<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
NATIONAL HEALTH REALTY, INC.
(Exact name of registrant as specified in its charter)
Maryland Application Filed
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Vine Street, Suite 1400 37130
Murfreesboro, TN -----
---------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 890-2020
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- -------------------------------
30,000,000 Shares of Common Stock
(when issued and regular way) American Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act
None
(Title of Class)
<PAGE> 2
Item 1. Business.
The information required by this item is contained under the sections
"Introduction," "Summary of Certain Information," "The Plan of Restructure,"
"Pro Forma Financial Information," "Summary Historical and Pro Forma Financial
Information," "Business -- The REIT" and "Relationship Between the REIT and the
Corporation After the Restructure" of the Prospectus contained in the
Registration Statement on Form S-4 of National Health Realty, Inc. attached
hereto (the "Prospectus") and such sections are incorporated herein by
reference.
Item 2. Financial Information.
The information required by this item is contained under the sections
"Summary Historical and Pro Forma Financial Information" and "Pro Forma
Financial Information" of the Prospectus and such sections are incorporation
herein by reference.
Item 3. Properties.
The information required by this item is contained under the sections
"Business -- The REIT" and "Relationship Between the REIT and the Corporation
After the Restructure" of the Prospectus and such sections are incorporated
herein by reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained under the sections
"Management -- The REIT" and "Security Ownership of Certain Beneficial Owners
and Management -- The REIT" of the Prospectus and such sections are incorporated
herein by reference.
Item 5. Directors and Executive Officers.
The information required by this item is contained under the section
"Management -- The REIT" of the Prospectus and such section is incorporated
herein by reference.
Item 6. Executive Compensation.
The information required by this item is contained under the section
"Management -- The REIT" of the Prospectus and such section is incorporated
herein by reference.
Item 7. Certain Relationships and Related Transactions.
The information required by this item is contained under the sections
"The Plan of Restructure," "Business -- The REIT," "Relationship Between the
REIT and the Corporation After the Restructure" and "Certain Transactions" of
the Prospectus and such sections are incorporated herein by reference.
2
<PAGE> 3
Item 8. Legal Proceedings.
The information required by this item is contained under the section
"Risk Factors -- The REIT," "Business -- The REIT," "Business -- The Corporation
- -- Legal Proceedings" of the Information Statement and such sections are
incorporated herein by referenced.
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters.
The information required by this item is contained under the sections
"Summary of Certain Information -- REIT Shares to be Distributed," "--Trading
Market," "The Plan of Restructure -- Manner of Effecting the Distribution and
Merger," "-- Listing and Trading of Shares and REIT Shares," and "-- Dividends,"
"Description of Securities -- Shares of the REIT" and "Dividend Policy -- The
REIT" of the Prospectus and such sections are incorporated herein by reference.
Item 10. Recent Sales of Unregistered Securities.
None. The REIT Shares which will be distributed by National HealthCare
L.P. ("NHC") to its Unitholders in the Plan of Restructure described in the
Prospectus will be issued to NHC by the Registrant in connection with the
formation of the Registrant. The REIT Shares Distributed to NHC's Unitholders
are registered pursuant to the S-4.
Item 11. Description of Registrant's Securities to be Registered.
The information required by this item is contained under the sections
"Description of Securities" and "Comparison of Stockholder/Unitholder Rights" of
the Prospectus and such sections are incorporated herein by reference.
Item 12. Indemnification of Directors and Officers.
The information required by this item is contained under the section
"Description of Securities" and "Comparison of Stockholder/Unitholder Rights" of
the Prospectus and Part II, Item 20 of the Registration Statement and such
section is incorporated herein by reference.
Item 13. Financial Statements and Supplementary Data.
The information required by this item is contained under the section
"Summary Historical and Pro Forma Financial Information" and "Pro Forma
Financial Information" and the audited balance sheet and accompanying notes of
National Health Realty, Inc. in the Prospectus and such financial information is
incorporated herein by reference.
3
<PAGE> 4
Item 14. Disagreement with Accountants on Accounting and Financial Matters.
None.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements
(i) See Report of Arthur Andersen LLP, independent
public accountants in the Prospectus, incorporated
herein by reference.
(ii) See Audited Balance Sheet of National Health Realty, Inc.
as of October 15, 1997, and Notes thereto in the
Prospectus, incorporated herein by reference.
(iii) See "Pro Forma Financial Information" in the Prospectus,
incorporated herein by reference.
(b) Exhibits
See Index to Exhibits.
4
<PAGE> 5
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly cause this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL HEALTH REALTY, INC.
Date: October 10, 1997 By: /s/ Richard F. LaRoche, Jr.
---------------------------
Title: Senior Vice President
5
<PAGE> 6
NATIONAL HEALTH REALTY, INC.
FORM 10
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
2.1 Plan of Restructure (incorporated by reference to Exhibit 2.1 to the N/A
Registrant Registration Statement No. 333-37173 on Form S-4).
2.2 Agreement of Merger (incorporated by reference to Exhibit 2.2 to the N/A
Registrant Registration Statement No. 333-37173 on Form S-4).and
3.1 Articles of Incorporation of National Health Realty, Inc. (incorporated N/A
by reference to Exhibit 3.1 to the Registrant Registration Statement
No. 333-37173 on Form S-4).
3.2 Bylaws of National Health Realty, Inc. (incorporated by reference to N/A
Exhibit 3.2 to the Registrant Registration Statement No. 333-37173 on
Form S-4).
3.3 Limited Partnership Agreement of NHR/OP, L.P. (incorporated by N/A
reference to Exhibit 3.3 to the Registrant Registration Statement No.
333-37173 on Form S-4).
4 Indenture of Trust and Security Agreement dated as of December 1, N/A
1990 by and among National Health Corporation Leveraged Employee
Stock Ownership Trust, National Health Corporation, and National
HealthCorp L.P. to State Street Bank and Trust Company of
Connecticut, National Association, as Indenture Trustee and Barnett
Banks Trust Company, National Association, as Florida Co-Indenture
Trustee (incorporated by reference to Exhibit 4 to the Registrant
Registration Statement No. 333-37173 on Form S-4).
10.1 Master Agreement of Lease effective as of January 1, 1998 by and N/A
among National Health Realty, Inc., NHR/OP, L.P. and National
HealthCare Corporation. (incorporated by reference to Exhibit 10.1 to
the Registrant Registration Statement No. 333-37173 on Form S-4).
10.2 Advisory, Administrative Services and Facilities Agreement effective N/A
as of January 1, 1998 between National Health Realty, Inc., NHR/OP,
L.P. and National HealthCare Corporation. (incorporated by reference
to Exhibit 10.2 to the Registrant Registration Statement No. 333-37173
on Form S-4).
10.3.1 Form of National Health Realty, Inc. 1997 Employee Stock Purchase N/A
Plan (incorporated by reference to Exhibit 10.3.1 to the Registrant
Registration Statement No. 333-37173 on Form S-4).
10.3.2 Form of National Health Realty, Inc. 1997 Stock Option and Stock N/A
Appreciation Rights Plan (incorporated by reference to Exhibit 10.3.2
to the Registrant Registration Statement No. 333-37173 on Form S-4).
10.4 Loan Agreement dated as of April 21, 1995 by and between National N/A
HealthCare L.P. and First American National Bank (incorporated by
reference to Exhibit 10.4 to the Registrant Registration Statement No.
333-37173 on Form S-4).
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C>
10.5 Credit Agreement dated as of December 31, 1996 by and among N/A
National HealthCare L.P., The Banks, and SunTrust Bank, Nashville,
N.A., as Agent (incorporated by reference to Exhibit 10.5 to the
Registrant Registration Statement No. 333-37173 on Form S-4).
10.6 Reimbursement and Letter of Credit Agreement dated as of June 1, N/A
1989 among West Plains Manor, National HealthCare L.P. and The
Bank of Tokyo, Ltd. New York Agency (incorporated by reference to
Exhibit 10.6 to the Registrant Registration Statement No. 333-37173
on Form S-4).
10.7 Guaranty Agreement dated as of June 1, 1989 by and between N/A
National HealthCare L.P. and The Bank of Tokyo, Ltd., New York
Agency (incorporated by reference to Exhibit 10.7 to the Registrant
Registration Statement No. 333-37173 on Form S-4).
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 N/A
to the Registrant Registration Statement No. 333-37173 on Form S-4).
23 Consent of Arthur Andersen LLP, independent public accountants E-1
99 Registration Statement No. 333-37173 on Form S-4 of the Registrant as
filed October 3, 1997
</TABLE>
7
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report on
National Health Realty, Inc. dated October 15, 1997 and to all references to our
firm included in or made a part of this Form 10 Registration Statement.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
October 10, 1997
<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1997
REGISTRATION NO. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------------------
NATIONAL HEALTH REALTY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
MARYLAND 6798 APPLICATION FILED
<S> <C> <C>
(State or other jurisdiction (Primary Standard (I.R.S. Employer Identification No.)
of incorporation or organization) Industrial Classification
Code Number)
</TABLE>
100 VINE STREET, SUITE 1400
MURFREESBORO, TENNESSEE 37130
(615) 890-2020
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------------------
RICHARD F. LAROCHE, JR.
SENIOR VICE PRESIDENT AND SECRETARY
NATIONAL HEALTH REALTY, INC.
100 VINE STREET, SUITE 1400
MURFREESBORO, TENNESSEE 37130
(615) 890-2020
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------
COPY TO:
ERNEST E. HYNE II
HARWELL HOWARD HYNE GABBERT & MANNER, P.C.
1800 FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37238
(615) 256-0500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. [ ]
-----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Title of Each Class
of Securities Amount Proposed Maximum Proposed Maximum Amount of
Amount of to be Offering Price Aggregate Offering Registration
to be Registered Registered (1) per Share (2) Price (2) Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01
per share . . . . . . . . . . 10,013,400 shares $13.91 $139,308,060 $42,214.56
====================================================================================================================================
</TABLE>
(1) Based on the maximum number of shares of National Health Realty, Inc.
Common Stock issuable pursuant to the Distribution.
(2) Estimated in accordance with Rule 457(f)(1) solely for the purpose of
calculating the registration fee, based on 30% of the market value of the
outstanding units of National HealthCare L.P. as of September 29, 1997
divided by 10,819,400 then multiplied by 10,013,400.
-----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
Dear Limited Partner:
A special meeting of limited partners (the "Special Meeting") of
National HealthCare L.P., a Delaware limited partnership ("NHC"), will be held
on Thursday, November 20, 1997, at 9:00 a.m., Central Standard time, at NHC's
partnership offices, 100 Vine Street, Suite 1400 Murfreesboro, Tennessee 37130.
At the Special Meeting, holders of NHC general and limited partnership
units ("Units") as of October 31, 1997 (the "Record Date") will be asked to
consider and vote upon the following matters:
1. Approval and adoption of a proposed plan of restructure (the
"Plan of Restructure"), pursuant to which NHC will make a
distribution (the "Distribution") of all of the outstanding
shares of common stock (the "REIT Shares") of National Health
Realty, Inc., a newly-formed Maryland corporation which is
intended to qualify as a real estate investment trust under
federal tax laws (the "REIT"), to the holders of NHC general
and limited partnership units and approximately 806,000 units
of limited partnership interest in NHR/OP, L.P., a Delaware
limited partnership (the "Operating Partnership"), to National
Health Corporation, NHC's administrative general partner, in
the manner set forth in the accompanying proxy statement and
NHC will then merge (the "Merger") with National HealthCare
Corporation, a newly-formed Delaware corporation (the
"Corporation"). Prior to the Distribution, but effective on
the date thereof, NHC will transfer to the REIT and the
Operating Partnership (i) the effective ownership (subject to
certain debt thereon) in the land, building and fixtures of 17
licensed nursing homes, six assisted living facilities and one
retirement center, (ii) NHC's interest in certain promissory
notes totaling approximately $92.5 million secured by
mortgages on approximately 23 additional nursing homes which
are owned by third parties and managed by NHC, (iii) certain
other assets having little or no book value on NHC's books and
(iv) certain liabilities.
2. Approval of the possible adjournment of the Special Meeting
for the purpose of soliciting additional votes in favor of
proposal (1) above (the "NHC Adjournment Proposal"); and
3. Such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
Partnership approval of the Plan of Restructure is being sought to
ensure that NHC's Managing General Partner has identified and structured a
transaction appropriate for NHC and its Unitholders.
The Board of Directors of the Managing General Partner has unanimously
approved the Plan of Restructure and the transactions contemplated thereby, all
as described in the attached material, and has determined that the Plan of
Restructure and the related transactions are fair to and in the best interests
of NHC and its Unitholders. The Board of Directors of the Managing General
Partner recommends that the Unitholders vote in favor of the Plan of
Restructure. You are urged to consider carefully all aspects of the proposed
Plan of Restructure discussed in the attached Proxy Statement/Prospectus.
In the material accompanying this letter, you will find a Notice of
Special Meeting of NHC Unitholders, a proxy card and a Proxy
Statement/Prospectus relating to, among other things, the actions to be taken by
NHC at the Special Meeting. The Proxy Statement/Prospectus more fully describes
the Plan of Restructure. It also includes information about the REIT and the
Corporation and also serves as a Prospectus for the REIT and the Corporation
with respect to the securities of such entities to be issued upon the
consummation of the Plan of Restructure.
All Unitholders as of the Record Date are cordially invited to attend
the Special Meeting in person. However, whether or not you plan to attend the
Special Meeting, please complete, sign, date and return your proxy in the
enclosed postage paid envelope. If you attend the Special Meeting, you may vote
in person if you wish, even though you have previously returned your proxy. It
is important that your Units be represented and voted at the Special Meeting.
Sincerely,
Richard F. LaRoche, Jr.
Senior Vice President and Secretary
NHC, Inc.
<PAGE> 3
NATIONAL HEALTHCARE L.P.
100 VINE STREET
SUITE 1400
MURFREESBORO, TENNESSEE 37130
NOTICE OF SPECIAL MEETING OF UNITHOLDERS
TO BE HELD ON NOVEMBER 20, 1997
NOTICE IS HEREBY GIVEN that a special meeting of Unitholders (the
"Special Meeting") of National HealthCare L.P., a Delaware limited partnership
("NHC"), will be held on Thursday, November 20, 1997, at 9:00 a.m., Central
Standard time, at NHC's partnership offices, 100 Vine Street, Suite 1400,
Murfreesboro, Tennessee 37130 to consider and vote upon the following matters
more fully described in the accompanying Joint Proxy Statement/Prospectus:
1. Approval and adoption of a plan of restructure, the
("Plan of Restructure"), pursuant to which NHC will make a
distribution (the "Distribution") of all of the outstanding
shares of common stock (the "REIT Shares") of National Health
Realty, Inc., a newly-formed Maryland corporation which is
intended to qualify as a real estate investment trust under
federal income tax laws (the "REIT"), to the holders of NHC
general and limited partnership units and approximately
806,000 units of limited partnership interest in NHR/OP, L.P.,
a Delaware limited partnership (the "Operating Partnership"),
to National Health Corporation, NHC's administrative general
partner, in the manner set forth in the accompanying proxy
statement and NHC will then merge (the "Merger") with National
HealthCare Corporation, a newly-formed Delaware corporation
(the "Corporation"). Prior to the Distribution, but effective
on the date thereof, NHC will transfer to the REIT and the
Operating Partnership (i) the effective ownership (subject to
certain debt thereon) in the land, building and fixtures of 17
licensed nursing homes, six assisted living facilities and one
retirement center, (ii) NHC's interest in certain promissory
notes totaling approximately $92.5 million secured by
mortgages on approximately 23 additional nursing homes which
are owned by third parties and managed by NHC, (iii) certain
other assets having little or no book value on NHC's books and
(iv) certain liabilities.
2. Approval of the possible adjournment of the Special Meeting
for the purpose of soliciting additional votes in favor of
proposal (1) above; and
3. Such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
Only Unitholders of record at the close of business on October 31,
1997, are entitled to notice of, and to vote at, the Special Meeting, or at any
adjournment or postponement thereof.
By order of NHC, Inc., the Managing General Partner
-------------------------------------------------------
Richard F. LaRoche, Jr.
Senior Vice President and Secretary
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 3, 1997
PROXY STATEMENT
FOR SPECIAL MEETING OF
PARTNERS OF
NATIONAL HEALTHCARE L.P.
JOINT PROSPECTUS OF
NATIONAL HEALTHCARE CORPORATION
AND
NATIONAL HEALTH REALTY, INC.
This Proxy Statement/Prospectus is being furnished by National HealthCare
L.P., a Delaware limited partnership ("NHC"), in connection with the
solicitation of proxies by the Board of Directors of NHC, Inc., the managing
general partner of NHC (the "Managing General Partner"), in connection with a
special meeting (the "Special Meeting") of the holders (the "Unitholders") of
limited partnership interests of NHC to be held on November 20, 1997, and at any
adjournment thereof to approve the proposed restructure of NHC as described in
this Proxy Statement/Prospectus. This Proxy Statement/Prospectus and form of
proxy are being mailed to Unitholders on or about November 1, 1997.
To counteract the governmentally mandated loss of taxation as a partnership
which is effective January 1, 1998, NHC has proposed a restructure whereby NHC
will make a distribution (the "Distribution") of all of the outstanding shares
of common stock (the "REIT Shares") of National Health Realty, Inc., a
newly-formed Maryland corporation which is intended to qualify as a real estate
investment trust under federal tax laws (the "REIT"), to the holders of NHC
general and limited partnership units (the "Units") on a pro rata basis, except
for approximately 806,000 units of limited partnership interests in NHR/OP,
L.P., a Delaware limited partnership (the "Operating Partnership"), which will
be distributed to National Health Corporation, NHC's administrative general
partner ("National") as discussed under "The Plan of Restructure" and NHC will
then merge (the "Merger") with and into National HealthCare Corporation, a
newly-formed Delaware corporation (the "Corporation"). Pursuant to the Merger,
each outstanding Unit of NHC will represent the right to receive one share of
common stock (the "Shares") of the Corporation. Prior to the Distribution, but
effective on the date thereof, NHC will transfer to the REIT and the Operating
Partnership (i) the effective ownership (subject to certain debt thereon) in the
land, building and fixtures of 17 licensed nursing homes, six assisted living
facilities and one retirement center (the "Owned Healthcare Facility or
Facilities"), (ii) NHC's interest in certain promissory notes totaling
approximately $92.5 million secured by mortgages on approximately 23 additional
nursing homes which are owned by third parties and managed by NHC (the "Notes"),
(iii) certain other assets having little or no book value on NHC's books (the
"Other Assets") and (iv) certain liabilities (the "Assumed Liabilities"). See
"Business -- The REIT" for a more complete description of these assets and
liabilities.
This Proxy Statement/Prospectus also constitutes the joint prospectus of:
(i) National HealthCare Corporation filed with the Securities and Exchange
Commission (the "Commission") as a part of a Registration Statement on Form S-4
(the "Corporation Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to up to 10,819,400 shares of
National HealthCare Corporation Common Stock which will be issued in the Merger
or upon the exercise of options or conversion of convertible securities and (ii)
National Health Realty, Inc., filed with the Commission as a part of a
Registration Statement on Form S-4 (the "REIT Registration Statement") under the
Securities Act, with respect to up to 10,013,400 shares of National Health
Realty, Inc. Common Stock which will be issued to NHC Unitholders in the
Distribution or upon the exercise of options or conversion of convertible
securities.
A Unitholder who executes a proxy has the right to revoke the proxy at any
time before it is voted by giving written notice of revocation to the secretary
of the Managing General Partner, by executing a proxy bearing a later date, or
by attending the Special Meeting and voting in person. Proxies will be voted in
accordance with instructions noted on the proxies. Unless otherwise specifically
instructed in the proxies, it is the intention of the persons named in the proxy
to vote all proxies received by them FOR THE PLAN OF RESTRUCTURE. Management
does not know of any other matters that will be presented for action at the
Special Meeting . If any other matter does come before the meeting, however, the
persons appointed in the proxy will vote in accordance with their best judgment
on such matter.
The cost of this proxy solicitation will be borne by NHC. It is
contemplated that proxies will be solicited solely by mail. Banks, brokers and
other custodians will be requested to forward proxy soliciting materials to
their customers where appropriate, and NHC will reimburse such banks, brokers,
and custodians for their reasonable out-of-pocket expenses in sending the proxy
materials to the beneficial Unitholders.
The Merger will be effective at 11:59 p.m. on December 31, 1997 (the
"Effective Time") and the Distribution will be made by NHC to Unitholders of
record immediately prior to the Effective Time. The Unitholders entitled to
receive the REIT Shares in the Distribution will not be required to pay any
consideration or take any action to receive those REIT Shares. Prior to the
Merger and the Distribution there has been no public market for the Shares or
the REIT Shares. Each of the Corporation and the REIT have made application to
list the Shares and REIT Shares, respectively, on the American Stock Exchange.
SEE "RISK FACTORS" ON PAGE 13 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
The date of this Proxy Statement/Prospectus is ________, 1997.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
INTRODUCTION..................................................................................................... 1
AVAILABLE INFORMATION............................................................................................ 1
SUMMARY OF CERTAIN INFORMATION................................................................................... 2
Summary Historical and Pro Forma Financial Information...................................................... 6
THE PLAN OF RESTRUCTURE.......................................................................................... 7
Background and Reasons for the Plan of Restructure.......................................................... 7
Certain Transactions Preceding the Distribution............................................................. 9
Manner of Effecting the Distribution and Merger............................................................. 9
Conditions to the Plan of Restructure....................................................................... 9
Federal Income Tax Aspects of the Plan of Restructure....................................................... 9
Businesses of the REIT and the Corporation after the Plan of Restructure.................................... 9
NHC's Outstanding Options and Convertible Debentures........................................................10
Effect on NHC Units.........................................................................................10
Listing and Trading of Shares and REIT Shares...............................................................12
Termination.................................................................................................12
RISK FACTORS.....................................................................................................13
Risks Associated With Forward Looking Statements............................................................13
The REIT....................................................................................................13
The Corporation.............................................................................................19
VOTING AND PROXY INFORMATION.....................................................................................25
Voting Procedures...........................................................................................25
Revocation of Proxies.......................................................................................25
Vote Required; Quorum.......................................................................................25
Solicitation of Proxies.....................................................................................25
Independent Auditors........................................................................................25
No Appraisal Rights.........................................................................................25
Other Matters...............................................................................................25
PRICE RANGE OF NHC UNITS.........................................................................................26
DIVIDEND POLICY..................................................................................................27
NHC ........................................................................................................27
The REIT....................................................................................................27
The Corporation.............................................................................................27
BUSINESS.........................................................................................................28
NHC ........................................................................................................28
The REIT....................................................................................................28
The Corporation.............................................................................................31
RELATIONSHIP BETWEEN THE REIT AND THE CORPORATION AFTER THE RESTRUCTURE..........................................46
The Assumed Liabilities.....................................................................................46
The Lease...................................................................................................46
Advisory, Administrative Services and Facilities Agreement..................................................48
PRO FORMA FINANCIAL INFORMATION..................................................................................51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ....................................................................................57
NHC ........................................................................................................57
The Corporation.............................................................................................61
The REIT....................................................................................................62
MANAGEMENT.......................................................................................................63
NHC ........................................................................................................63
The REIT....................................................................................................69
The Corporation.............................................................................................70
</TABLE>
i
<PAGE> 6
<TABLE>
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PAGE
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CERTAIN TRANSACTIONS.............................................................................................74
National ...................................................................................................74
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................75
NHC ........................................................................................................75
The REIT....................................................................................................76
DESCRIPTION OF SECURITIES........................................................................................77
Shares of the Corporation...................................................................................77
Shares of the REIT..........................................................................................78
Operating Partnership Agreement.............................................................................80
COMPARISON OF STOCKHOLDER/UNITHOLDER RIGHTS......................................................................82
Fiduciary Duties............................................................................................88
FEDERAL INCOME TAX CONSIDERATIONS................................................................................89
Introduction................................................................................................89
Certain Differences Between the Ownership of Units, Shares..................................................89
The REIT....................................................................................................89
Federal Income Taxation of the REIT.........................................................................92
Opinion of REIT Counsel.....................................................................................92
Requirements for Qualification..............................................................................93
Failure to Qualify..........................................................................................95
Taxation of U.S. Stockholders...............................................................................96
Special Tax Considerations for Foreign Stockholders.........................................................97
Information Reporting Requirements and Backup Withholding Tax...............................................98
Other Tax Considerations....................................................................................98
Alternative Minimum Tax.....................................................................................99
ERISA Considerations........................................................................................99
The Corporation............................................................................................100
State and Local Taxes......................................................................................101
Unitholders Should Seek Their Own Tax Advice...............................................................101
LEGAL MATTERS...................................................................................................101
EXPERTS.........................................................................................................101
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
APPENDICES
1. Plan of Restructure...................................................................................A-1
2. Agreement of Merger ..................................................................................B-2
</TABLE>
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<PAGE> 7
INTRODUCTION
To counteract the governmentally mandated loss of taxation as a partnership
which is effective January 1, 1998, on August 19 and September 5, 1997, the
Board of Directors of the Managing General Partner of National HealthCare L.P.,
a Delaware limited partnership, unanimously approved in principle (i) the
formation of National Health Realty, Inc., a Maryland corporation, as a wholly
owned subsidiary of NHC and the formation of NHR/OP, L.P., a Delaware limited
partnership with respect to which the REIT would be the general partner and NHC
and the REIT would be the limited partners, (ii) the transfer to the REIT and
the Operating Partnership all of the Owned Healthcare Facilities, the Notes, the
Other Assets and the Assumed Liabilities, (iii) the formation of National
HealthCare Corporation, a Delaware corporation, as a wholly-owned subsidiary of
NHC, (iv) the Distribution of the REIT Shares to NHC's Unitholders and all
of the Operating Partnership's limited partnership units held by NHC to
National, and (v) the Merger of NHC with and into the Corporation (the "Plan of
Restructure"). The Plan of Restructure will have the effect of separating NHC
into two new independent public entities. The Distribution will be payable to
the NHC Unitholders of record immediately prior to the Effective Time, at the
rate of one REIT Share for each NHC Unit outstanding provided, however, National
shall receive either one REIT share or one Operating Partnership Unit ("OP
Unit") for each of its NHC Units. As a result of the Merger, each Unitholder
certificate in NHC will represent the identical number of shares in the
Corporation. The Merger will be effective at 11:59 p.m. on December 31, 1997.
The REIT Shares issued in the Distribution will be mailed to the Unitholders as
soon thereafter as is practicable. See "The Plan of Restructure -- Manner of
Effecting the Distribution and Merger."
Both the Corporation and the REIT were incorporated on September 26, 1997,
each as a wholly-owned subsidiary of NHC for purposes of consummating the Plan
of Restructure described herein. Prior to the Distribution, NHC will transfer to
the REIT and the Operating Partnership the Owned Healthcare Facilities, the
Notes, the Other Assets and the Assumed Liabilities.
Unitholders of NHC who have questions relating to the Plan of Restructure
should contact NHC at its principal corporate offices, 100 Vine Street, Suite
1400, Murfreesboro, Tennessee 37130, telephone (615) 890-2020, Attention:
Investor Relations. After the Effective Time, stockholders of the Corporation
who have questions relating to the Plan of Restructure should contact the
Corporation at its principal corporate offices, 100 Vine Street, Suite 1400,
Murfreesboro, Tennessee 37130, telephone (615) 890-2020, Attention: Investor
Relations and shareholders of the REIT who have questions relating to the
Distribution should contact the REIT at its principal office, 100 Vine Street,
Suite 1400, Murfreesboro, Tennessee 37130 and its telephone number is (615)
890-2020.
AVAILABLE INFORMATION
Each of the Corporation and the REIT have filed a registration statement on
Form S-4 (the "Registration Statements") with the Commission under the
Securities Act with respect to the Shares and the REIT Shares, respectively.
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statements and the exhibits and schedules thereto. For
further information, reference is made hereby to the Registration Statements and
such exhibits and schedules. Statements contained herein concerning any
documents are not necessarily complete and, in each instance, reference is made
to the copies of such documents filed as exhibits to either of the Registration
Statements. Each such statement is qualified in its entirety by such reference.
Copies of these documents may be inspected without charge at the principal
office of the Commission at 450 5th Street, N.W., Washington, D.C. 20549, at the
Regional Offices of the Commission at 7 World Trade Center, Suite 1300, New
York, New York 10048 and at Northwestern Atrium Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of all or any part thereof may
be obtained from the Commission upon payment of the charges prescribed by the
Commission. In addition, such Registration Statements may be electronically
accessed at the Commission's site on the World Wide Web located at
http://www.sec.gov.
Following the Distribution, the Corporation and the REIT will each be
required to comply with the reporting requirements of the Exchange Act and will
file annual, quarterly and other reports with the Commission. The Corporation
and the REIT will also each be subject to the proxy solicitation requirements of
the Exchange Act and, accordingly, will furnish audited financial statements to
their respective stockholders in connection with its annual meetings of
stockholders. Following the listing of the Corporation and the REIT common stock
on the American Stock Exchange ("AMEX"), the Corporation and the REIT will each
be required to file with AMEX copies of such reports, proxy statements and other
information which then can be inspected at the offices of AMEX at 86 Trinity
Place, New York, New York 10006-1881.
NO PERSON IS AUTHORIZED BY NHC, THE CORPORATION OR THE REIT TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON WHOM IT IS NOT
LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE
SECURITIES MADE UNDER THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF NHC, THE REIT OR THE CORPORATION SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
<PAGE> 8
SUMMARY OF CERTAIN INFORMATION
This summary is qualified by the more detailed information set forth
elsewhere in this Proxy Statement/Prospectus, which should be read in its
entirety.
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THE REIT.................................... National Health Realty, Inc., a Maryland corporation, which is
intended to qualify as a real estate investment trust under Section
856 of the Internal Revenue Code of 1986, as amended (the
"Code"). As used in this Proxy Statement/Prospectus, the REIT
means National Health Realty, Inc. and its subsidiaries (including
the Operating Partnership). At the time of the Distribution, the
REIT will own (i) 15 of the Owned Healthcare Facilities and lease
nine of the Owned Healthcare Facilities with a nominal purchase
option, (ii) the Notes, and (iii) Other Assets subject to the
Assumed Liabilities. See "Business -- The REIT."
THE CORPORATION............................. National HealthCare Corporation, a Delaware corporation and its
subsidiaries. At the Effective Time of the Merger, it will acquire
all of the assets, operations and liabilities of NHC, other than the
assets and liabilities transferred to the REIT. See "Business --
The Corporation."
NHC......................................... National HealthCare L.P., a Delaware limited partnership and its
subsidiaries. See "Business -- NHC."
RISK FACTORS................................ After the Effective Time, the REIT and the Corporation will continue
to be subject to a number of risks, including those which were
applicable to the business historically operated by NHC and
litigation to which it was subject, as well as new risks, such as a
significant conflict of interest. See "Risk Factors."
REIT SHARES TO BE DISTRIBUTED............... Approximately 10,013,400 shares of common stock of National
Health Realty, Inc., a Maryland corporation. The actual number of
REIT Shares to be distributed will depend upon the number of
NHC Units outstanding at the Effective Time. Unitholders will not
be required to pay any cash or other consideration or to exchange
their Units for the REIT Shares they receive in the Distribution.
See "The Plan of Restructure -- Manner of Effecting the
Distribution and Merger" and "-- NHC's Outstanding Options and
Convertible Debentures."
SHARES TO BE ISSUED IN THE MERGER .......... Approximately 10,819,400 Shares of common stock of National
HealthCare Corporation, a Delaware corporation. The actual num
ber of Shares to be issued will depend upon the number of NHC
Units outstanding at the Effective Time. Unitholders will receive
one Share of stock for each Unit held at the Effective Time. See
"The Plan of Restructure -- Manner of Effecting the Distribution
and Merger" and "-- NHC's Outstanding Options and Convertible
Debentures."
DISTRIBUTION RATIO.......................... One REIT Share for each outstanding NHC Unit, except for certain
Units held by National Health Corporation, which will receive one
OP Unit in the Operating Partnership for each such NHC Unit.
See "The Plan of Restructure -- Manner of Effecting the
Distribution and Merger", "-- NHC's Outstanding Options and
Convertible Debentures" and "Certain Transactions -- National."
MERGER CONSIDERATION ....................... One Share for each outstanding NHC Unit. See "The Plan of
Restructure -- Manner of Effecting the Distribution and Merger"
and "-- NHC's Outstanding Options and Convertible Debentures."
DISTRIBUTION DATE........................... The distribution of REIT shares to Unitholders shall be effective on
the date of, but prior to, the Effective Time. However, with respect
to the physical delivery of REIT shares, as soon as practical after
the Effective Time, NHC will deliver the REIT Shares to the
distribution agent. The distribution agent will mail stock
certificates representing the REIT Shares as soon thereafter as
practicable. Current Unit certificates will be deemed to represent
shares of the Corporation after the Effective Time. See "The Plan
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2
<PAGE> 9
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<S> <C>
of Restructure -- Manner of Effecting the Distribution and
Merger."
EFFECTIVE TIME ............................. 11:59 p.m. Central Standard time on December 31,1997. As of the
Effective Time, each Unit will represent one share of the
Corporation. See "The Plan of Restructure -- Manner of Effecting
the Distribution and Merger."
REIT'S INITIAL ASSETS AND DEBT.............. The REIT's initial assets will consist of: (i) fee ownership or
capitalized leases on 17 skilled nursing centers, six assisted living
facilities and one retirement center (the "Owned Healthcare
Facilities"), (ii) certain promissory notes secured by mortgages on
approximately 23 additional nursing homes managed by NHC (the
"Notes") and (iii) certain other assets with nominal book value on
the current books of NHC (the "Other Assets"). The transfer of the
Owned Healthcare Facilities, the Notes and the Other Assets will
be subject to (and the REIT will agree to pay and perform) certain
NHC debt of approximately $105.9 (the "Assumed Liabilities").
All of the REIT's assets will be owned by the Operating
Partnership or a subsidiary partnership of the Operating
Partnership. See "Relationship between the REIT and the
Corporation After the Restructure -- Assumed Liabilities."
CORPORATION'S INITIAL ASSETS AND LIABILITIES The Corporation's initial assets and liabilities will consist
of all of the assets and liabilities of NHC, other than those
transferred to the REIT; however, the Corporation will
continue to be contingently liable on debt which the REIT has
agreed to pay. See "Business -- The Corporation."
RELATIONSHIP BETWEEN THE
CORPORATION AND THE REIT
AFTER THE PLAN OF RESTRUCTURE .............. After the Plan of Restructure, the Corporation will continue to be
engaged in the development and operation of nursing homes,
assisted living and retirement centers, home health agencies and
other related services and will lease the Owned Healthcare
Facilities from the REIT. The Corporation will render certain
advice and services to the REIT pursuant to an Advisory,
Administrative Services and Facilities Agreement (the "REIT
Advisory Agreement"), for which it will receive a fee. See
"Relationship Between the REIT and the Corporation After the
Restructure -- Advisory Administrative Services and Facility
Agreement."
REASONS FOR THE PLAN OF RESTRUCTURE ........ NHC is currently a publicly traded limited partnership. Under current
federal tax laws, beginning January 1, 1998, NHC would be taxed
as a corporation and not as a partnership. Management of NHC
believes that by dividing NHC into two entities, one of which will
be taxed as a real estate investment trust and one of which will be
taxed as a corporation, the NHC Unitholders will be able to retain
some benefits of a single federal taxable entity with respect to the
income derived from assets transferred to the REIT. In addition,
there will be a public market for the REIT Shares and the Shares.
NHC intends to transfer only tax qualifying assets to the REIT so
that the REIT will be taxed for federal income tax purposes as a
real estate investment trust and not as a taxable corporation. See
"The Plan of Restructure -- Background and Reasons for the Plan
of Restructure."
TRADING MARKET.............................. Application has been made to list both the REIT Shares and the Shares
on the American Stock Exchange.
FEDERAL TAX CONSEQUENCES.................... The formation of the Corporation and the REIT by NHC and the
contribution of assets to the REIT by NHC are intended to qualify
as tax free transfers under the Internal Revenue Code of 1986, as
amended (the "Code"), with respect to which neither the
Corporation, the REIT nor NHC generally would recognize gain,
except (as to NHC) to the extent that liabilities assumed by the
REIT or subject to assets transferred to the REIT exceed NHC's
adjusted tax basis in such assets immediately prior to such transfer.
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<PAGE> 10
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It is not anticipated that such liabilities will exceed such
bases. See "Federal Income Tax Considerations -- The REIT
-- Formation of the REIT -- Tax Consequences, -- Nonrecognition
Rule of Code Section 351" and "Federal Income Tax
Considerations -- The Corporation -- Formation."
The formation of, and transfer of assets to, the Operating
Partnership are intended to qualify as a tax free contribution
to a partnership under the Code, with respect to which neither
the Operating Partnership, NHC nor the REIT generally would
recognize gain.
The Distribution and Merger will be treated for federal income
tax purposes as a complete termination and liquidation of NHC
in which NHC Unitholders receive Corporation shares and REIT
shares in exchange for Units. The merger of NHC into the
Corporation will be treated as a contribution of NHC's assets
(other than those contributed to the REIT or the Operating
Partnership) to the Corporation, which would generally be tax
free to the Corporation and NHC, except (as to NHC) to the
extent liabilities assumed by the Corporation or subject to
assets transferred to the Corporation exceed NHC's adjusted
tax bases in such assets immediately prior to the transfer. It
is not anticipated that such liabilities will exceed such
bases. See "Federal Income Tax Considerations -- The
Corporation -- The Merger."
The REIT is intended to qualify as a real estate investment
trust under the Code, the applicable provisions of which will
generally allow the REIT to avoid the"double taxation" of
corporate earnings to the extent of distributions made to its
shareholders. REIT shareholders would generally be taxed upon
such distributions as ordinary income to the extent of the
REIT's accumulated and current earnings and profits. See
"Federal Income Tax Considerations -- The REIT -- Taxation as
a Real Estate Investment Trust."
The Corporation will not be a pass-through entity such as NHC
or a quasi pass-through entity like the REIT. Instead, the
Corporation's earnings will be taxed at the corporate level
and, to the extent distributions are made to the Corporation's
shareholders, such distributions will generally be taxed at
the shareholder level (as ordinary income) to the extent of
the Corporation's accumulated and current earnings and
profits. See "Federal Income Tax Considerations -- Certain
Differences Between the Ownership of Units, REIT Shares and
Shares."
INVESTOR BASIS IN SHARES AND REIT SHARES Since the Distribution and Merger will be treated as a
complete termination and liquidation of NHC, a Unitholder's
initial tax basis in the REIT Shares and Shares would in the
aggregate generally be based upon such Unitholder's tax basis
in his Units. See "Federal Income Tax Considerations -- The
REIT -- The Distribution -- Tax Consequences."
INVESTMENT POLICIES........................ The Corporation intends to continue NHC's historical investment
policy of developing and acquiring nursing homes, assisted living
and retirement centers and of managing such types of facilities for
others. See "Business-- The Corporation."
The REIT will lease the Owned Healthcare Facilities to the
Corporation. The REIT may purchase additional properties,
however, the REIT Advisory Agreement provides that the REIT
will only do business with the Corporation so long as both the
REIT Advisory Agreement is in effect and the Corporation
continues to advise National Health Investors, Inc. See
"Business -- The REIT -- Investment and Other Policies."
DIVIDENDS................................... The REIT intends to pay quarterly dividends to its shareholders in an
amount at least sufficient to satisfy the distribution requirements of
a REIT. Such requirements generally necessitate that at least 95%
of the REIT's taxable income (which term does not include net
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4
<PAGE> 11
<TABLE>
<S> <C>
capital gains realized by the REIT) be distributed annually.
See "Federal Income Tax Considerations -- The REIT -- Taxation
as a REIT -- Annual Distribution Requirements." The REIT may
elect to distribute dividends in excess of 95% of its REIT
taxable income. Payment of dividends, however, will always be
at the discretion of the REIT's Board of Directors and will
depend upon such factors as the REIT's financial condition,
its earnings, anticipated investments, bank covenants and
other relevant factors. It may be necessary for the REIT to
borrow or liquidate investments to satisfy its distribution
requirements. The REIT's Board of Directors anticipates paying
a dividend that would initially be at the annual rate of $1.33
per REIT Share. See "Risk Factors -- Risks Associated with
Forward Looking Statements" and "Dividend Policy."
The Corporation may pay dividends at the discretion of the
Corporation's Board of Directors. The Corporation does not
anticipate initially paying dividends.
LEASES....................................... Initially, each of the Owned Healthcare Facilities will be leased to the
Corporation. Each lease (each a "Lease" and collectively the
"Leases") will be a "triple net" lease with (i) an original fixed term
expiring December 31, 2007, (ii) an option of the Corporation to
renew the Lease for two additional periods of 5 years each (on the
same terms as the initial 10 year term, and (iii) a right of first
refusal for NHC to purchase the Owned Healthcare Facilities. See
"Relationship Between the REIT and the Corporation after the
Restructure -- The Leases."
DEBT OF THE REIT............................. The REIT will assume (or take the Owned Healthcare Facilities
subject to and agree to pay and perform) the Assumed Liabilities
amounting to approximately $105.9 million. The REIT expects to
refinance the Assumed Liabilities soon after the Effective Time.
See "Business -- The REIT -- Assumed Liabilities." The
Corporation will remain directly liable on all of the remaining debt
of NHC. Since both the REIT and the Corporation resulted from
NHC, creditors of NHC may be able to reach the assets of both.
See "Risk Factors -- The REIT -- Lack of Consents; Acceleration
of Certain Maturities" and "-- The Corporation -- Lack of
Consents; Acceleration of Certain Maturities."
INTENTION OF THE REIT TO QUALIFY
AS A REAL ESTATE INVESTMENT TRUST.......... The REIT was organized and intends to conduct its operations so as
to qualify for taxation as a real estate investment trust under
Sections 856 through 860 of the Code. The primary advantage to
the REIT if it so qualifies is that it will generally be allowed to
deduct from its taxable income an amount equal to the dividends
paid to its shareholders. This treatment substantially eliminates the
"double taxation" normally imposed on corporate earnings. The
REIT could be subject to state excise taxes in the event a state
recognizes a REIT to be a corporation subject to such state's excise
tax. If the REIT fails to qualify as a REIT at any time, distributions
to shareholders in any such year will not be deductible by the REIT
and the amount of cash available for distribution to shareholders
could accordingly be reduced. As a result, its income subject to
taxation (including the alternative minimum tax) will be greater
than if the REIT continued to qualify as a REIT. See "Federal
Income Tax Considerations -- The REIT -- Taxation as a Real
Estate Investment Trust."
OUTSTANDING OPTIONS AND DEBENTURES........... NHC has certain outstanding unit options (the "Options") and 6% subordinated
convertible debentures (the "6% Debentures"). Any of the Options which are
not exercised, or 6% Debentures which are not converted, into NHC Units
prior to the Plan of Restructure (the payment obligation of which will
remain the obligation of the Corporation) will convert, at the election of
the holder, into the same number of Shares and REIT Shares that it would
have been convertible or exercisable into Units prior to the Plan of
Restructure. Certain covertible notes issued in October 1997 will only be
converted into Shares. See "The Plan of Restructure -- NHC's Outstanding
Options and Covertible Debentures."
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5
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
Audited Financial Statements. The following selected financial data of the
Corporation has been derived from the NHC audited financial statements
included elsewhere herein. The selected financial data should be read in
conjunction with NHC's consolidated financial statements and notes thereto.
Pro Forma Financial Data. The following pro forma financial data of the
Corporation and the REIT has been prepared by the Corporation and the REIT
assuming that the transfer of the Owned Healthcare Facilities, the Notes
and the Assumed Liabilities and the execution of the Leases occurred as of
January 1, 1996. The unaudited pro forma data, in the opinion of
management, reflects all adjustments necessary to present fairly the data
set forth therein.
NATIONAL HEALTHCARE CORPORATION, SUCCESSOR TO
NATIONAL HEALTHCARE L.P.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------
SIX
YEAR MONTHS
ENDED ENDED
OR AS OF OR AS OF
SIX MONTHS ENDED YEAR ENDED OR DECEMBER 31, JUNE 30,
OR AS OF JUNE 30, AS OF DECEMBER 31, -----------------------
1997 1996 1996 1995 1994 1993 1992 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues......... $212,054 $183,784 $388,660 $350,957 $298,901 $269,858 $216,378 $379,623 $207,188
Income before taxes.. 14,300 11,472 29,286 21,115 15,853 37,562 9,501 15,504 7,655
Net Income........... 14,300 11,472 29,286 21,115 15,853 37,562 9,501 9,382 4,695
Earnings per
Unit/Share........... 1.41 1.18 2.98 2.31 1.80 4.05 1.23 1.02 0.50
BALANCE SHEET DATA:
Working capital...... $24,000 $26,639 $7,291 $30,393 $42,468 $69,493 $37,983 $ 46,168
Total assets......... 462,505 361,106 404,740 355,491 396,133 344,680 304,074 $255,331
Long-term debt....... 144,867 111,291 124,678 100,871 104,243 54,625 49,299 58,009
Partners' Capital.... 137,767 116,073 128,537 108,899 101,006 92,526 67,922 0
Stockholders' Equity. 0 0 0 0 0 0 0 17,451
</TABLE>
NATIONAL HEALTH REALTY, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
SIX
YEAR Months
ENDED Ended
OR AS OF or as of
DECEMBER 31 June 30,
----------- --------
1996 1997
---- ----
<S> <C> <C>
INCOME STATEMENT DATA:
Net Revenues............................................................................ $20,210 $ 11,247
Net Income.............................................................................. 11,893 5,684
Earnings per share...................................................................... 1.23 0.57
BALANCE SHEET DATA:
Total Assets............................................................................ $232,473
Long-term debt.......................................................................... 86,858
Stockholders' Equity.................................................................... 145,615
</TABLE>
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<PAGE> 13
THE PLAN OF RESTRUCTURE
BACKGROUND AND REASONS FOR THE PLAN OF RESTRUCTURE
In 1986, the predecessor to NHC converted from a corporation to a limited
partnership by forming NHC and transferring all assets to it. At that time, the
limited partnership form offered important tax advantages since there was (i) no
separate taxation of cash distributions to a partner, (ii) no federal income tax
at the partnership level and (iii) personal income tax rates were lower than
corporate tax rates. However, in late 1987, Congress passed the Revenue Act of
1987, one of the provisions of which provided that publicly traded limited
partnerships, which are frequently referred to as master limited partnerships
("MLPs"), with certain exceptions, would be taxed for federal income tax
purposes as corporations. MLPs existing on December 17, 1987 were
"grandfathered" for ten years until December 31, 1997.
For taxable periods beginning after December 31, 1997, the benefit to an
MLP of being treated as a partnership for federal income tax purposes will be
significantly reduced. For such taxable periods, existing MLPs generally have
the option of (i) being taxed as a corporation or (ii) being taxed as a
partnership by electing to be subject to additional tax at the rate of 3.5% on
its gross income. Based on NHC's projected gross income for 1997, the 3.5%
partnership tax (which would be in addition to income tax paid by NHC's
Unitholders) NHC would be required to pay if such provision had been in effect
during 1997 would be approximately $15.6 million.
In considering the best way for NHC to deal with the approaching change in
its taxation, the Board of Directors of the Managing General Partner focused on
NHC's desire to continue to make distributions to its Unitholders in conjunction
with the necessity for retaining earnings needed for NHC to continue its growth
plan. The Board agreed in its analysis of the restructuring consequences that
the first premise would be that NHC retain substantially the same percentage of
its cash flow after the restructure as it presently retains and second, that the
cash flow not retained should be available for distribution to investors to the
greatest extent practicable. With these premises in mind, the Board of Directors
of the Managing General Partner considered various alternatives, including the
following:
1. Remain a limited partnership, delist the Units from the AMEX and cease
being a "publicly traded" entity by restricting the trading in the
Units and granting investors the right to be "cashed out" by selling
their interest to third party investors.
Disadvantages
- Investors would lose the liquidity of the Units.
- Uncertainty as to whether there would be a sufficient number
of third party investors to buy Units of current investors who
wanted out.
Advantages
- NHC would continue as a limited partnership without being
taxed as a corporation because of the restrictions on
transferability.
- NHC would be able to continue to make distributions to its
Unitholders because it would not be subject to double
taxation.
2. Remain a limited partnership, delist the Units from the AMEX and cease
being a "publicly traded" entity by further restricting the trading in
the Units and granting investors the right to be "cashed out" by
selling their interests, one half to third party investors and one half
purchased by the limited partnership.
Disadvantages
- Investors would lose the liquidity of the Units.
- NHC would have to incur new debt to purchase selling
Unitholders' interests, which would likely restrict NHC's
ability to grow.
- NHC's cash balance would likely be adversely impacted by
incurring additional debt and the resulting increase in
interest expense.
- Uncertainty as to whether there would be a sufficient number
of third party investors to buy one half of the Units of
current investors who wanted out.
Advantages
- NHC would continue as a limited partnership without being
taxed as a corporation because of the restrictions on
transferability.
- NHC would be able to continue to make distributions to its
Unitholders because it would not be subject to double
taxation.
- There would not be as big a need for new third party investors
if one half of interests sold by Unitholders were purchased by
NHC
3. Convert NHC to a corporate form, which is what will happen under
current tax law, effective January 1, 1998, if NHC retains its existing
business structure.
Disadvantages
- There would be a significant loss of after tax return to
investors from distributions due to double taxation and NHC's
need to retain sufficient cash to maintain growth.
7
<PAGE> 14
Advantages
- There would likely be an increased market for NHC shares since
they would no longer produce UBIT (unrelated business income
tax), thus attracting institutional investors.
- Since the corporate form of NHC would be a public entity, the
investors would maintain liquidity in their shares.
- This would be the easiest transaction, from a structural
point of view.
4. Split NHC into two companies, one a publicly-traded entity which owns
all current real estate and notes receivables, which leases the real
estate back to NHC which would delist, and impose trading restrictions
to become a private partnership. Again, the private partnership would
offer existing investors the right to "cashout" using third party
investors or purchasing the interests at the partnership level.
Disadvantages
- Investors would lose the liquidity of the Units in the
private partnership.
- NHC would have to incur new debt to purchase at least some of
the selling Unitholders' interests, which would likely
restrict NHC's ability to grow.
- NHC's cash balance would likely be adversely impacted by
incurring additional debt and the resulting increase in
interest expense.
- Uncertainty as to whether there would be a sufficient number
of third party investors to buy at least some portion of the
Units of current investors that wanted out.
- NHC would need to include some restrictions on the
publicly-traded real estate company in order to avoid
conflicting with the objectives of National Health Investors,
Inc. ("NHI").
Advantages
- At least some of the investors liquidity would be preserved
through the publicly-traded real estate entity, which could
also avoid tax at the entity level by meeting the requirements
of an exception to the taxation of MLPs that is available to
publicly-traded partnerships with certain passive income or a
real estate investment trust.
- The operating company would continue as a limited partnership
without being taxed as a corporation because of the
restrictions on transferability.
- The operating company would be able to continue to make
distributions to its Unitholders because it would not be
subject to double taxation.
- There would not be as big a need for new third party investors
if one entity maintained a public market and at least some of
the interests sold by Unitholders were purchased by the
operating entity.
Finally, management considered the Plan of Restructure, pursuant to which
the real estate and certain other qualifying assets are contributed to a real
estate investment trust, and the remaining operating entity is converted into a
corporation. Management believes that the Plan of Restructure has the following
benefits:
- No Double Taxation of the REIT. By transferring assets to the REIT that
will generally enable it to qualify as a real estate investment trust
under the Code, the REIT will be able to continue to make distributions
to its stockholders without incurring the double taxation which would
be incurred by the Corporation.
- Maintain Public Market. The Managing General Partner has made listing
applications to list the common stock of both the Corporation and the
REIT on AMEX, thereby maintaining the public market that currently
exists for the NHC Units.
- Tax Reporting. The Managing General Partner believes that the
complexities of tax reporting associated with partnership investments
are regarded as unduly burdensome for most limited partners under
current conditions.
- Expanded Investor Base. By creating a real estate investment trust and
a corporation, instead of a passive income MLP, the Managing General
Partner believes that both entities will have a broader investor base,
which will include institutional and other investors who do not
typically invest in MLPs, including NHC, because of various tax and
administrative reasons.
Management also recognized and considered the following disadvantages to
the Plan of Restructure:
- No Dividends by the Corporation. The Corporation would likely retain
its earnings in order to maintain its growth plan and would not likely
pay dividends to its shareholders, at least initially. Any distribution
would be subject to double taxation.
- Restrictions on REIT's Business. NHC would need to include some
restrictions on the REIT in order to avoid conflicting with the
objectives of NHI.
After careful analysis of each of the possible structures, the Board of
Directors concluded, based on advice from investment advisors, accountants and
legal counsel, that the Plan of Restructure was the best alternative overall.
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NHC, the REIT and the Corporation will enter into a Plan of Restructure and
Agreement of Merger which provide for the Plan of Restructure described herein.
The following is a summary of certain provisions of the Plan of Restructure and
Agreement of Merger, however, such summary does not purport to be complete and
is subject to and qualified in its entirety by reference to all provisions of
the Plan of Restructure and Agreement of Merger which are attached hereto as
Annex A and B, respectively, and are incorporated herein by reference.
CERTAIN TRANSACTIONS PRECEDING THE DISTRIBUTION
Immediately prior to the Distribution, NHC will transfer to the REIT and
its subsidiaries, including the Operating Partnership, the Owned Healthcare
Facilities, the Notes, the Other Assets and the Assumed Liabilities in exchange
for a number of REIT Shares equal to the number of NHC Units (except for the OP
Units that will be distributed to National) outstanding immediately prior to the
Effective Time. In addition, the REIT will agree to issue additional REIT Shares
as required to be issued upon the exercise of current NHC options and conversion
of currently outstanding debentures. The REIT will be the sole general partner
of the Operating Partnership, which will then lease the Owned Healthcare
Facilities to the Corporation and the Corporation will enter into the REIT
Advisory Agreement with the REIT.
MANNER OF EFFECTING THE DISTRIBUTION AND MERGER
Subject to the approval of the Plan of Restructure by the Unitholders, the
REIT Shares issued in the Distribution will be mailed to the Unitholders as soon
as practicable after the Effective Time. Promptly after the Effective Time, the
REIT Shares will be delivered to SunTrust Bank, Atlanta which will act as the
distribution agent (the "Distribution Agent"). As soon as practicable
thereafter, the Distribution Agent will mail to each NHC Unitholder of record at
the Effective Time one REIT Share for every Unit.
Holders of NHC Units will not be required to pay any cash or
other consideration or to exchange their Units for the REIT
Shares they receive in the Distribution. The Distribution will
not change the number of NHC Units outstanding.
National Health Corporation, NHC's Administrative General Partner,
("National") will receive approximately 794,000 REIT Shares and 806,000 OP
Units, in connection with approximately 1,600,000 NHC Units in order for the
REIT to meet one of the requirements of a real estate investment trust. See
"Certain Transactions -- National."
At the Effective Time, each outstanding Unit will represent one Share of
the Corporation. New certificates will not be issued for the Shares until the
holder thereof subsequently sells, exchanges or surrenders the certificate to
the Corporation's transfer agent. In the event a Unitholder claims his
certificate representing his Units has been stolen, lost or destroyed, upon the
making of an affidavit of that fact by such Unitholder, the Corporation's Board
of Directors may direct a new certificate representing the Shares to be issued
in the place of such stolen, lost or destroyed certificate representing the
Units. When authorizing such issue of a new certificate, the Corporation's Board
of Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such stolen, lost or destroyed certificate or
legal representative to advertise the same in such manner as it shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise by reason of the issuance of a new
certificate.
CONDITIONS TO THE PLAN OF RESTRUCTURE
Certain lenders to NHC must consent to the transfer of the Owned Healthcare
Facilities, the Notes, the Other Assets and the Assumed Liabilities and the
Merger. Although NHC has no reason to believe that certain lenders will not
consent, and, in fact, have received certain oral indications that consents will
be given, in the event they do not, NHC may terminate the Plan of Restructure,
or NHC may pay down the debt to a level sufficient to obtain, or obviate the
need for, a lender's consent or attempt to find substitute lenders. There can be
no assurances that NHC can obtain the funds to pay down such debt or that there
will not be penalties and other costs associated with such payments.
With respect to certain other lenders from whom NHC will not seek consent,
see "Risk Factors -- The REIT -Lack of Consents; Acceleration of Certain
Maturities."
FEDERAL INCOME TAX ASPECTS OF THE PLAN OF RESTRUCTURE
For a discussion of the income tax aspects of the Plan of Restructure, see
"Federal Income Tax Considerations."
BUSINESSES OF THE REIT AND THE CORPORATION AFTER THE PLAN OF RESTRUCTURE
The Corporation intends to continue NHC's historical business of developing
and acquiring nursing homes, assisted living and retirement centers and also
managing such types of facilities for other owners. The Corporation will also
continue to operate home health agencies and provide related ancillary services
to its patients, residents and third parties. The REIT may from time to time
provide financing to the Corporation by either acquiring facilities and having
the Corporation manage or lease them or by providing first mortgage loans to the
Corporation in order to enable it to acquire, construct or expand facilities. In
such event, a special disinterested committee will be formed by the REIT to
negotiate the terms with the Corporation.
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<PAGE> 16
While managed by the Corporation the REIT intends to own, but not operate,
healthcare facilities, which shall be solely healthcare facilities operated by
the Corporation. However, the REIT Advisory Agreement provides that for that
period of time equal to the lesser of (i) the term of the REIT Advisory
Agreement and (ii) the Corporation being actively engaged as the investment
advisor for NHI, the REIT will not (without the prior approval of NHI) transact
business with any party, person, company or firm other than the Corporation. It
is the intent of the foregoing restriction that the REIT will not be actively or
passively engaged in the pursuit of additional investment opportunities, but
rather will focus upon its capacities as landlord and note holder of those
certain assets conveyed to it in the Plan of Restructure. The investment
policies of the REIT are explained in "Business -- The REIT -- Investment and
Other Policies of the REIT."
In connection with the REIT's assumption of, or taking property subject to,
the Assumed Liabilities, a Unitholder should be aware that a default by the REIT
under such debt could default certain of the Corporation's debt which the REIT
is not assuming. Similarly, the Corporation's default under certain of its
obligations could default the Assumed Liabilities. Although the REIT has agreed
to indemnify, defend and hold NHC and the Corporation harmless with respect to
all debt assumed by or which the REIT has agreed to pay in accordance with the
Plan of Restructure and agreed, that without the written consent of the
Corporation, the REIT will not cause or suffer any such debt to be defaulted or
otherwise breached, no assurance can be given that the REIT will not default on
such debt or will be able to pay any amounts due as a result of such
indemnification. In addition, although the Corporation has agreed to indemnify,
defend and hold the REIT harmless with respect to all debt and all obligations
of NHC except those specifically assumed by or which the REIT has agreed to pay
in accordance with the Plan of Restructure and the Corporation agreed, that
without the written consent of the REIT, the Corporation will not cause or
suffer any such debt to be defaulted or otherwise breached, no assurance can be
given that the Corporation will not default on such debt or will be able to pay
any amounts due as a result of such indemnification. Thus, either entity could
cause the other to incur substantial obligations or to lose certain of its
facilities through foreclosures. Creditors (whether contingent or absolute
liabilities) of NHC at the Effective Time could make a claim against either or
both the Corporation and the REIT and it is likely that they each would be
liable. Generally, any risk factors that applied to NHC at the time an investor
purchased his Units will continue to apply to the Corporation. For certain risks
associated with the REIT, see "Risk Factors -- The REIT", and for certain risks
associated with the Corporation, see "Risk Factors -- The Corporation."
NHC'S OUTSTANDING OPTIONS AND CONVERTIBLE DEBENTURES
All options and convertible debentures of NHC which grant rights to
subscribe for NHC Units exercisable or convertible after the Effective Time,
shall be deemed to grant the right to acquire an equal number of REIT Shares and
Shares as such right grants in NHC Units, except for the October 1997
convertible notes described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- The Corporation." The exercise
price for such options and receipt thereof shall be divided pro rata between
REIT and Corporation (and the pro rata distribution shall be equal to the ratio
that the closing price on the American Stock Exchange at the close of business
on the first trading day in 1998 of the REIT Shares and the Shares bear to each
other). The interest and principal and all other payments due under or
obligations due as a result of such convertible debentures is to be paid and
performed by the Corporation and if any of such debt is converted then the
Corporation shall provide written notification thereof to the REIT, and the REIT
shall issue REIT Shares equal to the number of Shares issued by Corporation upon
such conversion; and the REIT agrees, at the expense of the Corporation, to
cause to be filed any registration statement relating to REIT Shares required by
agreements binding on the Corporation or needed as determined in the sole
discretion of the Corporation.
EFFECT ON NHC UNITS
Following the Plan of Restructure, an NHC Unitholder will own a number of
REIT Shares and Shares equal to the number of Units of such Unitholder (except
for the OP Units issued to National described in "Certain Transactions
- -- National"). The following is a brief description of certain inherent
differences between NHC Units, REIT Shares and Shares.
CASH DISTRIBUTIONS
NHC Units. NHC presently makes quarterly cash distributions equal to
approximately sixty percent (60%) of its taxable income. If NHC were to remain a
partnership but be taxed as a corporation, its investors' after-tax return on
the dividends would be significantly reduced because of the double tax on
corporate earnings distributed as dividends.
REIT Shares. Distributions are declared from funds legally available
therefor in the discretion of the Board of Directors. To qualify for taxation as
a real estate investment trust, however, the REIT must generally distribute at
least 95% of its taxable income. Initially, it is anticipated that approximately
120% of the REIT's taxable income will be paid as a dividend. See "Risk Factors
- -- Risks Associated with Forward Looking Statements."
Shares. Dividends may be declared from funds legally available therefor
in the discretion of the Board of Directors. At least initially, the Corporation
anticipates retaining its earnings for operation and expansion of its business
and does not anticipate paying dividends.
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<PAGE> 17
LIQUIDITY AND MARKETABILITY
NHC Units. NHC Units are freely transferable and are traded on AMEX.
REIT Shares. The REIT Shares will be freely transferable and
application has been made to list the REIT Shares on AMEX. See "Listing and
Trading of Shares and REIT Shares" below.
Shares. The Shares will be freely transferable, and application has
been made to list the Shares on AMEX. See "Listing and Trading of Shares and
REIT Shares" below.
CONTINUITY OF EXISTENCE
NHC. NHC's Partnership Agreement provides that it will terminate in
2085. However, pursuant to the Plan of Restructure, NHC will merge with and into
the Corporation and thereafter cease to exist as a limited partnership.
REIT. The REIT will have perpetual existence.
Corporation. The Corporation will have perpetual existence.
TAXATION
For a discussion of certain differences in the tax treatment of REIT
Shares and Shares, see "Federal Income Tax Considerations -- Certain Differences
Between the Ownership of Units and REIT Shares."
PERSONAL LIABILITY
NHC Units. A limited partner's liability for the obligations of NHC is
limited to his total agreed upon investment in NHC and his share of NHC's assets
and undistributed profits if he does not participate in the control of NHC's
business.
REIT Shares. REIT Shares of common stock are fully paid and
non-assessable. REIT shareholders generally do not have personal liability for
obligations of the REIT.
Shares. Shares of common stock are fully paid and non-assessable.
Shareholders generally do not have personal liability for obligations of the
Corporation.
VOTING AND LIQUIDATION RIGHTS
NHC Units. Management of NHC is vested in the Managing General Partner,
and Limited Partners have limited voting rights on matters affecting the
partnership. Certain matters require the prior approval of either (i) the
holders of more than 50% of the Units together with the unanimous approval of
the Board of the Managing General Partner or (ii) holders of 70% or more of the
Units. Holders of Units are entitled to share ratably in 99% of the proceeds
resulting from liquidation of partnership assets (subsequent to the payment of
positive capital accounts), or in limited circumstances to receive interests in
those assets, on liquidation of NHC.
REIT Shares. Each REIT Share entitles its holder to cast one vote on
matters as to which voting is permitted or required, including the election of
Directors. Certain matters require the prior approval of either (i) the holders
of more than 50% of the REIT Shares together with the majority approval of the
REIT's disinterested Board of Directors or (ii) the holders of 70% or more of
the REIT Shares. Each REIT Share entitles its holder to share ratably in any
assets available for distribution to holders of REIT Shares on liquidation of
the REIT. A shareholder has a right to inspect the books and records of the
REIT, including stock transfer records, upon notice and during reasonable
business hours.
Shares. Each Share entitles its holder to cast one vote on matters as
to which voting is permitted or required, including the election of Directors.
Certain matters require the prior approval of either (i) the holders of more
than 50% of the Shares together with the unanimous approval of the Corporation's
Board of Directors or (ii) the holders of 70% or more of the Shares. Each Share
entitles its holder to share ratably in any assets available for distribution to
holders of Shares on liquidation of the Corporation. A shareholder has a right
to inspect the books and records of the Corporation including stock transfer
records upon notice and during reasonable business hours. See "Description of
Securities."
REPORTING REQUIREMENTS
NHC Units. NHC is subject to the reporting requirements of the Exchange
Act and files annual and quarterly and other periodic reports thereunder.
REIT Shares. The REIT will also be subject to the reporting
requirements of the Exchange Act and will file quarterly and other periodic
reports thereunder. The REIT will be required to hold annual meetings of its
shareholders.
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Shares. The Corporation will also be subject to the reporting
requirements of the Exchange Act and will file annual and quarterly and other
periodic reports thereunder. The Corporation will be required to hold annual
meetings of its shareholders.
TAX BASIS
NHC Units. A holder's tax basis in each Unit generally will be
allocated between each Share and REIT Share distributed with respect to or in
exchange for, such Unit, which will generally be allocated between the Share
and the REIT Share based upon the relative adjusted bases to NHC of the Share
and the REIT Share.
REIT Shares. The REIT Shares delivered in the Distribution generally
will have an initial tax basis equal to such Unitholder's basis in his Units
minus the tax basis in such shareholder's Shares. This tax basis will be reduced
if and to the extent that the REIT's dividends in any one year exceed the REIT's
current and accumulated earnings and profits. Any reduction in such basis will
be reported on the Form 1099 distributed annually to each REIT Shareholder.
Shares. The Shares issued in the Merger will have an initial tax basis
equal to such shareholder's tax basis in his NHC Unites minus the tax basis in
such holder's REIT Shares. This tax basis will be reduced if and to the extent
that the Corporation's dividends in any one year exceed the Corporation's
current and accumulated earnings and profits. Any reduction in such basis will
be reported on the Form 1099 distributed annually to each Shareholder. See
"Federal Income Tax Consideration -- The REIT -- Other Tax Consequences."
OTHER DIFFERENCES
For a description of certain other differences between NHC, the REIT and
the Corporation which relate to differences between owning a Unit, a REIT Share
and a Share, see "Description of Securities".
LISTING AND TRADING OF SHARES AND REIT SHARES
No trading market for the Shares or the REIT Shares currently exists
because the Corporation and the REIT are wholly-owned subsidiaries of NHC. The
widespread ownership of the Shares and REIT Shares after the Effective Time of
the Plan of Restructure should assist in the establishment of a trading market,
but there can be no assurance as to the extent to which a market for Shares or
REIT Shares will develop or the prices at which Shares or REIT Shares may trade
after the Effective Time of the Plan of Restructure.
The market price and liquidity of Shares may be affected by many factors,
including, among others, the results of the Corporation's operations, the
economic condition and investor perception of the industry in which the
Corporation operates and the Corporation's dividend policy and general economic
and market conditions. Until the Shares are fully distributed and an orderly
market develops, the prices at which trading occurs may fluctuate significantly.
The market price and liquidity of Shares may also be affected by certain
provisions of the Corporation's Articles of Incorporation and By-Laws provided
for under the Delaware General Corporation Law which may also have antitakeover
effects.
The market price and liquidity of REIT Shares may be affected by many
factors, including, among others, the results of the REIT's operations, the
restrictions on the REIT's ability to do business with entities other than the
Corporation, the results of the Corporation's operations, the economic condition
and investor perception of the industry in which the REIT operates, the REIT's
dividend policy and investment policy and general economic and market
conditions. Since the REIT is restricted to doing business only with the
Corporation generally, then the operational stability of the Corporation may
greatly impact the financial stability of the REIT. Until the REIT Shares are
fully distributed and an orderly market develops, the prices at which trading
occurs may fluctuate significantly. The market price and liquidity of REIT
Shares may also be affected by certain provisions of the REIT's Articles of
Incorporation and By-Laws provided for under the Maryland General Corporation
Law or designed to enhance the REIT's ability to meet the requirements of a REIT
but that may also have antitakeover effects.
The Corporation and the REIT have each made application to list the Shares
and the REIT Shares, respectively, on AMEX.
Shares and REIT Shares will be freely transferable, except for Shares or
REIT Shares received by persons who may be deemed to be affiliates of the
Corporation, the REIT or NHC under the Securities Act or as otherwise required
to ensure the REIT satisfies certain ownership tests to maintain its
qualification as a real estate investment trust. Persons who may be deemed to be
affiliates of the Corporation, the REIT or NHC after the Distribution generally
include individuals or entities that control, are controlled by, or are under
common control with, the Corporation, the REIT or NHC, and may include certain
officers and directors as well as principal stockholders and/or unitholders, if
any, of the Corporation, the REIT or NHC. Persons who are affiliates will be
permitted to sell their Shares or REIT Shares only pursuant to an effective
registration statement under the Securities Act or pursuant to an exemption from
such registration, including, among others, Rule 144 under the Securities Act.
The REIT may also disallow the sale of REIT Shares to a person who, after
acquiring ownership of such REIT Shares, would cause the REIT to be disqualified
as a real estate investment trust. See "Description of Securities -- Shares of
the REIT -- REIT Provisions."
TERMINATION
NHC, Inc., the Managing General Partner of NHC, if in its sole discretion
it deems that it is in the best interest of the Unitholders, may determine not
to proceed with the Plan of Restructure at any time prior to the Effective Time.
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RISK FACTORS
Investment in the Shares and REIT Shares involves various risks. In
addition to general investment risks and those factors set forth elsewhere in
this Proxy Statement/Prospectus, Unitholders should consider the following
factors before making a decision to hold or dispose of the Shares or REIT
Shares.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS.
This Proxy Statement/Prospectus contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, the discussions of the Corporation's and the
REIT's expectations concerning their future profitability and distributions and
the Corporation's and the REIT's operating and growth strategy, including
possible strategic acquisitions. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, the factors set forth under the caption "Risk Factors" in this
Prospectus. Although the Corporation and the REIT believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, based
on information available on the date hereof, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included in this Proxy Statement/Prospectus will prove to be
accurate. Factors that could cause actual results to differ materially include,
but are not limited to, the risk factors discussed below as well as changing
economic and market conditions, changes in tax laws, and other factors discussed
in Managements Discussion and Analysis of Results of Operation and Financial
Condition. Moreover, new risk factors may emerge from time to time and it is not
possible for management to predict all such risks factors, nor can it assess the
impact of all such risks on the business of the REIT or the Corporation or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by NHC, the Corporation, the REIT or any other
person that the objectives and plans of the Corporation and the REIT will be
achieved.
THE REIT
NEWLY ORGANIZED COMPANY
The REIT was recently organized and has no stand-alone operating history.
There has been no market for the REIT Shares and no assurance can be given that
an active trading market will develop.
REIT'S RELIANCE ON THE CORPORATION
The Owned Healthcare Facilities initially consists of 17 skilled nursing
centers, six assisted living facilities and one retirement center each of which
will be leased to the Corporation. Thus, the financial returns to the REIT and
the condition of the REIT are dependent upon the successful operation of the
Owned Healthcare Facilities by the Corporation. Such facilities will be
transferred to the REIT subject to certain debt. In addition, the Notes are
secured by mortgages on additional nursing homes that are managed by the
Corporation and have been pledged as collateral for part of the Assumed
Liabilities. Thus, a default by the Corporation under its debt instruments,
including the Assumed Liabilities, could cause the REIT to lose its assets
through foreclosure or other means or be called upon to pay the same. Such a
loss of assets could also be triggered by the Corporation's failure to fulfill
its obligations in respect of debt, the holders of which may not have consented
to the Plan of Restructure. Accordingly, the holders of such debt may have
rights to the assets of the REIT. The REIT will not have significantly
diversified its investment portfolio to include assets unrelated to the
Corporation's obligations.
Payments of rent under the Leases comprise a substantial portion of the
REIT's net income (interest payments on the Notes and investment income comprise
the remainder of such net income). Certain of the Owned Healthcare Facilities do
not generate sufficient cash flow to the Corporation to pay the entire base rent
due under the Lease of such facilities.
In the event the Corporation voluntarily or involuntarily defaults under
the terms of a Lease, the REIT will not be able to operate the facility and,
therefore, may need to find another healthcare provider willing to lease and
operate the facility, and may have to negotiate new lease terms, including
rentals due, which terms may be less favorable than those of the defaulted
Lease. In addition, NHC is only contributing the real estate to the REIT. All of
the equipment, furnishings and personal property will belong to the Corporation,
and in the event a Lease is terminated for any reason, either the REIT or a new
tenant will have to replace all equipment and furnishings. The REIT has no
healthcare licenses nor any employees and it must have both to operate a health
care facility. Any such default under or termination of a Lease could result in
a reduction in revenue derived from the affected Lease and defaults under
several Leases at the same time could have a material adverse effect on the
REIT's results of operations.
The REIT will be advised by the Corporation, under the supervision of the
REIT's Board of Directors, which is ultimately responsible for the management of
the REIT. The REIT will have no employees and will be managed by the
Corporation. The REIT Advisory Agreement can be terminated within 90 days;
however, the REIT has no other possible managers under consideration. In
addition, all services provided by the Corporation will actually be by
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employees of National since the Corporation has no employees. Investment
decisions of the REIT other transactions, including those with the Corporation,
must be approved by a majority of the Directors.
The Corporation has agreed to indemnify the REIT for certain liabilities
which may be incurred by the REIT in connection with the Owned Healthcare
Facilities, the Notes, and the Assumed Liabilities. Such indemnities relate to
matters including, without limitation, certain financial obligations,
acceleration of debt due to failure to obtain required consents, environmental
liabilities and title matters. There can be no assurance that, at the time the
REIT may seek any such indemnity, the Corporation will be financially able to
meet its indemnity obligations, which obligations are unsecured.
Since the REIT is dependent on the Corporation, all the risk factors
starting on page 19 relating to the Corporation are also applicable to the REIT.
CONFLICTS OF INTEREST
Because all of the initial directors and all of the initial officers of the
REIT occupy positions with the Corporation, there will be conflicts of interest
in their duties to the Corporation's shareholders and the REIT's shareholders.
Although management believes the terms of the Leases and the REIT Advisory
Agreement are fair and reasonable, none of the terms of the Leases or the REIT
Advisory Agreement were negotiated on an arms' length basis. Since the
Corporation will be the REIT's investment advisor, it will have a conflict of
interest in assessing the quality of the management services, determining if the
REIT Advisory Agreement should be terminated, determining the price to be paid
by the REIT for additional assets which may be purchased from the Corporation
and the terms of any leases to be entered into between the REIT and the
Corporation. Further, the REIT is likely to purchase additional equity interests
in real estate from, or make additional mortgage loans to, the Corporation.
Pursuant to the REIT Advisory Agreement, the REIT has agreed to only do
business with the Corporation and not to compete with NHI as long as both the
REIT Advisory Agreement and the NHI Advisory Agreement (as hereinafter defined)
are obligations of the Corporation. Therefore, there may be situations where the
REIT has cash available (such as from prepayments, insurance proceeds or
condemnation settlements or receipt of normal payments on principal) at a time
when the Corporation does not have a need for additional funds. In these
situations, the REIT may not be able to invest such cash in an efficient manner.
All but three of the directors of the REIT, and all of the executive
officers of the REIT are also either directors or executive officers of NHI, a
real estate investment trust that is also advised by the Corporation. The
overlap of directors and executive officers may cause a conflict in the
determination of the long term goals of the REIT, such as whether to terminate
the REIT Advisory Agreement and seek to expand its portfolio beyond the
properties leased to the Corporation, whether the REIT should consider a
potential sale of all or substantially all of its assets or a potential merger
with another real estate investment trust other than NHI. These conflicts could
have an adverse effect on the long term value of the REIT's common stock.
There may from time to time be disputes between the REIT as lessor and the
Corporation as lessee with respect to maintenance, repairs, defaults, and
similar items. However, since all board members of the REIT are also board
members of the Corporation and the Corporation manages the REIT, it is uncertain
whether potential disputes will be recognized as conflicts or that the REIT will
recognize a need for independent persons to determine how to resolve such
disputes. These disputes will be settled by binding arbitration.
Prior to their acquisition by the REIT, the Owned Healthcare Facilities
will have been owned and operated by NHC. The REIT's book and tax basis in the
Owned Healthcare Facilities generally will be the same as NHC's basis in the
properties. The REIT will not obtain independent appraisals of the Owned
Healthcare Facilities.
In connection with the Distribution, National, who is the Administrative
General Partner of NHC, will receive approximately 794,000 REIT Shares and
approximately 806,000 OP Units. The primary reason for the different treatment
of National is to prevent National from receiving Excess Shares and to help
ensure the qualification of the REIT as a real estate investment trust. As a
result, National will be treated differently than all of the other Unitholders.
See "Description of Securities -- Operating Partnership Agreement" for a
description of the rights of the holder of an OP Unit.
Counsel to the REIT also represents the Corporation on certain matters. In
the course of such representation circumstances may arise in which the REIT and
the Corporation have conflicting interests, in which event separate counsel may
be retained to represent one or both of the parties.
LEVERAGING
The REIT will initially have debt representing 42% of its total
capitalization, primarily because NHC's contribution of the Owned Healthcare
Facilities to the REIT will result in the REIT's accounting for the Owned
Healthcare Facilities at the same book value as NHC's depreciated cost, and
because such contribution is subject to the Assumed Liabilities. All of the
REIT's balance sheet debt will be mortgage indebtedness. If the REIT is unable
to meet its obligations under the various mortgage loans and guarantees, and if
there are foreclosures or conveyances in lieu of foreclosure, the REIT could
lose its interest in the Notes and its equity investment in the affected Owned
Healthcare Facilities.
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TITLE MATTERS
NHC intends to transfer some of the Owned Healthcare Facilities to the REIT
by means of "quitclaim" deeds. Such deeds contain no warranties of title,
although NHC has warranted good title to the REIT to the extent described below.
The REIT has not obtained policies insuring title to the Owned Healthcare
Facilities. As a result, in the event of a title dispute, the REIT will have
recourse solely to the Corporation (which after the Merger will be the successor
to the obligations of NHC). With respect to any title problem or dispute, the
Corporation has agreed to indemnify, defend and hold the REIT harmless to the
maximum extent the Corporation has a claim against a predecessor-in-title or a
title insurance company, but not otherwise. The REIT has no title insurance and
could suffer significant losses if a title claim does not give rise to a claim
against the Corporation under its limited indemnity described in the foregoing
sentence. In addition, certain of the Owned Healthcare Facilities will be leased
by NHC to the REIT pursuant to a 50 year lease with the REIT to have a purchase
option for a nominal purchase price.
ENVIRONMENTAL MATTERS
The REIT will become the fee simple owner of fifteen of the Owned
Healthcare Facilities and will have the right to purchase the remaining nine for
a nominal purchase price. Pursuant to the terms of the Leases, the REIT does not
have control over the operational activities of the Corporation, nor does it
monitor the Corporation with respect to environmental matters. Under various
federal, state and local environmental laws, ordinances and regulations, an
owner of real property (such as the REIT) may be liable in certain circumstances
for the costs of removal or remediation of certain hazardous or toxic substances
at, under or disposed of in connection with such property, as well as certain
other potential costs relating to hazardous or toxic substances (including
government fines and injuries to persons and adjacent property). Such laws often
impose such liability without regard to whether the owner knew or, or was
responsible for, the presence or disposal of such substances and may be imposed
on the owner in connection with the activities of an operator of the property.
The cost of any required remediation, removal, fines or personal or property
damages and the owner's liability therefore could exceed the value of the
property and/or the aggregate assets of the owner. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral which, in turn, would
reduce the REIT's revenues and ability to make distributions. The Plan of
Restructure and the REIT Master Agreement provide that the Corporation will
indemnify the REIT for any environmental matters arising on or after January 1,
1998, but the REIT is liable for any such matters arising before such date.
LACK OF CONSENTS; ACCELERATION OF CERTAIN MATURITIES
The REIT is assuming approximately $105.9 million in Assumed Liabilities.
In addition, the Corporation will retain approximately $112.6 in additional
debt. The consent of such lenders is a requirement to the transfer of the
underlying secured properties from the original obligor thereunder to any
successor obligor, and the transfer of the Owned Healthcare Facilities and Notes
to the REIT. Although NHC, the REIT and the Corporation believe that such
consents can be obtained on reasonable terms in a timely manner with respect to
the transfer of the Assumed Liabilities from NHC to the REIT or the transfer of
the Owned Healthcare Facilities and the Notes to the REIT; no assurance can be
made that such consents will be received. If the lenders were to assert their
rights, that is that the transfer of the Assumed Liabilities or the Owned
Healthcare Facilities from NHC to the REIT constituted a default under the
relevant loan or guarantee documents, then such lenders could demand that the
Corporation and the REIT perform under the loan agreements and pay the full
amount of such debt plus any prepayment penalties and costs. There can be no
assurance that the REIT or the Corporation would be able to repay such debt or
replace such debt on the same or similar terms, if at all. Failing to timely
repay such amounts could cross-default other loans.
In addition, the Plan of Restructure may require the consent of various
third parties in connection with the Notes or the Other Assets, which consents
are not being sought. For example, all of the Notes being transferred to the
REIT are owed by third parties for loans made relating to facilities managed by
NHC. In the event a dispute arises with respect to the management contract, such
third party may cease to make payments under the Notes and attempt to offset any
damages claimed by such third party against NHC against amounts owed to the REIT
pursuant to the Notes. Such offsets may be allowed if the third party has not
consented to the transfer of the Notes. In addition, since the REIT and the
Corporation both resulted from NHC, any existing NHC creditor (whether
contingent or absolute) may be able to reach the assets of the REIT for any
claim such creditor may have against NHC.
OUTSTANDING NHC OPTIONS AND CONVERTIBLE DEBENTURES
NHC currently has outstanding Options and 6% convertible debentures. The
indenture which governs the debentures and the Unit Option Plan do not
contemplate a restructure of NHC such as provided in the Plan of Restructure.
NHC's management has reviewed the indenture and Unit Option Plan and determined
that the indenture and Unit Option Plan provide that the debentures and Options
will be convertible into a number of Shares and REIT Shares equal to the number
of NHC Units, the debentures and Options are convertible into as of the
Effective Time. The indenture and Unit Option Plan may be subject to different
interpretations and there can be no assurance that holders of the debentures or
Options will not claim that they are entitled to different treatment than is
provided in the Plan of Restructure. If such a dispute should arise, there can
be no assurance how a court or other authority would interpret the indenture or
Unit Option Plan.
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INVOLVEMENT WITH FLORIDA CONVALESCENT CENTERS, INC.
NHC has outstanding loans of approximately $75.8 million and has guaranteed
approximately $36.5 million in loans made or letters of credit issued by third
parties to or for the account of Florida Convalescent Centers, Inc., a Florida
corporation ("FCC"), certain of which loans and letters of credit are guaranteed
by such corporation's primary shareholder, James McCarver, a Florida resident.
The REIT will assume NHC's position as lender. The default by such corporation
or individual, or the bankruptcy or other financial difficulty of either of
them, could result in the inability of such corporation or individual to pay its
obligations to the REIT and the Corporation, and could result in the REIT's and
the Corporation's having to make payments under their guarantees. In addition,
NHC and FCC are currently involved in a lawsuit concerning the management
agreements pursuant to which NHC manages the FCC facilities. The FCC management
agreements, as well as the lawsuit, will be maintained by the Corporation.
However, there can be no assurance that FCC will not include the payment of the
Notes in the lawsuit. Although FCC is current on its notes, no assurance can be
given that FCC will not cease making payments and attempt to set off any alleged
damages. See "Business -- The Corporation -- Legal Proceedings," and " -- The
REIT -- The Notes."
REAL ESTATE INVESTMENT RISKS
The Owned Healthcare Facilities and any subsequently acquired properties
will be subject to various real estate related risks. The acquisition of
additional properties may be subject to the ability of the REIT to borrow
amounts sufficient to enable the REIT to pay the purchase price therefor. There
can be no assurance that any such acquisition will not be made on terms less
favorable than the terms for the Owned Healthcare Facilities and the Notes.
Further, there can be no assurance that the value of any property acquired by
the REIT will appreciate or that the value of any property securing the REIT's
mortgage loans will not depreciate.
There can be no assurance that rates payable by the Corporation under the
Leases would be paid by an independent lessee. Therefore, in the event the
Corporation defaults on or terminates a Lease prior to its expiration, or in
the event that a Lease expires, there can be no assurance that a substitute
lessee could be found nor that such a lessee, if found, would pay the same rent
set forth in the relevant Leases.
Additional risks of investing in real estate are the possibilities that the
Leases will not generate income sufficient to meet operating expenses, will
generate income and capital appreciation, if any, at rates lower than those
anticipated or will yield returns lower than those available through investment
in comparable real estate or other investments. Income from properties and
yields from investments in such properties may be affected by many factors,
including changes in governmental regulation (such as zoning laws), general or
local economic conditions (such as fluctuations in interest rates and employment
conditions), the available local supply of and demand for improved real estate,
a reduction in rental income as the result of the inability to maintain
occupancy levels, natural disasters (such as earthquakes and floods) or similar
factors. Due to the illiquid nature of real estate investments, the REIT would
have difficulty in altering its investment portfolio to respond to changes in
such factors.
It is the intention of the REIT to secure, or to require the Corporation to
secure, adequate comprehensive property and liability insurance. Certain risks
may, however, be uninsurable or not economically insurable and there can be no
assurance that the REIT will have adequate funds to cover all contingencies.
Should such an uninsurable loss occur, the REIT could lose both its invested
capital, including its equity interests, and its anticipated profits relating to
such property.
Any lease arrangement, such as the Leases, creates the possibility that a
tenant may either default on the lease or fail to exercise an option to renew
the lease and in such event, the REIT may be unable to lease such property to
another tenant or, even if it could, such lease may be on less favorable terms
than those of the original lease. There can be no assurance, however, that the
Corporation will exercise its options to renew the Leases upon the expiration of
the initial terms or that, if such failure to renew were to occur, the REIT
could lease the property to others on favorable terms. In such an instance, the
REIT would continue to be responsible for payment of any indebtedness it had
incurred with respect to such property.
Certain local real property tax assessors may seek to reassess certain of
the Owned Healthcare Facilities as a result of the Plan of Restructure and the
transfer of interests to occur thereby. Further, there can be no assurance that
local real property tax assessors will not seek to reassess the Owned Healthcare
Facilities in the future. In the event any reassessment would be detrimental to
the REIT, it would vigorously oppose any such reassessment; however, no
assurance can be given that this opposition would succeed.
CERTAIN RESTRICTIONS ON TRANSFER OF REIT SHARES; BUSINESS COMBINATIONS
Provisions of the Articles of Incorporation (the "REIT Charter") of the
REIT, primarily intended to enable the REIT to maintain its status as a real
estate investment trust, authorize the REIT (i) to refuse to transfer REIT
Shares to, or prohibit exercise of rights by, any person who as a result would
beneficially own, directly or indirectly by attribution, REIT Shares in excess
of 9.8% of the outstanding stock of the REIT ("Excess Stock") or any person
whose accumulation of such stock would, in the opinion of the Board of
Directors, jeopardize the status of the REIT as a real estate investment trust
including as a result of a violation of the "related party tenant rules" and
(ii) to redeem Excess Stock, the accumulation of which would jeopardize the
status of the REIT as a real estate investment trust. In addition, the REIT
Charter prevents a shareholder from owning at any time, directly or indirectly
by attribution, more than 9.8%.
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If these transfer or ownership restrictions are declared to be void as a matter
of law or are violated by any person, common stock of the REIT acquired in
excess of these limits shall be deemed to have been acquired by and to be held
on behalf of the REIT and, as the equivalent of treasury shares for such
purpose, shall not be considered to be outstanding for quorum or voting purposes
and shall not be entitled to receive dividends.
The REIT will set forth in its Forms 10-Q and Forms 10-K filed under the
Exchange Act the percentage limitation on share ownership applicable to the
related period.
For the REIT to qualify as a real estate investment trust in any taxable
year (other than the first year for which the REIT elects to be taxed as a
REIT), no more than 50% of its outstanding REIT Shares may be owned, directly or
indirectly by attribution, by five or fewer individuals (which for this purpose
includes pension funds and certain other tax exempt entities) at any time during
the second half of the REIT's taxable year. In addition, the REIT Shares must be
owned by 100 or more persons during at least 335 days of a taxable year of
twelve months or during a proportionate part of a short taxable year. Further,
in all taxable years a large percentage (at least 75% and more likely 95%) of
the REIT's income must generally be derived from lessees in which the REIT does
not own, directly or indirectly by attribution, a 10% or greater interest. The
REIT would be generally deemed to own that percentage interest in a lessee
(including the Corporation) owned by a shareholder of the REIT who owned,
directly or indirectly by attribution, 10% or more of the Shares. See "Federal
Income Tax Considerations -- The REIT -- Taxation as a REIT -- Requirements for
Qualification," "-- Tax and Accounting Income May Vary", and " -- Real Estate
Investment Trust -- Income Tests".
The limitations on ownership of REIT Shares set forth in the REIT Charter
are intended to reduce the possibility of the REIT's failing to meet the
percentage ownership requirements for qualification as a real estate investment
trust. However, such provisions may inhibit market activity with respect to the
REIT Shares and the resulting opportunity for Shareholders to receive a premium
for their REIT Shares that might otherwise exist if an individual were
attempting to assemble a block of REIT Shares in excess of the applicable
percentage limitation. Also, there can be no assurance that such provisions will
in fact prevent the REIT from failing to meet such ownership requirements.
Accordingly, the REIT Charter restricts stock ownership of the REIT directly or
indirectly by attribution to 9.8%.
Such provisions would also make the REIT an unsuitable investment for any
person seeking to obtain ownership of more than 9.8% of the outstanding voting
equity of the REIT. Although the REIT does not anticipate that it will redeem or
otherwise reduce the number of outstanding REIT Shares except for Excess Shares,
if such number of REIT Shares were reduced, the percentage limitation might be
exceeded by a shareholder without any action on his part.
In addition, certain provisions of Maryland law regarding business
combinations (as defined therein) require approval of the holders of 80% of the
outstanding voting shares of the REIT. See "Certain Restrictions on Transfer of
REIT Shares; Business Combinations."
FEDERAL INCOME TAX RISKS
The REIT was organized and intends to conduct its operations so as to
qualify for federal income taxation as a real estate investment trust under
Sections 856 through 860 of the Code. See "Federal Income Tax Considerations --
The REIT -- Taxation as a Real Estate Investment Trust." The REIT has not
sought, nor will it seek, a ruling from the Internal Revenue Service (the "IRS")
with respect to its qualification as a real estate investment trust.
ADVERSE CONSEQUENCES OF THE REIT'S FAILURE TO QUALIFY AS A REAL ESTATE
INVESTMENT TRUST
The REIT intends to operate so as to qualify as a real estate investment
trust under the Code, commencing with its taxable year ending December 31, 1998.
Although management believes that the REIT will be organized and will operate in
such a manner, no assurance can be given that the REIT will be organized or will
be able to operate in a manner so as to qualify or remain so qualified.
Qualification as a real estate investment trust involves the satisfaction of
numerous requirements (some on an annual and quarterly basis) established under
highly technical and complex Code provisions for which there are only limited
judicial and administrative interpretations, and involves the determination of
various factual matters and circumstances not entirely within the REIT's
control. For example, in order to qualify as a real estate investment trust, at
least 95% of the REIT's gross income in any year must be derived from qualifying
sources, and the REIT must pay distributions to shareholders aggregating
annually at least 95% of its REIT taxable income (excluding capital gains). The
complexity of these provisions and of the applicable treasury regulations that
have been promulgated under the Code is greater in the case of a real estate
investment trust, such as the REIT, that holds its assets in partnership form.
No assurance can be given that legislation, new regulation administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a real estate investment trust or the federal
income tax consequences of such qualification. The REIT, however, is not aware
of any pending tax legislation that would adversely affect the REIT's ability to
operate as a real estate investment trust.
Goodwin, Proctor & Hoar LLP, as special REIT tax counsel to the REIT, has
rendered an opinion to the effect that the REIT is organized in conformity with
the requirements for qualification as a real estate investment trust and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a real estate investment trust. See "Federal
Income Tax Considerations -- The REIT -- Taxation as a Real Estate Investment
Trust." Such legal opinion, however, is based on various assumptions and factual
representations by the REIT regarding the REIT's ability to meet the various
requirements for qualification as a real estate investment trust, and no
assurance can
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be given that actual operating results will meet these requirements. Such legal
opinion is not binding on the IRS or any court. Moreover, the REIT's
qualification and taxation as a real estate investment trust will depend upon
the REIT's ability to meet (through actual annual operating results,
distribution levels and diversity of stock ownership) the various qualification
tests imposed under the Code, the result of which will not be reviewed by
special REIT tax counsel to the REIT.
If the REIT were to fail to qualify as a real estate investment trust in
any taxable year, the REIT would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Moreover, unless entitled to relief under certain statutory provisions,
the REIT also would be disqualified from treatment as a real estate investment
trust for the four taxable years following the year during which qualification
was lost. This treatment would significantly reduce the net earnings of the REIT
available for investment or distribution to shareholders because of the
additional tax liability to the REIT for the years involved. In addition,
distributions to shareholders would no longer be required to be made. See
"Federal Income Tax Considerations -- The REIT -- Taxation as a Real Estate
Investment Trust."
In the Plan of Restructure, National will receive approximately 794,000
REIT Shares and approximately 806,000 OP Units in order to permit the REIT to
comply with the various stock ownership rules referred to above.
In order to minimize the chances that the REIT will violate certain stock
ownership rules (see "Federal Income Tax Consideration -- The REIT -- Taxation
as a Real Estate Investment Trust -- Asset Test" and " -- Income Tests"), the
Directors of the REIT are given the power to redeem or prohibit the transfer of
REIT Shares and the power to prohibit the distribution of the REIT Shares to any
Unitholder if such transfer or distribution would cause the REIT to violate any
stock ownership or source of income rule. Shareholders are cautioned, however,
that because broad attribution rules are used in determining stock ownership and
a large percentage of NHC Units is held by nominees in "street name," the REIT
may be unaware of a violation of these stock ownership and source of income
rules and therefore the qualification of the REIT as a real estate investment
trust may be inadvertently lost. See also "Certain Considerations -- Certain
Restrictions on the Transfer of Shares; Business Combinations" for a further
discussion of additional requirements imposed by the Board of Directors of the
REIT as a result of such attribution rules.
If the IRS successfully challenged the status of the REIT as the owner of
the Owned Healthcare Facilities and the status of the Leases as true leases, the
REIT would not be entitled to claim depreciation with respect to any of the
Owned Healthcare Facilities. As a result, the REIT's taxable income might
increase and the REIT might fail to meet the 95% Distribution Requirement
necessary to be taxed as a real estate investment trust, or if such requirement
were met, then a larger percentage of distributions from the REIT would
constitute ordinary dividend income, instead of a partial return of capital to
the REIT's shareholders, or the REIT would be subject to an excise tax. REIT
Counsel has rendered an opinion that it is more likely than not that the REIT
will be treated as the owner of the Owned Healthcare Facilities and that the
Leases will be treated as true leases for federal income tax purposes. This
opinion is not binding on the IRS and no assurance can be given that the IRS
will not successfully challenge the status of the REIT as the owner of the Owned
Healthcare Facilities or the status of the Leases as true leases. The REIT has
not sought, and will not seek, a ruling from the IRS with respect to its status
as a real estate investment trust or the status of the Leases. See "Federal
Income Tax Considerations -- Taxation as a Real Estate Investment Trust --
Income Tests."
DEPENDENCE ON MANAGEMENT AND SKILLED PERSONNEL.
The REIT believes it depends substantially on active involvement of its
senior managers, including its executive officers (none of which are employees
of the REIT). See "Relationship Between the REIT and the Corporation After the
Restructure -- Advisory, Administrative Services and Facilities Agreement." The
loss of one or more of such officers could have a material adverse effect on the
REIT's business and future operations. The REIT does not maintain key-man
insurance on the lives of its executive officers. The REIT does not have
employment agreements with its executive officers. See "Management -- The REIT."
The agreement by which such persons are made available to the REIT is between
the Corporation and National and is outside the control of the REIT. This
agreement could be terminated between the Corporation and National without any
involvement of the REIT. See "Certain Transactions -- National."
NO PUBLIC MARKET.
There has been no public market for the REIT Shares and there can be no
assurance that an active trading market will develop or be sustained following
the Plan of Restructure. The REIT has applied for listing the REIT Shares on
AMEX. No assurance can be given as to the liquidity of the trading market for
the REIT Shares or that an active trading market for the REIT Shares will
develop. If an active market does not develop, the market price and liquidity of
the REIT Shares may be adversely affected.
ANTI-TAKEOVER CONSIDERATIONS.
The REIT is authorized to issue up to 10,000,000 shares of preferred stock,
the rights of which may be fixed by the Board of Directors without shareholder
approval. The REIT's Charter provides for the classification of its Board of
Directors into three classes, with each class of directors serving staggered
terms of three years. The REIT's Charter requires the approval of 70% of the
outstanding REIT Shares to approve certain transactions and amend certain
provisions of the REIT Charter. The foregoing matters may have the effect of
discouraging or making more difficult
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an acquisition or change of control of the REIT. See "Description of Securities
- -- Shares of the REIT -- Control Share Acquisitions."
THE CORPORATION
NEWLY ORGANIZED COMPANY
The Corporation was recently organized and has no stand-alone operating
history. There has been no market for the Shares and no assurance can be given
that an active trading market will develop.
CONFLICTS OF INTEREST
Because all but one of the initial directors and all of the initial
officers of the Corporation occupy positions with the REIT, there will be
conflicts of interest in their duties to the Corporation's shareholders and the
REIT's Shareholders. Although NHC's management believes the terms of the Leases
and the REIT Advisory Agreement are fair and reasonable, none of the terms of
the Leases or the REIT Advisory Agreement were negotiated on an arms-length
basis. The Leases provide that all maintenance and repairs, including structural
problems will be provided by the Corporation. Since the Corporation will be the
REIT's investment advisor, it will have a conflict of interest in assessing the
quality of the management services under the REIT Advisory Agreement or in
determining if the REIT Advisory Agreement should be terminated or in
determining the price to be paid by the REIT for additional assets which may be
purchased from the Corporation and the terms of any leases to be entered into
between the REIT and the Corporation. Further, the REIT is likely to purchase
additional equity interests in real estate from, or make additional mortgage
loans to, the Corporation.
The Corporation will not have any employees. All of the personnel services
will be provided by National pursuant to the Employee Services Agreement. The
Employee Services Agreement can be terminated by either party at any time.
Therefore, the Corporation will be dependent upon National to supply an adequate
number of qualified personnel to meet the needs of the Corporation, and no
assurance can be given that National will continue to provide such employees for
any time period.
There may from time to time be disputes between the Corporation as Lessee
and the REIT as Lessor with respect to maintenance, repairs, defaults and
similar items. However, since all but one of the board members of the
Corporation are also board members of the REIT, it is uncertain whether
potential disputes will be recognized as conflicts or that the Corporation will
recognize a need for independent persons to determine how to resolve such
disputes. Recognized disputes between the Corporation and the REIT will be
settled by binding arbitration.
Counsel to the Corporation also represents the REIT on certain matters. In
the course of such representation circumstances may arise in which the
Corporation and the REIT have conflicting interests, in which event separate
counsel may be retained to represent one or both of the parties.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS.
Substantially all of the Corporation's nursing home revenues, including
management fees, will be directly or indirectly dependent upon reimbursement
from third-party payors, including the Medicare and Medicaid programs, and
private insurers. For the period ended June 30, 1997, approximately 60% of NHC's
net revenues were derived from Medicare and state Medicaid programs. It is not
possible to predict the impact of the Balanced Budget Act of 1997 on the
Corporation's reimbursement rates, and a further reduction in Medicare or
Medicaid rates could have an adverse impact on the Corporation and other
providers of nursing home services. The revenues and profitability of the
Corporation will be affected by the continuing efforts of third-party payors to
contain or reduce the costs of health care by lowering reimbursement rates,
increasing case management review of services and negotiating reduced contract
pricing. Changes in the mix of the Corporation's patients among the Medicaid,
Medicare, and private pay categories, and among different types of private pay
sources, can significantly affect the revenues and the profitability of the
Corporation's operations. There can be no assurance that the Corporation will be
able to maintain a profitable payor or revenue mix. In addition, any changes in
reimbursement levels under Medicaid, Medicare, or private payor programs and any
changes in applicable government regulations could significantly affect the
profitability of the Corporation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- The Corporation
Government Health Care Reimbursement Programs."
In order to receive Medicare and Medicaid reimbursement, the Corporation
must be certified by Medicare and Medicaid. In 1995, the Federal Government
promulgated new survey, certification and enforcement rules governing long-term
care facilities participating in the Medicare and Medicaid programs, which
impose significant new requirements on long-term care facilities. The breadth of
the new rules creates uncertainty over the manner in which the rules will be
implemented, the ability of any long-term care facility to comply with them and
the effect of the new rules on the Corporation. Facilities which are found not
to be in compliance with the new rules are subject to decertification from
participating in the Medicare/Medicaid programs; termination of provider
agreement; temporary management; denial of payment for new admissions; civil
money penalties; closure of the facility or transfer of patients or both; and
on-site state monitoring. In the ordinary course of its business, NHC has
received and the Corporation is likely to receive notices of deficiencies for
failure to comply with various regulatory requirements. The Corporation will
review such notices and take appropriate corrective action. It is anticipated
that in most cases, the Corporation and
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the reviewing agency will agree upon the measures to be taken to bring the
facility into compliance with regulatory requirements. See "Business -- The
Corporation -- Regulation."
IMPACT OF HEALTH CARE REFORM AND LIMITS ON GOVERNMENT REIMBURSEMENT AND
OTHER PAYMENTS.
Government at both the federal and state levels has continued in its
efforts to reduce, or at least limit the growth of, spending for health care
services, including services to be provided by the Corporation. On August 5,
1997, President Clinton signed into law The Balanced Budget Act of 1997 ("BBA"),
which contains numerous Medicare and Medicaid cost-saving measures, as well as
new anti-fraud provisions. The BBA has been projected to save $115 billion in
Medicare spending over the next five years, and $13 billion in the Medicaid
program. Section 4711 of BBA, entitled "Flexibility in Payment Methods for
Hospital, Nursing Facility, ICF/MR, and Home Health Services", repealed the
Boren Amendment, which had required that state Medicaid programs pay to nursing
home providers amounts adequate to enable them to meet government quality and
safety standards; the Boren Amendment was previously the foundation of
litigation by nursing homes seeking rate increases. In place of the Boren
Amendment, the BBA requires only that, for services and items furnished on or
after October 1, 1997, a state Medicaid program must provide for a public
process for determination of Medicaid rates of payment for nursing facility
services, under which proposed rates, the methodologies underlying the
establishment of such rates, and justifications for the proposed rates are
published, and which gives providers, beneficiaries and other concerned state
residents a reasonable opportunity for review and comment on the proposed rates,
methodologies and justifications. Several of the states in which the Corporation
will operate are actively seeking ways to reduce Medicaid spending for nursing
home care by such methods as capitated payments and substantial reductions in
reimbursement rates. The BBA also requires that nursing homes transition to a
prospective payment system under the Medicare program during a three-year
"transition period" commencing with the first cost reporting period beginning on
or after July 1, 1998; home health agencies must also transition from a
cost-based reimbursement system to a prospective payment system beginning in
1999. In addition, the BBA creates a managed care Medicare Program called
"Medicare + Choice", which allows Medicare beneficiaries to participate in
either the original Medicare fee-for-service program or to enroll in a
coordinated care plan such as health maintenance organizations ("HMOs"). Such
coordinated care plans would allow HMOs to enter into risk-based contracts with
the Medicare program, and the HMO's would then contract with providers such as
the Corporation. No assurances can be given that the facilities to be operated
by the Corporation will be successful in negotiating favorable contracts with
Medicare + Choice managed care organizations. The BBA also contains several new
antifraud provisions. Given the recent enactment of the BBA, the Corporation is
unable to predict the impact of the BBA and potential changes in state Medicaid
reimbursement methodologies on its operations; however, any significant
reduction in either Medicare or Medicaid payments could adversely affect the
Corporation. Changes in certification and participation requirements of the
Medicare and Medicaid programs have restricted, and are likely to continue to
restrict further, eligibility for reimbursement under those programs. Failure to
obtain and maintain Medicare and Medicaid certification at the Corporation's
facilities will result in denial of Medicare and Medicaid payments which could
result in a significant loss of revenue to the Corporation. In addition, private
payors, including managed care payors, increasingly are demanding that providers
accept discounted fees or assume all or a portion of the financial risk for the
delivery of health care services. Such measures may include capitated payments
whereby the Corporation is responsible for providing, for a fixed fee, all
services needed by certain patients. Capitated payments can result in
significant losses if patients require expensive treatment not adequately
covered by the capitated rate. Efforts to impose reduced payments, greater
discounts and more stringent cost controls by government and other payors are
expected to continue. For the fiscal year ended December 31, 1996, NHC derived
38% and 33% of its net patient revenues from the Medicare and Medicaid programs,
respectively. Any reforms that significantly limit rates of reimbursement under
the Medicare or Medicaid programs, therefore, could have a material adverse
effect on the Corporation's profitability. The Corporation is unable to predict
what reform proposals or reimbursement limitations will be adopted in the future
or the effect such changes will have on its operations. No assurance can be
given that such reforms will not have a material adverse effect on the
Corporation. See "Business -- The Corporation -- Sources of Revenue."
Nursing homes and home health agencies have recently been the target of
health care reform, from both a fraud and reimbursement perspective. Operation
Restore Trust, a demonstration project which has been conducted by the
Department of Health and Human Services in five states, is expanding to a dozen
more states. "ORT Plus" will continue its focus on fraud in the areas of home
health, nursing home and DME suppliers, as well as adding new anti-fraud and
abuse targets. The Corporation will operate nursing homes and home health
agencies in five ORT Plus states and could be subject to increased scrutiny.
President Clinton recently announced a moratorium on the certification of home
health agencies in an attempt to curb what is perceived to be rampant fraud and
abuse in this area. The Corporation cannot predict what impact this ORT Plus or
moratorium will have on its home care programs. Although NHC's management
believes that its home care and nursing home operations are in compliance with
applicable laws and regulations, there can be no assurance that the Corporation,
its home care and nursing home operations will not be the subject of an
investigation nor that they will be found to be in compliance if investigated.
See "Business -- The Corporation -- Legal Proceedings."
GOVERNMENT REGULATION.
The United States government, and all states in which the Corporation will
operate regulate various aspects of its business. Various federal and state laws
regulate relationships among providers of services, including employment or
service contracts and investment relationships. The operation of long-term care
facilities and the provision of services are also subject to extensive federal,
state, and local laws relating to, among other things, the adequacy of medical
care, distribution of pharmaceuticals, equipment, personnel, operating policies,
environmental compliance, ADA compliance,
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<PAGE> 27
fire prevention and compliance with building codes. Long-term care facilities
are also subject to periodic inspection to assure continued compliance with
various standards and licensing requirements under state law, as well as with
Medicare and Medicaid standards. The failure to obtain or renew any required
regulatory approvals or licenses could adversely affect the Corporation's growth
and could prevent it from offering the services currently offered by NHC or any
additional services. In addition, health care is an area of extensive and
frequent regulatory change. Changes in the laws or new interpretations of
existing laws can have a significant effect on methods and costs of doing
business and amounts of payments received from governmental and other payors.
The Corporation's operations could be adversely affected by, among other things,
regulatory developments such as mandatory increases in the scope and quality of
care to be afforded patients and revisions in licensing and certification
standards. The Corporation will at all times attempt to comply with all
applicable laws; however, there can be no assurance that administrative or
judicial interpretation of existing laws or regulations will not have a material
adverse effect on the Corporation's operations or financial condition.
Most states have adopted certificate of need ("CON") or similar laws that
generally require that a state agency approve certain acquisitions and determine
that a need exists for certain new services, the addition of beds and capital
expenditures or other changes. To the extent that CON or other similar approvals
are required for expansion of the Corporation's operations, either through
facility acquisitions or expansion or provision of new services or other
changes, such expansion could be adversely affected by the failure or inability
to obtain the necessary approvals, changes in standards applicable to such
approvals and possible delays and expenses associated with obtaining such
approvals. CON laws are also subject to being repealed or modified which could
increase competition by lowering competitors' barriers to enter certain markets.
The sale or transfer of a CON is generally prohibited. If the regulatory
body administering the CON program in a given state determines that the
restructuring is a "transfer," the ability of the REIT or the Corporation to
utilize an unimplemented or partially implemented CON could be restricted or a
new CON could be required. Such a process could be costly and time consuming.
The Corporation currently has four unimplemented CONs and ten partially
implemented CONs.
SELF-REFERRAL AND ANTI-KICKBACK LEGISLATION.
The health care industry is highly regulated at the state and federal
levels. In the United States, various state and federal laws regulate the
relationships between providers of health care services, physicians, and other
clinicians. These laws impose restrictions on physician referrals for designated
health services to entities with which they have financial relationships. These
laws also prohibit the offering, payment, solicitation or receipt of any form of
remuneration in return for the referral of Medicare or state health care program
patients or patient care opportunities in return for the purchase, lease or
order of any item or service that is covered by the Medicare and Medicaid
programs. There can be no assurance the Corporation's operations will not be
subject to review, scrutiny, penalties or enforcement actions under these laws,
or that these laws will not change in the future. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare or Medicaid programs. Such exclusions or penalties, if applied to the
Corporation, could have a material adverse effect on the profitability of the
Corporation.
FLORIDA AUDITS AND LAWSUIT
In October 1996, two managed centers in Florida were audited by
representatives of the regional office of the Office of Inspector General
("OIG") . As part of these audits, the OIG reviewed various records of the
facilities relating to allocation of nursing hours and contracts with suppliers
of outside services. At one center, the OIG indicated during an exit conference
that it had no further questions, but has not yet issued a final report. At the
second facility, which is one of the four named in the Braeuning lawsuit
described below, the OIG determined certain records were insufficient and NHC
supplied the additional requested information.
NHC is also a defendant in a lawsuit styled Braeuning et al vs. National
HealthCare L.P., et al. filed "under seal" in the U.S. District Court of the
Northern District of Florida on April 9, 1996. The court removed the seal from
the complaint - but not the file itself - on March 20, 1997 and service of
process occurred on July 8, 1997, with the government participating as an
intervening plaintiff. The suit alleges that NHC has submitted cost reports and
routine cost limit exception requests containing "fraudulent allocation of
routine nursing services to ancillary service cost centers" and improper
allocation of skilled nursing service hours in four managed centers, all in the
state of Florida. The suit was filed under the Qui Tam provisions of the Federal
False Claims Act, commonly referred to as the "Whistleblower Act". NHC is fully
cooperating and the Corporation intends to fully cooperate with the government
in an attempt to determine dollar amounts involved, and each intends to
aggressively pursue an amicable settlement. The cost report periods under
review include periods from 1991 through 1995.
Florida is one of the states of which governmental officials are conducting
"Operating Restore Trust", a federal/state program aimed at detecting and
eliminating fraud and abuse by providers in the Medicare and Medicaid programs
(the "ORT"). The OIG has increased its investigative actions in Florida (and has
now opened a Tennessee office) as part of ORT and ORT Plus. NHC and the
Corporation will continue to review and monitor the cost reporting process and
their compliance with all government reimbursement standards, but cannot predict
whether the OIG or other government officials will take further action or
request additional information as a result of the Braeuning suit or any other
audit that may be conducted in the future. An adverse determination in the
lawsuit or as the result of an audit could subject the
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<PAGE> 28
Corporation to civil or criminal fines and penalties which could have a material
negative impact on the profitability of the Corporation.
CERTAIN GUARANTEED DEBT
The Corporation will assume loan guarantees of approximately $69.5 million
in loans made or letters of credit issued by third parties to or for the account
of certain unrelated third parties for whom the Corporation will manage a
licensed healthcare center. 53% of these guarantees are on behalf of FCC. A
default by any such corporation or individual, or the bankruptcy or other
financial difficulty of such entities, could result in the inability of such
entity to pay its loan obligations, and could result in the Corporation having
to make payments under its guarantees.
FCC LAWSUIT
FCC, an independent Florida corporation for whom NHC manages sixteen
licensed nursing centers in Florida, and NHC are currently involved in a lawsuit
in the Circuit Court of the Twelfth Judicial Circuit in and for Sarasota County,
Florida, requesting the court to interpret the parties' rights under their
contractual arrangements. In the summer of 1997, FCC filed a Third Amended and
Supplemental Complaint in the Sarasota County Court action asserting fifteen
separate counts against NHC and its general partners, which are collectively
referred to as NHC in the complaint. Among the claims added in the amended
complaint are claims for breach of all management agreements between the
parties, for a declaration that FCC does not owe any deferred contingent fees to
NHC or in the alternative, a declaration that any such deferred fees constitute
usurious interest, for breach of a 1994 loan agreement between FCC and
defendants related to the construction of a facility in Orlando, for business
libel, and for breach of fiduciary duty arising from defendants' alleged
obstruction of FCC's right to audit, from defendants' alleged failure to
properly manage FCC's facilities, and from defendants' alleged self dealing by
causing FCC and defendants or their affiliates to enter into contracts that are
not customary or usual in the industry. In additional to declaratory relief, FCC
asserts that it is entitled to unspecified damages and to terminate all of the
management agreements between the parties for cause. Defendants, including NHC,
have filed an answer denying all of FCC's claims and asserting a counterclaim
against FCC. No trial date has been set in this matter. To date, FCC has
notified NHC that it currently does not intend to renew five of the sixteen
management contracts, but has agreed that NHC will remain as manager until a
final decision is reached by the Sarasota Court. The balance of the FCC
contracts may be terminated in the years 2001-2003. See "Business -- The
Corporation -- Legal Proceedings."
LACK OF CONSENTS; ACCELERATION OF CERTAIN MATURITIES
The Corporation will retain approximately $112.6 million in debt of NHC. In
addition, the REIT will assume approximately $105.9 million in Assumed
Liabilities. The consent of such lenders is a requirement to the transfer of the
underlying secured properties from the original obligor thereunder to any
successor obligor, and the transfer of the Owned Healthcare Facilities and Notes
to the REIT. NHC, the REIT and the Corporation have obtained the oral consent of
these lenders. Written documentation of such consents may not be obtained on
reasonable terms in a timely manner with respect to the transfer of the Assumed
Liabilities from NHC to the REIT or the transfer of the Owned Healthcare
Facilities and the Notes to the REIT. If the lenders were to assert their
rights, that is that the transfer of the Assumed Liabilities or the Owned
Healthcare Facilities from NHC to the REIT constituted a default under the
relevant loan or guarantee documents, then such lenders could demand that the
Corporation and the REIT perform under the loan agreements and pay the full
amount of such debt plus any prepayment penalties and costs. There can be no
assurance that the REIT or the Corporation would be able to repay such debt or
replace such debt on the same or similar terms, if at all. Failing to timely
repay such amounts could cross-default other loans.
In addition, the Plan of Restructure may require the consent of various
third parties to agreements with NHC which will be assumed by the Corporation in
the Plan of Restructure. NHC and the Corporation have determined not to seek
consents in connection with existing leases, management contracts or other
operating agreements with NHC. As a result, such third parties could claim such
agreements have been breached by NHC, seek to terminate such agreements and sue
NHC, the Corporation and the REIT for damages. In addition, since the REIT and
the Corporation both resulted from NHC, any existing NHC creditor (whether
contingent or absolute) may be able to reach the assets of the Corporation for
any claim such creditor may have against NHC. There can be no assurance that the
number of such agreements terminated, the amount of damages that could be sought
or the claims of any such creditors would not have a material adverse effect on
the Corporation.
RELATIONSHIPS BETWEEN LONG-TERM CARE FACILITIES AND OTHER PROVIDERS.
Relationships between long-term care facilities and other providers such as
providers of physical therapy and other ancillary service providers have
recently come under increased scrutiny by government and private payors. To the
extent that the Corporation, any facility with which it does business, or any of
their owners or directors have a financial relationship with each other or with
other health care entities providing services to long-term care patients, such
relationships could be subject to increased scrutiny. There can be no assurance
that the Corporation's business operations and agreements with other providers
of health care services will not be subject to change, review, penalties or
enforcement actions under state and federal laws regarding self-referrals or
fraud and abuse, or that these laws will not change in the future. See "Business
- -- Government Regulation."
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<PAGE> 29
THIRD-PARTY INDEBTEDNESS SECURED BY ASSETS LEASED OR MANAGED BY
CORPORATION.
The Corporation, through leases and management agreements, will operate
facilities that secure the indebtedness of the owners of the facilities. As a
result, the Corporation's leases at such facilities are subject to cancellation
upon the default of these third-party owners under their credit agreements. In
addition, the payment of management fees to the Corporation at these facilities
is subordinated to the payment of the owners' debt obligations. To the extent
that the owners of the Corporation's managed facilities experience financial
difficulty or otherwise are unable to meet their obligations, the ability of the
Corporation to receive management fees or continue as manager of such facility
is jeopardized. See "Business -- Description of Management Services and
Agreements."
COMPETITION.
The long-term care industry generally, and the nursing home and assisted
living center businesses particularly, are highly competitive. The Corporation
will face direct competition for the acquisition or management of facilities. In
turn, its facilities face competition for employees, patients and residents.
Some of NHC's present and potential competitors, which will likely be the
Corporation's competitors, are significantly larger and have or may obtain
greater financial and marketing resources than those of NHC or the Corporation.
Some hospitals that provide long-term care services will also be a potential
source of competition to the Corporation. In addition, the Corporation may
encounter substantial competition from new market entrants. Consequently, there
can be no assurance that the Corporation will not encounter increased
competition in the future, which could limit its ability to attract patients or
residents or expand its business, and could materially and adversely affect its
business or decrease its market share. See "Business -- The Corporation --
Relationship with National Health Investors, Inc." and " -- Competition."
LIABILITY AND INSURANCE.
The provision of health care services involves an inherent risk of
liability. In recent years, participants in the long-term care industry have
become subject to an increasing number of lawsuits alleging malpractice or
related legal theories, many of which involve large claims and significant
defense costs. It is expected that the Corporation from time to time will be
subject to such suits as a result of the nature of its business. NHC currently
maintains liability insurance of $1.0 million per claim with additional umbrella
coverage in the amount of $5.0 million in the aggregate per annum, intended to
cover such claims which the Corporation intends to maintain and NHC believes its
insurance coverage is consistent with industry standards. There can be no
assurance, however, that claims in excess of the Corporation's insurance
coverage or claims not covered by the Corporation's insurance coverage (e.g.,
claims for punitive damages) will not arise. A successful claim against the
Corporation in excess of the Corporation's insurance coverage could have a
material adverse effect upon the Corporation and its financial condition. Claims
against the Corporation, regardless of their merit or eventual outcome, may also
have a material adverse effect upon the Corporation's ability to attract
patients or residents or expand its business. In addition, the Corporation's
insurance policies must be renewed annually. There can be no assurance that the
Corporation will be able to obtain liability insurance coverage in the future on
acceptable terms, if at all. See "Business -- The Corporation -- Legal
Proceedings."
DEPENDENCE ON MANAGEMENT AND SKILLED PERSONNEL.
The Corporation believes it will depend substantially on active involvement
of its senior managers, including its executive officers. The loss of one or
more of such officers could have a material adverse effect on the Corporation's
business and future operations. The Corporation does not intend to maintain
"key-man" insurance on the lives of its executive officers. The Corporation does
not intend to have employment agreements with executive officers. See
"Management -- The Corporation." In addition, the Corporation will depend upon
skilled personnel such as nurses. In some areas in which the Corporation will
operate there is from time to time a nursing shortage that could have a material
adverse affect upon the Corporation's ability to attract or retain sufficient
numbers of nurses. In addition, although NHC has not yet experienced
unionization efforts, there have been reports of increased unionization within
the senior care business. The Corporation cannot predict whether there will be
successful attempts to organize unions at its facilities, or what effect such
activities might have on its operations.
ABILITY TO ACQUIRE ADDITIONAL LONG-TERM CARE FACILITY OPERATIONS.
The Corporation intends to expand its business through the development and
selective acquisition of additional long-term care facility operations. See
"Business -- The Corporation -- Strategy." The Corporation's prospects for
growth are directly affected by its ability to acquire suitable long-term care
facility operations, which in turn will depend, among other things, upon the
pricing expectations of sellers, the ability to obtain financing, including the
availability of adequate working capital, the ability to obtain government
licenses and approvals, and the competitive environment for acquisitions. The
nature of such licenses and approvals and the timing and likelihood of obtaining
them vary widely from state to state, depending upon the facility or operation
and the type of services proposed. See "Business -- The Corporation --
Regulation." In making acquisitions, the Corporation will compete with other
providers, some of which have greater financial resources than the Corporation.
There can be no assurance that suitable acquisitions will be identified, that
acquisitions can be consummated or that the acquired facility operations can be
integrated successfully into the Corporation's operations. The various risks
associated with the Corporation's acquisition of long-term care facility
operations and uncertainties regarding the profitability of such operations may
affect the Corporation's financial performance in any given period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- The Corporation -- Liquidity, and Capital Resources and Financial
Condition."
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<PAGE> 30
NO PUBLIC MARKET.
There has been no public market for the Shares and there can be no
assurance that an active trading market will develop or be sustained following
the offering. The Corporation has applied for listing of the Shares on the
American Stock Exchange. No assurance can be given as to the liquidity of the
trading market for the Shares or that an active trading market for the Shares
will develop. If an active market does not develop, the market price and
liquidity of the Shares may be adversely affected. There can be no assurance
that the combined price at which the Shares and REIT Shares may trade in any
market subsequent to the Plan of Restructure will not be lower than the current
trading price of NHC Units.
LACK OF DIVIDENDS
The Corporation's initial policy will be to retain any earnings to finance
the operation and expansion of the Corporation's business and, therefore, to pay
no dividends in the foreseeable future. In addition, the Corporation may be
prohibited from paying dividends under certain debt instruments.
ANTI-TAKEOVER CONSIDERATIONS.
The Corporation is authorized to issue up to 10,000,000 shares of preferred
stock, the rights of which may be fixed by the Board of Directors without
shareholder approval. The Corporation's Certificate of Incorporation (the
"Corporation Certificate") provides for the classification of its Board of
Directors into three classes, with each class of directors serving staggered
terms of three years. The Corporation's Certificate requires the approval of 70%
of the outstanding shares to approve certain actions. Section 203 of the
Delaware General Corporate Law restricts the ability of a Delaware corporation
from engaging in any business combination with an interested stockholder. The
foregoing matters may have the effect of discouraging or making more difficult
an acquisition or change of control of the Corporation. See "Description of
Securities -- Shares of the Corporation."
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<PAGE> 31
VOTING AND PROXY INFORMATION
VOTING PROCEDURES
Under the Partnership Agreement, a holder of a Unit may vote only if the
holder has been admitted as a general or limited partner of the Partnership on
or before the record date for the Special Meeting. Each Unit entitles the holder
thereof to one vote with respect to matters to be voted on at the Special
Meeting. The Managing General Partner has set the close of business on October
31, 1997 as the record date (the "Record Date") for the determination of general
and limited partners entitled to vote at the Special Meeting.
NHC will accept proxies at any time before the Plan of Restructure is voted
on at the Special Meeting. The enclosed form of proxy, when properly completed
and returned, will constitute a general or limited partner's vote for or
against, or abstention on, the Plan of Restructure. If a general or limited
partner returns a form of proxy duly signed without voting, the general or
limited partner will be deemed to have voted FOR the Plan of Restructure.
REVOCATION OF PROXIES
A general or limited partner may revoke a proxy any time during the
solicitation period before its exercise by (i) delivering written notice of
revocation to NHC, (ii) executing and delivering to NHC a later dated form of
proxy or (iii) voting in person at the Special Meeting. Any such written notice
or later dated proxy should be sent to National HealthCare L.P., 100 Vine
Street, Suite 1400, Murfreesboro, Tennessee 37130, Attention: Richard F.
LaRoche, Jr.
VOTE REQUIRED; QUORUM
Approval of the Plan of Restructure will require the affirmative vote of
general and limited partners holding an aggregate of more than 50% of the
outstanding Units. The presence, in person or by proxy, of general and limited
partners holding an aggregate of more than 50% of the outstanding Units will
constitute a quorum at the Special Meeting. Abstentions and broker non-votes
will be treated as present for the purpose of determining a quorum but will have
the effect of votes against the Plan of Restructure.
The executive officers, directors and other affiliates of the Managing
General Partner own or have the authority to vote approximately 54% of the
outstanding Units. They have advised NHC that they each intend to vote their
Units in favor of the Plan of Restructure and have delivered irrevocable proxies
coupled with an interest to vote in favor of the Plan of Restructure. Therefore,
approval of the Plan of Restructure is assured. For further information
concerning the ownership of Units by the Managing General Partner's affiliates,
executive officers and directors, see "Security Ownership of Certain Beneficial
Owners and Management."
SOLICITATION OF PROXIES
This solicitation is being made by the Managing General Partner on behalf
of NHC. NHC will pay the cost of soliciting proxies. NHC will reimburse
brokerage houses and other nominees for their reasonable expenses of forwarding
proxy materials to beneficial owners of Units.
INDEPENDENT AUDITORS
Representatives of Arthur Andersen LLP, NHC's independent accountants, are
expected to be present at the Special Meeting.
NO APPRAISAL RIGHTS
Unitholders who object to the Plan of Restructure will have no appraisal,
dissenters' or similar rights (i.e., the right, instead of receiving securities
of the REIT and the Corporation, to seek a judicial determination of the "fair
value" of their Units and to compel NHC to purchase their Units for cash in that
amount) under state law or the Partnership Agreement, nor will such rights be
voluntarily accorded to limited partners by NHC. Thus, approval of the Plan of
Restructure by the requisite vote of general and limited partners will bind all
general and limited partners, and objecting general and limited partners will
have no alternative to receipt of securities of the REIT and the Corporation
other than selling their Units (or securities of the REIT and the Corporation)
in the open market.
OTHER MATTERS
The enclosed form of proxy grants discretionary authority to the persons
named to vote on any other matters that may properly come before the Special
Meeting. NHC is not aware of any other proposals planned to be made at the
Special Meeting and has no current intention of making any additional proposals.
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<PAGE> 32
PRICE RANGE OF NHC UNITS
NHC's Units are listed on AMEX under the symbol "NHC." The following table
sets forth, for the periods indicated, the high and low sales prices for the
Units as reported by AMEX.
<TABLE>
<CAPTION>
HIGH Low
<S> <C> <C>
1995
- ----
First Quarter $26.000 $22.875
Second Quarter 28.500 24.375
Third Quarter 31.500 28.000
Fourth Quarter 39.375 29.500
1996
- ----
First Quarter $41.125 $37.125
Second Quarter 41.375 34.875
Third Quarter 39.875 37.000
Fourth Quarter 45.000 37.500
1997
- ----
First Quarter $47.250 $44.250
Second Quarter 46.188 40.750
Third Quarter 59.250 44.375
</TABLE>
On September 30, 1997, the last reported sale price of the Units on AMEX
was $59.25 per Unit. On August 19, 1997, the date immediately preceding NHC's
announcement of the Plan of Restructure, the last reported sale price of the
Units on AMEX was $49.125 per Unit. At September 30, 1997, there were
approximately 4,168 holders of the Units, comprised of 1,982 Unitholders of
record and an additional 2,186 Unitholders indicated by security position
listings.
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DIVIDEND POLICY
NHC
NHC paid cash distributions on its outstanding partnership Units as
follows: 1991, $1.20 per Unit; 1992, $.54 per Unit; 1993, $.88 per Unit; 1994,
$1.35 per Unit; 1995, $1.98 per Unit; and 1996, $2.16 per Unit.
THE REIT
In order to qualify for the quasi pass through tax treatment accorded to a
real estate investment trust, the REIT intends to make quarterly distributions
to holders of its common stock equal on an annual basis to at least 95% of its
real estate investment trust taxable income (excluding net capital gains), as
defined in the Code. Generally, cash available for distribution to the REIT
shareholders will be primarily derived from the distributions made by the
Operating Partnership. The Operating Partnership's cash available for
distribution will be derived primarily from the rental payments under the Leases
and interest payments on the Notes. All distributions will be made by the REIT
at the discretion of the Board of Directors and will depend on the cash flow and
earnings of the REIT, its financial condition, bank covenants and such other
factors as the Board of Directors deems relevant. The REIT's taxable income will
be calculated without reference to its cash flow. Therefore, under certain
circumstances, the REIT may not have available cash sufficient to pay its
required distributions. See "Federal Income Tax Considerations -- Taxation of
the REIT -- 95% Distribution Requirement." The REIT believes that it will have
sufficient available cash to pay its required distributions for 1998 but this is
subject to a number of risk factors. See "Risk Factors -- Risks Associated with
Forward Looking Statements." The Board of Directors has not determined when any
such distributions will be declared or paid.
The REIT's Board of Directors anticipates that, commencing in 1998, the
REIT and the Operating Partnership will pay initial annual dividend to holders
of its common stock and distribution to the OP Units equal to $1.33 per REIT
Share and OP Unit, although no assurances can be given that this will be the
case. See "Risk Factors -- Risks Associated with Forward Looking Statements."
Compensation payable by the REIT to the Corporation under the REIT Advisory
Agreement will be deferred to the extent that the REIT either does not have
Funds from Operations adequate to pay dividends at such annual rate. "Funds from
Operations" is defined in the REIT Advisory Agreement as the net income of the
REIT plus depreciation and amortization, less capital gains (or plus capital
losses) included in such net income.
For a discussion of the tax treatment of distributions to the REIT
stockholders, see "Federal Income Tax Considerations -- The REIT -- The
Distribution -- Tax Consequences."
THE CORPORATION
The Corporation's initial policy will be to retain any earnings to finance
the operations and expansion of the Corporation's business. In addition, the
Corporation may be prohibited from paying dividends under certain debt
instruments.
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<PAGE> 34
BUSINESS
NHC
NHC is a limited partnership organized under the laws of the State of
Delaware which principally operates residential care facilities, long-term
healthcare centers and home healthcare programs in the southeastern United
States. At September 30, 1997, NHC operated 111 long-term healthcare centers
with a total of 13,835 licensed beds in nine states. NHC's health care centers
provide subacute, skilled and intermediate nursing and rehabilitative care. Of
the 111 centers operated, 17 are owned, 40 are leased from NHI and 54 are
managed for other owners. NHC's homecare programs provide rehabilitative care at
a patient's residence. During 1996, NHC operated 33 homecare programs and
provided 754,000 homecare patient visits. NHC also operates 387 retirement
apartments located in one managed and three leased retirement centers.
Additionally, NHC operates 14 assisted living centers at twelve owned or leased
centers and two managed centers. Pursuant to the Plan of Restructure, NHC will
contribute to the REIT through fee ownership or 50 year capitalized leases, the
17 Owned Healthcare Facilities, six assisted living facilities and one
retirement center, certain promissory notes and certain other assets to the
REIT. NHC will then merge with and into the Corporation so that all of NHC's
remaining assets will be owned by the Corporation. The REIT will then lease the
Owned Healthcare Facilities back to the Corporation.
NHC has three general partners:
1. Managing General Partner NHC, Inc., a Tennessee corporation. As of
the Effective Time, W. Andrew Adams, NHC's Chief Executive Officer, President
and a Director of NHC, will own approximately 52% of the voting securities of
NHC, Inc. and Robert G. Adams, Senior Vice President and Chief Operating Officer
of NHC will own approximately 19.3%.
2. Administrative General Partner National Health Corporation, a
Tennessee corporation. All of the authorized, issued and outstanding stock of
National Health Corporation is owned by the National Health Corporation
Leveraged Employee Stock Ownership Plan (the "ESOP"). See "Certain Transactions
- -- National."
3. Individual General Partner W. Andrew Adams. Mr. Adams is the Chief
Executive Officer and President of NHC and will be the Chief Executive Officer,
President and a Director of both the REIT and the Corporation.
The general partners own, in the aggregate, a general partnership interest
in NHC representing a 1% interest in the profits, losses and distributions of
the partnership.
THE REIT
The REIT is a newly-formed Maryland corporation. Prior to the Distribution,
the REIT, through the Operating Partnership will acquire the Owned Healthcare
Facilities and the Notes and Other Assets (subject to the Assumed Liabilities)
and will lease the Owned Healthcare Facilities to the Corporation. The REIT will
also assume certain debt of NHC of approximately $105.9 million. See
"Relationship Between the REIT and the Corporation after the Restructure -- The
Assumed Liabilities." The Leases covering the Owned Healthcare Facilities will
be "triple net" leases. See "Relationship between the REIT and the Corporation
after the Restructure -- The Leases." The REIT will enter into an Advisory,
Administrative Services and Facilities Agreement with the Corporation pursuant
to which the Corporation will provide the REIT with investment advice, office
space and personnel. See "Relationship Between the REIT and the Corporation
after the Restructure -- The Advisory, Administrative Services and Facilities
Agreement."
However, the REIT Advisory Agreement provides that for that period of time
equal to the lesser of (i) the term of the REIT Advisory Agreement and (ii) the
Corporation being actively engaged as the investment advisor for NHI, the REIT
will not (without the prior approval of NHI) transact business with any party,
person, company or firm other than the Corporation. It is the intent of the
foregoing restriction that the REIT will not be actively or passively engaged in
the pursuit of additional investment opportunities, but rather will focus upon
its capacities as landlord and note holder of those certain assets conveyed to
it in the Plan of Restructure.
28
<PAGE> 35
OWNED HEALTHCARE FACILITIES
The following table includes certain information regarding the Owned
Healthcare Facilities.
<TABLE>
<CAPTION>
No. Minimum
of Book Annual Total Debt
Name of Facility Location Beds Basis Rent Transferred
---------------- -------------------- ---- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Healthcare Facilities
Adams Place Murfreesboro, TN 40 $6,022,834 $572,129
NHC HealthCare, Naples Naples, FL 60 5,646,872 536,453
NHC HealthCare, Clinton Clinton, SC 131 3,732,339 354,572
NHC HealthCare, Coconut Ft. Lauderdale, FL 120 9,896,567 940,174
Creek(2)
NHC HealthCare, Daytona Beach Daytona Beach, FL 60 6,297,586 598,271
NHC HealthCare, Farragut(2) Farragut, TN 60 5,393,486 512,381
NHC HealthCare, Garden City Murrells Inlet, SC 88 6,133,219 487,656
NHC HealthCare, Greenville Greenville, SC 176 5,429,906 515,841
NHC HealthCare, Lexington Lexington, SC 88 5,353,143 508,549
NHC HealthCare, Mauldin Greenville, SC 120 7,745,945 776,414
NHC HealthCare, Imperial(3) Naples, FL 90 5,311,591 504,601
NHC HealthCare, North Augusta North Augusta, SC 132 5,028,383 477,696
NHC HealthCare, Orlando Orlando, FL 120 8,628,798 819,736
NHC HealthCare, Parklane Columbia, SC 120 8,594,178 816,447
NHC HealthCare, Port Charlotte Port Charlotte, FL 180 8,594,178 816,447
West Plains Health, Care Center West Plains, MO 120 3,801,401 361,133
NHC HealthCare, Franklin(4) Franklin, TN 160 6,638,475 630,655
Assisted Living Facilities
NHC Place/ Vero Beach Vero Beach, FL 84 8,183,504 777,433
NHC Place/Anniston Anniston, AL 68 5,792,107 550,250
Adams Place Murfreesboro, TN 84 6,490,387 616,587
NHC Place/Merritt Island Merritt Island, FL 84 7,144,486 678,726
NHC Place/Stuart Stuart, FL 84 6,808,672 646,824
NHC HealthCare, Farragut(2) Farragut, TN 84 6,741,858 640,477
Retirement Center
Adams Place Murfreesboro, TN 53 14,263,000 1,354,985
Debt Transferred 105,857,629
</TABLE>
- ----------------------
(1) or debt which the property is subject to and being serviced by the
REIT.
(2) currently under construction.
(3) 30 additional beds under construction.
(4) a facility to be constructed. Construction has not began on the date
hereof.
CONVEYANCE OF FACILITIES. Immediately prior to the Plan of Restructure, NHC
will convey its fee ownership of six of the Owned Healthcare Facilities to the
REIT by means of "quitclaim" deeds and nine of the Owned Healthcare Facilities
pursuant to a 50 year capitalized lease with a purchase option at a nominal
purchase price at any time at the election of the REIT. The remaining nine Owned
Healthcare Facilities will be conveyed by warranty or special form deeds. All of
the conveyances and 50 year capitalized leases will include NHC's representation
that it has good and marketable title to the interests being conveyed and NHC
will indemnify the REIT against any title problems. The Corporation will assume
NHC's indemnification obligations to the REIT pursuant to the Merger. Quitclaim
deeds and the 50 year capitalized leases will be used in order to minimize or
eliminate, where possible, the imposition of transfer taxes.
The master capitalized lease ("Master Capitalized Lease") has a 50 year
term expiring December 31, 2048 and grants the REIT the right to purchase the
property at any time upon 90 days notice for $100. Under the Master Capitalized
Lease, the REIT as tenant is responsible for all taxes, utilities, insurance
premium costs, repairs,
29
<PAGE> 36
maintenance (including the structural maintenance and repair of the
improvements) and all other charges and expenses relating to the ownership of
the property covered by the Master Capitalized Lease.
Sources of Rental Payments. The REIT's revenues will be derived primarily
from the Corporation under the Leases. Those payments will be derived primarily
from the Owned Healthcare Facilities operated by the Corporation. See "Business
- -- The Corporation -- Sources of Revenue" for a description of the sources of
revenue generated by the Owned Healthcare Facilities.
THE NOTES.
The REIT will own approximately 50 Notes representing approximately $92.5
million loaned to the owners of approximately 23 nursing homes, all but one of
which are in Florida and managed by NHC. The loans were utilized by the owners
to acquire land, then construct and equip the nursing homes. The Notes are
secured by mortgages on each of the facilities. Forty-three of the Notes
(representing approximately $74.9 million the principal amount) are from FCC and
are personally guaranteed by its sole shareholder. The FCC Notes bear interest
at 10.25 and are payable over 10 years. Most of the FCC Notes are due in 2004.
The 19 nursing homes which are located in Florida are each licensed for
approximately 120 to 180 beds. No defaults have occurred under any of the Notes.
NHC has no reason to suspect any impending defaults under the Notes. In the
event NHC's management agreement for the facilities is not extended by the owner
at the completion of the term, the Note secured by such facility becomes
immediately due and payable.
ASSUMED LIABILITIES.
The REIT will assume or take the Owned Healthcare Facilities subject to
Assumed Liabilities of approximately $105.9 million. The Assumed Liabilities
consist of four loan agreements which are secured by mortgages on certain of the
Owned Healthcare Facilities. The interest rate on the Assumed Liabilities
include fixed rates of 8% to 8.64% and floating rate based on prime rate and
LIBOR plus 1%. The term of the loans range from 2005 through 2015. See
"Relationship between the REIT and the Corporation after the Restructure -- The
Assumed Liabilities."
INVESTMENT AND OTHER POLICIES OF THE REIT.
General. The REIT's investment objectives are: (i) to provide current
income for distribution to stockholders, (ii) to provide the opportunity for
additional returns to investors by participating in any increase in the
operating revenues of its leased properties; (iii) to provide the opportunity to
realize capital growth resulting from appreciation, if any, in the value of its
portfolio properties, and (iv) to preserve and protect stockholder's capital.
There is no assurance that these objectives will be realized. The REIT Advisory
Agreement provides that the REIT will not, without the prior approval of the
Corporation, be actively or passively engaged in the pursuit of additional
investment opportunities until the earlier of the termination of the REIT
Advisory Agreement or such time as the Corporation is no longer actively engaged
as investment advisor to NHI.
Objectives and Policies. The REIT was organized to own the Owned Healthcare
Facilities. Because of the competitive restrictions contained in the REIT
Advisory Agreement, the REIT does not intend to seek further health care-related
investment opportunities or to provide lease or mortgage financing for such
investments. The REIT expects to continue to engage in transactions with the
Corporation, but does not anticipate purchasing from, leasing to or financing
other operations.
The REIT has no present plans to issue securities other than the REIT
Shares distributed in the Plan of Restructure, including senior securities or
(except pursuant to its or NHC's stock option plan or NHC's 6% Debentures) any
additional shares of common stock, although the Board of Directors is authorized
to issue up to 30,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock. See "Description of Securities -- Shares of the REIT." The REIT
is authorized to offer shares of its capital stock in exchange for investments
that conform to its standards and to repurchase or otherwise acquire its shares
or other securities, but does not currently intend to do so. The REIT has no
plans to invest in the securities of others for the purpose of exercising
control.
The REIT 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 the REIT or the Corporation, or
any affiliate thereof, as the case may be, any of the assets or other property
of the REIT.
In addition, see "Federal Income Tax Considerations -- The REIT -- Taxation
as a Real Estate Investment Trust" for a discussion of certain limitations on
investments and other activities of the REIT.
Subject to the REIT Advisory Agreement, the REIT Board of Directors may
alter the REIT's investment policies if they determine in the future that such a
change is in the best interests of the REIT and its stockholders. The methods of
implementing the REIT's investment policies may vary as new investment and
financing techniques are developed or for other reasons.
Borrowing Policies. The REIT is currently negotiating with a lender to
refinance the Assumed Liabilities. See "Relationship between the REIT and the
Corporation after the Restructure -- The Assumed Liabilities." The REIT may
30
<PAGE> 37
incur additional indebtedness in the future to support its current investments
in health care-related facilities when, in the opinion of the REIT Board of
Directors, it is advisable. The REIT may, for short term purposes, negotiate
other lines of credit, or arrange for other short term borrowings from banks or
otherwise. The REIT may arrange for long term borrowerings from institutional
investors or through public offerings. The REIT will own and may in the future
invest in properties subject to existing loans or secured by mortgages, deeds of
trust or similar liens with favorable terms.
THE CORPORATION
GENERAL
The Corporation is a newly formed Delaware corporation which will merge
with NHC at the Effective Time. As a result of the merger, the Corporation will
acquire all of the assets and liabilities of NHC other than those transferred to
the REIT. Thus, the Corporation will primarily operate long-term health care
centers and home health care programs in the southeastern United States. As of
September 30, 1997, NHC operated 111 long-term health care centers with a total
of approximately 13,835 licensed beds. Of these 111 centers operated, 17 will be
leased from the REIT, 40 will be leased from NHI and 54 will be managed for
other owners. As of September 30, 1997, NHC also operated 33 homecare programs,
four retirement centers (one managed and three leased) and 14 assisted living
centers (twelve leased and two managed). In addition, as of September 30, 1997,
NHC operated specialized care units such as Alzheimer's Disease care units (10),
sub-acute nursing units (8) and a number of in house pharmacies. Similar
specialty units are under development or consideration at a number of the
Corporation's centers, as well as free standing projects.
LONG-TERM HEALTH CARE CENTERS
The health care centers to be operated by the Corporation provide
in-patient skilled and intermediate nursing care services and in-patient and
out-patient rehabilitation services. Skilled nursing care consists of 24-hour
nursing service by registered or licensed practical nurses and related medical
services prescribed by the patient's physician. Intermediate nursing care
consists of similar services on a less intensive basis principally provided by
non-licensed personnel. These distinctions are generally found in the long-term
health care industry although for Medicaid reimbursement purposes, some states
in which the Corporation operates have additional classifications, while in
other states the Medicaid rate is the same regardless of patient classification.
Rehabilitative services consist of physical, speech, and occupational therapies,
which are designed to aid the patient's recovery and enable the patient to
resume normal activities.
Each health care center has a licensed administrator responsible for
supervising daily activities, and larger centers have assistant administrators.
All have medical directors, a director of nurses and full-time registered nurse
coverage. All centers provide physical therapy and most have other
rehabilitative programs, such as occupational or speech therapy. Each facility
is located near at least one hospital and is qualified to accept patients
discharged from such hospitals. Each center has a full dining room, kitchen,
treatment and examining room, emergency lighting system, and sprinkler system
where required. NHC's Management believes that all centers are in compliance
with the existing fire and life safety codes.
NHC has developed a quality assurance program which it utilizes and the
Corporation will continue to utilize in each of its health care centers to
verify that high standards of care are maintained. An integral part of the
program is a computerized patient assessment system which aids in placing the
patient in the appropriate section of each center (skilled or intermediate) and
monitors the health care needs of the patient, number and frequency of
medications and other essential medical information. The data derived from this
system is used not only to assure that appropriate care is given to each
individual patient, but also to ascertain the appropriate amount of staffing of
each section of the center. Additionally, NHC requires and the Corporation will
require a patient care survey to be performed at least quarterly by the regional
and home office nursing support team, and a "consumer view" survey by senior
management at least twice a year. NHC developed and promotes a "customer
satisfaction" rating system, using 1993 as a bench mark, and requires
significant improvement in the ratings by each center as a condition of
participation in its overall "Excellence Program". The Corporation intends to
continue this system.
The Corporation will provide centralized management and support services to
the Corporation's health care nursing centers. The management and support
services include operational support through the use of regional vice presidents
and regional nurses, accounting and financial services, cash management, data
processing, legal, consulting and services in the area of rehabilitative care.
All personnel will be employed by National and will be leased to the Corporation
pursuant to an Employee Services Agreement. National will be responsible for
overall services in the area of personnel, loss control, insurance, education
and training. The Corporation will reimburse National by paying all the costs of
personnel employed for the benefit of the Corporation as well as a fee. National
is located in Murfreesboro, Tennessee. See "Certain Transactions -- National."
The Corporation will provide the same management services to centers
operated under management contracts as it will provide to centers leased by the
Corporation. The term of each contract and the amount of the management fee will
be determined on a case-by-case basis. Typically, the Corporation will charge a
minimum of 6% of net revenues. The term of the contracts will range from five
years to twenty years. The Corporation will maintain a right of first refusal
should any owner desire to sell a managed center and, in certain situations,
special termination payments have been negotiated should an owner sell to a
third party or terminate or not renew a management contract.
31
<PAGE> 38
All health care centers to be operated by the Corporation are licensed by
the appropriate state and local agencies. All except two are currently certified
as providers for Medicaid patients, and all are currently certified as Medicare
providers. All of the Corporation's centers will be subject to state and federal
licensure and certification surveys. These surveys, from time to time, may
produce statements of deficiencies. In response to such a statement, if any, the
staff at each center will file a plan of correction after consultation with the
Regional Vice President and any alleged deficiencies will be corrected.
Presently, none of NHC's facilities are operating under material statements of
deficiencies which NHC believes would have a material adverse effect on its
operations. The Corporation will have a significant monetary bonus to employees
attached to passing these surveys with few or no deficiencies.
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<PAGE> 39
LONG-TERM HEALTH CARE CENTERS
<TABLE>
<CAPTION>
Total Beds under Development Joined
State City Center Affiliation Beds and Special Care Units NHC
- ----- ---- ------ ----------- ---- ------------------------- -----
<S> <C> <C> <C> <C> <C> <C>
Alabama Anniston NHC HealthCare, Anniston Leased(1) 151 55 bed Alzheimer's unit 1973
Moulton NHC HealthCare, Moulton Leased(1) 136 29 beds under development 1973
Florida Brooksville Brooksville Nursing Manor Managed 180 30 bed Alzheimer's unit 1993
Hudson Bear Creek Nursing Center Managed 120 1993
Crystal River Cypress Cove Care Center Managed 120 1993
Datona Beach NHC HealthCare, Daytona Beach Leased(2) 60 1996
Trenton Ayers Health and Rehabilitation Center Managed 120 30 bed Alzheimer's unit 1993
36 beds under development
Ft. Lauderdale NHC of Ft. Lauderdale Managed 253 1984
New Port Richey Heather Hill Nursing Home Managed 120 1993
Hudson NHC HealthCare, Hudson Leased(1) 180 50 bed subacute care unit 1986
Ft. Lauderdale NHC HealthCare, Coconut Creek Leased(2) 120 1997
Merritt Island NHC HealthCare, Merritt Island Leased(1) 120 22 bed Alzheimer's unit 1990
60 beds under development
Panama City NHC of Panama City Managed 120 1986
Port Charlotte NHC HealthCare, Port Charlotte Leased(2) 180 60 beds subacute care unit 1994
30 bed Alzheimer's unit
Naples NHC HealthCare, Naples Leased(2) 60 1996
Naples NHC HealthCare, Imperial Leased(2) 60 30 beds under development 1994
St. Petersburg NHC HealthCare, St. Petersburg Managed 159 1984
Stuart NHC HealthCare, Stuart Leased(1) 118 24 bed Alzheimer's unit 1989
35 beds under development
Ocoee Ocoee Health Care Center Managed 120 1990
St. Cloud Osceola Health Care Center Managed 120 1991
Palatka Palatka Health Care Center Managed 180 20 bed Alzheimer's unit 1989
Clearwater Palm Garden of Clearwater Managed (3) 120 1987
Gainesville Palm Garden of Gainesville Managed (3) 120 1987
Jacksonville Palm Garden of Jacksonville Managed (3) 120 1990
Largo Palm Garden of Largo Managed (3) 140 1987
N. Miami Beach Palm Garden of N. Miami Beach Managed (3) 120 1988
Ocala Palm Garden of Ocala Managed (3) 120 60 bed subacute care unit 1987
Orlando Palm Garden of Orlando Managed (3) 120 1987
Orlando NHC HealthCare of Orlando Leased (2) 120 30 bed Alzheimer's unit 1997
20 bed subacute care unit
Pensacola Palm Garden of Pensacola Managed (3) 180 1987
Lake City Palm Garden of Lake City Managed (3) 120 28 bed Alzheimer's unit 1992
Largo Palm Garden of Pinellas Managed (3) 120 20 bed subacute care unit 1991
Port St. Lucie Palm Garden of Port St. Lucie Managed (3) 120 1988
Tampa Palm Garden of Tampa Managed (3) 120 1987
Vero Beach Palm Garden of Vero Beach Managed (3) 173 7 beds under development 1987
</TABLE>
33
<PAGE> 40
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
West Palm Beach Palm Garden of West Palm Beach Managed(3) 162 1988
Winter Haven Palm Garden of Winter Haven Managed(3) 120 1987
Plant City NHC HealthCare, Plant City Leased(1) 171 1 bed under development 1985
Dade City Royal Oak Nursing Center Managed 120 1993
Sarasota Sarasota Health Care Center Managed 120 1990
Sun City Palm Garden of Sun City Managed(3) 120 1991
Niceville The Manor at Blue Water Bay Managed 60 1993
Madison Lake Park of Madison Managed 79 23 beds under development 1995
Miami The Nursing Center at Mercy Managed 120 1995
Georgia Fort Oglethorpe NHC HealthCare, Fort Oglethorpe Owned(4) 81 54 beds under development 1989
Rossville NHC HealthCare, Rossville Leased(1) 112 1971
Indiana Brownsburg Brownsburg Health Care Center Managed 178 20 bed Alzheimer's unit 1990
Castleton Castleton Health Care Center Managed 120 18 bed Alzheimer's unit 1990
Evansville Center for Geriatric Nursing Managed 156 1997
Ladoga Ladoga Health Care Center Managed 95 1990
Logansport Camelot Care Center Managed 75 1997
Markle Markle Health Care Managed 66 1997
Plainfield Plainfield Health Care Center Managed 199 22 bed Alzheimer's unit 1990
Westfield Westfield Village Health Care Managed 80 1997
Kentucky Dawson Springs NHC HealthCare, Dawson Springs Leased(1) 80 1973
Glasgow NHC HealthCare, Glasgow Leased(1) 206 1971
Madisonville NHC HealthCare, Madisonville Leased(1) 94 1973
Missouri Desloge NHC HealthCare, Desloge Leased(1) 120 1982
Joplin NHC HealthCare, Joplin Leased(1) 126 1982
Kennett NHC HealthCare, Kennett Leased(1) 160 1982
Macon Macon Health Care Center Managed 120 1982
St. Louis NHC HealthCare, Maryland Heights Leased(1) 220 1987
Osage Beach Osage Beach Health Care Center Managed 120 1982
Springfield Springfield Health Care Center Managed 120 1982
St. Charles NHC HealthCare, St. Charles Leased(1) 120 1982
West Plains West Plains Health Care Center Leased(2) 120 1982
North Carolina Goldsboro Guardian Care Managed 49 1997
South Carolina Anderson NHC HealthCare, Anderson Leased(1) 290 1973
Greenwood NHC HealthCare, Greenwood Leased(1) 152 1973
Sumter NHC HealthCare, Hopewelll Managed 96 1985
Laurens NHC HealthCare, Laurens Leased(1) 176 1973
Aiken Mattie C. Hall Health Care Center Managed 176 44 bed Alzheimer's unit 1982
Clinton NHC HealthCare, Clinton Leased(2) 131 1993
</TABLE>
34
<PAGE> 41
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Murrells Inlet NHC HealthCare, Garden City Leased(2) 88 1992
Greenville NHC HealthCare, Greenville Leased(2) 176 1992
Lexington NHC HealthCare, Lexington Leased(2) 88 12 bed subacute care unit 1994
32 beds under development
Columbia NHC HealthCare, Parklane Leased(2) 120 32 beds under development 1997
30 bed Alzheimer's Unit
____ bed subacute care unit
North Augusta NHC HealthCare, North Augusta Leased(2) 132 1991
Greenville NHC HealthCare, Mauldin Leased(2) 120 1997
Sumter NHC HealthCare, Sumter Managed 120 3 beds under development 1985
Tennessee Murfreesboro Adams Place Leased(2) 40 1997
Carthage Smith County Health Care Center Managed 128 1997
Franklin Franklin Manor Leased(2) 47 1997
Athens NHC HealthCare, Athens Leased(1) 98 1971
Johnson City NHC HealthCare, Johnson City Leased(1) 179 18 bed Alzheimer's unit 1971
Columbia NHC HealthCare, Columbia Leased(1) 120 12 bed subacute care unit 1973
Cookeville NHC HealthCare, Cookeville Managed 96 1975
Franklin NHC HealthCare, Franklin Leased(1) 84 1979
Dickson NHC HealthCare, Dickson Leased(1) 197 1971
Columbia NHC HealthCare, Hillview Leased(1) 98 1971
Knoxville NHC HealthCare, Knoxville Leased(1) 152 1971
Knoxville NHC HealthCare, Fort Sanders Owned(4) 180 12 bed subacute unit 1977
McMinnville NHC HealthCare, McMinnville Leased(1) 150 1971
Lewisburg NHC HealthCare, Lewisburg Leased(1) 95 1971
Murfreesboro NHC HealthCare, Murfreesboro Managed 190 69 bed subacute care unit 1974
Nashville NHC HealthCare, Nashville Leased(1) 133 1975
Hendersonville NHC HealthCare, Hendersonville Leased(1) 117 1987
Lawrenceburg NHC HealthCare, Lawrenceburg Managed 97 1985
Oak Ridge NHC HealthCare, Oak Ridge Managed 130 1977
Lewisburg NHC HealthCare, Oakwood Leased(1) 62 1973
Chattanooga NHC HealthCare, Chattanooga Leased(1) 212 20 bed subacute care 1971
Pulaski NHC HealthCare, Pulaski Leased(1) 104 1971
Milan NHC HealthCare, Milan Leased(1) 129 1971
Lawrenceburg NHC HealthCare, Scott Leased(1) 62 1971
Dunlap NHC HealthCare, Sequatchie Leased(1) 60 60 beds under development 1976
Somerville NHC HealthCare, Somerville Leased(1) 72 1976
Sparta NHC HealthCare, Sparta Leased(1) 150 1975
Springfield NHC HealthCare, Springfield Leased(1) 112 1973
Smithville NHC HealthCare, Smithville Leased(1) 107 1971
Nashville The Health Center of Richland Place Managed 98 1992
Nashville West Meade Place Managed 120 1993
Farragut NHC HealthCare, Farragut Leased(2) 60 1997
Virginia Bristol NHC HealthCare, Bristol Leased(1) 120 1973
</TABLE>
35
<PAGE> 42
ASSISTED LIVING UNITS
<TABLE>
<CAPTION>
State City Center
- ----- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Alabama Anniston NHC Place/Anniston (free-standing) Leased(2) 68
Florida Stuart NHC Place, Stuart Leased(2) 84
Merrit Island NHC Place, Merrit Island Leased(2) 84
Naples NHC HealthCare, Imperial Leased(1) 60
Naples NHC HealthCare, Naples Leased(1) 36
Vero Beach NHC Place/Vero Beach (free-standing) Leased(2) 84
West Palm Beach Palm Garden of West Palm Beach Managed(3) 25
Missouri St. Charles Lake St. Charles Retirement Center Leased(1) 25
Tennessee Murfreesboro Adams Place Leased(2) 84
Dickson NHC HealthCare, Dickson Leased(1) 20
Johnson City NHC HealthCare, Johnson City Leased(1) 15
Nashville, Richland Place Managed 32
Somerville NHC HealthCare, Somerville Leased(1) 12
Farragut NHC Place, Farragut Leased(2) 84
RETIREMENT APARTMENTS
Missouri St. Charles Lake St. Charles Retirement Apartments Leased(1) 155 1984
Tennessee Murfreesboro Adams Place Leased (2) 53 1997
Johnson City Colonial Hill Retirement Apartments Leased(1) 63 1987
Chattanooga Parkwood Retirement Apartments Leased(1) 32 1986
Nashville Richland Place Retirement Apartments Managed 137 1993
HOMECARE PROGRAMS
Total Beds under Development Joined
State City Center Affiliation Beds and Special Care Units NHC
- ----- ---- ------ ----------- ---- ---------------------- -----
Florida Blountstown NHC HomeCare of Blountstown Owned 1994
Carrabelle NHC HomeCare of Carrabelle Owned 1994
Chipley NHC HomeCare of Chipley Owned 1994
Crawfordville NHC HomeCare of Crawfordville Owned 1994
Madison NHC HomeCare of Madison Owned 1994
Marianna NHC HomeCare of Marianna Owned 1994
Ocala NHC HomeCare of Ocala Owned 1996
Panama City NHC HomeCare of Panama City Owned 1994
Panama City NHC Private Nursing Owned 1994
</TABLE>
36
<PAGE> 43
<TABLE>
<S> <C> <C> <C> <C>
Perry NHC HomeCare of Perry Owned 1994
Port St. Joe NHC HomeCare of Port St. Joe Owned 1994
Quincy NHC HomeCare of Quincy Owned 1994
Stuart NHC HomeCare of Stuart Owned 1996
Tallahassee NHC HomeCare of Tallahassee Owned 1994
Vero Beach NHC HomeCare of Vero Beach Owned 1997
South Carolina Aiken NHC HomeCare of Aiken Owned 1996
Greenwood NHC HomeCare of Greenwood Owned 1996
Laurens NHC HomeCare of Laurens Owned 1996
Tennessee Athens NHC HomeCare of Athens Owned 1984
Johnson City NHC HomeCare of Johnson City Owned 1978
Columbia NHC HomeCare of Columbia Owned 1977
Cookeville NHC HomeCare of Cookeville Owned 1976
Dickson NHC HomeCare of Dickson Owned 1977
Lawrenceburg NHC HomeCare of Lawrenceburg Owned 1977
Lewisburg NHC HomeCare of Lewisburg Owned 1977
McMinnville NHC HomeCare of McMinnville Owned 1976
Murfreesboro NHC HomeCare of Murfreesboro Owned 1976
Knoxville NHC HomeCare of Knoxville Owned 1977
Chattanooga NHC HomeCare of Chattanooga Owned 1985
Pulaski NHC HomeCare of Pulaski Owned 1985
Milan NHC HomeCare of Milan Owned 1977
Somerville NHC HomeCare of Somerville Owned 1983
Sparta NHC HomeCare of Sparta Owned 1984
Springfield NHC HomeCare of Springfield Owned 1984
</TABLE>
- -----------------
(1) Leased from NHI
(2) Leased from REIT
(3) Managed by the NHC for FCC. NHC and FCC are currently involved in
litigation regarding certain of these management agreements. See " -- Legal
Proceedings."
(4) NHC HealthCare, Fort Oglethorpe and NHC HealthCare, Fort Sanders are owned
by two limited partnerships. The Corporation will own approximately 79% of
the partnership interest of the partnership which owns Fort Oglethorpe and
25% of the partnership interest of the partnership which owns Fort Sanders.
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<PAGE> 44
HEALTH CARE CENTERS UNDER CONSTRUCTION
The following table sets forth the long-term health care centers or
additions to existing centers under construction as of June 30, 1997 which the
Corporation will operate:
<TABLE>
<CAPTION>
Projected
Location Number of Beds Leased/ Managed Opening Date
-------- -------------- -------------------------- -------------------
<S> <C> <C> <C>
Ft. Lauderdale, FL 120 Leased October 1997
Greenville, SC 120 Leased October 1997
Farragut, TN 144 Leased May 1998
Palatka, FL 60* Managed July 1997
Dunlap, TN 60* Leased January 1998
Smithville, TN 31* Leased July 1997
Merrit Island, FL 60* Leased October 1997
Ft. Oglethorpe, GA 54* Owned October 1997
Ocala, FL 60* Managed August 1997
Naples, FL 30* Leased December 1997
Vero Beach, FL 7* Managed August 1997
Columbia, SC 32* Leased August 1998
</TABLE>
* Expansion of existing center
OCCUPANCY RATES
The following table shows certain information relating to occupancy rates
for NHC with respect to the Corporation's continuing operated long-term health
care centers:
<TABLE>
<CAPTION>
Six months
Year Ended December 31 ended June 30,
---------------------- --------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Overall census 92.8% 93.0% 93.6% 93.21%
Census excluding
acquisitions and new
openings 94.5% 93.0% 93.8% 94.67%
</TABLE>
Occupancy rates are calculated by dividing the total number of days of
patient care provided by the number of patient days available (which is
determined by multiplying the number of licensed beds by 365 or 366).
HOMECARE PROGRAMS
The Corporation's home health programs (called "homecare" by the
Corporation) will provide nursing and rehabilitative services to individuals in
their residences and are licensed by the Tennessee, South Carolina and Florida
state governments and certified by the federal government for participation in
the Medicare program. Each of NHC's 32 Medicare certified homecare programs and
its one private duty program is managed by a registered nurse, with speech,
occupational and physical therapists either employed by the program or on a
contract basis. Homecare visits increased from 717,000 visits in 1995 to 754,000
visits in 1996. Current projections are for approximately 765,000 visits in
1997.
The Corporation will have homecare programs in Tennessee, Florida, and
South Carolina. NHC opened two new program offices in South Carolina and two in
Florida in 1996. The Corporation's Tennessee homecare programs will be
associated with its long-term health care centers and, historically with NHC,
have been based within the health care center. The Corporation's new homecare
programs in Florida will be separately based in an effort to continually expand
the Corporation's market leadership in these services. NHC's experience in this
field indicates that homecare is not a substitute for institutional care in a
hospital or health care center. Instead, the Corporation's homecare programs
will
38
<PAGE> 45
provide an additional level of health care because its centers will be able to
provide services to patients after they have been discharged from the center or
prior to their admission.
ASSISTED LIVING UNITS
As of June 30, 1997, NHC operates 11 assisted living units, eight of which
are located within the physical structure of a long-term health care center or
retirement center and three of which are freestanding and were opened in 1996
and 1997. The Corporation plans to add at least two free standing assisted
living projects each year with the first priority being to serve markets in
which NHC already operates health care centers. Assisted living units provide
basic room and board functions for the elderly with the on-staff availability to
assist in minor medical needs on an as needed basis. Certificates of Need are
generally not necessary to build these projects. NHC has opened one and the
Corporation expects to start construction on two free standing projects in 1998.
RETIREMENT CENTERS
The Corporation's retirement centers will 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. In most cases, retirement centers will also include long-term
health care facilities, either in contiguous or adjacent licensed health care
centers. Charges for services will be paid from private sources without
assistance from governmental 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 required for health care centers. Although NHC has developed
retirement centers adjacent to its health care properties with an initial
construction of 57 to 137 units and which are rented by the month, these centers
offer only the expansion of NHC's continuum of care, rather than a separate
profit center. The projects are designed, however, to be expandable if the
demand justifies. Thus, these retirement units offer a positive marketing aspect
of the Corporation's health care centers.
One retirement area which the Corporation will be entering is that of
"continuing care communities", where the resident pays a substantial endowment
fee and a monthly maintenance fee. The resident then receives a full range of
services - including nursing home care - without additional charge.
One such continuing care community, the 137 unit Richland Place Retirement
Center, was opened in Nashville, Tennessee in January, 1993 and is fully
occupied. NHC is currently marketing additional continuing care retirement
communities in Murfreesboro and Knoxville, Tennessee.
ADDITIONAL SERVICES
The Corporation plans to continue to expand its continuum of care for the
elderly by offering a comprehensive and increasing range of services through
related or separately structured health care centers, homecare programs,
specialized care units, pharmacy operations, rehabilitative services, assisted
living centers and retirement centers, as described below:
A. HOMECARE PROGRAMS. The Corporation's policy will be to affiliate each
of its licensed and certified homecare programs with a Corporation
operated health care center. Although NHC's existing programs have
increased their total number of visits from 94,000 in 1989 to 754,184
in 1996, NHC has applied for and received CONs to expand the program
services in both Florida and South Carolina, and the Corporation will
pursue a number of acquisition opportunities. Such acquired or new
programs are not presently planned to be operated out of a health care
center. Additional certificate of need applications will be filed by
the Corporation during 1998.
B. REHABILITATIVE SERVICES. The Corporation will continue to operate an
intensive offering of physical, speech, and occupational therapy
provided by center specific therapists. NHC increased its staff of
professionally licensed therapists from nearly 800 last year to over
1,000 in 1996. Starting in October, 1993, NHC redirected its focus
from center-based therapists to a wider operational format and has
created a separate rehabilitation subsidiary known as National Health
Rehab (NHR), which will become a subsidiary of the Corporation.
Because of NHC's extensive network of health care centers in the
southeastern United States, the Corporation believes it will be better
able to attract, employ, and retain therapists. The Corporation will
also provide contract services to 606 health care centers owned by
third parties. Provision of these services will not be covered under
the Corporation's contracts to manage health care centers and must be
renegotiated annually with the center owner. The Corporation believes
its rates for these services will be competitive with other market
rates.
C. MEDICAL SPECIALTY UNITS. NHC has required all of its centers to
participate in the Medicare program since 1973, which requirement the
Corporation will continue and intends to expand its range of services
by the creation of center-specific medical specialty units such as
NHC's twelve Alzheimer's disease care units and nine subacute nursing
units. The services will be provided not only at each of the
Corporation's operated center, but also at existing specialized care
units.
D. PHARMACY OPERATIONS. The Corporation's policy will continue to be to
have an in-house pharmacy located in each health care center in those
states where licensure permits the operation of an in-house pharmacy.
In
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<PAGE> 46
other states, pharmaceutical services will be provided by third party
contracts. The Corporation will continue to review opportunities for
regional pharmacy operations and NHC now operates three, one in east
Tennessee and two in central Florida. These pharmacy operations will
operate out of a central office and supply (on a separate contractual
basis) pharmaceutical services and supplies which were formerly
purchased by each center from local vendors. NHC's regional pharmacy
operations now have 5,450 nursing home beds under contract.
E. ASSISTED LIVING PROJECTS. NHC presently operates eleven assisted
living projects, eight of which are located within the physical
structure of a long-term health care center or retirement complex. The
Corporation has identified the assisted living market as an expanding
area for the delivery of health care and hospitality services and will
embark upon a market review in its states of operation for the
construction of free-standing assisted living centers. Assisted living
units provide basic room and board functions for the elderly with the
on-staff availability to assist in minor medical needs on an as needed
basis.
F. NUTRITIONAL SUPPORT SERVICES. The Corporation will own a medical
support services business, which will primarily provide nutritional
enteral, parenteral feeding materials, urological and medical supplies
to patients in the Corporation's facilities as well as in other
long-term care or home settings. This company is headquartered in
Knoxville, Tennessee and is known as Nutritional Support Services
("NSS"). Revenues from this subsidiary accounted for from 4% to 6%
NHC's net revenues in 1996, 1995 and 1994.
G. MANAGED CARE CONTRACTS. The Corporation will have seven regional
contract management offices, staffed by experienced case managers who
contract with managed care organizations ("MCOs") and insurance
carriers for the provision of subacute and other medical specialty
services within a regional cluster of centers. Florida, Middle and
East Tennessee, and South Carolina are currently being serviced by
NHC's seven case managers.
RELATIONSHIP WITH NATIONAL HEALTH INVESTORS, INC.
In 1991 NHC formed NHI, as a wholly-owned subsidiary. It then transferred
to NHI certain healthcare facilities then owned by NHC and then distributed the
shares of NHI to NHC's unitholders. The distribution had the effect of
separating NHC and NHI into two independent public companies. As a result of the
distribution, all of the outstanding shares of NHI were distributed to the then
NHC unitholders.
NHI MASTER AGREEMENT TO LEASE. The Master Agreement to Lease (the "NHI
Master Agreement") with NHI covering 40 nursing homes and three retirement
centers, sets forth certain terms and conditions applicable to all leases
entered into by and between NHI and NHC (each an "NHI Lease", and together, the
"NHI Leases"). the NHI Master Lease and all of the NHI Leases will be assumed by
the Corporation pursuant to the Merger. The NHI Leases are for an initial term
expiring on December 31, 2005 with two five-year renewal options at the election
of the Corporation which allow for the renewal of the NHI Leases on an omnibus
basis only unless otherwise specifically agreed in writing by NHI. During the
initial term and the first renewal term (if applicable), the Corporation is
obligated to pay annual base rent for the respective NHI Leased facilities
aggregating $15.2 million plus additional rent described below on the properties
initially sold to NHI. Additionally, $1.4 million in base rent per year as a
result of expansion of three of the facilities. During the second renewal term,
the Corporation is required to pay annual base rent based on the then fair
market rental of the property as negotiated at that time between NHI and the
Corporation. The NHI Master Agreement also obligates the Corporation to pay as
additional rent under each NHI Lease (i) all payments of interest and principal,
(ii) any other payments due under each mortgage to which the conveyance of the
respective health care facility to NHI was subject and (iii) any refinancing of
such mortgage debt that matures or is required to be paid in its entirety during
the term of the NHI Lease. In addition, each year after 1992 (the first full
calendar year of the term of the NHI Master Agreement), the Corporation is
obligated to pay percentage rent to NHI equal to 3% of the amount by which gross
revenues of each NHI Leased facility in such later year exceeds the gross
revenues of such facility in 1992. NHC paid $1.8 million as percentage rent for
1996 and expects to pay $2.3 million in 1997.
The NHI Master Agreement is a "triple net lease", under which the
Corporation will be responsible to pay all taxes, utilities, insurance premium
costs, repairs (including structural portions of the buildings, constituting a
part of the NHI Leased facilities) and other charges relating to the ownership
and operation of the NHI Leased facilities. The Corporation will be obligated at
its expense to keep all improvements and fixtures and other components of the
NHI Leased 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 NHI Leased 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 the
Corporation at such NHI Leased facility. The Corporation will also be obligated
to indemnify and hold harmless NHI from all claims resulting from the use and
occupancy of each NHI Leased facility by the Corporation or persons claiming
under the Corporation 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 NHI Leased facility.
NHI ADVISORY AGREEMENT. NHI entered into an Advisory, Administrative
Services and Facilities Agreement (the "NHI Advisory Agreement") on October 15,
1991 with NHC as "Advisor", which agreement will be assumed by the Corporation
pursuant to the Merger. Under the NHI Advisory Agreement, the Corporation will
provide management and advisory services to NHI during the term of the NHI
Advisory Agreement. Under the NHI Advisory Agreement, NHI will engage the
Corporation to use its best efforts (a) to present to NHI a continuing and
suitable investment
40
<PAGE> 47
program consistent with the investment policies of NHI adopted by NHI's Board of
Directors from time to time; (b) to manage the day-to-day affairs and operations
of NHI; and (c) to provide administrative services and facilities appropriate
for such management. In performing its obligations under the NHI Advisory
Agreement, the Corporation will be subject to the supervision of and policies
established by NHI's Board of Directors.
The NHI Advisory Agreement was initially for a stated term which expired
December 31, 1996. The NHI Advisory Agreement is now on a year to year term.
Either party may terminate the NHI Advisory Agreement at any time on 90 days
notice, and NHI may terminate the NHI Advisory Agreement for cause at any time.
For its services under the NHI Advisory Agreement, the Corporation will be
entitled to annual compensation in a base amount of $1.625 million. Under the
NHI Advisory Agreement, NHI will reimburse the Corporation 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 fully diluted Funds from Operations per common share (as defined in the NHI
Advisory Agreement). In 1996, the annual compensation under the NHI Advisory
Agreement was $3.1 million and it is expected to be approximately $3.3 million
in 1997.
Pursuant to the NHI Advisory Agreement, the Corporation will manage all of
the day-to-day affairs of NHI and provide all such services through the
Corporation's personnel. The NHI Advisory Agreement provides that without regard
to the amount of compensation received by the Corporation under the NHI Advisory
Agreement, the Corporation shall pay all expenses in performing its obligations
including the employment expenses of the officers and directors and the
Corporation personnel providing services to NHI. The NHI 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 the Corporation.
Currently, other than the NHI directors who are not employees of NHC, NHI does
not have any officers or employees who are not also employees of NHC. NHI's two
executive officers, Mr. Adams and Mr. LaRoche, will be employees of the
Corporation and all of their fees, salaries and employment costs will be paid by
the Corporation.
SOURCES OF REVENUE
The Corporation's revenues will be primarily derived from its health care
centers. The source and amount of the revenues are determined by (i) the
licensed bed capacity of its health care centers, (ii) the occupancy rate of
those centers, (iii) the extent to which the rehabilitative and other skilled
ancillary services provided at each center are utilized by the patients in the
centers, (iv) the mix of private pay, Medicare and Medicaid patients, and (v)
the rates paid by private paying patients and by the Medicare and Medicaid
programs.
The following table sets forth sources of patient revenues to NHC from
health care centers and homecare services for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
Source 1994 1995 1996
- ------ ---- ---- ----
<S> <C> <C> <C>
Private 28% 28% 28%
Medicare 35% 38% 38%
Medicaid/Skilled 11% 9% 9%
Medicaid/Intermediate 25% 24% 24%
VA and Other 1% 1% 1%
--- --- ---
Total 100% 100% 100%
--- --- ---
</TABLE>
GOVERNMENT HEALTH CARE REIMBURSEMENT PROGRAMS
The federal health insurance program for the aged is Medicare, which is
administered by the Department of Health and Human Services. State programs for
medical assistance to the indigent are generally known as Medicaid. All health
care centers to be operated by the Corporation are certified to participate in
Medicare and all but two participate in Medicaid. Eligibility for participation
in these programs depends upon a variety of factors, including, among others,
accommodations, services, equipment, patient care, safety, physical environment
and the implementation and maintenance of cost controls and accounting
procedures. In addition, some of the centers to be operated by the Corproation
have entered into separate contracts with the United States Veterans
Administration which provides reimbursement for care to veterans transferred
from Veterans Administration hospitals.
Generally, government health care reimbursement programs make payments
under a cost based reimbursement system. Although general similarities exist due
to federal mandates, each state operates under its own specific system.
Medicare, however, is uniform nationwide and pays, as defined by the program,
the reasonable direct and indirect cost
41
<PAGE> 48
of services furnished to Medicare patients, including depreciation, interest and
overhead. Medicare payments have previously been limited by ceilings which,
pursuant to the 1993 Tax Reform Act, were frozen at their 1993 level for 1994,
1995 and the first nine months of 1996. During 1996 NHC had 48 owned or leased
centers which operated at Medicare costs higher than the ceiling. NHC has filed
"exception requests" with the fiscal intermediary for substantially all of these
centers. Revenues therefrom will not be booked until paid and audited by the
appropriate payors. Private paying patients, private insurance carriers and the
Veterans Administration generally pay on the basis of the center's charges or
specifically negotiated contracts. Average per capita daily room and board
revenue from private paying patients is higher than from Medicare and Medicaid
patients, while the average per capita daily revenue from Medicare patients is
higher than from Medicaid patients. The Corporation will attempt to attract an
increased percentage of private and Medicare patients by providing
rehabilitative services and by NHC increasing its marketing of those services
through market areas and "Managed Care Offices", of which four were open by
December 31, 1996. These services are designed to speed the patient's recovery
and allow the patient to return home as soon as is practical. In addition to
educating physicians and patients to the advantages of the rehabilitative
services, NHC also has implemented incentive programs which provide for the
payment of bonuses to its regional and center personnel if they are able to
obtain private and Medicare goals at their centers, which programs will be
continued by the Corporation.
Items eligible for payment under the Medicare program consist of nursing
care, room and board, social services, physical and speech therapy, drugs and
other supplies, and other necessary services of the type provided by skilled
nursing facilities. Routine service costs for extended care facilities are
subject to certain per diem costs limits. Medicare patients are entitled to have
payment made on their behalf to a skilled nursing facility for up to 100 days
during each calendar year and a prior 3-day hospital stay is required. A patient
must be certified for entitlement under the Medicare program before the skilled
nursing facility is entitled to receive Medicare payments and patients are
required to pay approximately $95.00 per day after the first 20 days of the
covered stay. Under the Medicare program, the federal government pays directly
to the skilled nursing facility the reasonable direct and indirect costs of the
services furnished. The Medicare program only reimburses for skilled nursing
services, which generally afford a more intensive level of care.
Medicaid programs provide funds for payment of medical services obtained by
"medically indigent persons". These programs are operated by state agencies
which adopt their own medical reimbursement formulas and standards, but which
are entitled to receive supplemental funds from the federal government if their
programs comply with certain federal government regulations. In all states in
which the Corporation will initially operate, the Medicaid programs authorize
reimbursement at a fixed rate per day of service. The fixed rate is established
on the basis of a predetermined average cost of operating nursing centers in the
state in which the facility is located or based upon the center's actual cost.
The rate is adjusted annually based upon changes in historical costs and/or
actual costs and a projected cost of living factor.
During the fiscal year, each facility receives payments under the
applicable government reimbursement program. Medicaid payments are generally
"prospective" in that the payment is based upon the prior years actual costs.
Medicare payments are "retrospective" in that current year payments are designed
to reasonably approximate the facility's reimbursable costs during that year.
Payments under Medicare are adjusted to actual allowable costs each year. The
actual costs incurred and reported by the facility under the Medicare program
are subject to audit with respect to proper application of the various payment
formulas. These audits can result in retroactive adjustments of interim payments
received from the program. If, as a result of such audits, it is determined that
overpayment of benefits were made, the excess amount must be repaid to the
government. If, on the other hand, it is determined that an underpayment was
made, the government agency makes an additional payment to the operator. The
Corporation will book as receivables the amounts which it expects to receive
under the Medicare and Medicaid programs and book into profit or loss any
differences in amounts actually received. To date, adjustments have not had a
material adverse effect on NHC. NHC believes that its payment formulas have been
properly applied and that any future adjustments will not be materially adverse
to the Corporation. The current reimbursement system will be modified in
accordance with the BBA. For further discussion of the BBA See "Health Care
Reform."
REGULATION
Health care centers are subject to extensive federal, state and in some
cases, local regulatory, licensing, and inspection requirements. These
requirements relate, among other things, to the adequacy of physical buildings
and equipment, qualifications of administrative personnel and nursing staff,
quality of nursing provided and continued compliance with laws and regulations
relating to the operation of the centers. In all states in which the Corporation
will initially operate, before the facility can make a capital expenditure
exceeding certain specified amounts or construct any new long-term health care
beds, approval of the state health care regulatory agency or agencies must be
obtained and a Certificate of Need issued. Alabama exempts from this review
process any bed additions which are less than 10% of the total existing licensed
beds or 10 beds, whichever is less. The appropriate state health planning agency
must determine that a need for the new beds or expenditure exists before a CON
can be issued. A CON is generally issued for a specific maximum amount of
expenditure and the project must be completed within a specific time period.
There is no advance assurance that the Corporation will be able to obtain a CON
in any particular instance. In some states, approval is also necessary in order
to purchase existing health care beds, although the purchaser is normally
permitted to avoid a full scale CON application procedure by giving advance
written notice of the acquisition and giving written assurance to the state
regulatory agency that the change of ownership will not result in a change in
the number of beds or the services offered at the facility.
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<PAGE> 49
While there are currently no significant legislative proposals to eliminate
CON pending in the states in which the Corporation initially intends to do
business, deregulation in the CON area would likely result in increased
competition among nursing home companies and could adversely affect occupancy
rates and the supply of licensed and certified personnel.
HEALTH CARE REFORM
Government at both the federal and state levels has continued in its
efforts to reduce, or at least limit the growth of, spending for health care
services, including services to be provided by the Corporation. On August 5,
1997, President Clinton signed into law BBA, which contains numerous Medicare
and Medicaid cost-saving measures, as well as new anti-fraud provisions. The BBA
has been projected to save $115 billion in Medicare spending over the next five
years, and $13 billion in the Medicaid program. Section 4711 of BBA, entitled
"Flexibility in Payment Methods for Hospital, Nursing Facility, ICF/MR, and Home
Health Services", repealed the Boren Amendment, which had required that state
Medicaid programs pay to nursing home providers amounts adequate to enable them
to meet government quality and safety standards; the Boren Amendment was
previously the foundation of litigation by nursing homes seeking rate increases.
In place of the Boren Amendment, the BBA requires only that, for services and
items furnished on or after October 1, 1997, a state Medicaid program must
provide for a public process for determination of Medicaid rates of payment for
nursing facility services, under which proposed rates, the methodologies
underlying the establishment of such rates, and justifications for the proposed
rates are published, and which gives providers, beneficiaries and other
concerned state residents a reasonable opportunity for review and comment on the
proposed rates, methodologies and justifications. Several of the states in which
the Corporation will operate are actively seeking ways to reduce Medicaid
spending for nursing home care by such methods as capitated payments and
substantial reductions in reimbursement rates. The BBA also requires that
nursing homes transition to a prospective payment system under the Medicare
program during a three-year "transition period" commencing with the first cost
reporting period beginning on or after July 1, 1998. In addition, the BBA
creates a managed care Medicare Program called "Medicare + Choice", which allows
Medicare beneficiaries to participate in either the original Medicare
fee-for-service program or to enroll in a coordinated care plan such as health
maintenance organizations ("HMOs"). Such coordinated care plans would allow HMOs
to enter into risk-based contracts with the Medicare program, and the HMO's
would then contract with providers such as the Corporation. No assurances can be
given that the facilities to be operated by the Corporation will be successful
in negotiating favorable contracts with Medicare + Choice managed care
organizations. The BBA also contains several new antifraud provisions. Given the
recent enactment of the BBA, the Corporation is unable to predict the impact of
the BBA and potential changes in state Medicaid reimbursement methodologies on
its operations; however, any significant reduction in either Medicare or
Medicaid payments could adversely affect the Corporation. Changes in
certification and participation requirements of the Medicare and Medicaid
programs have restricted, and are likely to continue to restrict further,
eligibility for reimbursement under those programs. Failure to obtain and
maintain Medicare and Medicaid certification at the Corporation's facilities
will result in denial of Medicare and Medicaid payments which could result in a
significant loss of revenue to the Corporation. In addition, private payors,
including managed care payors, increasingly are demanding that providers accept
discounted fees or assume all or a portion of the financial risk for the
delivery of health care services. Such measures may include capitated payments
whereby the Corporation is responsible for providing, for a fixed fee, all
services needed by certain patients. Capitated payments can result in
significant losses if patients require expensive treatment not adequately
covered by the capitated rate. Efforts to impose reduced payments, greater
discounts and more stringent cost controls by government and other payors are
expected to continue. For the fiscal year ended December 31, 1996, NHC derived
38% and 33% of its net patient revenues from the Medicare and Medicaid programs,
respectively. Any reforms that significantly limit rates of reimbursement under
the Medicare or Medicaid programs, therefore, could have a material adverse
effect on the Corporation's profitability. The Corporation is unable to predict
what reform proposals or reimbursement limitations will be adopted in the future
or the effect such changes will have on its operations. No assurance can be
given that such reforms will not have a material adverse effect on the
Corporation. See "Business --The Corporation -- Sources of Revenue"
Nursing homes and home health agencies have recently been the target of
health care reform, from both a fraud and reimbursement perspective. Operation
Restore Trust, a demonstration project which has been conducted by the
Department of Health and Human Services in five states, is expanding to a dozen
more states. "ORT Plus" will continue its focus on fraud in the areas of home
health, nursing home and DME suppliers, as well as adding new anti-fraud and
abuse targets. The Corporation will operate nursing homes and home health
agencies in five ORT Plus states and could be subject to increased scrutiny.
President Clinton recently announced a moratorium on the certification of home
health agencies in an attempt to curb what is perceived to be rampant fraud and
abuse in this area. The Corporation cannot predict what impact ORT Plus or this
moratorium will have on its home care programs. Although NHC's management
believes that its home care and nursing home operations are in compliance with
applicable laws and regulations, there can be no assurance that the Corporation,
its home care and nursing home operations will not be the subject of an
investigation nor that they will be found to be in compliance if investigated.
See "Business -- The Corporation -- Legal Proceedings."
Although it is likely that there will be a substantial reduction in the
growth of governmental revenues for Medicare and Medicaid, the Corporation
believes that loss of governmental revenues can be offset by increased private
paying revenues and the continued expansion of its service component income.
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<PAGE> 50
COMPETITION
In most of the communities in which the health care centers which will be
operated by the Corporation are located, there are other health care centers
with which the Corporation will compete. In competing for patients and staff
with these centers, the Corporation will rely upon referrals from acute care
hospitals, physicians, residential care facilities, church groups and other
community service organizations. The reputation in the community and the
physical appearance of the Corporation's health care centers will also be
important in obtaining patients, since members of the patient's family generally
participate to a greater extent in selecting health care centers than in
selecting an acute care hospital. The Corporation believes that by providing and
emphasizing rehabilitative as well as skilled care services at its centers, it
will be able to broaden its patient base and to differentiate its centers from
competing health care centers.
The Corporation will experience competition in employing and retaining
nurses, technicians, aides and other high quality professional and
non-professional employees. In order to enhance its competitive position, the
Corporation will continue NHC's educational tuition loan program, an American
Dietary Association approved internship program, a specially designed nurse's
aide training class, and make financial scholarship aid available to physical
therapy vocational programs and The Foundation for Geriatric Education. The
Corporation will also continue NHC's "Administrator in Training" course, 24
months in duration, for the professional training of administrators. Presently,
NHC has twelve full-time individuals in this program. Four of NHC's eight
regional vice presidents and 53 of its 110 health care center administrators
have graduated therefrom.
The Corporation's employee benefit package will offer a tuition
reimbursement program. The goal of the program will be to insure a well trained
qualified work force to meet future demands. While the program will be offered
to all disciplines, special emphasis will be placed on supporting students in
nursing and physical therapy programs. Students will be reimbursed at the end of
each semester after presenting tuition receipts and grades to management. The
program has been successful for NHC in providing a means for many bright
students to pursue a formal education.
EMPLOYEES
As of June 30, 1997, NHC's managed centers had approximately 16,000 full
and part time employees, who are called "Partners" by NHC. The Corporation
intends to retain all of these employees although they will be employees of
National and provided to the Corporation pursuant to the Employee Services
Agreement. No employees are presently represented by a bargaining unit. NHC and
National believe their current relations with these employees are good. See
"Certain Transactions -- National."
LEGAL PROCEEDINGS
In March 1996, FCC, an independent Florida corporation for whom NHC manages
sixteen licensed nursing centers in Florida, gave NHC notice of its intent not
to renew one management contract. Pursuant to written agreements between the
parties, NHC valued the center, offering to either purchase the center at the
price so valued or require FCC to pay to NHC certain deferred compensation based
upon that value. FCC responded on March 26, 1996, by filing a Declaratory
Judgment suit in the Circuit Court of the Twelfth Judicial Circuit in and for
Sarasota County, Florida, requesting the court to interpret the parties' rights
under their contractual arrangements. FCC next sued on April 18, 1996 in the
Circuit Court for Columbia County, Florida, removed on May 1, 1996 to the United
States District Court, Middle District, Florida, Jacksonville Division to obtain
possession of the center for which it alleged the management contract had been
terminated. This suit has now been dismissed, and the issue of possession will
be decided by the Sarasota Circuit Court.
In January, 1997, FCC notified NHC that it currently does not intend to
renew an additional four contracts which mature in 1997, but has agreed that NHC
will remain as manager until a final decision is reached by the Sarasota Court.
The balance of the FCC contracts may be terminated in the years 2001-2003. In
the summer of 1997, FCC filed a Third Amended and Supplemental Complaint in the
Sarasota County Court action asserting fifteen separate counts against NHC and
its general partners, which are collectively referred to as NHC in the
complaint. Among the claims added in the amended complaint are claims for breach
of all management agreements between the parties, for a declaration that FCC
does not owe any deferred contingent fees to NHC or in the alternative, a
declaration that any such deferred fees constitute usurious interest, for breach
of a 1994 loan agreement between FCC and defendants related to the construction
of a facility in Orlando, for business libel, and for breach of fiduciary duty
arising from defendants' alleged obstruction of FCC's right to audit, from
defendants' alleged failure to properly manage FCC's facilities, and from
defendants' alleged self dealing by causing FCC and defendants or their
affiliates to enter into contracts that are not customary or usual in the
industry. In additional to declaratory relief, FCC asserts that it is entitled
to unspecified damages and to terminate all of the management agreements between
the parties for cause. Defendants, including NHC, have filed an answer denying
all of FCC's claims and asserting a counterclaim against FCC. No trial date has
been set in this matter.
NHC is also a defendant in a lawsuit styled Braeuning, et al vs. National
HealthCare L.P., et al filed "under seal" in the U.S. District Court of the
Northern District of Florida on April 9, 1996. The court removed the seal from
the complaint - but not the file itself - on March 20, 1997 and service of
process occurred on July 8, 1997, with the government participating as an
intervening plaintiff. The suit alleges that NHC has submitted cost reports and
routine cost limit exception requests containing "fraudulent allocation of
routine nursing services to ancillary service cost centers" and improper
allocation of skilled nursing service hours in four managed centers, all in the
state of Florida.
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The suit was filed under the Qui Tam provisions of the Federal False Claims Act,
commonly referred to as the "Whistleblower Act".
In regard to the allegations contained in the lawsuit, NHC believes that
the cost report information of its centers have been either appropriately filed
or, upon appropriate amendment, will reflect adjustments only for the correction
of unintentional misallocations. Prior to the filing of the suit, NHC had
commenced an in-depth review of the nursing time allocation process at its
owned, leased and managed centers. A significant number of amended cost reports
have been filed and the Corporation will continue to schedule and prepare
revised cost reports and exception requests. It is anticipated that any years in
question will be reviewed prior to there being further action in this matter at
the judicial level. NHC is fully cooperating and the Corporation will fully
cooperate with the government in an attempt to determine dollar amounts
involved, and each intends to aggressively pursue an amicable settlement. The
cost report periods under review include periods from 1991 through 1995.
NHC would be responsible for any settlement related to its owned or leased
facilities and to the extent that managed centers have settlements, NHC's 6%
management fee would be adversely impacted. The Corporation will continue NHC's
revenue policy not reflect routine cost limit exception requests as income until
the process, including cost report audits, is completed. The Corporation cannot
predict at this time the ultimate outcome of the suit but will strongly defend
its actions in this matter.
In October 1996 two managed centers in Florida were audited by
representatives of the regional office of the OIG. As part of these audits, the
OIG reviewed various records of the facilities relating to allocation of nursing
hours and contracts with suppliers of outside services. At one center the OIG
indicated during an exit conference that it had no further questions but has not
yet issued a final report. At the second facility - which is one of four named
in the Braeuning lawsuit - the OIG determined that certain records were
insufficient and NHC supplied the additional requested information. These audits
have been incorporated into the lawsuit.
Florida is one of the states in which governmental officials are conducting
"Operation Restore Trust", a federal/state program aimed at detecting and
eliminating fraud and abuse by providers in the Medicare and Medicaid programs.
The OIG has increased its investigative actions in Florida (and has now opened a
Tennessee office) as part of Operation Restore Trust. The Corporation will
continue to review and monitor the cost reporting process and its compliance
with all government reimbursement standards, but cannot predict whether the OIG
or other government officials will take further action or request additional
information as a result of the Braeuning suit or any other audit that may be
conducted in the future. An adverse determination in the lawsuit or as a result
of an audit could subject the Corporation to civil or criminal fines and
penalties which could have a material negative impact on the profitability of
the Corporation.
NHC is subject to claims and suits in the ordinary course of business,
which will be assumed by the Corporation as a result of the Plan of Restructure.
While there are several worker's compensation and personal liability claims
presently in the court system, management believes that the ultimate resolution
of such pending proceedings other than the legal proceedings described above
will not have any material adverse effect on the Corporation or its operations.
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RELATIONSHIP BETWEEN THE REIT AND THE
CORPORATION AFTER THE RESTRUCTURE
THE ASSUMED LIABILITIES
The REIT will assume or take the Owned Healthcare Facilities subject to
Assumed Liabilities of approximately $105.9 million. The Assumed Liabilities
consist of four loan agreements which are secured by mortgages on certain of the
Owned Healthcare Facilities. The interest rate on the Assumed Liabilities
include fixed rates of 8% to 8.64% and floating rate based on prime rate and
LIBOR plus 1%. The term of the loans range from 2005 through 2015.
Although the REIT is assuming or taking the Owned Healthcare Facilities
subject to the Assumed Liabilities, unless the holder of such debt has
specifically consented, the Corporation will remain liable on such debt. The
REIT has agreed to indemnify NHC and the Corporation in respect of such
continuing liability. In connection with the transfer of the Owned Healthcare
Facilities and the Notes to the REIT, and the assumption by the REIT of the
Assumed Liabilities, NHC, the REIT and the Corporation have obtained oral
consents, subject to the preparation and execution of definitive documentation,
of the lenders of such Assumed Liabilities. Although there can be no assurance,
NHC management has no reason to believe that such documentation will not be
finalized in a timely manner. However, NHC, the REIT and the Corporation have
not obtained consents of the lenders of the remaining principal amount. See
"Risk Factors -- The REIT -- Lack of Consents; Acceleration of Certain
Maturities." In the event that the REIT or the Corporation fails to obtain any
required consent, such failure may be deemed to constitute a default under the
related Assumed Liabilities, the REIT and/or the Corporation may be required to
retire such Assumed Liabilities prior to its stated maturity. A default under
such debt, if not waived or cured, could result in a loss of certain of the
REIT's or the Corporation's assets through foreclosure or other means.
The majority of the Assumed Liabilities is cross-defaulted with other NHC
liabilities which will be assumed by the Corporation. Thus, in the event the
Corporation defaulted on its remaining obligations under its debt package, the
REIT could lose its interest in the Notes or the Owned Healthcare Facilities,
even if its own payments on the Assumed Liabilities were current.
The REIT is in the process of negotiating a new credit agreement (the "New
REIT Credit Agreement") which, if obtained, will be used to replace all but
approximately $14.8 million of the Assumed Liabilities. The REIT is seeking a
$105 million unsecured credit facility. The REIT believes it will be able to
obtain the new credit soon after the Effective Time. The New REIT Credit
Agreement will be the sole obligation of the REIT and once it is in place, the
Corporation will not have any obligations in the event of a default by the REIT.
There can be no assurance that the REIT will be able to successfully negotiate
the New REIT Credit Agreement or what the final terms of any such credit
agreement will be.
In addition, the Corporation is also in the process of negotiating a new
credit agreement (the "New Corporation Credit Agreement") which, if obtained,
will be used to replace a portion of its outstanding debt. The Corporation is
seeking a $35 million credit facility. The Corporation believes it will be able
to obtain the debt soon after the Effective Time. The New Corporation Credit
Agreement will be the sole obligation of the Corporation and once it is in
place, the REIT will not have any obligations in the event of a default by the
Corporation. There can be no assurance that the Corporation will be able to
successfully negotiate the New Corporation Credit Agreement or what the final
terms of any such credit agreement will be.
THE LEASES
Concurrently with NHC's conveyance of the Owned Healthcare Facilities to
the REIT, the REIT as "Landlord" will lease back to the Corporation, as "Tenant"
each of the Owned Healthcare Facilities. Each such facility will be the subject
of a separate Lease Agreement that will incorporate the provisions of a Master
Agreement to Lease between the REIT as Landlord and the Corporation as Tenant
(the "REIT Master Agreement").The Lease of each Owned Healthcare Facility will
include the land, the buildings and structures and other improvements thereon,
easements, rights and similar appurtenances to such land and improvements, and
permanently affixed equipment, machinery and other fixtures relating to the
operation of the Owned Healthcare Facility, but no personal property of the
Corporation that is utilized in the Corporation's operation of the Owned
Healthcare Facility will be the subject of a Lease.
The REIT Master Agreement provides that each Lease will be for an initial
term expiring on December 31, 2007 (the "Initial Term"). Provided that the
Corporation is not then in default and gives at least six months notice, the
Corporation has the option to renew all (but without REIT's consent not less
than all) of the Leases for a further five-year term expiring December 31, 2012
(the "First Renewal Term"); and, provided that the Corporation is not then in
default and gives at least six (6) months notice, the Corporation will have the
option to renew all (but not less than all) of the Leases for a term expiring
December 31, 2017 (the "Second Renewal Term").
During the Initial Term and both Renewal Terms (if applicable), the
Corporation is obligated to pay the REIT annual base rent for the respective
Owned Healthcare Facilities in the respective amounts set forth under "Business
- -The REIT -- Owned Healthcare Facilities", which amounts initially to an
aggregate $15,494,437 increased each year by 3% of the increase in gross
revenues over 1999, the "base year."
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The REIT Master Agreement and the respective Leases will also obligate the
Corporation to pay as "other additional rent" all real estate taxes, utility
charges and other charges imposed by third parties and which, if not paid, might
become a levy or a lien upon the property. In addition to the base rent, and
other additional rent, in each year after 1999 the Corporation must pay
percentage rent to the REIT equal to 3% of the amount by which gross revenues of
each Owned Healthcare Facility in such later year exceeds the Gross Revenues of
such Owned Healthcare Facility in 1999. Base Rent, Other Additional Rent and
Percentage Rent are collectively referred to in the REIT Master Agreement as
"Rent". NHC believes that the rent the Corporation will pay to the REIT under
the various Leases represents the fair rental value for each leased property.
Each Lease of an Owned Healthcare Facility is what is commonly known as a
"triple net lease" or "absolute net lease," under which the Corporation is
responsible to pay all taxes, utilities, insurance premium costs, repairs
(including to structural portions of the buildings constituting a part of the
Owned Healthcare Facilities) and other charges relating to the ownership and
operation of the Owned Healthcare Facilities. The Corporation is obligated at
its expense to keep all improvements and fixtures and other components of the
Owned Healthcare Facilities covered by "all risk" insurance in an amount equal
to at least 100% of the full replacement costs thereof, and insured against
boiler explosion and similar insurance; to provide loss of rent insurance (if
the same is available at a reasonable cost), and flood insurance if the land
constituting the Owned Healthcare Facility is located within a designated flood
plain area; and to maintain specified minimal personal injury and property
damage insurance, protecting the REIT as well as the Corporation at each Owned
Healthcare Facility. The Corporation is also obligated to indemnify and hold
harmless the REIT from all claims resulting from the use and occupancy of each
Owned Healthcare Facility by Corporation or persons claiming under the
Corporation and related activities, as well as to be fully responsible for, and
to indemnify and hold the REIT harmless against, all costs related to any
hazardous substances or materials on, or other environmental responsibility with
respect to, each Owned Healthcare Facility.
Under each Lease, the Corporation's use of the Owned Healthcare Facility is
limited to use as a nursing home, healthcare facility or other purpose for which
the Leased Property is being used at the commencement date of the Lease unless
the REIT's consent to some other use is obtained. The Corporation has
responsibility to obtain and maintain all licenses, certificates and consents
needed to use and operate each Owned Healthcare Facility for such purposes, and
to use and maintain each Owned Healthcare Facility in a careful, safe and proper
manner and in compliance with all local board of health and other applicable
governmental and insurance regulations. Each Lease permits the Corporation to
replace fixtures at each Owned Healthcare Facility and to finance such
replacement (subject to the approval of the REIT in the case of any financing in
excess of $10,000), and to make alterations with respect to any Owned Healthcare
Facility (subject to the REIT's approval for any alteration in excess of
$150,000 at any one Owned Healthcare Facility in any one year), with the title
to any such replacement fixtures and alterations belonging to the REIT.
An "Event of Default" will be deemed to have occurred under the REIT
Master Agreement and any individual Lease if the Corporation fails to pay Rent
within ten business days after notice of nonpayment from the REIT; if the REIT
gives three or more notices of nonpayment of Rent to the Corporation in any
one year (provided however that such will not be an Event of Default if REIT
fails to exercise its remedies within 60 days after the last of such notices);
if the Corporation fails to perform any other covenant and the Corporation
does not diligently undertake to cure the same within 30 days' notice from the
REIT; with respect to a Lease of any particular Owned Healthcare Facility, if
the Corporation ceases operations thereof for more than 180 days other than as a
result of destruction or condemnation; if any bankruptcy proceedings are
instituted by or against the Corporation and, if against the Corporation, they
are not dismissed within 90 days; if a custodian or receiver is appointed for
any Owned Healthcare Facility and not discharged within 60 days or the
Corporation is enjoined or prevented from conducting a substantial part of its
business for more than 60 days; if uncontested liens on any part of the property
of the Corporation are not dismissed or bonded within 60 days; or if the
Corporation or any affiliate of the Corporation defaults on any other material
obligation to the REIT or on any material obligation under any debt associated
with any Owned Healthcare Facility or any debt co-guaranteed by the REIT and the
Corporation.
In the event of any Event of Default, the REIT may evict the Corporation
and either terminate the Lease or re-let the premises in the REIT's name but for
the account of the Corporation. In either event, the Corporation shall remain
responsible for the rental value of the premises for the stated remainder period
of the term in excess of rents received by the REIT from any successor occupant.
In addition the REIT may exercise any other rights that it may have under law.
In the event of any damage or destruction to any Owned Healthcare Facility,
the Corporation has the obligation fully to repair or restore the same at the
Corporation's expense, with the Base Rent, real estate taxes and other
impositions on the particular Owned Healthcare Facility being appropriately
abated during the time of restoration. If any Owned Healthcare Facility is
damaged to such an extent that 50% of the licensed nursing home beds at such
Owned Healthcare Facility are rendered unusable and if the Corporation has fully
complied with the insurance obligations with respect to such Owned Healthcare
Facility (including maintaining insurance against loss of rents), the
Corporation may upon turning over all insurance proceeds with respect to such
Owned Healthcare Facility terminate the Lease of that Owned Healthcare Facility.
In the event of a condemnation or taking of any leased Owned Healthcare
Facility, the Lease terminates as to the portion of the Owned Healthcare
Facility taken, and in the event of a partial taking, the Corporation is
obligated to repair the portion not taken, if the same may still be economically
used, and the Base Rent therefor will abate in proportion to the number of beds
remaining.
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The REIT Master Agreement provides that if during the Lease Term or within
six months after termination of such Term the REIT receives a bona fide third
party offer to purchase any Owned Healthcare Facility, then, prior to accepting
such third party offer, the REIT shall give the Corporation a 15-day right of
first refusal during which the Corporation may elect to purchase such Owned
Healthcare Facility on the same terms and conditions offered by the third party.
The Corporation also is granted a thirty day right of first refusal to lease an
Owned Healthcare Facility expiring six months after the expiration of the Lease
Term, on the same terms and conditions as offered by a third party.
Various other provisions of the REIT Master Agreement with respect to
Leases of the various Owned Healthcare Facilities provide for arbitration in the
event of the REIT and the Corporation's inability to resolve disputes under the
REIT Master Agreement or any Lease. Such Agreement also provides that upon its
termination and the last of the Leases between the REIT and the Corporation, the
REIT will, upon the Corporation's request within 12 months after such
termination, use its best efforts to change its corporate name to a name that
does not include the word "National".
The REIT Master Agreement described above applies only to the 24 Leases of
the Owned Healthcare Facilities. The REIT and the Corporation anticipate that
any future leases of additional healthcare facilities between them will also
become subject to the REIT Master Agreement with appropriate modifications to
fit the specific situation. The foregoing summary of certain of the provisions
of the REIT Master Agreement does not purport to be complete and is subject to
and qualified in its entirety by reference to all provisions of the REIT Master
Agreement.
ADVISORY, ADMINISTRATIVE SERVICES AND FACILITIES AGREEMENT
The REIT intends to enter into an Advisory, Administrative Services and
Facilities Agreement with the Corporation as "Advisor" under which the
Corporation will provide management and advisory services to the REIT during the
term of the REIT Advisory Agreement. The following summary of certain provisions
of the REIT Advisory Agreement does not purport to be complete and is subject to
and qualified in its entirety by reference to all provisions of the REIT
Advisory Agreement.
SERVICES OF ADVISOR
Under the REIT Advisory Agreement, the REIT engages the Corporation and the
Corporation , as Advisor, agrees to use its best efforts (a) to present to the
REIT a continuing and suitable investment program consistent with the investment
policy of the REIT adopted by the Directors from time to time; (b) to manage the
day-to-day affairs and operations of the REIT; and (c) to provide administrative
services and facilities appropriate for such management. In performing its
obligations under the Agreement, the Advisor is subject to the supervision of
and policies established by the REIT's Board of Directors.
The specific duties of the Advisor under the REIT Advisory Agreement
include providing the REIT with economic information and evaluations with
respect to additional investment opportunities, formulating an investment
program and selecting potential investments for the REIT and recommending the
terms thereof; and also evaluating and making recommendations as to the possible
sale or other disposition of the assets of the REIT. The Advisor also is
responsible for recommending selections of tenants, lenders, providers of
professional and specialized services and handling other managerial functions
with respect to the REIT's properties. The Advisor is also obligated to provide
office and clerical facilities adequate for the REIT's operations, and to
provide or obtain others to provide accounting, custodial, funds collection and
payment, stockholder and debentureholder communications, legal and other
services necessary in connection with the REIT's operations. The Advisor also
undertakes to keep the REIT's Directors informed as to developments in the
healthcare and REIT industries useful to the REIT's existing and potential
future business and investments.
The REIT Advisory Agreement also obligates the Advisor to handle or arrange
for the handling of the REIT's financial and other records. The Advisor is also
required to keep its own records with respect to its services under the REIT
Advisory Agreement. Annually, or as more frequently requested by the REIT's
Directors, the Advisor is obligated to report to the Directors its estimated
costs in providing services under the REIT Advisory Agreement and such
information as the Advisor may reasonably obtain concerning the cost to other
REITs specializing in healthcare facility investments of administrative and
advisory services comparable to those provided by the Advisor, in order that the
REIT's Directors may evaluate the performance of the Advisor and the efficiency
of the arrangements provided to the REIT under the Agreement.
RESTRICTIONS ON INVESTMENT ACTIVITIES
The REIT Advisory Agreement provides that prior to the earlier to occur of
that period of time equal to the lesser of (i) the termination, for any reason,
of the REIT Advisory Agreement or (ii) the Corporation ceasing to be actively
engaged as the investment advisor for NHI, the REIT will not (without the prior
approval of NHI) transact business with any party, person, company or firm other
than the Corporation. It is the intent of the foregoing restriction that the
REIT will not be actively or passively engaged in the pursuit of additional
investment opportunities, but rather will focus upon its capacities as landlord
and note holder of those certain assets conveyed to it in the Plan of
Restructure.
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TERM
The REIT Advisory Agreement is for a stated term expiring December 31, 2003
and thereafter from year to year unless earlier terminated. However, either
party may terminate the REIT Advisory Agreement at any time on or after January
1, 2000 on 90 days written notice, and the REIT may terminate the REIT Advisory
Agreement for cause at any time.
Upon termination of the REIT Advisory Agreement for any reason, the Advisor
is obligated to deliver all property of the REIT that the Advisor is holding in
its capacity as Advisor, to render a full accounting to the REIT and to
cooperate with the REIT Directors to provide an orderly management transition.
The REIT is obligated, upon such termination, to pay the Corporation all
compensation for services through the date of termination, including any
compensation the payment of which was deferred during the period the REIT
Advisory Agreement was in effect.
COMPENSATION
For its services under the REIT Advisory Agreement, the Corporation is
entitled to annual compensation of the greater of (i) two percent (2%) of the
REIT's gross consolidated revenues calculated according to generally accepted
accounting principles, or (ii) the actual expenses incurred by the Corporation
as outlined in the REIT Advisory Agreement.
However, the REIT Advisory Agreement conditions payment of such annual
compensation to the Advisor in any year upon the REIT's having Funds From
Operations (as defined in the REIT Advisory Agreement) in such year equal to at
least the product of (i) $1.33 times (ii) the average number of shares of the
REIT outstanding on each dividend record date during such year (the "Dividend
Requirement"). In the event that Funds From Operations is less than the Dividend
Requirement for any year, the compensation payable to the Corporation in respect
of such year shall be reduced by the amount of such shortfall ("Shortfall
Amount"), and the Corporation is obligated to repay any portion of the Shortfall
Amount previously received for such year. The Advisor is entitled to payment of
any Shortfall Amount from a prior year, together with interest at 2% over the
prime lending rate of the Corporation's principal bank in Tennessee, to the
extent that Funds From Operations in a subsequent year exceeds the Dividend
Requirement, and in any event upon the termination of the REIT Advisory
Agreement for any reason.
For purposes of determining the Advisor's compensation, the REIT Advisory
Agreement defines "Funds From Operations" as the consolidated net income of the
REIT computed in accordance with generally accepted accounting principles, plus
depreciation and amortization, less the amount of any capital gains or plus the
amount of any capital losses included in such net income, before applying the
payment of the compensation under the REIT Advisory Agreement. Per share Funds
From Operations, or per share dividends paid, in any year is the amount of the
Funds From Operations, or dividends paid, for that year divided by the average
number of shares of REIT Common Stock outstanding during the year determined in
accordance with generally accepted accounting principles.
PAYMENT OF EXPENSES
The REIT Advisory Agreement provides that the Corporation shall pay all
expenses incurred in performing its obligations thereunder, without regard to
the amount of compensation received under the Agreement. Expenses specifically
listed as expenses to be borne by the Corporation without reimbursement include:
the cost of accounting, statistical or bookkeeping equipment necessary for the
maintenance of the REIT's books and records; employment expenses of the officers
and directors and personnel of the Corporation and all expenses, including
travel expenses, of the Corporation incidental to the investigation and
acquisition of properties for the REIT prior to the time the REIT Directors
definitively decide to acquire the property or to have the Corporation continue
with the acquisition process, whether the property is acquired or not, and after
the REIT Directors definitively decide to dispose of a property; advertising and
promotional expenses incurred in seeking and disposing of investments for the
REIT; rent, telephone, utilities, office furniture and furnishings and other
office expenses incurred by or allocable to the Corporation for its own benefit
and account regardless of whether incurred or used in connection with rendering
the services to the REIT provided for in the REIT Advisory Agreement; all
miscellaneous administrative and other expenses of the Corporation, whether or
not relating to the performance by the Corporation of its functions under the
REIT Advisory Agreement; fees and expenses paid to independent contractors,
appraisers, consultants, attorneys, managers and other agents retained by or on
behalf of the REIT and expenses directly connected with the acquisition,
financing, refinancing, disposition and ownership of real estate interests or of
other property (including insurance premiums, legal services, brokerage and
sales commissions, maintenance, repair and improvement of property); insurance
as required by the REIT Directors (including REIT Directors' liability
insurance); expenses connected with payments of dividends or distributions in
cash or any other form made or caused to be made by the REIT Directors to REIT
shareholders and expenses connected with payments of interest to holders of the
REIT's debentures; all expenses connected with communication to holders of
securities of the REIT and the other bookkeeping and clerical work necessary in
maintaining relations with holders of securities, including the cost of printing
and mailing certificates for securities and proxy solicitation materials and
reports to holders of the REIT's securities; transfer agent's, registrar's,
dividend disbursing agent's, dividend reinvestment plan agent's and indenture
trustee's fees and charges. The REIT Advisory Agreement also confirms that the
Corporation shall pay all costs and expenses which it is obligated to pay as
tenant under any lease of healthcare facilities from the REIT.
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The REIT Advisory Agreement also confirms that the Corporation is
responsible for all legal and auditing fees and expenses of the REIT and legal,
auditing accounting, underwriting, brokerage, listing, registration and other
fees and printing, engraving and other expenses and taxes incurred in connection
with the organization of the REIT, but such expenses incurred after January 1,
1998 for the issuance, distribution, transfer, registration and listing of the
REIT Shares shall remain the REIT's obligation.
The REIT Advisory Agreement provides that, except as the Corporation may
have responsibility for such costs as tenant under the lease of any property
from the REIT, the REIT is responsible to pay its own expenses of the following
types: dividends, the cost of borrowed money; taxes on income and taxes and
assessments on real property and all other taxes applicable to the REIT
including, without limitation, franchise and excise fees; except as assumed by
the Corporation, all ordinary and necessary expenses incurred with respect to
and allocable to the prudent operation and business of the REIT including,
without limitation, any fees, salaries and other employment costs, taxes and
expenses paid to REIT Directors, officers and employees of the REIT who are not
also employees of the Corporation.
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PRO FORMA FINANCIAL INFORMATION
The audited financial statements of NHC for each of the years ended
December 31, 1996, 1995 and 1994 and the unaudited financial statements for the
six months ended June 30, 1997 and 1996 are included in the Proxy
Statement/Prospectus.
The following unaudited pro forma balance sheets as of June 30, 1997 and
statements of income for the year ended December 31, 1996 and the six months
ended June 30, 1997 of National HealthCare Corporation and National Health
Realty, Inc. have been prepared based on the historical statements as adjusted
to reflect the proposed Restructure between NHC, National HealthCare Corporation
and National Health Realty, Inc. and the sale and subsequent conversion of
subordinated convertible debentures by NHC as outlined in the notes to the pro
forma financial statements as if they occurred on June 30, 1997 for the balance
sheets and on January 1, 1996 for the statements of income.
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
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Actual Debit Credit Pro Forma
----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Revenues:
Rent income $ -- $ 11,173(a) $ 11,173
Interest -- 9,037(c) 9,037
----------- ------------ ----------------
Net revenues -- 20,210 20,210
----------- ------------ ----------------
Costs and Expenses:
Operating and administrative -- $ 404(e) 404
Provision for depreciation and amortization -- 3,580(b) 3,580
Interest -- 3,142(d) 3,142
----------- ----------- ----------------
Total costs and expenses -- 7,126 7,126
----------- ----------- ----------------
Net Income from Operations -- 7,126 20,210 13,084
Minority Interest in Earnings of Consolidated Subsidiary -- 1,191 (f) 1,191
----------- ----------- ------------ ----------------
Net Income $ -- $ 8,317 $ 20,210 $ 11,893
=========== =========== ============ ================
Earnings Per Share
Primary $ -- $ 1.55
=========== ================
Fully Diluted $ -- $ 1.23
=========== ================
Weighted Average Shares
Primary -- 7,663,483
=========== ================
Fully Diluted -- 9,649,890
=========== ================
</TABLE>
The REIT's anticipated transactions, reflected on a pro forma basis, are as
follows:
(a) To record rent income from the Corporation in accordance with the terms
of lease agreements between the REIT and the Corporation.
(b) To record depreciation expense on fixed assets transferred by NHC based
on the estimated remaining life.
(c) To record interest income on first mortgage notes receivable
transferred by NHC. The interest rate on $79,065 of the notes
receivable is fixed at 10.25%. The interest rate on the balance of
notes receivable is generally at prime plus 2%.
(d) To record interest expense on debt transferred from NHC related to real
property.
(e) To record administrative expenses of the REIT based on expected
operating and administrative miscellaneous expenses.
(f) To record minority interest.
(g) The REIT intends to account for the leases with the Corporation as
operating leases.
51
<PAGE> 58
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
------------------------
Actual Debit Credit Pro Forma
----------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Rent income $ -- $ 6,381(a) $ 6,381
Interest -- 4,866(c) 4,866
----------- ----------- ----------------
Net revenues -- 11,247 11,247
----------- ----------- ----------------
Costs and Expenses:
Operating and administrative -- $ 225(e) 225
Provision for depreciation and amortization -- 2,566(b) 2,566
Interest -- 2,203(d) 2,203
----------- ---------- ----------------
Total costs and expenses -- 4,994 4,994
----------- ---------- ----------------
Net Income from Operations -- 4,994 11,247 6,253
Minority Interest in Earnings of Consolidated
Subsidiary -- 569(f) 569
----------- ---------- ----------- ----------------
Net Income $ -- $ 5,563 $ 11,247 $ 5,684
=========== ========== =========== ================
Earnings Per Share
Primary $ -- $ 0.71
=========== ================
Fully Diluted $ -- $ 0.57
=========== ================
Weighted Average Shares
Primary -- 8,023,656
=========== ================
Fully Diluted -- 9,921,944
=========== ================
</TABLE>
The REIT's anticipated transactions, reflected on a pro forma basis, are as
follows:
(a) To record rent income from the Corporation in accordance with the terms
of lease agreements between the REIT and the Corporation.
(b) To record depreciation expense on fixed assets transferred by NHC based
on the estimated remaining life.
(c) To record interest income on first mortgage notes receivable
transferred by NHC. The interest rate on $83,371 of the notes
receivable is fixed at 10.25%. The interest rate on the balance of
notes receivable is generally at prime plus 2%.
(d) To record interest expense on debt transferred from NHC related to real
property.
(e) To record administrative expenses of the REIT based on expected
operating and administrative miscellaneous expenses.
(f) To record minority interest.
(g) The REIT intends to account for the leases with the Corporation as
operating leases.
52
<PAGE> 59
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
------------------------------
Actual Debit Credit Pro Forma
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Assets:
Cash $ -- $ 1,000(a) $ 1,000
Real Estate Properties:
Land -- 19,836(a) 19,836
Fixed Assets -- 114,497(a) 114,497
------------- ------------- -------------
Real Estate Properties, Net -- 134,333 134,333
Mortgage loans receivable -- 97,140(b) 97,140
------------- ------------- -------------
Total Assets $ -- $ 232,473 $ 232,473
============= ============= =============
Liabilities and Stockholders' Equity:
Liabilities:
Long-term notes and bonds payable $ -- $ 86,858(a) $ 86,858
------------- -------------- -------------
Total Liabilities -- 86,858 86,858
Minority interest in consolidated subsidiaries 15,056(c) 15,056
Stockholders' equity -- $ 15,056(c) 48,475(a) 130,559
97,140(b)
------------- ------------- -------------- -------------
Total Liabilities and Stockholders' Equity $ -- $ 15,056 $ 247,529 $ 232,473
============= ============= ============== =============
============= =============
Book value per share $ -- $ 16.27
============= =============
Shares outstanding -- 8,023,656
============= =============
</TABLE>
The REIT's anticipated transactions, reflected on a pro forma basis, are as
follows:
(a) To record the transfer of cash, real property and related debt from NHC
at net book value.
(b) To record the transfer of first mortgage notes receivable from NHC at
net book value.
(c) To record minority interest.
(d) The REIT intends to account for the leases with the Corporation as
operating leases.
53
<PAGE> 60
NATIONAL HEALTHCARE CORPORATION AND SUBSIDIARIES,
SUCCESSOR TO NATIONAL HEALTHCARE L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
---------------------------
Actual Debit Credit Pro Forma
--------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Net patient revenues $ 341,818 $ 341,818
Other revenues 46,842 $ 9,037(d) 37,805
--------------- ------------- ---------------
Net revenues 388,660 9,037 379,623
--------------- ------------- ---------------
Costs and Expenses:
Operating and administrative 334,987 11,173(a) 346,454
294(e)
Provision for depreciation and amortization 13,634 $ 3,580(b) 10,054
Interest 10,753 3,142(c) 7,611
--------------- ------------- ----------- ---------------
Total costs and expenses 359,374 11,467 6,722 364,119
--------------- ------------- ----------- ---------------
Net income before taxes 29,286 20,504 6,722 15,504
Provision for income taxes -- 6,122(f) --(g) (6,122)
--------------- ------------- ----------- ---------------
Net Income $ 29,286 $ 26,626 $ 6,722 $ 9,382
=============== ============= =========== ===============
Earnings Per Unit/Share:
Primary $ 3.44 $ 1.04
=============== ===============
Fully Diluted $ 2.98 $ 1.02
=============== ===============
Weighted Average Units/Shares:
Primary 8,496,299 9,051,854
=============== ===============
Fully Diluted 10,455,706 11,011,261
=============== ===============
</TABLE>
The Corporation's anticipated transactions, reflected on a pro forma basis, are
as follows:
(a) To record rent expense in accordance with the Lease terms between the
REIT and the Corporation on assets intended to be transferred to the
REIT and leased by the Corporation.
(b) To remove depreciation expense on assets transferred.
(c) To remove interest expense on debt transferred to the REIT.
(d) To remove interest income on mortgage notes receivable transferred to
the REIT.
(e) To record state franchise taxes based on expected corporate structure.
(f) To record federal and state income taxes.
(g) The Corporation would have recorded non-recurring income tax benefits
of $3,964 related to the change in the Corporation's tax status.
54
<PAGE> 61
NATIONAL HEALTHCARE CORPORATION AND SUBSIDIARIES, SUCCESSOR TO
NATIONAL HEALTHCARE L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
---------------------------
Actual Debit Credit Pro Forma
-------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Net patient revenues $ 189,240 $ 189,240
Other revenues 22,814 $ 4,866(d) 17,948
-------------- ------------ ---------------
Net revenues 212,054 4,866 207,188
-------------- ------------ ---------------
Costs and Expenses:
Operating and administrative 183,969 6,381(a) 190,517
167(e)
Provision for depreciation and amortization 7,712 $2,566(b) 5,146
Interest 6,073 2,203(c) 3,870
-------------- ------------ ----------- ---------------
Total costs and expenses 197,754 6,548 4,769 199,533
-------------- ------------ ----------- ---------------
Net income before taxes 14,300 11,414 4,769 7,655
Provision for income taxes -- 2,960(f) --(g) (2,960)
-------------- ------------ ----------- ---------------
Net Income $ 14,300 $ 14,374 $ 4,769 $ 4,695
============== ============ =========== ===============
Earnings Per Unit/Share:
Primary $ 1.62 $ 0.50
============== ===============
Fully Diluted $ 1.41 $ 0.50
============== ===============
Weighted Average Units/Shares:
Primary 8,829,472 9,385,027
============== ===============
Fully Diluted 10,727,760 11,283,315
============== ===============
</TABLE>
The Corporation's anticipated transactions, reflected on a pro forma basis, are
as follows:
(a) To record rent expense in accordance with the Lease terms between the
Corporation and the REIT on assets intended to be transferred to the
REIT and leased by the Corporation.
(b) To remove depreciation expense on assets transferred.
(c) To remove interest expense on debt transferred to the REIT.
(d) To remove interest income on mortgage notes receivable transferred to
the REIT.
(e) To record state franchise taxes based on expected corporate structure.
(f) To record federal and state income taxes.
(g) The Corporation would have recorded non-recurring income tax benefits
of $4,649 related to the change in the Corporation's tax status.
55
<PAGE> 62
NATIONAL HEALTHCARE CORPORATION AND SUBSIDIARIES, SUCCESSOR TO
NATIONAL HEALTHCARE L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
--------------------------------
Actual Debit Credit Pro Forma
-------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Assets:
Current Assets $ 126,279 $ 2,518(c) $ 148,447
19,650(d)
Property and equipment 201,866 $ 134,333(a) 67,533
Assets held by other parties 21,472 21,472
Other Assets 112,888 2,131(c) 97,140(b) 17,879
-------------- --------------- ------------- --------------
Total Assets $ 462,505 $ 24,299 $ 231,473 $ 255,331
============== =============== ============= ==============
Liabilities and Partners' Capital:
Current liabilities $ 102,279 $ 102,279
Debt serviced by other parties 32,024 32,024
Long-term debt 144,867 $ 86,858(a) 58,009
Subordinated convertible notes 28,839 28,839
Deferred income 15,945 15,945
Minority interest in consolidated subsidiaries 784 784
Partners' capital 137,767 47,475(a) $ 4,649(c) --
97,140(b) 19,650(d)
17,451(e)
Stockholders' Equity -- 17,451(e) 17,451
-------------- --------------- ------------- --------------
Total Liabilities & Stockholders' Equity $ 462,505 $ 248,924 $ 41,750 $ 255,331
============== =============== ============= ==============
Book value per unit/share $ 15.55 $ 1.85
============== ==============
Units/Shares outstanding 8,862,187 9,417,742
============== ==============
</TABLE>
The Corporation's anticipated transactions, reflected on a pro forma basis, are
as follows:
(a) To record the transfer of real property and related debt to the REIT at
net book value.
(b) To record the transfer of first mortgage notes receivable to the REIT
at net book value.
(c) To record deferred income taxes at a 40% rate.
(d) Subsequent to June 30, 1997 but prior to this filing, NHC sold
subordinated convertible debentures of $20,000. The debentures are
convertible into Corporation shares only. Since the debentures
mandatorily convert to equity on January 1, 1998, this amount has been
reflected above as an addition to partners' capital.
(e) To reclassify partners' capital.
(f) The Corporation intends to account for the distribution of assets (and
related debt) to the REIT at net book value and the subsequent leasing
of the real estate assets as operating leases.
56
<PAGE> 63
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NHC
OVERVIEW
NHC is a leading provider of long-term health care services. NHC
operates or manages 110 long-term health care centers with 13,775 beds in ten
states. NHC provides nursing care as well as ancillary therapy services to
patients in a variety of settings including long-term nursing centers, managed
care specialty units, subacute care units, Alzheimer's care units, homecare
programs, and facilities for assisted living. NHC also operates retirement
centers.
RESULTS OF OPERATIONS
The following table and discussion sets forth items from the
consolidated statements of income as a percentage of net revenues for the
unaudited periods ended June 30, 1997 and 1996 and audited years ended
December 31, 1996, 1995 and 1994.
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------ -----------------------
1997 1996 1996 1995 1994
------ ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient revenues 89.2% 88.0% 87.9% 87.8% 90.2%
Other revenues 10.8 12.0 12.1 12.2 9.8
------ ------- ----- ----- -----
Net revenues 100.0 100.0 100.0 100.0 100.0
------ ------- ----- ----- -----
Costs and expenses:
Salaries, wages and benefits 55.5 55.5 53.9 53.8 52.7
Other operating 31.3 31.5 32.2 31.2 33.0
Depreciation and amortization 3.6 3.4 3.6 4.2 4.6
Interest 2.9 3.4 2.8 4.8 4.4
------ ------- ----- ----- -----
Total costs and expenses 93.3 93.8 92.5 94.0 94.7
------ ------- ----- ----- -----
Net Income 6.7% 6.2% 7.5% 6.0% 5.3%
====== ======= ===== ===== =====
</TABLE>
The following table sets forth the increase in certain items from the
consolidated statements of income as compared to the prior period.
PERIOD TO PERIOD INCREASE (DECREASE)
<TABLE>
<CAPTION>
(Unaudited)
Six Months
Ended
June 30, Year Ended December 31,
---------------------- -----------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
---------------------- -------------------- -------------------
(dollars in thousands) Amount Percent Amount Percent Amount Percent
-------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net patient revenues $ 27,555 17.0 $ 33,849 11.0% $38,247 14.2%
Other revenues 715 3.2 3,854 9.0 13,809 47.3
-------- ------- -------- ------ ------- ------
Net revenues 28,270 15.4 37,703 10.7 52,056 17.4
-------- ------- -------- ------ ------- ------
Costs and expenses:
Salaries, wages and benefits 15,623 15.3 20,660 10.9 31,322 19.9
Other operating 8,373 14.4 15,925 14.6 10,664 10.8
Depreciation & amortization 1,542 25.0 (915) (6.3) 967 7.1
Interest (96) (1.6) (6,138) (36.3) 3,841 29.4
-------- ------- -------- ------ ------- ------
Total costs and expenses 25,442 14.8 29,532 9.0 46,794 16.5
-------- ------- -------- ------ ------- ------
Net income $ 2,828 24.7% $ 8,171 38.7% $ 5,262 33.2%
======== ======= ======== ====== ======= ======
</TABLE>
NHC's owned or leased long-term health care centers and contract
therapy services provided 78% of net revenues in 1996, 76% in 1995, and 76% in
1994. Homecare programs provided 13% of net revenues in 1996, 15% in 1995 and
16% in 1994.
The overall census in owned or leased centers for the six months ended
June 30, 1997 and also for the six months ended June 30, 1996 was 93.2%. The
overall census in owned or leased centers for 1996 was 93.6% compared to 93.0%
in 1995 and 92.8% in 1994. The census excluding acquisitions and new openings
was 93.8%, 93.0% and 94.5%, respectively, for the same periods. NHC opened a net
of 190 new owned, leased or managed beds in 1996.
57
<PAGE> 64
HEALTH CARE REVENUES
NHC's principal business is operating and managing long-term health
care centers, including the provision of routine and ancillary services.
Approximately 60% of NHC's net revenues in 1996 and 1995 and 61% in 1994 are
from participation in Medicare and Medicaid programs. Amounts paid under these
programs are generally based on a facility's allowable costs or a fixed rate
subject to program cost ceilings. Revenues are recorded at standard billing
rates less allowances and discounts principally for patients covered by
Medicare, Medicaid and other contractual programs. Amounts earned under the
Medicare and Medicaid programs are subject to review by the third party payors
and as disclosed in the notes to the financial statements, by the Office of the
Inspector General. In the opinion of management, adequate provision has been
made for any adjustments that may result from such reviews. (See "Business --
The Corporation -- Legal Proceedings"). However, substantial cash payments may
be required at the time of finalization if material adjustments are made by
auditors.
Any differences between estimated settlements and final determinations
are reflected in operations in the year finalized. NHC has submitted various
requests for exceptions to Medicare routine cost limitations for reimbursement.
NHC has received approval on certain requests, and others are pending approval.
NHC will record revenues associated with the approved requests when such
approvals, including cost report audits, are assured.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,
1996. Results for the six month period ended June 30, 1997 include a 25%
increase over the same period in 1996 in net income, a 19% increase in fully
diluted earnings per unit, and a 15% increase in net revenues.
The increased revenues for the six months ended June 30, 1997 reflect
the continued growth of operations. Compared to the six month period a year ago,
NHC has increased the number of owned, leased, and managed long-term care beds
by 1,025 beds from 12,750 beds to 13,775 beds. The number of homecare locations
has increased from 31 locations to 33 locations. Also contributing to increased
revenues are improvements in both private pay and third party payor rates.
Revenues improved during first six months of 1997 also due to increased
emphasis on rehabilitative and managed care services. NHC has extended its
rehabilitative services into additional geographic areas and to additional
customers.
Revenues from management services, which are included in the Statements
of Income in Other Revenues, increased 4.4% for the six month period in 1997
compared to the same period in 1996 from $16.3 million to $17.0 million due to
the increased number of beds being managed for others and due to increased
management fees. Management fees are generally based upon a percentage of net
revenues of the managed center and therefore tend to increase as a facility
matures and as prices rise in general.
Total costs and expenses for the 1997 six month period increased $25.4
million or 14.8% to $197.8 million from $173.2 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $15.6
million or 15.3% to $117.6 million from $102.0 million. Other operating expenses
increased $8.4 million or 14.4% to $66.3 million for the 1997 second quarter
compared to $58.0 million in the 1996 period. Depreciation and amortization
increased 25.0% to $7.7 million. Interest costs decreased $0.1 million or 1.6%
to $6.1 million from $6.2 million for last year.
Increases in salaries, wages and benefits are attributable to the
increase in staffing levels due to long-term care bed additions, assisted living
expansions, homecare expansions, and the increased emphasis on rehabilitative
services. Also contributing to higher costs of labor are inflationary increases
for salaries and the associated benefits.
Operating costs have increased due to the increased number of beds in
operation, the opening of three new assisted living projects, the expansion of
homecare services, the expansion of rehabilitative and managed care services,
and the growth in management services provided to others.
Depreciation and amortization increased as a result of NHC's placing of
newly constructed or purchased assets in service and due to capital improvements
at existing properties.
The total census at owned and leased centers for the six months
averaged 93.2% compared to an average of 93.2% for the same six months a year
ago.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
In 1996, NHC achieved record earnings while growing in the variety and quality
of services offered. Results for 1996 included a 39% increase in net income, a
29% increase in primary earnings per unit, and a 11% increase in net revenues.
The growth in revenues in 1996 occurred in long-term care, in
rehabilitative and managed care and in management services.
Improved revenues in long-term care were due in part to increased
numbers of owned beds having been placed in service. In 1996, 130 beds were
opened or acquired in owned and leased centers. Furthermore, 111 long-term care
beds which had been added in 1995 had improved occupancy rates in 1996. Also
contributing to improved revenues in long-term care were increases in types and
levels of services being offered and in private pay and third party payor rates.
Increases in third party payor rates were held down in part by the negative
impact of routine cost limits for Medicare certified nursing homes. During 1996
and 1995, NHC had 48 and 44, respectively, owned or leased centers which
operated at Medicare costs higher than the ceiling.
58
<PAGE> 65
Homecare revenues improved due to increased payor rates and number of
visits at NHC's 16 additional Tennessee locations. At all locations, there were
754,000 visits in 1996 compared to 717,000 visits in 1995.
Revenues also improved during 1996 as a result of NHC's increased
emphasis on rehabilitative and managed care services. To boost the ability to
offer physical, speech and occupational therapy to greater numbers of patients,
NHC increased its staff of professionally licensed therapists from nearly 800
last year to over 1,000 in 1996. Over 585 companies, including school systems,
hospitals, home care companies and outpatient clinics contracted for NHC's
rehabilitative services in 1996, which number is up from 420 companies in 1995.
Revenues from management services, which are included in the Statements
of Income in Other Revenues, increased 13% in 1996 from $28,719,000 to
$32,363,000 due to increased management fees and increased interest income from
higher principal amounts on loans to managed centers. In 1996, 60 additional
long-term care beds came under management contract. Management fees are
generally based upon a percentage of net revenues of the managed center and
therefore tend to increase as a facility matures and as prices rise in general.
Increases in salaries, wages and benefits in 1996 were attributable to
the increase in staffing levels due to long-term care bed additions and the
increased emphasis on rehabilitative services. Also contributing to higher costs
of labor were inflationary increases for salaries and the associated benefits.
Operating costs increased due to the increased numbers of beds in
operation, the expansion of rehabilitative and managed care services, the growth
in management services provided to others, and due to the increase in rent
expense as explained below.
Depreciation expense and interest expense both decreased compared to
last year due primarily to capital transactions which occurred in 1995. During
December 1995, NHI prepaid debt on which NHC had also been obligated in the
amount of $20,544,000. In addition, NHC was released from its obligation on
approximately $25,324,000 of debt which had been transferred to NHI in 1991.
Since NHC is no longer obligated on transferred debt in the amount of
$45,868,000, debt serviced by other parties and assets under arrangement with
other parties was reduced by $45,868,000.
The leases with NHI provide that NHC shall continue to make
non-obligated debt service rent payments equal to the debt service including
principal and interest on the obligated debt which was prepaid and from which
NHC has been released as a direct obligor. As a result, other operating expenses
are increased by the amount of the rent payments, depreciation is decreased by
the amount of depreciation formerly charged on assets under arrangement with
other parties and interest expense is decreased by the amount of interest
expense formerly associated with the debt serviced by other parties.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
In 1995, NHC achieved rapid annual growth in earnings, earnings per unit, and
revenues. Net income totaled $21,115,000, a 33% increase over the comparable
prior year amount. Fully diluted earnings per unit totaled $2.31, a 28%
increase. Net revenues totaled $350,957,000, a 17% increase. NHC's net margin
ratio, which is defined as net income divided by net revenues, increased to 6.0%
from 5.3% in 1994 illustrating that in 1995 NHC grew its revenues at a faster
rate than its expenses.
The growth in net patient revenues in 1995 occurred in long-term care,
homecare, and rehabilitative and managed care.
Improved revenues in long-term care were due primarily to increased
types and levels of services being offered and to increases in private pay and
third party billing rates. Also, the total number of owned or leased beds
increased from 6,295 beds at the end of 1994 to 6,406 beds at the end of 1995.
During 1995 and 1994, NHC had 44 and 41, respectively, owned or leased centers
which operated at Medicare costs higher than the routine cost limits, which were
frozen at 1993 levels by the 1993 Tax Reform Act.
Homecare revenues improved due to increased payor rates and increased
numbers of visits at NHC's 28 Florida and Tennessee homecare locations. There
were 717,000 homecare visits in 1995 compared to 674,000 visits in 1994.
Revenues also improved during 1995 due to continued emphasis on
rehabilitative and managed care services. To boost the ability to offer
physical, speech and occupational therapy to greater numbers of patients, NHC
increased its staff of professionally licensed therapists by 19% in 1995 and by
40% in 1994. NHC has also determined to provide high acuity medical services and
has signed managed care contracts with 34 private insurance companies to provide
subacute care to their insurees, offering a less expensive alternative to acute
care and rehabilitative hospitals. NHC also is expanding its network of regional
contract offices which are staffed by experienced case managers and which assure
appropriate placement and payment for subacute patients in the NHC system.
The growth in other revenues in 1995 occurred primarily in the areas of
revenues from management services, advisory fees from NHI, and interest income.
Other revenues are more fully detailed in Note 5 to the financial statements.
Revenues from management services of $28,719,000, which are included in
the Statements of Income in Other Revenues, increased 51% in 1995 due to the
increased number of beds being managed for others, increased amounts
59
<PAGE> 66
and types of management and other support services being offered, and increased
interest income from higher principal amounts on loans to managed centers. In
1995, two long-term care centers and 273 long-term care beds came under new
management contracts. Management fees are generally based upon a percentage of
net revenues of the managed center and therefore tend to increase as a facility
matures and as prices rise in general. NHC's management contracts are generally
long-term (up to ten years) and include equity participation agreements and the
right of first refusal upon the sale of the property.
Revenues from advisory fees received from NHI of $3,265,000 represent a
52% increase over 1994 and are based upon a formula which measures the increase
in NHI's funds from operations over a base year.
Revenues from interest income totaled $6,462,000 and represent a 33%
increase over 1994 and are in part from NHC's investment in loan participation
agreements. Loan participation agreements may generally be sold in the market
should NHC require additional capital.
Increases in salaries, wages and benefits in 1995 are attributable to
the increase in staffing levels due to the increased emphasis on rehabilitative
services, homecare expansions and long-term care bed additions. Also
contributing to higher costs of labor are inflationary increases for salaries
and the associated benefits. Labor costs are the most significant costs of NHC.
Operating costs have increased due to the expansion of rehabilitative
and managed care services, the expansion of homecare services, the growth in
managed services and the increased numbers of beds in operation.
Depreciation and amortization increased as a result of NHC's placing of
newly constructed or purchased assets in service and due to capital improvements
at existing properties.
Interest expense increased due to additional borrowing for newly
constructed long-term care beds and due to increased interest rates on floating
rate debt. Approximately 35% of NHC's long-term debt was at floating rates at
the end of 1995.
GROWTH AND DEVELOPMENT
The Corporation plans to continue to expand NHC's continuum of care to
the elderly by offering a comprehensive range of services through related or
separately structured health care centers, homecare programs, specialized care
units, pharmacy operations, rehabilitative services, assisted living centers and
retirement centers.
During the first six months of 1997, the Company added a net total of
893 licensed long-term care beds, of which 336 are owned or leased and 577 of
which are managed for other parties. Additionally, 252 assisted living units in
three newly constructed projects were opened.
During 1996, NHC grew its long-term health care business by acquiring
or constructing additions totaling 130 licensed beds at owned or leased health
care centers and totaling 60 licensed beds at managed health care centers, all
located in Florida. All in all, 190 owned, leased or managed beds were added in
1996. These additions increased the total number of owned, leased or managed
centers to 100 and the total number of licensed beds to 12,882.
At June 30, 1997, NHC had 871 beds under development at 12 owned or
leased centers and six managed health care centers in various locations. These
beds are either under construction or a Certificate of Need has been received
from the appropriate state agency authorizing the construction of additional
centers or beds.
NHC has identified the assisted living market as an expanding area for
the delivery of health care and hospitality services. Assisted living centers
provide basic room and board functions for the elderly with on-staff
availability to assist in minor medical and living needs on an as needed basis.
NHC currently operates ten assisted living projects, eight of which are located
within the physical structure of a long-term care center or retirement center
and two of which are freestanding. The two freestanding projects opened in 1996.
It is expected that NHC will start
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<PAGE> 67
construction of four additional assisted living projects in 1997. Certificates
of need are not required to build assisted living projects.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
During the first six months of 1997, the Company generated net cash of
$23.7 million from operating activities, $14.1 million from the collection of
long-term notes receivable, $23.2 million debt proceeds, $0.5 million from the
issuance of partnership units, and $5.0 million from the collection of
receivables. Of these funds, $21.4 million was used for additions to and
acquisitions of property and equipment; $18.0 million for investment in
long-term notes receivable and loan participation agreements; $4.6 million for
payments on debt; and $10.4 million for cash distributions to partners. Cash
and cash equivalents increased $10.3 million during the quarter.
During 1996 NHC spent approximately $69,970,000 on construction,
acquisitions and routine capital expenditures, $17,466,000 on cash distributions
to partners, $8,161,000 as principal payments and financing costs on debt, and
$34,798,000 to invest in notes receivable and marketable securities. These and
other cash needs were financed through cash on hand; cash flow from operations
of $51,961,000; the collection of long-term notes receivable, loan participation
agreements, investments and receivables related to stock options of $44,284,000;
the issuance of $29,183,000 of debt and the issuance of partnership units for
$1,378,000.
NHC has guaranteed approximately $69,362,000 of debt of certain health
care centers which NHC manages for others. At June 30, 1997, NHC expects to have
no additional liability as a result of its debt guarantees.
NHC's current cash on hand, marketable securities, short-term notes
receivable, operating cash flows and, as needed, its borrowing capacity are
expected to be adequate to finance NHC's and the Corporation's operating
requirements and growth and development plans for 1997 and into 1998. If
additional capital is necessary, NHC's balance sheet ratios are at commercially
reasonable levels to obtain additional capital. The current ratio is 1.2:1 at
June 30, 1997 and working capital is $24,000,000. The ratio of long-term debt to
equity, as defined in our banking relationships to include both deferred income
and subordinated convertible notes as equity, is 1:1 at June 30, 1997.
For all financial instruments except the subordinated convertible notes,
NHC believes that the financial statement carrying amounts approximate fair
value at June 30, 1997 and at December 31, 1996. The fair value of the
subordinated convertible notes were estimated based on quoted market prices.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996, NHC adopted Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation". The adoption of the provisions of
these accounting pronouncements did not have a material impact on NHC's
financial condition or results of operations.
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS 128") has been issued effective for years ending after December 15,
1997. This statement establishes standards for computing and presenting
earnings per share. NHC is required to adopt the provisions of SFAS 128 in the
fourth quarter of 1997 and does not expect adoption thereof to have a material
effect on NHC's financial position or results of operations.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information About Capital Structure" ("SFAS 129") has been issued effective for
years ending after December 15, 1997. This statement establishes standards for
disclosing information about an entity's capital structure. NHC will be
required to adopt the provisions of SFAS 129 in the fourth quarter of 1997 and
does not expect adoption thereof to have a material impact on NHC's financial
position or results of operations.
CASH DISTRIBUTIONS
NHC management intends to distribute approximately 60% of ordinary
taxable income to unitholders during 1997. Management expects that NHC's cash
distribution will never be lower than the maximum federal tax rate to
individuals unless there is a material change in our present tax rate system.
IMPACT OF INFLATION
Reimbursement rates under the Medicare and Medicaid programs generally
reflect the underlying increases in costs and expenses resulting from inflation.
For this reason, the impact of inflation on profitability has not been
significant.
THE CORPORATION
The Corporation will be the successor to NHC. Management's Discussion
and Analysis of Results of Operations and Financial Condition from NHC's Annual
Report to Partners for the year ended December 31, 1996 is included elsewhere in
this registration statement.
On a pro forma basis at June 30, 1997, the Corporation's working
capital has increased from $24,000,000 to $46,168,000 and its current ratio has
increased from 1.23 to 1.45 primarily as a result of the issuance of $20,000,000
of subordinated convertible debentures. Partners' capital/stockholders' equity
has been reduced from $137,767,000 to $17,451,000 primarily to reflect the
transfer of the equity in the assets transferred to the REIT. The results of
operations on a pro forma basis for the year ended December 31, 1996 and the six
months ended June 30, 1997 reflect reductions in interest income and
depreciation and interest expense based on the transfer of the Notes, Owned
Healthcare Facilities, Assumed Liabilities and Other Assets transferred to the
REIT. Operating and administrative expenses have increased to reflect the
additional lease and other expenses to be incurred based on the terms of the
operating leases with the REIT.
The Corporation believes that available cash and funds generated from
operations will be sufficient to satisfy capital expenditures, working capital,
and debt requirements.
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<PAGE> 68
NHC is currently negotiating the sale of $20 Million in 5.75%
Subordinated Convertible Notes, and prior to November 15, 1997 at the sole
option of NHC, an additional $10 Million 5.75% Subordinated Convertible Notes
(the "1818 Fund Notes"), to The 1818 Fund II, L.P. (the "Fund") pursuant to a
private placement. It is anticipated that the terms of the 1818 Fund Notes will
provide that, upon the completion of the Plan of Restructure, the 1818 Fund
Notes will automatically convert into common stock of the Corporation at $36 per
share. The Fund will therefore become a stockholder of the Corporation, but not
of the REIT. If the Plan of Restructure shall not have taken place prior to
January 5, 1998, the Fund may at its option convert the 1818 Fund Notes into
limited partnership Units of NHC at $53 per Unit. If the Plan of Restructure
then occurs after such conversion, the Fund will become a stockholder in both
the Corporation and the REIT. In addition, the 1818 Fund Notes would also be
granted registration rights which could be requested on or after January 5,
1998 or could be registered incidental to a registration by the Corporation of
its own securities. It is anticipated that the Corporation would also agree to
file a shelf registration with respect to the 1818 Fund Notes pursuant to Rule
415 within 18 months after the sale. The registration rights would survive the
Plan of Restructure and inure to the benefit of any holder of the 1818 Fund
Notes. Finally, the Corporation would have a right after 42 months following the
sale, to prepay or redeem the 1818 Fund Notes in whole (but not in part) at a
price equal to the then outstanding principal and accrued interest.
THE REIT
The REIT is a newly formed entity intended to qualify for federal
income tax purposes as a real estate investment trust and incorporated in
Maryland on September 26, 1997. The REIT originally issued 1,000 shares of
common stock to NHC for $1,000 cash on October 15, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The REIT was organized to maintain the Owned Healthcare Facilities and
Notes transferred to the REIT from NHC. The REIT received the Owned Healthcare
Facilities, Notes, Assumed Liabilities and Other Assets from NHC in exchange for
approximately 8,060,000 shares of the REIT's common stock. The REIT has reserved
an additional 1,896,000 shares of common stock for conversion of subordinated
convertible notes held by the Corporation.
A portion of the Assumed Liabilities is currently cross-defaulted with
other NHC liabilities which will be assumed by the Corporation. In addition, a
majority of the Notes are collateral for part of the Assumed Liabilities and
for certain debt that will be assumed by the Corporation and for certain debt
of National Health Investors, Inc. and National Health Corporation. In the
event that the Corporation, National Health Investors, Inc. or National Health
Corporation defaulted on these debt obligations, the REIT could lose its
interest in the Notes or the Owned Healthcare Facilities.
The REIT has entered into an advisory services agreement with the
Corporation whereby services related to investment activities and day-to-day
management and operations are provided to the REIT by the Corporation. Because
of the competitive restrictions contained in the advisory services agreement,
the REIT does not intend to seek further health care-related investment
opportunities or to provide lease or mortgage financing for such investments.
The REIT expects to continue to engage in transactions with the Corporation but
does not anticipate purchasing from, leasing to, or financing other operations.
The REIT intends to pay quarterly dividends to its stockholders in an
amount at least sufficient to satisfy the distribution requirements of a real
estate investment trust. Such requirements necessitate that at least 95% of the
REIT's taxable income be distributed annually. The primary source for dividends
will be rental and interest income it earns on the Owned Healthcare Facilities
and the Notes transferred to the REIT from NHC.
RESULTS OF OPERATIONS
The REIT's results of operations will depend upon the rental and
interest income it earns on the Owned Healthcare Facilities and Notes
transferred to the REIT from NHC. Because of the competitive restrictions
contained in its advisory services agreement with the Corporation, the REIT does
not intend to seek further health care-related investment opportunities or to
provide lease or mortgage financing for such investments.
PRO FORMA RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On a pro forma basis, the REIT would have had $20,210,000 and
$11,247,000 in revenues for the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively. The increase on an annual basis from 1996 to
1997 is primarily attributable to additional rental and interest income on the
Owned Healthcare Facilities and Notes acquired during late 1996 and early 1997
and to increases in rent under the lease agreements.
On a pro forma basis, the REIT would have had $7,126,000 and $4,994,000
in expenses for the year ended December 31, 1996 and the six months ended June
30, 1997, respectively. The REIT's pro forma depreciation and interest expenses
reflect the book basis and estimated lives of the Owned Healthcare Facilities
received by the REIT and the interest rates and terms on the Assumed
Liabilities. The increase on an annual basis from 1996 to 1997 is primarily
attributable to additional expenses on Owned Healthcare Facilities acquired and
debt assumed during late 1996 and early 1997.
The REIT is in the process of negotiating a new credit agreement to
replace the liabilities assumed from the Corporation. The REIT expects that the
rental and interest income it earns on the health care centers and mortgage
notes receivable will be sufficient to satisfy its capital expenditures, working
capital, and debt requirements.
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<PAGE> 69
MANAGEMENT
NHC
GENERAL PARTNERS: NHC has three general partners identified in the
Amended and Restated Agreement of Limited Partnership (the "LP Agreement"):
1. Managing General Partner: NHC, Inc., a Tennessee corporation.
The authorized, issued and outstanding stock of NHC, Inc. is
owned by its board of directors and senior management, a total
of 14 individuals. W. Andrew Adams, NHC's President, owns
approximately 52% of the voting securities of NHC, Inc. and
Robert G. Adams, Senior Vice President and Chief Operating
Officer, owns 19.3%. No other person owns in excess of 9.4%.
2. Administrative General Partner: National Health Corporation, a
Tennessee corporation ("National"). National's Board of
Directors is identical to that of NHC, Inc. All of the
authorized, issued and outstanding stock of National Health
Corporation is owned by the National Health Corporation
Leveraged Employee Stock Ownership Plan and Trust. Trustees
are Olin O. Williams, a director of both NHC, Inc. and
National and Richard F. LaRoche, Jr., NHC's Senior Vice
President and General Counsel.
3. Individual General Partner: W. Andrew Adams. Mr. Adams is the
Chairman of the Board and Chief Executive Officer of NHC.
Pursuant to the LP Agreement, the three general partners are
collectively referred to as "General Partners". The General Partners own, in
aggregate, a general partnership interest in NHC representing a 1% interest in
the profits, losses and distributions of NHC.
DIRECTORS AND EXECUTIVE OFFICERS: As a limited partnership, NHC is
managed by the managing general partner, NHC, Inc. NHC, Inc.'s Board of
Directors is divided into three classes. The Directors hold office until the
annual meeting for the year in which their term expires and until their
successor is elected and qualified. As each of their terms expire, the successor
shall be elected to a three-year term. A director may be removed from office for
cause only. Officers serve at the pleasure of the Board of Directors for a term
of one year. The following table sets forth the directors of both the managing
and administrative general partners of NHC, as well as the executive officers of
NHC:
<TABLE>
<CAPTION>
Director of
Managing Officer of
General Managing
Position Partner or Current General
with NHC NHC's Term as Partner or
or Managing Predecessor Director Predecessor
Name Age General Partner Since Expires Since
---- --- --------------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
W. Andrew Adams 52 Chairman of the Since
Board/Chief 1995 (CEO)
Executive Officer 1974 (Pres.) 1999 1973
Dr. J. K. Twilla 70 Director 1972 1998 ---
Dr. Olin O. Williams 67 Director 1971 2000 ---
Ernest G. Burgess, III 58 Director 1991 1999 1975
Robert G. Adams 50 Sr. Vice President/
Chief Operating
Officer and
Director 1993 2000 1985
Richard F. LaRoche, Jr. 52 Sr. Vice President
and
General Counsel -- -- 1974
Steven A. Strawn 40 Vice President/
Operations -- -- 1992
Donald K. Daniel 51 Vice President/
Controller -- -- 1977
David L. Lassiter 43 Vice President/
Corporate Affairs -- -- 1995
Charlotte A. Swafford 49 Treasurer -- -- 1985
</TABLE>
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<PAGE> 70
<TABLE>
<CAPTION>
Director of
Managing Officer of
General Managing
Position Partner or Current General
with NHC NHC's Term as Partner or
or Managing Predecessor Director Predecessor
Name Age General Partner Since Expires Since
---- --- --------------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Julia W. Powell 48 Vice President/
Patient Services -- -- 1985
Joanne G. Batey 53 Vice President/
Homecare -- -- 1989
D. Gerald Coggin 46 Vice President/
Government
Affairs and
Rehabilitation
Services -- -- 1991
Kenneth D. DenBesten 45 Vice President/ -- -- 1992
Finance
</TABLE>
Drs. Twilla and Williams each were physicians in private practice in
Tennessee for more than 30 years.
Mr. W. Andrew Adams has been Chairman of the Board and Chief Executive
Officer since 1995. He was president from 1981 until 1983 of the National
Council of Health Centers, the trade association for multi-facility long-term
health care center companies, and served as Chairman of the Multi-facility
Committee of the American Health Care Association from 1992 through 1994. He has
an M.B.A. degree from Middle Tennessee State University. Mr. Adams serves on the
Board of Trust of David Lipscomb University, Nashville, Tennessee, is President
and Chairman of the Board of Directors of National Health Investors, Inc. and
serves on the Board of SunTrust Bank in Nashville, Tennessee.
Mr. Robert Adams (Senior Vice President, Chief Operating Officer and
Director) has served both as Administrator and as Regional Administrator,
holding the last position from 1977 to 1985. He has a B.S. degree from Middle
Tennessee State University. Mr. Robert Adams and Mr. W. Andrew Adams are
brothers.
Mr. Burgess (Director) served as NHC' s Senior Vice President for
Operations from 1975 through 1994. He has an M.S. degree from the University of
Tennessee.
Mr. LaRoche (Senior Vice President) has been Senior Vice President
since 1985, and General Counsel since 1971. He has a law degree from Vanderbilt
University and an A.B. degree from Dartmouth College. His responsibilities
include acquisitions and finance. Mr. LaRoche also serves on the Board of
National Health Investors, Inc.
Mr. Strawn (Vice President/Operations) has been with NHC since 1979. He
trained in NHC's A.I.T. program and then served both as administrator and
Regional Vice president before being appointed to the present position in 1995.
He has a B.S. degree from Middle Tennessee State University.
Mr. Daniel (Vice President and Controller) joined NHC in 1977 as
Controller. He received a B.A. degree from Harding University and an M.B.A. from
the University of Texas. He is a certified public accountant.
Mr. Lassiter (Vice President/Corporate Affairs) joined NHC in 1995.
From 1988 to 1995, he was Executive Vice President, Human Resources and
Administration for Vendell Healthcare. From 1980-1988, he was in human resources
positions with Hospital Corporation of America and HealthTrust Corporation. Mr.
Lassiter has B.S. and M.B.A. degrees from the University of Tennessee.
Ms. Swafford (Treasurer) has been Treasurer of NHC since 1985. She
joined NHC in 1973 and has served as Staff Accountant, Accounting Supervisor and
Assistant Treasurer. She has a B.S. degree from Tennessee Technological
University.
Ms. Powell (Vice President/Patient Services) has been with NHC since
1974. She has served as a nurse consultant and director of patient assessment
computerized services for NHC. Ms. Powell has a bachelor of science in nursing
from the University of Alabama, Birmingham, and a master's of art in sociology
with an emphasis in gerontology from Middle Tennessee State University. She
co-authored Patient Assessment Computerized in 1980 with Dr. Carl Adams, NHC's
founder.
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<PAGE> 71
Ms. Batey (Vice President/Homecare) has been with NHC since 1976. She
served as homecare coordinator for five years before being named Vice president
in 1989. Prior to that she was director of communication disorders services. Ms.
Batey received her bachelor's and master's degrees in speech pathology from
Purdue University.
Mr. Coggin (Vice President/Government Affairs and Rehabilitation
Services) has been employed by NHC since 1973. He has served as both
Administrator and Regional Vice President before being appointed to the present
position. He received a B.A. degree from David Lipscomb University and a M.P.H.
degree from the University of Tennessee. He is responsible for NHC's
rehabilitation, managed care and legislative activities.
Mr. DenBesten (Vice President/Finance) has served as Vice President of
Finance since 1992. From 1987 to 1992, he was employed by Physicians Health
Care, most recently as Chief Operating Officer. From 1984-1986, he was employed
by Health America Corporation as Treasurer, Vice president of Finance and Chief
Financial Officer. Mr. DenBesten received a B.S. degree in business
administration and an M.S. degree in finance from the University of Arizona.
The above officers serve in identical capacities for NHC and its two
corporate general partners: NHC, Inc., and National Health Corporation.
EXECUTIVE COMPENSATION
INTRODUCTION. Pursuant to Article V of the LP Agreement of NHC, the
General Partners are given the full, exclusive and complete discretion in the
management and control of the business of NHC. Pursuant to Article 5.7, the
General Partners do not receive compensation for serving as general partners. In
compliance with the LP Agreement the General Partners hire and compensate all of
the officers of the partnership and of the corporate general partners. The
General Partners' goals in executive compensation and compensation at all levels
within NHC are derived from the following priorities: First, to encourage the
achievement of the highest levels of quality in its fields of endeavor; and
second, to provide the strongest incentive possible in order to average, over a
five year period, a 20% return on partners equity. With these goals in mind, the
General Partners' executive compensation program is based on employee
performance rewarded as follows: (1) the achievement of a return on investment
for limited partners; (2) returns generated from unit performance based
incentive plans; and (3) from base salary. The following text and tables
describe the various components of this plan as were attained and applied during
1996.
TOTAL COMPENSATION: Table I sets forth certain information concerning
the total compensation paid by the administrative general partner and reimbursed
to it by NHC for the year ended December 31, 1996 to the three executive
officers of NHC.
TABLE I
NATIONAL HEALTHCARE L.P.
SUMMARY COMPENSATION TABLE
1996-1994
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------------
Annual Compensation(1) Awards Payouts
- -------------------------------------------------------------------- ------------------------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other annual Restricted Options/ All Other
Name and Compensation Stock Awards SARs LTIP Payouts Compensation
Principal Position Year Salary ($) Bonus ($)(2) ($)(3) ($) (#)(4) ($) ($)
- ------------------ ---- ---------- ---------- ------------ ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Andrew Adams 1996 129,757 451,693 8,147 -0- -0- -0- -0-
CEO 1995 129,964 579,200 121,350 -0- 40,000 -0- -0-
1994 132,349 359,920 78,789 -0- 40,000 -0- -0-
Robert G. Adams 1996 140,279 225,846 8,269 -0- -0- -0- -0-
Senior Vice President 1995 145,647 646,227 6,452 -0- 30,000 -0- -0-
& COO 1994 216,384 383,430 26,828 -0- 25,000 -0- -0-
Richard F. LaRoche, Jr. 1996 135,784 225,846 18,823 -0- -0- -0- -0-
Sr. VP 1995 142,639 380,365 8,453 -0- 30,000 -0- -0-
1994 134,150 190,467 15,637 -0- 25,000 -0- -0-
</TABLE>
(1) Compensation deferred at the election of an executive has been
included in salary column (d).
(2) 1996 Performance Bonus has not yet been determined and is not
included in this table.
(3) Includes (a) life insurance benefit, (b) 401-K matching contribution,
(c) nonqualified deferred compensation matching contribution, (d)
ESOP contribution.
(4) The 1995 awards are NHC Unit Options issued at $31.00 per unit. These
officers also received stock options from National Health Investors,
Inc. in 1993 and 1995, which are disclosed in that company's Form
10-K.
The non-employee Directors of NHC, Inc. (the Managing General Partner
of NHC) are paid $2,500 per meeting attended. There were five board meetings
during 1996 and no board member missed a meeting.
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<PAGE> 72
OPTION PLANS
At the 1994 annual meeting of the Partners, the 1994 Unit Option Plan
was adopted and approved by the Unitholders. A total of 1,200,000 Units were
reserved for issuance upon exercise of options to be granted by the Board of
Directors of the Managing General Partner.
No options were granted to key employees during 1996, however, pursuant
to the Plan, non-employee directors each receive an option to purchase 5,000
units on the date of the annual partnership meeting and for the closing Unit
price that day. 15,000 Units were granted to the three non-employee Directors at
$38.625 per unit on March 21, 1996.
At December 31, 1996, options to purchase 2,500 Units at $11.25 per
unit are outstanding, an option to purchase 5,000 Units at $24.88 per Unit is
outstanding to one director, options to purchase 6,500 Units at $25.12 per Unit
are outstanding to six employees, options to purchase 15,000 Units are
outstanding at $38.625 per Unit to three directors and options to purchase
361,000 Units at $31.00 per Unit are outstanding to 31 key employees.
Table II shows as to the three executive officers: (i) the number of
Units as to which options have been granted from January 1, 1996 through
December 31, 1996 under the Unit Option Plans; (ii) the percentage of all Units
granted represented by these individuals (iii) the option exercise price per
Unit and the expiration date; and (iv) the potential realizable value of these
options assuming both a five percent and ten percent Unit price appreciation
over the next four years.
TABLE II
NATIONAL HEALTHCARE L.P.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
December 31, 1996
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Unit Price Appreciation for
Option Term(2)
-----------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
Granted to
Options/SARs Employees in Exercise or Base
Executive Officers Granted (#)(1) Fiscal Year Price ($/Sh) Expiration Date 5%($) 10%($)
- ---------------------------- ------------- -------------- ----------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
W. Andrew Adams, CEO -0- -0- -0- -0- -0- -0-
Robert G. Adams, Sr., VP, -0- -0- -0- -0- -0- -0-
COO
Richard F. LaRoche, Jr., Sr. VP -0- -0- -0- -0- -0- -0-
</TABLE>
(1) No options were awarded during 1996 to executive officers.
(2) Based on remaining option term (if any) and annual compounding
Table III identifies for the same three person group all options
exercised during 1996, the value realized upon exercise, and the unrealized
value of the balance of options outstanding.
TABLE III
NATIONAL HEALTHCARE L.P.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
December 31, 1996
<TABLE>
<CAPTION> Value of Unexercised
In-the Money
Number of Unexercised Options/SARs at
Options/SARs at FY-End (#) FY-End ($)
-------------------------- ----------------
Shares acquired on Exercisable/ Exercisable/
Executive Officer Exercise (#) Value Realized ($)(1) Unexercisable Unexercisable
- ------------------------------- ------------------ --------------------- ------------- -------------
<S> <C> <C> <C> <C>
W. Andrew Adams, CEO -0- -0- 40,000/0 $500,000/0
Robert G. Adams, Sr., VP, COO -0- -0- 30,000/0 375,000/0
Richard F. LaRoche, Jr., Sr. VP -0- -0- 30,000/0 375,000/0
</TABLE>
(1) Market value of underlying securities at exercise date, minus the exercise
or base price.
NHC maintains several non-qualified deferred compensation plans for its
key employees, one of which provides a matching contribution (15%) for all
deferred compensation used to purchase Units of limited partnership interest
held by an independent trustee. The matching contribution is forfeited to NHC
unless the employee achieves eight years of vesting service before withdrawing
funds from the Trustee account. Mr. LaRoche participated in this plan during
1996. Other than as described herein or as identified in Tables I, II and III,
NHC has no other long-term incentive plans for its executive officers.
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<PAGE> 73
EMPLOYEE STOCK OWNERSHIP PLAN
In 1986 the Administrative General Partner adopted as its Employee
Stock Ownership Plan and Trust ("ESOP") the ESOP previously sponsored by NHC's
corporate predecessor. The ESOP is a qualified pension plan under Section 401(a)
of the Internal Revenue Code. The Administrative General Partner makes
contributions to the ESOP for all employees and is reimbursed for same by NHC.
Employees make no contributions. All contributions are used by the ESOP to
purchase "qualifying employer securities" which is the Common Stock of the
Administrative General Partner. These securities are allocated among
participating employees of the Administrative General Partner who participate in
the ESOP in the ratio of the employee's wages to the total wages of all
participating employees during that fiscal year. Participating employees are all
employees, including officers, who have earned one year of service by working
more than 1,000 hours during the fiscal year.
On January 20, 1988, the Administrative General Partner of NHC formed a
Leveraged Employee Stock Purchase Plan (Leveraged ESOP). During 1988, the
Leveraged ESOP borrowed, in two separate transactions, $88.5 million from four
commercial banks, the proceeds of which were used to purchase additional stock
in the Administrative General Partner. The Administrative General Partner, in
turn, purchased eight (8) health care centers from NHC and contracted with NHC
to manage these centers for a 20-year period. The Administrative General Partner
also loaned $8.5 million to City Center, Ltd. to construct a 15-story office
building in Murfreesboro, Tennessee, approximately 60% of which is occupied by
NHC. In late 1988, the Administrative General Partner entered into a Loan
Agreement with NHC and advanced $50,000,000 to NHC to be used by NHC to pay off
its existing $30,000,000 revolving line of credit, with the balance to be used
for acquisition, development and general working capital needs. In September of
1988, the original ESOP was merged into the Leveraged ESOP so that as of
December 31, 1995, the employees still participated in only one qualified plan.
On December 28, 1990, the Leveraged ESOP borrowed $50,000,000 from three
commercial lenders, the proceeds of which were used as an equity contribution to
the Administrative General Partner, which in turn loaned said proceeds to NHC at
8.48% fixed rate of interest. The proceeds were used for acquisition and new
construction.
The Leveraged ESOP is administered by an Administrative Committee,
currently consisting of Ernest G. Burgess, III (Director), Donald K. Daniel and
Charlotte Swafford (officers of NHC), which is appointed by the Board of
Directors of the administrative general partner. The Trustees of the Leveraged
ESOP are Dr. Olin O. Williams, a director, and Richard F. LaRoche, Jr., NHC's
Senior Vice President and General Counsel.
The amounts contributed to the ESOP in 1996 and allocated to NHC's
executive officers are included in Table I, and total $19,458.
EMPLOYEE UNIT PURCHASE PLAN
NHC has established its Employee Unit Purchase Plan for employees.
Pursuant to the Plan, eligible employees may purchase units through payroll
deductions at the lesser of the closing asked price of the units as reported on
the American Stock Exchange on the first trading or the last trading day of each
year. At the end of each year, funds accumulated in the employee's account will
be used to purchase the maximum number of units at the above price. NHC makes no
contribution to the purchase price. 21,665 units were issued pursuant to the
Plan in January, 1997, with all payroll deductions being made in 1996.
All employees (including officers and directors) may elect to
participate in the Plan if they meet minimum employment requirements. The
maximum payroll deduction is the employee's normal monthly pay. Participating
employee's rights under the plan are nontransferable. Prior to the end of a
year, a participant may elect to withdraw from the Plan and the amount
accumulated as a result of his payroll deductions shall be returned to him
without interest. Any terminated employee immediately ceases to be a participant
and also receives his or her prior contributions.
In no event may a participant in the Plan purchase thereunder during a
calendar year, units having a fair market value more than $25,000.
The units purchased pursuant to the Plan are freely tradeable, except
for any shares held by an "affiliate" of NHC, which would be subject to the
limitations of Rule 144.
Only Mr. LaRoche and Mr. Robert Adams of NHC's executive officers
participated in this Plan during 1996 and the positive spread between the
purchase price and the then fair market price for these individuals is included
in Table I.
1975 PERFORMANCE BONUS PLAN
In 1975 NHC implemented a performance Bonus Plan which was reaffirmed
and readopted by the unitholders in 1994. This plan provides for the Chairman of
the Board to allocate, with the approval of the non-employee directors, the
bonus at the end of each fiscal year. The total amount available for bonuses
under the plan is 20% of NHC's net income (without regard to NHI lease payments
or Advisory fee income) after a 20% return on partners' equity as determined at
the beginning of that fiscal year. Bonuses of $3,093,901 were paid under this
plan to a total of 125 employees for fiscal year 1995.
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<PAGE> 74
401(K) PLAN
NHC and its affiliates offer a 401(k) Plan for all employees who are
over 18 years of age. The Board of Directors has authorized a matching
contribution to be made for 50% of contributions with contributions being
matched up to 2.5% of quarterly gross wages. No employee may contribute more
than 15% of wages to the Plan, and employees who earn more than $66,000 were
limited to a contribution of no more than $3,500. These matching funds will be
used to purchase Units on the open market, which Units will vest in the
employees account only after the employee has achieved five years of vesting
service. Forfeited units are allocated among remaining participants. A total of
$1,170,000 was contributed to the Plan as matching contributions for 1996.
EMPLOYEE LOAN AND BONUS PROGRAMS
On December 31, 1986, NHC's unitholders adopted an Employee Stock
Financing Plan (the "Financing Plan"). The Plan was designed to enable key
employees of the Corporation to finance the exercise of unit options granted to
them by the Board of Directors and only if authorized by the Board. Under the
Plan, NHC may finance the exercise of any unit options by the acceptance of the
employees' full recourse promissory note bearing interest at a fixed rate equal
to 2.5% below New York prime on the date of the note, with interest payable
quarterly and principal due and payable on ninety days notice, but no longer
than 60 months. The notes are secured by Units having a fair market value equal
to twice the note amount.
The following tables shows, as to each executive officer whose
indebtedness exceeded $60,000, the largest aggregate amount of such indebtedness
since December 31, 1994 and the present outstanding balance.
<TABLE>
<CAPTION>
Financing Plan
-----------------------------------------
Largest Balance out-
Aggregate standing as of
Indebtedness 6/30/97
------------- --------------
<S> <C> <C> <C>
W. Andrew Adams President & Chief $ 4,101,131.00 $3,426,131.00
Executive Officer
Robert G. Adams Sr. Vice President & 2,426,309.00 1,920,059.00
Director
Richard F. LaRoche, Jr. Sr. Vice President & 2,418,076.00 2,136,826.00
Secretary
Ernest G. Burgess Director 1,309,368.00 1,028,118.00
J. K. Twilla Director 169,750.00 -0-
Olin O. Williams Director 679,462.50 595,087.50
-------------- -------------
All Executive Officers $11,104,096.50 $9,106,221.50
& Directors as a Group (6) ============== =============
</TABLE>
Obligations to repay the Financing Plan loans are an asset of NHC (and will
become assets of the Corporation), but are not reflected as increasing
partnership equity (or stockholder equity) until paid. From time to time the
Board has declared a special key employee bonus, directing that the proceeds of
same be used to retire some or all of these financing plan notes. These bonuses
are included in Table I.
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<PAGE> 75
THE REIT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the REIT will be divided into three classes.
The REIT Directors will hold office until the annual meeting for the year in
which their term expires and until their successor is elected and qualified. As
each of their terms expire, the successor shall be elected to a three-year term.
A director may be removed from office for cause only. Officers serve at the
pleasure of the REIT's Board of Directors for a term of one year. The following
table sets forth the initial directors of the REIT:
<TABLE>
<CAPTION>
Name Officer of
---- Current NHC's Managing
Term as General Partner or
Director Predecessor
Expires Since
-------- ------------------
<S> <C> <C>
J. K. Twilla 2001 ---
Robert G. Adams 2000 1985
Olin O. Williams 2000 ---
W. Andrew Adams 1999 1973
Ernest G. Burgess, III 1999 1975
</TABLE>
Each of the directors of the Corporation are currently directors of NHC
and their biographies are included above.
Outside directors receive $2,500 per meeting attended. In addition, outside
directors will receive a stock option to purchase 5,000 shares of REIT common
stock at a purchase price equal to the closing price of the REIT Shares on the
initial date of trading and will be automatically granted an option to purchase
1,000 shares of REIT common stock at the closing price on the date of the REIT's
annual meeting.
The REIT's day to day operations will be conducted by personnel provided by
the Corporation. The REIT will have two executive officers, W. Andrews Adams as
President and Richard F. LaRoche, Jr., as secretary, both of whom are also
officers of the Corporation. See "Relationship Between the REIT and the
Corporation After the Restructure -- Advisory, Administrative Services and
Facilities Agreement".
The compensation of Mr. Adams and Mr. LaRoche will be set by the Board of
Directors of the Corporation and the obligations of the Corporation pursuant to
the REIT Advisory Agreement. Any compensation paid by the Corporation is
credited against the Advisory fee paid to the Corporation.
STOCK OPTION PLAN
The REIT Board of Directors and the sole shareholder of the REIT have
approved the adoption of the 1997 Stock Option and Stock Appreciation Rights
Plan (the "REIT Stock Option Plan"), under which options to purchase shares of
the REIT's common stock are available for grant to consultants, advisors,
directors and employees of the REIT, providing an equity interest in the REIT
and additional compensation based on appreciation of the value of such stock.
The REIT Stock Option Plan allows for options to purchase in the aggregate
up to 500,000 shares of REIT common stock to be granted by the REIT Board of
Directors. The REIT Board of Directors may, in its discretion grant incentive
stock options ("ISO's"), non-qualified stock options or stock appreciation
rights ("SAR's")
In addition, the REIT Stock Option Plan provides that the non-employee
directors will receive a non-qualified stock option to purchase 5,000 shares of
REIT common stock at a purchase price equal to the closing price of the REIT
Shares on the initial date of trading and will be automatically granted an
option to purchase 5,000 shares of REIT common stock annually on the date of the
REIT's annual meeting with an exercise price equal to the closing price on the
date of such annual meeting.
The REIT Stock Option Plan provides that the exercise price of an ISO
option must not be less than the fair market value of the REIT common stock on
the trading day next preceding the date of the grant. Payment for shares of REIT
common stock to be issued upon exercise of an option may be made either in cash,
REIT common stock or any combination thereof, at the discretion of the option
holder. Options are nontransferable, other than by will, the laws of descent and
distribution or pursuant to certain domestic relations orders. REIT Shares
subject to options granted under the REIT Stock Option Plan that expire,
terminate or are canceled without having been exercised in full become available
again for option grants.
The REIT Stock Option Plan is administered by the REIT Board of Directors,
or, at the discretion of the REIT Board of Directors, a committee of directors.
Subject to certain limitations, the REIT Board and its committee have the
authority to determine the recipients, as well as the exercise prices, exercise
periods, length and other terms of stock
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<PAGE> 76
options granted pursuant to the REIT Stock Option Plan. In making such
determinations, the REIT Board may take into account the nature of the services
rendered or to be rendered by option recipients, and their past, present or
potential contributions to the REIT.
The number of shares of REIT common stock that may be granted under the
REIT Stock Option Plan or under any outstanding options granted thereunder will
be proportionately adjusted, to the nearest whole share, in the event of any
stock dividend, stock split, share combination or similar recapitalization
involving the REIT common stock or any spin-off, spin-out or other significant
distribution of the REIT's assets to its stockholders for which the REIT
receives no consideration.
Generally, in the event an option holder is terminated as an employee by
reason of disability or death, the holder or his or her representative may
exercise the option for a period of 12 months following such termination unless
the Board of Directors elects, in its sole discretion, to extend the exercise
period. If the employment of an option holder is terminated for "cause," as
defined in the REIT Stock Option Plan, the unexercised options expire. In the
event the option holder is terminated as an employee for any reason other than
disability, death or cause, the holder may exercise his or her option for a
period of three months following termination, unless extended by agreement of
the REIT.
In the event of a dissolution or liquidation of the REIT or a merger or
consolidation or acquisition in which the REIT is not the surviving corporation,
each outstanding option will become fully exercisable and each holder will have
the right, within 60 days prior to such dissolution, liquidation, merger,
consolidation or acquisition, to exercise his or her options, in whole or in
part.
Either non-qualified or incentive stock options may be granted under the
REIT Stock Option Plan. No federal income tax consequences occur to either the
REIT or the optionee upon the REIT's grant or issuance of a non-qualified stock
option. Upon an optionee's exercise of a non-qualified stock option, the
optionee will recognize ordinary income in an amount equal to the difference
between the fair market value of the REIT common stock purchased pursuant to the
exercise of the option and the exercise price of the option. However, if the
REIT common stock purchased upon exercise of the option is not transferable or
is subject to a substantial risk of forfeiture, then the optionee will not
recognize income until the stock becomes transferable or is no longer subject to
such a risk of forfeiture (unless the optionee makes an election under Internal
Revenue Code Section 83(b) to recognize the income in the year of exercise,
which election must be made within 30 days of the option exercise). The REIT
will be entitled to a deduction in an amount equal to the ordinary income
recognized by the optionee in the year in which such income is recognized by the
optionee. Upon a subsequent disposition of the shares of REIT common stock, the
optionee will recognize a capital gain to the extent the sales proceeds exceed
the optionee's cost of the shares plus the previously recognized ordinary
income.
Incentive stock options granted under the REIT Stock Option Plan are
intended to qualify for a favorable tax treatment under Internal Revenue Code
Section 422. No individual may be granted incentive stock options under the REIT
Stock Option Plan exercisable for the first time during any calendar year and
having an aggregate fair market value in excess of $100,000. If the recipient of
an incentive stock option disposes of the underlying shares before the end of
certain holding periods (essentially the later of one year after the exercise
date or two years after the grant date), he or she will generally recognize
ordinary income in the year of disposition in an amount equal to the difference
between his or her purchase price and the fair market value of the REIT common
stock on the exercise date. If a disposition does not occur until after the
expiration of the holding periods, the recipient will generally recognize a
capital gain equal to the excess of the disposition price over the price paid by
the recipient on the exercise date. The REIT generally will not be entitled to a
tax deduction for compensation expense on account of the original sales to
employees, but may be entitled to deduction if a participant disposes of stock
received upon exercise of an incentive stock option under the REIT Stock Option
Plan prior to the expiration of the holding periods.
The only options which the REIT Board of Directors has determined to grant
under the REIT Stock Option Plan to date are the options to purchase 5,000
shares of REIT common stock to be granted to non-employee directors on the first
trading date after the Effective Time.
THE CORPORATION
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Corporation will be divided into three
classes. The Directors will hold office until the annual meeting for the year in
which their term expires and until their successor is elected and qualified. As
each of their terms expire, the successor shall be elected to a three-year term.
A director may be removed from office for cause only. Officers serve at the
pleasure of the Board of Directors for a term of one year. The following table
sets forth the initial directors of the Corporation:
<TABLE>
<CAPTION>
Officer of
Current NHC's Managing
Term as General Partner or
Director Predecessor
Name Expires Since
---- -------- ------------------
<S> <C> <C>
J. K. Twilla 2001 ---
</TABLE>
70
<PAGE> 77
<TABLE>
<CAPTION>
Officer of
Current NHC's Managing
Term as General Partner or
Director Predecessor
Name Expires Since
---- --------- -----------
<S> <C> <C>
Lawrence C. Tucker 2001 ---
Robert G. Adams 2000 1985
Olin O. Williams 2000 ---
W. Andrew Adams 1999 1973
Ernest G. Burgess, III 1999 1975
</TABLE>
Each of the directors of the Corporation are currently directors of NHC
(and their biographical information is set forth above) with the exception of
Mr. Tucker.
Mr. Tucker has been with Brown Brothers Harriman & Co. ("BBH&Co."), a
private banking company, for 31 years and became a general partner in January
1979. Mr. Tucker currently serves as a member of the Steering Committee of
BBH&Co. He is responsible for the corporate finance activities of BBH&Co.,
including management of the 1818 Fund's, private equity investing partnerships
with committed capital exceeding $1 billion. Mr. Tucker is a director of
WorldCom, Inc., Riverwood International Corporation and WellCare Management
Group, Inc. Mr. Tucker has a B.S. degree from Georgia Institute of Technology
and an MBA from the Wharton School of the University of Pennsylvania.
The executive officers of the Corporation will be the same as the
current officers of NHC. See "Management -- NHC." In addition, the employees of
the Corporation will be provided pursuant to the Employee Services Agreement
between the Corporation and National. The Corporation does not have employment
agreements with any of its employees and anticipates that the compensation
received by its executive officers will be in line with the compensation
received by such officers as officers of NHC. See "Management -- NHC --
Executive Compensation."
Outside directors receive $2,500 per meeting attended. In addition,
outside directors will receive a stock option to purchase 10,000 shares of REIT
common stock at a purchase price equal to the closing price of the Corporation
Shares on the initial date of trading and will be automatically granted an
option to purchase 10,000 shares of Corporation common stock at the closing
price on the date of the Corporation's annual meeting.
The Corporation's Board of Directors and the sole shareholder of the
Corporation have approved the adoption of the 1997 Stock Option and Stock
Appreciation Rights Plan (the "Corporation Stock Option Plan"), under which
options to purchase shares of the Corporation's common stock are available for
grant to consultants, advisors, directors and employees of the Corporation,
providing an equity interest in the Corporation and additional compensation
based on appreciation of the value of such stock.
The Corporation Stock Option Plan allows for options to purchase in the
aggregate up to 1,000,000 shares of Corporation common stock to be granted by
the Corporation Board of Directors. The Corporation Board of Directors may, in
its discretion grant incentive stock options ("ISO's"), non-qualified stock
options or stock appreciation rights ("SAR's")
In addition, the Corporation Stock Option Plan provides that the
non-employee directors will receive a non-qualified stock option to purchase
10,000 shares of Corporation common stock at a purchase price equal to the
closing price of the Corporation Shares on the initial date of trading and will
be automatically granted an option to purchase 10,000 shares of Corporation
common stock annually on the date of the Corporation's annual meeting with an
exercise price equal to the closing price on the date of such annual meeting.
The Corporation Stock Option Plan provides that the exercise price of
an ISO option must not be less than the fair market value of the Corporation
common stock on the trading day next preceding the date of the grant. Payment
for shares of Corporation common stock to be issued upon exercise of an option
may be made either in cash, Corporation common stock or any combination thereof,
at the discretion of the option holder. Options are nontransferable, other than
by will, the laws of descent and distribution or pursuant to certain domestic
relations orders. Corporation Shares subject to options granted under the
Corporation Stock Option Plan that expire, terminate or are canceled without
having been exercised in full become available again for option grants.
The Corporation Stock Option Plan is administered by the Corporation
Board of Directors, or, at the discretion of the Corporation Board of Directors,
a committee of directors. Subject to certain limitations, the Corporation Board
and its committee have the authority to determine the recipients, as well as the
exercise prices, exercise periods, length and other terms of stock options
granted pursuant to the Corporation Stock Option Plan. In making such
determinations, the Corporation Board may take into account the nature of the
services rendered or to be rendered by option recipients, and their past,
present or potential contributions to the Corporation.
The number of shares of Corporation common stock that may be granted
under the Corporation Stock Option Plan or under any outstanding options granted
thereunder will be proportionately adjusted, to the nearest whole share, in the
event of any stock dividend, stock split, share combination or similar
recapitalization involving the Corporation common
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<PAGE> 78
stock or any spin-off, spin-out or other significant distribution of the
Corporation's assets to its stockholders for which the Corporation receives no
consideration.
Generally, in the event an option holder is terminated as an employee by
reason of disability or death, the holder or his or her representative may
exercise the option for a period of 12 months following such termination unless
the Board of Directors elects, in its sole discretion, to extend the exercise
period. If the employment of an option holder is terminated for "cause," as
defined in the Corporation Stock Option Plan, the unexercised options expire. In
the event the option holder is terminated as an employee for any reason other
than disability, death or cause, the holder may exercise his or her option for a
period of three months following termination, unless extended by agreement of
the Corporation.
In the event of a dissolution or liquidation of the Corporation or a merger
or consolidation or acquisition in which the Corporation is not the surviving
corporation, each outstanding option will become fully exercisable and each
holder will have the right, within 60 days prior to such dissolution,
liquidation, merger, consolidation or acquisition, to exercise his or her
options, in whole or in part.
Either non-qualified or incentive stock options may be granted under the
Corporation Stock Option Plan. No federal income tax consequences occur to
either the Corporation or the optionee upon the Corporation's grant or issuance
of a non-qualified stock option. Upon an optionee's exercise of a non-qualified
stock option, the optionee will recognize ordinary income in an amount equal to
the difference between the fair market value of the Corporation common stock
purchased pursuant to the exercise of the option and the exercise price of the
option. However, if the Corporation common stock purchased upon exercise of the
option is not transferable or is subject to a substantial risk of forfeiture,
then the optionee will not recognize income until the stock becomes transferable
or is no longer subject to such a risk of forfeiture (unless the optionee makes
an election under Internal Revenue Code Section 83(b) to recognize the income in
the year of exercise, which election must be made within 30 days of the option
exercise). The Corporation will be entitled to a deduction in an amount equal to
the ordinary income recognized by the optionee in the year in which such income
is recognized by the optionee. Upon a subsequent disposition of the shares of
Corporation common stock, the optionee will recognize a capital gain to the
extent the sales proceeds exceed the optionee's cost of the shares plus the
previously recognized ordinary income.
Incentive stock options granted under the Corporation Stock Option Plan are
intended to qualify for a favorable tax treatment under Internal Revenue Code
Section 422. No individual may be granted incentive stock options under the
Corporation Stock Option Plan exercisable for the first time during any calendar
year and having an aggregate fair market value in excess of $100,000. If the
recipient of an incentive stock option disposes of the underlying shares before
the end of certain holding periods (essentially the later of one year after the
exercise date or two years after the grant date), he or she will generally
recognize ordinary income in the year of disposition in an amount equal to the
difference between his or her purchase price and the fair market value of the
Corporation common stock on the exercise date. If a disposition does not occur
until after the expiration of the holding periods, the recipient will generally
recognize a capital gain equal to the excess of the disposition price over the
price paid by the recipient on the exercise date. The Corporation generally will
not be entitled to a tax deduction for compensation expense on account of the
original sales to employees, but may be entitled to deduction if a participant
disposes of stock received upon exercise of an incentive stock option under the
Corporation Stock Option Plan prior to the expiration of the holding periods.
The only options which the Corporation Board of Directors has determined to
grant under the Corporation Stock Option Plan to date are the options to
purchase 10,000 shares of Corporation common stock to be granted to non-employee
directors on the first trading date after the Effective Time.
The Corporation has also established several non-qualified deferred
compensation plans for its key employees similar to the plans offered by NHC,
one of which provides a matching contribution (15%) for all deferred
compensation used to purchase shares of common stock held by an independent
trustee. The matching contribution is forfeited to the Corporation unless the
employee achieves eight years of vesting service before withdrawing funds from
the Trustee account. The Corporation will grant credit to employees for years of
service with NHC.
EMPLOYEE STOCK PURCHASE PLAN
The Corporation has established its Employee Stock Purchase Plan for
employees. Pursuant to the Plan, eligible employees may purchase shares of
Common Stock through payroll deductions at the lesser of the closing asked price
of the stock as reported on the American Stock Exchange on the first trading or
the last trading day of each plan year. At the end of each plan year, funds
accumulated in the employee's account will be used to purchase the maximum
number of Shares at the above price. The Corporation makes no contribution to
the purchase price.
All employees (including officers and directors) may elect to participate
in the Employee Stock Purchase Plan if they meet minimum employment
requirements. The maximum payroll deduction is the employee's normal monthly
pay. Participating employee's rights under the Plan are nontransferable. Prior
to the end of a year, a participant may elect to withdraw from the Plan and the
amount accumulated as a result of his payroll deductions shall be returned to
him without interest. Any terminated employee immediately ceases to be a
participant and also receives his or her prior contributions.
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<PAGE> 79
In no event may a participant in the Employee Stock Purchase Plan purchase
thereunder during a calendar year, units having a fair market value more than
$25,000.
The Shares purchased pursuant to the Plan are freely tradeable, except for
any shares held by an "affiliate" of the Corporation, which would be subject to
the limitations of Rule 144.
EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation has adopted as its Employee Stock Ownership Plan and Trust
("ESOP") the ESOP previously sponsored by NHC. The ESOP is a qualified pension
plan under Section 401(a) of the Internal Revenue Code. National Health
Corporation ("National") makes contributions to the ESOP for all employees and
is reimbursed for same by the Corporation. Employees make no contributions. All
contributions are used by the ESOP to purchase "qualifying employer securities"
which is the Common Stock of the Administrative General Partner. These
securities are allocated among participating employees of the Administrative
General Partner who participate in the ESOP in the ratio of the employee's wages
to the total wages of all participating employees during that fiscal year.
Participating employees are all employees, including officers, who have earned
one year of service by working more than 1,000 hours during the fiscal year. The
Corporation's ESOP will assume the debt on NHC's Leveraged ESOP as described
under "Management -- NHC -- Executive Compensation."
The Corporation's ESOP will be administered by an Administrative Committee,
currently consisting of Ernest G. Burgess, III (Director), Donald K. Daniel and
Charlotte Swafford (officers of the Corporation), which is appointed by the
Board of Directors of the Corporation. The Trustees of the ESOP are Dr. Olin 0.
Williams, a director, and Richard F. LaRoche, Jr., the Corporation's Senior Vice
President and General Counsel.
PERFORMANCE BONUS PLAN
The Corporation has adopted a Performance Bonus Plan. This plan provides
for the Chairman of the Board to allocate, with the approval of the non-employee
directors, the bonus at the end of each fiscal year. The total amount available
for bonuses under the plan is 20% of the Corporation's net income (without
regard to NHI lease payments or NHI Advisory fee income or the REIT Lease
payments or REIT Advisory Fee income) after a 20% return on stockholders' equity
as determined at the beginning of that fiscal year.
401(K) PLAN
The Corporation will offer a 401(k) Plan for all employees who are over 18
years of age. The Board of Directors has authorized a matching contribution to
be made for 50% of contributions with contributions being matched up to 2.5% of
quarterly gross wages. No employee may contribute more than 15% of wages to the
Plan, and employees who earn more than $66,000 were limited to a contribution of
no more than $3,500. These matching funds will be used to purchase Shares on the
open market, which Shares will vest in the employees account only after the
employee has achieved five years of vesting service. Forfeited Shares will be
allocated among remaining participants.
EMPLOYEE LOAN AND BONUS PROGRAMS
The Corporation has adopted an Employee Stock Financing Plan (the
"Financing Plan"). The Plan was designed to enable key employees of the
Corporation to finance the exercise of stock options granted to them by the
Board of Directors and only if authorized by the Board. Under the Plan, the
Corporation may finance the exercise of any options by the acceptance of the
employees' full recourse promissory note bearing interest at a fixed rate equal
to 2.5% below New York prime on the date of the note, with interest payable
quarterly and principal due and payable on ninety days notice, but no longer
than 60 months. The notes are secured by Shares having a fair market value equal
to twice the note amount.
Obligations to repay the Financing Plan loans are an asset of the
Corporation, but are not reflected as increasing Equity until paid. From time to
time the Board may declare a special key employee bonus, directing that the
proceeds of same be used to retire some or all of these financing plan notes.
73
<PAGE> 80
CERTAIN TRANSACTIONS
W. ANDREW ADAMS
NHC has successfully developed a continuing care retirement community in
Nashville, Tennessee (Richland Place) and is pursuing similar projects in
Tennessee and Florida. Having identified Murfreesboro, Rutherford County,
Tennessee as a viable market, the Company invited a number of potential
residents to serve as a focus group to assist in the location and design of the
project. After reviewing a number of potential locations, management and the
focus group chose a twenty-two acre tract with extensive frontage on US Highway
231 as the optimum location. This site was owned and occupied by Mr. and Mrs. W.
Andrew Adams, NHC's chief executive officer. After negotiations and appraisal,
the Company acquired in 1993 and 1994 (by exchange of like kind property and
cash) the site from Mr. and Mrs. Adams for a total valuation of $1,500,000,
which the Company believes to be equal to or even less than comparable property
in the market. Mr. and Mrs. Adams are currently renting the residence on the
site on a month to month basis and for a fair market value.
NATIONAL
In January, 1988, NHC sold the assets of eight health care centers (1,121
licensed beds) to National for a total consideration of $40,000,000. The
consideration consisted of $30,000,000 in cash and a $10,000,000 note receivable
due December 31, 2007. The note receivable earns interest at 8.5% per annum. NHC
has agreed to manage the centers under a 20-year management contract for
management fees comparable to those in the industry. NHC has a receivable from
National for management fees of approximately $3.2 million at December 31, 1996.
As of December 31, 1996, National had borrowed $2,153,000 form NHC to finance
the construction of additions at two health care centers. These notes are
unsecured, mature in 1998 and require monthly principal and interest payments,
with interest at the prime rate.
In January, 1988, NHC obtained long-term financing of $8.5 million from
National for its new headquarters building. The note requires quarterly
principal and interest payments with interest at 9%. At December 31, 1996, the
outstanding balance was approximately $5.5 million. The building is owned by a
separate partnership of which NHC is the general partner and the other building
tenants are limited partners. NHC has guaranteed the debt service of the
building partnership (and the Corporation will receive this general partnership
interest). In addition, NHC's bank credit facility and the senior secured notes
were financed through National and National's ESOP. NHC's interest costs,
financing expenses and principal payments are equal to those incurred by
National. In October 1991, NHC borrowed $10.0 million from National. This term
note requires quarterly interest payments at 8.5% with the entire principal due
at maturity in 1998.
The Corporation and National intend to enter into an Employee Services
Agreement (the "Employee Services Agreement") whereby the Corporation will lease
all of its employees from National. Pursuant to the Employee Lease Agreement,
The Corporation will reimburse National for the gross payroll of employees
provided to the Corporation plus a monthly fee equal to one percent of such
month's gross payroll, but in shall such fee be less than the actual cost of
administering the payroll and personnel department. The Employee Services
Agreement may be terminated by either at anytime with or without notice.
National will be responsible for: the employment of all persons necessary
to conduct the business of the Corporation and set all wages and salaries, and
provide all fringe benefits; utilization of any qualified leveraged employee
stock ownership plan; payment of pensions, and establishment or continue and
carry out pension, profit sharing, bonus, purchase, option, savings, thrift and
other incentive and employee benefit plans; purchase and payment of insurance;
the indemnification and purchase of insurance on behalf of any fiduciary of any
employee benefit plans and health insurance on behalf of any fiduciary of such
plans.
In the Employee Services Agreement, the Corporation agrees to indemnify,
defend and hold harmless National from any damages caused by a misrepresentation
by the Corporation, litigation arising from the acts or failure to act of the
Corporation or its agents in accordance with law or the Employee Services
Agreement, any employment matters relating to the employees as a result of gross
negligence or intentional misconduct by the Corporation or the failure of the
Corporation to obtain and/or follow specific advice and direction from National
in matters of employee separation and/or discipline. In addition, National
agrees to indemnify and defend and hold harmless the Corporation from any
damages caused by reason of or resulting from or relating to employee separation
and/or discipline of National employees.
In connection with the Plan of Restructure, with respect to approximately
806,000 of the Units owned by National, instead of receiving REIT Shares,
National will receive approximately 806,000 OP Units. National will receive the
OP Units in order to preserve the ownership restrictions required for the REIT
to qualify as a real estate investment trust. Therefore, after the Effective
Time, National will own approximately 794,000 REIT Shares and 806,000 OP Units.
74
<PAGE> 81
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
NHC
The following table sets forth certain information as to the number of
general and limited partnership Units of NHC beneficially owned as of July 31,
1997 (a) by each person (including any "group" as that term is used in Section
13(d) (3) of the Exchange Act) who is known to NHC to own beneficially 5% or
more of the outstanding Units (8,862,187 Units as of July 31, 1997), (b) by each
director of the Managing or Administrative General Partner, and (c) by all
executive officers and directors of NHC, Managing General Partner and the
Administrative General Partner as a group. Members of management of NHC listed
below are all members of management and/or the Board of Directors of the
Managing and Administrative General Partners, but they disclaim that they are
acting as a "group" and the table below is not reflective of them acting as a
group:
<TABLE>
<CAPTION>
Names and Addresses Number of Units Percentage of
of Beneficial Owner Beneficially Owned (1) Total Units
------------------- ---------------------- -------------
<S> <C> <C>
W. Andrew Adams, President and 1,062,173 12.00%
Individual General Partner
1927 Memorial Blvd.
Murfreesboro, TN 37129
Dr. J. K. Twilla, Director 73,155 .82%
525 Golf Club Lane
Smithville, TN 37166
Dr. Olin O. Williams, Director 99,340 1.12%
2007 Riverview Drive
Murfreesboro, TN 37139
Robert G. Adams, Director & Sr. V.P. 438,073 4.94%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Ernest G. Burgess, Director 178,592 2.02%
2239 Shannon Drive
Murfreesboro, TN 37129
Richard F. LaRoche, Jr., Sr. V.P. 374,685 4.23%
2103 Shannon Drive
Murfreesboro, TN 37130
National Health Corporation, (2) 1,271,058 14.34%
Admin. General Partner
P. O. Box 1398
Murfreesboro, TN 37133
NHC, Inc., Managing General Partner 87,715 .99%
P. O. Box 1398
Murfreesboro, TN 37133
Albert O. Nicholas 443,600 5.00%
6002 North Highway 83
Hartland, WI 53029
All Executive Officers, Directors of the 3,579,988 40.40%
Corporate General Partners and the
Corporate General Partners as a Group
</TABLE>
(1) Assumes exercise of unit options and convertible subordinated
debentures outstanding. See "Management -- NHC -- Option Plans."
(2) Does not include 99,495 Units owned by a revocable trust under NHC's
deferred compensation plan or 239,600 Units owned by National for the
benefit of a third party, of which National may be deemed the
beneficial owner. National disclaims beneficial ownership of such
Units.
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<PAGE> 82
THE REIT
Since its incorporation, the REIT has been and until the Distribution
occurs will be a wholly-owned subsidiary of NHC. As a result, NHC currently
owns 100% of the outstanding REIT Shares. Immediately following the Effective
Time of the Plan of Restructure, the REIT will be beneficially owned by each
person and with the same percentage ownership as NHC is currently owned except
that National will own approximately 794,000 REIT Shares and 806,000 OP Units
and there will be approximately 806,000 fewer REIT Shares outstanding. See
"Certain Transactions - National."
After applying certain ownership attribution rules of the Code, the two
largest shareholders of the REIT will be (i) W. Andrew Adams and other members
of his family, and (ii) National Health Corporation. See "Federal Income Tax
Considerations - The REIT - Taxation as a Real Estate Investment Trust." The
following table sets forth certain information as to REIT Shares estimated to
be beneficially owned after the Effective Time.
<TABLE>
<CAPTION>
Number of REIT Shares Percentage of
Names and Addresses Beneficially Owned After the Total REIT Shares After the
of Beneficial Owner Restructure (1) Restructure (2)
------------------- ---------------------------- ---------------------------
<S> <C> <C>
W. Andrew Adams, President and 1,062,173 10.61%
Individual General Partner
1927 Memorial Blvd.
Murfreesboro, TN 37129
Dr. J. K. Twilla, Director 73,155 0.73%
525 Golf Club Lane
Smithville, TN 37166
Dr. Olin O. Williams, Director 99,340 0.99%
2007 Riverview Drive
Murfreesboro, TN 37139
Robert G. Adams, Director & Sr. V.P. 438,073 4.37%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Ernest G. Burgess, Director 178,592 1.78%
2239 Shannon Drive
Murfreesboro, TN 37129
Richard F. LaRoche, Jr., Sr. V.P. 374,685 3.74%
2103 Shannon Drive
Murfreesboro, TN 37130
National Health Corporation, 794,000 7.93%
Admin. General Partner
P. O. Box 1398
Murfreesboro, TN 37133
All Executive Officers, Directors of the 2,221,215 22.18%
REIT
</TABLE>
(1) Assumes exercise of options outstanding.
(2) Based on an estimated 10,013,400 to be outstanding immediately after
the Effective Time.
76
<PAGE> 83
THE CORPORATION
Since its incorporation, the Corporation has been and until the Merger
occurs will be a wholly-owned subsidiary of NHC. As a result, NHC currently owns
100% of the outstanding Shares. Immediately following the Effective Time of the
Plan of Restructure, the Corporation will be beneficially owned by each person
and with the same percentage ownership as NHC except that the 1818 Notes, if
issued, will immediately be converted into approximatley 555,555 Shares at the
Effective Time. The following table sets forth certain information as to Shares
estimated to be beneficially owned after the Effective Time.
<TABLE>
<CAPTION>
Number of Corporation Shares Percentage of
Names and Addresses Beneficially Owned After the Total Corporation Shares After the
of Beneficial Owner Restructure (1) Restructure (2)
------------------- ---------------------------- ---------------------------
<S> <C> <C>
W. Andrew Adams, Director, CEO 1,062,173 10.61%
1927 Memorial Blvd.
Murfreesboro, TN 37129
Dr. J.K. Twilla, Director 73,155 0.73%
525 Golf Club Lane
Smithville, TN 37166
Dr. Olin O. Williams, Director 99,340 0.99%
2007 Riverview Drive
Murfreesboro, TN 37139
Robert G. Adams, Director & Sr.V.P. 438,073 4.37%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Ernest G. Burgess, Director 178,592 1.78%
2239 Shannon Drive
Murfreesboro, TN 37129
Lawrence C. Tucker, Director (3) 555,555 5.13%
59 Wall Street
New York, NY 10005
Richard F. LaRoche, Jr., Sr.V.P. 374,685 3.74%
2103 Shannon Drive
Murfreesboro, TN 37130
National Health Corporation (4) 1,271,058 11.75%
P.O. Box 1398
Murfreesboro, TN 37133
1818 Fund 555,555 5.13%
59 Wall Street
New York, New York 10005
All Executive Officers, Directors of the 2,776,770 25.66%
Corporation
</TABLE>
(1) Assumes exercise of options outstanding.
(2) Based on an estimated 10,819,400 to be outstanding immediately after
the Effective Time.
(3) Mr. Tucker is a general partner of 1818 Fund and may be deemed to be
the beneficial owner of the Shares owned by the 1881 Fund. Mr. Tucker
disclaims beneficial ownership.
(4) Does not include 99,495 Units owned by a revocable trust under NHC'S
deferred compensation plan or 239,600 Units owned by National for the
benefit of a third party of which National may be deemed the beneficial
owner. National disclaims beneficial ownership of such Shares.
76
<PAGE> 84
DESCRIPTION OF SECURITIES
SHARES OF THE CORPORATION
COMMON STOCK
The Corporation is authorized to issue 30,000,000 shares of common stock,
par value $.01 per share and 10,000,000 shares of preferred stock, par value
$.01 per share.
Holders of the Shares are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors. Holders of the Shares are
entitled to receive dividends when, as and if declared by the board of directors
out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of the Corporation, holders of the Shares are entitled
to share ratably in all assets remaining available for distribution to them
after payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the Shares. Holders of the Shares, as
such, have no conversion, preemptive or other subscription rights, and there are
no redemption provisions applicable to the Shares. All of the Shares outstanding
are fully paid and nonassessable.
The Corporation's board of directors is authorized to issue preferred stock
in one or more series and, with respect to each series, to determine the number
of shares constituting any series, and the preferences, conversion and other
rights, voting powers, restrictions and limitations as to dividends,
qualifications and terms and conditions of redemption.
The preferred stock and the variety of characteristics available for it
offers the Corporation flexibility in financing and acquisition transactions. An
issuance of preferred stock could dilute the book value or adversely affect the
relative voting power of the Corporation Shares. The issuance of such shares
could be used to discourage unsolicited business combinations, for example, by
providing for class voting rights which would enable the holder to block such a
transaction. Although the Corporation's board of directors is required when
issuing such stock to act based on its judgment as to the best interests of the
stockholders of the Corporation, the board of directors could act in a manner
that would discourage or prevent a transaction some stockholders might believe
is in the Corporation's best interests or in which stockholders could or would
receive a premium for their Corporation Shares over the market price.
The Corporation's board of directors has authority to classify or
reclassify authorized but unissued shares of preferred stock by setting or
changing the preferences, conversion and other rights, voting powers,
restrictions and limitations as to dividends, qualifications, and terms and
conditions of redemption of stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The certificate of incorporation of the Corporation (the "Corporation
Certificate") provides that directors of the Corporation will not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
directors' duty of loyalty to the Corporation or its stockholders, (ii) for acts
of omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL relating to prohibited
dividends or distribution or the repurchase or redemption of stock or (iv) for
any transaction from which the director derives an improper personal benefit.
The provision does not apply to claims against directors for violations of
certain laws, including federal securities laws. If the DGCL is amended to
authorize further elimination or limitation of director's liability, then the
liability of directors of the Corporation shall automatically be limited to the
fullest extent provided by law. The Corporation Certificate and the bylaws of
the Corporation (the "Corporation Bylaws") also contain provisions to indemnify
the directors, officers, employees or other agents to the fullest extent
permitted by the DGCL. These provisions may have the practical effect in certain
cases of eliminating the ability of stockholders to collect monetary damages
from directors.
BUSINESS COMBINATIONS
Subject to certain exceptions, Section 203 of the DGCL prohibits a public
Delaware corporation from engaging in a business combination (as defined
therein) with an "interested stockholder" (defined generally as any person who
beneficially owns 15% or more of the outstanding voting stock of the corporation
or any person affiliated with such person) for a period of three years following
the date that such stockholder became an interested stockholder, unless (i)
prior to such date the board of directors of the corporation approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
at the time the transaction commenced (excluding for purposes of determining the
number of shares outstanding those shares owned (a) by directors who are also
officers of the corporation and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer); or
(iii) on or subsequent to such date the business combination is approved by the
board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of at least two-thirds of the outstanding
voting stock of the corporation not owned by the interested stockholder. Section
203 of the DGCL may have the effect of deterring merger proposals, tender offers
or other attempts to effect changes in control of the Corporation that are not
negotiated with and approved by the Corporation's board of directors.
77
<PAGE> 85
TRANSFER AGENT AND REGISTRATION
The transfer agent and registrar for the Shares will be SunTrust Bank,
Atlanta.
SHARES OF THE REIT
COMMON STOCK
The REIT is authorized to issue 30,000,000 shares of common stock, par
value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01
per share.
Each REIT Share is entitled to one vote on each matter submitted to a vote
of stockholders. There is no right of cumulative voting in connection with the
election of directors. Any of the REIT Shares issued and sold hereunder will be
fully paid and nonassessable. Holders of the REIT Shares are entitled to
receive, pro rata, dividends declared by the REIT board of directors out of
funds legally available therefor. In the event of any liquidation, dissolution
or winding up of the REIT, holders of the REIT Shares are entitled to share
ratably in the assets available for distribution to stockholders. There are no
pre-emptive or other subscription rights, conversion rights, or redemption or
sinking fund provisions with respect to the REIT Shares.
PREFERRED STOCK
The REIT's board of directors is authorized to issue preferred stock in one
or more series and, with respect to each series, to determine the number of
shares constituting any series, and the preferences, conversion and other
rights, voting powers, restrictions and limitations as to dividends,
qualifications and terms and conditions of redemption.
The preferred stock and the variety of characteristics available for it
offers the REIT flexibility in financing and acquisition transactions. An
issuance of preferred stock could dilute the book value or adversely affect the
relative voting power of the REIT Shares. The issuance of such shares could be
used to discourage unsolicited business combinations, for example, by providing
for class voting rights which would enable the holder to block such a
transaction. Although the REIT board of directors is required when issuing such
stock to act based on its judgment as to the best interests of the stockholders
of the REIT, the board of directors could act in a manner that would discourage
or prevent a transaction some stockholders might believe is in the REIT's best
interests or in which stockholders could or would receive a premium for their
REIT Shares over the market price.
The REIT's board of directors has authority to classify or reclassify
authorized but unissued shares of preferred stock by setting or changing the
preferences, conversion and other rights, voting powers, restrictions and
limitations as to dividends, qualifications, and terms and conditions of
redemption of stock.
REIT PROVISIONS
The REIT Charter contains certain limitations on the number of shares of
the REIT's stock that any one stockholder may own, which limitations are
designed to ensure that the REIT maintains its status as a real estate
investment trust.
Upon demand of the REIT, each stockholder must disclose to the REIT such
information with respect to direct and indirect ownership of stock owned (or
deemed to be owned after applying the rules applicable to real estate investment
trusts under the Code) as the REIT board of directors deems reasonably necessary
in order that the REIT may fully comply with the real estate investment trust
provisions of the Code. Proposed transferees of stock must also satisfy the
board, upon demand, that such transferees will not cause the REIT to fall out of
compliance with such provisions.
The Code generally prevents a company from qualifying as a real estate
investment trust if more than 50% in value of its stock is owned, directly or
indirectly, by five or fewer individuals, which includes certain entities
treated as individuals (the "Closely-Held Rule"). The REIT Charter prohibits a
stockholder from owning more than 9.8% of any other class of capital stock of
the REIT. Any shares of common stock in excess of such limit are deemed to be
"Excess Shares". Excess Shares shall be deemed automatically to have been
converted into a class separate and distinct from the class from which converted
and from any other class of Excess Shares, each such class being designated
"Excess Shares of [stockholder's name]" or in the event of excess preferred
stock, "Excess Preferred Stock of [stockholder's name]". No Excess Shares may be
voted, nor considered outstanding for the purpose of determining a quorum at any
meeting of stockholders. Any dividends or other distributions payable upon the
Excess Shares may, in the discretion of the REIT, be paid into a non-interest
bearing account and released to the stockholder only at such time as he or she
ceases to be the holder of Excess Shares. The REIT, upon authorization of the
board of directors, may redeem any or all Excess Shares, and from the date of
the giving of notice of redemption such shares shall cease to be outstanding and
the stockholder shall cease to be entitled to dividends, voting rights and other
benefits with respect to such shares. The redemption price will be based on the
trading prices of the class of stock from which the Excess Shares being redeemed
were converted, and is payable, without interest, only upon the liquidation of
the REIT. However, the REIT Charter contains provisions under which the holder
of Excess Shares may cause the REIT to rescind such redemption by selling (and
notifying the REIT of such sale), within 30 days after notice of the redemption,
a number of the shares held by such holder equal to the number of Excess Shares.
In addition, Excess Shares held by any holder may be converted back into shares
of the original class and series of stock if the holder sells such shares prior
to their being called for redemption.
78
<PAGE> 86
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Maryland General Corporate Law (the "MGCL") permits a Maryland
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its stockholders from money
damages, excluding liability resulting from (a) actual receipt of an improper
benefit or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The REIT Charter contains such a provision, which eliminates such
liability to the maximum extent permitted by the MGCL.
The REIT Charter obligates the REIT, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any present or former
director or officer who is made a party to the proceeding by reason of his
service in that capacity or (b) any individual who, at the request of the REIT,
serves or has served another entity and who is made a party to the proceeding by
reason of his service in that capacity. The MGCL also permits the REIT to
indemnify and advance expenses to any person who served a predecessor of the
REIT in any of the capacities described above and to any employee or agent of
the REIT or a predecessor of the REIT.
The MGCL requires a corporation (unless its charter provides otherwise,
which the REIT Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines. settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise tot he proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the REIT, as a condition to advancing expenses, to
obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the REIT as authorized by the bylaws and (b) a written undertaking by or in his
behalf to repay the amount paid or reimbursed by the REIT if it shall ultimately
be determined that the standard of conduct was not met. The REIT will indemnify
all of its officers and directors to the fullest extent permitted under Maryland
law.
BUSINESS COMBINATIONS
Under the Maryland General Corporation Law (the "MGCL"), certain "Business
Combinations" (including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance of equity securities) between a
Maryland corporation and any person who beneficially owns 10% or more of the
voting power of the REIT's outstanding voting stock (an "Interested
Stockholder") must be: (a) recommended by the REIT's board of directors; and (b)
approved by the affirmative vote of at least (i) 80% of the REIT's outstanding
shares entitled to vote and (ii) two-thirds of the outstanding shares entitled
to vote that is not held by the Interested Stockholder with whom the business
combination is to be effected, unless, among other things, the REIT's common
stockholders receive a minimum price (as defined in the statute) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for his shares. In addition, an
Interested Stockholder or any affiliate thereof may not engage in a "Business
Combination" with the REIT for a period of five years following the date he
becomes an Interested Stockholder. These provisions of MGCL do not apply,
however, to Business Combinations that are approved or exempted by the board of
directors prior to a person's becoming an Interested Stockholder. The REIT may
expressly elect not to be governed by these provisions, in whole or in part, by
so providing in its Charter or by adopting a charter amendment.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" may not be voted except to the extent approved
by a vote of two-thirds of the votes entitled to be cast by stockholders
excluding shares owned by the acquirer, officers and directors who are employees
of the REIT. "Control shares" are shares that, if aggregated with all other
shares previously acquired that the person is entitled to vote, would entitle
the acquirer to vote (i) 20% or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority of the outstanding shares.
Control shares do not include shares the acquiring person is entitled to vote
because stockholder approval has previously been obtained. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition and
who has obtained a definitive financing agreement with a responsible financial
institution providing for any amount of financing not to be provided by the
acquiring person may compel the REIT's board of directors to call a special
meeting of stockholders to be held within 50 days of demand to consider the
voting rights of the shares. If no request for a meeting is made, the REIT may
itself present the question at any stockholders' meeting.
Subject to certain conditions and limitations, the REIT may redeem any or
all of the control shares, except those for which voting rights have previously
been approved, for fair value determined, without regard to voting rights, as of
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<PAGE> 87
the date of the last control shares acquisition or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders'
meeting and the acquirer is entitled to vote a majority of the shares entitled
to vote, all other stockholders may exercise appraisal rights. The fair value of
the shares as determined for purposes of such appraisal rights may not be less
than the highest price per share in the control shares acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenter's
rights do not apply in the context of control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to the acquisitions approved or excepted by the REIT Charter or
REIT Bylaws prior to a control share acquisition.
The limitation on ownership of stock set forth in the REIT Charter, as well
as Maryland business combination and control share acquisition statutes could
have the effect of discouraging offers to acquire the REIT and of increasing the
difficulty of consummating any such offer.
TRANSFER AGENT AND REGISTRAR
SunTrust Bank in Nashville will act as transfer agent and registrar for the
REIT Shares.
OPERATING PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement describes the
material provisions of such agreement. This summary is qualified in its entirety
by reference to the Operating Partnership Agreement, which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership was organized as a Delaware limited partnership
in October, 1997. The REIT is the sole general partner of, and will hold
approximately 91% of the economic interests in, the Operating Partnership. The
REIT will hold a one percent general partner interest in the Operating
Partnership and the balance will be held as a limited partner interest. The REIT
will conduct substantially all of its business through the Operating Partnership
and its subsidiaries. It is contemplated that National Health Corporation
initially will be the sole limited partner of the Operating Partnership.
Pursuant to the Operating Partnership Agreement, the REIT, as the sole
general partner of the Operating Partnership, generally has full, exclusive and
complete responsibility and discretion in the management, operation and control
of the Operating Partnership, including the ability to cause the Operating
Partnership to enter into certain major transactions, including acquisitions,
developments and dispositions of properties and refinancings of existing
indebtedness. No limited partner may take part in the operation, management or
control of the business of the Operating Partnership by virtue of being a holder
of OP Units.
The limited partners of the Operating Partnership have agreed that in the
event of any conflict in the fiduciary duties owed by the REIT to its
stockholders and by the REIT, as general partner of the Operating Partnership,
to such limited partners, the REIT may act in the best interests of the REIT's
stockholders without violating its fiduciary duties to such limited partners or
being liable for any resulting breach of its duties to the limited partners.
The Operating Partnership Agreement provides that all business activities
of the REIT, including all activities pertaining to the acquisition and
operation of properties, must be conducted through the Operating Partnership,
and that the Operating Partnership must be operated in a manner that will enable
the REIT to satisfy the requirements for being classified as a real estate
investment trust.
REMOVAL OF THE GENERAL PARTNER; TRANSFER OF THE GENERAL PARTNER'S INTEREST
The Operating Partnership provides that the limited partners may not remove
the REIT as general partner of the Operating Partnership. The REIT may not
transfer any of its interests as general or limited partner in the Operating
Partnership except (i) in connection with a merger or sale of all or
substantially all of its assets pursuant to a transaction for which it has
obtained the requisite approval in accordance with the terms of the Operating
Partnership Agreement (ii) if the limited partners holding at least
three-fourths of the OP Units (excluding OP Units owned by the REIT) consent to
such transfer or (iii) to certain affiliates of the REIT.
AMENDMENTS OF THE OPERATING PARTNERSHIP AGREEMENT
Amendments to the Operating Partnership Agreement may be proposed by the
REIT or by limited partners owning at least 25% of the OP Units.
Generally, the Operating Partnership Agreement may be amended with the
approval of the REIT, as general partner, and limited partners (including the
REIT) holding a majority of the OP Units. Certain amendments that would, among
other things, convert a limited partner's interest into a general partner's
interest, modify the limited liability of a limited partner, alter the interest
of a partner in profits or losses or the right to receive any distributions,
alter or modify the
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<PAGE> 88
redemption right described above, or cause the termination of the Operating
Partnership at a time or on terms inconsistent with those set forth in the
Operating Partnership Agreement must be approved by the REIT and each limited
partner that would be adversely affected by such amendment. Notwithstanding the
foregoing, the REIT, as general partner, will have the power, without the
consent of the limited partners, to amend the Operating Partnership Agreement as
may be required to (1) add to the obligations of the REIT as general partner or
surrender any right or power granted to the REIT as general partner; (2) reflect
the admission, substitution, termination or withdrawal of partners in accordance
with the terms of the Operating Partnership Agreement; (3) establish the rights,
powers, duties and preferences of any additional partnership interests issued in
accordance with the terms of the Operating Partnership Agreement; (4) reflect a
change of an inconsequential nature that does not materially adversely affect
the limited partners, or cure any ambiguity, correct or supplement any
provisions of the Operating Partnership Agreement not inconsistent with law or
with other provisions of the Operating Partnership Agreement, or make other
changes concerning matters under the Operating Partnership Agreement that are
not otherwise inconsistent with the Operating Partnership Agreement or law; or
(5) satisfy any requirements of federal or state law. Certain provisions
affecting the rights and duties of the REIT as general partner (e.g.,
restrictions on the REIT's power to conduct businesses other than owning OP
Units; restrictions relating to the issuance of securities of the REIT and
related capital contributions to the Operating Partnership; restrictions
relating to certain extraordinary transactions involving the REIT or the
Operating Partnership) may not be amended without the approval of a majority or,
in certain instances, a supermajority of the OP Units not held by the REIT.
TRANSFER OF OP UNITS; SUBSTITUTE LIMITED PARTNERS
The Operating Partnership Agreement provides that limited partners
generally may transfer their OP Units without the consent of any other person,
but may substitute a transferee as a limited partner only with the prior written
consent of the REIT as the sole general partner of the Operating Partnership. In
addition, limited partners may not transfer OP Units in violation of certain
regulatory and other restrictions set forth in the Operating Partnership
Agreement.
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
The REIT is authorized, without the consent of the limited partners, to
cause the Operating Partnership to issue additional OP Units to the REIT, to the
limited partners or to other persons for such consideration and on such terms
and conditions as the REIT deems appropriate. If additional OP Units are issued
to the REIT, then the REIT must (i) issue additional shares of Common Stock and
must contribute to the Operating Partnership the entire proceeds received by the
REIT from such issuance or (ii) issue additional OP Units to all partners in
proportion to their respective interests in the Operating Partnership. In
addition, the REIT may cause the Operating Partnership to issue to the REIT
additional partnership interests in different series or classes, which may be
senior to the OP Units, in conjunction with an offering of securities of the
REIT having substantially similar rights, in which the proceeds thereof are
contributed to the Operating Partnership. Consideration for additional
partnership interests may be cash or other property or assets. No limited
partner has preemptive, preferential or similar rights with respect to
additional capital contributions to the Operating Partnership or the issuance or
sale of any partnership interests therein.
EXTRAORDINARY TRANSACTIONS
The Operating Partnership Agreement provides that the REIT may not
generally engage in any merger, consolidation or other combination with or into
another person or sale of all or substantially all of its assets, or any
reclassification, or any recapitalization or change of outstanding shares of
Common Stock (a "Business Combination"), unless the holders of OP Units will
receive, or have the opportunity to receive, the same consideration per OP Unit
as holders of Common Stock receive per share of Common Stock in the transaction;
the REIT may not engage in such transaction unless limited partners holding at
least 51% of the OP Units held by limited partners vote to approve the Business
Combination.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Operating Partnership Agreement generally provides that the REIT, as
general partner of the Operating Partnership, will incur no liability to the
Operating Partnership or any limited partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if the REIT
carried out its duties in good faith. In addition, the REIT is not responsible
for any misconduct or negligence on the part of its agents, provided the REIT
appointed such agents in good faith. The REIT may consult with legal counsel,
accountants, appraisers, management consultants, investment bankers and other
consultants and advisors, and any action it takes or omits to take in reliance
upon the opinion of such persons, as to matters that the REIT reasonably
believes to be within their professional or expert competence, shall be
conclusively presumed to have been done or omitted in good faith and in
accordance with such opinion.
The Operating Partnership Agreement also provides for indemnification of
the REIT, the directors and officers of the REIT, and such other persons as the
REIT may from time to time designate against any judgments, penalties, fines,
settlements and reasonable expenses actually incurred by such person in
connection with the preceding unless it is established that: (1) the act or
omission of the indemnified person was material to the matter giving rise to the
preceding and either was committed in bad faith or was the result of active and
deliberate dishonesty; (2) the indemnified person actually received an improper
personal benefit in money, property or services; or (3) in the case of any
criminal proceeding, the indemnified person had reasonable cause to believe that
the act or omission was unlawful.
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<PAGE> 89
TAX MATTERS
The REIT will be the tax matters partner of the Operating Partnership and,
as such, will have the authority to make tax elections under the Code on behalf
of the Operating Partnership.
TERM
The Operating Partnership will continue in full force and effect until
_______________, or until sooner dissolved pursuant to the terms of the
Operating Partnership Agreement.
COMPARISON OF STOCKHOLDER/UNITHOLDER RIGHTS
NHC is a limited partnership existing under the laws of the State of
Delaware, and the rights of the holders of the Units as such are governed in
part by the Delaware Revised Uniform Limited Partnership Act and the Partnership
Agreement. The Corporation is incorporated in the State of Delaware, and the
rights of the holders of the Shares are governed in part by the DGCL, the
Corporation Certificate and the Corporation Bylaws. The REIT is incorporated
under the laws of the State of Maryland, and the rights of the holders of the
REIT Shares as such are governed in part by the MGCL, the REIT Charter and the
REIT Bylaws.
The following summary compares a number of differences between ownership of
the Units and ownership of the Shares and the REIT Shares and the effects
relating thereto. This summary is not intended to be complete and is qualified
in its entirety by reference to the Delaware Revised Limited Partnership Act,
the DGCL, the MGCL, and the constituent documents of NHC, the Corporation and
the REIT. See also "Description of Securities."
<TABLE>
<CAPTION>
ISSUER
UNITS SHARES REIT SHARES
NHC The Corporation The REIT
TAXATION
UNITS SHARES REIT SHARES
<S> <C> <C>
Under current law, NHC does not The Corporation is a taxable entity The REIT is a taxable entity with
pay tax on its net income. with respect to its income after respect to its income after
However, in order to continue its allowable deductions and credits. allowable deductions and credits.
current operations and remain a Stockholders will have taxable As a REIT, the REIT may
partnership for tax purposes for income from the Corporation's generally deduct from its taxable
periods beginning after December operations only to the extent that income an amount equal to the
31, 1997, it will have to pay tax at a taxable dividends and other dividends paid to its Shareholders.
rate of 3.5% of gross income. distributions are declared and paid Stockholders will have taxable
Otherwise, it will be taxed as a on the Shares. See "Federal Income income from the REIT's
corporation. Each Unitholder Tax Considerations." operations only to the extent that
annually includes the holder's share taxable dividends and other
of the income and gain and, subject distributions are declared and paid
to certain limitations, the losses, on the REIT Shares. See "Federal
deductions and credits of NHC in Income Tax Considerations."
computing taxable income without
regard to any cash distributed to the
limited partner. Generally, cash
distributions to holders of Units are
not taxable, unless such distributions
exceed the limited partner's basis in
the Units. See "Federal Income
Tax Considerations."
</TABLE>
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<PAGE> 90
<TABLE>
<CAPTION>
<S> <C> <C>
A tax-exempt limited partner's No portion of the earnings of, or any No portion of the earnings of, or
share of NHC's taxable income dividends received from, the any dividends received from, the
constitutes unrelated business Corporation will generally constitute REIT will generally constitute
taxable income to the tax-exempt unrelated business taxable income to unrelated business taxable income
unitholder. See "Federal Income tax-exempt stockholders, except to to tax-exempt stockholders,
Tax Considerations." the extent their investment in stock except to the extent their
of the Corporation is considered investment in stock of the REIT is
debt-financed. See "Federal Income considered debt-financed. See
Tax Considerations." "Federal Income Tax
Considerations."
DISTRIBUTIONS AND DIVIDENDS
UNITS SHARES REIT SHARES
The Managing General Partner of The board of directors of the The MGCL provides that the
NHC has the discretion under the Corporation has the discretion to Board of Directors of the REIT
Partnership Agreement to make determine whether or not and when has the discretion to determine
distributions of NHC's Cash to declare and pay dividends and the whether or not and when to
Available for Distribution. Cash amount of any dividend. Holders of declare and pay dividends and the
Available for Distribution generally the Shares will have no contractual amount of any dividend.
means NHC's cash less (i) cash right to receive dividends. However, in order to qualify as a
expenses, liabilities and obligations real estate investment trust for
of NHC and (ii) reserves federal tax purposes the REIT
established by the Managing must distribute at least 95% of the
General Partner in its sole REIT's taxable income. See
discretion for capital expenditures, "Federal Income Tax
and other improvements, retirement Considerations-- The REIT--
of indebtedness, operations or Annual Distribution
contingencies and liabilities. Requirements." Holders of REIT
Shares will have no contractual
right to receive dividends.
MANAGEMENT
UNITS SHARES REIT SHARES
The business and affairs of NHC The business and affairs of the The business and affairs of the
are managed by the Managing Corporation are managed by or REIT are managed by or under
General Partner, NHC, Inc. under the direction of the board of the direction of the board of
directors of the Corporation. The directors of the REIT. The
personnel in control of the personnel in control of the REIT
Corporation will be substantially the will be identical to that of NHC.
same as that of NHC.
Subject to the procedure prescribed Holders of the Shares will have the Holders of the REIT Shares will
in the Partnership Agreement, the ability to elect members of the board have the ability to elect members
Managing General Partner may be of directors with a plurality of the of the board of directors with a
removed by vote of (i) 50% or votes cast for such election and to plurality of the votes cast for such
greater of the Units together with remove the board of directors with a election and to remove the board
the unanimous consent of the board majority vote of the common stock of directors with a majority vote
of directors of the Managing outstanding and entitled to vote. of the common stock outstanding
General Partner or (ii) and entitled to vote.
approximately 70% of the Units.
</TABLE>
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<PAGE> 91
<TABLE>
<CAPTION>
VOTING RIGHTS
UNITS SHARES REIT SHARES
<S> <C> <C>
Under Delaware law and the Holders of the Shares will have the Holders of the REIT Shares will
Partnership Agreement, limited right to vote on matters specified by have the right to vote on matters
partners have voting rights with Delaware law affecting the specified by Maryland law
respect to (i) the removal and corporate structure of the affecting the corporate structure
replacement of the Managing Corporation, including election of of the REIT, including election of
General Partner, (ii) the merger of the board of directors. Stockholders the board of directors.
NHC, (iii) the sale of all or of the Corporation will have the Stockholders of the REIT will
substantially all of the assets right to vote on all matters on which have the right to vote on all
owned, directly or indirectly, by stockholders must be permitted to matters on which stockholders
NHC, (iv) the dissolution of NHC, vote including ,as a general matter, must be permitted to vote
and (v) material amendments to the election of directors, fundamental including, as a general matter,
Partnership Agreement, subject to changes in the Corporation, sale of election of directors, fundamental
certain limitations. all or substantially all of the assets changes in the REIT, sale of all or
of the Corporation and amendments substantially all of the assets of
to the Corporation Certificate. the REIT and amendments to the
REIT Charter.
Each Unit entitles the holder Each Share entitles its holder to cast Each REIT Share entitles its
thereof who is admitted as a limited one vote on each matter presented to holder to cast one vote on each
partner to the Partnership to cast the stockholders. matter presented to the
one vote on all matters presented to stockholders.
limited partners.
Approval of any matter submitted Approval of any matter submitted to Approval on any matter submitted
to limited partners generally the stockholders generally requires to the stockholders generally
requires the affirmative vote of the affirmative vote of holders of requires the affirmative vote of
limited partners holding more than more than 50% of the Shares more than 50% of the REIT
50% of the Units then outstanding. outstanding and entitled to vote. Shares outstanding and entitled to
The removal of the Managing Certain matters require the vote. Certain matters require the
General Partner requires the affirmative vote of approximately affirmative vote of approximately
affirmative vote of 70% of the 70% of the outstanding Shares, 70% of the outstanding Shares,
outstanding Units, except that a except that a vote of more than 50% except that a vote of more than
vote of 50% of the outstanding is required for such matters if the 50% is required for such matters
Units is sufficient to remove the board of directors of the if the board of directors of the
Managing General Partner if the Corporation unanimously consents. Corporation unanimously
board of directors of the Managing consents.
General Partner unanimously
consents.
Holders of 10% of the Units held Amendment of the Corporation Amendment of the REIT Charter
by limited partners may propose Certificate or Bylaws requires or the REIT Bylaws requires
amendments to the Partnership approval of a majority of the approval of a majority of the
Agreement. members of the board of directors board of directors and, in certain
and, in certain cases, approval by cases, approval by the
the stockholders. stockholders.
Any action that may be taken at a Stockholders may act by written Stockholders may act by
meeting of limited partners may be consent in lieu of a meeting with a unanimous written consent in lieu
taken by written consent in lieu of a number of votes sufficient for such of a meeting.
meeting executed by limited action.
partners sufficient to authorize such
action at a meeting of limited
partners.
</TABLE>
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<TABLE>
<CAPTION>
SPECIAL MEETINGS
UNITS SHARES REIT SHARES
<S> <C> <C>
Special meetings of the Unitholders Special meetings of stockholders Special meetings of stockholders
may be called by the Managing can only be called by the board of can only be called by the board of
General Partner or by Unitholders directors or president. directors or president.
holding at least 10% of the
outstanding Units.
CONVERSION RIGHTS
UNITS SHARES REIT SHARES
The Units are not convertible into The Shares are not convertible into The REIT Shares are not
any other securities. any other securities. convertible into any other
securities.
REDEMPTION
UNITS SHARES REIT SHARES
The Units are not subject to The Shares are not subject to The REIT Shares are not subject
mandatory or optional redemption. mandatory or optional redemption. to mandatory or optional
redemption.
LIQUIDATION RIGHTS
UNITS SHARES REIT SHARES
In the event of the liquidation of In the event of a liquidation of the In the event of a liquidation of the
NHC the assets of NHC remaining Corporation, the holders of the REIT, the holders of the REIT
after payments to creditors of NHC Shares would be entitled to share Shares would be entitled to share
(except partners of NHC) are ratably in any assets remaining after ratably in any assets remaining
distributed pro rata to the general satisfaction of obligations to after satisfaction of obligations to
partners of NHC to satisfy amounts creditors and any liquidation creditors and any liquidation
due the general partners pursuant to preferences on any series of preferences on any series of
the Partnership Agreement; next preferred stock of the Corporation preferred stock of the REIT that
pro rata to partners of NHC for that may then be outstanding. may then be outstanding.
loans (and other indebtedness)
made by such partners to NHC;
next to partners of NHC in
accordance with their capital
accounts; and finally to the partners
of NHC in accordance with their
ownership interests in NHC.
</TABLE>
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<PAGE> 93
<TABLE>
<CAPTION>
RIGHT TO COMPEL DISSOLUTION
UNITS SHARES REIT SHARES
<S> <C> <C>
Under the Partnership Agreement, Under Delaware law, holders of Stockholders of the REIT may not
limited partners may compel Common Stock may compel unilaterally compel the dissolution
termination of NHC by the dissolution of the Corporation, of the REIT. A majority of the
affirmative vote of the holders of absent prior action by the board of board of directors is required to
70% of the outstanding REIT Units. directors, only if all holders consent adopt a resolution declaring the
in writing. A plan of dissolution advisability of the REIT's
unanimously adopted by the board dissolution and direct that the
of directors must be approved by a proposed plan of dissolution be
majority of the Common Stock submitted to the stockholders,
outstanding and entitled to vote. who must approve the plan by
affirmative vote of two-thirds
of the votes entitled to be cast
on the matter. Stockholders of
the REIT may under certain
circumstances, petition a court
of equity to dissolve the REIT.
LIMITED LIABILITY
UNITS SHARES REIT SHARES
In general, holders of the Units are The Shares, upon receipt by the The REIT Shares, upon receipt by
limited partners in a Delaware Unitholders, will be fully paid and the Unitholders, will be fully paid
limited partnership, and do not have nonassessable. Stockholders and nonassessable. Stockholders
personal liability for obligations of generally will not have personal generally will not have personal
NHC. liability for obligations of the liability for obligations of the
Corporation. REIT.
LIQUIDITY AND MARKETABILITY
UNITS SHARES REIT SHARES
The Units are freely transferable The Shares will be freely The REIT Shares will be freely
and are currently listed and traded transferable and application has transferable and application has
on AMEX. been made for listing the Shares on been made for listing the REIT
AMEX. Shares on AMEX.
CONTINUITY OF EXISTENCE
UNITS SHARES REIT SHARES
The Partnership Agreement The Corporation Certificate The REIT Charter provides for
provides for NHC to continue in provides for perpetual existence, perpetual existence, subject to
existence until December 31, 2085, subject to Delaware law. Maryland law.
unless earlier terminated in
accordance with the Partnership
Agreement.
</TABLE>
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<PAGE> 94
<TABLE>
<CAPTION>
SEC FILINGS
UNITS SHARES REIT SHARES
<S> <C> <C>
NHC is subject to the reporting The Corporation will be subject to The REIT will be subject to the
requirements of the Exchange Act the reporting requirements of the reporting requirements of the
and files annual and quarterly Exchange Act and will file annual Exchange Act and will file annual
reports thereunder. NHC also and quarterly reports thereunder. and quarterly reports thereunder.
provides annual reports to its The Corporation also will provide The REIT will also provide
limited partners. annual reports to its stockholders. annual reports to its stockholders.
CERTAIN LEGAL RIGHTS
UNITS SHARES REIT SHARES
Delaware law allows a limited Delaware law affords stockholders Maryland law affords
partner to institute legal action on of a corporation rights to bring stockholders no similar such right.
behalf of NHC (a partnership stockholder derivative actions when
derivative action) to recover the board of directors has failed to
damages from a third party or a institute an action against third
general partner where the general parties or directors of the
partner has failed to institute the corporation, and class actions to
action. In addition, a limited recover damages from directors for
partner may have rights to institute violations of their fiduciary duties.
legal action on behalf of the limited Stockholders may also have rights to
partner or all other similarly bring actions in federal courts to
situated limited partners (a class enforce federal rights. These rights
action) to recover damages from a are comparable to the rights of the
general partner for violations of limited partners in the Partnership.
fiduciary duties to the limited
partners. Limited partners may also
have rights to bring actions in
federal courts to enforce federal
rights.
</TABLE>
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<PAGE> 95
<TABLE>
<CAPTION>
RIGHT TO LIST OF HOLDERS; INSPECTION OF BOOK AND RECORDS
UNITS SHARES REIT SHARES
<S> <C> <C>
Upon reasonable demand, at the Under Delaware law, upon written Under Maryland law, a
limited partner's own expense and request, at reasonable times and for stockholder may inspect during
for a purpose reasonably related to a proper purpose reasonably related usual business hours the bylaws,
his interest in NHC, a limited to a stockholder's interest as a minutes of the proceedings of the
partner may have access, at stockholder, any stockholder of stockholders and any voting trust
reasonable times, to certain record shall have the right to agreements on file at the REIT's
information regarding the status of examine and copy the Corporation's principal office. Upon written
the business and financial condition stock ledger, a list of its request, any stockholder may
of NHC, tax returns, governing stockholders and its other books and review a statement showing all
instruments of NHC and a current records. In certain circumstances stock and securities issued by the
list of the partners of NHC, under Delaware law, stockholders REIT during a specified period of
provided that the Managing General may not have the same right to not more than 12 months before
Partner may keep confidential any information regarding the the date of the request. In
trade secrets or any other Corporation that they currently have addition, stockholders owning at
information the disclosure of which with respect to information least 5% of any class of securities
could damage NHC or violate any regarding NHC. of the REIT may, upon written
agreement or applicable law. request, inspect during usual
business hours a statement of the REIT's
assets and liabilities and a list of the
REIT's stockholders. Stockholders of the
REIT will have generally less access to the
records of the REIT than do the Unitholders
with respect to NHC.
SUBORDINATION
UNITS SHARES REIT SHARES
Subordinated to claims of creditors Subordinated to claims of creditors Subordinated to claims of
of NHC. of the Corporation. creditors of the REIT.
</TABLE>
FIDUCIARY DUTIES
Delaware courts have generally held that a general partner of a limited
partnership is liable for a breach of fiduciary duty only when he acts in bad
faith by ignoring the provisions of the partnership agreement. It should be
noted that, with respect to issues or concerns not governed by the express terms
of the limited partnership agreement, general principles of fiduciary duty law
will apply. In those circumstances, a general partner holds a fiduciary duty to
the limited partnership (as do the officers and directors of a corporate general
partner) to exercise the utmost good faith, fairness and loyalty. However,
section 17-403(b) of the Delaware Revised Limited Partnership Act provides that
contractual provisions in the partnership agreement addressing the liability of
a general partner to limited partnership and to other partners may modify the
general fiduciary duties standard.
The Partnership Agreement provides that no General Partner shall have
liability to the Unitholders for the return of their capital contributions or
for any loss, damage, liability or expense arising out of the Partnership
Agreement or the business of NHC except as caused by gross negligence,
misconduct in the performance of his or its fiduciary duties to NHC, violation
of any of the provisions of the Partnership Agreement or as otherwise provided
in the Partnership Agreement. Under the Partnership Agreement, the Partnership
is required to indemnify general partners and the officers, directors, employees
and agents of the general partners against liabilities and expenses incurred by
the general partners or such persons if (i) the general partner or such person
acted in good faith, and in a manner reasonably believed to be in, or not
opposed to, the interests of NHC and, with respect to any criminal proceeding,
had no reason to believe the conduct was unlawful and (ii) the general partner's
or such person's conduct did not constitute actual fraud, gross negligence or
willful misconduct. See "Description of Securities -- Shares of the Corporation
- -- Limitation of Liability and Indemnification Matters" and "-- Shares of the
REIT -- Limitation of Liability and Indemnification Matters" for description of
provisions relating to the liability and indemnification of the directors of the
Corporation and the REIT, respectively.
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<PAGE> 96
FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX CONSIDERATIONS SHOULD BE
READ IN ITS ENTIRETY BY ALL UNITHOLDERS OF NHC. THIS DISCUSSION IS A SUMMARY
ONLY, AND IS NOT INTENDED TO ADDRESS THE SPECIFIC TAX SITUATION OF EACH
UNITHOLDER. EACH UNITHOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE FORMATION OF THE REIT AND THE
CORPORATION, THE PLAN OF RESTRUCTURE, THE OWNERSHIP OF SHARES AND REIT SHARES
AND THE TAXATION OF THE REIT AS A REAL ESTATE INVESTMENT TRUST. NO RULING FROM
THE IRS, OR FROM ANY OTHER TAXING AUTHORITY, WILL BE SOUGHT OR OBTAINED AS TO
ANY OF THE FOLLOWING TAX CONSIDERATIONS. MOREOVER, THE IRS IS NOT BOUND BY THE
DISCUSSION OR THE OPINIONS OF SPECIAL REIT OR TAX COUNSEL SET FORTH BELOW.
INTRODUCTION
GENERAL SUMMARY ONLY. The following is a general summary of material
federal income tax consequences of the Plan of Restructure, and the taxation of
the REIT as a real estate investment trust. The discussion is based upon current
interpretations of the Code, applicable U.S. treasury regulations and
administrative interpretations thereunder, and case law, any of which could
change at any time, even on a retroactive basis. Because of the complexity of
tax laws, and the varying tax situations of different taxpayers, each Unitholder
should consult his own tax advisor. This summary of federal income tax
consequences has been prepared by Harwell Howard Hyne Gabbert & Manner, P.C.,
Nashville, Tennessee, special counsel to NHC and the Corporation ("Tax Counsel")
and Goodwin, Proctor & Hoar, LLP, Boston, Massachusetts, special counsel to NHC
and the REIT ("REIT Counsel").
OPINION OF TAX COUNSEL. In the opinion of Tax Counsel, which opinion is
attached hereto and is subject to such qualifications and assumptions contained
therein, the following summary describes in general the material U.S. federal
income tax consequences of the Plan of Restructure.
NO RULINGS. 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 Proxy
Statement/Prospectus. In the absence of any such rulings, no assurances can be
given that the IRS will agree with this discussion. Neither Tax Counsel nor REIT
Counsel can offer any assurance that the applicable 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 conclusions of
Tax Counsel or REIT Counsel in the event of a challenge by the IRS.
CERTAIN DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS, SHARES AND REIT SHARES
NHC is organized as a limited partnership under the laws of the State of
Delaware. A partnership is not generally subject to federal income taxation.
Instead, a partnership generally acts as a conduit, and the tax consequences of
its operations are reflected in the personal income tax returns of its partners.
In the Plan of Restructure, NHC Unitholders will receive common stock of the
REIT, which intends to qualify and elect to be taxed as a real estate investment
trust, and common stock of the Corporation.
A significant difference between owning Units and owning REIT Shares
involves the treatment and amount of income (or loss) reportable by investors.
As Unitholders, investors must take into account their distributive shares of
all separately reportable items of NHC's income or loss, regardless of the
amount of any distributions of cash to the Unitholders. That information is
supplied to each Unitholder annually on a Form K-1. Under Code Section 469(k),
net income from publicly traded partnerships, such as NHC, constitutes portfolio
income. Under the passive loss rules, portfolio income cannot be offset by
passive losses, but can be offset by net investment interest expense. Moreover,
each partner in a publicly traded partnership must treat loss (if any) from the
partnership as separate from income or loss from any other publicly traded
partnership, and also as separate from any income or loss from passive
activities. As of January 1, 1998, however, a publicly traded limited
partnership will generally be taxed as a corporation.
In contrast, as a shareholder of the REIT, an investor is taxed based on
the amount of distributions received from the REIT. The taxable portion of such
distributions will generally depend on the amount of the REIT's earnings and
profits. Each REIT shareholder will receive a Form 1099 reporting the amount of
taxable and nontaxable distributions paid to him during the preceding year. The
character of this income is not dependent on its character to the REIT, and is
generally ordinary income to the shareholders. Under the passive loss rules,
this income is generally further classified as portfolio income. Furthermore,
while losses incurred by a partnership are reportable to the partners, should
the REIT incur a taxable loss, that amount will not be passed through to its
shareholders.
The Corporation will not be a pass-through entity such as NHC or a quasi
pass-through entity like the REIT. Instead, the Corporation's earnings will be
taxed at the corporate level and, to the extent distributions are made to the
Corporation's shareholders, such distributions will be taxed at the shareholder
level to the extent of the Corporation's accumulated and current earnings and
profits.
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THE REIT
FORMATION OF THE REIT - TAX CONSEQUENCES
NONRECOGNITION RULE OF CODE SECTION 351. Under the general rule of Code
Section 351, no gain or loss is recognized upon the transfer of property to a
corporation by the transferors of such property solely in exchange for stock in
the corporation if immediately thereafter the transferors are in control of the
corporation. Control is defined in Section 368(c) as the ownership of eighty
percent (80%) of the voting stock and eighty percent (80%) of each class of
non-voting stock of a corporation.
In exchange for the Owned Healthcare Facilities, the Notes and the Other
Assets, subject to the Assumed Liabilities, NHC will receive one hundred percent
(100%) of the outstanding stock of the REIT. NHC will then immediately
distribute all of such stock to its Unitholders. As a result of this
distribution, NHC will hold the REIT Shares immediately after its transfer of
assets to the REIT, but it will hold them for only an instant. Whether such a
two-step transaction should be collapsed or integrated for purposes of
determining whether the "immediately after" requirement of Section 351 is
satisfied has frequently been the subject of interpretation by the IRS and
courts.
In the case of a partnership that contributes its assets to a corporation
in exchange for corporate stock and immediately thereafter liquidates by
distributing the stock to its partners "in proportion to their partnership
interests," the IRS has ruled that the "immediately after" requirement of
Section 351 is satisfied. Revenue Ruling 84-111, 1984-2 C.B. 88. This is so even
though the identities of the actual contributor or transferor of property to the
corporation and the ultimate recipient of the corporate stock were not the same.
While this ruling involves a partnership that liquidates as a result of its
distribution of shares in a corporation, the ruling is enlightening because
Section 351 was found to apply despite the short period during which the
partnership held the stock. Although NHC will actually merge into the
Corporation, thereby ceasing to exist as a separate entity, it will be treated
as liquidating for tax purposes.
Similarly, Code Section 351(c) provides that in determining control for
these purposes, the fact that a corporate transferor distributes part or all of
the stock it received in a transaction subject to Section 351 to its
shareholders will not be taken into account. While the Code contains no
analogous provision for such distributions by a partnership, Tax Counsel
believes it is appropriate for the same result to follow, and that the general
nonrecognition rule of Section 351 would apply to NHC's contribution of assets
to the REIT, except as otherwise provided below.
INVESTMENT COMPANY EXCEPTION. An exception to the general rule of
nonrecognition under Code Section 351 is found in subsection 351(e), which
provides that Section 351 shall not apply to a "transfer of property to an
investment company." The Regulations state that a transfer is considered to be
to an investment company if: (i) the transfer is to, inter alia, a real estate
investment trust, and (ii) the transfer results, directly or indirectly, in the
diversification of the transferors' interests. Regulation ss. 1.351 - 1(c) (1).
As described elsewhere in this Proxy Statement/Prospectus, NHC and the REIT
intend that the REIT qualify and be taxed as a real estate investment trust.
In that regard, REIT Counsel has rendered an opinion that the form of
organization of the REIT will permit it to be so classified. Therefore, it is
anticipated that one of the two investment company definitional requirements
will be met.
With respect to the second requirement, a transfer ordinarily results in
the diversification of the transferors' interests if two or more persons
transfer non-identical assets to a corporation in the exchange. Regulation ss.
1.351-1(c) (5). Since NHC is the only transferor, the second requirement of an
investment company is absent, and therefore, the general nonrecognition Rule of
Section 351 should apply to the incorporation of the REIT.
CODE SECTION 357. Code Section 357 generally permits a corporation, in
addition to issuing stock in a Code Section 351 transaction, to assume
liabilities of the transferor, without causing the transferor to recognize gain
or be precluded from obtaining the benefits of Code Section 351. This rule does
not apply, however, if either (i) the principal purpose for the assumption was
tax avoidance (or was not a bona fide business purpose), or (ii) the liabilities
exceeded the transferor's basis in the contributed assets. NHC has represented
that the Assumed Liabilities do not exceed NHC's adjusted tax basis in the Owned
Healthcare Facilities, the Notes and the Other Assets, and that the principal
purpose of the REIT's assumption of the Assumed Liabilities is not the avoidance
of taxes.
OTHER TAX CONSEQUENCES. NHC will have a tax basis in the REIT Shares it
receives generally equal to its basis in the assets it contributes to the REIT,
net of the amount of the NHC liabilities the REIT assumes or acquires in the
transfer. NHC's holding period for the REIT Shares it receives in the exchange
will include its holding period in the capital and Section 1231 assets it
transfers to the REIT. If any of the assets NHC contributes to the REIT are
deemed not to be capital or Section 1231 assets, then NHC's holding period in
the REIT Shares will be bifurcated; the holding period for that portion of the
REIT Shares received in exchange for such other assets would begin on the day
following the date of the exchange.
Pursuant to Code Section 1032, the REIT will not recognize any gain or loss
on the receipt of the NHC assets and assumption of NHC liabilities in exchange
for the issuance of the REIT Shares. The initial tax bases of the assets
received will generally equal their tax basis in the hands of NHC immediately
prior to the exchange. The REIT's holding period for each asset acquired in the
exchange will generally include NHC's holding period for that asset.
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THE DISTRIBUTION - TAX CONSEQUENCES
Code Section 731(b) provides that a partnership will not recognize gain
upon its distribution of property or money to its partners. As to the partners,
Code Section 731(a)(1) generally provides that no gain or loss shall be
recognized by a partner upon a distribution to him of property, other than
money. For purposes of Section 731(a), "marketable securities" are generally
treated as money. Marketable securities are defined to include, in part, (i)
stock that is, as of the date of distribution, actively traded within the
meaning of Code Section 1092(d)(1) and (ii) other equity interests that,
pursuant to their terms or any other arrangement, are readily convertible into,
or exchangeable for, money or marketable securities. Regulations promulgated
under Section 731(c) provide that stock is actively traded if it is of a type
that is, as of the date of distribution, listed on a national securities
exchange. It is anticipated that as of the Effective Time the REIT Shares will
be approved for listing on the American Stock Exchange, although such listing
will not be effective until after the Effective Time. Furthermore, while the
Operating Partnership units will not be listed on an exchange, they will be
convertible into REIT Shares.
However, Section 731(a) does not apply to the distribution of marketable
securities in a "qualified partnership liquidation" if (i) such securities were
received by the partnership in a nonrecognition transaction for substantially
all of the partnership's assets, (ii) such securities are distributed by the
partnership within 90 days after their receipt by the partnership, and (iii) the
partnership is liquidated before the beginning of the partnership's first
taxable year beginning after December 31, 1997. For purposes of this
transitional rule, a "qualified partnership liquidation" is a complete
liquidation of a publicly traded partnership as defined in Code Section 7704(b)
that is an existing partnership as defined in Section 10211(c)(2) of the Revenue
Act of 1987.
NHC is a publicly traded and existing partnership as so defined. The REIT
Shares and the Shares will be issued to NHC in exchange for all of NHC's assets
under the nonrecognition rule of Section 351 and will be issued within 90 days
of their receipt by NHC. As discussed below in The Corporation -- The Merger,
the Distribution and Merger will be treated for federal income tax purposes as
a complete termination and liquidation of NHC, which is to be effective prior
to NHC's first taxable year after December 31, 1997. Accordingly, Tax Counsel
believes it is more likely than not that Code Section 731(c) would not apply
to the Distribution.
Under Code Section 732(b), a Unitholder's aggregate initial tax basis in
his REIT Shares and the Shares will be generally equal to the Unitholder's
adjusted basis in his Units, decreased by the amount of any marketable
securities treated as money and increased by the amount of any gain recognized
as a result thereof, which shall be allocated between the REIT Shares and the
Shares generally based upon the relative adjusted bases to NHC of the REIT
Shares and the Shares.
Each Unitholder may have multiple holding periods for the REIT Shares and
the Shares received, depending upon the holding periods and character of the
various assets transferred by NHC to the REIT and the Corporation. The holding
period of the portion of the REIT Shares and the Shares attributable to capital
assets and Code Section 1231 assets transferred by NHC to the REIT or the
Corporation will include NHC's holding period for those assets. The holding
period for REIT Shares and the Shares attributable to other NHC assets, if any,
will begin on the day following the Effective Time. The period during which
Unitholders have held their Units will have no impact on their holding period in
REIT Shares or the Shares.
TAXATION AS A REAL ESTATE INVESTMENT TRUST
GENERAL PRINCIPLES. The Code provides special tax treatment for
organizations that qualify and elect to be taxed as real estate investment
trusts. If certain conditions are met (see "Requirements for Qualification"
below), entities that primarily invest in real estate or mortgages secured by
real estate and would otherwise be taxed as regular corporations may elect real
estate investment trust status so that they are, with certain limited
exceptions, not taxed at the corporate level on their ordinary net income or
capital gains distributed currently to their shareholders. This treatment
substantially eliminates the "double taxation" (at the corporate and shareholder
levels) that typically results from the use of corporate investment vehicles.
The REIT will elect to be taxed as a real estate investment trust as soon as
practicable after it meets the necessary requirements.
Upon consultation with its advisers, the REIT believes that it is in a
position to qualify for treatment as a real estate investment trust for the year
ending December 31, 1998, upon filing of its election to be taxed as a real
estate investment trust, and intends to operate so as to meet the requirements
under the Code for qualification as a real estate investment trust, commencing
with its taxable year ending December 31, 1998 and thereafter. The REIT also
believes, after consultation with its advisers, that it has been organized, has
operated and will operate in such a manner as to qualify for taxation as a real
estate investment trust under the Code. No assurance can be given, however, that
such requirements have been or will be met.
OPINION OF REIT COUNSEL. In the opinion of REIT Counsel, commencing with
the REIT's taxable year ending December 31, 1998, the REIT will qualify to be
taxed as a real estate investment trust under the Code, provided that (i) the
elections and other procedural steps described in this discussion of "Federal
Income Tax Considerations" are completed in a timely fashion and (ii) the REIT
and the Operating Partnership operate in accordance with various assumptions and
factual representations made by NHC, the REIT and the Operating Partnership
concerning their business, properties and operations. It must be emphasized that
REIT Counsel's opinion is based on various assumptions and is conditioned upon
such assumptions and representations made by NHC, the REIT and the Operating
Partnership concerning their business and properties as set forth in this Proxy
Statement/Prospectus. Such factual assumptions and
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representations are set forth below in this discussion of "Federal Income Tax
Considerations." In addition, REIT Counsel's opinion is based upon the factual
representations of NHC, the REIT and the Operating Partnership concerning its
business and properties as set forth in this Proxy Statement/Prospectus.
Moreover, such qualification and taxation as a real estate investment trust
depends upon the REIT's ability to meet, through actual annual operating
results, distribution levels and diversity of stock ownership, the various
qualification tests imposed under the Code discussed below, the results of which
will not be reviewed by REIT Counsel. Accordingly, no assurance can be given
that the actual results of the REIT's operations for any one taxable year will
satisfy such requirements. See "Risk Factors -- The REIT -- Adverse Consequences
of the REIT's Failure to Qualify as a Real Estate Investment Trust."
The opinion of REIT Counsel is also based upon existing law as currently
applicable, U.S. treasury regulations, currently published administrative
positions of the IRS and judicial decisions, which are subject to change either
prospectively or retroactively. No assurance can be given that any such changes
would not modify the conclusions expressed in the opinion. Moreover, unlike a
private letter ruling (which will not be sought), an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
successfully challenge the status of the REIT as a real estate investment trust.
If the REIT qualifies for taxation as a real estate investment trust, it
generally will not be subject to federal corporate income taxes on that portion
of its ordinary income or capital gain that is currently distributed to its
stockholders. The real estate investment trust provisions of the Code generally
allow a real estate investment trust to deduct dividends paid to its
stockholders. This deduction for dividends paid to stockholders substantially
eliminates the federal "double taxation" on earnings (once at the corporate
level and once again at the stockholder level) that usually results from
investments in a corporation.
FEDERAL INCOME TAXATION OF THE REIT
Upon consultation with its advisers, the REIT believes that it is in a
position to qualify for treatment as a real estate investment trust for the year
ended December 31, 1998, upon filing of its election to be taxed as a real
estate investment trust, and intends to operate so as to meet the requirements
under the Code for qualification as a real estate investment trust, commencing
with its taxable year ended December 31, 1998 and thereafter. The REIT also
believes, after consultation with its advisers, that it has been organized, has
operated and will operate in such a manner as to qualify for taxation as a real
estate investment trust under the Code. No assurance can be given, however, that
such requirements have been or will be met.
OPINION OF REIT COUNSEL
Goodwin, Procter & Hoar LLP has acted as special REIT tax counsel to the
REIT in connection with the formation of the REIT and the REIT's election to be
taxed as a real estate investment trust. In the opinion of Goodwin, Procter &
Hoar LLP, commencing with the REIT's taxable year ended December 31, 1998, the
REIT will qualify to be taxed as a real estate investment trust under the Code,
provided that (i) the elections and other procedural steps described in this
discussion of "Federal Income Tax Considerations" are completed in a timely
fashion and (ii) the REIT and the Operating Partnership operate in accordance
with various assumptions and factual representations made by the REIT concerning
their business, properties and operations. It must be emphasized that Goodwin,
Procter & Hoar LLP's opinion is based on various assumptions and is conditioned
upon such assumptions and representations made by the REIT concerning their
business and properties. Such factual assumptions and representations are set
forth below in this discussion of "Federal Income Tax Considerations." In
addition, Goodwin, Procter & Hoar LLP's opinion is based upon the factual
representations of the REIT and the Operating Partnership concerning its
business and properties. Moreover, such qualification and taxation as a real
estate investment trust depends upon the REIT's ability to meet, through actual
annual operating results, distribution levels and diversity of stock ownership,
the various qualification tests imposed under the Code discussed below, the
results of which will not be reviewed by Goodwin, Procter & Hoar LLP.
Accordingly, no assurance can be given that the actual results of the REIT's
operations for any one taxable year will satisfy such requirements. See "Risk
Factors -- The REIT -- Adverse Consequences of The REIT's Failure to Qualify as
a Real Estate Investment Trust."
The opinion of Goodwin, Procter & Hoar LLP is also based upon existing law
as currently applicable, IRS regulations, currently published administrative
positions of the IRS and judicial decisions, which are subject to change either
prospectively or retroactively. No assurance can be given that any such changes
would not modify the conclusions expressed in the opinion. Moreover, unlike a
private letter ruling (which will not be sought), an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
successfully challenge the status of the real estate investment trust as a REIT.
If the REIT qualifies for taxation as a real estate investment trust, it
generally will not be subject to federal corporate income taxes on that portion
of its ordinary income or capital gain that is currently distributed to
stockholders. The real estate investment trust provisions of the Code generally
allow a real estate investment trust to deduct dividends paid to its
stockholders. This deduction for dividends paid to stockholders substantially
eliminates the federal "double taxation" on earnings (once at the corporate
level and once again at the stockholder level) that usually results from
investments in a corporation.
Even if the REIT qualifies for taxation as a real estate investment trust,
however, the REIT will be subject to federal income tax, as follows: First, the
REIT will be taxed at regular corporate rates on its undistributed REIT taxable
income.
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The REIT may elect to retain and pay income tax on its net long-term capital
gains received during the taxable year. Second, under certain circumstances, the
REIT may be subject to the "alternative minimum tax." Third, if the REIT has 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 other
non-qualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the REIT 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 the REIT should fail to satisfy either the 75% or 95%
gross income test (discussed below) but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the REIT fails the 75% or 95% test, multiplied by a
fraction intended to reflect the REIT's profitability. Sixth, if the REIT fails
to distribute during each year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such
year (unless the REIT has elected to retain and pay income tax on a portion of
its net long-term capital gain) and (iii) any undistributed taxable income from
prior periods, the REIT will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
REIT should acquire any asset from a C corporation (i.e., a corporation
generally subject to full corporate-level tax) in a carryover-basis transaction
and the REIT subsequently recognizes gain on the disposition of such asset
during the ten-year period (the "Recognition Period") beginning on the date on
which the asset was acquired by the REIT, then, to the extent of the excess of
(a) the fair market value of the asset as of the beginning of the applicable
Recognition Period over (b) the REIT's adjusted basis in such asset as of the
beginning of such Recognition Period (the "Built-In Gain"), such gain will be
subject to tax at the highest regular corporate rate, pursuant to guidelines
issued by the IRS (the "Built-In Gain Rules").
REQUIREMENTS FOR QUALIFICATION
To qualify as a real estate investment trust, the REIT must elect to be so
treated and must meet the requirements, discussed below, relating to the REIT's
organization, sources of income, nature of assets and distributions of income to
stockholders.
ORGANIZATIONAL REQUIREMENTS
The Code defines a real estate investment trust as a corporation, trust or
association: (i) that is managed by one or more directors or trustees, (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 the real estate investment trust requirements,
(iv) that is neither a financial institution nor an insurance real estate
investment trust subject to certain provisions of the Code, (v) the beneficial
ownership of which is held by 100 or more persons, and (vi) during the last half
of each taxable year not more than 50% in value of the outstanding stock of
which is owned, directly or indirectly through the application of certain
attribution rules, by five or fewer individuals (as defined in the Code to
include certain entities). In addition, certain other tests, described below,
regarding the nature of its income and assets also must be satisfied. The Code
provides that conditions (i) through (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. Conditions (v) and (vi) (the "100 Stockholder
Requirement" and "Five or Fewer Requirement") will not apply until after the
first taxable year for which an election is made to be taxed as a real estate
investment trust. For purposes of conditions (v) and (vi), pension funds and
certain other tax-exempt entities are treated as individuals, subject to a
"look-through" exception in the case of condition (vi).
In order to protect the REIT from a concentration of ownership of its stock
that would cause the REIT to fail the Five or Fewer Requirement, the REIT's
Certificate provides that stock owned, or deemed to be owned or transferred to a
stockholder in excess of the Ownership Limit will automatically be converted
into Excess Stock. See "Description of Securities -- Shares of the REIT -- REIT
Provisions." Because of the absence of authority on this issue, however, there
is no assurance that the operation of the Excess Stock or other provisions
contained in the Certificate will, as a matter of law, prevent a concentration
of ownership of stock in excess of the Ownership Limit from causing the REIT to
violate the Five or Fewer Requirement. If there were a concentration of
ownership that would cause the REIT to violate the Five or Fewer Requirement,
and the operation of the Excess Stock or other provisions contained in the
Certificate were not held to cure such violation, the REIT would be disqualified
as a real estate investment trust. In rendering its opinion that the REIT is
organized in a manner that permits the REIT to qualify as a real estate
investment trust, Goodwin, Procter & Hoar LLP is relying on the representation
of the REIT that the ownership of its stock (without regard to the Excess Stock
provisions) satisfies the Five or Fewer Requirement, and Goodwin, Procter & Hoar
LLP expresses no opinion as to whether, as a matter of law, the Excess Stock or
other provisions contained in the Certificate preclude the REIT from failing the
Five or Fewer Requirement.
In addition, a corporation may not elect to become a real estate investment
trust unless its taxable year is the calendar year. The REIT's taxable year is
the calendar year.
In the case of a real estate investment trust that is a partner in a
partnership, treasury regulations provide that the real estate investment trust
will be deemed to own its proportionate share (based on its interest in
partnership capital) of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership shall
retain the same character in the hands of the real estate investment trust for
purposes of Section 856 of the Code, including satisfying the gross income tests
and asset tests. Thus, the REIT's proportionate share of the assets, liabilities
and items of income with respect to
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any partnership, including the Operating Partnership, in which it holds an
interest will be treated as assets, liabilities and items of income of the REIT
for purposes of applying the requirements described herein.
INCOME TESTS
To maintain qualification as a real estate investment trust, three gross
income requirements must be satisfied annually.
- First, at least 75% of the REIT's gross income, excluding gross income
from certain dispositions of property held primarily for sale to
customers in the ordinary course of a trade or business ("prohibited
transactions"), for each taxable year must be 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. The REIT, however, is permitted under new tax legislation
to receive up to one percent of all amounts received or accrued during
a taxable year with respect to a property from certain impermissible
tenant services.
- Second, at least 95% of the REIT's gross income (excluding gross
income from prohibited transactions) for each taxable year must be
derived from such real property investments described above and from
dividends, interest and gain from the sale or disposition of stock or
securities or from any combination of the foregoing. The REIT, however,
is permitted under new tax legislation to receive up to one percent of
all amounts received or accrued during a taxable year with respect to a
property from certain impermissible tenant services.
Rents received or deemed to be received by the REIT 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 generally must not be based in whole or in
part on the income or profits of any person. An amount received or
accrued generally will not be excluded from the term "rents from real
property," however, 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 the REIT, or an owner of 10% or more of the REIT, directly or
constructively owns 10% or more of such tenant (a "Related Party
Tenant") or a subtenant of such tenant (in which case only rent
attributable to the subtenant is disqualified).
- 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 the
personal property will not qualify as "rents from real property."
- Finally, for rents to qualify as "rents from real property" the REIT
must not operate or manage the property or furnish or render
to tenants, other than through an "independent contractor"
who is adequately compensated and from whom the REIT does not derive
any income; provided, however, that a REIT may provide services with
respect to its properties and the income will qualify as "rents from
real property" if the services are "usually or customarily rendered"
in connection with the rental of room or other space for occupancy
only and are not otherwise considered "rendered to the occupant." In
addition, under new tax legislation, a real estate investment trust
can furnish or render otherwise impermissible services to tenants if
the amount treated as received by the REIT from such services does
not exceed one percent of all amounts received or accrued with
respect to the property. The amount treated as received for any such
impermissible service must be at least 150 percent of the direct
cost of the REIT in furnishing or rendering such service or
providing such management or operation.
The REIT does not charge rent that is based in whole or in part on the
income or profits of any person (except by reason of being based on a fixed
percentage or percentages of receipts or sales consistent with the rule
described above). The REIT does not derive, and does not anticipate deriving,
rent attributable to personal property leased in connection with real property
that exceeds 15% of the total rents.
If the REIT fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for that year
if it is eligible for relief under certain provisions of the Code. These relief
provisions generally will be available if (i) the REIT's failure to meet these
tests was due to reasonable cause and not due to willful neglect, (ii) the REIT
attaches a schedule of the sources of its income to its federal income tax
return and (iii) any incorrect information on the schedule is not due to fraud
with intent to evade tax. It is not possible, however, to state whether, in all
circumstances, the REIT would be entitled to the benefit of these relief
provisions. For example, if the REIT fails to satisfy the gross income tests
because nonqualifying income that the REIT intentionally incurs exceeds the
limits on such income, the IRS could conclude that the REIT's failure to satisfy
the tests was not due to reasonable cause. As discussed above in "-- Opinion of
REIT Counsel," even if these relief provisions apply, a tax would be imposed
with respect to the excess net income. See "Risk Factors -- The REIT -- Adverse
Consequences of the REIT's Failure to Qualify as a Real Estate Investment
Trust."
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ASSET TESTS
At the close of each quarter of its taxable year, the REIT also must
satisfy three tests relating to the nature and diversification of its assets.
- First, at least 75% of the value of the REIT's total assets
must be represented by real estate assets, cash, cash items
and government securities.
- Second, no more than 25% of the REIT's total assets may be
represented by securities other than those in the 75% asset
class.
- Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the REIT may not
exceed 5% of the value of the REIT's total assets, and the
REIT may not own more than 10% of any one issuer's outstanding
voting securities.
After initially meeting the asset tests at the close of any quarter,
the REIT will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The REIT maintains, and will continue to maintain, adequate
records of the value of its assets to ensure compliance with the asset tests
and will take such other actions within 30 days after the close of any quarter
as may be required to cure any noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to be taxed as a real estate investment trust, the REIT is
required to distribute dividends (other than capital gain dividends) to its
stockholders in an amount at least equal to (a) the sum of (i) 95% of the
REIT's "REIT taxable income" (computed without regard to the dividends-paid
deduction and the REIT's capital gain) and (ii) 95% of the net income, if any,
from foreclosure property in excess of the special tax on income from
foreclosure property, minus (b) 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 the REIT timely files its federal
income tax return for such year and if paid on or before the first regular
dividend payment after such declaration. Even if the REIT satisfies the
foregoing distribution requirements, to the extent that the REIT does not
distribute all of its net capital gain or "REIT taxable income" as adjusted, it
will be subject to tax thereon at regular capital gains or ordinary corporate
tax rates. Furthermore, if the REIT should fail to distribute during each
calendar year at least the sum of (a) 85% of its ordinary income for that year,
(b) 95% of its capital gain net income for that year (unless the REIT has
elected to retain and pay income tax on a portion of its net long-term capital
gain) and (c) any undistributed taxable income from prior periods, the REIT
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. In addition, if the REIT disposes of any
asset subject to the Built-In Gain Rules during the applicable Recognition
Period, the REIT will be required, pursuant to guidance issued by the IRS, to
distribute at least 95% of the Built-In Gain (after tax), if any, recognized
on the disposition of the asset. The REIT intends to make timely distributions
sufficient to satisfy the annual distribution requirements.
It is expected that the REIT's "REIT taxable income" will be less than
its cash flow due to the allowance of depreciation and other non-cash charges
in computing REIT taxable income. Accordingly, the REIT anticipates that it
will generally have sufficient cash or liquid assets to enable it to satisfy
the 95% distribution requirement. It is possible, however, that the REIT, from
time to time, may not have sufficient cash or other liquid assets to meet the
95% distribution requirement or to distribute such greater amount as may be
necessary to avoid income and excise taxation, as a result of timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the REIT, or as a result of
nondeductible expenses such as principal amortization or capital expenditures
in excess of noncash deductions. In the event that such timing differences
occur, the REIT may find it necessary to arrange for borrowings or, if
possible, pay taxable stock dividends in order to meet the dividend
requirement.
Under certain circumstances, the REIT may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the REIT's
deduction for dividends paid for the earlier year. Thus, the REIT may be able
to avoid being taxed on amounts distributed as deficiency dividends. The REIT
will, however, be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the REIT fails to qualify for taxation as a real estate investment
trust in any taxable year and the relief provisions do not apply, the REIT 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 the REIT fails to qualify will not be deductible by the REIT nor
will they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to stockholders will be
dividends, taxable as ordinary income, and subject to certain limitations of
the Code, corporate distributees may be eligible for the dividends-received
deduction. Unless the REIT is entitled to relief under specific statutory
provisions, the REIT also will be disqualified from taxation as a REIT for the
four taxable years following the year during which qualification was lost. It
is not possible to state whether in
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all circumstances the REIT would be entitled to such statutory relief. For
example, if the REIT fails to satisfy the gross income tests because
nonqualifying income that the REIT intentionally incurs exceeds the limit on
such income, the IRS could conclude that the REIT's failure to satisfy the
tests was not due to reasonable cause. See "Risk Factors -- The REIT -- Adverse
Consequences of the REIT's Failure to Qualify as a Real Estate Investment
Trust."
TAXATION OF U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of Common
Stock for United States federal income tax purposes who is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate, the income of which is subject
to United States federal income taxation regardless of its source or (iv) a
trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust
and (v) is not an entity that has a special status under the Code (such as a
tax-exempt organization or a dealer in securities).
DISTRIBUTIONS GENERALLY
Distributions to U.S. Stockholders, other than capital gain dividends
discussed below, will constitute dividends up to the amount of the REIT's
current or accumulated earnings and profits and will be taxable to the
stockholders as ordinary income. These distributions are not eligible for the
dividends-received deduction for corporations. To the extent that the REIT
makes a distribution in excess of its current or accumulated earnings and
profits, the distribution will be treated first as a tax-free return of
capital, reducing the tax basis in the U.S. Stockholder's REIT Shares and the
amount of such distribution in excess of a U.S. Stockholder's tax basis in its
REIT Shares will be taxable as gain realized from the sale of its REIT Shares.
Dividends declared by the REIT in October, November or December of any year
payable to a stockholder of record on a specified date in any such month shall
be treated as both paid by the REIT and received by the stockholder on December
31 of the year, provided that the dividend is actually paid by the REIT during
January of the following calendar year. Stockholders may not include on their
own federal income tax returns any losses of the REIT.
The REIT will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the REIT up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax as discussed
in "-- Opinion of Tax Counsel" above. Moreover, any "deficiency dividend" will
be treated as an ordinary or capital gain dividend, as the case may be,
regardless of the REIT's earnings and profits. As a result, stockholders may be
required to treat certain distributions that would otherwise result in a
tax-free return of capital as taxable dividends.
The REIT may elect to retain and pay income tax on its net long-term
capital gains received during the taxable year. For taxable years beginning
after December 31, 1997, if the REIT so elects for a taxable year, the REIT's
shareholders would include in income as long-term capital gains their
proportionate share of such portion of the REIT's undistributed long-term
capital gains for the taxable year as the REIT may designate. A stockholder
would be deemed to have paid his share of the tax paid by the REIT on such
undistributed capital gains, which would be credited or refunded to the
shareholder. The shareholder's basis in his shares of REIT Shares would be
increased by the amount of undistributed long-term capital gains (less the
capital gains tax paid by the REIT) included in the stockholder's long-term
capital gains.
CAPITAL GAIN DIVIDENDS
Subject to the discussion below regarding changes to the capital gains
tax rates, distributions that are designated as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed the REIT 's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held his REIT Shares. However, corporate shareholders
may be required to treat up to 20% of certain capital gain dividends as
ordinary income. Capital gain dividends are not eligible for the
dividends-received deduction for corporations.
The Taxpayer Relief Act of 1997 (the "Relief Act") alters the taxation
of capital gain income. Under the Relief Act, individuals, trusts and estates
that hold certain investments for more than 18 months may be taxed at a maximum
long-term capital gain tax of 20% on the sale or exchange of those investments.
Individuals, trusts and estates that hold certain assets for more than 12
months but not more than 18 months may be taxed at a maximum mid-term capital
gain rate of 28% on the sale or exchange of those investments. The Relief Act
also provides a maximum rate of 25% for "unrecaptured section 1250 gain" for
individuals, trusts, and estates, special rules for "qualified 5-year gain," as
well as other changes to prior law. The Relief Act allows the IRS to prescribe
regulations on how the Relief Act's new capital gain rates will apply to sales
of capital assets by "pass-through entities," which include REITs such as the
REIT. To date regulations have not yet been prescribed, and it remains unclear
how the Relief Act's new rates will apply to capital gain dividends or
undistributed capital gains, including, for example the extent, if any, to
which capital gain dividends or undistributed capital gains from the REIT will
be taxed to individuals at the new rates for mid-term capital gains and
unrecaptured section 1250 gain, rather than the long-term capital gain rates.
Investors are urged to consult their own tax advisors with respect to the new
rules contained in the Relief Act.
PASSIVE ACTIVITY LOSS AND INVESTMENT INTEREST LIMITATIONS
Distributions from the REIT and gain from the disposition of REIT
Shares will not be treated as passive activity income, and therefore
stockholders may not be able to apply any "passive losses" against such income.
Dividends from
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the REIT (to the extent they do not constitute a return of capital) will
generally be treated as investment income for purposes of the investment
interest limitation. Capital gains from the disposition of REIT Shares (or
distributions treated as such) will be treated as investment income only if the
shareholder so elects, in which case such capital gains will be taxed at
ordinary income rates.
CERTAIN DISPOSITIONS OF SHARES
In general, any gain or loss realized upon a taxable disposition of
the REIT Shares by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the REIT Shares have been held for
more than one year, (or, in the case of individuals, trusts, and estates,
mid-term capital gain or loss if the shares have been held for more than one
year but not more than 18 months and long-term capital gain or loss if the
shares have been held for more than 18 months) and otherwise as short-term
capital gain or loss. However, any loss upon a sale or exchange of REIT Shares
by a stockholder who has held such stock for six months or less (after applying
certain holding period rules), will be treated as a long-term capital loss to
the extent of distributions from the REIT or undistributed capital gains
required to be treated by such shareholder as long-term capital gain. All or a
portion of any loss realized upon a taxable disposition of REIT Shares may be
disallowed if other REIT Shares are purchased within 30 days before or after
the disposition.
TREATMENT OF TAX-EXEMPT STOCKHOLDERS
Distributions from the REIT to a tax-exempt employee pension trust or
other domestic tax-exempt stockholder generally, will not constitute "unrelated
business taxable income" ("UBTI") unless the stockholder has borrowed to
acquire or carry its REIT Shares. Qualified trusts that hold more than 10% (by
value) of the shares of certain REITs, however, may be required to treat a
certain percentage of such a REIT's distributions as UBTI. This requirement
will apply only if (i) the REIT would not qualify as such for federal income
tax purposes but for the application of the "look-through" exception to the
Five or Fewer Requirement applicable to shares held by qualified trusts and
(ii) the REIT is "predominantly held" by qualified trusts. A REIT is
predominantly held by qualified trusts if either (i) a single qualified trust
holds more than 25% by value of the interests in the REIT or (ii) one or more
qualified trusts, each owning more than 10% by value of the interests in the
REIT, hold in the aggregate more than 50% of the interests in the REIT. The
percentage of any REIT dividend treated as UBTI is equal to the ratio of (a)
the UBTI earned by the REIT (treating the REIT as if it were a qualified trust
and therefore subject to tax on UBTI) to (b) the total gross income (less
certain associated expenses) of the REIT. A de minimis exception applies where
the ratio set forth in the preceding sentence is less than 5% for any year. For
these purposes, a qualified trust is any trust described in section 401(a) of
the Code and exempt from tax under section 501(a) of the Code. The provisions
requiring qualified trusts to treat a portion of REIT distributions as UBTI
will not apply if the REIT is able to satisfy the Five or Fewer Requirement
without relying upon the "look-through" exception.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
The rules governing United States income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships and foreign
trusts and estates (collectively, "Non-U.S. Stockholders") are complex, and the
following discussion is intended only as a summary of these rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws on an investment in the
REIT, including any reporting requirements.
In general, Non-U.S. Stockholders will be subject to regular United
States federal income tax with respect to their investment in the REIT if the
investment is "effectively connected" with the Non-U.S. Stockholder's conduct
of a trade or business in the United States. A corporate Non-U.S. Stockholder
that receives income that is (or is treated as) effectively connected with a
U.S. trade or business also may be subject to the branch profits tax under
section 884 of the Code, which is payable in addition to regular United States
federal corporate income tax. The following discussion will apply to Non-U.S.
Stockholders whose investment in the REIT is not so effectively connected.
A distribution by the REIT that is not attributable to gain from the
sale or exchange by the REIT of a United States real property interest and that
is not designated by the REIT as a capital gain dividend will be treated as an
ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits. Generally, any ordinary income dividend will
be subject to a United States federal income tax equal to 30% of the gross
amount of the dividend unless this tax is reduced by an applicable tax treaty.
Such a distribution in excess of the REIT's earnings and profits will be
treated first as a return of capital that will reduce a Non-U.S. Stockholder's
basis in its Common Stock (but not below zero) and then as gain from the
disposition of such shares, the tax treatment of which is described under the
rules discussed below with respect to dispositions of Common Stock.
Distributions by the REIT that are attributable to gain from the sale
or exchange of a United States real property interest will be taxed to a
Non-U.S. Stockholder under the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholder as if the distributions were gains "effectively connected" with a
United States trade or business. Accordingly, a Non-U.S. Stockholder will be
taxed at the normal capital gain rates applicable to a U.S. Stockholder
(subject to any applicable alternative minimum tax and a special alternative
minimum tax in the case of non-resident alien individuals). Distributions
subject to FIRPTA also may be subject to a 30% branch profits tax when made to
a foreign corporate stockholder that is not entitled to treaty exemptions.
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Although tax treaties may reduce the REIT's withholding obligations,
the REIT generally will be required to withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS, (i) 35% of designated capital gain
dividends (or, if greater, 35% of the amount of any distributions that could
be designated as capital gain dividends) and (ii) 30% of ordinary dividends
paid out of earnings and profits. In addition, if the REIT designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for purposes of withholding. A distribution in excess of the REIT's earnings
and profits will be subject to 30% dividend withholding if at the time of the
distribution it cannot be determined whether the distribution will be in an
amount in excess of the REIT's current or accumulated earnings and profits. If
the amount of tax withheld by the REIT with respect to a distribution to a
Non-U.S. Stockholder exceeds the stockholder's United States tax liability with
respect to such distribution, the Non-U.S. Stockholder may file for a refund of
such excess from the IRS.
Unless the REIT Share constitutes a "United States real property
interest" within the meaning of FIRPTA, a sale of REIT Shares by a Non-U.S.
Stockholder generally will not be subject to United States federal income
taxation. The REIT Share will not constitute a United States real property
interest if the REIT is a "domestically controlled REIT." A domestically
controlled REIT is a REIT in which at all times during a specified testing
period less than 50% in value of its shares is held directly or indirectly by
Non-U.S. Stockholders. It is currently anticipated that the REIT will be a
domestically controlled REIT and therefore that sales of REIT Shares will not
be subject to taxation under FIRPTA. However, because the REIT will be
publicly traded, no assurance can be given that the REIT will continue to be a
domestically controlled REIT. If the REIT were not a domestically controlled
REIT, whether a Non-U.S. Stockholder's sale of REIT Shares would be subject to
tax under FIRPTA as a sale of a United States real property interest would
depend on whether the REIT Shares were "regularly traded" on an established
securities market (such as AMEX on which the REIT will be listed) and on the
size of the selling stockholder's interest in the REIT. If the gain on the sale
of REIT Shares were subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as a U.S. Stockholder with respect to
the gain (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of non-resident alien individuals). In
addition, distributions that are treated as gain from the disposition of REIT
Shares and are subject to tax under FIRPTA also may be subject to a 30% branch
profit tax when made to a foreign corporate stockholder that is not entitled to
treaty exemptions. In any event, a purchaser of REIT Shares from a Non-U.S.
Stockholder will not be required to withhold under FIRPTA on the purchase price
if the purchased REIT Shares are "regularly traded" on an established
securities market (such as AMEX) or if the REIT is a domestically controlled
REIT. Otherwise, under FIRPTA the purchaser of REIT Shares may be required to
withhold 10% of the purchase price and remit this amount to the IRS. Capital
gains not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the
Non-U.S. Stockholder is a non-resident alien individual who is present in the
United States for 183 days or more during the taxable year and certain other
conditions apply, in which case the non-resident alien individual will be
subject to a 30% tax on his or her U.S. source capital gains.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under certain circumstances, U.S. Stockholders may be subject to
backup withholding at a rate of 31% on payments made with respect to, or cash
proceeds of a sale or exchange of, REIT Shares. Backup withholding will apply
only if the holder (i) fails to furnish his or her taxpayer identification
number ("TIN") (which, for an individual, would be his or her Social Security
Number), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he
or she has failed properly to report payments of interest and dividends or is
otherwise subject to backup withholding or (iv) under certain circumstances,
fails to certify, under penalties of perjury, that he or she has furnished a
correct TIN and (a) that he or she has not been notified by the IRS that he or
she is subject to backup withholding for failure to report interest and
dividend payments or (b) that he or she has been notified by the IRS that he or
she is no longer subject to backup withholding. Backup withholding will not
apply with respect to payments made to certain exempt recipients, such as
corporations and tax-exempt organizations.
U.S. Stockholders should consult their own tax advisors regarding
their qualifications for exemption from backup withholding and the procedure
for obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
U.S. Stockholder will be allowed as a credit against the U.S. Stockholder's
United States federal income tax liability and may entitle the U.S. Stockholder
to a refund, provided that the required information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Stockholders. Non-U.S. Stockholders should
consult their tax advisors with regard to U.S. information reporting and backup
withholding.
OTHER TAX CONSIDERATIONS
STATE AND LOCAL TAX
The REIT and its operating subsidiaries may be subject to state and
local tax in states and localities in which they do business or own property.
The tax treatment of the REIT and its operating subsidiaries and the holders of
REIT Shares in such jurisdictions may differ from the federal income tax
treatment described above.
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 the REIT to maintain
complete ownership records, as described above, or to know whether a violation
of the 100 Stockholder Requirement or Five or
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Fewer Requirement have occurred. For example, a shareholder of the REIT would
be deemed to own REIT Shares owned by his parents, children, spouse, siblings
and, in certain instances, his proportionate interest of shares owned by
another corporation, partnership, estate or trust in which the shareholder has
an interest. Accordingly, no assurances can be given that the REIT will be able
to satisfy these requirements and at all times qualify as a real estate
investment trust.
TAX AND ACCOUNTING INCOME MAY VARY
Due to differences between accounting rules for federal income tax
purposes and generally accepted accounting principles for financial reporting
purposes, the REIT's taxable income may vary from its net income for financial
reporting purposes. For tax purposes, the REIT will use the accrual method of
accounting.
EFFECT OF TAX STATUS OF OPERATING PARTNERSHIP ON QUALIFICATION OF THE
REIT AS A REAL ESTATE INVESTMENT TRUST
Substantially all of the REIT's investments are through the Operating
Partnership. In addition, the Operating Partnership holds interests in
certain Owned Healthcare Facilities through subsidiary partnerships. The REIT's
interest in these partnerships may involve special tax considerations. Such
considerations include (i) the allocations of items of income and expense,
which could affect the computation of taxable income of the REIT, (ii) the
status of the Operating Partnership, and other subsidiary partnerships as
partnerships (as opposed to associations taxable as corporations) for federal
income tax purposes, and (iii) the taking of actions by the Operating
Partnership and subsidiary partnerships that could adversely affect the REIT's
qualification as a real estate investment trust. In the opinion of REIT
Counsel, based on certain representations of the REIT and its subsidiaries,
each of the Operating Partnership and the other subsidiary partnerships in
which the Operating Partnership has an interest will be treated for federal
income tax purposes as a partnership (and not as an association taxable as a
corporation). If any of the Operating Partnership or other subsidiary
partnerships in which the Operating Partnership has an interest were treated as
an association taxable as a corporation, the REIT would fail to qualify as a
real estate investment trust for a number of reasons.
ALTERNATIVE MINIMUM TAX
The REIT's operations could generate items of tax preference under the
alternative minimum tax. For example, the REIT's alternative 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. The REIT's shareholders are also subject to the
alternative minimum tax to the extent that it exceeds their regular tax. The
shareholders should therefore consult their own tax advisors as to the possible
application of the alternative minimum tax rules.
ERISA CONSIDERATIONS
The assets of certain pension plans, profit sharing plans and Keogh
Plans (collectively "Qualified Plans") must be valued annually. In addition,
valuation may become necessary in connection with distributions to participants
or beneficiaries, or for other reasons. Each year the trustee or custodian of
an individual retirement account ("IRA") must furnish to the person who has
established the IRA a statement which indicates the value of the IRA at the end
of the preceding calendar year. Otherwise, the assets of an IRA need to be
valued only in rare circumstances. The REIT does not contemplate providing
shareholders with an annual appraisal of its properties. However, it is
anticipated that a public trading market will develop for the REIT Shares, and
this market may provide sufficient data to value the REIT Shares.
Fiduciaries of Qualified Plans subject to the Employee Retirement
Income Securities Act of 1974, as amended ("ERISA"), should also consider
whether (i) under the fiduciary standards of ERISA an investment in the REIT is
prudent because of possible limitations on the marketability of the REIT
Shares, (ii) an investment in the REIT satisfies ERISA's diversification
requirements and (iii) such fiduciaries have authority to hold REIT Shares
under the appropriate governing instrument and Title I of ERISA. Fiduciaries of
an "IRA" should similarly note that an IRA may only make investments that are
authorized by the appropriate governing instrument.
Fiduciaries of Qualified Plans should also consider ERISA's
prohibition on improper delegation of control over or responsibility for "plan
assets." Qualified Plan and IRA fiduciaries should note that the Department of
Labor, which has certain administrative responsibilities over these employee
benefit plans, issued regulations defining "plan assets" on November 13, 1986.
Under the regulations, the assets of an entity in which employee benefit plans
make equity investments will not be treated as plan assets if interests in the
entity are (i) freely transferable, (ii) widely held and (iii) registered
pursuant to the Securities Exchange Act of 1934 or sold to the plan in a public
offering pursuant to a registration statement under the Securities Act of 1933.
It is anticipated that the REIT Shares will be freely transferable, widely
held, and registered pursuant to the Exchange Act.
If the REIT does not satisfy the above-described conditions, the
assets of the REIT could be deemed to be plan assets under ERISA. In such case,
(i) the prudence standards and other provisions of Part 4 of Title I of ERISA
(which impose liability on fiduciaries) would extend to investments made by the
REIT (which could materially impact the operations of the REIT); (ii) the
persons who have investment discretion over the assets of Qualified Plans which
hold REIT Shares could be liable under Part 4 of Title I for investments made
by the REIT which do not conform to such ERISA standards; and (iii) certain
transactions that the REIT might enter into in the ordinary course of its
business and operations might constitute "prohibited transactions" under ERISA.
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Finally, the tax-exempt status of an IRA could be lost if an
investment in the REIT constituted a prohibited transaction under Section
408(e) (2) of the Code by reason of the REIT engaging in a prohibited
transaction with the individual who established the IRA or his beneficiary.
Qualified Plans and IRAs contemplating the retention of REIT Shares
are urged to consult their tax advisors.
THE CORPORATION
FORMATION. The formation of the Corporation by NHC is intended to
qualify as a tax free incorporation under Code Section 351. Under Section 351,
neither the Corporation nor NHC would generally recognize gain upon formation
of the Corporation.
THE MERGER. The Merger (together with the Distribution) will be
treated for federal income tax purposes as a complete termination and
liquidation of NHC in which NHC Unitholders receive shares in the Corporation
and shares in the REIT in exchange for their Units. The merger of NHC into the
Corporation will be treated as a contribution of NHC's assets (other than those
contributed to the REIT or the Operating Partnership) to the Corporation, which
would generally be tax free under Code Section 351. Under the general rule of
Code Section 351, no gain or loss is recognized upon the transfer of property
to a corporation by the transferors of such property solely in exchange for
stock in the corporation if immediately thereafter the transferors are in
control of the corporation. Control is defined in Section 368(c) as the
ownership of eighty percent (80%) of the voting stock and eighty percent (80%)
of each class of non-voting stock of a corporation.
In the case of a partnership that contributes its assets to a
corporation in exchange for corporate stock and immediately thereafter
liquidates by distributing the stock to its partners "in proportion to their
partnership interests," the IRS has ruled that the "immediately after"
requirement of Section 351 is satisfied. Revenue Ruling 84-111, 1984-2 C.B. 88.
This is so even though the identities of the actual contributor or transferor
of property to the corporation and the ultimate recipient of the corporate
stock were not the same. While this ruling involves a partnership that
liquidates as a result of its distribution of shares in a corporation, the
ruling is enlightening because Section 351 was found to apply despite the short
period during which the partnership held the stock. Although NHC will
actually merge into the Corporation, thereby ceasing to exist as a separate
entity, it will be treated as liquidating for tax purposes.
Similarly, Code Section 351(c) provides that in determining control
for these purposes, the fact that a corporate transferor distributes part or
all of the stock it received in a transaction subject to Section 351 to its
shareholders will not be taken into account. While the Code contains no
analogous provision for such distributions by a partnership, Tax Counsel
believes it is appropriate for the same result to follow, and that it is more
likely than not that the general nonrecognition rule of Section 351 would apply
to constructive contribution of assets to the Corporation, except as otherwise
provided below.
Code Section 357 generally permits a corporation, in addition to
issuing stock in a Section 351 transaction, to assume liabilities of the
transferor, without causing the transferor to recognize gain or be precluded
from obtaining the benefits of Code Section 351. This rule does not apply,
however, if either (i) the principal purpose for the assumption was tax
avoidance (or was not a bona fide business purpose), or (ii) the liabilities
exceeded the transferor's basis in the contributed assets. NHC has represented
that the liabilities to be assumed by the Corporation or subject to assets
constructively contributed to the Corporation do not exceed NHC's adjusted tax
bases in the assets constructively contributed to the Corporation, and that the
principal purpose of the Corporation's assumption of such liabilities is not
the avoidance of taxes.
NHC will have a tax basis in the Shares it receives generally equal
to NHC's basis in the assets it constructively contributes to the Corporation,
net of the amount of the NHC liabilities the Corporation assumes or acquires in
the transfer. NHC's holding period for the Shares it receives in the exchange
will include NHC's holding period in the capital and Section 1231 assets it
transfers to the Corporation. If any of the assets NHC contributes to the
Corporation are deemed not to be capital or Section 1231 assets, then NHC's
holding period in the Shares will be bifurcated; the holding period for that
portion of the Shares received in exchange for such other assets would begin on
the day following the date of the exchange.
Pursuant to Code Section 1032, the Corporation will not recognize any
gain or loss on the receipt of the NHC assets and assumption of NHC liabilities
in exchange for the issuance of the Shares. The initial tax bases of the assets
received will generally equal their tax basis in the hands of NHC immediately
prior to the exchange. The Corporation's holding period for each asset acquired
in the exchange will generally include NHC's holding period for that asset.
Generally, under Code Section 731, NHC's Unitholders would not
recognize gain upon the complete liquidation of their limited partnership
interests in NHC in exchange for the Shares and the REIT shares.
Code Section 731(b) provides that a partnership will not recognize
gain upon its distribution of property or money to its partners. As to the
partners, Code Section 731(a)(1) generally provides that no gain or loss shall
be recognized by a partner upon a distribution to him of property, other than
money. For purposes of Section 731(a), "marketable securities" are generally
treated as money. Marketable securities are defined to include, in part, (i)
stock that is, as of the date of distribution, actively traded within the
meaning of Code Section 1092(d)(1) and (ii) other equity interests that,
pursuant to their terms or any other arrangement, are readily convertible into,
or exchangeable for, money or marketable securities. Regulations promulgated
under Section 731(c) provide that stock is actively traded if it is of a
100
<PAGE> 108
type that is, as of the date of distribution, listed on a national securities
exchange. It is anticipated that as of the Effective Time the Shares will be
approved for listing on the American Stock Exchange, though such listing will
not be effective until January 2, 1998.
However, Section 731(a) does not apply to the distribution of
marketable securities in a "qualified partnership liquidation" if (i) such
securities were received by the partnership in a nonrecognition transaction for
substantially all of the partnership's assets, (ii) such securities are
distributed by the partnership within 90 days after their receipt by the
partnership, and (iii) the partnership is liquidated before the beginning of
the partnership's first taxable year beginning after December 31, 1997. For
purposes of this transitional rule, a "qualified partnership liquidation" is a
complete liquidation of a publicly traded partnership as defined in Code
Section 7704(b) that is an existing partnership as defined in Section
10211(c)(2) of the Revenue Act of 1987.
NHC is a publicly traded and existing partnership as so defined. The
REIT Shares and the Shares will be issued to NHC in exchange for all of its
assets under the nonrecognition rule of Section 351 and will be issued within
90 days of their receipt by NHC. The Distribution and Merger will be treated
for federal income tax purposes as a complete termination and liquidation of
NHC, which is to be effective prior to NHC's first taxable year after December
31, 1997. Accordingly, Tax Counsel believes it is more likely than not that
Code Section 731(c) would not apply to the Merger.
Under Code Section 732(b), a Unitholder's aggregate initial tax basis
in his REIT Shares and the Shares will be generally equal to the Unitholder's
adjusted basis in his Units, decreased by the amount of any marketable
securities treated as money and increased by the amount of any gain recognized
as a result thereof, which shall be allocated between the REIT Shares and the
Shares generally based upon the relative adjusted bases to NHC of the REIT
Shares and the Shares.
Each Unitholder may have multiple holding periods for the REIT Shares
and the Shares received, depending upon the holding periods and character of
the various assets transferred by NHC to the REIT and the Corporation. The
holding period of the portion of the REIT Shares and the Shares attributable to
capital assets and Code Section 1231 assets transferred by NHC to the REIT or
the Corporation will include NHC's holding period for those assets. The holding
period for REIT Shares and the Shares attributable to other NHC assets, if any,
will begin on the day following the Effective Time. The period during which
Unitholders have held their Units will have no impact on their holding period
in REIT Shares or the Shares.
STATE AND LOCAL TAXES
The REIT, the Corporation, and each of their shareholders may be
subject to state or local taxation in various states or local jurisdictions,
including those in which they transact business or reside. Moreover, the tax
treatment in such jurisdictions may differ from the federal income tax
treatment. For instance, while some states recognize the status of real estate
investment trusts as corporations and permit them to substantially eliminate
corporate-level taxation via deductible distributions, other states may not.
Each Unitholder should therefore consult with his own tax advisor as to the
actual or potential impact of federal, state and local taxation on the Plan of
Restructure and the holding of REIT Shares and Shares.
UNITHOLDERS SHOULD SEEK THEIR OWN TAX ADVICE
The preceding is a brief summary of the tax considerations potentially
affecting NHC, its Unitholders, the REIT and the Corporation and their
respective shareholders. This discussion is based on the current state of the
law, which is subject to legislative, administrative or judicial actions, which
may apply retroactively. Moreover, the discussion does not address
considerations that may adversely affect the treatment of certain Unitholders
(such as corporations, foreign and tax-exempt investors). In these
circumstances, and particularly because the ultimate tax impact may vary
depending upon the personal circumstances of each investor, ALL UNITHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX ASPECTS OF THE
FORMATION OF THE REIT AND THE CORPORATION, THE PLAN OF RESTRUCTURE, AND THE
OWNING AND DISPOSING OF REIT SHARES AND SHARES OF THE CORPORATION.
LEGAL MATTERS
Certain legal matters in connection with the Distribution of the Shares and
the REIT Shares being offered hereby will be passed upon for the REIT by McQuire
Woods Battle & Boothe LLP, Baltimore, Maryland and the Corporation by Harwell
Howard Hyne Gabbert & Manner, P.C., Nashville, Tennessee.
EXPERTS
The consolidated financial statements and schedules of NHC at December
31, 1996 and 1995, and for each of the three years in the period ended December
31, 1996 and the audited balance sheet of the REIT as of September 26, 1997
which are included in this Proxy Statement/Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
101
<PAGE> 109
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
NATIONAL HEALTHCARE L.P.
Report of Independent Public Accountants F-2
Consolidated Statements of Income F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Partners' Capital F-6
Notes to Consolidated Financial Statements F-7
Interim Condensed Consolidated Statements of Income F-18
Interim Condensed Consolidated Balance Sheets F-19
Interim Condensed Consolidated Statements of Cash Flows F-21
Interim Condensed Consolidated Statements of Changes in Partners' Capital F-23
Notes to Interim Condensed Consolidated Financial Statements F-24
NATIONAL HEALTH REALTY, INC.
Report of Independent Public Accountants F-27
Balance Sheet dated October 15, 1997 F-28
Notes to Balance Sheet F-29
</TABLE>
<PAGE> 110
To the Partners of National HealthCare L.P.:
We have audited the accompanying consolidated balance sheets of
National HealthCare L.P. (a Delaware partnership) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
partners' capital and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of National HealthCare L.P.'s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
National HealthCare L.P. and subsidiaries as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 3, 1997
F-2
<PAGE> 111
NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except unit amounts)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
-------------- -------------- ------------
<S> <C> <C> <C>
Revenues:
Net patient revenues $ 341,818 $ 307,969 $ 269,722
Other revenues 46,842 42,988 29,179
------------ ------------ ----------
Net revenues 388,660 350,957 298,901
------------ ------------ ----------
Costs and Expenses:
Salaries, wages and benefits 209,645 188,985 157,663
Other operating 125,342 109,417 98,753
Depreciation and amortization 13,634 14,549 13,582
Interest 10,753 16,891 13,050
------------ ------------ ----------
Total costs and expenses 359,374 329,842 283,048
------------ ------------ ----------
Net Income $ 29,286 $ 21,115 $ 15,853
============ ============ ==========
Earnings Per Unit:
Primary $ 3.44 $ 2.65 $ 2.02
Fully diluted 2.98 2.31 1.80
Weighted Average Units Outstanding:
Primary 8,496,299 7,953,651 7,834,375
Fully diluted 10,455,706 9,971,867 9,807,241
Net Income Allocable to Partners:
General Partners $ 293 $ 211 $ 159
Limited Partners 28,993 20,904 15,694
============ ============ ==========
$ 29,286 $ 21,115 $ 15,853
============ ============ ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-3
<PAGE> 112
NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31 1996 1995
- ----------- -------- --------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,881 $ 4,835
Cash held by trustees 2,274 1,721
Marketable securities 17,968 1,514
Accounts receivable, less allowance for doubtful accounts of $4,739 and $4,441, respectively 50,902 47,285
Notes receivable 2,515 2,538
Loan participation agreements --- 27,579
Inventory, at lower of cost (first-in, first-out method) or market 3,572 3,075
Prepaid expenses and other assets 982 893
---------- ---------
Total current assets 80,094 89,440
---------- ---------
Property, Equipment and Assets Under Arrangement With Other Parties:
Property and equipment, at cost 234,934 165,265
Accumulated depreciation and amortization (48,171) (38,265)
Assets under arrangement with other parties, net 22,538 29,921
---------- ---------
Net property, equipment and assets under arrangement with other parties 209,301 156,921
---------- ---------
Other Assets:
Bond reserve funds, mortgage replacement reserves and other deposits 141 1,789
Unamortized financing costs 1,601 1,937
Notes receivable 95,206 86,178
Notes receivable from National 12,153 12,271
Minority equity investments and other 6,244 6,955
---------- ---------
Total other assets 115,345 109,130
---------- ---------
$ 404,740 $ 355,491
========== =========
Liabilities and Partners' Capital
Current Liabilities:
Current portion of long-term debt $ 8,574 $ 8,558
Trade accounts payable 11,835 6,142
Accrued payroll 28,963 23,876
Amount due to third party payors 13,135 9,800
Accrued interest 501 1,822
Other current liabilities 9,795 8,849
---------- ---------
Total current liabilities 72,803 59,047
---------- ---------
Long-term Debt, Less Current Portion 124,678 100,871
Debt Serviced by Other Parties, Less Current Portion 32,857 40,771
Minority Interests in Consolidated Subsidiaries 791 812
Commitments, Contingencies and Guarantees Subordinated Convertible Notes 28,908 30,000
Deferred Income 16,166 15,091
Partners' Capital:
General partners 1,408 1,290
Limited partners, less notes receivable and cumulative unrealized gains and losses on
securities 127,129 107,609
---------- ---------
Total partners' capital 128,537 108,899
---------- ---------
$ 404,740 $ 355,491
========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-4
<PAGE> 113
NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,286 $ 21,115 $ 15,853
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 12,453 14,081 13,147
Provision for doubtful accounts receivable 1,654 2,182 2,118
Amortization of intangibles and deferred charges 1,083 1,845 848
Amortization of deferred income (295) (497) (403)
Equity in earnings of unconsolidated investments (313) (347) (450)
Distributions from unconsolidated investments and other 210 236 333
Changes in assets and liabilities:
Increase in accounts receivable (5,271) (1,095) (20,095)
Increase in inventory (497) (123) (19)
(Increase) decrease in prepaid expenses and other assets (89) 680 (1,012)
Increase (decrease) in trade accounts payable 5,693 (10,910) 12,331
Increase in accrued payroll 5,087 5,232 4,663
Increase in amounts due to third party payors 3,335 5,404 769
Increase (decrease) in accrued interest (1,321) (401) 1,235
Increase in other current liabilities 946 2,456 2,057
-------- -------- --------
Net cash provided by operating activities 51,961 39,858 31,375
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to and acquisitions of property and equipment, net (69,970) (29,435) (9,599)
Investments in notes receivable and loan participation agreements (20,170) (30,694) (112,069)
Collections of long-term notes receivable and loan participation agreements 38,862 39,157 80,199
Increase (decrease) in minority equity investments and other (441) 210 (3,984)
(Increase) decrease in marketable securities, net (14,628) 2,361 2,140
Sales of investments 1,900 --- 136
-------- -------- --------
Net cash used in investing activities (64,447) (18,401) (43,177)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance 29,183 2,368 34,225
Increase in cash held by trustees (553) (117) (315)
(Increase) decrease in minority interests in subsidiaries (21) 10 35
Issuance of partnership units 1,378 820 773
Collections of receivables from exercise of options 3,522 795 437
(Increase) decrease in bond reserve funds, mortgage replacement reserves and
other deposits 1,648 (69) (57)
Payments on debt (8,138) (6,767) (4,360)
Cash distributions to partners (17,466) (14,702) (17,639)
Increase in financing costs (21) (402) ---
-------- -------- --------
Net cash provided by (used in) financing activities 9,532 (18,064) 13,099
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,954) 3,393 1,297
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,835 1,442 145
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,881 $ 4,835 $ 1,442
======== ======== ========
<CAPTION>
Year Ended December 31 1996 1995 1994
-------- -------- --------
SUPPLEMENTAL INFORMATION:
Cash payments for interest expense $ 12,074 $ 17,292 $ 11,815
-------- -------- --------
During 1996 and 1995, NHC was released from its liability on debt serviced by
others by the respective lenders.
Debt serviced by other parties $ (5,136) $(45,868) $ ---
======== ======== ========
Assets under arrangement with other parties $ 5,136 $ 45,868 $ ---
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-5
<PAGE> 114
NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit amounts)
<TABLE>
<CAPTION>
Unrealized
Receivables Gains Total
Number from Sale (Losses) on General Limited Partners'
of Units of Units Securities Partner Partners Capital
---------- ------------ ----------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 7,796,433 $ (15,134) $ --- $1,027 $106,633 $ 92,526
--------- --------- ----- ----- ------- -------
Net income --- --- --- 159 15,694 15,853
Collection of receivables --- 437 --- --- --- 437
Units sold 29,732 --- --- --- 773 773
Unrealized gains on securities --- --- 480 --- --- 480
Cash distributions declared
($1.17 per unit) --- --- --- (91) (8,972) (9,063)
--------- ------- ----- ----- ------- -------
BALANCE AT DECEMBER 31, 1994 7,826,165 (14,697) 480 1,095 114,128 101,006
--------- -------- ----- ----- ------- -------
Net income --- --- --- 211 20,904 21,115
Collection of receivables --- 795 --- --- --- 795
Units sold 526,949 (12,294) --- 131 12,983 820
Unrealized losses on securities --- --- (135) --- --- (135)
Cash distributions declared
($1.88 per unit) --- --- --- (147) (14,555) (14,702)
--------- ------- ----- ----- ------- -------
BALANCE AT DECEMBER 31, 1995 8,353,114 (26,196) 345 1,290 133,460 108,899
--------- ------- ----- ----- ------- -------
Net income --- --- --- 293 28,993 29,286
Collection of receivables --- 3,522 --- --- --- 3,522
Units sold 43,035 --- --- --- 1,378 1,378
Units issued in conversion of 71,810 --- --- --- 1,092 1,092
convertible debentures to
partnership units
Unrealized gains on securities --- --- 1,826 --- --- 1,826
Cash distributions declared
($2.08 per unit) --- --- --- (175) (17,291) (17,466)
--------- -------- ------ ------ -------- --------
BALANCE AT DECEMBER 31, 1996 8,467,959 $(22,674) $2,171 $1,408 $147,632 $128,537
========= ======== ====== ====== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-6
<PAGE> 115
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Presentation--
The consolidated financial statements include the accounts of National
HealthCare L.P. and its subsidiaries (NHC). Investments are accounted for on
either the cost or equity method. All material intercompany balances, profits,
and transactions have been eliminated in consolidation, and minority interests
are reflected in consolidation. Certain reclassifications have been made to
the 1994 and 1995 financial statements to conform to the 1996 presentation.
Use of Estimates--
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Health Care Revenues--
NHC's principal business is operating and managing long-term health care
centers, including the provision of routine and ancillary services.
Approximately 60% of NHC's net revenues in 1996 and 1995 and 61% in 1994 are
from participation in Medicare and Medicaid programs. Amounts paid under these
programs are generally based on a facility's allowable costs or a fixed rate
subject to program cost ceilings. Revenues are recorded at standard billing
rates less allowances and discounts principally for patients covered by
Medicare, Medicaid and other contractual programs. These allowances and
discounts were $110,795,000, $103,186,000 and $82,443,000 for 1996, 1995 and
1994, respectively. Amounts earned under the Medicare and Medicaid programs
are subject to review by the third party payors. In the opinion of management,
adequate provision has been made for any adjustments that may result from such
reviews. NHC generally expects final determinations to occur two to three
years subsequent to the year in which amounts are earned. Any differences
between estimated settlements and final determinations are reflected in
operations in the year finalized. NHC has submitted various requests for
exceptions to Medicare routine cost limitations for reimbursement. NHC has
received approval on certain requests, and others are pending approval. NHC
will record revenues associated with the approved requests when such approvals,
including cost report audits, are assured.
Provision for Doubtful Accounts--
Provisions for estimated uncollectible accounts and notes receivable are
included in other operating expenses.
Property, Equipment and Assets Under Arrangement with Other Parties--
NHC uses the straight-line method of depreciation over the expected useful
lives of property and equipment estimated as follows: buildings and
improvements, 20-40 years; equipment and furniture, 3-15 years; and properties
under arrangement with other parties, 10-20 years. The provision for
depreciation includes the amortization of properties under capital leases and
properties under arrangement with National Health Investors, Inc. (NHI) (See
Note 3).
Expenditures for repairs and maintenance are charged against income as
incurred. Betterments are capitalized. NHC removes the costs and related
allowances from the accounts for properties sold or retired, and any resulting
gains or losses are included in income. NHC includes interest costs incurred
during construction periods in the cost of buildings ($1,428,000 in 1996 and
$1,057,000 in 1995).
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (SFAS 121). NHC
adopted the provisions of SFAS 121 effective January 1, 1996. The effect of
adoption of SFAS 121 is not material to NHC's financial statements. In
accordance with SFAS 121, NHC evaluates the recoverability of the carrying
values of its properties on a property by property basis.
Investments in Marketable Securities--
NHC considers its investments in marketable securities as available for sale
securities and unrealized gains and losses are recorded in partners' capital in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
F-7
<PAGE> 116
Intangible Assets--
Any excess of cost over net assets of companies purchased is amortized
generally over 40 years using the straight-line method. Deferred financing
costs are amortized principally by the interest method over the terms of the
related loans.
Income Taxes--
NHC is not a taxable entity. Accordingly, no provision for income taxes has
been made in the Consolidated Statements of Income.
The earnings of NHC are taxable to the individual partners. Partners are
required to report their distributive share of the income, gain, loss,
deductions and credits of the partnership on their individual income tax
returns.
The Revenue Act of 1987 contains provisions which cause some publicly traded
partnerships to be taxed as corporations. Because NHC was in existence and
publicly traded on December 17, 1987, it will continue to be treated as a
partnership for the 1987 through 1997 taxable years.
NHC adopted Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109) effective January 1, 1993. SFAS 109 generally
requires NHC to record any income tax provisions or income taxes payable based
on the liability method. NHC management believes, based on current
information, that the initial recognition of any income tax assets or
liabilities that would be recorded in 1998, the year that master limited
partnerships become taxable as a corporation, would not be material to NHC's
financial condition or results of operations.
Concentration of Credit Risks--
NHC's credit risks primarily relate to cash and cash equivalents, cash held
by trustees, accounts receivable, marketable securities, notes receivable and
loan participation agreements. Cash and cash equivalents are primarily held in
bank accounts and overnight investments. Cash held by trustees is primarily
invested in commercial paper and certificates of deposit with financial
institutions. Accounts receivable consist primarily of amounts due from
patients (funded approximately 80% through Medicare, Medicaid, and other
contractual programs and approximately 20% through private payors) in the
states of Alabama, Florida, Georgia, Kentucky, Missouri, South Carolina,
Tennessee, and Virginia and from other health care companies for management
services. NHC performs continual credit evaluations of its clients and
maintains allowances for doubtful accounts on these accounts receivable.
Marketable securities are held primarily in two accounts with brokerage
institutions. Notes receivable relate primarily to secured loans with health
care facilities and to secured notes receivable from officers, directors and
supervisory employees as discussed in Notes 13 and 14. NHC also has notes
receivable from National Health Corporation as discussed in Note 4.
NHC's financial instruments, principally its notes receivable (which are
predominantly with Florida Convalescent Centers, Inc.) are subject to the
possibility of loss of the carrying values as a result of either the failure of
other parties to perform according to their contractual obligations or changes
in market prices which may make the instruments less valuable. NHC obtains
various collateral and other protective rights, and continually monitors these
rights, in order to reduce such possibilities of loss. NHC evaluates the need
to provide for reserves for potential losses on its financial instruments based
on management's periodic review of its portfolio on an instrument by instrument
basis. See Notes 13 and 14 for additional information on the notes receivable.
Cash and Cash Equivalents--
Cash equivalents include highly liquid investments with an original maturity
of less than three months.
NOTE 2 - ORGANIZATION OF THE PARTNERSHIP:
The general partners of NHC are as follows: (1) NHC, Inc. (the "Managing
General Partner"), a Tennessee corporation, which is owned by its board of
directors and senior management of NHC; (2) National Health Corporation
("National" and "Administrative General Partner"), a Tennessee corporation,
which is owned by the National Health Corporation Leveraged Employee Stock
Ownership Plan and Trust (the "ESOP"); and (3) W. Andrew Adams, NHC Inc.'s
President (the "Individual General Partner"). The Managing General Partner,
the Administrative General Partner and the Individual General Partner are
collectively called "the General Partners". The General Partners own a general
partnership interest in NHC representing a 1% interest in the profits, losses
and distributions of NHC.
F-8
<PAGE> 117
NOTE 3 - RELATIONSHIP WITH NATIONAL HEALTH INVESTORS, INC.:
Leases--
On October 17, 1991, concurrent with NHC's conveyance of real property to
NHI, NHC leased from NHI the real property of 40 long-term care centers and
three retirement centers. Each lease is for an initial term expiring December
31, 2001, with two additional five-year renewal terms at the option of NHC,
assuming no defaults. NHC accounts for the leases as operating leases.
During the initial term and first renewal term of the leases, NHC is
obligated to pay NHI annual base rent on all 43 facilities of $15,238,000. If
NHC exercises its option to extend the leases for the second renewal term, the
base rent will be the then fair rental value as negotiated by NHC and NHI.
The leases also obligate NHC to pay as debt service rent all payments of
interest and principal due under each mortgage to which the conveyance of the
facilities was subject. The payments are required over the remaining life of
the mortgages as of the conveyance date, but only during the term of the lease.
Payments for debt service rent are being treated by NHC as payments of
principal and interest if NHC remains obligated on the debt ("obligated debt
service rent") and as operating expense payments if NHC has been relieved of
the debt obligation by the lender ("non-obligated debt service rent"). See
"Accounting Treatment of the Transfer" for further discussion.
In addition to base rent and debt service rent, in each year after 1992, NHC
must pay percentage rent to NHI equal to 3% of the amount by which gross
revenues of each facility in such later year exceed the gross revenues of such
facility in 1992. Percentage rent for 1996 and 1995 was approximately
$1,817,000 and $1,237,000, respectively.
Each lease with NHI is a "triple net lease" under which NHC is responsible
for paying all taxes, utilities, insurance premium costs, repairs and other
charges relating to the ownership of the facilities. NHC is obligated at its
expense to maintain adequate insurance on the facilities' assets.
NHC has a right of first refusal with NHI to purchase any of the properties
transferred from NHC should NHI receive an offer from an unrelated party during
the term of the lease or up to 180 days after termination of the related lease.
Base rent expense to NHI was $15,238,000 in 1996, 1995 and 1994 and
non-obligated debt service rent to NHI was $5,048,000 in 1996. At December 31,
1996, the approximate future minimum base rent and non-obligated debt service
rent commitments to be paid by NHC on non-cancelable operating leases with NHI
during the initial term are as follows:
<TABLE>
<S> <C>
1997 20,298,000
1998 20,354,000
1999 20,372,000
2000 20,409,000
2001 20,486,000
Thereafter ---
</TABLE>
Advisory Agreement--
NHC has entered into an Advisory Agreement with NHI whereby services related
to investment activities and day-to-day management and operations are provided
to NHI by NHC as Advisor. The Advisor is subject to the supervision and
policies established by NHI's Board of Directors.
Either party may terminate the Advisory Agreement on 90 days notice at any
time. NHI may terminate the Advisory Agreement for cause at any time.
For its services under the Advisory Agreement, NHC's annual compensation is
calculated to be $3,100,000, $2,827,000, and $2,570,000 in 1996, 1995 and 1994,
respectively. However, the payment of such annual compensation is conditional
upon NHI having sufficient funds from operations to pay annual dividends of
$2.00 per share and upon NHI paying such dividends. NHI met this condition in
1996, 1995 and 1994.
Accounting Treatment of the Transfer--
NHC has accounted for the conveyance in 1991 of assets (and related debt) to
NHI and the subsequent leasing of the real estate assets as a
"financing/leasing" arrangement. Since NHC remains obligated on certain of the
transferred debt, the obligated debt and
F-9
<PAGE> 118
applicable asset balances have been reflected on the Consolidated Balance
Sheets as "assets under arrangement with other parties" and "debt serviced by
other parties". The net book value equity of the assets transferred has been
transferred from NHC to NHI. As NHC utilizes the applicable real estate over
the lease term, its Consolidated Statements of Income will reflect the
continued depreciation of the applicable assets over the lease term, the
continued interest expenses on the obligated debt balances and the additional
base and non-obligated debt service rents (as an operating expense) payable to
NHI each year. NHC has recovery provisions from NHI if NHC is required to
service the debt through a default by NHI.
Release from Debt Serviced by Other Parties--
In 1996 and 1995, NHI prepaid debt on which NHC had also been obligated in
the amounts of $5,136,000 and $20,544,000, respectively. In addition, in 1995,
NHC was released from its obligation on approximately $25,324,000 of the
transferred debt. Since NHC is no longer obligated on this transferred debt,
debt serviced by other parties and assets under arrangement with other parties
have been reduced by $5,136,000 and $45,868,000 in 1996 and 1995, respectively.
The leases with NHI provide that NHC shall continue to make non-obligated debt
service rent payments equal to the debt service including principal and
interest on the obligated debt which was prepaid and from which NHC has been
released.
NOTE 4 - RELATIONSHIP WITH NATIONAL HEALTH CORPORATION:
Sale of Health Care Centers--
On January 20, 1988, NHC sold the assets (inventory, property and equipment)
of eight health care centers (1,121 licensed beds) to National, the
administrative general partner of NHC, for a total consideration of
$40,000,000. The consideration consisted of $30,000,000 in cash and a
$10,000,000 note receivable due December 31, 2007. The note receivable earns
interest at 8.5%. NHC has agreed to manage the centers under a 20-year
management contract for management fees comparable to those in the industry.
NHC has a receivable from National for management fees of approximately
$3,184,000 and $1,864,000 at December 31, 1996 and 1995, respectively.
NHC's basis in the assets sold was approximately $24,255,000. The resulting
profit of $15,745,000 was deferred and will be amortized into income beginning
with the collection of the note receivable (up to $12,000,000) with the balance
($3,745,000) of the profit being amortized into income on a straight-line
basis over the management contract period.
As of December 31, 1996, National had borrowed $2,153,000 from NHC to finance
the construction of additions at two health care centers. The notes require
monthly principal and interest payments. The interest rate is equal to the
prime rate, and the notes mature in 1998.
Financing Activities--
On January 20, 1988, NHC obtained long-term financing of $8,500,000 for its
new headquarters building from National through the National Health Corporation
Leveraged Employee Stock Ownership Plan and Trust. The note requires quarterly
principal and interest payments with interest at 9%. At December 31, 1996 and
1995, the outstanding balance on the note was approximately $5,520,000 and
$5,961,000, respectively. The building is owned by a separate partnership of
which NHC is the general partner and building tenants are limited partners.
NHC has guaranteed the debt service of the building partnership.
In addition, NHC's bank credit facility and the senior secured notes
described in Note 10 were financed through National and National's ESOP. NHC's
interest costs, financing expenses and principal payments are equal to those
incurred by National. In October 1991, NHC borrowed $10,000,000 from National.
The term note payable requires quarterly interest payments at 8.5%. The entire
principal is due at maturity in 1998.
Duties as Administrative General Partner--
The personnel conducting the business of NHC are employees of National, which
provides payroll services, provides employee fringe benefits, and maintains
certain liability insurance. NHC pays to National all the costs of personnel
employed for the benefit of NHC, as well as an administrative fee ($1,820,000
in 1996) equal to 1% of payroll costs.
National maintains and makes contributions to its ESOP for the benefit of
eligible employees.
F-10
<PAGE> 119
NOTE 5 - OTHER REVENUES:
Revenues from management services include management fees, interest income on
notes receivable, and revenues from other services provided to managed
long-term care centers. "Other" revenues include non-health care related
earnings.
<TABLE>
<CAPTION>
(in thousands)
Year Ended December 31 1996 1995 1994
---------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues from managed services $32,363 $28,719 $19,035
Guarantee fees 693 814 936
Advisory fees from NHI 3,100 3,265 2,138
Dividends and other realized gains (losses) on securities 932 450 (47)
Equity in earnings of unconsolidated investments 313 347 450
Interest income 4,386 6,457 4,817
Other 5,055 2,936 1,850
------- ------- -------
$46,842 $42,988 $29,179
======= ======= =======
</TABLE>
NOTE 6 - EARNINGS PER UNIT:
Primary earnings per unit is based on the weighted average number of common
and common equivalent units outstanding. Common equivalent units result from
dilutive unit options computed using the treasury stock method.
Fully diluted earnings per unit assumes, in addition to the above, that the
6% subordinated convertible notes were converted at the date issued with
earnings being increased for interest expense thereon.
The following table summarizes the earnings and the average number of common
units and common equivalent units used in the calculation of primary and fully
diluted earnings per unit.
(dollars in thousands, except per unit amounts)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Primary:
Weighted average common units 8,421,523 7,920,795 7,796,508
Stock options 74,776 32,856 37,867
---------- ---------- ---------
Average common units outstanding 8,496,299 7,953,651 7,834,375
========== ========== =========
Earnings $ 29,286 $ 21,115 $ 15,853
========== ========== =========
Earnings per unit, primary $ 3.44 $ 2.65 $ 2.02
========== ========== =========
Fully Diluted:
Weighted average common units 8,421,523 7,920,795 7,796,508
Stock options 108,045 78,206 37,867
Convertible subordinated notes 1,926,138 1,972,866 1,972,866
---------- ---------- ---------
Assumed average common units
outstanding 10,455,706 9,971,867 9,807,241
========== ========== =========
Earnings $ 31,136 $ 23,007 $ 17,653
========== ========== =========
Earnings per unit, fully diluted $ 2.98 $ 2.31 $ 1.80
========== ========== =========
</TABLE>
F-11
<PAGE> 120
NOTE 7 - PROPERTY, EQUIPMENT AND ASSETS UNDER ARRANGEMENT WITH OTHER PARTIES:
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
(in thousands)
December 31 1996 1995
- ----------- ---- ----
<S> <C> <C>
Land $ 20,607 $ 21,117
Buildings and improvements 99,564 67,576
Furniture and equipment 70,947 58,772
Construction in progress 43,816 17,800
-------- --------
$234,934 $165,265
======== ========
</TABLE>
Assets under arrangement with other parties, net of accumulated
depreciation, consist of the following:
<TABLE>
<CAPTION>
(in thousands)
December 31 1996 1995
- ----------- ---- ----
<S> <C> <C>
Land $ 2,313 $ 2,612
Buildings and improvements 15,885 22,625
Fixed equipment 1,664 2,008
Mortgage notes receivable 2,676 2,676
------- --------
$22,538 $ 29,921
======= ========
</TABLE>
NOTE 8 - ACQUISITIONS AND DISPOSITIONS:
In July 1996, NHC purchased, for total consideration of approximately
$4,680,000, a 120 bed long-term health care center located in West Plains,
Missouri. NHC had managed the health care center since its opening in 1982.
Also in July 1996, NHC purchased, for total consideration of approximately
$6,500,000, a long-term health care center with assisted living apartments
located in Naples, Florida. There are 60 long-term health care beds and 36
assisted living apartments.
The purchase prices for the acquisitions above were allocated to the
underlying assets based on their relative fair market values. The Consolidated
Statement of Income for 1996 includes the results of operations from the
respective dates of acquisition.
NOTE 9 - INVESTMENTS IN MARKETABLE SECURITIES:
NHC considers its investments in marketable securities as available
for sale securities and unrealized gains and losses are recorded in partners'
capital in accordance with SFAS 115.
The adoption of SFAS 115 did not have a material effect on NHC's
financial position or results of operations.
Proceeds from the sale of investments in debt and equity securities
during the years ended December 31, 1996 and 1995 were $1,669,000 and
$2,696,000 respectively. Gross investment gains of $92,000 and $335,000 were
realized on these sales during the years ended December 31, 1996 and 1995.
Gross investment losses of $41,000 were realized on these sales during the year
ended December 31, 1996. Realized gains and losses from securities sales are
determined on the specific identification of the securities.
F-12
<PAGE> 121
NOTE 10 - DEBT AND LEASE COMMITMENTS:
Long-Term Debt--
Long-term debt and debt serviced by other parties consist of the
following:
<TABLE>
<CAPTION>
Weighted Average Final Debt Service by
Interest Rate Maturities Other Parties Long-Term Debt
-------------------- ---------- ------------- --------------
(in thousands)
December 31 1996 1995 1996 1995
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Bank revolving credit facility, interest
payable periodically, principal due at
maturity variable, 6.7% 1999 $ --- $ --- $ 28,000 $ ---
Bank credit facility, principal and
interest payable quarterly variable, 6.0 2009 --- --- 14,831 15,518
Senior secured notes, principal and
interest payable semiannually 8.4 2005 17,567 19,462 24,397 27,860
First mortgage notes, principal and
interest payable quarterly variable, 6.8 2002 --- --- 22,106 22,612
Notes and other obligations, principal and
interest payable in periodic installments 6.4 1997-2019 4,443 9,822 30,679 30,065
First mortgage revenue bonds, principal
payable in periodic installments,
interest payable monthly variable, 4.5 2000-2010 14,086 14,861 --- ---
Unsecured term note payable to National,
interest payable quarterly, principal
payable at maturity 8.5 1998 --- --- 10,000 10,000
------- -------- -------- --------
36,096 44,145 130,013 106,055
Less current portion (3,239) (3,374) (5,335) (5,184)
------- -------- -------- --------
$32,857 $ 40,771 $124,678 $100,871
======= ======== ======== ========
</TABLE>
The bank credit facility and the senior secured notes were borrowed through
NHC's administrative partner, National. NHC granted certain credits and
interest rate concessions related to its management fees from National in
obtaining these loans.
The debt identified above as senior secured notes is cross-defaulted with
other NHC and NHI liabilities and is cross-collateralized to the extent of
approximately $24,397,000 of other debt.
To obtain the consent of various lenders to the transfer of assets, NHI
guaranteed certain NHC debt which was not transferred to NHI. A default by NHI
under its obligations would default the debt or guarantees of NHC.
The aggregate maturities of long-term debt and debt serviced by others for
the five years subsequent to December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Long-term Debt Serviced
Debt By Others Total
--------- ------------- ----------
<S> <C> <C> <C>
1997 $ 5,335,000 $3,239,000 $ 8,574,000
1998 6,450,000 2,496,000 8,946,000
1999 32,931,000 3,995,000 36,926,000
2000 34,414,000 3,895,000 38,309,000
2001 6,293,000 3,284,000 9,577,000
</TABLE>
Certain property and equipment of NHC and NHI are pledged as
collateral on long-term debt or capital lease obligations. Other property and
assets are available for use as collateral as needed.
F-13
<PAGE> 122
Certain loan agreements require maintenance of specified operating
ratios as well as specified levels of cash held in escrow, working capital and
partners' capital by NHC and NHI. All such covenants have been met by NHC, and
management believes that NHI is in compliance with the loan covenants.
Lease Commitments--
Operating expenses for the years ended December 31, 1996, 1995, and
1994 include expenses for leased premises and equipment under operating leases
of $25,036,000, $18,820,000, and $16,692,000, respectively. See Note 3 for the
approximate future minimum base rent and non-obligated debt service rent
commitments on non-cancelable operating leases with NHI.
Construction and Financing Commitments--
NHC is committed to spend approximately $25,217,000 for ongoing
construction contracts and to provide financing to managed facilities in the
amount of $3,423,000 for ongoing construction contracts in 1997. NHC's cash on
hand, marketable securities, short-term notes receivable, operating cash flow
and, as needed, its borrowing capacity are expected to be adequate to fund
these commitments.
NOTE 11 - SUBORDINATED CONVERTIBLE NOTES:
At December 31, 1996, $28,908,000 of 6% subordinated convertible notes
("the notes") remain outstanding. The notes mature July 1, 2000. Interest is
payable quarterly. The notes are convertible at the option of the holder at
any time into units of NHC at a price of $15.2063 per unit, subject to
adjustment for certain changes in the number of units outstanding. The notes
may be redeemed at the option of NHC, but only if NHC has elected to be taxed
as a corporation and only if the market price of NHC's units is such as to
guarantee certain specified returns to the holders of the notes. During 1996,
$1,092,000 of the notes were converted into 71,810 units. NHC has reserved an
additional 1,901,057 units for conversion of the notes.
NOTE 12 - CONTINGENCIES AND GUARANTEES:
Litigation--
There is certain litigation incidental to NHC's business, none of
which, in management's opinion, would be material to the financial position or
results of operations of NHC.
In March 1996, Florida Convalescent Centers, Inc. (FCC), an
independent Florida corporation for whom NHC manages sixteen licensed nursing
centers in Florida, gave NHC notice of its intent not to renew one management
contract. Pursuant to written agreements between the parties, NHC valued the
center, offering to either purchase the center at the price so valued or
require FCC to pay to NHC certain deferred compensation based upon that value.
FCC responded by requesting the court to interpret the parties' rights under
their contractual arrangements. FCC also sued to obtain possession of the
center for which it alleged the management contract had been terminated. This
suit has now been dismissed, and the issue of possession will be decided in
connection with the original suit. The remaining suit is still in the
preliminary stages and no hearing date has been scheduled.
In January 1997, FCC notified NHC that it will not renew the four
contracts which mature in 1997 but has agreed that NHC will remain as manager
until a final decision is reached in the remaining suit. The balance of the
contracts may be terminated in the years 1998-2002.
Third Party Reviews--
Amounts earned under Medicare, Medicaid and other governmental
programs are subject to review by third party payors. NHC has recently been
notified that audits or reviews by the Office of the Inspector General have
commenced at certain long-term care centers. NHC intends to continually
monitor the progress of these audits and reviews.
Professional Liability and Other Insurance--
NHC carries a professional liability insurance policy ($1,000,000 per
claim with additional umbrella coverage in the amount of $5,000,000 in the
aggregate per annum) for coverage from liability claims and losses incurred in
its health care business. The policy is a fixed premium and occurrence form
policy and has no provisions for a retrospective refund or assessment due to
actual loss experience. In the opinion of management, NHC's insurance coverage
is adequate to cover settlement of outstanding claims against NHC.
F-14
<PAGE> 123
NHC has assumed certain risks related to health insurance and workers
compensation insurance claims of the employees of National and the managed
facilities. The liability for reported claims and estimates for incurred but
unreported claims of the managed facilities is $5,078,000 and $4,433,000 at
December 31, 1996 and December 31, 1995, respectively. The liability is
included in other current liabilities in the Consolidated Balance Sheets. NHC
remits for the claims with regards to National's employees utilized by NHC on a
monthly basis. The amounts are subject to adjustment for actual claims
incurred.
Guarantees and Related Events--
In order to obtain management agreements and to facilitate
construction or acquisition of certain health care centers which NHC manages
for others, NHC has guaranteed some or all of the centers' first mortgage bond
debt (principal and interest). For this service, NHC charges an annual
guarantee fee of 1% to 2% of the outstanding principal balance guaranteed,
which fee is in addition to NHC's management fee. The principal amount
outstanding under the guarantees is approximately $72,919,000 (net of available
debt service reserves) at variable and fixed interest rates with a weighted
average rate of 5.1% at December 31, 1996.
In management's opinion, these guarantee fees approximate fees that
NHC would currently charge to enter into similar guarantees.
All of the guaranteed indebtedness is secured by first mortgages,
pledges of personal property, accounts receivable and, in certain instances, by
the personal guarantees of the owners of the facilities. The borrower has
granted second mortgages over the relevant properties in favor of NHC. Such
rights may be enforced if NHC is required to pay under its guarantees.
NHI has guaranteed certain of the debts of NHC. NHC has agreed to
indemnify and hold harmless NHI against any and all loss, liability or harm
incurred by NHI as a result of having to perform under its guarantee of any or
all of the guaranteed debt.
NHC has entered into an interest rate cap arrangement with a managed
entity under which NHC has guaranteed that the entity's weighted average
interest rate on its first and second mortgage debt will not exceed 9.0%. The
entity's first mortgage debt is tax-exempt, floating-rate bonds and its second
mortgage debt is owed to NHC. The bond debt outstanding under the arrangement
is $16,100,000 and the weighted average rate of both debts is 6.7% at December
31, 1996. NHC is obligated under the agreement only for the term of its
management contract, as extended, and only so long as the tax-exempt bonds are
outstanding. At December 31, 1996, NHC expects to have no additional liability
as a result of this interest rate cap arrangement.
NOTE 13 - NOTES RECEIVABLE:
Notes receivable generally consist of loans and accrued interest to
managed health care centers (predominantly FCC) and retirement centers for
construction costs, development costs incurred during construction and working
capital during initial operating periods. The notes generally require monthly
payments with maturities ranging from five to twenty-five years. The majority
of the notes mature in 2004. Interest on the notes is generally at prime plus
2% or at a fixed rate of 10.25%, payable monthly. The collateral for the notes
consists of first and second mortgages, certificates of need, personal
guarantees and stock pledges.
F-15
<PAGE> 124
NOTE 14 - PARTNERS' CAPITAL:
NHC has Incentive Option Plans which provide for the granting of
options to key employees and directors to purchase units at no less than market
value on the date of grant. The options may be exercised immediately, but NHC
may purchase the units at the grant price if employment is terminated prior to
six years from the date of grant. The maximum term of the options is five
years. The following table summarizes option activity:
<TABLE>
<CAPTION>
Number of Weighted Average
Units Exercise Price
<S> <C> <C>
Options outstanding December 31, 1993 5,000 $11.25
Options granted 485,500 25.15
Options exercised --- ---
Options outstanding December 31, 1994 490,500 25.00
Options granted 376,000 30.76
Options exercised 489,000 25.14
------- -----
Options outstanding December 31, 1995 377,500 30.56
Options granted 15,000 38.63
Options exercised 2,500 11.25
------- -----
Options outstanding December 31, 1996 390,000 $30.99
</TABLE>
At December 31, 1996, all options outstanding are exercisable.
Exercise prices on the exercisable options range from $11.25 to $38.63. The
weighted average remaining contractual life of options outstanding at December
31, 1996 is 2.9 years.
Additionally, NHC has an employee unit purchase plan which allows
employees to purchase ownership units of NHC through payroll deductions. The
plan allows employees to terminate participation at any time.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 establishes new financial
accounting and reporting standards for stock-based compensation plans. NHC has
adopted the disclosure-only provisions of SFAS 123. As a result, no
compensation cost has been recognized for NHC's stock-based compensation plans.
Management believes that any compensation cost attributable to stock-based
compensation plans is immaterial.
In connection with the exercise of certain stock options, NHC has
received interest-bearing (ranging from 3.5% to 6.25%), full recourse notes in
the amount of $22,674,000 at December 31, 1996. The notes are secured by units
of NHC or shares of NHI having a fair market value of not less than 150% of the
amount of the note. The principal balances of the notes are reflected as a
reduction of partners' capital in the consolidated financial statements.
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical to
estimate that value:
Cash and cash equivalents; Cash held by trustees; Bond reserve funds, mortgage
replacement reserves and other deposits; Loan participation agreements; and
Accrued interest--
The fair value approximates the carrying amount because of the short
maturity or the nature of these instruments.
Marketable securities--
The fair value is estimated based on quoted market prices and is the
same as the carrying amount.
Notes receivable--
The fair value of NHC's notes receivable is estimated based on the
current rates offered by NHC or comparable parties for the same or similar type
of notes receivable of the same or similar maturities and is approximately the
same as the carrying amount.
F-16
<PAGE> 125
Long-term debt and Debt serviced by other parties--
The fair value is estimated based on the current rates offered to NHC
for similar debt of the same maturities and is approximately the same as the
carrying amounts.
Subordinated convertible notes--
The fair values are estimated based on quoted market prices and
approximate $82,995,000 and $76,942,000 at December 31, 1996 and December 31,
1995, respectively, as compared to carrying values of $28,908,000 and
$30,000,000 at December 31, 1996 and December 31, 1995, respectively.
F-17
<PAGE> 126
NATIONAL HEALTHCARE L.P.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- -------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
(in thousands (in thousands
except unit amounts) except unit amounts)
<S> <C> <C> <C> <C>
REVENUES:
Net patient revenues $ 94,657 $ 81,078 $ 189,240 $ 161,685
Other revenues 11,534 10,551 22,814 22,099
---------- ---------- ---------- ----------
Net revenues 106,191 91,629 212,054 183,784
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Salaries, wages and benefits 58,414 50,137 117,629 102,006
Other operating 33,214 29,653 66,340 57,967
Depreciation and amortization 3,977 3,135 7,712 6,170
Interest 3,244 2,697 6,073 6,169
---------- ---------- ---------- ----------
Total costs and expenses 98,849 85,622 197,754 172,312
---------- ---------- ---------- ----------
NET INCOME $ 7,342 $ 6,007 $ 14,300 $ 11,472
========== ========== ========== ==========
EARNINGS PER UNIT:
Primary $ .83 $ .70 $ 1.62 $ 1.34
========== ========== ========== ==========
Fully diluted $ .72 $ .62 $ 1.41 $ 1.18
========== ========== ========== ==========
WEIGHTED AVERAGE UNITS OUTSTANDING:
Primary 8,861,960 8,586,893 8,829,472 8,578,654
Fully diluted 10,759,346 10,518,688 10,727,760 10,527,339
CASH DISTRIBUTIONS PAID PER UNIT $ .60 $ .52 $ 1.20 $ 1.04
========== ========== ========== ==========
NET INCOME ALLOCABLE TO PARTNERS:
General Partners $ 73 $ 60 $ 143 $ 115
Limited Partners 7,269 5,947 14,157 11,357
---------- ---------- ---------- ----------
$ 7,342 $ 6,007 $ 14,300 $ 11,472
========== ========== ========== ==========
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
F-18
<PAGE> 127
NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,193 $ 1,881
Cash held by trustees 3,752 2,274
Marketable securities 17,298 17,968
Accounts receivable, less allowance for doubtful accounts of $5,472
and $4,079 78,586 50,902
Notes receivable 9,189 2,515
Inventory at lower of cost (first-in, first-out method) or market 4,077 3,572
Prepaid expenses and other assets 1,184 982
-------- --------
Total current assets 126,279 80,094
-------- --------
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 256,345 234,934
Less accumulated depreciation and amortization (54,479) (48,171)
Assets under arrangement with other parties 21,472 22,538
-------- --------
Net property, equipment and assets under arrangement with other parties 223,338 209,301
-------- --------
OTHER ASSETS:
Bond reserve funds, mortgage replacement reserves and other deposits 282 141
Unamortized financing costs 1,505 1,601
Notes receivable 93,980 95,206
Notes receivable from National 10,647 12,153
Minority equity investments and other 6,474 6,244
-------- --------
Total other assets 112,888 115,345
-------- --------
$462,505 $404,740
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
F-19
<PAGE> 128
NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
------------ ----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,865 $ 8,574
Trade accounts payable 29,361 11,835
Accrued payroll 30,259 28,963
Amount due to third-party payors 21,725 13,135
Accrued interest 1,067 501
Other current liabilities 12,002 9,795
-------- ---------
Total current liabilities 102,279 72,803
-------- ---------
LONG-TERM DEBT, less current portion 144,867 124,678
DEBT SERVICED BY OTHER PARTIES, LESS
CURRENT PORTION 32,024 32,857
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 784 791
COMMITMENTS, CONTINGENCIES AND GUARANTEES
SUBORDINATED CONVERTIBLE NOTES 28,839 28,908
DEFERRED INCOME 15,945 16,166
PARTNERS' CAPITAL:
General partners 1,447 1,408
Limited partners 136,320 127,129
-------- ---------
Total partners' capital 137,767 128,537
-------- ---------
$462,505 $ 404,740
======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
F-20
<PAGE> 129
NATIONAL HEALTHCARE L.P. INTERIM CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 14,300 $ 11,472
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 7,342 5,785
Provision for doubtful accounts 1,253 1,140
Amortization of intangibles and deferred charges 418 638
Amortization of deferred income (221) (130)
Equity in earnings of unconsolidated investments (40) (107)
Distributions from unconsolidated investments 154 180
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (28,937) 1,362
Increase in inventory (505) (504)
Increase in prepaid expenses and other assets (202) (84)
Increase in trade accounts payable 17,527 3,355
Increase (Decrease) in accrued payroll 1,296 (3,753)
Increase (Decrease) in amounts due to third party payors 8,590 (6,130)
Increase (Decrease) in accrued interest payable 566 (746)
Increase in other current liabilities 2,206 172
---------- ----------
23,747 12,650
---------- ----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Additions to and acquisitions of property and equipment, net (21,379) (11,592)
Investment in long-term notes receivable and loan participation agreements (18,022) (15,132)
Collection of long-term notes receivable and loan participation agreements 14,080 24,654
Increase in minority equity investments and other (574) (2,850)
(Increase) Decrease in debt and equity securities 362 (15,395)
----------- ----------
(25,533) (20,315)
----------- ----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 23,166 13,311
Increase in cash held by trustee (1,478) (1,358)
Decrease in minority interest in subsidiaries (7) (3)
Increase (Decrease) in bond reserve funds, mortgage replacement reserves
and other deposits (141) 1,081
Issuance of partnership units 539 571
Collection of receivables 5,014 3,340
Payments on debt (4,601) (3,639)
Cash distributions to partners (10,384) (8,708)
Increase in financing costs (10) (94)
----------- -----------
12,098 4,501
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,312 (3,164)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,881 4,835
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,193 $ 1,671
=========== ==========
Supplemental Information:
Cash payments for interest expense $ 6,920 $ 6,920
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-21
<PAGE> 130
NATIONAL HEALTHCARE L.P.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
During the six months ended June 30, 1996, NHC was released from its liability
on debt serviced by others by the respective lenders
Debt serviced by other parties $ (3,841) $(3,841)
Assets under arrangement with other parties 3,841 3,841
During the six months ended June 30, 1997 and June 30, 1996, respectively
$69,000 and $686,000 of convertible subordinated debentures were converted
into 4,534 and 45,112 units of NHC's partnership units:
Convertible subordinated debentures (69) (686)
Financing costs 1 1
Accrued interest (1) (5)
Partner's capital 69 690
</TABLE>
F-22
<PAGE> 131
NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RECEIVABLES UNREALIZED TOTAL
NUMBER OF FROM SALE OF GAINS(LOSSES) GENERAL LIMITED PARTNERS'
UNITS UNITS ON SECURITIES PARTNERS PARTNERS CAPITAL
----- ----- ------------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/96 8,467,959 $(22,674) $2,171 $1,408 $147,632 $128,537
Net income -- -- -- 143 14,157 14,300
Collection of
receivables -- 5,014 -- -- -- 5,014
Units sold 389,694 (11,577) -- -- 12,116 539
Units in conversion of
convertible debentures
to partnership units 4,534 -- -- -- 69 69
Unrealized losses on
securities -- -- (308) -- -- (308)
Cash distributions
($1.20 per unit) -- -- -- (104) (10,280) (10,384)
--------- -------- ------ ------ -------- --------
BALANCE AT 6/30/97 8,862,187 $(29,237) $1,863 $1,447 $163,694 $137,767
========= ======= ====== ====== ======== ========
BALANCE AT 12/31/95 8,353,114 $(26,196) $ 345 $1,290 $133,460 $108,899
Net income -- -- -- 115 11,357 11,472
Collection of
receivables -- 3,340 -- -- -- 3,340
Units sold 24,270 -- -- -- 571 571
Units in conversion of
convertible debentures
to partnership units 45,112 -- -- -- 690 690
Unrealized losses on
securities -- -- (191) -- -- (191)
Cash distributions
($1.04 per unit) -- -- -- (87) (8,621) (8,708)
--------- -------- ------ ------ -------- -------
BALANCE AT 6/30/96 8,422,496 $(22,856) $ 154 $1,318 $137,457 $116,073
========= ======== ====== ====== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-23
<PAGE> 132
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements for the six months ended June 30, 1997 and
1996, which have not been examined by independent public accountants, reflect,
in the opinion of management, all adjustments necessary to present fairly the
data for such periods. The results of the operations for the six months ended
June 30, 1997 are not necessarily indicative of the results that may be
expected for the entire fiscal year ended December 31, 1997. The interim
condensed balance sheet at December 31, 1996 is taken from the audited
financial statements at that date. The interim condensed financial statements
should be read in conjunction with the consolidated financial statements,
including the notes thereto, for the periods ended December 31, 1996, December
31, 1995, and December 31, 1994.
Note 2 - OTHER REVENUES:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenue from managed centers $ 8,713 $ 7,943 $16,995 $16,284
Guarantee fees 150 185 312 365
Advisory fee from NHI 776 797 1,551 1,594
Earnings on securities 370 64 891 125
Equity in earnings of unconsolidated investments 24 (59) 24 101
Interest income 968 1,133 1,949 2,722
Other 533 488 1,092 908
------- ------- ------- -------
$11,534 $10,551 $22,814 $22,099
======= ======= ======= =======
</TABLE>
Revenues from managed centers include management fees and interest
income on notes receivable from the managed centers. "Other" revenues include
non-health care related earnings.
Note 3 - INVESTMENT IN MARKETABLE SECURITIES:
NHC considers its investments in marketable securities as available
for sale securities and unrealized gains and losses are recorded in partners'
capital in accordance with SFAS 115.
The adoption of SFAS 115 did not have a material effect on NHC's
financial position or results of operations.
Proceeds from the sale of investments in debt and equity securities
for the period ended June 30, 1996 was $511,000. Gross investment gains of
$149,000 were realized on these sales during the period ended June 30, 1997.
Realized gains and losses from securities sales are determined on the specific
identification of the securities.
F-24
<PAGE> 133
Note 4 - GUARANTEES:
In order to obtain management agreements and to facilitate the
construction or acquisition of certain health care centers which NHC manages
for others, NHC has guaranteed some or all of the debt (principal and interest)
on those centers. For this service NHC charges an annual guarantee fee of 1%
to 2% of the outstanding principal balance guaranteed, which fee is in addition
to NHC's management fee. The principal amounts outstanding under the
guarantees is approximately $69,362,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average of 4.7%
at June 30, 1997.
NHC has entered into an interest rate cap arrangement with a managed
entity under which NHC has guaranteed that the entity's weighted average
interest rate on its first and second mortgage debt will not exceed 9.0%. The
entity's first mortgage debt is tax-exempt, floating-rate bonds and its second
mortgage debt is owed to NHC. The bond debt outstanding under the arrangement
is $15,600,000 and the weighted average rate of both debts is 6.9% at June 30,
1997. NHC is obligated under the agreement only for the term of its management
contract, as extended, and only so long as the tax-exempt bonds are
outstanding. At June 30, 1997, NHC expects to have no additional liability as
a result of this interest rate cap arrangement.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure," ("SFAS
129"), SFAS 129 establishes standards for disclosing information about an
entity's capital structure. NHC will be required to adopt SFAS 129 in the
fourth quarter of 1997. Management does not expect the adoption to have a
material impact on NHC's financial position results of operations or cash
flows.
Statement of Financial Accounting Standards No. 128,"Earnings per
Share," ("SFAS 128") has been issued effective for fiscal periods ending after
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share. NHC is required to adopt the provisions of SFAS
No. 128 in the fourth quarter of 1997. Under the standards established by SFAS
128, earnings per share is measured at two levels: basic earnings per share and
diluted earnings per share. Basic earnings per share is computed by dividing
net income by the weighted average number of common shares outstanding during
the year. Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares after considering the additional
dilution related to preferred stock, convertible debt, options and warrants.
Management does not expect the adoption to have a material impact on NHC's
financial position, results of operations or cash flows.
Note 6 - LEGAL PROCEEDINGS:
In March 1996, Florida Convalescent Centers, Inc. (FCC), an
independent Florida corporation for whom the company manages sixteen licensed
nursing centers in Florida, gave NHC notice of its intent not to renew a
management contract at one of the centers. Pursuant to written agreements
between the parties, NHC valued the center, offering to either purchase the
center at the price so valued or require FCC to pay to NHC certain deferred
compensation based upon that value. FCC responded on March 26, 1996, by filing
a Declaratory Judgment suit in the Circuit Court of the Twelfth Judicial
Circuit in and for Sarasota County, Florida, requesting the court to interpret
the parties' rights under their contractual arrangements. Since that time, FCC
has amended the suit to allege, among other items, that NHC has "self-dealt"
with or mismanaged the centers, that the deferred compensation creates a
usurious rate of interest, and that the recorded mortgages securing FCC's debt
to NHC do not secure the payment of the deferred compensation. NHC has denied
all allegations and conclusions. The suit is still in the preliminary stages
and no trial date has been scheduled.
F-25
<PAGE> 134
In January, 1997, NHC was notified that FCC currently does not intend
to renew an additional four contracts which mature in 1997, but FCC agreed that
NHC will remain as manager until a final decision is reached by the Sarasota
Court. The balance of the FCC contracts may be terminated in the years
2001-2003.
NHC is also a defendant in a lawsuit styled Braeuning et al vs.
National HealthCare L.P. et al filed "under seal" in the U. S. District Court
of the Northern district of Florida on April 9, 1996. The court removed the
seal from the complaint - but not the file itself - on March 20, 1997 and
service of process occurred on July 8, 1997 with the government participating
as an intervening plaintiff. The suit alleges that NHC has submitted cost
reports and routine cost limit exception requests containing "fraudulent
allocation of routine nursing services to ancillary service cost centers" and
improper allocation of skilled nursing service hours in four managed centers,
all in the state of Florida. The suit was filed under the Qui Tam provisions
of the Federal False Claims Act, commonly referred to as the "Whistleblower
Act".
In regard to the allegations contained in the lawsuit, NHC believes
that the cost report information of its centers have been either appropriately
filed or, upon appropriate amendment, will reflect adjustments only for the
correction of unintentional misallocations. Prior to the filing of the suit,
the Company had commenced an in-depth review of the nursing time allocation
process at its owned, leased and managed centers. A significant number of
amended cost reports have been filed and the Company continues to schedule and
prepare revised cost reports and exception requests. It is anticipated that
any years in question will be reviewed prior to there being further action in
this matter at the judicial level. The Company is fully cooperating with the
government in an attempt to determine dollar amounts involved, and intends to
aggressively pursue an amicable settlement of this matter. The cost report
periods under review include periods from 1991 through 1995.
NHC would be responsible for any settlement related to its owned
facilities and to the extent that managed centers have settlements, NHC's 6%
management fee would be impacted. NHC's revenue policy is to not reflect
routine cost limit exception requests as income until the process, including
cost report audits, is completed. NHC cannot predict at this time the ultimate
outcome of the suit but will strongly defend its actions in this matter.
As reported in NHC's 1996 10-K, in October 1996 two managed centers in
Florida were audited by representatives of the regional office of the Office of
the Inspector General ("OIG"). As part of these audits, the OIG reviewed
various records of the facilities relating to allocation of nursing hours and
contracts with suppliers of outside services. At one center the OIG indicated
during an exit conference that it had no further questions but has not yet
issued a final report. At the second facility - which is one of four named in
the Braeuning lawsuit - the OIG determined that certain records were
insufficient and NHC supplied the additional requested information. These
audits have been incorporated into the lawsuit.
Florida is one of the states in which governmental officials are
conducting "Operation Restore Trust", a federal/state program aimed at
detecting and eliminating fraud and abuse by providers in the Medicare and
Medicaid programs. The OIG has increased its investigative actions in Florida
(and has now opened a Tennessee office) as part of Operation Restore Trust.
NHC will continue to review and monitor the cost reporting process and its
compliance with all government reimbursement standards, but cannot predict
whether the OIG or other government officials will take further action or
request additional information as a result of the Braeuning suit or any other
audit that may be conducted in the future.
Note 7 - SUBSEQUENT EVENTS
The Board of Directors of the Managing General Partner of NHC has
unanimously approved in principle the following effective December 31, 1997:
(i) the formation of National Health Realty, Inc. (the "REIT" and a
wholly-owned subsidiary of NHC) and the formation of NHR/OP, L.P. (the
"Operating Partnership" and a subsidiary of the REIT), (ii) the transfer to the
Operating Partnership 17 licensed nursing homes, six assisted living centers,
one retirement center (the "Owned Healthcare Facilities"), certain promissory
notes (the "Notes"), certain other assets (the "Other Assets") and certain debt
(the "Assumed Liabilities"), (iii) the formation of National HealthCare
Corporation (the "Corporation" and a wholly-owned subsidiary of NHC), (iv) the
distribution of REIT Shares to NHC's unitholders and (v) the merger of NHC with
and into the Corporation. The Operating Partnership is expected to lease the
Owned Healthcare Facilities to the Corporation. Each lease will be a "triple
net" lease with (i) an initial fixed term expiring December 31, 2007, (ii) an
option for NHC to renew for two additional five-year periods on identical terms
as the initial period, and (iii) a right of first refusal for NHC to purchase
the Owned Healthcare Facilities.
The Corporation Board of Directors and the sole shareholder of the
Corporation have approved the 1997 Stock Appreciation Rights Plan (the
"Corporation Stock Option Plan"). The Corporation Stock Option Plan
allows for options to purchase up to 1,000,000 shares of Corporation common
stock to be granted by the Corporation Board of Directors. The Corporation
Board of Directors may grant incentive stock options ("ISO's"), non-qualified
stock options or stock appreciation rights. The Corporation Stock Option Plan
provides that the exercise price of an ISO must not be less than the fair
market value of the Corporation stock.
F-26
<PAGE> 135
After the initial capitalization of National Health Realty, Inc. as discussed
in Note 1 to National Health Realty, Inc.'s financial statement is effected, we
expect to be in a position to render the following audit report.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
October 15, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To National Health Realty, Inc.:
We have audited the accompanying balance sheet of NATIONAL HEALTH REALTY, INC.
(a Maryland corporation and a wholly owned subsidiary of National HealthCare
L.P.) as of October 15, 1997 (date of capitalization). This financial statement
is the responsibility of management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of National Health Realty, Inc. as of
October 15, 1997 in conformity with generally accepted accounting principles.
F-27
<PAGE> 136
NATIONAL HEALTH REALTY, INC.
BALANCE SHEET
OCTOBER 15, 1997
<TABLE>
<S> <C> <C>
ASSETS
Cash and temporary investments $ 1,000
================
LIABILITIES AND STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none outstanding $ -
Common stock, $.01 par value; 30,000,000 shares authorized;
1,000 shares issued and outstanding 10
Additional paid-in capital 990
----------------
$ 1,000
================
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-28
<PAGE> 137
NATIONAL HEALTH REALTY, INC.
NOTES TO BALANCE SHEET
OCTOBER 15, 1997
1. ORGANIZATION
National Health Realty, Inc. (the "REIT" and a wholly owned
subsidiary of National HealthCare L.P) was incorporated on
September 26, 1997. The REIT has had no operations to date but
issued 1,000 shares of common stock to National HealthCare
L.P ("NHC") on October 15, 1997 for consideration of $1,000.
2. FEDERAL INCOME TAXES
At the earliest possible date, after the spinoff from NHC, the
REIT intends to qualify as a real estate investment trust
under the Internal Revenue Code and, accordingly, will not be
subject to federal income taxes on amounts distributed to
stockholders providing it distributes at least 95% of its real
estate investment trust taxable income and meets certain other
conditions.
3. PREFERRED STOCK
No shares of preferred stock are outstanding. Preferred stock
may be issued from time to time without stockholder approval
with terms and conditions established by the Board of
Directors of the REIT.
4. Events subsequent to Date of Balance Sheet
NHC has announced its intentions to distribute shares of the
REIT to its unitholders. NHC expects to form NHR/OP,
L.P. (the "Operating Partnership" and a subsidiary of the
REIT) and, immediately prior to the distribution of shares,
will transfer to the Operating Partnership 17 licensed nursing
homes, six assisted living centers, one retirement center (the
"Owned Healthcare Facilities") and certain promissory notes
(the "Notes") secured by mortgages on 23 nursing homes. NHC
will convey its ownership in 15 of the Owned Healthcare
Facilities. The remaining nine Owned Healthcare Facilities
will be transferred pursuant to a 50-year capitalized lease.
The transfer will be subject to certain assumed debts (the
"Assumed Liabilities").
The Operating Partnership is expected to lease the Owned
Healthcare Facilities to NHC pursuant to operating leases.
Each operating lease will be a "triple net" lease with (i) an
initial fixed term expiring December 31, 2007, (ii) an option
for NHC to renew for two additional five-year periods on
identical terms as the initial period, and (iii) a right of
first refusal for NHC to purchase the Owned Healthcare
Facilities.
NHC will retain all of the equipment, furnishings and personal
property in the Owned Healthcare Facilities. In the event that
a lease with NHC is terminated for any reason, either the
Operating Partnership or a new tenant will have to replace all
of the equipment and furnishings. Because the Operating
Partnership has neither licenses nor employees to operate the
Owned Healthcare Facilities, the termination of a lease or
leases with NHC could have a material adverse effect on the
REIT's results of operations.
NHC will advise the REIT under the supervision of the REIT's
Board of Directors. The REIT's Board of Directors is
ultimately responsible for the management of the REIT.
The Notes are secured by mortgages on additional nursing homes
managed by NHC and have been pledged as collateral for part of
the Assumed Liabilities. In addition, parties to certain of
the Assumed Liabilities may not have consented to the transfer
of the Assumed Liabilities. Thus, a default by NHC under its
debt obligations could cause the Operating Partnership to lose
its assets through foreclosure or other means.
A significant portion of the Notes transferred to the Operating
Partnership is due from one company for which NHC manages 16
nursing homes. Although the Notes have been guaranteed by that
company's primary shareholder, the default, bankruptcy, or
other financial difficulty by the company or the guarantor
could have a material adverse effect on the Operating
Partnership's results of operations. NHC and the company are
currently involved in a lawsuit regarding the management
agreements of the 16 nursing homes.
The REIT does not intend to seek further healthcare-related
investment opportunities or to provide lease or mortgage
financing for such investments; consequently, the REIT's
results of operations and financial condition are dependent
upon the successful operation of the Owned Healthcare
Facilities and the realizability of the Notes.
The REIT's Board of Directors has approved the adoption of the
1997 Stock Option and Stock Appreciation Rights Plan (the "REIT
Stock Option Plan"). The REIT Stock Option Plan allows for
options to purchase in the aggregate 500,000 shares of REIT
common stock to be granted by the REIT's Board of Directors.
The REIT's Board of Directors may, in its discretion, grant
incentive stock options, non-qualified stock options, or stock
appreciation rights.
F-29
<PAGE> 138
APPENDIX A
PLAN OF RESTRUCTURE OF NATIONAL HEALTH CARE L.P.
NATIONAL HEALTHCARE L.P. ("NHC"), and its two wholly owned
subsidiaries, NATIONAL HEALTHCARE CORPORATION (the "Corporation"), and NATIONAL
HEALTH REALTY, INC. (the "REIT") hereby adopt a plan of restructure (the
"Plan") pursuant to and in accordance with the provisions of Sections
5.2(a)(xxvii) and 6.4(a) of the Amended and Restated Agreement of Limited
Partnership of NHC, Section 17-211 of the Delaware Revised Uniform Limited
Partnership Act and Section 263 of the Delaware General Corporation Law and
other applicable sections of the foregoing.
4. Purpose of the Plan. The purpose of this Plan is to set forth
the effective date and other terms of the restructure of NHC into the
Corporation and REIT, as soon as the Plan is consummated. NHC has recently
formed the Corporation and REIT as wholly owned subsidiaries. Upon adoption of
the Plan and the effectiveness as set forth herein, the stock of the REIT will
be distributed to the holders of the outstanding units (the "Units") of NHC in
proportion to their ownership of outstanding Units (except with respect to
Excess Stock, as later defined, the holder thereof shall be entitled to receive
the consideration described in Paragraph 6 hereof); and NHC shall merge with
and into the Corporation with the Corporation being the survivor thereof.
5. Unitholder Approval. A resolution approving the Plan shall be
submitted to the Unitholders of NHC for action on the resolution at a Special
Meeting to be held at the offices of NHC no later than November 20, 1997.
Consummation of the Plan shall be subject to: (i) adoption of the Plan by the
affirmative vote of at least a majority of the Units outstanding on the Record
Date for the meeting, and (ii) such rights to terminate or amend the Plan as
are set forth herein. If the Plan is so adopted, then the directors and
officers of the managing general partner of NHC shall cause this Plan to be
implemented in accordance with the following terms, all of which must be
accomplished on or before 12:00:01 a.m. central time on January 1, 1998.
6. Contribution to REIT's Operating Partnership of Qualifying
Assets and Assumption by REIT of Certain Liabilities. NHC has formed the REIT
under the Maryland General Corporation Law and REIT has formed NHR/OP, L.P., a
Delaware limited partnership (the "Operating Partnership"). NHC shall
contribute to Operating Partnership the specified assets, subject to certain
specified liabilities, effective at 4:00 p.m. central time on December 31, 1997
pursuant to the Contribution Agreement (the "Contribution Agreement") attached
hereto as Exhibit A pursuant to which: (a) real estate located in Florida owned
by NHC shall be leased to the Operating Partnership pursuant to a long term
capitalized lease (the "Capitalized Lease"), (b) substantially all other real
estate owned by NHC shall be conveyed by deed (the "Deeds") to the Operating
Partnership pursuant to deed forms selected by officers of the managing general
partner of NHC, (c) debt described in the Contribution Agreement secured by the
real property located in South Carolina shall be paid by, but not assumed by,
the Operating Partnership, (d) other debt of NHC described in the Contribution
Agreement shall be assumed by the Operating Partnership, (e) the notes and
related security including mortgages owned by NHC, as lender, specified in the
Contribution Agreement shall be conveyed to the Operating Partnership, and (f)
certain other assets having little or no book value on NHC's books, as
specified in the Contribution Agreement, shall be conveyed to the Operating
Partnership.
7. Agreements Between REIT and Corporation. Immediately after
the effectiveness of the matters described in paragraph 3 above, the following
shall occur: (a) the Operating Partnership shall lease to the Corporation, and
the Corporation shall lease from the Operating Partnership, pursuant to the
Operating Lease (the "Operating Lease"), attached hereto as Exhibit B all real
estate subject to the Contribution Agreement and, (b) the REIT, Operating
Partnership and Corporation shall enter into the Advisory Agreement, attached
hereto as Exhibit C. In the event of a title problem or dispute involving the
real property subject to the Capitalized Lease or conveyed pursuant to the
Deeds, to the maximum extent that NHC (or the Corporation, as successor to NHC
after the Merger) has a claim against a predecessor-in-title or a title
insurance company, NHC (or the Corporation as successor to NHC after the
Merger) shall
<PAGE> 139
indemnify, defend and hold REIT harmless from all damages, but not otherwise.
REIT and Operating Partnership, jointly and severally, shall indemnify, defend
and hold NHC and Corporation harmless with respect to all debt assumed by or
which REIT or Operating Partnership has agreed to pay in accordance with the
foregoing. REIT and Operating Partnership agree, without the written consent
of the Corporation, not to cause or suffer any such debt to be defaulted or
otherwise breached. Corporation shall indemnify, defend and hold REIT and
Operating Partnership harmless with respect to all debt and all obligations of
NHC except those specifically assumed by or which REIT or Operating Partnership
have agreed to pay in accordance with the foregoing. Corporation agrees,
without the written consent of REIT and Operating Partnership, not to cause or
suffer any such debt to be defaulted or otherwise breached. The Corporation
shall use its best efforts to provide to REIT and Operating Partnership
financial statements of the Corporation, and any predecessor, and the
unqualified opinion from a nationally recognized independent accounting firm
with respect to such annual financial statements, and consents of auditors to
the inclusion of such financial statements in any registration statements,
private placement memoranda, filings on any exchange or with any regulatory
body, if any, necessary or appropriate in order to enable REIT and Operating
Partnership to comply with applicable registration and reporting requirements
of federal and state securities laws or exchange requirements; and expenses
relating to the foregoing shall be borne by the Corporation (including
obtaining audits if required by the foregoing even if the Corporation does not
otherwise need to obtain them) as long as the Corporation is the investment
advisor of the REIT (whether pursuant to the Advisory Agreement attached
hereto, any amendment thereof, or a replacement thereto) and for such period of
time after such advisory relationship ends until such time as REIT and
Operating Partnership no longer are legally required to include such financial
statements in its SEC filings; the Corporation shall indemnify, defend and hold
REIT and Operating Partnership harmless with respect to any damages caused by
any errors or misstatements in such financial statements.
8. Contingent Liabilities. The Corporation, by reason of the
merger described below, shall assume and agree to pay (to the extent that NHC
is liable therefor, subject to all of the defenses and offsets which are
available to NHC) all absolute and contingent liabilities of NHC, except as
follows, each of which shall be assumed by the REIT and Operating Partnership,
jointly and severally, effective with the effectiveness of the Contribution
Agreement: (a) the absolute liabilities described in paragraph 3 above and
described more fully in the Contribution Agreement, and (b) environmental and
hazardous material liabilities relating to the land or improvements thereon
which are subject to either the Capitalized Lease or the Operating Leases,
described above, except those created from and after January 1, 1998 by the
Corporation or its tenants, subcontractors, agents or employees.
9. Issuance of REIT Shares to NHC; Distribution to Unitholders.
In consideration for the Contribution Agreement REIT shall issue to NHC that
number of shares of REIT common stock which is equal to the number of Units
outstanding on the date of the Contribution Agreement; provided, however, the
Excess Stock, as defined in the REIT Charter, which would have been issued to
National Health Corporation ("National") shall, instead, entitle National to
receive one Unit in the Operating Partnership ("OP Units") for each share of
Excess Stock. NHC shall immediately thereafter distribute or cause to be
distributed to each Unitholder of record immediately prior to the Effective
Time, as later defined, one (1) share of REIT common stock for each Unit owned
by the Unitholder subject to the proviso in the immediately preceding sentence.
Such actions shall result in the spin out of the REIT, without the necessity of
the surrender of unit certificates. All such actions shall be effective for
all purposes on or before 11:59 p.m. central time, December 31, 1997; provided,
however, the physical delivery of the certificates representing the REIT shares
and OP Units shall take place as soon as practical thereafter. REIT and
Corporation agree that all options and convertible debentures of NHC which
grant rights to subscribe for NHC Units exercisable or convertible after
December 31, 1997, shall be deemed to grant the right to acquire an equal
number of shares of REIT shares and an equal number of Corporation shares as
such right grants in Units of NHC. The exercise price for such options and
receipt thereof shall be divided pro rata between REIT and Corporation (and the
pro rata distribution shall be equal to the ratio that the closing price on the
American Stock Exchange at the close of business on the first trading day in
1998 of REIT shares and Corporation shares bear to each other). The interest
and principal and all other payments due under or obligations due as a result
of such convertible debentures is to be paid and performed by the Corporation
and if the conversion rights of any of such debt is exercised then the
Corporation shall provide written notification thereof to REIT, and the REIT
shall issue (upon payment of cash by Corporation to REIT in the amount of the
par value for such REIT shares) REIT shares equal to the number of shares
issued by Corporation upon such conversion; and REIT agrees, at the expense of
A-2
<PAGE> 140
Corporation, to cause to be filed any registration statement relating to REIT
shares required by agreements binding on Corporation or needed as determined in
the sole discretion of Corporation. Notwithstanding the foregoing in this
paragraph 6, the Convertible Debentures issued pursuant to the Note Purchase
Agreement dated in October 1997 shall be convertible solely into Corporation
shares and all obligations of NHC pursuant to such agreement (as well as the
related Note and Registration Rights Agreement) shall be solely those of the
Corporation.
10. Merger. Effective as of 11:59 p.m., central time, December
31, 1997 (the "Effective Time") NHC shall merge with and into the Corporation
pursuant to the Merger Agreement attached hereto as Exhibit D.
11. Amendment or Abandonment of Plan. The Board of Directors of
the managing general partner of NHC may modify or amend the Plan at any time
prior to Unitholder approval. Such Board of Directors may abandon the Plan
without Unitholder approval at any time prior to 11:59 p.m., central time,
December 31, 1997 (either before or after Unitholder adoption) in its sole and
absolute discretion if it deems such abandonment in the best interest of
Unitholders.
If the Plan is not implemented because it does not receive the
requisite Unitholder vote or the other conditions specified herein are not met,
or because the Board of Directors determines for some other reason that it is
advisable to abandon the Plan, the business and legal structure of NHC will
continue substantially in the present manner.
12. Miscellaneous.
(a) In connection with the Plan, the unit option plans of
NHC will be terminated and the unit options outstanding thereunder as of
December 31, 1997 to the extent not then exercised, will be cancelled to the
maximum extent permitted contractually and by law.
(b) All other employee benefit plans of NHC which are not
described in the Registration Statement on Form S-4 as employee benefits of the
Corporation shall be cancelled on December 31, 1997.
(c) The Board of Directors of the managing general
partner of NHC and the officers of NHC shall have the power to adopt all
resolutions, and the officers of NHC shall have the power to execute, deliver,
and file all instruments, documents and certificates in the offices of the
Secretaries of State of the State of Tennessee, Delaware and Maryland or other
offices, and to publish and give such notices, and to do any and all other or
additional things (including the setting of record dates and the closing of
stock transfer books), as are required by the laws of the State of Tennessee,
Delaware and Maryland or other applicable laws, or as such Board of Directors
or other officers may deem necessary, desirable or appropriate to carry out the
provisions of this Plan.
(d) This Plan is attached to and is part of a
Registration Statement on Form S-4 filed by the Corporation with the Securities
and Exchange Commission, reference to which is hereby made for any and all
purposes.
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<PAGE> 141
Executed as of the _____ day of ________________, 1997.
NATIONAL HEALTHCARE L.P.
By its Managing General Partner NHC, Inc.
By:
------------------------------------
W. Andrew Adams, President
NATIONAL HEALTHCARE CORPORATION
By:
------------------------------------
W. Andrew Adams, President
NATIONAL HEALTH REALTY, INC.
By:
------------------------------------
W. Andrew Adams, President
NHR/OP, L.P.
By: National Health Realty, Inc.,
its general partner
By:
------------------------------------
W. Andrew Adams, President
A-4
<PAGE> 142
EXHIBIT INDEX
Exhibit A Contribution Agreement
Exhibit B Operating Lease Agreement
Exhibit C Advisory Agreement
Exhibit D Merger Agreement
A-5
<PAGE> 143
APPENDIX B
AGREEMENT OF MERGER
OF
NATIONAL HEALTHCARE L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND
NATIONAL HEALTHCARE CORPORATION
(A DELAWARE CORPORATION)
THIS AGREEMENT OF MERGER is made and entered into this ___ day of
_________________, 1997 by and between NATIONAL HEALTHCARE L.P., a Delaware
limited partnership ("NHC"), and NATIONAL HEALTHCARE CORPORATION, a Delaware
corporation ("CORPORATION").
WHEREAS, National HealthCare L.P. is a business limited partnership of
the State of Delaware with its registered office therein located at 1013 Centre
Road, City of Wilmington, County of New Castle; and
WHEREAS, National HealthCare Corporation is a business corporation of
the State of Delaware with its registered office therein located at 9 East
Loockerman Street, City of Dover, County of Kent; and
WHEREAS, Section 263 of the Delaware General Corporation Law and
Section 17-211 of the Delaware Revised Uniform Limited Partnership Act permit
the merger of a corporation and limited partnership; and
WHEREAS, the Board of Directors of the Corporation and the Board of
Directors of NHC, Inc., the Managing General Partner of NHC, deem it is
advisable and to the advantage, welfare and best interests of said entities and
their respective stockholders and unitholders to merge NHC with and into the
Corporation pursuant to and in accordance with the provisions of Section 263 of
the General Corporation Law of the State of Delaware, Section 17-211 of the
Delaware Revised Uniform Limited Partnership Act and Section 6.4(a) of the
Amended and Restated Agreement of Limited Partnership of NHC, upon the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreement of the parties hereto, being thereunto duly approved and adopted by
the general partners and a majority of the limited partners of NHC and by the
Board of Directors and stockholders of the Corporation, the parties agree as
follows:
1. Terms and Conditions of Merger; Method of Effecting Merger.
Upon the Effective Time (as defined herein), NHC shall merge with and into the
Corporation and the separate partnership existence of NHC shall cease, and the
Corporation shall continue as the surviving corporation (sometimes hereinafter
referred to as the "SURVIVING CORPORATION"). The merger shall be effected by
the filing of a Certificate of Merger with the Delaware Secretary of State.
2. Effective Time. The effective date and time of the merger
shall be 11:59 p.m., central time, December 31, 1997 (the "EFFECTIVE TIME").
3. Manner of Converting Shares and Partnership Interests. Each
issued and outstanding unit of limited partnership interest ("UNIT") of NHC
shall, at the Effective Time, represent one share of common stock of the
Corporation. New certificates will not be issued for the shares of the
Corporation until the holder thereof subsequently sells, exchanges or
surrenders the certificate to the Corporation's transfer agent. The shares of
the Corporation issued
<PAGE> 144
prior to the merger shall not be converted or exchanged in any manner, but each
said share which is issued as of the Effective Time shall be canceled without
any action on the holder's part.
4. Assumption of Rights and Liabilities by Corporation. At the
Effective Time, NHC shall be merged into the Corporation which shall continue
as the Surviving Corporation, and the Surviving Corporation shall become the
owner, without transfer, of all rights, powers, assets, qualifications and
property of NHC, and the Surviving Corporation shall become subject to all
debts and liabilities of NHC in the same manner as if the Surviving Corporation
had itself incurred them.
5. Name. The Corporation shall continue its existence as the
Surviving Corporation under its present name.
6. Certificate of Incorporation of Surviving Corporation. The
Certificate of Incorporation of the Corporation, as now in force and effect,
shall continue to be the Certificate of Incorporation of said Surviving
Corporation until amended and changed in the manner prescribed by the
provisions of the General Corporation Law of the State of Delaware.
7. Bylaws of Surviving Corporation. The present Bylaws of the
Corporation, as now in force and effect, shall continue to be the Bylaws of
said Surviving Corporation until changed, altered or amended as therein
provided and in the manner prescribed by the provisions of the General
Corporation Law of the State of Delaware.
8. Directors and Officers of Surviving Corporation. The
directors and officers in office of the Corporation at the Effective Time shall
be the members of the Board of Directors of and the officers of said Surviving
Corporation, all of whom shall hold their directorships and offices until the
election and qualification of their respective successors or until their tenure
is otherwise terminated in accordance with the Bylaws of the Surviving
Corporation.
9. Amendment or Abandonment of Agreement of Merger. The Board of
Directors of NHC, Inc., the Managing General Partner of NHC, may modify or
amend this Agreement of Merger at any time prior to approval by the holders of
the Units (the "UNITHOLDERS"). Such Board of Directors may abandon the
Agreement of Merger without Unitholder approval at any time prior to 11:59
p.m., central time, December 31, 1997 (either before or after Unitholder
adoption) in its sole and absolute discretion if it deems such abandonment in
the best interest of Unitholders. If the Agreement of Merger is not
implemented because it does not receive the requisite Unitholder vote or the
other conditions specified herein are not met, or because the Board of
Directors of NHC, Inc. determines for some other reason that it is advisable to
abandon the Agreement of Merger, the business and legal structure of NHC will
continue substantially in the present manner.
10. General Authorization. The Board of Directors and the proper
officers of NHC, Inc. and of the Corporation and Surviving Corporation are
hereby authorized, empowered and directed to do any and all acts and things,
and to make, execute, deliver, file and record any and all instruments, papers
and documents which shall be or become necessary, proper or convenient to carry
out or put into effect any of the provisions of this Agreement of Merger or of
the merger provided for herein.
B-2
<PAGE> 145
IN WITNESS WHEREOF, the undersigned have executed this Agreement of
Merger as of the ____ day of ______________, 1997.
NHC:
NATIONAL HEALTHCARE L.P.
By: NHC, Inc., its Managing General Partner
By:
------------------------------------------
Printed Name:
--------------------------------
Title of Authorized Officer:
----------------
CORPORATION:
NATIONAL HEALTHCARE CORPORATION
By:
------------------------------------------
Printed Name:
--------------------------------
Title of Authorized Officer:
-----------------
B-3
<PAGE> 146
CERTIFICATE OF SECRETARY OF
NATIONAL HEALTHCARE CORPORATION
(a Delaware corporation)
The undersigned, being the Secretary of National HealthCare
Corporation, a Delaware corporation, does hereby certify that the holders of
all of the outstanding stock of said corporation dispensed with a meeting and
vote of shareholders, and all of the shareholders entitled to vote consented in
writing, pursuant to the provisions of Section 228 of the General Corporation
Law of the State of Delaware, to the adoption of the foregoing Agreement of
Merger.
Executed on this ____ day of _________________, 1997.
NATIONAL HEALTHCARE CORPORATION
By:
-------------------------------
Richard F. LaRoche, Jr.
Secretary
B-4
<PAGE> 147
CERTIFICATE OF SECRETARY OF
THE MANAGING GENERAL PARTNER
OF
NATIONAL HEALTHCARE L.P.
(a Delaware limited partnership)
The undersigned, being the Secretary of NHC, Inc., a Tennessee
corporation and the Managing General Partner of National HealthCare L.P., does
hereby certify that the foregoing Agreement of Merger was submitted to the
Unitholders of National HealthCare L.P. entitled to vote at a special meeting
thereof for the purpose of acting on the Agreement of Merger. Due notice of
the time, place, and purpose of said meeting was mailed to each Unitholder of
said limited partnership at least 20 days prior to the date of the meeting. At
said meeting, the Agreement of Merger was considered by the Unitholders
entitled to vote and, a vote having been taken for the adoption or rejection by
them of the Agreement of Merger, at least a majority of the outstanding units
entitled to vote of the limited partnership was voted in favor of the adoption
of the Agreement of Merger.
Executed on this ____ day of _________________, 1997.
NHC, INC., Managing General Partner of
NATIONAL HEALTHCARE L.P.
By:
-----------------------------
Richard F. LaRoche, Jr.
Secretary
B-5
<PAGE> 148
APPENDIX C
PROXY PROXY
NATIONAL HEALTHCARE L.P.
SPECIAL MEETING OF PARTNERS, NOVEMBER 20, 1997
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
THE MANAGING GENERAL PARTNER
The undersigned hereby appoints W. Andrew Adams and Richard F.
LaRoche, or either of them, as proxies, with power of substitution, to vote all
Units of the undersigned at the Special Meeting of Limited Partners of National
HealthCare L.P. to be held on Thursday, November 20, 1997, at 9:00 a.m. Central
Standard Time, at the Managing General Partners's Offices located at 100 Vine
Street, Murfreesboro, Tennessee, and at any adjournments or postponements
thereof, in accordance with the following instructions:
(1) APPROVAL AND ADOPTION OF A PLAN OF RESTRUCTURE, PURSUANT TO WHICH NHC
WILL MAKE A DISTRIBUTION OF ALL OF THE OUTSTANDING SHARES OF COMMON
STOCK OF NATIONAL HEALTH REALTY, INC. TO THE HOLDERS OF NHC GENERAL AND
LIMITED PARTNERSHIP UNITS IN THE MANNER SET FORTH IN THE ACCOMPANYING
PROXY STATEMENT AND NHC WILL THEN MERGE WITH AND INTO NATIONAL
HEALTHCARE CORPORATION.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) APPROVAL OF THE POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING FOR THE
PURPOSE OF SOLICITING ADDITIONAL VOTES IN FAVOR OF PROPOSAL (1) ABOVE;
AND
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR
ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED ON REVERSE SIDE)
- --------------------------------------------------------------------------------
(CONTINUED FROM OTHER SIDE)
THE UNITS REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, THE UNITS WILL BE VOTED FOR THE PLAN OF RESTRUCTURE AND
IN THE DISCRETION OF THE PROXIES ON SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING.
PLEASE SIGN AND DATE BELOW AND RETURN PROMPTLY.
DATED: , 1997
--------------------
--------------------------------
DATED: , 1997
--------------------
--------------------------------
Signature(s) of Unitholder(s)
should correspond exactly with
the name(s) printed hereon.
Joint owners should each sign
personally. Executors,
administrators, trustees, etc.,
should give full title and
authority.
<PAGE> 149
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
1. Statutory Provisions.
Section 2-418 of the Maryland General Corporation Law provides as
follows:
(a) DEFINITIONS. In this section the following words have the
meanings indicated.
(1) "Director" means any person who is or was a director
of a corporation and any person who, while a director of a corporation, is or
was serving at the request of the corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, other enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or foreign
predecessor entity of a corporation in a merger, consolidation, or other
transaction in which the predecessor's existence ceased upon consummation of
the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a director, the office of
director in the corporation; and
(ii) When used with respect to a person other than a
director as contemplated in subsection (j), the elective or appointive office
in the corporation held by the officer, or the employment or agency
relationship undertaken by the employee or agent in behalf of the corporation.
(iii) "Official capacity" does not include service for any
other foreign or domestic corporation or any partnership, joint venture, trust,
other enterprise, or employee benefit plan.
(5) "Party" includes a person who was, is, or is
threatened to be made a named defendant or respondent in a proceeding.
(6) "Proceeding" means any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative.
(b) PERMITTED INDEMNIFICATION OF DIRECTOR.
(1) A corporation may indemnify any director made a party
to any proceeding by reason of service in that capacity if the director:
(i) Acted in good faith;
(ii) Reasonably believed:
1. In the case of conduct in the director's
official capacity with the corporation, that the conduct was in the best
interests of the corporation; and
<PAGE> 150
2. In all other cases, that the conduct was at
least not opposed to the best interests of the corporation; and
(iii) In the case of any criminal proceeding, had no
reasonable cause to believe that the conduct was unlawful.
(2) (i) Indemnification may be against judgments,
penalties, fines, settlements, and reasonable expenses actually incurred by the
director in connection with the proceeding.
(ii) However, if the proceeding was one by or in the right
of the corporation, indemnification may be made only against reasonable
expenses and may not be made in respect of any proceeding in which the director
shall have been adjudged to be liable to the corporation.
(3) The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
creates a rebuttable presumption that the director did not meet the requisite
standard of conduct set forth in this subsection.
(c) NO INDEMNIFICATION OF DIRECTOR LIABLE FOR IMPROPER PERSONAL
BENEFIT. A director may not be indemnified under subsection (b) of this
section in respect of any proceeding charging improper personal benefit to the
director, whether or not involving action in the director's official capacity,
in which the director was adjudged to be liable on the basis that personal
benefit was improperly received.
(d) REQUIRED INDEMNIFICATION AGAINST EXPENSES INCURRED IN
SUCCESSFUL DEFENSE. -- Unless limited by the charter:
(1) A director who has been successful, on the merits or
otherwise, in the defense of any proceeding referred to in subsection (b) of
this section shall be indemnified against reasonable expenses incurred by the
director in connection with the proceeding.
(2) A court of appropriate jurisdiction, upon application
of a director and such notice as the court shall require, may order
indemnification in the following circumstances:
(i) If it determines a director is entitled to
reimbursement under paragraph (1) of this subsection, the court shall order
indemnification, in which case the director shall be entitled to recover the
expenses of securing such reimbursement; or
(ii) If it determines that the director is fairly and
reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not the director has met the standards of conduct set
forth in subsection (b) of this section or has been adjudged liable under the
circumstances described in subsection (c) of this section, the court may order
such indemnification as the court shall deem proper. However, indemnification
with respect to any proceeding by or in the right of the corporation or in
which liability shall have been adjudged in the circumstances described in
subsection (c) shall be limited to expenses.
(3) A court of appropriate jurisdiction may be the same
court in which the proceeding involving the director's liability took place.
(e) DETERMINATION THAT INDEMNIFICATION IS PROPER.
(1) Indemnification under subsection (b) of this section may
not be made by the corporation unless authorized in the specific case after a
determination has been made that indemnification of the director is permissible
in the circumstances because the director has met the standard of conduct set
forth in subsection (b) of this section.
II-2
<PAGE> 151
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a
quorum consisting of directors not, at the time, parties to the proceeding, or,
if such a quorum cannot be obtained, then by a majority vote of a committee of
the board consisting solely of two or more directors not, at the time, parties
to such proceeding and who were duly designated to act in the matter by a
majority vote of the full board in which the designated directors who are
parties may participate;
(ii) By special legal counsel selected by the board of
directors or a committee of the board by vote as set forth in subparagraph (i)
of this paragraph, or, if the requisite quorum of the full board cannot be
obtained therefor and the committee cannot be established, by a majority vote
of the full board in which directors who are parties may participate; or
(iii) By the stockholders.
(3) Authorization of indemnification and determination as
to reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible. However, if the
determination that indemnification is permissible is made by special legal
counsel, authorization of indemnification and determination as to
reasonableness of expenses shall be made in the manner specified in
subparagraph (ii) of paragraph (2) of this subsection for selection of such
counsel.
(4) Shares held by directors who are parties to the
proceeding may not be voted on the subject matter under this subsection.
(f) PAYMENT OF EXPENSES IN ADVANCE OF FINAL DISPOSITION OF ACTION.
(1) Reasonable expenses incurred by a director who is a
party to a proceeding may be paid or reimbursed by the corporation in advance
of the final disposition of the proceeding, after a determination that the
facts then known to those making the determination would not preclude
indemnification under this section, upon receipt by the corporation of:
(i) A written affirmation by the director of the
director's good faith belief that the standard of conduct necessary for
indemnification by the corporation as authorized in this section has been met;
and
(ii) A written undertaking by or on behalf of the director
to repay the amount if it shall ultimately be determined that the standard of
conduct has not been met.
(2) The undertaking required by subparagraph (ii) of
paragraph (1) of this subsection shall be an unlimited general obligation of
the director but need not be secured and may be accepted without reference to
financial ability to make the repayment.
(3) Determinations and authorizations of payments under
this subsection shall be in the manner specified in subsection (e) of this
section.
(g) VALIDITY OF INDEMNIFICATION PROVISION. A provision for the
corporation to indemnify a director who is made a party to a proceeding,
whether contained in the charter, the bylaws, a resolution of stockholders or
directors, an agreement or otherwise, except as contemplated by subsection (k)
of this section, is not valid unless consistent with this section or, to the
extent that indemnity under this section is limited by the charter, consistent
with the charter.
(h) REIMBURSEMENT OF DIRECTOR'S EXPENSES INCURRED WHILE APPEARING
AS 'WITNESS. This section does not limit the corporation's power to pay or
reimburse expenses incurred by a director in
II-3
<PAGE> 152
connection with an appearance as a witness in a proceeding at a time when the
director has not been made a named defendant or respondent in the proceeding.
(i) DIRECTOR'S SERVICE TO EMPLOYEE BENEFIT PLAN. For purposes of
this section:
(1) The corporation shall be deemed to have requested a
director to serve an employee benefit plan where the performance of the
director's duties to the corporation also imposes duties on, or otherwise
involves services by, the director to the plan or participants or beneficiaries
of the plan;
(2) Excise taxes assessed on a director with respect to
an employee benefit plan pursuant to applicable law shall be deemed fines; and
(3) Action taken or omitted by the director with respect
to an employee benefit plan in the performance of the director's duties for a
purpose reasonably believed by the director to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is not opposed to the best interests of the corporation.
(j) OFFICER, EMPLOYEE OR AGENT. Unless limited by the charter:
(1) An officer of the corporation shall be indemnified as
and to the extent provided in subsection (d) of this section for a director and
shall be entitled, to the same extent as a director, to seek indemnification
pursuant to the provisions of subsection (d);
(2) A corporation may indemnify and advance expenses to
an officer, employee, or agent of the corporation to the same extent that it
may indemnify directors under this section; and
(3) A corporation, in addition, may indemnify and advance
expenses to an officer, employee, or agent who is not a director to such
further extent, consistent with law, as may be provided by its charter, bylaws,
general or specific action of its board of directors, or contract.
(k) INSURANCE. A corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee, or agent
of the corporation, or who, while a director, officer, employee, or agent of
the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise, or
employee benefit plan against any liability asserted against and incurred by
such person in any such capacity or arising out of such person's position,
whether or not the corporation would have the power to indemnify against
liability under the provisions of this section.
(l) REPORT OF INDEMNIFICATION TO STOCKHOLDERS. Any
indemnification of, or advance of expenses to, a director in accordance with
this section, if arising out of a proceeding by or in the right of the
corporation, shall be reported in writing to the stockholders with the notice
of the next stockholders' meeting or prior to the meeting.
II-4
<PAGE> 153
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed as part of the Registration Statement.
The Registrant agrees to furnish supplementally a copy of any omitted schedule
to the SEC upon request.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Plan of Restructure
2.2 Agreement of Merger
3.1 * Articles of Incorporation of National Health Realty, Inc.
3.2 * Bylaws of National Health Realty, Inc.
3.3 Limited Partnership Agreement of NHR/OP, L.P.
4 Indenture of Trust and Security Agreement dated as of December 1, 1990 by and among
National Health Corporation Leveraged Employee Stock Ownership Trust, National Health
Corporation, and National HealthCorp L.P. to State Street Bank and Trust Company of
Connecticut, National Association, as Indenture Trustee and Barnett Banks Trust Company,
National Association, as Florida Co-Indenture Trustee
5 * Legal Opinion of McGuire, Woods, Battle and Boothe, counsel to the Registrant, as to the
due formation of the REIT
8 Form of Legal Opinion of Goodwin Procter & Hoar, counsel to the Registrant, as to the tax
effect to security holders
10.1 Master Agreement of Lease effective as of January 1, 1998 by and among National Health
Realty, Inc., NHR/OP, L.P. and National HealthCare Corporation.
10.2 Advisory, Administrative Services and Facilities Agreement effective as of January 1, 1998
between National Health Realty, Inc., NHR/OP, L.P. and National HealthCare Corporation.
10.3.1 * Form of National Health Realty, Inc. 1997 Employee Stock Purchase Plan
10.3.2 Form of National Health Realty, Inc. 1997 Stock Option and Stock Appreciation Rights Plan
10.4 Loan Agreement dated as of April 21, 1995 by and between National HealthCare L.P. and First
American National Bank
10.5 Credit Agreement dated as of December 31, 1996 by and among National HealthCare L.P., The
Banks, and SunTrust Bank, Nashville, N.A., as Agent
10.6 Reimbursement and Letter of Credit Agreement dated as of June 1, 1989 among West Plains
Manor, National HealthCare L.P. and The Bank of Tokyo, Ltd. New York Agency
10.7 Guaranty Agreement dated as of June 1, 1989 by and between National HealthCare L.P. and The
Bank of Tokyo, Ltd., New York Agency
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP, independent public accountants
24 Power of Attorney (included on the signature page hereto)
</TABLE>
* To be filed by amendment.
(b) The Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been omitted.
II-5
<PAGE> 154
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1. That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
2. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
3. That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
4. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
5. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form S-4, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
6. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became Effective.
II-6
<PAGE> 155
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement on Form S-4 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of Murfreesboro, State
of Tennessee on the 3rd day of October, 1997.
NATIONAL HEALTH REALTY, INC.
By: /s/ W. Andrew Adams
-------------------------------------
W. Andrew Adams
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature to the Registration Statement appears below
hereby appoints W. Andrew Adams and Richard F. LaRoche, Jr., and each of them,
as his attorneys-in-fact to execute in the name and on behalf of any such
person, individually and in the capacity stated below, and to file all
amendments and post-effective amendments to this Registration Statement, which
amendment or amendments may make such changes and additions in this
Registration Statement as such attorneys-in-fact may deem necessary or
appropriate.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed on the dates indicated by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ W. Andrew Adams Chairman, Chief Executive October 3, 1997
- -------------------------------------------- Officer and Director (Chief
W. Andrew Adams Executive Officer)
/s/ Donald K. Daniel Vice President, Controller, October 3, 1997
- -------------------------------------------- (Chief Financial Officer and
Donald K. Daniel Chief Accounting Officer)
/s/ J. K. Twilla Director October 3, 1997
- ---------------------------------------------
J. K. Twilla
Director October ___, 1997
- ---------------------------------------------
Olin O. Williams
/s/ Robert G. Adams Director October 3, 1997
- ---------------------------------------------
Robert G. Adams
/s/ Ernest G. Burgess Director October 3, 1997
- --------------------------------------------
Ernest G. Burgess
</TABLE>
II-7
