<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 JUNE 30, 1995
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 1-9381
American Health Properties, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4084878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6400 FIDDLER'S GREEN CIRCLE, SUITE 1800, 80111
ENGLEWOOD, CO (Zip Code)
(Address of principal executive offices)
</TABLE>
(303) 796-9793
(Registrant's 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
-- --
SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE,
OUTSTANDING AT AUGUST 11, 1995 -- 20,865,539
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
AMERICAN HEALTH PROPERTIES, INC.
JUNE 30, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
CONSOLIDATED COMPANY
Item 1. Consolidated Condensed Financial Statements:
Balance sheets as of June 30, 1995 and December 31, 1994 ................................ 2
Statements of operations for the three and six months ended June 30, 1995 and 1994....... 3
Statements of cash flows for the three and six months ended June 30, 1995 and 1994....... 4
Notes to financial statements ........................................................... 5
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations ........................................... 8
CORE GROUP
Item 1. Core Group Combined Condensed Financial Statements:
Balance sheets as of June 30, 1995 and December 31, 1994 ................................ 14
Statements of operations for the three and six months ended June 30, 1995 and 1994....... 15
Statements of cash flows for the three and six months ended June 30, 1995 and 1994....... 16
Notes to financial statements ........................................................... 17
Item 2. Management's Discussion and Analysis of Core Group
Combined Financial Condition and Results of Operations .................................. 21
PSYCHIATRIC GROUP
Item 1. Psychiatric Group Combined Condensed Financial Statements:
Balance sheets as of June 30, 1995 and December 31, 1994 ................................ 25
Statements of operations for the three and six months ended June 30, 1995 and 1994....... 26
Statements of cash flows for the three and six months ended June 30, 1995 and 1994....... 27
Notes to financial statements ........................................................... 28
Item 2. Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations .................................. 32
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...................................... 37
Item 6. Exhibits and Reports on Form 8-K......................................................... 37
</TABLE>
1
<PAGE> 3
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------------------------------------------------------ --------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Real estate investments
Real property and mortgage notes $ 619,551 $ 603,870
Construction loan and investments 27,118 21,383
Accumulated depreciation (75,116) (70,617)
--------- ---------
571,553 554,636
Notes receivable and financing leases 11,604 13,244
Other assets 9,497 9,785
Cash and short-term investments 1,201 1,838
------------------------------------------------------------ --------- ---------
$ 593,855 $ 579,503
============================================================ ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable $ 57,500 $ 14,500
Notes and bonds payable 207,268 231,163
Accounts payable and accrued liabilities 9,564 9,668
Dividends payable 11,998 11,989
Deferred income 4,587 4,682
------------------------------------------------------------ --------- ---------
290,917 272,002
------------------------------------------------------------ --------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
none outstanding - -
Common stock $.01 par value; 100,000 shares authorized;
20,866 and 20,851 shares issued and outstanding 209 209
Additional paid-in capital 427,012 426,783
Cumulative net income 189,143 169,931
Cumulative dividends (313,426) (289,422)
------------------------------------------------------------ --------- ---------
302,938 307,501
------------------------------------------------------------ --------- ---------
$ 593,855 $ 579,503
============================================================ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE> 4
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
----------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 16,681 $ 16,856 $ 33,295 $ 33,406
Mortgage interest income 1,469 1,445 2,939 2,890
Additional rental and interest income 2,717 2,432 5,353 4,723
Other interest income 1,106 920 2,117 2,187
----------------------------------------- -------- -------- -------- --------
21,973 21,653 43,704 43,206
----------------------------------------- -------- -------- -------- --------
EXPENSES
Depreciation and amortization 3,523 3,679 6,993 7,332
Interest expense 6,906 6,291 13,734 12,819
General and administrative 1,642 844 3,303 2,363
Targeted stock issuance costs 300 - 300 -
Write-down of real estate investments - 30,000 - 30,000
----------------------------------------- -------- -------- -------- --------
12,371 40,814 24,330 52,514
----------------------------------------- -------- -------- -------- --------
Minority interest 57 95 162 164
----------------------------------------- -------- -------- -------- --------
NET INCOME (LOSS) $ 9,545 $(19,256) $ 19,212 $ (9,472)
========================================= ======== ======== ======== ========
ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Net Income $ 8,206 $ 8,638 $ 16,182 $ 16,562
Net Income Per Share $ 0.39 $ 0.41 $ 0.77 $ 0.79
Weighted Average Shares Outstanding 20,913 20,857 20,906 20,836
Cash Dividends Per Share $ 0.4950 $ 0.4620 $ 0.9900 $ 0.9240
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net Income (Loss) $ 1,339 $(27,894) $ 3,030 $(26,034)
Net Income (Loss) Per Share $ 0.64 $ (13.37) $ 1.45 $ (12.49)
Weighted Average Shares Outstanding 2,091 2,086 2,091 2,084
Cash Dividends Per Share $ 0.8000 $ 1.1300 $ 1.6000 $ 2.2600
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1995 1994
------------------------------------------------------ -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 19,212 $ (9,472)
Depreciation, amortization and other non-cash items 8,179 8,316
Deferred income (51) 70
Write-down of real estate investments - 30,000
Change in other assets 107 11
Change in accounts payable and accrued liabilities (361) (1,837)
------------------------------------------------------ -------- --------
27,086 27,088
------------------------------------------------------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (29,951) (27,352)
Proceeds from sale of properties 10,825 -
Construction loan fundings (4,901) (16,337)
Construction loan paid - 16,836
Other notes receivable 4,416 (667)
Direct financing leases (2,776) (1,365)
Administrative capital expenditures (81) (2)
------------------------------------------------------ -------- --------
(22,468) (28,887)
------------------------------------------------------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 43,000 4,500
Principal payments on notes payable (24,000) -
Principal payments on mortgages - (14,468)
Financing costs paid (260) (191)
Proceeds from exercise of stock options - 1,963
Dividends paid (23,995) (23,845)
------------------------------------------------------ -------- --------
(5,255) (32,041)
------------------------------------------------------ -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (637) (33,840)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,838 35,670
------------------------------------------------------ -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,201 $ 1,830
====================================================== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation and psychiatric hospitals,
long-term care facilities and a medical office building.
Distribution of Psychiatric Group Depositary Shares On July 25, 1995,
the Company completed the distribution of Psychiatric Group Depositary Shares to
holders of its Common Stock (the Distribution). Shareholders received one
Psychiatric Group Depositary Share for every ten shares of Common Stock held of
record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock, a new series of preferred stock, par value $0.01 per share. The
Distribution is designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its investments
in acute care and rehabilitation hospitals, long-term care facilities and a
medical office building (the Core Group) into two distinct portfolios, with two
distinct classes of publicly traded shares intended to represent those
portfolios. The Psychiatric Group Depositary Shares are intended to reflect the
separate performance of the Psychiatric Group. The Company's existing Common
Stock is intended to reflect the separate performance of the Core Group. In
connection with the Distribution, the Company has specifically identified or
allocated its assets, liabilities and stockholders' equity, and its revenues,
expenses and cash flow items, between the Core Group and Psychiatric Group.
However, each holder of Common Stock or Psychiatric Group Depositary Shares is a
holder of an issue of capital stock of the entire Company and is subject to the
risks associated with an investment in the Company and all of its businesses,
assets and liabilities.
Basis of Presentation The consolidated condensed financial statements
of the Company included herein have been prepared by the Company without audit
and include all normal, recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with those
included in the Company's annual report on Form 10-K for the year ended
December 31, 1994 and the Company's current report on Form 8-K, dated August
14, 1995. The financial statements of the Core Group and the Psychiatric Group
are also included elsewhere herein. For purposes of computing per share data
for periods prior to the actual Distribution, the number of shares of Core
Group Common Stock are assumed to be the same as the corresponding number of
shares of the Company's common stock prior to the Distribution, while the
number of Psychiatric Group Depositary Shares are assumed to be one-tenth of
the corresponding number of shares of the Company's common stock prior to the
Distribution.
Interest Paid Interest paid by the Company, net of interest
capitalized, was $12,919,000 and $11,994,000 for the six months ended June 30,
1995 and 1994, respectively. The Company had $15,000 and $592,000 of capitalized
interest for the six months ended June 30, 1995 and 1994, respectively.
5
<PAGE> 7
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
2. DEBT
Term Loan Facility In May 1995, the Company increased its $100 million
unsecured credit facility to $124 million to include a $24 million term loan
facility. The term loan facility was used solely for the purpose of funding a
$24 million principal payment on the Company's $125 million 1989 senior note
issue on May 31, 1995. The term loan facility bears interest at either LIBOR
plus a margin of 150 to 175 basis points or the prime rate plus a margin of 25
basis points through December 31, 1995. Thereafter and until maturity on April
30, 1997, the term loan facility bears interest at either LIBOR plus a margin of
175 to 200 basis points or the prime rate plus a margin of 50 basis points.
Currently, the Company is able to borrow at either LIBOR plus 150 basis points
or the prime rate plus 25 basis points. The applicable margin on LIBOR is
dependent upon the Company maintaining investment grade senior debt ratings.
3. STOCKHOLDERS' EQUITY
Stock Incentive Plans Under the terms of the Company's stock incentive
plans, outstanding restricted stock awards, stock options and DERs have been
adjusted to reflect the Distribution. During the six months ended June 30,
1995, options to purchase 183,537 shares of Core Group Common Stock at a
weighted average exercise price of $18.97 per share and 14,859 Core Group
restricted stock awards were issued pursuant to the Company's stock incentive
plans. During the six months ended June 30, 1995, options to purchase 18,534
Psychiatric Group Depositary Shares at a weighted average exercise price of
$18.90 per share and 1,486 Psychiatric Group restricted share awards were
issued pursuant to the Company's stock incentive plans.
4. COMMITMENTS
Other Notes Receivable The Company provides financing at variable rates
to certain psychiatric hospital operators under revolving credit agreements
secured by accounts receivable. The aggregate commitment under these credit
agreements was $5.7 million at June 30, 1995 of which $1.2 million was unfunded.
Construction Loan/Mortgage Notes Receivable As of June 30, 1995, the
Company had funded $26.3 million of a $30 million commitment to participate in
an $86 million construction and mortgage financing of a 670,000 square foot
integrated hospital and medical office complex presently under construction in
Austin, Texas.
6
<PAGE> 8
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Real Estate Properties The Company has the right to approve capital
expenditures at all of its properties, the option to fund certain capital
expenditures and in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. At June 30, 1995,
the Company had remaining commitments to fund approximately $7.5 million of
capital expenditures pursuant to these rights and obligations. The base and
additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Company's increased investment.
As of June 30, 1995, the Company had funded $834,000 of a $4 million
commitment to finance the construction of a 96-bed Alzheimer's care facility in
Houston, Texas. The Company will purchase the facility upon completion in early
1996 and enter into a long-term lease. The facility will be operated by
Servicemaster Diversified Health Services, an experienced operator of long-term
care facilities.
In August 1995, the Company completed the $7.6 million purchase and
lease of two long-term care facilities located in Arizona and committed to
provide $5.6 million of construction and lease financing for an 80-unit assisted
living facility to be constructed in Walla Walla, Washington.
5. PROPERTY SALES AND RESTRUCTURINGS
In February 1995, the Company sold its Westwood and Pembroke,
Massachusetts psychiatric hospital investments. The cash proceeds of $13,825,000
represented payment for the $10,825,000 net book value of the real property and
repayment of the $3,000,000 balance outstanding under a revolving credit
agreement that had been provided to the operator. The Company's total revenues
from these two investments were $412,000 and $1,459,000 for the six months ended
June 30, 1995 and 1994, respectively, and $3,000,000 for the full year in 1994.
In March 1995, the Company restructured the terms of its two Florida
psychiatric hospital investments that were included in a $30 million write-down
recorded by the Company in 1994 against its psychiatric portfolio. Pursuant to
the restructuring effective January 1, 1995, the annual minimum rental
obligation of The Retreat psychiatric hospital in Sunrise, Florida was reduced
from $2,359,000 to $1,100,000, and the annual minimum rental obligation of The
Manors psychiatric hospital in Tarpon Springs, Florida was reduced from $855,000
to $600,000. As part of the restructuring, The Retreat used an existing
$1,000,000 lease reserve fund to pay down outstanding borrowings under a
revolving credit agreement provided by the Company, and the maximum amount
available for borrowing under the credit agreement was reduced from $2,250,000
to $1,000,000. The Manors used an existing $325,000 lease reserve fund to pay
down outstanding borrowings under a $2,000,000 revolving credit agreement
provided by the Company.
7
<PAGE> 9
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the consolidated financial condition and
results of operations of the Company which should be read in conjunction with
the consolidated condensed financial statements and accompanying notes. For
discussions of the financial condition and results of operations of the Core
Group and the Psychiatric Group, see the management's discussion and analysis of
financial condition and results of operations of the Core Group and the
Psychiatric Group included elsewhere herein.
Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of Psychiatric Group Depositary Shares to
holders of its Common Stock (the Distribution). Shareholders received one
Psychiatric Group Depositary Share for every ten shares of Common Stock held of
record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock, a new series of preferred stock, par value $0.01 per share. The
Distribution is designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its investments
in acute care and rehabilitation hospitals, long-term care facilities and a
medical office building (the Core Group) into two distinct portfolios, with two
distinct classes of publicly traded shares intended to represent those
portfolios. The Psychiatric Group Depositary Shares are intended to reflect the
separate performance of the Psychiatric Group. The Company's existing Common
Stock is intended to reflect the separate performance of the Core Group. In
connection with the Distribution, the Company has specifically identified or
allocated its assets, liabilities and stockholders' equity, and its revenues,
expenses and cash flow items, between the Core Group and Psychiatric Group.
However, each holder of Common Stock or Psychiatric Group Depositary Shares is a
holder of an issue of capital stock of the entire Company and is subject to the
risks associated with an investment in the Company and all of its businesses,
assets and liabilities.
OPERATING RESULTS
Second Quarter and Year to Date 1995 Compared With 1994
For the second quarter of 1995, the Company reported net income of
$9,545,000 compared with a net loss of ($19,256,000) for the second quarter of
1994. For the six months ended June 30, 1995, the Company reported net income of
$19,212,000 compared with a net loss of ($9,472,000) for the first six months of
1994. The net loss for the second quarter and first six months of 1994 included
a $30,000,000 write-down of psychiatric real estate investments as a result of
accelerating negative trends in the psychiatric industry. See the Consolidated
Condensed Statement of Operations for the comparative gross and per share
amounts of net income or loss attributable to the Core Group Common Stock and
the Psychiatric Group Depositary Shares.
Rental income was $16,681,000 for the second quarter of 1995, a decrease
of $175,000 or 1% from $16,856,000 for the second quarter of 1994. Rental income
was $33,295,000 for the six months ended June 30, 1995, a decrease of $111,000
or less than 1% from $33,406,000 for the comparable period in 1994. This net
decrease was primarily attributable to a reduction in rental income due to the
sale of three psychiatric properties and the lease restructurings of two
psychiatric investments partially offset by rental income from new properties
acquired and various capital additions subsequent to the first quarter of 1994.
8
<PAGE> 10
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
These factors, combined with lower depreciation expense on psychiatric
properties written down in June 1994, resulted in a net decrease in depreciation
and amortization of $156,000 to $3,523,000 for the second quarter of 1995
compared with the second quarter of 1994 and a net decrease of $339,000 to
$6,993,000 for the six months ended June 30, 1995 compared with the same period
in 1994.
Additional rental and interest income was $2,717,000 for the second
quarter of 1995, an increase of $285,000 or 12% from $2,432,000 for the second
quarter of 1994. Additional rental and interest income was $5,353,000 for the
six months ended June 30, 1995, an increase of $630,000 or 13% from $4,723,000
for the comparable period in 1994. This increase was primarily attributable to
first-time additional rent from several properties.
Other interest income increased $186,000 to $1,106,000 for the second
quarter of 1995 from $920,000 for the second quarter of 1994. Other interest
income for the six months ended June 30, 1995 decreased $70,000 to $2,117,000
from $2,187,000 for the comparable period in 1994. An increase in interest
income resulting from a higher average construction loan balance during 1995 was
partially offset by a decrease in interest income resulting from a lower average
balance of short-term investments. In addition, the second quarter and first
half of 1994 included the recognition of $215,000 and $710,000, respectively, of
fee income related to the prepayment of a construction loan in February 1994.
Interest expense was $6,906,000 for the second quarter of 1995, an
increase of $615,000 or 10% from $6,291,000 for the second quarter of 1994.
Interest expense was $13,734,000 for the six months ended June 30, 1995, an
increase of $915,000 or 7% from $12,819,000 for the comparable period in 1994.
This increase was primarily attributable to higher average short-term borrowings
during the second quarter and first half of 1995 and a reduction in capitalized
interest in 1995 compared to 1994. The first quarter of 1994 included interest
expense from mortgage notes payable until the balance of $14.4 million was
prepaid in February 1994.
General and administrative expenses increased to $1,642,000 for the
second quarter of 1995 from $844,000 for the second quarter of 1994. For the
first half of 1995, general and administrative expenses increased to $3,303,000
from $2,363,000 for the first half of 1994. The increase for the second quarter
and first half of 1995 was primarily attributable to higher expense from the
Company's stock incentive plans and increased shareholder reporting costs
associated with the distribution of the Psychiatric Group Depositary Shares. In
the second quarter of 1994, the Company reversed $750,000 of a corporate
relocation accrual recorded in the fourth quarter of 1993, after the Company
decided to maintain its headquarters in Denver, Colorado.
The $300,000 targeted stock issuance costs was an additional accrual made
in the second quarter of 1995 to reflect the increased costs of the
Distribution. The increased costs primarily reflect higher legal and accounting
fees and printing and shipping costs as a result of the extended filing period.
9
<PAGE> 11
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Future Operating Results
The nature of health care delivery in the United States is currently
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. The Company's Board and management are
monitoring potential changes closely. The Company believes that these potential
changes may pose risks for certain institutions that are unwilling or unable to
respond. However, the Company believes that this changing health care
environment will provide the Core Group with new opportunities for investment in
its current facilities as well as new facilities.
The Company recognizes that the health care industry in the United
States is undergoing significant evolution. The ongoing changes in the health
care industry include trends toward shorter lengths of hospital stay, increased
use of outpatient services, increased federal, state and third party oversight
of health care company operations and business practices, and increased demand
for capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal, state
and third party payors continue to propose and adopt various cost containment
measures that restrict the scope of reimbursable health care services and limit
increases in reimbursement rates for such services. Payors are also continuing
to aggressively enforce compliance with program requirements and pursue
providers that they believe have not complied with such requirements. Outpatient
business is expected to increase as advances in medical technologies allow more
procedures to be performed on an outpatient basis and as payors continue to
direct more patients from inpatient care to outpatient care. In addition, the
entrance of insurance companies into managed care programs is accelerating the
introduction of managed care in new localities, and states and insurance
companies continue to negotiate actively the amounts they will pay for services.
Moreover, the percentage of health care services that are reimbursed under the
Medicare and Medicaid programs continues to increase as the population ages and
as states expand their Medicaid programs. Continued eligibility to participate
in these programs is crucial to a provider's financial strength. As a result of
the foregoing, the revenues and margins may decrease at the Company's hospitals.
Notwithstanding the potential for increasing government regulation, the
Company believes that health care will continue to be delivered on a local basis
and that well-managed, high-quality, cost-controlled facilities will continue to
be an integral part of local health care delivery systems. The Company also
believes that certain acute care hospitals will need to reconfigure or expand
existing facilities or to affiliate themselves with other providers so as to
become part of comprehensive and cost-effective health care systems. Such
systems will likely include lower cost treatment settings, such as ambulatory
care clinics, outpatient surgery centers, skilled nursing facilities and medical
office buildings. In general, the Core Group facilities are part of local health
care delivery systems or are in the process of becoming integrated into such
systems.
10
<PAGE> 12
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's future operating results could be affected by the
operating performance of the Company's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Company's
portfolio are generally further supported by one or more credit enhancements
that take the form of cross-default provisions, letters of credit, corporate and
personal guarantees, security interests in cash reserve funds, accounts
receivable or other personal property and requirements to maintain specified
financial ratios.
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Company's psychiatric
properties. Institutions responsible for providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions include
decreasing the inpatient length of stay, intensively reviewing utilization,
directing patients from inpatient care to outpatient care and negotiating
reduced reimbursement rates for services. In addition, such institutions have
extended the length of time for making payments, resulting in increases in
accounts receivable. The wider use of psychotropic drugs has also resulted in
significant declines in the average length of stay. Although the operators of
the psychiatric hospitals are responding by developing lower cost outpatient and
daypatient programs, increasing case management and reducing operating costs,
their efforts are generally not consistently mitigating the negative impact of
these fundamental psychiatric industry changes.
The Company is currently providing financing under revolving credit
agreements to the operators of three of its psychiatric hospitals. As of August
11, 1995, outstanding borrowings under such agreements totaled $4,475,000, and
the Company has committed to fund an additional $1,225,000 of borrowings upon
request, subject to certain conditions. These borrowings, which are secured by
accounts receivable and certain personal property and which contain events of
default that would be triggered by defaults under the lease or mortgage loan
relating to the relevant psychiatric hospital, are the primary source of
financing for these operators' operating and capital needs. These psychiatric
hospitals have, from time to time, been unable to generate sufficient cash flow
for working capital and the development of new programs. In certain cases, these
psychiatric hospitals have not been able to pay down the outstanding borrowings
under the revolving credit agreements provided by the Company or to secure
replacement financing from third-party lenders. To the extent the psychiatric
hospitals have increased working capital needs in the future, the Psychiatric
Group may be the only source of such financing. In the event the Company's board
of directors determines that it is appropriate to provide additional working
capital financing to a psychiatric hospital, it may cause the Core Group to make
revolving inter-Group loans to the Psychiatric Group to fund such financing (to
the extent consistent with its then existing policies), although the Company's
board of directors is under no obligation to do so.
11
<PAGE> 13
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is currently discussing with the operator of the two Four
Winds psychiatric hospitals in New York possible alternatives for creating
additional available capital for the development and expansion of the hospitals'
programs, including the release of certain collateral securing the Company's
mortgage loan investments. The Company is currently reviewing the operator's
plan for these new programs which are intended to address the potential negative
consequences of the expected changes in Medicaid reimbursement and the increase
in managed care penetration in the State of New York.
In 1992, the Company recorded a $45,000,000 write-down of its
investments in two psychiatric hospitals and restructured the payment
obligations of these two facilities. In addition, at June 30, 1994, in view of
negative trends that caused declining cash flow at a number of the psychiatric
hospitals, the Company recorded a $30,000,000 write-down of its investments in
the psychiatric hospitals. Although management believes that the recorded
investments in psychiatric hospitals are realizable, if the cash flow at the
psychiatric hospitals continues to decline, the Company may be required to
further restructure payment obligations or make additional write-downs of the
value of its investments in the psychiatric hospitals. In July 1994, the Company
announced its intention to pursue alternatives for the psychiatric portfolio
including selected sales of hospitals to operators or other parties,
restructuring of financial obligations or other approaches that might allow the
effective separation of these assets from the Company's core portfolio of acute
care and rehabilitation hospitals, long-term care facilities and a medical
office building. As part of this initiative, the Company sold its psychiatric
property in Torrance, California in October 1994 for $5,772,000 in cash (at net
book value), sold two of its psychiatric properties in Massachusetts in February
1995 for $13,825,000 in cash (at net book value), restructured the leases and
revolving credit agreements of its two Florida psychiatric investments in March
1995 and has issued the Psychiatric Group Depositary Shares.
Additional rental income and interest income from the Company's
existing investments will be affected by changes in the revenues of the
underlying business operations upon which such income is based. The Company's
acute care investments accounted for 88% of net additional rental and interest
income for the first half of 1995, while rehabilitation and psychiatric
investments each accounted for 6%. Historically, a substantial portion of the
Company's additional rental and interest income has been attributable to six of
the Company's original acute care properties (the "Original Properties"). With
the significant revenue growth at a majority of the Original Properties in
recent years, two properties had reached the additional rent transition point at
the end of 1994 and it is anticipated that other properties may do so over the
next few years. The Company's revenue participation rate for the six Original
Properties declines from 5% to 1% when the additional rent transition point is
reached. At December 31, 1994, the amount of potential additional rent at the 5%
revenue participation rate for the six Original Properties was approximately
$2.8 million per annum.
The future operating results of the Company will be affected by
additional factors including the amount, timing and yield of additional real
estate investments and the competition for such investments. Operating results
will also be affected by the availability and terms of the Company's future
equity and debt financing. The Company's financing strategy includes the
objective to reduce its cost of capital over time and enhance its financial
flexibility to facilitate future growth. The Company believes that the
distribution of the Psychiatric Group Depositary Shares will facilitate
achievement of this objective.
12
<PAGE> 14
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's senior debt carries an implied investment grade rating
from two rating agencies. In August 1994, the Company's BBB- implied senior debt
rating was affirmed by Standard & Poor's but the outlook was revised to negative
from stable. Duff & Phelps Credit Rating Co. assigned an initial implied senior
debt rating of BBB- in November 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of August 11, 1995, the Company had commitments of $19.1 million to
fund construction obligations and capital expenditures over approximately the
next twelve months. Aggregate unfunded commitments under revolving credit
agreements provided to facility operators totaled $1.2 million as of August 11,
1995.
The Company recently increased its total unsecured credit facility to
$124 million to include a $24 million term loan facility which was used for the
sole purpose of funding a $24 million senior note maturity on May 31, 1995. The
$100 million revolving portion of the unsecured credit facility matures on
December 31, 1996, and as of August 11, 1995, the Company had $44.5 million of
revolving borrowings. The term loan portion of the unsecured credit facility
matures on April 30, 1997, and as of August 11, 1995, the Company had $24
million of term borrowings. The Company currently believes it has sufficient
capital to meet its commitments and that its cash flow and liquidity will
continue to be sufficient to fund current operations and to provide for the
payment of dividends to stockholders in compliance with the applicable sections
of the Internal Revenue Code governing real estate investment trusts.
13
<PAGE> 15
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------------------------------------------------- --------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Real estate investments
Real property and mortgage notes $ 556,714 $ 528,291
Construction loan and investments 27,118 21,383
Accumulated depreciation (71,544) (65,042)
--------- ---------
512,288 484,632
Financing leases 6,592 3,816
Revolving loan to Psychiatric Group 5,388 9,428
Fixed rate loan to Psychiatric Group 9,175 20,000
Other assets 8,907 8,972
Cash and short-term investments 1,201 1,838
---------------------------------------------------- --------- ---------
$ 543,551 $ 528,686
==================================================== ========= =========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable $ 57,500 $ 14,500
Notes and bonds payable 207,268 231,163
Accounts payable and accrued liabilities 9,162 9,480
Dividends payable 10,329 10,112
Deferred income 4,376 4,232
---------------------------------------------------- --------- ---------
288,635 269,487
---------------------------------------------------- --------- ---------
Commitments and contingencies
Total Attributed Core Group Equity 254,916 259,199
---------------------------------------------------- --------- ---------
$ 543,551 $ 528,686
==================================================== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 16
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
-------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Rental income $16,000 $14,765 $31,604 $29,224
Additional rental income 2,586 2,240 5,027 4,453
Other interest income 946 674 1,741 1,719
Interest on loans to Psychiatric Group 434 1,042 1,169 2,077
-------------------------------------- ------- ------- ------- -------
19,966 18,721 39,541 37,473
-------------------------------------- ------- ------- ------- -------
EXPENSES
Depreciation and amortization 3,337 3,008 6,563 5,990
Interest expense 6,906 6,291 13,734 12,819
General and administrative 1,460 689 2,900 1,938
-------------------------------------- ------- ------- ------- -------
11,703 9,988 23,197 20,747
-------------------------------------- ------- ------- ------- -------
Minority interest 57 95 162 164
-------------------------------------- ------- ------- ------- -------
NET INCOME $ 8,206 $ 8,638 $16,182 $16,562
====================================== ======= ======= ======= =======
NET INCOME PER SHARE $ 0.39 $ 0.41 $ 0.77 $ 0.79
====================================== ======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 20,913 20,857 20,906 20,836
====================================== ======= ======= ======= =======
CASH DIVIDENDS PER SHARE $0.4950 $0.4620 $0.9900 $0.9240
====================================== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 17
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1995 1994
------------------------------------------------------ -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 16,182 $ 16,562
Depreciation, amortization and other non-cash items 7,667 6,941
Deferred income (42) 100
Change in other assets (63) 8
Change in accounts payable and accrued liabilities (357) (1,820)
------------------------------------------------------ -------- --------
23,387 21,791
------------------------------------------------------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (29,258) (27,352)
Construction loan fundings (4,901) (16,337)
Construction loan paid 0 16,836
Direct financing leases (2,776) (1,365)
Paydowns on revolving loan to Psychiatric Group 3,874 504
Paydowns on fixed rate loan to Psychiatric Group 10,825 272
Administrative capital expenditures (81) (2)
------------------------------------------------------ -------- --------
(22,317) (27,444)
------------------------------------------------------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 43,000 4,500
Principal payments on notes payable (24,000) 0
Principal payments on mortgages 0 (14,468)
Financing costs paid (260) (191)
Proceeds from exercise of stock options 0 1,691
Dividends paid (20,447) (19,719)
------------------------------------------------------ -------- --------
(1,707) (28,187)
------------------------------------------------------ -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (637) (33,840)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,838 35,670
------------------------------------------------------ -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,201 $ 1,830
====================================================== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 18
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Distribution of Psychiatric Group Depositary Shares and Basis of
Presentation American Health Properties, Inc., a Delaware corporation (the
Company, which term refers to the Company and its subsidiaries unless the
context otherwise requires), is a self-administered real estate investment trust
(REIT) that commenced operations in 1987. The Company has investments in health
care properties, including acute care, rehabilitation and psychiatric hospitals,
long-term care facilities and a medical office building. On July 25, 1995, the
Company completed the distribution of Psychiatric Group Depositary Shares to
holders of its Common Stock (the Distribution). Shareholders received one
Psychiatric Group Depositary Share for every ten shares of Common Stock held of
record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock, a new series of preferred stock, par value $0.01 per share. The
Distribution is designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its investments
in acute care and rehabilitation hospitals, long-term care facilities and a
medical office building (the Core Group) into two distinct portfolios, with two
distinct classes of publicly traded shares intended to represent those
portfolios. The Psychiatric Group Depositary Shares are intended to reflect the
separate performance of the Psychiatric Group. The Company's existing Common
Stock is intended to reflect the separate performance of the Core Group. In
connection with the Distribution, the Company has specifically identified or
allocated its assets, liabilities and stockholders' equity, and its revenues,
expenses and cash flow items, between the Core Group and Psychiatric Group, as
more fully described below.
The combined condensed financial statements of the Core Group included
herein have been prepared by the Company without audit and include all normal,
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the results of operations pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with those included in the Company's
annual report on Form 10-K for the year ended December 31, 1994 and the
Company's current report on Form 8-K, dated August 14, 1995.
The financial statements of the Core Group include the financial
position, results of operations and cash flows of the Company's core investments
in acute care and rehabilitation hospitals, long-term care facilities and a
medical office building, an allocated portion of the Company's general and
administrative expense, all corporate assets and liabilities and related
transactions associated with the ongoing operations of the Company which are not
separately identified with either operating group, an attributed amount of
inter-Group loans receivable from the Psychiatric Group and an attributed amount
of the Company's stockholders' equity. For purposes of computing per share data
for periods prior to the actual Distribution, the number of shares of Core Group
Common Stock are assumed to be the same as the corresponding number of shares of
the Company's common stock prior to the Distribution. The Core Group financial
statements are prepared using the amounts included in the Company's consolidated
financial statements.
17
<PAGE> 19
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Although the financial statements of the Core Group and the Psychiatric
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow of
the Company attributed to each such Group, such attribution does not affect the
respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Nor does such attribution affect the rights
of creditors of the Company or any subsidiary, including rights under financing
covenants.
Each holder of Core Group Common Stock or Psychiatric Group Depositary
Shares is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition or borrowing costs can affect the results of operations, financial
condition or borrowing costs of the other Group. Net losses of either Group, as
well as dividends and distributions on, and repurchases of, Core Group Common
Stock or Psychiatric Group Depositary Shares will reduce the funds of the
Company legally available for dividends on both the Core Group Common Stock and
Psychiatric Group Depositary Shares. Furthermore, fundamental changes in the
psychiatric industry continue to negatively impact the facility specific
operating cash flow at the Psychiatric Group hospitals. Accordingly, the Core
Group's financial statements and the financial statements of the Psychiatric
Group should be read in conjunction with the Company's consolidated financial
statements.
These financial statements include the accounts of the Core Group
business. The Core Group and the Psychiatric Group financial statements, taken
together, comprise all of the accounts included in the Company's consolidated
financial statements.
Interest Paid Interest paid by the Core Group, net of interest
capitalized, was $12,919,000 and $11,994,000 for the six months ended June 30,
1995 and 1994, respectively. The Core Group had $15,000 and $592,000 of
capitalized interest for the six months ended June 30, 1995 and 1994,
respectively.
2. DEBT
Term Loan Facility In May 1995, the Company increased its $100 million
unsecured credit facility to $124 million to include a $24 million term loan
facility. The term loan facility was used solely for the purpose of funding a
$24 million principal payment on the Company's $125 million 1989 senior note
issue on May 31, 1995. The term loan facility bears interest at either LIBOR
plus a margin of 150 to 175 basis points or the prime rate plus a margin of 25
basis points through December 31, 1995. Thereafter and until maturity on April
30, 1997, the term loan facility bears interest at either LIBOR plus a margin of
175 to 200 basis points or the prime rate plus a margin of 50 basis points.
Currently, the Company is able to borrow at either LIBOR plus 150 basis points
or the prime rate plus 25 basis points. The applicable margin on LIBOR is
dependent upon the Company maintaining investment grade senior debt ratings.
18
<PAGE> 20
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. STOCKHOLDERS' EQUITY
Stock Incentive Plans Under the terms of the Company's stock incentive
plans, outstanding restricted stock awards, stock options and DERs have been
adjusted to reflect the Distribution. During the six months ended June 30,
1995, options to purchase 183,537 shares of Core Group Common Stock at a
weighted average exercise price of $18.97 per share and 14,859 Core Group
restricted stock awards were issued pursuant to the Company's stock incentive
plans.
Dividends A quarterly dividend of $.495 per share of Core Group Common
Stock was declared by the Company's board of directors on July 11, 1995, payable
on August 11, 1995 to shareholders of record on July 31, 1995. The aggregate
amount of this Core Group dividend payable of $10,329,000 has been recorded in
the accompanying financial statements as of June 30, 1995.
4. COMMITMENTS
Inter-Group Loans Repayment of inter-Group loans by the Psychiatric Group
is dependent upon the amount and timing of sales of the Psychiatric Group's
assets and paydowns received by the Psychiatric Group on borrowings provided to
psychiatric hospital operators under revolving credit agreements. In the first
quarter of 1995, the Core Group received $15,150,000 in inter-Group loan
repayments from the Psychiatric Group as a result of such asset sales and
operator borrowing paydowns. The Company's board of directors has established
certain policies relating to the Core Group's inter-Group loans to the
Psychiatric Group. Under these policies, the aggregate revolving inter-Group
loans owed by the Psychiatric Group to the Core Group will be limited to a
maximum of $8,750,000 at any one time outstanding, subject to reduction of such
limit commensurate with any permanent repayment in the future of borrowings
under revolving credit agreements provided to Psychiatric Group hospital
operators, but in no event will such limit be reduced below $5,000,000, and
except for such revolving inter-Group loans no additional fixed rate or other
inter-Group loans will be advanced by the Core Group to the Psychiatric Group.
Construction Loan/Mortgage Notes Receivable As of June 30, 1995, the Core
Group had funded $26.3 million of a $30 million commitment to participate in an
$86 million construction and mortgage financing of a 670,000 square foot
integrated hospital and medical office complex presently under construction in
Austin, Texas.
Real Estate Properties The Core Group has the right to approve capital
expenditures at all of its properties, the option to fund certain capital
expenditures and in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. At June 30, 1995,
the Core Group had remaining commitments to fund approximately $7.5 million of
capital expenditures pursuant to these rights and obligations. The base and
additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Core Group's increased investment.
19
<PAGE> 21
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As of June 30, 1995, the Core Group had funded $834,000 of a $4 million
commitment to finance the construction of a 96-bed Alzheimer's care facility in
Houston, Texas. The Company will purchase the facility upon completion in early
1996 and enter into a long-term lease. The facility will be operated by
Servicemaster Diversified Health Services, an experienced operator of long-term
care facilities.
In August 1995, the Core Group completed the $7.6 million purchase and
lease of two long-term care facilities located in Arizona and committed to
provide $5.6 million of construction and lease financing for an 80-unit assisted
living facility to be constructed in Walla Walla, Washington.
20
<PAGE> 22
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and
results of operations of the Core Group which should be read in conjunction with
(a) the combined condensed financial statements and accompanying notes of the
Core Group and (b) management's discussion and analysis of financial condition
and results of operations and the condensed financial statements and
accompanying notes of the Company and the Psychiatric Group included elsewhere
herein.
OPERATING RESULTS
Second Quarter and Year to Date 1995 Compared With 1994
For the second quarter of 1995, the Core Group reported net income of
$8,206,000 or $.39 per share compared with net income of $8,638,000 or $.41 per
share for the second quarter of 1994. For the six months ended June 30, 1995,
the Core Group reported net income of $16,182,000 or $.77 per share compared
with net income of $16,562,000 or $.79 per share for the first six months of
1994.
Rental income was $16,000,000 for the second quarter of 1995, an increase
of $1,235,000 or 8% from $14,765,000 for the second quarter of 1994. Rental
income was $31,604,000 for the six months ended June 30, 1995, an increase of
$2,380,000 or 8% from $29,224,000 for the comparable period in 1994. This
increase was primarily attributable to rental income from new properties
acquired and various capital additions subsequent to the first quarter of 1994.
These property additions also resulted in an increase in depreciation and
amortization of $329,000 to $3,337,000 for the second quarter of 1995 compared
with the second quarter of 1994 and an increase of $573,000 to $6,563,000 for
the six months ended June 30, 1995 compared with the same period in 1994.
Additional rental income was $2,586,000 for the second quarter of 1995,
an increase of $346,000 or 15% from $2,240,000 for the second quarter of 1994.
Additional rental income was $5,027,000 for the six months ended June 30, 1995,
an increase of $574,000 or 13% from $4,453,000 for the comparable period in
1994. This increase was primarily attributable to first-time additional rent
from several properties.
Other interest income increased $272,000 to $946,000 for the second
quarter of 1995 from $674,000 for the second quarter of 1994. Other interest
income increased $22,000 to $1,741,000 for the six months ended June 30, 1995
from $1,719,000 for the same period in 1994. An increase in interest income
resulting from a higher average construction loan balance during 1995 was
partially offset by a decrease in interest income resulting from a lower average
balance of short-term investments. In addition, the second quarter and first
half of 1994 included the recognition of $215,000 and $710,000, respectively, of
fee income related to the prepayment of a construction loan in February 1994.
21
<PAGE> 23
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest income on inter-Group loans to the Psychiatric Group was
$434,000 for the second quarter of 1995, a decrease of $608,000 or 58% from
$1,042,000 for the second quarter of 1994. Interest income on inter-Group loans
to the Psychiatric Group was $1,169,000 for the six months ended June, 30, 1995,
a decrease of $908,000 or 44% from $2,077,000 for the comparable period in 1994.
The decrease reflects a lower average balance outstanding on loans to the
Psychiatric Group primarily as a result of $15,150,000 of repayments by the
Psychiatric Group from the proceeds of asset sales and the paydown of borrowings
under revolving credit agreements provided to psychiatric hospital operators.
Interest expense was $6,906,000 for the second quarter of 1995, an
increase of $615,000 or 10% from $6,291,000 for the second quarter of 1994.
Interest expense was $13,734,000 for the six months ended June 30, 1995, an
increase of $915,000 or 7% from $12,819,000 for the comparable period in 1994.
This increase was primarily attributable to higher average short-term borrowings
during the second quarter and first half of 1995 and a reduction in capitalized
interest in 1995 compared to 1994. The first quarter of 1994 included interest
expense from mortgage notes payable until the balance of $14.4 million was
prepaid in February 1994.
General and administrative expenses increased to $1,460,000 for the
second quarter of 1995 from $689,000 for the second quarter of 1994. For the
first half of 1995, general and administrative expenses increased to $2,900,000
from $1,938,000 for the first half of 1994. This variation was attributable to
an increase in the Company's consolidated general and administrative expenses
which are allocated between the Core Group and Psychiatric Group primarily based
on revenues, and an increase in Core Group revenues relative to the Company's
consolidated revenues. The increase in the Company's consolidated general and
administrative expenses for the second quarter and first half of 1995 was
primarily attributable to higher expense from the Company's stock incentive
plans and increased shareholder reporting costs associated with the distribution
of the Psychiatric Group Depositary Shares. In the second quarter of 1994, the
Company reversed $750,000 of a corporate relocation accrual recorded in the
fourth quarter of 1993, after the Company decided to maintain its headquarters
in Denver, Colorado.
Future Operating Results
The nature of health care delivery in the United States is currently
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. The Company's Board and management are
monitoring potential changes closely. The Company believes that these potential
changes may pose risks for certain institutions that are unwilling or unable to
respond. However, the Company believes that this changing health care
environment will provide the Core Group with new opportunities for investment in
its current facilities as well as new facilities.
22
<PAGE> 24
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company recognizes that the health care industry in the United
States is undergoing significant evolution. The ongoing changes in the health
care industry include trends toward shorter lengths of hospital stay, increased
use of outpatient services, increased federal, state and third party oversight
of health care company operations and business practices, and increased demand
for capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal, state
and third party payors continue to propose and adopt various cost containment
measures that restrict the scope of reimbursable health care services and limit
increases in reimbursement rates for such services. Payors are also continuing
to aggressively enforce compliance with program requirements and pursue
providers that they believe have not complied with such requirements. Outpatient
business is expected to increase as advances in medical technologies allow more
procedures to be performed on an outpatient basis and as payors continue to
direct more patients from inpatient care to outpatient care. In addition, the
entrance of insurance companies into managed care programs is accelerating the
introduction of managed care in new localities, and states and insurance
companies continue to negotiate actively the amounts they will pay for services.
Moreover, the percentage of health care services that are reimbursed under the
Medicare and Medicaid programs continues to increase as the population ages and
as states expand their Medicaid programs. Continued eligibility to participate
in these programs is crucial to a provider's financial strength. As a result of
the foregoing, the revenues and margins may decrease at the Core Group's
hospitals.
Notwithstanding the potential for increasing government regulation, the
Company believes that health care will continue to be delivered on a local basis
and that well-managed, high-quality, cost-controlled facilities will continue to
be an integral part of local health care delivery systems. The Company also
believes that certain acute care hospitals will need to reconfigure or expand
existing facilities or to affiliate themselves with other providers so as to
become part of comprehensive and cost-effective health care systems. Such
systems will likely include lower cost treatment settings, such as ambulatory
care clinics, outpatient surgery centers, skilled nursing facilities and medical
office buildings. In general, the Core Group facilities are part of local health
care delivery systems or are in the process of becoming integrated into such
systems.
The Core Group's future operating results could be affected by the
operating performance of the Core Group's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Core
Group's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios. In addition, financial effects arising from the
Psychiatric Group that affect the Company's consolidated results of operations,
financial condition or borrowing costs could affect the results of operations,
financial condition or borrowing costs of the Core Group. Fundamental changes in
the psychiatric industry continue to negatively impact the facility specific
operating cash flow at the Psychiatric Group hospitals. Accordingly, the Core
Group's financial statements should be read in conjunction with the financial
statements of the Psychiatric Group and the Company's consolidated financial
statements.
23
<PAGE> 25
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional rental income from the Core Group's existing investments
will be affected by changes in the revenues of the underlying business
operations upon which such income is based. The Core Group's acute care
investments accounted for 93% of net additional rental income for the first half
of 1995, while rehabilitation investments accounted for 7%. Historically, a
substantial portion of the Core Group's additional rental income has been
attributable to six of the Core Group's original acute care properties (the
"Original Properties"). With the significant revenue growth at a majority of the
Original Properties in recent years, two properties had reached the additional
rent transition point at the end of 1994 and it is anticipated that other
properties may do so over the next few years. The Core Group's revenue
participation rate for the six Original Properties declines from 5% to 1% when
the additional rent transition point is reached. At December 31, 1994, the
amount of potential additional rent at the 5% revenue participation rate for the
six Original Properties was approximately $2.8 million per annum.
The future operating results of the Core Group will be affected by
additional factors including the amount, timing and yield of additional real
estate investments and the competition for such investments. Operating results
will also be affected by the availability and terms of the Company's future
equity and debt financing. The Company's financing strategy includes the
objective to reduce its cost of capital over time and enhance its financial
flexibility to facilitate future growth. The Company believes that the
distribution of the Psychiatric Group Depositary Shares will facilitate
achievement of this objective.
The Company's senior debt carries an implied investment grade rating
from two rating agencies. In August 1994, the Company's BBB- implied senior debt
rating was affirmed by Standard & Poor's but the outlook was revised to negative
from stable. Duff & Phelps Credit Rating Co. assigned an initial implied senior
debt rating of BBB- in November 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, the Core Group had $5,388,000 outstanding under
its revolving inter-Group loan to the Psychiatric Group. Under management
policies currently in effect, the Core Group may provide the Psychiatric Group
with revolving inter-Group loans of up to $8,750,000.
As of August 11, 1995, the Core Group had commitments of $19.1 million
to fund construction obligations and capital expenditures over approximately the
next twelve months.
The Company recently increased its total unsecured credit facility to
$124 million to include a $24 million term loan facility which was used for the
sole purpose of funding a $24 million senior note maturity on May 31, 1995. The
$100 million revolving portion of the unsecured credit facility matures on
December 31, 1996, and as of August 11, 1995, the Company had $44.5 million of
revolving borrowings. The term loan portion of the unsecured credit facility
matures on April 30, 1997, and as of August 11, 1995, the Company had $24
million of term borrowings. The Company currently believes it has sufficient
capital to meet its commitments and that its cash flow and liquidity will
continue to be sufficient to fund current operations and to provide for the
payment of dividends to stockholders in compliance with the applicable sections
of the Internal Revenue Code governing real estate investment trusts.
24
<PAGE> 26
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------------------------------------------------- -------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Real estate investments
Real property and mortgage notes $ 62,837 $ 75,579
Accumulated depreciation (3,572) (5,575)
-------- --------
59,265 70,004
Other notes receivable 5,012 9,428
Other assets 590 813
--------------------------------------------------- -------- --------
$ 64,867 $ 80,245
=================================================== ======== ========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving loan from Core Group $ 5,388 $ 9,428
Fixed rate loan from Core Group 9,175 20,000
Accounts payable and accrued liabilities 402 188
Dividends payable 1,669 1,877
Deferred income 211 450
--------------------------------------------------- -------- --------
16,845 31,943
--------------------------------------------------- -------- --------
Commitments and contingencies
Total Attributed Psychiatric Group Equity 48,022 48,302
--------------------------------------------------- -------- --------
$ 64,867 $ 80,245
=================================================== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 27
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
---------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 681 $ 2,091 $ 1,691 $ 4,182
Mortgage interest income 1,469 1,445 2,939 2,890
Additional rental and interest income 131 192 326 270
Other interest income 160 246 376 468
---------------------------------------------- -------- -------- -------- --------
2,441 3,974 5,332 7,810
---------------------------------------------- -------- -------- -------- --------
EXPENSES
Depreciation and amortization 186 671 430 1,342
Interest on loans from Core Group 434 1,042 1,169 2,077
General and administrative 182 155 403 425
Targeted stock issuance costs 300 - 300 -
Write-down of real estate investments - 30,000 - 30,000
---------------------------------------------- -------- -------- -------- --------
1,102 31,868 2,302 33,844
---------------------------------------------- -------- -------- -------- --------
NET INCOME (LOSS) $ 1,339 $(27,894) $ 3,030 $(26,034)
============================================== ======== ======== ======== ========
NET INCOME (LOSS) PER DEPOSITARY SHARE $ 0.64 $ (13.37) $ 1.45 $ (12.49)
============================================== ======== ======== ======== ========
WEIGHTED AVERAGE DEPOSITARY SHARES OUTSTANDING 2,091 2,086 2,091 2,084
============================================== ======== ======== ======== ========
CASH DIVIDENDS PER DEPOSITARY SHARE $ 0.8000 $ 1.1300 $ 1.6000 $ 2.2600
============================================== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 28
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1995 1994
------------------------------------------------------ -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,030 $(26,034)
Depreciation, amortization and other non-cash items 512 1,375
Deferred income (9) (30)
Write-down of real estate investments - 30,000
Change in other assets 170 3
Change in accounts payable and accrued liabilities (4) (17)
------------------------------------------------------ -------- --------
3,699 5,297
------------------------------------------------------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (693) -
Proceeds from sale of properties 10,825 -
Other notes receivable 4,416 (667)
------------------------------------------------------ -------- --------
14,548 (667)
------------------------------------------------------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving loan from Core Group (3,874) (504)
Payments on fixed rate loan from Core Group (10,825) (272)
Proceeds from exercise of stock options - 272
Dividends paid (3,548) (4,126)
------------------------------------------------------ -------- --------
(18,247) (4,630)
------------------------------------------------------ -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS - -
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD - -
------------------------------------------------------ -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ - $ -
====================================================== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 29
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Distribution of Psychiatric Group Depositary Shares and Basis of
Presentation American Health Properties, Inc., a Delaware corporation (the
Company, which term refers to the Company and its subsidiaries unless the
context otherwise requires), is a self-administered real estate investment trust
(REIT) that commenced operations in 1987. The Company has investments in health
care properties, including acute care, rehabilitation and psychiatric hospitals,
long-term care facilities and a medical office building. On July 25, 1995, the
Company completed the distribution of Psychiatric Group Depositary Shares to
holders of its Common Stock (the Distribution). Shareholders received one
Psychiatric Group Depositary Share for every ten shares of Common Stock held of
record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock, a new series of preferred stock, par value $0.01 per share. The
Distribution is designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its investments
in acute care and rehabilitation hospitals, long-term care facilities and a
medical office building (the Core Group) into two distinct portfolios, with two
distinct classes of publicly traded shares intended to represent those
portfolios. The Psychiatric Group Depositary Shares are intended to reflect the
separate performance of the Psychiatric Group. The Company's existing Common
Stock is intended to reflect the separate performance of the Core Group. In
connection with the Distribution, the Company has specifically identified or
allocated its assets, liabilities and stockholders' equity, and its revenues,
expenses and cash flow items, between the Psychiatric Group and Core Group, as
more fully described below.
The combined condensed financial statements of the Psychiatric Group
included herein have been prepared by the Company without audit and include all
normal, recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the results of operations pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with those included in the Company's
annual report on Form 10-K for the year ended December 31, 1994 and the
Company's current report on Form 8-K, dated August 14, 1995.
The financial statements of the Psychiatric Group include the financial
position, results of operations and cash flows of the Company's psychiatric
hospital investments, an allocated portion of the Company's general and
administrative expense, an attributed amount of inter-Group debt payable to the
Core Group and an attributed amount of the Company's stockholders' equity. For
purposes of computing per share data for periods prior to the actual
Distribution, the number of Psychiatric Group Depositary Shares are assumed to
be one-tenth of the corresponding number of shares of the Company's common stock
prior to the Distribution. The Psychiatric Group financial statements are
prepared using the amounts included in the Company's consolidated financial
statements.
Although the financial statements of the Psychiatric Group and the Core
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow of
the Company attributed to each such Group, such attribution does not affect the
respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Nor does such attribution affect the rights
of creditors of the Company or any subsidiary, including rights under financing
covenants.
28
<PAGE> 30
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Each holder of Psychiatric Group Depositary Shares or Core Group Common
Stock is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition or borrowing costs can affect the results of operations, financial
condition or borrowing costs of the other Group. In addition, net losses of
either Group, as well as dividends and distributions on, and repurchases of,
Psychiatric Group Depositary Shares or Core Group Common Stock will reduce the
funds of the Company legally available for dividends on both the Psychiatric
Group Depositary Shares and Core Group Common Stock. Accordingly, the
Psychiatric Group's financial statements and the financial statements of the
Core Group should be read in conjunction with the Company's consolidated
financial statements.
These financial statements include the accounts of the Psychiatric Group
business. The Psychiatric Group and the Core Group financial statements, taken
together, comprise all of the accounts included in the Company's consolidated
financial statements.
Interest Paid Interest paid by the Psychiatric Group on inter-Group loans
from the Core Group was $1,169,000 and $2,077,000 for the six months ended June
30, 1995 and 1994, respectively.
2. DEBT
Inter-Group Loans Repayment of inter-Group loans from the Core Group is
dependent upon the amount and timing of sales of the Psychiatric Group's assets
and paydowns received by the Psychiatric Group on borrowings provided to
psychiatric hospital operators under revolving credit agreements. In the first
quarter of 1995, the Psychiatric Group made $15,150,000 in inter-Group loan
repayments to the Core Group as a result of such asset sales and operator
borrowing paydowns. The Company's board of directors has established certain
policies relating to the Psychiatric Group's inter-Group loans from the Core
Group. Under these policies, the aggregate revolving inter-Group loans owed to
the Core Group by the Psychiatric Group will be limited to a maximum of
$8,750,000 at any one time outstanding, subject to reduction of such limit
commensurate with any permanent repayment in the future of borrowings under
revolving credit agreements provided to Psychiatric Group hospital operators,
but in no event will such limit be reduced below $5,000,000, and except for such
revolving inter-Group loans no additional fixed rate or other inter-Group loans
will be advanced to the Psychiatric Group by the Core Group.
29
<PAGE> 31
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. STOCKHOLDERS' EQUITY
Stock Incentive Plans Under the terms of the Company's stock incentive
plans, outstanding restricted stock awards, stock options and DERs have been
adjusted to reflect the Distribution. During the six months ended June 30,
1995, options to purchase 18,354 Psychiatric Group Depositary Shares at a
weighted average exercise price of $18.90 per share and 1,486 Psychiatric Group
restricted share awards were issued pursuant to the Company's stock incentive
plans.
Dividends A quarterly dividend of $.80 per Psychiatric Group Depositary
Share was declared by the Company's board of directors on July 11, 1995, payable
on August 11, 1995 to shareholders of record on July 31, 1995. The aggregate
amount of this Psychiatric Group dividend payable of $1,669,000 has been
recorded in the accompanying financial statements as of June 30, 1995.
4. COMMITMENTS
Other Notes Receivable The Psychiatric Group provides financing at
variable rates to certain psychiatric hospital operators under revolving credit
agreements secured by accounts receivable. The aggregate commitment under these
credit agreements was $5.7 million at June 30, 1995 of which $1.2 million was
unfunded.
Real Estate Properties The Psychiatric Group has the right to approve
capital expenditures at all of its properties and the option to fund certain
capital expenditures on terms comparable to the original investment. The base
and additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Psychiatric Group's increased investment.
The Psychiatric Group had no commitments to fund such capital expenditures at
June 30, 1995.
30
<PAGE> 32
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. PROPERTY SALES AND RESTRUCTURINGS
In February 1995, the Psychiatric Group sold its Westwood and Pembroke,
Massachusetts psychiatric hospital investments. The cash proceeds of $13,825,000
represented payment for the $10,825,000 net book value of the real property and
repayment of the $3,000,000 balance outstanding under a revolving credit
agreement that had been provided to the operator. The Psychiatric Group applied
$10,825,000 of the cash proceeds to pay down its fixed rate inter-Group loan
from the Core Group and applied $3,000,000 of the cash proceeds to pay down its
revolving inter-Group loan from the Core Group. The Psychiatric Group's total
revenues from these two investments were $412,000 and $1,459,000 for the six
months ended June 30, 1995 and 1994, respectively, and $3,000,000 for the full
year in 1994.
In March 1995, the Psychiatric Group restructured the terms of its two
Florida psychiatric hospital investments that were included in a $30 million
write-down recorded by the Psychiatric Group in 1994 against its psychiatric
portfolio. Pursuant to the restructuring effective January 1, 1995, the annual
minimum rental obligation of The Retreat psychiatric hospital in Sunrise,
Florida was reduced from $2,359,000 to $1,100,000, and the annual minimum rental
obligation of The Manors psychiatric hospital in Tarpon Springs, Florida was
reduced from $855,000 to $600,000. As part of the restructuring, The Retreat
used an existing $1,000,000 lease reserve fund to pay down outstanding
borrowings under a revolving credit agreement provided by the Psychiatric Group,
and the maximum amount available for borrowing under the credit agreement was
reduced from $2,250,000 to $1,000,000. The Manors used an existing $325,000
lease reserve fund to pay down outstanding borrowings under a $2,000,000
revolving credit agreement provided by the Psychiatric Group. The payments
received by the Psychiatric Group were used to pay down its revolving
inter-Group loan from the Core Group.
31
<PAGE> 33
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and
results of operations of the Psychiatric Group which should be read in
conjunction with (a) the combined condensed financial statements and
accompanying notes of the Psychiatric Group and (b) management's discussion and
analysis of financial condition and results of operations and the condensed
financial statements and accompanying notes of the Company and the Core Group
included elsewhere herein.
OPERATING RESULTS
Second Quarter and Year to Date 1995 Compared With 1994
For the second quarter of 1995, the Psychiatric Group reported net income
of $1,339,000 or $.64 per share compared with a net loss of ($27,894,000) or
($13.37) per share for the second quarter of 1994. For the six months ended June
30, 1995, the Psychiatric Group reported net income of $3,030,000 or $1.45 per
share compared with a net loss of ($26,034,000) or ($12.49) per share for the
first six months of 1994. The net loss for the second quarter and first six
months of 1994 included a write-down of psychiatric real estate investments of
$30,000,000, or ($14.38) and ($14.40) per share, respectively, as a result of
accelerating negative trends in the psychiatric industry.
Rental income was $681,000 for the second quarter of 1995, a decrease of
$1,410,000 or 67% from $2,091,000 for the second quarter of 1994. Rental income
was $1,691,000 for the six months ended June 30, 1995, a decrease of $2,491,000
or 60% from $4,182,000 for the comparable period in 1994. This decrease was
primarily attributable to a reduction in rental income due to the sale of three
psychiatric properties and the lease restructurings of two psychiatric
investments. The property sales, together with lower depreciation expense on
psychiatric properties written down in June 1994, resulted in a decrease in
depreciation and amortization of $485,000 to $186,000 for the second quarter of
1995 compared with the second quarter of 1994 and a decrease of $912,000 to
$430,000 for the six months ended June 30, 1995 compared with the same period in
1994.
Additional rental and interest income was $131,000 for the second quarter
of 1995, a decrease of $61,000 from $192,000 for the first quarter of 1994.
Additional rental and interest income was $326,000 for the six months ended June
30, 1995, an increase of $56,000 from $270,000 for the comparable period in
1994. These differences are attributable to variations in revenues upon which
such additional rent and interest is based.
Other interest income decreased $86,000 to $160,000 for the second
quarter of 1995 from $246,000 for the second quarter of 1994. Other interest
income decreased $92,000 to $376,000 for the six months ended June 30, 1995
from $468,000 for the same period in 1994. The decrease is primarily
attributable to lower average borrowings under revolving credit agreements
provided to psychiatric hospital operators as a result of the sale of one
psychiatric property, the lease restructurings of two psychiatric investments
and the reduction in fee amortization as a result of the above mentioned
property sale.
32
<PAGE> 34
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense on inter-Group loans from the Core Group was $434,000
for the second quarter of 1995, a decrease of $608,000 or 58% from $1,042,000
for the second quarter of 1994. Interest expense on inter-Group loans from the
Core Group was $1,169,000 for the six months ended June 30, 1995, a decrease of
$908,000 or 44% from $2,077,000 for the comparable period in 1994. The decrease
reflects a lower average balance outstanding on loans from the Core Group
primarily as a result of $15,150,000 of repayments to the Core Group from the
proceeds of the previously mentioned property sales and restructurings.
The $300,000 targeted stock issuance costs was an additional accrual
made in the second quarter of 1995 to reflect the increased costs of the
Distribution. The increased costs primarily reflect higher legal and accounting
fees and printing and shipping costs as a result of the extended filing period.
Future Operating Results
The Company recognizes that the health care industry in the United
States is undergoing significant evolution. The ongoing changes in the health
care industry include trends toward shorter lengths of hospital stay, increased
use of outpatient services, increased federal, state and third party oversight
of health care company operations and business practices, and increased demand
for capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal, state
and third party payors continue to propose and adopt various cost containment
measures that restrict the scope of reimbursable health care services and limit
increases in reimbursement rates for such services. Payors are also continuing
to aggressively enforce compliance with program requirements and pursue
providers that they believe have not complied with such requirements. Outpatient
business is expected to increase as advances in medical technologies allow more
procedures to be performed on an outpatient basis and as payors continue to
direct more patients from inpatient care to outpatient care. In addition, the
entrance of insurance companies into managed care programs is accelerating the
introduction of managed care in new localities, and states and insurance
companies continue to negotiate actively the amounts they will pay for services.
Moreover, the percentage of health care services that are reimbursed under the
Medicare and Medicaid programs continues to increase as the population ages and
as states expand their Medicaid programs. Continued eligibility to participate
in these programs is crucial to a provider's financial strength.
33
<PAGE> 35
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Psychiatric Group's
properties. Institutions responsible for providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions include
decreasing the inpatient length of stay, intensively reviewing utilization,
directing patients from inpatient care to outpatient care and negotiating
reduced reimbursement rates for services. In addition, such institutions have
extended the length of time for making payments, resulting in increases in
accounts receivable. The wider use of psychotropic drugs has also resulted in
significant declines in the average length of stay. Although the operators of
the psychiatric hospitals are responding by developing lower cost outpatient and
daypatient programs, increasing case management and reducing operating costs,
their efforts are generally not consistently mitigating the negative impact of
these fundamental psychiatric industry changes.
The Psychiatric Group is currently providing financing under revolving
credit agreements to the operators of three of its psychiatric hospitals. As of
August 11, 1995, outstanding borrowings under such agreements totaled
$4,475,000, and the Psychiatric Group has committed to fund an additional
$1,225,000 of borrowings upon request, subject to certain conditions. These
borrowings, which are secured by accounts receivable and certain personal
property and which contain events of default that would be triggered by defaults
under the lease or mortgage loan relating to the relevant psychiatric hospital,
are the primary source of financing for these operators' operating and capital
needs. These psychiatric hospitals have, from time to time, been unable to
generate sufficient cash flow for working capital and the development of new
programs. In certain cases, these psychiatric hospitals have not been able to
pay down the outstanding borrowings under the revolving credit agreements
provided by the Psychiatric Group or to secure replacement financing from
third-party lenders. To the extent the psychiatric hospitals have increased
working capital needs in the future, the Psychiatric Group may be the only
source of such financing. In the event the Company's board of directors
determines that it is appropriate to provide additional working capital
financing to a psychiatric hospital, it may cause the Core Group to make
revolving inter-Group loans to the Psychiatric Group to fund such financing (to
the extent consistent with its then existing policies), although the Company's
board of directors is under no obligation to do so.
The Psychiatric Group is currently discussing with the operator of the
two Four Winds psychiatric hospitals in New York possible alternatives for
creating additional available capital for the development and expansion of the
hospitals' programs, including the release of certain collateral securing the
Psychiatric Group's mortgage loan investments. The Psychiatric Group is
currently reviewing the operator's plan for these new programs which are
intended to address the potential negative consequences of the expected changes
in Medicaid reimbursement and the increase in managed care penetration in the
State of New York.
34
<PAGE> 36
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 1992, the Psychiatric Group recorded a $45,000,000 write-down of its
investments in two psychiatric hospitals and restructured the payment
obligations of these two facilities. In addition, at June 30, 1994, in view of
negative trends that caused declining cash flow at a number of the psychiatric
hospitals, the Psychiatric Group recorded a $30,000,000 write-down of its
investments in the psychiatric hospitals. Although management believes that the
recorded investments in psychiatric hospitals are realizable, if the cash flow
at the psychiatric hospitals continues to decline, the Psychiatric Group may be
required to further restructure payment obligations or make additional
write-downs of the value of its investments in the psychiatric hospitals. In
July 1994, the Company announced its intention to pursue alternatives for the
psychiatric portfolio including selected sales of hospitals to operators or
other parties, restructuring of financial obligations or other approaches that
might allow the effective separation of these assets from the Company's core
portfolio of acute care and rehabilitation hospitals, long-term care facilities
and a medical office building. As part of this initiative, the Psychiatric Group
sold its psychiatric property in Torrance, California in October 1994 for
$5,772,000 in cash (at net book value), sold two of its psychiatric properties
in Massachusetts in February 1995 for $13,825,000 in cash (at net book value),
restructured the leases and revolving credit agreements of its two Florida
psychiatric investments in March 1995 and has issued the Psychiatric Group
Depositary Shares.
LIQUIDITY AND CAPITAL RESOURCES
As of August 11, 1995, the Psychiatric Group had aggregate unfunded
commitments under revolving credit agreements provided to facility operators of
$1.2 million.
At June 30, 1995, the Psychiatric Group had $5,388,000 and $9,175,000
outstanding under its revolving inter-Group loan from the Core Group and its
fixed rate inter-Group loan from the Core Group, respectively. The Psychiatric
Group is required to use the net proceeds from the disposition of Psychiatric
Group assets to pay down its outstanding revolving inter-Group loan (to the
extent of the psychiatric hospital operator borrowings under revolving credit
agreements associated with the asset or assets sold) with any excess used to pay
down the balance outstanding under the fixed rate inter-Group loan. The
Psychiatric Group reduced the combined balance of the revolving inter-Group and
fixed rate inter-Group loans by $15,150,000 in the first quarter of 1995 with
proceeds from the sale of the Westwood and Pembroke psychiatric hospitals in
February 1995 and the paydowns received on borrowings under revolving credit
agreements provided to the operator of the two Florida psychiatric hospitals in
March 1995. The Core Group may, under management policies currently in effect,
provide the Psychiatric Group with revolving inter-Group loans of up to
$8,750,000 (subject to reduction of such limit commensurate with any permanent
repayment in the future of borrowings under revolving credit agreements provided
to Psychiatric Group hospital operators, but in no event will such limit be
reduced below $5,000,000). The Psychiatric Group has no third party sources of
additional financing and, as a result, will be dependent on the Core Group for
all such financing. Although the Core Group may make this financing available,
there is no obligation of the Company's board of directors to cause the Core
Group to provide funds to the Psychiatric Group if the board of directors
determines that it is in the Company's best interest not to do so.
35
<PAGE> 37
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Psychiatric Group does not expect to make any additional acquisitions
or capital investments except to the extent of existing unfunded commitments
under revolving credit agreements provided to facility operators. Payment of
dividends will be primarily dependent upon the performance of the Psychiatric
Group. The Psychiatric Group expects to distribute a substantial portion of its
funds from operations and net proceeds from asset dispositions, after payments
of inter-Group loan obligations, to holders of Psychiatric Group Depositary
Shares.
36
<PAGE> 38
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of American Health Properties, Inc.
was held on May 19, 1995 ("Annual Meeting").
(b) At the Annual Meeting, Royce Diener, Charles M. Haar and Joseph P.
Sullivan were elected as Class II directors to serve for a three-year
term until the 1998 Annual Meeting of Shareholders. Voting results for
these directors are summarized as follows:
Royce Diener Votes For--19,271,212; Votes Withheld--301,644
Charles M. Haar Votes For--19,274,776; Votes Withheld--298,080
Joseph P. Sullivan Votes For--19,082,326; Votes Withheld--490,530
Class I directors whose term of office continues until the 1997 Annual
Meeting of Shareholders include Norman Barker, Jr. and James L. Fishel.
Class III directors whose term of office continues until the 1996 Annual
Meeting of Shareholders include Sheldon S. King, Walter J. McNerney and
Louis T. Rosso.
(c) At the Annual Meeting, shareholders approved the following matters:
i. Amendment to the Certificate of Incorporation of the Company to
increase the authorized number of shares of the Company's Common
Stock from 25,000,000 to 100,000,000 shares. Votes For--15,122,352;
Votes Against--4,129,498; Votes Abstained--321,006.
ii. Appointment of the accounting firm of Arthur Andersen LLP as the
auditors and as independent public accountants for the Company for
the fiscal year ending December 31, 1995. Votes For--19,271,373;
Votes Against--132,864; Votes Abstained--168,619.
(d) Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 14, 1995, the Company filed a Current Report on Form 8-K
pertaining to the distribution of Psychiatric Group Depositary Shares on
July 25, 1995. Consolidated financial statements of the Company,
combined financial statements of the Core Group and combined financial
statements of the Psychiatric Group for the three years ended December
31, 1994 were filed.
37
<PAGE> 39
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.
Date: August 14, 1995
AMERICAN HEALTH PROPERTIES, INC.
By: JOSEPH P. SULLIVAN
---------------------------
Joseph P. Sullivan
President & Chief Executive Officer
By: MICHAEL J. MCGEE
---------------------------
Michael J. McGee
Vice President & Controller
(Principal Financial and Accounting
Officer)
38
<PAGE> 40
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,201
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> (75,116)
<TOTAL-ASSETS> 593,855
<CURRENT-LIABILITIES> 0
<BONDS> 207,268
<COMMON> 209
0
0
<OTHER-SE> 302,729
<TOTAL-LIABILITY-AND-EQUITY> 593,855
<SALES> 0
<TOTAL-REVENUES> 43,704
<CGS> 0
<TOTAL-COSTS> 6,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,734
<INCOME-PRETAX> 19,212
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,212
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Primary and fully diluted earnings per share attributable to Core Group Common
Stock $.77; Psychiatric Group Depositary Shares $1.45.
</FN>
</TABLE>
