<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
<TABLE>
<S> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
</TABLE>
American Health Properties, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4084878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6400 SOUTH FIDDLER'S GREEN CIRCLE 80111
SUITE 1800 (Zip Code)
ENGLEWOOD, CO
(Address of principal executive offices)
</TABLE>
(303) 796-9793
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____
SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE,
OUTSTANDING AT NOVEMBER 7, 1997 -- 23,559,054
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 NOVEMBER 7, 1997 -- 2,083,931.
================================================================================
<PAGE> 2
AMERICAN HEALTH PROPERTIES, INC.
SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
CONSOLIDATED COMPANY
Item 1. Consolidated Condensed Financial Statements:
Balance sheets as of September 30, 1997 and December 31, 1996...................................... 2
Statements of operations for the three and nine months ended September 30, 1997 and 1996........... 3
Statements of cash flows for the nine months ended September 30, 1997 and 1996..................... 4
Notes to financial statements...................................................................... 5
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations...................................................... 10
CORE GROUP
Item 1. Core Group Combined Condensed Financial Statements:
Balance sheets as of September 30, 1997 and December 31, 1996...................................... 16
Statements of operations for the three and nine months ended September 30, 1997 and 1996........... 17
Statements of cash flows for the nine months ended September 30, 1997 and 1996..................... 18
Notes to financial statements...................................................................... 19
Item 2. Management's Discussion and Analysis of Core Group
Combined Financial Condition and Results of Operations............................................. 23
PSYCHIATRIC GROUP
Item 1. Psychiatric Group Combined Condensed Financial Statements:
Balance sheets as of September 30, 1997 and December 31, 1996...................................... 28
Statements of operations for the three and nine months ended September 30, 1997 and 1996........... 29
Statements of cash flows for the nine months ended September 30, 1997 and 1996..................... 30
Notes to financial statements...................................................................... 31
Item 2. Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations............................................. 37
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................... 44
</TABLE>
1
<PAGE> 3
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
- ------------------------------------------------------------ --------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Real estate investments
Real property and mortgage notes, net $ 649,608 $ 644,380
Construction in progress 8,100 4,834
Accumulated depreciation (97,985) (90,139)
--------- ---------
559,723 559,075
Other notes receivable and direct financing leases 5,866 8,152
Other assets 12,652 9,175
Cash and short-term investments 1,352 1,480
- ------------------------------------------------------------ --------- ---------
$ 579,593 $ 577,882
- ------------------------------------------------------------ --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable $ 8,500 $ 48,500
Notes and bonds payable 225,807 158,601
Accounts payable and accrued liabilities 7,180 7,385
Dividends payable 13,660 13,981
Deferred income 3,595 4,276
- ------------------------------------------------------------ --------- ---------
258,742 232,743
- ------------------------------------------------------------ --------- ---------
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;
23,559 and 23,455 shares issued and outstanding 236 235
Additional paid-in capital 485,365 482,083
Cumulative net income 270,324 256,691
Cumulative dividends (435,076) (393,872)
- ------------------------------------------------------------ --------- ---------
320,851 345,139
- ------------------------------------------------------------ --------- ---------
$ 579,593 $ 577,882
- ------------------------------------------------------------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1997 1996 1997 1996
- ------------------------------------------- ------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES
Rental income $17,945 $17,315 $ 53,572 $51,693
Mortgage interest income 1,613 1,493 4,661 4,479
Additional rental and interest income 3,124 3,092 9,247 9,103
Other property income 73 -- 107 --
Other interest income 195 238 1,467 911
- ------------------------------------------- ------- ------- -------- -------
22,950 22,138 69,054 66,186
- ------------------------------------------- ------- ------- -------- -------
EXPENSES
Depreciation and amortization 3,910 3,761 11,627 11,204
Property operating 204 11 292 33
Interest expense 4,533 5,285 15,118 16,564
General and administrative 1,987 1,876 5,815 5,645
Impairment loss on real estate
investments and other notes receivable -- -- 11,000 --
- ------------------------------------------- ------- ------- -------- -------
10,634 10,933 43,852 33,446
- ------------------------------------------- ------- ------- -------- -------
Minority interest 48 54 142 169
- ------------------------------------------- ------- ------- -------- -------
NET INCOME BEFORE EXTRAORDINARY ITEM 12,268 11,151 25,060 32,571
EXTRAORDINARY LOSS ON DEBT PREPAYMENT -- -- (11,427) --
- ------------------------------------------- ------- ------- -------- -------
NET INCOME $12,268 $11,151 $ 13,633 $32,571
- ------------------------------------------- ------- ------- -------- -------
ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Net Income Before Extraordinary Item $11,087 $ 9,873 $ 32,146 $28,627
Extraordinary Loss On Debt Prepayment $ -- $ -- $(11,427) $ --
Net Income $11,087 $ 9,873 $ 20,719 $28,627
PER SHARE AMOUNTS:
Net Income Before Extraordinary Item $ 0.47 $ 0.42 $ 1.36 $ 1.22
Extraordinary Loss On Debt Prepayment $ -- $ -- $ (0.48) $ --
Net Income $ 0.47 $ 0.42 $ 0.88 $ 1.22
Dividends Declared $ 0.525 $ 0.505 $ 1.575 $1.5150
Weighted Average Shares Outstanding 23,649 23,522 23,585 23,511
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net Income (Loss) $ 1,181 $ 1,278 $ (7,086) $ 3,944
Net Income (Loss) Per Share $ 0.56 $ 0.61 $ (3.38) $ 1.89
Dividends Declared Per Share $ 0.620 $ 0.650 $ 2.000 $2.0000
Weighted Average Shares Outstanding 2,099 2,093 2,097 2,092
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
- ----------------------------------------------------------- --------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 13,633 $ 32,571
Extraordinary loss on debt prepayment 11,427 --
Depreciation, amortization and other non-cash items 13,601 12,908
Deferred income (174) (283)
Impairment loss on real estate
investments and other notes receivable 11,000 --
Change in other assets (2,270) 802
Change in accounts payable and accrued liabilities (627) (3,333)
- ----------------------------------------------------------- --------- --------
46,590 42,665
- ----------------------------------------------------------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (17,919) (13,041)
Mortgage note receivable fundings (3,683) --
Principal payments on mortgage notes receivable 52 47
Other notes receivable 173 154
Direct financing leases 389 2,329
Administrative capital expenditures (18) (52)
- ----------------------------------------------------------- --------- --------
(21,006) (10,563)
- ----------------------------------------------------------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable (40,000) 51,500
Proceeds from notes payable issuance 218,965 --
Prepayment of notes payable (163,176) --
Principal payments on notes payable -- (49,000)
Financing costs paid (2,152) (80)
Proceeds from exercise of stock options 2,176 241
Dividends paid (41,525) (40,003)
- ----------------------------------------------------------- --------- --------
(25,712) (37,342)
- ----------------------------------------------------------- --------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (128) (5,240)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,480 7,571
- ----------------------------------------------------------- --------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,352 $ 2,331
- ----------------------------------------------------------- --------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living and Alzheimer's care
facilities and medical office buildings.
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 proceeds from the October
1997 sale of the Company's depositary shares (Series B Depositary Shares)
representing its 8.60% Cumulative Redeemable Preferred Stock, Series B (Series
B Preferred Stock), as well as the dividends payable thereon, have been
attributed to the Company's Core Group for financial accounting and reporting
purposes. The Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, rank senior to the Company's Core Group Common Stock and
its Psychiatric Group Depositary Shares with respect to dividend payments and
liquidation rights. Attribution of the components of the Company's capital
structure to its Core Group and Psychiatric Group for financial accounting and
reporting purposes does not affect the legal title to assets or responsibility
for liabilities of the Company, and each holder of Core Group Common Stock,
Series B Depositary Shares 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.
5
<PAGE> 7
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Interest Paid Interest paid by the Company, net of interest
capitalized, was $14,306,000 and $18,736,000 for the nine months ended
September 30, 1997 and 1996, respectively. The Company had $344,000 and
$781,000 of capitalized interest for the nine months ended September 30, 1997
and 1996, respectively.
2. DEBT
All of the Company's third-party debt is attributed to the Core Group
for financial accounting and reporting purposes. 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 facility outstanding at the time. 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
Preferred Equity Offering In October 1997, the Company sold 4,000,000
Series B Depositary Shares at $25 per share representing 40,000 shares of
Series B Preferred Stock. Each Series B Depositary Share represents 1/100 of a
share of Series B Preferred Stock, and entitles the holder to such proportion
of all the rights, preferences and privileges of the Series B Preferred Stock
represented thereby. The Series B Depositary Shares, and the Series B Preferred
Stock represented thereby, rank senior to the Company's Core Group Common
Stock, its Series A Preferred Stock (when and if issued) and its Psychiatric
Group Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, with respect to dividend payments and liquidation rights. The annual
dividend rate and liquidation preference with respect to each Series B
Depositary Share are $2.15 and $25, respectively (equivalent to $215 and $2,500
per share of Series B Preferred Stock, respectively). Dividends on the Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, are
cumulative from the date of original issue and, if and when declared, are
payable quarterly in arrears on the last day of February, May, August and
November of each year (or, if such day is not a business day, the next business
day), commencing on December 1, 1997. On or after October 27, 2002, the Series
B Depositary Shares, and the Series B Preferred Stock represented thereby, may
be redeemed, in whole or in part, at the option of the Company at a redemption
price of $25 per Series B Depositary Share (equivalent to $2,500 per share of
Series B Preferred Stock), plus accrued and unpaid dividends thereon. The
redemption price, other than the portion representing accrued and unpaid
dividends, is payable solely out of proceeds from the sale of other capital
stock of the Company. The proceeds from the sale of the Series B Depositary
Shares, and the Series B Preferred Stock represented thereby, as well as the
dividends payable thereon, have been attributed to the Company's Core Group for
financial accounting and reporting purposes. The net proceeds of approximately
$96.4 million were used to pay off the borrowings under the Company's bank
credit facility outstanding at the time and the remaining proceeds will be used
to fund Core Group investments.
Stock Incentive Plans During the nine months ended September 30, 1997,
options to purchase 194,982 shares of Core Group Common Stock at a weighted
average exercise price of $25.37 per share were issued pursuant to the
Company's stock incentive plans. During the nine months ended September 30,
1997, options to purchase 100,000 shares of Core Group
6
<PAGE> 8
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Common Stock were exercised at a weighted average exercise price of $21.76 per
share resulting in additional equity of $2,176,000. Options to purchase 30,000
shares of Core Group Common Stock at a weighted average exercise price of
$29.10 per share were canceled during the nine months ended September 30, 1997.
Pursuant to an election to receive payment of his annual board fees on a
deferred basis in the form of stock, 4,027 shares of Core Group Common Stock
were issued to a director during the nine months ended September 30, 1997.
Options to purchase 10,000 shares of Psychiatric Group Depositary Shares at a
weighted average exercise price of $24.15 per share were canceled during the
nine months ended September 30, 1997.
4. COMMITMENTS
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
September 30, 1997, the Company had no commitments to fund capital expenditures
pursuant to these rights and obligations.
As of September 30, 1997, the Company had funded $5.4 million of a
$6.2 million commitment to finance the acquisition and renovation of a
long-term acute care facility in Amarillo, Texas to be operated by an
experienced operator. In addition, the Company had funded $3.7 million of a
$4.4 million mortgage loan to this same operator, which is secured by a
long-term acute care facility in Houston, Texas. The Company has also agreed to
provide an additional $9.4 million of real estate financing to this same
operator for other similar facilities.
As of September 30, 1997, the Company had funded $2.7 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.
The Company has agreed to provide $50 million of real estate financing
to an experienced operator of assisted living facilities. Approximately $29
million of this amount has been specifically identified for the construction of
five properties located in four states, with the remaining $21 million
available for future acquisitions or projects that have not yet been identified
and agreed upon. The operator has undergone a change in ownership during the
year and is presently reevaluating which investment opportunities it may
ultimately pursue, which could impact the amount of the Company's financing
commitment that is ultimately used.
The Company has signed letters of intent and is currently negotiating
or has under contract investments in a number of existing medical office
buildings and similar facilities, which, if closed, would aggregate
approximately $130 million of total investment. Although the Company
anticipates closing approximately $100 million of these proposed investments in
the fourth quarter of 1997 and the remainder in the first quarter of 1998, the
Company cannot be assured as to the actual timing of such closings or that the
proposed investments will ultimately be closed.
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, Northpointe
Behavioral Health System (Northpointe) and The Retreat, and during 1996,
provided for the partial deferral of rental and interest obligations related to
one of these
7
<PAGE> 9
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
properties and the partial deferral of rental obligations of its psychiatric
property in Illinois, Rock Creek Center (RCC).
Adverse publicity from a lawsuit filed against the owner of the two
Florida psychiatric hospitals in late 1996 materially exacerbated the
operational and financial difficulties of the facilities during the first
quarter of 1997. After reviewing the significantly worsened operational and
financial problems of the hospitals and various alternatives for the
facilities, the Company recorded an $11 million impairment charge in the first
quarter of 1997 to reduce its total carrying value for these two investments to
their estimated fair value of $5,400,000. The financial and operational
problems at the two Florida psychiatric hospitals continued to worsen during
1997. The owner of the Northpointe hospital ceased operations during the second
quarter of 1997. A restructuring of The Retreat's obligations to the Company
was completed shortly after the end of the third quarter of 1997, pursuant to
which the Company received $105,000 for past base rent, monthly base rent was
reduced to $35,000, additional rent was eliminated until August 2000 and
previous obligations of approximately $500,000 owed to the Company were
consolidated in a note requiring monthly payments of approximately $18,000
commencing January 1998. Although the restructured agreement with The Retreat
is a positive step in stabilizing the cash flow and operations of this
facility, the Company cannot be assured that The Retreat will be able to
continue to meet its restructured obligations or to continue operations, even
if there is a change in the owner or operator of the facility or if the Company
provides additional financial assistance. The Company is continuing to explore
a range of options for each of the two Florida properties, including the
transfer of the hospitals to new operators, conversion of the facilities to an
alternative use or sale of the properties. Due to the complexity and time
involved in evaluating its options, the Company has not yet reached a decision
as to its ultimate course of action. In light of the volatile circumstances of
these two properties, the Company cannot be assured that further write-downs of
these investments will not be required.
The $2,500,000 balance outstanding under RCC's revolving credit
agreement matured June 30, 1997 and the current term of the RCC lease expires
in December 1997. The Company and the operator are currently discussing the
possible extension of the maturity of the revolving credit agreement and the
lease term. Meanwhile, the operator has continued to make interest payments on
the delinquent balance outstanding under the revolving credit agreement.
Although the Company believes that the maturity of the revolving credit
agreement and the lease term will be extended, the Company cannot be assured of
this. Furthermore, if the lease term is extended, the Company cannot be assured
that the annual minimum rent payments will remain at the current level of
$1,000,000. Should the lease not be extended or the revolving loan not be
repaid or extended, a negative impact to the Company likely would result.
The two New York Four Winds facilities have been working to develop an
integrated behavioral health care delivery system in lower and upper New York
state. Such a system has been intended to create a cost-effective response to
the potential negative reimbursement consequences of the expected movement to a
managed Medicaid care environment within New York which is likely to accelerate
during early 1998. However, it is not possible for the Company to predict the
impact of such changes or whether the operator's system will be successful in
such an environment, and some restructuring of the operator's obligations to
the Company may be required for the operator to remain competitive in such an
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 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 are
8
<PAGE> 10
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
likely to be incurred by the Company in an effort to protect, maintain and
pursue alternatives for 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. Historically, the level of dividends of the Psychiatric
Group 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. In addition to the foregoing, future operating results, cash flows and
dividends of the Company's Psychiatric Group will be affected by changes in the
level of additional rent and interest, the amount of additional financial
advisory fees and, to the extent necessary, various costs which might be
incurred in an effort to protect, maintain and pursue alternatives for its
psychiatric investments.
9
<PAGE> 11
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 proceeds from the October
1997 sale of the Company's depositary shares (Series B Depositary Shares)
representing its 8.60% Cumulative Redeemable Preferred Stock, Series B (Series
B Preferred Stock), as well as the dividends payable thereon, have been
attributed to the Company's Core Group for financial accounting and reporting
purposes. The Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, rank senior to the Company's Core Group Common Stock and
its Psychiatric Group Depositary Shares with respect to dividend payments and
liquidation rights. Attribution of the components of the Company's capital
structure to its Core Group and Psychiatric Group for financial accounting and
reporting purposes does not affect the legal title to assets or responsibility
for liabilities of the Company, and each holder of Core Group Common Stock,
Series B Depositary Shares 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
Third Quarter and Year to Date 1997 Compared With 1996
For the third quarter of 1997, the Company reported net income of
$12,268,000 compared with net income of $11,151,000 for the third quarter of
1996. For the nine months ended September 30, 1997, the Company reported net
income of $13,633,000 compared with net income of $32,571,000 for the nine
months ended September 30, 1996. For the nine months ended September 30, 1997,
the Company reported net income before extraordinary item of $25,060,000
compared with net income before extraordinary item of $32,571,000 for the nine
months ended September 30, 1996. Net income for the nine months ended September
30, 1997 included an
10
<PAGE> 12
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Rental income was $17,945,000 for the third quarter of 1997, an
increase of $630,000 or 4% from $17,315,000 for the third quarter of 1996.
Rental income was $53,572,000 for the nine months ended September 30, 1997, an
increase of $1,879,000 or 4% from $51,693,000 for the nine months ended
September 30, 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 $149,000 or 4% to $3,910,000 for the third quarter of 1997
compared with $3,761,000 for the third quarter of 1996 and an increase of
$423,000 or 4% to $11,627,000 for the nine months ended September 30, 1997
compared with $11,204,000 for the same period in 1996.
Additional rental and interest income was $3,124,000 for the third
quarter of 1997, an increase of $32,000 or 1% from $3,092,000 for the third
quarter of 1996. Additional rental and interest income was $9,247,000 for the
nine months ended September 30, 1997, an increase of $144,000 or 2% from
$9,103,000 for the nine months ended September 30, 1996. The majority of this
positive variation was attributable to various properties other than the
Company's six original acute care properties.
Other property income of $73,000 and $107,000 for the third quarter of
1997 and nine months ended September 30, 1997, respectively, represents
property operating expense reimbursements from medical office facility tenants.
Other interest income decreased $43,000 or 18% to $195,000 for the
third quarter of 1997 from $238,000 for the third quarter of 1996. Other
interest income increased $556,000 or 61% to $1,467,000 for the nine months
ended September 30, 1997 from $911,000 for the nine months ended September 30,
1996. The decrease in other interest income for the third quarter was primarily
attributable to a lower average balance of direct financing leases and a lower
average balance of interest-earning borrowings outstanding under revolving
credit facilities provided to psychiatric hospital operators in 1997. The
increase in other interest income for the first nine months of 1997 was
primarily attributable to higher investable cash balances, partially offset by
a lower average balance of direct financing leases and a lower average balance
of interest-earning borrowings outstanding under revolving credit facilities
provided to psychiatric hospital operators in 1997. Investable cash balances
were significantly higher during the first quarter of 1997 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.
Property operating expense was $204,000 for the third quarter of 1997,
an increase of $193,000 from $11,000 for the third quarter of 1996. Property
operating expense was $292,000 for the nine months ended September 30, 1997, an
increase of $259,000 from $33,000 for the comparable period in 1996. This
increase was attributable to operating expenses associated with an investment
in a multi-tenant medical office facility during the second quarter of 1997 and
costs related to the protection and maintenance of a psychiatric property in
Florida after the hospital operator ceased hospital operations during the
second quarter of 1997.
Interest expense was $4,533,000 for the third quarter of 1997, a
decrease of $752,000 or 14% from $5,285,000 for the third quarter of 1996.
Interest expense was $15,118,000 for the nine months ended September 30, 1997,
a decrease of $1,446,000 or 9% from $16,564,000 for the nine months ended
September 30, 1996. The decrease in interest expense during these periods was
primarily attributable to a lower weighted average effective interest rate on
long-term debt during 1997, partially offset by a higher amount of long-term
debt and a lower amount of capitalized interest in 1997. In late January 1997,
the Company sold $220 million of publicly-traded
11
<PAGE> 13
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 facility outstanding at the time 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 $1,987,000 for the third
quarter of 1997, an increase of $111,000 or 6% from $1,876,000 for the third
quarter of 1996. For the first nine months of 1997, general and administrative
expenses were $5,815,000, an increase of $170,000 or 3% from $5,645,000 for the
first nine months of 1996. This variation was primarily attributable to higher
compensation and benefits expense and an increase in travel expense, partially
offset by a reduction in financial advisory and officer hiring costs.
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 and passed by both Houses of Congress.
These plans generally include 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 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.
12
<PAGE> 14
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 the Company cannot be assured 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 November
7, 1997, outstanding borrowings under such agreement totaled $2,500,000. 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, Northpointe
Behavioral Health System (Northpointe) and The Retreat, 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, Rock Creek Center (RCC).
13
<PAGE> 15
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Adverse publicity from a lawsuit filed against the owner of the two
Florida psychiatric hospitals in late 1996 materially exacerbated the
operational and financial difficulties of the facilities during the first
quarter of 1997. After reviewing the significantly worsened operational and
financial problems of the hospitals and various alternatives for the
facilities, the Company recorded an $11 million impairment charge in the first
quarter of 1997 to reduce its total carrying value for these two investments to
their estimated fair value of $5,400,000. The financial and operational
problems at the two Florida psychiatric hospitals continued to worsen during
1997. The owner of the Northpointe hospital ceased operations during the second
quarter of 1997. A restructuring of The Retreat's obligations to the Company
was completed shortly after the end of the third quarter of 1997, pursuant to
which the Company received $105,000 for past base rent, monthly base rent was
reduced to $35,000, additional rent was eliminated until August 2000 and
previous obligations of approximately $500,000 owed to the Company were
consolidated in a note requiring monthly payments of approximately $18,000
commencing January 1998. Although the restructured agreement with The Retreat
is a positive step in stabilizing the cash flow and operations of this
facility, the Company cannot be assured that The Retreat will be able to
continue to meet its restructured obligations or to continue operations, even
if there is a change in the owner or operator of the facility or if the Company
provides additional financial assistance. The Company is continuing to explore
a range of options for each of the two Florida properties, including the
transfer of the hospitals to new operators, conversion of the facilities to an
alternative use or sale of the properties. Due to the complexity and time
involved in evaluating its options, the Company has not yet reached a decision
as to its ultimate course of action. In light of the volatile circumstances of
these two properties, the Company cannot be assured that further write-downs of
these investments will not be required.
The $2,500,000 balance outstanding under RCC's revolving credit
agreement matured June 30, 1997 and the current term of the RCC lease expires
in December 1997. The Company and the operator are currently discussing the
possible extension of the maturity of the revolving credit agreement and the
lease term. Meanwhile, the operator has continued to make interest payments on
the delinquent balance outstanding under the revolving credit agreement.
Although the Company believes that the maturity of the revolving credit
agreement and the lease term will be extended, the Company cannot be assured of
this. Furthermore, if the lease term is extended, the Company cannot be assured
that the annual minimum rent payments will remain at the current level of
$1,000,000. Should the lease not be extended or the revolving loan not be
repaid or extended, a negative impact to the Company likely would result.
The two New York Four Winds facilities have been working to develop an
integrated behavioral health care delivery system in lower and upper New York
state. Such a system has been intended to create a cost-effective response to
the potential negative reimbursement consequences of the expected movement to a
managed Medicaid care environment within New York which is likely to accelerate
during early 1998. However, it is not possible for the Company to predict the
impact of such changes or whether the operator's system will be successful in
such an environment, and some restructuring of the operator's obligations to
the Company may be required for the operator to remain competitive in such an
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 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 are likely
to be incurred by the Company in an effort to protect, maintain and pursue
alternatives for 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.
14
<PAGE> 16
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Historically, the level of dividends of the Psychiatric
Group 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. In addition to the foregoing, future operating results, cash flows and
dividends of the Company's Psychiatric Group will be affected by changes in the
level of additional rent and interest, the amount of additional financial
advisory fees and, to the extent necessary, various costs which might be
incurred in an effort to protect, maintain and pursue alternatives for its
psychiatric investments.
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 November 7, 1997, the Company had remaining commitments of $15.5
million to fund real estate projects currently under construction over
approximately the next fifteen months. In addition, the Company has agreed to
provide real estate financing to two different operators aggregating
approximately $59.4 million for which there are currently no definitive funding
requirements. Of this amount, $50 million has been committed to the assisted
living sector and $9.4 million has been committed to the long-term acute care
sector. The Company also has signed letters of intent and is currently
negotiating or has under contract investments in a number of existing medical
office buildings and similar facilities, which, if closed, would aggregate
approximately $130 million of total investment. Although the Company
anticipates closing approximately $100 million of these proposed investments in
the fourth quarter of 1997 and the remainder in the first quarter of 1998, the
Company cannot be assured as to the actual timing of such closings or that the
proposed investments will ultimately be closed.
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 bank credit facility at the time
and to prepay all of its $152 million of outstanding private placement debt in
late February 1997. In October 1997, the Company completed a $100 million
preferred equity offering and used the net proceeds to pay off all outstanding
borrowings under its bank credit facility at the time and will use the
remaining proceeds to fund Core Group investments. As of November 7, 1997, the
Company had no outstanding borrowings under its revolving $150 million bank
credit facility and had $101.1 million in cash and short-term investments. The
Company's total indebtedness as of November 7, 1997 was $225.8 million. The
Company will utilize its bank 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.
15
<PAGE> 17
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
- ----------------------------------------------------------- ------------- ------------
<S> <C> <C>
ASSETS (Unaudited)
Real estate investments
Real property and mortgage notes, net $ 599,966 $ 581,631
Construction in progress 8,100 4,834
Accumulated depreciation (96,431) (85,451)
--------- ---------
511,635 501,014
Direct financing leases 3,306 3,695
Revolving loan to Psychiatric Group 3,687 4,183
Fixed rate loan to Psychiatric Group 9,175 9,175
Other assets 11,949 8,432
Cash and short-term investments 1,352 1,480
- ----------------------------------------------------------- --------- ---------
$ 541,104 $ 527,979
- ----------------------------------------------------------- --------- ---------
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable $ 8,500 $ 48,500
Notes and bonds payable 225,807 158,601
Accounts payable and accrued liabilities 6,818 7,385
Dividends payable 12,368 12,314
Deferred income 3,570 4,003
- ----------------------------------------------------------- --------- ---------
257,063 230,803
- ----------------------------------------------------------- --------- ---------
Commitments and contingencies
Total Attributed Core Group Equity 284,041 297,176
- ----------------------------------------------------------- --------- ---------
$ 541,104 $ 527,979
- ----------------------------------------------------------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 18
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1997 1996 1997 1996
- ---------------------------------------- ------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES
Rental income $17,590 $16,911 $ 52,294 $50,343
Mortgage interest income 97 -- 112 --
Additional rental income 2,939 2,882 8,691 8,491
Other property income 73 -- 107 --
Other interest income 113 126 1,201 605
Interest on loans to Psychiatric Group 392 425 1,176 1,272
- ---------------------------------------- ------- ------- -------- -------
21,204 20,344 63,581 60,711
- ---------------------------------------- ------- ------- -------- -------
EXPENSES
Depreciation and amortization 3,722 3,575 11,065 10,646
Property operating 129 11 192 33
Interest expense 4,533 5,285 15,118 16,564
General and administrative 1,685 1,546 4,918 4,672
- ---------------------------------------- ------- ------- -------- -------
10,069 10,417 31,293 31,915
- ---------------------------------------- ------- ------- -------- -------
Minority interest 48 54 142 169
- ---------------------------------------- ------- ------- -------- -------
NET INCOME BEFORE EXTRAORDINARY ITEM 11,087 9,873 32,146 28,627
EXTRAORDINARY LOSS ON DEBT PREPAYMENT -- -- (11,427) --
- ---------------------------------------- ------- ------- -------- -------
NET INCOME $11,087 $ 9,873 $ 20,719 $28,627
- ---------------------------------------- ------- ------- -------- -------
PER COMMON SHARE AMOUNTS:
- -------------------------
NET INCOME BEFORE EXTRAORDINARY ITEM $ 0.47 $ 0.42 $ 1.36 $ 1.22
EXTRAORDINARY LOSS ON DEBT PREPAYMENT $ -- $ -- $ (0.48) $ --
- ---------------------------------------- ------- ------- -------- -------
NET INCOME $ 0.47 $ 0.42 $ 0.88 $ 1.22
- ---------------------------------------- ------- ------- -------- -------
DIVIDENDS DECLARED $ 0.525 $ 0.505 $ 1.575 $1.5150
- ---------------------------------------- ------- ------- -------- -------
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 23,649 23,522 23,585 23,511
- ---------------------------------------- ------- ------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 19
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
- ----------------------------------------------------------- --------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,719 $ 28,627
Extraordinary loss on debt prepayment 11,427 --
Depreciation, amortization and other non-cash items 12,937 12,255
Deferred income (152) (243)
Change in other assets (2,307) 800
Change in accounts payable and accrued liabilities (848) (3,187)
- ----------------------------------------------------------- --------- --------
41,776 38,252
- ----------------------------------------------------------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (17,919) (13,041)
Mortgage note receivable fundings (3,683) --
Direct financing leases 389 2,329
Paydowns (fundings) on revolving loan to Psychiatric Group 496 132
Administrative capital expenditures (18) (52)
- ----------------------------------------------------------- --------- --------
(20,735) (10,632)
- ----------------------------------------------------------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable (40,000) 51,500
Proceeds from notes payable issuance 218,965 --
Prepayment of notes payable (163,176) --
Principal payments on notes payable -- (49,000)
Financing costs paid (2,152) (80)
Proceeds from exercise of stock options 2,176 241
Dividends paid (36,982) (35,521)
- ----------------------------------------------------------- --------- --------
(21,169) (32,860)
- ----------------------------------------------------------- --------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (128) (5,240)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,480 7,571
- ----------------------------------------------------------- --------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,352 $ 2,331
- ----------------------------------------------------------- --------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 20
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'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 proceeds from the October
1997 sale of the Company's depositary shares (Series B Depositary Shares)
representing its 8.60% Cumulative Redeemable Preferred Stock, Series B (Series
B Preferred Stock), as well as the dividends payable thereon, have been
attributed to the Company's Core Group for financial accounting and reporting
purposes. The Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, rank senior to the Company's Core Group Common Stock and
its Psychiatric Group Depositary Shares with respect to dividend payments and
liquidation rights. Attribution of the components of the Company's capital
structure to its Core Group and Psychiatric Group for financial accounting and
reporting purposes does not affect the legal title to assets or responsibility
for liabilities of the Company, and each holder of Core Group Common Stock,
Series B Depositary Shares 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.
19
<PAGE> 21
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Each holder of Core Group Common Stock, Series B Depositary Shares or
Psychiatric Group Depositary Shares is a holder of an issue of capital stock of
the entire Company and is subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. Financial effects
arising from one Group that affect the Company's consolidated results of
operations, financial condition, 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, Core Group Common Stock,
Series B Depositary Shares or Psychiatric Group Depositary Shares will reduce
the funds of the Company legally available for dividends on all the Core Group
Common Stock, Series B Depositary Shares 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 $14,306,000 and $18,736,000 for the nine months ended
September 30, 1997 and 1996, respectively. The Core Group had $344,000 and
$781,000 of capitalized interest for the nine months ended September 30, 1997
and 1996, respectively.
2. DEBT
All of the Company's third-party debt is attributed to the Core Group
for financial accounting and reporting purposes. 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 facility outstanding at the time. 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.
20
<PAGE> 22
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. ATTRIBUTED EQUITY
Preferred Equity Offering In October 1997, the Company sold 4,000,000
Series B Depositary Shares at $25 per share representing 40,000 shares of
Series B Preferred Stock. Each Series B Depositary Share represents 1/100 of a
share of Series B Preferred Stock, and entitles the holder to such proportion
of all the rights, preferences and privileges of the Series B Preferred Stock
represented thereby. The Series B Depositary Shares, and the Series B Preferred
Stock represented thereby, rank senior to the Company's Core Group Common
Stock, its Series A Preferred Stock (when and if issued) and its Psychiatric
Group Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, with respect to dividend payments and liquidation rights. The annual
dividend rate and liquidation preference with respect to each Series B
Depositary Share are $2.15 and $25, respectively (equivalent to $215 and $2,500
per share of Series B Preferred Stock, respectively). Dividends on the Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, are
cumulative from the date of original issue and, if and when declared, are
payable quarterly in arrears on the last day of February, May, August and
November of each year (or, if such day is not a business day, the next business
day), commencing on December 1, 1997. On or after October 27, 2002, the Series
B Depositary Shares, and the Series B Preferred Stock represented thereby, may
be redeemed, in whole or in part, at the option of the Company at a redemption
price of $25 per Series B Depositary Share (equivalent to $2,500 per share of
Series B Preferred Stock), plus accrued and unpaid dividends thereon. The
redemption price, other than the portion representing accrued and unpaid
dividends, is payable solely out of proceeds from the sale of other capital
stock of the Company. The proceeds from the sale of the Series B Depositary
Shares, and the Series B Preferred Stock represented thereby, as well as the
dividends payable thereon, have been attributed to the Company's Core Group for
financial accounting and reporting purposes. The net proceeds of approximately
$96.4 million were used to pay off the borrowings under the Company's bank
credit facility outstanding at the time and the remaining proceeds will be used
to fund Core Group investments.
Stock Incentive Plans During the nine months ended September 30, 1997,
options to purchase 194,982 shares of Core Group Common Stock at a weighted
average exercise price of $25.37 per share were issued pursuant to the
Company's stock incentive plans. During the nine months ended September 30,
1997, options to purchase 100,000 shares of Core Group Common Stock were
exercised at a weighted average exercise price of $21.76 per share resulting in
additional equity of $2,176,000. Options to purchase 30,000 shares of Core
Group Common Stock at a weighted average exercise price of $29.10 per share
were canceled during the nine months ended September 30, 1997. Pursuant to an
election to receive payment of his annual board fees on a deferred basis in the
form of stock, 4,027 shares of Core Group Common Stock were issued to a
director during the nine months ended September 30, 1997.
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 $7,930,000 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-
21
<PAGE> 23
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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
September 30, 1997, the Core Group had no commitments to fund capital
expenditures pursuant to these rights and obligations.
As of September 30, 1997, the Core Group had funded $5.4 million of a
$6.2 million commitment to finance the acquisition and renovation of a
long-term acute care facility in Amarillo, Texas to be operated by an
experienced operator. In addition, the Core Group had funded $3.7 million of a
$4.4 million mortgage loan to this same operator, which is secured by a
long-term acute care facility in Houston, Texas. The Core Group has also agreed
to provide an additional $9.4 million of real estate financing to this same
operator for other similar facilities.
As of September 30, 1997, the Core Group had funded $2.7 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.
The Core Group has agreed to provide $50 million of real estate
financing to an experienced operator of assisted living facilities.
Approximately $29 million of this amount has been specifically identified for
the construction of five properties located in four states, with the remaining
$21 million available for future acquisitions or projects that have not yet
been identified and agreed upon. The operator has undergone a change in
ownership during the year and is presently reevaluating which investment
opportunities it may ultimately pursue, which could impact the amount of the
Core Group's financing commitment that is ultimately used.
The Core Group has signed letters of intent and is currently
negotiating or has under contract investments in a number of existing medical
office buildings and similar facilities, which, if closed, would aggregate
approximately $130 million of total investment. Although the Core Group
anticipates closing approximately $100 million of these proposed investments in
the fourth quarter of 1997 and the remainder in the first quarter of 1998, the
Core Group cannot be assured as to the actual timing of such closings or that
the proposed investments will ultimately be closed.
22
<PAGE> 24
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
Third Quarter and Year to Date 1997 Compared With 1996
For the third quarter of 1997, the Core Group reported net income of
$11,087,000 or $.47 per share compared with net income of $9,873,000 or $.42
per share for the third quarter of 1996. For the nine months ended September
30, 1997, the Core Group reported net income of $20,719,000 or $.88 per share
compared with net income of $28,627,000 or $1.22 per share for the nine months
ended September 30, 1996. For the nine months ended September 30, 1997, the
Core Group reported net income before extraordinary item of $32,146,000 or
$1.36 per share, an increase of $3,519,000 or 12% compared with net income
before extraordinary item of $28,627,000 or $1.22 per share for the nine months
ended September 30, 1996. Net income for the nine months ended September 30,
1997 included an extraordinary loss on debt prepayment of ($11,427,000) or
($.48) per share.
Rental income was $17,590,000 for the third quarter of 1997, an
increase of $679,000 or 4% from $16,911,000 for the third quarter of 1996.
Rental income was $52,294,000 for the nine months ended September 30, 1997, an
increase of $1,951,000 or 4% from $50,343,000 for the nine months ended
September 30, 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 $147,000 or 4% to $3,722,000 for the third quarter of 1997
compared with $3,575,000 for the third quarter of 1996 and an increase of
$419,000 or 4% to $11,065,000 for the nine months ended September 30, 1997
compared with $10,646,000 for the same period in 1996.
Additional rental and interest income was $2,939,000 for the third
quarter of 1997, an increase of $57,000 or 2% from $2,882,000 for the third
quarter of 1996. Additional rental and interest income was $8,691,000 for the
nine months ended September 30, 1997, an increase of $200,000 or 2% from
$8,491,000 for the nine months ended September 30, 1996. The majority of this
positive variation was attributable to various properties other than the Core
Group's six original acute care properties.
23
<PAGE> 25
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other property income of $73,000 and $107,000 for the third quarter of
1997 and nine months ended September 30, 1997, respectively, represents
property operating expense reimbursements from medical office facility tenants.
Other interest income decreased $13,000 or 10% to $113,000 for the
third quarter of 1997 from $126,000 for the third quarter of 1996. Other
interest income increased $596,000 or 99% to $1,201,000 for the nine months
ended September 30, 1997 from $605,000 for the nine months ended September 30,
1996. The decrease in other interest income for the third quarter was primarily
attributable to a lower average balance of direct financing leases in 1997. The
increase in other interest income for the first nine months of 1997 was
primarily attributable to higher investable cash balances, partially offset by
a lower average balance of direct financing leases. Investable cash balances
were significantly higher during the first quarter of 1997 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 income on inter-Group loans to the Psychiatric Group was
$392,000 for the third quarter of 1997, a decrease of $33,000 or 8% from
$425,000 for the third quarter of 1996. Interest income on inter-Group loans to
the Psychiatric Group was $1,176,000 for the nine months ended September 30,
1997, a decrease of $96,000 or 8% from $1,272,000 for the nine months ended
September 30, 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.
Property operating expense was $129,000 for the third quarter of 1997,
an increase of $118,000 from $11,000 for the third quarter of 1996. Property
operating expense was $192,000 for the nine months ended September 30, 1997, an
increase of $159,000 from $33,000 for the comparable period in 1996. This
increase was attributable to operating expenses associated with an investment
in a multi-tenant medical office facility during the second quarter of 1997.
Interest expense was $4,533,000 for the third quarter of 1997, a
decrease of $752,000 or 14% from $5,285,000 for the third quarter of 1996.
Interest expense was $15,118,000 for the nine months ended September 30, 1997,
a decrease of $1,446,000 or 9% from $16,564,000 for the nine months ended
September 30, 1996. The decrease in interest expense during these periods was
primarily attributable to a lower weighted average effective interest rate on
long-term debt during 1997, partially offset by a higher amount of long-term
debt and a lower amount of capitalized interest in 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 facility outstanding at the time 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 $1,685,000 for the third
quarter of 1997, an increase of $139,000 or 9% from $1,546,000 for the third
quarter of 1996. For the first nine months of 1997, general and administrative
expenses were $4,918,000, an increase of $246,000 or 5% from $4,672,000 for the
first nine months 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 and an increase in travel expense,
partially offset by a reduction in officer hiring costs.
24
<PAGE> 26
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE 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 and passed by both Houses of Congress.
These plans generally include 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 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.
25
<PAGE> 27
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Core Group had $3,687,000 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 $7,930,000. In addition, as of
September 30, 1997, the Core Group had $9,175,000 in fixed rate inter-Group
loans to the Psychiatric Group.
As of November 7, 1997, the Core Group had remaining commitments of
$15.5 million to fund real estate projects currently under construction over
approximately the next fifteen months. In addition, the Core Group has agreed
to provide real estate financing to two different operators aggregating
approximately $59.4 million for which there are currently no definitive funding
requirements. Of this amount, $50 million has been committed to the assisted
living sector and $9.4 million has been committed to the long-term acute care
sector. The Core Group also has signed letters of intent and is currently
negotiating or has under contract investments in a number of existing medical
office buildings and similar facilities, which, if closed, would aggregate
approximately $130 million of total investment. Although the Core Group
anticipates closing approximately $100 million of these proposed investments in
the fourth quarter of 1997 and the remainder in the first quarter of 1998, the
Core Group cannot be assured as to the actual timing of such closings or that
the proposed investments will ultimately be closed.
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 bank credit facility at the time
and to prepay all of its $152 million of outstanding private placement debt in
late February 1997. In October 1997, the Company completed a $100 million
preferred equity offering and used the net proceeds to pay off all outstanding
borrowings under its bank credit facility at the time and will use the
remaining proceeds to fund Core Group investments. As of November 7, 1997, the
Company had no outstanding borrowings under its revolving $150 million bank
credit facility and had $101.1 million in cash and short-term investments. The
Company's total indebtedness as of November 7, 1997 was $225.8 million. The
Company will utilize its bank 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
26
<PAGE> 28
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
27
<PAGE> 29
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
- ----------------------------------------------------------- -------- --------
ASSETS (Unaudited)
<S> <C> <C>
Real estate investments
Real property and mortgage notes, net $ 49,642 $ 62,749
Accumulated depreciation (1,554) (4,688)
-------- --------
48,088 58,061
Other notes receivable 2,560 4,457
Other assets 703 743
- ----------------------------------------------------------- -------- --------
$ 51,351 $ 63,261
- ----------------------------------------------------------- -------- --------
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving loan from Core Group $ 3,687 $ 4,183
Fixed rate loan from Core Group 9,175 9,175
Accounts payable and accrued liabilities 362 --
Dividends payable 1,292 1,667
Deferred income 25 273
- ----------------------------------------------------------- -------- --------
14,541 15,298
- ----------------------------------------------------------- -------- --------
Commitments and contingencies
Total Attributed Psychiatric Group Equity 36,810 47,963
- ----------------------------------------------------------- -------- --------
$ 51,351 $ 63,261
- ----------------------------------------------------------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 30
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- --------------------
1997 1996 1997 1996
- ------------------------------------------ ------ ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 355 $ 404 $ 1,278 $ 1,350
Mortgage interest income 1,516 1,493 4,549 4,479
Additional rental and interest income 185 210 556 612
Other interest income 82 112 266 306
- ------------------------------------------ ------ ------- -------- -------
2,138 2,219 6,649 6,747
- ------------------------------------------ ------ ------- -------- -------
EXPENSES
Depreciation and amortization 188 186 562 558
Property operating 75 -- 100 --
Interest on loans from Core Group 392 425 1,176 1,272
General and administrative 302 330 897 973
Impairment loss on real estate
investments and other notes receivable -- -- 11,000 --
- ------------------------------------------ ------ ------- -------- -------
957 941 13,735 2,803
- ------------------------------------------ ------ ------- -------- -------
NET INCOME (LOSS) $1,181 $ 1,278 $ (7,086) $ 3,944
- ------------------------------------------ ------ ------- -------- -------
NET INCOME (LOSS) PER DEPOSITARY SHARE $ 0.56 $ 0.61 $ (3.38) $ 1.89
- ------------------------------------------ ------ ------- -------- -------
DIVIDENDS DECLARED PER DEPOSITARY SHARE $0.620 $ 0.650 $ 2.000 $2.0000
- ------------------------------------------ ------ ------- -------- -------
WEIGHTED AVERAGE
DEPOSITARY SHARES OUTSTANDING 2,099 2,093 2,097 2,092
- ------------------------------------------ ------ ------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 31
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
- ----------------------------------------------------------- -------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7,086) $ 3,944
Depreciation, amortization and other non-cash items 664 653
Deferred income (22) (40)
Impairment loss on real estate
investments and other notes receivable 11,000 --
Change in other assets 37 2
Change in accounts payable and accrued liabilities 221 (146)
- ----------------------------------------------------------- -------- -------
4,814 4,413
- ----------------------------------------------------------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on mortgage notes receivable 52 47
Other notes receivable 173 154
- ----------------------------------------------------------- -------- -------
225 201
- ----------------------------------------------------------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on revolving loan from Core Group (496) (132)
Dividends paid (4,543) (4,482)
- ----------------------------------------------------------- -------- -------
(5,039) (4,614)
- ----------------------------------------------------------- -------- -------
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.
30
<PAGE> 32
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'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 proceeds from the October
1997 sale of the Company's depositary shares (Series B Depositary Shares)
representing its 8.60% Cumulative Redeemable Preferred Stock, Series B (Series
B Preferred Stock), as well as the dividends payable thereon, have been
attributed to the Company's Core Group for financial accounting and reporting
purposes. The Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, rank senior to the Company's Core Group Common Stock and
its Psychiatric Group Depositary Shares with respect to dividend payments and
liquidation rights. Attribution of the components of the Company's capital
structure to its Core Group and Psychiatric Group for financial accounting and
reporting purposes does not affect the legal title to assets or responsibility
for liabilities of the Company, and each holder of Core Group Common Stock,
Series B Depositary Shares 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, Core Group Common
Stock or Series B Depositary Shares is a holder of an issue of capital stock of
the entire Company and is subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. Financial effects
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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, Psychiatric Group
Depositary Shares, Core Group Common Stock or Series B Depositary Shares will
reduce the funds of the Company legally available for dividends on all the
Psychiatric Group Depositary Shares, Core Group Common Stock and Series B
Depositary Shares. 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 $1,176,000 and $1,272,000 for the nine months
ended September 30, 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 $7,930,000 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.
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. ATTRIBUTED EQUITY
Stock Incentive Plans Options to purchase 10,000 shares of Psychiatric
Group Depositary Shares at a weighted average exercise price of $24.15 per
share were canceled during the nine months ended September 30, 1997.
4. COMMITMENTS
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 September 30, 1997.
5. STATUS OF PSYCHIATRIC GROUP INVESTMENTS
At the beginning of 1996, the hospital owner of the Psychiatric
Group's two Florida properties, 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 were not recognized as income by the Psychiatric Group.
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 materially exacerbated the operational and financial
difficulties of Northpointe and The Retreat during the first quarter of 1997.
During the first quarter of 1997, the census at Northpointe fell
significantly below the levels projected by the owner at the end of 1996 to a
level which made it appear unlikely that the owner could 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 was unable
to pay its subsequent monthly base rent and interest
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
obligations or its deferred base rent and interest obligations. Adverse
publicity from the aforementioned lawsuit also began having a negative impact
on The Retreat resulting in declining census and deterioration of its cash flow
during the first quarter of 1997. Although The Retreat had made all of its rent
and interest payments to the Psychiatric Group in 1996 and in 1997 through
April, The Retreat made its February 1997 base rent payment from lease reserve
funds and was unable to pay its $45,000 additional rent payment for the first
quarter of 1997 and its $92,000 base rent payment for May 1997. The volatile
circumstances at The Retreat and deterioration in cash flows and census levels
appeared likely to preclude the owner from continuing operations at the
facility. The owner of these two hospitals and the Psychiatric Group were
exploring a range of options for the facilities, including the transfer of the
hospitals to new operators, closing the facilities, conversion of the
facilities to an alternative use or sale of the properties. As a result of this
review, the Psychiatric Group recorded an $11,000,000 charge in the first
quarter of 1997 for impairment of the carrying value of these two investments.
Of this amount, $5,100,000 related to the Psychiatric Group's investment in
Northpointe and included a $1,675,000 reserve against the entire unpaid balance
under a revolving credit agreement and a $3,425,000 reduction in the carrying
value of its net real estate investment in Northpointe to its estimated fair
value of $2,000,000. The remaining impairment charge of $5,900,000 related to
the Psychiatric Group's investment in The Retreat and included a $49,000
reserve against the entire unpaid balance under a revolving credit agreement
and a $5,851,000 reduction in the carrying value of its net real estate
investment in The Retreat to its estimated fair value of $3,400,000. The
estimated fair values of these two investments were determined primarily based
upon the discounting of estimated future cash flows and fundamental analysis.
The financial and operational problems at the two Florida hospitals
continued to worsen during 1997. The owner of the Northpointe hospital ceased
operations during the second quarter of 1997. The Psychiatric Group will incur
approximately $75,000 per quarter ($.04 per depositary share) to protect and
maintain the property while various alternatives are evaluated and pursued,
including conversion of the facility to an alternative use or sale of the
property. A restructuring of The Retreat's obligations to the Psychiatric Group
was completed shortly after the end of the third quarter of 1997. The Retreat's
restructured base rent is $35,000 per month ($105,000 per quarter or $.05 per
depositary share) and additional rent will not accrue or be payable until
August 1, 2000. The Psychiatric Group received $105,000 ($.05 per depositary
share) for past base rent from the Retreat and such payment was recognized as
income in the third quarter. In addition, the Psychiatric Group received a note
for approximately $500,000, representing a consolidation of previous
obligations owed by The Retreat. The note has a term of 32 months with monthly
payments of approximately $18,000 scheduled to commence January 1, 1998. The
note has not been recognized for financial accounting purposes. Although the
restructured agreement with The Retreat is a positive step in stabilizing the
cash flow and operations of this facility, the Psychiatric Group cannot be
assured that The Retreat will be able to continue to meet its restructured
obligations or to continue operations, even if there is a change in the owner
or operator of the facility or if the Psychiatric Group provides additional
financial assistance. The Psychiatric Group is continuing to explore a range of
options for each of the two Florida properties, including the transfer of the
hospitals to new operators, conversion of the facilities to an alternative use
or sale of the properties. Due to the complexity and time involved in
evaluating its options, the Psychiatric Group has not yet reached a decision as
to its ultimate course of action. In light of the volatile circumstances of
these two properties, the Psychiatric Group cannot be assured that further
write-downs of these investments will not be required.
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
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
investment in RCC, including advances under existing revolving credit
agreements and other receivables, as of September 30, 1997 totaled $7,749,000.
Quarterly base rent and interest obligations of RCC total approximately
$330,000 ($.16 per depositary share). In 1996, the Psychiatric Group 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. After a period of partial rental payments, full monthly
base rent payments of $83,000 have been paid since November 1996. RCC's
deferred rental obligations of approximately $333,000 are to be paid in the
future only when the facility's cash exceeds a specified level and are not
recognized as income by the Psychiatric Group until such time as they are paid.
To date, no deferred rental obligations have been paid and the Psychiatric
Group cannot be assured that RCC will be able to pay any of the deferred rental
obligations in the future.
The $2,500,000 balance outstanding under RCC's revolving credit
agreement matured June 30, 1997 and the current term of the RCC lease expires
in December 1997. The Psychiatric Group and the operator are currently
discussing the possible extension of the maturity of the revolving credit
agreement and the lease term. Meanwhile, the operator has continued to make
interest payments on the delinquent balance outstanding under the revolving
credit agreement. Although the Psychiatric Group believes that the maturity of
the revolving credit agreement and the lease term will be extended, the
Psychiatric Group cannot be assured of this. Furthermore, if the lease term is
extended, the Psychiatric Group cannot be assured that the annual minimum rent
payments will remain at the current level of $1,000,000. Should the lease not
be extended or the revolving loan not be repaid or extended, a significant
negative impact to the Psychiatric Group likely would result.
The two New York Four Winds facilities have been working to develop an
integrated behavioral health care delivery system in lower and upper New York
state. Such a system has been intended to create a cost-effective response to
the potential negative reimbursement consequences of the expected movement to a
managed Medicaid care environment within New York which is likely to accelerate
during early 1998. However, it is not possible for the Psychiatric Group to
predict the impact of such changes or whether the operator's system will be
successful in such an environment, and some restructuring of the operator's
obligations to the Psychiatric Group may be required for the operator to remain
competitive in such an 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 are likely to be incurred by the Psychiatric Group in an effort
to protect, maintain and pursue alternatives for 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. Historically, the level of dividends of the
Psychiatric Group 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
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
quarterly dividend payment on Psychiatric Group Depositary Shares. In addition
to the foregoing, future operating results, cash flows and dividends of the
Psychiatric Group will be affected by changes in the level of additional rent
and interest, the amount of additional financial advisory fees and, to the
extent necessary, various costs which might be incurred in an effort to
protect, maintain and pursue alternatives for its investments.
36
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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
Third Quarter and Year to Date 1997 Compared With 1996
For the third quarter of 1997, the Psychiatric Group reported net
income of $1,181,000 or $.56 per depositary share compared with net income of
$1,278,000 or $.61 per depositary share for the third quarter of 1996. For the
nine months ended September 30, 1997, the Psychiatric Group reported a net loss
of ($7,086,000) or ($3.38) per depositary share compared with net income of
$3,944,000 or $1.89 per depositary share for the nine months ended September
30, 1996. The net loss for the nine months ended September 30, 1997 included an
impairment loss on real estate investments and other notes receivable of
($11,000,000) or ($5.25) per depositary share.
Rental income was $355,000 for the third quarter of 1997, a decrease
of $49,000 or 12% from $404,000 for the third quarter of 1996. Rental income
was $1,278,000 for the nine months ended September 30, 1997, a decrease of
$72,000 or 5% from $1,350,000 for the comparable period in 1996. The decrease
in rental income during these periods was primarily attributable to the
nonpayment and subsequent reduction of base rent on one of the Florida
properties during 1997, partially offset by the partial deferral of base rent
on the Illinois property during 1996.
Additional rental and interest income was $185,000 for the third
quarter of 1997, a decrease of $25,000 or 12% from $210,000 for the third
quarter of 1996. Additional rental and interest income was $556,000 for the
nine months ended September 30, 1997, a decrease of $56,000 or 9% from $612,000
for the comparable period in 1996. This decrease was primarily attributable to
the nonpayment of additional rent by one of the Florida properties during 1997.
Other interest income decreased $30,000 or 27% to $82,000 for the
third quarter of 1997 from $112,000 for the third quarter of 1996. Other
interest income decreased $40,000 or 13% to $266,000 for the nine months ended
September 30, 1997 from $306,000 for the nine months ended September 30, 1996.
The decrease in other
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interest income during these periods was primarily attributable to a lower
average balance of interest-earning borrowings outstanding under revolving
credit facilities provided to psychiatric hospital operators in 1997.
Property operating expense of $75,000 and $100,000 for the third
quarter of 1997 and nine months ended September 30, 1997, respectively,
represents costs related to the protection and maintenance of one of the
properties in Florida after the hospital owner ceased hospital operations
during the second quarter of 1997.
Interest expense on inter-Group loans from the Core Group was $392,000
for the third quarter of 1997, a decrease of $33,000 or 8% from $425,000 for
the third quarter of 1996. Interest expense on inter-Group loans from the Core
Group was $1,176,000 for the nine months ended September 30, 1997, a decrease
of $96,000 or 8% from $1,272,000 for the comparable period in 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 $302,000 for the third
quarter of 1997, a decrease of $28,000 or 8% from $330,000 for the third
quarter of 1996. General and administrative expenses were $897,000 for the nine
months ended September 30, 1997, a decrease of $76,000 or 8% from $973,000 for
the first nine months 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. Costs
allocated to the Psychiatric Group based on revenues and direct costs charged
to the Psychiatric Group both decreased for the third quarter and first nine
months of 1997 compared to the comparable periods in 1996. The Psychiatric
Group was specifically charged for $130,000 and $378,000 of costs in the third
quarter and first nine months of 1997, respectively, for financial advisory
services provided primarily by an investment banking firm which included
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. On a comparative basis, general and
administrative expenses for the third quarter and the nine months ended
September 30, 1996 included $157,000 and $442,000 of such financial advisory
costs.
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 and passed by both Houses of Congress.
These plans generally include 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.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 the Psychiatric Group cannot be assured that hospital
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
November 7, 1997, outstanding borrowings under such agreement totaled
$2,500,000. 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. The Psychiatric Group cannot be assured 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. 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 hospital owner of the Psychiatric
Group's two Florida properties, Northpointe Behavioral Health System
(Northpointe) and The Retreat, retained the Intensive Resource Division of
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 were not recognized as income by the Psychiatric Group.
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 materially exacerbated the operational and financial
difficulties of Northpointe and The Retreat during the first quarter of 1997.
During the first quarter of 1997, the census at Northpointe fell
significantly below the levels projected by the owner at the end of 1996 to a
level which made it appear unlikely that the owner could 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 was unable
to pay its subsequent monthly base rent and interest obligations or its
deferred base rent and interest obligations. Adverse publicity from the
aforementioned lawsuit also began having a negative impact on The Retreat
resulting in declining census and deterioration of its cash flow during the
first quarter of 1997. Although The Retreat had made all of its rent and
interest payments to the Psychiatric Group in 1996 and in 1997 through April,
The Retreat made its February 1997 base rent payment from lease reserve funds
and was unable to pay its $45,000 additional rent payment for the first quarter
of 1997 and its $92,000 base rent payment for May 1997. The volatile
circumstances at The Retreat and deterioration in cash flows and census levels
appeared likely to preclude the owner from continuing operations at the
facility. The owner of these two hospitals and the Psychiatric Group were
exploring a range of options for the facilities, including the transfer of the
hospitals to new operators, closing the facilities, conversion of the
facilities to an alternative use or sale of the properties. As a result of this
review, the Psychiatric Group recorded an $11,000,000 charge in the first
quarter of 1997 for impairment of the carrying value of these two investments.
Of this amount, $5,100,000 related to the Psychiatric Group's investment in
Northpointe and included a $1,675,000 reserve against the entire unpaid balance
under a revolving credit agreement and a $3,425,000 reduction in the carrying
value of its net real estate investment in Northpointe to its estimated fair
value of $2,000,000. The remaining impairment charge of $5,900,000 related to
the Psychiatric Group's investment in The Retreat and included a $49,000
reserve against the entire unpaid balance under a revolving credit agreement
and a $5,851,000 reduction in the carrying value of its net real estate
investment in The Retreat to its estimated fair value of $3,400,000.
40
<PAGE> 42
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial and operational problems at the two Florida hospitals
continued to worsen during 1997. The owner of the Northpointe hospital ceased
operations during the second quarter of 1997. The Psychiatric Group will incur
approximately $75,000 per quarter ($.04 per depositary share) to protect and
maintain the property while various alternatives are evaluated and pursued,
including conversion of the facility to an alternative use or sale of the
property. A restructuring of The Retreat's obligations to the Psychiatric Group
was completed shortly after the end of the third quarter of 1997. The Retreat's
restructured base rent is $35,000 per month ($105,000 per quarter or $.05 per
depositary share) and additional rent will not accrue or be payable until
August 1, 2000. The Psychiatric Group received $105,000 ($.05 per depositary
share) for past base rent from the Retreat and such payment was recognized as
income in the third quarter. In addition, the Psychiatric Group received a note
for approximately $500,000, representing a consolidation of previous
obligations owed by The Retreat. The note has a term of 32 months with monthly
payments of approximately $18,000 scheduled to commence January 1, 1998. The
note has not been recognized for financial accounting purposes. Although the
restructured agreement with The Retreat is a positive step in stabilizing the
cash flow and operations of this facility, the Psychiatric Group cannot be
assured that The Retreat will be able to continue to meet its restructured
obligations or to continue operations, even if there is a change in the owner
or operator of the facility or if the Psychiatric Group provides additional
financial assistance. The Psychiatric Group is continuing to explore a range of
options for each of the two Florida properties, including the transfer of the
hospitals to new operators, conversion of the facilities to an alternative use
or sale of the properties. Due to the complexity and time involved in
evaluating its options, the Psychiatric Group has not yet reached a decision as
to its ultimate course of action. In light of the volatile circumstances of
these two properties, the Psychiatric Group cannot be assured that further
write-downs of these investments will not be required.
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
September 30, 1997 totaled $7,749,000. Quarterly base rent and interest
obligations of RCC total approximately $330,000 ($.16 per depositary share). In
1996, the Psychiatric Group 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. After a period
of partial rental payments, full monthly base rent payments of $83,000 have
been paid since November 1996. RCC's deferred rental obligations of
approximately $333,000 are to be paid in the future only when the facility's
cash exceeds a specified level and are not recognized as income by the
Psychiatric Group until such time as they are paid. To date, no deferred rental
obligations have been paid and the Psychiatric Group cannot be assured that RCC
will be able to pay any of the deferred rental obligations in the future.
The $2,500,000 balance outstanding under RCC's revolving credit
agreement matured June 30, 1997 and the current term of the RCC lease expires
in December 1997. The Psychiatric Group and the operator are currently
discussing the possible extension of the maturity of the revolving credit
agreement and the lease term. Meanwhile, the operator has continued to make
interest payments on the delinquent balance outstanding under the revolving
credit agreement. Although the Psychiatric Group believes that the maturity of
the revolving credit agreement and the lease term will be extended, the
Psychiatric Group cannot be assured of this. Furthermore, if the lease term is
extended, the Psychiatric Group cannot be assured that the annual minimum rent
payments will remain at the current level of $1,000,000. Should the lease not
be extended or the revolving loan not be repaid or extended, a significant
negative impact to the Psychiatric Group likely would result.
41
<PAGE> 43
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The two New York Four Winds facilities have been working to develop an
integrated behavioral health care delivery system in lower and upper New York
state. Such a system has been intended to create a cost-effective response to
the potential negative reimbursement consequences of the expected movement to a
managed Medicaid care environment within New York which is likely to accelerate
during early 1998. However, it is not possible for the Psychiatric Group to
predict the impact of such changes or whether the operator's system will be
successful in such an environment, and some restructuring of the operator's
obligations to the Psychiatric Group may be required for the operator to remain
competitive in such an 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 are likely to be incurred by the Psychiatric Group in an effort
to protect, maintain and pursue alternatives for 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. Historically, the level of dividends of the
Psychiatric Group 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 addition to the foregoing, future
operating results, cash flows and dividends of the Psychiatric Group will be
affected by changes in the level of additional rent and interest, the amount of
additional financial advisory fees and, to the extent necessary, various costs
which might be incurred in an effort to protect, maintain and pursue
alternatives for its investments.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Psychiatric Group had $3,687,000 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 $7,930,000 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
42
<PAGE> 44
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
43
<PAGE> 45
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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: November 7, 1997
AMERICAN HEALTH PROPERTIES, INC.
By: JOSEPH P. SULLIVAN By: MICHAEL J. MCGEE
---------------------------------- ---------------------------------
Joseph P. Sullivan Michael J. McGee
Chairman of the Board, President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
44
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,352
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> (97,985)
<TOTAL-ASSETS> 579,593
<CURRENT-LIABILITIES> 0
<BONDS> 225,807
0
2
<COMMON> 236
<OTHER-SE> 320,613
<TOTAL-LIABILITY-AND-EQUITY> 579,593
<SALES> 0
<TOTAL-REVENUES> 69,054
<CGS> 0
<TOTAL-COSTS> 11,919
<OTHER-EXPENSES> 11,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,118
<INCOME-PRETAX> 25,060
<INCOME-TAX> 0
<INCOME-CONTINUING> 25,060
<DISCONTINUED> 0
<EXTRAORDINARY> (11,427)
<CHANGES> 0
<NET-INCOME> 13,633
<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 $ 1.36
Extraordinary Loss On Debt Prepayment $(0.48)
Net Income $ 0.88
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net Loss Per Share $(3.38)
</FN>
</TABLE>
