-----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, JLqXMrkQCRbRlcE6600WDGCxWy7N/PTRYB8y+j91XD/lys40iN/6QXf4wAHLJqo+ FJnmop83UaTOLP+FYmW4cg== 0000877860-00-000002.txt : 20000331 0000877860-00-000002.hdr.sgml : 20000331 ACCESSION NUMBER: 0000877860-00-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL HEALTH INVESTORS INC CENTRAL INDEX KEY: 0000877860 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621470956 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10822 FILM NUMBER: 588934 BUSINESS ADDRESS: STREET 1: 100 VINE ST STE 1402 CITY: MURFREESBORO STATE: TN ZIP: 37130 BUSINESS PHONE: 6158909100 MAIL ADDRESS: STREET 1: P.O. BOX 1102 CITY: MURFREESBORO STATE: TN ZIP: 37133 10-K405 1 _______________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _________ Commission file number 33-41863 NATIONAL HEALTH INVESTORS, INC. (Exact name of registrant as specified in its charter) Maryland 62-1470956 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 100 Vine Street, Suite 1202, Murfreesboro, Tennessee 37130 (Address of principal executive offices) (Zip Code) (615) 890-9100 (Company's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered Shares of Common Stock New York Stock Exchange Shares of Preferred Convertible Stock New York Stock Exchange Senior Subordinated Convertible Debentures Due 2006 (10%) New York Stock Exchange Senior Subordinated Convertible Debentures Due 1998 (7-3/8%) New York Stock Exchange Convertible Subordinated Debentures Due 2001 (7-3/4%) New York Stock Exchange Convertible Subordinated Debentures Due 2006 (7%) New York Stock Exchange $100,000,000 of 7.30% Notes Due 2007 -------- Securities registered pursuant to Section 12(g) of the Act Same 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 re- quirement for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the registrant was $301,370,000 as of February 29, 2000. The number of shares of Common Stock outstanding as of February 29, 2000 was 24,382,987. PAGE 1 OF 86 PAGES Exhibit Index Page 50 PART I Item 1. Business General The Company is a real estate investment trust ("REIT") which invests in income producing health care properties primarily in the long-term care industry. As of December 31, 1999, the Company had interests in net real estate owned by it, mortgage investments and REMIC investments totaling approximately $680.6 million, and other investments in preferred stock and marketable securities of $87.8 million, resulting in total invested assets of $768.4 million. The Company's strategy is to provide current income for distribution to stockholders through investments in health care related businesses and facilities, including long-term care facilities, acute care hospitals, medical office buildings, retirement centers and assisted living facilities, all of which are collectively referred to herein as "Health Care Facilities". Although, the Company intends to implement this strategy by acquiring additional properties and making additional mortgage loans nationwide, predominately in the long-term care industry, current market conditions make it unlikely that any material new investments in Health Care Facilities will occur during the new year. Instead the Company is actively engaged in monitoring and improving its existing portfolio. The Company funds these investments through three sources of capital: current cash flow, including principal prepayments, the sale of equity in the form of common and preferred stock and debt offerings, including bank lines of credit, the issuance of convertible debt instruments, and the issuance of straight debt. As of December 31, 1999, the Company had approximately $680.6 million in real estate and mortgage investments in 202 health care facilities located in 26 states consisting of 146 long-term care facilities, two acute care hospitals, eight medical office buildings, 22 assisted living facilities, seven retirement centers and 17 residential projects for the developmentally disabled. These investments consist of approximately $326.9 million aggregate principal amount of loans to 29 borrowers and $316.0 million of purchase leaseback agreements with seven lessees and $37.7 million invested in REMIC pass through certificates. Of these 202 facilities, 51 are leased to NHC and nine additional facilities are managed by NHC. At December 31, 1999, NHI was committed, subject to due diligence and financial performance goals, to fund approximately $9.0 million in health care real estate projects of which $7.0 million is expected to be funded within the next 12 months. The commitments include mortgage loans for two long-term health care centers, one medical office buildings, and three assisted living centers all at rates ranging from 9.0% to 11.5%. Included in the $9.0 million of commitments is a commitment to loan an additional $2.0 million on one loan when the mortgagee obtains certain operating ratios. The Company commenced operations on October 17, 1991 with approximately $121.8 million in net assets obtained when it acquired 40 skilled long-term care facilities, three retirement centers, and four third party first mortgage notes from National HealthCare Corporation ("NHC"), successor by merger to National HealthCare L.P. in exchange for 7,306,570 shares of the Company's Common Stock. Concurrently, the Company assumed mortgage indebtedness and certain other obligations of NHC related to the acquired properties. The 43 properties were then leased to NHC. NHC is a publicly traded corporation which at December 31, 1999 operated 95 long-term care facilities with a total of 12,783 licensed beds. Included within seven of these centers are 150 assisted care beds; within 21 centers are located 683 Alzheimer's beds and finally 363 sub-acute beds are located in 14 centers. NHC also operates six retirement centers with a total of 473 units, eight freestanding assisted living facilities with a total of 654 units and 34 home health care programs. Except for properties directly managed for the Company, all NHC operations are in the southeastern United States. Since the Company commenced operations, NHC has provided advisory services to the Company since its inception pursuant to an Advisory, Administrative Services and Facilities Agreement (the "Advisory Agreement"). In addition, the Company and NHC have certain other relationships. See "Certain Relationships and Related Transactions." Unless the context indicates otherwise, references herein to the Company include all of the Company's subsidiaries. Types of Health Care Facilities Long-term care facilities. As of December 31, 1999, the Company owned and leased 59 licensed long-term care facilities, 47 of which were operated by NHC. The remaining twelve licensed long-term care facilities are managed by two other long-term care companies. It also had outstanding first mortgage loans and REMIC investments on 87 additional licensed long-term care facilities, three of which were operated by NHC. All of these facilities provide some combination of skilled and intermediate nursing and rehabilitative care, including speech, physical and occupational therapy. The operators of the long-term care facilities receive payment from a combination of private pay sources and government programs such as Medicaid and Medicare. Long-term care facilities are required to obtain state licenses and are highly regulated at the federal, state and local level. Most long-term care facilities must obtain certificates of need from the state before opening or expanding such facilities. Acute and long term care hospitals. As of December 31, 1999, the Company owned and leased one acute care hospital and had an outstanding first mortgage loan on one additional operating long term care hospital. Acute care hospitals provide a wide range of inpatient and outpatient services and are subject to extensive federal, state and local legislation and regulation. Long-term care hospitals provide specialty care services for chronic care patients, whose average length of stay must exceed twenty-five days. Acute and long term care hospitals undergo periodic inspections regarding standards of medical care, equipment and hygiene as a condition of licensure. Services provided by acute and long term care hospitals are generally paid for by a combination of private pay sources and governmental programs. Medical office buildings. As of December 31, 1999, the Company owned and leased seven medical office buildings. In addition, the Company had a first mortgage loan on one medical office building. Medical office buildings are specifically configured office buildings whose tenants are primarily physicians and other medical practitioners. Medical office buildings differ from conventional office buildings due to the special requirements of the tenants and their patients. Each of the Company's owned medical office buildings is leased to one lessee, and is physically attached to an acute care hospital. The lessee then leases individual office space to the physicians or other medical practitioners. The lessee is responsible to the Company for the lease obligations of the entire building, regardless of its ability to lease the individual office space. Assisted Living Facilities. The Company owns 16 assisted living facilities. Four of which are leased to a subsidiary of Marriott International and eleven to Alterra, Inc. and one to Sun Healthcare. The Company also has first mortgages on seven additional assisted living projects. Assisted living unit facilities are free standing facilities or facilities which are attached to long term care facilities or retirement facilities and provide basic room and board functions for the elderly. Some assisted living projects include licensed long term care (nursing home) beds. On-site staff are normally available to assist in minor medical needs on an as needed basis. Retirement Centers. The Company owns five retirement centers, all of which are leased to NHC, and has first mortgages on two others. Retirement centers offer specially designed residential units for the active and ambulatory elderly and provide various ancillary services for their residents including restaurants, activity rooms and social areas. Charges for services are paid from private sources without assistance from government programs. Retirement centers may be licensed and regulated in some states, but do not require the issuance of a certificate of need such as is normally required for long-term care facilities. Residences for the developmentally disabled. As of December 31, 1999, the Company had outstanding first mortgage notes on 17 residences for the developmentally disabled. Residences for the developmentally disabled are generally small home-like environments which accommodate six to eight mentally and developmentally disabled persons. These persons obtain custodial care which includes food, lodging, education and transportation services. These community based services are replacing the large state institutions which have historically provided care to the developmentally disabled. Services to the developmentally disabled are primarily paid for by state Medicaid programs. Nature of Investments The Company's investments are typically structured as either purchase leaseback transactions or mortgage loans. The Company also provides construction loans for facilities for which it has already committed to provide long-term financing or which agree to enter into a lease with the Company upon completion of the construction. The capitalization rates of the Company's leases and the interest rates on the mortgage loans and construction loans have historically ranged between 9.0% and 12% per annum. For transactions closed in 1999, rates were comparable to those charged in 1998 and generally ranged from 9.0% to 11.5%. The Company charges a commitment fee of 1% based on the purchase price of the property of a purchase leaseback or the total principal loan amount of a mortgage loan. In instances where construction financing has also been supplied, there is generally an additional 1% commitment fee for the construction financing. The Company believes its lease terms, mortgage loan and construction loan terms are competitive in the market place. Except for eight properties, as described under the heading "Foreclosure Properties", all of the operating Health Care Facilities are currently performing under their mortgage loans or leases. Typical characteristics of these transactions are as follows: Mortgage Loans. In general, the term of the Company's mortgage loans is 10 years with the principal amortized over 20 to 25 years and a balloon payment due at the end of the 10 year term. Substantially all mortgage loans have an additional interest component which is based on the escalation of gross revenues at the project level or fixed rate increases. These escalators are between 2.5% and 5% of the increase in gross revenue over a base year for nursing homes (typically, the first year following the close of the financing) and are negotiated on a project by project basis. Assisted living escalators are generally higher, (5 to 7%) while medical office buildings are lower (generally 2% or so). The escalators, while not currently material to net income. In certain of its mortgage loans, the Company has received an equity participation which allows the Company to share in a portion of any appreciation of the equity value of the underlying property. The Company does not expect the equity participations to constitute a significant or frequent source of income. Most mortgage loans have prepayment penalties starting at 10% during the first year and decreasing by 1% each year thereafter. In most cases, the owner of the property has committed to make minimum annual capital improvements for the purpose of maintenance or upgrading the facility. In most circumstances, the Company will require some additional form of security and/or collateral beyond that provided by the lien of the mortgage. This additional security or collateral may consist of some or all of the following: (a) a guaranty by the borrowers' parent, if any, affiliates or individual principals; (b) an assignment of the leases and rents relating to the mortgaged property; (c) cross collateralization among loans; (d) security interest in other real property; (e) an assignment of personal property including accounts receivable; (f) letters of credit or certificates of deposit, and (g) other intangibles. Leases. The Company's leases generally have an initial leasehold term of 10 to 14 years with one or more five year renewal options. The leases are "triple net leases" under which the tenant is responsible to pay all taxes, utilities, insurance premium costs, repairs and other charges relating to the ownership and operation of the Health Care Facilities. The tenant is generally obligated at its expense to keep all improvements and fixtures and other components of the Health Care Facilities covered by "all risk" insurance in an amount equal to at least the full replacement costs thereof and to maintain specified minimal personal injury and property damage insurance, protecting the Company as well as the tenant at such Health Care Facility. The leases also require the tenant to indemnify and hold harmless the Company from all claims resulting from the use and occupancy of each Health Care Facility by the tenant and related activities, as well as to indemnify the Company against all costs related to any release, discovery, clean-up and removal of hazardous substances or materials on, or other environmental responsibility with respect to, each Health Care Facility. All of the Company's leases contain annual escalators in rent payments. Revenue escalators for both long-term care centers and acute care hospitals are typically between 3% and 5% of the revenue increase per annum. Rent escalators on certain medical office buildings generally range from 2% to 4% of the prior year's rent or in certain instances are based on increases in the Consumer Price Index. All of the acute care and medical office building properties which the Company owns and leases give the lessee an option to purchase the underlying property at the greater of i) the Company's acquisition costs; ii) the then fair market value as established by independent appraisers or iii) the sum of the land costs, construction costs and any additional capital improvements made to the property by the Company. None of the Company's other leases have options to purchase. In addition, the acute care and medical office building leases contain a right of first refusal for the lessee if the Company receives an offer to buy the underlying leased property. Most of the obligations under the leases are guaranteed by the parent corporation of the lessee, if any, or affiliates or individual principals of the lessee. In some leases, the third party operator will also guarantee some portion of the lease obligations, usually for a fixed period such as six months or one year. Some obligations are further backed by other collateral such as machinery, equipment, furnishings and other personal property. Construction loans. The Company also provides construction loans that by their terms convert either into purchase leaseback transactions or mortgage loans upon the completion of the construction of the facility. Generally the interest rates on the construction loans range from 9.0% to 11.5%. The term of such construction loans are for a period which commences upon the closing of such loan and terminates upon the earlier of (a) the completion of the construction of the applicable facility or (b) a specific date. During the term of the construction loan, funds are usually advanced pursuant to draw requests made by the borrower in accordance with the terms and conditions of the loan. In addition to the security of the lien against the property, the Company will generally require additional security and collateral in the form of either payment and performance completion bonds or completion guarantees by the borrower's parent, affiliates of the borrower or one or more of the individuals who control the borrower. Competition and Market Conditions The Company competes, primarily on the basis of price, available capital, knowledge of the industry, and flexibility of financing structure, with real estate partnerships, other REITs and other investors (including, but not limited to, banks, insurance companies, and investment bankers developing securities in mortgage funds) in the acquisition, leasing and financing of health care related entities. The operators of the Health Care Facilities compete on a local and regional basis with operators of facilities that provide comparable services. Operators compete for patients and staff based on quality of care, reputation, physical appearance of facilities, services offered, family preference, physicians, staff and price. They compete with independent operators as well as companies managing multiple facilities, some of which are substantially larger and have greater resources than the operators of the Health Care Facilities. Some of these facilities are operated for profit while others are owned by governmental agencies or tax-exempt non-profit organizations. In mid 1998 the long term care industry began experiencing Medicare revenue reductions brought about by he enactment of the 1997 Balanced Budget Act ("BBA 97"). Additionally, the assisted living industry experienced slower fill-up rates on new projects and more competition for their mature projects a overbuilding occurred in more and more markets. Stock prices for publicly traded companies declined precipitously and companies announced greatly reduced earnings or even significant losses. By the end of 1999, two of the four largest public long term care companies were in bankruptcy and at least three of the top ten private long term care companies were also. By February 3, 2000 two other public healthcare companies filed for bankruptcy protection. With the operators in such dire financial distress it is not surprising that the health care REIT industry - including this Company - have seen such a reduction in market capitalization to the extent that using publicly sold equity to generate capital is not a realistic option. Additionally, commercial borrowing sources are restricting if not altogether avoiding investments in health care REIT debt issues. Accordingly, the Company is not currently competing with any healthcare REITs or commercial banks for placing new mortgage loans or sale leasebacks. Instead, the Company is focusing on monitoring closely its investments, rather than making new ones. Operators The majority (by total real estate assets) of the Health Care Facilities are operated by third party management companies on behalf of the owner or lessee. The balance of the Health Care Facilities are operated by the owner or lessee. As a percent of total investments, 55.4% of the Health Care Facilities are operated by publicly-owned companies, while 24.0% are operated by multistate regional health care operators. Generally, a third party operator of a facility is not liable to the Company under the mortgage or lease; however, the Company considers the operator to be an important factor in determining the creditworthiness of the investment and the Company generally has the right to approve any changes in operators. On some investments, the third party operator of a facility guarantees at least a portion of the lease or mortgage. Operators of the Health Care Facilities include NHC, Marriott Senior Living Services, Lenox HealthCare, Inc., Alterra, Inc. Sun Healthcare, Integrated Health Services, Inc., Columbia/HCA, Paracelcus, Beverly Enterprises, Res-Care, Inc., American Retirement Corp., Mariner Post Acute Services, and Centennial Healthcare Corporation. Although Lenox, Sun HealthCare, Mariner Post Acute Services and Integrated Health Services are currently in bankruptcy, only one of Lenox's ten properties is impacted, and none of Sun Healthcare's three properties. As of yet, no impact has been felt or is anticipated due to the Mariner and IHS bankruptcies. For additional information, see "Foreclosure Properties". Investment in REMIC Certificates 1993 Transactions On November 9, 1993, the Company purchased $34.2 million principal amount of SC Commercial Mortgage Pass-Through Certificates, Series 1993-1 (the Certificates), which qualify as a real estate mortgage investment conduit (REMIC). The Certificates consist of nine classes issued in the aggregate principal amount of $172.9 million. The Certificates represent the entire beneficial ownership interest in a trust fund consisting of a pool of forty- one mortgage loans generally secured by a first lien on a single property that provides long-term care and/or assisted living care. All loans bear a fixed rate of interest, the weighted average of which is 9.308%. The Certificates were purchased in a private placement offering and are not readily marketable or freely tradable. The Company's investment in the Certificates includes Class D and Class E Certificates which bear interest and the Class I Certificates which have no principal amount and are not entitled to distributions of principal, but are entitled to certain priority interest distributions. The Class D and Class E Certificates were issued with original issue discount. The Class D Certificates were rated "BB" by Standard & Poor's Rating Group (S&P) and Fitch Investors Services (Fitch) and the Class I Certificates were rated "AA" by Fitch. (As a policy S&P does not rate interest only certificates.) The Class E Certificates were not rated. Fitch's rating of the Class I Certificates does not address the possibility that Class I Certificate holders might suffer a lower than anticipated yield or that if there is a rapid rate of principal payments (including both voluntary and involuntary prepayments), investors in such Certificates could fail to recover their initial investments. Distributions of interest and principal on the Class D and Class E Certificates are subordinated to distributions of interest and principal with respect to the other classes of Certificates (which aggregate $137.9 million in principal amount). Distributions of interest on the Class I certificates are senior to (or, with respect to certain classes of Certificates, pari passu to) distributions of principal and interest of the other classes of Certificates. The Company is not aware of any defaults by the properties servicing this REMIC. 1995 Transactions On December 28, 1995, the Company purchased $7,305,000 face amount (purchase price was $6,158,000) of SC Commercial Mortgage Pass Through Certificates, Series 1995-1 (the Certificates) which qualifies as a REMIC. The Certificates consist of ten classes issued in the aggregate principle amount of $140,258,000. The Certificates represent the entire beneficial ownership interest in a trust fund consisting of a pool of 36 first mortgage loans secured by a first lien on 38 properties that provide long term and/or assisted living care. All loans bear a fixed rate of interest the weighted average of which is 10.47%. The Certificates were purchased in a private placement offering and are not readily marketable or freely tradable. The Company's investment is in Certificate Class F which are rated "B" by S & P and Fitch. Distributions of interest and principal on the Class F certificates are subordinated to distributions of interest and principle with respect to the other classes of the Certificates totaling $132,953,000 in principal amount. The Company is not aware of any defaults by the properties servicing this REMIC. NHC Master Agreement to Lease The Master Agreement to Lease (the "Master Agreement") with NHC regarding 40 nursing homes and three retirement centers, sets forth certain terms and conditions applicable to all leases entered into by and between NHC and the Company (the "Leases"). The Leases are for an initial term expiring on December 31, 2001 with two five year renewal options at the election of NHC which allow for the renewal of the leases on an omnibus basis only. During the initial term and the first renewal term (if applicable), NHC is obligated to pay annual base rent for the respective Health Care Facilities aggregating $15.2 million plus additional rent described below. During the second renewal term, NHC is required to pay annual base rent based on the then fair market rental of the property as negotiated at that time between NHC and the Company. The Master Agreement also obligates NHC to pay as additional rent under each Lease all payments of interest and principal and other payments due under each mortgage to which the conveyance of the respective Health Care Facility to the Company was subject or any refinancing of mortgage debt that matures or is required to be paid in its entirety during the term of the Lease. In addition, in each year after 1992 (the first full calendar year of the term of the Master Agreement), NHC is obligated to pay percentage rent to the Company equal to 3% of the amount by which gross revenues of each NHC leased Health Care Facility in such later year exceeds the gross revenues of such Health Care Facility in 1992. NHC paid $1.2 million as percentage rent for 1999. The Master Agreement is a "triple net lease", under which NHC is responsible to pay all taxes, utilities, insurance premium costs, repairs (including structural portions of the buildings, constituting a part of the Health Care Facilities) and other charges relating to the ownership and operation of the Health Care Facilities. NHC is obligated at its expense to keep all improvements and fixtures and other components of the Health Care Facilities covered by "all risk" insurance in an amount equal to the full replacement costs thereof, insurance against boiler explosion and similar insurance, flood insurance if the land constituting the Health Care Facility is located within a designated flood plain area and to maintain specified minimal personal injury and property damage insurance, protecting the Company as well as NHC at such Health Care Facility. NHC is also obligated to indemnify and hold harmless the Company from all claims resulting from the use and occupancy of each Health Care Facility by NHC or persons claiming under NHC and related activities, as well as to indemnify the Company against, all costs related to any release, discovery, cleanup and removal of hazardous substances or materials on, or other environmental responsibility with respect to, each Health Care Facility leased by NHC. Repayments Although NHI structures its first mortgages with a declining prepayment penalty commencing at 10%, the Company has experienced no loan prepayments in 1999 as contrasted with 1998. During 1998, $93,891,000 of loans were prepaid, and during 1999 $0.00 was prepaid. Foreclosure Properties During the last quarter of 1998, the Company experienced its first default, and took title by deed in lieu of foreclosure to four long term care properties in Washington state. These properties have continued to service their debt to the company during 1999. In the second quarter of 1999, six long term care properties in Florida were placed in bankruptcy. The Company acquired title by Trustees deed on December 31, 1999, and has received all required debt service payments for 1999. In the third quarter of 1999, the Company acquired title by deed in lieu of foreclosure on three long-term care and one assisted living project in New Hampshire and four long term care projects in Massachusetts. The Company has not booked any interest revenue from these projects for the last seven months of 1999. The Company began recording the operating revenues of these facilities upon foreclosure of the properties in August 1999. In the fourth quarter of 1999, Texas Health Enterprises, Sun Health Care and Lenox HealthCare filed for bankruptcy protection. By February 3, 2000, Mariner Post Acute Services and Integrated Health Services had also filed for bankruptcy protection. Sun has three leased properties from the Company and is current on all lease payments. Lenox's nine mortgaged properties and one lease are current on payments except for the default on the leased property. Texas Health Enterprises has a subsidiary which owns twelve properties financed by NHI. Mariner has approximately six centers in the 1993 REMIC collateral pool and Integrated has six centers securing a note in which the Company participates. Except as discussed below, all payments are current and NHI believes its principal is fully covered by the asset value of the properties. All of these properties are referred to as "Foreclosure Properties" and more specifically described as follows: Washington State Properties On October 31, 1994, the Company loaned approximately $14.5 million to All Seasons, Inc., a Washington state corporation, owned by a single shareholder. The loan was secured by the guarantee of the shareholder as well as first mortgages on four licensed nursing homes. The sole shareholder passed away unexpectedly in early April 1998. Upon commencement of the administration of the deceased shareholder's estate, irregularities in the handling of All Seasons' cash were disclosed and the Estate informed the Company that it was insolvent. Accordingly, the Board deeded in lieu of foreclosure the four properties to NHI's subsidiary on October 16, 1998. Simultaneously with the receipt of the deeds to the properties, the Company entered into a management contract with a public nursing home chain operating a number of other properties in Washington. Commencing February 1, 2000, the management of these facilities has been transferred to a subsidiary of NHC. At the present time, the Company's investment in the collateral is approximately $13,700,000 represented by first mortgage notes. These properties paid their required debt service payments during 1999 and the Company believes that the properties will continue to generate operating income in excess of the debt service but there can be no assurance that this will be the outcome. Through a broker, the Company is aggressively seeking new lessees and/or owners for these four properties. Florida Properties In December 1993 the Company provided first mortgage financing to a Florida corporation known as York Hannover Nursing Properties, Inc. The loan was secured by first mortgages on six licensed nursing homes. In April of 1999, this company was placed in bankruptcy and a court ordered trustee assumed operational control in August of 1999. The bankruptcy court ordered the sale of the properties to the Company on December 30, 1999. The transaction was accomplished by Trustees Deed on December 31, 1999. The Company received assets in this purchase sufficient, in its opinion, to value the properties at the then outstanding principal mortgage amount and received additional current assets sufficient to pay all interest and expenses in 1999. NHI has now sold the properties to a third party in an amount equal to the first mortgage debt obligation. NHI has also obtained a $5 million guarantee of principal and interest. The Company knows of no reason why these properties will not continue to make required debt service payments. New England Properties In the mid 1990's the Company made a series of first mortgage loans to a public long term care company initially known as Iatros Healthcare Systems, which by change of name, became Phoenix Healthcare. In the third quarter of 1999, Phoenix defaulted on its loan payments on the three nursing homes and one assisted living center in New Hampshire and four licensed nursing homes in Massachusetts. Phoenix deeded these properties to the Company in lieu of foreclosure on August 11, 1999 and the Company retained an operating subsidiary of NHC to manage the properties. Although the transaction required Phoenix to pay all liabilities including payroll of these operations for periods prior to August 11, 1999, it has failed to do so. Consequently, NHI has focused on stabilizing operations and providing working capital funding for periods after the deed in lieu of foreclosure. The Company has recorded no interest revenue for these properties for the last seven months of 1999. The Company began recording the operating revenues of these facilities upon foreclosure of the properties in August 1999. The Company believes that these properties have the potential to generate sufficient cash flows to cover a debt service comparable to their previous debt service to NHI. Lenox Healthcare On November 3, 1999, Lenox Healthcare, one of the nation's largest privately owned long term care companies, filed for bankruptcy protection. NHI's investments with Lenox included first mortgages on ten nursing homes in Kansas and Missouri and also a first mortgage on a facility leased by Lenox in Florida. The ten properties in Kansas and Missouri have continued to make required payments and the debtor in possession has advised the Company that it intends to retain these properties in its plan of reorganization. However, the single property leased in Florida, has been rejected by Lenox and foreclosure proceedings against the owner of that property have been commenced. The single Florida property is not making its scheduled lease payments to NHI nor is it anticipated to do so during 2000. Sun HealthCare In the third quarter of 1999, SunRise HealthCare, one of the nation's largest publicly owned long term care chains, filed for bankruptcy protection. The Company has three properties which it leases to Sun. All properties are current in their lease payments and have lease coverage ratios sufficient to maintain compliance with all lease covenants. The Company has no reason to anticipate a diminution of income from these leases during 2000. Texas Health Enterprises The Company has twelve licensed nursing facilities securing a first mortgage note made by a subsidiary of Texas Health Enterprises. All note payments are current and the Company has no reason to anticipate a diminution of income from this loan in 2000. Mariner Mariner has six properties in the 1993 REMIC collateral pool. All payments are current and NHI believes its principal is fully covered by the asset value of the properties. Integrated Health Services The Company participates with a commercial bank in a first mortgage note made by IHS and secured with six properties. All note payments are current and NHI believes its principal is fully covered by the asset value of the properties. Commitments The Company has received commitment fees to make loans and to fund construction in progress to third parties for $136.9 million. Commitments include construction financings which have closed but which have not been fully funded as of December 31, 1998 and also investment amounts for which the Company has received a commitment fee but which have not been funded as of December 31, 1998. The following table sets forth certain information regarding the Company's commitments as of December 31, 1999. No. of Facil- Commitments Facility Type ities Current Future Total (in thousands) Long-term care 6 $ 14,111 $ 3,300 $ 17,411 Medical office bldgs 2 957 --- 957 Assisted Living 24 118,480 --- 118,480 Commitments 32 $133,548 $ 3,300 $136,848 Sources of Revenues General. The Company's revenues are derived primarily from mortgage interest income and rental income. During 1999, mortgage interest income equaled $49.0 million of which all except $.5 million was from non-NHC borrowers. Rental income totaled $46.0 million, 67% of which was from properties operated by NHC. The interest and rental payments are primarily derived from the operations of the Health Care Facilities. The source and amount of revenues from such operations are determined by (i) the licensed bed or other capacity of the Health Care Facilities, (ii) the occupancy rate of the Health Care Facilities, (iii) the extent to which the services provided at each Health Care Facility are utilized by the patients, (iv) the mix of private pay, Medicare and Medicaid patients at the Health Care Facilities, and (v) the rates paid by private paying patients and by the Medicare and Medicaid programs. Governmental and popular concerns regarding health care costs have and may continue to result in significant reductions in payments to health care facilities, and there can be no assurance that future payment rates for either governmental or private health care plans will be sufficient to cover cost increases in providing services to patients. The BBA'97 is blamed by many for the current state of financial disarray in the long term care business. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care have and could continue to adversely affect revenues of the Company's health-related lessees and borrowers and thereby adversely affect those lessees' and borrowers' abilities to make their lease or debt payments to the Company. Failure of the lessees or borrowers to make their lease or debt payments would have a direct and material adverse impact on the Company. Medicare and Medicaid. A significant portion of the revenue of the Company's lessees and borrowers is derived from governmental-funded reimbursement programs, such as Medicare and Medicaid. Medicare is a federal health insurance program under the Social Security Act for individuals age 65 and over and certain chronically disabled individuals. BBA'97 made fundamental changes in the Medicare program which have resulted in reduced levels of payment for a substantial portion of health care services. Amendments to the BBA'97 Medicare enactments were made in late 1999, but the effects, if any, will not be financially reported by providers until mid-2000. Medicaid is a joint federal and state program designed to provide medical assistance to "medically indigent persons". These programs are operated by state agencies which adopt their own medical reimbursement formula and standards, and rates and covered services vary from state to state. However, in many instances, revenues from Medicaid programs are insufficient to cover the actual costs incurred in providing care to those patients. The Medicare and Medicaid programs are highly regulated and subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. Moreover, health care facilities have experienced increasing pressures from private payors attempting to control health care costs, and reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors. Governmental Funding of Medicare and Medicaid. Government at both the federal and state levels has continued in its efforts to reduce, or at least limit the growth of, spending for health care services, including services to be provided by the Company's lessee's or their operators. On August 5, 1997, President Clinton signed into law the Balanced Budget Act of 1997 (BBA'97), which contains numerous Medicare and Medicaid cost-saving measures, as well as new anti-fraud provisions. The BBA has been projected to save $115 billion in Medicare spending over the next five years, and $13 billion in the Medicaid program. Section 4711 of the BBA, entitled "Flexibility in Payment Methods for Hospital, Nursing Facility, ICF/MR, and Home Health Services", repealed the Boren Amendment, which has required that state Medicaid programs pay to nursing home providers amounts adequate to enable them to meet government quality and safety standards; the Boren Amendment was previously the foundation of litigation by nursing homes seeking rate increases. In place of the Boren Amendment, the BBA requires only that, for services and items furnished on or after October 1, 1997, a state Medicaid program must provide for a public process for determination of Medicaid rates of payment for nursing facility services, under which proposed rates, the methodologies underlying the establishment of such rates, and justifications for the proposed rates are published, and which give providers, beneficiaries and other concerned state residents a reasonable opportunity for review and comment on the proposed rates, methodologies and justifications. Several of the states in which the Company has assets are actively seeking ways to reduce Medicaid spending for nursing home care by such methods as capitated payments and substantial reductions in reimbursement rates. The BBA also requires that nursing homes transition to a prospective payment system under the Medicare program during a three-year "transition period" commencing with the first cost reporting period beginning on or after July 1, 1998. Substantially all of the health care facilities in which the Company has invested commenced reimbursement under this program effective January 1, 1999. The Company believes that the deduction in Medicare revenues have negatively impacted its additional percentage rent, but not the base rent, of its skilled nursing facilities. In addition, the BBA creates a managed care Medicare Program called "Medicare + Choice", which allows Medicare beneficiaries to participate in either the original Medicare fee-for-service program or to enroll in a coordinated care plan such as health maintenance organizations ("HMOs"). Such coordinated care plans would allow HMOs to enter into risk-based contracts with the Medicare program, and the HMO's would then contract with providers such as those financed by NHI. No assurances can be given that such facilities will be successful in negotiating favorable contracts with Medicare + Choice managed care organizations. The BBA also contains several new antifraud provisions. Given the recent enactment of the BBA, the Company is unable to predict the impact of the BBA and its potential changes in state Medicaid reimbursement methodologies on the operations of its tenants or borrowers; however, any significant reduction in either Medicare or Medicaid payments could adversely affect their cash flows. Changes in certification and participation requirements of the Medicare and Medicaid programs have restricted, and are likely to continue to restrict further, eligibility for reimbursement under those programs. Failure to obtain and maintain Medicare and Medicaid certification at the Company's tenants or borrowers will result in denial of Medicare and Medicaid payments which could result in a significant loss of revenue to those providers. In addition, private payors, including managed care payors, increasingly are demanding that providers accept discounted fees or assume all or a portion of the financial risk for the delivery of health care services. Such measures may include capitated payments whereby the provider is responsible for providing, for a fixed fee, all services needed by certain patients. Capitated payments can result in significant losses if patients require expensive treatment not adequately covered by the capitated rate. Efforts to impose reduced payments, greater discounts and more stringent cost controls by government and other payors are expected to continue. Any reforms that significantly limit rates of reimbursement under the Medicare and Medicaid programs, therefore, could have a material adverse effect on the Company's tenants or borrowers. The Company is unable to predict what reform proposals or reimbursement limitations will be adopted in the future or the effect such changes will have on its operations. No assurance can be given that such reforms will not have a material adverse effect on the Company; however, the Company believes the most material negative impact occurred during 1999. Licensure and Certification. The health care industry is highly regulated by federal, state and local law, and is directly affected by state and local licensing requirements, facility inspections, state and federal reimbursement policies, regulations concerning capital and other expenditures, certification requirements, and other such laws, regulations and rules. Sanctions for failure to comply with these regulations and laws include (but are not limited to) loss of licensure, fines, and loss of certification to participate in the Medicare and Medicaid programs, as well as potential criminal penalties. The failure of any lessee or borrower to comply with such laws, requirements and regulations could affect its ability to operate the facility or facilities and could adversely affect such lessee's or borrower's ability to make lease or debt payments to the Company. In the past several years, due to rising health care costs, there has been an increased emphasis on detecting and eliminating fraud and abuse in the Medicare and Medicaid programs. Payment of any consideration in exchange for referral of Medicare and Medicaid patients is generally prohibited by federal statute, which subjects violators to severe penalties, including exclusion from the Medicare and Medicaid programs, fines, and even prison sentences. In recent years, both federal and state governments have significantly increased investigation and enforcement activity to detect and punish wrongdoers. In addition, legislation has been adopted at both state and federal levels which severely restricts the ability of physicians to refer patients to entities in which they have a financial interest. It is anticipated that the trend toward increased investigation and enforcement activity in the area of fraud and abuse, as well as self-referral, will continue in future years. Certain of the Company's investments are with lessees or borrowers which are partially or wholly owned by physicians. In the event that any lessee or borrower were to be found in violation of laws regarding fraud and abuse or self-referral, that lessee's or borrower's ability to operate the facility as a health care facility could be jeopardized, which could adversely affect the lessee's or borrower's ability to make lease or debt payments to the Company and thereby adversely affect the Company. Certificates of Need. Certain Health Care Facilities in which the Company invests are also generally subject to state statutes which may require regulatory approval, in the form of a certificate of need ("CON") prior to the addition or construction of new beds, the addition of services or certain capital expenditures. CON requirements are not uniform throughout the United States and are subject to change. The Company cannot predict the impact of regulatory changes with respect to CON's on the operations of the Company's lessees and mortgagees; however, in the Company's primary market areas, a significant reduction in new construction of long term care beds as occurred. Investment Policies The Company's investment objectives are (i) to provide current income for distribution to its stockholders through investments primarily in health care related facilities, (ii) to provide the opportunity to realize capital growth resulting from appreciation, if any, in the residual value of its portfolio properties, and (iii) to preserve and protect stockholders' capital. There can be no assurance that these objectives will be realized. It is not the present intention of the Company to sell its properties and reinvest in other investments for the purpose of realizing gains resulting from the appreciation of value of those properties; the Company, however, in the future would consider selling properties in the event circumstances should arise which would make a sale advisable or attractive. The Company does not anticipate seeking further health care related investment opportunities such as lease or mortgage financing during 2000 and will instead focus on monitoring and enhancing its current investments, with specific emphasis on its foreclosure properties. The Company plans to continue its goal of maintaining a one to one ratio of debt to shareholder's equity. If the late 1999 amendments to BBA'97 generate renewed investment confidence in the long term care industry, the Company will once again compete with health care providers and investors, including other real estate investment trusts, for additional health care related investments. In evaluating potential investments, the Company considers such factors, as (i) the geographic area and type of property, (ii) the location, construction quality, condition and design of the property, (iii) the current and anticipated cash flow and its adequacy to meet operational needs and lease or mortgage obligations and to provide a competitive market return on equity to the Company's investors, (iv) the growth, tax and regulatory environments of the communities in which the properties are located, (v) occupancy and demand for similar health care facilities in the same or nearby communities, (vi) the quality, experience and creditworthiness of the management operating the facilities located on the property; and (vii) the mix of private and government sponsored patients. There can be no assurances that these intentions will be realized. The Company will not, without the prior approval of a majority of the Board of Directors, enter into any joint venture relationships with or acquire from or sell to any director, officer, or employee of NHC or the Company, or any affiliate thereof, as the case may be, any of the assets or other property of the Company. The Company's Credit Agreements limit the amount of investment in any one borrower to 25% of the Company's assets, except for investments in NHC which is limited to 35% of the Company's assets. As of December 31, 1999, investments in NHC totaled approximately 22.1%. The Company is unable to predict the extent to which it will engage in activities with NHC or any other operator within these limits. The Board of Directors, without the approval of the stockholders, may alter the Company's investment policies if they determine that such a change is in the best interests of the Company and its stockholders. The methods of implementing the Company's investment policies may vary as new investment and financing techniques are developed or for other reasons. The Company may incur additional indebtedness in the future to make investments in health care related facilities or business when it is advisable in the opinion of the Board of Directors. The Company may negotiate other lines of credit, or arrange for other short or long term borrowings from banks, NHC or otherwise. The Company has and may arrange for long term borrowings from institutional investors or through public offerings. The Company has invested and may in the future invest in properties subject to existing loans or secured by mortgages, deeds of trust or similar liens with favorable terms or REMIC investments. Advisory Agreement The Company entered into the Advisory Agreement on October 17, 1991 with NHC as "Advisor" under which NHC provides management and advisory services to the Company during the term of the Advisory Agreement. The Company believes the Advisory Agreement benefits the Company by providing it access to NHC's extensive experience in the ownership and management of long-term care facilities and retirement centers. Under the Advisory Agreement, the Company engaged NHC to use its best efforts (a) to present to the Company a continuing and suitable investment program consistent with the investment policies of the Company adopted by the Board of Directors from time to time; (b) to manage the day-to-day affairs and operations of the Company; and (c) to provide administrative services and facilities appropriate for such management. In performing its obligations under the Advisory Agreement, NHC is subject to the supervision of and policies established by the Company's Board of Directors. The Advisory Agreement was initially for a stated term which expired December 31, 1997. The Agreement is now on a year to year term. Either party may terminate the Advisory Agreement at any time on 90 days notice, and the Company may terminate the Advisory Agreement for cause at any time. For its services under the Advisory Agreement, the Advisor is entitled to annual compensation in a base amount of $1.6 million, payable in monthly installments of $135,417. This fee is subordinate to the payment of a minimum $2.00 per share dividend. In 1999 the dividend declared and paid was $2.96. Under the Advisory Agreement, the Company reimburses NHC for certain out of pocket expenses including those incurred in connection with borrowed money, taxes, fees to independent contractors, legal and accounting services and stockholder distributions and communications. For 1993 and later years the annual compensation is calculated on a formula which is related to the increase in Funds from Operations per common share (as defined in the Advisory Agreement). In 1999, the annual compensation under the Advisory Agreement was $3.0 million. Pursuant to the Advisory Agreement, NHC manages all of the day-to-day affairs of the Company and provides all such services through its personnel. The Advisory Agreement provides that without regard to the amount of compensation received by NHC under the Advisory Agreement, NHC shall pay all expenses in performing its obligations including the employment expenses of the officers and directors and personnel of NHC providing services to the Company. The Advisory Agreement further provides that the Company shall pay the expenses incurred with respect to and allocable to the prudent operation and business of the Company including any fees, salaries, and other employment costs, taxes and expenses paid to directors, officers and employees of the Company who are not also employees of NHC. Currently, other than the directors who are not employees of NHC, the Company does not have any officers or employees who are not also employees of NHC. The Company's three executive officers, Mr. W. Andrew Adams, Mr. Robert G. Adams and Mr. LaRoche are employees of NHC and all of their fees, salaries and employment costs are paid by NHC, but a portion of their bonus, if any, is allocated to the Company. In addition, although not specifically provided for in the Advisory Agreement, during 1999 the Company granted stock options to purchase a total of 145,000 shares of Common Stock for the benefit of various key employees and outside directors. Additionally, the Company has implemented an option exercise loan guaranty program, the purpose of which is to facilitate Directors and key personnel exercising options to purchase NHI common stock. Pursuant to Board of Directors' resolution unanimously passed, each Director and Key Employee to whom options to purchase NHI common shares have been granted is eligible to benefit from a Company guaranty on up to $100,000 per year of loans made from commercial banking institutions, the proceeds of which are used to exercise NHI options. The guarantee is structured as follows: Option holders must pledge to NHI 125% of the loan amount in publicly traded stock as additional collateral for the guarantee; the option holder must personally guarantee the loan to the bank; the interest rate charged by the bank and all expenses pertaining to the loan are to be borne by the Director or Employee and the maximum outstanding amount of loan guarantees is $5.0 million. Furthermore, this facility is to have a one year term and be renewable at the Board's discretion. The table in Item 13 indicates the current amount of loans outstanding by Directors of NHI individually and by all designated NHC employees collectively as of December 31, 1999. The total outstanding as of December 31, 1999 is $1.4 million. Federal Income Tax The Company believes that it has operated its business so as to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") and the Company intends to continue to operate in such a manner, but no assurance can be given that the Company will be able to qualify at all times. If the Company qualifies as a REIT, it will generally not be subject to federal corporate income taxes on its net income that is currently distributed to its stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that typically applies to corporate dividends. NHI's failure to continue to qualify under the applicable REIT qualification rules and regulations would have a material adverse impact on the financial position, results of operations and cash flows of NHI. NHI is aware of certain income tax contingencies with regards to limitations on ownership of its stock and to its use of an independent contractor to mange certain of its foreclosure properties. In order to fully resolve the contingencies, NHI is in the process of requesting from the Internal Revenue Service ("IRS") closing agreements regarding each of these contingencies. NHI's management, based on its discussions with its legal counsel, understands that other real estate investment trusts have been successful in obtaining closing agreements with the IRS regarding real estate investment trust qualification issues. However, it is possible that the IRS will not rule in favor of NHI. Such an unfavorable ruling could result in the assessment of taxes, penalties and interest by the IRS that are material to NHI's financial statements taken as a whole and could also result in the loss of NHI's status as a real estate investment trust, which would have a significant adverse impact on the financial position, results of operations and cash flows of NHI. Item 2. Properties NHI PROPERTIES LONG TERM CARE Center City Beds ALABAMA NHC HealthCare, Anniston Anniston 151 NHC HealthCare, Moulton Moulton 136 ARIZONA Estralla Care and Rehab Avondale 161 COLORADO Brookside Inn Castle Rock 95 FLORIDA Alachua Nursing Home Gainesville 120 Bear Creek Nursing Center Hudson 120 Brighton Gardens of Edison* Edison 30 Brighton Gardens of Maitland* Maitland 39 Brighton Gardens of West Palm Beach* West Palm Beach 30 Brooksville Nursing Manor Brooksville 180 Cypress Cove Care Center New Port Richey 120 Health Care Center at Mercy Hospital Miami 120 Heather Hill Nursing Home Crystal River 120 Huber Restorium St. Petersburg 96 Jefferson Nursing Center Monticello 60 Lake Park - Madison Lake Park 119 Medic-Ayers Nursing Center Trenton 120 Plantation Gardens Rehab & Nursing Ocoee 120 Miracle Hill Nursing & Convalescent Tallahassee 120 NHC HealthCare, Hudson Hudson 180 NHC HealthCare, Merritt Island Merritt Island 180 NHC HealthCare, Plant City Plant City 180 NHC HealthCare, Stuart Stuart 153 Oakview Nursing Williston 180 Osceola Health Care Center St. Cloud 120 Pine Lake Nursing Home Greeneville 58 Royal Oak Nursing Center Dade City 120 GEORGIA Ashton Woods Dekalb County 157 Forest Lake Manor Augusta 100 Jennings Health Care Center Augusta 100 Meadowbrook Nursing Center Tucker 144 Moss Oaks Health Care Center Pooler 122 Rossville Convalescent Center Rossville 112 West Lake Manor Augusta 100 IDAHO Grangeville Care Center Grangeville 62 Sunny Ridge Care Center Nampa 192 KANSAS Park Place HealthCare Chanute 84 Twin Lakes HealthCare Council Grove 94 Prestige Rehab & Nursing Haysville 120 Larned Healthcare & Living Center Larned 83 Sedgwick Convalescent Center Sedgwick 79 Hoisington Rehabilitation Center Hoisington 62 Emporia Rehabilitation Center Emporia 79 KENTUCKY NHC HealthCare, Dawson Springs Dawson Springs 80 NHC HealthCare, Glasgow Glasgow 206 NHC HealthCare, Madisonville Madisonville 94 MASSACHUSETTS Buckley Nursing Home Greenfield 120 Buckley Nursing & Retirement Center Holyoke 102 Longmeadow of Taunton Taunton 100 John Adams Nursing Home Quincy 71 MISSOURI Charleviox Nursing Center St. Charles 142 Clayton House Healthcare Clayton 282 Columbia House Healthcare Columbia 141 Florissant Nursing Center Florissant 120 Hunter Acres Nursing Center Sikeston 120 NHC HealthCare, Desloge Desloge 120 NHC HealthCare, Joplin Joplin 126 NHC HealthCare, Kennett Kennett 170 NHC HealthCare, Maryland Heights St. Louis 220 NHC HealthCare, St. Charles St. Charles 120 Oak View Living Center Jefferson City 120 Ozark Nursing Center West Plains 120 Spanish Lake Nursing Center Florissant 120 Woodland Park Healthcare Center Joplin 92 NEW HAMPSHIRE Epsom Manor, Inc. Epsom 108 Maple Leaf Health Care Center Manchester 114 Villa Crest Manchester 163 NEW JERSEY Health Gate Nursing & Rehab* Trenton 120 Regal Manor Health Care Center Toms River 130 OKLAHOMA Skyline Terrace Tulsa 209 PENNSYLVANIA Briarcliff Pavilion for Special Care N. Huntingdon 120 Kade Nursing Home Canton Township 68 Nipple Convalescent Center Liverpool 37 SOUTH CAROLINA NHC HealthCare, Anderson Anderson 290 NHC HealthCare, Greenwood Greenwood 152 NHC HealthCare, Laurens Laurens 176 TENNESSEE NHC HealthCare, Athens Athens 98 NHC HealthCare, Chattanooga Chattanooga 212 NHC HealthCare, Columbia Columbia 120 NHC HealthCare, Dickson* Dickson 197 NHC HealthCare, Franklin Franklin 84 NHC HealthCare, Hendersonville Hendersonville 117 NHC HealthCare, Hillview Columbia 98 NHC HealthCare, Johnson City* Johnson City 179 NHC HealthCare, Knoxville Knoxville 152 NHC HealthCare, Lewisburg Lewisburg 104 NHC HealthCare, McMinnville McMinnville 150 NHC HealthCare, Milan Milan 129 NHC HealthCare, Nashville Nashville 133 NHC HealthCare, Oakwood Lewisburg 62 NHC HealthCare, Pulaski Pulaski 104 NHC HealthCare, Scott Lawrenceburg 62 NHC HealthCare, Sequatchie Dunlap 120 NHC HealthCare, Smithville Smithville 107 NHC HealthCare, Somerville* Somerville 72 NHC HealthCare, Sparta Sparta 150 NHC HealthCare, Springfield Springfield 112 TEXAS Autumn Hills Convalescent Center Houston 116 Autumn Hills Convalescent Center Richmond 99 Autumn Hills Convalescent Center Sugarland 150 Autumn Hills Convalescent Center Tomball 150 Bonham Nursing Center Bonham 65 Canterbury Villa of Falfurrias Falfurrias 98 Canterbury Villa of Kingsville Kingsville 162 College Street Nursing Center Beaumont 50 Columbus Care Center Columbus 129 Conroe Convalescent Center Conroe 108 Denison Manor Denison 71 Fair Park Nursing Center Huntsville 92 Friendswood Arms Convalescent Center Friendswood 102 Galaxy Manor Nursing Center Cleveland 148 Golden Charm Nursing Center Liberty 118 Lindbergh Health Care Center Beaumont 82 Shoreline Health Care Center Taft 200 Terry Haven Nursing Center Mt. Vernon 65 Town Park Convalescent Center Houston 125 Willis Convalescent Center Willis 114 Willow Bend Care Center Mesquite 162 Heritage Forest Lane Dallas 120 Heritage Manor - Canton Canton 110 Heritage Manor - Mesquite Dallas 152 Heritage Oaks Arlington 204 Heritage Village Dallas 280 Winterhaven Houston 160 VIRGINIA Brian Center of Alleghany Low Moor 60 Brian Center of Fincastle Fincastle 60 Kegley Manor Bastian 57 Maple Grove Health Care Lebanon 60 NHC HealthCare, Bristol Bristol 120 The Springs Nursing Center Hot Springs 60 Willow Creek Health Care Center Midlothian 120 WASHINGTON Highline Care Center Seattle 73 Park Ridge Care Center Seattle 115 Park West Care Center Seattle 139 Sehome Park Care Center Bellingham 115 WISCONSIN Haney Creek Health & Rehab Center Milwaukee 196 ACUTE CARE PROPERTIES KENTUCKY Kentucky River Hospital Jackson 55 LOUISIANA University Rehab Hospital New Orleans 106 MEDICAL OFFICE BUILDINGS Square Center City Footage FLORIDA North Okaloosa Crestview 27,017 ILLINOIS Crossroads Mt. Vernon 12,910 KENTUCKY Scott Hospital Georgetown 24,824 LOUISIANA Women's & Children's Lafayette 30,000 TEXAS Pasadena Pasadena 61,500 Hill Regional Hillsboro 23,000 UTAH Pioneer Valley Salt Lake City 69,910 WASHINGTON Capital Medical Office Building Olympia 67,152 RETIREMENT CENTERS Center City Beds MISSOURI Lake St. Charles Retirement Center* St. Charles 155 NEW HAMPSHIRE Heartland Place Epsom 60 TENNESSEE Parkwood Retirement Center Chattanooga 32 Colonial Hill Retirement Center Johnson City 63 TEXAS Remington Retirement Community Corpus Christi 90 Tiffany Walk Congregate Center Tomball 60 ASSISTED LIVING AND DEVELOPMENTALLY DISABLED Center City Beds ARIZONA Clare Bridge - Glendale Glendale 38 Sterling House - Gilbert Gilbert 50 Sterling House - Tucson Tucson 50 Clare Bridge - Tanque Verde Tucson 38 FLORIDA 19th Street Group Home Gainesville 6 107th Place Group Home Belleview 6 Bessent Road Group Home Starke 6 Brighton Gardens of Maitland* Maitland 112 Brighton Gardens of West Palm Beach* West Palm Beach 114 Clare Bridge - Maitland Maitland 38 Coletta Drive Group Home Orlando 6 Frederick Avenue Group Home Daytona Beach 6 High Desert Court Group Home Jacksonville 6 Spring Street Group Home Lake City 6 Claudia Drive Group Home Jacksonville 6 Plaza Oval Group Home Casselberry 6 Rosewood Group Home Ormond Beach 6 Second Street Group Home Ocala 6 Somerset on Lake Saunders Tavares 66 Sterling House - Daytona Beach Daytona Beach 60 Suffridge Drive Group Home Bonita Springs 6 Tunis Street Group Home Jacksonville 6 Walnut Street Group Home Starke 6 Wynwood Maitland 78 Park Place of St. Augustine (U/C) St. Augustine 89 MARYLAND Morningside House of St. Charles St. Charles 86 Morningside House of Friendship Hanover 120 Morningside House of Harmans Harmans 98 MISSOURI Lake St. Charles Retirement Center* St. Charles 25 NEW JERSEY Brighton Gardens of Edison* Edison 118 Royal Health Gate Nursing & Rehab* Trenton 30 Regal Manor Health Care Center* Toms River 30 NORTH CAROLINA Manorhouse - Charlotte Charlotte 144 SOUTH CAROLINA Sterling House - Conway Conway 52 TENNESSEE 717 Cheatam Street Springfield 8 305 West Hillcrest Drive Springfield 8 307 West Hillcrest Drive Springfield 8 Sterling House - Gallatin Gallatin 49 Sterling House - Kingsport Kingsport 49 Sterling House - Tullahoma Tullahoma 49 NHC HealthCare, Dickson* Dickson 20 NHC HealthCare, Johnson City* Johnson City 15 NHC HealthCare, Somerville* Somerville 12 NHC HealthCare, Smithville Smithville 10 TEXAS Brighton Gardens of Preston Road Dallas 109 VIRGINIA Morningside House of Leesburg Leesburg 110 *These facilities are listed in multiple categories. U/C = Under construction REAL ESTATE MORTGAGE INVESTMENT CONDUITS 20.0% participating interest 14 Properties 1,971 5.2% participating interest 23 Properties 2,896 Item 3. Legal Proceedings The Company is not subject to any material pending litigation, although a number of its operators or mortgagors are currently in bankruptcy. See "Foreclosure Properties". The Health Care Facilities are subject to claims and suits in the ordinary course of business. The Company's lessees and mortgagees have indemnified and will continue to indemnify the Company against all liabilities arising from the operation of the Health Care Facilities, and will indemnify the Company against environmental or title problems affecting the real estate underlying such facilities. While there are lawsuits pending against certain of the owners and/or lessees of the Health Care Facilities, management believes that the ultimate resolution of all pending proceedings will have no material adverse effect on the Company or its operations. Item 4. Submission of Matters to a Vote of Security Holders (a) The 1999 Annual Meeting of the Shareholders was held on April 26, 1999. (b) Matters voted upon at the meeting are as follows: PROPOSAL NO. 1: Election of Jack Tyrrell and W. Andrew Adams to serve as directors for terms of three years or until their successors have been fully elected and qualified. Other directors whose terms of office continue are Mr. Robert T. Webb; Mr. Ted H. Welch and Mr. Richard F. LaRoche, Jr. % of Total Outstanding Shares For Abstain Voting Voting For Jack Tyrrell 22,873,832 123,087 94.4% 93.9% W. Andrew Adams 22,868,970 127,938 94.4% 93.9% PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as the Company's independent accountant. % of Total Outstanding Shares For Against Abstain Voting Voting For 22,865,199 73,449 58,260 94.4% 93.85% PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters On October 16, 1996, the NHI Board of Directors, pursuant to powers granted by NHI's charter, changed the limit on the percentage of ownership which any person may have in the outstanding common stock of NHI from a limit of 7.0% (as passed on October 17, 1995) to a limit of 9.9%. The limit on ownership of any other class of stock (including issues convertible into common stock) remains at 9.9% of the outstanding stock. In order to qualify for the beneficial tax treatment accorded to a REIT, the Company must make quarterly distributions to holders of its Common Stock equal on an annual basis to at least 95% of the Company's REIT taxable income (excluding net capital gains), as defined in the Code. Cash available for distribution to stockholders of the Company is primarily derived from interest payments received on its mortgages and from rental payments received under the Company's leases. All distributions will be made by the Company at the discretion of the Board of Directors and will depend on the cash flow and earnings of the Company, its financial condition, bank covenants contained in its financing documents and such other factors as the Board of Directors deems relevant. The Company's REIT taxable income is calculated without reference to its cash flow. Therefore, under certain circumstances, the Company may not have received cash sufficient to pay its required distributions. Common Stock Market Prices and Dividends The Company's common stock is traded on the New York Stock Exchange under the symbol NHI. The closing price for NHI stock on February 29, 2000 was $13.3125. As of December 31, 1999, there were approximately 1,671 holders of record of shares and the Company estimates that as of such date there were in addition in excess of 25,700 beneficial owners of the shares. High and low stock prices and dividends for the last two years were: 1999 1998 ---------------------------- ------------------------------ Cash Cash Sales Price Dividends Sales Price Dividends Quarter Ended High Low Declared High Low Declared March 31 $28.2500 $21.5000 .74 $42.2500 $38.6250 $.74 June 30 25.7500 20.0000 .74 39.9375 32.1250 .74 September 30 23.2500 15.2500 .74 33.8750 25.3125 .74 December 31 17.2500 14.1250 .74 30.9375 24.3750 .74 Item 6. Selected Financial Data The following table represents financial information with respect to the Company for the five years ended December 31, 1999. This financial information has been derived from financial statements included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and accompanying footnotes. NATIONAL HEALTH INVESTORS, INC. SELECTED FINANCIAL DATA (dollars in thousands, except per share amounts)
Year Ended December 31 1999 1998 1997 1996 1995 Net revenues $ 131,158 $ 106,552 $ 111,410 $ 99,429 $ 90,068 Net income 53,618 69,645 75,388 67,164 49,692 Net income per share Basic $ 2.13 $ 2.72 $ 3.01 $ 2.92 $ 2.63 Diluted 2.13 2.69 2.92 2.81 2.48 Mortgages and other investments, net $ 441,906 $ 495,964 $ 479,194 $ 553,456 $ 505,108 Real estate properties, net 316,021 245,538 200,069 184,255 123,195 Total assets 788,545 769,198 753,033 748,672 639,256 Long term debt 172,870 151,559 155,659 160,008 141,103 Credit facilities 88,000 58,500 --- 59,000 31,750 Convertible subordinated debentures 95,741 100,096 119,038 90,735 82,316 Total stockholders' equity 392,640 424,660 444,080 409,683 356,981 Common shares outstanding 24,382,987 24,364,391 24,753,570 23,474,751 20,535,014 Weighted average common shares Basic 24,365,027 24,964,047 24,394,044 21,916,921 16,381,826 Diluted 24,367,529 28,689,192 28,887,987 27,211,999 22,851,888 Common dividends declared per share $ 2.960 $ 2.960 $ 2.960 $ 2.840 $ 2.610
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview National Health Investors, Inc. ("NHI" or the "Company") is a real estate investment trust that invests primarily in income producing health care properties with emphasis on the long-term care sector. As of December 31, 1999, NHI had interests in net real estate owned, and investments in mortgages, real estate mortgage investment conduits ("REMICs"), preferred stock and marketable securities resulting in total invested assets of $757.9 million. NHI's strategy has been to invest in health care real estate which generates current income that will be distributed to stockholders. NHI has implemented this strategy by making mortgage loans and acquiring properties to lease nationwide primarily in the long-term health care industry. Current market conditions make it unlikely that any material new investments in health care properties will occur during 2000. Instead, NHI is monitoring and improving its existing properties. As of December 31, 1999, the Company was diversified with investments in 202 health care facilities located in 26 states consisting of 146 long-term care facilities, two acute care hospitals, eight medical office buildings, 22 assisted living facilities, seven retirement centers and 17 residential projects for the developmentally disabled. These investments consisted of approximately $316.5 million aggregate principal amount of loans to 29 borrowers, $316.0 million of purchase leaseback transactions with seven lessees and $37.7 million invested in REMIC pass through certificates backed by first mortgage loans to four operators. Of these 202 facilities, 51 are leased to National HealthCare Corporation ("NHC") and nine additional facilities are managed by NHC. NHC is the Company's investment advisor. Consistent with its strategy of diversification, the Company has reduced the portion of its portfolio operated or managed by NHC from 100.0% of total invested assets on October 17, 1991 to 22.1% of total invested assets on December 31, 1999. At December 31, 1999, 55.4% of the total invested assets of the health care facilities were operated by public operators, 24.0% by regional operators, and 20.6% by small operators. Liquidity and Capital Resources Sources and Uses of Funds NHI has generated net cash from operating activities during 1999 totaling $73.4 million compared to $84.9 million in the prior year. The primary reason for this year to year decline was a reduction in net income accompanied by an increase in accounts receivable offset in part by increased depreciation expense, loan loss provisions and accounts payable. The increased accounts receivable and payable are due primarily to patient accounts receivable generated from operations of nursing centers taken over in loan foreclosures. Net cash from operating activities generally includes net income plus non-cash expenses, such as depreciation and amortization and provision for loan losses, and working capital changes. Net cash used in investing activities during 1999 totaled $53.4 million compared to $78.7 million in the prior year. Cash flows provided from investing activities during 1999 included collections on mortgage notes receivable of $16.3 million compared to $3.9 million for the prior year, along with prepayment of $93.9 million of mortgage notes receivable in the prior period. Cash flows used in investing activities during 1999 included investment in mortgage notes receivable of $22.2 million, real estate properties of $14.3 million, and marketable securities of $33.2 million. Cash flows used in investing activities in the prior period included investment in mortgage notes receivable of $67.6 million, in real estate properties of $40.7 million, in preferred stock of $38.1 million and in marketable securities of $30.1 million. Net cash used in financing activities during 1999 totaled $23.8 million compared to $50.7 million in the prior year. Cash flows provided by financing activities included $29.5 million from credit facility borrowings and $25.8 million from long term debt borrowings, compared to $58.5 million from credit facility borrowings, $0.2 million from long term debt borrowing and $2.0 million from the sale of common stock. Cash flows used in financing activities for 1999 included principal payments on long-term debt of $4.5 million and dividends paid to shareholders of $73.8 million. This compares to prior year activity of $4.3 million of principal payments on long term debt, dividends paid to shareholders of $75.8 million and the repurchase of common stock of $31.3 million. In March 2000, we announced a reduction in our quarterly dividend of 10 cents per common share to 64 cents. This is NHI's first dividend decline and it reflects the Company's concern over continuing volatility in the long-term care industry and increased interest expense on the company's bank debt. NHI has established a senior unsecured revolving line of credit that allows it to borrow a maximum of $100.0 million. The amount available to be drawn on this revolving line of credit is $12.0 million at December 31, 1999, and the entire balance outstanding matures in October 2000. In addition, $38.1 million of the Company's convertible subordinated debentures outstanding at December 31, 1999 mature on January 1, 2001, and NHI likely will redeem these debentures in cash. It is unlikely that holders of these convertible subordinated debentures will convert them to common stock prior to January 1, 2001. The debentures may be repaid from the proceeds of mortgage prepayments or through the sale of short-term investments. NHI believes that it will be able to refinance its commitments under the line of credit and the convertible subordinated debentures at or prior to their maturity; however, it is likely that NHI's costs under new debt or equity issues will exceed the interest rates NHI currently pays on its line of credit and convertible subordinated debentures. The lack of availability of reasonably priced capital limits NHI's ability to make new investments, and future refinancings at higher interest rates could have an adverse impact on NHI's financial position, results of operations and cash flows. Commitments At December 31, 1999, the Company was committed, subject to due diligence and financial performance goals, to fund approximately $9.0 million in health care real estate projects, of which $7.0 million is expected to be funded within the next 12 months. The commitments include mortgage loans for two long-term health care centers, one medical office building, and three assisted living facilities all at rates ranging from 9.0% to 11.5 %. Also included in the $9.0 million of commitments is a commitment to loan an additional $2.0 million on one existing loan when the mortgagee obtains certain operating ratios. Financing for current commitments and future commitments to others may be provided by cash balances, by borrowings under the Company's bank credit facilities, new lines of credit, private placements or public offerings of debt or equity, the assumption of secured or unsecured indebtedness, or by the sale of all or a portion of certain currently held investments. NHI is currently limited in its ability to make new investments due to a lack of availability of reasonably priced capital. However, the Company believes it has sufficient liquidity and financing capability to finance current investments for which it is committed as well as to repay or refinance borrowings at or prior to their maturity. Loan Foreclosures and Bankruptcy As more fully described in Note 3 to the Consolidated Financial Statements, during late 1998 and during 1999, NHI purchased 17 long-term health care facilities and a retirement center for $81.4 million. The purchases were undertaken either in foreclosure or in lieu of foreclosure due to financial defaults on first mortgage loans with three different owners. The mortgages had been funded from 1993 through 1996 in original principal amounts totaling $88.6 million. NHI is treating each of the properties described above as foreclosure property for federal income tax purposes. With this election, unqualified income generated by the properties is expected to be treated as qualified income for a minimum of two years from the purchase date for purpose of the income-source tests that must be satisfied by real estate investment trusts to maintain their tax status. As more fully described in Note 4 to the Consolidated Financial Statements, during late 1999, NHI was informed of the bankruptcy of one of its major customers. The bankruptcy may affect three of NHI's mortgage loans. The three loans, which are secured by 17 long-term health care facilities and other property, were made to three different entities in the original principal amounts totaling $55.5 million. Current carrying amounts of the three loans total $41.9 million. NHI is currently evaluating the collateral given for the loans, but believes that for each of the three loans the collateral supports the net carrying value of the loan. Loan Write-offs and Income Recognition As more fully described in Note 4 to the Consolidated Financial Statements, during 1999 NHI wrote off $10.0 million of mortgage notes receivable with carrying values before write-off of $74.0 million. In addition, NHI discontinued income recognition on one loan that had a carrying value of $4.5 million. As of December 31, 1999, two loans with carrying values of $40.9 million earning interest at approximately 11% have unpaid interest of from 30 to 60 days outstanding. Consistent with its policy on nonperforming loans to not recognize unpaid mortgage interest income in excess of 90 days, NHI may discontinue income recognition on these and other mortgage notes receivable in 2000. Results of Operations Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net income for the year ended December 31, 1999 is $53.6 million versus $69.6 million for the same period in 1998, a decrease of 23.0%. Diluted earnings per common share decreased 56 cents or 20.8%, to $2.13 in 1999 from $2.69 in 1998. Total revenues for the year ended December 31, 1999 increased $24.6 million or 23.1% to $131.2 million from $106.6 million for the year ended December 31, 1999. Revenues from mortgage interest income decreased $7.9 million, or 13.9%, when compared to the same period in 1998. Revenues from rental income increased $3.7 million, or 8.8% in 1999 as compared to 1998. Revenues from investment interest and other income increased $4.5 million or 61.2% compared to 1998. Facility operating revenue increased to $24.3 million in 1999 compared to $0.00 million in 1998. The decrease in mortgage interest income is due in part to a decline in the average amount of mortgage investments outstanding as a result of prepayments and foreclosure on mortgage loans. During the prior year 1998, NHI received $93.9 million of prepayments on mortgage notes receivable. In addition, during 1998 and 1999, NHI foreclosed on mortgage loans totaling $81.4 million. Furthermore, mortgage interest income in 1999 included no income from prepayment penalties and unamortized commitment fees applicable to early loan repayments as compared to $5.0 million of income in 1998. The increase in rental income resulted primarily from the increase in investments in real estate properties of $55.0 million during the last 24 months. The increase in investment interest and other income is due to the investment of higher cash amounts, as well as the net investment of $33.2 million in marketable securities during 1999. Total expenses for 1999 increased $40.6 million or 110.1% to $77.5 million from $36.9 million for 1998. Interest expense increased $6.5 million or 33.9% in 1999 as compared to 1998. Depreciation of real estate increased $2.5 million or 28.3% when compared to 1998. General and administrative costs decreased $0.6 million or 15.9%. Loan loss expense increased $9.5 million or 223.9% to $13.8 million. Facility operating expense increased to $22.6 million in 1999 compared to $0.0 million in 1998. Interest expense increased due to increased borrowing on credit facilities and long-term debt compared to the prior year. Depreciation increased as a result of the Company placing newly constructed assets in service, property acquisitions, and the purchase, in lieu of foreclosure, of four long-term health care centers previously owned by All Seasons Living Centers, and seven long term health care centers and one retirement center previously managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros Health Network) as discussed in Note 3 to the Consolidated Financial Statements. NHI recorded a non-cash charge of $10.0 million, a decrease of 41 cents per share basic and diluted, in the fourth quarter because of the impairment of values related to mortgage loans, foreclosures and lease terminations. The charge reduces net income but has no impact on funds from operations ("FFO"). Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net income for the year ended December 31, 1998 is $69.6 million versus $75.4 million for 1997, a decrease of 7.6%. Diluted earnings per common share decreased 23 cents or 7.9% to $2.69 in 1998 from $2.92 in 1997. Total revenues for the year ended December 31, 1998 decreased $4.9 million or 4.4% to $106.6 million from $111.4 million for the year ended December 31, 1998. Revenues from mortgage interest income decreased $10.5 million, or 15.6%, when compared to the same period in 1997. Revenues from rental income increased $2.3 million, or 5.8% in 1998 as compared to 1997. Revenues from investment interest and other income increased $3.3 million or 83.7% compared to 1997. The decrease in mortgage interest income is due to the receipt by NHI of prepayments of $93.9 million of first mortgages receivable during 1998, compared to new mortgage investments of $67.6 million during the same period. Mortgage interest income included $7.3 million of prepayment penalties and unamortized commitment fees applicable to early loan repayments in 1998. The increase in rental income resulted primarily from the increase in investments in real estate properties of $40.7 million during the previous 12 months. The increase in investment interest and other income is due to the investment of higher cash amounts, as well as the investment of $38.1 million in the preferred stock of LTC Properties, Inc. and $30.1 million in marketable securities. Total expenses for the 1998 twelve month period increased $0.9 million or 2.5% to $36.9 million from $36.0 million for the 1997 twelve month period. Interest expense decreased $3.1 million or 14.0% in the 1998 twelve month period as compared to the 1997 period. Depreciation of real estate increased $.9 million or 11.4% while amortization of loan and organization costs decreased $.1 million or 17.7% in 1998 when compared to 1997. General and administrative costs increased 5.2%. Loan loss provisions were $4.3 million for 1998 compared to $1.2 million for 1997. Interest expense decreased due to lower average levels of long-term and subordinated debt compared to a year ago. Depreciation increased as a result of the Company placing newly constructed assets in service and property acquisitions. Loan loss provisions increased based on the application of the Company's policy for determining loan loss provisions. The 1998 repurchase of 1,122,000 shares of common stock for $31.3 million resulted in a reduction of weighted average basic and diluted common shares outstanding in 1998 of 343,000. Notwithstanding alternative uses of the cash used to repurchase the common stock, the repurchase resulted in an increase in 1998 net income per share of 3 cents basic and diluted. Income Taxes NHI intends at all times to qualify as a real estate investment trust under Section 856 through 860 of the Internal Revenue code of 1986, as amended. Therefore, NHI will not be subject to federal income tax provided it distributes at least 95% of its annual real estate investment trust taxable income to its stockholders and meets other requirements to continue to qualify as a real estate investment trust. Accordingly, no provision for federal income taxes has been made in the financial statements. NHI's failure to continue to qualify under the applicable REIT qualification rules and regulations would have a material adverse impact on the financial position, results of operations and cash flows of NHI. NHI is aware of certain income tax contingencies with regards to limitations on ownership of its stock and to its use of an independent contractor to manage certain of its foreclosure properties. In order to fully resolve the contingencies, NHI is in the process of requesting from the Internal Revenue Service ("IRS") closing agreements regarding each of these contingencies. NHI's management, based on its discussions with its legal counsel, understands that other real estate investment trusts have been successful in obtaining closing agreements with the IRS regarding real estate investment trust qualification issues. However, it is possible that the IRS will not rule in favor of NHI. Such an unfavorable ruling could result in the assessment of taxes, penalties and interest by the IRS that are material to NHI's financial statements taken as a whole and could also result in the loss of NHI's status as a real estate investment trust, which would have a significant adverse impact on the financial position, results of operations and cash flows of NHI. Impact of Inflation Inflation may affect the Company in the future by changing the underlying value of the Company's real estate or by impacting the Company's cost of financing its operations. Revenues of the Company are primarily from long-term investments. Certain of the Company's leases require increases in rental income based upon increases in the revenues of the tenants. The Company has negotiated similar provisions in many of its mortgage notes receivable. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133, as amended by Statement of Financial Accounting Standards No. 137, "Deferred of the Effective Date of SFAS 133", is effective for fiscal quarters beginning after June 15, 1999. The impact of the adoption of SFAS 133 is not expected to have a material impact on NHI's results of operations or financial position. Year 2000 Compliance In recent years, as part of its Year 2000 readiness plan, NHI focused on potential Year 2000 issues in areas such as mainframe and network computer operations, personal computer hardware and software, third party mortgagees and lessees, and third party vendors. Based on the results of NHI's Year 2000 assessment remediation and testing and based on experience since January 1, 2000, NHI does not believe that any significant Year 2000 issues continue to exist related to these areas. With regard to NHI's third party mortgagees and lessees, NHI's assessment of Year 2000 issues has been based primarily on information provided by mortgagees and lessees and on NHI's uninterrupted receipt of monthly mortgage and lease payments. However, there can be no assurance that the information provided by the mortgagees and lessees is accurate or complete or that NHI's third party mortgagees and lessees are not experiencing or may experience Year 2000 issues. As a result of its advisory agreement with NHC, costs related to NHI's Year 2000 plan have not been material and are not expected to be material in future periods. No additional advisory fees have been or will be charged to NHI related to the assessment, remediation and testing of NHI's Year 2000 compliance. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Interest Rate Risk The Company's cash and cash equivalents consist of highly liquid investments with a maturity of less than three months. All of the Company's mortgage and other notes receivable bear interest at fixed interest rates. The Company's investment in preferred stock represents an investment in the preferred stock of another real estate investment trust and bears interest at a fixed rate of 8.5%. The underlying mortgages included in the Company's investments in real estate mortgage investment conduits (REMIC's) also bear interest at fixed interest rates. As a result of the short-term nature of the Company's cash instruments and because the interest rates on the Company's investment in notes receivable, preferred stock and REMIC's are fixed, a hypothetical 10% change in interest rates has no impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates has an immaterial impact on the fair values of these instruments. As of December 31, 1999, $112,488,000 of the Company's long-term debt bears interest at fixed interest rates. As of December 31, 1999, all of the Company's $95,741,000 of convertible subordinated debentures bear interest at fixed rates. Because the interest rates of these instruments are fixed, a hypothetical 10% change in interest rates has no impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates has an immaterial impact on the fair values of these instruments. The remaining $60,382,000 of the Company's long-term debt and $88,000,000 line of credit facility bear interest at variable rates. However, in order to mitigate the impact of fluctuations in interest rates on its variable rate debt, the Company has entered into interest rate swap agreements whereby the Company has exchanged certain variable interest rates on a $50,000,000 notional principal amount for a fixed rate of interest. Therefore, after including the mitigating impact of the interest rate swaps, a hypothetical 10% change in interest rates has an immaterial impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates has an immaterial impact on the fair values of these instruments. The Company's use of derivative instruments is limited to the interest rate swap discussed above. The Company does not use derivative instruments for trading purposes and the use of such instruments is subject to strict approvals by the Company's senior officers. The Company's exposure related to such derivative instruments is not material to the Company's financial position, results of operations or cash flows. Equity Price Risk The Company considers its investments in marketable securities as available for sale securities and unrealized gains and losses are recorded in stockholders' equity in accordance with Statement of Financial Accounting Standards No. 115. The investments in marketable securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. Hypothetically, a 10% change in quoted market prices would result in a related 10% change in the fair value of the Company's investments in marketable securities. In addition, a hypothetical 10% change in the quoted market prices of the Company's subordinated convertible debentures would result in a related 10% change in the fair value of the debenture instruments. Item 8. Financial Statements and Supplementary Data The following Consolidated Financial Statements are included as Exhibit 13 and are incorporated in this Item 8 by reference: a. Report of Independent Public Accountants b. Consolidated Balance Sheets c. Consolidated Statements of Income d. Consolidated Statements of Cash Flows e. Consolidated Statements of Stockholders' Equity f. Notes to Consolidated Financial Statements The following table sets forth selected quarterly financial data for the two most recent fiscal years. Selected Quarterly Financial Data (Unaudited, in thousands, except per share amounts)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter 1999 Net Revenues $30,014 $29,182 $32,888 $39,074 Net Income 16,243 15,953 15,785 5,637 Basic Earnings Per Share .650 .640 .630 .210 Diluted Earnings Per Share .650 .640 .630 .210 1998 Net Revenues $28,244 $26,423 $25,544 $26,341 Net Income 17,846 17,889 17,768 16,142 Basic Earnings Per Share .700 .690 .690 .640 Diluted Earnings Per Share .690 .680 .680 .640
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not Applicable PART III Item 10. Directors and Executive Officers of Registrant Management The following table sets forth the directors and executive officers of the Company. Each executive officer of the Company is elected by the directors, serves at the pleasure of the Board of Directors and holds office until a successor is elected or until the earliest of resignation or removal. Directors hold office until the annual meeting for the year in which their term expires and until their successor is elected and qualified. A director may be removed from office for cause only. Director Term Name Age Position with the Company Expires W. Andrew Adams 54 Director and President 2002 Richard F. 54 Director, Senior Vice LaRoche, Jr. President and Secretary 2001 Jack Tyrrell 53 Director 2002 Robert T. Webb 55 Director 2000 Ted H. Welch 66 Director 2001 Robert G. Adams 53 Senior Vice President ---- W. Andrew Adams has been President and a director of the Company since its inception in 1991. Mr. Adams is also President and a director of National HealthCare Corporation ("NHC"), the Company's Investment Advisor. He has served on the Multi-Facility Committee of the American Health Care Association, the trade association for long-term health care center companies. He has an M.B.A. from Middle Tennessee State University. Mr. Adams serves on the Board of Directors of David Lipscomb University in Nashville, Tennessee, the Board of Directors of SunTrust Bank in Nashville, Tennessee, and the Board of Directors of National Health Realty, Inc. Richard F. LaRoche, Jr. has served as Vice President, Secretary and a director of the Company since its inception in 1991. Mr. LaRoche is also General Counsel, Secretary and Senior Vice President of NHC. He serves in the same capacities for National Health Realty, Inc. He received a J.D. from Vanderbilt University and an A.B. from Dartmouth College. Mr. LaRoche is responsible for legal affairs, acquisitions and finance for all three companies. Jack Tyrrell has served as a director of the Company since its inception in 1991. Mr. Tyrrell is managing partner of Richland Ventures, L.P. and Richland Ventures II, L.P., venture capital firms based in Nashville, Tennessee which were founded in May 1994 and September 1996. He also currently serves as general partner of Lawrence, Tyrrell, Ortale & Smith and Lawrence, Tyrrell, Ortale & Smith, II, L.P., venture capital partnerships based in Nashville, Tennessee and New York, New York. Robert T. Webb has served as a director of the Company since its inception in 1991. Mr. Webb is the owner of commercial buildings and rental properties in the Middle Tennessee area, a subdivision developer, and a partner in commercial properties located in Rosslyn, Virginia and Phoenix, Arizona. Mr. Webb is the President and the sole owner of Webb's Refreshments, Inc. which has been in operation serving the Middle Tennessee area since 1976. Mr. Webb attended David Lipscomb College and received a B.A. in business marketing from Middle Tennessee State University in 1969. Mr. Webb is Chairman of the Board and a Director of Care Foundation of America, Inc., a non-profit, tax exempt operating long term care provider. Ted H. Welch has served as a director of the Company since its inception in 1991. Mr. Welch has owned and operated income producing real estate (primarily office buildings) in the southeastern United States since 1976. From 1953 until 1971, Mr. Welch worked for the Southwestern Company where he became Executive Vice President. From 1971 to 1974, he served as the Commissioner of Finance and Administration for the State of Tennessee, in which capacity he was responsible for all construction and maintenance of State of Tennessee real property, along with being chief operating officer. Mr. Welch received a B.S. from the University of Tennessee at Martin and attended the Graduate School of Management at Indiana University. Mr. Welch is Chairman and Chief Executive Officer of Eagle Communications. Mr. Welch serves on the Board of Directors of American Constructors, Inc.; First American Corporation, Nashville, Tennessee; Logan's Roadhouse, Inc.; and Southeast Service Corporation. Robert G. Adams has served as Vice President since 1997. He is the brother of W. Andrew Adams. He is the Chief Operating Officer of NHC and serves on the Board of Directors of NHC and National Health Realty, Inc. He is responsible for oversight of all company due diligence efforts and financial pro formas. He received a B.S. degree from Middle Tennessee State University. The following employees of NHC have material involvement with the Company: Donald K. Daniel (Vice President and Controller) joined NHC in 1977 as Controller. He received a B.A. degree from Harding University and an M.B.A. from the University of Texas. He is a certified public accountant. Kenneth D. DenBesten (Vice President/Finance) has served as Vice President/ Finance since 1992. From 1987 to 1992, he was employed by Physicians Health Care, most recently as Chief Operating Officer. From 1984 to 1986, he was employed by Health America Corporation as Treasurer, Vice President of Finance and Chief Financial Officer. Mr. DenBesten received a B.S. in business administration and an M.S. in Finance from the University of Arizona. Charlotte A. Swafford (Treasurer) has been Treasurer of NHC since 1985. She joined NHC in 1973 and has served as Staff Accountant, Accounting Supervisor and Assistant Treasurer. She has a B.S. degree from Tennessee Technological University. Dinsie B. C. Hale (Senior Accountant) has been with NHC since 1985. She is responsible for billing and collection and functions as a senior account for NHI. She has a B.S. degree from Middle Tennessee State University. Kristin S. Gaines (Credit Analyst) has been with NHI since 1998. She oversees portfolio compliance and reports on those issues monthly to the NHC Advisory Committee and quarterly to the Board of Directors. She has a B.S. and an M.B.A. from Middle Tennessee State University. Sherel A. Cochran (Administrative Secretary) has been with NHC since 1999. She has held several administrative positions within the banking and finance industry. She is a graduate of Western Business University in Portland, Oregon. Item 11. Executive Compensation The Company's day to day operations are conducted by personnel provided by NHC. The Company does have three executive officers, all of whom are also officers of NHC. The three executive officers may receive a bonus for their work for NHI, which is paid by NHC and credited against the advisory fee; however, no bonus has yet been declared or paid to them for 1999. The following Table 1 sets forth certain information concerning the compensation of the Company's chief executive officer and the other executive officers of the Company: TABLE I NATIONAL HEALTH INVESTORS, INC. SUMMARY COMPENSATION TABLE 1999
Restricted Name and Principal Other annual Stock All Other Position Year Salary($) Bonus Compensation Awards Options/SARs LTIP Payouts Compensation W. Andrew Adams 1999 $ --- $ (3) --- --- --- --- --- President & 1998 --- 253,225 --- --- --- --- --- Director 1997 --- 600,000 --- --- --- --- --- Robert G. Adams 1999 $ --- $ (3) --- --- --- --- --- Vice President 1998 --- 202,000 --- --- --- --- --- 1997 --- 400,000 --- --- --- --- --- Richard F. 1999 $ --- $ (3) --- --- --- --- --- LaRoche, Jr. 1998 --- 202,995 --- --- --- --- --- VP/Secretary 1997 --- 400,000 --- --- --- --- --- & Director
1Compensation deferred at the election of an executive has been included in salary column (d). 2These officers also received compensation from National HealthCare Corporation and National Health Realty, Inc. which are disclosed in those Company's Form 10-K or proxy statements. 3No bonus has yet been declared or paid for 1999. The compensations of Messrs. Adams and Mr. LaRoche are set by the board of directors of NHC (NHC Board) and are the obligations of NHC pursuant to the Advisory Agreement. Any compensation paid by the Company is credited against the Advisory fee paid to NHC. See "Business - Advisory Agreement". NHC's Board is composed of J. K. Twilla, Olin O. Williams, W. Andrew Adams, Ernest G. Burgess, III, Robert G. Adams, and Lawrence C. Tucker. Messrs. Adams and Mr. LaRoche also serve as Executive Officers of National Health Realty, Inc., and National HealthCare Corporation. Directors' Compensation Directors not affiliated with NHC (Messrs. Welch, Tyrrell, and Webb) receive $2,500 for each meeting attended, plus reimbursement for any actual travel expenses. In addition, non-NHC affiliated directors are granted options to purchase 15,000 shares of Common Stock at the first Annual Meeting each year pursuant to the 1997 Stock Option Plan. See "Stock Option Plan" below. Stock Option Plan The 1991 Option Plan (as amended in 1994) provided for an automatic grant to each non-NHC affiliated director of an option to purchase 5,000 shares of Common Stock on the date of the Annual Stockholder's Meeting at the then fair market value. The 1997 Stock Option Plan increased that number to 15,000 shares per Annual Meeting. Both Plans permit options to be exercised for cash or by surrender of shares of Common Stock of the Company valued at the then fair market value. Unless otherwise specifically provided in the option agreement, no option or SAR shall be transferable other than by will, family gift, or the laws of descent and distribution. All shares which may be issued under either Plan and the exercise prices for outstanding options are subject to adjustment in the event that the number of outstanding shares of Common Stock will be changed by reason of stock splits, stock dividends, reclassifications or recapitalizations. In addition, upon a merger or consolidation involving the Company, participants are entitled to shares in the surviving corporation. Pursuant to the automatic grant provisions of the Plans, the three non- NHC affiliated directors have each received options to purchase shares at $25.375 in 1995, $33.50 in 1996, $36.00 in 1997, $39.875 in 1998 and $24.25 in 1999. The outside directors have exercised all but 5,060 of the 1995 grants, all but 10,000 of the 1996 grants and none of the 1997, 1998 or 1999 grants. On January 15, 1997, the option to purchase 194,000 shares were granted to Key Employees at $36.00 per share. On October 26, 1999, the Company awarded options on 145,000 shares at the then fair market value of $14.50 per share to Key Employees from the 1997 Stock Option Plan. None of the Stock Option grants have been exercised. Of the 620,800 shares available under the Company's Option Plans, 395,000 are available for future grants. Options Granted in 1999 The table below provides certain information on grants of stock options to the executive officers and directors pursuant to the Company's 1991 Option Plan during the fiscal year ended December 31, 1999. Although stock appreciation rights are available under the plan, none have been issued to date.
Potential Realizable Percent of Value at Assumed Total Exercise Annual Rates of Options/SAR's or Base Stock Price Appreciation Options/SAR's Granted in Price Expiration for Option Term (1) Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($) Ted H. Welch 15,000 7.9% $24.250 4/25/04 $ -0- $ -0- Jack Tyrrell 15,000 7.9% 24.250 4/25/04 -0- -0- Robert T. Webb 15,000 7.9% 24.250 4/25/04 -0- -0- W. Andrew Adams 30,000 15.8% 14.500 10/2005 --- --- Richard F. LaRoche, Jr. 20,000 10.5% 14.500 10/2005 --- --- Robert G. Adams 20,000 10.5% 14.500 10/2005 --- ---
(1) Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option terms over the December 31, 1999 average stock price of $14.6563. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted. Actual gains, if any, on stock option exercises will depend on the future performance of the Common Stock and the date on which the options are exercised. 1999 Year-End Option Values The following table summarizes certain information regarding stock options exercised during the fiscal year ended December 31, 1999 and stock options held as of December 31, 1999 by the Executive Officers and Directors. No SARs were held or exercised during fiscal 1999. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Shares Shares Underlying Unexercised Value of Unexercised Acquired on Value Options at Fiscal In-the-Money Options Exercise Realized Year-End at Fiscal Year-End Name (#) ($)(1) (#) ($)(2) W. Andrew Adams -0- $ -0- 70,000 $ -0- Richard F. LaRoche, Jr. -0- -0- 50,000 -0- Robert T. Webb -0- -0- 45,000 -0- Ted H. Welch -0- -0- 50,000 -0- Jack Tyrrell -0- -0- 55,000 -0- Robert G. Adams -0- -0- 50,000 -0-
(1) Represents the difference between the exercise price and the average sales price of the Common stock on the date of exercise. (2) Value based on the average sales price per share ($14.6563) of the Com- pany's Common Stock on December 31, 1999, as reported on the New York Stock Exchange, less the exercise price. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as to the number of shares of Common Stock of the Company beneficially owned as of December 31, 1998 (a) by each person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") who is known to the Company to own beneficially 5% or more of the outstanding shares, (b) by each director, and (c) by all executive officers and directors of the Company:
Names and Addresses Number of Shares Percentages of of Beneficial Owners Beneficially Owned(1) Total Shares W. Andrew Adams(2) 1,405,727 5.8% 1927 Memorial Blvd. Murfreesboro, TN 37129 Richard F. LaRoche, Jr.(3)(9) 376,248 1.5% 2103 Shannon Drive Murfreesboro, TN 37129 Jack Tyrrell(4)(9) 85,586 * 3100 West End Avenue Nashville, TN 37203 Robert T. Webb(5) 100,671 * 149 MTCS Drive Murfreesboro, TN 37129 Ted Welch(6) 73,940 * 611 Commerce, 29th Floor Nashville, TN 37219 Robert G. Adams(7)(9) 384,370 1.6% 2217 Tomahawk Trace Murfreesboro, TN 37129 Franklin Resources, Inc.(10) 2,443,915 10.0% 777 Mariners Island Blvd. San Mateo, CA 94403 Nicholas Fund, Inc. 1,931,000 7.9% and Nicholas Income Fund, Inc. 6002 North Highway 83 Hartland, WI 53029-8503 All Executive Officers and Directors as a Group (6 persons)(8) 2,426,542 9.9% ________________ *Less than 1%.
(1) The percentages shown are based on 24,365,159 shares of Common Stock outstanding on December 31, 1999 plus, as to each individual and group listed, the number of shares of Common Stock deemed to be owned by such holder pursuant to Rule 13d-3 under the Exchange Act as disclosed by Vickers Stock Research Corporation. (2) Includes options to purchase 70,000 shares of Common Stock held by Mr. Adams. (3) Includes options to purchase 50,000 shares of Common Stock held by Mr. LaRoche. (4) Includes options to purchase 56,000 shares of Common Stock held by Mr. Tyrrell or family trusts. (5) Includes options to purchase 45,000 shares of Common Stock held by Mr. Webb. (6) Includes options to purchase 54,000 shares of Common Stock held by Mr. Welch. (7) Includes options to purchase 50,000 shares of Common Stock held by Mr. Adams. (8) Includes options to purchase 250,000 shares of Common Stock. (9) Substantially all the options included in this total have been transferred to a family partnership or trust. (10) This is ownership for SEC purposes and not for purposes of real estate investment trust regulations. The Charter contains certain limitations on the number of shares of the Company's stock that any one stockholder may own, which limitations are designed to ensure that the Company maintains its status as a REIT. This limitation (as amended) states that no person (as defined in the Code) may own directly or indirectly 9.9 percent or more of the Common Stock of the Company. Any shares of Common Stock in excess of such limits are deemed to be "Excess Common Stock". Excess Common Stock shall be deemed automatically to have been converted into a class separate and distinct from the class from which converted and from any other class of Excess Common Stock, each such class being designated "Excess Common Stock of [stockholder's name]". No Excess Common Stock may be voted, nor considered outstanding for the purpose of determining a quorum at any meeting of stockholders. Any dividends or other distributions payable upon the Excess Common Stock may, in the discretion of the Company, be paid into a non-interest bearing account and released to the stockholder only at such time as he or she ceases to be the holder of Excess Common Stock. The Company, upon authorization of the Board of Directors, may redeem any or all Excess Common Stock, and from the date of the giving of notice of redemption such shares shall cease to be outstanding and the stockholder shall cease to be entitled to dividends, voting rights and other benefits with respect to such shares. The redemption price will be based on the trading prices of the class of stock from which the Excess Common Stock being redeemed were converted, and is payable, without interest, only upon the liquidation of the Company. However, the Charter contains provisions under which the holder of Excess Common Stock may cause the Company to rescind such redemption by selling (and notifying the Company of such sale), within 30 days after notice of the redemption, a number of the shares of Common Stock held by such holder equal to the number of shares of Excess Common Stock. In addition, Excess Common Stock held by any holder may be converted back into shares of Common Stock if the holder sells such shares prior to their being called for redemption. Upon demand of the Company, each stockholder must disclose to the Company such information with respect to direct and indirect ownership of stock owned (or deemed to be owned after applying the rules applicable to REITs under the Code) as the Board of Directors deems reasonably necessary in order that the Company may fully comply with the REIT provisions of the Code. Proposed transferees of stock must also satisfy the Board, upon demand, that such transferees will not cause the Company to fall out of compliance with such provisions. Item 13. Certain Relationships and Related Transactions Advisory, Administrative Services and Facilities Agreement The Company entered into an Advisory, Administrative Services and Facilities Agreement with NHC as "Advisor" under which NHC provides management and advisory services to the Company during the term of the Advisory Agreement. See "Business - Advisory, Administrative Services and Facilities Agreement". Leases Pursuant to NHC's conveyance of certain of the Health Care Facilities to the Company, the Company leases to NHC 43 of the Health Care Facilities. Pursuant to these Leases, the Company and NHC have entered into a Master Agreement to Lease. See "Business - NHC Master Agreement to Lease". Since the date of the original lease to NHC (October 17, 1991), NHC has expanded the number of licensed beds at 15 of the 43 centers. By authority and unanimous vote of the non-NHC affiliated Directors, at such time as the bed additions were completed, NHI reimbursed NHC its actual out of pocket costs and expenses in connection with the plant expansions and received a corresponding increase in the base rent paid by NHC. The 15 expansions were funded at a cost of $10,534,135 in 1996 and $23,375,000 in 1997 and the lease increases at all expanded centers are now in effect. At the expiration of the leases, all of the expansions remain the full and complete property of NHI. The Mortgage Debt In connection with NHC's conveyance of 43 of the Health Care Facilities (the "NHC Health Care Facilities") to the Company in 1991, the Company assumed mortgage debt of $120.4 million (the "NHC Mortgage Debt"). As of December 31, 1998, after the early retirement by the Company of $20,662,000 for which NHC is still obligated under the original terms, the aggregate principal balance of the mortgage debt was $48,676,000. If the Company were required to redeem all or a material portion of such debt, there can be no assurance that the Company would be able to replace such debt on the same or similar terms or in a similar amount. NHC has agreed to indemnify and hold the Company harmless from certain costs and damages incurred in refinancing or so redeeming this debt, including closing or commitment fees, legal fees, and increased interest rates. The balance of the mortgage indebtedness encumbering the Health Care Facilities received from NHC is long-term self-amortizing debt with final maturities from 1999 through 2017. Although the Company assumed the NHC Mortgage Debt, NHC remains liable on such debt and the Company has agreed to indemnify NHC in respect of such continuing liability. In connection with the transfer of the NHC Health Care Facilities and the Notes to the Company, and the assumption by the Company of the NHC Mortgage Debt, NHC and the Company obtained the written consent of each material lender of such Mortgage Debt and of the Guaranteed Debt (defined below). In addition, the Company and NHC have covenanted with such lenders to maintain certain debt coverage and similar financial ratios. Although there can be no assurance, management believes that the Company and NHC will be able to comply with each such covenant, during all relevant periods. In the event, however, that the Company or NHC fails to comply with any such covenant, and such failure is deemed to constitute a default under the related NHC Mortgage Debt or Guaranteed Debt, the Company may be required to retire such NHC Mortgage Debt or Guaranteed Debt prior to its stated maturity. A default under such debt, if not waived or cured, could result in a loss of certain of the Company's assets through foreclosure or other means. NHC has agreed to indemnify and hold the Company harmless from suffering any loss, liability or harm as a result of this cross-collateralization, regardless of the form of such loss, liability or harm. The majority of the NHC Mortgage Debt is cross-defaulted with other NHC liabilities and is cross-collateralized as mentioned above. NHC has advised the Company that an event of default has been declared on one approximately $32,000,000 loan which the Company guarantees. The lenders dispute the allocation of certain collateral between itself and another lending institution. It has advised the Company that it is in continuing negotiations with the lenders on curing the default. Thus, in the event NHC defaulted on its remaining obligations under its debt package, the Company could lose its interest in the Notes or the NHC Health Care Facilities, even if its own payments on the NHC Mortgage Debt were current. The Guaranteed Debt In order to obtain the consent of appropriate lenders to NHC's transfer of assets to NHI, NHI guaranteed the debt ($14,320,000 at December 31, 1999) of unrelated parties which NHC has also guaranteed. The debt is at fixed interest rates with a weighted average interest rate of 8.3% at December 31, 1999. NHI receives from NHC compensation of approximately $72,000 per annum for the guarantees which is credited against NHC's base rent requirements. Additionally, NHI has outstanding letters of credit for $9,580,000 of debt. NHI also has guaranteed bank loans in the amount of $1,447,700 to key employees and directors of the Company and NHC employees and directors utilized for the exercise of stock options. No fee is charged for these option exercise guarantees. In management's opinion, these guarantee fees approximate the guarantee fees that NHI would currently charge to enter into similar guarantees. All of the guaranteed indebtedness is secured by first mortgages, pledges of personalty, accounts receivable and, in certain instances, by the guarantees of the owners of the facilities. The borrower has granted second mortgages over the relevant properties in favor of NHC, and NHC has assigned its rights in such mortgages to NHI. Such rights may be enforced if either party is required to pay under their respective guarantees. NHC has agreed to indemnify and hold harmless NHI against any and all loss, liability or harm incurred by NHI as a result of having to perform under its guarantee of any or all of the guaranteed debt. Advisory Contracts A subsidiary of NHC, the Company's investment advisor, was retained by the Company in August 1999 to manage its eight New England properties. Additionally, effective February 1, 2000, the Company has transferred managerial control of its four Washington state properties pursuant to an advisory agreement with other subsidiaries of NHC. Details of these properties can be found in the section entitled "Foreclosure Properties". The advisory fee is substantially the same to that which NHI negotiated with a third party management company who operated the Washington state properties for approximately 16 months. Management Conflict of Interest Two of the five directors and all of the officers of the Company occupy positions with NHC, and therefore, there may be conflicts of interest in their duties to the NHC stockholders and Company stockholders. Although the Directors of the Company believe the terms of the NHC leases and the Advisory Agreement are fair and reasonable, not all of the terms of the leases or the Advisory Agreement are fair and reasonable, not all of the terms of the leases or the Advisory Agreement were negotiated on an arm's-length basis. The Company may purchase additional equity interests in real estate from, or make additional mortgage loans to, NHC. Since NHC will be the Company's investment advisor, it will have a conflict of interest in determining the price to be paid by the Company for additional assets which may be purchased from NHC and the terms of any leases to be entered into between the Company and NHC. Security Counsel to NHC also represents the Company on certain security matters. In the course of such representation, circumstances may arise in which NHC and the Company have conflicting interests, in which event separate counsel will be retained to represent one or both of the parties. Investment Advisor's Conflict of Interest The Company's Investment Advisor, NHC, is also serving as the Investment Advisor for National Health Realty, Inc. ("NHR") a separate health care real estate investment trust founded in December, 1997, by NHC. Although NHR is publicly traded on the American Stock Exchange, its investment activities are restricted by the terms of NHC's Advisory Agreement. NHR's Advisory Agreement provides that prior to the earlier to occur of (i) the termination, for any reason, of the Advisory Agreement or (ii) NHC ceasing to be actively engaged as the investment advisor for NHI, NHR will not (without the prior approval of NHI) transact business with any party, person, company or firm other than NHC. It is the intent of the foregoing restriction that NHR will not be actively or passively engaged in the pursuit of additional investment opportunities, but rather will focus upon its capacities as landlord and note holder of those certain assets conveyed to it upon its formation by NHC. Option Exercise Loan Guaranty Program The Company has implemented an option exercise loan guaranty program, the purpose of which is to facilitate Directors and key personnel exercising options to purchase NHI common stock. Pursuant to Board of Directors' resolution unanimously passed, each Director and Key Employee to whom options to purchase NHI common shares have been granted is eligible to obtain an NHI guaranty of up to $100,000 per year on loans made from commercial banking institutes, the proceeds of which are used to exercise NHI options. The guarantee is structured as follows: Option holders must pledge to NHI 125% of the loan amount in publicly traded stock as additional collateral for the guarantee; the option holder must personally guarantee the loan to the bank; the interest rate charged by the bank and all expenses pertaining to the loan are to be borne by the Director or Employee and the maximum outstanding amount of loan guarantees is $5,000,000. Furthermore, this facility is to have a one year term and be renewable at the Board's discretion. The table below indicates the current amount of loans outstanding by Directors of NHI individually and by all designated NHC employees collectively as of December 31, 1999.
Current Maximum Loan Loan Commercial Bank Outstanding Outstanding Originating Loan W. Andrew Adams $ -0- $ -0- -- Richard F. LaRoche, Jr. 100,000 200,000 SouthTrust Bank Jack Tyrrell -0- -0- -- Robert T. Webb -0- -0- -- Ted Welch -0- -0- -- Robert G. Adams -0- 100,000 SouthTrust Bank Olin O. Williams 50,000 50,000 SouthTrust Bank NHC Employees 1,437,699 1,654,333 SouthTrust Bank
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K FINANCIAL STATEMENTS AND SCHEDULES (a) The following documents are filed as part of this Report: 1. Financial Statements The Consolidated Financial Statements are included as Exhibit 13 and are filed as part of this report. 2. Financial Statement Schedules The Financial Statement Schedules and Report of Independent Public Accountants on Financial Statement Schedules listed in the Index to Financial Statements are filed as part of this Form 10-K. 3. Exhibits Exhibits required as part of this report are listed in the Exhibit Index. (b) Reports on Form 8-K. - Filed November 9, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Murfreesboro, State of Tennessee, on the 28th day of March, 2000. NATIONAL HEALTH INVESTORS, INC. BY: /s/ Richard F. LaRoche, Jr. Richard F. LaRoche, Jr. Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed on the dates indicated by the following persons in the capacities indicated.
Signature Title Date /s/ W. Andrew Adams President & Director March 28, 2000 W. Andrew Adams (Principal Executive Officer) /s/ Richard F. LaRoche, Jr. Secretary and Director March 28, 2000 Richard F. LaRoche, Jr. (Principal Financial Officer) /s/ Jack Tyrrell Director March 28, 2000 Jack Tyrrell /s/ Robert T. Webb Director March 28, 2000 Robert T. Webb /s/ Ted H. Welch Director March 28, 2000 Ted H. Welch
NATIONAL HEALTH INVESTORS, INC. FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999 EXHIBIT INDEX
Exhibit No. Description Page No. or Location 3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 to Form S-11 Registration Statement No. 33-41863 3.2 Bylaws Incorporated by reference to Exhibit 3.2 to Form S-11 Registration Statement No. 33-41863 4.1 Form of Common Stock Certificate Incorporated by reference to Exhibit 39 to Form S-11 Registration Statement No. 33-41863 4.2 Form of Preferred Convertible Incorporated by reference Stock Certificate to Exhibit 60 to Form S-3 Registration Statement No. 33-72370 4.3 Form of Debenture due 2006 Incorporated by reference (10%) to Exhibit 38 to Form S-11 Registration Statement No. 33-41863 4.4 Form of Indenture Governing Incorporated by reference the Debentures to Exhibit 4.3 to Form S-4 Registration Statement No. 33-41863 4.5 Form of Debenture due 2001 Incorporated by reference (7-3/4%) to Exhibit 4.3 to Form S-3 Registration Statement No. 33-85398 4.6 Form of Debenture due 2006 Incorporated by reference (7%) to Exhibit 1 to Form S-3 Registration Statement No. 33-72370 4.7 First Supplemental Indenture Incorporated by reference Dated December 15, 1995 to Exhibit 4.7 to Form 10-K dated February 26, 1996
NATIONAL HEALTH INVESTORS, INC. FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999 EXHIBIT INDEX (Continued)
Exhibit No. Description Page No. or Location 10 Materials Contracts Incorporated by reference from Exhibits 10.1 thru 10.9 to Form S-4 Registration Statement No. 33-41863 10.12 1991 Stock Option Plan Incorporated by reference from Exhibit 10.12 to Form S-4 Registration No. 33-41863 1997 Stock Option Plan Incorporated by reference from the 1997 Proxy Statement as filed 13 Report of Independent Public Filed Herewith Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity Notes to Consolidated Financial Statements Financial Statement Schedules 23 Consent of Independent Public Filed Herewith Accountants 27 Financial Data Schedule (for SEC purposes only)
EXHIBIT 13 NATIONAL HEALTH INVESTORS, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Financial Statements Report of Independent Public Accountants Consolidated Balance Sheets-December 31, 1999 & 1998 Consolidated Statements of Income-For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows-For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity-For the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Financial Statements Schedules Report of Independent Public Accountants on Financial Statement Schedules Schedule II Valuation and Qualifying Accounts Schedule III Real Estate and Accumulated Depreciation Schedule IV Mortgage Loans on Real Estate All other schedules are not submitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto. The 1999 consolidated financial statements, together with the Report of Independent Public Accountants, listed in the above index are filed herewith. NATIONAL HEALTH INVESTORS, INC. Report of Independent Public Accountants To National Health Investors, Inc.: We have audited the accompanying consolidated balance sheets of National Health Investors, Inc. (a Maryland corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 1999, 1998 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Health Investors, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Nashville, Tennessee January 18, 2000 NATIONAL HEALTH INVESTORS, INC. Consolidated Balance Sheets (In thousands, except share amounts)
December 31 1999 1998 Assets Real estate properties: Land $ 31,875 $ 22,649 Buildings and improvements 340,966 267,962 Construction in progress 567 798 373,408 291,409 Less accumulated depreciation (57,387) (45,871) Real estate properties, net 316,021 245,538 Mortgage and other notes receivable, net 316,454 394,174 Investment in preferred stock 38,132 38,132 Investments in real estate mortgage investment conduits 37,670 36,861 Cash and cash equivalents 16,723 20,407 Marketable securities 49,650 26,797 Accounts receivable 10,714 4,542 Deferred costs and other assets 3,181 2,747 Total Assets $788,545 $769,198 Liabilities and Deferred Income Long-term debt $172,870 $151,559 Credit facilities 88,000 58,500 Convertible subordinated debentures 95,741 100,096 Accounts payable and other accrued expenses 7,228 1,696 Accrued interest 6,412 6,463 Dividends payable 18,033 18,030 Deferred income 7,621 8,194 Total Liabilities and Deferred Income 395,905 344,538 Commitments and guarantees Stockholders' Equity Cumulative convertible preferred stock, $.01 par value; 10,000,000 shares authorized; 748,694 and 768,894 shares, respectively, issued and outstanding; stated at liquidation preference of $25 per share 18,717 19,222 Common stock, $.01 par value; 40,000,000 shares authorized; 24,382,987 and 24,364,391 shares, respectively, issued and outstanding 244 244 Capital in excess of par value 425,963 425,449 Cumulative net income 394,165 340,547 Cumulative dividends (431,282) (357,518) Unrealized losses on marketable securities (15,167) (3,284) Total Stockholders' Equity 392,640 424,660 Total Liabilities and Stockholders' Equity $788,545 $769,198
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. NATIONAL HEALTH INVESTORS, INC.
Consolidated Statements of Income (In thousands, except share amounts) Year Ended December 31 1999 1998 1997 Revenues: Mortgage interest income $ 49,049 $ 56,958 $ 67,473 Rental income 45,993 42,268 39,948 Investment interest and other income 11,810 7,326 3,989 Facility operating revenue 24,306 --- --- 131,158 106,552 111,410 Expenses: Interest 25,596 19,112 22,219 Depreciation of real estate 11,485 8,955 8,036 Amortization of loan costs 743 688 836 General and administrative 3,275 3,892 3,700 Loan loss expense 13,800 4,260 1,231 Facility operating expenses 22,641 --- --- 77,540 36,907 36,022 Net income 53,618 69,645 75,388 Dividends to preferred stockholders 1,633 1,676 1,916 Net income applicable to common stock $ 51,985 $ 67,969 $ 73,472 Net income per common share: Basic $ 2.13 $ 2.72 $ 3.01 Diluted 2.13 2.69 2.92 Weighted average common shares outstanding: Basic 24,365,027 24,964,047 24,394,044 Diluted 24,367,529 28,689,192 28,887,987
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. NATIONAL HEALTH INVESTORS, INC.
Consolidated Statements of Cash Flows (In thousands) Year Ended December 31 1999 1998 1997 Cash flows from operating activities: Net income $ 53,618 $ 69,645 $ 75,388 Depreciation of real estate 11,485 8,955 8,036 Provision for loan losses 13,800 4,260 1,231 Amortization of loan costs 743 688 836 Interest on debenture conversion --- 324 300 Deferred income 1,095 1,906 1,495 Amortization of deferred income (1,668) (2,022) (2,370) Amortization of bond discount on held to maturity marketable securities (1,563) --- --- (Increase) decrease in accounts receivable (8,382) 643 197 Increase in other assets (1,177) (2) (25) Increase in accounts payable and accrued liabilities 5,482 531 4,848 Net cash provided by operating activities 73,433 84,928 89,936 Cash flows from investing activities: Investment in mortgage notes receivable (22,163) (67,564) (115,876) Collection of mortgage notes receivable 16,287 3,872 7,695 Prepayment of mortgage notes receivable --- 93,891 181,212 Acquisition of and construction of property and equipment, net (14,318) (40,724) (23,848) Investment in preferred stock --- (38,132) --- Investment in marketable securities, net (33,173) (30,081) --- Net cash provided by (used in) investing activities (53,367) (78,738) 49,183 Cash flows from financing activities: Repayment of credit facilities --- --- (151,000) Proceeds from credit facilities 29,500 58,500 92,000 Proceeds from long-term debt 25,773 243 99,756 Principal payments on long-term debt (4,462) (4,343) (104,105) Proceeds from (payments on) convertible subordinated debentures (800) (40) 60,000 Financing costs paid --- --- (2,671) Dividends paid to stockholders (73,761) (75,759) (73,577) Sale of stock and exercise of stock options --- 1,953 1,993 Repurchase of common stock --- (31,252) --- Net cash used in financing activities (23,750) (50,698) (77,604) Increase (decrease)in cash and cash equivalents (3,684) (44,508) 61,515 Cash and cash equivalents, beginning of period 20,407 64,915 3,400 Cash and cash equivalents, end of period $ 16,723 $ 20,407 $ 64,915
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. NATIONAL HEALTH INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share amounts)
Cumulative Convertible Capital in Unrealized Total Preferred Stock Common Stock Excess of Cumulative Cumulative Losses on Mar- Stockholders' Shares Amount Shares Amount Par Value Net Income Dividends ketable Sec. Equity BALANCE AT 12/31/96 1,050,122 $ 26,253 23,474,751 $235 $395,204 $195,514 $(207,523) $ --- $409,683 Net income --- --- --- --- --- 75,388 --- --- 75,388 Shares sold --- --- 61,999 1 1,992 --- --- --- 1,993 Shares issued in conversion of convertible debentures to common stock --- --- 1,020,926 10 31,530 --- --- --- 31,540 Shares issued in con- version of preferred stock to common stock (216,458) (5,411) 195,894 2 5,409 --- --- --- --- Dividends to common share- holders($2.960 per share) --- --- --- --- --- --- (72,608) --- (72,608) Dividends to preferred share- holders($2.125 per share) --- --- --- --- --- --- (1,916) --- (1,916) BALANCE AT 12/31/97 833,664 20,842 24,753,570 248 434,135 270,902 (282,047) --- 444,080 Net income --- --- --- --- --- 69,645 --- --- 69,645 Unrealized losses on marketable securities --- --- --- --- --- --- --- (3,284) (3,284) Total comprehensive income 66,361 Shares sold --- --- 66,973 1 1,952 --- --- --- 1,953 Common shares repurchased --- --- (1,122,075) (12) (31,240) --- --- --- (31,252) Shares issued in conversion of convertible debentures to common stock --- --- 607,327 6 18,983 --- --- --- 18,989 Shares issued in con- version of preferred stock to common stock (64,770) (1,620) 58,596 1 1,619 --- --- --- --- Dividends to common share- holders($2.960 per share) --- --- --- --- --- --- (73,795) --- (73,795) Dividends to preferred share- holders ($2.125 per share) --- --- --- --- --- --- (1,676) --- (1,676) BALANCE AT 12/31/98 768,894 19,222 24,364,391 244 425,449 340,547 (357,518) (3,284) 424,660 Net income --- --- --- --- --- 53,618 --- --- 53,618 Unrealized losses on market- able securities --- --- --- --- --- --- --- (11,883) (11,883) Total comprehensive income 41,735 Shares issued in conversion of convertible debentures to common stock --- --- 316 --- 9 --- --- --- 9 Shares issued in con- version of preferred stock to common stock (20,200) (505) 18,280 --- 505 --- --- --- --- Dividends to common share- holders ($2.960 per share) --- --- --- --- --- --- (72,131) --- (72,131) Dividends to preferred share- holders ($2.125 per share) --- --- --- --- --- --- (1,633) --- (1,633) BALANCE AT 12/31/99 748,694 $ 18,717 24,382,987 $244 $425,963 $394,165 $(431,282) $(15,167) $392,640
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998, and 1997 Note 1. Organization National Health Investors, Inc. ("NHI" or the "Company") is a Maryland real estate investment trust that was incorporated on July 24, 1991. The majority of NHI's revenue is derived from interest income on mortgage loans and from rent generated on leased properties. NHI invests in health care properties including long-term care centers, acute care hospitals, medical office buildings, assisted living facilities and retirement centers. These properties are located throughout the United States and are operated by qualified health care providers. Note 2. Summary of Significant Accounting Policies Basis of Presentation - The consolidated financial statements include the accounts of NHI and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Use of Estimates - 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. Real Estate Properties - NHI records properties at cost, including capitalized interest during construction periods. NHI uses the straight-line method of depreciation for buildings and improvements over their estimated remaining useful lives of up to 40 years. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), NHI evaluates the recoverability of the carrying values of its properties on a property by property basis. NHI reviews its properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment is based on estimated future cash flows from a property compared to the carrying value of that property. If recognition of an impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property. Allowance for Loan Losses - The allowance for loan losses is considered adequate to cover potential losses on NHI's mortgage and other notes receivable. In accordance with Statement of Financial Accounting Standards No. 114, "Accounting for Creditors for Impairment of a Loan - An Amendment of FASB Statements No. 5 and 15," the allowance is determined on a specific loan basis and is based on an evaluation of the estimated collectibility of loan payments and general economic conditions. Cash Equivalents - Cash equivalents consist of all highly liquid investments with a maturity of three months or less. Federal Income Taxes - NHI intends at all times to qualify as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Therefore, NHI will not be subject to federal income tax provided it distributes at least 95% of its annual real estate investment trust taxable income to its stockholders and meets other requirements to continue to qualify as a real estate investment trust. Accordingly, no provision for federal income taxes has been made in the financial statements. NHI's failure to continue to qualify under the applicable REIT qualification rules and regulations would have a material adverse impact on the financial position, results of operations and cash flows of NHI. The primary difference between NHI's tax basis and the reported amounts of NHI's assets and liabilities is a higher tax basis than book basis in its real estate properties by approximately $13,050,000 and in mortgage and other notes receivable (by approximately $10,422,000). Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported for financial reporting purposes due primarily to differences in the basis of assets, differences in recognition of commitment fees, differences in the estimated useful lives used to compute depreciation expense and differences in the treatment of accrued interest expense that existed at the time the debentures were converted to common stock. Concentration of Credit Risks - NHI's credit risks primarily relate to cash and cash equivalents, to the investments in real estate mortgage investment conduits and to mortgage and other notes receivable. Cash and cash equivalents are primarily held in bank accounts and overnight investments. The investments in real estate mortgage investment conduits relate to a participating interest in two real estate mortgage investment conduits as discussed in Note 8. Mortgage and other notes receivable relate primarily to secured loans with health care facilities as discussed in Note 4. NHI's financial instruments, principally its investments in the real estate mortgage investment conduits and notes receivable, are subject to the possibility of loss of the carrying values as a result of either the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instruments less valuable. NHI obtains various collateral and other protective rights, and continually monitors these rights in order to reduce such possibilities of loss. NHI evaluates the need to provide for reserves for potential losses on its financial instruments based on management's periodic review of its portfolio on an instrument by instrument basis. See Notes 4 and 8 for additional information on the notes receivable and real estate mortgage investment conduits. NHI's investments in marketable securities include available for sale securities and held to maturity securities. Unrealized gains and losses on available for sale securities are recorded in stockholders' equity in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Deferred Costs - Costs incurred to acquire financings are amortized by the interest method over the term of the related debt. Other Assets - Other assets include NHI's $300,000 investment in Summerfield Development LLC ("Summerfield"). Summerfield is a related party of NHI, since certain members of NHI's management and board of directors are also members of Summerfield. NHI carries its investment in Summerfield at cost in the consolidated balance sheets. Loan Commitment Fees - Non-refundable loan commitment fees received by NHI are amortized into income by the interest method over the expected period of the related loans. In the event that a potential borrower chooses not to borrow funds from NHI, the related commitment fees are recognized into income when the commitment expires. In management's opinion, these loan commitment fees approximate the loan commitment fees that NHI would currently charge to enter into similar agreements based on the terms of the agreements and the creditworthiness of the parties, and the committed interest rates are approximately the same as current levels of interest rates. Rental Income - Rental income is recognized by NHI based on the terms of NHI's leases. Mortgage Interest Income - Mortgage interest income is recognized by NHI based on the interest rates and principal amounts outstanding of the mortgage notes receivable. Under certain of its mortgages, NHI receives contingent interest, which is based on the increase in the current year revenues of a borrower over a base year. NHI recognizes contingent interest income annually when, based on the actual revenues of the borrower, receipt of such income is assured. Mortgage interest income includes prepayment penalties, which are recognized into income upon prepayment of notes receivable. The Company's policy related to mortgage interest income on nonperforming mortgage loans is to not recognize unpaid mortgage interest income in excess of 90 days. Note 3. Real Estate Properties The following table summarizes NHI's real estate properties by type of facility and by state as of December 31, 1999:
Buildings, Number Improvements & Mortgage of Construction Accumulated Notes Facility Type and State Facilities Land in Progress Depreciation Payable (Dollar amounts in thousands) Long-Term Care: Alabama 2 $ 95 $ 5,165 $ 1,833 $ 441 Arizona 1 453 6,678 506 2,765 Florida 10 3,503 62,208 8,787 9,582 Georgia 1 52 865 496 141 Idaho 2 365 6,824 614 --- Kentucky 3 201 2,899 1,272 --- Massachusetts 4 1,189 16,034 477 --- Missouri 5 1,171 23,072 7,055 14,509 New Hampshire 3 1,483 20,060 588 --- South Carolina 3 572 11,543 4,420 5,556 Tennessee 21 2,118 45,061 15,061 10,384 Virginia 1 176 2,511 842 3,535 Washington 4 1,881 12,148 461 --- Total Long-Term Care 60 13,259 215,068 42,412 46,913 Acute Care: Kentucky 1 540 6,961 1,498 --- Total Acute Care 1 540 6,961 1,498 --- Medical Office Buildings: Florida 1 170 3,349 806 --- Illinois 1 --- 1,925 72 --- Kentucky 1 23 3,667 838 --- Louisiana 1 --- 3,487 878 --- Texas 2 631 9,676 1,446 --- Utah 1 223 6,886 1,713 --- Total Medical Office Buildings 7 1,047 28,990 5,753 --- Assisted Living: Arizona 4 1,757 13,622 311 --- Florida 4 7,095 33,044 2,519 --- New Hampshire 1 218 2,962 86 --- New Jersey 1 4,229 13,030 1,440 --- South Carolina 1 344 2,879 69 --- Tennessee 3 874 7,061 150 --- Texas 1 2,094 9,091 957 --- Total Assisted Living 15 16,611 81,689 5,532 --- Retirement Centers: Missouri 1 354 3,181 968 --- Tennessee 2 64 5,644 1,224 457 Total Retirement Centers 3 418 8,825 2,192 457 Total 86 $31,875 $341,533 $57,387 $47,370
All Seasons Living Centers In 1994, NHI funded a mortgage loan for All Seasons Living Centers in the original principal amount of $15,000,000. Collateral for the loan included first mortgages on four long-term health care facilities and a leasehold mortgage on two additional properties, all located in the State of Washington. On October 16, 1998, NHI purchased from All Seasons Living Centers for approximately $13,700,000 (the then current loan balance) all of the real estate, property and equipment of the four long term health care facilities described above (502 beds), but excluding the two leasehold properties. The purchase was undertaken in lieu of foreclosure after certain technical defaults on NHI's loan agreements and after the death of the principal owner. Sunrise Healthcare Corporation, a subsidiary of Sun Healthcare Group, Inc., has been engaged by NHI to manage the facilities. Iatros Health Network In 1996, NHI funded mortgage loans for Heartland Healthcare Corporation in the original principal amount of $25,805,500. In 1997, NHI funded mortgage loans for Buckley Nursing Home, Inc. and Greenfield Associates Real Estate Trust in the original principal amount of $10,000,000, and for OHI Realty Limited Partnership I OHI Corporation d/b/a Oasis Healthcare in the original principal amount of $8,300,000. Phoenix Healthcare Corp. (formerly Iatros Health Network) and its subsidiary, OHI Corporation, which did business as Oasis Healthcare, were the manager and guarantor of all facilities securing these loans. Collateral for the loans included first mortgages on seven long-term health care facilities and one retirement center located in the states of Massachusetts and New Hampshire, the corporate guarantee of Phoenix Healthcare Corp., and certain accounts receivable. In May 1999, NHI declared the borrowers in default under the terms of the loan agreements. The events of default included the violation of the financial covenants contained in the loan agreement and the failure to make timely payments of principal and interest. On August 10, 1999, NHI purchased from the borrowers for approximately $41,800,000, (the then current loan balance) all of the real estate, property and equipment of the seven long-term health care facilities and the retirement center. The purchase was undertaken in lieu of foreclosure. NHI has engaged a subsidiary of National HealthCare Corporation to manage the facilities. Stockbridge Investment Partners, Inc. In 1993, NHI funded a mortgage loan for Stockbridge Investment Partners, Inc. and its subsidiary York Hannover Nursing Centers, Inc. in the original principal amount of $29,500,000. Collateral for the loan included first mortgages on six long-term health care centers located in the state of Florida, the personal guarantee of certain of the owners, certain accounts receivable balances above another creditor's $2,000,000 loan, and the corporate guarantee of NHC for up to $5,000,000 of principal and interest. On December 30, 1999, NHI purchased from the borrowers for approximately $25,900,000 (the then current loan balance) all of the real estate, property and equipment of the six long-term health care facilities. NHI also received on December 30, 1999, the accounts receivable of the facilities approximating $2,200,000 as consideration for unpaid interest on the mortgage loan. The purchase was undertaken in lieu of foreclosure. NHI is treating each of the properties described above as foreclosure property for federal income tax purposes. With this election, unqualified income generated by the properties is expected to be treated as qualified income for up to two years from the purchase date for purpose of the income- source tests that must be satisfied by real estate investment trusts to maintain their tax status. Note 4. Mortgage and Other Notes Receivable The following is a summary of mortgage and other notes receivable by type: December 31 1999 1998 Mortgage loans $321,722,000 $380,417,000 Construction loans 1,617,000 17,965,000 Term loans 3,537,000 3,618,000 326,876,000 402,000,000 Loan loss allowance (10,422,000) (7,826,000) $316,454,000 $394,174,000 The following is a summary of the terms and amounts of mortgage and other notes receivable at December 31, 1999:
Final Number of Principal Payment Date Loans Payment Terms Amount Mortgage Loans: 2000 1 Monthly payments of $258,000, which include principal and interest at 11%. $ 23,699,000 2000 1 Loan participation agreement with SouthTrust Bank acquiring a 50% interest in six mortgage notes. Monthly payments averaging $195,000, which include interest at a variable rate equal to the London Interbank Offered Rate ("LIBOR") plus 2.2%. 25,696,000 2003 1 Monthly payments of $98,000, which include interest at 11%. Contingent interest related to the increase in certain lease payments of the facilities over a base year is paid annually. 9,347,000 2005 1 Monthly payments of $99,000, which include interest at 11.55%. The interest rate escalates annually by .1% per year. Contingent interest related to a percentage of the facilities' annual increase in revenue over a base year is due annually. 9,281,000 2006 1 Monthly payments of $209,000, which include interest at 10.65%, adjusted annually to include principal and interest at a rate equal to .15% above the previous year's rate 20,755,000 2007 1 Monthly payments of principal and interest of $501,000, which include interest at 10.5%. Contingent interest related to a percentage of the facilities' annual increase in revenue over a base year is due annually. 51,363,000 2007 1 Monthly payments of $91,000, which include interest at 10.5%. Contingent interest re- lated to a percentage of the facilities' annual increase in revenue over a base year is due annually. 9,282,000 2009 1 Monthly payments of $135,000, which include interest at 9.5%. Contingent interest related to a percentage of the facilities' annual increase in revenue over a base year is paid annually. 15,100,000 2009 1 Monthly payments of $188,000, which include interest at 10.25%. 19,952,000 2010 1 Monthly payments of $183,000, which include interest at 11.65%. The interest rate will escalate .1% per year through September 1, 2005, the anniversary date of the note. Effective September 1, 2005, the monthly payment will be adjusted to include interest at the greater of 12.25% or the rate that five-year United States securities yield plus 4.5%. 13,328,000 2000 - 2009 28 Monthly payments from $12,000 to $114,000, which include interest at 7.75% to 12.60%. Principal outstanding ranges from $326,000 to $7,832,000. 123,919,000 Construction Loan: 2010 1 Monthly payment of interest only at the rate of 10% during construction. The construction note will convert to a mortgage note at close of construction. 1,617,000 Term Loans: 2019 3 Monthly payments of $29,000, which include interest at 7.5%. 3,537,000 ----------- $326,876,000
The mortgage notes receivable are generally first mortgage notes secured by the real estate of long-term health care centers, medical office buildings, assisted living facilities and retirement centers in the states of Alabama, Arizona, Colorado, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, North Carolina, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin. The mortgage notes receivable are secured by first mortgages on the real property and UCC liens on the personal property of the facilities. Certain of the notes receivable are also secured by guarantees of significant parties and by cross-collateralization on properties with the same respective owner. Borrower Bankruptcy NHI was informed on November 4, 1999, that Lenox Healthcare, Inc. and its affiliates ("Lenox") have filed for Chapter 11 Bankruptcy protection in the United States Bankruptcy District Court in Wilmington, Delaware. NHI's loans may be impacted as follows: Zurich North America Capital Corporation - In 1996, NHI funded a mortgage loan for Zurich North America Capital Corporation in the original principal amount of $26,000,000. Collateral for the loan includes first mortgages on ten long-term health care facilities, the corporate guarantees of Lenox and Greylock Health Corporation, and certain personal guarantees. Lenox is the manager of the ten long-term health care facilities located in the states of Kansas and Missouri. At December 31, 1999, the net carrying value of the loan is approximately $21,700,000, which earns 11% interest. NHI has not received principal and interest payments on the loan since October 1999. NHI is currently evaluating the health care center portion of the collateral given the bankruptcy status of the manager and other circumstances affecting the centers but believes that the combined collateral supports the net carrying value of the mortgage. Pinellas Healthcare Investors, Inc. - In 1995, NHI funded a mortgage loan for Pinellas Healthcare Investors, Inc. in the original principal amount of $4,500,000. Lenox is the manager of the long-term health care facility located in the state of Florida. An affiliate of Lenox is the operator and lessee of the facility. Collateral for the loan includes a first mortgage on the facility, the corporate guarantee of Stockbridge Investment Partners, Inc., certain personal guarantees, and certain accounts receivable. Lenox notified NHI that its affiliate does not intend to honor its lease commitment. NHI is in the process of negotiating a management contract with a subsidiary of NHC to manage the facility. At December 31, 1999, the net carrying value of the loan is approximately $1,000,000, which earns $12.45% interest. NHI has not received principal and interest payments on these loans since August 1999 and discontinued interest income recognition on the loan on the same date. NHI is currently evaluating the health care center portion of the collateral given the bankruptcy status of the operator, disavowment of the lease, the condition of the physical plant, and other circumstances affecting the center. NHI believes that the combined collateral supports the net carrying value of the mortgage. Colonial Land Corporation - In 1996, NHI funded a mortgage loan for Colonial Land Corporation in the original amount of $25,000,000. Collateral for the loan includes first mortgages on six long-term health care facilities located in Virginia. Although Colonial Land Corporation is not included in the bankruptcy filing, Lenox manages three of the facilities, and Mr. Tom Clarke, the owner of Lenox, is also the owner of Colonial Land Corporation. At December 31, 1999, the net carrying value of the loan is approximately $19,200,000, which earns interest at 10.65%. NHI has not received principal and interest payments on the loan since November 1999. NHI is currently evaluating the health care portion of the collateral given the bankruptcy status of the manager and other circumstances affecting the centers but believes that the combined collateral supports the net carrying value of the mortgage. Other Entities Owned by Principals of Lenox - Not Affected by Lenox Bankruptcy - Although not impacted by the bankruptcy filing, Mr. Tom Clarke, the owner of Lenox, is involved as a principal in other entities financed by NHI. The carrying value of NHI's investments in these other entities is $12,640,000 at December 31, 1999. At the present time, NHI knows of no reason to assume that these entities will be negatively impacted by the Lenox filing or that any loss of income or asset value will occur. Loan Write-offs and Reserves During 1999, NHI wrote-off $10,000,000 of its mortgage notes receivable from the aforementioned Iatros Health Network, Pinellas Healthcare Investors, Inc. and Colonial Land Corporation. In addition, mortgage and other notes receivable are reduced by an allowance for loan losses of $10,422,000 at December 31, 1999 and $7,826,000 at December 31, 1998. The provision for loan losses in 1999, 1998, and 1997 was $13,800,000, $4,260,000, and $1,231,000 respectively, and has been recorded as loan loss expense in the consolidated statements of income. Note 5. Disclosures about Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Mortgage and other notes receivable - The fair value of NHI's mortgage and other notes receivable is estimated based on the current rates offered by NHI and other real estate investment trusts and financial institutions for the same or similar types of mortgage and other notes receivable of the same or similar maturities. Investment in preferred stock - The fair value is estimated based on the current rates offered by NHI and other real estate investment trusts for similar investments and is the same as the carrying amount. Investments in real estate mortgage investment conduits - The fair value of NHI's investments in real estate mortgage investment conduits is estimated based on the present value of the estimated cash flows discounted at a rate comparable to current rates offered by NHI and other real estate investment trusts for similar investments. Marketable securities - The fair market value is estimated based on quoted market prices and is the same as the carrying amount for securities available for sale. Accounts Receivable - The carrying amount approximates fair value because of the short term nature of these receivables. Cash and cash equivalents - The carrying amount approximates fair value because of the short maturity of these instruments. Long-term debt and credit facilities - The fair value of NHI's long-term debt and credit facilities is estimated based on the current rates offered to NHI and other real estate investment trusts for debt of the same remaining maturities. The fair value of the debt transferred from NHC to NHI is estimated to approximate the carrying value of the debt as NHC is obligated to pay NHI debt service rent. Convertible subordinated debentures - The fair value of NHI's 1997 debentures, 1995 debentures and senior debentures is estimated based on the quoted market prices of the debentures. Payables and accrued expenses - The carrying amount approximates fair value because of the short-term nature of these liabilities. The estimated fair values of NHI's financial instruments are as follows:
(in thousands) December 31 1999 1998 Carrying Fair Carrying Fair Amount Value Amount Value Mortgage and other notes receivable $ 316,454 $ 316,454 $ 394,174 $ 394,174 Investment in preferred stock 38,132 38,132 38,132 38,132 Investments in real estate mort- gage investment conduits 37,670 37,670 36,861 36,861 Marketable securities 49,650 45,798 26,797 26,797 Accounts receivable 10,714 10,714 4,542 4,542 Cash and cash equivalents 16,723 16,723 20,407 20,407 Long-term debt and credit facilities (260,870) (260,870) (210,059) (210,059) Convertible subordinated debentures (95,741) (40,868) (100,096) (72,562) Payables and accrued expenses (31,673) (31,673) (26,189) (26,189)
Note 6. Investment in Preferred Stock In September 1998, NHI purchased two million shares of the cumulative preferred stock of another real estate investment trust. The nonvoting preferred stock is convertible into common stock at a 1:1 ratio. The preferred stock has an annual cumulative coupon rate of 8.5% payable quarterly and a liquidation preference of $19.25 per share. The preferred stock is not redeemable by NHI or the issuer. The preferred stock, which is not listed on a stock exchange, is considered a nonmarketable security and is recorded at cost in the consolidated balance sheets. Amounts received from the 8.5% coupon rate are recorded as income when earned. Note 7. Investment in Marketable Securities NHI's investments in marketable securities include available for sale securities and held to maturity securities. Unrealized gains and losses on available for sale securities are recorded in stockholders' equity in accordance with SFAS 115. Realized gains and losses from securities sales are determined on the specific identification of the securities. Marketable securities consist of the following: (in thousands) December 31 1999 1998 ----------------- ------------------ Amortized Fair Amortized Fair Cost Value Cost Value Available for sale $43,835 $28,668 $22,042 $18,758 Held to maturity 20,982 17,130 8,039 8,039 $64,817 $45,798 $30,081 $26,797 NHI's available for sale marketable securities consist of the common stock of other publicly traded real estate investment trusts. None of these available for sale marketable securities have stated maturity dates. NHI's held to maturity marketable securities consist of corporate bonds, all of which mature in the next five years. Proceeds from the sale of investments in available for sale securities during the year ended December 31, 1999 were $804,000. Gross investment gains of $83,000 were realized on these sales during the year ended December 31, 1999. No sales of marketable securities occurred during 1998. Note 8. Investments in Real Estate Mortgage Investment Conduits On December 29, 1995, NHI purchased for $6,158,000 a participating interest in a real estate mortgage investment conduit ("REMIC") in the form of one class of certificates issued in the aggregate principal amount of $146,104,000 (the "1995 REMIC"). On November 9, 1993, NHI purchased for $34,196,000 a participating interest in a REMIC in the form of nine classes of certificates issued in the aggregate principal amount of $172,928,000 (the "1993 REMIC"). Both of the REMICs represent the entire beneficial ownership interest in a trust fund. Each trust fund consists of pools of mortgage loans, each secured by a first lien on a property which is used in providing long-term nursing care and certain other assets. A portion of the 1993 REMIC certificates are interest-only certificates and entitle NHI to receive cash flow designated as interest. Principal and interest distributions on other certificates purchased by NHI are subordinated to distributions of principal and interest with respect to certain other classes of certificates. Pursuant to SFAS 115, NHI has classified its investments in the certificates as held-to-maturity debt securities. Accordingly, the investments in the certificates have been recorded at the amortized cost in NHI's consolidated financial statements. The effective yields, as calculated, have been used to accrue income based on actual and projected future cash flows that reflect actual and assumed mortgage prepayments and interest rates. The average remaining lives of the mortgages in the 1995 REMIC and the 1993 REMIC are calculated to be 5.9 years and 3.8 years, respectively. NHI continually monitors the carrying values of the 1995 and 1993 REMIC investments based on actual cash payments received and revised cash flow projections that reflect updated assumptions about interest rates and prepayment rates. In the opinion of management, no impairments of the carrying values have occurred as of December 31, 1999. Note 9. Long-term Debt and Credit Facilities Long-Term Debt - Long-term debt and credit facilities, including refinancing commitments, consist of the following:
Weighted Average Final Principal Interest Rate Maturities Amount December 31 1999 1998 Bank credit facility, principal and Variable, interest payable quarterly 5.5% 2009 $ 20,592,000 $ 22,003,000 Senior secured notes, principal and interest payable semiannually 8.4 2005 10,993,000 12,825,000 Senior secured notes, principal and interest payable semiannually 8.3 2003 580,000 746,000 Senior unsecured line of credit agreement, payable in periodic installments of Variable, principal and interest 6.2 2000 88,000,000 58,500,000 Senior unsecured term loan, interest pay- able monthly, principal due at Variable, maturity 10.75 2004 500,000 --- Unsecured notes, interest payable semi- annually, principal due at maturity 7.3 2007 100,000,000 100,000,000 Unsecured term credit note, interest pay- Variable, able in periodic installments, principal due at maturity 7.2 2002 25,000,000 --- First mortgage notes, principal payable in periodic installments, interest payable monthly 5.0 2017 915,000 935,000 First mortgage revenue bonds, principal payable in periodic installments, Variable, interest payable monthly 4.6 2000-2014 14,290,000 15,050,000 $260,870,000 $210,059,000
NHI has established a senior unsecured revolving line of credit which allows it to borrow a maximum of $100,000,000. The agreement allows NHI to borrow up to two-thirds of its borrowing base, which consists primarily of NHI's mortgage notes receivable and REMIC investments. The loan bears interest at the prime rate or at a premium over the London Interbank Offered Rate ("LIBOR") at the option of NHI. The loan matures in October 2000. At December 31, 1999, NHI had borrowed $88,000,000 under this credit facility. On June 25, 1997, NHI received proceeds from the sale of $100,000,000 of 7.3% notes payable (the "Notes"), which mature on July 16, 2007 and have no sinking fund provisions. The Notes are general unsecured obligations of NHI and rank equally with NHI's other unsecured and subordinated debt. NHI agrees in the note indenture that it will limit liens on assets to certain percentages of tangible assets and that it will limit the issuance of new debt to certain multiples of capital or net worth. On October 11, 1995 and April 28, 1995, NHI entered into two five-year interest rate swap agreements. Pursuant to these agreements, NHI has exchanged certain variable interest rates on a $50,000,000 notional principal amount for a weighted average fixed rate of 6.5% per annum. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on variable rate long-term debt and credit facilities. The fair value of the swap agreements are not recognized in the consolidated financial statements as they are accounted for as hedges. Amounts payable under such agreements are accrued as an increase in interest expense. NHI is exposed to credit losses in the event of nonperformance by the counterparties to these agreements. NHI anticipates, however, that counterparties will be able to fully satisfy their obligations under the contracts. NHI does not obtain collateral or other security to support these agreements subject to credit risk but does monitor the credit standing of counterparties. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133, as amended by Statement of Financial Accounting Standards No. 137, "Deferral of the Effective Date of SFAS 133", is effective for fiscal quarters beginning after June 15, 2000. The impact of the adoption of SFAS 133 is not expected to have a material impact on NHI's results of operations or financial position. Substantially all real estate property and certain mortgage notes receivable are either pledged as collateral on the long-term debt and credit facilities or are subject to a negative pledge. The debt identified as bank credit facility was financed through NHC, National Health Corporation, ("National") and through the National Health Corporation Leveraged Employee stock Ownership Plan and Trust before being transferred to NHI with the creation of NHI in 1991. On July 30, 1999, National was notified by SunTrust Bank of Nashville, N.A., the Agent for itself and certain other lenders for the above-referenced loan, that as Agent it disputes the allocation of certain collateral between itself and another lending institution. National is actively negotiating for resolution of this dispute. In the event the dispute is not resolved, the Agent may call the loan into default. If the loan is called into default, payments by NHI to repay the loan may have a material adverse impact upon NHI's cash flows and liquidity. The debt identified as senior secured notes is cross-defaulted with other liabilities of NHC and its affiliates and is cross-collateralized to the extent of approximately $15,906,000 of debt. Thus, in the event NHC defaulted on its obligations under its debt packages, NHI could lose its interest in the related mortgage notes receivable or real estate properties. The aggregate principal maturities of all long-term debt and credit facilities, for the five years subsequent to December 31, 1999 are as follows: 2000 $92,574,000 2001 4,606,000 2002 30,952,000 2003 5,084,000 2004 5,886,000 Certain loan agreements require maintenance of specified operating ratios as well as specified levels of working capital and stockholders' equity by NHI and NHC. All such covenants have been met by NHI, and NHI believes all such covenants have been met by NHC. Note 10. Convertible Subordinated Debentures 1997 Debentures - On January 29, 1997, NHI issued $60,000,000 of 7% convertible subordinated debentures (the "1997 debentures") due on February 1, 2004. At December 31, 1999, 1997 debentures in the amount of $56,286,000 were outstanding. The 1997 debentures are convertible at the option of the holder into common stock of NHI at a conversion price of $37.50, subject to adjustment. During 1999, none of the 1997 debentures were converted. During 1998, $3,349,000 of the 1997 debentures were converted into 89,302 shares of common stock. NHI has reserved an additional 1,500,960 shares of common stock for 1997 debenture conversions. The 1997 debentures will not be redeemable prior to February 8, 2002 except in the event of certain tax-related events or to the extent necessary to preserve and protect NHI's status as a real estate investment trust. The debentures are subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company. Interest is payable semiannually on February 1 and August 1 of each year. 1995 Debentures - On December 12, 1995, NHI sold $45,000,000 of a total of $100,000,000 of 7.75% convertible subordinated debentures (the "1995 debentures") due on January 1, 2001. The remaining $55,000,000 were sold on January 15, 1996. At December 31, 1999, 1995 debentures in the amount of $38,060,000 were outstanding. The 1995 debentures are convertible at the option of the holder into common stock of NHI at a conversion price of $31.625, subject to adjustment. During 1999 and 1998, $10,000 and $9,352,000, respectively, of the 1995 debentures were converted into 316 and 295,711 shares of common stock. NHI has reserved an additional 1,203,478 shares of common stock for 1995 debenture conversions. The 1995 debentures will not be redeemable prior to maturity except in the event of certain tax-related events or to the extent necessary to preserve and protect NHI's status as a real estate investment trust. The debentures are subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company. Interest is payable semiannually on January 1 and July 1 of each year. 1995 Debt Service Debentures - In November 1995, NHI began offering 7% subordinated convertible debentures due on January 1, 2006. NHI may offer up to $25,000,000 of these debentures to current and future mortgagees and lessees of NHI to satisfy existing debt service reserve escrow requirements under applicable mortgages or leases. During 1999, $4,347,000 of the debentures were redeemed. At December 31, 1999, debentures in the amount of $1,190,000 were outstanding. The debentures are convertible at the option of the holder into common stock of NHI at a conversion price of 110% of the market price on the date of issuance of the debentures, subject to adjustment. During 1999, none of the debentures were converted into common stock. During 1998, $871,000 of the debentures were converted into 26,393 shares of common stock. NHI has reserved 32,740 shares of common stock for conversion of 1995 debt service debentures. Interest is payable semiannually on April 1 and October 1 of each year. Senior Debentures - On October 17, 1991, NHI issued $110,000,000 of 10% senior convertible subordinated debentures (the "senior debentures") due 2006. At December 31, 1999, senior debentures in the amount of $205,000 were outstanding. The senior debentures are convertible at the option of the holder into NHI's common stock at a price of $20 per share, subject to adjustment. In 1999, none of the senior debentures were converted. In 1998, $25,000 of the senior debentures were converted into 1,250 shares of common stock. NHI has reserved an additional 10,250 shares of common stock for senior debenture conversions. The senior debentures rank equally with other unsecured debt of NHI (other than the trade debt) but are subordinated to all existing and secured indebtedness. NHI may not incur or guarantee unsecured indebtedness which is senior in right of payment to the senior debentures. Interest at 10% is payable semiannually on January 1 and July 1 of each year. Note 11. Commitments and Guarantees At December 31, 1999, NHI was committed, subject to due diligence and financial performance goals, to fund approximately $9,000,000 in health care real estate projects, of which $7,000,000 is expected to be funded within the next 12 months. The commitments include mortgage loans for two long-term health care centers, one medical office building, and three assisted living facilities, all at rates ranging from 9% to 11.5%. Included in the $9,000,000 of commitments is a commitment to loan an additional $2,000,000 on one existing loan when the mortgagee obtains certain operating ratios. In order to obtain the consent of appropriate lenders to NHC's transfer of assets to NHI, NHI guaranteed certain debt ($14,320,000 at December 31, 1999) of NHC and its affiliates. The debt is at fixed interest rates with a weighted average interest rate of 8.3% at December 31, 1999. NHI receives from NHC compensation of approximately $72,000 per annum for the guarantees which is credited against NHC's base rent requirements. In management's opinion, these guarantee fees approximate the guarantee fees that NHI would currently charge to enter into similar guarantees. All of the guaranteed indebtedness discussed above is secured by first mortgages and rights which may be enforced if either party is required to pay under their respective guarantees. NHC has agreed to indemnify and hold harmless NHI against any and all loss, liability or harm incurred by NHI as a result of having to perform under its guarantee of any or all of the guaranteed debt. Additionally, NHI has outstanding letters of credit totaling $9,580,000. NHI also has guaranteed bank loans in the amount of $1,447,700 to key employees and directors utilized for the exercise of stock options. All shares of NHI stock purchased with the proceeds of the guaranteed loans are held as collateral by NHI and the loans are limited to $100,000 per individual per year. NHI's potential accounting loss related to these guaranteed bank loans, if all collateral failed, is the face amount of the guaranteed loans outstanding. NHI is aware of certain income tax contingencies with regards to limitations on ownership of its stock and to its use of an independent contractor to mange certain of its foreclosure properties. In order to fully resolve the contingencies, NHI is in the process of requesting from the Internal Revenue Service ("IRS") closing agreements regarding each of these contingencies. NHI's management, based on its discussions with its legal counsel, understands that other real estate investment trusts have been successful in obtaining closing agreements with the IRS regarding real estate investment trust qualification issues. However, it is possible that the IRS will not rule in favor of NHI. Such an unfavorable ruling could result in the assessment of taxes, penalties and interest by the IRS that are material to NHI's financial statements taken as a whole and could also result in the loss of NHI's status as a real estate investment trust, which would have a significant adverse impact on the financial position, results of operations and cash flows of NHI. Note 12. Cumulative Convertible Preferred Stock In February and March 1994, NHI issued $109,558,000 of 8.5% cumulative convertible preferred stock ("Preferred Stock") with a liquidation preference of $25 per share. Dividends at an annual rate of $2.125 are cumulative from the date of issuance and are paid quarterly. The Preferred Stock is convertible into NHI common stock at the option of the holder at any time at a conversion price of $27.625 per share of common stock, which is equivalent to a conversion rate of 0.905 per share of common stock for each share of Preferred Stock, subject to adjustment in certain circumstances. The Preferred Stock is not redeemable for cash, but effective February 15, 1999, the Preferred Stock is redeemable by NHI for common stock. NHI may redeem the Preferred Stock only if the trading price of the common stock on the New York Stock Exchange ("NYSE") exceeds $27.625 per share for 20 trading days within a period of 30 trading days prior to the exercise. At December 31, 1999, 748,694 shares of the Preferred Stock, which are convertible into 677,568 shares of common stock, are outstanding. During 1999 and 1998, respectively, 20,200 and 64,770 shares of Preferred Stock were converted into 18,280 and 58,596 shares of common stock. NHI has reserved 677,568 shares of common stock for Preferred Stock conversions. Note 13. Limits on Common Stock Ownership On October 16, 1996, the NHI Board of Directors, pursuant to powers granted by the Company's charter, changed the limit on the percentage of ownership which any person may have in the outstanding common stock of the Company from a limit of 7.0% to a limit of 9.9%. The limit on ownership of any other class of stock (including issues convertible into common stock) remains at 9.9% of the outstanding stock. This limit is a provision of the Company's charter and is necessary in order to reduce the possibility of the Company's failing to meet the stock ownership requirements for qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended. Note 14. Stock Option Plan NHI has stock option plans which provide for the granting of options to key employees and directors of NHI to purchase shares of common stock at a price no less than the market value of the stock on the date the option is granted. The options may be exercised immediately, but the Company may purchase the shares at the grant price if employment is terminated prior to six years from the date of grant. The maximum term of the options is five years. The following table summarizes option activity:
Weighted Average Number of Exercise Options Outstanding Shares Price Outstanding December 31, 1996 100,712 $26.75 Options granted 194,000 36.00 Options exercised 39,365 29.78 Outstanding December 31, 1997 255,347 33.31 Options granted 45,000 39.88 Options exercised and canceled 79,213 28.42 Outstanding December 31, 1998 221,134 36.40 Options granted 190,000 16.81 Options expired 1,000 28.75 Outstanding December 31, 1999 410,134 $27.34
At December 31, 1999, all options outstanding are exercisable. Exercise prices on the exercisable options range from $14.50 to $39.88. The weighted average remaining contractual life of options outstanding at December 31, 1999 is 3.4 years. NHI has reserved 577,347 shares of common stock for issuance under the stock option plans. NHI has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As a result, no compensation cost has been recognized for NHI's stock option plans. Based on the number of options outstanding and the historical and expected future trends of factors affecting valuation of those options, management believes that the additional compensation cost, as calculated in accordance with SFAS 123, has no effect on NHI's earnings per share. Note 15. Supplemental Cash Flow Information Supplemental disclosure of cash flow information is as follows:
(in thousands, except share amounts) Year Ended December 31 1999 1998 1997 Cash payments for interest expense $ 21,299 $ 16,451 $ 13,577 During 1999, 1998 and 1997, $10,000, $18,902,000 and $31,697,000, respectively, of convertible subordinated debentures were converted into 316 shares, 607,327 shares and 1,020,926 shares, respectively, of NHI's common stock: Convertible subordinated debentures $ (8) $(18,902) $ (31,697) Financing costs --- 237 457 Accrued interest (1) (324) (300) Common stock --- 6 10 Capital in excess of par value 9 18,983 31,530 During 1999 and 1998, NHI acquired property and equipment in ex- change for NHI's rights under mortgage notes receivable Mortgage and other notes receivables $ 67,650 $ 13,700 $ --- Land (4,091) (1,881) --- Buildings and improve- ments (63,559) (11,819) --- During 1999, NHI redeemed certain 1995 Debt Service Debentures and applied those debentures against mortgage notes re- ceivable Mortgage notes re- ceivable $ 3,547 $ --- $ --- Convertible sub- ordinated de- bentures (3,547) --- ---
Note 16. Earnings Per Share Basic earnings per share is based on the weighted average number of common shares outstanding during the year. Net income is reduced by dividends to holders of cumulative convertible preferred stock. Diluted earnings per share assumes the conversion of convertible subordinated debentures, the conversion of cumulative convertible preferred stock and the exercise of stock options using the treasury stock method. Net income is increased for interest expense on the convertible subordinated debentures. The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per share:
Year Ended December 31 1999 1998 1997 BASIC: Weighted average common shares 24,365,027 24,964,047 24,394,044 Net income $53,618,000 $69,645,000 $75,388,000 Dividends paid to preferred stockholders (1,633,000) (1,676,000) (1,916,000) Net income available to common stockholders $51,985,000 $67,969,000 $73,472,000 Net income per common share $ 2.13 $ 2.72 $ 3.01 DILUTED: Weighted average common shares 24,365,027 24,964,047 24,394,044 Stock options 2,502 13,302 36,897 Convertible subordinated debentures --- 2,990,904 3,621,812 Cumulative convertible pre- ferred stock --- 720,939 835,234 Average common shares outstanding 24,367,529 28,689,192 28,887,987 Net income $53,618,000 $69,645,000 $75,388,000 Dividends paid to pre- ferred stockholders (1,633,000) --- --- Interest expense on con- vertible subordinated debentures --- 7,594,000 9,046,000 Net income assuming con- version of convertible subordinated debentures to common stock $51,985,000 $77,239,000 $84,434,000 Net income per common share $ 2.13 $ 2.69 $ 2.92
For the year ended December 31,1999, convertible subordinated debentures and convertible preferred stock were convertible into 2,822,553 and 695,480 incremental shares, respectively. In accordance with SFAS 128, these incremental shares were excluded from the computation of diluted earnings per share, since inclusion of these incremental shares in the calculation would have been anti-dilutive. Note 17. Dividends Dividend payments by NHI to its common stockholders are characterized in the following manner for tax purposes in 1999:
Dividend Taxable Non-Taxable Payment as Ordinary Taxable as Return of Date Income Capital Gains Capital Totals May 10, 1999 $ .6656 $--- $.0744 $ .74 Aug. 10, 1999 .6656 --- .0744 .74 Nov. 10, 1999 .6656 --- .0744 .74 Jan. 31, 2000 .2552 --- .4848 .74 $2.2520 $--- $.7080 $2.96
Note 18. Relationship with National HealthCare Corporation Leases - On October 17, 1991, concurrent with NHC's conveyance of real property to NHI, NHI leased to NHC 40 long-term care facilities and three retirement centers. Each lease is for an initial term expiring December 31, 2001, with two additional five-year renewal terms at the option of NHC, assuming no defaults. NHI accounts for its leases as operating leases. During the initial term of the first renewal term, NHC is obligated to pay annual base rent on all 43 facilities of $15,238,000. If NHC exercises its option to extend the leases for a second renewal term, the base rent will be the then fair rental value as negotiated by NHI and NHC. The leases also obligate NHC to pay as debt service rent all payments of interest and principal due under each mortgage to which the conveyance of the facilities was subject. Payments for debt still being serviced are required for the shorter of the remaining life of the mortgage or lease term. In addition to base rent and debt service rent, in each year after 1992, NHC must pay percentage rent to NHI equal to 3% of the amount by which gross revenue of each facility in such later year exceeds the gross revenue of such facility in 1992. Each lease with NHC is a "triple net lease" under which NHC is responsible for paying all taxes, utilities, insurance premium costs, repairs and other charges relating to the ownership of the facilities. NHC is obligated at its expense to maintain adequate insurance on the facilities' assets. NHC has a right-of-first refusal with NHI to purchase any of the initial properties transferred from NHC should NHI receive an offer from an unrelated party during the term of the lease or up to 180 days after termination of the related lease. Rental income was $45,993,000 ($30,735,000 from NHC) in 1999; $42,268,000 ($31,732,000 from NHC) in 1998; and $39,948,000 ($29,829,000 from NHC) in 1997. During 1997, NHI purchased $23,375,000 of additional property from NHC. This property represents capital improvements at 15 long-term care centers owned by NHI and leased to NHC. Additional base rent equal to 9.5% of the amount transferred is paid annually by NHC. At December 31, 1999, the future minimum lease payments to be received by NHI under its operating leases, including debt service payments which are based on interest rates in effect at December 31, 1999, are as follows: NHC Others Total 2000 $29,652,000 $ 15,077,000 $ 44,729,000 2001 29,504,000 15,201,000 44,705,000 2002 -0- 14,783,000 14,783,000 2003 -0- 14,539,000 14,539,000 2004 -0- 14,673,000 14,673,000 Thereafter -0- 105,779,000 105,779,000 NHC has stated in its financial statements that it is a defendant in a lawsuit filed under the Qui Tam provisions of the Federal False Claims Act. The outcome of this pending lawsuit could have a material adverse impact on the financial position, results of operations and cash flows of NHC and NHC's resultant ability to make its lease payments to NHI. Advisory Agreement - NHI has entered into an Advisory Agreement with NHC whereby services related to investment activities and day-to-day management and operations are provided to NHI by NHC. As Advisor, NHC is subject to the supervision of and policies established by NHI's Board of Directors. Either party may terminate the Advisory Agreement on 90 days notice at any time. NHI may terminate the Advisory Agreement for cause at any time. For its services under the Advisory Agreement, the Advisor is entitled to annual compensation of $2,779,000 in 1999 ($3,310,000 in 1998 and $3,101,000 in 1997). The annual compensation is reduced by any compensation paid by NHI to its executive officers, if any. However, the payment of such annual compensation is conditional upon NHI having funds from operations sufficient to enable NHI to pay annual dividends of $2.00 per common share and upon NHI paying such dividends. Funds from operations is defined for these purposes as net income, plus depreciation and amortization, less the effect of any capital gains or losses included in such net income. Increases in compensation to NHC under the Advisory Agreement are proportional to increases in NHI's funds from operations per common share as defined above. Note 19. Prior Year Reclassifications Certain reclassifications have been made to the 1997 and 1998 financial statements to conform to the 1999 presentation. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To National Health Investors, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of National Health Investors, Inc. included in Exhibit 13 to this Form 10-K, and have issued our report thereon dated January 18, 2000. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedules listed in the accompanying index to Exhibit 13 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not otherwise a required part of the basic consolidated financial statements. The financial statement schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Nashville, Tennessee January 18, 2000 NATIONAL HEALTH INVESTORS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (in thousands)
Column A Column B Column C Column D Column E Additions Balance- Charged to Charged to Balance Beginning Costs and Mortgage -End of Description of Period Expenses Int. Income Deductions Period For the year ended December 31, 1997-Loan loss allowance $2,335 $ 1,231 $ --- $ --- $ 3,566 For the year ended December 31, 1998-Loan loss allowance $3,566 $ 4,260 $ --- $ --- $ 7,826 For the year ended December 31, 1999-Loan loss allowance $7,826 $13,800 $ --- $11,204 $10,422
NATIONAL HEALTH INVESTORS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1999
Column A Column B Column C Column D Column E Cost capitalized Gross amount Initial Cost subsequent to at which carried to Company acquisition at close of period Encum- Building & Improve- Carrying Buildings & Description brances Land Improvements ments Costs Land Improvements Total (dollars in thousands) Health Care Centers (2) Alabama $ 441 $ 95 $ 5,165 $ --- $ --- $ 95 $ 5,165 $ 5,260 Health Care Centers (1) Arizona 2,765 453 6,678 --- --- 453 6,678 7,131 Health Care Centers (10) Florida 9,582 3,503 62,208 --- --- 3,503 62,208 65,711 Health Care Centers (1) Georgia 141 52 865 --- --- 52 865 917 Health Care Centers (2) Idaho --- 365 6,824 --- --- 365 6,824 7,189 Health Care Centers (3) Kentucky --- 201 2,899 --- --- 201 2,899 3,100 Health Care Centers (4) Massachusetts --- 1,189 16,034 --- --- 1,189 16,034 17,223 Health Care Centers (5) Missouri 14,509 1,171 23,072 --- --- 1,171 23,072 24,243 Health Care Centers (3) New Hampshire --- 1,483 20,060 --- --- 1,483 20,060 21,543 Health Care Centers (3) South Carolina 5,556 572 11,543 --- --- 572 11,543 12,115 Health Care Centers (21) Tennessee 10,384 2,118 45,061 --- --- 2,118 45,061 47,179 Health Care Centers (1) Virginia 3,535 176 2,511 --- --- 176 2,511 2,687 Health Care Centers (4) Washington --- 1,881 12,148 --- --- 1,881 12,148 14,029 Acute Care Hospital (1) Kentucky --- 540 6,961 --- --- 540 6,961 7,501
NATIONAL HEALTH INVESTORS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1999
Column F Column G Column H Accumulated Date of Date Depreciation Construction Acquired $ 1,833 N/A 10/17/91 506 N/A 8/13/96 8,787 N/A 10/17/91 & 12/31/99 496 N/A 10/17/91 614 N/A 8/13/96 1,272 N/A 10/17/91 477 N/A 8/10/99 7,055 N/A 10/17/91 588 N/A 8/10/99 4,420 N/A 10/17/91 15,061 N/A 10/17/91 842 N/A 10/17/91 461 N/A 10/16/98 1,498 N/A 6/12/92
NATIONAL HEALTH INVESTORS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1999
Column A Column B Column C Column D Column E Cost capitalized Gross amount Initial Cost subsequent to at which carried to Company acquisition at close of period Encum- Building & Improve- Carrying Buildings & Description brances Land Improvements ments Costs Land Improvements Total (dollars in thousands) Medical Office Building (1) Florida --- 170 3,349 --- --- 170 3,349 3,519 Medical Office Building (1) Illinois --- --- 1,925 --- --- --- 1,925 1,925 Medical Office Building (1) Kentucky --- 23 3,667 --- --- 23 3,667 3,690 Medical Office Building (1) Louisiana --- --- 3,487 --- --- --- 3,487 3,487 Medical Office Building (2) Texas --- 631 9,676 --- --- 631 9,676 10,307 Medical Office Building (1) Utah --- 223 6,886 --- --- 223 6,886 7,109 Assisted Living Centers (4) Arizona --- 1,757 13,622 --- --- 1,757 13,622 15,379 Assisted Living Centers (4) Florida --- 7,095 33,044 --- --- 7,095 33,044 40,139 Assisted Living Centers (1) New Hampshire --- 218 2,962 --- --- 218 2,962 3,180 Assisted Living Centers (1) New Jersey --- 4,229 13,030 --- --- 4,229 13,030 17,259 Assisted Living Centers (1) South Carolina --- 344 2,879 --- --- 344 2,879 3,223 Assisted Living Centers (3) Tennessee --- 874 7,061 --- --- 874 7,061 7,935 Assisted Living Centers (1) Texas --- 2,094 9,091 --- --- 2,094 9,091 11,185 Retirement Center (1) Missouri --- 354 3,181 --- --- 354 3,181 3,535 Retirement Centers (2) Tennessee 457 64 5,644 --- --- 64 5,644 5,708 ------ ------ ------- ------ ----- ------ ------- ------- $47,370 $31,875 $341,533 $ --- $ --- $31,875 $341,533 $373,408 ====== ====== ======= ====== ====== ====== ======= =======
NATIONAL HEALTH INVESTORS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1999
Column F Column G Column H Accumulated Depreciation Date of Construction Date Acquired 806 N/A 6/30/93 72 12/31/98 N/A 838 N/A 7/27/93 878 1/1/95 N/A 1,446 1/1/95 N/A & 7/31/97 1,713 1/1/95 N/A 311 --- 12/31/98 & 3/31/99 2,519 --- 8/6/96, 12/31/98 & 1/1/99 86 N/A 8/10/99 1,440 --- 8/6/96 69 --- 12/31/98 150 --- 12/31/98 & 3/31/99 957 --- 8/6/96 968 N/A 10/17/91 1,224 N/A 10/17/91 - ------- $57,387 =======
(A) See Notes 3 and 18 of Notes to Consolidated Financial Statements. (B) The aggregate cost for federal income tax purposes is approximately $386,387,000. (C) Depreciation is calculated using depreciation lives up to 40 years for all completed facilities. NATIONAL HEALTH INVESTORS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
December 31 1999 1998 1997 Investment in Real Estate: Balance at beginning of period $291,409 $236,998 $213,150 Additions through cash expenditures 14,318 40,724 23,848 Additions in exchange for rights under mortgage notes receivable 67,681 13,687 --- Improvements --- --- --- Balance at end of year $373,408 $291,409 $236,998 Accumulated Depreciation: Balance at beginning of period $ 45,871 $ 36,929 $ 28,895 Addition charged to costs and expenses 11,516 8,942 8,034 Balance at end of year $ 57,387 $ 45,871 $ 36,929
NATIONAL HEALTH INVESTORS, INC. SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE FOR THE YEAR ENDED DECEMBER 31, 1999
Column A Column B Column C Column D Column E Column F Column G Column H Principal Amt. of Loans Sub. Final Monthly Original to Delinquent Interest Maturity Payment Prior Face Amount Carrying Amount Principal or Description Rate Date Terms Liens Of Mortgages of Mortgages Interests LONG-TERM CARE FACILITIES: First Mortgage Loans: Missouri and Kansas (A)(L)(N) 11.0% January, 2000 $ 258,000 None $ 26,000,000 $ 21,457,000 None SouthTrust Loan Participation(B) LIBOR + 2.2% July, 2001 195,000 None 26,500,000 25,696,000 None Florissant, Joplin, Sikeston Missouri (C)(L) 11.00% September, 2003 98,000 None 10,000,000 9,347,000 None Williston and Gainesville, Florida (E)(L)(M) 11.55% December, 2005 99,000 None 9,620,000 9,031,000 None Fincastle, Hot Springs, Lebanon, Bastian, Low Moor, Bristol, Midlothian, Virginia (F)(L)(N) 10.65% February, 2006 209,000 None 25,000,000 16,608,000 None Friendswood, Richmond, Sugarland, Conroe, Beaumont, Huntsville, Cleveland, Liberty, Houston, and Tomball, Texas (G)(L)(M) 10.5% September, 2007 501,000 None 51,500,000 50,363,000 None Kansas and Wisconsin 10.50% July, 2007 91,000 None 9,500,000 9,282,000 None Augusta and Pooler, Georgia (I)(L) 9.5% January, 2009 135,000 None 15,243,000 15,100,000 None Trenton and Dover, NJ (K)(L)(M) 10.25% December, 2009 --- None 20,000,000 19,502,000 None Seven Mortgages(L)(M) 7.75%-11.88% January, 2002 N/A None N/A 10,795,000 None December, 2008 Eight Mortgages(L)(M) 10.05%-12.60% January, 2002- N/A None N/A 35,401,000 None May, 2007 Twelve Mortgages(L)(M) 9.00%-12.15% January, 2000- N/A None N/A 75,390,000 None December, 2010 Dallas, Texas (J)(L) 11.65% September, 2010 183,000 None 18,000,000 13,328,000 None Construction Loan: St. Augustine, Florida (K) 10.00% July, 2010 --- None 1,617,000 1,617,000 None
NATIONAL HEALTH INVESTORS, INC. SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE FOR THE YEAR ENDED DECEMBER 31, 1999
Column A Column B Column C Column D Column E Column F Column G Column H Principal Amount of Loans Subject Final Monthly Original to Delinquent Interest Maturity Payment Prior Face Amount Carrying Amount Principal or Description Rate Date Terms Liens Of Mortgages of Mortgages Interest Term Notes: Johnson City, Tennessee 7.5% June, 2019 15,000 None 2,062,000 1,813,000 None Lewisburg, Tennessee 7.5% December, 2018 7,000 None 968,000 847,000 None Smithville, Tennessee 7.5% December, 2017 7,000 None 1,016,000 877,000 None $316,454,000
(A) Balloon payment of $23,699,000 due at maturity. (B) Mortgage loan participation agreement, of which the Company has 50% participation. Balloon payment of $25,199,000 due at maturity. (C) Balloon payment of $8,667,000 due at maturity. (D) Balloon payment of $8,161,000 due at maturity. (E) Interest escalates 0.1% per year. Balloon payment of $8,449,000 due at maturity. (F) Effective January, 1999, the interest escalates .15% per year through maturity. Balloon payment of $20,755,000 due at maturity. (G) Balloon payment of $45,042,000 due at maturity. (H) Balloon payment of $17,010,000 due at maturity. (I) Balloon payment of $12,923,000 due at maturity. (J) Interest escalates 0.1% per year through September 1, 2005. Thereafter the payment will be adjusted to include interest at the greater of 12.25% or the rate that five-year United States securities yield plus 4.5%. (K) Monthly payments of interest only during construction. The Company is committed to provide permanent financing when construction is completed. (L) Mortgages provide for prepayment penalties. (M) The Company has reduced the carrying amount of this mortgage loan by a reserve calculated in accordance with the provisions of Statement of Financial Accounting Standards 114, Accounting by Creditors for Impair- ment of a Loan - An Amendment of FASB Statements No. 5 and 15. The reserve is based on the Company's knowledge of the general economic condition in the long-term health care industry and the cash flows of the long-term health care facilities that service the mortgage loan. (N) The Company has reduced the carrying amount of this mortgage loan by a reserve calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan - An Amendment of FASB Statements No. 5 and 15. The reserve is based on the Company's knowledge of the general economic condition in the long-term health care industry, the cash flows of the long-term health care facilities that service the mortgage loan and the declaration of bankruptcy by the borrower and/or the borrower's principal owner. NATIONAL HEALTH INVESTORS, INC. SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued) FOR THE YEAR ENDED DECEMBER 31, 1999 (1) See Note 4 of Notes to Consolidated Financial Statements. (2) For tax purposes, the cost of investments is the carrying amount.
December 31 1999 1998 1997 (in thousands) Reconciliation of mortgage loans Balance at beginning of period $402,000 $445,603 $519,229 Additions: New mortgage loans 22,163 67,564 115,876 Deductions during period: Loans written off 10,000 --- --- Collection of principal 16,287 111,167 189,502 Acquisition of property and equipment in exchange for mortgage notes receivable 71,000 --- --- 97,287 111,167 189,502 Balance at end of period $326,876 $402,000 $445,603
EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statement File No. 33-72370 and No. 33-85398. ARTHUR ANDERSEN LLP Nashville, Tennessee March 27, 2000 EX-27 2
5 12-MOS DEC-31-1999 DEC-31-1999 16,723,000 49,650,000 327,168,000 0 0 0 373,408,000 (57,387,000) 788,545,000 0 0 0 18,717,000 244,000 373,679,000 788,545,000 0 131,158,000 0 0 3,275,000 13,800,000 25,596,000 0 0 0 0 0 0 51,985,000 2.13 2.13
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