proposed
or future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have an adverse
effect on the Company.

COMPETITION

The long-term care industry is highly competitive. The Company competes with
other providers of long-term care on the basis of the scope and quality of
services offered, the rate of positive medical outcomes, cost-effectiveness and
the reputation and appearance of its long-term care facilities. The Company also
competes in recruiting qualified healthcare personnel, in acquiring and
developing additional facilities and in obtaining CONs. The Company's current
and potential competitors include national, regional and local long-term care
providers, some of whom have substantially greater financial and other resources
and may be more established in their communities than the Company. The Company
also faces competition from assisted living facility operators as well as
providers of home healthcare. In addition, certain competitors are operated by
not-for-profit organizations and similar businesses which can finance capital
expenditures and acquisitions on a tax-exempt basis or receive charitable
contributions unavailable to the Company.

In general, consolidation in the long-term care industry has resulted in the
Company being faced with larger competitors, many of whom have significant
financial and other resources. The Company expects that this continuing
consolidation may increase the competition for the acquisition of long-term care
facilities.

The Company believes that state regulations which require a CON before a new
long-term care facility can be constructed or additional licensed beds can be
added to existing facilities reduce the possibility of overbuilding and promote
higher utilization of existing facilities. CON legislation is currently in place
in all states in which the Company operates or expects to operate with the
exception of Indiana where the CON program expired as of June 30, 1998. Several
of the states in which the Company operates have imposed moratoriums on the
issuance of CONs for new skilled nursing facility beds. Connecticut has imposed
a moratorium on the addition of any new skilled nursing facility beds, including
chronic and convalescent nursing facility beds and rest home beds with nursing
supervision, until the year 2002. Massachusetts has imposed a moratorium on the
addition of any new skilled nursing facility beds until May 1, 2003, except that
an existing facility can add up to 12 beds without being subject to CON review.
New Hampshire has imposed an indefinite moratorium on the addition of any new
beds to skilled nursing facilities, intermediate care homes and rehabilitation
homes. Ohio has imposed a moratorium until June 30, 2001 on the addition of any
new skilled nursing facility beds. Rhode Island has imposed an indefinite

10
<PAGE>

moratorium on the issuance of any new initial licenses for skilled nursing
facilities and on the increase in the licensed bed capacity of any existing
licensed skilled nursing facility, except that an existing facility may increase
its licensed bed capacity to the greater of 10 beds or 10% of the facility's
licensed bed capacity. The other states in which the Company conducts business
do not currently have a moratorium on new skilled nursing facility beds in
effect. Although New Jersey does not have a "moratorium" on new skilled nursing
facility beds, with the exception of the Add-a-bed program (in which a facility
may request approval from the state licensure agency to increase total licensed
skilled nursing beds, including hospital based subacute care beds, by no more
than 10 beds or 10% of its licensed bed capacity (every five years), whichever
is less, (every five years) without obtaining CON approval), New Jersey only
accepts applications for a CON for additional skilled nursing facility beds when
the state CON agency issues a call for beds. There is presently no call for
additional beds, and no call is expected to be made in the near future. A
relaxation of CON requirements could lead to an increase in competition. In
addition, as cost containment measures have reduced occupancy rates at acute
care hospitals, a number of these hospitals have converted portions of their
facilities into subacute units. In the states in which the Company currently
operates, these conversions are subject to state CON regulations. The Company
believes that the application of the new Medicare PPS rules have made such
conversions less desirable. New Jersey recently enacted legislation permitting
acute care hospitals to offer subacute care services under their existing
hospital licenses, subject to first obtaining CON approval pursuant to an
expedited CON review process.

EMPLOYEES

As of December 31, 1999, the Company employed approximately 8,100
facility-based personnel on a full- and part-time basis. The Company's corporate
and regional staff consisted of 141 persons as of such date. Approximately 650
employees at eight of the Company's facilities are covered by collective
bargaining agreements. Although the Company believes that it maintains good
relationships with its employees and the unions that represent certain of its
employees, it cannot predict the impact of continued or increased union
representation or organizational activities on its future operations.

The Company believes that the attraction and retention of dedicated, skilled
and experienced nursing and other professional staff has been and will continue
to be a critical factor in the successful growth of the Company. The Company
believes that its wage rates and benefit packages for nursing and other
professional staff are commensurate with market rates and practices.

The Company competes with other healthcare providers in attracting and
retaining qualified or skilled personnel. The long-term care industry has, at
times, experienced shortages of qualified personnel. A shortage of nurses or
other trained personnel or general economic inflationary pressures may require
the Company to enhance its wage and benefits package in order to compete with
other employers. There can be no assurance that the Company's labor costs will
not increase or, if they do, that they can be matched by corresponding increases
in private-payor revenues or governmental reimbursement. Failure by the Company
to attract and retain qualified employees, to control its labor costs or to
match increases in its labor expenses with corresponding increases in revenues
could have a material adverse effect on the Company.

INSURANCE

The Company carries general liability, professional liability, comprehensive
property damage and other insurance coverages that management considers adequate
for the protection of its assets and operations based on the nature and risks of
its business, historical experience and industry standards. There can be no
assurance, however, that the coverage limits of such policies will be adequate
or that insurance will continue to be available to the Company on commercially
reasonable terms in the future. A successful claim against the Company not
covered by, or in excess of, its insurance coverage could have a material
adverse effect on the Company. Claims against the Company, regardless of their
merit or eventual outcome, may also have a material adverse effect on the
Company's business and reputation, may lead to increased insurance premiums and
may require the Company's management to devote time and attention to matters
unrelated to the Company's business. The Company is self-insured (subject to
contributions by covered employees) with respect to most of the healthcare
benefits and workers' compensation benefits available to its employees. The
Company believes that it has adequate resources to cover any self-insured claims
and the Company maintains excess liability coverage to protect it against
unusual claims in these areas. However, there can be no assurance that the
Company will continue to have such resources available to it or that substantial
claims will not be made against the Company.

ITEM 2. PROPERTIES

The following table summarizes certain information regarding the Company's
facilities as of December 31, 1999:

SUMMARY OF FACILITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
LICENSED YEAR OWNED/ LICENSED
FACILITY LOCATION ACQUIRED LEASED/MANAGED BEDS
- ------------------------------- ------------------ -------- -------------- -----
SOUTHEAST REGION
Florida

<
Brevard ..................... Rockledge 1994 Leased 100
Clearwater .................. Clearwater 1990 Owned 120
Gulf Coast .................. New Port Richey 1990 Owned 120
Naples ...................... Naples 1989 Leased 120
Ocala ....................... Ocala 1990 Owned 180
Palm Harbor ................. Palm Harbor 1990 Owned 120
Pinebrook ................... Venice 1989 Leased 120
Sarasota .................... Sarasota 1990 Leased 120
Tampa Bay ................... Oldsmar 1990 Owned 120
-----
1,120

11
<PAGE>

MIDWEST REGION
Ohio
Defiance .................... Defiance 1993 Leased 100
Northwestern Ohio ........... Bryan 1993 Leased 189
Swanton ..................... Swanton 1995 Leased 100
Perrysburg .................. Perrysburg 1990 Owned 100
Troy ........................ Troy 1989 Leased 195
Beachwood ................... Beachwood 1996 Owned (1) 274
Broadview ................... Broadview Heights 1996 Owned (1) 159
Westlake I .................. Westlake 1996 Owned (1) 153
Westlake II ................. Westlake 1996 Owned (1) 106
Dayton ...................... Dayton 1997 Owned 100
Laurelwood .................. Dayton 1997 Owned 115
New Lebanon ................. New Lebanon 1997 Owned 126
Point Place ................. Toledo 1998 Owned 98
Sylvania .................... Sylvania 1998 Owned 150
Indiana
Decatur ..................... Indianapolis 1988 Owned 88
Indianapolis ................ Indianapolis 1988 Leased 104
New Haven ................... New Haven 1990 Leased 120
Terre Haute ................. Terre Haute 1990 Owned 120
-----
2,397
NEW ENGLAND REGION
Connecticut
Arden House .................. Hamden 1997 Leased 360
Governor's House ............. Simsbury 1997 Leased 73
Madison House ................ Madison 1997 Leased 90
The Reservoir ................ West Hartford 1997 Leased 75
Willows ...................... Woodbridge 1997 Leased 90
Glen Hill .................... Danbury 1998 Owned (2) 100
Glen Crest ................... Danbury 1998 Owned (2) 49
Massachusetts
Maplewood ................... Amesbury 1997 Leased 120
Cedar Glen .................. Danvers 1997 Leased 100
Danvers-Twin Oaks ........... Danvers 1997 Leased 101
North Shore ................. Saugus 1997 Leased 80
The Stone Institute ......... Newton Upper Falls 1997 Managed 106
New Hampshire
Applewood ................... Winchester 1996 Leased 70
Crestwood ................... Milford 1996 Leased 82
Milford ..................... Milford 1996 Leased 52
Northwood ................... Bedford 1996 Leased 147
Pheasant Wood ............... Peterborough 1996 Leased 99
Westwood .................... Keene 1996 Leased 87
Rhode Island
Greenwood .................... Warwick 1998 Owned 136
Pawtuxet ..................... Warwick 1998 Owned 131
-----
2,148

MID-ATLANTIC REGION
Maryland
Harford Gardens .............. Baltimore 1997 Leased 163
Larkin Chase Center .......... Bowie 1994 Owned (3) 120
New Jersey
Woods Edge .................. Bridgewater 1988 Leased 176
-----
459

Total 6,124
=====

</TABLE>

(1) Indicates an owned facility, the acquisition of which has been accounted
for as a capital lease.
(2) Indicates an owned facility financed through a synthetic lease.
(3) Owned by Bowie L.P. The Company's interest in Bowie L.P. is pledged to the
facility's mortgage lender. The Company has guaranteed the indebtedness of
Bowie L.P.

12
<PAGE>

The Company maintains its Corporate offices in Boston as well as regional
offices in Palm Harbor, Florida; Indianapolis, Indiana; Topsfield,
Massachusetts; West Hartford, Connecticut; and Peterborough, New Hampshire. The
Company considers its properties to be in good operating condition and suitable
for the purposes for which they are being used.

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to claims and legal actions arising in the ordinary
course of business. Management does not believe that unfavorable outcomes in any
such matters, individually or in the aggregate, would have a material adverse
effect on the Company's financial condition, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders during the
last quarter of the Company's fiscal year ended December 31, 1999.

13
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS

The Company completed its initial public offering and shares began trading on
June 14, 1996. The Company's common stock was listed on the New York Stock
Exchange under the symbol "HBR". The following table sets forth, for the periods
indicated, the high and low sale price per share of the Company's common stock
as reported on the New York Stock Exchange composite tape.

1997 1998
<S> <C> <C> <C> <C>
High Low High Low

First quarter ...................... $ 12.87 $ 11.00 $ 24.00 $ 18.000
Second quarter ..................... 14.37 11.12 24.06 20.250
Third quarter ...................... 18.75 14.25 24.87 23.813
Fourth quarter ..................... 21.75 16.75

</TABLE>

As a result of the August 11, 1998 Merger noted in the General Overview, the
Company's common stock was de-listed from the New York Stock Exchange on August
11, 1998.

The Company has never declared or paid any dividends on its common stock since
its formation in 1996. The Company does not anticipate paying cash dividends on
its Common Stock for the foreseeable future and intends to retain all of its
earnings for reinvestment in the operations and activities of the Company. Any
future decision as to the payment of dividends will be at the discretion of the
Company's Board of Directors. The Company's ability to pay dividends is also
limited by the terms of current (and possibly future) lease and financing
arrangements that restrict, among other things, the ability of the Company's
subsidiaries to distribute funds to the Company.

14
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table sets forth selected consolidated financial data for the
Company. The selected historical consolidated financial data for each of the
years in the five year period ended December 31, 1999 have been derived from the
Company's consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, our independent accountants. The financial data set
forth below should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
filing.

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (1)
(in thousands, except share, per share and other data)
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
Statement of operations data:

Total net revenues .................................... $ 109,425 $ 165,412 $ 221,777 $ 311,044 $ 300,615
----------- ----------- ----------- ----------- -----------

Expenses:
Facility operating .................................... 89,378 132,207 176,404 246,000 248,795
General and administrative ............................ 5,076 7,811 10,953 15,422 17,808
Service charges paid to affiliate .................... 700 700 708 1,291 1,173
Amortization of prepaid management fee ................ -- -- -- 500 1,200
Special compensation and other ........................ -- 1,716 -- -- --
Depreciation and amortization ......................... 4,385 3,029 4,074 6,350 10,249
Facility rent ......................................... 1,907 10,223 12,446 22,412 22,394
Merger costs .......................................... -- -- -- 37,172 --
Restructuring costs ................................... -- -- -- -- 5,745
----------- ----------- ----------- ----------- -----------
Total expenses ......................................... 101,446 155,686 204,585 329,147 307,364
----------- ----------- ----------- ----------- -----------

Income (loss) from operations ......................... 7,979 9,726 17,192 (18,103) (6,749)

Other:
Interest expense, net ................................. 5,107 4,634 5,853 11,271 20,895
Other expense (income) ................................ 114 263 189 (167) 261
Gain on sale of facilities, net ....................... (4,869) -- -- -- --
Minority interest in net income ....................... 6,393 -- -- -- --
----------- ----------- ----------- ----------- -----------

Income (loss) before income taxes and
extraordinary loss .................................... 1,234 4,829 11,150 (29,207) (27,905)
Income tax expense (benefit) ........................... -- 809 4,347 (5,020) (10,304)
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary loss ................ 1,234 4,020 6,803 (24,187) (17,601)
Extraordinary loss on early
retirement of debt, net of tax ........................ -- (1,318) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) ...................................... $ 1,234 $ 2,702 $ 6,803 $ (24,187 $ (17,601)

Preferred stock dividends ......................... -- -- -- (2,296) (6,004)
----------- ----------- ----------- ----------- -----------
Earnings (loss) available for common shares...... $ 1,234 $ 2,702 $ 6,803 $ (26,483) $ (23,605)
=========== =========== =========== =========== ===========
Earnings (loss) per common share:
Basic ................. $ 0.85 $ (3.42) $ (3.25)
=========== =========== ===========
Diluted ................ $ 0.84 $ (3.42) $ (3.25)
=========== =========== ===========

Pro forma data:
Historical income before income
taxes and extraordinary loss ........................ $ 1,234 $ 4,829
Pro forma income taxes ................................. 481 799
----------- -----------
Pro forma income before
extraordinary loss ................................. 753 4,030
Extraordinary loss, net of tax ......................... -- (1,318)
----------- -----------
Pro forma net income ................................... $ 753 $ 2,712
=========== ===========

Pro forma earnings per common share
(basic and diluted):
Pro forma income before extraordinary loss ............. $ 0.17 $ 0.63
Extraordinary loss ..................................... -- 0.21
----------- -----------
Pro forma earnings per common share .................... $ 0.17 $ 0.42
=========== ===========

Weighted average number of common shares
used in per share computations (2):
Basic .............................................. 4,425,000 6,396,000 8,037,000 7,742,000 7,261,000
Diluted ............................................ 4,425,000 6,396,000 8,139,000 7,742,000 7,261,000

15
<PAGE>

</TABLE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (continued)
(DOLLARS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
Operational data (as of end of year) (3):

Facilities ............................. 20 30 45 50 50
Licensed beds .......................... 2,471 3,700 5,468 6,120 6,124

Average occupancy rate (4) .............. 92.5% 92.6% 92.3% 92.3% 90.9%

Patient days (5):
Private and other ....................... 261,488 335,363 394,151 503,234 489,074
Medicare ................................ 90,107 108,229 138,023 196,222 219,924
Medicaid ................................ 437,325 653,222 834,637 1,169,258 1,240,228
----------- ----------- ----------- ----------- -----------
Total ................................... 788,920 1,096,814 1,366,811 1,868,714 1,949,226
=========== =========== =========== =========== ===========

Sources of total net revenues:
Private and other (6) ................... 35.1% 35.5% 34.1% 30.2% 28.9%
Medicare ................................ 31.7% 26.3% 25.9% 27.7% 21.8%
Medicaid ................................ 33.2% 38.2% 40.0% 42.1% 49.3%

Balance sheet data:
Working capital ......................... $ 10,735 $ 16,826 $ 22,621 $ 36,403 $ 36,536
Total assets ............................ 92,632 141,799 168,562 264,536 283,233
Total debt .............................. 43,496 18,208 33,642 134,680 171,245
Capital lease obligation ................ -- 57,277 56,285 55,531 54,700
Stockholders' equity (deficit) (7) ...... 4,130 44,880 51,783 83 (23,522)
</TABLE>

(1) Financial and operating data combine the historical results of various
legal entities (the "Predecessor Entities") that became subsidiaries of
Harborside Healthcare Corporation (the "Company") through a reorganization
(the "Reorganization") that occurred immediately prior to the Company's
initial public offering on June 14, 1996 (the "IPO"). Prior to the
Reorganization, the Predecessor Entities (primarily partnerships and
subchapter S corporations) were not directly subject to Federal or state
income taxation. A pro forma income tax expense has been reflected for
periods presented, prior to the IPO, as if the Company had always owned the
Predecessor Entities.
(2) Through the IPO, the Company issued 3,600,000 shares of common stock. Pro
forma net income per share for 1995 is calculated based on the 4,400,000
shares of common stock issued through the Reorganization. For 1996 the
calculation is based upon 4,400,000 shares outstanding for the entire year
and the appropriate weighting for shares issued through the IPO.
(3) Includes two managed facilities with 178 licensed beds in 1997 and one
managed facility with 106 licensed beds in 1998 and 1999.
(4) "Average occupancy rate" is computed by dividing the number of billed bed
days by the total number of available licensed bed days during each of the
periods indicated. This calculation includes all facilities operated by the
Company excluding managed facilities.
(5) "Patient Days" includes billed bed days for the facilities operated by the
Company excluding billed bed days of managed facilities and the one
facility accounted for using the equity method.
(6) Consists primarily of revenues derived from private pay individuals,
managed care organizations, HMO's, hospice programs, commercial insurers,
management fees from managed facilities, and through September 1999,
rehabilitation therapy revenues from non-affiliated facilities.
(7) In accordance with Securities and Exchange Commission requirements, the
book value of the Company's Exchangeable Preferred Stock is excluded from
total stockholders' equity. As of December 31, 1998 and 1999, the book
value of the Company's Exchangeable Preferred Stock was $42,293,000 and
$48,277,000, respectively.

16
<PAGE>

ITEM 7.

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

Harborside Healthcare Corporation, ("Harborside" or the "Company") is a
leading provider of high-quality long-term care and specialty medical services
in the eastern United States. The Company has focused on establishing strong
local market positions with high-quality facilities in four principal regions:
the Southeast (Florida), the Midwest (Ohio and Indiana), New England
(Connecticut, Massachusetts, New Hampshire and Rhode Island) and the
Mid-Atlantic (New Jersey and Maryland). As of December 31, 1999, the Company
operated 50 facilities (22 owned, 27 leased and one managed) with a total of
6,124 licensed beds. As described in Note A to the audited consolidated
financial statements of the Company included elsewhere in this filing, the
Company accounts for its investment in one of its owned facilities using the
equity method. The Company provides a broad continuum of medical services
including: (i) traditional skilled nursing care and (ii) specialty medical
services, including a variety of subacute care programs such as orthopedic
rehabilitation, CVA/stroke care, cardiac recovery, pulmonary rehabilitation and
wound care, as well as distinct programs for the provision of care to
Alzheimer's and hospice patients. As part of its subacute services, the Company
provides physical, occupational and speech rehabilitation therapy services at
Company-operated facilities. Through September 1999, the Company also provided
rehabilitation therapy services under contracts with non-affiliated long-term
care facilities through a wholly-owned subsidiary. During the third quarter of
1999, the Company terminated its contracts with non-affiliated facilities and
ceased providing therapy services to non-affiliated facilities. (See Note P to
the Company's consolidated financial statements included elsewhere in this
report).

The Company was created in March 1996, in anticipation of an initial public
offering (the "IPO"), in order to combine under its control the operations of
various long-term care facilities and ancillary businesses (the "Predecessor
Entities") which had operated since 1988. The Company completed the IPO on June
14, 1996 and issued 3,600,000 shares of common stock at $11.75 per share. The
owners of the Predecessor Entities contributed their interests in such
Predecessor Entities to the Company and received 4,400,000 shares of the
Company's common stock.

The Company's financial statements for periods prior to the IPO have been
prepared by combining the historical financial statements of the Predecessor
Entities, similar to a pooling of interests presentation. The Company's
financial statements prior to the date of the IPO do not include a provision for
Federal or state income taxes because the Predecessor Entities (primarily
partnerships and subchapter S corporations) were not directly subject to Federal
or state income taxation. The Company's combined financial statements for
periods prior to the date of the IPO include a pro forma income tax expense for
each period presented, as if the Company had always owned the Predecessor
Entities.

One of the Predecessor Entities was the general partner of the Krupp Yield
Plus Limited Partnership ("KYP"), which owned seven facilities (the "Seven
Facilities") until December 31, 1995. The Company held a 5% interest in KYP
while the remaining 95% was owned by the limited partners of KYP (the
"Unitholders"). Effective December 31, 1995, KYP sold the Seven Facilities and a
subsidiary of the Company began leasing the facilities from the buyer. Prior to
December 31, 1995 the accounts of KYP were included in the Company's combined
financial statements and the interest of the Unitholders was reflected as
minority interest. The net gain of $4,869,000 recognized by KYP in connection
with the sale of the Seven Facilities was allocated to the KYP Unitholders and
is reflected in "minority interest in net income." In March of 1996, a
liquidating distribution was paid to the Unitholders.

On April 15, 1998, Harborside entered into a Merger Agreement with HH
Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose of
effecting a merger on behalf of Investcorp S.A., certain of its affiliates and
certain other international investors (the "New Investors"). On August 11, 1998,
MergerCo merged with and into Harborside, with Harborside Healthcare Corporation
as the surviving corporation. As a result of the transaction, and pursuant to
the Merger Agreement, the New Investors acquired approximately 91% of the
post-merger common stock of Harborside. The remaining 9% of the common stock was
retained by existing shareholders, including management. As a result of the
merger, Harborside shares were de-listed from the New York Stock Exchange.

The merger was approved by a majority of the Company's shareholders at a
special meeting held on August 11, 1998. Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million. Holders of outstanding stock options of
the Company converted the majority of their options into cash at $25 per
underlying share (less applicable exercise price and withholding taxes) with
aggregate payments of approximately $8 million.

In connection with the transaction and prior to the merger, the New Investors
made cash common equity contributions of $158.5 million, net of issuance costs,
to MergerCo, and MergerCo obtained gross proceeds of $99.5 million through the
issuance of 11% Senior Subordinated Discount Notes ("Discount Notes") due 2008
and $40 million through the issuance of 13.5% Exchangeable Preferred Stock
("Preferred Stock") mandatorily redeemable in 2010. In connection with the
merger, Harborside also entered into a new $250 million collateralized credit
facility. In the third quarter of 1998, Harborside recorded a charge to income
from operations of approximately $37 million (approximately $29 million after
taxes) for direct and other costs related to the Merger transaction. In
connection with the merger and the related refinancings, the Company exercised
purchase options for seven facilities which had been financed through synthetic
leases.

REVENUES

The Company's total net revenues include net patient service revenues, and
beginning in 1995, rehabilitation therapy service revenues from contracts with
non-affiliated long-term care facilities until the third quarter of 1999 when
these contracts were terminated. (See Note P to the Company's consolidated
financial statements included elsewhere in this report). The Company derives its
net patient service revenues primarily from private pay sources, the federal
Medicare program for certain elderly and disabled patients and state Medicaid
programs for indigent patients. The Company's total net revenues are influenced
by a number of factors, including: (i) the licensed bed capacity of its
facilities; (ii) the occupancy rates; (iii) the payor mix of its facilities and
the rates of reimbursement among payor categories (private and other, Medicare

17
<PAGE>

and Medicaid); and (iv) the extent to which subacute and other specialty medical
and ancillary services are utilized by the patients and paid for by the
respective payment sources. Private net patient service revenues are recorded at
established per diem billing rates. Net patient service revenues to be
reimbursed under contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at amounts estimated to be realized under these
contractual arrangements. The Company employs specialists to monitor
reimbursement rules, policies and related developments in order to comply with
all reporting requirements and to assist the Company in receiving
reimbursements.

The table set forth below identifies the percentage of the Company's total net
revenues attributable to each of its payor sources for each of the periods
indicated. The increase in Medicaid revenues as a percentage of total net
revenues during fiscal 1999 is primarily the result of a decrease in Medicare
revenues as a result of the implementation of the new Medicare Prospective
Payment System ("PPS") effective January 1, 1999, as well as a decrease in other
revenues derived from contracts to provide rehabilitation therapy services to
non-affiliated long-term care facilities. Implementation of PPS was effective
for all of the Company's facilities beginning January 1, 1999 and caused the
Company's average Part A per diem rate to decrease from $397 per day in 1998 to
$286 per day in 1999. During the third quarter of 1999, the Company terminated
its contracts to provide rehabilitation therapy services to non-affiliated
long-term care facilities.

TOTAL NET REVENUES (1)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1998 1999
------ ------ ------

Private and other 34.1% 30.2% 28.9%
Medicare ........ 25.9 27.7 21.8
Medicaid ........ 40.0 42.1 49.3
------ ------ ------
Total ......... 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>

(1) Total net revenues exclude net revenues of the Larkin Chase Center which is
owned by Bowie Center Limited Partnership ("Bowie L.P."). The Company owns
a 75% partnership interest in Bowie L.P. but records its investment in
Bowie L.P. using the equity method of accounting. See Note A to the
Company's consolidated financial statements included elsewhere in this
filing.

OPERATING EXPENSES

The Company's facility operating expenses consist primarily of payroll and
employee benefits related to nursing, housekeeping and dietary services provided
to patients, as well as maintenance and administration of the facilities. Other
significant facility operating expenses include the cost of rehabilitation
therapy services, medical and pharmacy supplies, food, utilities, insurance and
taxes. The Company's general and administrative expenses include all costs
associated with its regional and corporate operations.

18
<PAGE>

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Total Net Revenues. Total net revenues decreased by $10,429,000 or 3.4%, from
$311,044,000 in 1998 to $300,615,000 in 1999. The reduction in total revenues
from 1998 to 1999 was primarily the result of lower occupancy and lower average
revenues per patient day at the Company's facilities and the termination of the
Company's contracts to provide rehabilitation therapy services to non-affiliated
long-term care facilities. These factors were partially offset by increased
revenues from facilities acquired by the Company in 1998 and operated by the
Company during all of 1999. The Company's revenues increased by $2,115,000 as a
result of the acquisition of two North Toledo facilities (the "North Toledo
Facilities") on April 1, 1998; $4,738,000 from the acquisition of two Rhode
Island facilities (the "Rhode Island Facilities") on May 8, 1998, and $7,571,000
from the acquisition of two Danbury, Connecticut facilities (the "Danbury
Facilities") on December 1, 1998. The average occupancy rate at all of the
Company's facilities decreased from 92.3% for the year ended December 31, 1998
to 90.9% for the year ended December 31, 1999. Average net patient service
revenues per patient day at "same store" facilities decreased from $159.74 for
the year ended December 31, 1998 to $153.08 for the year ended December 31,
1999. This decrease in average net patient service revenues per patient day was
a result of the implementation of the new Medicare Prospective Payment System
("PPS") which became effective at all of the Company's facilities on January 1,
1999. Implementation of PPS caused the Company's average Medicare Part A per
diem rate to decrease from $397 per Medicare patient day for the year ended
December 31, 1998 to $286 per Medicare patient day for the year ended December
31, 1999. For the year ended December 31, 1999, the Company also experienced
reduced revenues generated through the provision of Medicare Part B services to
residents at its facilities. This reduction was due partially to lower
productivity by Company therapists during the first quarter as they adjusted to
the newly implemented Medicare reimbursement system. Additionally, PPS
established certain annual per patient limitations on the amount of Part B
therapy that is reimbursable through the Medicare program. Management believes
that the introduction of these annual limits resulted in reduced revenues for
the year ended December 31, 1999 as affected parties adapted to the new
regulatory environment. Implementation of PPS also caused a decrease in revenues
generated by providing rehabilitation therapy services to non-affiliated
long-term care facilities. In response to reduced reimbursement from the
Medicare program, non-affiliated facilities reduced the amount of therapy
services provided at their facilities. Additionally, during the third quarter of
1999, the Company terminated its contracts to provide rehabilitation therapy
services at non-affiliated facilities. The Company's quality mix of private,
Medicare and insurance revenues was 57.9% for the year ended December 31, 1998
as compared to 50.7% during the same period of 1999. This decrease in quality
mix of revenues was primarily the result of the decrease in Medicare revenues
caused by the implementation of PPS.

Facility Operating Expenses. Facility operating expenses increased by
$2,795,000, or 1.1%, from $246,000,000 in 1998 to $248,795,000 in 1999. Of this
increase, $1,758,000 was due to the operations of the North Toledo Facilities,
$4,300,000 was due to the operations of the Rhode Island Facilities, and
$6,242,000 was due to the operations of the Danbury Facilities. These increases
in operating expenses were substantially offset by reductions in expenses at
"same store" facilities in 1999, which were initiated by management in response
to the revenue decline noted above. Expense reductions included wage and
staffing reductions related to the delivery of rehabilitative therapy services,
reduced indirect nursing support and the renegotiation of vendor contracts. The
Company experienced an increased reliance on outside nurse agency personnel in
1999, which offset the effects of some of these savings. Outside nurse agency
personnel are more costly than the Company's employees; however, their use is
necessary to maintain adequate staffing levels in the Company's facilities when
the Company cannot recruit or retain sufficient employees. Strong economic
conditions in the Company's markets in 1999 made it difficult to maintain or
expand the Company's employee base.

General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $2,386,000 or 15.5%, from $15,422,000 in
1998 to $17,808,000 in 1999. As a percentage of total net revenues, general and
administrative expenses increased from 5.0% in 1998 to 5.9% in 1999. This
increase resulted from an increase in salaries, consulting and other related
expenses associated with the development of the Company's data processing
capabilities, efforts to streamline the Company's business processes, training
initiatives supporting facility-based personnel, and increased legal expenses.
The Company reimburses a former affiliate for certain data processing and
administrative services provided to the Company. During 1998, such
reimbursements totaled $1,291,000 as compared to $1,173,000 in 1999.

Amortization of Prepaid Management Fees. Amortization of prepaid management
fees (paid in connection with the Merger) was $500,000 in 1998 as compared to
$1,200,000 in 1999. (See Note O to the Company's consolidated financial
statements included elsewhere in this report).

Depreciation and Amortization. Depreciation and amortization increased by
$3,899,000 from $6,350,000 in 1998 to $10,249,000 in 1999 primarily due to the
amortization of costs related to the leveraged recapitalization and the exercise
of purchase options for seven facilities which were financed through synthetic
leases prior to the leveraged recapitalization. The exercise of these purchase
options was funded through financing arranged in connection with the leveraged
recapitalization.

Facility Rent. Facility rent expense decreased by $18,000 from $22,412,000 in
1998 to $22,394,000 in 1999. The decrease in rent expense is the result of a
reduction in rent expense related to the exercise of purchase options on
previously leased facilities partially offset by the acquisition of the Danbury
Facilities by means of a synthetic lease.

Restructuring Costs. In connection with restructuring the Company's therapy
services business, the Company incurred restructuring costs of $5,745,000 during
the third quarter of 1999. (See Note P to the Company's consolidated financial
statements included elsewhere in this report).

Interest Expense, net. Interest expense, net, increased from $11,271,000 in
1998 to $20,895,000 in 1999. This net increase is primarily due to the issuance
of $99,500,000 of 11% Senior Subordinated Discount Notes (the "Discount Notes")
during the third quarter of 1998 in connection with the leveraged
recapitalization, as well as increased utilization of the Company's revolving
credit facility in 1999. The interest associated with the Discount Notes
accretes until August 1, 2003 and then becomes payable in cash, semi-annually in
arrears, beginning on February 1, 2004.

19
<PAGE>

Income Tax Benefit. As a result of the losses incurred in 1998 and 1999,
income tax benefits of $5,020,000 and $10,304,000, respectively, were recognized
for those years.

Net Loss. Net loss was $17,601,000 in 1999 as compared to a loss of
$24,187,000 in 1998.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Total Net Revenues. Total net revenues increased by $89,267,000 or 40.3%, from
$221,777,000 in 1997 to $311,044,000 in 1998. This increase resulted primarily
from the acquisition of the Harford Gardens facility on March 1, 1997, four
Massachusetts facilities (the "Massachusetts Facilities") on August 1, 1997,
three Dayton, Ohio facilities (the "Dayton Facilities") on September 1, 1997,
the five Connecticut facilities (the "Connecticut Facilities") on December 1,
1997, two North Toledo, Ohio facilities (the "North Toledo Facilities") on April
1, 1998, two Rhode Island facilities (the "Rhode Island Facilities") on May 8,
1998 and two Danbury, Connecticut facilities (the "Danbury Facilities") on
December 1, 1998. Of such increase, $1,022,000, or 1.1% of the increase,
resulted from the operation of the Harford Gardens facility; $11,986,000, or
13.4% of the increase, resulted from the operation of the Massachusetts
Facilities; $10,758,000, or 12.1% of the increase, resulted from the operation
of the Dayton Facilities; $43,916,000, or 49.2% of the increase, resulted from
the operation of the Connecticut Facilities; $8,469,000; or 9.5% of the
increase, resulted from the operation of the North Toledo Facilities;
$7,626,000, or 8.5% of the increase, resulted from the operation of the Rhode
Island Facilities; and $692,000, or 0.8% of this increase, resulted from the
operation of the Danbury Facilities. Revenues generated by providing
rehabilitation therapy services to non-affiliated long-term care facilities
decreased by $2,671,000, from $17,628,000 in 1997 to $14,957,000 in 1998. The
remaining $7,469,000, or 8.4% of such increase, was largely attributable to
higher average net patient service revenues per patient day at the Company's
"same store" facilities, primarily resulting from increased levels of care
provided to patients with medically complex conditions. Average net patient
service revenues per patient day at "same store" facilities increased by 3.0%
from $150.85 in 1997 to $155.44 in 1998. Contributing to the increase in total
net revenues was an increase in occupancy at "same store" facilities from 92.0%
in 1997 to 92.3% in 1998. The average occupancy rate at all of the Company's
facilities was 92.3% in 1997 and 1998. The Company's quality mix of private,
Medicare and insurance revenues was 60.0% for the year ended December 31, 1997
as compared to 57.9% for the year ended December 31, 1998. The decrease in the
quality mix percentage was primarily due to dilution resulting from the
acquisition of new facilities.

Facility Operating Expenses. Facility operating expenses increased by
$69,596,000 or 39.5%, from $176,404,000 in 1997 to $246,000,000 in 1998. The
operation of the Harford Gardens facility accounted for $1,659,000, or 2.4% of
this increase; the operation of the Massachusetts Facilities accounted for
$10,959,000, or 15.8% of this increase; the operation of the Dayton Facilities
accounted for $7,881,000, or 11.3% of this increase; the operation of the
Connecticut Facilities accounted for $35,308,000, or 50.7% of this increase; the
operation of the North Toledo Facilities accounted for $6,653,000 or 9.6% of
this increase; the operation of the Rhode Island Facilities accounted for
$6,741,000 or 9.7%; of this increase and the operation of the Danbury Facilities
accounted for $479,000 or 0.7% of this increase. Operating expenses associated
with rehabilitation therapy services provided to non-affiliated long-term care
facilities decreased as a result of fewer therapy contracts. Operating expenses
associated with these contracts decreased by $6,795,000 from 1997 to 1998. The
decrease in contracts resulted from the Company's decision to eliminate low
profit contracts. The remaining $6,711,000 increase in facility operating
expenses was primarily due to increases in the costs of labor, medical supplies
and rehabilitation therapy services purchased from third-parties at "same store"
facilities.

General and Administrative; Service Charges Paid to Affiliate. General and
administrative expenses increased by $4,469,000 or 40.8%, from $10,953,000 in
1997 to $15,422,000 in 1998. As a percentage of total net revenues, general and
administrative expenses increased from 4.9% in 1997 to 5.0% in 1998. This
increase resulted from the acquisition of new facilities that resulted in an
increase in regional and corporate support, and additional travel, consulting
and systems development expenses. The Company reimbursed an affiliate for rent
and other expenses related to its corporate headquarters as well as for certain
data processing and administrative services provided to the Company. During
1997, such reimbursements totaled $708,000 as compared to $1,291,000 in 1998.
The increased reimbursement related primarily to additional data processing
services.

Amortization of Prepaid Management Fees. Amortization of prepaid management
fees (paid in connection with the Merger) was $500,000 in 1998. (See Note O to
the Company's consolidated financial statements included elsewhere in this
report).

Depreciation and Amortization. Depreciation and amortization increased by
$2,276,000 from $4,074,000 in 1997 to $6,350,000 in 1998 primarily due to the
acquisition of new facilities and the amortization of costs related to the
Merger.

Facility Rent. Facility rent expense increased by $9,966,000 from $12,446,000
in 1997 to $22,412,000 in 1998. The increase in rent expense is due to the
acquisition of new facilities partially offset by a reduction of rent expense
resulting from the exercise of purchase options on seven facilities. The
exercise of these purchase options was funded through Merger-related financings.

Merger costs. In connection with the Merger completed on August 11, 1998, the
Company incurred merger costs of $37,172,000. Merger costs consisted of
transaction fees and expenses associated with the Merger and the related
refinancings and the elimination of deferred financing costs related to debt
retired in connection with these events.

Interest Expense, net. Interest expense, net, increased from $5,853,000 in
1997 to $11,271,000 in 1998. This increase is primarily due to the issuance of
$99,500,000 of 11.0% Senior Subordinated Discount Notes in connection with the
Merger. The interest associated with these notes accretes until August 1, 2003
and then becomes payable in cash, semi-annually in arrears, beginning on
February 1, 2004.

Income Taxes (Benefit). As a result of the loss incurred in 1998, an income
tax benefit of $5,020,000 was recognized for that year as compared to income tax
expense of $4,347,000 for 1997.

Net Income (Loss). Net income was $6,803,000 in 1997 as compared to a loss of
$24,187,000 in 1998

20
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash needs are for acquisitions, capital expenditures,
working capital, debt service and general corporate purposes. The Company has
historically financed these requirements primarily through a combination of
internally generated cash flow, mortgage financing and operating leases, in
addition to funds borrowed under a credit facility. In addition, in 1996 the
Company financed the acquisition of four facilities located in Ohio by means of
leases which are accounted for as capital leases for financial reporting
purposes. The Company's existing leased facilities are leased from either the
owner of the facilities, from a real estate investment trust which has purchased
the facilities from the owner, or through synthetic lease borrowings. The
Company's existing facility leases generally require it to make monthly lease
payments and pay all property operating costs. The Company generally negotiates
leases which provide for extensions beyond the initial lease term and an option
to purchase the leased facility. In some cases, the option to purchase the
leased facility is at a price based on the fair market value of the facility at
the time the option is exercised. In other cases, the lease for the facility
sets forth a fixed purchase option price which the Company believes is equal to
the fair market value of the facility at the inception date of such lease, thus
allowing the Company to realize the value appreciation of the facility while
maintaining financial flexibility.

In connection with the leveraged recapitalization completed on August 11,
1998, the Company obtained gross proceeds of $99.5 million through the issuance
of 11% Senior Subordinated Discount Notes (the "Discount Notes") due 2008 and
$40 million through the issuance of 13.5% Exchangeable Preferred Stock (the
"Preferred Stock") mandatorily redeemable in 2010. Interest on the Discount
Notes accretes at 11% per annum until August 1, 2003 and then becomes payable in
cash, semi-annually in arrears, beginning on February 1, 2004. Dividends on the
Preferred Stock are payable, at the option of the Company, in additional shares
of the Preferred Stock until August 1, 2003. After that date dividends may only
be paid in cash. The Company also entered into a new $250 million collateralized
credit facility (the "New Credit Facility"). The terms of the New Credit
Facility provide up to $75 million on a revolving credit basis plus an
additional $175 million initially funded on a revolving basis that converts to a
term loan on an annual basis on each anniversary of the closing. During the
first four years of the facility, any or all of the full $250 million of
availability under the facility may be used for synthetic lease financings.
Proceeds of loans under the facility may be used for acquisitions, working
capital purposes, capital expenditures and general corporate purposes. Interest
is based on either LIBOR or prime rates of interest (plus applicable margins
determined by the Company's leverage ratio) at the election of the Company. The
New Credit Facility contains various financial and other restrictive covenants
and limits aggregate borrowings under the New Credit Facility to a predetermined
multiple of EBITDA.

As noted above, the Company, through a wholly-owned limited partnership,
leases and operates four facilities in Ohio (the "Cleveland Facilities") which
it acquired in 1996 through capital leases. Each lease is guaranteed by the
Company. The guaranty provides that failure by the Company to have a specified
minimum consolidated net worth at the end of any two consecutive quarters is an
event of default under the guaranty, which in turn would be an event of default
under each lease. During the third quarter of 1999, the Company recorded a $5.7
million restructuring charge to terminate its contracts to provide
rehabilitation therapy services to non-affiliated long-term care facilities. As
a result of this restructuring charge, the Company's consolidated net worth as
of September 30, 1999 (as calculated for purposes of this requirement) had
fallen below the required level. The Company anticipated that its net worth
would continue to be below the required level at December 31, 1999, as a result
of which the Company would have been in default under each of these leases and
could have faced the loss of these operations. Such a default could also have
triggered cross-defaults under the Company's other lease and debt obligations.
In December of 1999, the Company paid $5 million to the landlord of the
Cleveland Facilities and obtained an option (the "New Option") to acquire these
facilities. The Company borrowed $5 million from an affiliate of Investcorp S.A.
to fund this payment. The Company already held an option to acquire these
facilities during a limited period beginning July 1, 2001. The New Option allows
the Company to exercise its right to purchase the Cleveland Facilities as of the
date of the New Option. If the Company does not exercise the New Option by March
31, 2000, but has taken certain steps to obtain financing for this acquisition
(as detailed in the agreement), the Company may extend its right to exercise the
New Option until June 30, 2000, with closing required prior to December 31,
2000. The New Option provides a waiver of the net worth requirement until the
earlier of the lapse of the New Option or December 31, 2000. The Company intends
to extend the New Option through June 30, 2000 and exercise the New Option by
June 30, 2000. The Company then intends to assign its purchase rights to an
affiliate of Investcorp and enter into an operating lease of the Cleveland
Facilities by December 31, 2000. The $5 million payment made to obtain the New
Option will be applied to the purchase price of the facilities, or forfeited if
the acquisition is not completed. If the Company cannot complete the refinancing
of the Cleveland Facilities by December 31, 2000, the Company would also be
required to make an additional payment of $3,000,000 to the landlord, and the
Company could potentially face the loss of the Cleveland Facilities. Although no
assurances can be given in this regard, the Company believes that it will be
able to complete the refinancing of the Cleveland Facilities within the required
time period.

During the first quarter of 1999, the Company determined that its anticipated
financial results for that quarter would cause the Company to be out of
compliance with certain financial covenants of the New Credit Facility. The
Company's reduced level of EBITDA during the first quarter of 1999 was
attributable to transitional difficulties associated with the implementation of
the new Medicare prospective payment system which became effective at all of the
Company's facilities on January 1, 1999. Such transitional difficulties resulted
in lower than expected revenues, primarily due to fewer than expected Medicare
patient days, lower Medicare Part A rates, reduced revenues from therapy
services provided to non-affiliated long-term care centers and a reduction in
revenues from the provision of Medicare Part B services at the Company's own
facilities. In response, during the first quarter of 1999, the Company initiated
additional facility-based training directed towards the documentation
requirements of the revised Medicare reimbursement system. The Company also
continued to refine its admission and assessment protocols in order to increase
patient admissions and introduced a series of targeted initiatives to lower
operating expenses. Such initiatives included wage and staffing reductions
(primarily related to the delivery of rehabilitative therapy services and
indirect nursing support), renegotiation of vendor contracts and ongoing efforts
to reduce the Company's reliance on outside nurse agency personnel. All of the
staffing reductions were implemented, on or prior to, April 1, 1999. Effective
March 30, 1999, the Company obtained an amendment to the New Credit Facility
which limits borrowings under the New Credit Facility to an aggregate of
$58,500,000 (exclusive of undrawn letters of credit outstanding as of March 30,
1999) and which modified certain financial covenants. Access to additional
borrowings for acquisitions and general corporate purposes under the New Credit
Facility are permitted to the extent the Company achieves certain financial
targets. The amendment allows the Company access to the entire $250 million
facility if the Company's operating performance returns to the level of
compliance contemplated by the original financial covenants. As of December 31,
1999, total borrowings under the New Credit Facility (exclusive of undrawn
letters of credit outstanding as of March 30, 1999) were approximately
$49,483,000 and consisted of $32,750,000 of revolver loans, $13,700,000 of

21
<PAGE>

synthetic leasing loans and $3,033,000 of undrawn letters of credit issued after
March 30, 1999. As of December 31, 1999, the Company had approximately
$9,000,000 of funding available under the New Credit Facility and was in
compliance with the financial covenants of the New Credit Facility.

The Company's operating activities in 1998 used net cash of $39,447,000 as
compared to providing net cash of $752,000 in 1999, an improvement of
$40,199,000. The improvement in cash flows from operations was the result of a
lower net loss and higher levels of non-cash expenses in 1999, including
depreciation, amortization and accretion of interest on the Company's Discount
Notes. Additionally, the Company was required to prepay a five-year $6,000,000
management fee in 1998 and also experienced a $17,530,000 increase in accounts
receivable during 1998. In comparison, the Company's accounts receivable balance
as of December 31, 1999 was approximately equal to the prior year balance, and
the prepaid management fee is being amortized as a non-cash expense over the
related five year period.

Net cash used by investing activities was $78,664,000 during 1998 as compared
to $20,762,000 used in 1999. The primary use of cash for investing purposes
during 1998 was to fund the payment of deferred financing fees and the addition
of property and equipment in connection with the exercise of certain options to
purchase long-term care facilities, which had been financed through synthetic
leases prior to the leveraged recapitalization. The primary use of cash for
investing purposes during 1999 was to fund additions to property and equipment
associated with the maintenance of the Company's existing facilities and the
development of its data processing capabilities. As discussed above, the Company
also paid $5,000,000 to the landlord of the Cleveland Facilities in order to
obtain the New Option.

Net cash provided by financing activities was $110,260,000 in 1998 as compared
to $20,500,000 provided in 1999. During 1998, the New Investors made cash equity
contributions of $165 million ($158.5 million, net of issuance costs) to
MergerCo prior to its merger with and into Harborside. During 1998, these funds,
as well as the proceeds from the issuance of the Discount Notes and the
Preferred Stock, and borrowings totaling $12,750,000 under the New Credit
Facility were used to purchase shares of the Company's common stock not retained
by shareholders subsequent to the Merger and to repay the outstanding balance on
the previous credit facility. The Company acquired 7,349,832 shares of its
common stock for cash payments aggregating approximately $184 million during
1998. During 1999, the Company borrowed $20,000,000 under the New Credit
Facility to fund its operations. The Company has not drawn on the facility since
July 7, 1999. As discussed above, the Company borrowed $5 million from an
affiliate of Investcorp S.A..

In addition to the Discount Notes, as of December 31, 1999, the Company had
two mortgage loans outstanding totaling $17,648,000 and $32,750,000 in advances
on its New Credit Facility. One mortgage loan had an outstanding principal
balance of $16,110,000 of which $15,140,000 is due at maturity in 2004. This
loan bears interest at an annual rate of 10.65% plus additional interest equal
to 0.3% of the difference between the annual operating revenues of the four
mortgaged facilities and actual revenues during the twelve-month base period.
The Company's other mortgage loan, which encumbers a single facility, had an
outstanding principal balance of $1,538,000 at December 31, 1999, of which
$1,338,000 is due in 2010.

Harborside expects that its capital expenditures for 2000, excluding
acquisitions of new long-term care facilities, will aggregate approximately
$4,200,000. Harborside's expected capital expenditures will relate to
maintenance capital expenditures, systems enhancements, special construction
projects and other capital improvements. Harborside expects that its future
facility acquisitions will be financed with borrowings under the New Credit
Facility, direct operating leases or assumed debt. Harborside may be required to
obtain additional equity financing to finance any significant acquisitions in
the future.

Seasonality

Harborside's earnings generally fluctuate from quarter to quarter. This
seasonality is related to a combination of factors which include, among other
things, the timing of Medicaid rate increases, seasonal census cycles and the
number of calendar days in a given quarter.

INFLATION

The healthcare industry is labor intensive. Wages and other labor related
costs are especially sensitive to inflation. Shortages in the labor market or
general inflationary pressure could have a significant effect on the Company. In
addition, suppliers attempt to pass along rising costs to the Company in the
form of higher prices. When faced with increases in operating costs, the Company
has generally increased its charges for services. The Company's operations could
be adversely affected if it is unable to recover future cost increases or if it
experiences significant delays in Medicare and Medicaid revenue sources
increasing their rates of reimbursement.

22
<PAGE>

THE YEAR 2000 ISSUE

The Company undertook a comprehensive effort to evaluate and address risks
that could have arisen in connection with the inability of computer programs to
recognize dates that followed December 31, 1999 (the "Year 2000 Issue"). The
Company has not observed any significant problems with its information
technology systems or equipment. The Company has noted no problems with similar
systems operated by third parties doing business with the Company, including its
suppliers, state Medicaid agencies and fiscal intermediaries responsible for
administering payments on behalf of the Medicare program.

23
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES:
Report of Independent Accountants........................................ 25
Consolidated Balance Sheets as of December 31, 1998 and 1999............. 26
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999..................................................... 27
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999.................... 28
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999...................................................... 29
Notes to Consolidated Financial Statements............................... 30

24
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Harborside Healthcare Corporation

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows present fairly, in all material respects, the
financial position of Harborside Healthcare Corporation and its subsidiaries
(the "Company") at December 31, 1999 and 1998, and the results of their
operations and their cash flows for the three years then ended in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 16, 2000

25
<PAGE>

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)

AS OF DECEMBER 31,

<TABLE>
<CAPTION>
<S> <C> <C>
1998 1999
--------- ---------
ASSETS
Current assets:

Cash and cash equivalents .................................................... $ 896 $ 1,386
Accounts receivable, net of allowances for doubtful
accounts of $2,864 and $3,098 respectively ................................ 49,946 50,168
Prepaid expenses and other ................................................... 10,934 19,940
Prepaid income taxes ......................................................... 3,873 2,608
Deferred income taxes (Note K) ............................................... 4,084 2,400
--------- ---------
Total current assets ....................................................... 69,733 76,502

Restricted cash (Note C) ....................................................... 2,110 2,420
Property and equipment, net (Note D) ........................................... 160,504 166,326
Deferred financing and other non-current assets, net (Note E) .................. 18,173 15,546
Other assets, net (Note O) ..................................................... 4,300 3,100
Note receivable (Note F) ....................................................... 7,487 7,487
Deferred income taxes (Note K) ................................................. 2,229 11,852
--------- ---------
Total assets ............................................................... $ 264,536 $283,233
========= =========

LIABILITIES
Current liabilities:
Current maturities of long-term debt (Note H) ................................ $ 207 $ 227
Current portion of capital lease obligation (Note I) ......................... 4,278 4,633
Note payable to affiliate (Note O) ........................................... -- 5,000
Accounts payable ............................................................. 7,401 9,328
Employee compensation and benefits ........................................... 13,220 14,021
Other accrued liabilities .................................................... 7,485 5,508
Accrued interest ............................................................. 62 572
Current portion of deferred income ........................................... 677 677
--------- ---------
Total current liabilities .................................................. 33,330 39,966

Long-term portion of deferred income (Note G) .................................. 3,104 2,427
Long-term debt (Note H) ........................................................ 134,473 166,018
Long-term portion of capital lease obligation (Note I) ......................... 51,253 50,067
--------- ---------
Total liabilities .......................................................... 222,160 258,478
--------- ---------

Commitments and contingencies (Notes G and M)

Exchangeable preferred stock, redeemable, $.01 par value with a liquidation
value of $1,000 per share; 500,000 shares authorized; 42,293 and
48,277 issued and outstanding, respectively (Note L) ......................... 42,293 48,277
--------- ---------

STOCKHOLDERS' EQUITY (DEFICIT) (Note L)
Common stock, $.01 par value, 19,000,000 shares
authorized, 7,261,332 shares issued and outstanding ........................... 146 146
Additional paid-in capital ..................................................... 204,607 198,603
Less common stock in treasury, at cost, 7,349,832 shares ....................... (183,746) (183,746)
Accumulated deficit ............................................................ (20,924) (38,525)
--------- ---------
Total stockholders' equity (deficit) ....................................... 83 (23,522)
--------- ---------
Total liabilities and stockholders' equity (deficit) .......................... $ 264,536 $ 283,233
========= =========
</TABLE>

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

26
<PAGE>

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

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

FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1998 1999
--------- --------- -------

Total net revenues ................................ $ 221,777 $ 311,044 $ 300,615
--------- --------- --------

Expenses:
Facility operating .............................. 176,404 246,000 248,795
General and administrative ...................... 10,953 15,422 17,808
Service charges paid to former affiliate (Note O) 708 1,291 1,173
Amortization of prepaid management fee (Note O) . -- 500 1,200
Depreciation and amortization ................... 4,074 6,350 10,249
Facility rent ................................... 12,446 22,412 22,394
Merger costs (Note B) ........................... -- 37,172 --
Restructuring costs (Note P) .................... -- -- 5,745
--------- --------- ---------
Total expenses ................................. 204,585 329,147 307,364
--------- --------- ---------

Income (loss) from operations .................... 17,192 (18,103) (6,749)

Other:
Interest expense, net ............................. 5,853 11,271 20,895
Other expense (income) .......................... 189 (167) 261
--------- --------- ---------
Income (loss) before income taxes ................. 11,150 (29,207) (27,905)

Income tax expense (benefit) (Note K) ............. 4,347 (5,020) (10,304)
--------- --------- ---------

Net income (loss) ................................. 6,803 (24,187) (17,601)

Preferred stock dividends ......................... -- (2,296) (6,004)
--------- --------- ---------
Earnings (loss) available for common shares........ $ 6,803 $(26,483) $ (23,605)
========= ========= =========

Earnings (loss) per common share (Note L):
Basic .................................... $ 0.85 $ (3.42) $ (3.25)
========= ========= =========
Diluted .................................. $ 0.84 $ (3.42) $ (3.25)
========= ========= =========
</TABLE>

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

27
<PAGE>

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)

FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 and 1999

Additional
Common Paid-in Treasury Accumulated
Stock Capital Stock Deficit Total
--------- --------- -------- --------- ---------

Stockholders' equity, December 31, 1996 ................ $ 80 $ 48,340 -- $ (3,540) $ 44,880

Net income for the year ended December 31, 1997 ........ -- -- -- 6,803 6,803
Exercise of stock options .............................. -- 100 -- -- 100
--------- --------- -------- --------- ---------

Stockholders' equity, December 31, 1997 ................ 80 48,440 -- 3,263 51,783

Net loss for the year ended December 31, 1998 .......... -- -- -- (24,187) (24,187)

Exercise of stock options .............................. -- 29 -- -- 29

Issuance of common stock, net (6,600,000 shares) ....... 66 158,434 -- -- 158,500

Purchase of treasury stock (7,349,832 shares) .......... -- -- $(183,746) -- (183,746)

Preferred stock dividends .............................. -- (2,296) -- -- (2,296)
--------- --------- --------- --------- ---------

Stockholders' equity, December 31, 1998 ................ 146 204,607 (183,746) (20,924) 83

Net loss for the year ended December 31, 1999 .......... -- -- -- (17,601) (17,601)

Preferred stock dividends .............................. -- (6,004) -- -- (6,004)
--------- --------- --------- --------- ---------

Stockholders' equity (deficit), December 31, 1999 ..... $ 146 $ 198,603 $(183,746) $ (38,525) $ (23,522)
========= ========= ========= ========= =========

</TABLE>

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

28
<PAGE>

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>

FOR THE YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
1997 1998 1999
--------- --------- ---------
Operating activities:
Net income (loss) ..............................................$ 6,803 $ (24,187) $ (17,601)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation of property and equipment ......................... 3,589 4,973 7,173
Amortization of deferred financing and other
non-current assets ............................................ 485 1,377 3,076
Amortization of prepaid management fee ............ -- 500 1,200
Amortization of deferred income ................................ (449) (550) (677)
Prepayment of management fees .................................. -- (6,000) --
Accretion of senior subordinated discount notes ................ -- 4,583 11,771
Amortization of loan costs
and fees (included in rental and interest expense) ........... 257 56 156
Accretion of interest on capital lease obligation .............. 2,952 3,185 3,443
Non-cash restructuring charge .................................. -- -- 1,852
Merger costs not requiring cash ................................ -- (350) --
--------- --------- ---------
13,637 (16,413) 10,393
Changes in operating assets and liabilities:
(Increase) in accounts receivable ............................. (9,432) (17,530) (222)
(Increase) in prepaid expenses and other ...................... (2,885) (3,202) (4,006)
(Increase) in deferred income taxes ........................... (265) (4,092) (7,939)
Increase in accounts payable .................................. 1,264 126 1,927
Increase in employee compensation and benefits ................ 2,102 2,479 801
Increase (decrease) in accrued interest ....................... 232 (189) 510
Increase (decrease) in other accrued liabilities .............. 2,240 3,068 (1,977)
Increase (decrease) in income taxes payable ................... (1,272) (3,694) 1,265
--------- --------- ---------
Net cash provided (used) by operating activities ............. 5,621 (39,447) 752
--------- --------- ---------

Investing activities:
Additions to property and equipment ........................... (5,274) (68,605) (13,197)
Additions to deferred financing and other
non-current assets ........................................... (6,301) (13,494) (2,255)
Transfers (to) from restricted cash, net ...................... (1,794) 3,435 (310)
Payment of purchase deposit ................................... -- -- (5,000)
Receipt of note receivable .................................... (7,487) -- --
Repayment of demand note from limited partnership ............. 1,369 -- --
--------- --------- ---------
Net cash used by investing activities ........................ (19,487) (78,664) (20,762)
--------- --------- ---------

Financing activities:
Borrowings under revolving line of credit ..................... 15,600 17,150 20,000
Issuance of note payable to affiliate ......................... -- -- 5,000
Repaid on revolving line of credit ............................ -- (20,000) --
Payment of long-term debt ..................................... (166) (191) (206)
Proceeds from issuance of senior subordinated discount notes .. -- 99,493 --
Proceeds from issuance of exchangeable preferred stock ........ -- 40,000 --
Purchase of treasury stock .................................... -- (183,746) --
Proceeds from sale of common stock ............................ -- 158,500 --
Principal payments of capital lease obligation ................ (3,944) (3,939) (4,274)
Receipt of cash in connection with lease ...................... 1,301 2,964 --
Dividends paid on exchangeable preferred stock ................ -- -- (20)
Exercise of stock options ..................................... 100 29 --
--------- --------- ---------
Net cash provided by financing activities .................... 12,891 110,260 20,500
--------- --------- ---------

Net increase (decrease) in cash and cash equivalents ........... (975) (7,851) 490
Cash and cash equivalents, beginning of year ................... 9,722 8,747 896
--------- --------- ---------
Cash and cash equivalents, end of year .........................$ 8,747 $ 896 $ 1,386
========= ========= =========

Supplemental Disclosure:
Interest paid ................................................$ 3,371 $ 3,636 $ 5,911
Income taxes paid ............................................$ 5,783 $ 3,047 $ 243
Accretion of preferred dividends..............................$ - $ 2,293 $ 5,584
</TABLE>

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

29
<PAGE>

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. NATURE OF BUSINESS

Harborside Healthcare Corporation and its subsidiaries (the "Company") operate
long-term care facilities and, until September 1999, provided rehabilitation
therapy services to non-affiliated long-term care facilities (See Note P). As of
December 31, 1999, the Company owned twenty-two facilities, operated
twenty-seven additional facilities under various leases and managed one
facility. The Company accounts for its investment in one 75% owned facility
using the equity method of accounting.

B. BASIS OF PRESENTATION

The Company was incorporated as a Delaware corporation on March 19, 1996, and
was formed as a holding company, in anticipation of an initial public offering
(the "IPO"), to combine under the control of a single corporation the operations
of various business entities (the "Predecessor Entities") which were all under
the majority control of several related stockholders.

On April 15, 1998, the Company entered into a Merger Agreement (the "Merger")
with HH Acquisition Corp. ("MergerCo"), an entity organized for the sole purpose
of effecting a merger on behalf of Investcorp S.A., certain of its affiliates
and certain other international investors (the "New Investors"). The New
Investors made common equity cash contributions totaling $165 million ($158.5
million, net of issuance costs). On August 11, 1998, MergerCo merged with and
into the Company, with Harborside Healthcare Corporation as the surviving
corporation. As a result of the transaction, and pursuant to the Merger
Agreement, the New Investors acquired approximately 91% of the post-merger
common stock of the Company. The remaining 9% of the common stock was retained
by existing shareholders, including management. As a result of the Merger, the
Company's shares were de-listed from the New York Stock Exchange.

The Merger was approved by a majority of the Company's shareholders at a
special meeting held on August 11, 1998. Each share not retained by existing
shareholders was converted into $25 in cash, representing in the aggregate, cash
payments of approximately $184 million. The converted shares (7,349,832 shares)
were recorded at cost as treasury stock and represent a deduction from the
Company's stockholders' equity. Holders of outstanding stock options of the
Company converted the majority of their options into cash at $25 per underlying
share (less applicable exercise price and withholding taxes) with aggregate
payments of approximately $8 million.

In connection with the transaction and prior to the Merger, the New Investors
made cash common equity contributions of $158.5 million, net of issuance costs,
to MergerCo, and MergerCo obtained gross proceeds of $99.5 million through the
issuance of 11% Senior Subordinated Discount Notes ("Discount Notes") due 2008
and $40 million through the issuance of 13.5% Exchangeable Preferred Stock
("Preferred Stock") mandatorily redeemable in 2010. In connection with the
Merger, Harborside also entered into a new $250 million collateralized credit
facility. In the third quarter of 1998, Harborside recorded a charge to income
from operations of $37 million ($29 million after taxes) for direct and other
costs related to the Merger transaction. In connection with the Merger and the
related refinancings, the Company exercised purchase options for seven
facilities which had been previously financed through synthetic leases.

C. SIGNIFICANT ACCOUNTING POLICIES

The Company uses the following accounting policies for financial reporting
purposes:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.

Total Net Revenues

Total net revenues include net patient service revenues, management fees from
managed facilities and the facility accounted for using the equity method, and,
through September 1999, rehabilitation therapy service revenues from contracts
to provide rehabilitation therapy services to non-affiliated long-term care
facilities.

Net patient service revenues payable by patients at the Company's facilities
are recorded at established billing rates. Net patient service revenues to be
reimbursed by contracts with third-party payors, primarily the Medicare and
Medicaid programs, are recorded at the amount estimated to be realized under
these contractual arrangements. Revenues from Medicare and Medicaid are
generally based on reimbursement of the reasonable direct and indirect costs of
providing services to program participants or a prospective payment system. The
Company separately estimates revenues due from each third-party with which it
has a contractual arrangement and records anticipated settlements with these
parties in the contractual period during which services were rendered. The
amounts actually reimbursable under Medicare and Medicaid are determined by
filing cost reports which are then audited and generally retroactively adjusted
by the payor. Legislative changes to state or Federal reimbursement systems may
also retroactively affect recorded revenues. Changes in estimated revenues due
in connection with Medicare and Medicaid may be recorded by the Company
subsequent to the year of origination and prior to final settlement based on
improved estimates. Such adjustments and final settlements with third-party
payors, which could materially and adversely affect the Company, are reflected
in operations at the time of the adjustment or settlement. Beginning on January
1, 1999, all of the Company's facilities which participate in the Medicare
program began to be reimbursed in accordance with the provisions of the Balanced
Budget Act of 1997 (the "Balanced Budget Act"). The Balanced Budget Act provides

30
<PAGE>

for the reimbursement of Medicare funded skilled nursing facility services
through a Prospective Payment System which when fully implemented will reimburse
the Company's facilities based upon a per diem rate adjusted for the acuity of
each patient and the geographic location of each facility. Accounts receivable,
net, at December 31, 1998 and 1999 includes $22,388,000 and $12,838,000,
respectively, of estimated settlements due from third-party payors and
$8,445,000 and $4,465,000, respectively, of estimated settlements due to
third-party payors.

Prior to the effective date of the Balanced Budget Act, direct and allocated
indirect costs reimbursed under the Medicare program were subject to regional
limits. The Company's costs generally exceeded those limits and accordingly, the
Company was required to submit exception requests to recover such excess costs.
The Company believes it will be successful in collecting these receivables,
however, the failure to recover these costs in the future could materially and
adversely affect the Company.

Concentrations

A significant portion of the Company's revenues are derived from the Medicare
and Medicaid programs. There have been, and the Company expects that there will
continue to be, a number of proposals to limit reimbursement allowable to
long-term care facilities under these programs. Approximately 66%, 70%, and 71%
of the Company's net revenues in the years ended December 31, 1997, 1998 and
1999, respectively, are from the Company's participation in the Medicare and
Medicaid programs. As of December 31, 1998 and 1999, $26,461,000 and
$29,774,000, respectively, of net accounts receivable were due from the Medicare
and Medicaid programs.

Facility Operating Expenses

Facility operating expenses include expenses associated with the normal
operations of a long-term care facility. The majority of these costs consist of
payroll and employee benefits related to nursing, housekeeping and dietary
services provided to patients, as well as maintenance and administration of the
facilities. Other significant facility operating expenses include: the cost of
rehabilitation therapies, medical and pharmacy supplies, food and utilities.
Through September 1999, facility operating expenses included expenses associated
with rehabilitation therapy services rendered by the Company under contracts to
provide rehabilitation therapy services to non-affiliated long-term care
facilities. (See Note P to the Company's consolidated financial statements
included elsewhere in this report).

Provision for Doubtful Accounts

Provisions for uncollectible accounts receivable of $1,188,000, $1,418,000 and
$1,655,000 are included in facility operating expenses for the years ended
December 31, 1997, 1998 and 1999, respectively. Individual patient accounts
deemed to be uncollectible are written off against the allowance for doubtful
accounts.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates. Estimates are used when accounting for the collectibility
of receivables, depreciation and amortization, employee benefit plans, taxes and
contingencies.

Property and Equipment

Property and equipment are stated at cost. Expenditures that extend the lives
of affected assets are capitalized, while maintenance and repairs are charged to
expense as incurred. Upon the retirement or sale of an asset, the cost of the
asset and any related accumulated depreciation are removed from the balance
sheet, and any resulting gain or loss is included in net income (loss).

Depreciation expense includes the amortization of capital assets and is
estimated using the straight-line method. These estimates are calculated using
the following estimated useful lives:

Buildings and improvements 31.5 to 40 years
Furniture and equipment 5 to 10 years
Leasehold improvements over the life of the lease
Land improvements 8 to 40 years

Deferred Financing and Other Non-Current Assets

Deferred financing costs consist of costs incurred in obtaining financing
(primarily loans and facility leases). These costs are amortized using the
straight-line method (which approximates the interest method) over the term of
the related financial obligation (See Notes E and H).

In connection with each of its acquisitions, the Company reviewed the assets
of the acquired facility and assessed its relative fair value in comparison to
the purchase price. Covenants not-to-compete are being amortized using the
straight-line method over the period during which competition is restricted.
Goodwill resulted from the acquisition of certain assets for which the
negotiated purchase prices exceeded the allocations of the fair market value of
identifiable assets. The Company's policy is to evaluate each acquisition
separately and identify an appropriate amortization period for goodwill based on
the acquired property's characteristics. Goodwill is amortized using the
straight-line method over a 15 to 40 year period.

Assessment of Long-Lived Assets

The Company periodically reviews the carrying value of its long-lived assets
(primarily property and equipment and deferred financing and other non-current
assets) to assess the recoverability of these assets; any impairments would be

31
<PAGE>

recognized in operating results if a diminution in value considered to be other
than temporary were to occur. As part of this assessment, the Company reviews
the expected future net operating cash flows from its facilities, as well as the
values included in appraisals of its facilities, which have periodically been
obtained in connection with various financial arrangements. The Company has not
recognized any adjustments as a result of these assessments except for those
noted with regard to the termination of the Company's contract therapy business
(See Note P).

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at the date of their acquisition by the Company.

Restricted Cash

Restricted cash consists of cash set aside in escrow accounts as required by
several of the Company's leases and other financing arrangements.

Income Taxes

The Company determines deferred taxes in accordance with Statement of
Accounting Financial Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), which requires that deferred tax assets and liabilities be computed based
on the difference between the financial statement and income tax bases of assets
and liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the assets or liabilities from
period to period.

Reclassification of Prior Period Amounts

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

New Accounting Pronouncements

The Financial Accounting Board has issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", (SFAS No. 133) as amended, which is effective for financial
statements issued for periods beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company does not expect SFAS No. 133 to
have an effect on the financial statements as the Company currently has no
derivative financial instruments.

D. PROPERTY AND EQUIPMENT

The Company's property and equipment are stated at cost and consist of the
following as of December 31:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1999
------------ ------------

Land .............................. $ 7,238,000 $ 7,238,000
Land improvements ................. 3,538,000 3,625,000
Buildings and improvements ........ 85,398,000 88,780,000
Leasehold improvements ............ 4,520,000 4,520,000
Equipment, furnishings and fixtures 17,760,000 26,997,000
Assets under capital lease ........ 63,532,000 63,481,000
------------ ------------
181,986,000 194,641,000
Less accumulated depreciation ..... 21,482,000 28,315,000
------------ ------------
$160,504,000 $166,326,000
============ ============
</TABLE>

E. DEFERRED FINANCING AND OTHER NON-CURRENT ASSETS

Deferred financing and other non-current assets are stated at cost and consist
of the following as of December 31:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1999
----------- -----------

Deferred financing costs .... $16,648,000 $18,760,000
Covenant not-to-compete ..... 1,200,000 1,200,000
Goodwill .................... 2,861,000 569,000
Other ....................... 380,000 256,000
----------- -----------
21,089,000 20,785,000
Less accumulated amortization 2,916,000 5,239,000
----------- -----------
$18,173,000 $15,546,000
=========== ===========
</TABLE>

32
<PAGE>

F. NOTE RECEIVABLE

In connection with the acquisition of five Connecticut facilities on December
1, 1997 (See Note G), the Company received a note receivable from the owners in
the amount of $7,487,000. Interest is earned at the rate of 9% per annum, and
payments are due monthly, in arrears, commencing January 1, 1998 and continuing
until November 30, 2010, at which time the entire principal balance is due. The
proceeds of the note were used by the owner to repay certain indebtedness. The
note is collateralized by various mortgage interests and other collateral.

G. OPERATING LEASES

In March 1993, a subsidiary of the Company entered into an agreement with a
non-affiliated entity to lease two long-term care facilities in Ohio with 289
beds for a period of ten years. The lease agreement, which became effective in
June 1993, provides for fixed annual rental payments of $900,000. At the end of
the ten-year period, the Company has the option to acquire the facilities for
$8,500,000, or to pay a $500,000 termination fee and relinquish the operation of
the facilities to the lessor. On the effective date of the lease, the subsidiary
paid $1,200,000 to the lessor for a covenant not-to-compete which remains in
force through June 2003.

Effective October 1, 1994, a subsidiary of the Company entered into an
agreement with a related party to lease a 100 bed long-term care facility in
Florida for a period of ten years. The lease agreement provides for annual
rental payments of $551,250 in the initial twelve-month period and annual
increases of 2% thereafter. The Company has the option to exercise two
consecutive five-year lease renewals. The Company also has the right to purchase
the facility at fair market value at any time after the fifth anniversary of the
commencement of the lease. The lease agreement also required the Company to
escrow funds equal to three months' base rent.

Effective April 1, 1995, a subsidiary of the Company entered into an agreement
with Meditrust to lease a 100-bed long-term care facility in Ohio for a period
of ten years. The lease agreement provides for annual rental payments of
$698,400 in the initial twelve-month period. The Company is also required to
make additional rental payments beginning April 1, 1996 in an amount equal to
5.0% of the difference between the facility's operating revenues in each
applicable year and the operating revenues in the twelve-month base period which
commenced on April 1, 1995. The annual additional rent payment will not exceed
$14,650. At the end of the initial lease period, the Company has the option to
exercise two consecutive five-year lease renewals. The Company's obligations
under the lease are collateralized by, among other things, an interest in any
property improvements made by the Company and by a second position on the
facility's accounts receivable. The Company also has the right to purchase the
facility at its fair market value on the eighth and tenth anniversary dates of
the commencement of the lease and at the conclusion of each lease renewal.

Effective January 1, 1996, a subsidiary of the Company entered into an
agreement with Meditrust to lease seven facilities with a total of 820 beds. The
lease agreement provides for annual rental payments of $4,582,500 in the initial
twelve-month period and annual increases based on changes in the consumer price
index thereafter. The lease has an initial term of ten years with two
consecutive five-year renewal terms exercisable at the Company's option. The
Company's obligations under the lease are collateralized by, among other things,
an interest in any property improvements made by the Company and by a second
position on the related facilities' accounts receivable. In conjunction with the
lease, the Company was granted a right of first refusal and an option to
purchase the facilities as a group, which option is exercisable at the end of
the eighth year of the initial term and at the conclusion of each renewal term.
The purchase option is exercisable at the greater of the fair market value of
the facilities at the time of exercise or Meditrust's original investment.

Effective January 1, 1996, a subsidiary of the Company entered into an
agreement with Meditrust to lease six long-term care facilities with a total of
537 licensed beds in New Hampshire. The lease agreement provides for annual
rental payments of $2,324,000 in the initial twelve-month period and annual
rental increases based on changes in the consumer price index thereafter. The
lease has an initial term of ten years with two consecutive five-year renewal
terms exercisable at the Company's option. The Company's obligations under the
lease are collateralized by, among other things, an interest in any property
improvements made by the Company and by a second position on the related
facilities' accounts receivable. In conjunction with the lease, the Company was
granted a right of first refusal and an option to purchase the facilities as a
group, which is exercisable at the end of the eighth year of the initial term
and at the conclusion of each renewal term. The purchase option is exercisable
at the greater of 90% of the fair market value of the facilities at the time of
exercise or Meditrust's original investment. In connection with this lease, the
Company received a cash payment of $3,685,000 from Meditrust which was recorded
as deferred income and is being amortized over the ten-year initial lease term
as a reduction of rental expense.

The Meditrust leases contain cross-default and cross-collateralization
provisions. A default by the Company under one of these leases could adversely
affect a significant number of the Company's properties and result in a loss to
the Company of such properties. In addition, the leases permit Meditrust to
require the Company to purchase the facilities upon the occurrence of a default.

Effective March 1, 1997, the Company entered into an agreement with a
non-affiliated party to lease one long-term care facility with 163 beds in
Baltimore, Maryland for a period of ten years. The lease agreement provides for
fixed annual rental payments of $900,000 for the first three years and annual
increases based on changes in the consumer price index thereafter. From July 1,
1999 through August 28, 2000, the Company has the option to acquire the facility
for $10,000,000. After August 28, 2000, the purchase price escalates in
accordance with a schedule. On the effective date of the lease, the Company paid
$1,000,000 to the lessor in exchange for the purchase option. This option
payment is being amortized over the life of the lease.

As of August 1, 1997, the Company acquired four long-term care facilities with
401 beds in Massachusetts. The Company financed this acquisition through an
operating lease with a real estate investment trust (the "REIT"). The lease
provides for annual rental payments of $1,576,000 in the initial twelve-month
period and annual increases based on changes in the consumer price index
thereafter. The lease has an initial term of ten years with, at the Company's
option, eight consecutive five-year renewal terms. In conjunction with the
lease, the Company was granted a right of first refusal and an option to
purchase the facilities as a group, which option is exercisable at the end of

33
<PAGE>

the initial lease term and at the conclusion of each renewal term. The purchase
option is exercisable at the fair market value of the facilities at the time of
exercise.

On August 28, 1997, the Company obtained a five-year synthetic leasing
facility (the "Leasing Facility") from the same group of banks that provided the
"Credit Facility" (See Note H). The Company used $23,600,000 of the funds
available through the Leasing Facility to acquire three long-term care
facilities with 341 beds in Dayton, Ohio in September 1997. Acquisitions made
through the Leasing Facility were accounted for financial reporting purposes as
operating leases with an initial lease term which would have expired at the
expiration date of the leasing facility. Annual rent for properties acquired
through the Leasing Facility was determined based on the purchase price of the
facilities acquired and an interest rate factor which varied with the Company's
leverage ratio (as defined) and which was based on LIBOR, or at the Company's
option, the agent bank's prime rate.

As of December 1, 1997, the Company acquired five long-term care facilities
with 684 beds in Connecticut. The Company financed this acquisition through an
operating lease from the seller. The lease provides for an initial annual rental
payment of $7,491,000 and, beginning in the third lease year, certain annual
rent increases based on changes in the consumer price index, but not to exceed
$30,000 per year. The lease has an initial term of ten years with, at the
Company's option, three one-year extensions. In conjunction with the lease, the
Company was granted an option to purchase the facilities as a group at
predetermined purchase prices between eight and thirteen years post the lease
commencement.

On April 1, 1998, the Company acquired two facilities with 248 beds in Ohio
through the Leasing Facility, and on May 8, 1998 the Company acquired two
facilities with 267 beds in Rhode Island through the Leasing Facility. The
Company used a total of $35,650,000 of funds available through the Leasing
Facility to acquire these four facilities.

In connection with the Merger on August 11, 1998, the Company exercised its
rights to purchase all seven of the facilities it had acquired through the
Leasing Facility for an aggregate amount equal to $59,250,000.

Under the terms of each of the facility leases described above, the Company is
responsible for the payment of all real estate and personal property taxes, as
well as other reasonable costs required to operate, maintain, insure and repair
the facilities.

Future minimum rent commitments under the Company's non-cancelable operating
leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Real Estate Equipment Total

2000 $ 21,508,000 $ 1,668,000 $ 23,176,000
2001 21,694,000 1,403,000 23,097,000
2002 21,883,000 505,000 22,388,000
2003 21,626,000 167,000 21,793,000
2004 20,840,000 -- 20,840,000
Thereafter 37,598,000 -- 37,598,000
------------ ------------ ------------
$145,149,000 $ 3,743,000 $148,892,000
============ ============ ============
</TABLE>

H. LONG-TERM DEBT

The Company has a mortgage payable to Meditrust in the amount of $16,110,000
at December 31, 1999. The Meditrust debt is cross-collateralized by the assets
of four of the Company's facilities (the "Four Facilities"). The Meditrust debt
bears interest at the annual rate of 10.65%. Additional interest payments are
also required in an amount equal to 0.3% of the difference between the operating
revenues of the Four Facilities in each applicable year and the operating
revenues of the Four Facilities during a twelve-month base period which
commenced October 1, 1995. The loan agreement with Meditrust places certain
restrictions on the Four Facilities; among them, the agreement restricts their
ability to incur additional debt or to make significant dispositions of assets.
The Four Facilities are also required to maintain a debt service coverage ratio
of at least 1.2 to 1.0 (as defined in the loan agreement) and a current ratio of
at least 1.0 to 1.0. The Meditrust Loan agreement contains a prepayment penalty
calculated in accordance with a formula.

A subsidiary of the Company assumed a first mortgage note (the "Note") with a
remaining balance of $1,775,000 as part of the acquisition of a long-term care
facility in 1988. The Note requires the annual retirement of principal in the
amount of $20,000. The Company pays interest monthly at the rate of 14% per
annum on the outstanding principal amount until maturity in October 2010, when
the remaining unpaid principal balance of $1,338,000 is due. The Note is
collateralized by the property and equipment of the facility.

In April of 1997, the Company obtained a three-year $25,000,000 revolving
credit facility (the "Credit Facility") from a commercial bank. On August 28,
1997, the Company amended the Credit Facility to add additional banks as parties
to the Credit Facility, extended the maturity to five years and made certain
additional amendments to the terms of the agreement. Borrowings under this
facility were collateralized by patient accounts receivable and certain real
estate. The assets which collateralized the Credit Facility also collateralized
the Company's obligation under the Leasing Facility. The facility was scheduled
to mature in September 2002 and provided for prime and LIBOR interest rate
options which varied with the Company's leverage ratio (as defined).

On August 11, 1998, in connection with the Merger, the Company entered into a
new, six year $250,000,000 collateralized credit facility (the "New Credit
Facility"). The terms of the New Credit Facility provide up to $75 million on a
revolving credit basis plus an additional $175 million initially funded on a
revolving basis that convert to a term loan on an annual basis on each
anniversary of the closing. If for any year beginning after December 31, 1999,
the Company shall generate Excess Cash Flow (as defined), then, 50% of such
Excess Cash Flow shall be applied toward the repayment of outstanding borrowings
under the New Credit Facility. During the first four years of the New Credit
Facility, up to $250,000,000 may be used in connection with synthetic lease
financing. Proceeds of the loans may be used for working capital, capital
expenditures, acquisitions and general corporate purposes. The New Credit

34
<PAGE>

Facility is collateralized by substantially all of the Company's patient
accounts receivable, certain real estate and a first or second priority interest
in the capital stock of certain of the Company's subsidiaries. Interest is based
on either LIBOR or prime rates of interest (plus applicable margins determined
by the leverage ratio), at the election of the Company, and ranged from 8.70% to
10.0% at December 31, 1999. The New Credit Facility requires that the Company
maintain an interest/rent coverage ratio which varies by year, and limits
aggregate borrowings under the New Credit Facility to a predetermined multiple
of EBITDA. The New Credit Facility contains a number of restrictive covenants
that, among other things, restrict the Company's ability to incur additional
indebtedness, prohibit the disposition of certain assets, limit the Company's
ability to make capital expenditures in excess of pre-determined levels and
limits the ability of the Company to declare and pay certain dividends.

During the first quarter of 1999, the Company determined that its anticipated
financial results for that quarter would cause the Company to be out of
compliance with certain financial covenants of the New Credit Facility.
Accordingly, the Company obtained an amendment to the New Credit Facility
effective March 30, 1999 which limits borrowings under the New Credit Facility
to an aggregate of $58,500,000 (exclusive of undrawn letters of credit
outstanding as of March 30, 1999) and which modifies certain financial
covenants. Access to additional borrowings for acquisitions and general
corporate purposes under the New Credit Facility are permitted to the extent the
Company achieves certain financial targets. The amendment allows the Company
access to the entire $250 million facility if the Company's operating
performance returns to the level of compliance contemplated by the original
financial covenants. As of December 31, 1999, the Company had outstanding
$32,750,000 in revolving loans and $13,700,000 in synthetic lease financings,
and had $8,967,000 of remaining availability under the New Credit Facility.

In connection with the Merger on August 11, 1998, the Company issued
$170,000,000 principal amount at maturity (approximately $99,500,000 gross
proceeds) of 11% Senior Subordinated Discount Notes Due 2008 (the "Discount
Notes"). Each Discount Note was issued with a principal amount at maturity of
$1,000 and an original issue price of $585.25. Interest on the Discount Notes
accretes in accordance with a predetermined formula on a semi-annual basis on
February 1, and August 1, of each year. Cash interest will not accrue on the
Discount Notes until August 1, 2003. Thereafter, interest on the Discount Notes
will be paid semi-annually in arrears in cash on February 1 and August 1, of
each year commencing February 1, 2004. The Discount Notes will be redeemable in
whole or in part, at the option of the Company on or after August 1, 2003 based
on a predetermined redemption schedule which begins on August 1, 2003 at 105.5%
and which declines incrementally to 100% on August 1, 2006. In addition, the
Company may redeem up to 35% of the aggregate outstanding accreted value of the
Discount Notes at a redemption price of 111% of accreted value at any time prior
to August 1, 2001 with the proceeds of a public offering of common stock,
provided that the redemption occurs within 60 days of the closing of the public
offering and that at least 65% of the aggregate principal amount of the Discount
Notes remains outstanding immediately after such redemption. At any time on or
prior to August 1, 2003, the Discount Notes may be redeemed in whole but not in
part at the option of the Company upon the occurrence of a Change of Control (as
defined) in accordance with the prescribed procedures and the payment of any
Applicable Premium (as defined). The Discount Notes must be redeemed in whole on
August 1, 2008.

Upon any voluntary or involuntary liquidation of the Company, holders of the
Discount Notes will be entitled to be paid in full 100% of principal and accrued
interest out of the assets available for distribution after holders of senior
debt have been paid in full. The debt evidenced by the Discount Notes is
unsecured, subordinate to existing and future senior debt of the Company, but
senior in right with all existing and future subordinated debt of the Company.
Certain of the subsidiaries of the Company have jointly and severally guaranteed
the Company's payment obligations (subject to maximum amounts per subsidiary)
under the Discount Notes (See Note Q). Each Discount Note guaranteed by such
subsidiary is subordinated to any Senior Debt of such guarantor. The Company
derives substantially all of its income from operations through its subsidiaries
and consequently, the Discount Notes are effectively subordinated to the
potential claims of creditors of all of the subsidiaries of the Company
irrespective of subsidiary guarantees. The Discount Notes also contain certain
restrictive covenants which limit the ability of the Company to incur debt,
issue preferred stock, merge or dispose of substantially all of its assets.

Interest expense charged to operations for the years ended December 31, 1997,
1998 and 1999 was $6,681,000, $12,447,000 and $21,678,000, respectively.

As of December 31, 1998 and 1999, the Company's long-term debt, excluding the
current portion, consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1999
------------- -------------

Senior subordinated discount notes .... $ 104,076,000 $ 115,847,000
Mortgages payable ..................... 17,647,000 17,421,000
Credit facility ....................... 12,750,000 32,750,000
------------- -------------
$ 134,473,000 $ 166,018,000
</TABLE>

As of December 31, 1999, future long-term debt maturities associated with the
Company's debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 227,000
2001 247,000
2002 273,000
2003 302,000
2004 47,910,000
Thereafter 117,286,000
-----------
$166,245,000
</TABLE>

Substantially all of the Company's assets are subject to liens under long-term
debt or operating lease agreements.

35
<PAGE>

I. CAPITAL LEASE OBLIGATION

On July 1, 1996, a subsidiary of the Company began leasing four long-term care
facilities in Ohio (the "Cleveland Facilities"). These leases were accounted for
as capital leases as a result of a bargain purchase option exercisable at the
end of the lease. The initial term of the leases is five years and during the
final six months of the initial term, the Company could exercise an option to
purchase the Cleveland Facilities for a total price of $57,125,000. If the
Company exercised the purchase option but was unable to obtain financing for the
acquisition, the lease could be extended for up to two additional years, during
which time the Company would have to obtain financing and complete the purchase
of the facilities. The annual rent under the agreement is $5,000,000 during the
initial term and $5,500,000 during the extension term. The Company is also
responsible for facility expenses such as taxes, maintenance and repairs. The
Company agreed to pay $8,000,000 for an option to purchase these facilities. Of
this amount, $5,000,000 was paid prior to the closing on July 1, 1996, and the
remainder, $3,000,000, was due at the end of the initial lease term whether or
not the Company exercised its purchase option. Upon the exercise of the purchase
option, the option payments would be applied towards the purchase price.

Each of these leases is guaranteed by the Company. The guaranty provides that
failure by the Company to have a specified minimum consolidated net worth at the
end of any two consecutive quarters is an event of default under the guaranty,
which in turn would be an event of default under each lease. During the third
quarter of 1999, the Company recorded a $5.7 million restructuring charge to
terminate its contracts to provide rehabilitation therapy services to
non-affiliated long-term care facilities (See Note P). As a result of this
restructuring charge, the Company's consolidated net worth as of September 30,
1999 (as calculated for purposes of this requirement) had fallen below the
required level. The Company anticipated that its net worth would continue to be
below the required level at December 31, 1999, as a result of which the Company
would have been in default under each of the leases and could have faced the
loss of these operations. Such default could also have triggered cross-defaults
under the Company's other lease and debt obligations.

In December of 1999, the Company paid $5 million to the landlord of the
Cleveland Facilities and obtained an option (the "New Option") to acquire these
facilities. The Company borrowed $5 million from an affiliate of Investcorp S.A.
to fund this payment. The New Option allows the Company to exercise its right to
purchase the Cleveland Facilities as of the date of the New Option. If the
Company does not exercise the New Option by March 31, 2000, but has taken
certain steps to obtain financing for this acquisition (as detailed in the
agreement), the Company may extend its right to exercise the New Option until
June 30, 2000, with closing required prior to December 31, 2000. The New Option
provides a waiver of the net worth requirement until the earlier of the lapse of
the New Option or December 31, 2000. The Company intends to extend the New
Option through June 30, 2000 and exercise the New Option by June 30, 2000. The
Company then intends to assign its purchase rights to an affiliate of Investcorp
S.A. and enter into an operating lease of the Cleveland Facilities by December
31, 2000. The $5 million payment made to obtain the New Option will be applied
to the purchase price of the facilities, or farfeited if the acquistion is not
completed. If the Company cannot complete the refinancing of the Cleveland
Facilities by December 31, 2000, the Company would also be required to make an
additional payment of $3 million to the landlord, and the Company could
potentially face the loss of the Cleveland Facilities. Although no assurances
can be given in this regard, the Company believes that it will be able to
complete the refinancing of the Cleveland Facilities within the required time
period.

The following is a schedule of future minimum lease payments required by this
lease together with the present value of the minimum lease payments:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 5,000,000
2001 57,625,000
-----------
62,625,000
Less amount representing interest (7,925,000)
-----------
54,700,000
Less current portion (4,633,000)
-----------
Long-term portion of capital lease obligation $50,067,000
===========
</TABLE>

J. RETIREMENT PLANS

The Company maintains an employee 401(k) defined contribution plan. All
employees who have worked at least one thousand hours and have completed one
year of continuous service are eligible to participate in the plan. The plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. Employee contributions to this plan may be matched at the discretion of
the Company. The Company contributed $365,000 and $475,000 to the plan in 1997
and 1998. There were no contributions made to the plan in 1999.

In September 1995, the Company established a Supplemental Executive Retirement
Plan (the "SERP") to provide benefits to key employees. Participants may defer
up to 25% of their compensation which is matched by the Company at a rate of 50%
(up to 10% of base salary). Vesting in the matching portion occurs in January of
the second year following the plan year in which contributions were made.

K. INCOME TAXES

As required by SFAS No. 109, the Company annually evaluates the positive and
negative evidence bearing upon the realizability of its deferred tax assets. Thc
Company has considered the recent and historical results of operations and
concluded, in accordance with the applicable accounting methods that it is more
likely than not that a certain portion of the deferred tax assets will not be
realizable. To the extent that an asset will not be realizable, a valuation
allowance is established. The tax effects of temporary differences giving rise
to deferred tax assets as of December 31,1998 and 1999 are as follows:

36
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C>
1998 1999
----------- -----------
Deferred tax assets:

Reserves ....................... $ 4,024,000 $ 2,288,000
Rental payments ................ 703,000 770,000
Interest payments .............. 1,578,000 6,007,000
Net operating loss carryforwards -- 5,778,000
Other .......................... 8,000 23,000
Valuation allowance............. -- (614,000)
----------- -----------
Total deferred tax assets ........... $ 6,313,000 $14,252,000
=========== ===========
</TABLE>

Significant components of the provision (benefit) for income taxes for the years
ended December 31, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
<S> <C> <C>
1998 1999
---- ----
Current:

Federal $ (781,000) $ (2,784,000)
State (146,000) 418,000
------------ --------------
Total current (927,000) (2,366,000)
------------ --------------

Deferred:
Federal (3,447,000) (6,277,000)
State (646,000) (1,661,000)
------------ ---------------
Total deferred (4,093,000) (7,938,000)
------------ ---------------

Total income tax expense (benefit) $ (5,020,000) $ (10,304,000)
============= ==============
</TABLE>

The reconciliation of income tax computed at statutory rates to income tax
(benefit) for the years ended December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----

<S> <C> <C> <C> <C>
Statutory rate $(10,222,000) (35.0)% $ (9,767,000) (35.0)%
State income tax, net of federal benefit (515,000) (1.8) (808,000) (2.9)
Permanent differences 59,000 0.2 41,000 0.2
Net operating loss - rate differential - - 230,000 0.8
Nondeductible merger costs - permanent 5,658,000 19.4 - -
-------------- ------ ------------ --------

$ (5,020,000) (17.2)% $(10,304,000) (36.9)%
============== ======= ============ ========
</TABLE>

L. CAPITAL STOCK

Common Stock

On August 11, 1998, as a result of the Merger, the Company authorized the
issuance of 500,000 shares of preferred stock with a par value of $.01 per share
(the "Preferred Stock") and 19,000,000 shares (comprised of five classes) of
common stock, each with a par value of $.01 per share, consisting of Harborside
Class A Common Stock, Harborside Class B Common Stock, Harborside Class C Common
Stock, Harborside Class D Common Stock and Common Stock (collectively
"Harborside Common Stock").

The numbers of shares of Harborside Common Stock authorized and outstanding as
of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Title Authorized Shares Outstanding Shares

Harborside Class A Common Stock .............. 1,200,000 661,332
Harborside Class B Common Stock .............. 6,700,000 5,940,000
Harborside Class C Common Stock .............. 1,580,000 640,000
Harborside Class D Common Stock .............. 20,000 20,000
Common Stock ................................. 9,500,000 --
---------- ----------
Total ................................... 19,000,000 7,261,332
========== ==========
</TABLE>

Holders of shares of Harborside Class A Common Stock and Common Stock are
entitled to one vote per share on all matters as to which stockholders may be
entitled to vote pursuant to Delaware General Corporate Law ("the DGCL").
Holders of shares of Harborside Class D Common Stock are entitled to 330 votes
per share on all matters as to which stockholders may be entitled to vote
pursuant to the DGCL. This number of votes per share results in holders of
Harborside Class D Common Stock, as of December 31, 1999, being entitled in the
aggregate to a number of votes equal to the total number of outstanding shares
of Harborside Class B Common Stock, Harborside Class C Common Stock and
Harborside Class D Common Stock as of December 31, 1999. Holders of Harborside
Class B Common Stock or Harborside Class C Common Stock will not have any voting
rights, except that the holders of the Harborside Class B Common Stock and
Harborside Class C Common Stock will have the right to vote as a class to the
extent required under the laws of the State of Delaware.

37
<PAGE>

Upon the occurrence of a sale of 100% of the outstanding equity securities or
substantially all of the assets of the Company, a merger as a result of which
the ownership of the Harborside Common Stock is changed to the extent of 100%,
or a public offering of any equity securities of the Company, each share of
Harborside Class A Common Stock, Harborside Class B Common Stock, Harborside
Class C Common Stock and Harborside Class D Common Stock will convert into one
share of Common Stock of the Company.

Preferred Stock

In connection with the Merger on August 11, 1998, the Company issued 40,000
shares of 13.5% Exchangeable Preferred Stock (the "Preferred Stock"). The
holders of the Preferred Stock are entitled to receive quarterly dividend
payments in arrears beginning November 1, 1998. Dividends are payable in cash or
in additional shares of Preferred Stock, at the option of the Company, until
August 1, 2003. After August 1, 2003, dividends may be paid only in cash. During
the years ended December 31, 1998 and 1999, all dividends except for fractional
shares amounting to $3,000 and $20,000, respectively, were paid in additional
shares. The Preferred Stock may be redeemed for cash by the Company, in whole or
in part, at the option of the Company, in accordance with a predetermined
redemption premium schedule which begins on August 1, 2003 at 106.75% of the
liquidation preference of the Preferred Stock at the date of redemption and
which declines to 100% on August 1, 2006. In addition, at any time prior to
August 1, 2001 the Company may redeem up to 35% of the Preferred Stock at a
redemption price equal to 113.5% of the liquidation preference of the Preferred
Stock at the date of redemption with the proceeds of a public offering of common
stock, provided that the redemption occurs within 60 days of the closing of such
offering. At any time prior to August 1, 2003, the Preferred Stock may be
redeemed by the Company, in whole but not in part, upon the occurrence of a
change in control (as defined) and in accordance with prescribed procedures and
the payment of a premium based upon a formula. The Preferred Stock is
exchangeable in whole but not in part, on any dividend date, at the option of
the Company, into 13.5% Exchange Debentures due in 2010 subject to such exchange
being permitted by (1) the terms of the Indenture and (2) the terms of the
Company's Credit Facility. The Company is required to redeem the Preferred Stock
in whole on August 1, 2010.

Upon any voluntary or involuntary liquidation of the Company, holders of the
Preferred Stock will be entitled to be paid out of the assets available for
distribution, the liquidation preference per share plus an amount equal to all
accumulated and unpaid dividends, before any distribution is made to the holders
of Harborside Common Stock. Holders of the Preferred Stock have no voting rights
except those provided by law and as set forth in the Certificate of Designation
(the "Certificate"). The Certificate provides that if the Company fails to meet
certain obligations associated with the Preferred Stock, then the Board of
Directors shall be adjusted to allow the holders of a majority of the then
outstanding Preferred Stock, voting separately as a class, to elect two
directors. Voting rights associated with the failure to meet Preferred Stock
obligations will continue until either the obligation is satisfied or a majority
of the holders of the then outstanding Preferred Stock waive the satisfaction of
the obligation. The Certificate also contains certain restrictive covenants that
limit the Company's restricted subsidiaries from making certain payments or
investments and which limit the Company's ability to incur debt, issue preferred
stock, merge or dispose of substantially all of its assets.

As of December 31, 1999, Preferred Stock dividends accrete based on the
following schedule:

2000 $6,857,000
2001 7,830,000
2002 8,942,000
2003 5,782,000

Earnings (Loss) per Common Share Computation

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS No. 128), "Earnings Per Share", which
revised the methodology of calculating earnings per share. The Company adopted
SFAS No. 128 in the fourth quarter of 1997. All earnings (loss) per common share
amounts for all periods have been presented in accordance with, and where
appropriate have been restated to conform with, the requirements of SFAS No.
128.

Basic earnings (loss) per common share is computed by dividing net income
(loss) less Preferred Stock dividends by the weighted average number of common
shares outstanding. The computation of diluted earnings per share is similar to
that of basic earnings per share except that the number of common shares is
increased to reflect the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. Dilutive
potential common shares for the Company consist of shares issuable upon exercise
of the Company's stock options.

38
<PAGE>

The following table sets forth the computation of basic and diluted earnings
(loss) per common share for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1998 1999
------------ ------------ ------------
Numerator:

Net income (loss) .................................................. $ 6,803,000 $(24,187,000) $(17,601,000)
Preferred Stock dividends .......................................... -- (2,296,000) (6,004,000)
------------ ------------ ------------
Income (loss) available for common shares .......................... $ 6,803,000 $(26,483,000) $(23,605,000)
============ ============ ============

Denominator:
Denominator for basic earnings (loss) per common share -
weighted average shares ............................................ 8,037,026 7,742,000 7,261,000
Effect of dilutive securities - employee stock options ............. 101,767 -- --
------------ ------------ ------------

Denominator for diluted earnings (loss) per common share -
Adjusted weighted - average shares and assumed conversions 8,138,793 7,742,000 7,261,000
============ ============ ============

Basic earnings (loss) per common share ............................. $ 0.85 $ (3.42) $ (3.25)
Diluted earnings (loss) per common share ........................... $ 0.84 $ (3.42) $ (3.25)
</TABLE>

For the years ended December 31, 1998 and 1999, 675,499 and 637,226,
respectively, of stock options were not included in the computation of diluted
EPS because to do so would have been antidilutive.

Stock Option Plans

During 1996, the Company established two stock option plans, the 1996 Stock
Option Plan for Non-employee Directors (the "Director Plan") and the 1996
Long-Term Stock Incentive Plan (the "Stock Plan"). Directors of the Company who
were not employees, or affiliates of the Company, were eligible to participate
in the Director Plan. On the date of the IPO, each of the four non-employee
directors was granted options to acquire 15,000 shares of the Company's common
stock at the IPO price. On January 1 of each year, each non-employee director
received an additional grant for 3,500 shares at the fair market value on the
date of grant. Options issued under the Director Plan became exercisable on the
first anniversary of the date of grant and terminated upon the earlier of ten
years from date of grant or one year from date of termination as a director.
Through the Directors Retainer Fee Plan, non-employee directors of the Company
could also elect to receive all or a portion of their director fees in shares of
the Company's common stock. The Stock Plan was administered by the Stock Plan
Committee of the Board of Directors which was composed of outside directors who
were not eligible to participate in this plan. The Stock Plan authorized the
issuance of non-qualified stock options, incentive stock options, stock
appreciation rights, restricted stock and other stock-based awards. Options
granted during the years ended December 31, 1996 and 1997, were granted with
exercise prices equal to or greater than the fair market value of the stock on
the date of grant. Options granted under the stock plan during 1996 and 1997
vested over a three-year period and had a maximum term of ten years. A maximum
of 800,000 shares of common stock were reserved for issuance in connection with
these plans.

In connection with the Merger, all holders of options issued through the
Director Plan and the Stock Plan had the right to retain their options or to
have their options converted into cash at $25.00 per underlying share less the
applicable exercise price (and taxes required to be withheld by the Company).
Holders of options representing options to purchase 109,994 shares of stock
retained their options while the remainder (representing 648,923 options)
exercised their right to convert their options into cash. The Company recognized
a compensation charge of $8,011,066 in connection with the exercise of these
options into cash. This charge was included as part of the Merger Costs recorded
by the Company in 1998 (See Note B).

In connection with the Merger, the Company adopted the Harborside Healthcare
Corporation Stock Incentive Plan (the "Stock Option Plan"). The Stock Option
Plan is administered by the Board of Directors of the Company. The Board of
Directors designates which employees of the Company will be eligible to receive
awards under the Stock Option Plan, and the amount, timing, and other terms and
conditions applicable to such awards. Options will expire on the date determined
by the Board of Directors, which will not be later than 30 days after the
seventh anniversary of the grant date. Optionees will have certain rights to put
to the Company, and the Company will have certain rights to call from the
optionee, vested stock options upon termination of the optionee's employment
with the Company prior to an initial public offering. All options granted under
the Stock Option Plan during 1998 were granted with an exercise price equal to
$25.00, equal to the fair market value of the stock on the date of grant.
Options granted under the Stock Option Plan during 1998 vest at the end of a
seven year period or earlier if certain financial performance criteria are met.
In the case of a public offering of the Company's common stock, unvested options
as of the date of such a public offering would continue to vest ratably over a
three year period. A maximum of 806,815 shares have been reserved for issuance
in connection with the Stock Option Plan.

39
<PAGE>

Information with respect to options granted under the Director Plan, the Stock
Plan and the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options Outstanding: Number Exercise Price Weighted-Average
of Shares Per Share Exercise Price

Balance at December 31, 1996 499,000 $ 8.15 - $11.75 $11.14
- --------------------------------------------------------------------------------
Granted 227,500 $ 11.69 - $18.69 $12.66
Exercised (8,665) $ 11.75 $11.75
Cancelled (52,334) $ 11.75 - $12.00 $11.80
- --------------------------------------------------------------------------------
Balance at December 31, 1997 665,501 $ 8.15 - $18.69 $11.59
Granted 704,246 $ 19.50 - $25.00 $21.41
Exercised (651,422) $ 8.15 - $21.69 $12.87
Cancelled (42,826) $ 11.75 - $25.00 $23.35
Balance at December 31, 1998 675,499 $ 8.15 - $25.00 $23.06
- --------------------------------------------------------------------------------
Granted - - -
================================================================================
Exercised - - -
Cancelled (38,273) $ 25.00 $25.00
================================================================================
Balance at December 31, 1999 637,226 $ 8.15 - $25.00 $22.94
================================================================================
</TABLE>

As of December 31, 1996 no options to purchase shares of the Company's common
stock were exercisable. As of December 31, 1997, there were 187,000 exercisable
options at a weighted-average exercise price of $11.20. As of December 31, 1998
and 1999 there were 109,994 exercisable options at a weighted-average exercise
price of $13.07.

In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company has
adopted the disclosure provisions of SFAS No. 123, and has applied Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates as calculated
in accordance with SFAS No. 123, the Company's unaudited pro forma net income
and pro forma net income per share for the years ended December 31, 1997, 1998
and 1999 would have been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1997 1998 1998 1999 1999
---- ---- ---- ---- ---- ----
Earnings Earnings (loss) Earnings (loss)
Earnings Available Earnings (loss) Available Earnings (loss) Available
Available for Per Common Available for Per Common Available for Per Common
Common Shares Share Diluted Common Shares Share Diluted Common Shares Share Diluted
------------- ------------- ------------- ------------- ------------- -------------

As
Reported $6,803,000 $ 0.84 $(26,483,000) $(3.42) $(23,605,000) $(3.25)

Pro
Forma $5,733,000 $ 0.70 $(29,300,000) $(3.78) $(24,027,000) $(3.31)
</TABLE>

The weighted average fair value of options granted was $5.63 and $6.28 during
1997 and 1998, respectively. The fair value for each stock option is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: an expected life of five years, no
dividend yield, and a risk-free interest rate of 6.2% and 5.4% for 1997 and 1998
respectively. Expected volatility of 40% and 0% (except for 109,994 in options
held by senior management; such options have an assumed volatility of 40%) was
assumed for the years ended December 31, 1997 and 1998, respectively.

M. CONTINGENCIES

The Company is involved in legal actions and claims in the ordinary course of
its business. It is the opinion of management, based on the advice of legal
counsel, that such litigation and claims will be resolved without material
effect on the Company's consolidated financial position, results of operations
or liquidity.

The Company self-insures for health benefits provided to a majority of its
employees. The Company maintains stop-loss insurance such that the Company's
liability for losses is limited. The Company recognizes an expense for estimated
health benefit claims incurred but not reported at the end of each year.

The Company self-insures for most workers' compensation claims. The Company
maintains stop-loss insurance such that the Company's liability for losses is
limited. The Company accrues for estimated workers' compensation claims incurred
but not reported at the end of each year.

The Company owns a 75% interest in a partnership which owns one facility. The
Company accounts for its investment in this partnership using the equity method.
The Company has guaranteed a loan of approximately $6,400,000 made to this
partnership to refinance a loan which funded the construction of the facility
and provided working capital. The loan is also collateralized by additional
collateral pledged by the non-affiliated partner. The Partnership agreement
states that each partner will contribute an amount in respect of any liability
incurred by a partner in connection with a guarantee of the partnership's debt,
so that partners each bear their proportionate share of any liability based on
their percentage ownership of the partnership.

40
<PAGE>

N. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The methods and assumptions used to estimate the fair value of each class of
financial instruments, for those instruments for which it is practicable to
estimate that value, and the estimated fair values of the financial instruments
are as follows:

Cash and Cash Equivalents

The carrying amount approximates fair value because of the short effective
maturity of these instruments.

Note Receivable

The carrying value of the note receivable approximates its fair value at
December 31, 1998 and 1999, based on the yield of the note and the present value
of expected cash flows.

Long-term Debt

The fair value of the Company's fixed rate long-term debt is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. At
December 31, 1999, the fair market value of the Company's Senior Subordinated
Debt was approximately $50,150,000. The book value of the Company's Senior
Subordinated Debt was $115,847,000. The Company estimates that the fair value of
its remaining fixed rate debt approximates its fair value.

O. RELATED PARTY TRANSACTIONS

Until December 31, 1998, a former affiliate of the Company provided office
space, legal, tax, data processing and other administrative services to the
Company in return for a monthly fee. Total service charges under this
arrangement were $708,000 and $1,291,000, for the years ended December 31, 1997
and 1998, respectively. Beginning January 1, 1999, the former affiliate provided
only data processing and tax services to the Company. Total service charges
under this arrangement were $1,173,000 in 1999.

At the time of the Merger, Investcorp International Inc. received a $6,000,000
management advisory and consulting service fee which is being expensed on a
straight line basis over the life of the related five year agreement. The
expense recognized by the Company in connection with this management agreement
during the years ended December 31, 1998 and 1999 was $500,000 and $1,200,000,
respectively. As of December 31, 1999, $1,200,000 of the unamortized fee is
classified in "Prepaid and other expenses" while $3,100,000 is classified as
"Other assets, net".

In December 1999, an affiliate of Investcorp S.A., provided the Company with
$5,000,000 in financing under a credit agreement. The funds were provided for
purposes of making an acquisition deposit on certain facilities currently
financed through a capital lease (See Note I). The loan is payable one year
after its issuance or earlier (as stipulated in the agreement). Interest is paid
quarterly at current market rates ("Eurodollar base rate").

As of December 31, 1998 and 1999, the net receivable due from Bowie, L.P. was
approximately $1.2 million and $2.6 million, respectively.

P. RESTRUCTURING COSTS

During the third quarter of 1999, the Company terminated its contracts to
provide rehabilitation therapy services to non-affiliated long-term care
facilities. The Company, through a wholly-owned subsidiary, had provided
physical, speech and occupational services to non-affiliated skilled nursing
facilities since 1995. Significant changes in the contract therapy business,
primarily related to reductions in Medicare reimbursement for therapy services
caused by the Balanced Budget Act of 1997 led to this decision. The Company
continues to provide rehabilitation therapy services to nursing facilities which
it owns.

The Company's therapy services restructuring plan required the termination of
approximately sixty rehabilitation therapy services employees and the closure of
two regional offices. During the third quarter of 1999, the Company recorded
restructuring charges of approximately $5.7 million under this plan, most of
which were non-cash in nature. The restructuring charge consisted of
approximately $2.5 million of uncollectible accounts receivable, $1.5 million of
unamortized goodwill, $0.7 million of employee costs and $1.0 million due to the
write-off of other assets. As of December 31, 1999, the Company's restructuring
reserve was approximately $0.5 million.

The components of the restructuring reserve consist of the following at
December 31, 1999:
<TABLE>
<CAPTION>

<S> <C> <C> <C>
Cash/Non-cash Charge Activity Liability

Employee costs ............................... cash $ 700,000 $ (418,000) $ 282,000
Other assets ................................. non-cash 1,045,000 (831,000) 214,000
Unamortized goodwill ......................... non-cash 1,517,000 (1,517,000) --
Accounts receivable .......................... non-cash 2,483,000 (2,483,000) --
----------- ----------- -----------
$ 5,745,000 $(5,249,000) $ 496,000
=========== =========== ===========
</TABLE>

41
<PAGE>

Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Certain of the Company's subsidiaries are precluded from guaranteeing the debt
of the parent company (the "Non-Guarantors"), based on current agreements in
effect. The Company's remaining subsidiaries (the "Guarantors") are not
restricted from serving as guarantors of the parent company debt. The Guarantors
are comprised of Harborside Healthcare Limited Partnership, Belmont Nursing
Center Corp., Orchard Ridge Nursing Center Corp., Oakhurst Manor Nursing Center
Corp., Riverside Retirement Limited Partnership, Harborside Toledo Limited
Partnership, Harborside Connecticut Limited Partnership, Harborside of Florida
Limited Partnership, Harborside of Ohio Limited Partnership, Harborside
Healthcare Baltimore Limited Partnership, Harborside of Cleveland Limited
Partnership, Harborside of Dayton Limited Partnership, Harborside Massachusetts
Limited Partnership, Harborside of Rhode Island Limited Partnership, Harborside
North Toledo Limited Partnership, Harborside Healthcare Advisors Limited
Partnership, Harborside Toledo Corp., KHI Corporation, Harborside Danbury
Limited Partnership, Harborside Acquisition Limited Partnership V, Harborside
Acquisition Limited Partnership VI, Harborside Acquisition Limited Partnership
VII, Harborside Acquisition Limited Partnership VIII, Harborside Acquisition
Limited Partnership IX, Harborside Acquisition Limited Partnership X, Sailors,
Inc., New Jersey Harborside Corp., Bridgewater Assisted Living Limited
Partnership, Maryland Harborside Corp., Harborside Homecare Limited Partnership,
Harborside Rehabilitation Limited Partnership, Harborside Healthcare Network
Limited Partnership and Harborside Health I Corporation.

The information which follows presents the condensed consolidating financial
position as of December 31, 1998 and 1999; the condensed consolidating results
of operations for the years ended December 31, 1997, 1998 and 1999; and the
condensed consolidating cash flows for the years ended December 31, 1997, 1998
and 1999 of (a) the parent company only ("the Parent"), (b) the combined
Guarantors, (c) the combined Non-Guarantors, (d) eliminating entries and (e) the
Company on a consolidated basis.

42
<PAGE>

Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31,1998
(dollars in thousands)
<TABLE>
<CAPTION>

Parent Guarantors Non-Guarantor Elimination Consolidated
--------- ---------- ------------- ----------- ------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ....................... $ 51 $ 99 $ 746 $ - $ 896
Receivables, net of allowance ................... -- 36,485 15,733 (2,272) 49,946
Intercompany receivable ......................... 116,555 -- -- (116,555) --
Prepaid expenses and other ...................... 1,268 7,291 2,804 (429) 10,934
Prepaid income taxes ............................ 3,873 -- -- -- 3,873
Deferred income taxes ........................... 2,150 1,934 -- -- 4,084
--------- --------- --------- --------- ---------
Total current assets ............................... 123,897 45,809 19,283 (119,256) 69,733

Restricted cash .................................... -- 2,162 472 (524) 2,110
Investments in limited partnerships ................ 15,584 -- 4,044 (19,628) --
Property and equipment, net ........................ -- 142,383 18,595 (474) 160,504
Deferred financing and other
non-current assets, net ........................... 10,532 6,176 1,642 (177) 18,173
Other assets, net .................................. 4,300 -- -- -- 4,300
Note receivable .................................... -- 7,487 -- -- 7,487
Deferred income taxes .............................. 71 2,158 -- -- 2,229
--------- --------- --------- --------- ---------
Total assets ....................................... $ 154,384 $ 206,175 $ 44,036 $(140,059) $ 264,536
========= ========= ========= ========= =========

LIABILITIES
Current liabilities:
Current maturities of long-term debt ............ $ - $ 22 $ 185 $ -- $ 207
Current portion of capital lease
obligation ...................................... -- 4,278 -- -- 4,278
Accounts payable ................................ -- 5,010 3,159 (768) 7,401
Intercompany payable ............................ -- 91,467 8,923 (100,390) --
Employee compensation and benefits .............. -- 9,853 3,367 -- 13,220
Other accrued liabilities ....................... 3,254 3,306 925 -- 7,485
Accrued interest ................................ 1,385 3,260 -- (4,583) 62
Current portion of deferred income .............. -- -- -- 677 677
--------- --------- --------- --------- ---------
Total current liabilities .......................... 4,639 117,196 16,559 (105,064) 33,330
Long-term portion of deferred income ............... -- 1,202 2,579 (677) 3,104
Long-term debt ..................................... 112,243 1,538 16,109 4,583 134,473
Long-term portion of capital lease obligation ..... -- 54,348 -- (3,095) 51,253
--------- --------- --------- --------- ---------
Total liabilities .................................. 116,882 174,284 35,247 (104,253) 222,160
--------- --------- --------- --------- ---------

Exchangeable preferred stock, redeemable,
$.01 par value with a liquidation value of
$1,000 per share; 500,000 shares authorized;
42,293 issued and outstanding ..................... 42,293 -- -- -- 42,293
--------- --------- --------- --------- ---------

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 19,000,000
shares authorized, 7,261,332 shares issued
and outstanding .................................... 146 2,569 3,885 (6,454) 146
Additional paid-in capital ......................... 204,381 -- -- 226 204,607
Treasury stock ..................................... (183,746) -- -- -- (183,746)
Retained earnings (deficit) ........................ (25,572) 4,567 (2,170) 2,251 (20,924)
Partners' equity ................................... -- 24,755 7,074 (31,829) --
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ............... (4,791) 31,891 8,789 (35,806) 83
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ................................... $ 154,384 $ 206,175 $ 44,036 $(140,059) $ 264,536
========= ========= ========= ========= =========
</TABLE>

43
<PAGE>

Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31,1999
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantors Non-Guarantors Elimination Consolidated
--------- ---------- -------------- ----------- ------------
ASSETS
Current assets:

Cash and cash equivalents ....................... $ -- $ 355 $ 1,031 $ -- $ 1,386
Receivables, net of allowance ................... -- 34,423 15,745 -- 50,168
Intercompany receivable ......................... 137,614 -- -- (137,614) --
Prepaid expenses and other ...................... 3,590 14,096 2,254 -- 19,940
Prepaid income taxes ............................ 2,608 -- -- -- 2,608
Deferred income taxes ........................... 2,150 250 -- -- 2,400
--------- --------- --------- --------- ---------
Total current assets ............................... 145,962 49,124 19,030 (137,614) 76,502

Restricted cash .................................... -- 1,826 594 -- 2,420
Investments in limited partnerships ................ 15,584 -- 4,044 (19,628) --
Property and equipment, net ........................ -- 146,976 19,350 -- 166,326
Deferred financing and other
non-current assets, net ........................... 10,749 3,416 1,381 -- 15,546
Other assets, net .................................. 3,100 -- -- -- 3,100
Note receivable .................................... -- 7,487 -- -- 7,487
Deferred income taxes .............................. 71 11,781 -- -- 11,852
--------- --------- --------- --------- ---------
Total assets ....................................... $ 175,466 $ 220,610 $ 44,399 $(157,242) $ 283,233
========= ========= ========= ========= =========

LIABILITIES
Current liabilities:
Current maturities of long-term debt .......... $ -- $ 22 $ 205 $ -- $ 227
Current portion of capital lease
obligation .................................... -- 4,633 -- -- 4,633
Note payable to affiliate ....................... 5,000 -- -- -- 5,000
Accounts payable ................................ -- 6,879 2,449 -- 9,328
Intercompany payable ............................ -- 109,511 11,766 (121,277) --
Employee compensation and benefits .............. -- 10,687 3,334 -- 14,021
Other accrued liabilities ....................... -- 4,663 845 -- 5,508
Accrued interest ................................ 4,342 12,584 -- (16,354) 572
Current portion of deferred income .............. -- -- -- 677 677
--------- --------- --------- --------- ---------
Total current liabilities .......................... 9,342 148,979 18,599 (136,954) 39,966
Long-term portion of deferred income ............... -- 893 2,211 (677) 2,427
Long-term debt ..................................... 132,243 1,517 15,904 16,354 166,018
.Long-term portion of capital lease obligation .... -- 50,067 -- -- 50,067
--------- --------- --------- --------- ---------
Total liabilities .................................. 141,585 201,456 36,714 (121,277) 258,478
--------- --------- --------- --------- ---------

Exchangeable preferred stock, redeemable,
$.01 par value with a liquidation value of
$1,000 per share; 500,000 shares authorized;
48,277 issued and outstanding ..................... 48,277 -- -- -- 48,277
--------- --------- --------- --------- ---------

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 19,000,000
shares authorized, 7,261,332 shares issued
and outstanding .................................. 146 2,569 3,885 (6,454) 146
Additional paid-in capital ......................... 198,377 -- -- 226 198,603
Treasury stock ..................................... (183,746) -- -- -- (183,746)
Retained earnings (deficit) ........................ (29,173) (8,170) (3,274) 2,092 (38,525)
Partners' equity ................................... -- 24,755 7,074 (31,829) --
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ............... (14,396) 19,154 7,685 (35,965) (23,522)
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ................................... $ 175,466 $ 220,610 $ 44,399 $(157,242) $ 283,233
========= ========= ========= ========= =========
</TABLE>

44
<PAGE>

Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the year ended December 31, 1997
(dollars in thousands)

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantors Non-Guarantors Elimination Consolidated

Total net revenues ................................. $ -- $152,476 $101,480 $(32,179) $221,777
-------- -------- -------- -------- --------

Expenses:
Facility operating .............................. -- 113,686 83,595 (20,877) 176,404
General and administrative ...................... 612 9,499 37 805 10,953
Service charges paid to former affiliate ........ -- 708 -- -- 708
Depreciation and amortization ................... 70 2,599 1,405 -- 4,074
Facility rent ................................... -- 4,209 8,237 -- 12,446
Management fees paid to affiliates .............. -- 6,039 6,085 (12,124) --
-------- -------- -------- -------- --------
Total expenses ..................................... 682 136,740 99,359 (32,196) 204,585
-------- -------- -------- -------- --------

Income (loss) from operations ...................... (682) 15,736 2,121 17 17,192

Other:
Interest expense, net ........................... (108) 5,488 473 -- 5,853
Other expense ................................... -- 189 -- -- 189
-------- -------- -------- -------- --------

Income (loss) before income taxes .................. (574) 10,059 1,648 17 11,150
Income tax expense (benefit) ....................... (224) 3,927 644 -- 4,347
-------- -------- -------- -------- --------
Net income (loss) .................................. $ (350) $ 6,132 $ 1,004 $ 17 $ 6,803
======== ======== ======== ======== ========
</TABLE>

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the year ended December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantors Non-Guarantors Elimination Consolidated

Total net revenues ................................. $ -- $ 234,672 $ 104,280 $ (27,908) $ 311,044
--------- --------- --------- --------- ---------

Expenses:
Facility operating .............................. -- 187,849 86,059 (27,908) 246,000
General and administrative ...................... 150 15,272 -- -- 15,422
Service charges paid to former affiliate ........ -- 1,291 -- -- 1,291
Amortization of prepaid management fee .......... 500 -- -- -- 500
Depreciation and amortization ................... 624 4,150 1,576 -- 6,350
Facility rent ................................... -- 14,110 8,302 -- 22,412
Merger costs .................................... 27,047 9,874 251 -- 37,172
Management fees paid to affiliates .............. -- (6,203) 6,203 -- --
--------- --------- --------- --------- ---------
Total expenses ..................................... 28,321 226,343 102,391 (27,908) 329,147
--------- --------- --------- --------- ---------

Income (loss) from operations ..................... (28,321) 8,329 1,889 -- (18,103)

Other:
Interest expense, net ........................... 2,015 7,687 1,569 -- 11,271
Other income .................................... -- -- -- (167) (167)
--------- --------- --------- --------- ---------

Income (loss) before income taxes .................. (30,336) 642 320 167 (29,207)
Income tax expense (benefit) ....................... (5,101) 250 223 (392) (5,020)
--------- --------- --------- --------- ---------

Net income (loss) .................................. $ (25,235) $ 392 $ 97 $ 559 $ (24,187)
========= ========= ========= ========= =========
</TABLE>

45
<PAGE>

Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the year ended December 31, 1999
(dollars in thousands)

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantors Non-GuarantorsElimination Consolidated

Total net revenues ................................. $ 24 $ 217,818 $ 96,498 $ (13,725) $ 300,615
--------- --------- --------- --------- ---------

Expenses:
Facility operating .............................. -- 181,995 80,525 (13,725) 248,795
General and administrative ...................... 65 17,743 -- -- 17,808
Service charges paid to former affiliate ........ -- 1,173 -- -- 1,173
Amortization of prepaid management fee .......... 1,200 -- -- -- 1,200
Depreciation and amortization ................... 1,718 6,720 1,811 -- 10,249
Facility rent ................................... -- 13,890 8,504 -- 22,394
Restructuring costs ............................. -- 5,745 -- -- 5,745
Management fees paid to affiliates .............. -- (5,757) 5,757 -- --
--------- --------- --------- --------- ---------
Total expenses ..................................... 2,983 221,509 96,597 (13,725) 307,364
--------- --------- --------- --------- ---------

Loss from operations .............................. (2,959) (3,691) (99) -- (6,749)

Other:
Interest expense, net ........................... 2,945 16,241 1,709 -- 20,895
Other expense ................................... -- -- -- 261 261
--------- --------- --------- --------- ---------

Loss before income taxes ........................... (5,904) (19,932) (1,808) (261) (27,905)
Income tax benefit ................................. (2,303) (7,195) (704) (102) (10,304)
--------- --------- --------- --------- ---------

Net loss ........................................... $ (3,601) $ (12,737) $ (1,104) $ (159) $ (17,601)
========= ========= ========= ========= =========
</TABLE>

46
<PAGE>

Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantors Non-Guarantors Elimination Consolidated
Operating activities:

Net cash provided (used) by operating activities ... $ 455 $ 6,102 $ (1,135) $ 199 $ 5,621
-------- -------- -------- -------- --------

Investing activities:
Additions to property and equipment ........... -- (3,543) (1,731) -- (5,274)
Additions to deferred financing and
other non-current assets ..................... (341) (5,884) (20) (56) (6,301)
Receipt of note receivable .................... -- (7,487) -- -- (7,487)
Transfers to restricted cash, net ............. -- (1,588) (34) (172) (1,794)
Repayment of demand note from limited
partnership ................................ -- 1,369 -- -- 1,369
-------- -------- -------- -------- --------
Net cash (used) by investing activities ........... (341) (17,133) (1,785) (228) (19,487)
-------- -------- -------- -------- --------

Financing activities:
Borrowing under the revolving line of
credit ................................ -- 15,600 -- -- 15,600
Payment of long-term debt ..................... -- (22) (144) -- (166)
Principal payments of capital lease obligation -- (3,952) 8 -- (3,944)
Receipt of cash in connection with lease ...... -- 1,301 -- -- 1,301
Exercise of stock options ..................... 100 -- -- -- 100
Other ......................................... 21 -- -- (21) --
-------- -------- -------- -------- --------
Net cash provided (used) by financing activities ... 121 12,927 (136) (21) 12,891
-------- -------- -------- -------- --------

Net increase (decrease) in cash and cash equivalents 235 1,896 (3,056) (50) (975)
Cash and cash equivalents, beginning of year ....... 463 2,482 6,727 50 9,722
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year ............. $ 698 $ 4,378 $ 3,671 $ -- $ 8,747
======== ======== ======== ======== ========

Supplemental Disclosure:
Interest paid ...................................... $ -- $ 3,104 $ 267 $ -- $ 3,371
======== ======== ======== ======== ========
Income taxes paid .................................. $ 5,783 $ -- $ -- $ -- $ 5,783
======== ======== ======== ======== ========
</TABLE>

47
<PAGE>

Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Parent Guarantors Non-Guarantors Elimination Consolidated
---------- ---------- --------- --------- --------
Operating activities:

Net cash provided (used) by operating activities ...... $ (110,038) $ 77,121 $ (3,033) $ (3,497) $ (39,447)
---------- ---------- --------- --------- ---------

Investing activities:
Additions to property and equipment .............. -- (68,817) (2,591) 2,803 (68,605)
Additions to deferred financing and
other non-current assets ........................ (4,885) (8,613) 4 -- (13,494)
Transfers to restricted cash, net ................ -- 212 2,529 694 3,435
--------- ----------- --------- --------- ---------
Net cash provided (used) by investing activities ..... (4,885) (77,218) (58) 3,497 (78,664)
--------- ----------- --------- --------- ---------

Financing activities:
Borrowings under the revolving line of
credit ................................... -- 17,150 -- -- 17,150
Repaid on revolving line of credit ........... -- (20,000) -- -- (20,000)
Payment of long-term debt ........................ -- (357) 166 -- (191)
Proceeds from issuance of senior
subordinated discount notes ..................... 99,493 -- -- -- 99,493
Proceeds from issuance of exchangeable
preferred stock ............................. 40,000 -- -- -- 40,000
Purchase of treasury stock ....................... (183,746) -- -- -- (183,746)
Proceeds from sale of common stock ............... 158,500 -- -- -- 158,500
Principal payments of capital lease obligation ... -- (3,939) -- -- (3,939)
Receipt of cash in connection with lease ......... -- 2,964 -- -- 2,964
Exercise of stock options ........................ 29 -- -- -- 29
--------- ---------- --------- --------- ---------
Net cash provided (used) by financing activities ...... 114,276 (4,182) 166 -- 110,260
--------- ----------- --------- --------- ---------
Net decrease in cash and cash equivalents ............. (647) (4,279) (2,925) -- (7,851)
Cash and cash equivalents, beginning of year .......... 698 4,378 3,671 -- 8,747
--------- ----------- --------- --------- ---------
Cash and cash equivalents, end of year ................ $ 51 $ 99 $ 746 $ -- $ 896
========= =========== ========= ========= =========

Supplemental Disclosure:
Interest paid ......................................... $ 650 $ 2,480 $ 506 $ -- $ 3,636
========= ========== ========= ========= =========
Income taxes paid ..................................... $ 3,047 $ -- $ -- $ -- $ 3,047
========= ========== ========= ========= =========
Accretion of preferred dividends....................... $ 2,293 $ -- $ -- $ -- $ 2,293
========= ========== ========= ========= =========

</TABLE>

48
<PAGE>

Q. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

HARBORSIDE HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>

<S> <C> <C> <C> <C> <C>
Parent Guarantors Non-Guarantors Elimination Consolidated
Operating activities:

Net cash provided (used) by operating activities .......... $ (23,096) $ 19,958 $ 2,892 $ 998 $ 752
-------- -------- -------- -------- --------

Investing activities:
Additions to property and equipment .................. -- (10,435) (2,288) (474) (13,197)
Additions to deferred financing and
other non-current assets ............................ (1,935) (308) (12) -- (2,255)
Payment of purchase deposit -- (5,000) -- -- (5,000)
Transfers to (from) restricted cash, net ............. -- 336 (122) (524) (310)
-------- -------- -------- -------- --------
Net cash (used) by investing activities .................. (1,935) (15,407) (2,422) (998) (20,762)
-------- -------- -------- -------- --------

Financing activities:
Borrowings under the revolving line of
credit .......................................... 20,000 -- -- -- 20,000
Issuance of note payable to affiliate 5,000 -- -- -- 5,000
Payment of long-term debt ............................ -- (21) (185) -- (206)
Principal payments of capital lease obligation ....... -- (4,274) -- -- (4,274)
Dividends paid on exchangeable preferred stock (20) -- -- -- (20)
-------- -------- -------- -------- --------
Net cash provided (used) by financing activities .......... 24,980 (4,295) (185) -- 20,500
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ...... (51) 256 285 -- 490
Cash and cash equivalents, beginning of year .............. 51 99 746 -- 896
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year .................... $ -- $ 355 $ 1,031 $ -- $ 1,386
======== ======== ======== ======== ========

Supplemental Disclosure:
Interest paid ............................................. $ 834 $ 4,594 $ 483 $ -- $ 5,911
======== ======== ======== ======== ========
Income taxes paid ......................................... $ 243 $ -- $ -- $ -- $ 243
======== ======== ======== ======== ========
Accretion of preferred dividends........................... $ 5,984 $ -- $ -- $ -- $ 5,984
======== ======== ======== ======== ========
</TABLE>

49
<PAGE>

R. SUMMARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The Company's unaudited quarterly financial information follows:

Year Ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total

Total net revenues $ 47,384,000 $ 50,292,000 $ 57,964,000 $ 66,137,000 $ 221,777,000
Income from operations 3,822,000 4,069,000 4,455,000 4,846,000 17,192,000

Income before taxes 2,461,000 2,613,000 2,773,000 3,303,000 11,150,000
Income taxes 959,000 1,020,000 1,081,000 1,287,000 4,347,000
Net income 1,502,000 1,593,000 1,692,000 2,016,000 6,803,000

Earnings per common share:
Basic $ 0.19 $ 0.20 $ 0.21 $ 0.25 $ 0.85
Diluted $ 0.19 $ 0.20 $ 0.21 $ 0.24 $ 0.84
</TABLE>

Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total

Total net revenues $ 72,454,000 $ 76,186,000 $ 78,697,000 $ 83,707,000 $ 311,044,000
Income (loss) from operations 4,754,000 4,869,000 (32,786,000) 5,060,000 (18,103,000)

Income (loss) before
income taxes 3,073,000 3,276,000 (36,360,000) 804,000 (29,207,000)
Income taxes (benefit) 1,198,000 1,278,000 (7,460,000) (36,000) (5,020,000)
Net income (loss) 1,875,000 1,998,000 (28,900,000) 840,000 (24,187,000)
Preferred stock dividends - - (915,000) (1,381,000) (2,296,000)
Earnings (loss) available for
common shares 1,875,000 1,998,000 (29,815,000) (541,000) (26,483,000)

Earnings (loss) per
common share:
Basic $ 0.23 $ 0.25 $ (3.93) $ (0.07) $ (3.42)
Diluted $ 0.23 $ 0.24 $ (3.93) $ (0.07) $ (3.42)
</TABLE>

Year Ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total

Total net revenues $ 71,704,000 $ 75,016,000 $ 77,590,000 $ 76,305,000 $ 300,615,000
Income (loss) from operations (4,541,000) 347,000 (3,972,000) 1,417,000 (6,749,000)

Loss before
income taxes (9,404,000) (4,976,000) (9,241,000) (4,284,000) (27,905,000)
Income tax benefit (3,668,000) (1,940,000) (3,604,000) (1,092,000) (10,304,000)
Net loss (5,736,000) (3,036,000) (5,637,000) (3,192,000) (17,601,000)
Preferred stock dividends (1,427,000) (1,475,000) (1,525,000) (1,577,000) (6,004,000)
Loss available for
common shares (7,163,000) (4,511,000) (7,162,000) (4,769,000) (23,605,000)

Loss per
common share:
Basic and Diluted $ (0.99) $ (0.62) $ (0.99) $ (0.58) $ (3.25)
</TABLE>

50
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The Company pays no remuneration to its employees or to executives of Investcorp
for serving as directors.

The following table sets forth the names and ages of each Director of the
Company, their principal offices with the company, their term of office as a
Director and any periods during which they have served as such:

Name and Principal Offices with the Company

NAME AGE POSITION
---- --- --------
Stephen L. Guillard 50 Chairman, President, Chief Executive Officer
and Director
Damian N. Dell'Anno 40 Executive Vice President, Chief Operating Officer
and Director
William H. Stephan 43 Senior Vice President, Chief Financial Officer
and Director
Christopher J. O'Brien 41 Director
Charles J. Philippin 48 Director
Lars C. Haegg 34 Director
Edward G. Lord III 51 Director
James O. Egan 51 Director
Charles J. Marquis 57 Director

Stephen L. Guillard has served as President and Chief Executive Officer of the
Company since March 21, 1996 and of the predecessors of the Company since May
1988 and as a Director and Chairman of the Board of the Company since its
incorporation. Mr. Guillard previously served as Chairman, President and Chief
Executive Officer of Diversified Health Services ("DHS"), a long-term care
company which Mr. Guillard co-founded in 1982. DHS operated approximately 7,500
long-term care and assisted living beds in five states. Mr. Guillard has a total
of 26 years of experience in the long-term care industry and is a licensed
Nursing Home Administrator.

Damian N. Dell'Anno has served as Executive Vice President of Operations of
the Company since March 21, 1996 and its predecessors since 1994. From 1993 to
1994, he served as the head of the specialty services group for the predecessors
of the Company and was instrumental in developing the Company's rehabilitation
therapy business. From 1989 to 1993, Mr. Dell'Anno was Vice President of
Reimbursement for the predecessors of the Company. From 1988 to 1989, Mr.
Dell'Anno served as Director of Budget, Reimbursement and Cash Management for
The Mediplex Group, Inc. ("Mediplex"), a long-term care company. Mr. Dell'Anno
has a total of 16 years of experience in the long-term care industry.

William H. Stephan has served as Senior Vice President and Chief Financial
Officer since March 21, 1996 and its predecessors since joining the Company in
1994. From 1986 to 1994, Mr. Stephan was a Manager in the health care practice
of Coopers & Lybrand LLP. His clients there included long-term care facilities,
continuing care retirement centers, physician practices and acute care
hospitals. Mr. Stephan is a Certified Public Accountant and a member of the
Healthcare Financial Management Association.

Christopher J. O'Brien has been an executive of Investcorp, its predecessor or
one or more of its wholly-owned subsidiaries since December 1993. Prior to
joining Investcorp, he was a Managing Director of Mancuso & Company, a private
New York-based merchant bank. He is a director of Falcon Building Products,
Inc., Simmons Holdings, Inc., Star Markets Holdings, Inc., CSK Auto Corporation
and The William Carter Company.

Charles J. Philippin has been a member of the Management Committee of
Investcorp since July 1994. From 1982 until he joined Investcorp, Mr. Philippin
was a partner in the firm of Coopers & Lybrand LLP, responsible for the Firm's
U.S. mergers & acquisitions business. Mr. Philippin is a director of Burnham,
Carvel Corporation, CSK Auto Corporation., Falcon Building Products, Inc.,
Harborside Healthcare, Saks Fifth Avenue, Stratus Computer, Star Markets
Company, Inc., Werner Holding Co., and The William Carter Company.

Lars C. Haegg has been an executive of Investcorp, its predecessor or one or
more of its wholly-owned subsidiaries since 1998. Prior to joining Investcorp,
Mr. Haegg worked with McKinsey & Company where he was responsible for leading
consulting teams for media, retail and electronics clients. Mr. Haegg previously
worked with Strategic Planning Associates (now Mercer Management Consulting) in
the telecommunications and consumer goods sectors. Mr. Haegg holds a Master of
Businees Administration degree from Harvard Business School and Bachelor of Arts
degree from the University of Texas at Austin.

Edward G. Lord joined Investcorp in 1994 as a member of the Management
Committee and is the senior partner of the Investcorp Real Estate Team. A real
estate executive for 25 years, Mr. Lord has served as a Director and Chief
Operating Officer (Tehran, Jeddah, New York) for the Kettaneh Group; a Corporate
Officer for The Mutual Life Insurance Company of New York and Managing Director
of Dean Witter Realty. His professional specialty and work experience are in the
equity investment and asset management of commercial property. Mr. Lord holds a
Master of Business Administration degree from Harvard Business School and a
Bachelor of Arts degree from Middlebury College.

51
<PAGE>

James O. Egan has been an executive of Investcorp, its predecessor or one or
more of its wholly-owned subsidiaries since January 1999. Prior to joining
Investcorp, he was employed by KPMG, an accounting firm, as a Partner; Riverwood
International, a paperboard, packaging and machinery company, as Senior Vice
President and Chief Financial Officer; and Coopers & Lybrand LLP, an accounting
firm, as a Partner. He is a director of Falcon Building Products, Inc., Werner
Holding Co. (DE), Inc. and Stratus Computer System International.

Charles K. Marquis has been an executive of Investcorp or one or more of its
wholly-owned subsidiaries since January 1999. Prior to joining Investcorp, Mr.
Marquis was a partner in the law firm of Gibson, Dunn & Crutcher LLP. Mr.
Marquis is a director of CSK Auto Corporation, Stratus Computer and Tiffany &
Co.
EXECUTIVE OFFICERS

The following table sets forth certain information with respect to the executive
officers of the Company:

NAME AGE POSITION
- ---- --- --------

Stephen L. Guillard 50 Chairman, President, Chief Executive Officer
and Director
Damian N. Dell'Anno 40 Executive Vice President, Chief Operating Officer
and Director
William H. Stephan 43 Senior Vice President, Chief Financial Officer
and Director
Bruce J. Beardsley 36 Senior Vice President of Acquisitions
Steven Raso 35 Senior Vice President of Operations

Information on Mr. Guillard, Mr. Dell'Anno and Mr. Stephan appears above.

Bruce J. Beardsley has served as Senior Vice President of Acquisitions since
March 21, 1996 and its predecessors since 1994. From 1992 to 1994, he was Vice
President of Planning and Development of the Company with responsibility for the
development of specialized services, planning and engineering. From 1990 to
1992, he was an Assistant Vice President of the Company responsible for risk
management and administrative services. From 1988 to 1990, Mr. Beardsley served
as Special Projects Manager of the Company. Prior to joining the Company in
1988, Mr. Beardsley was a commercial and residential real estate appraiser.

Steven V. Raso has served as Senior Vice President of Operations since 1998.
From 1994 to 1998, he served as Vice President of Reimbursement for the Company
and he served as Director of Reimbursement and Budgets from 1989 to 1994. In
these capacities, Mr. Raso has been responsible for various aspects of Company
Operations, including the Medicare and Medicaid reimbursement cost reporting
functions, including audits, appeals, licensing and rate determinations. Mr.
Raso also oversees the budgeting, accounts receivable and compliance departments
within the Company.

52
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Compensation Long Term Compensation
Awards Payouts
Other Securities
Annual Restricted Underlying All Other
Name and Year Salary Bonus Compen- Stock Options/ LTIP Compen-
Principal Position ($) ($) sation($)(1)Award(s) SARs # Payouts sation ($)(2)(3)
---- --------- --------- --------- --------- --------- --------- ----------------

Stephen L. Guillard 1999 345,000 0 0 0 0 0 14,440
Chairman, President 1998 348,579 300,000 1,854,500 0 184,904 0 761,419
And Chief Executive 1997 300,300 232,500 0 0 55,000 0 16,250
Officer

Damian N. Dell'Anno 1999 225,000 0 0 0 0 0 9,000
Executive Vice .... 1998 225,344 100,000 916,643 0 117,666 0 349,150
President of ...... 1997 192,115 117,000 0 0 27,000 0 7,578
Operations

Bruce J. Beardsley 1999 200,000 0 0 0 0 0 10,000
Senior Vice ....... 1998 195,227 40,000 435,370 0 80,641 0 210,195
President of ...... 1997 151,153 70,000 0 0 17,000 0 8,178
Acquisitions

William H. Stephan 1999 190,000 0 0 0 0 0 9,500
Senior Vice ....... 1998 186,230 40,000 432,505 0 80,641 0 199,007
President and ..... 1997 146,154 60,000 0 0 16,000 0 7,346
Chief Financial
Officer

Steven V. Raso .... 1999 140,000 0 0 0 0 0 7,000
Senior Vice ....... 1998 138,462 220,000 278,780 0 55,771 0 147,442
President of ...... 1997 111,153 35,000 0 0 18,000 0 5,923
Operations
</TABLE>

(1) Includes stock options exercised on August 11, 1998 in connection with the
Merger.

(2) Includes matching contributions made by the Company under its Supplemental
Executive Retirement Plan and 401(k) Plan.

(3) Includes "Change in Control" payments made and forgiveness of loans used to
purchase stock, as provided in the Employee Agreements referred to below.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END FISCALYEAR END ($)
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
---- ------------ ------------ ------------- -----------------

Stephen L. Guillard 0 0 0/160,904 0
Damian N. Dell'Anno 0 0 10,560/104,666 0
Bruce J. Beardsley 0 0 39,162/72,641 0
William H. Stephan 0 0 38,332/72,641 0
Steven V. Raso 0 0 21,940/50,771 0
</TABLE>

(1) Underlying shares are not publicly traded and are subject to repurchase by
the Company under certain circumstances at the employee's cost or at the then
current value of the underlying share, as determined by the Company's Board of
Directors upon the termination of the employee's employment with the Company.
None of these options are classified as in-the-money for purposes of this table.
The Company has not established any recent valuations for such shares.

53
<PAGE>

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Messrs. Guillard,
Dell'Anno, Stephan, Beardsley and Raso (collectively, the "Employment
Agreements"). Under the terms of the Employment Agreements, Mr. Guillard serves
as President and Chief Executive Officer of the Company and receives a minimum
base salary payable at an annual rate of $345,000, Mr. Dell'Anno serves as
Executive Vice President and Chief Operating Officer of the Company and receives
a minimum base salary payable at an annual rate of $225,000, Mr. Stephan serves
as Senior Vice President and Chief Financial Officer of the Company and receives
a minimum base salary payable at an annual rate of $190,000, Mr. Beardsley
serves as Senior Vice President of Acquisitions of the Company and receives a
minimum base salary payable at an annual rate of $200,000 and Mr. Raso serves as
Senior Vice President of Operations of the Company and receives a minimum base
salary payable at an annual rate of $140,000. The salaries of Messrs. Guillard,
Dell'Anno, Stephan, Beardsley and Raso were to be increased to $375,000,
$240,000, $200,000, $215,000 and $150,000, respectively, effective April 1,
1999. Through December 31, 1999, Messrs. Guillard, Dell'Anno, Stephan, Beardsley
and Raso elected to forgo the scheduled compensation adjustments. In January
2000, the amounts of compensation due to these individuals as a result of these
elective deferrals were paid by the Company, and as of January 1, 2000, the
salaries of Messrs. Guillard, Dell'Anno, Stephan, Beardsley, and Raso were
increased to $375,000, $270,000, $200,000, $215,000 and $170,000, respectively.
Under the terms of these Employment Agreements, the salaries of each officer
will be subject to further adjustment at the discretion of the Compensation
Committee of the Board of Directors of the Company.

The Employment Agreements also provide (i) for an annual bonus to be paid to
Messrs. Guillard, Dell'Anno, Stephan, Beardsley and Raso, part of which will be
based upon achievement of specific performance targets and part of which will be
discretionary, in maximum amounts of 120% of base salary in the case of Mr.
Guillard, 96% of base salary in the case of Mr. Dell'Anno and 78% of base salary
in the cases of Messrs. Stephan, Beardsley and Raso, and (ii) that upon
termination of employment prior to an initial public offering, the Company will
have certain rights to call from such officers shares of Harborside Common Stock
owned by such officers (including shares underlying then-exercisable stock
options), and such officers will have certain rights to put such shares to an
affiliate of Investcorp (subject to a right of first refusal in favor of the
Company).

Each officer has the right to terminate his Employment Agreement on 30 days
notice. The Company has the right to terminate an Employment Agreement without
obligation for severance only for Good Cause (as defined in the Employment
Agreements). The Employment Agreements provide for severance benefits to be paid
in the event an officer's employment is terminated if such termination is, in
the case of termination by the Company, without Good Cause, or, in the case of
termination by an officer, for Good Reason (as defined in the Employment
Agreements). If the Company terminates the employment of an officer without Good
Cause or the officer terminates his employment for Good Reason, the officer will
be entitled to receive severance benefits which will include (i) the vesting of
the pro rata portion of stock options subject to vesting in the then current
year attributable to the part of the year that the officer was employed, if the
applicable performance targets are met, (ii) the ability to exercise vested
stock options for the period ending on the earlier of the date that is 180 days
from the date his employment is terminated or the specific expiration date
stated in the options, and (iii) in the case of Mr. Guillard, for the period
ending 24 months after termination, and in the cases of Messrs. Dell'Anno,
Stephan, Beardsley and Raso, for the period ending 12 months after termination,
payment of the officer's compensation at the rate most recently in effect;
subject to such officer's compliance with noncompetition and nonsolicitation
covenants for such 12 or 24 month period, as applicable.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Effective September 15, 1995, Harborside established a Supplemental Executive
Retirement Plan ("SERP") to provide benefits for key employees of Harborside.
Participants may defer up to 25% of their salary and bonus compensation by
making contributions to the SERP. Amounts deferred by the participant are
credited to his or her account and are always fully vested. Harborside matches
50% of amounts contributed until 10% of base salary has been contributed.
Matching contributions made by Harborside become vested as of January 1 of the
second year following the end of the plan year for which contributions were
credited, provided the employee is still employed with Harborside on that date.
In addition, participants will be fully vested in such matching contribution
amounts in the case of death or permanent disability or at the discretion of
Harborside. Participants are eligible to receive benefits distributions upon
retirement or in certain pre-designated years. Participants may not receive
distributions prior to a pre-designated year, except in the case of termination,
death or disability or demonstrated financial hardship. Only amounts contributed
by the employee may be distributed because of financial hardship. Although
amounts deferred and Company matching contributions are deposited in a "rabbi
trust," they are subject to risk of loss. If Harborside becomes insolvent, the
rights of participants in the SERP would be those of an unsecured general
creditor of Harborside.

STOCK INCENTIVE PLAN

Immediately following the Merger, the Company adopted the Harborside
Healthcare Corporation Stock Incentive Plan (the "Stock Option Plan").
Initially, 806,815 shares were made available to be awarded under the Stock
Option Plan, representing approximately 10% of the shares of common stock of
Harborside outstanding immediately after the Effective Time, determined after
giving effect to the exercise of the options issued or issuable under the Stock
Option Plan. Options to purchase approximately 7.7% of such shares (determined
on such basis) were granted to members of the Company's management upon
consummation of the Merger. Options for the remaining approximately 2.3% of the
shares of capital stock of the Company (determined on such basis) were reserved
for grant to current or future officers and employees of the Company.

The Stock Option Plan is administered by the Company's Board of Directors. The
Board designates which employees of the Company are eligible to receive awards
under the Stock Option Plan, and the amount, timing and other terms and
conditions applicable to such awards. Future options will be exercisable in
accordance with the terms established by the Board and will expire on the date
determined by the Board, which will not be later than 30 days after the seventh
anniversary of the grant date. An optionee will have certain rights to put to
the Company, and the Company will have certain rights to call from the optionee,
vested stock options issued to the optionee under the Stock Option Plan upon
termination of the optionee's employment with the Company prior to an initial
public offering.

54
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

The Company is authorized to issue shares of five classes of common stock,
each with a par value of $0.01, consisting of Class A Common Stock ("Harborside
Class A Common Stock"), Class B Common Stock ("Harborside Class B Common
Stock"), Class C Common Stock ("Harborside Class C Common Stock"), Class D
Common Stock ("Harborside Class D Common Stock") and Common Stock ("Common
Stock") (collectively "Harborside Common Stock"). Harborside Class A Common
Stock, Harborside Class D Common Stock and Common Stock are the only classes of
the Company's common stock that have the power to vote. Holders of Harborside
Class B Common Stock and Harborside Class C Common Stock do not have any voting
rights, except that the holders of Harborside Class B Common Stock and
Harborside Class C Common Stock have the right to vote as a class to the extent
required under the laws of the State of Delaware.

As of March 30, 2000, there were 661,332 shares of Harborside Class A Common
Stock, 20,000 shares of Harborside Class D Common Stock and no shares of Common
Stock outstanding. Holders of shares of Harborside Class A Common Stock and
Common Stock of the Company are entitled to one vote per share on all matters as
to which stockholders may be entitled to vote pursuant to the DGCL. Holders of
Harborside Class D Common Stock as of the Effective Time are entitled to 330
votes per share on all matters as to which stockholders may be entitled to vote
pursuant to the DGCL.

As a result of the consummation of the Merger, the New Investors beneficially
own all of the outstanding Harborside Class D Common Stock, constituting
approximately 91% of the outstanding voting stock of the Company, and pre-Merger
stockholders, including certain members of management, beneficially own all of
the outstanding Harborside Class A Common Stock, constituting approximately 9%
of the outstanding voting stock of the Company. In addition, the New Investors
own 5,940,000 shares of Harborside Class B Common Stock and 640,000 shares of
Harborside Class C Common Stock.

The following table sets forth certain information regarding the beneficial
ownership of the voting stock of the Company as of March 30, 2000. The table
sets forth, as of that date, (i) each person known by the Company to be the
beneficial owner of more than 5% of any class of voting stock of the Company,
(ii) each person who was a director of the Company or a named executive officer
of the Company who beneficially owned shares of voting stock of the Company and
(iii) all directors of the Company and executive officers of the Company as a
group. None of the Company's directors or officers own shares of Harborside
Class D Common Stock. Unless otherwise indicated, each of the stockholders shown
in the table below has sole voting and investment power with respect to the
shares beneficially owned.

HARBORSIDE CLASS A COMMON STOCK
(9% Of Voting Power)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Name and address Number of Number of Percent of
Beneficial Owner (1) Shares(2) Options Total (Class (4)
- -------------------- ------- ------- ------- ----

George Krupp (5) ...................... 194,162 -- 194,162 29.4
Douglas Krupp (5) ..................... 194,163 -- 194,163 29.4
Stephen L. Guillard ................... 177,688 -- 177,688 26.9
Damian N. Dell'Anno ................... 47,563 10,560 58,123 8.7
Bruce J. Beardsley .................... -- 39,162 39,162 5.6
William H. Stephan .................... 400 38,332 38,732 5.5
Steven V. Raso ........................ -- 21,940 21,940 3.2
All directors and executive officers as
a group, including certain of the
persons named above (10 persons) ...... 225,561 109,994 335,555 43.5
</TABLE>

HARBORSIDE CLASS D COMMON STOCK
(91% Of Voting Power)

<TABLE>
<CAPTION>
<S> <C> <C>
Number of Percent of
Name and address of Beneficial Owner Shares(2) Class
- ------------------------------------ ------ -----

<
INVESTCORP S.A. (6)(7) ............................ 20,000 100.0
SIPCO Limited (8) ................................. 20,000 100.0
CIP Limited (9)(10) ............................... 18,400 92.0
Ballet Limited (9)(10) ............................ 1,840 9.2
Denary Limited (9)(10) ............................ 1,840 9.2
Gleam Limited (9)(10) ............................. 1,840 9.2
Highlands Limited (9)(10) ......................... 1,840 9.2
Nobel Limited (9)(10) ............................. 1,840 9.2
Outrigger Limited (9)(10) ......................... 1,840 9.2
Quill Limited (9)(10) ............................. 1,840 9.2
Radial Limited (9)(10) ............................ 1,840 9.2
Shoreline Limited (9)(10) ......................... 1,840 9.2
Zinnia Limited (9)(10) ............................ 1,840 9.2
INVESTCORP Investment Equity Limited (7) .......... 1,600 8.0
</TABLE>

55
<PAGE>

(1) The address of each person listed in the table as a holder of
Harborside Class A Common Stock is c/o Harborside Healthcare
Corporation, One Beacon Street, Boston, Massachusetts 02108.
(2) As used in the table above, a beneficial owner of a security includes
any person who, directly or indirectly, through contract, arrangement,
understanding, relationship, or otherwise has or shares (i) the power
to vote, or direct the voting of, such security or (ii) investment
power which includes the power to dispose, or to direct the disposition
of, such security.
(3) Includes shares of stock that are subject to options exercisable within
60 days of March 31, 1999. The options granted upon consummation of the
Merger pursuant to the Issuer's new Stock Option Plan are not included
in this table because they are not exercisable within 60 days of March
31, 1999.
(4) Reflects the percentage such shares and options represent of the number
of outstanding shares of such class of the Issuer's common stock after
giving effect to the exercise of options owned by such person or
persons.
(5) The shares beneficially owned by George Krupp are owned of record by
The George Krupp 1994 Family Trust ("GKFT"). The shares beneficially
owned by Douglas Krupp are owned of record by The Douglas Krupp 1994
Family Trust ("DKFT"). The trustees of both GKFT and DKFT are Lawrence
I. Silverstein, Paul Krupp and M. Gordon Ehrlich (the "Trustees"). The
Trustees share control over the power to dispose of the assets of GKFT
and DKFT and thus each may be deemed to beneficially own the shares
held by GKFT and DKFT; however, each of the Trustees disclaims
beneficial ownership of all of such shares.
(6) Investcorp does not directly own any stock in the Issuer. The number of
shares shown as owned by Investcorp includes all of the shares owned by
INVESTCORP Investment Equity Limited (See note (7) below). Investcorp
owns no stock in Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited,
Radial Limited, Shoreline Limited, Zinnia Limited, or in the beneficial
owners of these entities (See note (10) below). Investcorp may be
deemed to share beneficial ownership of the shares of voting stock held
by these entities because the entities have entered into revocable
management services or similar agreements with an affiliate of
Investcorp, pursuant to which each such entities has granted such
affiliate the authority to direct the voting and disposition of the
Issuer voting stock owned by such entity for so long as such agreement
is in effect. Investcorp is a Luxembourg corporation with its address
at 37 rue Notre-Dame, Luxembourg.
(8) INVESTCORP Investment Equity Limited is a Cayman Islands corporation,
and a wholly-owned subsidiary of Investcorp, with its address at P.O.
Box 1111, West Wind Building, George Town, Grand Cayman, Cayman
Islands.
(9) SIPCO Limited may be deemed to control Investcorp through its ownership
of a majority of a company's stock that indirectly owns a majority of
Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West
Wind Building, George Town, Grand Cayman, Cayman Islands.
(10) CIP Limited ("CIP") owns no stock in the Issuer. CIP indirectly owns
less than 0.1% of the stock in each of Ballet Limited, Denary Limited,
Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited,
Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited
(See note (10) below). CIP may be deemed to share beneficial ownership
of the shares of voting stock of the Issuer held by such entities
because CIP acts as a director of such entities and the ultimate
beneficial stockholders of each of those entities have granted to CIP
revocable proxies in companies that own those entities' stock. None of
the ultimate beneficial owners of such entities beneficially owns
individually more than 5% of the Issuer's voting stock.
(11) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited,
Radial Limited, Shoreline Limited and Zinnia Limited is a Cayman
Islands corporation with its address at P.O. Box 2197, West Wind
Building, GeorgeTown, Grand Cayman, Cayman Islands.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In December of 1999, the Company borrowed $5 million from an affiliate of
Investcorp S.A. to fund a payment of $5 million to the landlord of four
facilities in Ohio. In return for the payment, the Company received an option to
acquire the four facilities. Interest on this loan is payable quarterly in
arrears and is based on a ninety-day LIBOR rate plus 275 basis points. The loan
is due on the earlier of December 31, 2000 or the acquisition of the facilities.

On the date of the Merger, the Company received $165.0 million of common
equity capital provided by the New Investors. An affiliate of Investcorp was
paid by the Company a fee of $6.5 million for services rendered outside of the
United States in connection with the raising of the equity capital from the
international investors. In connection with the Merger, the Company paid III, an
affiliate of the Company and of Investcorp, a loan finance advisory fee of $4.0
million and Invifin S.A., an affiliate of Investcorp, a fee of $1.5 million for
providing a standby commitment to fund the $99.5 million of Old Notes. In
connection with the closing of the Merger, the Company entered into an agreement
for management advisory and consulting services for a five-year term with III,
pursuant to which the Company prepaid III $6.0 million upon such closing.

Pursuant to the Merger Agreement, at the date of the Merger the Company
entered into a master rights agreement for the benefit of The Berkshire
Companies Limited Partnership, a Massachusetts limited partnership that was
affiliated with Harborside prior to the date of the Merger ("BCLP"), certain of
its affiliates (BCLP and such affiliates collectively, the "Berkshire
Stockholders") and the New Investors, which agreement provides, among other
things, for the following: (i) the New Investors have demand and "piggyback"
registration rights; (ii) the Berkshire Stockholders have "piggyback"
registration rights entitling them (subject to certain limitations) to
participate pro rata in Company registration statements filed with the
Commission; (iii) unless otherwise agreed by the New Investors holding voting
common stock and the Berkshire Stockholders, if any new equity securities
(subject to certain exceptions) are to be issued by the Company prior to an
initial public offering by the Company at a price below fair market value, as
determined in good faith by the Board of Directors of the Company, the Company
will give all holders of the then outstanding common stock (not including stock
options) the right to participate pro rata in such equity financing; and (iv)
the Berkshire Stockholders are entitled to receive periodic information
concerning the Company (subject to certain limitations). The terms of the master
rights agreement may be modified or terminated by agreement of the Company, the
New Investors and the Berkshire Stockholders.

56
<PAGE>

Pursuant to the Merger Agreement, the Company has agreed that for six years
after the date of the Merger, it will indemnify all current and former
directors, officers, employees and agents of the Company and its subsidiaries
and will, subject to certain limitations, maintain for six years a directors'
and officers' insurance and indemnification policy containing terms and
conditions which are not less advantageous than the policy in effect as of the
date of the Merger Agreement.

Harborside entered into a Non-Compete Agreement, dated as of April 15, 1998,
with each of Douglas Krupp, a director of Harborside prior to the Merger and a
beneficial stockholder of the Company, and George Krupp, a beneficial
stockholder of the Company, pursuant to which each such individual agreed for a
one-year period commencing at the date of the Merger not to engage in certain
business activities or to own certain equity interests in any person or entity
that engages in such business activities. Pursuant to such agreements,
Harborside paid $250,000 to each of such individuals at the date of the Merger.

In 1995, Mr. Guillard subscribed for equity interests in certain of
Harborside's predecessors. The aggregate subscription price of $438,000, equal
to the fair market value of such equity interests as of December 31, 1995, was
paid by Mr. Guillard in 1996 with the proceeds of a special bonus equal to such
purchase price. To pay taxes due with respect to the purchase of equity
interests and this bonus, Mr. Guillard received a loan from Harborside,
evidenced by a note maturing April 15, 2001, and bearing interest at 7.0% per
annum. In connection with the IPO Reorganization, such equity interests and
Messrs. Guillard's and Dell'Anno's interests in Harborside Healthcare Limited
Partnership were exchanged for an aggregate of 307,724 shares of Harborside
Common Stock. Under his prior employment agreement, Mr. Dell'Anno also received
an additional 18,037 shares of Harborside Common Stock pursuant to a bonus
payment in connection with the IPO (with a value of $212,000). Mr. Dell'Anno
also received a loan from Harborside at an interest rate of prime plus 1% to pay
income tax liabilities that resulted from such bonus payment.

In connection with the IPO, Harborside entered into a Reorganization Agreement
(the "Reorganization Agreement") with certain individuals, including but not
limited to Messrs. Guillard and Dell'Anno (the "Contributors"), pursuant to
which the Contributors received 4,400,000 shares of Harborside Common Stock in
exchange for their ownership interests in Harborside's predecessors. The
reorganization contemplated by the Reorganization Agreement was completed
immediately prior to completion of the IPO.

Harborside adopted an Executive Long-Term Incentive Plan (the "Executive
Plan") effective July 1, 1995. Eligible participants, consisting of Harborside's
department heads and regional directors, were entitled to receive payment upon
an initial public offering or sale of Harborside above a baseline valuation of
$23,000,000 within two years of the effective date of the plan. The Executive
Plan terminated upon completion of the IPO. The payments to Messrs. Beardsley,
Stephan and Raso totaled $185,250, $150,250 and $75,000, respectively.

Pursuant to certain Change In Control Agreements dated as of January 15, 1998
between Harborside and each of Messrs. Guillard, Dell'Anno, Stephan, Beardsley
and Raso, which were entered into prior to the execution of the Merger
Agreement, at the date of the Merger, each of such officers received a payment
equal to his annual salary, except for Mr. Guillard who received a payment equal
to 1.5 times his annual salary. The amounts of such payments were as follows:
Mr. Guillard, $517,500; Mr. Dell'Anno, $225,000; Mr. Stephan, $190,000; Mr.
Beardsley, $200,000; and Mr. Raso, $140,000. In addition, pursuant to these
agreements, all outstanding loans made by Harborside to such officers for the
purchase of stock were forgiven as of the date of the Merger. The forgiven loans
were to Messrs. Guillard and Dell'Anno and had a remaining balance of $229,350
and $112,520, respectively, as of the date of the Merger. The purpose of the
Change In Control Agreements was to induce such officers to remain in the employ
of Harborside and to assure them of fair severance should their employment
terminate in specified circumstances following a change in control of
Harborside. Such officers were entitled to the payments and loan forgiveness
described above because the Merger constituted a "change in control" under the
terms of the Change In Control Agreements. The Change In Control Agreements also
provided for certain payments if the employment with Harborside of any of such
officers is terminated by Harborside for any reason other than cause within 12
months following a change in control. The Change In Control Agreements were
terminated by mutual agreement of the parties as of the date of the Merger,
except that Harborside complied with its obligations under the provisions
described in the first sentence of this paragraph.

57
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

1. Financial Statements:

See Index to Consolidated Financial Statements in Item 8 of
this annual report.

2. Financial Statement Schedules:

None.

3. Exhibits

The exhibits listed in the accompanying index to exhibits are incorporated by
reference herein or are filed as part of this annual report.

Exhibit
Number Description of Exhibit

2.1** Agreement and Plan of Merger dated as of April 15, 1998

2.2** Stockholder Agreement dated as of April 15, 1998

3.1(a)****# Amended and Restated Certificate of Incorporation of the Registrant

3.1(b)**** Certificate of Designation of the Registrant with respect to the
Exchangeable Preferred Stock

3.1(c)** Amended and Restated By-laws of the Registrant

3.1(d)**** Form of Certificate of Incorporation of certain registrants, as
amended

3.2(a)**** Certificate of Incorporation of Sailors, Inc.

3.2(b)**** Form A of Articles of Organization, Articles of Amendment and
Articles of Merger of certain registrants

3.2(c)**** Form B of Articles of Organization of certain registrants

3.2(d)**** Form of First Amendment to and Restatement of Agreement of Limited
Partnership of certain registrants

3.2(e)**** Form of Agreement of Limited Partnership of certain registrants

3.2(f)**** Amended and Restated Agreement of Limited Partnership of Harborside
Healthcare Limited Partnership, dated as of May 12, 1987, as amended and
restated as of July 1, 1995

3.2(g)**** Agreement of Limited Partnership of KHC Partners, Limited Partners,
dated as of May 28, 1987, as amended

3.2(h)**** Form A of Certificate of Limited Partnership of certain registrants

3.2(i)**** Form B of Certificate of Limited Partnership of certain registrants

3.2(j)**** Certificate of Limited Partnership of Bridgewater Assisted Living
Limited Partnership

3.2(k)**** First Amendment to and Restatement of Certificate of Limited
Partnership of KHC Partners Limited Partnership (now known as Harborside
Healthcare Advisors Limited Partnership)

3.2(l)**** First Amendment to and Restatement of Certificate of Limited
Partnership of Harborside Acquisition Limited Partnership IV (now known as
Harborside Danbury Limited Partnership)

3.2(m)**** Certificate of Formation and Agreement of Limited Partnership of
Riverside Retirement Limited Partnership, as amended

3.2(n)**** Certificate of Limited Partnership of Harborside Healthcare Limited
Partnership

58
<PAGE>

3.2(o)**** Form A of By-laws of certain registrants

3.2(p)**** Form B of By-laws of certain registrants

4.1**** Indenture between MergerCo and the Trustee, dated as of July 31, 1998,
with respect to the Notes

4.2**** Supplemental Indenture between the Registrant, the Guarantors and the
Trustee, dated as of August 11, 1998

4.3****# Form of New Note

4.4**** Registration Rights Agreement, dated July 31, 1998, between the
Registrant (as successor to MergerCo) and the Placement Agents, relating to
the Old Notes

4.5**** Certificate of Designation of the Registrant with respect to the
Exchangeable Preferred Stock (filed as Exhibit 3.1.2)

4.6**** Form of Stock Certificate representing New Preferred Stock

4.7**** Registration Rights Agreement, dated July 31, 1998, between the
Registrant (as successor to MergerCo) and the Placement Agents, relating to
the Old Preferred Stock (filed as Exhibit 1.3)
4.8**** Form of Letter of Transmittal (filed as Exhibit 1.4)

10.1(a)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (New Haven
Facility)

10.1(b)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust Tri-States, Inc. and HHCI Limited Partnership (Indianapolis
Facility)

10.1(c)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy Facility)

10.1(d)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Sarasota Facility)

10.1(e)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Pinebrook
Facility)

10.1(f)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples Facility)

10.1(g)* Facility Lease Agreement, dated as of December 31, 1995, between
Meditrust of New Jersey, Inc. and HHCI Limited Partnership (Woods Edge
Facility)

10.1(h)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust Tri-States, Inc. and HHCI Limited Partnership (New
Haven Facility)

10.1(i)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust Tri-States, Inc. and HHCI Limited Partnership
(Indianapolis Facility)

10.1(j)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy
Facility)

10.1(k)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of Florida, Inc. and HHCI Limited Partnership
(Sarasota Facility)

10.1(l)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of Florida, Inc. and HHCI Limited Partnership
(Pinebrook Facility)

10.1(m)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of Florida, Inc. and HHCI Limited Partnership
(Naples Facility)

10.1(n)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of New Jersey, Inc. and HHCI Limited Partnership
(Woods Edge Facility)

10.2(a)* Loan Agreement, dated October 13, 1994, among Meditrust Mortgage
Investments, Inc. and Bay Tree Nursing Center Corporation, Belmont Nursing
Center Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing Center
Corporation and Harborside Healthcare Limited Partnership.

59
<PAGE>

10.2(b)* Guaranty, dated October 14, 1994, to Meditrust Mortgage Investments,
Inc. from Harborside Healthcare Limited Partnership

10.2(c)* Environmental Indemnity Agreement, dated October 13, 1994, by and among
Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation,
Countryside Care Center Corporation, Oakhurst Manor Nursing Center
Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing
Center Corporation, West Bay Nursing Center Corporation and Harborside
Healthcare Limited Partnership and Meditrust Mortgage Investments, Inc.

10.2(d)* Consolidated and Renewed Promissory Note, dated October 13, 1994, from
Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation,
Countryside Care Center Corporation, Oakhurst Manor Nursing Center
Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing
Center Corporation, West Bay Nursing Center Corporation and Harborside
Healthcare Limited Partnership and Meditrust Mortgage Investments, Inc.

10.2(e)* Negative Pledge Agreement, dated October 13, 1994, by and among Douglas
Krupp, George Krupp, Bay Tree Nursing Center Corporation, Belmont Nursing
Center Corporation, Countryside Care Center Corporation, Oakhurst Manor
Nursing Center Corporation, Orchard Ridge Nursing Center Corporation,
Sunset Point Nursing Center Corporation, West Bay Nursing Center
Corporation and Harborside Healthcare Limited Partnership and Meditrust
Mortgage Investments, Inc.

10.2(f)* Affiliated Party Subordination Agreement, dated October 13, 1994, by
and among Bay Tree Nursing Center Corporation, Belmont Nursing Center
Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing
Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point
Nursing Center Corporation, West Bay Nursing Center Corporation and
Harborside Healthcare Limited Partnership and Meditrust Mortgage
Investments, Inc.

10.2(g)* First Amendment to Loan Agreement, dated May 17, 1996, by and among
Meditrust Mortgage Investments, Inc. and Bay Tree Nursing Center
Corporation, Belmont Nursing Center Corporation, Countryside Care Center
Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge
Nursing Center Corporation, Sunset Point Nursing Center Corporation, West
Bay Nursing Center Corporation and Harborside Healthcare Limited
Partnership

10.2(h)* Credit Agreement, dated as of April 14, 1997, among Harborside
Healthcare Corporation and the other Borrowers specified therein, the
Lenders party thereto and the Chase Manhattan Bank, as Administrative Agent

10.2(i)*** First Amendment to Revolving Credit Agreement, dated as of August 1,
1997, among Harborside Healthcare and other borrowers specified therein,
the Lenders party thereto and Chase Manhattan Bank, Administrative Agent

10.2(j)*** Second Amendment to Revolving Credit Agreement, dated as of
August 28, 1997, among Harborside Healthcare and other borrowers specified
therein, the Lenders party thereto and Chase Manhattan Bank, Administrative
Agent

10.3(a)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire Limited
Partnership (Westwood Facility)

10.3(b)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire Limited
Partnership (Pheasant Wood Facility)

10.3(c)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire Limited
Partnership (Crestwood Facility)

10.3(d)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire Limited
Partnership (Milford Facility)

10.3(e)* Facility Lease Agreement, dated as of January 1, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire Limited
Partnership (Applewood Facility)

10.3(f)* Facility Lease Agreement, dated as of December 31, 1996, between
Meditrust of New Hampshire Inc. and Harborside New Hampshire Limited
Partnership (Northwood Facility)

10.3(g)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of New Hampshire, Inc. and Harborside New
Hampshire Limited Partnership (Westwood Facility)

10.3(h)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of New Hampshire, Inc. and Harborside New
Hampshire Limited Partnership (Pheasant Wood Facility)

10.3(i)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of New Hampshire, Inc. and Harborside New
Hampshire Limited Partnership (Crestwood Facility)

60
<PAGE>

10.3(j)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of New Hampshire, Inc. and Harborside New
Hampshire Limited Partnership (Milford Facility)

10.3(k)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of New Hampshire, Inc. and Harborside New
Hampshire Limited Partnership (Applewood Facility)

10.3(l)* First Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of New Hampshire, Inc. and Harborside New
Hampshire Limited Partnership (Northwood Facility)

10.4(a)* Facility Lease Agreement, dated as of March 31, 1995, between Meditrust
of Ohio, Inc. and Harborside of Toledo Limited Partnership (Swanton
Facility)

10.4(b)* First Amendment to Facility Lease Agreement, dated as of December 31,
1995, by and between Harborside Toledo Limited Partnership and Meditrust of
Ohio, Inc. (Swanton Facility)

10.4(c)* Second Amendment to Facility Lease Agreement, dated as of May 17, 1996,
by and between Meditrust of Ohio, Inc. and Harborside Toledo Limited
Partnership (Swanton Facility)

10.5*Amended and Restated Agreement of Limited Partnership of Bowie Center
Limited Partnership, dated April 7, 1993

10.6*Agreement of Lease, dated March 16, 1993, between Bryan Nursing Home, Inc.
and Harborside of Ohio Limited Partnership (Defiance and Northwestern Ohio
Facilities)

10.7*First Amendment to Agreement of Lease, dated June 1, 1993, by and between
Bryan Nursing Home, Inc. and Harborside Ohio Limited Partnership

10.8*Option to Purchase Agreement, dated March 16, 1993, by and between Bryan
Nursing Home, Inc. and Harborside Ohio Limited Partnership

10.9(a)* Lease, dated September 30, 1994, between Rockledge T. Limited
Partnership and Harborside of Florida Limited Partnership (Brevard
Facility)

10.9(b)* Lease Guaranty, dated September 30, 1994, to Rockledge T. Limited
Partnership from Harborside Healthcare Limited Partnership

10.9(c)* Indemnity Agreement, dated September 30, 1994, between Rockledge T.
Limited Partnership, Harborside of Florida Limited Partnership, Harborside
Healthcare Limited Partnership and Southtrust Bank of Alabama

10.9(d)* Assignment and Security Agreement, dated September 30, 1994, to
Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership
and Southtrust Bank of Alabama

10.9(e)* Subordination Agreement (Lease), dated September 30, 1994, between
Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership
and Southtrust Bank of Alabama

10.9(f)* Subordination Agreement (Management), dated September 30, 1994, by and
among Rockledge T. Limited Partnership, Harborside of Florida Limited
Partnership, Harborside Healthcare Limited Partnership and Southtrust Bank
of Alabama

10.10(a)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and Stephen L. Guillard

10.10(b)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and Damian Dell'Anno

10.10(c)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and Bruce Beardsley

10.10(d)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and William Stephan

10.10(e)****+ Employment Agreement, dated as of August 11, 1998, between the
Registrant and Steven Raso

10.11(a)****+ Management Stock Incentive Plan, established by the Registrant as
of August 11, 1998

10.11(b)****+ Form of Stock Option Agreement pursuant to Management Stock
Incentive Plan

10.12(a)*+ 1996 Long-Term Stock Incentive Plan

10.12(b)*+ Form of Nonqualified Stock Option Agreement pursuant to the 1996
Long-Term Stock Incentive Plan

10.13****+ Form of Put/Call Agreement, dated August 11, 1998, between the
Registrant and each of Messrs. Guillard, Dell'Anno, Beardsley, Stephan and
Raso

61
<PAGE>

10.14*+ Supplemental Executive Retirement Plan of the Registrant

10.15* Administrative Services Agreement, dated April 15, 1988, between the
Registrant and The Berkshire Companies Limited Partnership ("BCLP")

10.16* Agreement to Lease, dated as of May 3, 1996, among Westbay Manor Company,
Westbay Manor II Development Company, Royal View Manor Development Company,
Beachwood Care Center Limited Partnership, Royalview Manor Company,
Harborside Health I Corporation and Harborside Healthcare Limited
Partnership

10.17* Guaranty by Harborside in favor of Westbay Manor Company, Westbay Manor
II Development Company, Royalview Manor Development Company and Beachwood
Care Center Limited Partnership

10.18**** Master Rights Agreement, dated as of August 11, 1998, by and among the
Registrant, BCLP, certain affiliates of BCLP and the New Investors

10.19(a)**** Credit Agreement, dated as of August 11, 1998, among the
Registrant, Chase Securities, Inc., as Arranger, Morgan Stanley Senior
Funding, Inc. and BT Alex. Brown Incorporated, as Co-Arrangers, Bankers
Trust Company, as Documentation Agent, Morgan Stanley Senior Funding, Inc.,
as Syndication Agent, The Chase Manhattan Bank, as Administrative Agent,
and the lenders party thereto (the "Lenders")

10.19(b) First Amendment to Credit Agreement, dated as of March 30, 1999, among
the Registrant, Morgan Stanley Senior Funding, Inc. and BT Alex. Brown
Incorporated, as Co-Arrangers, Bankers Trust Company, as Documentation
Agent, Morgan Stanley Senior Funding Inc., as Syndication Agent, The Chase
Manhattan Bank, as Administrative Agent, and the Lenders

10.20**** Collateral Agreement, dated as of August 11, 1998, in favor of The
Chase Manhattan Bank, as administrative agent, together with the Lenders

10.21**** HHC 1998-1 Trust Credit Agreement, $238,125,000 Credit Facility, dated
as of August 11, 1998, among the Registrant, Chase Securities Inc., as
Arranger, Morgan Stanley Senior Funding, Inc. and BT Alex. Brown
Incorporated, as Co-Arrangers, Bankers Trust Company, as Documentation
Agent, Morgan Stanley Senior Funding, Inc., as Syndication Agent, The Chase
Manhattan Bank, as Administrative Agent, and the lenders party thereto

10.22**** Participation Agreement, dated as of August 11, 1998, among Harborside
of Dayton Limited Partnership, as Lessee, HHC 1998-1 Trust, as Lessor,
Wilmington Trust Company, BTD Harborside Inc., Morgan Stanley Senior
Funding, Inc. and CSL Leasing, Inc., as Investors, The Chase Manhattan
Bank, as Agent, and the lenders party thereto

10.23**** Lease, dated August 11, 1998, between HHC 1998-1 Trust, as Lessor, and
Harborside of Dayton Limited Partnership, as Lessee

10.24**** Accounts Receivable Intercreditor Agreement (Leased Facilities), dated
as of August 11, 1998, among (i) The Chase Manhattan Bank, as
administrative agent, (ii) HHC 1998-1 Trust, (iii) CSL Leasing, Inc., BTD
Harborside, Inc. and Morgan Stanley Senior Funding, Inc. and (iv) Meditrust
Company LLC

10.25**** Accounts Receivable Intercreditor Agreement (Mortgaged Facilities),
dated as of August 11, 1998, among (i) The Chase Manhattan Bank, as
administrative agent, (ii) HHC 1998-1 Trust, (iii) CSL Leasing, Inc., BTD
Harborside, Inc. and Morgan Stanley Senior Funding, Inc. and (iv) Meditrust
Mortgage Investments, Inc.

10.26**** Financing Advisory Agreement, dated August 11, 1998, between the
Registrant (as successor to MergerCo) and Investcorp International Inc.
("III")

10.27**** Agreement for Management Advisory, Strategic Planning and Consulting
Services, dated August 11, 1998, between the Registrant (as successor to
MergerCo) and III

10.28**** Second Amendment to Loan Agreement, Consent to Merger and Confirmation
of Guaranties, dated as of July 31, 1998, by and among Bay Tree Nursing
Center Corp., Countryside Cave Center Corp., Sunset Point Nursing Center
Corp., West Bay Nursing Center Corp., Harborside Healthcare Limited
Partnership, Harborside Healthcare Corporation and Meditrust Mortgage
Investments, Inc.

10.29**** Omnibus Amendment to Facility Lease Agreements, Consent to Merger and
Confirmation of Guaranties, dated as of July 31, 1998, by and among
Harborside New Hampshire Limited Partnership, Harborside Bledo Limited
Partnership, HHCI Limited Partnership, Harborside Healthcare Limited
Partnership, Harborside Healthcare Corporation and Meditrust Company LLC

21.1 Subsidiaries of the Registrant

27.1 Financial Data Schedule

62
<PAGE>

* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-3096)

** Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-51633)

*** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No. 01-14538)

**** Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration No. 333-64679)

# Replaces previously filed exhibit

+ Management contract or compensation plan or arrangement required to be
filed as an exhibit.

(b) Reports on Form 8-K:
None

63
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 2000.
HARBORSIDE HEALTHCARE CORPORATION

By /s/ Stephen L. Guillard
Chairman of the Board,
President and Chief
Executive Officer

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

/s/ Stephen L. Guillard Chairman, President, Chief Executive Officer
- ----------------------- and Director
(Principal Executive Officer)

/s/ Damian N. Dell'Anno Executive Vice President of Operations
- ----------------------- and Director

/s/ William H. Stephan Senior Vice President, Chief Financial Officer
- ---------------------- and Director
(Principal Financial and Accounting Officer)

/s/ Christopher J. O'Brien Director

/s/ Charles J. Philippin Director

/s/ Lars C. Haegg Director
- -----------------

/s/ Edward G. Lord III Director
- ----------------------

/s/ James O. Egan Director
- -----------------

/s/ Charles Marquis Director
- -------------------

64
<PAGE>

Harborside Healthcare Corporation
One Beacon Street
Boston, MA 02210

March 30, 2000

Securities and Exchange Commission
450 Fifth Avenue, N.W.
Washington, D.C. 20549

Ladies and Gentlemen:

In accordance with Item 601(b)(4)(iii) of Regulation S-K, Harborside
Healthcare Corporation (the "Company") has not filed herewith any instrument
with respect to long term debt not being registered where the total number of
securities authorized thereunder does not exceed ten percent (10%) of the total
assets of the Company and its subsidiaries on a consolidated basis. The Company
hereby agrees to furnish a copy of any such agreement to the Securities and
Exchange Commission upon request.

Very truly yours,

HARBORSIDE HEALTHCARE CORPORATION

By: /s/ William H. Stephan
------------------
Chief Financial Officer

65
<PAGE>

<PAGE>

Exhibit 21.1

Subsidiaries of Harborside Healthcare Corporation as of December 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
Jurisdiction of
Incorporation or
Name Organization Doing Business As

1. Bay Tree Nursing Center Corporation Massachusetts Harborside Healthcare -Palm Harbor

2. Belmont Nursing Center Corporation Massachusetts Harborside Healthcare -Toledo

3. Bowie Center Limited Partnership Maryland Larkin Chase Nursing and
Restoration Center

4. Countryside Care Center Corporation Massachusetts Harborside Healthcare -Terre Haute

5. Harborside of Cleveland Limited Partnership Massachusetts Harborside Healthcare - Beachwood
Rehabilitation and Nursing Center
Harborside Healthcare - Broadview Heights
Rehabilitation and Nursing
Center
Harborside Healthcare - Westlake I
Rehabilitation and Nursing Center
Harborside Healthcare - Westlake II
Rehabilitation and Nursing Center

6. Harborside of Florida Limited Partnership Florida Harborside Healthcare - Brevard

7. Harborside of Ohio Limited Partnership Massachusetts Harborside Healthcare - Northwest Ohio
Harborside Healthcare - Defiance

8. Harborside Funding Limited Partnership Massachusetts

9. Harborside Health I Corporation Delaware Harborside Nursing Homes, Inc.

10. Harborside Healthcare Advisors Massachusetts
Limited Partnership

11. Harborside Healthcare Limited Massachusetts Allicor
Partnership Harborside Healthcare Management
Limited Partnership
12. Harborside Healthcare Network Florida
Limited Partnership

13. Harborside Homecare Limited Massachusetts Behavioral Health Care
Partnership

14. Harborside New Hampshire Massachusetts Harborside Nursing Facilities Limited
Limited Partnership Partnership
Harborside Healthcare - Applewood
Rehabilitation and Nursing Center
Harborside Healthcare - Crestwood
Rehabilitation and Nursing Center
Harborside Healthcare - Milford
Rehabilitation and Nursing Center
Harborside Healthcare - Northwood
Rehabilitation and Nursing Center
Harborside Healthcare - Pheasantwood
Rehabilitation and Nursing Center
Harborside Healthcare - Westwood
Rehabilitation and Nursing Center

66
<PAGE>

15. Harborside Rehabilitation Limited Massachusetts Theracor Rehabilitation Services
Partnership

16. Harborside Toledo Corporation Massachusetts

17. Harborside Toledo Limited Partnership Massachusetts Harborside Healthcare - Swanton

18. HHCI Limited Partnership Massachusetts Harborside Healthcare - Naples
Harborside Healthcare - Sarasota
Harborside Healthcare - Pinebrook
Harborside Healthcare - New Haven
Harborside Healthcare - Woods Edge
Harborside Healthcare - Indianapolis
Harborside Healthcare - Troy
19. KHI Corporation Delaware

20. Maryland Harborside Corporation Massachusetts

21. Oakhurst Manor Nursing Center Massachusetts Harborside Healthcare - Ocala
Corporation

22. Orchard Ridge Nursing Center Massachusetts Harborside Healthcare - Gulf Coast
Corporation

23. Riverside Retirement Limited Partnership Massachusetts Harborside Healthcare - Decatur

24. Sunset Point Nursing Center Corporation Massachusetts Harborside Healthcare - Clearwater

25. West Bay Nursing Center Corporation Massachusetts Harborside Healthcare - Tampa Bay

26. Harborside Healthcare Baltimore Limited
Partnership Massachusetts Harborside Healthcare -Harford Gardens

27. Harborside Massachusetts
Limited Partnership Massachusetts Harborside Healthcare - North Shore
Harborside Healthcare -Maplewood
Harborside Healthcare - Cedar Glen
Harborside Healthcare - Danvers
28. Harborside of Dayton
Limited Partnership Massachusetts Harborside Healthcare - Laurelwood
Harborside Healthcare - New Lebanon
Harborside Healthcare - Dayton
29. Harborside Connecticut
Limited Partnership Massachusetts Harborside Healthcare - Arden House
Harborside Healthcare - Governor's
Harborside Healthcare - Willows
Harborside Healthcare - Madison House
Harborside Healthcare - Reservoir

30. Harborside Rhode Island
Limited Partnership Massachusetts Harborside Healthcare - Greenwood
Harborside Healthcare - Pawtuxet Village

31. Harborside North Toledo
Limited Partnership Massachusetts Harborside Healthcare - Sylvania
Harborside Healthcare - Point Place

32. Harborside Danbury
Limited Partnership Massachusetts Harborside Healthcare - Glen Hill
Harborside Healthcare - Glen Crest
</TABLE>

67
<PAGE>

<PAGE>

<ARTICLE>5

<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of operations and is qualified in its entirety to such
financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,386
<SECURITIES> 0
<RECEIVABLES> 53,266
<ALLOWANCES> (3,098)
<INVENTORY> 65,353<F1>
<CURRENT-ASSETS> 76,502
<PP&E> 194,641
<DEPRECIATION> (28,315)
<TOTAL-ASSETS> 283,233
<CURRENT-LIABILITIES> 39,966
<BONDS> 218,512<F2>
48,277
0
<COMMON> 146
<OTHER-SE> (23,668)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 283,233
<SALES> 0
<TOTAL-REVENUES> 300,615
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 307,364
<LOSS-PROVISION> 261<F4>
<INTEREST-EXPENSE> 20,895
<INCOME-PRETAX> (27,905)
<INCOME-TAX> 10,304
<INCOME-CONTINUING> (17,601)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,601)
<EPS-BASIC> (3.25)
<EPS-DILUTED> (3.25)
<FN>
<F1>Includes the following assets: prepaid expenses and other of $19,940,
prepaid income taxes of $2,608, deferred income taxes--current of $2,400,
deferred income taxes--long-term of $11,852, restricted cash of $2,420, note
receivable of $7,487, deferred financing and other non-current assets, net of
$15,546 and other assets, net of $3,100.
<F2>Includes the following long-term
liabilities: deferred income of $2,427, capital lease obligation of $50,067, and
long-term debt of $166,018.
<F3>Includes the following equity accounts: additional paid-in capital of
$198,603, treasury stock of ($183,746) and retained deficit of ($38,525).
<F4>Includes other expense $261.
</FN>

</TABLE>