-----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, DnEkkuuP2QPWRS0UeCoiLM3nMuhui0IPSKeCkVD75bbAYHyD36csZxyXVkXWgPD3 b+v6fwbG/8B3ekQNGwrQ5Q== 0000877860-98-000005.txt : 19980330 0000877860-98-000005.hdr.sgml : 19980330 ACCESSION NUMBER: 0000877860-98-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE 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: 98575361 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _________ Commission file number 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 require- ment 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 state- ments 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 $875,120,400 as of February 27, 1998. The number of shares of Common Stock outstanding as of January 31, 1998 was 24,814,508. PAGE 1 OF 76 PAGES Exhibit Index Page 43 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, 1997, the Company had interests in net real estate owned by it, mortgage investments and REMIC investments totaling approximately $682.8 million. The Company's strategy is to provide current income for distribution to stockholders through investments in health care related 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". The Company intends to implement this strategy by acquiring additional properties and making additional mortgage loans nationwide, predominately in the long-term care industry. As of December 31, 1997, the Company had approximately $682.8 million in investments in 226 health care facilities located in 26 states consisting of 179 long-term care facilities, three acute care hospitals, nine medical office buildings, eleven assisted living facilities, seven retirement centers and 17 residential projects for the developmentally disabled. These investments consist of approximately $445.6 million aggregate principal amount of loans to 49 borrowers and $200.1 million of purchase leaseback agreements with five lessees and $37.1 million invested in REMIC pass through certificates. Of these 226 facilities, 43 are leased to NHC and nine additional facilities are managed by NHC. Consistent with its strategy of diversification, the Company has reduced the portion of its portfolio operated by NHC from 100.0% of total assets on October 17, 1991, to 23.3% of total assets on December 31, 1997. At December 31, 1997, NHI was committed, subject to due diligence and financial performance goals, to fund approximately $104.4 million in health care real estate projects of which amount approximately $71.3 million is expected to be funded within the next 12 months. The commitments include mortgage loans for seven long-term health care centers, three medical office buildings, and 10 assisted living centers all at rates ranging from 9.75% to 11.5%. Also included in the $104.4 million of commitments is a commitment to loan an additional $4.3 million on three loans when the mortgagee obtains certain operating ratios. During 1997, NHI achieved investment grade ratings on its senior unsecured debt from three major rating agencies: Duff & Phelps Rating Co. (BBB-), Moody's Investment Service (Baa3) and Standard & Poor's (BBB-). The rating agencies cited NHI's stable cash flow provided by a diversified portfolio of investments in health care properties, moderate financial leverage, a track record of growth and profitability and an experienced management team. These ratings allowed NHI to lower its cost of both debt and equity capital and helped to expand financing alternatives. 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 and three retirement centers and four first mortgage notes from National HealthCare Corporation, successor to National HealthCare L.P. ("NHC") 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, 1997 operated 111 long-term care facilities with a total of 14,071 licensed beds. Included within these centers and beds are 14 assisted care units (729 beds), 16 Alzheimer's units (443 beds) and 28 sub-acute units (841 beds). NHC also operates four retirement centers with a total of 387 units, five freestanding assisted living facilities with a total of 420 units and 36 home health care programs. All NHC operations are in the southeastern United States. Since the Company commenced operations, NHC has provided advisory services 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, 1997, the Company owned and leased 43 licensed long-term care facilities, 40 of which were operated by NHC. It also had outstanding first mortgage loans on 136 additional licensed long-term care facilities, nine (9) of which were operating 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, 1997, the Company owned and leased one acute care hospital and had outstanding first mortgage loans on one additional operating acute care hospital and one 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, 1997, the Company owned and leased six medical office buildings. In addition, the Company had first mortgage loans on three medical office buildings, one of which is undergoing a significant expansion. 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 four assisted living facilities all of which are leased to a subsidiary of Marriott International and 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. Additionally, the Company has granted $150,000,000 in lines of credit for construction and permanent financing to three assisted living companies, one of which is public. Currently $4,700,000 has been funded on these lines which is invested in one assisted living project now in operation. These lines will expire, if not used, by the end of fiscal year 2000. Each project must be individually approved under each line at the time funding is requested. Certificates of need are normally not necessary to build these projects. RETIREMENT CENTERS. The Company owns three retirement centers, all of which are leased to NHC, and has first mortgages on four 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, 1997, the Company had outstanding first mortgage notes on 17 residences for the developmentally disabled. Subsequent to year end, the Company also has received a commitment fee on a $50,000,000 line to be used to purchase or provide first mortgage financing on additional residences for the developmentally disabled. Residences for the developmentally disabled are generally small home-like environments which accommodate six 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 9.25% and 12% per annum. For transactions closed in 1997, rates were slightly lower than 1996 and generally ranged from 9.25% to 10.75%. 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. All of the Health Care Facilities are currently performing under their mortgage loans or leases and the Company has no reason to believe that any of the Health Care Facilities will not be able to perform the obligations under the mortgage loans or leases in the future. 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, are expected to be more significant in future periods. The Company generally requires that the interest rate on mortgage loans be reset five years from the date of the original loan at the greater of the then 10-year United States Treasury Notes yield plus 450 to 500 basis points or the then current interest rate provided in the mortgage. 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. The escalators, while not currently material to net income, are expected to become more significant to future periods. 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 9.25% to 10.75%. 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 The Company competes, primarily on the basis of price, knowledge of the industry, and flexibility of financing structure, with real estate partnerships, other REITs and other investors (including, but not limited to, banks and insurance companies) 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 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. OPERATORS The majority (by total 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, 58% of the Health Care Facilities are operated by publicly-owned companies, while 22% 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, Columbia/HCA, Sun Healthcare, Tenet Corporation, Horizon Healthcare Corporation, Beverly Enterprises, Inc., IATROS Health Network, Inc., Unison Health Systems, Lexon Health Care Systems, and Community Health Systems. 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. 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 principle 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 principle amount. 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 $2.2 million as percentage rent for 1997. 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 experienced material loan prepayments in 1997. The $150,000,000 loan to Litchfield-Integrated Health Services was prepaid (with a 4% prepayment penalty) in October, 1997, and another $31,615,000 representing eight separate loans was also prepaid with the contracted for prepayment fees. Funds received have either been reinvested or used to repurchase outstanding short term company debt. COMMITMENTS The Company has received commitment fees to make loans and to fund construction in progress to third parties for $104.4 million. Commitments include construction financings which have closed but which have not been fully funded as of December 31, 1997 and also investment amounts for which the Company has received a commitment fee but which have not been funded as of December 31, 1997. The following table sets forth certain information regarding the Company's commitments as of December 31, 1997. No. of Facil- Commitments Facility Type ities Current Future Total (in thousands) Long-term care 7 $27,445 $ 9,300 $ 36,745 Medical office bldgs 3 3,984 --- 3,984 Assisted Living 10 39,893 23,784 63,677 Commitments 20 $71,322 $33,084 $104,406 SOURCES OF REVENUES GENERAL. The Company's revenues are derived primarily from mortgage interest income and rental income. During 1997, mortgage interest income equaled $66.2 million of which all except $.6 million was from non-NHC borrowers. Rental income totaled $39.9 million, 75% 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 may 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. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care could 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. In recent years, there have been fundamental changes in the Medicare program which have resulted in reduced levels of payment for a substantial portion of health care services. 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 Corporation. On August 5, 1997, President Clinton signed into law the Blanced Budget Act of 1997 (BBA), 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 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 given 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. 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 potential changes in state Medicaid reimbursement methodologies on the operations of its tenants or borowers; 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. Although it is clear that there will be a reduction in the growth of governmental revenues for Medicare and Medicaid, NHI and similar financial institutions believe that their position as either lessee or first mortgage holder is protected by sufficient revenue base so that it does not anticipate the creation of problem or defaulting loans due to these cuts. 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 payment 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. 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 intends to seek further health care related investment opportunities and to provide lease or mortgage financing for such investments with additional capital, possibly including debt, from public or private sources. The Company plans to continue its goal of maintaining a one to one ratio of debt to shareholder's equity. The Company will be competing with health care providers and investors, including other real estate investment trusts, for additional health care related investments. In evaluating potential investments, the Company expects to consider 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, 1997, investments in NHC totaled approximately 23.26%. 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 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. 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 1997, the annual compensation under the Advisory Agreement was $3.1 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. In addition, although not specifically provided for in the Advisory Agreement, during 1993 the Company granted stock options to purchase a total of 100,000 shares of Common Stock for the benefit of various NHC employees and outside directors of NHC who provided services to the Company. An additional 100,000 shares were granted as options to various NHC employees and outside directors in 1995 and 194,000 shares in 1997. 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 on page 40 indicates the current amount of loans outstanding by Directors of NHI individually and by all designated NHC employees collectively as of December 31, 1997. The total outstanding as of December 31, 1997 is $2.1 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. ITEM 2. PROPERTIES NHI PROPERTIES
LONG TERM CARE Center City Beds ALABAMA NHC HealthCare, Anniston Anniston 151 NHC HealthCare, Moulton Moulton 136 ARIZONA The Arbors Health Care Center Camp Verde 120 Pueblo Notre Nursing Show Low 100 Rio Verde Health Care Center Cottonwood 100 Royal Sun West Care Center Avondale 120 COLORADO Amberwood Court Denver 88 Brookshire House Denver 79 Brookside Inn Castle Rock 120 Christopher House Wheat Ridge 75 FLORIDA Alachua Nursing Home Gainesville 120 Bay St. Joseph Care Center Port St. Joe 120 Bear Creek Nursing Center Hudson 120 Brooksville Nursing Manor Brooksville 180 Cypress Cove Care Center New Port Richey 120 Hampton Court Health Care Center North Miami Beach 120 Health Care Center at Mercy Hospital Miami 120 Heather Hill Nursing Home Crystal River 120 Huber Restorium St. Petersburg 96 Lake Park - Madison Lake Park 79 Medic-Ayers Nursing Center Trenton 120 Plantation Gardens Rehab & Nursing Ocoee 120 Miracle Hill Nursing & Convalescent Tallahassee 120 (under construction) NHC HealthCare, Hudson Hudson 180 NHC HealthCare, Merritt Island Merritt Island 120 NHC HealthCare, Plant City Plant City 171 NHC HealthCare, Stuart Stuart 106 Oakview Nursing Williston 180 Oaks of Kissimmee Kissimmee 59 Osceola Health Care Center St. Cloud 120 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 100 Moss Oaks Health Care Center Pooler 122 Rossville Convalescent Center Rossville 112 West Lake Manor Augusta 100 IDAHO Grangeville Care Center Grangeville 64 Sunny Ridge Care Center Nampa 185 KANSAS Bethesda Nursing Center Chanute 90 Country Club Home Council Grove 100 Green Meadows Nursing Center Haysville 150 Hammond Holiday Home Larned 100 Royal Terrace Nursing Olathe 147 Sedgwick Convalescent Center Sedgwick 95 Hoisington Rehabilitation Center Hoisington 70 Emporia Emporia 79 KENTUCKY NHC HealthCare, Dawson Springs Dawson Springs 80 NHC HealthCare, Glasgow Glasgow 206 NHC HealthCare, Madisonville Madisonville 94 LOUISIANA East Haven Care Center New Orleans 260 Fountain View Nursing Home Springhill 153 Heritage Manor of Abbeville Abbeville 120 Jackson Manor Jonesboro 84 Woodland Care Center New Orleans 186 MARYLAND Windsor Ridge Nursing and Rehabilitation Center Rockville 120 MASSACHUSETTS Buckley Nursing Home Greenfield 120 Buckley Nursing & Retirement Center Holyoke 102 Longmeadow of Taunton Taunton 71 John Adams Nursing Home Quincy 100 MISSOURI Charleviox Nursing Center St. Charles 142 Clayton House Healthcare Clayton 282 Columbia House Healthcare Columbia 141 Florissant Nursing Center Florissant 120 Heritage Manor of Springfield Springfield 102 Hunter Acres Nursing Center Sikeston 116 Medicenter-Springfield Springfield 168 NHC HealthCare, Desloge Desloge 120 NHC HealthCare, Joplin Joplin 126 NHC HealthCare, Kennett Kennett 160 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 Tradition House Healthcare Joplin 92 NEW HAMPSHIRE The Courville at Nashua Nashua 100 Epsom Manor, Inc. Epsom 108 Maple Leaf Health Care Center Manchester 114 Villa Crest, Inc. Manchester 165 Courville at Manchester Manchester 72 NEW MEXICO West Mesa Care Center Albuquerque 120 Belen Health Care Center Belen 120 OHIO The Riverside Dayton 200 Wood Glen Nursing Center Dayton 148 PENNSYLVANIA Briarcliff Pavilion for Special Care N. Huntingdon 225 Kade Nursing Home Canton Township 100 Nipple Convalescent Center Liverpool 37 SOUTH CAROLINA NHC HealthCare, Anderson Anderson 290 NHC HealthCare, Greenwood Greenwood 152 NHC HealthCare, Laurens Laurens 176 Orangeburg Nursing Center Orangeburg 88 TENNESSEE Fentress County Nursing Home Jamestown 130 Greenville West Health Care Center Greenville 144 NHC HealthCare, Athens Athens 96 NHC HealthCare, Chattanooga Chattanooga 212 NHC HealthCare, Columbia Columbia 120 NHC HealthCare, Dickson Dickson 217 NHC HealthCare, Franklin Franklin 84 NHC HealthCare, Hendersonville Hendersonville 107 NHC HealthCare, Hillview Columbia 98 NHC HealthCare, Johnson City Johnson City 179 NHC HealthCare, Knoxville Knoxville 152 NHC HealthCare, Lewisburg Lewisburg 95 NHC HealthCare, McMinnville McMinnville 142 NHC HealthCare, Milan Milan 129 NHC HealthCare, Nashville Nashville 133 NHC HealthCare, Oakwood Lewisburg 62 NHC HealthCare, Pulaski Pulaski 95 NHC HealthCare, Scott Lawrenceburg 62 NHC HealthCare, Sequatchie Dunlap 60 NHC HealthCare, Smithville Smithville 76 NHC HealthCare, Somerville Somerville 84 NHC HealthCare, Sparta Sparta 150 NHC HealthCare, Springfield Springfield 112 Pickett County Nursing Home Byrdstown 63 Rivermont Convalescent and Nursing Center South Pittsburg 165 Standing Stone Nursing Home Monterey 115 Sycamore View Nursing Home Memphis 130 TEXAS Autumn Hills Convalescent Center Houston 113 Autumn Hills Convalescent Center Richmond 89 Autumn Hills Convalescent Center Sugarland 141 Autumn Hills Convalescent Center Tomball 145 Bonham Nursing Center Bonham 65 Canterbury Villa of Falfurrias Falfurrias 98 Canterbury Villa of Kingsville Kingsville 194 College Street Nursing Center Beaumont 50 Columbus Care Center Columbus 134 Conroe Convalescent Center Conroe 106 Denison Manor Mt. Vernon 71 Fair Park Nursing Center Huntsville 88 Friendswood Arms Convalescent Center Friendswood 100 Galaxy Manor Nursing Center Cleveland 100 Golden Charm Nursing Center Liberty 118 Linbergh Health Care Center Beaumont 78 Panola Health Care Center Carthage 108 Shoreline Health Care Center Taft 200 Silver Threads Nursing Center Houston 78 Terry Haven Nursing Center Mt. Vernon 65 Town Park Convalescent Center Houston 120 Willis Convalescent Center Willis 114 Willow Bend Care Center Mesquite 251 VIRGINIA Brian Center of Alleghany Low Moor 60 Brian Center of Bastian Bastian 60 Brian Center of Fincastle Fincastle 60 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 Greenwood Park Care Center Seattle 151 Highline Care Center Seattle 86 Park Ridge Care Center Seattle 128 Park Rose Care Center Tacoma 218 Park West Care Center Seattle 152 Sehome Park Care Center Bellingham 137 WISCONSIN River Hills South Health Care Center Milwaukee 196 ACUTE CARE PROPERTIES KENTUCKY Kentucky River Hospital Jackson 55 LOUISIANA Doctors Hospital Metarie 138 University Rehab Hospital New Orleans 106
MEDICAL OFFICE BUILDINGS
Square Center City Footage ARIZONA North Valley Medical Center Scottsdale 80,000 FLORIDA North Okaloosa Crestview 27,017 KENTUCKY Scott Hospital Georgetown 24,824 LOUISIANA Women's & Children's Lafayette 30,000 TENNESSEE Murfreesboro Medical Clinic Murfreesboro 77,801 under construction 45,000 TEXAS Pasadena Pasadena 61,500 Hill Regional (under construction) Hillsboro 23,000 UTAH Pioneer Valley Salt Lake City 69,000 WASHINGTON Capital Medical Office Building Olympia 67,152 RETIREMENT CENTERS Center City Beds MISSOURI Lake St. Charles Retirement Center St. Charles 168 NEW HAMPSHIRE Heartland Place Epsom 80 Villas at Nashua Nashua 2 TENNESSEE Parkwood Retirement Center Chattanooga 36 Colonial Hill Retirement Center Johnson City 132 TEXAS Remington Retirement Community Corpus Christi 60 Tiffany Walk Congregate Center Tomball 103 ASSISTED LIVING AND DEVELOPMENTALLY DISABLED Center City Beds FLORIDA 19th Street Group Home Gainesville 6 107th Place Group Home Belleview 6 Bessent Road Group Home Starke 6 Brighton Gardens of Maitland Maitland 102 Brighton Gardens of West Palm Beach West Palm Beach 104 Coletta Drive Group Home Orlando 6 Frederick Avenue Group Home Daytona Beach 6 High Desert Court Group Home Jacksonville 6 McFarland Avenue Group Home Lake City 6 Naples Court 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 54 Suffridge Drive Group Home Bonita Springs 6 Tunis Street Group Home Jacksonville 6 Walnut Street Group Home Starke 6 MARYLAND Morningside - St. Charles (U/C) St. Charles 92 Morningside - Satyr Hill (U/C) Baltimore 109 Morningside House of Harmons (U/C) Harmons 98 NEW HAMPSHIRE Aynsley Place, Inc. Nashua 46 Carlyle Place, Inc. Bedford 40 NEW JERSEY Brighton Gardens of Edison Edison 98 TENNESSEE 717 Cheatam Street Springfield 8 305 West Hillcrest Drive Springfield 8 307 West Hillcrest Drive Springfield 8 TEXAS Brighton Gardens of Preston Road Dallas 109 VIRGINIA Morningside House of Leesburg Leesburg 79 REAL ESTATE MORTGAGE INVESTMENT CONDUITS 20.0% participating interest 22 Properties 3,426 5.2% participating interest 36 Properties 4,784
ITEM 3. LEGAL PROCEEDINGS The Company is not subject to any pending litigation. 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 Annual Meeting of the Shareholders was held on March 20, 1997. (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. Ted Welch; Mr. Richard F. LaRoche, Jr., and Mr. W. Andrew Adams. % of Total Outstanding Shares For Abstain Voting Voting For 20,297,933 50,274 84.8% 84.6% PROPOSAL NO. 2: Adoption of 1997 Stock Option Plan which authorizes the issuance for up to ten years from January 15, 1997 options to purchase 600,000 shares of the common stock of National Health Investors, Inc. % of Total Outstanding Shares For Against Abstain Voting Voting For 19,134,465 1,058,618 155,124 84.56% 79.9% PROPOSAL NO. 3: Ratify the appointment of Arthur Andersen LLP as the Company's independent accountant. % of Total Outstanding Shares For Against Abstain Voting Voting For 20,250,083 36,963 61,161 84.8% 84.56% 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 24, 1998 was $40.9375. As of December 31, 1997, there were approximately 1,800 holders of record of shares and the Company estimates that as of such date there were in addition in excess of 23,330 beneficial owners of the shares. High and low stock prices and dividends for the last two years were: 1997 1996 ----------------------------- ----------------------------- Cash Cash Sales Price Dividends Sales Price Dividends Quarter Ended High Low Declared High Low Declared March 31 $40.000 $36.750 .74 $34.125 $31.750 $.70 June 30 40.000 35.250 .74 34.500 30.500 .70 September 30 40.000 37.687 .74 34.125 31.500 .70 December 31 44.750 38.312 .74 38.000 33.000 .74 ITEM 6. SELECTED FINANCIAL DATA The following table represents financial information with respect to the Company for the five years ended December 31, 1997. 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 1997 1996 1995 1994 1993 Net revenues $ 110,179 $ 99,429 $ 87,924 $ 70,850 $ 49,552 Net income 75,388 67,164 49,692 38,880 24,366 Net income per share Basic $ 3.01 $ 2.92 $ 2.63 $ 2.35 $ 1.95 Diluted 2.92 2.81 2.48 2.28 1.95 - ---------------------------------------------------------------------------------------------------- Mortgages and other investments $ 482,760 $ 555,791 $ 507,768 $ 508,135 $ 303,979 Real estate properties, net 200,069 184,255 123,195 118,152 113,376 Total assets 756,599 751,097 641,916 635,423 427,748 Long Term Debt 155,659 160,008 141,103 90,210 110,967 Credit Facilities --- 59,000 31,750 193,944 76,700 Convertible subordinated debentures 119,038 90,735 82,316 102,840 121,613 Total stockholders' equity 444,080 409,683 356,981 223,879 100,606 - ---------------------------------------------------------------------------------------------------- Common shares outstanding 24,753,570 23,474,751 20,535,014 14,047,563 12,762,117 Weighted average common shares Basic 24,394,044 21,916,921 16,381,826 13,236,205 12,502,019 Diluted 28,887,987 27,211,999 22,851,888 20,796,237 16,372,652 - ---------------------------------------------------------------------------------------------------- Common dividends declared per share $ 2.960 $ 2.840 $ 2.610 $ 2.380 $ 2.175
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 which invests primarily in income producing health care properties with emphasis on the long-term care sector. As of December 31, 1997, NHI had interests in net real estate owned, mortgage investments and REMIC investments totaling $682.8 million. NHI's strategy is to invest in health care real estate which generates current income which will be distributed to stockholders. NHI intends to implement this strategy by making mortgage loans and acquiring properties to lease nationwide primarily in the long-term health care industry. As of December 31, 1997, the Company was diversified with investments in 226 health care facilities located in 26 states consisting of 179 long-term care facilities, three acute care hospitals, nine medical office buildings, eleven assisted living facilities, seven retirement centers and 17 residential projects for the developmentally disabled. These investments consisted of approximately $445.6 million aggregate principal amount of loans to 49 borrowers and $200.1 million of purchase leaseback transactions with five lessees and $37.1 million invested in REMIC pass through certificates backed by first mortgage loans to four operators. Of these 226 facilities, 43 are leased to NHC and nine additional facilities are managed by National HealthCare Corporation ("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 23.3% of total invested assets on December 31, 1997. At December 31, 1997, 58.2% of the total invested assets of the health care facilities were operated by public chain operators, 22.0% by private chain operators, and 19.8% by small operators. Liquidity and Capital Resources Sources and Uses of Funds During 1997, NHI has strengthened its capital structure by obtaining from each of the nation's top three rating agencies an investment grade rating for its senior unsecured debt, by issuing additional convertible debt, by the conversions of convertible debentures to common equity, and by the successful placement of its first fixed rate, unsecured, public debt offering. NHI's debt as a percentage of capitalization is at a near all-time low and the Company is in excellent position to grow by making additional investments in 1998. NHI has generated net cash from operating activities during 1997 in the amount of $89.9 million. The funds were used along with $60.0 million of proceeds from the issuance of convertible subordinated debentures, $99.8 million of proceeds from the placement of fixed rate public debt, $92.0 million of proceeds from credit facility borrowings, and $188.9 million received from the prepayment and collection of mortgage notes receivable to make additional investments in income producing loans and real estate properties totaling approximately $139.7 million, to repay debt and credit facilities of $255.1 million and to pay dividends to stockholders of $73.6 million. During 1997, NHI achieved investment grade ratings on its senior unsecured debt from three major rating agencies: Duff & Phelps Rating Co. (BBB-), Moody's Investment Service (Baa3) and Standard & Poor's (BBB-). The rating agencies cited NHI's stable cash flow provided by a diversified portfolio of investments in health care properties, moderate financial leverage, a track record of growth and profitability and an experienced management team. These ratings allowed NHI to lower its cost of both debt and equity capital and helped to expand financing alternatives. In January 1997, NHI placed $60.0 million of 7.0% convertible debentures. Throughout 1997, the Company's balance sheet was further strengthened by the conversion of $5.4 million of NHI's outstanding convertible preferred stock and $31.7 million of convertible debentures to common equity. In June 1997, NHI successfully placed its first $100 million public debt offering of 7.3% senior unsecured notes due 2007. The amount available to be drawn on NHI's line of credit was $100.0 million at December 31, 1997. During 1997, the Company received mortgage prepayments totaling $181.2 million. Proceeds were used to eliminate borrowings under the Company's $100 million revolving credit facility and to make new property and mortgage loan investments. Prepayment penalties and commitment arrangements with the borrower have partially offset reduced net income while the amounts repaid are being reinvested. At year end, debt as a percentage of total capitalization remains strong at 38.2%. The Company continues to be well positioned to take advantage of new investment opportunities. Commitments At December 31, 1997, the Company was committed, subject to due diligence and financial performance goals, to fund approximately $104.4 million in health care real estate projects, of which approximately $71.3 million is expected to be funded within the next 12 months. The commitments include mortgage loans or purchase leaseback agreements for seven long-term health care centers, three medical office buildings, and ten assisted living facilities all at rates ranging from 9.75% to 11.5%. Also included in the $104.4 million of commitments is a commitment to loan an additional $4.3 million on three loans 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, and the assumption of secured or unsecured indebtedness or by the sale of all or a portion of certain currently held investments. The Company believes it has sufficient liquidity and financing capability to finance future investments as well as repay borrowings at or prior to their maturity. Results of Operations Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Net income for the year ended December 31, 1997 is $75.4 million versus $67.2 million for the same period in 1996, an increase of 12.2%. Diluted earnings per common share increased 11 cents or 3.9%, to $2.92 in 1997 from $2.81 in 1996. Total revenues for the year ended December 31, 1997 increased $10.8 million or 10.8% to $110.2 million from $99.4 million for the year ended December 31, 1997. Revenues from mortgage interest income increased $3.8 million, or 6.0%, when compared to the same period in 1996. Revenues from rental income increased $5.4 million, or 15.5% in 1997 as compared to 1996. These increases resulted primarily from investments in additional facilities during 1997 and 1996 and from the recognition of commitment fees. Total expenses for the 1997 twelve month period increased $2.5 million or 7.8% to $34.8 million from $32.3 million for the 1996 twelve month period. Interest expense increased $1.6 million or 7.7% in the 1997 twelve month period as compared to the 1996 period. Depreciation of real estate increased $1.2 million or 17.6% while amortization of loan and organization costs decreased $0.3 million or 25.0% in 1997 when compared to 1996. General and administrative costs increased 0.4%. The increase in interest expense is due primarily to higher average amounts borrowed in 1997 when compared to 1996. Depreciation increased as a result of the Company placing newly constructed assets in service in 1997 and 1996. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995. Net income for the year ended December 31, 1996 is $67.2 million versus $49.7 million for 1995, an increase of 35.2%. Diluted earnings per common share increased $0.33 or 13.3% to $2.81 in the 1996 period from $2.48 in the 1995 period. Total revenues for the year ended December 31, 1996 increased $11.5 million or 13.1% to $99.4 million from $87.9 million in the year ended December 31, 1995. Revenues from mortgage interest income increased $8.6 million or 15.9% when compared to the same period in 1995. Revenues from rental income increased $2.5 million or 7.8% in the 1996 period as compared to the 1995 period. These increases resulted primarily from investments in additional facilities during the last 12 months and from the recognition of commitment fees. Total expenses for 1996 decreased $6.0 million or 15.6% to $32.2 million from $38.2 million for 1995. Interest expense decreased $6.7 million or 24.1% in 1996 as compared to 1995. Depreciation on real estate increased $0.8 million or 13.5% while amortization of loan and organization costs decreased $0.5 million or 31.9% when compared to 1995. General and administrative costs increased $0.3 million or 9.3%. The decrease in interest expense was due to decreased debt levels resulting from the lower average balances of credit facility debt and from the conversion of 7.375%, 7.75% and 10% convertible debentures to common stock. The decrease in interest expense was offset in part by the increased interest on 7.75% convertible debt, $45.0 million of which was issued in December 1995 and $55.0 million of which was issued in January 1996. Depreciation increased as a result of the Company's placing in service newly constructed assets in 1996 and 1995. General and administrative expenses increased due to increased administrative expenses and advisory fees to NHC. Future Growth The Company expects increases in both mortgage interest income and rental income from the additional investments it has made in mortgage loans and owned facilities during 1997 and from revenue participations and escalators the Company has negotiated in its mortgages and leases. Additionally, the Company expects to make new investments in health care facilities that would increase interest and rental revenues as well as interest and depreciation expense. Increases in revenues are expected to more than offset increases in associated expenses. 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 rent 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 1997, NHI adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" and Statement of Financial Accounting Standards No. 129, "Disclosure of Information About Capital Structure". The adoption of the provisions of these accounting pronouncements did not have a material impact on NHI's financial condition or results of operations. Year 2000 Compliance The Company is currently in the process of evaluating its information technology infrastructure for Year 2000 compliance. The Company does not expect that the cost to modify its information technology infrastructure to be Year 2000 compliant will be material to its financial condition or results of operations. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company to be in compliance. The Company does not currently have any information concerning Year 2000 compliance status of its suppliers and customers. In the event that any of the Company's significant suppliers or customers does not successfully and timely achieve Year 2000 compliance, the Company's business or operations could be adversely affected. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not Applicable 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 1997 Net Revenues $26,445 $27,204 $28,360 $28,170 Net Income 17,942 18,525 19,056 19,865 Basic Earnings Per Share .700 .720 .730 .770 Diluted Earnings Per Share .710 .720 .740 .760 1996 Net Revenues $23,344 $23,887 $25,275 $26,923 Net Income 15,638 16,401 16,939 18,186 Basic Earnings Per Share .730 .740 .760 .790 Diluted Earnings Per Share .670 .690 .710 .730
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 52 Director and President 1999 Richard F. LaRoche, Jr. 52 Director and Secretary 1998 Jack Tyrrell 51 Director 1999 Robert T. Webb 53 Director 2000 Ted H. Welch 64 Director 1998 Robert G. Adams 51 Vice President ---- W. Andrew Adams has been President and a director of the Company since its inception in 1991. Mr. Adams has also been President and Director of NHC since 1974. 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 has also been General Counsel of NHC since 1971, Secretary of NHC since 1974 and Senior Vice President of NHC since 1986. 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 both companies. Jack Tyrrell has served as a director of the Company since its inception in 1991. Mr. Tyrrell is a partner of Richland Ventures, L.P. and Richland Ventures, L.P. II, venture capital firms based in Nashville, Tennessee which were founded in May 1994 and September 1996. He also currently serves as a 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. Mr. Tyrrell serves as a director of Regal Cinemas, and Premier Parks, both of which are publicly held entities. 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. 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 President 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 and is also the brother of W. Andrew Adams. He is the Chief Operating Officer of NHC, serves on NHC's Board of Directors and on the Board of National Health Realty, Inc. He is responsible for oversight of all company due diligence reports 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 the Company 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 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. degree from Middle Tennessee State University. 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. See "Business - Advisory Agreement". The following table sets forth certain information concerning the compensation of the Company's chief executive officer and the other executive officers of the Company: SUMMARY COMPENSATION TABLE NAME AND PRINCIPAL POSITION YEAR COMPENSATION W. Andrew Adams, 1997 $650,000 President and Director 1996 600,000 1995 450,000 Richard F LaRoche, Jr. 1997 450,000 Vice President, 1996 400,000 Secretary and Director 1995 225,000 Robert G. Adams 1997 450,000 Vice President 1996 400,000 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. 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 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 $28.75 per share in 1994, $25,375 in 1995, $33.50 in 1997 and $36.00 in 1997. The outside directors have exercised all options granted in 1994, all but 9,000 of the 1995 grants, all but 10,000 of the 1996 grants and none of the 1997 grants. In 1993 the Board awarded options on 100,000 shares at the then fair market value of $25.00 to its Investment Advisor, with the direction that they be allocated among those employees who were directly involved in the provision of investment advisory services to the Company. On June 1, 1995, the Company awarded options on another 100,000 shares at the then fair market value of $26.00 per share to key NHC employees. On January 15, 1997, the balance of the shares available under the 1991 Plan were granted to Key Employees at $36.00 per share. 45,000 shares of the 1997 Plan have been granted, 45,000 to non NHC affiliated directors, and -0- to NHC Key Employees. OPTIONS GRANTED IN 1997 The table below provides certain information on grants of stock options to the executive officers and directors pursuant to the Company's 1991 Option Plan during the fiscal year ended December 31, 1997. Although stock appreciation rights are available under the plan, none have been issued to date.
Potential Realizable Percent of Value at Assumed Total Exercise Annual Rates of Options/SAR's or Base Stock Price Appreciation Options/SAR's Granted in Price Expiration for Option Term Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($) Ted H. Welch 15,000 7.7% $36.000 1/15/02 $149,192 $329,675 Jack Tyrrell 15,000 7.7% 36.000 1/15/02 149,192 329,675 Robert T. Webb 15,000 7.7% 36.000 1/15/02 149,192 329,675 W. Andrew Adams 40,000 20.6% 36.000 1/15/02 397,845 879.134 Richard F. LaRoche, Jr. 30,000 15.5% 36.000 1/15/02 298,384 659.351 Robert G. Adams 30,000 15.5% 36.000 1/15/02 298,384 659.351
Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option terms. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted. Actual gains, if any, on stock option exercises will depend on the future performance of the Common Stock and the date on which the options are exercised. 1997 YEAR-END OPTION VALUES The following table summarizes certain information regarding stock options exercised during the fiscal year ended December 31, 1997 and stock options held as of December 31, 1997 by the Executive Officers and Directors. No SARs were held or exercised during fiscal 1997. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Shares Shares Underlying Unexercised Value of Unexercised Acquired on Value Options at Fiscal In-the-Money Options Exercise Realized Year-End at Fiscal Year-End Name (#) ($) (#) ($) W. Andrew Adams 4,000 $ 47,250 76,000 $828,750 Richard F. LaRoche, Jr. 4,000 47,250 34,000 250,125 Robert T. Webb 5,000 19,830 15,000 90,937 Ted H. Welch -0- -0- 24,000 200,500 Jack Tyrrell -0- -0- 28,000 264,625 Robert G. Adams 4,000 47,250 34,000 250,125 Represents the difference between the exercise price and the average sales price of the Common stock on the date of exercise. Value based on the average sales price per share ($42.0625) of the Company's Common Stock on December 31, 1997, 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, 1997 (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 Total Shares W. Andrew Adams 1,095,350 4.4% 1927 Memorial Blvd. Murfreesboro, TN 37129 Richard F. LaRoche, Jr. 320,625 1.3% 2103 Shannon Drive Murfreesboro, TN 37129 Jack Tyrrell 15,586 * 3100 West End Avenue Nashville, TN 37203 Robert T. Webb 50,073 * 149 MTCS Drive Murfreesboro, TN 37129 Ted Welch 17,000 * 611 Commerce, 29th Floor Nashville, TN 37219 Robert G. Adams 269,300 1.1% 2217 Tomahawk Trace Murfreesboro, TN 37129 Franklin Resources, Inc. 2,140,100 8.6% 777 Maariners Island Blvd. San Mateo, CA 94403 Wasatch Advisors, Inc. 1,176,931 4.8% 68 South Main Street Salt Lake City, UT 84101 All Executive Officers and Directors as a Group (6 persons) 1,767,934 7.1% ________________ *Less than 1%. The percentages shown are based on 24,753,570 shares of Common Stock outstanding on December 31, 1997 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. Includes options to purchase 76,000 shares of Common Stock held by Mr. Adams. Includes options to purchase 34,000 shares of Common Stock held by Mr. LaRoche. Includes options to purchase 28,000 shares of Common Stock held by Mr. Tyrrell. Includes options to purchase 15,000 shares of Common Stock held by Mr. Webb. Includes options to purchase 24,000 shares of Common Stock held by Mr. Welch. Includes options to purchase 34,000 shares of Common Stock held by Mr. Adams. Includes options to purchase 211,000 shares of Common Stock. Substantially all the options included in this total have been transferred to a family partnership or trust.
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, 1997, and 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 $52,833,359 million. 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 1995 through 2015. 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. 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 ($21,038,000 at December 31, 1997) of unrelated parties which NHC has also guaranteed. The debt is at fixed interest rates with a weighted average interest rate of 8.4% at December 31, 1997. NHI receives from NHC compensation of approximately $105,190 per annum for the guarantees which is credited against NHC's base rent requirements. Additionally, NHI has outstanding letters of credit for $10,835,000 of debt. NHI also has guaranteed bank loans in the amount of $2,074,000 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. 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 Unitholders 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. Counsel to NHC also represents the Company on certain 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, 1997. Current Maximum Loan Loan Commercial Bank Outstanding Outstanding Originating Loan W. Andrew Adams $ -0- $ -0- -- Richard F. LaRoche, Jr. 200,000 200,000 SouthTrust Bank Jack Tyrrell -0- -0- -- Robert T. Webb -0- -0- SouthTrust Bank Ted Welch -0- 51,000 SouthTrust Bank Robert G. Adams 100,000 300,000 SouthTrust Bank NHC Employees 1,774,277 2,285,808 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. - None 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 26th day of March, 1998. 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 26, 1998 W. Andrew Adams (Principal Executive Officer) /s/ Richard F. LaRoche, Jr. Secretary and Director March 26, 1998 Richard F. LaRoche, Jr. (Principal Financial Officer) /s/ Jack Tyrrell Director March 26, 1998 Jack Tyrrell /s/ Robert T. Webb Director March 26, 1998 Robert T. Webb /s/ Ted H. Welch Director March 26, 1998 Ted H. Welch NATIONAL HEALTH INVESTORS, INC. FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997 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 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 24 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, 1997 & 1996 Consolidated Statements of Income-For the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows-For the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity-For the Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Financial Statements Schedules Report of Independent Public Accountants on Financial Statement Schedules 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 1997 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 incorporated on July 24, 1991 which began operations on October 17, 1991) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Nashville, Tennessee January 13, 1998 NATIONAL HEALTH INVESTORS, INC.
Consolidated Balance Sheets (In thousands, except share amounts) December 31 1997 1996 Assets Real estate properties: Land $ 20,468 $ 20,468 Buildings and improvements 205,631 192,095 Construction in progress 10,899 587 236,998 213,150 Less accumulated depreciation (36,929) (28,895) Real estate properties, net 200,069 184,255 Mortgage and other notes receivable 445,603 519,229 Investments in real estate mortgage investment conduits 37,157 36,562 Interest and rent receivable 5,185 5,382 Cash and cash equivalents 64,915 3,400 Deferred costs and other assets 3,670 2,269 Total Assets $756,599 $751,097 Liabilities and Deferred Income Long-term debt $155,659 $160,008 Credit facilities --- 59,000 Convertible subordinated debentures 119,038 90,735 Accounts payable and other accrued expenses 4,266 3,131 Accrued interest 6,928 1,984 Dividends payable 18,318 17,371 Deferred income 8,310 9,185 Total Liabilities and Deferred Income 312,519 341,414 Commitments and guarantees Stockholders' Equity Cumulative convertible preferred stock, $.01 par value; 10,000,000 shares authorized; 833,664 and 1,050,122 shares, respectively, issued and outstanding; stated at liquidation preference of $25 per share 20,842 26,253 Common stock, $.01 par value; 40,000,000 shares authorized; 24,753,570 and 23,474,751 shares, respectively, issued and outstanding 248 235 Capital in excess of par value 434,135 395,204 Cumulative net income 270,902 195,514 Cumulative dividends (282,047) (207,523) Total Stockholders' Equity 444,080 409,683 Total Liabilities and Stockholders' Equity $756,599 $751,097 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 1997 1996 1995 Revenues: Mortgage interest income $ 66,242 $ 62,508 $ 53,919 Rental income 39,948 34,579 32,061 Investment interest and other income 3,989 2,342 1,944 110,179 99,429 87,924 Expenses: Interest 22,219 20,633 27,205 Depreciation of real estate 8,036 6,832 6,020 Amortization of loan & organization costs 836 1,115 1,637 General and administrative 3,700 3,685 3,370 34,791 32,265 38,232 Net income 75,388 67,164 49,692 Dividends to preferred stockholders 1,916 3,118 6,613 Net income applicable to common stock $ 73,472 $ 64,046 $ 43,079 Net income per common share: Basic $3.01 $2.92 $2.63 Diluted 2.92 2.81 2.48 Weighted average common shares outstanding: Basic 24,394,044 21,916,921 16,381,826 Diluted 28,887,987 27,211,999 22,851,888 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 1997 1996 1995 Cash flows from operating activities: Net income $ 75,388 $ 67,164 $ 49,692 Depreciation of real estate 8,036 6,832 6,020 Amortization of loan and organization costs 836 1,115 1,637 Interest on debenture conversion 300 719 659 Deferred income 1,495 6,335 530 Recognition of deferred income (2,370) (6,190) (1,542) (Increase) decrease in interest & rent receivable 197 679 (1,349) (Increase) decrease in other assets (25) 68 232 Increase (decrease) in accounts payable and accrued liabilities 6,079 (9) (665) Net cash provided by operating activities 89,936 76,713 55,214 Cash flows from investing activities: Investment in mortgage notes receivable (115,876) (153,084) (85,145) Investment in real estate mortgage investment conduit --- --- (6,158) Collection of mortgage notes receivable 7,695 8,750 8,423 Prepayment of mortgage notes receivable 181,212 96,311 83,247 Acquisition of and construction of property and equipment, net (23,848) (67,892) (11,063) Net cash provided by (used in) investing activities 49,183 (115,915) (10,696) Cash flows from financing activities: Repayment of credit facilities (151,000) (95,250) (84,792) Proceeds from credit facilities 92,000 122,500 --- Proceeds from long-term debt 99,756 103,168 115,085 Principal payments on long-term debt (104,105) (84,263) (141,594) Proceeds from issuance of convertible subordinated debentures 60,000 57,735 48,671 Financing costs paid (2,671) (1,548) (1,409) Dividends paid to stockholders (73,577) (64,484) (44,102) Sale of stock and exercise of stock options 1,993 2,622 65,729 Net cash provided by (used in) financing activities (77,604) 40,480 (42,412) Increase in cash and cash equivalents 61,515 1,278 2,106 Cash and cash equivalents, beginning of period 3,400 2,122 16 Cash and cash equivalents, end of period $ 64,915 $ 3,400 $ 2,122 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 Total Preferred Stock Common Stock Excess of Cumulative Cumulative Stockholders' Shares Amount Shares Amount Par Value Net Income Dividends Equity Balance at 12/31/94 3,802,960 $95,074 14,047,563$ 140 $140,281 $ 78,658 $ (90,274) $223,879 Net income --- --- --- --- --- 49,692 --- 49,692 Shares sold --- --- 2,534,453 25 65,704 --- --- 65,729 Shares issued in conversion of convertible debentures to common stock --- --- 2,603,317 27 68,650 --- --- 68,677 Shares issued in conversion of preferred stock to common stock (1,491,427)(37,286) 1,349,681 13 37,273 --- --- --- Dividends to common stock- holders ($2.610 per share) --- --- --- --- --- --- (44,383) (44,383) Dividends to preferred stock- holders ($2.125 per share) --- --- --- --- --- --- (6,613) (6,613) Balance at 12/31/95 2,311,533 57,788 20,535,014 205 311,908 128,350 (141,270) 356,981 Net income --- --- --- --- --- 67,164 --- 67,164 Shares sold --- --- 95,878 1 2,621 --- --- 2,622 Shares issued in conversion of convertible debentures to common stock --- --- 1,702,366 18 49,151 --- --- 49,169 Shares issued in conversion of preferred stock to common stock (1,261,411)(31,535) 1,141,493 11 31,524 --- --- --- Dividends to common stock- holders ($2.840 per share) --- --- --- --- --- --- (63,135) (63,135) Dividends to preferred stock- holders ($2.125 per share) --- --- --- --- --- --- (3,118) (3,118) 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 conversion of preferred stock to common stock (216,458) (5,411) 195,894 2 5,409 --- --- --- Dividends to common stock- holders ($2.960 per share) --- --- --- --- --- --- (72,608) (72,608) Dividends to preferred stock- 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 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, 1997, 1996, and 1995 NOTE 1. ORGANIZATION National Health Investors, Inc. ("NHI" or the "Company") is a Maryland real estate investment trust which 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. Real property transferred from National HealthCare Corporation ("NHC") was recorded at NHC's historical cost book value at the date of transfer. NHI uses the straight-line method of depreciation for buildings and improvements over their estimated remaining useful lives of up to 40 years. In March 1995, the Financial Accounting Standards Board issued 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 adopted the provisions of SFAS 121 effective January 1, 1996. The adoption of SFAS 121 did not have a material effect on NHI's financial statements. NHI evaluates the recoverability of the carrying values of its properties on a property by property basis. 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. 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 (by approximately $16,465,000) in its real estate properties. 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 which 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 6. Mortgage and other notes receivable relate primarily to secured loans with health care facilities as discussed in Note 4. NHI also has loan participation agreements which it purchased from a financial institution on certain mortgage and other notes receivable. 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 6 for additional information on the real estate mortgage investment conduits and notes receivable. Deferred Costs - Costs incurred to acquire financings are amortized by the interest method over the term of the related debt. 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. 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, 1997:
Buildings, Number Improvements & Mortgage of Construction Accum. Notes Facility Type and State Facilities Land in Progress Depr. Payable (Dollar amounts in thousands) LONG-TERM CARE: Alabama 2 $ 95 $ 5,165 $ 1,314 $ 498 Arizona 1 453 4,558 168 2,985 Florida 4 1,949 33,126 5,592 12,298 Georgia 1 52 865 400 159 Idaho 2 365 6,824 252 --- Kentucky 3 201 2,899 1,006 --- Missouri 5 1,070 23,070 5,284 16,196 South Carolina 3 572 11,544 3,318 6,856 Tennessee 21 2,118 42,705 10,826 12,084 Virginia 1 176 2,511 650 3,735 Total Long-Term Care 43 7,051 133,267 28,810 54,811 ACUTE CARE: Kentucky 1 540 6,961 1,098 --- Total Acute Care 1 540 6,961 1,098 --- MEDICAL OFFICE BUILDINGS: Florida 1 170 3,349 558 --- Kentucky 1 23 3,667 577 --- Louisiana 1 --- 3,153 545 --- Texas 2 631 7,921 797 --- Utah 1 223 6,541 1,093 --- Total Medical Office Buildings 6 1,047 24,631 3,570 --- ASSISTED LIVING: Florida 2 5,089 20,725 922 --- New Jersey 1 4,229 13,030 597 --- Texas 1 2,094 9,091 396 --- Total Assisted Living 4 11,412 42,846 1,915 --- RETIREMENT CENTERS: Missouri 1 354 3,181 736 --- Tennessee 2 64 5,644 800 1,007 Total Retirement Centers 3 418 8,825 1,536 1,007 Total 57 $20,468 $216,530 $36,929 $55,818
NOTE 4. MORTGAGE AND OTHER NOTES RECEIVABLE The following is a summary of mortgage and other notes receivable by type: December 31, 1997 1996 Mortgage loans $424,272,000 $505,275,000 Construction loans 17,638,000 10,191,000 Term loans 3,693,000 3,763,000 $445,603,000 $519,229,000 The following is a summary of the terms and amounts of mortgage and other notes receivable at December 31, 1997:
Final Number of Principal Payment Date Loans Payment Terms Amount First Mortgage Notes: 1999 1 Monthly payments of $258,000, which include interest at 11%. $25,796,000 2000 1 Loan participation agreement with SouthTrust Bank acquiring a 20.9% interest in 16 mortgage notes. Monthly payments of $166,000, which include interest at 8.26%. 19,423,000 2002 1 Monthly payments of $132,000, which include interest at 10.5%. Contingent interest related to a percentage of the facility's annual increase in revenue over a base year is paid annually. 13,073,000 2002 1 Monthly principal payments of $214,000 plus interest at 12%. Contingent interest related to a percentage of the facility's annual increase in revenue over a base year is paid annually. 11,137,000 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. 9,610,000 2003 1 Monthly interest payments of $245,000, at 10% through April 1998. Beginning May 1998 monthly payments of principal and interest of $294,000, which include interest at 10%. 28,834,000 2003 1 Monthly payments of $103,000, which include interest at 10.75%. Effective October 1998, the monthly payments will be adjusted to include interest at the greater of 10.75% or the rate that ten-year United States securities yield plus 4.5%. Contingent interest related to a percentage of the facility's annual increase in revenue over a base year is paid annually. 11,943,000 2004 1 Monthly payments of $149,000, which include interest at 11%. Effective October 2000, the monthly payments will be adjusted to include interest at the greater of 11% or the rate that ten-year United States securities yield plus 5%. Contingent interest related to the greater of a percentage of the facilities' annual increase in revenue over a base year or the percentage increase in the Consumer Price Index over a base year is paid annually. 14,565,000 2004 1 Monthly payments of $180,000, which include interest at 10.5%. Effective April 1999, the monthly payments will be adjusted to include interest at the greater of 10.5% or the rate that ten-year United States securities yield plus 5%. Contingent interest related to the greater of a percentage of the facilities' annual increase in revenue over a base year or the percentage increase in the Consumer Price Index over a base year is paid annually. 18,451,000 2005 1 Monthly payments of $98,000, which include interest at 11.35%. The interest rate escalates annually by .1% per year. Contingent interest related to a percentage of the facility's annual increase in revenue over a base year is due annually. 9,464,000 2006 1 Monthly interest payments of $212,000 at 10.5%. Effective January 1999, the monthly payment will be adjusted annually to include principal and interest at a rate equal to .15% above the previous year's rate. 22,896,000 2007 1 Monthly interest payments of $466,000, at 10.5% through October 1999. Beginning November 1999 monthly payments of principal and interest of $501,000, which include interest at 10.5%. Contingent interest related to a percentage of the facility's annual increase in revenue over a base year is due annually beginning in 1999. 51,500,000 2007 1 Monthly interest payments of $446,000 at 10.5% through April 1999. Beginning May 1999, monthly payments of principal and interest of $94,000, which include interest at 10.5%. Contingent interest related to a percentage of the facility's annual in- crease in revenue over a base year is due annually. 10,000,000 2011 1 Monthly interest payments of $237,000 at 10.65%. The interest rate will be in- creased by .15% annually. Principal on the loan is due at maturity. 25,805,000 1997 to 2006 29 Monthly payments from $5,000 to $95,000, which include interest at 9.95% to 15.00%. Principal outstanding ranges from $414,000 to $9,469,000. 134,076,000 2010 1 Monthly payments of $185,000, which include interest at 11.45%. The interest rate will escalate .1% per year through September 1, 2005, the anniversary date of the note. Effec- tive 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%. 17,699,000 Construction Loans: 2012 6 Monthly payments of interest only at the rates of 10.5% to 11.5% during con- struction. Construction notes will convert to mortgage notes at close of construction. The notes provide for interest escalation at various anniversary dates of the note. Contingent interest related to a percentage of the facilities' annual increase in revenue over a base year will be paid annually beginning during the term of the mortgage loans. 17,638,000 Term Notes: 2019 3 Monthly payments of $29,000, which include interest at 7.5%. 3,693,000 $445,603,000
The mortgage notes receivable are generally first mortgage notes secured by the real estate of long-term health care centers, acute care hospitals, medical office buildings, assisted living facilities and retirement centers in the states of Alabama, Arizona, Colorado, Florida, Georgia, Kansas, Louisiana, Maryland, Missouri, New Hampshire, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, and Wisconsin. Construction loans are for the construction of two nursing homes located in Florida, three assisted living facilities in Maryland and one medical office building located in Tennessee. NHI has agreed to provide permanent financing for the projects upon completion of the construction. 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. 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. 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 risk- free rate. Interest and rent 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, 1993 debentures and senior debentures is estimated based on the quoted market prices of the debentures. The estimated fair values of NHI's financial instruments are as follows:
December 31, 1997 December 31, 1996 Carrying Fair Carrying Fair Amount Value Amount Value (in thousands) (in thousands) Mortgage and other notes receivable $ 445,603 $ 445,603 $ 519,229 $ 519,229 Investments in real estate mort- gage investment conduits 37,157 37,157 36,562 36,562 Interest and rent receivable 5,185 5,185 5,382 5,382 Cash and cash equivalents 64,915 64,915 3,400 3,400 Long-term debt and credit facilities (155,659) (155,659) (219,008) (219,008) Convertible subordinated debentures (119,038) (144,486) (90,735) (106,311)
NOTE 6. 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 Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("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 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. At the end of each future fiscal quarter, the effective yield of the certificates will be recalculated by NHI based on actual cash payments received and revised cash flow projections that reflect updated assumptions about interest rates and prepayment rates. The carrying value of the certificates will be adjusted by NHI at the end of each future quarter as if the new effective yield had been applied since the purchase of the certificates, and the cumulative effect of this adjustment will be reflected in operations in the period the adjustment is made. At December 31, 1997, the effective yields have been calculated by NHI to be 10.5% and 12.0%, respectively, on the 1995 REMIC and the 1993 REMIC and the average remaining lives of the mortgages are calculated to be 7.9 years and 5.3 years, respectively. NOTE 7. DEBT Short-Term Borrowings - As of December 31, 1997 and 1996, there were no short-term borrowings outstanding. Long-Term Debt - Long-term debt, including refinancing commitments, consists of the following:
Weighted Average Final Principal Interest Rate Maturities Amount December 31 1997 1996 Bank credit facility, principal and Variable, interest payable quarterly 6.1% 2009 $ 23,301,000 $ 24,493,000 Senior secured notes, principal and interest payable semiannually 8.4 2005 14,657,000 16,490,000 Senior secured notes, principal and interest payable semiannually 8.3 2003 912,000 1,077,000 Senior unsecured line of credit agreement, payable in periodic installments of principal and interest Variable 2000 --- 59,000,000 Senior unsecured term loan, repaid in 1997 --- ---- --- 100,000,000 Unsecured notes, interest payable semi- annually, principal due at maturity 7.3 2007 100,000,000 --- First mortgage notes, principal payable in periodic installments, interest payable monthly 5.0 2017 834,000 746,000 First mortgage revenue bonds, principal payable in periodic installments, Variable, interest payable monthly 4.8 1999-2014 15,955,000 17,202,000 $155,659,000 $219,008,000
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. No amount was outstanding at December 31, 1997. 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 equal 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 its variable rate interest rate obligations on a $50,000,000 notional principal amount for a weighted average fixed rate obligation of 7.6% per annum. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on variable rate long-term debt. 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. Substantially all real estate property and certain mortgage notes receivable are either pledged as collateral on the long-term debt or are subject to a negative pledge. The debt identified above as senior secured notes is cross-defaulted with other NHC liabilities and is cross-collateralized to the extent of approximately $21,038,000 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, including refinancing commitments, for the five years subsequent to December 31, 1997 are as follows: 1998 $ 4,420,000 1999 4,162,000 2000 4,474,000 2001 4,529,000 2002 4,699,000 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. In 1997 the Financial Standards Board issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). NHI adopted the provisions of SFAS 129 during the fourth quarter of 1997. The adoption of SFAS 129 did not have a material effect on NHI's financial statements. NOTE 8. 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, 1997, 1997 debentures in the amount of $59,635,000 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 1997, $365,000 of the 1997 debentures were converted into 9,733 shares of common stock. NHI has reserved an additional 1,590,267 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, 1997, 1995 debentures in the amount of $47,422,000 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 1997 and 1996, $27,472,000 and $25,106,000, respectively, of the 1995 debentures were converted into 868,664 and 793,861 shares of common stock. NHI has reserved an additional 1,499,510 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. At December 31, 1997, debentures in the amount of $6,406,000 have been issued. 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. At December 31, 1997, none of the debentures have been converted. Interest is payable semiannually on April 1 and October 1 of each year. 1993 Debentures - On March 25, 1993, NHI issued $112,210,000 of 7.375% convertible subordinated debentures (the "1993 debentures") due on April 1, 1998. At December 31, 1997, 1993 debentures in the amount of $5,345,000 were outstanding. The 1993 debentures are convertible at the option of the holder into common stock of NHI at a conversion price of $27.25 per share, subject to adjustment. During 1997 and 1996, $3,790,000 and $22,700,000, respectively, of the 1993 debentures were converted into 139,074 shares and 833,005 shares, respectively, of common stock. NHI has reserved an additional 196,147 shares of common stock for 1993 debenture conversions. The 1993 debentures are redeemable by NHI in whole or in part at any time upon payment of 100% of the principal amount and accrued interest to the date fixed for redemption. The 1993 debentures are subordinated in right of payment to all principal and interest on existing secured indebtedness. 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, 1997, senior debentures in the amount of $230,000 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 1997 and 1996, $70,000 and $1,510,000, respectively, of the senior debentures were converted into 3,500 and 75,500 shares, respectively, of common stock. NHI has reserved an additional 11,500 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 9. COMMITMENTS AND GUARANTEES At December 31, 1997, NHI was committed, subject to due diligence and financial performance goals, to fund approximately $104,406,000 in health care real estate projects, of which amount, approximately $71,322,000 is expected to be funded within the next 12 months. The commitments include mortgage loans for seven long-term health care centers, three medical office buildings, and ten assisted living facilities, all at rates ranging from 9.75% to 11.5%. Also included in the $104,406,000 of commitments is a commitment to loan an additional $4,300,000 on three loans when the mortgagee obtains certain operating ratios. In addition to the above commitments, NHI has entered into an agreement to loan up to $150,000,000 in January 1998. In order to obtain the consent of appropriate lenders to NHC's transfer of assets to NHI, NHI guaranteed certain debt ($21,038,000 at December 31, 1997) of NHC. The debt is at fixed interest rates with a weighted average interest rate of 8.4% at December 31, 1997. NHI receives from NHC compensation of approximately $105,190 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 $10,835,000. NHI also has guaranteed bank loans in the amount of $2,074,000 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. NOTE 10. 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 by NHI prior to February 15, 1999 and is not redeemable for cash. On or after February 15, 1999, the Preferred Stock will be 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, 1997, 833,664 shares of the Preferred Stock, which are convertible into 754,466 shares of common stock, are outstanding. During 1997 and 1996, respectively, 216,458 and 1,261,411 shares of preferred stock were converted into 195,894 and 1,141,493 shares of common stock. NHI has reserved 754,466 shares of common stock for Preferred Stock conversions. The Preferred Stock is listed on the NYSE under the symbol "NHIPr". NOTE 11. COMMON STOCK OFFERINGS On May 23, 1995, NHI sold, in a public equity offering, 1,900,000 shares of common stock at a price of $26.75 per share. Net proceeds to the Company from the sale were approximately $48,000,000. On July 26, 1995, NHI sold, in a private placement, 577,000 shares of common stock at a price of $28.25 per share. Net proceeds to the Company from the sale were $16,300,000. NOTE 12. 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, 1993 114,000 $24.91 Options granted 3,000 28.75 Options exercised 22,000 25.00 Outstanding December 31, 1994 95,000 25.01 Options granted 115,000 25.92 Options exercised 53,209 25.09 Outstanding December 31, 1995 156,791 25.65 Options granted 15,000 33.50 Options exercised 71,079 25.75 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 At December 31, 1997, all options outstanding are exercisable. Exercise prices on the exercisable options range from $25.00 to 36.00. The weighted average remaining contractual life of options outstanding at December 31, 1997 is 3.43 years. NHI has reserved 812,347 shares of common stock for issuance under the stock option plans. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. NHI has adopted the disclosure-only provisions of 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 pro forma earnings and earnings per share. 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 REIT qualification under the Internal Revenue Code. NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows:
(in thousands, except share amounts) Year Ended December 31 1997 1996 1995 Cash payments for interest expense $ 13,577 $ 15,530 $ 29,199 During 1997, 1996 and 1995, $31,697,000,$49,316,000 and $69,195,000, respectively, of convertible subordinated debentures were converted into 1,020,971 shares, 1,702,316 shares and 2,603,317 shares, respectively, of NHI's common stock: Convertible subordinated debentures $ (31,697) $(49,316) $ (69,195) Financing costs 457 866 1,177 Accrued interest (300) (719) (659) Common stock 10 18 27 Capital in excess of par value 31,530 49,151 68,650
NOTE 15. EARNINGS PER SHARE In 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). NHI adopted the provisions of SFAS 128 during the fourth quarter of 1997 and has restated reporting earnings per share for 1996 and 1995. 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 all 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 1997 1996 1995 BASIC: Weighted average common shares 24,394,044 21,916,921 16,381,826 Net income $75,388,000 $67,164,000 $49,692,000 Dividends paid to preferred stockholders (1,916,000) (3,118,000) (6,613,000) Net income available to common stockholders $73,472,000 $64,046,000 $43,079,000 Net income per common share $ 3.01 $ 2.92 $ 2.63 DILUTED: Weighted average common shares 24,394,044 21,916,921 16,381,826 Stock options 36,897 29,937 13,529 Convertible subordinated debentures 3,621,812 3,851,251 3,478,326 Cumulative convertible pre- ferred stock 835,234 1,413,890 2,978,207 Average common shares outstanding 28,887,987 27,211,999 22,851,888 Net income $75,388,000 $67,164,000 $49,692,000 Interest expense on con- vertible subordinated debentures 9,046,000 9,184,000 7,057,000 Net income assuming con- version of subordinated convertible debentures to common stock $84,434,000 $76,348,000 $56,749,000 Net income per common share $ 2.92 $ 2.81 $ 2.48
NOTE 16. DIVIDENDS Dividend payments by NHI to its common stockholders are characterized in the following manner for tax purposes in 1997:
Dividend Taxable Non-Taxable Payment as Ordinary Taxable as Return of Date Income Capital Gains Capital Totals Feb. 10, 1997 $ .74 $--- $--- $ .74 May 9, 1997 .74 --- --- .74 Aug. 11, 1997 .74 --- --- .74 Nov. 10, 1997 .74 --- --- .74 Jan. 30, 1998 .74 --- --- .74 $3.70 $--- $--- $3.70
NOTE 17. 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 $39,948,000 ($29,829,000 from NHC) in 1997; $34,579,000 ($26,910,000 from NHC) in 1996; and $32,061,000 ($27,618,000 from NHC) in 1995. 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 will be paid annually by NHC. At December 31, 1997, 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, 1997, are as follows: NHC Others Total 1998 $29,260,000 $10,119,000 $39,379,000 1999 29,293,000 10,223,000 39,516,000 2000 29,282,000 10,331,000 39,613,000 2001 29,301,000 10,442,000 39,743,000 2002 -0- 10,031,000 10,031,000 Thereafter -0- 95,917,000 95,917,000 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 $3,101,000 in 1997 ($3,101,000 in 1996 and $2,827,159 in 1995). 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 18. PRIOR YEAR RECLASSIFICATIONS Certain reclassifications have been made to the 1995 and 1996 financial statements to conform to the 1997 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 financial statements included in National Health Investors, Inc.'s Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 13, 1998. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules listed in the accompanying index are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and regulations under the Securities and Exchange Act of 1934 and are not otherwise a required part of the basic financial statements. The financial statement schedules have been subjected to the auditing procedures applied in the audits of the basic 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 financial statements taken as a whole. ARTHUR ANDERSEN LLP Nashville, Tennessee January 13, 1998 NATIONAL HEALTH INVESTORS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1997
Column A Column B Column C Column D Column E Column F Column G Column H Cost capitalized Gross amount Initial Cost subsequent to at which carried to Company acquisition at close of period ---------------- ------------------ ------------------- Accum. Encum- Building & Improve- Carrying Buildings & Depre- Date of Date Description brances Land Improve. ments Costs Land Improvements Total ciation Construction Acquired (dollars in thousands) Health Care Centers (2) Alabama $ 498 $ 95 $ 5,165 $ --- $ --- $ 95 $ 5,165 $ 5,260 $1,314 N/A 10/17/91 Health Care Centers (4) Florida 12,298 1,949 28,301 4,825 --- 1,949 33,126 35,075 5,592 N/A 10/17/91 Health Care Centers (1) Georgia 159 52 865 --- --- 52 865 917 400 N/A 10/17/91 Health Care Centers (3) Kentucky --- 201 2,591 308 --- 201 2,899 3,100 1,006 N/A 10/17/91 Health Care Centers (5) Missouri 16,196 1,070 21,860 1,210 --- 1,070 23,070 24,140 5,284 N/A 10/17/91 Health Care Centers (3) South Carolina 6,856 572 9,953 1,591 --- 572 11,544 12,116 3,318 N/A 10/17/91 Health Care Centers (21) Tennessee 12,084 2,118 31,037 11,668 --- 2,118 42,705 44,823 10,826 N/A 10/17/91 Health Care Centers (1) Virginia 3,735 176 2,511 --- --- 176 2,511 2,687 650 N/A 10/17/91 Health Care Centers (1) Arizona 2,985 453 4,558 --- --- 453 4,558 5,011 168 N/A 8/13/96 Health Care Centers (2) Idaho --- 365 6,824 --- --- 365 6,824 7,189 252 N/A 8/13/96 Retirement Center (1) Missouri --- 354 3,181 --- --- 354 3,181 3,535 736 N/A 10/17/91 Retirement Centers (2) Tennessee 1,007 64 3,071 2,573 --- 64 5,644 5,708 800 N/A 10/17/91 Acute Care Hospital (1) Kentucky --- 540 6,961 --- --- 540 6,961 7,501 1,098 N/A 6/12/92 Medical Office Bldg.(2) Texas --- 631 6,248 1,673 --- 631 7,921 8,552 797 1-1-95 N/A & 7/31/97 Medical Office Bldg.(1) Florida --- 170 3,349 --- --- 170 3,349 3,519 558 N/A 6/30/93 Medical Office Bldg.(1) Kentucky --- 23 3,667 --- --- 23 3,667 3,690 577 N/A 7/27/93 Medical Office Bldg.(1) Louisiana --- --- 3,153 --- --- --- 3,153 3,153 545 1-1-95 N/A Medical Office Bldg.(1) Utah --- 223 6,541 --- --- 223 6,541 6,764 1,093 1-1-95 N/A Assisted Living Centers (2) Florida --- 5,089 20,725 --- --- 5,089 20,725 25,814 922 --- 8/6/96 Assisted Living Centers (1) New Jersey --- 4,229 13,030 --- --- 4,229 13,030 17,259 597 --- 8/6/96 Assisted Living Centers (1) Texas --- 2,094 9,091 --- --- 2,094 9,091 11,185 396 --- 8/6/96 $55,818 $20,468$192,682 $23,848 $ --- $20,468 $216,530 $236,998 $36,929 (A) See Notes 3 and 17 of Notes to Consolidated Financial Statements. (B) The aggregate cost for federal income tax purposes is approximately $281,298,090.79. (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, 1997
December 31 1997 1996 1995 (in thousands) Investment in Real Estate: Balance at beginning of period $213,150 $145,258 $134,195 Additions through cash expenditures 23,848 67,892 11,063 Improvements --- --- --- Balance at end of year $236,998 $213,150 $145,258 Accumulated Depreciation: Balance at beginning of period $ 28,895 $ 22,063 $ 16,043 Addition charged to costs and expenses 8,034 6,832 6,020 Balance at end of year $ 36,929 $ 28,895 $ 22,063
NATIONAL HEALTH INVESTORS, INC. SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE FOR THE YEAR ENDED DECEMBER 31, 1997
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 (dollars in thousands) LONG-TERM CARE FACILITIES: First Mortgage Loans: SouthTrust Bank 8.26% Sept., 2000 $ 166,000 None $ 19,683,000 $ 19,423,000 None Augusta and Pooler Georgia 10.5% Dec., 2002 132,000 None 13,300,000 13,073,000 None Bedford and Nashua, New Hampshire 10.75% Oct., 2003 103,000 None 12,200,000 11,943,000 None Manchester and Epsom, New Hampshire 10.65% June, 2011 237,000 None 25,805,000 25,805,000 None Pittsfield Mass. 10.00% Dec., 2003 245,000 None 29,500,000 28,834,000 None Seattle, Tacoma, and Billington, Washington 11.0% Oct., 2004 149,000 None 15,000,000 14,565,000 None Greeley, Colorado 10.5% March, 2004 180,000 None 19,100,000 18,451,000 None Dallas Texas 11.45% June, 2010 185,000 None 18,000,000 17,699,000 None Fincastle, Hot Springs, Lebanon, Bastian, Low Moor, Bristol, Midlothian, VA 10.50% Feb., 2006 212,000 None 25,000,000 22,896,000 None Williston and Gainesville, Florida 11.35% Dec., 2005 98,000 None 9,620,000 9,464,000 None Florissant, Joplin, Sikeston Missouri 11.00% Sept., 2003 98,000 None 10,000,000 9,610,000 None Missouri and Kansas 11.0% Aug., 1999 258,000 None 26,000,000 25,796,000 None Construction Loans: Madison, Florida 10.75% June, 2006 --- None 650,000 120,000 None Tallahassee, FL 10.50% Sept., 2006 --- None 5,400,000 5,108,000 None Nine Mortgages 7.75%-15.0% Jan., 2002 N/A None N/A 14,351,000 None Dec., 2007 Ten Mortgages 9.95%-15.0% Dec., 1997- N/A None N/A 46,025,000 None June, 2006 Ten Mortgages 10.02%-11.7% Sept., 1997- N/A None N/A 73,700,000 None July, 2007 Friendswood, Richmond, Sugarland, Conroe, Beaumont, Huntsville, Cleveland, Liberty, Houston, and Tomball, TX 10.5% Sept., 2007 N/A None 51,500,000 51,500,000 None Holyoke and Greenfield Massachusetts 10.5% April, 2007 N/A None 10,000,000 10,000,000 None Term Notes: Johnson City, TN 7.5% June, 2019 15,000 None 2,062,000 1,889,000 None Lewisburg, TN 7.5% Dec., 2018 7,000 None 968,000 884,000 None Smithville, TN 7.5% Dec., 2017 7,000 None 1,016,000 919,000 NoneHOSPITALS: First Mortgage Notes: Metarie, LA 12.0% April, 2002 408,000 None 25,700,000 11,137,000 None ASSISTED LIVING CENTERS: Construction Loans: Harmons, MD 11.5% May, 2002 --- None 7,089,000 4,120,000 None St. Charles, MD 11.5% --- None 6,673,000 2,110,000 None Townson, MD 11.5% --- None 7,565,000 1,454,000 None MEDICAL OFFICE BUILDING: Construction Loans: Murfreesboro, TN10.75% Dec., 2012 --- None 10,950,000 4,727,000 None $445,603,000 Mortgage loan participation agreement, of which the Company has 20.9% participation. Balloon payment of $18,473,000 due at maturity. Balloon payment of $11,854,000 due at maturity. Effective October, 1998 payment will be adjusted to include interest at the greater of 10.75% or the rate that ten-year United States securities yield plus 4.5%. Balloon payment of $9,723,000 due at maturity. Effective May, 1998, the monthly payment will be adjusted to include principal and interest payments of $294,000 at 11%. Balloon payment of $27,346,000 due at maturity. Effective October, 2000, payment will be adjusted to include interest at the greater of 11.0% or the rate that ten-year United States securities yield plus 5%. Balloon payment of $12,979,000 due at maturity. Effective April, 1999, monthly payment will be adjusted to include interest at the greater of 10.5% or the rate that ten-year United States securities yield plus 5%. Balloon payment of $16,332,000 due at maturity. Interest escalates .001% per year. Balloon payment of $8,420,000 due at maturity. 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%. Balloon payment of $15,806,000 due at maturity. Constant monthly payments of $214,000, plus interest. Monthly interest only payments through December 1998. Effective January, 1997 and 1998, the interest rate will be adjusted to 10.75% and 10.50% respectively. Effective January, 1999, the interest escalates .15% per year through maturity. Balloon payment of $23,336,000 due at maturity. Monthly payments of interest only during construction. The Company committed to provide permanent financing when construction is completed. Mortgages provide for prepayment penalties. Effective August, 1997, and annually thereafter, the interest rate will be increased by .15%. Principal of $25,805,000 due at maturity. Balloon payment of $8,667,000 due at maturity. Balloon payment of $25,414,000 due at maturity. Balloon payment of $45,436,000 due at maturity. Balloon payment of $9,076,860 due at maturity.
NATIONAL HEALTH INVESTORS, INC. SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (continued) FOR THE YEAR ENDED DECEMBER 31, 1997 (1) See Note 4 of Notes to Consolidated Financial Statements. (2) For tax purposes, the cost of investments is the carrying amount, as disclosed in the schedule.
December 31 1997 1996 1995 (in thousands) Reconciliation of mortgage loans: Balance at beginning of period $519,229 $469,628 $475,253 Additions: New mortgage loans 115,876 153,084 85,145 Deductions during period: Collection of principal 189,502 103,483 90,770 Balance at end of period $445,603 $519,229 $469,628
EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports on National Health Investors, Inc. dated January 13, 1998, included in this Form 10-K for the year ended December 31, 1997, into the Company's previously filed Registration Statements No. 33-72370 and No. 33-85398. It should be noted that we have not audited any financial statements of National Health Investors, Inc. subsequent to December 31, 1997 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Nashville, Tennessee March 25, 1998 EX-27 2
5 0000877860 NATIONAL HEALTH INVESTORS, INC. 12-MOS DEC-31-1997 DEC-31-1997 64,915,000 0 487,945,000 0 0 0 236,998,000 (36,929,000) 756,599,000 0 0 0 20,842,000 248,000 422,990,000 756,599,000 0 110,179,000 0 0 3,700,000 0 22,219,000 0 0 0 0 0 0 75,388,000 3.01 2.92
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