<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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, CO
(Address of principal executive offices)
</TABLE>
(303) 796-9793
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE,
OUTSTANDING AT MAY 7, 1999 -- 24,984,422
SHARES OF REGISTRANT'S PSYCHIATRIC GROUP DEPOSITARY SHARES, EACH
REPRESENTING ONE-TENTH OF ONE SHARE OF PSYCHIATRIC GROUP PREFERRED STOCK, $.01
PAR VALUE, OUTSTANDING AT MAY 7, 1999 -- 2,083,931.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
AMERICAN HEALTH PROPERTIES, INC.
MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
CONSOLIDATED COMPANY
Item 1. Consolidated Condensed Financial Statements:
Balance sheets as of March 31, 1999 and December 31, 1998.......................................... 2
Statements of operations for the three months ended March 31, 1999 and 1998........................ 3
Statements of cash flows for the three months ended March 31, 1999 and 1998........................ 5
Notes to financial statements...................................................................... 6
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations...................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 14
CORE GROUP
Item 1. Core Group Combined Condensed Financial Statements:
Balance sheets as of March 31, 1999 and December 31, 1998.......................................... 17
Statements of operations for the three months ended March 31, 1999 and 1998........................ 18
Statements of cash flows for the three months ended March 31, 1999 and 1998........................ 19
Notes to financial statements...................................................................... 20
Item 2. Management's Discussion and Analysis of Core Group
Combined Financial Condition and Results of Operations............................................. 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 28
PSYCHIATRIC GROUP
Item 1. Psychiatric Group Combined Condensed Financial Statements:
Balance sheets as of March 31, 1999 and December 31, 1998.......................................... 31
Statements of operations for the three months ended March 31, 1999 and 1998........................ 32
Statements of cash flows for the three months ended March 31, 1999 and 1998........................ 33
Notes to financial statements...................................................................... 34
Item 2. Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations............................................. 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 39
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................... 42
</TABLE>
1
<PAGE> 3
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate investments
Real property and mortgage notes $ 840,558 $ 841,618
Construction in progress 20,888 14,247
Accumulated depreciation (127,305) (121,726)
------------ ------------
734,141 734,139
Other notes receivable and direct financing leases 3,658 3,638
Other assets 13,192 12,248
Cash and short-term investments 1,886 3,817
------------ ------------
$ 752,877 $ 753,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable $ 75,000 $ 69,000
Mortgage notes payable 20,619 20,772
Notes and bonds payable 219,191 219,164
Accounts payable and accrued liabilities 9,934 15,278
Dividends payable 15,031 15,031
Deferred income 3,551 3,732
------------ ------------
343,326 342,977
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
8.60% 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 shares issued and outstanding 250 250
Additional paid-in capital 520,133 519,738
Cumulative net income 344,673 329,918
Cumulative dividends (555,507) (539,043)
------------ ------------
409,551 410,865
------------ ------------
$ 752,877 $ 753,842
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Rental income $ 24,188 $ 21,358
Mortgage interest income 117 1,653
Additional rental and interest income 3,339 3,420
Other property income 700 335
Other interest income 147 241
------------ ------------
28,491 27,007
------------ ------------
EXPENSES
Depreciation and amortization 5,617 4,874
Property operating 1,610 1,215
Interest expense 5,520 4,942
General and administrative 2,224 2,106
------------ ------------
14,971 13,137
------------ ------------
Minority interest 48 47
------------ ------------
INCOME BEFORE GAIN ON SALE OF PROPERTY 13,472 13,823
GAIN ON SALE OF PROPERTY 1,283 --
------------ ------------
NET INCOME $ 14,755 $ 13,823
============ ============
SERIES B PREFERRED DIVIDEND REQUIREMENT $ (2,150) $ (2,150)
============ ============
ATTRIBUTABLE TO CORE GROUP COMMON STOCK
AND PSYCHIATRIC GROUP DEPOSITARY SHARES -
INCOME BEFORE GAIN ON SALE OF PROPERTY $ 11,322 $ 11,673
============ ============
NET INCOME $ 12,605 $ 11,673
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (continued)
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Net income $ 11,212 $ 10,434
Basic per share amounts -
Net income $ 0.45 $ 0.44
Weighted average common shares 24,988 23,716
Diluted per share amounts -
Net income $ 0.45 $ 0.43
Weighted average common shares and
dilutive potential common shares 25,166 23,992
Dividends declared per common share $ 0.565 $ 0.545
PSYCHIATRIC GROUP DEPOSITARY SHARES
Income before gain on sale of property $ 110 $ 1,239
Gain on sale of property $ 1,283 $ --
Net income $ 1,393 $ 1,239
Basic per share amounts -
Income before gain on sale of property $ 0.05 $ 0.59
Gain on sale of property $ 0.62 $ --
Net income $ 0.67 $ 0.59
Weighted average depositary shares 2,084 2,084
Diluted per share amounts -
Income before gain on sale of property $ 0.05 $ 0.59
Gain on sale of property $ 0.60 $ --
Net income $ 0.65 $ 0.59
Weighted average depositary shares and
dilutive potential depositary shares 2,142 2,102
Dividends declared per depositary share $ 0.095 $ 0.640
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,755 $ 13,823
Depreciation, amortization and other non-cash items 6,272 5,503
Deferred income (156) (44)
Gain on sale of property (1,283) --
Change in other assets (1,193) (365)
Change in accounts payable and accrued liabilities (5,369) (4,343)
------------ ------------
13,026 14,574
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (6,781) (43,776)
Proceeds from sale of property 2,483 --
Mortgage note receivable fundings -- (179)
Principal payments on mortgage notes receivable -- 21
Other notes receivable (308) --
Direct financing leases 288 259
Administrative capital expenditures (18) (13)
------------ ------------
(4,336) (43,688)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 6,000 15,000
Principal payments on mortgage notes payable (153) (103)
Financing costs paid (4) (6)
Proceeds from sale of common stock -- 9,475
Proceeds from exercise of stock options -- 1,045
Cash dividends paid (16,464) (16,294)
------------ ------------
(10,621) 9,117
------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (1,931) (19,997)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 3,817 23,053
------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,886 $ 3,056
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living, Alzheimer's care and
medical office/clinic facilities.
The Company's common stock (the Core Group Common Stock) is currently
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
currently 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 currently 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.
Subsequent to the end of the first quarter, the Company announced that
it will redeem all of the outstanding Psychiatric Group Depositary Shares, and
the underlying Psychiatric Group Preferred Stock represented thereby, for $2.08
per Depositary Share payable in cash on May 21, 1999. The Board determined,
after taking into account the assets and liabilities of the Psychiatric Group,
that the net fair market value of the Psychiatric Group is $4,250,000. Pursuant
to the Certificate of Designations for the Psychiatric Group Preferred Stock,
the total amount to be distributed in redemption of the Psychiatric Group
Depositary Shares, and the underlying Psychiatric Group Preferred Stock
represented thereby, will equal $4,462,500 (105% of the net fair market value
of the Psychiatric Group), or $2.08 per Depositary Share on a fully diluted
basis.
Upon redemption of the Psychiatric Group Depositary Shares, and the
underlying Psychiatric Group Preferred Stock represented thereby, the Company's
common stock will reflect the financial performance of the entire Company.
Accordingly, the Company anticipates that only consolidated financial
statements will be presented after May 21, 1999.
Basis of Presentation The consolidated condensed financial statements
of the Company included herein have been prepared by the Company without audit
and include all normal, recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with those
included in the Company's annual report on Form 10-K for the year ended
December 31, 1998. The financial statements of the Core Group and the
Psychiatric Group, which are included elsewhere herein, should also be read in
conjunction with these financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6
<PAGE> 8
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
New Accounting Standards Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities",
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 Company's financial statements.
Interest Paid Interest paid by the Company, net of interest
capitalized, was $9,153,000 and $8,529,000 for the three months ended March 31,
1999 and 1998, respectively. The Company had $353,000 and $118,000 of
capitalized interest for the three months ended March 31, 1999 and 1998,
respectively.
2. SALE OF REAL ESTATE
Subsequent to the end of the first quarter, the Company completed the
sale of Kendall Regional Medical Center (Kendall) on April 16, 1999 to an
affiliate of Columbia/HCA Healthcare Corporation (Columbia) for a gross
purchase price of $105 million. As a result of the Kendall sale, the Company
will recognize a gain for book purposes of over $50 million in the second
quarter of 1999. Kendall had been leased to a subsidiary of Columbia and
generated aggregate revenues of approximately $10.3 million in 1998, or 9% of
the Company's total revenues. The Kendall sale resulted from Columbia's
exercise of its option to purchase Kendall at fair market value pursuant to the
terms of the lease. To complete the Kendall sale, the purchaser paid $75
million in cash, and assumed and paid $30 million of borrowings outstanding
under the Company's bank credit facility. Since the Company currently intends
to effect a "deferred like-kind" 1031 exchange for tax purposes, the net cash
proceeds of $73.65 million were delivered to a third-party intermediary, which
will use such proceeds to purchase and convey to the Company like-kind
replacement property selected by the Company. Pursuant to Section 1031 of the
Internal Revenue Code, the Company must identify potential replacement
properties by May 28, 1999 and must acquire all identified replacement
properties it will acquire as part of the exchange by October 13, 1999. If the
Company is successful in identifying and acquiring a sufficient amount of
like-kind replacement properties within the required time limits, the Company
should not recognize current taxable gain and, accordingly, should incur no tax
liability as a result of the transaction. Furthermore, in that event, there
should be no impact on the Company's REIT distribution requirements. If the
Company does not complete the transaction as an exchange, the tax liability
incurred and recognized by the Company for book purposes, as well as the impact
on the Company's REIT distribution requirements will depend on the tax position
of the Company as a whole. The Company cannot be assured that total revenues
generated by replacement properties 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.
3. COMMITMENTS
As of March 31, 1999, the Company had funded $7,088,000 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
March 31, 1999, the Company had funded $11,091,000 of an $18.6 million
commitment to develop three assisted living facilities to be managed by an
experienced operator of assisted living facilities. The lease commenced on one
of these facilities in April 1999 after its construction was completed at a
total cost of $4.5 million. The Company has a $22.5 million forward funding
commitment to
7
<PAGE> 9
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 31, 1999, $1,705,000 was funded under this
commitment for the development of two facilities having a total development
cost of approximately $5.6 million. The Company has also funded $1,004,000 as
of March 31, 1999 toward completion of a $5.7 million medical office/clinic
facility under development in Roseburg, Oregon that is master-leased to the
operator of the adjacent hospital.
4. STOCKHOLDERS' EQUITY
Stock Incentive Plans During the three months ended March 31, 1999,
options to purchase 358,000 shares of Core Group Common Stock at a weighted
average exercise price of $20.27 per share were issued pursuant to the
Company's stock incentive plans.
5. 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 gain on sale
of property attributable to Core Group Common Stock and Psychiatric Group
Depositary Shares:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------
1999 1998
--------------------- ---------------------
(In thousands) Income Shares Income Shares
--------------------- ---------------------
<S> <C> <C> <C> <C>
ATTRIBUTABLE TO CORE GROUP
Net income $ 13,362 -- $ 12,584 --
Less Series B preferred dividend requirement (2,150) -- (2,150) --
Outstanding common shares -- 24,984 -- 23,715
Deferred common shares -- 4 -- 1
-------- -------- -------- --------
Basic EPS components 11,212 24,988 10,434 23,716
Effect of dilutive potential common shares-
Stock options -- 3 -- 145
DER's -- 175 -- 131
Subordinated convertible bonds payable -- -- -- --
-------- -------- -------- --------
Diluted EPS components $ 11,212 25,166 $ 10,434 23,992
======== ======== ======== ========
ATTRIBUTABLE TO PSYCHIATRIC GROUP
Income before gain on sale of property $ 110 -- $ 1,239 --
Outstanding depositary shares -- 2,084 -- 2,084
-------- -------- -------- --------
Basic EPS components 110 2,084 1,239 2,084
Effect of dilutive potential depositary shares-
Stock options -- -- -- --
DER's -- 58 -- 18
-------- -------- -------- --------
Diluted EPS components $ 110 2,142 $ 1,239 2,102
======== ======== ======== ========
</TABLE>
8
<PAGE> 10
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. SEGMENT INFORMATION
During the first quarter of 1999, the Company had two reportable
operating segments, the Core Group and the Psychiatric Group, for which
separate financial information was available and whose operating results were
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Operating results of the Core
Group reflected 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 reflected
the separate financial performance of a distinct portfolio of the Company's
investments in psychiatric hospitals. The Company evaluated performance based
on profit or loss from operations before depreciation and amortization,
impairment losses on real estate and notes receivable and gains on the sale of
property. During the first quarter of 1999, the reportable segments were
business units of the Company that were managed separately based on the two
distinct portfolios, with two distinct classes of publicly-traded shares
intended to represent those portfolios. Segment financial information for these
two business units are summarized in the table below. Upon redemption of the
Psychiatric Group Depositary Shares, the Company will only have one reportable
operating segment.
<TABLE>
<CAPTION>
CORE GROUP PSYCHIATRIC GROUP SEGMENT TOTALS
--------------------------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total segment revenue (1) $ 28,115 $ 25,103 $ 406 $ 2,269 $ 28,521 $ 27,372
Real estate depreciation 5,449 4,661 110 188 5,559 4,849
Gain on sale of property -- -- 1,283 -- 1,283 --
Segment operating profit 18,811 17,245 220 1,427 19,031 18,672
</TABLE>
(1) The difference between total consolidated revenues and total segment
revenues represents interest income on inter-Group loans of $30 and $365
for the three months ended March 31, 1999 and 1998, respectively.
9
<PAGE> 11
AMERICAN HEALTH PROPERTIES, INC.
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 anticipated funds from operations of
the Company, 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 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, the Company's
ability to close on future 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 a successful 1031 exchange in connection with the
sale of Kendall Regional Medical Center in which the Company acquires
replacement properties 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.
10
<PAGE> 12
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
First Quarter 1999 Compared With 1998
For the first quarter of 1999, the Company reported income before gain
on sale of property attributable to Core Group Common Stock and Psychiatric
Group Depositary Shares of $13,472,000 compared with $13,823,000 for the first
quarter of 1998. For the first quarter of 1999, the Company reported net income
attributable to Core Group Common Stock and Psychiatric Group Depositary Shares
of $14,755,000, which included a gain on sale of property of $1,283,000,
compared with $13,823,000 for the first quarter of 1998. See the Consolidated
Condensed 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 $24,188,000 for the first quarter of 1999, an
increase of $2,830,000 or 13% from $21,358,000 for the first quarter of 1998.
This increase was primarily attributable to rental income from new Core Group
properties acquired subsequent to the first quarter of 1998. These property
additions also resulted in an increase in depreciation and amortization of
$743,000 or 15% to $5,617,000 for the first quarter of 1999 compared with
$4,874,000 for the first quarter of 1998.
Mortgage interest income was $117,000 for the first quarter of 1999, a
decrease of $1,536,000 or 93% from $1,653,000 for the first quarter of 1998. On
July 1, 1998, the Company received $35 million as payment in full of its
Psychiatric Group's two New York Four Winds mortgage loans resulting in a
decrease in mortgage interest income in the first quarter of 1999.
Additional rental and interest income was $3,339,000 for the first
quarter of 1999, a decrease of $81,000 or 2% from $3,420,000 for the first
quarter of 1998. The decrease in additional rental and interest income was
attributable to decreases in additional rent/interest of $265,000 from
psychiatric properties and $76,000 from rehabilitation properties, partially
offset by increases in additional rent of $232,000 from acute care properties
and $28,000 from long-term care properties.
Other property income was $700,000 for the first quarter of 1999, an
increase of $365,000 from $335,000 for the first quarter of 1998. The first
quarter of 1999 included other property income for eight multi-tenant
facilities in operation during the entire quarter compared to the first quarter
of 1998 which included other property income for six multi-tenant facilities,
three of which were acquired during the first quarter of 1998.
Other interest income decreased $94,000 or 39% to $147,000 for the
first quarter of 1999 from $241,000 for the first quarter of 1998. The decrease
in other interest income for the first quarter of 1999 resulted primarily from
lower investable cash balances and a lower average balance of direct financing
leases during the first quarter of 1999 compared to the first quarter of 1998.
In addition, interest income decreased as a result of the write-off, at the end
of 1998, of the outstanding borrowings under a revolving credit agreement
provided to a psychiatric hospital operator. 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 a working capital loan provided to the operator
of the Sunrise psychiatric facility in the fourth quarter of 1998.
Property operating expense was $1,610,000 for the first quarter of
1999, an increase of $395,000 or 33% from $1,215,000 for the first quarter of
1998. The first quarter of 1999 included property operating expenses for eight
multi-tenant facilities in operations during the entire quarter compared to the
first quarter of 1998 which included property operating expenses for six
multi-tenant facilities, three of which were acquired
11
<PAGE> 13
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
during the first quarter of 1998. The increase is partially offset by a
decrease in property operating expenses for the first quarter of 1999 compared
to the same period in 1998 for the maintenance and protection of a closed
psychiatric property in Florida.
Interest expense was $5,520,000 for the first quarter of 1999, an
increase of $578,000 or 12% from $4,942,000 for the first quarter of 1998. This
increase was primarily attributable to a higher average balance of bank credit
facility borrowings and the assumption of one mortgage loan in connection with
the acquisition of a medical office/clinic facility subsequent to the first
quarter of 1998. The increase was partially offset by a higher level of
capitalized interest in 1999 compared to 1998 and a reduction in interest
expense as a result of the redemption of the Company's Convertible Dual
Currency Subordinated Bonds on December 30, 1998.
General and administrative expenses were $2,224,000 for the first
quarter of 1999, an increase of $118,000 or 6% from $2,106,000 for the first
quarter of 1998. This variation was primarily attributable to hiring of
additional personnel, expansion of property management capabilities and higher
compensation and benefits expense, partially offset by a reduction in
consulting expenses.
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 of the Company's operators and tenants.
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 significantly reduce the projected amount of increase in Medicare spending.
In addition, the Budget Act repealed certain limits on states' ability to
reduce their Medicaid reimbursement levels. The Budget Act has the potential to
significantly reduce 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
12
<PAGE> 14
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 it with new opportunities
for investment.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing to enforce compliance with program requirements
aggressively and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health care
services that are reimbursed under the Medicare and Medicaid programs continues
to increase as the population ages. 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 of the Company's operators and tenants may decrease.
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 Company's 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.
Subsequent to the end of the first quarter, the Company completed the
sale of Kendall Regional Medical Center (Kendall) on April 16, 1999 to an
affiliate of Columbia/HCA Healthcare Corporation (Columbia) for a gross
purchase price of $105 million. As a result of the Kendall sale, the Company
will recognize a gain for book purposes of over $50 million in the second
quarter of 1999. Kendall had been leased to a subsidiary of Columbia and
generated aggregate revenues of approximately $10.3 million in
13
<PAGE> 15
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1998, or 9% of the Company's total revenues. The Kendall sale resulted from
Columbia's exercise of its option to purchase Kendall at fair market value
pursuant to the terms of the lease. To complete the Kendall sale, the purchaser
paid $75 million in cash, and assumed and paid $30 million of borrowings
outstanding under the Company's bank credit facility. Since the Company
currently intends to effect a "deferred like-kind" 1031 exchange for tax
purposes, the net cash proceeds of $73.65 million were delivered to a
third-party intermediary, which will use such proceeds to purchase and convey
to the Company like-kind replacement property selected by the Company. Pursuant
to Section 1031 of the Internal Revenue Code, the Company must identify
potential replacement properties by May 28, 1999 and must acquire all
identified replacement properties it will acquire as part of the exchange by
October 13, 1999. If the Company is successful in identifying and acquiring a
sufficient amount of like-kind replacement properties within the required time
limits, the Company should not recognize current taxable gain and, accordingly,
should incur no tax liability as a result of the transaction. Furthermore, in
that event, there should be no impact on the Company's REIT distribution
requirements. If the Company does not complete the transaction as an exchange,
the tax liability incurred and recognized by the Company for book purposes, as
well as the impact on the Company's REIT distribution requirements will depend
on the tax position of the Company as a whole. The Company cannot be assured
that total revenues generated by replacement properties 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.
Quantitative and Qualitative Disclosures About Market Risk -- 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
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.
14
<PAGE> 16
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent to the end of the first quarter, the Company announced that
it will redeem all of the outstanding Psychiatric Group Depositary Shares, and
the underlying Psychiatric Group Preferred Stock represented thereby, for $2.08
per Depositary Share payable in cash on May 21, 1999. The Board determined,
after taking into account the assets and liabilities of the Psychiatric Group,
that the net fair market value of the Psychiatric Group is $4,250,000. Pursuant
to the Certificate of Designations for the Psychiatric Group Preferred Stock,
the total amount to be distributed in redemption of the Psychiatric Group
Depositary Shares, and the underlying Psychiatric Group Preferred Stock
represented thereby, will equal $4,462,500 (105% of the net fair market value
of the Psychiatric Group), or $2.08 per Depositary Share on a fully diluted
basis. Upon redemption of the Psychiatric Group Depositary Shares, and the
underlying Psychiatric Group Preferred Stock represented thereby, the Company's
common stock will reflect the financial performance of the entire Company.
Accordingly, the Company anticipates that only consolidated financial
statements will be presented after May 21, 1999.
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. The
Company does not expect the costs to remediate its Year 2000 Issues to be
material and 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
15
<PAGE> 17
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 May 7, 1999, the Company had a remaining commitment of
approximately $2.0 million to fund the development of one skilled nursing
facility. The Company's remaining commitment to fund the development of two
assisted living facilities was approximately $6.1 million as of May 7, 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 May 7, 1999, $2.0 million was funded under this commitment for
the development of two facilities having total development costs of
approximately $5.6 million. The Company's expected future funding to complete
development of a medical office/clinic facility was $4.5 million as of May 7,
1999.
As of May 7, 1999, the Company had $36.5 million of outstanding
borrowings under its $250 million bank credit facility and had $3.5 million in
cash and short-term investments. The Company's total indebtedness as of May 7,
1999 was $276.3 million. The Company expects to utilize its bank credit
facility to fund future property acquisitions and 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.
16
<PAGE> 18
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate investments
Real property and mortgage notes $ 835,856 $ 835,716
Construction in progress 20,888 14,247
Accumulated depreciation (126,424) (120,955)
------------ ------------
730,320 729,008
Other note receivable and direct financing leases 3,458 3,443
Other assets 13,140 12,218
Cash and short-term investments 1,872 2,326
------------ ------------
$ 748,790 $ 746,995
============ ============
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable $ 75,000 $ 69,000
Mortgage notes payable 20,619 20,772
Notes and bonds payable 219,191 219,164
Revolving loans from Psychiatric Group 4,123 180
Accounts payable and accrued liabilities 9,514 14,834
Dividends payable 14,833 14,833
Deferred income 3,551 3,732
------------ ------------
346,831 342,515
------------ ------------
Commitments and contingencies
Total Attributed Core Group Equity 401,959 404,480
------------ ------------
$ 748,790 $ 746,995
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 19
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Rental income $ 23,856 $ 21,003
Mortgage interest income 117 113
Additional rental income 3,310 3,126
Other property income 700 335
Other interest income 132 161
Interest income on loans to Psychiatric Group -- 365
------------ ------------
28,115 25,103
------------ ------------
EXPENSES
Depreciation and amortization 5,507 4,686
Property operating 1,535 990
Interest expense 5,520 4,942
Interest expense on loans from Psychiatric Group 30 --
General and administrative 2,113 1,854
------------ ------------
14,705 12,472
------------ ------------
Minority interest 48 47
------------ ------------
NET INCOME $ 13,362 $ 12,584
============ ============
SERIES B PREFERRED DIVIDEND REQUIREMENT $ (2,150) $ (2,150)
============ ============
ATTRIBUTABLE TO CORE GROUP COMMON STOCK -
NET INCOME $ 11,212 $ 10,434
============ ============
Basic per share amounts -
Net income $ 0.45 $ 0.44
Weighted average common shares 24,988 23,716
Diluted per share amounts -
Net income $ 0.45 $ 0.43
Weighted average common shares and
dilutive potential common shares 25,166 23,992
Dividends declared per common share $ 0.565 $ 0.545
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 20
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 13,362 $ 12,584
Depreciation, amortization and other non-cash items 6,150 5,285
Deferred income (156) (40)
Change in other assets (1,171) (365)
Change in accounts payable and accrued liabilities (5,345) (4,739)
------------ ------------
12,840 12,725
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (6,781) (43,776)
Mortgage note receivable fundings -- (179)
Other note receivable (303) --
Direct financing leases 288 259
Paydowns on revolving loans to Psychiatric Group -- 578
Administrative capital expenditures (18) (13)
------------ ------------
(6,814) (43,131)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 6,000 15,000
Principal payments on mortgage notes payable (153) (103)
Financing costs paid (4) (6)
Advances on revolving loans from Psychiatric Group 3,943 --
Proceeds from sale of common stock -- 9,475
Proceeds from exercise of stock options -- 1,045
Cash dividends paid (16,266) (15,002)
------------ ------------
(6,480) 10,409
------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (454) (19,997)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 2,326 23,053
------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,872 $ 3,056
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 21
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living, Alzheimer's care and
medical office/clinic facilities.
Basis of Presentation The Company's common stock (the Core Group
Common Stock) is currently 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 currently 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 currently attributed to the
Company's Core Group for financial accounting and reporting purposes.
The combined condensed financial statements of the Core Group included
herein have been prepared by the Company without audit and include all normal,
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the results of operations pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with those included in the Company's
annual report on Form 10-K for the year ended December 31, 1998.
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
20
<PAGE> 22
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Subsequent to the end of the first quarter, the Company announced that
it will redeem all of the outstanding Psychiatric Group Depositary Shares, and
the underlying Psychiatric Group Preferred Stock represented thereby, for $2.08
per Depositary Share payable in cash on May 21, 1999. The Board determined,
after taking into account the assets and liabilities of the Psychiatric Group,
that the net fair market value of the Psychiatric Group is $4,250,000. Pursuant
to the Certificate of Designations for the Psychiatric Group Preferred Stock,
the total amount to be distributed in redemption of the Psychiatric Group
Depositary Shares, and the underlying Psychiatric Group Preferred Stock
represented thereby, will equal $4,462,500 (105% of the net fair market value
of the Psychiatric Group), or $2.08 per Depositary Share on a fully diluted
basis.
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. Upon redemption of the Psychiatric Group Depositary
Shares, and the underlying Psychiatric Group Preferred Stock represented
thereby, the Company's common stock will reflect the financial performance of
the entire Company. Accordingly, the Company anticipates that only consolidated
financial statements will be presented after May 21, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities",
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.
Interest Paid Interest paid by the Core Group, net of interest
capitalized, was $9,183,000 and $8,529,000 for the three months ended March 31,
1999 and 1998, respectively. The Core Group had $353,000 and $118,000 of
capitalized interest for the three months ended March 31, 1999 and 1998,
respectively.
2. SALE OF REAL ESTATE
Subsequent to the end of the first quarter, the Company completed the
sale of Kendall Regional Medical Center (Kendall) on April 16, 1999 to an
affiliate of Columbia/HCA Healthcare Corporation (Columbia) for a gross
purchase price of $105 million. As a result of the Kendall sale, the Company
will recognize a gain for book purposes of over $50 million in the second
quarter of 1999. Kendall had been leased to a subsidiary of Columbia and
generated aggregate revenues of approximately $10.3 million in 1998, or 9% of
the Company's total revenues. The Kendall sale resulted from Columbia's
exercise of its option to purchase Kendall at fair market value pursuant to the
terms of the lease. To complete the Kendall sale, the purchaser paid $75
million in cash, and assumed and paid $30 million of borrowings outstanding
under the Company's bank credit facility. Since the Company currently intends
to effect a "deferred like-
21
<PAGE> 23
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
kind" 1031 exchange for tax purposes, the net cash proceeds of $73.65 million
were delivered to a third-party intermediary, which will use such proceeds to
purchase and convey to the Company like-kind replacement property selected by
the Company. Pursuant to Section 1031 of the Internal Revenue Code, the Company
must identify potential replacement properties by May 28, 1999 and must acquire
all identified replacement properties it will acquire as part of the exchange
by October 13, 1999. If the Company is successful in identifying and acquiring
a sufficient amount of like-kind replacement properties within the required
time limits, the Company should not recognize current taxable gain and,
accordingly, should incur no tax liability as a result of the transaction.
Furthermore, in that event, there should be no impact on the Company's REIT
distribution requirements. If the Company does not complete the transaction as
an exchange, the tax liability incurred and recognized by the Company for book
purposes, as well as the impact on the Company's REIT distribution requirements
will depend on the tax position of the Company as a whole. The Company cannot
be assured that total revenues generated by replacement properties 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.
3. COMMITMENTS
As of March 31, 1999, the Core Group had funded $7,088,000 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
March 31, 1999, the Core Group had funded $11,091,000 of an $18.6 million
commitment to develop three assisted living facilities to be managed by an
experienced operator of assisted living facilities. The lease commenced on one
of these facilities in April 1999 after its construction was completed at a
total cost of $4.5 million. 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 31, 1999, $1,705,000 was funded
under this commitment for the development of two facilities having a total
development cost of approximately $5.6 million. The Core Group has also funded
$1,004,000 as of March 31, 1999 toward completion of a $5.7 million medical
office/clinic facility under development in Roseburg, Oregon that is
master-leased to the operator of the adjacent hospital.
4. ATTRIBUTED EQUITY
Stock Incentive Plans During the three months ended March 31, 1999,
options to purchase 358,000 shares of Core Group Common Stock at a weighted
average exercise price of $20.27 per share were issued pursuant to the
Company's stock incentive plans.
22
<PAGE> 24
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. 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 attributable to Core
Group Common Stock:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------
1999 1998
----------------------- -----------------------
(In thousands) Income Shares Income Shares
-------- --------- -------- ------
<S> <C> <C> <C> <C>
Net income $ 13,362 -- $ 12,584 --
Less Series B preferred dividend requirement (2,150) -- (2,150) --
Outstanding common shares -- 24,984 -- 23,715
Deferred common shares -- 4 -- 1
-------- --------- -------- ------
Basic EPS components 11,212 24,988 10,434 23,716
Effect of dilutive potential common shares-
Stock options -- 3 -- 145
DER's -- 175 -- 131
Subordinated convertible bonds payable -- -- -- --
-------- --------- -------- ------
Diluted EPS components $ 11,212 25,166 $ 10,434 23,992
======== ========= ======== ======
</TABLE>
23
<PAGE> 25
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and
results of operations of the Core Group, which should be read in conjunction
with (a) the combined financial statements and accompanying notes of the Core
Group and (b) management's discussion and analysis of financial condition and
results of operations and the financial statements and accompanying notes of
the Company and the Psychiatric Group included elsewhere herein.
Factors Regarding Future Results and Forward-Looking Statements 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 anticipated funds from operations of
the Company, 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 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, the Company's
ability to close on future 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 a successful 1031 exchange in connection with the
sale of Kendall Regional Medical Center in which the Company acquires
replacement properties 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.
24
<PAGE> 26
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
First Quarter 1999 Compared With 1998
For the first quarter of 1999, the Core Group reported net income
attributable to Core Group Common Stock of $11,212,000, or $.45 per share on a
diluted basis, compared with $10,434,000, or $.43 per share on a diluted basis,
for the first quarter of 1998.
Rental income was $23,856,000 for the first quarter of 1999, an
increase of $2,853,000 or 14% from $21,003,000 for the first quarter of 1998.
This increase was primarily attributable to rental income from new Core Group
properties acquired subsequent to the first quarter of 1998. These property
additions also resulted in an increase in depreciation and amortization of
$821,000 or 18% to $5,507,000 for the first quarter of 1999 compared with
$4,686,000 for the first quarter of 1998.
Additional rental and interest income was $3,310,000 for the first
quarter of 1999, an increase of $184,000 or 6% from $3,126,000 for the first
quarter of 1998. The increase in additional rental and interest income for the
first quarter of 1999 was attributable to increases in additional rent of
$232,000 from acute care properties and $28,000 from long-term care properties,
partially offset by a $76,000 decrease in additional rent from rehabilitation
properties.
Other property income was $700,000 for the first quarter of 1999, an
increase of $365,000 from $335,000 for the first quarter of 1998. The first
quarter of 1999 included other property income for eight multi-tenant
facilities in operation during the entire quarter compared to the first quarter
of 1998 which included other property income for six multi-tenant facilities,
three of which were acquired during the first quarter of 1998.
Other interest income decreased $29,000 or 18% to $132,000 for the
first quarter of 1999 from $161,000 for the first quarter of 1998. The decrease
in other interest income for the first quarter of 1999 resulted primarily from
lower investable cash balances and a lower average balance of direct financing
leases during the first quarter of 1999 compared to the first quarter of 1998.
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 $0
for the first quarter of 1999 and $365,000 for the first quarter of 1998. 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 $1,535,000 for the first quarter of
1999, an increase of $545,000 or 55% from $990,000 for the first quarter of
1998. The first quarter of 1999 included property operating expenses for eight
multi-tenant facilities in operation during the entire quarter compared to the
first quarter of 1998 which included property operating expenses for six
multi-tenant facilities, three of which were acquired during the first quarter
of 1998.
Interest expense was $5,520,000 for the first quarter of 1999, an
increase of $578,000 or 12% from $4,942,000 for the first quarter of 1998. This
increase was primarily attributable to a higher average balance of bank credit
facility borrowings and the assumption of one mortgage loan in connection with
the acquisition of a
25
<PAGE> 27
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
medical office/clinic facility subsequent to the first quarter of 1998. The
increase was partially offset by a higher level of capitalized interest in 1999
compared to 1998 and a reduction in interest expense as a result of the
redemption of the Company's Convertible Dual Currency Subordinated Bonds on
December 30, 1998.
Interest expense on inter-Group loans from the Psychiatric Group was
$30,000 for the first quarter of 1999 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 $2,113,000 for the first
quarter of 1999, an increase of $259,000 or 14% from $1,854,000 for the first
quarter of 1998. This variation was attributable to an increase in the
Company's consolidated general and administrative expenses and an increase in
the Core Group's allocated share of such expenses. The increase in the
Company's consolidated general and administrative expenses was primarily
attributable to hiring of additional personnel, expansion of property
management capabilities and higher compensation and benefits expense, partially
offset by a reduction in consulting expenses. The Core Group's share of
consolidated general and administrative expenses has increased since the
Psychiatric Group is now allocated only the minimum quarterly amount of $62,500
plus any direct charges.
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 of the Company's operators and tenants.
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 significantly reduce the projected amount of increase in Medicare spending.
In addition, the Budget Act repealed certain limits on states' ability to
reduce their Medicaid reimbursement levels. The Budget Act has the potential to
significantly reduce 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
26
<PAGE> 28
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 it with new opportunities
for investment.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing to enforce compliance with program requirements
aggressively and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health care
services that are reimbursed under the Medicare and Medicaid programs continues
to increase as the population ages. 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 of the Company's operators and tenants may decrease.
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 Company's 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.
Subsequent to the end of the first quarter, the Company completed the
sale of Kendall Regional Medical Center (Kendall) on April 16, 1999 to an
affiliate of Columbia/HCA Healthcare Corporation
27
<PAGE> 29
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Columbia) for a gross purchase price of $105 million. As a result of the
Kendall sale, the Company will recognize a gain for book purposes of over $50
million in the second quarter of 1999. Kendall had been leased to a subsidiary
of Columbia and generated aggregate revenues of approximately $10.3 million in
1998, or 9% of the Company's total revenues. The Kendall sale resulted from
Columbia's exercise of its option to purchase Kendall at fair market value
pursuant to the terms of the lease. To complete the Kendall sale, the purchaser
paid $75 million in cash, and assumed and paid $30 million of borrowings
outstanding under the Company's bank credit facility. Since the Company
currently intends to effect a "deferred like-kind" 1031 exchange for tax
purposes, the net cash proceeds of $73.65 million were delivered to a
third-party intermediary, which will use such proceeds to purchase and convey
to the Company like-kind replacement property selected by the Company. Pursuant
to Section 1031 of the Internal Revenue Code, the Company must identify
potential replacement properties by May 28, 1999 and must acquire all
identified replacement properties it will acquire as part of the exchange by
October 13, 1999. If the Company is successful in identifying and acquiring a
sufficient amount of like-kind replacement properties within the required time
limits, the Company should not recognize current taxable gain and, accordingly,
should incur no tax liability as a result of the transaction. Furthermore, in
that event, there should be no impact on the Company's REIT distribution
requirements. If the Company does not complete the transaction as an exchange,
the tax liability incurred and recognized by the Company for book purposes, as
well as the impact on the Company's REIT distribution requirements will depend
on the tax position of the Company as a whole. The Company cannot be assured
that total revenues generated by replacement properties 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.
Quantitative and Qualitative Disclosures About Market Risk -- 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, distributions and other
cash requirements. Although in the past, the Core Group has 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 Core Group 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
28
<PAGE> 30
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Core
Group's financial structure.
Subsequent to the end of the first quarter, the Company announced that
it will redeem all of the outstanding Psychiatric Group Depositary Shares, and
the underlying Psychiatric Group Preferred Stock represented thereby, for $2.08
per Depositary Share payable in cash on May 21, 1999. The Board determined,
after taking into account the assets and liabilities of the Psychiatric Group,
that the net fair market value of the Psychiatric Group is $4,250,000. Pursuant
to the Certificate of Designations for the Psychiatric Group Preferred Stock,
the total amount to be distributed in redemption of the Psychiatric Group
Depositary Shares, and the underlying Psychiatric Group Preferred Stock
represented thereby, will equal $4,462,500 (105% of the net fair market value
of the Psychiatric Group), or $2.08 per Depositary Share on a fully diluted
basis. Upon redemption of the Psychiatric Group Depositary Shares, and the
underlying Psychiatric Group Preferred Stock represented thereby, the Company's
common stock will reflect the financial performance of the entire Company.
Accordingly, the Company anticipates that only consolidated financial
statements will be presented after May 21, 1999.
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. The
Company does not expect the costs to remediate its Year 2000 Issues to be
material and 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
29
<PAGE> 31
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
As of May 7, 1999, the Core Group had a remaining commitment of
approximately $2.0 million to fund the development of one skilled nursing
facility. The Core Group's remaining commitment to fund the development of two
assisted living facilities was approximately $6.1 million as of May 7, 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 May 7, 1999, $2.0 million was funded under this commitment for the
development of two facilities having total development costs of approximately
$5.6 million. The Core Group's expected future funding to complete development
of a medical office/clinic facility was $4.5 million as of May 7, 1999.
As of May 7, 1999, $36.5 million of outstanding borrowings under the
Company's $250 million bank credit facility and $2.2 million in cash and
short-term investments were attributed to the Core Group. Including $2.5
million of inter-Group borrowings from the Psychiatric Group, the total
indebtedness attributed to the Company's Core Group as of May 7, 1999 was
$278.8 million. The Company expects to utilize its bank credit facility to fund
future property acquisitions and 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.
30
<PAGE> 32
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate investments
Real property $ 4,702 $ 5,902
Accumulated depreciation (881) (771)
---------- ----------
3,821 5,131
Other note receivable 200 195
Revolving loans to Core Group 4,123 180
Other assets 52 30
Cash and short-term investments 14 1,491
---------- ----------
$ 8,210 $ 7,027
========== ==========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Accounts payable and accrued liabilities $ 420 $ 444
Dividends payable 198 198
---------- ----------
618 642
---------- ----------
Commitments and contingencies
Total Attributed Psychiatric Group Equity 7,592 6,385
---------- ----------
$ 8,210 $ 7,027
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE> 33
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
REVENUES
Rental income $ 332 $ 355
Mortgage interest income -- 1,540
Additional rental and interest income 29 294
Other interest income 15 80
Interest income on loans to Core Group 30 --
---------- ----------
406 2,269
---------- ----------
EXPENSES
Depreciation and amortization 110 188
Property operating 75 225
Interest expense on loans from Core Group -- 365
General and administrative 111 252
---------- ----------
296 1,030
---------- ----------
INCOME BEFORE GAIN ON SALE OF PROPERTY 110 1,239
GAIN ON SALE OF PROPERTY 1,283 --
---------- ----------
NET INCOME $ 1,393 $ 1,239
========== ==========
Basic per share amounts -
Income before gain on sale of property $ 0.05 $ 0.59
Gain on sale of property $ 0.62 $ --
Net income $ 0.67 $ 0.59
Weighted average depositary shares 2,084 2,084
Diluted per share amounts -
Income before gain on sale of property $ 0.05 $ 0.59
Gain on sale of property $ 0.60 $ --
Net income $ 0.65 $ 0.59
Weighted average depositary shares and
dilutive potential depositary shares 2,142 2,102
Dividends declared per depositary share $ 0.095 $ 0.640
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE> 34
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,393 $ 1,239
Depreciation, amortization and other non-cash items 122 218
Deferred income -- (4)
Gain on sale of property (1,283) --
Change in other assets (22) --
Change in accounts payable and accrued liabilities (24) 396
---------- ----------
186 1,849
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property 2,483 --
Principal payments on mortgage notes receivable -- 21
Other notes receivable (5) --
Advances on revolving loans to Core Group (3,943) --
---------- ----------
(1,465) 21
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Paydowns on revolving loans from Core Group -- (578)
Cash dividends paid (198) (1,292)
---------- ----------
(198) (1,870)
---------- ----------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (1,477) --
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,491 --
---------- ----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 14 $ --
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 35
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living, Alzheimer's care and
medical office/clinic facilities.
Basis of Presentation The Psychiatric Group Depositary Shares are
currently 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 currently 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 currently attributed to the Company's
Core Group for financial accounting and reporting purposes.
The combined condensed financial statements of the Psychiatric Group
included herein have been prepared by the Company without audit and include all
normal, recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results of operations pursuant to the
rules and regulations of the Securities and Exchange Commission. These
financial statements should be read in conjunction with those included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
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.
34
<PAGE> 36
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Subsequent to the end of the first quarter, the Company announced that
it will redeem all of the outstanding Psychiatric Group Depositary Shares, and
the underlying Psychiatric Group Preferred Stock represented thereby, for $2.08
per Depositary Share payable in cash on May 21, 1999. The Board determined,
after taking into account the assets and liabilities of the Psychiatric Group,
that the net fair market value of the Psychiatric Group is $4,250,000. Pursuant
to the Certificate of Designations for the Psychiatric Group Preferred Stock,
the total amount to be distributed in redemption of the Psychiatric Group
Depositary Shares, and the underlying Psychiatric Group Preferred Stock
represented thereby, will equal $4,462,500 (105% of the net fair market value
of the Psychiatric Group), or $2.08 per Depositary Share on a fully diluted
basis.
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. Upon redemption of the Psychiatric Group
Depositary Shares, and the underlying Psychiatric Group Preferred Stock
represented thereby, the Company's common stock will reflect the financial
performance of the entire Company. Accordingly, the Company anticipates that
only consolidated financial statements will be presented after May 21, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities",
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.
Interest Paid Interest paid by the Psychiatric Group on inter-Group
loans from the Core Group was $0 and $365,000 for the three months ended March
31, 1999 and 1998, respectively.
2. STATUS OF PSYCHIATRIC GROUP INVESTMENTS
The 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 $8.3 million charge in 1998.
The Northpointe property has been vacant since mid-1997 and during
1998, the Psychiatric Group incurred $450,000 of maintenance and security
costs. The Psychiatric Group expects to incur at least $75,000 per quarter for
ongoing maintenance and security costs while it continues to seek alternate
uses or a buyer for the property, however the Psychiatric Group cannot be
assured that other unexpected costs will not be incurred. Attempts to locate an
alternate health care 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 health
35
<PAGE> 37
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
care 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 March 31, 1999, the Sunrise property had a carrying value of
$2,521,000. In September 1998, a new operator assumed all operational
responsibility for the hospital and entered into a new five-year lease with an
effective monthly rent of $60,000. 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 Company provided the
operator with a $200,000 working capital loan at the end of 1998. The cash flow
difficulties have continued and, during April and May 1999, the Company loaned
an additional $435,000 to the operator to support continued operation of the
Sunrise facility. Under the credit facility, up to $265,000 of additional
working capital loans may be advanced to the operator by the Company. 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 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. 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 at the end of 1998.
On February 24, 1999, the Psychiatric Group sold its total RCC investment to
the current operator for a cash price of $2.5 million.
3. 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 gain on sale
attributable to Psychiatric Group Depositary Shares:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------
1999 1998
--------------------- -----------------------
(In thousands) Income Shares Income Shares
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income before gain on sale of property $ 110 -- $ 1,239 --
Outstanding depositary shares -- 2,084 -- 2,084
------- ------- ------- -------
Basic EPS components 110 2,084 1,239 2,084
Effect of dilutive potential depositary shares-
Stock options -- -- -- --
DER's -- 58 -- 18
------- ------- ------- -------
Diluted EPS components $ 110 2,142 $ 1,239 2,102
======= ======= ======= =======
</TABLE>
36
<PAGE> 38
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and
results of operations of the Psychiatric Group, which should be read in
conjunction with (a) the combined financial statements and accompanying notes
of the Psychiatric Group and (b) management's discussion and analysis of
financial condition and results of operations and the financial statements and
accompanying notes of the Company and the Core Group included elsewhere herein.
Factors Regarding Future Results and Forward-Looking Statements 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 anticipated funds from operations of the Company,
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 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
First Quarter 1999 Compared With 1998
For the first quarter of 1999, the Psychiatric Group reported income
before gain on sale of property of $110,000, or $.05 per depositary share on a
diluted basis, compared with $1,239,000, or $.59 per depositary share on a
diluted basis, for the first quarter of 1998. For the first quarter of 1999,
the Psychiatric Group reported net income
37
<PAGE> 39
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of $1,393,000, or $.65 per depositary share on a diluted basis, compared with
net income of $1,239,000, or $.59 per depositary share on a diluted basis, for
the first quarter of 1998. Net income for the first quarter of 1999 included a
gain on sale of property of $1,283,000, or $.60 per depositary share on a
diluted basis.
Rental income was $332,000 for the first quarter of 1999, a decrease
of $23,000 or 6% from $355,000 for the first quarter of 1998. This decrease was
attributable to the sale of Rock Creek Center on February 24, 1999, partially
offset by an increase in rent received from the Sunrise property as a result of
the transition to a new operator in the third quarter of 1998. The sale of Rock
Creek Center also resulted in a decrease in depreciation and amortization of
$78,000, or 41% to $110,000 for the first quarter of 1999 compared with
$188,000 for the first quarter of 1998.
Mortgage interest income was $0 for the first quarter of 1999 and
$1,540,000 for the first quarter of 1998. On July 1, 1998, the Psychiatric
Group received $35 million as payment in full of its two New York Four Winds
mortgage loans.
Additional rental and interest income was $29,000 for the first
quarter of 1999, a decrease of $265,000 or 90% from $294,000 for the first
quarter of 1998. The decrease for the first quarter was primarily attributable
to the $35 million payoff of the two New York Four Winds mortgage loans in July
1998.
Other interest income was $15,000 for the first quarter of 1999, a
decrease of $65,000 or 81% from $80,000 for the first quarter of 1998. This
decrease was attributable to the write-off, at the end of 1998, of the
outstanding borrowings under a revolving credit agreement provided to a
psychiatric hospital operator. The decrease was partially offset by interest
income from a working capital loan provided to the operator of the Sunrise
facility in the fourth quarter of 1998.
Interest income on inter-Group loans to the Core Group was $30,000 for
the first quarter of 1999 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 was $75,000 for the first quarter of 1999 a
decrease of $150,000, or 67% from $225,000 for the first quarter of 1998.
Property operating expense represents costs related to the protection and
maintenance of Northpointe, which has been vacant since mid-1997. The first
quarter of 1998 included $150,000 of unexpected capital expenditures for
Northpointe.
Interest expense on inter-Group loans from the Core Group was $0 for
the first quarter of 1999 and $365,000 for the first quarter of 1998. 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 New York Four Winds mortgage loans on July 1, 1998.
General and administrative expenses were $111,000 for the first
quarter of 1999, a decrease of $141,000 or 56% from $252,000 for the first
quarter of 1998. 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 for the first quarter of 1999
compared to the first quarter of 1998. The Psychiatric Group was specifically
charged for $35,000 of costs in the first quarter of 1999 for financial
advisory services provided by an investment banking firm which included
supplemental monitoring of the performance of the Psychiatric Group's
properties and assistance in addressing operational and cash flow difficulties
of certain operators of the properties. On a comparative basis, general and
administrative expenses for the first quarter of 1998 included $77,000 of such
financial advisory costs.
38
<PAGE> 40
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Analysis of Psychiatric Group
The 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 $8.3 million charge in 1998.
The Northpointe property has been vacant since mid-1997 and during
1998, the Psychiatric Group incurred $450,000 of maintenance and security
costs. The Psychiatric Group expects to incur at least $75,000 per quarter for
ongoing maintenance and security costs while it continues to seek alternate
uses or a buyer for the property, however the Psychiatric Group cannot be
assured that other unexpected costs will not be incurred. Attempts to locate an
alternate health care 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 health care 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 March 31, 1999, the Sunrise property had a carrying value of
$2,521,000. In September 1998, a new operator assumed all operational
responsibility for the hospital and entered into a new five-year lease with an
effective monthly rent of $60,000. 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 Company provided the
operator with a $200,000 working capital loan at the end of 1998. The cash flow
difficulties have continued and, during April and May 1999, the Company loaned
an additional $435,000 to the operator to support continued operation of the
Sunrise facility. Under the credit facility, up to $265,000 of additional
working capital loans may be advanced to the operator by the Company. 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 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. 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 at the end of 1998.
On February 24, 1999, the Psychiatric Group sold its total RCC investment to
the current operator for a cash price of $2.5 million.
Quantitative and Qualitative Disclosures About Market Risk -- 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.
Subsequent to the end of the first quarter, the Company announced that
it will redeem all of the outstanding Psychiatric Group Depositary Shares, and
the underlying Psychiatric Group Preferred Stock represented thereby, for $2.08
per Depositary Share payable in cash on May 21, 1999. The Board
39
<PAGE> 41
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
determined, after taking into account the assets and liabilities of the
Psychiatric Group, that the net fair market value of the Psychiatric Group is
$4,250,000. Pursuant to the Certificate of Designations for the Psychiatric
Group Preferred Stock, the total amount to be distributed in redemption of the
Psychiatric Group Depositary Shares, and the underlying Psychiatric Group
Preferred Stock represented thereby, will equal $4,462,500 (105% of the net
fair market value of the Psychiatric Group), or $2.08 per Depositary Share on a
fully diluted basis. Upon redemption of the Psychiatric Group Depositary
Shares, and the underlying Psychiatric Group Preferred Stock represented
thereby, the Company's common stock will reflect the financial performance of
the entire Company. Accordingly, the Company anticipates that only consolidated
financial statements will be presented after May 21, 1999.
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. The
Company does not expect the costs to remediate its Year 2000 Issues to be
material and 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
40
<PAGE> 42
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
At May 7, 1999, the Psychiatric Group had $2.5 million of inter-Group
loans owed to it by the Core Group and $1.3 in cash and short-term investments.
The Psychiatric Group has no sources of additional financing. However, upon
redemption of the Psychiatric Group Depositary Shares by the Company, the
Psychiatric Group will have no further capital or financing requirements.
41
<PAGE> 43
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 7, 1999
AMERICAN HEALTH PROPERTIES, INC.
<TABLE>
<S> <C>
By: JOSEPH P. SULLIVAN By: MICHAEL J. MCGEE
-------------------------------------- ------------------------------------------------
Joseph P. Sullivan Michael J. McGee
Chairman of the Board, President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
</TABLE>
42
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,886
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> (127,305)
<TOTAL-ASSETS> 752,877
<CURRENT-LIABILITIES> 0
<BONDS> 239,810
0
100,002
<COMMON> 250
<OTHER-SE> 309,299
<TOTAL-LIABILITY-AND-EQUITY> 752,877
<SALES> 0
<TOTAL-REVENUES> 28,491
<CGS> 0
<TOTAL-COSTS> 7,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,520
<INCOME-PRETAX> 13,472
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,472
<DISCONTINUED> 0
<EXTRAORDINARY> 1,283
<CHANGES> 0
<NET-INCOME> 14,755
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F2>
<FN>
<F1> BASIC EARNINGS PER SHARE ATTRIBUTABLE TO-
CORE GROUP COMMON STOCK
NET INCOME $0.45
PSYCHIATRIC GROUP DEPOSITARY SHARES
INCOME BEFORE GAIN ON SALE OF PROPERTY $0.05
GAIN ON SALE OF PROPERTY $0.62
NET INCOME $0.67
<F2> DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO-
CORE GROUP COMMON STOCK
NET INCOME $0.45
PSYCHIATRIC GROUP DEPOSITARY SHARES
INCOME BEFORE GAIN ON SALE OF PROPERTY $0.06
GAIN ON SALE OF PROPERTY $0.60
NET INCOME $0.65
</FN>
</TABLE>
