-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CpmmcJFBT9syhyZhcsJmZ6Bi6JAHcv2JNYzKujos4D6RMxvUDxS30Bibf0wMpkzP /zNhzfJCmqAn7hyudP4bgQ== 0000892569-99-003273.txt : 19991216 0000892569-99-003273.hdr.sgml : 19991216 ACCESSION NUMBER: 0000892569-99-003273 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991104 ITEM INFORMATION: FILED AS OF DATE: 19991215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH CARE PROPERTY INVESTORS INC CENTRAL INDEX KEY: 0000765880 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330091377 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-08895 FILM NUMBER: 99775040 BUSINESS ADDRESS: STREET 1: 4675 MACARTHUR COURT 9TH FL STREET 2: SUITE 900 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 9492210600 MAIL ADDRESS: STREET 1: 4675 MACARTHUR COURT STREET 2: SUITE 900 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 8-K/A 1 AMENDMENT #2 TO FORM 8-K. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1999 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT NO. 2 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 4, 1999 HEALTH CARE PROPERTY INVESTORS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MARYLAND 001-08895 33-0091377 - --------------------------------- ------------ ---------------------- (State or other jurisdiction (Commission (I.R.S. Employer of incorporation or organization) File Number) Identification Number) 4675 MACARTHUR COURT, 9TH FLOOR NEWPORT BEACH, CALIFORNIA 92660 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (949) 221-0600 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) ================================================================================ 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS On November 4, 1999, Health Care Property Investors, Inc. ("HCPI") consummated a merger with American Health Properties, Inc. ("AHP"). AHP merged with and into HCPI and the separate corporate existence of AHP ceased. HCPI will continue under the name "Health Care Property Investors, Inc." (a) Financial statements of business acquired. The financial statements of AHP set forth on pages F-2 through F-23 of AHP's Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on Form 10-K for the fiscal year ended December 31, 1998 filed with the Securities and Exchange Commission on March 31, 1999 are filed as Exhibit 99.2 hereto. The Financial Statements of AHP set forth on pages 2-7 of AHP's Quarterly Report pursuant to Section 13 or 15(d) of the Exchange Act on Form 10-Q for the six-month period ended June 30, 1999 filed with the Securities and Exchange Commission on August 13, 1999 are filed as Exhibit 99.3 hereto. (b) Pro forma information. The Unaudited Pro Forma Combined Financial Statements of HCPI and AHP for the year ended December 31, 1998 and the nine months ended September 30, 1999 are filed as Exhibit 99.4 hereto. (c) Exhibits. 23.1 Consent of Arthur Andersen LLP (Denver, Colorado) 99.1 Press Release dated November 5,1999 (previously filed). 99.2 Financial Statements of AHP for the fiscal year ended December 31,1998 99.3 Financial Statements of AHP for the six months ended June 30, 1999 99.4 Pro Forma Combined Financial Statements of HCPI and AHP. 2 3 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 hereunto duly authorized. HEALTH CARE PROPERTY INVESTORS, INC. By: /s/ Devasis Ghose -------------------------------- Name: Devasis Ghose Title: Senior Vice President -- Finance and Treasurer Dated: December 15, 1999 3 4 EXHIBIT INDEX Exhibit Number Description ======= ----------- 23.1 Consent of Arthur Andersen LLP (Denver, Colorado) 99.1 Press Release dated November 5,1999 (previously filed). 99.2 Financial Statements of AHP for the fiscal year ended December 31,1998 99.3 Financial Statements of AHP for the six months ended June 30, 1999 99.4 Pro Forma Combined Financial Statements of HCPI and AHP. EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 As independent public accountants, we hereby consent to the use of our report dated January 22, 1999 for American Health Properties, Inc. included in this Form 8-k/a. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Denver, Colorado December 9, 1999 EX-99.2 3 FINANCIAL STATEMENTS OF AHP FOR YEAR END 12/31/99. 1 EXHIBIT 99.2 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To American Health Properties, Inc.: We have audited the accompanying consolidated balance sheets of American Health Properties, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Health Properties, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Denver, Colorado, January 22, 1999. F-2 2 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------- 1998 1997 ----------- ----------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Real estate properties Buildings and improvements................................ $ 760,679 $ 638,943 Accumulated depreciation.................................. (121,726) (102,235) --------- --------- 638,953 536,708 Land...................................................... 76,539 64,897 Construction in progress.................................. 14,247 4,729 --------- --------- 729,739 606,334 Mortgage notes receivable, net.............................. 4,400 41,936 Other notes receivable...................................... 1,663 2,500 Direct financing leases..................................... 1,975 3,053 Cash and short-term investments............................. 3,817 23,053 Receivables................................................. 7,359 7,103 Deferred financing costs and other assets................... 4,889 6,593 --------- --------- $ 753,842 $ 690,572 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Bank loans payable.......................................... $ 69,000 $ -- Mortgage notes payable...................................... 20,772 17,922 Subordinated convertible bonds payable...................... -- 6,832 Senior notes payable........................................ 219,164 219,059 Accounts payable and accrued liabilities.................... 15,278 13,193 Dividends payable........................................... 15,031 14,847 Deferred income............................................. 3,732 3,758 --------- --------- 342,977 275,611 --------- --------- Commitments and contingencies Stockholders' equity Preferred stock $.01 par value; 1,000 shares authorized; 8.6% Cumulative Redeemable Preferred Stock, Series B; $2,500 liquidation value; 40 shares issued and outstanding........................................... 100,000 100,000 Psychiatric Group Preferred Stock; 208 shares issued and outstanding....................................... 2 2 Common stock $.01 par value; 100,000 shares authorized; 24,984 and 23,557 shares issued and outstanding........ 250 236 Additional paid-in capital................................ 519,738 482,030 Cumulative net income..................................... 329,918 283,453 Cumulative dividends...................................... (539,043) (450,760) --------- --------- 410,865 414,961 --------- --------- $ 753,842 $ 690,572 ========= =========
The accompanying notes are an integral part of these financial statements. F-3 3 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 --------- --------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) REVENUES Rental income.............................................. $ 92,110 $ 72,237 $69,488 Mortgage interest income................................... 3,542 6,289 5,980 Additional rental and interest income...................... 14,098 12,498 12,342 Other property income...................................... 2,099 187 -- Other interest income...................................... 873 2,254 1,114 -------- -------- ------- 112,722 93,465 88,924 -------- -------- ------- EXPENSES Depreciation and amortization.............................. 21,354 15,904 15,016 Property operating......................................... 5,769 524 44 Interest expense........................................... 21,609 19,659 21,842 General and administrative................................. 9,006 8,000 7,427 Impairment loss on real estate and notes receivable........ 8,330 11,000 -- -------- -------- ------- 66,068 55,087 44,329 Minority interest.......................................... 189 189 216 -------- -------- ------- INCOME BEFORE EXTRAORDINARY ITEM........................... 46,465 38,189 44,379 EXTRAORDINARY LOSS ON DEBT PREPAYMENT...................... -- (11,427) -- -------- -------- ------- NET INCOME............................................... $ 46,465 $ 26,762 $44,379 ======== ======== ======= SERIES B PREFERRED DIVIDEND REQUIREMENT.................... $ (8,600) $ (1,553) $ -- ======== ======== ======= ATTRIBUTABLE TO CORE GROUP COMMON STOCK AND PSYCHIATRIC GROUP DEPOSITARY SHARES -- INCOME BEFORE EXTRAORDINARY ITEM......................... $ 37,865 $ 36,636 $44,379 ======== ======== ======= NET INCOME............................................... $ 37,865 $ 25,209 $44,379 ======== ======== ======= ATTRIBUTABLE TO -- CORE GROUP COMMON STOCK Income before extraordinary item....................... $ 43,045 $ 42,554 $38,800 Extraordinary loss on debt prepayment.................. $ -- $(11,427) $ -- Net income............................................. $ 43,045 $ 31,127 $38,800 Basic per share amounts -- Income before extraordinary item.................... $ 1.77 $ 1.81 $ 1.65 Extraordinary loss on debt prepayment............... $ -- $ (0.49) $ -- Net income.......................................... $ 1.77 $ 1.32 $ 1.65 Weighted average common shares...................... 24,379 23,505 23,453 Diluted per share amounts -- Income before extraordinary item.................... $ 1.75 $ 1.80 $ 1.65 Extraordinary loss on debt prepayment............... $ -- $ (0.49) $ -- Net income.......................................... $ 1.75 $ 1.31 $ 1.65 Weighted average common shares and dilutive potential common shares........................... 24,605 23,703 23,558 Dividends declared per common share.................... $ 2.20 $ 2.12 $ 2.04 PSYCHIATRIC GROUP DEPOSITARY SHARES Net income (loss)...................................... $ (5,180) $ (5,918) $ 5,579 Basic per share amounts -- Net income (loss)................................... $ (2.49) $ (2.84) $ 2.68 Weighted average depositary shares.................. 2,084 2,084 2,084 Diluted per share amounts -- Net income (loss)................................... $ (2.49) $ (2.84) $ 2.67 Weighted average depositary shares and dilutive potential depositary shares....................... 2,084 2,084 2,093 Dividends declared per depositary share................ $ 1.73 $ 2.62 $ 2.80
The accompanying notes are an integral part of these financial statements. F-4 4 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PSYCHIATRIC SERIES B GROUP PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------- --------------- --------------- PAID-IN CUMULATIVE SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL NET INCOME ------ -------- ------ ------ ------ ------ ---------- ----------- (IN THOUSANDS) BALANCES AT DECEMBER 31, 1995... -- $ -- 208 $2 23,443 $234 $480,703 $212,312 Stock incentives, net......... -- -- -- -- (1) -- 1,140 -- Exercise of stock options..... -- -- -- -- 13 1 240 -- Net income.................... -- -- -- -- -- -- -- 44,379 Cash dividends................ -- -- -- -- -- -- -- -- -- -------- --- -- ------ ---- -------- -------- BALANCES AT DECEMBER 31, 1996... -- -- 208 2 23,455 235 482,083 256,691 Issuance of preferred stock... 40 100,000 -- -- -- -- (3,600) -- Stock incentives, net......... -- -- -- -- 2 -- 1,372 -- Exercise of stock options..... -- -- -- -- 100 1 2,175 -- Net income.................... -- -- -- -- -- -- -- 26,762 Cash dividends................ -- -- -- -- -- -- -- -- -- -------- --- -- ------ ---- -------- -------- BALANCES AT DECEMBER 31, 1997... 40 100,000 208 2 23,557 236 482,030 283,453 Issuance of common stock...... -- -- -- -- 415 4 11,162 -- Conversion of subordinated convertible bonds........... -- -- -- -- -- -- 10 -- Stock incentives, net......... -- -- -- -- 6 -- 1,334 -- Exercise of stock options..... -- -- -- -- 173 2 3,600 -- Net income.................... -- -- -- -- -- -- -- 46,465 Stock dividend................ -- -- -- -- 833 8 21,602 -- Cash dividends................ -- -- -- -- -- -- -- -- -- -------- --- -- ------ ---- -------- -------- BALANCES AT DECEMBER 31, 1998... 40 $100,000 208 $2 24,984 $250 $519,738 $329,918 == ======== === == ====== ==== ======== ======== TOTAL CUMULATIVE STOCKHOLDERS' DIVIDENDS EQUITY ---------- ------------- (IN THOUSANDS) BALANCES AT DECEMBER 31, 1995... $(340,191) $353,060 Stock incentives, net......... -- 1,140 Exercise of stock options..... -- 241 Net income.................... -- 44,379 Cash dividends................ (53,681) (53,681) --------- -------- BALANCES AT DECEMBER 31, 1996... (393,872) 345,139 Issuance of preferred stock... -- 96,400 Stock incentives, net......... -- 1,372 Exercise of stock options..... -- 2,176 Net income.................... -- 26,762 Cash dividends................ (56,888) (56,888) --------- -------- BALANCES AT DECEMBER 31, 1997... (450,760) 414,961 Issuance of common stock...... -- 11,166 Conversion of subordinated convertible bonds........... -- 10 Stock incentives, net......... -- 1,334 Exercise of stock options..... -- 3,602 Net income.................... -- 46,465 Stock dividend................ (21,610) -- Cash dividends................ (66,673) (66,673) --------- -------- BALANCES AT DECEMBER 31, 1998... $(539,043) $410,865 ========= ========
The accompanying notes are an integral part of these financial statements. F-5 5 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 --------- --------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................. $ 46,465 $ 26,762 $ 44,379 Extraordinary loss on debt prepayment...................... -- 11,427 -- Depreciation, amortization and other non-cash items........ 23,895 18,486 17,271 Deferred income............................................ 198 (253) (368) Impairment loss on real estate and notes receivable........ 8,330 11,000 -- Change in receivables and other assets..................... 708 (2,838) 412 Change in accounts payable and accrued liabilities......... 2,974 5,572 (453) --------- --------- -------- 82,570 70,156 61,241 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition and construction of real estate properties..... (143,835) (92,242) (17,142) Proceeds from sale of property............................. -- -- 423 Mortgage note receivable fundings.......................... (179) (4,221) -- Principal payments on mortgage notes receivable............ 35,039 72 64 Other notes receivable..................................... (1,648) 233 458 Direct financing leases.................................... 1,078 642 2,535 Administrative capital expenditures........................ (122) (14) (55) --------- --------- -------- (109,667) (95,530) (13,717) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (payments) on bank loans payable................ 69,000 (48,500) 48,500 Principal payments on mortgage notes payable............... (525) (34) -- Redemption of subordinated convertible bonds payable....... (7,058) -- -- Proceeds from notes payable issuance....................... -- 218,965 -- Prepayment of notes payable................................ -- (163,176) -- Principal payments on notes payable........................ -- -- (49,000) Financing costs paid....................................... (144) (2,862) (150) Proceeds from sale of preferred stock...................... -- 96,400 -- Proceeds from sale of common stock......................... 9,475 -- -- Proceeds from exercise of stock options.................... 3,602 2,176 241 Cash dividends paid........................................ (66,489) (56,022) (53,206) --------- --------- -------- 7,861 46,947 (53,615) --------- --------- -------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... (19,236) 21,573 (6,091) CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 23,053 1,480 7,571 --------- --------- -------- CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 3,817 $ 23,053 $ 1,480 ========= ========= ========
The accompanying notes are an integral part of these financial statements. F-6 6 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE COMPANY American Health Properties, Inc., a Delaware corporation (the Company, which term refers to the Company and its subsidiaries unless the context otherwise requires), is a self-administered real estate investment trust (REIT) that commenced operations in 1987. The Company has investments in health care properties, including acute care, rehabilitation, long-term acute care and psychiatric hospitals, skilled nursing, assisted living, Alzheimer's care and medical office/clinic facilities. The Company's common stock (the Core Group Common Stock) is intended to reflect the separate financial performance of the Company's investments in acute care, rehabilitation and long-term acute care hospitals, skilled nursing, assisted living, Alzheimer's care and medical office/clinic facilities (the Core Group). The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Company's investments in psychiatric hospitals (the Psychiatric Group). The Company's Series B Depositary Shares, and the Series B Preferred Stock represented thereby, are attributed to the Company's Core Group for financial accounting and reporting purposes. Attribution of the components of the Company's capital structure to its Core Group and Psychiatric Group for financial accounting and reporting purposes does not affect the legal title to assets or responsibility for liabilities of the Company, and each holder of Core Group Common Stock, Series B Depositary Shares or Psychiatric Group Depositary Shares is a holder of an issue of capital stock of the entire Company and is subject to the risks associated with an investment in the Company and all of its businesses, assets and liabilities. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements of the Core Group and the Psychiatric Group also are included elsewhere herein. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Short-Term Investments. Cash and short-term investments consist of cash and all highly liquid investments with an original maturity date of less than three months and are stated at cost which approximates fair value. Real Estate Properties. The Company records properties at cost and recognizes depreciation on a straight-line basis over the estimated useful lives of the buildings and improvements (21 to 42 years). Tenant improvements paid for by the Company are capitalized and depreciated over the lives of the related leases. In general, other capital expenditures incurred are capitalized when significant and depreciated over the period they are expected to provide benefits to the related property. Impairment of Real Estate Properties and Notes Receivable. The Company reviews the carrying value of its real estate properties and notes receivable for possible impairment of value whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. In general, an impairment of such assets would be indicated if the estimated future cash flows expected to result from the use of such assets and their eventual disposition is less than their carrying amounts. Additional Rental and Interest Income. Certain of the Company's facility leases provide for contingent rental or interest income based upon specific target revenues of the operator. The Company recognizes contingent rental and interest income on a quarterly basis by comparing the specific target to an estimate of F-7 7 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the operator's future operating revenues for the remainder of the lease calculation period. If the Company deferred recognition of contingent rental and interest income until the specific target that triggers the contingent rental or interest income was achieved, there would not have been a material impact on the Company's financial statements for the year ended December 31, 1998. Deferred Income. Fees received, net of related direct costs, associated with the origination or amendment of leases and mortgage notes receivable are deferred and amortized at a constant effective rate over the remaining term of the related leases and mortgage notes receivable. Deferred Costs. Deferred financing costs are amortized over the term of the related debt at a constant effective rate. Federal Income Taxes. The Company intends at all times to operate so as to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As such, the Company generally will not be subject to federal income tax to the extent it distributes to shareholders at least 100% of its taxable income. Qualification as a REIT under Sections 856 to 860 of the Internal Revenue Code applies to the Company as a whole, rather than the Core Group or Psychiatric Group individually. Dividends paid by the Company on its Core Group Common Stock, Series B Depositary Shares and Psychiatric Group Depositary Shares must be sufficient in the aggregate for the Company to meet the minimum distribution requirements of the Internal Revenue Code. The Company's earnings and profits as a whole, without reference to the Core Group or Psychiatric Group individually, is used to determine the taxable character of dividends paid to holders of its Core Group Common Stock, Series B Depositary Shares and Psychiatric Group Depositary Shares, with earnings and profits allocated first to Series B Depositary Shares. Earnings and profits, which determine the taxable character of dividends paid to stockholders, differ from net income for financial reporting purposes due primarily to timing differences in the recognition of deferred income, impairment losses and various accruals and differences between the estimated useful lives used to compute depreciation for financial statement purposes and a 40-year life generally used in determining earnings and profits. The cost basis of the Company's real estate properties is generally the same for financial reporting and earnings and profits purposes, except for properties written down for financial reporting purposes and properties for which the previous owner's basis is required to be carried forward for tax purposes. New Accounting Standards. In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The adoption of this statement had no impact on the Company's financial statements. In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for reporting financial and descriptive information about reportable operating segments. In general, reportable operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Currently, the Company has two such reportable operating segments, the Core Group and the Psychiatric Group. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits". SFAS No. 132 revises employer's disclosures about pension and other post retirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets and eliminates certain previous disclosures. The adoption of this statement in 1998 had no impact on the Company's financial statements. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet F-8 8 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as either an asset or liability measured at its fair value. It also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The required adoption of this statement in 2000 is not expected to have a material impact on the Company's financial statements. In April 1998, the AICPA issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities". In general, SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The adoption of SOP 98-5 in 1998 had no impact on the Company's financial statements. REAL ESTATE PROPERTIES The following table summarizes the Company's investment in health care real estate properties as of December 31, 1998:
BUILDINGS AND TOTAL ACCUMULATED STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION ----- ------- ------------- ---------- ------------ (IN THOUSANDS) ACUTE CARE HOSPITALS: Chesterfield General Hospital.......... SC $ 720 $ 10,687 $ 11,407 $ 1,306 Cleveland Regional Medical Center...... TX 300 8,000 8,300 1,482 Desert Valley Hospital................. CA 1,755 24,650 26,405 2,517 Frye Regional Medical Center........... NC 1,247 44,202 45,449 13,285 Irvine Medical Center.................. CA 17,987 57,013 75,000 10,987 Kendall Regional Medical Center........ FL 4,163 64,849 69,012 19,008 Lucy Lee Hospital...................... MO 404 23,162 23,566 6,521 Marlboro Park Hospital................. SC 640 7,153 7,793 874 North Fulton Regional Hospital......... GA 4,149 42,042 46,191 10,273 Palm Beach Gardens Medical Center...... FL 4,024 41,624 45,648 12,274 Pioneer Valley Hospital................ UT 1,997 47,469 49,466 3,894 Shannon Medical Center, St. John's Campus............................... TX 255 16,197 16,452 2,951 Tarzana Regional Medical Center........ CA 12,421 61,279 73,700 18,938 ------- -------- -------- -------- 50,062 448,327 498,389 104,310 ------- -------- -------- -------- ALZHEIMER'S CARE FACILITIES: Pine Haven at Cypresswood.............. TX 225 3,475 3,700 268 Pine Haven at Sugar Land............... TX 265 3,759 4,024 172 ------- -------- -------- -------- 490 7,234 7,724 440 ------- -------- -------- -------- ASSISTED LIVING FACILITIES: Cambria Lodge.......................... TX 300 4,882 5,182 290 Garrison Creek Lodge................... WA 219 5,429 5,648 334 Sherwood Place......................... TX 220 4,814 5,034 276 Summer Wind Residence.................. ID 110 2,890 3,000 241 ------- -------- -------- -------- 849 18,015 18,864 1,141 ------- -------- -------- -------- LONG-TERM ACUTE CARE HOSPITAL: SCCI Hospital -- Amarillo.............. TX 810 5,300 6,110 144 ------- -------- -------- -------- MEDICAL OFFICE/CLINIC FACILITIES: Casa Blanca Clinic(1).................. AZ 1,900 18,681 20,581 723 Emerson Medical Office Building/Surgery Center(1)............................ FL 572 8,478 9,050 106 Fannin Medical Buildings(1)............ TX 2,850 49,209 52,059 1,794 Morristown Professional Plaza.......... NJ 1,500 18,146 19,646 613 Murfreesboro Medical Clinic(2)......... TN 650 12,394 13,044 236 Northpark Professional Building........ FL -- 10,651 10,651 443
F-9 9 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUILDINGS AND TOTAL ACCUMULATED STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION ----- ------- ------------- ---------- ------------ (IN THOUSANDS) Park Plaza Professional Building....... TX $ 1,100 $ 15,947 $ 17,047 $ 578 Valencia Medical Office Building....... CA 2,200 7,313 9,513 87 Walsh Medical Arts Center.............. CA 285 8,532 8,817 1,011 Westpark Plaza......................... TX 1,700 7,436 9,136 297 Woodlake Medical Center................ CA 2,470 10,200 12,670 247 ------- -------- -------- -------- 15,227 166,987 182,214 6,135 ------- -------- -------- -------- PSYCHIATRIC HOSPITALS: Northpointe............................ FL 1,300 -- 1,300 -- Rock Creek Center...................... IL 440 760 1,200 -- Sunrise Regional Medical Center........ FL 1,200 2,202 3,402 771 ------- -------- -------- -------- 2,940 2,962 5,902 771 ------- -------- -------- -------- REHABILITATION HOSPITALS: HealthSouth MountainView Rehabilitation Hospital............................. WV -- 11,718 11,718 2,176 HealthSouth Rehabilitation Hospital of Fayetteville......................... AR 962 8,124 9,086 1,523 Wesley Rehabilitation Hospital......... KS 1,938 12,659 14,597 2,149 ------- -------- -------- -------- 2,900 32,501 35,401 5,848 ------- -------- -------- -------- SKILLED NURSING FACILITIES: Arkansas Manor Nursing Home............ CO 154 3,912 4,066 514 Cornerstone Care Center................ CO 125 4,731 4,856 480 Covington Manor Nursing Center......... IN 170 8,064 8,234 168 Douglas Manor.......................... AZ 175 2,446 2,621 246 Edgewood Manor Nursing Center.......... OH 155 5,027 5,182 109 Fairview Manor Nursing Center.......... OH 130 7,796 7,926 168 Lakeland Nursing Center................ IN 50 3,842 3,892 83 Norwood Nursing Center................. IN 30 3,779 3,809 85 Safford Care Center.................... AZ 100 4,834 4,934 472 Silver Hills Health Care Center........ NV 1,322 6,065 7,387 38 University Park Nursing Center......... IN 110 4,847 4,957 94 Versailles Health Care Center.......... OH 160 6,303 6,463 119 Villa Fairborn......................... OH 260 6,227 6,487 130 Villa Georgetown....................... OH 125 6,338 6,463 128 Villa Springfield...................... OH 195 5,142 5,337 103 ------- -------- -------- -------- 3,261 79,353 82,614 2,937 ------- -------- -------- -------- $76,539 $760,679 $837,218 $121,726 ======= ======== ======== ========
- --------------- (1) Casa Blanca Clinic represents four separate facilities leased together under a single master lease. Fannin Medical Buildings represent two separate facilities master-leased to affiliated tenants under separate leases, with one such facility encumbered by a $17,495 mortgage note payable. Emerson Medical Office Building/Surgery Center represents two separate facilities, one of which is master-leased and the other leased to multiple tenants. (2) Murfreesboro Medical Clinic is encumbered by a $3,277 mortgage note payable. A substantial portion of the Company's properties are leased to single-tenant operators under "net" leases pursuant to which the lessees are responsible for all maintenance, repairs, taxes and insurance of the leased properties. The leases provide for the payment of minimum base rent and additional rent during the fixed term F-10 10 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and any renewal terms. Additional rent is generally based on the increase in annual gross revenues of the related facility or the consumer price index as specified in the lease agreements. The Company has the right to approve capital expenditures at such properties, the option to fund certain capital expenditures and, in certain situations, is obligated to fund approved capital expenditures on terms comparable to the original investment. The base and additional rent provisions of the leases are amended when such capital expenditures are funded to reflect the Company's increased investment. At December 31, 1998, the Company had no commitments to fund capital expenditures pursuant to these rights and obligations. Many of the Company's medical office/clinic facilities are leased to multiple tenants on a gross or modified net basis pursuant to which the Company, as lessor, is responsible for a portion of the operating costs of the building, including but not limited to the cost of maintenance, repairs, insurance and taxes on the leased properties. In general, the Company is also initially responsible for capital expenditures, leasing commissions and tenant improvements at these buildings, subject to reimbursement from tenants in some instances. At December 31, 1998, the Company had construction in progress of $14,247,000. As of December 31, 1998, the Company had funded $5,230,000 of a $9.5 million commitment to develop a skilled nursing facility in Las Vegas, Nevada to be operated by an experienced operator of skilled nursing facilities. As of December 31, 1998, the Company had funded $8,329,000 of an $18.6 million commitment to develop three assisted living facilities to be managed by an experienced operator of assisted living facilities. The Company has a $22.5 million forward funding commitment to develop up to nine Alzheimer's care facilities to be managed by the same operator that currently manages two existing Alzheimer's care facilities owned by the Company. As of December 31, 1998, $688,000 was funded under this commitment for the development of one facility having a total development cost of approximately $2.8 million. The Company has identified a second facility site under this commitment having a total development cost of approximately $2.8 million. The Company also has a $5.7 million commitment to develop a medical office/clinic facility in Roseburg, Oregon to be master-leased to the operator of the adjacent hospital. Six of the Company's acute care properties are leased to subsidiaries of American Medical International, Inc. (AMI), a subsidiary of Tenet Healthcare Corporation. The six leases are covered by cross-default provisions and the lease obligations are unconditionally guaranteed by AMI. In 1998, revenues from these leases accounted for 41% of the Company's total revenues. Kendall Regional Medical Center (Kendall) is leased to a subsidiary of Columbia/HCA Healthcare Corporation (Columbia). Aggregate revenues from the lease, which was originally scheduled to mature in February 1999, were approximately $10.3 million in 1998, or 9% of the Company's total revenues. Pursuant to the terms of the lease, Columbia has exercised its option to purchase Kendall at fair market value. The purchase price of $105 million will be paid in cash, or at the option of the Company, a combination of cash and debt relief. The Company currently intends to effect the transaction as a "deferred like-kind" 1031 exchange for tax purposes. The first part of the exchange, the transfer of Kendall to Columbia, is currently scheduled to occur on April 15, 1999. The Company would complete the exchange by acquiring new investment properties within the time limits imposed by federal tax law, if possible. If the Company is successful in identifying and closing on a sufficient amount of new investments within the required time limits, the Company should not recognize current taxable gain as a result of the transaction. In that event, there should be no impact on the Company's REIT distribution requirements. Even though the Company may not recognize a gain on the transaction for tax purposes, the Company expects to be able to recognize a gain of over $50 million for book purposes. The Company cannot be assured that total revenues generated by new investments acquired to effect the exchange will equal the annual revenues currently generated by the Kendall investment, nor is it certain that the Company will complete the transaction as an exchange. If the Company does not complete the transaction as an exchange, the amount of the Company's tax liability, the impact on its REIT distribution requirements and the amount of gain, net of taxes, if any, recognized for book purposes F-11 11 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) would depend on the amount of gain recognized for tax purposes, any losses recognized by the Company on sales of other assets and various tax elections available to the Company. Future minimum annual rentals, assuming the sale of Kendall on April 15, 1999, under the Company's noncancellable operating leases for calendar years 1999 through 2003 are approximately $89,360,000, $85,670,000, $80,640,000, $75,490,000, and $73,690,000, respectively. The fundamental ongoing changes in the psychiatric industry and the resulting negative impact on operator financial performance have resulted in the periodic restructuring of psychiatric operator payment obligations, the closing of one psychiatric hospital and significant impairment losses on psychiatric investments, including an $11 million charge in 1997 and a $8.3 million charge in 1998. At December 31, 1998, the aggregate carrying value of the Company's psychiatric properties was $5,131,000. The Northpointe property has been vacant since mid-1997 and has a carrying value of $1,300,000. The Company incurs ongoing costs for maintenance and security of the property while it continues to seek alternate uses or a buyer for the property. The operator of the Rock Creek Center (RCC) experienced continuing financial and operational difficulties over the past several years, and at the end of 1998, the operator was in default on its obligations to the Company. As a result, the carrying value of the RCC property was written down to $1,200,000 and the Company's net investment in related notes and various other obligations owed to it by the operator of RCC were totally written off. Subsequent to year-end, the Company sold its total RCC investment for a cash price of $2.5 million. At December 31, 1998, the Sunrise Regional Medical Center (Sunrise) property had a carrying value of $2,631,000. In September 1998, a new operator assumed all operational responsibility for the hospital and entered into a new five-year lease with effective monthly rent of $60,000. Although the new operator has fulfilled its obligations to the Company under the lease so far, the new operator has experienced cash flow difficulties primarily as a result of delays in obtaining Baker Act certification. As a result, the Company provided the operator with a $200,000 working capital loan at the end of 1998, and subsequent to year-end, the operator requested $700,000 of additional working capital loans. Although this request is still being evaluated, the Company likely will provide the additional loans. The Company cannot be assured that the operator will be successful and, if it were to cease operations, an impairment charge to reduce the carrying value of the Sunrise property and any related outstanding working capital loans would be likely. The Company will continue to encourage the operator to pursue financing alternatives that might enable it to acquire the property and repay its borrowings from the Company. MORTGAGE NOTES RECEIVABLE SCCI Hospital -- Houston Central $4,400,000. The Company has a mortgage note receivable secured by a first mortgage and security interest in the real property of a long-term acute care facility in Houston, Texas. The note has an initial term of ten years with two optional ten-year extension terms. The initial term maturity date is June 30, 2007. The interest rate on the note is 10.50% with interest only payable monthly through June 30, 1999 and monthly principal and interest payments of $40,000 payable thereafter. Pursuant to the terms of the mortgage note receivable, the Company may receive additional interest each year based on the increase in annual operating revenues of the facility. Four Winds. The Company had two mortgage notes receivable secured by first mortgages and security interests in the real property of Four Winds, two psychiatric facilities located in Saratoga Springs and Katonah, New York. The Saratoga Springs note had an initial term of ten years with a maturity date of June 30, 1999, bore interest at a rate of 12.42% and required monthly principal and interest payments of $194,000. The Katonah note had an initial term of ten years with a maturity date of November 30, 2002, bore interest at rates of 13.44%, 13.80% and 14.13%, in 1996, 1997 and 1998, respectively and required monthly payments of interest only. On July 1, 1998, the Company received $35 million as prepayment in full of the two Four Winds mortgage notes receivable resulting in an impairment loss of $2.73 million. F-12 12 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The carrying amount of mortgage notes receivable is a reasonable estimate of fair value, as the pricing and terms of the notes are indicative of current rates and credit risk. OTHER NOTES RECEIVABLE In 1998, the Company committed to advance funds on a senior subordinated note due from the operator of an Alzheimer's care facility for a total maximum principal amount of $1,902,000. The note is secured by a pledge of stock in the operator and is personally guaranteed by one of its principals. Advances under the note are conditioned upon borrower's compliance with various covenants. The Company has no obligation to make principal advances after February 27, 2003. As of December 31, 1998, $1,468,000 was outstanding under the note, which included principal advanced of $1,283,000 and accrued interest of $185,000. Prior to December 31, 2002, interest accrues on the principal balance of the note at a rate of 18% per annum and will be added to the outstanding principal balance on a quarterly basis. Accrued interest is payable quarterly as it accrues commencing January 1, 2003 until March 31, 2006, subject to an intercreditor agreement and certain earnings requirements of the operator. Commencing April 1, 2006, quarterly principal and interest payments sufficient to amortize the principal amount of the loan as of March 31, 2006 together with unpaid interest are due in equal quarterly installments until April 1, 2012 at which time all unpaid principal and interest amounts are due and payable. The Company has provided financing at variable rates to certain psychiatric hospital operators under revolving credit agreements and working capital loans. Borrowings under these agreements are conditioned upon the borrower's compliance with various covenants and are partially secured by accounts receivable, other personal property and/or issued and outstanding shares of capital stock of the operators. As of December 31, 1998, $195,000 was outstanding under a $200,000 working capital loan provided to one psychiatric hospital operator at an annual interest rate of 12%. Interest only on the note is payable monthly through August 1, 1999. Commencing September 1, 1999, principal and interest payments of $35,000 are payable monthly until maturity on February 1, 2000. During 1998, $2,485,000 of outstanding borrowings were written off by the Company as part of a $5.6 million impairment loss recorded on psychiatric investments, and during 1997, $1,724,000 of outstanding borrowings were written off as part of an $11.0 million impairment loss recorded on psychiatric investments. The pricing and terms of other notes receivable are indicative of current rates and credit risk, and therefore, the current carrying amount of these financial instruments is a reasonable estimate of fair value. DIRECT FINANCING LEASES In connection with its investments in certain acute and long-term care properties, the Company has provided equipment leasing for terms of five to seven years which are classified as direct financing leases. As of December 31, 1998, the Company's aggregate net investment in these direct financing leases was $1,975,000, represented by total minimum lease payments receivable of $2,163,000 less unearned income of $188,000. Future minimum annual lease payments under these leases for calendar years 1999 through 2002 are approximately $1,342,000, $704,000, $94,000 and $23,000, respectively. DEBT Bank Loans Payable. The Company has a $250 million unsecured revolving credit agreement with a syndicate of banks that matures on December 31, 2000 and bears an annual facility fee based on the total commitment. This agreement provides for interest on outstanding borrowings based on, at the Company's election, LIBOR plus a margin, a rate bid by the lenders, or the prime rate. The margin on LIBOR borrowings and the annual facility fee may vary and are dependent upon various conditions, including the Company's debt ratings and the level of borrowings outstanding. Currently, the Company's LIBOR margin is 62.5 basis points and the annual facility fee is 25 basis points. F-13 13 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average amount of borrowings under bank credit agreements outstanding during 1998, 1997 and 1996 was $37,764,000, $6,151,000 and $21,622,000 at weighted average interest rates of 6.3%, 7.1%, and 6.4%, respectively. The maximum amount outstanding under bank credit agreements in 1998, 1997 and 1996 was $75,000,000, $48,500,000 and $53,000,000, respectively. As of December 31, 1998, the Company had $69,000,000 of outstanding borrowings under its bank credit agreement at a weighted average interest rate of 6.0%. The duration of borrowings under the Company's unsecured revolving credit agreement is generally less than 90 days at variable pricing indicative of current short-term borrowing rates. Accordingly, the carrying amount is a reasonable estimate of fair value. Mortgage Notes Payable. In connection with the acquisition of a medical office building in Houston, Texas in 1997, a mortgage note payable in the amount of $17,956,000 was assumed. The remaining balance at December 31, 1998 and 1997 was $17,495,000 and $17,922,000, respectively with an interest rate of 8.30%. The note is secured by a first mortgage and security interest in the real property and requires a monthly payment of principal and interest of approximately $158,000 with the remaining principal balance due at maturity on June 15, 2011. In connection with the acquisition of a medical office building in Murfreesboro, Tennessee in 1998, a mortgage note payable in the amount of $3,375,000 was assumed. The remaining balance at December 31, 1998 was $3,277,000 with an interest rate of 7.0%. The note is secured by a first mortgage and security interest in the real property and requires a monthly payment of principal and interest of approximately $33,000 with the remaining principal balance due at maturity on October 2, 1999. The carrying amount of the mortgage notes payable is a reasonable estimate of fair value, as the pricing and terms of the notes are indicative of current rates and credit terms. Senior Notes Payable. In January 1997, the Company completed a $220 million public debt offering of unsecured senior notes payable, issuing $100 million of notes with a coupon rate of 7.05% due January 15, 2002 (2002 Notes) and $120 million of notes with a coupon rate of 7.50% due January 15, 2007 (2007 Notes). The 2002 Notes and 2007 Notes have effective interest rates of approximately 7.34% and 7.74%, respectively. Interest is payable at the coupon rates semi-annually on January 15th and July 15th. The fair value of the Company's 2002 Notes and 2007 Notes is based on the quoted market price of the notes as traded over-the-counter. As of December 31, 1998 and 1997, the estimated fair value of the 2002 Notes and 2007 Notes was $208 million and $225 million, respectively. In February 1997, the Company prepaid its two issues of private placement debt, which included $72 million of 11.45% unsecured senior notes payable and $80 million of 10.41% unsecured senior notes payable. The weighted average amount of borrowings under these senior note issues during 1997 and 1996 was $22,800,000 and $178,250,000 at weighted average effective interest rates of 11.06% and 11.03%, respectively. The prepayment resulted in an extraordinary charge in the first quarter of 1997 of $11,427,000 consisting of a make-whole premium and other costs related to the prepayment. Subordinated Convertible Bonds Payable. The Company's Convertible Dual Currency Subordinated Bonds (the Swiss Bonds) were sold in Switzerland pursuant to public subscription in 1990. The Swiss Bonds had a coupon rate of 8.5% and were convertible at the option of the holder at any time until July 9, 2000 into shares of the Company's common stock at a conversion price of $23.45 per share and a fixed exchange rate of Sfr. 1.41 per U.S. $1.00. In 1998, $10,000 of the 1990 Swiss Bonds, with accrued interest, were converted into 302 shares of common stock resulting in additional equity of $10,000, net of conversion and unamortized issuance costs. There were no conversions of Swiss Bonds in 1997 or 1996. Pursuant to the Company's call for early redemption, the remaining 1,489 outstanding Swiss Bonds were redeemed on December 30, 1998 for F-14 14 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $7,058,000. As of December 31, 1997, the estimated fair value of the Company's subordinated convertible bonds payable was $7,259,000 based on the quoted market price of bonds as traded in Switzerland. Debt Covenants. Covenants and restrictions in the Company's various debt agreements include limitations on secured borrowings, restrictions covering the use of proceeds from asset sales and payments of dividends and requirements relating to the maintenance of specified financial covenants, including those relating to minimum tangible net worth, fixed charge coverage and ratios of liabilities to minimum tangible net worth and asset values. Annual Maturities. The aggregate amount of annual maturities of the Company's outstanding debt at December 31, 1998, for calendar years 1999 through 2003 and thereafter is $3,741,000, $504,000, $547,000, $100,594,000, $646,000 and $134,740,000, respectively. In addition, the outstanding balance of $69,000,000 at December 31, 1998 under the Company's unsecured revolving credit agreement matures on December 31, 2000, although certain events could require the earlier paydown of the outstanding balance. Interest. Interest capitalized on construction in progress was $819,000, $517,000 and $895,000 in 1998, 1997 and 1996, respectively. Interest paid, net of interest capitalized, in 1998, 1997 and 1996 was $20,482,000, $14,374,000 and $21,547,000, respectively. PENSION PLANS The Company has a defined contribution pension plan covering all of its employees. Pension expense in 1998, 1997 and 1996 was $287,000, $207,000 and $247,000, respectively. The Company has an unfunded defined benefit pension plan covering non-employee members of its Board of Directors elected prior to 1997 upon completion of sixty months of membership on the Board. The benefits, limited to ten years, are based on years of service and the annual base director fee in effect as of the date a director ceases to be a member of the Board. The following tables set forth the amounts recognized in the Company's financial statements: Change in benefit obligations:
1998 1997 ------ ----- (IN THOUSANDS) Projected benefit obligation January 1...................... $ 874 $807 Benefit payments............................................ (110) (66) Service cost................................................ 24 52 Interest cost............................................... 57 59 Actuarial loss.............................................. 33 22 ----- ---- Projected benefit obligation December 31.................... $ 878 $874 Unrecognized prior service cost............................. -- -- Unrecognized net gain....................................... 65 101 ----- ---- Pension liability........................................... $ 943 $975 ===== ====
F-15 15 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Components of net pension cost:
1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current service cost........................................ $24 $ 52 $ 95 Interest cost............................................... 57 59 53 Amortization of prior service cost.......................... -- 7 49 Amortization of net gain.................................... (3) (21) -- --- ---- ---- Net periodic pension cost................................... $78 $ 97 $197 === ==== ====
Discount rates of 6.75% and 7.0% for 1998 and 1997, respectively, and a 10.0% increase in annual base director fees once every five years were used in determining the actuarial present value of the projected benefit obligation. The discount rates used in determining the net pension cost for 1998, 1997 and 1996 were 7.0%, 7.5% and 7.0%, respectively. STOCK INCENTIVE PLANS The Company's stock incentive plans provide for the issuance of up to 2,600,000 shares of stock to directors and key employees of the Company. There were 726,114 shares available to grant further stock incentives at December 31, 1998. The following is a summary of stock incentives activity:
CORE GROUP COMMON STOCK PSYCHIATRIC GROUP DEPOSITARY SHARES ------------------------------------------------ ------------------------------------------------ STOCK OPTIONS STOCK OPTIONS -------------------- -------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE DEFERRED AND RESTRICTED NUMBER OF EXERCISE DEFERRED AND RESTRICTED SHARES PRICE DER SHARES STOCK SHARES PRICE DER SHARES STOCK --------- -------- ------------ ---------- --------- -------- ------------ ---------- December 31, 1995........... 716,930 $22.43 46,225 19,049 71,694 $ 22.35 5,207 1,904 Granted/accumulated....... 161,651 $22.76 35,526 3,910 -- -- 5,394 -- Exercised/restrictions lapsed.................. (12,500) $19.28 -- (13,161) -- -- -- (1,121) -------- ------- ------- ------- ------ ------ December 31, 1996........... 866,081 $22.54 81,751 9,798 71,694 $ 22.35 10,601 783 Granted/accumulated....... 194,982 $25.37 43,122 -- -- -- 5,611 -- Exercised/restrictions lapsed.................. (100,000) $21.76 (4,027) (8,426) -- -- -- (646) Expired/canceled.......... (30,000) $29.10 -- -- (10,000) $ 24.15 -- -- -------- ------- ------- ------- ------ ------ December 31, 1997........... 931,063 $23.01 120,846 1,372 61,694 $ 22.06 16,212 137 Granted/accumulated....... 160,424 $28.00 47,159 -- -- -- 39,121 -- Exercised/restrictions lapsed.................. (172,326) $20.90 (6,312) (1,372) -- -- -- (137) Expired/canceled.......... (47,728) $28.72 (1,264) -- (16,250) $ 21.78 -- -- -------- ------- ------- ------- ------ ------ December 31, 1998........... 871,433 $24.03 160,429 -- 45,444 $ 22.16 55,333 -- ======== ======= ======= ======= ====== ======
F-16 16 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of significant ranges of outstanding and exercisable options at December 31, 1998:
OPTIONS OUTSTANDING ----------------------------------------------- OPTIONS EXERCISABLE WEIGHTED AVERAGE ---------------------------- RANGES OF NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE - --------------- --------- ---------------- ---------------- --------- ---------------- (IN YEARS) CORE GROUP COMMON STOCK $16.00 - $21.50...... 198,728 4.6 $19.84 198,728 $19.84 $21.50 - $27.00...... 533,831 6.5 $24.45 442,519 $24.20 $27.00 - $32.50...... 138,874 8.7 $28.41 20,000 $29.98 PSYCHIATRIC GROUP DEPOSITARY SHARES $16.00 - $21.50...... 21,873 4.5 $19.75 21,873 $19.75 $21.50 - $27.00...... 22,571 4.6 $24.06 22,571 $24.06 $27.00 - $32.50...... 1,000 3.1 $31.94 1,000 $31.94
Restrictions on shares of restricted stock lapse annually over a period of years. Expense is determined based on the market value at the date of award and is recognized over the period such restrictions lapse. The exercise price of stock options is equal to the fair market value of the shares on the dates the options were granted. Stock options granted to directors become exercisable immediately or over two years and stock options granted to key employees become exercisable over two to four years. Stock options terminate ten years from the date of grant. Options on 661,247, 708,884 and 629,579 shares of Core Group Common Stock were exercisable at December 31, 1998, 1997 and 1996 with weighted average exercise prices of $23.07, $22.55 and $22.90 per share, respectively. Options on 45,444, 61,557 and 64,210 Psychiatric Group Depositary Shares were exercisable at December 31, 1998, 1997 and 1996 with weighted average exercise prices of $22.16, $22.07 and $22.75 per share, respectively. DERs have been granted in tandem with some of the stock options granted to key employees. At each dividend declaration date, a calculation is made to determine the number of shares that could be acquired if dividends were paid on shares under option for a period of up to five years from the date of grant and on accumulated DER shares for a period of up to ten years from the date of grant, and such number of shares are accumulated for the benefit of option holders over the term of the option grant. Upon exercise or expiration of the related option, each option holder is entitled to receive additional shares equivalent to the accumulated number of related DER shares. Expense related to the DER shares is equal to the equivalent amount of dividends used to determine the number of DER shares. Directors may elect to receive payment of their annual Board fees on a deferred basis in the form of stock of the Company. These deferred shares, and related accumulated DER shares, are issued to the director making such an election at the end of each three-year deferral period. At December 31, 1998, substantially all deferred and DER shares were issuable upon exercise of the related vested options or otherwise unrestricted. As allowed by SFAS 123, "Accounting for Stock-Based Compensation", the Company measures employee stock-based compensation expense using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". Total stock-based compensation expense recognized under APB 25 in 1998, 1997 and 1996 was $1,334,000, $1,427,000 and $1,251,000 respectively. As determined under SFAS 123, the weighted average fair value at the date of grant for options to purchase Core Group Common Stock granted during 1998, 1997 and 1996 was $5.57, $5.11 and $4.84 per F-17 17 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) option, respectively. The fair value of options was estimated using an option pricing model with the following weighted average assumptions:
1998 1997 1996 ---- ---- ---- Expected life in years...................................... 8.0 7.4 6.7 Risk-free interest rate..................................... 5.66% 6.55% 5.62% Expected volatility......................................... 15% 15% 15% Expected dividend yield -- Options without DERs...................................... 7.5% 7.5% 8% Options with DERs......................................... 0% 0% 0%
The weighted average fair value at the date of grant for restricted and deferred shares of Core Group Common Stock granted during 1998, 1997 and 1996 was $25.44, $24.39 and $22.53 per share, respectively. If the fair value based method of accounting defined by SFAS 123 had been used to measure and recognize stock-based compensation expense, the pro forma effect on the reported amounts of earnings per share of the consolidated Company, the Core Group and the Psychiatric Group for 1998, 1997 and 1996 would not have been material. The pro forma effect for 1998, 1997 and 1996 may not be representative of the pro forma effect in future years because it does not take into consideration stock-based incentives granted prior to 1995. STOCKHOLDERS' EQUITY 8.6% Cumulative Redeemable Preferred Stock, Series B. The Company has 4,000,000 Series B Depositary Shares outstanding which represent 40,000 shares of Series B Preferred Stock. Each Series B Depositary Share represents 1/100 of a share of Series B Preferred Stock, and entitles the holder to such proportion of all the rights, preferences and privileges of the Series B Preferred Stock represented thereby. The Series B Depositary Shares, and the Series B Preferred Stock represented thereby, rank senior to the Company's Core Group Common Stock, its Series A Preferred Stock (when and if issued) and its Psychiatric Group Depositary Shares, and the Psychiatric Group Preferred Stock represented thereby, with respect to dividend payments and liquidation rights. The annual dividend rate and liquidation preference with respect to each Series B Depositary Share are $2.15 and $25, respectively (equivalent to $215 and $2,500 per share of Series B Preferred Stock, respectively). Dividends on the Series B Depositary Shares, and the Series B Preferred Stock represented thereby, are cumulative and, if and when declared, are payable quarterly in arrears on the last day of February, May, August and November of each year. On or after October 27, 2002, the Series B Depositary Shares, and the Series B Preferred Stock represented thereby, may be redeemed, in whole or in part, at the option of the Company at a redemption price of $25 per Series B Depositary Share (equivalent to $2,500 per share of Series B Preferred Stock), plus accrued and unpaid dividends thereon. The redemption price, other than the portion representing accrued and unpaid dividends, is payable solely out of proceeds from the sale of other capital stock of the Company. The proceeds from the sale of the Series B Depositary Shares, and the Series B Preferred Stock represented thereby, as well as the dividends payable thereon, have been attributed to the Company's Core Group for financial accounting and reporting purposes. Preferred Stock Purchase Rights Plan. On April 20, 1990, the Company distributed to shareholders one preferred stock purchase right (each a Right) for each outstanding share of common stock. Under certain conditions, each Right may be exercised to purchase 1/100 of a share of preferred stock, Series A, par value $.01 per share (the Series A Preferred Shares), of the Company at a price of $45. The Company's Psychiatric Group Depositary Shares do not include the Rights or entitle holders thereof to receive the Rights, which are applicable only to the Company's Core Group Common Stock. The total number of Rights currently issued or issuable, including Rights issuable in connection with common stock which may be issued under the Company's stock incentive plans is approximately 26,742,000. Approximately 267,000 Series A Preferred F-18 18 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Shares could be purchased upon the exercise of all Rights currently issued or issuable. The number of Rights outstanding and Series A Preferred Shares issuable upon exercise, as well as the Series A Preferred Share purchase price, are subject to customary antidilution adjustments. The Rights are evidenced by the certificates for shares of common stock, and in general are not transferable apart from the common stock or exercisable until after a party has acquired beneficial ownership of, or made a tender offer for, 10% or more of the outstanding common stock of the Company (an Acquiring Person), or the occurrence of other events as specified in the Rights Plan. Under certain conditions as specified in the Rights Plan, including but not limited to the acquisition by a party of 15% or more of the outstanding common stock of the Company or the acquisition of the Company in a merger or other business combination, each holder of a Right (other than an Acquiring Person whose Rights will be void) will receive upon exercise thereof and payment of the exercise price that number of shares of common stock of the Company or of the other party, as applicable, having a market value of two times the exercise price of the Right. The Rights expire on April 20, 2000, and until exercised, the holder thereof, as such, will have no rights as a shareholder of the Company. At the Company's option, the Rights may be redeemed in whole at a price of $.01 per Right at any time prior to becoming exercisable. In general, the Company also may exchange the Rights at a ratio of one share of common stock per Right after becoming exercisable but prior to the acquisition of 50% or more of the outstanding shares of common stock by any party. Series A Preferred Shares issuable upon exercise of the Rights will not be redeemable. Each Series A Preferred Share will have 100 votes and will be entitled to (a) dividends in an amount equal to the greater of $1.00 or 100 times the amount of the dividends per share paid on the common stock, (b) a liquidation preference in an amount equal to the greater of $100 or 100 times the amount per share paid on the common stock and (c) a payment in connection with a business combination (in which shares of common stock are exchanged) equal to 100 times the amount per share paid on the common stock. The Series A Preferred Stock (when and if issued) rank senior to the Company's Core Group Common Stock and its Psychiatric Group Depositary Shares, and the Psychiatric Group Preferred Stock represented thereby, with respect to dividend payments and liquidation rights, but rank junior to the Company's Series B Depositary Shares, and the Series B Preferred Stock represented thereby. F-19 19 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EARNINGS PER SHARE The following is a reconciliation of the income and share amounts used in the basic and diluted per share computations of income before extraordinary item attributable to Core Group Common Stock and Psychiatric Group Depositary Shares:
1998 1997 1996 ---------------- ---------------- ---------------- INCOME SHARES INCOME SHARES INCOME SHARES ------- ------ ------- ------ ------- ------ (IN THOUSANDS) ATTRIBUTABLE TO CORE GROUP Income before extraordinary item...... $51,645 -- $44,107 -- $38,800 -- Less Series B preferred dividend requirement......................... (8,600) -- (1,553) -- -- -- Outstanding common shares............. -- 24,377 -- 23,503 -- 23,451 Deferred common shares................ -- 2 -- 2 -- 2 ------- ------ ------- ------ ------- ------ Basic EPS components.................. 43,045 24,379 42,554 23,505 38,800 23,453 Effect of dilutive potential common shares Stock options....................... -- 81 -- 94 -- 40 DERs................................ -- 145 -- 104 -- 65 Subordinated convertible bonds payable.......................... -- -- -- -- -- -- ------- ------ ------- ------ ------- ------ Diluted EPS components................ $43,045 24,605 $42,554 23,703 $38,800 23,558 ======= ====== ======= ====== ======= ====== ATTRIBUTABLE TO PSYCHIATRIC GROUP Basic EPS components.................. $(5,180) 2,084 $(5,918) 2,084 $ 5,579 2,084 Effect of dilutive potential depositary shares Stock options....................... -- -- -- -- -- -- DERs................................ -- -- -- -- -- 9 ------- ------ ------- ------ ------- ------ Diluted EPS components................ $(5,180) 2,084 $(5,918) 2,084 $ 5,579 2,093 ======= ====== ======= ====== ======= ======
DIVIDENDS AND REDEMPTION PROVISIONS A quarterly dividend of $.565 per share for Core Group Common Stock, or approximately $14,116,000, was declared by the Board of Directors on January 22, 1999, payable on February 24, 1999 to shareholders of record on February 10, 1999. A quarterly dividend of $.095 per share for Psychiatric Group Depositary Shares, or approximately $198,000, was declared by the Board of Directors on January 22, 1999, payable on February 24, 1999 to shareholders of record on February 10, 1999. A dividend of $.5375 per share for Series B Depositary Shares was declared by the Board of Directors on January 22, 1999, payable March 1, 1999 to shareholders of record February 15, 1999. This dividend was for the regular quarterly period ended February 28, 1999 of which approximately $717,000 was accrued at December 31, 1998. The aggregate dividends of $15,031,000 have been reflected as dividends payable in the accompanying financial statements as of December 31, 1998. As a result of the payoff of the Four Winds mortgage notes receivable, the Company distributed 833,067 new shares of Core Group Common Stock at a price of $25.9407 per share to holders of Psychiatric Group Depositary Shares as a special stock dividend on July 24, 1998. Holders of Psychiatric Group Depositary Shares received 0.4 shares of Core Group Common Stock for each Psychiatric Group Depositary Share held and cash-in-lieu of fractional shares of Core Group Common Stock based on the price of $25.9407. Cash dividends of $2.18 per share paid on Core Group Common Stock during 1998 are characterized as $1.076 of ordinary income and $1.104 of return of capital for tax purposes. Dividends of $12.62628 per share, including $2.25 of cash dividends and a special stock dividend valued at $10.37628, paid on Psychiatric Group F-20 20 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depositary Shares during 1998 are characterized as $6.2325 of ordinary income and $6.39378 of return of capital for tax purposes. For Psychiatric Group Depositary Share holders of record on July 17, 1998, the initial tax basis in the Core Group Common Stock distributed as a special stock dividend is $25.9407 per share of Core Group Common Stock. Cash dividends of $2.15 per share paid on Series B Depositary Shares during 1998 are characterized entirely as ordinary income for income tax purposes. In general, cash dividends on the Company's Core Group Common Stock and Psychiatric Group Depositary Shares are limited by the Company's unsecured revolving credit agreement to 95% of cash flow available for debt service, less interest expense, plus gains on asset dispositions and certain proceeds from the disposition of Psychiatric Group assets. Dividends on the Company's Psychiatric Group Depositary Shares are determined each quarter based upon the operating results of the Company's Psychiatric Group. It continues to be the policy of the Board to maintain a dividend payout ratio for each quarter in excess of 90 percent of the Psychiatric Group's funds from operations for the related quarter, when possible. With the disposition of the RCC investment subsequent to year-end, the Sunrise investment is currently the sole income-producing property of the Company's Psychiatric Group and the operator of Sunrise is experiencing cash flow difficulties. Therefore, commencing in the second quarter of 1999, the Psychiatric Group's funds from operations may not be sufficient to permit the payment of a dividend on the Psychiatric Group Depositary Shares. The Company intends to periodically evaluate the financial position of the Psychiatric Group, including an assessment of the potential cash requirements of the Psychiatric Group and the appropriate use of the proceeds from the sale of the RCC investment. Initially, proceeds from the RCC disposition, net of closing costs and applicable reserves, will be retained by the Psychiatric Group to defray its ongoing costs, including the potential long-term costs of carrying the two remaining Psychiatric Group properties. The Psychiatric Group may continue to retain such proceeds or, alternatively, may distribute a portion of such net proceeds to holders of Psychiatric Group Depositary Shares, in cash or Core Group Common Stock, either by dividend or in connection with redemption of the Psychiatric Group Depositary Shares. Should the Board of Directors of the Company decide that the remaining Psychiatric Group portfolio and operations are not consistent with a separate public security, the Board may elect to redeem the outstanding Psychiatric Group Depositary Shares in cash or in exchange for shares of Core Group Common Stock. Under the terms of the Certificate of Designations for the Psychiatric Group Preferred Stock and the Deposit Agreement providing for issuance of Depositary Receipts (Psychiatric Group Depositary Shares) each representing one-tenth of one share of the Psychiatric Group Preferred Stock, the Company has the right to redeem all outstanding Psychiatric Group Depositary Shares, and the Psychiatric Group Preferred Stock represented thereby, for cash (or in exchange for newly issued shares of Core Group Common Stock) at a premium generally ranging from 5% to 15% over the value of the Psychiatric Group Depositary Shares. Since an exchange or redemption of the Psychiatric Group Depositary Shares may be at a premium to the then current market price of the Psychiatric Group Depositary Shares, and since the Board could determine to effect such an exchange or redemption at a time when either or both the Core Group Common Stock and the Psychiatric Group Depositary Shares may be considered to be overvalued or undervalued, the exchange or redemption could be disadvantageous to the holders of the Core Group Common Stock or the Psychiatric Group Depositary Shares. SEGMENT INFORMATION The Company has two reportable operating segments, the Core Group and the Psychiatric Group, for which separate financial information is available and whose operating results are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Operating results of the Core Group reflect the separate financial performance of a distinct portfolio of the Company's investments in acute care, rehabilitation and long-term acute care hospitals, skilled nursing, assisted living, Alzheimer's care and medical office/clinic facilities. Operating results of the Psychiatric Group reflect the F-21 21 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) separate financial performance of a distinct portfolio of the Company's investments in psychiatric hospitals. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before depreciation and amortization and impairment losses on real estate and notes receivable. The reportable segments are business units of the Company that are managed separately based on the two distinct portfolios, with two distinct classes of publicly-traded shares intended to represent those portfolios. The following table summarizes pertinent financial information of the Company's reportable operating segments:
CORE GROUP PSYCHIATRIC GROUP SEGMENT TOTALS ------------------------------ -------------------------- ------------------------------ 1998 1997 1996 1998 1997 1996 1998 1997 1996 -------- -------- -------- ------ ------- ------- -------- -------- -------- Total segment revenue(1)......... $107,549 $ 86,302 $ 81,429 $6,002 $ 8,716 $ 9,174 $113,551 $ 95,018 $ 90,603 Real estate depreciation......... 20,440 15,042 14,145 753 751 744 21,193 15,793 14,889 Impairment loss on real estate and notes receivable........... -- -- -- 8,330 11,000 -- 8,330 11,000 -- Extraordinary loss on debt prepayment..................... -- 11,427 -- -- -- -- -- 11,427 -- Segment operating profit......... 72,085 59,149 52,945 3,903 5,833 6,323 75,988 64,982 59,268 Segment assets(2)................ 746,995 652,132 527,979 7,027 50,994 63,261 754,022 703,126 591,240
- --------------- (1) The difference between total segment revenues and total consolidated revenues represents interest income on inter-Group loans of $829, $1,553 and $1,679 in 1998, 1997 and 1996, respectively. (2) The difference between total segment assets and total consolidated assets represents inter-Group loans of $180, $12,554 and $13,358 for 1998, 1997 and 1996, respectively. F-22 22 AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL -------- ------- ------- ------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1998 Consolidated -- Revenues....................................... $ 27,007 $28,143 $28,709 $28,863 $112,722 Net income..................................... 13,823 11,225(1) 13,638 7,779(2) 46,465 Attributable to -- Core Group Common Stock Revenues..................................... $ 25,103 $26,248 $27,753 $28,445 $107,549 Net income................................... 10,434 10,559 10,859 11,193 43,045 Basic per share amounts -- Net income................................. $ 0.44 $ 0.44 $ 0.44 $ 0.45 $ 1.77 Diluted per share amounts -- Net income................................. $ 0.43 $ 0.43 $ 0.44 $ 0.44 $ 1.75 Psychiatric Group Depositary Shares Revenues..................................... $ 2,269 $ 2,242 $ 1,052 $ 439 $ 6,002 (5,564)(2) Net income (loss)............................ 1,239 (1,484)(1) 629 (5,180) Basic per share amounts -- Net income (loss).......................... $ 0.59 $ (0.71) $ 0.30 $ (2.67) $ (2.49) Diluted per share amounts -- Net income (loss).......................... $ 0.59 $ (0.71) $ 0.30 $ (2.67) $ (2.49) 1997 Consolidated -- Revenues....................................... $ 23,333 $22,771 $22,950 $24,411 $ 93,465 Attributable to -- Core Group Common Stock and Psychiatric Group Depositary Shares -- Income before extraordinary item............. $ 460(3) $12,332 $12,268 $11,576 $ 36,636 Extraordinary loss on debt prepayment........ (11,427) -- -- -- (11,427) Net income (loss)............................ (10,967)(3) 12,332 12,268 11,576 25,209 Attributable to -- Core Group Common Stock Revenues..................................... $ 21,322 $21,055 $21,204 $22,721 $ 86,302 Income before extraordinary item............. 9,930 11,129 11,087 10,408 42,554 Extraordinary loss on debt prepayment........ (11,427) -- -- -- (11,427) Net income (loss)............................ (1,497) 11,129 11,087 10,408 31,127 Basic per share amounts -- Income before extraordinary item........... $ 0.42 $ 0.47 $ 0.47 $ 0.44 $ 1.81 Extraordinary loss on debt prepayment...... (0.48) -- -- -- (0.49) Net income (loss).......................... (0.06) 0.47 0.47 0.44 1.32 Diluted per share amounts -- Income before extraordinary item........... $ 0.42 $ 0.47 $ 0.47 $ 0.44 $ 1.80 Extraordinary loss on debt prepayment...... (0.48) -- -- -- (0.49) Net income (loss).......................... (0.06) 0.47 0.47 0.44 1.31 Psychiatric Group Depositary Shares Revenues..................................... $ 2,401 $ 2,110 $ 2,138 $ 2,067 $ 8,716 Net income (loss)............................ (9,470)(3) 1,203 1,181 1,168 (5,918) Basic per share amounts -- Net income (loss).......................... $ (4.54) $ 0.58 $ 0.57 $ 0.56 $ (2.84) Diluted per share amounts -- Net income (loss).......................... $ (4.54) $ 0.57 $ 0.56 $ 0.56 $ (2.84)
- --------------- (1) Includes impairment loss of $2,730 on Psychiatric Group notes receivable. (2) Includes impairment loss of $5,600 on Psychiatric Group real estate and notes receivable. (3) Includes impairment loss of $11,000 on Psychiatric Group real estate and notes receivable. F-23 EX-99.3 4 FINANCIAL STATEMENTS OF AHP FOR SIX MONTHS 6/30/99 1 EXHIBIT 99.3 AMERICAN HEALTH PROPERTIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
June 30, December 31, 1999 1998 ---------- ------------ ASSETS (Unaudited) Real estate investments Real property and mortgage note $ 784,245 $ 841,618 Construction in progress 21,656 14,247 Accumulated depreciation (113,044) (121,726) ---------- ---------- 692,857 734,139 Other notes receivable and direct financing leases 3,940 3,638 Other assets 12,950 12,248 Cash and short-term investments 3,509 3,817 Funds held by intermediary for 1031 exchange 70,576 -- ---------- ---------- $ 783,832 $ 753,842 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Bank loans payable $ 51,000 $ 69,000 Mortgage notes payable 24,484 20,772 Notes and bonds payable 219,219 219,164 Accounts payable and accrued liabilities 15,163 15,278 Dividends payable 14,833 15,031 Deferred income 3,330 3,732 ---------- ---------- 328,029 342,977 ---------- ---------- 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; 0 and 208 shares issued and outstanding -- 2 Common stock $.01 par value; 100,000 shares authorized; 24,984 shares issued and outstanding 250 250 Additional paid-in capital 515,952 519,738 Cumulative net income 411,374 329,918 Cumulative dividends (571,773) (539,043) ---------- ---------- 455,803 410,865 ---------- ---------- $ 783,832 $ 753,842 ========== ==========
The accompanying notes are an integral part of these financial statements. 2 2 AMERICAN HEALTH PROPERTIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- -------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- REVENUES Rental income $ 22,397 $ 22,484 $ 46,585 $ 43,842 Mortgage interest income 116 1,655 233 3,308 Additional rental and interest income 3,028 3,400 6,367 6,820 Other property income 735 384 1,435 719 Other interest income 824 220 971 461 ---------- ---------- ---------- ---------- 27,100 28,143 55,591 55,150 ---------- ---------- ---------- ---------- EXPENSES Depreciation and amortization 5,301 5,159 10,918 10,033 Property operating 1,634 1,352 3,244 2,567 Interest expense 5,155 5,308 10,675 10,250 General and administrative 2,113 2,322 4,337 4,428 Impairment loss on notes receivable -- 2,730 -- 2,730 ---------- ---------- ---------- ---------- 14,203 16,871 29,174 30,008 ---------- ---------- ---------- ---------- Minority interest 46 47 94 94 ---------- ---------- ---------- ---------- INCOME BEFORE GAIN ON SALE OF PROPERTIES 12,851 11,225 26,323 25,048 GAIN ON SALE OF PROPERTIES 53,850 -- 55,133 -- ---------- ---------- ---------- ---------- NET INCOME $ 66,701 $ 11,225 $ 81,456 $ 25,048 ---------- ---------- ---------- ---------- SERIES B PREFERRED DIVIDEND REQUIREMENT $ (2,150) $ (2,150) $ (4,300) $ (4,300) ---------- ---------- ---------- ---------- ATTRIBUTABLE TO COMMON STOCK (NOTE 5) - Income before gain on sale of property $ 10,716 $ 10,559 $ 21,928 $ 20,993 Gain on sale of property $ 53,850 $ -- $ 53,850 $ -- Net income $ 64,566 $ 10,559 $ 75,778 $ 20,993 Basic per share amounts - Income before gain on sale of property $ 0.43 $ 0.44 $ 0.88 $ 0.88 Gain on sale of property $ 2.15 $ -- $ 2.15 $ -- Net income $ 2.58 $ 0.44 $ 3.03 $ 0.88 Weighted average common shares 24,988 24,055 24,988 23,887 Diluted per share amounts - Income before gain on sale of property $ 0.43 $ 0.43 $ 0.87 $ 0.87 Gain on sale of property $ 2.13 $ -- $ 2.14 $ -- Net income $ 2.56 $ 0.43 $ 3.01 $ 0.87 Weighted average common shares and dilutive potential common shares 25,193 24,314 25,180 24,154 Dividends declared per common share $ 0.565 $ 0.545 $ 1.130 $ 1.090
The accompanying notes are an integral part of these financial statements. 3 3 AMERICAN HEALTH PROPERTIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Six Months Ended June 30, -------------------------- 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 81,456 $ 25,048 Depreciation, amortization and other non-cash items 12,178 11,319 Deferred income (296) 481 Gain on sale of properties (55,133) -- Impairment loss on notes receivable -- 2,730 Change in other assets (1,136) (388) Change in accounts payable and accrued liabilities (221) 616 ---------- ---------- 36,848 39,806 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition and construction of real estate properties (16,227) (114,105) Net proceeds from sale of properties 75,825 -- Net increase in funds held by intermediary for 1031 exchange (70,576) -- Mortgage note receivable fundings -- (179) Principal payments on mortgage notes receivable -- 39 Other notes receivable (885) (1,236) Direct financing leases 583 525 Administrative capital expenditures (20) (61) ---------- ---------- (11,300) (115,017) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on bank loans payable 12,000 75,000 Principal payments on mortgage notes payable (309) (229) Financing costs paid (53) (7) Redemption of Psychiatric Group Stock (4,566) -- Proceeds from sale of common stock -- 9,475 Proceeds from exercise of stock options -- 2,653 Cash dividends paid (32,928) (32,880) ---------- ---------- (25,856) 54,012 ---------- ---------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (308) (21,199) CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 3,817 23,053 ---------- ---------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 3,509 $ 1,854 ========== ==========
The accompanying notes are an integral part of these financial statements. 4 4 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. 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 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. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133 - an Amendment of SFAS No. 133", defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. The required adoption of this statement 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 $10,157,000 and $9,311,000 for the six months ended June 30, 1999 and 1998, respectively. The Company had $761,000 and $294,000 of capitalized interest for the six months ended June 30, 1999 and 1998, respectively. 2. KENDALL DISPOSITION On April 16, 1999, the Company completed the sale of Kendall Regional Medical Center (Kendall) 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 recognized a gain for book purposes of $53,850,000 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 is using such proceeds to purchase and convey to the Company like-kind replacement property selected by the Company. Pursuant to the requirements of 5 5 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Section 1031 of the Internal Revenue Code, the Company identified approximately $200 million of potential exchange properties prior to the close of business on May 28, 1999. The Company must acquire all identified replacement properties it will acquire as part of the 1031 exchange by October 13, 1999. As of August 6, 1999, approximately $48 million of like-kind replacement properties have been acquired as part of the 1031 exchange. The Company also has approximately $35 million of additional properties under contract as of August 6, 1999 that will likely be acquired as part of the 1031 exchange. If the Company is successful in 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 a 1031 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. Although the Company believes that it has developed a sufficiently large pool of replacement properties to allow the Company to complete the 1031 exchange, the Company cannot be assured that total revenues generated by replacement properties acquired to effect the 1031 exchange will equal annual revenues previously generated by the Kendall investment, nor can the Company be certain that the 1031 exchange will be completed. 3. OTHER COMMITMENTS As of June 30, 1999, the Company had funded $8,559,000 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. The Company acquired the completed facility in July 1999, whereupon the lease commenced. As of June 30, 1999, the Company had funded $8,500,000 of a $13.8 million commitment to develop two assisted living facilities to be managed by an experienced operator of assisted living facilities. The Company has a $22.5 million forward funding commitment to develop up to nine Alzheimer's care facilities to be operated by the same operator that currently operates two existing Alzheimer's care facilities owned by the Company. As of June 30, 1999, $2,650,000 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 $1,947,000 as of June 30, 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 six months ended June 30, 1999, options to purchase 358,000 shares of common stock at a weighted average exercise price of $20.27 per share were issued pursuant to the Company's stock incentive plans. Options to purchase 10,000 shares of common stock at a weighted average exercise price of $23.18 per share and options to purchase 45,444 Psychiatric Group Depositary Shares at a weighted average exercise price of $22.16 per share expired during the six months ended June 30, 1999. During the six months ended June 30, 1999, 63,172 Psychiatric Group Depositary Shares were issued for vested accumulated DERs. Redemption of Psychiatric Group Stock On May 21, 1999, the Company redeemed all outstanding Psychiatric Group Depositary Shares and the underlying Psychiatric Group Preferred Stock represented thereby (collectively the "Psychiatric Group Stock") at a redemption price of $2.08 per depositary share. The total cost of redemption was $4,566,000. 6 6 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 5. INCOME ATTRIBUTABLE TO COMMON STOCK AND 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 common stock:
Three Months Ended June 30, Six Months Ended June 30, --------------------------------------------- ---------------------------------------------- 1999 1998 1999 1998 --------------------- -------------------- --------------------- --------------------- (In thousands) Income Shares Income Shares Income Shares Income Shares -------- -------- -------- -------- -------- -------- -------- -------- Income before gain on sale of properties $ 12,851 -- $ 11,225 -- $ 26,323 -- $ 25,048 -- Less Series B preferred dividend requirement (2,150) -- (2,150) -- (4,300) -- (4,300) -- Loss (income) attributed to Psychiatric Group Stock 15 -- 1,484 -- (95) -- 245 -- Outstanding common shares -- 24,984 -- 24,054 -- 24,984 -- 23,886 Deferred common shares -- 4 -- 1 -- 4 -- 1 -------- -------- -------- -------- -------- -------- -------- -------- Basic EPS components 10,716 24,988 10,559 24,055 21,928 24,988 20,993 23,887 Effect of dilutive potential common shares - Stock options -- 10 -- 116 -- 7 -- 130 DERs -- 195 -- 143 -- 185 -- 137 Subordinated convertible bonds payable -- -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Diluted EPS components $ 10,716 25,193 $ 10,559 24,314 $ 21,928 25,180 $ 20,993 24,154 ======== ======== ======== ======== ======== ======== ======== ========
Prior to redemption of the Psychiatric Group Stock on May 21, 1999, a portion of the Company's income (loss) was attributable to the Psychiatric Group Stock. The income (loss) before gain on sale of properties attributable to the Psychiatric Group Stock is shown in the table above. The gain on sale of properties attributable to the Psychiatric Group Stock for the six months ended June 30, 1999 was $1,283,000. There was no such gain on sale of properties attributable to the Psychiatric Group Stock for the three months ended June 30, 1999 and 1998 or the six months ended June 30, 1998. 6. SUBSEQUENT EVENT - MERGER AGREEMENT On August 4, 1999, the Company entered into a definitive agreement and plan of merger with Health Care Property Investors, Inc. (HCPI) in which the Company will merge with and into HCPI in a stock-for-stock transaction, with HCPI being the surviving corporation. The common shareholders of the Company will receive a fixed exchange ratio of 0.78 of a share of HCPI common stock for each share of the Company's common stock. In addition, holders of the Company's preferred stock will receive one share of substantially similar HCPI preferred stock in exchange for each share of the Company's preferred stock. The transaction is subject to, among other things, the approval of the shareholders of both companies and the registration of the shares to be issued in connection with the transaction. The transaction will be treated as a purchase for financial accounting purposes, will be tax-free to the Company's shareholders and is expected to close by the end of 1999. 7 EX-99.4 5 PRO FORMA COMBINED FIN. STATEMENTS OF HCPI AND AHP 1 EXHIBIT 99.4 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined financial statements give effect to the merger using the purchase method of accounting, after giving effect to the pro forma adjustments described in the accompanying notes. The unaudited pro forma combined balance sheet gives effect to the merger as if it had occurred on September 30, 1999. The unaudited pro forma combined statements of income for the year ended December 31, 1998 and the nine months ended September 30, 1999 give effect to the merger as if it had occurred at the beginning of the periods presented. PLEASE REMEMBER THAT THE INFORMATION PRESENTED IN THE FOLLOWING PRO FORMA COMBINED FINANCIAL STATEMENTS IS ONLY HYPOTHETICAL AND DOES NOT NECESSARILY REFLECT THE FINANCIAL PERFORMANCE THAT WOULD HAVE ACTUALLY RESULTED IF THE MERGER HAD BEEN COMPLETED ON THOSE DATES. FURTHER, THIS INFORMATION DOES NOT NECESSARILY REFLECT FUTURE FINANCIAL PERFORMANCE RESULTING FROM THE MERGER. This information is only a summary and you should read it together with the historical financial statements and related notes contained in the annual reports, quarterly reports and other information that HCPI has filed with the SEC and incorporated by reference. 2 HEALTH CARE PROPERTY INVESTORS, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1999 (In thousands)
Historical --------------------------------- Health Care American Property Health Pro Forma Investors, Inc. Properties, Inc. Adjustments Pro Forma --------------- ---------------- ---------------- ------------- ASSETS Real Estate Investments Buildings and Improvements $ 1,283,343 $ 796,513 $ 66,897 (1) $ 2,146,753 Accumulated Depreciation (215,258) (118,597) 118,597 (1) (215,258) ----------- ----------- ----------- ----------- 1,068,085 677,916 185,494 1,931,495 Construction in Progress 9,293 15,236 -- 24,529 Land 161,445 81,206 -- 242,651 ----------- ----------- ----------- ----------- 1,238,823 774,358 185,494 2,198,675 Investments in and Advances to Partnerships 46,184 -- -- 46,184 Loans Receivable 187,461 8,669 (4,044)(1) 192,086 Other Assets 23,924 12,860 (4,227)(1) 32,557 Cash and Cash Equivalents 8,199 15,512 -- 23,711 ----------- ----------- ---------- ----------- TOTAL ASSETS $ 1,504,591 $ 811,399 $ 177,223 $ 2,493,213 =========== =========== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Bank Notes Payable $ 100,500 $ 53,000 $ 47,110 (2) $ 200,610 Senior Notes Payable 551,070 219,248 (4,394)(1) 765,924 Convertible Subordinated Notes due 2000 100,000 -- -- 100,000 Mortgage Notes Payable 60,596 56,032 -- 116,628 Accounts Payable, Accrued Expenses and Deferred Income 35,150 29,721 1,260 (1) 66,131 Minority Interests in Partnerships 39,400 359 -- 39,759 STOCKHOLDERS' EQUITY Preferred Stock 187,847 100,000 (11,850)(1) 275,997 Common Stock 32,046 250 19,238 (1) 51,534 Additional Paid-In Capital 463,456 516,335 (37,687)(1) 942,104 Cumulative Net Income 601,153 424,493 (424,493)(1) 601,153 Cumulative Dividends (666,627) (588,039) 588,039 (1) (666,627) ----------- ----------- ---------- ----------- TOTAL STOCKHOLDERS' EQUITY 617,875 453,039 133,247 1,204,161 ----------- ----------- ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,504,591 $ 811,399 $ 177,223 $ 2,493,213 =========== =========== ========== ===========
See accompanying notes to unaudited pro forma combined financial statements. 2 3 HEALTH CARE PROPERTY INVESTORS, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1999 (In Thousands)
Historical --------------------------------- Health Care American Property Health Pro Forma Investors, Inc. Properties, Inc. Adjustments Pro Forma --------------- ---------------- ----------- --------- Revenue Rental Income $ 128,245 $ 79,425 $ -- $ 207,670 Tenant Reimbursements 6,394 2,426 -- 8,820 Interest and Other Income 19,012 2,027 -- 21,039 --------- --------- --------- --------- 153,651 83,878 -- 237,529 --------- --------- --------- --------- Expense Interest Expense 39,496 16,280 4,011 (3) 59,787 Depreciation/Non Cash Charges 32,059 16,518 2,688 (4) 51,265 Facility Operating Expenses 11,894 5,238 -- 17,132 Other Expenses 7,440 6,259 (5,507)(5) 8,192 --------- --------- --------- --------- 90,889 44,295 1,192 136,376 --------- --------- --------- --------- Income From Operations 62,762 39,583 (1,192) 101,153 Minority Interests (3,838) (141) -- (3,979) Gain on Sale of Real Estate Properties 10,303 55,133 -- 65,436 --------- --------- --------- --------- Net Income 69,227 94,575 (1,192) 162,610 --------- --------- --------- --------- Dividends to Preferred Stockholders 12,328 6,450 -- 18,778 Net Income Applicable to Psychiatric Group Depository Shares -- 1,378 -- 1,378 --------- --------- --------- --------- Net Income Applicable to Common Shares $ 56,899 $ 86,747 $ (1,192) $ 142,454(6) ========= ========= ========= ========= Basic Earnings Per Common Share $ 1.80 $ 3.47 $ 2.79(6) ========= ========= ========= Diluted Earnings Per Common Share $ 1.80 $ 3.44 $ 2.73(6) ========= ========= ========= Funds From Operations (7) $ 77,608 $ 49,297 $ 2,783 (8) $ 129,688(6) ========= ========= ========= ========= Dividends Per Common Share $ 2.07 $ 1.70 -- $ 2.07 ========= ========= ========= ========= Weighted Average Shares Outstanding -- Basic 31,590 24,988 (5,500)(9) 51,078 ========= ========= ========= ========= Weighted Average Shares Outstanding -- Diluted 34,317 25,189 (5,005)(9) 54,501 ========= ========= ========= =========
See accompanying notes to unaudited pro forma combined financial statements. 3 4 HEALTH CARE PROPERTY INVESTORS, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1998 (In Thousands)
Historical --------------------------------- Health Care American Property Health Pro Forma Investors, Inc. Properties, Inc. Adjustments Pro Forma --------------- ---------------- ----------- --------- Revenue Rental Income $ 134,158 $ 105,600 $ -- $ 239,758 Tenant Reimbursements 2,800 2,099 -- 4,899 Interest and Other Income 24,591 5,023 -- 29,614 --------- --------- --------- --------- 161,549 112,722 -- 274,271 --------- --------- --------- --------- Expense Interest Expense 36,753 21,609 5,339 (3) 63,701 Depreciation/Non Cash Charges 32,523 21,354 3,579 (4) 57,456 Facility Operating Expenses 5,053 5,769 -- 10,822 Impairment Loss on Real Estate and Notes Receivable -- 8,330 -- 8,330 Other Expenses 8,566 9,006 (8,003)(5) 9,569 --------- --------- --------- --------- 82,895 66,068 915 149,878 --------- --------- --------- --------- Income From Operations 78,654 46,654 (915) 124,393 Minority Interests (5,540) (189) -- (5,729) Gain on Sale of Real Estate Properties 14,053 -- -- 14,053 --------- --------- --------- --------- Net Income 87,167 46,465 (915) 132,717 --------- --------- --------- --------- Dividends To Preferred Stockholders 8,532 8,600 -- 17,132 Net Loss Applicable To Psychiatric Group Depositary Shares -- (5,180) -- (5,180) --------- --------- --------- --------- Net Income Applicable to Common Shares $ 78,635 $ 43,045 $ (915) $ 120,765(6) ========= ========= ========= ========= Basic Earnings Per Common Share $ 2.56 $ 1.77 $ 2.40(6) ========= ========= ========= Diluted Earnings Per Common Share $ 2.54 $ 1.75 $ 2.40(6) ========= ========= ========= Funds From Operations (7) $ 96,255 $ 63,485 $ 4,384 (8) $ 164,124(6) ========= ========= ========= ========= Dividends Per Common Share $ 2.62 $ 2.20 $ 2.62 ========= ========= ========= Weighted Average Shares Outstanding -- Basic 30,747 24,379 (4,891)(9) 50,235 ========= ========= ========= ========= Weighted Average Shares Outstanding -- Diluted 33,664 24,605 (5,119)(9) 53,150 ========= ========= ========= =========
See accompanying notes to unaudited pro forma combined financial statements. 4 5 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS BALANCE SHEET (1) Adjustments to reflect (a) the estimated fair value of assets acquired and liabilities assumed, (b) the elimination of AHP stockholders' equity, (c) the issuance of HCPI's common stock in exchange for all the outstanding common stock of AHP and (d) the conversion of AHP series B cumulative redeemable preferred stock into HCPI series C cumulative redeemable preferred stock. Components of the estimated purchase price (in thousands): LIABILITIES ASSUMED: Existing Liabilities Net Assumed $358,360 Estimated Fair Value Decrease in Liabilities (3,134) Estimated Increase in Bank Credit Facility 47,110 -------- Estimated Total Liabilities Assumed $402,336 ======== EQUITY ISSUED: Preferred Stock (4,000,000 depositary shares valued at $22.04, the average closing price of AHP series B cumulative redeemable preferred depositary shares during the week of August 2, 1999) 88,150 Common Stock (19,488,000 shares valued at $25.57 per share, the average closing price of HCPI common stock during the week of August 2, 1999) 498,386 Estimated Registration Costs (250) -------- Estimated Equity Issued 586,286 -------- Estimated Total Purchase Price $988,622 ======== Fair value of the real estate properties are based on preliminary estimates. HCPI is in the process of determining fair values on a property-by-property basis using the present value of future cash flows. Senior Notes Payable have been adjusted to estimated fair values based upon current interest rates. Estimated allocation of the purchase price (in thousands): Cash and Cash equivalents $ 15,512 Estimated Real Estate Properties 959,852 Estimated Loans Receivable 4,625 Estimated Other Assets 8,633 -------- Estimated Assets Acquired $988,622 ======== 5 6 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (2) Adjustment to reflect estimated borrowings required to fund the amounts listed below in connection with the merger (in thousands): AHP executive employment and consulting agreements costs $ 17,000 Estimated cash payments for AHP common stock options and rights 8,500(a) Other AHP employee and director compensation costs 3,300 Financial advisory, legal, accounting and other costs 18,310 -------- $ 47,110 ======== - ------------- (a) assumes outstanding options to acquire AHP common stock were converted into the right to receive cash. STATEMENTS OF INCOME (3) Adjustment to reflect the effect of (a) the increase in interest expense related to additional borrowings described in the adjustment described in Note (2) applying an 8.25% annual interest rate (a change of 0.125% in this interest rate would result in a $60,000 annual change in this interest expense adjustment) and (b) the increase in interest expense related to adjusting assumed liabilities to estimated fair value. (4) Adjustment to reflect (a) increased depreciation expense associated with the increase to fair value of the AHP depreciable property using the straight-line method over a 35-year period and (b) elimination of amortization expense related to intangible assets which have no continuing value to HCPI after the merger. (5) Adjustments to reflect the net reduction in general and administrative expenses resulting from (a) the elimination of most of AHP's payroll and corporate office costs, (b) the elimination of duplicative administrative costs and offset by (c) increased payroll and related costs pertaining to additional employees required by HCPI due to the merger. (6) If the adjustments referred to in (5) above had not been made, (a) pro forma net income applicable to common shares would have been $136,947 and $112,762 for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively, (b) pro forma basic earnings per common share would have been $2.68 and $2.24 for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively, (c) pro forma diluted earnings per common share would have been $2.63 and $2.24 for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively, and (d) pro forma funds from operations would have been $124,181 and $156,121 for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively. (7) HCPI believes that funds from operations is an important supplemental measure of operating performance. Funds from operations is defined as net income applicable to common shares (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructure and sales of property, plus real estate depreciation, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations does not, and is not intended to, represent cash generated from operating activities in accordance with generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income. Funds from 6 7 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) operations, as defined by HCPI, may not be comparable to similarly titled items reported by other real estate investment trusts that do not define it in accordance with the definition prescribed by the National Association of Real Estate Investment Trusts (NAREIT). (8) Adjustment to reflect the effect of the merger upon funds from operations due to (a) additional interest expense on additional borrowings discussed in Note (2) and an increase in interest expense related to adjusting assumed liabilities to estimated fair value, (b) elimination of non-cash amortization due to the elimination of intangible assets with no future value after the completion of the merger and (c) impact of adjustments to general and administrative expenses discussed in Note (5). (9) Adjustment to reflect the impact of the issuance of HCPI common stock by applying the exchange ratio of 0.78 to the outstanding AHP common stock. Assumes options to acquire AHP common stock were converted into the right to receive cash. 7 -----END PRIVACY-ENHANCED MESSAGE-----