Report of Independent Auditors

Board of Directors
Principal Healthcare Finance Limited

We have  audited  the  accompanying  consolidated  balance  sheets of  Principal
Healthcare  Finance Limited and subsidiaries as of August 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows  for  the  years  then  ended.   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  in  accordance  with  generally   accepted  auditing
standards.  Those standards 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.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  consolidated  financial  position  of  Principal
Healthcare Finance Limited and subsidiaries at August 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.


/s/  Ernst & Young

Chartered Accountants
Jersey, Channel Islands


Date:  December 21, 1999

<PAGE>
                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                  Year Ended August 31
                                                                  --------------------
                                                                   1999           1998
                                                                   ----           ----
                                                                      (In thousands)
<S>                                                                 <C>             <C>

ASSETS:
Investment in real estate:
    Real estate properties ..............................         $413,927       $377,332
    Accumulated depreciation ............................          (18,394)       (11,391)
                                                                  --------        -------
                                                                   395,533        365,941
Zero coupon investment ..................................           61,385         28,997
Other investments .......................................            3,541          7,950
                                                                  --------       --------
                                                                   460,459        402,888

Cash and short-term investments .........................            6,668          5,354
Accounts receivable .....................................           29,184         17,233
Cash on deposit as collateral - restricted ..............           20,371         17,452
Notes receivable ........................................                -          8,790
Debt issue costs ........................................           38,429         13,495
Cost in excess of tangible assets acquired,
 net of amortization ....................................           14,025         13,235
Other assets ............................................              530          1,094
                                                                  --------       --------
Total assets ............................................         $569,666       $479,541
                                                                  ========       ========

LIABILITIES:
Accounts payable and other liabilities ..................         $ 13,912       $ 10,838
Borrowings under revolving credit facility ..............           19,139        117,625
Deferred tax liability ..................................           18,491         16,653
Long-term borrowings ....................................          459,094        287,017
Loans from Worldwide ....................................           41,908         32,584
                                                                  --------        -------
Total liabilities .......................................          552,544        464,717

SHAREHOLDERS' EQUITY:
Class A Common stock $.016  par value:
    Authorized - 60,000,000 shares
    Issued and outstanding - 10,000,000 shares ..........             161             161
Additional paid-in capital ..............................          14,472          14,472
Retained earnings (deficit) .............................           2,808            (243)
Foreign currency translation adjustments ................            (319)            434
                                                                 --------        --------
Total shareholders' equity ..............................          17,122          14,824
                                                                 --------        --------
Total liabilities and shareholders' equity ..............        $569,666        $479,541
                                                                 ========        ========

</TABLE>

                            See accompanying notes.

<PAGE>

                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                           YEAR ENDED AUGUST 31,
                                                                     1999         1998            1997
                                                                     ----         ----            ----
                                                                            (In thousands)
<S>                                                                   <C>          <C>             <C>
Revenue:
    Rental Income .......................................         $ 55,693      $ 47,542      $ 16,722
    Mortgage interest income ............................            1,007             -           103
    Other investment income .............................            5,100         3,500           187
                                                                  --------      --------      --------
                                                                    61,800        51,042        17,012
Expenses:
    Interest ............................................           39,149        34,572        12,403
    Provisions for depreciation and amortization ........            9,839         7,202         2,959
    General and administrative ..........................            5,880         4,284         1,652
                                                                  --------      --------      --------
                                                                    54,868        46,058        17,014

Net income (loss) from operations .......................            6,932         4,984            (2)

Non-operating income ....................................                -         1,406             -
                                                                  --------      --------      --------

Net income (loss) before income taxes and
  extraordinary charge from prepayment of debt ..........            6,932         6,390            (2)
Provision for income taxes:
    Current .............................................              460           184           202
    Deferred ............................................            2,593         2,099           509
                                                                  --------      --------       -------
                                                                     3,053         2,283           711
                                                                  --------      --------       -------
Net income (loss) before extraordinary charge for
  prepayment of debt ....................................            3,879         4,107          (713)
Extraordinary charge from prepayment of debt                             -        (1,985)            -
                                                                  --------      --------       -------

Net income (loss) .......................................         $  3,879      $  2,122      $   (713)
                                                                  ========      ========      ========

Total comprehensive income (loss) .......................         $  3,166      $  2,490      $   (656)
                                                                  ========      ========      ========
</TABLE>


                            See accompanying notes.
<PAGE>

                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                 CONSOLIDATED  STATEMENTS  OF  SHAREHOLDERS'  EQUITY Years ended
                  August 31, 1999, 1998, and 1997
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                                                        Accumulated
                                                                                             Additional     Retained       Other
                                                         Class A              Class B           Paid        Earnings   Comprehensive
                                                   ------------------    -----------------
                                                   Shares      Amount    Shares     Amount   in Capital     (Deficit)      Income
                                                   ------      ------    ------     ------   ----------     ---------    -----------
<S>                                                  <C>          <C>       <C>        <C>        <C>          <C>             <C>

Balance at August 31, 1996 .....................    1,500     $   24          -     $    -     $ 1,489     $   (826)        $    9
  Issuance of Class A Common Stock .............    2,500         41          -          -       3,994            -              -
  Issuance of Class B Common Stock .............        -          -      6,000         96       8,989            -              -
  Dividends paid ...............................        -          -          -          -           -         (158)             -
  Foreign currency translation adjustment ......        -          -          -          -           -            -             57
  Net loss for 1997                                     -          -          -          -           -         (713)             -
                                                    -----      -----      -----      -----     -------      -------         ------
Balance at August 31, 1997 .....................    4,000         65      6,000         96      14,472       (1,697)            66
  Dividends paid ...............................        -          -          -          -           -         (668)             -
  Recapitalization .............................    6,000         96     (6,000)       (96)          -            -              -
  Foreign currency translation adjustment ......        -          -          -          -           -            -            368
  Net income for 1998 ..........................        -          -          -          -           -        2,122              -
                                                   ------      -----     ------      -----      ------      -------         ------
Balance at August 31, 1998 .....................   10,000        161          -          -      14,472         (243)           434
  Dividends paid ...............................        -          -          -          -           -         (828)             -
  Foreign currency translation adjustment ......        -          -          -          -           -            -           (753)
  Net income for 1999 ..........................        -          -          -          -           -        3,879              -
                                                   ------      -----     ------      -----      ------      -------         ------
Balance at August 31, 1999 .....................   10,000     $  161          -      $   -     $14,472     $  2,808         $ (319)
                                                   ======     ======     ======      =====     =======     ========         ======

</TABLE>


                             See accompanying notes.

<PAGE>


                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>

                                                                               YEAR ENDED AUGUST 31,
                                                                     1999            1998          1997
                                                                     ----            ----          ----

<S>                                                                   <C>             <C>            <C>
Net income (loss) ............................................     $ 3,879         $ 2,122       $   (713)
Adjustments  to  reconcile  net  income  (loss) to cash  provided  by  operating
 activities:
 Depreciation and amortization ...............................       9,839           7,202          2,959
 Deferred tax provision ......................................       2,593           2,099            509
 Change in operating assets and liabilities
   Accounts receivable .......................................     (15,929)        (14,726)        (2,572)
   Accounts payable and accruals .............................       2,082           3,111          2,542
Foreign currency translation .................................         173             201            120
                                                                    ------          ------          -----
Cash provided by operating activities ........................       2,637               9          2,845

 INVESTING ACTIVITIES
Acquisition of real estate ...................................     (50,915)        (96,447)       (60,716)
Proceeds from disposal of real estate ........................           -           2,751              -
Notes receivable .............................................           -          (8,696)             -
Proceeds from notes and loan receivables .....................       8,817               -              -
Investment and loans to subsidiaries .........................        (932)              -              -
Quality Care Homes Plc acquisition ...........................           -               -        (54,728)
Other investments ............................................           -               -         (6,566)
Decrease (increase) in cash on deposit as collateral .........      (3,828)          1,257          1,243
Proceeds from disposal of assets held for sale ...............           -           3,017              -
Other ........................................................           -             999              -
                                                                    ------          ------         -------
Cash used in investing activities ............................     (46,858)        (97,119)      (120,767)

 FINANCING ACTIVITIES
Proceeds from borrowings .....................................     197,584         256,395         59,958
Borrowing under revolving credit facility ....................      54,612         116,366              -
Payments of borrowings .......................................    (157,401)       (121,121)             -
Issuance of common stock                                                 -               -         13,472
Short-term borrowings from (repayments to)
 Omega and Worldwide, net ....................................      11,097         (53,596)        50,875
Early extinguishment of debt                                             -         (59,382)             -
Zero coupon investment .......................................     (31,808)        (27,400)             -
Debt issue costs .............................................     (27,722)        (14,318)             -
 Dividends paid ..............................................        (827)           (668)          (158)
Cost of raising capital ......................................           -               -           (634)
                                                                    ------          ------        -------
Cash provided by financing activities ........................      45,535          96,276        123,513
                                                                    ------          ------        -------

Increase (decrease) in unrestricted cash
 and cash equivalents ........................................       1,314            (834)         5,591

Unrestricted cash and cash equivalents at
 beginning  of period ........................................       5,354           6,188            597
                                                                     -----           -----          -----
Unrestricted cash and cash equivalents at
 end of period ...............................................     $ 6,668         $ 5,354        $ 6,188
                                                                   =======         =======        =======

                            See accompanying notes.

</TABLE>

<PAGE>


                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.       ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICES

ORGANIZATION

         Principal  Healthcare  Finance  Limited (the  "Company") was formed and
initially funded in June 1995 by Omega Healthcare Investors,  Inc. ("Omega"). In
April 1998, Omega Worldwide,  Inc.  ("Worldwide") acquired a 33.375% interest in
the Company from Omega.  The Company is a Jersey,  Channel Islands based company
organized to purchase and lease back nursing  homes in the United  Kingdom.  The
Company  maintains  its  records in British  pounds  sterling  under  accounting
principles   generally  acceptable  in  the  United  Kingdom.  The  accompanying
financial  statements are based on generally accepted  accounting  principles in
the United States and are stated in U.S. dollars.

         The  consolidated  financial  statements  of the  Company  include  the
accounts of the Company and all wholly owned  subsidiaries  after elimination of
all material intercompany accounts and transactions.

CASH AND SHORT-TERM INVESTMENTS

         Short-term  investments  consist of highly  liquid  investments  with a
maturity  date of three months or less when  purchased.  These  investments  are
stated at cost, which approximates the fair value.

INVESTMENTS IN REAL ESTATE

         Investments in real estate properties are recorded at cost. The cost of
the properties  acquired is allocated between land and buildings based generally
upon management's valuations and external appraisals. Depreciation for buildings
is recorded on the  straight-line  basis,  using 40 to 50 year estimated  useful
lives.   The  Company   provides   reserves  for  potential  losses  based  upon
management's  periodic  review of its assets and  classifies  these  reserves as
reductions to the related assets.

COSTS IN EXCESS OF TANGIBLE ASSETS ACQUIRED

         The  excess  of the  sum of the  purchase  cost  and the  deferred  tax
liability  recognized  over the fair  value of real  estate  and other  tangible
assets  acquired in  connection  with the  purchase of Quality Care Homes Plc is
amortized on a straight-line basis over a 30-year period.  Amortization  expense
was  approximately  $450,000,  $452,000  and  $22,000 in 1999,  1998,  and 1997,
respectively.

IMPAIRMENT OF ASSETS

         Impairment  losses  related to long-lived  assets,  certain  intangible
assets and goodwill  related to those assets are recognized when expected future
cash flows are less than the  carrying  value of the assets.  If  indicators  of
impairment are present,  the Company evaluates the carrying value of the related
real estate investments in relationship to the future undiscounted cash flows of
the underlying operations.  The Company adjusts the net book value of the leased
assets  and other  long-lived  assets to fair  value if the sum of the  expected
future cash flows is less than book value.


<PAGE>
REVENUE RECOGNITION

         Rental income is recognized on a straight-line  basis over the terms of
the related master leases.  Such income  includes  periodic  increases  based on
predetermined  formulas  as  defined  in the master  leases  and  mortgage  loan
agreements.

TRANSLATION

         Translation  from British pounds  sterling has been performed under the
provisions  of  Financial  Accounting  Standards  Board  Statement  No. 52 which
provides that balance sheet amounts are translated at the year end exchange rate
and income  statement  amounts are translated at the average annual rate.  There
are no material amounts of exchange gains or losses included in the results of
operations for 1999, 1998, and 1997.

INCOME TAXES

         The Company and its' Channel Island resident  subsidiaries  are subject
to UK  income  tax at a rate of 23% on  their  income  after  deducting  related
expenses, including interest. The Company's UK resident subsidiaries are subject
to the UK corporate tax, at a rate of 30%.

COMPREHENSIVE INCOME

         Comprehensive  income  consists  of the  Company's  net  income  (loss)
adjusted for the foreign currency translation adjustment.

ACCOUNTING ESTIMATES

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

2.       REAL ESTATE PROPERTIES

         The Company's real estate properties, represented by 207 long-term care
facilities at August 31, 1999, are leased under provisions of master leases with
initial terms of thirty years.  However,  certain leases may be terminated after
10 or 20 years by exercise of a purchase  option by the  operator or upon giving
proper notice.  Purchase options are generally either at fair market value or at
original  purchase  price  increased by a  stipulated  annual  percentage  or by
reference for annual  increases  based upon changes in the Retail Price Index in
the United Kingdom with certain minimum and maximum limits (generally 2% and 5%,
respectively).  There are no  provisions  for payment of  contingent  rentals by
tenants.  Under the terms of the  leases,  the  lessee  is  responsible  for all
maintenance, repairs, taxes and insurance on the leased properties. A summary of
the Company's investment in real estate properties is as follows (In thousands):


                                                    August 31,
                                                   ----------
                                                1999         1998
                                                ----         ----


Buildings ...............................     $ 351,839    $ 320,732
Land ....................................        62,088       56,600
                                               --------    ---------
                                                413,927      377,332
Less accumulated depreciation ...........       (18,394)     (11,391)
                                               --------    ---------
Total ...................................     $ 395,533    $ 365,941
                                              =========    =========

<PAGE>
The  following  table  summarizes  the  changes in real  estate  properties  and
accumulated depreciation during 1999 and 1998.


                                             Real Estate    Accumulated
                                             Properties     Depreciation
                                             ----------     ------------
                                                   (In thousands)

Balance at August 31, 1997 ..............     $ 274,982     $  (4,294)
Additions for 1998 ......................        96,447        (6,824)
Disposals for 1998 ......................        (2,751)          175
Other, primarily currency adjustments ...         8,654          (448)
                                               --------       -------
Balance at August 31, 1998 ..............       377,332       (11,391)
Additions for 1999 ......................        50,915        (7,722)
Other, primarily currency adjustments ...       (14,320)          719
                                               --------       -------
Balance at August 31, 1999 ..............     $ 413,927     $ (18,394)
                                              =========     =========


         The future  minimum  annual  rentals  expected to be  received  for the
remainder of the initial terms of the leases, are as follows (In thousands):


                        2000 ...........   $    46,698
                        2001 ...........        47,586
                        2002 ...........        48,496
                        2003 ...........        49,428
                        2004 ...........        50,383
                        Thereafter .....       974,763
                                            -----------
                                           $ 1,217,354
                                           ===========


3.       INVESTMENT CONCENTRATIONS

         As of August 31, 1999,  all of the  Company's  real estate  investments
were related to long-term care facilities. The Company's real estate investments
are operated by 13 companies,  including Tamaris.(31.90% of amount invested)
and Sun Healthcare  (21.51% of amount  invested).  The Company's  facilities are
located in England  (79.37% of amount  invested),  Northern  Ireland  (15.39% of
amount invested) and Scotland (5.24% of amount invested).

<PAGE>
         The  following  is a summary of the amounts  invested and the number of
facilities owned at August 31 (In thousands):
<TABLE>
<CAPTION>

                                             1999                           1998
                                        --------------               ----------------
                                                  Number of                      Number of
                                   Investment    Facilities      Investment     Facilities
County                               Amount        Owned           Amount         Owned
------------------------------------------------------------------------------------------
<S>                                    <C>           <C>              <C>            <C>

Berkshire .....................    $  5,241           3          $  3,780            2
Cambridgeshire ................       1,264           1             1,328            1
Cleveland .....................       5,981           3
Coventry ......................          -           -                 -             -
Cumbria .......................       5,884           2             3,717            1
Derbyshire ....................       6,051           4             6,357            4
Durham ........................      42,340          19            46,693           19
East Riding of Yorkshire ......       1,076           1
Essex .........................       2,351           1             2,470            1
Greater London ................      10,600           3            11,136            3
Greater Manchester ............       3,844           2             4,038            2
Hertfordshire .................       3,899           1             4,096            1
Kent ..........................      16,306          12             3,136            1
Leeds .........................       2,296           1
Leicestershire ................       3,188           1             3,349            1
Lincolnshire ..................       6,342           3             6,662            3
Merseyside ....................       8,191           4             8,605            3
Newcastle Upon Tyne ...........       2,135           1
Norfolk .......................      13,676           8             5,052            3
Norwich .......................       3,417           1                -             -
North Ayrshire ................       6,685           1             7,022            1
North Humberside ..............       4,603           1             4,835            1
North Linconshire .............       1,114           1             1,170            1
North Yorkshire ...............       7,149           4             7,510            4
Northhamptonshire .............       2,534           1             2,662            1
Northhumberland ...............      10,133           4             8,048            3
Nottinghamshire ...............      20,803          12            21,854           12
Oxfordshire ...................       6,366           3             6,270            3
Shropshire ....................       1,158           1
South Yorkshire ...............      15,541          11             8,594            5
Staffordshire .................      16,338          18            14,508           13
Suffolk .......................      10,107           4            10,618            4
Tyne & Wear ...................      42,413          19            43,511           18
Warwickshire ..................       1,401           1             1,488            1
West Midlands .................      19,866          12            20,920           12
West Yorkshire ................      18,241           5            21,574            6
                                    -------------------           --------------------
   Total England ..............     328,534         169           291,003          130


Antrim ........................      21,541          13            19,253           11
Armagh ........................      10,504           4            11,034            4
Down ..........................       7,510           2             7,889            2
Fermanagh .....................       7,454           4             7,830            4
Londonderry ...................       9,645           6            10,132            6
Tyrone ........................       7,042           3             7,398            3
                                     ------------------           --------------------
   Total Northern Ireland .....      63,696          32            63,536           30

Dundee City ...................      10,505           3            11,035            3
East Lothian ..................       8,276           2             8,694            2
Glasgow .......................       2,916           1             3,064            1
                                     ------------------            -------------------
   Total Scotland .............      21,697           6            22,793            6
                                     ------------------           --------------------

Total .........................    $413,927        207           $377,332          166
                                    ===================           ====================

</TABLE>

         Pursuant to leases the Company's tenants provide liquidity deposits and
letters of credit,  which generally  represent  monthly rent for a period of six
months.  Additional  security from operations is provided by covenants regarding
minimum  working capital and net worth,  liens on other operating  assets of the
operators, provisions for cross default and by corporate guarantees.
<PAGE>

         As of August 31,  additional  security  with  respect to the lease with
Exceler Health Services Limited is provided in the form of a six-month letter of
credit and a six-month payment guarantee by its ultimate parent,  Sun Healthcare
Group,  Inc.  (Sun),  which is a public  company and NYSE listed.  Sun's payment
guarantee is unconditional  and  non-cancellable  for the term of the lease. Sun
files  annual,  quarterly  and  current  reports,  proxy  statements  and  other
information with the Securities and Exchange Commission.

         The following is condensed financial data pertaining to:

<TABLE>
<CAPTION>

                                             Idun Health
                                              Care Ltd.       Tamaris          Tamaris
                                            Proforma 1999       1998             1997
                                                 ----           ----             ----
<S>                                               <C>          <C>              <C>

         Year ended March 31:                           (In thousands)
         Cash flows from:
         Operating activities ..........       $   6,298        $ (14,148)     $ (4,874)
         Financing activities ..........         (10,350)          18,507        (9,844)
         Investing activities ..........           5,478           (8,960)       17,893
         Net revenues ..................         120,882           59,158        31,172
         Net profit (loss)..............          (6,251)          (5,620)       (4,999)


         Total assets ..................       $  39,208         $ 74,697      $ 22,016
         Total liabilities .............          37,402           42,527        15,902
         Shareholders' equity ..........           1,806           32,170         6,114

</TABLE>


        On October 29, 1999, Idun, a wholly owned subsidiary of Omega Worldwide,
Inc. purchased the operating subsidiearies of Tamaris plc.

4.       NOTES RECEIVABLE

         Notes receivable is comprised of the following (In thousands):

                                                                  August 31,
                                                            --------------------
                                                            1999          1998
                                                            ----          ----
            Notes receivable from tenant .........        $    -       $  5,998
            Notes receivable from sale of stock ..             -          2,106
            Other ................................             -            686
                                                          ------         ------
                                                          $    -        $ 8,790
                                                          ======        =======

         The  notes  receivable  from  tenant  and from  stock  sale  relate  to
transactions with Baneberry (see note 11).

5.       BORROWING ARRANGEMENTS

         In  October  1997,  the  Company   obtained   through  a  wholly  owned
subsidiary,  a  secured  revolving  credit  facility  permitting  borrowings  of
approximately $250,000,000. As of August 31, 1999, $19,139,000 had been drawn on
the facility.  The facility matures on October 6, 2000 with each advance bearing
interest at LIBOR plus 1.50% (6.8% at August 31, 1999).

         The  loans  payable  to  Worldwide  at August  31,  1999  consist  of a
short-term loan of $18,034,000, which bears interest at 9.25%, and a $23,874,000
subordinated  loan,  which bears  interest at 12.55% and matures in December 31,
2000.  The estimated fair value of the  subordinated  loan at August 31, 1999 is
$24,699,000.  The carrying value of the short-term  loan  approximates  its fair
value. In connection with the subordinated  loan, the Company provided  warrants
to acquire 10,000,000 shares of stock at (pound)1.50  (approximately  $2.55) per
share. These warrants expire June 30, 2001.

<PAGE>

         The following is a summary of other long-term borrowings,  all of which
are British pound sterling denominated (In thousands):

                                                        August 31,
                                                  --------------------
                                                  1999          1998
                                                  ----          ----

     Mortgage bonds .....................      $432,285      $250,800
     Secured bank loan ..................        12,585        16,730
     Collateralized bank term loan ......         6,266        11,127
     Subordinated loan ..................         7,958         8,360
                                               --------      --------
                                               $459,094      $287,017
                                               ========      ========

         Substantially all of the real estate  properties are  collateralized by
commercial mortgages and bank loans.

         On  December   12,   1997,   the  Company   completed  a   $238,740,000
  ((pound)150,000,000)  mortgages bond placement issued in two series. The first
  series of bonds with a balance  of  $167,200,000  ((pound)100,000,000)  have a
  final  maturity  in 2025.  The  second  series  of  bonds  with a  balance  of
  $71,540,000  ((pound)50,000,000)  have a final  maturity in 2027. The proceeds
  were  primarily  used  to  repay  certain   outstanding   borrowings  totaling
  $190,000,000  at the date of the offering.  The bonds have a weighted  average
  coupon of 7.52%.

         On March 23, 1999, the Company  completed a $194,175,000  mortgage bond
placement  issued in three  series.  The first  series of Class A bonds,  with a
balance of $130,511,000  ((pound)82,000,000)  have a final maturity in 2027. The
second series Class M, with a balance of $47,748,000  ((pound)30,000,000) have a
final  maturity of 2029. The third series Class B, with a balance of $15,916,000
((pound)10,000,000)  have a final  maturity of 2029. The proceeds were primarily
used to repay outstanding  borrowings  totaling $152, 993,000 at the date of the
offering. The bonds have a weighted average coupon of 6.31%.

         The secured bank loan matures on August 25, 2000 and bears  interest to
maturity at rates fixed at the time each tranche of the loan was drawn down. The
average  rate on funds  drawn  down at  August  31,  1999 and 1998 was 8.67% and
8.70%, respectively.

         The  collateralized   bank  term  is  secured  by  restricted  cash  of
$11,538,000, bears interest at 7.5% and matures on October 1, 2001.

         The  subordinated  loan is due for  repayment  on December 31, 2000 and
bears interest over the remaining term of the loans at rates ranging from 12.55%
to 12.93%.  In  connection  with the loans,  the  Company  provided  warrants to
acquire  3,333,333  shares of stock at (pound) 1.50.  These warrants expire June
30, 2001.  The carrying  amount and the estimated fair value of the loan for the
year ending August 31, 1999 are $7,958,000 and $8,233,000.

         The borrowings from commercial mortgages,  the acquisition finance loan
and the loan notes and guarantees were all repaid during 1998 from proceeds from
the secured revolving credit facility.  The interest on the commercial mortgages
had varying  interest rates ranging from 6.18% to 8.5%. The interest rate on the
acquisition  finance loan was 1% per annum over LIBOR.  The interest rate on the
loan notes and guarantees was 6.5% per annum.

<PAGE>

         The principal  payments for each of the five years following August 31,
1999 is set forth below (In thousands):

                     2000 ..........    $  20,543
                     2001 ..........        4,716
                     2002 ..........        1,551
                     2003 ..........            -
                     2004 ..........            -
                     Thereafter ....      432,284
                                        ---------
                                        $ 459,094
                                        =========



         The  aggregate  carrying  value and fair values of borrowings at August
31, 1999 and 1998 are set forth below (In thousands):

                                       Carrying       Fair
                                         Value        Value
                                        -----         -----
                  1999 ...........     $524,626     $526,234
                  1998 ...........      441,407      443,871


         Fair  values  are based on the  estimates  of  management  and on rates
currently prevailing for comparable loans.

6.       PURCHASE OF QUALITY CARE HOMES PLC NURSING HOME FACILITIES

         On  June  30,  1997  the  Company  acquired  all  of the  nursing  home
facilities  of  Quality  Care  Homes  plc  through  the  purchase  of all of its
outstanding common stock. The purchase price for net assets totaled $73,818,000,
and it was funded by  acquisition  financing of  $55,245,000,  the issue of loan
notes for  $18,087,000  and cash.  As a result of the  expected  disposal of the
assets of the nursing home business,  the Company effectively  acquired only the
nursing home facilities of Quality Care Homes,  the predecessor  operator of the
facilities (In thousands):


             Land and Buildings ................     $ 4,524
             Receivables and inventory .........       3,224
             Cash ..............................          23
             Accounts payable and accruals .....      (4,730)
                                                      ------
             Assets held for sale ..............     $ 3,041
                                                     =======


7.       CAPITAL STOCK

         The Company has issued  warrants to subscribe for additional  shares as
follows:

<TABLE>
<CAPTION>

                                 Number            Exercise           Expiration
                                of Shares           Price                Date
                               ----------           ------        ------------------
<S>                                <C>              <C>                  <C>
     Class A Shares ........    1,666,666        (pound)1.00       December 31, 2000
     Class A Shares ........      750,000        (pound)1.10       December 31, 2000
     Class A Shares ........   13,333,333        (pound)1.50       June 30, 2001

</TABLE>

         As to the  warrants,  which  expire  in  December,  2000,  no value was
assigned at the date of issuance  because the underlying  securities were issued
at their fair value at that date. As to the warrants  which expire in June 2001,
the  Company  believes  that the coupon rate for the  subordinated  debt was the
prevailing market rate on the date of the loan, and therefore the face amount of
the subordinated loans  approximated its fair value on the date of issuance.  In
addition,  the exercise price on these warrants  significantly exceeded the fair
value of the  stock on the date of  issuance  since  the  warrants  enabled  the
purchase of shares at (pound)1.50, while the current value of the shares at that
time was  approximately  (pound)1.00.  Based on these factors at the date of the
borrowing, no value was ascribed to the warrants when they were issued.

<PAGE>

8.       INCOME TAXES

         The provision for income taxes is as follows (In thousands):

                                                     Year ended August 31,
                                                     ---------------------
                                                 1999        1998        1997
                                                 ----        ----        ----
Current
   UK income tax on net rental income ....    $   460      $   184      $  266
   UK corporation tax credit .............          -            -         (64)
                                              -------      -------      ------
                                                  460          184         202
   Deferred ..............................      2,593        2,099         509
                                              -------      -------      ------
                                              $ 3,053      $ 2,283      $  711
                                              =======      =======      ======


         The effective  tax rate differs from the UK income tax rate,  primarily
due to depreciation  and amortization  expense,  which is not deductible for tax
purposes in the UK.

         The Primary  components of the Company's  deferred tax liability are as
follows (In thousands):


                                                   August 31,
                                               ----------------
                                               1999        1998
                                               ----        ----
         Deferred tax liability
         Accounts receivable ..........    $  2,639     $  2,663
         Real estate ..................      15,682       13,811
         Other ........................         170          179
                                           --------     --------
                                           $ 18,491     $ 16,653
                                           ========     ========



9.       RELATED PARTY TRANSACTIONS

         The Company  has an  agreement  with  Worldwide  under which  Worldwide
provides investment advice,  portfolio  monitoring,  administration and advisory
services  to the  Company.  The  Company  pays  and  annual  fee of  0.9% of the
Company's   invested  assets  (as  defined)  to  Worldwide.   The  Company  paid
approximately $4,479,100,  $3,295,000 and $1,341,000 during 1999, 1998 and 1997,
respectively.

         On February  26,  1998, a  purchase/leaseback  transaction  with County
Healthcare  Limited,  a  company  in  which a  director  of the  Company  has an
ownership  interest,   was  completed  at  a  purchase  price  of  approximately
$4,370,000. The lease has a term of thirty years and an initial yield of 10.75%.
A loan of approximately $300,000 to County Healthcare (P2) Limited was closed on
the same date. The loan was repaid during fiscal year 1999.

         During 1999, two purchase/leaseback transactions with County Healthcare
Limited, a company in which a director of the Company has as ownership interest,
was completed at a total purchase price of approximately $5,265,000.  The leases
have a term of thirty years and an initial yield of 10.5%.  The  transaction was
approved unanimously by the disinterested directors.

         Interest  expense on the  short-term  loan from Worldwide for the years
ended  August 31, 1999,  1998 and 1997 is  $1,614,798,  $902,809 and  $1,397,563
respectively.

         Interest expense on the subordinated  loan from Worldwide for the years
ended August 31, 1999, 1998 and 1997 is $2,963,453,  $2,990,922,  and $2,987,809
respectively.

<PAGE>
10.      LOSS ON EARLY EXTINGUISHMENT OF DEBT

         In November,  1997 the Company borrowed  $56,000,000  under its secured
revolving  credit  facility to repay a portion of the  $64,000,000 due under the
secured bank loan  agreement  (see note 5). As a result of the  repayment of the
bank  loan,  the  Company  paid   prepayment   fees  and  related   expenses  of
approximately  $1,985,000  and recorded such amount as an  extraordinary  charge
from prepayment of debt.

11.      NON-OPERATING INCOME

         In July 1998, Principal sold its entire ownership interest in Baneberry
Healthcare  Limited  (Baneberry)  which  it  acquired  as  part  of  Baneberry's
formation in November 1997. The Company  realized sale proceeds of approximately
$4,000,000,  resulting in a gain of approximately $1,900,000,  which is included
in non-operating  income in 1998. Of the ownership interest sold, 19.9% was sold
to Worldwide,  and included in non-operating  income is  approximately  $500,000
related to the Worldwide sale.