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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-9381
American Health Properties, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4084878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6400 SOUTH FIDDLER'S GREEN CIRCLE 80111
SUITE 1800 (Zip Code)
ENGLEWOOD, CO
(Address of principal executive offices)
(303) 796-9793
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____
SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE,
OUTSTANDING AT MAY 7, 1997 -- 23,455,027
SHARES OF REGISTRANT'S PSYCHIATRIC GROUP DEPOSITARY SHARES, EACH
REPRESENTING ONE-TENTH OF ONE SHARE OF PSYCHIATRIC GROUP PREFERRED STOCK, $.01
PAR VALUE, OUTSTANDING AT MAY 7, 1997 -- 2,083,931.
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AMERICAN HEALTH PROPERTIES, INC.
MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
CONSOLIDATED COMPANY
Item 1. Consolidated Condensed Financial Statements:
Balance sheets as of March 31, 1997 and December 31, 1996.......................................... 2
Statements of operations for the three months ended March 31, 1997 and 1996........................ 3
Statements of cash flows for the three months ended March 31, 1997 and 1996........................ 4
Notes to financial statements...................................................................... 5
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations...................................................... 8
CORE GROUP
Item 1. Core Group Combined Condensed Financial Statements:
Balance sheets as of March 31, 1997 and December 31, 1996.......................................... 13
Statements of operations for the three months ended March 31, 1997 and 1996........................ 14
Statements of cash flows for the three months ended March 31, 1997 and 1996........................ 15
Notes to financial statements...................................................................... 16
Item 2. Management's Discussion and Analysis of Core Group
Combined Financial Condition and Results of Operations............................................. 20
PSYCHIATRIC GROUP
Item 1. Psychiatric Group Combined Condensed Financial Statements:
Balance sheets as of March 31, 1997 and December 31, 1996.......................................... 24
Statements of operations for the three months ended March 31, 1997 and 1996........................ 25
Statements of cash flows for the three months ended March 31, 1997 and 1996........................ 26
Notes to financial statements...................................................................... 27
Item 2. Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations............................................. 32
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................... 38
</TABLE>
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
- ------------------------------------------------------------------ --------- ---------
<S> <C> <C>
ASSETS (Unaudited)
Real estate investments
Real property and mortgage notes, net $ 635,332 $ 644,380
Construction in progress 2,542 4,834
Accumulated depreciation (90,241) (90,139)
--------- ---------
547,633 559,075
Notes receivable and financing leases 6,464 8,152
Other assets 12,112 9,175
Cash and short-term investments 4,338 1,480
- ------------------------------------------------------------------ --------- ---------
$ 570,547 $ 577,882
================================================================== ========= =========
Liabilities and Stockholders' Equity
Bank loans payable $ -- $ 48,500
Notes and bonds payable 225,642 158,601
Accounts payable and accrued liabilities 6,473 7,385
Dividends payable 13,877 13,981
Deferred income 3,889 4,276
- ------------------------------------------------------------------ --------- ---------
249,881 232,743
- ------------------------------------------------------------------ --------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
208 shares issued and outstanding 2 2
Common stock $.01 par value; 100,000 shares authorized;
23,455 shares issued and outstanding 235 235
Additional paid-in capital 482,453 482,083
Cumulative net income 245,724 256,691
Cumulative dividends (407,748) (393,872)
- ------------------------------------------------------------------ --------- ---------
320,666 345,139
- ------------------------------------------------------------------ --------- ---------
$ 570,547 $ 577,882
================================================================== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
- ------------------------------------------- -------- --------
<S> <C> <C>
REVENUES
Rental income $ 17,810 $ 17,298
Mortgage interest income 1,517 1,493
Additional rental and interest income 2,976 2,948
Other interest income 1,030 382
- ------------------------------------------- -------- --------
23,333 22,121
- ------------------------------------------- -------- --------
EXPENSES
Depreciation and amortization 3,828 3,725
Interest expense 6,107 5,766
General and administrative 1,891 1,822
Impairment loss on real estate
investments and other notes receivable 11,000 --
- ------------------------------------------- -------- --------
22,826 11,313
- ------------------------------------------- -------- --------
Minority interest 47 57
- ------------------------------------------- -------- --------
NET INCOME BEFORE EXTRAORDINARY ITEM 460 10,751
EXTRAORDINARY LOSS ON DEBT PREPAYMENT (11,427) --
- ------------------------------------------- -------- --------
NET INCOME (LOSS) $(10,967) $ 10,751
=========================================== ======== ========
ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Net Income Before Extraordinary Item $ 9,930 $ 9,319
Extraordinary Loss On Debt Prepayment $(11,427) $ --
Net Income (Loss) $ (1,497) $ 9,319
PER SHARE AMOUNTS:
Net Income Before Extraordinary Item $ 0.42 $ 0.40
Extraordinary Loss On Debt Prepayment $ (0.48) $ --
Net Income (Loss) $ (0.06) $ 0.40
Dividends Declared $ 0.5250 $ 0.5050
Weighted Average Shares Outstanding 23,547 23,500
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net Income (Loss) $ (9,470) $ 1,432
Net Income (Loss) Per Share $ (4.52) $ 0.68
Dividends Declared Per Share $ 0.7500 $ 0.7000
Weighted Average Shares Outstanding 2,096 2,091
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
- ------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (10,967) $ 10,751
Extraordinary loss on debt prepayment 11,427 --
Depreciation, amortization and other non-cash items 4,498 4,291
Deferred income (102) (144)
Impairment loss on real estate
investments and other notes receivable 11,000 --
Change in other assets (1,292) (104)
Change in accounts payable and accrued liabilities (1,112) (3,408)
- ------------------------------------------------------------------- ----------- -----------
13,452 11,386
- ------------------------------------------------------------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (1,733) (4,655)
Principal payments on mortgage notes receivable 17 15
Other notes receivable 41 50
Direct financing leases (77) 322
Administrative capital expenditures (1) (16)
- ------------------------------------------------------------------- ----------- -----------
(1,753) (4,284)
- ------------------------------------------------------------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable (48,500) 1,000
Proceeds from notes payable issuance 218,965 --
Prepayment of notes payable (163,176) --
Financing costs paid (2,150) (73)
Dividends paid (13,980) (13,508)
- ------------------------------------------------------------------- ----------- -----------
(8,841) (12,581)
- ------------------------------------------------------------------- ----------- -----------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 2,858 (5,479)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,480 7,571
- ------------------------------------------------------------------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 4,338 $ 2,092
=================================================================== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living and Alzheimer's care
facilities and medical office buildings.
The Company has two distinct classes of publicly-traded shares
outstanding. The Company's common stock (the Core Group Common Stock) is
intended to reflect the separate financial performance of the Company's
investments in acute care, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and medical
office buildings (the Core Group). The Psychiatric Group Depositary Shares are
intended to reflect the separate financial performance of the Company's
investments in psychiatric hospitals (the Psychiatric Group). The capital
structure of the Company as reflected by its two classes of shares does not
affect the legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock or Psychiatric Group
Depositary Shares is a holder of an issue of capital stock of the entire
Company and is subject to the risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Basis of Presentation The consolidated condensed financial statements
of the Company included herein have been prepared by the Company without audit
and include all normal, recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with those
included in the Company's annual report on Form 10-K for the year ended
December 31, 1996. The financial statements of the Core Group and the
Psychiatric Group, which are included elsewhere herein, should also be read in
conjunction with these financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standard In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share." SFAS No. 128 is intended to simplify the computation
of earnings per share (EPS) and to make the U.S. standard for computing EPS
more compatible with the EPS standards of other countries and with that of the
International Accounting Standards Committee. The effective date for the
application of SFAS No. 128 for both interim and annual periods is after
December 15, 1997. Earlier application is not permitted. Management does not
expect the application of SFAS No. 128 to have a material impact on the
Company's EPS calculation.
Interest Paid Interest paid by the Company, net of interest
capitalized, was $5,561,000 and $7,896,000 for the three months ended March 31,
1997 and 1996, respectively. The Company had $107,000 and $210,000 of
capitalized interest for the three months ended March 31, 1997 and 1996,
respectively.
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
2. DEBT
In January 1997, the Company completed a $220 million public debt
offering of unsecured senior notes payable, issuing $100 million of notes with
a coupon rate of 7.05% due January 15, 2002 (2002 Notes) and $120 million of
notes with a coupon rate of 7.50% due January 15, 2007 (2007 Notes). The 2002
Notes and 2007 Notes were sold for $99,749,000 and $119,216,000, respectively,
and have effective interest rates of approximately 7.34% and 7.74%,
respectively. Interest is payable at the coupon rates semi-annually on January
15th and July 15th. The proceeds from the public debt offering were used to pay
off the Company's $152 million of 11.03% private placement debt prior to its
scheduled maturity and the Company's borrowings under its bank credit
agreement. The prepayment of the private placement debt in February 1997
resulted in an extraordinary charge in the first quarter of 1997 of $11,427,000
consisting of a make-whole premium and other costs related to the prepayment.
3. STOCKHOLDERS' EQUITY
Stock Incentive Plans During the three months ended March 31, 1997,
options to purchase 144,534 shares of Core Group Common Stock at a weighted
average exercise price of $25.53 per share were issued pursuant to the
Company's stock incentive plans.
4. COMMITMENTS
Other Notes Receivable The Company provides financing at variable
rates to a psychiatric hospital operator under a revolving credit agreement.
The commitment under this credit agreement was $2.7 million at March 31, 1997
of which $.2 million was unfunded.
Real Estate Properties The Company has the right to approve capital
expenditures at all of its properties, the option to fund certain capital
expenditures and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. The base and
additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Company's increased investment. At March
31, 1997, the Company had no commitments to fund capital expenditures pursuant
to these rights and obligations.
As of March 31, 1997, the Company had funded $2.5 million of a $6.2
million commitment to finance the acquisition and renovation of an existing
property in Amarillo, Texas to be operated as a long-term acute care facility
by an experienced operator. The Company has also agreed to provide another
$13.8 million of real estate financing to the operator for other similar
facilities. Of this amount, $4.4 million has been specifically identified for a
property in Houston, Texas.
In April 1997, the Company funded $1.8 million of a $17 million
commitment to provide construction and lease financing for two skilled nursing
properties in Las Vegas, Nevada to be operated by an experienced operator of
skilled nursing facilities.
In May 1997, the Company acquired a $10.6 million medical office
building located on the campus of an existing regional medical center in North
Miami Beach, Florida. The medical office building is a multi-
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
tenant facility for which property management and leasing services will be
provided by an experienced real estate management company.
The Company has agreed to provide $50 million of real estate financing
to an experienced operator of assisted living facilities. Approximately $29
million has been specifically identified for the construction of five
properties located in four states which will be leased to the operator upon
completion.
5. STATUS OF PSYCHIATRIC GROUP INVESTMENTS
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in
significant psychiatric investment write-downs and the periodic restructuring
of psychiatric operator payment obligations. In 1995, the Company restructured
the leases covering its two psychiatric properties in Florida, and during 1996,
provided for the partial deferral of rental and interest obligations related to
one of these properties and the partial deferral of rental obligations of its
psychiatric property in Illinois. The financial and operational problems at the
two Florida psychiatric hospitals significantly worsened during the first
quarter of 1997. After reviewing the decreased census levels that were well
below the owner's and operator's expectations, operational and financial
problems of the hospitals and various alternatives for the facilities, the
Company recorded an $11 million charge in the first quarter of 1997 for
impairment of the carrying value of these two investments. This charge had no
current impact on dividends on the Company's Psychiatric Group Depositary
Shares for the quarter, although it is likely that the difficulties at the two
Florida facilities will have a negative impact on dividend levels on the
Company's Psychiatric Group Depositary Shares in the future.
Although management currently believes that the recorded investments in
the psychiatric hospitals are realizable, if the psychiatric operators are
unable to successfully adapt to the fundamental ongoing changes in the
psychiatric industry and consistently mitigate the negative impact of such
changes on their financial performance, the Company may be required to further
restructure payment obligations, identify alternative operators, pursue
alternative uses for or dispositions of the properties and/or make additional
write-downs of the value of its investments in the psychiatric hospitals. If the
Company is required to take any of these actions, various costs may be incurred
by the Company in an effort to protect and maintain its investments. The Company
does not intend to make new investments in the psychiatric sector, and over
time, may sell, restructure or seek other means to reduce its investments in the
psychiatric sector.
The dividend on the Company's Psychiatric Group Depositary Shares is
determined each quarter based upon the operating results of the Company's
Psychiatric Group. The level of dividends of the Psychiatric Group in the past
year have varied quarter-to-quarter. Any significant advance of additional
funds to psychiatric hospital operators, modification of terms covering the
rental or interest obligations of its psychiatric properties or nonpayment or
deferral of such obligations as they become due likely will have an adverse
impact on the Company's Psychiatric Group results of operations and cash flows,
as well as the quarterly dividend payment on Psychiatric Group Depositary
Shares.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has two distinct classes of publicly-traded shares
outstanding. The Company's common stock (the Core Group Common Stock) is
intended to reflect the separate financial performance of the Company's
investments in acute care, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and medical
office buildings (the Core Group). The Psychiatric Group Depositary Shares are
intended to reflect the separate financial performance of the Company's
investments in psychiatric hospitals (the Psychiatric Group). The capital
structure of the Company as reflected by its two classes of shares does not
affect the legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock or Psychiatric Group
Depositary Shares is a holder of an issue of capital stock of the entire
Company and is subject to the risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Following is a discussion of the consolidated financial condition and
results of operations of the Company which should be read in conjunction with
the consolidated financial statements and accompanying notes. For discussions
of the financial condition and results of operations of the Core Group and the
Psychiatric Group, see the management's discussion and analysis of financial
condition and results of operations of the Core Group and the Psychiatric Group
included elsewhere herein.
Factors Regarding Future Results and Forward-Looking Statements
Statements that are not historical facts contained in management's discussion
and analysis of financial condition and results of operations are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ from projected results. Certain factors that
could cause actual results to differ materially include, among others: the
financial success of the operations conducted at the Company's facilities and
the financial strength of the operators of such facilities, the continuing
ability of operators to meet their obligations to the Company under existing or
restructured agreements, changes in operators or ownership of operators, the
viability of alternative uses for the Company's properties when necessary,
changes in government policy relating to the health care industry including
reductions in reimbursement levels under the Medicare and Medicaid programs,
operators' continued eligibility to participate in the Medicare or Medicaid
programs, reductions in reimbursement by other third-party payors, lower
occupancy levels at the Company's facilities, the strength and financial
resources of the Company's competitors, the availability and cost of capital,
the Company's ability to make additional real estate investments at attractive
yields and changes in tax laws and regulations affecting real estate investment
trusts. For a further discussion of such factors, see "Management's Discussion
and Analysis of Consolidated Financial Condition and Results of Operations -
Future Operating Results" herein.
OPERATING RESULTS
First Quarter 1997 Compared With 1996
For the first quarter of 1997, the Company reported a net loss of
($10,967,000) compared with net income of $10,751,000 for the first quarter of
1996. For the first quarter of 1997, the Company reported net income before
extraordinary item of $460,000 compared with net income before extraordinary
item of $10,751,000 for the first quarter of 1996. The net loss for the first
quarter of 1997 included an impairment loss on psychiatric investments of
($11,000,000) and an extraordinary loss on debt prepayment of ($11,427,000). See
the Consolidated Condensed Statements of Operations for the net income (loss)
and per share amounts attributable to the Core Group Common Stock and the
Psychiatric Group Depositary Shares.
8
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Rental income was $17,810,000 for the first quarter of 1997, an
increase of $512,000 or 3% from $17,298,000 for the first quarter of 1996. This
increase was primarily attributable to rental income from new properties
acquired subsequent to the first quarter of 1996. These property additions also
resulted in an increase in depreciation and amortization of $103,000 or 3% to
$3,828,000 for the first quarter of 1997 compared with $3,725,000 for the first
quarter of 1996.
Other interest income increased $648,000 or 170% to $1,030,000 for the
first quarter of 1997 from $382,000 for the first quarter of 1996. This
variation was due to higher investable cash balances partially offset by a
lower average balance of direct financing leases. Investable cash balances were
higher due to the temporary investment of a portion of the proceeds of a public
debt offering in late January 1997 until used to prepay the Company's private
placement debt in late February 1997 after the prepayment notice period had
expired.
Interest expense was $6,107,000 for the first quarter of 1997, an
increase of $341,000 or 6% from $5,766,000 for the first quarter of 1996. This
increase was attributable to higher average line of credit and long-term debt
balances during the first quarter of 1997 and higher capitalized interest in
1996 as compared to 1997. In late January 1997, the Company sold $220 million
of publicly-traded unsecured senior notes with a weighted average effective
interest rate of approximately 7.56%. The Company used the proceeds of this
offering to pay off the borrowings under its bank credit agreement and to
prepay $152 million of 11.03% private placement debt in late February 1997
prior to its scheduled maturity, incurring an extraordinary charge in the first
quarter of 1997 of $11,427,000.
General and administrative expenses were $1,891,000 for the first
quarter of 1997, an increase of $69,000 or 4% from $1,822,000 for the first
quarter of 1996. This increase was primarily attributable to higher
compensation and benefits expense.
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A reduction in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States continues to
undergo 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. Various plans to decrease the growth in
Medicare spending have been proposed by both Houses of Congress. These plans
have generally included revisions to and limits on Medicare and federal
programs providing Medicaid reimbursement to state health care programs and
potentially would have an adverse impact on the level of funds available in the
future to health care facilities. The Company's
9
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. At the same time, the Company believes
that this changing health care environment will provide the Core Group with new
opportunities for investment.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing to aggressively enforce compliance with program
requirements and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health care
services that are reimbursed under the Medicare and Medicaid programs continues
to increase as the population ages and as states expand their Medicaid
programs. Continued eligibility to participate in these programs is crucial to
a provider's financial strength. As a result of the foregoing, the revenues and
margins may decrease at the Company's facilities.
Notwithstanding the potential for increasing government regulation,
the Company believes that health care will continue to be delivered on a local
and regional basis and that well-managed, high-quality, cost-controlled
facilities will continue to be an integral part of local and regional 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 likely will 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 or regional 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 generally further supported by one or more credit enhancements
that take the form of cross-default provisions, letters of credit, corporate
and personal guarantees, security interests in cash reserve funds, accounts
receivable or other personal property and requirements to maintain specified
financial ratios.
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Company's psychiatric
properties. Institutions responsible for the reimbursement of care provided 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. The wider use of
psychotropic drugs also has resulted in significant declines in the average
length of
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
stay. In addition, aggressive program compliance enforcement and increased
scrutiny of past and current billing practices has resulted in the filing of
lawsuits against some providers and significant negative publicity which has
further exacerbated the financial and operational difficulties of providers.
Although the operators of the psychiatric hospitals are responding by
increasing case management, developing lower cost outpatient and daypatient
programs and reducing operating costs, their efforts are generally not
consistently mitigating the negative impact of these fundamental psychiatric
industry changes. As a result, certain of the psychiatric hospital operators
have not met their contractual payment obligations to the Company as scheduled
and there can be no assurance that psychiatric hospital operators will be able
to meet such payment obligations in the future.
In general, the operators of the Company's psychiatric properties have
very limited access to financing for their operating and capital needs. The
Company currently is providing such financing under a revolving credit
agreement to the operator of one of its psychiatric properties. As of May 7,
1997, outstanding borrowings under such agreement totaled $2,500,000, and the
Company has committed to fund an additional $200,000 of borrowings upon
request, subject to certain conditions. To the extent operators of the
Company's psychiatric properties have increased working capital needs in the
future, the Company may be the only source of such financing.
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in
significant psychiatric investment write-downs and the periodic restructuring
of psychiatric operator payment obligations. In 1995, the Company restructured
the leases covering its two psychiatric properties in Florida, and during 1996,
provided for the partial deferral of rental and interest obligations related to
one of these properties and the partial deferral of rental obligations of its
psychiatric property in Illinois. The financial and operational problems at the
two Florida psychiatric hospitals significantly worsened during the first
quarter of 1997. After reviewing the decreased census levels that were well
below the owner's and operator's expectations, operational and financial
problems of the hospitals and various alternatives for the facilities, the
Company recorded an $11 million charge in the first quarter of 1997 for
impairment of the carrying value of these two investments. This charge had no
current impact on dividends on the Company's Psychiatric Group Depositary
Shares for the quarter, although it is likely that the difficulties at the two
Florida facilities will have a negative impact on dividend levels on the
Company's Psychiatric Group Depositary Shares in the future.
Although management currently believes that the recorded investments in
the psychiatric hospitals are realizable, if the psychiatric operators are
unable to successfully adapt to the fundamental ongoing changes in the
psychiatric industry and consistently mitigate the negative impact of such
changes on their financial performance, the Company may be required to further
restructure payment obligations, identify alternative operators, pursue
alternative uses for or dispositions of the properties and/or make additional
write-downs of the value of its investments in the psychiatric hospitals. If the
Company is required to take any of these actions, various costs may be incurred
by the Company in an effort to protect and maintain its investments. The Company
does not intend to make new investments in the psychiatric sector, and over
time, may sell, restructure or seek other means to reduce its investments in the
psychiatric sector.
The dividend on the Company's Psychiatric Group Depositary Shares is
determined each quarter based upon the operating results of the Company's
Psychiatric Group. The level of dividends of the Psychiatric Group in the past
year have varied quarter-to-quarter. Any significant advance of additional
funds to psychiatric hospital operators, modification of terms covering the
rental or interest obligations of its psychiatric properties or nonpayment or
deferral of such obligations as they become due likely will have an adverse
impact on the Company's Psychiatric Group results of operations and cash flows,
as well as the quarterly dividend payment on Psychiatric Group Depositary
Shares. The quarterly dividend on Psychiatric Group Depositary Shares was
11
<PAGE> 13
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
decreased to $.75 per share in the first quarter of 1997 compared to $.80 per
share in the fourth quarter of 1996.
The future operating results of the Company will be affected by
additional factors including the amount, timing and yield of additional real
estate investments and the competition for such investments. Operating results
also will be affected by the availability and terms of the Company's future
equity and debt financing. The Company's financing strategy to facilitate
future growth includes objectives to reduce its cost of capital over time and
enhance its liquidity and financial flexibility.
LIQUIDITY AND CAPITAL RESOURCES
As of May 7, 1997, the Company had remaining commitments of $18.5
million to fund real estate projects currently under construction over
approximately the next fifteen months. In addition, the Company had agreed to
provide real estate financing to two different operators aggregating
approximately $63.8 million. Of this amount, approximately $29 million has been
committed to five assisted living projects to be constructed over the next
fifteen months and $4.4 million has been committed to the financing of an
existing long-term acute care hospital within the next two months. The
remaining $30.4 million of financing has not been committed to specific
acquisitions or projects. The unfunded commitment under a revolving credit
agreement provided to a psychiatric hospital operator was $.2 million as of May
7, 1997.
The Company has continued to increase its liquidity and enhance its
financial flexibility. In January 1997, the Company completed a $220 million
public unsecured debt offering, issuing $100 million of five-year senior notes
and $120 million of ten-year senior notes. The Company used the net proceeds to
pay off all outstanding borrowings under its $150 million bank facility at the
time and to prepay all of its $152 million of outstanding private placement
debt in late February 1997. As of May 7, 1997, the Company had no outstanding
borrowings under its revolving credit facility and had $2.4 million in cash and
short-term investments. The Company's total indebtedness as of May 7, 1997 was
$225.7 million. The Company will utilize its revolving credit facility to fund
future acquisitions and its other commitments. The Company may incur additional
indebtedness or refinance existing indebtedness if the Company determines that
opportunities to pursue such transactions would be attractive. 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.
12
<PAGE> 14
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
- ------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
ASSETS (Unaudited)
Real estate investments
Real property $ 585,655 $ 581,631
Construction in progress 2,542 4,834
Accumulated depreciation (89,064) (85,451)
----------- -----------
499,133 501,014
Financing leases 3,772 3,695
Revolving loan to Psychiatric Group 4,149 4,183
Fixed rate loan to Psychiatric Group 9,175 9,175
Other assets 11,419 8,432
Cash and short-term investments 4,338 1,480
- ------------------------------------------------------------------- ----------- -----------
$ 531,986 $ 527,979
=================================================================== =========== ===========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable $ -- $ 48,500
Notes and bonds payable 225,642 158,601
Accounts payable and accrued liabilities 6,473 7,385
Dividends payable 12,314 12,314
Deferred income 3,855 4,003
- ------------------------------------------------------------------- ----------- -----------
248,284 230,803
- ------------------------------------------------------------------- ----------- -----------
Commitments and contingencies
Total Attributed Core Group Equity 283,702 297,176
- ------------------------------------------------------------------- ----------- -----------
$ 531,986 $ 527,979
=================================================================== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 15
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
- --------------------------------------------- ----------- -----------
<S> <C> <C>
REVENUES
Rental income $ 17,229 $ 16,717
Additional rental income 2,772 2,766
Other interest income 931 283
Interest on loans to Psychiatric Group 390 420
- --------------------------------------------- ----------- -----------
21,322 20,186
- --------------------------------------------- ----------- -----------
EXPENSES
Depreciation and amortization 3,642 3,539
Interest expense 6,107 5,766
General and administrative 1,596 1,505
- --------------------------------------------- ----------- -----------
11,345 10,810
- --------------------------------------------- ----------- -----------
Minority interest 47 57
- --------------------------------------------- ----------- -----------
Net Income Before Extraordinary Item 9,930 9,319
EXTRAORDINARY LOSS ON DEBT PREPAYMENT (11,427) --
- --------------------------------------------- ----------- -----------
NET INCOME (LOSS) $ (1,497) $ 9,319
- --------------------------------------------- ----------- -----------
PER COMMON SHARE AMOUNTS:
NET INCOME BEFORE EXTRAORDINARY ITEM $ 0.42 $ 0.40
EXTRAORDINARY LOSS ON DEBT PREPAYMENT $ (0.48) $ --
- --------------------------------------------- ----------- -----------
NET INCOME (LOSS) $ (0.06) $ 0.40
============================================= =========== ===========
DIVIDENDS DECLARED $ 0.5250 $ 0.5050
============================================= =========== ===========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 23,547 23,500
============================================= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 16
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1997 1996
- ------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,497) $ 9,319
Extraordinary loss on debt prepayment 11,427 --
Depreciation, amortization and other non-cash items 4,278 4,073
Deferred income (89) (130)
Change in other assets (1,339) 41
Change in accounts payable and accrued liabilities (971) (3,347)
- ------------------------------------------------------------------- ----------- -----------
11,809 9,956
- ------------------------------------------------------------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (1,733) (4,655)
Direct financing leases (77) 322
Paydowns (fundings) on revolving loan to Psychiatric Group 34 (173)
Administrative capital expenditures (1) (16)
- ------------------------------------------------------------------- ----------- -----------
(1,777) (4,522)
- ------------------------------------------------------------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable (48,500) 1,000
Proceeds from notes payable issuance 218,965 --
Prepayment of notes payable (163,176) --
Financing costs paid (2,150) (73)
Dividends paid (12,313) (11,840)
- ------------------------------------------------------------------- ----------- -----------
(7,174) (10,913)
- ------------------------------------------------------------------- ----------- -----------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 2,858 (5,479)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,480 7,571
- ------------------------------------------------------------------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 4,338 $ 2,092
=================================================================== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 17
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living and Alzheimer's care
facilities and medical office buildings.
The Company has two distinct classes of publicly-traded shares
outstanding. The Company's common stock (the Core Group Common Stock) is
intended to reflect the separate financial performance of the Company's
investments in acute care, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and medical
office buildings (the Core Group). The Psychiatric Group Depositary Shares are
intended to reflect the separate financial performance of the Company's
investments in psychiatric hospitals (the Psychiatric Group). The capital
structure of the Company as reflected by its two classes of shares does not
affect the legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock or Psychiatric Group
Depositary Shares is a holder of an issue of capital stock of the entire
Company and is subject to the risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Basis of Presentation The combined condensed financial statements of
the Core Group included herein have been prepared by the Company without audit
and include all normal, recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with those
included in the Company's annual report on Form 10-K for the year ended
December 31, 1996.
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, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and medical
office buildings, an allocated portion of the Company's general and
administrative expense, all corporate assets and liabilities and related
transactions associated with the ongoing operations of the Company which are
not separately identified with either operating group, an attributed amount of
inter-Group loans receivable from the Psychiatric Group and an attributed
amount of the Company's stockholders' equity. 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. Furthermore, such
attribution does not affect the rights of creditors of the Company or any
subsidiary, including rights under financing covenants.
Each holder of Core Group Common Stock or Psychiatric Group Depositary
Shares is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the
16
<PAGE> 18
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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, cash flows or borrowing costs may also affect
the results of operations, financial condition, cash flows or borrowing costs
of the other Group. Net losses of either Group, as well as dividends and
distributions on, and repurchases of, Core Group Common Stock or Psychiatric
Group Depositary Shares will reduce the funds of the Company legally available
for dividends on both the Core Group Common Stock and Psychiatric Group
Depositary Shares. Accordingly, the Core Group's financial statements should be
read in conjunction with the Company's consolidated financial statements and
the financial statements of the Psychiatric Group.
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standard In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share." SFAS No. 128 is intended to simplify the computation
of earnings per share (EPS) and to make the U.S. standard for computing EPS
more compatible with the EPS standards of other countries and with that of the
International Accounting Standards Committee. The effective date for the
application of SFAS No. 128 for both interim and annual periods is after
December 15, 1997. Earlier application is not permitted. Management does not
expect the application of SFAS No. 128 to have a material impact on the Core
Group's EPS calculation.
Interest Paid Interest paid by the Core Group, net of interest
capitalized, was $5,561,000 and $7,896,000 for the three months ended March 31,
1997 and 1996, respectively. The Core Group had $107,000 and $210,000 of
capitalized interest for the three months ended March 31, 1997 and 1996,
respectively.
2. DEBT
All of the Company's third-party debt is attributed to the Core Group.
In January 1997, the Company completed a $220 million public debt offering of
unsecured senior notes payable, issuing $100 million of notes with a coupon
rate of 7.05% due January 15, 2002 (2002 Notes) and $120 million of notes with
a coupon rate of 7.50% due January 15, 2007 (2007 Notes). The 2002 Notes and
2007 Notes were sold for $99,749,000 and $119,216,000, respectively, and have
effective interest rates of approximately 7.34% and 7.74%, respectively.
Interest is payable at the coupon rates semi-annually on January 15th and July
15th. The proceeds from the public debt offering were used to pay off the
Company's $152 million of 11.03% private placement debt prior to its scheduled
maturity and the Company's borrowings under its bank credit agreement. The
prepayment of the private placement debt in February 1997 resulted in an
extraordinary charge in the first quarter of 1997 of $11,427,000 consisting of
a make-whole premium and other costs related to the prepayment.
17
<PAGE> 19
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. ATTRIBUTED EQUITY
Stock Incentive Plans During the three months ended March 31, 1997,
options to purchase 144,534 shares of Core Group Common Stock at a weighted
average exercise price of $25.53 per share were issued pursuant to the
Company's stock incentive plans.
4. COMMITMENTS
Inter-Group Loans Repayment of inter-Group loans by the Psychiatric
Group is primarily dependent upon the amount and timing of sales of the
Psychiatric Group's assets and paydowns received by the Psychiatric Group on
borrowings provided to a psychiatric hospital operator under a revolving credit
agreement. The Company's board of directors has established certain management
policies relating to the Core Group's inter-Group loans to the Psychiatric
Group. Under the policies currently in effect, which may be modified or
rescinded in the sole discretion of the Company's board of directors, the
aggregate revolving inter-Group loans owed by the Psychiatric Group to the Core
Group are limited to a maximum of $8,050,000 at any one time outstanding, which
limit is to be reduced dollar-for-dollar with any permanent repayment in the
future of borrowings under a revolving credit agreement provided to a
Psychiatric Group hospital operator. In addition, the limit on the aggregate
revolving inter-Group loans will not be reduced below $5,000,000, and except
for such revolving inter-Group loans, no additional fixed rate or other
inter-Group loans will be advanced by the Core Group to the Psychiatric Group.
Real Estate Properties The Core Group has the right to approve capital
expenditures at all of its properties, the option to fund certain capital
expenditures and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. The base and
additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Core Group's increased investment. At
March 31, 1997, the Core Group had no commitments to fund capital expenditures
pursuant to these rights and obligations.
As of March 31, 1997, the Core Group had funded $2.5 million of a $6.2
million commitment to finance the acquisition and renovation of an existing
property in Amarillo, Texas to be operated as a long-term acute care facility
by an experienced operator. The Core Group has also agreed to provide another
$13.8 million of real estate financing to the operator for other similar
facilities. Of this amount, $4.4 million has been specifically identified for a
property in Houston, Texas.
In April 1997, the Core Group funded $1.8 million of a $17 million
commitment to provide construction and leasing financing for two skilled
nursing properties in Las Vegas, Nevada to be operated by an experienced
operator of skilled nursing facilities.
In May 1997, the Core Group acquired a $10.6 million medical office
building located on the campus of an existing regional medical center in North
Miami Beach, Florida. The medical office building is a multi-tenant facility
for which property management and leasing services will be provided by an
experienced real estate management company.
18
<PAGE> 20
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The Core Group has agreed to provide $50 million of real estate
financing to an experienced operator of assisted living facilities.
Approximately $29 million has been specifically identified for the construction
of five properties located in four states which will be leased to the operator
upon completion.
19
<PAGE> 21
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and
results of operations of the Core Group which should be read in conjunction
with (a) the combined financial statements and accompanying notes of the Core
Group and (b) management's discussion and analysis of financial condition and
results of operations and the financial statements and accompanying notes of
the Company and the Psychiatric Group included elsewhere herein.
Factors Regarding Future Results and Forward-Looking Statements
Statements that are not historical facts contained in management's discussion
and analysis of financial condition and results of operations are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ from projected results. Certain factors that
could cause actual results to differ materially include, among others: the
financial success of the operations conducted at the Core Group's facilities
and the financial strength of the operators of such facilities, the continuing
ability of operators to meet their obligations to the Core Group under existing
agreements, changes in operators or ownership of operators, the viability of
alternative uses for the Core Group's properties when necessary, changes in
government policy relating to the health care industry including reductions in
reimbursement levels under the Medicare and Medicaid programs, operators'
continued eligibility to participate in the Medicare or Medicaid programs,
reductions in reimbursement by other third-party payors, lower occupancy levels
at the Core Group's facilities, the strength and financial resources of the
Core Group's competitors, the availability and cost of capital, the Core
Group's ability to make additional real estate investments at attractive yields
and changes in tax laws and regulations affecting real estate investment
trusts. For a further discussion of such factors, see "Management's Discussion
and Analysis of Core Group Combined Financial Condition and Results of
Operations - Future Operating Results" herein.
OPERATING RESULTS
First Quarter 1997 Compared With 1996
For the first quarter of 1997, the Core Group reported a net loss of
($1,497,000) or ($.06) per share compared with net income of $9,319,000 or $.40
per share for the first quarter of 1996. For the first quarter of 1997, the
Core Group reported net income before extraordinary item of $9,930,000 or $.42
per share, an increase of $611,000 or 7% compared with net income before
extraordinary item of $9,319,000 or $.40 per share for the first quarter of
1996. The net loss for the first quarter of 1997 included an extraordinary loss
on debt prepayment of ($11,427,000) or ($.48) per share.
Rental income was $17,229,000 for the first quarter of 1997, an
increase of $512,000 or 3% from $16,717,000 for the first quarter of 1996. This
increase was primarily attributable to rental income from new properties
acquired subsequent to the first quarter of 1996. These property additions also
resulted in an increase in depreciation and amortization of $103,000 or 3% to
$3,642,000 for the first quarter of 1997 compared with $3,539,000 for the first
quarter of 1996.
Other interest income increased $648,000 or 229% to $931,000 for the
first quarter of 1997 from $283,000 for the first quarter of 1996. This
variation was due to higher investable cash balances partially offset by a
lower average balance of direct financing leases. Investable cash balances were
higher due to the temporary investment of a portion of the proceeds of a public
debt offering in late January 1997 until used to
20
<PAGE> 22
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
prepay the Company's private placement debt in late February 1997 after the
prepayment notice period had expired.
Interest income on inter-Group loans to the Psychiatric Group was
$390,000 for the first quarter of 1997, a decrease of $30,000 or 7% from
$420,000 for the first quarter of 1996. This decrease reflects a lower average
balance outstanding on loans to the Psychiatric Group as a result of repayments
by the Psychiatric Group from its available undistributed cash flow.
Interest expense was $6,107,000 for the first quarter of 1997, an
increase of $341,000 or 6% from $5,766,000 for the first quarter of 1996. This
increase was attributable to higher average line of credit and long-term debt
balances during the first quarter of 1997 and higher capitalized interest in
1996 as compared to 1997. In late January 1997, the Company sold $220 million
of publicly-traded unsecured senior notes with a weighted average effective
interest rate of approximately 7.56%. The Company used the proceeds of this
offering to pay off the borrowings under its bank credit agreement and to
prepay $152 million of 11.03% private placement debt in late February 1997
prior to its scheduled maturity, incurring an extraordinary charge in the first
quarter of 1997 of $11,427,000.
General and administrative expenses were $1,596,000 for the first
quarter of 1997, an increase of $91,000 or 6% from $1,505,000 for the first
quarter of 1996. This variation was attributable to an increase in the
Company's consolidated general and administrative expenses which are allocated
between the Core Group and Psychiatric Group primarily based on revenues, and
an increase in Core Group revenues relative to the Company's consolidated
revenues. The increase in the Company's consolidated general and administrative
expenses affecting the Core Group was primarily attributable to higher
compensation and benefits expense.
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A reduction in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States continues to
undergo 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. Various plans to decrease the growth in
Medicare spending have been proposed by both Houses of Congress. These plans
have generally included revisions to and limits on Medicare and federal
programs providing Medicaid reimbursement to state health care programs and
potentially would have an adverse impact on the level of funds available in the
future to health care facilities. 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. At the same time, the
21
<PAGE> 23
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company believes that this changing health care environment will provide the
Core Group with new opportunities for investment.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing to aggressively enforce compliance with program
requirements and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health care
services that are reimbursed under the Medicare and Medicaid programs continues
to increase as the population ages and as states expand their Medicaid
programs. Continued eligibility to participate in these programs is crucial to
a provider's financial strength. As a result of the foregoing, the revenues and
margins may decrease at the Core Group's facilities.
Notwithstanding the potential for increasing government regulation,
the Company believes that health care will continue to be delivered on a local
and regional basis and that well-managed, high-quality, cost-controlled
facilities will continue to be an integral part of local and regional 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 likely will 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 or regional health care delivery
systems or are in the process of becoming integrated into such systems.
The Core Group's future operating results could be affected by the
operating performance of the Core Group's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Core
Group's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios. In addition, financial effects arising from the
Psychiatric Group that affect the Company's consolidated results of operations,
financial condition or borrowing costs may also affect the results of
operations, financial condition or borrowing costs of the Core Group.
Accordingly, the Core Group's financial statements should be read in
conjunction with the financial statements of the Psychiatric Group and the
Company's consolidated financial statements.
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
also will be affected by the availability and terms of the Company's future
equity and debt financing. The Company's financing strategy to facilitate
future growth includes objectives to reduce its cost of capital over time and
enhance its liquidity and financial flexibility.
22
<PAGE> 24
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Core Group had $4,149,000 outstanding under
its revolving inter-Group loan to the Psychiatric Group. Under management
policies currently in effect, the Core Group may provide the Psychiatric Group
with revolving inter-Group loans of up to $8,050,000. In addition, as of March
31, 1997, the Core Group had $9,175,000 in fixed rate inter-Group loans to the
Psychiatric Group.
As of May 7, 1997, the Core Group had remaining commitments of $18.5
million to fund real estate projects currently under construction over
approximately the next fifteen months. In addition, the Core Group had agreed
to provide real estate financing to two different operators aggregating
approximately $63.8 million. Of this amount, approximately $29 million has been
committed to five assisted living projects to be constructed over the next
fifteen months and $4.4 million has been committed to the financing of an
existing long-term acute care hospital within the next two months. The
remaining $30.4 million of financing has not been committed to specific
acquisitions or projects.
The Company has continued to increase its liquidity and enhance its
financial flexibility. In January 1997, the Company completed a $220 million
public unsecured debt offering, issuing $100 million of five-year senior notes
and $120 million of ten-year senior notes. The Company used the net proceeds to
pay off all outstanding borrowings under its $150 million bank facility at the
time and to prepay all of its $152 million of outstanding private placement
debt in late February 1997. As of May 7, 1997, the Company had no outstanding
borrowings under its revolving credit facility and had $2.4 million in cash and
short-term investments. The Company's total indebtedness as of May 7, 1997 was
$225.7 million. The Company will utilize its revolving credit facility to fund
its future Core Group acquisitions and its other commitments. The Company may
incur additional indebtedness or refinance existing indebtedness if the Company
determines that opportunities to pursue such transactions would be attractive.
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.
23
<PAGE> 25
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
- ------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
ASSETS (Unaudited)
Real estate investments
Real property and mortgage notes, net $ 49,677 $ 62,749
Accumulated depreciation (1,177) (4,688)
----------- -----------
48,500 58,061
Other notes receivable 2,692 4,457
Other assets 693 743
- ------------------------------------------------------------------- ----------- -----------
$ 51,885 $ 63,261
=================================================================== =========== ===========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving loan from Core Group $ 4,149 $ 4,183
Fixed rate loan from Core Group 9,175 9,175
Dividends payable 1,563 1,667
Deferred income 34 273
- ------------------------------------------------------------------- ----------- -----------
14,921 15,298
- ------------------------------------------------------------------- ----------- -----------
Commitments and contingencies
Total Attributed Psychiatric Group Equity 36,964 47,963
- ------------------------------------------------------------------- ----------- -----------
$ 51,885 $ 63,261
=================================================================== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 26
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1997 1996
- --------------------------------------------- ----------- -----------
<S> <C> <C>
REVENUES
Rental income $ 581 $ 581
Mortgage interest income 1,517 1,493
Additional rental and interest income 204 182
Other interest income 99 99
- --------------------------------------------- ----------- -----------
2,401 2,355
- --------------------------------------------- ----------- -----------
EXPENSES
Depreciation and amortization 186 186
Interest on loans from Core Group 390 420
General and administrative 295 317
Impairment loss on real estate
investments and other notes receivable 11,000 --
- --------------------------------------------- ----------- -----------
11,871 923
- --------------------------------------------- ----------- -----------
NET INCOME (LOSS) $ (9,470) $ 1,432
============================================= =========== ===========
NET INCOME (LOSS) PER DEPOSITARY SHARE $ (4.52) $ 0.68
============================================= =========== ===========
DIVIDENDS DECLARED PER DEPOSITARY SHARE $ 0.7500 $ 0.7000
============================================= =========== ===========
WEIGHTED AVERAGE
DEPOSITARY SHARES OUTSTANDING 2,096 2,091
============================================= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 27
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-=------------------------
1997 1996
- ------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (9,470) $ 1,432
Depreciation, amortization and other non-cash items 220 218
Deferred income (13) (14)
Impairment loss on real estate
investments and other notes receivable 11,000 --
Change in other assets 47 (145)
Change in accounts payable and accrued liabilities (141) (61)
- ------------------------------------------------------------------- ----------- -----------
1,643 1,430
- ------------------------------------------------------------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on mortgage notes receivable 17 15
Other notes receivable 41 50
- ------------------------------------------------------------------- ----------- -----------
58 65
- ------------------------------------------------------------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on revolving loan from Core Group (34) 173
Dividends paid (1,667) (1,668)
- ------------------------------------------------------------------- ----------- -----------
(1,701) (1,495)
- ------------------------------------------------------------------- ----------- -----------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS -- --
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD -- --
- ------------------------------------------------------------------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ -- $ --
=================================================================== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 28
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living and Alzheimer's care
facilities and medical office buildings.
The Company has two distinct classes of publicly-traded shares
outstanding. The Company's common stock (the Core Group Common Stock) is
intended to reflect the separate financial performance of the Company's
investments in acute care, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and medical
office buildings (the Core Group). The Psychiatric Group Depositary Shares are
intended to reflect the separate financial performance of the Company's
investments in psychiatric hospitals (the Psychiatric Group). The capital
structure of the Company as reflected by its two classes of shares does not
affect the legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock or Psychiatric Group
Depositary Shares is a holder of an issue of capital stock of the entire
Company and is subject to the risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Basis of Presentation The combined condensed financial statements of
the Psychiatric Group included herein have been prepared by the Company without
audit and include all normal, recurring adjustments which are, in the opinion
of management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with those
included in the Company's annual report on Form 10-K for the year ended
December 31, 1996.
The financial statements of the Psychiatric Group include the
financial position, results of operations and cash flows of the Company's
psychiatric hospital investments, an allocated portion of the Company's general
and administrative expense, an attributed amount of inter-Group debt payable to
the Core Group and an attributed amount of the Company's stockholders' equity.
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. Furthermore, such attribution does not
affect the rights of creditors of the Company or any subsidiary, including
rights under financing covenants.
Each holder of Psychiatric Group Depositary Shares or Core Group
Common Stock is a holder of an issue of capital stock of the entire Company and
is subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition, cash flows or borrowing costs may also affect the results of
operations, financial condition, cash flows or borrowing costs of the other
Group. In addition, net losses of either Group, as well as dividends and
distributions on, and repurchases of,
27
<PAGE> 29
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Psychiatric Group Depositary Shares or Core Group Common Stock will reduce the
funds of the Company legally available for dividends on both the Psychiatric
Group Depositary Shares and Core Group Common Stock. Accordingly, the
Psychiatric Group's financial statements should be read in conjunction with the
Company's consolidated financial statements and the financial statements of the
Core Group.
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standard In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share." SFAS No. 128 is intended to simplify the computation
of earnings per share (EPS) and to make the U.S. standard for computing EPS
more compatible with the EPS standards of other countries and with that of the
International Accounting Standards Committee. The effective date for the
application of SFAS No. 128 for both interim and annual periods is after
December 15, 1997. Earlier application is not permitted. Management does not
expect the application of SFAS No. 128 to have a material impact on the
Psychiatric Group's EPS calculation.
Interest Paid Interest paid by the Psychiatric Group on inter-Group
loans from the Core Group was $390,000 and $420,000 for the three months ended
March 31, 1997 and 1996, respectively.
2. DEBT
Inter-Group Loans Repayment of inter-Group loans by the Psychiatric
Group is primarily dependent upon the amount and timing of sales of the
Psychiatric Group's assets and paydowns received by the Psychiatric Group on
borrowings provided to a psychiatric hospital operator under a revolving credit
agreement. The Company's board of directors has established certain management
policies relating to the Psychiatric Group's inter-Group loans from the Core
Group. Under the policies currently in effect, which may be modified or
rescinded in the sole discretion of the Company's board of directors, the
aggregate revolving inter-Group loans owed by the Psychiatric Group to the Core
Group are limited to a maximum of $8,050,000 at any one time outstanding, which
limit is to be reduced dollar-for-dollar with any permanent repayment in the
future of borrowings under a revolving credit agreement provided to a
Psychiatric Group hospital operator. In addition, the limit on the aggregate
revolving inter-Group loans will not be reduced below $5,000,000, and except
for such revolving inter-Group loans, no additional fixed rate or other
inter-Group loans will be advanced to the Psychiatric Group by the Core Group.
28
<PAGE> 30
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS
Other Notes Receivable The Psychiatric Group provides financing at
variable rates to a psychiatric hospital operator under a revolving credit
agreement. The commitment under this credit agreement was $2.7 million at March
31, 1997 of which $.2 million was unfunded.
Real Estate Properties The Psychiatric Group has the right to approve
capital expenditures at all of its properties and the option to fund certain
capital expenditures on terms comparable to the original investment. The base
and additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Psychiatric Group's increased
investment. The Psychiatric Group had no commitments to fund such capital
expenditures at March 31, 1997.
4. STATUS OF PSYCHIATRIC GROUP INVESTMENTS
At the beginning of 1996, the owner of the Florida facilities,
Northpointe Behavioral Health System (Northpointe) and The Retreat, retained
the Intensive Resource Division of Quorum Health Resources, Inc. (Quorum), a
subsidiary of Quorum Health Group, Inc., to operate both hospitals on a
contract basis. The owner had previously become aware of and was monitoring
potential wide-ranging objections by several large insurance companies with
respect to claims presented for services rendered. Additionally, there had been
negative stories in the national media and the local press in Florida on
psychiatric care provided in Florida, including criticism of admissions
policies and practice patterns at psychiatric hospitals in the state generally,
and at these two hospitals. Legislative hearings had been held in Florida on
these issues, and various regulatory investigations likely had been conducted
or initiated. The hospitals were also experiencing operational and cash flow
difficulties which negatively impacted their ability to fund their rental and
interest obligations to the Psychiatric Group as they became due.
During 1996, the Psychiatric Group modified its agreements with the
owner to allow for the deferral of rent and interest payments of Northpointe
while certain restructuring and restaffing of the facility occurred. Pursuant
to the deferral arrangements, Northpointe's monthly base rent payments of
$50,000 were deferred from February 1996 through September 1996 and such
deferred payments were scheduled to become payable twelve months from the month
of deferral. In accordance with the terms of the deferral arrangements,
Northpointe resumed making its full monthly base rent payments of $50,000 on
October 1, 1996. In addition, Northpointe's monthly interest payments of
$16,600 were deferred from February 1996 until March 1, 1997 on which date all
such deferred interest was scheduled to be paid in full. Northpointe's deferred
obligations are not recognized as income by the Psychiatric Group until such
time as they are paid.
In late 1996, the owner of Northpointe and The Retreat was named,
together with other operators of other psychiatric facilities in Florida, in a
lawsuit filed by several large insurance companies alleging widespread
irregularities with respect to operations in years prior to 1995. Adverse
publicity from the lawsuit appears to have materially exacerbated the
operational and financial difficulties of Northpointe and The Retreat. Such
operational and financial difficulties significantly worsened during the first
quarter of 1997.
The census at Northpointe in 1997 has been falling significantly below
the levels projected by the owner at the end of 1996 and has now reached a
level which makes it appear unlikely that the current operator of the facility
can
29
<PAGE> 31
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
continue operations at the facility. Although Northpointe had made its monthly
base rent payments of $50,000 during the fourth quarter of 1996 and for January
1997, it has been unable to pay its subsequent monthly base rent and interest
obligations or its deferred base rent and interest obligations. The owner and
the Psychiatric Group have been exploring a range of options including the
transfer of the hospital to a new operator, closing the facility, conversion of
the facility to an alternative use or sale of the property. As a result of this
review, the Psychiatric Group recorded a $5,100,000 impairment loss in the first
quarter of 1997, including a $1,675,000 reserve against the entire unpaid
balance under a revolving credit agreement provided to Northpointe and a
reduction in the carrying value of its net real estate investment in Northpointe
of $3,425,000 to its estimated fair value of $2,000,000. The estimated fair
value of its investment was determined primarily based upon the discounting of
estimated future cash flows and fundamental analysis. Base rent paid by
Northpointe in the first quarter of 1997 represented $.02 per depositary share.
The Retreat made all of its rent and interest payments to the
Psychiatric Group in 1996. Adverse publicity from the aforementioned lawsuit
also began having a negative impact on The Retreat during the first quarter of
1997. The facility has been experiencing a deterioration of its cash flow and a
decline in census during 1997. Although The Retreat made its base rent and
interest payments in 1997 through April, The Retreat made its February 1997 base
rent payment of $92,000 from lease reserve funds and has not yet paid its
additional rent for the first quarter of 1997 of approximately $45,000 or its
base rent payment for May 1997 of $92,000. The volatile circumstances at The
Retreat and deterioration in cash flows and census levels are likely to preclude
the current operator of The Retreat from continuing operations at the facility.
The owner and the Psychiatric Group have been exploring a range of options
including the transfer of the hospital to a new operator, closing the facility,
conversion of the facility to an alternative use or sale of the property. As a
result of this review, the Psychiatric Group recorded a $5,900,000 impairment
loss in the first quarter of 1997, including a $49,000 reserve against the
entire unpaid balance under a revolving credit agreement provided to The Retreat
and a reduction in the carrying value of its net real estate investment in The
Retreat of $5,851,000 to its estimated fair value of $3,400,000. The estimated
fair value of its investment was determined primarily based upon the discounting
of estimated future cash flows and fundamental analysis. Base rent paid by The
Retreat in the first quarter of 1997 represented $.13 per depositary share.
In the first quarter of 1996, Rock Creek Center (RCC) in Illinois
experienced certain documentation and procedural deficiencies that resulted in
the denial of a substantial amount of Medicare receivables and a substantial
negative adjustment to the hospital's 1995 Medicare cost report and 1996
interim Medicare reimbursement rate. These payor reimbursement issues, combined
with lower than expected census during the first quarter of 1996, had an
adverse impact on RCC's cash flow and its ability to fund its rental and
interest obligations to the Psychiatric Group in 1996 as they became due. The
net book value of the Psychiatric Group's investment in RCC, including advances
under existing revolving credit agreements and other receivables, as of March
31, 1997 totaled $7,906,000. Quarterly base rent and interest obligations of
RCC total approximately $324,000 ($.15 per depositary share). In 1996, the
Psychiatric Group advanced $214,000 on behalf of the operator to pay property
taxes on the facility, and reached an agreement with the operator for the
deferral of base rent payments while the operator took certain actions to
stabilize operations and implemented its revised business plan. Pursuant to the
deferral arrangements, 100% of RCC's monthly base rent payments of $83,000 were
deferred for May and June of 1996 and 50% of such monthly payments were
deferred from July 1996 through October 1996, at which time monthly base rent
payments returned to 100%. Deferred base rent is payable in the future only
when the facility's cash exceeds a specified level, and the property tax
advance is payable in monthly installments. RCC's deferred rent obligations are
not recognized as income by the Psychiatric Group until such time as they are
paid. RCC has made all of its monthly rent and interest payments in 1997
through May and the Psychiatric Group's property tax advance has been reduced
by monthly payments to $78,000 as of March 31, 1997. Although the deferral
arrangements provided interim financial relief while the operator implemented
its strategy, there can be no assurance that the deferred amounts will be paid
or that RCC will not require additional financial relief in the future.
The current term of the RCC lease expires in December 1997. The lease
agreement provides the operator with an option to renew the lease for an
additional five-year term at fair market rental. Although the
30
<PAGE> 32
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Psychiatric Group believes that the lease will be renewed, there can be no
assurance that the lease will be renewed or that, if renewed, the annual
minimum rent payments will remain at the current level of $1,000,000.
Furthermore, the $2,500,000 balance outstanding under RCC's revolving credit
agreement matures June 30, 1997. The Psychiatric Group believes that it will
extend the term of the revolving credit agreement to correspond with the
expiration of RCC's current lease term and will negotiate further extensions in
connection with renewal of the lease. Should the lease not be renewed or the
revolving loan not be repaid or extended, a significant negative impact to the
Psychiatric Group could result.
The two New York Four Winds facilities are working to develop an
integrated behavioral health care delivery system in lower and upper New York
state. Although such a system is intended to address the potential negative
consequences of the expected changes in Medicaid reimbursement and the increase
in managed care penetration in the state of New York, it is not possible to
predict the impact and timing of such changes and whether the proposed system
will be successful in that new environment.
Although management currently believes that the recorded investments in
the psychiatric hospitals are realizable, if the psychiatric operators are
unable to successfully adapt to the fundamental ongoing changes in the
psychiatric industry and consistently mitigate the negative impact of such
changes on their financial performance, the Psychiatric Group may be required to
further restructure payment obligations, identify alternative operators, pursue
alternative uses for or disposition of the properties and/or make additional
write-downs of the value of its investments in the psychiatric hospitals. If the
Psychiatric Group is required to take any of there actions, various costs may be
incurred by the Psychiatric Group in an effort to protect and maintain its
investments. The Psychiatric Group does not intend to make new investments, and
over time, may sell, restructure or seek other means to reduce its investments.
The Company retains an investment banking firm to provide financial advisory
services to the Psychiatric Group. These services include supplemental
monitoring of the performance of individual assets, assistance in potential
sales or restructurings of particular investments and continuing assessments of
available strategic alternatives for the portfolio. The cost of the financial
advisory services are specifically charged to the operating results of the
Psychiatric Group.
The Psychiatric Group's dividend is determined quarterly based upon
each quarter's operating results. The level of dividends of the Psychiatric
Group in the past year have varied quarter-to-quarter. Any significant advance
of additional funds to operators of the Psychiatric Group's properties,
modification of terms covering the rental or interest obligations of its
properties or nonpayment or deferral of such obligations as they become due
likely will have an adverse impact on the Psychiatric Group results of
operations and cash flows, as well as the quarterly dividend payment on
Psychiatric Group Depositary Shares. In light of the uncertainty surrounding
the ultimate financial outcome of the two Florida investments, it is likely
that future quarterly dividends will be adjusted downward to reflect an expected
loss of some or all of the income from those investments.
31
<PAGE> 33
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and
results of operations of the Psychiatric Group which should be read in
conjunction with (a) the combined financial statements and accompanying notes
of the Psychiatric Group and (b) management's discussion and analysis of
financial condition and results of operations and the financial statements and
accompanying notes of the Company and the Core Group included elsewhere herein.
Factors Regarding Future Results and Forward-Looking Statements
Statements that are not historical facts contained in management's discussion
and analysis of financial condition and results of operations are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ from projected results. Certain factors that
could cause actual results to differ materially include, among others: the
financial success of the operations conducted at the Psychiatric Group's
facilities and the financial strength of the operators of such facilities, the
continuing ability of operators to meet their obligations to the Psychiatric
Group under existing or restructured agreements, changes in operators or
ownership of operators, the viability of alternative uses for the Psychiatric
Group's properties when necessary, changes in government policy relating to the
health care industry including reductions in reimbursement levels under the
Medicare and Medicaid programs, operators' continued eligibility to participate
in the Medicare or Medicaid programs, reductions in reimbursement by other
third-party payors, lower occupancy levels at the Psychiatric Group's
facilities, the availability and cost of capital and changes in tax laws and
regulations affecting real estate investment trusts. For a further discussion
of such factors, see "Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations - Future Operating
Results" herein.
OPERATING RESULTS
First Quarter 1997 Compared With 1996
For the first quarter of 1997, the Psychiatric Group reported a net
loss of ($9,470,000) or ($4.52) per depositary share compared with net income
of $1,432,000 or $.68 per depositary share for the first quarter of 1996. The
net loss for the first quarter of 1997 included an impairment loss on real
estate investments and other notes receivable of ($11,000,000) or ($5.25) per
depositary share.
Interest expense on inter-Group loans from the Core Group was $390,000
for the first quarter of 1996, a decrease of $30,000 or 7% from $420,000 for
the first quarter of 1996. This decrease reflects a lower average balance
outstanding on loans from the Core Group as a result of repayments by the
Psychiatric Group from its available undistributed cash flow.
General and administrative expenses were $295,000 for the first
quarter of 1997, a decrease of $22,000 or 7% from $317,000 for the first
quarter of 1996. The Company's consolidated general and administrative expenses
are allocated between the Core Group and Psychiatric Group primarily based on
revenues, however significant costs directly related to either Group are
specifically charged to the applicable Group. The Psychiatric Group was
specifically charged for $116,000 of costs in the first quarter of 1997
compared with $140,000 in the first quarter of 1996 for financial advisory
services. These services were provided primarily by an investment banking firm
for supplemental monitoring of the performance of the Psychiatric Group's
properties and assistance in addressing operational and cash flow difficulties
of certain operators of the properties.
32
<PAGE> 34
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A reduction in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States continues to
undergo 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. Various plans to decrease the growth in
Medicare spending have been proposed by both Houses of Congress. These plans
have generally included revisions to and limits on Medicare and federal
programs providing Medicaid reimbursement to state health care programs and
potentially would have an adverse impact on the level of funds available in the
future to health care facilities. 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.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing to aggressively enforce compliance with program
requirements and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health care
services that are reimbursed under the Medicare and Medicaid programs continues
to increase as the population ages and as states expand their Medicaid
programs. Continued eligibility to participate in these programs is crucial to
a provider's financial strength. As a result of the foregoing, the revenues and
margins may decrease at the Psychiatric Group's facilities.
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Psychiatric Group's
properties. Institutions responsible for the reimbursement of care provided 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
33
<PAGE> 35
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
services. The wider use of psychotropic drugs also has resulted in significant
declines in the average length of stay. In addition, aggressive program
compliance enforcement and increased scrutiny of past and current billing
practices has resulted in the filing of lawsuits against some providers and
significant negative publicity which has further exacerbated the financial and
operational difficulties of providers. Although the operators of the
psychiatric hospitals are responding by increasing case management, developing
lower cost outpatient and daypatient programs and reducing operating costs,
their efforts are generally not consistently mitigating the negative impact of
these fundamental psychiatric industry changes. As a result, certain of the
Psychiatric Group hospital operators have not met their contractual payment
obligations to the Psychiatric Group as scheduled and there can be no assurance
that Psychiatric Group operators will be able to meet such payment obligations
in the future.
In general, the operators of the Psychiatric Group's properties have
very limited access to financing for their operating and capital needs. The
Psychiatric Group currently is providing such financing under a revolving credit
agreement to the operator of one of its psychiatric properties. As of May 7,
1997, outstanding borrowings under such agreement totaled $2,500,000, and the
Psychiatric Group has committed to fund an additional $200,000 of borrowings
upon request, subject to certain conditions. In the past, the Psychiatric Group
has provided similar financing to other operators of its properties which have
been unable to pay off their outstanding borrowings. There can be no assurance
that the operator currently borrowing under a revolving credit agreement will be
able to secure replacement financing from third-party lenders or to pay off its
outstanding borrowings when they become due. To the extent the operators of the
Psychiatric Group's properties 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 operator,
it may cause the Core Group to make revolving inter-Group loans to the
Psychiatric Group to fund such financing (to the extent consistent with its
then-existing policies), although the Company's Board of Directors is under no
obligation to do so.
At the beginning of 1996, the owner of the Florida facilities,
Northpointe Behavioral Health System (Northpointe) and The Retreat, retained
the Intensive Resource Division of Quorum Health Resources, Inc. (Quorum), a
subsidiary of Quorum Health Group, Inc., to operate both hospitals on a
contract basis. The owner had previously become aware of and was monitoring
potential wide-ranging objections by several large insurance companies with
respect to claims presented for services rendered. Additionally, there had been
negative stories in the national media and the local press in Florida on
psychiatric care provided in Florida, including criticism of admissions
policies and practice patterns at psychiatric hospitals in the state generally,
and at these two hospitals. Legislative hearings had been held in Florida on
these issues, and various regulatory investigations likely had been conducted
or initiated. The hospitals were also experiencing operational and cash flow
difficulties which negatively impacted their ability to fund their rental and
interest obligations to the Psychiatric Group as they became due.
During 1996, the Psychiatric Group modified its agreements with the
owner to allow for the deferral of rent and interest payments of Northpointe
while certain restructuring and restaffing of the facility occurred. Pursuant
to the deferral arrangements, Northpointe's monthly base rent payments of
$50,000 were deferred from February 1996 through September 1996 and such
deferred payments were scheduled to become payable twelve months from the month
of deferral. In accordance with the terms of the deferral arrangements,
34
<PAGE> 36
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northpointe resumed making its full monthly base rent payments of $50,000 on
October 1, 1996. In addition, Northpointe's monthly interest payments of
$16,600 were deferred from February 1996 until March 1, 1997 on which date all
such deferred interest was scheduled to be paid in full. Northpointe's deferred
obligations are not recognized as income by the Psychiatric Group until such
time as they are paid.
In late 1996, the owner of Northpointe and The Retreat was named,
together with other operators of other psychiatric facilities in Florida, in a
lawsuit filed by several large insurance companies alleging widespread
irregularities with respect to operations in years prior to 1995. Adverse
publicity from the lawsuit appears to have materially exacerbated the
operational and financial difficulties of Northpointe and The Retreat. Such
operational and financial difficulties significantly worsened during the first
quarter of 1997.
The census at Northpointe in 1997 has been falling significantly below
the levels projected by the owner at the end of 1996 and has now reached a level
which makes it appear unlikely that the current operator of the facility can
continue operations at the facility. Although Northpointe had made its monthly
base rent payments of $50,000 during the fourth quarter of 1996 and for January
1997, it has been unable to pay its subsequent monthly base rent and interest
obligations or its deferred base rent and interest obligations. The owner and
the Psychiatric Group have been exploring a range of options including the
transfer of the hospital to a new operator, closing the facility, conversion of
the facility to an alternative use or sale of the property. As a result of this
review, the Psychiatric Group recorded a $5,100,000 impairment loss in the first
quarter of 1997, including a $1,675,000 reserve against the entire unpaid
balance under a revolving credit agreement provided to Northpointe and a
reduction in the carrying value of its net real estate investment in Northpointe
of $3,425,000 to its estimated fair value of $2,000,000. Base rent paid by
Northpointe in the first quarter of 1997 represented $.02 per depositary share.
The Retreat made all of its rent and interest payments to the
Psychiatric Group in 1996. Adverse publicity from the aforementioned lawsuit
also began having a negative impact on The Retreat during the first quarter of
1997. The facility has been experiencing a deterioration of its cash flow and a
decline in census during 1997. Although The Retreat made its base rent and
interest payments in 1997 through April, The Retreat made its February 1997 base
rent payment of $92,000 from lease reserve funds and has not yet paid its
additional rent for the first quarter of 1997 of approximately $45,000 or its
base rent payment for May 1997 of $92,000. The volatile circumstances at The
Retreat and deterioration in cash flows and census levels are likely to preclude
the current operator of The Retreat from continuing operations at the facility.
The owner and the Psychiatric Group have been exploring a range of options
including the transfer of the hospital to a new operator, closing the facility,
conversion of the facility to an alternative use or sale of the property. As a
result of this review, the Psychiatric Group recorded a $5,900,000 impairment
loss in the first quarter of 1997, including a $49,000 reserve against the
entire unpaid balance under a revolving credit agreement provided to The Retreat
and a reduction in the carrying value of its net real estate investment in The
Retreat of $5,851,000 to its estimated fair value of $3,400,000. Base rent paid
by The Retreat in the first quarter of 1997 represented $.13 per depositary
share.
In the first quarter of 1996, Rock Creek Center (RCC) in Illinois
experienced certain documentation and procedural deficiencies that resulted in
the denial of a substantial amount of Medicare receivables and a substantial
negative adjustment to the hospital's 1995 Medicare cost report and 1996 interim
Medicare reimbursement rate. These payor reimbursement issues, combined with
lower than expected census during the first quarter of 1996, had an adverse
impact on RCC's cash flow and its ability to fund its rental and interest
obligations to the Psychiatric Group in 1996 as they became due. The net book
value of the Psychiatric Group's investment in RCC, including advances under
existing revolving credit agreements and other receivables, as of March 31, 1997
totaled $7,906,000. Quarterly base rent and interest obligations of RCC total
approximately $324,000 ($.15 per depositary share). In 1996, the Psychiatric
Group advanced $214,000 on behalf of the operator to pay property taxes on the
facility, and reached an agreement with the operator for the deferral of base
rent payments while the operator took certain actions to stabilize operations
and implemented its revised business plan. Pursuant to the deferral
arrangements, 100% of RCC's monthly base rent payments of $83,000 were deferred
for May and June of 1996
35
<PAGE> 37
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and 50% of such monthly payments were deferred from July 1996 through October
1996, at which time monthly base rent payments returned to 100%. Deferred base
rent is payable in the future only when the facility's cash exceeds a specified
level, and the property tax advance is payable in monthly installments. RCC's
deferred rent obligations are not recognized as income by the Psychiatric Group
until such time as they are paid. RCC has made all of its monthly rent and
interest payments in 1997 through May and the Psychiatric Group's property tax
advance has been reduced by monthly payments to $78,000 as of March 31, 1997.
Although the deferral arrangements provided interim financial relief while the
operator implemented its strategy, there can be no assurance that the deferred
amounts will be paid or that RCC will not require additional financial relief
in the future.
The current term of the RCC lease expires in December 1997. The lease
agreement provides the operator with an option to renew the lease for an
additional five-year term at fair market rental. Although the Psychiatric Group
believes that the lease will be renewed, there can be no assurance that the
lease will be renewed or that, if renewed, the annual minimum rent payments
will remain at the current level of $1,000,000. Furthermore, the $2,500,000
balance outstanding under RCC's revolving credit agreement matures June 30,
1997. The Psychiatric Group believes that it will extend the term of the
revolving credit agreement to correspond with the expiration of RCC's current
lease term and will negotiate further extensions in connection with renewal of
the lease. Should the lease not be renewed or the revolving loan not be repaid
or extended, a significant negative impact to the Psychiatric Group could
result.
The two New York Four Winds facilities are working to develop an
integrated behavioral health care delivery system in lower and upper New York
state. Although such a system is intended to address the potential negative
consequences of the expected changes in Medicaid reimbursement and the increase
in managed care penetration in the state of New York, it is not possible to
predict the impact and timing of such changes and whether the proposed system
will be successful in that new environment.
Although management currently believes that the recorded investments in
the psychiatric hospitals are realizable, if the psychiatric operators are
unable to successfully adapt to the fundamental ongoing changes in the
psychiatric industry and consistently mitigate the negative impact of such
changes on their financial performance, the Psychiatric Group may be required to
further restructure payment obligations, identify alternative operators, pursue
alternative uses for or dispositions of the properties and/or make additional
write-downs of the value of its investments in the psychiatric hospitals. If the
Psychiatric Group is required to take any of these actions, various costs may be
incurred by the Psychiatric Group in an effort to protect and maintain its
investments. The Psychiatric Group does not intend to make new investments, and
over time, may sell, restructure or seek other means to reduce its investments.
The Company retains an investment banking firm to provide financial advisory
services to the Psychiatric Group. These services include supplemental
monitoring of the performance of individual assets, assistance in potential
sales or restructurings of particular investments and continuing assessments of
available strategic alternatives for the portfolio. The cost of the financial
advisory services are specifically charged to the operating results of the
Psychiatric Group.
The Psychiatric Group's dividend is determined quarterly based upon
each quarter's operating results. The level of dividends of the Psychiatric
Group in the past year have varied quarter-to-quarter. Any significant advance
of additional funds to operators of the Psychiatric Group's properties,
modification of terms covering the rental or interest obligations of its
properties or nonpayment or deferral of such obligations as they become due
likely will have an adverse impact on the Psychiatric Group results of
operations and cash flows, as well as the quarterly dividend payment on
Psychiatric Group Depositary Shares. The quarterly dividend on Psychiatric
Group Depositary Shares was decreased to $.75 per share in the first quarter of
1997 compared to $.80 per share in the fourth quarter of 1996. In light of the
uncertainty surrounding the ultimate financial outcome of the
36
<PAGE> 38
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
two Florida investments, it is likely that future quarterly dividends will be
adjusted downward to reflect an expected loss of some or all of the income from
those investments.
LIQUIDITY AND CAPITAL RESOURCES
As of May 7, 1997, the Psychiatric Group had an unfunded commitment
under a revolving credit agreement provided to a psychiatric hospital operator
of $.2 million.
At March 31, 1997, the Psychiatric Group had $4,149,000 and $9,175,000
outstanding under its revolving inter-Group loan from the Core Group and its
fixed rate inter-Group loan from the Core Group, respectively. The Psychiatric
Group is required to use the net proceeds from the disposition of Psychiatric
Group assets to pay down its outstanding revolving inter-Group loan (to the
extent of the psychiatric hospital operator borrowings under revolving credit
agreements associated with the asset or assets sold) with any excess used to
pay down the balance outstanding under the fixed rate inter-Group loan. The
Company's Board of Directors has established certain management policies
relating to the Psychiatric Group's inter-Group loans from the Core Group.
Under the policies currently in effect, which may be modified or rescinded in
the sole discretion of the Company's Board of Directors, the aggregate
revolving inter-Group loans owed by the Psychiatric Group to the Core Group are
limited to a maximum of $8,050,000 at any one time outstanding, which limit is
to be reduced dollar-for-dollar with any permanent repayment in the future of
borrowings under a revolving credit agreement provided to a Psychiatric Group
hospital operator. In addition, the limit on the aggregate revolving
inter-Group loans will not be reduced below $5,000,000, and except for such
revolving inter-Group loans, no additional fixed rate or other inter-Group
loans will be advanced to the Psychiatric Group by the Core Group. The
Psychiatric Group has no third-party sources of additional financing and, as a
result, is dependent on the Core Group for all such financing. Although the
Core Group may make this financing available, there is no obligation of the
Company's Board of Directors to cause the Core Group to provide funds to the
Psychiatric Group if the Board of Directors determines that it is in the
Company's best interest not to do so. To the extent needed funds are not
advanced by the Core Group, the Psychiatric Group would experience immediate,
significant negative effects.
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.
Future dividend payments will be determined quarterly and will be primarily
dependent upon the financial performance of the Psychiatric Group. The
Psychiatric Group expects to distribute a substantial portion of its funds from
operations and net proceeds from asset dispositions, after payments of
inter-Group loan obligations, to holders of Psychiatric Group Depositary
Shares. In general, the Psychiatric Group will not retain any significant
amount of its cash flow, and as discussed above, its sources of financing and
liquidity will be limited.
37
<PAGE> 39
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment to Credit Agreement dated as of January 15, 1997
27 Financial Data Schedule
(b) Reports on Form 8-K
On January 8, 1997, the Company filed a Current Report on Form 8-K that
contained as exhibits Executive Employment Agreements for Joseph P.
Sullivan, Michael J. McGee and C. Gregory Schonert and a consent of
Arthur Andersen LLP, the Company's independent public accountants.
On January 16, 1997, the Company filed a Current Report on Form 8-K that
contained as exhibits an Executive Employment Agreement for Thomas T.
Schleck and the First Amendment to the Company's Credit Agreement.
On January 21, 1997, the Company filed a Current Report on Form 8-K that
contained as exhibits the Underwriting Agreement, Pricing Agreements and
Indenture for the Company's $220 million public debt offering of
unsecured senior notes payable and a consent of Arthur Andersen LLP, the
Company's independent public accountants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 1997
AMERICAN HEALTH PROPERTIES, INC.
By: JOSEPH P. SULLIVAN
-------------------------------------
Joseph P. Sullivan
Chairman of the Board, President &
Chief Executive Officer
(Principal Executive Officer)
By: MICHAEL J. McGEE
-------------------------------------
Michael J. McGee
Senior Vice President & Chief
Financial Officer
(Principal Financial and Accounting
Officer)
38
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 Second Amendment to Credit Agreement dated as of January 15, 1997
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated as of January 15, 1997
by and among American Health Properties, Inc. (together with its successors and
assigns, the "Company"), the banks listed on the signature pages hereto (the
"Lenders") and Wells Fargo Bank, N.A., as agent for the Lenders (in such
capacity, together with its successors in such capacity, the "Agent".
W I T N E S S E T H:
WHEREAS, the Company, the Lenders, Banque Paribas, as Co-Agent, First
Union National Bank of North Carolina, as Co-Agent, NationsBank of Texas, N.A.,
as Co-Agent and Wells Fargo Bank, N.A., as Agent, as arranger of the facilities
provided (in such capacity, the "Arranger"), and as the issuer of the Letters
of Credit (in such capacity, together with its successors in such capacity, the
"Facing Bank") entered into that certain Credit Agreement dated as of December
27, 1995 (as amended to date, the "Credit Agreement"), pursuant to which the
Lenders agreed to make available to the Company certain financial
accommodations; and
WHEREAS, the Company intends to issue and sell $100,000,000 of its
7.05% Notes due January 15, 2002 and $120,000,000 of its 7.50% Notes due
January 15, 2007 (collectively, the "1997 Senior Notes") pursuant to the terms
of that certain Indenture dated as of January 15, 1997 by and between the
Company and The Bank of New York (the "Indenture") and that certain Officer's
Certificate with respect to the 1997 Senior Notes dated as of January 15, 1997
executed by the Company (the "Officer's Certificate");
WHEREAS, following the application of proceeds of the 1997 Senior
Notes to all amounts due and payable under the Credit Agreement as provided in
Section 2.11(e)(i) thereof, the Company intends to prepay the Senior Notes to
the extent of the remaining net proceeds of the 1997 Senior Notes(the
"Prepayment"; the issuance of the 1997 Senior Notes together with the
prepayment are collectively referred to as the "Proposed Transaction");
WHEREAS, the Company has requested the parties hereto to amend certain
covenants in connection with the Proposed Transaction.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged by the parties, the parties
hereto agree as follows:
<PAGE> 2
Section 1. Amendment to Credit Agreement.
(a) Addition of Definition. The Credit Agreement is hereby
amended by including in Section 1.1. the following definition in the
appropriate alphabetic order:
"'1997 Senior Notes' shall mean, collectively, each of (a)
$100,000,000 of the Company's 7.05% Notes due January 15, 2002 and (b)
$120,000,000 of the Company's 7.50% Notes due January 15, 2007."
(b) Amendment of Definition. The Credit Agreement is hereby
further amended by adding the following proviso at the end of subsection (ii)
of the definition of "Restricted Payment" in Section 1.1.:
"provided, however, that the prepayment of the Senior Notes with the
proceeds of the 1997 Senior Notes shall not be considered a
'Restricted Payment' hereunder"
(c) Amendment of Section 8.1. The Credit Agreement is hereby
further amended by inserting the phrase "or the 1997 Senior Notes" following
the phrase "the Senior Notes" in the second line of Section 8.1.(m).
(d) Amendment of Section 9.11. The Credit Agreement is hereby
further amended by adding the following proviso at the end of Section 9.11:
"provided, however, that the Company may prepay the Senior Notes with
the proceeds of the 1997 Senior Notes and terminate the agreements
evidencing such Senior Notes."
(g) Amendment of Section 9.14. The Credit Agreement is hereby
further amended by adding the following at the end of Section 9.14.:
"and the Company may prepay the Senior Notes with the proceeds of the
1997 Senior Notes."
Section 2. Consent and Agreement. Upon the Amendment Effective Date,
the Required Lenders hereby consent to the Proposed Transaction. The parties
hereto further agree that for purposes of complying with Section 9.3 of the
Credit Agreement, the covenants and events of default contained in the
Indenture and the Officer's Certificate setting forth the terms of the 1997
Senior Notes are not materially less favorable to the Company than those set
forth in the Credit Agreement or those agreements listed on Schedule 7.12 of
the Credit Agreement.
Section 3. Conditions Precedent to Effectiveness of Amendment. This
Amendment shall be effective as of the date first written above (the "Amendment
Effective Date") after and subject to the conditions precedent that the Agent
has received each of
2
<PAGE> 3
the following, each to be in form and substance specified below or otherwise
satisfactory to the Agent:
(a) This Amendment duly executed by the Company, the Agent and the
Required Lenders;
(b) A Reaffirmation of Guaranty from the Guarantors (other than
AHP of New Orleans, Inc.), in substantially the form of Exhibit A attached
hereto (the "Reaffirmation");
(c) An opinion letter from Davis, Graham & Stubbs LLP, counsel to
the Company, in substantially the form of Exhibit B attached hereto;
(d) A Certificate of the Assistant Secretary of the Company
stating that the Company's articles of incorporation and bylaws, copies of
which were delivered in connection with the closing of the Credit Agreement,
remain in full force and effect and have not been amended or repealed;
(e) Certified copies (certified by the Assistant Secretary of the
Company) of all corporate action taken by the Company to authorize the
execution and delivery of this Amendment and the performance of the Credit
Agreement, as amended by this Amendment;
(f) Certificates of incumbency and specimen signatures with
respect to each of the officers of the Company who are authorized to execute
and deliver this Amendment;
(g) A certificate evidencing the good standing of the Company
issued as of a recent date by the Secretary of State of the State of Delaware;
(h) A certificate executed by the chief executive officer and
chief financial officer of the Company, stating that: (a) on such date, and
after giving effect to the transaction contemplated hereby, no Unmatured
Default or Event of Default has occurred and is continuing; (b) no material
adverse change in the financial condition or operations of the business of the
Company or any of its Subsidiaries or the projected cash flow of the Company
and its Subsidiaries has occurred; and (c) the representations and warranties
set forth in Sections 4 and 5 of the Amendment are true and correct in all
material respects on and as of such date with the same effect as though made on
and as of such date.
(i) A fully-executed copy of the the Indenture and the Officer's
Certificate, each with terms and conditions acceptable to the Agent and the
Required Lenders;
(j) Such other documents, agreements, opinions or evidences as the
Agent may reasonably request.
Section 4. Reaffirmation. The Company hereby reaffirms all
representations and warranties made by the Company in the Credit Agreement on
and as of the date hereof
3
<PAGE> 4
with the same force and effect as if such representations and warranties were
set forth in this Amendment in full, except that the Company makes no
representations or warranties with respect to AHP of New Orleans, Inc. which
has been dissolved.
Section 5. Representations. The Company further represents that:
(a) Authorization. The Company has the right and power, and has
taken all necessary action to authorize it, to execute and deliver this
Amendment and to perform the Credit Agreement, all as amended by this
Amendment, in accordance with their respective terms. This Amendment has been
duly executed and delivered by the duly authorized officers of the Company, and
each of this Amendment and the Credit Agreement, as amended by this Amendment,
is a legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
generally the enforcement of creditors' rights.
(b) Compliance of Credit Documents with Laws, etc. The execution
and delivery of this Amendment, and the performance of the Credit Agreement, as
amended by this Amendment, in accordance with their respective terms and the
borrowings thereunder do not and will not, by the passage of time, the giving
of notice or otherwise: (i) require any approval from any Governmental Agency
or violate any applicable law relating to the Company; (ii) conflict with,
result in a breach of or constitute a default under the certificate of
incorporation or bylaws of the Company, or any indenture, agreement or other
instrument to which the Company is a party or by which it or any of its
properties may be bound; or (iii) result in or require the creation or
imposition of any Lien upon or with respect to any property now owned or
hereafter acquired by the Company other than in favor of the Agent for the
benefit of the Lenders.
(c) No Default. No Unmatured Default or Event of Defaults exists
as of the date hereof and, after giving effect to this Amendment, no Unmatured
Default or Event of Default will occur or exist.
Section 6. References to the Credit Agreement and the Other Credit
Documents. Upon the occurrence of the Amendment Effective Date, each reference
to the Credit Agreement and any of the Credit Documents shall be deemed to be a
reference to the Credit Agreement as amended by this Amendment, and as each may
from time to time be further amended, supplemented, restated or otherwise
modified in the future by one or more other written amendments or supplemental
or modification agreements entered into pursuant to the applicable provisions
of the Credit Agreement. The term "Credit Documents" as defined in the Credit
Agreement shall include the Reaffirmation executed pursuant to Section 3
hereof.
Section 7. Expenses. Pursuant to Section 13.3(a) of the Credit
Agreement, the Company shall reimburse the Agent upon demand for all costs and
expenses (including attorneys' fees) incurred by the Agent in the preparation,
negotiation and execution of this
4
<PAGE> 5
Amendment and the other agreements and documents executed and delivered in
connection herewith.
Section 8. Benefits. This Amendment shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.
SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE
(WHETHER OF THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE
THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF
CALIFORNIA. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA SHALL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AMENDMENT,
EVEN THOUGH UNDER THAT JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW
ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY
APPLY.
Section 10. Effect. Except as expressly herein amended, the terms
and conditions of the Credit Agreement and the other Credit Documents shall
remain in full force and effect.
Section 11. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be deemed to be an original and
shall be binding upon all parties, their successors and assigns when a
counterpart hereof has been executed by the Company, the Agent and the Required
Lenders.
Section 12. Definitions. All terms defined in the Credit Agreement
which are used herein shall have the meanings defined in the Credit Agreement,
unless specifically defined otherwise herein. The Credit Agreement shall be
further amended by incorporating all terms defined in this Amendment.
Section 13. No Novation. The parties do not intend that the
amendment to the Credit Agreement effected hereby constitutes a novation of the
indebtedness incurred under, and evidenced by, the Credit Agreement and the
other Credit Documents.
[Signatures begin on following page]
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to Credit Agreement to be executed by their duly authorized officers
as of the date first above written.
AMERICAN HEALTH PROPERTIES, INC.
By:
------------------------------------------
Michael J. McGee
Senior Vice President and
Chief Financial Officer
WELLS FARGO BANK, N.A., as Agent and Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
BANQUE PARIBAS, as Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
NATIONSBANK OF TEXAS, N.A., as Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
[Signatures continued on following page]
6
<PAGE> 7
[Continuation of signatures to the Second Amendment to Credit Agreement]
BHF-BANK AKTIENGESELLSCHAFT, as Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
BANQUE NATIONALE DE PARIS, as Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
COLORADO NATIONAL BANK, as Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
FLEET NATIONAL BANK, as Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
[Signatures continued on following page]
7
<PAGE> 8
[Continuation of signatures to the Second Amendment to Credit Agreement]
KLEINWORT BENSON LIMITED, as Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
AMSOUTH BANK OF ALABAMA, as Lender
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
8
<PAGE> 9
EXHIBIT A
FORM OF REAFFIRMATION OF GUARANTY
THIS REAFFIRMATION OF GUARANTY dated as of January 15, 1997, executed
and delivered by each of AMIREIT (Frye), Inc., a North Carolina corporation,
AMIREIT (Kendall), Inc., a Florida corporation, AMIREIT Lucy Lee, Inc., a
Missouri corporation, AMIREIT (North Fulton), Inc., a Georgia corporation,
AMIREIT (Palm Beach Gardens), Inc., a Florida corporation, AHE of California,
Inc., a California corporation, AHE of Irvine, Inc., a California corporation,
American Health Properties of Arizona, Inc., an Arizona corporation, AHP of
Colorado, Inc., a Colorado corporation, AHP of Fayetteville, Inc., an Arkansas
corporation, AHP of Illinois, Inc., an Illinois corporation, AHP of Kansas,
Inc., a Kansas corporation, AHP of South Carolina, Inc., a South Carolina
corporation, AHP of Sunrise, Inc., a Florida corporation, AHP of Tarpon
Springs, Inc., a Florida corporation, AHP of Texas, Inc., a Texas corporation,
AHP of Washington, Inc., a Washington corporation, AHP of West Virginia, Inc.,
a West Virginia corporation, and AHP of Utah, Inc., a Utah corporation,
together with the Subsidiaries of the Company that may from time to time become
a party hereto (each a "Guarantor", and, collectively, the "Guarantors") in
favor of Wells Fargo Bank, N.A., in its capacity as agent (the "Agent"), and in
its capacity as the Facing Bank (the "Facing Bank"), in favor of Banque
Paribas, in its capacity as Co-Agent ("Banque Paribas"), in favor of First
Union National Bank of North Carolina in its capacity as Co-Agent ("First
Union"), in favor of NationsBank of Texas, N.A., in its capacity as Co-Agent
("NationsBank") and in favor of each Lender (present and future) under the
Credit Agreement (as hereinafter defined) (the Lenders, NationsBank, First
Union, Banque Paribas, the Facing Bank and the Agent being collectively
referred to herein as the "Guaranteed Parties").
WHEREAS, the Lenders, Banque Paribas, as Co-Agent, First Union
National Bank of North Carolina, as Co-Agent, NationsBank of Texas, N.A., as
Co-Agent, Wells Fargo Bank, N.A., as Arranger, Agent and Facing Bank and
American Health Properties, Inc. (the "Company") entered into that certain
Credit Agreement dated as of December 27, 1995 (as the same may be amended,
modified, supplemented, or extended from time to time, the "Credit Agreement");
WHEREAS, in connection with the Credit Agreement, the Guarantors
executed and delivered a Guaranty dated as of December 27, 1995 (the
"Guaranty") in favor of the Guaranteed Parties, providing for the undersigned's
guaranty of repayment of certain indebtedness and obligations of the Company
owing to the Guaranteed Parties;
WHEREAS, the Company and the Lender have entered into that certain
Second Amendment to Credit Agreement dated as of the date hereof (the
"Amendment"), to amend certain covenants and for other purposes;
WHEREAS, each Guarantor has reviewed the Amendment;
A-1
<PAGE> 10
WHEREAS, its is a condition precedent to the effectiveness of the
Amendment that the Guarantors execute and deliver this Reaffirmation of
Guaranty;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which each Guarantor hereby acknowledges, each Guarantor hereby
agrees as follows:
Section 1. Reaffirmation. Each Guarantor hereby reaffirms its
continuing obligations to the Guaranteed Parties under the Guaranty and agrees
that neither the transactions contemplated by the Amendment, nor any future
agreements or arrangements whatsoever by the Guaranteed Parties with the
Company relating to the Credit Agreement, any of the other Credit Documents, or
any collateral thereunder, shall in any way affect the validity and
enforceability of the Guaranty or reduce, impair or discharge the obligations
of such Guarantor thereunder.
Section 2. References. Each Guarantor agrees that each reference to
the Credit Agreement or any of the other Credit Documents in any of the Credit
Documents shall be deemed to be a reference to the Credit Agreement or such
other Credit Document as amended by the Amendment, and as each may from time to
time be further amended, supplemented, restated or otherwise modified in the
future by one or more other written amendments or supplemental or modification
agreements entered into pursuant to the applicable provisions of the respective
Credit Document.
Section 3. Defined Terms. Terms not otherwise defined herein are
used herein as defined in the Credit Agreement.
[Signatures on following page]
A-2
<PAGE> 11
IN WITNESS WHEREOF, this Reaffirmation of Guaranty is signed, sealed
and delivered as of the date first written above.
AMIREIT (FRYE), INC.
AMIREIT (KENDALL), INC.
AMIREIT LUCY LEE, INC.
AMIREIT (NORTH FULTON ), INC.
AMIREIT (PALM BEACH GARDENS), INC.
AHE OF CALIFORNIA, INC.
AHE OF IRVINE, INC.
AMERICAN HEALTH PROPERTIES OF
ARIZONA, INC.
AHP OF COLORADO, INC.
AHP OF FAYETTEVILLE, INC.
AHP OF ILLINOIS, INC.
AHP OF KANSAS, INC.
AHP OF SOUTH CAROLINA, INC.
AHP OF SUNRISE, INC.
AHP OF TARPON SPRINGS, INC.
AHP OF TEXAS, INC.
AHP OF WASHINGTON, INC.
AHP OF WEST VIRGINIA, INC.
AHP OF UTAH, INC.
By:
---------------------------------
Michael J. McGee
Vice President
A-3
<PAGE> 12
EXHIBIT B
FORM OF OPINION OF COUNSEL
[Letterhead of Company's Counsel]
January 15, 1997
Wells Fargo Bank, N.A.
as Arranger, Agent and Facing Bank
420 Montgomery Street
San Francisco, California 94163
and
The financial institutions that have or may
become Lenders under the Credit
Agreement described below
RE: Second Amendment to Credit Agreement dated as of January 15,
1997, among American Health Properties, Inc., the financial
institutions that are signatories thereto and Wells Fargo
Bank, N.A., as Agent (the) "Amendment")
Ladies and Gentlemen:
We have acted as counsel to American Health Properties, Inc., a
Delaware corporation (the "Company"); AMIREIT (Frye), Inc., a North Carolina
corporation ("Frye"); AMIREIT (Kendall), Inc., a Florida corporation
("Kendall"); AMIREIT Lucy Lee, Inc., a Missouri corporation ("Lucy Lee");
AMIREIT (North Fulton), Inc., a Georgia corporation ("North Fulton"); AMIREIT
(Palm Beach Gardens), Inc., a Florida corporation (Palm Beach Gardens"); AHE of
California, Inc., a California corporation ("California"); AHE of Irvine, Inc.,
a California corporation ("Irvine"); American Health Properties of Arizona,
Inc., an Arizona corporation ("Arizona"); AHP of Colorado, Inc., a Colorado
corporation ("Colorado"), AHP of Fayetteville, an Arkansas corporation
('Fayetteville"); AHP of Illinois, Inc., an Illinois corporation ("Illinois");
AHP of Kansas, Inc., a Kansas corporation ("Kansas"); AHP of South Carolina,
Inc., a South Carolina corporation ("South Carolina"), AHP of Sunrise, Inc., a
Florida corporation ("Sunrise"); AHP of Tarpon Springs, Inc., a Florida
corporation ("Tarpon Springs"); AHP of Texas, Inc., a Texas corporation
("Texas"); AHP of Washington, Inc., a Washington corporation ("Washington"),
AHP of West Virginia, Inc., a West Virginia corporation ("West Virginia"); and
AHP of Utah, Inc., a Utah corporation ("Utah") (Frye, Kendall, Lucy Lee, North
Fulton, Palm Beach Gardens, California, Irvine, Arizona, Colorado,
Fayetteville,
B-1
<PAGE> 13
Illinois, Kansas, South Carolina, Sunrise, Tarpon Springs, Texas, Washington,
West Virginia and Utah are herein collectively referred to as the "Guarantors"
and the Guarantors and the Company are herein collectively referred to as the
"Credit Parties") in connection with the preparation, negotiation and delivery
of the above-captioned Amendment. This opinion is being delivered to you
pursuant to Section 3 of the Amendment.
In these capacities we have reviewed the following:
(a) the Credit Agreement;
(b) the Amendment;
(c) the Indenture;
(d) the Subsidiary Guaranty; and
(e) the Reaffirmation.
Items (b), (c) and (d) above are sometimes referred to herein as the "Amendment
Documents". Capitalized terms used in this opinion which are defined in the
Amendment have the meaning specified therein, unless otherwise defined herein.
In addition to the foregoing, we have reviewed the articles of
incorporation and bylaws of each of the Credit Parties and certain resolutions
of the boards of directors of each of the Credit Parties (collectively, the
"Organizational Documents"). We have examined originals or copies, certified
or otherwise identified to our satisfaction, of such documents, corporate
records, and other instruments, and made such other investigations of law and
fact, as we have deemed necessary or advisable for the purposes of rendering
this opinion. In our examination of documents, we assumed the genuineness of
all signatures on documents presented to us as originals (other than signatures
on behalf of the Credit Parties) and the conformity to originals of documents
presented to us as conformed or reproduced copies.
Based on the foregoing, and subject to the assumptions and
qualifications set forth below, we are of the opinion that:
1. Each of the Credit Parties (i) is an existing corporation and
in good standing under the laws of its jurisdiction of incorporation and (ii)
has the corporate power to execute, deliver and perform the Amendment Documents
to which it is a party, to own and use its assets, and to conduct its business
as presently conducted and as proposed to be conducted immediately following
the consummation of the transactions contemplated by the Amendment.
B-2
<PAGE> 14
2. Each of the Credit Parties has duly authorized the execution
and delivery of the Amendment Documents to which it is a party and all
performance by it thereunder. Each of the Credit Parties has duly executed and
delivered such Amendment Documents.
3. The execution, delivery and performance by each Credit Party
of each of the Reaffirmation, the Amendment, and the Credit Agreement as
amended by the Amendment to which it is a party (i) require no action or
consent by or in respect of, or filing with, any governmental body, agency or
official of the State of Colorado or of the federal government of the United
States and (ii) do not contravene, or constitute a default under, any provision
of applicable Colorado or United States federal law or regulation or of the
Organizational Documents or Material Contracts of such Credit Party, or, to the
best of our knowledge of any judgment, injunction, order, decree or other
instrument binding on such Credit Party or result in the creation or imposition
of any Lien on any asset of any Credit Party.
4. If the Amendment Documents and the Credit Documents were
governed by the laws of the State of Colorado, each of the Reaffirmation, the
Amendment and the Credit Agreement as amended by the Amendment would constitute
the legal, valid and binding obligation of each Credit Party a party thereto,
enforceable against such Credit Party in accordance with its terms.
5. In a properly presented and argued case, a Colorado state
court or a federal court sitting in Colorado as the forum state, applying
Colorado conflict of laws principles should enforce the choice of law
provisions in the Amendment Documents and the Credit Agreement as amended by
the Amendment.
6. Since December 27, 1995, the date of our prior legal opinion
rendered to the Agent and the Lenders in connection with the Credit Agreement,
no facts or circumstances concerning the Company have come to the attention of
attorneys in this firm who provide services to the Company, which would cause
us to believe that our opinion in Paragraph 10 of such prior opinion concerning
the real estate investment trust status of the Company under the Internal
Revenue Code of 1986, as amended (a) was inaccurate, or (b) would not be
accurate through the date of this opinion.
7. To the best of our knowledge, there does not exist any
litigation or governmental proceedings, pending or threatened against any of
the Credit Parties which purport to affect the legality, validity, binding
effect or enforceability of any of the Amendment Documents or Credit Documents
or which are likely to have a material adverse effect upon the financial
condition or operations of the Company or its Subsidiaries.
This opinion is subject to the following assumptions and
qualifications:
B-3
<PAGE> 15
(i) To the extent matters of fact are involved in the opinions set
forth above, we have, with your permission, relied upon
certificates of public officials or of officers of the
Company, copies of which are attached hereto.
(ii) The opinions rendered in Paragraph 4 above relating to the
enforceability of the Amendment Documents are subject to and
limited by the following: (i) applicable bankruptcy,
insolvency, reorganization, moratorium, or other similar laws
now or hereafter affecting the enforcement of creditors'
rights and generally and (ii) general equitable principles,
including (without limitation) concepts of materiality,
reasonableness, good faith and fair dealing (regardless of
whether the issue of enforceability is considered in a
proceeding in equity or at law) and (iii) public policies
which may affect the enforceability of certain remedies or
rights provided for in the Amendment Documents.
(iii) The opinions with respect to enforceability of the agreements
referred to herein and as to no conflict or breach of any
federal or Colorado statute are subject to fraudulent
conveyance laws.
The opinions set forth above are limited to the effect of the laws of
the State of Colorado, the federal laws of the United States of America and the
general corporation law of the State of Delaware. We express no opinion with
respect to the laws of any other jurisdiction.
This opinion is furnished to the Agent, the Facing Bank, the Co-Agents
and the Lenders. This opinion may not be relied on by any other person other
than the Arranger, the Agent, the Facing Bank, the Co-Agents, the Lenders, and
Alston & Bird, counsel to the Arranger, the Agent and the Facing Bank.
Sincerely yours,
--------------------------------------
B-4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,338
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> (90,241)
<TOTAL-ASSETS> 570,547
<CURRENT-LIABILITIES> 0
<BONDS> 225,642
0
2
<COMMON> 235
<OTHER-SE> 320,429
<TOTAL-LIABILITY-AND-EQUITY> 570,547
<SALES> 0
<TOTAL-REVENUES> 23,333
<CGS> 0
<TOTAL-COSTS> 3,828
<OTHER-EXPENSES> 11,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,107
<INCOME-PRETAX> 460
<INCOME-TAX> 0
<INCOME-CONTINUING> 460
<DISCONTINUED> 0
<EXTRAORDINARY> (11,427)
<CHANGES> 0
<NET-INCOME> (10,967)
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Primary and fully diluted earnings per share attributable to:
Core Group Common Stock:
Net Income Before Extraordinary Item $ 0.42
Extraordinary Loss on Debt Prepayment $(0.48)
Net Loss $(0.06)
Psychiatric Group Depositary Shares:
Net Loss $(4.52)
</FN>
</TABLE>
