<PAGE>   1

                                                                   EXHIBIT 99(a)



                         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, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended August 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the three
years in the period ended August 31, 1998, in conformity with generally accepted
accounting principles.


                                                         /s/  Ernst & Young  LLP
Chartered Accountants
Jersey, Channel Islands


Date: December 23, 1998





<PAGE>   2
                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                      YEAR ENDED AUGUST 31
                                                                    ------------------------
                                                                       1998           1997
                                                                    ---------      ---------
                                                                          (IN THOUSANDS)
<S>                                                                 <C>            <C>      
         ASSETS
         Investments in real estate
           Real estate properties...........................        $ 377,332      $ 274,982
           Accumulated depreciation.........................          (11,391)        (4,294)
                                                                    ---------      ---------       
                                                                      365,941        270,688
         Zero coupon investment.............................           28,997              -       
         Other investments..................................            7,950          5,474
                                                                    ---------      ---------
                                                                      402,888        276,162

         Cash and short-term investments....................            5,354          6,188       
         Accounts receivable................................           17,233          3,520 
         Assets held for sale...............................                0          3,041 
         Cash on deposit as collateral -- restricted........           17,452         18,056 
         Notes receivable...................................            8,790              -       
         Debt issue costs...................................           13,495              -  
                                                                      
         Cost in excess of tangible assets acquired, net of                                  
         $480 of amortization...............................           13,235         14,190
         Other assets.......................................            1,094            652       
                                                                    ---------      ---------
         Total assets.......................................        $ 479,541      $ 321,809
                                                                    =========      =========
         Liabilities and Shareholders' Equity                                    
                                                                  
         LIABILITIES:                                                             
           Accounts payable and other liabilities...........        $  10,838      $   5,456
           Revolving credit facility........................          117,625              -
           Deferred tax liability...........................           16,653         14,025
           Long-term borrowings.............................          287,017        205,581
           Loans from Omega (Worldwide in 1998).............           32,584         83,745
                                                                    ---------      ---------
         Total liabilities..................................          464,717        308,807

         Shareholders' equity: 
           Class A common stock $.016 par value:
              Authorized -- 60,000,000 shares
              Issued and outstanding-- 10,000,000 shares in 1998                         
                 And 4,000,000 in 1997......................              161             65
           Class B common stock $.016 par value:
              Authorized -- 17,000,000 shares in 1997
              Issued and outstanding -- None in 1998 and                                   
              6,000,000 shares in 1997......................                -             96
           Additional paid-in capital.......................           14,472         14,472
           Retained earnings deficit........................             (243)        (1,697)
           Foreign currency translation adjustments.........              434             66
                                                                    ---------      ---------
         Total shareholders' equity.........................           14,824         13,002
                                                                    ---------      ---------
         Total liabilities and shareholders' equity.........        $ 479,541      $ 321,809
                                                                    =========      =========
</TABLE>

                             See accompanying notes.




                                      -1-

<PAGE>   3


                                                  
                                                      
                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                            YEAR ENDED AUGUST 31
                                                                       1998         1997          1996
                                                                    ----------  ------------   ---------
                                                                               (IN THOUSANDS)
<S>                                                                 <C>           <C>          <C>    
         Revenue:                                                                            
           Rental income....................................        $   47,542  $     16,722   $   8,248 
           Mortgage interest income.........................                 -           103          86 
           Other investment income..........................             3,500           187         164
                                                                    ----------  ------------   --------- 
                                                                        51,042        17,012       8,498 
         Expenses:                                                                           
           Interest.........................................            34,572        12,403       7,421 
           Provisions for depreciation and amortization.....             7,202         2,959       1,357 
           General and administrative.......................             4,284         1,652         378
                                                                    ----------  ------------   ---------
                                                                        46,058        17,014       9,156

         Net income (loss) from operations..................             4,984            (2)       (658)

         Non-operating income...............................             1,406             -           - 
                                                                    ----------  ------------   ---------
         Net income (loss) before income taxes and
           extraordinary charge from prepayment of debt.....             6,390            (2)       (658)
         Provision for income taxes:                                                         
           Current..........................................               184           202             
           Deferred.........................................             2,099           509         168
                                                                    ----------  ------------   --------- 
                                                                         2,283           711         168
                                                                    ----------  ------------   ---------
         Net income (loss) before extraordinary charge for
           prepayment of debt...............................             4,107          (713)       (826)
         Extraordinary charge from prepayment of debt.......            (1,985)            -           -
                                                                    ----------  ------------   --------- 
         Net income (loss)..................................        $    2,122  $       (713)  $    (826)
                                                                    ==========  ============   ========= 
         Other comprehensive income, net of taxes:
           Foreign currency translation adjustment..........        $      368  $         57   $       0 
                                                                    ==========  ============   =========
</TABLE>
                                                                   
                             See accompanying notes.

                                      -2-

<PAGE>   4



                                                     


                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                   YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                                                                  
                                                                                                                 ACCUMULATED 
                                                CLASS A                 CLASS B        ADDITIONAL   RETAINED        OTHER    
                                          ------------------     ------------------       PAID      EARNINGS    COMPREHENSIVE
                                          SHARES      AMOUNT     SHARES      AMOUNT    IN CAPITAL   (DEFICIT)       INCOME   
                                          ------     -------     -------     -------   -----------  ---------   ------------- 
                                                                            (IN THOUSANDS)                       
<S>                                       <C>        <C>         <C>        <C>        <C>          <C>         <C>  
         Issuance of Class A Common
              Stock as of June 28,
              1995.......................  1,500     $    24           -     $     -   $     1,489  $       -   $           -
         Foreign currency translation                                                                                       
             adjustment..................                                                                                   9
           Net loss for 1996.............                                                                (826)   
                                          ------     -------      ------     -------   -----------  ---------   ------------- 
         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                                                                                    57
              adjustment.................
           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                                                                                   368
             adjustment..................
           Net income for 1998...........                                                               2,122    
                                          ------     -------      ------     -------   -----------  ---------   -------------
         Balance at August 31, 1998...... 10,000     $   161           0     $     0   $    14,472  $    (243)  $         434
                                          ======     =======      ======     =======   ===========  =========   =============
                                                                
</TABLE>


                             See accompanying notes.















                                      -3-
<PAGE>   5



                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              YEAR ENDED AUGUST 31
                                                        ---------------------------------
                                                          1998          1997        1996
                                                        --------    ----------    -------
                                                                 (IN THOUSANDS)
<S>                                                     <C>         <C>           <C>     
         Net income (loss) before extraordinary
           charge from early payment of debt (which
           did not involve a cash outlay).............  $  2,122    $    (713)    $  (826)
         Adjustments to reconcile net income (loss)
           to cash provided by operating activities
           Depreciation and amortization..............     7,202        2,959       1,357
           Deferred tax provision.....................     2,099          509         168
           Change in operating assets and liabilities                                    
              Accounts receivable.....................   (14,726)      (2,572)       (888)
              Accounts payable and accruals...........     3,111        2,542         930
         Foreign currency translation ................       201          120           7
                                                        --------    ---------     -------
         Cash provided by operating activities........         9        2,845         748

         INVESTING ACTIVITIES
         Acquisition of real estate...................   (96,447)     (60,716)    (91,071)
         Proceeds from disposal of real estate........     2,751            -           - 
         Notes receivable.............................    (8,696)           -           -
         Quality Care Homes Plc acquisition...........                (54,728)          - 
         Other investments............................         0       (6,566)     (9,851)
         Increase in cash on deposit as collateral....     1,257        1,243           - 
         Proceeds from disposal of assets held for 
          sale........................................     3,017            -           - 
         Other........................................       999            -           - 
                                                        --------    ---------     -------
         Cash used in investing activities............   (97,119)    (120,767)   (100,922)

         FINANCING ACTIVITIES
         Issuance of common stock.....................         -       13,472       2,317
         Proceeds from borrowings.....................   256,395       59,958      92,670
         Payments of borrowings.......................  (121,121)           -           -
         Early extinguishment of debt.................   (59,382)           -           -
         Borrowing under revolving credit              
           facility...................................   116,366            -           -
         Short-term borrowings from (repayments to 
           Omega and Worldwide........................   (53,596)      50,875       7,398
         Zero coupon investment.......................   (27,400)           -           -
         Debt issue costs.............................   (14,318)           -           -
         Dividends paid...............................      (668)        (158)          -
         Cost of raising capital......................         -         (634)     (1,614)
                                                        --------    ---------     -------
         Cash provided by financing activities........    96,276      123,513     100,771
                                                        --------    ---------     -------
         Increase (decrease) in unrestricted cash
           and cash equivalents.......................      (834)       5,591         597
       
         Unrestricted cash and cash equivalents at
           beginning  of period.......................     6,188          597           - 
                                                        --------    ---------     -------
         Unrestricted cash and cash equivalents at
           end of period..............................  $  5,354    $   6,188     $   597
                                                        ========    =========     =======
</TABLE>                   


                             See accompanying notes.



                                      -4-

<PAGE>   6



                      PRINCIPAL HEALTHCARE FINANCE LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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's results of operations and cash flows from
the date of incorporation to August 31, 1995 were not significant and are
combined with the results for the year ended August 31, 1996. 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 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.

COST 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 $452,000 and $22,000 in 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.

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 1998, 1997 and 1996.



                                      -5-

<PAGE>   7
INCOME TAXES

    The Company is subject to UK income tax at a rate of 24% on its net rental
income after deducting related expenses, including interest. The Company's
subsidiary, Principal Healthcare Plc, is a UK resident company and is subject to
UK corporate tax at a rate of 33%.

ACCOUNTING 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
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 166 long-term care
facilities at August 31, 1998, 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 in a price index. Substantially all of the master
leases provide for minimum annual rentals which are subject to 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:

<TABLE>
<CAPTION>
                                                         AUGUST 31
                                                       --------------
                                                       (IN THOUSANDS)
                                                   1998             1997
                                                 --------        ---------
<S>                                              <C>             <C>      
         Buildings...........................    $320,732        $ 233,736
         Land................................      56,600           41,246
                                                 --------        ---------
                                                  377,332          274,982
         Less accumulated depreciation.......      11,391            4,294
                                                 --------        ---------
         Total...............................    $365,941        $ 270,688
                                                 ========        =========
</TABLE>

The following table summarizes the changes in real estate properties and
accumulated depreciation during 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                     REAL ESTATE   ACCUMULATED
                                                     PROPERTIES   DEPRECIATION
                                                     ----------   ------------
                                                          (IN THOUSANDS)
<S>                                                   <C>            <C>    
         Balance at June 28, 1995................     $       -      $     -
         Additions for 1996......................        92,795        1,357
                                                      ---------      -------
         Balance at August 31, 1996..............        92,795        1,357
         Additions for 1997......................       182,187        2,937
                                                      ---------      -------
         Balance at August 31, 1997..............       274,982        4,294
         Additions for 1998......................        97,491        6,824                                            
         Disposals for 1998......................        (2,783)        (175)                                           
         Other, primarily currency adjustments...         7,642          448
                                                      ---------      -------
         Balance at August 31, 1998..............     $ 377,332      $11,391
                                                      =========      =======
</TABLE>

    The future minimum rentals expected to be received at August 31, 1998 for
the remainder of the initial terms of the leases are as follows:

<TABLE>
<CAPTION>
                           (IN THOUSANDS)
<S>       <C>              <C>       
          1999.........    $   42,798
          2000.........        43,658
          2001.........        44,531
          2002.........        45,422
          2003.........        46,330
          Thereafter...       939,849
                           ----------
                           $1,162,588
                           ==========
</TABLE>

                                      -6-
<PAGE>   8



3.  INVESTMENT CONCENTRATIONS

    As of August 31, 1998, all of the Company's real estate investments related
to long-term care facilities. The Company's real estate investments are operated
by 11 companies, including Exceler Healthcare Services Limited (24% of amount
invested) and Tamaris Plc (36% of amount invested). The Company's facilities are
located in England (77% of amount invested), Northern Ireland (17% of amount
invested) and Scotland (6% of amount invested). The following is a summary of
the amounts invested and the number of facilities owned at August 31:

<TABLE>
<CAPTION>
                                             1998                       1997
                                  ------------------------------------------------------
                                                 NUMBER OF                     NUMBER OF
                                    INVESTMENT   FACILITIES     INVESTMENT    FACILITIES
                COUNTY                AMOUNT       OWNED          AMOUNT         OWNED
          --------------------    -------------  ----------  ------------- -------------
                                  (IN THOUSANDS)           (IN THOUSANDS)
<S>                               <C>            <C>         <C>           <C>
          Berkshire...........    $       3,780      2       $       3,648       2
          Cambridgeshire......            1,328      1               1,282       1
          Coventry............                -      -               2,865       1
          Cumbria.............            3,717      1               2,865       1
          Derbyshire..........            6,357      4               3,457       2
          Durham..............           46,693     19              49,977      21
          Essex...............            2,470      1               5,471       2
          Greater London......           11,136      3               5,713       2
          Greater Manchester..            4,038      2               3,898       2
          Hertfordshire.......            4,096      1               3,954       1
          Kent................            3,136      1               2,228       1
          Leicestershire......            3,349      1               3,233       1
          Lincolnshire........            6,662      3               6,431       3
          Merseyside..........            8,605      3               4,090       2
          Norfolk.............            5,052      3                 660       1
          North Ayrshire......            7,022      1               6,778       1
          North Humberside....            4,835      1               4,668       1
          North Lincolnshire..            1,170      1                   -       -
          North Yorkshire.....            7,510      4               1,987       2
          Northhamptonshire...            2,662      1               3,368       1
          Northhumberland.....            8,048      3               5,165       2
          Nottinghamshire.....           21,854     12              18,948      11
          Oxfordshire.........            6,270      3               6,052       3
          South Yorkshire.....            8,594      5               8,128       5
          Staffordshire.......           14,508     13              11,800       4
          Suffolk.............           10,618      4              10,249       4
          Tyne & Wear.........           43,511     18              41,193      18
          Warwickshire........            1,488      1               1,436       1
          West Midlands.......           20,920     12              17,530      10
          West Yorkshire......           21,574      6              18,258       5
                                      ---------  -----            --------     ---
            Total England.....          291,003    130             255,332     111
                                                                   

          Antrim..............           19,253     11                   -       -
          Armagh..............           11,034      4                   -       -
          Down................            7,889      2                   -       -
          Fermanagh...........            7,830      4                   -       -
          Londonderry.........           10,132      6                   -       -
          Tyrone..............            7,398      3                   -       -
                                      ---------  -----            
            Total Northern               
              Ireland.........           63,536     30                   -       -

          Dundee City.........           11,035      3              10,652       3
          East Lothian........            8,694      2               6,133       1
          Glasgow.............            3,064      1               2,865       1
                                      ---------  -----            --------     ---
            Total Scotland....           22,793      6              19,650       5
                                      ---------  -----            --------     ---
          Total...............        $ 377,332    166            $274,982     116
                                      =========  =====            ========     ===
</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 operators 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.

    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.

                                      -7-


<PAGE>   9
    The following is condensed financial data pertaining to Tamaris Plc:

<TABLE>
<CAPTION>
                                               YEAR ENDED MARCH 31
                                          ----------------------------
                                               1998           1997
                                          -------------   ------------
                                                (IN THOUSANDS)
<S>                                       <C>                   <C>    
                    Cash flows from:                     
                    Operating Activities..$    (14,148)         (4,874)
                    Financing Activities..      18,507          (9,844)
                    Investing Activities..      (8,960)         17,893
                    Net Revenues..........      59,158          31,172
                    Net Loss..............      (5,620)         (4,999)

<CAPTION>
                                               AS OF MARCH 31
                                          ---------------------------
                                             1998              1997
                                          -----------     -----------
                                                (IN THOUSANDS)
<S>                                       <C>             <C>        
                    Total Assets..........$    74,697     $    22,016
                    Total Liabilities.....     42,527          15,902
                    Shareholders' Equity..     32,170           6,114
</TABLE>

4.   NOTES RECEIVABLE

Notes receivable is comprised of the following (IN THOUSANDS):

<TABLE>
<CAPTION>
<S>                                                      <C>    
                 Notes receivable from tenant            $ 5,998
                 Notes receivable from sale of stock       2,106
                 Other                                       686
                                                         -------       
                                                         $ 8,790
                                                         =======
</TABLE>
  
     The notes receivable from tenant and from stock sale relate to transactions
with Baneberry (See Note 11). The Company has a conditional obligation to fund
additional investment of approximately $8,360,000 with Baneberry, which would be
in partial satisfaction of the note receivable from tenant of certain conditions
are met. The advance will provide an interest initial yield of 10.8%.  

     The estimated fair values of the Company's notes receivable approximates
their face amounts. Face values are based on the estimates of management and on
rates prevailing for comparable loans.

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, 1998, $117,625,000 has been drawn on the
facility. The facility matures on October 6, 2000 with each advance bearing
interest at LIBOR plus 2% (9.6% at August 31, 1998).  During March of 1998, the
Company entered into an interest rate swap agreement with a maturity of 28
years. The swap agreement mitigates the Company's exposure to interest rate
movements by effectively converting a portion of its revolving credit borrowings
from variable to fixed rates. The net face amount of interest rate swap subject
to fixed rates as of August 31, 1998 was $105 million. This agreement involves
the exchange of fixed rate payments for variable rate payments. Fixed interest
rate payments are at a rate of 6.36%. Variable rate payments are based on
one-month British LIBOR (approximately 7.6%). Interest rate differentials paid
or received under these agreements are recognized over the period as adjustments
to interest expense. Gains and losses on terminated swap agreements are
amortized over the term of the borrowing as adjustments to interest expense. The
Company does not hold or issue interest rate swap agreements for trading
purposes. Subsequent to August 31, the Company paid approximately $17 million
associated with deferred cost to settle the hedge upon completion of permanent
financing in 1999.

     The loans payable to Worldwide at August 31, 1998 consist of a short-term
loan of $7,504,000 which bears interest at 9.25%, and a $25,080,000 subordinated
loan which bears interest at 12.18% and matures in December 31, 2000. The
estimated fair value of the subordinated loan at August 31, 1998 is $26,928,000.
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 $2.50) per share. These
warrants expire June 30, 2001. At August 31, 1997, the subordinated loan was
payable to Omega and temporary loans outstanding bearing interest at 9.25%
totaled $59,537,000.  These temporary loans were repaid in October from the
initial draw under the secured revolving credit facility.

                                      -8-



<PAGE>   10
\    The following is a summary of other long-term borrowings all of which are
sterling denominated:
<TABLE>
<CAPTION>
                                                   AUGUST 31
                                             ----------------------
                                                1998         1997
                                             ---------     --------
                                                (IN THOUSANDS)
<S>                                           <C>          <C>          
               Mortgage bonds..............   $250,800     $      -     
               Secured bank loan...........     16,730       64,556
               Commercial mortgages........          -       34,588
               Acquisition finance loan....          -       55,245
               Loan notes and guarantees...          -       18,087
               Collateralized bank term                      
                 loan......................     11,127       18,181
               Overdrafts..................          -        6,854
               Subordinated loan...........      8,360        8,070
                                              --------     --------
                                              $287,017     $205,581
                                              ========     ========
</TABLE>

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

    On December 12, 1997, the Company completed a $250,800,000
((pound)150,000,000) mortgage 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 matures in 2027. The proceeds were primarily
used to repay certain outstanding borrowings totalling $190,000,000 at the date
of the offering. The bonds have a weighted average coupon of 7.52%

    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 fixed on funds drawn down as at August 31, 1998 and 1997 was 8.7%
and 8.9%, respectively.

    The collateralized bank term loan is secured by restricted cash of 
$17,452,000, 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 12.1% to
12.9%. 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 at August 31, 1998
are $8,360,000 and $8,976,000, respectively.

The borrowings from commercial mortgages, the acquisition finance loan and the
loan notes and guarantees were all repaid during the year 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.

    The principal payments for each of the five years following August 31, 1998
is set forth below (IN THOUSANDS):
<TABLE>
<CAPTION>
<S>                 <C>              <C>      
                    1999.........    $   4,182
                    2000.........       21,275
                    2001.........       13,639
                    2002.........        1,304
                    2003.........            -
                    Thereafter...      250,799
                                     ---------                                                
                                     $ 291,199
                                     =========
</TABLE>

    Interest expense during 1998, 1997 and 1996 was approximately $34,572,000,
$12,403,000 and $7,421,000, respectively.

    The estimated fair value of the Company's long-term borrowings at August 31,
1997 approximates their face amounts. The aggregate carrying value and fair
value of borrowings at August 31, 1998 were $441,407,000 and $443,871,000,
respectively. 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. The assets which
were being held for sale during 1998 (started at the lower of carrying amount or
fair value) were as follows (in thousands):
<TABLE>
<CAPTION>
<S>                                              <C>    
                 Land and buildings............. $ 4,524
                 Receivables and inventory.. ...   3,224
                 Cash...........................      23
                 Accounts payable and accruals..  (4,730)
                                                 -------
                 Assets held for resale......... $ 3,041
                                                 =======
</TABLE>

                                      -9-
<PAGE>   11
    During 1998, these assets were sold, realizing net proceeds equal to the
net carrying amount. No gain or loss was recognized from the sale. The disposal
of these assets involved a concurrent execution of long-term triple-net
operating leases with the purchaser. The assets acquired and liabilities assumed
recorded at their estimated fair values follow (in thousands):

<TABLE>
<CAPTION>
<S>                                                      <C>      
                Investment properties.................   $ 121,180
                Accounts receivable and inventory.....       3,309
                Cost in excess of tangible assets         
                acquired..............................      22,231
                Cash (primarily restricted deposits)..      20,061
                Bank borrowings.......................     (23,826)
                Mortgages.............................     (36,140)
                Deferred income tax liability.........     (13,811)
                Accounts payable......................      (8,474)
                Other-- net...........................        (548)
                                                         ---------
                Net assets acquired...................   $  83,982
                                                         =========
</TABLE>

7.  CAPITAL STOCK

    At a special meeting held January 15, 1998, the shareholders approved a
recapitalization under which the distinction of Class B nonvoting stock was
eliminated.

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

<TABLE>
<CAPTION>
                                          NUMBER        EXERCISE   
                                         OF SHARES       PRICE       EXPIRATION 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.

8.  INCOME TAXES

    The provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED
                                                             AUGUST 31
                                                  -------------------------------
                                                    1998       1997        1996
                                                  -------    --------    --------
                                                         (IN THOUSANDS)
<S>                                                 <C>      <C>      <C>
          Current
            UK income tax on net rental income..  $   184    $    266    $      -
            UK corporation tax credit...........        -         (64)          -
                                                  -------    --------    --------
                                                      184         202           -
            Deferred............................    2,099         509         168
                                                  -------    --------    --------
                                                                          
                                                  $ 2,283    $    711    $    168
                                                  =======    ========    ========
</TABLE>

    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:

<TABLE>
<CAPTION>
                                                  AUGUST 31
                                               1998        1997
                                               ----        ----
                                               (IN THOUSANDS)
                   Deferred tax liability
<S>                                           <C>        <C>    
                       Accounts receivable..  $  2,663   $   522
                       Real estate..........    13,811    13,331
                       Other................       179       172
                                              --------   -------  
                                              $ 16,653   $14,025
                                              ========   =======
</TABLE>


                                      -10-
<PAGE>   12


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 agreement was formerly with Omega before Worldwide's
acquisition of an interest in Principal. The Company pays an annual fee of 0.9%
of the Company's invested assets (as defined) to Worldwide. The Company paid
approximately $3,295,000 and $1,341,000 during 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 is due 1 April 2002 and bears interest at 10.75%. The
transaction was approved unanimously by the disinterested directors.

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. 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.