Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

May 13, 2002

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on May 13, 2002


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 March 31, 2002
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 the number of shares outstanding of each of the issuer's classes
of common stock as of March 31, 2002

Common Stock, $.10 par value 37,127,456
(Class) (Number of shares)

OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
March 31, 2002

INDEX

Page No.

PART I Financial Information

Item 1. Consolidated Financial Statements:

Balance Sheets
March 31, 2002 (unaudited)
and December 31, 2001.......... ......................... 2

Statements of Operations (unaudited)
Three-month period ended
March 31, 2002 and 2001.................................. 3

Statements of Cash Flows (unaudited)
Three-month period ended
March 31, 2002 and 2001.................................. 4

Notes to Consolidated Financial Statements
March 31, 2002 (unaudited)............................... 5

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 19

Item 3. Quantitative and Qualitative Disclosures About Market Risk... 23

PART II Other Information

Item 1. Legal Proceedings............................................ 25

Item 2. Changes in Securities and Use of Proceeds.................... 25

Item 3. Defaults Upon Senior Securities.............................. 25

Item 4. Submission of Matters to a Vote of Security Holders.......... 26

Item 6. Exhibits and Reports on Form 8-K............................. 27

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statement
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)



March 31, December 31,
2002 2001
--------------- --------------
(Unaudited) (See Note)

ASSETS
Real estate properties
Land and buildings at cost................................................... $ 686,953 $ 684,848
Less accumulated depreciation................................................ (105,113) (100,038)
--------------- --------------
Real estate properties - net.............................................. 581,840 584,810
Mortgage notes receivable - net.............................................. 191,252 195,193
--------------- --------------
773,092 780,003
Other investments - net......................................................... 50,179 50,791
--------------- --------------
823,271 830,794
Assets held for sale - net...................................................... 7,317 7,396
--------------- --------------
Total Investments............................................................ 830,588 838,190

Cash and cash equivalents....................................................... 44,559 11,445
Accounts receivable - net....................................................... 1,667 4,565
Other assets.................................................................... 7,988 6,732
Operating assets for owned properties........................................... 30,156 29,907
--------------- --------------
Total Assets................................................................. $ 914,958 $ 890,839
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY

Revolving lines of credit....................................................... $ 194,076 $ 193,689
Unsecured borrowings............................................................ 161,910 197,526
Other long-term borrowings...................................................... 35,591 21,957
Accrued expenses and other liabilities.......................................... 14,177 16,790
Operating liabilities for owned properties...................................... 8,578 10,187
--------------- --------------
Total Liabilities............................................................ 414,332 440,149

Preferred stock................................................................. 212,342 212,342
Common stock and additional paid-in capital..................................... 484,695 440,071
Cumulative net earnings......................................................... 170,348 165,891
Cumulative dividends paid....................................................... (365,654) (365,654)
Unamortized restricted stock awards............................................. (116) (142)
Accumulated other comprehensive loss............................................ (989) (1,818)
--------------- --------------
Total Stockholders' Equity................................................... 500,626 450,690
--------------- --------------
Total Liabilities and Stockholders' Equity................................... $ 914,958 $ 890,839
=============== ==============


Note - The balance sheet at December 31, 2001 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
March 31,
-----------------------------------
2002 2001
--------------- --------------

Revenues
Rental income................................................................ $ 15,431 $ 16,021
Mortgage interest income..................................................... 5,412 5,678
Other investment income - net................................................ 1,103 1,258
Nursing home revenues of owned and operated assets........................... 21,748 45,997
Miscellaneous................................................................ 230 223
--------------- --------------
43,924 69,177
--------------- --------------
Expenses
Nursing home expenses of owned and operated assets........................... 23,700 46,450
Depreciation and amortization................................................ 5,326 5,541
Interest..................................................................... 8,166 9,672
General and administrative................................................... 1,719 2,349
Legal........................................................................ 855 951
State taxes.................................................................. 129 106
Adjustment of derivatives to fair value...................................... (400) 482
--------------- --------------
39,495 65,551
--------------- --------------

Earnings before gain on assets sold and gain on early extinguishment of debt.... 4,429 3,626
Gain on assets sold - net....................................................... - 619
Gain on extinguishment of debt.................................................. 28 248
--------------- --------------
Net earnings.................................................................... 4,457 4,493
Preferred stock dividends....................................................... (5,029) (4,908)
--------------- --------------

Net loss available to common.................................................... $ (572) $ (415)
=============== ==============
Loss per common share:
Net loss per share - basic................................................... $ (0.02) $ (0.02)
=============== ==============
Net loss per share - diluted................................................. $ (0.02) $ (0.02)
=============== ==============
Dividends declared and paid per common share.................................... $ - $ -
=============== ==============
Weighted-Average Shares Outstanding, Basic...................................... 27,421 20,013
=============== ==============

Weighted-Average Shares Outstanding, Diluted.................................... 27,421 20,013
=============== ==============

Components of other comprehensive income:
Unrealized gain on Omega Worldwide, Inc...................................... $ 547 $ -
=============== ==============
Unrealized gain (loss) on hedging contracts.................................. $ 283 $ (354)
=============== ==============
Total comprehensive income...................................................... $ 5,287 4,139
=============== ==============


See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)



Three Months Ended
March 31,
-----------------------------------
2002 2001
--------------- --------------

Operating activities
Net earnings.................................................................... $ 4,457 $ 4,493
Adjustment to reconcile net earnings to cash provided by operating
activities:
Depreciation and amortization............................................... 5,326 5,541
Gain on assets sold - net................................................... - (619)
Gain on early extinguishment of debt........................................ (28) (248)
Adjustment of derivatives to fair value..................................... (400) 482
Other....................................................................... 630 603
Net change in accounts receivable for Owned and Operated assets - net........... (1,398) (1,702)
Net change in accounts payable for Owned and Operated assets.................... (1,658) 359
Net change in other Owned and Operated assets and liabilities................... 1,197 811
Net change in operating assets and liabilities.................................. 2,064 739
--------------- --------------
Net cash provided by operating activities....................................... 10,190 10,459
--------------- --------------

Cash flows from financing activities
Proceeds from revolving lines of credit - net................................... 387 10,000
Proceeds from long-term borrowings - net........................................ 13,635 -
Payments of long-term borrowings................................................ (35,616) (18,778)
Receipts from Dividend Reinvestment Plan........................................ 1 9
Proceeds from rights offering and private placement - net....................... 44,600 -
Deferred financing costs paid................................................... (1,547) (370)
Other........................................................................... 23 (45)
--------------- --------------
Net cash provided by (used in) financing activities............................. 21,483 (9,184)
--------------- --------------

Cash flow from investing activities
Proceeds from sale of real estate investments - net............................. - 1,230
Capital improvements and funding of other investments - net..................... (501) (3,167)
Collection of mortgage principal................................................ 1,942 421
--------------- --------------
Net cash provided by (used in) investing activities............................. 1,441 (1,516)
--------------- --------------
Increase (decrease) in cash and cash equivalents................................ 33,114 (241)
Cash and cash equivalents at beginning of period................................ 11,445 7,172
--------------- --------------
Cash and cash equivalents at end of period...................................... $ 44,559 $ 6,931
=============== ==============

See notes to consolidated financial statements.

OMEGA HEALTHCARE INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

March 31, 2002

Note A - Basis of Presentation

The accompanying unaudited consolidated financial statements for Omega
Healthcare Investors, Inc. have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States 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 and impairment
provisions to adjust the carrying value of assets) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. 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, 2001.

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 re-lease 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
fair value (See "Owned and Operated Assets" below). Additionally, when a formal
plan to sell real estate is adopted and an agreement is imminent, the real
estate is classified as "Assets Held for Sale," with the net carrying amount
adjusted to the lower of cost or fair value, less cost of disposal.

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 on our financial statements.

A summary of the number of properties by category for the quarter ended
March 31, 2002 follows:



Total
Purchase/ Owned & Healthcare Held for
Facility Count Leaseback Mortgages Operated Facilities Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 2001..... 137 71 33 241 8 249
Properties transferred to
Held for Sale.................. - - - - - -
Properties transferred to
Owned & Operated............... - - - - - -
Properties Sold /
Mortgages Paid................. - (1) - (1) - (1)
Transition Leasehold Interest.... - - (5) (5) - (5)
Properties Leased /
Mortgages Placed............... - - - - - -
Properties transferred to
Purchase / Leaseback........... 10 (1) (9) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002...... 147 69 19 235 8 243
====================================================================================================================================

Gross Investment
- ---------------------------------
Balance at December 31, 2001..... $ 604,777 $ 195,193 $ 80,071 $ 880,041 $ 7,396 $ 887,437
Properties transferred to
Held for Sale.................. - - - - - -
Properties transferred to
Owned & Operated............... - - - - - -
Properties Sold /
Mortgages Paid................. - (1,501) - (1,501) - (1,501)
Transition Leasehold Interest.... - - - - - -
Properties Leased /
Mortgages Placed............... - - - - - -
Properties transferred to
Purchase / Leaseback........... 45,147 (2,000) (43,147) - - -
Capex and other.................. 76 (440) 29 (335) (79) (414)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002...... $ 650,000 $ 191,252 $ 36,953 $ 878,205 $ 7,317 $ 885,522
====================================================================================================================================


Real Estate Disposition

During the three-month period ending March 31, 2002, we leased 13
properties, previously classified as Owned and Operated Assets, to new
operators. We entered into agreements to lease four Arizona facilities to
subsidiaries of Infinia Health Care Companies ("Infinia") and to sublease four
other Arizona facilities to the same party. The agreements initially began as
management arrangements, effective March 1, 2002, and convert into leases upon
Infinia and us obtaining various approvals. The terms for the four Arizona
leases and four subleases are ten years and three years, respectively, with an
initial combined annual net rent payment of $1.02 million. Also on March 1,
2002, we leased four facilities in Massachusetts to subsidiaries of Harborside
Healthcare Corporation. The initial lease term for the four properties is ten
years with an initial annual rent payment of $1.675 million. We leased one
additional facility on March 1, 2002, for an initial annual rent of $0.38
million. Additionally, on February 1, 2002, the leasehold interest in one
facility was terminated by the landlord, bringing the total number of Owned and
Operated Assets down from 33 at December 31, 2001 to 19 at March 31, 2002.

There were no real estate dispositions during the three-month period ending
March 31, 2002. For the three-month period ended March 31, 2001, we disposed of
four facilities, including three Indiana facilities (previously included in
owned and operated assets) and one Massachusetts facility (previously included
in assets held for sale).

Note and 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 or 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. No provision for loss on mortgages or notes
receivable was recorded during the three-month periods ended March 31, 2002 and
2001, respectively.

On February 1, 2001, four Michigan facilities, previously operated by
Professional Health Care Management ("PHCM") and subject to our pre-petition
mortgage, were transferred by PHCM to a new operator who paid for the facilities
by execution of a promissory note that has been assigned to us. PHCM was given a
$4.5 million credit on February 1, 2001 and an additional $3.5 million credit on
September 1, 2001, both against the PHCM loan balance in exchange for the
assignment of the promissory note to us. The promissory note is secured by a
first mortgage on the four facilities. Following the closing of the settlement
agreement, the outstanding principal balance on the PHCM loan was approximately
$59.7 million.

Owned and Operated Assets

At March 31, 2002, we own 19 facilities that were recovered from customers
and are operated for our own account. These facilities have 1,567 beds and are
located in seven states. During the three-month period ended March 31, 2002, we
leased or subleased 13 properties previously classified as Owned and Operated to
three third-party operators. In addition, one leasehold interest was transferred
to a new operator with the owner's consent (See "Real Estate Dispositions"
above).

We intend to operate these owned and operated assets for our own account
until such time as these facilities' operations are stabilized and are
re-leasable or saleable at lease rates or sale prices that maximize the value of
these assets to us. In certain instances, we might determine that the best
course of action is to close a facility in the event its future prospects appear
limited. As a result, these facilities and their respective operations are
presented on a consolidated basis in our financial statements. See Note J -
Subsequent Events.

The revenues, expenses, assets and liabilities included in our condensed
consolidated financial statements which relate to such owned and operated assets
are set forth in the table below. Nursing home revenues from these owned and
operated assets 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.

The revenues, expenses, assets and liabilities in our consolidated
financial statements which related to our owned and operated assets are as
follows:

Three Months Ended,
March 31,
--------------------------------
2002 2001
--------------------------------
Unaudited
(In Thousands)

Revenues(1)
Medicaid.................................... $ 13,503 $ 27,240
Medicare.................................... 4,257 11,190
Private & Other............................. 3,988 7,567
--------------------------------
Total Revenues........................... 21,748 45,997
--------------------------------
Expenses
Patient Care Expenses....................... 15,278 33,153
Administration.............................. 4,502 6,535
Property & Related.......................... 1,592 3,214
--------------------------------
Total Expenses........................... 21,372 42,902

Contribution Margin......................... 376 3,095

Management Fees............................. 1,200 2,449
Rent........................................ 1,128 1,099
--------------------------------
EBITDA(2)................................... $ (1,952) $ (453)
================================

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

(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. We consider it to be a meaningful measure of performance of
our Owned and Operated Assets. EBITDA, in and of itself, does not represent
cash generated from operating activities in accordance with GAAP and
therefore should not be considered an alternative to net earnings as an
indication of operating performance or to net cash flow from operating
activities as determined by GAAP as a measure of liquidity, and is not
necessarily indicative of cash available to fund cash needs.

(In Thousands)

March 31, December 31,
2002 2001
--------------------------------
(Unaudited)
ASSETS
Cash........................................ $ 7,772 $ 6,549
Accounts Receivable - net................... 28,519 27,121
Other Current Assets........................ 1,429 2,125
--------------------------------
Total Current Assets..................... 37,720 35,795
--------------------------------

Investment in Leasehold - net............... 208 661

Land and Buildings.......................... 36,953 80,071
Less Accumulated Depreciation............... (4,196) (8,647)
--------------------------------
Land and Buildings - net.................... 32,757 71,424
--------------------------------
TOTAL ASSETS................................ $ 70,685 $ 107,880
================================

LIABILITIES
Accounts Payable............................ $ 3,158 $ 4,816
Other Current Liabilities................... 5,420 5,371
--------------------------------
Total Current Liabilities................ 8,578 10,187
--------------------------------

TOTAL LIABILITIES........................... $ 8,578 $ 10,187
================================


Accounts receivable for owned and operated assets is net of an allowance
for doubtful accounts of approximately $6.9 million at March 31, 2002 and $8.3
million at December 31, 2001.

Assets Held for Sale

At March 31, 2002, the carrying value of assets held for sale totaled $7.3
million (net of impairment reserves of $10.6 million). We intend to sell the
remaining facilities as soon as practicable. 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.

Segment Information

The following tables set forth the reconciliation of operating results and
total assets for our reportable segments for the three-month periods ended March
31, 2002 and March 31, 2001.


For the three months ended March 31, 2002
--------------------------------------------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
--------------------------------------------------------------------------------
Unaudited
(In Thousands)

Operating Revenues................................. $ 20,843 $ 21,748 $ - $ 42,591
Operating Expenses................................. - (23,700) - (23,700)
--------------------------------------------------------------------------------
Net operating income............................ 20,843 (1,952) - 18,891
Adjustments to arrive at net income:
Other revenues.................................. - - 1,333 1,333
Interest expense................................ - - (8,166) (8,166)
Depreciation and amortization................... (4,606) (515) (205) (5,326)
General and administrative...................... - - (1,719) (1,719)
Legal........................................... - - (855) (855)
State Taxes..................................... - - (129) (129)
Adjustment of derivatives to fair value......... - - 400 400
--------------------------------------------------------------------------------
(4,606) (515) (9,341) (14,462)
--------------------------------------------------------------------------------
Income (loss) before gain on early extinguishment
of debt......................................... 16,237 (2,467) (9,341) 4,429
Gain on early extinguishment of debt............... - - 28 28
Preferred dividends................................ - - (5,029) (5,029)
--------------------------------------------------------------------------------
Net income (loss) available to common.............. $ 16,237 $ (2,467) $(14,342) $ (572)
================================================================================

Total Assets....................................... $ 740,335 $ 78,002 $ 96,621 $ 914,958
================================================================================




For the three months ended March 31, 2001
--------------------------------------------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
------------------------------------------------------------------------------
Unaudited
(In Thousands)

Operating Revenues................................. $ 21,699 $ 45,997 $ - $ 67,696
Operating Expenses................................. - (46,450) - (46,450)
--------------------------------------------------------------------------------
Net operating income............................ 21,699 (453) - 21,246
Adjustments to arrive at net income:
Other revenues.................................. - - 1,481 1,481
Interest expense................................ - - (9,672) (9,672)
Depreciation and amortization................... (4,324) (996) (221) (5,541)
General and administrative...................... - - (2,349) (2,349)
Legal........................................... - - (951) (951)
State Taxes..................................... - - (106) (106)
Adjustment of derivatives to fair value......... - - (482) (482)
--------------------------------------------------------------------------------
(4,324) (996) (12,300) (17,620)
--------------------------------------------------------------------------------
Income (loss) before gain on assets sold and gain
on early extinguishment of debt................. 17,375 (1,449) (12,300) 3,626
Gain on assets sold - net.......................... - 619 - 619
Gain on early extinguishment of debt............... - - 248 248
Preferred dividends................................ - - (4,908) (4,908)
--------------------------------------------------------------------------------
Net income (loss) available to common.............. $ 17,375 $ (830) $(16,960) $ (415)
================================================================================

Total Assets....................................... $ 724,744 $ 160,777 $ 61,152 $ 946,673
================================================================================



Note C - Concentration of Risk and Related Issues

As of March 31, 2002, our portfolio of domestic investments consisted of
235 healthcare facilities, located in 28 states and operated by 37 third-party
operators. Our gross investment in these facilities, before reserve for
uncollectible loans, totaled $881.9 million at March 31, 2002, with 97.3% of our
real estate investments related to long-term care facilities. This portfolio is
made up of 145 long-term healthcare facilities and two rehabilitation hospitals
owned and leased to third parties, fixed rate, participating and convertible
participating mortgages on 69 long-term healthcare facilities and 12 long-term
healthcare facilities that were recovered from customers and are currently
operated through third-party management contracts for our own account. In
addition, seven facilities subject to third-party leasehold interests are
included in Other Investments. We also hold miscellaneous investments and closed
healthcare facilities held for sale of approximately $57.5 million at March 31,
2002, including $22.3 million related to two non-healthcare facilities leased by
the United States Postal Service, a $7.9 million investment in Omega Worldwide,
Inc., Principal Healthcare Finance Limited, an Isle of Jersey (United Kingdom)
company and Principal Healthcare Finance Trust, an Australian Unit Trust, and
$14.7 million of notes receivable, net of allowance.

Approximately 66.6% of our real estate investments are operated by seven
public companies, including Sun Healthcare Group, Inc. (24.8%), Integrated
Health Services, Inc. ("IHS") (18.1%, including 10.2% as the manager for and 50%
owner of Lyric Health Care LLC), Advocat, Inc. (12.1%), Mariner Post-Acute
Network (6.8%), Alterra Healthcare Corporation ("Alterra") (3.9%), Kindred
Healthcare, Inc. ("Kindred") (formerly known as Vencor Operating, Inc.) (0.8%),
and Genesis Health Ventures, Inc. ("Genesis") (0.1%). At March 31, 2002, Kindred
and Genesis manage facilities for our own account that are included in Owned and
Operated Assets. The two largest private operators represent 3.6% and 2.6%,
respectively, of investments. No other operator represents more than 2.6% of
investments. The three states in which we have our highest concentration of
investments are Florida (16.1%), California (7.6%) and Illinois (7.5%).

Government Healthcare Regulation, Reimbursements and Industry Concentration
Risks

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 facilities owned and operated for our
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
are subject to frequent and substantial changes.

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 that
reduce reimbursement levels could adversely affect the amounts we receive with
respect to our owned and operated portfolio and 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.

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.

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. It is 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.

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 ("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 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.

Risks Related to Owned and Operated Assets

As a consequence of the financial difficulties encountered by a number of
our operators, we have 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. During 2002, a number of companies were actively marketing
portfolios of similar assets and, in light of the market conditions in the
long-term care industry generally, it has become more difficult both to sell
such properties and for potential buyers to obtain financing to acquire such
properties.

We are typically required to hold applicable licenses and are responsible
for the regulatory compliance at our owned and operated facilities. Our
management contracts with third-party operators for these properties provide
that the third-party operator is responsible for regulatory compliance, but we
could be sanctioned for violation of regulatory requirements. In addition, the
risk of third-party claims such as patient care and personal injury claims may
be higher with respect to our owned and operated properties as compared with our
leased and mortgaged assets.

Recent Developments

During the quarter, we completed a renegotiated transaction with Alterra,
whereby we will take back two facilities in June 2002, and Alterra agreed to pay
us a fee of approximately $0.7 million and monthly rental payments of $187,000
in 2002, increasing to $268,000 per month in 2003. The total gross investment in
the properties leased to Alterra is $34.1 million, including $6.2 million for
the two facilities that are to be taken back. We currently expect these two
facilities to be leased to a new operator or marketed for sale.

In January 2002, Integrated Health Services, Inc., and its affiliate, Lyric
Health Care LLC, resumed payment of rents and mortgage interest to us at reduced
rates. We are currently negotiating with IHS to reach a permanent restructuring
agreement or to transition the facilities to a new operator or operators.

As of March 31, 2002, affiliates of Alden Management, Inc. ("Alden") were
delinquent in paying their lease and escrow payments on the four facilities they
lease from us. Alden has indicated the delinquency is the result of the State of
Illinois being behind in the processing of Medicaid reimbursements. Discussions
on ways to address past due amounts are continuing.

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. This action was intended to preserve cash to facilitate our
ability to obtain financing to fund the 2002 debt maturities. 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.
We have made sufficient distributions to satisfy the distribution requirements
under the REIT rules to maintain our REIT status for 2001 and intend to satisfy
such requirements under the REIT rules for 2002. The accumulated and unpaid
dividends relating to all series of preferred stocks total $24.9 million as of
March 31, 2002.

On March 30, 2001, we exercised our option to pay the accrued $4,666,667
Series C dividend from November 15, 2000 and the associated deferral fee by
issuing 48,420 Series C preferred shares to Explorer Holdings, L.P. ("Explorer")
on April 2, 2001, which are convertible into 774,722 shares of our common stock
at $6.25 per share. Such election resulted in an increase in the aggregate
liquidation preference of Series C Preferred Stock as of April 2, 2001 to
$104,842,000, including accrued dividends through that date. Dividends paid in
stock to a specific class of stockholders, such as our payment of our Series C
preferred stock in April 2001, constitute dividends eligible for the 2001
dividends paid deduction.

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.

Note F - Omega Worldwide, Inc.

As of March 31, 2002, we hold a $5.0 million investment in Omega Worldwide,
Inc. ("Worldwide"), represented by 1.16 million shares of common stock and 0.3
million shares of preferred stock. We also hold a $1.6 million investment in
Principal Healthcare Finance Limited, an Isle of Jersey (United Kingdom)
company, and a $1.3 million investment in Principal Healthcare Finance Trust, an
Australian Unit Trust

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, we believe that the outcome of each lawsuit
claim or legal preceding 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 by Madison/OHI Liquidity Investors, LLC ("Madison"), a
customer that claims that we have breached and/or anticipatorily breached a
commercial contract. Ronald M. Dickerman and Bryan Gordon are partners in
Madison and limited guarantors of Madison's obligations to us. Madison claims
damages as a result of the alleged breach of approximately $700,000. Madison
seeks damages as a result of the claimed anticipatory breach in an amount
ranging from $15 - $28 million or, in the alternative, Madison seeks specific
performance of the contract as modified by a course of conduct that Madison
alleges developed between Madison and us. We contend that Madison is in default
under the contract in question. We believe that the litigation is meritless. We
continue to vigorously defend the case and have filed counterclaims against
Madison and the guarantors seeking repayment of approximately $10.2 million,
including default interest, which Madison owes us, as well as damages resulting
from the conversion of the collateral securing our loan. The trial in this
matter is set for July 22, 2002. The financial statements do not contain any
adjustments relating to the ultimate outcome due to the uncertainty of such
outcome.

Note H - Borrowing Arrangements

On December 21, 2001, we reached amended agreements with the bank groups
under both of our revolving credit facilities. The amendments became effective
as of the closing of the rights offering and private placement to Explorer on
February 21, 2002. The amendments included modifications and/or eliminations to
certain financial covenants.

The amendment regarding our $175.0 million revolving credit facility
included a one-year extension in maturity from December 31, 2002 to December 31,
2003 and a reduction in the total commitment from $175.0 million to $160.0
million. Amounts up to $150.0 million may be drawn upon to repay the maturing
6.95% Notes due June 2002.

As part of the amendment regarding our $75.0 million revolving credit
facility, we prepaid $10.0 million in December 2001, originally scheduled to
mature in March 2002. This voluntary prepayment results in a permanent reduction
in the total commitment, thereby reducing the credit facility to $65.0 million.

Our $160.0 million secured revolving line of credit facility expires on
December 31, 2003. Borrowings under this facility bear interest at 2.50% to
3.25% over London Interbank Offer Rate ("LIBOR") through December 31, 2002 and
3.00% to 3.25% over LIBOR after December 31, 2002. Borrowings of approximately
$129.4 million were outstanding as of March 31, 2002. Additionally, $13.4
million of letters of credit were outstanding against this credit facility at
March 31, 2002. These letters of credit were collateral for certain long-term
borrowings and Owned and Operated insurance programs. LIBOR-based borrowings
under this facility bear interest at a weighted-average rate of 5.52% at March
31, 2002. Cost for the letters of credit range from 2.50% to 3.25%, based on our
leverage ratio. Real estate investments with a gross book value of approximately
$239.8 million are pledged as collateral for this revolving line of credit
facility at March 31, 2002.

Our $65.0 million line of credit facility expires on June 30, 2005.
Borrowings under this facility bear interest at 2.50% and 3.75% over LIBOR,
based on our leverage ratio and collateral assignment. Borrowings of
approximately $64.7 million were outstanding at March 31, 2002. LIBOR based
borrowings under this facility bear interest at a weighted-average rate of 5.76%
at March 31, 2002. Real estate investments with a gross book value of
approximately $117.1 million are pledged as collateral for this revolving line
of credit facility at March 31, 2002.

During the three-month period ended March 31, 2002, we repurchased $35.6
million of our 6.95% Notes maturing in June 2002. At March 31, 2002, $61.9
million of these notes remain outstanding with a June 2002 maturity (See Note J
- - Subsequent Events).

Note I - Effect of New Accounting Pronouncements

We utilize interest rate swaps to fix interest rates on variable rate debt
and reduce certain exposures to interest rate fluctuations. In June 1998, the
Financial Accounting Standards Board ("FASB") 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.

At March 31, 2002, we had two interest rate swaps with notional amounts of
$32.0 million each, based on 30-day LIBOR. Under the terms of the first
agreement, which expires in December 2003, we receive payments when LIBOR
exceeds 6.35% and pay the counterparty when LIBOR is less than 6.35%. At March
31, 2002, 30-day LIBOR was 1.90%. This interest rate swap was extended to
December 2003 at the option of the counterparty and therefore does not qualify
for hedge accounting under FASB No. 133. The fair value of this swap at March
31, 2002 and December 31, 2001 was a liability of $917,004 and $1,316,566,
respectively.

The initial liability at January 1, 2001 was recorded as a transition
adjustment in other comprehensive income and was recognized over the initial
term of the swap ending December 31, 2001. Such amortization for the three
month-period ended March 31, 2002 and 2001 was $0 and $87,836, respectively. The
change in fair market of $399,562 and $393,794 for the three-month periods
ending March 31, 2002 and 2001, respectively, along with the amortization are
included in charges for derivative accounting in our Consolidated Statement of
Operations.

Under the second agreement, which expires December 31, 2002, we receive
payments when LIBOR exceeds 4.89% and pay the counterparty when LIBOR is less
than 4.89%. The fair value of this interest rate swap at March 31, 2002 and
December 31, 2001 was a liability of $566,061 and $849,122, respectively. The
change in fair market of $283,061 and $90,043 for the three-month periods ending
March 31, 2002 and 2001, respectively, are included in other comprehensive
income as required under FASB No. 133 for fully effective cash flow hedges.

The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in our Consolidated Balance Sheet at March 31,
2002 and December 31, 2001.

Note J - Subsequent Events

In April 2002, we purchased $27.0 million of 6.95% Notes due June 2002. As
of the date of this report, the remaining balance on the 6.95% Notes due June
2002 is $34.9 million.

Also in April 2002, we closed a 120-bed nursing facility in Texarkana,
Texas. We have recently instructed the managers of two other facilities in
Massachusetts to begin the necessary steps to close each of those facilities.

On May 1, 2002, we entered into a Master Lease to lease three facilities in
Colorado to Conifer Care Communities. The initial term of the lease is 4.7 years
with three options to renew for four years each. The initial annual rent payment
is approximately $375,000. As a result of the three re-leased facilities and the
three announced facility closings, the total number of Owned and Operated Assets
is expected to decline by six, leaving 13 remaining facilities.

Since dividends on the Series A and Series B Preferred Stock are in arrears
for more than 18 months as of April 30, 2002, the holders of the Series A and
Series B Preferred Stock (voting together as a single class) have the right to
elect two additional directors to our Board of Directors in accordance with the
terms of the Series A and Series B Preferred Stock and our Bylaws. Explorer, the
sole holder of the Series C Preferred Stock, also has the right to elect two
other additional directors to our Board of Directors in accordance with the
terms of the Series C Preferred Stock and our Bylaws. We are not aware of any
action by holders of our preferred stock to elect additional directors pursuant
to the procedures set forth in the terms of the preferred stock and our Bylaws.
Explorer, without waiving its rights under the terms of the Series C Preferred
Stock or the Stockholders Agreement, has advised us that it is not currently
seeking the election of the two additional directors resulting from the Series C
dividend arrearage unless the holders of the Series A and Series B Preferred
Stock seek to elect additional directors.


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

The following discussion contains forward-looking statements. These
statements relate to our expectations regarding our beliefs, intentions, plans,
objectives, goals, strategies our future events or 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 such as "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 report and
only speak as of 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 such forward-looking statements as a result
of a variety of factors, including, among other things: (i) our ability to
dispose of assets held for sale on a timely basis and at appropriate prices;
(ii) 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; (iii) the ability of our 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 a bankruptcy
proceeding and retain security deposits for the debtor's obligations; (iv) the
availability and cost of capital; (v) regulatory and other changes in the
healthcare sector; (vi) our ability to manage, re-lease or sell its owned and
operated facilities; (vii) competition in the financing of healthcare
facilities; (viii) the effect of economic and market conditions generally, and
particularly in the healthcare industry; (ix) changes in interest rates; (x) the
amount and yield of any additional investments; (xi) changes in tax laws and
regulations affecting real estate investment trusts; (xii) access to the capital
markets and the cost of capital; (xiii) changes in the ratings of our debt
securities; and (xiv) the risk factors discussed in Note C - Concentration of
Risk and Related Issues.

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 and Note C - Concentration of Risk and Related Issues).

Revenues for the three-month period ending March 31, 2002 totaled $43.9
million, a decrease of $25.3 million over the period ending March 31, 2001.
Excluding nursing home revenues of Owned and Operated Assets, revenues were
$22.2 for the three-month period ending March 31, 2002, a decrease of $1.0
million from the comparable prior year period.

Rental income for the three-month period ending March 31, 2002 was $15.4
million, a decrease of $0.6 million over the same period in 2001. The decrease
is due to $2.1 million from reductions in lease revenue due to foreclosures,
bankruptcies and restructurings. This decrease is offset by $0.2 million
relating to contractual increases in rents that became effective in 2002 and
$1.3 million relating to assets previously classified as owned and operated.

Mortgage interest income for the three-month period ending March 31, 2002
totaled $5.4 million, a decrease of $0.3 million over the same period in 2001.
The decrease is due to reduced investments resulting from the payoffs of
mortgage notes ($0.7 million) offset by $0.4 million of new investments placed
in 2001.

Nursing home revenues of owned and operated assets for the three-month
period ending March 31, 2002 totaled $21.7 million, a decrease of $24.3 million
over the same period in 2001. This is principally due to a decreased number of
operated facilities versus the same period in 2001. (19 at March 31, 2002,
compared with 66 at March 31, 2001).

Expenses for the three-month period ending March 31, 2002 totaled $39.5
million, a decrease of $26.1 million compared with expenses of $65.6 million for
the three-month period ending March 31, 2001. Excluding nursing home expenses of
owned and operated assets, expenses were $15.9 million versus $19.1 million for
the same period in 2001.

Nursing home expenses for owned and operated assets for the three-month
period ending March 31, 2002 decreased by $22.8 million versus the same period
in 2001. This is primarily a result of a decreased number of facilities versus
the same period in 2001

The provision for depreciation and amortization totaled $5.3 million for
the three-month period ending March 31, 2002. This decrease of $0.2 million is
primarily due to assets sold in 2001 and lower depreciable values due to
impairment charges on owned and operated properties recorded during 2001.

Interest expense for the three-month period ending March 31, 2002 was
approximately $8.2 million compared with $9.7 million for the same period in
2001. The decrease in the first quarter of 2002 is primarily due to $51.0
million of reduced total outstanding debt versus the same period in 2001.

General and administrative expenses for the three-month period ending March
31, 2002, totaled $1.7 million compared to $2.3 million for the same period in
2001, a decrease of $0.6 million. The decrease is due to a reduction in
staffing, as well as a reduction in consulting costs related to our owned and
operated facilities.

Legal expenses for the three-month period ending March 31, 2002 totaled
$0.9 million, a decrease of $0.1 million, as compared with the same time period
in 2001. This decrease is due to a reduction in costs associated with
restructuring and releasing of our owned and operated assets.

There were no real estate dispositions during the three-month period ending
March 31, 2002. For the three-month period ended March 31, 2001, we disposed of
four facilities, including three Indiana facilities (previously included in
owned and operated assets) and one Massachusetts facility (previously included
in assets held for sale).

Funds from operations ("FFO") for the three-month period ending March 31,
2002 was $4.3 million, a reduction of $0.4 million as compared with $4.7 million
for the same period in 2001 due to results described above. Fully diluted FFO
was $6.9 million for the three-month period ending March 31, 2002, a reduction
of $0.3 million, as compared with the $7.2 million for the same period in 2001.
FFO is defined as net earnings available to common stockholders, excluding any
gains or losses from debt restructuring and the effects of asset dispositions,
plus depreciation and amortization associated with real estate investments.
Diluted FFO and FFO are adjusted for the assumed conversion of Series C
Preferred Stock and the exercise of in-the-money stock options. We consider FFO
to be one performance measure which is helpful to investors of real estate
companies because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors an understanding of
our ability to incur and service debt, to make capital expenditures and to pay
dividends to its stockholders. FFO, in and of itself, does not represent cash
generated from operating activities in accordance with GAAP and therefore should
not be considered an alternative to net earnings as an indication of operating
performance or to net cash flow from operating activities as determined by GAAP
as a measure of liquidity and is not necessarily indicative of cash available to
fund cash needs.

No provision for federal income taxes has been made since we continue to
qualify as a REIT under the provisions of Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. Accordingly, we have not been subject
to federal income taxes on amounts distributed to stockholders, since we have
distributed at least 90% of our REIT taxable income for taxable year 2001 (95%
prior to 2001) and have met certain other conditions.

Portfolio Developments

In February 2002, we completed a renegotiated transaction with Alterra,
whereby we will take back two facilities in June 2002, and Alterra agreed to pay
us a fee of approximately $0.7 million and monthly rental payments of $187,000
in 2002, increasing to $268,000 per month in 2003. The total gross investment in
the properties leased to Alterra is $34.1 million, including $6.2 million for
the two facilities that are to be taken back. We currently expect these two
facilities to be leased to a new operator or marketed for sale.

In January, 2002 Integrated Health Services, Inc., and its affiliate, Lyric
Health Care LLC, resumed payment of rents and mortgage interest to us at reduced
rates. We are currently negotiating with IHS to reach a permanent restructuring
agreement or to transition the facilities to a new operator or operators.

As of March 31, 2002, affiliates of Alden Management, Inc. were delinquent
in paying their lease and escrow payments on the four facilities they lease from
us. Alden has indicated the delinquency is the result of the State of Illinois
being behind in the processing of Medicaid reimbursements. Discussions on ways
to bring their past due amounts current are continuing.

Liquidity and Capital Resources

At March 31, 2002, we had total assets of $915.0 million, stockholders'
equity of $500.6 million and debt of $391.6 million, representing approximately
43.9% of total capitalization. In addition, as of March 31, 2002, we had an
aggregate of $62.5 million of outstanding debt which matures in the remaining
nine months of 2002, including $61.9 million of 6.95% Notes due June 2002.

We have two secured revolving credit facilities in place, providing up to
$225.0 million of financing, of which $194.1 million was outstanding and $13.4
million of which was utilized for the issuance of letters of credit at March 31,
2002.

On December 21, 2001, we reached amended agreements with the bank groups
under both of our revolving credit facilities. The amendments became effective
as of the closing of the rights offering and private placement to Explorer
Holdings, L.P. on February 21, 2002. The amendments included modifications
and/or eliminations to certain financial covenants.

The amendment regarding our $175.0 million revolving credit facility
included a one-year extension in maturity from December 31, 2002 to December 31,
2003 and a reduction in the total commitment from $175.0 million to $160.0
million. Amounts up to $150.0 million may be drawn upon to repay the maturing
6.95% Notes due June 2002.

As part of the amendment regarding our $75.0 million revolving credit
facility, we prepaid $10.0 million in December 2001, originally scheduled to
mature in March 2002. This voluntary prepayment resulted in a permanent
reduction in the total commitment, thereby reducing the credit facility to $65.0
million. Our $65.0 million line of credit facility expires on June 30, 2005.
(See Note H - Borrowing Arrangements).

In prior years, we have historically distributed to stockholders a large
portion of the cash available from operations. Our historical policy has been to
make distributions on common stock of approximately 80% of FFO, but on February
1, 2001, we announced the suspension of all common and preferred dividends. This
action was intended to preserve cash to facilitate our ability to obtain
financing to fund the 2002 debt maturities. Additionally, on March 30, 2001, we
exercised our option to pay the accrued $4,666,667 Series C dividend from
November 15, 2000 and the associated waiver fee by issuing 48,420 Series C
preferred shares to Explorer on April 2, 2001, which is convertible into 774,722
shares of our common stock at $6.25 per share.

We can give no assurance as to when or if the dividends will be reinstated
on the common stock or preferred stock, or the amount of the dividends if and
when such payments are recommenced. We do not anticipate paying dividends on any
class of capital stock unless and until the approximately $61.9 million ($34.9
million as of the date of this report) of indebtedness maturing in the first
half of 2002 has been repaid. 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. We have made sufficient distributions to
satisfy the distribution requirements under the REIT rules to maintain its REIT
status for 2001 and intend to satisfy such requirements under the REIT rules for
2002.

No common dividends were paid during the first quarters ending March 31,
2002 and 2001, respectively.

On February 6, 2002, we refinanced our investment in a Baltimore, Maryland
asset leased by the United States Postal Service ("USPS") resulting in $13.0
million of net cash proceeds. The new, fully-amortizing mortgage has a 20-year
term with a fixed interest rate of 7.26%. This transaction is cash neutral to us
on a monthly basis, as lease payments due from USPS equal debt service on the
new loan.

On February 21, 2002, we raised gross proceeds of $50.0 million through the
completion of a rights offering and simultaneous private placement to Explorer.
The proceeds from the rights offering and private placement will be used to
repay outstanding indebtedness and for working capital and general corporate
purposes.

We believe our liquidity and various sources of available capital,
including funds from operations and expected proceeds from planned asset sales
and refinancings, are adequate to finance operations, meet recurring debt
service requirements including our 2002 debt maturities and fund future
investments through the next 12 months.

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 March 31, 2002 was $369.8 million. A one-percent increase in interest rates
would result in a decrease in the fair value of long-term borrowings by
approximately $4.9 million.

We are subject to risks associated with debt or preferred equity financing,
including the risk that existing indebtedness may not be refinanced or that the
terms of such refinancing may not be as favorable as the terms of current
indebtedness. (See Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources).

We utilize interest rate swaps to fix interest rates on variable rate debt
and reduce certain exposures to interest rate fluctuations. 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.

At March 31, 2002, we had two interest rate swaps with notional amounts of
$32.0 million each, based on 30-day LIBOR. Under the terms of the first
agreement, which expires in December 2003, we receive payments when LIBOR
exceeds 6.35% and pay the counterparty when LIBOR is less than 6.35%. At March
31, 2002, 30-day LIBOR was 1.90%. This interest rate swap was extended to
December 2003 at the option of the counterparty and therefore does not qualify
for hedge accounting under FASB No. 133. The fair value of this swap at March
31, 2002 and December 31, 2001 was a liability of $917,004 and $1,316,566,
respectively.

The initial liability at January 1, 2001 was recorded as a transition
adjustment in other comprehensive income and was recognized over the initial
term of the swap ending December 31, 2001. Such amortization for the three
month-period ended March 31, 2002 and 2001 was $0 and $87,836, respectively. The
change in fair market of $399,562 and $393,794 for the three-month periods
ending March 31, 2002 and 2001, respectively, along with the amortization are
included in charges for derivative accounting in our Consolidated Statement of
Operations.

Under the second agreement, which expires December 31, 2002, we receive
payments when LIBOR exceeds 4.89% and pay the counterparty when LIBOR is less
than 4.89%. The fair value of this interest rate swap at March 31, 2002 and
December 31, 2001 was a liability of $566,061 and $849,122, respectively. The
change in fair market of $283,061 and $90,043 for the three-month periods ending
March 31, 2002 and 2001, respectively, are included in other comprehensive
income as required under FASB No. 133 for fully effective cash flow hedges.

The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in our Consolidated Balance Sheet at March 31,
2002 and December 31, 2001.


PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Note G to the Consolidated Financial Statements in Item 1 hereto, which
are hereby incorporated by reference in response to this item.

Item 2. Changes in Securities and Use of Proceeds

In February 2002, we completed a registered rights offering and
simultaneous private placement to Explorer. Stockholders exercised subscription
rights to purchase a total of 6.4 million shares of common stock at a
subscription price of $2.92 per share, raising gross proceeds of $18.7 million.
In the private placement with Explorer, we issued a total of 10.7 million shares
of common stock at a price of $2.92 per share, raising gross proceeds of $31.3
million. We expect to use the proceeds from the rights offering and private
placement to repay outstanding indebtedness and for working capital and general
corporate purposes. The shares of common stock were issued to Explorer without
registration under the Securities Act of 1933, as amended, in reliance upon the
private placement exemption pursuant to Section 4(2) thereof.

On February 21, 2002, we filed Articles of Amendment amending the terms of
our Series C Convertible Preferred Stock to: (i) remove the restriction that
prevents the voting or conversion of the Series C preferred stock in excess of
49.9% of our voting securities owned by Explorer; (ii) provide that if we fail
to pay dividends owed upon the Series C preferred stock for a period of time,
the holders of the Series C preferred stock will be entitled to designate two
additional directors to our Board of Directors; and (iii) provide that the
subscription price in the rights offering will not result in an adjustment to
the conversion price of our Series C preferred stock. The stockholders of our
Company approved the amendment on February 18, 2002. The Articles of Amendment
amending the terms of our Series C Convertible Preferred Stock were previously
filed as an exhibit to the Form 8-K filed by us on March 4, 2002.

Item 3. Defaults upon Senior Securities

(a) Payment Defaults. Not Applicable.

(b) Dividend Arrearages. On February 1, 2001, we announced the suspension
of dividends on all common and preferred stock. See Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources. Dividends on our
preferred stock are cumulative, and therefore all accrued and unpaid
dividends on our Series A, B and C Preferred Stock must be paid in
full prior to recommencing the payment of cash dividends on our Common
Stock. The table below sets forth information regarding arrearages in
payment of preferred stock dividends:

(c)



Annual
Dividend Per Arrearage as of
Title of Class Share March 31, 2002

- ------------------------------------------------------------------------------------------
9.25% Series A Cumulative Preferred Stock $ 2.3125 $ 6,648,438
- ------------------------------------------------------------------------------------------
8.625% Series B Cumulative Preferred Stock $ 2.1563 $ 5,390,625
- ------------------------------------------------------------------------------------------
Series C Convertible Preferred Stock $10.0000 $12,902,593
- ------------------------------------------------------------------------------------------
TOTAL $24,941,656
- ------------------------------------------------------------------------------------------


Since dividends on the Series A and Series B Preferred Stock are in arrears
for more than 18 months as of April 30, 2002, the holders of the Series A and
Series B Preferred Stock (voting together as a single class) have the right to
elect two additional directors to our Board of Directors in accordance with the
terms of the Series A and Series B Preferred Stock and our Bylaws. Explorer, the
sole holder of the Series C Preferred Stock, also has the right to elect two
other additional directors to our Board of Directors in accordance with the
terms of the Series C Preferred Stock and our Bylaws. We are not aware of any
action by holders of our preferred stock to elect additional directors pursuant
to the procedures set forth in the terms of the preferred stock and our Bylaws.
Explorer, without waiving its rights under the terms of the Series C Preferred
Stock or the Stockholders Agreement, has advised us that it is not currently
seeking the election of the two additional directors resulting from the Series C
dividend arrearage unless the holders of the Series A and Series B Preferred
Stock seek to elect additional directors.

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

A Special Meeting of Shareholders was held on February 18, 2002. At the
meeting the shareholders approved the issuance of common stock in connection
with Explorer Holdings, L.P.'s investment. The results of the vote were as
follows:


Manner of Votes Represented by
Vote Cast Common Stock Series C Preferred Stock Total
---------- ------------ ------------------------ -----


For 5,063,440 16,774,722 21,838,162
Against 197,110 - 197,110
Abstain 44,423 - 44,423


At the meeting, the shareholders also approved an amendment to our Articles
of Incorporation amending the terms of our Articles Supplementary for Series C
Convertible Preferred Stock. The results of the vote were as follows:


Manner of Votes Represented by
Vote Cast Common Stock Series C Preferred Stock Total
---------- ------------ ------------------------ -----

For 5,057,615 16,774,722 21,832,337
Against 194,177 - 194,177
Abstain 53,181 - 53,181


Item 6. Exhibits and Reports on Form 8-K

(a) Exhibit - The following Exhibit is filed herewith:

Exhibit Description

10.1 Second Amended and Restated Stockholders Agreement between
Explorer Holdings, L.P. and Omega Healthcare Investors, Inc.,
dated April 30, 2002

(b) Reports on Form 8-K

The following reports on Form 8-K were filed since December 31, 2001:

Form 8-K dated February 21, 2002: Report with the following exhibits:

4.1 Articles of Amendment amending the terms of our Series C
Convertible Preferred Stock

10.1 Amended and Restated Stockholders Agreement between
Explorer Holdings, L.P. and Omega Healthcare Investors,
Inc., dated as of February 21, 2002

10.2 Amended and Restated Registration Rights Agreement between
Explorer Holdings, L.P. and Omega Healthcare Investors,
Inc., dated as of February 21, 2002

10.3 Advisory Letter from The Hampstead Group, L.L.C. to Omega
Healthcare Investors, Inc., dated February 21,2002

10.4 Press Release issued by Omega Healthcare Investors, Inc. on
February 21, 2002


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: May 13, 2002 By: /s/ C. TAYLOR PICKETT
--------------------------------
C. Taylor Pickett
Chief Executive Officer

Date: May 13, 2002 By: /s/ ROBERT O. STEPHENSON
--------------------------------
Robert O. Stephenson
Chief Financial Officer