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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 12, 1999 there were outstanding (i) 24,984,422 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 $463,400,000. 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, 1998.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Registrant's Voting Stock and Related Stockholder
Matters..................................................... 17
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 20
Management's Discussion and Analysis of Core Group Combined
Financial Condition and Results of Operations............... 28
Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations...... 35
Item 8. Financial Statements and Supplementary Data................. 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 42
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 42
Item 11. Executive Compensation...................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 42
Item 13. Certain Relationships and Related Transactions.............. 42
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on
Form 8-K.................................................... 43
</TABLE>
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PART I
ITEM 1. BUSINESS.
American Health Properties, Inc. (the "Company," which term refers to the
Company and its subsidiaries unless the context otherwise requires) is a
self-administered real estate investment trust ("REIT") that commenced
operations in 1987. The Company has investments in health care facilities that
are operated by qualified third party health care providers, as well as medical
office/clinic facilities.
The Company's common stock (the Core Group Common Stock) is intended to
reflect the separate financial performance of the Company's investments in acute
care, rehabilitation and long-term acute care hospitals, skilled nursing,
assisted living, Alzheimer's care and medical office/clinic facilities (the Core
Group). The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Company's investments in psychiatric
hospitals (the Psychiatric Group). The 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.
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, 1998 consisted of
13 acute care hospitals, three rehabilitation hospitals, seven assisted living
facilities (three of which are under construction), one mortgage loan secured by
a long-term acute care hospital, one long-term acute care hospital, 16 skilled
nursing facilities (one of which is under construction), 16 medical
office/clinic facilities and three Alzheimer's care facilities (one of which is
under construction). As of December 31, 1998, the net book value of the Core
Group's total assets was $747 million. Of the Core Group's real estate assets at
that date, 54% in net book value represented the acute care segment, 24%
represented the medical office/clinic facilities, 12% represented the skilled
nursing segment, 4% represented the assisted living segment, 4% represented the
rehabilitation segment, 1% represented the Alzheimer's care segment and 1%
represented the long-term acute care segment. As of December 31, 1998, 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 21
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, Covenant Care, Inc., Paracelsus
Healthcare Corporation, HealthSouth Corporation, Community Health Systems, Inc.,
PhyCor, Inc., Balanced Care Corporation, Emeritus Corporation, Pine Haven Health
Care II, Inc., Shannon Health System, RainTree Healthcare Corporation and SCCI
Health Services Corporation. Facilities operated by Tenet represented 42% of the
Core Group's total revenues for the year ended December 31, 1998.
Approximately 60% of the Core Group's property revenues for the year ended
December 31, 1998 were secured by corporate guarantees of these operating
companies or their subsidiaries. Also, as of December 31, 1998, 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 19 of
the Core Group's facilities, representing 51% of the Core Group's property
revenues for the year ended December 31, 1998, contain cross-default provisions.
1
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THE CORE GROUP FACILITIES
The Company's 62 Core Group facilities as of March 15, 1999, consisted of
13 acute care hospitals (the "Acute Care Hospitals"), three rehabilitation
hospitals (the "Rehabilitation Hospitals"), seven assisted living facilities
(three 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"), 16 skilled nursing
facilities (one of which is under construction) (the "Skilled Nursing
Facilities"), 17 medical office/clinic facilities (one of which is under
construction) (the "Medical Office/ Clinic Facilities") and four Alzheimer's
care facilities (two of which are under construction) (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.
Skilled Nursing Facilities. The Skilled Nursing Facilities are skilled
nursing centers that provide a broad range of health care services, including
skilled nursing care, subacute care, rehabilitation therapy and other
specialized services to the elderly and to other patients with medically complex
needs who can be cared for outside of the acute care hospital environment and
generally cannot be efficiently and effectively cared for at home.
Medical Office/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.
2
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The following is a listing of the Core Group portfolio of investments as of
March 15, 1999.
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(4) 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 Medical Center, TX Shannon Health System 1991 16,452
St. John's Campus
Tarzana Regional Medical CA Tenet Healthcare Corporation 1987 73,700
Center
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Total Acute Care Hospitals $498,389
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ALZHEIMER'S CARE
FACILITIES
Pine Haven at TX Pine Haven Health Care II, Inc. 1995 $ 3,700
Cypresswood
Pine Haven at TX Pine Haven Health Care II, Inc. 1999 2,800
Kingwood(5)
Pine Haven at Sugar Land TX Pine Haven Health Care II, Inc. 1996 4,024
Pine Haven at The TX Pine Haven Health Care II, Inc. 1998 2,800
Woodlands(5)
--------
Total Alzheimer's Care Facilities $ 13,324
--------
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(5)
Outlook Pointe at IN Balanced Care Corporation 1998 8,722
Evansville(5)
Outlook Pointe at TN Balanced Care Corporation 1998 5,030
Jackson(5)
Sherwood Place TX Emeritus Corporation 1996 5,034
Summer Wind Residence ID Emeritus Corporation 1995 3,000
--------
Total Assisted Living Facilities $ 37,459
--------
<CAPTION>
ANNUAL CURRENT
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 2,981 2004
Frye Regional Medical 5,265 2004
Center
Irvine Medical Center 10,143 2004
Kendall Regional Medical 2,300 1999
Center(4)
Lucy Lee Hospital 2,731 2004
Marlboro Park Hospital 845 2005
North Fulton Regional 5,471 2004
Hospital
Palm Beach Gardens 5,283 2004
Medical Center
Pioneer Valley Hospital 7,024 2004
Shannon Medical Center, 1,478 2001
St. John's Campus
Tarzana Regional Medical 8,308 2004
Center
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Total Acute Care $53,879
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ALZHEIMER'S CARE
FACILITIES
Pine Haven at $ 353 2005
Cypresswood
Pine Haven at 243 2009
Kingwood(5)
Pine Haven at Sugar Land 423 2007
Pine Haven at The 243 2009
Woodlands(5)
-------
Total Alzheimer' $ 1,262
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ASSISTED LIVING
FACILITIES
Cambria Lodge $ 544 2006
Garrison Creek Lodge 593 2006
Outlook Pointe at 429 2009
Anderson(5)
Outlook Pointe at 744 2009
Evansville(5)
Outlook Pointe at 413 2009
Jackson(5)
Sherwood Place 529 2006
Summer Wind Residence 315 2005
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Total Assisted L $ 3,567
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</TABLE>
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<TABLE>
<CAPTION>
YEAR
ACQUIRED/ TOTAL
DESCRIPTION LOCATION OPERATOR FUNDED INVESTMENT(1)
----------- -------- -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LONG-TERM ACUTE CARE
HOSPITALS
SCCI Hospital - Amarillo TX SCCI Health Services 1996 $ 6,110
Corporation
SCCI Hospital - Houston TX SCCI Health Services 1997 4,400
Central(6) Corporation
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Total Long-Term Acute Care Hospitals $ 10,510
--------
MEDICAL OFFICE/CLINIC
FACILITIES
2460 Stewart Parkway OR Mercy Medical Center, Inc.(9) 1999 $ 5,700
Medical Office
Building(5)
Casa Blanca Clinic(7) AZ PhyCor of Mesa, Inc. 1997 20,581
Emerson Medical Office FL HealthAmerica Realty Group, 1998 9,055
Building/Surgery L.L.C.(9)
Center(7)
Fannin Medical TX Healthcare Realty Management(9) 1997 52,059
Buildings(7)
Morristown Professional NJ Jones Lang LaSalle(9) 1998 19,652
Plaza
Murfreesboro Medical TN PhyCor of Murfreesboro, Inc. 1998 13,044
Clinic
Northpark Professional FL Jones Lang LaSalle(9) 1997 10,628
Building
Park Plaza Professional TX Jones Lang LaSalle(9) 1997 17,086
Building
Valencia Medical Office CA Jones Lang LaSalle(9) 1998 9,513
Building
Walsh Medical Arts CA CDM Group Inc.(9) 1994 8,817
Center
Westpark Plaza TX Jones Lang LaSalle(9) 1998 9,136
Woodlake Medical Center CA Jones Lang LaSalle(9) 1998 12,700
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Total Medical Office/Clinic Facilities $187,971
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REHABILITATION HOSPITALS
HealthSouth MountainView WV HealthSouth Corporation 1991 $ 11,718
Rehabilitation
Hospital
HealthSouth AR HealthSouth Corporation 1991 9,086
Rehabilitation
Hospital of
Fayetteville
Wesley Rehabilitation KS HealthSouth Corporation 1992 14,597
Hospital
--------
Total Rehabilitation Hospitals $ 35,401
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SKILLED NURSING
FACILITIES
Arkansas Manor Nursing CO RainTree Healthcare Corporation 1995 $ 4,066
Home
Cornerstone Care Center CO RainTree Healthcare Corporation 1995 4,856
Covington Manor IN Covenant Care, Inc. 1998 8,234
Douglas Manor AZ RainTree Healthcare Corporation 1995 2,621
Edgewood Manor Nursing OH Covenant Care, Inc. 1998 5,182
Center
Fairview Manor Nursing OH Covenant Care, Inc. 1998 7,926
Center
Lakeland Nursing Center IN Covenant Care, Inc. 1998 3,892
Norwood Nursing Center IN Covenant Care, Inc. 1998 3,809
Safford Care Center AZ RainTree Healthcare Corporation 1995 4,934
<CAPTION>
ANNUAL CURRENT
BASE TERM OF
DESCRIPTION RENT/INTEREST(2) LEASE/MORTGAGE(3)
----------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG-TERM ACUTE CARE
HOSPITALS
SCCI Hospital - Amarillo $ 600 2007
SCCI Hospital - Houston 462 2007
Central(6)
-------
Total Long-Term $ 1,062
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MEDICAL OFFICE/CLINIC
FACILITIES
2460 Stewart Parkway $ 564 2014
Medical Office
Building(5)
Casa Blanca Clinic(7) 2,086 2012
Emerson Medical Office 791 (7)
Building/Surgery
Center(7)
Fannin Medical 4,403 2004/2006 (7)
Buildings(7)
Morristown Professional 2,824 (8)
Plaza
Murfreesboro Medical 1,443 2013
Clinic
Northpark Professional 1,031 (8)
Building
Park Plaza Professional 2,340 (8)
Building
Valencia Medical Office 909 (8)
Building
Walsh Medical Arts 1,021 (8)
Center
Westpark Plaza 1,265 2007
Woodlake Medical Center 1,625 (8)
-------
Total Medical Of $20,302
-------
REHABILITATION HOSPITALS
HealthSouth MountainView $ 1,358 2001
Rehabilitation
Hospital
HealthSouth 1,064 2001
Rehabilitation
Hospital of
Fayetteville
Wesley Rehabilitation 1,615 2002
Hospital
-------
Total Rehabilita $ 4,037
-------
SKILLED NURSING
FACILITIES
Arkansas Manor Nursing $ 406 2005
Home
Cornerstone Care Center 485 2005
Covington Manor 753 2013
Douglas Manor 254 2005
Edgewood Manor Nursing 474 2013
Center
Fairview Manor Nursing 725 2013
Center
Lakeland Nursing Center 356 2013
Norwood Nursing Center 349 2013
Safford Care Center 478 2005
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
YEAR
ACQUIRED/ TOTAL
DESCRIPTION LOCATION OPERATOR FUNDED INVESTMENT(1)
----------- -------- -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Silver Hills Healthcare NV Covenant Care, Inc. 1997 $ 7,387
Center
Silver Ridge Healthcare NV Covenant Care, Inc. 1997 9,500
Center(5)
University Park Nursing IN Covenant Care, Inc. 1998 4,957
Center
Versailles Health Care OH Covenant Care, Inc. 1998 6,463
Center
Villa Fairborn OH Covenant Care, Inc. 1998 6,487
Villa Georgetown OH Covenant Care, Inc. 1998 6,463
Villa Springfield OH Covenant Care, Inc. 1998 5,337
--------
Total Skilled Nursing Facilities $ 92,114
--------
CORE GROUP PORTFOLIO TOTAL $875,168
========
<CAPTION>
ANNUAL CURRENT
BASE TERM OF
DESCRIPTION RENT/INTEREST(2) LEASE/MORTGAGE(3)
----------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Silver Hills Healthcare $ 637 2008
Center
Silver Ridge Healthcare 824 2009
Center(5)
University Park Nursing 453 2013
Center
Versailles Health Care 591 2013
Center
Villa Fairborn 593 2013
Villa Georgetown 591 2013
Villa Springfield 488 2013
-------
Total Skilled Nu $ 8,457
-------
CORE GROUP POR $92,566
=======
</TABLE>
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(1) Reflects gross investment or total investment commitment.
(2) Reflects contract rate of annual base rent or interest received or
estimated to be received upon completion of construction or investment. For
multi-tenant medical office/clinic facilities, annual base rent reflects
the sum of the contract rate of base rent for individual tenants of each
respective facility as of March 15, 1999.
(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) Kendall Regional Medical Center (Kendall) is leased to a subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). Pursuant to the terms of
the lease, Columbia has exercised its option to purchase Kendall at fair
market value. See the Notes to the Consolidated Financial Statements,
Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations, the Notes to the Core Group Combined Financial
Statements and Management's Discussion and Analysis of Core Group Combined
Financial Condition and Results of Operations in this Annual Report on Form
10-K for additional information.
(5) Currently under construction.
(6) Investment held in the form of a mortgage rather than owned by the Company.
(7) Casa Blanca Clinic represents four separate facilities leased together
under a single master-lease. Fannin Medical Buildings represent two
separate facilities master-leased to affiliated tenants under separate
leases, one of which expires in 2004 and the other in 2006. Emerson Medical
Office Building/Surgery Center represents two separate facilities, one of
which is master-leased and expires in 2013 and the other leased to multiple
tenants with various lease terms.
(8) Multi-tenant medical office/clinic facility with various lease terms.
(9) Property manager.
(10) 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 two psychiatric hospitals owned by the Company (one of which has
been closed) (the "Psychiatric Hospitals"). As of December 31,
5
<PAGE> 8
1998, the net book value of the Psychiatric Group total assets was $7 million.
All of the Psychiatric Group's real estate assets at that date were held in fee.
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 one remaining
Psychiatric Hospital operator and borrower. As a result, the one remaining
Psychiatric Hospital operator has had, and may continue to have, difficulty
meeting its payment obligations to the Psychiatric Group. See "Management's
Discussion and Analysis of Psychiatric Group Combined Financial Condition and
Results of Operations -- Operating Results -- Analysis of Psychiatric Group"
included elsewhere herein.
The following is a listing of the Psychiatric Group portfolio of
investments as of March 15, 1999.
PSYCHIATRIC GROUP HOSPITALS
<TABLE>
<CAPTION>
YEAR
ACQUIRED/ TOTAL ANNUAL CURRENT TERM
DESCRIPTION LOCATION OPERATOR FUNDED INVESTMENT(1) BASE RENT(2) OF LEASE
----------- -------- -------- --------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Northpointe FL (3) 1990 1,300 (3)(4) (3)
Sunrise Regional FL Health Systems 1990 3,402 720(4) 2003(6)
Medical Center America, Inc.(5)
------- ------
Total Psychiatric Hospitals $ 4,702 $ 720
======= ======
</TABLE>
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(1) Reflects gross investment less write-downs.
(2) Reflects contract rate of annual base rent.
(3) The Northpointe property has been vacant since mid-1997 and the Company
incurs ongoing costs for maintenance and security of the property while it
continues to seek alternate uses or a buyer for the property. See the Notes
to the Consolidated Financial Statements, Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations, the
Notes to the Psychiatric Group Combined Financial Statements, and
Management's Discussion and Analysis of Psychiatric Group Combined Financial
Condition and Results of Operations in this Annual Report on Form 10-K for
additional information.
(4) Actual rent received for the year ended December 31, 1998 for Northpointe
and Sunrise Regional Medical Center was $0 and $855,000, respectively.
(5) Health Systems America, Inc. is the operator and Sunrise Regional Medical
Center, Ltd. is the lessee of Sunrise Regional Medical Center.
(6) The lease provides the lessee with renewal options to extend the term of the
lease beyond the primary term.
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
As of March 15, 1999, the Company owned 13 Acute Care Hospitals, two
Psychiatric Hospitals, three Rehabilitation Hospitals, seven Assisted Living
Facilities (three of which are under construction), one of the Long-Term Acute
Care Hospitals, 16 Skilled Nursing Facilities, (one of which is under
construction) and four Alzheimer's Care Facilities (two of which are under
construction), which are collectively referred to herein as the "Leased
Properties" or individually as a "Leased Property". The Company also owns
6
<PAGE> 9
17 Medical Office/Clinic Facilities (one of which is under construction) 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 8.5% to 13.6% 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 60% of the Company's
property revenues for the year ended December 31, 1998 were secured by corporate
guarantees. Also, as of December 31, 1998, letters of credit from commercial
banks and cash deposits aggregating $17.2 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 five to 17 years and one or more renewal options of from five to ten
years each. In addition to monthly base rent, all of the Acute Care Hospital
leases provide for the quarterly payment of additional rent in an amount equal
to (i) a specified percentage of the amount by which the gross revenues (as
defined) attributable to the Leased Property for the year exceeded the gross
revenues derived from such Leased Property during a specified base year ("Excess
Gross Revenues") up to a designated dollar amount (the "Transition Amount").
Should the Transition Amount be reached in any year, additional rent is equal to
a reduced percentage of the Excess Gross Revenues for the remainder of such
year.
Pursuant to the terms of the Acute Care Hospital leases, the Company has
the right to approve capital expenditures (only in excess of $2 million for
certain leases), the option to fund certain capital expenditures under some of
the leases and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. The base and
additional rent provisions of leases are amended when such capital expenditures
are funded to reflect the Company's increased investment.
Six of the Acute Care Hospitals are operated by subsidiaries of American
Medical International, Inc. ("AMI"), a subsidiary of Tenet, under long-term
leases with the Company, which comprised 42% of the Core Group's total revenues
for the year ended December 31, 1998. 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. For purposes of the
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
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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 Acute Care Hospitals, Kendall, is leased to a subsidiary of
Columbia. Pursuant to the terms of the lease, Columbia has exercised its option
to purchase Kendall at the fair market value of the Leased Property. See the
Notes to the Consolidated Financial Statements, Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations, the
Notes to the Core Group Combined Financial Statements and Management's
Discussion and Analysis of Core Group Combined Financial Condition and Results
of Operations in this Annual Report on Form 10-K for additional information.
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 HealthSouth MountainView 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 conditional 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. 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. Three
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facilities have commenced construction. Two of these facilities will be
completed during the second quarter of 1999 while the third facility is
anticipated to be completed during the third quarter of 1999.
Long-Term Acute Care Hospitals. The Long-Term Acute Care Hospital that is
owned by the Company is leased to an affiliate of SCCI Health Services
Corporation ("SCCI") 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 SCCI.
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 SCCI owns and operates this Long-Term Acute Care
Hospital. SCCI 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. Six of the Skilled Nursing Facility leases
establishes an initial term of ten years and an option for three renewal terms
of ten years each. Each of the other ten leases establishes an initial term of
fifteen years and an option for three renewal terms of ten years each. Four of
the Skilled Nursing Facilities are operated by an affiliate of RainTree
Healthcare Corporation (formerly Unison Healthcare Group, Inc.) ("RainTree") and
all of the leases for the RainTree facilities are cross-defaulted. Additionally,
the obligations under each RainTree lease are guaranteed by RainTree and an
affiliate of RainTree. The RainTree leases provide for monthly base rent, which
is automatically increased by a specified percentage each year. Each of the
RainTree 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
RainTree 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.
Twelve Skilled Nursing Facilities are operated by an affiliate of Covenant
Care, Inc. ("Covenant Care"). Certain of the leases for these facilities are
cross-defaulted and the obligations under each Covenant Care lease is guaranteed
by Covenant Care. Two of 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. Ten of the
Covenant Care leases provide for monthly base rent plus additional rent payable
quarterly in an amount equal to the sum of (i) additional rent for the
immediately preceding year and (ii) an amount equal to a specified percentage of
the sum of base rent and additional rent payable for the immediately preceding
year. The Covenant Care leases 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. Ten 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., Wellpoint Health
Networks, Inc., Murfreesboro Medical Clinic, Mercy Medical Center, Inc. and
Medical Partners Surgery Center, Ltd. for remaining terms ranging from six to
fifteen years. Six of the medical office/clinic facilities are leased to
multiple tenants for remaining terms ranging from one to ten years. One of the
medical office/clinic facilities is master-leased for a five-year remaining term
to a partnership consisting of 22 physicians who are the primary tenants of the
building.
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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 affiliates of 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 seven
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 2003 with three renewal
periods, one for five years followed by two for ten years each. The other
Psychiatric Hospital has been vacant since mid-1997.
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in the
periodic restructuring of psychiatric operator payment obligations, the closing
of one psychiatric hospital and significant impairment losses on psychiatric
investments, including an $11 million charge in 1997 and a $5.6 million charge
in 1998. At December 31, 1998, the aggregate carrying value of the Company's
psychiatric properties was $5,131,000. The Northpointe property has been vacant
since mid-1997 and has a carrying value of $1,300,000. The Company incurs
ongoing costs for maintenance and security of the property while it continues to
seek alternate uses or a buyer for the property. The operator of the Rock Creek
Center (RCC) experienced continuing financial and operational difficulties over
the past several years, and at the end of 1998, the operator was in default on
its obligations to the Company. As a result, the carrying value of the RCC
property was written down to $1,200,000 and the Company's net investment in
related notes and various other obligations owed to it by the operator of RCC
were totally written off. Subsequent to year-end in February 1999, the Company
sold its total RCC investment for a cash price of $2.5 million. At December 31,
1998, the Sunrise Regional Medical Center (Sunrise) property had a carrying
value of $2,631,000. In September 1998, a new operator assumed all operational
responsibility for the hospital and entered into a new five-year lease with
effective monthly rent of $60,000. Although the new operator has fulfilled its
obligations to the Company under the lease so far, the new operator has
experienced cash flow difficulties primarily as a result of delays in obtaining
Baker Act certification. As a result, the Company provided the operator with a
$200,000 working capital loan at the end of 1998, and subsequent to year-end,
the operator requested $700,000 of additional working capital loans. Although
this request is still being evaluated, the Company likely will provide the
additional loans. The Company cannot be assured that the operator will be
successful and, if it were to cease operations, an impairment charge to reduce
the carrying value of the Sunrise property and any related outstanding working
capital loans would be likely. The Company will continue to encourage the
operator to pursue financing alternatives that might enable it to acquire the
property and repay its borrowings from the Company.
Dividends on the Company's Psychiatric Group Depositary Shares are
determined each quarter based upon the operating results of the Company's
Psychiatric Group. It continues to be the policy of the Board to maintain a
dividend payout ratio for each quarter in excess of 90 percent of the
Psychiatric Group's funds from operations for the related quarter, when
possible. With the disposition of the RCC investment in February 1999, the
Sunrise investment is currently the sole income-producing property of the
Company's Psychiatric Group and the operator of Sunrise is experiencing cash
flow difficulties. Therefore, commencing in the second quarter of 1999, the
Psychiatric Group's funds from operations may not be sufficient to permit the
payment of a dividend on the Psychiatric Group Depositary Shares.
The Company intends to periodically evaluate the financial position of the
Psychiatric Group, including an assessment of the potential cash requirements of
the Psychiatric Group and the appropriate use of the proceeds from the February
1999 sale of the RCC investment. Initially, proceeds from the RCC disposition,
net of closing costs and applicable reserves, will be retained by the
Psychiatric Group to defray its ongoing
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costs, including the potential long-term costs of carrying the two remaining
Psychiatric Group properties. The Psychiatric Group may continue to retain such
proceeds or, alternatively, may distribute a portion of such net proceeds to
holders of Psychiatric Group Depositary Shares, in cash or Core Group Common
Stock, either by dividend or in connection with redemption of the Psychiatric
Group Depositary Shares. Should the Board of Directors of the Company decide
that the remaining Psychiatric Group portfolio and operations are not consistent
with a separate public security, the Board may elect to redeem the outstanding
Psychiatric Group Depositary Shares in cash or in exchange for shares of Core
Group Common Stock. Under the terms of the Certificate of Designations for the
Psychiatric Group Preferred Stock and the Deposit Agreement providing for
issuance of Depositary Receipts (Psychiatric Group Depositary Shares) each
representing one-tenth of one share of the Psychiatric Group Preferred Stock,
the Company has the right to redeem all outstanding Psychiatric Group Depositary
Shares, and the Psychiatric Group Preferred Stock represented thereby, for cash
(or in exchange for newly issued shares of Core Group Common Stock) at a premium
generally ranging from 5% to 15% over the value of the Psychiatric Group
Depositary Shares. Since an exchange or redemption of the Psychiatric Group
Depositary Shares may be at a premium to the then current market price of the
Psychiatric Group Depositary Shares, and since the Board could determine to
effect such an exchange or redemption at a time when either or both the Core
Group Common Stock and the Psychiatric Group Depositary Shares may be considered
to be overvalued or undervalued, the exchange or redemption could be
disadvantageous to the holders of the Core Group Common Stock or the Psychiatric
Group Depositary Shares.
For a fuller discussion of the Company's Psychiatric Group investments 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/clinic 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 hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and
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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
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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
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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 lessee of the Sunrise Regional Medical Center receives
payments for patient care from the federal Medicare program for elderly and
disabled 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........................ 56 Chairman of the Board of Directors,
President and Chief Executive Officer
Michael J. McGee.......................... 43 Senior Vice President, Chief Financial
Officer and Treasurer
Steven A. Roseman......................... 40 Senior Vice President, General Counsel and
Secretary
C. Gregory Schonert....................... 44 Senior Vice President and Chief
Development 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.
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.
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.
16
<PAGE> 19
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
------------------------- ----------------------------
CASH CASH
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW DECLARED HIGH LOW DECLARED
------- ---- ---- --------- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
1998
4th................................ $24 $19 7/8 $.5650 $ 3 13/16 $ 1 3/8 $.095
3rd................................ 26 3/4 21 1/2 .5450 16 1 1/2 .350
2nd................................ 28 1/4 24 3/4 .5450 18 1/2 14 7/8 .640
1st................................ 29 26 .5450 18 14 5/8 .640
1997
4th................................ $28 $24 $.5450 $ 17 $ 14 3/4 $.620
3rd................................ 25 15/16 24 7/16 .5250 18 7/8 14 3/4 .620
2nd................................ 26 3/8 23 .5250 19 3/8 16 1/2 .630
1st................................ 26 22 7/8 .5250 19 5/8 15 1/2 .750
</TABLE>
On July 24, 1998, a special dividend was paid to Psychiatric Group
Depositary shareholders of record on July 17, 1998 in the form of the Company's
Common Stock. Each holder of Psychiatric Group Depositary Shares received 0.4 of
a share of Common Stock, valued at $10.37628, for each one Psychiatric Group
Depositary Share.
As of March 12, 1999, the reported high and low sales prices (i) for the
Company's Common Stock for 1999 were $21 15/16 and $17 7/16, respectively, and
(ii) for the Company's Psychiatric Group Depositary Shares for 1999 were $2 3/4
and $1 1/32, respectively. As of March 12, 1999, there were approximately (i)
4,054 holders of record and 24,984,422 shares outstanding of the Company's
Common Stock, and (ii) 2,733 holders of record and 2,083,931 shares outstanding
of the Company's Psychiatric Group Depositary Shares.
In general, cash 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.
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
17
<PAGE> 20
(excluding distributions out of PG Excess Proceeds) at less than 95% of annual
funds from operations attributable to the Psychiatric Group.
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, 1998, 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 $303.5 million and $6.4 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, 1998, the funds of the Company legally
available for the payment of dividends would have been at least $309.9 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.
18
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below for the years ended December 31, 1998, 1997, 1996, 1995 and
1994 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,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................. $112,722 $ 93,465 $ 88,924 $ 91,230 $ 87,027
Income before extraordinary item
attributable to Core Group Common Stock
and Psychiatric Group Depositary
Shares(1).............................. $ 37,865 $ 36,636 $ 44,379 $ 42,381 $ 9,693
Cash flows from operating activities..... $ 82,570 $ 70,156 $ 61,241 $ 57,471 $ 54,984
Total assets............................. $753,842 $690,572 $577,882 $586,316 $579,503
Total debt............................... $308,936 $$243,813 $207,101 $207,378 $245,663
Stockholders' equity..................... $410,865 $414,961 $345,139 $353,060 $307,501
</TABLE>
<TABLE>
<CAPTION>
CORE GROUP
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................................. $107,549 $ 86,302 $ 81,429 $ 82,913 $ 75,680
Income before extraordinary item
attributable to common shares.......... $ 43,045 $ 42,554 $ 38,800 $ 36,107 $ 32,548
Basic per share amounts --
Income before extraordinary item
attributable to common shares....... $ 1.77 $ 1.81 $ 1.65 $ 1.69 $ 1.56
Weighted average common shares......... 24,379 23,505 23,453 21,356 20,835
Diluted per share amounts --
Income before extraordinary item
attributable to common shares....... $ 1.75 $ 1.80 $ 1.65 $ 1.69 $ 1.56
Weighted average common shares and
dilutive potential common shares.... 24,605 23,703 23,558 21,421 20,881
Cash flows from operating activities..... $ 76,891 $ 63,822 $ 54,841 $ 50,413 $ 46,258
Dividends declared per common share...... $ 2.20 $ 2.12 $ 2.04 $ 1.99 $ 1.88
Total assets............................. $746,995 $652,132 $527,979 $536,199 $528,686
Total attributed debt.................... $309,116 $243,813 $207,101 $207,378 $245,663
Total attributed equity.................. $404,480 $378,268 $297,176 $304,947 $259,199
</TABLE>
<TABLE>
<CAPTION>
PSYCHIATRIC GROUP
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 6,002 $ 8,716 $ 9,174 $ 10,346 $ 15,388
Net income (loss)(1)..................... $ (5,180) $ (5,918) $ 5,579 $ 6,274 $(22,855)
Basic per share amounts --
Net income (loss)(1)................... $ (2.49) $ (2.84) $ 2.68 $ 3.01 $ (10.97)
Weighted average depositary shares..... 2,084 2,084 2,084 2,086 2,084
Diluted per share amounts --
Net income (loss)(1)................... $ (2.49) $ (2.84) $ 2.67 $ 3.00 $ (10.97)
Weighted average depositary shares and
dilutive potential depositary
shares.............................. 2,084 2,084 2,093 2,091 2,084
Cash flows from operating activities..... $ 5,679 $ 6,334 $ 6,400 $ 7,058 $ 8,726
Dividends declared per depositary
share.................................. $ 1.73 $ 2.62 $ 2.80 $ 3.20 $ 4.16
Total assets............................. $ 7,027 $ 50,994 $ 63,261 $ 64,555 $ 80,245
Total attributed debt.................... $ -- $ 12,554 $ 13,358 $ 14,438 $ 29,428
Total attributed equity.................. $ 6,385 $ 36,693 $ 47,963 $ 48,113 $ 48,302
</TABLE>
- - ---------------
(1) Includes impairment loss of $8,330 in 1998, $11,000 in 1997 and $30,000 in
1994 on Psychiatric Group real estate and notes receivable.
19
<PAGE> 22
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
(a) the consolidated financial statements and accompanying notes of the Company
and (b) 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, the ability of an operator to continue
operations of a psychiatric facility, plans with respect to individual
facilities, expectations with respect to the specific terms of leases or sales
of the Company's facilities, the Company's anticipated dividends, the potential
redemption of the Psychiatric Group Depositary Shares, the Company's liquidity
position, projected expenses associated with operating or 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, changes in operators or
ownership of operators, the ability of operators and tenants to access short and
long-term capital at acceptable rates, 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, the impact of managed care pricing pressures, the
requirement to provide care on a fixed-price basis, lower occupancy levels at
the Company's facilities, the Company's ability to complete the proposed
disposition of the Kendall Regional Medical Center property as a successful 1031
exchange in which the Company acquires investments providing a comparable rate
of return, a downturn in market lease rates for medical office space,
disruptions caused by the failure of the Company or its vendors, operators,
lessees or borrowers, or the payors or other third parties upon which they are
dependent, to resolve any Year 2000 Issues affecting their respective
operations, 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, a reduction
in 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, the adoption of new accounting standards 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
1998 Compared to 1997
In 1998, the Company reported income before extraordinary item attributable
to Core Group Common Stock and Psychiatric Group Depository Shares of
$37,865,000, which included an impairment loss on
20
<PAGE> 23
psychiatric real estate and notes receivable of ($8,330,000), compared with
$36,636,000 in 1997, which included an impairment loss on psychiatric real
estate and notes receivable of ($11,000,000). In 1998, the Company reported net
income attributable to Core Group Common Stock and Psychiatric Group Depositary
Shares of $37,865,000 compared with $25,209,000 in 1997. An extraordinary loss
on debt prepayment of ($11,427,000) was reported in 1997. 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 $92,110,000 in 1998 an increase of $19,873,000 or 28%
from $72,237,000 in 1997. This increase was primarily attributable to rental
income from new Core Group properties acquired subsequent to the first quarter
of 1997. These property additions also resulted in an increase in depreciation
and amortization of $5,450,000 or 34% to $21,354,000 in 1998 compared with
$15,904,000 in 1997.
Mortgage interest income was $3,542,000 in 1998, a decrease of $2,747,000
or 44% from $6,289,000 in 1997. On July 1, 1998, the Company received $35
million as payment in full of its Psychiatric Group's two Four Winds mortgage
loans resulting in a decrease in mortgage interest income in 1998. The decrease
is partially offset by interest income from a Core Group mortgage note
receivable which was funded in the second quarter of 1997.
Additional rental and interest income was $14,098,000 in 1998, an increase
of $1,600,000 or 13% from $12,498,000 in 1997. The increase in additional rental
and interest income was attributable to increases in additional rent/interest of
$1,513,000 from acute care properties, $140,000 from long-term care properties
and $71,000 from psychiatric properties, partially offset by a $124,000 decrease
in additional rent from rehabilitation properties.
Other property income of $2,099,000 in 1998 primarily represents property
operating expense reimbursements and parking revenue from medical office/clinic
facility tenants.
Other interest income decreased $1,381,000 or 61% to $873,000 in 1998 from
$2,254,000 in 1997. The decrease in other interest income in 1998 resulted
primarily from lower investable cash balances and a lower average balance of
direct financing leases during 1998 compared to 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. The decrease was
partially offset by interest income from a subordinated note receivable due from
the operator of an Alzheimer's care facility, which was funded during the second
quarter of 1998, and interest income from the net proceeds of the Four Winds
loans payoff during the month of July until such proceeds were used to execute a
special dividend to holders of Psychiatric Group Depositary Shares on July 24,
1998.
Property operating expense was $5,769,000 in 1998, an increase of
$5,245,000 from $524,000 in 1997. Approximately $4,985,000 of this increase was
attributable to operating expenses of Core Group medical office/clinic
facilities acquired subsequent to the first quarter of 1997 and $260,000 of the
increase was attributable to costs related to the protection and maintenance of
a closed psychiatric property in Florida.
Interest expense was $21,609,000 in 1998, an increase of $1,950,000 or 10%
from $19,659,000 in 1997. This increase was primarily attributable to a higher
average balance of bank credit facility borrowings and the assumption of two
mortgage loans in connection with the acquisition of medical office/clinic
facilities. The increase was partially offset by a higher level of capitalized
interest in 1998 compared to 1997 and a lower weighted average effective
interest rate on debt during 1998.
General and administrative expenses were $9,006,000 in 1998, an increase of
$1,006,000 from $8,000,000 in 1997. This variation was primarily attributable to
hiring of additional personnel, expansion of property management capabilities,
higher compensation and benefits expense and increases in travel, legal and
consulting expenses.
21
<PAGE> 24
1997 Compared to 1996
In 1997, the Company reported 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
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.
22
<PAGE> 25
Future Operating Results
The operators and tenants 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 and tenants also are subject to
extensive federal, state and local government regulation relating to their
operations, and most of 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 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 have
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. 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/clinic 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,
long-term acute care, 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 and other regulatory activities 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 and physician groups 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
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services. Moreover, the percentage of health care services that are reimbursed
under the Medicare and Medicaid programs continues to increase as the population
ages. States are also expanding their Medicaid programs. Continued eligibility
to participate in these programs is crucial to a provider's financial strength.
As a result of the foregoing, revenues and margins may decrease at the Company's
facilities.
Notwithstanding the potential for increasing government regulation, the
Company believes that health care will continue to be delivered on a local and
regional basis and that well-managed, high-quality, cost-controlled facilities
will continue to be an integral part of local and regional health care delivery
systems. The Company also believes that certain acute care hospitals will need
to reconfigure or expand existing facilities or to affiliate themselves with
other providers so as to become part of comprehensive and cost-effective health
care systems. Such systems likely will include lower cost treatment settings,
such as ambulatory care clinics, outpatient surgery centers, long-term acute
care hospitals, skilled nursing facilities, assisted living and Alzheimer's care
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.
Kendall Regional Medical Center (Kendall) is leased to a subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). Aggregate revenues from the
lease, which was originally scheduled to mature in February 1999, were
approximately $10.3 million in 1998, or 9% of the Company's total revenues.
Pursuant to the terms of the lease, Columbia has exercised its option to
purchase Kendall at fair market value. The purchase price of $105 million will
be paid in cash, or at the option of the Company, a combination of cash and debt
relief. The Company currently intends to effect the transaction as a "deferred
like-kind" 1031 exchange for tax purposes. The first part of the exchange, the
transfer of Kendall to Columbia, is currently scheduled to occur on April 15,
1999. The Company would complete the exchange by acquiring new investment
properties within the time limits imposed by federal tax law, if possible. If
the Company is successful in identifying and closing on a sufficient amount of
new investments within the required time limits, the Company should not
recognize current taxable gain as a result of the transaction. In that event,
there should be no impact on the Company's REIT distribution requirements. Even
though the Company may not recognize gain on the transaction for tax purposes,
the Company expects to be able to recognize a gain of over $50 million for book
purposes. The Company cannot be assured that total revenues generated by new
investments acquired to effect the exchange will equal the annual revenues
currently generated by the Kendall investment, nor is it certain that the
Company will complete the transaction as an exchange. If the Company does not
complete the transaction as an exchange, the amount of the Company's tax
liability, the impact on its REIT distribution requirements and the amount of
gain, net of taxes, if any, recognized for book purposes would depend on the
amount of gain recognized for tax purposes, any losses recognized by the Company
on sales of other assets and various tax elections available to the Company.
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 initiatives intended to reduce its cost of capital over time and
enhance its liquidity and financial flexibility. The Company's future earnings,
cash flows and fair values relevant to financial instruments are dependent upon
prevailing market rates. Market risk is the risk of loss from adverse changes in
market prices and interest rates. The Company manages its market risk by
matching projected cash inflows from operating properties, financing activities
and investing activities with projected cash outflows to fund debt payments,
acquisitions, capital expenditures, distributions and other cash requirements.
Although in the past, the Company has occasionally utilized derivative financial
instruments for hedging purposes, and may do so in the future in certain
circumstances, generally the Company does not utilize derivative financial
instruments for hedging purposes and does not use such instruments for trading
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purposes. The Company utilizes debt and equity financing primarily for the
purpose of making additional investments in health care facilities.
Historically, the Company has made short-term variable rate borrowings under its
unsecured revolving credit agreement to initially fund its acquisitions until
market conditions were appropriate, based on management's judgement, to issue
equity or fixed rate debt to provide long-term financing. Changes in interest
rates on fixed rate debt generally affect fair market value, but not earnings or
cash flows. The Company's ability to prepay fixed rate debt prior to maturity is
generally limited, therefore, interest rate risk and changes in fair market
value should not have a significant impact on the fixed rate debt until the
maturity of such debt. The Company's earnings and cash flows are affected by
changes in interest rates affecting its variable rate borrowings under its bank
credit facility. At December 31, 1998, the Company had $69 million of such
variable rate borrowings outstanding at a weighted average interest rate of
6.0%. Assuming this balance were to remain constant, each one percentage point
increase or decrease in the weighted average interest rate on such variable rate
borrowings would result in a corresponding increase or decrease in interest
expense for 1999 of approximately $690,000. This estimate does not consider the
effects of the change in the level of overall economic activity that could exist
in such an environment of changing interest rates. Further, in the event of such
a change, management would likely take further actions to mitigate its exposure
to the change. However, due to the uncertainty of the specific actions that
would be taken and their possible effects, this analysis assumes no changes in
the Company's financial structure.
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in the
periodic restructuring of psychiatric operator payment obligations, the closing
of one psychiatric hospital and significant impairment losses on psychiatric
investments, including an $11 million charge in 1997 and a $8.3 million charge
in 1998. At December 31, 1998, the aggregate carrying value of the Company's
psychiatric properties was $5,131,000. The Northpointe property has been vacant
since mid-1997 and has a carrying value of $1,300,000. The Company incurs
ongoing costs for maintenance and security of the property while it continues to
seek alternate uses or a buyer for the property. The operator of the Rock Creek
Center (RCC) experienced continuing financial and operational difficulties over
the past several years, and at the end of 1998, the operator was in default on
its obligations to the Company. As a result, the carrying value of the RCC
property was written down to $1,200,000 and the Company's net investment in
related notes and various other obligations owed to it by the operator of RCC
were totally written off. Subsequent to year-end, the Company sold its total RCC
investment for a cash price of $2.5 million. At December 31, 1998, the Sunrise
Regional Medical Center (Sunrise) property had a carrying value of $2,631,000.
In September 1998, a new operator assumed all operational responsibility for the
hospital and entered into a new five-year lease with effective monthly rent of
$60,000. Although the new operator has fulfilled its obligations to the Company
under the lease so far, the new operator has experienced cash flow difficulties
primarily as a result of delays in obtaining Baker Act certification. As a
result, the Company provided the operator with a $200,000 working capital loan
at the end of 1998, and subsequent to year-end, the operator requested $700,000
of additional working capital loans. Although this request is still being
evaluated, the Company likely will provide the additional loans. The Company
cannot be assured that the operator will be successful and, if it were to cease
operations, an impairment charge to reduce the carrying value of the Sunrise
property and any related outstanding working capital loans would be likely. The
Company will continue to encourage the operator to pursue financing alternatives
that might enable it to acquire the property and repay its borrowings from the
Company.
Dividends on the Company's Psychiatric Group Depositary Shares are
determined each quarter based upon the operating results of the Company's
Psychiatric Group. It continues to be the policy of the Board to maintain a
dividend payout ratio for each quarter in excess of 90 percent of the
Psychiatric Group's funds from operations for the related quarter, when
possible. With the disposition of the RCC investment subsequent to year-end, the
Sunrise investment is currently the sole income-producing property of the
Company's Psychiatric Group and the operator of Sunrise is experiencing cash
flow difficulties. Therefore, commencing in the second quarter of 1999, the
Psychiatric Group's funds from operations may not be sufficient to permit the
payment of a dividend on the Psychiatric Group Depositary Shares.
The Company intends to periodically evaluate the financial position of the
Psychiatric Group, including an assessment of the potential cash requirements of
the Psychiatric Group and the appropriate use of the
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proceeds from the sale of the RCC investment. Initially, proceeds from the RCC
disposition, net of closing costs and applicable reserves, will be retained by
the Psychiatric Group to defray its ongoing costs, including the potential
long-term costs of carrying the two remaining Psychiatric Group properties. The
Psychiatric Group may continue to retain such proceeds or, alternatively, may
distribute a portion of such net proceeds to holders of Psychiatric Group
Depositary Shares, in cash or Core Group Common Stock, either by dividend or in
connection with redemption of the Psychiatric Group Depositary Shares. Should
the Board of Directors of the Company decide that the remaining Psychiatric
Group portfolio and operations are not consistent with a separate public
security, the Board may elect to redeem the outstanding Psychiatric Group
Depositary Shares in cash or in exchange for shares of Core Group Common Stock.
Under the terms of the Certificate of Designations for the Psychiatric Group
Preferred Stock and the Deposit Agreement providing for issuance of Depositary
Receipts (Psychiatric Group Depositary Shares) each representing one-tenth of
one share of the Psychiatric Group Preferred Stock, the Company has the right to
redeem all outstanding Psychiatric Group Depositary Shares, and the Psychiatric
Group Preferred Stock represented thereby, for cash (or in exchange for newly
issued shares of Core Group Common Stock) at a premium generally ranging from 5%
to 15% over the value of the Psychiatric Group Depositary Shares. Since an
exchange or redemption of the Psychiatric Group Depositary Shares may be at a
premium to the then current market price of the Psychiatric Group Depositary
Shares, and since the Board could determine to effect such an exchange or
redemption at a time when either or both the Core Group Common Stock and the
Psychiatric Group Depositary Shares may be considered to be overvalued or
undervalued, the exchange or redemption could be disadvantageous to the holders
of the Core Group Common Stock or the Psychiatric Group Depositary Shares.
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
a four-phase program to assess the impact upon the Company of the Year 2000
Issue and to remediate those Year 2000 Issues that may be discovered. The
Company will monitor its progress in achieving the target completion dates
established for each phase of the program. The first phase, a comprehensive
inventory of the Company's internal information systems, office equipment and
the embedded building control systems in the Company's multi-tenant properties,
has been completed. The second phase, assessing the impact of the Year 2000
Issue with respect to the Company's internal information systems, office
equipment and the embedded building control systems in the Company's
multi-tenant properties, is essentially complete. The third phase, preparation
and execution of a plan to remediate Year 2000 Issues identified in phases one
and two, is expected to be completed during the second and third quarters of
1999. The fourth and final phase includes the development of contingency plans
to address Year 2000 Issues that cannot be remediated. The timing for the fourth
phase will depend upon the results of the second and third phases and,
therefore, no schedule for the fourth phase can be set at this time. Since the
Company is in the initial phases of its Year 2000 program, it is likewise
currently unable to estimate the costs to remediate its Year 2000 Issues. The
costs incurred to date have not been material and the Company does not expect
the Year 2000 Issue to have a material impact on the Company's future operations
or financial results.
Vendors that provide payroll, banking, communications and property
management services to the Company and the Company's operators, lessees and
borrowers will also likely be affected by the Year 2000 Issue. The future
operations of the Company could be disrupted and/or its financial results could
be negatively impacted by the Year 2000 Issue if the Company's vendors or its
operators, lessees or borrowers do not adequately address their Year 2000
Issues. As health care providers, the Company's operators, 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. In addition, the delivery of
patient care by providers requires utilization of critical clinical systems,
medical devices and equipment that could be impacted by the Year 2000 Issue.
Furthermore, the Company's operators, lessees and borrowers likewise are
dependent on a variety of third parties, including but not limited to, insurance
companies, HMO's and other private payors, governmental agencies, fiscal
intermediaries that process claims and make payments for the Medicare and
Medicaid programs, utilities that provide electricity, water, natural gas and
communications services and vendors of medical supplies, pharmaceuticals,
clinical systems, medical devices and equipment used in patient care, all of
whom must also adequately address the Year 2000 Issue. The Company is reviewing
publicly filed information of, sending questionnaires to and/or contacting its
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vendors, operators, lessees and borrowers regarding their state of readiness
with respect to identifying and remediating their Year 2000 Issues. However, 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 vendors,
operators, lessees and borrowers. Furthermore, it is not possible for the
Company to determine or be assured that third parties upon which the Company's
vendors, operators, lessees and borrowers are dependent will accomplish adequate
remediation of their Year 2000 Issues.
Although the Company believes that the impact of the Year 2000 Issue, as it
relates to its internal information systems, office equipment and the embedded
building control systems in its multi-tenant properties, will not be material,
the Company cannot be assured that the Year 2000 Issues of its vendors or its
operators, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 18, 1999, the Company had a remaining commitment of
approximately $2.5 million to fund the development of one skilled nursing
facility. The Company's remaining commitment to fund the development of three
assisted living facilities was approximately $8.0 million as of March 18, 1999.
The Company has a $22.5 million forward funding commitment to develop up to nine
Alzheimer's care facilities to be managed by the same operator that currently
manages two existing Alzheimer's care facilities owned by the Company. As of
March 18, 1999, $1.7 million was funded under this commitment for the
development of two facilities having total development costs of approximately
$5.6 million. The Company had a remaining commitment of $4.7 million as of March
18, 1999 to develop a medical office/clinic facility.
As of March 18, 1999, the Company had $75.0 million of outstanding
borrowings under its $250 million bank credit facility and had $1.4 million in
cash and short-term investments. The Company's total indebtedness as of March
18, 1999 was $314.8 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and results
of operations of the Core Group, which should be read in conjunction with (a)
the combined financial statements and accompanying notes of the Core Group and
(b) management's discussion and analysis of financial condition and results of
operations and the financial statements and accompanying notes of the Company
and the Psychiatric Group included elsewhere herein.
Factors Regarding Future Results and Forward-Looking Statements. 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 of leases or sales of the
Company's facilities, the Company's anticipated dividends, the Company's
liquidity position, projected expenses associated with operating or 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, changes in operators or
ownership of operators, the ability of operators and tenants to access short and
long-term capital at acceptable rates, 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, the impact of managed care pricing pressures, the
requirement to provide care on a fixed-price basis, lower occupancy levels at
the Company's facilities, the Company's ability to complete the proposed
disposition of the Kendall Regional Medical Center property as a successful 1031
exchange in which the Company acquires investments providing a comparable rate
of return, a downturn in market lease rates for medical office space,
disruptions caused by the failure of the Company or its vendors, operators,
lessees or borrowers, or the payors or other third parties upon which they are
dependent, to resolve any Year 2000 Issues affecting their respective
operations, 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, a reduction
in 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, the adoption of new accounting standards 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
1998 Compared to 1997
In 1998, the Core Group reported income before extraordinary item
attributable to Core Group Common Stock of $43,045,000, or $1.75 per share on a
diluted basis, compared with $42,554,000 or $1.80 per share on a diluted basis,
in 1997. In 1998, the Core Group reported net income attributable to Core Group
Common
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Stock of $43,045,000, or $1.75 per share on a diluted basis, compared with
$31,127,000, or $1.31 per share on a diluted basis in 1997, which included an
extraordinary loss on debt prepayment of ($11,427,000), or ($.49) per share on a
diluted basis.
Rental income was $90,338,000 in 1998, an increase of $19,734,000 or 28%
from $70,604,000 in 1997. This increase was primarily attributable to rental
income from new properties acquired subsequent to the first quarter of 1997.
These property additions also resulted in an increase in depreciation and
amortization of $5,448,000 or 36% to $20,601,000 in 1998 compared with
$15,153,000 in 1997.
Mortgage interest income was $464,000 in 1998, an increase of $247,000 from
$217,000 in 1997. This increase was attributable to the funding of a mortgage
note receivable in the second quarter of 1997.
Additional rental and interest income was $13,362,000 in 1998, an increase
of $1,529,000 or 13% from $11,833,000 in 1997. The increase in additional rental
and interest income was attributable to increases in additional rent of
$1,513,000 from acute care properties and $140,000 from long-term care
properties, partially offset by a $124,000 decrease in additional rent from
rehabilitation properties.
Other property income of $2,099,000 in 1998, primarily represents property
operating expense reimbursements and parking revenue from medical office/clinic
facility tenants.
Other interest income decreased $1,334,000 or 70% to $574,000 in 1998 from
$1,908,000 in 1997. The decrease in other interest income for 1998 resulted
primarily from lower investable cash balances and a lower average balance of
direct financing leases during 1998 compared to 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. The decrease was
partially offset by interest income from a subordinated note receivable due from
the operator of an Alzheimer's care facility, which was funded during the second
quarter of 1998.
Interest income on inter-Group loans to the Psychiatric Group was $712,000
in 1998, a decrease of $841,000 or 54% from $1,553,000 in 1997. This decrease is
primarily attributable to the July 1, 1998 payoff of the entire $11.2 million
outstanding balance of fixed and revolving inter-Group loans owed to the Core
Group by the Psychiatric Group.
Property operating expense was $5,319,000 in 1998, an increase of
$4,985,000 from $334,000 in 1997. This increase was attributable to operating
expenses associated with medical office/clinic facilities acquired subsequent to
the first quarter 1997.
Interest expense was $21,609,000 in 1998, an increase of $1,950,000 or 10%
from $19,659,000 in 1997. This increase was primarily attributable to a higher
average balance of bank credit facility borrowings and the assumption of two
mortgage loans in connection with the acquisition of medical office/clinic
facilities. This increase was partially offset by a higher level of capitalized
interest in 1998 compared to 1997 and a lower weighted average effective
interest rate on debt during 1998.
Interest expense on inter-Group loans from the Psychiatric Group was
$117,000 in 1998 as a result of revolving inter-Group loans made by the
Psychiatric Group commencing July 1, 1998 with its available undistributed cash.
General and administrative expenses were $8,069,000 in 1998, an increase of
$1,209,000 from $6,860,000 in 1997. 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, expansion of property management capabilities,
higher compensation and benefits expense and increases in travel, legal and
consulting expenses.
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1997 Compared to 1996
In 1997, the Core Group reported 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 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
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increase in travel expense, partially offset by a reduction in director's fees
and expenses, legal costs and shareholder reporting costs.
Future Operating Results
The operators and tenants 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 and tenants also are subject to
extensive federal, state and local government regulation relating to their
operations, and most of 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 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 have
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. 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/clinic 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 and long-term acute care hospitals. 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 and other regulatory activities 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 and physician groups 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
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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. States are also expanding their Medicaid programs. Continued
eligibility to participate in these programs is crucial to a provider's
financial strength. As a result of the foregoing, 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, long-term acute
care hospitals, skilled nursing facilities, assisted living and Alzheimer's care
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.
Kendall Regional Medical Center (Kendall) is leased to a subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). Aggregate revenues from the
lease, which was originally scheduled to mature in February 1999, were
approximately $10.3 million in 1998, or 10% of the Core Group's total revenues.
Pursuant to the terms of the lease, Columbia has exercised its option to
purchase Kendall at fair market value. The purchase price of $105 million will
be paid in cash, or at the option of the Company, a combination of cash and debt
relief. The Company currently intends to effect the transaction as a "deferred
like-kind" 1031 exchange for tax purposes. The first part of the exchange, the
transfer of Kendall to Columbia, is currently scheduled to occur on April 15,
1999. The Company would complete the exchange by acquiring new investment
properties within the time limits imposed by federal tax law, if possible. If
the Company is successful in identifying and closing on a sufficient amount of
new investments within the required time limits, the Company should not
recognize current taxable gain as a result of the transaction. In that event,
there should be no impact on the Company's REIT distribution requirements. Even
though the Company may not recognize gain on the transaction for tax purposes,
the Core Group expects to be able to recognize a gain of over $50 million for
book purposes. The Company cannot be assured that total revenues generated by
new investments acquired to effect the exchange will equal the annual revenues
currently generated by the Kendall investment, nor is it certain that the
Company will complete the transaction as an exchange. If the Company does not
complete the transaction as an exchange, the amount of the Company's tax
liability, the impact on its REIT distribution requirements and the amount of
gain, net of taxes, if any, recognized for book purposes would depend on the
amount of gain recognized for tax purposes, any losses recognized by the Company
on sales of other assets and various tax elections available to the Company.
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 initiatives intended to reduce its cost of capital over time and
enhance its liquidity and financial flexibility. The Core Group's future
earnings, cash flows and fair values relevant to financial instruments are
dependent upon prevailing market rates. Market risk is the risk of loss from
adverse changes in market prices and interest rates. The Core Group manages its
market risk by matching projected cash inflows from operating properties,
financing activities and investing activities with projected cash outflows to
fund debt payments, acquisitions, capital expenditures,
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distributions and other cash requirements. Although in the past, the Core Group
has occasionally utilized derivative financial instruments for hedging purposes,
and may do so in the future in certain circumstances, generally the Core Group
does not utilize derivative financial instruments for hedging purposes and does
not use such instruments for trading purposes. The Core Group utilizes debt and
equity financing primarily for the purpose of making additional investments in
health care facilities. Historically, the Core Group has made short-term
variable rate borrowings under its unsecured revolving credit agreement to
initially fund its acquisitions until market conditions were appropriate, based
on management's judgement, to issue equity or fixed rate debt to provide
long-term financing. Changes in interest rates on fixed rate debt generally
affect fair market value, but not earnings or cash flows. The Core Group's
ability to prepay fixed rate debt prior to maturity is generally limited,
therefore, interest rate risk and changes in fair market value should not have a
significant impact on the fixed rate debt until the maturity of such debt. The
Core Group's earnings and cash flows are affected by changes in interest rates
affecting its variable rate borrowings under its bank credit facility and its
inter-Group variable rate borrowings from the Psychiatric Group. At December 31,
1998, the Company had $69.2 million of such variable rate borrowings outstanding
at a weighted average interest rate of 6.0%. Assuming this balance were to
remain constant, each one percentage point increase or decrease in the weighted
average interest rate on such variable rate borrowings would result in a
corresponding increase or decrease in interest expense for 1999 of approximately
$692,000. This estimate does not consider the effects of the change in the level
of overall economic activity that could exist in such an environment of changing
interest rates. Further, in the event of such a change, management would likely
take further actions to mitigate its exposure to the change. However, due to the
uncertainty of the specific actions that would be taken and their possible
effects, this analysis assumes no changes in the Core Group's financial
structure.
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
a four-phase program to assess the impact upon the Company of the Year 2000
Issue and to remediate those Year 2000 Issues that may be discovered. The
Company will monitor its progress in achieving the target completion dates
established for each phase of the program. The first phase, a comprehensive
inventory of the Company's internal information systems, office equipment and
the embedded building control systems in the Company's multi-tenant properties,
has been completed. The second phase, assessing the impact of the Year 2000
Issue with respect to the Company's internal information systems, office
equipment and the embedded building control systems in the Company's
multi-tenant properties, is essentially complete. The third phase, preparation
and execution of a plan to remediate Year 2000 Issues identified in phases one
and two, is expected to be completed during the second and third quarters of
1999. The fourth and final phase includes the development of contingency plans
to address Year 2000 Issues that cannot be remediated. The timing for the fourth
phase will depend upon the results of the second and third phases and,
therefore, no schedule for the fourth phase can be set at this time. Since the
Company is in the initial phases of its Year 2000 program, it is likewise
currently unable to estimate the costs to remediate its Year 2000 Issues. The
costs incurred to date have not been material and the Company does not expect
the Year 2000 Issue to have a material impact on the Company's future operations
or financial results.
Vendors that provide payroll, banking, communications and property
management services to the Company and the Company's operators, lessees and
borrowers will also likely be affected by the Year 2000 Issue. The future
operations of the Company could be disrupted and/or its financial results could
be negatively impacted by the Year 2000 Issue if the Company's vendors or its
operators, lessees or borrowers do not adequately address their Year 2000
Issues. As health care providers, the Company's operators, 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. In addition, the delivery of
patient care by providers requires utilization of critical clinical systems,
medical devices and equipment that could be impacted by the Year 2000 Issue.
Furthermore, the Company's operators, lessees and borrowers likewise are
dependent on a variety of third parties, including but not limited to, insurance
companies, HMO's and other private payors, governmental agencies, fiscal
intermediaries that process claims and make payments for the Medicare and
Medicaid programs, utilities that provide electricity, water, natural gas and
communications services and vendors of medical supplies, pharmaceuticals,
clinical systems, medical devices and equipment used in patient care, all of
whom must also adequately address the Year 2000 Issue.
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The Company is reviewing publicly filed information of, sending questionnaires
to and/or contacting its vendors, operators, lessees and borrowers regarding
their state of readiness with respect to identifying and remediating their Year
2000 Issues. However, 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 vendors, operators, lessees and borrowers. Furthermore, it is not possible
for the Company to determine or be assured that third parties upon which the
Company's vendors, operators, lessees and borrowers are dependent will
accomplish adequate remediation of their Year 2000 Issues.
Although the Company believes that the impact of the Year 2000 Issue, as it
relates to its internal information systems, office equipment and the embedded
building control systems in its multi-tenant properties, will not be material,
the Company cannot be assured that the Year 2000 Issues of its vendors or its
operators, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 18, 1999, the Core Group had a remaining commitment of
approximately $2.5 million to fund the development of one skilled nursing
facility. The Core Group's remaining commitment to fund the development of three
assisted living facilities was approximately $8.0 million as of March 18, 1999.
The Core Group has a $22.5 million forward funding commitment to develop up to
nine Alzheimer's care facilities to be managed by the same operator that
currently manages two existing Alzheimer's care facilities owned by the Core
Group. As of March 18, 1999, $1.7 million was funded under this commitment for
the development of two facilities having total development costs of
approximately $5.6 million. The Core Group had a remaining commitment of $4.7
million as of March 18, 1999 to develop a medical office/clinic facility.
As of March 18, 1999, $75.0 million of outstanding borrowings under the
Company's $250 million bank credit facility and $1.0 million in cash and
short-term investments were attributed to the Core Group. Including $3.8 million
of inter-Group borrowings from the Psychiatric Group, the total indebtedness
attributed to the Company's Core Group as of March 18, 1999 was $318.6 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.
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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, the ability of an operator to continue operations of a
psychiatric facility, plans with respect to individual facilities, expectations
with respect to the specific terms of leases or sales of the Company's
facilities, the Company's anticipated dividends, the potential redemption of the
Psychiatric Group Depositary Shares, the Company's liquidity position, projected
expenses associated with operating or 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, changes in operators or ownership of operators, the
ability of operators and tenants to access short and long-term capital at
acceptable rates, 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, the impact of managed care pricing pressures, the requirement to provide
care on a fixed-price basis, lower occupancy levels at the Company's facilities,
disruptions caused by the failure of the Company or its vendors, operators,
lessees or borrowers, or the payors or other third parties upon which they are
dependent, to resolve any Year 2000 Issues affecting their respective
operations, a reduction in 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, the adoption of new accounting
standards and changes in tax laws and regulations affecting real estate
investment trusts. For a further discussion of such factors, see "-- Analysis of
Psychiatric Group" herein.
OPERATING RESULTS
1998 Compared to 1997
In 1998, the Psychiatric Group reported a net loss of ($5,180,000), or
($2.49) per depositary share on a diluted basis, compared with a net loss of
($5,918,000), or ($2.84) per depositary share on a diluted basis, in 1997. The
net loss for the year ended December 31, 1998 includes an impairment loss on
real estate and mortgage notes receivable of ($8,330,000), or ($4.00) per
depositary share on a diluted basis. The net loss in 1997 includes an impairment
loss on real estate and notes receivable of ($11,000,000), or ($5.28) per
depositary share on a diluted basis.
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Rental income was $1,772,000 in 1998, an increase of $139,000 or 9% from
$1,633,000 in 1997. This increase is primarily attributable to a one-time
payment of $347,000 received from the previous operator of Sunrise to settle
certain of the obligations it owes to the Psychiatric Group. Excluding this
one-time payment, rental income decreased due to a net decrease in base rent
payments made by Sunrise during 1998 as the result of a lease restructuring
early in the fourth quarter of 1997 and the receipt of one month's base rent in
the first quarter of 1997 from Northpointe before the operator stopped paying
rent and subsequently ceased operations in the second quarter of 1997.
Mortgage interest income was $3,078,000 in 1998, a decrease of $2,994,000
or 49% from $6,072,000 in 1997. On July 1, 1998, the Psychiatric Group received
$35 million as payment in full of its two Four Winds mortgage loans resulting in
a decrease in mortgage interest income in 1998.
Additional rental and interest income was $736,000 in 1998, an increase of
$71,000 or 11% from $665,000 in 1997. This increase was primarily attributable
to an increase in additional interest received from the Four Winds
Hospital -- Katonah facility and additional rent received from Rock Creek Center
in 1998, partially offset by a decrease in additional interest resulting from
the $35 million payoff of the two Four Winds mortgage loans in July 1998.
Other interest income was $299,000 in 1998, a decrease of $47,000 or 14%
from $346,000 in 1997. This decrease was attributable to the nonpayment of
interest on the Rock Creek Center revolving credit agreement in November and
December 1998, partially offset by interest income on a portion of the net
proceeds of the Four Winds mortgage loans payoff during the month of July until
such proceeds were used to execute a special dividend on July 24, 1998.
Interest income on inter-Group loans to the Core Group was $117,000 in 1998
as a result of revolving inter-Group loans made by the Psychiatric Group
commencing July 1, 1998 with its available undistributed cash.
Property operating expense of $450,000 in 1998 represents costs related to
the protection and maintenance of Northpointe, incurred after the operator
ceased operations in the second quarter of 1997.
Interest expense on inter-Group loans from the Core Group was $712,000 in
1998, a decrease of $841,000 or 54% from $1,553,000 in 1997. This decrease is
attributable to the payoff of the entire $11.2 million outstanding balance of
inter-Group loans owed to the Core Group by the Psychiatric Group using a
portion of the $35 million received by the Psychiatric Group from the payoff of
its two Four Winds mortgage loans on July 1, 1998.
General and administrative expenses were $937,000 in 1998, a decrease of
$203,000 or 18% from $1,140,000 in 1997. The Company's consolidated general and
administrative expenses are allocated between the Core Group and Psychiatric
Group primarily based on revenues and are subject to a minimum of $62,500 per
quarter, however significant costs directly related to either Group are
specifically charged to the applicable Group. Costs allocated to the Psychiatric
Group and direct costs charged to the Psychiatric Group both decreased in 1998
compared to 1997. The Psychiatric Group was specifically charged $438,000 in
1998 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 1997 included $463,000 of such
financial advisory costs.
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.
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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.
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.
Analysis of Psychiatric Group
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in the
periodic restructuring of psychiatric operator payment obligations, the closing
of one psychiatric hospital and significant impairment losses on psychiatric
investments, including an $11 million charge in 1997 and a $8.3 million charge
in 1998.
In late 1995, the operator of the Northpointe and Sunrise Regional Medical
Center (Sunrise) facilities was experiencing operational and cash flow
difficulties which negatively impacted the operator's ability to pay rental and
interest obligations to the Psychiatric Group. During 1996, the Psychiatric
Group modified the Northpointe agreements to allow for the deferral of rent and
interest payments while certain restructuring and restaffing of the facility
occurred. In late 1996, adverse publicity from a lawsuit filed against the
operator alleging widespread irregularities materially exacerbated the
operational and financial difficulties of Northpointe and Sunrise. Subsequently,
the census at Northpointe fell significantly to a level that made it appear
unlikely that the operator could continue operations at the facility and the
operator was unable to continue paying its obligations to the Psychiatric Group
after January 1997. Sunrise suffered from declining census and significant
deterioration of its cash flow, which made it difficult to continue paying its
obligations to the Psychiatric Group. The volatile circumstances at Sunrise and
the deterioration in its cash flows and census levels appeared likely to
preclude the operator from continuing operations at the facility. A range of
options for these two facilities was explored, including the transfer of the
operations 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
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investment in Northpointe, which 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. The remaining
impairment charge of $5,900,000 related to the Psychiatric Group's investment in
Sunrise, which 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. The financial and operational problems
at the Northpointe and Sunrise facilities continued to worsen during 1997. The
operator of Northpointe ceased hospital operations during the second quarter of
1997 and a restructuring of Sunrise's obligations to the Psychiatric Group was
completed in the fourth quarter of 1997.
The Northpointe property remained vacant during 1998 and the Psychiatric
Group incurred $450,000 ($.22 per depositary share on a diluted basis) of
maintenance and security costs. Although the Psychiatric Group expects to incur
approximately $75,000 per quarter for ongoing maintenance and security costs
while it continues to seek alternate uses or a buyer for the property, the
Psychiatric Group cannot be assured that other unexpected costs will not be
incurred. Attempts to locate an alternate healthcare operator for the
Northpointe property have proven largely unsuccessful. After assessing the
various alternatives for the facility and reviewing the estimated net realizable
value of the property under each potential alternative, the Psychiatric Group
recorded an impairment charge at the end of 1998, which reduced the carrying
value of the investment to $1,300,000. If an acceptable healthcare operator is
not identified for the Northpointe facility in the near term, the property will
likely be marketed for sale. However, the Psychiatric Group cannot be assured
that any sale price would equal or exceed the current carrying value of the
Northpointe property.
At December 31, 1998, the Sunrise property had a carrying value of
$2,631,000. In September 1998, a new operator assumed all operational
responsibility for the hospital and entered into a new five-year lease with
effective monthly rent of $60,000 ($.029 per depositary share on a diluted
basis). In connection with the change in operators, the Psychiatric Group
received a one-time payment of $347,000 ($.17 per depositary share on a diluted
basis) from the former operator to settle certain of the obligations owed to the
Psychiatric Group. Although the new operator has fulfilled its obligations to
the Psychiatric Group under the lease so far, the new operator has experienced
cash flow difficulties primarily as a result of delays in obtaining Baker Act
certification. As a result, the Psychiatric Group provided the operator with a
$200,000 working capital loan at the end of 1998, and subsequent to year-end,
the operator requested $700,000 of additional working capital loans. Although
this request is still being evaluated, the Company likely will provide the
additional loans. The Company cannot be assured that the operator will be
successful and, if it were to cease operations, an impairment charge to reduce
the carrying value of the Sunrise property and any related outstanding working
capital loans would be likely. The Company will continue to encourage the
operator to pursue financing alternatives that might enable it to acquire the
property and repay its borrowings from the Company.
The operator of Rock Creek Center (RCC) experienced continuing financial
and operational difficulties over the past several years. In 1996, RCC
experienced substantial payor reimbursement issues and lower than expected
census that adversely impacted its cash flow and its ability to pay its rental
and interest obligations to the Psychiatric Group. As a result, the Psychiatric
Group modified the RCC agreements in 1996 to allow for the partial deferral of
base rent payments while the operator took certain actions to stabilize
operations and implemented its revised business plan. The maturity date of the
$2.5 million balance outstanding under the RCC revolving credit agreement and
the initial term of the RCC lease were extended on several occasions with the
latest extension to March 31, 1999. In June 1998, the operator of the RCC
facility informed the Psychiatric Group that it had incurred a material,
unanticipated liability to Medicare, which imperiled the continuing operation of
the facility. RCC met its rent and interest obligations to the Psychiatric Group
through November 1998, however, RCC made its November payments late due to cash
flow problems. In December 1998, cash flow problems at RCC became so severe that
the operator of the RCC facility defaulted on all of its obligations to the
Psychiatric Group and the Psychiatric Group delivered formal notice of default
to RCC for failure to pay such obligations. Although RCC had been involved in
negotiations to effect a transfer of its operations, those negotiations were
discontinued. As a result, the carrying value of the RCC property was written
down to $1,200,000 and the Company's net investment in related notes and various
other obligations owed to it by the operator of RCC were totally written off.
Subsequent to year-end, on February 24, 1999, the Psychiatric Group sold its
total RCC investment to the current operator for a cash
38
<PAGE> 41
price of $2.5 million. The Company considered other alternatives for the
property and evaluated offers from other potential buyers before agreeing to
sell to the current operator. The sale to the current operator represented the
highest price and most certain transaction the Psychiatric Group was able to
achieve from qualified potential purchasers of the property.
On July 1, 1998, the Psychiatric Group received $35 million as prepayment
in full of the two Four Winds mortgage notes receivable resulting in an
impairment loss of $2.73 million. The proceeds from the payment of the Four
Winds notes were first used by the Psychiatric Group to repay the entire $11.2
million outstanding balance of fixed and revolving inter-Group loans owed to the
Company's Core Group and to maintain a cash reserve of approximately $2.3
million for the net current liabilities of the Psychiatric Group. On July 24,
1998, the Psychiatric Group used substantially all of the remaining proceeds to
purchase 833,067 new shares of Core Group Common Stock from the Company's Core
Group at a price of $25.9407 per share, which were concurrently distributed to
holders of Psychiatric Group Depositary Shares as a special stock dividend.
Holders of Psychiatric Group Depositary Shares received 0.4 shares of Core Group
Common Stock for each Psychiatric Group Depositary Share held and were paid
cash-in-lieu of fractional shares of Core Group Common Stock based on the price
of $25.9407.
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Since the Psychiatric Group currently has no outstanding debt,
mortgage loans or commitments and since it has no plans to incur debt, issue
equity or make additional real estate investments, the Psychiatric Group is not
effected by changes in market prices and interest rates. The Psychiatric Group
does not utilize derivative financial instruments either for trading or hedging
purposes.
Dividends on the Company's Psychiatric Group Depositary Shares are
determined each quarter based upon the operating results of the Company's
Psychiatric Group. It continues to be the policy of the Board to maintain a
dividend payout ratio for each quarter in excess of 90 percent of the
Psychiatric Group's funds from operations for the related quarter, when
possible. With the disposition of the RCC investment, on February 24, 1999, the
Sunrise investment is currently the sole income-producing property of the
Company's Psychiatric Group and the operator of Sunrise is experiencing cash
flow difficulties. Therefore, commencing in the second quarter of 1999, the
Psychiatric Group's funds from operations may not be sufficient to permit the
payment of a dividend on the Psychiatric Group Depositary Shares.
The Company intends to periodically evaluate the financial position of the
Psychiatric Group, including an assessment of the potential cash requirements of
the Psychiatric Group and the appropriate use of the proceeds from the February
24, 1999 sale of the RCC investment. Initially, proceeds from the RCC
disposition, net of closing costs and applicable reserves, will be retained by
the Psychiatric Group to defray its ongoing costs, including the potential
long-term costs of carrying the two remaining Psychiatric Group properties. The
Psychiatric Group may continue to retain such proceeds or, alternatively, may
distribute a portion of such net proceeds to holders of Psychiatric Group
Depositary Shares, in cash or Core Group Common Stock, either by dividend or in
connection with redemption of the Psychiatric Group Depositary Shares. Should
the Board of Directors of the Company decide that the remaining Psychiatric
Group portfolio and operations are not consistent with a separate public
security, the Board may elect to redeem the outstanding Psychiatric Group
Depositary Shares in cash or in exchange for shares of Core Group Common Stock.
Under the terms of the Certificate of Designations for the Psychiatric Group
Preferred Stock and the Deposit Agreement providing for issuance of Depositary
Receipts (Psychiatric Group Depositary Shares) each representing one-tenth of
one share of the Psychiatric Group Preferred Stock, the Company has the right to
redeem all outstanding Psychiatric Group Depositary Shares, and the Psychiatric
Group Preferred Stock represented thereby, for cash (or in exchange for newly
issued shares of Core Group Common Stock) at a premium generally ranging from 5%
to 15% over the value of the Psychiatric Group Depositary Shares. Since an
exchange or redemption of the Psychiatric Group Depositary Shares may be at a
premium to the then current market price of the Psychiatric Group Depositary
Shares, and since the Board could determine to effect such an exchange or
redemption at a time when either or both the Core Group Common Stock and the
Psychiatric Group Depositary Shares may be considered to be overvalued or
undervalued, the exchange or redemption could be disadvantageous to the holders
of the Core Group Common Stock or the Psychiatric Group Depositary Shares.
39
<PAGE> 42
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
a four-phase program to assess the impact upon the Company of the Year 2000
Issue and to remediate those Year 2000 Issues that may be discovered. The
Company will monitor its progress in achieving the target completion dates
established for each phase of the program. The first phase, a comprehensive
inventory of the Company's internal information systems, office equipment and
the embedded building control systems in the Company's multi-tenant properties,
has been completed. The second phase, assessing the impact of the Year 2000
Issue with respect to the Company's internal information systems, office
equipment and the embedded building control systems in the Company's
multi-tenant properties, is essentially complete. The third phase, preparation
and execution of a plan to remediate Year 2000 Issues identified in phases one
and two, is expected to be completed during the second and third quarters of
1999. The fourth and final phase includes the development of contingency plans
to address Year 2000 Issues that cannot be remediated. The timing for the fourth
phase will depend upon the results of the second and third phases and,
therefore, no schedule for the fourth phase can be set at this time. Since the
Company is in the initial phases of its Year 2000 program, it is likewise
currently unable to estimate the costs to remediate its Year 2000 Issues. The
costs incurred to date have not been material and the Company does not expect
the Year 2000 Issue to have a material impact on the Company's future operations
or financial results.
Vendors that provide payroll, banking, communications and property
management services to the Company and the Company's operators, lessees and
borrowers will also likely be affected by the Year 2000 Issue. The future
operations of the Company could be disrupted and/or its financial results could
be negatively impacted by the Year 2000 Issue if the Company's vendors or its
operators, lessees or borrowers do not adequately address their Year 2000
Issues. As health care providers, the Company's operators, 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. In addition, the delivery of
patient care by providers requires utilization of critical clinical systems,
medical devices and equipment that could be impacted by the year 2000 Issue.
Furthermore, the Company's operators, lessees and borrowers likewise are
dependent on a variety of third parties, including but not limited to, insurance
companies, HMO's and other private payors, governmental agencies, fiscal
intermediaries that process claims and make payments for the Medicare and
Medicaid programs, utilities that provide electricity, water, natural gas and
communications services and vendors of medical supplies, pharmaceuticals,
clinical, systems, medical devices and equipment used in patient care, all of
whom must also adequately address the Year 2000 Issue. The Company is reviewing
publicly filed information of, sending questionnaires to and/or contacting its
vendors, operators, lessees and borrowers regarding their state of readiness
with respect to identifying and remediating their Year 2000 Issues. However, 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 vendors,
operators, lessees and borrowers. Furthermore, it is not possible for the
Company to determine or be assured that third parties upon which the Company's
vendors, operators, lessees and borrowers are dependent will accomplish adequate
remediation of their Year 2000 Issues.
Although the Company believes that the impact of the Year 2000 Issue, as it
relates to its internal information systems, office equipment and the embedded
building control systems in its multi-tenant properties, will not be material,
the Company cannot be assured that the Year 2000 Issues of its vendors or its
operators, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Psychiatric Group likely will provide the operator of its Sunrise
property with additional working capital loans of up to $700,000. At March 18,
1999, the Psychiatric Group had $3.8 million of inter-Group loans owed to it by
the Core Group, $400,000 in cash and short-term investments and no inter-Group
loans it owed to the Core Group. The Company's Board of Directors has
established certain management policies relating to the Core Group's commitment
to provide 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
40
<PAGE> 43
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 $7,865,000
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 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. 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.
41
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated balance sheets as of December 31, 1998 and 1997
and its consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1998, 1997 and 1996, 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, 1998 and 1997, and their combined statements of
operations, total attributed equity and cash flows for the years ended December
31, 1998, 1997 and 1996, 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
June 11, 1999 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998. 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 June 11, 1999 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1998.
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 June 11, 1999 Annual Meeting of Shareholders, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
42
<PAGE> 45
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, filed as Exhibit 4.4 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
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 -- Amended and Restated Employment Agreement between American
Health Properties, Inc. and Joseph P. Sullivan.
*10.4 -- Amended and Restated Employment Agreement between American
Health Properties, Inc. and Michael J. McGee.
*10.5 -- Amended and Restated Employment Agreement between American
Health Properties, Inc. and C. Gregory Schonert.
*10.6 -- Amended and Restated Employment Agreement between American
Health Properties, Inc. and Steven A. Roseman.
10.7 -- 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.
10.8 -- 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.
</TABLE>
43
<PAGE> 46
<TABLE>
<C> <C> <S>
10.9 -- 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.
*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
</TABLE>
- - ---------------
* Filed herewith
(B) REPORTS ON FORM 8-K.
None.
44
<PAGE> 47
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, 1998 and
1997................................................... F-3
For the years ended December 31, 1998, 1997, and 1996:
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 SCHEDULE:
Report of independent public accountants.................. F-24
Schedule III -- Real Estate and Accumulated
Depreciation........................................... F-25
CORE GROUP COMBINED FINANCIAL STATEMENTS:
Report of independent public accountants.................. F-29
Combined balance sheets at December 31, 1998 and 1997..... F-30
For the years ended December 31, 1998, 1997 and 1996:
Combined statements of operations...................... F-31
Combined statements of total attributed equity......... F-32
Combined statements of cash flows...................... F-33
Notes to combined financial statements.................... F-34
PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS:
Report of independent public accountants.................. F-46
Combined balance sheets at December 31, 1998 and 1997..... F-47
For the years ended December 31, 1998, 1997 and 1996:
Combined statements of operations...................... F-48
Combined statements of total attributed equity......... F-49
Combined statements of cash flows...................... F-50
Notes to combined financial statements.................... F-51
</TABLE>
F-1
<PAGE> 48
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, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 22, 1999.
F-2
<PAGE> 49
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Real estate properties
Buildings and improvements................................ $ 760,679 $ 638,943
Accumulated depreciation.................................. (121,726) (102,235)
--------- ---------
638,953 536,708
Land...................................................... 76,539 64,897
Construction in progress.................................. 14,247 4,729
--------- ---------
729,739 606,334
Mortgage notes receivable, net.............................. 4,400 41,936
Other notes receivable...................................... 1,663 2,500
Direct financing leases..................................... 1,975 3,053
Cash and short-term investments............................. 3,817 23,053
Receivables................................................. 7,359 7,103
Deferred financing costs and other assets................... 4,889 6,593
--------- ---------
$ 753,842 $ 690,572
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable.......................................... $ 69,000 $ --
Mortgage notes payable...................................... 20,772 17,922
Subordinated convertible bonds payable...................... -- 6,832
Senior notes payable........................................ 219,164 219,059
Accounts payable and accrued liabilities.................... 15,278 13,193
Dividends payable........................................... 15,031 14,847
Deferred income............................................. 3,732 3,758
--------- ---------
342,977 275,611
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
8.6% Cumulative Redeemable Preferred Stock, Series B;
$2,500 liquidation value; 40 shares issued and
outstanding........................................... 100,000 100,000
Psychiatric Group Preferred Stock; 208 shares issued
and outstanding....................................... 2 2
Common stock $.01 par value; 100,000 shares authorized;
24,984 and 23,557 shares issued and outstanding........ 250 236
Additional paid-in capital................................ 519,738 482,030
Cumulative net income..................................... 329,918 283,453
Cumulative dividends...................................... (539,043) (450,760)
--------- ---------
410,865 414,961
--------- ---------
$ 753,842 $ 690,572
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 50
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income.............................................. $ 92,110 $ 72,237 $69,488
Mortgage interest income................................... 3,542 6,289 5,980
Additional rental and interest income...................... 14,098 12,498 12,342
Other property income...................................... 2,099 187 --
Other interest income...................................... 873 2,254 1,114
-------- -------- -------
112,722 93,465 88,924
-------- -------- -------
EXPENSES
Depreciation and amortization.............................. 21,354 15,904 15,016
Property operating......................................... 5,769 524 44
Interest expense........................................... 21,609 19,659 21,842
General and administrative................................. 9,006 8,000 7,427
Impairment loss on real estate and notes receivable........ 8,330 11,000 --
-------- -------- -------
66,068 55,087 44,329
Minority interest.......................................... 189 189 216
-------- -------- -------
INCOME BEFORE EXTRAORDINARY ITEM........................... 46,465 38,189 44,379
EXTRAORDINARY LOSS ON DEBT PREPAYMENT...................... -- (11,427) --
-------- -------- -------
NET INCOME............................................... $ 46,465 $ 26,762 $44,379
======== ======== =======
SERIES B PREFERRED DIVIDEND REQUIREMENT.................... $ (8,600) $ (1,553) $ --
======== ======== =======
ATTRIBUTABLE TO CORE GROUP COMMON STOCK AND PSYCHIATRIC
GROUP DEPOSITARY SHARES --
INCOME BEFORE EXTRAORDINARY ITEM......................... $ 37,865 $ 36,636 $44,379
======== ======== =======
NET INCOME............................................... $ 37,865 $ 25,209 $44,379
======== ======== =======
ATTRIBUTABLE TO --
CORE GROUP COMMON STOCK
Income before extraordinary item....................... $ 43,045 $ 42,554 $38,800
Extraordinary loss on debt prepayment.................. $ -- $(11,427) $ --
Net income............................................. $ 43,045 $ 31,127 $38,800
Basic per share amounts --
Income before extraordinary item.................... $ 1.77 $ 1.81 $ 1.65
Extraordinary loss on debt prepayment............... $ -- $ (0.49) $ --
Net income.......................................... $ 1.77 $ 1.32 $ 1.65
Weighted average common shares...................... 24,379 23,505 23,453
Diluted per share amounts --
Income before extraordinary item.................... $ 1.75 $ 1.80 $ 1.65
Extraordinary loss on debt prepayment............... $ -- $ (0.49) $ --
Net income.......................................... $ 1.75 $ 1.31 $ 1.65
Weighted average common shares and dilutive
potential common shares........................... 24,605 23,703 23,558
Dividends declared per common share.................... $ 2.20 $ 2.12 $ 2.04
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net income (loss)...................................... $ (5,180) $ (5,918) $ 5,579
Basic per share amounts --
Net income (loss)................................... $ (2.49) $ (2.84) $ 2.68
Weighted average depositary shares.................. 2,084 2,084 2,084
Diluted per share amounts --
Net income (loss)................................... $ (2.49) $ (2.84) $ 2.67
Weighted average depositary shares and dilutive
potential depositary shares....................... 2,084 2,084 2,093
Dividends declared per depositary share................ $ 1.73 $ 2.62 $ 2.80
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 51
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, 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
Cash dividends................ -- -- -- -- -- -- -- --
-- -------- --- -- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1996... -- -- 208 2 23,455 235 482,083 256,691
Issuance of 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
Cash dividends................ -- -- -- -- -- -- -- --
-- -------- --- -- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1997... 40 100,000 208 2 23,557 236 482,030 283,453
Issuance of common stock...... -- -- -- -- 415 4 11,162 --
Conversion of subordinated
convertible bonds........... -- -- -- -- -- -- 10 --
Stock incentives, net......... -- -- -- -- 6 -- 1,334 --
Exercise of stock options..... -- -- -- -- 173 2 3,600 --
Net income.................... -- -- -- -- -- -- -- 46,465
Stock dividend................ -- -- -- -- 833 8 21,602 --
Cash dividends................ -- -- -- -- -- -- -- --
-- -------- --- -- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1998... 40 $100,000 208 $2 24,984 $250 $519,738 $329,918
== ======== === == ====== ==== ======== ========
<CAPTION>
TOTAL
CUMULATIVE STOCKHOLDERS'
DIVIDENDS EQUITY
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCES AT DECEMBER 31, 1995... $(340,191) $353,060
Stock incentives, net......... -- 1,140
Exercise of stock options..... -- 241
Net income.................... -- 44,379
Cash dividends................ (53,681) (53,681)
--------- --------
BALANCES AT DECEMBER 31, 1996... (393,872) 345,139
Issuance of preferred stock... -- 96,400
Stock incentives, net......... -- 1,372
Exercise of stock options..... -- 2,176
Net income.................... -- 26,762
Cash dividends................ (56,888) (56,888)
--------- --------
BALANCES AT DECEMBER 31, 1997... (450,760) 414,961
Issuance of common stock...... -- 11,166
Conversion of subordinated
convertible bonds........... -- 10
Stock incentives, net......... -- 1,334
Exercise of stock options..... -- 3,602
Net income.................... -- 46,465
Stock dividend................ (21,610) --
Cash dividends................ (66,673) (66,673)
--------- --------
BALANCES AT DECEMBER 31, 1998... $(539,043) $410,865
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 52
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 46,465 $ 26,762 $ 44,379
Extraordinary loss on debt prepayment...................... -- 11,427 --
Depreciation, amortization and other non-cash items........ 23,895 18,486 17,271
Deferred income............................................ 198 (253) (368)
Impairment loss on real estate and notes receivable........ 8,330 11,000 --
Change in receivables and other assets..................... 708 (2,838) 412
Change in accounts payable and accrued liabilities......... 2,974 5,572 (453)
--------- --------- --------
82,570 70,156 61,241
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties..... (143,835) (92,242) (17,142)
Proceeds from sale of property............................. -- -- 423
Mortgage note receivable fundings.......................... (179) (4,221) --
Principal payments on mortgage notes receivable............ 35,039 72 64
Other notes receivable..................................... (1,648) 233 458
Direct financing leases.................................... 1,078 642 2,535
Administrative capital expenditures........................ (122) (14) (55)
--------- --------- --------
(109,667) (95,530) (13,717)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable................ 69,000 (48,500) 48,500
Principal payments on mortgage notes payable............... (525) (34) --
Redemption of subordinated convertible bonds payable....... (7,058) -- --
Proceeds from notes payable issuance....................... -- 218,965 --
Prepayment of notes payable................................ -- (163,176) --
Principal payments on notes payable........................ -- -- (49,000)
Financing costs paid....................................... (144) (2,862) (150)
Proceeds from sale of preferred stock...................... -- 96,400 --
Proceeds from sale of common stock......................... 9,475 -- --
Proceeds from exercise of stock options.................... 3,602 2,176 241
Cash dividends paid........................................ (66,489) (56,022) (53,206)
--------- --------- --------
7,861 46,947 (53,615)
--------- --------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... (19,236) 21,573 (6,091)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 23,053 1,480 7,571
--------- --------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 3,817 $ 23,053 $ 1,480
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 53
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.
The Company's common stock (the Core Group Common Stock) is intended to
reflect the separate financial performance of the Company's investments in acute
care, rehabilitation and long-term acute care hospitals, skilled nursing,
assisted living, Alzheimer's care and medical office/clinic facilities (the Core
Group). The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Company's investments in psychiatric
hospitals (the Psychiatric Group). The 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.
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). Tenant improvements paid for
by the Company are capitalized and depreciated over the lives of the related
leases. In general, other capital expenditures incurred are capitalized when
significant and depreciated over the period they are expected to provide
benefits to the related property.
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 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.
Additional Rental and Interest Income. Certain of the Company's facility
leases provide for contingent rental or interest income based upon specific
target revenues of the operator. The Company recognizes contingent rental and
interest income on a quarterly basis by comparing the specific target to an
estimate of
F-7
<PAGE> 54
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the operator's future operating revenues for the remainder of the lease
calculation period. If the Company deferred recognition of contingent rental and
interest income until the specific target that triggers the contingent rental or
interest income was achieved, there would not have been a material impact on the
Company's financial statements for the year ended December 31, 1998.
Deferred Income. Fees received, net of related direct costs, associated
with the origination or amendment of leases and mortgage notes receivable 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 the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The adoption of this statement had no impact on
the Company's financial statements.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for
reporting financial and descriptive information about reportable operating
segments. In general, reportable operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Currently, the Company has two
such reportable operating segments, the Core Group and the Psychiatric Group.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits".
SFAS No. 132 revises employer's disclosures about pension and other post
retirement benefits, requires additional information on changes in the benefit
obligations and fair values of plan assets and eliminates certain previous
disclosures. The adoption of this statement in 1998 had no impact on the
Company's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet
F-8
<PAGE> 55
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as either an asset or liability measured at its fair value. It also requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The required adoption of this
statement in 2000 is not expected to have a material impact on the Company's
financial statements.
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". In general, SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
The adoption of SOP 98-5 in 1998 had no impact on the Company's financial
statements.
REAL ESTATE PROPERTIES
The following table summarizes the Company's investment in health care real
estate properties as of December 31, 1998:
<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 $ 1,306
Cleveland Regional Medical Center...... TX 300 8,000 8,300 1,482
Desert Valley Hospital................. CA 1,755 24,650 26,405 2,517
Frye Regional Medical Center........... NC 1,247 44,202 45,449 13,285
Irvine Medical Center.................. CA 17,987 57,013 75,000 10,987
Kendall Regional Medical Center........ FL 4,163 64,849 69,012 19,008
Lucy Lee Hospital...................... MO 404 23,162 23,566 6,521
Marlboro Park Hospital................. SC 640 7,153 7,793 874
North Fulton Regional Hospital......... GA 4,149 42,042 46,191 10,273
Palm Beach Gardens Medical Center...... FL 4,024 41,624 45,648 12,274
Pioneer Valley Hospital................ UT 1,997 47,469 49,466 3,894
Shannon Medical Center, St. John's
Campus............................... TX 255 16,197 16,452 2,951
Tarzana Regional Medical Center........ CA 12,421 61,279 73,700 18,938
------- -------- -------- --------
50,062 448,327 498,389 104,310
------- -------- -------- --------
ALZHEIMER'S CARE FACILITIES:
Pine Haven at Cypresswood.............. TX 225 3,475 3,700 268
Pine Haven at Sugar Land............... TX 265 3,759 4,024 172
------- -------- -------- --------
490 7,234 7,724 440
------- -------- -------- --------
ASSISTED LIVING FACILITIES:
Cambria Lodge.......................... TX 300 4,882 5,182 290
Garrison Creek Lodge................... WA 219 5,429 5,648 334
Sherwood Place......................... TX 220 4,814 5,034 276
Summer Wind Residence.................. ID 110 2,890 3,000 241
------- -------- -------- --------
849 18,015 18,864 1,141
------- -------- -------- --------
LONG-TERM ACUTE CARE HOSPITAL:
SCCI Hospital -- Amarillo.............. TX 810 5,300 6,110 144
------- -------- -------- --------
MEDICAL OFFICE/CLINIC FACILITIES:
Casa Blanca Clinic(1).................. AZ 1,900 18,681 20,581 723
Emerson Medical Office Building/Surgery
Center(1)............................ FL 572 8,478 9,050 106
Fannin Medical Buildings(1)............ TX 2,850 49,209 52,059 1,794
Morristown Professional Plaza.......... NJ 1,500 18,146 19,646 613
Murfreesboro Medical Clinic(2)......... TN 650 12,394 13,044 236
Northpark Professional Building........ FL -- 10,651 10,651 443
</TABLE>
F-9
<PAGE> 56
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BUILDINGS AND TOTAL ACCUMULATED
STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION
----- ------- ------------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Park Plaza Professional Building....... TX $ 1,100 $ 15,947 $ 17,047 $ 578
Valencia Medical Office Building....... CA 2,200 7,313 9,513 87
Walsh Medical Arts Center.............. CA 285 8,532 8,817 1,011
Westpark Plaza......................... TX 1,700 7,436 9,136 297
Woodlake Medical Center................ CA 2,470 10,200 12,670 247
------- -------- -------- --------
15,227 166,987 182,214 6,135
------- -------- -------- --------
PSYCHIATRIC HOSPITALS:
Northpointe............................ FL 1,300 -- 1,300 --
Rock Creek Center...................... IL 440 760 1,200 --
Sunrise Regional Medical Center........ FL 1,200 2,202 3,402 771
------- -------- -------- --------
2,940 2,962 5,902 771
------- -------- -------- --------
REHABILITATION HOSPITALS:
HealthSouth MountainView Rehabilitation
Hospital............................. WV -- 11,718 11,718 2,176
HealthSouth Rehabilitation Hospital of
Fayetteville......................... AR 962 8,124 9,086 1,523
Wesley Rehabilitation Hospital......... KS 1,938 12,659 14,597 2,149
------- -------- -------- --------
2,900 32,501 35,401 5,848
------- -------- -------- --------
SKILLED NURSING FACILITIES:
Arkansas Manor Nursing Home............ CO 154 3,912 4,066 514
Cornerstone Care Center................ CO 125 4,731 4,856 480
Covington Manor Nursing Center......... IN 170 8,064 8,234 168
Douglas Manor.......................... AZ 175 2,446 2,621 246
Edgewood Manor Nursing Center.......... OH 155 5,027 5,182 109
Fairview Manor Nursing Center.......... OH 130 7,796 7,926 168
Lakeland Nursing Center................ IN 50 3,842 3,892 83
Norwood Nursing Center................. IN 30 3,779 3,809 85
Safford Care Center.................... AZ 100 4,834 4,934 472
Silver Hills Health Care Center........ NV 1,322 6,065 7,387 38
University Park Nursing Center......... IN 110 4,847 4,957 94
Versailles Health Care Center.......... OH 160 6,303 6,463 119
Villa Fairborn......................... OH 260 6,227 6,487 130
Villa Georgetown....................... OH 125 6,338 6,463 128
Villa Springfield...................... OH 195 5,142 5,337 103
------- -------- -------- --------
3,261 79,353 82,614 2,937
------- -------- -------- --------
$76,539 $760,679 $837,218 $121,726
======= ======== ======== ========
</TABLE>
- - ---------------
(1) Casa Blanca Clinic represents four separate facilities leased together under
a single master lease. Fannin Medical Buildings represent two separate
facilities master-leased to affiliated tenants under separate leases, with
one such facility encumbered by a $17,495 mortgage note payable. Emerson
Medical Office Building/Surgery Center represents two separate facilities,
one of which is master-leased and the other leased to multiple tenants.
(2) Murfreesboro Medical Clinic is encumbered by a $3,277 mortgage note payable.
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
F-10
<PAGE> 57
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and any renewal terms. Additional rent is generally based on the increase in
annual gross revenues of the related facility or the 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, 1998, 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 general, the Company is also initially
responsible for capital expenditures, leasing commissions and tenant
improvements at these buildings, subject to reimbursement from tenants in some
instances.
At December 31, 1998, the Company had construction in progress of
$14,247,000. As of December 31, 1998, the Company had funded $5,230,000 of a
$9.5 million commitment to develop a skilled nursing facility in Las Vegas,
Nevada to be operated by an experienced operator of skilled nursing facilities.
As of December 31, 1998, the Company had funded $8,329,000 of an $18.6 million
commitment to develop three assisted living facilities to be managed by an
experienced operator of assisted living facilities. The Company has a $22.5
million forward funding commitment to develop up to nine Alzheimer's care
facilities to be managed by the same operator that currently manages two
existing Alzheimer's care facilities owned by the Company. As of December 31,
1998, $688,000 was funded under this commitment for the development of one
facility having a total development cost of approximately $2.8 million. The
Company has identified a second facility site under this commitment having a
total development cost of approximately $2.8 million. The Company also has a
$5.7 million commitment to develop a medical office/clinic facility in Roseburg,
Oregon to be master-leased to the operator of the adjacent hospital.
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 1998, revenues from
these leases accounted for 41% of the Company's total revenues.
Kendall Regional Medical Center (Kendall) is leased to a subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). Aggregate revenues from the
lease, which was originally scheduled to mature in February 1999, were
approximately $10.3 million in 1998, or 9% of the Company's total revenues.
Pursuant to the terms of the lease, Columbia has exercised its option to
purchase Kendall at fair market value. The purchase price of $105 million will
be paid in cash, or at the option of the Company, a combination of cash and debt
relief. The Company currently intends to effect the transaction as a "deferred
like-kind" 1031 exchange for tax purposes. The first part of the exchange, the
transfer of Kendall to Columbia, is currently scheduled to occur on April 15,
1999. The Company would complete the exchange by acquiring new investment
properties within the time limits imposed by federal tax law, if possible. If
the Company is successful in identifying and closing on a sufficient amount of
new investments within the required time limits, the Company should not
recognize current taxable gain as a result of the transaction. In that event,
there should be no impact on the Company's REIT distribution requirements. Even
though the Company may not recognize gain on the transaction for tax purposes,
the Company expects to be able to recognize a gain of over $50 million for book
purposes. The Company cannot be assured that total revenues generated by new
investments acquired to effect the exchange will equal the annual revenues
currently generated by the Kendall investment, nor is it certain that the
Company will complete the transaction as an exchange. If the Company does not
complete the transaction as an exchange, the amount of the Company's tax
liability, the impact on its REIT distribution requirements and the amount of
gain, net of taxes, if any, recognized for book purposes
F-11
<PAGE> 58
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would depend on the amount of gain recognized for tax purposes, any losses
recognized by the Company on sales of other assets and various tax elections
available to the Company.
Future minimum annual rentals, assuming the sale of Kendall on April 15,
1999, under the Company's noncancellable operating leases for calendar years
1999 through 2003 are approximately $89,360,000, $85,670,000, $80,640,000,
$75,490,000, and $73,690,000, respectively.
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in the
periodic restructuring of psychiatric operator payment obligations, the closing
of one psychiatric hospital and significant impairment losses on psychiatric
investments, including an $11 million charge in 1997 and a $8.3 million charge
in 1998. At December 31, 1998, the aggregate carrying value of the Company's
psychiatric properties was $5,131,000. The Northpointe property has been vacant
since mid-1997 and has a carrying value of $1,300,000. The Company incurs
ongoing costs for maintenance and security of the property while it continues to
seek alternate uses or a buyer for the property. The operator of the Rock Creek
Center (RCC) experienced continuing financial and operational difficulties over
the past several years, and at the end of 1998, the operator was in default on
its obligations to the Company. As a result, the carrying value of the RCC
property was written down to $1,200,000 and the Company's net investment in
related notes and various other obligations owed to it by the operator of RCC
were totally written off. Subsequent to year-end, the Company sold its total RCC
investment for a cash price of $2.5 million. At December 31, 1998, the Sunrise
Regional Medical Center (Sunrise) property had a carrying value of $2,631,000.
In September 1998, a new operator assumed all operational responsibility for the
hospital and entered into a new five-year lease with effective monthly rent of
$60,000. Although the new operator has fulfilled its obligations to the Company
under the lease so far, the new operator has experienced cash flow difficulties
primarily as a result of delays in obtaining Baker Act certification. As a
result, the Company provided the operator with a $200,000 working capital loan
at the end of 1998, and subsequent to year-end, the operator requested $700,000
of additional working capital loans. Although this request is still being
evaluated, the Company likely will provide the additional loans. The Company
cannot be assured that the operator will be successful and, if it were to cease
operations, an impairment charge to reduce the carrying value of the Sunrise
property and any related outstanding working capital loans would be likely. The
Company will continue to encourage the operator to pursue financing alternatives
that might enable it to acquire the property and repay its borrowings from the
Company.
MORTGAGE NOTES RECEIVABLE
SCCI Hospital -- Houston Central $4,400,000. The Company has a 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 optional ten-year extension 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 Company may receive additional
interest each year based on the increase in annual operating revenues of the
facility.
Four Winds. The Company had two mortgage notes receivable secured by first
mortgages and security interests in the real property of Four Winds, two
psychiatric facilities located in Saratoga Springs and Katonah, New York. The
Saratoga Springs note had an initial term of ten years with a maturity date of
June 30, 1999, bore interest at a rate of 12.42% and required monthly principal
and interest payments of $194,000. The Katonah note had an initial term of ten
years with a maturity date of November 30, 2002, bore interest at rates of
13.44%, 13.80% and 14.13%, in 1996, 1997 and 1998, respectively and required
monthly payments of interest only. On July 1, 1998, the Company received $35
million as prepayment in full of the two Four Winds mortgage notes receivable
resulting in an impairment loss of $2.73 million.
F-12
<PAGE> 59
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
In 1998, the Company committed to advance funds on a senior subordinated
note due from the operator of an Alzheimer's care facility for a total maximum
principal amount of $1,902,000. The note is secured by a pledge of stock in the
operator and is personally guaranteed by one of its principals. Advances under
the note are conditioned upon borrower's compliance with various covenants. The
Company has no obligation to make principal advances after February 27, 2003. As
of December 31, 1998, $1,468,000 was outstanding under the note, which included
principal advanced of $1,283,000 and accrued interest of $185,000. Prior to
December 31, 2002, interest accrues on the principal balance of the note at a
rate of 18% per annum and will be added to the outstanding principal balance on
a quarterly basis. Accrued interest is payable quarterly as it accrues
commencing January 1, 2003 until March 31, 2006, subject to an intercreditor
agreement and certain earnings requirements of the operator. Commencing April 1,
2006, quarterly principal and interest payments sufficient to amortize the
principal amount of the loan as of March 31, 2006 together with unpaid interest
are due in equal quarterly installments until April 1, 2012 at which time all
unpaid principal and interest amounts are due and payable.
The Company has provided financing at variable rates to certain psychiatric
hospital operators under revolving credit agreements and working capital loans.
Borrowings under these agreements are conditioned upon the borrower's compliance
with various covenants and are partially secured by accounts receivable, other
personal property and/or issued and outstanding shares of capital stock of the
operators. As of December 31, 1998, $195,000 was outstanding under a $200,000
working capital loan provided to one psychiatric hospital operator at an annual
interest rate of 12%. Interest only on the note is payable monthly through
August 1, 1999. Commencing September 1, 1999, principal and interest payments of
$35,000 are payable monthly until maturity on February 1, 2000. During 1998,
$2,485,000 of outstanding borrowings were written off by the Company as part of
a $5.6 million impairment loss recorded on psychiatric investments, and during
1997, $1,724,000 of outstanding borrowings were written off as part of an $11.0
million impairment loss recorded on psychiatric investments.
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 has provided equipment leasing for terms of five to
seven years which are classified as direct financing leases. As of December 31,
1998, the Company's aggregate net investment in these direct financing leases
was $1,975,000, represented by total minimum lease payments receivable of
$2,163,000 less unearned income of $188,000. Future minimum annual lease
payments under these leases for calendar years 1999 through 2002 are
approximately $1,342,000, $704,000, $94,000 and $23,000, 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 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-13
<PAGE> 60
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average amount of borrowings under bank credit agreements
outstanding during 1998, 1997 and 1996 was $37,764,000, $6,151,000 and
$21,622,000 at weighted average interest rates of 6.3%, 7.1%, and 6.4%,
respectively. The maximum amount outstanding under bank credit agreements in
1998, 1997 and 1996 was $75,000,000, $48,500,000 and $53,000,000, respectively.
As of December 31, 1998, the Company had $69,000,000 of outstanding borrowings
under its bank credit agreement at a weighted average interest rate of 6.0%.
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, the carrying amount is a
reasonable estimate of fair value.
Mortgage Notes Payable. In connection with the acquisition of a medical
office building in Houston, Texas in 1997, a mortgage note payable in the amount
of $17,956,000 was assumed. The remaining balance at December 31, 1998 and 1997
was $17,495,000 and $17,922,000, respectively 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.
In connection with the acquisition of a medical office building in
Murfreesboro, Tennessee in 1998, a mortgage note payable in the amount of
$3,375,000 was assumed. The remaining balance at December 31, 1998 was
$3,277,000 with an interest rate of 7.0%. 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 $33,000 with the remaining
principal balance due at maturity on October 2, 1999.
The carrying amount of the mortgage notes payable is a reasonable estimate
of fair value, as the pricing and terms of the notes are indicative of current
rates and credit terms.
Senior Notes Payable. 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,
1998 and 1997, the estimated fair value of the 2002 Notes and 2007 Notes was
$208 million and $225 million, respectively.
In February 1997, the Company prepaid its two issues of private placement
debt, which included $72 million of 11.45% unsecured senior notes payable and
$80 million of 10.41% unsecured senior notes payable. The weighted average
amount of borrowings under these senior note issues during 1997 and 1996 was
$22,800,000 and $178,250,000 at weighted average effective interest rates of
11.06% and 11.03%, respectively. The prepayment resulted in an extraordinary
charge in the first quarter of 1997 of $11,427,000 consisting of a make-whole
premium and other costs related to the prepayment.
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 had a coupon rate of 8.5% and
were 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. In 1998, $10,000 of the
1990 Swiss Bonds, with accrued interest, were converted into 302 shares of
common stock resulting in additional equity of $10,000, net of conversion and
unamortized issuance costs. There were no conversions of Swiss Bonds in 1997 or
1996. Pursuant to the Company's call for early redemption, the remaining 1,489
outstanding Swiss Bonds were redeemed on December 30, 1998 for
F-14
<PAGE> 61
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $7,058,000. As of December 31, 1997, the estimated fair value of
the Company's subordinated convertible bonds payable was $7,259,000 based on the
quoted market price of bonds as traded in Switzerland.
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, 1998, for calendar years 1999 through
2003 and thereafter is $3,741,000, $504,000, $547,000, $100,594,000, $646,000
and $134,740,000, respectively. In addition, the outstanding balance of
$69,000,000 at December 31, 1998 under the Company's unsecured revolving credit
agreement matures on December 31, 2000, although certain events could require
the earlier paydown of the outstanding balance.
Interest. Interest capitalized on construction in progress was $819,000,
$517,000 and $895,000 in 1998, 1997 and 1996, respectively. Interest paid, net
of interest capitalized, in 1998, 1997 and 1996 was $20,482,000, $14,374,000 and
$21,547,000, respectively.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Pension expense in 1998, 1997 and 1996 was $287,000, $207,000 and
$247,000, 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:
Change in benefit obligations:
<TABLE>
<CAPTION>
1998 1997
------ -----
(IN THOUSANDS)
<S> <C> <C>
Projected benefit obligation January 1...................... $ 874 $807
Benefit payments............................................ (110) (66)
Service cost................................................ 24 52
Interest cost............................................... 57 59
Actuarial loss.............................................. 33 22
----- ----
Projected benefit obligation December 31.................... $ 878 $874
Unrecognized prior service cost............................. -- --
Unrecognized net gain....................................... 65 101
----- ----
Pension liability........................................... $ 943 $975
===== ====
</TABLE>
F-15
<PAGE> 62
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of net pension cost:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current service cost........................................ $24 $ 52 $ 95
Interest cost............................................... 57 59 53
Amortization of prior service cost.......................... -- 7 49
Amortization of net gain.................................... (3) (21) --
--- ---- ----
Net periodic pension cost................................... $78 $ 97 $197
=== ==== ====
</TABLE>
Discount rates of 6.75% and 7.0% for 1998 and 1997, 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 1998, 1997 and 1996
were 7.0%, 7.5% and 7.0%, respectively.
STOCK INCENTIVE PLANS
The Company's stock incentive plans provide for the issuance of up to
2,600,000 shares of stock to directors and key employees of the Company. There
were 726,114 shares available to grant further stock incentives at December 31,
1998.
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 AVERAGE
NUMBER OF EXERCISE DEFERRED AND RESTRICTED NUMBER OF EXERCISE DEFERRED AND RESTRICTED
SHARES PRICE DER SHARES STOCK SHARES PRICE DER SHARES STOCK
--------- -------- ------------ ---------- --------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Granted/accumulated....... 160,424 $28.00 47,159 -- -- -- 39,121 --
Exercised/restrictions
lapsed.................. (172,326) $20.90 (6,312) (1,372) -- -- -- (137)
Expired/canceled.......... (47,728) $28.72 (1,264) -- (16,250) $ 21.78 -- --
-------- ------- ------- ------- ------ ------
December 31, 1998........... 871,433 $24.03 160,429 -- 45,444 $ 22.16 55,333 --
======== ======= ======= ======= ====== ======
</TABLE>
F-16
<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, 1998:
<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...... 198,728 4.6 $19.84 198,728 $19.84
$21.50 - $27.00...... 533,831 6.5 $24.45 442,519 $24.20
$27.00 - $32.50...... 138,874 8.7 $28.41 20,000 $29.98
PSYCHIATRIC GROUP DEPOSITARY SHARES
$16.00 - $21.50...... 21,873 4.5 $19.75 21,873 $19.75
$21.50 - $27.00...... 22,571 4.6 $24.06 22,571 $24.06
$27.00 - $32.50...... 1,000 3.1 $31.94 1,000 $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 661,247, 708,884
and 629,579 shares of Core Group Common Stock were exercisable at December 31,
1998, 1997 and 1996 with weighted average exercise prices of $23.07, $22.55 and
$22.90 per share, respectively. Options on 45,444, 61,557 and 64,210 Psychiatric
Group Depositary Shares were exercisable at December 31, 1998, 1997 and 1996
with weighted average exercise prices of $22.16, $22.07 and $22.75 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, 1998, 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 1998, 1997 and 1996 was $1,334,000,
$1,427,000 and $1,251,000 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 1998,
1997 and 1996 was $5.57, $5.11 and $4.84 per
F-17
<PAGE> 64
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option, respectively. The fair value of options was estimated using an option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life in years...................................... 8.0 7.4 6.7
Risk-free interest rate..................................... 5.66% 6.55% 5.62%
Expected volatility......................................... 15% 15% 15%
Expected dividend yield --
Options without DERs...................................... 7.5% 7.5% 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 1998, 1997 and 1996
was $25.44, $24.39 and $22.53 per share, 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 consolidated
Company, the Core Group and the Psychiatric Group for 1998, 1997 and 1996 would
not have been material. The pro forma effect for 1998, 1997 and 1996 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
8.6% 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. 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 is
approximately 26,742,000. Approximately 267,000 Series A Preferred
F-18
<PAGE> 65
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-19
<PAGE> 66
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
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 and Psychiatric Group Depositary Shares:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
INCOME SHARES INCOME SHARES INCOME SHARES
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ATTRIBUTABLE TO CORE GROUP
Income before extraordinary item...... $51,645 -- $44,107 -- $38,800 --
Less Series B preferred dividend
requirement......................... (8,600) -- (1,553) -- -- --
Outstanding common shares............. -- 24,377 -- 23,503 -- 23,451
Deferred common shares................ -- 2 -- 2 -- 2
------- ------ ------- ------ ------- ------
Basic EPS components.................. 43,045 24,379 42,554 23,505 38,800 23,453
Effect of dilutive potential common
shares
Stock options....................... -- 81 -- 94 -- 40
DERs................................ -- 145 -- 104 -- 65
Subordinated convertible bonds
payable.......................... -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Diluted EPS components................ $43,045 24,605 $42,554 23,703 $38,800 23,558
======= ====== ======= ====== ======= ======
ATTRIBUTABLE TO PSYCHIATRIC GROUP
Basic EPS components.................. $(5,180) 2,084 $(5,918) 2,084 $ 5,579 2,084
Effect of dilutive potential
depositary shares
Stock options....................... -- -- -- -- -- --
DERs................................ -- -- -- -- -- 9
------- ------ ------- ------ ------- ------
Diluted EPS components................ $(5,180) 2,084 $(5,918) 2,084 $ 5,579 2,093
======= ====== ======= ====== ======= ======
</TABLE>
DIVIDENDS AND REDEMPTION PROVISIONS
A quarterly dividend of $.565 per share for Core Group Common Stock, or
approximately $14,116,000, was declared by the Board of Directors on January 22,
1999, payable on February 24, 1999 to shareholders of record on February 10,
1999. A quarterly dividend of $.095 per share for Psychiatric Group Depositary
Shares, or approximately $198,000, was declared by the Board of Directors on
January 22, 1999, payable on February 24, 1999 to shareholders of record on
February 10, 1999. A dividend of $.5375 per share for Series B Depositary Shares
was declared by the Board of Directors on January 22, 1999, payable March 1,
1999 to shareholders of record February 15, 1999. This dividend was for the
regular quarterly period ended February 28, 1999 of which approximately $717,000
was accrued at December 31, 1998. The aggregate dividends of $15,031,000 have
been reflected as dividends payable in the accompanying financial statements as
of December 31, 1998.
As a result of the payoff of the Four Winds mortgage notes receivable, the
Company distributed 833,067 new shares of Core Group Common Stock at a price of
$25.9407 per share to holders of Psychiatric Group Depositary Shares as a
special stock dividend on July 24, 1998. Holders of Psychiatric Group Depositary
Shares received 0.4 shares of Core Group Common Stock for each Psychiatric Group
Depositary Share held and cash-in-lieu of fractional shares of Core Group Common
Stock based on the price of $25.9407.
Cash dividends of $2.18 per share paid on Core Group Common Stock during
1998 are characterized as $1.076 of ordinary income and $1.104 of return of
capital for tax purposes. Dividends of $12.62628 per share, including $2.25 of
cash dividends and a special stock dividend valued at $10.37628, paid on
Psychiatric Group
F-20
<PAGE> 67
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depositary Shares during 1998 are characterized as $6.2325 of ordinary income
and $6.39378 of return of capital for tax purposes. For Psychiatric Group
Depositary Share holders of record on July 17, 1998, the initial tax basis in
the Core Group Common Stock distributed as a special stock dividend is $25.9407
per share of Core Group Common Stock. Cash dividends of $2.15 per share paid on
Series B Depositary Shares during 1998 are characterized entirely as ordinary
income for income tax purposes.
In general, cash 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.
Dividends on the Company's Psychiatric Group Depositary Shares are
determined each quarter based upon the operating results of the Company's
Psychiatric Group. It continues to be the policy of the Board to maintain a
dividend payout ratio for each quarter in excess of 90 percent of the
Psychiatric Group's funds from operations for the related quarter, when
possible. With the disposition of the RCC investment subsequent to year-end, the
Sunrise investment is currently the sole income-producing property of the
Company's Psychiatric Group and the operator of Sunrise is experiencing cash
flow difficulties. Therefore, commencing in the second quarter of 1999, the
Psychiatric Group's funds from operations may not be sufficient to permit the
payment of a dividend on the Psychiatric Group Depositary Shares.
The Company intends to periodically evaluate the financial position of the
Psychiatric Group, including an assessment of the potential cash requirements of
the Psychiatric Group and the appropriate use of the proceeds from the sale of
the RCC investment. Initially, proceeds from the RCC disposition, net of closing
costs and applicable reserves, will be retained by the Psychiatric Group to
defray its ongoing costs, including the potential long-term costs of carrying
the two remaining Psychiatric Group properties. The Psychiatric Group may
continue to retain such proceeds or, alternatively, may distribute a portion of
such net proceeds to holders of Psychiatric Group Depositary Shares, in cash or
Core Group Common Stock, either by dividend or in connection with redemption of
the Psychiatric Group Depositary Shares. Should the Board of Directors of the
Company decide that the remaining Psychiatric Group portfolio and operations are
not consistent with a separate public security, the Board may elect to redeem
the outstanding Psychiatric Group Depositary Shares in cash or in exchange for
shares of Core Group Common Stock. Under the terms of the Certificate of
Designations for the Psychiatric Group Preferred Stock and the Deposit Agreement
providing for issuance of Depositary Receipts (Psychiatric Group Depositary
Shares) each representing one-tenth of one share of the Psychiatric Group
Preferred Stock, the Company has the right to redeem all outstanding Psychiatric
Group Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, for cash (or in exchange for newly issued shares of Core Group Common
Stock) at a premium generally ranging from 5% to 15% over the value of the
Psychiatric Group Depositary Shares. Since an exchange or redemption of the
Psychiatric Group Depositary Shares may be at a premium to the then current
market price of the Psychiatric Group Depositary Shares, and since the Board
could determine to effect such an exchange or redemption at a time when either
or both the Core Group Common Stock and the Psychiatric Group Depositary Shares
may be considered to be overvalued or undervalued, the exchange or redemption
could be disadvantageous to the holders of the Core Group Common Stock or the
Psychiatric Group Depositary Shares.
SEGMENT INFORMATION
The Company has two reportable operating segments, the Core Group and the
Psychiatric Group, for which separate financial information is available and
whose operating results are evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
Operating results of the Core Group reflect the separate financial performance
of a distinct portfolio 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. Operating results
of the Psychiatric Group reflect the
F-21
<PAGE> 68
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
separate financial performance of a distinct portfolio of the Company's
investments in psychiatric hospitals. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or loss from
operations before depreciation and amortization and impairment losses on real
estate and notes receivable. The reportable segments are business units of the
Company that are managed separately based on the two distinct portfolios, with
two distinct classes of publicly-traded shares intended to represent those
portfolios. The following table summarizes pertinent financial information of
the Company's reportable operating segments:
<TABLE>
<CAPTION>
CORE GROUP PSYCHIATRIC GROUP SEGMENT TOTALS
------------------------------ -------------------------- ------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- -------- ------ ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total segment revenue(1)......... $107,549 $ 86,302 $ 81,429 $6,002 $ 8,716 $ 9,174 $113,551 $ 95,018 $ 90,603
Real estate depreciation......... 20,440 15,042 14,145 753 751 744 21,193 15,793 14,889
Impairment loss on real estate
and notes receivable........... -- -- -- 8,330 11,000 -- 8,330 11,000 --
Extraordinary loss on debt
prepayment..................... -- 11,427 -- -- -- -- -- 11,427 --
Segment operating profit......... 72,085 59,149 52,945 3,903 5,833 6,323 75,988 64,982 59,268
Segment assets(2)................ 746,995 652,132 527,979 7,027 50,994 63,261 754,022 703,126 591,240
</TABLE>
- - ---------------
(1) The difference between total segment revenues and total consolidated
revenues, represents interest income on inter-Group loans of $829, $1,553
and $1,679 in 1998, 1997 and 1996, respectively.
(2) The difference between total segment assets and total consolidated assets,
represents inter-Group loans of $180, $12,554 and $13,358 for 1998, 1997 and
1996, respectively.
F-22
<PAGE> 69
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>
1998
Consolidated --
Revenues....................................... $ 27,007 $28,143 $28,709 $28,863 $112,722
Net income..................................... 13,823 11,225(1) 13,638 7,779(2) 46,465
Attributable to --
Core Group Common Stock
Revenues..................................... $ 25,103 $26,248 $27,753 $28,445 $107,549
Net income................................... 10,434 10,559 10,859 11,193 43,045
Basic per share amounts --
Net income................................. $ 0.44 $ 0.44 $ 0.44 $ 0.45 $ 1.77
Diluted per share amounts --
Net income................................. $ 0.43 $ 0.43 $ 0.44 $ 0.44 $ 1.75
Psychiatric Group Depositary Shares
Revenues..................................... $ 2,269 $ 2,242 $ 1,052 $ 439 $ 6,002
(5,564)(2)
Net income (loss)............................ 1,239 (1,484)(1) 629 (5,180)
Basic per share amounts --
Net income (loss).......................... $ 0.59 $ (0.71) $ 0.30 $ (2.67) $ (2.49)
Diluted per share amounts --
Net income (loss).......................... $ 0.59 $ (0.71) $ 0.30 $ (2.67) $ (2.49)
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(3) $12,332 $12,268 $11,576 $ 36,636
Extraordinary loss on debt prepayment........ (11,427) -- -- -- (11,427)
Net income (loss)............................ (10,967)(3) 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)(3) 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)
</TABLE>
- - ---------------
(1) Includes impairment loss of $2,730 on Psychiatric Group notes receivable.
(2) Includes impairment loss of $5,600 on Psychiatric Group real estate and
notes receivable.
(3) Includes impairment loss of $11,000 on Psychiatric Group real estate and
notes receivable.
F-23
<PAGE> 70
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 January 22, 1999. 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,
January 22, 1999.
F-24
<PAGE> 71
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS CARRYING AMOUNT
INITIAL COST TO COMPANY AT DECEMBER 31, 1998(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
------- -------- ------- ------- -------- --------
<CAPTION>
ACCUMULATED DATE OF DATE DEPRECIABLE
DESCRIPTION & LOCATION DEPRECIATION CONSTRUCTION(b) ACQUIRED LIFE
---------------------- ------------ --------------- -------- -----------
<S> <C> <C> <C> <C>
ACUTE CARE HOSPITALS:
Bennettsville, South Carolina... $ 874 1984-1993 05/02/95 30 years
Cheraw, South Carolina.......... 1,306 1982-1993 05/02/95 30 years
Cleveland, Texas................ 1,482 1968-1986 01/03/94 27 years
Hickory, North Carolina......... 13,285 1974-1993 02/27/87 38 years
Irvine, California.............. 10,987 1990 04/23/91 40 years
Miami, Florida.................. 19,008 1973-1994 02/27/87 38 years
Palm Beach Gardens, Florida..... 12,274 1964-1992 02/27/87 40 years
Poplar Bluff, Missouri.......... 6,521 1980-1995 02/27/87 40 years
Roswell, Georgia................ 10,273 1983-1993 02/27/87 42 years
San Angelo, Texas............... 2,951 1960-1991 09/30/91 40 years
Tarzana, California............. 18,938 1973-1994 02/27/87 34 years
Victorville, California......... 2,517 1994-1996 09/20/94 40 years
West Valley City, Utah.......... 3,894 1983-1990 05/16/96 32 years
--------
104,310
--------
ALZHEIMER'S CARE FACILITIES:
Houston, Texas.................. 268 1995 12/21/95 40 years
Sugar Land, Texas............... 172 1997 03/05/97 40 years
--------
440
--------
ASSISTED LIVING FACILITIES:
Boise, Idaho.................... 241 1994 09/01/95 40 years
El Paso, Texas.................. 290 1996 08/23/96 40 years
Odessa, Texas................... 276 1996 09/17/96 40 years
Walla Walla, Washington......... 334 1996 07/24/96 40 years
--------
1,141
--------
LONG-TERM ACUTE CARE HOSPITAL:
Amarillo, Texas................. 144 1997 12/23/97 40 years
--------
</TABLE>
F-25
<PAGE> 72
<TABLE>
<CAPTION>
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
GROSS CARRYING AMOUNT
INITIAL COST TO COMPANY AT DECEMBER 31, 1998(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>
MEDICAL OFFICE/CLINIC
FACILITIES:(F)
Apache Junction, Arizona........ n/a $ 218 $ 3,591 -- $ 218 $ 3,591 $ 3,809
Gilbert, Arizona................ n/a 773 6,447 -- 773 6,447 7,220
Gilbert, Arizona................ n/a 609 7,728 -- 609 7,728 8,337
Houston, Texas.................. n/a 1,250 38,237 -- 1,250 38,237 39,487
Houston, Texas.................. n/a 1,600 10,972 -- 1,600 10,972 12,572
Houston, Texas.................. n/a 1,100 15,841 4 1,100 15,947 17,047
Jacksonville, Florida........... n/a 316 5,215 -- 316 5,215 5,531
Jacksonville, Florida........... n/a 256 3,263 -- 256 3,263 3,519
Mesa, Arizona................... n/a 300 915 -- 300 915 1,215
Morristown, New Jersey.......... n/a 1,500 18,089 49 1,500 18,146 19,646
Murfreesboro, Tennessee......... n/a 650 12,394 -- 650 12,394 13,044
Murrieta, California............ n/a 285 8,515 -- 285 8,532 8,817
North Miami Beach, Florida...... n/a -- 10,628 -- -- 10,651 10,651
Plano, Texas.................... n/a 1,700 7,436 -- 1,700 7,436 9,136
Valencia, California............ n/a 2,200 7,313 -- 2,200 7,313 9,513
West Hills, California.......... n/a 2,470 10,130 10 2,470 10,200 12,670
------- -------- ------- ------- -------- --------
15,227 166,714 63 15,227 166,987 182,214
------- -------- ------- ------- -------- --------
PSYCHIATRIC HOSPITALS:
Lemont, Illinois................ 60 440 8,372 -- 440 760 1,200(c)
Sunrise, Florida................ 100 3,325 15,209 -- 1,200 2,202 3,402(d)
Tarpon Springs, Florida......... 130 1,457 2,904 -- 1,300 -- 1,300(e)
------- -------- ------- ------- -------- --------
5,222 26,485 -- 2,940 2,962 5,902
------- -------- ------- ------- -------- --------
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
------- -------- ------- ------- -------- --------
<CAPTION>
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
ACCUMULATED DATE OF DATE DEPRECIABLE
DESCRIPTION & LOCATION DEPRECIATION CONSTRUCTION(b) ACQUIRED LIFE
---------------------- ------------ --------------- -------- -----------
<S> <C> <C> <C> <C>
MEDICAL OFFICE/CLINIC
FACILITIES:(F)
Apache Junction, Arizona........ $ 139 1995 12/10/97 28 years
Gilbert, Arizona................ 250 1989 12/10/97 28 years
Gilbert, Arizona................ 299 1992 12/10/97 28 years
Houston, Texas.................. 1,394 1973 11/19/97 32 years
Houston, Texas.................. 400 1985 11/19/97 32 years
Houston, Texas.................. 578 1976 12/18/97 30 years
Jacksonville, Florida........... 66 1997 07/13/98 40 years
Jacksonville, Florida........... 40 1996 07/13/98 40 years
Mesa, Arizona................... 35 1976 12/10/97 28 years
Morristown, New Jersey.......... 613 1981 01/12/98 30 years
Murfreesboro, Tennessee......... 236 1979-1990 05/08/98 35 years
Murrieta, California............ 1,011 1991 04/01/94 40 years
North Miami Beach, Florida...... 443 1993 05/07/97 40 years
Plano, Texas.................... 297 1986-1997 01/30/98 25 years
Valencia, California............ 87 1990 08/25/98 35 years
West Hills, California.......... 247 1992 03/06/98 35 years
--------
6,135
--------
PSYCHIATRIC HOSPITALS:
Lemont, Illinois................ -- 1989 12/31/92 21 years
Sunrise, Florida................ 771 1988 08/15/90 21 years
Tarpon Springs, Florida......... -- 1928-1993 08/15/90 21 years
--------
771
--------
REHABILITATION HOSPITALS:
Fayetteville, Arkansas.......... 1,523 1991 07/01/91 40 years
Morgantown, West Virginia....... 2,176 1991-1994 02/25/91 40 years
Wichita, Kansas................. 2,149 1992 03/16/92 40 years
--------
5,848
--------
</TABLE>
F-26
<PAGE> 73
<TABLE>
<CAPTION>
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
GROSS CARRYING AMOUNT
INITIAL COST TO COMPANY AT DECEMBER 31, 1998(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>
SKILLED NURSING FACILITIES:
Angola, Indiana................. 75 $ 50 $ 3,842 -- $ 50 $ 3,842 $ 3,892
Denver, Colorado................ 120 154 3,912 -- 154 3,912 4,066
Douglas, Arizona................ 64 175 2,446 -- 175 2,446 2,621
Fairborn, Ohio.................. 108 260 6,227 -- 260 6,227 6,487
Fort Wayne, Indiana............. 121 170 8,064 -- 170 8,064 8,234
Fort Wayne, Indiana............. 104 110 4,847 -- 110 4,847 4,957
Georgetown, Ohio................ 100 125 6,338 -- 125 6,338 6,463
Huntington, Indiana............. 96 30 3,779 -- 30 3,779 3,809
Lakewood, Colorado.............. 153 125 4,731 -- 125 4,731 4,856
Las Vegas, Nevada............... 117 1,322 6,065 -- 1,322 6,065 7,387
Port Clinton, Ohio.............. 100 155 5,027 -- 155 5,027 5,182
Safford, Arizona................ 128 100 4,834 -- 100 4,834 4,934
Springfield, Ohio............... 110 195 5,142 -- 195 5,142 5,337
Toledo, Ohio.................... 137 130 7,796 -- 130 7,796 7,926
Versailles, Ohio................ 112 160 6,303 -- 160 6,303 6,463
------- -------- ------- ------- -------- --------
3,261 79,353 -- 3,261 79,353 82,614
------- -------- ------- ------- -------- --------
$78,231 $721,439 $63,143 $76,539 $760,679 $837,218
======= ======== ======= ======= ======== ========
<CAPTION>
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
ACCUMULATED DATE OF DATE DEPRECIABLE
DESCRIPTION & LOCATION DEPRECIATION CONSTRUCTION(b) ACQUIRED LIFE
---------------------- ------------ --------------- -------- -----------
<S> <C> <C> <C> <C>
SKILLED NURSING FACILITIES:
Angola, Indiana................. 83 1977 06/01/98 27 years
Denver, Colorado................ 514 1971 06/13/95 27 years
Douglas, Arizona................ 246 1982 07/28/95 34 years
Fairborn, Ohio.................. 130 1984 06/01/98 28 years
Fort Wayne, Indiana............. 168 1978 06/01/98 28 years
Fort Wayne, Indiana............. 94 1975 06/01/98 30 years
Georgetown, Ohio................ 128 1985 06/01/98 29 years
Huntington, Indiana............. 85 1975 06/01/98 26 years
Lakewood, Colorado.............. 480 1970-1974 06/13/95 35 years
Las Vegas, Nevada............... 38 1998 10/08/98 40 years
Port Clinton, Ohio.............. 109 1977 06/01/98 27 years
Safford, Arizona................ 472 1982 07/28/95 35 years
Springfield, Ohio............... 103 1985 06/01/98 29 years
Toledo, Ohio.................... 168 1978 06/01/98 27 years
Versailles, Ohio................ 119 1985 06/01/98 31 years
--------
2,937
--------
$121,726
========
</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 an
impairment loss was recorded in 1994, 1997 and 1998, the property in
Cheraw, South Carolina for which the previous owner's basis of $3.7 million
is required to be carried forward and the property in Murfreesboro,
Tennessee for which the previous owner's basis of $10.1 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 and $3.8 million, net in 1998.
(d) This property was written down by $6.6 million, net in 1994, $5.9 million,
net in 1997.
(e) This property was written down by $3.4 million, net in 1997 and $500,000,
net in 1998.
(f) As applicable, the gross carrying amount at December 31, 1998 of buildings
and improvements includes the cost of tenant improvements.
F-27
<PAGE> 74
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION ACTIVITY:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of
Year....................... $703,840 $102,235 $606,593 $ 90,139 $595,876 $82,435
Acquisitions............... 131,933 -- 100,169 -- -- --
Cost of Real Estate Sold... -- -- -- -- (423) --
Construction Projects
Completed............... 7,386 -- 10,134 -- 15,864 --
Capital Improvements....... 63 -- -- -- 2,460 --
Real Estate Exchange....... -- -- -- -- (7,184) (7,184)
Impairment Loss on Real
Estate.................. (6,004) (1,724) (13,056) (3,697) -- --
Depreciation............... -- 21,215 -- 15,793 -- 14,888
-------- -------- -------- -------- -------- -------
Balance at End of Year....... $837,218 $121,726 $703,840 $102,235 $606,593 $90,139
======== ======== ======== ======== ======== =======
</TABLE>
F-28
<PAGE> 75
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, 1998
and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 22, 1999.
F-29
<PAGE> 76
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Real estate properties
Buildings and improvements................................ $ 757,717 $ 630,133
Accumulated depreciation.................................. (120,955) (100,493)
--------- ---------
636,762 529,640
Land...................................................... 73,599 61,800
Construction in progress.................................. 14,247 4,729
--------- ---------
724,608 596,169
Mortgage note receivable.................................... 4,400 4,221
Other note receivable....................................... 1,468 --
Direct financing leases..................................... 1,975 3,053
Revolving inter-Group loans to Psychiatric Group............ -- 3,379
Fixed rate inter-Group loans to Psychiatric Group........... -- 9,175
Cash and short-term investments............................. 2,326 23,053
Receivables................................................. 7,329 6,489
Deferred financing costs and other assets................... 4,889 6,593
--------- ---------
$ 746,995 $ 652,132
========= =========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable.......................................... $ 69,000 $ --
Mortgage notes payable...................................... 20,772 17,922
Subordinated convertible bonds payable...................... -- 6,832
Senior notes payable........................................ 219,164 219,059
Revolving inter-Group loans from Psychiatric Group.......... 180 --
Accounts payable and accrued liabilities.................... 14,834 12,760
Dividends payable........................................... 14,833 13,555
Deferred income............................................. 3,732 3,736
--------- ---------
342,515 273,864
--------- ---------
Commitments and contingencies
Total attributed Core Group equity.......................... 404,480 378,268
--------- ---------
$ 746,995 $ 652,132
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 77
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income............................................... $ 90,338 $ 70,604 $67,499
Mortgage interest income.................................... 464 217 --
Additional rental income.................................... 13,362 11,833 11,530
Other property income....................................... 2,099 187 --
Other interest income....................................... 574 1,908 721
Interest income on inter-Group loans to Psychiatric Group... 712 1,553 1,679
-------- -------- -------
107,549 86,302 81,429
-------- -------- -------
EXPENSES
Depreciation and amortization............................... 20,601 15,153 14,272
Property operating.......................................... 5,319 334 44
Interest expense............................................ 21,609 19,659 21,842
Interest expense on inter-Group loans from Psychiatric
Group..................................................... 117 -- --
General and administrative.................................. 8,069 6,860 6,255
-------- -------- -------
55,715 42,006 42,413
Minority interest........................................... 189 189 216
-------- -------- -------
INCOME BEFORE EXTRAORDINARY ITEM............................ 51,645 44,107 38,800
EXTRAORDINARY LOSS ON DEBT PREPAYMENT....................... -- (11,427) --
-------- -------- -------
NET INCOME.................................................. $ 51,645 $ 32,680 $38,800
======== ======== =======
SERIES B PREFERRED DIVIDEND REQUIREMENT..................... $ (8,600) $ (1,553) $ --
======== ======== =======
ATTRIBUTABLE TO CORE GROUP COMMON STOCK --
INCOME BEFORE EXTRAORDINARY ITEM............................ $ 43,045 $ 42,554 $38,800
======== ======== =======
NET INCOME.................................................. $ 43,045 $ 31,127 $38,800
======== ======== =======
BASIC PER SHARE AMOUNTS --
Income before extraordinary item.......................... $ 1.77 $ 1.81 $ 1.65
Extraordinary loss on debt prepayment..................... $ -- $ (0.49) $ --
Net income................................................ $ 1.77 $ 1.32 $ 1.65
Weighted average common shares............................ 24,379 23,505 23,453
DILUTED PER SHARE AMOUNTS --
Income before extraordinary item.......................... $ 1.75 $ 1.80 $ 1.65
Extraordinary loss on debt prepayment..................... $ -- $ (0.49) $ --
Net income................................................ $ 1.75 $ 1.31 $ 1.65
Weighted average common shares and dilutive potential
common shares.......................................... 24,605 23,703 23,558
DIVIDENDS DECLARED PER COMMON SHARE......................... $ 2.20 $ 2.12 $ 2.04
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 78
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR............................... $378,268 $297,176 $304,947
Issuance of preferred stock............................... -- 96,400 --
Issuance of common stock.................................. 11,166 -- --
Sale of common stock to Psychiatric Group................. 21,610 -- --
Conversion of subordinated convertible bonds.............. 10 -- --
Stock incentives, net..................................... 1,243 1,264 1,033
Exercise of stock options................................. 3,602 2,176 241
Net income................................................ 51,645 32,680 38,800
Cash dividends............................................ (63,064) (51,428) (47,845)
-------- -------- --------
BALANCES AT END OF YEAR..................................... $404,480 $378,268 $297,176
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 79
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CORE GROUP COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 51,645 $ 32,680 $ 38,800
Extraordinary loss on debt prepayment...................... -- 11,427 --
Depreciation, amortization and other non-cash items........ 23,051 17,627 16,415
Deferred income............................................ 206 (228) (315)
Change in receivables and other assets..................... 123 (2,964) 384
Change in accounts payable and accrued liabilities......... 1,866 5,280 (443)
--------- --------- --------
76,891 63,822 54,841
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties..... (143,835) (92,242) (17,142)
Proceeds from sale of property............................. -- -- 423
Mortgage note receivable fundings.......................... (179) (4,221) --
Other note receivable...................................... (1,468) -- --
Direct financing leases.................................... 1,078 642 2,535
Paydowns on revolving inter-Group loans to Psychiatric
Group.................................................... 3,379 804 1,086
Paydowns on fixed rate inter-Group loans to Psychiatric
Group.................................................... 9,175 -- --
Administrative capital expenditures........................ (122) (14) (55)
--------- --------- --------
(131,972) (95,031) (13,153)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable................ 69,000 (48,500) 48,500
Principal payments on mortgage notes payable............... (525) (34) --
Redemption of subordinated convertible bonds payable....... (7,058) -- --
Proceeds from notes payable issuance....................... -- 218,965 --
Prepayment of notes payable................................ -- (163,176) --
Principal payments on notes payable........................ -- -- (49,000)
Financing costs paid....................................... (144) (2,862) (150)
Advances on revolving inter-Group loans from Psychiatric
Group.................................................... 180 -- --
Proceeds from sale of preferred stock...................... -- 96,400 --
Proceeds from sale of common stock......................... 9,475 -- --
Proceeds from sale of common stock to Psychiatric Group.... 21,610 -- --
Proceeds from exercise of stock options.................... 3,602 2,176 241
Cash dividends paid........................................ (61,786) (50,187) (47,370)
--------- --------- --------
34,354 52,782 (47,779)
--------- --------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... (20,727) 21,573 (6,091)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 23,053 1,480 7,571
--------- --------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 2,326 $ 23,053 $ 1,480
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 80
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.
The Company's common stock (the Core Group Common Stock) is intended to
reflect the separate financial performance of the Company's investments in acute
care, rehabilitation and long-term acute care hospitals, skilled nursing,
assisted living, Alzheimer's care and medical office/clinic facilities (the Core
Group). The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Company's investments in psychiatric
hospitals (the Psychiatric Group). The 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.
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 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.
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
F-34
<PAGE> 81
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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). Tenant improvements paid for
by the Core Group are capitalized and depreciated over the lives of the related
leases. In general, other capital expenditures incurred are capitalized when
significant and depreciated over the period they are expected to provide
benefits to the related property.
Impairment of Real Estate Properties and Notes Receivable. The Core 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.
Additional Rental and Interest Income. Certain of the Core Group's facility
leases provide for contingent rental or interest income based upon specific
target revenues of the operator. The Core Group recognizes contingent rental and
interest income on a quarterly basis by comparing the specific target to an
estimate of the operator's future operating revenues for the remainder of the
lease calculation period. If the Core Group deferred recognition of contingent
rental and interest income until the specific target that triggers the
contingent rental or interest income was achieved, there would not have been a
material impact on the Core Group's financial statements for the year ended
December 31, 1998.
Deferred Income. Fees received, net of related direct costs, associated
with the origination or amendment of leases and mortgage notes receivable 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.
F-35
<PAGE> 82
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Standards. In the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The adoption of this statement had no impact on
the Core Group's financial statements.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for
reporting financial and descriptive information about reportable operating
segments. In general, reportable operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Core Group is a separate
operating segment of the Company and does not have separate reportable operating
segments.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits".
SFAS No. 132 revises employer's disclosures about pension and other post
retirement benefits, requires additional information on changes in the benefit
obligations and fair values of plan assets and eliminates certain previous
disclosures. The adoption of this statement in 1998 had no impact on the Core
Group's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. It also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The required adoption of this statement in
2000 is not expected to have a material impact on the Core Group's financial
statements.
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". In general, SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
The adoption of SOP 98-5 in 1998 had no 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.
Third-Party Debt. All of the Company's third-party debt ($308,936,000 and
$243,813,000 at December 31, 1998 and 1997, 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.
The weighted average amount of borrowings under bank credit agreements
outstanding during 1998, 1997 and 1996 was $37,764,000, $6,151,000 and
$21,622,000 at weighted average interest rates of 6.3%, 7.1% and 6.4%,
respectively. The maximum amount outstanding under bank credit agreements in
1998, 1997 and 1996 was $75,000,000, $48,500,000 and $53,000,000, respectively.
As of December 31, 1998, the Company had
F-36
<PAGE> 83
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$69,000,000 of outstanding borrowings under its bank credit agreement at a
weighted average interest rate of 6.0%.
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, the carrying amount is a
reasonable estimate of fair value.
Mortgage notes payable. In connection with the acquisition of a medical
office building in Houston, Texas in 1997, a mortgage note payable in the amount
of $17,956,000 was assumed. The remaining balance at December 31, 1998 and 1997
was $17,495,000 and $17,922,000, respectively 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.
In connection with the acquisition of a medical office building in
Murfreesboro, Tennessee in 1998, a mortgage note payable in the amount of
$3,375,000 was assumed. The remaining balance at December 31, 1998 was
$3,277,000 with an interest rate of 7.0%. 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 $33,000 with the remaining
principal balance due at maturity on October 2, 1999.
The carrying amount of the mortgage notes payable is a reasonable estimate
of fair value, as the pricing and terms of the notes are indicative of current
rates and credit terms.
Senior notes payable. 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,
1998 and 1997, the estimated fair value of the 2002 Notes and 2007 Notes was
$208 million and $225 million, respectively.
In February 1997, the Company prepaid its two issues of private placement
debt, which included $72 million of 11.45% unsecured senior notes payable and
$80 million of 10.41% unsecured senior notes payable. The weighted average
amount of borrowings under these senior note issues during 1997 and 1996 was
$22,800,000 and $178,250,000 at weighted average effective interest rates of
11.06% and 11.03%, respectively. The prepayment resulted in an extraordinary
charge in the first quarter of 1997 of $11,427,000 consisting of a make-whole
premium and other costs related to the prepayment.
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 had a coupon rate of 8.5% and
were 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. In 1998, $10,000 of the
1990 Swiss Bonds, with accrued interest, were converted into 302 shares of
common stock resulting in additional equity of $10,000, net of conversion and
unamortized issuance costs. There were no conversions of Swiss Bonds in 1997 or
1996. Pursuant to the Company's call for early redemption, the remaining 1,489
outstanding Swiss Bonds were redeemed on December 30, 1998 for approximately
$7,058,000. As of December 31, 1997, the estimated fair value of the Company's
subordinated convertible bonds payable was $7,259,000 based on the quoted market
price of bonds as traded in Switzerland.
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
F-37
<PAGE> 84
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, for calendar years 1999 through
2003 and thereafter is $3,741,000, $504,000, $547,000, $100,594,000, $646,000
and $134,740,000, respectively. In addition, the outstanding balance of
$69,000,000 at December 31, 1998 under the Company's unsecured revolving credit
agreement matures on December 31, 2000, although certain events could require
the earlier paydown of the outstanding balance.
Interest. Interest capitalized on construction in progress was $819,000,
$517,000 and $895,000 in 1998, 1997 and 1996, respectively. Interest paid, net
of interest capitalized, in 1998, 1997 and 1996 was $20,599,000, $14,374,000 and
$21,547,000, respectively.
Inter-Group Loans. Revolving inter-Group loans owed by the Core Group to
the Psychiatric Group are unsecured, bear interest at a floating rate equal to
the weighted average interest rate on outstanding borrowings under the Company's
revolving credit agreement (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. The weighted average outstanding amount of revolving inter-Group
loans owed by the Core Group to the Psychiatric Group during 1998 was $1,870,000
at a weighted average interest rate of 6.28%.
Revolving and fixed rate inter-Group loans owed to the Core Group by the
Psychiatric Group are unsecured and are prepayable without premium at any time,
at the option of the Board. Revolving inter-Group loans owed to the Core Group
bear interest at a floating rate equal to the prevailing prime rate plus 2% and
fixed rate inter-Group loans owed to the Core Group bear interest at a fixed
rate of 13%. The weighted average outstanding amount of revolving inter-Group
loans owed to the Core Group by the Psychiatric Group during 1998, 1997 and 1996
was $1,106,000, $3,415,000, and $4,666,000 at weighted average interest rates of
10.50%, 10.44% and 10.27%, respectively. The weighted average outstanding amount
of fixed rate inter-Group loans owed to the Core Group by the Psychiatric Group
during 1998, 1997 and 1996 was $4,588,000, $9,175,000 and $9,175,000 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.
In July 1998, the Core Group received $11.2 million from the Psychiatric
Group for the payoff of the entire outstanding balance of fixed and revolving
inter-Group loans owed to the Core Group by the Psychiatric Group. The Company's
Board has established certain management policies relating to the Core Group's
commitment to provide 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 $7,865,000 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 other
inter-Group loans will be advanced by the Core Group to the Psychiatric Group.
The carrying amounts of the inter-Group loans are a reasonable estimate of
fair value, as the pricing and terms of the loans are indicative of current
rates and credit risk.
Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group or to cause the Psychiatric
Group to provide funds to the Core Group if the Board determines it is in the
best interests of the Company not to do so.
Equity Transactions. 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
F-38
<PAGE> 85
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and the proceeds of Psychiatric Group Depositary Share issuances 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 $62,500 per quarter.
REAL ESTATE PROPERTIES
The following table summarizes the Core Group's investment in health care
real estate properties as of December 31, 1998:
<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 $ 1,306
Cleveland Regional Medical Center...... TX 300 8,000 8,300 1,482
Desert Valley Hospital................. CA 1,755 24,650 26,405 2,517
Frye Regional Medical Center........... NC 1,247 44,202 45,449 13,285
Irvine Medical Center.................. CA 17,987 57,013 75,000 10,987
Kendall Regional Medical Center........ FL 4,163 64,849 69,012 19,008
Lucy Lee Hospital...................... MO 404 23,162 23,566 6,521
Marlboro Park Hospital................. SC 640 7,153 7,793 874
North Fulton Regional Hospital......... GA 4,149 42,042 46,191 10,273
Palm Beach Gardens Medical Center...... FL 4,024 41,624 45,648 12,274
Pioneer Valley Hospital................ UT 1,997 47,469 49,466 3,894
Shannon Medical Center, St. John's
Campus............................... TX 255 16,197 16,452 2,951
Tarzana Regional Medical Center........ CA 12,421 61,279 73,700 18,938
------- -------- -------- --------
50,062 448,327 498,389 104,310
------- -------- -------- --------
ALZHEIMER'S CARE FACILITIES:
Pine Haven at Cypresswood.............. TX 225 3,475 3,700 268
Pine Haven at Sugar Land............... TX 265 3,759 4,024 172
------- -------- -------- --------
490 7,234 7,724 440
------- -------- -------- --------
ASSISTED LIVING FACILITIES:
Cambria Lodge.......................... TX 300 4,882 5,182 290
Garrison Creek Lodge................... WA 219 5,429 5,648 334
Sherwood Place......................... TX 220 4,814 5,034 276
Summer Wind Residence.................. ID 110 2,890 3,000 241
------- -------- -------- --------
849 18,015 18,864 1,141
------- -------- -------- --------
LONG-TERM ACUTE CARE HOSPITAL:
SCCI Hospital -- Amarillo.............. TX 810 5,300 6,110 144
------- -------- -------- --------
</TABLE>
F-39
<PAGE> 86
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BUILDINGS AND TOTAL ACCUMULATED
STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION
----- ------- ------------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MEDICAL OFFICE/CLINIC FACILITIES:
Casa Blanca Clinic(1).................. AZ $ 1,900 $ 18,681 $ 20,581 $ 723
Emerson Medical Office Building/Surgery
Center(1)............................ FL 572 8,478 9,050 106
Fannin Medical Buildings(1)............ TX 2,850 49,209 52,059 1,794
Morristown Professional Plaza.......... NJ 1,500 18,146 19,646 613
Murfreesboro Medical Clinic(2)......... TN 650 12,394 13,044 236
Northpark Professional Building........ FL -- 10,651 10,651 443
Park Plaza Professional Building....... TX 1,100 15,947 17,047 578
Valencia Medical Office Building....... CA 2,200 7,313 9,513 87
Walsh Medical Arts Center.............. CA 285 8,532 8,817 1,011
Westpark Plaza......................... TX 1,700 7,436 9,136 297
Woodlake Medical Center................ CA 2,470 10,200 12,670 247
------- -------- -------- --------
15,227 166,987 182,214 6,135
------- -------- -------- --------
REHABILITATION HOSPITALS:
HealthSouth MountainView Rehabilitation
Hospital............................. WV -- 11,718 11,718 2,176
HealthSouth Rehabilitation Hospital of
Fayetteville......................... AR 962 8,124 9,086 1,523
Wesley Rehabilitation Hospital......... KS 1,938 12,659 14,597 2,149
------- -------- -------- --------
2,900 32,501 35,401 5,848
------- -------- -------- --------
SKILLED NURSING FACILITIES:
Arkansas Manor Nursing Home............ CO 154 3,912 4,066 514
Cornerstone Care Center................ CO 125 4,731 4,856 480
Covington Manor Nursing Center......... IN 170 8,064 8,234 168
Douglas Manor.......................... AZ 175 2,446 2,621 246
Edgewood Manor Nursing Center.......... OH 155 5,027 5,182 109
Fairview Manor Nursing Center.......... OH 130 7,796 7,926 168
Lakeland Nursing Center................ IN 50 3,842 3,892 83
Norwood Nursing Center................. IN 30 3,779 3,809 85
Safford Care Center.................... AZ 100 4,834 4,934 472
Silver Hills Health Care Center........ NV 1,322 6,065 7,387 38
University Park Nursing Center......... IN 110 4,847 4,957 94
Versailles Health Care Center.......... OH 160 6,303 6,463 119
Villa Fairborn......................... OH 260 6,227 6,487 130
Villa Georgetown....................... OH 125 6,338 6,463 128
Villa Springfield...................... OH 195 5,142 5,337 103
------- -------- -------- --------
3,261 79,353 82,614 2,937
------- -------- -------- --------
$73,599 $757,717 $831,316 $120,955
======= ======== ======== ========
</TABLE>
- - ---------------
(1) Casa Blanca Clinic represents four separate facilities leased together under
a single master lease. Fannin Medical Buildings represent two separate
facilities master-leased to affiliated tenants under separate leases, with
one such facility encumbered by a $17,495 mortgage note payable. Emerson
Medical Office Building/Surgery Center represents two separate facilities,
one of which is master-leased and the other leased to multiple tenants.
(2) Murfreesboro Medical Clinic is encumbered by a $3,277 mortgage note payable.
F-40
<PAGE> 87
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 the 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, 1998, 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 general, the Core Group is also
initially responsible for capital expenditures, leasing commissions and tenant
improvements at these buildings, subject to reimbursement from tenants in some
instances.
At December 31, 1998, the Core Group had construction in progress of
$14,247,000. As of December 31, 1998, the Core Group had funded $5,230,000 of a
$9.5 million commitment to develop a skilled nursing facility in Las Vegas,
Nevada to be operated by an experienced operator of skilled nursing facilities.
As of December 31, 1998, the Core Group had funded $8,329,000 of an $18.6
million commitment to develop three assisted living facilities to be managed by
an experienced operator of assisted living facilities. The Core Group has a
$22.5 million forward funding commitment to develop up to nine Alzheimer's care
facilities to be managed by the same operator that currently manages two
existing Alzheimer's care facilities owned by the Core Group. As of December 31,
1998, $688,000 was funded under this commitment for the development of one
facility having a total development cost of approximately $2.8 million. The Core
Group has identified a second facility site under this commitment having a total
development cost of approximately $2.8 million. The Core Group also has a $5.7
million commitment to develop a medical office/clinic facility in Roseburg,
Oregon to be master-leased to the operator of the adjacent hospital.
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 1998, revenues from
these leases accounted for 42% of the Core Group's total revenues.
Kendall Regional Medical Center (Kendall) is leased to a subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). Aggregate revenues from the
lease, which was originally scheduled to mature in February 1999, were
approximately $10.3 million in 1998, or 10% of the Core Group's total revenues.
Pursuant to the terms of the lease, Columbia has exercised its option to
purchase Kendall at fair market value. The purchase price of $105 million will
be paid in cash, or at the option of the Company, a combination of cash and debt
relief. The Company currently intends to effect the transaction as a "deferred
like-kind" 1031 exchange for tax purposes. The first part of the exchange, the
transfer of Kendall to Columbia, is currently scheduled to occur on April 15,
1999. The Company would complete the exchange by acquiring new investment
properties within the time limits imposed by federal tax law, if possible. If
the Company is successful in identifying and closing on a sufficient amount of
new investments within the required time limits, the Company should not
recognize current taxable gain as a result of the transaction. In that event,
there should be no impact on the Company's REIT distribution requirements. Even
though the Company may not recognize gain on the transaction for tax purposes,
the Core Group expects to be able to recognize a gain of over $50 million for
book purposes. The Company cannot be assured that total revenues generated by
new investments acquired to effect the exchange will equal the annual revenues
currently generated by the Kendall investment, nor is it certain that the
Company will complete the transaction as an exchange. If the Company
F-41
<PAGE> 88
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
does not complete the transaction as an exchange, the amount of the Company's
tax liability, the impact on its REIT distribution requirements and the amount
of gain, net of taxes if any, recognized for book purposes would depend on the
amount of gain recognized for tax purposes, any losses recognized by the Company
on sales of other assets and various tax elections available to the Company.
Future minimum annual rentals, assuming the sale of Kendall on April 15,
1999, under the Core Group's noncancellable operating leases for calendar years
1999 through 2003 are approximately $88,640,000, $84,950,000, $79,920,000,
$74,770,000, and $73,150,000, respectively.
MORTGAGE NOTE RECEIVABLE
SCCI Hospital -- Houston Central $4,400,000. The Core Group has a 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 optional ten-year extension 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.
OTHER NOTE RECEIVABLE
In 1998, the Core Group committed to advance funds on a senior subordinated
note due from the operator of an Alzheimer's care facility for a total maximum
principal amount of $1,902,000. The note is secured by a pledge of stock in the
operator and is personally guaranteed by one of its principals. Advances under
the note are conditioned upon borrower's compliance with various covenants. The
Core Group has no obligation to make principal advances after February 27, 2003.
As of December 31, 1998, $1,468,000 was outstanding under the note, which
included principal advanced of $1,283,000 and accrued interest of $185,000.
Prior to December 31, 2002, interest accrues on the principal balance of the
note at a rate of 18% per annum and will be added to the outstanding principal
balance on a quarterly basis. Accrued interest is payable quarterly as it
accrues commencing January 1, 2003 until March 31, 2006, subject to an
intercreditor agreement and certain earnings requirements of the operator.
Commencing April 1, 2006, quarterly principal and interest payments sufficient
to amortize the principal amount of the loan as of March 31, 2006 together with
unpaid interest are due in equal quarterly installments until April 1, 2012 at
which time all unpaid principal and interest amounts are due and payable.
The pricing and terms of the other note receivable is indicative of current
rates and credit risk, and therefore, the current carrying amount of this
financial instrument is a reasonable estimate of fair value.
DIRECT FINANCING LEASES
In connection with its investments in certain acute and long-term care
properties, the Core Group has provided equipment leasing for terms of five to
seven years which are classified as direct financing leases. As of December 31,
1998, the Core Group's aggregate net investment in these direct financing leases
was $1,975,000, represented by total minimum lease payments receivable of
$2,163,000 less unearned income of $188,000. Future minimum annual lease
payments under these leases for calendar years 1999 through 2002 are
approximately $1,342,000, $704,000, $94,000 and $23,000, respectively.
F-42
<PAGE> 89
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Pension expense allocated to the Core Group in 1998, 1997 and 1996
was $272,000, $188,000 and $222,000, 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 1998, 1997 and 1996 was
$74,000, $88,000 and $177,000, 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. 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 Core Group in 1998, 1997
and 1996 was $1,243,000, $1,319,000 and $1,139,000, 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 1998, 1997 and 1996
would not have been material. The pro forma effect for 1998, 1997 and 1996 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
Sale of Stock to Psychiatric Group. On July 24, 1998, the Core Group sold
833,067 new shares of Core Group Common Stock to the Company's Psychiatric Group
at a price of $25.9407 per share, which the Psychiatric Group concurrently
distributed to holders of Psychiatric Group Depositary Shares as a special stock
dividend.
8.6% 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
F-43
<PAGE> 90
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE
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>
1998 1997 1996
---------------- ---------------- ----------------
INCOME SHARES INCOME SHARES INCOME SHARES
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item......................... $51,645 -- $44,107 -- $38,800 --
Less Series B preferred
dividend requirement......... (8,600) -- (1,553) -- -- --
Outstanding common shares...... -- 24,377 -- 23,503 -- 23,451
Deferred common shares......... -- 2 -- 2 -- 2
------- ------ ------- ------ ------- ------
Basic EPS components........... 43,045 24,379 42,554 23,505 38,800 23,453
Effect of dilutive potential
common shares
Stock options................ -- 81 -- 94 -- 40
DERs......................... -- 145 -- 104 -- 65
Subordinated convertible
bonds payable............. -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Diluted EPS components......... $43,045 24,605 $42,554 23,703 $38,800 23,558
======= ====== ======= ====== ======= ======
</TABLE>
DIVIDENDS
A quarterly dividend of $.565 per share for Core Group Common Stock, or
approximately $14,116,000, was declared by the Board of Directors on January 22,
1999, payable on February 24, 1999 to shareholders of record on February 10,
1999. A dividend of $.5375 per share for Series B Depositary Shares was declared
by the Board of Directors on January 22, 1999, payable March 1, 1999 to
shareholders of record February 15, 1999. This dividend was for the regular
quarterly period ended February 28, 1999 and approximately $717,000 was accrued
at December 31, 1998. The aggregate dividends of $14,833,000 have been reflected
as dividends payable in the accompanying financial statements as of December 31,
1998.
Cash dividends of $2.18 per share paid on Core Group Common during 1998 are
characterized as $1.076 of ordinary income and $1.104 of return of capital for
tax purposes. Cash dividends of $2.15 per share paid on Series B Depositary
Shares during 1998 are characterized entirely as ordinary income for income tax
purposes.
F-44
<PAGE> 91
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In general, cash 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.
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>
1998
Revenues................................... $ 25,103 $26,248 $27,753 $28,445 $107,549
Attributable to Core Group Common Stock --
Net income................................. 10,434 10,559 10,859 11,193 43,045
Basic per share amounts --
Net income............................ $ 0.44 $ 0.44 $ 0.44 $ 0.45 $ 1.77
Diluted per share amounts --
Net income............................ $ 0.43 $ 0.43 $ 0.44 $ 0.44 $ 1.75
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
</TABLE>
F-45
<PAGE> 92
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Health Properties, Inc.:
We have audited the accompanying combined balance sheets of the Psychiatric
Group (a business unit of American Health Properties, Inc.) as of December 31,
1998 and 1997, 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, 1998. These financial statements are the responsibility of the
management of American Health Properties, Inc. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Psychiatric Group as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
January 22, 1999 (except with respect
to the matter discussed on page F-56 related
to the sale of Rock Creek Center, as to which the date
is February 24, 1999).
F-46
<PAGE> 93
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Real estate properties
Buildings and improvements................................ $2,962 $ 8,810
Accumulated depreciation.................................. (771) (1,742)
------ -------
2,191 7,068
Land...................................................... 2,940 3,097
------ -------
5,131 10,165
Mortgage notes receivable, net.............................. -- 37,715
Other note receivable....................................... 195 2,500
Revolving inter-Group loans to Core Group................... 180 --
Cash and short-term investments............................. 1,491 --
Receivables................................................. 30 614
------ -------
$7,027 $50,994
====== =======
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving inter-Group loans from Core Group................. $ -- $ 3,379
Fixed rate inter-Group loans from Core Group................ -- 9,175
Accounts payable and accrued liabilities.................... 444 433
Dividends payable........................................... 198 1,292
Deferred income............................................. -- 22
------ -------
642 14,301
------ -------
Commitments and contingencies
Total attributed Psychiatric Group equity................... 6,385 36,693
------ -------
$7,027 $50,994
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 94
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income.............................................. $ 1,772 $ 1,633 $1,989
Mortgage interest income................................... 3,078 6,072 5,980
Additional rental and interest income...................... 736 665 812
Other interest income...................................... 299 346 393
Interest income on inter-Group loans to Core Group......... 117 -- --
------- ------- ------
6,002 8,716 9,174
------- ------- ------
EXPENSES
Depreciation and amortization.............................. 753 751 744
Property operating......................................... 450 190 --
Interest expense on inter-Group loans from Core Group...... 712 1,553 1,679
General and administrative................................. 937 1,140 1,172
Impairment loss on real estate and notes receivable........ 8,330 11,000 --
------- ------- ------
11,182 14,634 3,595
------- ------- ------
NET INCOME (LOSS).......................................... $(5,180) $(5,918) $5,579
======= ======= ======
BASIC PER SHARE AMOUNTS --
Net income (loss)........................................ $ (2.49) $ (2.84) $ 2.68
Weighted average depositary shares....................... 2,084 2,084 2,084
DILUTED PER SHARE AMOUNTS --
Net income (loss)........................................ $ (2.49) $ (2.84) $ 2.67
Weighted average depositary shares and dilutive potential
depositary shares..................................... 2,084 2,084 2,093
DIVIDENDS DECLARED PER DEPOSITARY SHARE.................... $ 1.73 $ 2.62 $ 2.80
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 95
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR............................... $ 36,693 $47,963 $48,113
Stock incentives, net..................................... 91 108 107
Net income (loss)......................................... (5,180) (5,918) 5,579
Stock dividend............................................ (21,610) -- --
Cash dividends............................................ (3,609) (5,460) (5,836)
-------- ------- -------
BALANCES AT END OF YEAR..................................... $ 6,385 $36,693 $47,963
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 96
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
PSYCHIATRIC GROUP COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ (5,180) $(5,918) $ 5,579
Depreciation, amortization and other non-cash items......... 844 859 856
Deferred income............................................. (8) (25) (53)
Impairment loss on real estate and notes receivable......... 8,330 11,000 --
Change in receivables and other assets...................... 585 126 28
Change in accounts payable and accrued liabilities.......... 1,108 292 (10)
-------- ------- -------
5,679 6,334 6,400
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on mortgage notes receivable............. 35,039 72 64
Other notes receivable...................................... (180) 233 458
Advances on revolving inter-Group loans to Core Group....... (180) -- --
-------- ------- -------
34,679 305 522
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving inter-Group loans from Core Group..... (3,379) (804) (1,086)
Payments on fixed rate inter-Group loans from Core Group.... (9,175) -- --
Purchase of Core Group Common Stock......................... (21,610) -- --
Cash dividends paid......................................... (4,703) (5,835) (5,836)
-------- ------- -------
(38,867) (6,639) (6,922)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS...... 1,491 -- --
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR.......... -- -- --
-------- ------- -------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR................ $ 1,491 $ -- $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 97
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.
The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Company's investments in psychiatric
hospitals (the Psychiatric Group). The Company's common stock (the Core Group
Common Stock) is intended to reflect the separate financial performance of the
Company's investments in acute care, rehabilitation and long-term acute care
hospitals, skilled nursing, assisted living, Alzheimer's care and medical
office/clinic facilities (the Core 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.
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 loans 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.
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.
F-51
<PAGE> 98
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 mortgage notes receivable 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 the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The adoption of this statement had no impact on
the Psychiatric Group's financial statements.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for
reporting financial and descriptive information about reportable operating
segments. In general, reportable operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Psychiatric Group is a
separate operating segment of the Company and does not have separate reportable
operating segments.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits".
SFAS No. 132 revises employer's disclosures about pension and other post
retirement benefits, requires additional information on changes in the
F-52
<PAGE> 99
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
benefit obligations and fair values of plan assets and eliminates certain
previous disclosures. The adoption of this statement in 1998 had no impact on
the Psychiatric Group's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. It also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The required adoption of this statement in
2000 is not expected to have a material impact on the Psychiatric Group's
financial statements.
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". In general, SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
The adoption of SOP 98-5 in 1998 had no impact on the Psychiatric 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.
Third-Party Debt. All of the Company's third-party debt ($308,936,000 and
$243,813,000 at December 31, 1998 and 1997, 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, 1998 includes
$69,000,000 of unsecured bank loans payable, $219,164,000 of unsecured senior
notes payable and $20,772,000 of mortgage indebtedness. The aggregate amount of
annual maturities of the Company's outstanding debt at December 31, 1998, for
calendar years 1999 through 2003 and thereafter is $3,741,000, $504,000,
$547,000, $100,594,000, $646,000, and $134,740,000, respectively. In addition,
the outstanding balance of $69,000,000 at December 31, 1998 under the Company's
unsecured revolving credit agreement matures on December 31, 2000, although
certain events could require the earlier paydown of the outstanding balance. 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. Revolving inter-Group loans owed to the Psychiatric
Group by the Core Group are unsecured, bear interest at a floating rate equal to
the weighted average interest rate on outstanding borrowings under the Company's
revolving credit agreement (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. The weighted average outstanding amount of revolving inter-Group
loans owed to the Psychiatric Group by the Core Group during 1998 was $1,870,000
at a weighted average interest rate of 6.28%.
Revolving and fixed rate inter-Group loans owed by the Psychiatric Group to
the Core Group are unsecured and are prepayable without premium at any time, at
the option of the Board. Revolving inter-Group loans owed by the Psychiatric
Group bear interest at a floating rate equal to the prevailing prime rate plus
2% and fixed rate inter-Group loans owed by the Psychiatric Group bear interest
at a fixed rate of 13%. The weighted average outstanding amount of revolving
inter-Group loans owed by the Psychiatric Group to the Core Group during 1998,
1997 and 1996 was $1,106,000, $3,415,000, and $4,666,000 at weighted average
F-53
<PAGE> 100
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
interest rates of 10.50%, 10.44% and 10.27%, respectively. The weighted average
outstanding amount of fixed rate inter-Group loans owed by the Psychiatric Group
to the Core Group during 1998, 1997 and 1996 was $4,588,000, $9,175,000 and
$9,175,000 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.
In July 1998, the Psychiatric Group paid off the entire $11.2 million
outstanding balance of fixed and revolving inter-Group loans owed to the Core
Group with a portion of the proceeds the Psychiatric Group received from the
payoff of the Four Winds mortgage notes receivable. The Company's Board has
established certain management policies relating to the Core Group's commitment
to provide 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
$7,865,000 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 other
inter-Group loans will be advanced by the Core Group to the Psychiatric Group.
The carrying amounts of the inter-Group loans are a reasonable estimate of
fair value, as the pricing and terms of the loans are indicative of current
rates and credit risk.
Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group or to cause the Psychiatric
Group to provide funds to the Core Group if the Board determines it is in the
best interests of the Company not to do so.
Equity Transactions. 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 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 $62,500 per quarter. All general and administrative
expenses directly attributed or allocated to the Psychiatric Group are generally
paid currently, regardless of when such expenses are paid to third parties by
the Company.
REAL ESTATE PROPERTIES
The following table summarizes the Psychiatric Group's investment in health
care real estate properties as of December 31, 1998:
<TABLE>
<CAPTION>
BUILDINGS AND TOTAL ACCUMULATED
STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION
----- ------ ------------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northpointe........................ FL.. $1,300 $ -- $1,300 $ --
Rock Creek Center.................. IL.. 440 760 1,200 --
Sunrise Regional Medical Center.... FL.. 1,200 2,202 3,402 771
------ ------ ------ ----
$2,940 $2,962 $5,902 $771
====== ====== ====== ====
</TABLE>
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in the
periodic restructuring of psychiatric operator payment
F-54
<PAGE> 101
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
obligations, the closing of one psychiatric hospital and significant impairment
losses on psychiatric investments, including an $11 million charge in 1997 and a
$8.3 million charge in 1998.
In late 1995, the operator of the Northpointe and Sunrise Regional Medical
Center (Sunrise) facilities was experiencing operational and cash flow
difficulties which negatively impacted the operator's ability to pay rental and
interest obligations to the Psychiatric Group. During 1996, the Psychiatric
Group modified the Northpointe agreements to allow for the deferral of rent and
interest payments while certain restructuring and restaffing of the facility
occurred. In late 1996, adverse publicity from a lawsuit filed against the
operator alleging widespread irregularities materially exacerbated the
operational and financial difficulties of Northpointe and Sunrise. Subsequently,
the census at Northpointe fell significantly to a level that made it appear
unlikely that the operator could continue operations at the facility and the
operator was unable to continue paying its obligations to the Psychiatric Group
after January 1997. Sunrise suffered from declining census and significant
deterioration of its cash flow, which made it difficult to continue paying its
obligations to the Psychiatric Group. The volatile circumstances at Sunrise and
the deterioration in its cash flows and census levels appeared likely to
preclude the operator from continuing operations at the facility. A range of
options for these two facilities was explored, including the transfer of the
operations 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, which 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. The remaining impairment
charge of $5,900,000 related to the Psychiatric Group's investment in Sunrise,
which 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. The financial and operational problems at the
Northpointe and Sunrise facilities continued to worsen during 1997. The operator
of Northpointe ceased hospital operations during the second quarter of 1997 and
a restructuring of Sunrise's obligations to the Psychiatric Group was completed
in the fourth quarter of 1997.
The Northpointe property remained vacant during 1998 and the Psychiatric
Group incurred $450,000 ($.22 per depositary share on a diluted basis) of
maintenance and security costs. Although the Psychiatric Group expects to incur
approximately $75,000 per quarter for ongoing maintenance and security costs
while it continues to seek alternate uses or a buyer for the property, the
Psychiatric Group cannot be assured that other unexpected costs will not be
incurred. Attempts to locate an alternate healthcare operator for the
Northpointe property have proven largely unsuccessful. After assessing the
various alternatives for the facility and reviewing the estimated net realizable
value of the property under each potential alternative, the Psychiatric Group
recorded an impairment charge at the end of 1998, which reduced the carrying
value of the investment to $1,300,000. If an acceptable healthcare operator is
not identified for the Northpointe facility in the near term, the property will
likely be marketed for sale. However, the Psychiatric Group cannot be assured
that any sale price would equal or exceed the current carrying value of the
Northpointe property.
At December 31, 1998, the Sunrise property had a carrying value of
$2,631,000. In September 1998, a new operator assumed all operational
responsibility for the hospital and entered into a new five-year lease with
effective monthly rent of $60,000 ($.029 per depositary share on a diluted
basis). In connection with the change in operators, the Psychiatric Group
received a one-time payment of $347,000 ($.17 per depositary share on a diluted
basis) from the former operator to settle certain of the obligations owed to the
Psychiatric Group. Although the new operator has fulfilled its obligations to
the Psychiatric Group under the lease so far, the new operator has experienced
cash flow difficulties primarily as a result of delays in obtaining Baker Act
certification. As a result, the Psychiatric Group provided the operator with a
$200,000 working capital loan at the end of 1998, and subsequent to year-end,
the operator requested $700,000 of additional working capital loans. Although
this request is still being evaluated, the Company likely will provide the
additional loans. The Company cannot be assured that the operator will be
successful and, if it were to cease operations, an
F-55
<PAGE> 102
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
impairment charge to reduce the carrying value of the Sunrise property and any
related outstanding working capital loans would be likely. The Company will
continue to encourage the operator to pursue financing alternatives that might
enable it to acquire the property and repay its borrowings from the Company.
The operator of Rock Creek Center (RCC) experienced continuing financial
and operational difficulties over the past several years. In 1996, RCC
experienced substantial payor reimbursement issues and lower than expected
census that adversely impacted its cash flow and its ability to pay its rental
and interest obligations to the Psychiatric Group. As a result, the Psychiatric
Group modified the RCC agreements in 1996 to allow for the partial deferral of
base rent payments while the operator took certain actions to stabilize
operations and implemented its revised business plan. The maturity date of the
$2.5 million balance outstanding under the RCC revolving credit agreement and
the initial term of the RCC lease were extended on several occasions with the
latest extension to March 31, 1999. In June 1998, the operator of the RCC
facility informed the Psychiatric Group that it had incurred a material,
unanticipated liability to Medicare, which imperiled the continuing operation of
the facility. RCC met its rent and interest obligations to the Psychiatric Group
through November 1998, however, RCC made its November payments late due to cash
flow problems. In December 1998, cash flow problems at RCC became so severe that
the operator of the RCC facility defaulted on all of its obligations to the
Psychiatric Group and the Psychiatric Group delivered formal notice of default
to RCC for failure to pay such obligations. Although RCC had been involved in
negotiations to effect a transfer of its operations, those negotiations were
discontinued. As a result, the carrying value of the RCC property was written
down to $1,200,000 and the Company's net investment in related notes and various
other obligations owed to it by the operator of RCC were totally written off.
Subsequent to year-end on February 24, 1999, the Psychiatric Group sold its
total RCC investment to the current operator for a cash price of $2.5 million.
The Company considered other alternatives for the property and evaluated offers
from other potential buyers before agreeing to sell to the current operator. The
sale to the current operator represented the highest price and most certain
transaction the Psychiatric Group was able to achieve from qualified potential
purchasers of the property.
Future minimum annual rentals under the Psychiatric Group's noncancellable
operating leases for calendar years 1999 through 2002 are approximately
$720,000, and approximately $540,000 for calendar year 2003. These amounts do
not reflect any adjustments for the nonpayment of rent or the deferral of rent
which could occur in the future.
MORTGAGE NOTES RECEIVABLE
Four Winds. The Psychiatric Group had two mortgage notes receivable secured
by first mortgages and security interests in the real property of Four Winds,
two psychiatric facilities located in Saratoga Springs and Katonah, New York.
The Saratoga Springs note had an initial term of ten years with a maturity date
of June 30, 1999, bore interest at a rate of 12.42% and required monthly
principal and interest payments of $194,000. The Katonah note had an initial
term of ten years with a maturity date of November 30, 2002, bore interest at
rates of 13.44%, 13.80% and 14.13%, in 1996, 1997 and 1998, respectively and
required monthly payments of interest only. As of December 31, 1997, the
carrying amount of the mortgage notes receivable was a reasonable estimate of
fair value, as the pricing and terms of the notes were indicative of current
rates and credit risk. On July 1, 1998, the Psychiatric Group received $35
million as prepayment in full of the two Four Winds mortgage notes receivable
resulting in an impairment loss of $2.73 million.
OTHER NOTES RECEIVABLE
The Psychiatric Group has provided financing at variable rates to certain
hospital operators under revolving credit agreements and working capital loans.
Borrowings under these agreements are conditioned upon the borrower's compliance
with various covenants and are partially secured by accounts receivable, other
personal property and/or issued and outstanding shares of capital stock of the
operators. As of December 31,
F-56
<PAGE> 103
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1998, $195,000 was outstanding under a $200,000 working capital loan provided to
one psychiatric hospital operator at an annual interest rate of 12%. Interest
only on the note is payable monthly through August 1, 1999. Commencing September
1, 1999, principal and interest payments of $35,000 are payable monthly until
maturity on February 1, 2000. The pricing and terms of other notes receivable is
indicative of current rates and credit risk, and therefore, the current carrying
amount of these financial instruments is a reasonable estimate of fair value.
During 1998, $2,485,000 of outstanding borrowings were written off as part of a
$5.6 million impairment loss recorded on psychiatric investments, and during
1997, $1,724,000 of outstanding borrowings were written off as part of an $11.0
million impairment loss recorded on psychiatric investments.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Pension expense allocated to the Psychiatric Group in 1998, 1997 and
1996 was $15,000, $19,000, and $25,000, 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 Group in 1998, 1997 and 1996
was $4,000, $9,000 and $20,000, 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. 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 1998,
1997 and 1996 was $91,000, $108,000 and $112,000, 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 1998, 1997
and 1996 would not have been material. The pro forma effect for 1998, 1997 and
1996 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
8.6% 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
F-57
<PAGE> 104
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE
The following is a reconciliation of the income and share amounts used in
the basic and diluted per share computations of net income or loss attributable
to Psychiatric Group Depositary Shares:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ---------------
LOSS SHARES LOSS SHARES INCOME SHARES
------- ------ ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS components.................... $(5,180) 2,084 $(5,918) 2,084 $5,579 2,084
Effect of dilutive potential depositary
shares
Stock options......................... -- -- -- -- -- --
DERs.................................. -- -- -- -- -- 9
------- ----- ------- ----- ------ -----
Diluted EPS components.................. $(5,180) 2,084 $(5,918) 2,084 $5,579 2,093
======= ===== ======= ===== ====== =====
</TABLE>
DIVIDENDS AND REDEMPTION PROVISIONS
A quarterly dividend of $.095 per share for Psychiatric Group Depositary
Shares, or approximately $198,000, was declared by the Board of Directors on
January 22, 1999, payable on February 24, 1999 to shareholders of record on
February 10, 1999. The dividend has been reflected as dividends payable in the
accompanying financial statements as of December 31, 1998.
On July 24, 1998, the Psychiatric Group used proceeds from the payoff of
the Four Winds mortgage notes receivable to purchase 833,067 new shares of Core
Group Common Stock from the Company's Core Group at a price of $25.9407 per
share and concurrently distributed the shares to holders of Psychiatric Group
Depositary Shares as a special stock dividend. Holders of Psychiatric Group
Depositary Shares received 0.4 shares of Core Group Common Stock for each
Psychiatric Group Depositary Share held and were paid cash-in-lieu of fractional
shares of Core Group Common Stock based on the price of $25.9407.
Dividends of $12.62628 per share, including $2.25 of cash dividends and a
special stock dividend valued at $10.37628, paid on Psychiatric Group Depositary
Shares during 1998 are characterized as $6.2325 of ordinary income and $6.39378
of return of capital for tax purposes. For Psychiatric Group Depositary Share
holders of record on July 17, 1998, the initial tax basis in the Core Group
Common Stock distributed as a special stock dividend is $25.9407 per share of
Core Group Common Stock.
In general, cash 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
F-58
<PAGE> 105
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
available for debt service, less interest expense, plus gains on asset
dispositions and certain proceeds from the disposition of Psychiatric Group
assets.
Dividends on the Company's Psychiatric Group Depositary Shares are
determined each quarter based upon the operating results of the Company's
Psychiatric Group. It continues to be the policy of the Board to maintain a
dividend payout ratio for each quarter in excess of 90 percent of the
Psychiatric Group's funds from operations for the related quarter, when
possible. With the disposition of the RCC investment, on February 24, 1999, the
Sunrise investment is currently the sole income-producing property of the
Company's Psychiatric Group and the operator of Sunrise is experiencing cash
flow difficulties. Therefore, commencing in the second quarter of 1999, the
Psychiatric Group's funds from operations may not be sufficient to permit the
payment of a dividend on the Psychiatric Group Depositary Shares.
The Company intends to periodically evaluate the financial position of the
Psychiatric Group, including an assessment of the potential cash requirements of
the Psychiatric Group and the appropriate use of the proceeds from the February
24, 1999 sale of the RCC investment. Initially, proceeds from the RCC
disposition, net of closing costs and applicable reserves, will be retained by
the Psychiatric Group to defray its ongoing costs, including the potential
long-term costs of carrying the two remaining Psychiatric Group properties. The
Psychiatric Group may continue to retain such proceeds or, alternatively, may
distribute a portion of such net proceeds to holders of Psychiatric Group
Depositary Shares, in cash or Core Group Common Stock, either by dividend or in
connection with redemption of the Psychiatric Group Depositary Shares. Should
the Board of Directors of the Company decide that the remaining Psychiatric
Group portfolio and operations are not consistent with a separate public
security, the Board may elect to redeem the outstanding Psychiatric Group
Depositary Shares in cash or in exchange for shares of Core Group Common Stock.
Under the terms of the Certificate of Designations for the Psychiatric Group
Preferred Stock and the Deposit Agreement providing for issuance of Depositary
Receipts (Psychiatric Group Depositary Shares) each representing one-tenth of
one share of the Psychiatric Group Preferred Stock, the Company has the right to
redeem all outstanding Psychiatric Group Depositary Shares, and the Psychiatric
Group Preferred Stock represented thereby, for cash (or in exchange for newly
issued shares of Core Group Common Stock) at a premium generally ranging from 5%
to 15% over the value of the Psychiatric Group Depositary Shares. Since an
exchange or redemption of the Psychiatric Group Depositary Shares may be at a
premium to the then current market price of the Psychiatric Group Depositary
Shares, and since the Board could determine to effect such an exchange or
redemption at a time when either or both the Core Group Common Stock and the
Psychiatric Group Depositary Shares may be considered to be overvalued or
undervalued, the exchange or redemption could be disadvantageous to the holders
of the Core Group Common Stock or the Psychiatric Group Depositary Shares.
F-59
<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>
1998
Revenues............................. $ 2,269 $ 2,242 $1,052 $ 439 $ 6,002
Net income (loss).................... 1,239 (1,484)(1) 629 (5,564)(2) (5,180)
Basic per share amounts --
Net income (loss)............... $ 0.59 $ (0.71) $ 0.30 $ (2.67) $ (2.49)
Diluted per share amounts --
Net income (loss)............... $ 0.59 $ (0.71) $ 0.30 $ (2.67) $ (2.49)
1997
Revenues............................. $ 2,401 $ 2,110 $2,138 $ 2,067 $ 8,716
Net income (loss).................... (9,470)(3) 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)
</TABLE>
- - ---------------
(1) Includes impairment loss of $2,730 on Psychiatric Group notes receivable.
(2) Includes impairment loss of $5,600 on Psychiatric Group real estate and
notes receivable.
(3) Includes impairment loss of $11,000 on Psychiatric Group real estate and
notes receivable.
F-60
<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 26th day of March, 1999.
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.
<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 26, 1999
- - --------------------------------------------------- Executive Officer and
Joseph P. Sullivan Director
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
/s/ MICHAEL J. MCGEE Senior Vice President and March 26, 1999
- - --------------------------------------------------- Chief Financial Officer
Michael J. McGee
Director
- - ---------------------------------------------------
James L. Fishel
/s/ JAMES D. HARPER, JR. Director March 26, 1999
- - ---------------------------------------------------
James D. Harper, Jr.
/s/ SHELDON S. KING Director March 26, 1999
- - ---------------------------------------------------
Sheldon S. King
/s/ PETER K. KOMPANIEZ Director March 26, 1999
- - ---------------------------------------------------
Peter K. Kompaniez
/s/ JOHN P. MAMANA, M.D. Director March 26, 1999
- - ---------------------------------------------------
John P. Mamana, M.D.
/s/ LOUIS T. ROSSO Director March 26, 1999
- - ---------------------------------------------------
Louis T. Rosso
</TABLE>
<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 -- Amended and Restated Employment Agreement between American
Health Properties, Inc. and Joseph P. Sullivan.
10.4 -- Amended and Restated Employment Agreement between American
Health Properties, Inc. and Michael J. McGee.
10.5 -- Amended and Restated Employment Agreement between American
Health Properties, Inc. and C. Gregory Schonert.
10.6 -- Amended and Restated Employment Agreement between American
Health Properties, Inc. and Steven A. Roseman.
10.7 -- 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.
10.8 -- 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.
10.9 -- 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.
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
</TABLE>
<PAGE> 1
EXHIBIT 4.4
CERTIFICATE OF INCREASE
OF
SHARES DESIGNATED
AS
PREFERRED STOCK, SERIES A
American Health Properties, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
That the Certificate of Incorporation of said Corporation was filed in the
office of the Secretary of State of Delaware on December 17, 1986 and a
Certificate of Designations of the Preferred Stock, Series A, was filed in said
office of the Secretary of State on April 12, 1990; and
That the Board of Directors of said Corporation on November 11, 1997 duly
adopted a resolution authorizing and directing an increase in the number of
shares designated as Preferred Stock, Series A, from 250,000 shares to 350,000
shares, in accordance with the provisions of Section 151 of The General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said American Health Properties, Inc. has caused this
certificate to be signed by Michael J. McGee, its Senior Vice President and
Chief Financial Officer, this 17th day of February, 1998.
By: /s/ MICHAEL J. McGEE
-----------------------------
Name: Michael J. McGee
Title: Senior Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.3
AMERICAN HEALTH PROPERTIES, INC.
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
WITH
JOSEPH P. SULLIVAN
This Executive Employment Agreement (the "Agreement") is entered into
as of March 15, 1999, between AMERICAN HEALTH PROPERTIES, INC., a Delaware
corporation (the "Company"), and JOSEPH P. SULLIVAN, an individual
("Executive").
1. EMPLOYMENT AND TERM
The Company agrees to employ Executive for the period commencing on
the day and the year first written above and ending on the earlier of: (a) the
date of termination of Executive's employment in accordance with Section
4(a)-(c) below or (b) the date that is three (3) years from the date the
Company provides Executive with written notice of termination of Executive's
employment. The Board of Directors of the Company (the "Board") shall review
the terms of Executive's employment on an annual basis and shall make such
modifications to the terms as the Board in its discretion shall deem
appropriate and as Executive shall consent.
2. DUTIES
(a) Executive shall serve in the capacity of President and Chief
Executive Officer. Executive shall perform such services and duties as are
usually associated with such positions as well as those decided upon by the
Board.
(b) Executive shall devote his full business time and energy to the
business and affairs of the Company and shall use his best efforts and
abilities faithfully and diligently to promote the business interests of the
Company and its subsidiaries as directed by and to the reasonable satisfaction
of the Board.
(c) Executive's services shall be rendered in accordance with such
policies as the Company may establish for the conduct of its officers and
employees.
(d) Provided such services or investments do not violate any
applicable law, regulation or order or interfere in any way with the faithful
and diligent performance by Executive of services to the Company otherwise
required or contemplated by this Agreement or requested by the Board, Executive
may:
1
<PAGE> 2
(i) Serve as a director, trustee, or in any other similar
capacity of any business enterprise or any civic, educational,
charitable or trade organization if the Board has been informed of
such service and the Board has not expressly requested Executive to
refuse, or to discontinue, such service, and
(ii) Make and manage personal business investments of
Executive's choice that are consistent with the conflict-of-interest
policies of the Company.
3. COMPENSATION
Commencing as of February 1, 1999, the Company shall compensate
Executive as follows:
(a) Base Salary. Executive shall receive a Base Salary at the rate of
Five Hundred Forty-nine Thousand and Five Hundred Dollars ($549,500) per annum
which shall be payable in semi-monthly installments in conformity with the
Company's policy relating to its employees generally as in effect from time to
time. Executive's Base Salary shall be reviewed periodically by the Board and
may be increased by action of the Board upon such review, but Executive's
salary shall not be decreased except as provided in Sections 4 and 5.
(b) Incentive Compensation. The Board may, in its discretion, award an
annual bonus in addition to base compensation. Such bonus, if any, shall be
paid in such amount and based upon such criteria as are from time to time
adopted by the Board.
(c) Club Membership. During the term of this Agreement, Executive
shall also be entitled to receive the use of a membership in one or more
club(s) approved by the Chairman of the Compensation and Board Affairs
Committee of the Board, suitable for promoting the business interests of the
Company.
(d) Automobile. During the term of this Agreement, Executive shall
also be entitled to receive the use of a Company automobile, to be used
primarily by Executive, or in lieu thereof, at Executive's election, receive an
automobile allowance of $10,800 per annum which shall be payable in
semi-monthly installments.
(e) Certain Travel. During the term of this Agreement, Executive shall
be entitled to receive reimbursement for the reasonable expense of commercial
air travel of Executive or his spouse, for up to three trips per month total,
between the Company's principal executive office and Los Angeles, California.
(f) Additional Benefits. Executive also shall be entitled to receive
all benefits for which he is eligible under the terms of any stock incentive
plan, pension plan, SERP, life, medical, dental, vision and disability
insurance and reimbursement programs, and any other plans or arrangements,
which the Company may provide for executive officers from time to time
("Additional Benefits"). Additional Benefits shall in all respects be paid in
accordance with the then-existing plans, or policies,
2
<PAGE> 3
programs, or arrangements establishing or governing such Additional Benefits.
The Company reserves the right to add, terminate, or amend any existing plans,
policies, programs, or arrangements during the term of this Agreement and at
all other times.
(g) Vacation. Vacation, at full pay, of four (4) weeks per calendar
year. Vacation not used during any calendar year may not be carried over to the
following year.
All compensation paid to Executive shall be subject to withholding for
taxes and subject to payroll and other taxes as required by applicable law and
in conformity with the Company's policies relating thereto as in effect from
time to time.
4. TERMINATION OF EMPLOYMENT BY THE COMPANY
The compensation provided for in Section 3 of this Agreement and
Executive's employment by the Company may be terminated by the Company prior to
expiration of the term set forth in Section 1(b) as provided for below:
(a) Disability. If Executive becomes either partially or totally
unable to perform his duties because of any physical or mental disability
during the term of his employment hereunder for three (3) consecutive calendar
months or for shorter periods aggregating 90 or more business days in any
12-month period, Executive's employment may be terminated by the Company at any
time during the continuance of such disability. Upon termination as described
in this Section 4(a), Executive shall be entitled to receive the Base Salary
provided for in Section 3(a) of this Agreement for a period of 90 days after
such termination. The Company shall offset against such Base Salary payments
any payments received by Executive as a result of such illness or injury
pursuant to any federal or state program or any salary continuation or similar
program or disability insurance established by the Company.
Upon termination as described in this Section 4(a), Executive shall
resign from his offices as an officer and director of the Company and its
subsidiaries and the Company shall continue Executive's coverage under any and
all life, medical, dental, vision and disability insurance plans for a period
of 120 days after such termination at the expense of the Company. Other
Additional Benefits shall be made available to Executive as required by
applicable laws, including the health coverage continuation provisions of the
Consolidated Omnibus Budget Reconciliation Act, 29 U.S.C. ss.ss. 1161-1168
("COBRA"), and by the terms of the Additional Benefit plans, policies,
programs, and arrangements in effect at the time of termination. Executive's
period of coverage under COBRA (29 U.S.C. ss. 1162(2)), shall begin on the date
of the termination of his employment under this Section 4(a). Executive agrees
to execute such documents as may be requested by the Company in order to comply
with its obligations under this Section 4(a) and under COBRA and other
applicable laws. The Company shall provide Executive with the health coverage
continuation benefits specified by COBRA whether or not the Company is
obligated under COBRA to do so.
3
<PAGE> 4
(b) Death. If Executive dies during the term of this Agreement,
Executive's Beneficiary or Beneficiaries, as defined in Section 7 of this
Agreement, shall be entitled to receive the Base Salary provided for in Section
3(a) of this Agreement for a period of 90 days after the date such death
occurs. Additional Benefits shall be made available to the Beneficiaries of
Executive under the life, medical, dental, vision and other Additional Benefit
plans, policies, programs, and arrangements, as required by applicable laws,
including COBRA, and by the terms of the Additional Benefit plans, policies,
programs, and arrangements in effect at the time of Executive's death. The
Company shall provide Executive's Beneficiaries with the health coverage
continuation benefits specified by COBRA whether or not the Company is
obligated under COBRA to do so.
(c) For Cause. The Company may upon 14 days' notice to Executive
terminate this Agreement and all of its obligations hereunder to Executive
accruing after the date of such termination if the termination is for "cause."
A termination for cause is a termination effected by the Board on one or more
of the following grounds: (i) that Executive has been declared of unsound mind
by a court, (ii) that Executive has been convicted of a felony, (iii) that
Executive has been convicted of a misdemeanor involving moral turpitude, or
(iv) that Executive has repeatedly committed a material breach of this
Agreement (provided that Executive has been notified of the prior breach).
Except as expressly required by applicable laws, including COBRA if
applicable, and by the terms of the Additional Benefits plans, policies,
programs, and arrangements then in effect, upon such termination, Executive's
rights under Section 3 of this Agreement shall terminate on the date of the
termination of his employment under this Section 4(c). Executive's period of
coverage under COBRA (29 U.S.C. ss. 1162(2)), if any, shall begin on the date
of the termination of his employment under this Section 4(c). Upon termination
as described in this Section 4(c), Executive shall resign from his offices as
an officer and director of the Company and its subsidiaries. Executive agrees
to execute all documents as may be requested by the Company in order to comply
with its obligations under this Section 4(c) and under COBRA, if applicable,
and any other applicable laws.
(d) Other Termination. The Company may by notice to Executive
terminate Executive's employment for reasons other than those specified in
Sections 4(a) through (c) above. In the event notice of termination of
Executive's employment is given by the Company for reasons other than those
specified in Sections 4(a) through (c), from the date of such notice of
termination Executive shall be entitled to receive only the compensation
specifically provided below:
(i) The Executive's annual Base Salary in effect at the time
of termination until the expiration of the employment period as
provided in Section 1(b) of this Agreement.
(ii) Additional Benefits under any life, medical, dental,
vision and disability insurance and reimbursement programs in which
Executive was participating at the time of notice of termination of
Executive's employment, which benefits shall be continued until the
earlier to occur of the expiration of Executive's employment period as
provided in Section 1(b) or Executive's acceptance of comparable
employment. Additional Benefits under the terms of any stock incentive
plan, pension plan and SERP will not be continued except as expressly
required by applicable laws or by the terms of the Additional Benefits
plans, policies, programs, and arrangements then in effect.
4
<PAGE> 5
(iii) Immediate acceleration of vesting of stock options and
acceleration of the lapse of restrictions of any restricted stock
awards held by Executive that would have vested or lapsed during the
period between notice of termination of Executive's employment and the
expiration of Executive's employment period as provided in Section
1(b).
Upon termination of Executive's employment as described in this
Section 4(d), Executive shall resign from his offices as an officer and
director of the Company and its subsidiaries and the Company shall, at the
option of Executive, (i) continue installment payments to Executive on the
periodic basis described in Section 3(a) at the rate and for the duration of
the employment period specified in Section 4(d)(i); or (ii) make a lump sum
payment to Executive equal to seventy-five percent (75%) of the amounts due
Executive under Section 4(d)(i) for the duration of the employment period
specified therein. A lump sum payment in accordance with this paragraph shall
be made within ten (10) working days of Executive's election.
Upon termination of Executive's employment as described in this
Section 4(d), Additional Benefits shall be made available to Executive as
required by applicable laws, including COBRA. Executive's period of coverage
under COBRA (29 U.S.C. ss. 1162(2)), for purposes of this Section 4(d) shall
begin on the date of the termination of the benefits to which Executive is
entitled pursuant to Section 4(d)(ii). Executive agrees to execute such
documents as may be requested by the Company in order to comply with its
obligations under this Section 4(d) and under COBRA and any other applicable
laws. The Company shall provide Executive with the health coverage continuation
benefits specified by COBRA whether or not the Company is obligated under COBRA
to do so.
(e) Constructive Termination. The occurrence of any of the following
events shall be deemed a termination of Executive's employment under Section
4(d) above:
(i) Failure to elect or reelect or otherwise to maintain
Executive in the office or the position, or a substantially equivalent
office or position, with the Company which Executive holds as of the
date of this agreement (or which may be increased from time to time).
(ii) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties
attached to Executive's position with the Company, a reduction in
Executive's Base Salary, as increased from time to time, or the
termination or denial of Executive's rights to a substantial amount of
Additional Benefits as herein provided, any of which is not remedied
within 10 calendar days after receipt by the Company of written notice
from Executive of such change, reduction or termination, as the case
may be.
(iii) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor thereto.
5
<PAGE> 6
5. TERMINATION RELATING TO CHANGE OF CONTROL
(a) Any of the following events shall constitute a "Change of
Control" hereunder:
(i) any "person" (as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Company representing 20% or more of the combined
voting power of the Company's then outstanding securities; or
(ii) during any period of two consecutive years (not
including any period prior to the execution of this Agreement)
individuals who at the beginning of such period constitute the Board
of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation, or the shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
(b) Within 180 days of a Change of Control, Executive may terminate
employment with the Company by delivering written notice of such termination to
the Company, accompanied by Executive's resignation from his offices as an
officer and director of the Company and its subsidiaries. Upon Executive's
termination of employment as specified in the preceding sentence, or if the
Company (or any successor) terminates Executive's employment for any reason
within 180 days of a Change of Control, Executive shall be entitled to receive:
(i) A lump sum payment equal to three (3) times Executive's
Average Annual Compensation. "Average Annual Compensation" shall mean
the average of Executive's combined salary plus Bonus for the three
calendar years immediately preceding the date of determination.
"Bonus" shall mean the cash portion of any incentive compensation paid
to Executive plus an amount in cash equal to the value of any
restricted stock or stock options received by Executive as a deferral
of or in lieu of a cash bonus. Notwithstanding the foregoing, if the
Change of Control is a Change of Control as defined in subsection
(iii) of Section 5(a) and the Company (or its successor) offers
Executive the position of chief
6
<PAGE> 7
executive officer on terms and conditions no less favorable than those
contained in this Agreement for a term no shorter than the then
remaining term of this Agreement, and if Executive declines such
offer, then such lump sum payment shall equal only one (1) times
Executive's Average Annual Compensation. Such lump sum payment shall
be made within ten (10) working days of such termination of
employment.
(ii) Additional Benefits under any life, medical, dental,
vision and disability insurance and reimbursement programs in which
Executive was participating at the time of notice of termination of
Executive's employment, which benefits shall be continued until the
earlier to occur of the expiration of Executive's employment period as
provided in Section 1(b) or Executive's acceptance of comparable
employment. Additional Benefits under the terms of any stock incentive
plan, pension plan and SERP will not be continued except as expressly
required by applicable laws or by the terms of the Additional Benefits
plans, policies, programs, and arrangements then in effect.
(iii) Immediate acceleration of vesting of all stock options
and immediate lapse of restrictions on all restricted stock awards
held by Executive.
(c) In connection with any termination of employment pursuant to this
Section 5, the Company shall provide Executive with outplacement services from
an outplacement firm of Executive's choice up to a maximum cost of $10,000.
(d) If any dispute arises between the Company (or any successor) and
Executive regarding Executive's rights under this Section 5, Executive shall be
entitled to recover his attorneys' fees and costs incurred in connection with
such dispute, notwithstanding the provisions of Section 19 hereof.
(e) If the aggregate of all amounts received by Executive as a result
of termination of employment pursuant to this Section 5 equals or exceeds an
amount that would cause Executive to be deemed to receive an "excess parachute
payment" as defined in Internal Revenue Code Section 280G and subjects
Executive to an excise tax liability under Internal Revenue Code Section 4999,
Executive shall also be entitled to receive a lump sum payment equal to the
"grossed-up" amount of such excise tax liability and regular federal and state
tax liabilities with respect to the lump sum payment made under this Section
5(e).
(f) Any payments under Sections 5(b)-(e) shall be in lieu of any
payments under Section 4(d).
6. TERMINATION OF EMPLOYMENT BY EXECUTIVE
(a) In addition to his rights under Section 5 hereof, Executive may
terminate employment with the Company without cause as of a specified date not
less than 30 days after delivering written notice of such termination to the
Company. Upon the effective date of such termination, Executive's right to
receive the compensation provided for in Section 3 of this Agreement shall
terminate. The
7
<PAGE> 8
Company may at any time in its sole discretion waive all or part of the notice
period and specify any day in such period that has not yet occurred as the date
of termination for purposes of this Section 6(a); in the event of such
occurrence, the Company shall pay Executive the amount of the compensation
provided for in Section 3 of this Agreement for the remainder of the notice
period given by Executive.
(b) Upon termination as described in Section 6(a), Additional Benefits
will be made available to Executive as required by applicable laws, including
COBRA, if applicable, and by the terms of the Additional Benefit plans,
policies, programs, and arrangements in effect at the time of termination.
Executive's period of coverage under COBRA (29 U.S.C. ss. 1162(2)), if any,
shall begin on the date of the termination of his employment under Section
6(a). Executive agrees to execute such documents as may be requested by the
Company in order to comply with its obligations under this Section 6(b) and
under COBRA, if applicable, and any other applicable laws.
7. DESIGNATION OF BENEFICIARY
Executive may designate one or more persons or entities (including a
trust or trusts or his estate) to receive any compensation payable to him under
Section 4(b) ("Beneficiaries"). If Executive shall designate more than one
Beneficiary, he shall set forth the proportion in which each is to receive such
compensation; any such designation which fails to set forth such proportion
shall be an invalid designation as to all those so designated. Executive also
may designate one or more successor Beneficiaries who shall succeed to the
rights of the Beneficiaries originally designated, in case the latter should
die prior to the receipt of full payment. Executive may from time to time
change any designation so made, and that last designation shall be controlling.
If Executive designates a person other than, or in addition to, his spouse, his
spouse shall specifically approve his designation and authorize the Company to
pay his compensation as designated. In the absence of a valid designation by
Executive meeting the requirements of this Section 7, or in the event of the
death of a Beneficiary for whom no successor Beneficiary has been validly
designated, Executive's compensation, or the portion of such compensation then
payable to such deceased Beneficiary, shall be paid to the administrator or
executor of Executive's estate, who shall in that event be deemed a Beneficiary
under this Section 7.
Executive's designation and his spouse's approval and authorization,
if necessary, must be in the form of a signed writing witnessed by two adult
persons (other than any designated Beneficiary) and must have been delivered to
the Company prior to Executive's death.
8. REIMBURSEMENT OF EXPENDITURES
During the term of this Agreement, the Company shall reimburse
Executive for business expenses reasonably and necessarily incurred by him on
its behalf in accordance with its business-expense reimbursement policies as in
effect from time to time and subject to Executive's furnishing such
substantiation of such expenses as the Company may require.
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9. RELOCATION
If the Company shall relocate its principal executive offices to a
location which is in excess of 25 miles from its current location in Denver,
Colorado, Executive shall be entitled to receive all of the benefits of the
Company's relocation policy in effect in connection with such move. Such
benefits shall, at a minimum, include (i) the Company's guarantee to purchase
Executive's Denver residence at its then current appraised market value or
Executive's purchase cost plus remodeling costs, whichever is greater, if
Executive has been unable to sell the residence after marketing it for a
minimum of 90 days; (ii) reimbursement of any sales commission, and (iii)
reimbursement of direct moving costs. In the event of a relocation of the
Company's principal executive offices from Denver, Colorado in connection with
a "Change of Control" as defined in Section 5(a) hereof, Executive may elect to
designate his residence in Los Angeles, California as his residence for
purposes of the relocation benefits to which he is entitled hereunder.
10. CONFIDENTIAL INFORMATION
During the term of this Agreement and the period specified in Section
17 of this Agreement, Executive shall not disclose to any persons (other than
another employee of the Company) any confidential information relating to the
business of the Company obtained by him while in the employ of the Company,
without the consent of the Board, except as necessary or appropriate in the
discharge of his obligations to the Company and its shareholders.
11. NONASSIGNMENT OF EXECUTIVE'S OBLIGATIONS AND DUTIES
The obligations and duties of Executive hereunder shall be personal
and not assignable.
12. AGREEMENT BINDING UPON SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and shall be binding upon
the Company and its respective successors and assigns, including any purchaser
of all or substantially all of its assets, and shall be binding upon
Executive's assigns, executors, administrators, Beneficiaries, or their legal
representatives.
13. NOTICES
Any notices provided for in this Agreement shall be sent to the
Company at American Health Properties, Inc., 6400 S. Fiddler's Green Circle,
Suite 1800, Englewood, Colorado 80111, Attention: Chairman, Compensation
Committee, or at such other address as the Company may from time to time in
writing designate, and to Executive at 6400 S. Fiddler's Green Circle, Suite
1800, Englewood, Colorado 80111, or at such other address as he may from time
to time in writing designate. All notices will be deemed to have been delivered
(i) as of the first to occur of actual receipt or two (2) business days after
being sent by certified mail, return receipt requested, postage paid and
properly addressed to the designated address of the party to whom addressed or
(ii) if notice is given in any other manner, when actually received.
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14. ENTIRE AGREEMENT
This instrument contains the entire agreement between the Company and
Executive relating to the subject of Executive's employment by the Company,
except to the extent that the terms and provisions of Additional Benefits,
expense reimbursement policies and Company policies governing executives and
employees generally are (as referred to herein) set forth in other documents.
This Agreement supersedes all prior and contemporaneous oral and written
agreements, understandings, and representations, if any, among the parties.
15. UNIQUE SERVICES
Executive recognizes that the services to be rendered by him pursuant
to this Agreement are of a character giving them peculiar value, the loss of
which cannot be adequately compensated for in damages, and in the event of a
breach of this Agreement by Executive, the Company shall be entitled to
equitable relief by way of injunction in addition to any other legal or
equitable remedies available to it.
16. TERMINATION OF AGREEMENT
This Agreement shall terminate at the end of the period of Executive's
employment, as described in Section 1 of this Agreement (or at the end of any
different period specifically set forth herein for the termination of
Executive's employment), and may be continued thereafter only upon the
execution of a writing to that effect signed by the Company and Executive. If
Executive's employment continues after the termination of this Agreement for
any period during which no such writing is in effect, Executive shall be deemed
to be employed at the will of the Company and his employment may be terminated
at any time with or without notice and with or without cause and without
obligation of any party to any other party.
17. TRADE SECRETS; COMPETITION; SOLICITATION
In addition to the other provisions hereof, during the term of this
Agreement, and for a period of one year after Executive's employment with the
Company terminates or for so long as the Company continues to engage in
business as a real estate investment trust, whichever period is shorter,
Executive agrees not to, directly or indirectly: (a) disclose or utilize any
trade secrets or confidential information of the Company or otherwise compete
with the Company in respect of any business then carried on by the Company, (b)
serve as an employee, officer or director of, or consult with or otherwise
assist or act in the service of, any real estate investment trust which does
business in the United States of America and at least 30% of the value of whose
portfolio is comprised of property leased or used by health-related enterprises
and institutions (other than the Company as contemplated hereby), (c) hire,
cause or encourage any other person to hire, any employee of the Company or
form any business enterprise
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with any such employee or in any way persuade or encourage any such employee to
terminate or alter his or her employment with the Company, or (d) communicate
with any customer or vendor of the Company or any employee thereof regarding
the business of the Company or such person's business relationship with the
Company.
18. WAIVERS
The waiver or breach of any term or condition of this Agreement will
not be deemed to constitute the waiver of any other breach of the same or any
other term or condition.
19. GOVERNING LAW
This Agreement will be governed by and construed in accordance with
the laws of Colorado. Any dispute or claim at law or in equity between the
Company and Executive arising out of this Agreement or any transaction
contemplated hereby shall be submitted to and decided by neutral binding
arbitration in accordance with the rules of the American Arbitration
Association, by an arbitrator selected by both parties (or if such parties
cannot agree within sixty days, by an arbitrator selected in accordance with
such rules), and not by court action except as provided by applicable law for
judicial review of arbitration proceedings. Judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction thereof. The
parties shall have the right to discovery in accordance with applicable law as
it pertains to such arbitration proceedings. Any such arbitration shall be
conducted in the city in which the Company's principal executive office is
located (or, at the option of the Company, in the city nearest thereto in which
the American Arbitration Association has an office). The Company shall pay the
direct costs of any such arbitration proceedings, as assessed by the American
Arbitration Association, but each party shall pay its own attorneys' fees and
other costs and expenses in connection therewith.
20. SEVERABILITY
If any provision or clause of any provision of this Agreement is held
invalid or unenforceable, the remainder of this Agreement shall nevertheless
remain in full force and effect.
21. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which together shall be deemed to
be one and the same instrument.
22. NO CONFLICT WITH PRIOR AGREEMENTS AND RIGHTS
Executive hereby represents and warrants to the Company that neither
the execution of this Agreement nor performance by Executive of his obligations
hereunder conflicts with any contractual commitment on his part to any third
party or violates or interferes with any right of any third party.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
"Executive" "Company"
AMERICAN HEALTH PROPERTIES, INC.
By
- - ---------------------------- -------------------------------
Joseph P. Sullivan Michael J. McGee
Senior Vice President
Authorized
By
------------------------------
Sheldon S. King, Chairman,
Compensation and Board Affairs
Committee of the Board of Directors
of American Health Properties, Inc.
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EXHIBIT 10.4
AMERICAN HEALTH PROPERTIES, INC.
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
WITH
MICHAEL J. MCGEE
This Executive Employment Agreement (the "Agreement") is entered into
as of March 15, 1999, between AMERICAN HEALTH PROPERTIES, INC., a Delaware
corporation (the "Company") and Michael J. McGee, an individual ("Executive").
1. EMPLOYMENT AND TERM
The Company agrees to employ Executive for the period commencing on
the day and the year first written above and ending on the earlier of: (a) the
date of termination of Executive's employment in accordance with Section
4(a)-(c) below or (b) the date that is three (3) years from the date the
Company provides Executive with written notice of termination of Executive's
employment. The Board of Directors of the Company (the "Board") shall review
the terms of Executive's employment on an annual basis and shall make such
modifications to the terms as the Board in its discretion shall deem
appropriate and as Executive shall consent.
2. DUTIES
(a) Executive shall serve in the capacity of Senior Vice President,
Chief Financial Officer and Treasurer. Executive shall perform such services
and duties as are usually associated with such positions as well as those
decided upon by the President and the Board.
(b) Executive shall devote his full business time and energy to the
business and affairs of the Company and shall use his best efforts and
abilities faithfully and diligently to promote the business interests of the
Company and its subsidiaries as directed by and to the reasonable satisfaction
of the President and the Board.
(c) Executive's services shall be rendered in accordance with such
policies as the Company may establish for the conduct of its officers and
employees.
(d) Provided such services or investments do not violate any
applicable law, regulation or order or interfere in any way with the faithful
and diligent performance by Executive of services to the Company otherwise
required or contemplated by this Agreement or requested by the Board, Executive
may:
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(i) Serve as a director, trustee, or in any other similar
capacity of any business enterprise or any civic, educational,
charitable or trade organization if the Board has been informed of
such service and the Board has not expressly requested Executive to
refuse, or to discontinue, such service, and
(ii) Make and manage personal business investments of
Executive's choice that are consistent with the conflict-of-interest
policies of the Company.
3. COMPENSATION
Commencing as of February 1, 1999, the Company shall compensate
Executive as follows:
(a) Base Salary. Executive shall receive a Base Salary at the rate of
Two Hundred Twelve Thousand Dollars ($212,000) per annum which shall be payable
in semi-monthly installments in conformity with the Company's policy relating
to its employees generally as in effect from time to time. Executive's Base
Salary shall be reviewed periodically by the Board and may be increased by
action of the Board upon such review, but Executive's salary shall not be
decreased except as provided in Sections 4 and 5.
(b) Incentive Compensation. The Board may, in its discretion, award an
annual bonus in addition to base compensation. Such bonus, if any, shall be
paid in such amount and based upon such criteria as are from time to time
adopted by the Board.
(c) Additional Benefits. Executive also shall be entitled to receive
all benefits for which he is eligible under the terms of any stock incentive
plan, pension plan, SERP, life, medical, dental, vision and disability
insurance and reimbursement programs, and any other plans or arrangements,
which the Company may provide for executive officers from time to time
("Additional Benefits"). Additional Benefits shall in all respects be paid in
accordance with the then-existing plans, or policies, programs, or arrangements
establishing or governing such Additional Benefits. The Company reserves the
right to add, terminate, or amend any existing plans, policies, programs, or
arrangements during the term of this Agreement and at all other times.
(d) Vacation. Vacation, at full pay, of four (4) weeks per calendar
year. Vacation not used during any calendar year may not be carried over to the
following year.
All compensation paid to Executive shall be subject to withholding for
taxes and subject to payroll and other taxes as required by applicable law and
in conformity with the Company's policies relating thereto as in effect from
time to time.
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4. TERMINATION OF EMPLOYMENT BY THE COMPANY
The compensation provided for in Section 3 of this Agreement and
Executive's employment by the Company may be terminated by the Company prior to
expiration of the term set forth in Section 1(b) as provided for below:
(a) Disability. If Executive becomes either partially or totally
unable to perform his duties after the making of reasonable accommodations
because of any physical or mental disability during the term of his employment
hereunder for three (3) consecutive calendar months or for shorter periods
aggregating 90 or more business days in any 12-month period, Executive's
employment may be terminated by the Company at any time during the continuance
of such disability. Upon termination as described in this Section 4(a),
Executive shall be entitled to receive the Base Salary provided for in Section
3(a) of this Agreement for a period of 90 days after such termination. The
Company shall offset against such Base Salary payments any payments received by
Executive as a result of such illness or injury pursuant to any federal or
state program or any salary continuation or similar program or disability
insurance established by the Company.
Upon termination as described in this Section 4(a), Executive shall
resign from his offices as an officer of the Company and its subsidiaries and
the Company shall continue Executive's coverage under any and all life,
medical, dental, vision and disability insurance plans for a period of 120 days
after such termination at the expense of the Company. Other Additional Benefits
shall be made available to Executive as required by applicable laws, including
the health coverage continuation provisions of the Consolidated Omnibus Budget
Reconciliation Act, 29 U.S.C. ss.ss. 1161-1168 ("COBRA"), and by the terms of
the Additional Benefit plans, policies, programs, and arrangements in effect at
the time of termination. Executive's period of coverage under COBRA (29 U.S.C.
ss. 1162(2)), shall begin on the date of the termination of his employment
under this Section 4(a). Executive agrees to execute such documents as may be
requested by the Company in order to comply with its obligations under this
Section 4(a) and under COBRA and other applicable laws. The Company shall
provide Executive with the health coverage continuation benefits specified by
COBRA whether or not the Company is obligated under COBRA to do so.
(b) Death. If Executive dies during the term of this Agreement,
Executive's Beneficiary or Beneficiaries, as defined in Section 7 of this
Agreement, shall be entitled to receive the Base Salary provided for in Section
3(a) of this Agreement for a period of 90 days after the date such death
occurs. Additional Benefits shall be made available to the Beneficiaries of
Executive under the life, medical, dental, vision and other Additional Benefit
plans, policies, programs, and arrangements, as required by applicable laws,
including COBRA, and by the terms of the Additional Benefit plans, policies,
programs, and arrangements in effect at the time of Executive's death. The
Company shall provide Executive's Beneficiaries with the health coverage
continuation benefits specified by COBRA whether or not the Company is
obligated under COBRA to do so.
(c) For Cause. The Company may upon 14 days' notice to Executive
terminate this Agreement and all of its obligations hereunder to Executive
accruing after the date of such termination if the termination is for "cause."
A termination for cause is a termination effected by the Board on one or more
of the following grounds: (i) that Executive has been declared of
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unsound mind by a court, (ii) that Executive has been convicted of a felony,
(iii) that Executive has been convicted of a misdemeanor involving moral
turpitude, or (iv) that Executive has repeatedly committed a material breach of
this Agreement (provided that Executive has been notified of the prior breach).
Except as expressly required by applicable laws, including COBRA if
applicable, and by the terms of the Additional Benefits plans, policies,
programs, and arrangements then in effect, upon such termination, Executive's
rights under Section 3 of this Agreement shall terminate on the date of the
termination of his employment under this Section 4(c). Executive's period of
coverage under COBRA (29 U.S.C. ss. 1162(2)), if any, shall begin on the date
of the termination of his employment under this Section 4(c). Upon termination
as described in this Section 4(c), Executive shall resign from his offices as
an officer of the Company and its subsidiaries. Executive agrees to execute all
documents as may be requested by the Company in order to comply with its
obligations under this Section 4(c) and under COBRA, if applicable, and any
other applicable laws.
(d) Other Termination. The Company may by notice to Executive
terminate Executive's employment for reasons other than those specified in
Sections 4(a) through (c) above. In the event notice of termination of
Executive's employment is given by the Company for reasons other than those
specified in Sections 4(a) through (c), from the date of such notice of
termination Executive shall be entitled to receive only the compensation
specifically provided below:
(i) The Executive's annual Base Salary in effect at the time
of termination until the expiration of the employment period as
provided in Section 1(b) of this Agreement.
(ii) Additional Benefits under any life, medical, dental,
vision and disability insurance and reimbursement programs in which
Executive was participating at the time of notice of termination of
Executive's employment, which benefits shall be continued until the
earlier to occur of the expiration of Executive's employment period as
provided in Section 1(b) or Executive's acceptance of comparable
employment. Additional Benefits under the terms of any stock incentive
plan, pension plan and SERP will not be continued except as expressly
required by applicable laws or by the terms of the Additional Benefits
plans, policies, programs, and arrangements then in effect.
(iii) Immediate acceleration of vesting of stock options and
acceleration of the lapse of restrictions of any restricted stock
awards held by Executive that would have vested or lapsed during the
period between notice of termination of Executive's employment and the
expiration of Executive's employment period as provided in Section
1(b).
Upon termination of Executive's employment as described in this
Section 4(d), Executive shall resign from his offices as an officer of the
Company and its subsidiaries and the Company shall, at the option of Executive,
(i) continue installment payments to Executive on the periodic basis described
in Section 3(a) at the rate and for the duration of the employment period
specified in Section 4(d)(i); or (ii) make a lump sum payment to Executive
equal to seventy-five percent (75%)
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of the amounts due Executive under Section 4(d)(i) for the duration of the
employment period specified therein. A lump sum payment in accordance with this
paragraph shall be made within ten (10) working days of Executive's election.
Upon termination of Executive's employment as described in this
Section 4(d), Additional Benefits shall be made available to Executive as
required by applicable laws, including COBRA. Executive's period of coverage
under COBRA (29 U.S.C. ss. 1162(2)), for purposes of this Section 4(d) shall
begin on the date of the termination of the benefits to which Executive is
entitled pursuant to Section 4(d)(ii). Executive agrees to execute such
documents as may be requested by the Company in order to comply with its
obligations under this Section 4(d) and under COBRA and any other applicable
laws. The Company shall provide Executive with the health coverage continuation
benefits specified by COBRA whether or not the Company is obligated under COBRA
to do so.
(e) Constructive Termination. The occurrence of any of the following
events shall be deemed a termination of Executive's employment under Section
4(d) above:
(i) Failure to elect or reelect or otherwise to maintain
Executive in the office or the position, or a substantially equivalent
office or position, with the Company which Executive holds as of the
date of this agreement (or which may be increased from time to time).
(ii) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties
attached to Executive's position with the Company, a reduction in
Executive's Base Salary, as increased from time to time, or the
termination or denial of Executive's rights to a substantial amount of
Additional Benefits as herein provided, any of which is not remedied
within 10 calendar days after receipt by the Company of written notice
from Executive of such change, reduction or termination, as the case
may be.
(iii) The Company shall relocate its principal executive
offices, or require Executive to have his principal location of work
changed, to any location that is in excess of 25 miles from its
present location.
(iv) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor thereto.
5. TERMINATION RELATING TO CHANGE OF CONTROL
(a) Any of the following events shall constitute a "Change of
Control" hereunder:
(i) any "person" (as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), is or becomes the
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"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly of securities of the Company representing 20%
or more of the combined voting power of the Company's then outstanding
securities; or
(ii) during any period of two consecutive years (not
including any period prior to the execution of this Agreement)
individuals who at the beginning of such period constitute the Board
of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation, or the shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
(b) Within 180 days of a Change of Control, Executive may terminate
employment with the Company by delivering written notice of such termination to
the Company, accompanied by Executive's resignation from his offices as an
officer of the Company and its subsidiaries. Upon Executive's termination of
employment as specified in the preceding sentence, or if the Company (or any
successor) terminates Executive's employment for any reason within 180 days of
a Change of Control, Executive shall be entitled to receive:
(i) A lump sum payment equal to three (3) times Executive's
Average Annual Compensation. "Average Annual Compensation" shall mean
the average of Executive's combined salary plus Bonus with respect to
the three calendar years immediately preceding the date of
determination. If Executive was employed for less than a full year by
the Company for any of the three calendar years in the calculation
period, Executive's salary and Bonus for such year(s) shall be
computed on an annualized basis. If Executive was employed by the
Company for less than three calendar years, Average Annual
Compensation shall be computed with respect only to calendar years
during which Executive was employed by the Company. "Bonus" shall mean
the cash portion of any incentive compensation paid to Executive with
respect to a calendar year plus an amount in cash equal to the value
of any restricted stock or stock options received by Executive as a
deferral of or in lieu of a cash bonus. The Company and Executive
acknowledge that at present the Bonus, if any, with respect to a
calendar year is generally determined in January of the next following
calendar year.
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(ii) Additional Benefits under any life, medical, dental,
vision and disability insurance and reimbursement programs in which
Executive was participating at the time of notice of termination of
Executive's employment, which benefits shall be continued until the
earlier to occur of the expiration of Executive's employment period as
provided in Section 1(b) or Executive's acceptance of comparable
employment. Additional Benefits under the terms of any stock incentive
plan, pension plan and SERP will not be continued except as expressly
required by applicable laws or by the terms of the Additional Benefits
plans, policies, programs, and arrangements then in effect.
(iii) Immediate acceleration of vesting of all stock options
and immediate lapse of restrictions on all restricted stock awards
held by Executive.
(c) In connection with any termination of employment pursuant to this
Section 5, the Company shall provide Executive with outplacement services from
an outplacement firm of Executive's choice up to a maximum cost of $10,000.
(d) If any dispute arises between the Company (or any successor) and
Executive regarding Executive's rights under this Section 5, Executive shall be
entitled to recover his attorneys' fees and costs incurred in connection with
such dispute.
(e) If the aggregate of all amounts received by Executive as a result
of termination of employment pursuant to this Section 5 equals or exceeds an
amount that would cause Executive to be deemed to receive an "excess parachute
payment" as defined in Internal Revenue Code Section 280G and subjects
Executive to an excise tax liability under Internal Revenue Code Section 4999,
Executive shall also be entitled to receive a lump sum payment equal to the
"grossed-up" amount of such excise tax liability and regular federal and state
tax liabilities with respect to the lump sum payment made under this Section
5(e).
(f) Any payments under Sections 5(b)-(e) shall be in lieu of any
payments under Section 4(d).
6. TERMINATION OF EMPLOYMENT BY EXECUTIVE.
(a) In addition to his rights under Section 5 hereof, Executive may
terminate employment with the Company without cause as of a specified date not
less than 30 days and not more than 90 days after delivering written notice of
such termination to the Company. Upon the effective date of such termination,
Executive's right to receive the compensation provided for in Section 3 of this
Agreement shall terminate. The Company may at any time in its sole discretion
waive all or part of the notice period and specify any day in such period that
has not yet occurred as the date of termination for purposes of this Section
6(a); in the event of such occurrence, the Company shall pay Executive the
amount of the compensation provided for in Section 3 of this Agreement for the
remainder of the notice period given by Executive.
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(b) Upon termination as described in Section 6(a), Additional Benefits
will be made available to Executive as required by applicable laws, including
COBRA, if applicable, and by the terms of the Additional Benefit plans,
policies, programs, and arrangements in effect at the time of termination.
Executive's period of coverage under COBRA (29 U.S.C. ss. 1162(2)), if any,
shall begin on the date of the termination of his employment under Section
6(a). Executive agrees to execute such documents as may be requested by the
Company in order to comply with its obligations under this Section 6(b) and
under COBRA, if applicable, and any other applicable laws.
7. DESIGNATION OF BENEFICIARY
Executive may designate one or more persons or entities (including a
trust or trusts or his estate) to receive any compensation payable to him under
Section 4(b) ("Beneficiaries"). If Executive shall designate more than one
Beneficiary, he shall set forth the proportion in which each is to receive such
compensation; any such designation which fails to set forth such proportion
shall be an invalid designation as to all those so designated. Executive also
may designate one or more successor Beneficiaries who shall succeed to the
rights of the Beneficiaries originally designated, in case the latter should
die prior to the receipt of full payment. Executive may from time to time
change any designation so made, and that last designation shall be controlling.
If Executive designates a person other than, or in addition to, his spouse, his
spouse shall specifically approve his designation and authorize the Company to
pay his compensation as designated. In the absence of a valid designation by
Executive meeting the requirements of this Section 7, or in the event of the
death of a Beneficiary for whom no successor Beneficiary has been validly
designated, Executive's compensation, or the portion of such compensation then
payable to such deceased Beneficiary, shall be paid to the administrator or
executor of Executive's estate for the benefit of Executive's estate, who shall
in that event be deemed a Beneficiary under this Section 7.
Executive's designation and his spouse's approval and authorization,
if necessary, must be in the form of a signed writing witnessed by two adult
persons (other than any designated Beneficiary) and must have been delivered to
the Company prior to Executive's death.
8. REIMBURSEMENT OF EXPENDITURES
During the term of this Agreement, the Company shall reimburse
Executive for business expenses reasonably and necessarily incurred by him on
its behalf in accordance with its business-expense reimbursement policies as in
effect from time to time and subject to Executive's furnishing such
substantiation of such expenses as the Company may require.
9. CONFIDENTIAL INFORMATION
During the term of this Agreement, Executive shall not disclose to any
persons (other than another employee of the Company) any confidential
information relating to the business of the Company obtained by him while in
the employ of the Company, without the consent of the Board, except as
necessary or appropriate in the discharge of his obligations to the Company and
its shareholders.
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10. NONASSIGNMENT OF EXECUTIVE'S OBLIGATIONS AND DUTIES
The obligations and duties of Executive hereunder shall be personal
and not assignable.
11. AGREEMENT BINDING UPON SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and shall be binding upon
the Company and its respective successors and assigns, including any purchaser
of all or substantially all of its assets, and shall be binding upon
Executive's assigns, executors, administrators, Beneficiaries, or their legal
representatives.
12. NOTICES
Any notices provided for in this Agreement shall be sent to the
Company at American Health Properties, Inc., 6400 Fiddlers Green Circle, Suite
1800, Englewood, Colorado 80111, Attention: Chairman, Compensation Committee,
or at such other address as the Company may from time to time in writing
designate, and to Executive at 6400 Fiddlers Green Circle, Suite 1800,
Englewood, Colorado 80111, or at such other address as he may from time to time
in writing designate. All notices will be deemed to have been delivered (i) as
of the first to occur of actual receipt or two (2) business days after being
sent by certified mail, return receipt requested, postage paid and properly
addressed to the designated address of the party to whom addressed or (ii) if
notice is given in any other manner, when actually received.
13. ENTIRE AGREEMENT
This instrument contains the entire agreement between the Company and
Executive relating to the subject of Executive's employment by the Company,
except to the extent that the terms and provisions of Additional Benefits,
expense reimbursement policies and Company policies governing executives and
employees generally are (as referred to herein) set forth in other documents.
This Agreement supersedes all prior and contemporaneous oral and written
agreements, understandings, and representations, if any, among the parties,
including all prior agreements relating to the employment of the Executive by
the Company.
14. TERMINATION OF AGREEMENT
This Agreement shall terminate at the end of the period of Executive's
employment, as described in Section 1 of this Agreement (or at the end of any
different period specifically set forth herein for the termination of
Executive's employment), and may be continued thereafter only upon the
execution of a writing to that effect signed by the Company and Executive. If
Executive's employment continues after the termination of this Agreement for
any period during which no such
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writing is in effect, Executive shall be deemed to be employed at the will of
the Company and his employment may be terminated at any time with or without
notice and with or without cause and without obligation of any party to any
other party.
15. WAIVERS
The waiver or breach of any term or condition of this Agreement will
not be deemed to constitute the waiver of any other breach of the same or any
other term or condition.
16. GOVERNING LAW
This Agreement will be governed by and construed in accordance with
the laws of Colorado.
17. SEVERABILITY
If any provision or clause of any provision of this Agreement is held
invalid or unenforceable, the remainder of this Agreement shall nevertheless
remain in full force and effect.
18. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which together shall be deemed to
be one and the same instrument.
19. NO CONFLICT WITH PRIOR AGREEMENTS AND RIGHTS
Executive hereby represents and warrants to the Company that neither
the execution of this Agreement nor performance by Executive of his obligations
hereunder conflicts with any contractual commitment on his part to any third
party or violates or interferes with any right of any third party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
"Company"
AMERICAN HEALTH PROPERTIES, INC.
By
------------------------------------
Joseph P. Sullivan
Chairman, President and
Chief Executive Officer
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"Executive"
- - ------------------------------------
Michael J.McGee
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EXHIBIT 10.5
AMERICAN HEALTH PROPERTIES, INC.
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
WITH
C. GREGORY SCHONERT
This Executive Employment Agreement (the "Agreement") is entered into
as of March 15, 1999, between AMERICAN HEALTH PROPERTIES, INC., a Delaware
corporation (the "Company") and C. Gregory Schonert, an individual
("Executive").
1. EMPLOYMENT AND TERM
The Company agrees to employ Executive for the period commencing on
the day and the year first written above and ending on the earlier of: (a) the
date of termination of Executive's employment in accordance with Section
4(a)-(c) below or (b) the date that is three (3) years from the date the
Company provides Executive with written notice of termination of Executive's
employment. The Board of Directors of the Company (the "Board") shall review
the terms of Executive's employment on an annual basis and shall make such
modifications to the terms as the Board in its discretion shall deem
appropriate and as Executive shall consent.
2. DUTIES
(a) Executive shall serve in the capacity of Senior Vice President and
Chief Development Officer. Executive shall perform such services and duties as
are usually associated with such positions as well as those decided upon by the
President and the Board.
(b) Executive shall devote his full business time and energy to the
business and affairs of the Company and shall use his best efforts and
abilities faithfully and diligently to promote the business interests of the
Company and its subsidiaries as directed by and to the reasonable satisfaction
of the President and the Board.
(c) Executive's services shall be rendered in accordance with such
policies as the Company may establish for the conduct of its officers and
employees.
(d) Provided such services or investments do not violate any
applicable law, regulation or order or interfere in any way with the faithful
and diligent performance by Executive of services to the Company otherwise
required or contemplated by this Agreement or requested by the Board, Executive
may:
(i) Serve as a director, trustee, or in any other similar
capacity of any business enterprise or any civic, educational,
charitable or trade organization if the Board
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has been informed of such service and the Board has not expressly
requested Executive to refuse, or to discontinue, such service, and
(ii) Make and manage personal business investments of
Executive's choice that are consistent with the conflict-of-interest
policies of the Company.
3. COMPENSATION
Commencing as of February 1, 1999, the Company shall compensate
Executive as follows:
(a) Base Salary. Executive shall receive a Base Salary at the rate of
Two Hundred Twenty Five Thousand Dollars ($225,000) per annum which shall be
payable in semi-monthly installments in conformity with the Company's policy
relating to its employees generally as in effect from time to time. Executive's
Base Salary shall be reviewed periodically by the Board and may be increased by
action of the Board upon such review, but Executive's salary shall not be
decreased except as provided in Sections 4 and 5.
(b) Incentive Compensation. The Board may, in its discretion, award an
annual bonus in addition to base compensation. Such bonus, if any, shall be
paid in such amount and based upon such criteria as are from time to time
adopted by the Board.
(c) Additional Benefits. Executive also shall be entitled to receive
all benefits for which he is eligible under the terms of any stock incentive
plan, pension plan, SERP, life, medical, dental, vision and disability
insurance and reimbursement programs, and any other plans or arrangements,
which the Company may provide for executive officers from time to time
("Additional Benefits"). Additional Benefits shall in all respects be paid in
accordance with the then-existing plans, or policies, programs, or arrangements
establishing or governing such Additional Benefits. The Company reserves the
right to add, terminate, or amend any existing plans, policies, programs, or
arrangements during the term of this Agreement and at all other times.
(d) Vacation. Vacation, at full pay, of four (4) weeks per calendar
year. Vacation not used during any calendar year may not be carried over to the
following year.
All compensation paid to Executive shall be subject to withholding for
taxes and subject to payroll and other taxes as required by applicable law and
in conformity with the Company's policies relating thereto as in effect from
time to time.
4. TERMINATION OF EMPLOYMENT BY THE COMPANY
The compensation provided for in Section 3 of this Agreement and
Executive's employment by the Company may be terminated by the Company prior to
expiration of the term set forth in Section 1(b) as provided for below:
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<PAGE> 3
(a) Disability. If Executive becomes either partially or totally
unable to perform his duties after the making of reasonable accommodations
because of any physical or mental disability during the term of his employment
hereunder for three (3) consecutive calendar months or for shorter periods
aggregating 90 or more business days in any 12-month period, Executive's
employment may be terminated by the Company at any time during the continuance
of such disability. Upon termination as described in this Section 4(a),
Executive shall be entitled to receive the Base Salary provided for in Section
3(a) of this Agreement for a period of 90 days after such termination. The
Company shall offset against such Base Salary payments any payments received by
Executive as a result of such illness or injury pursuant to any federal or
state program or any salary continuation or similar program or disability
insurance established by the Company.
Upon termination as described in this Section 4(a), Executive shall
resign from his offices as an officer of the Company and its subsidiaries and
the Company shall continue Executive's coverage under any and all life,
medical, dental, vision and disability insurance plans for a period of 120 days
after such termination at the expense of the Company. Other Additional Benefits
shall be made available to Executive as required by applicable laws, including
the health coverage continuation provisions of the Consolidated Omnibus Budget
Reconciliation Act, 29 U.S.C. ss.ss. 1161-1168 ("COBRA"), and by the terms of
the Additional Benefit plans, policies, programs, and arrangements in effect at
the time of termination. Executive's period of coverage under COBRA (29 U.S.C.
ss. 1162(2)), shall begin on the date of the termination of his employment
under this Section 4(a). Executive agrees to execute such documents as may be
requested by the Company in order to comply with its obligations under this
Section 4(a) and under COBRA and other applicable laws. The Company shall
provide Executive with the health coverage continuation benefits specified by
COBRA whether or not the Company is obligated under COBRA to do so.
(b) Death. If Executive dies during the term of this Agreement,
Executive's Beneficiary or Beneficiaries, as defined in Section 7 of this
Agreement, shall be entitled to receive the Base Salary provided for in Section
3(a) of this Agreement for a period of 90 days after the date such death
occurs. Additional Benefits shall be made available to the Beneficiaries of
Executive under the life, medical, dental, vision and other Additional Benefit
plans, policies, programs, and arrangements, as required by applicable laws,
including COBRA, and by the terms of the Additional Benefit plans, policies,
programs, and arrangements in effect at the time of Executive's death. The
Company shall provide Executive's Beneficiaries with the health coverage
continuation benefits specified by COBRA whether or not the Company is
obligated under COBRA to do so.
(c) For Cause. The Company may upon 14 days' notice to Executive
terminate this Agreement and all of its obligations hereunder to Executive
accruing after the date of such termination if the termination is for "cause."
A termination for cause is a termination effected by the Board on one or more
of the following grounds: (i) that Executive has been declared of unsound mind
by a court, (ii) that Executive has been convicted of a felony, (iii) that
Executive has been convicted of a misdemeanor involving moral turpitude, or
(iv) that Executive has repeatedly committed a material breach of this
Agreement (provided that Executive has been notified of the prior breach).
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Except as expressly required by applicable laws, including COBRA if
applicable, and by the terms of the Additional Benefits plans, policies,
programs, and arrangements then in effect, upon such termination, Executive's
rights under Section 3 of this Agreement shall terminate on the date of the
termination of his employment under this Section 4(c). Executive's period of
coverage under COBRA (29 U.S.C. ss. 1162(2)), if any, shall begin on the date
of the termination of his employment under this Section 4(c). Upon termination
as described in this Section 4(c), Executive shall resign from his offices as
an officer of the Company and its subsidiaries. Executive agrees to execute all
documents as may be requested by the Company in order to comply with its
obligations under this Section 4(c) and under COBRA, if applicable, and any
other applicable laws.
(d) Other Termination. The Company may by notice to Executive
terminate Executive's employment for reasons other than those specified in
Sections 4(a) through (c) above. In the event notice of termination of
Executive's employment is given by the Company for reasons other than those
specified in Sections 4(a) through (c), from the date of such notice of
termination Executive shall be entitled to receive only the compensation
specifically provided below:
(i) The Executive's annual Base Salary in effect at the time
of termination until the expiration of the employment period as
provided in Section 1(b) of this Agreement.
(ii) Additional Benefits under any life, medical, dental,
vision and disability insurance and reimbursement programs in which
Executive was participating at the time of notice of termination of
Executive's employment, which benefits shall be continued until the
earlier to occur of the expiration of Executive's employment period as
provided in Section 1(b) or Executive's acceptance of comparable
employment. Additional Benefits under the terms of any stock incentive
plan, pension plan and SERP will not be continued except as expressly
required by applicable laws or by the terms of the Additional Benefits
plans, policies, programs, and arrangements then in effect.
(iii) Immediate acceleration of vesting of stock options and
acceleration of the lapse of restrictions of any restricted stock
awards held by Executive that would have vested or lapsed during the
period between notice of termination of Executive's employment and the
expiration of Executive's employment period as provided in Section
1(b).
Upon termination of Executive's employment as described in this
Section 4(d), Executive shall resign from his offices as an officer of the
Company and its subsidiaries and the Company shall, at the option of Executive,
(i) continue installment payments to Executive on the periodic basis described
in Section 3(a) at the rate and for the duration of the employment period
specified in Section 4(d)(i); or (ii) make a lump sum payment to Executive
equal to seventy-five percent (75%) of the amounts due Executive under Section
4(d)(i) for the duration of the employment period specified therein. A lump sum
payment in accordance with this paragraph shall be made within ten (10) working
days of Executive's election.
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Upon termination of Executive's employment as described in this
Section 4(d), Additional Benefits shall be made available to Executive as
required by applicable laws, including COBRA. Executive's period of coverage
under COBRA (29 U.S.C. ss. 1162(2)), for purposes of this Section 4(d) shall
begin on the date of the termination of the benefits to which Executive is
entitled pursuant to Section 4(d)(ii). Executive agrees to execute such
documents as may be requested by the Company in order to comply with its
obligations under this Section 4(d) and under COBRA and any other applicable
laws. The Company shall provide Executive with the health coverage continuation
benefits specified by COBRA whether or not the Company is obligated under COBRA
to do so.
(e) Constructive Termination. The occurrence of any of the following
events shall be deemed a termination of Executive's employment under Section
4(d) above:
(i) Failure to elect or reelect or otherwise to maintain
Executive in the office or the position, or a substantially equivalent
office or position, with the Company which Executive holds as of the
date of this agreement (or which may be increased from time to time).
(ii) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties
attached to Executive's position with the Company, a reduction in
Executive's Base Salary, as increased from time to time, or the
termination or denial of Executive's rights to a substantial amount of
Additional Benefits as herein provided, any of which is not remedied
within 10 calendar days after receipt by the Company of written notice
from Executive of such change, reduction or termination, as the case
may be.
(iii) The Company shall relocate its principal executive
offices, or require Executive to have his principal location of work
changed, to any location that is in excess of 25 miles from its
present location.
(iv) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor thereto.
5. TERMINATION RELATING TO CHANGE OF CONTROL
(a) Any of the following events shall constitute a "Change of
Control" hereunder:
(i) any "person" (as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Company representing 20% or more of the combined
voting power of the Company's then outstanding securities; or
(ii) during any period of two consecutive years (not
including any period prior to the execution of this Agreement)
individuals who at the beginning of such period
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constitute the Board of Directors of the Company and any new director
whose election by the Board of Directors or nomination for election by
the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation, or the shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
(b) Within 180 days of a Change of Control, Executive may terminate
employment with the Company by delivering written notice of such termination to
the Company, accompanied by Executive's resignation from his offices as an
officer of the Company and its subsidiaries. Upon Executive's termination of
employment as specified in the preceding sentence, or if the Company (or any
successor) terminates Executive's employment for any reason within 180 days of
a Change of Control, Executive shall be entitled to receive:
(i) A lump sum payment equal to three (3) times Executive's
Average Annual Compensation. "Average Annual Compensation" shall mean
the average of Executive's combined salary plus Bonus with respect to
the three calendar years immediately preceding the date of
determination. If Executive was employed for less than a full year by
the Company for any of the three calendar years in the calculation
period, Executive's salary and Bonus for such year(s) shall be
computed on an annualized basis. If Executive was employed by the
Company for less than three calendar years, Average Annual
Compensation shall be computed with respect only to calendar years
during which Executive was employed by the Company. "Bonus" shall mean
the cash portion of any incentive compensation paid to Executive with
respect to a calendar year plus an amount in cash equal to the value
of any restricted stock or stock options received by Executive as a
deferral of or in lieu of a cash bonus. The Company and Executive
acknowledge that at present the Bonus, if any, with respect to a
calendar year is generally determined in January of the next following
calendar year.
(ii) Additional Benefits under any life, medical, dental,
vision and disability insurance and reimbursement programs in which
Executive was participating at the time of notice of termination of
Executive's employment, which benefits shall be continued until the
earlier to occur of the expiration of Executive's employment period as
provided in Section 1(b) or Executive's acceptance of comparable
employment. Additional Benefits under the terms of any stock incentive
plan, pension plan and SERP will not be
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continued except as expressly required by applicable laws or by the
terms of the Additional Benefits plans, policies, programs, and
arrangements then in effect.
(iii) Immediate acceleration of vesting of all stock options
and immediate lapse of restrictions on all restricted stock awards
held by Executive.
(c) In connection with any termination of employment pursuant to this
Section 5, the Company shall provide Executive with outplacement services from
an outplacement firm of Executive's choice up to a maximum cost of $10,000.
(d) If any dispute arises between the Company (or any successor) and
Executive regarding Executive's rights under this Section 5, Executive shall be
entitled to recover his attorneys' fees and costs incurred in connection with
such dispute.
(e) If the aggregate of all amounts received by Executive as a result
of termination of employment pursuant to this Section 5 equals or exceeds an
amount that would cause Executive to be deemed to receive an "excess parachute
payment" as defined in Internal Revenue Code Section 280G and subjects
Executive to an excise tax liability under Internal Revenue Code Section 4999,
Executive shall also be entitled to receive a lump sum payment equal to the
"grossed-up" amount of such excise tax liability and regular federal and state
tax liabilities with respect to the lump sum payment made under this Section
5(e).
(f) Any payments under Sections 5(b)-(e) shall be in lieu of any
payments under Section 4(d).
6. TERMINATION OF EMPLOYMENT BY EXECUTIVE.
(a) In addition to his rights under Section 5 hereof, Executive may
terminate employment with the Company without cause as of a specified date not
less than 30 days and not more than 90 days after delivering written notice of
such termination to the Company. Upon the effective date of such termination,
Executive's right to receive the compensation provided for in Section 3 of this
Agreement shall terminate. The Company may at any time in its sole discretion
waive all or part of the notice period and specify any day in such period that
has not yet occurred as the date of termination for purposes of this Section
6(a); in the event of such occurrence, the Company shall pay Executive the
amount of the compensation provided for in Section 3 of this Agreement for the
remainder of the notice period given by Executive.
(b) Upon termination as described in Section 6(a), Additional Benefits
will be made available to Executive as required by applicable laws, including
COBRA, if applicable, and by the terms of the Additional Benefit plans,
policies, programs, and arrangements in effect at the time of termination.
Executive's period of coverage under COBRA (29 U.S.C. ss. 1162(2)), if any,
shall begin on the date of the termination of his employment under Section
6(a). Executive agrees to execute such documents as may be requested by the
Company in order to comply with its obligations under this Section 6(b) and
under COBRA, if applicable, and any other applicable laws.
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7. DESIGNATION OF BENEFICIARY
Executive may designate one or more persons or entities (including a
trust or trusts or his estate) to receive any compensation payable to him under
Section 4(b) ("Beneficiaries"). If Executive shall designate more than one
Beneficiary, he shall set forth the proportion in which each is to receive such
compensation; any such designation which fails to set forth such proportion
shall be an invalid designation as to all those so designated. Executive also
may designate one or more successor Beneficiaries who shall succeed to the
rights of the Beneficiaries originally designated, in case the latter should
die prior to the receipt of full payment. Executive may from time to time
change any designation so made, and that last designation shall be controlling.
If Executive designates a person other than, or in addition to, his spouse, his
spouse shall specifically approve his designation and authorize the Company to
pay his compensation as designated. In the absence of a valid designation by
Executive meeting the requirements of this Section 7, or in the event of the
death of a Beneficiary for whom no successor Beneficiary has been validly
designated, Executive's compensation, or the portion of such compensation then
payable to such deceased Beneficiary, shall be paid to the administrator or
executor of Executive's estate for the benefit of Executive's estate, who shall
in that event be deemed a Beneficiary under this Section 7.
Executive's designation and his spouse's approval and authorization,
if necessary, must be in the form of a signed writing witnessed by two adult
persons (other than any designated Beneficiary) and must have been delivered to
the Company prior to Executive's death.
8. REIMBURSEMENT OF EXPENDITURES
During the term of this Agreement, the Company shall reimburse
Executive for business expenses reasonably and necessarily incurred by him on
its behalf in accordance with its business-expense reimbursement policies as in
effect from time to time and subject to Executive's furnishing such
substantiation of such expenses as the Company may require.
9. CONFIDENTIAL INFORMATION
During the term of this Agreement, Executive shall not disclose to any
persons (other than another employee of the Company) any confidential
information relating to the business of the Company obtained by him while in
the employ of the Company, without the consent of the Board, except as
necessary or appropriate in the discharge of his obligations to the Company and
its shareholders.
10. NONASSIGNMENT OF EXECUTIVE'S OBLIGATIONS AND DUTIES
The obligations and duties of Executive hereunder shall be personal
and not assignable.
11. AGREEMENT BINDING UPON SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and shall be binding upon
the Company and its respective successors and assigns, including any purchaser
of all or substantially all of its assets, and shall be binding upon
Executive's assigns, executors, administrators, Beneficiaries, or their legal
representatives.
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12. NOTICES
Any notices provided for in this Agreement shall be sent to the
Company at American Health Properties, Inc., 6400 Fiddlers Green Circle, Suite
1800, Englewood, Colorado 80111, Attention: Chairman, Compensation Committee,
or at such other address as the Company may from time to time in writing
designate, and to Executive at 6400 Fiddlers Green Circle, Suite 1800,
Englewood, Colorado 80111, or at such other address as he may from time to time
in writing designate. All notices will be deemed to have been delivered (i) as
of the first to occur of actual receipt or two (2) business days after being
sent by certified mail, return receipt requested, postage paid and properly
addressed to the designated address of the party to whom addressed or (ii) if
notice is given in any other manner, when actually received.
13. ENTIRE AGREEMENT
This instrument contains the entire agreement between the Company and
Executive relating to the subject of Executive's employment by the Company,
except to the extent that the terms and provisions of Additional Benefits,
expense reimbursement policies and Company policies governing executives and
employees generally are (as referred to herein) set forth in other documents.
This Agreement supersedes all prior and contemporaneous oral and written
agreements, understandings, and representations, if any, among the parties,
including all prior agreements relating to the employment of the Executive by
the Company.
14. TERMINATION OF AGREEMENT
This Agreement shall terminate at the end of the period of Executive's
employment, as described in Section 1 of this Agreement (or at the end of any
different period specifically set forth herein for the termination of
Executive's employment), and may be continued thereafter only upon the
execution of a writing to that effect signed by the Company and Executive. If
Executive's employment continues after the termination of this Agreement for
any period during which no such writing is in effect, Executive shall be deemed
to be employed at the will of the Company and his employment may be terminated
at any time with or without notice and with or without cause and without
obligation of any party to any other party.
15. WAIVERS
The waiver or breach of any term or condition of this Agreement will
not be deemed to constitute the waiver of any other breach of the same or any
other term or condition.
16. GOVERNING LAW
This Agreement will be governed by and construed in accordance with
the laws of Colorado.
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17. SEVERABILITY
If any provision or clause of any provision of this Agreement is held
invalid or unenforceable, the remainder of this Agreement shall nevertheless
remain in full force and effect.
18. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which together shall be deemed to
be one and the same instrument.
19. NO CONFLICT WITH PRIOR AGREEMENTS AND RIGHTS
Executive hereby represents and warrants to the Company that neither
the execution of this Agreement nor performance by Executive of his obligations
hereunder conflicts with any contractual commitment on his part to any third
party or violates or interferes with any right of any third party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
"Company"
AMERICAN HEALTH PROPERTIES, INC.
By
-------------------------------------
Joseph P. Sullivan
Chairman, President and
Chief Executive Officer
"Executive"
- - ------------------------------------
C. Gregory Schonert
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EXHIBIT 10.6
AMERICAN HEALTH PROPERTIES, INC.
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
WITH
STEVEN A. ROSEMAN
This Executive Employment Agreement (the "Agreement") is entered into
as of March 15, 1999, between AMERICAN HEALTH PROPERTIES, INC., a Delaware
corporation (the "Company") and Steven A. Roseman, an individual ("Executive").
1. EMPLOYMENT AND TERM
The Company agrees to employ Executive for the period commencing on
the day and the year first written above and ending on the earlier of: (a) the
date of termination of Executive's employment in accordance with Section
4(a)-(c) below or (b) the date that is three (3) years from the date the
Company provides Executive with written notice of termination of Executive's
employment. The Board of Directors of the Company (the "Board") shall review
the terms of Executive's employment on an annual basis and shall make such
modifications to the terms as the Board in its discretion shall deem
appropriate and as Executive shall consent.
2. DUTIES
(a) Executive shall serve in the capacity of Senior Vice President,
Secretary and General Counsel. Executive shall perform such services and duties
as are usually associated with such positions as well as those decided upon by
the President and the Board.
(b) Executive shall devote his full business time and energy to the
business and affairs of the Company and shall use his best efforts and
abilities faithfully and diligently to promote the business interests of the
Company and its subsidiaries as directed by and to the reasonable satisfaction
of the President and the Board.
(c) Executive's services shall be rendered in accordance with such
policies as the Company may establish for the conduct of its officers and
employees.
(d) Provided such services or investments do not violate any
applicable law, regulation or order or interfere in any way with the faithful
and diligent performance by Executive of services to the Company otherwise
required or contemplated by this Agreement or requested by the Board, Executive
may:
(i) Serve as a director, trustee, or in any other similar
capacity of any business enterprise or any civic, educational,
charitable or trade organization if the Board
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has been informed of such service and the Board has not expressly
requested Executive to refuse, or to discontinue, such service, and
(ii) Make and manage personal business investments of
Executive's choice that are consistent with the conflict-of-interest
policies of the Company.
3. COMPENSATION
Commencing as of February 1, 1999, the Company shall compensate
Executive as follows:
(a) Base Salary. Executive shall receive a Base Salary at the rate of
Two Hundred One Thousand Dollars ($201,000) per annum which shall be payable in
semi-monthly installments in conformity with the Company's policy relating to
its employees generally as in effect from time to time. Executive's Base Salary
shall be reviewed periodically by the Board and may be increased by action of
the Board upon such review, but Executive's salary shall not be decreased
except as provided in Sections 4 and 5.
(b) Incentive Compensation. The Board may, in its discretion, award an
annual bonus in addition to base compensation. Such bonus, if any, shall be
paid in such amount and based upon such criteria as are from time to time
adopted by the Board.
(c) Additional Benefits. Executive also shall be entitled to receive
all benefits for which he is eligible under the terms of any stock incentive
plan, pension plan, SERP, life, medical, dental, vision and disability
insurance and reimbursement programs, and any other plans or arrangements,
which the Company may provide for executive officers from time to time
("Additional Benefits"). Additional Benefits shall in all respects be paid in
accordance with the then-existing plans, or policies, programs, or arrangements
establishing or governing such Additional Benefits. The Company reserves the
right to add, terminate, or amend any existing plans, policies, programs, or
arrangements during the term of this Agreement and at all other times.
(d) Vacation. Vacation, at full pay, of four (4) weeks per calendar
year. Vacation not used during any calendar year may not be carried over to the
following year.
All compensation paid to Executive shall be subject to withholding for
taxes and subject to payroll and other taxes as required by applicable law and
in conformity with the Company's policies relating thereto as in effect from
time to time.
4. TERMINATION OF EMPLOYMENT BY THE COMPANY
The compensation provided for in Section 3 of this Agreement and
Executive's employment by the Company may be terminated by the Company prior to
expiration of the term set forth in Section 1(b) as provided for below:
2
<PAGE> 3
(a) Disability. If Executive becomes either partially or totally
unable to perform his duties after the making of reasonable accommodations
because of any physical or mental disability during the term of his employment
hereunder for three (3) consecutive calendar months or for shorter periods
aggregating 90 or more business days in any 12-month period, Executive's
employment may be terminated by the Company at any time during the continuance
of such disability. Upon termination as described in this Section 4(a),
Executive shall be entitled to receive the Base Salary provided for in Section
3(a) of this Agreement for a period of 90 days after such termination. The
Company shall offset against such Base Salary payments any payments received by
Executive as a result of such illness or injury pursuant to any federal or
state program or any salary continuation or similar program or disability
insurance established by the Company.
Upon termination as described in this Section 4(a), Executive shall
resign from his offices as an officer of the Company and its subsidiaries and
the Company shall continue Executive's coverage under any and all life,
medical, dental, vision and disability insurance plans for a period of 120 days
after such termination at the expense of the Company. Other Additional Benefits
shall be made available to Executive as required by applicable laws, including
the health coverage continuation provisions of the Consolidated Omnibus Budget
Reconciliation Act, 29 U.S.C. ss.ss. 1161-1168 ("COBRA"), and by the terms of
the Additional Benefit plans, policies, programs, and arrangements in effect at
the time of termination. Executive's period of coverage under COBRA (29 U.S.C.
ss. 1162(2)), shall begin on the date of the termination of his employment
under this Section 4(a). Executive agrees to execute such documents as may be
requested by the Company in order to comply with its obligations under this
Section 4(a) and under COBRA and other applicable laws. The Company shall
provide Executive with the health coverage continuation benefits specified by
COBRA whether or not the Company is obligated under COBRA to do so.
(b) Death. If Executive dies during the term of this Agreement,
Executive's Beneficiary or Beneficiaries, as defined in Section 7 of this
Agreement, shall be entitled to receive the Base Salary provided for in Section
3(a) of this Agreement for a period of 90 days after the date such death
occurs. Additional Benefits shall be made available to the Beneficiaries of
Executive under the life, medical, dental, vision and other Additional Benefit
plans, policies, programs, and arrangements, as required by applicable laws,
including COBRA, and by the terms of the Additional Benefit plans, policies,
programs, and arrangements in effect at the time of Executive's death. The
Company shall provide Executive's Beneficiaries with the health coverage
continuation benefits specified by COBRA whether or not the Company is
obligated under COBRA to do so.
(c) For Cause. The Company may upon 14 days' notice to Executive
terminate this Agreement and all of its obligations hereunder to Executive
accruing after the date of such termination if the termination is for "cause."
A termination for cause is a termination effected by the Board on one or more
of the following grounds: (i) that Executive has been declared of unsound mind
by a court, (ii) that Executive has been convicted of a felony, (iii) that
Executive has been convicted of a misdemeanor involving moral turpitude, or
(iv) that Executive has repeatedly committed a material breach of this
Agreement (provided that Executive has been notified of the prior breach).
3
<PAGE> 4
Except as expressly required by applicable laws, including COBRA if
applicable, and by the terms of the Additional Benefits plans, policies,
programs, and arrangements then in effect, upon such termination, Executive's
rights under Section 3 of this Agreement shall terminate on the date of the
termination of his employment under this Section 4(c). Executive's period of
coverage under COBRA (29 U.S.C. ss. 1162(2)), if any, shall begin on the date
of the termination of his employment under this Section 4(c). Upon termination
as described in this Section 4(c), Executive shall resign from his offices as
an officer of the Company and its subsidiaries. Executive agrees to execute all
documents as may be requested by the Company in order to comply with its
obligations under this Section 4(c) and under COBRA, if applicable, and any
other applicable laws.
(d) Other Termination. The Company may by notice to Executive
terminate Executive's employment for reasons other than those specified in
Sections 4(a) through (c) above. In the event notice of termination of
Executive's employment is given by the Company for reasons other than those
specified in Sections 4(a) through (c), from the date of such notice of
termination Executive shall be entitled to receive only the compensation
specifically provided below:
(i) The Executive's annual Base Salary in effect at the time
of termination until the expiration of the employment period as
provided in Section 1(b) of this Agreement.
(ii) Additional Benefits under any life, medical, dental,
vision and disability insurance and reimbursement programs in which
Executive was participating at the time of notice of termination of
Executive's employment, which benefits shall be continued until the
earlier to occur of the expiration of Executive's employment period as
provided in Section 1(b) or Executive's acceptance of comparable
employment. Additional Benefits under the terms of any stock incentive
plan, pension plan and SERP will not be continued except as expressly
required by applicable laws or by the terms of the Additional Benefits
plans, policies, programs, and arrangements then in effect.
(iii) Immediate acceleration of vesting of stock options and
acceleration of the lapse of restrictions of any restricted stock
awards held by Executive that would have vested or lapsed during the
period between notice of termination of Executive's employment and the
expiration of Executive's employment period as provided in Section
1(b).
Upon termination of Executive's employment as described in this
Section 4(d), Executive shall resign from his offices as an officer of the
Company and its subsidiaries and the Company shall, at the option of Executive,
(i) continue installment payments to Executive on the periodic basis described
in Section 3(a) at the rate and for the duration of the employment period
specified in Section 4(d)(i); or (ii) make a lump sum payment to Executive
equal to seventy-five percent (75%) of the amounts due Executive under Section
4(d)(i) for the duration of the employment period specified therein. A lump sum
payment in accordance with this paragraph shall be made within ten (10) working
days of Executive's election.
4
<PAGE> 5
Upon termination of Executive's employment as described in this
Section 4(d), Additional Benefits shall be made available to Executive as
required by applicable laws, including COBRA. Executive's period of coverage
under COBRA (29 U.S.C. ss. 1162(2)), for purposes of this Section 4(d) shall
begin on the date of the termination of the benefits to which Executive is
entitled pursuant to Section 4(d)(ii). Executive agrees to execute such
documents as may be requested by the Company in order to comply with its
obligations under this Section 4(d) and under COBRA and any other applicable
laws. The Company shall provide Executive with the health coverage continuation
benefits specified by COBRA whether or not the Company is obligated under COBRA
to do so.
(e) Constructive Termination. The occurrence of any of the following
events shall be deemed a termination of Executive's employment under Section
4(d) above:
(i) Failure to elect or reelect or otherwise to maintain
Executive in the office or the position, or a substantially equivalent
office or position, with the Company which Executive holds as of the
date of this agreement (or which may be increased from time to time).
(ii) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties
attached to Executive's position with the Company, a reduction in
Executive's Base Salary, as increased from time to time, or the
termination or denial of Executive's rights to a substantial amount of
Additional Benefits as herein provided, any of which is not remedied
within 10 calendar days after receipt by the Company of written notice
from Executive of such change, reduction or termination, as the case
may be.
(iii) The Company shall relocate its principal executive
offices, or require Executive to have his principal location of work
changed, to any location that is in excess of 25 miles from its
present location.
(iv) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor thereto.
5. TERMINATION RELATING TO CHANGE OF CONTROL
(a) Any of the following events shall constitute a "Change of
Control" hereunder:
(i) any "person" (as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of the Company representing 20% or more of the combined
voting power of the Company's then outstanding securities; or
(ii) during any period of two consecutive years (not
including any period prior to the execution of this Agreement)
individuals who at the beginning of such period
5
<PAGE> 6
constitute the Board of Directors of the Company and any new director
whose election by the Board of Directors or nomination for election by
the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation, or the shareholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
(b) Within 180 days of a Change of Control, Executive may terminate
employment with the Company by delivering written notice of such termination to
the Company, accompanied by Executive's resignation from his offices as an
officer of the Company and its subsidiaries. Upon Executive's termination of
employment as specified in the preceding sentence, or if the Company (or any
successor) terminates Executive's employment for any reason within 180 days of
a Change of Control, Executive shall be entitled to receive:
(i) A lump sum payment equal to three (3) times Executive's
Average Annual Compensation. "Average Annual Compensation" shall mean
the average of Executive's combined salary plus Bonus with respect to
the three calendar years immediately preceding the date of
determination. If Executive was employed for less than a full year by
the Company for any of the three calendar years in the calculation
period, Executive's salary and Bonus for such year(s) shall be
computed on an annualized basis. If Executive was employed by the
Company for less than three calendar years, Average Annual
Compensation shall be computed with respect only to calendar years
during which Executive was employed by the Company. "Bonus" shall mean
the cash portion of any incentive compensation paid to Executive with
respect to a calendar year plus an amount in cash equal to the value
of any restricted stock or stock options received by Executive as a
deferral of or in lieu of a cash bonus. The Company and Executive
acknowledge that at present the Bonus, if any, with respect to a
calendar year is generally determined in January of the next following
calendar year.
(ii) Additional Benefits under any life, medical, dental,
vision and disability insurance and reimbursement programs in which
Executive was participating at the time of notice of termination of
Executive's employment, which benefits shall be continued until the
earlier to occur of the expiration of Executive's employment period as
provided in Section 1(b) or Executive's acceptance of comparable
employment. Additional Benefits under the terms of any stock incentive
plan, pension plan and SERP will not be continued except as expressly
required by applicable laws or by the terms of the Additional Benefits
plans, policies, programs, and arrangements then in effect.
6
<PAGE> 7
(iii) Immediate acceleration of vesting of all stock options
and immediate lapse of restrictions on all restricted stock awards
held by Executive.
(c) In connection with any termination of employment pursuant to this
Section 5, the Company shall provide Executive with outplacement services from
an outplacement firm of Executive's choice up to a maximum cost of $10,000.
(d) If any dispute arises between the Company (or any successor) and
Executive regarding Executive's rights under this Section 5, Executive shall be
entitled to recover his attorneys' fees and costs incurred in connection with
such dispute.
(e) If the aggregate of all amounts received by Executive as a result
of termination of employment pursuant to this Section 5 equals or exceeds an
amount that would cause Executive to be deemed to receive an "excess parachute
payment" as defined in Internal Revenue Code Section 280G and subjects
Executive to an excise tax liability under Internal Revenue Code Section 4999,
Executive shall also be entitled to receive a lump sum payment equal to the
"grossed-up" amount of such excise tax liability and regular federal and state
tax liabilities with respect to the lump sum payment made under this Section
5(e).
(f) Any payments under Sections 5(b)-(e) shall be in lieu of any
payments under Section 4(d).
6. TERMINATION OF EMPLOYMENT BY EXECUTIVE.
(a) In addition to his rights under Section 5 hereof, Executive may
terminate employment with the Company without cause as of a specified date not
less than 30 days and not more than 90 days after delivering written notice of
such termination to the Company. Upon the effective date of such termination,
Executive's right to receive the compensation provided for in Section 3 of this
Agreement shall terminate. The Company may at any time in its sole discretion
waive all or part of the notice period and specify any day in such period that
has not yet occurred as the date of termination for purposes of this Section
6(a); in the event of such occurrence, the Company shall pay Executive the
amount of the compensation provided for in Section 3 of this Agreement for the
remainder of the notice period given by Executive.
(b) Upon termination as described in Section 6(a), Additional Benefits
will be made available to Executive as required by applicable laws, including
COBRA, if applicable, and by the terms of the Additional Benefit plans,
policies, programs, and arrangements in effect at the time of termination.
Executive's period of coverage under COBRA (29 U.S.C. ss. 1162(2)), if any,
shall begin on the date of the termination of his employment under Section
6(a). Executive agrees to execute such documents as may be requested by the
Company in order to comply with its obligations under this Section 6(b) and
under COBRA, if applicable, and any other applicable laws.
7
<PAGE> 8
7. DESIGNATION OF BENEFICIARY
Executive may designate one or more persons or entities (including a
trust or trusts or his estate) to receive any compensation payable to him under
Section 4(b) ("Beneficiaries"). If Executive shall designate more than one
Beneficiary, he shall set forth the proportion in which each is to receive such
compensation; any such designation which fails to set forth such proportion
shall be an invalid designation as to all those so designated. Executive also
may designate one or more successor Beneficiaries who shall succeed to the
rights of the Beneficiaries originally designated, in case the latter should
die prior to the receipt of full payment. Executive may from time to time
change any designation so made, and that last designation shall be controlling.
If Executive designates a person other than, or in addition to, his spouse, his
spouse shall specifically approve his designation and authorize the Company to
pay his compensation as designated. In the absence of a valid designation by
Executive meeting the requirements of this Section 7, or in the event of the
death of a Beneficiary for whom no successor Beneficiary has been validly
designated, Executive's compensation, or the portion of such compensation then
payable to such deceased Beneficiary, shall be paid to the administrator or
executor of Executive's estate for the benefit of Executive's estate, who shall
in that event be deemed a Beneficiary under this Section 7.
Executive's designation and his spouse's approval and authorization,
if necessary, must be in the form of a signed writing witnessed by two adult
persons (other than any designated Beneficiary) and must have been delivered to
the Company prior to Executive's death.
8. REIMBURSEMENT OF EXPENDITURES
During the term of this Agreement, the Company shall reimburse
Executive for business expenses reasonably and necessarily incurred by him on
its behalf in accordance with its business-expense reimbursement policies as in
effect from time to time and subject to Executive's furnishing such
substantiation of such expenses as the Company may require. Without limitation
on the foregoing, the Company shall reimburse Executive for bar association
dues and the costs of attendance at continuing legal education seminars.
9. CONFIDENTIAL INFORMATION
During the term of this Agreement, Executive shall not disclose to any
persons (other than another employee of the Company) any confidential
information relating to the business of the Company obtained by him while in
the employ of the Company, without the consent of the Board, except as
necessary or appropriate in the discharge of his obligations to the Company and
its shareholders.
10. NONASSIGNMENT OF EXECUTIVE'S OBLIGATIONS AND DUTIES
The obligations and duties of Executive hereunder shall be personal
and not assignable.
8
<PAGE> 9
11. AGREEMENT BINDING UPON SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and shall be binding upon
the Company and its respective successors and assigns, including any purchaser
of all or substantially all of its assets, and shall be binding upon
Executive's assigns, executors, administrators, Beneficiaries, or their legal
representatives.
12. NOTICES
Any notices provided for in this Agreement shall be sent to the
Company at American Health Properties, Inc., 6400 Fiddlers Green Circle, Suite
1800, Englewood, Colorado 80111, Attention: Chairman, Compensation Committee,
or at such other address as the Company may from time to time in writing
designate, and to Executive at 6400 Fiddlers Green Circle, Suite 1800,
Englewood, Colorado 80111, or at such other address as he may from time to time
in writing designate. All notices will be deemed to have been delivered (i) as
of the first to occur of actual receipt or two (2) business days after being
sent by certified mail, return receipt requested, postage paid and properly
addressed to the designated address of the party to whom addressed or (ii) if
notice is given in any other manner, when actually received.
13. ENTIRE AGREEMENT
This instrument contains the entire agreement between the Company and
Executive relating to the subject of Executive's employment by the Company,
except to the extent that the terms and provisions of Additional Benefits,
expense reimbursement policies and Company policies governing executives and
employees generally are (as referred to herein) set forth in other documents.
This Agreement supersedes all prior and contemporaneous oral and written
agreements, understandings, and representations, if any, among the parties,
including all prior agreements relating to the employment of the Executive by
the Company.
14. TERMINATION OF AGREEMENT
This Agreement shall terminate at the end of the period of Executive's
employment, as described in Section 1 of this Agreement (or at the end of any
different period specifically set forth herein for the termination of
Executive's employment), and may be continued thereafter only upon the
execution of a writing to that effect signed by the Company and Executive. If
Executive's employment continues after the termination of this Agreement for
any period during which no such writing is in effect, Executive shall be deemed
to be employed at the will of the Company and his employment may be terminated
at any time with or without notice and with or without cause and without
obligation of any party to any other party.
15. WAIVERS
The waiver or breach of any term or condition of this Agreement will
not be deemed to constitute the waiver of any other breach of the same or any
other term or condition.
9
<PAGE> 10
16. GOVERNING LAW
This Agreement will be governed by and construed in accordance with
the laws of Colorado.
17. SEVERABILITY
If any provision or clause of any provision of this Agreement is held
invalid or unenforceable, the remainder of this Agreement shall nevertheless
remain in full force and effect.
18. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which together shall be deemed to
be one and the same instrument.
19. NO CONFLICT WITH PRIOR AGREEMENTS AND RIGHTS
Executive hereby represents and warrants to the Company that neither
the execution of this Agreement nor performance by Executive of his obligations
hereunder conflicts with any contractual commitment on his part to any third
party or violates or interferes with any right of any third party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
"Company"
AMERICAN HEALTH PROPERTIES, INC.
By
-----------------------------------------
Joseph P. Sullivan
Chairman, President and
Chief Executive Officer
"Executive"
- - -----------------------------
Steven A. Roseman
10
<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
AHE of Somerville, Inc. Massachusetts
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 Ohio, Inc. Ohio
AHP of Oregon, Inc. Oregon
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
American Health Properties of Arizona,
Inc. Arizona
</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 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,817
<SECURITIES> 0
<RECEIVABLES> 7,359
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 851,465
<DEPRECIATION> (121,726)
<TOTAL-ASSETS> 753,842
<CURRENT-LIABILITIES> 0
<BONDS> 239,936
0
100,002
<COMMON> 250
<OTHER-SE> 310,613
<TOTAL-LIABILITY-AND-EQUITY> 753,842
<SALES> 0
<TOTAL-REVENUES> 112,722
<CGS> 0
<TOTAL-COSTS> 27,123
<OTHER-EXPENSES> 8,330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,609
<INCOME-PRETAX> 46,465
<INCOME-TAX> 0
<INCOME-CONTINUING> 46,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,465
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F2>
<FN>
<F1>(1) Basic earnings per share attributable to -
Core Group Common Stock
Net income $ 1.77
Psychiatric Group Depositary Shares
Net loss $(2.49)
<F2>(2) Diluted earnings per share attributable to -
Core Group Common Stock
Net income $ 1.75
Psychiatric Group Depositary Shares
Net loss $(2.49)
</FN>
</TABLE>
