<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1995
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
FORM 8-A
------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
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.)
</TABLE>
------------------------
<TABLE>
<S> <C>
6400 SOUTH FIDDLER'S GREEN CIRCLE 80111
SUITE 1800 (ZIP CODE)
ENGLEWOOD, COLORADO
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- - - --------------------------------------------------------------------------------------------
<S> <C>
PSYCHIATRIC GROUP NEW YORK STOCK EXCHANGE
PREFERRED STOCK,
PAR VALUE $0.01 PER SHARE
DEPOSITARY SHARES, EACH NEW YORK STOCK EXCHANGE
REPRESENTING A ONE-TENTH INTEREST IN A SHARE
OF
THE REGISTRANT'S PSYCHIATRIC GROUP
PREFERRED STOCK, PAR VALUE $0.01 PER SHARE
</TABLE>
If this Form relates to the registration of a class of debt securities and
is effective upon filing pursuant to General Instruction A.(c)(1), please check
the following box. / /
If this Form relates to the registration of a class of debt securities and
is to become effective simultaneously with the effectiveness of a concurrent
registration statement under the Securities Act of 1933 pursuant to General
Instruction A.(c)(2), please check the following box. / /
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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- - - --------------------------------------------------------------------------------
<PAGE> 2
ITEM 1. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
A description of the Registrant's Psychiatric Group Preferred Stock, par
value $0.01 per share, and Depositary Shares, each representing a one-tenth
interest in a share of such Psychiatric Group Preferred Stock, is included under
the headings "Description of Capital Stock of the Company" and "Description of
Depositary Shares" in the Registrant's draft Information Statement attached
hereto as Exhibit 99 and is incorporated herein by reference.
ITEM 2. EXHIBITS.
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended (incorporated herein by
reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year ended
December 31, 1991 (Commission File No. 1-9381)).
3.2 Amended and Restated By-laws of the Registrant, as amended (incorporated herein by
reference to Exhibit 3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1992 (Commission File No. 1-9381)).
4.1 Form of certificate representing shares of Psychiatric Group Preferred Stock, par
value $0.01 per share, of the Registrant.
4.2 Form of Deposit Agreement (including form of Depositary Receipt).
4.3 Draft Certificate of Designations.
23.1 Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
99. Draft Information Statement.
</TABLE>
2
<PAGE> 3
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN HEALTH PROPERTIES, INC.
By: /s/ VICTOR C. STREUFERT
Victor C. Streufert
Executive Vice President,
Chief Financial Officer
Date: February 28, 1995
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description Page
- - - ----------- ------------------- ----
<S> <C> <C>
3.1. Certificate of Incorporation of the Registrant, as amended (incorporated herein
by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year ended
December 31, 1991 (Commission File No. 1-9381)).
3.2. Amended and Restated By-laws of the Registrant, as amended (incorporated herein
by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1992 (Commission File No. 1-9381)).
4.1. Form of certificate representing shares of Psychiatric Group Preferred Stock,
par value $0.01 per share, of the Registrant.
4.2. Form of Deposit Agreement (including form of Depositary Receipt).
4.3. Draft Certificate of Designations.
23.1. Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
99. Draft Information Statement.
</TABLE>
<PAGE> 1
<TABLE>
<S> <C>
[Form of share certificate]
PYSCHIATRIC GROUP PREFERRED STOCK PSYCHIATRIC GROUP PREFERRED STOCK
Par Value $0.01 Per Share
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
--------------------------------
CUSIP
--------------------------------
THIS CERTIFICATE IS TRANSFERABLE
IN THE CITY OF SAN FRANCISCO
OR IN LOS ANGELES
OR IN NEW YORK
AMERICAN HEALTH PROPERTIES, INC.
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PYSCHIATRIC GROUP PREFERRED STOCK OF
American Health Properties, Inc., transferable only on the books of the Corporation, in person or by Attorney duly authorized in
writing upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and
shall be held subject to all provisions of the Corporation's Certificate of Incorporation and any amendments thereof, and to all the
provisions of the Certificate of Designations relating to the Pyschiatric Group Preferred Stock, to all the provisions of which the
holder hereof assents by acceptance of this Certificate.
This Certificate is issued by the Board of Directors of American Health Properties, Inc. acting not individually but as such
Board of Directors and is not valid until countersigned and registered by the transfer agent and registrar.
Witness the seal of the signatures of the duly authorized officers of the Corporation in facsimile.
Dated:
Countersigned and Registered:
CHEMICAL TRUST COMPANY OF CALIFORNIA
Transfer Agent and Registrar President and Chief Executive Officer
By
Authorized Signature Secretary
</TABLE>
<PAGE> 2
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _________________ CUSTODIAN ___________
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Gifts to Minors
JT TEN -- as joint tenants with right Act _________________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, ------------------------------------------------------------ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - - --------------------------------------
- - - ----------------------------------------------------------------------------------------------------------------------
- - - ----------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
- - - ----------------------------------------------------------------------------------------------------------------------
- - - ---------------------------------------------------------------------------------------------------------------------- Shares
of Psychiatric Group Preferred Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
- - - -------------------------------------------------------------------------------------------------------------------- Attorney
to transfer the said Shares on the books of the within-named Corporation with full power of substitution in the premises.
Dated:
-----------------
(Sign here)
-----------------------------------------------------------------------------------
NOTICE: The signature to this assignment must correspond with the name as written upon the face
of the Certificate in every particular, without alteration or enlargement or any change whatever.
</TABLE>
<PAGE> 1
Draft of February 22, 1995
================================================================
AMERICAN HEALTH PROPERTIES, INC.,
CHEMICAL TRUST COMPANY OF CALIFORNIA, As Depositary,
AND
THE HOLDERS FROM TIME TO TIME OF
THE DEPOSITARY SHARES
-----------------
Deposit Agreement
-----------------
Dated as of ____________, 1995
================================================================
<PAGE> 2
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
DEFINITIONS
ARTICLE II
FORM OF RECEIPTS, DEPOSIT OF STOCK, EXECUTION AND
DELIVERY, TRANSFER, SURRENDER, EXCHANGE AND REDEMPTION OF
RECEIPTS
SECTION 2.01. Form and Transfer of Receipts . . . . . . 2
SECTION 2.02. Deposit of Stock; Execution and
Delivery of Receipts in Respect
Thereof . . . . . . . . . . . . . . . . . 4
SECTION 2.03. Exchange and Redemption of Stock . . . . 5
SECTION 2.04. Registration of Transfer of
Receipts . . . . . . . . . . . . . . . . . 6
SECTION 2.05. Split-ups and Combinations of
Receipts . . . . . . . . . . . . . . . . . 7
SECTION 2.06. Limitations on Execution and
Delivery, Transfer, Surrender and
Exchange of Receipts . . . . . . . . . . . 8
SECTION 2.07. Lost Receipts, etc. . . . . . . . . . . . 8
SECTION 2.08. Cancellation and Destruction of
Surrendered Receipts . . . . . . . . . . . 9
ARTICLE III
CERTAIN OBLIGATIONS OF THE HOLDERS
OF RECEIPTS AND THE COMPANY
SECTION 3.01. Filing Proofs, Certificates and
Other Information . . . . . . . . . . . . 9
SECTION 3.02. Payment of Taxes or Other
Governmental Charges . . . . . . . . . . 9
SECTION 3.03. Warranty as to Stock . . . . . . . . . . 10
-i-
<PAGE> 3
Page
----
ARTICLE IV
THE DEPOSITED SECURITIES; NOTICES
SECTION 4.01. Cash Distributions . . . . . . . . . . . 10
SECTION 4.02. Distributions Other than Cash . . . . . . 10
SECTION 4.03. Subscription Rights, Preferences or
Privileges . . . . . . . . . . . . . . . 11
SECTION 4.04. Notice of Dividends, etc.; Fixing
of Record Date for Holders of
Depositary Shares . . . . . . . . . . . . 12
SECTION 4.05. Voting Rights . . . . . . . . . . . . . . 13
SECTION 4.06. Changes Affecting Deposited
Securitites and Reclassifications,
Recapitalizations, etc. . . . . . . . . . 13
SECTION 4.07. Delivery of Reports . . . . . . . . . . . 14
SECTION 4.08. List of Holders . . . . . . . . . . . . . 14
ARTICLE V
THE DEPOSITARY, THE DEPOSITARY'S AGENTS,
THE REGISTRAR AND THE COMPANY
SECTION 5.01. Maintenance of Offices, Agencies
and Transfer Books by the
Depositary; Registrar . . . . . . . . . . 14
SECTION 5.02. Prevention of or Delay in
Performance by the Depositary, the
Depositary's Agents, any Registrar
or the Company . . . . . . . . . . . . . . 15
SECTION 5.03. Obligations of the Depositary, the
Depositary's Agents, any Registrar
and the Company . . . . . . . . . . . . . 16
SECTION 5.04. Resignation and Removal of the
Depositary; Appointment of
Successor Depositary . . . . . . . . . . . 17
SECTION 5.05. Corporate Notices and Reports . . . . . . 18
SECTION 5.06. Indemnification by the Company . . . . . . 18
SECTION 5.07. Charges and Expenses . . . . . . . . . . 19
ARTICLE VI
AMENDMENT AND TERMINATION
SECTION 6.01. Amendment . . . . . . . . . . . . . . . . . 19
SECTION 6.02. Termination . . . . . . . . . . . . . . . . 20
-ii-
<PAGE> 4
Page
----
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Counterparts . . . . . . . . . . . . . . 20
SECTION 7.02. Exclusive Benefit of Parties . . . . . . 20
SECTION 7.03. Invalidity of Provisions . . . . . . . . 21
SECTION 7.04. Notices . . . . . . . . . . . . . . . . . 21
SECTION 7.05. Depositary's Agents . . . . . . . . . . . 22
SECTION 7.06. Holders of Receipts Are Parties . . . . . 22
SECTION 7.07. Governing Law . . . . . . . . . . . . . . 22
SECTION 7.08. Inspection of Deposit Agreement . . . . . 22
SECTION 7.09. Headings . . . . . . . . . . . . . . . . 22
-iii-
<PAGE> 5
DEPOSIT AGREEMENT
This Deposit Agreement, dated as of ____________, 1995, is
entered into by and among American Health Properties, Inc., a Delaware
corporation (together with its successors, the "Company"), Chemical Trust
Company of California, a California corporation (together with any successor as
depositary hereunder, the "Depositary"), and the holders from time to time of
the Depositary Shares described herein.
WITNESSETH:
WHEREAS the parties hereto desire to provide, as hereinafter
set forth in this Deposit Agreement, for the deposit of shares of Stock (as
hereinafter defined) of the Company with the Depositary for the purposes set
forth in this Deposit Agreement and for the issuance hereunder of Receipts
evidencing Depositary Shares, in respect of the Stock so deposited;
NOW, THEREFORE, in consideration of the premises, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS
The following definitions shall for all purposes, unless
otherwise indicated, apply to the respective terms used in this Deposit
Agreement and the Receipts:
"Certificate" means the certificate of designations filed with
the Secretary of State of Delaware establishing the Stock as a series of
preferred stock of the Company.
"Common Stock" means shares of the Company's Common Stock, par
value $0.01 per share.
"Deposit Agreement" means this Deposit Agreement, as amended
or supplemented from time to time.
"Depositary Shares" means Depositary Shares evidenced by a
Receipt or Receipts issued hereunder, and representing the interests in the
Stock deposited with the Depositary hereunder. Each Depositary Share shall, as
provided herein, represent a one-tenth interest in a share of Stock and the
same proportionate interest in any and all
<PAGE> 6
other property received by the Depositary in respect of such shares of Stock
and held at the time under this Deposit Agreement.
"Depositary's Agent" means an agent appointed by the
Depositary pursuant to Section 7.05.
"Depositary's Office" means the office of the Depositary at
300 South Grand Avenue in Los Angeles, California, at which its depositary
receipt business shall be administered.
"Exchange Date" shall have the meaning set forth in Section
2.03.
"Receipt" means a depositary receipt issued hereunder, whether
in definitive or temporary form and evidencing a Depositary Share or Depositary
Shares.
"Record Holder" as applied with respect to a Depositary Share
means the person in whose name a Receipt evidencing such Depositary Share is
registered on the books of the Depositary maintained for such purpose.
"Redemption Date" shall have the meaning set forth in Section
2.03.
"Registrar" means any bank or trust company that shall be
appointed to register ownership and transfers of Receipts as herein provided.
"Stock" means shares of the Company's Psychiatric Group
Preferred Stock, par value $0.01 per share.
ARTICLE II
FORM OF RECEIPTS, DEPOSIT OF STOCK, EXECUTION AND
DELIVERY, TRANSFER, SURRENDER, EXCHANGE AND REDEMPTION OF
RECEIPTS
SECTION 2.01. Form and Transfer of Receipts.
Definitive Receipts shall be engraved or printed or
lithographed and shall be substantially in the form set forth in Exhibit A
annexed to this Deposit Agreement, with appropriate insertions, modifications
and omissions, as hereinafter provided. Pending the preparation of definitive
Receipts, the Depositary, upon the written order of the Company delivered in
compliance with Section 2.02, shall execute and deliver temporary Receipts that
are printed,
-2-
<PAGE> 7
lithographed, typewritten, mimeographed or otherwise substantially of the tenor
of the definitive Receipts in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations as the
persons executing such Receipts may determine, as evidenced by their execution
of such Receipts. If temporary Receipts are issued, the Company and the
Depositary will cause definitive Receipts to be prepared without unreasonable
delay. After the preparation of definitive Receipts, the temporary Receipts
shall be exchangeable for definitive Receipts upon surrender of the temporary
Receipts at an office designated by the Depositary as contemplated by the third
paragraph of Section 2.02, without charge to the holder. Upon surrender for
cancellation of any one or more temporary Receipts, the Depositary shall
execute and deliver in exchange therefor definitive Receipts representing the
same number of Depositary Shares as represented by the surrendered temporary
Receipt or Receipts. Such exchange shall be made at the Company's expense and
without any charge therefor. Until so exchanged, the temporary Receipts shall
in all respects be entitled to the same benefits under this Deposit Agreement,
and with respect to the Stock, as definitive Receipts.
Receipts shall be executed by the Depositary by the manual
signature of a duly authorized officer of the Depositary; provided, however,
that such signature may be a facsimile if a Registrar for the Receipts (other
than the Depositary) shall have been appointed and such Receipts are
countersigned by manual signature of a duly authorized officer of the
Registrar. No Receipt shall be entitled to any benefits under this Deposit
Agreement or be valid or obligatory for any purpose unless it shall have been
executed manually by a duly authorized officer of the Depositary or, if a
Registrar for the Receipts (other than the Depositary) shall have been
appointed, by facsimile signature of a duly authorized officer of the
Depositary and countersigned manually by a duly authorized officer of such
Registrar. The Depositary shall record on its books each Receipt so signed and
delivered as hereinafter provided.
Receipts shall be in denominations of any number of whole
Depositary Shares.
Receipts may be endorsed with or have incorporated in the text
thereof such legends or recitals or changes not inconsistent with the
provisions of this Deposit Agreement as may be required by the Company or the
Depositary or required to comply with any applicable law or any regulation
thereunder or with the rules and regulations of any securities exchange upon
which the Stock, the Depositary
-3-
<PAGE> 8
Shares or the Receipts may be listed or to conform with any usage with respect
thereto, or to indicate any special limitations or restrictions to which any
particular Receipts are subject.
Title to Depositary Shares evidenced by a Receipt that is
properly endorsed, or accompanied by a properly executed instrument of
transfer, shall be transferable by delivery with the same effect as in the case
of a negotiable instrument; provided, however, that until transfer of a
Depositary Share shall be registered on the books of the Depositary as provided
in Section 2.04, the Depositary may, notwithstanding any notice to the
contrary, treat the Record Holder thereof at such time as the absolute owner
thereof for the purpose of determining the person entitled to distributions of
dividends or other distributions or to any notice provided for in this Deposit
Agreement and for all other purposes.
SECTION 2.02. Deposit of Stock; Execution and Delivery of
Receipts in Respect Thereof.
Subject to the terms and conditions of this Deposit Agreement,
the Company may from time to time deposit shares of Stock under this Deposit
Agreement by delivery to the Depositary of a certificate or certificates for
the Stock to be deposited, properly endorsed or accompanied, if required by the
Depositary, by a duly executed instrument of transfer or endorsement, in form
satisfactory to the Depositary, together with all such certifications as may be
required by the Depositary in accordance with the provisions of this Deposit
Agreement, and together with a written order of the Company directing the
Depositary to execute and deliver to, or upon the written order of, the person
or persons stated in such order a Receipt or Receipts for the number of
Depositary Shares relating to such deposited Stock.
Deposited Stock shall be held by the Depositary at the
Depositary's Office or at such other place or places in the State of California
as the Depositary shall determine.
Upon receipt by the Depositary of a certificate or
certificates for Stock deposited in accordance with the provisions of this
Section, together with the other documents required as above specified, and
upon recordation of the Stock so deposited on the books of the Company in the
name of the Depositary or its nominee, the Depositary, subject to the terms and
conditions of this Deposit Agreement, shall execute and deliver to or upon the
order of the person or persons named in the written order delivered
-4-
<PAGE> 9
to the Depositary referred to in the first paragraph of this Section, a Receipt
or Receipts for the number of Depositary Shares relating to the Stock so
deposited and registered in such name or names as may be requested by such
person or persons. The Depositary shall execute and deliver such Receipt or
Receipts at the Depositary's Office or such other offices, if any, as the
Depositary may designate if requested by any such person or persons. Delivery
at other offices shall be at the risk and expense of the person requesting such
delivery.
SECTION 2.03. Exchange and Redemption of Stock.
Whenever the Company shall elect to exchange shares of Stock for Common Stock
or redeem shares of Stock for cash in accordance with the provisions of the
Certificate, it shall (unless otherwise agreed in writing with the Depositary)
mail notice to the Depositary of such proposed exchange or redemption, by first
class mail, postage prepaid, not less than 20 and not more than 60 days prior
to the date fixed for exchange (the "Exchange Date") or redemption (the
"Redemption Date"), as the case may be, of such shares of Stock in accordance
with Section 3(b) of the Certificate. On the Exchange Date or Redemption Date,
as the case may be, provided that the Company shall then have (i) exchanged the
Stock for Common Stock in accordance with the provisions of the Certificate, or
(ii) paid in full to the Depositary the redemption price of the Stock to be
redeemed, the Depositary shall exchange or redeem, as the case may be, the
Depositary Shares relating to such Stock. The Depositary shall mail notice of
such exchange or redemption and the simultaneous exchange or redemption of the
Depositary Shares relating to the Stock, by first class mail, postage prepaid,
not less than 10 and not more than 50 days prior to the Exchange Date or
Redemption Date, as the case may be, to the Record Holders of the Depositary
Shares, at the addresses of such holders as they appear on the records of the
Depositary, but neither failure to mail any such notice to one or more such
holders nor any defect in any notice to one or more such holders shall affect
the sufficiency of the proceedings for exchange or redemption as to other
holders. Each such notice shall state: (i) the Exchange Date or Redemption
Date, as the case may be; (ii) that all of the Depositary Shares held by such
holder are to be exchanged or redeemed, as the case may be; (iii) the exchange
price or redemption price, as the case may be; (iv) the place or places where
Receipts evidencing Depositary Shares are to be surrendered for exchange or for
payment of the redemption price and (v) that dividends with respect to such
Depositary Shares will cease
-5-
<PAGE> 10
to be paid as of such Exchange Date or Redemption Date, as the case may be.
No adjustments in respect of dividends on the Stock or Common
Stock shall be made upon any such exchange or redemption of shares of Stock;
provided, however, that if the Exchange Date or Redemption Date is after the
record date for determining holders of Depositary Shares entitled to any
dividend or distribution, such dividend or distribution shall be payable to the
holders of such Depositary Shares at the close of business on such record date,
notwithstanding such exchange or redemption.
Notice having been mailed by the Depositary as aforesaid, from
and after the Exchange Date or Redemption Date, as the case may be (unless the
Company shall have failed to exchange or redeem the shares of Stock as set
forth in the Company's notice provided for in the preceding paragraph), the
Depositary Shares being exchanged or redeemed with such Common Stock or
proceeds shall be deemed no longer to be outstanding, all rights of the holders
of Receipts evidencing such Depositary Shares (except (i) the right to receive
the exchange price or redemption price, as the case may be, and (ii) the right
to receive dividends the record date for which is prior to the Exchange Date or
Redemption Date, as set forth in the preceding paragraph) shall, to the extent
of such Depositary Shares, cease and terminate and, upon surrender in
accordance with such notice of the Receipts evidencing such Depositary Shares
(properly endorsed or assigned for transfer, if the Depositary shall so
require), such Depositary Shares shall be either (i) exchanged by the
Depositary for Common Shares at an exchange price per Depositary Share equal to
one-tenth of the exchange price per share in respect of the shares of Stock or
(ii) redeemed by the Depositary at a redemption price per Depositary Share
equal to one-tenth of the redemption price per share paid in respect of the
shares of Stock, plus in either case all money and other property, if any, paid
with respect to such Depositary Shares (rounded to the next highest whole cent,
where appropriate); provided, however, that no fractional shares of Common
Stock shall be issuable upon exchange of the Depositary Shares. If, except for
the provisions of this paragraph and the Certificate, any holder of Receipts
surrendered for exchange would be entitled to a fractional share of Common
Stock, the Company shall deliver to the Depositary for delivery to such holder,
in lieu of such fractional share, an amount in immediately available funds for
such fractional share based upon the fair market value of the Common Stock
computed as set forth in the Certificate.
-6-
<PAGE> 11
SECTION 2.04. Registration of Transfer of Receipts.
Subject to the terms and conditions of this Deposit Agreement,
the Depositary shall register on its books from time to time transfers of
Depositary Shares upon any surrender of the Receipt or Receipts evidencing such
Depositary Shares by the holder in person or by duly authorized attorney,
properly endorsed or accompanied by a properly executed instrument of transfer.
Thereupon the Depositary shall execute a new Receipt or Receipts evidencing the
same aggregate number of Depositary Shares as those evidenced by the Receipt or
Receipts surrendered and deliver such new Receipt or Receipts to or upon the
order of the person entitled thereto.
SECTION 2.05. Split-ups and Combinations of Receipts.
Upon surrender of a Receipt or Receipts at the Depositary's
Office or at such other offices as it may designate for the purpose of
effecting a split-up or combination of such Receipt or Receipts, and subject to
the terms and conditions of this Deposit Agreement, the Depositary shall
execute and deliver a new Receipt or Receipts in the denominations requested,
evidencing the aggregate number of Depositary Shares evidenced by the Receipt
or Receipts surrendered.
A HOLDER OF DEPOSITARY SHARES MAY NOT WITHDRAW SHARES OF STOCK
UNDERLYING SUCH DEPOSITARY SHARES.
-7-
<PAGE> 12
SECTION 2.06. Limitations on Execution and Delivery,
Transfer, Surrender and Exchange of Receipts.
As a condition precedent to the execution and delivery,
registration of transfer, split-up, combination, surrender or exchange of any
Receipt, the Depositary, any of the Depositary's Agents or the Company may
require payment to it of a sum sufficient for the payment (or, in the event
that the Depositary or the Company shall have made such payment, the
reimbursement to it) of any charges or expenses payable by the holder of a
Receipt pursuant to Section 5.07, may require the production of evidence
satisfactory to it as to the identity and genuineness of any signature and may
also require compliance with such regulations, if any, as the Depositary or the
Company may establish consistent with the provisions of this Deposit Agreement.
The delivery of Receipts against Stock may be suspended, the
registration of transfer of Depositary Shares may be refused and the
registration of transfer, surrender or exchange of outstanding Depositary
Shares may be suspended (i) during any period when the register of stockholders
of the Company is closed or (ii) if any such
-8-
<PAGE> 13
action is deemed necessary or advisable by the Depositary, any of the
Depositary's Agents or the Company at any time from time to time because of any
requirement of law or of any government or governmental body or commission or
under any provision of this Deposit Agreement.
SECTION 2.07. Lost Receipts, etc.
In case any Receipt shall be mutilated, destroyed, lost or
stolen, the Depositary in its discretion may execute and deliver a Receipt of
like form and tenor in exchange and substitution for such mutilated Receipt, or
in lieu of and in substitution for such destroyed, lost or stolen Receipt, upon
(i) the filing by the holder thereof with the Depositary of evidence
satisfactory to the Depositary of such destruction or loss or theft of such
Receipt, or the authenticity thereof and of his or her ownership thereof and
(ii) the furnishing to the Depositary of reasonable indemnification
satisfactory to it.
SECTION 2.08. Cancellation and Destruction of Surrendered
Receipts.
All Receipts surrendered to the Depositary or any Depositary's
Agent shall be cancelled by the Depositary. Except as prohibited by applicable
law or regulation, the Depositary is authorized to destroy all Receipts so
cancelled.
ARTICLE III
CERTAIN OBLIGATIONS OF THE HOLDERS
OF RECEIPTS AND THE COMPANY
SECTION 3.01. Filing Proofs, Certificates and Other
Information.
Any holder of a Depositary Share may be required from time to
time to file such proof of residence, or other matters or other information, to
execute such certificates and to make such representations and warranties as
the Depositary or the Company may reasonably deem necessary or proper. The
Depositary or the Company may withhold the delivery, or delay the registration
of transfer, redemption or exchange, of any Depositary Share or the
distribution of any dividend or other distribution or the sale of any rights or
of the proceeds thereof until such proof or other information is filed or such
certificates are executed or such representations and warranties are made.
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SECTION 3.02. Payment of Taxes or Other Governmental Charges.
Holders of Depositary Shares shall be obligated to make
payments to the Depositary of certain charges and expenses, as provided in
Section 5.07. Registration of transfer of any Depositary Share may be refused
until any such payment due is made, and any dividends or other distributions
may be withheld or all or any part of the Stock or other property relating to
such Depositary Shares and not theretofore sold may be sold for the account of
the holder thereof (after attempting by reasonable means to notify such holder
prior to such sale), and such dividends or other distributions or the proceeds
of any such sale may be applied to any payment of such charges or expenses, the
holder of such Depositary Share remaining liable for any deficiency.
SECTION 3.03. Warranty as to Stock.
The Company hereby represents and warrants that the Stock,
when issued, will be validly issued, fully paid and non-assessable. Such
representation and warranty shall survive the deposit of the Stock and the
issuance of the Receipts.
ARTICLE IV
THE DEPOSITED SECURITIES; NOTICES
SECTION 4.01. Cash Distributions.
Whenever the Depositary shall receive any cash dividend or
other cash distribution on the Stock, the Depositary shall, subject to Sections
3.01 and 3.02, promptly distribute to the Record Holder of Depositary Shares on
the record date fixed pursuant to Section 4.04 such amounts of such dividend or
distribution as are, as nearly as practicable in proportion to the respective
numbers of Depositary Shares held by such holders; provided, however, that in
case the Company or the Depositary shall be required to withhold and shall
withhold from any cash dividend or other cash distribution in respect of the
Stock an amount on account of taxes, the amount made available for distribution
or distributed in respect of Depositary Shares to the Record Holders shall be
reduced accordingly. Fractions will be rounded down to the nearest whole cent.
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SECTION 4.02. Distributions Other than Cash.
Whenever the Depositary shall receive any distribution other
than cash on the Stock, the Depositary shall, subject to Sections 3.01 and
3.02, promptly distribute to the Record Holders of Depositary Shares on the
record date fixed pursuant to Section 4.04 such amounts of the securities or
property received by it as are, as nearly as practicable, in proportion to the
respective numbers of Depositary Shares held by such holders, in any manner
that the Depositary may deem equitable and practicable for accomplishing such
distribution. If in the opinion of the Depositary such distribution cannot be
made proportionately among such Record Holders, or if for any other reason
(including any requirement that the Company or the Depositary withhold an
amount on account of taxes or governmental charges) the Depositary deems, after
consultation with the Company, such distribution not to be feasible, the
Depositary may, with the written approval of the Company, adopt such method as
it deems equitable and practicable for the purpose of effecting such
distribution, including the sale (at public or private sale) of the securities
or property thus received, or any part thereof, at such place or places and
upon such terms as it may deem proper. The net proceeds of any such sale
shall, subject to Sections 3.01 and 3.02, be distributed or made available for
distribution, as the case may be, by the Depositary to the Record Holders of
Depositary Shares entitled thereto as provided by Section 4.01 in the case of a
distribution received in cash.
SECTION 4.03. Subscription Rights, Preferences or Privileges.
If the Company shall at any time offer or cause to be offered
to the persons in whose names Stock is recorded on the books of the Company any
rights, preferences or privileges to subscribe for or to purchase any
securities or any rights, preferences or privileges of any other nature, such
rights, preferences or privileges shall in each such instance be made
available by the Depositary to the Record Holders of Depositary Shares in such
manner as the Depositary may determine, either by the issue to such Record
Holders of warrants representing such rights, preferences or privileges or by
such other method as may be approved by the Depositary with the written
approval of the Company; provided, however, that (a) if at the time of issue or
offer of any such rights, preferences or privileges the Depositary determines
that it is not lawful or (after consultation with the Company) not feasible to
make such rights, preferences or privileges available to holders of Depositary
Shares by
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<PAGE> 16
the issuance of warrants or otherwise, or (b) if and to the extent so
instructed by holders of Depositary Shares who do not desire to exercise such
rights, preferences or privileges, then the Depositary, in its discretion (with
the approval of the Company, in any case where the Depositary has determined
that it is not feasible to make such rights, preferences or privileges
available), may, if applicable laws or the terms of such rights, preferences or
privileges permit such transfer, sell such rights, preferences or privileges at
public or private sale, at such place or places and upon such terms as it may
deem proper. The net proceeds of any such sale shall, subject to Section 3.01
and 3.02, be distributed by the Depositary to the Record Holders of Depositary
Shares entitled thereto as provided by Section 4.01 in the case of a
distribution received in cash. The Company shall not make any distribution of
such rights, preferences or privileges unless the Company shall have provided
an opinion of counsel to the Depositary to the effect that such rights,
preferences or privileges have been registered under the Securities Act of 1933
or do not need to be registered.
If registration under the Securities Act of 1933 of the
securities to which any rights, preferences or privileges relate is required in
order for holders of Depositary Shares to be offered or sold the securities to
which such rights, preferences or privileges relate, the Company agrees with
the Depositary that it will file promptly a registration statement pursuant to
such Act with respect to such rights, preferences or privileges and securities
and use its best efforts and take all steps available to it to cause such
registration statement to become effective sufficiently in advance of the
expiration of such rights, preferences or privileges to enable such holders to
exercise such rights, preferences or privileges. In no event shall the
Depositary make available to the holders of Depositary Shares any right,
preference or privilege to subscribe for or to purchase any securities unless
and until such a registration statement shall have become effective, or unless
the offering and sale of such securities to such holders are exempt from
registration under the provisions of such Act.
If any other action under the laws of any jurisdiction or any
governmental or administrative authorization, consent or permit is required in
order for such rights, preferences or privileges to be made available to the
holders of Depositary Shares, the Company agrees with the Depositary that the
Company will use its best efforts to take such action or obtain such
authorization, consent or permit sufficiently in advance of the expiration of
such
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<PAGE> 17
rights, preferences or privileges to enable such holders to exercise such
rights, preferences or privileges.
SECTION 4.04. Notice of Dividends, etc.; Fixing of Record
Date for Holders of Depositary Shares.
Whenever any cash dividend or other cash distribution shall
become payable or any distribution other than cash shall be made, or if rights,
preferences or privileges shall at any time be offered, with respect to the
Stock, or whenever the Depositary shall receive notice of any meeting at which
holders of Stock are entitled to vote, or of which holders of Stock are
entitled to notice, the Depositary shall in each such instance fix a record
date (which shall be the same date as the record date fixed by the Company with
respect to the Stock) for the determination of the holders of Depositary Shares
who shall be entitled to receive a distribution in respect of such dividend,
distribution, rights, preferences or privileges or the net proceeds of the sale
thereof, or to give instructions for the exercise of voting rights at any such
meeting, or who shall be entitled to receive notice of such meeting.
SECTION 4.05. Voting Rights.
Upon receipt of notice of any meeting at which the holders of
the Stock are entitled to vote, the Depositary shall, as soon as practicable
thereafter, mail to the Record Holders of Depositary Shares a notice that shall
be provided by the Company and that shall contain (a) such information as is
contained in such notice of meeting and (b) a statement informing holders of
Depositary Shares that they may instruct the Depositary as to the exercise of
the voting rights pertaining to the amount of Stock underlying their respective
Depositary Shares and a brief statement as to the manner in which such
instructions may be given. Upon the written request of the holders of
Depositary Shares on the record date established in accordance with Section
4.04, the Depositary shall endeavor insofar as practicable to vote or cause to
be voted, in accordance with the instructions set forth in such requests, the
maximum number of whole shares of Stock underlying the Depositary Shares as to
which any particular voting instructions are received. The Company hereby
agrees to take all action that may be deemed necessary by the Depositary in
order to enable the Depositary to vote such Stock or cause such Stock to be
voted. In the absence of specific instructions from the holder of a Depositary
Share, the Depositary will refrain from voting to the extent of the Stock
underlying the Depositary Shares.
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SECTION 4.06. Changes Affecting Deposited Securities and
Reclassifications, Recapitalizations, etc.
Upon any change in par or liquidation value, split-up,
combination or any other reclassification of the Stock, or upon any
recapitalization, reorganization, merger, amalgamation or consolidation
affecting the Company or to which it is a party, the Depositary may in its
discretion, with the approval of, and shall upon the instructions of, the
Company, and (in either case) in such manner as the Depositary may deem
equitable, (i) make such adjustments in (a) the fraction of an interest in one
share of Stock underlying one Depositary Share and (b) the ratio of the
redemption price or exchange price per Depositary Share to the redemption price
or exchange price of a share of the Stock, in each case as may be necessary
fully to reflect the effects of such change in par or liquidation value,
split-up, combination or other reclassification of the Stock, or of such
recapitalization, reorganization, merger, amalgamation or consolidation and
(ii) treat any securities that shall be received by the Depositary in exchange
for or upon conversion of or in respect of the Stock as new deposited
securities so received in exchange for or upon conversion of or in respect of
such Stock. In any such case the Depositary may in its discretion, with the
approval of the Company, execute and deliver additional Receipts, or may call
for the surrender of all outstanding Receipts to be exchanged for new Receipts
specifically describing such new deposited securities. Furthermore, by mutual
agreement of the Company and the Depositary, the Depositary may at any time
make adjustments in (i) the fraction of an interest in one share of Stock
underlying one Depositary Share and (ii) the ratio of the redemption price or
exchange price per Depositary Share to the redemption price or exchange price
of a share of the Stock.
SECTION 4.07. Delivery of Reports.
The Depositary will forward to Record Holders of Receipts, at
their respective addresses appearing in the Depositary's books, all notices,
reports and communications received from the Company that are delivered to the
Depositary and that the Company is required to furnish to the holders of Stock
or Receipts.
SECTION 4.08. List of Holders.
Promptly upon each and every request from time to time by the
Company, the Depositary shall furnish to it a list, as of a recent date, of the
names, addresses and holdings of Depositary Shares of all persons in whose
names
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<PAGE> 19
Depositary Shares are registered on the books of the Depositary or Registrar,
as the case may be.
ARTICLE V
THE DEPOSITARY, THE DEPOSITARY'S AGENTS,
THE REGISTRAR AND THE COMPANY
SECTION 5.01. Maintenance of Offices, Agencies and Transfer
Books by the Depositary; Registrar.
Upon execution of this Deposit Agreement, the Depositary shall
maintain at the Depositary's Offices, or at any Registrar's Office, at which
the Depositary shall have complete access to all books and records maintained
on the Company's behalf, facilities for the execution and delivery, surrender
and exchange of Receipts and the registration and registration of transfer of
Depositary Shares, and at the offices of the Depositary's Agents, if any,
facilities for the delivery, surrender and exchange of Receipts and the
registration of transfer of Depositary Shares, all in accordance with the
provisions of this Deposit Agreement.
The Depositary shall keep books at the Depositary's Office for
the registration and registration of transfer of Depositary Shares, which books
at all reasonable times shall be open for inspection by the Record Holders of
Depositary Shares; provided, however, that such inspection shall be for a
proper purpose reasonably related to such person's interest as an owner of
Depositary Shares and any such holder requesting to exercise such right shall
certify such fact in writing to the Depositary and the Company.
The Depositary may close such books, at any time or from time
to time, when deemed expedient by it in connection with the performance of its
duties hereunder.
If the Receipts or the Depositary Shares evidenced thereby or
the Stock underlying such Depositary Shares shall be listed on the New York
Stock Exchange, the Depositary may, with the approval of the Company, appoint a
Registrar for registration of such Receipts or Depositary Shares in accordance
with any requirements of such exchange. Such Registrar (which may be the
Depositary if so permitted by the requirements of such exchange) may be removed
and a substitute registrar appointed by the Depositary upon the written request
or with the written approval of the Company. If the Receipts, such Depositary
Shares or such Stock are listed on one or more other stock exchanges, the
Depositary will, at the request of the Company, arrange such facilities
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<PAGE> 20
for the execution, delivery, registration, registration of transfer, surrender
and exchange of such Receipts, such Depositary Shares or such Stock as may be
required by law or applicable stock exchange regulation.
SECTION 5.02. Prevention of or Delay in Performance by the
Depositary, the Depositary's Agents, any Registrar or the Company.
Neither the Depositary nor any Depositary's Agent nor any
Registrar nor the Company shall incur any liability to any holder of any
Depositary Share if by reason of any provision of any present or future law, or
regulation thereunder, of the United States of America or of any other
governmental authority or, in the case of the Depositary, any Depositary's
Agent or any Registrar, by reason of any provision, present or future, of the
Company's Certificate of Incorporation (including the Certificate) or by reason
of any act of God or war or other circumstance beyond the control of the
relevant party, the Depositary, any Depositary's Agent, any Registrar or the
Company shall be prevented or forbidden from doing or performing any act or
thing that the terms of this Deposit Agreement provide shall be done or
performed; nor shall the Depositary, any Depositary's Agent, any Registrar or
the Company incur any liability to any holder of a Depositary Share (i) by
reason of any nonperformance or delay, caused as aforesaid, in the performance
of any act or thing that the terms of this Deposit Agreement provide shall or
may be done or performed, or (ii) by reason of any exercise of, or failure to
exercise, any discretion provided for in this Deposit Agreement except, in case
of any such exercise or failure to exercise discretion not caused as aforesaid,
if caused by the gross negligence or willful misconduct of the party charged
with such exercise or failure to exercise.
SECTION 5.03. Obligations of the Depositary, the Depositary's
Agents, any Registrar and the Company.
Neither the Depositary nor any Depositary's Agent nor any
Registrar nor the Company assumes any obligation or shall be subject to any
liability under this Deposit Agreement to holders of Depositary Shares other
than for such person's own gross negligence or willful misconduct.
Neither the Depositary nor any Depositary's Agent nor any
Registrar nor the Company shall be under any obligation to appear in, prosecute
or defend any action, suit or other proceeding in respect of the Stock, the
Depositary Shares or the Receipts that in its opinion may involve it in expense
or liability unless indemnity
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satisfactory to it against all expense and liability be furnished as often as
may be required.
Neither the Depositary nor any Depositary's Agent nor any
Registrar nor the Company shall be liable for any action or failure to act by
it in reliance upon the written advice of legal counsel or accountants, or
information from any person presenting Stock for deposit, any holder of a
Depositary Share or any other person believed by it in good faith to be
competent to give such information. The Depositary, any Depositary's Agent,
any Registrar and the Company may each rely and shall each be protected in
acting upon any written notice, request, direction or other document believed
by it to be genuine and to have been signed or presented by the proper party or
parties.
The Depositary undertakes, and any Registrar shall be required
to undertake, to perform such duties and only such duties as are specifically
set forth in this Deposit Agreement, and no implied covenants or obligations
shall be read into this Deposit Agreement against the Depositary or any
Registrar. The Depositary shall not be subject to any liability under this
Deposit Agreement to the Company other than for any liability that may arise
out of acts performed or omitted by the Depositary or its agents due to its or
their negligence, bad faith or willful misconduct. The Depositary, the
Depositary's agents, any Registrar and the Company may own and deal in any
class of securities of the Company and its affiliates and in Depositary Shares.
The Depositary may also act as transfer agent or registrar of any of the
securities of the Company and its affiliates.
Anything herein to the contrary notwithstanding, in no event
shall the Depositary be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits), even
if the Depositary has been advised of the likelihood of such loss or damage and
regardless of the form of action.
SECTION 5.04. Resignation and Removal of the Depositary;
Appointment of Successor Depositary.
The Depositary may at any time resign as Depositary hereunder
by written notice of its election so to be delivered to the Company, such
resignation to take effect upon the appointment of a successor Depositary and
such successor's written acceptance of such appointment as hereinafter
provided.
The Depositary may at any time be removed by the Company by
written notice of such removal delivered to the
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Depositary, such removal to take effect upon the appointment of a successor
Depositary and such successor's written acceptance of such appointment as
hereinafter provided.
In case the Depositary acting hereunder shall at any time
resign or be removed, the Company shall, within 60 days after the delivery of
the notice of resignation or removal, as the case may be, appoint a successor
Depositary, which shall be a bank or trust company having its principal office
in the United States of America and having a combined capital and surplus of at
least $50,000,000. If no successor Depositary shall have been so appointed
within 60 days after delivery of such notice, the resigning or removed
Depositary may petition any court of competent jurisdiction for the appointment
of a successor Depositary. Every successor Depositary shall execute and
deliver to its predecessor and to the Company an instrument in writing
accepting its appointment hereunder, and thereupon such successor Depositary,
without any further act or deed, shall become fully vested with all the rights,
powers, duties and obligations of its predecessor and for all purposes shall be
the Depositary under this Deposit Agreement, and such predecessor, upon the
written request of the Company, shall execute and deliver an instrument
transferring to such successor all rights and powers of such predecessor
hereunder, shall duly assign, transfer and deliver all right, title and
interest in the Stock and any moneys or property held hereunder to such
successor and shall deliver to such successor a list of the Record Holders of
all outstanding Depositary Shares. Any successor Depositary shall promptly
mail notice of its appointment to the Record Holders of Depositary Shares.
Thereafter, any predecessor Depositary shall deliver any correspondence
received from any holders of Depositary Shares to the successor Depositary.
Any corporation into or with which the Depositary may be
merged, consolidated or converted shall be the successor of such Depositary
without the execution or filing of any document or any further act. Such
successor Depositary may authenticate the Receipts in the name of the
predecessor Depositary or in the name of the successor Depositary.
SECTION 5.05. Corporate Notices and Reports.
The Company agrees that it will transmit to the Depositary all
notices, reports and communications (including without limitation financial
statements) required by law, the rules of any national securities exchange upon
which the Stock, the Depositary Shares or the Receipts are
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listed or by the Company's Certificate of Incorporation (including the
Certificate) to be furnished by the Company to holders of the Stock.
SECTION 5.06. Indemnification by the Company.
The Company shall indemnify the Depositary, any Depositary's
Agent and any Registrar against, and hold each of them harmless from, any loss,
liability or expense (including the costs and expenses of defense) that may
arise out of (i) acts performed or omitted in connection with this Deposit
Agreement and the Depositary Shares (a) by the Depositary, any Registrar or any
of their respective agents (including any Depositary's Agent), except for any
liability arising out of gross negligence, willful misconduct or bad faith on
the respective parts of any such person or persons, or (b) by the Company or
any of its agents, arising out of the Company's or its agents' gross
negligence, willful misconduct or bad faith, or (ii) the offer, sale or
registration under the securities laws of the United States of the Depositary
Shares or the Stock. The obligations of the Company set forth in this Section
5.06 shall survive any succession of any Depositary, Registrar or Depositary's
Agent.
SECTION 5.07. Charges and Expenses.
The Company shall pay all transfer and other taxes and
governmental charges arising solely from the existence of the depositary
arrangements. The Company shall pay all charges of the Depositary agreed upon
by the Company and the Depositary in connection with the initial deposit of the
Stock and the initial issuance of the Receipts and any redemption of the Stock
at the option of the Company. All other transfer and other taxes and
governmental charges shall be at the expense of holders of Depositary Shares.
If, at the request of a holder of a Depositary Share, the Depositary incurs
charges or expenses for which it is not otherwise liable hereunder, such holder
will be liable for such charges and expenses. The Company shall pay the
Depositary reasonable compensation for all services rendered by the Depositary
under this Deposit Agreement according to the fee schedule agreed to by the
Company and the Depositary. All other charges and expenses of the Depositary,
any Depositary's Agent hereunder and any Registrar (including, in each case,
fees and expenses of counsel) incident to the performance of their respective
obligations hereunder will be paid upon consultation and agreement between the
Depositary and the Company as to the amount and nature of such charges and
expenses.
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ARTICLE VI
AMENDMENT AND TERMINATION
SECTION 6.01. Amendment.
The form of the Receipts and any provisions of this Deposit
Agreement may at any time and from time to time be amended by agreement between
the Company and the Depositary in any respect that they may deem necessary or
desirable; provided, however, that no such amendment that shall materially and
adversely alter the rights of the existing holders of Depositary Shares shall
be effective unless such amendment shall have been approved by the holders of
at least a majority of the Depositary Shares then outstanding. Every holder of
any outstanding Depositary Share at the time any such amendment becomes
effective shall be deemed, by continuing to hold such Depositary Share, to
consent and agree to such amendment and to be bound by this Deposit Agreement
as amended thereby.
SECTION 6.02. Termination.
This Deposit Agreement may be terminated by the Company or the
Depositary only after (i) all outstanding Depositary Shares shall have been
exchanged for Common Stock or redeemed and any unpaid dividends on the Stock
represented by the Depositary Shares, together with all other moneys and
property, if any, to which holders of the related Receipts are entitled under
the terms of such Receipts or this Deposit Agreement, have been paid or
distributed as provided in this Deposit Agreement or provision therefor has
been duly made pursuant to Section 2.03 or (ii) there shall have been made a
final distribution in respect of the Stock in connection with any liquidation,
dissolution or winding up of the Company and such distribution shall have been
distributed to the holders of Receipts pursuant to Section 4.01 or 4.02, as
applicable.
Upon the termination of this Deposit Agreement, the Company
shall be discharged from all obligations under this Deposit Agreement except
for its obligations to the Depositary, any Depositary's Agents and any
Registrar under Sections 5.06 and 5.07.
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ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Counterparts.
This Deposit Agreement may be executed in any number of
counterparts, and by each of the parties hereto on separate counterparts, each
of which counterparts, when so executed and delivered, shall be deemed an
original, but all such counterparts taken together shall constitute one and the
same instrument.
SECTION 7.02. Exclusive Benefit of Parties.
This Deposit Agreement is for the exclusive benefit of the
parties hereto, and their respective successors hereunder, and shall not be
deemed to give any legal or equitable right, remedy or claim to any other
person whatsoever.
SECTION 7.03. Invalidity of Provisions.
In case any one or more of the provisions contained in this
Deposit Agreement or in the Receipts shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall in no way be affected,
prejudiced or disturbed thereby.
SECTION 7.04. Notices.
Any and all notices to be given to the Company hereunder or
under the Receipts shall be in writing and shall be deemed to have been duly
given if personally delivered or sent by mail or telegram or telex confirmed by
letter, addressed to the Company at 6400 South Fiddler's Green Circle, Suite
1800, Englewood, Colorado 80111, to the attention of the General Counsel, or at
any other address of which the Company shall have notified the Depositary in
writing.
Any and all notices to be given to the Depositary hereunder or
under the Receipts shall be in writing and shall be deemed to have been duly
given if personally delivered or sent by mail or by telegram or telex confirmed
by letter, addressed to the Depositary at the Depositary's Office, at 300 South
Grand Avenue, 4th Floor, Los Angeles, California 90071, or at any other address
of which the Depositary shall have notified the Company in writing.
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Any and all notices to be given to any Record Holder of a
Depositary Share hereunder or under the Receipts shall be in writing and shall
be deemed to have been duly given if personally delivered or sent by mail or by
telegram or telex confirmed by letter, addressed to such Record Holder at the
address of such Record Holder as it appears on the books of the Depositary, or
if such holder shall have filed with the Depositary a written request that
notices intended for such holder be mailed to some other address, at the
address designated in such request.
Delivery of a notice sent by mail or by telegram or telex
shall be deemed to be effected at the time when a duly addressed letter
containing the same (or a confirmation thereof in the case of a telegram or
telex message) is deposited, postage prepaid, in a post office letter box. The
Depositary or Company may, however, act upon any telegram or telex message
received by it from the other or from any holder of a Depositary Share,
notwithstanding that such telegram or telex message shall not subsequently be
confirmed by letter or as aforesaid.
SECTION 7.05. Depositary's Agents.
The Depositary may from time to time, upon written notice to,
and with the prior approval of, the Company, appoint Depositary's Agents to act
in any respect for the Depositary for the purposes of this Deposit Agreement
and may terminate the appointment of such Depositary's Agents. The Depositary
will notify the Company of any such termination.
SECTION 7.06. Holders of Receipts Are Parties.
The holders of Depositary Shares from time to time shall be
parties to this Deposit Agreement and shall be bound by all of the terms and
conditions hereof and of the Receipts evidencing such Depositary Shares by
acceptance of delivery thereof.
SECTION 7.07. Governing Law.
THIS DEPOSIT AGREEMENT AND THE RECEIPTS AND ALL RIGHTS
HEREUNDER AND THEREUNDER AND PROVISIONS HEREOF AND THEREOF SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA
WITHOUT REFERENCE TO CHOICE OR CONFLICT OF LAW PRINCIPLES.
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SECTION 7.08. Inspection of Deposit Agreement.
Copies of this Deposit Agreement shall be filed with the
Depositary and the Depositary's Agents and shall be open to inspection during
business hours at the Depositary's Office and the respective offices of the
Depositary's Agents, if any, by any holder of a Depositary Share.
SECTION 7.09. Headings.
The headings of articles and sections in this Deposit
Agreement and in the form of Receipt set forth in Exhibit A hereto have been
inserted for convenience only and are not to be regarded as part of this
Deposit Agreement or the Receipts or to have any bearing upon the meaning or
interpretation of any provision contained herein or in the Receipts.
IN WITNESS WHEREOF, the Company and the Depositary have duly
executed this Deposit Agreement as of the day and year first above set forth,
and all holders of Depositary Shares shall become parties hereto by and upon
acceptance by them of delivery of Receipts evidencing such Depositary Shares
and issued in accordance with the terms hereof.
AMERICAN HEALTH PROPERTIES, INC.
By:
---------------------------------
Authorized Officer
CHEMICAL TRUST COMPANY OF
CALIFORNIA
By:
---------------------------------
Authorized Officer
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<PAGE> 28
Draft of February 22, 1995
[FORM OF DEPOSITARY RECEIPT]
DEPOSITARY RECEIPT FOR DEPOSITARY SHARES
EACH REPRESENTING A ONE-TENTH INTEREST IN A SHARE OF
PSYCHIATRIC GROUP PREFERRED STOCK, PAR VALUE $0.01 PER SHARE
AMERICAN HEALTH PROPERTIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS DEPOSITARY RECEIPT IS TRANSFERABLE
IN THE CITIES OF LOS ANGELES, SAN FRANCISCO OR NEW YORK
Chemical Trust Company of California, as Depositary (the "Depositary"), hereby
certifies that
is the registered owner of _________________________________ DEPOSITARY SHARES
("Depositary Shares"), each Depositary Share representing a one-tenth interest
in one share of Psychiatric Group Preferred Stock, par value $0.01 per share
(the "Stock"), of American Health Properties, Inc., a Delaware corporation (the
"Company"), on deposit with the Depositary, subject to the terms and entitled
to the benefits of the Deposit Agreement, dated as of __________ ___, 1995 (the
"Deposit Agreement"), between the Company, the Depositary and all holders from
time to time of Depositary Receipts. By accepting this Depositary Receipt the
holder hereof becomes a party to and agrees to be bound by all the terms and
conditions of the Deposit Agreement. This Depositary Receipt shall not be
valid or obligatory for any purpose or entitled to any benefits under the
Deposit Agreement unless it shall have been executed by the Depositary by the
manual signature of a duly authorized officer or, if executed in facsimile by
the Depositary, countersigned by a Registrar in respect of the Depositary
Receipts by the manual signature of a duly authorized officer thereof.
Dated: __________________
CHEMICAL TRUST COMPANY OF CALIFORNIA
Depositary and Registrar
By: ________________________________
<PAGE> 29
AMERICAN HEALTH PROPERTIES, INC.
1. Depositary Shares. Subject to the terms of the Deposit
Agreement each owner of a Depositary Share is entitled through the Depositary
proportionately to all the rights and preferences of the Stock relating thereto
including dividend, voting, exchange, redemption and liquidation rights
contained in the Certificate of Designations adopted by the Company's Board of
Directors setting forth the number, terms, powers, descriptions, rights,
preferences, qualifications, restrictions and limitations of the Stock (the
"Certificate") copies of which are on file at the Depositary's Office at 300
South Grand Avenue, 4th Floor, Los Angeles, California 90071.
2. The Deposit Agreement. Depositary Receipts (the "Receipts"),
of which this Receipt is one, are made available upon the terms and conditions
set forth in the Deposit Agreement. The Deposit Agreement sets forth the
rights of holders of the Receipts and the Depositary Shares evidenced thereby
and the rights and duties of the Depositary and the Company in respect of the
Stock deposited, and any and all other property and cash deposited from time to
time thereunder. The statements made on the face and the reverse of this
Receipt are summaries of certain provisions of the Deposit Agreement and are
subject to the detailed provisions thereof, to which reference is hereby made.
Unless otherwise expressly herein provided, all defined terms used herein shall
have the meanings ascribed thereto in the Deposit Agreement.
3. Exchange and Redemption. Whenever the Company shall elect to
exchange shares of Stock for Common Stock or redeem shares of Stock for cash,
it shall (unless otherwise agreed in writing with the Depositary) mail notice
to the Depositary of such proposed exchange or redemption, by first class mail,
postage prepaid, not less than 20 and not more than 60 days prior to the date
fixed for exchange (the "Exchange Date") or redemption (the "Redemption Date").
The Depositary shall mail notice of such exchange or redemption and the
simultaneous exchange or redemption of the Depositary Shares relating to the
Stock not less than 10 and not more than 50 days prior to the Exchange Date or
Redemption Date, as the case may be, to the Record Holders of the Depositary
Shares. Each such notice shall state: (i) the Exchange Date or Redemption Date,
as the case may be; (ii) that all of the Depositary Shares held by such holder
are to be exchanged or redeemed, as the case may be; (iii) the exchange price
or redemption price, as the case may be; (iv) the place or places where
Receipts evidencing Depositary Shares are to be surrendered for exchange or for
payment of the redemption price and (v) that dividends with respect to such
Depositary Shares will cease to be paid as of such Exchange Date or Redemption
Date, as the case may be.
<PAGE> 30
No adjustments in respect of dividends on the Stock or Common
Stock shall be made upon any such exchange or redemption of shares of Stock;
provided, however, that if the Exchange Date or Redemption Date is after
the record date for determining holders of Depositary Shares entitled to any
dividend or distribution, such dividend or distribution shall be payable to the
holders of such Depositary Shares at the close of business on such record date,
nothwithstanding such exchange or redemption.
From and after the Exchange Date or Redemption Date, as the
case may be, the Depositary Shares being exchanged or redeemed with such Common
Stock or proceeds shall be deemed no longer to be outstanding, all rights of
the holders of Receipts evidencing such Depositary Shares (except (i) the right
to receive the exchange price or redemption price, as the case may be, and (ii)
the right to receive dividends the record date for which is prior to the
Exchange Date or Redemption Date, as set forth in the preceding paragraph)
shall cease and terminate and, upon surrender in accordance with such notice of
the Receipts evidencing such Depositary Shares (properly endorsed or
assigned for transfer, if the Depositary shall so require), such Depositary
Shares shall be either (i) exchanged by the Depositary for Common Shares at an
exchange price per Depositary Share equal to one-tenth of the exchange price
per share in respect of the shares of Stock or (ii) redeemed by the Depositary
at a redemption price per Depositary Share equal to one-tenth of the redemption
price per share paid in respect of the shares of Stock, plus in either case all
money and other property, if any, paid with respect to such Depositary Shares.
4. Transfer, Split-ups and Combinations. The Depositary Shares
evidenced by this Receipt are transferable on the books of the Depositary upon
surrender of this Receipt to the Depositary, properly endorsed or accompanied
by a properly executed instrument of transfer, and upon such transfer the
Depositary shall execute a new Receipt to or upon the order of the person
entitled thereto as provided in the Deposit Agreement. This Receipt may be
split into other Receipts or combined with other Receipts into one Receipt
representing the same aggregate number of Depositary Shares as the Receipt or
Receipts surrendered.
A HOLDER OF DEPOSITARY SHARES MAY NOT WITHDRAW SHARES OF STOCK
UNDERLYING SUCH DEPOSITARY SHARES.
-2-
<PAGE> 31
5. Suspension of Delivery, Transfer, etc. The transfer or
surrender of this Receipt may be suspended during any period when the register
of stockholders of the Company is closed or if any such action is deemed
necessary or advisable by the Depositary, any agent of the Depositary or the
Company at any time or from time to time because of any requirement of law or
of any government or governmental body or commission, or under any provision of
the Deposit Agreement.
6. Filing Proofs, Certificates and Other Information. Any holder
of a Depositary Share may be required to file such proof of residence or other
matters or other information, to execute such certificates and to make such
representations and warranties as the Depositary or the Company may reasonably
deem necessary or proper. The Depositary or the Company may withhold the
delivery or delay the registration of transfer, exchange or redemption of any
Depositary Share or the distribution of any dividend or other distribution or
the sale of any rights or of the proceeds thereof until such proof or other
information is filed or such certificates are executed or such representations
and warranties are made.
7. Payment of Taxes or Other Governmental Charges. If any tax or
other governmental charge shall become payable by or on behalf of the
Depositary with respect to this Receipt, such tax (including transfer taxes, if
any) or governmental charge shall be payable by the holder hereof. Transfer of
Depositary Shares
-3-
<PAGE> 32
may be refused until such payment is made, and any dividends or other
distributions may be withheld or all or any part of the Stock or other property
underlying the Depositary Share or Shares evidenced by this Receipt and not
theretofore sold may be sold for the account of the holder hereof (after
attempting by reasonable means to notify such holder prior to such sale) and
such dividends or other distributions or the proceeds of any such sale may be
applied to any payment of such charges or expenses, the holder of this Receipt
remaining liable for any deficiency.
8. Warranty by Company. The Company has warranted that the Stock
when issued will be validly issued, fully paid and nonassessable.
9. Amendment. The form of the Receipts and any provisions of the
Deposit Agreement may at any time and from time to time be amended by agreement
between the Company and the Depositary in any respect which they may deem
necessary or desirable; provided, however, that no such amendment which shall
materially and adversely alter the rights of the existing holders of Depositary
Shares shall be effective unless such amendment shall have been approved by the
holders of at least a majority of the Depositary Shares then outstanding. A
holder of a Receipt at the time any such amendment so becomes effective shall
be deemed, by continuing to hold such Receipt, to consent and agree to such
amendment and to be bound by the Deposit Agreement as amended thereby.
10. Charges of Depositary. The Company will pay all transfer and
other taxes and governmental charges arising solely from the existence of the
depositary arrangements and all charges of the Depositary in connection with
the initial deposit of the Stock and the initial issuance of the Receipts, any
exchange or redemption of the Stock at the option of the Company and any
withdrawals of Stock by holders of Depositary Shares. All other transfer and
other taxes and other governmental charges shall be at the expense of holders
of Depositary Shares. All other charges and expenses of the Depositary, any
Depositary's Agent and any Registrar will be paid upon consultation and
agreement between the Depositary and the Company.
11. Title to Receipts. This Receipt (and the Depositary Shares
evidenced hereby) when properly endorsed or accompanied by a properly executed
instrument of transfer, is transferable by delivery with the same effect as in
the case of a negotiable instrument; provided, however, that until transfer of
the Depositary Share or Shares evidenced by a Receipt shall be registered on
the books of the Depositary, the Depositary may, notwithstanding any notice to
the contrary, treat the Record Holder of such Depositary Share or Shares at
such time as the
-4-
<PAGE> 33
absolute owner thereof for the purpose of determining the person entitled to
distributions of dividends or other distributions or to any notice provided for
in the Deposit Agreement and for all other purposes.
12. Dividends and Distributions. Whenever the Depositary receives
any cash dividend or other cash distribution on the Stock, the Depositary will,
subject to the provisions of the Deposit Agreement, make such distribution to
the holders of Depositary Shares on the relevant record date as nearly as
practicable in proportion to the number of Depositary Shares held by such
holders; provided, however, that in case the Company or the Depositary shall be
required to withhold and shall withhold from any cash dividend or other cash
distribution in respect of the Stock an amount on account of taxes, the amount
made available for distribution or distributed in respect of Depositary Shares
shall be reduced accordingly. Fractions will be rounded down to the nearest
whole cent.
13. Fixing of Record Date. Whenever any cash dividend or other
cash distribution shall become payable or any distribution other than cash
shall be made, or if rights, preferences or privileges shall at any time be
offered with respect to the Stock, or whenever the Depositary shall receive
notice of any meeting at which holders of Stock are entitled to vote or of
which holders of Stock are entitled to notice, the Depositary shall in each
instance fix a record date (which shall be the record date fixed by the Company
with respect to the Stock) for the determination of the holders of Depositary
Shares who shall be entitled to receive such dividend distribution, rights,
preferences or privileges or the net proceeds of the sale thereof, or to give
instructions for the exercise of voting rights at any such meeting or who shall
be entitled to notice of such meeting.
14. Voting Rights. Upon receipt of notice of any meeting or
action to be taken by written consent at which holders of the Stock are
entitled to vote or consent, the Depositary shall, as soon as practicable
thereafter, mail to the record holders of Depositary Shares a notice which
shall contain (i) such information as is contained in such notice of meeting or
action and (ii) a statement informing holders of Depositary Shares that they
may instruct the Depositary as to the exercise of the voting rights or the
giving or refusal of consent pertaining to the amount of Stock underlying their
respective Depositary Shares and a brief statement as to the manner in which
such instructions may be given. Upon the written request of a holder of a
Depositary Share on the record date established in accordance with paragraph 13
hereof, the Depositary shall endeavor insofar as practicable to vote or cause
to be voted or give or withhold consent the amount of Stock underlying such
Depositary Share in accordance with the instructions set forth in such request.
In
-5-
<PAGE> 34
the absence of specific instructions from the holder of a Depositary Share, the
Depositary will refrain from voting to the extent of the Stock underlying such
Depositary Share.
15. Changes Affecting Deposited Securities. Upon any change in
par or liquidation value, split-up, combination or any other reclassification
of the Stock or upon any recapitalization, reorganization, merger, amalgamation
or consolidation affecting the Company or to which it is a party, the
Depositary may in its discretion, with the approval of the Company, and in such
manner as the Depositary may deem equitable (i) make such adjustments in (a)
the fraction of an interest in one share of Stock underlying one Depositary
Share and (b) the ratio of the redemption price or exchange price per
Depositary Share to the redemption price or exchange price of a share of Stock,
in each case as may be necessary fully to reflect the effect of such change and
(ii) treat any securities which shall be received by the Depositary in exchange
for or upon conversion of or in respect of the Stock as new deposited
securities so received in exchange for or upon conversion of or in respect of
such Stock. In any such case the Depositary may in its discretion, with the
approval of the Company, execute and deliver additional Receipts, or may call
for the surrender of all outstanding Receipts to be exchanged for new Receipts
specifically describing such new deposited securities. Furthermore, by mutual
agreement of the Company and the Depositary, the Depositary may at any time
make adjustments in (i) the fraction of an interest in one share of Stock
underlying one Depositary Share and (ii) the ratio of the redemption price or
exchange price per Depositary Share to the redemption price or exchange price
of a share of the Stock.
16. Liability and Obligations of the Depositary, the Depositary's
Agents or the Company. Neither the Depositary nor any Depositary's Agent nor
any Registrar nor the Company assumes any obligations or shall be subject to
any liability under the Deposit Agreement to any holder of any Depositary
Share, other than for such person's own gross negligence or willful misconduct.
Neither the Depositary nor any Depositary's Agent nor any Registrar nor the
Company shall incur any liability to any holder of any Depositary Share if by
reason of any provision of any present or future law, or regulation thereunder
of the United States of America or of any other governmental authority or, in
the case of the Depositary, any Depositary's Agent or any Registrar, by reason
of any provision, present or future, of the Company's Certificate of
Incorporation (including the Certificate) or by reason of any act of God or war
or other circumstance beyond their control, the Depositary, any Depositary's
Agent, any Registrar or the Company shall be prevented or forbidden from doing
or performing any act or thing which the terms of the Deposit Agreement provide
shall be done or performed, nor shall the Depositary, any Depositary's Agent,
any Registrar or the Company incur any liability to any holder of a
-6-
<PAGE> 35
Depositary Share by reason of nonperformance or delay, caused as aforesaid, in
performance of any act or thing which the terms of the Deposit Agreement
provide shall or may be done or performed, or by reason of any exercise of, or
failure to exercise, any discretion provided for in the Deposit Agreement,
other than for its or their gross negligence or willful misconduct. Neither
the Depositary nor any Depositary's Agent nor any Registrar nor the Company
shall be under any obligation to appear in, prosecute or defend any action,
suit or other proceeding in respect of the Stock, the Depositary Shares or the
Receipts, which in its opinion may involve it in expense or liability unless
indemnity satisfactory to it against all expense and liability be furnished.
The Deposit Agreement contains various other exculpatory, indemnification and
related provisions, to which reference is hereby made. Anything herein or in
the Deposit Agreement notwithstanding, in no event shall the Depositary be
liable for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Depositary
has been advised of the likelihood of such loss or damage and regardless of the
form of action.
17. Resignation and Removal of Depositary. The Depositary may at
any time (i) resign by written notice of its election to do so delivered to the
Company, such resignation to take effect upon the appointment of a successor
Depositary and such successor's written acceptance of such appointment, or (ii)
be removed by the Company effective upon the appointment of a successor
Depositary and such successor's written acceptance of such appointment.
18. Termination of Deposit Agreement. The Deposit Agreement may
be terminated by the Company or the Depositary only after (i) all outstanding
Depositary Shares shall have been exchanged or redeemed or (ii) there shall
have been made a final distribution in respect of the Stock in connection with
any liquidation, dissolution or winding up of the Company and such distribution
shall have been distributed to the holders of Depositary Shares. Upon the
termination of the Deposit Agreement, the Company shall be discharged from all
obligations thereunder except for its obligations to the Depositary, any
Depositary's Agent and any Registrar with respect to indemnification, charges
and expenses.
19. Governing Law. THIS RECEIPT AND THE DEPOSIT AGREEMENT AND ALL
RIGHTS HEREUNDER AND THEREUNDER AND THE PROVISIONS HEREOF AND THEREOF SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.
THE DEPOSITARY IS NOT RESPONSIBLE FOR THE VALIDITY OF ANY DEPOSITED
STOCK. THE DEPOSITARY MAKES NO WARRANTIES OR REPRESENTATIONS AS TO THE
VALIDITY, GENUINENESS OR SUFFICIENCY OF ANY STOCK AT ANY TIME DEPOSITED WITH
THE DEPOSITARY HEREUNDER OR
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<PAGE> 36
OF THE DEPOSITARY SHARES AS TO THE VALIDITY OR SUFFICIENCY OF THE DEPOSIT
AGREEMENT, AS TO THE VALUE OF THE DEPOSITARY SHARES OR AS TO ANY RIGHT, TITLE
OR INTEREST OF THE RECORD HOLDERS OF THE RECEIPTS TO THE DEPOSITARY SHARES.
AMERICAN HEALTH PROPERTIES, INC. WILL FURNISH WITHOUT CHARGE TO EACH
RECEIPTHOLDER WHO SO REQUESTS A COPY OF THE DEPOSIT AGREEMENT AND THE
CERTIFICATE. ANY SUCH REQUEST IS TO BE ADDRESSED TO THE SECRETARY OF AMERICAN
HEALTH PROPERTIES, INC.
-8-
<PAGE> 37
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ......................................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not Act ..................................
as tenants in common (State)
(Custodian)
UNIF TRF MIN ACT -- ......................................
(Cust) (Minor)
(until age _____) under Uniform
Transfers to Minors Act
......................................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
____________________
For value received, ______________________________ hereby sell(s), assign(s)
and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Depositary Shares represented by
the within Receipt and all rights thereunder, and do hereby irrevocably
constitute and appoint _________________________________________________________
_________________ Attorney to transfer the said Depositary Shares on the books
of the within-named Depositary with full power of substitution in the premises.
Dated:
_________________________________________________________________________
________________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
-9-
<PAGE> 1
Draft of February 8, 1995
CERTIFICATE OF DESIGNATIONS
OF THE
PSYCHIATRIC GROUP PREFERRED STOCK
(Par Value $0.01 Per Share)
OF
AMERICAN HEALTH PROPERTIES, INC.
_____________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
_____________
The undersigned duly authorized officer of American Health
Properties, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Company"), in accordance with
the provisions of Section 103 thereof, and pursuant to Section 151 thereof,
DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of
Directors by the Certificate of Incorporation, as amended, of the Company, the
Board of Directors (the "Board") of the Company on ___________, 1995 adopted
the following resolution creating a series of 220,000 shares of the Company's
Preferred Stock, par value $0.01 per share, each designated as set forth below:
RESOLVED, that pursuant to the authority expressly granted to
and vested in the Board by provisions of the Certificate of Incorporation, as
amended (the "Certificate of Incorporation"), and the General Corporation Law
of the State of Delaware, the issuance of a series of the Company's Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist
of up to 220,000 of the 1,000,000 shares of Preferred Stock that the Company
now has authority to issue, be, and the same hereby is, authorized, and the
Board hereby fixes the voting powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, of the shares of such series (in addition
to the voting powers, designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, set forth in the Certificate of Incorporation that may be
applicable to the Preferred Stock) as follows:
<PAGE> 2
1. Designation. The distinctive serial designation of the series
of the Preferred Stock authorized by this resolution shall be the "Psychiatric
Group Preferred Stock" (the "Psychiatric Group Stock"). The maximum number of
shares of Psychiatric Group Stock shall be 220,000.
2. Dividend Rights. Subject to the terms of any outstanding
series of Preferred Stock, dividends may be declared and paid upon Psychiatric
Group Stock and the Company's common stock, par value $0.01 per share (the
"Common Stock") upon the terms provided for below, in such amounts and at such
times as the Board may determine.
(a) Dividends on Psychiatric Group Stock. Dividends on the
Psychiatric Group Stock may be declared and paid only out of the lesser of (i)
the Available Dividend Amount attributable to the Psychiatric Group and (ii)
the amount of funds of the Company legally available under Delaware law for the
payment of dividends by the Company on its capital stock.
(b) Dividends on Common Stock. So long as any shares of Psychiatric
Group Stock are outstanding, dividends on the Common Stock may be declared and
paid only out of the lesser of (i) the Available Dividend Amount attributable
to the Core Group and (ii) the amount of funds of the Company legally available
under Delaware law for the payment of dividends by the Company on its capital
stock.
(c) Discrimination between Psychiatric Group Stock and Common Stock.
Subject to the provisions of paragraphs 2(a) and 2(b), dividends may be
declared and paid on the Common Stock and/or Psychiatric Group Stock in equal
or unequal amounts, when, as and if declared by the Board.
3. Exchange or Redemption.
(a) General.
(i) The Company may, at any time commencing one year after the
date of the Distribution and in its sole discretion, redeem all
outstanding shares of Psychiatric Group Stock for cash in an amount,
or in exchange for newly issued shares of Common Stock having an
aggregate value (based on an average Market Value for the ten
consecutive Trading Days ending on the last Trading Day prior to the
date on which notice of such exchange is mailed to holders of
Psychiatric Group Stock), equal to 115% of the average Market Value
during such ten Trading Day period of the shares of Psychiatric Group
Stock being redeemed.
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<PAGE> 3
(ii) If at any time commencing one year after the date of the
Distribution, the Fair Market Value of the assets (other than cash,
deposits and readily marketable securities) of the Psychiatric Group
(as determined by the Board, whose determination shall be conclusive)
is less than $10,000,000, the Company may, in its sole discretion,
redeem all outstanding shares of Psychiatric Group Stock for cash in
an amount, or in exchange for newly issued shares of Common Stock
having an aggregate value (based on an average Market Value for the
ten consecutive Trading Days ending on the last Trading Day prior to
the date on which notice of such exchange is mailed to holders of
Psychiatric Group Stock), equal to 105% of the Net Fair Market Value
of the Psychiatric Group (as determined by the Board, whose
determination shall be conclusive).
(b) Notice and Other Provisions.
(i) In the event of any exchange or redemption pursuant to
paragraphs 3(a)(i) or 3(a)(ii), the Company shall promptly cause to be
given to each holder of record of Psychiatric Group Stock to be so
exchanged or redeemed, a notice setting forth (A) a statement that
such Psychiatric Group Stock will be exchanged or redeemed, as the
case may be, (B) the Exchange Date or the Redemption Date, as the case
may be, (C) the amount of Common Stock and/or cash to be distributed
to such holder with respect to each share of such Psychiatric Group
Stock, including details as to the calculation thereof, (D) the place
or places where certificates for shares of Psychiatric Group Stock,
properly endorsed or assigned for transfer (unless the Company waives
such requirement), should be surrendered for delivery of certificates
for shares of Common Stock and/or cash and (E) a statement to the
effect that dividends on shares of such Psychiatric Group Stock will
cease to be paid as of such Exchange Date or Redemption Date, as the
case may be. Such notice will be sent by first-class mail, postage
prepaid, not less than 20 nor more than 60 days prior to the Exchange
Date or Redemption Date, as the case may be, and, in any case, to each
holder of record of outstanding shares of Psychiatric Group Stock at
such holder's address as the same appears on the stock transfer books
of the Company. Neither the failure to mail such notice to any
particular holder of shares of Psychiatric Group Stock nor any defect
therein shall affect the sufficiency thereof with respect to any other
holder of outstanding shares of Psychiatric Group Stock.
(ii) No adjustments in respect of dividends on the
Psychiatric Group Stock or Common Stock shall be made upon the
exchange or redemption of any shares of Psychiatric
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<PAGE> 4
Group Stock; provided, however, that if the Exchange Date or
Redemption Date therefor is after the record date for determining
holders of such Psychiatric Group Stock entitled to any dividend or
distribution thereon, such dividend or distribution shall be payable
to the holders of such shares at the close of business on such record
date notwithstanding such exchange or redemption, in each case without
interest.
(iii) Before any holder of Psychiatric Group Stock shall be
entitled to receive certificates representing shares of Common Stock
and/or cash to be distributed to such holder with respect to any
exchange or redemption of shares of Psychiatric Group Stock, such
holder shall be required to surrender at such place as the Company
specifies certificates for shares of Psychiatric Group Stock,
properly endorsed or assigned for transfer (unless the Company waives
such requirement). As soon as practicable after the Company's receipt
of certificates for such shares of Psychiatric Group Stock, the
Company shall deliver to the person for whose account such shares are
so surrendered, or to the nominee or nominees of such person,
certificates representing the number of whole shares of Common Stock
and/or cash to which such person is entitled, together with any
fractional payment referred to in 3(b)(iv) below, in each case without
interest.
(iv) The Company shall not be required to issue or deliver
fractional shares of Common Stock to any holder of Psychiatric Group
Stock upon any exchange or redemption pursuant to paragraphs 3(a)(i)
or 3(a)(ii). If more than one share of Psychiatric Group Stock shall
be held at the same time by the same holder, the Company may aggregate
the number of shares of Common Stock that shall be issuable upon any
such exchange or redemption (including any fractional shares). If
there are fractional shares of Common Stock remaining to be issued or
distributed to any holder of any Psychiatric Group Stock, the Company
shall, if such fractional shares are not issued or distributed to such
holder, pay cash in respect of such fractional shares in an amount
equal to the fair market value of such fractional shares on the fifth
Trading Day prior to the date such payment is to be made (without
interest). For purposes of the preceding sentence, "fair market
value" of any fraction of a share means the product of such fraction
and the Market Value of one share of Common Stock.
(v) From and after the Exchange Date or Redemption Date for
any exchange or redemption of shares of Psychiatric Group Stock, all
rights of a holder of shares of Psychiatric Group Stock that are
exchanged or redeemed shall cease except for the right, upon surrender
of the certificates
-4-
<PAGE> 5
representing such shares of Psychiatric Group Stock, to receive
certificates representing shares of Common Stock and/or cash for which
such shares are exchanged or redeemed, together with any fractional
payment or rights to dividends as provided above, in each case without
interest. No holder of a certificate that prior to the exchange of
Psychiatric Group Stock represented shares of Psychiatric Group Stock
will be entitled to receive any dividend or other distribution with
respect to the shares of Common Stock for which shares of Psychiatric
Group Stock are exchanged until surrender of such holder's certificate
in exchange for a certificate or certificates representing shares of
Common Stock. Upon such surrender, there will be paid to the holder
the amount of any dividends or other distributions (without interest)
which theretofore became payable with respect to a record date
occurring after the Exchange Date, but which were not paid by reason
of the foregoing, with respect to the number of whole shares of Common
Stock represented by the certificate or certificates issued upon such
surrender. From and after the Exchange Date for any exchange of
Psychiatric Group Stock for Common Stock, the Company shall, however,
be entitled to treat the certificates for Psychiatric Group Stock that
are not yet surrendered for exchange as evidencing the ownership of
the number of whole shares of Common Stock for which the shares of
Psychiatric Group Stock represented by such certificates shall have
been exchanged, notwithstanding the failure to surrender such
certificates.
(vi) The Company shall pay any and all documentary, stamp or
similar issue or transfer taxes that might be payable in respect of
the issue or delivery of any shares of Common Stock on exchange of
shares of Psychiatric Group Stock pursuant hereto. The Company shall
not, however, be required to pay any tax that might be payable in
respect of any transfer involved in the issue and delivery of any
shares of Common Stock in a name other than that in which the shares
of Psychiatric Group Stock so exchanged are registered, and no such
issue or delivery shall be made unless and until the person requesting
such issue pays to the Company the amount of any such tax, or
establishes to the satisfaction of the Company that such tax has been
paid.
(vii) The Company covenants that all shares of Common Stock
which may be delivered upon conversions of shares of Psychiatric Group
Stock will upon delivery be duly and validly issued and fully paid and
non-assessable, free of all liens and charges and not subject to any
preemptive rights.
-5-
<PAGE> 6
4. Voting Rights.
(a) Common Stock. Holders of Common Stock shall be entitled
to one vote per share and shall vote as one class with the holders of
Psychiatric Group Stock (together with any other series of Preferred Stock
outstanding at the time of such vote and so entitled to vote) on all matters
submitted to stockholders, other than matters which are required by law or the
Company's Certificate of Incorporation or paragraph 4(c) below to be submitted
to a separate class vote.
(b) Psychiatric Group Stock. Holders of Psychiatric Group
Stock will be entitled to a variable number of votes per share equal to the
ratio (calculated to the nearest three decimal places) of the average Market
Value of one share of Psychiatric Group Stock to one share of Common Stock for
the ten consecutive Trading Days ending on the last Trading Day prior to the
applicable record date (or if the Psychiatric Group Stock has been issued and
trading for less than ten consecutive Trading Days prior to such record date,
such shorter number of Trading Days as the Psychiatric Group Stock has been so
issued and trading), and could have more than, less than or exactly one vote
per share. Holders of Psychiatric Group Stock shall vote as one class with
holders of Common Stock (together with any other series of Preferred Stock
outstanding at the time of such vote and so entitled to vote) on all matters
submitted to stockholders, other than matters which are required by law or the
Company's Certificate of Incorporation or paragraph 4(c) below to be submitted
to a separate class vote. If the Psychiatric Group Stock is entitled to vote
separately as a class with respect to any matter, each share of Psychiatric
Group Stock shall be entitled to one vote in the separate vote on such matter.
(c) Merger or Consolidation. No class vote of holders of
Psychiatric Group Stock shall be required upon a merger or consolidation if (a)
the Psychiatric Group Stock remains outstanding and unchanged as a result of
the merger or consolidation, (b) the type and amount of consideration for such
merger or consolidation is divided between holders of Psychiatric Group Stock
and holders of Common Stock in a manner determined to be fair by the Board
(whose determination shall be conclusive) or (c) the Psychiatric Group Stock is
converted into capital stock of the surviving company to the merger or
consolidation having terms substantially similar to the terms of the
Psychiatric Group Stock. A class vote of the holders of a majority of the
outstanding shares of Psychiatric Group Stock shall be required for any other
merger or consolidation.
5. Liquidation Rights. In the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, holders of
Common Stock and Psychiatric Group Stock
-6-
<PAGE> 7
shall be entitled to receive their respective proportionate interests in the
net assets of the Company, if any, remaining for distribution to holders of
stock (after payment or provision for all liabilities, including contingent
liabilities, of the Company and payment of the liquidation preference payable
to holders of any other series of Preferred Stock ranking senior to the
Psychiatric Group Stock as to distributions upon liquidation) pro rata based
upon the average Market Value of the Common Stock as compared to the average
Market Value of the Psychiatric Group Stock, in each case for the ten
consecutive Trading Days ending on the Trading Day prior the date of the first
public announcement of (i) a voluntary liquidation, dissolution or winding-up
of the Company or (ii) the institution of any proceeding for the involuntary
liquidation, dissolution or winding-up of the Company; provided that if the
foregoing would result in a liquidation payment valued at less than $1.00 per
share of the Psychiatric Group Stock, the holders of Psychiatric Group Stock
shall not be entitled to a proportionate interest in such net assets but
instead will be entitled to receive a liquidation preference of $1.00 per share
(and no more) before any payment may be made to holders of Common Stock.
Neither the merger nor consolidation of the Company into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with the Company, nor a sale, transfer or lease of all or any part of the
assets of the Company, shall be deemed a liquidation, dissolution or winding-up
for these purposes.
6. Determinations by the Board. Any determination made by the
Board in good faith under this Certificate of Designations, and any
determinations with respect to either Group or the rights of holders of shares
of Common Stock or Psychiatric Group Stock made pursuant to or in furtherance
of this Certificate of Designations, shall be final and binding on all
stockholders of the Company, subject to the rights of stockholders under
Delaware law and under the federal securities laws.
7. Definitions. As used in this Certificate of Designations, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meaning when used in the plural and vice versa),
unless another definition is provided or the context otherwise requires:
"Available Dividend Amount," on any date (the "calculation date") with
respect to the Common Stock or the Psychiatric Group Stock (the "subject group
stock") issued with reference to either Group (the "subject group"), means
either:
(i) the excess of (x) an amount equal to the total assets of
the subject group less its total liabilities as of such calculation
date, determined in accordance with
-7-
<PAGE> 8
Delaware law applied as if the subject group were a Delaware
corporation, over (y) the sum of the aggregate par value of all
outstanding subject group stock and all other capital stock of the
Company attributed to the subject group; or
(ii) in case there shall be no such excess, an amount equal
to the net profits, if any, of the subject group for the fiscal year
in which the dividend is declared and/or the preceding fiscal year,
determined in accordance with Delaware law applied as if the subject
group were a Delaware corporation.
"Core Group" means all assets and liabilities of, and all activities
engaged in by, the Company and its subsidiaries, other than assets, liabilities
and activities which comprise part of the Psychiatric Group. Future issuances
of Common Stock or any other capital stock of the Company (other than
Psychiatric Group Stock) will be deemed to be for the account of, and net
proceeds from such issuances will be deemed to be assets of, the Core Group.
All dividends or other distributions on or repurchases of the Common Stock or
any other capital stock of the Company (other than Psychiatric Group Stock),
and all costs attributed by the Board to the Core Group, will be deemed to be
funded out of assets of the Core Group. In the case of an issuance of shares
of Common Stock as a dividend or other distribution on Psychiatric Group Stock,
the Psychiatric Group will be deemed to have purchased such shares for an
amount equal to the average Market Value of such shares for the ten consecutive
Trading Days ending on the last Trading Day prior to the record date for
determining holders of Psychiatric Group Stock entitled to receive such
dividend or distribution, and an amount equal to such purchase price shall be
deemed to have been transferred from the Psychiatric Group to the Core Group.
"Distribution" means the distribution to holders of Common Stock of
depositary shares ("Depositary Shares") representing interests in shares of
Psychiatric Group Stock.
"Exchange Date" means the date, if any, fixed for the exchange of
Psychiatric Group Stock for Common Stock, pursuant to paragraphs 3(a)(i) or
3(a)(ii).
"Fair Market Value" for any assets means the price that a willing
buyer adequately informed and not compelled to buy would pay for such assets to
a willing seller adequately informed and not compelled to sell, as determined
by the Board (whose determination shall be conclusive).
"Group" means the Core Group or the Psychiatric Group.
-8-
<PAGE> 9
"Market Value" of any stock on any Trading Day means the average of
the high and low reported sales prices regular way of a share of such stock on
such Trading Day or in case no such reported sale takes place on such Trading
Day the average of the reported closing bid and asked prices regular way of a
share of such stock on such Trading Day, in either case on the New York Stock
Exchange Composite Tape or other national securities exchange, or if the shares
of such stock are not listed or admitted to trading on any national securities
exchange on such Trading Day, on the National Association of Securities Dealers
Automated Quotations National Market System, or if the shares of such stock are
not listed or admitted to trading on any national securities exchange or quoted
on such National Market System on such Trading Day, the average of the closing
bid and asked prices of a share of such stock in the over-the-counter market on
such Trading Day as furnished by any New York Stock Exchange member firm
selected from time to time by the Company, or if such closing bid and asked
prices are not made available by any such New York Stock Exchange member firm
on such Trading Day, the market value of a share of such stock (as determined
by the Board, whose determination shall be conclusive); provided that, for
purposes of determining the ratios which compare the Market Values of Common
Stock and Psychiatric Group Stock, as calculated over any period, (i) the
"Market Value" of any share of Common Stock and/or Psychiatric Group Stock on
any day prior to the "ex" date or any similar date occurring during such period
for any dividend or distribution paid or to be paid with respect to such stock
shall be reduced by the fair market value of the per share amount of such
dividend or distribution (as determined by the Board, whose determination shall
be conclusive) and (ii) the "Market Value" of any share of Common Stock and/or
Psychiatric Group Stock on any day prior to (A) the effective date of any
subdivision (by stock split or otherwise) or combination occurring during such
period or (B) the "ex" date or any similar date occurring during such period
for any dividend or distribution with respect to such stock in shares of such
stock shall be appropriately adjusted to reflect such subdivision, combination,
dividend or distribution. For purposes of the foregoing, the Market Value of
the Psychiatric Group Stock on any day will be deemed to equal ten times (or
such other ratio as reflects the number or fraction of shares of Psychiatric
Group Stock that a Depositary Share represents, if such number or fraction is
changed) the Market Value of the Depositary Shares on such day.
"Net Fair Market Value" of the Psychiatric Group or Core Group, as the
case may be, means the hypothetical Fair Market Value of 100% of the stock of a
corporation, assuming the corporation had all of the assets and liabilities of
such Group and no other assets or liabilities, as determined by the Board
(whose determination shall be conclusive).
-9-
<PAGE> 10
"Psychiatric Group" means (a) the interests of the Company and its
subsidiaries in their respective investments in psychiatric hospitals, (b) all
activities engaged in by the Company and its subsidiaries in connection with
such investments and (c) all assets and liabilities of the Company or any of
its subsidiaries relating to or arising out of, or otherwise attributed by the
Board to, such investments or activities. Future issuances of Psychiatric
Group Stock will be deemed to be for the account of, and net proceeds from such
issuances will be deemed to be assets of, the Psychiatric Group. All dividends
or other distributions on or repurchases of the Psychiatric Group Stock, and
all costs attributed by the Board to the Psychiatric Group, will be deemed to
be funded out of assets of the Psychiatric Group. In the case of an issuance
of shares of Common Stock as a dividend or other distribution on Psychiatric
Group Stock, the Psychiatric Group will be deemed to have purchased such shares
for an amount equal to the average Market Value of such shares for the ten
consecutive Trading Days ending on the last Trading Day prior to the record
date for determining holders of Psychiatric Group Stock entitled to receive
such dividend or distribution, and an amount equal to such purchase price shall
be deemed to have been transferred from the Psychiatric Group to the Core
Group.
"Redemption Date" means the date, if any, fixed for the redemption of
Psychiatric Group Stock, pursuant to paragraphs 3(a)(i) or 3(a)(ii).
"Trading Day" means each weekday other than any day on which the
Common Stock or Depositary Shares, as the case may be, is not traded on any
national securities exchange or the National Association of Securities Dealers
Automated Quotations National Market System or in the over-the-counter market.
* * *
-10-
<PAGE> 11
IN WITNESS WHEREOF, American Health Properties, Inc. has
caused this Certificate of Designations to be signed by ________________, its
___________________, and attested by _________________, its
___________________, this ____ day of ____________, 1995.
AMERICAN HEALTH PROPERTIES, INC.
By:_____________________________
NAME:________________________
TITLE:_______________________
Attest:
_________________________
NAME:____________________
TITLE:___________________
-11-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 8-A, into the following of the Company's
previously filed Registration Statements: Form S-8 (File No. 33-25781); Form S-8
(File No. 33-36090); Form S-3 (File No. 33-36091); Form S-8 (File No. 33-54813);
and Form S-8 (File No. 33-54815).
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
February 28, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN HEALTH PROPERTIES CONTAINED IN
EXHIBIT 99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,838
<SECURITIES> 0
<RECEIVABLES> 6,974
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 565,995
<DEPRECIATION> 70,617
<TOTAL-ASSETS> 579,503
<CURRENT-LIABILITIES> 0
<BONDS> 231,163
<COMMON> 209
0
0
<OTHER-SE> 307,292
<TOTAL-LIABILITY-AND-EQUITY> 579,503
<SALES> 0
<TOTAL-REVENUES> 87,027
<CGS> 0
<TOTAL-COSTS> 14,103
<OTHER-EXPENSES> 30,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,101
<INCOME-PRETAX> 9,693
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,693
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM 8-A RELATING TO THE DEPOSITARY SHARES AND
PSYCHIATRIC GROUP STOCK DESCRIBED HEREIN HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. THE DISTRIBUTION OF THE DEPOSITARY SHARES MAY NOT
BE UNDERTAKEN UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
INFORMATION STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE DEPOSITARY SHARES OR THE PSYCHIATRIC
GROUP STOCK.
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1995
AMERICAN HEALTH PROPERTIES, INC.
INFORMATION STATEMENT
------------------------
, 1995
American Health Properties, Inc. (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 facilities,
including 13 acute care hospitals, three rehabilitation hospitals and five
psychiatric hospitals, all of which are operated by qualified third party health
care providers, and a medical office building. As of December 31, 1994, the net
book value of the Company's assets was $565.5 million on the pro forma basis
described herein.
The Company believes that investor uncertainty as to the expected cash
flows from its investments in psychiatric hospitals has depressed the market
value of the Company's common stock, par value $0.01 per share (the "Common
Stock" or "Core Group Stock"). In order to address this uncertainty, the Company
is (a) creating a new series of preferred stock, par value $0.01 per share, to
be designated "Psychiatric Group Preferred Stock" (the "Psychiatric Group
Stock"), and (b) making a distribution to its holders of Core Group Stock (the
"Distribution") of depositary shares (the "Depositary Shares"), each
representing one-tenth of one share of Psychiatric Group Stock. Stockholders
will receive one Depositary Share for every ten shares of Core Group Stock held
of record at the close of business on , 1995.
By way of the issuance of Psychiatric Group Stock, the Company seeks to
separate the economic attributes of its investments in psychiatric hospitals
(the "Psychiatric Group," as more fully defined herein) and its core investments
in acute care hospitals, rehabilitation hospitals and a medical office building
(the "Core Group," as more fully defined herein) into two distinct portfolios,
with two distinct classes of publicly traded shares intended to represent those
portfolios. The assets, liabilities and expenses of the Company have been
allocated between the two portfolios. In the future, in addition to consolidated
financial statements, the Company will publish separate financial statements for
each Group. Dividends and other payouts or distributions with respect to the
Core Group Stock and Psychiatric Group Stock are expected to be a function of
the individual financial performance of the Core Group and the Psychiatric
Group, respectively.
The Company anticipates that the Distribution will enhance stockholder
value by allowing the market to separately value the Core Group Stock and the
Psychiatric Group Stock and by permitting investors to make separate investment
decisions with respect to each Group. This should facilitate the Company's
ability to raise additional equity, as needed, through sales of Core Group
Stock, and should also facilitate the ability of the Company to use its Core
Group Stock to make acquisitions of health care investments for its Core Group.
Each holder of Core Group Stock or Psychiatric Group Stock will be a holder
of an issue of capital stock of the entire Company and will be subject to the
risks associated with an investment in the Company and all of its businesses,
assets and liabilities. For example, if the cash flow and proceeds of any sales
of assets of the Psychiatric Group should be insufficient to service
intercompany loans or other debt owed by the Psychiatric Group (approximately
$15.6 million at December 31, 1994 on the pro forma basis described herein), the
Core Group would be adversely affected.
The Company expects that further investments will be added to the Core
Group portfolio over time. The Company does not intend to make further
investments for the Psychiatric Group. Over time, the total assets in the
Psychiatric Group are expected to decrease, reflecting the Company's continuing
program to sell, restructure or seek other means to reduce its investment in the
psychiatric sector. The Company expects to use the net proceeds of any sales of
Psychiatric Group investments (after transaction costs and reserves for
contingencies) to repay then outstanding intercompany loans or other debt owed
by the Psychiatric Group and to distribute all remaining net proceeds, if any,
to holders of Psychiatric Group Stock.
A total of approximately 2.1 million Depositary Shares are being
distributed to holders of Core Group Stock. Depositary Shares will be evidenced
by depositary receipts ("Depositary Receipts"). Cash will be issued in lieu of
fractional Depositary Shares. Application has been made to list the Depositary
Shares and the Psychiatric Group Stock on the New York Stock Exchange (the
"NYSE").
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary Comparison of Current Terms of Common Stock With Terms of Common Stock and
Psychiatric Group Stock Following Issuance of Psychiatric Group Stock.............. 3
Information Statement Summary........................................................ 8
Summary Consolidated Financial Data -- The Company................................... 16
Summary Combined Financial Data -- Core Group........................................ 17
Summary Combined Financial Data -- Psychiatric Group................................. 18
Overview............................................................................. 19
The Company.......................................................................... 20
Special Considerations............................................................... 20
Dividend Policy...................................................................... 27
Management and Accounting Policies................................................... 29
Further Information With Respect to the Company, Core Group and Psychiatric Group.... 31
Description of Capital Stock of the Company.......................................... 32
Description of Depositary Shares..................................................... 39
Certain United States Federal Income Tax Considerations.............................. 42
Stock Incentive Plans................................................................ 44
Stock Exchange Listings.............................................................. 44
Financial Advisors................................................................... 44
Stock Registrar and Transfer Agent; Depositary....................................... 44
Glossary of Certain Terms............................................................ 45
Annex A -- The Company............................................................... A-1
Selected Consolidated Financial Data............................................... A-2
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... A-3
Report of Independent Public Accountants........................................... A-8
Consolidated Financial Statements.................................................. A-9
Annex B -- Core Group................................................................ B-1
Business and Properties............................................................ B-2
Selected Combined Financial Data................................................... B-12
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... B-13
Report of Independent Public Accountants........................................... B-17
Combined Financial Statements...................................................... B-18
Annex C -- Psychiatric Group......................................................... C-1
Business and Properties............................................................ C-2
Selected Combined Financial Data................................................... C-17
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... C-18
Report of Independent Public Accountants........................................... C-22
Combined Financial Statements...................................................... C-23
Annex D -- American Medical Holdings, Inc............................................ D-1
</TABLE>
2
<PAGE> 3
SUMMARY COMPARISON OF CURRENT TERMS OF
COMMON STOCK WITH TERMS OF
COMMON STOCK AND PSYCHIATRIC GROUP STOCK
FOLLOWING ISSUANCE OF PSYCHIATRIC GROUP STOCK
The following is a summary of certain terms of the Company's Common Stock
as currently in effect and the terms of the Common Stock and the Psychiatric
Group Stock following the issuance of the Psychiatric Group Stock. This summary
is qualified in its entirety by the more detailed information contained in this
Information Statement and the Annexes hereto.
Unless otherwise defined herein, capitalized terms used in this summary
have the respective meanings ascribed to them elsewhere in this Information
Statement. See "Glossary of Certain Terms." Stockholders are urged to read
carefully this Information Statement and the Annexes hereto in their entirety.
<TABLE>
<CAPTION>
FOLLOWING ISSUANCE OF PSYCHIATRIC GROUP STOCK
------------------------------------------------------------------
COMMON STOCK CURRENTLY COMMON STOCK PSYCHIATRIC GROUP STOCK
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C>
BASIC INVESTMENT The Common Stock reflects the The Common Stock is intended to The Psychiatric Group Stock is
CHARACTERISTICS: performance of all of the reflect the separate performance intended to reflect the separate
Company's investments. of the Core Group; however, performance of the Psychiatric
holders of Common Stock will Group; however, holders of
continue to be holders of an Psychiatric Group Stock will be
issue of capital stock of the holders of an issue of capital
entire Company and will be stock of the entire Company and
subject to risks associated with will be subject to risks
an investment in the Company and associated with an investment in
all of its businesses, assets the Company and all of its
and liabilities. See "Special businesses, assets and
Considerations -- Stockholders liabilities. See "Special
of One Company; Financial Considerations -- Stockholders
Performance of One Group Could of One Company; Financial
Affect the Other Group." Performance of One Group Could
Affect the Other Group."
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
FOLLOWING ISSUANCE OF PSYCHIATRIC GROUP STOCK
------------------------------------------------------------------
COMMON STOCK CURRENTLY COMMON STOCK PSYCHIATRIC GROUP STOCK
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C>
DIVIDEND The Company has historically The Company expects to declare The Company expects to declare
POLICY: declared dividends based quarterly dividends on the quarterly dividends on the
primarily upon its consolidated Common Stock in the future based Psychiatric Group Stock in the
Funds From Operations. primarily upon the Funds From future based primarily upon the
Operations attributable to the Funds From Operations
Core Group. Specifically, the attributable to the Psychiatric
Company expects to maintain the Group. Specifically, the Company
Common Stock dividend payout expects to maintain the
ratio at less than 90% of Funds Psychiatric Group Stock dividend
From Operations attributable to payout ratio (excluding
the Core Group. distributions out of asset sale
proceeds) at less than 95% of
Funds From Operations
attributable to the Psychiatric
Group.
In addition, the Company expects
to use the Net Proceeds from
Psychiatric Group Asset Sales
initially to repay then
outstanding intercompany loans
or other debt owed by the
Psychiatric Group and then to
distribute all remaining net
proceeds, if any, to holders of
Psychiatric Group Stock by
dividend, tender offer, open
market or privately negotiated
repurchases or otherwise (in
cash, or in Common Stock valued
at a ten Trading Day average
Market Value prior to the time
of the distribution).
The payment of dividends on the The payment of dividends on the
Common Stock will also be Psychiatric Group Stock will
dependent in part upon the also be dependent in part upon
financial condition of the the financial condition of the
Company as a whole. Company as a whole.
The Company currently pays The Company expects the The Company expects the
annual dividends on the Common aggregate annual dividends paid aggregate annual dividends paid
Stock at levels at least on the Common Stock and the on the Common Stock and the
sufficient to cause the Company Psychiatric Group Stock to be at Psychiatric Group Stock to be at
to maintain its status as a least sufficient to cause the least sufficient to cause the
REIT. See "Dividend Policy." Company to maintain its status Company to maintain its status
as a REIT. as a REIT.
Dividends are limited to the Dividends on the Common Stock Dividends on the Psychiatric
funds of the Company legally will be limited to the Available Group Stock will be limited to
available therefor. Dividend Amount attributable to the Available Dividend Amount
the Core Group (an amount attributable to the Psychiatric
similar to the amount that would Group (an amount similar to the
be legally available under amount that would be legally
Delaware law for the payment of available under Delaware law for
dividends by the Core Group if the payment of dividends by the
it were a separate Delaware Psychiatric Group if it were a
corporation) but may not exceed separate Delaware corporation)
the funds of the Company legally but may not exceed the funds of
available therefor. the Company legally available
therefor.
See "Overview," "Special See "Overview," "Special
Considerations -- Financial Considerations -- Financial
Covenants" and "Dividend Covenants" and "Dividend
Policy." Policy."
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
FOLLOWING ISSUANCE OF PSYCHIATRIC GROUP STOCK
------------------------------------------------------------------
COMMON STOCK CURRENTLY COMMON STOCK PSYCHIATRIC GROUP STOCK
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C>
COMPANY'S None. None. The Company may, at any time
OPTIONAL commencing one year after the
EXCHANGE AND date of the Distribution and in
REDEMPTION its sole discretion, redeem all
RIGHTS: outstanding shares of
Psychiatric Group Stock for cash
or in exchange for newly issued
shares of Common Stock at a 15%
premium (i.e. for cash in an
amount, or in exchange for newly
issued shares of Common Stock
having an aggregate value (based
on a ten Trading Day average
Market Value prior to the
exchange), equal to 115% of the
ten Trading Day average Market
Value of the shares of
Psychiatric Group Stock being
redeemed).
If at any time commencing one
year after the date of the
Distribution, the Fair Market
Value of the assets (other than
cash, deposits and readily
marketable securities) of the
Psychiatric Group (as determined
by the Board, whose
determination shall be
conclusive) is less than
$10,000,000, the Company may, in
its sole discretion, redeem all
outstanding shares of
Psychiatric Group Stock for cash
in an amount, or in exchange for
newly issued shares of Common
Stock having an aggregate value
(based on a ten Trading Day
average Market Value prior to
the exchange), equal to 105% of
the Net Fair Market Value of the
Psychiatric Group (as determined
by the Board, whose
determination shall be
conclusive).
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
FOLLOWING ISSUANCE OF PSYCHIATRIC GROUP STOCK
------------------------------------------------------------------
COMMON STOCK CURRENTLY COMMON STOCK PSYCHIATRIC GROUP STOCK
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C>
VOTING RIGHTS: Holders of Common Stock are Holders of Common Stock will be Holders of Psychiatric Group
entitled to one vote per share. entitled to one vote per share Stock will be entitled to a
and will vote as one class with variable number of votes per
holders of Psychiatric Group share equal to the ratio of a
Stock (together with any other ten Trading Day average Market
series of Preferred Stock Value of one share of
outstanding at the time of such Psychiatric Group Stock to one
vote and so entitled to vote) on share of Common Stock, and could
all matters submitted to have more than, less than or
stockholders, other than matters exactly one vote per share. This
which would be required by law formula is intended to equate
or the Company's Certificate of the proportionate voting rights
Incorporation to be submitted to of the Common Stock and
a separate class vote. Psychiatric Group Stock to their
respective Market Values at the
time of any vote. Holders of
Psychiatric Group Stock will
vote as one class with holders
of Common Stock (together with
any other series of Preferred
Stock outstanding at the time of
such vote and so entitled to
vote) on all matters submitted
to stockholders, other than
matters which would be required
by law or the Company's
Certificate of Incorporation to
be submitted to a separate class
vote.
Each holder of Depositary Shares
will, through the depositary
share arrangements described
elsewhere herein, be entitled to
a number of votes per Depositary
Share equal to one-tenth the
number of votes to which a
holder of one share of
Psychiatric Group Stock will be
entitled.
No class vote of holders of
Psychiatric Group Stock will be
required upon a merger or
consolidation if (a) the
Psychiatric Group Stock remains
outstanding and unchanged as a
result of the merger or
consolidation, (b) the type and
amount of consideration for such
merger or consolidation is
divided between holders of
Psychiatric Group Stock and
holders of Common Stock in a
manner determined to be fair by
the Board (whose determination
shall be conclusive) or (c) the
Psychiatric Group Stock is
converted into capital stock of
the surviving company to the
merger or consolidation having
terms substantially similar to
the terms of the Psychiatric
Group Stock. For purposes of
clause (b) above, the Board
expects that it would determine
that a fair division of
consideration for such a merger
or consolidation would be a pro
rata
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
FOLLOWING ISSUANCE OF PSYCHIATRIC GROUP STOCK
------------------------------------------------------------------
COMMON STOCK CURRENTLY COMMON STOCK PSYCHIATRIC GROUP STOCK
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C>
division in accordance with the
Net Fair Market Value of the
Psychiatric Group as compared to
the Net Fair Market Value of the
Core Group (in each case as
determined by the Board, whose
determination shall be
conclusive).
A class vote of the holders of a
majority of the outstanding
shares of Psychiatric Group
Stock will be required for any
other merger or consolidation.
LIQUIDATION: Holders of Common Stock are Holders of Common Stock will be Holders of Psychiatric Group
entitled to receive their entitled to receive their Stock will be entitled to
proportionate interest in the proportionate interest in the receive their proportionate
net assets of the Company, if net assets of the Company, if interest in the net assets of
any, remaining for distribution any, remaining for distribution the Company, if any, remaining
to holders of stock (after to holders of stock (after for distribution to holders of
payment or provision for all payment or provision for all stock (after payment or
liabilities, including liabilities, including provision for all liabilities,
contingent liabilities, of the contingent liabilities, of the including contingent
Company and payment of the Company and payment of the liabilities, of the Company and
liquidation preference, if any, liquidation preference payable payment of the liquidation
payable to any holders of to holders of any other series preference, if any, payable to
Preferred Stock). of Preferred Stock ranking holders of any other series of
senior to the Psychiatric Group Preferred Stock ranking senior
Stock as to distributions upon to the Psychiatric Group Stock
liquidation) together with as to distributions upon
holders of Psychiatric Group liquidation) together with
Stock, pro rata based upon a ten holders of Common Stock, pro
Trading Day average Market Value rata based upon a ten Trading
of the Common Stock as compared Day average market Value of the
to a ten Trading Day average Psychiatric Group Stock as
Market Value of the Psychiatric compared to a ten Trading Day
Group Stock, provided that if average Market Value of the
the foregoing would result in a Common Stock, provided that if
liquidation payment valued at the foregoing would result in a
less than $1.00 per share of the liquidation payment valued at
Psychiatric Group Stock, the less than $1.00 per share of the
holders of Psychiatric Group Psychiatric Group Stock, the
Stock will not be entitled to a holders of Psychiatric Group
proportionate interest in such Stock will not be entitled to a
net assets but instead will be proportionate interest in such
entitled to receive a net assets but instead will be
liquidation preference of $1.00 entitled to receive a
per share (and no more) before liquidation preference of $1.00
any payment may be made to per share (and no more) before
holders of Common Stock. any payment may be made to
holders of Common Stock.
STOCK NYSE under the symbol "AHE." NYSE under the symbol "AHE." Application has been made to
EXCHANGE list the Depositary Shares and
LISTINGS: Psychiatric Group Stock on the
NYSE under the symbol "AHE.P."
</TABLE>
7
<PAGE> 8
INFORMATION STATEMENT SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement and the Annexes hereto. Reference is made to, and
this Information Statement Summary is qualified in its entirety by, the more
detailed information contained in this Information Statement and the Annexes
hereto.
Unless otherwise defined herein, capitalized terms used in this summary
have the respective meanings ascribed to them elsewhere in this Information
Statement. See "Glossary of Certain Terms." Stockholders are urged to read
carefully this Information Statement and the Annexes hereto in their entirety.
OVERVIEW
The Company is a self-administered REIT that commenced operations in 1987.
The Company has investments in health care facilities, including 13 acute care
hospitals, three rehabilitation hospitals and five psychiatric hospitals, all of
which are operated by qualified third party health care providers, and a medical
office building. As of December 31, 1994, the net book value of the Company's
assets was $565.5 million on the pro forma basis described herein.
The Company believes that investor uncertainty as to the expected cash
flows from its investments in psychiatric hospitals has depressed the market
value of the Company's Core Group Stock. In order to address this uncertainty,
the Company is (a) creating a new series of preferred stock (the Psychiatric
Group Stock) and (b) making a Distribution to its holders of Core Group Stock of
Depositary Shares, each representing one-tenth of one share of Psychiatric Group
Stock. Stockholders will receive one Depositary Share for every ten shares of
Core Group Stock held of record at the close of business on , 1995.
By way of the issuance of Psychiatric Group Stock, the Company seeks to
separate the economic attributes of the Psychiatric Group and the Core Group
into two distinct portfolios, with two distinct classes of publicly traded
shares intended to represent those portfolios. The assets, liabilities and
expenses of the Company have been allocated between the two portfolios. In the
future, in addition to consolidated financial statements, the Company will
publish separate financial statements for each Group. Dividends and other
payouts or distributions with respect to the Core Group Stock and Psychiatric
Group Stock are expected to be a function of the individual financial
performance of the Core Group and the Psychiatric Group, respectively.
The Company anticipates that the Distribution will enhance stockholder
value by allowing the market to separately value the Core Group Stock and the
Psychiatric Group Stock and by permitting investors to make separate investment
decisions with respect to each Group. This should facilitate the Company's
ability to raise additional equity, as needed, through sales of Core Group
Stock, and should also facilitate the ability of the Company to use its Core
Group Stock to make acquisitions of health care investments for its Core Group.
Each holder of Core Group Stock or Psychiatric Group Stock will be a holder
of an issue of capital stock of the entire Company and will be subject to the
risks associated with an investment in the Company and all of its businesses,
assets and liabilities. For example, if the cash flow and proceeds of any sales
of assets of the Psychiatric Group should be insufficient to service
intercompany loans or other debt owed by the Psychiatric Group (approximately
$15.6 million at December 31, 1994 on the pro forma basis described herein), the
Core Group would be adversely affected.
The Company expects that further investments will be added to the Core
Group portfolio over time. The Company does not intend to make further
investments for the Psychiatric Group. Over time, the total assets in the
Psychiatric Group are expected to decrease, reflecting the Company's continuing
program to sell, restructure or seek other means to reduce its investment in the
psychiatric sector. The Company expects to use the Net Proceeds from Psychiatric
Group Asset Sales initially to repay then outstanding intercompany loans or
other debt owed by the Psychiatric Group and then to distribute all remaining
net proceeds, if any, to holders of Psychiatric Group Stock by dividend, tender
offer, open market or privately negotiated repurchases or otherwise (in cash, or
in Common Stock valued at a ten Trading Day average Market Value prior to the
time of the distribution).
8
<PAGE> 9
A total of approximately 2.1 million Depositary Shares are being
distributed to holders of Core Group Stock. The Depositary Shares will be
evidenced by Depositary Receipts. Cash will be issued in lieu of fractional
Depositary Shares. Application has been made to list the Depositary Shares and
the Psychiatric Group Stock on the NYSE.
THE COMPANY
The Company, through the Core Group and Psychiatric Group, has investments
in health care facilities, including acute care hospitals, rehabilitation
hospitals and psychiatric hospitals, all of which are operated by qualified
third party health care providers, and a medical office building.
The Core Group's current portfolio of 17 facilities consists of 13 acute
care hospitals (one of which is under construction), three physical
rehabilitation hospitals and one medical office building. As of December 31,
1994, the net book value of the Core Group's assets was $514.9 million on the
pro forma basis described herein. Of the Core Group's real estate assets at that
date, 91% in net book value represented the acute care segment, 7% in net book
value represented the rehabilitation segment and 2% in net book value
represented the medical office building segment. As of December 31, 1994,
substantially all of the Core Group's real estate assets were held in fee.
The Psychiatric Group owns three psychiatric hospitals and has made two
mortgage loans secured by psychiatric hospitals (collectively, the "Psychiatric
Hospitals"). As of December 31, 1994, the net book value of the Psychiatric
Group's assets was $66.2 million on the pro forma basis described herein. Of the
Psychiatric Group's real estate assets at that date, 36% in pro forma net book
value were held in fee and 64% in pro forma net book value were held as
mortgages.
The following table sets forth certain financial information derived from
the financial statements (and notes thereto) of the Company, the Core Group and
the Psychiatric Group and should be read in conjunction with those statements
and management's discussion and analysis of financial condition and results of
operations which are included in Annexes A, B and C to this Information
Statement.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
COMPANY (CONSOLIDATED)
Revenues.................................................... $ 87,027
Funds From Operations(2).................................... 55,205
Cash flows from operating activities........................ 54,984
Total assets................................................ 579,503
Facilities (number)......................................... 24
CORE GROUP
Revenues.................................................... $ 75,680 $ 73,503
Funds From Operations(2).................................... 46,092 43,729
Cash flows from operating activities........................ 46,258 43,871
Total assets................................................ 528,686 514,861
Facilities (number)......................................... 17 17
PSYCHIATRIC GROUP
Revenues.................................................... $ 15,388 $ 11,171
Funds From Operations(2).................................... 9,113 7,259
Cash flows from operating activities........................ 8,726 7,157
Total assets................................................ 80,245 66,185
Facilities (number)......................................... 7 5
</TABLE>
- - - ---------------
(1) Reflects the sales of one psychiatric property in October 1994 for $5.8
million and two psychiatric properties in February 1995 for $13.8 million
and the repayment of debt out of the proceeds thereof, as though such
transactions had occurred immediately prior to January 1, 1994 (in the case
of operating and cash flow data) or as of December 31, 1994 (in the case of
balance sheet data). These sales were at net book value.
9
<PAGE> 10
(2) Funds From Operations ("Funds From Operations") as currently defined by the
National Association of Real Estate Investment Trusts and as used herein
means net income (loss) computed in accordance with GAAP, excluding gains
(losses) from sales of property, adjusted for write-downs of mortgage notes
and investments in real estate and certain other non-cash items, primarily
depreciation and amortization. Funds From Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered an alternative to net income as an indicator of the Company's
operating performance or an alternative to cash flow as a measure of
liquidity.
SPECIAL CONSIDERATIONS
Stockholders of One Company; Financial Performance of One Group Could
Affect the Other Group. Notwithstanding the allocation of assets and liabilities
(including contingent liabilities), stockholders' equity and items of income,
expense and cash flow between each Group for purposes of preparing their
respective financial statements, the change in the capital structure of the
Company effected by the Psychiatric Group Stock issuance will not affect the
respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. The Psychiatric Group Stock issuance will
not affect the rights of creditors of the Company or any subsidiary, including
rights under financing covenants. Each holder of Common Stock or Psychiatric
Group Stock will be a holder of an issue of capital stock of the entire Company
and will be subject to risks associated with an investment in the Company and
all of its businesses, assets and liabilities. For example, if the cash flow and
proceeds of any sales of assets of the Psychiatric Group should be insufficient
to service intercompany loans or other debt owed by the Psychiatric Group
(approximately $15.6 million at December 31, 1994 on the pro forma basis
described herein), the Core Group would be adversely affected.
Financial effects arising from one 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
other Group or the market price of shares relating to the other Group. In
addition, net losses of one Group, as well as dividends and distributions on,
and repurchases of, Common Stock or Psychiatric Group Stock will reduce the
funds of the Company legally available for dividends on both the Common Stock
and the Psychiatric Group Stock.
Potential Conflicts of Interest. The issuance of Psychiatric Group Stock
could give rise to occasions when the interests of the holders of Common Stock
and the holders of Psychiatric Group Stock might diverge or appear to diverge.
Examples include determinations by the Board and, in certain circumstances, the
management of the Company to (i) pay or omit the payment of dividends on Common
Stock or Psychiatric Group Stock, (ii) allocate consideration to be received in
connection with a merger or consolidation involving the Company among holders of
Common Stock and Psychiatric Group Stock, (iii) advance or repay intercompany
loans as described below, (iv) redeem Psychiatric Group Stock or exchange it for
Common Stock, (v) approve dispositions of assets of either of the Groups and
(vi) make other operational and financial decisions with respect to one Group
that could be considered to be detrimental to the other Group. When making
decisions with regard to matters that create potential conflicts of interest,
the Board will act in accordance with the terms of the Company's Certificate of
Incorporation, management and accounting policies as described in "Management
and Accounting Policies" and its fiduciary duties. The Company's management will
be responsible for both the Core Group and the Psychiatric Group and
consequently could make management decisions with respect to one Group that
could be considered detrimental to the other. See "Special
Considerations -- Potential Conflicts of Interest" below.
Fiduciary Duties of the Board of Directors. Principles of Delaware law
established in cases involving differing treatment of two classes of capital
stock provide that a board of directors owes an equal duty to all stockholders
regardless of class or series and does not have separate or additional duties to
either group of stockholders. Although the Company is not aware of any precedent
involving the fiduciary duties of directors of corporations in relation to
separate classes or series of capital stock the rights of which are defined by
reference to specified operations of the corporation, under the principles of
Delaware law referred to above and the "business judgment rule," the Board
should be protected in acting with respect to matters having disparate impacts
upon holders of Common Stock and holders of Psychiatric Group Stock so long as
it is disinterested and adequately informed with respect to such matters and
acts in good faith.
10
<PAGE> 11
Disproportionate ownership interests of members of the Board in Common
Stock or Psychiatric Group Stock or disparate values of Common Stock and
Psychiatric Group Stock could create or appear to create potential conflicts of
interest when directors are faced with decisions that might have different
implications for holders of Common Stock and holders of Psychiatric Group Stock.
See "Special Considerations -- Potential Conflicts of Interest" below.
Nevertheless, the Company believes that a director would be able to discharge
his or her fiduciary responsibilities even if his or her interests in shares of
Common Stock and Psychiatric Group Stock were disproportionate and/or had
disparate values.
Initial Allocation of Debt; Intercompany Loans. All third party debt of
the Company ($231.8 million at December 31, 1994 on the pro forma basis
described herein) has been attributed to the Core Group in the financial
statements set forth herein. However, the Psychiatric Group has been attributed
(a) fixed rate intercompany loans owing to the Core Group in an amount at
December 31, 1994 determined by the Board to be appropriate in relation to the
assets and expected cash flow of the Psychiatric Group ($9.2 million on such pro
forma basis) and (b) revolving intercompany loans owing to the Core Group in an
amount at December 31, 1994 equal to the working capital notes receivable from
certain psychiatric hospital operators owing to the Psychiatric Group at that
date ($6.4 million on such pro forma basis).
If the Psychiatric Group is unable to repay any intercompany loans owed to
the Core Group, the Core Group would be adversely impacted. See "Special
Considerations -- Psychiatric Group." For this and other reasons, the Board has
established the following policies relating to the amount of intercompany loans
and required repayments thereof:
(a) the aggregate revolving intercompany loans owed by the Psychiatric
Group to the Core Group will be limited to a maximum of $10,000,000 at
any one time outstanding, subject to reduction of such limit
commensurate with any permanent repayment in the future of working
capital loans extended to Psychiatric Hospital operators, but in no
event will such limit be reduced below $5,000,000;
(b) except as permitted by (a) above, no additional fixed rate or other
intercompany loans will be advanced by the Core Group to the
Psychiatric Group;
(c) if the Psychiatric Group sells any assets out of the ordinary course,
the Net Proceeds from Psychiatric Group Asset Sales will be applied,
first, to repay revolving intercompany loans owed by the Psychiatric
Group to the Core Group to the extent of the psychiatric hospital
operator working capital loans associated with the asset or assets
sold, second, to repay fixed rate intercompany loans owed by the
Psychiatric Group to the Core Group (until repaid in full), and third,
to repay other revolving intercompany loans owed by the Psychiatric
Group to the Core Group (until repaid in full), before any remaining
Net Proceeds from Psychiatric Group Asset Sales may be used to make
distributions to holders of Psychiatric Group Stock as described under
"Dividend Policy"; and
(d) excess cash held by the Psychiatric Group (other than Net Proceeds from
Psychiatric Group Asset Sales, which will be treated as described in
(c) above) will be applied to reduce revolving intercompany loans owed
by the Psychiatric Group to the Core Group (until repaid in full),
subject to the ability of the Psychiatric Group, at the option of the
Board, to re-borrow cash from the Core Group up to the limitations
described in (a) above to cover future cash needs of the Psychiatric
Group (including, without limitation, to fund dividends in a manner
consistent with the dividend policy then applicable to the Psychiatric
Group Stock).
For information concerning certain additional policies relating to intercompany
loans established by the Board and the Board's power to change policies, see
"Management and Accounting Policies."
Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group if the Board determines it is in
the best interests of the Company not to do so. See "Management and Accounting
Policies."
Limited Stockholder Voting Rights. Subject to certain limited exceptions,
holders of Common Stock, Psychiatric Group Stock and any other series of
Preferred Stock outstanding at the time of such vote and so entitled to vote
will vote as one class on all matters coming before any meeting of stockholders.
Holders of
11
<PAGE> 12
Common Stock and Psychiatric Group Stock will not have any right to vote on
matters as a separate class (except pursuant to certain limited class voting
rights provided under Delaware law and, in limited circumstances, in connection
with a merger or consolidation of the Company with or into another company).
Similarly, separate meetings for the holders of Common Stock or Psychiatric
Group Stock will not be held.
Certain matters as to which the holders of Common Stock and Psychiatric
Group Stock are entitled to vote may involve a divergence or the appearance of a
divergence of the interests of holders of Common Stock and Psychiatric Group
Stock. Holders of Common Stock will likely be entitled to a substantial majority
of the total votes to which the then outstanding voting stock of the Company is
entitled. See "Special Considerations -- Potential Conflicts of Interest" and
"Description of Capital Stock of the Company -- Voting Rights."
Possibility that Psychiatric Group Stockholders will Receive No Premium if
Company is Acquired. The terms of the Psychiatric Group Stock do not provide
any separate class vote to holders of Psychiatric Group Stock to approve a
merger or consolidation if (a) the Psychiatric Group Stock remains outstanding
and unchanged as a result of the merger or consolidation, (b) the type and
amount of consideration for such merger or consolidation is divided between
holders of Psychiatric Group Stock and holders of Common Stock in a manner
determined to be fair by the Board (whose determination shall be conclusive) or
(c) the Psychiatric Group Stock is converted into capital stock of the surviving
company to the merger or consolidation having terms substantially similar to the
terms of the Psychiatric Group Stock. If the Company is acquired in a merger or
consolidation in which holders of Common Stock receive a premium, holders of
Psychiatric Group Stock may be required to continue to hold their existing
shares (under clause (a) above) or receive substantially similar shares (under
clause (c) above) and may thereby receive no premium in connection with such
acquisition.
Limited Stockholder Approval Rights for Future Issuances of Stock. The
Company will not solicit the approval of the holders of Psychiatric Group Stock
or Common Stock for the issuance from the authorized but unissued shares of
Common Stock and Preferred Stock of the Company of additional shares of Common
Stock or of a newly designated series of Preferred Stock (unless such approval
is deemed advisable by the Board or is required by stock exchange regulations or
such issuance would require amendment of the Company's Certificate of
Incorporation). The Company does not intend to issue any further Psychiatric
Group Stock except upon exercise of options granted in connection with the
Distribution. See "Stock Incentive Plans."
Management and Accounting Policies Subject to Change. The Board has
adopted certain management and accounting policies described herein with respect
to intercompany loans, cash management, corporate expenses, allocation of assets
and liabilities (including contingent liabilities) and inter-Group transactions,
any and all of which could be modified or rescinded in the sole discretion of
the Board without the approval of stockholders, although there is no present
intention to do so. The Board could also adopt additional policies depending
upon the circumstances. Any determination by the Board to modify or rescind such
policies, or to adopt additional policies, including any such decision that
could have disparate effects upon holders of Common Stock and Psychiatric Group
Stock, will be made by the Board in good faith and in the honest belief that
such decision is in the best interests of the Company's stockholders, including
holders of Common Stock and Psychiatric Group Stock. In addition, generally
accepted accounting principles would require that changes in accounting
principles must be preferable (in accordance with generally accepted accounting
principles) to the principles previously in place. See "Management and
Accounting Policies."
Potential Effects of Exchange or Redemption of Psychiatric Group Stock.
The terms of the Psychiatric Group Stock permit the exchange or redemption of
all such stock for Common Stock or cash upon the terms described under
"Description of Capital Stock of the Company -- Exchange and Redemption." Since
such exchange or redemption may be at a premium to the then current market price
of the Psychiatric Group Stock, and since the Board could determine to effect
such an exchange or redemption at a time when either or both the Common Stock
and the Psychiatric Group Stock may be considered to be overvalued or
undervalued, the exchange or redemption could be disadvantageous to the holders
of the Common Stock or the Psychiatric Group Stock. In addition, any such
exchange would preclude holders of Common Stock and Psychiatric
12
<PAGE> 13
Group Stock from retaining their investment in a security that is intended to
reflect separately the performance of their respective Groups.
No Assurance as to Market Price. It is not possible to predict the impact
of the issuance of the Psychiatric Group Stock on the market price of the Common
Stock and there can be no assurance that the market prices of the Psychiatric
Group Stock and Common Stock will together exceed the market price for the
Common Stock prior to the Distribution. Furthermore, there can be no assurance
that investors will assign values to the Common Stock and Psychiatric Group
Stock based on the reported financial results and prospects of the Core Group
and Psychiatric Group, respectively, or the dividend policies established by the
Board with respect to each Group. Accordingly, financial results of one Group
that affect the Company's consolidated results of operations or financial
condition could affect the market price of shares of both the Common Stock and
the Psychiatric Group Stock. In addition, the Company cannot predict the impact
on the market price of the Common Stock and Psychiatric Group Stock of certain
terms of the Psychiatric Group Stock, such as the ability of the Company to
exchange or redeem Psychiatric Group Stock, the discretion of the Board to make
various determinations and the minority voting power of the Psychiatric Group
Stock.
Limitations on Potential Unsolicited Acquisitions. If the Psychiatric
Group were a separate independent company, any person interested in acquiring
that Group without negotiation with management could seek control of that Group
by obtaining control of its outstanding voting stock. By contrast, a person
interested in acquiring only the Psychiatric Group without negotiation with the
Company's management would likely be able to do so only by obtaining majority
control of the Common Stock. Other limitations apply to acquisitions of the
Company's capital stock. See "Description of Capital Stock of the Company."
Psychiatric Group.
Psychiatric Hospital Trends. Fundamental changes in the psychiatric
industry continue to negatively impact the facility-specific operating cash flow
at the Psychiatric Hospitals. 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 revenue. 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. For example,
as the inpatient length of stay has decreased, offset by an increased number of
admissions in some cases, the costs of performing initial testing and other
administrative procedures associated with each admission have increased. As a
result, certain of the Psychiatric Hospital operators have had difficulty
meeting their payment obligations to the Company on a timely basis and there can
be no assurance that they will be able to meet their payment obligations in the
future.
Lack of Third-Party Working Capital Financing. The Company has provided
working capital loans to the operators of four of the Psychiatric Hospitals. As
of December 31, 1994, outstanding working capital loans totalled $9.4 million
($6.4 million on the pro forma basis described herein). The Company has
committed to make an additional $1.15 million of such working capital loans upon
request, subject to certain conditions. These working capital loans, 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
working capital loans provided by the Company or to secure replacement loans
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 Board determines that it is
13
<PAGE> 14
appropriate to provide additional working capital financing to a Psychiatric
Hospital, it may cause the Core Group to make revolving intercompany loans to
the Psychiatric Group to fund such financing (to the extent consistent with its
then existing policies), although the Board is under no obligation to do so. See
"Management and Accounting Policies."
Write-downs and Restructurings. In 1992, the Company recorded a $45
million 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 million
write-down of investments in the psychiatric hospitals. Although management
believes that the recorded investments in the 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.
Licensing and Certificate of Need Requirements. In order to operate, the
Psychiatric Hospitals are required to have both a license and a certificate of
need issued by the appropriate State health care regulatory authority. The
license and the certificate of need are obtained by the operator of the
facility. In the event one of the Psychiatric Hospitals were to default on its
obligations to the Company and the Company were to attempt to remove the current
operator, it is uncertain whether the Company would be able to maintain the
existing license and certificate of need or whether the Company would have to
apply for a new license and certificate of need in order to continue to operate
the facility as a psychiatric hospital. Moreover, if upon a default, the Company
were to try to convert the Psychiatric Hospital to an alternative health care
use, a new license and certificate of need may be required. Because the issuance
of a license and certificate of need is a regulatory process and is subject to
the discretion of state regulatory authorities, there can be no assurance that
the Company would be successful in obtaining such or that the process would not
take a significant period of time. In view of the foregoing, the Company's
ability to bring in a replacement operator for a Psychiatric Hospital or to
convert a Psychiatric Hospital to an alternative health care use may be
significantly restricted and could thus cause an impairment in the value of the
facility and/or a significant interruption in the cash flow from the facility.
Difficulty in Disposing of Psychiatric Group Assets. The Company has
announced its intention to sell, restructure or seek other means to reduce its
investment in the psychiatric sector. However, there can be no assurance as to
the timing of any such actions or that upon the disposition of a Psychiatric
Group asset, the Company would realize net proceeds equal to the book value of
such asset. Over the past twelve months, the Company has sold three of the
Psychiatric Group hospitals but has not been able to sell the remainder of the
Psychiatric Group portfolio on a basis management deemed economically
acceptable. The Company does not believe it will be able to sell additional
Psychiatric Group assets on such basis in the near term and is uncertain when
market conditions and other factors will enable it to do so.
Financial Covenants. As of December 31, 1994, the Company had outstanding
debt of $245.7 million ($231.8 million on the pro forma basis described herein).
Financial covenants in its various debt agreements require the Company to
maintain certain financial ratios, including (i) a minimum tangible net worth of
$260 million plus 75% of certain equity proceeds and (ii) a fixed charge
coverage ratio of at least 1.85 to 1. As of December 31, 1994, on an historical
basis the Company's tangible net worth of approximately $305.5 million and fixed
charge coverage ratio of 2.81 to 1 would have satisfied such tests. Such debt
agreements also limit the amount of outstanding indebtedness, and certain other
financings, of the Company, and require that specified ratios of liabilities to
tangible net worth and asset values be maintained. Such debt covenants further
limit the payment of dividends and other distributions to stockholders,
including making funds available to stockholders through the purchase,
redemption or retirement of capital stock. This restriction on dividends and
other distributions applies to both the Common Stock and the Psychiatric Group
Stock and, in general, limits such payments to 95% of consolidated cash flow
available for debt service, less interest expense, plus gains on asset
dispositions and plus certain proceeds ("PG Excess Proceeds") from the
disposition of Psychiatric Group assets after the repayment of Psychiatric Group
indebtedness. Dividends or other distributions paid out of PG Excess Proceeds
will be available only for the Psychiatric Group Stock and will be limited to
$30 million in the aggregate and $15 million in any calendar year. As of
December 31, 1994, under the most
14
<PAGE> 15
restrictive of these limitations, in addition to distributions that may be paid
out of PG Excess Proceeds, the Company could have declared and paid aggregate
dividends or other distributions to its stockholders of $21.7 million in
addition to the dividends already declared through that date. These covenants in
various debt agreements may limit the financial flexibility of the Company as
well as its ability to pay dividends, or otherwise make funds available to
stockholders (for example through redemptions or repurchases of stock), in the
future. However, dividends or other distributions that are payable in the form
of stock are generally not restricted. In addition, if the Company borrows
additional funds in the future, or refinances existing debt obligations, it is
expected that the Company will agree to financial covenants which could be more
or less restrictive than those referred to above. For additional information on
the Company's debt and the provisions of its debt agreements, see the notes to
the Company's consolidated financial statements, as well as the corresponding
notes to the financial statements of the Core Group and the Psychiatric Group,
included elsewhere herein.
For further discussion of the foregoing and certain other considerations,
see "Special Considerations" below.
DIVIDEND POLICY
The Company expects to declare quarterly dividends on the Common Stock and
the Psychiatric Group Stock in the future based primarily upon the Funds From
Operations attributable to the Core Group and the Psychiatric Group,
respectively. Specifically, the Company expects to maintain the Common Stock
dividend payout ratio at less than 90% of Funds From Operations attributable to
the Core Group and the Psychiatric Group Stock dividend payout ratio (excluding
distributions out of asset sale proceeds) at less than 95% of Funds From
Operations attributable to the Psychiatric Group.
In addition, the Company expects to use the Net Proceeds from Psychiatric
Group Asset Sales initially to repay then outstanding intercompany loans or
other debt owed by the Psychiatric Group and then to distribute all remaining
net proceeds, if any, to holders of Psychiatric Group Stock by dividend, tender
offer, open market or privately negotiated repurchases or otherwise (in cash, or
in Common Stock valued at a ten Trading Day average Market Value prior to the
time of the distribution).
The payment of dividends on the Common Stock and Psychiatric Group Stock
will also be dependent in part upon the financial condition of the Company as a
whole.
The Company expects the aggregate annual dividends paid on the Common Stock
and the Psychiatric Group Stock to be at least sufficient to cause the Company
to maintain its status as a REIT.
See "Overview", "Special Considerations -- Financial Covenants" and
"Dividend Policy."
DESCRIPTION OF COMMON STOCK AND PSYCHIATRIC GROUP STOCK FOLLOWING DISTRIBUTION
For a description of certain terms of the Common Stock and Psychiatric
Group Stock following the Distribution, see "Summary Comparison of Current Terms
of Common Stock with Terms of Common Stock and Psychiatric Group Stock Following
Issuance of Psychiatric Group Stock" above and "Description of Capital Stock of
the Company" below.
STOCK EXCHANGE LISTINGS
Application has been made to list the Depositary Shares and Psychiatric
Group Stock on the NYSE under the symbol "AHE.P." The Common Stock will continue
to trade on the NYSE under the symbol "AHE."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Company believes that no gain or loss will be recognized by the Company
or its stockholders on the issuance of the Psychiatric Group Stock and
Distribution of the Depositary Shares. However, there are no court decisions
bearing directly on similar transactions, and the Internal Revenue Service has
had under study since 1987 the federal income tax consequences of similar
transactions. See "Certain United States Federal Income Tax Considerations."
15
<PAGE> 16
SUMMARY CONSOLIDATED FINANCIAL DATA
THE COMPANY
The summary consolidated financial data below have been derived from the
financial statements (and notes thereto) of the Company and should be read in
conjunction with those statements and management's discussion and analysis of
financial condition and results of operations which are included in Annex A to
this Information Statement.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 87,027 $ 81,523 $ 82,079 $ 80,129 $ 59,409
Net income (loss)(1)...................... 9,693 50,987 (6,317) 33,753 28,032
Net income (loss) per share(1)............ 0.46 2.71 (0.37) 2.09 1.90
Weighted average shares outstanding....... 20,856 18,843 17,247 16,168 14,754
Funds From Operations(2).................. $ 55,205 $ 46,443 $ 41,405 $ 46,428 $ 36,370
Cash flows from operating activities...... 54,984 45,884 43,486 46,805 40,946
Cash flows from investing activities...... (42,740) (6,996) 12,774 (138,076) (134,696)
Cash flows from financing activities...... (46,076) (4,110) (58,165) 52,058 76,340
Dividends declared........................ 47,982 44,766 45,747 43,243 35,929
Dividends declared per share.............. 2.30 2.25 2.64 2.62 2.42
Total assets.............................. 579,503 614,453 566,394 630,511 541,584
Total debt................................ 245,663 245,423 286,859 301,176 263,852
Stockholders' equity...................... 307,501 343,303 255,349 303,069 256,982
</TABLE>
- - - ---------------
(1) Includes gains of $19,742,000 and $11,064,000 in 1993 and 1992,
respectively, on the sale of properties or partnership interests therein.
Also reflects write-downs of $30,000,000 in 1994 and $45,000,000 in 1992
relating to investments in psychiatric hospitals.
(2) Funds From Operations as currently defined by the National Association of
Real Estate Investment Trusts and as used herein means net income (loss)
computed in accordance with GAAP, excluding gains (losses) from sales of
property, adjusted for write-downs of mortgage notes and investments in real
estate and certain other non-cash items, primarily depreciation and
amortization. Funds From Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered an
alternative to net income as an indication of the Company's operating
performance or an alternative to cash flow as a measure of liquidity. The
Company has historically made certain adjustments to Funds From Operations
to adjust for the impact of items which management does not consider to be
routine costs of ongoing operations ("Funds From Operations As Adjusted").
These nonroutine items include: in 1994, targeted stock issuance costs of
$1,450,000 and reversal of accrued relocation costs of $750,000; in 1993,
litigation costs of $2,234,000 and accrued relocation costs of $850,000; and
in 1992, litigation costs of $786,000 and costs related to the termination
of a purchase commitment of $2,225,000. There were no adjustments for
nonroutine items in 1991 and 1990. The following table presents the
Company's Funds From Operations As Adjusted.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Funds From Operations As Adjusted........... $ 55,905 $ 49,527 $ 44,416 $ 46,428 $ 36,370
</TABLE>
16
<PAGE> 17
SUMMARY COMBINED FINANCIAL DATA
CORE GROUP
The summary combined financial data below have been derived from the
financial statements (and notes thereto) of the Core Group and should be read in
conjunction with (a) those statements and management's discussion and analysis
of financial condition and results of operations of the Core Group which are
included in Annex B to this Information Statement and (b) the financial
statements (and notes thereto) of the Company and the Psychiatric Group and
management's discussion and analysis of financial condition and results of
operations of the Company and the Psychiatric Group which are included in Annex
A and Annex C to this Information Statement.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
1994 ------------------------------------------------------
PRO FORMA(1) 1994 1993 1992 1991 1990
------------ -------- -------- -------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 73,503 $ 75,680 $ 73,036 $ 75,962 $ 69,845 $ 51,707
Net income(2)................. 30,145 32,548 48,616 36,194 25,987 21,595
Net income per share.......... 1.45
Weighted average shares
outstanding................. 20,856
Funds From Operations(3)...... $ 43,729 $ 46,092 $ 41,277 $ 37,520 $ 37,513 $ 29,636
Cash flows from operating
activities.................. 43,871 46,258 41,276 38,799 38,572 32,972
Cash flows from investing
activities.................. (49,051) (42,310) 33,286 11,756 (115,573) (132,280)
Cash flows from financing
activities.................. (37,780) (37,780) (39,784) (52,460) 37,788 81,898
Dividends declared............ 39,303 39,303 38,078 40,936 34,935 29,277
Total assets.................. 514,861 528,686 532,461 522,127 538,725 474,481
Total attributed debt......... 231,838 245,663 245,423 286,859 301,176 263,852
Total attributed equity....... 259,199 259,199 263,832 213,230 214,512 193,219
</TABLE>
- - - ---------------
(1) Reflects the sales of one psychiatric property in October 1994 for $5.8
million and two psychiatric properties in February 1995 for $13.8 million
and the repayment of debt out of the proceeds thereof, as though such
transactions had occurred immediately prior to January 1, 1994 (in the case
of operating and cash flow data) or as of December 31, 1994 (in the case of
balance sheet data). These sales were at net book value.
(2) Includes gains of $19,742,000 and $11,064,000 in 1993 and 1992,
respectively, on the sale of properties or partnership interests therein.
(3) Funds From Operations as currently defined by the National Association of
Real Estate Investment Trusts and as used herein means net income (loss)
computed in accordance with GAAP, excluding gains (losses) from sales of
property, adjusted for write-downs of mortgage notes and investments in real
estate and certain other non-cash items, primarily depreciation and
amortization. Funds From Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered an
alternative to net income as an indication of the Core Group's operating
performance or an alternative to cash flow as a measure of liquidity. The
Company has historically made certain adjustments to Funds From Operations
to adjust for the impact of items which management does not consider to be
routine costs of ongoing operations ("Funds From Operations As Adjusted").
These nonroutine items include: in 1994, reversal of accrued relocation
costs of $617,000; in 1993, accrued relocation costs of $690,000; and in
1992, costs related to the termination of a purchase commitment of
$2,225,000. There were no adjustments for nonroutine items in 1991 and 1990.
The following table presents the Core Group's Funds From Operations As
Adjusted.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
1994 ------------------------------------------------------
PRO FORMA(1) 1994 1993 1992 1991 1990
------------ -------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Funds From Operations As
Adjusted.................... $ 43,112 $ 45,475 $ 41,967 $ 39,745 $ 37,513 $ 29,636
</TABLE>
17
<PAGE> 18
SUMMARY COMBINED FINANCIAL DATA
PSYCHIATRIC GROUP
The summary combined financial data below have been derived from the
financial (and notes thereto) statements of the Psychiatric Group and should be
read in conjunction with (a) those statements and management's discussion and
analysis of financial condition and results of operations of the Psychiatric
Group which are included in Annex C to this Information Statement and (b) the
financial statements (and notes thereto) of the Company and the Core Group and
management's discussion and analysis of financial condition and results of
operations of the Company and the Core Group which are included in Annex A and
Annex B to this Information Statement.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
1994 ----------------------------------------------------
PRO FORMA(1) 1994 1993 1992 1991 1990
------------ -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $ 11,171 $ 15,388 $ 15,317 $ 15,163 $ 19,434 $ 13,954
Net income (loss)(2)............. (11,278) (22,855) 2,371 (42,511) 7,766 6,437
Net loss per Depositary
Share(2)....................... (5.41)
Weighted average Depositary
Shares outstanding............. 2,086
Funds From Operations(3)......... $ 7,259 $ 9,113 $ 5,166 $ 3,885 $ 8,915 $ 6,734
Cash flows from operating
activities..................... 7,157 8,726 4,608 4,687 8,233 7,974
Cash flows from investing
activities..................... (230) 4,942 (3,189) (2,163) (19,136) (45,081)
Cash flows from financing
activities..................... (6,927) (13,668) (1,419) (2,524) 10,903 37,107
Dividends declared............... 8,679 8,679 6,688 4,811 8,308 6,652
Total assets..................... 66,185 80,245 116,820 116,188 161,032 142,885
Total attributed debt............ 15,603 29,428 34,828 71,921 69,246 75,782
Total attributed equity.......... 48,302 48,302 79,471 42,119 88,557 63,763
</TABLE>
- - - ---------------
(1) Reflects the Distribution, the sales of one psychiatric property in October
1994 for $5.8 million and two psychiatric properties in February 1995 for
$13.8 million and the repayment of debt out of the proceeds thereof, as
though such transactions had occurred immediately prior to January 1, 1994
(in the case of operating and cash flow data) or as of December 31, 1994 (in
the case of balance sheet data). These sales were at net book value.
(2) Reflects write-downs of $30,000,000 in 1994 and $45,000,000 in 1992 relating
to investments in psychiatric hospitals.
(3) Funds From Operations as currently defined by the National Association of
Real Estate Investment Trusts and as used herein means net income (loss)
computed in accordance with GAAP, excluding gains (losses) from sales of
property, adjusted for write-downs of mortgage notes and investments in real
estate and certain other non-cash items, primarily depreciation and
amortization. Funds From Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered an
alternative to net income as an indication of the Psychiatric Group's
operating performance or an alternative to cash flow as a measure of
liquidity. The Company has historically made certain adjustments to Funds
From Operations to adjust for the impact of items which management does not
consider to be routine costs of ongoing operations ("Funds From Operations
As Adjusted"). These nonroutine items include: in 1994, targeted stock
issuance costs of $1,450,000 and reversal of accrued relocation costs of
$133,000; in 1993, litigation costs of $2,234,000 and accrued relocation
costs of $160,000; and in 1992, litigation costs of $786,000. There were no
adjustments for nonroutine items in 1991 and 1990. The following table
presents the Psychiatric Group's Funds From Operations As Adjusted.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
1994 --------------------------------------------------------
PRO FORMA(1) 1994 1993 1992 1991 1990
------------ -------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Funds From Operations As
Adjusted................ $ 8,576 $ 10,430 $ 7,560 $ 4,671 $ 8,915 $ 6,734
</TABLE>
18
<PAGE> 19
OVERVIEW
The Company is a self-administered REIT that commenced operations in 1987.
The Company has investments in health care facilities, including 13 acute care
hospitals, three rehabilitation hospitals and five psychiatric hospitals, all of
which are operated by qualified third party health care providers, and a medical
office building. As of December 31, 1994, the net book value of the Company's
assets was $565.5 million on the pro forma basis described herein.
The Company believes that investor uncertainty as to the expected cash
flows from its investments in psychiatric hospitals has depressed the market
value of the Company's Core Group Stock. In order to address this uncertainty,
the Company is (a) creating a new series of preferred stock (the Psychiatric
Group Preferred Stock) and (b) making a Distribution to its holders of Core
Group Stock of Depositary Shares, each representing one-tenth of one share of
Psychiatric Group Stock. Stockholders will receive one Depositary Share for
every ten shares of Core Group Stock held of record at the close of business on
, 1995.
By way of the issuance of Psychiatric Group Stock, the Company seeks to
separate the economic attributes of the Psychiatric Group and the Core Group
into two distinct portfolios, with two distinct classes of publicly traded
shares intended to represent those portfolios. The assets, liabilities and
expenses of the Company have been allocated between the two portfolios. In the
future, in addition to consolidated financial statements, the Company will
publish separate financial statements for each Group. Dividends and other
payouts or distributions with respect to the Core Group Stock and Psychiatric
Group Stock are expected to be a function of the individual financial
performance of the Core Group and the Psychiatric Group, respectively.
The Company anticipates that the Distribution will enhance stockholder
value by allowing the market to separately value the Core Group Stock and the
Psychiatric Group Stock and by permitting investors to make separate investment
decisions with respect to each Group. This should facilitate the Company's
ability to raise additional equity, as needed, through sales of Core Group
Stock, and should also facilitate the ability of the Company to use its Core
Group Stock to make acquisitions of health care investments for its Core Group.
Each holder of Core Group Stock or Psychiatric Group Stock will be a holder
of an issue of capital stock of the entire Company and will be subject to the
risks associated with an investment in the Company and all of its businesses,
assets and liabilities. For example, if the cash flow and proceeds of any sales
of assets of the Psychiatric Group should be insufficient to service
intercompany loans or other debt owed by the Psychiatric Group (approximately
$15.6 million at December 31, 1994 on the pro forma basis described herein), the
Core Group would be adversely affected.
The Company expects that further investments will be added to the Core
Group portfolio over time. The Company does not intend to make further
investments for the Psychiatric Group. Over time, the total assets in the
Psychiatric Group are expected to decrease, reflecting the Company's continuing
program to sell, restructure or seek other means to reduce its investment in the
psychiatric sector. The Company expects to use the Net Proceeds from Psychiatric
Group Asset Sales initially to repay then outstanding intercompany loans or
other debt owed by the Psychiatric Group and then to distribute all remaining
net proceeds, if any, to holders of Psychiatric Group Stock by dividend, tender
offer, open market or privately negotiated repurchases or otherwise (in cash, or
in Common Stock valued at a ten Trading Day average Market Value prior to the
time of the distribution).
The Board considered various alternatives to distributing targeted stock,
including sales of additional Psychiatric Group assets in the near-term or a
spin-off of the Psychiatric Group as a separate corporation. However, the Board
(a) did not believe the Company would be able to sell additional Psychiatric
Group assets in the near-term on an economically acceptable basis and (b)
recognized that a spin-off would violate various lender covenants (unless
consents were obtained) and would likely result in higher borrowing costs as
well as increased uncertainty regarding the Company's credit rating. Therefore,
upon the recommendation of management and after extensive consultation with its
financial advisors, the Board determined that the distribution of targeted stock
would be preferable to additional near-term asset sales or a spin off. At
various meetings held in 1994, management of the Company met with the Board to
discuss preliminarily the various alternatives with respect to the Psychiatric
Group, including the possible distribution of targeted stock of the
19
<PAGE> 20
Company. During this period, management consulted with the Company's financial
advisors and its outside legal counsel regarding their analyses of these
alternatives. On January 24, 1995, the Finance Committee of the Board considered
management's proposal that the Company effect the Distribution and determined to
recommend to the entire Board that management pursue such proposal. On January
25, 1995 and January 31, 1995, the Board met, reviewed the proposal and
authorized management to pursue the proposal and to file the necessary documents
with the Securities and Exchange Commission. On , 1995, the
Board met again, determined that the issuance of the Psychiatric Group Stock and
the Distribution of the Depositary Shares was in the best interests of the
Company and its stockholders and unanimously declared the Distribution.
A total of approximately 2.1 million Depositary Shares are being
distributed to holders of Core Group Stock. The Depositary Shares will be
evidenced by Depositary Receipts. Cash will be issued in lieu of fractional
Depositary Shares. Application has been made to list the Depositary Shares and
the Psychiatric Group Stock on the NYSE.
THE COMPANY
The Company, through the Core Group and Psychiatric Group, has investments
in health care facilities, including acute care hospitals, rehabilitation
hospitals and psychiatric hospitals, all of which are operated by qualified
third party health care providers, and a medical office building.
The Core Group's current portfolio of 17 facilities consists of 13 acute
care hospitals (one of which is under construction), three physical
rehabilitation hospitals and one medical office building. As of December 31,
1994, the net book value of the Core Group's assets was $514.9 million on the
pro forma basis described herein. Of the Core Group's real estate assets at that
date, 91% in net book value represented the acute care segment, 7% in net book
value represented the rehabilitation segment and 2% in net book value
represented the medical office building segment. As of December 31, 1994,
substantially all of the Core Group's real estate assets were held in fee.
The Psychiatric Group owns three Psychiatric Hospitals and has made two
mortgage loans secured by Psychiatric Hospitals. As of December 31, 1994, the
net book value of the Psychiatric Group's assets was $66.2 million on the pro
forma basis described herein. Of the Psychiatric Group's real estate assets at
that date, 36% in pro forma net book value were held in fee and 64% in pro forma
net book value were held as mortgages.
SPECIAL CONSIDERATIONS
STOCKHOLDERS OF ONE COMPANY; FINANCIAL PERFORMANCE OF ONE GROUP COULD AFFECT THE
OTHER GROUP
Notwithstanding the allocation of assets and liabilities (including
contingent liabilities), stockholders' equity and items of income, expense and
cash flow between each Group for purposes of preparing their respective
financial statements, the change in the capital structure of the Company
effected by the Psychiatric Group Stock issuance will not affect the respective
legal title to assets or responsibility for liabilities of the Company or any of
its subsidiaries. The Psychiatric Group Stock issuance will not affect the
rights of creditors of the Company or any subsidiary, including rights under
financing covenants. Each holder of Common Stock or Psychiatric Group Stock will
be a holder of an issue of capital stock of the entire Company and will be
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. For example, if the cash flow and proceeds
of any sales of assets of the Psychiatric Group should be insufficient to
service intercompany loans or other debt owed by the Psychiatric Group
(approximately $15.6 million at December 31, 1994 on the pro forma basis
described herein), the Core Group would be adversely affected.
Financial effects arising from one 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
other Group or the market price of shares relating to the other Group. In
addition, net losses of
20
<PAGE> 21
one Group, as well as dividends and distributions on, and repurchases of, Common
Stock or Psychiatric Group Stock will reduce the funds of the Company legally
available for dividends on both the Common Stock and the Psychiatric Group
Stock.
POTENTIAL CONFLICTS OF INTEREST
The issuance of Psychiatric Group Stock could give rise to occasions when
the interests of the holders of Common Stock and the holders of Psychiatric
Group Stock might diverge or appear to diverge. Examples include determinations
by the Board and, in certain circumstances, the management of the Company to (i)
pay or omit the payment of dividends on Common Stock or Psychiatric Group Stock,
(ii) allocate consideration to be received in connection with a merger or
consolidation involving the Company among holders of Common Stock and
Psychiatric Group Stock, (iii) advance or repay intercompany loans as described
below, (iv) redeem Psychiatric Group Stock or exchange it for Common Stock, (v)
approve dispositions of assets of either of the Groups and (vi) make other
operational and financial decisions with respect to one Group that could be
considered to be detrimental to the other Group. When making decisions with
regard to matters that create potential conflicts of interest, the Board will
act in accordance with the terms of the Company's Certificate of Incorporation,
management and accounting policies as described in "Management and Accounting
Policies" and its fiduciary duties. The Company's management will be responsible
for both the Core Group and the Psychiatric Group and consequently could make
management decisions with respect to one Group that could be considered
detrimental to the other. Each of the foregoing potential conflicts of interest
is discussed below:
No Assurance of Payment of Dividends. The Board's current dividend
policy is described under "Dividend Policy" below. However, the Board
could, in its sole discretion, declare and pay dividends on the Common
Stock alone, on Psychiatric Group Stock alone or on both the Common Stock
and the Psychiatric Group Stock, in equal or unequal amounts,
notwithstanding the amount of assets available for dividends on either
class of stock, the amount of prior dividends declared on either class of
stock, Funds From Operations or asset sale proceeds attributable to either
Group or any other factor. Net losses of either Group, dividends and
distributions on either Common Stock or Psychiatric Group Stock, redemption
of Common Stock or Psychiatric Group Stock and repurchases of Common Stock
or Psychiatric Group Stock would reduce the funds of the Company legally
available for dividends on both the Common Stock and the Psychiatric Group
Stock.
Allocation of Consideration to be Received in Mergers or
Consolidations. No class vote of holders of Psychiatric Group Stock will
be required upon a merger or consolidation if the type and amount of
consideration therefor is divided between holders of Psychiatric Group
Stock and holders of Common Stock in a manner determined to be fair by the
Board (whose determination shall be conclusive). In any such merger or
consolidation, the division of consideration under the method used by the
Board might be materially different from such division had the Board chosen
a different method. In addition, no class vote of holders of Psychiatric
Group Stock will be required upon a merger or consolidation if the
Psychiatric Group Stock remains outstanding and unchanged as a result of
the merger or consolidation or the Psychiatric Group Stock is converted
into capital stock of the surviving company to the merger or consolidation
having terms substantially similar to the terms of the Psychiatric Group
Stock. As a result, the consideration to be received by the holders of
Psychiatric Group Stock in any such merger or consolidation might be
materially less valuable than the consideration such holders would have
received had the approval of the holders of a majority of Psychiatric Group
Stock been required.
Advancement or Repayment of Intercompany Loans. The Board could, in
its sole discretion, from time to time, decide to advance or repay
intercompany loans between the Groups, or not to advance or repay
intercompany loans between the Groups, and such advancement or repayment
(or refusal to advance or repay) could have disproportionate effects on the
Core Group and Psychiatric Group. See "Management and Accounting Policies"
below.
Optional Redemption or Exchange of Psychiatric Group Stock. The
Company may, at any time commencing one year after the date of the
Distribution and in its sole discretion, redeem all outstanding
21
<PAGE> 22
shares of Psychiatric Group Stock for cash or in exchange for newly issued
shares of Common Stock at a 15% premium (i.e. for cash in an amount, or in
exchange for newly issued shares of Common Stock having an aggregate value
(based on a ten Trading Day average Market Value prior to the exchange),
equal to 115% of the ten Trading Day average Market Value of the shares of
Psychiatric Group Stock being redeemed). If at any time commencing one year
after the date of the Distribution, the Fair Market Value of the assets
(other than cash, deposits and readily marketable securities) of the
Psychiatric Group (as determined by the Board, whose determination shall be
conclusive) is less than $10,000,000, the Company may, in its sole
discretion, redeem all outstanding shares of Psychiatric Group Stock for
cash in an amount, or in exchange for newly issued shares of Common Stock
having an aggregate value (based on a ten Trading Day average Market Value
prior to the exchange), equal to 105% of the Net Fair Market Value of the
Psychiatric Group (as determined by the Board, whose determination shall be
conclusive). In either instance, the redemption or exchange could be
disadvantageous to the holders of the Common Stock or the Psychiatric Group
Stock. See "-- Potential Effects of Exchange or Redemption of Psychiatric
Group Stock" below.
Dispositions of Psychiatric Group Assets. The Board may, in its sole
discretion and without stockholder approval, approve sales and other
dispositions of any amount of the properties and assets of the Psychiatric
Group since Delaware law requires stockholder approval only for a sale or
other disposition of all or substantially all of the properties and assets
of the entire Company. Over time the total assets in the Psychiatric Group
are expected to decrease reflecting the Company's ongoing program to sell,
restructure or seek other means to reduce its investment in the psychiatric
sector. See "Dividend Policy." There can be no assurance as to the timing
of any such asset sales or that upon the disposition of Psychiatric Group
assets the Company would realize net proceeds equal to the book value
thereof.
Operational and Financial Decisions. The Board could, in its sole
discretion, from time to time, make operational and financial decisions
that affect disproportionately the businesses of the Core Group and
Psychiatric Group, such as the allocation of funds for capital expenditures
and the payment of dividends. The Company's management is responsible for
both the Core Group and the Psychiatric Group and could make similar
decisions. For further discussion of potential conflicts of interest
arising from financial decisions, see "-- Initial Allocation of Debt;
Intercompany Loans" below.
FIDUCIARY DUTIES OF THE BOARD OF DIRECTORS
Principles of Delaware law established in cases involving differing
treatment of two classes of capital stock provide that a board of directors owes
an equal duty to all stockholders regardless of class or series and does not
have separate or additional duties to either group of stockholders. Although the
Company is not aware of any precedent involving the fiduciary duties of
directors of corporations in relation to separate classes or series of capital
stock the rights of which are defined by reference to specified operations of
the corporation, under the principles of Delaware law referred to above and the
"business judgment rule," the Board should be protected in acting with respect
to matters having disparate impacts upon holders of Common Stock and holders of
Psychiatric Group Stock so long as it is disinterested and adequately informed
with respect to such matters and acts in good faith.
Disproportionate ownership interests of members of the Board in Common
Stock or Psychiatric Group Stock or disparate values of Common Stock and
Psychiatric Group Stock could create or appear to create potential conflicts of
interest when directors are faced with decisions that might have different
implications for holders of Common Stock and holders of Psychiatric Group Stock.
See "-- Potential Conflicts of Interest" above. Nevertheless, the Company
believes that a director would be able to discharge his or her fiduciary
responsibilities even if his or her interests in shares of Common Stock and
Psychiatric Group Stock were disproportionate and/or had disparate values.
INITIAL ALLOCATION OF DEBT; INTERCOMPANY LOANS
All third party debt of the Company ($231.8 million at December 31, 1994 on
the pro forma basis described herein) has been attributed to the Core Group in
the financial statements set forth herein. However,
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the Psychiatric Group has been attributed (a) fixed rate intercompany loans
owing to the Core Group in an amount at December 31, 1994 determined by the
Board to be appropriate in relation to the assets and expected cash flow of the
Psychiatric Group ($9.2 million on such pro forma basis) and (b) revolving
intercompany loans owing to the Core Group in an amount at December 31, 1994
equal to the working capital notes receivable from certain psychiatric hospital
operators owing to the Psychiatric Group at that date ($6.4 million on such pro
forma basis).
If the Psychiatric Group is unable to repay any intercompany loans owed to
the Core Group, the Core Group would be adversely impacted. See "Special
Considerations -- Psychiatric Group." For this and other reasons, the Board has
established the following policies relating to the amount of intercompany loans
and required repayments thereof:
(a) the aggregate revolving intercompany loans owed by the Psychiatric
Group to the Core Group will be limited to a maximum of $10,000,000 at
any one time outstanding, subject to reduction of such limit
commensurate with any permanent repayment in the future of working
capital loans extended to Psychiatric Hospital operators, but in no
event will such limit be reduced below $5,000,000;
(b) except as permitted by (a) above, no additional fixed rate or other
intercompany loans will be advanced by the Core Group to the
Psychiatric Group;
(c) if the Psychiatric Group sells any assets out of the ordinary course,
the Net Proceeds from Psychiatric Group Asset Sales will be applied,
first, to repay revolving intercompany loans owed by the Psychiatric
Group to the Core Group to the extent of the psychiatric hospital
operator working capital loans associated with the asset or assets
sold, second, to repay fixed rate intercompany loans owed by the
Psychiatric Group to the Core Group (until repaid in full), and third,
to repay other revolving intercompany loans owed by the Psychiatric
Group to the Core Group (until repaid in full), before any remaining
Net Proceeds from Psychiatric Group Asset Sales may be used to make
distributions to holders of Psychiatric Group Stock as described under
"Dividend Policy"; and
(d) excess cash held by the Psychiatric Group (other than Net Proceeds from
Psychiatric Group Asset Sales, which will be treated as described in
(c) above) will be applied to reduce revolving intercompany loans owed
by the Psychiatric Group to the Core Group (until repaid in full),
subject to the ability of the Psychiatric Group, at the option of the
Board, to re-borrow cash from the Core Group up to the limitations
described in (a) above to cover future cash needs of the Psychiatric
Group (including, without limitation, to fund dividends in a manner
consistent with the dividend policy then applicable to the Psychiatric
Group Stock).
For information concerning certain additional policies relating to intercompany
loans established by the Board and the Board's power to change policies, see
"Management and Accounting Policies."
Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group if the Board determines it is in
the best interests of the Company not to do so. See "Management and Accounting
Policies."
LIMITED STOCKHOLDER VOTING RIGHTS
Subject to certain limited exceptions, holders of Common Stock, Psychiatric
Group Stock and any other series of Preferred Stock outstanding at the time of
such vote and so entitled to vote will vote as one class on all matters coming
before any meeting of stockholders. Holders of Common Stock and Psychiatric
Group Stock will not have any right to vote on matters as a separate class
(except pursuant to certain limited class voting rights provided under Delaware
law and, in limited circumstances, in connection with a merger or consolidation
of the Company with or into another company). Similarly, separate meetings for
the holders of Common Stock or Psychiatric Group Stock will not be held.
Certain matters as to which the holders of Common Stock and Psychiatric
Group Stock are entitled to vote may involve a divergence or the appearance of a
divergence of the interests of holders of Common Stock and Psychiatric Group
Stock. Holders of Common Stock will likely be entitled to a substantial majority
of the
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total votes to which the then outstanding voting stock of the Company is
entitled. See "-- Potential Conflicts of Interest" and "Description of Capital
Stock of the Company -- Voting Rights."
POSSIBILITY THAT PSYCHIATRIC GROUP STOCKHOLDERS WILL RECEIVE NO PREMIUM IF
COMPANY IS ACQUIRED
The terms of the Psychiatric Group Stock do not provide any separate class
vote to holders of Psychiatric Group Stock to approve a merger or consolidation
if (a) the Psychiatric Group Stock remains outstanding and unchanged as a result
of the merger or consolidation, (b) the type and amount of consideration for
such merger or consolidation is divided between holders of Psychiatric Group
Stock and holders of Common Stock in a manner determined to be fair by the Board
(whose determination shall be conclusive) or (c) the Psychiatric Group Stock is
converted into capital stock of the surviving company to the merger or
consolidation having terms substantially similar to the terms of the Psychiatric
Group Stock. If the Company is acquired in a merger or consolidation in which
holders of Common Stock receive a premium, holders of Psychiatric Group Stock
may be required to continue to hold their existing shares (under clause (a)
above) or receive substantially similar shares (under clause (c) above) and may
thereby receive no premium in connection with such acquisition.
LIMITED STOCKHOLDER APPROVAL RIGHTS FOR FUTURE ISSUANCES OF STOCK
The Company will not solicit the approval of the holders of Psychiatric
Group Stock or Common Stock for the issuance from the authorized but unissued
shares of Common Stock and Preferred Stock of the Company of additional shares
of Common Stock or of a newly designated series of Preferred Stock (unless such
approval is deemed advisable by the Board or is required by stock exchange
regulations or such issuance would require amendment of the Company's
Certificate of Incorporation). The Company does not intend to issue any further
Psychiatric Group Stock except upon exercise of options granted in connection
with the Distribution. See "Stock Incentive Plans" below.
MANAGEMENT AND ACCOUNTING POLICIES SUBJECT TO CHANGE
The Board has adopted certain management and accounting policies described
herein with respect to intercompany loans, cash management, corporate expenses,
allocation of assets and liabilities (including contingent liabilities) and
inter-Group transactions, any and all of which could be modified or rescinded in
the sole discretion of the Board without the approval of stockholders, although
there is no present intention to do so. The Board could also adopt additional
policies depending upon the circumstances. Any determination by the Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that could have disparate effects upon holders of Common Stock and
Psychiatric Group Stock, will be made by the Board in good faith and in the
honest belief that such decision is in the best interests of the Company's
stockholders, including holders of Common Stock and Psychiatric Group Stock. In
addition, generally accepted accounting principles would require that changes in
accounting principles must be preferable (in accordance with generally accepted
accounting principles) to the principles previously in place. See "Management
and Accounting Policies."
POTENTIAL EFFECTS OF EXCHANGE OR REDEMPTION OF PSYCHIATRIC GROUP STOCK
The terms of the Psychiatric Group Stock permit the exchange or redemption
of all such stock for Common Stock or cash upon the terms described under
"Description of Capital Stock of the Company -- Exchange and Redemption." Since
such exchange or redemption may be at a premium to the then current market price
of the Psychiatric Group Stock, and since the Board could determine to effect
such an exchange or redemption at a time when either or both the Common Stock
and the Psychiatric Group Stock may be considered to be overvalued or
undervalued, the exchange or redemption could be disadvantageous to the holders
of the Common Stock or the Psychiatric Group Stock. In addition, any such
exchange would preclude holders of Common Stock and Psychiatric Group Stock from
retaining their investment in a security that is intended to reflect separately
the performance of their respective Groups.
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NO ASSURANCE AS TO MARKET PRICE
It is not possible to predict the impact of the issuance of the Psychiatric
Group Stock on the market price of the Common Stock and there can be no
assurance that the market prices of the Psychiatric Group Stock and Common Stock
will together exceed the market price for the Common Stock prior to the
Distribution. The market prices of the Common Stock and the Psychiatric Group
Stock will be determined in the trading markets and could be influenced by many
factors, including the consolidated results of the Company, as well as the
respective performances of the Core Group and the Psychiatric Group, investors'
expectations for the Company as a whole, the Core Group and the Psychiatric
Group, trading volume and general economic and market conditions. There can be
no assurance that investors will assign values to the Common Stock and
Psychiatric Group Stock based on the reported financial results and prospects of
the Core Group and Psychiatric Group, respectively, or the dividend policies
established by the Board with respect to each Group. Accordingly, financial
results of one Group that affect the Company's consolidated results of
operations or financial condition could affect the market price of shares of
both the Common Stock and the Psychiatric Group Stock. In addition, the Company
cannot predict the impact on the market price of the Common Stock and
Psychiatric Group Stock of certain terms of the Psychiatric Group Stock, such as
the ability of the Company to exchange or redeem Psychiatric Group Stock, the
discretion of the Board to make various determinations and the minority voting
power of the Psychiatric Group Stock.
LIMITATIONS ON POTENTIAL UNSOLICITED ACQUISITIONS
If the Psychiatric Group were a separate independent company, any person
interested in acquiring that Group without negotiation with management could
seek control of that Group by obtaining control of its outstanding voting stock.
By contrast, a person interested in acquiring only the Psychiatric Group without
negotiation with the Company's management would likely be able to do so only by
obtaining majority control of the Common Stock. Other limitations apply to
acquisitions of the Company's capital stock. See "Description of Capital Stock
of the Company."
PSYCHIATRIC GROUP
Psychiatric Hospital Trends. Fundamental changes in the psychiatric
industry continue to negatively impact the facility-specific operating cash flow
at the Psychiatric Hospitals. 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 revenue. 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. For example,
as the inpatient length of stay has decreased, offset by an increased number of
admissions in some cases, the costs of performing initial testing and other
administrative procedures associated with each admission have increased. As a
result, certain of the Psychiatric Hospital operators have had difficulty
meeting their payment obligations to the Company on a timely basis and there can
be no assurance that they will be able to meet their payment obligations in the
future.
Lack of Third-Party Working Capital Financing. The Company has provided
working capital loans to the operators of four of the Psychiatric Hospitals. As
of December 31, 1994, outstanding working capital loans totalled $9.4 million
($6.4 million on the pro forma basis described herein). The Company has
committed to make an additional $1.15 million of such working capital loans upon
request, subject to certain conditions. These working capital loans, 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
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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 working capital loans provided by
the Company or to secure replacement loans 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 Board determines that it is appropriate to provide additional working
capital financing to a Psychiatric Hospital, it may cause the Core Group to make
revolving intercompany loans to the Psychiatric Group to fund such financing (to
the extent consistent with its then existing policies), although the Board is
under no obligation to do so. See "Management and Accounting Policies."
Write-downs and Restructurings. In 1992, the Company recorded a $45
million 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 million
write-down of investments in the psychiatric hospitals. Although management
believes that the recorded investments in the 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.
Licensing and Certificate of Need Requirements. In order to operate, the
Psychiatric Hospitals are required to have both a license and a certificate of
need issued by the appropriate State health care regulatory authority. The
license and the certificate of need are obtained by the operator of the
facility. In the event one of the Psychiatric Hospitals were to default on its
obligations to the Company and the Company were to attempt to remove the current
operator, it is uncertain whether the Company would be able to maintain the
existing license and certificate of need or whether the Company would have to
apply for a new license and certificate of need in order to continue to operate
the facility as a psychiatric hospital. Moreover, if upon a default, the Company
were to try to convert the Psychiatric Hospital to an alternative health care
use, a new license and certificate of need may be required. Because the issuance
of a license and certificate of need is a regulatory process and is subject to
the discretion of state regulatory authorities, there can be no assurance that
the Company would be successful in obtaining such or that the process would not
take a significant period of time. In view of the foregoing, the Company's
ability to bring in a replacement operator for a Psychiatric Hospital or to
convert a Psychiatric Hospital to an alternative health care use may be
significantly restricted and could thus cause an impairment in the value of the
facility and/or a significant interruption in the cash flow from the facility.
Difficulty in Disposing of Psychiatric Group Assets. The Company has
announced its intention to sell, restructure or seek other means to reduce its
investment in the psychiatric sector. However, there can be no assurance as to
the timing of any such actions or that upon the disposition of a Psychiatric
Group asset, the Company would realize net proceeds equal to the book value of
such asset. Over the past twelve months, the Company has sold three of the
Psychiatric Group hospitals but has not been able to sell the remainder of the
Psychiatric Group portfolio on a basis management deemed economically
acceptable. The Company does not believe it will be able to sell additional
Psychiatric Group assets on such basis in the near term and is uncertain when
market conditions and other factors will enable it to do so.
FINANCIAL COVENANTS
As of December 31, 1994, the Company had outstanding debt of $245.7 million
($231.8 million on the pro forma basis described herein). Financial covenants in
its various debt agreements require the Company to maintain certain financial
ratios, including (i) a minimum tangible net worth of $260 million plus 75% of
certain equity proceeds and (ii) a fixed charge coverage ratio of at least 1.85
to 1. As of December 31, 1994, on an historical basis the Company's tangible net
worth of approximately $305.5 million and fixed charge coverage ratio of 2.81 to
1 would have satisfied such tests. Such debt agreements also limit the amount of
outstanding indebtedness, and certain other financings, of the Company, and
require that specified ratios of
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liabilities to tangible net worth and asset values be maintained. Such debt
covenants further limit the payment of dividends and other distributions to
stockholders, including making funds available to stockholders through the
purchase, redemption or retirement of capital stock. This restriction on
dividends and other distributions applies to both the Common Stock and the
Psychiatric Group Stock and, in general, limits such payments to 95% of
consolidated cash flow available for debt service, less interest expense, plus
gains on asset dispositions and plus certain proceeds ("PG Excess Proceeds")
from the disposition of Psychiatric Group assets after the repayment of
Psychiatric Group indebtedness. Dividends or other distributions paid out of PG
Excess Proceeds will be available only for the Psychiatric Group Stock and will
be limited to $30 million in the aggregate and $15 million in any calendar year.
As of December 31, 1994, under the most restrictive of these limitations, in
addition to distributions that may be paid out of PG Excess Proceeds, the
Company could have declared and paid aggregate dividends or other distributions
to its stockholders of $21.7 million in addition to the dividends already
declared through that date. These covenants in various debt agreements may limit
the financial flexibility of the Company as well as its ability to pay
dividends, or otherwise make funds available to stockholders (for example
through redemptions or repurchases of stock), in the future. However, dividends
or other distributions that are payable in the form of stock are generally not
restricted. In addition, if the Company borrows additional funds in the future,
or refinances existing debt obligations, it is expected that the Company will
agree to financial covenants which could be more or less restrictive than those
referred to above. For additional information on the Company's debt and the
provisions of its debt agreements, see the notes to the Company's consolidated
financial statements, as well as the corresponding notes to the financial
statements of the Core Group and the Psychiatric Group, included elsewhere
herein.
DIVIDEND POLICY
The Company expects to declare quarterly dividends on the Common Stock and
the Psychiatric Group Stock in the future based primarily upon the Funds From
Operations attributable to the Core Group and the Psychiatric Group,
respectively. Specifically, the Company expects to maintain the Common Stock
dividend payout ratio at less than 90% of Funds From Operations attributable to
the Core Group and the Psychiatric Group Stock dividend payout ratio (excluding
distributions out of asset sale proceeds) at less than 95% of Funds From
Operations attributable to the Psychiatric Group.
In addition, the Company expects to use the Net Proceeds from Psychiatric
Group Asset Sales initially to repay then outstanding intercompany loans or
other debt owed by the Psychiatric Group and then to distribute all remaining
net proceeds, if any, to holders of Psychiatric Group Stock by dividend, tender
offer, open market or privately negotiated repurchases or otherwise (in cash, or
in Common Stock valued at a ten Trading Day average Market Value prior to the
time of the distribution).
The payment of dividends on the Common Stock and Psychiatric Group Stock
will also be dependent in part upon the financial condition of the Company as a
whole.
The Company expects the aggregate annual dividends paid on the Common Stock
and the Psychiatric Group Stock to be at least sufficient to cause the Company
to maintain its status as a REIT. In order to permit the Company to qualify as a
REIT, the Company must distribute to stockholders at least 95% of its annual
REIT taxable income (which essentially is its net ordinary income, excluding
capital gains). Generally, as a result of non-cash items, primarily
depreciation, cash dividends have exceeded and may continue to exceed the
Company's REIT taxable income and to that extent represent a return of capital.
Dividends on the Common Stock and Psychiatric Group Stock will be limited
to the Available Dividend Amount attributable to the Core Group and the
Psychiatric Group, respectively. Assuming the Distribution had occurred on
December 31, 1994, the Available Dividend Amount attributable to the Core Group
and the Psychiatric Group as of that date would have been at least $259.0
million and $48.3 million, respectively. The Available Dividend Amount is
similar to the amount that would be legally available under Delaware law for the
payment of dividends by the Core Group or the Psychiatric Group, as the case may
be, if such Group were a separate Delaware corporation. There can be no
assurance that there will be an Available Dividend Amount with respect to either
Group. All dividends on Common Stock will be deemed to be out of the Core
Group's funds and all dividends on Psychiatric Group Stock will be deemed to be
out of the Psychiatric Group's funds.
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Dividends on the Common Stock and the Psychiatric Group Stock will be
further limited to the amount of funds of the Company legally available under
Delaware law for the payment of dividends by the Company on its capital stock.
Assuming the Distribution had occurred on December 31, 1994, the funds of the
Company legally available for the payment of dividends would have been at least
$307.3 million. Payments of dividends on either the Common Stock or the
Psychiatric Group Stock will decrease the amount of funds legally available for
the payment of dividends on both the Common Stock and the Psychiatric Group
Stock.
See also "Special Considerations -- Financial Covenants" above.
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MANAGEMENT AND ACCOUNTING POLICIES
The Company will prepare financial statements in accordance with generally
accepted accounting principles, consistently applied, for both of the Groups,
and these financial statements, taken together, will comprise all of the
accounts included in the corresponding consolidated financial statements of the
Company. The financial statements of each Group principally reflect the
investments included therein. Such Group financial statements could also include
allocated portions of the Company's corporate assets, liabilities (including
contingent liabilities), stockholders' equity and items of income, expense and
cash flow that are not separately identified with the operations of the other
Group. Notwithstanding such allocations for the purpose of preparing Group
financial statements, each holder of Common Stock or Psychiatric Group Stock
will be a holder of an issue of capital stock of the entire Company and will be
subject to risks associated with an investment in the entire Company and all of
its businesses, assets and liabilities. See "Special
Considerations -- Stockholders of One Company; Financial Performance of One
Group Could Affect the Other Group" above.
Cash management and allocation of principal corporate activities between
the Psychiatric Group and the Core Group will be based upon methods that
management believes to be reasonable and will be reflected in their respective
Group financial statements. The following is a summary of certain policies
adopted by the Board and relating to these matters.
(i) All third party debt of the Company ($231.8 million at December
31, 1994 on the pro forma basis described herein) has been attributed to
the Core Group in the financial statements set forth herein. However, the
Psychiatric Group has been attributed (a) fixed rate intercompany loans
owing to the Core Group in an amount at December 31, 1994 determined by the
Board to be appropriate in relation to the assets and expected cash flow of
the Psychiatric Group ($9.2 million on such pro forma basis) and (b)
revolving intercompany loans owing to the Core Group in an amount at
December 31, 1994 equal to the working capital notes receivable from
certain psychiatric hospital operators owing to the Psychiatric Group at
that date ($6.4 million on such pro forma basis).
(ii) Cash needs of the Psychiatric Group in excess of cash held by
the Psychiatric Group may, at the option of the Board, be funded by
advances from the Core Group to the Psychiatric Group constituting
additional revolving intercompany loans, but the aggregate revolving
intercompany loans owed by the Psychiatric Group to the Core Group will be
limited to a maximum of $10,000,000 at any one time outstanding, subject to
reduction of such limit commensurate with any permanent repayment in the
future of working capital loans extended to Psychiatric Hospital operators,
but in no event will such limit be reduced below $5,000,000.
(iii) Except as permitted by (ii) above, no additional fixed rate or
other intercompany loans will be advanced by the Core Group to the
Psychiatric Group.
(iv) All third party debt incurred by the Company and its
subsidiaries will be specifically attributed to and reflected on the
financial statements of the Core Group except for debt that is non-recourse
to the assets of the Core Group.
(v) All Common Stock and any other class or series of stock of the
Company other than the Psychiatric Group Stock, as well as the net proceeds
of any future issuances thereof, will be specifically attributed to and
reflected on the financial statements of the Core Group.
(vi) If the Psychiatric Group sells any assets out of the ordinary
course, the Net Proceeds from Psychiatric Group Asset Sales will be
applied, first, to repay revolving intercompany loans owed by the
Psychiatric Group to the Core Group to the extent of the psychiatric
hospital operator working capital loans associated with the asset or assets
sold, second, to repay fixed rate intercompany loans owed by the
Psychiatric Group to the Core Group (until repaid in full), and third, to
repay other revolving intercompany loans owed by the Psychiatric Group to
the Core Group (until repaid in full), before any remaining Net Proceeds
from Psychiatric Group Asset Sales may be used to make distributions to
holders of Psychiatric Group Stock as described under "Dividend Policy."
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(vii) Excess cash held by the Psychiatric Group (other than Net
Proceeds from Psychiatric Group Asset Sales, which will be treated as
described in (vi) above) will be applied to reduce revolving intercompany
loans owed by the Psychiatric Group to the Core Group (until repaid in
full), subject to the ability of the Psychiatric Group, at the option of
the Board, to re-borrow cash from the Core Group up to the limitations
described in (ii) above to cover future cash needs of the Psychiatric Group
(including, without limitation, to fund dividends in a manner consistent
with the dividend policy then applicable to the Psychiatric Group Stock).
(viii) Fixed rate intercompany loans owed by the Psychiatric Group to
the Core Group will (a) bear interest at a fixed rate of approximately 13%
per annum (which is equal to the weighted average interest rate on the
Company's fixed rate senior debt at December 31, 1994, plus 2%) and (b) be
prepayable without premium at any time, at the option of the Board;
(ix) Revolving intercompany loans owed by the Psychiatric Group to
the Core Group will (a) bear interest at a floating rate equal from time to
time to the prevailing prime rate (as determined by the Board, whose
determination shall be conclusive) plus 2% (which would have been equal to
10.5% per annum at December 31, 1994) and (b) be prepayable without premium
at any time, at the option of the Board.
(x) Cash held by the Psychiatric Group in excess of intercompany
loans owed by the Psychiatric Group required to be repaid as set forth in
(vi) and (vii) above may, at the option of the Board, be advanced to the
Core Group as revolving intercompany loans (to the extent such cash can be
beneficially put to use by the Core Group) or otherwise invested on behalf
of the Psychiatric Group.
(xi) Revolving intercompany loans owed by the Core Group to the
Psychiatric Group will (a) bear interest at a floating rate equal from time
to time to the weighted average interest rate borne by the Company's
revolving debt (or, for periods in which there is no such revolving debt
outstanding, the interest rate at which the Company could borrow on a
revolving basis, as determined by the Board, whose determination shall be
conclusive) and (b) be prepayable without premium at any time, at the
option of the Board.
(xii) As a result of the foregoing, the balance sheet of the Core
Group will reflect its net revolving and net fixed rate intercompany loans
to or borrowings from the Psychiatric Group, and the balance sheet of the
Psychiatric Group will reflect its net revolving and net fixed rate
intercompany loans to or borrowings from the Core Group. Similarly, the
respective income statements of the Core Group and the Psychiatric Group
will reflect interest income or expense, as the case may be, associated
with such loans or borrowings and the respective statements of cash flows
of the Core Group and the Psychiatric Group will reflect changes in the
amounts thereof deemed outstanding.
(xiii) Corporate, general and administrative costs that cannot be
directly allocated to either Group will be allocated between the Core Group
and the Psychiatric Group on the basis of their respective contributions to
revenue, provided that at no time will such expenses allocated to either
Group be less than $250,000 per annum.
Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group if the Board determines it is in
the best interests of the Company not to do so. The foregoing policies may be
modified or rescinded in the sole discretion of the Board without the approval
of stockholders, although there is no present intention to do so. The Board
could also adopt additional policies depending upon the circumstances. Any
determination by the Board to modify or rescind such policies, or to adopt
additional policies, including any such decision that could have disparate
effects upon holders of Common Stock and Psychiatric Group Stock, would be made
by the Board in the good faith belief that such decision is in the best
interests of the Company and its stockholders, including the holders of Common
Stock and Psychiatric Group Stock. In addition, generally accepted accounting
principles would require that changes in accounting principles must be
preferable (in accordance with generally accepted accounting principles) to the
principles previously in place.
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FURTHER INFORMATION WITH RESPECT TO THE COMPANY,
CORE GROUP AND PSYCHIATRIC GROUP
See Annex A hereto for five year selected financial data, management's
discussion and analysis of financial condition and results of operations and
financial statements for the Company. See Annexes B and C hereto for business
and property descriptions, five year selected financial data, management's
discussion and analysis of financial condition and results of operations and
financial statements for the Core Group and Psychiatric Group, respectively.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The following description is intended as a summary of the principal
provisions of, and is qualified in all respects by reference to, (a) the
Company's Certificate of Incorporation and Bylaws previously filed with the
Securities and Exchange Commission and (b) the Certificate of Designations
specifying the terms of the Psychiatric Group Stock, a form of which is filed as
Exhibit 4.3 to the Registration Statement on Form 8-A of which this Information
Statement forms a part.
GENERAL
The Certificate of Incorporation of the Company provides that the Company
is authorized to issue 25,000,000 shares of Common Stock, par value $0.01 per
share, and 1,000,000 shares of Preferred Stock, par value $0.01 per share,
issuable in series by the Board. As of December 31, 1994, the Company had issued
and outstanding 20,851,000 shares of Common Stock. No shares of Preferred Stock
were issued or outstanding, but the Company had authorized the issuance of
approximately 232,000 Series A Preferred Shares (hereinafter defined), which
constitute a series of the Company's Preferred Stock, as part of its Preferred
Stock Purchase Rights Plan. See "-- Preferred Stock Purchase Rights Plan" below.
The Company is issuing approximately 210,000 shares of Psychiatric Group Stock,
which constitutes a separate series of the Company's Preferred Stock, in
connection with the Distribution. Such shares are the only shares of Psychiatric
Group Stock authorized by the Board to be issued, except shares of Psychiatric
Group Stock issuable upon exercise of options granted in connection with the
Distribution.
The authorized but unissued shares of Common Stock and Preferred Stock of
the Company will be available for issuance from time to time by the Company at
the sole discretion of the Board for any proper corporate purpose, which could
include raising capital, providing compensation or benefits to employees, paying
stock dividends or acquiring companies or businesses. The Preferred Stock may be
issued in such series and with such voting powers, and such preferences or other
special rights, qualifications, limitations or restrictions, as may be stated
and expressed in the resolutions authorizing its issuance as may be adopted by
the Board from time to time. Under applicable Delaware law, such future
issuances of Common Stock or Preferred Stock would not require further approval
of stockholders, and the Company would not seek approval of stockholders unless
such approval would be required by stock exchange regulations, would be in
conjunction with a further amendment to the Certificate of Incorporation or
would otherwise be deemed advisable by the Board.
DIVIDENDS
Dividends may be paid on the Common Stock and/or the Psychiatric Group
Stock in equal or unequal amounts, when, as and if declared by the Board.
Dividends on the Common Stock and Psychiatric Group Stock will be limited to the
Available Dividend Amount attributable to the Core Group and the Psychiatric
Group, respectively. Assuming the Distribution had occurred on December 31,
1994, the Available Dividend Amount attributable to the Core Group and the
Psychiatric Group as of that date would have been at least $259.0 million and
$48.3 million, respectively. The Available Dividend Amount is similar to the
amount that would be legally available under Delaware law for the payment of
dividends by the Core Group or Psychiatric Group, as the case may be, if such
Group were a separate Delaware corporation. There can be no assurance that there
will be an Available Dividend Amount with respect to either Group.
Dividends on the Common Stock and the Psychiatric Group Stock will be
further limited to the amount of funds of the Company legally available under
Delaware law for the payment of dividends by the Company on its capital stock.
Assuming the Distribution had occurred on December 31, 1994, the funds of the
Company legally available for the payment of dividends would have been at least
$307.3 million. Payments of dividends on either the Common Stock or the
Psychiatric Group Stock will decrease the amount of funds legally available for
the payment of dividends on both the Common Stock and the Psychiatric Group
Stock.
See also "Special Considerations -- Financial Covenants."
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EXCHANGE AND REDEMPTION
Common Stock. The Certificate of Incorporation does not provide for either
mandatory or optional conversion, exchange or redemption rights relating to
outstanding shares of Common Stock.
Psychiatric Group Stock. The Company may, at any time commencing one year
after the date of the Distribution and in its sole discretion, redeem all
outstanding shares of Psychiatric Group Stock for cash in an amount, or in
exchange for newly issued shares of Common Stock having an aggregate value
(based on the average Market Value for the ten consecutive Trading Days ending
on the last Trading Day prior to the date on which notice of such exchange is
mailed to holders of Psychiatric Group Stock), equal to 115% of the average
Market Value during such ten Trading Day period of the shares of Psychiatric
Group Stock being redeemed.
If at any time commencing one year after the date of the Distribution, the
Fair Market Value of the assets (other than cash, deposits and readily
marketable securities) of the Psychiatric Group (as determined by the Board,
whose determination shall be conclusive) is less than $10,000,000, the Company
may, in its sole discretion, redeem all outstanding shares of Psychiatric Group
Stock for cash in an amount, or in exchange for newly issued shares of Common
Stock having an aggregate value (based on the average Market Value for the ten
consecutive Trading Days ending on the last Trading Day prior to the date on
which notice of such exchange is mailed to holders of Psychiatric Group Stock),
equal to 105% of the Net Fair Market Value of the Psychiatric Group (as
determined by the Board, whose determination shall be conclusive).
In the event of any exchange or redemption described above, the Company
will promptly cause to be given to each holder of record of Psychiatric Group
Stock to be so exchanged or redeemed, a notice setting forth (A) a statement
that such Psychiatric Group Stock will be exchanged or redeemed, as the case may
be, (B) the Exchange Date or the Redemption Date, as the case may be, (C) the
amount of Common Stock and/or cash to be distributed to such holder with respect
to each share of such Psychiatric Group Stock, including details as to the
calculation thereof, (D) the place or places where certificates for shares of
Psychiatric Group Stock, properly endorsed or assigned for transfer (unless the
Company waives such requirement), should be surrendered for delivery of
certificates for shares of Common Stock and/or cash and (E) a statement to the
effect that dividends on shares of such Psychiatric Group Stock will cease to be
paid as of such Exchange Date or Redemption Date, as the case may be. Such
notice will be sent by first-class mail, postage prepaid, not less than 20 nor
more than 60 days prior to the Exchange Date or Redemption Date, as the case may
be, and, in any case, to each holder of record of outstanding shares of
Psychiatric Group Stock at such holder's address as the same appears on the
stock transfer books of the Company. Neither the failure to mail such notice to
any particular holder of shares of Psychiatric Group Stock nor any defect
therein will affect the sufficiency thereof with respect to any other holder of
outstanding shares of Psychiatric Group Stock.
No adjustments in respect of dividends on the Psychiatric Group Stock or
Common Stock will be made upon the exchange or redemption of any shares of
Psychiatric Group Stock; provided, however, that if the Exchange Date or
Redemption Date therefor is after the record date for determining holders of
such Psychiatric Group Stock entitled to any dividend or distribution thereon,
such dividend or distribution will be payable to the holders of such shares at
the close of business on such record date notwithstanding such exchange or
redemption, in each case without interest.
Before any holder of Psychiatric Group Stock will be entitled to receive
certificates representing shares of Common Stock and/or cash to be distributed
to such holder with respect to any exchange or redemption of shares of
Psychiatric Group Stock, such holder will be required to surrender at such place
as the Company specifies certificates for shares of Psychiatric Group Stock,
properly endorsed or assigned for transfer (unless the Company waives such
requirement). As soon as practicable after the Company's receipt of certificates
for such shares of Psychiatric Group Stock, the Company will deliver to the
person for whose account such shares are so surrendered, or to the nominee or
nominees of such person, certificates representing the number of whole shares of
Common Stock and/or cash to which such person is entitled, together with any
fractional payment referred to below, in each case without interest.
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The Company will not be required to issue or deliver fractional shares of
Common Stock to any holder of Psychiatric Group Stock upon any exchange or
redemption described above. If more than one share of Psychiatric Group Stock
are held at the same time by the same holder, the Company may aggregate the
number of shares of Common Stock that would be issuable upon any such exchange
or redemption (including any fractional shares). If there are fractional shares
of Common Stock remaining to be issued or distributed to any holder of any
Psychiatric Group Stock, the Company will, if such fractional shares are not
issued or distributed to such holder, pay cash in respect of such fractional
shares in an amount equal to the fair market value of such fractional shares on
the fifth Trading Day prior to the date such payment is to be made (without
interest). For purposes of the preceding sentence, "fair market value" of any
fraction of a share means the product of such fraction and the Market Value of
one share of Common Stock.
From and after the Exchange Date or Redemption Date for any exchange or
redemption of shares of Psychiatric Group Stock, all rights of a holder of
shares of Psychiatric Group Stock that are exchanged or redeemed will cease
except for the right, upon surrender of the certificates representing such
shares of Psychiatric Group Stock, to receive certificates representing shares
of Common Stock and/or cash for which such shares are exchanged or redeemed,
together with any fractional payment or rights to dividends as provided above,
in each case without interest. No holder of a certificate that prior to the
exchange of Psychiatric Group Stock represented shares of Psychiatric Group
Stock will be entitled to receive any dividend or other distribution with
respect to the shares of Common Stock for which shares of Psychiatric Group
Stock are exchanged until surrender of such holder's certificate in exchange for
a certificate or certificates representing shares of Common Stock. Upon such
surrender, there will be paid to the holder the amount of any dividends or other
distributions (without interest) which theretofore became payable with respect
to a record date occurring after the Exchange Date, but which were not paid by
reason of the foregoing, with respect to the number of whole shares of Common
Stock represented by the certificate or certificates issued upon such surrender.
From and after the Exchange Date for any exchange of Psychiatric Group Stock for
Common Stock, the Company will, however, be entitled to treat the certificates
for Psychiatric Group Stock that are not yet surrendered for exchange as
evidencing the ownership of the number of whole shares of Common Stock for which
the shares of Psychiatric Group Stock represented by such certificates shall
have been exchanged, notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that might be payable in respect of the issue or delivery of any
shares of Common Stock on exchange of shares of Psychiatric Group Stock pursuant
to the provisions described above. The Company will not, however, be required to
pay any tax that might be payable in respect of any transfer involved in the
issue and delivery of any shares of Common Stock in a name other than that in
which the shares of Psychiatric Group Stock so exchanged are registered, and no
such issue or delivery will be made unless and until the person requesting such
issue pays to the Company the amount of any such tax, or establishes to the
satisfaction of the Company that such tax has been paid.
Except as specified above, the Certificate of Incorporation and Certificate
of Designations relating to the Psychiatric Group Stock do not provide for
either mandatory or optional conversion, exchange or redemption rights relating
to outstanding shares of Psychiatric Group Stock.
VOTING RIGHTS
Holders of Common Stock will be entitled to one vote per share and will
vote as one class with the holders of Psychiatric Group Stock (together with any
other series of Preferred Stock outstanding at the time of such vote and so
entitled to vote) on all matters submitted to stockholders, other than matters
which would be required by law or the Company's Certificate of Incorporation to
be submitted to a separate class vote.
Holders of Psychiatric Group Stock will be entitled to a variable number of
votes per share equal to the ratio (calculated to the nearest three decimal
places) of the average Market Value of one share of Psychiatric Group Stock to
one share of Common Stock for the ten consecutive Trading Days ending on the
last Trading Day prior to the applicable record date, and could have more than,
less than or exactly one vote per share. This formula is intended to equate the
proportionate voting rights of the Common Stock and Psychiatric Group
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Stock to their respective Market Values at the time of any vote. Holders of
Psychiatric Group Stock will vote as one class with holders of Common Stock
(together with any other series of Preferred Stock outstanding at the time of
such vote and so entitled to vote) on all matters submitted to stockholders,
other than matters which would be required by law or the Company's Certificate
of Incorporation to be submitted to a separate class vote. Each holder of
Depositary Shares will, through the depositary share arrangements described
elsewhere herein, be entitled to a number of votes per Depositary Share equal to
one-tenth the number of votes to which a holder of one share of Psychiatric
Group Stock will be entitled.
No class vote of holders of Psychiatric Group Stock will be required upon a
merger or consolidation if (a) the Psychiatric Group Stock remains outstanding
and unchanged as a result of the merger or consolidation, (b) the type and
amount of consideration for such merger or consolidation is divided between
holders of Psychiatric Group Stock and holders of Common Stock in a manner
determined to be fair by the Board (whose determination shall be conclusive) or
(c) the Psychiatric Group Stock is converted into capital stock of the surviving
company to the merger or consolidation having terms substantially similar to the
terms of the Psychiatric Group Stock. A class vote of the holders of a majority
of the outstanding shares of Psychiatric Group Stock will be required for any
other merger or consolidation.
Provisions of the Company's Certificate of Incorporation require that any
action permitted or required to be taken by the stockholders must be effected at
a duly called annual or special meeting; stockholders cannot take any action by
written consent of the stockholders. Special meetings of the stockholders may be
called only by a majority of the Board, by the Chairman of the Board or by the
President and may not be called by the stockholders.
Neither the holders of Common Stock nor the holders of Psychiatric Group
Stock will have any cumulative voting rights or any preemptive rights to
subscribe for or purchase additional shares of capital stock or any other
obligations convertible into or exercisable for shares of capital stock that may
hereafter be issued by the Company.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the Company, holders of Common Stock and Psychiatric Group Stock
will be entitled to receive their respective proportionate interests in the net
assets of the Company, if any, remaining for distribution to holders of stock
(after payment or provision for all liabilities, including contingent
liabilities, of the Company and payment of the liquidation preference payable to
holders of any other series of Preferred Stock ranking senior to the Psychiatric
Group Stock as to distributions upon liquidation) pro rata based upon the
average Market Value of the Common Stock as compared to the average Market Value
of the Psychiatric Group Stock, in each case for the ten consecutive Trading
Days ending on the Trading Day prior to the date of the first public
announcement of (i) a voluntary liquidation, dissolution or winding-up of the
Company or (ii) the institution of any proceeding for the involuntary
liquidation, dissolution or winding-up of the Company; provided that if the
foregoing would result in a liquidation payment valued at less than $1.00 per
share of the Psychiatric Group Stock, the holders of Psychiatric Group Stock
will not be entitled to a proportionate interest in such net assets but instead
will be entitled to receive a liquidation preference of $1.00 per share (and no
more) before any payment may be made to holders of Common Stock.
Neither the merger nor consolidation of the Company into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with the Company, nor a sale, transfer or lease of all or any part of the assets
of the Company, would be deemed a liquidation, dissolution or winding-up for
these purposes.
DETERMINATIONS BY THE BOARD
The Company's Certificate of Incorporation provides that a Director will
not be liable to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a Director, except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) pursuant to specific
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provisions of Delaware law or (iv) for any transaction from which the Director
derived any improper personal benefit. The liability of Directors will be
further eliminated or limited to the fullest extent permitted by future changes
in Delaware law. In addition, the Certificate of Designations relating to the
Psychiatric Group Stock provides that any determinations made in good faith by
the Board under such Certificate of Designations, and any determinations with
respect to either Group or the rights of holders of shares of Common Stock or
Psychiatric Group Stock made pursuant to or in furtherance of such Certificate
of Designations, will be final and binding on all stockholders of the Company,
subject to the rights of stockholders under Delaware law and under the federal
securities laws.
PREFERRED STOCK PURCHASE RIGHTS PLAN
On April 20, 1990, the Company distributed to its holders of Common Stock
one preferred stock purchase right (each, a "Right") for each outstanding share
of Common Stock. Under certain conditions, each Right may be exercised to
purchase one one-hundredth of a share of preferred stock, Series A, par value
$.01 per share (the "Series A Preferred Shares"), of the Company at a price of
$45. The total number of Rights currently issued or issuable, including Rights
issuable in connection with Common Stock which may be issued under the Company's
stock incentive plans and upon the conversion of the Company's outstanding Swiss
franc convertible bonds, is approximately 23,200,000. Approximately 232,000
Series A Preferred Shares could be purchased upon the exercise of all Rights
currently issued or issuable. The number of Rights outstanding and Series A
Preferred Shares issuable upon exercise, as well as the Series A Preferred Share
purchase price, are subject to customary antidilution adjustments.
The Rights are evidenced by the certificates for shares of Common Stock,
and in general are not transferable apart from the Common Stock or exercisable
until after a party has acquired beneficial ownership of or made a tender offer
for 10% or more of the outstanding Common Stock of the Company (an "Acquiring
Person"), or the occurrence of other events as specified in the Rights Plan.
Under certain conditions as specified in the Rights Plan, including but not
limited to the acquisition by a party of 15% or more of the outstanding Common
Stock of the Company or the acquisition of the Company in a merger or other
business combination, each holder of a Right (other than an Acquiring Person,
whose Rights will be void) will receive upon exercise thereof and payment of the
exercise price that number of shares of Common Stock of the Company or of the
other party, as applicable, having a market value of two times the exercise
price of the Right.
The Rights expire on April 20, 2000, and until exercised, the holder
thereof, as such, will have no rights as a shareholder of the Company. At the
Company's option, the Rights may be redeemed in whole at a price of $.01 per
Right at any time prior to becoming exercisable. In general, the Company may
also exchange the Rights at a ratio of one share of Common Stock per Right after
becoming exercisable but prior to the acquisition of 50% or more of the
outstanding shares of Common Stock by any party.
Series A Preferred Shares issuable upon exercise of the Rights will not be
redeemable. Each Series A Preferred Share will have 100 votes and will be
entitled to (a) dividends in an amount equal to the greater of $1.00 or 100
times the amount of the dividends per share paid on the Common Stock, (b) a
liquidation preference in an amount equal to the greater of $100 or 100 times
the amount per share paid on the Common Stock and (c) a payment in connection
with a business combination (in which shares of Common Stock are exchanged)
equal to 100 times the amount per share paid on the Common Stock.
The Psychiatric Group Stock will not include, or entitle the holders
thereof to receive, the Rights, which will be applicable only to the Company's
Common Stock.
LIMITS ON STOCK OWNERSHIP
The Company's Certificate of Incorporation provides that as a condition to
the transfer and/or registration of transfer of any shares of capital stock of
the Company which would result in any stockholder owning, directly or
indirectly, shares in excess of 9% of the issued and outstanding capital stock
of the Company, the proposed transferee must file with the Company an affidavit
setting forth the number of shares owned, directly or indirectly, by such
transferee. Any acquisition of shares, transfer of shares or any options,
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warrants or other securities convertible into shares that would result in the
disqualification of the Company as a REIT will be deemed void to the fullest
extent permitted under applicable law and the intended transferee shall be
deemed never to have had an interest therein. If more than 9.8% of the capital
stock of the Company has become concentrated in the hands of one beneficial
owner, (i) such beneficial owner and its affiliates and associates will be
deemed to have offered to sell to the Company or its designee on the date
specified in the Company's notice of acceptance of such offer to sell such
number of shares sufficient, in the opinion of the Board, to maintain or bring
the direct or indirect ownership of the capital stock of the Company held by
such beneficial owner to a level of no more than 9.8% of the issued and
outstanding capital stock of the Company, and (ii) the Board also will refuse to
transfer or issue shares of capital stock to any person whose acquisition of
such shares would result in the direct or indirect ownership by that person of
more than 9.8% of the issued and outstanding capital stock of the Company. The
purchase price for any shares of capital stock of the Company so redeemed will
be equal to the fair market value of the shares reflected in the closing sales
price for the shares, if then listed on a national securities exchange, or the
average of the closing sales prices for the shares if then listed on more than
one national securities exchange, or if the shares are not then listed on a
national securities exchange, the latest bid quotation for the shares if then
traded over-the-counter, on the last business day immediately preceding the day
on which notice of acceptance of the offer of sale is sent by the Company, or,
if no such closing sales prices or quotations are available, then the purchase
price will be equal to the net asset value of such shares as determined in good
faith by the Board. The purchase price of any such shares acquired by the
Company, or its designee, will be paid, at the option of the Company, in cash or
in the form of an unsecured, subordinated promissory note of the Company, or its
designee, bearing interest and having a term to maturity (to be not less than 5
nor more than 20 years) as determined by the Board. From and after the tender by
the Company of the purchase price therefor, the holder of any shares of capital
stock of the Company so called for purchase will cease to be entitled to any
rights as a holder of such shares, except the right to payment of the purchase
price therefor.
BUSINESS COMBINATION PROVISIONS
The Certificate of Incorporation requires that Business Combinations (as
defined in the Certificate of Incorporation) between the Company and a
Beneficial Owner (as defined in the Certificate of Incorporation) of 10% or more
of the Company's outstanding shares of Voting Stock (as defined in the
Certificate of Incorporation) (a "Related Person"), and any Affiliate (as
defined in the Certificate of Incorporation) or Associate (as defined in the
Certificate of Incorporation) of such person, be approved by (i) the affirmative
vote of the holders of not less than 80% of the outstanding shares of Voting
Stock and (ii) the holders of a majority of the outstanding shares of Voting
Stock other than such Related Person and such person's Associates and
Affiliates, unless a majority of the Continuing Directors (as defined in the
Certificate of Incorporation) shall have approved the Business Combination or
shall have approved the acquisition of outstanding shares of Voting Stock which
caused the Related Person to become a Related Person. In general, Voting Stock
means the capital stock of the Company entitled to vote generally in the
election of directors, including the Psychiatric Group Stock, and each share is
allocated for this purpose the number of votes granted to it generally in the
election of directors.
A "Business Combination" is defined in the Certificate of Incorporation as
(a) any merger or consolidation of the Company or any subsidiary (other than
pursuant to Section 253 of the Delaware General Corporation Law with or into any
corporation which owns at least 90% of the outstanding shares of each class of
stock of the Company or its subsidiary, as applicable) with a Related Person or
any other corporation (whether or not itself a Related Person) which is, or
after such merger or consolidation would be, an Affiliate or Associate of a
Related Person, (b) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions) to or with a
Related Person or such person's Affiliates or Associates of any assets of the
Company (including the securities of a subsidiary) or a subsidiary having a fair
market value of $20 million or more, (c) the issuance or transfer of any
securities of the Company or a subsidiary by the Company or such subsidiary to
any Related Person having an aggregate fair market value of $20 million or more,
other than by any distribution pro rata, to, or exchange offer made to, all
holders of a publicly held class or series of stock of the Company or any of its
subsidiaries, or upon the exercise, conversion or exchange of securities of the
Company or any of its subsidiaries which are exercisable, convertible or
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exchangeable into or for securities of the Company or any of its subsidiaries,
(d) the adoption of any plan or proposal for the liquidation or dissolution of
the Company by or on behalf of a Related Person or any of such person's
Affiliates or Associates or (e) any reclassification of securities or
recapitalization of the Company (including any reverse stock split), or any
merger or consolidation of the Company with any of its subsidiaries or any other
transaction involving the Company or any of its subsidiaries (whether or not
with or into or otherwise involving a Related Person) which has the effect,
directly or indirectly, of increasing the proportionate share of the outstanding
shares of any class of voting stock of the Company or of any of its subsidiaries
directly or indirectly owned by any Related Person or such person's Associates
or Affiliates.
The Company is also subject to the provisions of Section 203 of the
Delaware General Corporation Law which relate to business combinations.
STAGGERED BOARD; REMOVAL OF DIRECTORS
The Board is divided into three classes, each class consisting, as nearly
as may be possible, of one-third of the total number of Directors. Directors are
elected for a three-year term and the term of one class expires each year. A
Director holds office until the annual meeting for the year in which his or her
term expires. If the number of Directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain the number of Directors
in each class as nearly equal as possible, but in no case will a decrease in the
number of Directors shorten the term of any incumbent Director. Under Delaware
law, because the Board is divided into classes, no Director may be removed from
office before expiration of his or her term except for cause.
VOTE REQUIRED TO CHANGE CERTAIN PROVISIONS
The provisions described under "Limits on Stock Ownership" and "Business
Combination Provisions" above may not be amended without the affirmative vote of
stockholders holding at least 80% of the Voting Stock of the Company and, with
respect to the provisions under "Business Combination Provisions" only, a
majority vote of the stockholders of Voting Stock who are Disinterested
Stockholders (as defined in the Certificate of Incorporation). The provisions
described under "Staggered Board" above may not be amended without the
affirmative vote of stockholders holding at least 66 2/3% of the outstanding
shares of capital stock of the Company entitled to vote generally in the
election of Directors.
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions described under "Preferred Stock Purchase Rights Plan",
"Limits on Stock Ownership", "Business Combination Provisions" and "Staggered
Board" above may have the effect of discouraging unilateral tender offers or
other takeover proposals which certain stockholders might deem in their
interests or in which they might receive a substantial premium over market price
for their shares. The Board's authority to issue and establish the terms of
currently authorized Preferred Stock without stockholder approval may also have
the effect of discouraging takeover attempts. The provisions could also have the
effect of insulating current management against the possibility of removal and
could, by possibly reducing temporary fluctuations in market price caused by
accumulations of Common Stock, deprive stockholders of opportunities to sell at
a temporarily higher market price. However, the Board believes that the
Preferred Stock Purchase Rights Plan and inclusion of the Business Combination
and Staggered Board provisions may help assure fair treatment of stockholders
and continuity of management and that the Limits on Stock Ownership provision is
reasonably necessary to safeguard the Company's REIT status.
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DESCRIPTION OF DEPOSITARY SHARES
The following description is intended as a summary of the principal
provisions of, and is qualified in all respects by reference to, the Depositary
Receipts and the Deposit Agreement, forms of which are filed as Exhibit 4.2 to
the Registration Statement on Form 8-A of which this Information Statement forms
a part.
GENERAL
Stockholders will receive one Depositary Share for every ten shares of
Common Stock held of record at the close of business on , 1995. A total
of approximately 2.1 million Depositary Shares will be distributed. Each
Depositary Share will represent one-tenth of one share of Psychiatric Group
Stock. Cash will be issued in lieu of fractional Depositary Shares. Application
has been made to list the Depositary Shares and the Psychiatric Group Stock on
the NYSE.
The shares of Psychiatric Group Stock underlying the Depositary Shares will
be deposited under a separate Deposit Agreement (the "Deposit Agreement")
between the Company and Chemical Trust Company of California. Subject to the
terms of the Deposit Agreement, each owner of Depositary Shares will be
entitled, in proportion to the applicable fractional interest in shares of
Psychiatric Group Stock underlying such Depositary Shares, to all the rights and
preferences of the Psychiatric Group Stock underlying such Depositary Shares
(including dividend, voting and liquidation rights).
A HOLDER OF DEPOSITARY SHARES MAY NOT WITHDRAW SHARES OF PSYCHIATRIC GROUP
STOCK UNDERLYING SUCH DEPOSITARY SHARES.
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the Deposit Agreement.
Pending the preparation of definitive engraved Depositary Receipts, the
Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts but
not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will be
exchangeable for definitive Depositary Receipts at the Company's expense.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of Psychiatric Group Stock to the record
holders of Depositary Shares relating to such Psychiatric Group Stock in
proportion to the numbers of such Depositary Shares owned by such holders on the
relevant record date. Fractions will be rounded down to the nearest whole cent.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may, with the approval of
the Company, sell such property and distribute the net proceeds from such sale
to such holders.
The Deposit Agreement will also contain provisions relating to the manner
in which any subscription or similar rights offered by the Company to holders of
Psychiatric Group Stock shall be made available to holders of Depositary Shares.
EXCHANGE AND REDEMPTION OF DEPOSITARY SHARES
If the Company chooses to exchange or redeem the Psychiatric Group Stock
underlying the Depositary Shares, the Depositary Shares shall be exchanged or
redeemed from the proceeds, whether in the form of cash or newly issued shares
of Common Stock, received by the Depositary resulting from the exchange or
redemption of the Psychiatric Group Stock held by the Depositary. The Depositary
shall mail notice of exchange or redemption not less than 10 and not more than
50 days prior to the date fixed for exchange or redemption to the record holders
of the Depositary Shares at the respective addresses appearing in the
Depositary's books. The redemption price, or number of shares of Common Stock,
per Depositary Share will
39
<PAGE> 40
be equal to the applicable fraction of the redemption price, or number of shares
of Common Stock, per share payable with respect to Psychiatric Group Stock;
provided, however, that no fractional shares of Common Stock shall be exchanged
for Depositary Shares. If any holder of Depositary Shares surrendered for
exchange would otherwise be entitled to a fractional share of Common Stock, the
Depositary shall deliver to such holder an amount in immediately available funds
for such fractional share based upon the fair market value of the Common Stock
calculated as set forth under "Description of Capital Stock of the
Company -- Exchange and Redemption" above.
After the date fixed for exchange or redemption, the Depositary Shares will
no longer be deemed to be outstanding and all rights of the holders of the
Depositary Shares will cease, except the right to receive the moneys, or shares
of newly issued Common Stock, as the case may be, payable upon such exchange or
redemption and any money or other property to which the holders of such
Depositary Shares were entitled upon such exchange or redemption upon surrender
to the Depositary of the Depositary Receipts evidencing such Depositary Shares.
VOTING THE PSYCHIATRIC GROUP STOCK
Upon receipt of notice of any meeting at which the holders of Psychiatric
Group Stock are entitled to vote, the Depositary will mail the information
contained in such notice of meeting to the record holders of Depositary Shares
relating to such Psychiatric Group Stock. Each record holder of such Depositary
Shares on the record date (which will be the same date as the record date for
the Psychiatric Group Stock) will be entitled to instruct the Depositary as to
the exercise of the voting rights pertaining to the number of shares of
Psychiatric Group Stock underlying such holder's Depositary Shares. The
Depositary will endeavor, insofar as practicable, to vote the number of shares
of Psychiatric Group Stock underlying such Depositary Shares in accordance with
such instructions, and the Company will agree to take all action which may be
deemed necessary by the Depositary in order to enable the Depositary to do so.
The Depositary will refrain from voting shares of Psychiatric Group Stock to the
extent it does not receive specific instructions from the holders of Depositary
Shares relating to such Psychiatric Group Stock.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment which materially
and adversely alters the rights of the existing holders of Depositary Shares
will not be effective unless such amendment has been approved by the record
holders of at least a majority of the Depositary Shares then outstanding. The
Deposit Agreement may be terminated by the Company or the Depositary only if (i)
all outstanding Depositary Shares relating thereto have been exchanged for
Common Stock or redeemed or (ii) there has been a final distribution in respect
of the Psychiatric Group Stock in connection with any liquidation, dissolution
or winding-up of the Company and such distribution has been distributed to the
holders of the related Depositary Shares.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
Psychiatric Group Stock and any exchange for Common Stock or redemption of the
Psychiatric Group Stock. Holders of Depositary Shares will pay other transfer
charges and other taxes and governmental charges and such other charges as are
expressly provided in the Deposit Agreement to be for their accounts.
MISCELLANEOUS
The Depositary will forward to the holders of Depositary Shares all reports
and communications from the Company which are delivered to the Depositary and
which the Company is required to furnish to the holders of Psychiatric Group
Stock.
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<PAGE> 41
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. Neither the Company nor the Depositary
will be subject to any liability under the Deposit Agreement to any holder of a
Depositary Share, other than for their gross negligence or willful misconduct,
and they will not be obligated to prosecute or defend any legal proceeding in
respect of any Depositary Shares or Psychiatric Group Stock unless satisfactory
indemnity is furnished. They may rely upon written advice of counsel or
accountants, or information provided by persons presenting Psychiatric Group
Stock for deposit, holders of Depositary Shares or other persons believed to be
competent and on documents believed to be genuine. Anything herein or in the
Deposit Agreement notwithstanding, in no event will the Depositary be liable for
special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Depositary has been
advised of the likelihood of such loss or damage and regardless of the form of
action.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice of
resignation or removal and must be a bank or trust company having its principal
office in the United States and having a combined capital and surplus of at
least $50,000,000.
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<PAGE> 42
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the United States Federal income tax
consequences of the Distribution of the Depositary Shares on the Common Stock.
The discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Department regulations, published positions of the Internal
Revenue Service (the "Service") and court decisions now in effect, all of which
are subject to change. In particular, Congress could enact legislation affecting
the treatment of stock with characteristics similar to the Psychiatric Group
Stock or the Treasury Department could change the current law in future
regulations, including regulations issued pursuant to its authority under
Section 337(d) of the Code. Any future legislation or regulations could be
enacted or promulgated so as to apply retroactively to the Distribution.
The Company has not applied for a ruling from the Service with respect to
the Federal income tax consequences of the Distribution, or the ownership of
Depositary Shares or Psychiatric Group Stock, and there can be no assurance that
the Service would agree with the conclusions expressed herein. The Service
announced in 1987 that it will not issue advance rulings on the classification
of stock with characteristics similar to the Psychiatric Group Stock.
This discussion addresses only those holders who are citizens or residents
of the United States for United States Federal tax purposes and who hold the
Common Stock and will hold the Depositary Shares (or the Psychiatric Group
Stock) as capital assets within the meaning of Section 1221 of the Code and is
included for general information only. It does not discuss all aspects of United
States Federal income taxation that could be relevant to a holder in light of
such holder's particular tax circumstances and does not apply to certain types
of holders who could be subject to special treatment under the United States
Federal income tax laws. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
REGARD TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATION, AS WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE,
LOCAL OR FOREIGN TAX LAWS TO WHICH THEY MAY BE SUBJECT.
Holders of Depositary Shares will generally be treated as holders of the
Psychiatric Group Stock represented by such Depositary Shares for United States
Federal income tax purposes.
The Company believes that the Distribution will be a tax-free stock
dividend. In that case, the basis of Common Stock held immediately before the
Distribution will be allocated between the Depositary Shares received and such
Common Stock in proportion to the fair market values of the Depositary Shares
received and such Common Stock, and the holding period of the Depositary Shares
and the Common Stock will include the holding period of the Common Stock,
assuming that the Common Stock is a capital asset in the hands of the holder on
the date of the Distribution. Assuming that both the Common Stock and the
Depositary Shares are traded on a stock exchange on the date of the
Distribution, for purposes of the basis allocation described in the preceding
sentence the fair market values of the Common Stock and the Depositary Shares
will be based upon the mean between the highest and lowest quoted per share
selling prices of such Common Stock or Depositary Shares, as the case may be, on
such date.
The Company does not believe that the Depositary Shares or the Psychiatric
Group Stock will be "Section 306 stock" because the Psychiatric Group Stock will
not be limited in its ability to participate in the earnings of or appreciation
in value of the Psychiatric Group assets, and because the Psychiatric Group
Stock will share in all of the assets of the Company upon liquidation based on
its relative market capitalization; however, in the absence of authority, this
conclusion cannot be certain. If the Depositary Shares or the Psychiatric Group
Stock were treated as Section 306 stock, all or part of the amount realized on
the disposition of such stock would generally be treated as ordinary income
unless certain exceptions applied. The discussion below assumes that the
Psychiatric Group Stock will not be Section 306 stock.
Upon the taxable sale or exchange of the Depositary Shares, a holder will
recognize gain or loss equal to the difference between (i) any cash received
plus the fair market value of any other consideration received, and (ii) the tax
basis of the stock sold or exchanged. Such tax basis would be determined as
described above.
Distributions with respect to the Depositary Shares or the Psychiatric
Group Stock will be treated first as taxable dividends to the extent they are
made out of the current and accumulated earnings and profits of the Company,
then as tax-free return of capital to the extent of a stockholder's basis in the
Psychiatric Group
42
<PAGE> 43
Stock (with such basis being reduced by such amount), and finally as gain from
the sale or exchange of the Psychiatric Group Stock. The calculation of current
and accumulated earnings and profits, and the determination of whether a
distribution with respect to the Depositary Shares or the Psychiatric Group
Stock (or the Common Stock) is out of earnings and profits, will be made by
reference to the Company as a whole, without reference to the Core Group or the
Psychiatric Group.
Generally, assuming the Company does not have outstanding any stock with a
preference as to dividends, distributions as to either the Common Stock or the
Psychiatric Group Stock will be considered to be out of the Company's current
earnings and profits in an amount equal to the proportion that distributions on
that class of stock bears to total distributions by the Company for the taxable
year multiplied by the Company's earnings and profits for the taxable year.
Thus, for example, distributions with respect to the Depositary Shares or the
Psychiatric Group Stock may be dividends regardless of the economic performance
of the Psychiatric Group.
Holders should be aware that although it is not expected that the
Distribution will result in the recognition of any income, gain or loss or the
receipt of a taxable dividend by holders of Common Stock, there are no United
States Federal income tax regulations, court decisions or published Service
rulings bearing directly on the effect of the dividend and liquidation features
of the Common Stock and the Psychiatric Group Stock. In addition, the Service
announced in 1987 that it is studying the Federal income tax consequences of
stock which has certain voting and liquidation rights in an issuing corporation,
but whose dividend rights are determined by reference to the earnings and
profits of a segregated portion of the issuing corporation's assets, and would
not issue any advance rulings regarding such stock. It is possible, therefore,
that the Service could assert that the Psychiatric Group Stock represents
property other than stock of the Company.
If the Psychiatric Group Stock were treated as property other than stock of
the Company, the Distribution would be treated as a distribution of property on
the Common Stock in an amount equal to the fair market value of the Depositary
Shares. Distributions of property on the Common Stock are treated first as
dividends to the extent of the Company's current and accumulated earnings and
profits, then as tax-free return of capital to the extent of a holder's basis in
the Common Stock (with such basis being reduced by such amount), and finally as
gain from the sale or exchange of such Common Stock. Because the Company is
likely to make distributions in excess of its current earnings and profits in
1995 and does not have any pre-1995 accumulated earnings and profits, and
because the Company does not believe that any of the Psychiatric Group assets
has a value in excess of its basis, treating the Distribution as a distribution
of property other than stock of the Company would likely not result in any
increased dividend income in 1995 to holders of the Company's Common Stock who
hold such stock for the entire year. Instead, the Distribution would result in
the reduction of a holder's basis in the Common Stock and, depending on the
amount of such holder's basis, possibly in the recognition of gain. The
consequences might vary for a holder who disposed of Common Stock in 1995. In
addition, the Company could recognize gain on the Distribution in an amount
equal to the difference, if any, between the fair market value of the assets
deemed distributed on the Depositary Shares and the Company's tax bases in such
property, although the Company does not believe there would be any such gain.
Further, depending on the characterization of the Psychiatric Group Stock and
the Psychiatric Group assets for tax purposes, the Company's qualification as a
REIT might be affected. If the Company were to fail to qualify as a REIT, the
Company would be subject to tax on its taxable income at regular corporate
rates, and could be precluded from reelecting REIT status for the year of
disqualification and the ensuing four years. Distributions to stockholders in
any such year would not be deductible by the Company.
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<PAGE> 44
STOCK INCENTIVE PLANS
Under the terms of the Company's Stock Incentive and Stock Option Plans, in
connection with the Distribution each director or officer holding options to
purchase Common Stock will receive options to purchase the number of shares of
Psychiatric Group Stock that would have been issued at the time of the
Distribution on the number of shares of Common Stock underlying options held by
such director or officer at the time of Distribution. The exercise price of the
existing Common Stock options will be reallocated between the existing Common
Stock options and the Psychiatric Group Stock options being granted. The Company
is granting the options to purchase Psychiatric Group Stock in order to give the
directors and officers an ownership interest in both the Psychiatric Group Stock
and the Common Stock. No additional options to purchase Psychiatric Group Stock
will be issued. Similar adjustments will be made with respect to restricted
stock awards and dividend equivalent rights under the Company's Stock Incentive
Plans.
STOCK EXCHANGE LISTINGS
Application has been made to list the Depositary Shares and Psychiatric
Group Stock on the NYSE under the symbol "AHE.P." The Common Stock will continue
to trade on the NYSE under the symbol "AHE."
FINANCIAL ADVISORS
The Company has engaged Goldman, Sachs & Co. as its financial advisors in
connection with the Distribution. Goldman, Sachs & Co. assisted the Company in
its analysis and consideration of various financial alternatives relating to the
Psychiatric Group, including possible spin-offs or sales of assets of the
Psychiatric Group and the adoption of a targeted stock program. Goldman, Sachs &
Co. are further assisting the Company with regard to the implementation of the
Distribution.
STOCK REGISTRAR AND TRANSFER AGENT; DEPOSITARY
Chemical Trust Company of California is the registrar and transfer agent
for the Common Stock and will be the registrar and transfer agent for the
Psychiatric Group Stock. Chemical Trust Company of California will also be the
Depositary for the Depositary Shares.
44
<PAGE> 45
GLOSSARY OF CERTAIN TERMS
"Available Dividend Amount," on any date (the "calculation date") with
respect to the Common Stock or the Psychiatric Group Stock (the "subject group
stock") issued with reference to either Group (the "subject group"), means
either:
(i) the excess of (x) an amount equal to the total assets of the
subject group less its total liabilities as of such calculation date,
determined in accordance with Delaware law applied as if the subject group
were a Delaware corporation, over (y) the sum of the aggregate par value of
all outstanding subject group stock and all other capital stock of the
Company attributed to the subject group; or
(ii) in case there shall be no such excess, an amount equal to the net
profits, if any, of the subject group for the fiscal year in which the
dividend is declared and/or the preceding fiscal year, determined in
accordance with Delaware law applied as if the subject group were a
Delaware corporation.
"Board" means the Board of Directors of the Company.
"Common Stock" has the meaning specified on page 1.
"Company" has the meaning specified on page 1.
"Core Group" means all assets and liabilities of, and all activities
engaged in by, the Company and its subsidiaries, other than assets, liabilities
and activities which comprise part of the Psychiatric Group. Future issuances of
Common Stock or any other capital stock of the Company (other than Psychiatric
Group Stock) will be deemed to be for the account of, and net proceeds from such
issuances will be deemed to be assets of, the Core Group. All dividends or other
distributions on or repurchases of the Common Stock or any other capital stock
of the Company (other than Psychiatric Group Stock), and all costs attributed by
the Board to the Core Group, will be deemed to be funded out of assets of the
Core Group. In the case of an issuance of shares of Common Stock as a dividend
or other distribution on Psychiatric Group Stock, the Psychiatric Group will be
deemed to have purchased such shares for an amount equal to the average Market
Value of such shares for the ten consecutive Trading Days ending on the last
Trading Day prior to the record date for determining holders of Psychiatric
Group Stock entitled to receive such dividend or distribution, and an amount
equal to such purchase price shall be deemed to have been transferred from the
Psychiatric Group to the Core Group.
"Core Group Stock" has the meaning specified on page 1.
"Depositary Shares" means Depositary Shares, each representing the right to
receive one-tenth of one share of Psychiatric Group Stock, issued under the
Deposit Agreement, dated as of , 1995, between the Company, Chemical
Trust Company of California and the holders from time to time of Depositary
Shares.
"Distribution" has the meaning specified on page 1.
"Fair Market Value" for any assets means the price that a willing buyer
adequately informed and not compelled to buy would pay for such assets to a
willing seller adequately informed and not compelled to sell, as determined by
the Board (whose determination shall be conclusive).
"Funds From Operations" has the meaning specified on page 10.
"GAAP" means generally accepted accounting principles.
"Group" means the Core Group or the Psychiatric Group.
"Market Value" of any stock on any Trading Day means the average of the
high and low reported sales prices regular way of a share of such stock on such
Trading Day or in case no such reported sale takes place on such Trading Day the
average of the reported closing bid and asked prices regular way of a share of
such stock on such Trading Day, in either case on the New York Stock Exchange
Composite Tape or other national securities exchange, or if the shares of such
stock are not listed or admitted to trading on any national securities exchange
on such Trading Day, on the National Association of Securities Dealers Automated
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<PAGE> 46
Quotations National Market System, or if the shares of such stock are not listed
or admitted to trading on any national securities exchange or quoted on such
National Market System on such Trading Day, the average of the closing bid and
asked prices of a share of such stock in the over-the-counter market on such
Trading Day as furnished by any New York Stock Exchange member firm selected
from time to time by the Company, or if such closing bid and asked prices are
not made available by any such New York Stock Exchange member firm on such
Trading Day, the market value of a share of such stock (as determined by the
Board, whose determination shall be conclusive); provided that, for purposes of
determining the ratios which compare the Market Values of Common Stock and
Psychiatric Group Stock, as calculated over any period, (i) the "Market Value"
of any share of Common Stock and/or Psychiatric Group Stock on any day prior to
the "ex" date or any similar date occurring during such period for any dividend
or distribution paid or to be paid with respect to such stock shall be reduced
by the fair market value of the per share amount of such dividend or
distribution (as determined by the Board, whose determination shall be
conclusive) and (ii) the "Market Value" of any share of Common Stock and/or
Psychiatric Group Stock on any day prior to (A) the effective date of any
subdivision (by stock split or otherwise) or combination occurring during such
period or (B) the "ex" date or any similar date occurring during such period for
any dividend or distribution with respect to such stock in shares of such stock
shall be appropriately adjusted to reflect such subdivision, combination,
dividend or distribution. For purposes of the foregoing, the Market Value of the
Psychiatric Group Stock on any day will be deemed to equal ten times (or such
other ratio as reflects the number or fraction of shares of Psychiatric Group
Stock that a Depositary Share represents, if such number or fraction is changed)
the Market Value of the Depositary Shares on such day.
"Net Fair Market Value" of the Psychiatric Group or Core Group, as the case
may be, means the hypothetical Fair Market Value of 100% of the stock of a
corporation, assuming the corporation had all of the assets and liabilities of
such Group and no other assets or liabilities, as determined by the Board (whose
determination shall be conclusive).
"Net Proceeds from Psychiatric Group Asset Sales" means the net proceeds of
any sales of Psychiatric Group investments (after transaction costs and reserves
for contingencies).
"Psychiatric Group" means (a) the interests of the Company and its
subsidiaries in their respective investments in psychiatric hospitals, (b) all
activities engaged in by the Company and its subsidiaries in connection with
such investments and (c) all assets and liabilities of the Company or any of its
subsidiaries relating to or arising out of, or otherwise attributed by the Board
to, such investments or activities. Future issuances of Psychiatric Group Stock
will be deemed to be for the account of, and net proceeds from such issuances
will be deemed to be assets of, the Psychiatric Group. All dividends or other
distributions on or repurchases of the Psychiatric Group Stock, and all costs
attributed by the Board to the Psychiatric Group, will be deemed to be funded
out of assets of the Psychiatric Group. In the case of an issuance of shares of
Common Stock as a dividend or other distribution on Psychiatric Group Stock, the
Psychiatric Group will be deemed to have purchased such shares for an amount
equal to the average Market Value of such shares for the ten consecutive Trading
Days ending on the last Trading Day prior to the record date for determining
holders of Psychiatric Group Stock entitled to receive such dividend or
distribution, and an amount equal to such purchase price shall be deemed to have
been transferred from the Psychiatric Group to the Core Group.
"REIT" means a real estate investment trust.
"Trading Day" means each weekday other than any day on which the Common
Stock or Depositary Shares, as the case may be, is not traded on any national
securities exchange or the National Association of Securities Dealers Automated
Quotations National Market System or in the over-the-counter market.
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<PAGE> 47
ANNEX A
THE COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Selected Consolidated Financial Data.................................................. A-2
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... A-3
Report of Independent Public Accountants.............................................. A-8
Consolidated Financial Statements..................................................... A-9
</TABLE>
A-1
<PAGE> 48
SELECTED CONSOLIDATED FINANCIAL DATA
THE COMPANY
The selected consolidated financial data below have been derived from the
financial statements (and notes thereto) of the Company and should be read in
conjunction with those statements and management's discussion and analysis of
financial condition and results of operations which are included in this Annex
A.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 87,027 $ 81,523 $ 82,079 $ 80,129 $ 59,409
Net income (loss)(1)...................... 9,693 50,987 (6,317) 33,753 28,032
Net income (loss) per share(1)............ 0.46 2.71 (0.37) 2.09 1.90
Weighted average shares outstanding....... 20,856 18,843 17,247 16,168 14,754
Funds From Operations(2).................. $ 55,205 $ 46,443 $ 41,405 $ 46,428 $ 36,370
Cash flows from operating activities...... 54,984 45,884 43,486 46,805 40,946
Cash flows from investing activities...... (42,740) (6,996) 12,774 (138,076) (134,696)
Cash flows from financing activities...... (46,076) (4,110) (58,165) 52,058 76,340
Dividends declared........................ 47,982 44,766 45,747 43,243 35,929
Dividends declared per share.............. 2.30 2.25 2.64 2.62 2.42
Total assets.............................. 579,503 614,453 566,394 630,511 541,584
Total debt................................ 245,663 245,423 286,859 301,176 263,852
Stockholders' equity...................... 307,501 343,303 255,349 303,069 256,982
</TABLE>
- - - ---------------
(1) Includes gains of $19,742,000 and $11,064,000 in 1993 and 1992,
respectively, on the sale of properties or partnership interests therein.
Also reflects write-downs of $30,000,000 in 1994 and $45,000,000 in 1992
relating to investments in psychiatric hospitals.
(2) Funds From Operations as currently defined by the National Association of
Real Estate Investment Trusts and as used herein means net income (loss)
computed in accordance with GAAP, excluding gains (losses) from sales of
property, adjusted for write-downs of mortgage notes and investments in real
estate and certain other non-cash items, primarily depreciation and
amortization. Funds From Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered an
alternative to net income as an indication of the Company's operating
performance or an alternative to cash flow as a measure of liquidity. The
Company has historically made certain adjustments to Funds From Operations
to adjust for the impact of items which management does not consider to be
routine costs of ongoing operations ("Funds From Operations As Adjusted").
These nonroutine items include: in 1994, targeted stock issuance costs of
$1,450,000 and reversal of accrued relocation costs of $750,000; in 1993,
litigation costs of $2,234,000 and accrued relocation costs of $850,000; and
in 1992, litigation costs of $786,000 and costs related to the termination
of a purchase commitment of $2,225,000. There were no adjustments for
nonroutine items in 1991 and 1990. The following table presents the
Company's Funds From Operations As Adjusted.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Funds From Operations As Adjusted........... $ 55,905 $ 49,527 $ 44,416 $ 46,428 $ 36,370
</TABLE>
A-2
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
Following is a discussion of the financial condition and results of
operations of the Company which should be read in conjunction with the Selected
Consolidated Financial Data and the consolidated financial statements (and notes
thereto) included in this Annex A.
On January 31, 1995, the Company's Board of Directors authorized management
to pursue a transaction which is designed to separate the economic attributes of
its investments in psychiatric hospitals (the "Psychiatric Group") and its core
investments in acute care hospitals, rehabilitation hospitals 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 transaction would entail the distribution to holders of Common
Stock of depositary shares representing a new series of preferred stock, par
value $0.01 per share, to be designated Psychiatric Group Preferred Stock (the
"Psychiatric Group Stock"). The Psychiatric Group Stock would be intended to
reflect the separate performance of the Psychiatric Group. The Company's
existing Common Stock would be intended to reflect the separate performance of
the Core Group. In connection with the proposed transaction, 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
Stock would be a holder of an issue of capital stock of the entire Company and
would be subject to the risks associated with an investment in the Company and
all of its businesses, assets and liabilities. 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 which are included in
Annex B and Annex C.
OPERATING RESULTS
1994 Compared to 1993
In 1994, the Company reported net income of $9,693,000, or $.46 per share
compared with net income of $50,987,000, or $2.71 per share in 1993.
Several significant items impacted net income in both 1994 and 1993. Net
income in 1994 reflected a write-down of psychiatric hospital investments of
$30,000,000, or $1.44 per share, as a result of accelerating negative trends in
the psychiatric industry. In 1994, $1,450,000, or $.07 per share, was accrued
for the cost of the planned issuance of the Psychiatric Group Stock. Net income
in 1993 included a gain of $19,742,000, or $1.05 per share, on the sale of an
acute care property in March 1993. Litigation costs were $2,234,000, or $.12 per
share, in 1993 as a result of the defense and settlement of a shareholder class
action lawsuit against the Company.
Rental income was $67,732,000 in 1994, an increase of $3,177,000 or 5% from
$64,555,000 in 1993. This net increase is primarily attributable to rental
income from new properties acquired and various capital additions subsequent to
the first quarter of 1993 partially offset by a reduction in rental income due
to the previously mentioned property sale in March 1993.
Additional rental and interest income was $9,506,000 in 1994, an increase
of $172,000 or 2% from $9,334,000 in 1993. This increase is attributable to
increased additional rent from six of the Company's original acute care
properties and more recently purchased properties generating additional rent for
the first time in 1994. This increase is net of the loss of additional rent due
to the previously mentioned property sale.
Other interest income increased $2,055,000 to $4,002,000 in 1994 from
$1,947,000 in 1993. This increase resulted from higher average balances of
construction loans, other notes receivable and direct financing leases in 1994
compared with 1993. In addition, 1994 included the recognition of $710,000 of
fee income related to the prepayment of a construction loan in February 1994.
A-3
<PAGE> 50
Interest expense was $26,101,000 in 1994, a decrease of $1,168,000 or 4%
from $27,269,000 in 1993. An equity offering in July 1993 resulted in lower
average short-term borrowings during 1994 compared with 1993. A higher level of
construction in progress during 1994 compared with 1993 resulted in an increase
in capitalized interest. In addition, the Company prepaid mortgage notes payable
of $14.4 million in February 1994.
General and administrative expenses decreased to $5,376,000 in 1994 from
$6,437,000 in 1993. The decrease for 1994 was attributable to the reversal of
$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. This was partially offset by higher expense from the Company's stock
incentive plans and increased shareholder reporting and distribution costs in
1994.
1993 Compared to 1992
In 1993, the Company reported net income of $50,987,000, or $2.71 per share
compared with a net loss of ($6,317,000), or ($.37) per share in 1992.
Net income in 1993 and net loss in 1992 were impacted by several
significant items. Net income in 1993 included a gain of $19,742,000, or $1.05
per share, on the sale of an acute care property in March 1993, while the net
loss in 1992 included total gains of $11,064,000, or $.64 per share, on the sale
of the Company's partnership interests in four rehabilitation properties.
Litigation costs were $2,234,000, or $.12 per share, in 1993 as a result of the
defense and settlement of a shareholder class action lawsuit against the
Company. Litigation costs related to this lawsuit in 1992 were $786,000, or $.05
per share. Net loss in 1992 reflected a write-down of $45,000,000, or $2.61 per
share, related to the restructuring of two psychiatric mortgage notes receivable
and a cost of $2,225,000, or $.13 per share, as a result of the Company
exercising its right to terminate a purchase commitment to enhance its liquidity
position.
Rental income was $64,555,000 in 1993, a decrease of $1,206,000 or 2% from
$65,761,000 in 1992. This decrease is attributable to a reduction in rental
income due to the sale of the Company's 97% partnership interests in three
rehabilitation properties in October 1992 and the sale of an acute care property
in March 1993, partially offset by rental income from a newly acquired property
and various capital additions coming under lease subsequent to the first quarter
of 1992. Additionally, 1993 includes rental income from a psychiatric property
conveyed to the Company in late 1992 in satisfaction of a mortgage note
receivable. The conveyance of this property together with the modification and
restructuring of another mortgage note receivable in 1992 resulted in a decrease
in mortgage interest income of $1,457,000 in 1993 compared with 1992.
Additional rental and interest income was $9,334,000 in 1993, an increase
of $805,000 or 9% from $8,529,000 in 1992. This increase is attributable to
increased additional rent from six of the Company's original acute care
properties and more recently purchased properties generating additional rent for
the first time in 1993. This increase is net of the loss of additional rent from
properties sold in 1992 and 1993.
Depreciation and amortization increased $1,265,000 to $14,087,000 in 1993
compared with 1992 primarily as a result of the Company's revision of the
estimated remaining lives of its psychiatric real estate properties from an
average of 38 years to 21 years effective as of January 1, 1993.
Interest expense was $27,269,000 in 1993, a decrease of $2,508,000 or 8%
from $29,777,000 in 1992. Property sales in the last quarter of 1992 and first
quarter of 1993, and an equity offering in July 1993, resulted in lower average
short-term borrowings in 1993. Lower short-term interest rates in 1993
contributed to the decrease in interest expense in 1993.
General and administrative expenses decreased to $6,437,000 in 1993 from
$8,221,000 in 1992. In the fourth quarter of 1993, the Company recorded an
accrual of $850,000 related to the planned relocation of its corporate offices
to Southern California in the middle of 1994. General and administrative
expenses in 1992 include severance costs of $1.5 million related to personnel
changes announced during 1992. Additionally, in 1992 the negotiation and
restructuring of two psychiatric mortgage notes receivable, the review of a
potential
A-4
<PAGE> 51
business combination and other matters resulting from a legal action against the
Company, resulted in increases in consulting, professional and travel costs
totaling $1.3 million.
Minority interest decreased $378,000 to $251,000 in 1993 compared with 1992
as a result of the Company's sale of three real estate partnerships in October
1992.
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
outpatient services, downward pressure on reimbursement rates from government,
insurance company and managed care payors and an increasing trend toward
capitation of health care delivery costs (delivery of services on a fixed price
basis to a defined group of covered parties). Outpatient business is expected to
increase as advances in medical technologies allow more procedures to be
performed on an outpatient basis. Payors continue to direct more patients from
inpatient care to outpatient care. The portion of providers' patient services
reimbursed under Medicare and Medicaid continues to increase as the population
ages and states expand Medicaid programs. States and insurance companies
continue to negotiate actively the amounts they will pay for services. In
addition, the entrance of insurance companies into managed care programs is
accelerating the introduction of managed care in new localities. As a result,
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.
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 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
hospitals. 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
A-5
<PAGE> 52
industry changes. For example, as the inpatient length of stay has decreased,
offset by an increased number of admissions in some cases, the costs of
performing initial testing and other administrative procedures associated with
each admission have increased. As a result, certain of the psychiatric hospital
operators have had difficulty meeting their payment obligations to the Company
on a timely basis and there can be no assurance that they will be able to meet
their payment obligations in the future.
The Company has provided working capital loans to the operators of four of
its psychiatric hospitals. As of December 31, 1994, outstanding working capital
loans totalled $9.4 million ($6.4 million on the pro forma basis described
herein). The Company has committed to make an additional $1.15 million of such
working capital loans upon request, subject to certain conditions. These working
capital loans, 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 working capital loans provided by the Company or to secure
replacement loans 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 Board
determines that it is appropriate to provide additional working capital
financing to a psychiatric hospital, it may cause the Core Group to make
revolving intercompany loans to the Psychiatric Group to fund such financing (to
the extent consistent with its then existing policies), although the Board is
under no obligation to do so.
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 the
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. The Company is pursuing
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 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) and
is issuing the Psychiatric Group Stock.
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 85% of net additional rental and interest income for
the year ended December 31, 1994, while rehabilitation and psychiatric
investments accounted for 9% and 6%, respectively. Over the years, 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"). Also, 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. As a result,
the Company anticipates slower growth in additional rental and interest income
in the near term from its current portfolio of properties.
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
A-6
<PAGE> 53
financial flexibility to facilitate future growth. Toward achievement of this
objective, the Company raised $80.8 million of new equity in 1993. The
distribution of depositary shares representing Psychiatric Group Stock is also
intended to facilitate this objective.
The Company's unsecured revolving credit facility was increased to $100
million in April 1994. 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 January 23, 1995, the Company had commitments of $12.6 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 totalled $1.15 million as of January
23, 1995.
The Company has continued to increase its liquidity and enhance its
financial flexibility. In July 1993, the Company completed an offering of
3,450,000 additional shares of Common Stock resulting in net proceeds of $80.8
million. Proceeds from the offering were used to pay off the outstanding balance
under the Company's revolving credit facility and fund additional real estate
investments. In April 1994, the Company increased its unsecured revolving credit
facility to $100 million. The facility bears interest at either LIBOR plus a
margin of 125 to 200 basis points or the prime rate plus, in certain
circumstances, a margin of 50 basis points, and matures on December 31, 1996.
Currently, the Company is able to borrow at either LIBOR plus 125 basis points
or the prime rate. As of January 23, 1995, the Company had $10.5 million of
borrowings under its credit facility. The Company expects to pay down this
facility with the cash proceeds of the sale of the Westwood and Pembroke,
Massachusetts psychiatric hospitals, which was consummated in February 1995. 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.
A-7
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Health Properties, Inc.:
We have audited the accompanying consolidated balance sheets of American
Health Properties, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1994 and 1993 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Health Properties,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the financial
statements taken as a whole. Schedule III is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. This information has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 28, 1995.
A-8
<PAGE> 55
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income................................................... $67,732 $64,555 $65,761
Mortgage interest income........................................ 5,787 5,687 7,144
Additional rental and interest income........................... 9,506 9,334 8,529
Other interest income........................................... 4,002 1,947 645
------- ------- -------
87,027 81,523 82,079
------- ------- -------
EXPENSES
Depreciation and amortization................................... 14,103 14,087 12,822
Interest expense................................................ 26,101 27,269 29,777
General and administrative...................................... 5,376 6,437 8,221
Targeted stock issuance costs................................... 1,450 -- --
Litigation costs................................................ -- 2,234 786
Write-down of real estate investments........................... 30,000 -- 45,000
Termination of purchase commitment.............................. -- -- 2,225
------- ------- -------
77,030 50,027 98,831
------- ------- -------
Minority interest............................................... 304 251 629
------- ------- -------
Income (loss) before gain on sale of properties................. 9,693 31,245 (17,381)
Gain on sale of properties...................................... -- 19,742 11,064
------- ------- -------
NET INCOME (LOSS)............................................... $ 9,693 $50,987 $(6,317)
======= ======= =======
NET INCOME (LOSS) PER SHARE..................................... $ 0.46 $ 2.71 $ (0.37)
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING............................. 20,856 18,843 17,247
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-9
<PAGE> 56
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate properties
Buildings and improvements....................................... $ 503,047 $ 480,776
Accumulated depreciation......................................... (70,617) (58,157)
--------- ---------
432,430 422,619
Land............................................................. 62,948 62,317
Construction in progress......................................... -- 11,719
--------- ---------
495,378 496,655
Mortgage notes receivable, net..................................... 37,875 45,825
Construction loans................................................. 21,383 15,039
Other notes receivable............................................. 9,428 8,598
Direct financing leases............................................ 3,816 2,803
Cash and short-term investments.................................... 1,838 35,670
Receivables........................................................ 6,974 6,675
Deferred financing costs and other assets.......................... 2,811 3,188
--------- ---------
$ 579,503 $ 614,453
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term loan payable............................................ $ 14,500 $ --
Mortgage notes payable............................................. -- 14,468
Subordinated convertible bonds payable............................. 6,163 5,955
Senior notes payable............................................... 225,000 225,000
Accounts payable and accrued liabilities........................... 9,668 9,631
Dividends payable.................................................. 11,989 11,830
Deferred income.................................................... 4,682 4,266
--------- ---------
272,002 271,150
--------- ---------
Commitments and contingencies
Stockholders' Equity
Preferred stock $.01 par value; 1,000 shares authorized; none
outstanding................................................... -- --
Common stock $.01 par value; 25,000 shares authorized; 20,851 and
20,755 shares issued and outstanding.......................... 209 208
Additional paid-in capital....................................... 426,783 424,297
Cumulative net income............................................ 169,931 160,238
Cumulative dividends............................................. (289,422) (241,440)
--------- ---------
307,501 343,303
--------- ---------
$ 579,503 $ 614,453
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-10
<PAGE> 57
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
--------------- PAID-IN NET CUMULATIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME DIVIDENDS EQUITY
------ ------ -------- -------- --------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1991....... 17,074 $171 $338,257 $115,568 $(150,927) $ 303,069
Conversion of subordinated
convertible bonds................. 91 1 2,471 -- -- 2,472
Restricted stock grants, net........ 21 -- 344 -- -- 344
Exercise of stock options........... 74 1 1,527 -- -- 1,528
Net loss............................ -- -- -- (6,317) -- (6,317)
Dividends ($2.64 per share)......... -- -- -- -- (45,747) (45,747)
------ ------ -------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1992....... 17,260 173 342,599 109,251 (196,674) 255,349
Public offering of additional
shares............................ 3,450 35 80,806 -- -- 80,841
Restricted stock grants, net........ 25 -- 399 -- -- 399
Exercise of stock options........... 20 -- 493 -- -- 493
Net income.......................... -- -- -- 50,987 -- 50,987
Dividends ($2.25 per share)......... - -- -- -- (44,766) (44,766)
------ ------ -------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1993....... 20,755 208 424,297 160,238 (241,440) 343,303
Restricted stock grants, net........ 6 -- 524 -- -- 524
Exercise of stock options........... 90 1 1,962 -- -- 1,963
Net income.......................... -- -- -- 9,693 -- 9,693
Dividends ($2.30 per share)......... -- -- -- -- (47,982) (47,982)
------ ------ -------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1994....... 20,851 $209 $426,783 $169,931 $(289,422) $ 307,501
====== ====== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-11
<PAGE> 58
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................ $ 9,693 $ 50,987 $ (6,317)
Depreciation, amortization and other non-cash items.......... 16,041 15,414 14,015
Deferred income.............................................. 269 (412) 70
Write-down of real estate investments........................ 30,000 -- 45,000
Gain on sale of properties................................... -- (19,742) (11,064)
Change in receivables and other assets....................... (383) 109 (255)
Change in accounts payable and accrued liabilities........... (636) (472) 2,037
-------- -------- --------
54,984 45,884 43,486
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties....... (40,142) (28,502) (27,191)
Proceeds from sale of properties............................. 5,772 41,940 41,511
Mortgage notes receivable.................................... -- -- 1,105
Construction loan fundings................................... (23,180) (15,039) --
Construction loan paid....................................... 16,836 -- --
Other notes receivable....................................... (830) (2,548) (2,612)
Direct financing leases...................................... (1,013) (2,803) --
Administrative capital expenditures.......................... (183) (44) (39)
-------- -------- --------
(42,740) (6,996) 12,774
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on short-term loan payable............. 14,500 (40,500) (11,000)
Principal payments on mortgages.............................. (14,468) (1,137) (1,029)
Financing costs paid......................................... (248) (1,371) (371)
Proceeds from sale of stock.................................. -- 80,841 --
Proceeds from exercise of stock options...................... 1,963 493 1,528
Dividends paid............................................... (47,823) (42,436) (47,732)
Contributions from minority interest......................... -- -- 439
-------- -------- --------
(46,076) (4,110) (58,165)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS....... (33,832) 34,778 (1,905)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR........... 35,670 892 2,797
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR................. $ 1,838 $ 35,670 $ 892
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-12
<PAGE> 59
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COMPANY
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
facilities, including 13 acute care hospitals, three rehabilitation hospitals
and five psychiatric hospitals, all of which are operated by qualified third
party health care providers, and a medical office building.
Psychiatric Group Preferred Stock Distribution. On January 31, 1995, the
Company's Board of Directors authorized management to pursue a transaction which
is designed to separate the economic attributes of its investments in
psychiatric hospitals (the Psychiatric Group) and its investments in acute care
hospitals, rehabilitation hospitals 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 transaction would
entail the distribution to holders of Common Stock of depositary shares
representing a new series of preferred stock, par value $0.01 per share, to be
designated Psychiatric Group Preferred Stock (the Psychiatric Group Stock). The
Psychiatric Group Stock would be intended to reflect the separate performance of
the Psychiatric Group. The Company's existing Common Stock would be intended to
reflect the separate performance of the Core Group. In connection with the
proposed transaction, 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 Stock would be a holder of an issue
of capital stock of the entire Company and would be subject to the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. The combined financial statements of the Core Group and the
Psychiatric Group are included in Annex B and Annex C to the Information
Statement relating to the transaction.
The conversion rights of the Company's convertible subordinated bonds, and
the Common Stock reserved for issuance upon conversion, will be appropriately
adjusted in accordance with the terms of the indenture to reflect the planned
distribution. In addition, appropriate adjustments will be made to the Company's
stock incentive plans.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
New Accounting Standards. The Financial Accounting Standards Board has
issued Statements of Financial Accounting Standards No.'s 114 and 118,
"Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures", respectively
(SFAS 114 and 118). SFAS 114 and 118 are applicable to all creditors and to all
loans that are restructured in a troubled debt restructuring involving a
modification of terms. SFAS 114 and 118 require estimating the value of impaired
loans based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral if the loan
is collateral dependent.
SFAS 114 and 118 are effective in fiscal 1995. Management believes that
adoption of SFAS 114 and 118 will not have a material impact on the accompanying
consolidated financial statements.
Real Estate Properties. The Company accounts for its property leases as
operating leases. The Company records properties at cost and allocates the cost
between land and buildings and improvements based on independent appraisals.
Depreciation of acute care and rehabilitation properties is recorded on a
straight-line basis over the estimated useful lives of the buildings and
improvements (27 to 42 years). The Company prospectively revised the estimated
remaining lives of its psychiatric real estate properties from an average of
A-13
<PAGE> 60
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
38 years to 21 years effective as of January 1, 1993. This estimate revision
increased depreciation and reduced net income by $1,165,000, or $.06 per share,
for the year ended December 31, 1993.
Deferred Income. Fees received, net of related direct costs, associated
with the origination or amendment of leases and mortgages are deferred and
amortized at a constant effective rate over the remaining initial term of the
related leases and mortgage notes receivable.
Deferred Costs. Deferred financing costs are amortized over the term of
the related debt at a constant effective rate.
Federal Income Taxes. The Company intends at all times to operate so as to
qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company will not be subject to federal income tax.
Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial reporting purposes due
primarily to timing differences in the recognition of fee income, real estate
property write-downs, mortgage note impairment reserves and various accruals and
differences between the estimated useful lives used to compute depreciation for
financial statement purposes and a 40-year life used in determining earnings and
profits. The cost basis of the Company's real estate properties is generally the
same for financial reporting and earnings and profits purposes, except for
properties written down for financial reporting purposes.
Cash and Short-Term Investments. Cash and short-term investments consist
of cash and all highly liquid investments with an original maturity date of less
than three months.
A-14
<PAGE> 61
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE PROPERTIES
The following table summarizes the Company's investment in health care real
estate properties as of December 31, 1994:
CONSOLIDATED REAL ESTATE PROPERTIES
<TABLE>
<CAPTION>
BUILDINGS AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
------- ------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ACUTE CARE GENERAL PROPERTIES:
Irvine Medical Center
Irvine, California........................................ $17,987 $ 57,013 $ 5,286 $ 69,714
Tarzana Regional Medical Center
Tarzana, California....................................... 12,421 61,279 11,291 62,409
Desert Valley Hospital
Victorville, California................................... 1,755 22,245 162 23,838
Kendall Regional Medical Center
Miami, Florida............................................ 4,163 64,849 11,997 57,015
Palm Beach Gardens Medical Center
Palm Beach Gardens, Florida............................... 4,024 41,624 8,102 37,546
North Fulton Medical Center
Roswell, Georgia.......................................... 4,149 42,042 6,061 40,130
Halstead Hospital
Halstead, Kansas.......................................... 80 14,170 709 13,541
Elmwood Medical Center
Jefferson, Louisiana...................................... 4,412 38,411 4,370 38,453
Lucy Lee Hospital
Poplar Bluff, Missouri.................................... 404 22,861 4,156 19,109
Frye Regional Medical Center
Hickory, North Carolina................................... 1,247 44,202 8,555 36,894
Cleveland Regional Medical Center
Cleveland, Texas.......................................... 300 8,000 296 8,004
Concho Valley Regional Hospital
San Angelo, Texas......................................... 256 16,196 1,315 15,137
------- --------- -------- --------
51,198 432,892 62,300 421,790
------- --------- -------- --------
PSYCHIATRIC PROPERTIES:
The Retreat
Sunrise, Florida.......................................... 3,325 8,609 1,886 10,048
The Manors
Tarpon Springs, Florida................................... 1,457 5,066 596 5,927
Rock Creek Center
Lemont, Illinois.......................................... 440 5,372 718 5,094
Pembroke Hospital
Pembroke, Massachusetts................................... 1,712 5,840 1,356 6,196
Westwood Lodge Hospital
Westwood, Massachusetts................................... 1,631 4,252 1,019 4,864
------- --------- -------- --------
8,565 29,139 5,575 32,129
------- --------- -------- --------
REHABILITATION PROPERTIES:
Northwest Arkansas Rehabilitation Hospital
Fayetteville, Arkansas.................................... 962 8,124 711 8,375
HCA Wesley Rehabilitation Hospital
Wichita, Kansas........................................... 1,938 12,659 883 13,714
MountainView Regional Rehabilitation Hospital
Morgantown, West Virginia................................. -- 11,718 988 10,730
------- --------- -------- --------
2,900 32,501 2,582 32,819
------- --------- -------- --------
MEDICAL OFFICE BUILDING PROPERTIES:
Walsh Medical Arts Center
Murrieta, California...................................... 285 8,515 160 8,640
------- --------- -------- --------
$62,948 $ 503,047 $ 70,617 $495,378
======= ========= ======== ========
</TABLE>
A-15
<PAGE> 62
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1992, the Company recorded an $11,400,000 write-down on a
$21,400,000 mortgage note receivable (the "RCC Note") secured by a first
mortgage and security interest in the real property of The Rock Creek Center
("RCC") in Lemont, Illinois. Subsequent recovery of cash in an interest reserve
fund maintained by RCC reduced the Company's recorded investment in the RCC Note
to $8,812,000. At the end of 1992, a formal restructuring of the RCC Note was
completed, pursuant to which the RCC real property was conveyed to the Company
in return for the Company's forgiveness of the RCC Note. The RCC real property
was then leased to the existing operator for an initial term of five years at an
annual rate of $1 million with monthly payments commencing January 1, 1993.
Income received and recognized by the Company on its RCC investment in 1994 and
1993 was $1,000,000 and in 1992 was $1,332,000. Income of $2,664,000 would have
been recorded in 1994, 1993 and 1992, had the RCC Note performed in accordance
with its original terms.
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 psychiatric hospitals at
such date. Of the $30,000,000 write-down, $22,050,000 related to the Company's
investments in psychiatric hospital properties and $7,950,000 was established as
a mortgage note impairment reserve. Over time, the Company intends to reduce its
investments in the psychiatric sector. This is expected to be accomplished
through the Company's announced program to sell, restructure or seek other means
to reduce its investments in the psychiatric sector. In connection with this
program, the Company sold one of its psychiatric properties to a third party in
October, 1994. Additionally, subsequent to year end, the Company sold its
psychiatric real estate investments in Westwood and Pembroke, Massachusetts.
These sales were accomplished at net book value. The Company is also in the
process of renegotiating the lease terms covering two additional psychiatric
real estate investments.
The Company's properties are leased under "net" leases pursuant to which
the lessees are responsible for all maintenance, repairs, taxes, and insurance
of the leased properties. The leases provide for the payment of minimum base
rent and additional rent during the fixed term and any renewal terms. Additional
rent is based on the increase in annual gross revenues of the related hospital
as specified in the lease agreements.
The Company has the right to approve capital expenditures at all
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. The Company has committed to fund
approximately $5,000,000 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.
Six of the Company's acute care properties are leased to subsidiaries of
American Medical International, Inc. (AMI). The six leases are covered by
cross-default provisions and the lease obligations are unconditionally
guaranteed by AMI. In 1994, income from these leases accounted for 50% of the
Company's total revenues.
Future minimum rentals under the Company's noncancellable operating leases,
after consideration of the sale of the Westwood and Pembroke, Massachusetts
psychiatric hospitals, are approximately $66,600,000 annually in 1995 through
1997, $65,600,000 in 1998, $42,700,000 in 1999 and $137,800,000 thereafter.
MORTGAGE NOTES RECEIVABLE
Four Winds Hospital -- Saratoga $18,225,000. The Company has a mortgage
note receivable secured by a first mortgage and security interest in the real
property of Four Winds Hospital in Saratoga Springs, New York. The note has an
initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is June 30, 1999. The interest rate on the note is
12.42%. Interest is payable monthly for the first six years, and thereafter,
principal and interest payments will be payable in level monthly installments
based on a thirty-year amortization schedule.
Four Winds Hospital -- Katonah $27,600,000. The Company has a mortgage
note receivable secured by a first mortgage and security interest in the real
property of Four Winds Hospital in Katonah (Westchester County), New York (the
"Four Winds Note"). At June 30, 1992, the Company recorded a $33,600,000
A-16
<PAGE> 63
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
write-down on the original $61,200,000 Four Winds Note which reduced the
Company's recorded investment in the Four Winds Note to $27,600,000.
At the end of 1992, a formal restructuring of the Four Winds Note was
completed, pursuant to which monthly interest payments amount to $3,400,000 in
the first year, increase $100,000 annually in each of the succeeding six years
and remain at $4,000,000 per year through maturity. The restructured note has an
initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is November 30, 2002. Interest income received and
recognized by the Company on the Four Winds Note in 1994, 1993 and 1992 was
$3,508,000, $3,408,000 and $3,524,000, respectively. Interest income of
$7,635,000 would have been recorded in 1994, 1993 and 1992 had the Four Winds
Note performed in accordance with its original terms.
Pursuant to the terms of the mortgage notes receivable, the Company may
receive additional interest each year based on the increase in annual operating
revenues of the related psychiatric facility. The Company may provide permanent
financing for capital additions at the facilities.
Mortgage Note Impairment Reserve. As discussed above, at June 30, 1994, in
view of negative trends that caused declining cash flows at a number of the
psychiatric hospitals, the Company recorded a $30,000,000 write-down of its
investments in psychiatric hospitals. In connection with a review of Four Winds
Hospital -- Saratoga and Four Winds Hospital -- Katonah, as well as
uncertainties surrounding possible changes in Medicaid reimbursement in the
State of New York, $7,950,000 of the $30,000,000 write-down was recorded as a
mortgage note impairment reserve. The Company will record interest on such
mortgage notes as interest payments are received.
CONSTRUCTION LOANS
At December 31, 1994, the Company had funded $21,383,000 of a $30,000,000
commitment to participate in an $86 million construction and mortgage financing
of a 670,000 square foot integrated hospital and medical office building
presently under construction in Austin, Texas.
At December 31, 1993, the Company had funded $15,039,000 under a
construction loan commitment on an ambulatory care and medical office complex in
Overland Park, Kansas. This construction loan was prepaid by the borrower in
February 1994 at which time the balance outstanding was $16,836,000.
OTHER NOTES RECEIVABLE
The Company provides financing at variable rates to certain operators under
revolving credit agreements. The aggregate commitment under these credit
agreements is $9,950,000 as of December 31, 1994. Borrowings under the credit
agreements are subject to compliance with various covenants and may not exceed a
specified percentage of the operators' net accounts receivable. Borrowings under
the credit agreements are secured by accounts receivable and other personal
property of the operator. As of December 31, 1994, $8,800,000 was outstanding
under these revolving credit agreements at a weighted average interest rate of
11.8%. The weighted average amount of borrowings under these credit agreements
outstanding during 1994 was $8,458,000 at a weighted average interest rate of
10.6% with a maximum of $8,800,000 outstanding during the year.
In connection with the Four Winds Note restructuring, the $950,000 balance
outstanding under a revolving credit agreement was converted to a five-year
amortizing term note. The note bears interest at an annual rate of 10.5%, and
requires monthly principal and interest payments of $21,000 through maturity on
December 1, 1997. As of December 31, 1994, the outstanding balance of this note
was $628,000.
DIRECT FINANCING LEASES
In connection with its investment in the real property of an acute care
general hospital on June 30, 1993, the Company also provided a five-year
equipment lease to the hospital operator which is classified as a direct
A-17
<PAGE> 64
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financing lease. As of December 31, 1994, the Company's net investment in this
direct financing lease is $2,296,000, represented by total minimum lease
payments receivable of $2,722,000 less unearned income of $426,000. Future
minimum lease payments under this lease are approximately $765,000 annually in
1995 through 1997 and $427,000 in 1998.
In connection with its investment in the real property of an acute care
general hospital on January 3, 1994, the Company also provided a seven-year
equipment lease to the hospital operator which is classified as a direct
financing lease. As of December 31, 1994, the Company's net investment in this
direct financing lease is $1,520,000, represented by total minimum lease
payments receivable of $2,015,000 less unearned income of $495,000. Future
minimum lease payments under this lease are approximately $333,000 annually in
1995 through 2000 and $17,000 in 2001.
DEBT
Short-Term Loan Payable. The Company has a $100 million unsecured
revolving credit agreement with a syndicate of banks maturing on December 31,
1996. This agreement provides for interest on outstanding borrowings at either
LIBOR plus a margin of 125 to 200 basis points or the prime rate plus, in
certain circumstances, a margin of 50 basis points. The margin on LIBOR or prime
rate borrowings is dependent upon various conditions, including the Company's
leverage and debt ratings, and the level and duration of borrowings outstanding.
Currently, the Company is able to borrow at either LIBOR plus 125 basis points
or the prime rate.
The weighted average amount of borrowings under bank credit agreements
outstanding during 1994, 1993 and 1992 was $5,404,000, $11,227,000 and
$54,007,000 at weighted average interest rates of 6.9%, 4.7% and 5.1%,
respectively. The maximum amount outstanding under bank credit agreements in
1994, 1993 and 1992 was $20,500,000, $44,500,000 and $72,000,000, respectively.
As of December 31, 1994, the Company had $14,500,000 outstanding under its bank
credit agreement with a weighted average interest rate of 7.6%.
Mortgage Notes Payable. Two of the properties owned by the Company had
existing mortgages with remaining balances at December 31, 1993 of approximately
$8.8 million and $5.7 million with interest rates of 10.0% and 8.75%,
respectively. The Company prepaid both mortgages in February 1994.
Senior Notes Payable. The Company's two issues of unsecured senior notes
(the Senior Notes) were sold pursuant to private placements with institutional
investors.
In May 1989, the Company sold $5 million of 11.33% Series A Senior Notes
and $120 million of 11.40% Series B Senior Notes. As provided under the terms of
the note agreement, the interest rates on these notes were automatically
adjusted to 11.38% on Series A and 11.45% on Series B effective as of October
25, 1989, concurrent with the downgrading of AMI's publicly rated unsecured
senior debt obligations. In the event that such AMI debt obligations are
subsequently upgraded to an investment grade rating, the interest rates on the
Series A and Series B Senior Notes will automatically readjust to 11.33% and
11.40%, respectively. Interest is payable quarterly in arrears. The Series A
Senior Notes mature May 31, 1996, and the Series B Senior Notes require annual
principal payments of $24 million beginning May 31, 1995 through maturity on May
31, 1999.
In September 1990, the Company sold $100 million of 10.41% Senior Notes.
Interest is payable semi-annually in arrears. The Senior Notes require annual
principal payments of $20 million beginning September 15, 1996 through maturity
on September 15, 2000.
Subordinated Convertible Bonds Payable. The Company's Convertible Dual
Currency Subordinated Bonds (the Swiss Bonds) were sold in Switzerland pursuant
to public subscription.
The 1990 Swiss Bonds have a coupon rate of 8 1/2% and are convertible at
the option of the holder at any time until July 9, 2000 into shares of the
Company's Common Stock at a conversion price of $25.875 per share and a fixed
exchange rate of SFr. 1.41 per U.S. $1.00. In 1994 and 1993, no conversions of
1990 Swiss Bonds
A-18
<PAGE> 65
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were made. In 1992, $2,590,000 of the 1990 Swiss Bonds, with accrued interest,
were converted into 91,259 shares of common stock resulting in additional equity
of $2,472,000, net of conversion and unamortized issuance costs of $118,000.
Final redemption of the 1,491 remaining 1990 Swiss Bonds will be made in U.S.
dollars of $7,455,000 on July 19, 2000 provided additional conversions or
redemption have not occurred earlier.
Interest on outstanding Swiss Bonds is payable annually in arrears in Swiss
Francs in July. Accrued and accreted interest is not paid on Swiss Bonds
converted into common stock.
The Company has reserved approximately 204,000 unissued shares of Common
Stock for potential future Swiss Bond conversions.
Debt Covenants. Covenants and restrictions in the Company's various debt
agreements include limitations on secured borrowings, restrictions covering the
use of proceeds from asset sales and payments of dividends and requirements
relating to the maintenance of specified financial covenants, including those
relating to minimum tangible net worth, fixed charge coverage and ratios of
liabilities to minimum tangible net worth and asset values.
Annual Maturities. The aggregate amount of annual maturities of the
Company's debt for calendar years 1995 through 1999 and thereafter is
$24,000,000, $49,000,000, $44,000,000, $44,000,000, $44,000,000 and $27,455,000,
respectively. In addition, the outstanding balance of $14,500,000 at December
31, 1994 under the Company's unsecured revolving credit agreement matures on
December 31, 1996, although certain events, including sales of assets, may
require the earlier paydown of the outstanding balance.
Interest. Interest capitalized on construction in progress was $883,000,
$577,000 and $872,000 in 1994, 1993 and 1992, respectively. Interest paid, net
of interest capitalized, in 1994, 1993, and 1992 was $24,924,000, $26,686,000
and $29,127,000, respectively.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Pension expense in 1994, 1993 and 1992 was $207,000, $202,000 and
$229,000, respectively.
The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors upon completion of sixty months
of membership on the Board. The benefits, limited to ten years, are based on
years of service and the annual base director fee in effect as of the date a
director ceases to be a member of the Board.
The following table sets forth the amounts recognized in the Company's
financial statements:
Actuarial present value of benefit obligations:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
----------- -----------
<S> <C> <C>
Vested benefit obligation................................ $ 580,000 $ 552,000
----------- -----------
Accumulated benefit obligation........................... $ 580,000 $ 552,000
----------- -----------
Projected benefit obligation............................. $ 596,000 $ 566,000
Unrecognized prior service cost.......................... (106,000) (155,000)
Unrecognized net gain.................................... 144,000 99,000
Minimum liability recognized............................. -- 42,000
----------- -----------
Pension liability........................................ $ 634,000 $ 552,000
========== ==========
</TABLE>
A-19
<PAGE> 66
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension cost included the following components:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current service cost.............................. $ 70,000 $ 99,000 $ 91,000
Interest cost..................................... 39,000 43,000 33,000
Amortization of prior service cost................ 49,000 49,000 49,000
Amortization of net gain.......................... (9,000) -- --
-------- -------- --------
Net periodic pension cost......................... $149,000 $191,000 $173,000
======== ======== ========
</TABLE>
A discount rate of 8.5% for 1994 and 7.0% for 1993, and a 10.0% increase in
annual base director fees once every five years were used in determining the
actuarial present value of the projected benefit obligation.
STOCK INCENTIVE PLANS
The Company's stock incentive plans provide for the issuance of up to
2,600,000 shares of common stock for restricted stock awards and options to
directors and key employees of the Company. There were 1,369,754 and 149,183
shares available to grant further restricted stock awards and options at
December 31, 1994 and 1993, respectively.
Restricted stock awards are granted with transfer restrictions as described
in the stock incentive plans. At December 31, 1994, 32,941 shares of the
Company's common stock awarded to key employees remained restricted.
Restrictions relating to these shares will lapse each year following the date of
grant with respect to one-sixth, one-fifth or one-half of the total number of
shares granted, as the case may be. Expense is determined based on the market
value at the date of grant and is recognized over the period the restrictions
lapse. Expense recorded in 1994, 1993 and 1992 related to stock awards granted
was $367,000, $399,000 and $344,000, respectively.
Outstanding stock options granted to directors and key employees of the
Company were 753,130 and 688,166 at December 31, 1994 and 1993, respectively.
The exercise price of stock options outstanding ($18 to $35 1/4) is equal to the
fair market value of the shares on the dates the options were granted. In 1994,
174,964 stock options were granted with exercise prices of $26 to $27 1/8, and
in 1993, 204,596 stock options were granted with exercise prices of $23 1/2 to
$27 3/4. In 1992, 98,145 stock options were granted with exercise prices of
$29 1/4 to $35 1/4. Stock options granted to directors are exercisable
immediately and stock options granted to key employees become exercisable over
two to four years. In 1994, 90,000 stock options with exercise prices of $18 1/8
to $25 3/4 were exercised, and in 1993, 20,000 stock options with exercise
prices of $23 1/2 to $25 3/4 were exercised. In 1992, 73,650 stock options with
exercise prices of $18 to $23 1/8 were exercised. In 1994, 20,000 stock options
with exercise prices of $27 1/8 to $35 1/4 expired. Stock options of 611,987 and
538,751 at December 31, 1994 and 1993, respectively, were exercisable at prices
of $18 to $35 1/4. Stock options terminate ten years from the date of grant.
Dividend Equivalent Rights (DER) were granted in tandem with 74,964 and
104,596 of the stock options granted in 1994 and 1993, respectively. At each
dividend declaration date, a calculation is made to determine the number of
shares that could be acquired if dividends were paid on shares under option and
accumulated DERs, and such number of shares are accumulated for the benefit of
option holders for a period of five years from the date of the option grant.
Upon exercise or expiration of the related option, each option holder is
entitled to receive additional shares equivalent to the accumulated number of
related DER shares. At December 31, 1994 and 1993, the accumulated number of DER
shares were 27,856 and 9,198, respectively. Expense related to the DER shares is
equal to the equivalent amount of dividends used to determine the number of DER
shares. Expense recorded in 1994, 1993 and 1992 related to DER shares was
$577,000, $255,000 and $60,000, respectively. Under the terms of the Company's
stock incentive plans, in connection
A-20
<PAGE> 67
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with the planned issuance of Psychiatric Group Stock, outstanding restricted
stock awards, stock options, and DERs will be adjusted to reflect the issuance
of Psychiatric Group Stock.
PREFERRED STOCK PURCHASE RIGHTS PLAN
On April 20, 1990, the Company distributed to shareholders one preferred
stock purchase right (each a Right) for each outstanding share of Common Stock.
Under certain conditions, each Right may be exercised to purchase one
one-hundredth of a share of preferred stock, Series A, par value $.01 per share
(the Series A Preferred Shares), of the Company at a price of $45. The total
number of Rights currently issued or issuable, including Rights issuable in
connection with Common Stock which may be issued under the Company's stock
incentive plans and upon the conversion of the Company's outstanding Swiss
Bonds, is approximately 23,206,000. Approximately 232,000 Series A Preferred
Shares could be purchased upon the exercise of all Rights currently issued or
issuable. The number of Rights outstanding and Series A Preferred Shares
issuable upon exercise, as well as the Series A Preferred Share purchase price,
are subject to customary antidilution adjustments.
The Rights are evidenced by the certificates for shares of Common Stock,
and in general are not transferable apart from the Common Stock or exercisable
until after a party has acquired beneficial ownership of or made a tender offer
for 10% or more of the outstanding Common Stock of the Company (an Acquiring
Person), or the occurrence of other events as specified in the Rights Plan.
Under certain conditions as specified in the Rights Plan, including but not
limited to the acquisition by a party of 15% or more of the outstanding Common
Stock of the Company or the acquisition of the Company in a merger or other
business combination, each holder of a Right (other than an Acquiring Person
whose Rights will be void) will receive upon exercise thereof and payment of the
exercise price that number of shares of Common Stock of the Company or of the
other party, as applicable, having a market value of two times the exercise
price of the Right.
The Rights expire on April 20, 2000, and until exercised, the holder
thereof, as such, will have no rights as a shareholder of the Company. At the
Company's option, the Rights may be redeemed in whole at a price of $.01 per
Right at any time prior to becoming exercisable. In general, the Company may
also exchange the Rights at a ratio of one share of Common Stock per Right after
becoming exercisable but prior to the acquisition of 50% or more of the
outstanding shares of Common Stock by any party.
Series A Preferred Shares issuable upon exercise of the Rights will not be
redeemable. Each Series A Preferred Share will have 100 votes and will be
entitled to (a) dividends in an amount equal to the greater of $1.00 or 100
times the amount of the dividends per share paid on the Common Stock, (b) a
liquidation preference in an amount equal to the greater of $100 or 100 times
the amount per share paid on the Common Stock and (c) a payment in connection
with a business combination (in which shares of Common Stock are exchanged)
equal to 100 times the amount per share paid on the Common Stock.
DIVIDENDS
A quarterly dividend of $.575 per share, or approximately $11,989,000 in
the aggregate, was declared by the Board of Directors on January 31, 1995,
payable on February 24, 1995 to shareholders of record on February 10, 1995.
This dividend has been reflected as dividends payable in the accompanying
financial statements as of December 31, 1994. Dividends of $2.295 per share paid
during the year ended December 31, 1994 are characterized as $1.8275 of ordinary
income and $0.4675 return of capital.
In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess
A-21
<PAGE> 68
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Proceeds will be available only for the Psychiatric Group Stock and will be
limited to $30 million in the aggregate and $15 million in any calendar year.
LEGAL PROCEEDINGS
In August 1992, a shareholder class action lawsuit was filed against the
Company and certain directors and officers of the Company in the Federal
District Court in Denver, Colorado, alleging that among other things, the
defendants knowingly or recklessly disseminated false and misleading information
regarding the performance and creditworthiness of two of the Company's mortgage
loan investments. On May 28, 1993, the Company reached an agreement with the
plaintiffs, the other defendants to the lawsuits and its insurance carrier
regarding settlement and dismissal of the cases with prejudice. The Company
contributed $2,615,000 to the settlement in 1993. The Company's total costs
related to this matter were $3,020,000 including the Company's settlement
contribution, legal fees and other expenses. Of this amount, $786,000 was
accrued in the fourth quarter of 1992, and the remaining $2,234,000 was charged
against income in 1993. The settlement became effective upon approval by the
court in December 1993.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Mortgage Notes Receivable. The carrying amount of mortgage notes
receivable is a reasonable estimate of fair value, as the pricing and terms of
the notes are indicative of current rates and credit risk.
Construction Loans. The carrying amounts of these construction loans are a
reasonable estimate of fair value, as the variable rate pricing and terms of the
loans are indicative of current rates and credit risk.
Other Notes Receivable. The Company's pricing and terms of variable-rate
financing and commitments provided to certain operators and a term note are
indicative of current rates and credit risk, and therefore, the carrying amount
of these financial instruments is a reasonable estimate of fair value.
Cash and Short-Term Investments. The carrying amount approximates fair
value because of the short maturity of these financial instruments.
Short-Term Loan Payable. The terms of borrowings under the Company's
unsecured revolving credit agreement are generally less than 90 days at variable
pricing indicative of current short-term borrowing rates. Accordingly, the
carrying amount is a reasonable estimate of fair value.
Mortgage Notes Payable. The carrying amount of mortgage notes payable
generally reflects current rates for similar type borrowings and is a reasonable
estimate of fair value.
Subordinated Convertible Bonds Payable. The fair value of the Company's
subordinated convertible bonds payable is based on the quoted market price of
the bonds as traded in Switzerland.
Senior Notes Payable. An estimate of rates currently available to the
Company for debt with similar terms was used to determine the fair value of the
Company's senior notes payable.
Loan Commitments. The terms and pricing of the Company's $30,000,000
commitment at December 31, 1994 to participate in the funding of a construction
loan that will convert to a mortgage note receivable are indicative of current
rates and terms for similar arrangements. The amount shown as carrying amount
and fair value at December 31, 1993 represents the construction financing fee
that was received and deferred by the Company on another construction loan that
was prepaid by the borrower in February 1994.
A-22
<PAGE> 69
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Mortgage notes receivable................. $37,875 $37,875 $45,825 $45,825
Construction loan......................... 21,383 21,383 15,039 15,039
Other notes receivable.................... 9,428 9,428 8,598 8,598
Cash and short-term investments........... 1,838 1,838 35,670 35,670
FINANCIAL LIABILITIES
Short-term loan payable................... 14,500 14,500 -- --
Mortgage notes payable.................... -- -- 14,468 14,468
Subordinated convertible bonds payable.... 6,163 5,894 5,955 6,442
Senior notes payable...................... 225,000 231,358 225,000 245,668
UNRECOGNIZED FINANCIAL INSTRUMENTS
Loan commitments.......................... 225 225 520 520
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1994
Revenues....................... $21,553 $21,653 $21,774 $22,047 $87,027
Net Income (Loss).............. 9,784 (19,256)(1) 10,395 8,770 9,693
Net Income (Loss) per share.... .47 (.92) .50 .42 .46
1993
Revenues....................... $20,098 $19,723 $20,889 $20,813 $81,523
Net Income..................... 27,864(2) 5,765 9,026 8,332 50,987
Net Income per share........... 1.61 .33 .45 .40 2.71
</TABLE>
- - - ---------------
(1) Reflects a write-down of $30,000,000 relating to investments in psychiatric
hospitals.
(2) Includes a gain of $19,742,000 on the sale of a property.
A-23
<PAGE> 70
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS CARRYING AMOUNT
INITIAL COST TO COMPANY AT DECEMBER 31, 1994(A)
----------------------- SUBSEQUENT ----------------------------------
LICENSED BUILDINGS AND CAPITAL BUILDINGS AND
DESCRIPTION AND LOCATION BEDS LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- - - ------------------------------- -------- ------- ------------- ------------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Acute care general properties:
Irvine, California 177 $17,987 $ 57,013 $ -- $17,987 $ 57,013 $ 75,000
Tarzana, California 233 11,921 43,079 18,700 12,421 61,279 73,700
Victorville, California 77 1,755 22,245 -- 1,755 22,245 24,000
Miami, Florida 412 4,163 55,837 9,012 4,163 64,849 69,012
Palm Beach Gardens, Florida 204 4,024 40,976 648 4,024 41,624 45,648
Roswell, Georgia 167 4,149 20,851 21,191 4,149 42,042 46,191
Halstead, Kansas 190 80 14,170 -- 80 14,170 14,250
Jefferson, Louisiana 135 3,012 32,138 7,673 4,412 38,411 42,823
Poplar Bluff, Missouri 201 404 19,596 3,265 404 22,861 23,265
Hickory, North Carolina 275 1,247 38,753 5,449 1,247 44,202 45,449
Cleveland, Texas 104 300 8,000 -- 300 8,000 8,300
San Angelo, Texas 171 165 15,867 420 256 16,196 16,452
------- --------- ------- ------- --------- --------
49,207 368,525 66,358 51,198 432,892 484,090
------- --------- ------- ------- --------- --------
Psychiatric properties:
Sunrise, Florida 100 3,325 15,209 -- 3,325 8,609 11,934(d)
Tarpon Springs, Florida 130 1,457 2,904 2,162 1,457 5,066 6,523
Lemont, Illinois 60 440 8,372 -- 440 5,372 5,812(c)(d)
Pembroke, Massachusetts 115 1,712 9,340 -- 1,712 5,840 7,552(d)
Westwood, Massachusetts 100 1,631 7,052 -- 1,631 4,252 5,883(d)
------- --------- ------- ------- --------- --------
8,565 42,877 2,162 8,565 29,139 37,704
------- --------- ------- ------- --------- --------
Rehabilitation properties:
Fayetteville, Arkansas 60 962 8,124 -- 962 8,124 9,086
Wichita, Kansas 60 1,938 12,659 -- 1,938 12,659 14,597
Morgantown, West Virginia 80 -- 10,084 1,634 -- 11,718 11,718
------- --------- ------- ------- --------- --------
2,900 30,867 1,634 2,900 32,501 35,401
------- --------- ------- ------- --------- --------
Medical Office Buildings:
Murrieta, California n/a 285 8,515 -- 285 8,515 8,800
------- --------- ------- ------- --------- --------
$60,957 $ 450,784 $70,154 $62,948 $ 503,047 $565,995
------- --------- ------- ------- --------- --------
<CAPTION>
ACCUMULATED DATE OF DATE DEPRECIABLE
DESCRIPTION AND LOCATION DEPRECIATION CONSTRUCTION(B) ACQUIRED LIFE
- - - ------------------------------- ------------ --------------- -------- -----------
<S> <C> <C> <C> <C>
Acute care general properties:
Irvine, California $ 5,286 1990 04/23/91 40 years
Tarzana, California 11,291 1973-1994 02/27/87 34 years
Victorville, California 162 1994 09/20/94 40 years
Miami, Florida 11,997 1973-1994 02/27/87 38 years
Palm Beach Gardens, Florida 8,102 1964-1992 02/27/87 40 years
Roswell, Georgia 6,061 1983-1993 02/27/87 42 years
Halstead, Kansas 709 1976 06/30/93 30 years
Jefferson, Louisiana 4,370 1987-1992 05/11/90 40 years
Poplar Bluff, Missouri 4,156 1980-1993 02/27/87 40 years
Hickory, North Carolina 8,555 1974-1993 02/27/87 38 years
Cleveland, Texas 296 1968-1986 01/03/94 27 years
San Angelo, Texas 1,315 1960-1991 09/30/91 40 years
--------
62,300
--------
Psychiatric properties:
Sunrise, Florida 1,886 1988 08/15/90 25 years
Tarpon Springs, Florida 596 1928-1993 08/15/90 25 years
Lemont, Illinois 718 1989 12/31/92 25 years
Pembroke, Massachusetts 1,356 1984 10/05/90 20 years
Westwood, Massachusetts 1,019 1890-1984 10/05/90 20 years
--------
5,575
--------
Rehabilitation properties:
Fayetteville, Arkansas 711 1991 07/01/91 40 years
Wichita, Kansas 883 1992 03/16/92 40 years
Morgantown, West Virginia 988 1991 02/25/91 40 years
--------
2,582
--------
Medical Office Buildings:
Murrieta, California 160 1991 04/01/94 40 years
--------
$ 70,617
--------
</TABLE>
- - - ---------------
(a) The cost basis of the properties for Federal income tax purposes is the same
as the gross carrying amount, except for those properties for which a
write-down was recorded in 1994. For Federal income tax purposes, the gross
carrying amount for the Halstead, Kansas facility is classified as an
investment in an Industrial Revenue Bond and is not depreciated.
(b) Most properties have had improvements since their initial construction. The
range of dates reflects the construction date of the original structures
through the latest date of improvements.
(c) This property was conveyed to the Company in December 1992 in connection
with the restructuring and forgiveness of a mortgage note receivable. The
$21.4 million mortgage note receivable had been written down in June 1992 to
$10 million. Subsequent recovery of a $1.1 million interest reserve fund
from the mortgagee reduced the Company's recorded investment in the note to
$8.8 million (net of unamortized fees) which became the Company's basis in
the property upon its conveyance. The property was written down by $3
million in 1994 to its current gross carrying amount of $5.8 million.
(d) In view of negative trends that caused declining cash flow at these
psychiatric hospitals, the Company recorded a write-down of its investment
in each of these properties in 1994. The write-downs by property were:
Sunrise, Florida $6.6 million; Lemont, Illinois $3 million; Pembroke,
Massachusetts $3.5 million; and Westwood, Massachusetts $2.8 million.
A-24
<PAGE> 71
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1994
(IN THOUSANDS)
Summary of Real Estate and Accumulated Depreciation Activity:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------- ----------------------- -----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of
Year........................ $543,093 $ 58,157 $536,845 $ 47,829 $537,796 $ 36,744
Acquisitions.................. 30,020 n/a 14,250 n/a 8,812 n/a
Cost of Real Estate Sold...... (7,309) (1,537) (26,000) (3,642) (33,958) (1,571)
Construction Projects
Completed................... 15,000 n/a n/a n/a 14,597 n/a
Capital Improvements.......... 7,241 n/a 17,998 n/a 9,598 n/a
Write-Down of Real Estate
Investments................. (22,050) n/a -- n/a -- n/a
Depreciation.................. n/a 13,997 n/a 13,970 n/a 12,656
-------- -------- -------- -------- -------- --------
Balance at End of Year........ $565,995 $ 70,617 $543,093 $ 58,157 $536,845 $ 47,829
-------- -------- -------- -------- -------- --------
</TABLE>
A-25
<PAGE> 72
ANNEX B
CORE GROUP
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business and Properties............................................................... B-2
Selected Combined Financial Data...................................................... B-12
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... B-13
Report of Independent Public Accountants.............................................. B-17
Combined Financial Statements......................................................... B-18
</TABLE>
B-1
<PAGE> 73
BUSINESS AND PROPERTIES
CORE GROUP
References herein to the "Core Group" are to the Core Group as it conducts
its business and holds its investments through the Company. Because the Core
Group is a notional entity and has no separate legal existence, all rights and
obligations of the Core Group are rights and obligations of the entire Company.
See "Special Considerations -- Stockholders of One Company; Financial
Performance of One Group Could Affect the Other Group."
GENERAL
On January 31, 1995, the Company's Board of Directors authorized management
to pursue a transaction which is designed to separate the economic attributes of
its investments in psychiatric hospitals (the "Psychiatric Group") and its core
investments in acute care hospitals, rehabilitation hospitals 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 transaction would entail the distribution to holders of Common
Stock of depositary shares representing a new series of preferred stock, par
value $0.01 per share, to be designated Psychiatric Group Preferred Stock (the
"Psychiatric Group Stock"). The Psychiatric Group Stock would be intended to
reflect the separate performance of the Psychiatric Group. The Company's
existing Common Stock would be intended to reflect the separate performance of
the Core Group. In connection with the proposed transaction, 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 would be a holder of
an issue of capital stock of the entire Company and would be subject to the
risks associated with an investment in the Company and all of its businesses,
assets and liabilities. For example, if cash flow and proceeds of any sales of
assets of the Psychiatric Group should be insufficient to service intercompany
loans or other debt owed by the Psychiatric Group (approximately $29,428,000 at
December 31, 1994, or approximately $15,603,000 at that date on the pro forma
basis described herein), the Core Group would be adversely affected.
Following is a description of the business and properties of the
investments of the Company that comprise the Core Group. The Company expects
that further investments will be added to the Core Group portfolio over time.
The Core Group's current portfolio of 17 facilities consists of 13 acute
care hospitals (one of which is under construction), three physical
rehabilitation hospitals ("Rehabilitation Hospitals") and one medical office
building. As of December 31, 1994, the net book value of the Core Group's assets
was $514.9 million on the pro forma basis described herein. Of the Core Group's
real estate assets at that date, 91% in net book value represented the acute
care segment, 7% in net book value represented the rehabilitation segment and 2%
in net book value represented the medical office building segment. As of
December 31, 1994, substantially all of the Core Group's real estate assets were
held in fee. The Company expects that all of its future investments will be
added to the Core Group's portfolio over time.
The facilities are diversified geographically across 10 states, are
distributed among large and small population centers, and are operated by eight
experienced management companies. These operators include American Medical
International, Inc. ("AMI"), Columbia/HCA Healthcare Corporation
("Columbia/HCA"), Continental Medical Systems, Inc. ("CMS"), HealthTrust,
Inc. -- The Hospital Company ("HealthTrust"), NovaCare, Inc. ("NovaCare"),
Paracelsus Healthcare Corporation ("Paracelsus"), Quorum Health Group, Inc.
("Quorum") and Dynamic Health, Inc. ("Dynamic Health"). Facilities operated by
AMI represented 58% of the Core Group's revenues for the year ended December 31,
1994. AMI has entered into a merger agreement with National Medical Enterprises,
Inc. ("NME") pursuant to which AMI is to become a wholly-owned subsidiary of
NME. Columbia/HCA has entered into an agreement with HealthTrust pursuant to
which HealthTrust is to become a wholly-owned subsidiary of Columbia/HCA. Both
transactions are subject to certain conditions, including certain regulatory
approvals.
Approximately 85% of the Core Group's property revenues for the year ended
December 31, 1994 were secured by corporate guarantees. Also, as of December 31,
1994, letters of credit from commercial banks and
B-2
<PAGE> 74
cash deposits aggregating $13 million were available to the Core Group as
security for lease and construction development obligations. Leases for nine of
the Core Group's facilities, representing 87% of the Core Group's 1994 property
revenues, contain cross-default provisions.
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
outpatient services, downward pressure on reimbursement rates from government,
insurance company and managed care payors and an increasing trend toward
capitation of health care delivery costs (delivery of services on a fixed price
basis to a defined group of covered parties). Outpatient business is expected to
increase as advances in medical technologies allow more procedures to be
performed on an outpatient basis. Payors continue to direct more patients from
inpatient care to outpatient care. The portion of providers' patient services
reimbursed under Medicare and Medicaid continues to increase as the population
ages and states expand Medicaid programs. States and insurance companies
continue to negotiate actively the amounts they will pay for services. In
addition, the entrance of insurance companies into managed care programs is
accelerating the introduction of managed care in new localities. As a result,
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
delivery systems or are in the process of becoming integrated into such systems.
THE CORE GROUP FACILITIES
The Core Group's 17 facilities consist of 12 acute care hospitals owned by
the Core Group (the "Acute Care Hospitals"), three Rehabilitation Hospitals
owned by the Core Group, an acute care hospital currently under construction in
Austin, Texas to which the Core Group has made a participating mortgage loan
("Austin Diagnostic Hospital") and one medical office building owned by the Core
Group (together, the "Core Group Facilities").
The Acute Care Hospitals provide a wide range of services which may include
fully-equipped operating and recovery rooms, obstetrics, radiology, intensive
care, open-heart surgery and coronary care, neurosurgery, neonatal intensive
care, magnetic resonance imaging, nursing units, oncology, clinical
laboratories, respiratory therapy, physical therapy, nuclear medicine,
rehabilitation services and outpatient services.
The Rehabilitation Hospitals provide acute rehabilitation care on a
multi-disciplinary, physician-directed basis to severely disabled patients. In
addition to general medical rehabilitation programs, the Rehabilitation
Hospitals offer a number of specialty programs, including pulmonary, ventilator,
neurobehavioral, brain injury and paid programs. Each of the Rehabilitation
Hospitals is operated pursuant to a joint venture between a publicly-held,
national rehabilitation hospital operator and a local health care provider.
The Core Group is funding a $30 million participation in an $86 million
participating mortgage loan to Austin Diagnostic Hospital, a 158-bed acute care
hospital and medical office building currently under construction in Austin,
Texas. Austin Diagnostic Hospital is owned by a joint venture comprised of
B-3
<PAGE> 75
HealthTrust and The Austin Diagnostic Clinic Association ("ADC"), the largest
primary care and multi-specialty physician group practice in the Austin area.
HealthTrust will manage the facility upon completion of construction, which is
scheduled for the second quarter of 1995.
The Core Group owns a 60,000 square-foot medical office building located in
Murrieta, California known as Walsh Medical Arts Center. The medical office
building is located across the street from Sharp Healthcare Murrieta, a
developing medical campus that includes 49 acute care beds and 42 skilled
nursing beds operated by Sharp Healthcare System of San Diego.
B-4
<PAGE> 76
The following is a listing of the Core Group Facilities as of January 31,
1995. Unless otherwise indicated, all Core Group Facilities listed are owned by
the Company:
THE CORE GROUP FACILITIES
<TABLE>
<CAPTION>
ANNUAL INITIAL TERM
YEAR TOTAL BASE RENT/ OF LEASE/
DESCRIPTION & LOCATION OPERATOR ACQUIRED INVESTMENT(1) INTEREST(2) MORTGAGE(3)
---------------------- -------- --------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACUTE CARE HOSPITALS
Cleveland Regional Medical Center Dynamic Health, Inc. 1994 $ 8,300 $ 812 2003
Cleveland, Texas
Concho Valley Regional Hospital Quorum Health Group, 1991 16,452 1,478 2001
San Angelo, Texas Inc.
Desert Valley Hospital Quorum Health Group, 1994 24,000 2,654 2004
Victorville, California Inc.(4)
Elmwood Medical Center Paracelsus Healthcare 1990 42,823 5,451 2004
Jefferson, Louisiana Corporation
Frye Regional Medical Center American Medical 1987 45,449 5,265 1999
Hickory, North Carolina International, Inc.(5)
Halstead Hospital Paracelsus Healthcare 1993 14,250 1,600 2003
Halstead, Kansas(6) Corporation
Irvine Medical Center American Medical 1991 75,000 10,057 2004
Irvine, California International, Inc.(5)
Kendall Regional Medical Center Columbia/HCA 1987 69,012 7,884 1999
Miami, Florida Healthcare
Corporation(7)
Lucy Lee Hospital American Medical 1987 23,265 2,703 1999
Poplar Bluff, Missouri International, Inc.(5)
North Fulton Medical Center American Medical 1987 46,191 5,471 1999
Roswell, Georgia International, Inc.(5)
Palm Beach Gardens Medical Center American Medical 1987 45,648 5,283 1999
Palm Beach Gardens, Florida International, Inc.(5)
Tarzana Regional Medical Center American Medical 1987 73,700 8,308 2004
Tarzana, California International, Inc.(5)
--------- --------
Total Acute Care Hospitals $ 484,090 $ 56,966
========= ========
REHABILITATION HOSPITALS
HCA Wesley Rehabilitation Hospital Continental Medical 1992 $ 14,597 $ 1,615 2002
Wichita, Kansas Systems, Inc.(8)
MountainView Regional NovaCare, Inc.(8) 1991 11,718 1,358 2001
Rehabilitation Hospital
Morgantown, West Virginia
Northwest Arkansas Continental Medical 1991 9,086 1,064 2001
Rehabilitation Hospital Systems, Inc.(8)
Fayetteville, Arkansas
--------- --------
Total Rehabilitation Hospitals $ 35,401 $ 4,037
========= ========
OTHER
Austin Diagnostic Medical Center HealthTrust, Inc. -- 1995 $ 30,001 $ 2,925(10) 2025(11)
Austin, Texas(9) The Hospital
Company(7)
Walsh Medical Arts Center N/A 1994 8,800 903 2003
Murrieta, California
--------- --------
Total Other $ 38,801 $ 3,828
========= ========
PORTFOLIO TOTAL $ 558,292 $ 64,831
========= ========
</TABLE>
- - - ---------------
(1) Reflects gross investments, except Austin Diagnostic Medical Center, which
reflects the Company's total investment commitment.
(2) Reflects contract rate of annual base rent or interest.
(3) Each lease and mortgage provides the lessee or borrower with renewal
options to extend the term of the lease or mortgage beyond the primary
term.
B-5
<PAGE> 77
(4) Quorum is the operator and Desert Valley Hospital, Inc. is the lessee.
(5) AMI has entered into a merger agreement with NME pursuant to which AMI is
to become a wholly-owned subsidiary of NME. The transaction is subject to
certain conditions, including certain regulatory approvals.
(6) The Company's investment in Halstead Hospital was consummated on June 30,
1993 by the acquisition of ten year industrial revenue bonds secured by the
hospital, which the Company expects to exchange for ownership of the
hospital at the end of the ten year term.
(7) Columbia/HCA has entered into an agreement with HealthTrust pursuant to
which HealthTrust is to become a wholly-owned subsidiary of Columbia/HCA.
The transaction is subject to certain conditions, including certain
regulatory approvals.
(8) Such Rehabilitation Hospital is leased by a joint venture comprised of the
operator and other health care providers.
(9) Investment held in the form of a mortgage rather than owned by the Company.
(10) Base interest for the first two years is 9.75%. The interest rate in years
three through ten will be 10.25%. The interest rate will reset in years 11
and 21 to the greater of the then current loan rate or 450 basis points
over the then current ten year Treasury rate. Beginning in year three,
monthly principal payments are required based on a thirty year
amortization.
(11) Based on scheduled completion date of facility.
See the notes to the Company consolidated financial statements and the Core
Group combined financial statements included in this Information Statement for
additional information regarding the Core Group Leased Properties (as defined
below) and the participating mortgage loan relating to Austin Diagnostic
Hospital and for the carrying value and accumulated depreciation of the Core
Group Leased Properties.
CORE GROUP FACILITY OPERATORS
Below are brief descriptions of the operators of the Core Group Facilities
based on information provided by the operators or, where available, obtained
from publicly available information filed with the Securities and Exchange
Commission (the "SEC"). Readers may obtain updated information from the SEC with
respect to operators that file periodic reports with the SEC under the
Securities Exchange Act of 1934. With the exception of Dynamic Health, all of
the operators have accessed public equity or debt markets.
American Medical International, Inc. AMI is one of the leading hospital
management companies in the United States. As of August 31, 1994, AMI operated
36 acute care hospitals and one psychiatric hospital containing a total of 9,021
licensed beds. Subsequent to August 31, 1994, AMI, in partnership with
unaffiliated third parties, acquired an additional acute care hospital,
increasing the total acute care hospitals operated by AMI to 37. AMI focuses on
delivering value to its patients and its communities with a full range of
quality inpatient and outpatient services, including medical, surgical,
obstetric, diagnostic, specialty and home health care. AMI also operates
ancillary facilities at each of its hospitals, such as ambulatory, occupational
and rural health care clinics. AMI's hospitals are principally located in the
suburbs of major metropolitan areas of 13 states, including Texas, California
and Florida. AMI has entered into a merger agreement with National Medical
Enterprises, Inc. ("NME") pursuant to which AMI is to become a wholly-owned
subsidiary of NME. The transaction is subject to certain conditions, including
certain regulatory approvals. For further information regarding AMI see Annex D.
Columbia/HCA Healthcare Corporation. Columbia/HCA is one of the largest
health care service companies in the United States. As of October 31, 1994,
Columbia/HCA operated 167 general, acute care hospitals and 28 psychiatric
hospitals in 26 states and two foreign countries. In addition, as part of its
comprehensive health care networks, Columbia/HCA operates facilities that
provide a broad range of outpatient and ancillary services. As of October 31,
1994, Columbia/HCA operated more than 125 outpatient centers. HealthTrust has
entered into an agreement with Columbia/HCA pursuant to which HealthTrust is to
become a wholly-owned subsidiary of Columbia/HCA. The transaction is subject to
certain conditions, including certain regulatory approvals.
B-6
<PAGE> 78
Continental Medical Systems, Inc. CMS is a diversified provider of
comprehensive medical rehabilitation and physician services. CMS has a
significant presence in each of the rehabilitation industry's three principal
sectors -- inpatient rehabilitation care, contract services and outpatient
rehabilitation care. As of September 12, 1994 CMS operated 36 freestanding
comprehensive medical rehabilitation hospitals with a total of 2,343 licensed
beds located in 15 states. CMS also has one freestanding comprehensive medical
rehabilitation hospital currently under construction with a total of 68 beds.
CMS's comprehensive freestanding medical rehabilitation hospitals typically
provide on-site outpatient services. As of June 30, 1994, CMS also provided
outpatient services through 130 outpatient rehabilitation clinics, 91 of which
are operated as satellite facilities to CMS's inpatient rehabilitation
hospitals. The remaining 39 outpatient clinics are operated through CMS's
contract therapy subsidiaries. Additionally, CMS provides short term contract
physician services to institutional providers and physician practice groups
throughout the United States.
HealthTrust, Inc. -- The Hospital Company. HealthTrust is one of the
largest providers of health care services in the United States, delivering a
full range of inpatient, outpatient and other health care services principally
through its affiliated hospitals. As of October 31, 1994, HealthTrust operated
116 acute care hospitals, all of which are owned or leased by HealthTrust
through its subsidiaries or joint venture arrangements. HealthTrust is also an
investor, through joint ventures, in four other acute care hospitals.
HealthTrust's affiliated hospitals are located in rural, suburban and urban
communities in 22 southern and western states. HealthTrust's affiliated
hospitals generally provide a full range of inpatient and outpatient health care
services, including medical/surgical, diagnostic, obstetric, pediatric and
emergency services. Many of HealthTrust's hospitals also offer certain specialty
programs and services, including occupational medicine programs, home health
care services, skilled nursing services, physical therapy programs,
rehabilitation services, alcohol and drug dependency programs and selected
mental health services. The health care services provided by each hospital are
based upon the local demand for such services and the ability to provide such
services on a competitive basis. HealthTrust has entered into an agreement with
Columbia/HCA pursuant to which HealthTrust is to become a wholly-owned
subsidiary of Columbia/HCA. The transaction is subject to certain conditions,
including certain regulatory approvals.
NovaCare, Inc. NovaCare is a leading national provider of comprehensive
medical rehabilitation services. These services include providing rehabilitation
therapy and subacute services on a contract basis to health care institutions,
primarily nursing facilities; operating acute medical rehabilitation hospitals;
providing outpatient rehabilitation services through a national network of
clinics; and delivering orthotic and prosthetic rehabilitation services through
a national network of patient care centers. As of September 30, 1994, NovaCare
provided rehabilitation therapy through 5,637 contracts in 2,155 facilities
located in 40 states, operated 11 rehabilitation hospitals, provided outpatient
services at 375 clinics in 40 states and provided orthotic and prosthetic
rehabilitation services through 125 patient care centers in 26 states. NovaCare
has entered into a merger agreement to be acquired by Healthsouth
Rehabilitation.
Paracelsus Healthcare Corporation. Paracelsus is a privately-owned company
that operates 18 acute care hospitals with a total of 1,781 licensed beds.
Paracelsus was organized in late 1980 in connection with its acquisition in
February 1981 of the assets of Ramada Medical Corporation, a subsidiary of
Ramada Inns, Inc. Paracelsus is owned by a German shareholder who, through
various companies, also operates hospitals in Europe, and operates a total of
9,192 licensed hospital beds worldwide.
Quorum Health Group, Inc. Quorum is a leading hospital management company
which, as of June 30, 1994, owned and/or managed acute care hospitals in 44
states. As of June 30, 1994, Quorum also owned and operated eleven acute care
hospitals with 2,413 licensed beds, including an acute care hospital held for
sale with 184 licensed beds. Effective August 1, 1994, Quorum acquired an
additional acute care hospital with 208 licensed beds. Quorum also provides
comprehensive management services to 262 hospitals with more than 31,000
licensed beds and has contracts with 115 additional hospitals to provide
consulting and support services.
Dynamic Health, Inc. Dynamic Health is a privately-held company formed in
1992 to acquire and operate acute care hospitals. Dynamic Health currently owns
and operates three hospitals with a total of 320 beds. Operations of Dynamic
Health's acquired facilities and development of the related health care services
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<PAGE> 79
are managed by an executive team with combined experience of over 40 years of
management and historic oversight responsibilities for over 50 acute care
hospitals.
LEASES AND MORTGAGE LOAN
The Core Group owns the 12 Acute Care Hospitals, the three Rehabilitation
Hospitals and the medical office building, which are collectively referred to
herein as the "Core Group Leased Properties" or individually as a "Core Group
Leased Property."
Leases.
GENERAL. The leases for the Core Group Leased Properties provide for base
rental rates which generally range from 8.9% to 13.4% per annum of the
acquisition price of the related Core Group Leased Property. Rental rates vary
by lease, taking into consideration many factors, including, but not limited to,
credit of the lessee, operating performance of the Core Group Leased Property,
interest rates at the commencement of the lease, and location, type and physical
condition of the Core Group Leased Property. The leases provide for additional
rents which are based upon a percentage of increased revenues over specific base
period revenues of the related Core Group Leased Properties.
The obligations under the leases are generally guaranteed by the parent
corporation of the lessee, if the lessee is a subsidiary, or has some other form
of credit enhancement such as a letter of credit or a security deposit. Certain
of the Core Group's leases are with subsidiaries of the operator's described
above and are non-recourse to such operators. Approximately 85% of the Core
Group's property revenues for the year ended December 31, 1994 were secured by
corporate guarantees. Also, as of December 31, 1994, letters of credit from
commercial banks and cash deposits aggregating $13 million were available to the
Company as security for Core Group lease and construction development
obligations.
The leases are on a triple "net" basis, and the lessee is responsible
thereunder, in addition to the base and additional rents, for all additional
charges, including every fine, penalty, interest and cost which may be levied
for non-payment or late payment thereof, all taxes, assessments, levies, fees,
water and sewer rents and charges, all governmental charges with respect to the
Core Group Leased Property and all utility and other charges incurred with the
operation of the Core Group Leased Property. Each lessee is required, at its
expense, to maintain the Core Group Leased Property in good order and repair.
The Core Group is not required to repair, rebuild or maintain the Core Group
Leased Properties.
ACUTE CARE HOSPITALS. The Acute Care Hospital leases provide for a fixed
term of from ten to 17 years and one or more renewal options of from five to ten
years each. In addition to monthly base rent, all of the Acute Care Hospital
leases provide for the quarterly payment of additional rent in an amount equal
to (i) a specified percentage of the amount by which the Gross Revenues (as
defined) attributable to the Core Group Leased Property for the year exceed the
Gross Revenues derived from such Core Group Leased Property during a specified
base year ("Excess Gross Revenues") up to a designated dollar amount (the
"Transition Amount"). Should the Transition Amount be reached in any year,
additional rent shall be equal to a reduced percentage of the Excess Gross
Revenues for the remainder of such year.
Pursuant to the terms of the Acute Care Hospital leases, the Core Group has
the right to approve capital expenditures (only in excess of $2 million for
certain leases), the option to fund certain capital expenditures under some of
the leases and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. The base and
additional rental provisions of leases are amended when such capital
expenditures are funded to reflect the Company's increased investment.
Six of the Acute Care Hospitals are operated by subsidiaries of AMI under
long-term leases with the Core Group, which comprised 58% of the Core Group's
1994 total revenues. AMI has guaranteed certain obligations of its subsidiaries
under such leases and each such lease is cross-defaulted with the other AMI
leases. The AMI leases each grant to AMI the option, exercisable on not less
than six months' nor more than 24 months' notice, to purchase the Core Group
Leased Property upon the expiration of any term of the lease at the Fair Market
Value of the Core Group Leased Property at the expiration of said term. The
expiration of the
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<PAGE> 80
initial terms of such leases are shown in the table above. For purposes of the
second preceding sentence, "Fair Market Value" means the price that a willing
buyer not compelled to buy would pay to a willing seller not compelled to sell
for such property at the applicable expiration less the portion of such price
attributable to capital additions paid for by AMI. The determination of such
price will take into account (i) that the applicable lease is assumed not to be
in effect on the Core Group Leased Property and (ii) that the seller of such
Core Group Leased Property must pay for title insurance and closing costs.
The leases of the other Acute Care Hospitals generally provide the lessee
with an option to purchase the property at the end of the term of the lease at
the greater of fair market value or Total Investment Cost (as defined). Six of
the leases provide the lessee an additional purchase option during the term of
the lease at a predetermined purchase price designed to provide the Core Group a
favorable total return on its investment.
Two of the Acute Care Hospitals are operated by subsidiaries of Paracelsus
under long-term leases with the Company, which comprised 10% of the Company's
1994 total revenues. The leases for the two Acute Care Hospitals operated by
Paracelsus contain reciprocal cross-default provisions.
REHABILITATION HOSPITALS. The Rehabilitation Hospital leases provide for
an initial term of ten years and three renewal periods of five years each,
except in the case of the Mountain View Regional Rehabilitation Hospital lease,
which provides for two renewal periods of ten years each and a third renewal
period of up to fifteen years. In addition to monthly base rent, the
Rehabilitation Hospital leases provide for the quarterly payment of additional
rent in an amount equal to a specified percentage of Excess Gross Revenues. The
Rehabilitation Hospital leases each grant to the operator the option to purchase
the Rehabilitation Hospital upon expiration of any term of the lease at the
greater of the Fair Market Value of or the Core Group's cost basis in the
Rehabilitation Hospital at the expiration of said term. One of the
Rehabilitation Hospital leases grants an interim purchase option exercisable at
the end of the fifth year of the lease at a purchase price equal to the greater
of the fair market value of the facility based on the income approach or the
Core Group's costs basis in the facility.
MEDICAL OFFICE BUILDING. The medical office building is master-leased for
a nine-year remaining term to a partnership consisting of 22 physicians who are
the primary tenants of the building.
Mortgage Loan.
As of December 31, 1994, the Core Group had funded $21.4 million of its $30
million participation in an $86 million participating mortgage loan for the
development of the 158-bed Austin Diagnostic Hospital. The mortgage loan is
secured by the hospital and related land and improvements. In addition, an $8.6
million bank letter of credit will be provided to secure the obligations under
the mortgage upon issuance of a certificate of occupancy and will be limited to
10% of the final amount of the mortgage loan. HealthTrust and ADC have each
guaranteed 50% of the obligations under the mortgage.
COMPETITION
The Core Group competes with health care providers, real estate
partnerships, other real estate investment trusts and other investors, including
insurance companies and banks, generally in the acquisition, leasing and
financing of health care facilities. Management of the Company believes that the
Core Group Facilities in which it has invested are providers of high quality
health care services in their respective markets.
The operators of the Core Group Facilities compete on a local and regional
basis with other operators of comparable facilities. They compete with
independent operators as well as managers of multiple facilities, some of which
are substantially larger and have greater resources than the operators of the
Core Group Facilities. Some of these competing facilities are operated for
profit while others are owned by governmental agencies or tax-exempt,
not-for-profit organizations. The Company believes that the Core Group
Facilities compete favorably with other hospitals based upon many factors,
including the services and specialties offered, quality of management, ease of
access, reputation and the ability to attract competent physicians and maintain
strong physician relationships.
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ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. In connection with its ownership and operation of the Core
Group Facilities, the Company may be potentially liable for such costs.
All of the Core Group Facilities have been subject to Phase I environmental
assessments, which are intended to discover information regarding, and to
evaluate the environmental condition of, the surveyed properties and surrounding
properties. The Phase I assessments included a historical review, a public
records review, a preliminary investigation of the site and surrounding
properties, screening for the presence of asbestos, polychlorinated biphenyls
and underground storage tanks and the preparation and issuance of a written
report, but do not include soil sampling or subsurface investigations. In each
case where Phase I assessments resulted in specific recommendations for remedial
actions, the Company's management has taken the recommended action.
The Phase I assessments have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Core Group's
business, assets or results of operations, nor is the Company aware of any such
liability. Nevertheless, it is possible that these assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Moreover, no assurances can be given that (i)
future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the Core
Group Facilities will not be affected by tenants and occupants of the Core Group
Facilities, by the condition of properties in the vicinity of the Core Group
Facilities (such as the presence of underground storage tanks) or by third
parties unrelated to the Company.
The Company believes that the Core Group Facilities are in compliance in
all material respects with all federal, state and local ordinances and
regulations regarding hazardous or toxic substances. The Company has not been
notified by any governmental authority, or is otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of its present or former properties.
LEGAL PROCEEDINGS
The Core Group is not currently involved in any material litigation nor, to
the Company's knowledge, is any material litigation currently threatened against
the Core Group or its properties, other than routine litigation arising in the
ordinary course of business.
GOVERNMENT REGULATION AND PAYOR ARRANGEMENTS
Each of the Core Group Facilities is a health care related facility and the
amount of additional rent or additional interest, if any, which is based on the
lessee's or mortgagee's gross revenue, is in most cases subject to changes in
the reimbursement and licensing policies of federal, state and local
governments. In addition, the acquisition of health care facilities is generally
subject to state and local regulatory approval.
Acute Care Hospitals. Acute care hospitals are subject to extensive
federal, state and local legislation and regulation. Acute care hospitals
undergo periodic inspections regarding standards of medical care, equipment and
hygiene as a condition of licensure. Various licenses and permits also are
required for narcotics, laboratories, pharmacies, radioactive materials and
certain equipment. Each facility eligible for accreditation is accredited by the
Joint Commission on Accreditation of Health Care Organizations. Accreditation is
required for participation in government-sponsored provider programs, such as
Medicare and Medicaid.
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<PAGE> 82
Acute care hospitals are subject to and comply with various forms of
utilization review. In addition, under the Medicare program, each state must
have a Professional Review Organization to carry out a federally-mandated system
of review of Medicare patient admission, treatment and discharge. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each acute care hospital, and are reviewed by each acute care
hospital's local governing board and quality-assurance personnel. New
regulations governing the control of disposal of hazardous wastes may increase
the costs of operating acute care facilities.
The lessees and mortgagees of the Core Group Facilities, which provide
acute care hospital services, receive payments for patient care from federal
Medicare programs for elderly and disabled patients, Medicaid and other state
programs for medically indigent patients, private insurance carriers, employers,
Blue Cross plans, health maintenance organizations, preferred provider
organizations and directly from patients.
Medicare payments for most inpatient hospital services provided by acute
care general hospitals are made under a "prospective payment system" ("PPS")
under which a hospital is paid a prospectively determined rate per discharge.
The PPS payment rate includes reimbursement for capital related costs. These
rates vary according to a patient classification system that is based on
clinical, diagnostic and other factors. Acute care hospitals are reimbursed for
cost reimbursable items at a tentative rate with final settlement determined
after submission of annual cost reports and audits thereof by the Medicare
fiscal intermediary. In general, payments made by Medicare are less than
established charges for such services. Additionally, Medicare payments may be
delayed due to Federal government regulations.
Medicaid payments for acute care hospitals will vary between states. These
payments may be based on a percentage of reasonable cost, a fixed rate per
discharge, a capitated payment, or other payment arrangements. If a state
selects a cost based reimbursement methodology, acute care hospitals are
reimbursed at a tentative rate with final settlement determined after submission
of annual cost reports and audits thereof by Medicaid. In general, payments made
by Medicaid are less than established charges for such services. Additionally,
Medicaid payments may be delayed due to State budget deficits.
Blue Cross payments in different states and areas are based on cost, a per
diem, or other negotiated rates and may also be subject to payment delay.
Payments from health maintenance organizations and preferred provider
organizations generally are negotiated, either at a discount from charges or on
a per capita, shared-risk basis with stop-loss provisions for high severity
cases. In more developed markets such as California and Florida, the Core
Group's hospitals are now entering into risk sharing, or capitated,
arrangements. These arrangements reimburse the hospital based on a fixed fee per
participant in a managed care plan with the hospital assuming the costs of
services provided, regardless of the level of utilization. If utilization is
higher than anticipated and/or costs are not effectively controlled, such
arrangements could produce low or negative operating margins.
Rehabilitation Hospitals. Rehabilitation hospitals are also subject to
extensive federal, state and local legislation and regulation. Rehabilitation
hospitals are subject to periodic inspections and licensure requirements.
Outpatient rehabilitation services and free-standing inpatient rehabilitation
facilities are generally reimbursed under the same payment arrangement as acute
care hospitals, except as noted below. Medicare payments for inpatient
rehabilitative services are made based on reasonable operating cost, subject to
a per discharge limitation. If a facility operates below the cost per discharge
limitation, it will qualify for a bonus payment. If a facility operates above
the cost per discharge limitation, it will be reimbursed solely to the extent of
the limitation. Defined capital costs and outpatient services related to
Medicare beneficiaries are reimbursed based on reasonable cost. All Medicare
inpatient and outpatient services are reimbursed at a tentative rate with final
settlement determined after submission of annual cost reports and audits thereof
by the Medicare fiscal intermediary. In general, payments made by Medicare are
less than established charges for such services. Additionally, Medicare payments
may be delayed due to Federal government regulations.
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<PAGE> 83
SELECTED COMBINED FINANCIAL DATA
CORE GROUP
The selected combined financial data below have been derived from the
financial statements (and notes thereto) of the Core Group and should be read in
conjunction with (a) those statements and management's discussion and analysis
of financial condition and results of operations of the Core Group which are
included in this Annex B and (b) the financial statements (and notes thereto) of
the Company and the Psychiatric Group and management's discussion and analysis
of financial condition and results of operations of the Company and the
Psychiatric Group which are included in Annex A and Annex C.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
1994 ------------------------------------------------------
PRO FORMA(1) 1994 1993 1992 1991 1990
------------ -------- -------- -------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 73,503 $ 75,680 $ 73,036 $ 75,962 $ 69,845 $ 51,707
Net income(2)................. 30,145 32,548 48,616 36,194 25,987 21,595
Net income per share.......... 1.45
Weighted average shares
outstanding................. 20,856
Funds From Operations(3)...... $ 43,729 $ 46,092 $ 41,277 $ 37,520 $ 37,513 $ 29,636
Cash flows from operating
activities.................. 43,871 46,258 41,276 38,799 38,572 32,972
Cash flows from investing
activities.................. (49,051) (42,310) 33,286 11,756 (115,573) (132,280)
Cash flows from financing
activities.................. (37,780) (37,780) (39,784) (52,460) 37,788 81,898
Dividends declared............ 39,303 39,303 38,078 40,936 34,935 29,277
Total assets.................. 514,861 528,686 532,461 522,127 538,725 474,481
Total attributed debt......... 231,838 245,663 245,423 286,859 301,176 263,852
Total attributed equity....... 259,199 259,199 263,832 213,230 214,512 193,219
</TABLE>
- - - ---------------
(1) Reflects the sales of one psychiatric property in October 1994 for $5.8
million and two psychiatric properties in February 1995 for $13.8 million
and the repayment of debt out of the proceeds thereof, as though such
transactions had occurred immediately prior to January 1, 1994 (in the case
of operating and cash flow data) or as of December 31, 1994 (in the case of
balance sheet data). These sales were at net book value.
(2) Includes gains of $19,742,000 and $11,064,000 in 1993 and 1992,
respectively, on the sale of properties or partnership interests therein.
(3) Funds From Operations as currently defined by the National Association of
Real Estate Investment Trusts and as used herein means net income (loss)
computed in accordance with GAAP, excluding gains (losses) from sales of
property, adjusted for write-downs of mortgage notes and investments in real
estate and certain other non-cash items, primarily depreciation and
amortization. Funds From Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered an
alternative to net income as an indication of the Core Group's operating
performance or an alternative to cash flow as a measure of liquidity. The
Company has historically made certain adjustments to Funds From Operations
to adjust for the impact of items which management does not consider to be
routine costs of ongoing operations ("Funds From Operations As Adjusted").
These nonroutine items include: in 1994, reversal of accrued relocation
costs of $617,000; in 1993, accrued relocation costs of $690,000; and in
1992, costs related to the termination of a purchase commitment of
$2,225,000. There were no adjustments for nonroutine items in 1991 and 1990.
The following table presents the Core Group's Funds From Operations As
Adjusted.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
1994 ----------------------------------------------------
PRO FORMA(1) 1994 1993 1992 1991 1990
------------ -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Funds From Operations As
Adjusted.............. $ 43,112 $45,475 $41,967 $39,745 $37,513 $29,636
</TABLE>
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<PAGE> 84
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CORE GROUP
Following is a discussion of the financial condition and results of
operations of the Core Group which should be read in conjunction with (a) the
Selected Combined Financial Data and combined financial statements (and notes
thereto) of the Core Group included in this Annex B and (b) the Selected
Consolidated Financial Data or Selected Combined Financial Data, as the case may
be, management's discussion and analysis of financial condition and results of
operations and the financial statements (and notes thereto) of the Company and
the Psychiatric Group included in Annex A and Annex C.
OPERATING RESULTS
1994 Compared to 1993
In 1994, the Core Group reported net income of $32,548,000 compared with
net income of $48,616,000 in 1993. Net income in 1993 included a gain of
$19,742,000 on the sale of an acute care property in March 1993.
Rental income was $59,755,000 in 1994, an increase of $3,532,000 or 6% from
$56,223,000 in 1993. This net increase is primarily attributable to rental
income from new properties acquired and various capital additions partially
offset by a reduction in rental income due to the previously mentioned property
sale in March 1993.
Additional rental income was $8,908,000 in 1994, an increase of $234,000 or
3% from $8,674,000 in 1993. This increase is attributable to increased
additional rent from six of the Core Group's original acute care properties and
more recently purchased properties generating additional rent for the first time
in 1994. This increase is net of the loss of additional rent due to the
previously mentioned property sale.
Other interest income increased $1,667,000 to $2,976,000 in 1994 from
$1,309,000 in 1993. This increase resulted from higher average balances of
construction loans and direct financing leases in 1994 compared with 1993. In
addition, 1994 included the recognition of $710,000 of fee income related to the
prepayment of a construction loan in February 1994.
Interest income on intercompany loans to the Psychiatric Group decreased to
$4,041,000 in 1994 from $6,830,000 in 1993. This decrease reflects a lower
average balance outstanding on loans to the Psychiatric Group following the
attribution of equity to the Psychiatric Group in connection with an equity
offering by the Company.
Depreciation and amortization increased $887,000 to $12,302,000 in 1994
compared with 1993 due to newly acquired properties and capital additions during
1994.
Interest expense was $26,101,000 in 1994, a decrease of $1,168,000 or 4%
from $27,269,000 in 1993. The previously mentioned equity offering in July 1993
resulted in lower average short-term borrowings during 1994 compared with 1993.
A higher level of construction in progress during 1994 compared with 1993
resulted in an increase in capitalized interest. In addition, the Core Group
prepaid mortgage notes payable of $14.4 million in February 1994.
General and administrative expenses decreased to $4,425,000 in 1994 from
$5,227,000 in 1993. This variation is attributable to a decrease in the
Company's general and administrative expenses which are allocated between the
Core Group and Psychiatric Group primarily based on revenues. The Company's
decrease in consolidated general and administrative expenses for 1994 was
attributable to the reversal of $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. This was partially offset by higher
expense from the Company's stock incentive plans and increased shareholder
reporting and distribution costs in 1994.
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<PAGE> 85
1993 Compared to 1992
In 1993, the Core Group reported net income of $48,616,000 compared with
net income of $36,194,000 in 1992.
Net income for both 1993 and 1992 were impacted by several significant
items. Net income in 1993 included a gain of $19,742,000 on the sale of an acute
care property in March 1993, while net income in 1992 included total gains of
$11,064,000 on the sale of the Core Group's partnership interests in four
rehabilitation properties. Net income in 1992 reflected a cost of $2,225,000 as
a result of the Core Group exercising its right to terminate a purchase
commitment to enhance its liquidity position.
Rental income was $56,223,000 in 1993, a decrease of $2,287,000 or 4% from
$58,510,000 in 1992. This decrease is attributable to a reduction in rental
income due to the sale of the Core Group's 97% partnership interests in three
rehabilitation properties in October 1992 and the sale of an acute care property
in March 1993, partially offset by rental income from a newly acquired property
and various capital additions coming under lease subsequent to the first quarter
of 1992.
Additional rental income was $8,674,000 in 1993, an increase of $374,000 or
5% from $8,300,000 in 1992. This positive variation is attributable to increased
additional rent from six of the Core Group's original acute care properties and
more recently purchased properties generating additional rent for the first time
in 1993. This increase is net of the loss of additional rent from properties
sold in 1992 and 1993.
Other interest income increased $1,203,000 to $1,309,000 in 1994 from
$106,000 in 1993. This positive variation is attributable to interest from new
construction loans and a direct financing lease in 1993.
Interest income on intercompany loans to the Psychiatric Group decreased to
$6,830,000 in 1993 from $9,046,000 in 1992 as a result of a lower average
balance outstanding on loans to the Psychiatric Group following the attribution
of equity to the Psychiatric Group in connection with an equity offering by the
Company and as a result of lower short term interest rates in 1993.
Interest expense was $27,269,000 in 1993, a decrease of $2,508,000 or 8%
from $29,777,000 in 1992. Property sales in the last quarter of 1992 and first
quarter of 1993, and the previously mentioned equity offering in July 1993,
resulted in lower average short-term borrowings in 1993. Lower short-term
interest rates in 1993 contributed to the decrease in interest expense in 1993.
General and administrative expenses decreased to $5,227,000 in 1993 from
$6,700,000 in 1992. This variation is attributable to a decrease in the
Company's general and administrative expenses which are allocated between the
Core Group and Psychiatric Group primarily based on revenues. In the fourth
quarter of 1993, the Company recorded an accrual of $850,000 related to the
planned relocation of its corporate offices to Southern California in the middle
of 1994. General and administrative expenses of the Company in 1992 include
severance costs of $1.5 million related to personnel changes announced during
1992. Additionally, in 1992 negotiation and restructuring of two psychiatric
mortgage notes receivable, the review of a potential business combination and
other matters resulting from a legal action against the Company, resulted in
increases in consulting, professional and travel costs of the Company totaling
$1.3 million.
Minority interest decreased $378,000 to $251,000 in 1993 compared with 1992
as a result of the Core Group's sale of three real estate partnerships in
October 1992.
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.
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<PAGE> 86
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
outpatient services, downward pressure on reimbursement rates from government,
insurance company and managed care payors and an increasing trend toward
capitation of health care delivery costs (delivery of services on a fixed price
basis to a defined group of covered parties). Outpatient business is expected to
increase as advances in medical technologies allow more procedures to be
performed on an outpatient basis. Payors continue to direct more patients from
inpatient care to outpatient care. The portion of providers' patient services
reimbursed under Medicare and Medicaid continues to increase as the population
ages and states expand Medicaid programs. States and insurance companies
continue to negotiate actively the amounts they will pay for services. In
addition, the entrance of insurance companies into managed care programs is
accelerating the introduction of managed care in new localities. As a result,
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
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 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.
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 91% of net additional rental income for the year ended December 31, 1994,
while rehabilitation investments accounted for 9%. Over the years, 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"). Also, 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. As a result,
the Core Group anticipates slower growth in additional rental and interest
income in the near term from its current portfolio of properties.
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. Toward achievement of this objective,
the Company raised $80.8 million of new equity in 1993. The distribution of
depositary shares representing Psychiatric Group Stock is also intended to
facilitate this objective.
The Company's unsecured revolving credit facility was increased to $100
million in April 1994. In August 1994, the Company's BBB- implied senior debt
rating was affirmed by Standard & Poor's and 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.
B-15
<PAGE> 87
LIQUIDITY AND CAPITAL RESOURCES
As of January 23, 1995, the Core Group had commitments of $12.6 million to
fund construction obligations and capital expenditures over approximately the
next twelve months.
The Company has continued to increase its liquidity and enhance its
financial flexibility. In July 1993, the Company completed an offering of
3,450,000 additional shares of Common Stock resulting in net proceeds of $80.8
million of which $39.3 million was allocated to the Core Group. Proceeds from
the offering were used to pay off the outstanding balance under the Company's
revolving credit facility and fund additional real estate investments. In April
1994, the Company increased its unsecured revolving credit facility to $100
million. The facility bears interest at either LIBOR plus a margin of 125 to 200
basis points or the prime rate plus, in certain circumstances, a margin of 50
basis points, and matures on December 31, 1996. Currently, the Company is able
to borrow at either LIBOR plus 125 basis points or the prime rate. As of January
23, 1995, the Company had $10.5 million of borrowings under its credit facility.
The Company expects to pay down this facility with the cash proceeds of the sale
of the Westwood and Pembroke, Massachusetts psychiatric hospitals, which was
consummated in February 1995. 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.
B-16
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Health Properties, Inc.:
We have audited the accompanying combined balance sheets of the Core Group
(a business unit of American Health Properties, Inc.) as of December 31, 1994
and 1993 and the related combined statements of operations, total attributed
equity and cash flows for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of the management of
American Health Properties, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Core Group as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
February 28, 1995
B-17
<PAGE> 89
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Rental income................................................. $59,755 $56,223 $58,510
Additional rental income...................................... 8,908 8,674 8,300
Other interest income......................................... 2,976 1,309 106
Interest income on intercompany loans to Psychiatric Group.... 4,041 6,830 9,046
------- ------- -------
75,680 73,036 75,962
------- ------- -------
EXPENSES
Depreciation and amortization................................. 12,302 11,415 11,501
Interest expense.............................................. 26,101 27,269 29,777
General and administrative.................................... 4,425 5,227 6,700
Termination of purchase commitment............................ -- -- 2,225
------- ------- -------
42,828 43,911 50,203
------- ------- -------
Minority interest............................................. 304 251 629
------- ------- -------
Income before gain on sale of properties...................... 32,548 28,874 25,130
Gain on sale of properties.................................... -- 19,742 11,064
------- ------- -------
NET INCOME.................................................... $32,548 $48,616 $36,194
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-18
<PAGE> 90
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate properties
Buildings and improvements........................................... $473,908 $425,478
Accumulated depreciation............................................. (65,042) (52,847)
-------- --------
408,866 372,631
Land................................................................. 54,383 50,552
Construction in progress............................................. -- 11,719
-------- --------
463,249 434,902
Construction loans..................................................... 21,383 15,039
Direct financing leases................................................ 3,816 2,803
Revolving intercompany loan to Psychiatric Group....................... 9,428 8,784
Fixed rate intercompany loan to Psychiatric Group...................... 20,000 26,044
Cash and short-term investments........................................ 1,838 35,670
Receivables............................................................ 6,179 6,100
Deferred financing costs and other assets.............................. 2,793 3,119
-------- --------
$528,686 $532,461
======== ========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Short-term loan payable................................................ $ 14,500 $ --
Mortgage notes payable................................................. -- 14,468
Subordinated convertible bonds payable................................. 6,163 5,955
Senior notes payable................................................... 225,000 225,000
Accounts payable and accrued liabilities............................... 9,480 9,403
Dividends payable...................................................... 10,112 10,062
Deferred income........................................................ 4,232 3,741
-------- --------
269,487 268,629
-------- --------
Commitments and contingencies
Total Attributed Core Group Equity..................................... 259,199 263,832
-------- --------
$528,686 $532,461
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-19
<PAGE> 91
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR.............................. $263,832 $213,230 $214,512
Public offering of additional shares....................... -- 39,341 --
Conversion of subordinated convertible bonds............... -- -- 1,965
Restricted stock grants, net............................... 431 324 280
Exercise of stock options.................................. 1,691 399 1,215
Net income................................................. 32,548 48,616 36,194
Dividends.................................................. (39,303) (38,078) (40,936)
-------- -------- --------
BALANCES AT END OF YEAR.................................... $259,199 $263,832 $213,230
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-20
<PAGE> 92
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 32,548 $ 48,616 $ 36,194
Depreciation, amortization and other non-cash items........ 14,175 12,667 12,630
Deferred income............................................ 344 (312) 145
Gain on sale of properties................................. -- (19,742) (11,064)
Change in receivables and other assets..................... (214) 224 (858)
Change in accounts payable and accrued liabilities......... (595) (177) 1,752
-------- -------- --------
46,258 41,276 38,799
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties..... (40,142) (27,861) (26,535)
Proceeds from sale of properties........................... -- 41,940 41,511
Construction loan fundings................................. (23,180) (15,039) --
Construction loan paid..................................... 16,836 -- --
Direct financing leases.................................... (1,013) (2,803) --
Fundings on revolving intercompany loan to Psychiatric
Group.................................................... (672) (4,501) (3,494)
Paydowns on fixed rate intercompany loan to Psychiatric
Group.................................................... 6,044 41,594 313
Administrative capital expenditures........................ (183) (44) (39)
-------- -------- --------
(42,310) 33,286 11,756
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on short-term loan payable........... 14,500 (40,500) (11,000)
Principal payments on mortgages............................ (14,468) (1,137) (1,029)
Financing costs paid....................................... (248) (1,371) (371)
Proceeds from sale of stock................................ -- 39,341 --
Proceeds from exercise of stock options.................... 1,691 399 1,215
Dividends paid............................................. (39,255) (36,516) (41,714)
Contributions from minority interest....................... -- -- 439
-------- -------- --------
(37,780) (39,784) (52,460)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... (33,832) 34,778 (1,905)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 35,670 892 2,797
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 1,838 $ 35,670 $ 892
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-21
<PAGE> 93
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS
PROPOSED TRANSACTION AND BASIS OF PRESENTATION
American Health Properties, Inc. (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 facilities including 13
acute care hospitals, three rehabilitation hospitals and five psychiatric
hospitals, all of which are operated by qualified third party health care
providers, and a medical office building. On January 31, 1995, the Company's
Board authorized management to pursue a transaction which is designed to
separate the economic attributes of its investments in psychiatric hospitals
(the Psychiatric Group) and its core investments in acute care hospitals,
rehabilitation hospitals 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 transaction would entail the
distribution to holders of Common Stock of depositary shares representing a new
series of preferred stock, par value $0.01 per share, to be designated
Psychiatric Group Preferred Stock (the Psychiatric Group Stock). The Psychiatric
Group Stock would be intended to reflect the separate performance of the
Psychiatric Group. The Company's existing Common Stock would be intended to
reflect the economic performance and attributes of the Core Group. In connection
with the proposed transaction, 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 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 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 intercompany loans receivable from the
Psychiatric Group and an attributed amount of the Company's stockholders'
equity. The Core Group financial statements are prepared using the amounts
included in the Company's consolidated financial statements.
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 will such attribution affect the rights
of creditors of the Company or any subsidiary, including rights under financing
covenants.
Each holder of Common Stock or Psychiatric Group Stock would be a holder of
an issue of capital stock of the entire Company and would be 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 could 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, Common Stock or Psychiatric
Group Stock would reduce the funds of the Company legally available for
dividends on both the Common Stock and Psychiatric Group Stock. Accordingly, the
Core Group's financial statements and the financial statements of the
Psychiatric Group should be read in connection with the Company's consolidated
financial statements.
Fundamental changes in the psychiatric industry continue to negatively
impact the facility specific operating cash flow at the Psychiatric Group
hospitals. For additional information, see the Psychiatric Business section in
the notes to the combined financial statements of the Psychiatric Group
contained in Annex C to the Information Statement relating to the issuance of
Psychiatric Group Stock.
B-22
<PAGE> 94
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
New Accounting Standards. The Financial Accounting Standards Board has
issued Statements of Financial Accounting Standards No.'s 114 and 118,
"Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures", respectively
(SFAS 114 and 118). SFAS 114 and 118 are applicable to all creditors and to all
loans that are restructured in a troubled debt restructuring involving a
modification of terms. SFAS 114 and 118 require estimating the value of impaired
loans based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral if the loan
is collateral dependent.
SFAS 114 and 118 are effective in fiscal 1995. Management believes that
adoption of SFAS 114 and 118 will not have a material impact on the accompanying
combined financial statements.
Real Estate Properties. The Core Group accounts for its property leases as
operating leases. The Core Group records properties at cost and allocates the
cost between land and buildings and improvements based on independent
appraisals. Depreciation of Core Group real estate properties is recorded on a
straight-line basis over the estimated useful lives of the buildings and
improvements (27 to 42 years).
Deferred Income. Fees received, net of related direct costs, associated
with the origination or amendment of leases are deferred and amortized at a
constant effective rate over the remaining initial term of the related leases.
Deferred Costs. Deferred financing costs are amortized over the term of
the related debt at a constant effective rate.
Federal Income Taxes. The Company intends at all times to operate so as to
qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company will not be subject to federal income tax.
Qualification as a REIT under Sections 856 to 860 of the Internal Revenue
Code applies to the Company as a whole, rather than the Core Group or
Psychiatric Group individually. Dividends paid by the Company on the Common
Stock and the Psychiatric Group Stock must be sufficient in the aggregate for
the Company to meet the minimum distribution requirements of the Internal
Revenue Code. The Company's earnings and profits as a whole, without reference
to the Core Group or the Psychiatric Group individually, is used to determine
the taxable character of dividends paid to holders of the Common Stock and the
Psychiatric Group Stock.
Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial reporting purposes due
primarily to timing differences in the recognition of fee income, real estate
property write-downs, mortgage note impairment reserves and various accruals and
differences between the estimated useful lives used to compute depreciation for
financial statement purposes and a 40-year life used in determining earnings and
profits. The cost basis of the Company's real estate properties is generally the
same for financial reporting and earnings and profits purposes, except for
properties written down for financial reporting purposes.
Cash and Short-Term Investments. Cash and short-term investments consist
of cash and all highly liquid investments with an original maturity date of less
than three months.
B-23
<PAGE> 95
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CORPORATE ACTIVITIES; INTERCOMPANY LOANS, THIRD PARTY DEBT AND EQUITY
Financial Activities. As a matter of policy, the Company manages all
financial activities on a centralized, consolidated basis. Such financial
activities include the investment of surplus cash; the issuance and repayment of
all short-term and long-term debt; and the issuance of common and preferred
stock. These activities are then attributed to the Core Group and the
Psychiatric Group in the manner described herein.
Historical Debt and Equity Transactions. All third party debt
($245,663,000 at December 31, 1994, or $231,838,000 on the pro forma basis
described herein) has been attributed to the Core Group in the financial
statements set forth herein. However, the Psychiatric Group has been attributed
(a) fixed rate intercompany loans owing to the Core Group in an amount at
December 31, 1994 determined by the Board to be appropriate in relation to the
assets and expected cash flow of the Psychiatric Group and its cash requirements
($20,000,000 at December 31, 1994, or $9,175,000 on such pro forma basis) and
(b) revolving intercompany loans owing to the Core Group in an amount at
December 31, 1994 equal to the working capital notes receivable from certain
Psychiatric Hospital operators owing to the Psychiatric Group at that date
($9,428,000 at December 31, 1994, or $6,428,000 on such pro forma basis). As a
result of such attributed intercompany loans, and in light of the carrying value
of each Group's assets and its other liabilities at December 31, 1994, the
equity attributed to the Core Group at that date was $259,199,000 and the equity
attributed to the Psychiatric Group at that date was $48,302,000.
Historically, the Psychiatric Group was attributed intercompany loans owing
to the Core Group from the date of the first Psychiatric Group asset purchase in
1988 to December 31, 1994 in amounts equal to the Psychiatric Group's net cash
requirements not otherwise covered by the proceeds of equity issuances
attributed to the Psychiatric Group. All of such intercompany loans were
initially designated as floating rate loans (with an interest rate equal to the
prevailing prime rate plus 2%), but portions of such intercompany loans were
re-designated as fixed rate loans in amounts that correspond to designated
portions of third-party fixed rate senior debt issued by the Company from time
to time (with an interest rate equal to that borne by third-party fixed rate
senior debt plus 2%). Proceeds of equity issuances after 1988 were attributed to
the Psychiatric Group in amounts determined to be appropriate in relation to the
assets and expected cash flow of the Psychiatric Group, its cash requirements
and its intercompany debt at the time of such issuances; proceeds attributed to
the Psychiatric Group were deemed to correspondingly reduce intercompany debt.
In general, dividends paid by the Company were attributed to the Core Group and
the Psychiatric Group on the basis of their respective contributions to funds
from operations, excluding expenses associated with litigation, relocation,
issuance of Psychiatric Group Stock and purchase commitment termination which
are not considered to be routine costs of ongoing operations.
Third Party Debt.
All of the Company's third party debt has been attributed to the Core
Group. This debt and its relevant terms are summarized in the following
paragraphs.
Short-term loan payable. The Company has a $100 million unsecured
revolving credit agreement with a syndicate of banks maturing on December 31,
1996. This agreement provides for interest on outstanding borrowings at either
LIBOR plus a margin of 125 to 200 basis points or the prime rate plus, in
certain circumstances, a margin of 50 basis points. The margin on LIBOR and
prime rate borrowings is dependent upon various conditions, including the
Company's leverage and debt ratings, and the level and duration of borrowings
outstanding. Currently, the Company is able to borrow at either LIBOR plus 125
basis points or the prime rate.
The weighted average amount of borrowings under bank credit agreements
outstanding during 1994, 1993 and 1992 was $5,404,000, $11,227,000 and
$54,007,000 at weighted average interest rates of 6.9%, 4.7% and 5.1%,
respectively. The maximum amount outstanding under bank credit agreements in
1994, 1993 and 1992
B-24
<PAGE> 96
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
was $20,500,000, $44,500,000 and $72,000,000, respectively. As of December 31,
1994, the Company had $14,500,000 outstanding under its bank credit agreement
with a weighted average interest rate of 7.6%.
Mortgage notes payable. Two of the properties owned by the Company had
existing mortgages with remaining balances at December 31, 1993 of approximately
$8.8 million and $5.7 million with interest rates of 10.0% and 8.75%,
respectively. The Company prepaid both mortgages in February 1994.
Senior notes payable. The Company's two issues of unsecured senior notes
(the Senior Notes) were sold pursuant to private placements with institutional
investors.
In May 1989, the Company sold $5 million of 11.33% Series A Senior Notes
and $120 million of 11.40% Series B Senior Notes. As provided under the terms of
the note agreement, the interest rates on these notes were automatically
adjusted to 11.38% on Series A and 11.45% on Series B effective as of October
25, 1989, concurrent with the downgrading of AMI's publicly rated unsecured
senior debt obligations. In the event that such AMI debt obligations are
subsequently upgraded to an investment grade rating, the interest rates on the
Series A and Series B Senior Notes will automatically readjust to 11.33% and
11.40%, respectively. Interest is payable quarterly in arrears. The Series A
Senior Notes mature May 31, 1996, and the Series B Senior Notes require annual
principal payments of $24 million beginning May 31, 1995 through maturity on May
31, 1999.
In September 1990, the Company sold $100 million of 10.41% Senior Notes.
Interest is payable semi-annually in arrears. The Senior Notes require annual
principal payments of $20 million beginning September 15, 1996 through maturity
on September 15, 2000.
Subordinated convertible bonds payable. The Company's Convertible Dual
Currency Subordinated Bonds (the Swiss Bonds) were sold in Switzerland pursuant
to public subscription.
The 1990 Swiss Bonds have a coupon rate of 8 1/2% and are convertible at
the option of the holder at any time until July 9, 2000 into shares of the
Company's Common Stock at a conversion price of $25.875 per share and a fixed
exchange rate of SFr. 1.41 per U.S. $1.00. In 1994 and 1993, no conversions of
1990 Swiss Bonds were made. In 1992, $2,590,000 of the 1990 Swiss Bonds, with
accrued interest, were converted into 91,259 shares of common stock resulting in
additional equity of $2,472,000, net of conversion and unamortized issuance
costs of $118,000. Final redemption of the 1,491 remaining 1990 Swiss Bonds will
be made in U.S. dollars of $7,455,000 on July 19, 2000 provided additional
conversions or redemption have not occurred earlier. The conversion rights of
the 1990 Swiss Bonds will be appropriately adjusted in accordance with the
indenture to reflect the planned issuance of Psychiatric Group Stock.
Interest on outstanding Swiss Bonds is payable annually in arrears in Swiss
Francs in July. Accrued and accreted interest is not paid on Swiss Bonds
converted into common stock.
The Company has reserved approximately 204,000 unissued shares of Common
Stock for potential future Swiss Bond conversions.
Debt covenants. Covenants and restrictions in the Company's various debt
agreements include limitations on secured borrowings, restrictions covering the
use of proceeds from asset sales and payments of dividends and requirements
relating to the maintenance of specified financial covenants, including those
relating to minimum tangible net worth, fixed charge coverage and ratios of
liabilities to minimum tangible net worth and asset values.
Annual maturities. The aggregate amount of annual maturities of the
Company's debt for calendar years 1995 through 1999 and thereafter is
$24,000,000, $49,000,000, $44,000,000, $44,000,000, $44,000,000 and $27,455,000,
respectively. In addition, the outstanding balance of $14,500,000 at December
31, 1994 under the Company's unsecured revolving credit agreement matures on
December 31, 1996, although certain events, including sales of assets, may
require the earlier paydown of the outstanding balance.
B-25
<PAGE> 97
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Interest. Interest capitalized on construction in progress was $883,000,
$577,000 and $872,000 in 1994, 1993 and 1992, respectively. Interest paid, net
of interest capitalized, in 1994, 1993, and 1992 was $24,924,000, $26,686,000
and $29,127,000, respectively.
Intercompany Loans. Intercompany loans at December 31, 1994 were as
described under "Historical Debt and Equity Transactions" above.
The weighted average outstanding amount of revolving intercompany loans
owed by the Psychiatric Group to the Core Group during 1994, 1993 and 1992 was
$9,106,000, $6,533,000 and $2,535,000 at weighted average interest rates of
9.15%, 8.0% and 8.25%, respectively.
The weighted average outstanding amount of fixed rate intercompany loans
owed by the Psychiatric Group to the Core Group during 1994, 1993 and 1992 was
$24,706,000, $48,570,000 and $68,048,000 at a weighted average interest rate of
13% for all three years. There were no new fixed rate loans made to the
Psychiatric Group during these three years. Paydowns were received from the
proceeds of equity transactions attributed to the Psychiatric Group, and in
1994, the net proceeds from the sale of a Psychiatric Group real estate
investment.
Repayment of intercompany loans by the Psychiatric Group is dependent upon
the amount and timing of sales of the Psychiatric Group's assets. The
Psychiatric Group expects to pay down $3,000,000 of revolving intercompany loans
and $10,825,000 of fixed rate intercompany loans out of the cash proceeds of the
sale of the Westwood and Pembroke hospitals.
The Company's Board has established certain policies relating to the Core
Group's intercompany loans to the Psychiatric Group. The aggregate revolving
intercompany loans owed by the Psychiatric Group to the Core Group will be
limited to a maximum of $10,000,000 at any one time outstanding, subject to
reduction of such limit commensurate with any permanent repayment in the future
of working capital loans extended to psychiatric hospital operators, but in no
event will such limit be reduced below $5,000,000, and except for such revolving
intercompany loans no additional fixed rate or other intercompany loans will be
advanced by the Core Group to the Psychiatric Group.
If the Psychiatric Group sells any assets out of the ordinary course, the
net proceeds from such sales (after transaction costs and reserves for
contingencies) will be applied, first, to repay revolving intercompany loans
owed by the Psychiatric Group to the Core Group to the extent of the psychiatric
hospital operator working capital loans associated with the asset or assets
sold, second, to repay the outstanding fixed rate intercompany loan owed by the
Psychiatric Group to the Core Group (until repaid in full), and third, to repay
other revolving intercompany loans owed by the Psychiatric Group to the Core
Group (until repaid in full), before any remaining net proceeds from such sales
may be used to make distributions to holders of Psychiatric Group Stock.
Excess cash held by the Psychiatric Group (other than net proceeds from
asset sales) will be applied to reduce revolving intercompany loans owed by the
Psychiatric Group to the Core Group (until repaid in full), subject to the
ability of the Psychiatric Group, at the option of the Board, to re-borrow cash
from the Core Group up to the limitations mentioned previously to cover future
cash needs of the Psychiatric Group (including, without limitation, to fund
dividends in a manner consistent with the dividend policy then applicable to the
Psychiatric Group Stock).
Fixed rate intercompany loans owed by the Psychiatric Group to the Core
Group bear interest at a fixed rate of approximately 13% per annum (which is
equal to the current weighted average interest rate on the Company's fixed rate
senior debt plus 2%), and are prepayable without premium at any time, at the
option of the Board.
B-26
<PAGE> 98
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revolving intercompany loans owed by the Psychiatric Group to the Core
Group bear interest at a floating rate equal to the prevailing prime rate plus
2% (10.5% at December 31, 1994) and are prepayable without premium at any time,
at the option of the Board.
Cash held by the Psychiatric Group in excess of required repayments of
intercompany loans owed by the Psychiatric Group may, at the option of the
Company's Board, be advanced to the Core Group as revolving intercompany loans
(to the extent such cash can be used beneficially by the Core Group), or
otherwise be invested on behalf of the Psychiatric Group. Revolving intercompany
loans owed by the Core Group to the Psychiatric Group bear interest at a
floating rate equal to the weighted average interest rate borne by the Company's
revolving debt (or, for periods in which there is no such revolving debt
outstanding, the interest rate at which the Company could borrow on a revolving
basis), and are prepayable without premium at any time, at the option of the
Board. Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group if the Board determines it is in
the best interests of the Company not to do so.
Future Equity Transactions. The proceeds of future Common Stock issuances
as well as cash required to fund future Common Stock dividends or repurchases
will be attributed to the Core Group. The proceeds of future Psychiatric Group
Stock issuances (e.g., upon exercise of management stock options) as well as
cash required to fund future Psychiatric Group Stock dividends or repurchases
will be attributed to the Psychiatric Group.
General and administrative expenses. General and administrative expenses
of the Company that cannot be directly attributed to either Group have been
allocated to the Core Group and the Psychiatric Group on the basis of their
respective contributions to revenues (excluding intercompany revenues and
revenues from investment dispositions), provided that at no time will such
expenses allocated to either Group be less than $250,000. The Company's general
and administrative expenses consist primarily of employment and related
benefits, professional services, shareholder reporting, franchise taxes, travel
and other related corporate activity.
B-27
<PAGE> 99
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE PROPERTIES
The following table summarizes the Core Group's investment in acute care,
rehabilitation and medical office properties as of December 31, 1994:
CORE GROUP REAL ESTATE PROPERTIES
<TABLE>
<CAPTION>
BUILDINGS AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
-------- -------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ACUTE CARE GENERAL PROPERTIES:
Irvine Medical Center
Irvine, California....................................... $ 17,987 $ 57,013 $ 5,286 $ 69,714
Tarzana Regional Medical Center
Tarzana, California...................................... 12,421 61,279 11,291 62,409
Desert Valley Hospital
Victorville, California.................................. 1,755 22,245 162 23,838
Kendall Regional Medical Center
Miami, Florida........................................... 4,163 64,849 11,997 57,015
Palm Beach Gardens Medical Center
Palm Beach Gardens, Florida.............................. 4,024 41,624 8,102 37,546
North Fulton Medical Center
Roswell, Georgia......................................... 4,149 42,042 6,061 40,130
Halstead Hospital
Halstead, Kansas......................................... 80 14,170 709 13,541
Elmwood Medical Center
Jefferson, Louisiana..................................... 4,412 38,411 4,370 38,453
Lucy Lee Hospital
Poplar Bluff, Missouri................................... 404 22,861 4,156 19,109
Frye Regional Medical Center
Hickory, North Carolina.................................. 1,247 44,202 8,555 36,894
Cleveland Regional Medical Center
Cleveland, Texas......................................... 300 8,000 296 8,004
Concho Valley Regional Hospital
San Angelo, Texas........................................ 256 16,196 1,315 15,137
-------- ----------- --------- ---------
51,198 432,892 62,300 421,790
-------- ----------- --------- ---------
REHABILITATION PROPERTIES:
Northwest Arkansas Rehabilitation Hospital
Fayetteville, Arkansas................................... 962 8,124 711 8,375
HCA Wesley Rehabilitation Hospital
Wichita, Kansas.......................................... 1,938 12,659 883 13,714
MountainView Regional Rehabilitation Hospital
Morgantown, West Virginia................................ -- 11,718 988 10,730
-------- ----------- --------- ---------
2,900 32,501 2,582 32,819
-------- ----------- --------- ---------
MEDICAL OFFICE BUILDING PROPERTIES:
Walsh Medical Arts Center
Murrieta, California..................................... 285 8,515 160 8,640
-------- ----------- --------- ---------
$ 54,383 $473,908 $65,042 $463,249
======== =========== ========= =========
</TABLE>
The Core Group's properties are leased under "net" leases pursuant to which
the lessees are responsible for all maintenance, repairs, taxes, and insurance
of the leased properties. The leases provide for the payment of minimum base
rent and additional rent during the fixed term and any renewal terms. Additional
rent is based on the increase in annual gross revenues of the related hospital
as specified in the lease agreements.
The Core Group has the right to approve capital expenditures at all
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. The Core Group has committed to fund
approximately $5,000,000 of capital expenditures pursuant to these rights and
obligations. The base and additional rent provisions of the
B-28
<PAGE> 100
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
leases are amended when such capital expenditures are funded to reflect the Core
Group's increased investment.
Six of the Core Group's acute care properties are leased to subsidiaries of
American Medical International, Inc. (AMI). The six leases are covered by
cross-default provisions and the lease obligations are unconditionally
guaranteed by AMI. In 1994, income from these leases accounted for 58% of the
Core Group's total revenues.
Future minimum rentals under the Core Group's noncancellable operating
leases are approximately $62,400,000 annually in 1995 through 1998, $39,500,000
in 1999 and $135,700,000 thereafter.
CONSTRUCTION LOANS
At December 31, 1994, the Core Group had funded $21,383,000 of a
$30,000,000 commitment to participate in an $86 million construction and
mortgage financing of a 670,000 square foot integrated hospital and medical
office building presently under construction in Austin, Texas.
At December 31, 1993, the Core Group had funded $15,039,000 under a
construction loan commitment on an ambulatory care and medical office complex in
Overland Park, Kansas. This construction loan was prepaid by the borrower in
February 1994 at which time the balance outstanding was $16,836,000.
DIRECT FINANCING LEASES
In connection with its investment in the real property of an acute care
general hospital on June 30, 1993, the Core Group also provided a five-year
equipment lease to the hospital operator which is classified as a direct
financing lease. As of December 31, 1994, the Core Group's net investment in
this direct financing lease is $2,296,000, represented by total minimum lease
payments receivable of $2,722,000 less unearned income of $426,000. Future
minimum lease payments under this lease are approximately $765,000 annually in
1995 through 1997 and $427,000 in 1998.
In connection with its investment in the real property of an acute care
general hospital on January 3, 1994, the Core Group also provided a seven-year
equipment lease to the hospital operator which is classified as a direct
financing lease. As of December 31, 1994, the Core Group's net investment in
this direct financing lease is $1,520,000, represented by total minimum lease
payments receivable of $2,015,000 less unearned income of $495,000. Future
minimum lease payments under this lease are approximately $333,000 annually in
1995 through 2000 and $17,000 in 2001.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Consolidated pension expense of the Company in 1994, 1993 and 1992
was $207,000, $202,000 and $229,000, respectively.
The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors upon completion of sixty months
of membership on the Board. The benefits, limited to ten years, are based on
years of service and the annual base director fee in effect as of the date a
director ceases to be a member of the Board. The consolidated accrued pension
liability of the Company was $634,000 and $552,000 as of December 31, 1994 and
1993, respectively. Consolidated net periodic pension cost of the Company in
1994, 1993 and 1992 was $149,000, $191,000 and $173,000, respectively. The Notes
to the Consolidated Financial Statements of the Company should be read for
further details regarding this plan.
The cost of the Company's pension plans has been allocated to the Core
Group under the general and administrative expense allocation methodology
described previously.
B-29
<PAGE> 101
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK INCENTIVE PLANS
The Company's stock incentive plans provide for the issuance of up to
2,600,000 shares of common stock for restricted stock awards and options to
directors and key employees of the Company. There were 1,369,754 and 149,183
shares available to grant further restricted stock awards and options at
December 31, 1994 and 1993, respectively. The Company's consolidated expense
recorded in 1994, 1993 and 1992 related to restricted stock awards granted was
$367,000, $399,000 and $344,000, respectively. The Company's consolidated
expense recorded in 1994, 1993 and 1992 related to Dividend Equivalent Rights
(DERs) was $577,000, $255,000 and $60,000, respectively. The Notes to the
Consolidated Financial Statements of the Company should be read for further
details regarding the Company's stock incentive plans. The Company's
consolidated cost of its stock incentive plans has been allocated to the Core
Group under the general and administrative expense allocation methodology
described previously. Under the terms of the Company's stock incentive plans, in
connection with the planned distribution of Psychiatric Group Stock, outstanding
restricted stock awards, stock options, and DERs will be adjusted to reflect the
issuance of Psychiatric Group Stock.
PREFERRED STOCK PURCHASE RIGHTS PLAN
The Company has a preferred stock purchase rights plan which provides for
the distribution of one preferred stock purchase right (each a Right) to
shareholders for each outstanding share of Common Stock. Under certain
conditions, each Right may be exercised to purchase one one-hundredth of a share
of preferred stock, Series A, par value $.01 per share (the Series A Preferred
Shares), of the Company at a price of $45. In connection with the planned
distribution of Psychiatric Group Stock, the Psychiatric Group Stock will not
include or entitle holders thereof to receive the Rights, which will be
applicable only to the Common Stock. The Notes to the Consolidated Financial
Statements of the Company should be read for further details regarding the
Company's preferred stock purchase rights plan.
DIVIDENDS
A quarterly dividend of $.575 per share, or approximately $11,989,000 in
the aggregate, was declared by the Board of Directors on January 31, 1995,
payable on February 24, 1995 to the Company's common stockholders of record on
February 10, 1995. The Core Group's attributed portion of this dividend of
$10,112,000 has been reflected as dividends payable in the accompanying
financial statements as of December 31, 1994.
In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess Proceeds will be available only for the
Psychiatric Group Stock and will be limited to $30 million in the aggregate and
$15 million in any calendar year.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Construction Loans. The carrying amounts of these construction loans are a
reasonable estimate of fair value, as the variable rate pricing and terms of the
loans are indicative of current rates and credit risk.
Intercompany Loans to Psychiatric Group. The carrying amounts of the
intercompany loans to the Psychiatric Group are a reasonable estimate of fair
value, as the pricing and terms of the loans are indicative of current rates and
credit risk.
B-30
<PAGE> 102
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Short-Term Investments. The carrying amount approximates fair
value because of the short maturity of these financial instruments.
Short-Term Loan Payable. The terms of borrowings under the Company's
unsecured revolving credit agreement are generally less than 90 days at variable
pricing indicative of current short-term borrowing rates. Accordingly, carrying
amount is a reasonable estimate of fair value.
Mortgage Notes Payable. The carrying amount of mortgage notes payable
generally reflects current rates for similar type borrowings and is a reasonable
estimate of fair value.
Subordinated Convertible Bonds Payable. The fair value of the Company's
subordinated convertible bonds payable is based on the quoted market price of
the bonds as traded in Switzerland.
Senior Notes Payable. An estimate of rates currently available to the
Company for debt with similar terms was used to determine the fair value of the
Company's senior notes payable.
Loan Commitments. The terms and pricing of the Company's $30,000,000
commitment at December 31, 1994 to participate in the funding of a construction
loan that will convert to a mortgage note receivable are indicative of current
rates and terms for similar arrangements. The amount shown as carrying amount
and fair value at December 31, 1993 represents the construction financing fee
that was received and deferred by the Company on another construction loan that
was prepaid by the borrower in February 1994.
The carrying amounts and estimated fair values of the Core Group's
financial instruments at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Construction loans...................... $ 21,383 $ 21,383 $ 15,039 $ 15,039
Intercompany loans to Psychiatric
Group................................. 29,428 29,428 34,828 34,828
Cash and short-term investments......... 1,838 1,838 35,670 35,670
FINANCIAL LIABILITIES
Short-term loan payable................. 14,500 14,500 -- --
Mortgage notes payable.................. -- -- 14,468 14,468
Subordinated convertible bonds
payable............................... 6,163 5,894 5,955 6,442
Senior notes payable.................... 225,000 231,358 225,000 245,668
UNRECOGNIZED FINANCIAL INSTRUMENTS
Loan commitments........................ 225 225 520 520
</TABLE>
PRO FORMA INFORMATION
The following pro forma information reflects the sales of one psychiatric
property in October 1994 for $5.8 million and two psychiatric properties in
February 1995 for $13.8 million and the repayment of debt out of the proceeds
thereof, as though such transactions had occurred immediately prior to January
1, 1994 (in the case of operating data) or as of December 31, 1994 (in the case
of balance sheet data). These sales were at net
B-31
<PAGE> 103
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
book value. Revenues and net income reflect pro forma adjustments primarily for
a decrease in interest income on intercompany loans.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
PRO FORMA
--------------------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Revenues........................................................... $ 73,503
Net income......................................................... 30,145
Net income per share............................................... 1.45
Weighted average shares outstanding................................ 20,856
Total assets....................................................... 514,861
Total attributed debt.............................................. 231,838
Total attributed equity............................................ 259,199
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1994
Revenues......................... $18,752 $18,721 $18,770 $19,437 $75,680
Net Income....................... 7,924 8,638 7,919 8,067 32,548
1993
Revenues......................... $18,651 $18,280 $18,111 $17,994 $73,036
Net Income....................... 27,604(1) 7,195 7,198 6,619 48,616
</TABLE>
- - - ---------------
(1) Includes a gain of $19,742,000 on the sale of a property.
B-32
<PAGE> 104
ANNEX C
PSYCHIATRIC GROUP
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Business and Properties.............................................................. C-2
Selected Combined Financial Data..................................................... C-17
Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... C-18
Report of Independent Public Accountants............................................. C-22
Combined Financial Statements........................................................ C-23
</TABLE>
C-1
<PAGE> 105
BUSINESS AND PROPERTIES
PSYCHIATRIC GROUP
References herein to the "Psychiatric Group" are to the Psychiatric Group
as it conducts its business and holds its investments through the Company.
Because the Psychiatric Group is a notional entity and has no separate legal
existence, all rights and obligations of the Psychiatric Group are rights and
obligations of the entire Company. See "Special Considerations -- Stockholders
of One Company; Financial Performance of One Group Could Affect the Other
Group."
GENERAL
On January 31, 1995, the Company's Board of Directors authorized management
to pursue a transaction which is designed to separate the economic attributes of
its investments in psychiatric hospitals (the "Psychiatric Group") and its core
investments in acute care hospitals, rehabilitation hospitals 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 transaction would entail the distribution to holders of Common
Stock of depositary shares representing a new series of preferred stock, par
value $0.01 per share, to be designated Psychiatric Group Preferred Stock (the
"Psychiatric Group Stock"). The Psychiatric Group Stock would be intended to
reflect the separate performance of the Psychiatric Group. The Company's
existing Common Stock would be intended to reflect the separate performance of
the Core Group. In connection with the proposed transaction, the Company has
specifically identified or allocated its assets, liabilities and stockholders'
equity, and its revenues, expenses and cash flows items, between the Core Group
and Psychiatric Group. However, each holder of Psychiatric Group Stock would be
a holder of an issue of capital stock of the entire Company and would be subject
to risks associated with an investment in the Company and all of its businesses,
assets and liabilities.
Following is a description of the business and properties of the
investments of the Company that comprise the Psychiatric Group. The Company does
not expect to make any further investments for the Psychiatric Group.
The Psychiatric Group owns three psychiatric hospitals and has made two
mortgage loans secured by psychiatric hospitals (collectively, the "Psychiatric
Hospitals"). The Company sold its psychiatric property in Torrance, California
in October 1994 for $5.8 million and sold two of its psychiatric properties in
Massachusetts in January 1995 for $13.8 million. As of December 31, 1994, the
net book value of the Psychiatric Group's assets was $66.2 million (on the pro
forma basis described herein). As of December 31, 1994, 36% in pro forma net
book value were held in fee and 64% in pro forma net book value were held as
mortgages.
As of January 23, 1995, letters of credit from commercial banks and cash
deposits aggregating $4.5 million were available to the Psychiatric Group as
security for lease and mortgage obligations.
For a discussion of certain factors which may affect the business of the
Psychiatric Group, see "Special Considerations -- Psychiatric Group" in the
foregoing Information Statement.
C-2
<PAGE> 106
The following table sets forth certain information concerning the
Psychiatric Hospitals as of December 31, 1994:
PSYCHIATRIC HOSPITALS
<TABLE>
<CAPTION>
LICENSED
DESCRIPTION & LOCATION(1) OPERATOR(2) BEDS ACREAGE
- - - --------------------------------- -------------------- -------- -------
<S> <C> <C> <C>
Four Winds Psychiatric Hospital Four Winds, Inc. 175(3) 51
Katonah, New York
Four Winds Psychiatric Hospital FW of Saratoga, Inc. 83 26
Saratoga Springs, New York
Less: Mortgage note receivable N/A N/A N/A
impairment reserve
The Manors The Anclote 130 21
Tarpon Springs, Florida Psychiatric
Hospital, Ltd.
The Retreat The Retreat 100 9
Sunrise, Florida Psychiatric
Hospital, Ltd.
Rock Creek Center DHP, L.P. 60(4) 42
Lemont, Illinois
--- ---
Total 548 149
=== ===
<CAPTION>
NET CARRYING AMOUNT AT
DECEMBER 31, 1994
------------------------------------------------------------
LAND,
BUILDINGS WORKING
AND CAPITAL MORTGAGE
DESCRIPTION & LOCATION(1) IMPROVEMENTS LOANS LOANS TOTAL
- - - --------------------------------- -------------- ------------ -------- -------
(IN THOUSANDS)
<S> C> <C> <C> <C>
Four Winds Psychiatric Hospital N/A $ 628 $27,600 $28,228
Katonah, New York
Four Winds Psychiatric Hospital N/A N/A 18,225 18,225
Saratoga Springs, New York
Less: Mortgage note receivable N/A N/A (7,950) (7,950)
impairment reserve
The Manors $ 5,927 2,000 -- 7,927
Tarpon Springs, Florida
The Retreat 10,048 1,300 -- 11,348
Sunrise, Florida
Rock Creek Center 5,094 2,500 -- 7,594
Lemont, Illinois
------- ------- ------- -------
Total $21,069 $ 6,428 $37,875 $65,372
======= ======= ======= =======
</TABLE>
- - - ---------------
(1) Excludes Pembroke and Westwood, Massachusetts hospitals which were sold in
February 1995.
(2) For further information regarding the operators, see the "Psychiatric
Hospitals" text below.
(3) Currently 110 beds are staffed.
(4) Currently 38 beds are staffed.
PSYCHIATRIC HOSPITALS
Four Winds Hospital -- Katonah. Four Winds Hospital -- Katonah is a
private psychiatric hospital located in Katonah, New York, 50 miles north of New
York City. The hospital is operated by Four Winds, Inc., a closely held
corporation controlled by Dr. Samuel Klagsbrun, a practicing clinical
psychiatrist. The hospital opened October 1, 1977 with 45 beds. Four Winds
Hospital -- Katonah has gradually increased its capacity to the current 175 beds
through the construction of additional patient care units in the form of 15-bed
cottages. The hospital comprises 53 structures in a campus setting containing
approximately 169,916 square feet located on 51 acres. The primary focus of this
facility is the inpatient and outpatient care of adolescents, young adults and
adults. Specialized programs treat patients with eating disorders, dual
psychiatric and addiction illnesses, as well as prolonged psychiatric illnesses.
The Psychiatric Group has a mortgage note receivable secured by a first
mortgage security interest in the real property of Four Winds
Hospital -- Katonah (the "Katonah Note"). At June 30, 1992, the Company recorded
a $33,600,000 write-down on the original $61,200,000 Katonah Note which reduced
the Company's recorded investment in the Katonah Note to $27,600,000.
At the end of 1992, a formal restructuring of the Katonah Note was
completed, pursuant to which monthly payments amount to $3,400,000 in the first
year, increase $100,000 annually in each of the succeeding six years and remain
at $4,000,000 per year through maturity. The restructured Katonah Note has an
initial term of ten years with two ten-year extension terms at the option of the
borrower. The initial term maturity date is November 30, 2002.
Four Winds Hospital -- Saratoga. Four Winds Hospital -- Saratoga is
located in Saratoga Springs, New York. This hospital is operated by FW of
Saratoga, Inc., a closely held corporation controlled by Dr. Samuel Klagsbrun.
This facility, approved for 120 beds, began operations in August 1986 with 60
beds. The facility's activity building, which houses the secondary education
program, activity therapy and the partial hospitalization program, opened in
August 1988. In October 1990, the 15-bed college-age unit opened increasing the
bed complement to 75 beds. The hospital completed an 8-bed adolescent unit
expansion which
C-3
<PAGE> 107
opened on October 14, 1993. This expansion increased licensed and operating beds
to the present 83 beds. Currently, the campus contains 11 buildings, 5 of which
are residential facilities, representing a total of 82,170 square feet of
building improvements situated on 26 acres.
This tertiary care facility offers acute, comprehensive inpatient care for
adolescents, adults and college-age patients with special programs in eating
disorders and dual diagnosis. Four Winds Hospital -- Saratoga also offers
outpatient consultation and evaluation services as well as partial
hospitalization.
The Psychiatric Group has a $18,225,000 mortgage note receivable secured by
a first mortgage security interest in the real property of Four Winds
Hospital -- Saratoga (the "Saratoga Note"). The Saratoga Note has an initial
term of ten years with two ten-year extension terms at the option of the
borrower. The initial term maturity date is June 30, 1999. The interest rate on
the Saratoga Note is 12.42%. Interest is payable monthly for the first six
years, and thereafter, principal and interest payments will be payable in level
monthly installments based on a thirty-year amortization schedule.
At June 30, 1994, in view of negative trends that caused declining cash
flows at a number of the psychiatric hospitals, the Psychiatric Group recorded a
$30,000,000 write-down of its investments in psychiatric hospitals. In
connection with a review of Four Winds Hospital -- Saratoga and Four Winds
Hospital -- Katonah, as well as uncertainties surrounding possible changes in
Medicaid reimbursement in the State of New York, $7,950,000 of the $30,000,000
write-down was recorded as a mortgage note impairment reserve. The Psychiatric
Group will record interest on such mortgage notes as interest payments are
received.
The Manors. The Manors, a 130-bed facility located on the West Coast of
Florida in Tarpon Springs, Florida, is situated directly on the Gulf of Mexico.
It opened for psychiatric care with 31 beds in 1954. The original structure was
built in 1928 as a clubhouse for a country club. There were three major
additions to the facility in 1962, 1966 and 1977. In addition, the facility was
refurbished and remodeled between 1991 and 1993 for approximately $2,200,000.
The hospital real estate consists of 21.41 acres and is improved with the 82,180
square foot main hospital and four ancillary maintenance buildings with a total
of 2,331 square feet. The hospital is leased by the Anclote Psychiatric
Hospital, Ltd., a closely-held operating company.
When the hospital opened, it was well known as an extended care treatment
facility. In August 1990, The Manors added specialized short-term care programs.
The hospital now provides specialized programs for adolescents and children,
older adults, patients with dual diagnosis/codependency problems, adults seeking
short-term treatment, a women's program, a partial hospitalization, and a
hearing-impaired program.
The Retreat. The Retreat is located in Sunrise, Florida, 16 miles west of
downtown Fort Lauderdale. This 100-bed psychiatric and substance abuse hospital
opened in September 1988 with 20 beds. The adult and geriatric buildings were
under construction and opened three months later with full operation by 1989.
The facility is constructed on 9.5 acres in a campus-like setting. There are six
buildings and an engineering shop with a total of 83,691 square feet. The
Retreat offers services for adults, adolescents, children and seniors. In
addition to general psychiatric inpatient care, the hospital offers specialized
programs in chemical dependency and dual diagnosis (chemical dependency or
eating disorder combined with a mood or anxiety disorder), on either inpatient,
day hospitalization or outpatient aftercare basis. The hospital is leased by the
Retreat Psychiatric Hospital, Ltd., a closely-held operating company.
Rock Creek Center. Rock Creek Center is a tertiary care psychiatric
hospital located in Lemont, Illinois, a Chicago suburb in the southwest corner
of Cook County, approximately 40 miles southwest of Chicago. The hospital was
planned for development in three phases. Currently, Phase I has been completed
with the opening of 60 beds. Due to decreasing lengths of stay, however, only 38
of these beds are currently staffed for use. This hospital opened in June 1989
and provides general inpatient and partial hospitalization as well as outpatient
treatment services. Specialty areas provide programming for patients with eating
disorders, personality disorders and those with a dual diagnosis of substance
abuse and psychiatric illnesses. The hospital has been operated since early 1994
by DHP, L.P., a closely-held partnership. The hospital comprises 11 structures
in a campus setting containing approximately 86,100 square feet located on 42
acres.
C-4
<PAGE> 108
At June 30, 1992, the Psychiatric Group recorded an $11,400,000 write-down
on a $21,400,000 mortgage note receivable (the "RCC Note") secured by a first
mortgage and security interest in the real property of Rock Creek Center.
Subsequent recovery of cash in an interest reserve fund maintained by Rock Creek
Center reduced the Psychiatric Group's recorded investment in the RCC Note to
$8,812,000. At the end of 1992, a formal restructuring of the RCC Note was
completed, pursuant to which the Rock Creek Center real property was conveyed to
the Psychiatric Group in return for the Psychiatric Group's forgiveness of the
RCC Note. The Rock Creek Center real property was then leased to the existing
operator for an initial term of five years at an annual rate of $1,000,000 with
monthly payments commencing January 1, 1993.
PSYCHIATRIC HOSPITAL RESULTS
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Psychiatric Group's
hospitals. 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
revenue. 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. For example, as the inpatient
length of stay has decreased, offset by an increased number of admissions in
some cases, the costs of performing initial testing and other administrative
procedures associated with each admission have increased. As a result, certain
of the psychiatric hospital operators have had difficulty meeting their payment
obligations to the Company on a timely basis and there can be no assurance that
they will be able to meet their payment obligations in the future.
The following discussion and the financial information for Four Winds,
Inc., the operator of Four Winds Hospital -- Katonah, are based upon certain
audited and unaudited financial and operational information provided by the
Psychiatric Hospital operators. The following information is being provided by
the Company without the benefit of independent audit.
Four Winds Hospital -- Katonah. Over the period from January 1, 1991
through September 30, 1994 (the "Period") the average length of stay at Four
Winds Hospital -- Katonah has declined while admissions have increased,
resulting in a decrease in the average daily census over the Period. Net
revenues also decreased during the Period reflecting not only the reduced census
but also increases in the contractual allowances and bad debts ("Allowances")
due to pressures from third party payors. Also over the Period operating
expenses have been reduced through various cost containment efforts. All of
these factors combined resulted in an increase in the Minimum Interest Coverage
Ratio (net income before interest, depreciation and amortization and
subordinated management fees ("EBDIT"), divided by minimum mortgage interest)
from slightly over 1 times for fiscal 1991 to nearly 2 times at the end of the
Period. The Fixed Charge Coverage Ratio (EBDIT divided by total senior and other
interest expense) increased from slightly over 1 times in 1991 to over 1.5 times
at the end of the Period. Cash flows from operating activities have also
improved.
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FOUR WINDS, INC. FINANCIAL SUMMARY (1)
(FOUR WINDS HOSPITAL -- KATONAH)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, FISCAL YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1994 1993 1993 1992 1991
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net Revenue........................ $ 21,991 $ 19,656 $ 26,380 $ 26,182 $ 35,900
Operating Income(2)................ 4,676 4,095 5,431 260 5,934
Depreciation....................... 956 1,018 1,360 1,477 1,504
Interest: Senior(3)............... 2,874 2,603 3,539 3,533 7,523
Other..................... 449 431 530 4,514 435
Net Income (loss).................. 965 603 749 27,508(4) (24,895)(5)
Cashflow From Operating
Activities...................... 422 212 25 (2,633) (8,766)
BALANCE SHEET
Total Assets......................... $ 27,302 $ 26,859 $ 27,064 $ 26,589 $ 29,994
Debt: Senior(3)................... 29,072 29,198 29,198 29,350 61,200
Other....................... 6,182 6,165 6,165 4,983 3,983
Stockholders' Deficit.............. (11,831) (12,757) (12,611) (13,360) (40,868)
Working Capital.................... 5,436 3,775 3,800 2,275 4,562
</TABLE>
- - - ---------------
(1) Audited financial statements for Four Winds, Inc. can be obtained by making
a written request that includes the name and address of Four Winds Hospital,
800 Cross River Road, Katonah, New York 10536, submitted to: New York State
Department of Health, Empire State Plaza, 2230 Corning Tower, Albany, New
York 12237.
(2) Operating Income consists of net income before interest, depreciation,
amortization and nonoperating gains and losses.
(3) Senior Debt consists of a mortgage loan and term note payable to the
Company. Interest expense also includes participation interest paid to the
Company pursuant to the mortgage loan agreement.
(4) Includes a $36 million extraordinary gain from debt relief.
(5) Includes a $24 million loss on restructuring.
Four Winds Hospital -- Saratoga. The average length of stay decreased over
the Period while admissions increased resulting in an increase in the average
daily census. The expected corresponding increase in patient service revenue was
offset by an increase in Allowances. Operating expenses remained constant even
though the census increased. The increase in patient volume and expense
reductions implemented over the Period were offset somewhat by increases in
Allowances; however, the Minimum Interest Coverage Ratio increased from slightly
over 1.5 times for fiscal 1991 to slightly under 2 times by the end of the
Period. The Fixed Charge Coverage Ratio also increased from over 1.0 in 1991 to
nearly 1.5 for the Period. Cash flows from operating activities reflect a
deterioration due to increases in patient accounts receivable.
The Manors. During the Period the average length of stay decreased while
admissions increased substantially. These two factors resulted in an increase in
the average daily census during the Period. This increase in inpatient census
together with the development of partial hospitalization programs resulted in an
increase in net revenues and an increase in operating expenses over the Period.
This facility is also experiencing pressure from third party payors to reduce
contract rates and lengths of stay resulting in increases in Allowances as a
percent of gross revenues. The Minimum Rent Coverage Ratio (EBDIT divided by
minimum rent) decreased from slightly over 1.5 times in 1991 to a level at
September 30, 1994 of nearly 1 times. The Fixed Charge Coverage Ratio for this
same period decreased from over 1 times to over .5 times. Cash flow from
operating activities had deteriorated as well. In addition, the facility is
having problems collecting partial hospitalization receivables from Medicare due
to a difference in interpretation of Medicare
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regulations. At this time there are approximately $1 million in claims under
review or dispute contributing to the hospital's liquidity problem. Management
is currently in discussions with the hospital regarding restructuring of the
current lease.
The Retreat. The average length of stay has declined during the Period
while admissions increased resulting in a constant average daily inpatient
census. Net revenue decreased over the Period. The south Florida area has
experienced extreme pressure from managed care companies to reduce contract
rates and lengths of stay. Therefore, Allowances as a percent of gross revenue
increased over the Period. At the same time the hospital has been developing
outpatient partial hospitalization programs. Operating expenses have remained
relatively constant over the Period. As a result of these various operational
pressures, both the Minimum Rent Coverage Ratio and the Fixed Charge Coverage
Ratio have declined from over 1.5 times in 1991 to under 1 times by the end of
the Period. Cash flow from operations has also declined for the current fiscal
year. Company management is currently discussing a restructuring of the existing
lease in response to these operational pressures.
Rock Creek Center. When this facility opened in 1989 it specialized in
providing treatment for patients requiring long-term care. However, throughout
the Period there has been a substantial decline in the average length of stay.
During the Period, although the annual hospital admissions increased, the
average daily census decreased due to the reduction in the average length of
stay. Net revenues decreased over the Period reflecting not only the decrease in
census but also an increase in Allowances. Throughout the Period the operating
expenses remained relatively constant until there was a staff reduction and a
change in management late in 1993, at which time expenses were decreased. In
response to the declining census and cash flow, the Company's mortgage was
converted to a lease in a restructuring at the end of fiscal 1992. The fixed
mortgage interest payment, then converted to a lease payment, was reduced by
62%. The Minimum Rent Coverage Ratio and the Fixed Charge Coverage Ratio
increased from nearly .5 times in 1991 to current levels of slightly over 1.5
times for the Minimum Rent Coverage Ratio and nearly 1.5 times for the Fixed
Charge Coverage Ratio. However, fluctuations in census and patient accounts
receivable collections have contributed to periodic deficiencies in working
capital and the hospital's inability to consistently meet all of its obligations
on a timely basis.
LEASES AND MORTGAGES
The following table sets forth information with respect to the leases and
mortgages relating to the Psychiatric Hospitals.
<TABLE>
<CAPTION>
INITIAL
YEAR TERM OF NUMBER YEARS
ACQUIRED/ TOTAL ANNUAL BASE LEASE/ OF PER
DESCRIPTION & LOCATION FUNDED INVESTMENT(1) RENT/INTEREST(2) MORTGAGE(3) OPTIONS OPTION
- - - ---------------------- -------- ------------- ---------------- ----------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Four Winds Psychiatric Hospital 1988 $27,600 $ 3,600 2002 2 10
Katonah, New York(5)
Four Winds Psychiatric Hospital 1989 18,225 2,264 1999 2 10
Saratoga Springs, New York(5)
Less: Mortgage note receivable N/A (7,950) N/A N/A N/A N/A
impairment reserve
The Manors 1990 6,523 855(6) 2000 3 10
Tarpon Springs, Florida
The Retreat 1990 11,934 2,359(6) 2000 3 10
Sunrise, Florida
Rock Creek Center 1989 5,812 1,000 1997 1 5
Lemont, Illinois 2 10
------- --------
Total Psychiatric Hospitals $62,144 $ 10,078
======= ========
</TABLE>
- - - ---------------
(1) Reflects initial investments less write-downs.
(2) Reflects current contract rate of annual base rent or interest.
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(3) Each lease and mortgage provides the lessee or borrower with renewal options
to extend the term of the lease or mortgage beyond the primary term.
(4) Base rent during the renewal terms is based on fair market rental with
specified minimum and maximum increases.
(5) Investments held in the form of mortgages rather than owned by the
Psychiatric Group.
(6) Management is currently in discussions with the hospital regarding
restructuring of the current lease.
Leases.
All of the leases relating to the Psychiatric Hospitals (the "Psychiatric
Group Leases") contain the same basic provisions described below. Each leased
Psychiatric Hospital includes a fee interest in the land, buildings and
improvements, related easements and rights and fixtures but not personal
property (the "Psychiatric Group Leased Property"), and is leased by a
subsidiary of the Company (the "Landlord" under the Psychiatric Group Lease) to
a psychiatric health care provider (the "Tenant") under a Psychiatric Group
Lease which will have a primary term (the "Fixed Term") and renewal options as
set forth in the table above.
Use of the Properties. Each Psychiatric Group Lease permits the Tenant to
operate the Psychiatric Group Leased Property as a psychiatric and, in some
instances, a substance abuse hospital with treatment and diagnostic facilities
for inpatient or outpatient care and for such other uses as may be necessary or
incidental to such use or otherwise reasonably approved by prior written consent
of the Landlord.
Amounts Payable Under the Psychiatric Group Leases; "Net" Provisions.
During the initial term and the renewal terms of the Psychiatric Group Leases
(the "Fixed Rent Renewal Terms"), the Tenant pays a base rental in equal
monthly installments, in arrears ("Base Rent"). In addition, commencing in the
second year of each Psychiatric Group Lease, additional rent ("Additional
Rent") will be payable with respect to each calendar year during the initial
term and the Fixed Rent Renewal Terms of the Psychiatric Group Lease for each
Psychiatric Group Leased Property in an amount ranging from 2% to 6% (depending
on the Psychiatric Group Lease) of the Gross Revenues (as hereinafter
described) attributable to the Psychiatric Group Leased Property for that year,
in excess of the Gross Revenues derived from such property during the first
year of the lease term ("Excess Gross Revenues"). Additional Rent will be
calculated and paid on a quarterly basis, subject to annual reconciliation.
The term "Gross Revenues" is defined in the Psychiatric Group Leases to
mean, with respect to any Psychiatric Group Leased Property, the sum of all
revenues received or receivable from or by reason of the operation of the
Psychiatric Group Leased Property, including all patient revenues received or
receivable from all rooms, beds and other facilities provided, meals served,
services performed, space or facilities subleased or goods sold; provided,
however, that Gross Revenues does not include revenue from professional fees or
charges by physicians or providers of ancillary services, non-operating revenues
such as interest income or income from the sale of assets which are not sold in
the ordinary course of business, and is reduced by contractual allowances or
reserves for billings not paid from applicable governmental agencies, allowances
for uncollectible accounts, including credit card accounts, uncompensated care
or charity care, patient billing credits and adjustments, taxes added to patient
billings, all rental income, concession fees and other payments received by the
Tenant from any affiliate of the Tenant, and, except with respect to the Rock
Creek Center lease, revenues attributable to off-site services provided by the
Tenant.
Each Psychiatric Group Lease is a "net" lease, and the Tenant is to pay
thereunder Base Rent, Additional Rent and all additional charges, including
every fine, penalty, interest or cost which may be added for nonpayment or late
payment thereof, all taxes, assessments, levies, fees, water and sewer rents and
charges, all governmental charges with respect to the Psychiatric Group Leased
Property and all utility and other charges, including insurance premiums,
incurred in the operation of the Psychiatric Group Leased Property. Each
Psychiatric Group Lease also provides for certain rent reductions or abatement
in the event of damage or destruction or a partial taking of the Psychiatric
Group Leased Property as described below.
Each Tenant is obligated, at its expense, to maintain its Psychiatric Group
Leased Property in good order and repair, and to make all repairs and
replacements thereto, whether interior or exterior, structural or nonstructural,
foreseen or unforeseen, ordinary or extraordinary, patent or latent, that may be
necessary and
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appropriate to keep such Psychiatric Group Leased Property in good order and
repair. The Psychiatric Group Lease requires the Tenant not to take or omit to
take any action that might materially impair the value or usefulness of the
Psychiatric Group Leased Property as a health care related facility. The Tenant
shall have the right to make certain non-capital improvements as it, in its
reasonable discretion, may deem to be desirable for the Property's uses. The
cost of such non-capital additions, modifications or improvements to the
Psychiatric Group Leased Property shall be paid by the Tenant and shall, without
payment by the Landlord at any time, be included under the terms of the
Psychiatric Group Lease, and upon expiration or earlier termination of the
Psychiatric Group Lease shall pass to and become the property of the Landlord.
Indemnification. Under each Psychiatric Group Lease, the Tenant will
indemnify the Landlord against liability caused by any hazardous substance,
accident, injury or death of persons (including malpractice claims), damage to
property, claims of misuse or mismanagement regarding any portion of the
Psychiatric Group Leased Property, impositions on the Psychiatric Group Leased
Property, failure of the Tenant to comply with the Psychiatric Group Lease or
non-performance of any sublease. Also under each Psychiatric Group Lease, the
Landlord indemnifies each Tenant against liability caused by gross negligence or
willful misconduct of the Landlord.
If no event of default on the part of the Tenant has occurred under the
Psychiatric Group Lease, the Tenant has the right pursuant to the Psychiatric
Group Lease to construct or install Capital Additions (as defined herein) on the
Psychiatric Group Leased Property. The term "Capital Additions" is defined in
the Psychiatric Group Lease to mean (i) any expansion of the facility, (ii) the
construction of a new wing or new story on existing building, (iii) the
renovation of existing Improvements on the Psychiatric Group Leased Property in
order to provide services not previously offered by the Tenant in the facility
or (iv) any expansion, construction, renovation or conversion of the Psychiatric
Group Leased Property, the building or the facility that increases the bed or
service capacity of the facility or changes the purpose for which the facility
is utilized. Capital Additions may be constructed by the Tenant at the Tenant's
option, provided that the Tenant gives notice to the Landlord. No Capital
Addition may be made without the consent of the Landlord. Prior to commencing
the construction of any Capital Addition, the Tenant may, and under the Rock
Creek Center lease must, request that the Landlord provide or arrange financing
for any Capital Addition which is reasonably expected to cost in excess of
$50,000 with respect to the Psychiatric Group Leased Properties other than the
Rock Creek Center property, with respect to which the threshold cost is
$125,000. In the event the Tenant offers such opportunity to the Landlord and
the Landlord proposes to pay for such Capital Addition, the Landlord shall
notify the Tenant of the terms and conditions, including the terms of any
amendment to the Psychiatric Group Lease (including, without limitation, an
increase in rent). If the Landlord declines to fund the cost of any Capital
Addition, the Tenant may pay the cost of such Capital Addition itself. In such
event, the Capital Addition will not result in any increase in the Base Rent
payable under the Psychiatric Group Lease, and the Landlord will not be required
to compensate the Tenant at the expiration or termination of the Psychiatric
Group Lease. All Capital Additions will pass to the Landlord free and clear of
all encumbrances.
Assignment and Subletting. Under each of the Psychiatric Group Leases,
other than the Rock Creek Center lease, an assignment or subletting of all or
any portion of the Psychiatric Group Leased Property is not permitted unless the
consent of the Landlord is first obtained, which the Landlord may withhold in
its sole and absolute discretion; provided, however, that the Tenant may, with
the prior written consent of the Landlord first had and obtained, which consent
shall not unreasonably be withheld, sublet less than an aggregate of 25% of the
net usable square footage of the Psychiatric Group Leased Property to
concessionaires or other third party users or operators of portions of the
Psychiatric Group Leased Property, provided that any subletting to any party
shall not individually, or in the aggregate, materially diminish the actual or
potential Additional Rent. Under the Rock Creek Center lease, the Tenant may not
assign all or any portion of its interest in the Rock Creek Center property
without the prior consent of the Landlord. The Landlord shall not unreasonably
withhold its consent to any proposed assignment (as distinguished from a
subletting). The Tenant is also prohibited from subletting the Rock Creek Center
property or any portion thereof, except, with the prior consent of the Landlord,
for up to (i) ten percent of the net usable square footage of the facility to
any one concessionaire or other third party user or operator or (ii) 25% of such
square footage to all such sublessees. The Landlord shall not unreasonably
withhold its consent to any such proposed subletting (as distinguished
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<PAGE> 113
from an assignment), provided that such subletting shall not materially diminish
the actual or potential Additional Rent payable under the Rock Creek Center
lease. The Tenant's ability to assign any Psychiatric Group Lease or sublet any
of the Psychiatric Group Leased Properties (other than as expressly authorized
in the Psychiatric Group Lease) is also subject to certain other conditions,
including the conditions that the Tenant remain primarily liable for performance
of the Psychiatric Group Lease and, in the case of an assignment, that the
assignee assume the Psychiatric Group Lease in writing.
Damage to, or Condemnation of, a Psychiatric Group Leased Property. In the
event of damage to or destruction of any Psychiatric Group Leased Property which
is caused by an insured or self-insured risk which renders the Psychiatric Group
Leased Property unsuitable for the Tenant's then use and occupancy, the Tenant
is obligated to do one of the following: (i) rebuild (to the extent possible)
the Psychiatric Group Leased Property, or (ii) offer to acquire the Psychiatric
Group Leased Property from the Landlord for a purchase price equal to the
greater of the Fair Market Value (as defined under "Valuation" below) of the
Psychiatric Group Leased Property or the Minimum Repurchase Price (as defined
under "Valuation" below). In the event the Tenant restores the destroyed
facility, the insurance proceeds shall be paid out by the Landlord to the Tenant
from time to time as necessary to pay for the reasonable costs of such
restoration. If the Tenant acquires the Psychiatric Group Leased Property, all
applicable insurance proceeds will become the property of the Tenant upon the
Landlord's receipt of the full purchase price for the Property.
In the event of damage to or destruction of the Psychiatric Group Leased
Property that is caused by an insured risk which does not render the Psychiatric
Group Leased Property unsuitable for the Tenant's then use and occupancy, the
Tenant will be obligated to restore the Psychiatric Group Leased Property to
substantially the same condition as existed immediately before the damage or
destruction: provided, however, that if the Tenant cannot, within a reasonable
time, obtain the necessary regulatory permits to repair the Psychiatric Group
Leased Property, the Tenant shall either (i) offer to purchase the Psychiatric
Group Leased Property for a purchase price equal to the greater of the Minimum
Repurchase Price or the Fair Market Value immediately prior to such damage or
destruction, or (ii) continue with the Psychiatric Group Lease in which event
the Landlord will be entitled to retain the insurance proceeds less the amount
needed to restore the Psychiatric Group Leased Property (as defined under
"Valuation" below). If the Landlord does not accept either of the Tenant's
offers, the Tenant may withdraw such offer, in which case the Psychiatric Group
Lease remains in full force and effect and the Tenant will proceed to restore
the Psychiatric Group Leased Property and the Landlord will pay out insurance
proceeds to pay for restoration.
In the event of a partial taking of the Psychiatric Group Leased Property,
which does not render the Psychiatric Group Leased Property unsuitable for the
Tenant's then use and occupancy, the Tenant at its own cost shall with all
reasonable diligence restore the untaken portion of the Psychiatric Group Leased
Property so that the Psychiatric Group Leased Property constitutes a complete
architectural unit of the same general character as existing immediately prior
to the taking.
In the event of a total taking with respect to any of the Psychiatric Group
Leased Properties other than the Rock Creek Center property, the Psychiatric
Group Lease shall cease and terminate as of the date of such taking. In the
event of a partial taking of any Psychiatric Group Property other than the Rock
Creek Center property, which nevertheless renders such Psychiatric Group
Property unsuitable for its primary intended use, the Tenant and the Landlord
each shall have the option by notice to the other, at any time prior to such
taking, to terminate the Psychiatric Group Property Lease as of such date. In
the event of a total or partial taking of the Rock Creek Center property, the
validity of the Rock Creek Center lease will not be affected nor the Tenant's
obligations to pay rent. However, if the entire property is taken or condemned,
or if the portion of the property taken or condemned is rendered unsuitable for
the Tenant's use, and the Landlord receives an award which is equal to or
greater than the greater of the Minimum Repurchase Price or the Fair Market
Value of the property, the Landlord shall terminate the Psychiatric Group Lease
and the Tenant's obligation to pay rent will be abated.
In the event of damage to or destruction of the Psychiatric Group Leased
Property caused by an uninsured risk (including earthquake), whether or not such
damage or destruction renders the Psychiatric Group Leased Property unsuitable
for the Tenant's then use and occupancy, the Tenant will, within 90 days of
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such destruction (i) rebuild the Psychiatric Group Leased Property and the
Psychiatric Group Lease will continue in full force or (ii) purchase the
Psychiatric Group Leased Property from the Landlord for a purchase price equal
to the greater of the Minimum Repurchase Price or the Fair Market Value prior to
such damage or destruction.
If during the last 12 months of the then applicable term of the Psychiatric
Group Psychiatric Group Lease, as extended, there is material damage or
destruction of the Psychiatric Group Leased Property that cannot be repaired or
rebuilt within certain specified time periods or at costs below certain
specified amounts as provided by each Psychiatric Group Lease, the Tenant may
terminate the Psychiatric Group Lease by giving 30 days' written notice thereof
and the Landlord will collect any insurance proceeds to which it is entitled,
and the Tenant will assign to the Landlord the Tenant's rights to all insurance
proceeds.
Insurance. Each Tenant must keep the Psychiatric Group Leased Property and
all property located in or on such Psychiatric Group Leased Property insured at
all times. Required insurance includes insurance against casualty loss, business
interruption, personal injury, medical malpractice risks, flood and construction
insurance during a period of capital addition.
Valuation. "Minimum Repurchase Price" means (i) the initial improvement
costs (or, in the case of the Rock Creek Center lease, $10,000,000), plus any
portion of a Capital Additions Cost (as such term is defined in the Psychiatric
Group Lease) which the Landlord has actually paid less the net amount of any
insurance proceeds or condemnation awards received by the Landlord and not
applied to restore the Psychiatric Group Leased Property. "Fair Market Value" at
any time means the price that a willing buyer not compelled to buy would pay to
a willing seller not compelled to sell, assuming (a) that the Psychiatric Group
Property Lease is not in effect, (b) that the Psychiatric Group Property had
been exposed for sale on the market for a reasonable period of time, (c) that
such seller must pay any closing costs and title insurance premiums with respect
to such sale and (d) that the Psychiatric Group Leased Property is fully
licensed by all governmental agencies having jurisdiction thereof, is and will
continue to be operated for its primary intended use and is otherwise a going
concern.
Events of Default. Events of Default are defined in each Psychiatric Group
Lease to include, among others, the following:
(i) failure by the Tenant to pay rentals when due and payable;
(ii) failure by the Tenant to observe or perform any other material
term, covenant or condition of the Psychiatric Group Lease and such failure
is not cured by the Tenant for a period of 30 days (10 business days with
respect to the Rock Creek Center lease) after notice from the Landlord
thereof, unless such failure cannot with due diligence be cured within said
30 days (or 10 business days with respect to the Rock Creek Center lease)
and thereafter proceeds promptly, with due diligence, to correct such
failure and diligently completes the curing thereof;
(iii) default is made in the payment of any installment of interest
on, or the principal of any working capital loan made by the Landlord, as
the same becomes due (and, with respect to the Rock Creek Center lease,
continuation of such failure for a period of five business days);
(iv) certain events of bankruptcy with respect to the Tenant;
(v) the Tenant is liquidated and dissolved;
(vi) if the estate or interest of the Tenant in the Psychiatric Group
Leased Property or any part thereof shall be levied upon or attached in any
proceeding and the same shall not have been vacated or discharged within 60
days (with respect to the Rock Creek Center property only) after the
commencement thereof, or, with respect to Psychiatric Group Leased
Properties other than the Rock Creek Center property, the later of 60 days
after commencement of such proceeding or 30 days after notice by the
Landlord (unless the Tenant is contesting such lien or attachment in
accordance with the Psychiatric Group Lease);
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(vii) if, except as a result of damage, destruction or partial,
temporary, or complete condemnation, the Tenant voluntarily ceases
operations on the Psychiatric Group Leased Property for a period in excess
of 60 days;
(viii) if any of the representations or warranties in the purchase
agreement relating to the Psychiatric Group Leased Property proves to be
untrue when made in any material respects which materially and adversely
affects the Landlord; or
(ix) the Tenant is in breach of any obligation owed by the Tenant
under any loan agreement or security agreement with the Landlord.
If an Event of Default shall have occurred and be continuing, the Landlord
may terminate the Psychiatric Group Lease (some of the Psychiatric Group Leases
provide for a ten day cure period). Upon termination, the Tenant's rights will
cease and the Tenant will surrender possession of the Psychiatric Group Leased
Property and the Landlord will be entitled to all damages incurred by the
Tenant's default. After repossessing the Psychiatric Group Leased Property, the
Landlord is obligated to use reasonable good faith efforts to relet the
Psychiatric Group Leased Property or otherwise to mitigate the Landlord's
damages. To the fullest extent provided by applicable law, neither the
termination of the Psychiatric Group Lease nor the repossession of the
Psychiatric Group Leased Property nor the reletting of (or failure to relet) the
Psychiatric Group Leased Property will relieve the Tenant of its obligations
under the Psychiatric Group Lease. In the event of the termination of the
Psychiatric Group Lease, the Tenant is required to pay to the Landlord all
rentals then due through the date of such termination and generally to make the
Landlord whole as to any deficiency which the Landlord may suffer by reason of
its reletting (or failure to relet) the Psychiatric Group Leased Property.
Right to Renew Psychiatric Group Lease. Each Psychiatric Group Lease
provides that, beginning on the expiration of the term the Tenant will have the
option to renew which may be exercised by the Tenant by delivery of notice not
less than 180 days nor more than 360 days prior to the date the Psychiatric
Group Lease would terminate.
Option to Purchase a Psychiatric Group Leased Property. Each Psychiatric
Group Lease grants to the Tenant a right of first refusal, which must be
exercised within 30 days after notice from the Landlord, to purchase the
Psychiatric Group Leased Property at all times during the term of the
Psychiatric Group Lease, at the same price and terms as the Landlord has offered
the Psychiatric Group Leased Property for sale or as the Landlord intends to
accept (or has accepted subject to The Tenant's right of first refusal).
Option to Purchase a Psychiatric Group Leased Property. Each Psychiatric
Group Lease grants to the Tenant the option to purchase the Psychiatric Group
Leased Property upon the expiration of any term at the greater of the Fair
Market Value of the Psychiatric Group Leased Property as of the expiration of
said term or the Minimum Repurchase Price.
Landlord Financing. Each of the Psychiatric Group Leases other than the
Rock Creek Center lease provide that the Landlord may encumber the Psychiatric
Group Leased Property whether to secure any borrowing or other means of
financing provided that the principal amount of such borrowing does not exceed
80% of the then Fair Market Value of the Psychiatric Group Leased Property.
Mortgages.
Katonah Loan. In November 1988, the Psychiatric Group loaned $60,000,000
to Four Winds, Inc. secured by a first mortgage security interest in the real
property of Four Winds Hospital--Katonah (the "Katonah Loan"). In October 1991,
in connection with the restructuring of certain indebtedness of the hospital,
the Katonah Loan was increased to $61,200,000. In May 1992, the Company provided
Four Winds Hospital--Katonah with a revolving loan for working capital purposes
pursuant to which it subsequently advanced $800,000. At June 30, 1992, the
Company recorded a $33,600,000 write-down on the original $61,200,000 Katonah
Note which reduced the Company's recorded investment in the Katonah Note to
$27,600,000.
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At the end of 1992, a formal restructuring of the Katonah Note was
completed, pursuant to which monthly payments amount to $3,400,000 in the first
year, increase $100,000 annually in each of the succeeding six years and remain
at $4,000,000 per year through maturity. The restructured Katonah Note has an
initial term of ten years with two ten-year extension terms at the option of the
borrower. The initial term maturity date is November 30, 2002. In connection
with the restructuring, the Company converted the revolving working capital loan
into a five-year amortizing term note.
Pursuant to a Contingent Interest Agreement between the Psychiatric Group
and Four Winds, Inc. (the "Katonah Contingent Interest Agreement"), Four Winds,
Inc. has granted to the Company an interest equal to 1.75% of the excess net
revenue in any year. Excess net revenue generally refers to the amounts by which
operating revenue for the specified year exceeds operating revenue for 1992.
The payment of principal of and interest on the Katonah Loan, along with
Four Winds, Inc.'s other obligations under the Katonah Loan and the Katonah
Contingent Interest Agreement, are secured by a first mortgage and security
interest in the real property owned by Four Winds, Inc. (consisting of
approximately 51 acres of land located in the Town of Lewisboro, Westchester
County, New York) and the buildings and the fixtures comprising the Four Winds
Hospital -- Katonah. Such obligations are also secured by a security interest in
all items of personal property owned by Four Winds, Inc. and associated with
operation of the Four Winds Hospital -- Katonah, including, but not limited to,
accounts receivable due from patients and third-party payors, inventories and
supplies, prepaid expenses and equipment, but excluding certain specified
assets. The obligations of Four Winds, Inc. under or in connection with the
Katonah Loan, the Katonah Note, the mortgage, the security agreements and the
Katonah Contingent Interest Agreement are limited solely to recourse against the
collateral provided for under the Katonah Loan and the security agreements.
Four Winds, Inc. is a corporation organized solely to own the Katonah
hospital.
The Saratoga Loans. In June of 1989, February of 1991 and October of 1991,
the Psychiatric Group made $16 million, $1.825 million and $400,000 mortgage
loans, respectively (the "Saratoga Loans") to FW of Saratoga, Inc. The Saratoga
Loans are evidenced by an $18,225,000 mortgage note receivable secured by a
first mortgage security interest in the real property of Four Winds
Hospital -- Saratoga (the "Saratoga Note"). The Saratoga Note has an initial
term of ten years with two ten-year extension terms at the option of the
borrower. The initial term maturity date is June 30, 1999. The interest rate on
the Saratoga Note is 12.42%. Interest is payable monthly for the first six
years, and thereafter, principal and interest payments will be payable in level
monthly installments based on a thirty-year amortization schedule. However,
principal and accrued and unpaid interest are due and payable in full on the
last day of the initial term (if the final maturity has not been extended beyond
such date) or the last day of the first or second extension term, as the case
may be, of the Saratoga Loans.
The Saratoga Note is not prepayable during the initial term. The Saratoga
Note is prepayable in whole during any extension term. Any prepayment must be
accompanied by payment of the greater of (a) a reconveyance fee in an amount
specified from quarter to quarter and which approximates the net present value
of the Company's anticipated remaining interest in excess net revenue of the
Saratoga Hospital (as described in the following paragraph) or (b) the Company's
interest in the appreciated value profit of the Saratoga Hospital and the other
improvements (as described in the following paragraph).
Pursuant to a Contingent Interest Agreement between the Psychiatric Group
and FW of Saratoga, Inc. (the "Saratoga Contingent Interest Agreement"), FW of
Saratoga, Inc. has granted to the Company, until the Saratoga Note is fully
repaid, a 5% interest in the "excess net revenue" of the Saratoga Hospital,
which is defined as the excess of operating revenue for a specified year over
operating revenue for calendar year 1989 during the initial term of the loan and
operating revenue for the period of 12 consecutive calendar months immediately
preceding each of two extension terms during the first and second extension
terms, respectively. In addition, at the end of the initial term and each
extension term of the Saratoga Loans, or if during the term of the Saratoga
Loans the Saratoga Hospital is sold or FW of Saratoga, Inc. prepays the Saratoga
Loans, the Psychiatric Group will receive a payment equal to 30% of the
difference between (i) the then fair market value of the Saratoga Hospital and
(ii) the sum of the original principal amount of the Saratoga Note and the cost
of any capital additions. The amount of such payments to the Psychiatric Group
will not, however, exceed
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a return of more than 2.5% per annum on the Saratoga Loans and any subsequent
loans by the Psychiatric Group to FW of Saratoga, Inc.
The payment of principal of and interest on the Saratoga Loans, along with
the other obligations of FW of Saratoga, Inc. under the Saratoga Loans and the
Saratoga Contingent Interest Agreement, are secured by a first mortgage and
security interest in the real property owned by FW of Saratoga, Inc. (consisting
of approximately 26 acres of land located in the City of Saratoga Springs,
Saratoga County, New York) and the building and the fixtures comprising the
Saratoga Hospital. Such obligations are also secured by a security interest in
all items of personal property owned by FW of Saratoga, Inc. and associated with
the operations of the Saratoga Hospital, including, but not limited to, accounts
receivable due from patients and third-party payors, inventories and supplies,
prepaid expenses, contract rights and equipment. The obligations of FW of
Saratoga, Inc. under or in connection with Saratoga Loans, the Saratoga Note,
the mortgage, the security agreements and the Saratoga Contingent Interest
Agreement are limited solely to recourse against the collateral described in the
security agreements.
FW of Saratoga, Inc. is a privately-held corporation organized solely to
own and operate the Saratoga Hospital.
As discussed above, at June 30, 1994, in view of negative trends that
caused declining cash flows at a number of the psychiatric hospitals, the
Psychiatric Group recorded a $30,000,000 write-down of its investments in
psychiatric hospitals. In connection with a review of Four Winds
Hospital -- Saratoga and Four Winds Hospital -- Katonah, as well as
uncertainties surrounding possible changes in Medicaid reimbursement in the
State of New York, $7,950,000 of the $30,000,000 write-down was recorded as a
mortgage note impairment reserve. The Psychiatric Group will record interest on
such mortgage notes as interest payments are received.
DEPRECIATION
The Psychiatric Group accounts for its property leases as operating leases.
The Psychiatric Group records properties at cost and allocates the cost between
land and building and improvements based on independent appraisals. Depreciation
of the Psychiatric Hospitals is recorded on a straight-line basis over the
estimated useful lives of the buildings and improvements (20 to 25 years).
COMPETITION
The operators of the Psychiatric Group Facilities compete on a local and
regional basis with other operators of comparable facilities. They compete with
independent operators as well as managers of multiple facilities, some of which
are substantially larger and have greater resources than the operators of the
Psychiatric Group Facilities. Some of these competing facilities are operated
for profit while others are owned by governmental agencies or tax-exempt,
not-for-profit organizations.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. In connection with its ownership and operation of the
Psychiatric Hospitals, the Company may be potentially liable for such costs.
All of the Psychiatric Hospitals have been subject to Phase I environmental
assessments, which are intended to discover information regarding, and to
evaluate the environmental condition of, the surveyed properties and surrounding
properties. The Phase I assessments included a historical review, a public
records review, a preliminary investigation of the site and surrounding
properties, screening for the presence of asbestos, polychlorinated biphenyls
and underground storage tanks and the preparation and issuance of a
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written report, but do not include soil sampling or subsurface investigations.
In each case where Phase I assessments resulted in specific recommendations for
remedial actions, the Company's management has either taken or scheduled the
recommended action.
The Phase I assessments have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Psychiatric
Group's business, assets or results of operations, nor is the Company aware of
any such liability. Nevertheless, it is possible that these assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, no assurances can be
given that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition of
the Psychiatric Hospitals will not be affected by tenants and occupants of the
Psychiatric Hospitals, by the condition of properties in the vicinity of the
Psychiatric Hospitals (such as the presence of underground storage tanks) or by
third parties unrelated to the Company.
The Company believes that the Psychiatric Hospitals are in compliance in
all material respects with all federal, state and local ordinances and
regulations regarding hazardous or toxic substances. The Company has not been
notified by any governmental authority, or is otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of its present or former properties.
LEGAL PROCEEDINGS
The Psychiatric Group is not currently involved in any material litigation
nor, to the Company's knowledge, is any material litigation currently threatened
against the Psychiatric Group or its properties, other than routine litigation
arising in the ordinary course of business.
GOVERNMENT REGULATION AND PAYMENT ARRANGEMENTS
Government Regulations. In addition to the licensing, certificate of need
and Medicare/Medicaid rules and regulations, there are a number of specific
federal and state laws affecting psychiatric hospitals, such as the regulation
of civil commitments of patients, admitting procedures, and disclosure of
information regarding patients being treated for chemical dependency. Many
states have adopted a "patient's bill of rights" which sets forth standards
governing the treatment of patients of psychiatric hospitals, such as using the
least restrictive treatment method, allowing patient access to telephone and
mail, allowing a patient to see a lawyer, and requiring the patient to be
treated with dignity.
Payment Arrangements. The lessees and mortgagees of the Psychiatric Group
Facilities receive payments for patient care from federal Medicare programs for
elderly and disabled patients, Medicaid and other state programs for medically
indigent patients, private insurance carriers, employers, Blue Cross plans,
health maintenance organizations, preferred provider organizations and directly
from patients.
Medicare payments for inpatient psychiatric services are made based on
reasonable operating cost, subject to a per discharge limitation. If a facility
operates below the cost per discharge limitation, it will qualify for a bonus
payment. If a facility operates above the cost per discharge limitation, it will
be reimbursed solely to the extent of the limitation. Defined capital costs and
outpatient services related to Medicare beneficiaries are reimbursed based on
reasonable cost. All Medicare inpatient and outpatient services are reimbursed
at a tentative rate with final settlement determined after submission of annual
cost reports and audits thereof by the Medicare fiscal intermediary. A
psychiatric hospital's classification of patients under the Medicare program and
the appropriateness of their admission to a psychiatric program is subject to an
independent review and approval. In general, payments made by Medicare are less
than established charges for such services. Additionally, Medicare payments may
be delayed due to federal government regulations.
Medicaid payments for psychiatric hospitals will vary between states. These
payments may be based on a percentage of reasonable cost, a fixed rate per
discharge, or other payment arrangements. If a state selects a cost based
reimbursement methodology, psychiatric hospitals are reimbursed at a tentative
rate with final settlement determined after submission of annual cost reports
and audits thereof by Medicaid. In general,
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payments made by Medicaid are less than established charges for such services.
Additionally, Medicaid payments may be delayed due to State budget deficits.
Blue Cross payments in different states and areas are based on cost, a per
diem, or other negotiated rate and may also be subject to payment delay.
Payments from health maintenance organizations and preferred provider
organizations generally are negotiated, either at a discount from charges or on
a per diem basis. In general, insurance companies which contract with
psychiatric facilities pay less than established charges for such services. In
addition, the appropriateness of admission to a psychiatric hospital is
generally subject to independent review and approval. These insurance companies
also limit the total mental health benefits provided to a patient; thus, at
times a patient, while initially covered by an insurance plan, may be required
to pay for continuing treatment.
The Retreat is required to provide a minimum level of charity care to
indigent patients. The minimum level of care is set forth in the certificate of
need, and is equal to 5% of gross in-patient service charges.
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SELECTED COMBINED FINANCIAL DATA
PSYCHIATRIC GROUP
The selected combined financial data below have been derived from the
financial statements (and notes thereto) of the Psychiatric Group and should be
read in conjunction with (a) those statements and management's discussion and
analysis of financial condition and results of operations of the Psychiatric
Group which are included in this Annex C and (b) the financial statements (and
notes thereto) of the Company and the Core Group and management's discussion and
analysis of financial condition and results of operations of the Company and the
Core Group which are included in Annex A and Annex B.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
1994 ----------------------------------------------------
PRO FORMA(1) 1994 1993 1992 1991 1990
------------ -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $ 11,171 $ 15,388 $ 15,317 $ 15,163 $ 19,434 $ 13,954
Net income (loss)(2)............. (11,278) (22,855) 2,371 (42,511) 7,766 6,437
Net loss per Depositary
Share(2)....................... (5.41)
Weighted average Depositary
Shares outstanding............. 2,086
Funds From Operations(3)......... $ 7,259 $ 9,113 $ 5,166 $ 3,885 $ 8,915 $ 6,734
Cash flows from operating
activities..................... 7,157 8,726 4,608 4,687 8,233 7,974
Cash flows from investing
activities..................... (230) 4,942 (3,189) (2,163) (19,136) (45,081)
Cash flows from financing
activities..................... (6,927) (13,668) (1,419) (2,524) 10,903 37,107
Dividends declared............... 8,679 8,679 6,688 4,811 8,308 6,652
Total assets..................... 66,185 80,245 116,820 116,188 161,032 142,885
Total attributed debt............ 15,603 29,428 34,828 71,921 69,246 75,782
Total attributed equity.......... 48,302 48,302 79,471 42,119 88,557 63,763
</TABLE>
- - - ---------------
(1) Reflects the Distribution, the sales of one psychiatric property in October
1994 for $5.8 million and two psychiatric properties in February 1995 for
$13.8 million and the repayment of debt out of the proceeds thereof, as
though such transactions had occurred immediately prior to January 1, 1994
(in the case of operating and cash flow data) or as of December 31, 1994 (in
the case of balance sheet data). These sales were at net book value.
(2) Reflects write-downs of $30,000,000 in 1994 and $45,000,000 in 1992 relating
to investments in psychiatric hospitals.
(3) Funds From Operations as currently defined by the National Association of
Real Estate Investment Trusts and as used herein means net income (loss)
computed in accordance with GAAP, excluding gains (losses) from sales of
property, adjusted for write-downs of mortgage notes and investments in real
estate and certain other non-cash items, primarily depreciation and
amortization. Funds From Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered an
alternative to net income as an indication of the Psychiatric Group's
operating performance or an alternative to cash flow as a measure of
liquidity. The Company has historically made certain adjustments to Funds
From Operations to adjust for the impact of items which management does not
consider to be routine costs of ongoing operations ("Funds From Operations
As Adjusted"). These nonroutine items include: in 1994, targeted stock
issuance costs of $1,450,000 and reversal of accrued relocation costs of
$133,000; in 1993, litigation costs of $2,234,000 and accrued relocation
costs of $160,000; and in 1992, litigation costs of $786,000. There were no
adjustments for nonroutine items in 1991 and 1990. The following table
presents the Psychiatric Group's Funds From Operations As Adjusted.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEARS ENDED DECEMBER 31,
1994 ------------------------------------------------
PRO FORMA(1) 1994 1993 1992 1991 1990
------------ -------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Funds From Operations As
Adjusted.................. $ 8,576 $ 10,430 $ 7,560 $ 4,671 $ 8,915 $ 6,734
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PSYCHIATRIC GROUP
Following is a discussion of the financial condition and results of
operations of the Psychiatric Group which should be read in conjunction with (a)
the Selected Combined Financial Data and combined financial statements (and
notes thereto) of the Psychiatric Group included in this Annex C and (b) the
Selected Consolidated Financial Data or Selected Combined Financial Data, as the
case may be, management's discussion and analysis of financial condition and
results of operations and financial statements (and notes thereto) of the
Company and the Core Group included in Annex A and Annex B.
OPERATING RESULTS
1994 Compared to 1993
In 1994, the Psychiatric Group reported a net loss of ($22,855,000)
compared with net income of $2,371,000 in 1993.
Net loss in 1994 and net income in 1993 were impacted by several
significant items. Net loss in 1994 reflected a write-down of psychiatric
hospital investments of $30,000,000 as a result of accelerating negative trends
in the psychiatric industry. In 1994, $1,450,000 was accrued for the cost of the
planned issuance of the Psychiatric Group Stock. Litigation costs were
$2,234,000 in 1993 as a result of the defense and settlement of a shareholder
class action lawsuit against the Company.
Rental income was $7,977,000 in 1994, a decrease of $355,000 or 4% from
$8,332,000 in 1993. This decrease is attributable to a reduction in rental
income due to the sale of a property in October 1994. The property was sold at
net book value.
Additional rental and interest income was $598,000 in 1994, a decrease of
$62,000 or 9% from $660,000 in 1993. This decrease is attributable to a decline
in the psychiatric hospitals' revenues due to negative industry trends.
Other interest income increased $388,000 to $1,026,000 in 1994 from
$638,000 in 1993. This increase resulted from higher average balances of other
notes receivable in 1994 compared with 1993.
Depreciation and amortization decreased $871,000 to $1,801,000 in 1994
compared with 1993 primarily as a result of lower depreciation expense
subsequent to the aforementioned write-down of psychiatric hospital investments.
Interest expense on intercompany loans from the Core Group was $4,041,000
in 1994, a decrease of $2,789,000 or 41% from $6,830,000 in 1993. This decrease
reflects a lower average balance outstanding on loans from the Core Group
following the attribution of equity to the Psychiatric Group in connection with
an equity offering by the Company in 1993.
General and administrative expenses decreased to $951,000 in 1994 from
$1,210,000 in 1993. This variation is attributable to a decrease in consolidated
general and administrative expenses which are allocated between the Core Group
and the Psychiatric Group primarily based on revenues. The Company's decrease in
consolidated general and administrative expenses for 1994 was attributable to
the reversal of $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. This was partially offset by higher expense from the
Company's stock incentive plans and increased shareholder reporting and
distribution costs in 1994.
1993 Compared to 1992
In 1993, the Psychiatric Group reported net income of $2,371,000 compared
with a net loss of ($42,511,000) in 1992.
Net income in 1993 and net loss in 1992 were impacted by several
significant items. Litigation costs were $2,234,000 in 1993 as a result of the
defense and settlement of a shareholder class action lawsuit against the
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Company. Litigation costs related to this lawsuit in 1992 were $786,000. Net
loss in 1992 reflected a write-down of $45,000,000 related to the restructuring
of two mortgage notes receivable.
Rental income was $8,332,000 in 1993, an increase of $1,081,000 or 15% from
$7,251,000 in 1992. Rental income in 1993 includes rental income from a capital
addition coming under lease and rental income from a psychiatric property
conveyed to the Psychiatric Group in late 1992 in satisfaction of a mortgage
note receivable. The conveyance of this property together with the modification
and restructuring of another mortgage note receivable in 1992 resulted in a
decrease in mortgage interest income of $1,457,000 in 1993 compared with 1992.
Additional rental and interest income was $660,000 in 1993, an increase of
$431,000 or 188% from $229,000 in 1992. This increase is attributable to
properties generating additional rent for the first time in 1993.
Other interest income increased $99,000 to $638,000 in 1993 from $539,000
in 1992. This increase is attributable to increased interest from higher average
balances of other notes receivable compared with 1993.
Depreciation and amortization increased $1,351,000 to $2,672,000 in 1993
compared with 1992 primarily as a result of the Psychiatric Group's revision of
the estimated remaining lives of its psychiatric real estate properties from an
average of 38 years to 21 years effective as of January 1, 1993.
Interest expense on intercompany loans from the Core Group was $6,830,000
in 1993, a decrease of $2,216,000 or 24% from $9,046,000 in 1992. This decrease
reflects a lower average balance outstanding on loans from the Core Group
following the attribution of equity to the Psychiatric Group in connection with
an equity offering by the Company in 1993.
General and administrative expenses decreased to $1,210,000 in 1993 from
$1,521,000 in 1992. This variation is attributable to a decrease in consolidated
general and administrative expenses which are allocated between the Core Group
and the Psychiatric Group primarily based on revenues. In the fourth quarter of
1993, the Company recorded an accrual of $850,000 related to the planned
relocation of its corporate offices to Southern California in the middle of
1994. General and administrative expenses of the Company in 1992 include
severance costs of $1,500,000 related to personnel changes announced during
1992. Additionally, in 1992 the negotiation and restructuring of two psychiatric
mortgage notes receivable, the review of a potential business combination and
other matters resulting from a legal action against the Company, resulted in
increases in consulting, professional and travel costs of the Company totaling
$1.3 million.
Future Operating Results
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Company's psychiatric
hospitals. 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 payment, 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. For example, as the inpatient
length of stay has decreased, offset by an increased number of admissions in
some cases, the costs of performing initial testing and other administrative
procedures associated with each admission have increased. As a result, certain
of the psychiatric hospital operators have had difficulty meeting their payment
obligations to the Company on a timely basis and there can be no assurance that
they will be able to meet their payment obligations in the future.
The Psychiatric Group has provided working capital loans to the operators
of four of its psychiatric hospitals. As of December 31, 1994, outstanding
working capital loans totalled $9.4 million ($6.4 million on
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the pro forma basis described herein). The Psychiatric Group has committed to
make an additional $1.15 million of such working capital loans upon request,
subject to certain conditions. These working capital loans, 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 working capital loans
provided by the Psychiatric Group or to secure replacement loans 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 Board determines that it is
appropriate to provide additional working capital financing to a psychiatric
hospital, it may cause the Core Group to make revolving intercompany loans to
the Psychiatric Group to fund such financing (to the extent consistent with its
then existing policies), although the Board is under no obligation to do so.
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 the 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. The
Company is pursuing 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 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) and is issuing the Psychiatric Group Stock.
Additional rental income and interest income from the Psychiatric Group's
existing investments will be affected by changes in the revenues of the
underlying business operations upon which such income is based.
Future operating results of the Psychiatric Group will 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. Toward achievement of this objective, the Company raised $80.8 million
of new equity in 1993. The distribution of depositary shares representing
Psychiatric Group Stock is also intended to facilitate this objective.
The Company's unsecured revolving credit facility was increased to $100
million in April 1994. 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 January 23, 1995, the Psychiatric Group had aggregate unfunded
commitments under revolving credit agreements provided to facility operators of
$1.15 million.
At December 31, 1994, the Psychiatric Group had $9,428,000 and $20,000,000
outstanding under its revolving intercompany loan from the Core Group and its
fixed rate intercompany loan from the Core Group, respectively. The Psychiatric
Group will use the net proceeds from the disposition of Psychiatric Group assets
to pay down its outstanding revolving intercompany loan (to the extent of the
psychiatric hospital operator working capital loans associated with the asset or
assets sold) with any excess used to pay down the balance outstanding under the
fixed rate intercompany loan. As a result of the sale of the Westwood and
Pembroke, Massachusetts psychiatric hospitals in February 1995, the Psychiatric
Group has reduced the combined balance of the revolving intercompany and fixed
rate intercompany loans by $13,825,000. The Core Group
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may (under management policies currently in effect) provide the Psychiatric
Group with revolving intercompany loans of up to $10,000,000 (subject to
reduction of such limit commensurate with any permanent repayment in the future
of working capital loans extended to Psychiatric 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 to cause the
Core Group to provide funds to the Psychiatric Group if the Board determines
that it is in the Company's best interests not to do so.
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, after payment of intercompany loan
obligations, to holders of Psychiatric Group Stock.
C-21
<PAGE> 125
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Health Properties, Inc.:
We have audited the accompanying combined balance sheets of the Psychiatric
Group (a business unit of American Health Properties, Inc.) as of December 31,
1994 and 1993 and the related combined statements of operations, total
attributed equity and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of the
management of American Health Properties, Inc. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Psychiatric Group as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
February 28, 1995
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<PAGE> 126
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Rental income............................................... $ 7,977 $ 8,332 $ 7,251
Mortgage interest income.................................... 5,787 5,687 7,144
Additional rental and interest income....................... 598 660 229
Other interest income....................................... 1,026 638 539
-------- ------- --------
15,388 15,317 15,163
-------- ------- --------
EXPENSES
Depreciation and amortization............................... 1,801 2,672 1,321
Interest expense on intercompany loans from Core Group...... 4,041 6,830 9,046
General and administrative.................................. 951 1,210 1,521
Targeted stock issuance costs............................... 1,450 -- --
Litigation costs............................................ -- 2,234 786
Write-down of real estate investments....................... 30,000 -- 45,000
-------- ------- --------
38,243 12,946 57,674
-------- ------- --------
NET INCOME (LOSS)........................................... $(22,855) $ 2,371 $(42,511)
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 127
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate properties
Buildings and improvements............................................ $29,139 $ 55,298
Accumulated depreciation.............................................. (5,575) (5,310)
------- --------
23,564 49,988
Land.................................................................. 8,565 11,765
------- --------
32,129 61,753
Mortgage notes receivable, net.......................................... 37,875 45,825
Other notes receivable.................................................. 9,428 8,598
Receivables............................................................. 795 575
Other assets............................................................ 18 69
------- --------
$80,245 $116,820
======= ========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving intercompany loan from Core Group............................. $ 9,428 $ 8,784
Fixed rate intercompany loan from Core Group............................ 20,000 26,044
Accounts payable and accrued liabilities................................ 188 228
Dividends payable....................................................... 1,877 1,768
Deferred income......................................................... 450 525
------- --------
31,943 37,349
------- --------
Commitments and contingencies
Total Attributed Psychiatric Group Equity............................... 48,302 79,471
------- --------
$80,245 $116,820
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-24
<PAGE> 128
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR............................... $ 79,471 $42,119 $ 88,557
Public offering of additional shares........................ -- 41,500 --
Conversion of subordinated convertible bonds................ -- -- 507
Restricted stock grants, net................................ 93 75 64
Exercise of stock options................................... 272 94 313
Net income (loss)........................................... (22,855) 2,371 (42,511)
Dividends................................................... (8,679) (6,688) (4,811)
-------- ------- --------
BALANCES AT END OF YEAR..................................... $ 48,302 $79,471 $ 42,119
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-25
<PAGE> 129
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................... $(22,855) $ 2,371 $(42,511)
Depreciation, amortization and other non-cash items........ 1,866 2,747 1,385
Deferred income............................................ (75) (100) (75)
Write-down of real estate investments...................... 30,000 -- 45,000
Change in receivables and other assets..................... (169) (115) 603
Change in accounts payable and accrued liabilities......... (41) (295) 285
-------- -------- --------
8,726 4,608 4,687
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties..... -- (641) (656)
Proceeds from sale of properties........................... 5,772 -- --
Mortgage notes receivable.................................. -- -- 1,105
Other notes receivable..................................... (830) (2,548) (2,612)
-------- -------- --------
4,942 (3,189) (2,163)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving intercompany loan from Core
Group.................................................... 672 4,501 3,494
Payments on fixed rate intercompany loan from Core Group... (6,044) (41,594) (313)
Proceeds from sale of stock................................ -- 41,500 --
Proceeds from exercise of stock options.................... 272 94 313
Dividends paid............................................. (8,568) (5,920) (6,018)
-------- -------- --------
(13,668) (1,419) (2,524)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... -- -- --
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... -- -- --
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ -- $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-26
<PAGE> 130
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS
PROPOSED TRANSACTION AND BASIS OF PRESENTATION
American Health Properties, Inc. (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 facilities including 13
acute care hospitals, three rehabilitation hospitals and five psychiatric
hospitals, all of which are operated by qualified third party health care
providers, and a medical office building. On January 31, 1995, the Company's
Board authorized management to pursue a transaction which is designed to
separate the economic attributes of its investments in psychiatric hospitals
(the Psychiatric Group) and its core investments in acute care hospitals,
rehabilitation hospitals 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 transaction would entail the
distribution to holders of Common Stock of depositary shares representing a new
series of preferred stock, par value $0.01 per share, to be designated
Psychiatric Group Preferred Stock (the Psychiatric Group Stock). The Psychiatric
Group Stock would be intended to reflect the separate performance of the
Psychiatric Group. The Company's existing Common Stock would be intended to
reflect the economic performance and attributes of the Core Group. In connection
with the proposed transaction, 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 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 intercompany debt payable to the
Core Group and an attributed amount of the Company's stockholders' equity. 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 will such attribution affect the rights
of creditors of the Company or any subsidiary, including rights under financing
covenants.
Each holder of Psychiatric Group Stock or Common Stock would be a holder of
an issue of capital stock of the entire Company and would be 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 could 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, Common Stock or Psychiatric
Group Stock would reduce the funds of the Company legally available for
dividends on both the Common Stock and Psychiatric Group Stock. Accordingly, the
Psychiatric Group's financial statements and the financial statements of the
Core Group should be read in connection with the Company's consolidated
financial statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
New Accounting Standards. The Financial Accounting Standards Board has
issued Statements of Financial Accounting Standards No.'s 114 and 118,
"Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures," respectively
(SFAS 114 and 118). SFAS 114 and 118 are applicable to all creditors and to all
loans that are restructured in a troubled debt restructuring involving a
modification of terms. SFAS 114 and 118 require estimating the
C-27
<PAGE> 131
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
value of impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate or the fair value of the
collateral if the loan is collateral dependent.
SFAS 114 and 118 are effective in fiscal 1995. Management believes that
adoption of SFAS 114 and 118 will not have a material impact on the accompanying
combined financial statements.
Real Estate Properties. The Psychiatric Group accounts for its property
leases as operating leases. The Psychiatric Group records properties at cost and
allocates the cost between land and buildings and improvements based on
independent appraisals. The Psychiatric Group prospectively revised the
estimated remaining lives of its real estate properties from an average of 38
years to 21 years effective as of January 1, 1993. This estimate revision
increased depreciation expense and reduced net income by $1,165,000 for the year
ended December 31, 1993.
Deferred Income. Fees received, net of related direct costs, associated
with the origination or amendment of leases and mortgages are deferred and
amortized at a constant effective rate over the remaining initial term of the
related leases and mortgage notes receivable.
Federal Income Taxes. The Company intends at all times to operate so as
to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company will not be subject to federal income tax.
Qualification as a real estate investment trust under Sections 856 to 860
of the Internal Revenue Code applies to the Company as a whole, rather than the
Core or Psychiatric Group individually. Dividends paid by the Company on the
Common Stock and the Psychiatric Group Stock must be sufficient in the aggregate
for the Company to meet the minimum distribution requirements of the Internal
Revenue Code. The Company's earnings and profits as a whole, without reference
to the Core Group or the Psychiatric Group individually, is used to determine
the taxable character of dividends paid to holders of the Common Stock and the
Psychiatric Group Stock.
Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial reporting purposes due
primarily to timing differences in the recognition of fee income, real estate
property write-downs, mortgage note impairment reserves and various accruals and
differences between the estimated useful lives used to compute depreciation for
financial statement purposes and a 40-year life used in determining earnings and
profits. The cost basis of the Company's real estate properties is generally the
same for financial reporting and earnings and profits purposes, except for
properties written down for financial reporting purposes.
CORPORATE ACTIVITIES; INTERCOMPANY LOANS, THIRD PARTY DEBT AND EQUITY
Financial Activities. As a matter of policy, the Company manages all
financial activities on a centralized, consolidated basis. Such financial
activities include the investment of surplus cash; the issuance and repayment of
all short-term and long-term debt; and the issuance of common and preferred
stock. These activities are then attributed to the Core Group and the
Psychiatric Group in the manner described herein.
Historical Debt and Equity Transactions. All third party debt
($245,663,000 at December 31, 1994, or $231,838,000 on the pro forma basis
described herein) has been attributed to the Core Group in the financial
statements set forth herein. However, the Psychiatric Group has been attributed
(a) fixed rate intercompany loans owing to the Core Group in an amount at
December 31, 1994 determined by the Board to be appropriate in relation to the
assets and expected cash flow of the Psychiatric Group and its cash requirements
($20,000,000 at December 31, 1994 or $9,175,000 on such pro forma basis) and (b)
revolving intercompany loans owing to the Core Group in an amount at December
31, 1994 equal to the working capital notes receivable from certain Psychiatric
Hospital operators owing to the Psychiatric Group at that date ($9,428,000 at
December 31, 1994, or $6,428,000 on such pro forma basis). As a result of such
attributed intercompany
C-28
<PAGE> 132
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
loans, and in light of the carrying value of each Group's assets and its other
liabilities at December 31, 1994, the equity attributed to the Core Group at
that date was $259,199,000 and the equity attributed to the Psychiatric Group at
that date was $48,302,000.
Historically, the Psychiatric Group was attributed intercompany loans owing
to the Core Group from the date of the first Psychiatric Group asset purchase in
1988 to December 31, 1994 in amounts equal to the Psychiatric Group's net cash
requirements not otherwise covered by the proceeds of equity issuances
attributed to the Psychiatric Group. All of such intercompany loans were
initially designated as floating rate loans (with an interest rate equal to the
prevailing prime rate plus 2%), but portions of such intercompany loans were
re-designated as fixed rate loans in amounts that correspond to designated
portions of third-party fixed rate senior debt issued by the Company from time
to time (with an interest rate equal to that borne by third-party fixed rate
senior debt plus 2%). Proceeds of equity issuances after 1988 were attributed to
the Psychiatric Group in amounts determined to be appropriate in relation to the
assets and expected cash flow of the Psychiatric Group, its cash requirements
and its intercompany debt at the time of such issuances; proceeds attributed to
the Psychiatric Group were deemed to correspondingly reduce intercompany debt.
In general, dividends paid by the Company were attributed to the Core Group and
the Psychiatric Group on the basis of their respective contributions to funds
from operations, excluding expenses associated with litigation, relocation,
issuance of Psychiatric Group Stock and purchase commitment termination which
are not considered to be routine costs of ongoing operations.
Third Party Debt. All of the Company's third party debt has been
attributed to the Core Group; however, the Psychiatric Group, together with the
Core Group, is subject to all of the terms, restrictions and covenants relating
to such third party debt. These include limitations on secured borrowings,
restrictions covering the use of proceeds from asset sales and payments of
dividends and requirements relating to the maintenance of specified financial
ratios, including those relating to minimum tangible net worth, fixed charge
coverage and ratios of liabilities to minimum tangible net worth and asset
values. The third party debt attributed to the Core Group at December 31, 1994
includes $225,000,000 of unsecured senior notes payable, $6,163,000 of
subordinated convertible bonds payable and $14,500,000 outstanding under a
$100,000,000 unsecured revolving credit agreement. The aggregate amount of
annual maturities of the Company's third party debt for calendar years 1995
through 1999 and thereafter is $24,000,000, $49,000,000, $44,000,000,
$44,000,000, $44,000,000 and $27,455,000, respectively. In addition, the
outstanding balance of $14,500,000 at December 31, 1994 under the Company's
unsecured revolving credit agreement matures on December 31, 1996, although
certain events, including sales of assets, may require the earlier paydown of
the outstanding balance. See the "Debt" discussion in the Notes to Consolidated
Financial Statements of the Company included in Annex A to the Information
Statement for additional information.
Intercompany Loans. Intercompany loans at December 31, 1994 were as
described under "Historical Debt and Equity Transactions" above.
The weighted average outstanding amount of revolving intercompany loans
owed by the Psychiatric Group to the Core Group during 1994, 1993 and 1992 was
$9,106,000, $6,533,000 and $2,535,000 at weighted average interest rates of
9.15%, 8.0% and 8.25%, respectively.
The weighted average outstanding amount of fixed rate intercompany loans
owed by the Psychiatric Group to the Core Group during 1994, 1993 and 1992 was
$24,706,000, $48,570,000 and $68,048,000 at a weighted average interest rate of
13% for all three years. There were no new fixed rate loans made to the
Psychiatric Group during these three years. Paydowns were funded with the
proceeds of equity transactions attributed to the Psychiatric Group, and in
1994, the net proceeds from the sale of a Psychiatric Group real estate
investment.
Repayment of intercompany loans by the Psychiatric Group is dependent upon
the amount and timing of sales of the Psychiatric Group's assets. The
Psychiatric Group expects to pay down $3,000,000 and
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<PAGE> 133
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$10,825,000 of the revolving intercompany loans and fixed rate intercompany
loans, respectively, out of the cash proceeds of the sale of the Westwood and
Pembroke hospitals.
The Company's Board has established certain policies relating to the Core
Group's intercompany loans to the Psychiatric Group. The aggregate revolving
intercompany loans owed by the Psychiatric Group to the Core Group will be
limited to a maximum of $10,000,000 at any one time outstanding, subject to
reduction of such limit commensurate with any permanent repayment in the future
of working capital loans extended to psychiatric hospital operators, but in no
event will such limit be reduced below $5,000,000, and except for such revolving
intercompany loans no additional fixed rate or other intercompany loans will be
advanced by the Core Group to the Psychiatric Group.
If the Psychiatric Group sells any assets out of the ordinary course, the
net proceeds from such sales (after transaction costs and reserves for
contingencies) will be applied, first, to repay revolving intercompany loans
owed by the Psychiatric Group to the Core Group to the extent of the psychiatric
hospital operator working capital loans associated with the asset or assets
sold, second, to repay the outstanding fixed rate intercompany loan owed by the
Psychiatric Group to the Core Group (until repaid in full), and third, to repay
other revolving intercompany loans owed by the Psychiatric Group to the Core
Group until repaid in full, before any remaining net proceeds from such sales
may be used to make distributions to holders of Psychiatric Group Stock.
Excess cash held by the Psychiatric Group (other than net proceeds from
asset sales) will be applied to reduce revolving intercompany loans owed by the
Psychiatric Group to the Core Group (until repaid in full), subject to the
ability of the Psychiatric Group, at the option of the Board, to re-borrow cash
from the Core Group up to the limitations mentioned previously to cover future
cash needs of the Psychiatric Group (including, without limitation, to fund
dividends in a manner consistent with the dividend policy then applicable to the
Psychiatric Group Stock).
Fixed rate intercompany loans owed by the Psychiatric Group to the Core
Group bear interest at a fixed rate of approximately 13% per annum (which is
equal to the current weighted average interest rate on the Company's fixed rate
senior debt plus 2%) and are prepayable without premium at any time, at the
option of the Board.
Revolving intercompany loans owed by the Psychiatric Group to the Core
Group bear interest at a floating rate equal to the prevailing prime rate plus
2% (10.5% at December 31, 1994) and are prepayable without premium at any time,
at the option of the Board.
Cash held by the Psychiatric Group in excess of required repayments of
intercompany loans owed by the Psychiatric Group may, at the option of the
Company's Board, be advanced to the Core Group as revolving intercompany loans
(to the extent such cash can be used beneficially by the Core Group) or
otherwise be invested on behalf of the Psychiatric Group. Revolving intercompany
loans owed by the Core Group to the Psychiatric Group bear interest at a
floating rate equal to the weighted average interest rate borne by the Company's
revolving debt (or, for periods in which there is no such revolving debt
outstanding, the interest rate at which the Company could borrow on a revolving
basis), and are prepayable without premium at any time, at the option of the
Board.
Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group if the Board determines it is in
the best interests of the Company not to do so.
Future Equity Transactions. The proceeds of future Common Stock issuances
as well as cash required to fund future Common Stock dividends or repurchases
will be attributed to the Core Group. The proceeds of future Psychiatric Group
Stock issuances (e.g., upon exercise of management stock options) as well as
cash required to fund future Psychiatric Group Stock dividends or repurchases
will be attributed to the Psychiatric Group.
C-30
<PAGE> 134
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
General and administrative expenses. General and administrative expenses
of the Company that cannot be directly attributed to either Group have been
allocated to the Psychiatric Group and the Core Group on the basis of their
respective contributions to revenues (excluding intercompany revenues and
revenues from investment dispositions), provided that at no time will such
expenses allocated to either Group be less than $250,000. All general and
administrative expenses allocated to the Psychiatric Group are paid currently,
regardless of when such expenses are paid to third parties by the Company. As
such, the Psychiatric Group financial statements do not reflect any liabilities
for such allocated general and administrative expenses. The Company's general
and administrative expenses consist primarily of employment and related
benefits, professional services, shareholder reporting, franchise taxes, travel
and other related corporate activity.
PSYCHIATRIC BUSINESS
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Psychiatric Group
hospitals. 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
revenue. 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 Group 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. For example, as the
inpatient length of stay has decreased, offset by an increased number of
admissions in some cases, the costs of performing initial testing and other
administrative procedures associated with each admission have increased. As a
result, certain of the Psychiatric Group hospital operators have had difficulty
meeting their payment obligations to the Psychiatric Group on a timely basis and
there can be no assurance that Psychiatric Group operators will be able to meet
their payment obligations in the future.
The Psychiatric Group has provided working capital loans to the operators
of four of the Psychiatric Group hospitals. As of December 31, 1994, outstanding
working capital loans totalled $9.4 million ($6.4 million on the pro forma basis
described herein). The Psychiatric Group has committed to make an additional
$1.15 million of such working capital loans upon request, subject to certain
conditions. These working capital loans, 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 working capital loans provided by
the Psychiatric Group or to secure replacement loans 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 intercompany loans to the Psychiatric
Group to fund such financing, although the Board is under no obligation to do
so.
As more fully discussed below, 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 investments in the psychiatric hospitals. Of the
$30,000,000 write-down, $22,050,000 related to the Psychiatric Group's
investments in psychiatric hospital properties and $7,950,000 was established as
a mortgage note impairment
C-31
<PAGE> 135
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reserve. Although management believes that the recorded investments in the
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. The Company does not intend to
make further investments in the psychiatric sector. Over time, the total assets
in the Psychiatric Group are expected to decrease, reflecting the Psychiatric
Group's continuing program to sell, restructure or seek other means to reduce
its investment in the psychiatric sector. The Psychiatric Group expects to use
the net proceeds of any sales of Psychiatric Group investments (after
transaction costs and reserves for contingencies) to repay then outstanding
intercompany loans or other debt owed by the Psychiatric Group and to distribute
all remaining net proceeds, if any, in cash or Common Stock to holders of
Psychiatric Group Stock.
REAL ESTATE PROPERTIES
The following table summarizes the Psychiatric Group's investment in
psychiatric real estate properties as of December 31, 1994:
PSYCHIATRIC GROUP REAL ESTATE PROPERTIES
<TABLE>
<CAPTION>
BUILDINGS AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
------ ------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Psychiatric properties:
The Retreat
Sunrise, Florida............................. $3,325 $ 8,609 $1,886 $ 10,048
The Manors
Tarpon Springs, Florida...................... 1,457 5,066 596 5,927
Rock Creek Center
Lemont, Illinois............................. 440 5,372 718 5,094
Pembroke Hospital
Pembroke, Massachusetts...................... 1,712 5,840 1,356 6,196
Westwood Lodge Hospital
Westwood, Massachusetts...................... 1,631 4,252 1,019 4,864
------ --------- ------ ---------
$8,565 $ 29,139 $5,575 $ 32,129
====== ========= ====== =========
</TABLE>
The total revenues, including interest income from other notes receivable,
from each of the above psychiatric hospitals, excluding The Manors, is in excess
of 10% of total Psychiatric Group revenues in 1994.
In February 1995, the Psychiatric Group sold its Westwood and Pembroke
psychiatric hospitals to a third party. The $13,825,000 cash proceeds on the
sale represented payment for the net book value of the psychiatric hospitals and
repayment of the balance outstanding under its working capital loan.
Management is currently in discussion with the operator of The Retreat and
The Manors covering the restructuring of the existing obligations of the
facilities under their respective leases and working capital loans. Management
believes that the restructuring will be completed at an amount commensurate with
the net book values of the facilities and the working capital loans.
On October 17, 1994, the Psychiatric Group sold its Del Amo psychiatric
hospital in Torrance, California to a third party for approximately $5.8 million
in cash. The sale was at net book value and, in certain circumstances, provides
the Psychiatric Group with the opportunity to share in the future appreciation,
if any, of the property.
See related pro forma information below.
C-32
<PAGE> 136
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1992, the Psychiatric Group recorded an $11,400,000 write-down
on a $21,400,000 mortgage note receivable (the "RCC Note") secured by a first
mortgage and security interest in the real property of The Rock Creek Center
("RCC") in Lemont, Illinois. Subsequent recovery of cash in an interest reserve
fund maintained by RCC reduced the Psychiatric Group's recorded investment in
the RCC Note to $8,812,000. At the end of 1992, a formal restructuring of the
RCC Note was completed, pursuant to which the RCC real property was conveyed to
the Psychiatric Group in return for the Psychiatric Group's forgiveness of the
RCC Note. The RCC real property was then leased to the existing operator for an
initial term of five years at an annual rate of $1 million with monthly payments
commencing January 1, 1993. Income received and recognized by the Psychiatric
Group on its RCC investment in 1994, 1993 and 1992 was $1,000,000, $1,000,000
and $1,332,000, respectively. Income of $2,664,000 would have been recorded in
1994, 1993 and 1992, had the RCC Note performed in accordance with its original
terms.
The Psychiatric Group's properties are leased under "net" leases pursuant
to which the lessees are responsible for all maintenance, repairs, taxes, and
insurance of the leased properties. The leases provide for the payment of
minimum base rent and additional rent during the fixed term and any renewal
terms. Additional rent is based on the increase in annual gross revenues of the
related hospital as specified in the lease agreements.
The Psychiatric Group has the right to approve capital expenditures at all
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.
Future minimum rentals under the Psychiatric Group's noncancellable
operating leases, after consideration of the sale of the Westwood and Pembroke,
Massachusetts properties and before any possible decreases in rentals resulting
from the restructuring discussions relating to The Retreat and The Manors
leases, are approximately $4,200,000 annually in 1995 through 1997, $3,200,000
in 1998 and 1999 and $2,100,000 in 2000.
MORTGAGE NOTES RECEIVABLE
Four Winds Hospital -- Saratoga $18,225,000. The Psychiatric Group has a
mortgage note receivable secured by a first mortgage and security interest in
the real property of Four Winds Hospital in Saratoga Springs, New York. The note
has an initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is June 30, 1999. The interest rate on the note is
12.42%. Interest is payable monthly for the first six years, and thereafter,
principal and interest payments will be payable in level monthly installments
based on a thirty-year amortization schedule. Interest income received and
recognized by the Psychiatric Group on this note represented approximately 15%
of Psychiatric Group revenues for 1994, 1993 and 1992.
Four Winds Hospital -- Katonah $27,600,000. The Psychiatric Group has a
mortgage note receivable secured by a first mortgage and security interest in
the real property of Four Winds Hospital in Katonah (Westchester County), New
York (the "Four Winds Note"). At June 30, 1992, the Company recorded a
$33,600,000 write-down on the original $61,200,000 Four Winds Note which reduced
the Psychiatric Group's recorded investment in the Four Winds Note to
$27,600,000.
At the end of 1992, a formal restructuring of the Four Winds Note was
completed, pursuant to which monthly interest payments amount to $3,400,000 in
the first year, increase $100,000 annually in each of the succeeding six years
and remain at $4,000,000 per year through maturity. The restructured note has an
initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is November 30, 2002. Interest income received and
recognized by the Psychiatric Group on the Four Winds Note in 1994, 1993 and
1992 was $3,508,000, $3,408,000 and $3,524,000, respectively, which is
approximately 23% of
C-33
<PAGE> 137
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Psychiatric Group revenues for each of the three years. Interest income of
$7,635,000 would have been recorded in 1994, 1993 and 1992 had the Four Winds
Note performed in accordance with its original terms.
Pursuant to the terms of the mortgage notes receivable, the Psychiatric
Group may receive additional interest each year based on the increase in annual
operating revenues of the related psychiatric facility. The Psychiatric Group
may provide permanent financing for capital additions at the facilities.
Mortgage Note Impairment Reserve. As discussed above, at June 30, 1994, in
view of negative trends that caused declining cash flows at a number of the
psychiatric hospitals, the Psychiatric Group recorded a $30,000,000 write-down
of its investments in psychiatric hospitals. In connection with a review of Four
Winds Hospital -- Saratoga and Four Winds Hospital -- Katonah, as well as
uncertainties surrounding possible changes in Medicaid reimbursement in the
State of New York, $7,950,000 of the $30,000,000 write-down was recorded as a
mortgage note impairment reserve. The Psychiatric Group will record interest on
such mortgage notes as interest payments are received.
OTHER NOTES RECEIVABLE
The Psychiatric Group provides financing at variable rates to certain
operators under revolving credit agreements. The aggregate commitment under
these credit agreements is $9,950,000 as of December 31, 1994. The aggregate
commitment decreases to $6,950,000 after consideration of the sale of the
Westwood and Pembroke, Massachusetts properties and the restructuring of The
Retreat and The Manors working capital loans. Borrowings under the credit
agreements are subject to compliance with various covenants and may not exceed a
specified percentage of the operators' net accounts receivable. Borrowings under
the credit agreements are secured by accounts receivable and other personal
property of the operator. As of December 31, 1994, $8,800,000 was outstanding
under these revolving credit agreements at a weighted average interest rate of
11.8%. After consideration of the February 1995 sale of the Westwood and
Pembroke, Massachusetts hospitals, the amount outstanding was $5,800,000. The
weighted average amount of borrowings under these credit agreements outstanding
during 1994 was $8,458,000 at a weighted average interest rate of 10.6% with a
maximum of $8,800,000 outstanding during the year.
In connection with the Four Winds Note restructuring, the $950,000 balance
outstanding under a revolving credit agreement was converted to a five-year
amortizing term note. The note bears interest at an annual rate of 10.5%, and
requires monthly principal and interest payments of $21,000 through maturity on
December 1, 1997. As of December 31, 1994, the outstanding balance of this note
was $628,000.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Consolidated pension expense of the Company in 1994, 1993 and 1992
was $207,000, $202,000 and $229,000, respectively.
The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors upon completion of sixty months
of membership on the Board. The benefits, limited to ten years, are based on
years of service and the annual base director fee in effect as of the date a
director ceases to be a member of the Board. The consolidated accrued pension
liability of the Company was $634,000 and $552,000 as of December 31, 1994 and
1993, respectively. Consolidated net periodic pension cost of the Company in
1994, 1993 and 1992 was $149,000, $191,000 and $173,000, respectively. The Notes
to the Consolidated Financial Statements of the Company should be read for
further details regarding this plan.
The cost of the Company's pension plans has been allocated to the
Psychiatric Group under the general and administrative expense allocation
methodology described previously.
C-34
<PAGE> 138
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK INCENTIVE PLANS
The Company's stock incentive plans provide for the issuance of up to
2,600,000 shares of common stock for restricted stock awards and options to
directors and key employees of the Company. There were 1,369,754 and 149,183
shares available to grant further restricted stock awards and options at
December 31, 1994 and 1993, respectively. The Company's consolidated expense
recorded in 1994, 1993 and 1992 related to restricted stock awards granted was
$367,000, $399,000 and $344,000, respectively. The Company's consolidated
expense recorded in 1994, 1993 and 1992 related to Dividend Equivalent Rights
(DERs) was $577,000, $255,000 and $60,000, respectively. The Notes to the
Consolidated Financial Statements of the Company should be read for further
details regarding the Company's stock incentive plans. The Company's
consolidated cost of its stock incentive plans has been allocated to the
Psychiatric Group under the general and administrative expense allocation
methodology described previously. Under the terms of the Company's stock
incentive plans in connection with the planned distribution of Psychiatric Group
Stock, outstanding restricted stock awards, stock options, and DERs will be
adjusted to reflect the issuance of Psychiatric Group Stock.
PREFERRED STOCK PURCHASE RIGHTS PLAN
The Company has a preferred stock purchase rights plan which provides for
the distribution of one preferred stock purchase right (each a Right) to
shareholders for each outstanding share of Common Stock. Under certain
conditions, each Right may be exercised to purchase one one-hundredth of a share
of preferred stock, Series A, par value $.01 per share (the Series A Preferred
Shares), of the Company at a price of $45. In connection with the planned
distribution of Psychiatric Group Stock, the Psychiatric Group Stock will not
include or entitle holders thereof to receive the Rights, which will be
applicable only to the Common Stock. The Notes to the Consolidated Financial
Statements of the Company should be read for further details regarding the
Company's preferred stock purchase rights plan.
DIVIDENDS
A quarterly dividend of approximately $11,989,000 in the aggregate was
declared by the Board of Directors on January 31, 1995, payable on February 24,
1995 to the Company's common stockholders of record on February 10, 1995. The
Psychiatric Group's attributed portion of this dividend of $1,877,000 has been
reflected as dividends payable in the accompanying financial statements as of
December 31, 1994.
In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess Proceeds will be available only for the
Psychiatric Group Stock and will be limited to $30 million in the aggregate and
$15 million in any calendar year.
LEGAL PROCEEDINGS
In August 1992, a shareholder class action lawsuit was filed against the
Company and certain directors and officers of the Company in the Federal
District Court in Denver, Colorado, alleging that among other things, the
defendants knowingly or recklessly disseminated false and misleading information
regarding the performance and creditworthiness of two of the Psychiatric Group's
mortgage loan investments. On May 28, 1993, the Company reached an agreement
with the plaintiffs, the other defendants to the lawsuit and its insurance
carrier regarding settlement and dismissal of the cases with prejudice. The
Company contributed $2,615,000 to the settlement in 1993. The Company's total
costs related to this matter were $3,020,000 including the Company's settlement
contribution, legal fees and other expenses. Of this amount, $786,000 was
accrued in the fourth quarter of 1992, and the remaining $2,234,000 was charged
against income in 1993. The settlement became effective upon approval by the
court in December 1993.
C-35
<PAGE> 139
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As the legal proceedings and resulting settlement related primarily to the
Psychiatric Group, all costs of the legal proceedings and settlement have been
attributed to the Psychiatric Group.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Mortgage Notes Receivable. The carrying amount of mortgage notes
receivable is a reasonable estimate of fair value, as the pricing and terms of
the notes are indicative of current rates and credit risk.
Other Notes Receivable. The Company's pricing and terms of variable-rate
financing and commitments provided to certain operators and a term note are
indicative of current rates and credit risk, and therefore, the carrying amount
of these financial instruments is a reasonable estimate of fair value.
Intercompany Loans From Core Group to Psychiatric Group. The carrying
amounts of the intercompany loans from the Core Group to the Psychiatric Group
are a reasonable estimate of fair value, as the pricing and terms of the loans
are indicative of current rates and credit risk.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Mortgage notes receivable.... $37,875 $ 37,875 $45,825 $ 45,825
Other notes receivable....... 9,428 9,428 8,598 8,598
FINANCIAL LIABILITIES
Intercompany loans from Core
Group...................... 29,428 29,428 34,828 34,828
</TABLE>
PRO FORMA INFORMATION
The following pro forma information reflects the distribution of depositary
shares representing Psychiatric Group Stock, the sales of one psychiatric
property in October 1994 for $5.8 million and two psychiatric properties in
January 1995 for $13.8 million and the repayment of debt out of the proceeds
thereof, as though such transactions had occurred immediately prior to January
1, 1994 (in the case of operating data) or as of December 31, 1994 (in the case
of balance sheet data). The sales were at net book value. Revenues and net loss
reflect pro forma adjustments primarily for decreases in revenues, depreciation
expense and write-downs associated with these properties, and a decrease in
interest expense on intercompany loans.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
PRO FORMA
-----------------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
Revenues.................................................... $ 11,171
Net loss.................................................... (11,278)
Net loss per Depositary Share............................... (5.41)
Weighted average Depositary Shares outstanding.............. 2,086
Total assets................................................ $ 66,185
Total attributed debt....................................... 15,603
Total attributed equity..................................... 48,302
</TABLE>
C-36
<PAGE> 140
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- -------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1994
Revenues............................. $ 3,836 $ 3,974 $ 4,051 $ 3,527 $ 15,388
Net income (loss).................... 1,860 (27,894)(1) 2,476 703 (22,855)
1993
Revenues............................. $ 3,736 $ 3,754 $ 3,994 $ 3,833 $ 15,317
Net income (loss).................... 260 (1,430) 1,828 1,713 2,371
</TABLE>
- - - ---------------
(1) Reflects a write-down of $30,000,000 relating to investments in psychiatric
hospitals.
C-37
<PAGE> 141
ANNEX D
AMERICAN MEDICAL HOLDINGS, INC.
AMERICAN MEDICAL INTERNATIONAL, INC.
SET FORTH ON THE FOLLOWING PAGES IS CERTAIN CONDENSED FINANCIAL DATA OF
AMERICAN MEDICAL HOLDINGS, INC. ("HOLDINGS") AND AMERICAN MEDICAL INTERNATIONAL,
INC. ("AMI" TOGETHER WITH HOLDINGS, "AMI/HOLDINGS") WHICH IS TAKEN FROM
AMI/HOLDINGS' ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED AUGUST 31, 1994 AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") UNDER THE
SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT") AND THE AMI QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1994, AS FILED WITH THE
COMMISSION.
The information and condensed financial data contained herein concerning
AMI/HOLDINGS was obtained from AMI/HOLDINGS' public filings under the Exchange
Act. The AMI/HOLDINGS condensed financial data presented includes only the most
recent interim and fiscal year end reporting periods. The Company can make no
representation as to the accuracy and completeness of AMI/HOLDINGS' public
filings but has no reason to doubt the accuracy and completeness of such
filings. It should be noted that AMI/HOLDINGS has no duty, contractual or
otherwise, to advise the Company of any events which might have occurred
subsequent to the date of such publicly available information which could affect
the significance or accuracy of such information.
AMI/HOLDINGS is subject to the information filing requirements of the
Exchange Act, and, in accordance therewith, is obligated to file periodic
reports, proxy statements and other information with the Commission relating to
its business, financial condition and other matters. Such reports, proxy
statements and other information may be inspected and copied at the offices of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and should
also be available at the following Regional Offices of the Commission: 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such reports and other
information concerning AMI/HOLDINGS can also be inspected at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, Room 1102, New York, New York
10005.
D-1
<PAGE> 142
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
AS OF AUGUST 31,
---------------------------------------------------
1994 1993
----------------------- -----------------------
HOLDINGS AMI HOLDINGS AMI
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents..................... $ 31,941 $ 31,941 $ 44,335 $ 44,335
Accounts receivable, less reserves for
uncollectible accounts of $98,622 in 1994
and $98,143 in 1993......................... 147,415 147,415 90,596 90,596
Inventory of supplies......................... 63,444 63,444 59,516 59,516
Income taxes, net (including current portion
of deferred income taxes)................... 30,876 30,876 24,641 24,641
Prepaid expenses.............................. 15,133 15,133 11,617 11,617
---------- ---------- ---------- ----------
288,809 288,809 230,705 230,705
---------- ---------- ---------- ----------
Property and Equipment:
Land.......................................... 117,841 117,841 104,723 104,723
Buildings and improvements.................... 1,253,411 1,253,411 1,151,890 1,151,890
Equipment..................................... 577,687 577,687 507,505 507,505
Construction in progress...................... 22,457 22,457 35,827 35,827
---------- ---------- ---------- ----------
1,971,396 1,971,396 1,799,945 1,799,945
Less -- Accumulated depreciation.............. 507,653 507,653 395,736 395,736
---------- ---------- ---------- ----------
1,463,743 1,463,743 1,404,209 1,404,209
---------- ---------- ---------- ----------
Other Assets:
Notes receivable.............................. 15,559 15,559 10,791 10,791
Investments................................... 24,523 24,523 27,982 27,982
Cost in excess of net assets acquired, net.... 1,153,887 1,153,887 1,165,435 1,165,435
Deferred costs................................ 30,026 30,026 29,248 29,248
---------- ---------- ---------- ----------
1,223,995 1,223,995 1,233,456 1,233,456
---------- ---------- ---------- ----------
$2,976,547 $2,976,547 $2,868,370 $2,868,370
========== ========== ========== ==========
</TABLE>
D-2
<PAGE> 143
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
AS OF AUGUST 31,
---------------------------------------------------
1994 1993
----------------------- -----------------------
HOLDINGS AMI HOLDINGS AMI
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current Liabilities:
Current maturities of long-term debt.......... $ 156,028 $ 156,028 $ 40,831 $ 40,831
Accounts payable.............................. 86,898 86,898 84,513 84,513
Accrued liabilities:
Payroll and benefits........................ 116,961 116,961 131,170 131,170
Interest.................................... 20,563 20,563 20,641 20,641
Taxes, other than income.................... 26,322 26,322 26,353 26,353
Other....................................... 69,692 69,692 67,147 67,147
---------- ---------- ---------- ----------
476,464 476,464 370,655 370,655
---------- ---------- ---------- ----------
Long-Term Debt................................ 1,130,967 1,130,967 1,283,665 1,283,665
---------- ---------- ---------- ----------
Convertible Subordinated Debt................. 10,707 10,707 10,487 10,487
---------- ---------- ---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes......................... 218,651 218,651 211,451 211,451
Reserve for professional liability risks...... 103,099 103,099 100,496 100,496
Other deferred credits and liabilities........ 187,941 187,941 187,743 187,743
---------- ---------- ---------- ----------
509,691 509,691 499,690 499,690
---------- ---------- ---------- ----------
Commitments and Contingencies
Common Stock Subject to Repurchase
Obligations................................. -- -- 6,046 --
---------- ---------- ---------- ----------
Shareholders' Equity:
AMI common stock, $0.01 par value -- 200,000
shares authorized 72,481 shares issued and
outstanding in 1994 and 1993................ -- 725 -- 725
Holdings preferred stock, $0.01 par
value -- 5,000 shares authorized, no shares
outstanding................................. -- -- -- --
Holdings common stock, $0.01 par
value -- 200,000 shares authorized 77,491
shares issued and outstanding in 1994 and
76,873 in 1993.............................. 775 -- 768 --
Additional paid-in capital.................... 608,096 592,494 596,623 587,060
Retained earnings............................. 245,547 261,199 108,436 124,088
Adjustment for minimum pension liability...... (5,700) (5,700) (8,000) (8,000)
---------- ---------- ---------- ----------
848,718 848,718 697,827 703,873
---------- ---------- ---------- ----------
$2,976,547 $2,976,547 $2,868,370 $2,868,370
========== ========== ========== ==========
</TABLE>
D-3
<PAGE> 144
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------
1994 1993 1992
----------------------- ----------------------- -----------------------
HOLDINGS AMI HOLDINGS AMI HOLDINGS AMI
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues.............. $2,381,689 $2,381,689 $2,238,525 $2,238,525 $2,237,912 $2,237,912
Operating Costs and
Expenses:
Salaries and benefits... 869,020 869,020 815,323 815,323 838,727 838,727
Supplies................ 339,985 339,985 315,935 315,935 316,541 316,541
Provisions for
uncollectible
accounts............. 165,539 165,539 148,135 148,135 163,824 163,824
Depreciation and
amortization......... 156,718 156,718 147,397 147,397 149,051 149,051
Other operating costs... 524,221 524,221 505,614 505,614 496,180 496,180
---------- ---------- ---------- ---------- ---------- ----------
Total operating costs
and expenses....... 2,055,483 2,055,483 1,932,404 1,932,404 1,964,323 1,964,323
---------- ---------- ---------- ---------- ---------- ----------
Operating Income.......... 326,206 326,206 306,121 306,121 273,589 273,589
Gains on sales of
securities........... 69,328 69,328 -- -- 119,803 119,803
Interest expense, net... (154,507) (154,507) (166,582) (166,582) (204,556) (204,556)
---------- ---------- ---------- ---------- ---------- ----------
Income Before Taxes,
Minority Equity Interest
and Extraordinary
Loss.................... 241,027 241,027 139,539 139,539 188,836 188,836
Provision for income
taxes................ (98,300) (98,300) (68,800) (68,800) (77,900) (77,900)
---------- ---------- ---------- ---------- ---------- ----------
Net Income Before Minority
Equity Interest and
Extraordinary Loss...... 142,727 142,727 70,739 70,739 110,936 110,936
Minority equity
interest............. (3,707) (3,707) (3,770) (3,770) (1,318) (1,318)
---------- ---------- ---------- ---------- ---------- ----------
Net Income Before
Extraordinary Loss...... 139,020 139,020 66,969 66,969 109,618 109,618
Extraordinary loss on
early extinguishment
of debt.............. (1,909) (1,909) (25,431) (25,431) (9,997) (9,997)
---------- ---------- ---------- ---------- ---------- ----------
Net Income................ $ 137,111 $ 137,111 $ 41,538 $ 41,538 $ 99,621 $ 99,621
========== ========== ========== ========== ========== ==========
Per Share Data:
Net income before
extraordinary loss... $ 1.80 N/A $ 0.87 N/A $ 1.43 N/A
Extraordinary loss on
early extinguishment
of debt.............. (0.02) N/A (0.33) N/A (0.13) N/A
---------- ---------- ---------- ---------- ---------- ----------
Net Income Per Common and
Common Equivalent
Share................... $ 1.78 N/A $ 0.54 N/A $ 1.30 N/A
========== ========== ========== ========== ========== ==========
Shares Used for
Computation of Net
Income Per Share........ 77,143 N/A 76,760 N/A 76,645 N/A
</TABLE>
D-4
<PAGE> 145
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
---------------------------------------------------------------------
1994 1993 1992
--------------------- --------------------- ---------------------
HOLDINGS AMI HOLDINGS AMI HOLDINGS AMI
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Income before extraordinary loss......... $ 139,020 $ 139,020 $ 66,969 $ 66,969 $ 109,618 $ 109,618
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization......... 156,718 156,718 147,397 147,397 149,051 149,051
Deferred income taxes................. (8,100) (8,100) 300 300 19,600 19,600
Amortization of debt discount,
deferred financing costs and
non-cash interest................... 49,021 49,021 60,617 60,617 62,396 62,396
Gains on sales of securities.......... (43,428) (43,428) -- -- (119,803) (119,803)
Financing fees paid................... (1,630) (1,630) (5,515) (5,515) (3,297) (3,297)
Foreign exchange translation (income)
loss................................ 215 215 (613) (613) 7,761 7,761
Decrease (increase) in accounts
receivable, net..................... (18,745) (18,745) 25,512 25,512 36,859 36,859
Increase in inventory of supplies and
prepaid expenses.................... (1,206) (1,206) (515) (515) (4,980) (4,980)
Decrease in accounts payable and
accrued liabilities................. (10,086) (10,086) (9,671) (9,671) (54,064) (54,064)
Decrease in accrued interest.......... (664) (664) (1,409) (1,409) (1,553) (1,553)
Income taxes, net..................... 18,283 18,283 (17,983) (17,983) 81,687 81,687
Decrease in other liabilities......... (14,273) (14,273) (6,751) (6,751) (27,527) (27,527)
Other non-cash items, net............. 4,506 4,506 (1,058) (1,058) (301) (301)
--------- --------- --------- --------- --------- ---------
Net Cash Provided by Operating
Activities............................... 269,631 269,631 257,280 257,280 255,447 255,447
--------- --------- --------- --------- --------- ---------
Cash Flows from Financing Activities:
Payments on debt......................... (62,169) (62,169) (653,884) (653,884) (506,406) (506,406)
Reducing Revolving Credit Facility....... (21,000) (21,000) 287,000 287,000 -- --
Borrowing Base Facility.................. -- -- -- -- (39,495) (39,495)
Borrowings............................... 890 890 152,047 152,047 185,794 185,794
Contribution to AMI by Holdings.......... -- 5,434 -- 2,381 -- 9,988
Stock repurchases........................ (20) -- (118) -- (3,170) --
Issuance of Holdings common stock........ 5,454 -- 2,499 -- 11,927 --
--------- --------- --------- --------- --------- ---------
Net Cash Used in Financing Activities...... (76,845) (76,845) (212,456) (212,456) (351,350) (350,119)
--------- --------- --------- --------- --------- ---------
Cash Flows from Investing Activities:
Property and equipment additions......... (112,214) (112,214) (116,322) (116,322) (96,816) (96,816)
Acquisitions............................. (111,606) (111,606) -- -- -- --
Disposition of assets.................... -- -- -- -- 100,089 100,089
Sales of securities...................... 46,537 46,537 -- -- 153,371 153,371
Decrease (increase) in deferred costs.... (7,279) (7,279) (3,956) (3,956) 4,107 4,107
Additions to notes receivable and
investments........................... (15,536) (15,536) (4,969) (4,969) (43,531) (43,531)
Decrease in notes receivable and
investments........................... 7,270 7,270 63,758 63,758 33,204 33,204
Other, net............................... (12,352) (12,352) (9,536) (9,536) (14,848) (14,848)
--------- --------- --------- --------- --------- ---------
Net Cash Provided by (used in) Investing
Activities............................... (205,180) (205,180) (71,025) (71,025) 135,576 135,576
--------- --------- --------- --------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents.............................. (12,394) (12,394) (26,201) (26,201) 39,673 40,904
Cash and cash equivalents, beginning of
period................................ 44,335 44,335 70,536 70,536 30,863 29,632
--------- --------- --------- --------- --------- ---------
Cash and Cash Equivalents, End of Period... $ 31,941 $ 31,941 $ 44,335 $ 44,335 $ 70,536 $ 70,536
========= ========= ========= ========= ========= =========
</TABLE>
D-5
<PAGE> 146
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE THREE YEARS ENDED AUGUST 31, 1994
<TABLE>
<CAPTION>
ADJUSTMENT
FOR
ADDITIONAL RETAINED MINIMUM
PAID-IN EARNINGS PENSION
SHARES AMOUNT CAPITAL (DEFICIT) LIABILITY
------ ------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Holdings:
Balance, August 31, 1991........................ 75,615 $756 $ 584,145 $ (32,723) $ --
------ ---- --------- --------- --------
Issuance of stock............................. 1,315 13 11,914 -- --
Stock repurchases............................. (290) (3) (3,167) -- --
Common Stock Subject to Repurchase
Obligations................................ -- -- 3,105 -- --
Net income.................................... -- -- -- 99,621 --
------ ---- --------- --------- --------
Balance, August 31, 1992........................ 76,640 766 595,997 66,898 --
------ ---- --------- --------- --------
Issuance of stock............................. 247 2 2,497 -- --
Stock repurchases............................. (14) -- (118) -- --
Common Stock Subject to Repurchase
Obligations................................ -- -- (1,753) -- --
Net income.................................... -- -- -- 41,538 --
Adjustment for minimum pension liability...... -- -- -- -- (8,000)
------ ---- --------- --------- --------
Balance, August 31, 1993........................ 76,873 768 596,623 108,436 (8,000)
------ ---- --------- --------- --------
Issuance of stock............................. 621 7 5,447 -- --
Stock repurchases............................. (3) -- (20) -- --
Common Stock Subject to Repurchase
Obligations................................ -- -- 6,046 -- --
Net income.................................... -- -- -- 137,111 --
Adjustment for minimum pension liability...... -- -- -- -- 2,300
------ ---- --------- --------- --------
Balance, August 31, 1994........................ 77,491 $775 $ 608,096 $ 245,547 $ (5,700)
====== ==== ========= ========= ========
AMI:
Balance, August 31, 1991........................ 72,481 $725 $ 567,444 $ (17,071) $ --
------ ---- --------- --------- --------
Contributions from Holdings................... -- -- 17,235 -- --
Net income.................................... -- -- -- 99,621 --
------ ---- --------- --------- --------
Balance, August 31, 1992........................ 72,481 725 584,679 82,550 --
------ ---- --------- --------- --------
Contributions from Holdings................... -- -- 2,381 -- --
Net income.................................... -- -- -- 41,538 --
Adjustment for minimum pension liability...... -- -- -- -- (8,000)
------ ---- --------- --------- --------
Balance, August 31, 1993........................ 72,481 725 587,060 124,088 (8,000)
------ ---- --------- --------- --------
Contributions from Holdings................... -- -- 5,434 -- --
Net income.................................... -- -- -- 137,111 --
Adjustment for minimum pension liability...... -- -- -- -- 2,300
------ ---- --------- --------- --------
Balance, August 31, 1994........................ 72,481 $725 $ 592,494 $ 261,199 $ (5,700)
====== ==== ========= ========= ========
</TABLE>
D-6
<PAGE> 147
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30, 1994 AUGUST 31, 1994
----------------------- -----------------------
HOLDINGS AMI HOLDINGS AMI
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents................... $ 21,377 $ 21,377 $ 31,941 $ 31,941
Accounts receivable, net.................... 167,444 167,444 147,415 147,415
Income taxes, net (including current portion
of deferred income taxes)................... 15,461 15,461 30,876 30,876
Other current assets........................ 83,411 83,411 78,577 78,577
---------- ---------- ---------- ----------
Total current assets..................... 287,693 287,693 288,809 288,809
---------- ---------- ---------- ----------
Property and Equipment........................ 2,022,574 2,022,574 1,971,396 1,971,396
Less -- Accumulated depreciation............ 540,338 540,338 507,653 507,653
---------- ---------- ---------- ----------
Net property and equipment............... 1,482,236 1,482,236 1,463,743 1,463,743
---------- ---------- ---------- ----------
Notes Receivable and Investments.............. 39,978 39,978 40,082 40,082
Cost in Excess of Net Assets Acquired, Net.... 1,153,928 1,153,928 1,153,887 1,153,887
Other Assets.................................. 60,983 60,983 30,026 30,026
---------- ---------- ---------- ----------
$3,024,818 $3,024,818 $2,976,547 $2,976,547
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities........................... $ 479,393 $ 479,393 $ 476,464 $ 476,464
Long-Term Debt................................ 1,136,545 1,136,545 1,130,967 1,130,967
Convertible Subordinated Debt................. 10,383 10,383 10,707 10,707
Deferred Income Taxes......................... 218,651 218,651 218,651 218,651
Other Deferred Credits and Liabilities........ 306,290 306,290 291,040 291,040
Commitments and Contingencies
Shareholders' Equity:
Common stock................................ 776 725 775 725
Additional paid-in capital.................. 609,887 594,286 608,096 592,494
Retained earnings........................... 268,593 284,245 245,547 261,199
Adjustment for minimum pension liability.... (5,700) (5,700) (5,700) (5,700)
---------- ---------- ---------- ----------
Total shareholders' equity............... 873,556 873,556 848,718 848,718
---------- ---------- ---------- ----------
$3,024,818 $3,024,818 $2,976,547 $2,976,547
========== ========== ========== ==========
</TABLE>
D-7
<PAGE> 148
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-----------------------------------------
1994 1993
------------------- -------------------
HOLDINGS AMI HOLDINGS AMI
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues.......................................... $632,211 $632,211 $558,217 $558,217
Operating Costs and Expenses:
Salaries and benefits............................... 236,925 236,925 205,414 205,414
Supplies............................................ 91,791 91,791 79,482 79,482
Provisions for uncollectible accounts............... 42,122 42,122 39,036 39,036
Depreciation and amortization....................... 41,090 41,090 38,273 38,273
Other operating costs............................... 140,200 140,200 126,654 126,654
-------- -------- -------- --------
Total operating costs and expenses.......... 552,128 552,128 488,859 488,859
-------- -------- -------- --------
Operating Income...................................... 80,083 80,083 69,358 69,358
Interest expense, net............................... (39,275) (39,275) (38,848) (38,848)
-------- -------- -------- --------
Income Before Taxes and Minority Equity Interest...... 40,808 40,808 30,510 30,510
Provision for income taxes............................ (17,100) (17,100) (12,900) (12,900)
-------- -------- -------- --------
Net Income Before Minority Equity Interest............ 23,708 23,708 17,610 17,610
Minority equity interest............................ (662) (662) (1,097) (1,097)
-------- -------- -------- --------
Net Income............................................ $ 23,046 $ 23,046 $ 16,513 $ 16,513
======== ======== ======== ========
Per Share Data:
Net income per common and common equivalent share..... $ 0.30 N/A $ 0.21 N/A
======== ========
Shares used for computation of net income per share... 77,567 N/A 76,938 N/A
======== ========
</TABLE>
D-8
<PAGE> 149
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
---------------------------------------
1994 1993
------------------ ------------------
HOLDINGS AMI HOLDINGS AMI
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................. $ 23,046 $23,046 $ 16,513 $16,513
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization........................ 41,090 41,090 38,273 38,273
Amortization of debt discount, deferred financing
costs and non-cash interest........................ 12,348 12,348 12,481 12,481
Change in working capital............................ (21,843) (21,843) (11,925) (11,925)
Other................................................ 1,090 1,090 129 129
-------- ------- -------- -------
Net Cash Provided by Operating Activities................. 55,731 55,731 55,471 55,471
-------- ------- -------- -------
Cash Flows from Financing Activities:
Payments on debt........................................ (3,748) (3,748) (31,507) (31,507)
Revolving credit facility............................... (4,000) (4,000) (28,000) (28,000)
Other................................................... 1,240 1,240 1,008 1,008
-------- ------- -------- -------
Net Cash Used in Financing Activities..................... (6,508) (6,508) (58,499) (58,499)
-------- ------- -------- -------
Cash Flows from Investing Activities:
Property and equipment additions........................ (30,662) (30,662) (27,093) (27,093)
Acquisitions............................................ (18,209) (18,209) -- --
Decrease (increase) in other assets..................... (14,054) (14,054) 1,251 1,251
Additions in notes receivable and investments........... (2,023) (2,023) (1,773) (1,773)
Decrease in notes receivable and investments............ 4,524 4,524 1,453 1,453
Other................................................... 637 637 (1,506) (1,506)
-------- ------- -------- -------
Net Cash Used in Investing Activities..................... (59,787) (59,787) (27,668) (27,668)
-------- ------- -------- -------
Decrease in Cash and Cash Equivalents..................... (10,564) (10,564) (30,696) (30,696)
Cash and cash equivalents, beginning of period.......... 31,941 31,941 44,335 44,335
-------- ------- -------- -------
Cash and Cash Equivalents, End of Period.................. $ 21,377 $21,377 $ 13,639 $13,639
======== ======= ======== =======
</TABLE>
D-9
<PAGE> 150
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTE
Holdings was organized in July, 1989 to acquire AMI. As a result of this
acquisition, Holdings is the owner of all of the outstanding shares of common
stock of AMI. AMI's financial statements for periods subsequent to September 1,
1991 are the same as Holdings' financial statements for such periods, except for
the components of shareholders' equity and the impact of common stock subject to
repurchase obligations.
D-10
