-----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, QS5+ShpgcZQ3ZV68BPggrPYyDKvjnhryeELjAvrHMRphBXJb7XJ2D7WLP8QMwrRX zUehH5qwlhl6/oTj0QLgjw== 0000950134-95-002978.txt : 19951120 0000950134-95-002978.hdr.sgml : 19951120 ACCESSION NUMBER: 0000950134-95-002978 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HEALTH PROPERTIES INC CENTRAL INDEX KEY: 0000808240 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 954084878 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09381 FILM NUMBER: 95593072 BUSINESS ADDRESS: STREET 1: 6400 S FIDDLERS GREEN CIRCLE STREET 2: STE 1800 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037969793 MAIL ADDRESS: STREET 1: 6400 S FIDDLERS GREEN CIRCLE STREET 2: SUITE 1800 CITY: ENGLEWOOD STATE: CA ZIP: 80111 10-Q 1 FORM 10-Q 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO __________ COMMISSION FILE NUMBER 1-9381 American Health Properties, Inc. (Exact name of registrant as specified in its charter) DELAWARE 95-4084878 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6400 FIDDLER'S GREEN CIRCLE, SUITE 1800, 80111 ENGLEWOOD, CO (Zip Code) (Address of principal executive offices)
(303) 796-9793 (Registrant's telephone number, including area code) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO -- -- SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE, OUTSTANDING AT NOVEMBER 7, 1995 -- 23,418,354 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 AMERICAN HEALTH PROPERTIES, INC. SEPTEMBER 30, 1995 TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE CONSOLIDATED COMPANY Item 1. Consolidated Condensed Financial Statements: Balance sheets as of September 30, 1995 and December 31, 1994................................... 2 Statements of operations for the three and nine months ended September 30, 1995 and 1994.................................................................... 3 Statements of cash flows for the nine months ended September 30, 1995 and 1994.................. 4 Notes to financial statements................................................................... 5 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations................................................... 8 CORE GROUP Item 1. Core Group Combined Condensed Financial Statements: Balance sheets as of September 30, 1995 and December 31, 1994................................... 15 Statements of operations for the three and nine months ended September 30, 1995 and 1994.................................................................... 16 Statements of cash flows for the nine months ended September 30, 1995 and 1994.................. 17 Notes to financial statements................................................................... 18 Item 2. Management's Discussion and Analysis of Core Group Combined Financial Condition and Results of Operations.......................................... 22 PSYCHIATRIC GROUP Item 1. Psychiatric Group Combined Condensed Financial Statements: Balance sheets as of September 30, 1995 and December 31, 1994................................... 27 Statements of operations for the three and nine months ended September 30, 1995 and 1994.................................................................... 28 Statements of cash flows for the nine months ended September 30, 1995 and 1994.................. 29 Notes to financial statements................................................................... 30 Item 2. Management's Discussion and Analysis of Psychiatric Group Combined Financial Condition and Results of Operations.......................................... 34 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................................ 39
1 3 AMERICAN HEALTH PROPERTIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands except per share amounts)
September 30, December 31, 1995 1994 - --------------------------------------------------------- ------------- ------------ (Unaudited) ASSETS Real estate investments Real property and mortgage notes $ 656,615 $ 603,870 Construction loan and investments 2,277 21,383 Accumulated depreciation (78,757) (70,617) --------- --------- 580,135 554,636 Notes receivable and financing leases 11,235 13,244 Other assets 9,669 9,785 Cash and short-term investments 2,584 1,838 - --------------------------------------------------------- --------- --------- $ 603,623 $ 579,503 ========================================================= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Bank loans payable $ 73,000 $ 14,500 Notes and bonds payable 207,323 231,163 Accounts payable and accrued liabilities 6,044 9,668 Dividends payable 11,990 11,989 Deferred income 4,445 4,682 - --------------------------------------------------------- --------- --------- 302,802 272,002 - --------------------------------------------------------- --------- --------- Commitments and contingencies Stockholders' equity Preferred stock $.01 par value; 1,000 shares authorized; 208 shares issued and outstanding 2 -- Common stock $.01 par value; 100,000 shares authorized; 20,853 and 20,851 shares issued and outstanding 209 209 Additional paid-in capital 426,999 426,783 Cumulative net income 199,027 169,931 Cumulative dividends (325,416) (289,422) - --------------------------------------------------------- --------- --------- 300,821 307,501 - --------------------------------------------------------- --------- --------- $ 603,623 $ 579,503 ========================================================= ========= =========
The accompanying notes are an integral part of these financial statements. 2 4 AMERICAN HEALTH PROPERTIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1995 1994 1995 1994 - ----------------------------------------------- -------- -------- -------- -------- REVENUES Rental income $ 17,182 $ 17,033 $ 50,477 $ 50,439 Mortgage interest income 2,079 1,444 5,018 4,334 Additional rental and interest income 2,769 2,442 8,122 7,165 Other interest income 375 855 2,492 3,042 - ----------------------------------------------- -------- -------- -------- -------- 22,405 21,774 66,109 64,980 - ----------------------------------------------- -------- -------- -------- -------- EXPENSES Depreciation and amortization 3,674 3,323 10,667 10,655 Interest expense 7,126 6,409 20,860 19,228 General and administrative 1,664 1,566 4,967 3,929 Targeted stock issuance costs -- -- 300 -- Write-down of real estate investments -- -- -- 30,000 - ----------------------------------------------- -------- -------- -------- -------- 12,464 11,298 36,794 63,812 - ----------------------------------------------- -------- -------- -------- -------- Minority interest 57 81 219 245 - ----------------------------------------------- -------- -------- -------- -------- NET INCOME $ 9,884 $ 10,395 $ 29,096 $ 923 =============================================== ======== ======== ======== ======== ATTRIBUTABLE TO - CORE GROUP COMMON STOCK Net Income $ 8,235 $ 7,919 $ 24,417 $ 24,481 Net Income Per Share $ 0.39 $ 0.38 $ 1.17 $ 1.17 Weighted Average Shares Outstanding 20,920 20,872 20,911 20,848 Cash Dividends Per Share $ 0.495 $ 0.475 $ 1.485 $ 1.399 PSYCHIATRIC GROUP DEPOSITARY SHARES Net Income (Loss) $ 1,649 $ 2,476 $ 4,679 $(23,558) Net Income (Loss) Per Share $ 0.79 $ 1.19 $ 2.24 $ (11.30) Weighted Average Shares Outstanding 2,091 2,087 2,091 2,085 Cash Dividends Per Share $ 0.80 $ 1.00 $ 2.40 $ 3.26
The accompanying notes are an integral part of these financial statements. 3 5 AMERICAN HEALTH PROPERTIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended September 30, ------------------------------- 1995 1994 - ----------------------------------------------------------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 29,096 $ 923 Depreciation, amortization and other non-cash items 12,410 12,115 Deferred income (227) 415 Write-down of real estate investments -- 30,000 Change in other assets (309) 5 Change in accounts payable and accrued liabilities (4,101) (4,996) - ----------------------------------------------------------- -------- -------- 36,869 38,462 - ----------------------------------------------------------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition and construction of real estate properties (41,949) (38,166) Proceeds from sale of properties 10,825 -- Principal payments on mortgage notes receivable 10 -- Construction loan fundings (5,136) (20,690) Construction loan paid -- 16,836 Other notes receivable 4,464 (874) Direct financing leases (2,455) (1,191) Administrative capital expenditures (95) (79) - ----------------------------------------------------------- -------- -------- (34,336) (44,164) - ----------------------------------------------------------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (payments) on bank loans payable 58,500 20,500 Principal payments on notes payable (24,000) -- Principal payments on mortgages -- (14,468) Financing costs paid (276) (195) Proceeds from exercise of stock options -- 1,963 Cash paid in lieu of fractional shares (18) -- Dividends paid (35,993) (35,834) - ----------------------------------------------------------- -------- -------- (1,787) (28,034) - ----------------------------------------------------------- -------- -------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 746 (33,736) CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,838 35,670 - ----------------------------------------------------------- -------- -------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 2,584 $ 1,934 =========================================================== ======== ========
The accompanying notes are an integral part of these financial statements. 4 6 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 and psychiatric hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building. Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the Company completed the distribution of 2,085,675 Psychiatric Group Depositary Shares to holders of its Common Stock (the Distribution). Shareholders received one Psychiatric Group Depositary Share for every ten shares of Common Stock held of record at the close of business on July 14, 1995. Each Psychiatric Group Depositary Share represents one-tenth of a share of Psychiatric Group Preferred Stock, a new series of preferred stock, par value $0.01 per share. The Distribution is designed to separate the economic attributes of the Company's investments in psychiatric hospitals (the Psychiatric Group) and its investments in acute care and rehabilitation hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building (the Core Group) into two distinct portfolios, with two distinct classes of publicly traded shares intended to represent those portfolios. In connection with the Distribution, the Company specifically identified or allocated its assets, liabilities and stockholders' equity, and its revenues, expenses and cash flow items, between the Core Group and Psychiatric Group. The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Psychiatric Group. The Company's existing Common Stock is intended to reflect the separate financial performance of the Core Group. However, the change in the capital structure of the Company effected by the Distribution does not affect the respective legal title to assets or responsibility for liabilities of the Company, and each holder of Common Stock or Psychiatric Group Depositary Shares is a holder of an issue of capital stock of the entire Company and is subject to the risks associated with an investment in the Company and all of its businesses, assets and liabilities. 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, 1994 and the Company's current report on Form 8-K, dated August 14, 1995. The financial statements of the Core Group and the Psychiatric Group are also included elsewhere herein. For purposes of computing per share data for periods prior to the actual Distribution, the number of shares of Core Group Common Stock are assumed to be the same as the corresponding number of shares of the Company's common stock prior to the Distribution, while the number of Psychiatric Group Depositary Shares are assumed to be one-tenth of the corresponding number of shares of the Company's common stock prior to the Distribution. Interest Paid Interest paid by the Company, net of interest capitalized, was $22,854,000 and $21,057,000 for the nine months ended September 30, 1995 and 1994, respectively. The Company had $53,000 and $883,000 of capitalized interest for the nine months ended September 30, 1995 and 1994, respectively. 5 7 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 2. STOCKHOLDERS' EQUITY Core Group Common Stock Offering Pursuant to a Prospectus dated September 26, 1995 and a Prospectus Supplement dated October 17, 1995, the Company offered and sold 2,500,000 additional shares of Core Group Common Stock at a price of $21.375 per share. Net proceeds of approximately $50.8 million were received October 23, 1995 upon closing of the offering and were used to pay off the balance outstanding under the Company's revolving credit facility and its $24 million term loan. Stock Incentive Plans Under the terms of the Company's stock incentive plans, restricted stock awards, stock options and dividend equivalent rights (DERs) have been adjusted to reflect the Distribution. During the nine months ended September 30, 1995, options to purchase 183,537 shares of Core Group Common Stock at a weighted average exercise price of $18.97 per share and 14,859 Core Group restricted stock awards were issued pursuant to the Company's stock incentive plans. Options and related DERs to purchase 14,409 shares of Core Group Common Stock at a weighted average exercise price of $18.92 per share and 12,639 Core Group restricted stock awards were canceled during the nine months ended September 30, 1995. During the nine months ended September 30, 1995, options to purchase 18,354 Psychiatric Group Depositary Shares at a weighted average exercise price of $18.90 per share and 1,486 restricted Psychiatric Group Depositary Share awards were issued pursuant to the Company's stock incentive plans. Options and related DERs to purchase 4,493 shares of Psychiatric Group Depositary Shares at a weighted average exercise price of $17.76 per share and 1,263 restricted Psychiatric Group Depositary Share awards were canceled during the nine months ended September 30, 1995. 3. COMMITMENTS Other Notes Receivable The Company provides financing at variable rates to certain psychiatric hospital operators under revolving credit agreements secured by accounts receivable. The aggregate commitment under these credit agreements was $5.7 million at September 30, 1995 of which $1.2 million was unfunded. Real Estate Properties The Company has the right to approve capital expenditures at all of its properties, the option to fund certain capital expenditures and, in certain situations, is obligated to fund approved capital expenditures on terms comparable to the original investment. At September 30, 1995, the Company had remaining commitments to fund approximately $7.1 million of capital expenditures pursuant to these rights and obligations. The base and additional rent provisions of the leases are amended when such capital expenditures are funded to reflect the Company's increased investment. As of September 30, 1995, the Company had funded $1.9 million of a $4 million commitment to finance the construction of a 96-bed Alzheimer's care facility in Houston, Texas. The Company will own the facility upon completion in early 1996 and enter into a long-term lease. The facility will be operated by an experienced operator of long-term care facilities. 6 8 AMERICAN HEALTH PROPERTIES, INC., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The Company has total commitments of $16.6 million to finance the construction of three separate 80-unit assisted living facilities located in El Paso, Texas ($5.5 million), Odessa, Texas ($5.5 million) and Walla Walla, Washington ($5.6 million). Construction of the facilities will take approximately ten months. The Company will own the facilities upon completion and enter into long-term leases with an experienced operator of assisted living facilities. 4. PROPERTY SALES AND RESTRUCTURINGS In February 1995, the Company sold its Westwood and Pembroke, Massachusetts psychiatric hospital investments. The cash proceeds of $13,825,000 represented payment for the $10,825,000 net book value of the real property and repayment of the $3,000,000 balance outstanding under a revolving credit agreement that had been provided to the operator. The Company's total revenues from these two investments were $412,000 and $2,219,000 for the nine months ended September 30, 1995 and 1994, respectively, and $3,000,000 for the full year in 1994. In March 1995, the Company restructured the terms of its two Florida psychiatric hospital investments that were included in a $30 million write-down recorded by the Company in 1994 against its psychiatric portfolio. Pursuant to the restructuring, which was effective January 1, 1995, the annual minimum rental obligation of The Retreat psychiatric hospital in Sunrise, Florida was reduced from $2,359,000 to $1,100,000, and the annual minimum rental obligation of The Manors psychiatric hospital in Tarpon Springs, Florida was reduced from $855,000 to $600,000. As part of the restructuring, The Retreat used an existing $1,000,000 lease reserve fund to pay down outstanding borrowings under a revolving credit agreement provided by the Company, and the maximum amount available for borrowing under the credit agreement was reduced from $2,250,000 to $1,000,000. The Manors used an existing $325,000 lease reserve fund to pay down outstanding borrowings under a $2,000,000 revolving credit agreement provided by the Company. 5. OTHER EVENTS In October 1995, the Company received $29.15 million as proceeds from the payoff of its interest in a mortgage loan on a hospital located in Austin, Texas. The proceeds received by the Company represented $26.5 million in principal and a $2.65 million prepayment premium, and were used by the Company to reduce outstanding borrowings under its revolving credit facility. 7 9 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a discussion of the consolidated financial condition and results of operations of the Company which should be read in conjunction with the consolidated condensed financial statements and accompanying notes. For discussions of the financial condition and results of operations of the Core Group and the Psychiatric Group, see the management's discussion and analysis of financial condition and results of operations of the Core Group and the Psychiatric Group included elsewhere herein. Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the Company completed the distribution of 2,085,675 Psychiatric Group Depositary Shares to holders of its Common Stock (the Distribution). Shareholders received one Psychiatric Group Depositary Share for every ten shares of Common Stock held of record at the close of business on July 14, 1995. Each Psychiatric Group Depositary Share represents one-tenth of a share of Psychiatric Group Preferred Stock, a new series of preferred stock, par value $0.01 per share. The Distribution was designed to separate the economic attributes of the Company's investments in psychiatric hospitals (the Psychiatric Group) and its investments in acute care and rehabilitation hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building (the Core Group) into two distinct portfolios, with two distinct classes of publicly traded shares intended to represent those portfolios. In connection with the Distribution, the Company specifically identified or allocated its assets, liabilities and stockholders' equity, and its revenues, expenses and cash flow items, between the Core Group and Psychiatric Group. The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Psychiatric Group. The Company's existing Common Stock is intended to reflect the separate financial performance of the Core Group. However, the change in the capital structure of the Company effected by the Distribution does not affect the respective legal title to assets or responsibility for liabilities of the Company, and each holder of Common Stock or Psychiatric Group Depositary Shares is a holder of an issue of capital stock of the entire Company and is subject to the risks associated with an investment in the Company and all of its businesses, assets and liabilities. OPERATING RESULTS Third Quarter and Year to Date 1995 Compared With 1994 For the third quarter of 1995, the Company reported net income of $9,884,000 compared with net income of $10,395,000 for the third quarter of 1994. For the nine months ended September 30, 1995, the Company reported net income of $29,096,000 compared with net income of $923,000 for the first nine months of 1994. Net income for the first nine months of 1994 included a $30,000,000 write-down of psychiatric real estate investments as a result of accelerating negative trends in the psychiatric industry. The decrease in net income for the third quarter and, excluding the write-down, the first nine months of 1995 was primarily attributable to a reduction in income due to the sale of three psychiatric properties and the lease restructurings of two psychiatric investments subsequent to the third quarter of 1994. (See the Consolidated Condensed Statement of Operations for the comparative gross and per share amounts of net income or loss attributable to the Core Group Common Stock and the Psychiatric Group Depositary Shares.) 8 10 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Rental income was $17,182,000 for the third quarter of 1995, an increase of $149,000 or 1% from $17,033,000 for the third quarter of 1994. Rental income was $50,477,000 for the nine months ended September 30, 1995, an increase of $38,000 or less than 1% from $50,439,000 for the comparable period in 1994. This net increase was primarily attributable to rental income from new properties acquired and various capital additions subsequent to the first quarter of 1994, which was partially offset by a reduction in rental income due to the sale of three psychiatric properties and the lease restructurings of two psychiatric investments. These factors, combined with lower depreciation expense on psychiatric properties written down in June 1994, resulted in a net increase in depreciation and amortization of $351,000 to $3,674,000 for the third quarter of 1995 compared with the third quarter of 1994 and a net increase of $12,000 to $10,667,000 for the nine months ended September 30, 1995 compared with the same period in 1994. Mortgage interest income increased $635,000 to $2,079,000 for the third quarter of 1995 from $1,444,000 for the third quarter of 1994. Mortgage interest income for the nine months ended September 30, 1995 increased $684,000 to $5,018,000 from $4,334,000 for the comparable period in 1994. This increase was primarily attributable to the conversion of a construction loan on a hospital located in Austin, Texas to a mortgage loan during the third quarter of 1995. In October 1995, the Company received $29.15 million as proceeds from the payoff of this mortgage loan, which represented $26.5 million in principal and a $2.65 million prepayment premium. Additional rental and interest income was $2,769,000 for the third quarter of 1995, an increase of $327,000 or 13% from $2,442,000 for the third quarter of 1994. Additional rental and interest income was $8,122,000 for the nine months ended September 30, 1995, an increase of $957,000 or 13% from $7,165,000 for the comparable period in 1994. This increase was primarily attributable to first-time additional rent from several properties. Other interest income decreased $480,000 to $375,000 for the third quarter of 1995 from $855,000 for the third quarter of 1994. This decrease was primarily attributable to the previously mentioned conversion of a construction loan to a mortgage loan in the third quarter of 1995 upon completion of construction. Other interest income for the nine months ended September 30, 1995 decreased $550,000 to $2,492,000 from $3,042,000 for the comparable period in 1994. The first nine months of 1994 included the recognition of $710,000 of fee income related to the prepayment of a construction loan in February 1994. The remaining net increase in other interest income during the first nine months of 1995 resulted from a higher average construction loan balance, which was partially offset by a lower average balance of short-term investments and a lower average balance of borrowings outstanding under revolving credit facilities provided to psychiatric hospital operators. Interest expense was $7,126,000 for the third quarter of 1995, an increase of $717,000 or 11% from $6,409,000 for the third quarter of 1994. Interest expense was $20,860,000 for the nine months ended September 30, 1995, an increase of $1,632,000 or 8% from $19,228,000 for the comparable period in 1994. Interest expense increased as a result of higher average bank loan borrowings during the third quarter and first nine months of 1995 and a reduction in capitalized interest in 1995 compared to 1994. This was partially offset by a reduction in interest expense on senior notes payable as a result of a $24 million maturity in May 1995. 9 11 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS General and administrative expenses increased to $1,664,000 for the third quarter of 1995 from $1,566,000 for the third quarter of 1994. For the first nine months of 1995, general and administrative expenses increased to $4,967,000 from $3,929,000 for the first nine months of 1994. In the second quarter of 1994, the Company reversed $750,000 of a corporate relocation accrual recorded in the fourth quarter of 1993 after the Company decided to maintain its headquarters in Denver, Colorado. The remaining net increase for the third quarter and first nine months of 1995 was primarily attributable to higher expense from the Company's stock incentive plans and costs incurred during the third quarter of 1995 related to financial advisory services provided to the Psychiatric Group by an investment banking firm. The $300,000 targeted stock issuance costs was an additional accrual made in the second quarter of 1995 to reflect the increased costs of the Distribution. The increased costs primarily reflect higher legal and accounting fees and printing and shipping costs as a result of the extended filing period. Future Operating Results The operators of most of the Company's facilities derive a substantial percentage of their total revenues from federal and state health care programs such as Medicare and Medicaid and from other third party payors such as private insurance companies, self-insured employers and health maintenance organizations. Such operators are also subject to extensive federal, state and local government regulation relating to their operations, and the Company's facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with mandated procedures, licensure requirements under state law and certification standards under the Medicare and Medicaid programs. A change in reimbursement levels under the Medicare or Medicaid programs, a reduction in reimbursement by other third party payors or an operator's failure to maintain its certification under Medicare or Medicaid programs could adversely affect revenues to the Company's facilities. The nature of health care delivery in the United States is currently undergoing change and further review at both the national and state levels. Generally accepted goals of reform continue to include controlling costs and improving access to medical care. A proposed plan to decrease the growth in Medicare spending has recently passed both Houses of Congress. The bill also includes revisions and limits on federal programs providing Medicaid reimbursement to state health care programs. If enacted into law, such a bill may have an adverse impact on the level of funds available in the future to health care facilities. The Company's Board and management are monitoring potential changes closely. The Company believes that these potential changes may pose risks for certain institutions that are unwilling or unable to respond. However, the Company believes that this changing health care environment will provide the Core Group with new opportunities for investment in its current facilities as well as new facilities. 10 12 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The ongoing changes in the health care industry include trends toward shorter lengths of hospital stay, increased use of outpatient services, increased federal, state and third party oversight of health care company operations and business practices, and increased demand for capitated health care services (delivery of services at a fixed price per capita basis to a defined group of covered parties). Furthermore, federal, state and third party payors continue to propose and adopt various cost containment measures that restrict the scope of reimbursable health care services and limit increases in reimbursement rates for such services. Payors are also continuing to aggressively enforce compliance with program requirements and pursue providers that they believe have not complied with such requirements. Outpatient business is expected to increase as advances in medical technologies allow more procedures to be performed on an outpatient basis and as payors continue to direct more patients from inpatient care to outpatient care. In addition, the entrance of insurance companies into managed care programs is accelerating the introduction of managed care in new localities, and states and insurance companies continue to negotiate actively the amounts they will pay for services. Moreover, the percentage of health care services that are reimbursed under the Medicare and Medicaid programs continues to increase as the population ages and as states expand their Medicaid programs. Continued eligibility to participate in these programs is crucial to a provider's financial strength. As a result of the foregoing, the revenues and margins may decrease at the Company's hospitals. Notwithstanding the potential for increasing government regulation, the Company believes that health care will continue to be delivered on a local basis and that well-managed, high-quality, cost-controlled facilities will continue to be an integral part of local health care delivery systems. The Company also believes that certain acute care hospitals will need to reconfigure or expand existing facilities or to affiliate themselves with other providers so as to become part of comprehensive and cost-effective health care systems. Such systems will likely include lower cost treatment settings, such as ambulatory care clinics, outpatient surgery centers, skilled nursing facilities and medical office buildings. In general, the Core Group facilities are part of local health care delivery systems or are in the process of becoming integrated into such systems. The Company's future operating results could be affected by the operating performance of the Company's lessees and borrowers. The rental and interest obligations of its facility operators are primarily supported by the facility-specific operating cash flow. Real estate investments in the Company's portfolio are generally further supported by one or more credit enhancements that take the form of cross-default provisions, letters of credit, corporate and personal guarantees, security interests in cash reserve funds, accounts receivable or other personal property and requirements to maintain specified financial ratios. Fundamental changes in the psychiatric industry continue to negatively impact the facility-specific operating cash flow at the Company's psychiatric properties. Institutions responsible for providing insurance coverage to patients who use inpatient psychiatric treatment services have directed efforts toward decreasing their payments for such services, thereby reducing hospital operating revenues. Some cost-cutting measures used by such institutions include decreasing the inpatient length of stay, intensively reviewing utilization, directing patients from inpatient care to outpatient care and negotiating reduced reimbursement rates for services. In addition, such institutions have extended the length of time for making payments, resulting in increases in accounts receivable. The wider use of psychotropic drugs has also resulted in significant declines in the average length of stay. 11 13 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Although the operators of the psychiatric hospitals are responding by developing lower cost outpatient and daypatient programs, increasing case management and reducing operating costs, their efforts are generally not consistently mitigating the negative impact of these fundamental psychiatric industry changes. The Company is currently providing financing under revolving credit agreements to the operators of three of its psychiatric hospitals. As of November 10, 1995, outstanding borrowings under such agreements totaled $4,475,000, and the Company has committed to fund an additional $1,225,000 of borrowings upon request, subject to certain conditions. These borrowings, which are secured by accounts receivable and certain personal property and which contain events of default that would be triggered by defaults under the lease relating to the relevant psychiatric hospital, are the primary source of financing for these operators' operating and capital needs. These psychiatric hospitals have, from time to time, been unable to generate sufficient cash flow for working capital and the development of new programs. In certain cases, these psychiatric hospitals have not been able to pay down the outstanding borrowings under the revolving credit agreements provided by the Company or to secure replacement financing from third-party lenders. To the extent the psychiatric hospitals have increased working capital needs in the future, the Psychiatric Group may be the only source of such financing. In the event the Company's board of directors determines that it is appropriate to provide additional working capital financing to a psychiatric hospital, it may cause the Core Group to make revolving inter-Group loans to the Psychiatric Group to fund such financing (to the extent consistent with its then existing policies), although the Company's board of directors is under no obligation to do so. The Company is currently discussing with the operator of the two Four Winds psychiatric hospitals in New York possible alternatives for creating additional available capital for the development and expansion of the hospitals' programs, including the release of certain collateral securing the Company's mortgage loan investments, which were $37.9 million at September 30, 1995. The Company is currently reviewing the operator's plan for these new programs which are intended to address the potential negative consequences of the expected changes in Medicaid reimbursement and the increase in managed care penetration in the State of New York. The Company has received information from the operator of its two psychiatric hospitals in Florida regarding wide-ranging objections by several large insurance companies and other payors with respect to claims presented for services rendered. There have also been a series of negative stories in the national media and the local press in Florida on psychiatric care provided in Florida, including criticism of admissions policies and practice patterns at psychiatric hospitals in the state generally, and at these two facilities. There have been legislative hearings in Florida on these issues, and the Company believes that regulatory investigations are being conducted. At this time both of these facilities remain current on their rent and interest obligations to the Company, and the Company is continuing to monitor this situation closely. 12 14 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS In September 1995, the Company retained an investment banking firm for an initial one year period to provide a broad range of financial advisory services to the Psychiatric Group. These services are expected to include supplemental monitoring of the performance of individual assets, assistance in potential sales or restructurings of particular investments and continuing assessments of available strategic alternatives for the portfolio. In 1992, the Company recorded a $45,000,000 write-down of its investments in two psychiatric hospitals and restructured the payment obligations of these two facilities. In addition, at June 30, 1994, in view of negative trends that caused declining cash flow at a number of the psychiatric hospitals, the Company recorded a $30,000,000 write-down of its investments in the psychiatric hospitals. Although management believes that the recorded investments in psychiatric hospitals are realizable, if the cash flow at the psychiatric hospitals continues to decline, the Company may be required to further restructure payment obligations or make additional write-downs of the value of its investments in the psychiatric hospitals. In July 1994, the Company announced its intention to pursue alternatives for the psychiatric portfolio including selected sales of hospitals to operators or other parties, restructuring of financial obligations or other approaches that might allow the effective separation of these assets from the Company's core portfolio of acute care and rehabilitation hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building. As part of this initiative, the Company sold its psychiatric property in Torrance, California in October 1994 for $5,772,000 in cash (at net book value), sold two of its psychiatric properties in Massachusetts in February 1995 for $13,825,000 in cash (at net book value), restructured the leases and revolving credit agreements of its two Florida psychiatric investments in March 1995 and has issued the Psychiatric Group Depositary Shares. Additional rental income and interest income from the Company's existing investments will be affected by changes in the revenues of the underlying business operations upon which such income is based. The Company's acute care investments accounted for 87% of net additional rental and interest income for the first nine months of 1995, while rehabilitation and psychiatric investments accounted for 6% and 7%, respectively. Historically, a substantial portion of the Company's additional rental and interest income has been attributable to six of the Company's original acute care properties (the "Original Properties"). With the significant revenue growth at a majority of the Original Properties in recent years, two properties had reached the additional rent transition point at the end of 1994 and it is anticipated that other properties may do so over the next few years. The Company's revenue participation rate for the six Original Properties declines from 5% to 1% when the additional rent transition point is reached. At December 31, 1994, the amount of potential additional rent at the 5% revenue participation rate for the six Original Properties was approximately $2.8 million per annum. 13 15 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The future operating results of the Company will be affected by additional factors including the amount, timing and yield of additional real estate investments and the competition for such investments. Operating results will also be affected by the availability and terms of the Company's future equity and debt financing. The Company's financing strategy includes the objective to reduce its cost of capital over time and enhance its financial flexibility to facilitate future growth. The Company believes that the distribution of the Psychiatric Group Depositary Shares will facilitate achievement of this objective. The Company's senior debt carries an implied investment grade rating from two rating agencies. In August 1994, the Company's BBB- implied senior debt rating was affirmed by Standard & Poor's but the outlook was revised to negative from stable. Duff & Phelps Credit Rating Co. assigned an initial implied senior debt rating of BBB- in November 1994. LIQUIDITY AND CAPITAL RESOURCES As of November 10, 1995, the Company had commitments of $22.6 million to fund construction obligations and capital expenditures over approximately the next ten months. Aggregate unfunded commitments under revolving credit agreements provided to facility operators totaled $1.2 million as of November 10 , 1995. The Company has recently increased its liquidity and enhanced its financial flexibility. On October 11, 1995, the Company received $29.15 million as proceeds from the payoff of its interest in a mortgage loan. On October 23, 1995, the Company completed an offering of 2,500,000 additional shares of Core Group Common Stock resulting in net proceeds of $50.8 million. Proceeds from the mortgage loan payoff and equity offering were used to pay off the outstanding balance under the Company's revolving credit facility and its $24 million term loan. The Company has a $100 million unsecured revolving credit facility which matures on December 31, 1996. As of November 10, 1995, the Company had no outstanding borrowings under its revolving credit facility and had $4.9 million in cash and short-term investments. The Company's total indebtedness as of November 10, 1995 was $207.3 million. The Company will utilize its revolving credit facility to fund its commitments and future acquisitions. Although the Company does not have any current intention to borrow beyond the Company's revolving credit line, the Company may incur additional indebtedness or refinance existing indebtedness if the Company determines that opportunities to pursue such transactions would be attractive. The Company currently believes it has sufficient capital to meet its commitments and that its cash flow and liquidity will continue to be sufficient to fund current operations and to provide for the payment of dividends to stockholders in compliance with the applicable sections of the Internal Revenue Code governing real estate investment trusts. 14 16 AMERICAN HEALTH PROPERTIES, INC. CORE GROUP COMBINED CONDENSED BALANCE SHEETS (In thousands)
September 30, December 31, 1995 1994 - ------------------------------------------------------ ------------- ------------ ASSETS (Unaudited) Real estate investments Real property and mortgage notes $ 593,788 $ 528,291 Construction loan and investments 2,277 21,383 Accumulated depreciation (74,999) (65,042) --------- --------- 521,066 484,632 Financing leases 6,271 3,816 Revolving loan to Psychiatric Group 5,180 9,428 Fixed rate loan to Psychiatric Group 9,175 20,000 Other assets 9,079 8,972 Cash and short-term investments 2,584 1,838 - ------------------------------------------------------ --------- --------- $ 553,355 $ 528,686 ====================================================== ========= ========= ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY Bank loans payable $ 73,000 $ 14,500 Notes and bonds payable 207,323 231,163 Accounts payable and accrued liabilities 5,629 9,480 Dividends payable 10,322 10,112 Deferred income 4,247 4,232 - ------------------------------------------------------ --------- --------- 300,521 269,487 - ------------------------------------------------------ --------- --------- Commitments and contingencies Total Attributed Core Group Equity 252,834 259,199 - ------------------------------------------------------ --------- --------- $ 553,355 $ 528,686 ====================================================== ========= =========
The accompanying notes are an integral part of these financial statements. 15 17 AMERICAN HEALTH PROPERTIES, INC. CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1995 1994 1995 1994 - ---------------------------------------- ------- ------- ------- ------- REVENUES Rental income $16,501 $14,942 $48,105 $44,166 Mortgage interest income 609 -- 609 -- Additional rental income 2,543 2,207 7,570 6,660 Other interest income 218 574 1,959 2,293 Interest on loans to Psychiatric Group 433 1,047 1,602 3,124 - ---------------------------------------- ------- ------- ------- ------- 20,304 18,770 59,845 56,243 - ---------------------------------------- ------- ------- ------- ------- EXPENSES Depreciation and amortization 3,488 3,088 10,051 9,078 Interest expense 7,126 6,409 20,860 19,228 General and administrative 1,398 1,273 4,298 3,211 - ---------------------------------------- ------- ------- ------- ------- 12,012 10,770 35,209 31,517 - ---------------------------------------- ------- ------- ------- ------- Minority interest 57 81 219 245 - ---------------------------------------- ------- ------- ------- ------- Net Income $ 8,235 $ 7,919 $24,417 $24,481 ======================================== ======= ======= ======= ======= Net Income Per Share $ 0.39 $ 0.38 $ 1.17 $ 1.17 ======================================== ======= ======= ======= ======= Weighted Average Shares Outstanding 20,920 20,872 20,911 20,848 ======================================== ======= ======= ======= ======= Cash Dividends Per Share $ 0.495 $ 0.475 $ 1.485 $ 1.399 ======================================== ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. 16 18 AMERICAN HEALTH PROPERTIES, INC. CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine Months Ended September 30, ------------------------------- 1995 1994 - ---------------------------------------------------------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 24,417 $ 24,481 Depreciation, amortization and other non-cash items 11,694 10,488 Deferred income (205) 468 Change in other assets (479) (13) Change in accounts payable and accrued liabilities (4,092) (4,979) - ---------------------------------------------------------- -------- -------- 31,335 30,445 - ---------------------------------------------------------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition and construction of real estate properties (41,256) (38,166) Construction loan fundings (5,136) (20,690) Construction loan paid -- 16,836 Direct financing leases (2,455) (1,191) Paydowns on revolving loan to Psychiatric Group 4,082 658 Paydowns on fixed rate loan to Psychiatric Group 10,825 272 Administrative capital expenditures (95) (79) - ---------------------------------------------------------- -------- -------- (34,035) (42,360) - ---------------------------------------------------------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (payments) on bank loans payable 58,500 20,500 Principal payments on notes payable (24,000) -- Principal payments on mortgages -- (14,468) Financing costs paid (276) (195) Proceeds from exercise of stock options -- 1,691 Dividends paid (30,778) (29,349) - ---------------------------------------------------------- -------- -------- 3,446 (21,821) - ---------------------------------------------------------- -------- -------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 746 (33,736) CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,838 35,670 - ---------------------------------------------------------- -------- -------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 2,584 $ 1,934 ========================================================== ======== ========
The accompanying notes are an integral part of these financial statements. 17 19 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL Distribution of Psychiatric Group Depositary Shares and Basis of Presentation 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 and psychiatric hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building. On July 25, 1995, the Company completed the distribution of 2,085,675 Psychiatric Group Depositary Shares to holders of its Common Stock (the Distribution). Shareholders received one Psychiatric Group Depositary Share for every ten shares of Common Stock held of record at the close of business on July 14, 1995. Each Psychiatric Group Depositary Share represents one-tenth of a share of Psychiatric Group Preferred Stock, a new series of preferred stock, par value $0.01 per share. The Distribution was designed to separate the economic attributes of the Company's investments in psychiatric hospitals (the Psychiatric Group) and its investments in acute care and rehabilitation hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building (the Core Group) into two distinct portfolios, with two distinct classes of publicly traded shares intended to represent those portfolios. In connection with the Distribution, the Company specifically identified or allocated its assets, liabilities and stockholders' equity, and its revenues, expenses and cash flow items, between the Core Group and Psychiatric Group, as more fully described below. The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Psychiatric Group. The Company's existing Common Stock is intended to reflect the separate financial performance of the Core Group. The combined condensed financial statements of the Core Group included herein have been prepared by the Company without audit and include all normal, recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with those included in the Company's annual report on Form 10-K for the year ended December 31, 1994 and the Company's current report on Form 8-K, dated August 14, 1995. The financial statements of the Core Group include the financial position, results of operations and cash flows of the Company's core investments in acute care and rehabilitation hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building, an allocated portion of the Company's general and administrative expense, all corporate assets and liabilities and related transactions associated with the ongoing operations of the Company which are not separately identified with either operating group, an attributed amount of inter-Group loans receivable from the Psychiatric Group and an attributed amount of the Company's stockholders' equity. For purposes of computing per share data for periods prior to the actual Distribution, the number of shares of Core Group Common Stock are assumed to be the same as the corresponding number of shares of the Company's common stock prior to the Distribution. The Core Group financial statements are prepared using the amounts included in the Company's consolidated financial statements. 18 20 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Although the financial statements of the Core Group and the Psychiatric Group separately report the assets, liabilities (including contingent liabilities), stockholders' equity and items of income, expense and cash flow of the Company attributed to each such Group, such attribution does not affect the respective legal title to assets or responsibility for liabilities of the Company or any of its subsidiaries. Nor does such attribution affect the rights of creditors of the Company or any subsidiary, including rights under financing covenants. Each holder of Core Group Common Stock or Psychiatric Group Depositary Shares is a holder of an issue of capital stock of the entire Company and is subject to risks associated with an investment in the Company and all of its businesses, assets and liabilities. Financial effects arising from one Group that affect the Company's consolidated results of operations, financial condition or borrowing costs can affect the results of operations, financial condition or borrowing costs of the other Group. Net losses of either Group, as well as dividends and distributions on, and repurchases of, Core Group Common Stock or Psychiatric Group Depositary Shares will reduce the funds of the Company legally available for dividends on both the Core Group Common Stock and Psychiatric Group Depositary Shares. Furthermore, fundamental changes in the psychiatric industry continue to negatively impact the facility specific operating cash flow at the Psychiatric Group hospitals. Accordingly, the Core Group's financial statements should be read in conjunction with the Company's consolidated financial statements and the financial statements of the Psychiatric Group. These financial statements include the accounts of the Core Group business. The Core Group and the Psychiatric Group financial statements, taken together, comprise all of the accounts included in the Company's consolidated financial statements. Interest Paid Interest paid by the Core Group, net of interest capitalized, was $22,854,000 and $21,057,000 for the nine months ended September 30, 1995 and 1994, respectively. The Core Group had $53,000 and $883,000 of capitalized interest for the nine months ended September 30, 1995 and 1994, respectively. 2. STOCKHOLDERS' EQUITY Core Group Common Stock Offering Pursuant to a Prospectus dated September 26, 1995 and a Prospectus Supplement dated October 17, 1995, the Company offered and sold 2,500,000 additional shares of Core Group Common Stock at a price of $21.375 per share. Net proceeds of approximately $50.8 million were received October 23, 1995 upon closing of the offering and were used to pay off the balance outstanding under the Company's revolving credit facility and its $24 million term loan. 19 21 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Stock Incentive Plans Under the terms of the Company's stock incentive plans, restricted stock awards, stock options and dividend equivalent rights (DERs) have been adjusted to reflect the Distribution. During the nine months ended September 30, 1995, options to purchase 183,537 shares of Core Group Common Stock at a weighted average exercise price of $18.97 per share and 14,859 Core Group restricted stock awards were issued pursuant to the Company's stock incentive plans. Options and related DERs to purchase 14,409 shares of Core Group Common Stock at a weighted average exercise price of $18.92 per share and 12,639 Core Group restricted stock awards were canceled during the nine months ended September 30, 1995. Dividends A quarterly dividend of $.495 per share of Core Group Common Stock was declared by the Company's board of directors on October 13, 1995, payable on November 10, 1995 to shareholders of record on October 27, 1995. The aggregate amount of this Core Group dividend payable of $10,322,000 has been recorded in the accompanying financial statements as of September 30, 1995. 3. COMMITMENTS Inter-Group Loans Repayment of inter-Group loans by the Psychiatric Group is dependent upon the amount and timing of sales of the Psychiatric Group's assets and paydowns received by the Psychiatric Group on borrowings provided to psychiatric hospital operators under revolving credit agreements. In the first quarter of 1995, the Core Group received $15,150,000 in inter-Group loan repayments from the Psychiatric Group as a result of such asset sales and operator borrowing paydowns. The Company's board of directors has established certain management policies relating to the Core Group's inter-Group loans to the Psychiatric Group. Under these policies, which may be modified or rescinded in the sole discretion of the Company's board of directors, the aggregate revolving inter-Group loans owed by the Psychiatric Group to the Core Group will be limited to a maximum of $8,750,000 at any one time outstanding, which limit is to be reduced dollar-for-dollar with any permanent repayment in the future of borrowings under revolving credit agreements provided to Psychiatric Group hospital operators. Under management policies currently in effect, the limit on the aggregate revolving inter-Group loans will not be reduced below $5,000,000, and except for such revolving inter-Group loans, no additional fixed rate or other inter-Group loans will be advanced by the Core Group to the Psychiatric Group. Real Estate Properties The Core Group has the right to approve capital expenditures at all of its properties, the option to fund certain capital expenditures and, in certain situations, is obligated to fund approved capital expenditures on terms comparable to the original investment. At September 30, 1995, the Core Group had remaining commitments to fund approximately $7.1 million of capital expenditures pursuant to these rights and obligations. The base and additional rent provisions of the leases are amended when such capital expenditures are funded to reflect the Core Group's increased investment. As of September 30, 1995, the Core Group had funded $1.9 million of a $4 million commitment to finance the construction of a 96-bed Alzheimer's care facility in Houston, Texas. The Core Group will own the facility upon completion in early 1996 and enter into a long-term lease. The facility will be operated by an experienced operator of long-term care facilities. 20 22 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The Core Group has total commitments of $16.6 million to finance the construction of three separate 80-unit assisted living facilities located in El Paso, Texas ($5.5 million), Odessa, Texas ($5.5 million) and Walla Walla, Washington ($5.6 million). Construction of the facilities will take approximately ten months. The Core Group will own the facilities upon completion and enter into long-term leases with an experienced operator of assisted living facilities. 4. OTHER EVENTS In October 1995, the Core Group received $29.15 million as proceeds from the payoff of its interest in a mortgage loan on a hospital located in Austin, Texas. The proceeds received by the Core Group represented $26.5 million in principal and a $2.65 million prepayment premium, and were used to reduce outstanding borrowings under the Company's revolving credit facility. 21 23 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a discussion of the combined financial condition and results of operations of the Core Group which should be read in conjunction with (a) the combined condensed financial statements and accompanying notes of the Core Group and (b) management's discussion and analysis of financial condition and results of operations and the condensed financial statements and accompanying notes of the Company and the Psychiatric Group included elsewhere herein. OPERATING RESULTS Third Quarter and Year to Date 1995 Compared With 1994 For the third quarter of 1995, the Core Group reported net income of $8,235,000 or $.39 per share compared with net income of $7,919,000 or $.38 per share for the third quarter of 1994. For the nine months ended September 30, 1995, the Core Group reported net income of $24,417,000 or $1.17 per share compared with net income of $24,481,000 or $1.17 per share for the first nine months of 1994. Rental income was $16,501,000 for the third quarter of 1995, an increase of $1,559,000 or 10% from $14,942,000 for the third quarter of 1994. Rental income was $48,105,000 for the nine months ended September 30, 1995, an increase of $3,939,000 or 9% from $44,166,000 for the comparable period in 1994. This increase was primarily attributable to rental income from new properties acquired and various capital additions subsequent to the first quarter of 1994. These property additions also resulted in an increase in depreciation and amortization of $400,000 to $3,488,000 for the third quarter of 1995 compared with the third quarter of 1994 and an increase of $973,000 to $10,051,000 for the nine months ended September 30, 1995 compared with the same period in 1994. Mortgage interest income for the third quarter and first nine months of 1995 was $609,000 compared to $0 for the same periods in 1994. This increase was attributable to the conversion of a construction loan on a hospital located in Austin, Texas to a mortgage loan during the third quarter of 1995. In October 1995, the Core Group received $29.15 million as proceeds from the payoff of this mortgage loan, which represented $26.5 million in principal and a $2.65 million prepayment premium. Additional rental income was $2,543,000 for the third quarter of 1995, an increase of $336,000 or 15% from $2,207,000 for the third quarter of 1994. Additional rental income was $7,570,000 for the nine months ended September 30, 1995, an increase of $910,000 or 14% from $6,660,000 for the comparable period in 1994. This increase was primarily attributable to first-time additional rent from several properties. Other interest income decreased $356,000 to $218,000 for the third quarter of 1995 from $574,000 for the third quarter of 1994. This decrease was primarily attributable to the previously mentioned conversion of a construction loan to a mortgage loan in the third quarter of 1995 upon completion of construction. Other interest income decreased $334,000 to $1,959,000 for the nine months ended September 30, 1995 from $2,293,000 for the same period in 1994. The first nine months of 1994 included the recognition of $710,000 of fee income related to the prepayment of a construction loan in February 1994. The remaining net increase in other interest income during the first nine months of 1995 resulted from a higher average construction loan balance, which was partially offset by a lower average balance of short-term investments. 22 24 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest income on inter-Group loans to the Psychiatric Group was $433,000 for the third quarter of 1995, a decrease of $614,000 or 59% from $1,047,000 for the third quarter of 1994. Interest income on inter-Group loans to the Psychiatric Group was $1,602,000 for the nine months ended September, 30, 1995, a decrease of $1,522,000 or 49% from $3,124,000 for the comparable period in 1994. The decrease reflects a lower average balance outstanding on loans to the Psychiatric Group, which is primarily attributable to $15,150,000 of repayments by the Psychiatric Group from the proceeds of asset sales and the paydown of borrowings under revolving credit agreements provided to Psychiatric Group hospital operators. Interest expense was $7,126,000 for the third quarter of 1995, an increase of $717,000 or 11% from $6,409,000 for the third quarter of 1994. Interest expense was $20,860,000 for the nine months ended September 30, 1995, an increase of $1,632,000 or 8% from $19,228,000 for the comparable period in 1994. Interest expense increased as a result of higher average bank loan borrowings during the third quarter and first nine months of 1995 and a reduction in capitalized interest in 1995 compared to 1994. This was partially offset by a reduction in interest expense on senior notes payable as a result of a $24 million maturity in May 1995. General and administrative expenses increased to $1,398,000 for the third quarter of 1995 from $1,273,000 for the third quarter of 1994. For the first nine months of 1995, general and administrative expenses increased to $4,298,000 from $3,211,000 for the first nine months of 1994. This variation was attributable to an increase in the Company's consolidated general and administrative expenses which are allocated between the Core Group and Psychiatric Group primarily based on revenues, and an increase in Core Group revenues relative to the Company's consolidated revenues. In the second quarter of 1994, the Company reversed $750,000 of a corporate relocation accrual recorded in the fourth quarter of 1993 after the Company decided to maintain its headquarters in Denver, Colorado. The remaining net increase in the Company's consolidated general and administrative expenses for the third quarter and first nine months of 1995 was primarily attributable to higher expense from the Company's stock incentive plans. Future Operating Results The operators of most of the Company's facilities derive a substantial percentage of their total revenues from federal and state health care programs such as Medicare and Medicaid and from other third party payors such as private insurance companies, self-insured employers and health maintenance organizations. Such operators are also subject to extensive federal, state and local government regulation relating to their operations, and the Company's facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with mandated procedures, licensure requirements under state law and certification standards under the Medicare and Medicaid programs. A change in reimbursement levels under the Medicare or Medicaid programs, a reduction in reimbursement by other third party payors or an operator's failure to maintain its certification under Medicare or Medicaid programs could adversely affect revenues to the Company's facilities. 23 25 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The nature of health care delivery in the United States is currently undergoing change and further review at both the national and state levels. Generally accepted goals of reform continue to include controlling costs and improving access to medical care. A proposed plan to decrease the growth in Medicare spending has recently passed both Houses of Congress. The bill also includes revisions and limits on federal programs providing Medicaid reimbursement to state health care programs. If enacted into law, such a bill may have an adverse impact on the level of funds available in the future to health care facilities. The Company's Board and management are monitoring potential changes closely. The Company believes that these potential changes may pose risks for certain institutions that are unwilling or unable to respond. However, the Company believes that this changing health care environment will provide the Core Group with new opportunities for investment in its current facilities as well as new facilities. The ongoing changes in the health care industry include trends toward shorter lengths of hospital stay, increased use of outpatient services, increased federal, state and third party oversight of health care company operations and business practices, and increased demand for capitated health care services (delivery of services at a fixed price per capita basis to a defined group of covered parties). Furthermore, federal, state and third party payors continue to propose and adopt various cost containment measures that restrict the scope of reimbursable health care services and limit increases in reimbursement rates for such services. Payors are also continuing to aggressively enforce compliance with program requirements and pursue providers that they believe have not complied with such requirements. Outpatient business is expected to increase as advances in medical technologies allow more procedures to be performed on an outpatient basis and as payors continue to direct more patients from inpatient care to outpatient care. In addition, the entrance of insurance companies into managed care programs is accelerating the introduction of managed care in new localities, and states and insurance companies continue to negotiate actively the amounts they will pay for services. Moreover, the percentage of health care services that are reimbursed under the Medicare and Medicaid programs continues to increase as the population ages and as states expand their Medicaid programs. Continued eligibility to participate in these programs is crucial to a provider's financial strength. As a result of the foregoing, the revenues and margins may decrease at the Core Group's hospitals. Notwithstanding the potential for increasing government regulation, the Company believes that health care will continue to be delivered on a local basis and that well-managed, high-quality, cost-controlled facilities will continue to be an integral part of local health care delivery systems. The Company also believes that certain acute care hospitals will need to reconfigure or expand existing facilities or to affiliate themselves with other providers so as to become part of comprehensive and cost-effective health care systems. Such systems will likely include lower cost treatment settings, such as ambulatory care clinics, outpatient surgery centers, skilled nursing facilities and medical office buildings. In general, the Core Group facilities are part of local health care delivery systems or are in the process of becoming integrated into such systems. 24 26 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Core Group's future operating results could be affected by the operating performance of the Core Group's lessees and borrowers. The rental and interest obligations of its facility operators are primarily supported by the facility-specific operating cash flow. Real estate investments in the Core Group's portfolio are generally further supported by one or more credit enhancements that take the form of cross-default provisions, letters of credit, corporate and personal guarantees, security interests in cash reserve funds, accounts receivable or other personal property and requirements to maintain specified financial ratios. In addition, financial effects arising from the Psychiatric Group that affect the Company's consolidated results of operations, financial condition or borrowing costs could affect the results of operations, financial condition or borrowing costs of the Core Group. Fundamental changes in the psychiatric industry continue to negatively impact the facility specific operating cash flow at the Psychiatric Group hospitals. Accordingly, the Core Group's financial statements should be read in conjunction with the financial statements of the Psychiatric Group and the Company's consolidated financial statements. Additional rental income from the Core Group's existing investments will be affected by changes in the revenues of the underlying business operations upon which such income is based. The Core Group's acute care investments accounted for 94% of net additional rental income for the first nine months of 1995, while rehabilitation investments accounted for 6%. Historically, a substantial portion of the Core Group's additional rental income has been attributable to six of the Core Group's original acute care properties (the "Original Properties"). With the significant revenue growth at a majority of the Original Properties in recent years, two properties had reached the additional rent transition point at the end of 1994 and it is anticipated that other properties may do so over the next few years. The Core Group's revenue participation rate for the six Original Properties declines from 5% to 1% when the additional rent transition point is reached. At December 31, 1994, the amount of potential additional rent at the 5% revenue participation rate for the six Original Properties was approximately $2.8 million per annum. The future operating results of the Core Group will be affected by additional factors including the amount, timing and yield of additional real estate investments and the competition for such investments. Operating results will also be affected by the availability and terms of the Company's future equity and debt financing. The Company's financing strategy includes the objective to reduce its cost of capital over time and enhance its financial flexibility to facilitate future growth. The Company believes that the distribution of the Psychiatric Group Depositary Shares will facilitate achievement of this objective. The Company's senior debt carries an implied investment grade rating from two rating agencies. In August 1994, the Company's BBB- implied senior debt rating was affirmed by Standard & Poor's but the outlook was revised to negative from stable. Duff & Phelps Credit Rating Co. assigned an initial implied senior debt rating of BBB- in November 1994. 25 27 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1995, the Core Group had $5,180,000 outstanding under its revolving inter-Group loan to the Psychiatric Group. Under management policies currently in effect, the Core Group may provide the Psychiatric Group with revolving inter-Group loans of up to $8,750,000. As of November 10, 1995, the Core Group had commitments of $22.6 million to fund construction obligations and capital expenditures over approximately the next ten months. The Company has recently increased its liquidity and enhanced its financial flexibility. On October 11, 1995, the Company's Core Group received $29.15 million as proceeds from the payoff of its interest in a mortgage loan. On October 23, 1995, the Company completed an offering of 2,500,000 additional shares of Core Group Common Stock resulting in net proceeds of $50.8 million. Proceeds from the mortgage loan payoff and equity offering were used to pay off the outstanding balance under the Company's revolving credit facility and its $24 million term loan. The Company has a $100 million unsecured revolving credit facility which matures on December 31, 1996. As of November 10, 1995, the Company had no outstanding borrowings under its revolving credit facility and had $4.9 million in cash and short-term investments. The Company's total indebtedness as of November 10, 1995 was $207.3 million. The Company will utilize its revolving credit facility to fund its Core Group commitments and future acquisitions. Although the Company does not have any current intention to borrow beyond the Company's revolving credit line, the Company may incur additional indebtedness or refinance existing indebtedness if the Company determines that opportunities to pursue such transactions would be attractive. The Company currently believes it has sufficient capital to meet its commitments and that its cash flow and liquidity will continue to be sufficient to fund current operations and to provide for the payment of dividends to stockholders in compliance with the applicable sections of the Internal Revenue Code governing real estate investment trusts. 26 28 AMERICAN HEALTH PROPERTIES, INC. PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS (IN THOUSANDS)
September 30, December 31, 1995 1994 - ----------------------------------------------------- ------------ ----------- ASSETS (Unaudited) Real estate investments Real property and mortgage notes $ 62,827 $ 75,579 Accumulated depreciation (3,758) (5,575) -------- -------- 59,069 70,004 Other notes receivable 4,964 9,428 Other assets 590 813 - ------------------------------------------------------ -------- -------- $ 64,623 $ 80,245 - ------------------------------------------------------ -------- -------- ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY Revolving loan from Core Group $ 5,180 $ 9,428 Fixed rate loan from Core Group 9,175 20,000 Accounts payable and accrued liabilities 415 188 Dividends payable 1,668 1,877 Deferred income 198 450 - ------------------------------------------------------ -------- -------- 16,636 31,943 - ------------------------------------------------------ -------- -------- Commitments and contingencies Total Attributed Psychiatric Group Equity 47,987 48,302 - ------------------------------------------------------ -------- -------- $ 64,623 $ 80,245 - ------------------------------------------------------ -------- --------
The accompanying notes are an integral part of these financial statements. 27 29 AMERICAN HEALTH PROPERTIES, INC. PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1995 1994 1995 1994 - ----------------------------------------- -------- -------- -------- -------- REVENUES Rental income $ 681 $ 2,091 $ 2,372 $ 6,273 Mortgage interest income 1,470 1,444 4,409 4,334 Additional rental and interest income 226 235 552 505 Other interest income 157 281 533 749 - ----------------------------------------- -------- -------- -------- -------- 2,534 4,051 7,866 11,861 - ----------------------------------------- -------- -------- -------- -------- EXPENSES Depreciation and amortization 186 235 616 1,577 Interest on loans from Core Group 433 1,047 1,602 3,124 General and administrative 266 293 669 718 Targeted stock issuance costs -- -- 300 -- Write-down of real estate investments -- -- -- 30,000 - ----------------------------------------- -------- -------- -------- -------- 885 1,575 3,187 35,419 - ----------------------------------------- -------- -------- -------- -------- NET INCOME (LOSS) $ 1,649 $ 2,476 $ 4,679 $(23,558) - ----------------------------------------- -------- -------- -------- -------- NET INCOME (LOSS) PER DEPOSITARY SHARE $ 0.79 $ 1.19 $ 2.24 $ (11.30) - ----------------------------------------- -------- -------- -------- -------- WEIGHTED AVERAGE DEPOSITARY SHARES OUTSTANDING 2,091 2,087 2,091 2,085 - ----------------------------------------- -------- -------- -------- -------- CASH DIVIDENDS PER DEPOSITARY SHARE $ 0.80 $ 1.00 $ 2.40 $ 3.26 - ----------------------------------------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. 28 30 AMERICAN HEALTH PROPERTIES, INC. PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended September 30, ------------------------------- 1995 1994 - ----------------------------------------------------------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 4,679 $(23,558) Depreciation, amortization and other non-cash items 716 1,627 Deferred income (22) (53) Write-down of real estate investments -- 30,000 Change in other assets 170 18 Change in accounts payable and accrued liabilities (9) (17) - ----------------------------------------------------------- -------- -------- 5,534 8,017 - ----------------------------------------------------------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition and construction of real estate properties (693) -- Proceeds from sale of properties 10,825 -- Principal payments on mortgage notes receivable 10 -- Other notes receivable 4,464 (874) - ----------------------------------------------------------- -------- -------- 14,606 (874) - ----------------------------------------------------------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on revolving loan from Core Group (4,082) (658) Payments on fixed rate loan from Core Group (10,825) (272) Proceeds from exercise of stock options -- 272 Cash paid in lieu of fractional shares (18) -- Dividends paid (5,215) (6,485) - ----------------------------------------------------------- -------- -------- (20,140) (7,143) - ----------------------------------------------------------- -------- -------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS -- -- CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD -- -- - ----------------------------------------------------------- -------- -------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ -- $ -- - ----------------------------------------------------------- -------- --------
The accompanying notes are an integral part of these financial statements. 29 31 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL Distribution of Psychiatric Group Depositary Shares and Basis of Presentation 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 and psychiatric hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building. On July 25, 1995, the Company completed the distribution of 2,085,675 Psychiatric Group Depositary Shares to holders of its Common Stock (the Distribution). Shareholders received one Psychiatric Group Depositary Share for every ten shares of Common Stock held of record at the close of business on July 14, 1995. Each Psychiatric Group Depositary Share represents one-tenth of a share of Psychiatric Group Preferred Stock, a new series of preferred stock, par value $0.01 per share. The Distribution was designed to separate the economic attributes of the Company's investments in psychiatric hospitals (the Psychiatric Group) and its investments in acute care and rehabilitation hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building (the Core Group) into two distinct portfolios, with two distinct classes of publicly traded shares intended to represent those portfolios. In connection with the Distribution, the Company specifically identified or allocated its assets, liabilities and stockholders' equity, and its revenues, expenses and cash flow items, between the Psychiatric Group and Core Group, as more fully described below. The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Psychiatric Group. The Company's existing Common Stock is intended to reflect the separate financial performance of the Core Group. The combined condensed financial statements of the Psychiatric Group included herein have been prepared by the Company without audit and include all normal, recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with those included in the Company's annual report on Form 10-K for the year ended December 31, 1994 and the Company's current report on Form 8-K, dated August 14, 1995. The financial statements of the Psychiatric Group include the financial position, results of operations and cash flows of the Company's psychiatric hospital investments, an allocated portion of the Company's general and administrative expense, an attributed amount of inter-Group debt payable to the Core Group and an attributed amount of the Company's stockholders' equity. For purposes of computing per share data for periods prior to the actual Distribution, the number of Psychiatric Group Depositary Shares are assumed to be one-tenth of the corresponding number of shares of the Company's common stock prior to the Distribution. The Psychiatric Group financial statements are prepared using the amounts included in the Company's consolidated financial statements. 30 32 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Although the financial statements of the Psychiatric Group and the Core Group separately report the assets, liabilities (including contingent liabilities), stockholders' equity and items of income, expense and cash flow of the Company attributed to each such Group, such attribution does not affect the respective legal title to assets or responsibility for liabilities of the Company or any of its subsidiaries. Nor does such attribution affect the rights of creditors of the Company or any subsidiary, including rights under financing covenants. Each holder of Psychiatric Group Depositary Shares or Core Group Common Stock is a holder of an issue of capital stock of the entire Company and is subject to risks associated with an investment in the Company and all of its businesses, assets and liabilities. Financial effects arising from one Group that affect the Company's consolidated results of operations, financial condition or borrowing costs can affect the results of operations, financial condition or borrowing costs of the other Group. In addition, net losses of either Group, as well as dividends and distributions on, and repurchases of, Psychiatric Group Depositary Shares or Core Group Common Stock will reduce the funds of the Company legally available for dividends on both the Psychiatric Group Depositary Shares and Core Group Common Stock. Accordingly, the Psychiatric Group's financial statements should be read in conjunction with the Company's consolidated financial statements and the financial statements of the Core Group. These financial statements include the accounts of the Psychiatric Group business. The Psychiatric Group and the Core Group financial statements, taken together, comprise all of the accounts included in the Company's consolidated financial statements. Interest Paid Interest paid by the Psychiatric Group on inter-Group loans from the Core Group was $1,602,000 and $3,124,000 for the nine months ended September 30, 1995 and 1994, respectively. 2. DEBT Inter-Group Loans Repayment of inter-Group loans from the Core Group is dependent upon the amount and timing of sales of the Psychiatric Group's assets and paydowns received by the Psychiatric Group on borrowings provided to psychiatric hospital operators under revolving credit agreements. In the first quarter of 1995, the Psychiatric Group made $15,150,000 in inter-Group loan repayments to the Core Group as a result of such asset sales and operator borrowing paydowns. The Company's board of directors has established certain management policies relating to the Psychiatric Group's inter-Group loans from the Core Group. Under these policies, which may be modified or rescinded in the sole discretion of the Company's board of directors, the aggregate revolving inter-Group loans owed to the Core Group by the Psychiatric Group will be limited to a maximum of $8,750,000 at any one time outstanding, which limit is to be reduced dollar-for-dollar with any permanent repayment in the future of borrowings under revolving credit agreements provided to Psychiatric Group hospital operators. Under management policies currently in effect, the limit on the aggregate revolving inter-Group loans will not be reduced below $5,000,000, and except for such revolving inter-Group loans, no additional fixed rate or other inter-Group loans will be advanced to the Psychiatric Group by the Core Group. 31 33 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 3. STOCKHOLDERS' EQUITY Stock Incentive Plans Under the terms of the Company's stock incentive plans, restricted stock awards, stock options and dividend equivalent rights (DERs) have been adjusted to reflect the Distribution. During the nine months ended September 30, 1995, options to purchase 18,354 Psychiatric Group Depositary Shares at a weighted average exercise price of $18.90 per share and 1,486 restricted Psychiatric Group Depositary Share awards were issued pursuant to the Company's stock incentive plans. Options and related DERs to purchase 4,493 shares of Psychiatric Group Depositary Shares at a weighted average exercise price of $17.76 per share and 1,263 restricted Psychiatric Group Depositary Share awards were canceled during the nine months ended September 30, 1995. Dividends A quarterly dividend of $.80 per Psychiatric Group Depositary Share was declared by the Company's board of directors on October 13, 1995, payable on November 10, 1995 to shareholders of record on October 27, 1995. The aggregate amount of this Psychiatric Group dividend payable of $1,668,000 has been recorded in the accompanying financial statements as of September 30, 1995. 4. COMMITMENTS Other Notes Receivable The Psychiatric Group provides financing at variable rates to certain psychiatric hospital operators under revolving credit agreements secured by accounts receivable. The aggregate commitment under these credit agreements was $5.7 million at September 30, 1995 of which $1.2 million was unfunded. Real Estate Properties The Psychiatric Group has the right to approve capital expenditures at all of its properties and the option to fund certain capital expenditures on terms comparable to the original investment. The base and additional rent provisions of the leases are amended when such capital expenditures are funded to reflect the Psychiatric Group's increased investment. The Psychiatric Group had no commitments to fund such capital expenditures at September 30, 1995. 5. PROPERTY SALES AND RESTRUCTURINGS In February 1995, the Psychiatric Group sold its Westwood and Pembroke, Massachusetts psychiatric hospital investments. The cash proceeds of $13,825,000 represented payment for the $10,825,000 net book value of the real property and repayment of the $3,000,000 balance outstanding under a revolving credit agreement that had been provided to the operator. The Psychiatric Group applied $10,825,000 of the cash proceeds to pay down its fixed rate inter-Group loan from the Core Group and applied $3,000,000 of the cash proceeds to pay down its revolving inter-Group loan from the Core Group. The Psychiatric Group's total revenues from these two investments were $412,000 and $2,219,000 for the nine months ended September 30, 1995 and 1994, respectively, and $3,000,000 for the full year in 1994. 32 34 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) In March 1995, the Psychiatric Group restructured the terms of its two Florida psychiatric hospital investments that were included in a $30 million write-down recorded by the Psychiatric Group in 1994 against its psychiatric portfolio. Pursuant to the restructuring, which was effective January 1, 1995, the annual minimum rental obligation of The Retreat psychiatric hospital in Sunrise, Florida was reduced from $2,359,000 to $1,100,000, and the annual minimum rental obligation of The Manors psychiatric hospital in Tarpon Springs, Florida was reduced from $855,000 to $600,000. As part of the restructuring, The Retreat used an existing $1,000,000 lease reserve fund to pay down outstanding borrowings under a revolving credit agreement provided by the Psychiatric Group, and the maximum amount available for borrowing under the credit agreement was reduced from $2,250,000 to $1,000,000. The Manors used an existing $325,000 lease reserve fund to pay down outstanding borrowings under a $2,000,000 revolving credit agreement provided by the Psychiatric Group. The payments received by the Psychiatric Group were used to pay down its revolving inter-Group loan from the Core Group. 33 35 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a discussion of the combined financial condition and results of operations of the Psychiatric Group which should be read in conjunction with (a) the combined condensed financial statements and accompanying notes of the Psychiatric Group and (b) management's discussion and analysis of financial condition and results of operations and the condensed financial statements and accompanying notes of the Company and the Core Group included elsewhere herein. OPERATING RESULTS Third Quarter and Year to Date 1995 Compared With 1994 For the third quarter of 1995, the Psychiatric Group reported net income of $1,649,000 or $.79 per share compared with net income of $2,476,000 or $1.19 per share for the third quarter of 1994. For the nine months ended September 30, 1995, the Psychiatric Group reported net income of $4,679,000 or $2.24 per share compared with a net loss of ($23,558,000) or ($11.30) per share for the first nine months of 1994. The net loss for the first nine months of 1994 included a write-down of psychiatric real estate investments of $30,000,000, or ($14.39) per share as a result of accelerating negative trends in the psychiatric industry. The decrease in net income for the third quarter and, excluding the write-down, the first nine months of 1995 was primarily attributable to a reduction in income due to the sale of three psychiatric properties and the lease restructurings of two psychiatric investments subsequent to the third quarter of 1994. Rental income was $681,000 for the third quarter of 1995, a decrease of $1,410,000 or 67% from $2,091,000 for the third quarter of 1994. Rental income was $2,372,000 for the nine months ended September 30, 1995, a decrease of $3,901,000 or 62% from $6,273,000 for the comparable period in 1994. This decrease was primarily attributable to a reduction in rental income due to the sale of three psychiatric properties and the lease restructurings of two psychiatric investments. The property sales, together with lower depreciation expense on psychiatric properties written down in June 1994, resulted in a decrease in depreciation and amortization of $49,000 to $186,000 for the third quarter of 1995 compared with the third quarter of 1994 and a decrease of $961,000 to $616,000 for the nine months ended September 30, 1995 compared with the same period in 1994. Additional rental and interest income was $226,000 for the third quarter of 1995, a decrease of $9,000 from $235,000 for the third quarter of 1994. Additional rental and interest income was $552,000 for the nine months ended September 30, 1995, an increase of $47,000 from $505,000 for the comparable period in 1994. These differences are attributable to variations in revenues upon which such additional rent and interest is based. Other interest income decreased $124,000 to $157,000 for the third quarter of 1995 from $281,000 for the third quarter of 1994. Other interest income decreased $216,000 to $533,000 for the nine months ended September 30, 1995 from $749,000 for the same period in 1994. The decrease is primarily attributable to lower average borrowings under revolving credit agreements provided to psychiatric hospital operators as a result of the sale of two psychiatric properties and the lease restructurings of two psychiatric investments. 34 36 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest expense on inter-Group loans from the Core Group was $433,000 for the third quarter of 1995, a decrease of $614,000 or 59% from $1,047,000 for the third quarter of 1994. Interest expense on inter-Group loans from the Core Group was $1,602,000 for the nine months ended September 30, 1995, a decrease of $1,522,000 or 49% from $3,124,000 for the comparable period in 1994. The decrease reflects a lower average balance outstanding on loans from the Core Group, which is primarily attributable to $15,150,000 of repayments to the Core Group from the proceeds of the previously mentioned property sales and restructurings. The $300,000 targeted stock issuance costs was an additional accrual made in the second quarter of 1995 to reflect the increased costs of the Distribution. The increased costs primarily reflect higher legal and accounting fees and printing and shipping costs as a result of the extended filing period. Future Operating Results The operators of most of the Company's facilities derive a substantial percentage of their total revenues from federal and state health care programs such as Medicare and Medicaid and from other third party payors such as private insurance companies, self-insured employers and health maintenance organizations. Such operators are also subject to extensive federal, state and local government regulation relating to their operations, and the Company's facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with mandated procedures, licensure requirements under state law and certification standards under the Medicare and Medicaid programs. A change in reimbursement levels under the Medicare or Medicaid programs, a reduction in reimbursement by other third party payors or an operator's failure to maintain its certification under Medicare or Medicaid programs could adversely affect revenues to the Company's facilities. The nature of health care delivery in the United States is currently undergoing change and further review at both the national and state levels. Generally accepted goals of reform continue to include controlling costs and improving access to medical care. A proposed plan to decrease the growth in Medicare spending has recently passed both Houses of Congress. The bill also includes revisions and limits on federal programs providing Medicaid reimbursement to state health care programs. If enacted into law, such a bill may have an adverse impact on the level of funds available in the future to health care facilities. The Company's Board and management are monitoring potential changes closely. The Company believes that these potential changes may pose risks for certain institutions that are unwilling or unable to respond. The ongoing changes in the health care industry include trends toward shorter lengths of hospital stay, increased use of outpatient services, increased federal, state and third party oversight of health care company operations and business practices, and increased demand for capitated health care services (delivery of services at a fixed price per capita basis to a defined group of covered parties). Furthermore, federal, state and third party payors continue to propose and adopt various cost containment measures that restrict the scope of reimbursable health care services and limit increases in reimbursement rates for such services. 35 37 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Payors are also continuing to aggressively enforce compliance with program requirements and pursue providers that they believe have not complied with such requirements. Outpatient business is expected to increase as advances in medical technologies allow more procedures to be performed on an outpatient basis and as payors continue to direct more patients from inpatient care to outpatient care. In addition, the entrance of insurance companies into managed care programs is accelerating the introduction of managed care in new localities, and states and insurance companies continue to negotiate actively the amounts they will pay for services. Moreover, the percentage of health care services that are reimbursed under the Medicare and Medicaid programs continues to increase as the population ages and as states expand their Medicaid programs. Continued eligibility to participate in these programs is crucial to a provider's financial strength. Fundamental changes in the psychiatric industry continue to negatively impact the facility-specific operating cash flow at the Psychiatric Group's properties. Institutions responsible for providing insurance coverage to patients who use inpatient psychiatric treatment services have directed efforts toward decreasing their payments for such services, thereby reducing hospital operating revenues. Some cost-cutting measures used by such institutions include decreasing the inpatient length of stay, intensively reviewing utilization, directing patients from inpatient care to outpatient care and negotiating reduced reimbursement rates for services. In addition, such institutions have extended the length of time for making payments, resulting in increases in accounts receivable. The wider use of psychotropic drugs has also resulted in significant declines in the average length of stay. Although the operators of the psychiatric hospitals are responding by developing lower cost outpatient and daypatient programs, increasing case management and reducing operating costs, their efforts are generally not consistently mitigating the negative impact of these fundamental psychiatric industry changes. The Psychiatric Group is currently providing financing under revolving credit agreements to the operators of three of its psychiatric hospitals. As of November 10, 1995, outstanding borrowings under such agreements totaled $4,475,000, and the Psychiatric Group has committed to fund an additional $1,225,000 of borrowings upon request, subject to certain conditions. These borrowings, which are secured by accounts receivable and certain personal property and which contain events of default that would be triggered by defaults under the lease relating to the relevant psychiatric hospital, are the primary source of financing for these operators' operating and capital needs. These psychiatric hospitals have, from time to time, been unable to generate sufficient cash flow for working capital and the development of new programs. In certain cases, these psychiatric hospitals have not been able to pay down the outstanding borrowings under the revolving credit agreements provided by the Psychiatric Group or to secure replacement financing from third-party lenders. To the extent the psychiatric hospitals have increased working capital needs in the future, the Psychiatric Group may be the only source of such financing. In the event the Company's board of directors determines that it is appropriate to provide additional working capital financing to a psychiatric hospital, it may cause the Core Group to make revolving inter-Group loans to the Psychiatric Group to fund such financing (to the extent consistent with its then existing policies), although the Company's board of directors is under no obligation to do so. 36 38 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Psychiatric Group is currently discussing with the operator of the two Four Winds psychiatric hospitals in New York possible alternatives for creating additional available capital for the development and expansion of the hospitals' programs, including the release of certain collateral securing the Psychiatric Group's mortgage loan investments, which were $37.9 million at September 30, 1995. The Psychiatric Group is currently reviewing the operator's plan for these new programs which are intended to address the potential negative consequences of the expected changes in Medicaid reimbursement and the increase in managed care penetration in the State of New York. The Psychiatric Group has received information from the operator of its two psychiatric hospitals in Florida regarding wide-ranging objections by several large insurance companies and other payors with respect to claims presented for services rendered. There have also been a series of negative stories in the national media and the local press in Florida on psychiatric care provided in Florida, including criticism of admissions policies and practice patterns at psychiatric hospitals in the state generally, and at these two facilities. There have been legislative hearings in Florida on these issues, and the Psychiatric Group believes that regulatory investigations are being conducted. At this time both of these facilities remain current on their rent and interest obligations to the Psychiatric Group, and the Psychiatric Group is continuing to monitor this situation closely. In September 1995, the Company retained an investment banking firm for an initial one year period to provide a broad range of financial advisory services to the Psychiatric Group. These services are expected to include supplemental monitoring of the performance of individual assets, assistance in potential sales or restructurings of particular investments and continuing assessments of available strategic alternatives for the portfolio. The cost of these services are specifically charged to the operating results of the Psychiatric Group. In 1992, the Psychiatric Group recorded a $45,000,000 write-down of its investments in two psychiatric hospitals and restructured the payment obligations of these two facilities. In addition, at June 30, 1994, in view of negative trends that caused declining cash flow at a number of the psychiatric hospitals, the Psychiatric Group recorded a $30,000,000 write-down of its investments in the psychiatric hospitals. Although management believes that the recorded investments in psychiatric hospitals are realizable, if the cash flow at the psychiatric hospitals continues to decline, the Psychiatric Group may be required to further restructure payment obligations or make additional write-downs of the value of its investments in the psychiatric hospitals. In July 1994, the Company announced its intention to pursue alternatives for the psychiatric portfolio including selected sales of hospitals to operators or other parties, restructuring of financial obligations or other approaches that might allow the effective separation of these assets from the Company's core portfolio of acute care and rehabilitation hospitals, long-term care, assisted living and Alzheimer's care facilities and a medical office building. As part of this initiative, the Psychiatric Group sold its psychiatric property in Torrance, California in October 1994 for $5,772,000 in cash (at net book value), sold two of its psychiatric properties in Massachusetts in February 1995 for $13,825,000 in cash (at net book value), restructured the leases and revolving credit agreements of its two Florida psychiatric investments in March 1995 and has issued the Psychiatric Group Depositary Shares. 37 39 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES As of November 10, 1995, the Psychiatric Group had aggregate unfunded commitments under revolving credit agreements provided to facility operators of $1.2 million. At September 30, 1995, the Psychiatric Group had $5,180,000 and $9,175,000 outstanding under its revolving inter-Group loan from the Core Group and its fixed rate inter-Group loan from the Core Group, respectively. The Psychiatric Group is required to use the net proceeds from the disposition of Psychiatric Group assets to pay down its outstanding revolving inter-Group loan (to the extent of the psychiatric hospital operator borrowings under revolving credit agreements associated with the asset or assets sold) with any excess used to pay down the balance outstanding under the fixed rate inter-Group loan. The Psychiatric Group reduced the combined balance of the revolving inter-Group and fixed rate inter-Group loans by $15,150,000 in the first quarter of 1995 with proceeds from the sale of the Westwood and Pembroke psychiatric hospitals in February 1995 and the paydowns received on borrowings under revolving credit agreements provided to the operator of the two Florida psychiatric hospitals in March 1995. The Company's board of directors has established certain management policies relating to the Psychiatric Group's inter-Group loans from the Core Group. Under these policies, which may be modified or rescinded in the sole discretion of the Company's board of directors, the aggregate revolving inter-Group loans owed to the Core Group by the Psychiatric Group will be limited to a maximum of $8,750,000 at any one time outstanding, which limit is to be reduced dollar-for-dollar with any permanent repayment in the future of borrowings under revolving credit agreements provided to Psychiatric Group hospital operators. Under management policies currently in effect, the limit on the aggregate revolving inter-Group loans will not be reduced below $5,000,000, and except for such revolving inter-Group loans, no additional fixed rate or other inter-Group loans will be advanced to the Psychiatric Group by the Core Group. The Psychiatric Group has no third party sources of additional financing and, as a result, will be dependent on the Core Group for all such financing. Although the Core Group may make this financing available, there is no obligation of the Company's board of directors to cause the Core Group to provide funds to the Psychiatric Group if the board of directors determines that it is in the Company's best interest not to do so. The Psychiatric Group does not expect to make any additional acquisitions or capital investments except to the extent of existing unfunded commitments under revolving credit agreements provided to facility operators. Payment of dividends will be primarily dependent upon the financial performance of the Psychiatric Group. The Psychiatric Group expects to distribute a substantial portion of its funds from operations and net proceeds from asset dispositions, after payments of inter-Group loan obligations, to holders of Psychiatric Group Depositary Shares. 38 40 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K On August 14, 1995, the Company filed a Current Report on Form 8-K pertaining to the distribution of Psychiatric Group Depositary Shares on July 25, 1995. Consolidated financial statements of the Company, combined financial statements of the Core Group and combined financial statements of the Psychiatric Group for the three years ended December 31, 1994 were filed. On September 22, 1995, the Company filed a Current Report on Form 8-K pertaining to information received from the operators of its two psychiatric hospitals in Florida regarding wide-ranging objections by several large insurance companies and other payors with respect to claims presented for services rendered. On October 11, 1995, the Company filed a Current Report on From 8-K pertaining to the receipt of proceeds from the sale of its interest in a mortgage loan. On October 17, 1995, the Company filed a Current Report on From 8-K for the purpose of reporting selected financial information (statements of operations, funds from operations, net income (loss) per share, funds from operations per share, dividends per share, average shares outstanding, total assets, total debt and total shareholders' equity) with respect to the consolidated Company, Core Group and Psychiatric Group for the three and nine months ended September 30, 1995 and 1994. On October 18, 1995, the Company filed a Current Report on From 8-K that contained as exhibits the Underwriting Agreement and Terms Agreement for the Company's public offering of 2,500,000 shares of Core Group Common Stock on October 17, 1995. 39 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 1995 AMERICAN HEALTH PROPERTIES, INC. By: /s/ JOSEPH P. SULLIVAN ---------------------------------------- Joseph P. Sullivan President & Chief Executive Officer By: /s/ MICHAEL J. MCGEE ---------------------------------------- Michael J. McGee Vice President & Treasurer (Principal Financial and Accounting Officer) 40 42 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION PAGE ------ ------------------- ---- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1995 SEP-30-1995 2584 0 0 0 0 0 0 (78757) 603623 0 207323 209 0 2 300610 603623 0 66109 0 10667 0 0 20860 29096 0 29096 0 0 0 29096 0 0 Primary and fully diluted earnings per share attributable to Core Group Common Stock $1.17; Psychiatric Group Depository Shares $2.24
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