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PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(B)(5)
(TO PROSPECTUS DATED OCTOBER 20, 1994) Registration No. 33-85398
$20,000,000
[NHI LOGO]
NATIONAL HEALTH INVESTORS, INC.
Prime plus 1% Senior Subordinated Convertible Debentures due 2006
National Health Investors, Inc. is hereby offering up to $20,000,000
aggregate principal amount of its prime plus 1% senior subordinated convertible
debentures due 2006. The minimum interest rate for the term of the debentures
shall equal 9.0%. The debentures will mature on January 1, 2006. On and after
July 31, 2001 and at any time prior to redemption or maturity, the debentures
will be convertible into shares of common stock, par value $.01 per share at a
conversion price of $7.00 per share, subject to adjustment. To protect our
status as a real estate investment trust, a holder may not convert any debenture
if as a result of such conversion, any person or entity would be deemed,
beneficially or constructively, to own, directly or indirectly, 9.9% or more of
our common stock. The interest rate on the debentures will be adjusted quarterly
on January 1, April 1, July 1 and October 1 (or next business day) for the
quarter beginning on that date to the prime rate published in the money section
of the Wall Street Journal plus 1% with a minimum interest rate of 9.0%.
Interest will be payable quarterly in arrears on April 15, July 15, October 15
and January 15. The first interest period will be from December 29, 2000 to
March 31, 2001 at a rate of 10.5%.
The debentures will be general unsecured obligations and will rank
senior to our other unsecured and subordinated indebtedness. However, the
debentures will be subordinated in right of payment to our senior indebtedness.
As of November 10, 2000, our senior indebtedness was approximately $228.8. The
debentures will not limit the amount of senior indebtedness or other
indebtedness we may incur.
On November 21, 2000, the reported last price of our common stock on
the New York Stock Exchange was $6.3125 per share. The debentures are not
currently tradable. We intend to make application to list the debentures and the
shares issuable upon conversion on the New York Stock Exchange.
The debentures are being offered first to our shareholders and to the
holders of our outstanding 7.75% convertible subordinated debentures and 7.0%
subordinated debentures. Any debentures not purchased by our existing
shareholders, debenture holders will be available for purchase by the public.
The minimum purchase is $5,000 and we must approve subscriptions over $250,000
which do not relate to a shareholder's pro-rata ownership interest. Certain of
our officers and significant shareholders have indicated their intention to
purchase approximately $6 million of the debentures. All payments for the
debentures must be delivered to U.S. Bank Trust National Association as escrow
agent, no later than December 20, 2000 as provided in the attached subscription
letter.
THE DEBENTURES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE S-5 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 5 IN
THE ACCOMPANYING PROSPECTUS AND AS DESCRIBED IN OUR ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999 AS WELL AS IN OUR QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
======================================================== ================= ==================== ==============
Underwriting
Price to Discounts and Proceeds to
Public (1) Commission Company (2)
-------------------------------------------------------- ----------------- -------------------- --------------
Per debenture 100% 0% 100%
Total $20,000,000 $0 $20,000,000
======================================================== ================= ==================== ==============
(1) Plus accrued interest, if any, on the debentures from the date of
issuance to the date of delivery.
(2) Before deducting estimated expenses of $250,000.
The date of this prospectus supplement is November 22, 2000
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary should be read in conjunction with, and is
qualified by the more detailed information included or incorporated by reference
in, this prospectus supplement and in the appendices. Unless the context
indicates otherwise, references herein to NHI include National Health Investors,
Inc. and all of its subsidiaries.
THE COMPANY
We are a real estate investment trust which invests primarily in income
producing health care properties with emphasis on the long-term care sector. As
of September 30, 2000, we had interests in net real estate owned, and
investments in mortgages, REMICs, preferred stock and marketable securities
resulting in total invested assets of $746.6 million. Our strategy has been to
primarily invest in long term health care real estate which generates current
income which is available for distribution to stockholders. Under current market
conditions and provisions in our bank documents, however, no such investments
are currently being solicited or closed and no common stock cash distributions
for the third and fourth quarter of 2001 will be accrued.
As of September 30, 2000, we were diversified with investments in 199
health care facilities located in 26 states consisting of 143 long-term care
facilities, two acute care hospitals, eight medical office buildings, 22
assisted living facilities, seven retirement centers and 17 residential projects
for the developmentally disabled. These investments consisted of approximately
$335.1 million aggregate principal amount of loans to 28 borrowers, $283.9
million of purchase leaseback transactions with seven lessees and $37.3 million
invested in REMIC pass through certificates backed by first mortgage loans to 10
operators. Of these 199 facilities, 59 are leased to or managed by National
HealthCare Corporation. National HealthCare Corporation is our investment
advisor.
At September 30, 2000, 58.5% of the total invested assets of the health
care facilities were operated by public operators, 20.5% by regional operators,
and 21.0% by small operators.
NHI was incorporated in Maryland in 1991. Our principal executive
offices are located at 100 Vine Street, Suite 1202, Murfreesboro, Tennessee
37130; telephone number (615) 890-9100.
PLAN OF DISTRIBUTION
The debentures will be offered to our shareholders, and to the holders
of our 7.75% convertible subordinated debentures due 2001 and 7.0% subordinated
debentures due 2004 and then to the public. The shareholders and the debenture
holders will have until December 20, 2000 to purchase the debentures and any
remaining debentures will be available to the public until December 29, 2000. In
the event the offering is oversubscribed, our shareholders will have the right
to purchase their pro-rata share of the debentures. If our shareholders do not
purchase the
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entire amount, then the holders of our debentures may purchase their pro-rata
share based on their percentage ownership of such debentures. If the entire
amount is not sold to our shareholders and the debenture holders, then any
remaining amount may be sold to the public. See "Plan of Distribution."
The minimum amount any person may purchase is $5,000. Purchases of over
$250,000 which do not relate to a shareholder's pro-rata ownership interest in
NHI must be approved by the Company. All payments for the debentures must be
delivered to the escrow agent, no later than December 20, 2000. U.S. Bank Trust
National Association will serve as the escrow agent for this offering.
THE DEBENTURES
The following summary of the terms of the debentures is not complete
and is qualified by all of the terms contained in the debentures and in the
related indenture. For a more detailed description of the terms of the
debentures, see "Description of the Debentures."
Issue ........................... Up to $20,000,000 at prime plus 1% senior
subordinated convertible debentures due
January 1, 2006.
Maturity ........................ January 1, 2006.
Coupon .......................... Prime plus 1% per annum, adjusted quarterly.
The minimum interest rate paid during the
term of the debentures shall be 9.0%. Prime
will equal the prime rate published in the
money section of the Wall Street Journal on
January 1, April 1, July 1 and October 1 (or
if not a business day, the next business
day) for the quarter beginning on that date.
Interest will be payable quarterly in
arrears on April 15, July 15, October 15 and
January 15. The first interest period will
be from December 29, 2000 to March 31, 2001
at a rate of 10.5%.
Restriction on Amount ........... A $5,000 minimum purchase is required, and
Purchased subscriptions in excess of $250,000 which do
not bear a reasonable relationship to the
subscribing shareholder's ownership in NHI
must be approved by the Company.
Purpose and Use of Proceeds ..... To repay our outstanding 7.75% convertible
subordinated debentures and general
corporate purposes. See "Use of Proceeds."
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Conversion Rights ............... The debentures are convertible, on and after
July 31, 2001 and prior to redemption or
maturity, into shares of common stock at a
price of $7.00 per share. The conversion
price is subject to adjustment in the event
of stock splits, stock dividends and certain
similar events. To protect our status as a
REIT, a holder may not convert a debenture
if as a result of such conversion any person
would own, directly or indirectly, 9.9% or
more of our common stock. See "Description
of the Debentures--Conversion Rights."
Optional Redemption.............. The debentures are redeemable, at
any time after January 1, 2002, at the
option of NHI, in whole or from time to time
in part, at a redemption price equal to the
sum of the principal amount of the
debentures being redeemed plus accrued
interest thereon to the redemption date. See
"Description of the Debentures--Optional
Redemption by NHI."
Anticipated Participation ....... Certain officers and significant
shareholders of the Company have indicated
that they intend to purchase $6 million
principal amount of the debentures.
Mandatory Redemption ............ We are not required to make any mandatory
redemption or annual sinking fund payments.
Restrictions on Consolidation, .. NHI may not consolidate with, merge into or
Merger or Sale of Assets transfer all or substantially all of its
assets to another person unless (1) such
person assumes all of our obligations under
the debentures and the indenture, (2) no
default or event of default shall have
occurred and be continuing and (3) certain
conditions are met if such person is not a
U.S. corporation.
Ranking ......................... The debentures will be general unsecured
obligations and will rank senior to our
other unsecured and subordinated
indebtedness. The debentures will be
expressly subordinated to, and subject in
right of payment to, the prior payment in
full of the principal of, premium, if any,
and interest on senior indebtedness. See
"Description of the Debentures
--Subordination."
Unsecured Status ................ The debentures are unsecured. See
"Description of the Debentures--General" in
the accompanying prospectus.
Trustee and Escrow Agent ........ U.S. Bank Trust National Association
Listing ......................... We intend to make application to list the
debentures and the shares issuable upon
conversion on the New York Stock Exchange.
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RISK FACTORS
This prospectus supplement contains forward-looking statements that
involve a number of risks and uncertainties inherent in the purchase of the
debentures or shares. You should be aware that such statements are projections
or estimates as to future events, which may or may not occur.
In addition to the other information in this prospectus supplement, you
should carefully consider the following risk factors as well as the risks
contained in the accompanying prospectus before deciding whether an investment
in the debentures is suitable for you. If any of the adverse events contemplated
by these risk factors actually occur, our business, financial condition and
results of operations could be materially adversely affected. The risks and
uncertainties described below are not the only ones facing NHI, and additional
risks and uncertainties may also impair our business operations.
WE HAVE OUTSTANDING $38,060,000 IN 7.75% DEBENTURES WHICH MATURE ON JANUARY 2,
2001.
NHI has a $38,060,000 debenture obligation which matures January 2,
2001. Using current cash on hand and assuming receipt of proceeds from asset
sales and debt service and lease payments between now and that date, we
anticipate having approximately $18 million to pay towards this obligation. We
intend to use the proceeds from this offering to provide the additional funds
needed. There is no minimum amount required to close this offering. If the
proceeds raised by this debenture offering, together with asset sale proceeds
and cash on hand on January 2, is not sufficient to retire in full those
debentures, then we intend to commence liquidation (even at a loss) of its
current approximately $38 million marketable securities portfolio. If we are
unable to pay the outstanding debenture obligation in full on the due date, we
will be in default on that obligation. This default may cause defaults in other
debt obligations of NHI, which would have a material adverse impact on our
financial position and on our ability to satisfy our obligations under the
debentures being offered.
OUR NEW CREDIT FACILITY REQUIRES SUBSTANTIAL SHORT-TERM PRINCIPAL REDUCTIONS.
We entered into an amended and restated credit facility on November 10,
2000. This credit facility requires us to make $1 million monthly payments of
principal through June 2001, $2 million monthly payments of principal from July
2001 through December 2001, and make significant balloon payments of $18 million
on June 1, 2001, $48.2 million on December 31, 2001, and $10.8 million on July
31, 2002. If we are unable to sell assets, refinance properties, or induce the
early repayment of current debt owed to us by third parties, then our internal
cash flow will not be sufficient to make these balloon payments. Failure to make
these payments could result in a default in the credit facility, which default
in turn could cause a default our other debt obligations, all of which would
have a material adverse impact on our financial position and on our ability to
satisfy our obligations under the debentures being offered.
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WE MAY NOT BE ABLE TO MAINTAIN OUR TAX STATUS AS A REAL ESTATE INVESTMENT TRUST.
In November 2000, we announced that we would not accrue any cash common
stock distributions for the third and fourth quarter of 2000. One of the
requirements of a real estate investment trust is that we distribute at least
95% of our REIT taxable income to our shareholders (90% in 2001). While we
intend to maintain our status as a real estate investment trust, we may not have
sufficient cash flow to make the required distributions. If we are unable to
maintain our real estate investment trust status, we would be required to pay
federal income taxes, in which case we may be required to sell assets, even at a
loss, in a depressed market.
WE MAY NOT BE ABLE TO REPURCHASE OR REDEEM THE DEBENTURES BEING OFFERED.
On January 1, 2006, the debentures will mature and we may have
insufficient funds to satisfy our obligations thereunder.
SOME OF OUR BORROWERS HAVE ENCOUNTERED FINANCIAL DIFFICULTY, THEREBY INCREASING
THE RISK THAT WE MAY NOT BE ABLE TO COLLECT ALL OF OUR MORTGAGE LOAN PAYMENTS.
We currently have mortgage loans totaling approximately $139.8 million
that we have designated as non-performing due to the current financial
difficulty faced by these borrowers. Some of these borrowers are currently the
subject of bankruptcy proceedings. If we are unable to collect on these loans,
our business would be materially adversely impacted. If additional loans become
uncollectible or non-performing, our business may be materially adversely
impacted. Furthermore, uncollectible or non-performing loans severely impact our
ability to realize on our collateral or collect expected amounts on account of
our portfolio.
OUR LESSEES AND BORROWERS MAY ENCOUNTER REDUCED REVENUES DUE TO HEALTHCARE
REFORM.
All of our properties are used as healthcare facilities, and therefore,
we are is directly affected by the risk associated with the healthcare industry.
Our lessees and mortgagors derive a substantial portion of their net operating
revenues from third party payers, including the Medicare and Medicaid programs.
Such programs are highly regulated and subject to frequent and substantial
changes. Effective January 1, 1999, the majority of skilled nursing facilities
shifted from payments based on reimbursable cost to a prospective payment system
for services provided to Medicare beneficiaries. Long-term care facilities may
need to restructure their operations to operate profitably under the new
Medicare prospective payment system reimbursement.
In addition, private payers, including managed care payers, are
increasingly demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect revenues of our lessees and
borrowers and
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thereby adversely affect those lessees' and borrowers' abilities to make their
monthly lease or debt payments to us.
As a result of the foregoing, the revenues and margins of the operators
of our facilities may decrease, resulting in a reduction of our rent/interest
coverage from investments.
THIS OFFERING MAY BE DILUTIVE.
If the offered debentures are converted into common stock, our
shareholders who do not purchase their pro rata share of the debentures will
have their ownership percentage diluted. Conversion of the full $20 million of
debentures would result in approximately 2,857,000 new shares of common stock
being issued. Because we will not know the amount of the debentures sold until
approximately December 27, 2000, it is not currently possible to accurately
identify the potential dilution to existing shareholders from this offering.
Assuming, however, the full $20 million is sold, a shareholder must purchase
$.82 of these debentures for every share of stock that the shareholder owns in
order to avoid dilution. Therefore, a shareholder with 1,000 shares will need to
purchase a debenture in the amount of $820 in order to avoid dilution. Note,
however, that the minimum purchase is $5,000.00.
THE DEBENTURES ARE SUBORDINATED TO ALL OTHER SENIOR INDEBTEDNESS.
The debentures are unsecured and subordinated in right of payment to
all of our existing and future senior indebtedness. As a result, in the event of
bankruptcy, liquidation or reorganization or upon acceleration of the debentures
due to an event of default, our assets will be available to pay obligations on
the debentures only after all senior indebtedness has been paid in full in cash
or other payment satisfactory to the holders of senior indebtedness. There may
not be sufficient assets remaining to pay amounts due on any or all of the
debentures then outstanding. The debentures are also effectively subordinated to
the indebtedness and other liabilities, including trade payables, of our
subsidiaries. The indenture does not prohibit or limit the incurrence of senior
indebtedness or the incurrence of other indebtedness and other liabilities by
us. The incurrence of additional indebtedness and other liabilities by us could
adversely affect our ability to pay our obligations on the debentures. As of
November 10, 2000, we had approximately $228.7 million of senior indebtedness.
We anticipate that from time to time we will incur additional indebtedness,
including senior indebtedness.
WE HAVE $58 MILLION IN DEBENTURES MATURING IN 2004.
We may not be able to pay when the approximately, $58,000,000 in debentures
which mature on February 1, 2004. In the event we do not have sufficient funds
to pay the outstanding debenture obligation in full on the due date, NHI will be
in default on that obligation. This default may cause defaults in other debt
obligations of NHI, which would have a material adverse impact on our financial
position and on our ability to satisfy our obligations under the debentures
being offered.
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FLUCTUATIONS IN THE MARKET PRICE OF OUR COMMON STOCK MAY AFFECT THE PRICE OF THE
DEBENTURES BEING OFFERED.
Because the debentures are convertible into shares of our common stock,
fluctuations in the market price of our common stock may affect the market price
of the debentures. The market price for our common stock is subject to wide
fluctuations. For example, the closing price of our common stock on the New York
Stock Exchange fluctuated between $5.125 per share and $16.188 per share during
the first ten months of 2000.
ALTHOUGH THE DEBENTURES WILL BE REGISTERED, THERE IS CURRENTLY NO EXISTING
ACTIVE PUBLIC MARKET FOR THE DEBENTURES.
We can provide no assurances that an active trading market for the
debentures will develop or as to the liquidity or sustainability of any such
market, the ability of the holders to sell their debentures or the price at
which holders of the debentures will be able to sell their debentures. Future
trading prices of the debentures will depend on many factors, including, among
other things, prevailing interest rates, our operating results, our dividend
policy, the price of our common stock and the market for similar securities.
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RECENT DEVELOPMENTS
On October 10, 2000, NHI's existing credit facility matured. After
considerable negotiations and analysis of various alternatives including sale of
assets, merger or reorganization, on November 10, 2000 NHI and its lending group
led by Dresdner Bank AG extended the original $102 million Revolving Credit
Facility and combined that facility with the $25 million Bank of Montreal Term
Note, formerly due July 2002. Letter of Credit Guarantees in the amount of
$12,000,000 outstanding by some of the lenders were also extended. After a $31
million payment, the remaining $96.0 million facility was collateralized by an
assignment of certain notes receivable owned by NHI. We are required to make
principal payments on the combined facilities of $1 million a month commencing
on December 1, 2000 through June 1, 2001, increasing to $2 million a month from
July 1 through December 1, 2001. Additional installments in the amount of $18
million, $48.2 million and $10.8 million are due and payable on June 1, 2001 and
December 31, 2001 and July 31, 2002 respectively. The combined facility bears
interest at a rate of LIBOR plus 2% and provides for a default rate of interest
at LIBOR plus 4% upon an event of default and certain other events including the
period from the date the 7.75% debentures are paid until the later of the date
on which an aggregate of at least $47.0 million principal amount has been paid
since the closing date of the combined facilities and the first date on which
there is no unsecured obligations under the combined credit facilities. The
combined facilities prohibit the payment of dividends until we have paid or
replaced the 7.75% debentures and any dividends paid through December 31, 2001
are limited to 90% of our 2001 REIT taxable income.
In regard to the raising of necessary capital in order to meet the
payment schedule on the credit facility, NHI has assembled a group of assets and
entered into at least one agreement for the sale of these assets. This sale is
conditioned upon the satisfactory completion of due diligence procedures and the
arrangement of financing by the purchaser. Additionally, we are aggressively
pursuing the refinancing of other assets using the Federal Housing Authority
section 232 Mortgage Guaranty Program. Finally, NHI has announced that it does
not currently plan to accrue a dividend for the last two fiscal quarters of
calendar year 2000, dedicating that cash flow to the retirement of debt.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our consolidated ratios of earnings to
fixed charges for each of the years ended December 31, 1995, 1996, 1997, 1998
and 1999 and for each of the nine months ended September 30, 1999 and 2000:
Year Ended December 31 Nine Months Ended
September 30
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
2.2:1 3.6:1 3.9:1 4.2:1 2.9:1 3.3:1 2.3:1
For purposes of calculating the ratio of earnings to fixed charges of
the Company, "earnings" equal the sum of net income and Fixed Charges. "Fixed
Charges" consists of interest on all indebtedness, amortization of loan costs
and preferred stock dividends.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information of NHI for
the years ended December 31, 1995, 1996, 1997, 1998 and 1999 has been derived
from our audited consolidated financial statements, which have been audited by
Arthur Andersen LLP, independent accountants. The selected financial information
of NHI for the nine months ended September 30, 1999 and 2000 is derived from our
unaudited consolidated financial statements and the related notes thereto
included and incorporated by reference herein. The unaudited periods below, in
the opinion of management, include all adjustments which are necessary to fairly
present our financial position and results of operations. Results for the nine
months ended September 30, 2000 are not necessarily indicative of results for
the full year.
NATIONAL HEALTH INVESTORS, INC.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Ended
September 30
---------------------
Year Ended December 31 2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
Net revenues $ 111,014 $ 91,906 $ 131,158 $ 106,552 $ 111,410 $ 99,429 $ 90,068
Net income 33,217 47,981 53,618 69,645 75,388 67,164 49,692
Net income per share
Basic $ 1.31 $ 1.92 $ 2.13 $ 2.72 $ 3.01 $ 2.92 $ 2.63
Diluted 1.31 1.91 2.13 2.69 2.92 2.81 2.48
Mortgages and other
investments, net $ 462,732 $ 479,617 $ 441,906 $ 495,964 $ 479,194 $ 553,456 $ 505,108
Real estate properties, net 283,916 298,764 316,021 245,538 200,069 184,255 123,195
Total assets 772,857 806,472 788,545 769,198 753,033 748,672 639,256
Long term debt 170,761 174,610 172,870 151,559 155,659 160,008 141,103
Credit facilities 90,000 88,000 88,000 58,500 - 59,000 31,750
Convertible subordinated
debentures 94,551 97,286 95,741 100,096 119,038 90,735 82,316
Total stockholders' equity 396,058 411,184 392,640 424,660 444,080 409,683 356,981
Common shares outstanding 24,383,620 24,364,888 24,382,987 24,364,391 24,753,570 23,474,751 20,535,014
Weighted average common shares
Basic 24,383,444 24,364,827 24,365,027 24,964,047 24,394,044 21,916,921 16,381,826
Diluted 24,468,173 27,896,724 24,367,529 28,689,192 28,887,987 27,211,999 22,851,888
Common dividends declared
per share $ 1.28 $ 2.22 $ 2.96 $ 2.96 $ 2.96 $ 2.84 $ 2.61
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CAPITALIZATION
The following table sets forth our consolidated capitalization (1) as of
September 30, 2000, (2) as adjusted to reflect repayments of credit facility and
other long-term debt on October 10, and November 10, 2000, and (3) as adjusted
to reflect full subscription of this offering and the application of the net
proceeds as described under "Use of Proceeds."
The capitalization table should be read together with our consolidated
financial statements and the related notes thereto incorporated herein.
At September 30, 2000
---------------------
As As
Actual(1) Adjusted(2) Adjusted(3)
--------- ----------- -----------
(in thousands)
Indebtedness and Other Liabilities:
Long-term debt $170,761 $164,306 $164,306
Credit facilities 90,000 65,455 65,455
Convertible subordinated debentures existing 94,551 94,551 56,491
Convertible subordinated debentures offering 0- 0- 20,000
-------- -------- --------
Total Indebtedness and Other Liabilities 355,312 324,312 306,252
-------- -------- --------
Shareholders' Equity:
Preferred Stock 21,700 21,700 21,700
Common Stock 244 244 244
Capital in excess of par value of common stock 425,980 425,980 425,980
Cumulative net income 427,382 427,382 427,318
Cumulative dividends (463,820) (463,820) (463,820)
Unrealized losses on securities (15,428) (15,428) (15,428)
-------- -------- --------
Total Shareholders' Equity 396,058 396,058 395,994
-------- -------- --------
Total Capitalization $751,370 $720,370 $702,556
======== ======== ========
USE OF PROCEEDS
We anticipate using the net proceeds from this offering, plus available
cash, potential asset sales and potential marketable security sales for the
repayment of our 7.75% convertible subordinated debentures, which at September
30, 2000 totaled $38,060,000. These existing debentures mature on January 2,
2001 and management expects approximately $38.1 million of cash will be needed
to retire the 7.75% debentures on that date.
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BUSINESS
NHI 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 September 30, 2000, NHI had interests in net real estate owned, and
investments in mortgages, REMICs, preferred stock and marketable securities
resulting in total invested assets of $746.6 million. NHI's strategy has been to
primarily invest in long term health care real estate which generates current
income which will be distributed to stockholders. Under current market
conditions plus certain limitations in our bank covenants, no such investments
are currently being solicited or closed and no common stock cash distributions
for the third and fourth quarters of 2000 will be accrued.
As of September 30, 2000, NHI was diversified with investments in 199
health care facilities located in 26 states consisting of 143 long-term care
facilities, two acute care hospitals, eight medical office buildings, 22
assisted living facilities, seven retirement centers and 17 residential projects
for the developmentally disabled. These investments consisted of approximately
$335.1 million aggregate principal amount of loans to 28 borrowers, $283.9
million of purchase leaseback transactions with seven lessees and $37.3 million
invested in REMIC pass through certificates backed by first mortgage loans to 10
operators. Of these 199 facilities, 59 are leased to or managed by National
HealthCare Corporation ("NHC"). NHC is NHI's investment advisor.
At September 30, 2000, 58.5% of the total invested assets of the health
care facilities were operated by public operators, 20.5% by regional operators,
and 21.0% by small operators.
TYPES OF HEALTH CARE FACILITIES
Long-term care facilities. As of September 30, 2000, we owned and
leased 54 licensed long-term care facilities, 52 of which were operated by NHC.
The remaining two licensed long-term care facilities are managed by one other
long-term care company. We also had outstanding first mortgage loans and REMIC
investments on 89 additional licensed long-term care facilities, three of which
were operated by NHC. All of these facilities provide some combination of
skilled and intermediate nursing and rehabilitative care, including speech,
physical and occupational therapy. The operators of the long-term care
facilities receive payment from a combination of private pay sources and
government programs such as Medicaid and Medicare. Long-term care facilities are
required to obtain state licenses and are highly regulated at the federal, state
and local level. Most long-term care facilities must obtain certificates of need
from the state before opening or expanding such facilities.
Acute and long term care hospitals. As of September 30, 2000, we owned
and leased one acute care hospital and had an outstanding first mortgage loan on
one additional operating long term care hospital. Acute care hospitals provide a
wide range of inpatient and outpatient services and are subject to extensive
federal, state and local legislation and regulation. Long-term care
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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 surveys regarding standards of medical care,
equipment and hygiene as a condition of licensure and Medicare participation.
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 September 30, 2000, we owned and leased
seven medical office buildings. In addition, we had a first mortgage loan on one
medical office building. Medical office buildings are specifically configured
office buildings whose tenants are primarily physicians and other medical
practitioners. Medical office buildings differ from conventional office
buildings due to the special requirements of the tenants and their patients.
Each of our 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 NHI for the lease obligations of the entire building, regardless
of its ability to lease the individual office space.
Assisted Living Facilities. NHI owns 15 assisted living facilities,
four of which are leased to a subsidiary of Marriott International, and eleven
to Alterra, Inc. We also have 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 with minor medical needs on an
as-needed basis.
Retirement Centers. NHI owns five retirement centers, four of which are
leased to NHC and one to Sun Healthcare. NHI has first mortgages on two others.
Retirement centers offer specially designed residential units for the active and
ambulatory elderly and provide various ancillary services for their residents
including restaurants, activity rooms and social areas. Charges for services are
paid from private sources without assistance from government programs.
Retirement centers may be licensed and regulated in some states, but do not
require the issuance of a certificate of need such as is normally required for
long-term care facilities.
Residences for the developmentally disabled. As of September 30, 2000,
we had outstanding first mortgage notes on 17 residences for the developmentally
disabled. Residences for the developmentally disabled are generally small
home-like environments which accommodate six to eight mentally and
developmentally disabled persons. These persons obtain custodial care which
includes food, lodging, education and transportation services. These community
based services are usually licensed and 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.
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COMPETITION AND MARKET CONDITIONS
NHI competes, primarily on the basis of price, available capital,
knowledge of the industry, and flexibility of financing structure, with real
estate partnerships, other REITs and other investors (including, but not limited
to, banks, insurance companies, and investment bankers developing securities in
mortgage funds) in the acquisition, leasing and financing of health care related
entities.
The operators of the health care facilities compete on a local and
regional basis with operators of facilities that provide comparable services.
Operators compete for patients and staff based on quality of care, reputation,
physical appearance of facilities, services offered, family preference,
physicians, staff and price. They compete with independent operators as well as
companies managing multiple facilities, some of which are substantially larger
and have greater resources than the operators of the health care facilities.
Some of these facilities are operated for profit while others are owned by
governmental agencies or tax-exempt non-profit organizations.
In mid 1998 the long term care industry began experiencing severe
Medicare revenue reductions brought about by the enactment of the 1997 Balanced
Budget Act ("BBA `97"). Additionally, the assisted living industry experienced
slower fill-up rates on new projects and more competition for their mature
projects as overbuilding occurred in more and more markets. Stock prices for
publicly traded long term care companies declined precipitously and companies
announced greatly reduced earnings or even significant losses. By the end of
1999, two of the four largest public long term care companies were in bankruptcy
and at least three of the top ten private long term care companies were also. By
February 3, 2000 two other public healthcare companies filed for bankruptcy
protection.
With the operators in such dire financial distress it is not surprising
that the health care REIT industry - including NHI - has seen such a reduction
in market capitalization to the extent that using publicly sold equity to
generate capital is not a realistic option. Additionally, commercial borrowing
sources are restricting if not altogether avoiding investments in health care
REIT debt issues. Accordingly, NHI is not currently competing with any
healthcare REITs or commercial banks for placing new mortgage loans or sale
leasebacks. Instead, NHI is focusing on monitoring closely its investments,
rather than making new ones.
OPERATORS
The majority (by total real estate assets) of the health care
facilities are operated by third party management companies on behalf of the
owner or lessee. The balance of the health care facilities are operated by the
owner or lessee. As a percent of total investments, 58.5% of the health care
facilities are operated by publicly-owned companies, while 20.5% are operated by
multistate regional health care operators. Generally, a third party operator of
a facility is not liable to NHI under the mortgage or lease; however, NHI
considers the operator to be an important factor in determining the
creditworthiness of the investment and NHI generally has the right to
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approve any changes in operators. On some investments, the third party operator
of a facility guarantees at least a portion of the lease or mortgage. Operators
of the health care facilities include NHC, Marriott Senior Living Services,
Lenox HealthCare, Inc., Alterra, Inc. Sun Healthcare, Integrated Health
Services, Inc., Columbia/HCA, Paracelcus, Beverly Enterprises, Res-Care, Inc.,
American Retirement Corp., Mariner Post Acute Services, and Centennial
Healthcare Corporation. Lenox, Sun HealthCare, Mariner Post Acute Services and
Integrated Health Services are currently in bankruptcy. There could be an
adverse impact to NHI as a result of these bankruptcies.
NHC MASTER AGREEMENT TO LEASE
The master agreement to lease 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 NHI. 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 (which has been
exercised), 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 NHI. 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 NHI 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 quarter of each year after 1992 (the first full calendar year
of the term of the master agreement), NHC is obligated to pay percentage rent to
NHI equal to 3% of the amount by which gross revenues of each NHC leased health
care facility in such later quarter exceeds the gross revenues of such health
care facility in the applicable quarter of 1992. NHC paid $1.2 million as
percentage rent for 1999.
The master agreement is a "triple net lease", under which NHC is
responsible to pay all taxes, utilities, insurance premium costs, repairs
(including structural portions of the buildings, constituting a part of the
health care facilities) and other charges relating to the ownership and
operation of the health care facilities. NHC is obligated at its expense to keep
all improvements and fixtures and other components of the health care facilities
covered by "all risk" insurance in an amount equal to the full replacement costs
thereof, insurance against boiler explosion and similar insurance, flood
insurance if the land constituting the health care facility is located within a
designated flood plain area and to maintain specified minimal personal injury
and property damage insurance, protecting NHI as well as NHC at such health care
facility. NHC is also obligated to indemnify and hold harmless NHI 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
NHI 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.
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LOAN FORECLOSURES
During late 1998 and during 1999, NHI purchased 17 long-term health
care facilities and a retirement center for $81.4 million. The purchases were
undertaken either in foreclosure or in lieu of foreclosure due to financial
defaults on first mortgage loans with three different owners. The mortgages had
been funded from 1993 through 1996 in original principal amounts totaling $88.6
million.
NHI is treating each of the properties described above as foreclosure
property for federal income tax purposes. With this election, unqualified income
generated by the properties is expected to be treated as qualified income for a
minimum of two years from the purchase date for purpose of the income-source
tests that must be satisfied by real estate investment trusts to maintain their
tax status.
In January 2000, NHI sold the real estate, property and equipment of
six long-term health care facilities on which it had foreclosed (and which is
included in the $81.4 million mentioned above) to Care Foundation of America,
Inc. ("Care") for $25.9 million in exchange for a note receivable from Care. In
accordance with the provisions of Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate", NHI has accounted for the
transaction under the installment method. The note receivable from Care bears
interest at 10% and is collateralized by the first mortgages on the six
long-term health care facilities and the corporate guarantee of NHC for up to
$3.0 million of principal and interest. Care is current in its payments under
the note receivable.
BORROWER BANKRUPTCY
Lenox Healthcare, Inc. and its affiliates ("Lenox") have filed for
Chapter 11 Bankruptcy protection in the United States Bankruptcy District Court
in Wilmington, Delaware. NHI's loans may be impacted as follows:
Zurich North America Capital Corporation (an affiliate of Lenox) - In
1996, NHI funded a mortgage loan for Zurich North America Capital
Corporation in the original principal amount of $26,000,000. Collateral
for the loan includes first mortgages on ten long-term health care
facilities, leasehold assignment of certain existing leases on the
properties, the corporate guarantees of Lenox and Greylock Health
Corporation, and certain personal guarantees. Lenox is the operator of
nine of the ten long-term health care facilities located in the states
of Kansas and Missouri. The tenth facility has been closed during the
bankruptcy.
At September 30, 2000, the net carrying value of the loan is
approximately $23,800,000. NHI is currently evaluating the health care
center portion of the collateral given the bankruptcy status of the
manager and other circumstances affecting the centers but believes that
the combined collateral supports the net carrying value of the
mortgage. On
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September 26, 2000, NHI and the debtor in possession entered into a
Settlement Agreement, which is subject to approval by the creditors of
the bankrupt estate and the bankruptcy court. The proposed agreement
will verify the principal balance of the mortgage as of June 30, 2000,
and restate the interest rate on the restated mortgage amount at rates
from 9 to 11 percent with the mortgage balance becoming due and payable
on December 31, 2002. Additionally, Lenox has recommenced making
interest payments on the loan.
Pinellas Healthcare Investors, Inc. - In 1995, NHI funded a mortgage
loan for Pinellas Healthcare Investors, Inc. in the original principal
amount of $4,500,000. An affiliate of Lenox was the operator and lessee
of the facility. Collateral for the loan included a first mortgage on
the facility, the corporate guarantee of Stockbridge Investment
Partners, Inc., certain personal guarantees, and certain accounts
receivable. During the second quarter of 2000, Lenox notified NHI that
it rejected its lease with bankruptcy court approval. NHI approved the
assignment of the Lenox lease to an unaffiliated company in order to
allow the center to continue operations. On September 15, 2000, NHI
completed foreclosure action against the borrower and obtained title to
the project in the name of an NHI subsidiary.
At September 30, 2000, the net carrying value of the realty is
approximately $1,449,000. Although the property has been leased to a
third party, rental income is limited to available cash flow, of which
there currently is none. NHI believes that the combined collateral
supports the net carrying value of the realty.
Colonial Land Corporation - In 1996, NHI funded a mortgage loan for
Colonial Land Corporation in the original amount of $25,000,000.
Collateral for the loan includes first mortgages and lease assignments
on six long-term health care facilities located in Virginia. Although
Colonial Land Corporation is not included in the Lenox bankruptcy
filing, Lenox manages three of the facilities, and Mr. Tom Clarke, the
principal owner of Lenox, is also an owner of Colonial Land
Corporation.
At September 30, 2000, the net carrying value of the loan is
approximately $19,300,000, which earns interest at 10.8%. NHI is
currently evaluating the health care portion of the collateral given
the bankruptcy status of the manager and other circumstances affecting
the centers but believes that the combined collateral supports the net
carrying value of the mortgage.
Other Entities Owned by Principals of Lenox - Not Affected by Lenox
Bankruptcy - Although not impacted by the bankruptcy filing, Mr. Tom
Clarke, the principal owner of Lenox, is involved as a principal in
other entities financed by NHI. The carrying value of NHI's investments
in these other entities is $10,200,000 at September 30, 2000. At the
present time, NHI knows of no reason to assume that these entities will
be negatively impacted by the Lenox filing or that any loss of income
or asset value will occur.
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OTHER NON-PERFORMING LOANS
In addition, NHI has determined that the following loans are
non-performing loans.
Brookside Inn - NHI's investment totaled $5,138,000 as of September 30,
2000. NHI has initiated foreclosure proceedings against the owner, but is
currently forbearing from pursuing this action. The owner is making current
payments, plus repaying over the next eighteen months approximately four months
of missed payments. NHI believes that the expected cash flows from this loan,
along with the value of the collateral, support the net carrying value of this
loan.
SouthTrust Loan Participation - NHI has a 50% interest in a loan made
by SouthTrust Bank to Integrated Health Services, Inc. ("IHS"). NHI's loan
balance at September 30, 2000 totaled $25,643,000. IHS and its affiliates have
filed for Chapter 11 bankruptcy protection. In May 2000 during a
collateralization hearing, the bankruptcy court ruled that the value of the
collateral supporting NHI's loan exceeds the balance due to NHI under the loan.
Based on this ruling and based on NHI's knowledge, NHI believes that the
collateral supports the net carrying value of this loan; however, the debtor is
not currently making mortgage payments. NHI and SouthTrust Bank have filed for a
bankruptcy court order requiring IHS to make "adequate protection payments" and
are awaiting the ruling of the Court.
Autumn Hills Convalescent Centers, Inc. - In 1997, NHI funded a
mortgage loan for Autumn Hills Convalescent Centers, Inc. in the original
principal amount of $51,500,000. Collateral for the loan includes first
mortgages on thirteen long-term health facilities, and certain corporate and
personal guarantees. These facilities are located in Texas. At September 30,
2000 the net carrying value of the loan is approximately $45,200,000, which
earns 10.5% interest. NHI has not received all principal and interest payments
as due and has entered into a Forbearance Agreement with the Borrower. This
Agreement allows for partial payments while the Borrower secures HUD financing.
NHI is currently evaluating the health care center portion of the collateral
given the circumstances affecting the centers but believes that the combined
collateral supports the net carrying value of the mortgage. NHI has filed a
lawsuit against the individual guarantor on his guarantee.
Morningside - NHI's investment totaled approximately $21,200,000 at
September 30, 2000 and is secured by four long-term health care facilities in
Virginia and Maryland. NHI has not received all principal and interest payments
as due and the owners of the facilities have indicated that they will make no
additional equity contributions to the facilities. NHI is currently evaluating
the collateral supporting this loan but believes that it supports the net
carrying value of the mortgage.
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LOAN INCOME RECOGNITION
During the quarter ended September 30, 2000, NHI concluded that the
current events surrounding six mortgage loans required the writeoff of
previously recorded interest receivables under the Company's policy to accrue up
to 90 days of unpaid interest if believed collectable. These write offs,
totaling $4.6 million, have been included in loan loss expense in the interim
condensed consolidated statement of income. During this quarter, these loans
were affected by various bankruptcy court rulings and judgments about possible
refinancing and other collateral values to the extent that NHI determined that
the accruals should be reserved. Also, NHI determined that any additional
accruals for payments not received on these loans during the quarter should not
be recorded. NHI has been during the third quarter and is continuing to evaluate
the current events and circumstances that are affecting the borrowers under
these six mortgage loans totaling a net book value of $139.8 million. These
borrowers have either filed for protection under the bankruptcy laws or have not
made scheduled payments under their loans. NHI believes that additional events
(including borrowers emerging from bankruptcy, additional bankruptcy court
rulings or the completion by the borrowers of refinancings with other lenders or
other events that effect collectibility) could occur during the fourth quarter
of 2000. NHI is concerned that these events, if adverse to NHI, will indicate a
further impairment of the net book value of these loans. If such adverse events
occur, NHI will record the impairment charges in the fourth quarter. However,
NHI believes that the effect of any adverse events would not exceed $15.0
million.
Mortgage and other notes receivable were reduced by an allowance for
loan losses of $9.3 million at September 30, 2000.
DEBT AND RELATED GUARANTEE
NHC and NHI both have interests in a debt instrument originally
financed through the National Health Corporation Leveraged Employee Stock
Ownership Plan and Trust. As of September 30, 2000, the total debt balance on
the loan was $23.2 million, of which $10.6 million is the primary obligation of
NHI. NHI guarantees, and is contingently obligated on, the remaining $12.6
million of the outstanding balance under this loan. On July 7, 2000, under the
terms of the debt agreement, NHC, purchased the entire $23.2 million debt
instrument from the previous holders to protect NHC's interest in the debt and
to prevent NHI from being in default under a contractual obligation to purchase
the debt. On September 30, 2000, NHI had the liquidity and purchased the $23.2
million debt instrument from NHC. Subsequent to the quarter end, NHC repurchased
the outstanding notes from NHI. NHI remains liable for its primary obligations
which are unchanged and contingently liable on its guarantee as discussed above.
NHI believes that all terms and conditions of this and other debt obligations
are currently in full compliance.
COMMITMENTS
At November 20, 2000, NHI was committed, subject to due diligence and
financial performance goals, to fund approximately $2.9 million in health care
real estate projects, all of
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which is expected to be funded within the next 12 months. The commitments
include mortgage loans or purchase leaseback agreements for one long-term health
care center, two assisted living facilities, and one hospital all at rates
ranging from 10% to 11.5%.
NHI is currently limited in its ability to make new investments due to
a lack of availability of reasonably priced capital, certain limitations under
its covenants in the combined credit facilities and its short-term liquidity
demands. However, NHI believes it has sufficient liquidity and cash flow to
finance current investments for which it is committed. The following table sets
forth information regarding NHI's commitments as of September 30, 2000.
FACILITY TYPE NUMBER OF COMMITMENTS
FACILITIES (IN THOUSANDS)
Long-Term Care 1 $ 215
Hospitals 1 1,923
Assisted Living 2 776
-----
Total commitments 2,914
=====
INVESTMENT POLICIES
NHI's investment objectives are (1) to provide current income for
distribution to its stockholders through investments primarily in health care
related facilities, (2) to provide the opportunity to realize capital growth
resulting from appreciation, if any, in the residual value of its portfolio
properties, and (3) to preserve and protect stockholders' capital. There can be
no assurance that these objectives will be realized. It is not the present
intention of NHI to sell its properties and reinvest in other investments for
the purpose of realizing gains resulting from the appreciation of value of those
properties; NHI, however, in the future would consider selling properties in the
event circumstances should arise which would make a sale advisable or
attractive.
NHI does not anticipate seeking and is limited under certain covenants
in the combined credit facilities from making further significant health care
related investments such as lease or mortgage financing during 2000 and 2001 and
will instead focus on monitoring and enhancing its current investments, with
specific emphasis on its foreclosure properties. NHI plans to continue its goal
of reducing its ratio of debt to shareholder's equity. If the late 1999
amendments to BBA '97 generate renewed investment confidence in the long term
care industry, NHI will once again compete with health care providers and
investors, including other real estate investment trusts, for additional health
care related investments. In evaluating potential investments, NHI considers
such factors, as (1) the geographic area and type of property, (2) the location,
construction quality, condition and design of the property, (3) 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
NHI's investors, (4) the growth, tax and regulatory environments of the
communities in which the properties are located, (5) occupancy and demand for
similar health care
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facilities in the same or nearby communities, (6) the quality, experience and
creditworthiness of the management operating the facilities located on the
property, and (7) the mix of private and government sponsored patients. There
can be no assurances that these intentions will be realized.
We 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 NHI, or any affiliate
thereof, as the case may be, any of the assets or other property of NHI. NHI's
credit agreements limit the amount of investment in any one borrower to 25% of
our assets, except for investments in NHC which is limited to 35% of our assets.
The board of directors, without the approval of the stockholders, may
alter NHI's investment policies if they determine that such a change is in the
best interests of NHI and its stockholders. The methods of implementing our
investment policies may vary as new investment and financing techniques are
developed or for other reasons.
ADVISORY AGREEMENT
NHI entered into the advisory agreement on October 17, 1991 with NHC as
Advisor under which NHC provides management and advisory services to us during
the term of the advisory agreement. NHI believes the advisory agreement benefits
us by providing access to NHC's extensive experience in the ownership and
management of long-term care facilities and retirement centers. Under the
advisory agreement, we engaged NHC to use its best efforts (1) to present to NHI
a continuing and suitable investment program consistent with the investment
policies of NHI adopted by the board of directors from time to time, (2) to
manage the day-to-day affairs and operations of NHI, and (3) 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 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 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 in a base
amount of $1.6 million, payable in monthly installments of $135,417. This fee is
subordinate to NHI's funds from operations and dividend paid annually equaling
or exceeding $2.00 per diluted share. Fees so subordinated are accrued. Under
the advisory agreement, NHI 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. In 1999, the annual compensation expense
under the advisory agreement was $2.8 million. For the nine months ended
September 30, 2000, NHI has accrued $2.2 million under the terms of the advisory
agreement.
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Pursuant to the advisory agreement, NHC manages all of the day-to-day
affairs of NHI 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 NHI. The advisory agreement
further provides that NHI shall pay the expenses incurred with respect to and
allocable to the prudent operation and business of NHI including any fees,
salaries, and other employment costs, taxes and expenses paid to directors,
officers and employees of NHI who are not also employees of NHC. Currently,
other than the directors who are not employees of NHC, NHI does not have any
officers or employees who are not also employees of NHC. NHI's three executive
officers, Mr. W. Andrew Adams, Mr. Robert G. Adams and Mr. Richard F. LaRoche,
Jr. are employees of NHC and all of their fees, salaries and employment costs
are paid by NHC, but a portion of their bonus, if any, is allocated to NHI.
In addition, although not specifically provided for in the advisory
agreement, during 1999 NHI granted to directors of NHI and key employees of NHC
stock options to purchase a total of 145,000 shares of common stock for the
benefit of various key employees and outside directors. Additionally, NHI 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 NHI 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.
FEDERAL INCOME TAX
NHI believes that it has operated its business so as to qualify as a
real estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986 and NHI intends to continue to operate in such a
manner, but no assurance can be given that NHI will be able to qualify at all
times. If NHI qualifies as a REIT, it will generally not be subject to federal
corporate income taxes on its net income that is currently distributed to its
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that typically applies to corporate
dividends. NHI's failure to continue to qualify under the applicable REIT
qualification rules and regulations would have a material adverse impact on the
financial position, results of operations and cash flows of NHI.
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NHI is aware of certain income tax contingencies with regards to
limitations on ownership of its stock and to its use of an independent
contractor to mange certain of its foreclosure properties. In order to fully
resolve the contingencies, NHI is in the process of requesting from the Internal
Revenue Service closing agreements regarding each of these contingencies. NHI's
management, based on its discussions with its legal counsel, understands that
other real estate investment trusts have been successful in obtaining closing
agreements with the IRS regarding real estate investment trust qualification
issues. However, it is possible that the IRS will not rule in favor of NHI. Such
an unfavorable ruling could result in the assessment of taxes, penalties and
interest by the IRS that are material to NHI's financial statements taken as a
whole and could also result in the loss of NHI's status as a real estate
investment trust, which would have a significant adverse impact on the financial
position, results of operations and cash flows of NHI.
As a REIT, NHI is required to distribute at least 95% of its taxable
income through the payment of dividends that are eligible for the REIT dividends
paid deduction. During 2000, the Company has paid in cash $1.28 per share in
common stock dividends. These dividends should be eligible for the REIT
dividends paid deduction as long as NHI retains its status as a REIT and the
dividends are not considered preferential with respect to any other class of
stock. We believe that the dividends paid to date qualify for the REIT deduction
for dividends paid. We intend to preserve NHI's status as a REIT and do not
believe that our intent to not accrue a third and fourth quarter year 2000
common stock cash dividend should impact our REIT tax status. We will continue
to evaluate the dividends previously paid in 2000 in relation to 2000 REIT
taxable income. If necessary, we will consider alternative forms of
distributions. For example, we may consider paying dividends in 2001, which,
under certain circumstances, may qualify for REIT deduction for dividends paid
against 2000 REIT taxable income. These alternatives could also include a
taxable stock dividend in 2000 with a fair market value sufficient to meet the
distribution requirement.
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PLAN OF DISTRIBUTION
We will offer $20 million of the debentures until December 20, 2000 to
our shareholders and the holders of our 7.75% convertible subordinated
debentures due 2001 and 7.0 subordinated debentures due 2004. The minimum
purchase per person is $5,000 and purchases over $250,000 that do not relate to
the shareholders current ownership percentage must be approved by the Company.
In the event our shareholders and the holders of our debentures purchase less
than $20 million of the debentures, we may offer the remaining amount to the
public, until December 27, 2000. In the event the offering is oversubscribed the
procedures below will determine the amounts that may be purchased by each group.
In the event that the shareholders alone oversubscribe the offering,
then neither the debenture holders, nor the public will have the right to
purchase debentures and each participating shareholder will be entitled to
purchase debentures equal to the sum of: (1) the shareholder's percentage
ownership of the common stock multiplied by $20 million; plus (2) an amount
equal to: (a) the amount of debentures requested to be purchased by such
shareholder divided by the total amount of debentures requested to be purchased
by all of the shareholders; multiplied by (b) any debentures not purchased
pursuant to (1) above. The minimum purchase per person is $5,000 and purchases
over $250,000 that do not relate to the shareholders current ownership
percentage must be approved by the Company.
In the event that the shareholders, together with the debenture
holders, oversubscribe the offering, then the public shall have no right to
purchase debentures, the shareholders shall purchase all debentures requested
and each debenture holder shall purchase an amount of debentures equal to: (1)
the amount of debentures requested to be purchased by such debenture holder
divided by the total amount of debentures requested to be purchased by all such
debenture holders; multiplied by (2) the total amount of the debentures not
requested to be purchased by the shareholders.
In order to exercise your subscription right, each shareholder and/or
holder of debentures must complete the enclosed subscription agreement and
return it, along with the full purchase price, to the escrow agent. If you are a
shareholder who owns your shares through a bank or brokerage account, your
broker should have included such an agreement. If not, immediately contact your
broker in order to exercise your rights hereunder.
All payments for the debentures by the existing shareholders and the
debenture holders must be delivered to the escrow agent no later than December
20, 2000. U.S. Bank Trust National Association will serve as the escrow agent
for this offering.
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DESCRIPTION OF THE DEBENTURES
The debentures constitute a separate series of securities (which are
more fully described in the prospectus) to be issued pursuant to an indenture,
dated as of November, 2000 between NHI and U.S. Bank Trust National Association,
as trustee.
This summary of the debentures is qualified by reference to the
indenture. The terms of the debentures include those provisions contained in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939. The following description of the particular terms of the
debentures offered hereby supplements, and to the extent inconsistent therewith,
replaces, the description of the general terms and provisions of the debt
securities set forth in the prospectus.
The debentures and the indenture will not limit the securities which
may be issued by NHI or its subsidiaries and will contain no financial covenants
or similar restrictions respecting NHI or its subsidiaries and, therefore,
holders of the debentures will have no protection from adverse changes in NHI's
financial condition.
PRINCIPAL, MATURITY AND INTEREST
The debentures will be limited to $20,000,000 in aggregate principal
amount and will mature on January 1, 2006. The debentures will bear interest at
a rate of prime plus 1% per annum, with a minimum interest rate for the term of
the debentures shall be 9.0%. The interest rate shall be adjusted quarterly on
each January 1, April 1, July 1 and October 1. Interest will be payable
quarterly in arrears on each April 15, July 15, October 15 and January 15. The
first interest period will be from December 29, 2000 to March 31, 2001 at an
interest rate of 10.5% for that period. Prime means the prime rate reported in
the Money Section of the Wall Street Journal. Interest on the debentures will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
SUBORDINATION
The debentures will be subordinated in right of payment to the prior
payment in full of all senior indebtedness of NHI and will rank pari passu with
all other existing and future senior subordinated indebtedness of NHI. As of
November 10, 2000, after giving pro forma effect to the offering and the use of
proceeds therefrom, senior indebtedness would have been approximately
$228,728,406 million. The debentures do not limit the ability of NHI or its
subsidiaries to incur other indebtedness, including senior indebtedness, to
pledge assets or to contribute assets to subsidiaries. See "Use of Proceeds."
Senior Indebtedness means the principal, premium, if any, and unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating
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to the Company whether or not a claim for post-filing interest is allowed in
such proceeding), fees, charges, expenses, reimbursement and indemnification
obligations, and all other amounts payable under or in respect of (i)
Indebtedness of the Company secured by a lien to which property or assets are
subject, (ii) the Senior Secured Debt, (iii) all indebtedness and other
obligations guaranteed by the Company, (iv) the Company's 10% Senior
Subordinated Convertible Debentures in the original aggregate principal amount
of $110,000,000 due 2006; or (v) any collateralized guarantee by the Company of
Indebtedness of any Person to a third party, as any of the foregoing may be
outstanding at any time.
Subordinated Indebtedness means (i) the principal, premium, if any, and
interest on any Indebtedness of the Company which by its terms is expressly
subordinated in right of payment to the debentures and (ii) any account payable
or other obligation created or assumed by the Company in the ordinary course of
its business in connection with the obtaining of materials or services.
Senior Secured Debt means (i) the obligations of the Company with
respect to the Fifth Amended and Restated Credit Agreement with Dresdner Bank
AG, New York and Cayman Branches as Agent; (ii) the obligations of the Company
with respect to the Series A and Series B Senior Secured ESOP Notes issued by
the National Health Corporation Leveraged Employee Stock Ownership Trust; (iii)
the obligations of the Company under the Guarantee and Contingent Purchase
Agreement dated October 17, 1991 (as such may be amended from time to time)
between the Company, SunTrust Bank, Nashville, N.A., as agent, and certain banks
named therein; and (iv) the obligations of the Company with respect to the NHC
Guarantees (as delivered in the Indenture dated October 17, 1991 related to the
Company's 10% Senior Subordinated Convertible Debentures).
The debentures will be senior and prior in right of payment to all
Subordinated Indebtedness, to the extent and in the manner provided in such
Subordinated Indebtedness.
Upon any distribution of assets of NHI in any dissolution, winding-up,
liquidation or reorganization of NHI, payment of the principal of, and interest
on, the debentures will be subordinated, to the extent and in the manner set
forth in the indenture, to the prior payment in full of all senior indebtedness.
Such subordination will not prevent the occurrence of an event of default (as
defined in the indenture). Upon the happening of any event of default with
respect to any senior indebtedness which permits holders of senior indebtedness
to accelerate the maturity thereof, then, unless and until such event of default
shall have been cured or waived or shall have ceased to exist, no payment or
redemption may be made by NHI directly or indirectly, on account of the
principal of or interest on the debentures.
By reason of the subordination of the debentures, in the event of
insolvency, holders of the debentures may recover less ratably than NHI's other
general creditors.
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The debentures are obligations exclusively of NHI and not of its
subsidiaries. Because the operations of NHI are currently conducted through
subsidiaries, the cash flow and the consequent ability to service debt of NHI,
including the debentures, are dependent, in part, upon the earnings of its
subsidiaries and the distribution of those earnings to NHI or upon loans or
other payments of funds by those subsidiaries to NHI. The subsidiaries are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the debentures or to make any
funds available therefor, whether by dividends, loans or other payments. In
addition, the payment of dividends and the making of loans and advances to NHI
by its subsidiaries may be subject to statutory or contractual restrictions, are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations.
The debentures will be effectively subordinated to all indebtedness and
other liabilities, including current liabilities and commitments under leases,
if any, of NHI's subsidiaries. Any right of NHI to receive assets of any of its
subsidiaries upon liquidation or reorganization of the subsidiary (and the
consequent right of the holders of the debentures to participate in those
assets) will be effectively subordinated to the claims of that subsidiary's
creditors (including the Banks and all other creditors), except to the extent
that NHI is itself recognized as a creditor of such subsidiary, in which case
the claims of NHI would still be subject to any security interests in the assets
of such subsidiary and subordinated to any indebtedness of such subsidiary
senior to that held by NHI.
DELIVERY AND FORM OF DEBENTURE
The debentures will be issued in the form of certificated securities to
each purchaser.
CONVERSION RIGHTS
The debentures will be convertible into common stock at any time on and
after July 31, 2001 and before redemption or maturity. The initial conversion
price is $7.00 principal amount at maturity per share, subject to adjustment
upon the occurrence of various events described below. NHI will pay cash in lieu
of any fractional share.
Such conversion right shall be exercised by the surrender of the
debenture to NHI at any time during usual business hours at its principal place
of business to be maintained by it, accompanied by written notice that the
holder elects to convert the debenture (or a specified portion of the
outstanding principal amount thereof) and specifying the name or names (with
address) in which a certificate or certificates for shares are to be issued and
(if so required by NHI) by a written instrument or instruments of transfer in
form reasonably satisfactory to NHI duly executed by the holder or its duly
authorized legal representative and transfer tax stamps or funds therefor, if
required under the indenture. If less than all of the then outstanding principal
amount of the holder's debentures are to be converted, NHI will promptly issue
and deliver to the holder a new debenture in the principal amount of the
unconverted portion of the debenture submitted for conversion. A holder may
convert a portion of a debenture if the portion is $1,000
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principal amount or an integral multiple thereof and the remaining debenture is
equal to or greater than $5,000.
No payment or adjustment is to be made on conversion for interest
accrued hereon or for dividends on shares of common stock issued on conversion;
provided, however, that if a debenture is surrendered for conversion after the
record date for a payment of interest and on or before the interest payment
date, then, notwithstanding such conversion, the interest falling due to such
interest payment date will be paid to the person in whose name the debentures
are registered at the close of business on such record date and any debenture
surrendered for conversion during the period from the close of business on any
regular record payment date to the opening of business on the corresponding
interest payment date must be accompanied by payment of an amount equal to the
interest payable on such interest payment date.
If NHI is a party to a consolidation or merger or a transfer or lease
of all or substantially all of its assets, the right to convert a debenture into
shares of common stock may be changed into a right to convert it into
securities, cash or other assets of NHI or another person.
The conversion price is subject to adjustment if NHI shall, among other
things, at any time or from time to time: (1) pay a non-taxable stock dividend
or make a non-taxable distribution (other than a dividend or distribution paid
or made to the holder) on the outstanding common stock in common stock or other
equity interests (which, for purposes of this condition shall include, without
limitation, any dividends or distributions in the form of options, warrants or
other rights to acquire common stock or other equity interests) of NHI; (2)
subdivide the outstanding common stock into a larger number of common stock; (3)
combine the outstanding common stock into a smaller number of common stock; (4)
issue any equity interest in a reclassification of the common stock; or (5) pay
a dividend or make a distribution on the outstanding common stock in common
stock or other equity interests pursuant to a rights plan, "poison pill" or
similar arrangement.
Notwithstanding anything herein to the contrary, a holder shall not be
entitled to effect the conversion of, and NHI shall not be required to take any
steps to effect the conversion of, any debenture if such conversion, in the good
faith opinion of the board of directors of NHI or an officer, (1) might cause
NHI to fail to comply with any requirement necessary for the continued
qualification of NHI as a REIT under the code or (2) would result in a single
person being an owner (or upon conversion of any debenture thereupon being an
owner) of more than 9.9% of NHI's outstanding common stock (including NHI's
common stock reserved for issuance upon conversion of securities held by such
person or conversion or exchange of other securities of NHI held by such
person). Any attempted conversion of a debenture by a holder in violation of the
limits set forth above shall be null and void ab initio.
OPTIONAL REDEMPTION BY NHI
NHI may redeem the debentures, at any time after January 1, 2002, in
whole or from time to time in part, at the election of NHI, at a redemption
price equal to the principal amount of the
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debentures being redeemed plus accrued interest thereon to the redemption date,
referred to as the redemption price.
From and after notice has been given as provided in the indenture, if
funds for the redemption of any debentures called for redemption shall have been
made available on such redemption date, such debentures will cease to bear
interest on the date fixed for such redemption specified in such notice and the
only right of the holders of the debentures will be to receive payment of the
redemption price.
Notice of any optional redemption of any debentures will be given to
holders at their addresses, as shown in the debenture register, not more than 60
nor less than 30 days prior to the date fixed for redemption. The notice of
redemption will specify, among other items, the redemption price and the
principal amount of the debentures held by such holder to be redeemed.
NHI will notify the trustee at least 45 days prior to the redemption
date (or such shorter period as satisfactory to the trustee) of the aggregate
principal amount of debentures to be redeemed and the redemption date. If less
than all the debentures are to be redeemed at the option of NHI, the trustee
shall select, pro rata or by lot or by any other method that the trustee
considers fair and appropriate under the circumstances, debentures of such
series to be redeemed in whole or in part. Debentures may be redeemed in part in
the minimum authorized denomination for debentures or in any integral multiple
thereof.
EVENTS OF DEFAULT
An event of default with respect to the debentures will be any one of
the following events: (1) default in any payment when due of the principal of
any such debenture; (2) default for thirty days in the payment of any
installment of interest on any such debenture; (3) default for sixty days after
appropriate notice in the performance of any other covenant of NHI in the
debentures or the indenture with respect to such debentures; (4) certain events
of bankruptcy, insolvency or reorganization; or (5) acceleration of, or failure
to pay when due upon maturity, any indebtedness for money borrowed by NHI as to
which NHI has at least $5,000,000 in aggregate principal amount of indebtedness
outstanding, which acceleration is not rescinded or annulled or which failure is
not cured within 10 days after notice of acceleration or after such failure, as
the case may be. If an event of default shall occur and be continuing, the
holders or a majority in principal amount of the outstanding debentures may
declare the principal of and accrued interest on the debentures to be
immediately due and payable.
CONSOLIDATION, MERGER AND SALE OF ASSETS
NHI may consolidate with, merge into or sell or convey all or
substantially all of its property to, another corporation without the consent of
holders of the debentures, provided that the successor corporation assumes all
obligations of NHI under the debentures and under the indenture and, such
successor corporation is organized under the laws of the United States or any
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political subdivision thereof or therein, although it in turn may be owned by
foreign entity, and, provided further, that certain other conditions are met.
Upon compliance with these provision by a successor corporation, NHI would be
relieved of its obligations under the debentures and under the indenture.
Therefore, if such conditions are satisfied, NHI may consolidate with, merge
into or sell or convey its property to the other corporation.
MEETINGS, MODIFICATION AND WAIVER
The indenture (including the terms and conditions of the debentures and
coupons) may be modified or amended by NHI and the trustee without the consent
of the holder of any debenture or related coupon, to, among other things: (1)
evidence the succession of another corporation to NHI and the assumption by any
such successor of the covenants of NHI in the indenture or the debentures; (2)
add to the covenants of NHI for the benefit of the holder of debentures or
coupons, or to surrender any right or power herein conferred upon NHI; (3) cure
any ambiguity, to correct or supplement any provision therein which may be
inconsistent with any other provision therein; (4) add any events of default;
and (5) make any other provisions with respect to matters or questions arising
under the debentures or the indenture, provided such action pursuant to this
clause (6) shall not adversely affect the interests of the holders of debentures
or coupons.
Modifications and amendments to the indenture or to the terms and
conditions of the debentures may be made and future compliance with or any past
default by NHI under any of the provisions thereof may be waived, or any
acceleration thereunder annulled, with the consent of the holders of not less
than a majority in aggregate principal amount of the debentures at the time
outstanding (excluding for purposes of such calculation the aggregate principal
amount of debentures held by NHI or any of its subsidiaries); provided that no
such modification or amendment to the terms and conditions of the debentures
may, without the consent or the affirmative vote of the holder of each debenture
affected thereby, (1) waive (unless theretofore cured) a default in the payment
of principal of or interest on any debenture; (2) change the stated maturity of
the principal or premium, if any, or any installment of interest on any
debenture; (3) reduce the principal amount of or the rate of interest on any
such debenture; (4) change the coin or currency in which any debenture or
interest thereon is payable; (5) adversely affect the right to cause NHI to
redeem or the right to convert any such debenture.
REPLACEMENT OF DEBENTURES AND RELATED COUPONS
Debentures (including related coupons, if any) that become mutilated,
destroyed, stolen or lost will be replaced by NHI at the expense of the holder
upon delivery to the trustee of the debentures and related coupons or evidence
of the loss, theft or destruction thereof satisfactory to NHI and the trustee.
In the case of a lost, stolen or destroyed debenture or related coupon, an
indemnity satisfactory to NHI and the trustee may be required at the expense of
the holder of such debenture or related coupon before a replacement debenture or
related coupon, as the case may be, will be issued.
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DEFEASANCE
The indenture provides that NHI will be discharged from any and all
obligations with respect to the debentures (except for the obligations to
register the transfer or exchange of the debentures, to replace temporary or
mutilated, destroyed, lost or stolen debentures, to maintain an office or agency
in respect of the debentures and to hold moneys for payment in trust) upon the
irrevocable deposit by NHI with the trustees, in trust, of an amount, in cash or
U.S. Government obligations, or both, which through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient without reinvestment to pay the principal of and premium (if
any) and interest on the debentures on the scheduled due dates therefor.
U.S. Government obligations means direct, non-callable obligations of,
or non-callable obligations guaranteed by, the United States of America for the
timely payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.
GOVERNING LAW
The debentures and the indenture will be governed by and construed in
accordance with the laws of the State of New York, without giving effect to its
conflicts of law rules.
MARKETABILITY
At present there is no public market for the debentures; however, NHI
intends to make application to list debentures and the shares on the New York
Stock Exchange.
ADDITIONAL INFORMATION
Anyone who received this prospectus supplement may obtain a copy of the
Indenture without charge by writing to National Health Investors, Inc., 100 Vine
Street, Suite 1202, Murfreesboro, Tennessee 37130, Attention: Mr. Richard F.
LaRoche, Jr., Secretary & Vice President. You may also access your web page at
www.nhinvestors.com
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal United States
federal income tax considerations relevant to debenture holders. This discussion
is based on currently existing provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing Treasury regulations promulgated thereunder
and administrative and judicial interpretations thereof, all as in effect or
proposed on the date hereof and all of which are subject to change, possibly
with retroactive effect.
This discussion does not deal with all aspects of United States federal
income taxation that may be important to debenture holders or holders of shares
of common stock received upon conversion of debentures, and it does not include
any description of the tax laws of any state, local or foreign government. This
discussion does not address the tax consequences to subsequent beneficial owners
of the debentures and is limited to beneficial owners who hold the debentures
and the shares of common stock received upon conversion thereof as capital
assets within the meaning of Section 1221 of the Code. Moreover, this discussion
provides general information only and does not purport to address all of the
United States federal income tax consequences that may be relevant to particular
debenture holders (such as certain financial institutions, insurance companies,
pass-through entities, tax-exempt entities, dealers in securities or persons who
have hedged the risk of owning a debenture or a share of common stock) that may
be subject to special rules.
No rulings have been, or will be, sought from the IRS, or from any
other taxing authority, as to any of the matters described in this Prospectus
Supplement. In the absence of any such rulings, no assurances can be given that
the IRS will agree with this discussion. NHI can offer no assurances that the
law will not change adversely, that the assumptions underlying the following
discussion and opinions will prove to be accurate, or that the courts will agree
with the conclusion of NHI in the event of a challenge by the IRS.
For the purpose of this discussion, a "United States Holder" refers to
a beneficial owner of debentures or common stock who or which for United States
federal income tax purposes is:
- a citizen or resident of the United States;
- a corporation created or organized in or under the laws of the
United States or any political subdivision thereof;
- an estate, the income of which is subject to United States
federal income taxation regardless of its source; or
- a trust if, (A) a United States court is able to exercise
primary supervision over the administration of the trust and
one or more United States fiduciaries have authority
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to control all substantial decisions of the trust or (B) it
has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a United States person.
The term "Non-United States Holder" refers to any beneficial owner of a
debenture or common stock who or which is not a United States Holder.
Prospective holders of debentures are urged to consult with their
respective tax advisers as to the particular federal, state, local and foreign
tax consequences of the acquisition, ownership and disposition of the
debentures, including the conversion of the debentures into shares of common
stock and the effect that their particular circumstances may have on such tax
consequences.
CERTAIN FEDERAL TAX CONSIDERATIONS APPLICABLE TO UNITED STATES HOLDERS
Interest on Debentures
Interest paid on the debentures will be taxable to a United States
Holder as ordinary interest income in accordance with such holder's method of
tax accounting. NHI assumes that the debentures will not be issued with original
issue discount or subject to the high yield debt obligation rules within the
meaning of the Code. If, however, the terms of the debentures result in the
application of these provisions, holders of debentures should consult with their
tax advisors regarding the application of these provisions.
Amortizable Bond Premium on the Debentures
The purchase of a debenture for an amount which, when reduced by the
value of the conversion feature, is greater than its principal amount, will be
treated as having been purchased with "bond premium" equal to the excess. A
United States Holder generally may elect to amortize this bond premium over the
remaining term of the debenture on a constant yield method. The amount amortized
in any year will be treated as a reduction of the interest income from the
debenture for that year. If such election is not made, the bond premium on a
debenture will increase the loss that would otherwise be recognized on the
disposition of the debenture. Any election to amortize bond premium applies to
all debt obligations, other than debt obligations the interest on which is
excludable from gross income, that are held at the beginning of the first
taxable year to which the election applies and any that are thereafter acquired.
Such election to amortize bond premium may not be revoked without the consent of
the Internal Revenue Service. Prospective debenture holders are urged to consult
with their tax advisors regarding this election.
Market Discount on the Debentures
If a debenture is purchased for an amount less than its principal
amount, then a United States Holder will be treated as having purchased that
debenture at a "market discount" equal to the difference, unless the amount of
the market discount is less than the de minimis amount
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specified under the Code. Under the market discount rules, any gain on the sale,
exchange, redemption, retirement, or other taxable disposition of a debenture,
or any appreciation in a debenture in the case of a nontaxable disposition such
as a gift, will be required to be treated as ordinary income to the extent of
the market discount that has not previously been included in income and that is
treated as having accrued on the debenture through the date of disposition. In
addition, the deduction of all or a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry the debenture may be
required to be deferred until the maturity of the debenture or earlier taxable
disposition.
Any market discount will be considered to accrue evenly during the
period from the date of acquisition to the maturity date of the debenture,
unless an election is made to accrue the market discount on a constant yield
method. A United States Holder may also elect to include market discount in
income currently as it accrues, on either an even or constant yield method. If
such an election is made, the basis in the debenture will increase by the
amounts included in income, and the rules described above regarding ordinary
income on dispositions and deferral of interest deductions will not apply. This
election to include market discount in income currently, once made, applies to
all years after the first taxable year to which the election applies and may not
be revoked without the consent of the Internal Revenue Service. Prospective
holders of debentures are urged to consult with their respective tax advisors
regarding these market discount elections.
Constructive Dividend
Certain corporate transactions, such as cash and non-cash distributions
to holders of common stock, may cause a deemed distribution to the holders of
the debentures if the conversion price or conversion ratio of the debenture is
adjusted to reflect such corporate transactions. Such deemed distributions
generally will be taxable in the manner discussed below under "Taxation of
Distributions on Common Stock."
Conversion of Debentures
A United States Holder of debentures generally will not recognize gain
or loss on the conversion of the debentures solely into shares of common stock
(except with respect to cash received in lieu of fractional shares). The United
States Holder's tax basis in the shares of common stock received upon conversion
of the debentures will be equal to the holder's aggregate tax basis in the
debentures exchanged therefor (less any portion allocable to cash received in
lieu of a fractional share). The holding period of the shares of common stock
received by the holder upon a conversion of the debentures generally will
include the period during which the holder held the debentures prior to the
conversion. Any accrued market discount not previously included in income as of
the date of the conversion of the debentures will carry over to the common stock
received on conversion and will give rise to ordinary income on the subsequent
disposition thereof (see "Market Discount on the Debentures").
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Cash received in lieu of a fractional share of common stock should be
treated as a payment in exchange for such fractional share rather than as a
dividend. Gain or loss recognized on the receipt of cash paid in lieu of such
fractional shares generally will equal the difference between the amount of cash
received and the amount of tax basis allocable to the fractional shares
exchanged therefor. Any gain would be ordinary income to the extent of any
accrued market discount on the debentures that has not previously been included
in income and otherwise would be capital gain (see "Market Discount on the
Debentures").
Taxation of Distributions on Common Stock
As long as NHI qualifies as a REIT, distributions made to taxable
United States Holders with respect to common stock out of current or accumulated
earnings and profits (and not designated as capital gain dividends or retained
capital gains) will be taken into account by such United States Holders as
ordinary income and will not be eligible for the dividends received deduction
generally available to corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed NHI's actual net capital gain for the taxable year) without
regard to the period for which the stockholder has held his shares. However,
corporate stockholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. Beginning with NHI's 1998 taxable year, it
may elect to retain and pay income tax on its net long-term capital gains. In
that case, its stockholders would include in income as long-term capital gain
their proportionate share of NHI's undistributed long-term capital gains. In
addition, the stockholders would be deemed to have paid their proportionate
share of the tax paid by NHI, which would be credited or refunded to the
stockholders. Each stockholder's basis in his shares would be increased by the
amount of the undistributed long-term capital gains included in the
stockholder's income, less the stockholder's share of the tax paid by NHI.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that such distributions in excess of current
and accumulated earnings and profits exceed the adjusted basis of a
stockholder's shares, such distributions will be included in income as long-term
capital gain (or short-term capital gain if such shares have been held for one
year or less), assuming that such shares are capital assets in the hands of the
stockholder. In addition, any distribution declared by NHI in October, November
or December of any year and payable to a stockholder of record on a specified
date in any such month shall be treated as both paid by NHI and received by the
stockholder on December 31 of such year, provided that the distribution is
actually paid by it during January of the following calendar year. NHI may be
required to withhold a portion of capital gain distributions to stockholders who
fail to certify their nonforeign status to it.
Stockholders may not include in their individual income tax returns any
net operating losses or capital losses NHI incurs. Instead, such losses would be
carried over by NHI for potential offset against its future income (subject to
certain limitations). Taxable distributions made by NHI and
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gain from the disposition of common stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a stockholder is a limited partner) against such income.
In addition, taxable distributions from NHI generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of common stock or distributions treated as such (or
any portion of either), however, will be treated as investment income only if
the stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates. NHI will notify stockholders after the close of its
taxable year as to the portions of the distributions attributable to that year
that constitute ordinary income, return of capital, and capital gain.
Minimum Tax
NHI's operations could generate items of tax preference under the
alternative minimum tax. For example, NHI's minimum taxable income may be
adjusted to take into account the difference between depreciation allowable for
regular tax purposes and depreciation allowable for purposes of the alternative
minimum tax. NHI's stockholders are also subject to the alternative minimum tax
rules.
Sale or Exchange of Debentures or Shares of Common Stock
In general, a United States Holder of debentures will recognize gain or
loss upon the sale, redemption, retirement or other disposition of the
debentures measured by the difference between:
- the amount of cash and the fair market value of any property
received (except to the extent attributable to the payment of
accrued interest which will be taxable as such); and
- the United States Holder's tax basis in the debentures.
A United States Holder's tax basis in the debentures generally will
equal the cost of the debentures to the holder increased by any market discount
included in the holder's income and reduced by any bond premium amortized and
principal payments received. Subject to the market discount rules described
above, such gain or loss will be capital gain or loss and will be long-term
capital gain or loss if the holding period in the debentures exceeds one year,
except that any accrued market discount not previously included in income as of
the date of any sale or other disposition will be taxable as ordinary income. In
general, each United States Holder of common stock into which the debentures
have been converted will recognize gain or loss upon the sale, exchange,
redemption, or other disposition of the common stock under rules similar to
those applicable to the debentures, except that any accrued market discount not
previously included in income as of the date of the conversion of the debentures
will be taxable as ordinary income on the disposition. Special rules may apply
to redemptions of the common stock which may result in the amount paid being
treated as a dividend. Subject to the preceding sentence, and except that any
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accrued market discount not previously included in income as of the date of the
conversion of the debentures will be taxable as ordinary income on the
disposition thereof, gain or loss on the disposition of the debentures or shares
of common stock will be capital gain or loss and will be long-term capital gain
or loss if the holding period of the debentures or the common stock disposed of
exceeds one year. However, any loss upon a sale or exchange by a United States
Holder of common stock who has held such shares for six months or less (after
applying certain holding period rules), will be treated as a long-term capital
loss to the extent that a distribution made by NHI is required to be treated by
such United States Holder as long-term capital gain. All or a portion of any
loss realized upon a taxable disposition of shares of common stock may be
disallowed if other shares of the same common stock are purchased within 30 days
before or after the disposition.
Taxation of Tax-Exempt United States Holders of Common Stock
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Internal Revenue Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the shares of the
REIT are not otherwise used in an unrelated trade or business of the exempt
employee pension trust. Based on that ruling, amounts distributed by NHI to
Exempt Organizations generally will not constitute UBTI, provided that (i) the
Exempt Organization has not financed its acquisition of shares of common stock
with acquisition indebtedness within the meaning of the Code and (ii) the shares
of common stock are not otherwise used by the Exempt Organization in an
unrelated trade or business. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17), and (20), respectively, of Section 501(c) of the Code are subject to
different UBTI rules, which generally will require them to characterize
distributions from NHI as UBTI. In addition, in certain circumstances, a pension
trust that owns more than 10% of NHI stock (by value) may be required to treat a
percentage of the dividends received with respect to NHI shares as UBTI (the
"UBTI Percentage"). The UBTI Percentage equals the gross income derived by NHI
from an unrelated trade or business (determined as if NHI were a pension trust)
divided by its total gross income for the year in which the dividends are paid.
The UBTI rule applies to a pension trust holding more than 10% of NHI's
outstanding stock (by value) only if (i) the UBTI Percentage is at least 5%,
(ii) NHI qualifies as a REIT by reason of the modification of the 5/50 Rule that
allows the beneficiaries of the pension trust to be treated as holding its
shares in proportion to their actuarial interests in the pension trust, and
(iii) either (A) one pension trust owns more than 25% of the value of NHI shares
or (B) a group of pension trusts individually holding more than 10% of the value
of NHI shares collectively owns more than 50% of the value of its shares.
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ISSUANCE OF RIGHTS TO SUBSCRIBE TO THE DEBENTURES
NHI believes that issuance of the rights to its stockholders to
subscribe to the debentures will not result in the receipt of taxable income by
those stockholders and, accordingly, NHI does not intend to issue IRS Forms 1099
in connection therewith.
The tax consequences of the issuance of such rights are dependent upon
(i) the applicability of Section 305 of the Code and (ii) whether such rights
have a market value. In this regard, the IRS has taken the position that the
issuance by a corporation to its stockholders of rights entitling them to
subscribe to convertible debt securities will be nontaxable under Section 305 of
the Code if both of the following two requirements are satisfied: (i) the value
of the rights is attributable to the conversion privilege of the convertible
debt securities; and (ii) no exception to the general rule of nontaxability
under Section 305(a) of the Code applies.
NHI believes that any market value attributable to the rights to
subscribe to the debentures would be attributable to the conversion privilege of
the debentures. It should be noted that NHI has not sought or relied upon the
advice of any independent securities dealers or investment bankers in making
this determination and that the determination might be subject to challenge by
the IRS. NHI also believes that no exception to the general rule of
nontaxability under Section 305(a) of the Code will apply to the issuance of
such rights.
If, notwithstanding the foregoing (and contrary to NHI's believe), such
rights were determined to fall outside of the protective ambit of Section 305 of
the Code, and if such rights were determined to have a market value, the
distribution of such rights would result in taxable dividend income to those
stockholders exercising such rights (to the extent of the lesser of the market
value of such rights or such stockholders' allocable shares of NHI's current or
accumulated earnings and profits). With respect to stockholders not exercising
such rights, NHI believes that, although the matter is not free from doubt, such
stockholders could, because such rights are nontransferable, reasonably take the
position that they have not received taxable dividend income. No assurance can
be given that such position would ultimately be sustained if challenged.
BASIS IN AND EXERCISE OF RIGHTS TO SUBSCRIBE TO THE DEBENTURES
Unless a stockholder elects otherwise (as provided in (ii) below), if,
in accordance with NHI's belief, the fair market value of the rights to
subscribe to the debentures on the date of issuance is less that 15% of the fair
market value (on the date of issuance) of the common stock with respect to which
such rights are received, the basis of such rights received by a stockholder as
a distribution with respect to such stockholder's common stock will be zero. If,
however, either (i) the fair market value of such rights on the date of issuance
is 15% or more of the fair market value (on the date of issuance) of the common
stock with respect to which such rights are received or (ii) the stockholder
elects, in his, her or its federal income tax return for the taxable year in
which such rights are received, to allocate part of the basis of such common
stock to such rights, then upon exercise of such rights, the stockholder will
allocate such stockholder's basis in such
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common stock between the common stock and such rights if such rights expire
unexercised. The holding period of a stockholder with respect to such rights
received as a distribution on such stockholder's common stock will include the
stockholder's holding period for the common stock with respect to which such
rights were issued.
No income, gain or loss will be recognized upon exercise of the rights
to acquire the debenture to the extent the value of the debenture is equal to
the exercise price. The basis for federal income tax purposes of debentures
acquired upon exercise of such rights will equal the sum of the holder's basis
in such rights surrendered, the amount of cash paid for the debentures, and any
income recognized on exercise. The holding period of the debentures thereby
acquired will begin on the date of issuance of the debentures. No holder of
rights will recognize a capital loss upon expiration of the rights unless such
stockholder has recognized taxable income in connection with receipt of the
rights.
CERTAIN OTHER FEDERAL TAX CONSIDERATIONS APPLICABLE TO NON-UNITED STATES HOLDERS
Interest on Debentures
Generally, interest paid on the debentures to a Non-United States
Holder will not be subject to United States federal income tax if:
- such interest is not effectively connected with the conduct of
a trade or business within the United States by such
Non-United States Holder;
- the Non-United States Holder does not actually or
constructively own 10% or more of the total voting power of
all classes of NHI stock entitled to vote and is not a
controlled foreign corporation with respect to which NHI is a
"related person" within the meaning of the Code (for this
purpose, the holder of the debentures is deemed to own
constructively the common stock into which the debentures
could be converted); and
- the beneficial owner, under penalty of perjury, certifies that
the owner is not a United States person and provides the
owner's name and address.
If certain requirements are satisfied, the certification described in
the last clause above may be provided by a securities clearing organization, a
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business. Under recently adopted United States
Treasury regulations, which generally are effective for payments made after
December 31, 2000, subject to certain transition rules, the certification
described in the last clause above also may be provided by a qualified
intermediary on behalf of one or more beneficial owners (or other
intermediaries), provided that such intermediary has entered into a withholding
agreement with the Internal Revenue Service and certain other conditions are
met. A holder that is not exempt from tax under these rules will be subject to
United States federal income tax withholding at a rate
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of 30% unless the interest is effectively connected with the conduct of a United
States trade or business, in which case the interest as well as any bond premium
or market discount applicable to the debentures will be subject to the United
States federal income tax in the same manner as United States Holders are taxed
with respect to such items. Corporate Non-United States Holders that receive
interest income that is effectively connected with the conduct of a trade or
business within the United States may also be subject to an additional "branch
profits" tax on such income. Non-United States Holders should consult applicable
income tax treaties, which may provide different rules.
Constructive Dividend
Certain corporate transactions, such as cash and non-cash distributions
of assets to holders of common stock, may cause a deemed distribution to the
holders of the debentures if the conversion price or conversion ratio of the
debentures is adjusted to reflect such corporate transactions. Such deemed
distributions generally will be taxable in the manner discussed below under
"Taxation of Distributions on Common Stock." Unless such constructive dividend
is effectively connected with the conduct of a United Stated trade on business,
constructive dividends which do not qualify for exemption from taxation under
the rules described above under "Interest on Debentures" will be subject to
federal income tax and withholding at a rate of 30% unless such rate is reduced
or eliminated by an applicable treaty.
Conversion of Debentures
A Non-United States Holder generally will not be subject to United
States federal income tax on the conversion of a debenture into shares of common
stock. To the extent a Non-United States Holder receives cash in lieu of a
fractional share on conversion, such cash may give rise to gain that would be
subject to the rules described below with respect to the sale or exchange of a
debenture or common stock.
Taxation of Distributions on Common Stock
Distributions to Non-United States Holders of common stock that are not
attributable to gain from sales or exchanges of U.S. real property interests and
are not designated by NHI as capital gains dividends or retained capital gains
(i.e., undistributed capital gains to the extent so designated by NHI) will be
treated as dividends of ordinary income to the extent that they are made out of
its current or accumulated earnings and profits. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in common stock is treated as effectively
connected with the Non-United States Holder's conduct of a U.S. trade or
business, the Non-United States Holder generally will be subject to federal
income tax in the same manner as United States Holders are taxed with respect to
such distributions (and also may be subject to the 30% branch profits tax in the
case of a Non-United States Holder that is a non-U.S. corporation). NHI expects
to withhold U.S. income tax at the rate of 30% on the
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gross amount of any such distributions made to a Non-United States Holder unless
(i) a lower treaty rate applies and any required form evidencing eligibility for
that reduced rate is filed with it or (ii) the Non-United States Holder files an
IRS Form 4224 or its successor form with it claiming that the distribution is
effectively connected income. The Internal Revenue Service has issued
regulations that modify the manner in which NHI must comply with the withholding
requirements. Those regulations are effective for distributions made after
December 31, 2000.
Distributions in excess of NHI's current and accumulated earnings and
profits will not be taxable to a Non-United States Holder to the extent that
such distributions do not exceed the adjusted basis of the Non-United States
Holder's common stock but rather will reduce the adjusted basis of such shares.
To the extent that distributions in excess of current and accumulated earnings
and profits exceed the adjusted basis of a Non-United States Holder's common
stock, such distributions will give rise to tax liability if the Non-United
States Holder would otherwise be subject to tax on any gain from the sale or
disposition of his common stock, as described below. Because it generally cannot
be determined at the time a distribution is made whether or not such
distribution will be in excess of NHI's current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate applicable to dividend distributions. However,
amounts so withheld may be refundable to the extent it is determined
subsequently that such distribution was, in fact, in excess of NHI's current and
accumulated earnings and profits.
For any year in which NHI qualifies as a REIT, to the extent that a
distribution is attributable to gain from sales or exchanges of U.S. real
property interests the distribution will be taxed to a Non-United States Holder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-United States Holder as if such gain
were effectively connected with a U.S. business without regard to whether NHI
designates such distribution as capital gain dividends. Non-United States
Holders thus would generally be taxed in the same manner as United States
Holders on such distributions. Distributions subject to FIRPTA also may be
subject to the 30% branch profits tax in the hands of a non-U.S. corporate
shareholder not entitled to treaty relief or exemption. NHI is required to
withhold 35% of any distribution that is designated or could be designated by it
as a capital gains dividend. The amount withheld is creditable against the
Non-United States Holder's FIRPTA tax liability.
Sale or Exchange of Debentures or Common Stock
Subject to the discussion of FIRPTA below, a Non-United States Holder
generally will not be subject to United States federal income tax on gain
recognized upon the sale or other disposition of the debentures or shares of
common stock unless:
- the gain is (or is treated as) effectively connected with the
conduct of a trade or business within the United States by the
Non-United States Holder; or
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- in the case of a Non-United States Holder who is a nonresident
alien individual and holds the common stock as a capital
asset, such holder is present in the United States for 183 or
more days in the taxable year and certain other circumstances
are present.
Gain recognized by a Non-United States Holder upon a sale of debentures
or common stock generally will not be taxed under FIRPTA if NHI is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by non-U.S. persons. NHI believes that it is
currently a "domestically controlled REIT" and, therefore, the sale of
debentures or common stock will not be subject to taxation under FIRPTA, but
such may not be the case in future years (see "Taxation of NHI") and therefore
no assurance can be given that NHI will continue to be a "domestically
controlled REIT." If NHI were not a "domestically controlled REIT," gain
recognized upon the sale of debentures or common stock by a Non-United States
Holder generally would not be subject to tax under FIRPTA provided that (a) the
debentures or common stock are regularly traded, as defined in applicable
Treasury Regulations, on an established securities market and (b) the Non-United
States Holder held 5% or less of NHI's debentures or common stock at all times
within a specified testing period. If the gain on the sale of debentures or
common stock were to be subject to taxation under FIRPTA, the Non-United States
Holders would be subject to the same treatment as United States Holders with
respect to such gain. In addition, the purchaser would be required to withhold
10% of the purchase price and remit such amount to the Internal Revenue Service.
Federal Estate Taxes
A debenture beneficially owned by an individual who is a Non-United
States Holder at the time of his or her death generally will not be subject to
U.S. federal estate tax as a result of such individual's death, provided that:
- such individual does not actually or constructively own 10% or
more of the total combined voting power of all classes of
NHI's stock entitled to vote within the meaning of Section
871(h)(3) of the Code; and
- interest payments with respect to such debenture would not
have been, if received at the time of such individual's death,
effectively connected with the conduct of a U.S. trade or
business by such individual.
Common stock owned or treated as owned by an individual who is a
Non-United States Holder at the time of his or her death will be included in
such individual's estate for United States federal estate tax purposes and thus
will be subject to United States federal estate tax, unless an applicable estate
tax treaty provides otherwise.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
United States Holders
Information reporting and backup withholding may apply to payments of
interest or dividends on, or the proceeds of the sale or other disposition of,
the debentures or shares of common stock made by NHI with respect to certain
non-corporate United States Holders. Such United States Holders generally will
be subject to backup withholding at a rate of 31% unless the recipient of such
payment supplies a taxpayer identification number, certified under penalties of
perjury, as well as certain other information, or otherwise establishes, in the
manner prescribed by law, an exemption from backup withholding. Any amount
withheld under backup withholding is allowable as a credit against the United
States Holder's federal income tax, upon furnishing the required information to
the Internal Revenue Service.
Non-United States Holders
Generally, information reporting and backup withholding of United
States federal income tax at a rate of 31% may apply to the payment of
principal, interest and premium (if any) to Non-United States Holders if the
payee fails to certify that the holder is a Non-United States person or if NHI
or its paying agent have actual knowledge that the payee is a United States
person.
The payment of the proceeds on the disposition of debentures or shares
of common stock to or through the United States office of a United States or
foreign broker will be subject to information reporting and backup withholding
unless the owner provides the certification described above or otherwise
establishes an exemption. The proceeds of the disposition by a Non-United States
Holder of debentures or shares of common stock to or through a foreign office of
a broker will not be subject to backup withholding. However, if such broker is a
United States person, a controlled foreign corporation for United States tax
purposes, a foreign person 50% or more of whose gross income from all sources
for certain periods is from activities that are effectively connected with a
United States trade or business, or, with respect to payments made after
December 31, 2000, a foreign partnership in which United States persons hold
more than 50% of the income or capital interests or which is engaged in a United
States trade or business at any time during its tax year, information reporting
will apply unless such broker has documentary evidence of the owner's foreign
status and has no actual knowledge to the contrary or unless the owner otherwise
establishes an exemption. Both backup withholding and information reporting will
apply to the proceeds from such disposition if the broker has actual knowledge
that the payee is a United States Holder.
Recently adopted United States Treasury regulations, which generally
are effective for payments made after December 31, 2000, subject to certain
transition rules, alter the foregoing rules in certain respects. Among other
things, such regulations provide presumptions under which a Non-United States
Holder is subject to information reporting and backup withholding at the rate
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of 31% unless NHI receives certification from the holder of non-U.S. status.
Depending on the circumstances, this certificate will need to be provided:
- directly by the Non-United States Holder;
- in the case of a Non-United States Holder that is treated as a
partnership or other fiscally transparent entity, by the
partners, shareholders or other beneficiaries of such entity;
or
- by certain qualified financial institutions or other qualified
entities on behalf of the Non-United States Holder.
The new regulations require, in general, that a new series of Forms W-8 be
properly executed earlier than otherwise necessary. For example, a Non-United
States Holder must properly execute the appropriate new version of Form W-8, or
substantially similar form, no later than December 31, 2000 if still a
Non-United States Holder of debentures or common stock on that date. The new
regulations may also require Non-United States Holders claiming benefits under
an income tax treaty to obtain a taxpayer identification number and certify as
to eligibility under the applicable treaty.
TAXATION OF NHI
NHI currently has in effect an election to be taxed as a REIT under
Sections 856 through 860 of the Code and it believes that since its inception it
has been organized and operated in such a manner as to qualify it for taxation
as a REIT under the Code. NHI's continued qualification as a REIT will depend
upon its qualification as a REIT in prior years. NHI cannot assure debenture
holders, however, that it currently qualifies or will remain qualified as a
REIT. See discussion of certain income tax contingencies of which NHI is aware
under "Business -- Federal Income Tax." Prospective holders of debentures must
recognize that qualification as a REIT will depend upon NHI's ability to meet,
based on actual operations, various requirements. In particular, a REIT must
satisfy certain stock ownership, income and asset tests (see "-- Requirements
for REIT Qualification"). In applying these tests, as more fully described
below, broad attribution rules are used to attribute stock owned by one party to
another.
The following discussion sets forth the material aspects of the Code
sections that govern the federal income tax treatment of a REIT and its
stockholders. The discussion is qualified in its entirety by the applicable Code
provisions, Treasury Regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all of which are subject to change
prospectively or retroactively. This discussion addresses complex areas of the
tax law where, in certain instances, the relevant legal principles have not been
clearly developed.
If NHI qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its stockholders. That treatment
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substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and stockholder levels) that generally results from investment in a
corporation. However, NHI will be subject to federal income tax in the following
circumstances. First, it will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, it may be subject to the "alternative
minimum tax" on undistributed items of tax preference, if any. Third, if it has
(i) net income from the sale or other disposition of "foreclosure property" that
is held primarily for sale to customers in the ordinary course of business or
(ii) other nonqualifying income from foreclosure property, it will be subject to
tax at the highest corporate rate on such income. Fourth, if it has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if it should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below) and nonetheless have
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to tax in an amount equal to (a) the gross income
attributable to the greater of the amount by which it fails the 75% or 95% gross
income test, multiplied by (b) a fraction intended to reflect its profitability.
Sixth, if it should fail to distribute during each calendar year at least the
sum of (i) 95% (90% beginning January 1, 2001) of its REIT ordinary income for
such year, (ii) 95% (90% beginning January 1, 2001) of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, it would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. If it elects to retain and
pay income tax on our net long-term capital gain in a taxable year, any retained
amounts would be treated as having been distributed for purposes of the 4%
excise tax. (see "Requirements for REIT Qualification--Distribution
Requirements"). Seventh, if it acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a transaction in
which the basis of the asset in its hands is determined by reference to the
basis of the asset (or any other asset) in the hands of the C corporation and it
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by it, then to the extent
of such asset's "built-in-gain" (i.e., the excess of the fair market value of
such asset at the time of acquisition by it over the adjusted basis in such
asset at such time), such gain will be subject to tax at the highest regular
corporate rate applicable pursuant to IRS Notice 88-19 prior to February 4, 2000
and pursuant to recently promulgated temporary regulations on and after February
4, 2000. The results described above with respect to the recognition of
"built-in-gain" assume that NHI has made an election pursuant to IRS Notice
88-19 as to such acquisitions and will make such an election pursuant to the
recent temporary regulations as to any future such acquisition.
REQUIREMENTS FOR REIT QUALIFICATION
The rules governing REITs are highly technical and require continuous
compliance with a variety of tests that, among other things, restrict the nature
of NHI's income and assets and mandate specified levels of distributions. As a
result, while NHI anticipates that it has been and will continue to be able to
satisfy the applicable tests and will use its best efforts to do so, no
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assurance can be given that NHI will so qualify for any particular year or that
applicable law and regulations will not change and adversely affect NHI and its
stockholders.
The Code defines a REIT as a corporation, trust, or association (i)
that is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) that would be taxable as a domestic
corporation, but for sections 856 through 860 of the Code; (iv) that is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (v) the beneficial ownership of which is held by 100 or more
persons; (vi) not more than 50% in value of the outstanding shares of which is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Internal Revenue Service
that must be met in order to elect and maintain REIT status; (viii) that uses a
calendar year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (i) to
(iv), inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. For
purposes of determining stock ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. A trust that is a qualified trust under
Section 401(a) of the Code, however, generally is not considered an individual
and beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule.
NHI's certificate of incorporation contains restrictions regarding
transfer of its shares that are intended to assist it in continuing to satisfy
the share ownership requirements described in clauses (v) and (vi) above and the
related party rent test described below. The indenture to which the debentures
are subject also contains restrictions regarding the transfer, ownership and
conversion of the debentures which are intended to assist NHI in continuing to
satisfy the share ownership requirements described in clauses (v) and (vi)
above. Such restrictions are described in "Description of Debentures--Conversion
Rights."
As noted below in "Recordkeeping Requirements," NHI must maintain
records which disclose the actual and constructive ownership of all stock. To
fulfill this obligation, NHI must demand each year written statements from the
record holders of certain designated percentages of stock disclosing the actual
owners of such stock.
As previously noted, the Code requires the use of broad attribution
rules to determine certain direct and indirect stock ownership. Because of the
breadth of these rules, it may not be possible for NHI to maintain complete
ownership records, as described above, or to know whether
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a violation of the 5/50 Rule has occurred. For example, a stockholder of the
Company would be deemed to own stock by his or her parents, children, spouse,
siblings and his or her proportionate interest of shares owned by another
corporation, partnership, estate or trust in which the stockholder has an
interest. Accordingly, no assurances can be given that the Company will be able
to satisfy the 5/50 Rule or any other stock ownership test and at all times
qualify as a REIT.
NHI currently has wholly-owned corporate subsidiaries (the "Corporate
Subsidiaries"). It may have additional corporate subsidiaries in the future.
Section 856(i) of the Code provides that a corporation that is a "qualified REIT
subsidiary" will not be treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of a "qualified REIT
subsidiary" will be treated as assets, liabilities, and items of income,
deduction, and credit of the REIT. For taxable years beginning after December
31, 1997, a "qualified REIT subsidiary" is a corporation all of the capital
stock of which is owned by the REIT. However, for taxable years beginning before
January 1, 1998, a "qualified REIT subsidiary" was a corporation, all of the
capital stock of which was owned by the REIT at all times during the period such
corporation was in existence. Legislative history provided, however, that an
existing corporation acquired by a REIT would be deemed to satisfy this
requirement if a Section 338 election was made by the corporation. Thus, in
applying the requirements described herein, any of NHI's "qualified REIT
subsidiaries" will be ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiaries will be treated as its assets,
liabilities, and items of income, deduction, and credit. NHI believes its
current Corporate Subsidiaries are "qualified REIT subsidiaries" and will
continue to be "qualified REIT subsidiaries," such that no Corporate Subsidiary
will be subject to federal corporate income taxation (although it may be subject
to state and local taxation).
In addition, in order to become qualified and remain qualified as a
REIT, as of the close of each taxable year, a REIT must not have any accumulated
"earnings and profits" attributable to a non-REIT year, including for this
purpose any such accumulated "earnings and profits" carried over or deemed
carried over to it from a C corporation. NHI believes that it neither has, nor
any acquisition by it of a C corporation has resulted in its having, any such
accumulated "earnings and profits." Nevertheless, an adjustment of NHI's
earnings and profits for a prior year or the earnings and profits of any C
corporation that NHI acquired, resulting from an audit adjustment by the
Internal Revenue Service or otherwise, could cause it to fail to satisfy such
requirement effective for the year of such adjustment and subsequent years.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below.
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INCOME TESTS
In order for NHI to qualify and to maintain its qualification as a
REIT, two requirements relating to gross income must be satisfied annually.
First, at least 75% of its gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of defined types of income
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
at least 95% of its gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property or
temporary investments, and from dividends, other types of interest, and gain
from the sale or disposition of stock or securities, or from any combination of
the foregoing.
The rent received by NHI from its tenants ("Rent") will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
Rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code provides
that rents received from a tenant will not qualify as "rents from real property"
in satisfying the gross income tests if NHI, or a direct or indirect owner of
10% or more of NHI, directly or constructively owns 10% or more of the ownership
interests in such tenant (a "Related Party Tenant"). Third, if rent attributable
to personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, for the Rent to qualify as "rents from real property," NHI
generally must not operate or manage its properties or furnish or render
services to the tenants of such properties, other than through an "independent
contractor" who is adequately compensated and from whom NHI derives no revenue.
The "independent contractor" requirement, however, does not apply to the extent
the services provided by NHI are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant." In addition, beginning with its 1998 taxable year,
NHI may render a de minimis amount of "noncustomary" services to the tenants of
a property other than through an independent contractor as long as the amount
NHI receives with respect to such services does not exceed 1% of its total
receipts from the property. For that purpose, the amount attributable to such
services will be deemed to be at least equal to 150% of NHI's direct cost of
providing the services.
NHI does not charge Rent for any portion of any property that is based,
in whole or in part, on the sales, receipts, income or profits of any person. In
addition, NHI believes that it has not received and does not anticipate
receiving any Rent from a Related Party Tenant. The determination, however, of
whether NHI owns 10% or more of any tenant, is made after the application of
extensive attribution rules under which NHI will be treated as owning interests
in the tenant that are owned by NHI's 10% stockholders. In determining which
stockholders of NHI own more than 10% of its common stock, each actual
stockholder will be treated as owning
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common stock held by entities and individuals related to the stockholder. These
attribution rules can have broad and unpredictable consequences in the case of a
tenant, such as NHC, that is a publicly owned entity. For example, if two
unrelated NHI stockholders who own in the aggregate more than 10% of the
interests in the tenant are partners in an unrelated partnership, NHI will be
treated as owning the interests in the tenant that are owned by such NHI
stockholders. The uncertainty of the application of the attribution rules at any
point in time makes uncertain the determination that all or the requisite
percentages of rents received by NHI from tenants that are publicly owned
entities are "rents from real property" within the meaning of the Code. NHI
believes that it has not owned directly or by attribution at any time 10% or
more of the outstanding ownership interests in any tenant. If the rents received
do not so qualify, NHI might not qualify as a REIT unless the relief provisions
described below are determined to be available. NHI has carefully reviewed the
ownership of NHC and each other tenant and of its common stock with the
foregoing attribution rules in mind and, to the best of its knowledge, NHI does
not own directly or by attribution 10% or more of the outstanding ownership
interests in any tenant. Also, the Rent attributable to personal property leased
in connection with any lease (a "Lease") of real property by NHI does not exceed
15% of the total Rent received under the Lease. Finally, inasmuch as NHI's
leases are triple-net leases, it is not anticipated that NHI will be required to
provide any services to NHC or other lessees, as tenants of the health care
facilities, or to manage or operate the health care facilities subject to the 1%
de minimis exception, NHI provides no non-customary services to its tenants,
other than through an independent contractor.
If any portion of the Rent does not qualify as "rents from real
property" because the Rent attributable to personal property leased in
connection with any Lease of real property exceeds 15% of the total Rent
received under the Lease for a taxable year, the portion of the Rent that is
attributable to personal property will not be qualifying income for purposes of
either the 75% or 95% gross income test. Thus, if the Rent attributable to
personal property, plus any other income received by NHI during a taxable year
that is not qualifying income for purposes of the 95% gross income test, exceeds
5% of its gross income during such year, it is likely NHI would lose its REIT
status. If, however, any portion of the Rent received under a Lease does not
qualify as "rents from real property" because either (i) the Rent is considered
based on the income or profits of any person or (ii) the tenant is a Related
Party Tenant, none of the Rent received by NHI under such Lease would qualify as
"rents from real property." In that case, if the Rent received by NHI under such
Lease, plus any other income received by it during the taxable year that is not
qualifying income for purposes of the 95% gross income test, exceeds 5% of its
gross income for such year, it likely would lose its REIT status. Finally,
subject to the 1% de minimis exception, if any portion of the Rent does not
qualify as "rents from real property" because NHI furnishes noncustomary
services with respect to a property other than through a qualifying independent
contractor, none of the Rent received by it with respect to such property would
qualify as "rents from real property." In that case, if the Rent received by NHI
with respect to such property, plus any other income received by it during the
taxable year that is not qualifying income for purposes of the 95% gross income
test, exceeds 5% of its gross income for such year, it would lose its REIT
status.
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In addition to the Rent, certain of NHI's tenants may be required to
pay additional charges, such as late fees. To the extent that such charges
represent either (i) reimbursements of amounts a tenant is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such amounts,
such charges should qualify as "rents from real property." To the extent that
additional charges represent interest that is accrued on the late payment of the
Rent or such additional charges, such charges should be treated as interest that
qualifies for the 95% gross income test, but not the 75% gross income test.
Although no assurances can be given, subject to the limitations
described herein, it is anticipated that the rents derived by NHI under its
leases will qualify as "rents from real property". However, in the event (i) the
rental structure under any lease is altered such that rent is based on income or
profits, (ii) NHI is deemed at any time to own, directly or indirectly by
attribution, 10% or more of NHC or any other tenant of health care facilities,
or (iii) NHI itself furnishes impermissible services under any lease, the rents
derived from the lease might not qualify as "rents from real property", which
might, in turn, result in the disqualification of NHI as a REIT unless the
relief provisions described below are determined to be available.
Interest received with respect to mortgage loans generally qualifies
for the 75% and 95% income tests unless the amount of such interest depends, in
whole or in part, upon the income or profits of any person. Special rules apply
to mortgages with "shared appreciation" features. None of the interest currently
receivable by NHI under its mortgage loans depends, in whole or in part, upon
the income or profits of any person except that certain of such mortgage loans
contain "shared appreciation" features. NHI does not believe that its ability to
qualify as a REIT will be adversely affected by the "shared appreciation"
features of its mortgage loans.
Income from "dealer property" generally is not includable under the 75%
income test. "Dealer property" is stock in trade, inventory, and property held
primarily for sale to customers in the ordinary course of a trade or business.
NHI does not expect to realize significant amounts of income from "dealer
property" and intends to operate in a manner so as to minimize the risk that it
would be classified as a "dealer" for federal income tax purposes. However, a
determination of "dealer" status is necessarily dependent upon facts which will
occur in the future.
From time to time, NHI has entered into hedging transactions with
respect to one or more of its assets or liabilities, and it may continue to
enter into such hedging transactions. Such transactions include or may include
interest rate swap contracts, interest rate cap or floor contracts, futures or
forward contracts, and options. To the extent that NHI has entered or does enter
into an interest rate swap or cap contract, option, futures contract, forward
rate agreement, or similar financial instrument to reduce the interest rate risk
with respect to any indebtedness incurred or to be incurred by it to acquire or
carry real estate assets, any periodic income or gain from the disposition of
such contract will be qualifying income for purposes of the 95% gross income
test, but not for the 75% gross income test. To the extent that NHI hedges with
other types of financial instruments or in other situations, it is not entirely
clear how the income from those transactions will be treated for purposes of the
income tests that apply to REITs under the Code.
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NHI has structured, and for so long as it otherwise remains qualified as a REIT
it intends to structure in the future, any hedging transactions in a manner that
will not jeopardize its status as a REIT.
If NHI fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if NHI's failure to meet such tests is
due to reasonable cause and not due to willful neglect, it attaches a schedule
of the sources of its income to its return, and any incorrect information on the
schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances NHI would be entitled to the
benefit of those relief provisions. As discussed above in "Certain United States
Federal Income Tax Considerations--Taxation of NHI," even if those relief
provisions apply, NHI will be subject to a tax in an amount equal to (a) the
gross income attributable to the greater of the amount by which the 75% and 95%
gross income tests are failed, multiplied by (b) a fraction intended to reflect
its profitability.
ASSET TESTS
At the close of each quarter of each taxable year, NHI also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of its total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets,"
or, in cases where it raises new capital through stock or long-term (at least
five-year) debt offerings, temporary investments in stock or debt instruments
during the one-year period following its receipt of such capital. The term "real
estate assets" includes interests in real property, interests in mortgages on
real property to the extent the principal balance of a mortgage does not exceed
the value of the associated real property, and shares of other REITs. For
purposes of the 75% asset test, the term "interest in real property" includes an
interest in land and improvements thereon, such as buildings or other inherently
permanent structures (including items that are structural components of such
buildings or structures), a leasehold of real property, and an option to acquire
real property (or a leasehold of real property).
Second, of the investments not included in the 75% asset class, the
value of the issuer's securities owned by NHI issued by any single issuer that
is not a qualified REIT subsidiary may not exceed 5% of the value of its total
assets, 10% of such issuer's outstanding voting securities and, with respect to
taxable years beginning after 2000, 10% of the value of all classes of such
issuer's securities. However, securities owned by NHI in another REIT are not
subject to the limitations of the preceding sentence.
DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, NHI is required to distribute with
respect to each taxable year dividends (other than capital gain dividends or
retained capital gains) to its stockholders in an aggregate amount at least
equal to (i) the sum of (A) 95% (90% beginning January 1, 2001) of
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its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain) and (B) 95% (90% beginning January 1, 2001)
of the net income (after tax), if any, from foreclosure property, minus (ii) the
sum of certain items of non-cash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before NHI timely files its federal income tax return for such year and if paid
on or before the first regular dividend payment date after such declaration. To
the extent that it does not distribute all of its net capital gain or distribute
at least 95%, (90% beginning January 1, 2001) but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at capital gains
and regular ordinary corporate tax rates, as the case may be. Furthermore, if
NHI should fail to distribute during each calendar year at least the sum of (i)
95% (90% beginning January 1, 2001) of its REIT ordinary income for such year,
(ii) 95% (90% beginning January 1, 2001) of its REIT capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, it
would be subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. To the extent that NHI
elects to retain and pay income tax on its long-term capital gain in a taxable
year, as described in "--Taxation of Taxable U.S. Stockholders," such retained
amount will be treated as having been distributed for purposes of the 4% excise
tax. NHI is further required to distribute the full amount of any C corporation
"earnings and profits" no later than the last day of its taxable year in which
it acquires any C corporation from which such "earnings and profits" are
attributed or deemed attributed to it by virtue of is acquisition of such C
corporation. To the extent that NHI is required to include items in "REIT
taxable income" in advance of the receipt of cash payments associated with such
income or is required to expend cash for the repayment of debt or in any other
manner for which no current deduction is available in computing its "REIT
taxable income" (including, without limitation, distributing any C corporation
"earnings and profits"), it may find it necessary to arrange for short-term (or
possibly long-term) borrowings, raise funds through the issuance of additional
shares of Common or Preferred Stock, or pay dividends in the form of taxable
share dividends in order to meet the 95% distribution requirement necessary to
maintain its REIT qualification.
Under certain circumstances, NHI may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its stockholders in a later year, which may be included in its deduction for
dividends paid for the earlier year. Although NHI may be able to avoid being
taxed on amounts distributed as deficiency dividends, it will be required to pay
to the Internal Revenue Service interest based upon the amount of any deduction
taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, in order to qualify as a
REIT, NHI must maintain certain records. In addition, to avoid a monetary
penalty (with respect to its 1998 and later tax years) or disqualification as a
REIT (with respect to its 1997 and earlier tax years), NHI must have requested
and continue to request on an annual basis certain information from its
stockholders designed to disclose the actual ownership of its outstanding
shares.
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FAILURE TO QUALIFY
If NHI fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, it will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which NHI fails to qualify
will not be deductible nor will they be required to be made. In such event, to
the extent of current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, NHI also will be disqualified from taxation as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT. It
is not possible to predict whether in all circumstances NHI would be entitled to
such statutory relief. NHI could also be subject to significant tax liabilities
(including penalties and interest), and the amount of cash available for
distribution to its stockholders would be reduced. NHI could be forced to borrow
funds or to liquidate certain of its investments in order to meet these
liabilities. Unless NHI is qualified as a REIT at the time of any sale of its
assets, it will not be able to distribute such proceeds as a dividend
distribution to stockholders as a means of avoiding the incurrence of a
corporate level income tax at regular corporate rates on any gain on sale of
such assets. Although a corporate level tax consequence could be avoided if
substantially all its assets were disposed of in a transaction qualifying for
non-recognition under the reorganization provisions of the Code, due to the
carryover basis provisions of the Code applicable to such transactions and the
acquiror's inability to "step-up" the basis of those assets for federal income
tax purposes to current appreciated values, the consideration offered in such a
transaction to NHI or its stockholders would likely be less than the
consideration offered in a purchase of assets described in the preceding
sentence.
RECENT REIT LEGISLATION
Legislation was enacted on December 17, 1999 that made several changes
to the REIT provisions of the Code effective January 1, 2001. A REIT's ownership
of securities in another corporation that is not a REIT will be subject to the
additional percentage limitation that the value of such securities must not
represent more than 10% of the value of all of the outstanding securities of
such corporation. Certain debt securities issued by individuals, a partnership
in which the REIT owns at least a 20% profits interest, and nonconvertible
"straight debt" securities are exempt from such additional percentage
limitation.
Also effective on January 1, 2001, a REIT may own up to 100% of the
securities of a "taxable REIT subsidiary" subject only to the limitations that
the securities of all "taxable REIT subsidiaries" owned by the REIT do not
represent an amount in excess of 20% of the value of the assets of the REIT, and
the value of all securities of the REIT (including the securities of all taxable
REIT subsidiaries) do not represent an amount in excess of 25% of the value of
the assets of the REIT. A "taxable REIT subsidiary" is any corporation (other
than another REIT and corporations involved in certain lodging, healthcare and
franchising activities) owned by a REIT
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with respect to which the REIT and such corporation jointly elect that such
corporation shall be treated as a taxable REIT subsidiary. The amount of
deductions for interest paid by a "taxable REIT subsidiary" to its affiliated
REIT will be subject to limitations. In addition, a 100% excise tax will be
imposed to the extent that certain transactions between a "taxable REIT
subsidiary" and its affiliated REIT or the tenants of that REIT are not
conducted on an arm's length basis. Under the new legislation, a corporation may
convert tax-free into a "taxable REIT subsidiary" prior to January 1, 2004.
Such legislation also changes the income distribution requirement so
that beginning in 2001, a REIT will be required to distribute 90% (rather than
95%) of its "REIT taxable income" and 90% (rather than 95%) of its net income
(after tax), if any, from foreclosure property. Such legislation also makes
technical changes in the manner of computing pre-REIT accumulated C-corporation
earnings and profits that must be distributed to shareholders in order to retain
REIT status.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective holders of debentures or common stock should recognize that
the present federal income tax treatment of NHI and an investment in NHI may be
modified by legislative, judicial or administrative action at any time, and that
any such action may affect NHI and investments and commitments previously made.
The rules dealing with federal income taxation are constantly under review by
persons involved in the legislative process and by the Internal Revenue Service
and Treasury Department, resulting in revisions of regulations and revised
interpretations of established concepts as well as statutory changes. Revisions
in federal tax laws and the interpretations thereof could adversely affect the
tax consequences to NHI or of an investment in it.
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FORWARD-LOOKING STATEMENTS
Statements in this prospectus supplement that are not historical facts
are forward-looking statements that involve a number of known and unknown risks
and uncertainties. In addition to the factors discussed above, among the other
factors that could cause actual results, performance and achievements of NHI to
differ materially from any future results, performance or achievements implied
by such forward-looking statements are the following: ability to reach agreement
with certain creditors to extend maturity on terms NHI believes are reasonable
prior to due dates; receipt of sufficient cash flow to repay debt as it becomes
due; ability to continue to meet REIT status; general industry distress,
including the on-going effect of reimbursement cutbacks; additional bankruptcy
filings or other financial problems by lessees, mortgagors or managers of
healthcare facilities in which NHI has an interest; and the description of the
risk factors mentioned from time to time in NHIs SEC reports, including, but not
limited to the reports on the Form 10-K for the year ended December 31, 1999 and
on Form 10-Q for the quarter ended September 30, 2000. NHI cautions investors
that any forward-looking statements may involve risks and uncertainties and are
not guarantees of future performance. All forward looking statements represent
NHIs judgments as of the date of this prospectus supplement.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
NHI by Harwell Howard Hyne Gabbert & Manner, P.C., 1800 AmSouth Center,
Nashville, Tennessee 37238.
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No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus in connection with the offer made by this prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by NHI. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the securities offered
by this prospectus, nor does it constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
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TABLE OF CONTENTS
Page
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PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary ............................... S-2
Risk Factors ................................................ S-5
Recent Developments ......................................... S-9
Ratio of Earnings to Fixed Charges .......................... S-9
Selected Consolidated Financial Information ................. S-10
Capitalization .............................................. S-11
Use of Proceeds ............................................. S-11
Business .................................................... S-12
Plan of Distribution ........................................ S-24
Description of the Debentures ............................... S-25
Federal Income Tax Considerations ........................... S-32
Forward-Looking Statements .................................. S-55
Legal Matters ............................................... S-55
PROSPECTUS
Available Information ....................................... 2
Documents Incorporated by Reference ......................... 3
The Company ................................................. 4
Risk Factors ................................................ 5
Ratio of Earnings to Fixed Charges .......................... 12
Use of Proceeds ............................................. 13
Recent Developments ......................................... 13
Description of the Company's Capital Stock .................. 15
Description of Debt Securities .............................. 18
Description of Preferred Stock .............................. 25
Federal Income Tax Considerations ........................... 30
ERISA Considerations ........................................ 41
Plan of Distribution ........................................ 42
Legal Matters ............................................... 43
Experts ..................................................... 43
$20,000,000
[NHI LOGO]
NATIONAL HEALTH INVESTORS, INC.
Prime plus 1% Senior Subordinated
Convertible Debentures due 2006
____________
Prospectus Supplement
November 22, 2000
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