1
EXHIBIT 99.2
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Health Properties, Inc.:
We have audited the accompanying consolidated balance sheets of American
Health Properties, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Health Properties,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 22, 1999.
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AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
Real estate properties
Buildings and improvements................................ $ 760,679 $ 638,943
Accumulated depreciation.................................. (121,726) (102,235)
--------- ---------
638,953 536,708
Land...................................................... 76,539 64,897
Construction in progress.................................. 14,247 4,729
--------- ---------
729,739 606,334
Mortgage notes receivable, net.............................. 4,400 41,936
Other notes receivable...................................... 1,663 2,500
Direct financing leases..................................... 1,975 3,053
Cash and short-term investments............................. 3,817 23,053
Receivables................................................. 7,359 7,103
Deferred financing costs and other assets................... 4,889 6,593
--------- ---------
$ 753,842 $ 690,572
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable.......................................... $ 69,000 $ --
Mortgage notes payable...................................... 20,772 17,922
Subordinated convertible bonds payable...................... -- 6,832
Senior notes payable........................................ 219,164 219,059
Accounts payable and accrued liabilities.................... 15,278 13,193
Dividends payable........................................... 15,031 14,847
Deferred income............................................. 3,732 3,758
--------- ---------
342,977 275,611
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
8.6% Cumulative Redeemable Preferred Stock, Series B;
$2,500 liquidation value; 40 shares issued and
outstanding........................................... 100,000 100,000
Psychiatric Group Preferred Stock; 208 shares issued
and outstanding....................................... 2 2
Common stock $.01 par value; 100,000 shares authorized;
24,984 and 23,557 shares issued and outstanding........ 250 236
Additional paid-in capital................................ 519,738 482,030
Cumulative net income..................................... 329,918 283,453
Cumulative dividends...................................... (539,043) (450,760)
--------- ---------
410,865 414,961
--------- ---------
$ 753,842 $ 690,572
========= =========
The accompanying notes are an integral part of these financial statements.
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AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
REVENUES
Rental income.............................................. $ 92,110 $ 72,237 $69,488
Mortgage interest income................................... 3,542 6,289 5,980
Additional rental and interest income...................... 14,098 12,498 12,342
Other property income...................................... 2,099 187 --
Other interest income...................................... 873 2,254 1,114
-------- -------- -------
112,722 93,465 88,924
-------- -------- -------
EXPENSES
Depreciation and amortization.............................. 21,354 15,904 15,016
Property operating......................................... 5,769 524 44
Interest expense........................................... 21,609 19,659 21,842
General and administrative................................. 9,006 8,000 7,427
Impairment loss on real estate and notes receivable........ 8,330 11,000 --
-------- -------- -------
66,068 55,087 44,329
Minority interest.......................................... 189 189 216
-------- -------- -------
INCOME BEFORE EXTRAORDINARY ITEM........................... 46,465 38,189 44,379
EXTRAORDINARY LOSS ON DEBT PREPAYMENT...................... -- (11,427) --
-------- -------- -------
NET INCOME............................................... $ 46,465 $ 26,762 $44,379
======== ======== =======
SERIES B PREFERRED DIVIDEND REQUIREMENT.................... $ (8,600) $ (1,553) $ --
======== ======== =======
ATTRIBUTABLE TO CORE GROUP COMMON STOCK AND PSYCHIATRIC
GROUP DEPOSITARY SHARES --
INCOME BEFORE EXTRAORDINARY ITEM......................... $ 37,865 $ 36,636 $44,379
======== ======== =======
NET INCOME............................................... $ 37,865 $ 25,209 $44,379
======== ======== =======
ATTRIBUTABLE TO --
CORE GROUP COMMON STOCK
Income before extraordinary item....................... $ 43,045 $ 42,554 $38,800
Extraordinary loss on debt prepayment.................. $ -- $(11,427) $ --
Net income............................................. $ 43,045 $ 31,127 $38,800
Basic per share amounts --
Income before extraordinary item.................... $ 1.77 $ 1.81 $ 1.65
Extraordinary loss on debt prepayment............... $ -- $ (0.49) $ --
Net income.......................................... $ 1.77 $ 1.32 $ 1.65
Weighted average common shares...................... 24,379 23,505 23,453
Diluted per share amounts --
Income before extraordinary item.................... $ 1.75 $ 1.80 $ 1.65
Extraordinary loss on debt prepayment............... $ -- $ (0.49) $ --
Net income.......................................... $ 1.75 $ 1.31 $ 1.65
Weighted average common shares and dilutive
potential common shares........................... 24,605 23,703 23,558
Dividends declared per common share.................... $ 2.20 $ 2.12 $ 2.04
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net income (loss)...................................... $ (5,180) $ (5,918) $ 5,579
Basic per share amounts --
Net income (loss)................................... $ (2.49) $ (2.84) $ 2.68
Weighted average depositary shares.................. 2,084 2,084 2,084
Diluted per share amounts --
Net income (loss)................................... $ (2.49) $ (2.84) $ 2.67
Weighted average depositary shares and dilutive
potential depositary shares....................... 2,084 2,084 2,093
Dividends declared per depositary share................ $ 1.73 $ 2.62 $ 2.80
The accompanying notes are an integral part of these financial statements.
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AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PSYCHIATRIC
SERIES B GROUP
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- --------------- --------------- PAID-IN CUMULATIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL NET INCOME
------ -------- ------ ------ ------ ------ ---------- -----------
(IN THOUSANDS)
BALANCES AT DECEMBER 31, 1995... -- $ -- 208 $2 23,443 $234 $480,703 $212,312
Stock incentives, net......... -- -- -- -- (1) -- 1,140 --
Exercise of stock options..... -- -- -- -- 13 1 240 --
Net income.................... -- -- -- -- -- -- -- 44,379
Cash dividends................ -- -- -- -- -- -- -- --
-- -------- --- -- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1996... -- -- 208 2 23,455 235 482,083 256,691
Issuance of preferred stock... 40 100,000 -- -- -- -- (3,600) --
Stock incentives, net......... -- -- -- -- 2 -- 1,372 --
Exercise of stock options..... -- -- -- -- 100 1 2,175 --
Net income.................... -- -- -- -- -- -- -- 26,762
Cash dividends................ -- -- -- -- -- -- -- --
-- -------- --- -- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1997... 40 100,000 208 2 23,557 236 482,030 283,453
Issuance of common stock...... -- -- -- -- 415 4 11,162 --
Conversion of subordinated
convertible bonds........... -- -- -- -- -- -- 10 --
Stock incentives, net......... -- -- -- -- 6 -- 1,334 --
Exercise of stock options..... -- -- -- -- 173 2 3,600 --
Net income.................... -- -- -- -- -- -- -- 46,465
Stock dividend................ -- -- -- -- 833 8 21,602 --
Cash dividends................ -- -- -- -- -- -- -- --
-- -------- --- -- ------ ---- -------- --------
BALANCES AT DECEMBER 31, 1998... 40 $100,000 208 $2 24,984 $250 $519,738 $329,918
== ======== === == ====== ==== ======== ========
TOTAL
CUMULATIVE STOCKHOLDERS'
DIVIDENDS EQUITY
---------- -------------
(IN THOUSANDS)
BALANCES AT DECEMBER 31, 1995... $(340,191) $353,060
Stock incentives, net......... -- 1,140
Exercise of stock options..... -- 241
Net income.................... -- 44,379
Cash dividends................ (53,681) (53,681)
--------- --------
BALANCES AT DECEMBER 31, 1996... (393,872) 345,139
Issuance of preferred stock... -- 96,400
Stock incentives, net......... -- 1,372
Exercise of stock options..... -- 2,176
Net income.................... -- 26,762
Cash dividends................ (56,888) (56,888)
--------- --------
BALANCES AT DECEMBER 31, 1997... (450,760) 414,961
Issuance of common stock...... -- 11,166
Conversion of subordinated
convertible bonds........... -- 10
Stock incentives, net......... -- 1,334
Exercise of stock options..... -- 3,602
Net income.................... -- 46,465
Stock dividend................ (21,610) --
Cash dividends................ (66,673) (66,673)
--------- --------
BALANCES AT DECEMBER 31, 1998... $(539,043) $410,865
========= ========
The accompanying notes are an integral part of these financial statements.
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AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 46,465 $ 26,762 $ 44,379
Extraordinary loss on debt prepayment...................... -- 11,427 --
Depreciation, amortization and other non-cash items........ 23,895 18,486 17,271
Deferred income............................................ 198 (253) (368)
Impairment loss on real estate and notes receivable........ 8,330 11,000 --
Change in receivables and other assets..................... 708 (2,838) 412
Change in accounts payable and accrued liabilities......... 2,974 5,572 (453)
--------- --------- --------
82,570 70,156 61,241
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties..... (143,835) (92,242) (17,142)
Proceeds from sale of property............................. -- -- 423
Mortgage note receivable fundings.......................... (179) (4,221) --
Principal payments on mortgage notes receivable............ 35,039 72 64
Other notes receivable..................................... (1,648) 233 458
Direct financing leases.................................... 1,078 642 2,535
Administrative capital expenditures........................ (122) (14) (55)
--------- --------- --------
(109,667) (95,530) (13,717)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable................ 69,000 (48,500) 48,500
Principal payments on mortgage notes payable............... (525) (34) --
Redemption of subordinated convertible bonds payable....... (7,058) -- --
Proceeds from notes payable issuance....................... -- 218,965 --
Prepayment of notes payable................................ -- (163,176) --
Principal payments on notes payable........................ -- -- (49,000)
Financing costs paid....................................... (144) (2,862) (150)
Proceeds from sale of preferred stock...................... -- 96,400 --
Proceeds from sale of common stock......................... 9,475 -- --
Proceeds from exercise of stock options.................... 3,602 2,176 241
Cash dividends paid........................................ (66,489) (56,022) (53,206)
--------- --------- --------
7,861 46,947 (53,615)
--------- --------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... (19,236) 21,573 (6,091)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 23,053 1,480 7,571
--------- --------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 3,817 $ 23,053 $ 1,480
========= ========= ========
The accompanying notes are an integral part of these financial statements.
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AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COMPANY
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living, Alzheimer's care and
medical office/clinic facilities.
The Company's common stock (the Core Group Common Stock) is intended to
reflect the separate financial performance of the Company's investments in acute
care, rehabilitation and long-term acute care hospitals, skilled nursing,
assisted living, Alzheimer's care and medical office/clinic facilities (the Core
Group). The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Company's investments in psychiatric
hospitals (the Psychiatric Group). The Company's Series B Depositary Shares, and
the Series B Preferred Stock represented thereby, are attributed to the
Company's Core Group for financial accounting and reporting purposes.
Attribution of the components of the Company's capital structure to its Core
Group and Psychiatric Group for financial accounting and reporting purposes does
not affect the legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock, Series B Depositary Shares
or Psychiatric Group Depositary Shares is a holder of an issue of capital stock
of the entire Company and is subject to the risks associated with an investment
in the Company and all of its businesses, assets and liabilities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements of the Core Group and the Psychiatric Group also are
included elsewhere herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Short-Term Investments. Cash and short-term investments consist of
cash and all highly liquid investments with an original maturity date of less
than three months and are stated at cost which approximates fair value.
Real Estate Properties. The Company records properties at cost and
recognizes depreciation on a straight-line basis over the estimated useful lives
of the buildings and improvements (21 to 42 years). Tenant improvements paid for
by the Company are capitalized and depreciated over the lives of the related
leases. In general, other capital expenditures incurred are capitalized when
significant and depreciated over the period they are expected to provide
benefits to the related property.
Impairment of Real Estate Properties and Notes Receivable. The Company
reviews the carrying value of its real estate properties and notes receivable
for possible impairment of value whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. In general, an
impairment of such assets would be indicated if the estimated future cash flows
expected to result from the use of such assets and their eventual disposition is
less than their carrying amounts.
Additional Rental and Interest Income. Certain of the Company's facility
leases provide for contingent rental or interest income based upon specific
target revenues of the operator. The Company recognizes contingent rental and
interest income on a quarterly basis by comparing the specific target to an
estimate of
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AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the operator's future operating revenues for the remainder of the lease
calculation period. If the Company deferred recognition of contingent rental and
interest income until the specific target that triggers the contingent rental or
interest income was achieved, there would not have been a material impact on the
Company's financial statements for the year ended December 31, 1998.
Deferred Income. Fees received, net of related direct costs, associated
with the origination or amendment of leases and mortgage notes receivable are
deferred and amortized at a constant effective rate over the remaining term of
the related leases and mortgage notes receivable.
Deferred Costs. Deferred financing costs are amortized over the term of the
related debt at a constant effective rate.
Federal Income Taxes. The Company intends at all times to operate so as to
qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company generally will not be subject to federal income tax to the
extent it distributes to shareholders at least 100% of its taxable income.
Qualification as a REIT under Sections 856 to 860 of the Internal Revenue
Code applies to the Company as a whole, rather than the Core Group or
Psychiatric Group individually. Dividends paid by the Company on its Core Group
Common Stock, Series B Depositary Shares and Psychiatric Group Depositary Shares
must be sufficient in the aggregate for the Company to meet the minimum
distribution requirements of the Internal Revenue Code. The Company's earnings
and profits as a whole, without reference to the Core Group or Psychiatric Group
individually, is used to determine the taxable character of dividends paid to
holders of its Core Group Common Stock, Series B Depositary Shares and
Psychiatric Group Depositary Shares, with earnings and profits allocated first
to Series B Depositary Shares.
Earnings and profits, which determine the taxable character of dividends
paid to stockholders, differ from net income for financial reporting purposes
due primarily to timing differences in the recognition of deferred income,
impairment losses and various accruals and differences between the estimated
useful lives used to compute depreciation for financial statement purposes and a
40-year life generally used in determining earnings and profits. The cost basis
of the Company's real estate properties is generally the same for financial
reporting and earnings and profits purposes, except for properties written down
for financial reporting purposes and properties for which the previous owner's
basis is required to be carried forward for tax purposes.
New Accounting Standards. In the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The adoption of this statement had no impact on
the Company's financial statements.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for
reporting financial and descriptive information about reportable operating
segments. In general, reportable operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Currently, the Company has two
such reportable operating segments, the Core Group and the Psychiatric Group.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits".
SFAS No. 132 revises employer's disclosures about pension and other post
retirement benefits, requires additional information on changes in the benefit
obligations and fair values of plan assets and eliminates certain previous
disclosures. The adoption of this statement in 1998 had no impact on the
Company's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet
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AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as either an asset or liability measured at its fair value. It also requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The required adoption of this
statement in 2000 is not expected to have a material impact on the Company's
financial statements.
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". In general, SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
The adoption of SOP 98-5 in 1998 had no impact on the Company's financial
statements.
REAL ESTATE PROPERTIES
The following table summarizes the Company's investment in health care real
estate properties as of December 31, 1998:
BUILDINGS AND TOTAL ACCUMULATED
STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION
----- ------- ------------- ---------- ------------
(IN THOUSANDS)
ACUTE CARE HOSPITALS:
Chesterfield General Hospital.......... SC $ 720 $ 10,687 $ 11,407 $ 1,306
Cleveland Regional Medical Center...... TX 300 8,000 8,300 1,482
Desert Valley Hospital................. CA 1,755 24,650 26,405 2,517
Frye Regional Medical Center........... NC 1,247 44,202 45,449 13,285
Irvine Medical Center.................. CA 17,987 57,013 75,000 10,987
Kendall Regional Medical Center........ FL 4,163 64,849 69,012 19,008
Lucy Lee Hospital...................... MO 404 23,162 23,566 6,521
Marlboro Park Hospital................. SC 640 7,153 7,793 874
North Fulton Regional Hospital......... GA 4,149 42,042 46,191 10,273
Palm Beach Gardens Medical Center...... FL 4,024 41,624 45,648 12,274
Pioneer Valley Hospital................ UT 1,997 47,469 49,466 3,894
Shannon Medical Center, St. John's
Campus............................... TX 255 16,197 16,452 2,951
Tarzana Regional Medical Center........ CA 12,421 61,279 73,700 18,938
------- -------- -------- --------
50,062 448,327 498,389 104,310
------- -------- -------- --------
ALZHEIMER'S CARE FACILITIES:
Pine Haven at Cypresswood.............. TX 225 3,475 3,700 268
Pine Haven at Sugar Land............... TX 265 3,759 4,024 172
------- -------- -------- --------
490 7,234 7,724 440
------- -------- -------- --------
ASSISTED LIVING FACILITIES:
Cambria Lodge.......................... TX 300 4,882 5,182 290
Garrison Creek Lodge................... WA 219 5,429 5,648 334
Sherwood Place......................... TX 220 4,814 5,034 276
Summer Wind Residence.................. ID 110 2,890 3,000 241
------- -------- -------- --------
849 18,015 18,864 1,141
------- -------- -------- --------
LONG-TERM ACUTE CARE HOSPITAL:
SCCI Hospital -- Amarillo.............. TX 810 5,300 6,110 144
------- -------- -------- --------
MEDICAL OFFICE/CLINIC FACILITIES:
Casa Blanca Clinic(1).................. AZ 1,900 18,681 20,581 723
Emerson Medical Office Building/Surgery
Center(1)............................ FL 572 8,478 9,050 106
Fannin Medical Buildings(1)............ TX 2,850 49,209 52,059 1,794
Morristown Professional Plaza.......... NJ 1,500 18,146 19,646 613
Murfreesboro Medical Clinic(2)......... TN 650 12,394 13,044 236
Northpark Professional Building........ FL -- 10,651 10,651 443
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AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUILDINGS AND TOTAL ACCUMULATED
STATE LAND IMPROVEMENTS INVESTMENT DEPRECIATION
----- ------- ------------- ---------- ------------
(IN THOUSANDS)
Park Plaza Professional Building....... TX $ 1,100 $ 15,947 $ 17,047 $ 578
Valencia Medical Office Building....... CA 2,200 7,313 9,513 87
Walsh Medical Arts Center.............. CA 285 8,532 8,817 1,011
Westpark Plaza......................... TX 1,700 7,436 9,136 297
Woodlake Medical Center................ CA 2,470 10,200 12,670 247
------- -------- -------- --------
15,227 166,987 182,214 6,135
------- -------- -------- --------
PSYCHIATRIC HOSPITALS:
Northpointe............................ FL 1,300 -- 1,300 --
Rock Creek Center...................... IL 440 760 1,200 --
Sunrise Regional Medical Center........ FL 1,200 2,202 3,402 771
------- -------- -------- --------
2,940 2,962 5,902 771
------- -------- -------- --------
REHABILITATION HOSPITALS:
HealthSouth MountainView Rehabilitation
Hospital............................. WV -- 11,718 11,718 2,176
HealthSouth Rehabilitation Hospital of
Fayetteville......................... AR 962 8,124 9,086 1,523
Wesley Rehabilitation Hospital......... KS 1,938 12,659 14,597 2,149
------- -------- -------- --------
2,900 32,501 35,401 5,848
------- -------- -------- --------
SKILLED NURSING FACILITIES:
Arkansas Manor Nursing Home............ CO 154 3,912 4,066 514
Cornerstone Care Center................ CO 125 4,731 4,856 480
Covington Manor Nursing Center......... IN 170 8,064 8,234 168
Douglas Manor.......................... AZ 175 2,446 2,621 246
Edgewood Manor Nursing Center.......... OH 155 5,027 5,182 109
Fairview Manor Nursing Center.......... OH 130 7,796 7,926 168
Lakeland Nursing Center................ IN 50 3,842 3,892 83
Norwood Nursing Center................. IN 30 3,779 3,809 85
Safford Care Center.................... AZ 100 4,834 4,934 472
Silver Hills Health Care Center........ NV 1,322 6,065 7,387 38
University Park Nursing Center......... IN 110 4,847 4,957 94
Versailles Health Care Center.......... OH 160 6,303 6,463 119
Villa Fairborn......................... OH 260 6,227 6,487 130
Villa Georgetown....................... OH 125 6,338 6,463 128
Villa Springfield...................... OH 195 5,142 5,337 103
------- -------- -------- --------
3,261 79,353 82,614 2,937
------- -------- -------- --------
$76,539 $760,679 $837,218 $121,726
======= ======== ======== ========
- ---------------
(1) Casa Blanca Clinic represents four separate facilities leased together under
a single master lease. Fannin Medical Buildings represent two separate
facilities master-leased to affiliated tenants under separate leases, with
one such facility encumbered by a $17,495 mortgage note payable. Emerson
Medical Office Building/Surgery Center represents two separate facilities,
one of which is master-leased and the other leased to multiple tenants.
(2) Murfreesboro Medical Clinic is encumbered by a $3,277 mortgage note payable.
A substantial portion of the Company's properties are leased to
single-tenant operators under "net" leases pursuant to which the lessees are
responsible for all maintenance, repairs, taxes and insurance of the leased
properties. The leases provide for the payment of minimum base rent and
additional rent during the fixed term
F-10
10
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and any renewal terms. Additional rent is generally based on the increase in
annual gross revenues of the related facility or the consumer price index as
specified in the lease agreements. The Company has the right to approve capital
expenditures at such properties, the option to fund certain capital expenditures
and, in certain situations, is obligated to fund approved capital expenditures
on terms comparable to the original investment. The base and additional rent
provisions of the leases are amended when such capital expenditures are funded
to reflect the Company's increased investment. At December 31, 1998, the Company
had no commitments to fund capital expenditures pursuant to these rights and
obligations.
Many of the Company's medical office/clinic facilities are leased to
multiple tenants on a gross or modified net basis pursuant to which the Company,
as lessor, is responsible for a portion of the operating costs of the building,
including but not limited to the cost of maintenance, repairs, insurance and
taxes on the leased properties. In general, the Company is also initially
responsible for capital expenditures, leasing commissions and tenant
improvements at these buildings, subject to reimbursement from tenants in some
instances.
At December 31, 1998, the Company had construction in progress of
$14,247,000. As of December 31, 1998, the Company had funded $5,230,000 of a
$9.5 million commitment to develop a skilled nursing facility in Las Vegas,
Nevada to be operated by an experienced operator of skilled nursing facilities.
As of December 31, 1998, the Company had funded $8,329,000 of an $18.6 million
commitment to develop three assisted living facilities to be managed by an
experienced operator of assisted living facilities. The Company has a $22.5
million forward funding commitment to develop up to nine Alzheimer's care
facilities to be managed by the same operator that currently manages two
existing Alzheimer's care facilities owned by the Company. As of December 31,
1998, $688,000 was funded under this commitment for the development of one
facility having a total development cost of approximately $2.8 million. The
Company has identified a second facility site under this commitment having a
total development cost of approximately $2.8 million. The Company also has a
$5.7 million commitment to develop a medical office/clinic facility in Roseburg,
Oregon to be master-leased to the operator of the adjacent hospital.
Six of the Company's acute care properties are leased to subsidiaries of
American Medical International, Inc. (AMI), a subsidiary of Tenet Healthcare
Corporation. The six leases are covered by cross-default provisions and the
lease obligations are unconditionally guaranteed by AMI. In 1998, revenues from
these leases accounted for 41% of the Company's total revenues.
Kendall Regional Medical Center (Kendall) is leased to a subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). Aggregate revenues from the
lease, which was originally scheduled to mature in February 1999, were
approximately $10.3 million in 1998, or 9% of the Company's total revenues.
Pursuant to the terms of the lease, Columbia has exercised its option to
purchase Kendall at fair market value. The purchase price of $105 million will
be paid in cash, or at the option of the Company, a combination of cash and debt
relief. The Company currently intends to effect the transaction as a "deferred
like-kind" 1031 exchange for tax purposes. The first part of the exchange, the
transfer of Kendall to Columbia, is currently scheduled to occur on April 15,
1999. The Company would complete the exchange by acquiring new investment
properties within the time limits imposed by federal tax law, if possible. If
the Company is successful in identifying and closing on a sufficient amount of
new investments within the required time limits, the Company should not
recognize current taxable gain as a result of the transaction. In that event,
there should be no impact on the Company's REIT distribution requirements. Even
though the Company may not recognize a gain on the transaction for tax purposes,
the Company expects to be able to recognize a gain of over $50 million for book
purposes. The Company cannot be assured that total revenues generated by new
investments acquired to effect the exchange will equal the annual revenues
currently generated by the Kendall investment, nor is it certain that the
Company will complete the transaction as an exchange. If the Company does not
complete the transaction as an exchange, the amount of the Company's tax
liability, the impact on its REIT distribution requirements and the amount of
gain, net of taxes, if any, recognized for book purposes
F-11
11
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would depend on the amount of gain recognized for tax purposes, any losses
recognized by the Company on sales of other assets and various tax elections
available to the Company.
Future minimum annual rentals, assuming the sale of Kendall on April 15,
1999, under the Company's noncancellable operating leases for calendar years
1999 through 2003 are approximately $89,360,000, $85,670,000, $80,640,000,
$75,490,000, and $73,690,000, respectively.
The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in the
periodic restructuring of psychiatric operator payment obligations, the closing
of one psychiatric hospital and significant impairment losses on psychiatric
investments, including an $11 million charge in 1997 and a $8.3 million charge
in 1998. At December 31, 1998, the aggregate carrying value of the Company's
psychiatric properties was $5,131,000. The Northpointe property has been vacant
since mid-1997 and has a carrying value of $1,300,000. The Company incurs
ongoing costs for maintenance and security of the property while it continues to
seek alternate uses or a buyer for the property. The operator of the Rock Creek
Center (RCC) experienced continuing financial and operational difficulties over
the past several years, and at the end of 1998, the operator was in default on
its obligations to the Company. As a result, the carrying value of the RCC
property was written down to $1,200,000 and the Company's net investment in
related notes and various other obligations owed to it by the operator of RCC
were totally written off. Subsequent to year-end, the Company sold its total RCC
investment for a cash price of $2.5 million. At December 31, 1998, the Sunrise
Regional Medical Center (Sunrise) property had a carrying value of $2,631,000.
In September 1998, a new operator assumed all operational responsibility for the
hospital and entered into a new five-year lease with effective monthly rent of
$60,000. Although the new operator has fulfilled its obligations to the Company
under the lease so far, the new operator has experienced cash flow difficulties
primarily as a result of delays in obtaining Baker Act certification. As a
result, the Company provided the operator with a $200,000 working capital loan
at the end of 1998, and subsequent to year-end, the operator requested $700,000
of additional working capital loans. Although this request is still being
evaluated, the Company likely will provide the additional loans. The Company
cannot be assured that the operator will be successful and, if it were to cease
operations, an impairment charge to reduce the carrying value of the Sunrise
property and any related outstanding working capital loans would be likely. The
Company will continue to encourage the operator to pursue financing alternatives
that might enable it to acquire the property and repay its borrowings from the
Company.
MORTGAGE NOTES RECEIVABLE
SCCI Hospital -- Houston Central $4,400,000. The Company has a mortgage
note receivable secured by a first mortgage and security interest in the real
property of a long-term acute care facility in Houston, Texas. The note has an
initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is June 30, 2007. The interest rate on the note is
10.50% with interest only payable monthly through June 30, 1999 and monthly
principal and interest payments of $40,000 payable thereafter. Pursuant to the
terms of the mortgage note receivable, the Company may receive additional
interest each year based on the increase in annual operating revenues of the
facility.
Four Winds. The Company had two mortgage notes receivable secured by first
mortgages and security interests in the real property of Four Winds, two
psychiatric facilities located in Saratoga Springs and Katonah, New York. The
Saratoga Springs note had an initial term of ten years with a maturity date of
June 30, 1999, bore interest at a rate of 12.42% and required monthly principal
and interest payments of $194,000. The Katonah note had an initial term of ten
years with a maturity date of November 30, 2002, bore interest at rates of
13.44%, 13.80% and 14.13%, in 1996, 1997 and 1998, respectively and required
monthly payments of interest only. On July 1, 1998, the Company received $35
million as prepayment in full of the two Four Winds mortgage notes receivable
resulting in an impairment loss of $2.73 million.
F-12
12
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount of mortgage notes receivable is a reasonable estimate
of fair value, as the pricing and terms of the notes are indicative of current
rates and credit risk.
OTHER NOTES RECEIVABLE
In 1998, the Company committed to advance funds on a senior subordinated
note due from the operator of an Alzheimer's care facility for a total maximum
principal amount of $1,902,000. The note is secured by a pledge of stock in the
operator and is personally guaranteed by one of its principals. Advances under
the note are conditioned upon borrower's compliance with various covenants. The
Company has no obligation to make principal advances after February 27, 2003. As
of December 31, 1998, $1,468,000 was outstanding under the note, which included
principal advanced of $1,283,000 and accrued interest of $185,000. Prior to
December 31, 2002, interest accrues on the principal balance of the note at a
rate of 18% per annum and will be added to the outstanding principal balance on
a quarterly basis. Accrued interest is payable quarterly as it accrues
commencing January 1, 2003 until March 31, 2006, subject to an intercreditor
agreement and certain earnings requirements of the operator. Commencing April 1,
2006, quarterly principal and interest payments sufficient to amortize the
principal amount of the loan as of March 31, 2006 together with unpaid interest
are due in equal quarterly installments until April 1, 2012 at which time all
unpaid principal and interest amounts are due and payable.
The Company has provided financing at variable rates to certain psychiatric
hospital operators under revolving credit agreements and working capital loans.
Borrowings under these agreements are conditioned upon the borrower's compliance
with various covenants and are partially secured by accounts receivable, other
personal property and/or issued and outstanding shares of capital stock of the
operators. As of December 31, 1998, $195,000 was outstanding under a $200,000
working capital loan provided to one psychiatric hospital operator at an annual
interest rate of 12%. Interest only on the note is payable monthly through
August 1, 1999. Commencing September 1, 1999, principal and interest payments of
$35,000 are payable monthly until maturity on February 1, 2000. During 1998,
$2,485,000 of outstanding borrowings were written off by the Company as part of
a $5.6 million impairment loss recorded on psychiatric investments, and during
1997, $1,724,000 of outstanding borrowings were written off as part of an $11.0
million impairment loss recorded on psychiatric investments.
The pricing and terms of other notes receivable are indicative of current
rates and credit risk, and therefore, the current carrying amount of these
financial instruments is a reasonable estimate of fair value.
DIRECT FINANCING LEASES
In connection with its investments in certain acute and long-term care
properties, the Company has provided equipment leasing for terms of five to
seven years which are classified as direct financing leases. As of December 31,
1998, the Company's aggregate net investment in these direct financing leases
was $1,975,000, represented by total minimum lease payments receivable of
$2,163,000 less unearned income of $188,000. Future minimum annual lease
payments under these leases for calendar years 1999 through 2002 are
approximately $1,342,000, $704,000, $94,000 and $23,000, respectively.
DEBT
Bank Loans Payable. The Company has a $250 million unsecured revolving
credit agreement with a syndicate of banks that matures on December 31, 2000 and
bears an annual facility fee based on the total commitment. This agreement
provides for interest on outstanding borrowings based on, at the Company's
election, LIBOR plus a margin, a rate bid by the lenders, or the prime rate. The
margin on LIBOR borrowings and the annual facility fee may vary and are
dependent upon various conditions, including the Company's debt ratings and the
level of borrowings outstanding. Currently, the Company's LIBOR margin is 62.5
basis points and the annual facility fee is 25 basis points.
F-13
13
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average amount of borrowings under bank credit agreements
outstanding during 1998, 1997 and 1996 was $37,764,000, $6,151,000 and
$21,622,000 at weighted average interest rates of 6.3%, 7.1%, and 6.4%,
respectively. The maximum amount outstanding under bank credit agreements in
1998, 1997 and 1996 was $75,000,000, $48,500,000 and $53,000,000, respectively.
As of December 31, 1998, the Company had $69,000,000 of outstanding borrowings
under its bank credit agreement at a weighted average interest rate of 6.0%.
The duration of borrowings under the Company's unsecured revolving credit
agreement is generally less than 90 days at variable pricing indicative of
current short-term borrowing rates. Accordingly, the carrying amount is a
reasonable estimate of fair value.
Mortgage Notes Payable. In connection with the acquisition of a medical
office building in Houston, Texas in 1997, a mortgage note payable in the amount
of $17,956,000 was assumed. The remaining balance at December 31, 1998 and 1997
was $17,495,000 and $17,922,000, respectively with an interest rate of 8.30%.
The note is secured by a first mortgage and security interest in the real
property and requires a monthly payment of principal and interest of
approximately $158,000 with the remaining principal balance due at maturity on
June 15, 2011.
In connection with the acquisition of a medical office building in
Murfreesboro, Tennessee in 1998, a mortgage note payable in the amount of
$3,375,000 was assumed. The remaining balance at December 31, 1998 was
$3,277,000 with an interest rate of 7.0%. The note is secured by a first
mortgage and security interest in the real property and requires a monthly
payment of principal and interest of approximately $33,000 with the remaining
principal balance due at maturity on October 2, 1999.
The carrying amount of the mortgage notes payable is a reasonable estimate
of fair value, as the pricing and terms of the notes are indicative of current
rates and credit terms.
Senior Notes Payable. In January 1997, the Company completed a $220 million
public debt offering of unsecured senior notes payable, issuing $100 million of
notes with a coupon rate of 7.05% due January 15, 2002 (2002 Notes) and $120
million of notes with a coupon rate of 7.50% due January 15, 2007 (2007 Notes).
The 2002 Notes and 2007 Notes have effective interest rates of approximately
7.34% and 7.74%, respectively. Interest is payable at the coupon rates
semi-annually on January 15th and July 15th.
The fair value of the Company's 2002 Notes and 2007 Notes is based on the
quoted market price of the notes as traded over-the-counter. As of December 31,
1998 and 1997, the estimated fair value of the 2002 Notes and 2007 Notes was
$208 million and $225 million, respectively.
In February 1997, the Company prepaid its two issues of private placement
debt, which included $72 million of 11.45% unsecured senior notes payable and
$80 million of 10.41% unsecured senior notes payable. The weighted average
amount of borrowings under these senior note issues during 1997 and 1996 was
$22,800,000 and $178,250,000 at weighted average effective interest rates of
11.06% and 11.03%, respectively. The prepayment resulted in an extraordinary
charge in the first quarter of 1997 of $11,427,000 consisting of a make-whole
premium and other costs related to the prepayment.
Subordinated Convertible Bonds Payable. The Company's Convertible Dual
Currency Subordinated Bonds (the Swiss Bonds) were sold in Switzerland pursuant
to public subscription in 1990. The Swiss Bonds had a coupon rate of 8.5% and
were convertible at the option of the holder at any time until July 9, 2000 into
shares of the Company's common stock at a conversion price of $23.45 per share
and a fixed exchange rate of Sfr. 1.41 per U.S. $1.00. In 1998, $10,000 of the
1990 Swiss Bonds, with accrued interest, were converted into 302 shares of
common stock resulting in additional equity of $10,000, net of conversion and
unamortized issuance costs. There were no conversions of Swiss Bonds in 1997 or
1996. Pursuant to the Company's call for early redemption, the remaining 1,489
outstanding Swiss Bonds were redeemed on December 30, 1998 for
F-14
14
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $7,058,000. As of December 31, 1997, the estimated fair value of
the Company's subordinated convertible bonds payable was $7,259,000 based on the
quoted market price of bonds as traded in Switzerland.
Debt Covenants. Covenants and restrictions in the Company's various debt
agreements include limitations on secured borrowings, restrictions covering the
use of proceeds from asset sales and payments of dividends and requirements
relating to the maintenance of specified financial covenants, including those
relating to minimum tangible net worth, fixed charge coverage and ratios of
liabilities to minimum tangible net worth and asset values.
Annual Maturities. The aggregate amount of annual maturities of the
Company's outstanding debt at December 31, 1998, for calendar years 1999 through
2003 and thereafter is $3,741,000, $504,000, $547,000, $100,594,000, $646,000
and $134,740,000, respectively. In addition, the outstanding balance of
$69,000,000 at December 31, 1998 under the Company's unsecured revolving credit
agreement matures on December 31, 2000, although certain events could require
the earlier paydown of the outstanding balance.
Interest. Interest capitalized on construction in progress was $819,000,
$517,000 and $895,000 in 1998, 1997 and 1996, respectively. Interest paid, net
of interest capitalized, in 1998, 1997 and 1996 was $20,482,000, $14,374,000 and
$21,547,000, respectively.
PENSION PLANS
The Company has a defined contribution pension plan covering all of its
employees. Pension expense in 1998, 1997 and 1996 was $287,000, $207,000 and
$247,000, respectively.
The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors elected prior to 1997 upon
completion of sixty months of membership on the Board. The benefits, limited to
ten years, are based on years of service and the annual base director fee in
effect as of the date a director ceases to be a member of the Board.
The following tables set forth the amounts recognized in the Company's
financial statements:
Change in benefit obligations:
1998 1997
------ -----
(IN THOUSANDS)
Projected benefit obligation January 1...................... $ 874 $807
Benefit payments............................................ (110) (66)
Service cost................................................ 24 52
Interest cost............................................... 57 59
Actuarial loss.............................................. 33 22
----- ----
Projected benefit obligation December 31.................... $ 878 $874
Unrecognized prior service cost............................. -- --
Unrecognized net gain....................................... 65 101
----- ----
Pension liability........................................... $ 943 $975
===== ====
F-15
15
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of net pension cost:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Current service cost........................................ $24 $ 52 $ 95
Interest cost............................................... 57 59 53
Amortization of prior service cost.......................... -- 7 49
Amortization of net gain.................................... (3) (21) --
--- ---- ----
Net periodic pension cost................................... $78 $ 97 $197
=== ==== ====
Discount rates of 6.75% and 7.0% for 1998 and 1997, respectively, and a
10.0% increase in annual base director fees once every five years were used in
determining the actuarial present value of the projected benefit obligation. The
discount rates used in determining the net pension cost for 1998, 1997 and 1996
were 7.0%, 7.5% and 7.0%, respectively.
STOCK INCENTIVE PLANS
The Company's stock incentive plans provide for the issuance of up to
2,600,000 shares of stock to directors and key employees of the Company. There
were 726,114 shares available to grant further stock incentives at December 31,
1998.
The following is a summary of stock incentives activity:
CORE GROUP COMMON STOCK PSYCHIATRIC GROUP DEPOSITARY SHARES
------------------------------------------------ ------------------------------------------------
STOCK OPTIONS STOCK OPTIONS
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE DEFERRED AND RESTRICTED NUMBER OF EXERCISE DEFERRED AND RESTRICTED
SHARES PRICE DER SHARES STOCK SHARES PRICE DER SHARES STOCK
--------- -------- ------------ ---------- --------- -------- ------------ ----------
December 31, 1995........... 716,930 $22.43 46,225 19,049 71,694 $ 22.35 5,207 1,904
Granted/accumulated....... 161,651 $22.76 35,526 3,910 -- -- 5,394 --
Exercised/restrictions
lapsed.................. (12,500) $19.28 -- (13,161) -- -- -- (1,121)
-------- ------- ------- ------- ------ ------
December 31, 1996........... 866,081 $22.54 81,751 9,798 71,694 $ 22.35 10,601 783
Granted/accumulated....... 194,982 $25.37 43,122 -- -- -- 5,611 --
Exercised/restrictions
lapsed.................. (100,000) $21.76 (4,027) (8,426) -- -- -- (646)
Expired/canceled.......... (30,000) $29.10 -- -- (10,000) $ 24.15 -- --
-------- ------- ------- ------- ------ ------
December 31, 1997........... 931,063 $23.01 120,846 1,372 61,694 $ 22.06 16,212 137
Granted/accumulated....... 160,424 $28.00 47,159 -- -- -- 39,121 --
Exercised/restrictions
lapsed.................. (172,326) $20.90 (6,312) (1,372) -- -- -- (137)
Expired/canceled.......... (47,728) $28.72 (1,264) -- (16,250) $ 21.78 -- --
-------- ------- ------- ------- ------ ------
December 31, 1998........... 871,433 $24.03 160,429 -- 45,444 $ 22.16 55,333 --
======== ======= ======= ======= ====== ======
F-16
16
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of significant ranges of outstanding and
exercisable options at December 31, 1998:
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ----------------------------
RANGES OF NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- --------- ---------------- ---------------- --------- ----------------
(IN YEARS)
CORE GROUP COMMON STOCK
$16.00 - $21.50...... 198,728 4.6 $19.84 198,728 $19.84
$21.50 - $27.00...... 533,831 6.5 $24.45 442,519 $24.20
$27.00 - $32.50...... 138,874 8.7 $28.41 20,000 $29.98
PSYCHIATRIC GROUP DEPOSITARY SHARES
$16.00 - $21.50...... 21,873 4.5 $19.75 21,873 $19.75
$21.50 - $27.00...... 22,571 4.6 $24.06 22,571 $24.06
$27.00 - $32.50...... 1,000 3.1 $31.94 1,000 $31.94
Restrictions on shares of restricted stock lapse annually over a period of
years. Expense is determined based on the market value at the date of award and
is recognized over the period such restrictions lapse.
The exercise price of stock options is equal to the fair market value of
the shares on the dates the options were granted. Stock options granted to
directors become exercisable immediately or over two years and stock options
granted to key employees become exercisable over two to four years. Stock
options terminate ten years from the date of grant. Options on 661,247, 708,884
and 629,579 shares of Core Group Common Stock were exercisable at December 31,
1998, 1997 and 1996 with weighted average exercise prices of $23.07, $22.55 and
$22.90 per share, respectively. Options on 45,444, 61,557 and 64,210 Psychiatric
Group Depositary Shares were exercisable at December 31, 1998, 1997 and 1996
with weighted average exercise prices of $22.16, $22.07 and $22.75 per share,
respectively.
DERs have been granted in tandem with some of the stock options granted to
key employees. At each dividend declaration date, a calculation is made to
determine the number of shares that could be acquired if dividends were paid on
shares under option for a period of up to five years from the date of grant and
on accumulated DER shares for a period of up to ten years from the date of
grant, and such number of shares are accumulated for the benefit of option
holders over the term of the option grant. Upon exercise or expiration of the
related option, each option holder is entitled to receive additional shares
equivalent to the accumulated number of related DER shares. Expense related to
the DER shares is equal to the equivalent amount of dividends used to determine
the number of DER shares. Directors may elect to receive payment of their annual
Board fees on a deferred basis in the form of stock of the Company. These
deferred shares, and related accumulated DER shares, are issued to the director
making such an election at the end of each three-year deferral period. At
December 31, 1998, substantially all deferred and DER shares were issuable upon
exercise of the related vested options or otherwise unrestricted.
As allowed by SFAS 123, "Accounting for Stock-Based Compensation", the
Company measures employee stock-based compensation expense using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees". Total stock-based compensation
expense recognized under APB 25 in 1998, 1997 and 1996 was $1,334,000,
$1,427,000 and $1,251,000 respectively.
As determined under SFAS 123, the weighted average fair value at the date
of grant for options to purchase Core Group Common Stock granted during 1998,
1997 and 1996 was $5.57, $5.11 and $4.84 per
F-17
17
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option, respectively. The fair value of options was estimated using an option
pricing model with the following weighted average assumptions:
1998 1997 1996
---- ---- ----
Expected life in years...................................... 8.0 7.4 6.7
Risk-free interest rate..................................... 5.66% 6.55% 5.62%
Expected volatility......................................... 15% 15% 15%
Expected dividend yield --
Options without DERs...................................... 7.5% 7.5% 8%
Options with DERs......................................... 0% 0% 0%
The weighted average fair value at the date of grant for restricted and
deferred shares of Core Group Common Stock granted during 1998, 1997 and 1996
was $25.44, $24.39 and $22.53 per share, respectively.
If the fair value based method of accounting defined by SFAS 123 had been
used to measure and recognize stock-based compensation expense, the pro forma
effect on the reported amounts of earnings per share of the consolidated
Company, the Core Group and the Psychiatric Group for 1998, 1997 and 1996 would
not have been material. The pro forma effect for 1998, 1997 and 1996 may not be
representative of the pro forma effect in future years because it does not take
into consideration stock-based incentives granted prior to 1995.
STOCKHOLDERS' EQUITY
8.6% Cumulative Redeemable Preferred Stock, Series B. The Company has
4,000,000 Series B Depositary Shares outstanding which represent 40,000 shares
of Series B Preferred Stock. Each Series B Depositary Share represents 1/100 of
a share of Series B Preferred Stock, and entitles the holder to such proportion
of all the rights, preferences and privileges of the Series B Preferred Stock
represented thereby. The Series B Depositary Shares, and the Series B Preferred
Stock represented thereby, rank senior to the Company's Core Group Common Stock,
its Series A Preferred Stock (when and if issued) and its Psychiatric Group
Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, with respect to dividend payments and liquidation rights. The annual
dividend rate and liquidation preference with respect to each Series B
Depositary Share are $2.15 and $25, respectively (equivalent to $215 and $2,500
per share of Series B Preferred Stock, respectively). Dividends on the Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, are
cumulative and, if and when declared, are payable quarterly in arrears on the
last day of February, May, August and November of each year. On or after October
27, 2002, the Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, may be redeemed, in whole or in part, at the option of the
Company at a redemption price of $25 per Series B Depositary Share (equivalent
to $2,500 per share of Series B Preferred Stock), plus accrued and unpaid
dividends thereon. The redemption price, other than the portion representing
accrued and unpaid dividends, is payable solely out of proceeds from the sale of
other capital stock of the Company. The proceeds from the sale of the Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, as well
as the dividends payable thereon, have been attributed to the Company's Core
Group for financial accounting and reporting purposes.
Preferred Stock Purchase Rights Plan. On April 20, 1990, the Company
distributed to shareholders one preferred stock purchase right (each a Right)
for each outstanding share of common stock. Under certain conditions, each Right
may be exercised to purchase 1/100 of a share of preferred stock, Series A, par
value $.01 per share (the Series A Preferred Shares), of the Company at a price
of $45. The Company's Psychiatric Group Depositary Shares do not include the
Rights or entitle holders thereof to receive the Rights, which are applicable
only to the Company's Core Group Common Stock. The total number of Rights
currently issued or issuable, including Rights issuable in connection with
common stock which may be issued under the Company's stock incentive plans is
approximately 26,742,000. Approximately 267,000 Series A Preferred
F-18
18
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares could be purchased upon the exercise of all Rights currently issued or
issuable. The number of Rights outstanding and Series A Preferred Shares
issuable upon exercise, as well as the Series A Preferred Share purchase price,
are subject to customary antidilution adjustments.
The Rights are evidenced by the certificates for shares of common stock,
and in general are not transferable apart from the common stock or exercisable
until after a party has acquired beneficial ownership of, or made a tender offer
for, 10% or more of the outstanding common stock of the Company (an Acquiring
Person), or the occurrence of other events as specified in the Rights Plan.
Under certain conditions as specified in the Rights Plan, including but not
limited to the acquisition by a party of 15% or more of the outstanding common
stock of the Company or the acquisition of the Company in a merger or other
business combination, each holder of a Right (other than an Acquiring Person
whose Rights will be void) will receive upon exercise thereof and payment of the
exercise price that number of shares of common stock of the Company or of the
other party, as applicable, having a market value of two times the exercise
price of the Right.
The Rights expire on April 20, 2000, and until exercised, the holder
thereof, as such, will have no rights as a shareholder of the Company. At the
Company's option, the Rights may be redeemed in whole at a price of $.01 per
Right at any time prior to becoming exercisable. In general, the Company also
may exchange the Rights at a ratio of one share of common stock per Right after
becoming exercisable but prior to the acquisition of 50% or more of the
outstanding shares of common stock by any party.
Series A Preferred Shares issuable upon exercise of the Rights will not be
redeemable. Each Series A Preferred Share will have 100 votes and will be
entitled to (a) dividends in an amount equal to the greater of $1.00 or 100
times the amount of the dividends per share paid on the common stock, (b) a
liquidation preference in an amount equal to the greater of $100 or 100 times
the amount per share paid on the common stock and (c) a payment in connection
with a business combination (in which shares of common stock are exchanged)
equal to 100 times the amount per share paid on the common stock. The Series A
Preferred Stock (when and if issued) rank senior to the Company's Core Group
Common Stock and its Psychiatric Group Depositary Shares, and the Psychiatric
Group Preferred Stock represented thereby, with respect to dividend payments and
liquidation rights, but rank junior to the Company's Series B Depositary Shares,
and the Series B Preferred Stock represented thereby.
F-19
19
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
The following is a reconciliation of the income and share amounts used in
the basic and diluted per share computations of income before extraordinary item
attributable to Core Group Common Stock and Psychiatric Group Depositary Shares:
1998 1997 1996
---------------- ---------------- ----------------
INCOME SHARES INCOME SHARES INCOME SHARES
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
ATTRIBUTABLE TO CORE GROUP
Income before extraordinary item...... $51,645 -- $44,107 -- $38,800 --
Less Series B preferred dividend
requirement......................... (8,600) -- (1,553) -- -- --
Outstanding common shares............. -- 24,377 -- 23,503 -- 23,451
Deferred common shares................ -- 2 -- 2 -- 2
------- ------ ------- ------ ------- ------
Basic EPS components.................. 43,045 24,379 42,554 23,505 38,800 23,453
Effect of dilutive potential common
shares
Stock options....................... -- 81 -- 94 -- 40
DERs................................ -- 145 -- 104 -- 65
Subordinated convertible bonds
payable.......................... -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Diluted EPS components................ $43,045 24,605 $42,554 23,703 $38,800 23,558
======= ====== ======= ====== ======= ======
ATTRIBUTABLE TO PSYCHIATRIC GROUP
Basic EPS components.................. $(5,180) 2,084 $(5,918) 2,084 $ 5,579 2,084
Effect of dilutive potential
depositary shares
Stock options....................... -- -- -- -- -- --
DERs................................ -- -- -- -- -- 9
------- ------ ------- ------ ------- ------
Diluted EPS components................ $(5,180) 2,084 $(5,918) 2,084 $ 5,579 2,093
======= ====== ======= ====== ======= ======
DIVIDENDS AND REDEMPTION PROVISIONS
A quarterly dividend of $.565 per share for Core Group Common Stock, or
approximately $14,116,000, was declared by the Board of Directors on January 22,
1999, payable on February 24, 1999 to shareholders of record on February 10,
1999. A quarterly dividend of $.095 per share for Psychiatric Group Depositary
Shares, or approximately $198,000, was declared by the Board of Directors on
January 22, 1999, payable on February 24, 1999 to shareholders of record on
February 10, 1999. A dividend of $.5375 per share for Series B Depositary Shares
was declared by the Board of Directors on January 22, 1999, payable March 1,
1999 to shareholders of record February 15, 1999. This dividend was for the
regular quarterly period ended February 28, 1999 of which approximately $717,000
was accrued at December 31, 1998. The aggregate dividends of $15,031,000 have
been reflected as dividends payable in the accompanying financial statements as
of December 31, 1998.
As a result of the payoff of the Four Winds mortgage notes receivable, the
Company distributed 833,067 new shares of Core Group Common Stock at a price of
$25.9407 per share to holders of Psychiatric Group Depositary Shares as a
special stock dividend on July 24, 1998. Holders of Psychiatric Group Depositary
Shares received 0.4 shares of Core Group Common Stock for each Psychiatric Group
Depositary Share held and cash-in-lieu of fractional shares of Core Group Common
Stock based on the price of $25.9407.
Cash dividends of $2.18 per share paid on Core Group Common Stock during
1998 are characterized as $1.076 of ordinary income and $1.104 of return of
capital for tax purposes. Dividends of $12.62628 per share, including $2.25 of
cash dividends and a special stock dividend valued at $10.37628, paid on
Psychiatric Group
F-20
20
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depositary Shares during 1998 are characterized as $6.2325 of ordinary income
and $6.39378 of return of capital for tax purposes. For Psychiatric Group
Depositary Share holders of record on July 17, 1998, the initial tax basis in
the Core Group Common Stock distributed as a special stock dividend is $25.9407
per share of Core Group Common Stock. Cash dividends of $2.15 per share paid on
Series B Depositary Shares during 1998 are characterized entirely as ordinary
income for income tax purposes.
In general, cash dividends on the Company's Core Group Common Stock and
Psychiatric Group Depositary Shares are limited by the Company's unsecured
revolving credit agreement to 95% of cash flow available for debt service, less
interest expense, plus gains on asset dispositions and certain proceeds from the
disposition of Psychiatric Group assets.
Dividends on the Company's Psychiatric Group Depositary Shares are
determined each quarter based upon the operating results of the Company's
Psychiatric Group. It continues to be the policy of the Board to maintain a
dividend payout ratio for each quarter in excess of 90 percent of the
Psychiatric Group's funds from operations for the related quarter, when
possible. With the disposition of the RCC investment subsequent to year-end, the
Sunrise investment is currently the sole income-producing property of the
Company's Psychiatric Group and the operator of Sunrise is experiencing cash
flow difficulties. Therefore, commencing in the second quarter of 1999, the
Psychiatric Group's funds from operations may not be sufficient to permit the
payment of a dividend on the Psychiatric Group Depositary Shares.
The Company intends to periodically evaluate the financial position of the
Psychiatric Group, including an assessment of the potential cash requirements of
the Psychiatric Group and the appropriate use of the proceeds from the sale of
the RCC investment. Initially, proceeds from the RCC disposition, net of closing
costs and applicable reserves, will be retained by the Psychiatric Group to
defray its ongoing costs, including the potential long-term costs of carrying
the two remaining Psychiatric Group properties. The Psychiatric Group may
continue to retain such proceeds or, alternatively, may distribute a portion of
such net proceeds to holders of Psychiatric Group Depositary Shares, in cash or
Core Group Common Stock, either by dividend or in connection with redemption of
the Psychiatric Group Depositary Shares. Should the Board of Directors of the
Company decide that the remaining Psychiatric Group portfolio and operations are
not consistent with a separate public security, the Board may elect to redeem
the outstanding Psychiatric Group Depositary Shares in cash or in exchange for
shares of Core Group Common Stock. Under the terms of the Certificate of
Designations for the Psychiatric Group Preferred Stock and the Deposit Agreement
providing for issuance of Depositary Receipts (Psychiatric Group Depositary
Shares) each representing one-tenth of one share of the Psychiatric Group
Preferred Stock, the Company has the right to redeem all outstanding Psychiatric
Group Depositary Shares, and the Psychiatric Group Preferred Stock represented
thereby, for cash (or in exchange for newly issued shares of Core Group Common
Stock) at a premium generally ranging from 5% to 15% over the value of the
Psychiatric Group Depositary Shares. Since an exchange or redemption of the
Psychiatric Group Depositary Shares may be at a premium to the then current
market price of the Psychiatric Group Depositary Shares, and since the Board
could determine to effect such an exchange or redemption at a time when either
or both the Core Group Common Stock and the Psychiatric Group Depositary Shares
may be considered to be overvalued or undervalued, the exchange or redemption
could be disadvantageous to the holders of the Core Group Common Stock or the
Psychiatric Group Depositary Shares.
SEGMENT INFORMATION
The Company has two reportable operating segments, the Core Group and the
Psychiatric Group, for which separate financial information is available and
whose operating results are evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
Operating results of the Core Group reflect the separate financial performance
of a distinct portfolio of the Company's investments in acute care,
rehabilitation and long-term acute care hospitals, skilled nursing, assisted
living, Alzheimer's care and medical office/clinic facilities. Operating results
of the Psychiatric Group reflect the
F-21
21
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
separate financial performance of a distinct portfolio of the Company's
investments in psychiatric hospitals. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or loss from
operations before depreciation and amortization and impairment losses on real
estate and notes receivable. The reportable segments are business units of the
Company that are managed separately based on the two distinct portfolios, with
two distinct classes of publicly-traded shares intended to represent those
portfolios. The following table summarizes pertinent financial information of
the Company's reportable operating segments:
CORE GROUP PSYCHIATRIC GROUP SEGMENT TOTALS
------------------------------ -------------------------- ------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- -------- ------ ------- ------- -------- -------- --------
Total segment revenue(1)......... $107,549 $ 86,302 $ 81,429 $6,002 $ 8,716 $ 9,174 $113,551 $ 95,018 $ 90,603
Real estate depreciation......... 20,440 15,042 14,145 753 751 744 21,193 15,793 14,889
Impairment loss on real estate
and notes receivable........... -- -- -- 8,330 11,000 -- 8,330 11,000 --
Extraordinary loss on debt
prepayment..................... -- 11,427 -- -- -- -- -- 11,427 --
Segment operating profit......... 72,085 59,149 52,945 3,903 5,833 6,323 75,988 64,982 59,268
Segment assets(2)................ 746,995 652,132 527,979 7,027 50,994 63,261 754,022 703,126 591,240
- ---------------
(1) The difference between total segment revenues and total consolidated
revenues represents interest income on inter-Group loans of $829, $1,553 and
$1,679 in 1998, 1997 and 1996, respectively.
(2) The difference between total segment assets and total consolidated assets
represents inter-Group loans of $180, $12,554 and $13,358 for 1998, 1997 and
1996, respectively.
F-22
22
AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- ------- ------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1998
Consolidated --
Revenues....................................... $ 27,007 $28,143 $28,709 $28,863 $112,722
Net income..................................... 13,823 11,225(1) 13,638 7,779(2) 46,465
Attributable to --
Core Group Common Stock
Revenues..................................... $ 25,103 $26,248 $27,753 $28,445 $107,549
Net income................................... 10,434 10,559 10,859 11,193 43,045
Basic per share amounts --
Net income................................. $ 0.44 $ 0.44 $ 0.44 $ 0.45 $ 1.77
Diluted per share amounts --
Net income................................. $ 0.43 $ 0.43 $ 0.44 $ 0.44 $ 1.75
Psychiatric Group Depositary Shares
Revenues..................................... $ 2,269 $ 2,242 $ 1,052 $ 439 $ 6,002
(5,564)(2)
Net income (loss)............................ 1,239 (1,484)(1) 629 (5,180)
Basic per share amounts --
Net income (loss).......................... $ 0.59 $ (0.71) $ 0.30 $ (2.67) $ (2.49)
Diluted per share amounts --
Net income (loss).......................... $ 0.59 $ (0.71) $ 0.30 $ (2.67) $ (2.49)
1997
Consolidated --
Revenues....................................... $ 23,333 $22,771 $22,950 $24,411 $ 93,465
Attributable to --
Core Group Common Stock and Psychiatric Group
Depositary Shares --
Income before extraordinary item............. $ 460(3) $12,332 $12,268 $11,576 $ 36,636
Extraordinary loss on debt prepayment........ (11,427) -- -- -- (11,427)
Net income (loss)............................ (10,967)(3) 12,332 12,268 11,576 25,209
Attributable to --
Core Group Common Stock
Revenues..................................... $ 21,322 $21,055 $21,204 $22,721 $ 86,302
Income before extraordinary item............. 9,930 11,129 11,087 10,408 42,554
Extraordinary loss on debt prepayment........ (11,427) -- -- -- (11,427)
Net income (loss)............................ (1,497) 11,129 11,087 10,408 31,127
Basic per share amounts --
Income before extraordinary item........... $ 0.42 $ 0.47 $ 0.47 $ 0.44 $ 1.81
Extraordinary loss on debt prepayment...... (0.48) -- -- -- (0.49)
Net income (loss).......................... (0.06) 0.47 0.47 0.44 1.32
Diluted per share amounts --
Income before extraordinary item........... $ 0.42 $ 0.47 $ 0.47 $ 0.44 $ 1.80
Extraordinary loss on debt prepayment...... (0.48) -- -- -- (0.49)
Net income (loss).......................... (0.06) 0.47 0.47 0.44 1.31
Psychiatric Group Depositary Shares
Revenues..................................... $ 2,401 $ 2,110 $ 2,138 $ 2,067 $ 8,716
Net income (loss)............................ (9,470)(3) 1,203 1,181 1,168 (5,918)
Basic per share amounts --
Net income (loss).......................... $ (4.54) $ 0.58 $ 0.57 $ 0.56 $ (2.84)
Diluted per share amounts --
Net income (loss).......................... $ (4.54) $ 0.57 $ 0.56 $ 0.56 $ (2.84)
- ---------------
(1) Includes impairment loss of $2,730 on Psychiatric Group notes receivable.
(2) Includes impairment loss of $5,600 on Psychiatric Group real estate and
notes receivable.
(3) Includes impairment loss of $11,000 on Psychiatric Group real estate and
notes receivable.
F-23