AMERICAN HEALTH PROPERTIES INC, 10-K405, 1997-03-31

AMERICAN HEALTH PROPERTIES INC
10-K405, 1997-03-31
REAL ESTATE INVESTMENT TRUSTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-9381

American Health Properties, Inc.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 95-4084878
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

6400 SOUTH FIDDLER'S GREEN CIRCLE 80111
SUITE 1800 (ZIP CODE)
ENGLEWOOD, COLORADO
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 796-9793

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<C> <C>
COMMON STOCK NEW YORK STOCK EXCHANGE

PSYCHIATRIC GROUP DEPOSITARY SHARES NASDAQ
NATIONAL MARKET SYSTEM
</TABLE>

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 13, 1997 there were outstanding (i) 23,455,027 shares of
American Health Properties, Inc. common stock, $.01 par value, and (ii)
2,083,931 Psychiatric Group Depositary Shares, each representing one-tenth of
one share of American Health Properties, Inc. Psychiatric Group Preferred Stock,
$.01 par value. The aggregate market value of voting stock held by
non-affiliates of the Registrant, based on the closing price of these shares on
such date was approximately $642,800,000. For the purposes of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.

Documents Incorporated by Reference: Items 10, 11 and 12 of Part III are
incorporated by reference from the definitive proxy statement of American Health
Properties, Inc., to be filed within 120 days after December 31, 1996.
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13

PART II
Item 5. Market for Registrant's Voting Stock and Related Stockholder
Matters..................................................... 14
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 17
Management's Discussion and Analysis of Core Group Combined
Financial Condition and Results of Operations............... 23
Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations...... 28
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 35

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 35
Item 13. Certain Relationships and Related Transactions.............. 35

PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on
Form 8-K.................................................... 36
</TABLE>

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PART I

ITEM 1. BUSINESS.

American Health Properties, Inc. (the "Company," which term refers to the
Company and its subsidiaries unless the context otherwise requires) is a
self-administered real estate investment trust ("REIT") that commenced
operations in 1987. The Company has investments in health care facilities that
are operated by qualified third party health care providers, as well as a
medical office building.

In July 1995, the Company sought to separate the economic attributes of its
core portfolio of investments (the "Core Group") and its portfolio of
psychiatric hospital investments (the "Psychiatric Group") into two distinct
portfolios, with two distinct classes of publicly-traded shares intended to
represent those portfolios. On July 25, 1995, the Company distributed one
Psychiatric Group Depositary Share (the "Depositary Shares") for every ten
shares of the Company's common stock, $.01 par value (the "Common Stock"), held
of record on July 14, 1995, each such Depositary Share representing a one-tenth
interest in one share of the Company's Psychiatric Group Preferred Stock, $.01
par value (the "Psychiatric Group Stock"). The assets, liabilities and expenses
of the Company have been allocated between the two portfolios, and dividends and
other payouts or distributions with respect to the Common Stock and the
Psychiatric Group Stock are expected to be primarily a function of the
individual financial performance of the Core Group and the Psychiatric Group.
Accordingly, the Company has separated its business and properties into two
distinct business units: (a) the Core Group, which includes the Company's acute
care, rehabilitation and long-term acute care hospitals, assisted living,
skilled nursing and Alzheimer's care facilities and a medical office building,
and (b) the Psychiatric Group, which includes all of the Company's investments
in psychiatric hospitals. However, the change in the capital structure of the
Company effected by the issuance of the Psychiatric Group Stock does not affect
the legal title to assets or responsibility for liabilities of the Company, and
each holder of the Company's Common Stock or 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.

The Company's principal executive office is located at 6400 South Fiddler's
Green Circle, Suite 1800, Englewood, Colorado 80111, and its telephone number at
such address is (303) 796-9793.

THE CORE GROUP

The Core Group's current portfolio of investments consists of 13 acute care
hospitals, three rehabilitation hospitals, four assisted living facilities, one
long-term acute care hospital (currently under construction), four skilled
nursing facilities, a medical office building and two Alzheimer's care
facilities. As of December 31, 1996, the net book value of the Core Group's
total assets was $528 million. Of the Core Group's real estate assets at that
date, 84% in net book value represented the acute care segment, 6% represented
the rehabilitation segment, 4% represented the assisted living segment, 3%
represented the skilled nursing segment, 2% represented the medical office
building and 1% represented the Alzheimer's care segment. As of December 31,
1996, all of the Core Group's real estate assets were held in fee.

The Core Group's facilities are diversified geographically across 15
states, are distributed among large and small population centers, and are
operated by 13 experienced management companies. These operators include the
following companies or their subsidiaries: Tenet Healthcare Corporation
("Tenet," formerly American Medical International, Inc.), Columbia/HCA
Healthcare Corporation, Paracelsus Healthcare Corporation, Community Health
Systems, Inc. (formerly Dynamic Health, Inc.), PrimeCare International, Inc.,
Horizon/CMS Healthcare Corporation (formerly Continental Medical Systems, Inc.),
Emeritus Corporation, Unison HealthCare Corporation (formerly Signature Health
Care Corporation), Shannon Health System, HealthSouth Corporation, CDM/WestMar,
Autumn Hills and Spectrum Comprehensive Care, Inc. Facilities operated by Tenet
represented 55% of the Core Group's total revenues for the year ended December
31, 1996.

Approximately 73% of the Core Group's property revenues for the year ended
December 31, 1996 were secured by corporate guarantees of these operating
companies or their subsidiaries. Also, as of December 31, 1996, letters of
credit from commercial banks and cash deposits aggregating $18.5 million were
available to

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the Core Group as security for lease financings. Leases for 15 of the Core
Group's facilities, representing 60% of the Core Group's property revenues for
the year ended December 31, 1996, contain cross-default provisions.

THE CORE GROUP FACILITIES

The Company's 28 Core Group facilities consist of 13 acute care hospitals
(the "Acute Care Hospitals"), three rehabilitation hospitals (the
"Rehabilitation Hospitals"), four assisted living facilities (the "Assisted
Living Facilities"), one long-term acute care hospital (currently under
construction) (the "Long-Term Acute Care Hospital"), four skilled nursing
facilities (the "Skilled Nursing Facilities"), a medical office building and two
Alzheimer's care facilities (the "Alzheimer's Care Facilities" and together, the
"Core Group Facilities"). All of the Core Group Facilities are owned by the
Company.

Acute Care Hospitals. The Acute Care Hospitals provide a wide range of
services, which may include fully-equipped operating and recovery rooms,
obstetrics, radiology, intensive care, open-heart surgery and coronary care,
neurosurgery, neonatal intensive care, magnetic resonance imaging, nursing
units, oncology, clinical laboratories, respiratory therapy, physical therapy,
nuclear medicine, rehabilitation services and outpatient services.

Rehabilitation Hospitals. The Rehabilitation Hospitals provide acute
rehabilitation care on a multidisciplinary, physician-directed basis to severely
disabled patients. In addition to general medical rehabilitation programs, the
Rehabilitation Hospitals offer a number of specialty programs, including
pulmonary, ventilator, neurobehavioral, brain injury and pain programs. Each of
the Rehabilitation Hospitals is operated pursuant to a joint venture between a
publicly-held, national rehabilitation hospital operator and a local health care
provider.

Assisted Living Facilities. The Assisted Living Facilities provide a
special combination of housing, supportive services, personalized assistance and
health care services designed to respond to the individual needs of the elderly
and other persons who require help with activities of daily living. These
services are available 24 hours a day to meet both scheduled and unscheduled
needs in a way that promotes maximum dignity and independence for each resident.

Long-Term Acute Care Hospital. The Long-Term Acute Care Hospital provides
care for patients with complex medical conditions that require more intensive
care, monitoring, or emergency back-up than that available in most skilled
nursing-based subacute programs. Most Long-Term Acute Care Hospital patients
have severe chronic health problems and are medically unstable or at risk of
medical instability. These patients have historically been treated in general
acute care hospitals. The most common cases treated in this setting include high
acuity ventilator-dependent patients and patients with multiple system failures
related to cancer, spinal cord injuries or head injuries. The average length of
stay in this setting commonly ranges from 60 to 90 days.

Skilled Nursing Facilities. The Skilled Nursing Facilities are skilled
nursing centers that provide a broad range of health care services, including
skilled nursing care, subacute care, rehabilitation therapy and other
specialized services to the elderly and to other patients with medically complex
needs who can be cared for outside of the acute care hospital environment and
generally cannot be efficiently and effectively cared for at home.

Medical Office Building. The Company owns a 60,000 square-foot medical
office building located in Murrieta, California known as Walsh Medical Arts
Center. The medical office building is located across the street from Sharp
Healthcare Murrieta, a developing medical campus that includes 49 acute care
beds and 42 skilled nursing beds operated by Sharp Healthcare system of San
Diego.

Alzheimer's Care Facilities. The Alzheimer's Care Facilities were
developed in consultation with leading medical experts in the treatment of
Alzheimer's disease and dementia, and have a strong health care orientation
rather than the more customary residential care orientation.

The following is a listing of the Core Group portfolio of investments as of
March 1, 1997.

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CORE GROUP FACILITIES

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<CAPTION>
YEAR ANNUAL INITIAL
ACQUIRED/ TOTAL BASE TERM
DESCRIPTION & LOCATION OPERATOR FUNDED INVESTMENT(1) RENT(2) OF LEASE(3)
---------------------- -------- --------- ------------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACUTE CARE HOSPITALS
Chesterfield General Hospital Community Health Systems, Inc. 1995 $ 11,407 $ 1,238 2005
Cheraw, South Carolina
Cleveland Regional Medical Center Community Health Systems, Inc. 1994 8,300 812 2003
Cleveland, Texas
Desert Valley Hospital PrimeCare International, Inc. 1994 26,405 2,895 2004
Victorville, California
Frye Regional Medical Center Tenet Healthcare Corporation 1987 45,449 5,265 1999
Hickory, North Carolina
Irvine Medical Center Tenet Healthcare Corporation 1991 75,000 10,057 2004
Irvine, California
Kendall Regional Medical Center Columbia/HCA Healthcare Corporation 1987 69,012 7,884 1999
Miami, Florida
Lucy Lee Hospital Tenet Healthcare Corporation 1987 23,566 2,731 1999
Poplar Bluff, Missouri
Marlboro Park Hospital Community Health Systems, Inc. 1995 7,793 845 2005
Bennettsville, South Carolina
North Fulton Regional Hospital Tenet Healthcare Corporation 1987 46,191 5,471 1999
Roswell, Georgia
Palm Beach Gardens Medical Center Tenet Healthcare Corporation 1987 45,648 5,283 1999
Palm Beach Gardens, Florida
Pioneer Valley Hospital Paracelsus Healthcare Corporation 1996 49,466 7,024 2004
West Valley City, Utah
Shannon Health System, Shannon Health System 1991 16,452 1,478 2001
St. John's Campus
San Angelo, Texas
Tarzana Regional Medical Center Tenet Healthcare Corporation 1987 73,700 8,308 2004
Tarzana, California
-------- -------
Total Acute Care Hospitals 498,389 59,291
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REHABILITATION HOSPITALS
HCA Wesley Rehabilitation Horizon/CMS Healthcare Corporation 1992 14,597 1,615 2002
Hospital
Wichita, Kansas
MountainView Regional HealthSouth Corporation 1991 11,718 1,358 2001
Rehabilitation Hospital
Morgantown, West Virginia
Northwest Arkansas Horizon/CMS Healthcare Corporation 1991 9,086 1,064 2001
Rehabilitation Hospital
Fayetteville, Arkansas
-------- -------
Total Rehabilitation Hospitals 35,401 4,037
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ASSISTED LIVING FACILITIES
Cambria Lodge Emeritus Corporation 1996 5,182 544 2006
El Paso, Texas
Garrison Creek Lodge Emeritus Corporation 1996 5,648 593 2006
Walla Walla, Washington
Sherwood Place Emeritus Corporation 1996 5,034 528 2006
Odessa, Texas
Summer Wind Residence Emeritus Corporation 1995 3,000 315 2005
Boise, Idaho
-------- -------
Total Assisted Living Facilities 18,864 1,980
-------- -------
</TABLE>

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SKILLED NURSING FACILITIES
Arkansas Manor Nursing Home Unison HealthCare Corporation 1995 4,066 406 2005
Denver, Colorado
Cornerstone Care Center Unison HealthCare Corporation 1995 4,856 485 2005
Lakewood, Colorado
Douglas Manor Unison HealthCare Corporation 1995 2,621 254 2005
Douglas, Arizona
Safford Care Center Unison HealthCare Corporation 1995 4,934 478 2005
Safford, Arizona
-------- -------
Total Skilled Nursing Facilities 16,477 1,623
-------- -------
MEDICAL OFFICE BUILDING
Walsh Medical Arts Center CDM/WestMar 1994 8,800 984 2003
Murrieta, California -------- -------

ALZHEIMER'S CARE FACILITIES
Pinehaven I Alzheimer's Community Autumn Hills(5) 1995 3,700 353 2005
Houston, Texas
Pinehaven II Alzheimer's Community Autumn Hills(5) 1996 4,024 423 2007
Sugar Land, Texas
-------- -------
Total Alzheimer's Care Facilities 7,724 776
-------- -------
CORE GROUP PORTFOLIO TOTAL $591,855 $69,311
======== =======
</TABLE>

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(1) Reflects gross investment, except for facilities under construction, for
which the Company's total investment commitment is reflected.

(2) Reflects contract rate of annual base rent received or estimated to be
received upon completion of construction.
(3) Each lease provides the lessee with renewal options to extend the term of
the lease beyond the primary term.

(4) Currently under construction.

(5) Autumn Hills is the operator of these facilities. MQ Development I, L.P. is
the lessee of Pinehaven I and MQ Development II, L.P. is the lessee of
Pinehaven II.

See the Notes to the Consolidated Financial Statements, the Notes to the
Core Group Combined Financial Statements and Schedule III -- Real Estate and
Accumulated Depreciation included in this Annual Report on Form 10-K for
additional information regarding the Core Group Facilities and for the carrying
value and accumulated depreciation of the Core Group Facilities.

THE PSYCHIATRIC GROUP

The Psychiatric Group's portfolio of psychiatric hospital investments
consists of three psychiatric hospitals owned by the Company and two mortgage
loans secured by psychiatric hospitals (the "Psychiatric Hospitals"). As of
December 31, 1996, the net book value of the Psychiatric Group total assets was
$63.3 million. Of the Psychiatric Group's real estate assets at that date, 35%
in net book value were held in fee and 65% in net book value were held as
mortgages.

The Psychiatric Hospitals provide a wide range of inpatient and outpatient
care for children, adolescents and adults, including specialized care relating
to eating disorders, substance abuse and psychiatric illness. Fundamental
changes in the psychiatric industry in recent years have reduced the operating
cash flow at the

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Psychiatric Hospitals. These changes have had, and may continue to have, an
adverse effect on the results of operations of the Psychiatric Hospital
operators and borrowers. As a result, certain of the Psychiatric Hospital
operators have had, and may continue to have, difficulty meeting their payment
obligations to the Psychiatric Group. See "Management's Discussion and Analysis
of Psychiatric Group Combined Financial Condition and Results of
Operations -- Operating Results -- Future Operating Results" included elsewhere
herein.

The following is a listing of the current Psychiatric Group portfolio of
investments as of March 1, 1997.

PSYCHIATRIC GROUP HOSPITALS

<TABLE>
<CAPTION>
YEAR ANNUAL INITIAL TERM
ACQUIRED/ TOTAL BASE RENT/ OF LEASE/
DESCRIPTION & LOCATION OPERATOR FUNDED INVESTMENT(1) INTEREST(2) MORTGAGE(3)
---------------------- -------- --------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Four Winds Psychiatric Four Winds, Inc. 1988 $27,600 $3,808 2002
Hospital(4)
Katonah, New York
Four Winds Psychiatric FW of Saratoga, 1989 18,126 2,248 1999
Hospital(4) Inc.
Saratoga Springs, New York
Less: Mortgage note (7,950)
receivable impairment
reserve
Northpointe Behavioral Health Quorum Health 1990 6,523 600 2000
System(5)(6) Resources, Inc.
Tarpon Springs, Florida
The Retreat(5)(6) Quorum Health 1990 11,934 1,100 2000
Sunrise, Florida Resources, Inc.
Rock Creek Center(6) DHP, L.P. 1989 6,505 1,000 1997
Lemont, Illinois
------- ------
Total Psychiatric Hospitals $62,738 $8,756
======= ======
</TABLE>

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(1) Reflects gross investment less write-downs.

(2) Reflects contract rate of annual base rent or interest.

(3) Each lease and mortgage provides the lessee or borrower with renewal options
to extend the term of the lease or mortgage beyond the primary term.

(4) Investment held in the form of a mortgage rather than owned by the Company.

(5) Quorum is the operator of these facilities. The Anclote Psychiatric
Hospital, Ltd. is the lessee of Northpointe Behavioral Health System and The
Retreat Psychiatric Hospital, Ltd. is the lessee of The Retreat.

(6) Actual base rent received for the year ended December 31, 1996 for
Northpointe Behavioral Health System, The Retreat and Rock Creek Center was
$200,000, $1,100,000 and $667,000, respectively. See "Management's
Discussion and Analysis of Psychiatric Group Combined Financial Condition
and Results of Operations" included elsewhere herein.

See the Notes to the Consolidated Financial Statements, the Notes to the
Psychiatric Group Combined Financial Statements and Schedule III -- Real Estate
and Accumulated Depreciation included in this Annual Report on Form 10-K for
additional information regarding the leased Psychiatric Hospitals and the
mortgage loans and for the carrying value and accumulated depreciation of the
Psychiatric Hospitals.

LEASES AND MORTGAGE LOANS

The Company owns the 13 Acute Care Hospitals, three of the Psychiatric
Hospitals, the three Rehabilitation Hospitals, the four Assisted Living
Facilities, one Long-Term Acute Care Hospital (currently under construction),
the four Skilled Nursing Facilities, a medical office building and the two
Alzheimer's

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Care Facilities which are collectively referred to herein as the "Leased
Properties" or individually as a "Leased Property".

The leases for the Leased Properties provide for base rental rates that
generally range from 9.0% to 13.4% per annum of the acquisition price less
write-downs of the related Leased Property. Rental rates vary by lease, taking
into consideration many factors, including, but not limited to, credit of the
lessee, operating performance of the Leased Property, interest rates, and
location, type and physical condition of the Leased Property. The leases provide
for additional rents that are generally based upon a percentage of increased
revenues over specified base period revenues of the related Leased Properties.

The obligations under the leases are generally guaranteed by the parent
corporation of the lessee, if the lessee is a subsidiary, or have some other
form of credit enhancement such as a letter of credit or a security deposit.
Certain of the Company's leases are with subsidiaries of the operators described
above and are non-recourse to such operators. Approximately 66% of the Company's
property revenues for the year ended December 31, 1996 were secured by corporate
guarantees. Also, as of December 31, 1996, letters of credit from commercial
banks and cash deposits aggregating $20.5 million were available to the Company
as security for lease and construction development obligations.

The leases are on a "triple net" basis, and the lessee is responsible
thereunder for all additional charges, including every fine, penalty, interest
and cost that may be levied for non-payment or late payment thereof, for taxes,
assessments, levies, fees, water and sewer rents and charges, all governmental
charges with respect to the Leased Property and all utility and other charges
incurred in the operation of the Leased Property. Each lessee is required, at
its expense, to maintain the Leased Property in good order and repair. The
Company is not required to repair, rebuild or maintain the Leased Properties.

Core Group Facilities

Acute Care Hospitals. The Acute Care Hospital leases provide for a fixed
term of ten to 17 years and one or more renewal options of from five to ten
years each. In addition to monthly base rent, all of the Acute Care Hospital
leases provide for the quarterly payment of additional rent in an amount equal
to (i) a specified percentage of the amount by which the gross revenues (as
defined) attributable to the Leased Property for the year exceeded the gross
revenues derived from such Leased Property during a specified base year ("Excess
Gross Revenues") up to a designated dollar amount (the "Transition Amount").
Should the Transition Amount be reached in any year, additional rent is equal to
a reduced percentage of the Excess Gross Revenues for the remainder of such
year.

Pursuant to the terms of the Acute Care Hospital leases, the Company has
the right to approve capital expenditures (only in excess of $2 million for
certain leases), the option to fund certain capital expenditures under some of
the leases and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. The base and
additional rent provisions of leases are amended when such capital expenditures
are funded to reflect the Company's increased investment.

Six of the Acute Care Hospitals are operated by subsidiaries of American
Medical International, Inc. ("AMI"), a subsidiary of Tenet, under long-term
leases with the Company, which comprised 55% of the Core Group's total revenues
for the year ended December 31, 1996. AMI has guaranteed certain obligations of
its subsidiaries under such leases and each such lease is cross-defaulted to the
other AMI leases. Five of the AMI leases grant to AMI the option, exercisable on
not less than six months nor more than 24 months notice, to purchase the Leased
Property upon the expiration of any term of the lease at the Fair Market Value
of the Leased Property at the expiration of said term. Four of these leases with
purchase options expire in 1999 and one of such leases expires in 2004. For
purposes of the second preceding sentence, "Fair Market Value" means the price
that a willing buyer not compelled to buy would pay to a willing seller not
compelled to sell for such property at the applicable expiration less the
portion of such price attributable to capital additions paid for by AMI. The
determination of such price will take into account (i) that the applicable lease
is assumed not to be in effect on the Leased Property and (ii) that the seller
of such Leased Property must pay for title insurance and closing costs.

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One of the other Acute Care Hospital leases provides the lessee with an
option to purchase the property at the end of the term of the lease at the fair
market value of the Leased Property. Three of the leases generally provide the
lessee with an option to purchase the property at the end of the term of the
lease at the greater of the fair market value (or some percentage thereof) or
total investment cost (as defined). One of the leases provides the lessee with a
purchase option, on or after the fifth anniversary of the lease, at the greater
of fair market value or total investment cost (as defined). One of the leases
provides the lessee with a purchase option during the term of the lease at a
predetermined purchase price designed to provide the Company with a favorable
total return on its investment. In addition, this lease provides the lessee with
an option to purchase the property at the end of the term of the lease at the
greater of 90% of the fair market value of the Leased Property or 125% of the
total investment cost (as defined).

Rehabilitation Hospitals. The Rehabilitation Hospital leases provide for
an initial term of ten years and three renewal periods of five years each,
except in the case of the MountainView Regional Rehabilitation Hospital lease,
which provides for two renewal periods of ten years each and a third renewal
period of up to fifteen years. In addition to monthly base rent, the
Rehabilitation Hospital leases provide for the quarterly payment of additional
rent in an amount equal to a specified percentage of Excess Gross Revenues. The
Rehabilitation Hospital leases each grant to the operator the option to purchase
the Rehabilitation Hospital upon expiration of any term of the lease at the
greater of the fair market value of, or the Company's cost basis in, the
Rehabilitation Hospital at the expiration of said term.

Assisted Living Facilities. The Assisted Living Facility leases provide
for a ten year initial term with six renewal periods of five years each. Each of
the four Assisted Living Facilities is operated by an affiliate of Emeritus
Corporation ("Emeritus") and all of the facilities are cross-defaulted. The
Assisted Living Facility leases provide for monthly base rent plus additional
rent payable quarterly in an amount equal to the sum of (i) the additional rent
for the immediately preceding year and (ii) an amount equal to a specified
percentage of the sum of base rent and additional rent payable for the
immediately preceding year. The leases provide the tenant with the option to
purchase the property at the end of the fixed term or at the end of any extended
term at the greater of (i) fair market value minus the tenant's share of the
appreciation amount (as defined) less the fair market value of any improvements
funded by the tenant or (ii) the Company's total investment (as defined).

Long-Term Acute Care Hospital. The Company has recently entered into an
agreement with Spectrum Comprehensive Care, Inc. ("Spectrum") to provide
construction financing for a facility in Amarillo, Texas. The Company will
purchase the facility and enter into a ten-year lease with Spectrum upon its
completion. The lease will provide for monthly payments of base rent along with
quarterly payments of additional rent in an amount equal to four percent of
Excess Gross Revenues. The participation rate in Excess Gross Revenues drops to
one percent upon reaching a predetermined rate of return. The lease will provide
the tenant with three renewal terms of ten years each and the option to purchase
the property at the end of the fixed term or at the end of any extended term at
the greater of (i) fair market value or (ii) the Company's total investment (as
defined). The lease will be guaranteed by Spectrum.

Skilled Nursing Facilities. The Skilled Nursing Facility leases provide
for an initial term of ten years and three renewal periods of ten years each.
Each of the four Skilled Nursing Facilities is operated by an affiliate of
Unison Healthcare Group, Inc. (formerly Signature Health Care Corporation)
("Unison") and all of the facilities are cross-defaulted. Additionally, the
obligations under each lease are guaranteed by Unison and an affiliate of
Unison. The leases provide for a monthly base rent plus additional rent payable
quarterly in an amount equal to the sum of (i) additional rent for the
immediately preceding year and (ii) an amount equal to a specified percentage of
the sum of base rent and additional rent payable for the immediately preceding
year. Each of the Skilled Nursing Facility leases provides the tenant with an
option to purchase the property at the end of the fixed term or the end of any
extended term at the greater of fair market value or the total investment cost
(as defined), provided that the option to purchase the property is
simultaneously exercised on each of the four Skilled Nursing Facilities. The
leases also provide the tenant with a right of first refusal to purchase the
property on the same terms and conditions as received by and acceptable to the
Company.

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<PAGE> 10

Medical Office Building. The medical office building is master-leased for
a seven-year remaining term to a partnership consisting of 22 physicians who are
the primary tenants of the building.

Alzheimer's Care Facilities. The Alzheimer's Care Facility leases provide
for a ten-year initial term with three renewal periods of ten years each. The
Alzheimer's Care Facility leases provide for monthly base rent plus additional
rent payable quarterly in an amount equal to the sum of (i) additional rent for
the immediately preceding year and (ii) an amount equal to a specified
percentage of the sum of base rent and additional rent payable for the
immediately preceding year. The leases provide the tenant with the option to
purchase the property at the end of the fixed term or at the end of any extended
term at a purchase price equal to the greater of the fair market value or total
investment cost (as defined).

Psychiatric Group Facilities

Psychiatric Hospitals. The leases for two of the owned Psychiatric
Hospitals provide for an initial term expiring in 2000 with three renewal
periods for ten years each. The lease for the third owned Psychiatric Hospital
has an initial term expiring in 1997 with one renewal period for five years and
two renewal periods for ten years each. In addition to monthly base rent, the
leases provide for the quarterly payment of additional rent in an amount equal
to a specified percentage of Excess Gross Revenues.

The Company has made mortgage loans to two of the Psychiatric Hospitals.
The two mortgage loans are secured by first mortgages and security interests in
the two separate Psychiatric Hospitals. The two loans are also
cross-collateralized. The two mortgage loans have an initial term of ten years
with two optional ten-year extension terms. Pursuant to the terms of the
mortgage loans, the Company may receive additional interest each year in an
amount equal to a specified percentage of Excess Gross Revenues.

Continuing challenges facing psychiatric hospitals have resulted in
restructuring of the payment obligations of the operators of the Company's
Psychiatric Hospitals during 1996, as well as significant write-downs of such
investments in prior years. In addition, late in 1996 the owners of two of the
Company's Psychiatric Hospitals in Florida, together with other operators of
psychiatric hospitals in Florida, were named in a suit filed by several large
insurance companies. The suit alleges wide-spread irregularities with respect to
operations in 1994 and prior years. Adverse consequences from this lawsuit will
likely have a negative impact on the Psychiatric Group's results of operations
and cash flows as well as its quarterly dividend payment. The Company does not
believe this litigation will have a material adverse effect on the financial
condition or results of operations of the consolidated Company or the Core
Group.

For a fuller discussion of the restructuring of the Company's Psychiatric
Group investments during 1996 and certain issues facing the operators of the
Company's Psychiatric Group Facilities, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of
Operations -- Operating Results -- Future Operating Results" and "Management's
Discussion and Analysis of Psychiatric Group Combined Financial Condition and
Results of Operations -- Operating Results -- Future Operating Results" included
elsewhere herein.

COMPETITION

The Company competes with health care providers, real estate partnerships,
other real estate investment trusts and other investors, including insurance
companies and banks, generally in the acquisition, leasing and financing of
health care facilities.

Management of the Company believes that the Facilities in which it has
invested are providers of high quality health care services in their respective
markets. The operators of the Facilities compete on a local and regional basis
with other operators of comparable facilities. They compete with independent
operators as well as managers of multiple facilities, some of which are
substantially larger and have greater resources than the operators of the
Facilities. Some of these competing facilities are operated for profit while
others are owned by governmental agencies or tax-exempt, not-for-profit
organizations. The Company believes that the Facilities compete favorably with
other hospitals based upon many factors, including the services and specialties
offered,

8
<PAGE> 11

quality of management, ease of access, reputation and the ability to attract
competent physicians and maintain strong physician relationships.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. In connection with its ownership and operation of the
Facilities, the Company may be potentially liable for such costs.

The Company conducts Phase I environmental assessments on properties it
acquires, which assessments are intended to discover information regarding, and
to evaluate the environmental condition of, the surveyed properties and
surrounding properties. The Phase I assessments typically include a historical
review, a public records review, a preliminary investigation of the site and
surrounding properties, screening for the presence of asbestos, polychlorinated
biphenyls and underground storage tanks and the preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
In each case where Phase I assessments resulted in specific recommendations for
remedial actions, the Company's management has taken action with respect to the
issues raised.

The Phase I assessments obtained by the Company have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations. Nevertheless,
it is possible that these assessments do not reveal all environmental
liabilities or that there are material environmental liabilities of which the
Company is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Facilities will not be
affected by tenants and occupants of the Facilities, by the condition of
properties in the vicinity of the Facilities (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.

The Company believes that the Facilities are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company has not been notified by any
governmental authority and is not otherwise aware of any material noncompliance,
liability or claim relating to hazardous or toxic substances in connection with
any of its present or former properties.

GOVERNMENT REGULATIONS AND PAYOR ARRANGEMENTS

Each of the Facilities is a health care related facility and the amount of
additional rent or additional interest, if any, which is based on the lessee's
or mortgagor's gross revenue, and the ability of the operators of the Facilities
to meet their payment obligations to the Company, are subject to changes in the
reimbursement policies of federal, state and local governments. In addition, the
acquisition or construction of a health care facility is generally subject to
state and local regulatory approval.

The operators of most of the 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 are also 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 change 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 the Medicare or
Medicaid programs could adversely affect revenues to the Facilities.

9
<PAGE> 12

In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses and the requirement that all businesses offer
health insurance to their employees. In addition, Congress is considering
various proposals relating to the Medicare and Medicaid programs, including a
proposal to offer medical savings accounts in lieu of Medicare coverage and a
proposal to abandon the current Medicaid funding system in favor of federal
block grants to states. The proposals adopted and under consideration by
Congress are designed to reduce federal government spending on the Medicare and
Medicaid programs. Accordingly, these proposed legislative changes could
adversely affect revenues to the Facilities.

Acute Care Hospitals. Acute care hospitals are subject to extensive
federal, state and local legislation and regulation. Acute care hospitals
undergo periodic inspections regarding standards of medical care, equipment and
hygiene as a condition of licensure. In certain states the construction,
acquisition or lease of an acute care hospital may be subject to certificate of
need review. Various licenses and permits also are required for narcotics,
laboratories, pharmacies, radioactive materials and certain equipment. Each
facility eligible for accreditation is accredited by the Joint Commission on
Accreditation of Health Care Organizations. Accreditation is required for
participation in government-sponsored provider programs, such as Medicare and
Medicaid.

Acute care hospitals are subject to and comply with various forms of
utilization review. In addition, under the Medicare program, each state must
have a Professional Review Organization to carry out a federally-mandated system
of review of Medicare patient admission, treatment and discharge. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each acute care hospital, and are reviewed by each acute care
hospital's local governing board and quality-assurance personnel. New
regulations governing the control of disposal of hazardous wastes may increase
the costs of operating acute care facilities.

The lessees and mortgagors of the Facilities, which provide acute care
hospital services, receive payments for patient care from the federal Medicare
program for elderly and disabled patients. Medicaid and other state programs for
medically indigent patients, private insurance carriers, employers, Blue Cross
or Blue Shield plans, health maintenance organizations, preferred provider
organizations and directly from patients.

Medicare payments for most inpatient hospital services provided by acute
care general hospitals are made under a "prospective payment system" ("PPS")
under which a hospital is paid a prospectively determined rate per discharge.
The PPS payment rate includes reimbursement for capital related costs. These
rates vary according to a patient classification system that is based on
clinical, diagnostic and other factors. Acute care hospitals are reimbursed for
cost reimbursable items at a tentative rate with final settlement determined
after submission of annual cost reports and audits thereof by the Medicare
fiscal intermediary. In general, payments made by Medicare are less than
established charges for such services. Medicare payments may be delayed due to
audits by Medicare fiscal intermediaries conducted under federal government
regulations.

Medicaid payments for acute care hospitals will vary from state to state.
These payments may be based on a percentage of reasonable cost, a fixed rate per
discharge, a capitated payment, or other payment arrangements. If a state
selects a cost-based reimbursement methodology, acute care hospitals are
reimbursed at a tentative rate with final settlement determined after submission
of annual cost reports and audits thereof by Medicaid. In general, payments made
by Medicaid are less than established charges for such services. Additionally,
Medicaid payments may be delayed due to state budget deficits and audits by
Medicaid fiscal intermediaries conducted under federal government regulations.

Blue Cross and Blue Shield payments in different states and areas are based
on cost, a per diem, or other negotiated rates and may also be subject to
payment delay. Payments from health maintenance organizations and preferred
provider organizations generally are negotiated, either at a discount from
charges or on a per capita, risk-sharing basis with stop-loss provisions for
high severity cases. In more developed markets such as California and Florida,
the Company's hospitals are now entering into risk-sharing, or capitated,
arrangements. These arrangements reimburse the hospital based on a fixed fee per
participant in a managed care plan with

10
<PAGE> 13

the hospital assuming the costs of services provided, regardless of the level of
utilization. If utilization is higher than anticipated and/or costs are not
effectively controlled, such arrangements could produce low or negative
operating margins.

Rehabilitation Hospitals. Rehabilitation hospitals are also subject to
extensive federal, state and local legislation and regulation. Rehabilitation
hospitals are subject to periodic inspections and licensure requirements and
construction, acquisition or lease of such hospitals may be subject to
certificate of need review. Outpatient rehabilitation services and free-standing
inpatient rehabilitation facilities are generally reimbursed under the same
payment arrangement as acute care hospitals, except as noted below. Medicare
payments for inpatient rehabilitative services are based on reasonable operating
cost, subject to a per discharge limitation. If a facility operates below the
cost per discharge limitation, it will qualify for a bonus payment. If a
facility operates above the cost per discharge limitation, it will be reimbursed
solely to the extent of the limitation. Defined capital costs and outpatient
services related to Medicare beneficiaries are reimbursed based on reasonable
cost. All Medicare inpatient and outpatient services are reimbursed at a
tentative rate with final settlement determined after submission of annual cost
reports and audits thereof by the Medicare fiscal intermediary. In general,
payments made by Medicare are less than established charges for such services.
Additionally, Medicare payments may be delayed due to audits by Medicare fiscal
intermediaries under federal government regulations.

Assisted Living Facilities. Assisted living facilities are subject to
state and local legislation and regulation. Assisted living facilities are not
currently regulated by the federal government. Assisted living facilities are
subject to licensure requirements, and are surveyed on a regular basis to
determine whether such facilities are in compliance with the requirements for
participation in the Medicaid program in the states where assisted living
facilities are eligible for Medicaid reimbursement. The operator of the
Company's Assisted Living Facilities targets the private pay sector of the
assisted living services market, and does not target Medicaid patients for
admission to its facilities. Private pay patients utilize private insurance
sources for payment or use their income and savings to pay for care in assisted
living facilities.

Long-Term Acute Care Facilities. The development and operation of Long-Term
Acute Care Hospitals (LTACs) are subject to federal, state and local licensure
and certification laws which regulate, among other things, the services
provided, distribution of pharmaceuticals, equipment, staffing requirements,
operating policies, fire prevention and compliance with building codes. LTACs
are designated long stay, acute hospitals by the Health Care Financing
Administration (HCFA). Medicare payments for LTAC services are based on
reasonable operating costs, subject to a per discharge limitation. In order to
qualify for exemption from the prospective payment system, LTACs are required to
maintain an average length of stay of at least 25 days.

Skilled Nursing Facilities. Skilled nursing facilities are also subject to
extensive federal, state and local legislation and regulation. Construction,
acquisition or lease of Skilled nursing facilities may also be subject to
certificate of need review. Skilled nursing facilities are subject to licensure
requirements, and are surveyed on a regular basis to determine whether such
facilities are in compliance with the requirements for participation in the
Medicare and Medicaid programs. Medicare provides coverage for beneficiaries who
require skilled nursing and certain related medical services, such as physical,
occupational and speech therapy, pharmaceuticals, medical supplies and
ancillary, diagnostic and other necessary services of the type provided by
skilled nursing facilities. Medicare benefits are not available for patients
requiring intermediate and custodial levels of care. In general, Medicare
payments for skilled nursing services are based on the lesser of actual
allowable routine, ancillary and capital costs or charges. All Medicare
inpatient services are reimbursed at a tentative rate with final settlement
determined after submission of annual cost reports and audits thereof by the
Medicare fiscal intermediary. Although Medicaid programs vary from state to
state, reimbursement rates are typically determined by the state from cost
reports filed annually by each facility, on a prospective or retrospective
basis. Under most state Medicaid programs, individual facilities are reimbursed
on a prospective rate system, subject to retroactive adjustment. Under a
prospective system, per diem rates are established based upon certain historical
costs of providing services during the prior year, adjusted to reflect factors
such as inflation and any additional services required to be performed.
Providers must accept reimbursement from Medicaid as payment in full for the
services rendered.

11
<PAGE> 14

Alzheimer's Care Facilities. Alzheimer's care facilities are classified as
long-term care facilities and are reimbursed under the same payment arrangements
as long-term care facilities to the extent that the operator elects to
participate in the Medicare and Medicaid programs.

Psychiatric Hospitals. In addition to the licensing, certificate of need
and Medicare/Medicaid rules and regulations, there are a number of specific
federal and state laws affecting psychiatric hospitals, such as the regulation
of civil commitments of patients, admitting procedures, and disclosure of
information regarding patients being treated for chemical dependency. Many
states have adopted a "patient's bill of rights" which sets forth standards
governing the treatment of patients of psychiatric hospitals, such as using the
least restrictive treatment method, allowing patient access to telephone and
mail, allowing a patient to see a lawyer, and requiring the patient to be
treated with dignity. The lessees and mortgagors of the Psychiatric Hospitals
receive payments for patient care from the federal Medicare program for elderly
and disabled patients, Medicaid and other state programs for medically indigent
patients, private insurance carriers, employers, Blue Cross or Blue Shield
plans, health maintenance organizations, preferred provider organizations and
directly from patients.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Joseph P. Sullivan........................ 54 Chairman of the Board of Directors,
President and Chief Executive Officer
Michael J. McGee.......................... 41 Senior Vice President, Chief Financial
Officer and Treasurer
C. Gregory Schonert....................... 42 Senior Vice President and Chief
Development Officer
Thomas T. Schleck......................... 49 Senior Vice President, Chief Investment
Officer and Secretary
</TABLE>

JOSEPH P. SULLIVAN -- Mr. Sullivan was elected President and Chief
Executive Officer of the Company and a member of the Board of Directors
effective February 11, 1993. Mr. Sullivan was elected Chairman of the Board of
Directors in November 1996. Prior to that, Mr. Sullivan spent 20 years with
Goldman, Sachs & Co. where he had overall investment banking responsibility for
numerous companies in the health care field.

MICHAEL J. MCGEE -- Mr. McGee has been Senior Vice President and Chief
Financial Officer of the Company since January 1996, has served as Treasurer of
the Company since August 1995 and has served as Controller of the Company since
November 1989. Mr. McGee was a certified public accountant with Arthur Andersen
LLP from 1977 to November 1989.

C. GREGORY SCHONERT -- Mr. Schonert has been Senior Vice President and
Chief Development Officer of the Company since April 1988. Prior to that Mr.
Schonert was Assistance Administrator of Marketing and Planning at St. Joseph's
Hospital, Houston, Texas from February 1987. From September 1985 until February
1987, Mr. Schonert was a Manager in the Corporate Development Department of AMI.

THOMAS T. SCHLECK -- Mr. Schleck has been the Senior Vice President and
Chief Investment Officer of the Company since April 1996 and Secretary since May
1996. Prior to that Mr. Schleck was a Managing Director/Partner of Covington
Group, LC from July 1994 to April 1996, and from October 1988 to May 1994 he was
Chief Financial Officer and Treasurer of EPIC Healthcare Group, Inc. From March
1982 to October 1988, Mr. Schleck was Corporate Vice President/Treasurer of AMI,
and prior to that, he held various positions in health care lending with Bank of
America NT&SA from June 1970 to March 1982.

Each executive officer is elected by the Board of Directors at its first
meeting after each annual meeting of the shareholders and serves until such time
as his successor is elected.

12
<PAGE> 15

ITEM 2. PROPERTIES.

See "Item 1. Business" for a description of properties owned by the Company
or subject to mortgages held by the Company.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not currently involved in any material litigation nor, to
the Company's knowledge, is any litigation currently threatened against the
Company or its properties, other than routine litigation arising in the ordinary
course of business that, if determined adversely, would not have a material
adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

13
<PAGE> 16

PART II

ITEM 5. MARKET FOR REGISTRANT'S VOTING STOCK AND RELATED STOCKHOLDER MATTERS.

The Common Stock of American Health Properties, Inc. is traded on The New
York Stock Exchange ("NYSE") under the trading symbol "AHE." The Psychiatric
Group Depositary Shares of American Health Properties, Inc. are traded on the
NASDAQ National Market System ("NASDAQ") under the trading symbol "AHEPZ." The
table below shows the reported high and low sales prices (i) for the Company's
Common Stock as reported by the NYSE Composite Tape for the last two fiscal
years and the cash dividends declared per share with respect to such periods,
and (ii) for the Company's Psychiatric Group Depositary Shares as reported by
NASDAQ for the last two fiscal years and the cash dividends declared per share
with respect to such periods.

<TABLE>
<CAPTION>
PSYCHIATRIC GROUP DEPOSITARY
COMMON STOCK SHARES
------------------------- ----------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW DECLARED HIGH LOW DECLARED
------- ---- ---- --------- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
1996
4th................................ $24 3/8 $21 1/8 $.5250 $16 5/8 $14 $.80
3rd................................ 23 1/8 20 5/8 .5050 16 1/8 12 3/4 .65
2nd................................ 22 3/4 20 1/2 .5050 17 1/2 14 1/4 .65
1st................................ 23 7/8 21 1/2 .5050 17 1/2 14 1/4 .70

1995
4th................................ $21 3/4 $19 3/4 $.5050 $17 $12 3/8 $.80
3rd(1)............................. 23 1/4 20 1/4 .4950 21 15 1/2 .80
2nd(1)............................. 22 1/8 19 5/8 .4950 N/A N/A .80
1st................................ 22 1/8 19 3/8 .5750 N/A N/A N/A
</TABLE>

- ---------------
(1) On July 25, 1995, the Company made a distribution of one Depositary Share
for every ten shares of Common Stock held of record on July 14, 1995, each
such Depositary Share representing a one-tenth interest in one share of
Psychiatric Group Stock. On July 11, 1995, the Company declared dividends
totaling $.5750 for the second quarter of 1995, comprised of a dividend of
$.4950 to be paid on the Common Stock and a dividend of $.08 to be paid on
each one-hundredth of a share of Psychiatric Group Stock, which is
equivalent to $.80 per Depositary Share. The high and low sales prices of
the Common Stock for the periods subsequent to July 25, 1995 reflect the
value of the Common Stock after the Distribution.

As of March 13, 1997, the reported high and low sales prices (i) for the
Company's Common Stock for 1997 were $26 and $22 7/8, respectively, and (ii) for
the Company's Psychiatric Group Depositary Shares for 1997 were $19 1/2 and
$15 1/2, respectively. As of March 13, 1997, there were approximately (i) 4,303
holders of record and 23,455,027 shares outstanding of the Company's Common
Stock, and (ii) 3,477 holders of record and 2,083,931 shares outstanding of the
Company's Psychiatric Group Depositary Shares.

In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds from the disposition of Psychiatric Group assets after the
repayment of Psychiatric Group indebtedness ("PG Excess Proceeds"). Dividends or
other distributions paid out of PG Excess Proceeds will be available only for
the Psychiatric Group Stock and will be limited to $30 million in the aggregate
and $15 million in any calendar year.

The Company expects that quarterly dividends on the Common Stock and the
Psychiatric Group Stock in the future will be based primarily upon the funds
from operations attributable to the Core Group and the Psychiatric Group,
respectively. Specifically, the Company expects to maintain the Common Stock
dividend payout ratio at less than 90% of annual funds from operations
attributable to the Core Group and the

14
<PAGE> 17

Psychiatric Group Stock dividend payout ratio (excluding distributions out of PG
Excess Proceeds) at less than 95% of annual funds from operations attributable
to the Psychiatric Group.

In addition, the Company expects to use the net proceeds from the
disposition of the Psychiatric Group assets initially to repay then outstanding
inter-Group loans or other debt owed by the Psychiatric Group and then to
distribute all remaining net proceeds, if any, to holders of Psychiatric Group
Stock by dividend, tender offer, open market or privately negotiated repurchases
or otherwise (in cash, or in Common Stock valued at a ten trading day average
market value prior to the time of the distribution).

The payment of dividends on the Common Stock and the Psychiatric Group
Stock will also be dependent in part upon the financial condition of the Company
as a whole.

The Company expects the aggregate annual dividends paid on the Common Stock
and the Psychiatric Group Stock to be at least sufficient to cause the Company
to maintain its status as a REIT. In order to permit the Company to qualify as a
REIT, the Company must distribute to stockholders at least 95% of its annual
REIT taxable income (which essentially is its net ordinary income, excluding
capital gains). Generally, as a result of non-cash items, primarily
depreciation, cash dividends have exceeded and may continue to exceed the
Company's REIT taxable income and to that extent represent a return of capital.

Dividends on the Common Stock and the Psychiatric Group Stock will be
limited to the available dividend amount attributable to the Core Group and the
Psychiatric Group, respectively. The available dividend amount is similar to the
amount that would be legally available under Delaware law for the payment of
dividends by the Core Group or the Psychiatric Group, as the case may be, if
such Group were a separate Delaware corporation. There can be no assurance that
there will be an available dividend amount with respect to either Group. As of
December 31, 1996, the available dividend amount attributable to the Core Group
and the Psychiatric Group as of that date was at least $296.9 million and $48
million, respectively. All dividends on Common Stock will be deemed to be out of
the Core Group's funds and all dividends on Psychiatric Group Stock will be
deemed to be out of the Psychiatric Group's funds.

Dividends on the Common Stock and Psychiatric Group Stock will be further
limited to the amount of funds of the Company legally available under Delaware
law for the payment of dividends by the Company on its capital stock. As of
December 31, 1996, the funds of the Company legally available for the payment of
dividends would have been at least $344.9 million. Payments of dividends on
either the Common Stock or the Psychiatric Group Stock will decrease the amount
of funds legally available for the payment of dividends on both the Common Stock
and the Psychiatric Group Stock.

15
<PAGE> 18

ITEM 6. SELECTED FINANCIAL DATA.

Set forth below for the years ended December 31, 1996, 1995, 1994, 1993 and
1992 is (a) selected consolidated financial data with respect to the Company,
(b) selected combined financial data for the Core Group, and (c) selected
combined financial data for the Psychiatric Group. The selected financial data
should be read in conjunction with the Consolidated, Core Group Combined and
Psychiatric Group Combined Financial Statements and accompanying Notes included
elsewhere herein.

<TABLE>
<CAPTION>
CONSOLIDATED
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 88,924 $ 91,230 $ 87,027 $ 81,523 $ 82,079
Net income (loss)(1)(2)............. $ 44,379 $ 42,381 $ 9,693 $ 50,987 $ (6,317)
Cash flows from operating
activities........................ $ 61,241 $ 57,471 $ 54,984 $ 45,884 $ 43,486
Dividends declared.................. $ 53,681 $ 50,769 $ 47,982 $ 44,766 $ 45,747
Total assets........................ $577,882 $586,316 $579,503 $614,453 $566,394
Total debt.......................... $207,101 $207,378 $245,663 $245,423 $286,859
Stockholders' equity................ $345,139 $353,060 $307,501 $343,303 $255,349
</TABLE>

<TABLE>
<CAPTION>
CORE GROUP
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 81,429 $ 82,913 $ 75,680 $ 73,036 $ 75,962
Net income(1)....................... $ 38,800 $ 36,107 $ 32,548 $ 48,616 $ 36,194
Net income per common share(1)(3)... $ 1.65 $ 1.69 $ 1.56 $ 2.58 $ 2.10
Weighted average common shares
outstanding(3).................... 23,518 21,405 20,856 18,843 17,247
Cash flows from operating
activities........................ $ 54,841 $ 50,413 $ 46,258 $ 41,276 $ 38,799
Dividends declared.................. $ 47,845 $ 44,095 $ 39,303 $ 38,078 $ 40,936
Dividends declared per common
share(3).......................... $ 2.04 $ 1.99 $ 1.88 $ 1.91 $ 2.36
Total assets........................ $527,979 $536,199 $528,686 $532,461 $522,127
Total attributed debt............... $207,101 $207,378 $245,663 $245,423 $286,859
Total attributed equity............. $297,176 $304,947 $259,199 $263,832 $213,230
</TABLE>

<TABLE>
<CAPTION>
PSYCHIATRIC GROUP
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 9,174 $ 10,346 $ 15,388 $ 15,317 $ 15,163
Net income (loss)(2)................ $ 5,579 $ 6,274 $(22,855) $ 2,371 $(42,511)
Net income (loss) per depositary
share(2)(3)....................... $ 2.67 $ 3.00 $ (10.96) $ 1.26 $ (24.64)
Weighted average depositary shares
outstanding(3).................... 2,093 2,091 2,086 1,884 1,725
Cash flows from operating
activities........................ $ 6,400 $ 7,058 $ 8,726 $ 4,608 $ 4,687
Dividends declared.................. $ 5,836 $ 6,674 $ 8,679 $ 6,688 $ 4,811
Dividends declared per depositary
share(3).......................... $ 2.80 $ 3.20 $ 4.16 $ 3.36 $ 2.78
Total assets........................ $ 63,261 $ 64,555 $ 80,245 $116,820 $116,188
Total attributed debt............... $ 13,358 $ 14,438 $ 29,428 $ 34,828 $ 71,921
Total attributed equity............. $ 47,963 $ 48,113 $ 48,302 $ 79,471 $ 42,119
</TABLE>

- ---------------
(1) Includes gain of $19,742,000 and $11,064,000 in 1993 and 1992, respectively,
on the sale of properties or partnership interests therein.

(2) Includes write-downs of $30,000,000 in 1994 and $45,000,000 in 1992 relating
to investments in psychiatric properties.

(3) For purposes of computing per share and weighted average data for periods
prior to the July 25, 1995 distribution of the Depositary Shares, the number
of shares of Common Stock are assumed to be the same as the corresponding
number of shares of the Common Stock outstanding prior to July 25, 1995,
while the number of Depositary Shares are assumed to be one-tenth of the
corresponding number of shares of the Common Stock outstanding prior to July
25, 1995.

16
<PAGE> 19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Following is a discussion of the consolidated financial condition and
results of operations of the Company which should be read in conjunction with
the consolidated 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. 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, 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.

Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock held
of record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock. The Distribution was designed to separate the economic attributes of the
Company's investments in psychiatric hospitals (the Psychiatric Group) and its
investments in acute care, rehabilitation and longterm acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and a medical
office building (the Core Group) into two distinct portfolios, with two distinct
classes of publicly-traded shares intended to represent those portfolios. In
connection with the Distribution, the Company directly assigned or, if not
directly assigned, allocated its assets, liabilities and stockholders' equity,
and its revenues, expenses and cash flow items, between the Core Group and
Psychiatric Group. The Psychiatric Group Depositary Shares are intended to
reflect the separate financial performance of the Psychiatric Group. The
Company's common stock (the Core Group Common Stock) is intended to reflect the
separate financial performance of the Core Group. However, the change in the
capital structure of the Company effected by the Distribution does not affect
the respective legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock or Psychiatric Group
Depositary Shares is a holder of an issue of capital stock of the entire Company
and is subject to the risks associated with an investment in the Company and all
of its businesses, assets and liabilities.

OPERATING RESULTS

1996 Compared to 1995

In 1996, the Company reported net income of $44,379,000 compared with net
income of $42,381,000 in 1995. Net income in 1995 included a $2,652,000 premium
from the prepayment of a mortgage loan and reflects $300,000 of additional costs
related to the Distribution. See the Consolidated Statements of Operations for
the comparative gross and per share amounts of net income attributable to the
Core Group Common Stock and the Psychiatric Group Depositary Shares.

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<PAGE> 20

Rental income was $69,488,000 in 1996, an increase of $1,695,000 or 3% from
$67,793,000 in 1995. This net increase was primarily attributable to rental
income from new properties acquired subsequent to the first quarter of 1995,
which was partially offset by a reduction in rental income due to the sale of
two psychiatric properties during the first quarter of 1995 and the nonpayment
of $734,000 of rent by two psychiatric operators during 1996. The net property
additions also resulted in a net increase in depreciation and amortization of
$639,000 or 4% to $15,016,000 in 1996 compared with $14,377,000 in 1995.

Mortgage interest income was $5,980,000 in 1996, a decrease of $752,000 or
11% from $6,732,000 in 1995. This net decrease was primarily attributable to the
payoff of a mortgage loan on a hospital located in Austin, Texas in October
1995.

Additional rental and interest income was $12,342,000 in 1996, an increase
of $1,217,000 or 11% from $11,125,000 in 1995. This positive variation was
primarily attributable to increased additional rent from the Company's six
original acute care properties.

Other interest income decreased $4,466,000 or 80% to $1,114,000 in 1996
from $5,580,000 in 1995. Other interest income in 1995 included approximately
$1,500,000 of interest on a construction loan that subsequently converted to a
mortgage loan in the third quarter of 1995. In addition, this variation was due
to a lower average balance of borrowings outstanding under revolving credit
facilities provided to psychiatric hospital operators, the nonpayment of
$182,000 of interest by a psychiatric operator during 1996, and a lower average
balance of direct financing leases, partially offset by higher investable cash
balances.

Interest expense was $21,842,000 in 1996, a decrease of $5,215,000 or 19%
from $27,057,000 in 1995. Interest expense decreased as a result of the $24
million, $29 million and $20 million senior notes maturities in May 1995, May
1996 and September 1996, respectively, lower average bank loan borrowings during
1996 and an increase in capitalized interest in 1996 compared to 1995.

General and administrative expenses were $7,471,000 in 1996, an increase of
$632,000 or 9% from $6,839,000 in 1995. This increase was primarily attributable
to higher shareholder reporting costs as a result of the Distribution, higher
financial advisory services provided primarily by an investment banking firm
which included supplemental monitoring of the performance of the Company's
psychiatric properties and assistance in addressing operational and cash flow
difficulties of certain operators of the psychiatric properties and higher
travel and legal costs. In addition, stock incentive expense was lower in 1995
due to the reversal of a significant amount of such expense upon termination of
two officers.

The $300,000 of targeted stock issuance costs in 1995 was an additional
accrual made in the second quarter of 1995 to reflect the increased costs of the
Distribution. The increased costs primarily reflected higher legal and
accounting fees and printing and shipping costs as a result of the extended
filing period.

1995 Compared to 1994

In 1995, the Company reported net income of $42,381,000 compared with net
income of $9,693,000 in 1994. Net income in 1994 reflects a write-down of
psychiatric real estate investments of $30,000,000 as a result of accelerating
negative trends in the psychiatric industry, and net income in 1995 reflects a
reduction in income due to the sale of three psychiatric properties and the
lease restructurings of two psychiatric investments subsequent to September
1994. Net income in 1995 included a $2,652,000 premium from the prepayment of a
mortgage loan while net income in 1994 included $710,000 of fee income related
to the prepayment of a construction loan. Net income for 1995 and 1994 reflect
costs related to the Distribution of $300,000 and $1,450,000, respectively. See
the Consolidated Statements of Operations for the comparative gross and per
share amounts of net income or loss attributable to the Core Group Common Stock
and the Psychiatric Group Depositary Shares.

Rental income was $67,793,000 in 1995, an increase of $61,000 from
$67,732,000 in 1994. This net increase was primarily attributable to rental
income from new properties acquired and various capital additions subsequent to
the first quarter of 1994, which was partially offset by a reduction in rental
income due to the sale of three psychiatric properties and the lease
restructurings of two psychiatric investments. These factors,

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<PAGE> 21

combined with lower depreciation expense on psychiatric properties written down
in June 1994, resulted in a net increase in depreciation and amortization of
$274,000 to $14,377,000 in 1995 compared with 1994.

Mortgage interest income increased $945,000 to $6,732,000 in 1995 from
$5,787,000 in 1994. This increase was primarily attributable to the conversion
of a construction loan on a hospital located in Austin, Texas to a mortgage loan
during the third quarter of 1995. In October 1995, the Company received $29.15
million as proceeds from the payoff of this mortgage loan, which represented
$26.5 million in principal and a $2.65 million prepayment premium.

Additional rental and interest income was $11,125,000 in 1995, an increase
of $1,619,000 or 17% from $9,506,000 in 1994. This positive variation was
attributable to increased additional rent from six of the Company's original
acute care properties and more recently purchased properties generating
additional rent for the first time in 1995.

Other interest income increased $1,578,000 to $5,580,000 in 1995 from
$4,002,000 in 1994. Other interest income in 1995 included a $2.65 million
premium from the prepayment of a mortgage loan in October 1995. Other interest
income in 1994 included $710,000 of fee income related to the prepayment of a
construction loan in February 1994. The remaining net decrease in other interest
income during 1995 resulted from a lower average construction loan balance, a
lower average balance of short-term investments and a lower average balance of
borrowings outstanding under revolving credit facilities provided to psychiatric
hospital operators, which was partially offset by a higher average balance of
direct financing leases.

Interest expense was $27,057,000 in 1995, an increase of $956,000 or 4%
from $26,101,000 in 1994. Interest expense increased as a result of higher
average bank loan borrowings during 1995 and a reduction in capitalized interest
in 1995 compared to 1994. This was partially offset by a reduction in interest
expense on senior notes payable as a result of a $24 million maturity in May
1995.

General and administrative expenses increased to $6,839,000 in 1995 from
$5,376,000 in 1994. In the second quarter of 1994, the Company reversed $750,000
of a corporate relocation accrual recorded in the fourth quarter of 1993 after
the Company decided to maintain its headquarters in Denver, Colorado. The
remaining net increase in 1995 was primarily attributable to increased
compensation and benefits expense and costs incurred related to financial
advisory services provided to the Psychiatric Group by an investment banking
firm.

In 1994, $1,450,000 was accrued for the cost of the planned Distribution.
The $300,000 of targeted stock issuance costs in 1995 was an additional accrual
made in the second quarter of 1995 to reflect the increased costs of the
Distribution. The increased costs primarily reflect higher legal and accounting
fees and printing and shipping costs as a result of the extended filing period.

Future Operating Results

The 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.

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<PAGE> 22

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.

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 providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Although the operators of the psychiatric hospitals are
responding by increasing case management, developing lower cost outpatient and
daypatient programs and reducing operating costs, their efforts are generally
not consistently mitigating the negative impact of these fundamental psychiatric
industry changes. As a result, certain of the psychiatric hospital operators
have not met their contractual payment obligations to the Company as scheduled
and there can be no assurance that psychiatric hospital operators will be able
to meet such payment obligations in the future. The Company has in the past,
restructured obligations and written down its investments in certain psychiatric
facilities, and has consented, in certain circumstances, to the release or
modification of some of the related credit enhancements.

The Company currently is providing financing under revolving credit
agreements to the operators of three of its psychiatric hospitals which are the
primary source of financing for these operators' operating and capital

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<PAGE> 23

needs. As of March 19, 1997, outstanding borrowings under such agreements
totaled $4,225,000, and the Company has committed to fund an additional
$1,475,000 of borrowings upon request, subject to certain conditions. To the
extent the psychiatric hospitals have increased working capital needs in the
future, the Company may be the only source of such financing.

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 and pursue alternative uses for the properties
and/or make additional write-downs of the value of its investments in the
psychiatric hospitals. 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 Psychiatric Group
Depositary Shares were distributed in July 1995 in an effort to effectively
separate the economic attributes of the Company's psychiatric investments (the
Psychiatric Group) from its core investments in acute care, rehabilitation and
long-term acute care hospitals, skilled nursing, assisted living and Alzheimer's
care facilities and a medical office building (the Core Group).

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. Any significant advance of additional funds to psychiatric
hospital operators, modification of terms covering the rental or interest
obligations of its psychiatric properties or nonpayment or deferral of such
obligations as they become due likely will have an adverse impact on the
Company's Psychiatric Group results of operations and cash flows, as well as the
quarterly dividend payment on Psychiatric Group Depositary Shares. The
nonpayment and deferral of rental and interest obligations of two operators in
1996 was responsible for the reduction in the quarterly dividend on Psychiatric
Group Depositary Shares from $.80 per share in the fourth quarter of 1995 to
$.70 per share in the first quarter of 1996 and $.65 per share in the second and
third quarters of 1996. Although the quarterly dividend on Psychiatric Group
Depositary Shares was increased to $.80 per share in the fourth quarter of 1996,
there can be no assurance that the quarterly dividend will not be reduced in the
future.

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. The Company believes that the distribution
of the Psychiatric Group Depositary Shares in 1995 facilitated achievement of
these objectives. Subsequent to the Distribution, the Company raised $50.3
million of additional equity for the Core Group in October 1995 through the sale
of 2.5 million shares of its Core Group Common Stock and in December 1995,
closed on a new $150 million unsecured revolving credit facility with improved
pricing and terms. In January 1997, the Company completed its first public debt
offering, selling $220 million of unsecured senior notes at a weighted average
effective interest rate of approximately 7.56%. The Company used a portion of
the proceeds of this offering to prepay $152 million of 11.03% private placement
debt in February 1997 prior to its scheduled maturity, incurring an
extraordinary charge in the first quarter of 1997 of $11.4 million consisting of
a make-whole premium and other costs related to the prepayment.

LIQUIDITY AND CAPITAL RESOURCES

As of March 19, 1997, the Company had remaining commitments to fund real
estate projects under construction of approximately $4 million. In addition, the
Company had agreed to provide real estate financing to three different operators
aggregating approximately $81 million. Of this amount, approximately $46 million
has been committed to five assisted living and two skilled nursing projects to
be constructed over the next fifteen months and $4.4 million has been committed
to the financing of an existing long-term acute care hospital within the next
two months. The remaining $30.6 million of financing has not been committed to
specific acquisitions or projects. Aggregate unfunded commitments under
revolving credit agreements provided to psychiatric hospital operators totaled
$1.5 million as of March 19, 1997.

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<PAGE> 24

The Company has continued to increase its liquidity and enhance its
financial flexibility. In October 1995, the Company received $29.15 million as
proceeds from the payoff of its interest in a mortgage loan and completed an
offering of 2.5 million additional shares of Core Group Common Stock resulting
in net proceeds of $50.3 million. In December 1995, the Company closed on a new
$150 million unsecured revolving credit facility which matures on December 27,
1998. In January 1997, the Company completed a $220 million public unsecured
debt offering, issuing $100 million of five-year senior notes and $120 million
of ten-year senior notes. The Company used the net proceeds to pay off all
outstanding borrowings under its $150 million bank facility at the time and to
prepay all of its $152 million of outstanding private placement debt in late
February 1997. As of March 19, 1997, the Company had no outstanding borrowings
under its revolving credit facility and had $3.4 million in cash and short-term
investments. The Company's total indebtedness as of March 19, 1997 was $225.6
million. The Company will utilize its revolving credit facility to fund future
acquisitions and its other commitments. The Company may incur additional
indebtedness or refinance existing indebtedness if the Company determines that
opportunities to pursue such transactions would be attractive. The Company's
unsecured publicly-traded senior debt carries investment grade ratings from Duff
& Phelps Credit Rating Co. (BBB-), Moody's Investors Service (Baa3) and Standard
& Poor's (BBB-). 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.

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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. 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, 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

1996 Compared to 1995

In 1996, the Core Group reported net income of $38,800,000 or $1.65 per
share, an increase of $2,693,000 or 7% compared with net income of $36,107,000
or $1.69 per share in 1995. Net income in 1995 included a premium of $2,652,000
or $.12 per share from the prepayment of a mortgage loan.

Rental income was $67,499,000 in 1996, an increase of $2,759,000 or 4% from
$64,740,000 in 1995. This increase was primarily attributable to rental income
from new properties acquired subsequent to the first quarter of 1995. These
property additions also resulted in an increase in depreciation and amortization
of $697,000 or 5% to $14,272,000 in 1996 compared with $13,575,000 in 1995.

The Core Group had no mortgage interest income in 1996 compared to $845,000
in 1995 as a result of the payoff of a mortgage loan on a hospital located in
Austin, Texas in October 1995.

Additional rental income was $11,530,000 in 1996, an increase of $1,125,000
or 11% from $10,405,000 in 1995. This positive variation was primarily
attributable to increased additional rent from the Core Group's six original
acute care properties.

Other interest income decreased $4,173,000 or 85% to $721,000 in 1996 from
$4,894,000 in 1995. Other interest income in 1995 included approximately
$1,500,000 of interest on a construction loan that subsequently converted to a
mortgage loan in the third quarter of 1995. In addition, this variation was due
to a lower average balance of direct financing leases and higher investable cash
balances during 1996 compared with 1995.

Interest income on inter-Group loans to the Psychiatric Group was
$1,679,000 in 1996, a decrease of $350,000 or 17% from $2,029,000 in 1995. This
decrease reflects a lower average balance outstanding on loans to the
Psychiatric Group, which was primarily attributable to $15,150,000 of repayments
by the Psychiatric Group from the proceeds of asset sales and the paydown of
borrowings under revolving credit agreements provided to Psychiatric Group
hospital operators during the first quarter of 1995.

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<PAGE> 26

May 1995, May 1996 and September 1996, respectively, lower average bank loan
borrowings during 1996 and an increase in capitalized interest in 1996 compared
to 1995.

General and administrative expenses were $6,299,000 in 1996, an increase of
$401,000 or 7% from $5,898,000 in 1995. 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 shareholder reporting costs as a result of the Distribution and higher
travel and legal costs. In addition, stock incentive expense was lower in 1995
due to the reversal of a significant amount of such expense upon termination of
two officers.

1995 Compared to 1994

In 1995, the Core Group reported net income of $36,107,000 or $1.69 per
share compared with net income of $32,548,000 or $1.56 per share in 1994. Net
income in 1995 included a premium of $2,652,000 or $.12 per share from the
prepayment of a mortgage loan while net income in 1994 included fee income of
$710,000 or $.03 per share related to the prepayment of a construction loan.

Rental income was $64,740,000 in 1995, an increase of $4,985,000 or 8% from
$59,755,000 in 1994. This increase was primarily attributable to rental income
from new properties acquired and various capital additions subsequent to the
first quarter of 1994. These property additions also resulted in an increase in
depreciation and amortization of $1,273,000 to $13,575,000 in 1995 compared with
1994.

Mortgage interest income in 1995 was $845,000 compared to $0 in 1994. This
increase was attributable to the conversion of a construction loan on a hospital
located in Austin, Texas to a mortgage loan during the third quarter of 1995. In
October 1995, the Core Group received $29.15 million as proceeds from the payoff
of this mortgage loan, which represented $26.5 million in principal and a $2.65
million prepayment premium.

Additional rental income was $10,405,000 in 1995, an increase of $1,497,000
or 17% from $8,908,000 in 1994. This positive variation was attributable to
increased additional rent from six of the Core Group's original acute care
properties and more recently purchased properties generating additional rent for
the first time.

Other interest income increased $1,918,000 to $4,894,000 in 1995 from
$2,976,000 in 1994. Other interest income in 1995 included a $2.65 million
premium from the prepayment of a mortgage loan in October 1995. Other interest
income in 1994 included $710,000 of fee income related to the prepayment of a
construction loan in February 1994. The remaining net decrease in other interest
income during 1995 resulted from a lower average construction loan balance and a
lower average balance of short-term investments, which was partially offset by a
higher average balance of direct financing leases.

Interest income on inter-Group loans to the Psychiatric Group was
$2,029,000 in 1995, a decrease of $2,012,000 or 50% from $4,041,000 in 1994.
This decrease reflects a lower average balance outstanding on loans to the
Psychiatric Group, which was primarily attributable to $15,150,000 of repayments
by the Psychiatric Group from the proceeds of asset sales and the paydown of
borrowings under revolving credit agreements provided to Psychiatric Group
hospital operators.

General and administrative expenses increased to $5,898,000 in 1995 from
$4,425,000 in 1994. This variation was attributable to an increase in the
Company's consolidated general and administrative expenses which are allocated
between the Core Group and Psychiatric Group primarily based on revenues, and an
increase in Core Group revenues relative to the Company's consolidated revenues.
In the second quarter of 1994, the Company reversed $750,000 of a corporate
relocation accrual recorded in the fourth quarter of 1993 after the Company
decided to maintain its headquarters in Denver, Colorado. The remaining net
increase in

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<PAGE> 27

the Company's consolidated general and administrative expenses in 1995 was
primarily attributable to increased compensation and benefits expense.

Future Operating Results

The nature of health care delivery in the United States continues to
undergo change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed by both Houses of Congress. These plans
have generally included revisions to and limits on Medicare and federal programs
providing Medicaid reimbursement to state health care programs and potentially
would have an adverse impact on the level of funds available in the future to
health care facilities. The Company's Board and management are monitoring
potential changes closely. The Company believes that these potential changes may
pose risks for certain institutions that are unwilling or unable to respond. At
the same time, the Company believes that this changing health care environment
will provide the Core Group with new opportunities for investment.

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<PAGE> 28

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. The Company believes that the
distribution of the Psychiatric Group Depositary Shares in 1995 facilitated
achievement of these objectives. Subsequent to the Distribution, the Company
raised $50.3 million of additional equity for the Core Group in October 1995
through the sale of 2.5 million shares of its Core Group Common Stock and in
December 1995, closed on a new $150 million unsecured revolving credit facility
with improved pricing and terms. In January 1997, the Company completed its
first public debt offering, selling $220 million of unsecured senior notes at a
weighted average effective interest rate of approximately 7.56%. The Company
used a portion of the proceeds of this offering to prepay $152 million of 11.03%
private placement debt in February 1997 prior to its scheduled maturity,
incurring an extraordinary charge in the first quarter of 1997 of $11.4 million
consisting of a make-whole premium and other costs related to the prepayment.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, the Core Group had $4,183,000 outstanding under
its revolving inter-Group loan to the Psychiatric Group. Under management
policies currently in effect, the Core Group may provide the Psychiatric Group
with revolving inter-Group loans of up to $8,750,000. In addition, as of
December 31, 1996, the Core Group had $9,175,000 in fixed rate inter-Group loans
to the Psychiatric Group.

As of March 19, 1997, the Core Group had remaining commitments to fund real
estate projects under construction of approximately $4 million. In addition, the
Core Group had agreed to provide real estate financing to three different
operators aggregating approximately $81 million. Of this amount, approximately
$46 million has been committed to five assisted living and two skilled nursing
projects to be constructed over the next fifteen months and $4.4 million has
been committed to the financing of an existing long-term acute care hospital
within the next two months. The remaining $30.6 million of financing has not
been committed to specific acquisitions or projects.

The Company has continued to increase its liquidity and enhance its
financial flexibility. In October 1995, the Company's Core Group received $29.15
million as proceeds from the payoff of its interest in a mortgage loan and
completed an offering of 2.5 million additional shares of Core Group Common
Stock resulting in net proceeds of $50.3 million. In December 1995, the Company
closed on a new $150 million unsecured revolving credit facility which matures
on December 27, 1998. In January 1997, the Company completed a $220 million
public unsecured debt offering, issuing $100 million of five-year senior notes
and $120 million of ten-year senior notes. The Company used the net proceeds to
pay off all outstanding borrowings under its $150 million bank facility at the
time and to prepay all of its $152 million of outstanding private placement debt
in late February 1997. As of March 19, 1997, the Company had no outstanding
borrowings under its revolving credit facility and had $3.4 million in cash and
short-term investments. The Company's total indebtedness as of March 19, 1997
was $225.6 million. The Company will utilize its revolving credit facility to
fund its future Core Group acquisitions and its other commitments. The Company
may incur additional indebtedness or refinance existing indebtedness if the
Company determines that opportunities to pursue such transactions

26
<PAGE> 29

would be attractive. The Company's unsecured publicly-traded senior debt
currently carries investment grade ratings from Duff & Phelps Credit Rating Co.
(BBB-), Moody's Investors Service (Baa3) and Standard & Poor's (BBB-). 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.

27
<PAGE> 30

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. 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, 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 strength and financial resources of
the Psychiatric Group's competitors, the availability and cost of capital, the
Psychiatric 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 Psychiatric Group Combined Financial Condition and
Results of Operations -- Future Operating Results" herein.

OPERATING RESULTS

1996 Compared to 1995

In 1996, the Psychiatric Group reported net income of $5,579,000 or $2.67
per share, a decrease of $695,000 or 11% compared with net income of $6,274,000
or $3.00 per share in 1995. The decrease in net income in 1996 was primarily
attributable to a reduction in income due to the sale of two psychiatric
properties during the first quarter of 1995 and the nonpayment of rental and
interest obligations by two psychiatric operators at various times during 1996.

Rental income was $1,989,000 in 1996, a decrease of $1,064,000 or 35% from
$3,053,000 in 1995. This decrease was primarily attributable to a reduction in
rental income due to the sale of two psychiatric properties during the first
quarter of 1995 and the nonpayment of $734,000 of rent by two psychiatric
operators during 1996. The property sales resulted in a decrease in depreciation
and amortization of $58,000 or 7% to $744,000 in 1996 compared with $802,000 in
1995.

Additional rental and interest income was $812,000 in 1996, an increase of
$92,000 or 13% from $720,000 in 1995. These differences were primarily
attributable to variations in revenues upon which such additional rent and
interest is based.

Other interest income decreased $293,000 or 43% to $393,000 in 1996 from
$686,000 in 1995. This decrease was primarily attributable to lower average
borrowings under revolving credit agreements provided to psychiatric hospital
operators as a result of the sale of two psychiatric properties and the lease
restructurings of two psychiatric investments during the first quarter of 1995
and the nonpayment $182,000 of interest by a psychiatric operator during 1996.

Interest expense on inter-Group loans from the Core Group was $1,679,000 in
1996, a decrease of $350,000 or 17% from $2,029,000 in 1995. This decrease
reflects a lower average balance outstanding on loans from the Core Group, which
was primarily attributable to $15,150,000 of repayments to the Core Group from
the proceeds of the previously mentioned property sales and restructurings.

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<PAGE> 31

General and administrative expenses were $1,172,000 in 1996, an increase of
$231,000 or 25% from $941,000 in 1995. 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. Although costs
allocated to the Psychiatric Group based on revenues decreased in 1996, the
Psychiatric Group was specifically charged for $467,000 of costs in 1996
compared with $225,000 in 1995 for financial advisory services. These services
were 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.

1995 Compared to 1994

In 1995, the Psychiatric Group reported net income of $6,274,000 or $3.00
per share compared with a net loss of ($22,855,000) or ($10.96) per share in
1994. The net loss in 1994 reflects a write-down of psychiatric real estate
investments of $30,000,000 or $14.38 per share as a result of accelerating
negative trends in the psychiatric industry. Net income for 1995 and 1994
reflect costs related to the Distribution of $300,000 or $.14 per share and
$1,450,000 or $.70 per share, respectively. Net income in 1995 reflects a
reduction in income due to the sale of three psychiatric properties and the
lease restructurings of two psychiatric investments subsequent to September
1994.

Rental income was $3,053,000 in 1995, a decrease of $4,924,000 or 62% from
$7,977,000 in 1994. This decrease was primarily attributable to a reduction in
rental income due to the sale of three psychiatric properties and the lease
restructurings of two psychiatric investments. The property sales, together with
lower depreciation expense on psychiatric properties written down in June 1994,
resulted in a decrease in depreciation and amortization of $999,000 to $802,000
in 1995 compared with 1994.

Additional rental and interest income was $720,000 in 1995, an increase of
$122,000 from $598,000 in 1994. This positive variation was attributable to an
increase in the facility revenues upon which such additional rent and interest
is based.

Other interest income decreased $340,000 to $686,000 in 1995 from
$1,026,000 in 1994. This decrease was primarily attributable to lower average
borrowings under revolving credit agreements provided to psychiatric hospital
operators as a result of the sale of two psychiatric properties and the lease
restructurings of two psychiatric investments.

Interest expense on inter-Group loans from the Core Group was $2,029,000 in
1995, a decrease of $2,012,000 or 50% from $4,041,000 in 1994. This decrease
reflects a lower average balance outstanding on loans from the Core Group, which
was primarily attributable to $15,150,000 of repayments to the Core Group from
the proceeds of the previously mentioned property sales and restructurings.

General and administrative expenses decreased to $941,000 in 1995 from
$951,000 in 1994. 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. Although costs allocated to the
Psychiatric Group based on revenues decreased, the Psychiatric Group was
specifically charged for $225,000 of costs related to financial advisory
services provided to the Psychiatric Group by an investment banking firm.

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<PAGE> 32

Future Operating Results

Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Psychiatric Group's
properties. Institutions responsible for providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions include
decreasing the inpatient length of stay, intensively reviewing utilization,
directing patients from inpatient care to outpatient care and negotiating
reduced reimbursement rates for services. 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 litigation of some
providers and significant negative publicity which has further exacerbated the
financial and operational difficulties of providers. Although the operators of
the psychiatric hospitals are responding by increasing case management,
developing lower cost outpatient and daypatient programs and reducing operating
costs, their efforts are generally not consistently mitigating the negative
impact of these fundamental psychiatric industry changes. As a result, certain
of the Psychiatric Group hospital operators have not met their contractual
payment obligations to the Psychiatric Group as scheduled and there can be no
assurance that Psychiatric Group operators will be able to meet such payment
obligations in the future.

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<PAGE> 33

The Psychiatric Group currently is providing financing under revolving
credit agreements to the operators of three of its psychiatric hospitals. As of
March 19, 1997, outstanding borrowings under such agreements totaled $4,225,000,
and the Psychiatric Group has committed to fund an additional $1,475,000 of
borrowings upon request, subject to certain conditions. These borrowings, which
are partially secured by accounts receivable and certain personal property and
which contain events of default that would be triggered by defaults under the
lease relating to the relevant psychiatric hospital, are the primary source of
financing for these operators' operating and capital needs. These psychiatric
hospitals have, from time to time, been unable to generate sufficient cash flow
for working capital and the development of new programs. In certain cases, these
psychiatric hospitals have not been able to pay down the outstanding borrowings
under the revolving credit agreements provided by the Psychiatric Group or to
secure replacement financing from third-party lenders and there can be no
assurance that such operators will be able to fund such obligations when they
become due. To the extent the psychiatric hospitals have increased working
capital needs in the future, the Psychiatric Group may be the only source of
such financing. In the event the Company's Board of Directors determines that it
is appropriate to provide additional working capital financing to a psychiatric
hospital 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.

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 in 1992 and 1994 and the periodic
restructuring of psychiatric operator payment obligations. 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 and pursue alternative uses for the properties and/or make additional
write-downs of the value of its investments in the psychiatric hospitals. 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 Psychiatric
Group has sold three of its psychiatric properties since September 1994. The
Psychiatric Group Depositary Shares were distributed in July 1995 in an effort
to effectively separate the economic attributes of the Company's psychiatric
investments (the Psychiatric Group) from its core investments in acute care,
rehabilitation and long-term acute care hospitals, skilled nursing, assisted
living and Alzheimer's care facilities and a medical office building (the Core
Group). In September 1995, the Company retained an investment banking firm to
provide a broad range of 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.

At the beginning of 1996, the owner of the Florida facilities 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. Quarterly contractual base rent and
interest obligations of Northpointe and The Retreat total approximately $200,000
and $278,000 ($.10 and $.13 per Psychiatric Group Depositary Share),
respectively.

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<PAGE> 34

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 contractual base rent payments of $50,000 on October 1,
1996. In addition, Northpointe's monthly contractual interest payments of
$16,600 were deferred from February 1996 until March 1, 1997 on which date all
such deferred interest was scheduled to be paid in full. Northpointe's deferred
obligations are not recognized as income by the Psychiatric Group until such
time as they are paid. Northpointe's rent and interest deferrals in 1996
amounted to approximately $.28 per Psychiatric Group Depositary Share.

In late 1996, the owner of Northpointe and The Retreat was named, together
with other operators of other psychiatric facilities in Florida, in a lawsuit
filed by several large insurance companies alleging widespread irregularities
with respect to operations in years prior to 1995. Adverse publicity from the
lawsuit appears to have exacerbated the operational and financial difficulties
of Northpointe. The census at Northpointe in 1997 has been significantly below
the levels projected by the owner at the end of 1996. As a result, the facility
is experiencing substantial cash flow and operational difficulties. Although
Northpointe had made its monthly contractual base rent payments of $50,000
during the fourth quarter of 1996 and for January 1997, it has been unable to
pay its subsequent monthly contractual rent and interest obligations or its
deferred rent and interest obligations. The Psychiatric Group has not further
modified the Northpointe lease or revolving credit agreement, although further
modification may be necessary. The owner recently appointed a new executive
director and marketing director for the facility; however in view of the
facility's current financial difficulties, there can be no assurance that the
efforts under way will be successful in rebuilding the census and cash flow for
1997 to a level sufficient to allow the facility to meet its obligations.

The Psychiatric Group is continuing to closely monitor this situation. The
Psychiatric Group remains committed to maximizing the value of its investment in
Northpointe and believes the highest value for the property is most likely as a
health care facility. However, in view of the rapidly changing circumstances at
the facility, the Psychiatric Group, in conjunction with its financial advisor,
is evaluating a range of possibilities including alternative uses for the
facility and its related land. At December 31, 1996, the Psychiatric Group's
total investment in Northpointe was $7,170,000 consisting of a net investment in
the real estate of $5,495,000 and advances under a revolving credit agreement of
$1,675,000. The volatility of the current circumstances may not allow for an
orderly evaluation and pursuit of the various alternatives, and accordingly
there can be no assurance that the financial results from a restructured
arrangement as a psychiatric facility, an alternative use or a disposition will
allow the realization of the Psychiatric Group's recorded investment in
Northpointe.

At December 31, 1996, the Psychiatric Group's total investment in The
Retreat was $9,450,000 consisting of a net investment in the real estate of
$9,400,000 and advances under a revolving credit agreement of $50,000. The
Retreat made all of its contractual rent and interest payments to the
Psychiatric Group in 1996. Adverse publicity from the aforementioned lawsuit
currently appears to be having a less severe impact on The Retreat, however, the
facility has still experienced some deterioration of its cash flow and a decline
in census during 1997. Although The Retreat has made its monthly contractual
base rent and interest payments in 1997 through March, The Retreat made its
February 1997 contractual base rent payment of $92,000 from lease reserve funds
and has not yet paid its additional rent in the first quarter of 1997 of
approximately $45,000. An increase in operational difficulties and further cash
flow deterioration could occur if efforts currently being undertaken by the
owner are unsuccessful. Accordingly, there can be no assurance that the Retreat
will be able to continue to meet its obligations or that some measure of rent
and interest relief will not be necessary in the future. Additionally, if
circumstances at The Retreat become more volatile, the Psychiatric Group may be
required to consider various alternatives for the facility.

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<PAGE> 35

contractual base rent and interest obligations of RCC total approximately
$324,000 ($.15 per Psychiatric Group Depositary Share). In 1996, the Psychiatric
Group advanced $214,000 on behalf of the operator to pay property taxes on the
facility, and reached an agreement with the operator for the deferral of base
rent payments while the operator took certain actions to stabilize operations
and implemented its revised business plan. Pursuant to the deferral
arrangements, 100% of RCC's monthly base rent payments of $83,000 were deferred
for May and June of 1996 and 50% of such monthly payments were deferred from
July 1996 through October 1996, at which time monthly base rent payments
returned to 100%. Deferred base rent is payable in the future only when the
facility's cash exceeds a specified level, and the property tax advance is
payable in monthly installments. RCC's deferred rent obligations are not
recognized as income by the Psychiatric Group until such time as they are paid.
The Psychiatric Group's property tax advance has been reduced by monthly
payments to $122,000 as of December 31, 1996. RCC's rent deferral amounted to
approximately $.16 per Psychiatric Group Depositary Share for 1996. Although the
deferral arrangements provided interim financial relief while the operator
implemented its strategy, there can be no assurance that the deferred amounts
will be paid or that RCC will not require additional financial relief in the
future.

The current term of the RCC lease expires in December 1997. The lease
agreement provides the operator with an option to renew the lease for an
additional five-year term at fair market rental. Although the Psychiatric Group
believes that the lease will be renewed, there can be no assurance that the
lease will be renewed or that, if renewed, the annual minimum rent payments will
remain at the current level of $1,000,000. Furthermore, the $2,500,000 balance
outstanding under RCC's revolving credit agreement matures June 30, 1997. The
Psychiatric Group believes that it will extend the term of the revolving credit
agreement to correspond with the expiration of RCC's current lease term and will
negotiate further extensions in connection with renewal of the lease. Should the
lease not be renewed or the revolving loan not be repaid or extended, a
significant negative impact to the Psychiatric Group could result.

In 1996, the Psychiatric Group completed formal documentation of an
agreement with the operator of the two New York Four Winds facilities to release
certain of its security interests in the operator's short-term assets on a
staged basis. The operator believes that the release of this collateral will
permit it to obtain the capital required to develop an integrated behavioral
health care delivery system in lower and upper New York State, of which the two
Four Winds facilities will be an integral part. Although such a system is
intended to address the potential negative consequences of the expected changes
in Medicaid reimbursement and the increase in managed care penetration in the
state of New York, it is not possible to predict the impact and timing of such
changes and whether the proposed system will be successful in that new
environment.

The Psychiatric Group's dividend is determined quarterly based upon each
quarter's operating results. Any significant advance of additional funds to
operators of the Psychiatric Group's properties, modification of terms covering
the rental or interest obligations of its properties or nonpayment or deferral
of such obligations as they become due likely will have an adverse impact on the
Psychiatric Group results of operations and cash flows, as well as the quarterly
dividend payment on Psychiatric Group Depositary Shares. The nonpayment and
deferral of rental and interest obligations of two operators in 1996 was
responsible for the reduction in the quarterly dividend on Psychiatric Group
Depositary Shares from $.80 per share in the fourth quarter of 1995 to $.70 per
share in the first quarter of 1996 and $.65 per share in the second and third
quarters of 1996. Although the quarterly dividend was increased to $.80 per
share in the fourth quarter of 1996, there can be no assurance that the
quarterly dividend will not be reduced in the future.

LIQUIDITY AND CAPITAL RESOURCES

As of March 19, 1997, the Psychiatric Group had aggregate unfunded
commitments under revolving credit agreements provided to psychiatric hospital
operators of $1.5 million.

At December 31, 1996, the Psychiatric Group had $4,183,000 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

33
<PAGE> 36

excess used to pay down the balance outstanding under the fixed rate inter-Group
loan. The Psychiatric Group reduced the combined balance of the revolving
inter-Group and fixed rate inter-Group loans by $15,150,000 in the first quarter
of 1995 with proceeds from such asset sales and operator borrowing paydowns. 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 to the Core Group by the Psychiatric Group are limited to
a maximum of $8,750,000 at any one time outstanding, which limit is to be
reduced dollar-for-dollar with any permanent repayment in the future of
borrowings under revolving credit agreements provided to Psychiatric Group
hospital operators. In addition, the limit on the aggregate revolving
inter-Group loans will not be reduced below $5,000,000, and except for such
revolving inter-Group loans, no additional fixed rate or other inter-Group loans
will be advanced to the Psychiatric Group by the Core Group. The Psychiatric
Group has no third-party sources of additional financing and, as a result, is
dependent on the Core Group for all such financing. Although the Core Group may
make this financing available, there is no obligation of the Company's Board of
Directors to cause the Core Group to provide funds to the Psychiatric Group if
the Board of Directors determines that it is in the Company's best interest not
to do so. To the extent needed funds are not advanced by the Core Group, the
Psychiatric Group would experience immediate, significant negative effects.

The Psychiatric Group does not expect to make any additional acquisitions
or capital investments except to the extent of existing unfunded commitments
under revolving credit agreements provided to facility operators. Future
dividend payments will be determined quarterly and will be primarily dependent
upon the financial performance of the Psychiatric Group. The Psychiatric Group
expects to distribute a substantial portion of its funds from operations and net
proceeds from asset dispositions, after payments of inter-Group loan
obligations, to holders of Psychiatric Group Depositary Shares. In general, the
Psychiatric Group will not retain any significant amount of its cash flow, and
as discussed above, its sources of financing and liquidity will be limited.

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<PAGE> 37

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Company's consolidated balance sheets as of December 31, 1996 and 1995
and its consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1996, 1995 and 1994, together with a
report of Arthur Andersen LLP, independent public accountants, are included
elsewhere herein. The Core Group's and the Psychiatric Group's combined balance
sheets as of December 31, 1996 and 1995, and their combined statements of
operations, total attributed equity and cash flows for the years ended December
31, 1996, 1995 and 1994, together with reports of Arthur Andersen LLP,
independent public accountants, also are included elsewhere herein. See "Index
to Financial Statements."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

There is hereby incorporated by reference the information to appear under
the caption "Election of Directors" in the Company's proxy statement for its May
23, 1997 Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1996. See "Item 1.
Business -- Executive Officers of the Company" for a description of the
Executive Officers of the Company.

ITEM 11. EXECUTIVE COMPENSATION.

There is hereby incorporated by reference the information to appear under
the caption "Compensation of Directors and Executive Officers" in the Company's
proxy statement for its May 23, 1997 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

There is hereby incorporated by reference the information to appear under
the caption "Principal Shareholders of the Company" in the Company's proxy
statement for its May 23, 1997 Annual Meeting of Shareholders, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1996.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

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<PAGE> 38

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.

(A)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

The financial statements and schedule listed in the accompanying index to
the consolidated, Core Group combined and Psychiatric Group combined financial
statements, are filed as part of this Annual Report on Form 10-K.

(A)(3) EXHIBITS.

<TABLE>
<C> <C> <S>
3.1 -- Certificate of Incorporation, as amended to date, filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-3 (No. 33-61895), effective October 17, 1995, and
incorporated herein by reference.
3.2 -- Amended and Restated Bylaws of the Company, filed as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, and incorporated herein by
reference.
4.1 -- Rights Agreement dated as of April 10, 1990, filed as
Exhibit 2 to the Company's Registration Statement on Form
8-A dated April 20, 1990, and incorporated herein by
reference.
4.2 -- Indenture dated as of January 15, 1997 between American
Health Properties, Inc. and The Bank of New York as Trustee,
filed as Exhibit 4.1 to the Company's Current Report on Form
8-K dated January 21, 1997, and incorporated by reference.
4.3 -- Certificate of Designations of Psychiatric Group Preferred
Stock, filed as Exhibit 4.1 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.
10.1 -- American Health Properties, Inc. 1988 Stock Option Plan,
filed as Exhibit 28 to the Company's Registration Statement
on Form S-8 (No. 33-25781), filed with the Securities and
Exchange Commission on November 28, 1988, and incorporated
herein by reference.
10.2 -- American Health Properties, Inc. 1990 Stock Incentive Plan,
filed as Exhibit B to the Company's Proxy Statement for its
1990 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on May 7, 1990, and
incorporated herein by reference.
10.3 -- Employment Agreements between the Company and Joseph P.
Sullivan, C. Gregory Schonert and Michael J. McGee, filed as
Exhibits 10.1, 10.2, and 10.3, respectively, to the
Company's Current Report on Form 8-K dated January 8, 1997,
and incorporated herein by reference.
10.4 -- Employment Agreement between American Health Properties,
Inc. and Thomas T. Schleck, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated January 21, 1997,
and incorporated by reference.
10.5 -- American Health Properties, Inc. 1994 Stock Incentive Plan,
filed as Appendix A to the Company's Proxy Statements for
its 1994 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on April 8, 1994, and
incorporated herein by reference.
10.6 -- American Health Properties, Inc. Nonqualified Stock Option
Plan for Nonemployee Directors, filed as Appendix B to the
Company's Proxy Statement for its 1994 Annual Meeting of
Shareholders filed with the Securities and Exchange
Commission on April 8, 1994, and incorporated herein by
reference.
10.7 -- Credit Agreement dated as of December 27, 1995 among
American Health Properties, Inc., the financial institutions
listed therein, Banque Paribas as Co-Agent, First Union Bank
of North Carolina as Co-Agent, NationsBank of Texas, N.A. as
Co-Agent and Wells Fargo Bank, N.A. as Arranger, Agent and
Facing Bank, filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K filed with the Securities Exchange
Commission on January 5, 1996, and incorporated herein by
reference.
</TABLE>

36
<PAGE> 39
10.8 -- First Amendment to Credit Agreement dated as of December 10,
1996 between American Health Properties, Inc. and Wells
Fargo Bank, N.A., as agent for the Lenders, filed as Exhibit
10.2 to the Company's Current Report on Form 8-K dated
January 21, 1997, and incorporated by reference.
*21 -- List of subsidiaries of the Company
*23 -- Consent of Independent Public Accountants
*24 -- Powers of Attorney (included in signature page)
*27 -- Financial Data Schedule
*99.1 -- Four Winds, Inc. Financial Highlights

- ---------------
* Filed herewith

(B) REPORTS ON FORM 8-K.

None

37
<PAGE> 40

AMERICAN HEALTH PROPERTIES, INC.

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:

Report of independent public accountants.................. F-2
Consolidated balance sheets at December 31, 1996 and
1995................................................... F-3
For the years ended December 31, 1996, 1995 and 1994:
Consolidated statements of operations.................. F-4
Consolidated statements of stockholders' equity........ F-5
Consolidated statements of cash flows.................. F-6
Notes to consolidated financial statements................ F-7

SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:

Report of independent public accountants.................. F-20
Schedule III -- Real Estate and Accumulated
Depreciation........................................... F-21

CORE GROUP COMBINED FINANCIAL STATEMENTS:

Report of independent public accountants.................. F-23
Combined balance sheets at December 31, 1996 and 1995..... F-24
For the years ended December 31, 1996, 1995 and 1994:
Combined statements of operations...................... F-25
Combined statements of total attributed equity......... F-26
Combined statements of cash flows...................... F-27
Notes to combined financial statements.................... F-28

PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS:

Report of independent public accountants.................. F-38
Combined balance sheets at December 31, 1996 and 1995..... F-39
For the years ended December 31, 1996, 1995 and 1994:
Combined statements of operations...................... F-40
Combined statements of total attributed equity......... F-41
Combined statements of cash flows...................... F-42
Notes to combined financial statements.................... F-43
</TABLE>

F-1
<PAGE> 41

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To American Health Properties, Inc.:

We have audited the accompanying consolidated balance sheets of American
Health Properties, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Health Properties,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 24, 1997.

F-2
<PAGE> 42

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
ASSETS (IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Real estate properties
Buildings and improvements................................ $ 546,496 $ 534,023
Accumulated depreciation.................................. (90,139) (82,435)
--------- ---------
456,357 451,588
Land...................................................... 60,097 61,853
Construction in progress.................................. 4,834 6,016
--------- ---------
521,288 519,457
Mortgage notes receivable, net.............................. 37,787 37,851
Other notes receivable...................................... 4,457 4,915
Direct financing leases..................................... 3,695 6,230
Cash and short-term investments............................. 1,480 7,571
Receivables................................................. 6,881 7,141
Deferred financing costs and other assets................... 2,294 3,151
--------- ---------
$ 577,882 $ 586,316
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable.......................................... $ 48,500 $ --
Subordinated convertible bonds payable...................... 6,601 6,378
Senior notes payable........................................ 152,000 201,000
Accounts payable and accrued liabilities.................... 7,385 7,957
Dividends payable........................................... 13,981 13,506
Deferred income............................................. 4,276 4,415
--------- ---------
232,743 233,256
--------- ---------
Commitments and contingencies

Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
208 shares issued and outstanding...................... 2 2
Common stock $.01 par value; 100,000 shares authorized;
23,455 and 23,443 shares issued and outstanding........ 235 234
Additional paid-in capital................................ 482,083 480,703
Cumulative net income..................................... 256,691 212,312
Cumulative dividends...................................... (393,872) (340,191)
--------- ---------
345,139 353,060
--------- ---------
$ 577,882 $ 586,316
========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE> 43

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income............................................... $69,488 $67,793 $ 67,732
Mortgage interest income.................................... 5,980 6,732 5,787
Additional rental and interest income....................... 12,342 11,125 9,506
Other interest income....................................... 1,114 5,580 4,002
------- ------- --------
88,924 91,230 87,027
------- ------- --------
EXPENSES
Depreciation and amortization............................... 15,016 14,377 14,103
Interest expense............................................ 21,842 27,057 26,101
General and administrative.................................. 7,471 6,839 5,376
Targeted stock issuance costs............................... -- 300 1,450
Write-down of real estate investments....................... -- -- 30,000
------- ------- --------
44,329 48,573 77,030
Minority interest........................................... 216 276 304
------- ------- --------
NET INCOME.................................................. $44,379 $42,381 $ 9,693
======= ======= ========
ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Net income............................................. $38,800 $36,107 $ 32,548
Net income per share................................... $ 1.65 $ 1.69 $ 1.56
Weighted average shares outstanding.................... 23,518 21,405 20,856
Dividends declared per share........................... $ 2.04 $ 1.99 $ 1.88
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net income (loss)...................................... $ 5,579 $ 6,274 $(22,855)
Net income (loss) per share............................ $ 2.67 $ 3.00 $ (10.96)
Weighted average shares outstanding.................... 2,093 2,091 2,086
Dividends declared per share........................... $ 2.80 $ 3.20 $ 4.16
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 44

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- --------------- PAID-IN CUMULATIVE CUMULATIVE STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL NET INCOME DIVIDENDS EQUITY
------ ------ ------ ------ ---------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993..... -- $ -- 20,755 $208 $424,297 $160,238 $(241,440) $343,303
Stock incentives, net............. -- -- 6 -- 524 -- -- 524
Exercise of stock options......... -- -- 90 1 1,962 -- -- 1,963
Net income........................ -- -- -- -- -- 9,693 -- 9,693
Dividends......................... -- -- -- -- -- -- (47,982) (47,982)
--- ---- ------ ---- -------- -------- --------- --------
BALANCES AT DECEMBER 31, 1994..... -- -- 20,851 209 426,783 169,931 (289,422) 307,501
Public offering of additional
shares.......................... -- -- 2,500 25 50,292 -- -- 50,317
Stock incentives, net............. -- -- 15 -- 1,916 -- -- 1,916
Exercise of stock options......... -- -- 77 -- 1,732 -- -- 1,732
Distribution of Psychiatric Group
Preferred Stock................. 208 2 -- -- (20) -- -- (18)
Net income........................ -- -- -- -- -- 42,381 -- 42,381
Dividends......................... -- -- -- -- -- -- (50,769) (50,769)
--- ---- ------ ---- -------- -------- --------- --------
BALANCES AT DECEMBER 31, 1995..... 208 2 23,443 234 480,703 212,312 (340,191) 353,060
Stock incentives, net............. -- -- (1) -- 1,140 -- -- 1,140
Exercise of stock options......... -- -- 13 1 240 -- -- 241
Net income........................ -- -- -- -- -- 44,379 -- 44,379
Dividends......................... -- -- -- -- -- -- (53,681) (53,681)
--- ---- ------ ---- -------- -------- --------- --------
BALANCES AT DECEMBER 31, 1996..... 208 $ 2 23,455 $235 $482,083 $256,691 $(393,872) $345,139
=== ==== ====== ==== ======== ======== ========= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE> 45

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 44,379 $ 42,381 $ 9,693
Depreciation, amortization and other non-cash items........ 17,271 16,584 16,041
Deferred income............................................ (368) (340) 269
Write-down of real estate investments...................... -- -- 30,000
Change in receivables and other assets..................... 412 (636) (383)
Change in accounts payable and accrued liabilities......... (453) (518) (636)
-------- -------- --------
61,241 57,471 54,984
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties..... (17,142) (49,333) (40,142)
Proceeds from sale of properties........................... 423 10,825 5,772
Principal payments on mortgage notes receivable............ 64 26,543 --
Construction loan fundings................................. -- (5,136) (23,180)
Construction loan paid..................................... -- -- 16,836
Other notes receivable..................................... 458 4,513 (830)
Direct financing leases.................................... 2,535 (2,414) (1,013)
Administrative capital expenditures........................ (55) (96) (183)
-------- -------- --------
(13,717) (15,098) (42,740)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable................ 48,500 (14,500) 14,500
Principal payments on senior notes payable................. (49,000) (24,000) --
Principal payments on mortgage notes payable............... -- -- (14,468)
Financing costs paid....................................... (150) (919) (248)
Proceeds from sale of stock................................ -- 50,317 --
Proceeds from exercise of stock options.................... 241 1,732 1,963
Cash paid in lieu of fractional shares..................... -- (18) --
Dividends paid............................................. (53,206) (49,252) (47,823)
-------- -------- --------
(53,615) (36,640) (46,076)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... (6,091) 5,733 (33,832)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 7,571 1,838 35,670
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 1,480 $ 7,571 $ 1,838
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE> 46

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE COMPANY

American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living and Alzheimer's care
facilities and a medical office building.

Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock held
of record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock. The Distribution was designed to separate the economic attributes of the
Company's investments in psychiatric hospitals (the Psychiatric Group) and its
investments in acute care, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and a medical
office building (the Core Group) into two distinct portfolios, with two distinct
classes of publicly-traded shares intended to represent those portfolios. In
connection with the Distribution, the Company specifically assigned or, if not
directly assigned, allocated its assets, liabilities and stockholders' equity,
and its revenues, expenses and cash flow items, between the Core Group and
Psychiatric Group. The Psychiatric Group Depositary Shares are intended to
reflect the separate financial performance of the Psychiatric Group. The
Company's common stock (the Core Group Common Stock) is intended to reflect the
separate financial performance of the Core Group. However, the change in the
capital structure of the Company effected by the Distribution does not affect
the respective legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock or Psychiatric Group
Depositary Shares is a holder of an issue of capital stock of the entire Company
and is subject to the risks associated with an investment in the Company and all
of its businesses, assets and liabilities.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation The accompanying consolidated financial statements
include the accounts of the Company and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements of the Core Group and the Psychiatric Group also are
included elsewhere herein. For purposes of computing per share data for periods
prior to the actual Distribution, the number of shares of Core Group Common
Stock are assumed to be the same as the corresponding number of shares of the
Company's common stock prior to the Distribution, while the number of
Psychiatric Group Depositary Shares are assumed to be one-tenth of the
corresponding number of shares of the Company's common stock prior to the
Distribution.

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.

Cash and Short-Term Investments Cash and short-term investments consist of
cash and all highly liquid investments with an original maturity date of less
than three months and are stated at cost which approximates fair value.

Real Estate Properties The Company accounts for its property leases as
operating leases. The Company records properties at cost and allocates the cost
between land and buildings and improvements based on

F-7
<PAGE> 47

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

independent appraisals. Depreciation of properties is recorded on a
straight-line basis over the estimated useful lives of the buildings and
improvements (21 to 42 years).

Impairment of Real Estate Properties and Notes Receivable The Company
reviews for the possible impairment of its real estate properties and notes
receivable whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. In general, an impairment of such
assets would be indicated if the estimated future cash flows expected to result
from the use of such assets and their eventual disposition is less than their
carrying amounts.

Deferred Income Fees received, net of related direct costs, associated
with the origination or amendment of leases and mortgages are deferred and
amortized at a constant effective rate over the remaining initial term of the
related leases and mortgage notes receivable.

Deferred Costs Deferred financing costs are amortized over the term of the
related debt at a constant effective rate.

Stock-Based Compensation In 1996, the Company adopted Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" which defines a fair value based method of accounting for
stock-based compensation. As allowed by SFAS 123, the Company has elected to
continue to measure employee stock-based compensation expense using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees".

Federal Income Taxes The Company intends at all times to operate so as to
qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company will not be subject to federal income tax.

Qualification as a REIT under Sections 856 to 860 of the Internal Revenue
Code applies to the Company as a whole, rather than the Core Group or
Psychiatric Group individually. Dividends paid by the Company on its Core Group
Common Stock and Psychiatric Group Depositary Shares must be sufficient in the
aggregate for the Company to meet the minimum distribution requirements of the
Internal Revenue Code. The Company's earnings and profits as a whole, without
reference to the Core Group or Psychiatric Group individually, is used to
determine the taxable character of dividends paid to holders of its Core Group
Common Stock and Psychiatric Group Depositary Shares.

Earnings and profits, which determine the taxable character of dividends
paid to stockholders, differ from net income for financial reporting purposes
due primarily to timing differences in the recognition of deferred income, real
estate property write-downs, mortgage note impairment reserves and various
accruals and differences between the estimated useful lives used to compute
depreciation for financial statement purposes and a 40-year life generally used
in determining earnings and profits. The cost basis of the Company's real estate
properties is generally the same for financial reporting and earnings and
profits purposes, except for properties written down for financial reporting
purposes and properties for which the previous owner's basis is required to be
carried forward for tax purposes.

F-8
<PAGE> 48

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REAL ESTATE PROPERTIES

The following table summarizes the Company's investment in health care real
estate properties as of December 31, 1996:

<TABLE>
<CAPTION>
BUILDINGS
AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
------- ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ACUTE CARE GENERAL PROPERTIES:
Chesterfield General Hospital
Cheraw, South Carolina......................... $ 720 10,687 $ 594 $ 10,813
Cleveland Regional Medical Center
Cleveland, Texas............................... 300 8,000 889 7,411
Desert Valley Hospital
Victorville, California........................ 1,755 24,650 1,279 25,126
Frye Regional Medical Center
Hickory, North Carolina........................ 1,247 44,202 10,920 34,529
Irvine Medical Center
Irvine, California............................. 17,987 57,013 8,136 66,864
Kendall Regional Medical Center
Miami, Florida................................. 4,163 64,849 15,503 53,509
Lucy Lee Hospital
Poplar Bluff, Missouri......................... 404 23,162 5,339 18,227
Marlboro Park Hospital
Bennettsville, South Carolina.................. 640 7,153 397 7,396
North Fulton Regional Hospital
Roswell, Georgia............................... 4,149 42,042 8,167 38,024
Palm Beach Gardens Medical Center
Palm Beach Gardens, Florida.................... 4,024 41,624 10,188 35,460
Pioneer Valley Hospital
West Valley City, Utah......................... 1,997 47,469 927 48,539
Shannon Health System, St. John's Campus
San Angelo, Texas.............................. 255 16,197 2,133 14,319
Tarzana Regional Medical Center
Tarzana, California............................ 12,421 61,279 15,115 58,585
------- -------- ------- --------
50,062 448,327 79,587 418,802
------- -------- ------- --------
ALZHEIMER'S CARE PROPERTY:
Pine Haven I Alzheimer's Community
Houston, Texas................................. 225 3,475 94 3,606
------- -------- ------- --------
ASSISTED LIVING PROPERTIES:
Cambria Lodge
El Paso, Texas................................. 300 4,882 46 5,136
Garrison Creek Lodge
Walla Walla, Washington........................ 219 5,429 62 5,586
Sherwood Place
Odessa, Texas.................................. 220 4,814 35 4,999
Summer Wind Residence
Boise, Idaho................................... 110 2,890 96 2,904
------- -------- ------- --------
849 18,015 239 18,625
------- -------- ------- --------
</TABLE>

F-9
<PAGE> 49

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BUILDINGS
AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
------- ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MEDICAL OFFICE BUILDING:
Walsh Medical Arts Center
Murrieta, California........................... 285 8,515 585 8,215
------- -------- ------- --------
PSYCHIATRIC PROPERTIES:
Northpointe Behavioral Health System
Tarpon Springs, Florida........................ 1,457 5,066 1,028 5,495
The Retreat
Sunrise, Florida............................... 3,325 8,609 2,534 9,400
Rock Creek Center
Lemont, Illinois............................... 440 6,065 1,126 5,379
------- -------- ------- --------
5,222 19,740 4,688 20,274
------- -------- ------- --------
REHABILITATION PROPERTIES:
HCA Wesley Rehabilitation Hospital
Wichita, Kansas................................ 1,938 12,659 1,516 13,081
MountainView Regional Rehabilitation Hospital
Morgantown, West Virginia...................... -- 11,718 1,582 10,136
Northwest Arkansas Rehabilitation Hospital
Fayetteville, Arkansas......................... 962 8,124 1,117 7,969
------- -------- ------- --------
2,900 32,501 4,215 31,186
------- -------- ------- --------
SKILLED NURSING PROPERTIES:
Arkansas Manor Nursing Home
Denver, Colorado............................... 154 3,912 224 3,842
Cornerstone Care Center
Lakewood, Colorado............................. 125 4,731 209 4,647
Douglas Manor
Douglas, Arizona............................... 175 2,446 102 2,519
Safford Care Center
Safford, Arizona............................... 100 4,834 196 4,738
------- -------- ------- --------
554 15,923 731 15,746
------- -------- ------- --------
$60,097 546,496 $90,139 $516,454
======= ======== ======= ========
</TABLE>

As of December 31, 1996, the Company had the following construction in
progress:

<TABLE>
<CAPTION>
FUNDED REMAINING
TO DATE COMMITMENT
------- ----------
<S> <C> <C>
Comprehensive Care Hospital of Amarillo
Amarillo, Texas........................................... $2,029 $4,171
Pine Haven II Alzheimer's Community
Sugar Land, Texas......................................... 2,805 1,619
------ ------
$4,834 $5,790
====== ======
</TABLE>

In the second quarter of 1996, the Company acquired an acute care property
in West Valley City, Utah (Pioneer Valley Hospital) in exchange for its acute
care properties in Jefferson, Louisiana (Elmwood Medical Center) and Halstead,
Kansas (Halstead Hospital). The exchange was accounted for at the net book value
of

F-10
<PAGE> 50

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the properties exchanged. Pioneer Valley Hospital is leased to the same operator
that had leased the two exchanged properties under comparable terms and at a
lease rate equivalent to the combined lease rates of the two exchanged
properties.

The Company's properties are leased under "net" leases pursuant to which
the lessees are responsible for all maintenance, repairs, taxes, and insurance
of the leased properties. The leases provide for the payment of minimum base
rent and additional rent during the fixed term and any renewal terms. Additional
rent is generally based on the increase in annual gross revenues of the related
facility or consumer price index as specified in the lease agreements.

The Company has the right to approve capital expenditures at all
properties, the option to fund certain capital expenditures and, in certain
situations, is obligated to fund approved capital expenditures on terms
comparable to the original investment. At December 31, 1996, the Company had no
commitments to fund capital expenditures pursuant to these rights and
obligations. The base and additional rent provisions of the leases are amended
when such capital expenditures are funded to reflect the Company's increased
investment.

The Company has agreed to provide $13.8 million of real estate financing to
an experienced operator of long-term acute care hospitals. Of this amount, $4.4
million has been specifically identified for a property in Houston, Texas. In
addition, the Company has agreed to provide $50 million of real estate financing
to an experienced operator of assisted living facilities. Approximately $29
million has been specifically identified for the construction of five properties
located in four states which will be leased to the operator upon completion. The
Company has also agreed to provide $17 million of real estate construction and
lease financing for two skilled nursing properties in Las Vegas, Nevada to be
operated by an experienced operator of skilled nursing facilities.

Six of the Company's acute care properties are leased to subsidiaries of
American Medical International, Inc. (AMI), a subsidiary of Tenet Healthcare
Corporation. The six leases are covered by cross-default provisions and the
lease obligations are unconditionally guaranteed by AMI. In 1996, revenues from
these leases accounted for 50% of the Company's total revenues.

Aggregate revenues from five leases maturing in 1999 accounted for 40% of
the Company's total revenues in 1996. Four of these properties are leased to
subsidiaries of AMI and the other property is leased to a

F-11
<PAGE> 51

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subsidiary of Columbia/HCA Healthcare Corporation. Each such lease grants the
operator options, exercisable on not less than six months notice, to extend the
term of the lease for eight consecutive five-year renewal terms. Base and
additional rent during the first three to four extended terms would be on the
same terms and conditions as the current initial term. Minimum rent during the
final four to five extended terms would be fair market rental but no separate
additional rent. Each lease also grants the operator options, exercisable on not
less than six months notice, to purchase the leased property at fair market
value at the expiration of any term of the lease.

Future minimum annual rentals under the Company's noncancellable operating
leases for calendar years 1997 through 2001 and thereafter are approximately
$71,400,000, $70,400,000, $47,500,000, $43,300,000, $40,100,000 and $90,000,000,
respectively. These amounts do not reflect any adjustments for the nonpayment of
rent by psychiatric operators, deferrals of rent which may be granted to such
operators or the payment of rent previously deferred.

MORTGAGE NOTES RECEIVABLE

Four Winds Hospital -- Saratoga $18,137,000 The Company has a mortgage
note receivable secured by a first mortgage and security interest in the real
property of Four Winds Hospital in Saratoga Springs, New York. The note has an
initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is June 30, 1999. The interest rate on the note is
12.42% with interest only payable monthly through June 30, 1995 and monthly
principal and interest payments of $194,000 payable thereafter.

Four Winds Hospital -- Katonah $27,600,000 The Company has a mortgage note
receivable secured by a first mortgage and security interest in the real
property of Four Winds Hospital in Katonah (Westchester County), New York. The
note has an initial term of ten years with two optional ten-year extension
terms. The initial term maturity date is November 30, 2002. The annual interest
rate on the note was 12.71%, 13.07% and 13.44%, in 1994, 1995 and 1996,
respectively, and increases .36% annually thereafter until reaching 14.49% where
it remains through maturity. Interest only is payable monthly.

The Company has recorded a $7,950,000 reserve for impairment of its
mortgage notes receivable and records interest on its mortgage notes as interest
payments are received.

Pursuant to the terms of the mortgage notes receivable, the Company may
receive additional interest each year based on the increase in annual operating
revenues of the related psychiatric facility. The Company may provide permanent
financing for capital additions at the facilities.

The carrying amount of mortgage notes receivable is a reasonable estimate
of fair value, as the pricing and terms of the notes are indicative of current
rates and credit risk.

OTHER NOTES RECEIVABLE

The Company provides financing at variable rates to certain psychiatric
hospital operators under revolving credit agreements. The aggregate commitment
under these credit agreements was $5,700,000 as of December 31, 1996. Borrowings
under the credit agreements are subject to compliance with various covenants and
are partially secured by accounts receivable and other personal property of the
operators. As of December 31, 1996, $4,225,000 was outstanding under revolving
credit agreements at a weighted average contractual interest rate of 11.25%. The
weighted average amount of borrowings under revolving credit agreements
outstanding during 1996 was $4,414,000 at a weighted average interest rate,
reflecting deferrals, of 7.4% with a maximum of $4,475,000 outstanding during
the year.

The pricing and terms of other notes receivable are indicative of current
rates and credit risk, and therefore, the current carrying amount of these
financial instruments is a reasonable estimate of fair value.

F-12
<PAGE> 52

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DIRECT FINANCING LEASES

In connection with its investments in certain acute and long-term care
properties, the Company also has provided equipment leasing for terms of five to
seven years which are classified as direct financing leases. As of December 31,
1996, the Company's aggregate net investment in these direct financing leases
was $3,695,000, represented by total minimum lease payments receivable of
$4,423,000 less unearned income of $728,000. Future minimum annual lease
payments under these leases for calendar years 1997 through 2001 are
approximately $1,262,000, $1,262,000, $1,262,000, $624,000 and $13,000,
respectively.

DEBT

Bank Loans Payable The Company has a $150 million unsecured revolving
credit agreement with a syndicate of banks that matures on December 27, 1998 and
bears an annual facility fee based on the total commitment. This agreement
provides for interest on outstanding borrowings based on either LIBOR plus a
margin or the prime rate plus, in certain circumstances, a margin. The margin on
LIBOR or prime rate borrowings and the annual facility fee may vary and are
dependent upon various conditions, including the Company's debt ratings and the
level of borrowings outstanding. Currently, the Company is able to borrow at
either LIBOR plus 87.5 basis points or the prime rate, and the annual facility
fee is 25 basis points.

The weighted average amount of borrowings under bank credit agreements
outstanding during 1996, 1995 and 1994 was $21,622,000, $27,467,000 and
$5,404,000 at weighted average interest rates of 6.4%, 7.5% and 6.9%,
respectively. The maximum amount outstanding under bank credit agreements in
1996, 1995 and 1994 was $53,000,000, $73,000,000 and $20,500,000, respectively.
As of December 31, 1996, the Company had $48,500,000 of borrowings outstanding
under its bank credit agreement with a weighted average interest rate of 6.7%.

The duration of borrowings under the Company's unsecured revolving credit
agreement are generally less than 90 days at variable pricing indicative of
current short-term borrowing rates. Accordingly, carrying amount is a reasonable
estimate of fair value.

Senior Notes Payable At December 31, 1996, the Company had $72 million of
11.45% unsecured senior notes payable outstanding that were issued pursuant to a
$125 million private placement in 1989 and $80 million of 10.41% unsecured
senior notes payable outstanding that were issued pursuant to a $100 million
private placement in 1990. The weighted average amount of borrowings under these
senior note issues during 1996, 1995 and 1994 was $178,250,000, $211,000,000 and
$225,000,000 at weighted average effective interest rates of 11.03%, 11.06% and
11.09%, respectively. In February 1997, the Company prepaid the $152 million
outstanding balance of these senior note issues resulting 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.

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 two issues of private placement debt prior to its scheduled maturity
and the Company's borrowings under its bank credit agreement.

An estimate of rates currently available to the Company for debt with
similar terms was used to determine the fair value of the Company's senior notes
payable. As of December 31, 1996 and 1995, the estimated fair value of senior
notes payable was $163 million and $215 million, respectively.

F-13
<PAGE> 53

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Subordinated Convertible Bonds Payable The Company's Convertible Dual
Currency Subordinated Bonds (the Swiss Bonds) were sold in Switzerland pursuant
to public subscription in 1990. The Swiss Bonds have a coupon rate of 8.5% and
are convertible at the option of the holder at any time until July 9, 2000 into
shares of the Company's common stock at a conversion price of $23.45 per share
and a fixed exchange rate of Sfr. 1.41 per U.S. $1.00. There were no conversions
of Swiss Bonds in the last three years. Final redemption of the 1,491 remaining
Swiss Bonds will be made in U.S. dollars of $7,455,000 on July 19, 2000 provided
additional conversions or redemption have not occurred earlier. Interest on
outstanding Swiss Bonds is payable annually in arrears in Swiss francs in July.
Accrued and accreted interest is not paid on Swiss Bonds converted into common
stock. The Company has reserved approximately 225,000 unissued shares of common
stock for potential future Swiss Bond conversions.

The fair value of the Company's subordinated convertible bonds payable is
based on the quoted market price of the bonds as traded in Switzerland. As of
December 31, 1996 and 1995, the estimated fair value of subordinated convertible
bonds payable was $6,757,000 and $6,573,000, respectively.

Debt Covenants Covenants and restrictions in the Company's various debt
agreements include limitations on secured borrowings, restrictions covering the
use of proceeds from asset sales and payments of dividends and requirements
relating to the maintenance of specified financial covenants, including those
relating to minimum tangible net worth, fixed charge coverage and ratios of
liabilities to minimum tangible net worth and asset values.

Annual Maturities The aggregate amount of maturities of the Company's
outstanding debt at December 31, 1996, as adjusted for the sale of $220 million
of senior notes in January 1997 and the prepayment of $152 million of senior
notes in February 1997, is $7,455,000, $100,000,000 and $120,000,000 in 2000,
2002 and 2007, respectively.

Interest Interest capitalized on construction in progress was $895,000,
$198,000 and $883,000 in 1996, 1995 and 1994, respectively. Interest paid, net
of interest capitalized, in 1996, 1995 and 1994 was $21,547,000, $26,232,000 and
$24,924,000, respectively.

PENSION PLANS

The Company has a defined contribution pension plan covering all of its
employees. Pension expense in 1996, 1995 and 1994 was $247,000, $238,000 and
$207,000, respectively.

The following tables set forth the amounts recognized in the Company's
financial statements:

Actuarial present value of benefit obligations:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Vested benefit obligation.............................. $767,000 $721,000
-------- --------
Accumulated benefit obligation......................... $800,000 $737,000
-------- --------
Projected benefit obligation........................... $807,000 $762,000
Unrecognized prior service cost........................ (7,000) (56,000)
Unrecognized net gain.................................. 144,000 65,000
-------- --------
Pension liability...................................... $944,000 $771,000
======== ========
</TABLE>

F-14
<PAGE> 54

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Components of net pension cost:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current service cost......................... $ 95,000 $ 80,000 $ 70,000
Interest cost................................ 53,000 50,000 39,000
Amortization of prior service cost........... 49,000 49,000 49,000
Amortization of net gain..................... -- (18,000) (9,000)
-------- -------- --------
Net periodic pension cost.................... $197,000 $161,000 $149,000
======== ======== ========
</TABLE>

Discount rates of 7.5% and 7.0% for 1996 and 1995, respectively, and a
10.0% increase in annual base director fees once every five years were used in
determining the actuarial present value of the projected benefit obligation. The
discount rates used in determining the net pension cost for 1996, 1995 and 1994
were 7.0%, 8.5% and 7.0%, respectively.

STOCK INCENTIVE PLANS

The Company's stock incentive plans provide for the issuance of up to
2,600,000 shares of stock to directors and key employees of the Company. There
were 1,092,809 shares available to grant further stock incentives at December
31, 1996. Pursuant to the terms of the Company's stock incentive plans, stock
options, restricted stock, deferred shares and dividend equivalent rights (DERs)
were adjusted to reflect the Distribution.

The following is a summary of stock incentives activity:

<TABLE>
<CAPTION>
CORE GROUP COMMON STOCK PSYCHIATRIC GROUP DEPOSITARY SHARES
------------------------------------------- ------------------------------------------
STOCK OPTIONS STOCK OPTIONS
------------------- ------------------
WEIGHTED DEFERRED WEIGHTED DEFERRED
NUMBER AVERAGE AND NUMBER AVERAGE AND
OF EXERCISE DER RESTRICTED OF EXERCISE DER RESTRICTED
SHARES PRICE SHARES STOCK SHARES PRICE SHARES STOCK
-------- -------- -------- ---------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993.................. 688,166 $25.22 9,198 43,884
Granted/accumulated.............. 174,964 $26.71 18,658 5,807
Exercised/restrictions lapsed.... (90,000) $21.81 -- (16,750)
Expired/canceled................. (20,000) $31.19 -- --
-------- ------- -------
December 31, 1994.................. 753,130 $25.82 27,856 32,941 -- -- -- --
Granted/accumulated.............. 183,537 $20.86 37,885 14,859 -- -- 1,668 --
Adjustment for Distribution...... -- $22.60 -- -- 93,668 $22.51 5,718 4,777
Exercised/restrictions lapsed.... (77,547) $22.34 (13,922) (16,112) -- -- -- (1,610)
Expired/canceled................. (142,190) $23.56 (5,594) (12,639) (21,974) $23.04 (2,179) (1,263)
-------- ------- ------- ------- ------ ------
December 31, 1995.................. 716,930 $22.43 46,225 19,049 71,694 $22.35 5,207 1,904
Granted/accumulated.............. 161,651 $22.76 35,526 3,910 -- -- 5,394 --
Exercised/restrictions lapsed.... (12,500) $19.28 -- (13,161) -- -- -- (1,121)
-------- ------- ------- ------- ------ ------
December 31, 1996.................. 866,081 $22.54 81,751 9,798 71,694 $22.35 10,601 783
======== ======= ======= ======= ====== ======
</TABLE>

F-15
<PAGE> 55

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of significant ranges of outstanding and
exercisable options at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ----------------------------
RANGES OF NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- ---------------- ---------------- --------- ----------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
CORE GROUP COMMON STOCK
$16.00 -- $21.50........ 374,876 6.1 $19.81 273,877 $19.87
$21.50 -- $27.00........ 441,205 7.2 $23.79 305,702 $24.12
$27.00 -- $32.50........ 50,000 5.1 $32.06 50,000 $32.06
PSYCHIATRIC GROUP
DEPOSITARY SHARES
$16.00 -- $21.50........ 36,123 5.8 $19.60 28,639 $19.77
$21.50 -- $27.00........ 30,571 6.3 $24.03 30,571 $24.03
$27.00 -- $32.50........ 5,000 5.1 $31.94 5,000 $31.94
</TABLE>

Restrictions on shares of restricted stock lapse each year following the
date of award with respect to one-sixth, one-fifth, one-quarter or one-half of
the total number of shares awarded, as the case may be. Expense is determined
based on the market value at the date of award and is recognized over the period
such restrictions lapse.

The exercise price of stock options is equal to the fair market value of
the shares on the dates the options were granted. Stock options granted to
directors become exercisable immediately or over two years and stock options
granted to key employees become exercisable over two to four years. Stock
options terminate ten years from the date of grant. Options on 629,579, 536,815
and 611,987 shares of Core Group Common Stock were exercisable at December 31,
1996, 1995 and 1994 with weighted average exercise prices of $22.90, $23.29 and
$25.67 per share, respectively. Options on 64,210 and 53,683 Psychiatric Group
Depositary Shares were exercisable at December 31, 1996 and 1995 with weighted
average exercise prices of $22.75 and $23.21 per share, respectively.

DERs have been granted in tandem with some of the stock options granted to
key employees. At each dividend declaration date, a calculation is made to
determine the number of shares that could be acquired if dividends were paid on
shares under option for a period of up to five years from the date of grant and
on accumulated DER shares for a period of up to ten years from the date of
grant, and such number of shares are accumulated for the benefit of option
holders over the term of the option grant. Upon exercise or expiration of the
related option, each option holder is entitled to receive additional shares
equivalent to the accumulated number of related DER shares. Expense related to
the DER shares is equal to the equivalent amount of dividends used to determine
the number of DER shares. Directors may elect to receive payment of their annual
Board fees on a deferred basis in the form of stock of the Company. These
deferred shares, and related accumulated DER shares, are issued to the director
making such an election at the end of each three-year deferral period. At
December 31, 1996, substantially all deferred and DER shares were issuable upon
exercise of the related vested options or otherwise unrestricted.

Total stock-based compensation expense recognized under APB 25 in 1996,
1995 and 1994 was $1,251,000, $1,026,000 and $944,000, respectively.

F-16
<PAGE> 56

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As determined under SFAS 123, the weighted average fair value at the date
of grant for options to purchase Core Group Common Stock granted during 1996 was
$4.84 per option. The weighted average fair value at the date of grant for
options granted in 1995, adjusted to reflect the Distribution, was $5.32 per
option for Core Group Common Stock and $5.28 per option for Psychiatric Group
Depositary Shares. The fair value of options was estimated using an option
pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected life in years...................................... 6.7 7.2
Risk-free interest rate..................................... 5.62% 7.67%
Expected volatility......................................... 15% 15%
Expected dividend yield --
Options without DERs...................................... 8% 8%
Options with DERs......................................... 0% 0%
</TABLE>

The weighted average fair value at the date of grant for restricted and
deferred shares of Core Group Common Stock granted during 1996 was $22.53 per
share. The weighted average fair value at the date of grant for restricted and
deferred shares granted in 1995, adjusted to reflect the Distribution, was
$18.95 per share for Core Group Common Stock and $18.69 per share for
Psychiatric Group Depositary Shares.

If the fair value based method of accounting defined by SFAS 123 had been
used to measure and recognize stock-based compensation expense, the pro forma
effect on the reported amounts of net income and net income per share of the
consolidated Company, the Core Group and the Psychiatric Group for 1996 and 1995
would not have been material. The pro forma effect for 1996 and 1995 may not be
representative of the pro forma effect in future years because it does not take
into consideration stock-based incentives granted prior to 1995.

PREFERRED STOCK PURCHASE RIGHTS PLAN

On April 20, 1990, the Company distributed to shareholders one preferred
stock purchase right (each a Right) for each outstanding share of common stock.
Under certain conditions, each Right may be exercised to purchase one
one-hundredth of a share of preferred stock, Series A, par value $.01 per share
(the Series A Preferred Shares), of the Company at a price of $45. The Company's
Psychiatric Group Depositary Shares do not include the Rights or entitle holders
thereof to receive the Rights, which are applicable only to the Company's Core
Group Common Stock. The total number of Rights currently issued or issuable,
including Rights issuable in connection with common stock which may be issued
under the Company's stock incentive plans and upon the conversion of the
Company's outstanding Swiss Bonds, is approximately 25,721,000. Approximately
257,000 Series A Preferred Shares could be purchased upon the exercise of all
Rights currently issued or issuable. The number of Rights outstanding and Series
A Preferred Shares issuable upon exercise, as well as the Series A Preferred
Share purchase price, are subject to customary antidilution adjustments.

The Rights are evidenced by the certificates for shares of common stock,
and in general are not transferable apart from the common stock or exercisable
until after a party has acquired beneficial ownership of, or made a tender offer
for, 10% or more of the outstanding common stock of the Company (an Acquiring
Person), or the occurrence of other events as specified in the Rights Plan.
Under certain conditions as specified in the Rights Plan, including but not
limited to the acquisition by a party of 15% or more of the outstanding common
stock of the Company or the acquisition of the Company in a merger or other
business combination, each holder of a Right (other than an Acquiring Person
whose Rights will be void) will receive upon exercise thereof and payment of the
exercise price that number of shares of common stock of the Company or of the
other party, as applicable, having a market value of two times the exercise
price of the Right.

F-17
<PAGE> 57

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Rights expire on April 20, 2000, and until exercised, the holder
thereof, as such, will have no rights as a shareholder of the Company. At the
Company's option, the Rights may be redeemed in whole at a price of $.01 per
Right at any time prior to becoming exercisable. In general, the Company also
may exchange the Rights at a ratio of one share of common stock per Right after
becoming exercisable but prior to the acquisition of 50% or more of the
outstanding shares of common stock by any party.

Series A Preferred Shares issuable upon exercise of the Rights will not be
redeemable. Each Series A Preferred Share will have 100 votes and will be
entitled to (a) dividends in an amount equal to the greater of $1.00 or 100
times the amount of the dividends per share paid on the common stock, (b) a
liquidation preference in an amount equal to the greater of $100 or 100 times
the amount per share paid on the common stock and (c) a payment in connection
with a business combination (in which shares of common stock are exchanged)
equal to 100 times the amount per share paid on the common stock.

DIVIDENDS

A quarterly dividend of $.525 per share for Core Group Common Stock, or
approximately $12,314,000, was declared by the Board of Directors on January 24,
1997, payable on February 24, 1997 to shareholders of record on February 10,
1997. A quarterly dividend of $.80 per share for Psychiatric Group Depositary
Shares, or approximately $1,667,000, was declared by the Board of Directors on
January 24, 1997, payable on February 24, 1997 to shareholders of record on
February 10, 1997. The aggregate dividends of $13,981,000 have been reflected as
dividends payable in the accompanying consolidated financial statements as of
December 31, 1996. Dividends of $2.02 per share paid on Core Group Common Stock
during the year ended December 31, 1996 are characterized as $1.84 of ordinary
income and $.18 of return of capital for tax purposes. Dividends of $2.80 per
share paid on Psychiatric Group Depositary Shares during the year ended December
31, 1996 are characterized as $2.55 of ordinary income and $.25 of return of
capital for tax purposes.

In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess Proceeds will be available only for the
Psychiatric Group Depositary Shares and will be limited to $30 million in the
aggregate and $15 million in any calendar year.

F-18
<PAGE> 58

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ---------- ------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1996
Consolidated --
Revenues................................. $22,121 $21,927 $ 22,138 $22,738 $ 88,924
Net income............................... 10,751 10,669 11,151 11,808 44,379
Attributable to --
Core Group Common Stock
Revenues............................ $20,186 $20,181 $ 20,344 $20,718 $ 81,429
Net income.......................... 9,319 9,435 9,873 10,173 38,800
Net income per share................ .40 .40 .42 .43 1.65
Psychiatric Group Depositary Shares
Revenues............................ $ 2,355 $ 2,173 $ 2,219 $ 2,427 $ 9,174
Net income.......................... 1,432 1,234 1,278 1,635 5,579
Net income per share................ .68 .59 .61 .78 2.67
1995
Consolidated --
Revenues................................. $21,731 $21,973 $ 22,405 $25,121 $ 91,230
Net income............................... 9,667 9,545(1) 9,884 13,285(2) 42,381
Attributable to --
Core Group Common Stock
Revenues............................ $19,575 $19,966 $ 20,304 $23,068 $ 82,913
Net income.......................... 7,976 8,206 8,235 11,690(2) 36,107
Net income per share................ .38 .39 .39 .51 1.69
Psychiatric Group Depositary Shares
Revenues............................ $ 2,891 $ 2,441 $ 2,534 $ 2,480 $ 10,346
Net income.......................... 1,691 1,339(1) 1,649 1,595 6,274
Net income per share................ .81 .64 .79 .76 3.00
</TABLE>

- ---------------

(1) Includes costs related to the Distribution of $300,000.

(2) Includes a premium of $2,652,000 received in connection with the prepayment
of a mortgage note receivable.

F-19
<PAGE> 59

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in this Annual Report on Form
10-K, and have issued our report thereon dated March 24, 1997. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in the index of financial statements is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 24, 1997.

F-20
<PAGE> 60

SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION

AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS CARRYING AMOUNT
INITIAL COST TO COMPANY AT DECEMBER 31, 1996 (A)
------------------------ ---------------------------------
BUILDINGS SUBSEQUENT BUILDINGS
LICENSED AND CAPITAL AND
DESCRIPTION & LOCATION BEDS LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ---------------------- -------- -------- ------------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Acute care general properties:
Cheraw, South Carolina......... 66 $ 720 $ 10,687 $ -- $ 720 $ 10,687 $ 11,407
Cleveland, Texas............... 104 300 8,000 -- 300 8,000 8,300
Victorville, California........ 77 1,755 22,245 2,405 1,755 24,650 26,405
Hickory, North Carolina........ 275 1,247 38,753 5,449 1,247 44,202 45,449
Irvine, California............. 177 17,987 57,013 -- 17,987 57,013 75,000
Miami, Florida................. 412 4,163 55,837 9,012 4,163 64,849 69,012
Poplar Bluff, Missouri......... 201 404 19,596 3,566 404 23,162 23,566
Bennettsville, South
Carolina..................... 108 640 7,153 -- 640 7,153 7,793
Roswell, Georgia............... 167 4,149 20,851 21,191 4,149 42,042 46,191
Palm Beach Gardens, Florida.... 204 4,024 40,976 648 4,024 41,624 45,648
Tarzana, California............ 233 11,921 43,079 18,700 12,421 61,279 73,700
San Angelo, Texas.............. 171 165 15,867 420 255 16,197 16,452
West Valley City, Utah......... 139 1,997 47,469 -- 1,997 47,469 49,466
------- -------- ------- ------- -------- --------
49,472 387,526 61,391 50,062 448,327 498,389
------- -------- ------- ------- -------- --------
Alzheimer's care property:
Houston, Texas................. 96 225 3,420 55 225 3,475 3,700
------- -------- ------- ------- -------- --------
Assisted living properties:
Walla Walla, Washington........ 80 219 5,429 -- 219 5,429 5,648
El Paso, Texas................. 80 300 4,882 -- 300 4,882 5,182
Odessa, Texas.................. 80 220 4,814 -- 220 4,814 5,034
Boise, Idaho................... 60 110 2,890 -- 110 2,890 3,000
------- -------- ------- ------- -------- --------
849 18,015 -- 849 18,015 18,864
------- -------- ------- ------- -------- --------
Medical office building:
Murrieta, California........... n/a 285 8,515 -- 285 8,515 8,800
------- -------- ------- ------- -------- --------
Psychiatric properties:
Tarpon Springs, Florida........ 130 1,457 2,904 2,162 1,457 5,066 6,523
Sunrise, Florida............... 100 3,325 15,209 -- 3,325 8,609 11,934(d)
Lemont, Illinois............... 60 440 8,372 -- 440 6,065 6,505(c)
------- -------- ------- ------- -------- --------
5,222 26,485 2,162 5,222 19,740 24,962
------- -------- ------- ------- -------- --------
Rehabilitation properties:
Wichita, Kansas................ 60 1,938 12,659 -- 1,938 12,659 14,597
Morgantown, West Virginia...... 80 -- 10,084 1,634 -- 11,718 11,718
Fayetteville, Arkansas......... 60 962 8,124 -- 962 8,124 9,086
------- -------- ------- ------- -------- --------
2,900 30,867 1,634 2,900 32,501 35,401
------- -------- ------- ------- -------- --------
Skilled nursing properties:
Denver, Colorado............... 120 154 3,912 -- 154 3,912 4,066
Lakewood, Colorado............. 144 125 4,731 -- 125 4,731 4,856
Douglas, Arizona............... 64 175 2,446 -- 175 2,446 2,621
Safford, Arizona............... 128 100 4,834 -- 100 4,834 4,934
------- -------- ------- ------- -------- --------
554 15,923 -- 554 15,923 16,477
------- -------- ------- ------- -------- --------
$59,507 $490,751 $65,242 $60,097 $546,496 $606,593
======= ======== ======= ======= ======== ========

ACCUMULATED DATE OF DATE DEPRECIABLE
DESCRIPTION & LOCATION DEPRECIATION CONSTRUCTION(B) ACQUIRED LIFE
- ---------------------- ------------ --------------- -------- -----------
<S> <C> <C> <C> <C>
Acute care general properties:
Cheraw, South Carolina......... $ 594 1982 - 1993 05/02/95 30 years
Cleveland, Texas............... 889 1968 - 1986 01/03/94 27 years
Victorville, California........ 1,279 1994 - 1996 09/20/94 40 years
Hickory, North Carolina........ 10,920 1974 - 1993 02/27/87 38 years
Irvine, California............. 8,136 1990 04/23/91 40 years
Miami, Florida................. 15,503 1973 - 1994 02/27/87 38 years
Poplar Bluff, Missouri......... 5,339 1980 - 1995 02/27/87 40 years
Bennettsville, South
Carolina..................... 397 1984 - 1993 05/02/95 30 years
Roswell, Georgia............... 8,167 1983 - 1993 02/27/87 42 years
Palm Beach Gardens, Florida.... 10,188 1964 - 1992 02/27/87 40 years
Tarzana, California............ 15,115 1973 - 1994 02/27/87 34 years
San Angelo, Texas.............. 2,133 1960 - 1991 09/30/91 40 years
West Valley City, Utah......... 927 1983 - 1990 05/16/96 32 years
-------
79,587
-------
Alzheimer's care property:
Houston, Texas................. 94 1995 12/21/95 40 years
-------
Assisted living properties:
Walla Walla, Washington........ 62 1996 07/24/96 40 years
El Paso, Texas................. 46 1996 08/23/96 40 years
Odessa, Texas.................. 35 1996 09/17/96 40 years
Boise, Idaho................... 96 1994 09/01/95 40 years
-------
239
-------
Medical office building:
Murrieta, California........... 585 1991 04/01/94 40 years
-------
Psychiatric properties:
Tarpon Springs, Florida........ 1,028 1928 - 1993 08/15/90 25 years
Sunrise, Florida............... 2,534 1988 08/15/90 25 years
Lemont, Illinois............... 1,126 1989 12/31/92 25 years
-------
4,688
-------
Rehabilitation properties:
Wichita, Kansas................ 1,516 1992 03/16/92 40 years
Morgantown, West Virginia...... 1,582 1991-1994 02/25/91 40 years
Fayetteville, Arkansas......... 1,117 1991 07/01/91 40 years
-------
4,215
-------
Skilled nursing properties:
Denver, Colorado............... 224 1971 06/13/95 27 years
Lakewood, Colorado............. 209 1970 - 1974 06/13/95 35 years
Douglas, Arizona............... 102 1982 07/28/95 34 years
Safford, Arizona............... 196 1982 07/28/95 35 years
-------
731
-------
$90,139
=======
</TABLE>

- ---------------

(a) The cost basis of the properties for Federal income tax purposes is the same
as the gross carrying amount; except for those properties for which a
write-down was recorded in 1994 and the property in Cheraw, South Carolina
for which the previous owner's basis of $3.7 million is required to be
carried forward.
(b) Most properties have had improvements since their initial construction. The
range of dates reflects the construction date of the original structures
through the latest date of improvements.
(c) This property was conveyed to the Company in December 1992 in connection
with the restructuring and forgiveness of a mortgage note receivable. The
$21.4 million mortgage note receivable had been written down in June 1992 to
$10 million. Subsequent recovery of a $1.1 million interest reserve fund
from the mortgagee reduced the Company's recorded investment in the note to
$8.8 million (net of unamortized fees) which became the Company's basis in
the property upon its conveyance. The property was subsequently written down
by $2.3 million, net in 1994.
(d) This property was written down by $6.6 million, net in 1994.

F-21
<PAGE> 61

SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION

AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)

SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION ACTIVITY:

<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Year............. $595,876 $82,435 $565,995 $70,617 $543,093 $58,157
Acquisitions............................. -- -- 39,370 -- 30,020 --
Cost of Real Estate Sold................. (423) -- (13,435) (2,433) (7,309) (1,537)
Construction Projects Completed.......... 15,864 -- 3,645 -- 15,000 --
Capital Improvements..................... 2,460 -- 301 -- 7,241 --
Real Estate Exchange..................... (7,184) (7,184) -- -- -- --
Write-Down of Real Estate Investments.... -- -- -- -- (22,050) --
Depreciation............................. -- 14,888 -- 14,251 -- 13,997
-------- ------- -------- ------- -------- -------
Balance at End of Year................... $606,593 $90,139 $595,876 $82,435 $565,995 $70,617
======== ======= ======== ======= ======== =======
</TABLE>

F-22
<PAGE> 62

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To American Health Properties, Inc.:

We have audited the accompanying combined balance sheets of the Core Group
(a business unit of American Health Properties, Inc.) as of December 31, 1996
and 1995, and the related combined statements of operations, total attributed
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the management of
American Health Properties, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Core Group as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 24, 1997.

F-23
<PAGE> 63

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CORE GROUP COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate properties
Buildings and improvements................................ $526,756 $514,283
Accumulated depreciation.................................. (85,451) (78,491)
-------- --------
441,305 435,792
Land...................................................... 54,875 56,631
Construction in progress.................................. 4,834 6,016
-------- --------
501,014 498,439
Direct financing leases..................................... 3,695 6,230
Revolving inter-Group loan to Psychiatric Group............. 4,183 5,263
Fixed rate inter-Group loan to Psychiatric Group............ 9,175 9,175
Cash and short-term investments............................. 1,480 7,571
Receivables................................................. 6,260 6,520
Deferred financing costs and other assets................... 2,172 3,001
-------- --------
$527,979 $536,199
======== ========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY

Bank loans payable.......................................... $ 48,500 $ --
Subordinated convertible bonds payable...................... 6,601 6,378
Senior notes payable........................................ 152,000 201,000
Accounts payable and accrued liabilities.................... 7,385 7,806
Dividends payable........................................... 12,314 11,838
Deferred income............................................. 4,003 4,230
-------- --------
230,803 231,252
-------- --------
Commitments and contingencies
Total attributed Core Group equity.......................... 297,176 304,947
-------- --------
$527,979 $536,199
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-24
<PAGE> 64

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CORE GROUP COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income............................................. $67,499 $64,740 $59,755
Mortgage interest income.................................. -- 845 --
Additional rental income.................................. 11,530 10,405 8,908
Other interest income..................................... 721 4,894 2,976
Interest income on inter-Group loans to Psychiatric
Group................................................... 1,679 2,029 4,041
------- ------- -------
81,429 82,913 75,680
------- ------- -------
EXPENSES
Depreciation and amortization............................. 14,272 13,575 12,302
Interest expense.......................................... 21,842 27,057 26,101
General and administrative................................ 6,299 5,898 4,425
------- ------- -------
42,413 46,530 42,828
Minority interest......................................... 216 276 304
------- ------- -------
NET INCOME................................................ $38,800 $36,107 $32,548
======= ======= =======
Net income per common share............................... $ 1.65 $ 1.69 $ 1.56
Weighted average common shares outstanding................ 23,518 21,405 20,856
Dividends declared per common share....................... $ 2.04 $ 1.99 $ 1.88
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-25
<PAGE> 65

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CORE GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR............................... $304,947 $259,199 $263,832
Public offering of additional shares........................ -- 50,317 --
Stock incentives, net....................................... 1,033 1,687 431
Exercise of stock options................................... 241 1,732 1,691
Net Income.................................................. 38,800 36,107 32,548
Dividends................................................... (47,845) (44,095) (39,303)
-------- -------- --------
BALANCES AT END OF YEAR..................................... $297,176 $304,947 $259,199
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-26
<PAGE> 66

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CORE GROUP COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1,995 1,994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 38,800 $ 36,107 $ 32,548
Depreciation, amortization and other non-cash items........ 16,415 15,717 14,175
Deferred income............................................ (315) (305) 344
Change in receivables and other assets..................... 384 (625) (214)
Change in accounts payable and accrued liabilities......... (443) (481) (595)
-------- -------- --------
54,841 50,413 46,258
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties..... (17,142) (48,640) (40,142)
Proceeds from sale of property............................. 423 -- --
Principal payment on mortgage note receivable.............. -- 26,519 --
Construction loan fundings................................. -- (5,136) (23,180)
Construction loan paid..................................... -- -- 16,836
Direct financing leases.................................... 2,535 (2,414) (1,013)
Paydowns (fundings) on revolving inter-Group loan to
Psychiatric Group........................................ 1,086 4,001 (672)
Paydowns on fixed rate inter-Group loan to Psychiatric
Group.................................................... -- 10,825 6,044
Administrative capital expenditures........................ (55) (96) (183)
-------- -------- --------
(13,153) (14,941) (42,310)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable................ 48,500 (14,500) 14,500
Principal payments on senior notes payable................. (49,000) (24,000) --
Principal payments on mortgage notes payable............... -- -- (14,468)
Financing costs paid....................................... (150) (919) (248)
Proceeds from sale of stock................................ -- 50,317 --
Proceeds from exercise of stock options.................... 241 1,732 1,691
Dividends paid............................................. (47,370) (42,369) (39,255)
-------- -------- --------
(47,779) (29,739) (37,780)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... (6,091) 5,733 (33,832)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 7,571 1,838 35,670
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 1,480 $ 7,571 $ 1,838
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-27
<PAGE> 67

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS

THE COMPANY

Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock held
of record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock. The Distribution was designed to separate the economic attributes of the
Company's investments in psychiatric hospitals (the Psychiatric Group) and its
investments in acute care, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and a medical
office building (the Core Group) into two distinct portfolios, with two distinct
classes of publicly-traded shares intended to represent those portfolios. In
connection with the Distribution, the Company directly assigned or, if not
directly assigned, allocated its assets, liabilities and stockholders' equity,
and its revenues, expenses and cash flow items, between the Core Group and
Psychiatric Group, as more fully described below. The Psychiatric Group
Depositary Shares are intended to reflect the separate financial performance of
the Psychiatric Group. The Company's common stock (the Core Group Common Stock)
is intended to reflect the separate financial performance of the Core Group.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation 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
a medical office building, an allocated portion of the Company's general and
administrative expense, all corporate assets and liabilities and related
transactions associated with the ongoing operations of the Company which are not
separately identified with either operating group, an attributed amount of
inter-Group loans receivable from the Psychiatric Group and an attributed amount
of the Company's stockholders' equity. For purposes of computing per share data
for periods prior to the actual Distribution, the number of shares of Core Group
Common Stock are assumed to be the same as the corresponding number of shares of
the Company's common stock prior to the Distribution. The Core Group financial
statements are prepared using the amounts included in the Company's consolidated
financial statements.

Although the financial statements of the Core Group and the Psychiatric
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow of
the Company attributed to each such Group, such attribution does not affect the
respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Furthermore, such attribution does not
affect the rights of creditors of the Company or any subsidiary, including
rights under financing covenants.

Each holder of Core Group Common Stock or Psychiatric Group Depositary
Shares is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition, cash flows or borrowing costs may also affect the results of
operations, financial condition, cash flows or borrowing costs of the other
Group. Net losses of either Group, as well as dividends and distributions on,
and repurchases of, Core Group Common Stock or Psychiatric Group Depositary
Shares will reduce the funds of the Company legally available for

F-28
<PAGE> 68

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

dividends on both the Core Group Common Stock and Psychiatric Group Depositary
Shares. Accordingly, the Core Group's financial statements should be read in
conjunction with the Company's consolidated financial statements and the
financial statements of the Psychiatric Group.

These financial statements include the accounts of the Core Group business.
The Core Group and the Psychiatric Group financial statements, taken together,
comprise all of the accounts included in the Company's consolidated financial
statements.

Real Estate Properties The Core Group accounts for its property leases as
operating leases. The Core Group records properties at cost and allocates the
cost between land and buildings and improvements based on independent
appraisals. Depreciation of Core Group real estate properties is recorded on a
straight-line basis over the estimated useful lives of the buildings and
improvements (27 to 42 years).

Impairment of Real Estate Properties and Inter-Group Loans The Core Group
reviews for the possible impairment of its real estate properties and
inter-Group loans whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. In general, an impairment of such
assets would be indicated if the estimated future cash flows expected to result
from the use of such assets and their eventual disposition is less than their
carrying amounts.

Deferred Income Fees received, net of related direct costs, associated
with the origination or amendment of leases are deferred and amortized at a
constant effective rate over the remaining initial term of the related leases.

Deferred Costs Deferred financing costs are amortized over the term of the
related debt at a constant effective rate.

Stock-Based Compensation In 1996, the Core Group adopted Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" which defines a fair value based method of accounting for
stock-based compensation. As allowed by SFAS 123, the Core Group has elected to
continue to measure employee stock-based compensation expense using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees".

F-29
<PAGE> 69

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

CORPORATE ACTIVITIES, INTER-GROUP LOANS, THIRD-PARTY DEBT AND EQUITY

Financial Activities As a matter of policy, the Company manages all
financial activities on a centralized, consolidated basis. Such financial
activities include the investment of surplus cash; the issuance and repayment of
all short-term and long-term debt; and the issuance of common and preferred
stock. These activities are then attributed to the Core Group and the
Psychiatric Group in the manner described herein.

Historical Debt and Equity Transactions All third-party debt ($207,101,000
and $207,378,000 at December 31, 1996 and 1995, respectively) has been
attributed to the Core Group. However, the Psychiatric Group was attributed (a)
fixed rate inter-Group loans owing to the Core Group at December 31, 1994 of
$20,000,000, an amount determined by the Board to be appropriate in relation to
the assets and expected cash flow of the Psychiatric Group and its cash
requirements and (b) revolving inter-Group loans owing to the Core Group at
December 31, 1994 of $9,428,000, an amount equal to the outstanding borrowings
owed to the Psychiatric Group from psychiatric hospital operators under
revolving credit agreements at that date. As a result of such attributed
inter-Group loans, and in light of the carrying value of each Group's assets and
its other liabilities at December 31, 1994, the equity attributed to the Core
Group at that date was $259,199,000 and the equity attributed to the Psychiatric
Group at that date was $48,302,000.

Historically, the Psychiatric Group was attributed inter-Group loans owing
to the Core Group from the date of the first Psychiatric Group asset purchase in
1988 to December 31, 1994 in amounts equal to the Psychiatric Group's net cash
requirements not otherwise funded by the proceeds of equity issuances attributed
to the Psychiatric Group. All such inter-Group loans were initially designated
as floating rate loans (with an interest rate equal to the prevailing prime rate
plus 2%), but portions of such inter-Group loans were re-designated as fixed
rate loans in amounts that corresponded with designated portions of third-party
fixed rate senior debt issued by the Company from time to time (with an interest
rate equal to that borne by third-party fixed rate senior debt plus 2%).
Proceeds of equity issuances after 1988 were attributed to the Psychiatric Group
in amounts determined to be appropriate in relation to the assets and expected
cash flow of the Psychiatric Group, its cash requirements and its inter-Group
debt at the time of such issuances. Equity proceeds attributed to the
Psychiatric Group were deemed to correspondingly reduce inter-Group debt. In
general, dividends paid by the Company were attributed to the Core Group and the
Psychiatric Group on the basis of their respective contributions to funds from
operations, excluding expenses associated with litigation, relocation, issuance
of Psychiatric Group Depositary Shares and termination of purchase commitments
which were not considered to be routine costs of ongoing operations.

Third-Party Debt All of the Company's third-party debt has been attributed
to the Core Group. This debt and its relevant terms are summarized in the
following paragraphs.

Bank loans payable The Company has a $150 million unsecured revolving
credit agreement with a syndicate of banks that matures on December 27, 1998 and
bears an annual facility fee based on the total commitment. This agreement
provides for interest on outstanding borrowings based on either LIBOR plus a
margin or the prime rate plus, in certain circumstances, a margin. The margin on
LIBOR and prime rate borrowings and the annual facility fee may vary and are
dependent upon various conditions, including the

F-30
<PAGE> 70

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Company's debt ratings and the level of borrowings outstanding. Currently, the
Company is able to borrow at either LIBOR plus 87.5 basis points or the prime
rate, and the annual facility fee is 25 basis points.

Senior notes payable At December 31, 1996, the Company had $72 million of
11.45% unsecured senior notes payable outstanding that were issued pursuant to a
$125 million private placement in 1989 and $80 million of 10.41% unsecured
senior notes payable outstanding that were issued pursuant to a $100 million
private placement in 1990. The weighted average amount of borrowings under these
senior note issues during 1996, 1995 and 1994 was $178,250,000, $211,000,000 and
$225,000,000 at weighted average effective interest rates of 11.03%, 11.06% and
11.09%, respectively. In February 1997, the Company prepaid the $152 million
outstanding balance of these senior note issues resulting 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.

Subordinated convertible bonds payable The Company's Convertible Dual
Currency Subordinated Bonds (the Swiss Bonds) were sold in Switzerland pursuant
to public subscription in 1990. The Swiss Bonds have a coupon rate of 8.5% and
are convertible at the option of the holder at any time until July 9, 2000 into
shares of the Company's common stock at a conversion price of $23.45 per share
and a fixed exchange rate of Sfr. 1.41 per U.S. $1.00. There were no conversions
of Swiss Bonds in the last three years. Final redemption of the 1,491 remaining
Swiss Bonds will be made in U.S. dollars of $7,455,000 on July 19, 2000 provided
additional conversions or redemption have not occurred earlier. Interest on
outstanding Swiss Bonds is payable annually in arrears in Swiss francs in July.
Accrued and accreted interest is not paid on Swiss Bonds converted into common
stock. The Company has reserved approximately 225,000 unissued shares of common
stock for potential future Swiss Bond conversions.

Debt covenants Covenants and restrictions in the Company's various debt
agreements include limitations on secured borrowings, restrictions covering the
use of proceeds from asset sales and payments of

F-31
<PAGE> 71

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

dividends and requirements relating to the maintenance of specified financial
covenants, including those relating to minimum tangible net worth, fixed charge
coverage and ratios of liabilities to minimum tangible net worth and asset
values.

Annual maturities The aggregate amount of maturities of the Company's
outstanding debt at December 31, 1996, as adjusted for the sale of $220 million
of senior notes in January 1997 and the prepayment of $152 million of senior
notes in February 1997, is $7,455,000, $100,000,000 and $120,000,000 in 2000,
2002 and 2007, respectively.

Inter-Group Loans The weighted average outstanding amount of revolving
inter-Group loans owed by the Psychiatric Group to the Core Group during 1996,
1995 and 1994 was $4,666,000, $5,497,000 and $9,106,000 at weighted average
interest rates of 10.27%, 10.82% and 9.15%, respectively.

The weighted average outstanding amount of fixed rate inter-Group loans
owed by the Psychiatric Group to the Core Group during 1996, 1995 and 1994 was
$9,175,000, $10,979,000 and $24,706,000 at a weighted average interest rate of
13% for all three years. There were no new fixed rate loans made to the
Psychiatric Group during these three years. Paydowns were received from the
proceeds of equity transactions in 1994 attributed to the Psychiatric Group and
the net proceeds from sales of Psychiatric Group real estate investments in 1995
and 1994.

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
psychiatric hospital operators under revolving credit agreements. The Core Group
received $4,325,000 of revolving inter-Group loan repayments and $10,825,000 of
fixed rate inter-Group loan repayments in 1995 and $5,772,000 of fixed rate
inter-Group loan repayments in 1994 from the Psychiatric Group as a result of
such operator borrowing paydowns and asset sales.

The Company's Board 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, the aggregate revolving inter-Group loans owed by the
Psychiatric Group to the Core Group are limited to a maximum of $8,750,000 at
any one time outstanding, which limit is to be reduced dollar-for-dollar with
any permanent repayment in the future of borrowings under revolving credit
agreements provided to Psychiatric Group hospital operators. In addition, the
limit on the aggregate revolving inter-Group loans will not be reduced below
$5,000,000, and except for such revolving inter-Group loans, no additional fixed
rate or other inter-Group loans will be advanced by the Core Group to the
Psychiatric Group.

If the Psychiatric Group sells any assets out of the ordinary course, the
net proceeds from such sales (after transaction costs and reserves for
contingencies) will be applied, first, to repay revolving inter-Group loans owed
by the Psychiatric Group to the Core Group to the extent of outstanding
borrowings provided to psychiatric hospital operators under revolving credit
agreements associated with the asset or assets sold, second, to repay the
outstanding fixed rate inter-Group loans owed by the Psychiatric Group to the
Core Group (until repaid in full), and third, to repay other revolving
inter-Group loans owed by the Psychiatric Group to the Core Group (until repaid
in full), before any remaining net proceeds from such sales may be used to make
distributions to holders of Psychiatric Group Depositary Shares.

F-32
<PAGE> 72

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Group up to the limitations mentioned previously to cover future cash needs of
the Psychiatric Group (including, without limitation, to fund dividends in a
manner consistent with the dividend policy then applicable to the Psychiatric
Group Depositary Shares).

Fixed rate inter-Group loans owed by the Psychiatric Group to the Core
Group are unsecured, bear interest at a fixed rate of approximately 13% per
annum (which was equal to the weighted average interest rate on the Company's
fixed rate senior debt issues at the time the loans were attributed plus 2%),
and are prepayable without premium at any time, at the option of the Board.

Revolving inter-Group loans owed by the Psychiatric Group to the Core Group
are unsecured, bear interest at a floating rate equal to the prevailing prime
rate plus 2% (10.25% at December 31, 1996) and are prepayable without premium at
any time, at the option of the Board.

The carrying amounts of the inter-Group loans owed to the Core Group by the
Psychiatric Group are a reasonable estimate of fair value, as the pricing and
terms of the loans are indicative of current rates and credit risk.

Cash received by the Psychiatric Group in excess of required repayments of
inter-Group loans owed by the Psychiatric Group may, at the option of the
Company's Board, be advanced to the Core Group as revolving inter-Group loans
(to the extent such cash can be used beneficially by the Core Group), or
otherwise be invested on behalf of the Psychiatric Group. Revolving inter-Group
loans owed by the Core Group to the Psychiatric Group bear interest at a
floating rate equal to the weighted average interest rate borne by the Company's
revolving debt (or, for periods in which there is no such revolving debt
outstanding, the interest rate at which the Company could borrow on a revolving
basis), and are prepayable without premium at any time, at the option of the
Board.

Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group if the Board determines it is in
the best interests of the Company not to do so.

Equity Transactions Subsequent to the Distribution Subsequent to the
Distribution, the proceeds of Core Group Common Stock issuances as well as cash
required to fund Core Group Common Stock dividends or repurchases are attributed
solely to the Core Group and the proceeds of Psychiatric Group Depositary Share
issuances (e.g., upon exercise of management stock options) as well as cash
required to fund Psychiatric Group Depositary Share dividends or repurchases are
attributed solely to the Psychiatric Group.

General and Administrative Expenses General and administrative expenses of
the Company that cannot be directly attributed to either Group are allocated to
the Core Group and the Psychiatric Group on the basis of their respective
contributions to revenues (excluding inter-Group revenues and revenues from
investment dispositions), provided that at no time will such expenses allocated
to either Group be less than $250,000. The Company's general and administrative
expenses consist primarily of employment and related benefits, professional
services, shareholder reporting, franchise taxes, travel and other related
corporate activity.

F-33
<PAGE> 73

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

REAL ESTATE PROPERTIES

The following table summarizes the Core Group's investment in health care
real estate properties as of December 31, 1996:

<TABLE>
<CAPTION>
BUILDINGS NET
AND ACCUMULATED BOOK
LAND IMPROVEMENTS DEPRECIATION VALUE
------- ------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ACUTE CARE GENERAL PROPERTIES:
Chesterfield General Hospital
Cheraw, South Carolina...................... $ 720 $ 10,687 $ 594 $ 10,813
Cleveland Regional Medical Center
Cleveland, Texas............................ 300 8,000 889 7,411
Desert Valley Hospital
Victorville, California..................... 1,755 24,650 1,279 25,126
Frye Regional Medical Center
Hickory, North Carolina..................... 1,247 44,202 10,920 34,529
Irvine Medical Center
Irvine, California.......................... 17,987 57,013 8,136 66,864
Kendall Regional Medical Center
Miami, Florida.............................. 4,163 64,849 15,503 53,509
Lucy Lee Hospital
Poplar Bluff, Missouri...................... 404 23,162 5,339 18,227
Marlboro Park Hospital
Bennettsville, South Carolina............... 640 7,153 397 7,396
North Fulton Regional Hospital
Roswell, Georgia............................ 4,149 42,042 8,167 38,024
Palm Beach Gardens Medical Center
Palm Beach Gardens, Florida................. 4,024 41,624 10,188 35,460
Pioneer Valley Hospital
West Valley City, Utah...................... 1,997 47,469 927 48,539
Shannon Health System, St. John's Campus
San Angelo, Texas........................... 255 16,197 2,133 14,319
Tarzana Regional Medical Center
Tarzana, California......................... 12,421 61,279 15,115 58,585
------- -------- -------- --------
50,062 448,327 79,587 418,802
------- -------- -------- --------
ALZHEIMER'S CARE PROPERTY:
Pine Haven I Alzheimer's Community
Houston, Texas.............................. 225 3,475 94 3,606
------- -------- -------- --------
ASSISTED LIVING PROPERTIES:
Cambria Lodge
El Paso, Texas.............................. 300 4,882 46 5,136
Garrison Creek Lodge
Walla Walla, Washington..................... 219 5,429 62 5,586
Sherwood Place
Odessa, Texas............................... 220 4,814 35 4,999
Summer Wind Residence
Boise, Idaho................................ 110 2,890 96 2,904
------- -------- -------- --------
849 18,015 239 18,625
------- -------- -------- --------
MEDICAL OFFICE BUILDING:
Walsh Medical Arts Center
Murrieta, California........................ 285 8,515 585 8,215
------- -------- -------- --------
</TABLE>

F-34
<PAGE> 74

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BUILDINGS NET
AND ACCUMULATED BOOK
LAND IMPROVEMENTS DEPRECIATION VALUE
------- ------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REHABILITATION PROPERTIES:
HCA Wesley Rehabilitation Hospital
Wichita, Kansas............................. 1,938 12,659 1,516 13,081
MountainView Regional Rehabilitation Hospital
Morgantown, West Virginia................... -- 11,718 1,582 10,136
Northwest Arkansas Rehabilitation Hospital
Fayetteville, Arkansas...................... 962 8,124 1,117 7,969
------- -------- -------- --------
2,900 32,501 4,215 31,186
------- -------- -------- --------
SKILLED NURSING PROPERTIES:
Arkansas Manor Nursing Home
Denver, Colorado............................ 154 3,912 224 3,842
Cornerstone Care Center
Lakewood, Colorado.......................... 125 4,731 209 4,647
Douglas Manor
Douglas, Arizona............................ 175 2,446 102 2,519
Safford Care Center
Safford, Arizona............................ 100 4,834 196 4,738
------- -------- -------- --------
554 15,923 731 15,746
------- -------- -------- --------
$54,875 $526,756 $ 85,451 $496,180
======= ======== ======== ========
</TABLE>

As of December 31, 1996, the Core Group had the following construction in
progress:

In the second quarter of 1996, the Core Group acquired an acute care
property in West Valley City, Utah (Pioneer Valley Hospital) in exchange for its
acute care properties in Jefferson, Louisiana (Elmwood Medical Center) and
Halstead, Kansas (Halstead Hospital). The exchange was accounted for at the net
book value of the properties exchanged. Pioneer Valley Hospital is leased to the
same operator that had leased the two exchanged properties under comparable
terms and at a lease rate equivalent to the combined lease rates of the two
exchanged properties.

The Core Group's properties are leased under "net" leases pursuant to which
the lessees are responsible for all maintenance, repairs, taxes, and insurance
of the leased properties. The leases provide for the payment of minimum base
rent and additional rent during the fixed term and any renewal terms. Additional
rent is generally based on the increase in annual gross revenues of the related
facility or consumer price index as specified in the lease agreements.

The Core Group has the right to approve capital expenditures at all
properties, the option to fund certain capital expenditures and, in certain
situations, is obligated to fund approved capital expenditures on terms
comparable to the original investment. At December 31, 1996, the Core Group had
no commitments to fund capital expenditures pursuant to these rights and
obligations. The base and additional rent provisions of the leases are amended
when such capital expenditures are funded to reflect the Core Group's increased
investment.

F-35
<PAGE> 75

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The Core Group has agreed to provide $13.8 million of real estate financing
to an experienced operator of long-term acute care hospitals. Of this amount,
$4.4 million has been specifically identified for a property in Houston, Texas.
In addition, the Core Group has agreed to provide $50 million of real estate
financing to an experienced operator of assisted living facilities.
Approximately $29 million has been specifically identified for the construction
of five properties located in four states which will be leased to the operator
upon completion. The Core Group has also agreed to provide $17 million of real
estate construction and lease financing for two skilled nursing properties in
Las Vegas, Nevada to be operated by an experienced operator of skilled nursing
facilities.

Six of the Core Group's acute care properties are leased to subsidiaries of
American Medical International, Inc. (AMI), a subsidiary of Tenet Healthcare
Corporation. The six leases are covered by cross-default provisions and the
lease obligations are unconditionally guaranteed by AMI. In 1996, revenues from
these leases accounted for 55% of the Core Group's total revenues.

Aggregate revenues from five leases maturing in 1999 accounted for 43% of
the Core Group's total revenues in 1996. Four of these properties are leased to
subsidiaries of AMI and the other property is leased to a subsidiary of
Columbia/HCA Healthcare Corporation. Each such lease grants the operator
options, exercisable on not less than six months notice, to extend the term of
the lease for eight consecutive five-year renewal terms. Base and additional
rent during the first three to four extended terms would be on the same terms
and conditions as the current initial term. Minimum rent during the final four
to five extended terms would be fair market rental but no separate additional
rent. Each lease also grants the operator options, exercisable on not less than
six months notice, to purchase the leased property at fair market value at the
expiration of any term of the lease.

Future minimum annual rentals under the Core Group's noncancellable
operating leases for calendar years 1997 through 2001 and thereafter are
approximately $68,700,000, $68,700,000, $45,800,000, $42,200,000, $40,100,000
and $90,000,000, respectively.

DIRECT FINANCING LEASES

In connection with its investments in certain acute and long-term care
properties, the Core Group also has provided equipment leasing for terms of five
to seven years which are classified as direct financing leases. As of December
31, 1996, the Core Group's aggregate net investment in these direct financing
leases was $3,695,000, represented by total minimum lease payments receivable of
$4,423,000 less unearned income of $728,000. Future minimum annual lease
payments under these leases for calendar years 1997 through 2001 are
approximately $1,262,000, $1,262,000, $1,262,000, $624,000 and $13,000,
respectively.

PENSION PLANS

The Company has a defined contribution pension plan covering all of its
employees. Pension expense allocated to the Core Group in 1996, 1995 and 1994
was $222,000, $210,000 and $170,000, respectively.

The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors upon completion of sixty months
of membership on the Board. The benefits, limited to ten years, are based on
years of service and the annual base director fee in effect as of the date a
director ceases to be a member of the Board. Net periodic pension cost allocated
to the Core Group in 1996, 1995 and 1994 was $177,000, $142,000 and $123,000,
respectively. The Notes to the Consolidated Financial Statements of the Company
should be read for further details regarding this plan.

STOCK INCENTIVE PLANS

F-36
<PAGE> 76

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

stock options, restricted stock, deferred shares and dividend equivalent rights
(DERs) were adjusted to reflect the Distribution. Total stock-based compensation
expense recognized under APB 25 and allocated to the Core Group in 1996, 1995
and 1994 was $1,139,000, $961,000 and $777,000, respectively. If the fair value
based method of accounting defined by SFAS 123 had been used to measure and
recognize stock-based compensation expense, the pro forma effect on the reported
amounts of net income and net income per share of the Core Group for 1996 and
1995 would not have been material. The pro forma effect for 1996 and 1995 may
not be representative of the pro forma effect in future years because it does
not take into consideration stock-based incentives granted prior to 1995. The
Notes to the Consolidated Financial Statements of the Company should be read for
further details regarding the Company's stock incentive plans.

PREFERRED STOCK PURCHASE RIGHTS PLAN

The Company has a preferred stock purchase rights plan which provides for
the distribution of one preferred stock purchase right (each a Right) to
shareholders for each outstanding share of common stock. Under certain
conditions, each Right may be exercised to purchase one one-hundredth of a share
of preferred stock, Series A, par value $.01 per share (the Series A Preferred
Shares), of the Company at a price of $45. The Company's Psychiatric Group
Depositary Shares do not include the Rights or entitle holders thereof to
receive the Rights, which are applicable only to the Company's Core Group Common
Stock. The Notes to the Consolidated Financial Statements of the Company should
be read for further details regarding the Company's preferred stock purchase
rights plan.

DIVIDENDS

A quarterly dividend of $.525 per share for Core Group Common Stock, or
approximately $12,314,000, was declared by the Board of Directors on January 24,
1997, payable on February 24, 1997 to shareholders of record on February 10,
1997. This dividend has been reflected as dividends payable in the accompanying
financial statements as of December 31, 1996. Dividends of $2.02 per share paid
on Core Group Common Stock during the year ended December 31, 1996 are
characterized as $1.84 of ordinary income and $.18 of return of capital for tax
purposes.

In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess Proceeds will be available only for the
Psychiatric Group Depositary Shares and will be limited to $30 million in the
aggregate and $15 million in any calendar year.

QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1996
Revenues.................................... $20,186 $20,181 $20,344 $20,718 $81,429
Net income.................................. 9,319 9,435 9,873 10,173 38,800
Net income per common share................. .40 .40 .42 .43 1.65
1995
Revenues.................................... $19,575 $19,966 $20,304 $23,068 $82,913
Net income.................................. 7,976 8,206 8,235 11,690(1) 36,107
Net income per common share................. .38 .39 .39 .51 1.69
</TABLE>

- ---------------

(1) Includes a premium of $2,652,000 received in connection with the prepayment
of a mortgage note receivable.

F-37
<PAGE> 77

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To American Health Properties, Inc.:

We have audited the accompanying combined balance sheets of the Psychiatric
Group (a business unit of American Health Properties, Inc.) as of December 31,
1996 and 1995, and the related combined statements of operations, total
attributed equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
management of American Health Properties, Inc. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Psychiatric Group as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 24, 1997.

F-38
<PAGE> 78

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

PSYCHIATRIC GROUP COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate properties
Buildings and improvements................................ $19,740 $19,740
Accumulated depreciation.................................. (4,688) (3,944)
------- -------
15,052 15,796
Land...................................................... 5,222 5,222
------- -------
20,274 21,018
Mortgage notes receivable, net.............................. 37,787 37,851
Other notes receivable...................................... 4,457 4,915
Receivables................................................. 621 621
Other assets................................................ 122 150
------- -------
$63,261 $64,555
======= =======
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving inter-Group loan from Core Group.................. $ 4,183 $ 5,263
Fixed rate inter-Group loan from Core Group................. 9,175 9,175
Accounts payable and accrued liabilities.................... -- 151
Dividends payable........................................... 1,667 1,668
Deferred income............................................. 273 185
------- -------
15,298 16,442
------- -------
Commitments and contingencies

Total attributed Psychiatric Group equity................... 47,963 48,113
------- -------
$63,261 $64,555
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-39
<PAGE> 79

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

PSYCHIATRIC GROUP COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
-------- --------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income.............................................. $1,989 $ 3,053 $ 7,977
Mortgage interest income................................... 5,980 5,887 5,787
Additional rental and interest income...................... 812 720 598
Other interest income...................................... 393 686 1,026
------ ------- --------
9,174 10,346 15,388
------ ------- --------
EXPENSES
Depreciation and amortization.............................. 744 802 1,801
Interest expense on inter-Group loans from Core Group...... 1,679 2,029 4,041
General and administrative................................. 1,172 941 951
Targeted stock issuance costs.............................. -- 300 1,450
Write-down of real estate investments...................... -- -- 30,000
------ ------- --------
3,595 4,072 38,243
------ ------- --------
NET INCOME (LOSS).......................................... $5,579 $ 6,274 $(22,855)
====== ======= ========
Net income (loss) per depositary share..................... $ 2.67 $ 3.00 $ (10.96)
Weighted average depositary shares outstanding............. 2,093 2,091 2,086
Dividends declared per depositary share.................... $ 2.80 $ 3.20 $ 4.16
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-40
<PAGE> 80

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

PSYCHIATRIC GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR............................... $48,113 $48,302 $ 79,471
Stock incentives, net....................................... 107 229 93
Exercise of stock options................................... -- -- 272
Distribution of Psychiatric Group Preferred Stock........... -- (18) --
Net income (loss)........................................... 5,579 6,274 (22,855)
Dividends................................................... (5,836) (6,674) (8,679)
------- ------- --------
BALANCES AT END OF YEAR..................................... $47,963 $48,113 $ 48,302
======= ======= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-41
<PAGE> 81

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

PSYCHIATRIC GROUP COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
1996 1995 1994
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 5,579 $ 6,274 $(22,855)
Depreciation, amortization and other non-cash items......... 856 867 1,866
Deferred income............................................. (53) (35) (75)
Write-down of real estate investments....................... -- -- 30,000
Change in receivables and other assets...................... 28 (11) (169)
Change in accounts payable and accrued liabilities.......... (10) (37) (41)
------- -------- --------
6,400 7,058 8,726
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties...... -- (693) --
Proceeds from sale of properties............................ -- 10,825 5,772
Principal payments on mortgage notes receivable............. 64 24 --
Other notes receivable...................................... 458 4,513 (830)
------- -------- --------
522 14,669 4,942
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on revolving inter-Group loan from
Core Group................................................ (1,086) (4,001) 672
Payments on fixed rate inter-Group loan from Core Group..... -- (10,825) (6,044)
Proceeds from exercise of stock options..................... -- -- 272
Cash paid in lieu of fractional shares...................... -- (18) --
Dividends paid.............................................. (5,836) (6,883) (8,568)
------- -------- --------
(6,922) (21,727) (13,668)
------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS...... -- -- --
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR.......... -- -- --
------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR................ $ -- $ -- $ --
======= ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-42
<PAGE> 82

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS

THE COMPANY

Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock held
of record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock. The Distribution was designed to separate the economic attributes of the
Company's investments in psychiatric hospitals (the Psychiatric Group) and its
investments in acute care, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living and Alzheimer's care facilities and a medical
office building (the Core Group) into two distinct portfolios, with two distinct
classes of publicly-traded shares intended to represent those portfolios. In
connection with the Distribution, the Company directly assigned or, if not
directly assigned, allocated its assets, liabilities and stockholders' equity,
and its revenues, expenses and cash flow items, between the Psychiatric Group
and Core Group, as more fully described below. The Psychiatric Group Depositary
Shares are intended to reflect the separate financial performance of the
Psychiatric Group. The Company's common stock (the Core Group Common Stock) is
intended to reflect the separate financial performance of the Core Group.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation The financial statements of the Psychiatric Group
include the financial position, results of operations and cash flows of the
Company's psychiatric hospital investments, an allocated portion of the
Company's general and administrative expense, an attributed amount of
inter-Group debt payable to the Core Group and an attributed amount of the
Company's stockholders' equity. For purposes of computing per share data for
periods prior to the actual Distribution, the number of Psychiatric Group
Depositary Shares are assumed to be one-tenth of the corresponding number of
shares of the Company's common stock prior to the Distribution. The Psychiatric
Group financial statements are prepared using the amounts included in the
Company's consolidated financial statements.

Although the financial statements of the Psychiatric Group and the Core
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow of
the Company attributed to each such Group, such attribution does not affect the
respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Furthermore, such attribution does not
affect the rights of creditors of the Company or any subsidiary, including
rights under financing covenants.

Each holder of Psychiatric Group Depositary Shares or Core Group Common
Stock is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition, cash flows or borrowing costs may also affect the results of
operations, financial condition, cash flows or borrowing costs of the other
Group. In addition, net losses of either Group, as well as dividends and
distributions on, and repurchases of, Psychiatric Group Depositary Shares or
Core Group Common Stock will reduce the funds of the Company legally available
for dividends on both the Psychiatric Group Depositary Shares and Core Group
Common Stock. Accordingly, the Psychiatric Group's financial statements should
be read in conjunction with the Company's consolidated financial statements and
the financial statements of the Core Group.

F-43
<PAGE> 83

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Real Estate Properties The Psychiatric Group accounts for its property
leases as operating leases. The Psychiatric Group records properties at cost and
allocates the cost between land and buildings and improvements based on
independent appraisals. Depreciation of Psychiatric Group real estate properties
is recorded on a straight-line basis over 21 years, the estimated useful lives
of the buildings and improvements.

Impairment of Real Estate Properties and Notes Receivable The Psychiatric
Group reviews for the possible impairment of its real estate properties and
notes receivable whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. In general, an impairment of such
assets would be indicated if the estimated future cash flows expected to result
from the use of such assets and their eventual disposition is less than their
carrying amounts.

Stock-Based Compensation In 1996, the Psychiatric Group adopted Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation" which defines a fair value based method of accounting
for stock-based compensation. As allowed by SFAS 123, the Psychiatric Group has
elected to continue to measure employee stock-based compensation expense using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees".

F-44
<PAGE> 84

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

CORPORATE ACTIVITIES, INTER-GROUP LOANS, THIRD-PARTY DEBT AND EQUITY

Third-Party Debt All of the Company's third-party debt has been attributed
to the Core Group; however, the Psychiatric Group, together with the Core Group,
is subject to all of the terms, restrictions and covenants relating to such
third-party debt. These include limitations on secured borrowings, restrictions
covering the use of proceeds from asset sales and payments of dividends and
requirements relating to the maintenance of specified financial covenants,
including those relating to minimum tangible net worth, fixed charge coverage
and ratios of liabilities to minimum tangible net worth and asset values. The
third-party debt attributed to the Core Group at December 31, 1996 includes
$152,000,000 of unsecured senior notes payable and $6,601,000 of subordinated
convertible bonds payable. The aggregate amount of maturities of the Company's
outstanding third-party debt at December 31, 1996, as adjusted for the sale of
$220 million of senior notes in January 1997 and the prepayment of $152 million
of senior notes in February 1997, is $7,455,000, $100,000,000 and $120,000,000
in 2000, 2002 and 2007, respectively. The Notes to the Consolidated Financial
Statements of the Company should be read for further details regarding the
Company's third-party debt.

F-45
<PAGE> 85

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average outstanding amount of fixed rate inter-Group loans
owed by the Psychiatric Group to the Core Group during 1996, 1995 and 1994 was
$9,175,000, $10,979,000 and $24,706,000 at a weighted average interest rate of
13% for all three years. There were no new fixed rate loans made to the
Psychiatric Group during these three years. Paydowns were funded with the
proceeds of equity transactions in 1994 attributed to the Psychiatric Group and
the net proceeds from sales of Psychiatric Group real estate investments in 1995
and 1994.

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
psychiatric hospital operators under revolving credit agreements. The
Psychiatric Group made $4,325,000 of revolving inter-Group loan repayments and
$10,825,000 of fixed rate inter-Group loan repayments in 1995 and $5,772,000 of
fixed rate inter-Group loan repayments in 1994 to the Core Group as a result of
such operator borrowing paydowns and asset sales.

The Company's Board has established certain 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, the aggregate revolving inter-Group loans owed by the
Psychiatric Group to the Core Group are limited to a maximum of $8,750,000 at
any one time outstanding, which limit is to be reduced dollar-for-dollar with
any permanent repayment in the future of borrowings under revolving credit
agreements provided to Psychiatric Group hospital operators. In addition, the
limit on the aggregate revolving inter-Group loans will not be reduced below
$5,000,000, and except for such revolving inter-Group loans, no additional fixed
rate or other inter-Group loans will be advanced by the Core Group to the
Psychiatric Group.

Excess cash received by the Psychiatric Group (other than net proceeds from
asset sales) will be applied to reduce revolving inter-Group loans owed by the
Psychiatric Group to the Core Group (until repaid in full), subject to the
ability of the Psychiatric Group, at the option of the Board, to re-borrow cash
from the Core Group up to the limitations mentioned previously to cover future
cash needs of the Psychiatric Group (including, without limitation, to fund
dividends in a manner consistent with the dividend policy then applicable to the
Psychiatric Group Depositary Shares).

Fixed rate inter-Group loans owed by the Psychiatric Group to the Core
Group are unsecured, bear interest at a fixed rate of approximately 13% per
annum (which was equal to the weighted average interest rate on the Company's
fixed rate senior debt issues at the time the loans were attributed plus 2%) and
are prepayable without premium at any time, at the option of the Board.

The carrying amounts of the inter-Group loans owed by the Psychiatric Group
to the Core Group are a reasonable estimate of fair value, as the pricing and
terms of the loans are indicative of current rates and credit risk.

F-46
<PAGE> 86

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Cash received by the Psychiatric Group in excess of required repayments of
inter-Group loans owed by the Psychiatric Group may, at the option of the
Company's Board, be advanced to the Core Group as revolving inter-Group loans
(to the extent such cash can be used beneficially by the Core Group) or
otherwise be invested on behalf of the Psychiatric Group. Revolving inter-Group
loans owed by the Core Group to the Psychiatric Group bear interest at a
floating rate equal to the weighted average interest rate borne by the Company's
revolving debt (or, for periods in which there is no such revolving debt
outstanding, the interest rate at which the Company could borrow on a revolving
basis), and are prepayable without premium at any time, at the option of the
Board.

Equity Transactions Subsequent to the Distribution Subsequent to the
Distribution, the proceeds of Core Group Common Stock issuances as well as cash
required to fund Core Group Common Stock dividends or repurchases are attributed
solely to the Core Group, and the proceeds of Psychiatric Group Depositary Share
issuances (e.g., upon exercise of management stock options) as well as cash
required to fund Psychiatric Group Depositary Share dividends or repurchases are
attributed solely to the Psychiatric Group.

General and Administrative Expenses General and administrative expenses of
the Company that cannot be directly attributed to either Group are allocated to
the Psychiatric Group and the Core Group on the basis of their respective
contributions to revenues (excluding inter-Group revenues and revenues from
investment dispositions), provided that at no time will such expenses allocated
to either Group be less than $250,000. All general and administrative expenses
allocated to the Psychiatric Group are paid currently, regardless of when such
expenses are paid to third parties by the Company. As such, the Psychiatric
Group financial statements do not reflect any liabilities for such allocated
general and administrative expenses. The Company's general and administrative
expenses consist primarily of employment and related benefits, professional
services, shareholder reporting, franchise taxes, travel and other related
corporate activity.

PSYCHIATRIC BUSINESS

The Psychiatric Group currently is providing financing under revolving
credit agreements to the operators of three of its psychiatric hospitals. As of
December 31, 1996, outstanding borrowings under such agreements totaled
$4,225,000, and the Psychiatric Group has committed to fund an additional
$1,475,000 of borrowings upon request, subject to certain conditions. These
borrowings, which are partially secured by accounts receivable and certain
personal property and which contain events of default that would be triggered by

F-47
<PAGE> 87

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

defaults under the lease relating to the relevant psychiatric hospital, are the
primary source of financing for these operators' operating and capital needs.
These psychiatric hospitals have, from time to time, been unable to generate
sufficient cash flow for working capital and the development of new programs. In
certain cases, these psychiatric hospitals have not been able to pay down the
outstanding borrowings under the revolving credit agreements provided by the
Psychiatric Group or to secure replacement financing from third-party lenders
and there can be no assurance that such operators will be able to fund such
obligations when they become due. To the extent the psychiatric hospitals have
increased working capital needs in the future, the Psychiatric Group may be the
only source of such financing. In the event the Company's Board of Directors
determines that it is appropriate to provide additional working capital
financing to a psychiatric hospital 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.

As more fully discussed under "Real Estate Properties" and "Mortgage Notes
Receivable", 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 in 1992 and 1994 and the periodic
restructuring of psychiatric operator payment obligations. 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 and pursue alternative uses for the properties and/or make additional
write-downs of the value of its investments in the psychiatric hospitals. 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 Psychiatric
Group has sold three of its psychiatric properties since September 1994 and
expects to use the net proceeds of any future sales to repay then outstanding
inter-Group loans or other debt owed by the Psychiatric Group and to distribute
all remaining net proceeds, if any, in cash or common stock to holders of
Psychiatric Group Depositary Shares.

REAL ESTATE PROPERTIES

The following table summarizes the Psychiatric Group's investment in health
care real estate properties as of December 31, 1996:

<TABLE>
<CAPTION>
BUILDINGS
AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
------ ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
PSYCHIATRIC PROPERTIES:
Northpointe Behavioral Health System
Tarpon Springs, Florida......................... $1,457 $ 5,066 $1,028 $ 5,495
The Retreat
Sunrise, Florida................................ 3,325 8,609 2,534 9,400
Rock Creek Center
Lemont, Illinois................................ 440 6,065 1,126 5,379
------ ------- ------ -------
$5,222 $19,740 $4,688 $20,274
====== ======= ====== =======
</TABLE>

F-48
<PAGE> 88

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The total revenues, including interest income from other notes receivable,
from each of the above psychiatric excluding Northpointe Behavioral Health
System (Northpointe), were in excess of 10% of total Psychiatric Group revenues
in 1996.

In March 1995, the Psychiatric Group restructured the terms of its two
Florida psychiatric hospital investments. Pursuant to the restructuring, which
was effective January 1, 1995, the annual minimum rental obligation of The
Retreat psychiatric hospital in Sunrise, Florida was reduced from $2,359,000 to
$1,100,000, and the annual minimum rental obligation of Northpointe in Tarpon
Springs, Florida was reduced from $855,000 to $600,000.

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 contractual 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 contractual base rent payments of
$50,000 on October 1, 1996. In addition, Northpointe's monthly contractual
interest payments of $16,600 were deferred from February 1996 until March 1,
1997 on which date all such deferred interest was scheduled to be paid in full.
Northpointe's deferred obligations are not recognized as income by the
Psychiatric Group until such time as they are paid. Northpointe's rent and
interest deferrals in 1996 amounted to approximately $.28 per Psychiatric Group
Depositary Share.

F-49
<PAGE> 89

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

facility, the Psychiatric Group, in conjunction with its financial advisor, is
evaluating a range of possibilities including alternative uses for the facility
and its related land. At December 31, 1996, the Psychiatric Group's total
investment in Northpointe was $7,170,000 consisting of a net investment in the
real estate of $5,495,000 and advances under a revolving credit agreement of
$1,675,000. The volatility of the current circumstances may not allow for an
orderly evaluation and pursuit of the various alternatives, and accordingly
there can be no assurance that the financial results from a restructured
arrangement as a psychiatric facility, an alternative use or a disposition will
allow the realization of the Psychiatric Group's recorded investment in
Northpointe.

At December 31, 1996, the Psychiatric Group's total investment in The
Retreat was $9,450,000 consisting of a net investment in the real estate of
$9,400,000 and advances under a revolving credit agreement of $50,000. The
Retreat made all of its contractual rent and interest payments to the
Psychiatric Group in 1996. Adverse publicity from the aforementioned lawsuit
currently appears to be having a less severe impact on The Retreat, however, the
facility has still experienced some deterioration of its cash flow and a decline
in census during 1997. Although The Retreat has made its monthly contractural
base rent and interest payments in 1997 through March, The Retreat made its
February 1997 contractual base rent payment of $92,000 from lease reserve funds
and has not yet paid its additional rent in the first quarter of 1997 of
approximately $45,000. An increase in operational difficulties and further cash
flow deterioration could occur if efforts currently being undertaken by the
owner are unsuccessful. Accordingly, there can be no assurance that the Retreat
will be able to continue to meet its obligations or that some measure of rent
and interest relief will not be necessary in the future. Additionally, if
circumstances at The Retreat become more volatile, the Psychiatric Group may be
required to consider various alternatives for the facility.

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 and experienced lower than expected census which 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 December
31, 1996 totaled $8,002,000, and quarterly contractual base rent and interest
obligations of RCC total approximately $324,000 ($.15 per Psychiatric Group
Depositary Share). In 1996, the Psychiatric Group advanced $214,000 on behalf of
the operator to pay property taxes on the facility, and reached an agreement
with the operator for the deferral of base rent payments while the operator took
certain actions to stabilize operations and implemented its revised business
plan. Pursuant to the deferral arrangements, 100% of RCC's monthly base rent
payments of $83,000 were deferred for May and June of 1996 and 50% of such
monthly payments were deferred from July 1996 through October 1996, at which
time monthly base rent payments returned to 100%. Deferred base rent is payable
in the future only when the facility's cash exceeds a specified level, and the
property tax advance is payable in monthly installments. RCC's deferred rent
obligations are not recognized as income by the Psychiatric Group until such
time as they are paid. The Psychiatric Group's property tax advance has been
reduced by monthly payments to $122,000 as of December 31, 1996. RCC's rent
deferral amounted to approximately $.16 per Psychiatric Group Depositary Share
for 1996. Although the deferral arrangements provided interim financial relief
while the operator implemented its strategy, there can be no assurance that the
deferred amounts will be paid or that RCC will not require additional financial
relief in the future.

F-50
<PAGE> 90

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

with renewal of the lease. Should the lease not be renewed or the revolving loan
not be repaid or extended, a significant negative impact to the Psychiatric
Group could result.

The Psychiatric Group's properties are leased under "net" leases pursuant
to which the lessees are responsible for all maintenance, repairs, taxes, and
insurance of the leased properties. The leases provide for the payment of
minimum base rent and additional rent during the fixed term and any renewal
terms. Additional rent is generally based on the increase in annual gross
revenues of the related facility or a minimum amount as specified in the lease
agreements.

The Psychiatric Group has the right to approve capital expenditures at all
properties and the option to fund certain capital expenditures on terms
comparable to the original investment. The base and additional rent provisions
of the leases are amended when such capital expenditures are funded to reflect
the Psychiatric Group's increased investment.

Future minimum annual rentals under the Psychiatric Group's noncancellable
operating leases for calendar years 1997 through 2000 are approximately
$2,700,000, $1,700,000, $1,700,000 and $1,100,000, respectively. These amounts
do not reflect any adjustments for the nonpayment of rent, deferrals of rent
which may be granted to operators or the payment of rent previously deferred.

MORTGAGE NOTES RECEIVABLE

Four Winds Hospital -- Saratoga $18,137,000 The Psychiatric Group has a
mortgage note receivable secured by a first mortgage and security interest in
the real property of Four Winds Hospital in Saratoga Springs, New York. The note
has an initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is June 30, 1999. The interest rate on the note is
12.42% with interest only payable monthly through June 30, 1995 and monthly
principal and interest payments of $194,000 payable thereafter.

Four Winds Hospital -- Katonah $27,600,000 The Psychiatric Group has a
mortgage note receivable secured by a first mortgage and security interest in
the real property of Four Winds Hospital in Katonah (Westchester County), New
York. The note has an initial term of ten years with two optional ten-year
extension terms. The initial term maturity date is November 30, 2002. The annual
interest rate on the note was 12.71%, 13.07% and 13.44%, in 1994, 1995 and 1996,
respectively, and increases .36% annually thereafter until reaching 14.49% where
it remains through maturity. Interest only is payable monthly.

The Psychiatric Group has recorded a $7,950,000 reserve for impairment of
its mortgage notes receivable and records interest on its mortgage notes as
interest payments are received.

Pursuant to the terms of the mortgage notes receivable, the Psychiatric
Group may receive additional interest each year based on the increase in annual
operating revenues of the related psychiatric facility. The Psychiatric Group
may provide permanent financing for capital additions at the facilities.

The carrying amount of mortgage notes receivable is a reasonable estimate
of fair value, as the pricing and terms of the notes are indicative of current
rates and credit risk.

F-51
<PAGE> 91

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER NOTES RECEIVABLE

The Psychiatric Group provides financing at variable rates to certain
psychiatric hospital operators under revolving credit agreements. The aggregate
commitment under these credit agreements was $5,700,000 as of December 31, 1996.
Borrowings under the credit agreements are subject to compliance with various
covenants and are partially secured by accounts receivable and other personal
property of the operators. As of December 31, 1996, $4,225,000 was outstanding
under revolving credit agreements at a weighted average contractual interest
rate of 11.25%. The weighted average amount of borrowings under revolving credit
agreements outstanding during 1996 was $4,414,000 at a weighted average interest
rate, reflecting deferrals, of 7.4% with a maximum of $4,475,000 outstanding
during the year. As discussed under "Real Estate Properties", the $2,500,000
outstanding balance under the revolving credit agreement to RCC matures June 30,
1997.

PENSION PLANS

The Company has a defined contribution pension plan covering all of its
employees. Pension expense allocated to the Psychiatric Group in 1996, 1995 and
1994 was $25,000, $28,000 and $37,000, respectively.

The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors upon completion of sixty months
of membership on the Board. The benefits, limited to ten years, are based on
years of service and the annual base director fee in effect as of the date a
director ceases to be a member of the Board. Net periodic pension cost allocated
to the Psychiatric Group in 1996, 1995 and 1994 was $20,000, $19,000 and
$26,000, respectively. The Notes to the Consolidated Financial Statements of the
Company should be read for further details regarding this plan.

STOCK INCENTIVE PLANS

The Company's stock incentive plans provide for the issuance of shares of
the Company's stock to directors and key employees as stock incentives. Pursuant
to the terms of the Company's stock incentive plans, stock options, restricted
stock, deferred shares and dividend equivalent rights (DERs) were adjusted to
reflect the Distribution. Total stock-based compensation expense recognized
under APB 25 and allocated to the Psychiatric Group in 1996, 1995 and 1994 was
$112,000, $65,000 and $167,000, respectively. If the fair value based method of
accounting defined by SFAS 123 had been used to measure and recognize
stock-based compensation expense, the pro forma effect on the reported amounts
of net income and net income per share of the Psychiatric Group for 1996 and
1995 would not have been material. The pro forma effect for 1996 and 1995 may
not be representative of the pro forma effect in future years because it does
not take into consideration stock-based incentives granted prior to 1995. The
Notes to the Consolidated Financial Statements of the Company should be read for
further details regarding the Company's stock incentive plans.

PREFERRED STOCK PURCHASE RIGHTS PLAN

F-52
<PAGE> 92

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

DIVIDENDS

A quarterly dividend of $.80 per share for Psychiatric Group Depositary
Shares, or approximately $1,667,000, was declared by the Board of Directors on
January 24, 1997, payable on February 24, 1997 to shareholders of record on
February 10, 1997. The dividend has been reflected as dividends payable in the
accompanying financial statements as of December 31, 1996. Dividends of $2.80
per share paid on Psychiatric Group Depositary Shares during the year ended
December 31, 1996 are characterized as $2.55 of ordinary income and $.25 of
return of capital for tax purposes.

In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess Proceeds will be available only for the
Psychiatric Group Depositary Shares and will be limited to $30 million in the
aggregate and $15 million in any calendar year.

QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1996
Revenues..................................... $2,355 $2,173 $2,219 $2,427 $ 9,174
Net income................................... 1,432 1,234 1,278 1,635 5,579
Net income per depositary share.............. .68 .59 .61 .78 2.67
1995
Revenues..................................... $2,891 $2,441 $2,534 $2,480 $10,346
Net income................................... 1,691 1,339(1) 1,649 1,595 6,274
Net income per depositary share.............. .81 .64 .79 .76 3.00
</TABLE>

- ---------------

(1) Includes costs related to the Distribution of $300,000.

F-53
<PAGE> 93

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Englewood, State of Colorado, on the 28th day of March, 1997.

AMERICAN HEALTH PROPERTIES, INC.

By: MICHAEL J. MCGEE

------------------------------------
Michael J. McGee
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph P. Sullivan and Michael J. McGee, and each
or either of them as his true and lawful attorney-in-fact and agent, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute may
lawfully do or cause to be done by virtue hereof.

38
<PAGE> 94

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER

JOSEPH P. SULLIVAN Chairman of the Board, Chief March 28, 1997
- --------------------------------------------------- Executive Officer and
Joseph P. Sullivan Director

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER

MICHAEL J. MCGEE Senior Vice President and March 28, 1997
- --------------------------------------------------- Chief Financial Officer
Michael J. McGee

Director
- ---------------------------------------------------
Walter J. McNerney

NORMAN BARKER, JR. Director March 28, 1997
- ---------------------------------------------------
Norman Barker, Jr.

ROYCE DIENER Director March 28, 1997
- ---------------------------------------------------
Royce Diener

JAMES L. FISHEL Director March 28, 1997
- ---------------------------------------------------
James L. Fishel

CHARLES M. HAAR Director March 28, 1997
- ---------------------------------------------------
Charles M. Haar

SHELDON S. KING Director March 28, 1997
- ---------------------------------------------------
Sheldon S. King

LOUIS T. ROSSO Director March 28, 1997
- ---------------------------------------------------
Louis T. Rosso
</TABLE>

39
<PAGE> 95

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
3.1 -- Certificate of Incorporation, as amended to date, filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-3 (No. 33-61895), effective October 17, 1995, and
incorporated herein by reference.

3.2 -- Amended and Restated Bylaws of the Company, filed as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, and incorporated herein by
reference.
4.1 -- Rights Agreement dated as of April 10, 1990, filed as
Exhibit 2 to the Company's Registration Statement on Form
8-A dated April 20, 1990, and incorporated herein by
reference.
4.2 -- Indenture dated as of January 15, 1997 between American
Health Properties, Inc. and The Bank of New York as Trustee,
filed as Exhibit 4.1 to the Company's Current Report on Form
8-K dated January 21, 1997, and incorporated by reference.
4.3 -- Certificate of Designations of Psychiatric Group Preferred
Stock, filed as Exhibit 4.1 to the Company's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on August 14, 1995, and incorporated herein by
reference.
10.1 -- American Health Properties, Inc. 1988 Stock Option Plan,
filed as Exhibit 28 to the Company's Registration Statement
on Form S-8 (No. 33-25781), filed with the Securities and
Exchange Commission on November 28, 1988, and incorporated
herein by reference.
10.2 -- American Health Properties, Inc. 1990 Stock Incentive Plan,
filed as Exhibit B to the Company's Proxy Statement for its
1990 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on May 7, 1990, and
incorporated herein by reference.
10.3 -- Employment Agreements between the Company and Joseph P.
Sullivan, C. Gregory Schonert and Michael J. McGee, filed as
Exhibits 10.1, 10.2, and 10.3, respectively, to the
Company's Current Report on Form 8-K dated January 8, 1997,
and incorporated herein by reference.
10.4 -- Employment Agreement between American Health Properties,
Inc. and Thomas T. Schleck, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated January 21, 1997,
and incorporated by reference.
10.5 -- American Health Properties, Inc. 1994 Stock Incentive Plan,
filed as Appendix A to the Company's Proxy Statements for
its 1994 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on April 8, 1994, and
incorporated herein by reference.
10.6 -- American Health Properties, Inc. Nonqualified Stock Option
Plan for Nonemployee Directors, filed as Appendix B to the
Company's Proxy Statement for its 1994 Annual Meeting of
Shareholders filed with the Securities and Exchange
Commission on April 8, 1994, and incorporated herein by
reference.
10.7 -- Credit Agreement dated as of December 27, 1995 among
American Health Properties, Inc., the financial institutions
listed therein, Banque Paribas as Co-Agent, First Union Bank
of North Carolina as Co-Agent, NationsBank of Texas, N.A. as
Co-Agent and Wells Fargo Bank, N.A. as Arranger, Agent and
Facing Bank, filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K filed with the Securities Exchange
Commission on January 5, 1996, and incorporated herein by
reference.
10.8 -- First Amendment to Credit Agreement dated as of December 10,
1996 between American Health Properties, Inc. and Wells
Fargo Bank, N.A., as agent for the Lenders, filed as Exhibit
10.2 to the Company's Current Report on Form 8-K dated
January 21, 1997, and incorporated by reference.
*21 -- List of subsidiaries of the Company
*23 -- Consent of Independent Public Accountants
</TABLE>
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
*24 -- Powers of Attorney (included in signature page)
*27 -- Financial Data Schedule
*99.1 -- Four Winds, Inc. Financial Highlights
</TABLE>

- ---------------
* Filed herewith

<PAGE> 1

EXHIBIT 21
SUBSIDIARIES

The following list includes all of the subsidiaries of the Company, all of
which are wholly-owned.

<TABLE>
<CAPTION>
ORGANIZED UNDER
NAME LAWS OF
---- ---------------
<S> <C>
AMIREIT (Frye), Inc. North Carolina
AMIREIT (Kendall), Inc. Florida
AMIREIT Lucy Lee, Inc. Missouri
AMIREIT (North Fulton), Inc. Georgia
AMIREIT (Palm Beach Gardens), Inc. Florida
AHE of California, Inc. California
AHE of Irvine, Inc. California
American Health Properties of Arizona,
Inc. Arizona
AHP of Colorado, Inc. Colorado
AHP of Fayetteville, Inc. Arkansas
AHP of Illinois, Inc. Illinois
AHP of Kansas, Inc. Kansas
AHP of South Carolina, Inc. South Carolina
AHP of Sunrise, Inc. Florida
AHP of Tarpon Springs, Inc. Florida
AHP of Texas, Inc. Texas
AHP of Utah, Inc. Utah
AHP of Washington, Inc. Washington
AHP of West Virginia, Inc. West Virginia
</TABLE>

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the following of the Company's
previously filed Registration Statements: Form S-8 (File No. 33-25781); Form S-8
(File No. 33-36090); Form S-8 (File No. 33-54813); Form S-8 (File No. 33-54815);
Form S-3 (File No. 33-36091); and Form S-3 (File No. 33-61895).

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 24, 1997.

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,480
<SECURITIES> 0
<RECEIVABLES> 6,881
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 611,427
<DEPRECIATION> 90,139
<TOTAL-ASSETS> 577,882
<CURRENT-LIABILITIES> 0
<BONDS> 158,601
0
2
<COMMON> 235
<OTHER-SE> 344,902
<TOTAL-LIABILITY-AND-EQUITY> 577,882
<SALES> 0
<TOTAL-REVENUES> 88,924
<CGS> 0
<TOTAL-COSTS> 15,016
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,842
<INCOME-PRETAX> 44,379
<INCOME-TAX> 0
<INCOME-CONTINUING> 44,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,379
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Primary and fully diluted earnings per share attributable to Core Group Common
Stock $1.65; Psychiatric Group Depository Shares $2.67.
</FN>

</TABLE>

<PAGE> 1

EXHIBIT 99.1

FOUR WINDS, INC. Financial Highlights(1)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 FISCAL YEARS ENDED DECEMBER 31,
---------------------- --------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net revenue..................... $ 23,318 $ 23,401 $ 32,039 $ 29,000 $ 26,380
Operating income(2)............. 4,026 3,517 5,201 5,166 5,431
Depreciation.................... 1,153 1,026 1,392 1,339 1,360
Interest: senior(3)............. 3,105 2,952 3,980 3,862 3,539
other.................. 296 446 605 656 530
Net income (loss)............... 21 (195) 153 35 749

Cash flows from operating
activities................... 3,980 1,026 2,738 1,480 25

BALANCE SHEET
Total assets.................... $ 25,806 $ 27,574 $ 26,796 $ 26,779 $ 27,064
Debt: senior(3)................. 28,686 28,889 28,840 29,028 29,198
other..................... 4,369 6,182 4,987 5,988 6,165
Stockholders' deficit........... (12,929) (13,001) (12,890) (12,805) (12,611)

Working capital................. 5,466 4,205 6,203 3,941 3,800
</TABLE>

NOTES
- ---------------
(1) Audited financial statements for Four Winds, Inc. can be obtained by making
a written request that includes the provider's name and address (Four Winds
Hospital, 800 Cross River Road, Katonah, New York 10536) submitted to: New
York State Department of Health, Empire State Plaza, 2230 Corning Tower,
Albany, New York 12237.

(2) Operating income consists of net income before interest, depreciation,
amortization and nonoperating gains and losses.

(3) Senior debt consists of a mortgage loan and term note payable to American
Health Properties, Inc. Interest expense also includes participation
interest paid to American Health Properties, Inc. pursuant to the mortgage
loan agreement.