-----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, DXZWqLPKovEJP8xZaLWDiD1fOmuY2AJjz2xdn1HAf0EXxFy2ESPpfCSgPBasKN6n UDBQ6zcR+hH/hJvN4A0p7A== 0000950134-97-004072.txt : 19970520 0000950134-97-004072.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950134-97-004072 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97609778 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: CO ZIP: 80111 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 1-9381 American Health Properties, Inc. (Exact name of registrant as specified in its charter) DELAWARE 95-4084878 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6400 SOUTH FIDDLER'S GREEN CIRCLE 80111 SUITE 1800 (Zip Code) ENGLEWOOD, CO (Address of principal executive offices) (303) 796-9793 (Registrant's telephone number, including area code) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____ SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE, OUTSTANDING AT MAY 7, 1997 -- 23,455,027 SHARES OF REGISTRANT'S PSYCHIATRIC GROUP DEPOSITARY SHARES, EACH REPRESENTING ONE-TENTH OF ONE SHARE OF PSYCHIATRIC GROUP PREFERRED STOCK, $.01 PAR VALUE, OUTSTANDING AT MAY 7, 1997 -- 2,083,931. ================================================================================ 2 AMERICAN HEALTH PROPERTIES, INC. MARCH 31, 1997 TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE CONSOLIDATED COMPANY Item 1. Consolidated Condensed Financial Statements: Balance sheets as of March 31, 1997 and December 31, 1996.......................................... 2 Statements of operations for the three months ended March 31, 1997 and 1996........................ 3 Statements of cash flows for the three months ended March 31, 1997 and 1996........................ 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 March 31, 1997 and December 31, 1996.......................................... 13 Statements of operations for the three months ended March 31, 1997 and 1996........................ 14 Statements of cash flows for the three months ended March 31, 1997 and 1996........................ 15 Notes to financial statements...................................................................... 16 Item 2. Management's Discussion and Analysis of Core Group Combined Financial Condition and Results of Operations............................................. 20 PSYCHIATRIC GROUP Item 1. Psychiatric Group Combined Condensed Financial Statements: Balance sheets as of March 31, 1997 and December 31, 1996.......................................... 24 Statements of operations for the three months ended March 31, 1997 and 1996........................ 25 Statements of cash flows for the three months ended March 31, 1997 and 1996........................ 26 Notes to financial statements...................................................................... 27 Item 2. Management's Discussion and Analysis of Psychiatric Group Combined Financial Condition and Results of Operations............................................. 32 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................................... 38
1 3 AMERICAN HEALTH PROPERTIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
March 31, December 31, 1997 1996 - ------------------------------------------------------------------ --------- --------- ASSETS (Unaudited) Real estate investments Real property and mortgage notes, net $ 635,332 $ 644,380 Construction in progress 2,542 4,834 Accumulated depreciation (90,241) (90,139) --------- --------- 547,633 559,075 Notes receivable and financing leases 6,464 8,152 Other assets 12,112 9,175 Cash and short-term investments 4,338 1,480 - ------------------------------------------------------------------ --------- --------- $ 570,547 $ 577,882 ================================================================== ========= ========= Liabilities and Stockholders' Equity Bank loans payable $ -- $ 48,500 Notes and bonds payable 225,642 158,601 Accounts payable and accrued liabilities 6,473 7,385 Dividends payable 13,877 13,981 Deferred income 3,889 4,276 - ------------------------------------------------------------------ --------- --------- 249,881 232,743 - ------------------------------------------------------------------ --------- --------- Commitments and contingencies Stockholders' equity Preferred stock $.01 par value; 1,000 shares authorized; 208 shares issued and outstanding 2 2 Common stock $.01 par value; 100,000 shares authorized; 23,455 shares issued and outstanding 235 235 Additional paid-in capital 482,453 482,083 Cumulative net income 245,724 256,691 Cumulative dividends (407,748) (393,872) - ------------------------------------------------------------------ --------- --------- 320,666 345,139 - ------------------------------------------------------------------ --------- --------- $ 570,547 $ 577,882 ================================================================== ========= =========
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 March 31, ---------------------------- 1997 1996 - ------------------------------------------- -------- -------- REVENUES Rental income $ 17,810 $ 17,298 Mortgage interest income 1,517 1,493 Additional rental and interest income 2,976 2,948 Other interest income 1,030 382 - ------------------------------------------- -------- -------- 23,333 22,121 - ------------------------------------------- -------- -------- EXPENSES Depreciation and amortization 3,828 3,725 Interest expense 6,107 5,766 General and administrative 1,891 1,822 Impairment loss on real estate investments and other notes receivable 11,000 -- - ------------------------------------------- -------- -------- 22,826 11,313 - ------------------------------------------- -------- -------- Minority interest 47 57 - ------------------------------------------- -------- -------- NET INCOME BEFORE EXTRAORDINARY ITEM 460 10,751 EXTRAORDINARY LOSS ON DEBT PREPAYMENT (11,427) -- - ------------------------------------------- -------- -------- NET INCOME (LOSS) $(10,967) $ 10,751 =========================================== ======== ======== ATTRIBUTABLE TO - CORE GROUP COMMON STOCK Net Income Before Extraordinary Item $ 9,930 $ 9,319 Extraordinary Loss On Debt Prepayment $(11,427) $ -- Net Income (Loss) $ (1,497) $ 9,319 PER SHARE AMOUNTS: Net Income Before Extraordinary Item $ 0.42 $ 0.40 Extraordinary Loss On Debt Prepayment $ (0.48) $ -- Net Income (Loss) $ (0.06) $ 0.40 Dividends Declared $ 0.5250 $ 0.5050 Weighted Average Shares Outstanding 23,547 23,500 PSYCHIATRIC GROUP DEPOSITARY SHARES Net Income (Loss) $ (9,470) $ 1,432 Net Income (Loss) Per Share $ (4.52) $ 0.68 Dividends Declared Per Share $ 0.7500 $ 0.7000 Weighted Average Shares Outstanding 2,096 2,091
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)
Three Months Ended March 31, ---------------------------- 1997 1996 - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (10,967) $ 10,751 Extraordinary loss on debt prepayment 11,427 -- Depreciation, amortization and other non-cash items 4,498 4,291 Deferred income (102) (144) Impairment loss on real estate investments and other notes receivable 11,000 -- Change in other assets (1,292) (104) Change in accounts payable and accrued liabilities (1,112) (3,408) - ------------------------------------------------------------------- ----------- ----------- 13,452 11,386 - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition and construction of real estate properties (1,733) (4,655) Principal payments on mortgage notes receivable 17 15 Other notes receivable 41 50 Direct financing leases (77) 322 Administrative capital expenditures (1) (16) - ------------------------------------------------------------------- ----------- ----------- (1,753) (4,284) - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (payments) on bank loans payable (48,500) 1,000 Proceeds from notes payable issuance 218,965 -- Prepayment of notes payable (163,176) -- Financing costs paid (2,150) (73) Dividends paid (13,980) (13,508) - ------------------------------------------------------------------- ----------- ----------- (8,841) (12,581) - ------------------------------------------------------------------- ----------- ----------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 2,858 (5,479) CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,480 7,571 - ------------------------------------------------------------------- ----------- ----------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 4,338 $ 2,092 =================================================================== =========== ===========
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, long-term acute care and psychiatric hospitals, skilled nursing, assisted living and Alzheimer's care facilities and medical office buildings. The Company has two distinct classes of publicly-traded shares outstanding. The Company's common stock (the Core Group Common Stock) is intended to reflect the separate financial performance of the Company's investments in acute care, rehabilitation and long-term acute care hospitals, skilled nursing, assisted living and Alzheimer's care facilities and medical office buildings (the Core Group). The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Company's investments in psychiatric hospitals (the Psychiatric Group). The capital structure of the Company as reflected by its two classes of shares does not affect the legal title to assets or responsibility for liabilities of the Company, and 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 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, 1996. The financial statements of the Core Group and the Psychiatric Group, which are included elsewhere herein, should also be read in conjunction with these financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 is intended to simplify the computation of earnings per share (EPS) and to make the U.S. standard for computing EPS more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee. The effective date for the application of SFAS No. 128 for both interim and annual periods is after December 15, 1997. Earlier application is not permitted. Management does not expect the application of SFAS No. 128 to have a material impact on the Company's EPS calculation. Interest Paid Interest paid by the Company, net of interest capitalized, was $5,561,000 and $7,896,000 for the three months ended March 31, 1997 and 1996, respectively. The Company had $107,000 and $210,000 of capitalized interest for the three months ended March 31, 1997 and 1996, respectively. 5 7 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 2. DEBT In January 1997, the Company completed a $220 million public debt offering of unsecured senior notes payable, issuing $100 million of notes with a coupon rate of 7.05% due January 15, 2002 (2002 Notes) and $120 million of notes with a coupon rate of 7.50% due January 15, 2007 (2007 Notes). The 2002 Notes and 2007 Notes were sold for $99,749,000 and $119,216,000, respectively, and have effective interest rates of approximately 7.34% and 7.74%, respectively. Interest is payable at the coupon rates semi-annually on January 15th and July 15th. The proceeds from the public debt offering were used to pay off the Company's $152 million of 11.03% private placement debt prior to its scheduled maturity and the Company's borrowings under its bank credit agreement. The prepayment of the private placement debt in February 1997 resulted in an extraordinary charge in the first quarter of 1997 of $11,427,000 consisting of a make-whole premium and other costs related to the prepayment. 3. STOCKHOLDERS' EQUITY Stock Incentive Plans During the three months ended March 31, 1997, options to purchase 144,534 shares of Core Group Common Stock at a weighted average exercise price of $25.53 per share were issued pursuant to the Company's stock incentive plans. 4. COMMITMENTS Other Notes Receivable The Company provides financing at variable rates to a psychiatric hospital operator under a revolving credit agreement. The commitment under this credit agreement was $2.7 million at March 31, 1997 of which $.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. The base and additional rent provisions of the leases are amended when such capital expenditures are funded to reflect the Company's increased investment. At March 31, 1997, the Company had no commitments to fund capital expenditures pursuant to these rights and obligations. As of March 31, 1997, the Company had funded $2.5 million of a $6.2 million commitment to finance the acquisition and renovation of an existing property in Amarillo, Texas to be operated as a long-term acute care facility by an experienced operator. The Company has also agreed to provide another $13.8 million of real estate financing to the operator for other similar facilities. Of this amount, $4.4 million has been specifically identified for a property in Houston, Texas. In April 1997, the Company funded $1.8 million of a $17 million commitment to provide construction and lease financing for two skilled nursing properties in Las Vegas, Nevada to be operated by an experienced operator of skilled nursing facilities. In May 1997, the Company acquired a $10.6 million medical office building located on the campus of an existing regional medical center in North Miami Beach, Florida. The medical office building is a multi- 6 8 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) tenant facility for which property management and leasing services will be provided by an experienced real estate management company. The Company has agreed to provide $50 million of real estate financing to an experienced operator of assisted living facilities. Approximately $29 million has been specifically identified for the construction of five properties located in four states which will be leased to the operator upon completion. 5. STATUS OF PSYCHIATRIC GROUP INVESTMENTS The fundamental ongoing changes in the psychiatric industry and the resulting negative impact on operator financial performance have resulted in significant psychiatric investment write-downs and the periodic restructuring of psychiatric operator payment obligations. In 1995, the Company restructured the leases covering its two psychiatric properties in Florida, and during 1996, provided for the partial deferral of rental and interest obligations related to one of these properties and the partial deferral of rental obligations of its psychiatric property in Illinois. The financial and operational problems at the two Florida psychiatric hospitals significantly worsened during the first quarter of 1997. After reviewing the decreased census levels that were well below the owner's and operator's expectations, operational and financial problems of the hospitals and various alternatives for the facilities, the Company recorded an $11 million charge in the first quarter of 1997 for impairment of the carrying value of these two investments. This charge had no current impact on dividends on the Company's Psychiatric Group Depositary Shares for the quarter, although it is likely that the difficulties at the two Florida facilities will have a negative impact on dividend levels on the Company's Psychiatric Group Depositary Shares in the future. Although management currently believes that the recorded investments in the psychiatric hospitals are realizable, if the psychiatric operators are unable to successfully adapt to the fundamental ongoing changes in the psychiatric industry and consistently mitigate the negative impact of such changes on their financial performance, the Company may be required to further restructure payment obligations, identify alternative operators, pursue alternative uses for or dispositions of the properties and/or make additional write-downs of the value of its investments in the psychiatric hospitals. If the Company is required to take any of these actions, various costs may be incurred by the Company in an effort to protect and maintain its investments. The Company does not intend to make new investments in the psychiatric sector, and over time, may sell, restructure or seek other means to reduce its investments in the psychiatric sector. The dividend on the Company's Psychiatric Group Depositary Shares is determined each quarter based upon the operating results of the Company's Psychiatric Group. The level of dividends of the Psychiatric Group in the past year have varied quarter-to-quarter. Any significant advance of additional funds to psychiatric hospital operators, modification of terms covering the rental or interest obligations of its psychiatric properties or nonpayment or deferral of such obligations as they become due likely will have an adverse impact on the Company's Psychiatric Group results of operations and cash flows, as well as the quarterly dividend payment on Psychiatric Group Depositary Shares. 7 9 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has two distinct classes of publicly-traded shares outstanding. The Company's common stock (the Core Group Common Stock) is intended to reflect the separate financial performance of the Company's investments in acute care, rehabilitation and long-term acute care hospitals, skilled nursing, assisted living and Alzheimer's care facilities and medical office buildings (the Core Group). The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Company's investments in psychiatric hospitals (the Psychiatric Group). The capital structure of the Company as reflected by its two classes of shares does not affect the legal title to assets or responsibility for liabilities of the Company, and 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 the risks associated with an investment in the Company and all of its businesses, assets and liabilities. Following is a discussion of the consolidated financial condition and results of operations of the Company which should be read in conjunction with the consolidated financial statements and accompanying notes. For discussions of the financial condition and results of operations of the Core Group and the Psychiatric Group, see the management's discussion and analysis of financial condition and results of operations of the Core Group and the Psychiatric Group included elsewhere herein. Factors Regarding Future Results and Forward-Looking Statements Statements that are not historical facts contained in management's discussion and analysis of financial condition and results of operations are forward-looking statements that involve risks and uncertainties that could cause actual results to differ from projected results. Certain factors that could cause actual results to differ materially include, among others: the financial success of the operations conducted at the Company's facilities and the financial strength of the operators of such facilities, the continuing ability of operators to meet their obligations to the Company under existing or restructured agreements, changes in operators or ownership of operators, the viability of alternative uses for the Company's properties when necessary, changes in government policy relating to the health care industry including reductions in reimbursement levels under the Medicare and Medicaid programs, operators' continued eligibility to participate in the Medicare or Medicaid programs, reductions in reimbursement by other third-party payors, lower occupancy levels at the Company's facilities, the strength and financial resources of the Company's competitors, the availability and cost of capital, the Company's ability to make additional real estate investments at attractive yields and changes in tax laws and regulations affecting real estate investment trusts. For a further discussion of such factors, see "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations - Future Operating Results" herein. OPERATING RESULTS First Quarter 1997 Compared With 1996 For the first quarter of 1997, the Company reported a net loss of ($10,967,000) compared with net income of $10,751,000 for the first quarter of 1996. For the first quarter of 1997, the Company reported net income before extraordinary item of $460,000 compared with net income before extraordinary item of $10,751,000 for the first quarter of 1996. The net loss for the first quarter of 1997 included an impairment loss on psychiatric investments of ($11,000,000) and an extraordinary loss on debt prepayment of ($11,427,000). See the Consolidated Condensed Statements of Operations for the net income (loss) and per share amounts 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 $17,810,000 for the first quarter of 1997, an increase of $512,000 or 3% from $17,298,000 for the first quarter of 1996. This increase was primarily attributable to rental income from new properties acquired subsequent to the first quarter of 1996. These property additions also resulted in an increase in depreciation and amortization of $103,000 or 3% to $3,828,000 for the first quarter of 1997 compared with $3,725,000 for the first quarter of 1996. Other interest income increased $648,000 or 170% to $1,030,000 for the first quarter of 1997 from $382,000 for the first quarter of 1996. This variation was due to higher investable cash balances partially offset by a lower average balance of direct financing leases. Investable cash balances were higher due to the temporary investment of a portion of the proceeds of a public debt offering in late January 1997 until used to prepay the Company's private placement debt in late February 1997 after the prepayment notice period had expired. Interest expense was $6,107,000 for the first quarter of 1997, an increase of $341,000 or 6% from $5,766,000 for the first quarter of 1996. This increase was attributable to higher average line of credit and long-term debt balances during the first quarter of 1997 and higher capitalized interest in 1996 as compared to 1997. In late January 1997, the Company sold $220 million of publicly-traded unsecured senior notes with a weighted average effective interest rate of approximately 7.56%. The Company used the proceeds of this offering to pay off the borrowings under its bank credit agreement and to prepay $152 million of 11.03% private placement debt in late February 1997 prior to its scheduled maturity, incurring an extraordinary charge in the first quarter of 1997 of $11,427,000. General and administrative expenses were $1,891,000 for the first quarter of 1997, an increase of $69,000 or 4% from $1,822,000 for the first quarter of 1996. This increase was primarily attributable to higher compensation and benefits expense. Future Operating Results The operators of most of the Company's facilities derive a substantial percentage of their total revenues from federal and state health care programs such as Medicare and Medicaid and from other third-party payors such as private insurance companies, self-insured employers and health maintenance organizations. Such operators also are subject to extensive federal, state and local government regulation relating to their operations, and the Company's facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with mandated procedures, licensure requirements under state law and certification standards under the Medicare and Medicaid programs. A reduction in reimbursement levels under the Medicare or Medicaid programs, a reduction in reimbursement by other third-party payors or an operator's failure to maintain its certification under Medicare or Medicaid programs could adversely affect revenues to the Company's facilities. The nature of health care delivery in the United States continues to undergo change and further review at both the national and state levels. Generally accepted goals of reform continue to include controlling costs and improving access to medical care. Various plans to decrease the growth in Medicare spending have been proposed by both Houses of Congress. These plans have generally included revisions to and limits on Medicare and federal programs providing Medicaid reimbursement to state health care programs and potentially would have an adverse impact on the level of funds available in the future to health care facilities. The Company's 9 11 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. At the same time, the Company believes that this changing health care environment will provide the Core Group with new opportunities for investment. The ongoing changes in the health care industry include trends toward shorter lengths of hospital stay, increased use of outpatient services, increased federal, state and third-party oversight of health care company operations and business practices, and increased demand for discounted or capitated health care services (delivery of services at a fixed price per capita basis to a defined group of covered parties). Furthermore, federal, state and third-party payors continue to propose and adopt various cost containment measures that restrict the scope of reimbursable health care services and limit increases in reimbursement rates for such services. Payors also are continuing to aggressively enforce compliance with program requirements and to pursue providers that they believe have not complied with such requirements. Outpatient business is expected to increase as advances in medical technologies allow more procedures to be performed on an outpatient basis and as payors continue to direct more patients from inpatient care to outpatient care. In addition, the entrance of insurance companies into managed care programs is accelerating the introduction of managed care in new localities, and states and insurance companies continue to negotiate actively the amounts they will pay for services. Moreover, the percentage of health care services that are reimbursed under the Medicare and Medicaid programs continues to increase as the population ages and as states expand their Medicaid programs. Continued eligibility to participate in these programs is crucial to a provider's financial strength. As a result of the foregoing, the revenues and margins may decrease at the Company's facilities. Notwithstanding the potential for increasing government regulation, the Company believes that health care will continue to be delivered on a local and regional basis and that well-managed, high-quality, cost-controlled facilities will continue to be an integral part of local and regional health care delivery systems. The Company also believes that certain acute care hospitals will need to reconfigure or expand existing facilities or to affiliate themselves with other providers so as to become part of comprehensive and cost-effective health care systems. Such systems likely will include lower cost treatment settings, such as ambulatory care clinics, outpatient surgery centers, skilled nursing facilities and medical office buildings. In general, the Core Group facilities are part of local or regional health care delivery systems or are in the process of becoming integrated into such systems. The Company's future operating results could be affected by the operating performance of the Company's lessees and borrowers. The rental and interest obligations of its facility operators are primarily supported by the facility-specific operating cash flow. Real estate investments in the Company's portfolio are generally further supported by one or more credit enhancements that take the form of cross-default provisions, letters of credit, corporate and personal guarantees, security interests in cash reserve funds, accounts receivable or other personal property and requirements to maintain specified financial ratios. 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 the reimbursement of care provided to patients who use inpatient psychiatric treatment services have directed efforts toward decreasing their payments for such services, thereby reducing hospital operating revenues. Some cost-cutting measures used by such institutions include decreasing the inpatient length of stay, intensively reviewing utilization, directing patients from inpatient care to outpatient care and negotiating reduced reimbursement rates for services. The wider use of psychotropic drugs also has resulted in significant declines in the average length of 10 12 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS stay. In addition, aggressive program compliance enforcement and increased scrutiny of past and current billing practices has resulted in the filing of lawsuits against some providers and significant negative publicity which has further exacerbated the financial and operational difficulties of providers. Although the operators of the psychiatric hospitals are responding by increasing case management, developing lower cost outpatient and daypatient programs and reducing operating costs, their efforts are generally not consistently mitigating the negative impact of these fundamental psychiatric industry changes. As a result, certain of the psychiatric hospital operators have not met their contractual payment obligations to the Company as scheduled and there can be no assurance that psychiatric hospital operators will be able to meet such payment obligations in the future. In general, the operators of the Company's psychiatric properties have very limited access to financing for their operating and capital needs. The Company currently is providing such financing under a revolving credit agreement to the operator of one of its psychiatric properties. As of May 7, 1997, outstanding borrowings under such agreement totaled $2,500,000, and the Company has committed to fund an additional $200,000 of borrowings upon request, subject to certain conditions. To the extent operators of the Company's psychiatric properties have increased working capital needs in the future, the Company may be the only source of such financing. The fundamental ongoing changes in the psychiatric industry and the resulting negative impact on operator financial performance have resulted in significant psychiatric investment write-downs and the periodic restructuring of psychiatric operator payment obligations. In 1995, the Company restructured the leases covering its two psychiatric properties in Florida, and during 1996, provided for the partial deferral of rental and interest obligations related to one of these properties and the partial deferral of rental obligations of its psychiatric property in Illinois. The financial and operational problems at the two Florida psychiatric hospitals significantly worsened during the first quarter of 1997. After reviewing the decreased census levels that were well below the owner's and operator's expectations, operational and financial problems of the hospitals and various alternatives for the facilities, the Company recorded an $11 million charge in the first quarter of 1997 for impairment of the carrying value of these two investments. This charge had no current impact on dividends on the Company's Psychiatric Group Depositary Shares for the quarter, although it is likely that the difficulties at the two Florida facilities will have a negative impact on dividend levels on the Company's Psychiatric Group Depositary Shares in the future. Although management currently believes that the recorded investments in the psychiatric hospitals are realizable, if the psychiatric operators are unable to successfully adapt to the fundamental ongoing changes in the psychiatric industry and consistently mitigate the negative impact of such changes on their financial performance, the Company may be required to further restructure payment obligations, identify alternative operators, pursue alternative uses for or dispositions of the properties and/or make additional write-downs of the value of its investments in the psychiatric hospitals. If the Company is required to take any of these actions, various costs may be incurred by the Company in an effort to protect and maintain its investments. The Company does not intend to make new investments in the psychiatric sector, and over time, may sell, restructure or seek other means to reduce its investments in the psychiatric sector. The dividend on the Company's Psychiatric Group Depositary Shares is determined each quarter based upon the operating results of the Company's Psychiatric Group. The level of dividends of the Psychiatric Group in the past year have varied quarter-to-quarter. Any significant advance of additional funds to psychiatric hospital operators, modification of terms covering the rental or interest obligations of its psychiatric properties or nonpayment or deferral of such obligations as they become due likely will have an adverse impact on the Company's Psychiatric Group results of operations and cash flows, as well as the quarterly dividend payment on Psychiatric Group Depositary Shares. The quarterly dividend on Psychiatric Group Depositary Shares was 11 13 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS decreased to $.75 per share in the first quarter of 1997 compared to $.80 per share in the fourth quarter of 1996. The future operating results of the Company will be affected by additional factors including the amount, timing and yield of additional real estate investments and the competition for such investments. Operating results also will be affected by the availability and terms of the Company's future equity and debt financing. The Company's financing strategy to facilitate future growth includes objectives to reduce its cost of capital over time and enhance its liquidity and financial flexibility. LIQUIDITY AND CAPITAL RESOURCES As of May 7, 1997, the Company had remaining commitments of $18.5 million to fund real estate projects currently under construction over approximately the next fifteen months. In addition, the Company had agreed to provide real estate financing to two different operators aggregating approximately $63.8 million. Of this amount, approximately $29 million has been committed to five assisted living projects to be constructed over the next fifteen months and $4.4 million has been committed to the financing of an existing long-term acute care hospital within the next two months. The remaining $30.4 million of financing has not been committed to specific acquisitions or projects. The unfunded commitment under a revolving credit agreement provided to a psychiatric hospital operator was $.2 million as of May 7, 1997. The Company has continued to increase its liquidity and enhance its financial flexibility. In January 1997, the Company completed a $220 million public unsecured debt offering, issuing $100 million of five-year senior notes and $120 million of ten-year senior notes. The Company used the net proceeds to pay off all outstanding borrowings under its $150 million bank facility at the time and to prepay all of its $152 million of outstanding private placement debt in late February 1997. As of May 7, 1997, the Company had no outstanding borrowings under its revolving credit facility and had $2.4 million in cash and short-term investments. The Company's total indebtedness as of May 7, 1997 was $225.7 million. The Company will utilize its revolving credit facility to fund future acquisitions and its other commitments. The Company may incur additional indebtedness or refinance existing indebtedness if the Company determines that opportunities to pursue such transactions would be attractive. The Company currently believes it has sufficient capital to meet its commitments and that its cash flow and liquidity will continue to be sufficient to fund current operations and to provide for the payment of dividends to stockholders in compliance with the applicable sections of the Internal Revenue Code governing real estate investment trusts. 12 14 AMERICAN HEALTH PROPERTIES, INC. CORE GROUP COMBINED CONDENSED BALANCE SHEETS (IN THOUSANDS)
March 31, December 31, 1997 1996 - ------------------------------------------------------------------- ----------- ----------- ASSETS (Unaudited) Real estate investments Real property $ 585,655 $ 581,631 Construction in progress 2,542 4,834 Accumulated depreciation (89,064) (85,451) ----------- ----------- 499,133 501,014 Financing leases 3,772 3,695 Revolving loan to Psychiatric Group 4,149 4,183 Fixed rate loan to Psychiatric Group 9,175 9,175 Other assets 11,419 8,432 Cash and short-term investments 4,338 1,480 - ------------------------------------------------------------------- ----------- ----------- $ 531,986 $ 527,979 =================================================================== =========== =========== ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY Bank loans payable $ -- $ 48,500 Notes and bonds payable 225,642 158,601 Accounts payable and accrued liabilities 6,473 7,385 Dividends payable 12,314 12,314 Deferred income 3,855 4,003 - ------------------------------------------------------------------- ----------- ----------- 248,284 230,803 - ------------------------------------------------------------------- ----------- ----------- Commitments and contingencies Total Attributed Core Group Equity 283,702 297,176 - ------------------------------------------------------------------- ----------- ----------- $ 531,986 $ 527,979 =================================================================== =========== ===========
The accompanying notes are an integral part of these financial statements. 13 15 AMERICAN HEALTH PROPERTIES, INC. CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, ---------------------------- 1997 1996 - --------------------------------------------- ----------- ----------- REVENUES Rental income $ 17,229 $ 16,717 Additional rental income 2,772 2,766 Other interest income 931 283 Interest on loans to Psychiatric Group 390 420 - --------------------------------------------- ----------- ----------- 21,322 20,186 - --------------------------------------------- ----------- ----------- EXPENSES Depreciation and amortization 3,642 3,539 Interest expense 6,107 5,766 General and administrative 1,596 1,505 - --------------------------------------------- ----------- ----------- 11,345 10,810 - --------------------------------------------- ----------- ----------- Minority interest 47 57 - --------------------------------------------- ----------- ----------- Net Income Before Extraordinary Item 9,930 9,319 EXTRAORDINARY LOSS ON DEBT PREPAYMENT (11,427) -- - --------------------------------------------- ----------- ----------- NET INCOME (LOSS) $ (1,497) $ 9,319 - --------------------------------------------- ----------- ----------- PER COMMON SHARE AMOUNTS: NET INCOME BEFORE EXTRAORDINARY ITEM $ 0.42 $ 0.40 EXTRAORDINARY LOSS ON DEBT PREPAYMENT $ (0.48) $ -- - --------------------------------------------- ----------- ----------- NET INCOME (LOSS) $ (0.06) $ 0.40 ============================================= =========== =========== DIVIDENDS DECLARED $ 0.5250 $ 0.5050 ============================================= =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 23,547 23,500 ============================================= =========== ===========
The accompanying notes are an integral part of these financial statements. 14 16 AMERICAN HEALTH PROPERTIES, INC. CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Three Months Ended March 31, -------------------------- 1997 1996 - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (1,497) $ 9,319 Extraordinary loss on debt prepayment 11,427 -- Depreciation, amortization and other non-cash items 4,278 4,073 Deferred income (89) (130) Change in other assets (1,339) 41 Change in accounts payable and accrued liabilities (971) (3,347) - ------------------------------------------------------------------- ----------- ----------- 11,809 9,956 - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition and construction of real estate properties (1,733) (4,655) Direct financing leases (77) 322 Paydowns (fundings) on revolving loan to Psychiatric Group 34 (173) Administrative capital expenditures (1) (16) - ------------------------------------------------------------------- ----------- ----------- (1,777) (4,522) - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (payments) on bank loans payable (48,500) 1,000 Proceeds from notes payable issuance 218,965 -- Prepayment of notes payable (163,176) -- Financing costs paid (2,150) (73) Dividends paid (12,313) (11,840) - ------------------------------------------------------------------- ----------- ----------- (7,174) (10,913) - ------------------------------------------------------------------- ----------- ----------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 2,858 (5,479) CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 1,480 7,571 - ------------------------------------------------------------------- ----------- ----------- CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 4,338 $ 2,092 =================================================================== =========== ===========
The accompanying notes are an integral part of these financial statements. 15 17 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL American Health Properties, Inc., a Delaware corporation (the Company, which term refers to the Company and its subsidiaries unless the context otherwise requires), is a self-administered real estate investment trust (REIT) that commenced operations in 1987. The Company has investments in health care properties, including acute care, rehabilitation, long-term acute care and psychiatric hospitals, skilled nursing, assisted living and Alzheimer's care facilities and medical office buildings. The Company has two distinct classes of publicly-traded shares outstanding. The Company's common stock (the Core Group Common Stock) is intended to reflect the separate financial performance of the Company's investments in acute care, rehabilitation and long-term acute care hospitals, skilled nursing, assisted living and Alzheimer's care facilities and medical office buildings (the Core Group). The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Company's investments in psychiatric hospitals (the Psychiatric Group). The capital structure of the Company as reflected by its two classes of shares does not affect the legal title to assets or responsibility for liabilities of the Company, and 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 the risks associated with an investment in the Company and all of its businesses, assets and liabilities. Basis of Presentation 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, 1996. The financial statements of the Core Group include the financial position, results of operations and cash flows of the Company's core investments in acute care, rehabilitation and long-term acute care hospitals, skilled nursing, assisted living and Alzheimer's care facilities and medical office buildings, an allocated portion of the Company's general and administrative expense, all corporate assets and liabilities and related transactions associated with the ongoing operations of the Company which are not separately identified with either operating group, an attributed amount of inter-Group loans receivable from the Psychiatric Group and an attributed amount of the Company's stockholders' equity. The Core Group financial statements are prepared using the amounts included in the Company's consolidated financial statements. Although the financial statements of the Core Group and the Psychiatric Group separately report the assets, liabilities (including contingent liabilities), stockholders' equity and items of income, expense and cash flow of the Company attributed to each such Group, such attribution does not affect the respective legal title to assets or responsibility for liabilities of the Company or any of its subsidiaries. Furthermore, such attribution does not affect the rights of creditors of the Company or any subsidiary, including rights under financing covenants. Each holder of Core Group Common Stock 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 16 18 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Company and all of its businesses, assets and liabilities. Financial effects arising from one Group that affect the Company's consolidated results of operations, financial condition, cash flows or borrowing costs may also affect the results of operations, financial condition, cash flows or borrowing costs of the other Group. 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. Accordingly, the Core Group's financial statements should be read in conjunction with the Company's consolidated financial statements and the financial statements of the Psychiatric Group. These financial statements include the accounts of the Core Group business. The Core Group and the Psychiatric Group financial statements, taken together, comprise all of the accounts included in the Company's consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 is intended to simplify the computation of earnings per share (EPS) and to make the U.S. standard for computing EPS more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee. The effective date for the application of SFAS No. 128 for both interim and annual periods is after December 15, 1997. Earlier application is not permitted. Management does not expect the application of SFAS No. 128 to have a material impact on the Core Group's EPS calculation. Interest Paid Interest paid by the Core Group, net of interest capitalized, was $5,561,000 and $7,896,000 for the three months ended March 31, 1997 and 1996, respectively. The Core Group had $107,000 and $210,000 of capitalized interest for the three months ended March 31, 1997 and 1996, respectively. 2. DEBT All of the Company's third-party debt is attributed to the Core Group. In January 1997, the Company completed a $220 million public debt offering of unsecured senior notes payable, issuing $100 million of notes with a coupon rate of 7.05% due January 15, 2002 (2002 Notes) and $120 million of notes with a coupon rate of 7.50% due January 15, 2007 (2007 Notes). The 2002 Notes and 2007 Notes were sold for $99,749,000 and $119,216,000, respectively, and have effective interest rates of approximately 7.34% and 7.74%, respectively. Interest is payable at the coupon rates semi-annually on January 15th and July 15th. The proceeds from the public debt offering were used to pay off the Company's $152 million of 11.03% private placement debt prior to its scheduled maturity and the Company's borrowings under its bank credit agreement. The prepayment of the private placement debt in February 1997 resulted in an extraordinary charge in the first quarter of 1997 of $11,427,000 consisting of a make-whole premium and other costs related to the prepayment. 17 19 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 3. ATTRIBUTED EQUITY Stock Incentive Plans During the three months ended March 31, 1997, options to purchase 144,534 shares of Core Group Common Stock at a weighted average exercise price of $25.53 per share were issued pursuant to the Company's stock incentive plans. 4. COMMITMENTS Inter-Group Loans Repayment of inter-Group loans by the Psychiatric Group is primarily dependent upon the amount and timing of sales of the Psychiatric Group's assets and paydowns received by the Psychiatric Group on borrowings provided to a psychiatric hospital operator under a revolving credit agreement. The Company's board of directors has established certain management policies relating to the Core Group's inter-Group loans to the Psychiatric Group. Under the policies currently in effect, which may be modified or rescinded in the sole discretion of the Company's board of directors, the aggregate revolving inter-Group loans owed by the Psychiatric Group to the Core Group are limited to a maximum of $8,050,000 at any one time outstanding, which limit is to be reduced dollar-for-dollar with any permanent repayment in the future of borrowings under a revolving credit agreement provided to a Psychiatric Group hospital operator. In addition, 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. The base and additional rent provisions of the leases are amended when such capital expenditures are funded to reflect the Core Group's increased investment. At March 31, 1997, the Core Group had no commitments to fund capital expenditures pursuant to these rights and obligations. As of March 31, 1997, the Core Group had funded $2.5 million of a $6.2 million commitment to finance the acquisition and renovation of an existing property in Amarillo, Texas to be operated as a long-term acute care facility by an experienced operator. The Core Group has also agreed to provide another $13.8 million of real estate financing to the operator for other similar facilities. Of this amount, $4.4 million has been specifically identified for a property in Houston, Texas. In April 1997, the Core Group funded $1.8 million of a $17 million commitment to provide construction and leasing financing for two skilled nursing properties in Las Vegas, Nevada to be operated by an experienced operator of skilled nursing facilities. In May 1997, the Core Group acquired a $10.6 million medical office building located on the campus of an existing regional medical center in North Miami Beach, Florida. The medical office building is a multi-tenant facility for which property management and leasing services will be provided by an experienced real estate management company. 18 20 AMERICAN HEALTH PROPERTIES, INC. NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The Core Group has agreed to provide $50 million of real estate financing to an experienced operator of assisted living facilities. Approximately $29 million has been specifically identified for the construction of five properties located in four states which will be leased to the operator upon completion. 19 21 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a discussion of the combined financial condition and results of operations of the Core Group which should be read in conjunction with (a) the combined financial statements and accompanying notes of the Core Group and (b) management's discussion and analysis of financial condition and results of operations and the financial statements and accompanying notes of the Company and the Psychiatric Group included elsewhere herein. Factors Regarding Future Results and Forward-Looking Statements Statements that are not historical facts contained in management's discussion and analysis of financial condition and results of operations are forward-looking statements that involve risks and uncertainties that could cause actual results to differ from projected results. Certain factors that could cause actual results to differ materially include, among others: the financial success of the operations conducted at the Core Group's facilities and the financial strength of the operators of such facilities, the continuing ability of operators to meet their obligations to the Core Group under existing agreements, changes in operators or ownership of operators, the viability of alternative uses for the Core Group's properties when necessary, changes in government policy relating to the health care industry including reductions in reimbursement levels under the Medicare and Medicaid programs, operators' continued eligibility to participate in the Medicare or Medicaid programs, reductions in reimbursement by other third-party payors, lower occupancy levels at the Core Group's facilities, the strength and financial resources of the Core Group's competitors, the availability and cost of capital, the Core Group's ability to make additional real estate investments at attractive yields and changes in tax laws and regulations affecting real estate investment trusts. For a further discussion of such factors, see "Management's Discussion and Analysis of Core Group Combined Financial Condition and Results of Operations - Future Operating Results" herein. OPERATING RESULTS First Quarter 1997 Compared With 1996 For the first quarter of 1997, the Core Group reported a net loss of ($1,497,000) or ($.06) per share compared with net income of $9,319,000 or $.40 per share for the first quarter of 1996. For the first quarter of 1997, the Core Group reported net income before extraordinary item of $9,930,000 or $.42 per share, an increase of $611,000 or 7% compared with net income before extraordinary item of $9,319,000 or $.40 per share for the first quarter of 1996. The net loss for the first quarter of 1997 included an extraordinary loss on debt prepayment of ($11,427,000) or ($.48) per share. Rental income was $17,229,000 for the first quarter of 1997, an increase of $512,000 or 3% from $16,717,000 for the first quarter of 1996. This increase was primarily attributable to rental income from new properties acquired subsequent to the first quarter of 1996. These property additions also resulted in an increase in depreciation and amortization of $103,000 or 3% to $3,642,000 for the first quarter of 1997 compared with $3,539,000 for the first quarter of 1996. Other interest income increased $648,000 or 229% to $931,000 for the first quarter of 1997 from $283,000 for the first quarter of 1996. This variation was due to higher investable cash balances partially offset by a lower average balance of direct financing leases. Investable cash balances were higher due to the temporary investment of a portion of the proceeds of a public debt offering in late January 1997 until used to 20 22 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS prepay the Company's private placement debt in late February 1997 after the prepayment notice period had expired. Interest income on inter-Group loans to the Psychiatric Group was $390,000 for the first quarter of 1997, a decrease of $30,000 or 7% from $420,000 for the first quarter of 1996. This decrease reflects a lower average balance outstanding on loans to the Psychiatric Group as a result of repayments by the Psychiatric Group from its available undistributed cash flow. Interest expense was $6,107,000 for the first quarter of 1997, an increase of $341,000 or 6% from $5,766,000 for the first quarter of 1996. This increase was attributable to higher average line of credit and long-term debt balances during the first quarter of 1997 and higher capitalized interest in 1996 as compared to 1997. In late January 1997, the Company sold $220 million of publicly-traded unsecured senior notes with a weighted average effective interest rate of approximately 7.56%. The Company used the proceeds of this offering to pay off the borrowings under its bank credit agreement and to prepay $152 million of 11.03% private placement debt in late February 1997 prior to its scheduled maturity, incurring an extraordinary charge in the first quarter of 1997 of $11,427,000. General and administrative expenses were $1,596,000 for the first quarter of 1997, an increase of $91,000 or 6% from $1,505,000 for the first quarter of 1996. This variation was attributable to an increase in the Company's consolidated general and administrative expenses which are allocated between the Core Group and Psychiatric Group primarily based on revenues, and an increase in Core Group revenues relative to the Company's consolidated revenues. The increase in the Company's consolidated general and administrative expenses affecting the Core Group was primarily attributable to higher compensation and benefits expense. Future Operating Results The operators of most of the Company's facilities derive a substantial percentage of their total revenues from federal and state health care programs such as Medicare and Medicaid and from other third-party payors such as private insurance companies, self-insured employers and health maintenance organizations. Such operators also are subject to extensive federal, state and local government regulation relating to their operations, and the Company's facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with mandated procedures, licensure requirements under state law and certification standards under the Medicare and Medicaid programs. A reduction in reimbursement levels under the Medicare or Medicaid programs, a reduction in reimbursement by other third-party payors or an operator's failure to maintain its certification under Medicare or Medicaid programs could adversely affect revenues to the Company's facilities. The nature of health care delivery in the United States continues to undergo change and further review at both the national and state levels. Generally accepted goals of reform continue to include controlling costs and improving access to medical care. Various plans to decrease the growth in Medicare spending have been proposed by both Houses of Congress. These plans have generally included revisions to and limits on Medicare and federal programs providing Medicaid reimbursement to state health care programs and potentially would have an adverse impact on the level of funds available in the future to health care facilities. The 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. At the same time, the 21 23 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company believes that this changing health care environment will provide the Core Group with new opportunities for investment. The ongoing changes in the health care industry include trends toward shorter lengths of hospital stay, increased use of outpatient services, increased federal, state and third-party oversight of health care company operations and business practices, and increased demand for discounted or capitated health care services (delivery of services at a fixed price per capita basis to a defined group of covered parties). Furthermore, federal, state and third-party payors continue to propose and adopt various cost containment measures that restrict the scope of reimbursable health care services and limit increases in reimbursement rates for such services. Payors also are continuing to aggressively enforce compliance with program requirements and to pursue providers that they believe have not complied with such requirements. Outpatient business is expected to increase as advances in medical technologies allow more procedures to be performed on an outpatient basis and as payors continue to direct more patients from inpatient care to outpatient care. In addition, the entrance of insurance companies into managed care programs is accelerating the introduction of managed care in new localities, and states and insurance companies continue to negotiate actively the amounts they will pay for services. Moreover, the percentage of health care services that are reimbursed under the Medicare and Medicaid programs continues to increase as the population ages and as states expand their Medicaid programs. Continued eligibility to participate in these programs is crucial to a provider's financial strength. As a result of the foregoing, the revenues and margins may decrease at the Core Group's facilities. Notwithstanding the potential for increasing government regulation, the Company believes that health care will continue to be delivered on a local and regional basis and that well-managed, high-quality, cost-controlled facilities will continue to be an integral part of local and regional health care delivery systems. The Company also believes that certain acute care hospitals will need to reconfigure or expand existing facilities or to affiliate themselves with other providers so as to become part of comprehensive and cost-effective health care systems. Such systems likely will include lower cost treatment settings, such as ambulatory care clinics, outpatient surgery centers, skilled nursing facilities and medical office buildings. In general, the Core Group facilities are part of local or regional health care delivery systems or are in the process of becoming integrated into such systems. The Core Group's future operating results could be affected by the operating performance of the Core Group's lessees and borrowers. The rental and interest obligations of its facility operators are primarily supported by the facility-specific operating cash flow. Real estate investments in the Core Group's portfolio are generally further supported by one or more credit enhancements that take the form of cross-default provisions, letters of credit, corporate and personal guarantees, security interests in cash reserve funds, accounts receivable or other personal property and requirements to maintain specified financial ratios. In addition, financial effects arising from the Psychiatric Group that affect the Company's consolidated results of operations, financial condition or borrowing costs may also affect the results of operations, financial condition or borrowing costs of the Core Group. Accordingly, the Core Group's financial statements should be read in conjunction with the financial statements of the Psychiatric Group and the Company's consolidated financial statements. The future operating results of the Core Group will be affected by additional factors including the amount, timing and yield of additional real estate investments and the competition for such investments. Operating results also will be affected by the availability and terms of the Company's future equity and debt financing. The Company's financing strategy to facilitate future growth includes objectives to reduce its cost of capital over time and enhance its liquidity and financial flexibility. 22 24 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 March 31, 1997, the Core Group had $4,149,000 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 $8,050,000. In addition, as of March 31, 1997, the Core Group had $9,175,000 in fixed rate inter-Group loans to the Psychiatric Group. As of May 7, 1997, the Core Group had remaining commitments of $18.5 million to fund real estate projects currently under construction over approximately the next fifteen months. In addition, the Core Group had agreed to provide real estate financing to two different operators aggregating approximately $63.8 million. Of this amount, approximately $29 million has been committed to five assisted living projects to be constructed over the next fifteen months and $4.4 million has been committed to the financing of an existing long-term acute care hospital within the next two months. The remaining $30.4 million of financing has not been committed to specific acquisitions or projects. The Company has continued to increase its liquidity and enhance its financial flexibility. In January 1997, the Company completed a $220 million public unsecured debt offering, issuing $100 million of five-year senior notes and $120 million of ten-year senior notes. The Company used the net proceeds to pay off all outstanding borrowings under its $150 million bank facility at the time and to prepay all of its $152 million of outstanding private placement debt in late February 1997. As of May 7, 1997, the Company had no outstanding borrowings under its revolving credit facility and had $2.4 million in cash and short-term investments. The Company's total indebtedness as of May 7, 1997 was $225.7 million. The Company will utilize its revolving credit facility to fund its future Core Group acquisitions and its other commitments. The Company may incur additional indebtedness or refinance existing indebtedness if the Company determines that opportunities to pursue such transactions would be attractive. The Company currently believes it has sufficient capital to meet its commitments and that its cash flow and liquidity will continue to be sufficient to fund current operations and to provide for the payment of dividends to stockholders in compliance with the applicable sections of the Internal Revenue Code governing real estate investment trusts. 23 25 AMERICAN HEALTH PROPERTIES, INC. PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS (IN THOUSANDS)
March 31, December 31, 1997 1996 - ------------------------------------------------------------------- ----------- ----------- ASSETS (Unaudited) Real estate investments Real property and mortgage notes, net $ 49,677 $ 62,749 Accumulated depreciation (1,177) (4,688) ----------- ----------- 48,500 58,061 Other notes receivable 2,692 4,457 Other assets 693 743 - ------------------------------------------------------------------- ----------- ----------- $ 51,885 $ 63,261 =================================================================== =========== =========== ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY Revolving loan from Core Group $ 4,149 $ 4,183 Fixed rate loan from Core Group 9,175 9,175 Dividends payable 1,563 1,667 Deferred income 34 273 - ------------------------------------------------------------------- ----------- ----------- 14,921 15,298 - ------------------------------------------------------------------- ----------- ----------- Commitments and contingencies Total Attributed Psychiatric Group Equity 36,964 47,963 - ------------------------------------------------------------------- ----------- ----------- $ 51,885 $ 63,261 =================================================================== =========== ===========
The accompanying notes are an integral part of these financial statements. 24 26 AMERICAN HEALTH PROPERTIES, INC. PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, -------------------------- 1997 1996 - --------------------------------------------- ----------- ----------- REVENUES Rental income $ 581 $ 581 Mortgage interest income 1,517 1,493 Additional rental and interest income 204 182 Other interest income 99 99 - --------------------------------------------- ----------- ----------- 2,401 2,355 - --------------------------------------------- ----------- ----------- EXPENSES Depreciation and amortization 186 186 Interest on loans from Core Group 390 420 General and administrative 295 317 Impairment loss on real estate investments and other notes receivable 11,000 -- - --------------------------------------------- ----------- ----------- 11,871 923 - --------------------------------------------- ----------- ----------- NET INCOME (LOSS) $ (9,470) $ 1,432 ============================================= =========== =========== NET INCOME (LOSS) PER DEPOSITARY SHARE $ (4.52) $ 0.68 ============================================= =========== =========== DIVIDENDS DECLARED PER DEPOSITARY SHARE $ 0.7500 $ 0.7000 ============================================= =========== =========== WEIGHTED AVERAGE DEPOSITARY SHARES OUTSTANDING 2,096 2,091 ============================================= =========== ===========
The accompanying notes are an integral part of these financial statements. 25 27 AMERICAN HEALTH PROPERTIES, INC. PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Three Months Ended March 31, -=------------------------ 1997 1996 - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (9,470) $ 1,432 Depreciation, amortization and other non-cash items 220 218 Deferred income (13) (14) Impairment loss on real estate investments and other notes receivable 11,000 -- Change in other assets 47 (145) Change in accounts payable and accrued liabilities (141) (61) - ------------------------------------------------------------------- ----------- ----------- 1,643 1,430 - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Principal payments on mortgage notes receivable 17 15 Other notes receivable 41 50 - ------------------------------------------------------------------- ----------- ----------- 58 65 - ------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (payments) on revolving loan from Core Group (34) 173 Dividends paid (1,667) (1,668) - ------------------------------------------------------------------- ----------- ----------- (1,701) (1,495) - ------------------------------------------------------------------- ----------- ----------- 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. 26 28 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL American Health Properties, Inc., a Delaware corporation (the Company, which term refers to the Company and its subsidiaries unless the context otherwise requires), is a self-administered real estate investment trust (REIT) that commenced operations in 1987. The Company has investments in health care properties, including acute care, rehabilitation, long-term acute care and psychiatric hospitals, skilled nursing, assisted living and Alzheimer's care facilities and medical office buildings. The Company has two distinct classes of publicly-traded shares outstanding. The Company's common stock (the Core Group Common Stock) is intended to reflect the separate financial performance of the Company's investments in acute care, rehabilitation and long-term acute care hospitals, skilled nursing, assisted living and Alzheimer's care facilities and medical office buildings (the Core Group). The Psychiatric Group Depositary Shares are intended to reflect the separate financial performance of the Company's investments in psychiatric hospitals (the Psychiatric Group). The capital structure of the Company as reflected by its two classes of shares does not affect the legal title to assets or responsibility for liabilities of the Company, and 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 the risks associated with an investment in the Company and all of its businesses, assets and liabilities. Basis of Presentation 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, 1996. The financial statements of the Psychiatric Group include the financial position, results of operations and cash flows of the Company's psychiatric hospital investments, an allocated portion of the Company's general and administrative expense, an attributed amount of inter-Group debt payable to the Core Group and an attributed amount of the Company's stockholders' equity. The Psychiatric Group financial statements are prepared using the amounts included in the Company's consolidated financial statements. Although the financial statements of the Psychiatric Group and the Core Group separately report the assets, liabilities (including contingent liabilities), stockholders' equity and items of income, expense and cash flow of the Company attributed to each such Group, such attribution does not affect the respective legal title to assets or responsibility for liabilities of the Company or any of its subsidiaries. Furthermore, such attribution does not affect the rights of creditors of the Company or any subsidiary, including rights under financing covenants. Each holder of Psychiatric Group Depositary Shares 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, cash flows or borrowing costs may also affect the results of operations, financial condition, cash flows or borrowing costs of the other Group. In addition, net losses of either Group, as well as dividends and distributions on, and repurchases of, 27 29 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 is intended to simplify the computation of earnings per share (EPS) and to make the U.S. standard for computing EPS more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee. The effective date for the application of SFAS No. 128 for both interim and annual periods is after December 15, 1997. Earlier application is not permitted. Management does not expect the application of SFAS No. 128 to have a material impact on the Psychiatric Group's EPS calculation. Interest Paid Interest paid by the Psychiatric Group on inter-Group loans from the Core Group was $390,000 and $420,000 for the three months ended March 31, 1997 and 1996, respectively. 2. DEBT Inter-Group Loans Repayment of inter-Group loans by the Psychiatric Group is primarily dependent upon the amount and timing of sales of the Psychiatric Group's assets and paydowns received by the Psychiatric Group on borrowings provided to a psychiatric hospital operator under a revolving credit agreement. The Company's board of directors has established certain management policies relating to the Psychiatric Group's inter-Group loans from the Core Group. Under the policies currently in effect, which may be modified or rescinded in the sole discretion of the Company's board of directors, the aggregate revolving inter-Group loans owed by the Psychiatric Group to the Core Group are limited to a maximum of $8,050,000 at any one time outstanding, which limit is to be reduced dollar-for-dollar with any permanent repayment in the future of borrowings under a revolving credit agreement provided to a Psychiatric Group hospital operator. In addition, 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. 28 30 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 3. COMMITMENTS Other Notes Receivable The Psychiatric Group provides financing at variable rates to a psychiatric hospital operator under a revolving credit agreement. The commitment under this credit agreement was $2.7 million at March 31, 1997 of which $.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 March 31, 1997. 4. STATUS OF PSYCHIATRIC GROUP INVESTMENTS At the beginning of 1996, the owner of the Florida facilities, Northpointe Behavioral Health System (Northpointe) and The Retreat, retained the Intensive Resource Division of Quorum Health Resources, Inc. (Quorum), a subsidiary of Quorum Health Group, Inc., to operate both hospitals on a contract basis. The owner had previously become aware of and was monitoring potential wide-ranging objections by several large insurance companies with respect to claims presented for services rendered. Additionally, there had been negative stories in the national media and the local press in Florida on psychiatric care provided in Florida, including criticism of admissions policies and practice patterns at psychiatric hospitals in the state generally, and at these two hospitals. Legislative hearings had been held in Florida on these issues, and various regulatory investigations likely had been conducted or initiated. The hospitals were also experiencing operational and cash flow difficulties which negatively impacted their ability to fund their rental and interest obligations to the Psychiatric Group as they became due. During 1996, the Psychiatric Group modified its agreements with the owner to allow for the deferral of rent and interest payments of Northpointe while certain restructuring and restaffing of the facility occurred. Pursuant to the deferral arrangements, Northpointe's monthly base rent payments of $50,000 were deferred from February 1996 through September 1996 and such deferred payments were scheduled to become payable twelve months from the month of deferral. In accordance with the terms of the deferral arrangements, Northpointe resumed making its full monthly base rent payments of $50,000 on October 1, 1996. In addition, Northpointe's monthly interest payments of $16,600 were deferred from February 1996 until March 1, 1997 on which date all such deferred interest was scheduled to be paid in full. Northpointe's deferred obligations are not recognized as income by the Psychiatric Group until such time as they are paid. In late 1996, the owner of Northpointe and The Retreat was named, together with other operators of other psychiatric facilities in Florida, in a lawsuit filed by several large insurance companies alleging widespread irregularities with respect to operations in years prior to 1995. Adverse publicity from the lawsuit appears to have materially exacerbated the operational and financial difficulties of Northpointe and The Retreat. Such operational and financial difficulties significantly worsened during the first quarter of 1997. The census at Northpointe in 1997 has been falling significantly below the levels projected by the owner at the end of 1996 and has now reached a level which makes it appear unlikely that the current operator of the facility can 29 31 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) continue operations at the facility. Although Northpointe had made its monthly base rent payments of $50,000 during the fourth quarter of 1996 and for January 1997, it has been unable to pay its subsequent monthly base rent and interest obligations or its deferred base rent and interest obligations. The owner and the Psychiatric Group have been exploring a range of options including the transfer of the hospital to a new operator, closing the facility, conversion of the facility to an alternative use or sale of the property. As a result of this review, the Psychiatric Group recorded a $5,100,000 impairment loss in the first quarter of 1997, including a $1,675,000 reserve against the entire unpaid balance under a revolving credit agreement provided to Northpointe and a reduction in the carrying value of its net real estate investment in Northpointe of $3,425,000 to its estimated fair value of $2,000,000. The estimated fair value of its investment was determined primarily based upon the discounting of estimated future cash flows and fundamental analysis. Base rent paid by Northpointe in the first quarter of 1997 represented $.02 per depositary share. The Retreat made all of its rent and interest payments to the Psychiatric Group in 1996. Adverse publicity from the aforementioned lawsuit also began having a negative impact on The Retreat during the first quarter of 1997. The facility has been experiencing a deterioration of its cash flow and a decline in census during 1997. Although The Retreat made its base rent and interest payments in 1997 through April, The Retreat made its February 1997 base rent payment of $92,000 from lease reserve funds and has not yet paid its additional rent for the first quarter of 1997 of approximately $45,000 or its base rent payment for May 1997 of $92,000. The volatile circumstances at The Retreat and deterioration in cash flows and census levels are likely to preclude the current operator of The Retreat from continuing operations at the facility. The owner and the Psychiatric Group have been exploring a range of options including the transfer of the hospital to a new operator, closing the facility, conversion of the facility to an alternative use or sale of the property. As a result of this review, the Psychiatric Group recorded a $5,900,000 impairment loss in the first quarter of 1997, including a $49,000 reserve against the entire unpaid balance under a revolving credit agreement provided to The Retreat and a reduction in the carrying value of its net real estate investment in The Retreat of $5,851,000 to its estimated fair value of $3,400,000. The estimated fair value of its investment was determined primarily based upon the discounting of estimated future cash flows and fundamental analysis. Base rent paid by The Retreat in the first quarter of 1997 represented $.13 per depositary share. In the first quarter of 1996, Rock Creek Center (RCC) in Illinois experienced certain documentation and procedural deficiencies that resulted in the denial of a substantial amount of Medicare receivables and a substantial negative adjustment to the hospital's 1995 Medicare cost report and 1996 interim Medicare reimbursement rate. These payor reimbursement issues, combined with lower than expected census during the first quarter of 1996, had an adverse impact on RCC's cash flow and its ability to fund its rental and interest obligations to the Psychiatric Group in 1996 as they became due. The net book value of the Psychiatric Group's investment in RCC, including advances under existing revolving credit agreements and other receivables, as of March 31, 1997 totaled $7,906,000. Quarterly base rent and interest obligations of RCC total approximately $324,000 ($.15 per depositary share). In 1996, the Psychiatric Group advanced $214,000 on behalf of the operator to pay property taxes on the facility, and reached an agreement with the operator for the deferral of base rent payments while the operator took certain actions to stabilize operations and implemented its revised business plan. Pursuant to the deferral arrangements, 100% of RCC's monthly base rent payments of $83,000 were deferred for May and June of 1996 and 50% of such monthly payments were deferred from July 1996 through October 1996, at which time monthly base rent payments returned to 100%. Deferred base rent is payable in the future only when the facility's cash exceeds a specified level, and the property tax advance is payable in monthly installments. RCC's deferred rent obligations are not recognized as income by the Psychiatric Group until such time as they are paid. RCC has made all of its monthly rent and interest payments in 1997 through May and the Psychiatric Group's property tax advance has been reduced by monthly payments to $78,000 as of March 31, 1997. Although the deferral arrangements provided interim financial relief while the operator implemented its strategy, there can be no assurance that the deferred amounts will be paid or that RCC will not require additional financial relief in the future. The current term of the RCC lease expires in December 1997. The lease agreement provides the operator with an option to renew the lease for an additional five-year term at fair market rental. Although the 30 32 AMERICAN HEALTH PROPERTIES, INC. NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Psychiatric Group believes that the lease will be renewed, there can be no assurance that the lease will be renewed or that, if renewed, the annual minimum rent payments will remain at the current level of $1,000,000. Furthermore, the $2,500,000 balance outstanding under RCC's revolving credit agreement matures June 30, 1997. The Psychiatric Group believes that it will extend the term of the revolving credit agreement to correspond with the expiration of RCC's current lease term and will negotiate further extensions in connection with renewal of the lease. Should the lease not be renewed or the revolving loan not be repaid or extended, a significant negative impact to the Psychiatric Group could result. The two New York Four Winds facilities are working to develop an integrated behavioral health care delivery system in lower and upper New York state. Although such a system is 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, it is not possible to predict the impact and timing of such changes and whether the proposed system will be successful in that new environment. Although management currently believes that the recorded investments in the psychiatric hospitals are realizable, if the psychiatric operators are unable to successfully adapt to the fundamental ongoing changes in the psychiatric industry and consistently mitigate the negative impact of such changes on their financial performance, the Psychiatric Group may be required to further restructure payment obligations, identify alternative operators, pursue alternative uses for or disposition of the properties and/or make additional write-downs of the value of its investments in the psychiatric hospitals. If the Psychiatric Group is required to take any of there actions, various costs may be incurred by the Psychiatric Group in an effort to protect and maintain its investments. The Psychiatric Group does not intend to make new investments, and over time, may sell, restructure or seek other means to reduce its investments. The Company retains an investment banking firm to provide financial advisory services to the Psychiatric Group. These services include supplemental monitoring of the performance of individual assets, assistance in potential sales or restructurings of particular investments and continuing assessments of available strategic alternatives for the portfolio. The cost of the financial advisory services are specifically charged to the operating results of the Psychiatric Group. The Psychiatric Group's dividend is determined quarterly based upon each quarter's operating results. The level of dividends of the Psychiatric Group in the past year have varied quarter-to-quarter. Any significant advance of additional funds to operators of the Psychiatric Group's properties, modification of terms covering the rental or interest obligations of its properties or nonpayment or deferral of such obligations as they become due likely will have an adverse impact on the Psychiatric Group results of operations and cash flows, as well as the quarterly dividend payment on Psychiatric Group Depositary Shares. In light of the uncertainty surrounding the ultimate financial outcome of the two Florida investments, it is likely that future quarterly dividends will be adjusted downward to reflect an expected loss of some or all of the income from those investments. 31 33 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following is a discussion of the combined financial condition and results of operations of the Psychiatric Group which should be read in conjunction with (a) the combined financial statements and accompanying notes of the Psychiatric Group and (b) management's discussion and analysis of financial condition and results of operations and the financial statements and accompanying notes of the Company and the Core Group included elsewhere herein. Factors Regarding Future Results and Forward-Looking Statements Statements that are not historical facts contained in management's discussion and analysis of financial condition and results of operations are forward-looking statements that involve risks and uncertainties that could cause actual results to differ from projected results. Certain factors that could cause actual results to differ materially include, among others: the financial success of the operations conducted at the Psychiatric Group's facilities and the financial strength of the operators of such facilities, the continuing ability of operators to meet their obligations to the Psychiatric Group under existing or restructured agreements, changes in operators or ownership of operators, the viability of alternative uses for the Psychiatric Group's properties when necessary, changes in government policy relating to the health care industry including reductions in reimbursement levels under the Medicare and Medicaid programs, operators' continued eligibility to participate in the Medicare or Medicaid programs, reductions in reimbursement by other third-party payors, lower occupancy levels at the Psychiatric Group's facilities, the availability and cost of capital and changes in tax laws and regulations affecting real estate investment trusts. For a further discussion of such factors, see "Management's Discussion and Analysis of Psychiatric Group Combined Financial Condition and Results of Operations - Future Operating Results" herein. OPERATING RESULTS First Quarter 1997 Compared With 1996 For the first quarter of 1997, the Psychiatric Group reported a net loss of ($9,470,000) or ($4.52) per depositary share compared with net income of $1,432,000 or $.68 per depositary share for the first quarter of 1996. The net loss for the first quarter of 1997 included an impairment loss on real estate investments and other notes receivable of ($11,000,000) or ($5.25) per depositary share. Interest expense on inter-Group loans from the Core Group was $390,000 for the first quarter of 1996, a decrease of $30,000 or 7% from $420,000 for the first quarter of 1996. This decrease reflects a lower average balance outstanding on loans from the Core Group as a result of repayments by the Psychiatric Group from its available undistributed cash flow. General and administrative expenses were $295,000 for the first quarter of 1997, a decrease of $22,000 or 7% from $317,000 for the first quarter of 1996. The Company's consolidated general and administrative expenses are allocated between the Core Group and Psychiatric Group primarily based on revenues, however significant costs directly related to either Group are specifically charged to the applicable Group. The Psychiatric Group was specifically charged for $116,000 of costs in the first quarter of 1997 compared with $140,000 in the first quarter of 1996 for financial advisory services. These services were provided primarily by an investment banking firm for supplemental monitoring of the performance of the Psychiatric Group's properties and assistance in addressing operational and cash flow difficulties of certain operators of the properties. 32 34 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Future Operating Results The operators of most of the Company's facilities derive a substantial percentage of their total revenues from federal and state health care programs such as Medicare and Medicaid and from other third-party payors such as private insurance companies, self-insured employers and health maintenance organizations. Such operators also are subject to extensive federal, state and local government regulation relating to their operations, and the Company's facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with mandated procedures, licensure requirements under state law and certification standards under the Medicare and Medicaid programs. A reduction in reimbursement levels under the Medicare or Medicaid programs, a reduction in reimbursement by other third-party payors or an operator's failure to maintain its certification under Medicare or Medicaid programs could adversely affect revenues to the Company's facilities. The nature of health care delivery in the United States continues to undergo change and further review at both the national and state levels. Generally accepted goals of reform continue to include controlling costs and improving access to medical care. Various plans to decrease the growth in Medicare spending have been proposed by both Houses of Congress. These plans have generally included revisions to and limits on Medicare and federal programs providing Medicaid reimbursement to state health care programs and potentially would have an adverse impact on the level of funds available in the future to health care facilities. The 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 discounted or capitated health care services (delivery of services at a fixed price per capita basis to a defined group of covered parties). Furthermore, federal, state and third-party payors continue to propose and adopt various cost containment measures that restrict the scope of reimbursable health care services and limit increases in reimbursement rates for such services. Payors also are continuing to aggressively enforce compliance with program requirements and to pursue providers that they believe have not complied with such requirements. Outpatient business is expected to increase as advances in medical technologies allow more procedures to be performed on an outpatient basis and as payors continue to direct more patients from inpatient care to outpatient care. In addition, the entrance of insurance companies into managed care programs is accelerating the introduction of managed care in new localities, and states and insurance companies continue to negotiate actively the amounts they will pay for services. Moreover, the percentage of health care services that are reimbursed under the Medicare and Medicaid programs continues to increase as the population ages and as states expand their Medicaid programs. Continued eligibility to participate in these programs is crucial to a provider's financial strength. As a result of the foregoing, the revenues and margins may decrease at the Psychiatric Group's facilities. Fundamental changes in the psychiatric industry continue to negatively impact the facility-specific operating cash flow at the Psychiatric Group's properties. Institutions responsible for the reimbursement of care provided to patients who use inpatient psychiatric treatment services have directed efforts toward decreasing their payments for such services, thereby reducing hospital operating revenues. Some cost-cutting measures used by such institutions include decreasing the inpatient length of stay, intensively reviewing utilization, directing patients from inpatient care to outpatient care and negotiating reduced reimbursement rates for 33 35 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS services. The wider use of psychotropic drugs also has resulted in significant declines in the average length of stay. In addition, aggressive program compliance enforcement and increased scrutiny of past and current billing practices has resulted in the filing of lawsuits against some providers and significant negative publicity which has further exacerbated the financial and operational difficulties of providers. Although the operators of the psychiatric hospitals are responding by increasing case management, developing lower cost outpatient and daypatient programs and reducing operating costs, their efforts are generally not consistently mitigating the negative impact of these fundamental psychiatric industry changes. As a result, certain of the Psychiatric Group hospital operators have not met their contractual payment obligations to the Psychiatric Group as scheduled and there can be no assurance that Psychiatric Group operators will be able to meet such payment obligations in the future. In general, the operators of the Psychiatric Group's properties have very limited access to financing for their operating and capital needs. The Psychiatric Group currently is providing such financing under a revolving credit agreement to the operator of one of its psychiatric properties. As of May 7, 1997, outstanding borrowings under such agreement totaled $2,500,000, and the Psychiatric Group has committed to fund an additional $200,000 of borrowings upon request, subject to certain conditions. In the past, the Psychiatric Group has provided similar financing to other operators of its properties which have been unable to pay off their outstanding borrowings. There can be no assurance that the operator currently borrowing under a revolving credit agreement will be able to secure replacement financing from third-party lenders or to pay off its outstanding borrowings when they become due. To the extent the operators of the Psychiatric Group's properties have increased working capital needs in the future, the Psychiatric Group may be the only source of such financing. In the event the Company's Board of Directors determines that it is appropriate to provide additional working capital financing to a psychiatric hospital operator, it may cause the Core Group to make revolving inter-Group loans to the Psychiatric Group to fund such financing (to the extent consistent with its then-existing policies), although the Company's Board of Directors is under no obligation to do so. At the beginning of 1996, the owner of the Florida facilities, Northpointe Behavioral Health System (Northpointe) and The Retreat, retained the Intensive Resource Division of Quorum Health Resources, Inc. (Quorum), a subsidiary of Quorum Health Group, Inc., to operate both hospitals on a contract basis. The owner had previously become aware of and was monitoring potential wide-ranging objections by several large insurance companies with respect to claims presented for services rendered. Additionally, there had been negative stories in the national media and the local press in Florida on psychiatric care provided in Florida, including criticism of admissions policies and practice patterns at psychiatric hospitals in the state generally, and at these two hospitals. Legislative hearings had been held in Florida on these issues, and various regulatory investigations likely had been conducted or initiated. The hospitals were also experiencing operational and cash flow difficulties which negatively impacted their ability to fund their rental and interest obligations to the Psychiatric Group as they became due. During 1996, the Psychiatric Group modified its agreements with the owner to allow for the deferral of rent and interest payments of Northpointe while certain restructuring and restaffing of the facility occurred. Pursuant to the deferral arrangements, Northpointe's monthly base rent payments of $50,000 were deferred from February 1996 through September 1996 and such deferred payments were scheduled to become payable twelve months from the month of deferral. In accordance with the terms of the deferral arrangements, 34 36 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Northpointe resumed making its full monthly base rent payments of $50,000 on October 1, 1996. In addition, Northpointe's monthly interest payments of $16,600 were deferred from February 1996 until March 1, 1997 on which date all such deferred interest was scheduled to be paid in full. Northpointe's deferred obligations are not recognized as income by the Psychiatric Group until such time as they are paid. In late 1996, the owner of Northpointe and The Retreat was named, together with other operators of other psychiatric facilities in Florida, in a lawsuit filed by several large insurance companies alleging widespread irregularities with respect to operations in years prior to 1995. Adverse publicity from the lawsuit appears to have materially exacerbated the operational and financial difficulties of Northpointe and The Retreat. Such operational and financial difficulties significantly worsened during the first quarter of 1997. The census at Northpointe in 1997 has been falling significantly below the levels projected by the owner at the end of 1996 and has now reached a level which makes it appear unlikely that the current operator of the facility can continue operations at the facility. Although Northpointe had made its monthly base rent payments of $50,000 during the fourth quarter of 1996 and for January 1997, it has been unable to pay its subsequent monthly base rent and interest obligations or its deferred base rent and interest obligations. The owner and the Psychiatric Group have been exploring a range of options including the transfer of the hospital to a new operator, closing the facility, conversion of the facility to an alternative use or sale of the property. As a result of this review, the Psychiatric Group recorded a $5,100,000 impairment loss in the first quarter of 1997, including a $1,675,000 reserve against the entire unpaid balance under a revolving credit agreement provided to Northpointe and a reduction in the carrying value of its net real estate investment in Northpointe of $3,425,000 to its estimated fair value of $2,000,000. Base rent paid by Northpointe in the first quarter of 1997 represented $.02 per depositary share. The Retreat made all of its rent and interest payments to the Psychiatric Group in 1996. Adverse publicity from the aforementioned lawsuit also began having a negative impact on The Retreat during the first quarter of 1997. The facility has been experiencing a deterioration of its cash flow and a decline in census during 1997. Although The Retreat made its base rent and interest payments in 1997 through April, The Retreat made its February 1997 base rent payment of $92,000 from lease reserve funds and has not yet paid its additional rent for the first quarter of 1997 of approximately $45,000 or its base rent payment for May 1997 of $92,000. The volatile circumstances at The Retreat and deterioration in cash flows and census levels are likely to preclude the current operator of The Retreat from continuing operations at the facility. The owner and the Psychiatric Group have been exploring a range of options including the transfer of the hospital to a new operator, closing the facility, conversion of the facility to an alternative use or sale of the property. As a result of this review, the Psychiatric Group recorded a $5,900,000 impairment loss in the first quarter of 1997, including a $49,000 reserve against the entire unpaid balance under a revolving credit agreement provided to The Retreat and a reduction in the carrying value of its net real estate investment in The Retreat of $5,851,000 to its estimated fair value of $3,400,000. Base rent paid by The Retreat in the first quarter of 1997 represented $.13 per depositary share. In the first quarter of 1996, Rock Creek Center (RCC) in Illinois experienced certain documentation and procedural deficiencies that resulted in the denial of a substantial amount of Medicare receivables and a substantial negative adjustment to the hospital's 1995 Medicare cost report and 1996 interim Medicare reimbursement rate. These payor reimbursement issues, combined with lower than expected census during the first quarter of 1996, had an adverse impact on RCC's cash flow and its ability to fund its rental and interest obligations to the Psychiatric Group in 1996 as they became due. The net book value of the Psychiatric Group's investment in RCC, including advances under existing revolving credit agreements and other receivables, as of March 31, 1997 totaled $7,906,000. Quarterly base rent and interest obligations of RCC total approximately $324,000 ($.15 per depositary share). In 1996, the Psychiatric Group advanced $214,000 on behalf of the operator to pay property taxes on the facility, and reached an agreement with the operator for the deferral of base rent payments while the operator took certain actions to stabilize operations and implemented its revised business plan. Pursuant to the deferral arrangements, 100% of RCC's monthly base rent payments of $83,000 were deferred for May and June of 1996 35 37 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS and 50% of such monthly payments were deferred from July 1996 through October 1996, at which time monthly base rent payments returned to 100%. Deferred base rent is payable in the future only when the facility's cash exceeds a specified level, and the property tax advance is payable in monthly installments. RCC's deferred rent obligations are not recognized as income by the Psychiatric Group until such time as they are paid. RCC has made all of its monthly rent and interest payments in 1997 through May and the Psychiatric Group's property tax advance has been reduced by monthly payments to $78,000 as of March 31, 1997. Although the deferral arrangements provided interim financial relief while the operator implemented its strategy, there can be no assurance that the deferred amounts will be paid or that RCC will not require additional financial relief in the future. The current term of the RCC lease expires in December 1997. The lease agreement provides the operator with an option to renew the lease for an additional five-year term at fair market rental. Although the Psychiatric Group believes that the lease will be renewed, there can be no assurance that the lease will be renewed or that, if renewed, the annual minimum rent payments will remain at the current level of $1,000,000. Furthermore, the $2,500,000 balance outstanding under RCC's revolving credit agreement matures June 30, 1997. The Psychiatric Group believes that it will extend the term of the revolving credit agreement to correspond with the expiration of RCC's current lease term and will negotiate further extensions in connection with renewal of the lease. Should the lease not be renewed or the revolving loan not be repaid or extended, a significant negative impact to the Psychiatric Group could result. The two New York Four Winds facilities are working to develop an integrated behavioral health care delivery system in lower and upper New York state. Although such a system is 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, it is not possible to predict the impact and timing of such changes and whether the proposed system will be successful in that new environment. Although management currently believes that the recorded investments in the psychiatric hospitals are realizable, if the psychiatric operators are unable to successfully adapt to the fundamental ongoing changes in the psychiatric industry and consistently mitigate the negative impact of such changes on their financial performance, the Psychiatric Group may be required to further restructure payment obligations, identify alternative operators, pursue alternative uses for or dispositions of the properties and/or make additional write-downs of the value of its investments in the psychiatric hospitals. If the Psychiatric Group is required to take any of these actions, various costs may be incurred by the Psychiatric Group in an effort to protect and maintain its investments. The Psychiatric Group does not intend to make new investments, and over time, may sell, restructure or seek other means to reduce its investments. The Company retains an investment banking firm to provide financial advisory services to the Psychiatric Group. These services include supplemental monitoring of the performance of individual assets, assistance in potential sales or restructurings of particular investments and continuing assessments of available strategic alternatives for the portfolio. The cost of the financial advisory services are specifically charged to the operating results of the Psychiatric Group. The Psychiatric Group's dividend is determined quarterly based upon each quarter's operating results. The level of dividends of the Psychiatric Group in the past year have varied quarter-to-quarter. Any significant advance of additional funds to operators of the Psychiatric Group's properties, modification of terms covering the rental or interest obligations of its properties or nonpayment or deferral of such obligations as they become due likely will have an adverse impact on the Psychiatric Group results of operations and cash flows, as well as the quarterly dividend payment on Psychiatric Group Depositary Shares. The quarterly dividend on Psychiatric Group Depositary Shares was decreased to $.75 per share in the first quarter of 1997 compared to $.80 per share in the fourth quarter of 1996. In light of the uncertainty surrounding the ultimate financial outcome of the 36 38 AMERICAN HEALTH PROPERTIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS two Florida investments, it is likely that future quarterly dividends will be adjusted downward to reflect an expected loss of some or all of the income from those investments. LIQUIDITY AND CAPITAL RESOURCES As of May 7, 1997, the Psychiatric Group had an unfunded commitment under a revolving credit agreement provided to a psychiatric hospital operator of $.2 million. At March 31, 1997, the Psychiatric Group had $4,149,000 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 Company's Board of Directors has established certain management policies relating to the Psychiatric Group's inter-Group loans from the Core Group. Under the policies currently in effect, which may be modified or rescinded in the sole discretion of the Company's Board of Directors, the aggregate revolving inter-Group loans owed by the Psychiatric Group to the Core Group are limited to a maximum of $8,050,000 at any one time outstanding, which limit is to be reduced dollar-for-dollar with any permanent repayment in the future of borrowings under a revolving credit agreement provided to a Psychiatric Group hospital operator. In addition, 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, is dependent on the Core Group for all such financing. Although the Core Group may make this financing available, there is no obligation of the Company's Board of Directors to cause the Core Group to provide funds to the Psychiatric Group if the Board of Directors determines that it is in the Company's best interest not to do so. To the extent needed funds are not advanced by the Core Group, the Psychiatric Group would experience immediate, significant negative effects. The Psychiatric Group does not expect to make any additional acquisitions or capital investments except to the extent of existing unfunded commitments under revolving credit agreements provided to facility operators. Future dividend payments will be determined quarterly and 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. In general, the Psychiatric Group will not retain any significant amount of its cash flow, and as discussed above, its sources of financing and liquidity will be limited. 37 39 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Second Amendment to Credit Agreement dated as of January 15, 1997 27 Financial Data Schedule (b) Reports on Form 8-K On January 8, 1997, the Company filed a Current Report on Form 8-K that contained as exhibits Executive Employment Agreements for Joseph P. Sullivan, Michael J. McGee and C. Gregory Schonert and a consent of Arthur Andersen LLP, the Company's independent public accountants. On January 16, 1997, the Company filed a Current Report on Form 8-K that contained as exhibits an Executive Employment Agreement for Thomas T. Schleck and the First Amendment to the Company's Credit Agreement. On January 21, 1997, the Company filed a Current Report on Form 8-K that contained as exhibits the Underwriting Agreement, Pricing Agreements and Indenture for the Company's $220 million public debt offering of unsecured senior notes payable and a consent of Arthur Andersen LLP, the Company's independent public accountants. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 7, 1997 AMERICAN HEALTH PROPERTIES, INC. By: JOSEPH P. SULLIVAN ------------------------------------- Joseph P. Sullivan Chairman of the Board, President & Chief Executive Officer (Principal Executive Officer) By: MICHAEL J. McGEE ------------------------------------- Michael J. McGee Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) 38 40 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.1 Second Amendment to Credit Agreement dated as of January 15, 1997 27 Financial Data Schedule
EX-10.1 2 SECOND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.1 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated as of January 15, 1997 by and among American Health Properties, Inc. (together with its successors and assigns, the "Company"), the banks listed on the signature pages hereto (the "Lenders") and Wells Fargo Bank, N.A., as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent". W I T N E S S E T H: WHEREAS, the Company, the Lenders, Banque Paribas, as Co-Agent, First Union National Bank of North Carolina, as Co-Agent, NationsBank of Texas, N.A., as Co-Agent and Wells Fargo Bank, N.A., as Agent, as arranger of the facilities provided (in such capacity, the "Arranger"), and as the issuer of the Letters of Credit (in such capacity, together with its successors in such capacity, the "Facing Bank") entered into that certain Credit Agreement dated as of December 27, 1995 (as amended to date, the "Credit Agreement"), pursuant to which the Lenders agreed to make available to the Company certain financial accommodations; and WHEREAS, the Company intends to issue and sell $100,000,000 of its 7.05% Notes due January 15, 2002 and $120,000,000 of its 7.50% Notes due January 15, 2007 (collectively, the "1997 Senior Notes") pursuant to the terms of that certain Indenture dated as of January 15, 1997 by and between the Company and The Bank of New York (the "Indenture") and that certain Officer's Certificate with respect to the 1997 Senior Notes dated as of January 15, 1997 executed by the Company (the "Officer's Certificate"); WHEREAS, following the application of proceeds of the 1997 Senior Notes to all amounts due and payable under the Credit Agreement as provided in Section 2.11(e)(i) thereof, the Company intends to prepay the Senior Notes to the extent of the remaining net proceeds of the 1997 Senior Notes(the "Prepayment"; the issuance of the 1997 Senior Notes together with the prepayment are collectively referred to as the "Proposed Transaction"); WHEREAS, the Company has requested the parties hereto to amend certain covenants in connection with the Proposed Transaction. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereto agree as follows: 2 Section 1. Amendment to Credit Agreement. (a) Addition of Definition. The Credit Agreement is hereby amended by including in Section 1.1. the following definition in the appropriate alphabetic order: "'1997 Senior Notes' shall mean, collectively, each of (a) $100,000,000 of the Company's 7.05% Notes due January 15, 2002 and (b) $120,000,000 of the Company's 7.50% Notes due January 15, 2007." (b) Amendment of Definition. The Credit Agreement is hereby further amended by adding the following proviso at the end of subsection (ii) of the definition of "Restricted Payment" in Section 1.1.: "provided, however, that the prepayment of the Senior Notes with the proceeds of the 1997 Senior Notes shall not be considered a 'Restricted Payment' hereunder" (c) Amendment of Section 8.1. The Credit Agreement is hereby further amended by inserting the phrase "or the 1997 Senior Notes" following the phrase "the Senior Notes" in the second line of Section 8.1.(m). (d) Amendment of Section 9.11. The Credit Agreement is hereby further amended by adding the following proviso at the end of Section 9.11: "provided, however, that the Company may prepay the Senior Notes with the proceeds of the 1997 Senior Notes and terminate the agreements evidencing such Senior Notes." (g) Amendment of Section 9.14. The Credit Agreement is hereby further amended by adding the following at the end of Section 9.14.: "and the Company may prepay the Senior Notes with the proceeds of the 1997 Senior Notes." Section 2. Consent and Agreement. Upon the Amendment Effective Date, the Required Lenders hereby consent to the Proposed Transaction. The parties hereto further agree that for purposes of complying with Section 9.3 of the Credit Agreement, the covenants and events of default contained in the Indenture and the Officer's Certificate setting forth the terms of the 1997 Senior Notes are not materially less favorable to the Company than those set forth in the Credit Agreement or those agreements listed on Schedule 7.12 of the Credit Agreement. Section 3. Conditions Precedent to Effectiveness of Amendment. This Amendment shall be effective as of the date first written above (the "Amendment Effective Date") after and subject to the conditions precedent that the Agent has received each of 2 3 the following, each to be in form and substance specified below or otherwise satisfactory to the Agent: (a) This Amendment duly executed by the Company, the Agent and the Required Lenders; (b) A Reaffirmation of Guaranty from the Guarantors (other than AHP of New Orleans, Inc.), in substantially the form of Exhibit A attached hereto (the "Reaffirmation"); (c) An opinion letter from Davis, Graham & Stubbs LLP, counsel to the Company, in substantially the form of Exhibit B attached hereto; (d) A Certificate of the Assistant Secretary of the Company stating that the Company's articles of incorporation and bylaws, copies of which were delivered in connection with the closing of the Credit Agreement, remain in full force and effect and have not been amended or repealed; (e) Certified copies (certified by the Assistant Secretary of the Company) of all corporate action taken by the Company to authorize the execution and delivery of this Amendment and the performance of the Credit Agreement, as amended by this Amendment; (f) Certificates of incumbency and specimen signatures with respect to each of the officers of the Company who are authorized to execute and deliver this Amendment; (g) A certificate evidencing the good standing of the Company issued as of a recent date by the Secretary of State of the State of Delaware; (h) A certificate executed by the chief executive officer and chief financial officer of the Company, stating that: (a) on such date, and after giving effect to the transaction contemplated hereby, no Unmatured Default or Event of Default has occurred and is continuing; (b) no material adverse change in the financial condition or operations of the business of the Company or any of its Subsidiaries or the projected cash flow of the Company and its Subsidiaries has occurred; and (c) the representations and warranties set forth in Sections 4 and 5 of the Amendment are true and correct in all material respects on and as of such date with the same effect as though made on and as of such date. (i) A fully-executed copy of the the Indenture and the Officer's Certificate, each with terms and conditions acceptable to the Agent and the Required Lenders; (j) Such other documents, agreements, opinions or evidences as the Agent may reasonably request. Section 4. Reaffirmation. The Company hereby reaffirms all representations and warranties made by the Company in the Credit Agreement on and as of the date hereof 3 4 with the same force and effect as if such representations and warranties were set forth in this Amendment in full, except that the Company makes no representations or warranties with respect to AHP of New Orleans, Inc. which has been dissolved. Section 5. Representations. The Company further represents that: (a) Authorization. The Company has the right and power, and has taken all necessary action to authorize it, to execute and deliver this Amendment and to perform the Credit Agreement, all as amended by this Amendment, in accordance with their respective terms. This Amendment has been duly executed and delivered by the duly authorized officers of the Company, and each of this Amendment and the Credit Agreement, as amended by this Amendment, is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors' rights. (b) Compliance of Credit Documents with Laws, etc. The execution and delivery of this Amendment, and the performance of the Credit Agreement, as amended by this Amendment, in accordance with their respective terms and the borrowings thereunder do not and will not, by the passage of time, the giving of notice or otherwise: (i) require any approval from any Governmental Agency or violate any applicable law relating to the Company; (ii) conflict with, result in a breach of or constitute a default under the certificate of incorporation or bylaws of the Company, or any indenture, agreement or other instrument to which the Company is a party or by which it or any of its properties may be bound; or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Company other than in favor of the Agent for the benefit of the Lenders. (c) No Default. No Unmatured Default or Event of Defaults exists as of the date hereof and, after giving effect to this Amendment, no Unmatured Default or Event of Default will occur or exist. Section 6. References to the Credit Agreement and the Other Credit Documents. Upon the occurrence of the Amendment Effective Date, each reference to the Credit Agreement and any of the Credit Documents shall be deemed to be a reference to the Credit Agreement as amended by this Amendment, and as each may from time to time be further amended, supplemented, restated or otherwise modified in the future by one or more other written amendments or supplemental or modification agreements entered into pursuant to the applicable provisions of the Credit Agreement. The term "Credit Documents" as defined in the Credit Agreement shall include the Reaffirmation executed pursuant to Section 3 hereof. Section 7. Expenses. Pursuant to Section 13.3(a) of the Credit Agreement, the Company shall reimburse the Agent upon demand for all costs and expenses (including attorneys' fees) incurred by the Agent in the preparation, negotiation and execution of this 4 5 Amendment and the other agreements and documents executed and delivered in connection herewith. Section 8. Benefits. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA SHALL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AMENDMENT, EVEN THOUGH UNDER THAT JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY. Section 10. Effect. Except as expressly herein amended, the terms and conditions of the Credit Agreement and the other Credit Documents shall remain in full force and effect. Section 11. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties, their successors and assigns when a counterpart hereof has been executed by the Company, the Agent and the Required Lenders. Section 12. Definitions. All terms defined in the Credit Agreement which are used herein shall have the meanings defined in the Credit Agreement, unless specifically defined otherwise herein. The Credit Agreement shall be further amended by incorporating all terms defined in this Amendment. Section 13. No Novation. The parties do not intend that the amendment to the Credit Agreement effected hereby constitutes a novation of the indebtedness incurred under, and evidenced by, the Credit Agreement and the other Credit Documents. [Signatures begin on following page] 5 6 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Credit Agreement to be executed by their duly authorized officers as of the date first above written. AMERICAN HEALTH PROPERTIES, INC. By: ------------------------------------------ Michael J. McGee Senior Vice President and Chief Financial Officer WELLS FARGO BANK, N.A., as Agent and Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ BANQUE PARIBAS, as Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ FIRST UNION NATIONAL BANK OF NORTH CAROLINA, By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ NATIONSBANK OF TEXAS, N.A., as Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ [Signatures continued on following page] 6 7 [Continuation of signatures to the Second Amendment to Credit Agreement] BHF-BANK AKTIENGESELLSCHAFT, as Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ BANQUE NATIONALE DE PARIS, as Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ COLORADO NATIONAL BANK, as Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ FLEET NATIONAL BANK, as Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ [Signatures continued on following page] 7 8 [Continuation of signatures to the Second Amendment to Credit Agreement] KLEINWORT BENSON LIMITED, as Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ AMSOUTH BANK OF ALABAMA, as Lender By: ------------------------------------------ Name: ------------------------------------- Title: ------------------------------------ 8 9 EXHIBIT A FORM OF REAFFIRMATION OF GUARANTY THIS REAFFIRMATION OF GUARANTY dated as of January 15, 1997, executed and delivered by each of AMIREIT (Frye), Inc., a North Carolina corporation, AMIREIT (Kendall), Inc., a Florida corporation, AMIREIT Lucy Lee, Inc., a Missouri corporation, AMIREIT (North Fulton), Inc., a Georgia corporation, AMIREIT (Palm Beach Gardens), Inc., a Florida corporation, AHE of California, Inc., a California corporation, AHE of Irvine, Inc., a California corporation, American Health Properties of Arizona, Inc., an Arizona corporation, AHP of Colorado, Inc., a Colorado corporation, AHP of Fayetteville, Inc., an Arkansas corporation, AHP of Illinois, Inc., an Illinois corporation, AHP of Kansas, Inc., a Kansas corporation, AHP of South Carolina, Inc., a South Carolina corporation, AHP of Sunrise, Inc., a Florida corporation, AHP of Tarpon Springs, Inc., a Florida corporation, AHP of Texas, Inc., a Texas corporation, AHP of Washington, Inc., a Washington corporation, AHP of West Virginia, Inc., a West Virginia corporation, and AHP of Utah, Inc., a Utah corporation, together with the Subsidiaries of the Company that may from time to time become a party hereto (each a "Guarantor", and, collectively, the "Guarantors") in favor of Wells Fargo Bank, N.A., in its capacity as agent (the "Agent"), and in its capacity as the Facing Bank (the "Facing Bank"), in favor of Banque Paribas, in its capacity as Co-Agent ("Banque Paribas"), in favor of First Union National Bank of North Carolina in its capacity as Co-Agent ("First Union"), in favor of NationsBank of Texas, N.A., in its capacity as Co-Agent ("NationsBank") and in favor of each Lender (present and future) under the Credit Agreement (as hereinafter defined) (the Lenders, NationsBank, First Union, Banque Paribas, the Facing Bank and the Agent being collectively referred to herein as the "Guaranteed Parties"). WHEREAS, the Lenders, Banque Paribas, as Co-Agent, First Union National Bank of North Carolina, as Co-Agent, NationsBank of Texas, N.A., as Co-Agent, Wells Fargo Bank, N.A., as Arranger, Agent and Facing Bank and American Health Properties, Inc. (the "Company") entered into that certain Credit Agreement dated as of December 27, 1995 (as the same may be amended, modified, supplemented, or extended from time to time, the "Credit Agreement"); WHEREAS, in connection with the Credit Agreement, the Guarantors executed and delivered a Guaranty dated as of December 27, 1995 (the "Guaranty") in favor of the Guaranteed Parties, providing for the undersigned's guaranty of repayment of certain indebtedness and obligations of the Company owing to the Guaranteed Parties; WHEREAS, the Company and the Lender have entered into that certain Second Amendment to Credit Agreement dated as of the date hereof (the "Amendment"), to amend certain covenants and for other purposes; WHEREAS, each Guarantor has reviewed the Amendment; A-1 10 WHEREAS, its is a condition precedent to the effectiveness of the Amendment that the Guarantors execute and deliver this Reaffirmation of Guaranty; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which each Guarantor hereby acknowledges, each Guarantor hereby agrees as follows: Section 1. Reaffirmation. Each Guarantor hereby reaffirms its continuing obligations to the Guaranteed Parties under the Guaranty and agrees that neither the transactions contemplated by the Amendment, nor any future agreements or arrangements whatsoever by the Guaranteed Parties with the Company relating to the Credit Agreement, any of the other Credit Documents, or any collateral thereunder, shall in any way affect the validity and enforceability of the Guaranty or reduce, impair or discharge the obligations of such Guarantor thereunder. Section 2. References. Each Guarantor agrees that each reference to the Credit Agreement or any of the other Credit Documents in any of the Credit Documents shall be deemed to be a reference to the Credit Agreement or such other Credit Document as amended by the Amendment, and as each may from time to time be further amended, supplemented, restated or otherwise modified in the future by one or more other written amendments or supplemental or modification agreements entered into pursuant to the applicable provisions of the respective Credit Document. Section 3. Defined Terms. Terms not otherwise defined herein are used herein as defined in the Credit Agreement. [Signatures on following page] A-2 11 IN WITNESS WHEREOF, this Reaffirmation of Guaranty is signed, sealed and delivered as of the date first written above. AMIREIT (FRYE), INC. AMIREIT (KENDALL), INC. AMIREIT LUCY LEE, INC. AMIREIT (NORTH FULTON ), INC. AMIREIT (PALM BEACH GARDENS), INC. AHE OF CALIFORNIA, INC. AHE OF IRVINE, INC. AMERICAN HEALTH PROPERTIES OF ARIZONA, INC. AHP OF COLORADO, INC. AHP OF FAYETTEVILLE, INC. AHP OF ILLINOIS, INC. AHP OF KANSAS, INC. AHP OF SOUTH CAROLINA, INC. AHP OF SUNRISE, INC. AHP OF TARPON SPRINGS, INC. AHP OF TEXAS, INC. AHP OF WASHINGTON, INC. AHP OF WEST VIRGINIA, INC. AHP OF UTAH, INC. By: --------------------------------- Michael J. McGee Vice President A-3 12 EXHIBIT B FORM OF OPINION OF COUNSEL [Letterhead of Company's Counsel] January 15, 1997 Wells Fargo Bank, N.A. as Arranger, Agent and Facing Bank 420 Montgomery Street San Francisco, California 94163 and The financial institutions that have or may become Lenders under the Credit Agreement described below RE: Second Amendment to Credit Agreement dated as of January 15, 1997, among American Health Properties, Inc., the financial institutions that are signatories thereto and Wells Fargo Bank, N.A., as Agent (the) "Amendment") Ladies and Gentlemen: We have acted as counsel to American Health Properties, Inc., a Delaware corporation (the "Company"); AMIREIT (Frye), Inc., a North Carolina corporation ("Frye"); AMIREIT (Kendall), Inc., a Florida corporation ("Kendall"); AMIREIT Lucy Lee, Inc., a Missouri corporation ("Lucy Lee"); AMIREIT (North Fulton), Inc., a Georgia corporation ("North Fulton"); AMIREIT (Palm Beach Gardens), Inc., a Florida corporation (Palm Beach Gardens"); AHE of California, Inc., a California corporation ("California"); AHE of Irvine, Inc., a California corporation ("Irvine"); American Health Properties of Arizona, Inc., an Arizona corporation ("Arizona"); AHP of Colorado, Inc., a Colorado corporation ("Colorado"), AHP of Fayetteville, an Arkansas corporation ('Fayetteville"); AHP of Illinois, Inc., an Illinois corporation ("Illinois"); AHP of Kansas, Inc., a Kansas corporation ("Kansas"); AHP of South Carolina, Inc., a South Carolina corporation ("South Carolina"), AHP of Sunrise, Inc., a Florida corporation ("Sunrise"); AHP of Tarpon Springs, Inc., a Florida corporation ("Tarpon Springs"); AHP of Texas, Inc., a Texas corporation ("Texas"); AHP of Washington, Inc., a Washington corporation ("Washington"), AHP of West Virginia, Inc., a West Virginia corporation ("West Virginia"); and AHP of Utah, Inc., a Utah corporation ("Utah") (Frye, Kendall, Lucy Lee, North Fulton, Palm Beach Gardens, California, Irvine, Arizona, Colorado, Fayetteville, B-1 13 Illinois, Kansas, South Carolina, Sunrise, Tarpon Springs, Texas, Washington, West Virginia and Utah are herein collectively referred to as the "Guarantors" and the Guarantors and the Company are herein collectively referred to as the "Credit Parties") in connection with the preparation, negotiation and delivery of the above-captioned Amendment. This opinion is being delivered to you pursuant to Section 3 of the Amendment. In these capacities we have reviewed the following: (a) the Credit Agreement; (b) the Amendment; (c) the Indenture; (d) the Subsidiary Guaranty; and (e) the Reaffirmation. Items (b), (c) and (d) above are sometimes referred to herein as the "Amendment Documents". Capitalized terms used in this opinion which are defined in the Amendment have the meaning specified therein, unless otherwise defined herein. In addition to the foregoing, we have reviewed the articles of incorporation and bylaws of each of the Credit Parties and certain resolutions of the boards of directors of each of the Credit Parties (collectively, the "Organizational Documents"). We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, and other instruments, and made such other investigations of law and fact, as we have deemed necessary or advisable for the purposes of rendering this opinion. In our examination of documents, we assumed the genuineness of all signatures on documents presented to us as originals (other than signatures on behalf of the Credit Parties) and the conformity to originals of documents presented to us as conformed or reproduced copies. Based on the foregoing, and subject to the assumptions and qualifications set forth below, we are of the opinion that: 1. Each of the Credit Parties (i) is an existing corporation and in good standing under the laws of its jurisdiction of incorporation and (ii) has the corporate power to execute, deliver and perform the Amendment Documents to which it is a party, to own and use its assets, and to conduct its business as presently conducted and as proposed to be conducted immediately following the consummation of the transactions contemplated by the Amendment. B-2 14 2. Each of the Credit Parties has duly authorized the execution and delivery of the Amendment Documents to which it is a party and all performance by it thereunder. Each of the Credit Parties has duly executed and delivered such Amendment Documents. 3. The execution, delivery and performance by each Credit Party of each of the Reaffirmation, the Amendment, and the Credit Agreement as amended by the Amendment to which it is a party (i) require no action or consent by or in respect of, or filing with, any governmental body, agency or official of the State of Colorado or of the federal government of the United States and (ii) do not contravene, or constitute a default under, any provision of applicable Colorado or United States federal law or regulation or of the Organizational Documents or Material Contracts of such Credit Party, or, to the best of our knowledge of any judgment, injunction, order, decree or other instrument binding on such Credit Party or result in the creation or imposition of any Lien on any asset of any Credit Party. 4. If the Amendment Documents and the Credit Documents were governed by the laws of the State of Colorado, each of the Reaffirmation, the Amendment and the Credit Agreement as amended by the Amendment would constitute the legal, valid and binding obligation of each Credit Party a party thereto, enforceable against such Credit Party in accordance with its terms. 5. In a properly presented and argued case, a Colorado state court or a federal court sitting in Colorado as the forum state, applying Colorado conflict of laws principles should enforce the choice of law provisions in the Amendment Documents and the Credit Agreement as amended by the Amendment. 6. Since December 27, 1995, the date of our prior legal opinion rendered to the Agent and the Lenders in connection with the Credit Agreement, no facts or circumstances concerning the Company have come to the attention of attorneys in this firm who provide services to the Company, which would cause us to believe that our opinion in Paragraph 10 of such prior opinion concerning the real estate investment trust status of the Company under the Internal Revenue Code of 1986, as amended (a) was inaccurate, or (b) would not be accurate through the date of this opinion. 7. To the best of our knowledge, there does not exist any litigation or governmental proceedings, pending or threatened against any of the Credit Parties which purport to affect the legality, validity, binding effect or enforceability of any of the Amendment Documents or Credit Documents or which are likely to have a material adverse effect upon the financial condition or operations of the Company or its Subsidiaries. This opinion is subject to the following assumptions and qualifications: B-3 15 (i) To the extent matters of fact are involved in the opinions set forth above, we have, with your permission, relied upon certificates of public officials or of officers of the Company, copies of which are attached hereto. (ii) The opinions rendered in Paragraph 4 above relating to the enforceability of the Amendment Documents are subject to and limited by the following: (i) applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws now or hereafter affecting the enforcement of creditors' rights and generally and (ii) general equitable principles, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law) and (iii) public policies which may affect the enforceability of certain remedies or rights provided for in the Amendment Documents. (iii) The opinions with respect to enforceability of the agreements referred to herein and as to no conflict or breach of any federal or Colorado statute are subject to fraudulent conveyance laws. The opinions set forth above are limited to the effect of the laws of the State of Colorado, the federal laws of the United States of America and the general corporation law of the State of Delaware. We express no opinion with respect to the laws of any other jurisdiction. This opinion is furnished to the Agent, the Facing Bank, the Co-Agents and the Lenders. This opinion may not be relied on by any other person other than the Arranger, the Agent, the Facing Bank, the Co-Agents, the Lenders, and Alston & Bird, counsel to the Arranger, the Agent and the Facing Bank. Sincerely yours, -------------------------------------- B-4 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 MAR-31-1997 4,338 0 0 0 0 0 0 (90,241) 570,547 0 225,642 0 2 235 320,429 570,547 0 23,333 0 3,828 11,000 0 6,107 460 0 460 0 (11,427) 0 (10,967) 0 0 Primary and fully diluted earnings per share attributable to: Core Group Common Stock: Net Income Before Extraordinary Item $ 0.42 Extraordinary Loss on Debt Prepayment $(0.48) Net Loss $(0.06) Psychiatric Group Depositary Shares: Net Loss $(4.52)
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