OMEGA HEALTHCARE INVESTORS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------

FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SPETEMBER 30, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _______________

COMMISSION FILE NUMBER 1-11316

OMEGA HEALTHCARE
INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND 38-3041398
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

9690 DEERECO ROAD, SUITE 100, TIMONIUM, MD 21093
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(410) 427-1700
(TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES X NO
----- -----

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).

YES X NO
----- -----

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK AS OF SEPTEMBER 30, 2003.

COMMON STOCK, $.10 PAR VALUE 37,210,991
(CLASS) (NUMBER OF SHARES)

OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
SEPTEMBER 30, 2003

INDEX
Page No.
PART I Financial Information

Item 1. Consolidated Financial Statements:

Balance Sheets
September 30, 2003 (unaudited)
and December 31, 2002.................................... 2

Statements of Operations (unaudited)
Three and nine months ended
September 30, 2003 and 2002.............................. 3

Statements of Cash Flows (unaudited)
Nine months ended
September 30, 2003 and 2002.............................. 4

Notes to Consolidated Financial Statements
September 30, 2003 (unaudited)........................... 5

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 17

Item 3. Quantitative and Qualitative Disclosures About Market Risk... 29

Item 4. Controls and Procedures...................................... 30

PART II OTHER INFORMATION

Item 1. Legal Proceedings............................................ 31

Item 2. Changes in Securities and Use of Proceeds ................... 31

Item 3. Defaults Upon Senior Securities.............................. 31

Item 4. Submission of Matters to a Vote of Security Holders.......... 31

Item 6. Exhibits and Reports on Form 8-K............................. 31

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------------------------
(UNAUDITED) (SEE NOTE)

ASSETS
Real estate properties
Land and buildings at cost................................................... $ 709,825 $ 669,188
Less accumulated depreciation................................................ (133,344) (117,986)
--------------------------------
Real estate properties - net............................................... 576,481 551,202
Mortgage notes receivable - net.............................................. 120,314 173,914
--------------------------------
696,795 725,116
Other investments - net......................................................... 26,491 36,887
--------------------------------
723,286 762,003
Assets held for sale - net...................................................... 2,091 2,324
--------------------------------
Total investments............................................................ 725,377 764,327
Cash and cash equivalents....................................................... 6,079 14,340
Accounts receivable - net....................................................... 2,599 2,766
Interest rate cap............................................................... 5,280 7,258
Other assets.................................................................... 7,600 5,597
Operating assets for owned properties........................................... - 9,721
--------------------------------
Total assets................................................................. $ 746,935 $ 804,009
================================

LIABILITIES AND STOCKHOLDERS EQUITY
Revolving lines of credit....................................................... $ 190,545 $ 177,000
Unsecured borrowings............................................................ 100,000 100,000
Other long-term borrowings...................................................... 6,945 29,462
Accrued expenses and other liabilities.......................................... 18,075 13,234
Operating liabilities for owned properties...................................... - 4,612
Operating assets and liabilities for owned properties- net...................... 957 -
--------------------------------
Total liabilities............................................................ 316,522 324,308
--------------------------------

Preferred stock................................................................. 212,342 212,342
Common stock and additional paid-in capital..................................... 484,918 484,766
Cumulative net earnings......................................................... 169,092 151,245
Cumulative dividends paid....................................................... (431,123) (365,654)
Unamortized restricted stock awards............................................. - (116)
Accumulated other comprehensive loss............................................ (4,816) (2,882)
--------------------------------
Total stockholders equity.................................................... 430,413 479,701
--------------------------------
Total liabilities and stockholders equity.................................... $ 746,935 $ 804,009
================================

NOTE - The balance sheet at December 31, 2002 has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.

See notes to consolidated financial statements.

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------------------- ---------------------

REVENUES
Rental income.................................................................$ 16,523 $ 16,472 $ 49,350 $ 47,569
Mortgage interest income...................................................... 3,465 5,301 11,346 15,899
Other investment income - net................................................. 660 2,068 2,406 4,227
Nursing home revenues of owned and operated assets............................ - 6,798 - 40,756
Litigation settlement......................................................... - - 2,187 -
Miscellaneous................................................................. 278 243 990 759
--------------------- ----------------------
20,926 30,882 66,279 109,210
--------------------- ----------------------
EXPENSES
Nursing home expenses of owned and operated assets............................ - 19,677 - 56,862
Nursing home revenues and expenses of owned and operated assets - net......... 19 - 1,457 -
Depreciation and amortization................................................. 5,386 5,297 16,119 15,961
Interest...................................................................... 5,468 6,444 17,963 21,769
General and administrative.................................................... 1,493 1,576 4,425 5,065
Legal......................................................................... 538 610 1,880 2,262
State taxes................................................................... 153 54 472 270
Provision for impairment...................................................... 4,276 2,371 8,894 1,699
Provision for uncollectible mortgages, notes and accounts receivable.......... - 5,219 - 8,898
Adjustment of derivatives to fair value....................................... - (348) - (946)
--------------------- ----------------------
17,333 40,900 51,210 111,840
--------------------- ----------------------

Income (loss) before gain on assets sold........................................ 3,593 (10,018) 15,069 (2,630)
Gain on assets sold - net....................................................... - 2,157 1,282 1,855
--------------------- ----------------------
Income (loss) from continuing operations........................................ 3,593 (7,861) 16,351 (775)
Income (loss) from discontinued operations...................................... 1,440 (1) 1,496 (3,170)
--------------------- ----------------------
Net income (loss)............................................................... 5,033 (7,862) 17,847 (3,945)
Preferred stock dividends....................................................... (5,029) (5,029) (15,087) (15,087)
--------------------- ----------------------
Net income (loss) available to common...........................................$ 4 $(12,891) $ 2,760 $(19,032)
===================== ======================

Income (loss) per common share:
Basic:
Income (loss) from continuing operations....................................$ (0.04) $ (0.35) $ 0.03 $ (0.47)
===================== ======================
Net income (loss)...........................................................$ - $ (0.35) $ 0.07 $ (0.56)
===================== ======================
Diluted:
Income (loss) from continuing operations....................................$ (0.04) $ (0.35) $ 0.03 $ (0.47)
===================== ======================
Net income (loss)...........................................................$ - $ (0.35) $ 0.07 $ (0.56)
===================== ======================

Dividends declared per common share.............................................$ 0.15 $ - $ 0.15 $ -
===================== ======================

Weighted-average shares outstanding, basic...................................... 37,193 37,133 37,164 33,930
===================== ======================
Weighted-average shares outstanding, diluted.................................... 38,617 37,133 38,587 33,930
===================== ======================

Components of other comprehensive income:
Unrealized gain on Omega Worldwide, Inc.......................................$ - $ 411 $ - $ 969
===================== ======================
Unrealized gain (loss) on hedging contracts...................................$ 1,218 $ (1,318) $ (1,934) $ (952)
===================== ======================

Total comprehensive income......................................................$ 6,251 $ (8,769) $ 15,913 $ (3,928)
===================== ======================

OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)

NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2003 2002
--------------------------

OPERATING ACTIVITIES
Net income (loss)............................................................ $ 17,847 $ (3,945)
Adjustment to reconcile net income to cash provided by operating activities:
Depreciation and amortization.............................................. 16,119 15,976
Provision for impairment................................................... 8,894 4,854
Provision for uncollectible mortgages, notes and accounts receivable....... - 8,898
Gain on assets sold - net.................................................. (2,778) (1,855)
Adjustment of derivatives to fair value.................................... - (946)
Other...................................................................... 4,286 1,077
Net change in accounts receivable for owned and operated assets - net........... 5,415 16,205
Net change in accounts payable for owned and operated assets.................... (324) (3,741)
Net change in other owned and operated assets and liabilities................... 898 3,326
Net change in operating assets and liabilities.................................. (7,121) (1,957)
--------------------------

Net cash provided by operating activities....................................... 43,236 37,892
--------------------------

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from new financing - net............................................... 190,545 -
Payments of credit line borrowings - net........................................ (177,000) (3,889)
Proceeds from refinancing - net................................................. - 13,409
Payments of long-term borrowings................................................ (22,517) (97,981)
Payments for derivative instruments............................................. - (10,140)
Receipts from Dividend Reinvestment Plan........................................ 3 4
Receipts from exercised options................................................. 82 -
Dividends paid.................................................................. (54,859) -
Proceeds from rights offering and private placement - net....................... - 44,600
Deferred financing costs paid................................................... (7,203) (5,604)
--------------------------

Net cash used in financing activities........................................... (70,949) (59,601)
--------------------------

CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of real estate investments - net............................. 3,549 1,045
Capital improvements and funding of other investments........................... (1,307) (299)
Proceeds from other assets...................................................... 13,996 7,652
Collection of mortgage principal................................................ 3,214 11,587
--------------------------
Net cash provided by investing activities....................................... 19,452 19,985
--------------------------

Decrease in cash and cash equivalents........................................... (8,261) (1,724)
Cash and cash equivalents at beginning of period................................ 14,340 4,896
--------------------------
Cash and cash equivalents at end of period...................................... $ 6,079 $ 3,172
==========================
Interest paid during the period................................................. $ 13,731 $ 22,890
==========================

See notes to consolidated financial statements.

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

SEPTEMBER 30, 2003

NOTE A - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements for Omega
Healthcare Investors, Inc. have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In our opinion,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Certain reclassifications have been
made to the 2002 financial statements for consistency with the presentation
adopted for 2003. Such reclassifications have no effect on previously reported
earnings or equity.

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which stipulates that gains and losses from extinguishment of debt
generally will not be reported as extraordinary items effective for fiscal years
beginning after May 15, 2002. We adopted this standard effective January 1,
2003. SFAS No. 145 also specifies that any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in Accounting Principles Board ("APB") Opinion
No. 30, Reporting the Results of Operation's - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for classification as an extraordinary item
shall be reclassified. Therefore, the $49 thousand loss on extinguishment of
debt previously reported for the nine-month period ended September 30, 2002, has
been reclassified to interest expense in our Consolidated Statements of
Operations.

Due to the decrease in size of the owned and operated portfolio (one
facility as of September 30, 2003), the operations of such facilities and the
net assets employed therein are no longer considered a separate reportable
segment. Accordingly, commencing January 1, 2003, the operating revenues and
expenses and related operating assets and liabilities of the owned and operated
facilities are shown on a net basis in our Consolidated Statements of Operations
and Consolidated Balance Sheets, respectively.

Operating results for the three- and nine-month periods ended September 30,
2003 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003. For further information, refer to the financial
statements and footnotes included in our annual report on Form 10-K for the year
ended December 31, 2002.

NOTE B - PROPERTIES

In the ordinary course of our business activities, we periodically evaluate
investment opportunities and extend credit to customers. We also regularly
engage in lease and loan extensions and modifications. Additionally, we actively
monitor and manage our investment portfolio with the objectives of improving
credit quality and increasing returns. In connection with portfolio management,
we engage in various collection and foreclosure activities.

When we acquire real estate pursuant to a foreclosure, lease termination or
bankruptcy proceeding and do not immediately sell the properties to new
operators, the assets are included on the balance sheet as "real estate
properties," and the value of such assets is reported at the lower of cost or
estimated fair value. (See "Owned and Operated Assets" below). Additionally,
when a formal plan to sell real estate is adopted and is under contract, the
real estate is classified as "Assets Held for Sale," with the net carrying
amount adjusted to the lower of cost or estimated fair value, less estimated
costs of disposal.

Upon adoption of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, as of January 1, 2002, long-lived assets sold or designated
as held for sale after January 1, 2002 are reported as discontinued operations
in our financial statements. Long-lived assets designated as held for sale prior
to January 1, 2002 are subject to SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. During 2003,
certain properties were sold and $3.2 million of the impairment loss recorded in
2002 is now reflected in discontinued operations. (See "Mortgages Receivable,
Closed Facilities and Assets Held for Sale" below).

The table below summarizes our number of properties and investment by
category for the quarter ended September 30, 2003:

ASSETS
TOTAL HELD
PURCHASE / MORTGAGES OWNED & CLOSED HEALTHCARE FOR
FACILITY COUNT LEASEBACK RECEIVABLE OPERATED FACILITIES FACILITIES SALE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at June 30, 2003............... 155 52 1 13 221 3 224
Properties closed...................... - - - - - - -
Properties sold/mortgages paid......... - (1) - (4) (5) (2) (7)
Transition leasehold interest.......... - - - - - - -
Properties leased/mortgages placed..... - - - - - - -
Properties transferred to
purchase/leaseback................... - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003.......... 155 51 1 9 216 1 217
====================================================================================================================================

INVESTMENT ($000'S)
- ---------------------------------------
Balance at June 30, 2003............... $702,483 $120,912 $ 5,295 $ 8,070 $836,760 $ 2,227 $838,987
Properties transferred to assets
held for sale........................ - - - - - - -
Properties closed...................... - - - - - - -
Properties sold/mortgages paid......... - (73) - (1,902) (1,975) (136) (2,111)
Transition leasehold interest.......... - - - - - - -
Properties leased/mortgages placed..... - - - - - - -
Properties transferred to
purchase/leaseback................... - - - - - - -
Impairment on properties............... (4,276) - - - (4,276) - (4,276)
Capex and other........................ 155 (525) - - (370) - (370)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003.......... $698,362 $120,314 $ 5,295 $ 6,168 $830,139 $ 2,091 $832,230
====================================================================================================================================

PURCHASE/LEASEBACK

During the three-month period ended September 30, 2003, we re-leased five
former Sun Healthcare Group, Inc. ("Sun") skilled nursing facilities ("SNFs") to
three separate operators. (See Note J - Subsequent Events).

Specifically, we re-leased the five former Sun SNFs in the following three
separate lease transactions: (i) a Master Lease of two SNFs in Florida,
representing 350 beds, which Master Lease has a ten-year term and has an initial
annual lease rate of $1.3 million; (ii) a Master Lease of two SNFs in Texas,
representing 256 beds, which Master Lease has a ten-year term and has an initial
annual lease rate of $0.8 million; and (iii) a lease of one SNF in Louisiana,
representing 131 beds, which lease has a ten-year term and requires an initial
annual lease rate of $0.4 million. Aggregate monthly contractual lease payments,
under all three transactions, total approximately $0.2 million and commenced
July 1, 2003.

As a result of the above mentioned transitions of the five former Sun
facilities, Sun's contractual monthly rent, starting in July, was reduced $0.2
million from approximately $2.2 million to approximately $2.0 million. For the
three-month period ended September 30, 2003, Sun remitted approximately $4.5
million in lease payments versus $3.8 million for the second quarter of 2003.
However, during the second quarter, we applied $1.4 million of security
deposits, which exhausted all remaining security deposits associated with Sun.

During the third quarter of 2003, we amended our Master Lease with a
subsidiary of Alterra Healthcare Corporation ("Alterra") whereby the number of
leased facilities was reduced from eight to five. The amended Master Lease has a
remaining term of approximately ten years with an annual rent requirement of
approximately $1.5 million. We are in the process of negotiating terms and
conditions for the re-lease of the remaining three properties. In the interim,
Alterra will continue to operate the facilities. The Amended Master Lease was
approved by the U.S. Bankruptcy Court in the District of Delaware. (See Note J -
Subsequent Events).

Also during the third quarter of 2003, Claremont Health Care Holdings, Inc.
("Claremont") (formerly Lyric Health Care, LLC) failed to pay base rent in the
amount of $1.5 million. Therefore, we drew on a letter of credit (posted by
Claremont as a security deposit) in the amount of $1.5 million to pay
Claremont's third quarter rent payments and we demanded that Claremont restore
the $1.5 million letter of credit. We are recognizing revenue from Claremont on
a cash-basis as it is received. (See Note J - Subsequent Events). In addition,
we permitted Claremont to close one facility. As a result, a provision for
impairment of $4.3 million was recorded in the third quarter, reducing the
carrying value of the facility in the process of being closed to its estimated
fair value less estimated costs to dispose.

During the three-month period ended March 31, 2003, we re-leased nine
facilities formerly operated by Integrated Health Services, Inc. ("IHS").
Accordingly, eight SNFs on which we held mortgages, and one SNF, which we leased
to IHS, have been re-leased to various unaffiliated third parties. Titles to the
eight properties on which we held mortgages have been transferred to
wholly-owned subsidiaries of ours by Deeds in Lieu of Foreclosure.

Specifically, during the quarter ended March 31, 2003, we leased nine SNFs
to four unaffiliated third-party operators as part of four separate
transactions. Each of the nine facilities had formerly been operated by
subsidiaries of IHS. The four transactions included: (i) a Master Lease of five
SNFs in Florida representing 600 beds to affiliates of Seacrest Healthcare
Management, LLC, which lease has a ten-year term and has an initial annual rent
of $2.5 million; (ii) a month-to-month lease (following a minimum four-month
term) on two SNFs in Georgia representing 304 beds to subsidiaries of Triad
Health Management of Georgia, LLC, which lease provides for annualized rent of
$1.3 million; (iii) a lease of one SNF in Texas, representing 130 beds, to an
affiliate of Senior Management Services of America, Inc., which lease has a
ten-year term and has various rent step-ups, reaching $384,000 by year three,
thereafter, increasing by the lesser of CPI or 2.5%; and (iv) re-leased one
159-bed SNF, located in the state of Washington to a subsidiary of Sun, with an
initial lease term of eight years and initial annual rent of $0.5 million.

In an unrelated transaction during the first quarter of 2003, we recorded a
provision for impairment of $4.6 million associated with one closed facility,
located in the state of Washington, previously leased to a subsidiary of Sun as
part of a Master Lease. The $4.6 million provision was recorded to reduce the
value of the investment to its estimated fair value. We intend to sell this
closed facility as soon as practicable; however, there can be no assurance if,
or when, this sale will be completed.

Also during the first quarter of 2003, we completed a restructured
transaction with Claremont whereby nine facilities formerly leased under two
Master Leases were combined into one new ten-year Master Lease. Annual rent
under the new lease is $6.0 million, the same amount of rent recognized in 2002
for these properties. (See Note J - Subsequent Events).

MORTGAGES RECEIVABLE

Mortgage interest income is recognized as earned over the terms of the
related mortgage notes. Reserves are taken against earned revenues from mortgage
interest when collection of amounts due become questionable or when negotiations
for restructurings of troubled operators lead to lower expectations regarding
ultimate collection. When collection is uncertain, mortgage interest income on
impaired mortgage loans is recognized as received after taking into account
application of security deposits.

During the three months ended September 30, 2003, one facility, located in
Indiana, was removed from an existing mortgage and sold on behalf of the
mortgagor. Net sales proceeds of approximately $73 thousand were used to repay
principal on the existing mortgage.

During the three months ended June 30, 2003, fee-simple ownership of two
closed facilities on which we held mortgages were transferred to us by Deed in
Lieu of Foreclosure. These facilities have been transferred to closed facilities
and are included in our Consolidated Balance Sheet under "Land and buildings at
cost." We intend to sell these closed facilities as soon as practicable;
however, there can be no assurance if, or when, these sales will be completed.

During the three months ended March 31, 2003, fee-simple ownership of eight
facilities were transferred to us as discussed above (see "Purchase/Leaseback"
above). In addition, in an unrelated transaction with IHS, we received
fee-simple ownership to one closed property, which we previously held the
mortgage on, by Deed in Lieu of Foreclosure. This facility was transferred to
closed facilities and is included in our Consolidated Balance Sheet under "Land
and buildings at cost."

No provision for loss on mortgages or notes receivable was recorded during
the three- and nine-month periods ended September 30, 2003 as compared with $4.9
million for the same periods in 2002. The $4.9 million provision was associated
with the write-down of two mortgage loans to bankrupt operators.

OWNED AND OPERATED ASSETS

At September 30, 2003, we own one, 128-bed facility that was previously
recovered from a customer and is operated for our own account. We intend to
operate the remaining owned and operated asset for our own account until we are
able to re-lease, sell or close the facility. The facility and its respective
operations are presented on a consolidated basis in our financial statements.

Nursing home revenues, nursing home expenses, assets and liabilities
included in our consolidated financial statements which relate to such owned and
operated asset are set forth in the tables below. Nursing home revenues from
this owned and operated asset are recognized as services are provided. The
amounts shown in the consolidated financial statements are not comparable, as
the number of owned and operated facilities and the timing of the foreclosures
and re-leasing activities have occurred at different times during the periods
presented. For 2003, nursing home revenues, nursing home expenses, operating
assets and operating liabilities for our owned and operated properties are shown
on a net basis on the face of our consolidated financial statements. For 2002,
nursing home revenues, nursing home expenses, operating assets and operating
liabilities for our owned and operated properties are shown on a gross basis on
the face of our consolidated financial statements.

Nursing home revenues and nursing home expenses in our consolidated
financial statements which relate to our owned and operated assets are as
follows:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2003 2002 2003 2002
------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
NURSING HOME REVENUES (1)
Medicaid............................. $ 604 $ 3,908 $ 2,073 $24,899
Medicare............................. 193 1,591 645 8,662
Private & other...................... 280 1,299 943 7,195
------------------ ------------------
Total nursing home revenues (2).... 1,077 6,798 3,661 40,756
------------------ ------------------

NURSING HOME EXPENSES
Patient care expenses................ 597 7,854 2,020 30,964
Administration....................... 351 3,170 1,952 12,213
Property & related................... 67 1,070 327 3,545
Leasehold buyout expense............. - 1,670 582 1,670
Management fees...................... 81 414 209 2,292
Rent................................. - 480 28 1,957
Provision for uncollectible accounts. - 5,019 - 4,221
------------------ ------------------
Total nursing home expenses (2).... 1,096 19,677 5,118 56,862
------------------ ------------------
Nursing home revenues and expenses of
owned and operated assets - net (2).. $ (19) $ - $(1,457) $ -
================== ==================

(1) Nursing home revenues from these owned and operated assets are
recognized as services are provided.

(2) Nursing home revenues and expenses of owned and operated assets for
the three- and nine-months ended September 30, 2003 are shown on a net
basis on the face of our Consolidated Statements of Operations and are
shown on a gross basis for the three- and nine-months ended September
30, 2002.

Accounts receivable for owned and operated assets is net of an allowance
for doubtful accounts of approximately $5.5 million at September 30, 2003 and
$10.8 million at September 30, 2002. The following table is a summary of
allowance for doubtful accounts:

SEPTEMBER 30,
-----------------------
2003 2002
---------- ------------
(IN THOUSANDS)
Beginning balance..................... $ 12,171 $ 8,335
Provision charged/(recovery).......... - 4,269
Provision applied..................... (7,666) (1,823)
Collection of accounts receivable
previously written off.............. 1,008 -
---------- ------------
Ending balance........................ $ 5,513 $ 10,781
========== ============

The assets and liabilities in our consolidated financial statements which
relate to our owned and operated assets are as follows:

SEPTEMBER 30, DECEMBER 31,
2003 2002
-----------------------------
(IN THOUSANDS)
ASSETS
Cash ......................................... $ 331 $ 838
Accounts receivable-net....................... 1,997 7,491
Other current assets ......................... 294 1,207
-----------------------------
Total current assets (1)................... 2,622 9,536
-----------------------------

Investment in leasehold-net (1)............... - 185

Land and buildings............................ 5,295 5,571
Less accumulated depreciation................. (643) (675)
-----------------------------
Land and buildings-net........................ 4,652 4,896
-----------------------------
Assets held for sale-net...................... 2,091 2,324
-----------------------------
Total assets................................ $ 9,365 $16,941
=============================

LIABILITIES
Accounts payable.............................. $ 65 $ 389
Other current liabilities..................... 3,514 4,223
-----------------------------
Total current liabilities.................. 3,579 4,612
-----------------------------
Total liabilities (1)......................... $ 3,579 $ 4,612
=============================
Operating assets and liabilities for owned
properties-net (1)......................... $ (957) $ -
=============================

(1) Operating assets and liabilities for owned properties as of September
30, 2003 are shown on a net basis on the face of our Consolidated
Balance Sheet and are shown on a gross basis as of December 31, 2002.

CLOSED FACILITIES

During the quarter ended September 30, 2003, we sold four closed
facilities. We sold one facility located in Texas, realizing proceeds of $1.0
million, net of closing costs, resulting in a gain of approximately $0.6
million. We sold one facility located in Connecticut, realizing proceeds of
approximately $1.2 million, net of closing costs, resulting in a gain of
approximately $0.8 million. One facility located in Massachusetts was sold,
realizing proceeds of $0.9 million, net of closing costs, resulting in a gain of
approximately $0.3 million. Finally, one facility located in Florida was sold,
realizing proceeds of $0.6 million, net of closing costs, resulting in a loss of
approximately $0.3 million. In accordance with SFAS No. 144, the $1.4 million
realized net gain for the nine months ended September 30, 2003 is reflected in
our Consolidated Statements of Operations as discontinued operations.

During the quarter ended June 30, 2003, two facilities were transferred to
closed facilities. Both facilities were transferred from mortgage notes
receivable after we received a Deed in Lieu of Foreclosure.

During the quarter ended March 31, 2003, three facilities were transferred
to closed facilities. One facility was transferred from purchase leaseback and a
non-cash impairment of $4.6 million was recorded to reduce the value of the
investment to its estimated fair value. Another facility was transferred from
mortgage notes receivable after we received a Deed in Lieu of Foreclosure.
Finally, we transferred one facility from our owned and operated portfolio into
closed facilities. No provisions for impairments were needed on the latter two
investments.

At September 30, 2003, there are nine closed properties of which two are
currently under either a letter of intent or contract of sale. At this time it
was determined that no provisions for impairments were needed on the nine
remaining investments. We intend to sell the facilities as soon as practicable;
however, there can be no assurance if, or when, these sales will be completed on
terms that allow us to realize the carrying value of the assets. These
properties are included in "Land and buildings at cost" in our Consolidated
Balance Sheet. (See Note J - Subsequent Events).

ASSETS HELD FOR SALE

During the three-month period ended September 30, 2003, we sold two closed
buildings located in Indiana, realizing proceeds of $0.3 million, net of closing
costs, resulting in a gain of approximately $92 thousand. There were no sales or
transfers of real estate assets held for sale during the three-month period
ended September 30, 2002. In accordance with SFAS No. 144, the $0.1 million
realized gain for the nine months ended September 30, 2003 is reflected in our
Consolidated Statements of Operations as discontinued operations.

During the three-month period ended June 30, 2003, we sold one closed
building located in Indiana, realizing proceeds of $0.2 million, net of closing
costs, resulting in a gain of $56 thousand. During the three-month period ended
June 30, 2002, we sold one closed building located in Texas, realizing proceeds
of $1.0 million, net of closing costs, resulting in a loss of $0.3 million.
There were no sales or transfers of real estate assets held for sale during the
three-month period ended March 31, 2003. During the three-month period ended
March 31, 2002, we realized gross disposition proceeds of $0.1 million
associated with the sale of beds from two facilities.

At September 30, 2003, the carrying value of the remaining asset held for
sale totaled $2.1 million (net of impairment reserves of $2.1 million). There
can be no assurance if, or when, such sale will be completed or whether such
sale will be completed on terms that allow us to realize the carrying value of
the assets. (See Note J - Subsequent Events).

OTHER NON-CORE ASSETS

There were no non-core real estate transactions during the three-month
period ended September 30, 2003; however, during the three-month period ended
June 30, 2003, we sold an investment in a Baltimore, Maryland asset, leased by
the United States Postal Service, for approximately $19.6 million. The purchaser
paid us gross proceeds of $1.95 million and assumed the first mortgage of
approximately $17.6 million. As a result, we recorded a gain of $1.3 million,
net of closing costs and other expenses.

During the three-month period ended June 30, 2002, a charge of $3.7 million
for provision for uncollectible mortgages, notes and accounts receivable was
recognized. This charge was primarily related to the restructuring and reduction
of debt owed by Madison/OHI Liquidity Investors, LLC ("Madison"), as part of the
compromise and settlement of a lawsuit with Madison. (See Note G - Litigation).

NOTE C - CONCENTRATION OF RISK

As of September 30, 2003, our portfolio of domestic investments consisted
of 216 healthcare facilities, located in 28 states and operated by 34
third-party operators. Our gross investment in these facilities, net of
impairments, totaled $830.1 million at September 30, 2003, with 97.2% of our
real estate investments related to long-term care facilities. This portfolio is
made up of 153 long-term healthcare facilities and two rehabilitation hospitals
owned and leased to third parties, fixed rate mortgages on 51 long-term
healthcare facilities, one long-term healthcare facility that was recovered from
a customer and is currently operated through a third-party management contract
for our own account and nine long-term healthcare facilities that were recovered
from customers and are currently closed. At September 30, 2003, we also held
miscellaneous investments and assets held for sale of approximately $28.6
million, including a $1.3 million investment in Principal Healthcare Finance
Trust and $18.1 million of notes receivable, net of allowance.

Approximately 45.9% of our real estate investments are operated by four
public companies: Sun Healthcare Group, Inc. (22.8%), Advocat, Inc. ("Advocat")
(12.6%), Mariner Health Care, Inc. ("Mariner") (7.2%), and Alterra Healthcare
Corporation (3.3%). The three largest private operators represent 9.9%, 6.6% and
3.8%, respectively, of our investments. No other operator represents more than
2.8% of our investments. The three states in which we have our highest
concentration of investments are Florida (15.4%), California (8.0%) and Illinois
(8.0%). (See Note J - Subsequent Events).

NOTE D - DIVIDENDS

In order to qualify as a real estate investment trust ("REIT"), we are
required to distribute dividends (other than capital gain dividends) to our
stockholders in an amount at least equal to (A) the sum of (i) 90% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net capital gain) and (ii) 90% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of non-cash income. In
addition, if we dispose of any built-in gain asset during a recognition period,
we will be required to distribute at least 90% of the built-in gain (after tax),
if any, recognized on the disposition of such asset. Such distributions must be
paid in the taxable year to which they relate, or in the following taxable year
if declared before we timely file our tax return for such year and paid on or
before the first regular dividend payment after such declaration. In addition,
such distributions are required to be made pro rata, with no preference to any
share of stock as compared with other shares of the same class, and with no
preference to one class of stock as compared with another class except to the
extent that such class is entitled to such a preference. To the extent that we
do not distribute all of our net capital gain or do distribute at least 90%, but
less than 100% of our "REIT taxable income," as adjusted, we will be subject to
tax thereon at regular ordinary and capital gain corporate tax rates.

On February 1, 2001, we announced the suspension of all common and
preferred dividends. Due to our 2002 taxable loss, no distribution was necessary
to maintain our REIT status for 2002. Net operating loss carry-forwards through
2002 of approximately $21.9 million, which is comprised of $7.3 million
associated with our REIT and $14.6 million associated with our taxable REIT
subsidiary, are available to help offset taxable income.

In July 2003, our Board of Directors declared a full catch-up of
cumulative, unpaid dividends for all classes of preferred stock to be paid
August 15, 2003 to preferred stockholders of record on August 5, 2003. In
addition, our Board declared the regular quarterly dividend for all classes of
preferred stock to be paid on August 15, 2003 to preferred stockholders of
record on August 5, 2003. As a result, for the nine months ended September 30,
2003, preferred cash dividend payments totaling $54.9 million were paid;
however, no preferred cash dividends were paid during the twelve months ended
December 31, 2002 and 2001.

Series A and Series B preferred stockholders of record on August 5, 2003
were paid dividends in the amount of approximately $6.36 and $5.93 per preferred
share, respectively, on August 15, 2003. Our Series C preferred stockholder were
paid dividends of approximately $27.31 per Series C preferred share on August
15, 2003. The liquidation preference for our Series A, B and C preferred stock
is $25.00, $25.00 and $100.00 per share, respectively, excluding cumulative
unpaid dividends. Total August 2003 dividend payments for all classes of
preferred stock were approximately $54.9 million.

Cumulative unpaid dividends represent unpaid dividends accrued for the
period from November 1, 2000 through April 30, 2003. Regular quarterly dividends
represent dividends for the period May 1, 2003 through July 31, 2003. In
aggregate, preferred dividends continue to accumulate at approximately $5.0
million per quarter.

No common cash dividends were paid during the nine months ended September
30, 2003 or the twelve months ended December 31, 2002 and 2001. However, in
September 2003, our Board of Directors declared the reinstatement of its common
dividend to be paid November 17, 2003 to common shareholders of record on
October 31, 2003 in the amount of $0.15 per share. In addition, our Board
declared its regular quarterly dividends for all classes of preferred stock to
be paid November 17, 2003 to preferred stockholders of record on October 31,
2003.

Series A and Series B preferred stockholders of record on October 31, 2003
will be paid dividends in the amount of approximately $0.578 and $0.539 per
preferred share, respectively, on November 17, 2003. Our Series C preferred
stockholder will be paid dividends of $2.50 per Series C preferred share on
November 17, 2003. The liquidation preference for our Series A, B and C
preferred stock is $25.00, $25.00 and $100.00 per share, respectively. Regular
quarterly dividends represent dividends for the period August 1, 2003 through
October 31, 2003. Total dividend payments for all classes of preferred stock are
approximately $5.0 million.

NOTE E - EARNINGS PER SHARE

The computation of basic earnings per share is determined based on the
weighted-average number of common shares outstanding during the respective
periods. Diluted earnings per share reflect the dilutive effect, if any, of
stock options and the assumed conversion of the Series C preferred stock.

For the three- and nine-month periods ended September 30, 2003, stock
options that were in-the-money had a dilutive effect of $0.0001 per share and
$0.003 per share, respectively. There were no dilutive effects from stock
options in-the-money for the same periods in 2002.

NOTE F - STOCK-BASED COMPENSATION

We account for stock options using the intrinsic value method as defined by
APB Opinion No. 25, Accounting for Stock Issued to Employees. Under the terms of
the 2000 Stock Incentive Plan ("Incentive Plan"), we reserved 3,500,000 shares
of common stock for grants to be issued during a period of up to ten years.
Options are exercisable at the market price at the date of grant, expire five
years after date of grant for over 10% owners and ten years from the date of
grant for less than 10% owners. Directors' shares vest over three years while
other grants vest over five years or as defined in an employee's contract. At
September 30, 2003, there were 2,352,835 outstanding options granted to 21
eligible participants. Additionally, 342,124 shares of restricted stock have
been granted under the provisions of the Incentive Plan. The market value of the
restricted shares on the date of the award was recorded as unearned
compensation-restricted stock, with the unamortized balance shown as a separate
component of stockholders equity. Unearned compensation is amortized to expense
generally over the vesting period.

Statement of Financial Accounting Standard No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which was effective
January 1, 2003, requires certain disclosures related to our stock-based
compensation arrangements. The following table presents the effect on net income
and earnings per share if we had applied the fair value recognition provisions
of SFAS No. 123, Accounting for Stock-Based Compensation, to our stock-based
compensation.

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------------------- ---------------------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) PER SHARE AMOUNTS)

Net income (loss) to common stockholders.................................... $ 4 $(12,891) $ 2,760 $(19,032)
Add: Stock-based compensation expense included in net income (loss) to
common stockholders................................................... - - - -
--------------------- --------------------
4 (12,891) 2,760 (19,032)
Less: Stock-based compensation expense determined under the fair value
based method for all awards.......................................... 26 19 66 58
--------------------- --------------------
Pro forma net (loss) income to common stockholders.......................... $ (22) $(12,910) $ 2,694 $(19,090)
===================== ====================

Earnings per share:
Basic, as reported.......................................................... $ 0.00 $ (0.35) $ 0.07 $ (0.56)
===================== ====================
Basic, pro forma............................................................ $ 0.00 $ (0.35) $ 0.07 $ (0.56)
===================== ====================
Diluted, as reported........................................................ $ 0.00 $ (0.35) $ 0.07 $ (0.56)
===================== ====================
Diluted, pro forma.......................................................... $ 0.00 $ (0.35) $ 0.07 $ (0.56)
===================== ====================

At September 30, 2003, options currently exercisable (810,458) have a
weighted-average exercise price of $3.622, with exercise prices ranging from
$2.32 to $37.20. There are 574,486 shares available for future grants as of
September 30, 2003.

The following is a summary of quarterly activity through September 30, 2003
under the plan.

STOCK OPTIONS
-------------------------------------------
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE PRICE
- --------------------------------------------------------------------------------
Outstanding at December 31, 2002.... 2,394,501 $1.590 - $37.205 $3.267
Granted during 1st quarter 2003... - - -
Exercised......................... - - -
Canceled.......................... - - -
- --------------------------------------------------------------------------------
Outstanding at March 31, 2003....... 2,394,501 $1.590 - $37.205 $3.267
Granted during 2nd quarter 2003... 9,000 3.740 - 3.740 3.740
Exercised......................... - - -
Canceled.......................... - - -
- --------------------------------------------------------------------------------
Outstanding at June 30, 2003........ 2,403,501 $1.590 - $37.205 $3.152
Granted during 3rd quarter 2003... - - -
Exercised......................... (50,666) 1.590 - 3.813 1.619
Canceled.......................... - - -
- --------------------------------------------------------------------------------
Outstanding at September 30, 2003... 2,352,835 $2.320 - $37.205 $3.198
================================================================================

NOTE G - LITIGATION

We are subject to various legal proceedings, claims and other actions
arising out of the normal course of business. While any legal proceeding or
claim has an element of uncertainty, management believes that the outcome of
each lawsuit claim or legal proceeding that is pending or threatened, or all of
them combined, will not have a material adverse effect on our consolidated
financial position or results of operations.

On June 21, 2000, we were named as a defendant in certain litigation
brought against us in the U.S. District Court for the Eastern District of
Michigan, Detroit Division, by Madison/OHI Liquidity Investors, LLC , for the
breach and/or anticipatory breach of a revolving loan commitment. Ronald M.
Dickerman and Bryan Gordon are partners in Madison and limited guarantors
("Guarantors") of Madison's obligations to us. Effective as of September 30,
2002, the parties settled all claims in the suit in consideration of Madison's
payment of the sum of $5.4 million consisting of a $0.4 million cash payment for
our attorneys' fees, with the balance evidenced by the amendment of the existing
promissory note from Madison to us. The note reflects a principal balance of
$5.0 million, with interest accruing at 9% per annum, payable over three years
upon liquidation of the collateral securing the note. The note is also fully
guaranteed by the Guarantors; provided that if all accrued interest and 75% of
original principal has been repaid within 18 months, the Guarantors will be
released. Accordingly, a reserve of $1.25 million was recorded in 2002 relating
to this note. As of September 30, 2003, the principal balance on this note was
$2.2 million prior to reserves.

In 2000, we filed suit against a title company (later adding a law firm as
a defendant), seeking damages based on claims of breach of contract and
negligence, among other things, as a result of the alleged failure to file
certain Uniform Commercial Code ("UCC") financing statements in our favor. We
filed a subsequent suit seeking recovery under title insurance policies written
by the title company. The defendants denied the allegations made in the
lawsuits. In settlement of our claims against the defendants, we agreed in the
first quarter of 2003 to accept a lump sum cash payment of $3.2 million. The
cash proceeds were offset by related expenses incurred of $1.0 million resulting
in a net gain of $2.2 million.

We and several of our wholly-owned subsidiaries have been named as
defendants in professional liability claims related to our owned and operated
facilities. Other third-party managers responsible for the day-to-day operations
of these facilities have also been named as defendants in these claims. In these
suits, patients of certain previously owned and operated facilities have alleged
significant damages, including punitive damages against the defendants. The
lawsuits are in various stages of discovery and we are unable to predict the
likely outcome at this time. We continue to vigorously defend these claims and
pursue all rights we may have against the managers of the facilities, under the
terms of the management agreements. We have insured these matters, subject to
self-insured retentions of various amounts.

NOTE H - BORROWING ARRANGEMENTS

At September 30, 2003, we had $190.5 million of borrowings outstanding and
$12.1 million of letters of credit outstanding, leaving availability of $22.0
million under our $225 million Senior Secured Credit Facility ("Credit
Facility"). The $190.5 million of outstanding borrowings had an interest rate of
6.00% at September 30, 2003. In addition, during the quarter, we paid off three
Industrial Revenue Bonds totaling approximately $4.4 million with a blended rate
of 9.26% at the payoff date.

In June 2003, we completed the new $225 million Credit Facility arranged
and syndicated by GE Healthcare Financial Services. At the closing, we borrowed
$187.1 million under the new Credit Facility to repay borrowings under our two
previous credit facilities and replace letters of credit. In addition, proceeds
from the loan were permitted to be used to pay cumulative unpaid preferred
dividends, and are permitted to be used for general corporate purposes.

The new Credit Facility includes a $125 million term loan ("Term Loan") and
a $100 million revolving line of credit ("Revolver") collateralized by 121
facilities representing approximately half of our invested assets. Both the Term
Loan and Revolver have a four-year maturity with a one-year extension at our
option. The Term Loan amortizes on a 25-year basis and is priced at London
Interbank Offered Rate ("LIBOR") plus a spread of 3.75%, with a floor of 6.00%.
The Revolver is also priced at LIBOR plus a 3.75% spread, with a 6.00% floor.

Borrowings under our $160.0 million secured revolving line of credit
facility of $112.0 million were paid in full upon the closing of our new Credit
Facility. Additionally, $12.5 million of letters of credit previously
outstanding against this credit facility were reissued under the new Credit
Facility. LIBOR-based borrowings under this previous credit facility had a
weighted-average interest rate of approximately 4.5% at the payoff date.

Borrowings under our $65.0 million line of credit facility, which was fully
drawn, were paid in full upon the closing of our new Credit Facility.
LIBOR-based borrowings under this previous credit facility had a
weighted-average interest rate of approximately 4.6% at the payoff date.

As a result of the new Credit Facility, for the three- and nine-month
periods ended September 30, 2003, our interest expense includes $0 and $2.6
million, respectively, of non-cash interest expense (financing costs) related to
the termination of our two previous credit facilities.

NOTE I - ACCOUNTING FOR DERIVATIVES

We utilize interest rate swaps and caps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. We do not
use derivatives for trading or speculative purposes. We have a policy of only
entering into contracts with major financial institutions based upon their
credit ratings and other factors. When viewed in conjunction with the underlying
and offsetting exposure that the derivatives are designed to hedge, we have not
sustained a material loss from those instruments nor do we anticipate any
material adverse effect on our net income or financial position in the future
from the use of derivatives.

To manage interest rate risk, we may employ options, forwards, interest
rate swaps, caps and floors or a combination thereof depending on the underlying
exposure. We may employ swaps, forwards or purchased options to hedge qualifying
forecasted transactions. Gains and losses related to these transactions are
deferred and recognized in net income as interest expense in the same period or
periods that the underlying transaction occurs, expires or is otherwise
terminated. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which was
required to be adopted in years beginning after June 15, 2000. We adopted the
new Statement effective January 1, 2001. The Statement requires us to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in Other
Comprehensive Income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.

In September 2002, we entered into a 61-month, $200.0 million interest rate
cap with a strike of 3.50% that has been designated as a cash flow hedge. Under
the terms of the cap agreement, when LIBOR exceeds 3.50%, the counterparty will
pay us $200.0 million multiplied by the difference between LIBOR and 3.50% times
the number of days when LIBOR exceeds 3.50%. The unrealized gain/loss in the
fair value of cash flow hedges are reported on the balance sheet with
corresponding adjustments to accumulated Other Comprehensive Income. On
September 30, 2003, the derivative instrument was reported at its fair value of
$5.3 million as compared to its fair value at December 31, 2002 of $7.3 million.
An adjustment of $1.2 million (gain) and $1.9 million (loss) to Other
Comprehensive Income was made for the change in fair value of this cap during
the three- and nine-month periods ended September 30, 2003, respectively. Over
the term of the interest rate cap, the $10.1 million cost will be amortized to
earnings based on the specific portion of the total cost attributed to each
monthly settlement period. Over the twelve months ending December 31, 2003, $0.1
million is expected to be amortized. The amortization for the three- and
nine-month periods ended September 30, 2003 was $37,000 and $44,000,
respectively, as compared to $0 for the same periods in 2002.

NOTE J - SUBSEQUENT EVENTS

Alterra Healthcare Corporation. On November 1, 2003, we re-leased one
assisted living facility ("ALF") formerly leased by Alterra, located in
Washington and representing 52 beds, to a new operator under a Lease, which has
a ten-year term and has an initial annual lease rate of $0.2 million. We are in
the process of negotiating terms and conditions for the re-lease of the
remaining two properties. In the interim, Alterra will continue to operate the
two facilities.

Sun Healthcare Group Inc. On November 1, 2003, we re-leased two SNFs
formerly leased by Sun, located in California and representing 185 beds, to a
new operator under a Master Lease, which has a ten-year term and has an initial
annual lease rate of $0.6 million. In addition, on October 1, 2003, we re-leased
three SNFs formerly leased by Sun, located in California and representing 271
beds, to a new operator under a Master Lease, which has a 15-year term and has
an initial annual lease rate of $1.24 million.

Separately, we continue our ongoing restructuring discussions with Sun. At
the time of this filing, we cannot determine the timing or outcome of these
discussions. There can be no assurance that Sun will continue to pay rent at any
level, although, we believe that alternative operators would be available to
lease or buy the remaining Sun facilities if an appropriate agreement is not
completed with Sun. However, as a result of the above mentioned transitions of
the five former Sun facilities, Sun's contractual monthly rent, starting in
November, was reduced approximately $0.15 million from approximately $2.00
million to approximately $1.85 million. For the month of November, Sun remitted
approximately $1.51 million in lease payments (or $18.1 million annually)
similar to what was paid on a monthly basis during the third quarter of 2003.
Rent received in November from the ten former Sun facilities (five mentioned
above, plus five facilities re-leased in July - see Note B - Properties;
Purchase/Leaseback) totaled approximately $0.35 million or $4.22 million
annually.

Claremont Healthcare Holdings, Inc. Effective November 7, 2003, we
re-leased two SNFs formerly leased by Claremont, located in Ohio and
representing 279 beds, to a new operator under a Master Lease, which has a
ten-year term and has an initial annual lease rate of $1.2 million.

Claremont failed to pay base rent due on November 1, 2003 in the amount of
$0.5 million. On November 10, 2003, we applied a security deposit in the amount
of $0.5 million to pay Claremont's November rent payment and we demanded that
Claremont restore the $0.5 million security deposit. As of the date of this
filing, we have no additional security deposits with Claremont. We are
recognizing revenue from Claremont on a cash-basis as it is received.

Other Assets. On November 4, 2003, we sold one closed facility located in
Iowa for its approximate net book value. On October 31, 2003, we sold one closed
facility located in Florida, realizing proceeds of $2.6 million, net of closing
costs, resulting in a gain of $1.5 million. These two facilities are part of the
nine closed facilities at September 30, 2003 and are included in "Land and
buildings at cost" in our Consolidated Balance Sheet. (See Note B - Properties;
Closed Facilities). In addition, on October 31, 2003, we sold our remaining held
for sale facility located in Texas, realizing proceeds of $1.5 million, net of
closing costs, resulting in a loss of $0.8 million. (See Note B - Properties;
Assets Held for Sale).

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

As of September 30, 2003, our portfolio of domestic investments consisted
of 216 healthcare facilities, located in 28 states and operated by 34
third-party operators. Our gross investment in these facilities, net of
impairments, totaled $830.1 million at September 30, 2003, with 97.2% of our
real estate investments related to long-term care facilities. This portfolio is
made up of 153 long-term healthcare facilities and two rehabilitation hospitals
owned and leased to third parties, fixed rate mortgages on 51 long-term
healthcare facilities, one long-term healthcare facility that was recovered from
a customer and is currently operated through a third-party management contract
for our own account and nine long-term healthcare facilities that were recovered
from customers and are currently closed. At September 30, 2003, we also held
miscellaneous investments and assets held for sale of approximately $28.6
million, including a $1.3 million investment in Principal Healthcare Finance
Trust and $18.1 million of notes receivable, net of allowance. (See Note J -
Subsequent Events).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the 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.

We have identified six significant accounting policies as critical
accounting policies. These critical accounting policies are those that have the
most impact on the reporting of our financial condition and those requiring
significant judgments and estimates. With respect to these critical accounting
policies, we believe the application of judgments and assessments is
consistently applied and produces financial information that fairly presents the
results of operations for all periods presented. The six critical accounting
policies are:

Revenue Recognition. Rental income and mortgage interest income are
recognized as earned over the terms of the related Master Leases and mortgage
notes, respectively. Such income includes periodic increases based on
pre-determined formulas (i.e., such as increases in the CPI) as defined in the
Master Leases and mortgage loan agreements. Reserves are taken against earned
revenues from leases and mortgages when collection of amounts due become
questionable or when negotiations for restructurings of troubled operators lead
to lower expectations regarding ultimate collection. When collection is
uncertain, lease revenues are recorded as received, after taking into account
application of security deposits. Interest income on impaired mortgage loans is
recognized as received after taking into account application of security
deposits.

Nursing home revenues from owned and operated assets (primarily Medicare,
Medicaid and other third-party insurance) are recognized as patient services are
provided.

Impairment of Assets. We periodically evaluate our real estate investments
for impairment indicators. The judgment regarding the existence of impairment
indicators are based on factors such as market conditions, operator performance
and legal structure. If indicators of impairment are present, we evaluate the
carrying value of the related real estate investments in relationship to the
future undiscounted cash flows of the underlying facilities. Provisions for
impairment losses related to long-lived assets are recognized when expected
future cash flows are less than the carrying values of the assets. If the sum of
the expected future cash flow, including sales proceeds, is less than carrying
value, we then adjust the net carrying value of leased properties and other
long-lived assets to the present value of expected future cash flows.

Loan Impairment Policy. When management identifies an indication of
potential loan impairment, such as non-payment under the loan documents or
impairment of the underlying collateral, the loan is written down to the present
value of the expected future cash flows. In cases where expected future cash
flows cannot be estimated, the loan is written down to the fair value of the
collateral.

Accounts Receivable. Accounts receivable consists primarily of lease and
mortgage interest payments. Amounts recorded include estimated provisions for
loss related to uncollectible accounts and disputed items. On a monthly basis,
we review the contractual payment versus actual cash payment received and the
contractual payment due date versus actual receipt date. When management
identifies delinquencies, a judgment is made as to the amount of provision, if
any, that is needed.

Accounts Receivable-Owned and Operated Assets. Accounts receivable from
owned and operated assets consist of amounts due from Medicare and Medicaid
programs, other government programs, managed care health plans, commercial
insurance companies and individual patients. Amounts recorded include estimated
provisions for loss related to uncollectible accounts and disputed items.

Owned and Operated Assets and Assets Held for Sale. When we acquire real
estate pursuant to a foreclosure proceeding, it is designated as "owned and
operated assets" and is recorded at the lower of cost or fair value and is
included in real estate properties on our Consolidated Balance Sheet. For 2003,
operating assets and operating liabilities for our owned and operated properties
are shown on a net basis on the face of our Consolidated Balance Sheet. For
2002, operating assets and operating liabilities for our owned and operated
properties are shown on a gross basis on the face of our Consolidated Balance
Sheet and are detailed in Note B - Properties; Owned and Operated Assets. The
consolidation in 2003 is due to the decrease in the size of the owned and
operated portfolio (currently one facility).

When a formal plan to sell real estate is adopted and we hold a contract
for sale, the real estate is classified as "assets held for sale," with the net
carrying amount adjusted to the lower of cost or estimated fair value, less cost
of disposal. Depreciation of the facilities is excluded from operations after
management has committed to a plan to sell the asset. Upon adoption of FASB 144
as of January 1, 2002, long-lived assets sold or designated as held for sale
after January 1, 2002 are reported as discontinued operations in our financial
statements.

RESULTS OF OPERATIONS

The following is a discussion of our consolidated results of operations,
financial position and liquidity and capital resources which should be read in
conjunction with the consolidated financial statements and accompanying notes.
(See Note B - Properties).

Revenues for the three- and nine-month periods ended September 30, 2003
totaled $20.9 million and $66.3 million, respectively, a decrease of $10.0
million and $42.9 million, respectively, from the same periods in 2002. When
excluding nursing home revenues of owned and operated assets, revenues decreased
$3.2 million and $2.2 million versus the three- and nine-month periods ended
September 30, 2002, respectively. The decrease during the quarter was primarily
the result of operator restructurings. The decrease for the nine-month period is
primarily due to operator restructurings and the second quarter sale of our
investment in a Baltimore, Maryland asset, offset by a legal settlement (see
below).

Rental income for the three- and nine-month periods ended September 30,
2003 were $16.5 million and $49.4 million, respectively, an increase of $0 and
$1.8 million from the same periods in 2002. The $1.8 million increase for the
nine-month period is due to $1.7 million relating to contractual increases in
rents that became effective in the second half of 2002 and in 2003 and $0.4
million in net new leases (new lease revenue offset by the loss of lease revenue
due to operator foreclosures, bankruptcies and restructurings), offset by $0.3
million due to deferral for non-payment.

Mortgage interest income for the three- and nine-month periods ended
September 30, 2003 totaled $3.5 million and $11.3 million, respectively, a
decrease of $1.8 million and $4.6 million from the same periods in 2002. The
$1.8 million three-month decrease is primarily the result of operator
bankruptcies and restructurings of $1.5 million and mortgage payoffs and normal
amortization of $0.3 million. The $4.6 million nine-month decrease versus 2002
is primarily the result of operator bankruptcies and restructurings of $3.5
million and mortgage payoffs and normal amortization of $1.1 million.

Other investment income for the three- and nine-month periods ended
September 30, 2003 totaled $0.7 million and $2.4 million, respectively, a
decrease of $1.4 million and $1.8 million from the same periods in 2002. The
decrease in both the three- and nine-month periods is primarily due to the
second quarter 2003 sale of a Baltimore, Maryland asset, leased by the United
States Postal Service.

In 2000, we filed suit against a title company (later adding a law firm as
a defendant), seeking damages based on claims of breach of contract and
negligence, among other things, as a result of the alleged failure to file
certain UCC financing statements in our favor. We filed a subsequent suit
seeking recovery under title insurance policies written by the title company.
The defendants denied the allegations made in the lawsuits. In settlement of our
claims against the defendants, we agreed in the first quarter of 2003 to accept
a lump sum cash payment of $3.2 million. The cash proceeds were offset by
related expenses incurred of $1.0 million resulting in a net gain of $2.2
million.

Expenses for the three- and nine-month periods ended September 30, 2003
totaled $17.3 million and $51.2 million, respectively, a decrease of $23.6
million and $60.6 million from the same periods in 2002. When excluding nursing
home expenses of owned and operated assets, expenses were $17.3 million and
$49.8 million, respectively, for the three- and nine-month periods ended
September 30, 2003 versus $21.2 million and $55.0 million for the same periods
in 2002. The $3.9 million decrease for the three-month period ended September
30, 2003 primarily resulted from a $4.3 million provision for impairment
recorded during the third quarter of 2003 compared to a provision for impairment
of $2.4 million and a provision for uncollectible mortgages, notes and accounts
receivable of $5.2 million, both taken in the third quarter of 2002. In
addition, interest expense decreased approximately $0.9 million from $6.4
million for the third quarter of 2002 to $5.5 million for the three-month period
ended September 30, 2003. The $5.2 million decrease for the nine-month period
ended September 30, 2003 is primarily due to $3.8 million of interest savings,
$1.0 million favorable reduction in general and administrative and legal
expenses, $8.9 million favorable reduction in provision for uncollectible
mortgages, notes and accounts receivable, off set by an increase of $7.2 million
in provision for impairment and $1.0 million in adjustments of derivatives to
fair value. We believe that the presentation of our revenues and expenses,
excluding nursing home owned and operated assets, provides a useful measure of
the operating performance of our core portfolio as a REIT in view of the
disposition of all but one of our owned and operated assets.

Nursing home expenses, net of nursing home revenues, for owned and operated
assets for the three- and nine-month periods ended September 30, 2003 were $19
thousand and $1.5 million, respectively, a decrease of $12.9 million and $14.6
million from the same periods in 2002. The decrease was a result of the decrease
in the number of owned and operated facilities from eight at September 30, 2002
to one at September 30, 2003.

Interest expense for the three- and nine-month periods ended September 30,
2003 was $5.5 million and $18.0 million, respectively, compared to $6.4 million
and $21.8 million for the same periods in 2002. The decrease for the three- and
nine-month periods is primarily due to a $22.0 million reduction of total
outstanding debt versus the same periods in 2002.

General and administrative and legal expenses for the three- and nine-month
periods ended September 30, 2003, totaled $2.0 million and $6.3 million,
respectively, compared with $2.2 million and $7.3 million for the same periods
in 2002. The $0.2 million decrease for the three-month period ended September
30, 2003 is primarily due to a reduction in consulting costs relating to the
reduction in the number of our owned and operated facilities. The $1.0 million
decrease for the nine-month period ended September 30, 2003 is primarily due to
a reduction in legal and consulting costs relating to the reduction in the
number of our owned and operated facilities.

A provision for impairment of $4.3 million and $8.9 million was recorded
for the three- and nine-month periods ended September 30, 2003. The $4.3 million
provision reduced the carrying value of a facility in the process of being
closed to its estimated fair value less estimated costs to dispose. A provision
for impairment of $4.6 million, taken in the first quarter of 2003, reduced the
carrying value of a closed building to its estimated fair value less estimated
costs to dispose. The buildings are being actively marketed for sale; however,
there can be no assurance if, or when, such sales will be completed or whether
such sales will be completed on terms that allow us to realize the carrying
value of the assets. A provision for impairment of $2.4 million and $1.7 million
was recorded for the three- and nine-month periods ended September 30, 2002,
respectively. The $2.4 million provision was to reduce the carrying value of one
owned and operated building and three core buildings that were closed during the
third quarter of 2003 to their estimated fair value less estimated costs to
dispose. The $1.7 million provision was to reduce the value of three closed
owned and operated buildings and three closed core buildings to their estimated
fair value less estimated costs to dispose. (See Note B - Properties; Owned and
Operated Assets and Closed Facilities).

There were no charges recognized for provision for uncollectible mortgages,
notes and accounts receivable during the three- and nine-month period ended
September 30, 2003. Charges of $5.2 million and $8.9 million for provision for
uncollectible mortgages, notes and accounts receivable were recognized during
the three- and nine-month period ended September 30, 2002, respectively. The
$5.2 million charge was primarily related to the write-down of one loan to a
bankrupt operator during the third quarter of 2002. The $8.9 million consists
primarily of the write-down of the aforementioned loan during the quarter as
well as the restructuring and reduction of debt owed by Madison, as part of the
compromise and settlement of a lawsuit with Madison. (See Note G - Litigation).

During the three-month period ended September 30, 2003, we sold four closed
facilities. We sold one facility located in Texas, realizing proceeds of $1.0
million, net of closing costs, resulting in a gain of approximately $0.6
million. We sold one facility located in Connecticut, realizing proceeds of
approximately $1.2 million, net of closing costs, resulting in a gain of
approximately $0.8 million. One facility located in Massachusetts was sold,
realizing proceeds of $0.9 million, net of closing costs, resulting in a gain of
approximately $0.3 million. Finally, one facility located in Florida was sold,
realizing proceeds of $0.6 million, net of closing costs, resulting in a loss of
approximately $0.3 million. We also sold two closed assets held for sale
buildings in Indiana, realizing proceeds of $0.3 million, net of closing costs,
resulting in a gain of approximately $0.1 million. (See Note B - Properties;
Closed Facilities and Assets Held for Sale). During the three-month period ended
September 30, 2002, we sold our investments in Omega Worldwide, Inc. and
Principal Healthcare Finance Limited, realizing proceeds of $10.2 million,
resulting in a gain of $2.2 million.

During the three-month period ended June 30, 2003, we sold an investment in
a Baltimore, Maryland asset, leased by the United States Postal Service, for
approximately $19.6 million. The purchaser paid us gross proceeds of $1.95
million and assumed the first mortgage of approximately $17.6 million. As a
result, we recorded a gain of $1.3 million, net of closing costs and other
expenses. Also during the second quarter of 2003, we sold one closed building
located in Indiana, realizing proceeds, net of closing costs, of $0.2 million,
resulting in a gain of approximately $0.1 million.

The table below reconciles reported revenues and expenses to revenues and
expenses excluding nursing home revenues and expenses of owned and operated
assets. Nursing home revenues and expenses of owned and operated assets for the
three- and nine-month periods ended September 30, 2003 are shown on a net basis
on the face of our Consolidated Statements of Operations and are shown on a
gross basis for the three- and nine-month periods ended September 30, 2002.
Since nursing home revenues are not included in reported revenues for the three-
and nine-month periods ended September 30, 2003, no adjustment is necessary to
exclude nursing home revenues.

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2003 2002 2003 2002
------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)

Total revenues......................... $20,926 $30,882 $66,279 $109,210
Nursing home revenues of owned and
operated assets...................... - 6,798 - 40,756
------------------ ------------------
REVENUES EXCLUDING NURSING HOME
REVENUES OF OWNED AND OPERATED
ASSETS............................. $20,926 $24,084 $66,279 $ 68,454
================== ==================

Total expenses......................... $17,333 $40,900 $51,210 $111,840
Nursing home expenses of owned and
operated assets...................... - 19,677 - 56,862
Nursing home revenues and expenses of
owned and operated assets - net...... 19 - 1,457 -
------------------ ------------------
EXPENSES EXCLUDING NURSING HOME
EXPENSES OF OWNED AND OPERATED
ASSETS............................. $17,314 $21,223 $49,753 $ 54,978
================== ==================

PORTFOLIO DEVELOPMENTS

Alterra Healthcare Corporation. Alterra announced during the first quarter
of 2003, that, in order to facilitate and complete its on-going restructuring
initiatives, they had filed a voluntary petition with the U.S. Bankruptcy Court
for the District of Delaware to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. At that time, we leased eight assisted living facilities (325
units) located in seven states to subsidiaries of Alterra.

Effective July 7, 2003, we amended our Master Lease with a subsidiary of
Alterra whereby the number of leased facilities was reduced from eight to five.
The amended Master Lease has a remaining term of approximately ten years with an
annual rent requirement of approximately $1.5 million. This compares to the 2002
annualized revenue of $2.6 million. On November 1, 2003, we re-leased one ALF
formerly leased by Alterra, located in Washington and representing 52 beds, to a
new operator under a Lease, which has a ten-year term and has an initial annual
lease rate of $0.2 million. We are in the process of negotiating terms and
conditions for the re-lease of the remaining two properties. In the interim,
Alterra will continue to operate the two facilities. (See Note J - Subsequent
Events). The Amended Master Lease was approved by the U.S. Bankruptcy Court in
the District of Delaware.

Claremont Healthcare Holdings, Inc. Effective November 7, 2003, we
re-leased two SNFs formerly leased by Claremont, located in Ohio and
representing 279 beds, to a new operator under a Master Lease, which has a
ten-year term and has an initial annual lease rate of $1.2 million.

Claremont failed to pay base rent due on November 1, 2003 in the amount of
$0.5 million. On November 10, 2003, we applied a security deposit in the amount
of $0.5 million to pay Claremont's November rent payment and we demanded that
Claremont restore the $0.5 million security deposit. As of the date of this
filing, we have no additional security deposits with Claremont. We continue to
recognize revenue from Claremont on a cash-basis as it is received. (See Note J
- - Subsequent Events).

Sun Healthcare Group, Inc. Effective July 1, 2003, we re-leased five former
Sun SNFs in the following three separate lease transactions: (i) a Master Lease
of two SNFs in Florida, representing 350 beds, which Master Lease has a ten-year
term and has an initial annual lease rate of $1.3 million; (ii) a Master Lease
of two SNFs in Texas, representing 256 beds, which Master Lease has a ten-year
term and has an initial annual lease rate of $800,000; and (iii) a lease of one
SNF in Louisiana, representing 131 beds, which lease has a ten-year term and
requires an initial annual lease rate of $400,000. Aggregate monthly contractual
lease payments, under all three transactions, total approximately $208,000 and
commenced July 1, 2003.

On October 1, 2003, we re-leased three SNFs formerly leased by Sun, located
in California and representing 271 beds, to a new operator under a Master Lease,
which has a 15-year term and has an initial annual lease rate of $1.24 million.

As a result of the transitions mentioned above, Sun's contractual monthly
rent, starting in October, was reduced approximately $0.15 million from
approximately $2.00 million to approximately $1.85 million. For the month of
November, Sun remitted approximately $1.51 million in lease payments (or $18.1
million annually) similar to what was paid on a monthly basis during the third
quarter of 2003. Revenue from Sun continues to be recognized on a cash-basis as
it is received. Rent received in November from the ten former Sun facilities
mentioned above totaled approximately $0.35 million or $4.22 million annually.

On November 1, 2003, we re-leased two SNFs formerly leased by Sun, located
in California and representing 185 beds, to a new operator under a Master Lease,
which has a ten-year term and has an initial annual lease rate of $0.6 million.
(See Note J - Subsequent Events).

Separately, we continue our ongoing restructuring discussions with Sun and
have entered into letters of intent with respect to many of the Sun properties.
At the time of this filing, we cannot determine the timing or outcome of these
discussions. There can be no assurance that Sun will continue to pay rent at any
level, although, we believe that alternative operators would be available to
lease or buy the remaining Sun facilities if an appropriate agreement is not
completed with Sun. (See "Reimbursement Issues and Other Factors Affecting
Future Results" below).

Other Assets. On November 4, 2003, we sold one closed facility located in
Iowa for its approximate net book value. October 31, 2003, we sold one closed
facility located in Florida, realizing proceeds of $2.6 million, net of closing
costs, resulting in a gain of $1.5 million. These two facilities are part of the
nine closed facilities at September 30, 2003 and are included in "Land and
buildings at cost" in our Consolidated Balance Sheet. (See Note B - Properties;
Closed Facilities and Note J - Subsequent Events). In addition, on October 31,
2003, we sold our remaining held for sale facility located in Texas, realizing
proceeds of $1.5 million, net of closing costs, resulting in a loss of $0.8
million. (See Note B - Properties; Assets Held for Sale and Note J - Subsequent
Events).

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2003, we had total assets of $746.9 million, stockholders
equity of $430.4 million and debt of $297.5 million, representing approximately
40.9% of total capitalization.

BANK CREDIT AGREEMENTS

In June 2003, we completed a new $225 million Senior Secured Credit
Facility arranged and syndicated by GE Healthcare Financial Services. At the
closing, we borrowed $187.1 million under the new Credit Facility to repay
borrowings under our two previous credit facilities and replace letters of
credit. In addition, proceeds from the loan were permitted to be used to pay
cumulative unpaid preferred dividends, and are permitted to be used for general
corporate purposes.

The new Credit Facility includes a $125 million term loan and a $100
million revolving line of credit fully secured by 121 facilities representing
approximately half of the our invested assets. Both the Term Loan and Revolver
have a four-year maturity with a one-year extension at our option. The Term Loan
amortizes on a 25-year basis and is priced at London Interbank Offered Rate plus
a spread of 3.75%, with a floor of 6.00%. The Revolver is also priced at LIBOR
plus a 3.75% spread, with a 6.00% floor.

At September 30, 2003, we had $190.5 million of Credit Facility borrowings
outstanding and $12.1 million of letters of credit outstanding, leaving
availability of $22.0 million. The $190.5 million of outstanding borrowings had
an interest rate of 6.00% at September 30, 2003. (See Note H - Borrowing
Arrangements).

DIVIDENDS

In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders in an amount at least
equal to (A) the sum of (i) 90% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and our net capital gain) and (ii) 90% of
the net income (after tax), if any, from foreclosure property, minus (B) the sum
of certain items of non-cash income. In addition, if we dispose of any built-in
gain asset during a recognition period, we will be required to distribute at
least 90% of the built-in gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before we
timely file our tax return for such year and paid on or before the first regular
dividend payment after such declaration. In addition, such distributions are
required to be made pro rata, with no preference to any share of stock as
compared with other shares of the same class, and with no preference to one
class of stock as compared with another class except to the extent that such
class is entitled to such a preference. To the extent that we do not distribute
all of our net capital gain or do distribute at least 90%, but less than 100% of
our "REIT taxable income," as adjusted, we will be subject to tax thereon at
regular ordinary and capital gain corporate tax rates.

In prior years, we have historically distributed to stockholders a large
portion of the cash available from operations. On February 1, 2001, we announced
the suspension of all common and preferred dividends. Prior to recommencing the
payment of dividends on our common stock, all accrued and unpaid dividends on
our Series A, B and C preferred stock must be paid in full. Due to our 2002
taxable loss, no distribution was necessary to maintain our REIT status for
2002. Net operating loss carry-forwards through 2002 of approximately $21.9
million, which is comprised of $7.3 million associated with our REIT and $14.6
million associated with our taxable REIT subsidiary, are available to help
offset taxable income.

In July 2003, our Board of Directors declared a full catch-up of
cumulative, unpaid dividends for all classes of preferred stock to be paid
August 15, 2003 to preferred stockholders of record on August 5, 2003. In
addition, our Board declared the regular quarterly dividend for all classes of
preferred stock to be paid on August 15, 2003 to preferred stockholders of
record on August 5, 2003. As a result, for the nine months ended September 30,
2003, preferred cash dividend payments totaling $54.9 million were paid;
however, no preferred cash dividends were paid during the twelve months ended
December 31, 2002 and 2001.

Series A and Series B preferred stockholders of record on August 5, 2003
were paid dividends in the amount of approximately $6.36 and $5.93 per preferred
share, respectively, on August 15, 2003. Our Series C preferred stockholder were
paid dividends of approximately $27.31 per Series C preferred share on August
15, 2003. The liquidation preference for our Series A, B and C preferred stock
is $25.00, $25.00 and $100.00 per share, respectively, excluding cumulative
unpaid dividends. Total August 2003 dividend payments for all classes of
preferred stock were approximately $54.9 million.

Cumulative unpaid dividends represent unpaid dividends accrued for the
period from November 1, 2000 through April 30, 2003. Regular quarterly dividends
represent dividends for the period May 1, 2003 through July 31, 2003. In
aggregate, preferred dividends continue to accumulate at approximately $5.0
million per quarter.

No common cash dividends were paid during the nine months ended September
30, 2003 or the twelve months ended December 31, 2002 and 2001. However, in
September 2003, our Board of Directors declared the reinstatement of its common
dividend to be paid November 17, 2003 to common shareholders of record on
October 31, 2003 in the amount of $0.15 per share. In addition, our Board
declared its regular quarterly dividends for all classes of preferred stock to
be paid November 17, 2003 to preferred stockholders of record on October 31,
2003. (See Note D - Dividends).

Series A and Series B preferred stockholders of record on October 31, 2003
will be paid dividends in the amount of approximately $0.578 and $0.539 per
preferred share, respectively, on November 17, 2003. Our Series C preferred
stockholder will be paid dividends of $2.50 per Series C preferred share on
November 17, 2003. The liquidation preference for our Series A, B and C
preferred stock is $25.00, $25.00 and $100.00 per share, respectively. Regular
quarterly dividends represent dividends for the period August 1, 2003 through
October 31, 2003. Total dividend payments for all classes of preferred stock are
approximately $5.0 million. (See Note D - Dividends).

LIQUIDITY

We believe our liquidity and various sources of available capital,
including funds from operations, expected proceeds from planned asset sales and
availability under our new Credit Facility are adequate to finance operations,
meet recurring debt service requirements and fund future investments through the
next 12 months.

REIMBURSEMENT ISSUES AND OTHER FACTORS AFFECTING FUTURE RESULTS

This document contains forward-looking statements, including statements
regarding potential asset sales, potential future changes in reimbursement and
the future effect of the "Medicare cliff" on our operators. These statements
relate to our expectations, beliefs, intentions, plans, objectives, goals,
strategies, future events, performance and underlying assumptions and other
statements other than statements of historical facts. In some cases, you can
identify forward-looking statements by the use of forward-looking terminology
including "may," "will," "anticipates," "expects," "believes," "intends,"
"should" or comparable terms or the negative thereof. These statements are based
on information available on the date of this filing and only speak as to the
date hereof and no obligation to update such forward-looking statements should
be assumed. Our actual results may differ materially from those reflected in the
forward-looking statements contained herein as a result of a variety of factors,
including, among other things: (i) those items discussed in Item 1 above; (ii)
regulatory changes in the healthcare sector, including without limitation,
changes in Medicare reimbursement; (iii) changes in the financial position of
our operators; (iv) uncertainties relating to the restructure of Sun's remaining
obligations and payment of contractual rents; (v) the ability of operators in
bankruptcy to reject unexpired lease obligations, modify the terms of our
mortgages, and impede our ability to collect unpaid rent or interest during the
pendency of a bankruptcy proceeding and retain security deposits for the
debtor's obligations; (vi) our ability to dispose of assets held for sale on a
timely basis and at appropriate prices; (vii) uncertainties relating to the
operation of our owned and operated assets, including those relating to
reimbursement by third-party payors, regulatory matters and occupancy levels;
(viii) our ability to manage, re-lease or sell owned and operated assets; (ix)
the availability and cost of capital; and (x) competition in the financing of
healthcare facilities.

MEDICARE REIMBURSEMENT. Nearly all of our properties are used as healthcare
facilities; therefore, we are directly affected by the risk associated with the
healthcare industry. Our lessees and mortgagors, as well as the facility owned
and operated for our own account, derive a substantial portion of their net
operating revenues from third-party payors, including the Medicare and Medicaid
programs. These programs are highly regulated by federal, state and local laws,
rules and regulations and subject to frequent and substantial change. The
Balanced Budget Act of 1997 ("Balanced Budget Act") significantly reduced
spending levels for the Medicare and Medicaid programs. Due to the
implementation of the terms of the Balanced Budget Act, effective July 1, 1998,
the majority of skilled nursing facilities shifted from payments based on
reasonable cost to a prospective payment system for services provided to
Medicare beneficiaries. Under the prospective payment system, skilled nursing
facilities are paid on a per diem prospective case-mix adjusted payment basis
for all covered services. Implementation of the prospective payment system has
affected each long-term care facility to a different degree, depending upon the
amount of revenue it derives from Medicare patients. Long-term care facilities
have had to attempt to restructure their operations to operate profitably under
the new Medicare prospective payment system reimbursement policies.

Legislation adopted in 1999 and 2000 increased Medicare payments to nursing
facilities and specialty care facilities on an interim basis. Section 101 of the
Balanced Budget Relief Act of 1999 ("Balanced Budget Relief Act") included a 20%
increase for 15 patient acuity categories (known as Resource Utilization Groups
("RUGS")) and a 4% across the board increase of the adjusted federal per diem
payment rate. The 20% increase was implemented in April 2000 and will remain in
effect until the implementation of refinements in the current RUG case-mix
classification system to more accurately estimate the cost of non-therapy
ancillary services. The 4% increase was implemented in April 2000 and expired
October 1, 2002.

The Benefits Improvement and Protection Act of 2000 ("Benefits Improvement
and Protection Act") included a 16.7% increase in the nursing component of the
case-mix adjusted federal periodic payment rate and a 6.7% increase in the 14
RUG payments for rehabilitation therapy services. The 16.7% increase was
implemented in April 2000 and expired October 1, 2002. The 6.7% increase is an
adjustment to the 20% increase granted in the Balance Budget Relief Act and
spreads the funds directed at three of those 15 RUGs to an additional 11
rehabilitation RUGs. The increase was implemented in April 2001 and will remain
in effect until the implementation of refinements in the current RUG case-mix
classification system.

The expiration of the 4% and 16.7% increases under these statutes as of
October 1, 2002 has had an adverse impact on the revenues of the operators of
nursing facilities and has negatively impacted some operators' ability to
satisfy their monthly lease or debt payments to us. Medicare reimbursement could
be further reduced when the Centers for Medicare & Medicaid Services ("CMS")
completes its RUG refinement, thereby triggering the sunset of the temporary 20%
and 6.7% increases also established under these statutes.

On August 4, 2003, CMS published the payment rates for SNFs for federal
fiscal year 2004 (effective on October 1, 2003). CMS announced that the SNF
update would be a 3.0% increase in Medicare payments for federal fiscal year
2004. In addition, CMS announced that the two temporary payment increases - the
20% and 6.7% add-ons for certain payment categories - will continue to be
effective for federal fiscal year 2004.

Also in the August 4, 2003 announcement, CMS confirmed its intention to
incorporate a forecast error adjustment that takes into account previous years'
update errors. According to CMS, there was a cumulative SNF market basket, or
inflation adjustment, forecast error of 3.26% for federal fiscal years 2000
through 2002. As a result, CMS has increased the national payment rate by an
additional 3.26% above the 3.0% increase for federal fiscal year 2004.

Due to the temporary nature of the 20% and 6.7% payment increases
established under the Balanced Budget Relief Act and Benefits Improvement and
Protection Act, we cannot be assured that the federal reimbursement will remain
at levels comparable to present levels and that such reimbursement will be
sufficient for our lessees or mortgagors to cover all operating and fixed costs
necessary to care for Medicare and Medicaid patients. We also cannot be assured
that there will be any future legislation to increase payment rates for skilled
nursing facilities. If payment rates for skilled nursing facilities are not
increased in the future, some of our lessees and mortgagors may have difficulty
meeting their payment obligations to us.

MEDICAID AND OTHER THIRD-PARTY REIMBURSEMENT. Each state has its own
Medicaid program that is funded jointly by the state and federal government.
Federal law governs how each state manages its Medicaid program, but there is
wide latitude for states to customize Medicaid programs to fit the needs and
resources of its citizens.

Rising Medicaid costs and decreasing state revenues caused by current
economic conditions have prompted an increasing number of states to cut or
consider reductions in Medicaid funding as a means of balancing their respective
state budgets. Existing and future initiatives affecting Medicaid reimbursement
may reduce utilization of (and reimbursement for) services offered by the
operators of our properties. In early 2003, many states announced actual or
potential budget shortfalls. As a result of these budget shortfalls, many states
have announced that they are implementing or considering implementing "freezes"
or cuts in Medicaid reimbursement rates, including rates paid to SNF providers,
or reductions in Medicaid enrollee benefits, including long-term care benefits.
We cannot predict the extent to which Medicaid rate freezes or cuts or benefit
reductions will ultimately be adopted, the number of states that will adopt them
nor the impact of such adoption on our operators. However, extensive Medicaid
rate cuts or freezes or benefit reductions could have a material adverse effect
on our operators' liquidity, financial condition and results of operations,
which could affect adversely their ability to make rental payments to us.

On May 28, 2003, the federal Jobs and Growth Tax Relief Reconciliation Act
("Tax Relief Act") was signed into law, which included an increase in Medicaid
federal funding for five fiscal quarters (April 1, 2003 through June 30, 2004).
In addition, the Tax Relief Act provides state fiscal relief for federal fiscal
years 2003 and 2004 to assist states with funding shortfalls. It is anticipated
that these temporary federal funding provisions could mitigate state Medicaid
funding reductions through federal fiscal year 2004.

In addition, private payors, including managed care payors, are
increasingly demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect the revenues of our lessees
and mortgagors and thereby adversely affect those lessees' and mortgagors'
abilities to make their monthly lease or debt payments to us.

POTENTIAL RISKS FROM BANKRUPTCIES. Our lease arrangements with operators
who operate more than one of our facilities are generally made pursuant to a
single master lease ("Master Lease") covering all of that operator's facilities.
Although each lease or Master Lease provides that we may terminate the Master
Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy Reform Act
of 1978, as amended, ("Bankruptcy Act") provides that a trustee in a bankruptcy
or reorganization proceeding under the Bankruptcy Act, or a debtor-in-possession
in a reorganization, has the power and the option to assume or reject the
unexpired lease obligations of a debtor-lessee. In the event that the unexpired
lease is assumed on behalf of the debtor-lessee, all the rental obligations
generally would be entitled to a priority over other unsecured claims. However,
the court also has the power to modify a lease if a debtor-lessee, in a
reorganization, were required to perform certain provisions of a lease that the
court determined to be unduly burdensome. It is not possible to determine at
this time whether or not any of our leases or Master Leases contains any such
provision. If a lease is rejected, the lessor has a general unsecured claim
limited to any unpaid rent already due plus an amount equal to the rent reserved
under the lease, without acceleration, for the greater of one year or 15% of the
remaining term of such lease, not to exceed three years.

Generally, with respect to our mortgage loans, the imposition of an
automatic stay under the Bankruptcy Act precludes us from exercising foreclosure
or other remedies against the debtor. Pre-petition creditors generally do not
have rights to the cash flows from the properties underlying the mortgages. The
timing of the collection from mortgagors in bankruptcy depends on negotiating an
acceptable settlement with the mortgagor (and subject to approval of the
bankruptcy court) or the order of the bankruptcy court in the event a negotiated
settlement cannot be achieved. A mortgagee also is treated differently from a
landlord in three key respects. First, the mortgage loan is not subject to
assumption or rejection because it is not an executory contract or a lease.
Second, the mortgagee's loan may be divided into (1) a secured loan for the
portion of the mortgage debt that does not exceed the value of the property and
(2) a general unsecured loan for the portion of the mortgage debt that exceeds
the value of the property. A secured creditor such as ourselves is entitled to
the recovery of interest and costs only if, and to the extent that, the value of
the collateral exceeds the amount owed. If the value of the collateral exceeds
the amount of the debt, interest and allowed costs may not be paid during the
bankruptcy proceeding, but accrue until confirmation of a plan of reorganization
or such other time as the court orders. If the value of the collateral held by a
senior creditor is less than the secured debt, interest on the loan for the time
period between the filing of the case and confirmation may be disallowed.
Finally, while a lease generally would either be rejected or assumed with all of
its benefits and burdens intact, the terms of a mortgage, including the rate of
interest and timing of principal payments, may be modified if the debtor is able
to affect a "cramdown" under the Bankruptcy Act.

The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
some significant expenditures associated with real estate investment, such as
real estate taxes and maintenance costs, are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect our investments, we may take possession of a property or even become
licensed as an operator, which might expose us to successor liability to
government programs or require us to indemnify subsequent operators to whom we
might transfer the operating rights and licenses. Third party payors may also
suspend payments to us following foreclosure until we receive the required
licenses to operate the facilities. Should such events occur, our income and
cash flow from operations would be adversely affected.

CONCENTRATION OF RISK. Approximately 45.9% of our real estate investments
are operated by four public companies: Sun (22.8%), Advocat (12.6%), Mariner
(7.2%), and Alterra (3.3%). The three largest private operators represent 9.9%,
6.6% and 3.8%, respectively, of our investments. No other operator represents
more than 2.8% of our investments. The three states in which we have our highest
concentration of investments are Florida (15.4%), California (8.0%) and Illinois
(8.0%).

HEALTHCARE INVESTMENT RISKS. The possibility that the healthcare facilities
will not generate income sufficient to meet operating expenses or will yield
returns lower than those available through investments in comparable real estate
or other investments are additional risks of investing in healthcare-related
real estate. Income from properties and yields from investments in such
properties may be affected by many factors, including changes in governmental
regulation (such as zoning laws), general or local economic conditions (such as
fluctuations in interest rates and employment conditions), the available local
supply and demand for improved real estate, a reduction in rental income as the
result of an inability to maintain occupancy levels, natural disasters (such as
earthquakes and floods) or similar factors.

GENERAL REAL ESTATE RISKS. Real estate investments are relatively illiquid
and, therefore, tend to limit our ability to vary our portfolio promptly in
response to changes in economic or other conditions. Thus, if the operation of
any of our properties becomes unprofitable due to competition, age of
improvements or other factors such that the lessee or borrower becomes unable to
meet its obligations on the lease or mortgage loan, the liquidation value of the
property may be substantially less, particularly relative to the amount owing on
any related mortgage loan, than would be the case if the property were readily
adaptable to other uses.

RISKS RELATED TO OWNED AND OPERATED ASSETS. As a consequence of the
financial difficulties encountered by a number of our operators, over the last
several years we recovered various long-term care assets, pledged as collateral
for the operators' obligations, either in connection with a restructuring or
settlement with certain operators or pursuant to foreclosure proceedings. We are
typically required to hold applicable licenses and are responsible for the
regulatory compliance at our owned and operated facilities. At September 30,
2003, we had one facility, managed under a third-party management agreement,
classified as owned and operated. Our management contract with this third-party
operator provides that the third-party operator is responsible for regulatory
compliance, but we could be sanctioned for violation of regulatory requirements.
In general, the risks of third-party claims such as patient care and personal
injury claims are higher with respect to our owned and operated property as
compared with our leased and mortgaged assets.

We and several of our wholly-owned subsidiaries have been named as
defendants in professional liability claims related to our owned and operated
facilities. Other third-party managers responsible for the day-to-day operations
of these facilities have also been named as defendants in these claims. In these
suits, patients of certain previously owned and operated facilities have alleged
significant damages, including punitive damages against the defendants. The
lawsuits are in various stages of discovery and we are unable to predict the
likely outcome at this time. We continue to vigorously defend these claims and
pursue all rights we may have against the managers of the facilities, under the
terms of the management agreements. We have insured these matters, subject to
self-insured retentions of various amounts.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. We do not enter into derivatives
or other financial instruments for trading or speculative purposes, but we seek
to mitigate the effects of fluctuations in interest rates by matching the term
of new investments with new long-term fixed rate borrowing to the extent
possible.

The market value of our long-term fixed rate borrowings and mortgages are
subject to interest rate risk. Generally, the market value of fixed rate
financial instruments will decrease as interest rates rise and increase as
interest rates fall. The estimated fair value of our total long-term borrowings
at September 30, 2003 was $287.0 million. A one-percent increase in interest
rates would result in a decrease in the fair value of long-term borrowings by
approximately $2.7 million.

We utilize interest rate swaps and caps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. We do not
use derivatives for trading or speculative purposes. We have a policy of only
entering into contracts with major financial institutions based upon their
credit ratings and other factors. When viewed in conjunction with the underlying
and offsetting exposure that the derivatives are designed to hedge, we have not
sustained a material loss from those instruments nor do we anticipate any
material adverse effect on our net income or financial position in the future
from the use of derivatives.

To manage interest rate risk, we may employ options, forwards, interest
rate swaps, caps and floors or a combination thereof depending on the underlying
exposure. We may employ swaps, forwards or purchased options to hedge qualifying
forecasted transactions. Gains and losses related to these transactions are
deferred and recognized in net income as interest expense in the same period or
periods that the underlying transaction occurs, expires or is otherwise
terminated. In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which was required to be adopted in years beginning after June 15, 2000. We
adopted the new Statement effective January 1, 2001. The Statement requires us
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in Other Comprehensive Income until the hedge item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.

In September 2002, we entered into a 61-month, $200.0 million interest rate
cap with a strike of 3.50% that has been designated as a cash flow hedge. Under
the terms of the cap agreement, when LIBOR exceeds 3.50%, the counterparty will
pay us $200.0 million multiplied by the difference between LIBOR and 3.50% times
the number of days when LIBOR exceeds 3.50%. The unrealized gain/loss in the
fair value of cash flow hedges are reported on the balance sheet with
corresponding adjustments to accumulated Other Comprehensive Income. On
September 30, 2003, the derivative instrument was reported at its fair value of
$5.3 million as compared to its fair value at December 31, 2002 of $7.3 million.
An adjustment of $1.2 million (gain) and $1.9 million (loss) to Other
Comprehensive Income was made for the change in fair value of this cap during
the three- and nine-month periods ended September 30, 2003, respectively. Over
the term of the interest rate cap, the $10.1 million cost will be amortized to
earnings based on the specific portion of the total cost attributed to each
monthly settlement period. Over the twelve months ending December 31, 2003, $0.1
million is expected to be amortized. The amortization for the three- and
nine-month periods ended September 30, 2003 was $37,000 and $44,000,
respectively, as compared to $0 for the same periods in 2002.

ITEM 4 - CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report and,
based on that evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective. There have been no significant changes in our internal controls or in
other factors that have materially affected, or are reasonably likely to affect,
our internal control over financial reporting during the most recent fiscal
quarter.

Disclosure controls and procedures are the controls and other procedures
designed to ensure that information that we are required to disclose in our
reports under the Exchange Act is recorded, processed, summarized and reported
within the time periods required. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
we are required to disclose in the reports that we file under the Exchange Act
is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

See Note G - Litigation to the Consolidated Financial Statements in PART I,
Item 1 hereto, which is hereby incorporated by reference in response to this
item.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

None this period.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None this period.

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

None this period.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits - The following Exhibits are filed herewith:

Exhibit Description

10.1 2000 Stock Incentive Plan (as amended January 1, 2001).

31.1 Certification of the Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the Chief Executive Officer under Section 906
of the Sarbanes - Oxley Act of 2002.

32.2 Certification of the Chief Financial Officer under Section 906
of the Sarbanes - Oxley Act of 2002.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed or furnished during the
quarter ended September 30, 2003:

On July 25, 2003, Omega Healthcare Investors, Inc. furnished a Current
Report on Form 8-K pursuant to Item 9 announcing its results of operations
and financial condition as of and for the quarter ended June 30, 2003 and
the reinstatement of preferred dividends.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

OMEGA HEALTHCARE INVESTORS, INC.
Registrant

Date: November 10, 2003 By: /s/ C. TAYLOR PICKETT
------------------------------
C. Taylor Pickett
Chief Executive Officer

Date: November 10, 2003 By: /s/ ROBERT O. STEPHENSON
------------------------------
Robert O. Stephenson
Chief Financial Officer