<PAGE> 1
================================================================================
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9381
AMERICAN HEALTH PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<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
------------------- ---------------------
<S> <C>
COMMON STOCK NEW YORK STOCK EXCHANGE
DEPOSITARY SHARES, EACH REPRESENTING 1/100 OF
A SHARE OF 8.60% CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, SERIES B
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, 1998 there were outstanding (i) 23,965,255 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 and non-voting stock
(excluding the Company's 8.60% Cumulative Redeemable Preferred Stock, Series B)
held by non-affiliates of the Registrant, based on the closing price of these
shares on such date was approximately $663,700,000. 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, 1997.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Voting Stock and Related Stockholder
Matters..................................................... 18
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 22
Management's Discussion and Analysis of Core Group Combined
Financial Condition and Results of Operations............... 29
Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations...... 35
Item 8. Financial Statements and Supplementary Data................. 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 43
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 43
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 43
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on
Form 8-K.................................................... 44
</TABLE>
i
<PAGE> 3
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 medical
office/clinic facilities.
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, Alzheimer's care and medical office/clinic facilities, and (b)
the Psychiatric Group, which includes all of the Company's investments in
psychiatric hospitals. The proceeds from the October 1997 sale of the Company's
Series B Depositary Shares representing its 8.60% Cumulative Redeemable
Preferred Stock, Series B (Series B Preferred Stock), as well as the dividends
payable thereon, have been attributed to the Company's Core Group for financial
accounting and reporting purposes. The Series B Depositary Shares, and the
Series B Preferred Stock represented thereby, rank senior to the Company's Core
Group Common Stock and its Psychiatric Group Depositary Shares with respect to
dividend payments and liquidation rights. Attribution of the components of the
Company's capital structure to its Core Group and Psychiatric Group for
financial accounting and reporting purposes does not affect the legal title to
assets or responsibility for liabilities of the Company, and each holder of Core
Group Common Stock, Series B Depositary Shares or Psychiatric Group Depositary
Shares is a holder of an issue of capital stock of the entire Company and is
subject to the risks associated with an investment in the Company and all of its
businesses, assets and liabilities.
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 portfolio of investments at December 31, 1997 consisted of
13 acute care hospitals, three rehabilitation hospitals, four assisted living
facilities, one mortgage loan secured by a long-term acute care hospital, one
long-term acute care hospital, six skilled nursing facilities (two of which are
under construction), nine medical office/clinic facilities and two Alzheimer's
care facilities. As of December 31, 1997, the net book value of the Core Group's
total assets was $652 million. Of the Core Group's real estate assets at that
date, 68% in net book value represented the acute care segment, 18% represented
the medical office/clinic facilities, 5% represented the rehabilitation segment,
3% represented the assisted living segment, 3% represented the skilled nursing
segment, 2% represented the long-term acute care segment and 1% represented the
Alzheimer's care segment. As of December 31, 1997, 99% of the Core Group's real
estate assets were held in fee and 1% was held as a mortgage loan.
The Core Group's facilities are diversified geographically across 16
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"), Columbia/HCA Healthcare Corporation, Paracelsus Healthcare
Corporation, HealthSouth Corporation, Commu-
1
<PAGE> 4
nity Health Systems, Inc., PhyCor of Mesa, Inc., PrimeCare International, Inc.,
Covenant Care, Inc., Emeritus Corporation, Unison HealthCare Corporation,
Shannon Health System, Pine Haven Health Care II, Inc. and Spectrum
Comprehensive Care, Inc. Facilities operated by Tenet represented 51% of the
Core Group's total revenues for the year ended December 31, 1997.
Approximately 71% of the Core Group's property revenues for the year ended
December 31, 1997 were secured by corporate guarantees of these operating
companies or their subsidiaries. Also, as of December 31, 1997, letters of
credit from commercial banks and cash deposits aggregating $17.2 million were
available to the Core Group as security for lease financings. Leases for 17 of
the Core Group's facilities, representing 59% of the Core Group's property
revenues for the year ended December 31, 1997, contain cross-default provisions.
THE CORE GROUP FACILITIES
The Company's 44 Core Group facilities as of March 15, 1998, consisted of
13 acute care hospitals (the "Acute Care Hospitals"), three rehabilitation
hospitals (the "Rehabilitation Hospitals"), six assisted living facilities (two
of which are under construction) (the "Assisted Living Facilities"), one
mortgage loan secured by a long-term acute care hospital, one long-term acute
care hospital (the "Long-Term Acute Care Hospital"), six skilled nursing
facilities (two of which are under construction) (the "Skilled Nursing
Facilities"), 12 medical office/clinic facilities (the "Medical Office/Clinic
Facilities") and two Alzheimer's care facilities (the "Alzheimer's Care
Facilities" and together, the "Core Group Facilities"). Except for the long-term
acute care hospital securing a mortgage loan, 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 Hospitals. The Long-Term Acute Care Hospitals provide
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.
2
<PAGE> 5
Medical Office/Clinic Facilities. The Medical Office/Clinic Facilities
include both single-tenant clinic facilities from which large medical practice
groups provide a full range of services to their patients to multi-tenant
medical office buildings which provide strategically located office space to
physicians forming part of integrated health care delivery systems.
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 15, 1998.
CORE GROUP FACILITIES
<TABLE>
<CAPTION>
YEAR
ACQUIRED/ TOTAL
DESCRIPTION LOCATION OPERATOR FUNDED INVESTMENT(1)
----------- -------- -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ACUTE CARE HOSPITALS
Chesterfield General SC Community Health Systems, Inc. 1995 $ 11,407
Hospital
Cleveland Regional TX Community Health Systems, Inc. 1994 8,300
Medical Center
Desert Valley Hospital CA PrimeCare International, Inc. 1994 26,405
Frye Regional Medical NC Tenet Healthcare Corporation 1987 45,449
Center
Irvine Medical Center CA Tenet Healthcare Corporation 1991 75,000
Kendall Regional Medical FL Columbia/HCA Healthcare 1987 69,012
Center Corporation
Lucy Lee Hospital MO Tenet Healthcare Corporation 1987 23,566
Marlboro Park Hospital SC Community Health Systems, Inc. 1995 7,793
North Fulton Regional GA Tenet Healthcare Corporation 1987 46,191
Hospital
Palm Beach Gardens FL Tenet Healthcare Corporation 1987 45,648
Medical Center
Pioneer Valley Hospital UT Paracelsus Healthcare 1996 49,466
Corporation
Shannon Health System, TX Shannon Health System 1991 16,452
St. John's Campus
Tarzana Hospital of CA Tenet Healthcare Corporation 1987 73,700
Encino-Tarzana
Regional Medical
Center
--------
Total Acute Care Hospitals $498,389
--------
REHABILITATION HOSPITALS
HCA Wesley KS HealthSouth Corporation 1992 $ 14,597
Rehabilitation
Hospital
MountainView Regional WV HealthSouth Corporation 1991 11,718
Rehabilitation
Hospital
Northwest Arkansas AR HealthSouth Corporation 1991 9,086
Rehabilitation
Hospital
--------
Total Rehabilitation Hospitals $ 35,401
--------
<CAPTION>
ANNUAL INITIAL
BASE TERM OF
DESCRIPTION RENT/INTEREST(2) LEASE/MORTGAGE(3)
----------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ACUTE CARE HOSPITALS
Chesterfield General $ 1,238 2005
Hospital
Cleveland Regional 812 2003
Medical Center
Desert Valley Hospital 2,895 2004
Frye Regional Medical 5,265 1999
Center
Irvine Medical Center 10,057 2004
Kendall Regional Medical 7,884 1999
Center
Lucy Lee Hospital 2,731 1999
Marlboro Park Hospital 845 2005
North Fulton Regional 5,471 1999
Hospital
Palm Beach Gardens 5,283 1999
Medical Center
Pioneer Valley Hospital 7,024 2004
Shannon Health System, 1,478 2001
St. John's Campus
Tarzana Hospital of 8,308 2004
Encino-Tarzana
Regional Medical
Center
-------
Total Acute Care Hospitals $59,291
-------
REHABILITATION HOSPITALS
HCA Wesley $ 1,615 2002
Rehabilitation
Hospital
MountainView Regional 1,358 2001
Rehabilitation
Hospital
Northwest Arkansas 1,064 2001
Rehabilitation
Hospital
-------
Total Rehabilitation Hospitals $ 4,037
-------
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
YEAR
ACQUIRED/ TOTAL
DESCRIPTION LOCATION OPERATOR FUNDED INVESTMENT(1)
----------- -------- -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSISTED LIVING
FACILITIES
Cambria Lodge TX Emeritus Corporation 1996 $ 5,182
Garrison Creek Lodge WA Emeritus Corporation 1996 5,648
Outlook Pointe at IN Balanced Care Corporation 1998 4,843
Anderson, Indiana(4)
Outlook Pointe at TN Balanced Care Corporation 1998 5,030
Jackson, Tennessee(4)
Sherwood Place TX Emeritus Corporation 1996 5,034
Summer Wind Residence ID Emeritus Corporation 1995 3,000
--------
Total Assisted Living Facilities $ 28,737
--------
LONG-TERM ACUTE CARE
HOSPITALS
Comprehensive Care TX Spectrum Comprehensive Care, 1996 $ 6,110
Hospital of Amarillo Inc.
Total Life Care TX Spectrum Comprehensive Care, 1997 4,400
Hospital(5) Inc.
--------
Total Long-Term Acute Care Hospitals $ 10,510
--------
SKILLED NURSING
FACILITIES
Arkansas Manor CO Unison HealthCare Corporation 1995 $ 4,066
Buffalo Drive(4) NV Covenant Care, Inc. 1997 7,500
Cornerstone Care Center CO Unison HealthCare Corporation 1995 4,856
Douglas Manor AZ Unison HealthCare Corporation 1995 2,621
Safford Care Center AZ Unison HealthCare Corporation 1995 4,934
Torrey Pines(4) NV Covenant Care, Inc. 1997 9,500
--------
Total Skilled Nursing Facilities $ 33,477
--------
MEDICAL OFFICE/CLINIC
FACILITIES
Casa Blanca Clinic(6) AZ PhyCor of Mesa, Inc. 1997 $ 20,581
Fannin Medical TX Columbia/HCA Healthcare 1997 52,059
Buildings(6) Corporation
Morristown Professional NJ LaSalle Partners Management 1998 19,589
Plaza Services, Inc.(8)
Northpark Professional FL LaSalle Partners Management 1997 10,628
Building Services, Inc.(8)
Park Plaza Professional TX LaSalle Partners Management 1997 16,942
Building Services, Inc.(8)
Walsh Medical Arts CA CDM/WestMar(8) 1994 8,800
Center
Westpark Plaza TX LaSalle Partners Management 1998 9,136
Services, Inc.(8)
Woodlake Medical Center CA LaSalle Partners Management 1998 12,579
Services, Inc.(8)
--------
Total Medical Office/Clinic Facilities $150,314
--------
ALZHEIMER'S CARE
FACILITIES
Pine Haven I Alzheimer's TX Pine Haven Health Care II, Inc. 1995 $ 3,700
Community
Pine Haven II TX Pine Haven Health Care II, Inc. 1996 4,024
Alzheimer's Community
--------
Total Alzheimer's Care Facilities $ 7,724
--------
CORE GROUP PORTFOLIO TOTAL $764,552
========
<CAPTION>
ANNUAL INITIAL
BASE TERM OF
DESCRIPTION RENT/INTEREST(2) LEASE/MORTGAGE(3)
----------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSISTED LIVING
FACILITIES
Cambria Lodge $ 544 2006
Garrison Creek Lodge 593 2006
Outlook Pointe at 458 2009
Anderson, Indiana(4)
Outlook Pointe at 475 2009
Jackson, Tennessee(4)
Sherwood Place 529 2006
Summer Wind Residence 315 2005
-------
Total Assisted Living Facilities $ 2,914
-------
LONG-TERM ACUTE CARE
HOSPITALS
Comprehensive Care $ 596 2007
Hospital of Amarillo
Total Life Care 462 2007
Hospital(5)
-------
Total Long-Term Acute Care Hospitals $ 1,058
-------
SKILLED NURSING
FACILITIES
Arkansas Manor $ 406 2005
Buffalo Drive(4) 788 2008
Cornerstone Care Center 485 2005
Douglas Manor 254 2005
Safford Care Center 478 2005
Torrey Pines(4) 998 2008
-------
Total Skilled Nursing Facilities $ 3,409
-------
MEDICAL OFFICE/CLINIC
FACILITIES
Casa Blanca Clinic(6) $ 2,086 2012
Fannin Medical 4,403 2004/2006 (6)
Buildings(6)
Morristown Professional (7) (7)
Plaza
Northpark Professional (7) (7)
Building
Park Plaza Professional (7) (7)
Building
Walsh Medical Arts 1,011 2003
Center
Westpark Plaza 1,265 2007
Woodlake Medical Center (7) (7)
-------
Total Medical Office/Clinic
Facilities $ 8,765(9)
-------
ALZHEIMER'S CARE
FACILITIES
Pine Haven I Alzheimer's $ 353 2005
Community
Pine Haven II 423 2007
Alzheimer's Community
-------
Total Alzheimer's Care Facilities $ 776
-------
CORE GROUP PORTFOLIO TOTAL $80,250(9)
=======
</TABLE>
- ---------------
(1) Reflects gross investment or total investment commitment.
4
<PAGE> 7
(2) Reflects contract rate of annual base rent or interest received or estimated
to be received upon completion of construction or investment.
(3) The leases and mortgages generally provide the lessees with renewal options
to extend the term of the leases or mortgages beyond the primary term.
(4) Currently under construction.
(5) Investment held in the form of a mortgage rather than owned by the Company.
(6) Casa Blanca Clinic represents four separate facilities leased together under
a master lease. Fannin Medical Buildings represents two separate facilities,
one of which the master lease expires in 2004 and the other in 2006.
(7) Multi-tenant facility with various rental rates and lease terms.
(8) Property manager.
(9) Excludes multi-tenant medical office/clinic facilities.
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, 1997, the net book value of the Psychiatric Group total assets was
$51.0 million. Of the Psychiatric Group's real estate assets at that date, 21%
in net book value were held in fee and 79% 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 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, and one of the Psychiatric
Hospitals has ceased operations. See "Management's Discussion and Analysis of
Psychiatric Group Combined Financial Condition and Results of
Operations -- Operating Results -- Future Operating Results" included elsewhere
herein.
5
<PAGE> 8
The following is a listing of the Psychiatric Group portfolio of
investments as of March 15, 1998.
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> <C>
Four Winds Psychiatric NY Four Winds, Inc. 1988 $27,600 $3,908 2002
Hospital(4)
Four Winds Psychiatric NY FW of Saratoga, Inc. 1989 18,053 2,239 1999
Hospital(4)
Less: Mortgage note (7,950)
receivable impairment
reserve
Northpointe Behavioral FL (5) 1990 2,000 (5)(6) (5)
Health System
The Retreat FL Goldsel Group(7) 1990 3,402 420(6) 2000
Rock Creek Center IL Rock Creek Center 1989 6,505 1,000(6)(8) 1997(8)
Limited
Partnership
------- ------
Total Psychiatric Hospitals $49,610 $7,567
======= ======
</TABLE>
- ---------------
(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) The owner of the Northpointe hospital ceased operations during the second
quarter of 1997. The Company is currently exploring a range of options for
the property, including the conversion of the facility to an alternative use
or sale of the property. Due to the complexity and time involved in
evaluating its options, the Company has not yet reached a decision as to its
ultimate course of action. The Psychiatric Group will incur costs of
approximately $75,000 per quarter to protect and maintain the property until
a resolution is reached.
(6) Actual rent received for the year ended December 31, 1997 for Northpointe
Behavioral Health System, The Retreat and Rock Creek Center was $50,000,
$577,000 and $1,000,000, respectively.
(7) Goldsel Group is the operator and The Retreat Psychiatric Hospital, Ltd. is
the lessee of The Retreat.
(8) The initial term of the Rock Creek Center ("RCC") lease, originally
scheduled to expire in December 1997, was extended until March 31, 1998.
Although the original lease agreement provided the operator with an option
to renew the lease for an additional five-year term at fair market rental,
the operator did not exercise that option. However, negotiations for a
renewal of the current lease with the existing operator are continuing and
other operators have expressed interest in the facility. The Psychiatric
Group believes that either the current lease will be renewed with the
existing operator or the facility will be leased to a new operator. The
Psychiatric Group cannot be assured that either of these will be
accomplished or that, if accomplished, the annual minimum rent payments will
be at the current level of $1,000,000. Although, the $2,500,000 balance
outstanding under RCC's revolving credit agreement matured June 30, 1997,
the operator has continued to make interest payments. The Psychiatric Group
is considering the operator's suggestion to extend the maturity of the
revolving credit agreement to correspond with the expiration of a renewed
lease term, if such a renewed lease is accomplished. Should the current
lease not be renewed or the revolving loan not be repaid or extended with
the existing operator and a facility lease with a new operator is not
accomplished, a significant negative impact to the Psychiatric Group likely
will result.
6
<PAGE> 9
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 currently owns the 13 Acute Care Hospitals, three of the
Psychiatric Hospitals, the three Rehabilitation Hospitals, the six Assisted
Living Facilities (two of which are under construction), one of the Long-Term
Acute Care Hospitals, the six Skilled Nursing Facilities, (two of which are
under construction) and the two Alzheimer's Care Facilities, which are
collectively referred to herein as the "Leased Properties" or individually as a
"Leased Property". The Company also owns 12 Medical Office/Clinic Facilities
which are collectively referred to herein as the "Leased MOB Properties".
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 64% of the Company's
property revenues for the year ended December 31, 1997 were secured by corporate
guarantees. Also, as of December 31, 1997, letters of credit from commercial
banks and cash deposits aggregating $19.2 million were available to the Company
as security for lease and construction development obligations.
The leases of single-tenant facilities 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
such 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
these Leased Properties.
Leases of office or other space within the Core Group's Leased MOB
Properties vary from gross leases (where landlord is responsible for repairs,
maintenance, insurance and taxes) to triple net leases (where tenant pays some
or all such expenses). Generally, the market in which a multi-tenant medical
office building is located will determine whether office space is leased on a
net or gross basis. Leases to single-tenant leased MOB Properties are usually on
a net or triple net basis.
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
7
<PAGE> 10
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 51% of the Core Group's total revenues
for the year ended December 31, 1997. 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, which comprised 27% of the Core Group's total
revenues for the year ended December 31, 1997, 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.
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. Four of the Assisted Living Facilities are
operated by an affiliate of Emeritus Corporation ("Emeritus") and all leases for
such facilities are cross-defaulted. These Assisted Living Facility leases
provide for a ten year initial term with six renewal periods of five years each.
These four Emeritus 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. These 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).
The Company has also entered into a commitment to develop up to five
assisted living facilities, each of which will be managed and operated by a
subsidiary of Balanced Care Corporation ("Balanced Care"). An entity independent
of both Balanced Care and the Company will lease each such facility for a term
commencing upon completion of construction and ending ten years thereafter. Each
such lease will also provide three five-year renewal terms at the option of the
tenant. The Balanced Care leases set forth monthly base rent payments that
escalate each year of the lease based upon an adjustment factor related to
inflation.
8
<PAGE> 11
Balanced Care has an option to acquire the equity interests of the tenant, the
leasehold interest and other assets of the tenant and a right of first offer to
purchase the properties that are the subject of a lease. In addition, the tenant
under the Balanced Care lease has the option to purchase all of the leased
properties in a pool in 2008 with such option extended by five years if the
option for extension of the term of the leases is exercised by tenant. Balanced
Care has committed to provide working capital support for each tenant, including
support for rental obligations owed to the Company. Each lease entered into
under the Company's development commitment for these facilities will be
cross-defaulted to the other executed leases. Two facilities, one located in
Jackson, Tennessee and the other in Anderson, Indiana have commenced
construction.
Long-Term Acute Care Hospitals. The Long-Term Acute Care Hospital that is
owned by the Company is leased to an affiliate of Spectrum Comprehensive Care,
Inc. ("Spectrum") pursuant to a ten-year lease. This lease provides for monthly
payments of base rent along with quarterly payments of additional rent in an
amount equal to a specified percentage of Excess Gross Revenues. The
participation rate in Excess Gross Revenues is equal to a reduced percentage
upon reaching a predetermined rate of return. This lease provides 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 has been guaranteed by Spectrum.
The Company holds a mortgage on one of the Long-Term Acute Care Hospitals.
The mortgage provides for an initial term of ten years and two renewal terms of
ten years each. An affiliate of Spectrum owns and operates this Long-Term Acute
Care Hospital. Spectrum has guaranteed the obligations under the mortgage and
has pledged to the Company the stock of the affiliate owning the Long-Term Acute
Care Hospital in order to secure its guaranty. The mortgage sets forth monthly
payments of principal plus base interest as well as quarterly payments of
additional interest in an amount equal to (i) net revenues (as defined) for the
current year, minus (ii) net revenues for the base year (as defined), multiplied
by (iii) a specified percentage.
Skilled Nursing Facilities. Each of the Skilled Nursing Facility leases
establishes an initial term of ten years and an option for three renewal terms
of ten years each. Four of the Skilled Nursing Facilities are operated by an
affiliate of Unison Healthcare Group, Inc. (formerly Signature Health Care
Corporation) ("Unison") and all of the leases for the Unison facilities are
cross-defaulted. Additionally, the obligations under each Unison lease are
guaranteed by Unison and an affiliate of Unison. The Unison leases provide for
monthly base rent, which is automatically increased by a specified percentage
each year. Each of the Unison 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 Skilled Nursing Facilities operated
by the tenant. The Unison 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.
Two Skilled Nursing Facilities are currently under construction and will be
operated by an affiliate of Covenant Care, Inc. ("Covenant Care") with such
leases commencing upon completion of construction. These two facilities will be
cross-defaulted and the obligations under each Covenant Care lease will be
guaranteed by Covenant Care. The Covenant Care leases set forth monthly base
rent payments plus quarterly additional rent payments in an amount equal to (i)
net revenues (as defined) for the current year, minus (ii) net revenues for the
base year (as defined), multiplied by (iii) a specified percentage. The Covenant
Care leases will provide the tenant with a right of first refusal to purchase
the properties at a purchase price equal to the greater of fair market value or
the total investment cost (as defined) for unsolicited offers to sell by the
Company or equal to the greater of the total investment cost or the purchase
price contained in any offer to purchase received by and acceptable to the
Company.
Medical Office/Clinic Facilities. Seven of the medical office/clinic
facilities are master leased to Columbia/HCA Healthcare Corporation, Casa Blanca
Clinic, a physician practice group managed by PhyCor, Inc., and Wellpoint Health
Networks, Inc., for remaining terms ranging from seven to fifteen years. Four of
the medical office/clinic facilities are leased to multiple tenants for
remaining terms ranging from one
9
<PAGE> 12
to ten years. One of the medical office/clinic facilities is master-leased for a
six-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 Facilities are leased to Pine Haven Health Care II, Inc. and
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). The
Company has also entered into a commitment to develop up to 11 additional
Alzheimer's care facilities to be operated and leased by Pine Haven Health Care
II, Inc. on substantially similar terms.
Psychiatric Group Facilities
Psychiatric Hospitals. The lease for one of the owned Psychiatric
Hospitals provides for an initial term expiring in 2000 with three renewal
periods for ten years each. The initial lease term of the second owned
Psychiatric Hospital, originally scheduled to expire in December 1997, was
extended until March 31, 1998. Although the original lease agreement provided
the operator with an option to renew the lease for an additional five-year term
at fair market rental, the operator did not exercise that option. However,
negotiations for a renewal of the current lease with the existing operator are
continuing and other operators have expressed interest in the facility. In
addition to monthly base rent, the lease provides for the quarterly payment of
additional rent in an amount equal to a specified percentage of Excess Gross
Revenues. The third owned Psychiatric Hospital ceased operations during the
second quarter of 1997.
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 and cross-defaulted. 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.
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in
significant impairment losses on psychiatric investments and the periodic
restructuring of psychiatric operator payment obligations. In 1995, the Company
restructured the leases covering its two psychiatric properties in Florida, and
during 1996, provided for the partial deferral of rental and interest
obligations related to one of these properties and the partial deferral of
rental obligations of its psychiatric property in Illinois. The Company recorded
an $11 million charge in the first quarter of 1997 for impairment of the
carrying value of its two psychiatric investments in Florida. Later in 1997, the
owner of one of the Florida hospitals ceased operations and a restructuring of
the other Florida hospital's obligations to the Company was completed. The
initial lease term of the psychiatric property in Illinois, originally scheduled
to expire in December 1997, was extended until March 31, 1998. In addition, the
$2,500,000 balance outstanding under a revolving credit agreement provided to
the operator of the Illinois property matured June 30, 1997, and, although the
operator has continued to make interest payments, the principal balance remains
past due. Negotiations with the existing operator for renewal of the current
lease and extension or repayment of the revolving credit agreement are
continuing. Although management currently believes that the recorded amounts of
its psychiatric investments are realizable, if the psychiatric operators are
unable to adapt to the fundamental ongoing changes in the psychiatric industry
successfully and consistently mitigate the negative impact of the ongoing
changes on their financial performance, the Company may be required to
restructure payment obligations further, identify alternative operators, pursue
alternative uses for or dispositions of the properties and/or recognize
additional impairment losses on its psychiatric investments. If the Company is
required to take any of these actions, various costs are likely to be incurred
by the Company in an effort to protect, maintain and pursue alternatives for its
investments. The Company does not currently 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 Company sold two of its
psychiatric properties in 1995 and continues to encourage each of the
psychiatric operators to pursue financing alternatives which would enable
10
<PAGE> 13
them to acquire the properties and/or repay their borrowings from the Company,
as the case may be. Subject to the rights of the holders of the Company's Series
B Depositary Shares, and the Series B Preferred Stock represented thereby, and
any other preferred stock of the Company then outstanding, the Company expects
to use the net proceeds of any future psychiatric property sales and/or
psychiatric operator borrowing repayments 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. The Company cannot be assured that the
efforts of psychiatric operators to obtain alternative financing will be
successful or, if successful, that the amounts of such financing would be
sufficient to enable the Company to realize the carrying amounts of its
psychiatric investments. The dividend on the Company's Psychiatric Group
Depositary Shares is determined each quarter based upon the operating results of
the Company's Psychiatric Group. Historically, the level of dividends of the
Psychiatric Group have varied quarter-to-quarter. Any significant advance of
additional funds to psychiatric hospital operators, modification of terms
covering the rental or interest obligations of its psychiatric properties or
nonpayment or deferral of such obligations as they become due likely will have
an adverse impact on the Company's Psychiatric Group results of operations and
cash flows, as well as on the quarterly dividend payment on Psychiatric Group
Depositary Shares. In addition to the foregoing, future operating results, cash
flows and dividends of the Company's Psychiatric Group will be affected by
changes in the level of additional rent and interest, interest rate adjustments
on mortgage notes receivable, the amount of additional financial advisory fees
and, to the extent necessary, various costs which might be incurred in an effort
to protect, maintain and pursue alternatives for its psychiatric investments.
For a fuller discussion of the restructuring of the Company's Psychiatric
Group investments during 1996 and 1997 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 single-tenant facilities in
which it has invested (the "Single-Tenant Facilities") provide high quality
health care services in their respective markets. The operators of the
Single-Tenant 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 Single-Tenant 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 Single-Tenant Facilities compete favorably with other
health care facilities based upon many factors, including the services and
specialties offered, quality of management, ease of access, reputation and the
ability to attract competent physicians and maintain strong physician
relationships.
Management of the Company likewise believes that the multi-tenant medical
office facilities in which it has invested (the "Multi-Tenant Facilities" and,
together with the Single-Tenant Facilities, the "Facilities") are
well-positioned in their markets. These Multi-Tenant Facilities compete with
other medical office buildings for tenants based upon the amenities they offer
and their proximity to acute care hospitals and other health care facilities.
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
11
<PAGE> 14
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 in most cases 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 and tenants 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 and tenants 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 reduction in reimbursement levels under the
Medicare or Medicaid programs, a reduction in reimbursement by other third party
payors or an operator's or tenant's failure to maintain its certification under
the Medicare or Medicaid programs could adversely affect revenues to the
Facilities.
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 (which
has received Congressional approval for a pilot study) 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
12
<PAGE> 15
on the Medicare and Medicaid programs. Accordingly, these proposed legislative
changes could adversely affect revenues to the Facilities.
On August 5, 1997, President Clinton signed into law the Balanced Budget
Act of 1997 (the "Budget Act"), which reduces the projected amount of increase
in Medicare spending by an estimated $115 billion and Medicaid spending by an
estimated $13 billion over five years. The Budget Act contains reductions in
payments for inpatient services, capital expenditures, graduate medical
education, outpatient services, clinical laboratory services and physician
services, and adopted a variety of changes to the Medicare and Medicaid
programs, including (a) the adoption of the Medicare+Choice program, which
expands Medicare beneficiaries' choices to include traditional Medicare
fee-for-service, private fee-for-service, medical savings accounts, various
managed care plans, and provider sponsored organizations, among others, (b) the
reduction of reimbursement for various services to Medicare beneficiaries, (c) a
freeze in hospital rates in 1998 and more limited annual increases in hospital
rates for 1999 through 2002, (d) the adoption of a prospective pay system for
skilled nursing facilities, home health agencies, hospital outpatient
departments and rehabilitation hospitals, (e) the repeal of the Boren amendment
in Medicaid so that states have the exclusive authority to determine provider
rates, and (f) the reduction in Medicare disproportionate share payments to
hospitals. The reductions on Medicare and Medicaid spending imposed by the
Budget Act may have an adverse impact on the revenues of the Company's operators
and the physicians who are tenants at the Company's medical office buildings.
See "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations -- Future Operating Results."
Prior to the Budget Act's repeal of the Boren amendment, state Medicaid
programs were required to pay hospitals and nursing facilities based on rates
that were reasonable and adequate to meet the costs that must be incurred by
efficiently and economically operated facilities in order to provide services in
conformity with federal and state standards and to assure that patients retain
reasonable access to medical services. After passage of the Budget Act, states
need only publish the methodology used to develop the proposed rates, along with
a justification for the methodology, and allow public comment. As a result of
this change, states may be able to reduce their Medicaid reimbursement levels
more easily, and the Company's operators may therefore experience reduced
Medicaid payments.
Health care operators are also subject to federal and state laws and
regulations that govern financial and other arrangements between health care
providers. These laws prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. The Budget Act
strengthened these anti-fraud and abuse laws to provide for stiffer penalties
for fraud and abuse violations.
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 generally 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 Acute Care Hospitals, receive payments
for patient care from the federal Medicare program for elderly and disabled
patients, Medicaid and other state programs for medically
13
<PAGE> 16
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. The Budget Act imposed a freeze in
Medicare rates for hospital services in 1998 and more limited annual increases
in such rates for 1999 through 2002. 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 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. Medicare payments for inpatient rehabilitative
services currently 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. The Budget Act altered the Medicare payment rules for
rehabilitation hospitals effective October 1, 1997 to limit further reimbursable
costs, reduce payment incentives for providers whose costs are below the
discharge limitation, and reduce capital related payments. In addition, the
Budget Act implemented a new payment system for rehabilitation services that
will be phased in after October 1, 2000. Under the new system, payments to
rehabilitation hospitals will be based on fixed rates per discharge that will
vary according to the nature of the patient's condition. All Medicare inpatient
and outpatient services currently 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 such licensure
requirements and with the requirements for participation in the Medicaid program
in the states where assisted living facilities are eligible for Medicaid
reimbursement. The operators of the Company's Assisted Living Facilities
primarily target the private pay sector of the assisted
14
<PAGE> 17
living services market, and generally do not target Medicaid patients for
admission to their 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 that 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. The Budget
Act also altered the Medicare payment rules for LTACs to limit future
reimbursable costs, reduce payment incentives for providers whose costs are
below the discharge limitation, and reduce capital related payments. 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. The Budget Act established
a prospective payment system for skilled nursing facilities that goes into
effect on July 1, 1998. During the first three years of the new system, the per
diem rates for skilled nursing facilities (other than new facilities) will be
based on a blend of facility-specific costs and federal costs. Thereafter, the
per diem rates for skilled nursing services will be based solely on federal
costs. Per diem rates for skilled nursing facilities first receiving Medicare
payments on or after October 1, 1995 will be based solely on federal costs. The
payments received under the new prospective payment system will cover all
services for Medicare patients, including all ancillary services, such as
respiratory therapy, physical therapy, occupational therapy, speech therapy and
certain covered drugs. Capital costs will also be included in the prospective
payment per diem rates. Although Medicaid programs vary from state to state,
reimbursement rates for skilled nursing services 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.
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.
15
<PAGE> 18
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........................ 55 Chairman of the Board of Directors,
President and Chief Executive Officer
Michael J. McGee.......................... 42 Senior Vice President, Chief Financial
Officer and Treasurer
Steven A. Roseman......................... 39 Senior Vice President, General Counsel and
Secretary
C. Gregory Schonert....................... 43 Senior Vice President and Chief
Development Officer
Thomas T. Schleck......................... 50 Senior Vice President and Chief Investment
Officer
</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 previously served as Controller of the Company
from November 1989 to February 1998. Mr. McGee was a certified public accountant
with Arthur Andersen LLP from 1977 to November 1989.
STEVEN A. ROSEMAN -- Mr. Roseman has been Senior Vice President, General
Counsel and Secretary of the Company since July 1997. Prior to that Mr. Roseman
had established his own legal practice, and from April 1995 to August 1996 he
was Vice President Business Affairs Worldwide Pay Television for Paramount
Pictures Corporation. From September 1983 to April 1995 he was with the law firm
of Ervin, Cohen & Jessup, Beverly Hills, California and was a partner in that
firm's tax and real estate department.
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 Senior Vice President and Chief
Investment Officer of the Company since April 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.
ITEM 2. PROPERTIES.
See "Item 1. Business" for a description of properties owned by the Company
or subject to mortgages held by the Company.
16
<PAGE> 19
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.
17
<PAGE> 20
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>
1997
4th................................ $28 $24 $.5450 $ 17 $ 14 3/4 $.62
3rd................................ 25 15/16 24 7/16 .5250 18 7/8 14 3/4 .62
2nd................................ 26 3/8 23 .5250 19 3/8 16 1/2 .63
1st................................ 26 22 7/8 .5250 19 5/8 15 1/2 .75
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
</TABLE>
As of March 13, 1998, the reported high and low sales prices (i) for the
Company's Common Stock for 1998 were $29 and $26, respectively, and (ii) for the
Company's Psychiatric Group Depositary Shares for 1998 were $18 and $14 5/8,
respectively. As of March 13, 1998, there were approximately (i) 3,964 holders
of record and 23,965,255 shares outstanding of the Company's Common Stock, and
(ii) 3,094 holders of record and 2,083,931 shares outstanding of the Company's
Psychiatric Group Depositary Shares.
In general, dividends on the Company's Common Stock and Psychiatric Group
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 the Company's Series B
Preferred Stock, and will be limited to $30 million in the aggregate and $15
million in any calendar year.
The Certificate of Designation for the Series B Preferred Stock prohibits
the Company from redeeming or declaring a dividend on the Common Stock or the
Psychiatric Group Depositary Shares unless all cumulative dividends with respect
to the Series B Preferred Stock have been paid or funds have been set apart for
the payment of such dividends.
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, after the payment of dividends on the Series B Preferred Stock.
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 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.
18
<PAGE> 21
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. Subject to the
rights of holders of the Series B Preferred Stock, the Company intends 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, 1997, the available dividend amount attributable to the Core Group,
after payment of dividends on the Series B Preferred Stock, and the Psychiatric
Group as of that date was at least $277.3 million and $36.7 million,
respectively. All dividends on the Series B Preferred Stock and 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 Series B Preferred Stock, the Common Stock and the Psychiatric
Group Stock will be further limited to the amount of funds of the Company
legally available under Delaware law for the payment of dividends by the Company
on its capital stock. As of December 31, 1997, the funds of the Company legally
available for the payment of dividends would have been at least $314.0 million.
Payments of dividends on any of the Series B Preferred Stock, the Common Stock
or the Psychiatric Group Stock will decrease the amount of funds legally
available for the payment of dividends on the Series B Preferred Stock, the
Common Stock and the Psychiatric Group Stock.
19
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below for the years ended December 31, 1997, 1996, 1995, 1994 and
1993 are (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,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 93,465 $ 88,924 $ 91,230 $ 87,027 $ 81,523
Income before extraordinary item
attributable to Core Group Common
Stock and Psychiatric Group
Depositary Shares(1)(2)........... $ 36,636 $ 44,379 $ 42,381 $ 9,693 $ 50,987
Cash flows from operating
activities........................ $ 70,156 $ 61,241 $ 57,471 $ 54,984 $ 45,884
Total assets........................ $690,572 $577,882 $586,316 $579,503 $614,453
Total debt.......................... $243,813 $207,101 $207,378 $245,663 $245,423
Stockholders' equity................ $414,961 $345,139 $353,060 $307,501 $343,303
</TABLE>
<TABLE>
<CAPTION>
CORE GROUP
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 86,302 $ 81,429 $ 82,913 $ 75,680 $ 73,036
Income before extraordinary item
attributable to common
shares(1)......................... $ 42,554 $ 38,800 $ 36,107 $ 32,548 $ 48,616
Basic per share amounts(3)(4)
Income before extraordinary item
attributable to common
shares(1)......................... $ 1.81 $ 1.65 $ 1.69 $ 1.56 $ 2.58
Weighted average common shares...... 23,505 23,453 21,356 20,835 18,838
Diluted per share amounts(3)(4)
Income before extraordinary item
attributable to common
shares(1)......................... $ 1.80 $ 1.65 $ 1.69 $ 1.56 $ 2.57
Weighted average common shares and
dilutive potential common
shares............................ 23,703 23,558 21,421 20,881 18,888
Cash flows from operating
activities........................ $ 63,822 $ 54,841 $ 50,413 $ 46,258 $ 41,276
Dividends declared per common
share(3).......................... $ 2.12 $ 2.04 $ 1.99 $ 1.88 $ 1.91
Total assets........................ $652,132 $527,979 $536,199 $528,686 $532,461
Total attributed debt............... $243,813 $207,101 $207,378 $245,663 $245,423
Total attributed equity............. $378,268 $297,176 $304,947 $259,199 $263,832
</TABLE>
<TABLE>
<CAPTION>
PSYCHIATRIC GROUP
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 8,716 $ 9,174 $ 10,346 $ 15,388 $ 15,317
Net income (loss)(2)................ $ (5,918) $ 5,579 $ 6,274 $(22,855) $ 2,371
Basic per share amounts(3)(4)
Net income (loss)(2)................ $ (2.84) $ 2.68 $ 3.01 $ (10.97) $ 1.26
Weighted average depositary
shares............................ 2,084 2,084 2,086 2,084 1,884
Diluted per share amounts(3)(4)
Net income (loss)(2)................ $ (2.84) $ 2.67 $ 3.00 $ (10.97) $ 1.26
Weighted average depositary shares
and dilutive potential depositary
shares............................ 2,084 2,093 2,091 2,084 1,889
Cash flows from operating
activities........................ $ 6,334 $ 6,400 $ 7,058 $ 8,726 $ 4,608
Dividends declared per depositary
share(3).......................... $ 2.62 $ 2.80 $ 3.20 $ 4.16 $ 3.36
Total assets........................ $ 50,994 $ 63,261 $ 64,555 $ 80,245 $116,820
Total attributed debt............... $ 12,554 $ 13,358 $ 14,438 $ 29,428 $ 34,828
Total attributed equity............. $ 36,693 $ 47,963 $ 48,113 $ 48,302 $ 79,471
</TABLE>
20
<PAGE> 23
- ---------------
(1) Includes gain of $19.7 million in 1993 on the sale of a property.
(2) Includes write-downs of $11 million and $30 million in 1997 and 1994,
respectively relating to Psychiatric Group real estate investments and notes
receivable.
(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.
(4) At the end of 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share," and restated prior period per share
amounts as required.
21
<PAGE> 24
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. This
report includes and incorporates by reference statements that are not purely
historical and are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
statements other than historical fact contained in this report, including
without limitation statements regarding rent or interest to be received from the
Company's operators and tenants, plans with respect to individual facilities,
expectations with respect to the specific terms and renewals of leases of the
Company's facilities, the Company's anticipated dividend payout ratios, the
Company's liquidity position, projected expenses associated with maintaining
individual properties, the Company's ability to realize the recorded amounts of
its investments and the potential effect of new or existing regulations on the
operations conducted at the Company's facilities, are forward-looking
statements. All forward-looking statements included or incorporated by reference
in this report are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update such forward-looking
statements. Although the Company believes that the assumptions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct or that the
Company will take any actions that may presently be planned.
Certain factors that could cause actual results to differ materially from
those expected include, among others: the financial success of the operations
conducted at the Company's facilities and the financial strength of the
operators and tenants of such facilities, the continuing ability of operators
and tenants to meet their obligations to the Company under existing or
restructured agreements, changes in operators or ownership of operators, the
viability of alternative uses for the Company's properties when necessary,
changes in government policy relating to the health care industry including
reductions in reimbursement levels under the Medicare and Medicaid programs,
operators' and tenants' 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, a downturn in market lease
rates for medical office space, higher than expected costs associated with the
maintenance and operation of the Company's medical office/clinic facilities,
higher than expected turnover at the Company's medical office/clinic facilities,
demand for the services provided 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 "-- 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 acute care, rehabilitation and long-term acute care
hospitals, skilled nursing, assisted living, Alzheimer's care and medical
office/clinic facilities (the Core Group) and its investments in psychiatric
hospitals (the Psychiatric 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 Company's common stock (the Core Group
Common Stock) is intended to reflect the separate financial performance of the
Core Group. The Psychiatric Group Depositary Shares are intended
22
<PAGE> 25
to reflect the separate financial performance of the Psychiatric Group. The
Company's Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, are attributed to the Company's Core Group for financial
accounting and reporting purposes. The Series B Depositary Shares, and the
Series B Preferred Stock represented thereby, rank senior to the Company's Core
Group Common Stock and its Psychiatric Group Depositary Shares with respect to
dividend payments and liquidation rights. Attribution of the components of the
Company's capital structure to its Core Group and Psychiatric Group for
financial accounting and reporting purposes does not affect the legal title to
assets or responsibility for liabilities of the Company, and each holder of Core
Group Common Stock, Series B Depositary Shares or Psychiatric Group Depositary
Shares is a holder of an issue of capital stock of the entire Company and is
subject to the risks associated with an investment in the Company and all of its
businesses, assets and liabilities.
OPERATING RESULTS
1997 Compared to 1996
In 1997, the Company reported net income before extraordinary item
attributable to Core Group Common Stock and Psychiatric Group Depositary Shares
of $36,636,000, which included an impairment loss on psychiatric investments of
($11,000,000), compared with $44,379,000 in 1996. An extraordinary loss on debt
prepayment of ($11,427,000) was reported in 1997. The Company reported net
income attributable to Core Group Common Stock and Psychiatric Group Depositary
Shares of $25,209,000 in 1997 compared with $44,379,000 in 1996. See the
Consolidated Statements of Operations for the comparative gross and per share
amounts attributable to the Core Group Common Stock and the Psychiatric Group
Depositary Shares.
Rental income was $72,237,000 in 1997, an increase of $2,749,000 or 4% from
$69,488,000 in 1996. This increase was primarily attributable to rental income
from new Core Group properties acquired subsequent to the first quarter of 1996.
These property additions also resulted in an increase in depreciation and
amortization expense of $888,000 or 6% to $15,904,000 in 1997 compared with
$15,016,000 in 1996.
Mortgage interest income was $6,289,000 in 1997, an increase of $309,000 or
5% from $5,980,000 in 1996. This increase was primarily attributable to the
funding of a mortgage note receivable during 1997.
Additional rental and interest income was $12,498,000 in 1997, a net
increase of $156,000 or 1% from $12,342,000 in 1996. This net increase was
attributable to increases in additional rent of $143,000 from acute care
properties, $91,000 from rehabilitation properties and $69,000 from long-term
care properties, partially offset by a $146,000 decrease in additional rent and
interest from psychiatric properties.
Other property income of $187,000 in 1997 represents property operating
expense reimbursements from medical office/clinic facility tenants.
Other interest income increased $1,140,000 or 102% to $2,254,000 in 1997
from $1,114,000 in 1996. The increase in other interest income in 1997 was
primarily attributable to higher investable cash balances, partially offset by a
lower average balance of direct financing leases and a lower average balance of
interest-earning borrowings outstanding under revolving credit facilities
provided to a psychiatric hospital operator in 1997. Investable cash balances
were significantly higher during the first quarter of 1997 due to the temporary
investment of a portion of the proceeds of a public debt offering in late
January 1997 until used to prepay the Company's private placement debt in late
February 1997 after the prepayment notice period had expired. In addition, the
temporary investment of a portion of the proceeds of a preferred equity offering
in October 1997 resulted in significantly higher investable cash balances during
the fourth quarter of 1997.
Property operating expense was $524,000 in 1997, an increase of $480,000
from $44,000 in 1996. Approximately $290,000 of this increase was attributable
to operating expenses of medical office/clinic facilities acquired during 1997
and $190,000 was attributable to costs related to the protection and maintenance
of a psychiatric property in Florida, incurred after the hospital operator
ceased hospital operations during the second quarter of 1997.
Interest expense was $19,659,000 in 1997, a decrease of $2,183,000 or 10%
from $21,842,000 in 1996. The decrease in interest expense was primarily
attributable to a lower weighted average effective interest rate on long-term
debt during 1997, partially offset by a higher amount of long-term debt and a
lower amount of capitalized interest in 1997. In late January 1997, the Company
sold $220 million of publicly-traded unsecured senior notes with a weighted
average effective interest rate of approximately 7.56%. The Company used the
23
<PAGE> 26
proceeds of this offering to pay off the borrowings under its bank credit
facility outstanding at the time and to prepay $152 million of 11.03% private
placement debt in late February 1997 prior to its scheduled maturity, incurring
an extraordinary charge in the first quarter of 1997 of $11,427,000.
General and administrative expenses were $8,000,000 in 1997, an increase of
$573,000 or 8% from $7,427,000 in 1996. This variation was primarily
attributable to hiring of additional personnel, higher compensation and benefits
expense and an increase in travel expense, partially offset by a reduction in
director's fees and expenses, legal costs and shareholder reporting costs.
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.
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 $7,427,000 in 1996, an increase of
$631,000 or 9% from $6,796,000 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.
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
24
<PAGE> 27
such as private insurance companies, self-insured employers and health
maintenance organizations. Such operators also are subject to extensive federal,
state and local government regulation relating to their operations, and the
Company's facilities are subject to periodic inspection by governmental and
other authorities to assure continued compliance with mandated procedures,
licensure requirements under state law and certification standards under the
Medicare and Medicaid programs. A reduction in reimbursement levels under the
Medicare or Medicaid programs, a reduction in reimbursement by other third-party
payors or an operator's failure to maintain its certification under Medicare or
Medicaid programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States continues to
undergo change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed and passed by both Houses of Congress.
These plans generally include revisions to and limits on Medicare and federal
programs providing Medicaid reimbursement to state health care programs and has
had and potentially would have an adverse impact on the level of funds available
in the future to health care facilities. The Balanced Budget Act of 1997
contains extensive changes to the Medicare and Medicaid programs intended to
reduce the projected amount of increase in Medicare spending by an estimated
$115 billion and Medicaid spending by an estimated $13 billion over five years.
In addition, the Budget Act repealed certain limits on states' ability to reduce
their Medicaid reimbursement levels. See "Business -- Government Regulation and
Payor Arrangements" herein. The Budget Act has the potential to reduce
significantly federal spending on health care services provided at each of the
Company's facilities and provided by the physician tenants of the Company's
medical office/clinics facilities, and to affect revenues of the Company's
operators and tenants adversely. In particular, the Budget Act's limitations on
reimbursable costs and reductions in payment incentives and capital related
payments, as well as the change toward a prospective payment system, may have a
material adverse effect on operator revenues at the Company's rehabilitation
hospitals, LTACs, and psychiatric hospitals. The Budget Act's freeze on acute
care hospital reimbursement rates may also have an adverse effect on the
operator revenues at the Company's acute care hospitals. In addition, the
prospective payment system imposed by the Budget Act on the operators of the
Company's skilled nursing facilities may have a material adverse effect on the
operator revenues at such facilities if the operators are unable to effectively
respond to the financial incentives provided by the prospective payment system.
The Company cannot be assured that the changes effected by the Budget Act will
not have a material adverse effect on the Company's financial condition or
results of operation.
The Company's Board and management are monitoring the effect of the Budget
Act on the Company's facilities and potential changes to reimbursement programs
closely. The Company believes that the changes effected by the Budget Act and
changes proposed at the federal and state level 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 enforce compliance with program requirements aggressively 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.
25
<PAGE> 28
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/clinic facilities. 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.
Aggregate revenues from five leases maturing in February 1999 accounted for
38% of the Company's total revenues in 1997. Four of these properties are leased
to subsidiaries of AMI and the other property is leased to a subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). 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 without
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. If these leases
are not renewed and the current operators do not exercise their options to
purchase the properties, the Company will be required to seek new operators for
the properties. Based on various factors, including an assessment of the
operational and financial performance of the tenant hospitals, management of the
Company currently believes that exercise of the lease renewal options for these
facilities by AMI and Columbia is the most likely outcome, however, until actual
notice of exercise is received, such an outcome is not certain.
Fundamental changes in the psychiatric industry continue to impact
negatively the facility-specific operating cash flow at the Company's
psychiatric properties. Institutions responsible for the reimbursement of care
provided to patients who use inpatient psychiatric treatment services have
directed efforts toward decreasing their payments for such services, thereby
reducing hospital operating revenues. Some cost-cutting measures used by such
institutions include decreasing the inpatient length of stay, intensively
reviewing utilization, directing patients from inpatient care to outpatient care
and negotiating reduced reimbursement rates for services. The wider use of
psychotropic drugs also has resulted in significant declines in the average
length of stay. In addition, aggressive program compliance enforcement and
increased scrutiny of past and current billing practices has resulted in the
filing of lawsuits against some providers and significant negative publicity
which has further exacerbated the financial and operational difficulties of
providers. Although the operators of the psychiatric hospitals are responding by
increasing case management, developing lower cost outpatient and daypatient
programs and reducing operating costs, their efforts are generally not
consistently mitigating the negative impact of these fundamental psychiatric
industry changes. As a result, certain of the psychiatric hospital operators
have not consistently met their contractual payment obligations to the Company
as scheduled and the Company cannot be assured that psychiatric hospital
operators will be able to meet such payment obligations in the future.
In general, the operators of the Psychiatric Group's properties have very
limited access to financing for their operating and capital needs. To the extent
the psychiatric hospitals have increased working capital needs in the future,
the Company may be the only source of such financing.
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in
significant impairment losses on psychiatric investments and
26
<PAGE> 29
the periodic restructuring of psychiatric operator payment obligations. In 1995,
the Company restructured the leases covering its two psychiatric properties in
Florida, and during 1996, provided for the partial deferral of rental and
interest obligations related to one of these properties and the partial deferral
of rental obligations of its psychiatric property in Illinois. The Company
recorded an $11 million charge in the first quarter of 1997 for impairment of
the carrying value of its two psychiatric investments in Florida. Later in 1997,
the owner of one of the Florida hospitals ceased operations and a restructuring
of the other Florida hospital's obligations to the Company was completed. The
initial lease term of the psychiatric property in Illinois, originally scheduled
to expire in December 1997, was extended until March 31, 1998. In addition, the
$2,500,000 balance outstanding under a revolving credit agreement provided to
the operator of the Illinois property matured June 30, 1997, and, although the
operator has continued to make interest payments, the principal balance remains
past due. Negotiations with the existing operator for renewal of the current
lease and extension or repayment of the revolving credit agreement are
continuing.
Although management currently believes that the recorded investments in the
psychiatric hospitals are realizable, if the psychiatric operators are unable to
adapt to the fundamental ongoing changes in the psychiatric industry
successfully and consistently mitigate the negative impact of the ongoing
changes on their financial performance, the Company may be required to
restructure payment obligations further, identify alternative operators, pursue
alternative uses for or dispositions of the properties and/or recognize
additional impairment losses on its psychiatric investments. If the Company is
required to take any of these actions, various costs are likely to be incurred
by the Company in an effort to protect, maintain and pursue alternatives for its
investments. The Company does not currently 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 Company sold two of its
psychiatric properties in 1995 and continues to encourage each of the
psychiatric operators to pursue financing alternatives which would enable them
to acquire the properties and/or repay their borrowings from the Company, as the
case may be. Subject to the rights of the holders of the Company's Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, and any
other preferred stock of the Company then outstanding, the Company expects to
use the net proceeds of any future psychiatric property sales and/or psychiatric
operator borrowing repayments 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. The Company cannot be assured that the efforts of psychiatric
operators to obtain alternative financing will be successful or, if successful,
that the amounts of such financing would be sufficient to enable the Company to
realize the carrying amounts of its psychiatric investments.
The dividend on the Company's Psychiatric Group Depositary Shares is
determined each quarter based upon the operating results of the Company's
Psychiatric Group. Historically, the level of dividends of the Psychiatric Group
have varied quarter-to-quarter. Any significant advance of additional funds to
psychiatric hospital operators, modification of terms covering the rental or
interest obligations of its psychiatric properties or nonpayment or deferral of
such obligations as they become due likely will have an adverse impact on the
Company's Psychiatric Group results of operations and cash flows, as well as on
the quarterly dividend payment on Psychiatric Group Depositary Shares. In
addition to the foregoing, future operating results, cash flows and dividends of
the Company's Psychiatric Group will be affected by changes in the level of
additional rent and interest, interest rate adjustments on mortgage notes
receivable, the amount of additional financial advisory fees and, to the extent
necessary, various costs which might be incurred in an effort to protect,
maintain and pursue alternatives for its psychiatric investments.
The future operating results of the Company will be affected by additional
factors including the amount, timing and yield of additional real estate
investments and the competition for such investments. Operating results also
will be affected by the availability and terms of the Company's future equity
and debt financing. The Company's financing strategy to facilitate future growth
includes objectives to reduce its cost of capital over time and enhance its
liquidity and financial flexibility.
Many existing information systems currently record years in a two-digit
format and will be unable to properly interpret dates beyond the year 1999 which
could lead to business disruptions (the Year 2000 Issue). The Company has
completed a preliminary assessment of its internal information systems with
respect to the
27
<PAGE> 30
Year 2000 Issue, does not expect the costs of remediation of its internal
information systems to be material and does not expect the Year 2000 Issue, as
it relates to the Company's internal information systems, to have a material
impact on the Company's future operations or financial results. However, the
Company's future operations could be disrupted and/or its financial results
could be negatively impacted by the Year 2000 Issue if the Company's lessees and
borrowers do not adequately address the Year 2000 Issue with respect to their
information systems. As health care providers, the Company's lessees and
borrowers generally rely extensively on information systems, including systems
for capturing patient and cost information and for billing and collecting
reimbursement for health care services provided. Furthermore, the Company's
lessees and borrowers likewise are dependent on a variety of third-parties who
must also adequately address the Year 2000 Issue, including private and
government payors. Although, the Company believes that its lessees and borrowers
are generally addressing their Year 2000 Issues, it is not possible for the
Company to determine or be assured that adequate remediation of the Year 2000
Issue will be accomplished by such lessees and borrowers. Furthermore, it is not
possible for the Company to determine or be assured that the various payors and
other third-parties upon which the Company's lessees and borrowers are dependent
for reimbursement and information will accomplish adequate remediation of their
Year 2000 Issues. Accordingly, although the Company believes that the impact and
costs of the Year 2000 Issue, as it relates to its internal information systems,
will not be material, the Company cannot be assured that the Year 2000 Issues of
its lessees and borrowers, and the third-parties upon which they are dependent,
will not have a material impact on the Company's future operations and/or
financial results.
LIQUIDITY AND CAPITAL RESOURCES
As of March 19, 1998, the Company had a remaining commitment of
approximately $11.3 million to fund the development of two skilled nursing
facilities. In addition, the Company had a $35 million forward funding
commitment to develop up to five assisted living facilities to be managed by an
experienced operator of assisted living facilities. Approximately $1.3 million
has been funded under this commitment to commence development of two facilities
having total development costs of approximately $10 million. The Company has a
similar commitment of $22.5 million to develop up to 11 Alzheimer's care
facilities to be managed by an experienced operator of Alzheimer's care
facilities. The Company also has agreed to provide $9.4 million of real estate
financing to an experienced operator of long-term acute care facilities for
which there are currently no identified projects.
The Company has continued to increase its liquidity and enhance its
financial flexibility. In January 1997, the Company completed a $220 million
public unsecured debt offering, issuing $100 million of five-year senior notes
and $120 million of ten-year senior notes. The Company used the net proceeds to
pay off all outstanding borrowings under its bank credit facility at the time
and to prepay all of its $152 million of outstanding private placement debt in
late February 1997. In October 1997, the Company completed a $100 million
preferred equity offering and used the net proceeds to pay off all outstanding
borrowings under its bank credit facility at the time and used the remaining
proceeds to fund Core Group investments. In December 1997, the Company closed on
a new $250 million unsecured revolving bank credit facility which matures on
December 31, 2000. In February 1998, the Company completed an offering of
353,201 additional shares of Core Group Common Stock resulting in net proceeds
of approximately $9.5 million. As of March 19, 1998, the Company had $15 million
of outstanding borrowings under its $250 million bank credit facility and had
$1.5 million in cash and short-term investments. The Company's total
indebtedness as of March 19, 1998 was $258.8 million. The Company expects to
utilize its bank credit facility to fund its future Core Group acquisitions and
its other commitments. The Company may incur additional indebtedness or
refinance existing indebtedness if the Company determines that opportunities to
pursue such transactions would be attractive. The Company currently believes it
has sufficient capital to meet its commitments and that its cash flow and
liquidity will continue to be sufficient to fund current operations and to
provide for the payment of dividends to stockholders in compliance with the
applicable sections of the Internal Revenue Code governing real estate
investment trusts.
28
<PAGE> 31
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. This
report includes and incorporates by reference statements that are not purely
historical and are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
statements other than historical fact contained in this report, including
without limitation statements regarding rent or interest to be received from the
Company's operators and tenants, plans with respect to individual facilities,
expectations with respect to the specific terms and renewals of leases of the
Company's facilities, the Company's anticipated dividend payout ratios, the
Company's liquidity position, projected expenses associated with maintaining
individual properties, the Company's ability to realize the recorded amounts of
its investments and the potential effect of new or existing regulations on the
operations conducted at the Company's facilities, are forward-looking
statements. All forward-looking statements included or incorporated by reference
in this report are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update such forward-looking
statements. Although the Company believes that the assumptions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct or that the
Company will take any actions that may presently be planned.
Certain factors that could cause actual results to differ materially from
those expected include, among others: the financial success of the operations
conducted at the Company's facilities and the financial strength of the
operators and tenants of such facilities, the continuing ability of operators
and tenants to meet their obligations to the Company under existing or
restructured agreements, changes in operators or ownership of operators, the
viability of alternative uses for the Company's properties when necessary,
changes in government policy relating to the health care industry including
reductions in reimbursement levels under the Medicare and Medicaid programs,
operators' and tenants' 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, a downturn in market lease
rates for medical office space, higher than expected costs associated with the
maintenance and operation of the Company's medical office/clinic facilities,
higher than expected turnover at the Company's medical office/clinic facilities,
demand for the services provided 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 "-- Future
Operating Results" herein.
OPERATING RESULTS
1997 Compared to 1996
In 1997, the Core Group reported net income before extraordinary item
attributable to Core Group Common Stock of $42,554,000, or $1.80 per share on a
diluted basis, an increase of $3,754,000 or 10% compared with $38,800,000, or
$1.65 per share on a diluted basis, in 1996. An extraordinary loss on debt
prepayment of ($11,427,000), or ($.49) per share on a diluted basis, was
reported in 1997. The Core Group reported net income attributable to Core Group
Common Stock of $31,127,000, or $1.31 per share on a diluted basis, in 1997
compared with $38,800,000, or $1.65 per share on a diluted basis, in 1996.
Rental income was $70,604,000 in 1997, an increase of $3,105,000 or 5% from
$67,499,000 in 1996. This increase was primarily attributable to rental income
from new properties acquired subsequent to the first
29
<PAGE> 32
quarter of 1996. These property additions also resulted in an increase in
depreciation and amortization expense of $881,000 or 6% to $15,153,000 in 1997
compared with $14,272,000 in 1996.
Mortgage interest income of $217,000 in 1997 was attributable to the
funding of a mortgage note receivable during 1997.
Additional rental income was $11,833,000 in 1997, an increase of $303,000
or 3% from $11,530,000 in 1996. This increase was attributable to increases in
additional rent of $143,000 from acute care properties, $91,000 from
rehabilitation properties and $69,000 from long-term care properties.
Other property income of $187,000 in 1997 represents property operating
expense reimbursements from medical office/clinic facility tenants.
Other interest income increased $1,187,000 or 165% to $1,908,000 in 1997
from $721,000 in 1996. The increase in other interest income in 1997 was
primarily attributable to higher investable cash balances, partially offset by a
lower average balance of direct financing leases. Investable cash balances were
significantly higher during the first quarter of 1997 due to the temporary
investment of a portion of the proceeds of a public debt offering in late
January 1997 until used to prepay the Company's private placement debt in late
February 1997 after the prepayment notice period had expired. In addition, the
temporary investment of a portion of the proceeds of a preferred equity offering
in October 1997 resulted in significantly higher investable cash balances during
the fourth quarter of 1997.
Interest income on inter-Group loans to the Psychiatric Group was
$1,553,000 in 1997, a decrease of $126,000 or 8% from $1,679,000 in 1996. This
decrease reflects a lower average balance outstanding on loans to the
Psychiatric Group as a result of repayments by the Psychiatric Group from its
available undistributed cash flow.
Property operating expense was $334,000 in 1997, an increase of $290,000
from $44,000 in 1996. This increase was attributable to operating expenses
associated with investments in medical office/clinic facilities during 1997.
Interest expense was $19,659,000 in 1997, a decrease of $2,183,000 or 10%
from $21,842,000 in 1996. The decrease in interest expense was primarily
attributable to a lower weighted average effective interest rate on long-term
debt during 1997, partially offset by a higher amount of long-term debt and a
lower amount of capitalized interest in 1997. In late January 1997, the Company
sold $220 million of publicly-traded unsecured senior notes with a weighted
average effective interest rate of approximately 7.56%. The Company used the
proceeds of this offering to pay off the borrowings under its bank credit
facility outstanding at the time and to prepay $152 million of 11.03% private
placement debt in late February 1997 prior to its scheduled maturity, incurring
an extraordinary charge in the first quarter of 1997 of $11,427,000.
General and administrative expenses were $6,860,000 in 1997, an increase of
$605,000 or 10% from $6,255,000 in 1996. This variation was attributable to an
increase in the Company's consolidated general and administrative expenses which
are allocated between the Core Group and Psychiatric Group primarily based on
revenues, and an increase in Core Group revenues relative to the Company's
consolidated revenues. The increase in the Company's consolidated general and
administrative expenses affecting the Core Group was primarily attributable to
hiring of additional personnel, higher compensation and benefits expense and an
increase in travel expense, partially offset by a reduction in director's fees
and expenses, legal costs and shareholder reporting costs.
1996 Compared to 1995
In 1996, the Core Group reported net income of $38,800,000, or $1.65 per
share on a diluted basis, an increase of $2,693,000 or 7% compared with
$36,107,000, or $1.69 per share on a diluted basis, in 1995. Net income in 1995
included a premium of $2,652,000, or $.12 per share on a diluted basis, 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
30
<PAGE> 33
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.
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 $6,255,000 in 1996, an increase of
$400,000 or 7% from $5,855,000 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.
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A reduction in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States continues to
undergo change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed and passed by both Houses of Congress.
These plans generally include revisions to and limits on Medicare and federal
programs providing Medicaid reimbursement to state health care programs and
potentially would have an adverse impact on the level of funds available in the
future to health care facilities. The Balanced Budget Act of 1997 contains
extensive changes to the Medicare and Medicaid programs intended to reduce the
projected amount of increase in Medicare spending by an estimated $115 billion
and Medicaid spending by an estimated $13 billion over five years. In addition,
the Budget Act repealed certain
31
<PAGE> 34
limits on states' ability to reduce their Medicaid reimbursement levels. See
"Business -- Government Regulation and Payor Arrangements" herein. The Budget
Act has the potential to reduce significantly federal spending on health care
services provided at each of the Core Group's facilities and provided by the
physician tenants of the Core Group's medical office/clinics facilities, and to
affect revenues of the Core Group's operators and tenants adversely. In
particular, the Budget Act's limitations on reimbursable costs and reductions in
payment incentives and capital related payments, as well as the change toward a
prospective payment system, may have a material adverse effect on operator
revenues at the Core Group's rehabilitation hospitals and LTACs. The Budget
Act's freeze on acute care hospital reimbursement rates may also have an adverse
effect on the operator revenues at the Core Group's acute care hospitals. In
addition, the prospective payment system imposed by the Budget Act on the
operators of the Core Group's skilled nursing facilities may have a material
adverse effect on the operator revenues at such facilities if the operators are
unable to effectively respond to the financial incentives provided by the
prospective payment system. The Company cannot be assured that the changes
effected by the Budget Act will not have a material adverse effect on the Core
Group's financial condition or results of operation.
The Company's Board and management are monitoring the effect of the Budget
Act on the Core Group's facilities and potential changes to reimbursement
programs closely. The Company believes that the changes effected by the Budget
Act and changes proposed at the federal and state level 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 enforce compliance with program requirements aggressively and to pursue
providers that they believe have not complied with such requirements. Outpatient
business is expected to increase as advances in medical technologies allow more
procedures to be performed on an outpatient basis and as payors continue to
direct more patients from inpatient care to outpatient care. In addition, the
entrance of insurance companies into managed care programs is accelerating the
introduction of managed care in new localities, and states and insurance
companies continue to negotiate actively the amounts they will pay for services.
Moreover, the percentage of health care services that are reimbursed under the
Medicare and Medicaid programs continues to increase as the population ages and
as states expand their Medicaid programs. Continued eligibility to participate
in these programs is crucial to a provider's financial strength. As a result of
the foregoing, the revenues and margins may decrease at the Core Group's
facilities.
Notwithstanding the potential for increasing government regulation, the
Company believes that health care will continue to be delivered on a local and
regional basis and that well-managed, high-quality, cost-controlled facilities
will continue to be an integral part of local and regional health care delivery
systems. The Company also believes that certain acute care hospitals will need
to reconfigure or expand existing facilities or to affiliate themselves with
other providers so as to become part of comprehensive and cost-effective health
care systems. Such systems likely will include lower cost treatment settings,
such as ambulatory care clinics, outpatient surgery centers, skilled nursing
facilities and medical office/clinic facilities. In general, the Core Group
facilities are part of local or regional health care delivery systems or are in
the process of becoming integrated into such systems.
The Core Group's future operating results could be affected by the
operating performance of the Core Group's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Core
Group's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios. In addition, financial effects arising from the
Psychiatric Group that affect the Company's consolidated results of
32
<PAGE> 35
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.
Aggregate revenues from five leases maturing in February 1999 accounted for
41% of the Core Group's total revenues in 1997. 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 without 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. If these leases are not
renewed and the current operators do not exercise their options to purchase the
properties, the Company will be required to seek new operators for the
properties. Based on various factors, including an assessment of the operational
and financial performance of the tenant hospitals, management of the Company
currently believes that exercise of the lease renewal options for these
facilities by AMI and Columbia is the most likely outcome, however, until actual
notice of exercise is received, such an outcome is not certain.
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.
Many existing information systems currently record years in a two-digit
format and will be unable to properly interpret dates beyond the year 1999 which
could lead to business disruptions (the Year 2000 Issue). The Company has
completed a preliminary assessment of its internal information systems with
respect to the Year 2000 Issue, does not expect the costs of remediation of its
internal information systems to be material and does not expect the Year 2000
Issue, as it relates to the Company's internal information systems, to have a
material impact on the future operations or financial results of the Company's
Core Group. However, the future operations of the Company's Core Group could be
disrupted and/or its financial results could be negatively impacted by the Year
2000 Issue if the Company's Core Group lessees and borrowers do not adequately
address the Year 2000 Issue with respect to their information systems. As health
care providers, the Company's Core Group lessees and borrowers generally rely
extensively on information systems, including systems for capturing patient and
cost information and for billing and collecting reimbursement for the health
care services provided. Furthermore, the Company's Core Group lessees and
borrowers likewise are dependent on a variety of third-parties who must also
adequately address the Year 2000 Issue, including private and government payors.
Although, the Company believes that the Core Group lessees and borrowers are
generally addressing their Year 2000 Issues, it is not possible for the Company
to determine or be assured that adequate remediation of the Year 2000 Issue will
be accomplished by such lessees and borrowers. Furthermore, it is not possible
for the Company to determine or be assured that the various payors and other
third-parties upon which the Company's Core Group lessees and borrowers are
dependent for reimbursement and information will accomplish adequate remediation
of their Year 2000 Issues. Accordingly, although the Company believes that the
impact and costs of the Year 2000 Issue, as it relates to its internal
information systems, will not be material to the Company's Core Group, the
Company cannot be assured that the Year 2000 Issues of its Core Group lessees
and borrowers, and the third-parties upon which they are dependent, will not
have a material impact on the future operations and/or financial results of the
Company's Core Group.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Core Group had $3,379,000 outstanding under
its revolving inter-Group loan to the Psychiatric Group. Under management
policies currently in effect, the Core Group may provide
33
<PAGE> 36
the Psychiatric Group with revolving inter-Group loans of up to $7,870,000. In
addition, as of December 31, 1997, the Core Group had $9,175,000 in fixed rate
inter-Group loans to the Psychiatric Group.
As of March 19, 1998, the Core Group had a remaining commitment of
approximately $11.3 million to fund the development of two skilled nursing
facilities. In addition, the Company had a $35 million forward funding
commitment to develop up to five assisted living facilities to be managed by an
experienced operator of assisted living facilities. Approximately $1.3 million
has been funded under this commitment to commence development of two facilities
having total development costs of approximately $10 million. The Core Group has
a similar commitment of $22.5 million to develop up to 11 Alzheimer's care
facilities to be managed by an experienced operator of Alzheimer's care
facilities. The Core Group also has agreed to provide $9.4 million of real
estate financing to an experienced operator of long-term acute care facilities
for which there are currently no identified projects.
The Company completed a $220 million public unsecured debt offering,
issuing $100 million of five-year senior notes and $120 million of ten-year
senior notes. The Company used the net proceeds to pay off all outstanding
borrowings under its bank credit facility at the time and to prepay all of its
$152 million of outstanding private placement debt in late February 1997. In
October 1997, the Company completed a $100 million preferred equity offering and
used the net proceeds to pay off all outstanding borrowings under its bank
credit facility at the time and used the remaining proceeds to fund Core Group
investments. In December 1997, the Company closed on a new $250 million
unsecured revolving bank credit facility which matures on December 31, 2000. In
February 1998, the Company completed an offering of 353,201 additional shares of
Core Group Common Stock resulting in net proceeds of approximately $9.5 million.
As of March 19, 1998, the Company had $15 million of outstanding borrowings
under its $250 million bank credit facility and had $1.5 million in cash and
short-term investments. The Company's total indebtedness as of March 19, 1998
was $258.8 million. The Company expects to utilize its bank credit facility to
fund its future Core group acquisitions and its other commitments. The Company
may incur additional indebtedness or refinance existing indebtedness if the
Company determines that opportunities to pursue such transactions would be
attractive. The Company currently believes it has sufficient capital to meet its
commitments and that its cash flow and liquidity will continue to be sufficient
to fund current operations and to provide for the payment of dividends to
stockholders in compliance with the applicable sections of the Internal Revenue
Code governing real estate investment trusts.
34
<PAGE> 37
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. This
report includes and incorporates by reference statements that are not purely
historical and are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
statements other than historical fact contained in this report, including
without limitation statements regarding rent or interest to be received from the
Company's operators and tenants, plans with respect to individual facilities,
expectations with respect to the specific terms and renewals of leases of the
Company's facilities, the Company's anticipated dividend payout ratios, the
Company's liquidity position, projected expenses associated with maintaining
individual properties, the Company's ability to realize the recorded amounts of
its investments and the potential effect of new or existing regulations on the
operations conducted at the Company's facilities, are forward-looking
statements. All forward-looking statements included or incorporated by reference
in this report are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update such forward-looking
statements. Although the Company believes that the assumptions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct or that the
Company will take any actions that may presently be planned.
Certain factors that could cause actual results to differ materially from
those expected include, among others: the financial success of the operations
conducted at the Company's facilities and the financial strength of the
operators of such facilities, the continuing ability of operators to meet their
obligations to the Company under existing or restructured agreements, changes in
operators or ownership of operators, the viability of alternative uses for the
Company's properties when necessary, changes in government policy relating to
the health care industry including reductions in reimbursement levels under the
Medicare and Medicaid programs, operators' continued eligibility to participate
in the Medicare or Medicaid programs, reductions in reimbursement by other
third-party payors, lower occupancy levels at the Company's facilities, demand
for the services provided 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 "-- Future
Operating Results" herein.
OPERATING RESULTS
1997 Compared to 1996
In 1997, the Psychiatric Group reported a net loss of ($5,918,000), or
($2.84) per Psychiatric Group Depositary Share on a diluted basis, compared with
net income of $5,579,000, or $2.67 per Psychiatric Group Depositary Share on a
diluted basis, in 1996. The net loss in 1997 included an impairment loss on real
estate investments and other notes receivable of ($11,000,000), or ($5.28) per
Psychiatric Group Depositary Share on a diluted basis.
Rental income was $1,633,000 in 1997, a decrease of $356,000 or 18% from
$1,989,000 in 1996. The decrease in rental income was primarily attributable to
the nonpayment and subsequent reduction of base rent on one of the Florida
properties during 1997, partially offset by the partial deferral of base rent on
the Illinois property during 1996.
35
<PAGE> 38
Additional rental and interest income was $665,000 in 1997, a decrease of
$147,000 or 18% from $812,000 in 1996. This decrease was primarily attributable
to the nonpayment of additional rent by one of the Florida properties during
1997.
Other interest income decreased $47,000 or 12% to $346,000 in 1997 from
$393,000 in 1996. The decrease in other interest income was primarily
attributable to a lower average balance of interest-earning borrowings
outstanding under revolving credit facilities provided to psychiatric hospital
operators in 1997.
Property operating expense of $190,000 in 1997 represents costs related to
the protection and maintenance of one of the properties in Florida, incurred
after the hospital owner ceased hospital operations during the second quarter of
1997.
Interest expense on inter-Group loans from the Core Group was $1,553,000 in
1997, a decrease of $126,000 or 8% from $1,679,000 in 1996. This decrease
reflects a lower average balance outstanding on loans from the Core Group as a
result of repayments by the Psychiatric Group from its available undistributed
cash flow.
General and administrative expenses were $1,140,000 in 1997, a decrease of
$32,000 or 3% from $1,172,000 in 1996. The Company's consolidated general and
administrative expenses are allocated between the Core Group and Psychiatric
Group primarily based on revenues, however significant costs directly related to
either Group are specifically charged to the applicable Group. Costs allocated
to the Psychiatric Group based on revenues and direct costs charged to the
Psychiatric Group both decreased in 1997 compared to 1996. The Psychiatric Group
was specifically charged for $463,000 in 1997 for financial advisory services
provided primarily by an investment banking firm which included supplemental
monitoring of the performance of the Psychiatric Group's properties and
assistance in addressing operational and cash flow difficulties of certain
operators of the properties. On a comparative basis, general and administrative
expenses in 1996 included $467,000 of such financial advisory costs.
1996 Compared to 1995
In 1996, the Psychiatric Group reported net income of $5,579,000, or $2.67
per Psychiatric Group Depositary Share on a diluted basis, a decrease of
$695,000 or 11% compared with net income of $6,274,000, or $3.00 per Psychiatric
Group Depositary Share on a diluted basis, 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 of $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.
36
<PAGE> 39
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.
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.
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A reduction in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States continues to
undergo change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed and passed by both Houses of Congress.
These plans generally include revisions to and limits on Medicare and federal
programs providing Medicaid reimbursement to state health care programs and
potentially would have an adverse impact on the level of funds available in the
future to health care facilities. The Balanced Budget Act of 1997 contains
extensive changes to the Medicare and Medicaid programs intended to reduce the
projected amount of increase in Medicare spending by an estimated $115 billion
and Medicaid spending by an estimated $13 billion over five years. In addition,
the Budget Act repealed certain limits on states' ability to reduce their
Medicaid reimbursement levels. See "Business -- Government Regulation and Payor
Arrangements" herein. The Budget Act has the potential to reduce significantly
federal spending on health care services provided at each of the Psychiatric
Group's facilities, and to affect revenues of the Psychiatric Group's operators
adversely. In particular, the Budget Act's limitations on reimbursable costs and
reductions in payment incentives and capital related payments, as well as the
change toward a prospective payment system, may have a material adverse effect
on operator revenues at the Psychiatric Group's hospitals. The Company cannot be
assured that the changes effected by the Budget Act will not have a material
adverse effect on the Psychiatric Group's financial condition or results of
operation.
The Company's Board and management are monitoring the effect of the Budget
Act on the Psychiatric Group's facilities and potential changes to reimbursement
programs closely. The Company believes that the changes effected by the Budget
Act and changes proposed at the federal and state level may pose risks for
certain institutions that are unwilling or unable to respond.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per capita
basis to a defined group of covered parties). Furthermore, federal, state and
third-party payors continue to propose and adopt various cost containment
measures that
37
<PAGE> 40
restrict the scope of reimbursable health care services and limit increases in
reimbursement rates for such services. Payors also are continuing to enforce
compliance with program requirements aggressively and to pursue providers that
they believe have not complied with such requirements. Outpatient business is
expected to increase as advances in medical technologies allow more procedures
to be performed on an outpatient basis and as payors continue to direct more
patients from inpatient care to outpatient care. In addition, the entrance of
insurance companies into managed care programs is accelerating the introduction
of managed care in new localities, and states and insurance companies continue
to negotiate actively the amounts they will pay for services. Moreover, the
percentage of health care services that are reimbursed under the Medicare and
Medicaid programs continues to increase as the population ages and as states
expand their Medicaid programs. Continued eligibility to participate in these
programs is crucial to a provider's financial strength. As a result of the
foregoing, the revenues and margins may decrease at the Psychiatric Group's
facilities.
Fundamental changes in the psychiatric industry continue to impact
negatively the facility-specific operating cash flow at the Psychiatric Group's
properties. Institutions responsible for the reimbursement of care provided to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions include
decreasing the inpatient length of stay, intensively reviewing utilization,
directing patients from inpatient care to outpatient care and negotiating
reduced reimbursement rates for services. The wider use of psychotropic drugs
also has resulted in significant declines in the average length of stay. In
addition, aggressive program compliance enforcement and increased scrutiny of
past and current billing practices has resulted in the filing of lawsuits
against some providers and significant negative publicity which has further
exacerbated the financial and operational difficulties of providers. Although
the operators of the psychiatric hospitals are responding by increasing case
management, developing lower cost outpatient and daypatient programs and
reducing operating costs, their efforts are generally not consistently
mitigating the negative impact of these fundamental psychiatric industry
changes. As a result, certain of the Psychiatric Group hospital operators have
not consistently met their contractual payment obligations to the Psychiatric
Group as scheduled and the Psychiatric Group cannot be assured that hospital
operators will be able to meet such payment obligations in the future.
In general, the operators of the Psychiatric Group's properties have very
limited access to financing for their operating and capital needs. The
Psychiatric Group provided such financing under a revolving credit agreement to
the operator of one of its psychiatric properties. As of December 31, 1997,
outstanding borrowings under such agreement totaled $2,500,000 which amount
remains outstanding even though the financing matured June 30, 1997. In the
past, the Psychiatric Group has provided similar financing to other operators of
its properties which have been unable to pay off their outstanding borrowings.
The Psychiatric Group cannot be assured that the operator currently borrowing
under a revolving credit agreement will be able to secure replacement financing
from third-party lenders or to pay off its outstanding borrowings. To the extent
the operators of the Psychiatric Group's properties have increased working
capital needs in the future, the Psychiatric Group may be the only source of
such financing. In the event the Company's Board of Directors determines that it
is appropriate to provide additional working capital financing to a psychiatric
hospital operator, it may cause the Core Group to make revolving inter-Group
loans to the Psychiatric Group to fund such financing (to the extent consistent
with its then-existing policies), although the Company's Board of Directors is
under no obligation to do so.
During 1995, the hospital owner of the Psychiatric Group's two Florida
properties, Northpointe and The Retreat, was 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.
38
<PAGE> 41
During 1996, the Psychiatric Group modified its agreements with the owner
to allow for the deferral of rent and interest payments of Northpointe while
certain restructuring and restaffing of the facility occurred. Pursuant to the
deferral arrangements, Northpointe's monthly base rent payments of $50,000 were
deferred from February 1996 through September 1996 and such deferred payments
were scheduled to become payable twelve months from the month of deferral. In
accordance with the terms of the deferral arrangements, Northpointe resumed
making its full monthly base rent payments of $50,000 on October 1, 1996. In
addition, Northpointe's monthly interest payments of $16,600 were deferred from
February 1996 until March 1, 1997 on which date all such deferred interest was
scheduled to be paid in full. Northpointe's deferred obligations were not
recognized as income by the Psychiatric Group.
In late 1996, the owner of Northpointe and The Retreat was named, together
with other operators of other psychiatric facilities in Florida, in a lawsuit
filed by several large insurance companies alleging widespread irregularities
with respect to operations in years prior to 1995. Subsequently, adverse
publicity from the lawsuit materially exacerbated the operational and financial
difficulties of Northpointe and The Retreat.
During 1997, the census at Northpointe fell significantly below the levels
projected by the owner at the end of 1996 to a level which made it appear
unlikely that the owner could continue operations at the facility. Although
Northpointe had made its monthly base rent payments of $50,000 during the fourth
quarter of 1996 and for January 1997, it was unable to pay its subsequent
monthly base rent and interest obligations or its deferred base rent and
interest obligations. Adverse publicity from the aforementioned lawsuit also
began having a negative impact on The Retreat resulting in declining census and
deterioration of its cash flow during 1997. Although The Retreat had made all of
its rent and interest payments to the Psychiatric Group in 1996 and in 1997
through April, The Retreat made its February 1997 base rent payment from lease
reserve funds and was unable to pay its $45,000 additional rent payment for the
first quarter of 1997 and its $92,000 base rent payment for May 1997. The
volatile circumstances at The Retreat and deterioration in cash flows and census
levels appeared likely to preclude the owner from continuing operations at the
facility. The owner of these two hospitals and the Psychiatric Group explored a
range of options for the facilities, including the transfer of the hospitals to
new operators, closing the facilities, conversion of the facilities to an
alternative use or sale of the properties. As a result of this review, the
Psychiatric Group recorded an $11,000,000 charge in the first quarter of 1997
for impairment of the carrying value of these two investments. Of this amount,
$5,100,000 related to the Psychiatric Group's investment in Northpointe and
included a $1,675,000 reserve against the entire unpaid balance under a
revolving credit agreement and a $3,425,000 reduction in the carrying value of
its net real estate investment in Northpointe to its estimated fair value of
$2,000,000. The remaining impairment charge of $5,900,000 related to the
Psychiatric Group's investment in The Retreat and included a $49,000 reserve
against the entire unpaid balance under a revolving credit agreement and a
$5,851,000 reduction in the carrying value of its net real estate investment in
The Retreat to its estimated fair value of $3,400,000.
The financial and operational problems at the two Florida hospitals
continued to worsen during 1997. The owner of the Northpointe hospital ceased
operations during the second quarter of 1997. The Psychiatric Group will incur
approximately $75,000 per quarter ($.04 per Psychiatric Group Depositary Share
on a diluted basis) to protect and maintain the property while various
alternatives are evaluated and pursued, including conversion of the facility to
an alternative use or sale of the property. A restructuring of The Retreat's
obligations to the Psychiatric Group was completed shortly after the end of the
third quarter of 1997. The Retreat's restructured base rent is $35,000 per month
($105,000 per quarter or $.05 per Psychiatric Group Depositary Share on a
diluted basis) and additional rent will not accrue or be payable until August 1,
2000. The Psychiatric Group received $105,000 ($.05 per Psychiatric Group
Depositary Share on a diluted basis) for past base rent from The Retreat and
such payment was recognized as income in the third quarter. In addition, the
Psychiatric Group received a note for approximately $500,000, representing a
consolidation of previous obligations owed by The Retreat. The note has a term
of 32 months with monthly payments of approximately $18,000 that commenced on
January 1, 1998. The note has not been recognized for financial accounting
purposes. The Psychiatric Group has received all base rent payments under the
restructured terms through March 1998 but has only received consolidation note
payments through February 1998. Although the
39
<PAGE> 42
restructured agreement with The Retreat is a positive step in stabilizing the
cash flow and operations of this facility, the Psychiatric Group cannot be
assured that The Retreat will be able to continue to meet its restructured
obligations or to continue operations, even if there is a change in the owner or
operator of the facility or if the Psychiatric Group provides additional
financial assistance. The Psychiatric Group is continuing to explore a range of
options for each of the two Florida properties, including the transfer of the
hospitals to new operators, conversion of the facilities to an alternative use
or sale of the properties. Due to the complexity and time involved in evaluating
its options, the Psychiatric Group has not yet reached a decision as to its
ultimate course of action. In light of the volatile circumstances of these two
properties, the Psychiatric Group cannot be assured that further impairment
losses on these investments will not be required.
In the first quarter of 1996, Rock Creek Center (RCC) in Illinois
experienced certain documentation and procedural deficiencies that resulted in
the denial of a substantial amount of Medicare receivables and a substantial
negative adjustment to the hospital's 1995 Medicare cost report and 1996 interim
Medicare reimbursement rate. These payor reimbursement issues, combined with
lower than expected census during the first quarter of 1996, had an adverse
impact on RCC's cash flow and its ability to fund its rental and interest
obligations to the Psychiatric Group in 1996 as they became due. The net book
value of the Psychiatric Group's investment in RCC, including outstanding
borrowings under a revolving credit agreement, as of December 31, 1997 totaled
$7,675,000. In 1996, the Psychiatric Group reached an agreement with the
operator for the deferral of base rent payments while the operator took certain
actions to stabilize operations and implemented its revised business plan. After
a period of partial rental payments, full monthly base rent payments of
approximately $83,000 have been paid since November 1996. RCC's deferred rental
obligations of approximately $333,000 are to be paid in the future only when the
facility's cash exceeds a specified level and are not recognized as income by
the Psychiatric Group until such time as they are paid. To date, no deferred
rental obligations have been paid and the Psychiatric Group cannot be assured
that RCC will be able to pay any of the deferred rental obligations in the
future.
The initial term of the RCC lease, originally scheduled to expire in
December 1997, was extended until March 31, 1998. Although the original lease
agreement provided the operator with an option to renew the lease for an
additional five-year term at fair market rental, the operator did not exercise
that option. However, negotiations for a renewal of the current lease with the
existing operator are continuing and other operators have expressed interest in
the facility. The Psychiatric Group believes that either the current lease will
be renewed with the existing operator or the facility will be leased to a new
operator. The Psychiatric Group cannot be assured that either of these will be
accomplished or that, if accomplished, the annual minimum rent payments will be
at the current level of $1,000,000. Although, the $2,500,000 balance outstanding
under RCC's revolving credit agreement matured June 30, 1997, the operator has
continued to make interest payments. The Psychiatric Group is considering the
operator's suggestion to extend the maturity of the revolving credit agreement
to correspond with the expiration of a renewed lease term, if such a renewed
lease is accomplished. Should the current lease not be renewed or the revolving
loan not be repaid or extended with the existing operator and a facility lease
with a new operator is not accomplished, a significant negative impact to the
Psychiatric Group likely will result. The Psychiatric Group's total revenue from
the RCC investment for the fourth quarter and full year 1997 on a diluted basis
was $.18 per Psychiatric Group Depositary Share and $.69 per Psychiatric Group
Depositary Share, respectively.
The operator of the two New York Four Winds facilities has been working to
develop an integrated behavioral health care delivery system in lower and upper
New York state. Such a system has been intended to create a cost-effective
response to the potential negative reimbursement consequences of the expected
movement to a managed Medicaid care environment within New York which is likely
to accelerate during 1998. However, it is not possible for the Psychiatric Group
to predict the impact of such changes or whether the operator's system will be
successful in such an environment, and the Psychiatric Group cannot be assured
that some restructuring of the operator's obligations to the Psychiatric Group
will not be required for the operator to remain competitive in such an
environment.
Although management currently believes that the recorded amounts of its
psychiatric investments are realizable, if the psychiatric operators are unable
to adapt to the fundamental ongoing changes in the psychiatric industry
successfully and consistently mitigate the negative impact of the ongoing
changes on their
40
<PAGE> 43
financial performance, the Psychiatric Group may be required to restructure
payment obligations further, identify alternative operators, pursue alternative
uses for or dispositions of the properties and/or recognize additional
impairment losses on its psychiatric investments. If the Psychiatric Group is
required to take any of these actions, various costs are likely to be incurred
by the Psychiatric Group in an effort to protect, maintain and pursue
alternatives for its investments. The Psychiatric Group does not currently
intend to make new investments, and over time, may sell, restructure or seek
other means to reduce its investments. The Psychiatric Group sold two of its
psychiatric properties in 1995 and continues to encourage each of the
psychiatric operators to pursue financing alternatives which would enable them
to acquire the properties and/or repay their borrowings from the Psychiatric
Group, as the case may be. Subject to the rights of the holders of the Company's
Series B Depositary Shares, and the Series B Preferred Stock represented
thereby, and any other preferred stock of the Company then outstanding, the
Psychiatric Group expects to use the net proceeds of any future property sales
and/or operator borrowing repayments 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. The Psychiatric Group cannot be assured that the efforts of
psychiatric operators to obtain alternative financing will be successful or, if
successful, that the amounts of such financing would be sufficient to enable the
Psychiatric Group to realize the carrying amounts of its investment. The Company
continues to retain an investment banking firm to provide financial advisory
services to the Psychiatric Group. These services include supplemental
monitoring of the performance of individual assets, assistance in potential
sales or restructurings of particular investments and continuing assessments of
available strategic alternatives for the portfolio. The cost of the financial
advisory services are specifically charged to the operating results of the
Psychiatric Group.
The Psychiatric Group's dividend is determined quarterly based upon each
quarter's operating results. Historically, the level of dividends of the
Psychiatric Group have varied quarter-to-quarter. Any significant advance of
additional funds to operators of the Psychiatric Group's properties,
modification of terms covering the rental or interest obligations of its
properties or nonpayment or deferral of such obligations as they become due
likely will have an adverse impact on the Psychiatric Group results of
operations and cash flows, as well as on the quarterly dividend payment on
Psychiatric Group Depositary Shares. In addition to the foregoing, future
operating results, cash flows and dividends of the Psychiatric Group will be
affected by changes in the level of additional rent and interest, interest rate
adjustments on mortgage notes receivable, the amount of additional financial
advisory fees and, to the extent necessary, various costs which might be
incurred in an effort to protect, maintain and pursue alternatives for its
investments.
Many existing information systems currently record years in a two-digit
format and will be unable to properly interpret dates beyond the year 1999 which
could lead to business disruptions (the Year 2000 Issue). The Company has
completed a preliminary assessment of its internal information systems with
respect to the Year 2000 Issue, does not expect the costs of remediation of its
internal information systems to be material and does not expect the Year 2000
Issue, as it relates to the Company's internal information systems, to have a
material impact on the future operations or financial results of the Company's
Psychiatric Group. However, the future operations of the Company's Psychiatric
Group could be disrupted and/or its financial results could be negatively
impacted by the Year 2000 Issue if the Company's Psychiatric Group lessees and
borrowers do not adequately address the Year 2000 Issue with respect to their
information systems. As health care providers, the Company's Psychiatric Group
lessees and borrowers generally rely extensively on information systems,
including systems for capturing patient and cost information and for billing and
collecting reimbursement for health care services provided. Furthermore, the
Company's Psychiatric Group lessees and borrowers likewise are dependent on a
variety of third-parties who must adequately address the Year 2000 Issue,
including private and government payors. Although the Company believes that the
Psychiatric Group lessees and borrowers are generally addressing their Year 2000
Issues, it is not possible for the Company to determine or be assured that
adequate remediation of the Year 2000 Issue will be accomplished by such lessees
and borrowers. Furthermore, it is not possible for the Company to determine or
be assured that the various payors and other third-parties upon which the
Company's Psychiatric Group lessees and borrowers are dependent for
reimbursement and information will accomplish adequate remediation of their Year
2000 Issues. Accordingly, although the Company believes that the impact and
costs of the Year 2000 Issue, as it relates to its internal information systems,
will not be material to the Company's Psychiatric Group, the
41
<PAGE> 44
Company cannot be assured that the Year 2000 Issues of its Psychiatric Group
lessees and borrowers, and the third-parties upon which they are dependent, will
not have a material impact on the future operations and/or financial results of
the Company's Psychiatric Group.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Psychiatric Group had $3,379,000 and $9,175,000
outstanding under its revolving inter-Group loan from the Core Group and its
fixed rate inter-Group loan from the Core Group, respectively. The Psychiatric
Group is required to use the net proceeds from the disposition of Psychiatric
Group assets to pay down its outstanding revolving inter-Group loan (to the
extent of the psychiatric hospital operator borrowings under revolving credit
agreements associated with the asset or assets sold) with any excess used to pay
down the balance outstanding under the fixed rate inter-Group loan. The
Psychiatric Group reduced the combined balance of the revolving inter-Group and
fixed rate inter-Group loans by $15,150,000 in the first quarter of 1995 with
proceeds from 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 at any time in the sole
discretion of the Company's Board of Directors, the aggregate revolving inter-
Group loans owed by the Psychiatric Group to the Core Group are limited to a
maximum of $7,870,000 at any one time outstanding, which limit is to be reduced
dollar-for-dollar by any permanent repayment in the future of borrowings under a
revolving credit agreement provided to a Psychiatric Group hospital operator;
provided that the limit on the aggregate revolving inter-Group loans will not be
reduced below $5,000,000. 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. Future dividend payments will be determined quarterly
and will be primarily dependent upon the financial performance of the
Psychiatric Group. Subject to the rights of the holders of the Company's Series
B Depositary Shares, and the Series B Preferred Stock represented thereby, and
any other preferred stock of the Company then outstanding, 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.
42
<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated balance sheets as of December 31, 1997 and 1996
and its consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995, 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, 1997 and 1996, and their combined statements of
operations, total attributed equity and cash flows for the years ended December
31, 1997, 1996 and 1995, 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
22, 1998 Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1997. 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 22, 1998 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997.
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 22, 1998 Annual Meeting of Shareholders, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
43
<PAGE> 46
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), 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.
*4.4 -- Certificate of Increase to Certificate of Designations of
Series A Preferred Stock
4.5 -- Certificate of Designations of Series B Preferred Stock,
filed as Exhibit 4.1 to the Company's Registration Statement
on Form 8-A filed November 7, 1997, 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 23, 1997 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
Registration Statement on Form S-3 (No. 333-27651), and
incorporated herein by reference.
</TABLE>
44
<PAGE> 47
<TABLE>
<C> <C> <S>
10.8 -- Employment Agreement between American Health Properties,
Inc. and Steven A. Roseman, filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-3 (No.
333-27651), and incorporated herein 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
</TABLE>
- ---------------
* Filed herewith
(B) REPORTS ON FORM 8-K.
On October 20, 1997, the Company filed a Current Report on Form 8-K for the
purpose of reporting selected financial information (statements of operations,
funds from operations, net income (loss) before extraordinary item per share,
extraordinary loss on debt prepayment per share, net income (loss) per share,
funds from operations per share, dividends declared per share, average shares
outstanding, total assets, total debt and total shareholders' equity) with
respect to the consolidated Company, Core Group and Psychiatric Group for the
three and nine months ended September 30, 1997 and 1996.
45
<PAGE> 48
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, 1997 and
1996................................................... F-3
For the years ended December 31, 1997, 1996, and 1995:
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-21
Schedule III -- Real Estate and Accumulated
Depreciation........................................... F-22
CORE GROUP COMBINED FINANCIAL STATEMENTS:
Report of independent public accountants.................. F-25
Combined balance sheets at December 31, 1997 and 1996..... F-26
For the years ended December 31, 1997, 1996 and 1995:
Combined statements of operations...................... F-27
Combined statements of total attributed equity......... F-28
Combined statements of cash flows...................... F-29
Notes to combined financial statements.................... F-30
PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS:
Report of independent public accountants.................. F-42
Combined balance sheets at December 31, 1997 and 1996..... F-43
For the years ended December 31, 1997, 1996 and 1995:
Combined statements of operations...................... F-44
Combined statements of total attributed equity......... F-45
Combined statements of cash flows...................... F-46
Notes to combined financial statements.................... F-47
</TABLE>
F-1
<PAGE> 49
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, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 24, 1998.
F-2
<PAGE> 50
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Real estate properties
Buildings and improvements................................ $ 638,943 $ 546,496
Accumulated depreciation.................................. (102,235) (90,139)
--------- ---------
536,708 456,357
Land...................................................... 64,897 60,097
Construction in progress.................................. 4,729 4,834
--------- ---------
606,334 521,288
Mortgage notes receivable, net.............................. 41,936 37,787
Other notes receivable...................................... 2,500 4,457
Direct financing leases..................................... 3,053 3,695
Cash and short-term investments............................. 23,053 1,480
Receivables................................................. 7,103 6,881
Deferred financing costs and other assets................... 6,593 2,294
--------- ---------
$ 690,572 $ 577,882
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable.......................................... $ -- $ 48,500
Mortgage note payable....................................... 17,922 --
Subordinated convertible bonds payable...................... 6,832 6,601
Senior notes payable........................................ 219,059 152,000
Accounts payable and accrued liabilities.................... 13,193 7,385
Dividends payable........................................... 14,847 13,981
Deferred income............................................. 3,758 4,276
--------- ---------
275,611 232,743
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
8 1/2% Cumulative Redeemable Preferred Stock, Series B;
$2,500 liquidation value; 40 and 0 shares issued and
outstanding............................................ 100,000 --
Psychiatric Group Preferred Stock; 208 shares issued
and outstanding....................................... 2 2
Common stock $.01 par value; 100,000 shares authorized;
23,557 and 23,455 shares issued and outstanding........ 236 235
Additional paid-in capital................................ 482,030 482,083
Cumulative net income..................................... 283,453 256,691
Cumulative dividends...................................... (450,760) (393,872)
--------- ---------
414,961 345,139
--------- ---------
$ 690,572 $ 577,882
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 51
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income............................................. $ 72,237 $69,488 $67,793
Mortgage interest income.................................. 6,289 5,980 6,732
Additional rental and interest income..................... 12,498 12,342 11,125
Other property income..................................... 187 -- --
Other interest income..................................... 2,254 1,114 5,580
-------- ------- -------
93,465 88,924 91,230
-------- ------- -------
EXPENSES
Depreciation and amortization............................. 15,904 15,016 14,377
Property operating........................................ 524 44 43
Interest expense.......................................... 19,659 21,842 27,057
General and administrative................................ 8,000 7,427 6,796
Targeted stock issuance costs............................. -- -- 300
Impairment loss on real estate and notes receivable....... 11,000 -- --
-------- ------- -------
55,087 44,329 48,573
Minority interest......................................... 189 216 276
-------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM.......................... 38,189 44,379 42,381
EXTRAORDINARY LOSS ON DEBT PREPAYMENT..................... (11,427) -- --
-------- ------- -------
NET INCOME................................................ $ 26,762 $44,379 $42,381
======== ======= =======
SERIES B PREFERRED DIVIDEND REQUIREMENT................... $ (1,553) $ -- $ --
======== ======= =======
ATTRIBUTABLE TO CORE GROUP COMMON STOCK AND PSYCHIATRIC
GROUP DEPOSITARY SHARES --
INCOME BEFORE EXTRAORDINARY ITEM.......................... $ 36,636 $44,379 $42,381
======== ======= =======
NET INCOME................................................ $ 25,209 $44,379 $42,381
======== ======= =======
ATTRIBUTABLE TO --
CORE GROUP COMMON STOCK
Income before extraordinary item........................ $ 42,554 $38,800 $36,107
Extraordinary loss on debt prepayment................... $(11,427) $ -- $ --
Net income.............................................. $ 31,127 $38,800 $36,107
Basic per share amounts --
Income before extraordinary item..................... $ 1.81 $ 1.65 $ 1.69
Extraordinary loss on debt prepayment................ $ (0.49) $ -- $ --
Net income........................................... $ 1.32 $ 1.65 $ 1.69
Weighted average common shares....................... 23,505 23,453 21,356
Diluted per share amounts --
Income before extraordinary item..................... $ 1.80 $ 1.65 $ 1.69
Extraordinary loss on debt prepayment................ $ (0.49) $ -- $ --
Net income........................................... $ 1.31 $ 1.65 $ 1.69
Weighted average common shares and dilutive potential
common shares...................................... 23,703 23,558 21,421
Dividends declared per common share..................... $ 2.12 $ 2.04 $ 1.99
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net income (loss)....................................... $ (5,918) $ 5,579 $ 6,274
Basic per share amounts --
Net income (loss).................................... $ (2.84) $ 2.68 $ 3.01
Weighted average depositary shares................... 2,084 2,084 2,086
Diluted per share amounts --
Net income (loss).................................... $ (2.84) $ 2.67 $ 3.00
Weighted average depositary shares and dilutive
potential depositary shares........................ 2,084 2,093 2,091
Dividends declared per depositary share................. $ 2.62 $ 2.80 $ 3.20
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 52
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PSYCHIATRIC
SERIES B GROUP
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- --------------- --------------- PAID-IN CUMULATIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL NET INCOME
------ -------- ------ ------ ------ ------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994......... -- $ -- -- $-- 20,851 $209 $426,783 $169,931
Public offering of common shares...... -- -- -- -- 2,500 25 50,292 --
Stock incentives, net................. -- -- -- -- 15 -- 1,916 --
Exercise of stock options............. -- -- -- -- 77 -- 1,732 --
Distribution of Psychiatric Group
Preferred Stock..................... -- -- 208 2 -- -- (20) --
Net income............................ -- -- -- -- -- -- -- 42,381
Dividends............................. -- -- -- -- -- -- -- --
-- -------- --- --- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1995......... -- -- 208 2 23,443 234 480,703 212,312
Stock incentives, net................. -- -- -- -- (1) -- 1,140 --
Exercise of stock options............. -- -- -- -- 13 1 240 --
Net income............................ -- -- -- -- -- -- -- 44,379
Dividends............................. -- -- -- -- -- -- -- --
-- -------- --- --- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1996......... -- -- 208 2 23,455 235 482,083 256,691
Public offering of Series B Preferred
Stock............................... 40 100,000 -- -- -- -- (3,600) --
Stock incentives, net................. -- -- -- -- 2 -- 1,372 --
Exercise of stock options............. -- -- -- -- 100 1 2,175 --
Net income............................ -- -- -- -- -- -- -- 26,762
Dividends............................. -- -- -- -- -- -- -- --
-- -------- --- --- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1997......... 40 $100,000 208 $ 2 23,557 $236 $482,030 $283,453
== ======== === === ====== ==== ======== ========
<CAPTION>
TOTAL
CUMULATIVE STOCKHOLDERS'
DIVIDENDS EQUITY
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCES AT DECEMBER 31, 1994......... $(289,422) $307,501
Public offering of common shares...... -- 50,317
Stock incentives, net................. -- 1,916
Exercise of stock options............. -- 1,732
Distribution of Psychiatric Group
Preferred Stock..................... -- (18)
Net income............................ -- 42,381
Dividends............................. (50,769) (50,769)
--------- --------
BALANCES AT DECEMBER 31, 1995......... (340,191) 353,060
Stock incentives, net................. -- 1,140
Exercise of stock options............. -- 241
Net income............................ -- 44,379
Dividends............................. (53,681) (53,681)
--------- --------
BALANCES AT DECEMBER 31, 1996......... (393,872) 345,139
Public offering of Series B Preferred
Stock............................... -- 96,400
Stock incentives, net................. -- 1,372
Exercise of stock options............. -- 2,176
Net income............................ -- 26,762
Dividends............................. (56,888) (56,888)
--------- --------
BALANCES AT DECEMBER 31, 1997......... $(450,760) $414,961
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 53
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 26,762 $ 44,379 $ 42,381
Extraordinary loss on debt prepayment..................... 11,427 -- --
Depreciation, amortization and other non-cash items....... 18,486 17,271 16,584
Deferred income........................................... (253) (368) (340)
Impairment loss on real estate and notes receivable....... 11,000 -- --
Change in receivables and other assets.................... (2,838) 412 (636)
Change in accounts payable and accrued liabilities........ 5,572 (453) (518)
--------- -------- --------
70,156 61,241 57,471
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties.... (92,242) (17,142) (49,333)
Proceeds from sale of properties.......................... -- 423 10,825
Mortgage note receivable fundings......................... (4,221) -- --
Principal payments on mortgage notes receivable........... 72 64 26,543
Construction loan fundings................................ -- -- (5,136)
Other notes receivable.................................... 233 458 4,513
Direct financing leases................................... 642 2,535 (2,414)
Administrative capital expenditures....................... (14) (55) (96)
--------- -------- --------
(95,530) (13,717) (15,098)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable............... (48,500) 48,500 (14,500)
Proceeds from notes payable issuance...................... 218,965 -- --
Prepayment of notes payable............................... (163,176) -- --
Principal payments on notes payable....................... -- (49,000) (24,000)
Principal payments on mortgage note payable............... (34) -- --
Financing costs paid...................................... (2,862) (150) (919)
Proceeds from sale of Series B preferred stock............ 96,400 -- --
Proceeds from sale of common stock........................ -- -- 50,317
Proceeds from exercise of stock options................... 2,176 241 1,732
Cash paid in lieu of fractional shares.................... -- -- (18)
Dividends paid............................................ (56,022) (53,206) (49,252)
--------- -------- --------
46,947 (53,615) (36,640)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS.... 21,573 (6,091) 5,733
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR........ 1,480 7,571 1,838
--------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR.............. $ 23,053 $ 1,480 $ 7,571
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 54
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, Alzheimer's care and
medical office/clinic facilities.
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 acute care, rehabilitation and long-term acute care
hospitals, skilled nursing, assisted living, Alzheimer's care and medical
office/clinic facilities (the Core Group) and its investments in psychiatric
hospitals (the Psychiatric 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 Company's common stock (the Core Group
Common Stock) is intended to reflect the separate financial performance of the
Core Group. The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Psychiatric Group. The Company's Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, are
attributed to the Company's Core Group for financial accounting and reporting
purposes. The Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, rank senior to the Company's Core Group Common Stock and
its Psychiatric Group Depositary Shares with respect to dividend payments and
liquidation rights. Attribution of the components of the Company's capital
structure to its Core Group and Psychiatric Group for financial accounting and
reporting purposes does not affect the legal title to assets or responsibility
for liabilities of the Company, and each holder of Core Group Common Stock,
Series B Depositary Shares or Psychiatric Group Depositary Shares is a holder of
an issue of capital stock of the entire Company and is subject to the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities.
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.
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 records properties at cost and
recognizes depreciation 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 the carrying value of its real estate properties and notes receivable
for possible impairment of value whenever events or changes in
F-7
<PAGE> 55
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 term of the related
leases and mortgage notes receivable.
Deferred Costs Deferred financing costs are amortized over the term of the
related debt at a constant effective rate.
Federal Income Taxes The Company intends at all times to operate so as to
qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company generally will not be subject to federal income tax to the
extent it distributes to shareholders at least 100% of its taxable income.
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, Series B Depositary Shares 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, Series B Depositary Shares and
Psychiatric Group Depositary Shares, with earnings and profits allocated first
to Series B 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,
impairment losses 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.
New Accounting Standards In 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", and as
required, restated per share amounts for all prior periods presented. The
adoption of SFAS No. 128 has not materially impacted the Company's financial
statements. The required adoption in 1998 of SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" is not expected to have a material impact on
the Company's financial statements.
F-8
<PAGE> 56
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, 1997:
<TABLE>
<CAPTION>
BUILDINGS AND TOTAL ACCUMULATED
STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION
----- ------- ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACUTE CARE HOSPITALS:
Chesterfield General Hospital....................... SC $ 720 $ 10,687 $ 11,407 $ 950
Cleveland Regional Medical Center................... TX 300 8,000 8,300 1,186
Desert Valley Hospital.............................. CA 1,755 24,650 26,405 1,898
Frye Regional Medical Center........................ NC 1,247 44,202 45,449 12,103
Irvine Medical Center............................... CA 17,987 57,013 75,000 9,562
Kendall Regional Medical Center..................... FL 4,163 64,849 69,012 17,256
Lucy Lee Hospital................................... MO 404 23,162 23,566 5,929
Marlboro Park Hospital.............................. SC 640 7,153 7,793 636
North Fulton Regional Hospital...................... GA 4,149 42,042 46,191 9,220
Palm Beach Gardens Medical Center................... FL 4,024 41,624 45,648 11,231
Pioneer Valley Hospital............................. UT 1,997 47,469 49,466 2,410
Shannon Health System, St. John's Campus............ TX 255 16,197 16,452 2,542
Tarzana Hospital of Encino-Tarzana
Regional Medical Center........................... CA 12,421 61,279 73,700 17,026
------- -------- -------- --------
50,062 448,327 498,389 91,949
------- -------- -------- --------
ALZHEIMER'S CARE FACILITIES:
Pine Haven I Alzheimer's Community.................. TX 225 3,475 3,700 181
Pine Haven II Alzheimer's Community................. TX 265 3,759 4,024 78
------- -------- -------- --------
490 7,234 7,724 259
------- -------- -------- --------
ASSISTED LIVING FACILITIES:
Cambria Lodge....................................... TX 300 4,882 5,182 168
Garrison Creek Lodge................................ WA 219 5,429 5,648 198
Sherwood Place...................................... TX 220 4,814 5,034 155
Summer Wind Residence............................... ID 110 2,890 3,000 169
------- -------- -------- --------
849 18,015 18,864 690
------- -------- -------- --------
LONG-TERM ACUTE CARE HOSPITAL:
Comprehensive Care Hospital of Amarillo............. TX 810 5,300 6,110 11
------- -------- -------- --------
MEDICAL OFFICE/CLINIC FACILITIES:
Casa Blanca Clinic (1).............................. AZ 1,900 18,675 20,575 56
Fannin Medical Buildings(1)......................... TX 2,850 49,184 52,034 256
Northpark Professional Building..................... FL -- 10,628 10,628 177
Park Plaza Professional Building.................... TX 1,100 15,831 16,931 44
Walsh Medical Arts Center........................... CA 285 8,515 8,800 798
------- -------- -------- --------
6,135 102,833 108,968 1,331
------- -------- -------- --------
PSYCHIATRIC HOSPITALS:
Northpointe Behavioral Health System................ FL 1,457 543 2,000 81
Rock Creek Center................................... IL 440 6,065 6,505 1,331
The Retreat......................................... FL 1,200 2,202 3,402 330
------- -------- -------- --------
3,097 8,810 11,907 1,742
------- -------- -------- --------
REHABILITATION HOSPITALS:
HCA Wesley Rehabilitation Hospital.................. KS 1,938 12,659 14,597 1,833
MountainView Regional Rehabilitation Hospital....... WV -- 11,718 11,718 1,879
Northwest Arkansas Rehabilitation Hospital.......... AR 962 8,124 9,086 1,320
------- -------- -------- --------
2,900 32,501 35,401 5,032
------- -------- -------- --------
SKILLED NURSING FACILITIES:
Arkansas Manor Nursing Home......................... CO 154 3,912 4,066 369
Cornerstone Care Center............................. CO 125 4,731 4,856 345
Douglas Manor....................................... AZ 175 2,446 2,621 174
Safford Care Center................................. AZ 100 4,834 4,934 333
------- -------- -------- --------
554 15,923 16,477 1,221
------- -------- -------- --------
$64,897 $638,943 $703,840 $102,235
======= ======== ======== ========
</TABLE>
- ---------------
(1) Casa Blanca Clinic represents four separate facilities leased together under
a master lease. Fannin Medical Buildings represents two separate facilities
leased together under a master lease, one of which is encumbered by a
$17,922 mortgage note payable.
F-9
<PAGE> 57
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A substantial portion of the Company's properties are leased to
single-tenant operators 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 such properties, the option to fund
certain capital expenditures and, in certain situations, is obligated to fund
approved capital expenditures on terms comparable to the original investment.
The base and additional rent provisions of the leases are amended when such
capital expenditures are funded to reflect the Company's increased investment.
At December 31, 1997, the Company had no commitments to fund capital
expenditures pursuant to these rights and obligations.
Many of the Company's medical office/clinic facilities are leased to
multiple tenants on a gross or modified net basis pursuant to which the Company,
as lessor, is responsible for a portion of the operating costs of the building,
including but not limited to the cost of maintenance, repairs, insurance and
taxes on the leased properties. In addition, the Company is in general initially
responsible for capital expenditures, leasing commissions and tenant
improvements at these buildings, subject to reimbursement from tenants in some
instances.
At December 31, 1997, the Company had construction in progress of
$4,729,000, representing the funded amount of commitments totaling $17 million
for the development of two skilled nursing facilities in Las Vegas, Nevada.
Subsequent to year-end, the Company completed the acquisition of three medical
office facilities in separate transactions totaling approximately $41.1 million.
The Company has a $35 million forward funding commitment to develop up to five
assisted living facilities to be managed by an experienced operator of assisted
living facilities. The Company has a similar commitment of $22.5 million to
develop up to 11 Alzheimer's care facilities to be managed by an experienced
operator of Alzheimer's care facilities. The Company also has agreed to provide
$9.4 million of real estate financing to an experienced operator of long-term
acute care facilities for which there are currently no identified projects.
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 1997, revenues from
these leases accounted for 48% of the Company's total revenues.
Aggregate revenues from five leases maturing in February 1999 accounted for
38% of the Company's total revenues in 1997. Four of these properties are leased
to subsidiaries of AMI and the other property is leased to a subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). 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 without
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 1998 through 2002 and thereafter are approximately
$79,830,000, $78,870,000, $55,020,000, $50,530,000, $48,170,000 and $91,860,000,
respectively.
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in
significant impairment losses on psychiatric investments and the periodic
restructuring of psychiatric operator payment obligations. In 1995, the Company
restructured the leases covering its two psychiatric properties in Florida, and
during 1996, provided for the partial deferral of rental and interest
obligations related to one of these properties and the partial deferral of
rental obligations of
F-10
<PAGE> 58
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its psychiatric property in Illinois. The Company recorded an $11 million charge
in the first quarter of 1997 for impairment of the carrying value of its two
psychiatric investments in Florida. Later in 1997, the owner of one of the
Florida hospitals ceased operations and a restructuring of the other Florida
hospital's obligations to the Company was completed. The initial lease term of
the psychiatric property in Illinois, originally scheduled to expire in December
1997, was extended until March 31, 1998. In addition, the $2,500,000 balance
outstanding under a revolving credit agreement provided to the operator of the
Illinois property matured June 30, 1997, and, although the operator has
continued to make interest payments, the principal balance remains past due.
Negotiations with the existing operator for renewal of the current lease and
extension or repayment of the revolving credit agreement are continuing.
Although management currently believes that the recorded amounts of its
psychiatric investments are realizable, if the psychiatric operators are unable
to adapt to the fundamental ongoing changes in the psychiatric industry
successfully and consistently mitigate the negative impact of the ongoing
changes on their financial performance, the Company may be required to
restructure payment obligations further, identify alternative operators, pursue
alternative uses for or dispositions of the properties and/or recognize
additional impairment losses on its psychiatric investments. If the Company is
required to take any of these actions, various costs are likely to be incurred
by the Company in an effort to protect, maintain and pursue alternatives for its
investments. The Company does not currently 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 Company sold two of its
psychiatric properties in 1995 and continues to encourage each of the
psychiatric operators to pursue financing alternatives which would enable them
to acquire the properties and/or repay their borrowings from the Company, as the
case may be. Subject to the rights of the holders of the Company's Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, and any
other preferred stock of the Company then outstanding, the Company expects to
use the net proceeds of any future psychiatric property sales and/or psychiatric
operator borrowing repayments 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. The Company cannot be assured that the efforts of psychiatric
operators to obtain alternative financing will be successful or, if successful,
that the amounts of such financing would be sufficient to enable the Company to
realize the carrying amounts of its psychiatric investments. The dividend on the
Company's Psychiatric Group Depositary Shares is determined each quarter based
upon the operating results of the Company's Psychiatric Group. Historically, the
level of dividends of the Psychiatric Group have varied quarter-to-quarter. Any
significant advance of additional funds to psychiatric hospital operators,
modification of terms covering the rental or interest obligations of its
psychiatric properties or nonpayment or deferral of such obligations as they
become due likely will have an adverse impact on the Company's Psychiatric Group
results of operations and cash flows, as well as on the quarterly dividend
payment on Psychiatric Group Depositary Shares. In addition to the foregoing,
future operating results, cash flows and dividends of the Company's Psychiatric
Group will be affected by changes in the level of additional rent and interest,
interest rate adjustments on mortgage notes receivable, the amount of additional
financial advisory fees and, to the extent necessary, various costs which might
be incurred in an effort to protect, maintain and pursue alternatives for its
psychiatric investments.
MORTGAGE NOTES RECEIVABLE
Total Life Care Hospital $4,221,000 The Company has funded $4.2 million of
a $4.4 million mortgage note receivable secured by a first mortgage and security
interest in the real property of a long-term acute care facility in Houston,
Texas. The note has an initial term of ten years with two ten-year renewal
terms. The initial term maturity date is June 30, 2007. The interest rate on the
note is 10.50% with interest only payable monthly through June 30, 1999 and
monthly principal and interest payments of $40,000 payable thereafter.
Four Winds Hospital -- Saratoga $18,065,000 The Company has a mortgage
note receivable secured by a first mortgage and security interest in the real
property of Four Winds Hospital, a psychiatric facility, in Saratoga Springs,
New York. The note has an initial term of ten years with two optional ten-year
extension
F-11
<PAGE> 59
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. During
an extension term, the interest rate on the note will be reset to the lesser of
(i) 325 basis points over the ten-year treasury rate at commencement of an
extension term or (ii) various indexed rates for various reset periods specified
in the note agreement and selected by the borrower during the first two years of
an extension term. If reset at December 31, 1997, the interest rate on the note
would have been approximately 9.0%.
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, a psychiatric facility, in Katonah, 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 13.07%, 13.44% and 13.80%, in 1995, 1996 and 1997,
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 two
Four Winds mortgage notes receivable and records interest on such 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 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 has provided financing at variable rates to certain psychiatric
hospital operators under revolving credit agreements. 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. During 1997, $1,725,000 of outstanding borrowings were written off by
the Company as part of an $11 million impairment loss recorded on psychiatric
investments. As of December 31, 1997, $2,500,000 was outstanding under a
revolving credit agreement provided to one psychiatric hospital operator at a
weighted average contractual interest rate of 12.25%. Although the $2,500,000
outstanding balance under the revolving credit agreement matured June 30, 1997,
the operator has continued to make interest payments while negotiations for
extension or repayment of the revolving credit agreement are continuing.
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.
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,
1997, the Company's aggregate net investment in these direct financing leases
was $3,053,000, represented by total minimum lease payments receivable of
$3,504,000 less unearned income of $451,000. Future minimum annual lease
payments under these leases for calendar years 1998 through 2002 are
approximately $1,342,000, $1,342,000, $704,000, $94,000 and $22,000,
respectively.
DEBT
Bank Loans Payable The Company has a $250 million unsecured revolving
credit agreement with a syndicate of banks that matures on December 31, 2000 and
bears an annual facility fee based on the total
F-12
<PAGE> 60
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitment. This agreement provides for interest on outstanding borrowings based
on, at the Company's election, LIBOR plus a margin, a rate bid by the lenders,
or the prime rate. The margin on LIBOR 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's LIBOR
margin is 62.5 basis points and the annual facility fee is 25 basis points.
The weighted average amount of borrowings under bank credit agreements
outstanding during 1997, 1996 and 1995 was $6,151,000, $21,622,000 and
$27,467,000 at weighted average interest rates of 7.1%, 6.4% and 7.5%,
respectively. The maximum amount outstanding under bank credit agreements in
1997, 1996 and 1995 was $48,500,000, $53,000,000 and $73,000,000, respectively.
As of December 31, 1997, the Company had no outstanding borrowings under its
bank credit agreement.
The duration of borrowings under the Company's unsecured revolving credit
agreement is generally less than 90 days at variable pricing indicative of
current short-term borrowing rates. Accordingly, carrying amount is a reasonable
estimate of fair value.
Mortgage Note Payable In connection with the acquisition of a medical
office building in Houston, Texas, a mortgage note payable in the amount of
$17,956,000 was assumed. The remaining balance at December 31, 1997 was
$17,922,000 with an interest rate of 8.30%. The note is secured by a first
mortgage and security interest in the real property and requires a monthly
payment of principal and interest of approximately $158,000 with the remaining
principal balance due at maturity on June 15, 2011.
The carrying amount of the mortgage note payable is a reasonable estimate
of fair value, as the pricing and terms of the note are indicative of current
rates and credit terms.
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 1997, 1996 and 1995 was $22,800,000, $178,250,000 and
$211,000,000 at weighted average effective interest rates of 11.06%, 11.03% and
11.06%, 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.
As of December 31, 1996, the estimated fair value of the Company's senior
notes payable was $163 million based on an estimate of rates available to the
Company for debt with similar terms.
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 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 fair value of the Company's 2002 Notes and 2007 Notes is based on the
quoted market price of the notes as traded over-the-counter. As of December 31,
1997, the estimated fair value of the 2002 Notes and 2007 Notes was $225
million.
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
F-13
<PAGE> 61
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and 1996, the estimated fair value of subordinated convertible
bonds payable was $7,259,000 and $6,757,000, 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 annual maturities of the
Company's outstanding debt at December 31, 1997, for calendar years 1998 through
2002 and thereafter is $427,000, $464,000, $7,959,000, $547,000, $100,594,000
and $135,386,000, respectively.
Interest Interest capitalized on construction in progress was $517,000,
$895,000 and $198,000 in 1997, 1996 and 1995, respectively. Interest paid, net
of interest capitalized, in 1997, 1996 and 1995 was $14,374,000, $21,547,000 and
$26,232,000, respectively.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Pension expense in 1997, 1996 and 1995 was $207,000, $247,000 and
$238,000, respectively.
The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors elected prior to 1997 upon
completion of sixty months of membership on the Board. The benefits, limited to
ten years, are based on years of service and the annual base director fee in
effect as of the date a director ceases to be a member of the Board.
The following tables set forth the amounts recognized in the Company's
financial statements:
Actuarial present value of benefit obligations:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Vested benefit obligation................................... $806,000 $767,000
-------- --------
Accumulated benefit obligation.............................. $862,000 $800,000
-------- --------
Projected benefit obligation................................ $874,000 $807,000
Unrecognized prior service cost............................. -- (7,000)
Unrecognized net gain....................................... 101,000 144,000
-------- --------
Pension liability........................................... $975,000 $944,000
======== ========
</TABLE>
F-14
<PAGE> 62
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of net pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current service cost............................... $ 52,000 $ 95,000 $ 80,000
Interest cost...................................... 59,000 53,000 50,000
Amortization of prior service cost................. 7,000 49,000 49,000
Amortization of net gain........................... (21,000) -- (18,000)
-------- -------- --------
Net periodic pension cost.......................... $ 97,000 $197,000 $161,000
======== ======== ========
</TABLE>
Discount rates of 7.0% and 7.5% for 1997 and 1996, 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 1997, 1996 and 1995
were 7.5%, 7.0% and 8.5%, 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 884,705 shares available to grant further stock incentives at December 31,
1997. 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 WEIGHTED
AVERAGE DEFERRED AVERAGE DEFERRED
NUMBER EXERCISE AND RESTRICTED NUMBER EXERCISE AND RESTRICTED
OF SHARES PRICE DER SHARES STOCK OF SHARES PRICE DER SHARES STOCK
--------- -------- ---------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994............... 753,130 $25.82 27,856 32,941 -- -- -- --
Granted/accumulated........... 183,537 $20.86 37,885 14,859 -- -- 1,668 --
Distribution adjustment....... -- $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
Granted/accumulated........... 194,982 $25.37 43,122 -- -- -- 5,611 --
Exercised/restrictions
lapsed...................... (100,000) $21.76 (4,027) (8,426) -- -- -- (646)
Expired/canceled.............. (30,000) $29.10 -- -- (10,000) $24.15 -- --
-------- ------- ------- ------- ------ ------
December 31, 1997............... 931,063 $23.01 120,846 1,372 61,694 $22.06 16,212 137
======== ======= ======= ======= ====== ======
</TABLE>
F-15
<PAGE> 63
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, 1997:
<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 - $21.50 314,876 5.4 $19.72 300,430 $19.66
$21.50 - $27.00 586,187 7.2 $24.31 378,454 $24.10
$27.00 - $32.50 30,000 4.1 $32.06 30,000 $32.06
PSYCHIATRIC GROUP
DEPOSITARY SHARES
$16.00 - $21.50 32,123 4.8 $19.50 31,986 $19.50
$21.50 - $27.00 26,571 5.4 $24.04 26,571 $24.04
$27.00 - $32.50 3,000 4.1 $31.94 3,000 $31.94
</TABLE>
Restrictions on shares of restricted stock lapse annually over a period of
years. 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 708,884, 629,579
and 536,815 shares of Core Group Common Stock were exercisable at December 31,
1997, 1996 and 1995 with weighted average exercise prices of $22.55, $22.90 and
$23.29 per share, respectively. Options on 61,557, 64,210 and 53,683 Psychiatric
Group Depositary Shares were exercisable at December 31, 1997, 1996 and 1995
with weighted average exercise prices of $22.07, $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, 1997, substantially all deferred and DER shares were issuable upon
exercise of the related vested options or otherwise unrestricted.
As allowed by SFAS 123, "Accounting for Stock-Based Compensation", the
Company measures 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". Total stock-based compensation
expense recognized under APB 25 in 1997, 1996 and 1995 was $1,427,000,
$1,251,000 and $1,026,000, respectively.
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 1997 and
1996 was $5.11 and $4.84 per option, respectively. The weighted average fair
value at the date of grant for options granted in 1995, adjusted to
F-16
<PAGE> 64
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected life in years..................................... 7.4 6.7 7.2
Risk-free interest rate.................................... 6.55% 5.62% 7.67%
Expected volatility........................................ 15% 15% 15%
Expected dividend yield --
Options without DERs..................................... 7.5% 8% 8%
Options with DERs........................................ 0% 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 1997 and 1996 was
$24.39 and $22.53 per share, respectively. 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 earnings per share of the consolidated
Company, the Core Group and the Psychiatric Group for 1997, 1996 and 1995 would
not have been material. The pro forma effect for 1997, 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.
STOCKHOLDERS' EQUITY
Subsequent Equity Offering In February 1998, the Company completed an
offering of 353,201 additional shares of Core Group Common Stock resulting in
net proceeds of approximately $9.5 million.
8 1/2% Cumulative Redeemable Preferred Stock, Series B The Company has
4,000,000 Series B Depositary Shares outstanding which represent 40,000 shares
of Series B Preferred Stock. Each Series B Depositary Share represents 1/100 of
a share of Series B Preferred Stock, and entitles the holder to such proportion
of all the rights, preferences and privileges of the Series B Preferred Stock
represented thereby. The Series B Depositary Shares, and the Series B Preferred
Stock represented thereby, rank senior to the Company's Core Group Common Stock,
its Series A Preferred Stock (when and if issued) and its Psychiatric Group
Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, with respect to dividend payments and liquidation rights. The annual
dividend rate and liquidation preference with respect to each Series B
Depositary Share are $2.15 and $25, respectively (equivalent to $215 and $2,500
per share of Series B Preferred Stock, respectively). Dividends on the Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, are
cumulative and, if and when declared, are payable quarterly in arrears on the
last day of February, May, August and November of each year. On or after October
27, 2002, the Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, may be redeemed, in whole or in part, at the option of the
Company at a redemption price of $25 per Series B Depositary Share (equivalent
to $2,500 per share of Series B Preferred Stock), plus accrued and unpaid
dividends thereon. The redemption price, other than the portion representing
accrued and unpaid dividends, is payable solely out of proceeds from the sale of
other capital stock of the Company. The proceeds from the sale of the Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, as well
as the dividends payable thereon, have been attributed to the Company's Core
Group for financial accounting and reporting purposes.
F-17
<PAGE> 65
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1/100 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
25,719,000. 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.
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. The Series A
Preferred Stock (when and if issued) rank senior to the Company's Core Group
Common Stock and its Psychiatric Group Depositary Shares, and the Psychiatric
Group Preferred Stock represented thereby, with respect to dividend payments and
liquidation rights, but rank junior to the Company's Series B Depositary Shares,
and the Series B Preferred Stock represented thereby.
EARNINGS PER SHARE
For purposes of computing earnings per share 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 following is
a reconciliation of the income and share amounts used in the basic
F-18
<PAGE> 66
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and diluted per share computations of income before extraordinary item
attributable to Core Group Common Stock and Psychiatric Group Depositary Shares:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
INCOME SHARES INCOME SHARES INCOME SHARES
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ATTRIBUTABLE TO CORE GROUP
Income before extraordinary item....... $44,107 -- $38,800 -- $36,107 --
Less Series B preferred dividend
requirement.......................... (1,553) -- -- -- -- --
Outstanding common shares.............. -- 23,503 -- 23,451 -- 21,356
Deferred common shares................. -- 2 -- 2 -- --
------- ------ ------- ------ ------- ------
Basic EPS components................... 42,554 23,505 38,800 23,453 36,107 21,356
Effect of dilutive potential common
shares Stock options................. -- 94 -- 40 -- 16
DERs................................. -- 104 -- 65 -- 49
Subordinated convertible bonds
payable........................... -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Diluted EPS components................. $42,554 23,703 $38,800 23,558 $36,107 21,421
======= ====== ======= ====== ======= ======
ATTRIBUTABLE TO PSYCHIATRIC GROUP
Basic EPS components................... $(5,918) 2,084 $ 5,579 2,084 $ 6,274 2,086
Effect of dilutive potential depositary
shares Stock options................. -- -- -- -- -- --
DERs................................. -- -- -- 9 -- 5
------- ------ ------- ------ ------- ------
Diluted EPS components................. $(5,918) 2,084 $ 5,579 2,093 $ 6,274 2,091
======= ====== ======= ====== ======= ======
</TABLE>
DIVIDENDS
A quarterly dividend of $.545 per share for Core Group Common Stock, or
approximately $12,838,000, was declared by the Board of Directors on January 23,
1998, payable on February 23, 1998 to shareholders of record on February 9,
1998. A quarterly dividend of $.62 per share for Psychiatric Group Depositary
Shares, or approximately $1,292,000, was declared by the Board of Directors on
January 23, 1998, payable on February 23, 1998 to shareholders of record on
February 9, 1998. A dividend of $.5375 per share for Series B Depositary Shares
was declared by the Board of Directors on January 23, 1998, payable March 2,
1998 to shareholders of record February 17, 1998. This dividend was for the
regular quarterly period ended February 28, 1998 and approximately $717,000 was
accrued at December 31, 1997. The aggregate dividends of $14,847,000 have been
reflected as dividends payable in the accompanying financial statements as of
December 31, 1997.
Dividends of $2.10 per share paid on Core Group Common Stock during the
year ended December 31, 1997 are characterized as $1.446 of ordinary income and
$.654 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, 1997
are characterized as $1.93 of ordinary income and $.87 of return of capital for
tax purposes. A cash dividend of $.209028 per share paid on Series B Depositary
Shares on December 1, 1997 is characterized entirely as ordinary income for
income tax purposes.
In general, dividends on the Company's Core Group Common Stock and
Psychiatric Group Depositary Shares 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 Depositary
Shares and will be limited to $30 million in the aggregate and $15 million in
any calendar year.
F-19
<PAGE> 67
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>
1997
Consolidated --
Revenues................................. $ 23,333 $22,771 $22,950 $24,411 $ 93,465
Attributable to Core Group Common Stock
and Psychiatric Group Depositary
Shares --
Income before extraordinary item....... $ 460(1) $12,332 $12,268 $11,576 $ 36,636
Extraordinary loss on debt
prepayment.......................... (11,427) -- -- -- (11,427)
Net income (loss)...................... (10,967)(1) 12,332 12,268 11,576 25,209
Attributable to --
Core Group Common Stock
Revenues............................... $ 21,322 $21,055 $21,204 $22,721 $ 86,302
Income before extraordinary item....... 9,930 11,129 11,087 10,408 42,554
Extraordinary loss on debt
prepayment.......................... (11,427) -- -- -- (11,427)
Net income (loss)...................... (1,497) 11,129 11,087 10,408 31,127
Basic per share amounts --
Income before extraordinary item.... $ 0.42 $ 0.47 $ 0.47 $ 0.44 $ 1.81
Extraordinary loss on debt
prepayment........................ (0.48) -- -- -- (0.49)
Net income (loss)................... (0.06) 0.47 0.47 0.44 1.32
Diluted per share amounts --
Income before extraordinary item.... $ 0.42 $ 0.47 $ 0.47 $ 0.44 $ 1.80
Extraordinary loss on debt
prepayment........................ (0.48) -- -- -- (0.49)
Net income (loss)................... (0.06) 0.47 0.47 0.44 1.31
Psychiatric Group Depositary Shares
Revenues............................... $ 2,401 $ 2,110 $ 2,138 $ 2,067 $ 8,716
Net income (loss)...................... (9,470)(1) 1,203 1,181 1,168 (5,918)
Basic per share amounts --
Net income (loss)................... $ (4.54) $ 0.58 $ 0.57 $ 0.56 $ (2.84)
Diluted per share amounts --
Net income (loss)................... $ (4.54) $ 0.57 $ 0.56 $ 0.56 $ (2.84)
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
Basic per share amounts --
Net income.......................... $ 0.40 $ 0.40 $ 0.42 $ 0.43 $ 1.65
Diluted per share amounts --
Net income.......................... $ 0.40 $ 0.40 $ 0.42 $ 0.43 $ 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
Basic per share amounts --
Net income.......................... $ 0.69 $ 0.59 $ 0.61 $ 0.78 $ 2.68
Diluted per share amounts --
Net income.......................... $ 0.68 $ 0.59 $ 0.61 $ 0.78 $ 2.67
</TABLE>
- ---------------
(1) Includes impairment loss of $11,000 on Psychiatric Group real estate and
notes receivable.
F-20
<PAGE> 68
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 February 24, 1998. 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,
February 24, 1998.
F-21
<PAGE> 69
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS CARRYING AMOUNT
INITIAL COST TO COMPANY AT DECEMBER 31, 1997(A)
------------------------ SUBSEQUENT ------------------------------------
LICENSED BUILDINGS AND CAPITAL BUILDINGS AND
DESCRIPTION & LOCATION BEDS LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
---------------------- -------- ------- ------------- ------------ ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ACUTE CARE HOSPITALS:
Bennettsville, South Carolina... 108 $ 640 $ 7,153 $ -- $ 640 $ 7,153 $ 7,793
Cheraw, South Carolina.......... 66 720 10,687 -- 720 10,687 11,407
Cleveland, Texas................ 104 300 8,000 -- 300 8,000 8,300
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
Palm Beach Gardens, Florida..... 204 4,024 40,976 648 4,024 41,624 45,648
Poplar Bluff, Missouri.......... 201 404 19,596 3,566 404 23,162 23,566
Roswell, Georgia................ 167 4,149 20,851 21,191 4,149 42,042 46,191
San Angelo, Texas............... 171 165 15,867 420 255 16,197 16,452
Tarzana, California............. 233 11,921 43,079 18,700 12,421 61,279 73,700
Victorville, California......... 77 1,755 22,245 2,405 1,755 24,650 26,405
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 FACILITIES:
Houston, Texas.................. 96 225 3,420 55 225 3,475 3,700
Sugar Land, Texas............... 80 265 3,759 -- 265 3,759 4,024
------- -------- ------- ------- -------- --------
490 7,179 55 490 7,234 7,724
------- -------- ------- ------- -------- --------
ASSISTED LIVING FACILITIES:
Boise, Idaho.................... 60 110 2,890 -- 110 2,890 3,000
El Paso, Texas.................. 80 300 4,882 -- 300 4,882 5,182
Odessa, Texas................... 80 220 4,814 -- 220 4,814 5,034
Walla Walla, Washington......... 80 219 5,429 -- 219 5,429 5,648
------- -------- ------- ------- -------- --------
849 18,015 -- 849 18,015 18,864
------- -------- ------- ------- -------- --------
LONG-TERM ACUTE CARE HOSPITAL:
Amarillo, Texas................. 44 810 5,300 -- 810 5,300 6,110
------- -------- ------- ------- -------- --------
MEDICAL OFFICE/CLINIC
FACILITIES:
Apache Junction, Arizona........ n/a 218 3,589 -- 218 3,589 3,807
Gilbert, Arizona................ n/a 773 6,445 -- 773 6,445 7,218
Gilbert, Arizona................ n/a 609 7,726 -- 609 7,726 8,335
Houston, Texas.................. n/a 1,250 38,218 -- 1,250 38,218 39,468
Houston, Texas.................. n/a 1,600 10,966 -- 1,600 10,966 12,566
Houston, Texas.................. n/a 1,100 15,831 -- 1,100 15,831 16,931
Mesa, Arizona................... n/a 300 915 -- 300 915 1,215
Murrieta, California............ n/a 285 8,515 -- 285 8,515 8,800
North Miami Beach, Florida...... n/a -- 10,628 -- -- 10,628 10,628
------- -------- ------- ------- -------- --------
6,135 102,833 -- 6,135 102,833 108,968
------- -------- ------- ------- -------- --------
<CAPTION>
ACCUMULATED DATE OF DATE DEPRECIABLE
DESCRIPTION & LOCATION DEPRECIATION CONSTRUCTION(B) ACQUIRED LIFE
---------------------- ------------ --------------- -------- -----------
<S> <C> <C> <C> <C>
ACUTE CARE HOSPITALS:
Bennettsville, South Carolina... $ 636 1984 - 1993 05/02/95 30 years
Cheraw, South Carolina.......... 950 1982 - 1993 05/02/95 30 years
Cleveland, Texas................ 1,186 1968 - 1986 01/03/94 27 years
Hickory, North Carolina......... 12,103 1974 - 1993 02/27/87 38 years
Irvine, California.............. 9,562 1990 04/23/91 40 years
Miami, Florida.................. 17,256 1973 - 1994 02/27/87 38 years
Palm Beach Gardens, Florida..... 11,231 1964 - 1992 02/27/87 40 years
Poplar Bluff, Missouri.......... 5,929 1980 - 1995 02/27/87 40 years
Roswell, Georgia................ 9,220 1983 - 1993 02/27/87 42 years
San Angelo, Texas............... 2,542 1960 - 1991 09/30/91 40 years
Tarzana, California............. 17,026 1973 - 1994 02/27/87 34 years
Victorville, California......... 1,898 1994 - 1996 09/20/94 40 years
West Valley City, Utah.......... 2,410 1983 - 1990 05/16/96 32 years
--------
91,949
--------
ALZHEIMER'S CARE FACILITIES:
Houston, Texas.................. 181 1995 12/21/95 40 years
Sugar Land, Texas............... 78 1997 03/05/97 40 years
--------
259
--------
ASSISTED LIVING FACILITIES:
Boise, Idaho.................... 169 1994 09/01/95 40 years
El Paso, Texas.................. 168 1996 08/23/96 40 years
Odessa, Texas................... 155 1996 09/17/96 40 years
Walla Walla, Washington......... 198 1996 07/24/96 40 years
--------
690
--------
LONG-TERM ACUTE CARE HOSPITAL:
Amarillo, Texas................. 11 1997 12/23/97 40 years
--------
MEDICAL OFFICE/CLINIC
FACILITIES:
Apache Junction, Arizona........ 11 1995 12/10/97 28 years
Gilbert, Arizona................ 19 1989 12/10/97 28 years
Gilbert, Arizona................ 23 1992 12/10/97 28 years
Houston, Texas.................. 199 1973 11/19/97 32 years
Houston, Texas.................. 57 1985 11/19/97 32 years
Houston, Texas.................. 44 1976 12/18/97 30 years
Mesa, Arizona................... 3 1976 12/10/97 28 years
Murrieta, California............ 798 1991 04/01/94 40 years
North Miami Beach, Florida...... 177 1993 05/07/97 40 years
--------
1,331
--------
</TABLE>
F-22
<PAGE> 70
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS CARRYING AMOUNT
INITIAL COST TO COMPANY AT DECEMBER 31, 1997(A)
------------------------ SUBSEQUENT ------------------------------------
LICENSED BUILDINGS AND CAPITAL BUILDINGS AND
DESCRIPTION & LOCATION BEDS LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
---------------------- -------- ------- ------------- ------------ ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PSYCHIATRIC HOSPITALS:
Lemont, Illinois................ 60 440 8,372 -- 440 6,065 6,505(c)
Sunrise, Florida................ 100 3,325 15,209 -- 1,200 2,202 3,402(d)
Tarpon Springs, Florida......... 130 1,457 2,904 -- 1,457 543 2,000(e)
------- -------- ------- ------- -------- --------
5,222 26,485 -- 3,097 8,810 11,907
------- -------- ------- ------- -------- --------
REHABILITATION HOSPITALS:
Fayetteville, Arkansas.......... 60 962 8,124 -- 962 8,124 9,086
Morgantown, West Virginia....... 80 -- 10,084 1,634 -- 11,718 11,718
Wichita, Kansas................. 60 1,938 12,659 -- 1,938 12,659 14,597
------- -------- ------- ------- -------- --------
2,900 30,867 1,634 2,900 32,501 35,401
------- -------- ------- ------- -------- --------
SKILLED NURSING FACILITIES:
Denver, Colorado................ 120 154 3,912 -- 154 3,912 4,066
Douglas, Arizona................ 64 175 2,446 -- 175 2,446 2,621
Lakewood, Colorado.............. 144 125 4,731 -- 125 4,731 4,856
Safford, Arizona................ 128 100 4,834 -- 100 4,834 4,934
------- -------- ------- ------- -------- --------
554 15,923 -- 554 15,923 16,477
------- -------- ------- ------- -------- --------
$66,432 $594,128 $63,080 $64,897 $638,943 $703,840
======= ======== ======= ======= ======== ========
<CAPTION>
ACCUMULATED DATE OF DATE DEPRECIABLE
DESCRIPTION & LOCATION DEPRECIATION CONSTRUCTION(B) ACQUIRED LIFE
---------------------- ------------ --------------- -------- -----------
<S> <C> <C> <C> <C>
PSYCHIATRIC HOSPITALS:
Lemont, Illinois................ 1,331 1989 12/31/92 21 years
Sunrise, Florida................ 330 1988 08/15/90 21 years
Tarpon Springs, Florida......... 81 1928 - 1993 08/15/90 21 years
--------
1,742
--------
REHABILITATION HOSPITALS:
Fayetteville, Arkansas.......... 1,320 1991 07/01/91 40 years
Morgantown, West Virginia....... 1,879 1991-1994 02/25/91 40 years
Wichita, Kansas................. 1,833 1992 03/16/92 40 years
--------
5,032
--------
SKILLED NURSING FACILITIES:
Denver, Colorado................ 369 1971 06/13/95 27 Years
Douglas, Arizona................ 174 1982 07/28/95 34 Years
Lakewood, Colorado.............. 345 1970-1974 06/13/95 35 Years
Safford, Arizona................ 333 1982 07/28/95 35 Years
--------
1,221
--------
$102,235
========
</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 1997 and 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 and $5.9
million, net in 1997.
(e) This property was written down by $3.4 million, net in 1997.
F-23
<PAGE> 71
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION ACTIVITY:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of
Year.................... $606,593 $ 90,139 $595,876 $82,435 $565,995 $70,617
Acquisitions.............. 100,169 -- -- -- 39,370 --
Cost of Real Estate
Sold.................... -- -- (423) -- (13,435) (2,433)
Construction Projects
Completed............... 10,134 -- 15,864 -- 3,645 --
Capital Improvements...... -- -- 2,460 -- 301 --
Real Estate Exchange...... -- -- (7,184) (7,184) -- --
Impairment Loss on Real
Estate.................. (13,056) (3,697) -- -- -- --
Depreciation.............. -- 15,793 -- 14,888 -- 14,251
-------- -------- -------- ------- -------- -------
Balance at End of Year.... $703,840 $102,235 $606,593 $90,139 $595,876 $82,435
======== ======== ======== ======= ======== =======
</TABLE>
F-24
<PAGE> 72
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, 1997
and 1996, 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, 1997. These financial statements are the responsibility of the management of
American Health Properties, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Core Group as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 24, 1998.
F-25
<PAGE> 73
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Real estate properties
Buildings and improvements................................ $ 630,133 $526,756
Accumulated depreciation.................................. (100,493) (85,451)
--------- --------
529,640 441,305
Land...................................................... 61,800 54,875
Construction in progress.................................. 4,729 4,834
--------- --------
596,169 501,014
Mortgage note receivable.................................... 4,221 --
Direct financing leases..................................... 3,053 3,695
Revolving inter-Group loan to Psychiatric Group............. 3,379 4,183
Fixed rate inter-Group loan to Psychiatric Group............ 9,175 9,175
Cash and short-term investments............................. 23,053 1,480
Receivables................................................. 6,489 6,260
Deferred financing costs and other assets................... 6,593 2,172
--------- --------
$ 652,132 $527,979
========= ========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable.......................................... $ -- $ 48,500
Mortgage note payable....................................... 17,922 --
Subordinated convertible bonds payable...................... 6,832 6,601
Senior notes payable........................................ 219,059 152,000
Accounts payable and accrued liabilities.................... 12,760 7,385
Dividends payable........................................... 13,555 12,314
Deferred income............................................. 3,736 4,003
--------- --------
273,864 230,803
--------- --------
Commitments and contingencies
Total attributed Core Group equity.......................... 378,268 297,176
--------- --------
$ 652,132 $527,979
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 74
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income............................................... $70,604 $67,499 $64,740
Mortgage interest income.................................... 217 -- 845
Additional rental income.................................... 11,833 11,530 10,405
Other property income....................................... 187 -- --
Other interest income....................................... 1,908 721 4,894
Interest income on inter-Group loans to Psychiatric Group... 1,553 1,679 2,029
------- ------- -------
86,302 81,429 82,913
------- ------- -------
EXPENSES
Depreciation and amortization............................... 15,153 14,272 13,575
Property operating.......................................... 334 44 43
Interest expense............................................ 19,659 21,842 27,057
General and administrative.................................. 6,860 6,255 5,855
------- ------- -------
42,006 42,413 46,530
Minority interest........................................... 189 216 276
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM............................ 44,107 38,800 36,107
EXTRAORDINARY LOSS ON DEBT PREPAYMENT....................... (11,427) -- --
------- ------- -------
NET INCOME.................................................. $32,680 $38,800 $36,107
======= ======= =======
SERIES B PREFERRED DIVIDEND REQUIREMENT..................... $(1,553) $ -- $ --
======= ======= =======
ATTRIBUTABLE TO CORE GROUP COMMON STOCK --
INCOME BEFORE EXTRAORDINARY ITEM............................ $42,554 $38,800 $36,107
======= ======= =======
NET INCOME.................................................. $31,127 $38,800 $36,107
======= ======= =======
BASIC PER SHARE AMOUNTS
INCOME BEFORE EXTRAORDINARY ITEM............................ $ 1.81 $ 1.65 $ 1.69
EXTRAORDINARY LOSS ON DEBT PREPAYMENT....................... $ (0.49) $ -- $ --
NET INCOME.................................................. $ 1.32 $ 1.65 $ 1.69
WEIGHTED AVERAGE COMMON SHARES.............................. 23,505 23,453 21,356
DILUTED PER SHARE AMOUNTS
INCOME BEFORE EXTRAORDINARY ITEM............................ $ 1.80 $ 1.65 $ 1.69
EXTRAORDINARY LOSS ON DEBT PREPAYMENT....................... $ (0.49) $ -- $ --
NET INCOME.................................................. $ 1.31 $ 1.65 $ 1.69
WEIGHTED AVERAGE COMMON SHARES AND DILUTIVE POTENTIAL COMMON
SHARES.................................................... 23,703 23,558 21,421
DIVIDENDS DECLARED PER COMMON SHARE......................... $ 2.12 $ 2.04 $ 1.99
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 75
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR.............................. $297,176 $304,947 $259,199
Public offering of Series B Preferred Stock................ 96,400 -- --
Public offering of common shares........................... -- -- 50,317
Stock incentives, net...................................... 1,264 1,033 1,687
Exercise of stock options.................................. 2,176 241 1,732
Net income................................................. 32,680 38,800 36,107
Dividends.................................................. (51,428) (47,845) (44,095)
-------- -------- --------
BALANCES AT END OF YEAR.................................... $378,268 $297,176 $304,947
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 76
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 32,680 $ 38,800 $ 36,107
Extraordinary loss on debt prepayment..................... 11,427 -- --
Depreciation, amortization and other non-cash items....... 17,627 16,415 15,717
Deferred income........................................... (228) (315) (305)
Change in receivables and other assets.................... (2,964) 384 (625)
Change in accounts payable and accrued liabilities........ 5,280 (443) (481)
--------- -------- --------
63,822 54,841 50,413
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties.... (92,242) (17,142) (48,640)
Proceeds from sale of property............................ -- 423 --
Mortgage note receivable fundings......................... (4,221) -- --
Principal payment on mortgage note receivable............. -- -- 26,519
Construction loan fundings................................ -- -- (5,136)
Direct financing leases................................... 642 2,535 (2,414)
Paydowns on revolving inter-Group loan to Psychiatric
Group................................................... 804 1,086 4,001
Paydowns on fixed rate inter-Group loan to Psychiatric
Group................................................... -- -- 10,825
Administrative capital expenditures....................... (14) (55) (96)
--------- -------- --------
(95,031) (13,153) (14,941)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable............... (48,500) 48,500 (14,500)
Proceeds from notes payable issuance...................... 218,965 -- --
Prepayment of notes payable............................... (163,176) -- --
Principal payments on notes payable....................... -- (49,000) (24,000)
Principal payments on mortgage note payable............... (34) -- --
Financing costs paid...................................... (2,862) (150) (919)
Proceeds from sale of Series B preferred stock............ 96,400 -- --
Proceeds from sale of common stock........................ -- -- 50,317
Proceeds from exercise of stock options................... 2,176 241 1,732
Dividends paid............................................ (50,187) (47,370) (42,369)
--------- -------- --------
52,782 (47,779) (29,739)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS.... 21,573 (6,091) 5,733
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR........ 1,480 7,571 1,838
--------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR.............. $ 23,053 $ 1,480 $ 7,571
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 77
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED 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, Alzheimer's care and
medical office/clinic facilities.
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 acute care, rehabilitation and long-term acute care
hospitals, skilled nursing, assisted living, Alzheimer's care and medical
office/clinic facilities (the Core Group) and its investments in psychiatric
hospitals (the Psychiatric 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
Company's common stock (the Core Group Common Stock) is intended to reflect the
separate financial performance of the Core Group. The Psychiatric Group
Depositary Shares are intended to reflect the separate financial performance of
the Psychiatric 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, Alzheimer's care and medical
office/clinic facilities, an allocated portion of the Company's general and
administrative expense, all corporate assets and liabilities and related
transactions associated with the ongoing operations of the Company which are not
separately identified with either operating Group, an attributed amount of
inter-Group loans receivable from the Psychiatric Group and an attributed amount
of the Company's stockholders' equity. The Core Group financial statements are
prepared using the amounts included in the Company's consolidated financial
statements.
Although the financial statements of the Core Group and the Psychiatric
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow of
the Company attributed to each such Group, such attribution does not affect the
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, Series B Depositary Shares or
Psychiatric Group Depositary Shares is a holder of an issue of capital stock of
the entire Company and is subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. Financial effects
arising from one Group that affect the Company's consolidated results of
operations, financial condition, cash flows or borrowing costs may also affect
the results of operations, financial condition, cash flows or borrowing costs of
the other Group. In addition, net losses of either Group, as well as dividends
and distributions on, and repurchases or redemptions of, Core Group Common
Stock, Series B Depositary Shares or Psychiatric Group Depositary Shares will
reduce the funds of the Company legally available for dividends on Core Group
Common Stock, Series B Depositary Shares and Psychiatric Group Depositary
Shares. Accordingly, the Core Group's financial statements should be read in
conjunction with the Company's consolidated financial statements and the
financial statements of the Psychiatric Group.
F-30
<PAGE> 78
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
These financial statements include the accounts of the Core Group business.
The Core Group and the Psychiatric Group financial statements, taken together,
comprise all of the accounts included in the Company's consolidated financial
statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 Core Group records properties at cost and
recognizes depreciation 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 the carrying value of its real estate properties, notes receivable and
inter-Group loans for the possible impairment of value 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 term of the related
leases and mortgage notes receivable.
Deferred Costs Deferred financing costs are amortized over the term of the
related debt at a constant effective rate.
Federal Income Taxes The Company intends at all times to operate so as to
qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company generally will not be subject to federal income tax to the
extent it distributes to Shareholders at least 100% of its taxable income.
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, Series B Depositary Shares 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, Series B Depositary Shares and
Psychiatric Group Depositary Shares, with earnings and profits allocated first
to Series B 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,
impairment losses 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.
New Accounting Standards In 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", and as
required, restated per share amounts for all prior periods presented. The
adoption of SFAS No. 128 has not materially impacted the Core Group's financial
F-31
<PAGE> 79
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
statements. The required adoption in 1998 of SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" is not expected to have a material impact on
the Core Group's financial statements.
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 of the
Company 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 ($243,813,000 and
$207,101,000 at December 31, 1997 and 1996, respectively) has been attributed to
the Core Group; however, the Core Group, together with the Psychiatric Group, is
subject to all of the terms, restrictions and covenants relating to such
third-party debt. This debt and its relevant terms are summarized in the
following paragraphs.
Bank loans payable The Company has a $250 million unsecured revolving
credit agreement with a syndicate of banks that matures on December 31, 2000 and
bears an annual facility fee based on the total commitment. This agreement
provides for interest on outstanding borrowings based on, at the Company's
election, LIBOR plus a margin, a rate bid by the lenders, or the prime rate. The
margin on LIBOR 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's LIBOR margin is 62.5
basis points and the annual facility fee is 25 basis points.
F-32
<PAGE> 80
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average amount of borrowings under bank credit agreements
outstanding during 1997, 1996 and 1995 was $6,151,000, $21,622,000 and
$27,467,000 at weighted average interest rates of 7.1%, 6.4% and 7.5%,
respectively. The maximum amount outstanding under bank credit agreements in
1997, 1996 and 1995 was $48,500,000, $53,000,000 and $73,000,000, respectively.
As of December 31, 1997, the Company had no outstanding borrowings under its
bank credit agreement.
The duration of borrowings under the Company's unsecured revolving credit
agreement is generally less than 90 days at variable pricing indicative of
current short-term borrowing rates. Accordingly, carrying amount is a reasonable
estimate of fair value.
Mortgage note payable In connection with the acquisition of a medical
office building in Houston, Texas, a mortgage note payable in the amount of
$17,956,000 was assumed. The remaining balance at December 31, 1997 was
$17,922,000 with an interest rate of 8.30%. The note is secured by a first
mortgage and security interest in the real property and requires a monthly
payment of principal and interest of approximately $158,000 with the remaining
principal balance due at maturity on June 15, 2011.
The carrying amount of the mortgage note payable is a reasonable estimate
of fair value, as the pricing and terms of the note are indicative of current
rates and credit terms.
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 1997, 1996 and 1995 was $22,800,000, $178,250,000 and
$211,000,000 at weighted average effective interest rates of 11.06%, 11.03% and
11.06%, 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.
As of December 31, 1996, the estimated fair value of the Company's senior
notes payable was $163 million based on an estimate of rates available to the
Company for debt with similar terms.
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 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 fair value of the Company's 2002 Notes and 2007 Notes is based on the
quoted market price of the notes as traded over-the-counter. As of December 31,
1997, the estimated fair value of the 2002 Notes and 2007 Notes was $225
million.
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.
F-33
<PAGE> 81
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and 1996, the estimated fair value of subordinated convertible
bonds payable was $7,259,000 and $6,757,000, 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 annual maturities of the
Company's outstanding debt at December 31, 1997, for calendar years 1998 through
2002 and thereafter, is $427,000, $464,000, $7,959,000, $547,000, $100,594,000
and $135,386,000, respectively.
Interest Interest capitalized on construction in progress was $517,000,
$895,000 and $198,000 in 1997, 1996 and 1995, respectively. Interest paid, net
of interest capitalized, in 1997, 1996 and 1995 was $14,374,000, $21,547,000 and
$26,232,000, respectively.
Inter-Group Loans The weighted average outstanding amount of revolving
inter-Group loans owed by the Psychiatric Group to the Core Group during 1997,
1996 and 1995 was $3,415,000, $4,666,000 and $5,497,000 at weighted average
interest rates of 10.44%, 10.27% and 10.82%, respectively.
The weighted average outstanding amount of fixed rate inter-Group loans
owed by the Psychiatric Group to the Core Group during 1997, 1996 and 1995 was
$9,175,000, $9,175,000 and $10,979,000 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 in 1995 were received from
the net proceeds from sales of Psychiatric Group real estate investments.
Repayment of inter-Group loans by the Psychiatric Group is primarily
dependent upon the amount and timing of sales of the Psychiatric Group's assets
and paydowns received by the Psychiatric Group on borrowings provided to a
psychiatric hospital operator under a revolving credit agreement. The 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 from the Psychiatric Group as a
result of 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 at any time 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
$7,870,000 at any one time outstanding, which limit is to be reduced
dollar-for-dollar by any permanent repayment in the future of borrowings under a
revolving credit agreement provided to a Psychiatric Group hospital operator;
provided that the limit on the aggregate revolving inter-Group loans will not be
reduced below $5,000,000. 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 a psychiatric hospital operator under a revolving credit
agreement associated with the asset 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-34
<PAGE> 82
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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% (10.50% at December 31, 1997) 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 and the issuance
of Series B Depositary Shares, as well as cash required to fund Core Group
Common Stock dividends or repurchases and Series B Depositary Share dividends or
redemptions 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-35
<PAGE> 83
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, 1997:
<TABLE>
<CAPTION>
BUILDINGS
AND TOTAL ACCUMULATED
LAND IMPROVEMENTS INVESTMENT DEPRECIATION
-------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACUTE CARE HOSPITALS:
Chesterfield General Hospital.......... SC $ 720 $ 10,687 $ 11,407 $ 950
Cleveland Regional Medical Center...... TX 300 8,000 8,300 1,186
Desert Valley Hospital................. CA 1,755 24,650 26,405 1,898
Frye Regional Medical Center........... NC 1,247 44,202 45,449 12,103
Irvine Medical Center.................. CA 17,987 57,013 75,000 9,562
Kendall Regional Medical Center........ FL 4,163 64,849 69,012 17,256
Lucy Lee Hospital...................... MO 404 23,162 23,566 5,929
Marlboro Park Hospital................. SC 640 7,153 7,793 636
North Fulton Regional Hospital......... GA 4,149 42,042 46,191 9,220
Palm Beach Gardens Medical Center...... FL 4,024 41,624 45,648 11,231
Pioneer Valley Hospital................ UT 1,997 47,469 49,466 2,410
Shannon Health System, St. John's
Campus............................... TX 255 16,197 16,452 2,542
Tarzana Hospital of Encino-Tarzana
Regional Medical Center.............. CA 12,421 61,279 73,700 17,026
-------- -------- -------- --------
50,062 448,327 498,389 91,949
-------- -------- -------- --------
ALZHEIMER'S CARE FACILITIES:
Pine Haven I Alzheimer's Community..... TX 225 3,475 3,700 181
Pine Haven II Alzheimer's Community.... TX 265 3,759 4,024 78
-------- -------- -------- --------
490 7,234 7,724 259
-------- -------- -------- --------
ASSISTED LIVING FACILITIES:
Cambria Lodge.......................... TX 300 4,882 5,182 168
Garrison Creek Lodge................... WA 219 5,429 5,648 198
Sherwood Place......................... TX 220 4,814 5,034 155
Summer Wind Residence.................. ID 110 2,890 3,000 169
-------- -------- -------- --------
849 18,015 18,864 690
-------- -------- -------- --------
LONG-TERM ACUTE CARE HOSPITAL:
Comprehensive Care Hospital of
Amarillo............................. TX 810 5,300 6,110 11
-------- -------- -------- --------
MEDICAL OFFICE/CLINIC FACILITIES:
Casa Blanca Clinic(1).................. AZ 1,900 18,675 20,575 56
Fannin Medical Buildings(1)............ TX 2,850 49,184 52,034 256
Northpark Professional Building........ FL -- 10,628 10,628 177
Park Plaza Professional Building....... TX 1,100 15,831 16,931 44
Walsh Medical Arts Center.............. CA 285 8,515 8,800 798
-------- -------- -------- --------
6,135 102,833 108,968 1,331
-------- -------- -------- --------
REHABILITATION HOSPITALS:
HCA Wesley Rehabilitation Hospital..... KS 1,938 12,659 14,597 1,833
MountainView Regional Rehabilitation
Hospital............................. WV -- 11,718 11,718 1,879
Northwest Arkansas Rehabilitation
Hospital............................. AR 962 8,124 9,086 1,320
-------- -------- -------- --------
2,900 32,501 35,401 5,032
-------- -------- -------- --------
</TABLE>
F-36
<PAGE> 84
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BUILDINGS
AND TOTAL ACCUMULATED
LAND IMPROVEMENTS INVESTMENT DEPRECIATION
-------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SKILLED NURSING FACILITIES:
Arkansas Manor Nursing Home............ CO 154 3,912 4,066 369
Cornerstone Care Center................ CO 125 4,731 4,856 345
Douglas Manor.......................... AZ 175 2,446 2,621 174
Safford Care Center.................... AZ 100 4,834 4,934 333
-------- -------- -------- --------
554 15,923 16,477 1,221
-------- -------- -------- --------
$ 61,800 $630,133 $691,933 $100,493
======== ======== ======== ========
</TABLE>
- ---------------
(1) Casa Blanca Clinic represents four separate facilities leased together under
a master lease. Fannin Medical Buildings represents two separate facilities
leased together under a master lease, one of which is encumbered by a
$17,922 mortgage note payable.
A substantial portion of the Core Group's properties are leased to
single-tenant operators 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 such properties, the option to fund
certain capital expenditures and, in certain situations, is obligated to fund
approved capital expenditures on terms comparable to the original investment.
The base and additional rent provisions of the leases are amended when such
capital expenditures are funded to reflect the Core Group's increased
investment. At December 31, 1997, the Core Group had no commitments to fund
capital expenditures pursuant to these rights and obligations.
Many of the Core Group's medical office/clinic facilities are leased to
multiple tenants on a gross or modified net basis pursuant to which the Core
Group, as lessor, is responsible for a portion of the operating costs of the
building, including but not limited to the cost of maintenance, repairs,
insurance and taxes on the leased properties. In addition, the Core Group is in
general initially responsible for capital expenditures, leasing commissions and
tenant improvements at these buildings, subject to reimbursement from tenants in
some instances.
At December 31, 1997, the Core Group had construction in progress of
$4,729,000, representing the funded amount of commitments totaling $17 million
for the development of two skilled nursing facilities in Las Vegas, Nevada.
Subsequent to year-end, the Core Group completed the acquisition of three
medical office facilities in separate transactions totaling approximately $41.1
million. The Core Group has a $35 million forward funding commitment to develop
up to five assisted living facilities to be managed by an experienced operator
of assisted living facilities. The Core Group has a similar commitment of $22.5
million to develop up to 11 Alzheimer's care facilities to be managed by an
experienced operator of Alzheimer's care facilities. The Core Group also has
agreed to provide $9.4 million of real estate financing to an experienced
operator of long-term acute care facilities for which there are currently no
identified projects.
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 1997, revenues from
these leases accounted for 51% of the Core Group's total revenues.
Aggregate revenues from five leases maturing in February 1999 accounted for
41% of the Core Group's total revenues in 1997. 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
F-37
<PAGE> 85
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 without 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 1998 through 2002 and thereafter are
approximately $79,160,000, $78,450,000, $54,740,000, $50,530,000, $48,170,000
and $91,860,000, respectively.
MORTGAGE NOTE RECEIVABLE
Total Life Care Hospital $4,221,000 The Core Group has funded $4.2 million
of a $4.4 million mortgage note receivable secured by a first mortgage and
security interest in the real property of a long-term acute care facility in
Houston, Texas. The note has an initial term of ten years with two ten-year
renewal terms. The initial term maturity date is June 30, 2007. The interest
rate on the note is 10.50% with interest only payable monthly through June 30,
1999 and monthly principal and interest payments of $40,000 payable thereafter.
Pursuant to the terms of the mortgage note receivable, the Core Group may
receive additional interest each year based on the increase in annual operating
revenues of the facility.
The carrying amount of the mortgage note receivable is a reasonable
estimate of fair value, as the pricing and terms of the note are indicative of
current rates and credit risk.
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, 1997, the Core Group's aggregate net investment in these direct financing
leases was $3,053,000, represented by total minimum lease payments receivable of
$3,504,000 less unearned income of $451,000. Future minimum annual lease
payments under these leases for calendar years 1998 through 2002 are
approximately $1,342,000, $1,342,000, $704,000, $94,000 and $22,000,
respectively.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Pension expense allocated to the Core Group in 1997, 1996 and 1995
was $188,000, $222,000 and $210,000, respectively.
The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors elected prior to 1997 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 1997, 1996 and 1995 was
$88,000, $177,000 and $142,000, 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. As allowed by SFAS 123, "Accounting for Stock-Based
Compensation", the Company
F-38
<PAGE> 86
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
measures 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". Total stock-based compensation
expense recognized under APB 25 and allocated to the Core Group in 1997, 1996
and 1995 was $1,319,000, $1,139,000 and $961,000, 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 earnings per share of the Core Group for 1997, 1996 and 1995
would not have been material. The pro forma effect for 1997, 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.
ATTRIBUTED EQUITY
Subsequent Equity Offering In February 1998, the Company completed an
offering of 353,201 additional shares of Core Group Common Stock resulting in
net proceeds of approximately $9.5 million.
8 1/2% Cumulative Redeemable Preferred Stock, Series B The Company has
4,000,000 Series B Depositary Shares outstanding which represent 40,000 shares
of Series B Preferred Stock. Each Series B Depositary Share represents 1/100 of
a share of Series B Preferred Stock, and entitles the holder to such proportion
of all the rights, preferences and privileges of the Series B Preferred Stock
represented thereby. The Series B Depositary Shares, and the Series B Preferred
Stock represented thereby, rank senior to the Company's Core Group Common Stock,
its Series A Preferred Stock (when and if issued) and its Psychiatric Group
Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, with respect to dividend payments and liquidation rights. The annual
dividend rate and liquidation preference with respect to each Series B
Depositary Share are $2.15 and $25, respectively (equivalent to $215 and $2,500
per share of Series B Preferred Stock, respectively). Dividends on the Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, are
cumulative and, if and when declared, are payable quarterly in arrears on the
last day of February, May, August and November of each year. On or after October
27, 2002, the Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, may be redeemed, in whole or in part, at the option of the
Company at a redemption price of $25 per Series B Depositary Share (equivalent
to $2,500 per share of Series B Preferred Stock), plus accrued and unpaid
dividends thereon. The redemption price, other than the portion representing
accrued and unpaid dividends, is payable solely out of proceeds from the sale of
other capital stock of the Company. The proceeds from the sale of the Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, as well
as the dividends payable thereon, have been attributed to the Company's Core
Group for financial accounting and reporting purposes.
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
1/100 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 Series A Preferred Stock (when and if issued) rank
senior to the Company's Core Group Common Stock and its Psychiatric Group
Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, with respect to dividend payments and liquidation rights, but rank
junior to the Company's Series B Depositary Shares, and the Series B Preferred
Stock represented thereby. 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.
F-39
<PAGE> 87
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
For purposes of computing earnings per share 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 following is a reconciliation of the income
and share amounts used in the basic and diluted per share computations of income
before extraordinary item attributable to Core Group Common Stock:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
INCOME SHARES INCOME SHARES INCOME SHARES
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item........ $44,107 -- $38,800 -- $36,107 --
Less Series B preferred dividend
requirement........................... (1,553) -- -- -- -- --
Outstanding common shares............... -- 23,503 -- 23,451 -- 21,356
Deferred common shares.................. -- 2 -- 2 -- --
------- ------ ------- ------ ------- ------
Basic EPS components.................... 42,554 23,505 38,800 23,453 36,107 21,356
Effect of dilutive potential common
shares
Stock options......................... -- 94 -- 40 -- 16
DERs.................................. -- 104 -- 65 -- 49
Subordinated convertible bonds
payable............................ -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Diluted EPS components.................. $42,554 23,703 $38,800 23,558 $36,107 21,421
======= ====== ======= ====== ======= ======
</TABLE>
DIVIDENDS
A quarterly dividend of $.545 per share for Core Group Common Stock, or
approximately $12,838,000, was declared by the Board of Directors on January 23,
1998, payable on February 23, 1998 to shareholders of record on February 9,
1998. A dividend of $.5375 per share for Series B Depositary Shares was declared
by the Board of Directors on January 23, 1998, payable March 2, 1998 to
shareholders of record February 17, 1998. This dividend was for the regular
quarterly period ended February 28, 1998 and approximately $717,000 was accrued
at December 31, 1997. The aggregate dividends of $13,555,000 have been reflected
as dividends payable in the accompanying financial statements as of December 31,
1997.
Dividends of $2.10 per share paid on Core Group Common Stock during the
year ended December 31, 1997 are characterized as $1.446 of ordinary income and
$.654 of return of capital for tax purposes. A cash dividend of $.209028 per
share paid on Series B Depositary Shares on December 1, 1997 is characterized
entirely as ordinary income for income tax purposes.
In general, dividends on the Company's Core Group Common Stock and
Psychiatric Group Depositary Shares 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 Depositary
Shares and will be limited to $30 million in the aggregate and $15 million in
any calendar year.
F-40
<PAGE> 88
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED 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>
1997
Revenues.................................... $ 21,322 $21,055 $21,204 $22,721 $ 86,302
Attributable to Core Group Common Stock --
Income before extraordinary item.......... $ 9,930 $11,129 $11,087 $10,408 $ 42,554
Extraordinary loss on debt prepayment..... (11,427) -- -- -- (11,427)
Net income (loss)......................... (1,497) 11,129 11,087 10,408 31,127
Basic per share amounts --
Income before extraordinary item....... $ 0.42 $ 0.47 $ 0.47 $ 0.44 $ 1.81
Extraordinary loss on debt
prepayment........................... (0.48) -- -- -- (0.49)
Net income (loss)...................... (0.06) 0.47 0.47 0.44 1.32
Diluted per share amounts --
Income before extraordinary item....... $ 0.42 $ 0.47 $ 0.47 $ 0.44 $ 1.80
Extraordinary loss on debt
prepayment........................... (0.48) -- -- -- (0.49)
Net income (loss)...................... (0.06) 0.47 0.47 0.44 1.31
1996
Revenues.................................... $ 20,186 $20,181 $20,344 $20,718 $ 81,429
Net income.................................. 9,319 9,435 9,873 10,173 38,800
Basic per share amounts --
Net income................................ $ 0.40 $ 0.40 $ 0.42 $ 0.43 $ 1.65
Diluted per share amounts --
Net income................................ $ 0.40 $ 0.40 $ 0.42 $ 0.43 $ 1.65
</TABLE>
F-41
<PAGE> 89
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, 1997
and 1996, 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, 1997. These financial statements are the responsibility of the management of
American Health Properties, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Core Group as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 24, 1998.
F-42
<PAGE> 90
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate properties
Buildings and improvements................................ $ 8,810 $19,740
Accumulated depreciation.................................. (1,742) (4,688)
------- -------
7,068 15,052
Land...................................................... 3,097 5,222
------- -------
10,165 20,274
Mortgage notes receivable, net.............................. 37,715 37,787
Other notes receivable...................................... 2,500 4,457
Receivables................................................. 614 621
Other assets................................................ -- 122
------- -------
$50,994 $63,261
======= =======
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving inter-Group loan from Core Group.................. $ 3,379 $ 4,183
Fixed rate inter-Group loan from Core Group................. 9,175 9,175
Accounts payable and accrued liabilities.................... 433 --
Dividends payable........................................... 1,292 1,667
Deferred income............................................. 22 273
------- -------
14,301 15,298
------- -------
Commitments and contingencies
Total attributed Psychiatric Group equity................... 36,693 47,963
------- -------
$50,994 $63,261
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 91
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------ -------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income............................................... $ 1,633 $1,989 $ 3,053
Mortgage interest income.................................... 6,072 5,980 5,887
Additional rental and interest income....................... 665 812 720
Other interest income....................................... 346 393 686
------- ------ -------
8,716 9,174 10,346
------- ------ -------
EXPENSES
Depreciation and amortization............................... 751 744 802
Property operating.......................................... 190 -- --
Interest expense on inter-Group loans from Core Group....... 1,553 1,679 2,029
General and administrative.................................. 1,140 1,172 941
Targeted stock issuance costs............................... -- -- 300
Impairment loss on real estate and notes receivable......... 11,000 -- --
------- ------ -------
14,634 3,595 4,072
------- ------ -------
NET INCOME (LOSS)........................................... $(5,918) $5,579 $ 6,274
======= ====== =======
BASIC PER SHARE AMOUNTS
NET INCOME (LOSS)........................................... $ (2.84) $ 2.68 $ 3.01
WEIGHTED AVERAGE DEPOSITARY SHARES.......................... 2,084 2,084 2,086
DILUTED PER SHARE AMOUNTS
NET INCOME (LOSS)........................................... $ (2.84) $ 2.67 $ 3.00
WEIGHTED AVERAGE DEPOSITARY SHARES
AND DILUTIVE POTENTIAL DEPOSITARY SHARES.................. 2,084 2,093 2,091
DIVIDENDS DECLARED PER DEPOSITARY SHARE..................... $ 2.62 $ 2.80 $ 3.20
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 92
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR............................... $47,963 $48,113 $48,302
Stock incentives, net....................................... 108 107 229
Distribution of Psychiatric Group Preferred Stock........... -- -- (18)
Net income (loss)........................................... (5,918) 5,579 6,274
Dividends................................................... (5,460) (5,836) (6,674)
------- ------- -------
BALANCES AT END OF YEAR..................................... $36,693 $47,963 $48,113
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 93
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(5,918) $ 5,579 $ 6,274
Depreciation, amortization and other non-cash items......... 859 856 867
Deferred income............................................. (25) (53) (35)
Impairment loss on real estate and notes receivable......... 11,000 -- --
Change in receivables and other assets...................... 126 28 (11)
Change in accounts payable and accrued liabilities.......... 292 (10) (37)
------- ------- --------
6,334 6,400 7,058
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties...... -- -- (693)
Proceeds from sale of properties............................ -- -- 10,825
Principal payments on mortgage notes receivable............. 72 64 24
Other notes receivable...................................... 233 458 4,513
------- ------- --------
305 522 14,669
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving inter-Group loan from Core Group...... (804) (1,086) (4,001)
Payments on fixed rate inter-Group loan from Core Group..... -- -- (10,825)
Cash paid in lieu of fractional shares...................... -- -- (18)
Dividends paid.............................................. (5,835) (5,836) (6,883)
------- ------- --------
(6,639) (6,922) (21,727)
------- ------- --------
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-46
<PAGE> 94
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED 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, Alzheimer's care and
medical office/clinic facilities.
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, Alzheimer's care and medical office/clinic
facilities (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. 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
legal title to assets or responsibility for liabilities of the Company or any of
its subsidiaries. Furthermore, such attribution does not affect the rights of
creditors of the Company or any subsidiary, including rights under financing
covenants.
Each holder of Psychiatric Group Depositary Shares, Core Group Common Stock
or Series B Depositary Shares is a holder of an issue of capital stock of the
entire Company and is subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. Financial effects
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 or redemptions of, Psychiatric Group
Depositary Shares, Core Group Common Stock or Series B Depositary Shares will
reduce the funds of the Company legally available for dividends on Psychiatric
Group Depositary Shares, Core Group Common Stock and Series B Depositary Shares.
Accordingly, the Psychiatric Group's financial statements should be read in
conjunction with the Company's consolidated financial statements and the
financial statements of the Core Group.
F-47
<PAGE> 95
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.
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.
Real Estate Properties The Psychiatric Group records properties at cost
and recognizes depreciation 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 the carrying value of its real estate properties and notes
receivable for the possible impairment of value 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 term of the related
leases and mortgage notes receivable.
Federal Income Taxes The Company intends at all times to operate so as to
qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company generally will not be subject to federal income tax to the
extent it distributes to Shareholders at least 100% of its taxable income.
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, Series B Depositary Shares 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, Series B Depositary Shares and
Psychiatric Group Depositary Shares, with earnings and profits allocated first
to Series B 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,
impairment losses 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.
New Accounting Standards In 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", and as
required, restated per share amounts for all prior periods presented. The
adoption of SFAS No. 128 has not materially impacted the Psychiatric Group's
financial statements. The required adoption in 1998 of SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" is not expected to have a material impact on
the Psychiatric Group's financial statements.
F-48
<PAGE> 96
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC 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 of the
Company 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 ($243,813,000 and
$207,101,000 at December 31, 1997 and 1996, respectively) 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, 1997 includes
$219,059,000 of unsecured senior notes payable, $17,922,000 of mortgage
indebtedness and $6,832,000 of subordinated convertible bonds payable. The
aggregate amount of annual maturities of the Company's outstanding debt at
December 31, 1997, for calendar years 1998 through 2002 and thereafter is
$427,000, $464,000, $7,959,000, $547,000, $100,594,000 and $135,386,000,
respectively. The Notes to the Consolidated Financial Statements of the Company
should be read for further details regarding the Company's third-party debt.
Inter-Group Loans The weighted average outstanding amount of revolving
inter-Group loans owed by the Psychiatric Group to the Core Group during 1997,
1996 and 1995 was $3,415,000, $4,666,000 and $5,497,000 at weighted average
interest rates of 10.44%, 10.27% and 10.82%, respectively.
F-49
<PAGE> 97
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 1997, 1996 and 1995 was
$9,175,000, $9,175,000 and $10,979,000 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 in 1995 were funded with
the net proceeds from sales of Psychiatric Group real estate investments.
Repayment of inter-Group loans by the Psychiatric Group is primarily
dependent upon the amount and timing of sales of the Psychiatric Group's assets
and paydowns received by the Psychiatric Group on borrowings provided to a
psychiatric hospital operator under a revolving credit agreement. The
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 to the Core Group
as a result of 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 at any time 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 $7,870,000 at
any one time outstanding, which limit is to be reduced dollar-for-dollar by any
permanent repayment in the future of borrowings under a revolving credit
agreement provided to a Psychiatric Group hospital operator; provided that the
limit on the aggregate revolving inter-Group loans will not be reduced below
$5,000,000. 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 a psychiatric hospital operator under a revolving credit
agreement associated with the asset 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.
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.
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% (10.50% at December 31, 1997) 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.
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
F-50
<PAGE> 98
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 and the issuance
of Series B Depositary Shares, as well as cash required to fund Core Group
Common Stock dividends or repurchases and Series B Depositary Share dividends or
redemptions 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
Fundamental changes in the psychiatric industry continue to impact
negatively the facility-specific operating cash flow at the Psychiatric Group's
properties. Institutions responsible for the reimbursement of care provided to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions include
decreasing the inpatient length of stay, intensively reviewing utilization,
directing patients from inpatient care to outpatient care and negotiating
reduced reimbursement rates for services. The wider use of psychotropic drugs
also has resulted in significant declines in the average length of stay. In
addition, aggressive program compliance enforcement and increased scrutiny of
past and current billing practices has resulted in the filing of lawsuits
against some providers and significant negative publicity which has further
exacerbated the financial and operational difficulties of providers. Although
the operators of the psychiatric hospitals are responding by increasing case
management, developing lower cost outpatient and daypatient programs and
reducing operating costs, their efforts are generally not consistently
mitigating the negative impact of these fundamental psychiatric industry
changes. As a result, certain of the Psychiatric Group hospital operators have
not consistently met their contractual payment obligations to the Psychiatric
Group as scheduled and the Psychiatric Group cannot be assured that hospital
operators will be able to meet such payment obligations in the future.
In general, the operators of the Psychiatric Group's properties have very
limited access to financing for their operating and capital needs. The
Psychiatric Group provided such financing under a revolving credit agreement to
the operator of one of its psychiatric properties. As of December 31, 1997,
outstanding borrowings under such agreement totaled $2,500,000 which amount
remains outstanding even though the financing matured June 30, 1997. In the
past, the Psychiatric Group has provided similar financing to other operators of
its properties which have been unable to pay off their outstanding borrowings.
The Psychiatric
F-51
<PAGE> 99
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Group cannot be assured that the operator currently borrowing under a revolving
credit agreement will be able to secure replacement financing from third-party
lenders or to pay off its outstanding borrowings. To the extent the operators of
the Psychiatric Group's properties have increased working capital needs in the
future, the Psychiatric Group may be the only source of such financing. In the
event the Company's Board of Directors determines that it is appropriate to
provide additional working capital financing to a psychiatric hospital operator,
it may cause the Core Group to make revolving inter-Group loans to the
Psychiatric Group to fund such financing (to the extent consistent with its
then-existing policies), although the Company's Board of Directors is under no
obligation to do so.
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 impairment losses on psychiatric investments, the periodic
restructuring of psychiatric operator payment obligations and the closing of one
psychiatric hospital. Although management currently believes that the recorded
amounts of its psychiatric investments are realizable, if the psychiatric
operators are unable to adapt to the fundamental ongoing changes in the
psychiatric industry successfully and consistently mitigate the negative impact
of the ongoing changes on their financial performance, the Psychiatric Group may
be required to restructure payment obligations further, identify alternative
operators, pursue alternative uses for or dispositions of the properties and/or
recognize additional impairment losses on its psychiatric investments. If the
Psychiatric Group is required to take any of these actions, various costs are
likely to be incurred by the Psychiatric Group in an effort to protect, maintain
and pursue alternatives for its investments. The Psychiatric Group does not
currently intend to make new investments, and over time, may sell, restructure
or seek other means to reduce its investments. The Psychiatric Group sold two of
its psychiatric properties in 1995 and continues to encourage each of the
psychiatric operators to pursue financing alternatives which would enable them
to acquire the properties and/or repay their borrowings from the Psychiatric
Group, as the case may be. Subject to the rights of the holders of the Company's
Series B Depositary Shares, and the Series B Preferred Stock represented
thereby, and any other preferred stock of the Company then outstanding, the
Psychiatric Group expects to use the net proceeds of any future property sales
and/or operator borrowing prepayments 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. The Psychiatric Group cannot be assured
that the efforts of psychiatric operators to obtain alternative financing will
be successful or, if successful, that the amounts of such financing would be
sufficient to enable the Psychiatric Group to realize the carrying amounts of
its investments. The Company continues to retain an investment banking firm to
provide financial advisory services to the Psychiatric Group. These services
include supplemental monitoring of the performance of individual assets,
assistance in potential sales or restructurings of particular investments and
continuing assessments of available strategic alternatives for the portfolio.
The cost of the financial advisory services are specifically charged to the
operating results of the Psychiatric Group.
The Psychiatric Group's dividend is determined quarterly based upon each
quarter's operating results. Historically, the level of dividends of the
Psychiatric Group have varied quarter-to-quarter. Any significant advance of
additional funds to operators of the Psychiatric Group's properties,
modification of terms covering the rental or interest obligations of its
properties or nonpayment or deferral of such obligations as they become due
likely will have an adverse impact on the Psychiatric Group results of
operations and cash flows, as well as on the quarterly dividend payment on
Psychiatric Group Depositary Shares. In addition to the foregoing, future
operating results, cash flows and dividends of the Psychiatric Group will be
affected by changes in the level of additional rent and interest, interest rate
adjustments on mortgage notes receivable, the amount of additional financial
advisory fees and, to the extent necessary, various costs which might be
incurred in an effort to protect, maintain and pursue alternatives for its
investments.
F-52
<PAGE> 100
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE PROPERTIES
The following table summarizes the Psychiatric Group's investment in health
care real estate properties as of December 31, 1997:
<TABLE>
<CAPTION>
BUILDINGS
AND TOTAL ACCUMULATED
STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION
----- ------ ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PSYCHIATRIC HOSPITALS:
Northpointe Behavioral Health System....... FL $1,457 $ 543 $ 2,000 $ 81
Rock Creek Center.......................... IL 440 6,065 6,505 1,331
The Retreat................................ FL 1,200 2,202 3,402 330
------ ------ ------- ------
$3,097 $8,810 $11,907 $1,742
====== ====== ======= ======
</TABLE>
Total revenues, including interest income from a revolving credit
agreement, from Rock Creek Center, was in excess of 10% of total Psychiatric
Group revenues in 1997.
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 1995, the hospital owner of the Psychiatric Group's two Florida
properties, Northpointe and The Retreat, was aware of and was monitoring
potential wide-ranging objections by several large insurance companies with
respect to claims presented for services rendered. Additionally, there had been
negative stories in the national media and the local press in Florida on
psychiatric care provided in Florida, including criticism of admissions policies
and practice patterns at psychiatric hospitals in the state generally, and at
these two hospitals. Legislative hearings had been held in Florida on these
issues, and various regulatory investigations likely had been conducted or
initiated. The hospitals were also experiencing operational and cash flow
difficulties which negatively impacted their ability to fund their rental and
interest obligations to the Psychiatric Group as they became due.
During 1996, the Psychiatric Group modified its agreements with the owner
to allow for the deferral of rent and interest payments of Northpointe while
certain restructuring and restaffing of the facility occurred. Pursuant to the
deferral arrangements, Northpointe's monthly base rent payments of $50,000 were
deferred from February 1996 through September 1996 and such deferred payments
were scheduled to become payable twelve months from the month of deferral. In
accordance with the terms of the deferral arrangements, Northpointe resumed
making its full monthly base rent payments of $50,000 on October 1, 1996. In
addition, Northpointe's monthly interest payments of $16,600 were deferred from
February 1996 until March 1, 1997 on which date all such deferred interest was
scheduled to be paid in full. Northpointe's deferred obligations were not
recognized as income by the Psychiatric Group.
In late 1996, the owner of Northpointe and The Retreat was named, together
with other operators of other psychiatric facilities in Florida, in a lawsuit
filed by several large insurance companies alleging widespread irregularities
with respect to operations in years prior to 1995. Subsequently, adverse
publicity from the lawsuit materially exacerbated the operational and financial
difficulties of Northpointe and The Retreat.
During 1997, the census at Northpointe fell significantly below the levels
projected by the owner at the end of 1996 to a level which made it appear
unlikely that the owner could continue operations at the facility. Although
Northpointe had made its monthly base rent payments of $50,000 during the fourth
quarter of 1996
F-53
<PAGE> 101
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and for January 1997, it was unable to pay its subsequent monthly base rent and
interest obligations or its deferred base rent and interest obligations. Adverse
publicity from the aforementioned lawsuit also began having a negative impact on
The Retreat resulting in declining census and deterioration of its cash flow
during 1997. Although The Retreat had made all of its rent and interest payments
to the Psychiatric Group in 1996 and in 1997 through April, The Retreat made its
February 1997 base rent payment from lease reserve funds and was unable to pay
its $45,000 additional rent payment for the first quarter of 1997 and its
$92,000 base rent payment for May 1997. The volatile circumstances at The
Retreat and deterioration in cash flows and census levels appeared likely to
preclude the owner from continuing operations at the facility. The owner of
these two hospitals and the Psychiatric Group explored a range of options for
the facilities, including the transfer of the hospitals to new operators,
closing the facilities, conversion of the facilities to an alternative use or
sale of the properties. As a result of this review, the Psychiatric Group
recorded an $11,000,000 charge in the first quarter of 1997 for impairment of
the carrying value of these two investments. Of this amount, $5,100,000 related
to the Psychiatric Group's investment in Northpointe and included a $1,675,000
reserve against the entire unpaid balance under a revolving credit agreement and
a $3,425,000 reduction in the carrying value of its net real estate investment
in Northpointe to its estimated fair value of $2,000,000. The remaining
impairment charge of $5,900,000 related to the Psychiatric Group's investment in
The Retreat and included a $49,000 reserve against the entire unpaid balance
under a revolving credit agreement and a $5,851,000 reduction in the carrying
value of its net real estate investment in The Retreat to its estimated fair
value of $3,400,000. The estimated fair values of these two investments were
determined primarily based upon the discounting of estimated future cash flows
and fundamental analysis.
The financial and operational problems at the two Florida hospitals
continued to worsen during 1997. The owner of the Northpointe hospital ceased
operations during the second quarter of 1997. The Psychiatric Group will incur
approximately $75,000 per quarter ($.04 per depositary share on a diluted basis)
to protect and maintain the property while various alternatives are evaluated
and pursued, including conversion of the facility to an alternative use or sale
of the property. A restructuring of The Retreat's obligations to the Psychiatric
Group was completed shortly after the end of the third quarter of 1997. The
Retreat's restructured base rent is $35,000 per month ($105,000 per quarter or
$.05 per depositary share on a diluted basis) and additional rent will not
accrue or be payable until August 1, 2000. The Psychiatric Group received
$105,000 ($.05 per depositary share on a diluted basis) for past base rent from
the Retreat and such payment was recognized as income in the third quarter. In
addition, the Psychiatric Group received a note for approximately $500,000,
representing a consolidation of previous obligations owed by The Retreat. The
note has a term of 32 months with monthly payments of approximately $18,000 that
commenced on January 1, 1998. The note has not been recognized for financial
accounting purposes. The Psychiatric Group has received all base rent payments
under the restructured terms through March 1998 but has only received
consolidation note payments through February 1998. Although the restructured
agreement with The Retreat is a positive step in stabilizing the cash flow and
operations of this facility, the Psychiatric Group cannot be assured that The
Retreat will be able to continue to meet its restructured obligations or to
continue operations, even if there is a change in the owner or operator of the
facility or if the Psychiatric Group provides additional financial assistance.
The Psychiatric Group is continuing to explore a range of options for each of
the two Florida properties, including the transfer of the hospitals to new
operators, conversion of the facilities to an alternative use or sale of the
properties. Due to the complexity and time involved in evaluating its options,
the Psychiatric Group has not yet reached a decision as to its ultimate course
of action. In light of the volatile circumstances of these two properties, the
Psychiatric Group cannot be assured that further impairment losses on these
investments will not be required.
In the first quarter of 1996, Rock Creek Center (RCC) in Illinois
experienced certain documentation and procedural deficiencies that resulted in
the denial of a substantial amount of Medicare receivables and a substantial
negative adjustment to the hospital's 1995 Medicare cost report and 1996 interim
Medicare reimbursement rate. These payor reimbursement issues, combined with
lower than expected census during the first quarter of 1996, had an adverse
impact on RCC's cash flow and its ability to fund its rental and interest
F-54
<PAGE> 102
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
obligations to the Psychiatric Group in 1996 as they became due. The net book
value of the Psychiatric Group's investment in RCC, including outstanding
borrowings under a revolving credit agreement, as of December 31, 1997 totaled
$7,675,000. In 1996, the Psychiatric Group reached an agreement with the
operator for the deferral of base rent payments while the operator took certain
actions to stabilize operations and implemented its revised business plan. After
a period of partial rental payments, full monthly base rent payments of
approximately $83,000 have been paid since November 1996. RCC's deferred rental
obligations of approximately $333,000 are to be paid in the future only when the
facility's cash exceeds a specified level and are not recognized as income by
the Psychiatric Group until such time as they are paid. To date, no deferred
rental obligations have been paid and the Psychiatric Group cannot be assured
that RCC will be able to pay any of the deferred rental obligations in the
future.
The initial term of the RCC lease, originally scheduled to expire in
December 1997, was extended until March 31, 1998. Although the original lease
agreement provided the operator with an option to renew the lease for an
additional five-year term at fair market rental, the operator did not exercise
that option. However, negotiations for a renewal of the current lease with the
existing operator are continuing and other operators have expressed interest in
the facility. The Psychiatric Group believes that either the current lease will
be renewed with the existing operator or the facility will be leased to a new
operator. The Psychiatric Group cannot be assured that either of these will be
accomplished or that, if accomplished, the annual minimum rent payments will be
at the current level of $1,000,000. Although, the $2,500,000 balance outstanding
under RCC's revolving credit agreement matured June 30, 1997, the operator has
continued to make interest payments. The Psychiatric Group is considering the
operator's suggestion to extend the maturity of the revolving credit agreement
to correspond with the expiration of a renewed lease term, if such a renewed
lease is accomplished. Should the current lease not be renewed or the revolving
loan not be repaid or extended with the existing operator and a facility lease
with a new operator is not accomplished, a significant negative impact to the
Psychiatric Group likely will result. The Psychiatric Group's total revenue from
the RCC investment for the fourth quarter and full year 1997 on a diluted basis
was $.18 per share and $.69 per share, respectively.
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 1998 through 2000 are approximately
$670,000, $420,000 and $280,000, 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 $18,065,000 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. During an
extension term, the interest rate on the note will be reset to the lesser of (i)
325 basis points over the ten-year treasury rate at commencement of an extension
term or (ii) various indexed rates for various
F-55
<PAGE> 103
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reset periods specified in the note agreement and selected by the borrower
during the first two years of an extension term. If reset at December 31, 1997,
the interest rate on the note would have been approximately 9.0%.
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, 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 13.07%, 13.44% and 13.80%, in 1995, 1996 and 1997, 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.
The operator of the two New York Four Winds facilities has been working to
develop an integrated behavioral health care delivery system in lower and upper
New York state. Such a system has been intended to create a cost-effective
response to the potential negative reimbursement consequences of the expected
movement to a managed Medicaid care environment within New York which is likely
to accelerate during 1998. However, it is not possible for the Psychiatric Group
to predict the impact of such changes or whether the operator's system will be
successful in such an environment, and the Psychiatric Group cannot be assured
that some restructuring of the operator's obligations to the Psychiatric Group
will not be required for the operator to remain competitive in such an
environment.
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 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.
OTHER NOTES RECEIVABLE
The Psychiatric Group has provided financing at variable rates to certain
psychiatric hospital operators under revolving credit agreements. 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. During 1997, $1,725,000 of outstanding borrowings were written off by
the Psychiatric Group as part of an $11 million impairment loss. As of December
31, 1997, $2,500,000 was outstanding under a revolving credit agreement provided
to one psychiatric hospital operator at a weighted average contractual interest
rate of 12.25%. Although the $2,500,000 outstanding balance under the revolving
credit agreement matured June 30, 1997, the operator has continued to make
interest payments while negotiations for extension or repayment of the revolving
credit agreement are continuing.
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.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Pension expense allocated to the Psychiatric Group in 1997, 1996 and
1995 was $19,000, $25,000 and $28,000, respectively.
The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors elected prior to 1997 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
F-56
<PAGE> 104
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Group in 1997, 1996 and 1995 was $9,000, $20,000 and $19,000, 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. As allowed by SFAS 123, "Accounting for Stock-Based
Compensation", the Company measures 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". Total
stock-based compensation expense recognized under APB 25 and allocated to the
Psychiatric Group in 1997, 1996 and 1995 was $108,000, $112,000 and $65,000,
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 earnings per share of the Psychiatric
Group for 1997, 1996 and 1995 would not have been material. The pro forma effect
for 1997, 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.
COMPANY PREFERRED EQUITY
8 1/2% Cumulative Redeemable Preferred Stock, Series B The Company has
4,000,000 Series B Depositary Shares outstanding which represent 40,000 shares
of Series B Preferred Stock. Each Series B Depositary Share represents 1/100 of
a share of Series B Preferred Stock, and entitles the holder to such proportion
of all the rights, preferences and privileges of the Series B Preferred Stock
represented thereby. The annual dividend rate and liquidation preference with
respect to each Series B Depositary Share are $2.15 and $25, respectively
(equivalent to $215 and $2,500 per share of Series B Preferred Stock,
respectively). Dividends on the Series B Depositary Shares, and the Series B
Preferred Stock represented thereby, are cumulative. Although the proceeds from
the sale of the Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, as well as the dividends payable thereon, have been
attributed to the Company's Core Group for financial accounting and reporting
purposes, the Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, rank senior to the Company's Core Group Common Stock, its
Series A Preferred Stock (when and if issued) and its Psychiatric Group
Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, with respect to dividend payments and liquidation rights.
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
1/100 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 Series A Preferred Stock (when and if issued) rank
senior to the Company's Core Group Common Stock and its Psychiatric Group
Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, with respect to dividend payments and liquidation rights, but rank
junior to the Company's Series B Depositary Shares, and the Series B Preferred
Stock represented thereby. 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.
F-57
<PAGE> 105
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
For purposes of computing earnings per share 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 following is a reconciliation of the
income and share amounts used in the basic and diluted per share computations of
net income attributable to Psychiatric Group Depositary Shares:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
INCOME SHARES INCOME SHARES INCOME SHARES
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS components................ $(5,918) 2,084 $ 5,579 2,084 $ 6,274 2,086
Effect of dilutive potential
depositary shares
Stock options..................... -- -- -- -- -- --
DERs.............................. -- -- -- 9 -- 5
------- ----- ------- ----- ------- -----
Diluted EPS components.............. $(5,918) 2,084 $ 5,579 2,093 $ 6,274 2,091
======= ===== ======= ===== ======= =====
</TABLE>
DIVIDENDS
A quarterly dividend of $.62 per share for Psychiatric Group Depositary
Shares, or approximately $1,292,000, was declared by the Board of Directors on
January 23, 1998, payable on February 23, 1998 to shareholders of record on
February 9, 1998. The dividend has been reflected as dividends payable in the
accompanying financial statements as of December 31, 1997. Dividends of $2.80
per share paid on Psychiatric Group Depositary Shares during the year ended
December 31, 1997 are characterized as $1.93 of ordinary income and $.87 of
return of capital for tax purposes.
In general, dividends on the Company's Core Group Common Stock and
Psychiatric Group Depositary Shares 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 Depositary
Shares and will be limited to $30 million in the aggregate and $15 million in
any calendar year.
F-58
<PAGE> 106
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Revenues................................. $ 2,401 $2,110 $2,138 $2,067 $ 8,716
Net income (loss)........................ (9,470)(1) 1,203 1,181 1,168 (5,918)
Basic per share amounts --
Net income (loss)...................... $ (4.54) $ 0.58 $ 0.57 $ 0.56 $ (2.84)
Diluted per share amounts --
Net income (loss)...................... $ (4.54) $ 0.57 $ 0.56 $ 0.56 $ (2.84)
1996
Revenues................................. $ 2,355 $2,173 $2,219 $2,427 $ 9,174
Net income............................... 1,432 1,234 1,278 1,635 5,579
Basic per share amounts --
Net income............................. $ 0.69 $ 0.59 $ 0.61 $ 0.78 $ 2.68
Diluted per share amounts --
Net income............................. $ 0.68 $ 0.59 $ 0.61 $ 0.78 $ 2.67
</TABLE>
- ---------------
(1) Includes impairment loss of $11,000 on Psychiatric Group real estate and
notes receivable.
F-59
<PAGE> 107
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 27th day of March, 1998.
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.
F-60
<PAGE> 108
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
/s/ JOSEPH P. SULLIVAN Chairman of the Board, Chief March 27, 1998
- --------------------------------------------------- Executive Officer and
Joseph P. Sullivan Director
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
/s/ MICHAEL J. MCGEE Senior Vice President and March 27, 1998
- --------------------------------------------------- Chief Financial Officer
Michael J. McGee
/s/ ROYCE DIENER Director March 27, 1998
- ---------------------------------------------------
Royce Diener
/s/ JAMES L. FISHEL Director March 27, 1998
- ---------------------------------------------------
James L. Fishel
/s/ JAMES D. HARPER, JR. Director March 27,1998
- ---------------------------------------------------
James D. Harper, Jr.
/s/ SHELDON S. KING Director March 27, 1998
- ---------------------------------------------------
Sheldon S. King
/s/ JOHN P. MAMANA, M.D. Director March 27, 1998
- ---------------------------------------------------
John P. Mamana, M.D.
Director
- ---------------------------------------------------
Louis T. Rosso
</TABLE>
F-61
<PAGE> 109
EXHIBIT INDEX
<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), 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.
4.4 -- Certificate of Increase to Certificate of Designations of
Series A Preferred Stock
4.5 -- Certificate of Designations of Series B Preferred Stock,
filed as Exhibit 4.1 to the Company's Registration Statement
on Form 8-A filed November 7, 1997, 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 23, 1997 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
Registration Statement on Form S-3 (No. 333-27651), and
incorporated herein by reference.
10.8 -- Employment Agreement between American Health Properties,
Inc. and Steven A. Roseman, filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-3 (No.
333-27651), and incorporated herein 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
</TABLE>
<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 Florida, Inc. Florida
AHP of Illinois, Inc. Illinois
AHP of Indiana, Inc. Indiana
AHP of Kansas, Inc. Kansas
AHP of Nevada, Inc. Nevada
AHP of New Jersey, Inc. New Jersey
AHP of South Carolina, Inc. South Carolina
AHP of Sunrise, Inc. Florida
AHP of Tarpon Springs, Inc. Florida
AHP of Tennessee, Inc. Tennessee
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); Form S-3 (File No. 33-61895); Form S-3 (File No.
333-27651); and Form S-4 (File No. 333-48813).
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 27, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,053
<SECURITIES> 0
<RECEIVABLES> 7,103
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 708,569
<DEPRECIATION> (102,235)
<TOTAL-ASSETS> 690,572
<CURRENT-LIABILITIES> 0
<BONDS> 243,813
0
100,002
<COMMON> 236
<OTHER-SE> 314,723
<TOTAL-LIABILITY-AND-EQUITY> 690,572
<SALES> 0
<TOTAL-REVENUES> 93,465
<CGS> 0
<TOTAL-COSTS> 16,428
<OTHER-EXPENSES> 11,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,659
<INCOME-PRETAX> 38,189
<INCOME-TAX> 0
<INCOME-CONTINUING> 38,189
<DISCONTINUED> 0
<EXTRAORDINARY> (11,427)
<CHANGES> 0
<NET-INCOME> 26,762
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F2>
<FN>
<F1> BASIC EARNINGS PER SHARE ATTRIBUTABLE TO--
CORE GROUP COMMON STOCK
Income before extraordinary item $ 1.81
Extraordinary loss on debt prepayment $ (0.49)
Net income $ 1.32
PSYCHIATRIC GROUP DEPOSITORY SHARES
Net loss $ (2.84)
<F2> DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO--
CORE GROUP COMMON STOCK
Income before extraordinary item $ 1.80
Extraordinary loss on debt prepayment $ (0.49)
Net income $ 1.31
PSYCHIATRIC GROUP DEPOSITORY SHARES
Net loss $ (2.84)
</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,
---------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net revenue..................... $ 23,441 $ 23,318 $ 31,260 $ 32,039 $ 29,000
Operating income(2)............. 4,172 4,026 5,667 5,201 5,166
Depreciation.................... 1,251 1,153 1,588 1,392 1,339
Interest: senior(3)............. 3,154 3,105 4,196 3,980 3,862
other.................. 293 296 391 605 656
Net income (loss)............... (123) 21 194 153 35
Cash flows from operating
activities................... 1,324 3,980 2,580 2,738 1,480
BALANCE SHEET
Total assets.................... $ 23,483 $ 25,806 $ 24,564 $ 26,796 $ 26,779
Debt: senior(3)................. 28,461 28,686 28,632 28,840 29,028
other..................... 4,515 4,369 4,552 4,987 5,988
Stockholders' deficit........... (12,879) (12,929) (12,756) (12,890) (12,805)
Working capital................. 12,391 5,466 14,316 6,203 3,941
</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.
