-----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, NTujYYscYjtCWNK+O2PYJZ93oXJElw3b4UZ0gShgQeo6ei7oFxcNwusAiVbzqCs2 Poq2b8aQIPkeCxhETLUqLg== /in/edgar/work/20000814/0000877860-00-000014/0000877860-00-000014.txt : 20000921 0000877860-00-000014.hdr.sgml : 20000921 ACCESSION NUMBER: 0000877860-00-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL HEALTH INVESTORS INC CENTRAL INDEX KEY: 0000877860 STANDARD INDUSTRIAL CLASSIFICATION: [6798 ] IRS NUMBER: 621470956 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10822 FILM NUMBER: 695649 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-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 of 15(d) of the Securities Exchange Act of 1934 For quarter ended June 30, 2000 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 of (I.R.S. Employer incorporation or organization Identification No.) 100 Vine Street Murfreesboro, TN 37130 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code (615) 890-9100 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. Yes x No (2) Has been subject to such filing requirements for the past 90 days. Yes x No 24,383,620 shares of common stock were outstanding as of July 31, 2000. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
June 30 Dec. 31 2000 1999 ASSETS (unaudited) Real estate properties: Land $ 30,673 $ 31,875 Buildings and improvements 316,673 340,966 Construction in progress 1,971 567 349,317 373,408 Less accumulated depreciation (64,297) (57,387) Real estate properties, net 285,020 316,021 Mortgage and other notes receivable, net 339,915 316,454 Investment in preferred stock 38,132 38,132 Investment in real estate mortgage investment conduits 38,142 37,670 Cash and cash equivalents 19,787 16,723 Marketable securities 49,107 49,650 Accounts receivable 12,825 10,714 Deferred costs and other assets 4,201 3,181 Total Assets $787,129 $788,545 LIABILITIES AND DEFERRED INCOME Debt $170,990 $172,870 Credit facilities 91,000 88,000 Convertible subordinated debentures 95,741 95,741 Accounts payable and other accrued expenses 10,257 7,228 Accrued interest 6,339 6,412 Dividends payable 15,606 18,033 Deferred income 7,190 7,621 Total Liabilities and Deferred Income 397,123 395,905 Commitments and guarantees STOCKHOLDERS' EQUITY Cumulative convertible preferred stock, $.01 par value; 10,000,000 shares authorized: 747,994 and 748,694 shares, respectively, issued and outstanding; stated at liquidation preference of $25 per share 18,700 18,717 250,000 shares issued and outstanding, stated at liquidation preference of $12.00 per share 3,000 --- Common stock, $.01 par value; 40,000,000 shares authorized; 24,383,620 and 24,382,987 shares, respectively, issued and outstanding 244 244 Capital in excess of par value of common stock 425,980 425,963 Cumulative net income 422,032 394,165 Cumulative dividends (463,347) (431,282) Unrealized gains (losses) on securities (16,603) (15,167) Total Stockholders' Equity 390,006 392,640 Total Liabilities and Stockholders' Equity $787,129 $788,545
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements. The interim condensed balance sheet at December 31, 1999 is taken from the audited financial statements at that date. 2 NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 2000 1999 2000 1999 (in thousands, except share amounts) REVENUES: Mortgage interest income $ 10,232 $ 12,628 $ 20,612 $ 25,016 Rental income 11,703 11,451 23,300 22,603 Facility operating revenue 13,124 2,149 26,234 6,272 Investment interest, dividends and other income 2,940 2,831 5,876 5,124 37,999 29,059 76,022 59,015 EXPENSES: Interest 7,062 6,091 14,005 12,219 Depreciation of real estate 3,459 2,852 6,910 5,354 Amortization of loan costs 268 181 490 348 Facility operating expenses 12,701 1,568 24,663 5,623 Loan loss expense (325) 1,524 (325) 1,524 General and administrative 920 890 2,412 1,751 24,085 13,106 48,155 26,819 NET INCOME 13,914 15,953 27,867 32,196 DIVIDENDS TO PREFERRED STOCKHOLDERS 457 409 854 817 NET INCOME APPLICABLE TO COMMON STOCK $ 13,457 $ 15,544 $ 27,013 $ 31,379 NET INCOME PER COMMON SHARE: Basic $ .55 $ .64 $ 1.11 $ 1.29 Diluted $ .55 $ .64 $ 1.10 $ 1.28 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 24,383,620 24,364,888 24,383,356 24,364,796 Diluted 24,637,806 27,906,229 24,510,449 27,919,439 Common dividends per share declared $ .64 $ .74 $ 1.28 $ 1.48
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements. 3 NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30 2000 1999 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 27,867 $ 32,196 Depreciation of real estate 6,910 5,354 Provision for loan losses (325) 1,524 Amortization of loan costs 490 348 Deferred income --- 167 Amortization of bond discount (893) (670) Amortization of deferred income (431) (594) Increase in accounts receivable (2,860) (3,083) Increase in other assets (1,510) (965) Increase (decrease) in accounts payable and accrued liabilities 2,957 2,218 NET CASH PROVIDED BY OPERATING ACTIVITIES 32,205 36,495 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in mortgage notes receivable (3,615) (17,834) Collection of mortgage notes receivable 6,657 11,876 Acquisition of property and equipment, net (1,810) (14,144) Increase in marketable securities --- (33,413) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,232 (53,515) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facilities 3,000 39,500 Principal payments on long-term debt (1,881) (1,952) Dividends paid to shareholders (34,492) (36,885) Payments on subordinated convertible debentures --- (800) Sale of preferred stock 3,000 --- NET CASH USED IN FINANCING ACTIVITIES (30,373) (137) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,064 (17,157) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,723 20,407 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,787 $ 3,250
4 NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30 2000 1999 (in thousands) Supplemental Information: Cash payments for interest expense $ 11,871 $ 10,134 During the six months ended June 30, 2000 and June 30, 1999, $0 and $10,000 respectively, of Senior Subordinated Convertible Debentures were converted into 0 shares and 316 shares, respectively, of NHI's common stock: Senior subordinated convertible debentures $ --- $ (10) Financing costs $ --- $ --- Accrued interest $ --- $ (1) Common stock $ --- $ --- Capital in excess of par $ --- $ 9 During the six months ended June 30, 2000 NHI acquired notes receivable in exchange for NHI's rights under property and equipment Mortgage and other notes receivable $(25,900) $ --- Land $ 1,202 $ --- Buildings and Improvements $ 24,698 $ ---
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements. 5 NATIONAL HEALTH INVESTORS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (dollars in thousands)
Cumulative Convertible Preferred Stock Capital in Unrealized Total Shares Amount Shares Amount Common Stock Excess of Cumulative Cumulative Gains(Losses) Stock. at $25 per Share at $12 per Share Shares Amount Par Value Net Income Dividends on Securities Equity BALANCE AT 12/31/99 748,694 $ 18,717 --- --- 24,382,987 $ 244 $425,963 $394,165 $(431,282) $(15,167) $392,640 Net income --- --- --- --- --- --- --- 27,867 --- --- 27,867 Unrealized gains(losses) on securities --- --- --- --- --- --- --- --- --- (1,436) (1,436) Total Comprehensive Income 26,431 Shares sold --- --- 250,000 3,000 --- --- --- --- --- --- 3,000 Shares issued in con- version of preferred stock to common stock (700) (17) --- --- 633 --- 17 --- --- --- --- Dividends to common shareholders ($1.28 per share) --- --- --- --- --- --- --- --- (31,211) --- (31,211) Dividends to preferred shareholders --- --- --- --- --- --- --- --- (854) --- (854) BAL. AT 6/30/00 747,994 $ 18,700 250,000 $ 3,000 24,383,620 $ 244 $425,980 $422,032 $(463,347) $(16,603) $390,006 BAL. AT 12/31/98 768,894 $ 19,222 --- $ --- 24,364,391 $ 244 $425,449 $340,547 $(357,518) $ (3,284) $424,660 Net income --- --- --- --- --- --- --- 32,196 --- --- 32,196 Unrealized gains (losses) on securities --- --- --- --- --- --- --- --- --- (1,577) (1,577) Total Comprehensive Income 30,619 Shares issued in con- version of converti- ble debentures to common stock --- --- --- --- 316 --- 9 --- --- --- 9 Shares issued in con- version of preferred stock to common stock (200) (5) --- --- 181 --- 5 --- --- --- --- Dividends to common shareholders (1.48 per share) --- --- --- --- --- --- --- --- (36,068) --- (36,068) Dividends to preferred shareholders ($1.0625 per share) --- --- --- --- --- --- --- --- (817) --- (817) BAL. AT 6/30/99 768,694 $ 19,217 --- $ --- 24,364,888 $ 244 $425,463 $372,743 $(394,403) $ (4,861) $418,403
The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements. 6 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) Note 1. SIGNIFICANT ACCOUNTING POLICIES: The unaudited financial statements furnished herein in the opinion of management include all adjustments which are necessary to fairly present the financial position, results of operations and cash flows of National Health Investors, Inc. ("NHI" or the "Company"). NHI assumes that users of the interim financial statements herein have read or have access to the audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in NHI's Form 10-K for the year ended December 31, 1999 and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in the Company's most recent annual report to stockholders have been omitted. The interim financial information contained herein is not necessarily indicative of the results that may be expected for a full year because of various reasons including changes in interest rates, rents and the timing of debt and equity financings. Note 2. NET INCOME PER COMMON SHARE: Basic earnings per share is based on the weighted average number of common and common equivalent shares outstanding. Net income is reduced by dividends to holders of all cumulative convertible preferred stock. Diluted earnings per common share assumes the conversion of 8% and 8.5% cumulative convertible preferred stock, the conversion of convertible subordinated debentures and the exercise of all stock options using the treasury stock method unless the impact of such assumptions on the calculations of earnings per share is anti-dilutive. Diluted net income is increased for interest expense on the convertible subordinated debentures in 1999. The following table summarizes the earnings and the average number of common shares and common equivalent shares used in the calculation of basic and diluted earnings per share. 7 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 2000 1999 2000 1999 BASIC: Weighted average common shares 24,383,620 24,364,888 24,383,356 24,364,796 Net income $13,914,000 $15,953,000 $27,867,000 $32,196,000 Dividends paid to pre- ferred shareholders (457,000) (409,000) (854,000) (817,000) Net income available to common stockholders $13,457,000 $15,544,000 $27,013,000 $31,379,000 Net income per common share-basic $ .55 $ .64 $ 1.11 $ 1.29 DILUTED: Weighted average common shares 24,383,620 24,364,888 24,383,356 24,364,796 Stock options 4,186 --- 2,093 1 Convertible subordinated debentures --- 2,845,690 --- 2,858,967 8.5% Cumulative convertible preferred stock --- 695,651 --- 695,675 8.0% Cumulative convertible preferred stock 250,000 --- 125,000 --- Average common shares outstanding 24,637,806 27,906,229 24,510,449 27,919,439 Net income $13,914,000 $15,953,000 $27,867,000 $32,196,000 8.5% Cumulative con- vertible preferred stock dividends (397,000) --- (795,000) --- Interest expense on convertible sub- ordinated debentures --- 1,813,000 --- 3,641,000 Net income - diluted $13,517,000 $17,766,000 $27,072,000 $35,837,000 Net income per common share - diluted $ .55 $ .64 $ 1.10 $ 1.28
For the three months ended June 30, 2000, convertible subordinated debentures and 8.5% cumulative convertible preferred stock were convertible into 2,747,428 and 676,918 incremental shares, respectively. For the six months ended June 30, 2000, convertible subordinated debentures and 8.5% cumulative convertible preferred stock were convertible into 2,747,428 and 677,183 incremental shares, respectively. 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. 8 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) Note 3. INVESTMENTS 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. Note 4. COMMITMENTS AND GUARANTEES: At June 30, 2000, NHI was committed, subject to due diligence and financial performance goals, to fund approximately $7,758,528 in health care real estate projects of which approximately $5,758,528 is eligible to be funded within the next 12 months. The commitments include mortgage loans or purchase leaseback agreements for one long-term care center, three assisted living facilities, and one hospital all at rates ranging from 9% to 11.5%. NHI has recorded deferred income for commitment fees related to these loans where applicable. In order to obtain the consent of appropriate lenders to National HealthCare Corporation's ("NHC"'s) transfer of assets to NHI, NHI guaranteed certain debt ($12,640,000 at June 30, 2000) of NHC. The debt is at fixed interest rates with a weighted average interest rate of 8.3% at June 30, 2000. NHI receives from NHC compensation of approximately $63,000 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. NHI has outstanding letters of credit totaling $10,000,000. Additionally, NHI has also guaranteed bank loans in the amount of $1,442,000 to key employees and directors which amount was utilized for the exercise of NHI stock options. Shares of NHI stock are held as security by NHI and the loans are limited to $100,000 per individual per year. 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 9 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) 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 5. CONVERTIBLE SUBORDINATED DEBENTURES: At June 30, 2000, $38,060,000 of 7.75% convertible subordinated debentures due on January 2, 2001 (the "1995 debentures") remain outstanding. The 1995 debentures are convertible at the option of the holder into the common stock of NHI at a conversion price of $31.625, subject to adjustment. During the six months ended June 30, 2000, none of the 1995 debentures were converted into common stock. NHI has reserved 1,203,478 shares of common stock for conversions of 1995 debentures. See Note 11 for a discussion of liquidity issues related to the maturity of the 1995 debentures. At June 30, 2000, $56,286,000 of 7% convertible subordinated debentures due on February 1, 2004 (the "1997 debentures") remain outstanding. The 1997 debentures are convertible at the option of the holder into common stock at a conversion price of $37.50, subject to adjustment. During the six months ended June 30, 2000, none of the 1997 debentures were converted into common stock. NHI has reserved 1,500,960 shares of common stock for conversions of 1997 debentures. At June 30, 2000, $1,190,000 of debentures due on January 1, 2006 remain outstanding related to "1995 debt service debentures" issued to mortgagees or lessees to satisfy debt service escrow requirements. The debentures are convertible at the option of the holder into common stock of the Company at a conversion price of 110% of the market price on the date of issuance of the debentures, subject to adjustment. During the six months ended June 30, 2000, none of the debentures were converted into common stock. NHI has reserved 32,740 shares of common stock for conversion of 1995 debt service debentures. 10 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) At June 30, 2000, $205,000 of the 10% senior convertible subordinated debentures due 2006 (the "senior debentures") remain outstanding. The senior debentures are convertible into the common stock of the Company at $20 per share. During the six months ended June 30, 2000, none of the senior debentures were converted. The Company has reserved 10,250 shares of common stock for conversion of the senior debentures. Note 6. CUMULATIVE CONVERTIBLE PREFERRED STOCK: In February and March, 1994, NHI issued $109,558,000 of 8.5% Cumulative Convertible Preferred Stock ("8.5% 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. At June 30, 2000, $18,699,850 of the preferred stock remains outstanding. The 8.5% 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 8.5% Preferred Stock is redeemable by NHI for common 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. NHI has reserved 676,918 shares of common stock for 8.5% Preferred Stock conversions. The 8.5% Preferred Stock is listed on the NYSE under the symbol "NHIPr." On March 31, 2000, NHI issued $3,000,000 of Cumulative Convertible Preferred Stock (the "2000 Preferred Stock"). The 2000 Preferred Stock, which is not listed on a stock exchange, is convertible into NHI common stock at the lower of the then trading value of NHI common stock or $12.00 per share after December 31, 2000. The shares pay dividends at the rate of 8% through June 30,2000, at the rate of 10% from July 1, 2000 through September 30, 2000, and at the rate of 12% thereafter. The 2000 Preferred Stock was sold to NHC, the Company's investment advisor. NHI has reserved 250,000 shares of common stock for preferred stock conversion related to this issue. 11 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) Note 7. NEW ACCOUNTING PRONOUNCEMENT: 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 the first quarter of the first fiscal year 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. In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101) regarding revenue recognition in financial statements. NHI will implement SAB 101 during the fourth quarter of 2000. Management currently is in the process of analyzing the impact that SAB 101 will have on NHI's financial position, results of operations and cash flows. Note 8. SALE OF REAL ESTATE: In 1993, NHI funded a mortgage loan for Stockbridge Investment Partners, Inc. and its subsidiary York Hannover Nursing Centers, Inc. ("York Hannover") 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. Effective January 1, 2000, NHI sold to Care Foundation of America, Inc. ("Care") all of the real estate, property and equipment of the six long-term nursing facilities. The sale price was $25,900,000, which was NHI's basis in the properties. Care assumed the first mortgage which had previously been owned by York Hannover. In accordance with the provisions of Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate, NHI has accounted for the sale under the installment method. The note receivable from Care bears interest at 10% and is collateralized by the first mortgages on the six long-term health care facilities and the corporate guarantee of NHC for up to $3,000,000 of principal and interest. 12 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) Note 9. MORTGAGE AND OTHER NOTES RECEIVABLE: 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, leasehold assignment of certain existing leases on the properties, the corporate guarantees of Lenox and Greylock Health Corporation, and certain personal guarantees. Lenox is the manager of nine of the ten long-term health care facilities located in the states of Kansas and Missouri. The tenth facility has been closed during the bankruptcy. At June 30, 2000, the net carrying value of the loan is approximately $21,800,000, which earns 11% interest. 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. The debtor in possession discontinued paying interest on the mortgages on May 25, 2000, and the Company is not currently booking any accrual income thereon. 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. An affiliate of Lenox was 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 it has rejected its lease with bankruptcy court approval. NHI approved the assignment of the Lenox lease to an unaffiliated company in order to allow the center to continue operations. NHI has initiated foreclosure action against the borrower in order to obtain title to the project. At June 30, 2000, the net carrying value of the loan is approximately $1,000,000. 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. 13 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) 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 and lease assignments on six long-term health care facilities located in Virginia. Although Colonial Land Corporation is not included in the Lenox bankruptcy filing, Lenox manages three of the facilities, and Mr. Tom Clarke, the principal owner of Lenox, is also an owner of Colonial Land Corporation. At June 30, 2000, the net carrying value of the loan is approximately $19,100,000, which earns interest at 10.8%. 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 principal 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 $10,700,000 at June 30, 2000. 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. Other Non-Performing Loans Brookside Inn - NHI's investment totaled $5,206,000 as of June 30,2000. NHI has initiated foreclosure proceedings against the owner, but is currently forbearing from pursuing this action. The owner is making current payments, plus repaying over the next eighteen months approximately four months of missed payments. NHI believes that the expected cash flows from this loan, along with the value of the collateral, support the net carrying value of this loan. SouthTrust Loan Participation - NHI has a 50% interest in a loan made by SouthTrust Bank to Integrated Health Services, Inc. ("IHS"). NHI's loan balance at June 30, 2000 totaled $25,643,000. IHS and its affiliates have filed for Chapter 11 bankruptcy protection. In May 2000 during a collateralization hearing, the bankruptcy court ruled that the value of the collateral supporting NHI's loan exceeds the balance due to NHI under the loan. Based on this ruling and based on NHI's knowledge, NHI believes that the collateral supports the net carrying value of this loan. Autumn Hills Convalescent Centers, Inc. - In 1997, NHI funded a mortgage loan for Autumn Hills Convalescent Centers, Inc. in the original principal amount of $51,500,000. Collateral for the loan includes first mortgages on thirteen long-term health facilities, and certain corporate and personal guarantees. These facilities are located in Texas. 14 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) At June 30, 2000 the net carrying value of the loan is approximately $49,200,000, which earns 10.5% interest. NHI has not received all principal and interest payments as due and has entered into a Forbearance Agreement with the Borrower. This Agreement allows for partial payments over the next five months while the Borrower secures HUD financing. NHI is currently evaluating the health care center portion of the collateral given the circumstances affecting the centers but believes that the combined collateral supports the net carrying value of the mortgage. NHI has ceased recognition of interest income on this loan. Loan Reserves Mortgage and other notes receivable are reduced by an allowance for loan losses of $9,346,000 at June 30, 2000. Note 10: DEBT AND RELATED GUARANTEE On June 30, 2000, NHI and NHC were in violation of certain financial covenants included in a debt instrument originally financed through the National Health Corporation Leveraged Employee Stock Ownership Plan Trust; however, these violations have been waived. In addition, NHI no longer meets a requirement that its senior unsecured debt be rated investment grade by Standard & Poor's and Moody's Investment Services. As of June 30, 2000, the total debt balance on the loan was $23,214,000, of which $10,574,000 is the primary obligation of NHI. NHI guarantees, and is contingently obligated on, the remaining $12,640,000 of the outstanding balance under this loan. As a result of NHI's investment grade down rating, NHI had been delivered a tender notice from the noteholders to purchase, between June 10, 2000 and June 15, 2000, the $23,214,000 in outstanding notes; however, on July 7, 2000, the noteholders rescinded the tender notice effective as on the date and time it was originally given. NHC, the Company's Investment Advisor, purchased the notes. The Company believes that all terms and conditions of the loan are currently in full compliance. Subsequent to the recission of the tender notice, NHC purchased the entire $23,214,000 debt instrument from the previous holders. Note 11. LIQUIDITY DEMANDS AND CAPITAL RAISING ALTERNATIVES Two significant capital needs are being addressed by the company. The first is the renewal of the existing $91,000,000 revolving credit facility, which matures on October 10, 2000. The second is the maturity of the company's $38,060,000 subordinated convertible debenture issue, which matures on January 2, 2001. These maturing debt issue challenges are compounded by the lack of capital available for health care REITs, nursing homes, and assisted living facilities. 15 NATIONAL HEALTH INVESTORS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) In regard to the revolving credit facility, extensive negotiations are under way between NHI and the lending group, led by Bank of Tokyo-Mitsubishi. Management believes that the facility will be extended at a commercially reasonable rate of interest on or before its maturity date. This rate is approximately 100 basis points higher than the current facility. It is also believed that this extension will require approximately $40,000,000 in principal reductions prior to December 31, 2000. In order to adequately address this capital requirement, plus the impending maturity of the subordinated convertible debentures, the company is considering several possible solutions. Capital raising alternatives being considered include the orderly sale of some assets; the delay, reduction or elimination of the company's third quarter dividend; a rights offering to existing shareholders; and inducement for current borrowers to prepay debt owed NHI. The company does not believe it to be financially prudent to incur new debt at a much higher interest rate in this volatile market. The long-term goal of NHI is to reduce its debt so as to remove the uncertainty of the payment and amount of the dividend to shareholders in the future. The lack of availability of reasonably priced capital limits NHI's ability to make new investments, and future refinancings at higher interest rates or the inability of the Company to repay or extend debt when due would have a material adverse impact on NHI's financial position, results of operations and cash flows. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Overview National Health Investors, Inc. ("NHI" or the "Company") is a real estate investment trust which invests primarily in income producing health care properties with emphasis on the long-term care sector. As of June 30, 2000, NHI had interests in net real estate owned, and investments in mortgages, REMICs, preferred stock and marketable securities resulting in total invested assets of $759.7 million. NHI's strategy has been to primarily invest in long term health care real estate which generates current income which will be distributed to stockholders. Under current market conditions, however, no such investments are currently being solicited or closed. 16 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) As of June 30, 2000, 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 $349.3 million aggregate principal amount of loans to 29 borrowers, $285.0 million of purchase leaseback transactions with seven lessees and $38.1 million invested in REMIC pass through certificates backed by first mortgage loans to 10 operators. Of these 202 facilities, 55 are leased to National HealthCare Corporation ("NHC"). NHC is the Company's investment advisor. At June 30, 2000, 55.9% of the total invested assets of the health care facilities were operated by public operators, 23.4% by regional operators, and 20.7% by small operators. Liquidity and Capital Resources Sources and Uses of Funds NHI has generated net cash from operating activities during the first six months of 2000 totaling $32.2 million compared to $36.5 million in the prior period. The primary reason for this period's decline was a reduction in net income offset in part by increased depreciation expense. Net cash from operating activities generally includes net income plus non-cash expenses, such as depreciation and amortization and working capital changes. Cash flows from investing activities during the first six months of 2000 included collection on mortgage notes receivable of $6.7 million compared to $11.9 million for the prior period. Cash flows used in investing activities during the first six months of 2000 included investment in mortgage notes receivable of $3.6 million and real estate properties of $1.8 million. Cash flows used in investing activities of the prior period included investment in mortgage notes receivable of $17.8 million, real estate properties of $14.1 million, and marketable securities of $33.4 million. Cash flows from financing activities for the first six months of 2000 included $3.0 million from credit facility proceeds, compared to the prior period of $39.5 million. On March 31, 2000, NHI issued $3,000,000 of Cumulative Convertible Preferred Stock (the "2000 Preferred Stock") to NHC. The 2000 Preferred Stock, which is not listed on a stock exchange and is convertible into NHI common stock at the lower of NHI common stock trading value or $12.00 per share after December 31, 2000. The shares pay dividends at the rate of 8% through June 30,2000, at the rate of 10% from July 1, 2000 through September 30, 2000, and at the rate of 12% thereafter. The 2000 Preferred Stock was sold to NHC, the Company's investment advisor. NHI has reserved 250,000 shares of common stock for preferred stock conversion related to this issue. 17 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) Cash flows used in financing activities for the first six months of 2000 included principal payments on long-term debt of $1.9 million and dividends paid to shareholders of $34.5 million. This compares to principal payments on long term debt of $2.0 million and dividends paid to shareholders of $36.9 million in the prior period. In March 2000, NHI announced a reduction in its quarterly dividend of 10 cents per common share to 64 cents. The reduction reflects the Company's concern over continuing volatility in the long-term care industry and increased interest expense on the Company's bank debt. See "Liquidity Demands and Capital Raising Alternatives" for additional comments concerning the Company's dividend payment policy. Commitments to Fund Projects At June 30, 2000, the Company was committed, subject to due diligence and financial performance goals, to fund approximately $7.8 million in health care real estate projects, of which approximately $5.8 million is expected to be funded within the next 12 months. The commitments include mortgage loans or purchase leaseback agreements for one long-term health care center, three assisted living facilities, and one hospital all at rates ranging from 9% to 11.5%. Financing for current commitments and future commitments to others may be provided by cash balances, 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 cash flow to finance current investments for which it is committed. Liquidity Demands and Capital Raising Alternatives NHI has established a senior unsecured revolving line of credit (Credit Facility) that allows it to borrow a maximum of $100.0 million. $91 million is outstanding on the Credit Facility at June 30, 2000, and the entire balance outstanding matures on October 10, 2000. In addition, $38.1 million of the Company's convertible subordinated debentures outstanding at June 30, 2000 mature on January 2, 2001. It is unlikely that holders of these convertible subordinated debentures will convert them to common stock prior to January 1, 2001. These maturing debt issue challenges are compounded by the lack of capital available for health care REIT's, nursing homes, and assisted living facilities. Management is considering several possible solutions in order to meet these short-term liquidity demands. 18 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) The renewal in whole or in part of NHI's $91 million credit facility which matures October 10, 2000, is a first priority. Extensive negotiations are under way between the Company and the lending group led by Bank of Tokyo/Mitsubishi. Management believes that the facility will be extended at a commercially reasonable rate of interest on or before its maturity date. The rate is expected to be approximately 100 basis points higher than the current Credit Facility. It is believed that this extension will require approximately $40 million in principal reductions between now and year end. In order to adequately address this capital requirement, plus the impending maturity of $38 million of subordinated convertible debentures on January 2, 2001, the Company is considering several possible solutions. Capital raising alternatives being considered include the orderly sale of some assets; the delay, reduction or elimination of the company's third quarter dividend; a rights offering to existing shareholders; and inducement for current borrowers to prepay debt owed NHI. NHI's long-term goal is to reduce its debt so as to remove the uncertainty of the payment and amount of the dividend to shareholders in the future. The lack of availability of reasonably priced capital limits NHI's ability to make new investments, and future refinancings at higher interest rates or the inability of the Company to repay or extend debt when due would have a material adverse impact on NHI's financial position, results of operations and cash flows. Loan Foreclosures and Bankruptcy 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. In January 2000, NHI sold the real estate, property and equipment of six long-term health care facilities on which it had foreclosed to Care Foundation of America, Inc. ("Care") for $25,900,000 in exchange for a note receivable from Care. In accordance with the provisions of Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate, NHI has accounted for the transaction under the installment method. The note receivable from Care bears interest at 10% and is collateralized by the first mortgages on the six long-term health care facilities and the corporate guarantee of NHC for up to $3,000,000 of principal and interest. 19 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) As more fully described in Note 9 to the Interim Condensed 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 Income Recognition During the six months ended June 30, 2000, NHI continued not to recognize income on one loan that had a carrying value of $1.1 million. NHI discontinued income recognition of unpaid interest on three loans with carrying values of $5 million, $25.6 million and $48.2 million, respectively. As of June 30, 2000, one loan with a carrying value of $21.6 million, has unpaid interest beyond 30 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 this and other mortgage notes receivable in 2000. Debt and Related Guarantee On June 30, 2000, NHI and NHC were not in compliance with certain financial covenants included in a debt instrument originally financed through the National Health Corporation Leveraged Employee Stock Ownership Plan Trust; however, those violations have been waived. As of June 30, 2000, the total debt balance on the loan was $23,214,000, of which $10,574,000 is the primary obligation of NHI. NHI guarantees, and is contingently obligated on, the remaining $12,640,000 of the outstanding balance under this loan. As a result of NHI's investment grade down rating, NHI had been delivered a tender notice from the noteholders to purchase, between June 10, 2000 and June 15, 2000, the $23,214,000 in outstanding notes; however, on July 7, 2000, the noteholders rescinded the tender notice effective as of the date and time it was originally given. NHC, the Company's Investment Advisor, purchased the notes. The Company believes that all terms and conditions of the loan are in full compliance. Subsequent to the recission of the tender notice, NHC purchased the entire $23,214,000 debt instrument from the previous holders. Results of Operations Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 Net income for the three months ended June 30, 2000 is $13.9 million versus $16.0 million for the same period in 1999, a decrease of 12.8%. Earnings per common share decreased 9 cents or 14.1%, to $.55 in the 2000 period from $.64 in the 1999 period. 20 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) Total revenues for three months ended June 30, 2000 increased $8.9 million or 30.7% to $38.0 million from $29.1 million for the three months ended June 30, 1999. Revenues from mortgage interest income decreased $2.4 million, or 19.0%, when compared to the same period in 1999. Revenues from rental income increased $.3 million, or 2.2% in 2000 as compared to 1999. Revenues from investment interest and other income increased $.1 million or 3.9% compared to 1999. Facility operating revenue increased to $13.1 million in 2000 compared to $2.1 million in 1999. The decrease in mortgage interest income is due to a decline in the average amount of mortgage investments outstanding as a result of foreclosure on mortgage loans and due to the discontinuation of interest income recognition on other loans. During 1999, NHI foreclosed or received deeds in lieu of foreclosure on mortgage loans totaling $41.8 million, which resulted in the acquisition of seven long-term health care centers and one retirement center. The increase in rental income resulted primarily from the increase in investments in real estate properties of $14.3 million during 1999. 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. The increase in facility operating revenues is due primarily to the purchase, in lieu of foreclosure, of seven long-term health care centers and one retirement center previously managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros Health Network) in August, 1999. Total expenses for the three months ended June 30, 2000 increased $11.0 million or 83.8% to $24.0 million from $13.1 million for 1999. Interest expense increased $1.0 million or 15.9% in 2000 as compared to 1999. Depreciation of real estate increased $.6 million or 21.3% when compared to 1999. Facility operating expense increased to $12.7 million in 2000 compared to $1.6 million in 1999. Interest expense increased due to increased interest rates and borrowing on credit facilities and long-term debt compared to the prior period. Depreciation increased as a result of the Company placing newly constructed assets in service, property acquisitions, and the purchase, in lieu of foreclosure, of seven long term health care centers and one retirement center previously managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros Health Network) in August, 1999. The increase in facility operating expense is due to the purchase, in lieu of foreclosure, of seven long-term health care centers and one retirement center previously managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros Health Network) in August, 1999. 21 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Net income for the six months ended June 30, 2000 is $27.9 million versus $32.2 million for the same period in 1999, a decrease of 13.4%. Basic net income per common share decreased 18 cents or 14.0%, to $1.11 in the 2000 period from $1.29 in the 1999 period. Total revenues for the six months ended June 30, 2000 increased $17.0 million or 28.8% to $76.0 million from $59.0 million for the six months ended June 30, 1999. Revenues from mortgage interest income decreased $4.4 million, or 17.6% when compared to the same period in 1999. Revenues from rental income increased $.7 million, or 3.0% in 2000 as compared to 1999. Revenues from investment interest and other income increased $.8 million or 14.7% compared to 1999. Facility operating revenue increased to $26.2 million in 2000 compared to $6.3 million in 1999. The decrease in mortgage interest income is due to a decline in the average amount of mortgage investments outstanding as a result of foreclosure on mortgage loans and due to the discontinuation of interest income recognition on other loans. During 1999, NHI foreclosed on mortgage loans totaling $41.8 million, which resulted in the purchase of seven long-term health care centers and one retirement center. The increase in rental income resulted primarily from the increase in investments in real estate properties of $14.3 million during 1999. 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. The increase in facility operating revenues is due primarily to the purchase, in lieu of foreclosure, of seven long-term health care centers and one retirement center previously managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros Health Network) in August, 1999. Total expenses for the six months ended June 30, 2000 increased $21.3 million or 79.6% to $48.2 million from $26.8 million for 1999. Interest expense increased $1.8 million or 14.6% in 2000 as compared to 1999. Depreciation of real estate increased $1.6 million or 29.1% when compared to 1999. General and administrative costs increased $0.7 million or 37.7% Facility operating expense increased to $24.7 million in 2000 compared to $5.6 million in 1999. Interest expense increased due to increased interest rates and borrowing on credit facilities and long-term debt compared to the prior period. Depreciation increased as a result of the Company placing newly constructed assets in service, property acquisitions, and the purchase, in lieu of foreclosure, of seven long term health care centers and one retirement center previously managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros Health Network) in August, 1999. The increase in facility operating expense is due to the purchase, in lieu of foreclosure, of seven long-term health care centers and one retirement center previously managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros Health Network) in August, 1999. 22 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) 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 the first quarter of the first fiscal year 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. 23 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101) regarding revenue recognition in financial statements. NHI will implement SAB 101 during the fourth quarter of 2000. Management currently is in the process of analyzing the impact that SAB 101 will have on NHI's financial position, results of operations and cash flows. Item 3. Quantitative and Qualitative Information 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 June 30, 2000, $111,225,000 of the Company's long-term debt bears interest at fixed interest rates. As of June 30, 2000, 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 $59,765,000 of the Company's long-term debt and $91,000,000 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 swaps discussed above. The Company does 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. 24 NATIONAL HEALTH INVESTORS, INC. June 30, 2000 (Unaudited) EQUITY PRICE RISK The Company'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. The investments in marketable securities classified as available for sale 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 classified as available for sale. 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. PART II. OTHER INFORMATION Item 1. Legal Proceedings. None of any materiality. Item 2. Changes in Securities. Not applicable Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. (a) The annual meeting of the shareholders was held on May 24, 2000. (b) Matters voted upon at the meeting are as follows: PROPOSAL NO. 1: Election of Robert T. Webb to serve as director for a term of three years or until his successor has been fully elected and qualified. Other directors whose terms of office continue are Mr. W. Andrew Adams, Mr. Jack Tyrrell, Mr. Ted. H. Welch and Mr. Richard F. LaRoche, Jr. Voting For Withholding Percent For Authority Robert T. Webb 22,073,491 146,203 90.5% PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as the Company's independent accountants for the fiscal year 2000. Voting For Voting Against Abstaining Percent For 22,073,194 49,055 52,005 90.7% Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) List of exhibits - none required (b) Reports on Form 8-K - none required 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL HEALTH INVESTORS, INC. (Registrant) Date August 11, 2000 /s/ Richard F. LaRoche, Jr. Richard F. LaRoche, Jr. Secretary Date August 11, 2000 /s/ Donald K. Daniel Donald K. Daniel Principal Accounting Officer 26 EX-27 2 0002.txt
5 6-MOS DEC-31-2000 JUN-30-2000 19,787,000 49,107,000 352,740,000 0 0 0 349,317,000 (64,297,000) 787,129,000 0 0 0 21,700,000 244,000 368,062,000 787,129,000 0 76,022,000 0 48,155,000 2,412,000 0 14,005,000 0 0 0 0 0 0 27,867,000 1.11 1.10
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