<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997
REGISTRATION NO. 333-37185
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
NATIONAL HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8051 APPLICATION FILED
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER IDENTIFICATION NO.)
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 HEALTHCARE CORPORATION
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 and all
other conditions to the Merger of National HealthCare L.P. with and into the
Registrant have been satisfied.
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. [ ]
------------------------
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, December 18, 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 November 7, 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 644,000 units
of limited partnership interest in NHR/OP, L.P., a newly
formed Delaware limited partnership which will be the
operating entity of the REIT (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) approximately $105.9 of assumed 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 and to approve the Merger as required
by Section 6.4 of the Partnership Agreement.
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 DECEMBER 18, 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, December 18, 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 644,000 units of
limited partnership interest in NHR/OP, L.P., a newly formed
Delaware limited partnership which will be the operating
entity of the REIT (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 November 7,
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
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 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 December 18, 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 ___, 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 644,000 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." 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) approximately $105.9 of assumed liabilities (the
"Assumed Liabilities"). See "Business -- The REIT" for a more complete
description of these assets and liabilities.
Unitholders do not have appraisal rights in connection with the Plan
of Restructure. See "Voting and Proxy Information."
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 19 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
<PAGE> 5
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 November ____, 1997.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
INTRODUCTION ............................................................................................... 1
AVAILABLE INFORMATION ...................................................................................... 1
SUMMARY OF CERTAIN INFORMATION ............................................................................. 2
SUMMARY OF RISK FACTORS .................................................................................... 6
Summary Historical and Pro Forma Financial Information .......................................... 8
THE PLAN OF RESTRUCTURE .................................................................................... 9
Background and Reasons for the Plan of Restructure .............................................. 9
Certain Transactions Preceding the Distribution ................................................. 11
Manner of Effecting the Distribution and Merger ................................................. 11
Conditions to the Plan of Restructure ........................................................... 11
Businesses of the REIT and the Corporation after the Plan of Restructure ........................ 12
NHC's Outstanding Options and Convertible Debentures ............................................ 12
Effect on NHC Units ............................................................................. 12
Listing and Trading of Shares and REIT Shares ................................................... 15
Termination ..................................................................................... 15
RISK FACTORS ............................................................................................... 16
Plan of Restructure ............................................................................. 16
Termination of NHC as a Limited Partnership .......................................... 16
Lack of Established Market ............................................................ 16
No Arms' Length Negotiation With the Plan of Restructure .............................. 16
The REIT ........................................................................................ 16
REIT's Reliance on the Corporation .................................................... 16
Conflicts of Interest ................................................................. 17
Lack of Consents ...................................................................... 18
Agreement of REIT to Only Do Business With the Corporation ............................ 18
Significant Debt Level ................................................................ 18
Involvement with Florida Convalescent Centers, Inc. ................................... 19
Location of Owned Healthcare Facilities ............................................... 19
Outstanding NHC Options and Convertible Debentures .................................... 19
Lack of Title Insurance ............................................................... 19
Adverse Consequences of the REIT's Failure to Qualify as a Real Estate Investment Trust 20
Certain Restrictions on Transfer of REIT Shares; Business Combinations ................ 21
Environmental Matters ................................................................. 22
Dependence on Management and Skilled Personnel ........................................ 22
No Public Market ...................................................................... 22
Anti-takeover Considerations .......................................................... 22
The Corporation ................................................................................. 23
Conflicts of Interest ................................................................. 23
Dependence on Reimbursement by Third-Party Payors ..................................... 23
FCC Lawsuit ........................................................................... 24
Certain Guaranteed Debt ............................................................... 25
Lack of Consents; Acceleration of Certain Maturities .................................. 25
Impact of Health Care Reform and Limits on Government Reimbursement and
Other Payments ........................................................................ 26
Government Regulation ................................................................. 26
Self-Referral and Anti-Kickback Legislation ........................................... 27
Relationships between Long-Term Care Facilities and Other Providers ................... 27
Third-Party Indebtedness Secured By Assets Leased or Managed By Corporation ........... 27
Competition ........................................................................... 27
Concentration of the Corporation's Operations in Certain States ....................... 28
Liability and Insurance ............................................................... 28
Dependence on Management and Skilled Personnel ........................................ 28
Ability to Acquire Additional Long-Term Care Facility Operations ...................... 28
No Public Market ...................................................................... 29
Lack of Dividends ..................................................................... 29
Anti-takeover Considerations .......................................................... 29
Risks Associated With Forward Looking Statements ................................................ 29
</TABLE>
i
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<TABLE>
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PAGE
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VOTING AND PROXY INFORMATION ........................................ 30
Voting Procedures ........................................ 30
Revocation of Proxies .................................... 30
Vote Required; Quorum .................................... 30
Solicitation of Proxies .................................. 30
Independent Auditors ..................................... 30
No Appraisal Rights ...................................... 30
Other Matters ............................................ 30
PRICE RANGE OF NHC UNITS ............................................ 31
DIVIDEND AND DISTRIBUTION POLICY .................................... 32
NHC ...................................................... 32
The REIT ................................................. 32
The Corporation .......................................... 32
BUSINESS ............................................................ 33
NHC ...................................................... 33
The REIT ................................................. 33
The Corporation .......................................... 36
RELATIONSHIP BETWEEN THE REIT AND THE
CORPORATION AFTER THE RESTRUCTURE ........................ 52
The Assumed Liabilities .................................. 52
The Lease ................................................ 52
Advisory, Administrative Services and Facilities Agreement 54
PRO FORMA FINANCIAL INFORMATION ..................................... 56
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......... 63
NHC ...................................................... 63
The Corporation .......................................... 68
The REIT ................................................. 68
MANAGEMENT .......................................................... 70
NHC ...................................................... 70
The REIT ................................................. 76
The Corporation .......................................... 77
CERTAIN TRANSACTIONS ................................................ 81
National ................................................. 81
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ......................... 82
NHC ...................................................... 82
The REIT ................................................. 83
The Corporation .......................................... 84
DESCRIPTION OF SECURITIES ........................................... 85
Shares of the Corporation ................................ 85
Shares of the REIT ....................................... 86
Operating Partnership Agreement .......................... 88
COMPARISON OF STOCKHOLDER/UNITHOLDER RIGHTS ......................... 90
Fiduciary Duties ......................................... 98
FEDERAL INCOME TAX CONSIDERATIONS ................................... 99
Introduction ............................................. 99
Certain Differences Between the Ownership of Units, Shares 99
The REIT ................................................. 100
Opinion of REIT Counsel .................................. 102
Requirements for Qualification ........................... 102
Failure to Qualify ....................................... 105
Taxation of U.S. Stockholders ............................ 105
</TABLE>
ii
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PAGE
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Special Tax Considerations for Foreign Stockholders ......... 107
Information Reporting Requirements and Backup Withholding Tax 108
Other Tax Considerations .................................... 108
Alternative Minimum Tax ..................................... 108
ERISA Considerations ........................................ 109
The Corporation ............................................. 109
Taxation Generally .......................................... 111
State and Local Taxes ....................................... 111
Unitholders Should Seek Their Own Tax Advice ................ 111
LEGAL MATTERS .......................................................... 112
EXPERTS ................................................................ 112
GLOSSARY OF DEFINED TERMS .............................................. 113
INDEX TO FINANCIAL STATEMENTS .......................................... F-1
APPENDICES
1. Plan of Restructure ...................................... A-1
2. Agreement of Merger ...................................... B-2
</TABLE>
iii
<PAGE> 9
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 or their subsidiaries 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 or their subsidiaries 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 Plan of Restructure, 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
<PAGE> 10
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.
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.
<TABLE>
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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."
REIT SHARES TO BE DISTRIBUTED.................... Approximately 10,013,400 shares of common stock of National
Health Realty, Inc., a Maryland corporation. The actual num
ber 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
number 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."
</TABLE>
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CONFLICTS OF INTEREST ........................... The REIT and the Corporation will have identical boards of
directors, except for one, which directors are also the same as
the Board of Directors of NHC. In addition, the Corporation
will manage the REIT pursuant to the REIT Advisory
Agreement and the REIT will have no employees. Pursuant
to the REIT Advisory Agreement, the REIT has agreed to only
do business with the Corporation as long as both the REIT
Advisory Agreement and the NHI Advisory Agreement (as
hereinafter defined) are obligations of the Corporation.
Therefore, there has been no arms' length negotiations among
NHC, the REIT and the Corporation with respect to the Plan of
Restructure, the Leases or the REIT Advisory Agreement. No
assurance can be given that unrelated entities would have
agreed to enter into the above agreements on the same or
similar terms. In addition, there is not likely to be arms' length
negotiations with respect to future transactions between the
REIT and the Corporation.
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 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."
APPRAISAL RIGHTS ................................ Unitholders who object to the Plan of Restructure have no
appraisal, dissenters' or similar rights. See "Voting and Proxy
Information -- No appraisal Rights."
REIT'S INITIAL ASSETS AND DEBT................... The REIT's initial assets will consist of: (i) effective ownership of
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. As of October 31, 1997 this includes the operation or
management of 111 long-term health care centers, 33 home care programs,
13 assist living centers and five retirement centers. See "Business --
The Corporation."
</TABLE>
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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 and is taxed for
federal income tax purposes as a partnership. As a publicly traded
partnership, under current federal tax laws, beginning January 1, 1998, NHC
would be taxed as a corporation, rather than a partnership. Management of
NHC believes that by dividing NHC into two entities, the form of one of
which will be such that it will, in the attached opinion of Goodwin,
Procter & Hoar LLP, Boston, Massachusetts, qualify to be taxed as a real
estate investment trust for federal income tax purposes and one of
which will be a corporation and, in the attached opinion of Harwell Howard
Hyne Gabbert & Manner, P.C., taxed as such for federal income tax purposes,
NHC Unitholders will be able to retain some benefits of an entity the
income of which is generally not taxed at the entity level for federal
income tax purposes with respect to the income derived from assets
transferred to the REIT. See "Federal Income Tax Considerations -- The
REIT" and "-- The Corporation." In addition, it is anticipated there will
be a public market for the REIT Shares and the Shares, though no assurance
can be given that an active trading market will in fact develop. NHC
intends to transfer assets to the REIT only of a nature that will enable
the REIT to qualify for taxation for federal income tax purposes as a real
estate investment trust and not as a taxable corporation. See "Federal
Income Tax Considerations -- The REIT." See generally "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.
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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 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. 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
</TABLE>
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<S> <C>
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 AND DISTRIBUTIONS......................... The REIT intends to pay quarterly distributions 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 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 make distributions in excess of 95% of its REIT taxable
income. Payment of distributions, 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 distributions that would initially be at the
annual rate of $1.33 per REIT Share of which $0.23 is
expected to be a return of capital. See "Dividend and
Distribution Policy -- The REIT" for a description of the
calculation of the initial distribution. 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
</TABLE>
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<S> <C>
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 convertible notes issued in
October 1997 will only be converted into Shares. See "The
Plan of Restructure -- NHC's Outstanding Options and
Convertible Debentures."
</TABLE>
SUMMARY OF RISK FACTORS
Approval of the Plan of Restructure, investment in the REIT Shares
and the Shares involve various risks. The following is a brief summary of the
most significant risks. Unitholders should carefully consider all of the risks
factors described under "Risk Factors" beginning on page 16.
<TABLE>
<S> <C>
TERMINATION OF NHC AS A LIMITED
PARTNERSHIP .........................................NHC is a limited partnership and as such makes quarterly
distributions to its Unitholders without incurring taxation at
the partnership level. Neither the REIT nor the Corporation
anticipate making distributions to their stockholders to the
extent NHC has historically made distributions. However, as
a result of the change in tax laws, NHC would not be able to
make distributions in the future to the same extent it has in
the past. See "Risk Factors -- Plan of Restructure --
Termination of NHC as a Limited Partnership."
NEWLY ORGANIZED COMPANIES ..............................NHC has been in existence and has been publicly traded since
1987. The REIT and the Corporation are newly formed
entities and have no history of operations or market trading.
No assurance can be given that a market will develop. See
"Risk Factors -- Plan of Restructure -- Newly Organized
Companies."
REIT'S RELIANCE ON THE CORPORATION .....................All of the REIT's assets will be operated by the Corporation and
the Corporation will manage the REIT pursuant to the REIT
Advisory Agreement. Therefore, the REIT will be dependent
upon the Corporation for successful operations. See "Risk
Factors -- The REIT -- REIT's Reliance on the
Corporation."
LACK OF ARMS' LENGTH TRANSACTION .......................NHC's directors are also directors of the REIT and the
Corporation. Therefore, there has been no arms' length
negotiations with respect to the Plan of Restructure, the
Leases or the REIT Advisory Agreement. See "Risk Factors
-- Plan of Restructure -- No Arms' Length Negotiations with
respect to the Plan of Restructure."
</TABLE>
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LACK OF CONSENTS ..................................... The REIT is assuming approximately $105.9 million in
Assumed Liabilities and the Corporation will retain
approximately $112.6 million of NHC's debt. Neither NHC,
the REIT nor the Corporation have obtained the written
consent of these lenders to the Plan of Restructure.
Therefore, these lenders could claim that the Plan of
Restructure constitutes a default under the relevant loan
agreements. Such a claim could have a material adverse
effect on the Corporation and the REIT. See "Risk Factors
-- The REIT -- Lack of Consents" and "-- The Corporation
-- Lack of Consents."
CONFLICTS OF INTEREST ................................ All of the Corporation's initial directors are also directors of the
REIT. Thus, there will be a potential conflict of interest of
the directors' duties to the REIT shareholders and
Corporation shareholders. On an ongoing basis, the
Corporation will be the REIT's investment advisor and will
manage the REIT's operations and the REIT will be the
landlord with respect to 24 facilities operated by the
Corporation. The directors of the REIT and the Corporation
will have a conflict of interest in (i) assessing the quality of
the Corporation's management services; (ii) assessing the
quality of the REIT's services as landlord; (iii) determining if
the Leases should be extended; (iv) determining whether
the REIT Advisory Agreement should be terminated; and (v)
determining if there should be, and if so, the terms of any
future transactions between the REIT and the Corporation.
This conflict of interest could have an impact on the
transactions between the REIT and the Corporation which
transactions could have a material impact on either the
REIT, the Corporation, or both. See "Risk Factors -- The
REIT -- Conflicts of Interest" and "-- The Corporation --
Conflicts of Interest."
AGREEMENT OF REIT TO ONLY DO BUSINESS
WITH THE CORPORATION ............................. Pursuant to the REIT Advisory Agreement, the REIT has
agreed that as long as both the REIT Advisory Agreement
and the NHI Advisory Agreement (as hereinafter defined)
are obligations of the Corporation, the REIT will only do
business with the Corporation and will not compete with
NHI. As a result, the REIT is severely limited in its ability to
grow and expand its business. The REIT Board of Directors
does not intend to seek to expand the REIT's investments.
Such a restriction could have a material adverse effect on
the long-term market value of the REIT and the REIT
Shares. See "Risk Factors -- The REIT -- Agreement of
REIT to only do business with the Corporation."
</TABLE>
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<PAGE> 17
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
----------------------------
NINE
YEAR MONTHS
NINE MONTHS ENDED ENDED ENDED
OR AS OF YEAR ENDED OR OR AS OF OR AS OF
SEPTEMBER 30, AS OF DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------ ---------------------------------------------------- ------------ -------------
1997 1996 1996 1995 1994 1993 1992 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues ....... $324,043 $279,602 $388,660 $350,957 $298,901 $269,858 $216,378 $379,623 $316,576
Income before taxes. 23,677 19,542 29,286 21,115 15,853 37,562 9,501 15,504 13,989
Net Income ......... 23,677 19,542 29,286 21,115 15,853 37,562 9,501 9,382 8,603
Earnings per Unit/
Share ........... 2.33 1.98 2.98 2.31 1.80 4.05 1.23 1.02 0.88
BALANCE SHEET DATA:
Working capital .... $ 19,012 $ 13,025 $ 7,291 $ 30,393 $ 42,468 $ 69,493 $ 37,983 $ 40,483
Total assets ....... 444,455 404,740 404,740 355,491 396,133 344,680 304,074 235,628
Long-term debt ..... 142,372 124,678 124,678 100,871 104,243 54,625 49,299 55,652
Partners' Capital .. 144,084 128,537 128,537 108,899 101,006 92,526 67,922 0
Stockholders' Equity 0 0 0 0 0 0 0 21,977
</TABLE>
NATIONAL HEALTH REALTY, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
------------------------------
NINE
YEAR MONTHS
ENDED ENDED
OR AS OF OR AS OF
DECEMBER 31 SEPTEMBER 30,
----------- -------------
1996 1997
---- ----
<S> <C> <C>
INCOME STATEMENT DATA:
Net Revenues ................. $ 20,210 $ 17,257
Net Income ................... 11,893 8,585
Earnings per share ........... 1.23 0.85
BALANCE SHEET DATA:
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Total Assets ................. $233,214
Long-term debt ............... 86,720
Stockholders' Equity.......... 137,118
</TABLE>
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<PAGE> 19
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
11
<PAGE> 20
- 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.
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
"cash-out" 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:
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- 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 and general
discussions with its independent accountants and regular outside legal counsel
the Board decided that the disadvantages of each of the structures in numbered
paragraphs 1 to 4, above, outweighed the advantages in comparison to this final
described structure. The Board discussed and considered all of the factors
listed and did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered in its
determination that the Plan of Restructure was the best option and in the best
interest of the unitholders. Although the Board was unable to quantify the above
factors (such as the value of maintenance of a public market, the value of
simplicity in tax reporting, expansion of the investor basis, the amount of
future taxation) since such factors are dependent on future facts, to the extent
factors are analyzable in quantifiable terms (such as it is better to have
greater rather than less after tax income and distributions), the Board used
good faith and reasonable business judgment in determining such factors and
making the conclusions. The Board of Directors did not seek or obtain a fairness
opinion, appraisal or other report concerning the Plan of Restructure. While NHC
is a finite life entity, its term of existence is until December 31, 2085. In
addition, the Units are traded on AMEX. As a result, the Board of Directors did
not consider the change from a finite life entity to an infinite life entity a
significant factor.
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 757,058 REIT Shares and 644,000 OP
Units, in connection with approximately 1,400,806 NHC Units owned by National.
National will receive the 644,000 OP Units in order for the REIT to meet one of
the requirements of a real estate investment trust. If National received
1,400,806 REIT Shares, it would own more than 10% of the outstanding REIT
Shares. See "Description of Securities -- Shares of the REIT -- REIT Provisions"
and "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 his Shares in the market, or requests the
Corporation's transfer agent to issue a stock certificate of the Corporation in
exchange for his certificate representing his NHC Units. 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
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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."
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.
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 and the
REIT. 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
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for such options and receipt thereof shall be divided pro rata between REIT and
Corporation (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. In each of the
first three quarters of 1997, NHC made distributions of $0.60 per Unit and has
announced its fourth quarter distribution of $0.60. In 1996, NHC paid an annual
cash distribution of $2.16 per Unit. See "Dividend and Distribution Policy --
NHC." 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 REIT 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 distributions.
See "Dividend and Distribution Policy" and "Risk Factors -- Risks Associated
with Forward Looking Statements."
Shares. Dividends may be declared from funds legally available
therefor in the discretion of the Corporation 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.
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; however, no assurance
can be made that an active market will develop or be sustained for the REIT
Shares. 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; however, no assurance can be made that
an active market will develop or be sustained for the Shares. 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 at which time, unless the Partnership Agreement is amended, NHC would
liquidate. However, pursuant to the Plan of Restructure, NHC will merge with and
into the Corporation and thereafter cease to exist as a limited partnership.
Therefore, the Unitholders will not be entitled to a return of capital in the
year 2085.
REIT. The REIT will have perpetual existence.
Corporation. The Corporation will have perpetual existence.
FEDERAL INCOME TAXATION
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NHC Units. Each Unitholder, as a partner for federal income tax
purposes, annually includes the Unitholder's share of the income and gain and,
subject to certain limitations, the losses, deductions and credits of NHC in
computing the Unitholder's taxable income for federal income tax purposes
without regard to whether cash or other property is distributed to such
Unitholder. Generally, distributions of property are not taxable to Unitholders
and distributions of cash or marketable securities are also not taxable to a
Unitholder, unless such distributions exceed the Unitholder's adjusted tax basis
in such Unitholder's Units. As a partner of a publicly traded partnership, a
Unitholder is generally not permitted to offset losses from other publicly
traded partnerships or passive activities with such Unitholder's share of NHC
income. A Unitholder is also not permitted to use such Unitholder's share of
NHC's losses to offset passive income from other sources. Instead, such losses
may be carried forward as a deduction against future income of the Unitholder
from NHC or when the Unitholder disposes of such Unitholder's entire interest in
NHC.
REIT Shares. Shareholders of the REIT will have taxable income
from the REIT's operations only to the extent that taxable dividends and other
distributions are declared and paid on the REIT Shares. Unlike Unitholders, REIT
Shareholders, as shareholders of a corporation, are taxed based upon the amount
of distributions received from the REIT, the taxable portion of which will
depend upon the amount of the REIT's earnings and profits. Such income may not
be used to offset passive losses. Losses of the REIT are not passed through to
its shareholders.
Shares. Shareholders will have taxable income from the
Corporation's operations only to the extent that taxable dividends and other
distributions are declared and paid by the Corporation on the Shares. Unlike
Unitholders, Shareholders, as shareholders of a corporation, are taxed based
upon the amount of distributions received from the Corporation, the taxable
portion of which will depend upon the amount of the Corporation's earnings and
profits. Such income may not be used to offset passive losses. Losses of the
Corporation are not passed through to its Shareholders
For further discussion of certain differences in the federal
income tax treatment of such equity interests, see "Federal Income Tax
Considerations -- Certain Differences Between the Ownership of Units, Shares 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.
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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.
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 basis 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 distributions 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 Units 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
distribution 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
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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.
PLAN OF RESTRUCTURE
TERMINATION OF NHC AS A LIMITED PARTNERSHIP
NHC is currently a limited partnership, and as such has a finite life
and makes quarterly distributions to its Unitholders. NHC is able to make such
distributions because as a limited partnership it is not taxed at the
partnership level. In 1996, NHC made distributions of $2.16 per Unit. Neither
the REIT nor the Corporation anticipate making distributions to their
stockholders to the extent NHC has historically. The REIT anticipates initially
making annual distributions of approximately $1.33 per REIT Share. The
Corporation does not anticipate initially paying any dividends. Therefore, as a
result of the Plan of Restructure, Unitholders should not expect to receive
distributions as stockholders of the REIT and the Corporation to the same extent
they received as Unitholders. Unitholders, however, should realize, that as a
result of the change in tax laws, NHC would be taxed as a corporation beginning
in 1998 and would therefore not be able to continue to make distributions as it
had in the past.
LACK OF ESTABLISHED MARKET
NHC has been in existence and its partnership Units have been traded
on the American Stock Exchange since 1987. However, both the REIT and the
Corporation have been recently organized and have no stand-alone operating
history. There has been no market for the REIT Shares or the Shares and no
assurance can be given that an active market will develop or be sustained. In
addition, even if an active market does develop, no assurance can be made that
the combined price at which the REIT Shares and the Shares may trade will not be
lower than the current trading price of NHC Units.
NO ARMS' LENGTH NEGOTIATION WITH THE PLAN OF RESTRUCTURE
The Board of Directors of NHC adopted the Plan of Restructure in
response to the changes in federal income tax laws. All of the directors of NHC
will also be initial directors of the REIT and the Corporation. In addition, all
of the initial directors of the REIT occupy positions with the Corporation.
Although NHC's
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management believes the terms of the Plan of Restructure, the Leases and the
REIT Advisory Agreement are fair and reasonable, none of the terms of the Plan
of Restructure, the Leases or the REIT Advisory Agreement were negotiated on an
arms' length basis. 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. As a result, there can be no assurance that the
terms of such agreements are the same as would have been agreed to if the
agreements had been negotiated on an arms' length basis.
THE REIT
REIT'S RELIANCE ON THE CORPORATION
The Owned Healthcare Facilities initially consist of 17 skilled
nursing centers, six assisted living centers and one retirement center each of
which will be leased to, and operated by the Corporation. In addition, each of
the Notes represent loans made to third party owners of nursing centers managed
by 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 and the healthcare facilities securing the Notes, by the Corporation.
Payments of rent under the Leases comprise a substantial portion of the REIT's
net income, with interest payments on the Notes comprising the remainder of such
income. If the Corporation is unable to operate the Owned Healthcare Facilities
or the 23 facilities securing the Notes in such a manner that a significant
number of the healthcare facilities are able to generate sufficient cash flow to
pay the rent due under the Leases or the interest and principal payments under
the Notes, it would have a material adverse effect on the REIT.
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 and on the market value of the REIT Shares.
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 employees
of National since the Corporation has no employees. Therefore, the termination
of the REIT Advisory Agreement by the Corporation, or the termination by
National of the Employee Services Agreement would leave the REIT with no
employees. Although the REIT believes it could replace such employees, the
termination of either of those agreements could have a material adverse effect
on the REIT.
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 ___ relating to the Corporation are also applicable to the
REIT.
CONFLICTS OF INTEREST
Since all of the REIT's initial directors also occupy positions with
the Corporation, there will be conflicts of interest in their duties to the
Corporation's shareholders and the REIT's shareholders. On an ongoing basis, the
Corporation will be the REIT's investment advisor and will provide all employees
required for the
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operation of the REIT's business. Further, the REIT is likely to purchase
additional equity interests in real estate from, or make additional mortgage
loans to, the Corporation. The directors of the REIT 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. Again, these future transactions between the REIT and the
Corporation will not be negotiated on an arm's length basis and no assurance can
be given that the directors of the REIT will demand the same terms as might be
demanded by a board of directors that was not involved in both sides of the
transaction.
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
which could have a material adverse impact on the REIT's results of operations
and the market value of the REIT Shares.
All but three of the directors of the REIT, and both 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. When recognized, these disputes will be settled by binding
arbitration; however, no assurance can be given that the board of directors will
recognize conflicts between the REIT and the Corporation to the same extent that
a group of independent directors might recognize conflicts. This failure to
recognize conflicts between the REIT and the Corporation could result in the
REIT not making demands on the Corporation which an independent board would
make. Depending on the circumstances of such potential conflicts, failure to
make certain demands could have a negative impact on the results of operations
of the REIT and market value of the REIT Shares.
In connection with the Distribution, National, who is the
Administrative General Partner of NHC, will receive approximately 794,000 REIT
Shares and approximately 644,000 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. While the management of NHC does not believe that National as a
related party is being treated more beneficially than all of the other
Unitholders, Unitholders should be aware that National will not receive the same
assets in the Distribution as 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 and therefore may not be considering the REIT's interest to the
exclusion of NHC's and the Corporation's interest. 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.
LACK OF CONSENTS
The REIT is assuming approximately $105.9 million in Assumed
Liabilities. In addition, the Corporation will retain approximately $112.6
million 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
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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.
In addition, the REIT has received commitment letters for a proposed $95 million
unsecured loan which would be used to payoff most of the Assumed Liabilities.
However, such consents have not been received yet and the new loan has not been
obtained yet. Therefore, if the lenders of the Assumed Liabilities were to
assert 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 REIT (and the
Corporation) perform under the loan agreements and pay the full amount of such
debt plus any prepayment penalties and costs. In addition, if the lenders of the
Corporations $112.6 million debt assert that the transfer of the Owned
Healthcare Facilities and the Notes constituted a default under the relevant
loan documents, such lenders could demand that the Corporation and the REIT
perform under the applicable loan agreements and pay in full the amount of such
debt plus any prepayments 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. In addition, failing to timely
repay such amounts could cause cross-defaults under other loans which could
raise additional claims against either the REIT or the Corporation or both. No
assurance can be given that if any such claims are made by lenders, such claims,
if successful, would not have a material adverse effect on the REIT's financial
condition and results of operations and the market value of the REIT Shares.
In addition, effecting 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. Such
claims, is successful, could have a material adverse effect on the REIT and the
market value of the REIT Shares.
AGREEMENT OF REIT TO ONLY DO BUSINESS WITH THE CORPORATION
Pursuant to the REIT Advisory Agreement, the REIT has agreed that as
long as both the REIT Advisory Agreement and the NHI Advisory Agreement (as
hereinafter defined) are obligations of the Corporation, the REIT will only do
business with the Corporation and will not compete with NHI. As a result, the
REIT is severely limited in its ability to grow and expand its business. The
REIT Board of Directors does not intend to seek to expand the REIT's
investments. Such a restriction could have a material adverse effect on the
long-term market value of the REIT and the REIT Shares. See "Risk Factors -- The
REIT -- Agreement of REIT to Only Do Business With the Corporation."
SIGNIFICANT DEBT LEVEL
As of September 30, 1997, NHC has approximately $210,947,000 in long
term debt. Of this amount, $28,739,000 is represented by the 6% Debentures with
a conversion price of $15.21. An additional $31,811,000 is identified as "debt
service by other parties." This is debt which is also reflected on the balance
sheet of National Health Investors, Inc., but which is serviced by NHC's lease
payment. The third component of NHC's debt is approximately $142,372,000. Of
this amount, approximately $30.9 million is represented by a fixed rate first
mortgage note, purchased by a consortium of insurance companies. The projects
securing this loan are cross-collateralized and cross-defaulted. The balance of
the long term indebtedness is represented either by small tax-exempt bond
financings, which are not cross-collateralized or cross-defaulted, or NHC's
unsecured credit agreement.
NHC's unsecured credit agreement has certain negative covenants,
which are customary and usual in such lines of credit. These negative covenants
prohibit (i) any additional indebtedness in an amount greater than $20 million
over the line of credit, (ii) indebtedness other than indebtedness which is
subordinated to the line of credit, and (iii)
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indebtedness other than indebtedness incurred in the normal course of business
in the form of trade payables, taxes and other governmental charges. NHC is in
compliance with these covenants. See also "Relationships between the REIT and
the Corporation -- Assumed Liabilities" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- NHC -- Liquidity
Capital Resources and Financial Condition" and "-- The REIT -- Liquidity and
Capital Resources."
Effective with the restructuring the REIT will assume approximately
$105.9 of NHC's indebtedness which includes approximately $75 million unsecured
indebtedness. The REIT intends to pay off the $75 million unsecured indebtedness
with a new line of credit with Bank of Tokyo/Mitsubishi as Agent, which line of
credit will also include an additional $20 million of unfunded but available
borrowing capacity. Although the REIT has received commitment letters from three
banks in connection with this new line of credit, the new line of credit has not
closed and no assurance can be given that such New REIT Credit Agreement will be
obtained. It is anticipated that the New REIT Credit Agreement will be unsecured
and will contain similar negative covenants to those presently existing on NHC's
line of credit. The balance of NHC's debt will be retained by the Corporation.
There is no restriction in the Corporation's Certificate or policy of the
Corporation's management limiting the amount of debt the Corporation may incur.
The REIT will take the Owned Healthcare Facilities subject to Assumed
Liabilities of approximately $105.9 million. The REIT anticipates repaying $75
million of the Assumed Liabilities with the proceeds of a New REIT Credit
Agreement in the amount of $95 million with the Bank of Tokyo/Mitsubishi as
Agent, if obtained. The balance of the $105.9 million are secured liabilities at
fixed rates of 8.0% and 8.64%, which are amortizing and will be paid in full by
the end of the calendar year 2005.
The REIT will initially have debt representing approximately 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. In
addition, there is no restriction in the REIT Charter or policy of the REIT's
management limiting the amount of debt the REIT may incur. 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.
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."
LOCATION OF OWNED HEALTHCARE FACILITIES
The Owned Healthcare Facilities are located in the states of Alabama,
Florida, Missouri, South Carolina and Tennessee, all within the southeastern
United States. In addition, all but one of the Notes are secured by healthcare
facilities in Florida. Therefore, the REIT will be subject to conditions in
these geographic areas, such as local economies, natural disasters, real estate
values, state regulation and reimbursement. The concentration of its assets in
five states make the REIT more susceptible to local conditions than if the
REIT's property was spread over a wide geographic area.
OUTSTANDING NHC OPTIONS AND CONVERTIBLE DEBENTURES
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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.
LACK OF TITLE INSURANCE
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. Such a title claim could have a material adverse effect on the REIT
and the market value of the REIT Shares.
ADVERSE CONSEQUENCES OF THE REIT'S FAILURE TO QUALIFY AS A REAL
ESTATE INVESTMENT TRUST
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
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the Internal Revenue Service (the "IRS") with respect to its qualification as a
real estate investment trust. 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, Procter & 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 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
757,000 REIT Shares and approximately 644,000 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. 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."
INVESTMENT IN REAL ESTATE
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.
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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 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%
of the outstanding stock of the REIT. 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
distributions.
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
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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."
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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 of, or was
responsible for, the presence or disposal of such substances and liability 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.
Significant environmental problems on the Owned Health Facilities could cause a
significant reduction in the value of such property and could impose significant
liability on the REIT.
DEPENDENCE ON MANAGEMENT AND SKILLED PERSONNEL
The REIT believes it depends substantially on active involvement of
its senior managers, including its two executive officers W. Andrews Adams and
Richard F. LaRoche, Jr. (neither 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 5,000,000 shares of preferred
stock, the rights of which may be fixed by the Board of Directors without
shareholder approval and 20,000,000 shares of Excess Stock. 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
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certain transactions and amend certain provisions of the REIT Charter. The
foregoing matters may have the effect of discouraging or making more difficult
an acquisition or change of control of the REIT. See "Description of Securities
- -- Shares of the REIT -- Control Share Acquisitions."
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."
THE CORPORATION
CONFLICTS OF INTEREST
Since all but one of the Corporation's initial directors are also
directors of the REIT, there will be conflicts of interest in their duties to
the Corporation's shareholders and the REIT's shareholders. On an ongoing basis,
the Corporation will be the REIT's investment advisor and will provide all
employees required for the operation of the REIT's business. Further, the REIT
is likely to purchase additional equity interests in real estate from, or make
additional mortgage loans to, the Corporation. The directors of the Corporation
will have a conflict of interest in assessing the quality of the services of the
REIT as a landlord, determining if the Leased should be renewed, and determining
the terms of any leases to be entered into between the REIT and the Corporation.
Again, these future transactions between the REIT and the Corporation will not
be negotiated on an arm's length basis and no assurance can be given that the
directors of the Corporation will demand the same terms as might be demanded by
a board of directors that was not involved in both sides of the transaction.
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
Corporation will recognize a need for independent persons to determine how to
resolve such disputes. When recognized, these disputes will be settled by
binding arbitration; however, no assurance can be given that the Corporation's
board of directors will recognize conflicts between the REIT and the Corporation
to the same extent that a group of independent directors might recognize
conflicts. This failure to recognize conflicts between the REIT and the
Corporation could result in the Corporation not making demands on the REIT which
an independent board would make. Depending on the circumstances of such
potential conflicts, failure to make certain demands could have a negative
impact on the results of operations of the Corporation and market value of the
Shares.
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. In the event National were to fail to adequately provided
qualified employees or terminate the Employee Services Agreement, it would
likely have a material adverse impact on the Corporation's results of operations
and the market price of the Shares, at least in the short term.
Counsel to the REIT also represents the Corporation on certain matters and
therefore may not be considering the REIT's interest to the exclusion of NHC's
and the Corporation's interest. 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.
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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 September 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 the reviewing agency will agree upon the
measures to be taken to bring the facility into compliance with regulatory
requirements; however, the failure of the Corporation to comply with the
regulatory requirements could have material adverse effect on the Corporation's
results of operations. See "Business -- The Corporation -- Regulation."
QUI TAM LITIGATION
NHC and its General Partners are also defendants 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. Thus, the plaintiffs are now
Braeuning and the U.S. Department of Justice. By agreement, and with court
approval, the suit has been moved from the Pensacola District Court to the
Tampa, Florida, District Court and NHC's time for filing its Answer has been
extended through year end 1997. 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 and seeks unspecified damages. 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 NHC continues to schedule and prepare revised cost reports
and exception requests. It is anticipated that all years in question will be
reviewed prior to there being further action in this matter at the judicial
level. NHC is fully cooperating with the government in an attempt to determine
dollar amounts involved, and intends to aggressively pursue
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<PAGE> 39
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
Healthcare 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. While NHC cannot predict at this
time the ultimate outcome of the suit, NHC does not believe that this litigation
will have a material impact on NHC's (or the Corporation's) results of
operations or financial condition. NHC intends to strongly defend its actions in
this matter.
OIG FLORIDA AUDITS
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 our 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.
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 loss of management contract
revenue on each individual FCC center would not have a material impact on the
results of operations of the Corporation, but the loss of the revenues from all
sixteen centers at once would have a material impact. This impact would be off
set, however, by the receipt by the Corporation of its deferred contingency fee
and/or the fact that it might purchase some or all of the facilities; thus
allowing the revenues and results of operations to be maintained by the
Corporation; provided such fees or rights are not disallowed by the lawsuit. The
balance of the FCC contracts may be terminated in the years 2001-2003. See
"Business -- The Corporation -- Legal Proceedings."
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. The following table identifies the party on whose
behalf NHC has made such guarantees and the amount guaranteed as of September
30, 1997.
<TABLE>
<CAPTION>
Party Amount
----- ------
<S> <C>
Florida Convalescent Centers, Inc. $30,045,000
Health Care Realty of Osage Beach Ltd. 3,065,000
Health Care Realty of Macon Ltd 3,140,000
Southern Medical Associates, Inc. 6,482,000
Richland Place, Inc. 12,441,000
West Meade Place, LP 4,270,000
</TABLE>
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<TABLE>
<S> <C>
Stockbridge Investment Partners, Inc. and
York Hanover Nursing Centers, Inc. 5,000,000
Panama City Health Care Center, Inc. 4,720,000
---------
Total Guaranteed Debt $69,163,000
</TABLE>
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.
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. Although NHC, the REIT and the Corporation have obtained the oral
consents of these lenders and 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 and the Plan of Restructure, no assurance
can be made that such consents will be received. In addition, the Corporation
has received commitment letters for a proposed $35 million unsecured loan which
would be used to pay off some of the existing NHC debt. However, such consents
and the new loan have not been obtained yet. If the lenders of the Assumed
Liabilities and the other NHC debt were to assert that the Plan of Restructure
constituted a default under the relevant loan or guarantee agreement, then such
lenders could demand that the Corporation (and the REIT) perform under such
agreement and pay the full amount of such debt plus any prepayment penalties and
costs. There can be no assurance that the Corporation or the REIT would be able
to repay such debt or replace such debt on the same or similar terms, if at all.
In addition, failing to timely repay such amounts could cause cross defaults
under other loans, which could raise additional claims against either the
Corporation or the REIT or both. No assurance can be given that if any such
claims are made by lenders, such claims, if successful, would not have a
material adverse effect on the Corporation's financial condition, results of
operations and the market value of the Shares.
In addition, effecting 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.
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
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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, has been expanded 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, 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 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. NHC
currently has four unimplemented CONs and ten partially implemented CONs.
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<PAGE> 42
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.
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.
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<PAGE> 43
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."
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. The
Corporation will initially operate facilities in the southeastern states of
Alabama, Florida, Georgia, Indiana, Kentucky, Missouri, North Carolina, South
Carolina, Tennessee and Virginia. Each of these states are certificate of need
states, which generally require the state to approve the opening of any new
long-term healthcare facility. There are hundreds of operators of long-term
care facilities in these states, and no single operator, including NHC,
dominates any of these states, long-term care markets except for some small
rural markets which might have only a few long-term care facilities. 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
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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."
CONCENTRATION OF THE CORPORATION'S OPERATIONS IN CERTAIN STATES
All of the Corporation's facilities are located in the states of Alabama,
Florida, Georgia, Indiana, Kentucky, Missouri, North Carolina, South Carolina,
Tennessee and Virginia. As a result, the Corporation's results of operations are
influenced by various conditions specific to those nine states such as economic
conditions, regulatory environment, litigation environment and real estate
values. Each of the states in which the Corporation will initially operate is
located in the southeast, so economic factors that are specific to the
southeastern United States will have more of an impact on the Corporation than
if its operations were spread over a more diverse area. In addition, each of
these nine states require that certificates of need be obtained in order to open
or expand existing operations. As a result, before the Corporation can open new
facilities or expand the size of its existing facilities, the Corporation must
obtain a certificate of need from the state. In addition, five of these states
are part of the ORT Plus project being conducted by the Department of Health and
Human Services. As a result, the Corporation's facilities located in these
states, which are focusing on fraud in the areas of home health and nursing
homes, which may subject be subject to closer scrutiny by the federal government
than if they were located in states not part of ORT Plus. All of these factors
may make the Corporation's results of operations and the market value of the
Shares subject to changes or events in these nine states more significantly than
if the Corporation's operations were spread over a more expansive geographic
area.
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 and the Corporation intends to maintain 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. 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 officers, including W. Andrew Adams, Robert G. Adams, Richard
F. LaRoche, Jr., Steven A. Strawn, Donald K. Daniel, David Lassiter, Julia W.
Powell, Joanne G. Batey, D. Gerald Coggin and Kenneth D. DenBesten. 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
36
<PAGE> 45
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."
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."
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 Proxy Statement/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.
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<PAGE> 46
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 November
7, 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.
Although officers of NHC (to the level of Vice President) own or have the
authority to vote 2,588,961 Units or 29.2% of the outstanding Units, the
executive officers, directors and other affiliates of the General Partners own
or have the authority to vote approximately 4,804,329 Units or 54% of the
outstanding Units, which figure includes the Units voted by management. These
affiliates 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.
38
<PAGE> 47
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
Fourth Quarter (through November 17) 61.875 55.500
</TABLE>
On November 17, 1997, the last reported sale price of the Units on AMEX
was $57.50 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 November 17, 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.
39
<PAGE> 48
DIVIDEND AND DISTRIBUTION POLICY
NHC
NHC paid cash distributions of $0.60 during each of the first three
quarters of 1997 and has declared a distribution of $0.60 for the fourth quarter
1997. NHC has historically 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 distribution to
holders of its common stock and distribution to the OP Units equal to $1.33 per
REIT Share and OP Unit. The estimated cash distribution to be paid by the REIT
in the first year of operations is $1.33 per common share based on the following
assumptions:
(a) Rent income will be paid to the REIT in the amount of 9 1/2% of the
fair market value of the real estate assets ($145,888,000) owned;
(b) Interest income will be received by the REIT on first mortgage notes
receivable of $90,287,000 at 10.25%.
(c) Interest expense will be paid by the REIT on its debt ($106,130,000);
(d) Principal of notes payable will be paid as it amortizes;
(e) Administrative expenses of 2% revenues will be paid;
(f) 100% of the available cash flow after meeting all anticipated operating
requirements will be paid to shareholders as a cash distribution.
The cash distributions will be treated for tax purposes as a return of
capital to the extent they exceed earnings and profits of the REIT. A return of
capital is generally not taxable to individual shareholders except to the extent
it exceeds their tax basis. A return of capital which exceeds tax basis is
generally taxable to individual shareholders at capital gain rates. Of the
projected first year cash distributions of $1.33 per common share, approximately
$0.23 per common share is expected to be a return of capital. However no
assurances can be given that this distribution will be made. See " Risk Factors
- -- Risks Associated with Forward Looking Statements."
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.
40
<PAGE> 49
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 October 31, 1997, NHC operated 111 long-term healthcare centers with
a total of approximately 14,046 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 440 retirement
apartments located in one managed , three leased and one owned retirement
center. Additionally, NHC operates 13 assisted living centers at five owned, six
leased and two managed centers. Pursuant to the Plan of Restructure, NHC will
contribute to the REIT through fee ownership or 50 year capitalized leases, 17
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 to the Corporation.
NHC'S OPERATING ENVIRONMENT
All of NHC's facilities are located in the states of Alabama, Florida,
Georgia, Indiana, Kentucky, Missouri, North Carolina, South Carolina, Tennessee
and Virginia. As a result, NHC's results of operations are influenced by various
conditions specific to those nine states such as economic conditions, regulatory
environment, litigation environment and real estate values. Each of the states
in which NHC currently operates is located in the southeast, so economic factors
that are specific to the southeastern United States will have more of an impact
on NHC than if its operations were spread over a more diverse area.
Each of the states where NHC has long-term care operations require that
certificates of need be obtained in order to open or expand existing operations.
As a result, before NHC (or the Corporation after the Merger) can open new
facilities or expand the size of its existing facilities, NHC must obtain a
certificate of need from the state. This can also be a benefit to NHC, because
before any new operators can open competing facilities or expand their existing
facilities which may make it more difficult for new competitors to enter the
market.
In addition, five of the states in which NHC currently has operations are
part of the ORT Plus project being conducted by the Department of Health and
Human Services. As a result, NHC's facilities are located in these states which
are focusing on fraud in the areas of home health and nursing homes, which may
subject NHC's facilities to closer scrutiny by the federal government than if
they were located in states not part of ORT Plus.
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
41
<PAGE> 50
REIT and the Corporation after the Restructure -- The Advisory, Administrative
Services and Facilities Agreement."
However, the REIT Advisory Agreement provides that for that prior to the
earlier to occur of (i) the termination of the REIT Advisory Agreement for any
reason and (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.
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 (1)
- -------------------------------------- ----------------------- -------- ----------------- -------------- -----------
Healthcare Facilities
- ---------------------
<S> <C> <C> <C> <C> <C>
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 (1) 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
42
<PAGE> 51
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, subject to
certain limitations. See "Risk Factors -- The REIT -- Title Matters." 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. The rent payable under the
Master Capitalized Lease is $____ per year. Under the Master Capitalized Lease,
the REIT as tenant is responsible for all taxes, utilities, insurance premium
costs, repairs, 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 and the interest and principal payments of
the Notes. The Lease 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.
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<PAGE> 52
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
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 borrowings 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
October 31, 1997, NHC operated 111 long-term health care centers with a total of
approximately 14,046 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 October 31, 1997, NHC also operated 33 homecare programs,
five retirement centers (one managed, three leased and one owned) and 13
assisted living centers (five owned, six leased and two managed). In addition,
as of October 31, 1997, NHC operated specialized care units such as Alzheimer' s
Disease care units (16), sub-acute nursing units (12) 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 will operate 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.
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<PAGE> 53
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.
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> 54
The following table shows certain information regarding facilities which
will be operated by the Corporation after the consummation of the Plan of
Restructure based on the facilities operated by NHC as of October 31, 1997.
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<PAGE> 55
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
Daytona NHC HealthCare, Daytona Beach Leased(2) 60 1996
Beach
Trenton Medic 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) (5) 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 30 bed subacute care unit 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 22 bed Alzheimer's unit 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>
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<PAGE> 56
<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, Hopewell 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>
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<PAGE> 57
<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
17 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 care 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 unit 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) (5) 60 1997
</TABLE>
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<PAGE> 58
<TABLE>
<S> <C> <C> <C> <C> <C>
Virginia Bristol NHC HealthCare, Bristol Leased(1) 120 1973
ASSISTED LIVING UNITS
State City Center
- ----- ---- ------
Alabama Anniston NHC Place/Anniston (free-standing) Leased(2) 68
Florida Stuart NHC Place, Stuart (free-standing) Leased(2) 84
Merrit Island NHC Place, Merrit Island (free-standing) 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 (free-standing) 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) (5) 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
Joined
State City Center Affiliation 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
</TABLE>
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<PAGE> 59
<TABLE>
<S> <C> <C> <C> <C>
Panama City NHC Private Nursing Owned 1994
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) Will be leased from REIT
(3) Managed by 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.
(5) Currently under construction.
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<PAGE> 60
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 September 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
Dunlap, TN (Sequatchie) 60* Leased January 1998
Merrit Island, FL 60* Leased October 1997
Ft. Oglethorpe, GA 54* Owned October 1997
Naples, FL 30* Leased December 1997
Vero Beach, FL 7* Managed October 1997
Columbia, SC 32* Leased August 1998
Franklin, TN 113 Leased November 1998
Blue Water Bay, FL 60 Managed December 1998
Tampa, FL 31 Managed November 1998
Gainesville, FL 60 Managed December 1998
Moulton, AL 29 Leased November 1998
</TABLE>
* Expansion of existing center
The following table shows certain information relating to occupancy rates
for NHC with respect to the Corporation's continuing owned and/or leased long
term care health centers, as well as the Corporation's managed centers.
<TABLE>
<CAPTION>
Nine
Year ended Year Ended Year Ended Months Ended
12/31/94 12/31/95 12/31/96 9/30/97
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Overall Census (owned and leased) 92.8% 93.0% 93.6% 94.55%
Overall Census (managed) N/A 90.2% 92.2% 90.93%
</TABLE>
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<PAGE> 61
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 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 September 30, 1997, NHC operates 13 assisted living units, eight of
which are located within the physical structure of a long term health care
center or retirement center, and five of which are freestanding and were opened
in 1996 and 1997. All thirteen projects are either owned or leased. The eight
units which are an integrated component of a long term health care center
historically and currently at run at 95% or greater occupancy. The five
freestanding centers averaged 50.6 percent occupancy for the month of September
1997 and 37.8 percent average for all of 1997. Two were opened in 1996 and three
in 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.
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 32 to 155 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. All but one of NHC's retirement
centers are owned or leased, and one is managed. The owned and leased retirement
centers have averaged 95 percent or greater occupancy for 1997 and two prior
years, and the managed retirement center has operated at 98 percent occupancy
for 1997 and the prior two years.
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.
Because all but one of NHC's retirement centers operate on a "rental" as
opposed to an "endowment" mode, the greatest risk with the development and
continuing operation of the retirement center is maintaining its occupancy.
Residents generally sign one year leases but may terminate on 30 days notice.
Thus, NHC has the risk of diminishing occupancy in the event of competition with
better facilities and/or lesser rental rates or general service inefficiencies.
Historically, however, NHC's retirement centers (both rental and endowment) have
operated at near capacity. NHC's one endowment center, which is managed, is not
as susceptible to diminished occupancy since the residents have made
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<PAGE> 62
a substantial down payment on their life time occupancy of their unit, which is
not refunded until the unit is reassigned and a new endowment collected.
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 in 1995 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 sixteen Alzheimer's disease care units and twelve 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 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 thirteen 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.
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 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.
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<PAGE> 63
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 Agreement 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, the Corporation will pay $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 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.
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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 Corporation
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 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.
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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. Each of the
corporation's health care centers must be appropriately licensed by the state in
which it operates for its applicable level of care and number of beds; in order
to maintain such licensure, each facility is subject to a periodic licensure
inspection. Additionally, each center which participates in the Medicare or
Medicaid programs is subject to periodic inspection to determine compliance with
Medicare and/or Medicaid regulations; generally, this inspection is combined
with the state licensure inspection. Licensure laws and regulations vary
somewhat from state to state, but they are generally similar to requirements for
participation in the Medicare program and impose complex and detailed
requirements, focusing on such areas as qualifications of nursing staff and
administrative personnel, maintenance of appropriate written policies and
procedures, resident rights, proper record keeping, compliance with fire and
safety codes, dietary and social services and medical care. Such requirements
are subject to periodic revision and changing administrative and judicial
interpretations. Management believes that the Corporation's health care centers
are in substantial compliance with applicable laws and regulations; however, in
the ordinary course of its business the Corporation receives various notices of
deficiencies for failure to fully comply. The Corporation reviews such notices
and takes appropriate corrective action. In most cases, the Corporation and the
regulators will agree upon a "plan of correction" setting forth the corrective
measures to be taken; after these measures are implemented, a follow-up
inspection is conducted to confirm compliance. Failure to adequately implement
an appropriate plan of correction could lead to adverse regulatory actions
against the health care center, including the imposition of fines, temporary
suspension of new admissions to the center, suspension of the center's right to
participate in the Medicare or Medicaid program, and in extreme cases, loss of
licensure. Management anticipates that the Corporation will be able to maintain
substantial compliance with applicable law or regulations; however, shortages in
nursing staff, changes in the regulations, or other conditions beyond
management's control could adversely affect this ability in the future. 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.
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.
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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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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. The Corporation will initially operate
111 long-term health care facilities, all of which are located in the States of
Alabama, Florida, Georgia, Indiana, Kentucky, Missouri, North Carolina, South
Carolina, Tennessee and Virginia. Each of these states are certificate of need
states which generally requires the state to approve the opening of any new
long-term health care facilities. There are hundreds of operators of long-term
health care facilities in each of these states and no single operator, including
the Corporation, dominates any of these state's long-term health care markets,
except for some small rural markets which might have only a few long-term health
care facilities. 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 September 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. On November 5,
1997, the trial court ruled against FCC's Partial Motion for Summary Judgment to
release the mortgages from securing the deferred compensation due upon
termination of the contract. No trial date has been set in this matter.
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The loss of management contract revenue on each individual FCC center would
not have a material impact on the results of operations of the Corporation, but
the loss of the revenues from all sixteen centers at once would have a material
impact. This impact would be offset, however, by the receipt by the Corporation
of the deferred contingency fee and or the fact that it might purchase some or
all of the facilities; thus allowing the revenues and results of operations to
be maintained by the Corporation; provided such fees or rights are not
disallowed by the law suit.
NHC and its General Partners are also defendants 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. Thus, the plaintiffs in this lawsuit
are now Braeuning and the United States Department of Justice. By agreement, and
with court approval, the suit has been moved from the Pensacola District Court
to the Tampa, Florida District Court and NHC's time for filing its Answer has
been extended through year end 1997. 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 and seeks unspecified damages. 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 to reflect routine cost limit exception requests as income
until the process, including cost report audits, is completed. While the
Corporation cannot predict at this time the ultimate outcome of the suit, the
Corporation does not believe that this litigation will have a material impact on
the Corporation's results of operations or financial condition. The Corporation
intends to 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 take the Owned Healthcare Facilities subject to Assumed
Liabilities estimated to be approximately $105.9 million at December 31, 1997.
The REIT anticipates repaying $75 million of the Assumed Liabilities with the
proceeds of the New REIT Credit Agreement in the amount of $95 million with the
Bank of Tokyo/Mitsubishi as Agent (described below) if obtained.
The balance of the $105.9 million are secured liabilities at fixed rates of
8.0% and 8.64%, which are amortizing and will be paid in full by the end of the
calendar year 2005.
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. 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.
Of the Assumed Liabilities, approximately $30.9 million is represented by
fixed rate first mortgage notes on several of the Owned Healthcare Facilities.
The REIT is seeking the consent of the holders of these notes to agree that the
REIT's liability be limited to (1) its interest in the Owned Healthcare
Facilities upon which the mortgages are placed, and (2) further limited to 28%
of the total outstanding mortgage notes in question. However, such consent has
not been obtained and no assurance can be given that such consent will be
obtained.
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
$95 million unsecured credit facility and has received commitment letters from
three banks to provide portions of the $95 million. 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 under the
New REIT Credit Agreement 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 and 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 under the New Corporation
Credit Agreement 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 to the Corporation, as "Tenant" each
of the Owned Healthcare Facilities. Each of the Owned Healthcare Facilities is
currently owned and operated by NHC. After the Plan of Restructure, the Owned
Healthcare Facilities will be owned by the REIT and operated by the Corporation.
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.
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<PAGE> 70
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."
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.
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In the event of any damage or destruction to any Owned Healthcare Facility,
the Corporation has the obligation to fully 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.
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 REIT 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 REIT 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
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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
(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.
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.
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
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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, distribution disbursing agent's,
distribution 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.
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: distributions, 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
nine months ended September 30, 1997 and 1996 are included in the Proxy
Statement/Prospectus.
The following unaudited pro forma balance sheets as of September 30, 1997
and statements of income for the year ended December 31, 1996 and the nine
months ended September 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 September 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
------------------------------
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:
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
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 -- 837 (f) 837
------ ------ --------- ----------
Net Income $ -- $7,963 $ 20,210 $ 12,247
====== ====== ========= ==========
Earnings Per Share
Primary $ -- $ 1.56
====== ==========
Fully Diluted $ -- $ 1.25
====== ==========
Weighted Average Shares
Primary -- 7,852,551
====== ==========
</TABLE>
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<TABLE>
<S> <C> <C>
Fully Diluted -- 9,811,958
========== ===============
</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 6.4% minority interest of National Health Corporation.
(g) The REIT intends to account for the leases with the Corporation as operating
leases.
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NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 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 $ -- $ 9,790(a) $ 9,790
Interest -- 7,467(c) 7,467
---------- -------- --------
Net revenues -- 17,257 17,257
---------- -------- --------
Costs and Expenses:
Operating and administrative -- $ 345(e) 345
Provision for depreciation and amortization -- 4,292(b) 4,292
Interest -- 3,448(d) 3,448
---------- ---------- --------
Total costs and expenses -- 8,085 8,085
---------- -------- --------
Net Income from Operations -- 8,085 17,257 9,172
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Minority interest in earnings of
consolidated subsidiary -- 587(f) 587
------ ------- -------- ----------
Net Income $ -- $ 8,672 $ 17,257 $ 8,585
====== ======= ======== ==========
Earnings Per Share
Primary $ -- $ 1.05
====== ==========
Fully Diluted $ -- $ 0.85
====== ==========
Weighted Average Shares
Primary -- 8,193,244
====== ==========
Fully Diluted -- 10,094,111
====== ==========
</TABLE>
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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 $80,058 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 6.4% minority interest of National Health Corporation.
(g) The REIT intends to account for the leases with the Corporation as operating
leases.
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NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 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 -- 117,573(a) 117,573
---------- ---------- -----------
Real Estate Properties, Net -- 137,409 137,409
Mortgage loans receivable -- 94,805(b) 94,805
---------- ---------- -----------
Total Assets $ -- $ 233,214 $ 233,214
========== ========== ===========
Liabilities and Stockholders' Equity:
Liabilities:
Long-term notes and bonds payable $ -- $ 86,720(a) $ 86,720
---------- --------- -----------
Total Liabilities -- 86,720 86,720
Minority interest in consolidated subsidiaries -- 9,376(c) 9,376
Stockholders' equity -- 9,376(c) 51,689(a) 137,118
94,805(b)
---------- ---------- --------- -----------
Total Liabilities and Stockholders' Equity
$ -- $ 9,376 $ 242,590 $ 233,214
========== ========== ========= ===========
Book value per share
$ -- $ 16.74
========== ===========
Shares outstanding -- 8,193,244
========== ===========
</TABLE>
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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 6.4% minority interest of National Health Corporation.
(d) The REIT intends to account for the leases with the Corporation as
operating leases.
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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 13,634 $ 3,580(b) 10,054
amortization
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.
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(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.
(h) The Corporation intends to account for the leasing of the real estate
assets as operating leases.
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NATIONAL HEALTHCARE CORPORATION AND SUBSIDIARIES, SUCCESSOR TO
NATIONAL HEALTHCARE L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 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 $ 288,640 $ 288,640
Other revenues 35,403 $ 7,467(d) 27,936
-------------- ------------ ---------------
Net revenues 324,043 7,467 316,576
-------------- ------------ ---------------
Costs and Expenses:
Operating and administrative 278,918 9,790(a) 288,879
171(e)
Provision for depreciation and amortization 12,061 $ 4,292(b) 7,769
Interest 9,387 3,448(c) 5,939
-------------- ------------ ------------- ---------------
Total costs and expenses 300,366 9,961 7,740 302,587
-------------- ------------ ------------- ---------------
Net income before taxes 23,677 17,428 7,740 13,989
Provision for income taxes -- 5,326(f) --(g) (5,326)
-------------- ------------ ------------- ---------------
Net Income $ 23,677 $ 22,754 $ 7,740 $ 8,663
============== ============ ============= ===============
Earnings Per Unit/Share:
Primary $ 2.68 $ 0.92
============== ===============
Fully Diluted $ 2.33 $ 0.89
============== ===============
Weighted Average Units/Shares:
Primary 8,836,992 9,392,547
============== ===============
Fully Diluted 10,737,859 11,293,414
============== ===============
</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.
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<PAGE> 87
(g) The Corporation would have recorded non-recurring income tax benefits
of $3,737 related to the change in the Corporation's tax status.
(h) The Corporation intends to account for the leasing of the real estate
assets as operating leases.
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NATIONAL HEALTHCARE CORPORATION AND SUBSIDIARIES, SUCCESSOR TO
NATIONAL HEALTHCARE L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 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 $ 100,853 $ 1,821(c) $ 122,324
19,650(d)
Property and equipment 208,148 $ 137,409(a) 70,739
Assets held by other parties 20,948 20,948
Other Assets 114,506 1,916(c) 94,805(b) 21,617
-------------- ------------ ----------- -------------
Total Assets $ 444,455 $ 23,387 $ 232,214 $ 235,628
============== ============ =========== =============
Liabilities and Partners' Capital:
Current liabilities $ 81,841 $ 81,841
Debt serviced by other parties 31,811 31,811
Long-term debt 142,372 $ 86,720(a) 55,652
Subordinated convertible notes 28,739 28,739
Deferred income 14,822 14,822
Minority interest in consolidated 786 786
subsidiaries
Partners' capital 144,084 50,689(a) $ 3,737(c) --
94,805(b) 19,650(d)
21,977(e)
Stockholders' Equity -- 21,977(e) 21,977
-------------- ------------ ----------- -------------
Total Liabilities &
Stockholders' Equity $ 444,455 $ 254,191 $ 45,364 $ 235,628
============== ============ =========== =============
Book value per unit/share $ 16.25 $ 2.33
============== =============
Units/Shares outstanding 8,866,822 9,422,377
============== =============
</TABLE>
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\
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) On October 15, 1997, NHC sold subordinated convertible debentures of $2
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 real estate assets as operating leases.
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<PAGE> 90
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.
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As of September 30, 1997, NHC operates or manages 110 long-term health care
centers with 13,926 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 September 30, 1997 and 1996 and audited years ended
December 31, 1996, 1995 and 1994.
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------ --------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient revenues 89.1% 88.0% 87.9% 87.8% 90.2%
Other revenues 10.9 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 54.8 55.4 53.9 53.8 52.7
Other operating 31.3 31.1 32.2 31.2 33.0
Interest 2.9 3.0 2.8 4.8 4.4
----- ----- ----- ----- -----
Total costs and expenses 92.7 93.0 92.5 94.0 94.7
----- ----- ----- ----- -----
Net Income 7.3% 7.0 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)
Nine Months Ended
September 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 $42,567 17.3% $33,849 11.0% $38,247 14.2%
Other revenues 1,874 5.6 3,854 9.0 13,809 47.3
------- ---- ------- ---- ------- -----
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net revenues 44,441 15.9 37,703 10.7 52,056 17.4
------- ----- -------- ----- ------- ----
Costs and expenses:
Salaries, wages and benefits 22,603 14.6 20,660 10.9 31,322 19.9
Other operating 14,524 16.7 15,925 14.6 10,664 10.8
Depreciation & amortization 2,266 23.1 (915) (6.3) 967 7.1
Interest 913 10.8 (6,138) (36.3) 3,841 29.4
------- ---- -------- ----- ------- ----
Total costs and expenses 40,306 15.5 29,532 9.0 46,794 16.5
------- ---- -------- ----- ------- ----
Net income $ 4,135 21.2% $ 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 nine months ended
September 30, 1997 averaged 92.8% compared to an average of 93.3% for the same
nine months a year ago. 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.
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.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996. Results for the nine month period ended September 30, 1997
include a 21% increase over the same period in 1996 in net income, an 18%
increase in fully diluted earnings per unit, and a 16% increase in net revenues.
The increased revenues for the nine months ended September 30, 1997
reflect the continued growth of operations. Compared to the nine month period a
year ago, NHC has increased the number of owned, leased, and managed long-term
care beds by 1,116 beds from 12,810 beds to 13,926 beds. The number of homecare
locations has increased from 32 locations to 33 locations. Also contributing to
increased revenues are improvements in both private pay and third party payor
rates.
Revenues improved during first nine 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.
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Revenues from management services, which are included in the Statements
of Income in Other Revenues, increased 6.2% for the nine month period in 1997
compared to the same period in 1996 from $24.3 million to $25.8 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 nine month period increased $40.3
million or 15.5% to $300.4 million from $260.1 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $22.6
million or 14.6% to $177.5 million from $154.9 million. Other operating expenses
increased $14.5 million or 16.7% to $101.4 million for the 1997 third quarter
compared to $86.9 million in the 1996 period. Depreciation and amortization
increased 23.1% to $12.1 million. Interest costs increased $0.9 million or 10.8%
to $9.4 million from $8.5 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. Interest expense increased due to increased borrowing
for newly purchased or constructed long-term care beds and assisted living beds.
The total census at owned and leased centers for the nine months
averaged 92.8% compared to an average of 93.3% for the same nine 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.
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 $28.7 million to $32.4
million 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.
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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 $20.5 million. In addition, NHC was released from its obligation on
approximately $25.3 million of debt which had been transferred to NHI in 1991.
Since NHC is no longer obligated on transferred debt in the amount of $45.9
million, debt serviced by other parties and assets under arrangement with other
parties was reduced by $45.9 million.
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 $21.1 million, a 33% increase over the comparable
prior year amount. Fully diluted earnings per unit totaled $2.31, a 28%
increase. Net revenues totaled $351.0 million, 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 $28.7 million, 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 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 $3.3 million 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 $6.5 million 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.
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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 nine months of 1997, the Company added a net total of
1,044 licensed long-term care beds, of which 367 are owned or leased and 677 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 September 30, 1997, NHC had 881 beds under development at 12 owned
or leased centers and seven 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 13 assisted living projects, eight of which are located
within the physical structure of a long-term care center or retirement center
and five of which are freestanding. Two of the freestanding projects opened in
1996 and three opened in 1997, with one currently under construction. At
September 30, 1997, NHC had 266 assisted living beds under development at five
locations. Furthermore, 211 retirement apartments are under development at two
locations. Certificates of need are not required to build assisted living or
retirement projects.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
During the first nine months of 1997, the Company generated net cash of
$31.0 million from operating activities, $21.6 million from the collection of
long-term notes receivable, $22.9 million debt proceeds, $0.5 million from the
issuance of partnership units, and $5.0 million from the collection of
receivables. Of these funds, $31.3 million was used for additions to and
acquisitions of property and equipment; $23.5 million for investment in
long-term notes receivable and loan participation agreements; $1.7 million to
increase cash held by trustees; $7.0 million for payments on debt; and $15.7
million for cash distributions to partners. Cash and cash equivalents increased
$1.4 million during the nine months.
During 1996 NHC spent approximately $70.0 million on construction,
acquisitions and routine capital expenditures, $17.5 million on cash
distributions to partners, $8.2 million as principal payments and financing
costs on debt, and $34.8 million to invest in notes receivable and marketable
securities. These and other cash needs were financed through cash on hand; cash
flow from operations of $52.0 million; the collection of long-term notes
receivable, loan participation agreements, investments and
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<PAGE> 96
receivables related to stock options of $44.3 million; the issuance of $29.2
million of debt and the issuance of partnership units for $1.4 million.
As of September 30, 1997, NHC has approximately $210,947,000 in long
term debt. Of this amount, $28,739,000 is represented by the 6% Debentures with
a conversion price of $15.21 which are due 2000. An additional $31,811,000 is
identified as "debt service by other parties." This is debt which is also
reflected on the balance sheet of National Health Investors, Inc., but which is
serviced by NHC's lease payment. The third component of NHC's debt is
approximately $142,372,000. Of this amount, approximately $30.9 million is
represented by a fixed rate first mortgage note, purchased by a consortium of
insurance companies. The projects securing this loan are cross-collateralized
and cross-defaulted. The balance of the long term indebtedness is represented
either by small tax-exempt bond financings, which are not cross-collateralized
or cross-defaulted, or NHC's unsecured credit agreement.
NHC's unsecured credit agreement has certain negative covenants, which
are customary and usual in such lines of credit. These negative covenants
prohibit (i) any additional indebtedness in an amount greater than $20 million
over the line of credit, (ii) indebtedness other than indebtedness which is
subordinated to the line of credit, and (iii) indebtedness other than
indebtedness incurred in the normal course of business in the form of trade
payables, taxes and other governmental charges. NHC is in compliance with these
covenants. The unsecured credit agreement is due in 1999 and has a current
outstanding balance of approximately $50 million.
NHC has guaranteed approximately $69.2 million of debt of certain
health care centers which NHC manages for others. At September 30, 1997, NHC
expects to have no additional liability as a result of its debt guarantees.
NHC has long-term construction commitments of $27.0 million at
September 30, 1997.
NHC's current cash on hand, marketable securities, short-term notes
receivable, operating cash flows and, as needed, its borrowing capacity and
equity raising 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 September 30, 1997 and working capital is $19.0 million. 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
0.9:1.0 at September 30, 1997.
On a long-term basis, NHC expects to be able to meet its debt
obligations and capital requirements through its borrowing and equity raising
capacity. Furthermore, $28.7 million of convertible debentures due in 2000 are
expected to convert to equity and not require the use of cash.
For all financial instruments except the subordinated convertible
notes, NHC believes that the financial statement carrying amounts approximate
fair value at September 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 September 30, 1997, the Corporation's working
capital has increased from $19.0 million to $40.5 million and its current ratio
has increased from 1.23:1 to 1.49:1 primarily as a result of the issuance of
$20.0 of subordinated convertible notes (described below). Partners'
capital/stockholders' equity has been reduced from $144.1 million to $22.0
million 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 nine months ended September 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
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<PAGE> 97
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.
On October 15, 1997 , NHC sold $20 million in 5.75% Subordinated
Convertible Notes, (the "1818 Fund Notes"), to The 1818 Fund II, L.P. (the
"Fund") pursuant to a private placement. The terms of the 1818 Fund Notes
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 holders of the 1818 Fund Notes
were granted demand registration rights which could be requested on or after
January 5, 1998 and incidental registration rights to a registration by the
Corporation of its own securities. The Corporation agreed 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 survive the Plan of Restructure
and inure to the benefit of any holder of the 1818 Fund Notes. Finally, the
Corporation has 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 8,837,000 shares of the REIT's common stock. The REIT has reserved
an additional 1,901,000 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 distributions 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
distributions 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 $20.2 million and $17.3
million in revenues for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively. The increase on an annual basis from
1996 to 1997 is primarily attributable to additional rental and interest income
on
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<PAGE> 98
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 $7.1 million and $8.1
million in expenses for the year ended December 31, 1996 and the nine months
ended September 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> 99
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' 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' 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 as of October 31, 1997.
<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
</TABLE>
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<PAGE> 100
<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>
David L. Lassiter 43 Vice President/
Corporate Affairs -- -- 1995
Charlotte A. Swafford 49 Treasurer -- -- 1985
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
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<PAGE> 101
gerontology from Middle Tennessee State University. She co-authored Patient
Assessment Computerized in 1980 with Dr. Carl Adams, NHC's founder.
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 Partnership 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 Partnership Agreement the General Partners hire
and compensate all of the officers of the partnership and of the corporate
general partners. The board of directors of National, the administrative general
partner determines the compensation of NHC's executive officers. 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>
Annual Compensation(1) Long Term Compensation
- ------------------------------------------------------------------ ---------------------------------------
Awards Payouts
------------------------ ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other annual Restricted Options/ All Other
Name and Bonus Compensation Stock Awards SARs LTIP Payouts Compensation
Principal Position Year Salary ($) ($) ($)(2) ($) (#)(3) ($) ($)
- ------------------ ---- --------- ----------- ------------ ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Andrew Adams 1996 129,757 1,401,693 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 140,279 852,607 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 135,784 850,846 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) Includes (a) life insurance benefit, (b) 401-K matching contribution, (c)
nonqualified deferred compensation matching contribution, (d) ESOP
contribution.
(3) 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.
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<PAGE> 102
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.
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
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<PAGE> 103
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.
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
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<PAGE> 104
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 1996.
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 9/30/97
------------- --------------
<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> 105
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 Current Officer of
---- Term as NHC's Managing
Director General Partner or
Expires Predecessor
-------- Since
------------------
<S> <C> <C>
J. K. Twill 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
5,000 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 common stock
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
97
<PAGE> 106
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 distribution, 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:
98
<PAGE> 107
<TABLE>
<CAPTION>
Officer of
Current NHC's Managing
Term as General Partner or
Director Predecessor
Name Expires Since
---- --------- ------
<S> <C> <S>
J. K. Twilla 2001 ---
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.
STOCK OPTION PLAN
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 common stock 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,
99
<PAGE> 108
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 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 (including employees of
National) may purchase shares of the Corporation's 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.
100
<PAGE> 109
All employees as defined in the Plan (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.
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 will assume 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.
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<PAGE> 110
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, NHC 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, NHC
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 NHC believes
to be equal to or even less than comparable property in the market.
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 no event 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; the
provision of all fringe benefits; the utilization of any qualified leveraged
employee stock ownership plan; the 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; the 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
644,000 of the Units owned by National, instead of receiving REIT Shares,
National will receive approximately 644,000 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 757,000 REIT Shares and 644,000 OP Units.
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<PAGE> 111
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 October
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 (8,866,822 Units as of October 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 1,064,211 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 104,340 1.8%
2007 Riverview Drive
Murfreesboro, TN 37139
Robert G. Adams, Director & Sr. V.P. 439,000 4.95%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Ernest G. Burgess, Director 178,592 2.01%
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) 1,368,583 15.43%
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 3,690,281 41.62%
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> 112
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 757,000 REIT Shares and 644,000 OP Units and
there will be approximately 644,000 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>
Names and Addresses Number of REIT Shares Percentage of
of Beneficial Owner Beneficially Owned After the Total REIT Shares
-------------------- Restructure (1) After the Restructure (2)
----------- ---------------------
<S> <C> <C>
W. Andrew Adams, President and 1,064,211 10.46%
Individual General Partner
1927 Memorial Blvd.
Murfreesboro, TN 37129
Dr. J. K. Twilla, Director 73,155 0.72%
525 Golf Club Lane
Smithville, TN 37166
Dr. Olin O. Williams, Director 104,340 1.03%
2007 Riverview Drive
Murfreesboro, TN 37139
Robert G. Adams, Director & Sr. V.P. 439,000 4.31%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Ernest G. Burgess, Director 178,592 1.76%
2239 Shannon Drive
Murfreesboro, TN 37129
Richard F. LaRoche, Jr., Sr. V.P. 374,685 3.68%
2103 Shannon Drive
Murfreesboro, TN 37130
National Health Corporation 757,000 7.44%
Admin. General Partner
P. O. Box 1398
Murfreesboro, TN 37133
All Executive Officers, Directors of the 2,233,983 21.95%
REIT
</TABLE>
(1) Assumes exercise of options outstanding.
(2) Based on an estimated 10,175,400 to be outstanding immediately after the
Effective Time.
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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 Fund Notes
will immediately be converted into approximately 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
of Beneficial Owner Restructure (1) After Restructure(2)
-------------------- -------------- --------------------
<S> <C> <C>
W. Andrew Adams, Director, CEO 1,064,211 9.36%
1927 Memorial Blvd.
Murfreesboro, TN 37129
Dr. J. K. Twilla, Director 73,155 0.64%
525 Golf Club Lane
Smithville, TN 37166
Dr. Olin O. Williams, Director 104,340 .92%
2007 Riverview Drive
Murfreesboro, TN 37139
Robert G. Adams, Director & Sr. V.P. 439,000 3.86%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Ernest G. Burgess, Director 178,592 1.57%
2239 Shannon Drive
Murfreesboro, TN 37129
Lawrence C. Tucker, Director (3) 555,555 4.88%
59 Wall Street
New York, NY 10005
Richard F. LaRoche, Jr., Sr. V.P. 374,685 3.29%
2103 Shannon Drive
Murfreesboro, TN 37130
National Health Corporation (4) 1,400,806 12.31%
P. O. Box 1398
Murfreesboro, TN 37133
1818 Fund 555,555 4.88%
59 Wall Street
New York, New York 10005
All Executive Officers, Directors of the 2,789,538 24.52%
Corporation
</TABLE>
(1) Assumes exercise of options outstanding.
(2) Based on an estimated 11,374,955 to be outstanding immediately after the
Effective Time.
(3) Mr. Tucker is a general partner of the Fund and may be deemed to be the
beneficial owner of the Shares owned by the 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.
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<PAGE> 114
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.
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<PAGE> 115
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 75,000,000 shares of common stock, par
value $.01 per share, 5,000,000 shares of preferred stock, par value $.01 per
share and 20,000,000 shares of Excess Stock.
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, distributions 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 also limits
any holder from owning, or being deemed to own after applying the constructive
ownership provisions of the Code described above, shares of stock of the REIT
having a value that is more than 9.8% (the "Ownership Limit") of the value of
all outstanding stock of the REIT. Under the REIT Charter, any transfer of stock
or any security convertible into stock that would create direct or indirect
ownership of stock in excess of the Ownership Limit (a "prohibited transfer")
shall be null and void, and the intended transferee will acquire no rights to
the stock. Shares of stock owned, or deemed to be owned, or transferred to a
stockholder in excess of the Ownership Limit will automatically be exchanged for
Excess Stock that will be transferred, by operation of law, to an unaffiliated
trustee to be named by the Board of Directors of the REIT for the exclusive
benefit (except to the extent described below) of one or more charitable
beneficiaries designated from time to time by the REIT. The Excess Stock held
in trust will be considered as issued and outstanding shares of stock of the
REIT, will be entitled to receive distributions authorized and declared by the
REIT and may be voted by the trustee for the exclusive benefit of the charitable
beneficiary. Any dividend or distribution paid to a purported transferee of
Excess Stock prior to the discovery by the REIT that stock has been transferred
in
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<PAGE> 116
a prohibited transfer shall be repaid to the REIT upon demand and thereupon paid
over by the REIT to the trustee. Subject to applicable law, any votes of holders
of shares of stock purported to have been cast by a purported transferee prior
to such discovery of a prohibited transfer will be retroactively deemed not to
have been cast and may be recast by the trustee for the benefit of the
charitable beneficiary, but said retroactive nullification or recast of the vote
of the relevant shares of stock shall not adversely affect the rights of any
person (other than the purported transferee) who has relied in good faith upon
the effectiveness of the matter that was the subject of the stockholder action
as to which such votes were cast.
Excess Stock is not transferable. Subject to the redemption rights of the
REIT, discussed below, the trustee of the trust may, however, sell and transfer
the interest in the trust to a transferee in whose hands the interest in the
trust representing Excess Stock would not be an interest in Excess Stock, and
upon such sale the shares of Excess Stock represented by the sold interest
shall be automatically exchanged for shares of stock of the class that was
originally exchanged into such Excess Stock. Upon such sale, the trustee shall
distribute to the purported transferee only so much of the sales proceeds as is
not more than the price paid by the purported transferee in the prohibited
transfer that resulted in the exchange of Excess Stock for the stock purported
to have been transferred (or, if the purported transferee received such stock by
gift, devise or otherwise without giving value for such stock, only an amount
that does not exceed the market price for such stock, as determined in the
manner set forth in the REIT Charter, at the time of the prohibited transfer),
and the trustee shall distribute all remaining proceeds from such sale to the
charitable beneficiary.
In addition to the foregoing transfer restrictions, the REIT will have the
right, for a period of 90 days during the time any Excess Stock is held by the
trustee, to purchase all or any portion of the Excess Stock from the trustee
for the lesser of the price paid for the stock by the original purported
transferee (or, if the purported transferee received such stock by gift, devise
or otherwise without giving value for such stock, the market price of the stock
as determined in the manner set forth in the REIT Charter at the time of such
prohibited transfer) or the market price (as so determined) of the stock on the
date the REIT exercises its right to purchase. Upon any such purchase by the
REIT, the trustee shall distribute the purchase price to the original purported
transferee. The 90-day period begins on the date on which the REIT receives
written notice of the prohibited transfer or other event resulting in the
exchange of stock for Excess Stock.
The REIT Charter authorizes the REIT Board of Directors to permit a
transfer which would otherwise be prohibited if the REIT Board is satisfied that
such transfer will not jeopardize the REIT 's status as a real estate investment
trust. The REIT Charter also provides that the provisions relating to Excess
Shares of the Ownership Limit shall not apply to shares of capital stock
acquired pursuant to an all cash tender offer for all outstanding shares of
capital stock in conformity with applicable laws where not less than two-thirds
of the outstanding shares of capital stock (not including securities held by the
tender offeror and/or its affiliates and associates) are tendered and accepted
pursuant to such tender offer and where the tender offeror commits in such
tender offer, if the offer is accepted by the holders of two-thirds of the
outstanding stock, promptly after the tender offeror's purchase of the tendered
stock to give any non-tendering stockholders a reasonable opportunity to "put"
their shares of stock to the tender offeror at a price not less than that paid
pursuant to the tender offer.
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
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<PAGE> 117
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
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
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<PAGE> 118
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 November, 1997. The REIT is the sole general partner of, and will hold
approximately 93% 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 NHC will be the initial limited
partner, but pursuant to the Plan of Restructure, will transfer its limited
partnership interest to National which will then 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 control or management of
the business of the Operating Partnership by virtue of being a holder of OP
Units.
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. Generally, the REIT
may not transfer any of its interests as general or limited partner in the
Operating Partnership except 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 of the limited partners in accordance with the
terms of the Operating Partnership Agreement.
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, or
alter or modify the redemption right of the limited partners described in the
Operating Partnership Agreement generally 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) set forth and reflect the designations, 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 that
does not adversely affect the limited partners in any material respect, or cure
any ambiguity, correct or supplement any provision of the Operating Partnership
Agreement not inconsistent with law or with other provisions of the Operating
Partnership Agreement, or make other changes concerning matters arising 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 of the Operating Partnership Agreement,
including 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 and
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managing the Operating Partnership, and restrictions relating to certain
extraordinary transactions involving the REIT or the Operating Partnership) may
not be amended without the approval of a majority 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 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 .
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 generally may
not 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 "Termination Transaction"), 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 a majority of the OP Units held by limited partners (including OP Units
held by the REIT as a limited partner) vote to approve the Termination
Transaction.
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 unless the
REIT acted in bad faith and the act or omission was material to the matters
giving rise to the loss or liability. 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 limited partners, the directors and officers of the Operating
Partnership and the REIT, and such other persons as the REIT may from time to
time designate against any and all losses, claims, damages, liabilities,
expenses, judgments, fines, settlements and other amounts actually incurred by
such person in connection with any and all claims, demands, actions, suits or
proceedings relating to the Operating Partnership or the REIT unless it is
established that: (1) the act or omission of the indemnified person was material
to the matter giving rise to the proceeding 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.
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
December 31, 2057, or until sooner dissolved pursuant to the terms of the
Operating Partnership Agreement.
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<PAGE> 120
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 OF ENTITY
NHC THE CORPORATION THE REIT
<S> <C> <C>
Under current federal tax laws, The Corporation is a taxable entity The REIT is a taxable entity for
as a partnership, NHC does not pay for federal income tax purposes with federal income tax purposes with respect
tax on its net income. However, respect to its income after allowable to its income after allowable deductions
to continue its current deductions and credits, for which no and credits. However, as a real estate investment
operations and remain a partnership deduction is permitted for trust, the REIT may generally deduct from
for federal income tax purposes for distributions of cash or other its taxable income an amount equal to the
periods beginning after December property to its shareholders and with distributions it pays to its shareholders and,
31, 1997, NHC will have to pay respect to which it will be taxed, in that regard, is required, as a real
taxes at a rate of 3.5% of its based upon current laws, at a rate of estate investment trust, to
gross income. Otherwise, 34%. Generally, see "Federal distribute approximately 95% of its real estate
beginning January 1, 1998 NHC Income Tax Considerations." investment trust taxable
will be taxed as a corporation for income. Generally, see "Federal Income Tax
federal income tax purposes, which Considerations."
under current laws would result in
NHC being taxed on its net income
generally at a rate of 34%.
</TABLE>
112
<PAGE> 121
<TABLE>
<CAPTION>
TAXATION OF UNITHOLDERS, SHAREHOLDERS AND REIT SHAREHOLDERS
UNITHOLDERS SHAREHOLDERS REIT SHAREHOLDERS
<S> <C> <C>
Each Unitholder, as a partner, Shareholders will have taxable income Shareholders of the REIT will
annually includes the Unitholder's from the Corporation's operations only have taxable income from the
share of the income and gain and, to the extent that taxable dividends REIT's operations only to the
subject to certain limitations, and other distributions are declared extent that taxable dividends and
the losses, deductions and credits and paid by the Corporation on the other distributions are declared
of NHC in computing the Unitholder's Shares. Such income may not be used to and paid on the REIT Shares.
taxable income for federal income offset passive losses. Losses of the Such income may not be used to
tax purposes without regard to Corporation are not passed through to offset passive losses. Losses of
whether cash or other property is its Shareholders. No portion of the the REIT are not passed through
distributed to such Unitholder. earnings of, or any dividends received to its shareholders. No portion of
Generally, distributions of property by a Shareholder from, the Corporation the earnings of, or any distributions
are not taxable to Unitholders and will generally constitute unrelated received by a REIT Shareholder
distributions of cash or marketable business taxable income to Shareholders from, the REIT will generally
securities to a Unitholder are not that are exempt from federal income constitute unrelated business
taxable, unless such distributions taxation under Code section 501(a), taxable income to REIT
exceed the Unitholder's adjusted except to the extent their investment Shareholders that are exempt from
tax basis in such Unitholder's in stock of the Corporation is federal income taxation under
Units. As a partner of a publicly considered debt-financed. Generally, Code section 501(a), except to the
traded partnership, a see "Federal Income Tax extent their investment in stock of
Unitholder is generally not Considerations." the REIT is considered debt-
permitted to offset losses from financed. Generally, see "Federal
other publicly traded partnerships Income Tax Considerations."
or passive activities with such
Unitholder's share of NHC
income. A Unitholder is also not
permitted to use such Unitholder's
share of NHC's losses to offset
passive income from other sources.
Instead, such losses may be carried
forward as a deduction against
future income of the Unitholder
from NHC or when the Unitholder
disposes of such Unitholder's entire
interest in NHC. The share of
NHC's taxable income of a
Unitholder that is exempt from
federal income taxation under Code
section 501(a) generally constitutes
unrelated business taxable income
to such Unitholder, which income is
generally subject to federal income
tax at corporate tax rates without
regard to such Unitholder's general
exemption from federal income
taxes. Generally, see "Federal
Income Tax Considerations."
</TABLE>
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<PAGE> 122
DISTRIBUTION AND DIVIDENDS
<TABLE>
<CAPTION>
UNITS SHARES REIT SHARES
<S> <C> <C>
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 distributions and the
Available for Distribution generally the Shares will have no contractual amount of any distributions.
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." Holders of
contingencies and liabilities. REIT Shares will have no
contractual right to receive distributions.
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> 123
VOTING RIGHTS
<TABLE>
<CAPTION>
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
presented to limited partners. all matters stockholders.
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 REIT
outstanding Units, except that a except that a vote of more than 50% Shares, except that a vote of more
vote of 50% of the outstanding is required for such matters if the than 50% is required for such
Units is sufficient to remove the board of directors of the matters if the board of directors of
Managing General Partner if the Corporation unanimously consents. the 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.
SPECIAL MEETINGS
UNITS SHARES REIT SHARES
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.
</TABLE>
115
<PAGE> 124
CONVERSION RIGHTS
<TABLE>
<CAPTION>
UNITS SHARES REIT SHARES
<S> <C> <C>
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.
RIGHT TO COMPEL DISSOLUTION
UNITS SHARES REIT SHARES
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.
</TABLE>
116
<PAGE> 125
LIMITED LIABILITY
<TABLE>
<CAPTION>
UNITS SHARES REIT SHARES
<S> <C> <C>
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.
SEC FILINGS
UNITS SHARES REIT SHARES
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.
</TABLE>
117
<PAGE> 126
<TABLE>
<CAPTION>
CERTAIN LEGAL RIGHTS
UNITS SHARES REIT SHARES
<S> <C> <C>
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.
RIGHT TO LIST OF HOLDERS; INSPECTION OF BOOK AND RECORDS
UNITS SHARES REIT SHARES
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 fo 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 Subordinated to claims of creditors Subordinated to claims of
creditors of NHC. of the Corporation. creditors of the REIT.
</TABLE>
118
<PAGE> 127
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.
119
<PAGE> 128
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 IS URGED TO 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 COUNSEL 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, with respect to any section herein dealing with federal income taxation of
real estate investment trusts, Goodwin, Procter & Hoar, LLP, Boston,
Massachusetts, special counsel to NHC and the REIT ("REIT Counsel").
OPINION OF TAX COUNSEL. In the opinion of Tax Counsel as identified in
the preceding paragraph, 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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<PAGE> 129
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 Section 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
Section 1.351-1(c) (5). Although Section 1002(a) of the Taxpayer Relief Act of
1997 amended Code Section 351(e) to change, according to the Conference
Committee Report, "the types of assets considered in the definition of an
investment company in the present Treasury regulations" (which changes are
inapplicable if the transfer is to a real estate investment trust), the new
legislation "does not override . . . the requirement that a contribution of
property to an investment company result in diversification in order for gain to
be recognized." 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. However, if the
transfer contemplated herein is part of a plan to achieve diversification
without recognition of gain, such as a plan which contemplates a subsequent
transfer, however delayed, of the corporate assets (or of the stock received in
the earlier exchange) to an investment company in a transaction purporting to
qualify for nonrecognition treatment, the original transfer will be treated as
resulting in diversification. NHC has no present plan to transfer additional
assets to 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
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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.
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, for purposes of Section 731(a) a distribution of marketable
securities is not considered a distribution of money if such distribution is
made in a "qualified partnership liquidation" and (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, the OP Units and the Shares will be issued to NHC in exchange for all of
NHC's assets under the nonrecognition rules of Section 351 and 721 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
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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
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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
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. 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
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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 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, two 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
services 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
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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."
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.
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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 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 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 real estate
investment
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trusts 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. Distributions
from 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
distribution 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 REIT
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Shares (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 REIT Shares.
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.
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.
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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 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.
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)
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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.
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.
As discussed in detail above, the investment company exception to the
nonrecognition rule of Code Section 351 precludes Section 351's application to a
"transfer of property to an investment company." The Regulations provide that a
transfer shall be considered to be made to an investment company if the
transferee is, among others, a corporation more than eighty percent (80%) the
value of which consists of assets held for investment that are readily
marketable stocks or securities or interests in regulated investment companies
or real estate investment trusts.
The Taxpayer Relief Act of 1997 amended Code section 351 to expand the
assets to be considered in determining whether a corporation is an investment
company beyond those currently listed in the Regulations. Under Code section
351(e) as amended, an investment company includes any corporation if more than
eighty percent (80%) of its assets by value consist of money, stocks and other
corporate equity interests, evidences of indebtedness, options, forward or
future
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contracts, notational principal contracts or derivatives, foreign currency,
certain interests in precious metals, interests in real estate investment trusts
and regulated investment companies, common trust funds, and publicly-traded
partnership or other interests in non-corporate entities that are convertible
into or exchangeable for any asset of a type previously listed. NHC has
represented that the value of the Corporation's assets of the types listed will
not equal or exceed eighty percent (80%) of the Corporation's value.
As discussed above, to be a transfer to an investment company, the transfer
must (i) be to, among others, a regulated investment company, a real estate
investment trust, or a company more than eighty percent (80%) the value of which
consists of assets of the types listed, and (ii) results, directly or
indirectly, in the diversification of the transferor's interests.
As noted above, a transfer ordinarily results in the diversification of the
transferor's interest if two or more persons transfer non-identical assets to a
corporation in the exchange. According to the Conference Committee Report, the
changes to Code Section 351(e) made by Section 1002(a) of the Relief Act do "not
override. . . the requirement that a contribution of property to an investment
company result in diversification in order for gain to be recognized."
Accordingly, based on NHC's representation with regard to the value of the
investment company type assets to be held by the Corporation and since NHC is
the only transferor of assets to the Corporation for purposes of Code Section
351, the investment company exception of Section 351(e) should not apply to
NHC's constructive contribution of assets to the Corporation.
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 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.
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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 GENERALLY
The Corporation is a taxable entity for federal income tax purposes with
respect to its income after allowable deductions and credits, for which no
deduction is permitted for distributions of cash or other property to its
shareholders and with respect to which it will be taxed, based upon current
laws, generally at a rate of 34%. Shareholders will have taxable income from the
Corporation's operations only to the extent that taxable dividends and other
distributions are declared and paid by the Corporation on the Shares, the
taxable portion of which will depend upon the amount of the Corporation's
earnings and profits. Losses of the Corporation are not passed through to its
Shareholders. Tax Counsel has opined that the Corporation will be taxed as a
corporation for federal income tax purposes.
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 McGuire
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 October 15, 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.
133
<PAGE> 142
GLOSSARY OF DEFINED TERMS
100 STOCKHOLDER REQUIREMENT - The requirement under the Code that a real
estate investment trust's beneficial ownership must be held by 100 or more
persons.
6% DEBENTURES - Approximately $30,000,000 original principal 6%
subordinated convertible debentures issued by NHC
AMEX - American Stock Exchange
ASSUMED LIABILITIES - Approximately $105.9 million of liabilities being
assumed by, or subject to property being transferred to, the REIT, the Operating
Partnership, or their subsidiaries
BBA - The Balanced Budget Act of 1997
BUILT-IN GAIN - The excess of the fair market value of an asset over the
tax basis in such asset as of the date of the transfer of such asset to the REIT
or the day the corporation is a qualifying real estate investment trust.
BUILT-IN GAIN RULES - The rules governing the taxation of Built-In Gain.
CODE - Internal Revenue Code of 1986, as amended
COMMISSION - Securities and Exchange Commission
CON - Certificate of need
CORPORATION - National HealthCare Corporation, a newly-formed Delaware
corporation
CORPORATION BYLAWS - The Bylaws of National HealthCare Corporation
CORPORATION CERTIFICATE - The Certificate of Incorporation of National
HealthCare Corporation
DISTRIBUTION - The distribution by NHC of all of the REIT Shares to the
holders of NHC general and limited partnership units except for National, which
will receive approximately 757,000 REIT Shares and approximately 644,000 units
of limited partnership interest in NHR/OP, L.P.
DISTRIBUTION AGENT - SunTrust Bank, Atlanta
EFFECTIVE TIME - The effective time of the Merger, which is expected to be
11:59 p.m. on December 31, 1997
EMPLOYEE LEASE AGREEMENT - An Agreement between the Corporation and
National whereby the Corporation will lease all of its employees from National.
EMPLOYEE SERVICES AGREEMENT - Agreement between the Corporation and
National pursuant to which the Corporation will lease all of its employees from
National.
ERISA - Employee Retirement Income Securities Act of 1974, as amended
ESOP - National Health Corporation Leveraged Employee Stock Ownership Plan
and Trust
EXCESS SHARES - Those REIT Shares which would cause the applicable
ownership limit of REIT Shares to be exceeded.
EXCESS STOCK - Excess stock, par value $.01 per share, of REIT Shares into
which Excess Shares shall be automatically converted.
EXCHANGE ACT - Securities Exchange Act of 1934, as amended
FCC - Florida Convalescent Centers, Inc., a Florida corporation
FINANCING PLAN - NHC's Employee Stock Financing Plan which enables key
employees to finance the exercise of unit options, if authorized by the Board,
by the acceptance of the employees' full recourse promissory note.
134
<PAGE> 143
FIRPTA - Foreign Investment in Real Property Tax Act of 1980
FIVE OR FEWER REQUIREMENT - (Also referred to as the "Closely Held Rule")
The requirement under the Code that not more than fifty percent (50%) in value
of the outstanding stock of the REIT is or will be owned, directly or
indirectly, or through the application of the attribution rules of the Code
section 544 (as modified by Code section 856(h)(1)(B)), by or for five (5) or
fewer individuals (as defined in the Code sections 542(a)(2) and 856(h)(3) to
include certain entities) during the last half of the REIT's taxable year.
FUND - The 1818 Fund II, L.P.
HMOS - Health maintenance organizations
INITIAL TERM - The initial term of each Lease, expiring on December 31,
2007
INTERESTED STOCKHOLDER - Any person who owns, directly or indirectly, by or
for any person 10% or more in value of the stock in the REIT.
IRS - Internal Revenue Service
ISOS - Incentive stock options
LEASE or LEASES - The REIT, as Landlord, will lease to the Corporation each
of the Owned Healthcare Facilities, each of which will be the subject of a
separate lease.
LP AGREEMENT - The Amended and Restated Agreement of Limited Partnership
of NHC
MANAGING GENERAL PARTNER - NHC, Inc., the managing general partner of NHC
MASTER CAPITALIZED LEASE - The master capitalized lease has a 50 year term
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,
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.
MERGER - NHC will merge with and into National HealthCare Corporation,
pursuant to which each outstanding Unit of NHC will represent the right to
receive one share of common stock of the Corporation
MGCL - The Maryland General Corporate Law
NATIONAL - National Health Corporation, NHC's administrative general
partner
NEW CORPORATION CREDIT AGREEMENT - The Corporation is seeking a $35 million
credit facility which, if obtained, will be used to replace a portion of its
outstanding debt.
NEW REIT CREDIT AGREEMENT - The REIT is seeking a $95 million unsecured
credit facility, and if obtained will be used to replace all but approximately
$14.8 million of the Assumed Liabilities.
NHC - National HealthCare L.P., a Delaware limited partnership. Also refers
to the trading symbol of NHC's limited partnership Units on AMEX.
NHC ADJOURNMENT PROPOSAL - Approval of the possible adjournment of the
Special Meeting for the purpose of soliciting additional votes in favor of the
Plan of Restructure and Merger.
NHC, INC. - The managing general partner of NHC
CORPORATION REGISTRATION STATEMENT - refers to the Registration Statement
on Form S-4 filed by National HealthCare Corporation (SEC File No. 333-37185)
with respect to up to 10,819,400 shares of its common stock to be issued in the
Merger or upon conversion of convertible securities.
NHI ADVISORY AGREEMENT - Refers to the Advisory, Administrative Services
and Facilities Agreement dated October 15, 1991 between NHC, as "Advisor",
(which agreement will be assumed by the Corporation pursuant to the Merger) and
pursuant to which the Corporation will provide management and advisory services
to NHI.
NHI MASTER AGREEMENT - The Master Agreement to Lease between NHC and NHI
covering 40 nursing homes and three retirement centers, and setting forth
certain terms and conditions applicable to all leases entered into by and
between NHI and NHC
NHI LEASE OR NHI LEASES - Refers to any and all leases entered into by and
between NHI and NHC
135
<PAGE> 144
NHR/OP, L.P. - a newly-formed Delaware limited partnership and the
Operating Partnership of National Health Realty, Inc.
NOTES - 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
OIG - Office of the Inspector General
OPERATING PARTNERSHIP - NHR/OP, L.P.
OPERATING PARTNERSHIP AGREEMENT -The agreement of limited partnership of
NHR/OP, L.P.
OP UNIT - one Operating Partnership Unit
OPTIONS - certain outstanding unit options of NHC
ORT - Operation Restore Trust, a federal/state program aimed at detecting
and eliminating fraud and abuse by providers in the Medicare and Medicaid
programs
OTHER ASSETS - certain other assets having little or no book value on NHC's
books which will be transferred to the REIT and the Operating Partnership
OWNED HEALTHCARE FACILITY OR FACILITIES - 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 being
transferred to the REIT and the Operating Partnership by NHC
PLAN OF RESTRUCTURE - The plan pursuant to which NHC will make the
Distribution of all of the outstanding REIT Shares to the holders of NHC general
and limited partnership units and approximately 644,000 OP Units to National and
NHC will then merge with and into 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) approximately $105.9 million of assumed
liabilities.
RECOGNITION PERIOD - the ten-year period beginning on the date on which the
asset was acquired by the REIT, which subjects the REIT to corporate-level tax
on the REIT's recognized Built-In Gain on such assets.
RECORD DATE - The close of business on November 7, 1997
REGISTRATION STATEMENTS - refers to Registration Statements on form S-4
filed by each of National Health Realty, Inc. (SEC File No. 333-37173) and
National Healthcare Corporation (SEC File No. 33-37185), collectively.
REIT - National Health Realty, Inc., a newly-formed Maryland corporation
which is intended to qualify as a real estate investment trust under federal tax
laws and its subsidiaries
REIT ADVISORY AGREEMENT - Agreement between the Corporation and the REIT
pursuant to which the Corporation will render certain advice and services to the
REIT.
REIT CHARTER - Articles of Incorporation of the REIT
REIT COUNSEL - Goodwin, Procter & Hoar, LLP, Boston, Massachusetts, special
counsel to NHC and the REIT
REIT MASTER AGREEMENT - Each of the Lease or Leases for the Owned
Healthcare Facilities will incorporate the provisions of a Master Agreement to
Lease between the REIT and the Corporation
REIT REGISTRATION STATEMENT - Refers to the Registration Statement on Form
S-4 filed by the REIT (SEC File No. 333-37173) with respect to up to 10,013,400
shares to be issued to NHC Unitholders in the Distribution or upon the exercise
of options or the conversion of convertible securities.
REIT SHARES - All of the outstanding shares of common stock of National
Health Realty, Inc.
REIT STOCK OPTION PLAN - The REIT's 1997 Stock Option and Stock
Appreciation Rights 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.
136
<PAGE> 145
RELATED PARTY TENANT - Any person in which the REIT owns, at any time
during the taxable year, (i) in the case of a corporation, 10% or more of the
total combined voting power of all classes of stock entitled to vote, ro 10% or
more of the total number of shares of all classes of stock, or (ii) in the case
of an entity other than a corporation, an interest of 10% or more in the assets
or net profits of such entity. For purposes of this definition, ownership will
be determined by taking into account the attribution rules of the Code section
318(a) (as modified by Code section 856(d)(5)).
RELIEF ACT - The Taxpayer Relief Act of 1997
SARS - Stock appreciation rights
SECURITIES ACT - The Securities Act of 1933, as amended
SHARES - The shares of common stock of National HealthCare Corporation
SPECIAL MEETING - A special meeting of limited partners of National
HealthCare L.P., to be held on Thursday, December 18, 1997, at 9:00 a.m.,
Central Standard time, at NHC's partnership offices, 100 Vine Street, Suite 1400
Murfreesboro, Tennessee 37130.
TAX COUNSEL - Harwell Howard Hyne Gabbert & Manner, P.C., Nashville,
Tennessee, special counsel to NHC and the Corporation
TERMINATION TRANSACTION - 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
THE 1818 FUND NOTES - $20 million in 5.75% Subordinated Convertible Notes
sold to the Fund pursuant to a private placement.
UBTI - Unrelated business taxable income, as such phrase is defined in Code
Section 512
UNITS - NHC general and limited partnership units
137
<PAGE> 146
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NATIONAL HEALTHCARE L.P.
PAGE
----
<S> <C>
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-28
Balance Sheet dated October 15, 1997 F-29
Notes to Balance Sheet F-30
</TABLE>
F-1
<PAGE> 147
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> 148
NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except unit amounts)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
------------ ------------ ------------
Revenues:
<S> <C> <C> <C>
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> 149
NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
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> 150
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
======== ======== =========
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> 151
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 Partners 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> 152
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Presentation--
The consolidated financial statements include the accounts of National
HealthCare L.P. and its majority owned 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. Investments in entities in
which NHC lacks control but has the ability to exercise significant influence
over operating and financial policies are accounted for on the equity method.
Investments in entities in which NHC lacks the ability to exercise significant
influence are included in the consolidated financial statements at the cost of
NHC's investment. 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.
F - 7
<PAGE> 153
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).
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> 154
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> 155
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> 156
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.
(in thousands)
<TABLE>
<CAPTION>
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> 157
NOTE 7 - PROPERTY, EQUIPMENT AND ASSETS UNDER ARRANGEMENT WITH OTHER PARTIES:
Property and equipment, at cost, consist of the following:
(in thousands)
<TABLE>
<CAPTION>
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:
(in thousands)
<TABLE>
<CAPTION>
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> 158
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> 159
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> 160
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.
In accordance with Statement of Financial Accounting Standards No 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS 119), NHC issued the interest rate cap for purposes other
than trading. The objective of the arrangement is to provide financial
assistance to the managed entity. At December 31, 1996 the interest rate cap is
not reflected in NHC's Consolidated Financial Statements, since NHC has no
liability and anticipates no future liability related to the arrangement. If,
due to future changes in interest rates, NHC is required to perform under the
arrangement, NHC will recognize a liability in the Consolidated Balance Sheet
and a related loss in the Consolidated Statement of Income.
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> 161
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> 162
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> 163
NATIONAL HEALTHCARE L.P.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Net patient revenues $ 99,400 $ 84,388 $ 288,640 $ 246,073
Other revenues 12,589 11,430 35,403 33,529
----------- ----------- ----------- -----------
Net revenues 111,989 95,818 324,043 279,602
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Salaries, wages and benefits 59,910 52,930 177,539 154,936
Other operating 35,039 28,888 101,379 86,855
Depreciation and amortization 4,349 3,625 12,061 9,795
Interest 3,314 2,305 9,387 8,474
----------- ----------- ----------- -----------
Total costs and expenses 102,612 87,748 300,366 260,060
----------- ----------- ----------- -----------
NET INCOME $ 9,377 $ 8,070 $ 23,677 $ 19,542
=========== =========== =========== ===========
EARNINGS PER UNIT:
Primary $ 1.06 $ .94 $ 2.68 $ 2.28
=========== =========== =========== ===========
Fully diluted $ .91 $ .81 $ 2.33 $ 1.98
=========== =========== =========== ===========
WEIGHTED AVERAGE UNITS OUTSTANDING:
Primary 8,860,413 8,583,911 8,836,992 8,585,875
Fully diluted 10,756,650 10,515,701 10,737,859 10,520,240
CASH DISTRIBUTIONS PAID PER UNIT $ .60 $ .52 $ 1.80 $ 1.56
=========== =========== =========== ===========
NET INCOME ALLOCABLE TO PARTNERS:
General Partners $ 94 $ 81 $ 237 $ 195
Limited Partners 9,283 7,989 23,440 19,347
----------- ----------- ----------- -----------
$ 9,377 $ 8,070 $ 23,677 $ 19,542
=========== =========== =========== ===========
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
F - 18
<PAGE> 164
NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
Sept. 30 December 31
1997 1996
--------- ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,270 $ 1,881
Cash held by trustees 4,001 2,274
Marketable securities 19,130 17,968
Accounts receivable, less
allowance for doubtful accounts
of $5,925 and $4,079 63,174 50,902
Notes receivable 5,940 2,515
Inventory at lower of cost (first-in,
first-out method) or market 4,258 3,572
Prepaid expenses and other assets 1,080 982
--------- ---------
Total current assets 100,853 80,094
--------- ---------
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 265,040 234,934
Less accumulated depreciation and
amortization (56,892) (48,171)
Assets under arrangement with
other parties 20,948 22,538
--------- ---------
Net property, equipment and assets
under arrangement with other parties 229,096 209,301
--------- ---------
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 397 141
Unamortized financing costs 1,636 1,601
Notes receivable 95,776 95,206
Notes receivable from National 10,102 12,153
Minority equity investments and other 6,595 6,244
--------- ---------
Total other assets 114,506 115,345
--------- ---------
$ 444,455 $ 404,740
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
F - 19
<PAGE> 165
NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
Sept. 30 December 31
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 8,025 $ 8,574
Trade accounts payable 8,702 11,835
Accrued payroll 27,140 28,963
Amount due to third-party payors 22,951 13,135
Accrued interest 540 501
Other current liabilities 14,483 9,795
-------- --------
Total current liabilities 81,841 72,803
-------- --------
LONG-TERM DEBT, less current portion 142,372 124,678
DEBT SERVICED BY OTHER PARTIES, LESS
CURRENT PORTION 31,811 32,857
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES 786 791
COMMITMENTS, CONTINGENCIES AND GUARANTEES
SUBORDINATED CONVERTIBLE NOTES 28,739 28,908
DEFERRED INCOME 14,822 16,166
PARTNERS' CAPITAL:
General partners 1,490 1,408
Limited partners 142,594 127,129
-------- --------
Total partners' capital 144,084 128,537
-------- --------
$444,455 $404,740
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
F - 20
<PAGE> 166
F - 21
<PAGE> 167
F - 22
<PAGE> 168
F - 23
<PAGE> 169
NATIONAL HEALTHCARE L.P.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $23,677 $19,542
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 11,469 9,048
Provision for doubtful accounts 1,946 5,214
Amortization of intangibles and deferred charges 642 858
Amortization of deferred income (1,344) (227)
Equity in earnings of unconsolidated investments (110) (279)
Distributions from unconsolidated investments 161 195
Changes in assets and liabilities:
Increase in accounts receivable (14,218) (4,888)
Increase in inventory (686) (705)
(Increase) Decrease in prepaid expenses
and other assets (98) 94
Increase (Decrease) in trade accounts payable (3,133) 3,155
Increase (Decrease) in accrued payroll (1,823) 1,517
Increase (Decrease) in amounts due to third
party payors 9,816 (484)
Increase (Decrease) in accrued interest payable 39 (716)
Increase in other current liabilities 4,688 1,000
------- -------
31,026 33,324
------- -------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (31,263) (44,581)
Investment in long-term notes receivable and loan
participation agreements (23,494) (14,370)
Collection of long-term notes receivable and loan
participation agreements 21,550 32,230
Increase (Decrease) in minority equity investments
and other (753) 2,431
(Increase) Decrease in debt and equity securities 605 (15,555)
------- -------
(33,355) (39,845)
------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 22,948 22,266
Increase in cash held by trustees (1,727) (324)
(Increase) Decrease in minority interest in subsidiaries (5) 5
Increase (Decrease) in bond reserve funds, mortgage
replacement reserves and other deposits (256) 1,660
Issuance of partnership units 505 558
Collection of receivables 5,131 3,428
Payments on debt (6,954) (9,245)
Cash distributions to partners (15,703) (13,087)
Increase in financing costs (221) (93)
------- -------
3,718 5,168
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,389 (1,353)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,881 4,835
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,270 $ 3,482
======= =======
Supplemental Information:
Cash payments for interest expense $ 9,348 $ 9,180
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F - 24
<PAGE> 170
NATIONAL HEALTHCARE L.P.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
During the nine months ended September 30, 1996, NHC
was released from its liability on debt serviced
by others by the respective lenders
Debt serviced by other parties $ -0- $(3,841)
Assets under arrangement with other parties -0- 3,841
During the nine months ended September 30, 1997 and
September 30, 1996, respectively $169,000 and $686,000
of convertible subordinated debentures were converted
into 4,534 and 45,112 units of NHC's partnership units:
Convertible subordinated debentures (169) (686)
Financing costs 1 1
Accrued interest (2) (5)
Partner's capital 170 690
</TABLE>
F - 25
<PAGE> 171
NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 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 -- -- -- 237 23,440 23,677
Collection of
receivables -- 5,131 -- -- -- 5,131
Units sold 387,753 (11,576) -- -- 12,081 505
Units in conversion of
convertible debentures
to partnership units 11,110 -- -- -- 170 170
Unrealized gains on
securities -- -- 1,767 -- -- 1,767
Cash distributions
($1.80 per unit) -- -- -- (155) (15,548) (15,703)
--------- --------- ------- ------ -------- --------
BALANCE AT 9/30/97 8,866,822 $ (29,119) $ 3,938 $1,490 $167,775 $144,084
========= ========= ======= ====== ======== ========
BALANCE AT 12/31/95 8,353,114 $ (26,196) $ 345 $1,290 $133,460 $108,899
Net income -- -- -- 195 19,347 19,542
Collection of
receivables -- 3,428 -- -- -- 3,428
Units sold 22,870 -- -- -- 558 558
Units in conversion of
convertible debentures
to partnership units 45,112 -- -- -- 690 690
Unrealized gains on
securities -- -- 927 -- -- 927
Cash distributions
($1.56 per unit) -- -- -- (131) (12,956) (13,087)
--------- --------- ------- ------- -------- --------
BALANCE AT 9/30/96 8,421,096 $ (22,768) $ 1,272 $ 1,354 $141,099 $120,957
========= ========= ======= ======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F - 26
<PAGE> 172
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements for the nine months ended September 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 nine
months ended September 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 Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
------- -------- -------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenue from managed centers $ 8,785 $ 7,988 $25,780 $24,272
Guarantee fees 157 165 46 530
Advisory fee from NHI 775 796 2,326 2,390
Earnings on securities 467 430 1,358 555
Equity in earnings of
unconsolidated investments 71 184 95 285
Interest income 1,150 859 3,099 3,581
Other 1,184 1,008 2,276 1,916
------- ------- ------- -------
$12,589 $11,430 $35,403 $33,529
======= ======= ======= =======
</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.
F - 27
<PAGE> 173
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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 September 30, 1997 was $854,000. Gross investment gains of
$249,000 were realized on these sales during the period ended September 30,
1997. Realized gains and losses from securities sales are determined on the
specific identification of the securities.
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 $69,163,000 (net of available debt service reserves) at variable
and fixed interest rates with a weighted average of 4.8% at September 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
$15,500,000 and the weighted average rate of both debts is 6.4% at September 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.
In accordance with Statement of Financial Accounting Standards No 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS 119), NHC issued the interest rate cap for purposes other
than trading.
The objective of the arrangement is to provide financial assistance to
the managed entity. At September 30,1996 the interest rate cap is not reflected
in NHC's Consolidated Financial Statements, since NHC has no liability and
anticipates no future liability related to the arrangement. If, due to future
changes in interest rates, NHC is required to perform under the arrangement, NHC
will recognize a liability in the Consolidated Balance Sheet and a related loss
in the Consolidated Statement of Income.
F - 28
<PAGE> 174
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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 129") 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 operation 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 (the "deferred compensation fee, or DCF"). 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 DCF. NHC has denied all
allegations and conclusions. Although on November 5, 1997, the trial court ruled
on FCC's partial Motion for Summary Judgement that the mortgages do secure the
DCF and that the DCF is due upon termination of a management contract, the suit
is still in the preliminary stages and no trial date has been scheduled.
In January, 1997, NHC was notified that FCC did not intend to renew an
additional four contracts which matured in 1997, but FCC agreed that NHC will
remain as manager until a final decision is reached by the Sarasota Court. The
remainder 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
F - 29
<PAGE> 175
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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. By agreement, and with court approval, the suit has
been moved from the Pensacola District Court to the Tampa, Florida District
Court and NHC's time for filing its Answer has been extended through year end
1997. 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, 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 NHC continues to schedule and prepare revised cost reports
and exception requests. It is anticipated that all 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.
F - 30
<PAGE> 176
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 - 31
<PAGE> 177
NATIONAL HEALTH REALTY, INC.
BALANCE SHEET
OCTOBER 15, 1997
<TABLE>
<CAPTION>
ASSETS
- ---------------------------------------------------------------------------------
<S> <C>
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 - 32
<PAGE> 178
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, furnishing 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.
F - 33
<PAGE> 179
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
REIT 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 - 34
<PAGE> 180
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.
1. 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.
2. 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 December 18, 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.
3. 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.
4. 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
<PAGE> 181
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 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.
5. 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.
6. 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
A - 2
<PAGE> 182
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 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.
7. 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.
8. 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.
9. 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.
A - 3
<PAGE> 183
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> 184
EXHIBIT INDEX
Exhibit A Contribution Agreement
Exhibit B Operating Lease Agreement
Exhibit C Advisory Agreement
Exhibit D Merger Agreement
A - 5
<PAGE> 185
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
<PAGE> 186
sells, exchanges or surrenders the certificate to the Corporation's transfer
agent. The shares of the Corporation issued 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> 187
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> 188
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> 189
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 10 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> 190
APPENDIX C
PROXY NATIONAL HEALTHCARE L.P. PROXY
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, December 18, 1997, at 9:00 a.m. Central
Standard Time, at the Managing General Partner'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.
C - 1
<PAGE> 191
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") applies to the
Corporation and the relevant portion of the DGCL provides as follows:
145. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act m good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorneys' fees) incurred
by other employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
<PAGE> 192
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
The Certificate of Incorporation limits the liability of directors (in their
capacity as directors, but not in their capacity as officers) to The Corporation
or its stockholders to the fullest extent permitted by the DGCL, as amended.
Specifically, no director of The Corporation will be personally liable to The
Corporation or its stockholders for monetary damages for breach of the
director's fiduciary duty as a director, except as provided in Section 102 of
the DGCL for liability: (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders; (ii) for acts or omissions not in good
faith and which involve intentional misconduct or knowing violation of law;
(iii) under Section 174 of the DGCL, which relates to unlawful payments of
dividends or unlawful stock repurchases or redemptions; or (iv) for any
transaction from which the director derived an improper personal benefit. The
inclusion of this provision in the Certificate of Incorporation may have the
effect of reducing the likelihood of derivative litigation against directors,
and may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such action, if
successful, might otherwise have benefitted the Corporation and its
stockholders.
Under the Certificate of Incorporation and in accordance with Section 145 of
the DGCL, the Corporation will indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than a "derivative" action by or in the right of the Corporation) by
reason of the fact that such person was or is a director or officer of the
Corporation, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such acts were unlawful. A
similar standard of care
II - 2
<PAGE> 193
is applicable in the case of derivative actions, except that indemnification
only extends to expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such an action and
then, where the person is adjudged to be liable to the Corporation, only if and
to the extent that the Court of Chancery of the State of Delaware or the court
in which such action was brought determines that such person is fairly and
reasonably entitled to such indemnity and then only for such expenses as the
court deems proper. The Corporation will indemnify, pursuant to the standard
enumerated in Section 145 of the DGCL, any past or present officer or director
who was or is a party, or is threatened to be made a party, to any threatened,
pending or completed derivative action by or in the right of the Corporation.
The Certification of Incorporation of the Corporation provides that the
Corporation may pay for the expenses incurred by an indemnified director or
officer in defending the proceedings specified above in advance of their final
disposition, provided that, if the DGCL so requires, such indemnified person
agrees to reimburse the Corporation if it is ultimately determined that such
person is not entitled to indemnification. The Corporation's Certificate of
Incorporation also allows the Corporation, in its sole discretion, to indemnify
any person who is or was one of its employees and agents to the same degree as
the foregoing indemnification of directors and officers. To the extent that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in subsections (a) and (b) of Section 145 of the DGCL, or in defense of any
claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith. In addition, the 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 another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against and
incurred by such person in such capacity, or arising out of the person's status
as such whether or not the Corporation would have the power or obligation to
indemnify such person against such liability under the provisions of the DGCL.
The Corporation maintains insurance for the benefit of the Corporation's
officers and directors insuring such persons against certain liabilities,
including civil liabilities under the securities laws. Additionally, the
Corporation has entered into indemnification agreements with each of the
Directors of the Corporation, which, among other things, provides that the
Corporation will indemnify such Directors to the fullest extent permitted by the
Certificate of Incorporation and the DGCL and will advance expenses of defending
claims against such Directors.
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 HealthCare Corporation
* 3.2 Bylaws of National HealthCare Corporation
* 4.1 Indenture between National HealthCare L.P. and First American National Bank, dated August
29, 1995 relating to 6.0% Convertible Senior Subordinated Debentures due 2000 aggregating
$30,000,000
* 4.2 Indenture of Mortgage and Deed of Trust dated as of October 15, 1989 by and among National
HealthCorp L.P. and Boatmen's Trust Company, Corporate Trustee, and H.E. Bradford,
Individual Trustee, relating to $20,000,000 ___% First Mortgage Bonds due 2005
* 4.3 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
</TABLE>
II - 3
<PAGE> 194
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
* 4.4 First Supplemental Indenture of Trust and Security Agreement dated as of November 1, 1991 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 Harwell Howard Hyne Gabbert & Manner, P.C., counsel to the Registrant, as
to the due formation of the Corporation
8 Legal Opinion of Harwell Howard Hyne Gabbert & Manner, P.C., counsel to the Registrant, as
to the tax effect to securityholders
* 10.1 Master Agreement of Lease dated as of October 17, 1991 by and among National Health
Investors, Inc. and National HealthCorp L.P.
* 10.2 REIT Master Lease effective as of January 1, 1998, by and among National HealthCare
Corporation, National Health Realty, Inc. and NHR/OP, L.P.
* 10.3 Advisory, Administrative Services and Facilities Agreement dated as of October 17, 1991
between National Health Investors, Inc. and National HealthCorp L.P.
* 10.4 Advisory, Administrative Services and Facilities Agreement effective as of January 1, 1998,
between National HealthCare Corporation, National Health Realty, Inc. and NHR/OP, L.P.
* 10.5.1 Form of Service Agreement by and between National Health Corporation and National
HealthCare Corporation.
10.5.2 Form of National HealthCare Corporation 1997 Employee Stock Purchase Plan
10.5.3 Form of National HealthCare Corporation 1997 Stock Option and Stock
Appreciation Rights Plan
10.6 Loan and Security Agreement dated as of December 16, 1988 regarding the Registrant's
guaranty of National Health Corporation Leveraged Employee Stock Ownership Trust's
obligation under $50,000,000 loan
* 10.7 Amended and Restated Revolving Credit Note dated as of September 1, 1995 by and between
National Health Corporation and National HealthCare L.P.
* 10.8 Amended and Restated Revolving Credit Agreement dated as of September 1, 1995 by and
between National Health Corporation and National HealthCare L.P.
* 10.9 Third Amendment to Guarantee and Contingent Purchase Agreement dated as of October 14,
1993 by and among National HealthCare L.P., National Health Corporation and Third National
Bank in Nashville, as agent for the Banks
* 10.10 Fourth Amendment to Guarantee and Contingent Purchase Agreement dated as of December 30,
1993 by and among National HealthCare L.P., National Health Corporation and Third National
Bank in Nashville, as agent for the Banks
* 10.11 Fifth Amendment to Guarantee and Contingent Purchase Agreement dated as of September 1,
1995, by and among National HealthCare L.P., National Health Corporation and Third National
Bank in Nashville, as agent for the Banks
* 10.12 Suretyship Agreement dated as of March 8, 1988 by and among City Center, Ltd., NHESOP,
Inc. and National HealthCorp L.P.
* 10.13 Guaranty Agreement dated as of December 1, 1987 by and among National HealthCorp L.P.,
James O. McCarver and The Toronto-Dominion Bank
</TABLE>
II - 4
<PAGE> 195
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
* 10.14 Guaranty Agreement dated as of May 1, 1993 by and between National HealthCorp L.P. and
Societe Generale
* 10.15 Guaranty Agreement dated as of March 5, 1991 by and between National HealthCorp L.P. and
The Bank of Tokyo, Ltd., New York Agency (Palm Beach County)
* 10.16 Guaranty Agreement dated as of March 5, 1991 by and between National HealthCorp L.P. and
The Bank of Tokyo, Ltd., New York Agency (Dade County)
* 10.17 Amendment to Guaranty Agreement dated as of October 17, 1991 by and among National
HealthCorp L.P., James O. McCarver and The Toronto-Dominion Bank
* 10.18 Amendment to Guaranty Agreement dated as of July 22, 1992 by and among National
HealthCorp L.P., James O. McCarver and The Toronto-Dominion Bank
* 10.19 Fourth Amendment to Guaranty Agreement dated as of June 30, 1995 by and among National
HealthCare L.P., James O. McCarver and The Toronto-Dominion Bank
* 10.20 Subordination Agreement dated as of May 1, 1993 by and among National HealthCorp L.P.,
Societe Generale and Richland Place, Inc.
* 10.21 Renewal Note dated as of December 31, 1993 in the principal amount of $10 million payable to
National HealthCorp L.P. by National Health Corporation
* 10.22 Second Deed of Trust Note dated as of January 20, 1988 in the principal amount of $10 million
payable to National HealthCorp L.P. by NHESOP, Inc.
* 10.23 First Amended Second Deed of Trust Note dated as of December 21, 1988 payable to National
HealthCorp L.P. by NHESOP, Inc.
* 10.24 Promissory Note dated as of January 15, 1996 in the principal amount of $2,797,511.28 payable
to National Health Investors, Inc. by National HealthCare L.P.
* 10.25 Renewal Term Note dated as of January 1, 1992 in the principal amount of $10 million
payable to National Health Corporation by National HealthCorp L.P.
* 10.26 Assumption and Modification Agreement dated as of October 17, 1991 by and among National
Health Investors, Inc., National HealthCorp L.P. and Third National Bank in Nashville, Agent
* 10.27 Amended and Restated Reimbursement Agreement dated as of December 1, 1986, and
Amended and Restated as of March 1, 1991, by and among Florida Convalescent Associates,
National HealthCorp L.P. and The Bank of Tokyo, Ltd., New York Agency
* 10.28 Contribution and Assumption Agreement dated as of October 17, 1991 by and between National
HealthCorp L.P. and National Health Investors, Inc.
10.29 5.75% Subordinated Convertible Note due June 30, 2004 by and between National HealthCare
L.P. and The 1818 Fund II, L.P.
21 Subsidiaries of the Registrant
23.2 Consent of Arthur Andersen LLP, independent public accountants.
* 24 Power of Attorney (included on the signature page hereto)
* Filed with initial registration statement.
</TABLE>
(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> 196
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3; and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
2. That, for the purpose 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.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
4. If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, provided, that
the registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (4) and
other information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include financial
statements and information required by Section 10(a)(3) of the Act or Rule 3-19
of this chapter if such financial statement and information are contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Form F-3.
5. 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.
6. 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.
II - 6
<PAGE> 197
7. 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 Securities 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.
8. 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.
II - 7
<PAGE> 198
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.
9. 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.
10. 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.
11. The undersigned registrant hereby undertakes to provide to the
Distribution Agent at the closing specified in the Plan of Restructure,
certificates in such denominations and registered in such names as required by
the Distribution Agent to permit prompt delivery to each Unitholder.
II - 8
<PAGE> 199
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to 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 19th day of November, 1997.
NATIONAL HEALTHCARE CORPORATION
By: /s/ W. Andrew Adams
-------------------------------------
W. Andrew Adams
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to 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, President, Chief November 19, 1997
- ------------------------------- Executive Officer and Director
W. Andrew Adams (Chief Executive Officer)
/s/ Donald K. Daniel Vice President, Controller, Chief November 19, 1997
- ------------------------------- Financial Officer and Chief
Donald K. Daniel Accounting Officer
* Director November 19, 1997
- -------------------------------
J. K. Twilla
* Director November 19, 1997
- -------------------------------
Olin O. Williams
* Director November 19, 1997
- -------------------------------
Robert G. Adams
* Director November 19, 1997
- -------------------------------
Ernest G. Burgess
</TABLE>
II - 9
<PAGE> 200
<TABLE>
<S> <C> <C>
* Director November 19, 1997
- -------------------------------
Lawrence C. Tucker
</TABLE>
/s/ Richard F. LaRoche, Jr.
- -----------------------------------------------
* By Richard F. LaRoche, Jr., attorney-in-fact
II - 10
<PAGE> 1
EXHIBIT 5
November 19, 1997
National HealthCare Corporation
100 Vine Street
City Center
Murfreesboro, Tennessee 37130
Gentlemen:
We have acted as special counsel to National HealthCare Corporation
(the "Company), a Delaware corporation, in connection with the registration of
10,819,400 shares of its common stock to be issued in a public offering pursuant
to Registration Statement No. 333-37185 on Form S-4, as filed with the
Securities and Exchange Commission (the "Registration Statement"). This firm
hereby consents to the filing of this opinion as an exhibit to the Registration
Statement and with agencies of such states and other jurisdictions as may be
necessary in the course of complying with the laws of such states and
jurisdictions regarding the offering and sale of the common stock in accordance
with the Registration Statement. We further consent to the use of our name in
the Registration Statement under the section of the prospectus entitled "Legal
Matters".
We have examined copies of the Company's Certificate of Incorporation
and Bylaws, such records of proceedings of the Company's Board of Directors as
we consider appropriate, and the Registration Statement.
In stating our opinion, we have assumed: (i) that all signatures are
genuine, all documents submitted to us as originals are authentic, and all
documents submitted to us as copies conform to authentic original documents; and
(ii) that the parties to such documents have the legal right and power under all
applicable laws, regulations and agreements to enter into, execute, deliver and
perform their respective obligations thereunder.
On the basis of such review, subject to the limitations expressed
herein, we are of the opinion, as of the date hereof, that the securities being
registered by the Registration Statement when issued, sold, and delivered in
accordance with the terms set forth in the Registration Statement will be
validly issued, fully paid and non-assessable.
<PAGE> 2
National HealthCare Corporation
November 19, 1997
Page 2
In rendering the opinion set forth herein, we have relied upon the
documents referenced above and such other information as we have deemed
necessary, but we have made no independent verification or investigation of
factual matters pertaining thereto or to the Company. The opinion expressed
herein is subject to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance and other similar laws now or thereafter in
effect relating to or affecting the rights of creditors generally, judicial
discretion, and equitable principles whether applied pursuant to a proceeding at
law or in equity; and no opinion is expressed with respect to the availability
of equitable remedies.
Sincerely,
HARWELL HOWARD HYNE
GABBERT & MANNER, P.C.
<PAGE> 1
EXHIBIT 8
November 19, 1997
HAND DELIVERED
National HealthCare L.P.
100 Vine Street
Murfreesboro, Tennessee 37130
Attention: Richard F. LaRoche, Jr.
Senior Vice President and Secretary, NHC, Inc.
Managing General Partner
Re: National HealthCare L.P. Plan of Restructure
Gentlemen:
We have served as tax counsel to National HealthCare L.P., a Delaware
limited partnership ("NHC"), in connection with (i) its incorporation of
National Health Realty, Inc., a Maryland corporation that is intended to qualify
as a real estate investment trust for federal income tax purposes (the "REIT"),
(ii) its proposed formation of NHR/OP, L.P., a Delaware limited partnership (the
"Operating Partnership"), (iii) its proposed contribution (subject to certain
liabilities) of certain real properties, mortgage notes and other assets (the
"REIT Assets") to the REIT and the Operating Partnership in exchange for one
hundred percent (100%) of the issued and outstanding capital stock of the REIT
and approximately six hundred forty-three thousand seven hundred forty-eight
(643,748) units of limited partnership interest in the Operating Partnership,
(iv) its proposed distribution of all REIT stock to the NHC unitholders and its
Operating Partnership units to National Health Corporation, a Tennessee
corporation and NHC's administrative general partner ("National"), (v) its
incorporation of National HealthCare Corporation, a Delaware corporation (the
"Corporation"), and (vi) the proposed merger of NHC with and into the
Corporation, all as more particularly described in the Proxy Statement and Joint
Form S-4 described below.
In connection with these transactions, you have asked us to render our
opinion regarding certain federal income tax consequences. At your request, we
have also participated in the preparation of the federal income tax
considerations discussion contained in the Joint Form S-4 described below.
Subject to the assumptions, qualifications and limitations contained therein,
said discussion fully and fairly addresses the federal income tax issues
material to NHC unitholders in connection with the Plan of Restructure as
defined in said Joint Form S-4. Said discussion, however, should be read in its
entirety and does not represent the opinion of counsel, which is set forth
below. Tax counsel consents to the inclusion of a copy of this opinion as an
exhibit to said Joint Form S-4 as filed with the Securities and Exchange
Commission.
In response to your request, our opinion is set forth below.
This opinion is based upon the provisions of the Internal Revenue Code
of 1986, as amended to the date of this letter (the "Code"), the existing U.S.
Treasury Regulations (the "Regulations") and proposed Regulations thereunder,
judicial decisions and currently published administrative rulings generally
available as of the date of this letter. Any such authority may be changed,
perhaps retroactively. Therefore, no assurance can be given that any such
changes would not adversely affect the accuracy of the conclusions stated
herein. Furthermore, we undertake no responsibility to advise
<PAGE> 2
National HealthCare L.P.
November 19, 1997
Page 2
you of any new developments in the application or interpretation of the federal
income tax laws to the transactions discussed herein. The Internal Revenue
Service (the "IRS") is not bound by our opinion.
In rendering this opinion, we have reviewed the Proxy Statement for
Special Meeting of Partners of NHC and Joint Form S-4 of the REIT and the
Corporation (Registration Statement Nos. 333-37173 and 333-37185 under the
Securities Act of 1933) filed with the Securities and Exchange Commission on
October 3, 1997, as amended (the "Joint Form S-4"), and exhibits attached
thereto.
In rendering our opinion, we have assumed: (i) the genuineness of all
signatures on documents we have examined, (ii) the authenticity of all documents
submitted to us as originals, (iii) the conformity to the original documents of
all documents submitted to us as copies, (iv) the conformity of final documents
to all documents submitted to us as drafts, (v) the due execution of all
documents where due execution and delivery are prerequisites to the
effectiveness thereof, (vi) the authority and capacity of the individual or
individuals who execute any such documents on behalf of any person or entity,
(vii) the factual accuracy of all representations, warranties and other
statements made by all persons in connection with the transactions described in
the Joint Form S-4, (viii) that the transactions contemplated by the Joint Form
S-4 will be consummated as described therein and, as relevant, summarized below,
and (ix) that NHC, the REIT, the Operating Partnership and the Corporation have
the legal right and power under all applicable laws and regulations to enter
into, execute and consummate such transactions. We have also relied upon and our
opinion assumes the accuracy of certain written representations made to us by
NHC.
BRIEF SUMMARY OF FACTS
NHC is a Delaware limited partnership that principally operates
residential care facilities, long-term healthcare centers and home healthcare
centers and programs throughout the southeastern United States. Units of limited
partnership interest in NHC are traded over the American Stock Exchange. NHC
intends to transfer most of the REIT Assets to the REIT, a recently formed
Maryland corporation, and a small portion of the REIT Assets to the Operating
Partnership, a yet to be formed Delaware limited partnership, in exchange for
all of the issued and outstanding capital stock of the REIT, the assumption by
the REIT of certain liabilities secured by the REIT Assets, and approximately
six hundred forty-three thousand seven hundred forty-eight (643,748) units of
limited partnership interest in the Operating Partnership. NHC intends to
distribute all of the REIT stock to NHC's unitholders on the basis of one REIT
share per one NHC unit; provided, however, National shall receive all of NHC's
Operating Partnership units on the basis of one such unit for each NHC unit held
by National, which distribution shall thereby reduce the REIT shares National
would otherwise receive on a one for one basis. The REIT intends to satisfy the
requirements of Part 2 of subchapter M of the Code, so as to qualify and be
taxed for federal income tax purposes as a real estate investment trust.
Immediately following the distribution of the REIT stock and the
Operating Partnership units to the NHC unitholders, NHC will merge with and into
National HealthCare Corporation, a recently formed Delaware corporation.
Pursuant to the merger, each outstanding unit of NHC will represent the right to
receive one share of common stock of the Corporation. Following the merger, NHC
will cease to exist.
DISCUSSION AND OPINIONS
NHC'S CONTRIBUTION OF ASSETS TO THE REIT
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 Code 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.
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National HealthCare L.P.
November 19, 1997
Page 3
In exchange for its contribution to the REIT of most of the REIT
Assets, NHC will receive one hundred percent (100%) of the REIT's outstanding
capital stock. NHC will then immediately distribute all of the REIT stock to
NHC's unitholders. Although NHC will hold the REIT shares immediately after its
transfer of such assets to the REIT, it will hold them only for an instant.
Whether a transaction involving two or more steps (e.g., NHC's contribution of
assets to the REIT in exchange for REIT stock and the distribution of such REIT
stock to NHC's unitholders) should be collapsed or integrated for purposes of
determining whether the "immediately after" requirement of section 351 has been
satisfied has frequently been the subject of interpretation by the IRS and
courts.
In the case of a partnership that contributes 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 (the partnership) and the ultimate recipient of the corporate stock
(the partners) were not the same. As discussed below, NHC's distribution of the
REIT stock and Operating Partnership units followed immediately by NHC's merger
into the Corporation will be treated as a liquidation of NHC. Accordingly, it is
the opinion of Tax Counsel that, if challenged, it is more likely than not that
the general nonrecognition rule of section 351 would apply to NHC's contribution
of REIT Assets to the REIT, except as otherwise provided below.
Investment Company Exception. An exception to the general
nonrecognition rule of Code section 351 is found in section 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, among others, 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 in the Joint Form S-4, NHC and the REIT intend that the
REIT qualify and be taxed as a real estate investment trust. In that regard, an
opinion of Goodwin, Procter & Hoar LLP, Boston, Massachusetts, special counsel
to the REIT, that the form of organization and proposed operations of the REIT
are such as to enable it to be classified as a real estate investment trust for
federal income tax purposes is attached as an Exhibit to the Joint Form S-4.
Based upon that opinion, we anticipate that one of the two investment company
definitional requirements would be met with respect to NHC's contribution of
assets to the REIT.
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).
Although section 1002(a) of the Taxpayer Relief Act of 1997 amended
Code section 351(e) to change, according to the Conference Committee Report,
"the types of assets considered in the definition of an investment company in
the present Treasury regulations" (which changes are inapplicable if the
transfer is to a real estate investment trust), the new legislation "does not
override. . . the requirement that a contribution of property to an investment
company result in diversification in order for gain to be recognized."
Since NHC is the only transferor of assets to the REIT for purposes of
Code section 351, we are of the opinion that the second definitional requirement
of an investment company is absent, and therefore, it is more likely than not
that the investment company exception of section 351(e) would not apply to NHC's
contribution of assets to the REIT.
Exception for Liabilities in Excess of Basis. A further exception to
the general nonrecognition rule of Code section 351 is found in section 357(c).
Under section 357(c), if the sum of the liabilities assumed by the transferee
corporation plus the liabilities to which the property contributed to the
transferee corporation are subject exceed the total adjusted tax basis of the
property contributed to the transferee corporation by the transferor, then the
transferor must
<PAGE> 4
National HealthCare L.P.
November 19, 1997
Page 4
recognize gain in an amount equal to such excess. Although the REIT will assume
certain liabilities in connection with NHC's contribution of assets to the REIT
and the property to be contributed by NHC to the REIT will be subject to
certain liabilities, NHC has represented in writing that such liabilities will
not exceed the adjusted tax basis of the assets to be contributed to the REIT.
Notwithstanding that Code section 357(c) limits any gain recognized to
the amount that the liabilities exceed the transferor's basis in the contributed
property, gain in an amount equal to the liabilities in full, not just the
excess, would be recognized by a transferor in a section 351 transaction if the
transferor's principal purpose, with respect to the transferee's assumption of
liabilities or acquisition of property subject to liabilities, is to avoid
federal income tax or if no bona fide business purpose exists for such
assumption or acquisition. NHC has represented that the REIT's assumption of
liabilities and NHC's transfer of assets to the REIT subject to certain
liabilities is not for the purpose of avoiding federal income tax and that bona
fide business purposes for the transaction exist, which purposes are set forth
in substantial detail in the Joint Form S-4.
Accordingly, and based solely upon NHC's representations, section
357(c) would be inapplicable to NHC's contribution of assets to the REIT.
NHC'S CONTRIBUTION OF ASSETS TO THE OPERATING PARTNERSHIP
Under the general rule of Code section 721, no gain or loss is
recognized to a partnership or its partners upon a partner's transfer or
contribution of property to the partnership in exchange for an interest in the
partnership. In contrast to Code section 351, section 721 does not impose a
requirement that the transferors be in control of the partnership immediately
after the transfer.
Simultaneously with NHC's contribution of a portion of the REIT assets
to the Operating Partnership, the REIT will contribute to the Operating
Partnership those REIT Assets contributed to it by NHC. In exchange for its
contribution to the Operating Partnership, NHC will receive approximately six
hundred forty-three thousand seven hundred forty-eight (643,748) units of
limited partnership interest in the Operating Partnership. NHC will then
immediately distribute all of said Operating Partnership units to National.
Since section 721 does not impose an immediately after control requirement as
does section 351, Tax Counsel is of the opinion that NHC's distribution of the
Operating Partnership units to National will not affect the application of Code
section 721 to NHC's contribution of assets to the Operating Partnership.
Accordingly, Tax Counsel is of the opinion that, if challenged, it is more
likely than not that the general nonrecognition rule of Code section 721 would
apply to NHC's contribution of assets to the Operating Partnership.
NHC'S DISTRIBUTION OF REIT SHARES & OPERATING PARTNERSHIP UNITS TO ITS
UNITHOLDERS
As noted above, immediately following the contribution of the REIT
Assets to the REIT and the Operating Partnership, NHC will distribute all of the
REIT shares and Operating Partnership units that NHC receives upon such
contributions to the NHC unitholders. Code section 731(b) provides that a
partnership will not recognize gain or loss upon its distribution of property or
money to its partners. As to the partners, Code section 731(a) generally
provides that no gain or loss shall be recognized by a partner upon the
distribution to the partner of property other than money.
For purposes of section 731(a), "marketable securities" are generally
treated as money. Marketable securities are defined in section 731(c) 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
(as defined in the Joint Form S-4) the REIT shares will be approved for listing
on the American Stock Exchange, though such listing will
<PAGE> 5
National HealthCare L.P.
November 19, 1997
Page 5
not be effective until some time 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 741(c)(4) of the Uruguay Round Agreements Act, which
amended Code section 731 to include marketable securities within the definition
of money, provides that such amendments do 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, the Operating Partnership units and stock in the Corporation will
be issued to NHC in exchange for all of NHC's assets under the nonrecognition
provisions of sections 351 and 721 and will be distributed by NHC to its
unitholders within 90 days of their receipt by NHC. As discussed below, the
distribution by NHC of the REIT stock and the Operating Partnership units
followed immediately by the merger of NHC into the Corporation 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 NHC's distribution of the REIT shares and
Operating Partnership units. Therefore, subject to the limitations, facts and
assumptions expressed herein, Tax Counsel is of the opinion that it is more
likely than not that neither NHC nor its unitholders will recognize gain upon
NHC's distribution of the REIT shares and Operating Partnership units to NHC's
unitholders.
MERGER OF NHC INTO THE CORPORATION
Incorporation of the Corporation. The incorporation of the Corporation
by NHC is intended to qualify as a tax free incorporation under Code section
351. It is the opinion of Tax Counsel that neither the Corporation nor NHC would
recognize gain upon the formation of the Corporation and that the Corporation
will be taxed as a corporation for federal income tax purposes.
The Merger: Constructive Contribution of Assets and Code Section 351.
The merger of NHC into the Corporation immediately following the distribution by
NHC of the REIT stock and the Operating Partnership units 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 REIT shares in
exchange for their units (though National will also receive Operating
Partnership units). The merger of NHC into the Corporation will be treated as a
contribution by NHC of its assets (other than those contributed to the REIT or
the Operating Partnership) to the Corporation and the distribution by NHC of the
Corporation's stock (with the REIT stock and Operating Partnership units) to
NHC's unitholders. As noted above, 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, as defined in section
368(c), of the corporation.
As discussed above, in Revenue Ruling 84-111 the IRS ruled that the
"immediately after" requirement of section 351 is satisfied if a partnership
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." Although NHC will actually merge
into the Corporation, NHC will cease to exist as a separate entity and, for
federal income tax purposes, be treated as liquidating. Therefore, Tax Counsel
is of the opinion that, if challenged, it is more
<PAGE> 6
National HealthCare L.P.
November 19, 1997
Page 6
likely than not that the general nonrecognition rule of Code section 351 would
apply to NHC's "constructive contribution" of assets to the Corporation.
As noted above, Code section 357 generally permits a corporation, in
addition to issuing stock in a section 351 transaction, to assume liabilities of
the transferor or acquire property from the transferor subject to liabilities,
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 or acquisition was tax avoidance
(or was not a bona fide business purpose), or (ii) such liabilities exceed the
transferor's basis in the contributed assets. NHC has represented that the
liabilities to be assumed by the Corporation or to which assets constructively
contributed to the Corporation are subject do not exceed NHC's adjusted tax
bases in such assets. NHC has also represented that the principal purpose of the
Corporation's assumption of such liabilities and acquisition of properties
subject to liabilities is a bona fide business purpose and not the avoidance of
taxes.
Accordingly, and based solely upon NHC's representations, section
357(c) would be inapplicable to NHC's constructive contribution of assets to the
Corporation.
As discussed in detail above, the investment company exception to the
nonrecognition rule of Code section 351 precludes section 351's application to a
"transfer of property to an investment company." The Regulations provide that a
transfer shall be considered to be made to an investment company if the
transferee is, among others, a corporation more than eighty percent (80%) the
value of which consists of assets held for investment that are readily
marketable stocks or securities or interests in regulated investment companies
or real estate investment trusts.
The Taxpayer Relief Act of 1997 amended Code section 351 to expand the
assets to be considered in determining whether a corporation is an investment
company beyond those currently listed in the Regulations. Under Code section
351(e) as amended, an investment company includes any corporation if more than
eighty percent (80%) of its assets by value consist of money, stocks and other
corporate equity interests, evidences of indebtedness, options, forward or
future contracts, notational principal contracts or derivatives, foreign
currency, certain interests in precious metals, interests in real estate
investment trusts and regulated investment companies, common trust funds, and
publicly-traded partnership or other interests in non-corporate entities that
are convertible into or exchangeable for any asset of a type previously listed.
NHC has represented that the value of the Corporation's assets of the types
listed will not equal or exceed eighty percent (80%) of the Corporation's value.
As discussed above, to be a transfer to an investment company, the
transfer must (i) be to, among others, a regulated investment company, a real
estate investment trust, or a company more than eighty percent (80%) the value
of which consists of assets of the types listed, and (ii) results, directly or
indirectly, in the diversification of the transferor's interests.
As noted above, a transfer ordinarily results in the diversification of
the transferors' interest if two or more persons transfer non-identical assets
to a corporation in the exchange. According to the Conference Committee Report,
the changes to Code section 351(e) made by section 1002(a) of the Taxpayer
Relief Act of 1997 do "not override. . . the requirement that a contribution of
property to an investment company result in diversification in order for gain to
be recognized."
Accordingly, based on NHC's representation with regard to the value of
the investment company type assets to be held by the Corporation and since NHC
is the only transferor of assets to the Corporation for purposes of Code section
351, Tax Counsel is of the opinion that, if challenged, it is more likely than
not that the investment company exception of section 351(e) would not apply to
NHC's constructive contribution of assets to the Corporation.
<PAGE> 7
National HealthCare L.P.
November 19, 1997
Page 7
The Merger: Constructive Distribution of Corporation Stock. Although
NHC will, for purposes of state law, merge into the Corporation, NHC will be
deemed to distribute to NHC's unitholders the Corporation stock it receives upon
its constructive contribution of assets to the Corporation (with the REIT stock
and Operating Partnership units) in complete liquidation of NHC and of the
partnership interests of its unitholders.
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, the definition of which includes "marketable securities" as discussed
above. It is anticipated that as of the Effective Time the Corporation's shares
will be approved for listing on the American Stock Exchange, though such listing
will not be effective until some time thereafter.
However, the definition of money does not include marketable securities
if such are distributed in a "qualified partnership liquidation" that satisfies
the requirements of the transitional rule of section 741(c)(4) of the Uruguay
Round Agreements Act discussed above. For these purposes, 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 such a
"publicly traded" "existing" partnership.
The REIT shares, the Operating Partnership units and the Corporation
stock will be issued to NHC in exchange for all of its assets under the
nonrecognition rules of sections 351 and 721 and will be distributed within 90
days of their receipt by NHC. NHC's distribution of the REIT stock and the
Operating Partnership units and its merger into the Corporation 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 is of the opinion that, if challenged, it is
more likely than not that Code section 731(c) would not apply to the merger, and
that, 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 REIT shares, the Operating Partnership units and the
Corporation's stock.
Our opinion is rendered as of the date of this letter and is based on
existing statutes, administrative rules and regulations, court decisions, and
general legal principles, any of which could be changed at any time. Any such
changes may apply retroactively, and could significantly modify our conclusions
set forth above. Our opinion is limited to the specific matters described
herein, and only represents Tax Counsel's best legal judgment of the application
to the transactions described herein of federal income tax laws, existing
judicial decisions, administrative regulations and published rulings and
procedures; it has no binding effect or official status, and no assurance can be
given that the conclusions reached in this opinion would be sustained by a court
of law if contested. We undertake no obligation to update this opinion at any
time. All opinions expressed herein relate only to matters governed by the laws
of the United States of America. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
This opinion is being rendered expressly to NHC in connection with the
transactions contemplated in the Joint Form S-4, and is not to be quoted or
relied upon by any other party without our prior written consent.
Very truly yours,
HARWELL HOWARD HYNE GABBERT & MANNER, P.C.
<PAGE> 1
EXHIBIT 10.5.2
NATIONAL HEALTHCARE CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I
TITLE, PURPOSE AND TERM
Section 1.01 This Plan shall be known as the NATIONAL HEALTHCARE
CORPORATION 1997 Employee Stock Purchase Plan (hereinafter referred to as the
"Plan").
Section 1.02 The purpose of the Plan is to provide employees of
NATIONAL HEALTHCARE CORPORATION, a Delaware corporation, and its subsidiaries
and selected consultants and advisors and employees thereof with a convenient
way to become shareholders of the Company. It is believed that participation in
the ownership of the Company will help to achieve the unity of purpose essential
to the continued growth of the Company and benefit its employees, consultants
and shareholders.
Section 1.03 The Plan will be effective on the Effective Date. Unless
otherwise not extended in the prior year pursuant to this section 1.03, the
Plan shall automatically continue through March 31 of each year without the
necessity of Board action. The continuation of the Plan beyond March 31 of each
year shall require Board approval. Notwithstanding anything in this section
1.03 to the contrary, the Plan may be modified or discontinued by the Company at
any time in accordance with section 5.03 hereof.
ARTICLE II
DEFINITIONS
As used herein, the following words and phrases shall have the meanings
specified below, unless a different meaning is plainly required by the context:
Section 2.01 The term "Anniversary Date" shall mean each January 1 on
and after the Effective Date.
Section 2.02 The term "Board of Directors" shall mean the Board of
Directors of NATIONAL HEALTHCARE CORPORATION.
Section 2.03 The term "Closing Market Price" shall mean the closing
price of the Sponsoring Employer Stock as reported in the consolidated trading
of the American Stock Exchange; provided, however, if such Stock shall no longer
be listed on the American Stock Exchange, then the term shall mean the market
value of such stock as determined by such method as shall be authorized by the
Board of Directors.
1
<PAGE> 2
Section 2.04 The term "Company" shall mean NATIONAL HEALTHCARE
CORPORATION, a Delaware corporation, (sometimes referred to as the "Sponsoring
Employer") and its successors by merger or consolidation and all of its
subsidiary corporations, except those subsidiary corporations expressly excluded
from participation in the Plan by action of the Board of Directors. The
Company's principal offices are located at 100 Vine Street, Murfreesboro,
Tennessee 37130.
Section 2.05 The term "Contribution Account" shall mean the account
established on behalf of a Participant to which shall be credited the amount of
the Participant's contribution, pursuant to Article IV.
Section 2.06 The term "Effective Date" shall mean January 1, 1998.
Section 2.07 The term "Employee" shall mean each current and future
employee of the Company, National Health Corporation, a Tennessee corporation,
and such other entities as authorized by the Board of Directors; provided,
National Health Corporation or such other entities consent to its employees
participating in the Plan.
Section 2.08 The term "Exercise Date" shall mean the last day of the
Plan Year on which the Sponsoring Employer Stock stock publicly trades.
Section 2.09 The term "Grant Date" shall mean the first day of the Plan
Year on which the Sponsoring Employer Stock publicly trades.
Section 2.10 The "Issue Price" shall mean the lessor of (i) the per
share Closing Market Price of the Sponsoring Employer Stock on the Grant Date,
or (ii) the per share Closing Market Price of said stock on the Exercise Date.
Section 2.11 The term "Participant" shall mean any Employee who has met
the conditions and provisions for becoming a Participant as provided in Article
III hereof.
Section 2.12 The term "Participant's Contribution Rate" shall be an
exact number of dollars determined by the Participant to contribute each pay
period by regular payroll deductions to his Contribution Account as outlined in
Section 4.02 and the term "Participant's Contribution" shall be the aggregate
dollars actually so contributed.
Section 2.13 The term "Normal Pay" shall be computed, with respect to
Employees who are paid on an hourly basis, by annualizing each such Employee's
hourly base pay and his regular scheduled hours of work as of the January 1
immediately preceding a Plan Year and dividing by twelve (12). With respect to
salaried Employees, the "Normal Pay" shall be the greater of such Employee's
compensation for the calendar year for which the determination is being made or
the immediately preceding calendar year.
2
<PAGE> 3
Section 2.14 The term "Plan Year" shall mean a consecutive twelve (12)
month period beginning on the first day of January and ending on the last day of
December.
Section 2.15 The term "Sponsoring Employer Stock" shall mean those
shares of the Company's common stock, par value $0.01 per share, which pursuant
to section 4.01 are reserved for issuance to Participants upon the exercise of
options granted under the Plan.
Section 2.16 Any words herein used in the masculine shall be read and
construed in the feminine where they would so apply. Words in the singular shall
be read and construed as though in the plural in all cases where they would so
apply.
ARTICLE III
PARTICIPATION IN PLAN
Section 3.01 Each Employee shall become eligible to be a Participant of
the Plan and may participate therein upon his date of employment.
Section 3.02 Except as otherwise provided in section 4.02, all eligible
Employees who become Participants of the Plan shall have the same rights and
privileges. Upon becoming a Participant, said Participant shall be bound by the
terms of the Plan, including any amendments hereto.
Section 3.03 Each Employee who becomes eligible to be a Participant in
the Plan shall be furnished a summary of the Plan and a Request for
Participation form. If such Employee elects to participate hereunder, he must
complete such form and file it with the Company. The completed Request for
Participation form shall indicate the Participant's Contribution Rate authorized
by the Participant. The Employee's election to participate shall remain in
effect for the current and all future Plan Years unless otherwise revoked or
modified by the Employee. If any Employee does not elect to participate in any
given Plan Year, he may elect to participate in a future Plan Year so long as he
continues to meet the eligibility requirements and elects to participate in such
year.
ARTICLE IV
ISSUANCE OF STOCK OPTIONS
Section 4.01 The aggregate number of shares of the Sponsoring Employer
Stock that may be issued to Participants under the Plan upon the exercise of
options granted hereunder and all other option plans of the Company shall be,
and the Company shall reserve, one million (1,000,000) shares of Company Stock.
These shares may be authorized and unissued shares, or issued shares held in or
acquired for the treasury of the Company, or shares of common stock reacquired
by the Company upon purchase in the open market or otherwise.
3
<PAGE> 4
Section 4.02 In order to participate in the Plan and be granted options
hereunder, an Employee must authorize the Company or the Employee's employer to
deduct the Participant's Contribution Rate from each paycheck. Such Contribution
Rate must be an exact number of dollars per month, but not less than ten dollars
($10.00) per pay period, and not more than one hundred percent (100%) of such
Employee's Normal Pay. Such authorization shall be in writing and on such forms
as provided by the Company. Such deductions shall begin on the first pay period
after the Company's receipt at its corporate office of the Employee's Request
for Participation form. For all purposes of this Plan, such deductions shall be
deemed a part of the Participant's Contribution. No interest shall accrue to any
Participant on any amounts deducted from his paychecks pursuant to this Plan.
The Participant's Contribution Rate, once established, shall remain in
effect for all Plan Years unless changed by the Participant in writing on such
forms as provided by the Company and filed with the Company.
At any time during the Plan Year, a Participant may notify the Company
that he wishes to withdraw from the Plan and discontinue his payroll deductions.
This notice shall be in writing and on such forms as provided by the Company.
Payroll deductions shall be stopped as soon as practical, but not more than
thirty (30) days following the Company's receipt of the withdrawal notice.
A Participant may elect to withdraw some or all of his Contribution
Account once at any time during the Plan Year without being terminated from the
Plan for such year. If a Participant withdraws contributions a second time
during the Plan Year, no further contributions will be permitted during that
Plan year by such withdrawing Participant. Where notice is received during the
last thirty (30) days of any Plan Year, the Company shall have no liability for
refunds not processed before shares are purchased on behalf of the Participant.
Section 4.03 If in a Plan Year the total number of shares of Company
Stock then subject to options granted to Participants exceeds the number of
shares of Company Stock authorized and then available under this Plan, a
pro-rata allocation of the available shares will be made among all Participants
authorizing payroll deductions based on the relative amounts of their respective
payroll deductions up to the Exercise Date.
Section 4.04 On each Exercise Date the Participant's Contribution
Account shall be used to purchase the maximum number of whole shares of Company
Stock determined by dividing the Issue Price into the Participant's Contribution
Account. Any money remaining in a Participant's Contribution Account shall be
returned to the Employee if requested. If such return is not requested, the
balance will remain in the Participant's Contribution Account to be used in the
next Plan Year along with new contributions in the new Plan Year. Options
granted under this Plan shall be subject to such amendment or
4
<PAGE> 5
modifications as the Company shall deem necessary to comply with any applicable
laws and regulations, and shall contain such other provisions as the Company
shall from time to time approve and deem necessary.
Section 4.05 In no event may a Participant transfer or otherwise
alienate any option granted to him under this Plan; provided, however, a
Participant may transfer same to members of his immediate family (or to one or
more trusts for the benefit of such family members or to partnerships or limited
liability companies in which such family members or trusts are the only partners
or members) provided the Participant does not receive any consideration for the
transfer. Any option held by any such transferees would continue to be subject
to the same terms and conditions that are applicable to such options immediately
prior to their transfer.
Section 4.06 Company stock certificates evidencing Company Stock
purchased upon the exercise of options granted under the Plan shall be issued as
soon as practical after the date of such exercise.
Section 4.07 Any Employee whose employment is terminated for any reason
(except death or retirement) during the Plan Year shall cease to be a
Participant immediately. The balance of the Participant's Contribution Account
shall be paid to such Participant, or his legal representative, as soon as
practical after his termination. Any unexercised options granted to such
Participant shall be deemed null and void.
Section 4.08 If a Participant dies during a Plan Year, no further
contributions on behalf of the deceased Participant may be made. The legal
representative of the deceased Participant may elect to withdraw the balance in
said Participant's Contribution Account by notifying the Company in writing at
least thirty (30) days prior to the last day of the Plan Year. In the event no
timely election to withdraw is made, the balance accumulated in the deceased
Participant's Contribution Account shall be used to purchase shares of the
Sponsoring Employer Stock in accordance with section 4.04 hereof. The balance,
if any, shall be distributed to such legal representative as soon as practical
after the Exercise Date.
Section 4.09 If a Participant shall retire during a Plan Year, no
further contributions on behalf of the retired Participant may be made. The
Participant may elect to withdraw the balance in his Contribution Account by
notifying the Company in writing at least thirty (30) days prior to the last day
of the Plan Year. In the event no timely election to withdraw is made, the
balance accumulated in the retired Participant's Contribution Account shall be
used to purchase shares of the Sponsoring Employer Stock in accordance with
section 4.04 hereof. The balance, if any, shall be distributed to such retired
Participant as soon as practical after the Exercise Date.
ARTICLE V
MISCELLANEOUS
Section 5.01 The Board of Directors or a committee established, or
person appointed, by such Board to which or whom is delegated such authority by
the Board, shall administer the Plan and keep records of individual Participant
benefits. The Board shall interpret the Plan and shall determine all questions
arising in the administration,
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<PAGE> 6
interpretation and application of the Plan, and all such determinations shall be
conclusive and binding on all persons.
Section 5.02 Each Participant, former Participant, or any other person
who shall claim a right or benefit under this Plan, shall be entitled only to
look to the Company for such benefit.
Section 5.03 Except as otherwise required by Rule 16b-3 under the
Securities Exchange Act of 1934, with respect to persons required to file
reports under section 16 of said Act, as amended, the Board of Directors may at
any time or from time to time amend the Plan in any respect without shareholder
approval or terminate the Plan. Notwithstanding anything to the contrary set
forth herein, if any provision herein shall be determined at any time to be in
violation of (i) Rule 16b-3 (or any successor regulation), as to a person who is
a reporting person under section 16 of such Act, or (ii) to create any
unintended tax result, then, such provision shall, upon such determination,
automatically be deemed inoperative, void and of no force and effect as if never
set forth herein and may be deleted from this Plan or amended by the Board of
Directors at any time with prospective or retroactive effect. The Plan shall be
suspended in the event a "tender offer" is made to the Company's stockholders.
The Board's determination that such an offer has been made shall be conclusive.
No contributions shall thereafter be accepted and all Contribution Accounts
shall be refunded to Participants. The Plan may thereafter be reactivated by
Board action at any time.
Section 5.04 The Company shall pay all expenses of administering this
Plan that may arise in connection with the Plan.
Section 5.05 Any rules, regulations, or procedures that may be
necessary for the proper administration or functioning of the Plan that are not
covered in the Plan shall be promulgated and adopted by the Board of Directors.
Section 5.06 Headings and subheadings in the Plan are inserted for
convenience of reference only and are to be ignored in the construction of any
provisions hereof.
Section 5.07 The Plan shall be construed in accordance with the laws of
the State of Tennessee.
Section 5.08 Any misstatement in an Employee's age, length of
continuous service, date of employment or any other such matter, shall be
corrected when it becomes known that any such misstatement of fact has occurred.
Section 5.09 The options granted hereunder may not be assigned or
transferable by Participants other than upon the death of a Participant by will
or the applicable laws of descent and distribution. If a Participant attempts
any prohibited assignment, transfer or
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alienation, the Company shall disregard such action. During the lifetime of each
Participant, the options granted hereunder are only exercisable by such
Participant.
Section 5.10 The Plan is not and shall not be deemed to constitute a
contract between an employer and any Employee or to be a consideration or an
inducement for the employment of any Employee. Nothing contained in the Plan
shall be deemed to give any Employee the right to be retained in the service of
his employer or to interfere with the right of his employer to discharge any
Employee at any time regardless of the effect that such discharge shall have
upon him as a Participant in the Plan.
Section 5.11 No liability whatever shall attach to or be incurred by
any past, present or future stockholders, officers, or directors, as such, of
the Company, under or by reason of any of the terms, conditions or agreements
contained in the Plan or implied therefrom, and any and all liabilities of and
any and all rights and claims against the Company, or any stockholder, officer
or director as such, whether arising at common law or in equity or created by
statute or constitution or otherwise, pertaining to the Plan, are hereby
expressly waived and released by every Participant, as a part of the
consideration for any benefits under the Plan. No member of the Board of
Directors and no employee of the Company involved in the administration of the
Plan shall be personally liable for any mistake of judgment made in good faith,
and the Company shall indemnify and hold harmless such person against any cost
or expense (including counsel fees) or liability (including any sum paid in
settlement of a claim) with the consent of the Company arising out of any act or
omission to act in connection with the Plan unless arising out of such person's
own fraud or bad faith.
Section 5.12 The aggregate number of shares of the Sponsoring Employer
Stock reserved for purchase under the Plan as provided in section 4.01 hereof
and the calculation of the Issue Price shall be appropriately adjusted to
reflect any increases or decreases in the number of issued shares of the
Sponsoring Employer Stock resulting from a subdivision, consolidation or
combination of shares or other capital adjustments, payment of a stock dividend,
stock split, stock rights offering, special dividend, or other change or
exchange for other securities by reclassification or otherwise, or other such
increase or decrease in such shares of the Sponsoring Employer Stock.
Section 5.13 The Company's obligation to sell and deliver the
Sponsoring Employer Stock under the Plan is at all times subject to all
approvals of, or filings with, any governmental authorities required in
connection with the authorization, issuance, sale or delivery of such stock.
Section 5.14 A Participant who is a person subject to section 16 of the
Securities Exchange Act of 1934, as amended, (i) is not allowed to sell any
shares of Company Stock purchased hereunder until six (6) months after the
Exercise Date relating to such shares,
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<PAGE> 8
and (ii) if such Participant ceases participation in the Plan, such Participant
may not enroll in the Plan again for at least six (6) months.
8
<PAGE> 1
NATIONAL HEALTHCARE CORPORATION
1997 STOCK OPTION & STOCK APPRECIATION RIGHTS PLAN
<PAGE> 2
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
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<S> <C> <C>
Section 1. Purpose..........................................................................1
Section 2. Definitions......................................................................1
2.1 "Board of Directors" or "Board"..................................................1
2.2 "Code"...........................................................................1
2.3 "Committee"......................................................................1
2.4 "Common Stock"...................................................................1
2.5 "Employee".......................................................................1
2.6 "ISO"............................................................................2
2.7 "Non-Qualified Option"...........................................................2
2.8 "Option".........................................................................2
2.9 "Participant"....................................................................2
2.10 "SAR"............................................................................2
2.11 "Subsidiary".....................................................................2
Section 3. Eligibility......................................................................2
Section 4. Common Stock Subject to the Plan.................................................2
4.1 Number...........................................................................2
4.2 Terminated/Reacquired Options....................................................2
Section 5. Administration of the Plan.......................................................3
5.1 Committee........................................................................3
5.2 Options..........................................................................3
5.3 Plan Interpretation..............................................................3
5.4 Committee Interpretations Conclusive.............................................3
5.5 Committee Voting.................................................................4
5.6 Committee Exculpation............................................................4
5.7 Granting of Options to Directors and Officers....................................4
Section 6. Terms and Conditions of Options..................................................4
6.1 ISOs.............................................................................4
6.2 Non-Qualified Options............................................................6
6.3 SARs.............................................................................7
6.4 Terms and Conditions Common to All Options.......................................8
6.5 Payment of Exercise Price with Previously Issued Stock..........................10
6.6 Modification, Extension and Renewal of Options..................................10
6.7 Fixed Option Grant of Non-Qualified Stock Options to Certain Directors..........10
6.8 Transfer of Non-Qualified Options and SARs......................................10
6.9 Rights as a Stockholder.........................................................11
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
6.10 Other Option Agreement Provisions...............................................11
Section 7. Adjustments.....................................................................11
7.1 Reorganization, Merger, Recapitalization, Etc...................................11
7.2 Sale of Not Less Than 50% of Common Stock.......................................11
7.3 Acceleration of Vesting.........................................................12
7.4 Limited Rights Upon Company's Restructure.......................................12
7.5 Effect of Options on Company's Capital and Business Structure...................12
Section 8. Effect of the Plan on Employment Relationship...................................12
Section 9. Amendment of the Plan...........................................................12
Section 10. Compliance with Rule 16b-3 and Code Section 422.................................13
Section 11. Investment Purpose..............................................................13
Section 12. Indemnification of Committee....................................................13
Section 13. Termination of the Plan.........................................................13
Section 14. Application of Funds............................................................14
Section 15. No Obligation to Exercise Option................................................14
Section 16. Effective Date of the Plan......................................................14
</TABLE>
ii
<PAGE> 4
NATIONAL HEALTHCARE CORPORATION
1997 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
Section 1. Purpose. The purpose of the NATIONAL HEALTHCARE CORPORATION
1997 Stock Option and Stock Appreciation Rights Plan (the "Plan") is to promote
the interests of NATIONAL HEALTHCARE CORPORATION, a Delaware corporation (the
"Company"), and its stockholders by providing an opportunity to selected
employees, officers, directors, consultants and advisors of the Company or any
Subsidiary thereof to purchase Common Stock of the Company or acquire stock
appreciation rights in the Company. By encouraging such stock ownership and/or
stock appreciation rights, the Company seeks to attract, retain and motivate
such employees and persons and to encourage such employees and persons to devote
their best efforts to the business and financial success of the Company. It is
intended that this purpose will be effected by the granting of "non-qualified
stock options" and/or "incentive stock options" to acquire the Common Stock of
the Company and "stock appreciation rights" in the Company. Under the Plan, the
Committee shall have the authority (in its sole discretion) to grant "incentive
stock options" within the meaning of section 422(b) of the Code and
"non-qualified stock options" and "stock appreciation rights" to which Code
section 421 does not apply. The Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA").
Section 2. Definitions. For purposes of the Plan, the following terms
used herein shall have the following meanings, unless a different meaning is
clearly required by the context.
2.1 "Board of Directors" or "Board" shall mean the Board of
Directors of the Company.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.3 "Committee" shall mean the Executive Committee of the
Board of Directors or such other committee established by the Board of Directors
to which it delegates administration of the Plan under section 5.1 hereof, or if
no committee is then administering the Plan, the Board of Directors.
2.4 "Common Stock" shall mean the common stock, $0.01 par
value, of the Company.
2.5 "Employee" shall mean (i) with respect to an ISO, any
person, including an officer or director of the Company, who, at the time an ISO
is granted to such person hereunder, is employed, as such term is used in Code
section 422 and the Treasury Regulations promulgated thereunder, on a full-time
basis by the Company or any Subsidiary of the Company, and (ii) with respect to
a Non-Qualified Option or SAR, any person employed by or performing services,
whether as an employee or otherwise, for the Company, any Subsidiary of the
Company, or National Health Corporation, a Tennessee corporation, ("National"),
including, without limitation, their directors and officers.
<PAGE> 5
2.6 "ISO" shall mean an Option to purchase Common Stock
granted under the Plan that constitutes and shall be treated as an "incentive
stock option," as such phrase is defined in section 422(b) of the Code.
2.7 "Non-Qualified Option" shall mean an option to purchase
Common Stock granted to an Employee pursuant to the Plan that is not an
"incentive stock option," with respect to which Code section 421 does not apply,
and that shall not constitute nor be treated as an ISO.
2.8 "Option" shall mean any ISO, Non-Qualified Option or SAR
granted to an Employee pursuant to this Plan.
2.9 "Participant" shall mean an Employee to whom an Option has
been granted pursuant to this Plan.
2.10 "SAR" shall mean a stock appreciation right as described
in section 6.3 hereof.
2.11 "Subsidiary" shall have the meaning set forth for
"subsidiary corporation" in section 424(f) of the Code.
Section 3. Eligibility. Options may be granted to any Employee. The
Committee shall have the sole authority to select the persons to whom Options
are to be granted hereunder and to determine whether a person is to be granted
an ISO, a NonQualified Option, an SAR, or any combination thereof. No person
shall have any right to participate in the Plan. Any person selected by the
Committee for participation during any one period shall not by virtue of such
participation have the right to be selected as a Participant for any other
period. Any Participant may hold at any time more than one (1) Option, but only
upon such terms as provided hereunder and any agreement evidencing such Options.
Section 4. Common Stock Subject to the Plan.
4.1 Number. The total number of shares of Common Stock for
which Options may be granted under this Plan and all other option and stock
purchase plans of the Company shall not exceed in the aggregate One Million
(1,000,000) shares of Common Stock.
4.2 Terminated/Reacquired Options. The shares of Common Stock
that may be subject to Options granted under this Plan may be either authorized
and unissued shares or shares reacquired at any time and now or hereafter held
as treasury stock as the Committee may determine. In the event any outstanding
Option expires or is terminated for any reason, the shares allocable to the
unexercised portion of such Option shall again become available for issuance
pursuant to the Plan. If any shares of Common Stock acquired pursuant to the
exercise of an Option shall have been repurchased or reacquired
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<PAGE> 6
by the Company, then such shares shall again become available for issuance
pursuant to the Plan.
Section 5. Administration of the Plan.
5.1 Committee. The Plan shall be administered, with the advice
and recommendations of the Company's compensation committee, if such committee
is then in existence, by the Executive Committee of the Board of Directors or,
at the Board of Directors' discretion, any committee of the Board of Directors
established thereby to which it delegates the administration of the Plan. If at
any time that there is no Executive Committee in existence and the Board of
Directors has not delegated the administration of the Plan to any other
committee established by the Board, then the Company's Board of Directors shall
administer the Plan and in such event all references herein to the Committee
shall be deemed to be references to the Board of Directors.
5.2 Options. The Committee shall have the sole authority and
discretion under the Plan (i) to select the Employees who are to be granted
Options hereunder; (ii) to designate whether any Option to be granted hereunder
is to be an ISO, a Non-Qualified Option or an SAR; (iii) to establish the number
of shares of Common Stock that may be issued upon the exercise of each Option;
(iv) to determine the time and the conditions subject to which Options may be
exercised in whole or in part; (v) to determine the form of the consideration
that may be used to purchase shares of Common Stock upon exercise of any Option
(including the circumstances under which the Company's issued and outstanding
shares of Common Stock may be used by a Participant to exercise an Option); (vi)
to provide financing, upon such terms and conditions as the Committee shall
determine, to optionees for the purchase of Common Stock upon the exercise of
Options granted hereunder; (vii) to impose restrictions and/or conditions with
respect to shares of Common Stock acquired upon exercise of an Option; (viii) to
determine the circumstances under which shares of Common stock acquired upon
exercise of any Option may be subject to repurchase by the Company; (ix) to
determine the circumstances and conditions subject to which shares acquired upon
exercise of an Option may be sold or otherwise transferred, including, without
limitation, the circumstances and conditions subject to which a proposed sale of
shares of Common Stock acquired upon exercise of an Option may be subject to the
Company's right of first refusal (as well as the terms and conditions of any
such right of first refusal); (x) to establish vesting provisions for any Option
relating to the time (or the circumstance) when the Option may be exercised by a
Participant, including vesting provisions that may be contingent upon the
Company meeting specified financial goals; (xi) to accelerate the time when
outstanding Options may be exercised, provided, however, that any ISO may be
"accelerated" only as permitted by section 424(h) of the Code; and (xii) to
establish any other terms, restrictions and/or conditions applicable to any
Option not inconsistent with the provisions of the Plan, and, with respect to
ISOs, not inconsistent with the provisions of Code section 422.
5.3 Plan Interpretation. The Committee shall be authorized to
interpret the Plan and any Option granted hereunder and may, from time to time,
adopt such rules and regulations, not inconsistent with the provisions of the
Plan, as it may deem advisable to carry out the purpose of the Plan.
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<PAGE> 7
5.4 Committee Interpretations Conclusive. The interpretation
and construction by the Committee of any provision of the Plan, any Option
granted hereunder or any agreement evidencing any such Option shall be final and
conclusive upon all parties, except as may otherwise be determined by the Board
of Directors.
5.5 Committee Voting. Subject to section 5.7 hereof, directors
of the Company (or members of the Committee) who are either eligible for Options
hereunder, or to whom Options have been granted hereunder, may vote on any
matter affecting the administration of the Plan or the granting of Options under
the Plan; provided, however, that no director (or member of the Committee) shall
vote upon the granting of an Option to himself, but any such director (or
Committee member) may be counted in determining the existence of a quorum at any
meeting of the Board of Directors (or the Committee) at which the Plan is
administered or action is taken with respect to the granting of any Option.
5.6 Committee Exculpation. All expenses and liabilities
incurred by the Committee in the administration of the Plan shall be borne by
the Company. The Committee may employ attorneys, consultants, accountants or
other persons in connection with the administration of the Plan. The Company,
and its officers and directors, shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No member of the Committee or Board
of Directors shall be liable for any action, determination or interpretation
taken or made in good faith with respect to the Plan or any Option granted
hereunder.
5.7 Granting of Options to Directors and Officers.
Administrative discretion regarding the selection of any director or officer of
the Company to whom Options may be granted pursuant to this Plan, or the
determination of the number of shares of Common Stock that may be allocated to
such Options and the terms thereof, shall be exercised in the following manner:
(i) approval in advance by the full Board of Directors; (ii) approval in advance
by a committee that is composed solely of two or more Non-Employee Directors, as
such term is defined under Rule 16b-3 ("Rule 16b-3") promulgated under the
Securities Exchange Act of 1934; (iii) approval in advance by a majority of the
Company's shareholders in accordance with Rule 16b-3; (iv) ratification by a
majority of the Company's shareholders no later than the next annual shareholder
meeting; or (v) the officer or director retains the issuer equity securities for
a period of six (6) months following their acquisition in accordance with Rule
16b-3.
Section 6. Terms and Conditions of Options.
6.1 ISOs. The terms and conditions of each ISO granted under
the Plan shall be specified by the Committee, shall be set forth in a written
ISO agreement between the Company and the Participant in such form as the
Committee shall approve, and shall be clearly identified therein as an ISO. The
terms and conditions of each ISO shall be such that each ISO issued hereunder
shall constitute and be treated as an "incentive stock option" as defined in
section 422 of the Code. The terms and conditions of any ISO granted hereunder
need not be identical to those of any other ISO granted hereunder.
4
<PAGE> 8
Notwithstanding the above, the terms and conditions of each ISO shall include
the following:
6.1.1 The option price shall not be less than one hundred
percent (100%) (or one hundred ten percent (110%) in the case of an
Employee referred to in section 6.1.3 hereof) of the fair market
value, as determined in good faith by the Board of Directors in
accordance with Code section 422(c)(7), of the shares of Common Stock
subject to the ISO on the date the ISO is granted, but in no event
shall the option price be less than the par value of such shares,
which price shall be payable in U.S. dollars upon the exercise of such
ISO and paid, except as otherwise provided in section 6.5, in cash or
by check immediately upon exercise.
6.1.2 The Committee shall fix the term of all ISOs granted
pursuant to the Plan, including the date on which such ISO shall expire
and terminate; provided, however, that such term shall in no event
exceed ten (10) years from the date on which such ISO is granted (or,
in the case of an ISO granted to an Employee referred to in section
6.1.3 hereof, such term shall in no event exceed five (5) years from
the date on which such ISO is granted). Each ISO shall be exercisable
in such amount or amounts, under such conditions and at such times or
intervals or in such installments as shall be determined by the
Committee in its sole discretion.
6.1.3 An ISO shall not be granted to an Employee who, at the
time the ISO is granted, owns (actually or constructively under the
provisions of Code section 424(d)) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or Subsidiary of the Company (taking into account
the attribution rules of Code section 424), unless the option price is
at least one hundred ten percent (110%) of the fair market value
(determined as of the time the ISO is granted) of the shares of Common
Stock subject to the ISO and the ISO by its terms is not exercisable
more than five (5) years from the date it is granted. Notwithstanding
any other provision of the Plan, the provisions of this section 6.1.3
shall not apply, or be construed to apply, to any Non-Qualified Option
or SAR granted under the Plan.
6.1.4 In the event the Company or any Subsidiary of the
Company is required to withhold any Federal, state or local taxes in
respect of any compensation income realized by the Participant as a
result of any "disqualifying disposition" of any shares of Common Stock
acquired upon exercise of an ISO granted hereunder, the Company shall
deduct from any payments of any kind otherwise due to such Participant
the aggregate amount of such Federal, state or local taxes required to
be so withheld or, if such payments are insufficient to satisfy such
Federal, state or local taxes, or if no such payments are due or to
become due to such Participant, then such Participant shall be required
to pay to the Company, or make other arrangements satisfactory to the
Company regarding payment to the Company of, the aggregate amount of
any such taxes. All matters with respect to
5
<PAGE> 9
the total amount of taxes to be withheld in respect of any such
compensation income shall be determined by the Committee in its sole
discretion.
6.1.5 If upon the exercise of one or more Options granted
pursuant to this or any other plan of the Company or any Subsidiary of
the Company that are designated as ISOs upon the grant thereof, a
portion of such exercised Options are not treated as ISOs pursuant to
Code section 422(d), which sets a limit upon the aggregate fair market
value (determined at the time the ISOs are granted) of stock subject to
ISOs that may become exercisable by the optionee thereof for the first
time during any calendar year, then the Company shall issue one or more
certificates evidencing the Common Stock acquired pursuant to the
exercise of ISOs and one or more certificates evidencing the Common
Stock acquired pursuant to the exercise of Options not treated as ISOs
in accordance with Code section 422 and shall so identify such
certificates in the Company's stock transfer records.
6.1.6 Following a transfer of stock to a Participant pursuant
to such Participant's exercise of an ISO, the Company or any Subsidiary
of the Company shall (on or before January 31 of the calendar year
following the year of such transfer) furnish to such Participant the
written statement prescribed by Code section 6039 and the Treasury
Regulations promulgated thereunder.
6.2 Non-Qualified Options. The terms and conditions of each
NonQualified Option granted under the Plan shall be specified by the Committee,
in its sole discretion, shall be set forth in a written option agreement between
the Company and the Participant in such form as the Committee shall approve, and
shall be clearly identified therein as a Non-Qualified Option. The terms and
conditions of each Non-Qualified Option shall be such that each Non-Qualified
Option granted hereunder shall not constitute or be treated as an "incentive
stock option," as such phrase is defined in section 422 of the Code, and will be
a "non-qualified stock option" for Federal income tax purposes to which Code
section 421 does not apply. The terms and conditions of any Non-Qualified Option
granted hereunder need not be identical to those of any other Non-Qualified
Option granted hereunder. Notwithstanding the above, the terms and conditions of
each NonQualified Option shall include the following:
6.2.1 The option price shall be as determined by the
Committee, but in no event shall the option price be more than one
hundred percent (100%) of the fair market value, as determined in good
faith by the Committee, of the shares of Common Stock subject to the
Non-Qualified Option on the date such Non-Qualified Option is granted,
nor less than the par value of such shares. The Committee may, in its
sole discretion, include in a Non-Qualified Option issued to an
Employee a provision providing for a reduction of the option price at a
set future date or dates on the condition that certain Company
objectives, as determined by the Committee, shall have been achieved by
such date.
6
<PAGE> 10
6.2.2 The Committee shall fix the term of all Non-Qualified
Options granted pursuant to the Plan (including the date on which such
Non-Qualified Option shall expire and terminate). Such term may be more
than ten (10) years from the date on which such Non-Qualified Option is
granted. Each Non-Qualified Option shall be exercisable in such amount
or amounts, under such conditions, and at such times or intervals or in
such installments as shall be determined by the Committee in its sole
discretion.
6.2.3 In the event the Company, a Subsidiary thereof, or
National is required to withhold any Federal, state or local taxes in
respect of any compensation income realized by the Participant in
respect of a Non-Qualified Option granted hereunder or in respect of
any shares of Common Stock acquired upon exercise of a Non-Qualified
Option, the Company, a Subsidiary thereof, or National shall deduct
from any payments of any kind otherwise due to such Participant the
aggregate amount of such Federal, state or local taxes required to be
so withheld or, if such payments are insufficient to satisfy such
Federal, state or local taxes, or if no such payments are due or to
become due to such Participant, then such Participant shall be
required to pay to the Company, or make other arrangements
satisfactory to the Company regarding payment to the Company of, the
aggregate amount of any such taxes. All matters with respect to the
total amount of taxes to be withheld in respect of any such
compensation income shall be determined by the Committee in its sole
discretion.
6.3 SARs. The terms and conditions of each SAR granted under
the Plan shall be specified by the Committee, in its sole discretion, shall be
set forth in a written agreement between the Company and the Participant in such
form as the Committee shall approve, and shall be clearly identified therein as
an SAR. The Committee shall have the power to grant, simultaneously with the
grant of a Non-Qualified Option or at any other time, stock appreciation rights
with respect to that portion of Common Stock as the Committee in its discretion
determines. Such rights may be granted separately and exclusively ("Exclusive
SARs") or in connection with a Non-Qualified Option ("Attached SARs") either at
the time of grant of such Non-Qualified Option or upon any amendment thereof.
The terms and conditions of any SAR granted hereunder need not be identical to
those of any other SAR granted hereunder. Notwithstanding the above, the terms
and conditions of SARs shall include the following:
6.3.1 Exclusive SARs shall include in their terms the fair
market value, for purposes of this section 6.3, of one (1) share of the
Company's Common Stock and shall provide that such SAR shall not be
exercisable prior to a date as determined by the Committee.
6.3.2 An Attached SAR may be exercised only to the extent the
Non-Qualified Option to which it relates is exercisable.
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<PAGE> 11
6.3.3 An SAR shall entitle the holder thereof to exercise such
SAR (or any portion thereof), and in the case of an Attached SAR, to
surrender simultaneously the Non-Qualified Option (or such portion
thereof) to the Company, and to receive from the Company in exchange
therefor cash, or its equivalent in shares of Common Stock, or any
combination thereof as determined in the sole discretion of the
Committee, having an aggregate value equal to the excess of the value
of one (1) share of Common Stock at the date of exercise over the value
thereof upon the date the SAR exercised was granted, as determined
pursuant to section 6.3.1 above, times the number of SARs exercised or
the number of Non-Qualified Options surrendered.
6.3.4 The Committee reserves the right to call for the
exercise of an SAR at any time without the approval of the holder of
such SAR.
6.3.5 If the Committee elects to pay part or all of the
benefit determined in accordance with section 6.3.3 above in shares of
Common Stock, the value of a share of Common Stock for such purpose
shall be the fair market value, as determined in accordance with
section 6.2.2 hereof, on the date of exercise. Provided, however, that
fractional shares shall not be delivered under this paragraph 6.3.5,
and in lieu thereof a cash adjustment shall be made.
6.3.6 It shall be a condition to the obligation of the
Company, upon settlement of an SAR, that the holder thereof pay to the
Company, upon its demand, such amount as may be requested by the
Company for the purpose of satisfying its liability to withhold
Federal, state or local income or other taxes incurred by reason of the
exercise of the SAR. If the amount requested is not paid, the Company
may refuse to conclude settlement of the SAR.
6.4 Terms and Conditions Common to All Options. All Options
granted under the Plan shall include the following provisions:
6.4.1 All Options, by their terms, shall not be transferable
otherwise than by last will and testament or the laws of descent and
distribution, and, during an Participant's lifetime, shall be
exercisable only by the Participant.
6.4.2 Each Option shall state the number of shares to which it
pertains and the requirements and vesting schedule thereof, if any.
6.4.3 Except as otherwise provided in section 6.4.4 (relating
to permanent and total disability), 6.4.5 (relating to death), and
6.4.6 (relating to "cause"), in the event a Participant shall cease to
be employed by the Company or a Subsidiary of the Company on a
full-time basis for any reason, the unexercised portion of any Option
held by such Participant at that time may only be exercised within
three (3) months after the date on which the Participant ceased to be
so employed, and only to the extent that the Participant could have
otherwise exercised such Option as of
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<PAGE> 12
the date on which he ceased to be so employed; provided, however, if
the Participant shall die within said three (3) month period, then the
period during which any Option may be exercised shall be extended to
the date that is one (1) year after the Participant ceased to be
employed by the Company; provided, further, that in no event may such
Option be exercised beyond the expiration of the term of the Option.
6.4.4 In the event a Participant shall cease to be employed by
the Company or any Subsidiary of the Company on a full-time basis by
reason of his "permanent and total disability" (within the meaning of
section 22(e)(3) of the Code), the unexercised portion of any Option
held by such Participant at that time may only be exercised within one
(1) year after the date on which the Participant ceased to be so
employed, and only to the extent that the Participant could have
otherwise exercised such Option as of the date on which he ceased to be
so employed; provided that in no event may such Option be exercised
beyond the expiration of the term of the Option.
6.4.5 In the event a Participant shall die while in the
full-time employ of the Company or a Subsidiary of the Company, the
unexercised portion of any Option held by such Participant at the time
of his death may only be exercised within one (1) year after the date
of such Participant's death, and only to the extent that the
Participant could have otherwise exercised such Option at the time of
his death. In such event, such Option may be exercised by the executor
or administrator of the Participant's estate or by any person or
persons who shall have acquired the Option directly from the
Participant by last will and testament or the applicable laws of
descent and distribution.
6.4.6 In the event a Participant is terminated from employment
with the Company for "cause," such Participant's right to exercise any
Option granted hereunder, weather vested or non-vested, shall terminate
upon notice of discharge. For purposes of this paragraph, "cause" shall
mean final conviction of a felony, adjudication of bankruptcy,
nonacceptance of office or conduct prejudicial to the interests of the
Company.
6.4.7 If an Participant shall cease to be employed by the
Company or any Subsidiary of the Company for any reason, the Company,
at its discretion, may elect to repurchase from the Participant or his
legal representative any and all Common Stock received by such
Participant upon exercise of any Options as of the date of termination
for a price per share equal to the exercise price of such Options. The
Company's right to repurchase the Common Stock shall continue for a
period of six (6) years from the date of grant of such Option. The
payment for shares of Common Stock repurchased by the Company pursuant
hereto shall be made, in cash or by check, at the address of the
Participant as set forth in the stock records of the Company, or at
such other location as the parties to the repurchase may mutually
agree. Upon payment by the Company in compliance with the provisions
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<PAGE> 13
of this section 6.4.7, the Participant or his legal representative
shall deliver to the Company for cancellation the certificate(s)
evidencing the Common Stock repurchased by the Company. The failure of
the Participant or legal representative to so deliver the
certificate(s) shall not impinge the validity of the Company's
repurchase.
6.4.8 With respect to Non-Qualified Options and SARs, for
purposes of this Section 6.4, a person shall be treated as an employee
of the Company or a Subsidiary of the Company if such person is
employed, as such term is used in Code section 422 and the Treasury
Regulations promulgated thereunder, on a full-time basis by the
Company, any Subsidiary of the Company, or National, or is a director
of any of said entities. Notwithstanding anything in the Plan to the
contrary, the Committee may grant Non-Qualified Options and SARs to
Employees, as such term is defined in Section 2.5 hereof with respect
to Non-Qualified Options and SARs, that do not include the provisions
of Section 6.4.3 through 6.4.7, or that include modified versions
thereof, provided the option agreement evidencing such options reflects
such deletions or modifications.
6.5 Payment of Exercise Price with Previously Issued Stock.
Except as otherwise provided in an option agreement between the Company and a
Participant granting an ISO or a Non-Qualified Option to such Participant, the
Committee may permit the option price for any ISO or Non-Qualified Option
granted under the Plan to be paid, in whole or in part, with previously issued
Common Stock of the Company (valued as of the date of exercise of such Option).
6.6 Modification, Extension and Renewal of Options. Subject to
the terms and conditions and within the limitations of the Plan, and with
respect to ISOs as permitted by the Code, the Committee, in its discretion, may
modify, extend or renew outstanding Options granted under the Plan, or accept
the surrender of outstanding Options (to the extent not theretofore exercised)
and authorize the granting of new Options and substitutions therefor; provided,
however, that no modification, extension, renewal, revision or cancellation of
an Option shall, without the consent of the optionee thereof, cause an ISO to
become a Non-Qualified Option or, except as otherwise set forth herein, alter or
impair any rights or obligations under any Option theretofore granted under the
Plan.
6.7 Fixed Option Grant of Non-Qualified Stock Options to
Certain Directors. Each Director of the Company who is not an employee of the
Company ("Non-Employee Director") shall on January 2, 1998, for fiscal year
1998, without the need of further action on the part of the Company,
automatically be granted a Non-Qualified Option to acquire ten thousand (10,000)
shares of Common Stock. Additionally, each year thereafter, at the first Board
meeting following the annual meeting of the Company's stockholders, each
Non-Employee Director on such date shall automatically be granted a
Non-Qualified Option to acquire ten thousand (10,000) shares of Common Stock.
All such Non-Qualified Options shall have a per share exercise price equal to
the fair market value
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<PAGE> 14
of a share of Common Stock at the close of business on the date of grant. If the
stock is listed upon an established stock exchange or exchanges, such fair
market value shall be deemed to be the last sales price of the Common Stock on
such stock exchange or exchanges on the day the Option is granted or if no sale
of the Company's Common Stock shall have been made on any stock exchange on that
day, on the next preceding day on which there was a sale of such stock. During
such time as the Common Stock is not listed upon an established stock exchange,
the fair market value per share shall be determined by the Committee. The
provisions of this section 6.7 may not be amended more than once every six (6)
months, other than to comply with changes in the Code, ERISA, or rules
promulgated thereunder.
6.8 Transfer of Non-Qualified Options and SARs. Except as
provided in this section 6.8 or as specifically permitted in the governing
option agreement, no NonQualified Option or SAR shall be transferable by the
optionee other than by last will and testament or the applicable laws of descent
and distribution, and during the lifetime of the optionee, Non-Qualified Options
and SARs granted hereunder may be exercised only by the optionee.
Notwithstanding anything in this section 6.8 to the contrary, any Participant of
a Non-Qualified Option or SAR may transfer same to members of his immediate
family (or to one or more trusts for the benefit of such family members or to
partnerships or limited liability companies in which such family members or
trusts are the only partners or members), if (i) the option agreement with
respect to which such Non-Qualified Option or SAR relates expressly so provides,
and (ii) the Participant does not receive any consideration for the transfer.
Any Non-Qualified Option or SAR held by any such transferees would continue to
be subject to the same terms and conditions that are applicable to such Options
immediately prior to their transfer.
6.9 Rights as a Stockholder. Any optionee or transferee of an
Option granted hereunder shall have no rights as a stockholder of the Company
with respect to any shares of Common Stock to which such Option relates until
the date of the issuance of a stock certificate to him for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
otherwise required by section 7 hereof.
6.10 Other Option Agreement Provisions. The option agreements
authorized under the Plan shall contain such other provisions, including,
without limitation, restrictions upon the exercise of Options, as the Committee
shall deem advisable. Any ISO agreement hereunder shall contain such limitations
and restrictions upon the exercise of ISOs as shall be necessary in order that
such ISOs will be "incentive stock options" as defined in section 422 of the
Code, or to conform to any change in the law, which provisions shall control any
inconsistent or contradictory provision of the Plan.
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<PAGE> 15
Section 7. Adjustments.
7.1 Reorganization, Merger, Recapitalization, Etc. Subject to
any required action by the Company's shareholders, in the event that, after the
adoption of the Plan by the Board of Directors, the outstanding shares of the
Company's Common Stock shall be increased or decreased or changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation through reorganization, merger or
consolidation, recapitalization, reclassification, stock split, split-up,
combination or exchange of shares or declaration of any dividends payable in
Common Stock or in any other manner effected without the receipt of
consideration by the Company, the Committee shall appropriately adjust (i) the
number of shares of Common Stock (and the option price per share) subject to the
unexercised portion of any outstanding Option (to the nearest possible full
share), provided, however, that the limitations of sections 422 and 424 of the
Code shall apply with respect to adjustments made to ISOs so as not to cause any
ISO to cease to qualify as an ISO under Code section 422, and (ii) the number of
shares of Common Stock for which Options may be granted under this Plan, as set
forth in section 4.1 hereof, and such adjustments shall be effective and binding
for all purposes of this Plan.
7.2 Sale of Not Less Than 50% of Common Stock. Notwithstanding
section 7.1, upon the closing of any offer to holders of not less than fifty
percent (50%) of the Company's Common Stock relating to the acquisition of their
shares in a single transaction or related series of transactions, including,
without limitation, through purchase, merger or otherwise, or any transaction
relating to the acquisition of substantially all of the assets or business of
the Company, the Committee may make such adjustment as it deems equitable in
respect of outstanding Options including, without limitation, the revision or
cancellation of any outstanding Options; provided, that, to the extent any such
Options shall be vested, such cancellation or revision shall be based upon the
difference between the acquisition value for the Company's Common Stock and the
exercise price of such Options. Any such equitable determination by the
Committee shall be effective and binding for all purposes of this Plan and any
option agreement hereunder.
7.3 Acceleration of Vesting. A dissolution or liquidation of
the Company or a merger, consolidation or acquisition in which the Company is
not the surviving corporation shall cause the vesting date of each outstanding
Option to accelerate and be exercisable within sixty (60) days prior to such
occurrence in whole or in part.
7.4 Limited Rights Upon Company's Restructure. Except as
hereinbefore expressly provided in this section 7, an optionee shall have no
rights by reason of any subdivision or consolidation of shares of stock of any
class or the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class or by reason of any dissolution,
liquidation, merger, or consolidation, or spin-off of assets or stock of another
corporation, and any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number or
price of shares of Common Stock subject to an Option granted hereunder.
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<PAGE> 16
7.5 Effect of Options on Company's Capital and Business
Structure. The grant of an Option pursuant to the Plan shall not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
Section 8. Effect of the Plan on Employment Relationship. Neither the
Plan nor any Option granted hereunder to an Employee shall be construed as
conferring upon such Participant any right to continue in the employ of the
Company or the service of the Company or any Subsidiary, as the case may be, or
limit in any respect the right of the Company or any Subsidiary to terminate
such Participant's employment or other relationship with the Company or any
Subsidiary, as the case may be, at any time.
Section 9. Amendment of the Plan. The Board of Directors may, as
permitted by law, amend the Plan from time to time as it deems desirable;
provided, however, that, without the approval of the holders of a majority of
the outstanding Common Stock of the Company entitled to vote thereon at a
shareholders' meeting, the Board of Directors may not amend the Plan to (i)
increase (except for increases due to adjustments in accordance with section 7
hereof) the aggregate number of shares of Common Stock for which Options may be
granted hereunder, (ii) increase the benefits accruing to a Participant under
this Plan, including any decrease in the minimum exercise price specified by the
Plan in respect of ISOs, (iii) change the class of Employees eligible to receive
Options under the Plan, or (iv) make any other revision to the Plan as it
relates to ISOs that requires shareholder approval under the Code.
Notwithstanding any other provision of the Plan, shareholder approval of
amendments to the Plan need not be obtained if such approval is not required
under Rule 16b-3 (to the extent applicable to the Company) as of the effective
date of such amendments, and with respect to ISOs, if such approval is not
required under Code section 422.
Section 10. Compliance with Rule 16b-3 and Code Section 422. The
Company shall use its best efforts to maintain the Plan, and to assure the
Options are granted and exercised under the Plan, in accordance with Rule 16b-3
(to the extent Rule 16b-3 could be applicable to any transaction in securities
arising in connection with the Plan), and with respect to ISOs, Code section
422, as said Rule 16b-3 and Code section 422 may be amended from time to time,
and any and all successor statutes and regulations thereof, including without
limitation, the seeking of any appropriate amendments to the Plan and all
requisite approvals and consents of such amendments; provided, however, that
except as otherwise set forth in the Plan, the Company shall take no action that
adversely affects Options then outstanding under the Plan without the prior
written consent of the holders of such Options.
Section 11. Investment Purpose. Each Option under the Plan shall be
granted on the condition that the purchases of stock thereunder shall be for
investment purposes, and not with a view to resale or distribution, except that
in the event the stock subject to such Option is registered under the Securities
Act of 1933, as amended, or in the event a
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<PAGE> 17
resale of such stock without such registration would otherwise be permissible
under applicable laws, rules and regulations. Such condition shall be
inoperative if, in the opinion of counsel for the Company, such condition is not
required under the Securities Act of 1933 or any other applicable law,
regulation, or rule of any governmental agency.
Section 12. Indemnification of Committee. In addition to such other
rights of indemnification as they may have as directors or as members of the
Committee, the members of the Committee shall be indemnified by the Company
against the reasonable expenses, including attorneys' fees actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Committee member is liable for negligence or misconduct in
the performance of his duties; provided that within sixty (60) days after
institution of any such action, suit or proceeding, a Committee member shall in
writing offer the Company the opportunity, at its expense, to handle and defend
the same.
Section 13. Termination of the Plan. The Board of Directors may
terminate the Plan at any time. Unless the Plan shall theretofore have been
terminated by the Board, the Plan shall terminate ten (10) years after the date
of its initial adoption by the Board of Directors. No Option may be granted
hereunder after termination of the Plan. The termination or amendment of the
Plan shall not alter or impair any rights or obligations under any Option
theretofore granted under the Plan.
Section 14. Application of Funds. The proceeds received by the Company
from the sale of Common Stock pursuant to Options granted hereunder shall be
used for general corporate purposes.
Section 15. No Obligation to Exercise Option. The granting of an
Option hereunder shall impose no obligation upon the optionee thereof to
exercise such Option.
Section 16. Effective Date of the Plan. This Plan shall be effective
as of January 1, 1998.
This Plan was adopted and approved by the Board of Directors on the
____ day of ______________, 1997 and the Company's shareholders, on the ____ day
of ______________, 1997.
______________________________________
Secretary
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<PAGE> 1
Exhibit 10.6
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") made and entered
into this 16th day of December, 1988, by and among the National Health
Corporation Leveraged Employee Stock Ownership Trust (the "Borrower") and Third
National Bank in Nashville, a national banking association with its principal
place of business in Nashville, Tennessee ("TNB") Irving Trust Company, a New
York banking corporation with its principal place of business in New York, New
York ("IT"), Sovran Bank/Central South, a Tennessee corporation with its
principal place of business in Nashville, Tennessee ("SCS"), SouthTrust Bank of
Alabama, National Association with its principal place of business in
Birmingham, Alabama ("ST") (TNB, IT, SCS and ST are sometimes hereinafter
referred to collectively as the "Banks" or individually as a "Bank"), Third
National Bank in Nashville as agent for the Banks (in such capacity, the
"Agent"), National HealthCorp L.P., a Delaware limited partnership ("NHLP"), and
National Health Corporation, a Tennessee corporation ("National").
W I T N E S S E T H:
WHEREAS, Banks have agreed to loan Borrower the amount of Fifty
Million and No/100 Dollars ($50,000,000.00) (the "Indebtedness" or the "Loan");
and
WHEREAS, the Loan shall be evidenced by a note or notes in form
satisfactory to Agent, which note(s) shall bear interest at the rate agreed to
by the parties hereto,
NOW, THEREFORE, for and in consideration of the foregoing premises,
and the covenants and agreements contained herein, and other valuable
consideration, the receipt and sufficiency of which are acknowledged hereby,
the Agent, Banks, Borrower, NHLP and National hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. As used herein, the following terms shall have the
following meanings (all terms defined in this Section 1.1. or in other
provisions of this Agreement in the singular shall have the same meanings when
used in the plural and vice versa):
"Additional Interest" means Additional Interest as defined in Section
6.1. of this Agreement.
<PAGE> 2
"Additions to Tax" means any penalties, additions to tax, and/or
additional amounts referred to in Chapters 67 or 68 of the Code or any
successor law or section, including without limitation any interest amounts due
or owing by any one or more of the Banks as a result of any tax deficiency
resulting from an Event of Taxability.
"Adjusted Tangible Net Worth" means Adjusted Tangible Net Worth as
defined in Section 9.1(c) of this Agreement.
"Adjusted Rate" means Adjusted Rate as defined in Section 5.1.(a) of
this Agreement.
"Affiliate" means:
(a) NHLP; and
(b) Any corporation that is a member of the same controlled
group of corporations (within the meaning of Section 414(b) of the
Code) as is National; and
(c) Any other trade or business (whether or not incorporated)
controlling, controlled by, or under common control (within the
meaning of Sections 414(c) and 414(o) of the Code) with National; and
(d) Any other corporation, partnership, or other organization
that is a member of an affiliated service group (within the meaning of
Sections 414(m) and 414(o) of the Code) with National.
"Agent" means Third National Bank in Nashville.
"Available Collateral" means Available Collateral as defined in
Section 2.4.(a) of this Agreement.
"Bank(s)" means Bank(s) as defined in the introductory paragraph to
this Agreement.
"Borrower" means Borrower as defined in the introductory paragraph to
this Agreement.
"Closing" means Closing as defined in Section 6.1. of this Agreement.
"Closing Date" means the date of funding of the Loan.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means the Collateral as defined in Article II of this
Agreement.
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<PAGE> 3
"Commitment" means the obligation of the Banks, which is several and
not joint, to extend credit to the Borrower pursuant to this Agreement in the
aggregate principal amount of up to Fifty Million and No/100 Dollars
($50,000,000.00) as set forth in Section 2.1. of this Agreement.
"Compliance Date" means Compliance Date as defined in Section 2.4(a)
of this Agreement.
"Contributions" means Contributions as defined in Section 2.2.(b) of
this Agreement.
"Current Ratio" means Current Ratio as defined in Section 9.1.(a) of
the Agreement.
"Debt Service Coverage" means Debt Service Coverage as defined in
Section 9.1.(e) of this Agreement.
"Determination of Taxability" means establishing the existence of an
Event of Taxability in one of the following ways:
(a) The delivery of written notification to Borrower by the
Agent declaring that an Event of Taxability has occurred on a
specified date by reason of a change of legislation, the issuance of a
Revenue Ruling (including a private letter ruling relating to the Loan
and addressed to the Agent or any one of the Banks (or their
counsel)), proposed deficiency letter ("30-day letter") or other order
or directive by the IRS, Department of the Treasury, or any other
governmental agency with the required jurisdiction, with respect to
any one or more of the Notes, the effect of which (in the opinion of
the Majority Banks) is to establish an Event of Taxability. The
notification shall become effective when sent, but the effective date
of said notice shall not be construed as a waiver of the Banks' right
to receive the increased (or decreased) rate of interest and
penalties, if applicable, set forth in the Notes from the Taxable
Date; or
(b) The delivery of written notification after the date
hereof ("Notice") to Borrower by the Agent declaring that an Event of
Taxability has occurred on a specified date (other than by reason of
the events described in the foregoing subparagraph (a)), which Notice
shall describe the Event of Taxability and which shall be based on an
opinion of counsel acceptable to Agent (based on the consent of the
Majority Banks) that, in light of information received by the Banks
after the date of this Agreement from any source whatsoever, an event
of Taxability has occurred and there is no substantial authority (as
defined in the Code and the regulations promulgated thereunder) for
the Banks not adjusting the
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<PAGE> 4
Adjusted Rate in accordance with Section 5.1. of this Agreement. Any Notice
shall become effective ten (10) days after such Notice is sent, unless,
prior to the effective date of the Notice, Borrower, on behalf of the Banks:
(1) agrees to seek a private letter ruling or other written
determination ("Letter Ruling") on behalf of the Banks from the IRS
affirming that the interest on the Notes will remain unaffected under
Section 5.1. hereof by the Event of Taxability described in the
Notice; and
(2) procures an opinion from counsel wholly satisfactory to
the Banks, in Banks' sole opinion, to the effect that (i) there is a
substantial and valid legal basis for the position that the Adjusted
Rate should not be adjusted, (ii) counsel has no reason to believe the
IRS will decline to consider the ruling request for procedural or
technical reasons, and (iii) counsel has no knowledge or reason to
believe that the IRS has indicated a position not to rule favorably on
similar questions or would not rule favorably; and
(3) agrees to reimburse and fully indemnify and hold harmless
the Banks and the Agent from and against any and all liability,
damage, loss, cost, or expense (including attorneys' fees) that the
Banks or the Agent may incur as the result of seeking the Letter
Ruling, and further agrees to pay on demand all reasonable costs and
expenses that the Banks or the Agent may incur in seeking the Letter
Ruling, and to furnish such bond, letter of credit, or other form of
security as the Banks or the Agent may reasonably request from time to
time to secure Borrower's additional obligations under the Loan
Documents, including without limitation any potential increases in
interest, whether prospective or retroactive, and any potential taxes,
penalties, or related interest.
Provided Borrower promptly initiates and continues to diligently pursue the
Letter Ruling, compliance with the foregoing requirements shall suspend the
effective date of the Notice. The issuance of a Letter Ruling clearly
concluding that the Adjusted Rate should not be adjusted will suspend the Event
of Taxability described in the Notice. The issuance of a Letter Ruling
concluding that the Adjusted Rate should be adjusted, or failure to obtain any
Letter Ruling that is conclusive with respect to whether the Adjusted Rate
should be adjusted within twelve (12) months from the date of the delivery of
the Notice, whichever shall first occur, shall constitute a final disposition
of the matter (any appeal rights notwithstanding) and a Determination of
Taxability shall be deemed to have occurred as of the Taxable Date. The above
procedure and the
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<PAGE> 5
effective date of said Notice shall in no event be construed as a waiver of the
Banks' right to receive the increased rate of interest and penalties set forth
in the Loan Documents from the Taxable Date.
"Disqualified Security" means disqualified security as defined in the
definition of Temporary Investments of this Agreement.
"Eligible Accounts" means NHLP's Accounts, excluding accounts (a)
overdue by more than one hundred twenty (120) days, (b) owed by insolvent
obligors, (c) in which the Banks do not have a fully perfected security
interest, or (d) customarily deemed ineligible for any other reason by
commercial financial lenders.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESOP" means an employee stock ownership plan, as defined in Section
4975(e)(7) of the Code and the regulations thereunder, qualified under Section
401(a) of the Code.
"Event of Default" means any Event of Default as such term is defined
in Article XI herein.
"Event of Taxability" means a change in law or fact, or the
interpretation thereof, or the occurrence or recognition of a fact,
circumstance, or situation, or any change in the Code, or the application
thereof by the IRS or other governmental authority having jurisdiction, or any
other event or circumstance of whatever kind or nature, the effect of which is
to cause a Bank to include in its Gross Income for purposes of taxation under
the Code more (or less) of the interest earned on its respective Note than
prior to such change, or to increase (or decrease) the highest marginal federal
corporate tax rate to which a Bank is subject, either as a result of a change
in the general corporate income tax structure or corporate income tax rates.
However, in no event shall the inclusion of more than 50% of any amounts
payable pursuant to Section 6.1 hereof in the Gross Income of any Bank for
purposes of taxation under the Code be construed as an Event of Taxability
hereunder.
"Funded Debt" means Funded Debt as defined in Section 9.1.(c) of this
Agreement.
"GAAP" means generally accepted accounting principles at any date of
determination in respect of a company or entity conducting a business the same
as or similar to that of the company or entity being studied, including,
without limitation, those set forth in applicable bulletins, opinions,
pronouncements, statements and interpretations issued by the
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<PAGE> 6
Accounting Principles Board, the American Institute of Certified Public
Accountants and the Financial Accounting Standards Board, consistently applied.
"Gross Income" means gross income as defined in Section 61 of the Code
and the regulations thereunder.
"Guarantee and Contingent Purchase Agreement" means the Guarantee and
Contingent Purchase Agreement as defined in Section 3.2.(b) of this Agreement.
"Guarantors" means collectively, NHLP and National.
"Indebtedness" means all amounts owing under this Agreement and all
indebtedness evidenced by the Notes, including accrued interest thereon, and
any and all costs and expenses incurred by Agent and/or the Banks in enforcing
or protecting their rights with respect to the Notes, the Collateral or the
indebtedness secured by the Collateral, including, but not limited to,
reasonable attorneys' fees.
"IRS" means the Internal Revenue Service.
"IT" means Irving Trust Company.
"Letter Ruling" means Letter Ruling as defined under the definition of
"Determination of Taxability" in this Agreement.
"Line of Credit Note" means Line of Credit Note as defined in Section
2.2.(d) of this Agreement.
"Loan" means Loan as defined in the first whereas clause of this
Agreement.
"Loan Documents" means Loan Documents as defined in Section 3.2. of
this Agreement.
"Majority Banks" means Banks holding at least sixty-six and two-thirds
percent (66-2/3%) of the then aggregate unpaid principal amount of the Notes
held by the Banks, or if no such principal amounts are then outstanding, Banks
having at least sixty-six and two-thirds percent (66-2/3%) of the Commitment.
"Member" means a participant of the Plan.
"National" means National Health Corporation, a Tennessee corporation
serving as Borrower's Plan sponsor.
"Net Income" means Net Income as defined in Section 7.1. (dd) of this
Agreement.
"NHLP" means National HealthCorp L.P., a Delaware limited partnership.
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"NHLP Deeds of Trust and Mortgages" means NHLP Deeds of Trust and
Mortgages as defined in Section 3.2.(c) of this Agreement.
"NHLP's Accounts" means all of the accounts of NHLP net of contractual
adjustments without regard for NHLP's bad debt reserve determined in accordance
with GAAP, including without limitation, all accounts, accounts receivable,
chattel paper, other choses in action related to accounts, and any right to
payment for goods sold or leased or for services rendered, whether or not
evidenced by an instrument or chattel paper, and whether or not earned by
performance, all of NHLP's rights as an unpaid vendor or lienor including
stoppage in transit, replevin or reclamation, and any other of NHLP's
property held by Agent or Banks or by others for Agent's or Banks' account,
including balances standing to NHLP's credit on the Agent's or any Bank's
books, and the proceeds of any and all of the foregoing.
"Note Purchase Date" means Note Purchase Date as defined in Section
3.2.(b) of this Agreement.
"Notes" means those non-recourse promissory notes executed by Borrower
referenced in Section 3.2.(a) hereof, together with any and all extensions,
amendments, restatements, renewals and modifications thereof.
"Notice of Revision" means Notice of Revision as defined in Section
5.4. of this Agreement.
"Participant" means any bank other than the Banks who purchases an
interest in the Commitment from any of the Banks.
"Participation Agreement" means any participation agreement to be
entered into between any Bank and a Participant.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof, or any other form of
entity.
"Plan" means the National Health Corporation Leveraged Employee Stock
Ownership Plan, as adopted by National, effective January 20, 1988, and as
amended and/or restated or merged from time to time.
"Plan Administrator" means Plan Administrator as defined in Section
10.1.(c) of this Agreement.
"Pledge of Line of Credit Note Agreement" means pledge of Line of
Credit Note Agreement as defined in Section 3.2.(g) of this Agreement.
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<PAGE> 8
"Pledge of NHLP's Accounts Agreement" means Pledge of NHLP's Accounts
Agreement as defined in Section 3.2.(d) of this Agreement.
"Pledge of Stock Agreement" means Pledge of Stock Agreement as defined
in Section 3.2.(f) of this Agreement.
"Pledge of Temporary Investments Agreement" means Pledge of Temporary
Investments Agreement as defined in Section 3.2.(e) of this Agreement.
"Pledged Nursing Homes" means the fifteen (15) nursing home properties
mortgaged, assigned and pledged by NHLP to secure payment of and performance
under the Guarantee and Contingent Purchase Agreement, which nursing home
properties are more particularly described on Exhibit A attached hereto and
made a part hereof, and any additions, substitutions or replacements thereto,
subject to the approval of the Majority Banks. With respect to the Pledged
Nursing Homes listed on Exhibit A hereto and/or any additions, substitutions or
replacements thereto, a survey of the property upon which such Pledged Nursing
Home is located shall be provided to Agent promptly upon request of Agent, at
the expense of NHLP which survey shall be sufficient to remove the survey
exception from any title policy issued with respect to such property.
"Quarter", "Quarterly" or "Fiscal Quarter" means a three month period
(or portion thereof) ending on March 31, June 30, September 30 or December 31.
"Qualified Lender" means any lender who is eligible for the interest
income exclusion with respect to a Securities Acquisition Loan as set forth in
Section 133 of the Code and the regulations thereunder.
"SCS" means Sovran Bank/Central South.
"Securities Acquisition Loan" means a securities acquisition loan as
defined in Section 133(b) of the Code and the regulations thereunder.
"ST" means SouthTrust Bank of Alabama.
"Stated Rate" means that variable rate of interest equal at all times
during the term of the Loan to eighty-five percent (85%) of the highest prime
rate of interest as published in the Wall Street Journal or such successor
rate of interest as is published in a generally available financial
publication, as such rate may change from time to time during the term of the
Loan.
"Stock" means Stock as defined in Section 2.2.(a) of this Agreement.
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<PAGE> 9
"Sovran Loan" means that certain loan in the original principal amount
of $38,500,000 from Sovran Bank/Central South to the National Health
Corporation Leveraged Employee Stock Ownership Trust as evidenced by that
certain Loan and security Agreement dated January 20, 1988 by and between
Marine Midland Bank, N.A., not individually or in its corporate capacity, but
solely as Trustee of the National Health Corporation Leveraged Employee Stock
Ownership Trust and Sovran Bank/Central South.
"Subordinated Debt" means any indebtedness that, to the satisfaction
of the Majority Banks as evidenced by a writing signed by the Majority Banks,
is by its terms expressly subject and subordinate in all respects to all
payments of Funded Debt, including without limitation all payments at any time
due or owing under the Guarantee and Contingent Purchase Agreement.
"Tangible Net Worth" means Tangible Net Worth as defined in Section
9.1.(d) of this Agreement.
"Taxable Date" means the first date on which an Event of Taxability
affects the taxable equivalent yield of the Banks.
"Taxable Rate" means Taxable Rate as defined in the Notes.
"Tendering Banks" means Tendering Banks as defined in Section 3.2.(b)
of this Agreement.
"Temporary Investments" means temporary investments pledged by
National and/or NHLP that are generated in connection with the purchase of
National stock by the Borrower or the execution of the Revolving Credit
Agreement dated December 16, 1988 between NHLP and National or in connection
with the sale of any Pledged Nursing Home by NHLP, which shall consist only of
cash or cash equivalents (including certificates of deposit at financial
institutions with capital in excess of One Hundred Million and No/100 Dollars
($100,000,000.00)), obligations of the United States Government, or obligations
of U.S. corporations with a published rating of no less than "A", provided that
in no event shall any of the foregoing have a maturity of greater than one (1)
year. In the event any of the foregoing held by Agent on behalf of Banks as
security for the Loan should fail to qualify as Temporary Investments
("Disqualified Security"), Borrower agrees to replace the Disqualified Security
with Temporary Investments within the thirty (30) day period following
Borrower's receipt of notice from Agent of the existence of the Disqualified
Security.
"TNB" means Third National Bank in Nashville.
"Trust" means the National Health Corporation Leveraged Employee Stock
Ownership Trust established by National, effective January 20, 1988, and
appointing Marine Midland Bank, N.A. as Trustee, as amended and/or restated
from time to time.
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<PAGE> 10
"Trustee" means Trustee as defined in Section 8.1 of this Agreement.
"Uniform Commercial Code" means the Uniform Commercial Code as adopted
by the State of Tennessee.
"Working Capital" means Working Capital as defined in Section 9.1.(b)
of this Agreement.
ARTICLE II
COLLATERAL
Section 2.1. The Commitment. Subject to the terms and conditions of
and relying on the representations, warranties and covenants contained in this
Agreement, the Banks, for a period ending December 16, 1993, agree to fund
severally but not jointly to the Borrower the aggregate maximum principal
amount of up to Fifty Million and No/100 Dollars ($50,000,000.00) (the
"Commitment"). The maximum Commitment of each of the Banks is as follows:
TNB $16,000,000
IT $15,000,000
SCS $ 9,000,000
ST $10,000,000
The Loan shall be evidenced by (i) the Sixteen Million Dollar ($16,000,000)
Note of TNB, (ii) the Fifteen Million Dollar ($15,000,000) Note of IT, (iii)
the Nine Million Dollar ($9,000,000) Note of SCS, and (iv) the Ten Million
Dollar ($10,000,000) Note of ST, which Notes are substantially in the form of
Exhibits B, C, D and E, respectively, with each Note payable in accordance with
its terms. The Loan is not a revolving loan so that amounts repaid on the Loan
after the Loan is funded cannot be reborrowed by Borrower.
Section 2.2. Description of Collateral. The Indebtedness shall be
secured by the following collateral ("Collateral"):
(a) The number of shares of common stock of National as are
actually purchased by Borrower with the Loan proceeds (the "Stock"),
together with all proceeds, monies, income, and benefits arising by
virtue of Borrower's ownership of the Stock, both now and in the
future, including without limitation all dividends, redemption
proceeds, and other distributions on or with respect to the Stock,
whether payable in cash, in stock, or in other property, and all
subscription and other rights in connection therewith; provided,
however, that the Stock shall not include Stock that the Banks have
released pursuant to Section 2.10. of this Agreement; and
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(b) Contributions made to Borrower by national to enable Borrower to
meet its obligations under the Loan Documents (the "Contributions"); and
(c) Earnings attributable to the stock and the investment of the
Contributions; and
(d) NHLP and National's joint and several guarantees of payment of the
Loan, which guarantees shall be secured by the following (which shall be
included in the definition of Collateral):
(i) NHLP Deeds of Trust and Mortgages; or assignments of same;
(ii) A prior perfected security interest in NHLP'S Accounts
and furniture, fixtures and equipment located on or used in connection
with the Pledged Nursing Homes;
(iii) Temporary Investments pledged by National or NHLP, which
Temporary Investments shall on the Closing Date be in an amount equal
to Sixteen Million Four Hundred Fifty Eight Thousand Four Hundred
Thirty and No/100 Dollars ($16,458,430.00), shall decrease dollar for
dollar with NHLP's draws under the Line of Credit Note and shall
increase to the extent of proceeds resulting either from a sale of any
Pledged Nursing Home or payment on the Line of Credit Note by NHLP and
pledged to the Banks pursuant to Section 2.5 hereof; and
(iv) A pledge of the revolving credit note (the "Line of
Credit Note") in the principal amount of Fifty Million and No/100
Dollars ($50,000,000.00) executed of even date herewith by NHLP in
favor of National.
Section 2.3. Purpose. The security interests hereby granted by
Borrower to the Banks are security for the payment of an indebtedness in the
amount of Fifty Million and No/100 Dollars ($50,000,000.00) that is being
advanced by Banks to Borrower on the date of this Agreement evidenced by the
Notes, together with any and all extensions, renewals, amendments,
restatements, and/or modifications thereof. The mortgage liens and security
interests hereby granted by National and NHLP to the Banks are security for the
payment of and performance under the Guarantee and Contingent Purchase
Agreement.
Section 2.4. Valuation.
(a) At all times, "Available Collateral" must be maintained
in an amount equal to one hundred thirty percent (130%) of the
outstanding principal amount of the Loan that is not secured by
Temporary Investments. "Available
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Collateral" is defined as the sum of the value of the Collateral described in
paragraphs (d)(i) and (d)(ii) of Section 2.2. hereof. NHLP's Accounts will be
assigned a value of seventy percent (70%) of the book value of Eligible
Accounts for purposes of this paragraph (a). NHLP Deeds of Trust and Mortgages
will be assigned a value pursuant to Section 2.4.(b) below. Determination of
compliance with this requirement shall be on a Quarterly basis, commencing
December 31, 1988 and continuing on a Quarterly basis thereafter (the
"Compliance Date"). Notwithstanding the foregoing, in the event Borrower fails
to comply with the requirement set forth in the first sentence of this
paragraph (a) because Available Collateral fails to equal one hundred thirty
percent (130%) of the outstanding principal under the Loan by the amount of
Five Million and No/100 Dollars ($5,000,000.00) or less, the Borrower will be
deemed to have complied with such requirement; provided, (i) such deficiency
shall only exist for a maximum of two (2) consecutive Compliance Dates, (ii)
such deficiency shall be remedied on or before the end of the thirty (30) day
period following the second consecutive Compliance Date during which the
deficiency exists, and (iii) in no event shall a deficiency occur during the
quarter coinciding with the Borrower's year end.
(b) Deeds of trust and mortgages and/or expenditures of Loan proceeds
on nursing home properties listed on Exhibit F attached hereto and incorporated
herein by this reference can be added to the Collateral available to the Banks
and/or expended, as applicable, and replace the Temporary Investments described
in Section 2.2.(d) hereof as those funds are utilized. Temporary Investments
can be used only at the times and for the purposes approved by the Majority
Banks regardless of whether Available Collateral exceeds One Hundred Thirty
Percent (130%) of the outstanding principal amount of the Loan that is not
secured by Temporary Investments. Temporary Investments shall be released by
the Agent upon its determination of compliance with the terms of this Section
2.4 and the Security and Pledge Agreement (Temporary Investments) by NHLP
National and/or Borrower, as applicable. Deeds of trust and mortgages on
nursing home properties not listed on Exhibit F can be added at the request of
Borrower to the Collateral available to the Banks only with the approval of the
Majority Banks. For purposes of determining the Collateral value with respect
to each property (including those listed on Exhibit A), each nursing home
property will be assigned a value by Borrower of either (i) seven (7) times
cash flow based on quarterly financial statements for each nursing home
property supplied by NHLP to Agent or (ii) seventy-five percent (75%) of
appraised value of such nursing home property; provided, Majority Banks, at
their
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sole option, can request new appraisals in addition to those appraisals
furnished by Borrower or updates of appraisals furnished by Borrower at NHLP's
expense. Notwithstanding the provisions of subparagraph (i) of this paragraph
(b), with respect to any nursing home property acquired by NHLP that has a
negative cash flow resulting from operations at the time of such acquisition,
for a period of twelve (12) months from the date of any such acquisition, the
Collateral value with respect to such nursing home property shall be a value
equal to the acquisition price paid for such nursing home property; provided,
however, that after the expiration of any such twelve (12) month period, the
Collateral value with respect to such nursing home property shall be based on
the tests set forth in subparagraphs (i) and (ii) of this paragraph (b), but in
any event not less than zero. Development nursing home properties will be
assigned a value equal to actual project costs for a period of eighteen (18)
months from the completion date of the project. Thereafter, value will be
assigned based on the tests set forth in subparagraph (i) or (ii) of this
subparagraph (b). Existing nursing home facilities to which improvements are
made will be assigned a value by Borrower based on (I) the test set forth in
subparagraph (i) of this paragraph, plus the dollar amount expended on such
improvements, provided said expenditures equal or exceed Five Hundred Thousand
and No/100 Dollars ($500,000.00), or (II) the test set forth in subparagraph
(ii) of this paragraph for a period of eighteen (18) months from the completion
date of such improvements. Thereafter, value will be assigned based on the
tests set forth in subparagraph (i) or (ii) of this subparagraph (b).
(c) Notwithstanding any UCC-1 financing statements or other security
documents relating to accounts, general intangibles, chattel paper or
otherwise executed or filed in connection with the Sovran Loan, SCS
acknowledges and agrees that the Agent, on behalf of the Banks, shall have a
first priority and perfected security interest in Temporary Investments and all
proceeds, substitutions and replacements thereof.
Section 2.5. Amounts Paid With Respect to Collateral.
(a) During the term of the Loan, all dividends (including, without
limitation, cash dividends) and other amounts paid with regard to the
Collateral may be applied at the option of Majority Banks to the payment of
principal and interest on any portion of the Indebtedness secured hereby, in
inverse order of maturity. In addition, if NHLP sells a Pledged Nursing Home
and the Majority Banks do not elect to apply the proceeds of such sale to the
payment of principal and interest on the Indebtedness (which
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<PAGE> 14
application shall be in inverse order of maturity), the proceeds of such
sale shall be pledged to the Banks as Temporary Investments. If no
Event of Default exists (or with notice and/or the passage of time would
exist), at the option of NHLP and upon the approval of Majority Banks, the
amount of such proceeds resulting from any such sale may be used by NHLP to
purchase, renovate or construct an additional nursing home, or additions to
other NHLP nursing homes, which shall be collateral for the Guarantee and
Contingent Purchase Agreement and shall be deemed to be a Pledged Nursing
Home hereunder.
(b) During the term of the Loan, all amounts, awards or payments
received by NHLP, Agent or any of the Banks in connection with any
payments made for loss or damage under insurance policies insuring the
property described in the NHLP Deeds of Trust and Mortgages or in
connection with any condemnation or other taking of any part of any of the
property described in the NHLP Deeds of Trust and Mortgages may, at the
option of NHLP (which option shall exist as long as no Event of Default has
occurred or exists), be (i) paid and applied to the payment of principal
and interest on any portion of the Indebtedness in inverse order of
maturity or (ii) be paid over, wholly or in part, to NHLP for the purpose
of (A) pledging such amounts, awards or payments to the Banks as Temporary
Investments and subsequent disbursement, with the approval of the Majority
Banks, to NHLP in accordance with and subject to the provisions of Sections
2.4(b) and 2.5(a) above, or (B) using such proceeds to acquire substitute
Pledged Nursing Homes, acceptable to Majority Banks pursuant to the terms
of this Agreement or (C) for any other purpose or object satisfactory to
the Majority Banks; provided, however, that in no event shall the Banks or
Agent be obligated to assure or see to the proper application of any
amounts paid over to NHLP. In addition, in no event shall the application
of any such amounts, awards, or payments described herein to the
Indebtedness relieve Borrower of its obligations to continue to make
payments required under the Notes or change or alter in any way whatsoever
the obligations of NHLP and/or National under the Guarantee and Contingent
Purchase Agreement. If an Event of Default exists or has occurred, all such
amounts, awards and payments shall be paid over to the Agent and applied as
determined by the Majority Banks.
Section 2.6. Voting Rights. During the term of this Agreement, and so
long as an Event of Default under this Agreement or a default or Event of
Default (as such term is defined in each Loan Document) under the Loan
Documents has not occurred and continues to exist, Borrower shall have the
right to vote all unreleased, pledged shares of Stock. Consistent with the
applicable provisions of the Plan and ERISA, Borrower shall
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vote such pledged shares of Stock in accordance with sound business practices,
and shall not consent to any action with respect to, or of, such pledged shares
of Stock that would imperil the assets of the Plan, would result in a failure
to obtain full value for all sales or transfers of National's assets, or would
dissipate all or any part of the property of National; provided, however, if
the requirements of this Section 2.6. shall conflict with Borrower's or
Trustee's fiduciary responsibilities and duties towards Plan participants and
their beneficiaries, specifically including the "exclusive benefit rule," then
Borrower or Trustee shall vote in accordance with said fiduciary
responsibilities and duties and shall not violate the provisions of this
Section 2.6 by doing so.
Section 2.7. Change in Capital Structure. In the event that, during
the term of this Agreement, any share dividend, reclassification, readjustment,
merger, or other change is declared or made in the capital structure of
National, all new, substituted, and additional shares or other securities
issued in exchange for or on account of the Collateral by reason of any such
change shall be held by Agent under the terms of this Agreement in the same
manner as the shares originally pledged hereunder. All such securities
delivered to Borrower shall be delivered to Agent immediately.
Section 2.8. Warrants, Options, etc. In the event that during the term
of this Agreement subscription warrants or any other rights or options shall be
issued in connection with the Collateral, so long as Borrower, National and/or
NHLP are not in default hereunder, such warrants, rights, and options
immediately shall be assigned by the Agent and Banks to Borrower, if necessary
to allow Borrower to exercise such warrants, rights or options. If any such
option is exercised by Borrower, all new shares or other securities thereby
acquired by Borrower immediately shall be pledged and assigned to Agent and
Banks to be held under the terms of this Agreement in the same manner as the
Stock originally pledged hereunder.
Section 2.9. Additional Stock. Agent, on behalf of the Banks, shall be
entitled to receive and have delivered to it (a) all stock dividends, (b) stock
issued as a result of stock splits, and (c) amounts paid in cash or other
property as liquidating dividends or returns of capital on any Stock pledged
and not released hereunder, to be held by Agent under the terms of this
Agreement as additional Collateral. Borrower immediately shall pledge and
deposit with Agent all such stock or amounts that may have come into Borrower's
possession or control.
Section 2.10. Release of Stock. Agent, on behalf of the Banks, in
consultation with the Trustee as to the number of shares, shall hold the Stock
and shall release in accordance
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with Treas. Reg. 54.4975-7(b)(8)(i) a portion of the Stock as the Indebtedness
is repaid within thirty (30) days after the annual valuation date of the Plan.
That portion of the Stock that shall be released from encumbrance annually
during the term of the Loan shall equal the number of shares of Stock held as
Collateral immediately before the release multiplied by a fraction, the
numerator of which is the amount of principal and interest paid for the year,
and the denominator of which is the sum of the numerator plus the principal and
interest to be paid for all future years. The interest to be paid in future
years shall be computed by using the interest rate applicable as of the end of
the Plan's then current plan year. If the Stock consists of more than one
class of securities, the fraction above is applied to each class to determine
the pro rata portion of that class that shall be released.
ARTICLE III
LOAN PURPOSE AND
DOCUMENTATION
Section 3.1. Purpose. The purpose of the Loan will be solely for the
purchase by the Borrower of the stock pledged as Collateral and described in
2.2(a) above, followed by National's extension of a Fifty Million and No/100
Dollar ($50,000,000.00) line of credit to NHLP evidenced by the Revolving Credit
Note of even date herewith. NHLP represents and warrants that proceeds of such
line of credit will be used by NHLP solely for (i) the refinancing of existing
debt, (ii) subject to Majority Bank approval, the acquisition, renovation and
development of nursing home properties, and (iii) with Majority Bank approval,
for working capital uses.
Section 3.2. List of Documents. Agent shall receive the following
documents, satisfactory in all respects to Agent, each of which shall be duly
authorized, executed, and delivered to Agent by the appropriate entity or
entities, (together with this Agreement and all other documents and
certificates executed in connection with this Agreement, collectively, the
"Loan Documents"):
(a) Notes. Four (4) non-recourse promissory notes
executed by Borrower of even date herewith in the aggregate principal
amount of Fifty Million and No/100 Dollars ($50,000,000.00), together
with any extensions, renewals and modifications thereof (the
"Notes"). The Notes shall be payable to the order of and in such
amounts as follows:
<TABLE>
<S> <C>
TNB $16,000,000
IT $15,000,000
SCS $ 9,000,000
ST $10,000,000
</TABLE>
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<PAGE> 17
The Note for each of TNB, IT, SCS, and ST is in substantially the
form of Exhibit B, C, D and E, respectively. Repayment of the Notes
shall be based on a twenty (20) year amortization schedule with a
five (5) year put and automatic tender option (followed by subsequent
options as may be negotiated by NHLP and the Banks thereafter) to
NHLP in favor of Banks as set forth in Section 3.2.(b) below. The
amortization schedule for principal payments on the Loan is attached
hereto as Exhibit G.
(b) Guarantee and Contingent Purchase Agreement. A
Guarantee and Contingent Purchase Agreement executed by and among
NHLP, National and Banks of even date herewith, together with any
amendments and modifications thereto (the "Guarantee and Contingent
Purchase Agreement"), in which NHLP and National guarantee payment of
the Indebtedness. Pursuant to the terms of the Guarantee and
Contingent Purchase Agreement, NHLP shall on December 16, 1993 and,
if negotiated by NHLP and the Banks thereafter, (each of which dates
is referred to as a or the "Note Purchase Date") purchase, upon
tender by all of the Banks to NHLP of all of the Notes with an
instrument of assignment attached thereto, the Loan evidenced by the
Notes (and the Notes evidencing the same) by payment to the Banks of
an amount (representing the purchase price therefor) in immediately
available funds equal to the sum of the principal of and accrued and
unpaid interest on the Notes at the time of such purchase together
with any amounts that would be owing under the Loan and Security
Agreement in the event the Notes were being paid in full at the time
of such purchase. Such tender shall be deemed automatically to be
made, and title to the Notes shall be deemed automatically to have
passed to NHLP on each Note Purchase Date, whereupon NHLP shall
become obligated forthwith to pay the purchase price to the Banks,
unless (a) Agent shall have notified NHLP no less than sixty (60)
days prior to the applicable Note Purchase Date that all of the Banks
elect not to so tender, or (b) NHLP requests the Banks through the
Agent no less than ninety (90) days prior to the applicable Note
Purchase Date that all of the Banks not so tender, and Agent shall
have given the notice referred to in clause (a) above within the time
period provided therein, whereupon, in either such case, NHLP shall
not be obligated on such Note Purchase Date to pay the purchase price
to the Banks. The giving of notice by Agent under clause (a) above
shall not affect in any way the rights of the Banks to tender all of
the Notes to NHLP with respect to any subsequent Note Purchase Date.
(c) NHLP Deeds of Trust, Mortgages and Security
Agreements. Deeds of Trust, Leasehold Deeds of Trust, Mortgages, and
Security Agreements and, in certain cases, assignments of same
(collectively, the "NHLP Deeds of Trust and Mortgages") (i) securing
payment of and performance
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under the Guarantee and Contingent Payment Agreement, (ii)
encumbering the real property on which the Pledged Nursing Homes are
located, and (iii) assigning NHLP's personal property (including,
without limitation, accounts receivable, furniture, fixtures and
equipment) located on or used in connection with the Pledged Nursing
Homes.
(d) Pledge of NHLP'S Accounts Agreement. A Pledge
Agreement executed by NHLP of even date herewith pledging NHLP's
Accounts as security for the Guarantee and Contingent Purchase
Agreement ("Pledge of NHLP's Accounts Agreement").
(e) Pledge of Temporary Investments Agreement. A Pledge
Agreement executed by National and NHLP of even date herewith
pledging Temporary Investments as security for the Guarantee and
Contingent Purchase Agreement ("Pledge of Temporary Investments
Agreement").
(f) Pledge of Stock Agreement. A Pledge Agreement
executed by Borrower of even date herewith pledging the Stock
("Pledge of Stock Agreement").
(g) Pledge of Line of Credit Note Agreement. A Security
and Pledge Agreement (Note) executed by National of even date
herewith pledging the Line of Credit Note ("Pledge of Line of Credit
Note Agreement").
Section 3.3. Non-Recourse Liability of Trustee and Borrower. The
Banks shall have no recourse against the Trustee on account of the Loan, and
the Trustee shall have no personal liability with respect to any obligation
hereunder or with respect to the representations, covenants and warranties
contained herein. The Banks shall have no recourse against the Borrower and the
Borrower shall have no obligation to make any payment hereunder or under the
Notes except to the extent of (x) the difference between (i) the sum of all
Contributions received by the Borrower from National for payments hereunder and
under the Notes and any earnings, income or dividends attributable to the
investment of such Contributions, and (ii) all payments on account of the
Borrower's obligations hereunder and under the Notes made by or on behalf of
the Borrower to the Banks and (y) the Banks' rights under the Pledge of Stock
Agreement.
Section 3.4. Participation. Each Bank shall have the right to enter
into one or more Participation Agreements with one or more banks on such terms
and conditions as such Bank shall deem advisable, provided that no Participant
shall have any rights under this Agreement.
Section 3.5. Purchase by NHLP. In the event that an Event of
Taxability occurs because (i) one or more of the Banks ceases to be a qualified
lender as defined in Section 133 of
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the Code or (ii) the Borrower or Trustee enters into a prohibited transaction
as defined in the Code and the regulations thereunder, NHLP shall have the
right to purchase the Notes of the Bank or Banks involved, by the payment to
the Banks of an amount in immediately available funds equal to the sum of the
principal of and accrued and unpaid interest on the Notes at the time of such
purchase together with any amounts that would be owing under the Loan and
Security Agreement in the event the notes were being paid in full at the time
of such purchase. NHLP shall have the right to purchase such notes upon five
(5) days written notice to the Bank or Banks involved. Such purchase shall be
deemed automatically to be made, and title to the Notes shall be deemed
automatically to have passed to NHLP on the day when NHLP tenders the purchase
price to the Bank or Banks involved.
ARTICLE IV
PREPAYMENT TERMS AND USURY
Section 4.1. Prepayment. Borrower may prepay all or part of the
Indebtedness evidenced by the Notes at any time before the Notes mature without
penalty. The Banks shall apply any such payment first to accrued interest and
then to principal.
Section 4.2. Usury. Notwithstanding any provision of this Agreement
or the Notes or any other Loan Documents to the contrary, it is the intent of
the Agent, the Banks, the Borrower, and all parties liable on the Notes, that
the Banks or any subsequent holder shall never be entitled to receive, collect,
reserve or apply, as interest, any amount in excess of the maximum rate of
interest permitted to be charged by applicable law or regulations, as amended
or enacted from time to time. In the event any of the Banks, or any subsequent
holder, ever receive, collect, reserve or apply, as interest, any such excess,
such amount that would be excessive interest shall be deemed a partial
prepayment of principal and treated as such, or, if the principal Indebtedness
is paid in full, any remaining excess funds shall immediately be paid to the
Borrower. In determining whether or not the interest paid or payable under any
specific contingency exceeds the highest lawful rate, the Borrower, the Agent
and Banks shall, to the maximum extent permitted under applicable law, (a)
exclude voluntary prepayments and the effects thereof, and (b) amortize,
prorate, allocate, and spread, in equal parts, the total amount of interest
throughout the entire term of the Indebtedness; provided that if the
Indebtedness is paid and performed in full prior to the end of the full
contemplated term hereof, and if the interest received for the actual period of
existence hereof exceeds the maximum lawful rate, the holder of the Notes shall
refund to the Borrower the amount of such excess or credit the amount of such
excess against the principal portion of the Indebtedness, as of the date it was
received, and, in such event, neither the Agent nor the Banks
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shall be subject to any penalties provided by any laws for contracting for,
charging, reserving or receiving interest in excess of the maximum lawful rate.
ARTICLE V
EVENT OF TAXABILITY
Section 5.1. Rate Adjustment.
(a) The amount, terms, and conditions of Indebtedness
evidenced by the Notes, this Agreement, and the other Loan Documents
have been agreed upon by Banks and Borrower based on (i) each Bank
being able to exclude fifty percent (50%) of the interest income from
the Loan from its Gross Income pursuant to Section 133 of the Code
for Securities Acquisition Loans made by Qualified Lenders, and (ii)
each Bank's highest marginal federal corporate tax rates remaining at
their present levels. The tax rates currently applicable to the
Banks, and circumstances (not now contemplated or anticipated) may
hereafter result in a determination (that may be disputed) that the
information contained in subparagraphs (i) through (ii) of this
Section 5.1.(a) has changed. Upon a Determination of Taxability,
effective on the applicable Taxable Date, the Stated Rate shall
automatically be adjusted (the "Adjusted Rate") to maintain for each
of the Banks the same taxable equivalent yield on the Loan that would
have been applicable but for the occurrence of the related Event of
Taxability. Each subsequent Event of Taxability shall necessitate an
adjustment to the Adjusted Rate, which rate shall be effective until
the next Event of Taxability or upon the total payment of the
Indebtedness, whether by prepayment or at or after the maturity of
the Notes. Notwithstanding the foregoing, in the event that one
hundred percent (100%) of the interest on the Notes shall be included
in the Gross Income of any of the Banks, the interest due and payable
on all principal amounts advanced pursuant to the terms of the Loan
shall automatically be adjusted to the Taxable Rate.
(b) The Borrower shall pay to Banks any and all Additions
to Tax imposed on Banks in connection with any Event of Taxability.
National shall make Contributions to Borrower to enable Borrower to
pay such Additions to Tax.
(c) The obligations of the Borrower under this Section
5.1. shall survive the payment in full of all amounts due under the
Notes and shall continue in effect until all amounts due hereunder
shall have been paid and in any event until the later of the date
that such amounts due have been paid or thirty (30) days after all
applicable statutes of limitations have run (after taking into
account all extensions and suspensions thereof) in respect of any
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taxable year during which any payment of interest on the Notes or any
payment pursuant to this Section 5.1. was received or accrued.
(d) Although the Banks shall have no obligation to
contest any Event of Taxability, the Agent shall notify the Borrower
thereof as soon as reasonably possible. The Banks will permit
Borrower to supply the IRS with any documentation or legal argument
against any Event of Taxability, but the Banks will be under no
obligation to delay or withhold any action of acquiescence in order
to permit the Borrower to do so. If the Borrower and/or the Banks
should decide to contest an Event of Taxability, and if by settlement
or negotiation, court determinations, or otherwise, the amount of
interest payable on any of the Notes includable under the Code in the
Gross Income of the Banks is ultimately determined to be less than
the amount initially asserted, the Borrower shall be entitled to a
prompt refund of any such excess amount actually paid by the Borrower
to the Banks on account of such Event of Taxability plus interest
thereon at the rate of five percent (5%) per annum. Nothing referred
to herein shall be construed to require the Banks to join in any
actions, proceeding, or appeal with respect to protesting or
contesting an Event of Taxability.
Section 5.2. Records. Notwithstanding Borrower's right to supply the
IRS with any documentation or legal argument against any Determination of
Taxability or Event of Taxability, nothing in this Article V shall under any
circumstances give Borrower any right to inspect the tax returns or other
records of the Agent or any of the Banks. The Banks will cooperate with the
Borrower, at NHLP's expense, in supplying appropriate information available to
the Banks in the event of any contest of an Event of Taxability.
Section 5.3. Notice. For purposes of the written notification of
Determination of Taxability, such notification by Agent to Borrower shall be in
writing, signed by the appropriate officers of Agent, and shall:
(a) briefly describe the Event of Taxability that has
occurred, setting forth the Taxable Date; and
(b) specify (to the extent determinable) that portion of
the Loan to which such Event of Taxability relates (it being
understood that in the event Agent does not specify a portion of the
Loan to which such Event of Taxability relates, such Event of
Taxability shall relate to the entire Loan); and
(C) set forth the new Adjusted Rate and the period of
time for which such rate relates (including information
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showing the calculations used in computing the new Adjusted Rate); and
(d) be accompanied by a description of the legislation
relied upon or a copy of either the Revenue Ruling, 30-day letter, or
other order or directive received by Agent or an opinion of counsel
acceptable to Agent (based on the consent of the Majority Banks) on
which such Event of Taxability is based.
Section 5.4. Revised Notice. If Agent has given Borrower written
notification of the occurrence of an Event of Taxability, Agent may at any time
and from time to time revise such notice of the occurrence of an Event
of Taxability to increase or decrease the amount payable under Section 5.1.
hereof by giving Borrower a written notice of such revision ("Notice of
Revision"), in which case Borrower and Agent shall make such adjustments
between themselves of amounts previously paid and to be paid as shall be
appropriate to reflect such revision as if the Notice of Revision had
constituted a part of the original notice of the occurrence of an Event of
Taxability, and any payments as a result of such adjustments for any period
prior to the date of the Notice of Revision shall be made within five (5) days
after Borrower has received such Notice of Revision. In addition, if Agent has
given Borrower notice of the occurrence of an Event of Taxability and Agent
subsequently determines for any period that the conclusions expressed in the
opinion of counsel acceptable to Agent (based on the consent of the Majority
Banks) on which such Determination of Taxability was based are not correct,
then (without limiting the right of the Agent to assert later that an Event of
Taxability has occurred with respect to such period), Borrower shall not be
obligated to pay the amounts set forth in Section 5.1. hereof for such period,
and Agent shall return any such payment or payments theretofore made with
respect to such period.
Section 5.5. Indemnification For Prohibited Transactions. NHLP and
National shall indemnify and hold Banks harmless from and against any taxes,
penalties and/or interest imposed on any of the Banks under the provisions of
Section 4975(a) and/or 4975(b) of the Code.
ARTICLE VI
ADDITIONAL INTEREST AND FEES
Section 6.1. Additional Interest. Borrower shall pay an amount equal
to one-half of one percent (.50%) (computed on the total commitment of Fifty
Million and No/100 Dollars ($50,000,000.00)) as additional interest on the Loan
("Additional Interest"), payable as follows:
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(a) twenty-five percent (25%) of the Additional Interest
within five (5) days of the Closing;
(b) eighteen and three-quarters percent (18.75%) of the
Additional Interest ninety (90) days after the Closing;
(c) eighteen and three-quarters percent (18.75%) of the
Additional Interest one hundred eighty (180) days after the Closing;
(d) eighteen and three-quarters percent (18.75%) of the
Additional Interest two hundred seventy (270) days after the Closing;
and
(e) eighteen and three-quarters percent (18.75%) of the
Additional Interest three hundred sixty (360) days after the Closing.
All amounts due under this Section 6.1. shall be deemed to have been earned at
the closing of the Loan (the "Closing") and shall be due and payable as set
forth in this Section 6.1. irrespective of any events occurring after the
Closing, including but not limited to (i) Borrower's, National's and/or NHLP's
default under the Loan Documents, (ii) Borrower's failure to draw down or
utilize the full amount of the Loan, or (iii) Borrower's refinancing of the
Loan.
Section 6.2. Agent Fee. NHLP shall pay an agent's fee of Twenty One
Thousand and No/100 Dollars ($21,000.00) per year, payable quarterly in advance
to TNB as Agent.
ARTICLE VII
COVENANTS AND WARRANTIES OF BORROWER, NHLP AND NATIONAL
Section 7.1. All covenants and warranties made by the Borrower in
this Article VII shall be deemed to be covenants and warranties relating only
to the Borrower, and shall not relate to any covenants or warranties made with
respect to National and/or NHLP. In no event shall any covenants or warranties
made in this Article VII with respect to NHLP or National be deemed to have
been made by Borrower. In no event shall any covenants or warranties made in
this Article VII with respect to NHLP be deemed to have been made by National.
Borrower, NHLP and National, as appropriate, hereby severally and not jointly
covenant and warrant that:
(a) Organization, Powers, etc. (i) The Borrower, NHLP and
National have full power and authority to execute this Agreement and
the documents required hereunder, as applicable, and to carry out the
transactions contemplated hereby; (ii) an application has been filed
for a determination letter from the IRS that the Borrower qualifies
as an exempt trust under Section 501(a) of the
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<PAGE> 24
Code, National is validly existing and duly formed under the laws of
the State of Tennessee, and NHLP is validly existing and duly formed
under the laws of the State of Delaware; (iii) the Borrower, NHLP and
National have filed all papers with all governmental authorities
required as a pre-condition to own property and transact business;
(iv) the Borrower, NHLP and National have all the necessary power and
authority to own their properties and assets and to carry on their
businesses; and (v) the Borrower, NHLP and National have all
necessary power to enter into, execute and perform the Loan
Documents, as applicable.
(b) Authorization of Borrowing, etc. The execution,
delivery and performance of this Agreement, the borrowings hereunder
and the execution and delivery of the Notes and other Loan Documents
required hereunder have been duly authorized by all requisite trust,
limited partnership, or corporate action, as applicable, of the
Borrower, NHLP and National, and will not violate any provision of
law, any order of any court or other agency of government, any
provision of any indenture, agreement or other instrument to which
either the Borrower, NHLP or National is a party (with due notice
and/or lapse of time), or by which the Borrower, NHLP or National or
any of their properties or assets are bound, or be in conflict with,
result in a breach of or constitute (with due notice and/or lapse of
time) a default under any such indenture, agreement or other
instrument, or result in the creation or imposition of any lien,
charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Borrower, NHLP or National, except as
contemplated by this Agreement.
(c) Validity and Binding Nature. This Agreement, the
Notes and all other Loan Documents, when duly executed and delivered,
are and will be, legal, valid and binding obligations of the
Borrower, NHLP and National, as applicable, enforceable in accordance
with their respective terms.
(d) Title to Properties. The Borrower has good and
marketable title to all of the Borrower's properties and assets, and,
except for the liens provided herein and except for the lien
resulting from the pledge by Borrower of National stock to SCS under
the Sovran Loan, all such properties and assets are free and clear
of mortgages, pledges, liens, charges and other encumbrances.
(e) Litigation. There is no action, suit or proceeding at
law or in equity or by or before any governmental instrumentality,
arbitration board or other agency now pending, or, to the knowledge
of the Borrower, NHLP or National, threatened against or affecting
the Borrower,
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NHLP or National, or any properties or rights of the Borrower, NHLP
or National, which, if determined adversely, would materially impair
the rights of the Borrower, NHLP or National to carry on business
substantially as now conducted or would materially adversely affect
the financial condition of either the Borrower, NHLP or National, or
would impair the ability of the Borrower, NHLP or National to perform
their respective obligations under the Loan Documents. Neither the
Borrower, NHLP nor National is in default with respect to any order,
decree or judgment of any court, arbitrator or governmental body.
(f) Payment of Taxes. The Borrower, NHLP and National, as
applicable, have respectively filed or caused to be filed all
Federal, state and local tax and information returns that are
required to be filed, and have paid or caused to be paid all taxes as
shown on said returns or on any assessment received by them, to the
extent that such taxes have become due, except for taxes that are
being contested in good faith and for which NHLP and/or National, as
the case may be, have provided additional security to the Banks
satisfactory in all respects to the Banks.
(g) Agreements. Neither the Borrower, NHLP nor National
is a party to any restriction materially adversely affecting its
business, properties or assets, operations or conditions (financial
or otherwise). Neither the Borrower, NHLP nor National is in default
in the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any agreement or
instrument to which it is a party.
(h) Purpose of Loan. Proceeds of the Loan will be used
exclusively for the purchase of the Stock.
(i) Investment Company Act. The Borrower is not an
"investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940,
as amended.
(j) Regulation U. The Borrower is not engaged
principally, or as one of its important activities, in the business
of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation U of the Board of Governors
of the Federal Reserve System).
(k) Trust Transactions. The sale by National of the
Stock to the Borrower, the purchase by the Borrower of the Stock,
and the distribution, if any, of the Stock pursuant to the Plan, do
not require registration under either the Securities Act of 1933 or
the Investment Company Act of 1940 or any applicable state securities
laws or regulations.
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<PAGE> 26
(l) Situs. Borrower's chief place of business is at the
address appearing after Borrower's signature hereto. Borrower will
notify Agent promptly in writing of any change in the location of any
such chief place of business or the establishment of any new place of
business.
(m) Protection of Collateral. Borrower, National and NHLP
are the owners of the assets titled respectively to each of them
constituting the Collateral free from any adverse lien, security
interest, or encumbrance other than those included herein as
described in Exhibit H. Borrower, National and NHLP will defend such
Collateral against all claims and demands of all persons at any
time claiming the same or any interest therein. Subject to the terms
of the Trust, no restrictions exist with respect to the transfer of
any of the pledged shares of Stock. Subject to the terms of the
Trust, Borrower has the right to transfer the shares of Stock free of
any encumbrances and without obtaining the consents of other
shareholders. Until the obligations under this Agreement, the Notes
and the Guarantee and Contingent Purchase Agreement have been paid in
full, Borrower, National and NHLP will keep such Collateral free from
any lien, security interest, or encumbrance, except for the security
interest described herein and the liens granted pursuant to the NHLP
Deeds of Trust and Mortgages.
(n) Records. Borrower, National and NHLP at all times
will keep accurate and complete records of their respective affairs
and (in the case of National and NHLP) the Collateral, and Borrower
(in the case of the Stock only), National and NHLP will not comingle
all or any portion of the Collateral with their other assets. Agent
or any of its agents shall have the right to call at Borrower's,
National's and NHLP's places of business upon notice and
during-normal business hours at intervals to be determined by Agent,
and without hindrance or delay, to inspect, audit, check, and make
extracts from the books, records, journals, orders, receipts,
correspondence, and other data of Borrower, National and NHLP
(o) Use of Collateral. Neither Borrower, National nor
NHLP will use the Collateral in violation of any statute or
ordinance.
(p) Sell or Transfer. Neither Borrower, National nor NHLP
shall sell or transfer all or any portion of the Collateral to a
third party without the Agent's prior written consent, which consent
shall be conditioned on approval of all of the Banks, which consent
shall not be unreasonably withheld; provided, however, that personal
property of Borrower, National or NHLP may be sold in the ordinary
course of business.
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(q) Notice upon Event of Default. In the event of the
occurrence of an Event of Default of which Borrower, National or NHLP
has knowledge, Borrower, National or NHLP shall notify Agent
immediately in writing, setting forth the nature of the default and
the action Borrower, National or NHLP proposes to take to cure the
default.
(r) Qualification of Plan and Trust. National has filed
for a determination that the Plan is an ESOP, and that the Trust is
a trust exempt from tax under Section 501(a) of the Code. Both the
Plan and the Trust are duly organized and existing under the laws of
the United States of America and are authorized to transact all
business that is now being transacted by them.
(s) Violation of Law. Borrower, NHLP and National will
materially comply with all applicable statutes and government
regulations.
(t) Costs, Expenses, etc. NHLP shall pay all costs
incurred by Banks and Agent in connection with the preparation,
recording, and filing of all documents evidencing or incident to this
transaction, including any legal fees incurred by Banks and Agent and
NHLP shall pay on behalf of Borrower on demand of Agent all costs,
fees, expenses, appraisals and any other expenses of any nature
whatsoever required to be paid in order for Borrower to comply with
all covenants, provisions and terms of this Agreement and the other
Loan Documents, whether now existing or hereafter arising; provided,
however, such costs shall not be paid from the Loan proceeds.
(u) Form 5500. Borrower or National shall furnish to
Agent annually a copy of the Plan's Annual Report, Form 5500, within
thirty, (30) days from the filing with the IRS, but in no event later
than nine (9) months after the end of the Plan's tax year.
(v) Determination Letter. Borrower or National shall
provide to Agent a copy of the favorable determination letter issued
by the IRS, indicating that the Plan is an ESOP qualified under
Section 401(a) of the Code, immediately after receipt of such
favorable determination letter.
(w) Contributions. Until such time as the Indebtedness
has been repaid in full, all cash Contributions made by National to
Borrower shall be used solely for the purposes of repaying the
Indebtedness and for paying administrative expenses and distributions
to Plan members and their beneficiaries in accordance with the terms
and provisions of the Plan and the Trust, unless the Majority Banks
agree otherwise in writing.
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(x) ESOP Opinion. Borrower shall, at its own expense, upon
Agent's request, furnish to Agent not more often than annually,
within thirty (30) days of each request, and shall furnish to Agent
on the Closing Date an opinion of Keck, Mahin & Cate, special ESOP
counsel to the Borrower, or other special ESOP counsel satisfactory
to the Agent, satisfactory in all respects to Agent assuring Agent
that the Plan is an ESOP and that the Loan is a Securities
Acquisition Loan.
(y) Interest Income Exclusion. Borrower shall provide to
Agent such information as Agent shall reasonably request from time to
time in order to ascertain whether the interest received by Banks
on the Notes has qualified, is qualified, and will continue to be
qualified as a Securities Acquisition Loan under Section 133 of the
Code.
(z) Consent. No consent of any party, not already
obtained, including the shareholders of National and the limited and
general partners of NHLP, and no license, approval, authorization,
registration, or declaration with any governmental or regulatory
authority or agency is required in connection with the execution,
delivery, performance, validity, or enforceability of the Loan
Documents.
(aa) Trust's Quarterly Financials. Borrower or National
shall furnish to Agent and all Banks within forty-five (45) days
after the close of each Quarter, including the last fiscal Quarter, a
balance sheet and income statement of the Trust, which need not be
certified but which shall accurately reflect the financial condition
of the Trust, together with a statement signed by the Trustee showing
the calculation of the financial covenants required in Section 7.1
(dd) of this Agreement.
(bb) Quarterly Financials. National and/or NHLP, as
appropriate, shall furnish to Agent and all Banks within forty-five
(45) days after the close of each Quarter, including with respect to
(ii) and (iii) of this Section 7.1(bb) the last fiscal Quarter, (i)
unaudited financial statements of National and NHLP using GAAP
consistently applied by a certified public accounting firm acceptable
to Agent, (ii) unaudited financial statements with respect to the
Pledged Nursing Homes, and (iii) a quarterly aging of NHLP's
Accounts.
(cc) Annual Financials. National and/or NHLP, as
appropriate, shall furnish to Agent and all Banks within sixty (60)
days after the close of each calendar year (i) audited financial
statements of National and NHLP using GAAP consistently applied by a
certified public accounting firm acceptable to Agent, which
statements shall express an
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unqualified opinion as to the soundness of each entity's respective
financial position, and (ii) audited financial statements of the Plan
compiled by a certified public accounting firm. The audited financial
statements shall be accompanied by a statement from the chief
financial officers and general partner of National and NHLP,
respectively, that no Events of Default have occurred (or with notice
and/or the passage of time would occur) under the Loan Documents.
(dd) Net Income. All income statements of the Trust
provided to Agent shall reflect a Net Income in excess of zero (o)
annually. For purposes of this subparagraph, the term, "Net Income,"
for any calendar year means the difference between the value of:
(A) the sum of annual cash contributions made
by National and any Affiliates to Borrower, plus earnings
from investments and net realized gain from the sale or
exchange of assets, if any, and other income of the Plan
and Trust for such year, and
(B) the sum of net realized loss from the
sale or exchange of assets plus distributions to former
Plan members and/or their beneficiaries for such year
plus interest expense plus annual administrative expenses
of the Plan and Trust, including without limitation,
amounts paid for office supplies, data processing,
service charges, and other expenses, plus principal and
interest payments for such year.
(ee) Quarterly Compliance. Borrower, NHLP and National
shall each furnish to Agent within forty-five (45) days after the
close of each Quarter a statement confirming that no Event of Default
exists under this Agreement with respect to the party furnishing the
statement, and NHLP shall furnish to Agent within forty-five (45)
days after the close of each quarter calculations showing compliance
with Section 9.1. hereof.
(ff) Contributions. National shall make Contributions to
Borrower sufficient in amount to enable Borrower to make payments due
under the Loan as and when such payments are due.
(gg) Records. Upon receipt of any contribution from
National, Borrower shall promptly note on its appropriate books and
records the amount of such contribution designated to be applied to
the Sovran Loan and the amount designated to be applied to this Loan.
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Section 7.2. Negative Covenants - Borrower and National. So long as
any Indebtedness secured hereby is outstanding, Borrower and/or National, as
stated below, each covenant that, without the prior written consent of the
Majority Banks:
(a) The Borrower shall not become liable, directly or
indirectly, with respect to any obligation for money borrowed, or the
equivalent, except (i) the Indebtedness, (ii) the loan evidenced by
that certain Loan and Security Agreement dated as of January 20, 1988
by and between Marine Midland Bank, N.A., not in its individual or
corporate capacity, but solely as Trustee of National Health
Corporation Leveraged Employee Stock Ownership Trust and SCS, and
(iii) any indebtedness fully guaranteed by NHLP.
(b) The Borrower shall not make investments, other than
in qualified employer securities of National, except for investments
in Temporary Investments.
(c) Neither the Borrower (in the case of the Stock only)
nor National shall suffer or permit any of the Collateral to become
subject to any security interest, lien, or other encumbrance, except
for any lien in connection with the Loan in favor of Agent or the
Banks.
(d) The Borrower shall not create, incur or suffer to
exist any pledge, mortgage, assignment or other encumbrance of or
upon any of the Stock (other than as pledged to the Banks as provided
herein), or of or upon the income or profits thereof.
(e) National covenants that it will not permit its
tangible net worth at any time to be less than Fifteen Million
Dollars ($15,000,000). For purposes of this subparagraph, "tangible
net worth" shall have the meaning set forth in the Guarantee and
Contingent Purchase Agreement dated January 20, 1988 between NHESOP,
Inc. and SCS (the "SCS Guaranty"), as amended by paragraph 2 of the
First Amendment to Guarantee and Contingent Purchase Agreement, dated
as of December 16, 1988.
Section 7.3. Negative Covenants - NHLP. So long as any Indebtedness
secured hereby is outstanding, NHLP covenants that, without the prior written
consent of the Majority Banks, it will not suffer or permit any of the
Collateral to become subject to any security interest, lien, or other
encumbrance, except for any lien in favor of Agent or the Banks.
Section 7.4. Prohibited Transactions. So long as any indebtedness
evidenced by any of the Notes is outstanding, Borrower shall give notice to
Agent of any notice Borrower receives from the Department of Labor alleging
that a "prohibited transaction" as defined in the Code and the regulations
thereunder has occurred.
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ARTICLE VIII
COVENANTS AND WARRANTIES OF THE TRUSTEE
Section 8.1. Trustee hereby covenants and warrants
that:
(a) Authority. As of the date hereof, Marine Midland Bank,
N.A. (the "Trustee") is the sole trustee of the Plan and the Trust
and has full authority to bind the Plan, the Trust, and/or Borrower
and to execute this Agreement and any note or notes evidencing the
Indebtedness secured hereby. Borrower and Trustee shall notify Agent
promptly in writing of any change of Trustee. For purposes of the
Loan, Banks and Borrower acknowledge that only Marine Midland Bank,
N.A. shall be executing the Loan Documents on behalf of the Plan and
the Trust solely in its capacity as independent trustee and not in
its individual or corporate capacity.
(b) Organization, Powers, etc. (i) The Trustee has full
power and authority to execute this Agreement, the Notes, Pledge of
Stock Agreement and all other documents to be executed by the Trustee
on behalf of the Borrower in connection with the Loan and to carry
out the transactions contemplated hereby; (ii) the Trustee is validly
existing and duly formed as a national banking association; and (iii)
the Trustee has filed all papers with all governmental authorities,
if any, that are required as a pre-condition to acting as Trustee of
the Borrower.
(c) Litigation. There is no action, suit or proceeding at
law or in equity or by or before any governmental instrumentality,
arbitration board or other agency now pending, or to the knowledge of
the Trustee, threatened against or affecting the Trustee that would
adversely affect the Trustee's power, authority or ability to act as
Trustee of the Borrower.
ARTICLE IX
COVENANTS AND CONDITIONS IMPOSED ON NHLP
Section 9.1. NHLP shall comply with the following financial
covenants, with determination of compliance being made Quarterly unless more
frequently requested by Agent:
(a) Current Ratio. NHLP shall at all times maintain a
"Current Ratio" of at least 1.5 to 1. "Current Ratio" shall be
defined as the ratio of current assets to current liabilities.
(b) Working Capital. NHLP shall at all times maintain a
minimum "Working Capital" level of Ten Million and No/100 Dollars
($10,000,000.00). "Working Capital" shall be defined as current
assets less current liabilities.
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(c) Funded Debt to Adjusted Tangible Net Worth Ratio. NHLP shall at
all times maintain a "Funded Debt" to "Adjusted Tangible Net Worth" ratio
of no more than 3.5:1. "Funded Debt" is defined as long term debt,
but excluding Subordinated Debt, notes payable, current maturities of long
term debt, plus capitalized and operating leases, plus all guaranties; and
"Adjusted Tangible Net Worth" is defined as total equity of NHLP, plus
approximately Fifteen Million Seven Hundred Forty-Five Dollars
($15,745,000) in deferred income resulting from the profit on the sale of
nursing home properties to National as equity (which amount shall decrease
in accordance with NHLP's books and records that comply with GAAP), plus
Subordinated Debt, minus good will and unamortized loan costs in excess of
One Million Four Hundred Thousand and No/100 Dollars ($1,400,000.00).
(d) Tangible Net Worth. NHLP shall at all times maintain the following
minimum Tangible Net Worth requirements for the following periods:
(A) From the date of closing through March 30, 1989 - Thirty
Four Million Dollars ($34,000,000).
(B) From March 31, 1989 through June 29, 1989 - Thirty Five
Million Two Hundred Thousand Dollars ($35,200,000).
(C) From June 30, 1989 through September 29, 1989 - Thirty
Six Million Four Hundred Thousand Dollars ($36,400,000).
(D) From September 30, 1989 through December 30, 1989 -
Thirty Seven Million Six Hundred Thousand Dollars ($37,600,000).
(E) From December 31, 1989 through March 30, 1990 - Forty
Million Dollars ($40,000,000).
(F) On March 31, 1990 and on subsequent calendar quarter
endings, the minimum Tangible Net Worth requirements will increase by
One Million Four Hundred Thousand Dollars ($1,400,000) per quarter on
a cumulative basis.
"Tangible Net Worth" is defined as total equity of NHLP, plus Subordinated
Debt, minus good will and unamortized loan costs in excess of One Million Four
Hundred Thousand Dollars ($1,400,000).
(e) Debt Service Coverage. NHLP shall at all times maintain a minimum
"Debt Service Coverage" of 1.3 to 1. The Debt Service Coverage is defined
as the ratio of (i) the
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annualized sum of net income, plus depreciation/amortization, plus interest
expense, minus distributions paid to holders of units of NHLP for the
fiscal year as projected by NHLP and evidenced by written financial
projections furnished to Agent, or as actually paid, whichever is greater,
to (ii) interest expense, plus current maturities of long term debt, plus
any payments required to fund any guaranty obligations of NHLP.
(f) Notes Receivable. NHLP shall at all times limit the balance of
notes receivable as set forth on its financials to no more than NHLP's
Adjusted Tangible Net Worth; provided, however, that the notes receivable
listed on Exhibit I attached hereto shall be excluded from the balance of
notes receivable as set forth on NHLP's financials in determining
compliance with this subparagraph (f). The listing of notes receivable on
Exhibit I attached hereto may be modified, amended, increased and/or
reduced from time to time by the Majority Banks; provided, however, that
any nursing home project or use of Loan proceeds approved by Majority Banks
which results in a note receivable to NHLP automatically shall be excluded
from the balance of notes receivables and shall be listed on Exhibit I.
ARTICLE X
CONDITIONS PRECEDENT TO LOAN
Section 10.1. The following shall be conditions precedent to Banks'
obligation to make the Loan contemplated hereby:
(a) ESOP Opinion. Borrower shall provide Agent on behalf of Banks an
opinion of Keck, Mahin & Cate, special ESOP counsel to Borrower,
substantially in the form attached hereto as Exhibit J, attached hereto and
made a part hereof.
(b) Opinion of Counsel. NHLP shall provide Agent on behalf of Banks
with an opinion of outside counsel that is acceptable to Agent and Agent's
counsel, which opinion shall be substantially in the form attached hereto
as Exhibit K and made a part hereof. NHLP shall provide Agent with opinions
of local counsel concerning the NHLP Deeds of Trust and Mortgages, which
opinions shall be acceptable to Agent and Agent's counsel and substantially
in the form attached hereto as Exhibit K and made a part hereof.
(c) Plan and Trust. National shall provide Agent executed or adopted
copies, satisfactory in all respects to Agent, of the Plan document, Trust
agreement, and all amendments thereto, together with a certified copy,
satisfactory in all respects to Agent, of the direction of
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the "Plan Administrator" (as that term is defined in Borrower's Plan document)
to Borrower and/or Trustee to authorize the execution, delivery, and
performance of the Loan Documents and the purchase of Twenty Nine Million Five
Hundred Eighty Five Thousand Seven Hundred Ninety Eight (29,585,798) shares of
common stock of National.
(d) Trustee Certificate. Borrower shall provide Agent a certificate,
satisfactory to Agent in all respects, stating that the Trustee has accepted
all duties, obligations, liabilities, and responsibilities of that position and
has agreed to act as such.
(e) Charter and Limited Partnership Certificate. National and NHLP
shall provide Agent certified copies of the charter and by-laws of National and
the limited partnership agreement and certificate of limited partnership of
NHLP, respectively, together with certified copies, satisfactory in all respects
to Agent, of all corporate and partnership resolutions and/or actions taken by
National and NHLP respectively, authorizing the execution, delivery, and
performance of the Guarantee and Contingent Purchase Agreement, the NHLP Deeds
of Trust and Mortgages, Pledge of Line of Credit Note Agreement, Pledge of
NHLP's Accounts Agreement and Pledge of Temporary Investments Agreement, and
the other agreements and transactions contemplated herein.
(f) Signature Information - Borrower. Borrower shall provide Agent a
certificate, satisfactory in all respects to Agent, setting forth the name,
title, and specimen signature of (i) the individual or individuals who have
executed the Plan document and Trust agreement, (ii) the Trustee or Trustees
who will, until replaced by a successor trustee or trustees, act as Borrower's
representative or representatives for the purpose of executing documents and
delivering and accepting notices and other communications in connection with
the Loan Documents. Agent may conclusively rely on such certificate until Agent
receives notice in writing from Borrower to the contrary.
(g) Signature Information - NHC and NHLP. National and NHLP shall
provide Agent with a certificate, satisfactory in all respects to Agent, of
each entity, setting forth the name, title, and specimen signatures of the
officer or officers (i) who are authorized to sign the Guarantee and Contingent
Purchase Agreement, the NHLP Deeds of Trust and Mortgages, Pledge of Line of
Credit Note Agreement, Pledge of NHLP's Accounts Agreement and Pledge of
Temporary Investments Agreement, and other documents contemplated by the
transactions described herein on behalf of National or NHLP, as the case may be,
and (ii) who will, until replaced by another officer or officers duly
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authorized for that purpose, act as their representatives for the purposes of
executing documents and delivering and receiving notices and other
communications in connection with the Loan Documents. Agent may conclusively
rely on such certificate until Agent receive notice in writing from Borrower to
the contrary.
(h) Documents-Borrower. Borrower shall deliver to Agent the Notes and
Pledge of Stock Agreement, duly completed and executed by Borrower, together
with certificates for Twenty Nine Million Five Hundred Eighty Five Thousand
Seven Hundred Ninety Eight (29,585,798) shares of stock of National, with duly
executed stock powers in blank.
(i) Documents-NHC and NHLP. National and NHLP shall deliver to Agent
the Guarantee and Contingent Purchase Agreement, duly completed and executed by
National and NHLP.
(j) Documents-NHLP. NHLP shall deliver to Agent the NHLP Deeds of Trust
and Mortgages, all title insurance policies and coverages required by the NHLP
Deeds of Trust and Mortgages and such consent and estoppel certificates
requested by the Agent executed by all parties holding prior liens on the
Pledged Nursing Homes. Such estoppel certificates shall be in form and
substance satisfactory to Agent and its counsel. In the event NHLP does not
deliver all of the required documents in connection with the NHLP Deeds of
Trust and Mortgages delivered and executed at the Closing, NHLP shall have
thirty (30) days from the Closing Date to deliver such required documentation
or, in the event that NHLP is unable to deliver and/or record all such
documentation, NHLP shall have the right to substitute additional Pledged
Nursing Homes acceptable to the Majority Lenders and shall have sixty (60) days
from the Closing Date to deliver and execute additional NHLP Deeds of Trust and
Mortgages and deliver the documentation required by Agent described above with
respect to such substitute Pledged Nursing Homes. NHLP shall also deliver to
Agent the Pledge of NHLP's Accounts Agreement and financing statements as
required by Agent, duly completed and executed by NHLP.
(k) Documents-NHC. National shall deliver to Agent the Security and
Pledge Agreement (Temporary Investments), the Security and Pledge Agreement
(Note), and financing statements as required by Agent, duly completed and
executed by National.
(l) Determination Letter. NHLP shall provide Agent with evidence of
the filing of an application for a determination letter from the IRS stating
that the Plan meets the requirements for qualification under section 401(a) of
the Code and the regulations thereunder, that the Plan meets the requirements
of sections 4975(e)(7) and 409
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of the Code and constitutes an ESOP, and that the Trust qualifies as an
exempt trust under section 501(a) of the Code. In addition, such
application shall contain no exceptions to qualification, except that
continued qualification of the Plan will depend on its effect in operation,
which may be reviewed periodically. However, reference may be made to the
fact that the determination letter, when issued, may be subject to adoption
of proposed amendments requested by the IRS. Borrower or NHLP shall also
provide Agent with copies of all the documents or amendments filed with the
IRS to obtain the determination letter.
(m) Value of Stock. Borrower shall provide Agent with a certificate of
Valuemetrics, Inc. that is in all respects satisfactory to Agent stating
that a "qualified independent appraiser," as defined in Section
401(a)(28)(C) and Section 170 of the Code and the regulations thereunder,
has valued the Stock to be worth no less than Fifty Million and No/100
Dollars ($50,000,000.00) using the factors set forth in applicable IRS
Revenue Rulings and judicial decisions, including Department of Labor
proposed regulation Section 2510.3(18).
(n) Event of Taxability. No Event of Taxability shall have occurred.
(o) Event of Default. No Event of Default shall have occurred and be
continuing.
(p) Representations and Warranties. The representations and
warranties in the Loan Documents shall be true and correct on and as of the
Closing Date, and the Trustee and the chief financial officer of National
and NHLP shall have delivered to Agent a duly executed certificate with
respect to their respective representations and warranties satisfactory in
all respects to Agent as to the foregoing.
(q) Additional Documents or Information. Borrower shall provide Agent
with any other documents or information that Agent or Agent's counsel,
Messrs. Farris, Warfield & Kanaday, may reasonably require.
Section 10.2. Waiver. No advance of the proceeds of the Loan shall
constitute a waiver of any of the conditions of Banks' obligation to make the
Loan, and the failure of Borrower to satisfy any condition not satisfied at
Closing within ten (10) days after receipt of written notice from the Majority
Banks shall constitute an Event of Default hereunder.
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ARTICLE XI
DEFAULT
Section 11.1. Definition. The term "Event of Default," whenever used
in this Agreement and in any instrument referred to herein, shall mean any one
or more of the following events or conditions:
(a) Principal or Interest Payment. Failure by Borrower to
make payment of any installment of principal or interest on any of the
obligations contained herein or in the Notes within five (5) business
days of when the same shall be due and payable under the terms hereof
or thereof.
(b) Covenant or Agreement. Any breach by Borrower, NHLP
and/or National of any covenant, agreement, condition precedent, or
undertaking of Borrower, NBLP and/or National contained in this
Agreement, if such breach shall continue without being cured to
Majority Banks' satisfaction for thirty (30) days after notice thereof
to Borrower from Agent by certified mail.
(c) Representations or Warranties. Any breach of Borrower's,
NHLP's and/or National's representations or warranties contained
herein or any misstatement or omission of fact or failure to state
facts necessary to make such representations and warranties in this
Agreement not misleading.
(d) Guarantee. Any breach of any agreement, undertaking, or
covenant contained in the Guarantee and Contingent Purchase Agreement
or the occurrence of any event of default as described in the other
Loan Documents or in any other agreement now or hereafter executed by
Borrower or Guarantors that evidences or secures the Indebtedness if
such breach or default shall continue without being cured to Majority
Banks' satisfaction for thirty (30) days after notice thereof to
Borrower from Agent by certified mail.
(e) Misleading Report. Any report, certificate, financial
statement or other instrument furnished in connection with this
Agreement or the borrowings hereunder shall prove to be false or
misleading in any material respect.
(f) Compliance with Plan and Trust. Except as required by
ERISA, failure by the Borrower or the Trustee to comply with the terms
of the Plan document or the Trust agreement.
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(g) Involuntary Bankruptcy or Receivership Proceedings. A
receiver, custodian, liquidator or trustee of NHLP or National, or of
any of their property, is appointed by the order or decree of any
court or agency or supervisory authority having jurisdiction, and such
decree or order remains in effect for more than sixty (60) days; or
Borrower, NHLP or National is adjudicated bankrupt or insolvent; or
any of the property of Borrower, NHLP or National is sequestered by
court order and such order remains in effect for more than sixty (60)
days; or a petition is filed against Borrower, NHLP or National under
any state or federal bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution, liquidation or
receivership law of any jurisdiction, whether now or hereafter in
effect, and not dismissed within sixty (60) days of filing.
(h) Voluntary Petitions. Borrower, NHLP or National takes
affirmative steps to prepare to file or files a petition in voluntary
bankruptcy or seeks relief under any provision of any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now or
hereafter in effect, or consents to the filing of any petition against
it under any such law.
(i) Monetary Judgment. Final judgment for the payment of
money exceeding valid, applicable, collectible insurance coverage by
more than One Hundred Thousand and No/100 Dollars (S100,000.00) shall
be rendered against the Borrower, NHLP or National and such judgment
is not discharged or satisfied within one hundred twenty (120) days of
the date such judgment becomes final.
(j) Existence. "The Borrower, NHLP or National shall cease to
exist.
(k) Plan Termination. The complete termination of the Plan,
which shall include, without limitation, the complete cessation of
contributions by National and its Affiliates to Borrower or the
termination of the Plan by appropriate corporate resolution(s).
(1) Tax Lien. The filing of any tax lien whatsoever with
respect to any of the Plan's or the Guarantors' property, except for a
tax lien that is being contested in good faith and for which Borrower
or Guarantors, as the case may be, provide additional security to
Banks satisfactory in all respects to Banks.
(m) Plan Failure. The failure of the Plan to qualify as an
ESOP under Section 401(a), and the failure of the Trust to qualify as
a tax exempt trust under Section
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501(a), respectively, of the Code after a final determination by the
IRS of such disqualification at the appeals level of the IRS.
(n) Injunctive Relief under ERISA. The commencement of any
proceeding under ERISA by or against Borrower, any of the Banks, the
Agent, the Plan, the Trust, or either of the Guarantors seeking
injunctive relief with respect to any of the terms, conditions, and
provisions of the Loan Documents, which proceeding is not dismissed
within thirty (30) days of its filing.
(o) Cross Default. The occurrence of any Event of Default as
defined under that certain Loan and Security Agreement dated as of
January 20, 1988 by and between Marine Midland Bank, N.A., not
individually but as Trustee of the National Health Corporation
Leveraged Employee Stock Ownership Trust and SCS or under any document
executed in connection therewith, including but not limited to that
certain Guarantee and Contingent Purchase Agreement dated as of
January 20, 1988 by and between National and SCS.
Section 11.2. Remedies.
(a) Due and Payable. Upon the occurrence of any Event of
Default, at the option of the Majority Banks, all obligations of
Borrower contained herein or in the Notes shall become due and payable
immediately without presentment, demand, or notice to Borrower or any
other person obligated hereon or thereon, except as otherwise provided
in Section 11.1.(b) and Section 11.1.(d) above. Notwithstanding
anything in this Agreement or the Notes to the contrary, upon the
occurrence of an Event of Default, Banks shall be entitled to payment
from Borrower only from (i) the unreleased Shares of Stock of
National, (ii) the Contributions, and (iii) earnings attributable to
the unreleased shares of Stock of National and the investment of the
Contributions.
(b) Uniform Commercial Code. Agent on behalf of the Banks
shall have and may exercise any or all of the rights and remedies of a
secured party (i) under the Uniform Commercial Code, and (ii) as
otherwise granted herein or under any other law or under any other
agreement now or hereafter executed by Borrower and/or Guarantors,
within the limitations of Treas. Reg. 54.4975-7 or any applicable
successor regulation, including without limitation the right and power
to sell at public or private sale or sales, or otherwise dispose of or
utilize, any such portion of the Collateral pledged hereby or by the
Loan Documents and any part or parts thereof in any manner authorized
or permitted under the Uniform Commercial Code after default by a
debtor. Agent on behalf of Banks may apply the proceeds
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thereof toward the payment of any costs and expenses and attorneys' fees
and legal expenses thereby incurred by Agent on behalf of Banks and toward
payment of the obligations secured hereby in such order or manner as Agent
may elect.
(c) Disposition. To the extent permitted by ERISA and
other relevant law, Borrower expressly waives any notice of sale or other
disposition of the Collateral and all other rights or remedies of Borrower
or formalities prescribed by law relative to sale or disposition of the
Collateral or exercise of any other right or remedy of Agent or Banks
existing after default hereunder. To the extent any such notice cannot be
waived, Borrower agrees that if such notice is mailed, postage prepaid, or
sent by telegram, charges prepaid, to Borrower at Borrower's address herein
stated at least five (5) days before the time of the sale or disposition
such notice shall be deemed reasonable and shall satisfy fully any
requirement of giving notice. All recitals in any instrument of assignment
or any other instrument executed by Agent or Banks incidental to sale,
transfer, assignment, or other disposition or utilization of the Collateral
or any proceeds thereof, or any part thereof shall be full proof of the
matters stated therein. No other proof shall be required to establish full
legal propriety of the sale or other action taken by Agent or Banks or of
any fact, condition, or thing incident thereto, and all prerequisites of
such sale or other action or of any fact, condition, or thing incident
thereto shall be presumed conclusively to have been performed or to have
occurred.
ARTICLE XII
BANKS' AGREEMENT
Except as provided in Section 12.8. below, this Article XII is between
and among the Agent and the Banks only. Neither the Borrower, NHLP, nor
National, nor any other creditor of the Borrower, NHLP or National nor any
other Person shall have any rights, duties or obligations under this Article
XII, whether as a third party beneficiary or otherwise.
Section 12.1. Authorization. With respect to all funds advanced
hereunder or under the Notes, TNB, IT, SCS and ST shall be obligated to advance
thirty two percent (32%), thirty percent (30%), eighteen percent (18%), and
twenty percent (20%), respectively, and each such Bank shall own a
corresponding undivided interest in the Collateral and Loan Documents. Each
Bank authorizes the Agent to act on behalf of such Bank or holder to the extent
provided herein or in any document or instrument delivered hereunder or in
connection herewith and signed by such Bank, and to take such other action
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as may be reasonably incidental thereto. The Agent shall be considered as
acting solely in an administrative and ministerial capacity, not as trustee or
other fiduciary of the Banks. The Agent shall not be construed as having any
agency or fiduciary relationship with the Borrower, National or NHLP
whatsoever. The Agent shall not have any duties or obligations to the Banks
other than those expressly provided for in the Loan Documents. As to any
matters provided for by the Loan Documents (including, without limitation,
enforcement or collection of the Notes, the Guarantee and Contingent Purchase
Agreement, or any of the other Loan Documents), the Agent shall not be required
to exercise any discretion or take any action, but shall be fully protected in
so acting or in refraining from acting, upon the instructions of the Majority
Banks (except as otherwise provided in Section 13.7. for matters which require
the consent of all Banks), and such instructions shall be binding upon all
Banks and holders of the Notes, and the Agent shall not be liable to any party
hereto for any consequence of any such action or refraining from action.
Notwithstanding any instructions of the Majority Banks, the Agent shall not be
required to take any action that exposes the Agent to personal liability or
that is contrary to any Loan Document or applicable law.
Section 12.2. Standard of Care. Neither the Agent nor any of its
officers, directors, agents, employees or representatives shall be liable for
any action taken or omitted to be taken by it or any of them under or in
connection with any Loan Document, except for its or their own gross negligence
or wilful misconduct. Without limitation of the generality of the foregoing,
the Agent: (a) may treat the payee of any Notes as the holder thereof and as a
Bank hereunder until the Agent receives written notice of the assignment or
transfer thereof signed by such payee and in form satisfactory to the Agent
(which notice shall be binding on all parties hereto); (b) may consult with
legal counsel (including counsel for the Borrower), independent public
accountants and other experts and advisors selected by it and shall not be
liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants, experts or other
advisors; (c) makes no warranty or representation to any Bank and shall not be
responsible to any Bank for any statements, warranties or representations made
in or in connection with any Loan Document or for any failure or delay in
performance by the Borrower or any Bank under the Loan Documents; (d) shall not
have any duty to ascertain or to inquire as to the performance or observance OF
any of the terms, covenants or conditions of any Loan Document or to inspect
the assets (including, without limitation, the books and records) of the
Borrower, NHLP or National or to inspect any Collateral; (e) shall not be
responsible to any Bank for the due execution, legality, validity,
enforceability, perfection, collectability, genuineness, sufficiency or value
of any Loan Document or
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Collateral or any other instrument or document furnished pursuant thereto or
for the accuracy or completeness of any credit or other information provided to
the Banks; (f) shall incur no liability under or in respect of any Loan
Document by acting upon any notice, consent, certificate or other instrument or
writing (which may be by telecopier, telegram, cable or telex) believed by it
to be genuine and signed or sent by the proper party or parties; and (g) shall
incur no liability for relying on any matters of fact that might reasonably be
expected to be within the knowledge of the Borrower, NHLP or National or upon a
certificate or other writing signed by Borrower, NHLP or National.
Section 12.3. No Waiver of Rights. With respect to the Notes, the
Agent shall have the same rights and powers hereunder as any other Bank and may
exercise the same as though it were not the Agent. The Agent may accept
deposits from, and generally engage in any kind of business with, the Borrower,
NHLP and National.
Section 12.4. Payments. All payments (including prepayments) by the
Borrower, NHLP or National on account of the Notes shall be made at the main
office of the Agent prior to 10:00 a.m., Nashville time, on the date of payment
in immediately available funds and, when due or upon instructions from the
Borrower, NHLP or National, may be made by debit to the Borrower's, NHLP's or
National's general account with Agent, as appropriate. The Agent shall use its
best efforts to deliver to each Bank on the same day as received by Agent in
immediately available funds such Bank's ratable share of all payments received
by the Agent for the benefit of the Banks but in the event Agent is unable to
deliver such payments to any Bank on the same day of receipt, Agent agrees to
pay such Bank interest on the payment for each day the Agent is unable to
deliver the payments after the date of its receipt based on the overnight
federal funds rate of interest. Any payment due for any reason under this
Agreement that is required to be made on a date on which the Agent is not open
for business shall be extended until the next day on which the Agent is open
for the transaction of business.
Section 12.5. Indemnification. The Agent shall not be required to do
any act hereunder or under any other document or instrument delivered hereunder
or in connection herewith or take any action toward the execution or
enforcement of the agency hereby created, or to prosecute or defend any suit in
respect of this Agreement or the Notes or the Guarantee and Contingent Purchase
Agreement or the Collateral or to advance funds hereunder upon the failure by
any Bank to fund its pro rata share of the Commitment hereunder, unless ratably
indemnified to its satisfaction (to the extent not reimbursed by Borrower) by
the holders of the Notes against loss, cost, liability and expense (including
reasonable fees and
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out-of-pocket expenses of counsel), claim, demand, action, loss or liability
(except such as result from Agent's gross negligence or willful misconduct)
that Agent may suffer or incur in connection with this Agreement or any action
taken or omitted by Agent hereunder. If any indemnity furnished to the Agent
for or against any loss, cost, liability, and expense or for any purpose shall,
in the opinion of the Agent, be insufficient or become impaired, the Agent may
call for additional indemnity and not commence or cease to do the acts
indemnified against until such additional indemnity is furnished. Each Bank
agrees to reimburse the Agent promptly upon demand for such Bank's pro rata
share of any expenses referred to in Section 13.13. incurred by the Agent to
the extent that the Agent is not reimbursed for such expenses by the Borrower.
Each Bank agrees to, in accordance with its pro rata share of the
Commitment hereunder, indemnify Agent (to the extent not reimbursed by
Borrower) against any cost, expense (including reasonable fees and
out-of-pocket expenses of counsel), claim, demand, action, loss or liability
(except such as result from Agent's gross negligence or willful misconduct)
that Agent may suffer or incur in connection with this Agreement or any Loan
Document or any action taken or omitted by Agent hereunder or under any Loan
Document.
Section 12.6 Exculpation. Neither Agent nor any of its directors,
officers, employees or agents shall be liable for any action taken or not taken
by it in connection herewith (a) with the consent or at the request of the
Banks or Majority Banks, as appropriate, or (b) in the absence of its own gross
negligence or willful misconduct. Neither Agent nor any of its directors,
officers, employees or agents shall (i) be responsible for any recitals,
representations or warranties contained in, or for the execution, validity,
genuineness, effectiveness or enforceability of this Agreement, any Note or any
other instrument or document delivered hereunder or in connection herewith,
(iii) be responsible for the validity, genuineness, perfection, effectiveness,
enforceability, existence, value or enforcement of any Collateral or security,
or (iii) be under any duty to inquire into or pass upon any of the foregoing
matters, or to make any inquiry concerning the performance by Borrower or any
other obligor of its obligations.
Section 12.7. Credit Investigation. Each Bank acknowledges that it has
made such inquiries and taken such care on its own behalf as would have been
the case had the Commitment been granted and the Loan made directly by such
Bank to the Borrower. Each Bank agrees and acknowledges that the Agent makes no
representations or warranties about the creditworthiness of the Borrower or any
other party to this Agreement or with respect to the legality, validity,
sufficiency or enforceability of this Agreement, the Notes or
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the value of any security therefor and that each Bank has not entered into this
Agreement in reliance upon any action, statement, representation, or warranty
of any other Bank or Agent. Each Bank agrees that it will, independently and
without reliance upon the Agent or any other Bank and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement and
the other loan Documents. Neither the Agent nor any other Bank shall have any
obligation whatsoever to make any such credit analysis or decisions for a Bank
or to provide any credit or other information with respect to the Borrower now
or in the future in the possession of the Agent or such other Bank, except that
the Agent shall promptly forward to the Banks a copy of any notice received by
the Agent from the Borrower of the occurrence of an Event of Default hereunder
and copies of all material documents delivered to it by the Borrower, NHLP or
National pursuant to the Loan Documents.
Section 12.8. Resignation and Replacement. Agent may resign at any
time as Agent under the Loan Documents by giving written notice thereof to
Banks and Borrower, which resignation shall be effective upon a successor
Agent's acceptance of its appointment. Borrower or the Majority Banks may
replace Agent at any time following sixty (60) days' prior written notice to
Agent and Banks; provided, however, that Borrower shall have such right only in
the absence of an Event of Default. Upon any such resignation or replacement,
the Majority Banks shall have the right to appoint a successor Agent hereunder,
which successor Agent shall also be reasonably acceptable to Borrower. If no
such successor Agent shall have been so appointed by the Majority Banks and
shall have accepted such appointment within thirty (30) days after the retiring
Agent's giving of notice of resignation, then the retiring Agent may, on behalf
of Banks, appoint a successor Agent, which shall be a commercial bank organized
under the laws of the United States of America or of any State thereof having
assets of at least One Billion and No/100 Dollars ($1,000,000,000.00) and which
shall be reasonably acceptable to Borrower. Upon the acceptance of any
appointment as Agent under the Loan Documents by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations under the Loan
Documents. After any retiring Agent's resignation or replacement as an Agent
under the Loan Documents, the provisions of this Section 12.8. shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
an Agent under the Loan Documents.
Section 12.9. Proration of Payments. Except as may be provided in
other sections of this Agreement, all funds received by Banks, or any of them,
shall be allocated pro rata among all
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<PAGE> 45
Banks in proportion to the then outstanding balances due on the Notes. If any
Bank or other holder of any Notes shall obtain any payment or other recovery
(whether voluntary, involuntary, by application of offset or otherwise) on
account of principal of or interest on the Note then held by it in excess of
its pro rata share of payments and other recoveries obtained by all Banks or
other holders on account of principal of and interest on the Note then held by
them, such Bank or other holder shall purchase from the other Banks or holders
such participation in the Note held by them as shall be necessary to cause such
purchasing Bank or other holder to share the excess payment or other recovery
ratably with each of them; provided, however, if all or any portion of the
excess payment or other recovery is thereafter recovered from such purchasing
holder, the purchase shall be rescinded and the purchase price restored to the
extent of such recovery, but without interest. Notwithstanding the foregoing,
no Bank shall, except as provided in Section 12.11 below, have any obligation
to account for or share any amount, property or profit of any kind received by
it for its own account arising out of a banking or other relationship with the
Borrower, NHLP or National apart from the obligations under the Loan Documents.
Section 12.10. No Liability for Errors. The Agent shall not be liable
for any error in computing the amounts payable to any Bank in respect of any
amounts due to the Banks under the Loan Documents or in making payment of such
amounts. In the event of an error in computing any amount payable to any Bank
or in the making of a payment, the Agent, the Borrower and such Bank shall,
forthwith upon discovery of such error, make such adjustment as shall be
required to correct such error, including the payment of interest on any
amounts that were incorrectly paid or not paid from the date paid or of the
date due to the date returned or paid, all as the case may be, at the average
daily rate for the overnight sale of federal funds by the Agent in effect for
such period.
Section 12.11. Offset. In addition to and not in limitation of all
rights of offset that any Bank or other holder of any Note may have under
applicable law, each Bank or other holder of a Note shall, upon the occurrence
of any Event of Default described in this Agreement or in the Note in question,
have the right to appropriate and apply to the payment of such Notes any and
all balances, credits, deposits, accounts or moneys of the Borrower, National
and/or NHLP then or thereafter with such Bank or other holder; provided,
however, all funds received as a result of such offsets shall be applied pro
rata among the Banks in proportion to the then outstanding balances of the
Notes. Each Bank agrees to notify the other Banks immediately upon the exercise
by it of this right of offset. SCS agrees that any such funds of Borrower or
NHLP received as a result of any such offset by SCS shall be applied to the
Notes pro rata as set forth in this section and shall not be
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<PAGE> 46
applied to satisfy any portion of the Sovran Loan. The Banks agree that any
funds of National received as a result of any such offset by SCS may be applied
to satisfy the Sovran Loan; provided, however, that any such funds of National
derived from payments by NHLP on the Line of Credit Note or from transfers made
to National by NHLP without consideration (excluding, however, distributions
made with respect to NHLP limited partnership units owned by National) shall be
applied to the Notes pro rata as set forth in this section and shall not be
applied to satisfy any portion of the Sovran Loan.
ARTICLE XIII
MISCELLANEOUS
Section 13.1. Survival. All agreements, representations, and
warranties contained herein or made in writing by or on behalf of Borrower,
National and NHLP in connection with the transactions contemplated hereby shall
survive the execution and delivery of this Agreement, any investigation at any
time made by Banks or on their behalf, and the acquisition and disposition of
the term note or notes evidencing the Indebtedness secured hereby. All
statements contained in any certificate or other instrument delivered by or on
behalf of Borrower pursuant hereto or in connection with the transactions
contemplated hereby shall be deemed representations and warranties by Borrower,
National and NHLP hereunder.
Section 13.2. Selection of Remedies. This Agreement shall
not prejudice the right of Agent and/or Banks at their option to enforce
collection of the Notes evidencing the Indebtedness secured hereby by suit or
in any other lawful manner, or to resort to any other security for the payment
of the Notes, this Agreement and the other Loan Documents being additional,
cumulative, and concurrent security for the payment of such obligations.
Section 13.3. Cumulative Remedies. No right or remedy in this Loan and
Security Agreement, the Notes, or the other Loan Documents referred to herein
is intended to be exclusive of any other right or remedy, but every such right
or remedy shall be cumulative and shall be in addition to every other right or
remedy herein or in such notes conferred, now or hereafter existing, at law, in
equity, or by statute.
Section 13.4. Delay or Omission. No delay or omission by Banks to
exercise any right or remedy shall impair any other right or remedy or be
construed to be a waiver of any default or an acquiescence therein. Every right
and remedy herein conferred or now or hereafter existing at law, in equity, or
by statute may be exercised separately or concurrently and in such order and as
often as may be deemed reasonable by Agent or Banks.
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<PAGE> 47
Section 13.5. Invalidity. The invalidity or unenforceability of any of
the rights or remedies herein provided in any jurisdiction shall not in any way
affect the right to the enforcement in such jurisdiction or elsewhere of any of
the other rights or remedies herein provided.
Section 13.6. Time. Time is of the essence with regard to each and
every provision of this Agreement.
Section 13.7. Entire Agreement. This Agreement, and the documents
executed and delivered pursuant hereto, constitute the entire agreement between
the parties and no amendment or waiver of any provision of any Loan Document,
nor any consent thereunder, shall in any event be effective without the written
concurrence of the Agent acting in each case at the direction of the Majority
Banks and, then such waiver or consent shall be effective only in the specific
instance and for the specific purposes for which given; provided, however, that
no amendment, waiver or consent shall, unless in writing and signed by all the
Banks, do any of the following: (a) increase or extend the Commitment of the
Banks, (b) reduce the principal of, or interest on, the Notes or any fees
thereunder, (c) postpone any date fixed for any payment of principal, of or
interest on, the Notes or any fees thereunder, (d) release any Collateral
except as shall be otherwise provided in any Loan Document, (e) take any action
that requires the signing or consent of all the Banks pursuant to the terms of
any Loan Document, (f) change the definition of Majority Banks, (g) modify or
amend Article V hereunder, or (h) amend or waive Section 3.1. or this Section
13.7. and provided, further, that no amendment, waiver or consent shall, unless
in writing and signed by the Agent in addition to the Banks required
hereinabove to take such action, affect the rights or duties of the Agent under
any Loan Document.
Section 13.8. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the successors and assigns of the
parties hereto; provided, however, in no event shall Borrower or any Guarantor
assign its rights under the Loan Documents without the prior written consent of
Agent. Any such assignment without such prior written consent shall be void.
Section 13.9. Exempt Loan. The Loan is intended to be a loan exempt
from the "prohibited transaction" provisions of Sections 406(a) of ERISA and
Section 4975(c)(1)(A) through (c)(1)(E) of the Code by virtue of the provisions
of Section 408(b)(3) of ERISA, Section 408(e) of ERISA, Sections 4975(d)(3) and
(13) of the Code and the applicable regulations thereunder. The terms of this
Agreement, the Notes and the other Loan Documents, and the rights and
obligations of the parties hereunder and thereunder, shall be construed and
interpreted so as to comply with such provisions and regulations and with
rulings thereunder.
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<PAGE> 48
Section 13.10. Counterparts. This Agreement may be executed in two
(2) or more counterparts, and it shall not be necessary that the signatures of
all parties be contained on any one counterpart; each counterpart shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
Section 13.11. Waiver of Jury Trial. NATIONAL, NHLP, AGENT AND THE
BANKS HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE (TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW) ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR THE TRANSACTIONS COMTEMPLATED HEREIN. FURTHER, NHLP AND NATIONAL
HEREBY CERTIFY THAT NO REPRESENTATIVE OF AGENT OR OF ANY OF THE BANKS OR ANY
OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT ANY OF THE BANKS OR
OTHER HOLDER OF THIS AGREEMENT WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK
TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. NHLP AND NATIONAL
ACKNOWLEDGE THAT THE BANKS HAVE BEEN INDUCED TO MAKE THE LOAN EVIDENCED BY THE
NOTES BY, INTER ALIA, THE PROVISIONS OF THIS SECTION 13.11.
Section 13.12. Closing. The closing shall occur at the offices of
Messrs. Farris, Warfield & Kanaday on December 21, 1988 at 10:00 a.m. Nashville
time or at such other location and time as the parties hereto shall mutually
agree.
Section 13.13. Costs, Expenses, and Taxes. NHLP agrees to pay on
demand all out-of-pocket costs and expenses of Agent and the Banks (including
the reasonable fees and out-of-pocket expenses of counsel for Agent and the
Banks and of local counsel, if any, whom Agent and the Banks' counsel may
retain) in connection with the preparation, execution, delivery, administration,
enforcement and/or protection of Agent's and the Banks' rights under the Loan
Documents. In addition, National and NHLP shall indemnify Agent and the Banks
from and against any and all costs, expenses (including reasonable legal fees),
claims, demands, actions, losses or liabilities (except such as are a direct
result of the gross negligence or willful misconduct of Agent and/or the Banks)
that Agent and/or the Banks may suffer or incur in connection with this
Agreement or any of the Loan Documents. In addition, NHLP agrees to pay and to
hold Agent and the Banks harmless from all liability for any stamp or other
taxes (including taxes under Tennessee Code Annotated Section 67-4-409 due upon
the recordation of mortgages and financing statements) that may be payable in
connection with the execution or delivery of this Agreement and the Collateral
under this Agreement, or the issuance of the Notes or any other Loan Documents
delivered or to be delivered under or in connection with this Agreement. NHLP,
upon request, promptly will reimburse Agent and the Banks for all amounts
expended, advanced, or incurred by Agent and the Banks
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<PAGE> 49
to satisfy any obligation of Borrower under this Agreement or any other Loan
Documents, or to perfect a lien in favor of the Banks, or to protect the Pledged
Nursing Homes or the businesses of Borrower, National and NHLP, or to collect
the Indebtedness, or to enforce the rights of Agent and Banks under this
Agreement or any other Loan Document, which amounts will include without
limitation all court costs, attorneys' fees, fees of auditors and accountants,
costs of insurance, and investigation expenses reasonably incurred by Agent and
the Banks in connection with any such matters, together with interest thereon at
the rate applicable to past due principal and interest as set forth in the Loan
Documents but in no event in excess of the maximum lawful rate of interest
permitted by applicable law on each such amount. All obligations for which this
Section provides shall survive any termination of this Agreement.
Section 13.14. Conflicts. In the event of any conflict between or
among any provision of the Guarantee and Contingent Purchase Agreement and this
Agreement, the provisions of the Guarantee and Contingent Purchase Agreement
shall control and prevail over this Agreement; provided, however, as to the
rights and obligations of the Borrower only, this Agreement shall control and
prevail. In the event of any conflict between or among any provision of this
Agreement and any other Loan Document other than the Guarantee and Contingent
Purchase Agreement, the provisions of this Agreement shall control and prevail
over the other Loan Documents other than the Guarantee and Contingent Purchase
Agreement.
ARTICLE XIV
CHOICE OF LAW
Section 14.1. Tennessee. This Agreement is being delivered and is
intended to be performed in the State of Tennessee and, to the extent not
governed by the laws of the United States of America, shall be construed and
enforced in accordance with and governed by the laws of such State.
Section 14.2. Jurisdiction. THE BORROWER, NHLP, NATIONAL AND EACH
BANK HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY TENNESSEE STATE OR
FEDERAL COURT SITTING IN THE CITY OF NASHVILLE OVER ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. THE BORROWER, NHLP,
NATIONAL AND EACH BANK HEREBY IRREVOCABLY WAIVE TO THE FULLEST EXTENT PERMITTED
BY LAW, ANY OBJECTION THAT THEY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE
VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND ANY
CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. THE BORROWER, NHLP AND NATIONAL AND EACH BANK
HEREBY AGREE THAT A FINAL JUDGMENT IN
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<PAGE> 50
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT, AFTER ALL
APPROPRIATE APPEALS, SHALL BE CONCLUSIVE AND BINDING UPON EACH OF THEM.
Section 14.3. Process. PROCESS MAY BE SERVED IN ANY SUIT, ACTION
COUNTERCLAIM OR PROCEEDING OF THE NATURE REFERRED TO IN SECTION 14.2. HEREOF
BY MAILING COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID,
RETURN RECEIPT REQUESTED, TO THE ADDRESS OF THE BORROWER, NHLP, NATIONAL AND
EACH BANK, AS APPLICABLE, AS SET FORTH IN SECTION 15.1. HEREOF OR TO ANY OTHER
ADDRESSES OF WHICH THE BORROWER, NHLP, NATIONAL AND EACH BANK HAVE GIVEN
WRITTEN NOTICE TO THE AGENT. THE BORROWER, NHLP, NATIONAL AND EACH BANK HEREBY
AGREE THAT SUCH SERVICE (A) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE
OF PROCESS UPON EACH OF THEM IN ANY SUCH SUIT, ACTION, COUNTERCLAIM OR
PROCEEDING, AND (B) SHALL TO THE FULLEST EXTENT ENFORCEABLE BY LAW, BE TAKEN
AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO EACH OF
THEM.
ARTICLE XV
NOTICE
Section 15.1. Notice. Any communications between the parties hereto
or notices provided herein shall be deemed given upon the mailing of same by
certified mail, return receipt requested, to Banks c/o Agent, at Third National
Bank, 201 Fourth Avenue North, Nashville, Tennessee 37244 Attention: Melanie B.
Dunn, to each of the Banks directly at the addresses set forth on Exhibit L
attached hereto and incorporated herein by reference, and to Borrower at 250
Park Avenue, New York, New York, Attention: Stephen J. Hartman, Jr. or to such
other addresses as the parties may indicate hereafter in writing.
Section 15.2. Notice to SCS. Upon the occurrence and continuance of
an Event of Default, Agent promptly shall give written notice of such Event of
Default to SCS as lender under the Sovran Loan. SCS shall also, upon the
occurrence and continuance of a default or an Event of Default (as such term is
defined in the loan agreement governing the Sovran Loan), promptly give written
notice of such default or Event of Default to Agent.
ARTICLE XVI
SEVERABILITY
Section 16.1. Severability. If any provision of this Agreement shall
be held invalid under any applicable law, SUCH invalidity shall not affect any
other provision of this Agreement that can be given effect without the invalid
provision, and, to this end, the provisions hereof are severable.
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<PAGE> 51
IN WITNESS WHEREOF, this Agreement has been executed and delivered as
of the day and date first above written.
BORROWER
NATIONAL HEALTH CORPORATION
LEVERAGED EMPLOYEE STOCK
OWNERSHIP TRUST
By: MARINE MIDLAND BANK, N.A.
solely as trustee and not
in its individual or
corporate capacity
By: /s/
-------------------------------
Title: MGR-EBTS
---------------------------
250 Park Avenue
New York, New York
BANKS
THIRD NATIONAL BANK IN NASHVILLE
By: /s/
-------------------------------
Title: Senior Vice President
----------------------------
Third National Bank Building
201 Fourth Avenue, North
Nashville, Tennessee 37244
SOVRAN BANK/CENTRAL SOUTH
By: /s/
-------------------------------
Title: Vice President
----------------------------
One Commerce Place M-5
Nashville, Tennessee 37219
----------------------------
AGENT
THIRD NATIONAL BANK IN
NASHVILLE, AS AGENT
By: /s/
-------------------------------
Title: Senior Vice President
----------------------------
Third National Bank Building
201 Fourth Avenue North
Nashville, Tennessee 37244
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<PAGE> 52
The undersigned hereby enter into this Loan and security Agreement as parties
hereto in order to be bound by any and all applicable representations,
warranties, covenants and agreements contained herein:
NATIONAL HEALTHCORP L.P.
By:/s/ NHC, Inc.
-----------------------------------
Managing General Partner
By:/s/
-------------------------
Title: President
----------------------
1400 City Center
100 Vine Street
Murfreesboro, TN 37130
NATIONAL HEALTH CORPORATION
By:/s/
------------------------------------
Title: Senior Vice President
1400 City Center
100 Vine Street
Murfreesboro, TN 37130
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<PAGE> 53
IRVING TRUST COMPANY
By:/s/
------------------------------
Title:Vice President
1290 Avenue of the Americas
29th Floor
New York, New York 10104
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<PAGE> 54
SOUTHTRUST BANK OF ALABAMA,
NATIONAL ASSOCIATION
By:/s/
----------------------------------
Title: Vice President
420 North 20th Street
Birmingham, Alabama 35203
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<PAGE> 1
EXHIBIT 10.29
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION
REQUIREMENTS OF SUCH ACT OR SUCH LAWS.
THE TRANSFER OF THIS NOTE IS RESTRICTED BY A NOTE PURCHASE
AGREEMENT ON FILE AT THE OFFICE OF THE COMPANY.
NATIONAL HEALTHCARE L.P.
5.75% SUBORDINATED CONVERTIBLE NOTE
DUE JUNE 30, 2004
New York, New York
October 15, 1997
FOR VALUE RECEIVED, the Company hereby promises to pay to The
1818 Fund II, L.P. or registered assigns, at such place as the holder of this
Note shall from time to time designate to the Company in writing, on June 30,
2004, or, if such date is not a Business Day, on the next day that is a Business
Day, a total of Twenty Million Dollars ($20,000,000) with daily interest from
the date hereof to and including the maturity hereof at the rate set forth in
Section 2 hereof, said interest being payable in quarterly installments in
arrears on the Business Day immediately preceding the last Business Day of
March, June, September and December in each year, commencing December 30, 1997,
to the Person in whose name this Note is registered at the close of business on
the fifteenth day of the month in which the payment date occurs, and at the
stated or any accelerated maturity hereof or, if the date of any such stated or
accelerated maturity is not a Business Day, on the next day which is a Business
Day. In case an Event of Default (as defined in Section 11) shall occur and be
continuing, the entire principal amount of this Note may become or be declared
to be due and payable in the manner and with the effect provided herein. Certain
capitalized terms used herein are defined in Section 12. Capitalized terms not
defined herein have the meanings ascribed to them in the Note Purchase
Agreement, dated as of October 15, 1997, by and between the Company and The 1818
Fund II,
<PAGE> 2
2
L.P. (as amended, supplemented or modified in accordance with the terms thereof,
the "Note Purchase Agreement").
Section 1. The Notes.
This 5.75% Subordinated Convertible Note is issued pursuant to
the Note Purchase Agreement and the holder of this Note is entitled to the
benefits of this Note, the Note Purchase Agreement and the Registration Rights
Agreement and may enforce the agreements of the Company contained herein and
therein and exercise the remedies provided for hereby and thereby or otherwise
available in respect hereto and thereto. All of the 5.75% Subordinated
Convertible Notes issued pursuant to the Note Purchase Agreement are referred to
herein as the "Notes." Upon (i) full payment of all principal and accrued
interest under this Note, or (ii) conversion of this Note as provided herein and
irrevocable full payment of all amounts due under this Note, all rights of the
holder of this Note and all obligations of the Company hereunder shall
terminate.
Section 2. Interest.
The Company will pay interest on the principal amount hereof,
until the principal amount hereof is paid in full, at a rate of 5.75% per annum.
Interest on this Note will accrue from and including the most recent date to
which interest has been paid (or, if no interest has been paid, from and
including the date of issuance of this Note) to but excluding the date of
payment. Interest will be computed on the basis of a 360-day year consisting of
twelve 30-day months. The Company shall pay interest on overdue principal and on
overdue interest (to the full extent permitted by law) at a rate equal to 8.0%
per annum.
Section 3. Method of Payment.
The registered holder of this Note at the close of business on
the fifteenth day of the month in which the interest payment date occurs shall
be entitled to receive interest on this Note, even if this Note is converted or
canceled after the record date and on or before the interest payment date. The
holder of this Note must surrender it to the Company to collect the principal
payment; provided, that if upon surrender of this Note the holder does not
receive the full principal amount of this Note plus accrued but unpaid interest
thereon, then the holder shall be issued a new Note equal in principal amount to
the outstanding principal balance on such Note. The Company will pay principal
and interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. The Company shall pay principal
and interest in immediately available funds.
<PAGE> 3
3
Section 4. Distributions.
In the event that the Company shall declare a dividend or make
any other distribution (including, without limitation, in capital stock (which
shall include, without limitation, any options, warrants or other rights to
acquire capital stock) of the Company, whether or not pursuant to a shareholder
rights plan, "poison pill" or similar arrangement, or other property or assets)
on or with respect to the Units (a "Special Distribution"), then the holder of
this Note shall be entitled to receive, a distribution in an amount equal to the
amount of such dividend or distribution received by a holder of the number of
Units for which this Note is convertible on the record date for such dividend or
distribution. Any such amount shall be paid to the holder of this Note at the
same time such dividend or distribution is made to holders of Units.
As used in this Section 4, a Special Distribution shall
include, among other things, a distribution the intention or effect of which is
to decrease the assets or earning power of the Company or to convey a portion of
such operating assets or earning power of the Company to holders of Units;
provided, however, that a Special Distribution shall not include: (i)
distributions of the Company's ordinary income not to exceed 60% of the
Company's ordinary income for the applicable fiscal quarter; (ii) distributions
of the Company's capital gains not to exceed that percentage which is equivalent
to the applicable maximum federal capital gains tax rate for individuals; (iii)
the distribution of securities of NHC and NHR in connection with the Special
Reorganization; (iv) a Regular Distribution (as defined in Section 7.5(g)
herein); and (v) a dividend or distribution paid solely in Units.
Section 5. Change of Control Offer.
The Company will redeem this Note tendered pursuant to a
Change of Control Offer in the manner and to the extent provided in the Note
Purchase Agreement.
Section 6. Redemption.
6.1 Optional Redemption. Except as otherwise provided herein,
the Company shall not have any right to prepay or redeem this Note. If at any
time on or after 42 months after the Closing Date the Company is then taxable as
a corporation the Company shall have the right, at any time at its sole option
and election, to redeem the Notes, in whole, but not in part, on not less than
30 days notice of the date of redemption, which must be a Business Day (any such
date an "Optional Redemption Date") at a price (the "Optional Redemption Price")
equal to (i) the outstanding principal amount of the Notes to be redeemed, plus
(ii) an amount equal to all accrued and unpaid interest thereon, whether or not
currently payable, to
<PAGE> 4
4
the applicable Optional Redemption Date, in cash or other immediately available
funds.
6.2 Notice. Notice of any redemption of the Notes pursuant to
this Section 6 shall be mailed at least 30, but not more than 60, days prior to
the date fixed for redemption to each holder of the Notes to be redeemed, at
such holder's address as it appears on the transfer books of the Company. In
order to facilitate the redemption of the Notes, the Board of Directors of the
Managing General Partner may fix a record date for the determination of the
Notes to be redeemed, or may cause the transfer books of the Company for the
Notes to be closed, not more than 60 days or less than 30 days prior to the date
fixed for such redemption.
6.3 Deposit of Funds. On the date of any redemption being made
pursuant to this Section 6 which is specified in a notice given pursuant to
Section 6.2, the Company shall, and at any time after such notice shall have
been mailed and before the date of redemption the Company may, deposit for the
benefit of the holders of the Notes to be redeemed the funds necessary for such
redemption with a bank or trust company in the Borough of Manhattan, The City of
New York, having a capital and surplus of at least $100,000,000. Any moneys so
deposited by the Company and unclaimed at the end of two years from the date
designated for such redemption shall revert to the general funds of the Company
or as otherwise required by law. After such reversion, any such bank or trust
company shall, upon demand, pay over to the Company such unclaimed amounts and
thereupon such bank or trust company shall be relieved of all responsibility in
respect thereof and any holder of Notes to be redeemed shall look only to the
Company for the payment of the Optional Redemption Price. In the event that
moneys are deposited pursuant to this Section 6.3 in respect of Notes that are
converted in accordance with the provisions of Section 7, such moneys shall,
upon such conversion, revert to the general funds of the Company and, upon
demand, such bank or trust company shall pay over to the Company such moneys and
shall be relieved of all responsibilities to the holders of such converted Notes
in respect thereof. Any interest accrued on funds deposited pursuant to this
Section 6.3 shall be paid from time to time to the Company for its own account.
6.4 Termination of Rights. Notice of redemption having been
given as aforesaid, upon the deposit of funds pursuant to Section 6.4 in respect
of Notes to be redeemed pursuant to Section 6.1, notwithstanding that any such
Notes themselves shall not have been surrendered for cancellation, from and
after the date of redemption designated in the notice of redemption (i) the
principal amount of the Notes that is to be redeemed shall no longer be deemed
outstanding, (ii) the rights to receive interest thereon shall cease to accrue
and (iii) all rights of the holders of the Notes to be redeemed shall cease and
terminate, excepting only the right to receive the Optional Redemption Price
therefor and the right to convert such Notes into Units until the close of
business on the date of redemption, in accordance with Section 7; provided,
however, that if the Company shall default in the payment of the Optional
Redemption Price, the principal amount of the Notes shall thereafter be deemed
to be
<PAGE> 5
5
outstanding and the holders thereof shall have all of the rights of a holder of
Notes until such time as such default shall no longer be continuing or shall
have been waived by holders of at least 66-2/3% of the then outstanding
principal amount of all Notes.
Section 7. Conversion.
7.1 Right to Convert.
(a) Following the expiration or termination of applicable
waiting periods under the HSR Act, including any extensions thereof, the holder
of this Note shall have the right, at its option, at any time and from time to
time on or after January 5, 1998, to convert, subject to the terms and
provisions of this Section 7, any or all of the then outstanding principal
amount of this Note into such number of fully paid and non-assessable Units as
is equal, subject to Section 7.8, to the quotient of the principal of this Note
being so converted divided by the Conversion Price (as defined below) then in
effect, except that with respect to any portion of the Note which shall be
called for redemption, such right shall terminate at the close of business on
the date of redemption for such portion of this Note, unless in any such case
the Company shall default in performance or payment due upon redemption thereof;
provided, however, that notwithstanding anything to the contrary herein, if
there is a Change of Control or Contemplated Change of Control (as defined
below) this Note shall be convertible at any time and from time to time, subject
to the expiration or termination of applicable waiting periods under the HSR
Act, including any extensions thereof. Such conversion right shall be exercised
by the surrender of this Note to the Company at any time during usual business
hours at its principal place of business to be maintained by it, accompanied by
written notice that the holder elects to convert this Note (or a specified
portion of the outstanding principal amount thereof) and specifying the name or
names (with address) in which a certificate or certificates for Units are to be
issued and (if so required by the Company) by a written instrument or
instruments of transfer in form reasonably satisfactory to the Company duly
executed by the holder or its duly authorized legal representative and transfer
tax stamps or funds therefor, if required pursuant to Section 7.12. If less than
all of the then outstanding principal amount of this Note is to be converted,
the Company will promptly issue and deliver to the holder a new Note in the
principal amount of the unconverted portion of the Note submitted for
conversion.
(b) Prior to and including the date of the occurrence of the
Special Reorganization, the Conversion Price shall be equal to $53 (the "Initial
Conversion Price"), subject to adjustment as set forth in Section 7.5. From and
including the next Business Day after the occurrence of the Special
Reorganization, the Conversion Price shall be equal to $36, subject to
adjustment as set forth in Section 7.5.
<PAGE> 6
6
7.2 Mandatory Conversion. On the next Business Day following the
later of (x) the occurrence of the Special Reorganization, or (y) the expiration
or termination of applicable waiting periods under the HSR Act, including any
extensions thereof, subject to the terms and provisions of this Section 7, all
of the outstanding principal amount of this Note shall be converted into such
number of fully paid and non-assessable Units as is equal, subject to Section
7.8, to the quotient of the principal amount of this Note divided by the
Conversion Price then in effect.
7.3 Issuance of Units. As promptly as practicable after the
surrender, as herein provided, of this Note for conversion pursuant to Section
7.1 and 7.2, the Company shall deliver to or upon the written order of the
holder of this Note so surrendered a certificate or certificates representing
the number of fully paid and nonassessable Units into which this Note may be or
has been converted in accordance with the provisions of this Section 7. Subject
to the following provisions of this Section 7.3 and of Section 7.5, such
conversion shall be deemed to have been made immediately prior to the close of
business on the date that this Note shall have been surrendered in satisfactory
form for conversion, and the Person or Persons entitled to receive the Units
deliverable upon conversion of this Note shall be treated for all purposes as
having become the record holder or holders of such Units at such appropriate
time, and such conversion shall be at the Conversion Price in effect at such
time; provided, however, that no surrender shall be effective to constitute the
Person or Persons entitled to receive the Units deliverable upon such conversion
as the record holder or holders of such Units while the transfer books of the
Company for Units shall be closed (but not for any period in excess of five
days), but such surrender shall be effective to constitute the Person or Persons
entitled to receive such Units as the record holder or holders thereof for all
purposes immediately prior to the close of business on the next succeeding day
on which such transfer books are open, and such conversion shall be deemed to
have been made at, and shall be made at the Conversion Price in effect at, such
time on such next succeeding day. In case of the redemption of this Note
pursuant to Section 6, the right of conversion shall cease and terminate, as to
the portion of this Note to be redeemed, at the close of business on the date
fixed for redemption, unless the Company shall default in the payment of the
applicable redemption price for this Note. If the last day for the exercise of
the conversion right shall not be a Business Day, then such conversion right may
be exercised on the next succeeding Business Day.
7.4 Payment of Interest. When this Note is converted, all
interest accrued and unpaid (whether or not currently payable) on this Note to
the date of conversion shall be immediately due and payable, in cash or other
immediately available funds, and must accompany the Units issued upon such
conversion.
<PAGE> 7
7
7.5 Adjustment of Conversion Price. The Conversion Price shall be
subject to adjustment as follows:
(a) In case the Company shall at any time or from time to
time (i) pay a dividend or make a distribution (other than a dividend or
distribution paid or made to the holder of this Note in the manner provided in
Section 4) on the outstanding Units in Units or other equity interests (which,
for purposes of this Section 7.5 shall include, without limitation, any
dividends or distributions in the form of options, warrants or other rights to
acquire Units or other equity interests) of the Company, (ii) subdivide the
outstanding Units into a larger number of Units, (iii) combine the outstanding
Units into a smaller number of Units, (iv) issue any equity interest in a
reclassification of the Units or (v) pay a dividend or make a distribution on
the outstanding Units in Units or other equity interests pursuant to a rights
plan, "poison pill" or similar arrangement, then, and in each such case, the
Conversion Price in effect immediately prior to such event shall be adjusted
(and any other appropriate actions shall be taken by the Company) so that the
holder of this Note thereafter surrendered for conversion shall be entitled to
receive the number of Units or other securities of the Company that such holder
would have owned or would have been entitled to receive upon or by reason of any
of the events described above, had this Note been converted immediately prior to
the occurrence of such event. An adjustment made pursuant to this Section 7.5(a)
shall become effective retroactively (i) in the case of any such dividend or
distribution, to a date immediately following the close of business on the
record date for the determination of holders of Units entitled to receive such
dividend or distribution or (ii) in the case of any such subdivision,
combination or reclassification, to the close of business on the day upon which
such corporate action become effective.
(b) In case the Company shall at any time or from time to
time issue or sell Units (or securities convertible into or exchangeable for
Units, or any options, warrants or other rights to acquire Units) (other than
Units issued pursuant to the Company's Employee Unit Purchase Plan or any other
employee or director option plan approved by the Board of Directors of the
Managing General Partner), at a price per Unit less than the Current Market
Price per Unit then in effect at the record date referred to in the following
sentence (treating the price per share or unit of any security convertible or
exchangeable or exercisable into Units as equal to (i) the sum of the price for
such security convertible, exchangeable or exercisable into Units plus any
additional consideration payable (without regard to any anti-dilution
adjustments) upon the conversion, exchange or exercise of such security into
Units divided by (ii) the number of Units initially underlying such convertible,
exchangeable or exercisable security), then, and in each such case, the
Conversion Price then in effect shall be adjusted by dividing the Conversion
Price in effect on the day immediately prior to such record date by a fraction
(x) the numerator of which shall be the sum of the number of Units outstanding
on such record date plus the number of additional Units issued or to be issued
(or the maximum number into which such convertible or exchangeable securities
initially may convert or exchange or for which
<PAGE> 8
8
such options, warrants or other rights initially may be exercised) and (y) the
denominator of which shall be the sum of the number of Units outstanding on such
record date plus the number of Units which the aggregate consideration for the
total number of such additional Units so issued (or into which such convertible
or exchangeable securities may convert or exchange or for which such options,
warrants or other rights may be exercised plus the aggregate amount of any
additional consideration initially payable upon conversion, exchange or exercise
of such security) would purchase at the Current Market Price per Unit on such
record date. Such adjustment shall be made whenever such Units, securities,
options, warrants or other rights are issued, and shall become effective
retroactively to a date immediately following the close of business on the
record date for the determination of holders of Units entitled to receive such
Units, securities, options, warrants or other rights; provided, however, that
the determination as to whether an adjustment is required to be made pursuant to
this Section 7.5(b) shall only be made upon the issuance of such Units or such
convertible or exchangeable securities, options, warrants or other rights, and
not upon the issuance of the security into which such convertible or
exchangeable security converts or exchanges, or the security underlying such
option, warrants or other right; provided, further, that if any convertible or
exchangeable securities, options, warrants or other rights (or any portions
thereof) which shall have given rise to an adjustment pursuant to this Section
7.5(b) shall have expired or terminated without the exercise thereof and/or if
by reason of the terms of such convertible or exchangeable securities, options,
warrants or other rights there shall have been an increase or increases, with
the passage of time or otherwise, in the price payable upon the exercise or
conversion thereof, then the Conversion Price hereunder shall be readjusted (but
to no greater extent than originally adjusted with respect to the related event)
on the basis of (x) eliminating from the computation any additional Units
corresponding to such convertible or exchangeable securities, options, warrants
or other rights as shall have expired or terminated, (y) treating the additional
Units, if any, actually issued or issuable pursuant to the previous exercise of
such convertible or exchangeable securities, options, warrants or other rights
as having been issued for the consideration actually received and receivable
therein and (z) treating any of such convertible or exchangeable securities,
options, warrants or other rights which remain outstanding as being subject to
exercise or conversion on the basis of such exercise or conversion price as
shall be in effect at the time.
(c) In case the Company shall at any time or from time to
time issue or sell Units or securities convertible into or exchangeable for
Units, or any options, warrants or other rights to acquire Units (other than
Units and options to acquire Units, in each case issued pursuant to any stock
option plan of the Company or the Company's Employee Unit Purchase Plan), at a
price per Unit less than the Conversion Price then in effect at the record date
referred to in the following sentence (treating the price per share or unit of
any security convertible or exchangeable or exercisable into Units as equal to
(A) the sum of the price for such security convertible, exchangeable or
exercisable into Units plus any additional consideration payable (without regard
to any anti-dilution adjustments) upon the conversion,
<PAGE> 9
9
exchange or exercise of such security into Units divided by (B) the number of
Units initially underlying such convertible, exchangeable or exercisable
security), then, and in each such case, the Conversion Price then in effect
shall be adjusted, to the extent an adjustment is not made for any such issuance
or sale pursuant to Section 7.5(b), by dividing the Conversion Price in effect
on the day immediately prior to such record date by a fraction (x) the numerator
of which shall be the sum of the number of Units outstanding on such record date
plus the number of additional Units issued or to be issued (or the maximum
number into which such convertible or exchangeable securities initially may
convert or exchange or for which such options, warrants or other rights
initially may be exercised) and (y) the denominator of which shall be the sum of
the number of Units outstanding on such record date plus the number of Units
which the aggregate consideration for the total number of such additional Units
so issued (or into which such convertible or exchangeable securities may convert
or exchange or for which such options, warrants or other rights may be exercised
plus the aggregate amount of any additional consideration initially payable upon
conversion, exchange or exercise of such security) would purchase at the
Conversion Price on such record date. Such adjustment shall be made whenever
such Units, securities, options, warrants or other rights are issued, and shall
become effective retroactively to a date immediately following the close of
business on the record date for the determination of holders of Units entitled
to receive such Units, securities, options, warrants or other rights; provided,
however, that the determination as to whether an adjustment is required to be
made pursuant to this Section 7.5(c) shall be made upon the issuance of such
Units or such convertible or exchangeable securities, options, warrants or other
rights; provided, further, that if any convertible or exchangeable securities,
options, warrants or other rights (or any portion thereof) which shall have
given rise to an adjustment pursuant to this Section 7.5(c) shall have expired
or terminated without the exercise thereof and/or if by reason of the terms of
such convertible or exchangeable securities, options, warrants or other rights
there shall have been an increase or increases, with the passage of time or
otherwise, in the price payable upon the exercise or conversion thereof, then
the Conversion Price hereunder shall be readjusted (but to no greater extent
than originally adjusted with respect to the related event) on the basis of (x)
eliminating from the computation any additional Units corresponding to such
convertible or exchangeable securities, options, warrants or other rights as
shall have expired or terminated, (y) treating the additional Units, if any,
actually issued or issuable pursuant to the previous exercise of such
convertible or exchangeable securities, options, warrants or other rights as
having been issued for the consideration actually received and receivable
therefor and (z) treating any of such convertible or exchangeable securities,
options, warrants or other rights which remain outstanding as being subject to
exercise or conversion on the basis of such exercise or conversion price as
shall be in effect at this time.
(d) In case the Company shall at any time or from time to
time distribute on or with respect to the Units (including any such distribution
made in connection with a consolidation or merger in which the Company is the
resulting or surviving corporation and the Units are not changed or exchanged)
cash, evidences of
<PAGE> 10
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Indebtedness of the Company or another issuer, securities of the Company or
another issuer or other assets (excluding (i) Regular Distributions, (ii)
dividends and distributions paid or made to the holder of this Note in the
manner provided in Section 4, and (iii) dividends payable in Units for which
adjustment is made under Section 7.5(a)) or rights or warrants to subscribe for
or purchase securities of the Company (excluding those referred to in Section
7.5(b) and 7.5(c)), then, and in each such case, the Conversion Price then in
effect shall be adjusted by dividing the Conversion Price in effect immediately
prior to the date of such distribution by a fraction (x) the numerator of which
shall be the Current Market Price of the Units on the record date referred to
below and (y) the denominator of which shall be such Current Market Price of the
Units less the amount that a willing buyer would pay a willing seller in an
arm's-length transaction at such time (as determined by the Board of Directors
of the Managing General Partner) for the portion of the cash, evidences of
Indebtedness, securities or other assets so distributed or of such subscription
rights or warrants applicable to one Unit (but such denominator not to be less
than one); provided, however, that no adjustment shall be made with respect to
any distribution of rights to purchase securities of the Company if the holder
of this Note would otherwise be entitled to receive such rights upon conversion
at any time of this Note into Units unless such rights are subsequently redeemed
by the Company, in which case such redemption shall be treated for purposes of
this Section 7.5(d) as a distribution on the Units. Such adjustment shall be
made whenever any such distribution is made; provided, however, that in the case
of one or more distributions of cash or cash equivalents on or with respect to
the Units ("Cash Distribution(s)") such adjustment shall be calculated not later
than 45 days following the last day of the Calculation Period or Relevant Period
(each as defined in Section 7.5(g)), as the case may be. The adjustment shall
become effective retroactively to a date immediately following the close of
business on the record date for the determination of holders of Units entitled
to receive such distribution.
(e) In case the Company at any time or from time to time
shall take any action affecting the Units or its other equity interests, if any,
other than an action described in any of Section 7.5(a) through Section 7.5(d),
inclusive, or Section 7.9, then, and in each such case, the Conversion Price
shall be adjusted in such manner and at such time as the Board of Directors of
the Managing General Partner in good faith determines to be equitable in the
circumstances (such determination to be evidenced in a resolution, a certified
copy of which shall be mailed to the holders of the Notes).
(f) Notwithstanding anything herein to the contrary, no
adjustment under this Section 7.5 need be made to the Conversion Price (i)
unless such adjustment would require an increase or decrease of at least 1% of
the Conversion Price then in effect or (ii) for issuances of Units to any or all
of the Managing General Partner, the Administrative General Partner and Adams
solely for the purpose of maintaining their collective 1% interest in the
Company. Any lesser adjustment shall be carried forward and shall be made at the
time of and together with
<PAGE> 11
11
the next subsequent adjustment, which, together with any adjustment or
adjustments so carried forward, shall amount to an increase or decrease of at
least 1% of such Conversion Price. Any adjustment to the Conversion Price
carried forward and not theretofore made shall be made immediately prior to the
conversion of this Note pursuant hereto.
(g) For purposes of this Agreement, a "Regular Distribution"
shall mean a Cash Distribution in an amount that, when added to the amount of
all other Cash Distributions made during the 12-month period ending on the last
day of the fiscal quarter of the Company in which such Cash Distribution is made
(or, if this Note has been outstanding for a period shorter than 12 months, the
period from the first day of the fiscal quarter in which this Note was issued to
the last day of such fiscal quarter) (the "Calculation Period"), does not exceed
sixty percent (60%) of the income of the Company during the Calculation Period
that, if the Calculation Period were a calendar year, would be subject, in the
hands of the holders of Units, to U.S. federal income tax applicable to the
Calculation Period. For the purposes of this Agreement, "Relevant Period" shall
mean the 12 month period ending on such last day (or, if this Note has been
outstanding for a period shorter than 12 months, the period from the first day
of the fiscal quarter in which the Note was issued to such last day).
(h) Notwithstanding anything to the contrary in this Sec
tion 7.5, no adjustment shall be made to the Conversion Price in connection with
or as a result of the Special Reorganization except as provided in Section 7.1.
7.6 No Adjustment for Taking Record Only. If the Company shall
take a record of the holders of Units for the purpose of entitling them to
receive a dividend or other distribution, and shall thereafter and before the
distribution to holders thereof legally abandon its plan to pay or deliver such
dividend or distribution, then thereafter no adjustment in the Conversion Price
then in effect shall be required by reason of the taking of such record.
7.7 Officers' Certificate. Upon any increase or decrease in the
Conversion Price, then, and in each such case, the Company promptly shall
deliver to the registered holder of this Note at least 10 Business Days prior to
effecting any of the foregoing transactions a certificate, signed by the
President or a Vice-President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Managing General Partner, setting
forth in reasonable detail the event requiring the adjustment and the method by
which such adjustment was calculated and specifying the increased or decreased
Conversion Price then in effect following such adjustment.
7.8 No Fractional Units Issued. No fractional Units or scrip
representing fractional Units shall be issued upon the conversion of this Note.
If more than one Note shall be surrendered for conversion at one time by the
same
<PAGE> 12
12
holder, the number of full Units issuable upon conversion thereof shall be
computed on the basis of the aggregate outstanding principal amount of the Notes
so surrendered. If the conversion of any Note or Notes results in a fraction, an
amount equal to such fraction multiplied by the Current Market Price of the
Units on the Business Day preceding the day of conversion shall be paid to such
holder in cash by the Company.
7.9 Subsequent Transactions. Except with regard to the Special
Reorganization, in case of any capital reorganization or reclassification or
other change of outstanding Units or other equity interests, if any, or in case
of any consolidation or merger of the Company with or into another Person (other
than a consolidation or merger in which the Company is the resulting or
surviving Person and which does not result in any reclassification or change of
Units or other outstanding equity interests, if any), or in case of any sale or
other disposition to another Person of all or substantially all of the assets of
the Company (any of the foregoing, a "Transaction"), the Company, or such
successor or purchasing Person, as the case may be, shall execute and deliver to
each holder of Notes at least 10 Business Days prior to effecting any of the
foregoing Transactions a certificate stating that the holder of each Note then
outstanding shall have the right thereafter to convert such Note into the kind
and amount (estimating such amount to the extent necessary) of equity securities
or other securities (of the Company or another issuer) or property or cash
receivable upon such Transaction by a holder of the number of Units into which
such Note could have been converted immediately prior to such Transaction. Such
certificate shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 7. If, in the
case of any such Transaction, the equity securities, other securities, cash or
property receivable thereupon by a holder of Units includes equity or other
securities of a Person other than the successor or purchasing Person and other
than the Company, which controls or is controlled by the successor or purchasing
Person or which, in connection with such Transaction, issues equity securities,
other securities, other property or cash to holders of Units, then such
certificate also shall be executed by such Person, and such Person shall, in
such certificate, specifically acknowledge the obligations of such successor or
purchasing Person and acknowledge its obligations to issue such equity
securities, other securities, other property or cash to the holders of Notes
upon conversion of the Notes as provided above. The provisions of this Section
7.9 and any equivalent thereof in any such certificate similarly shall apply to
successive Transactions. The provisions of this Section 7.9 and any equivalent
thereof in any such certificate are and shall be in addition to, and not in lieu
of, the requirements of the Note Purchase Agreement with respect to a Change of
Control Offer. Notwithstanding anything to the contrary in this Section 7.9,
from and after the consummation of the Special Reorganization, upon conversion
of this Note the holder shall be entitled to receive shares of capital stock of
NHC in accordance with the other provisions of this Section 7.
<PAGE> 13
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7.10 Notice of Certain Events. In case at any time or from time
to time:
(a) the Company shall declare a dividend (or any other
distribution) on the Units or other equity interests, if any, of the Company;
(b) the Company shall authorize the granting to the holders
of the Units or other equity interests, if any, of the Company of rights or
warrants to subscribe for or purchase any equity interests of any class or of
any other rights or warrants;
(c) there shall be any reclassification of the Units or
other equity interests, if any, of the Company, or any consolidation or merger
to which the Company is a party and for which approval of any holders of Units
of the Company is required, or any sale or other disposition of all or
substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then the Company shall mail to each holder of Notes at such holder's address as
it appears on the transfer books of the Company, as promptly as possible but in
any event at least ten days prior to the applicable date hereinafter specified,
a notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution or rights or warrants or, if a record is not to
be taken, the date as of which the holders of Units of record to be entitled to
such dividend, distribution or rights are to be determined, or (y) the date on
which such reclassification, consolidation, merger, sale, conveyance,
dissolution, liquidation or winding up is expected to become effective; provided
that in the case of any event to which Section 7.9 applies, the Company shall
give at least 10 days' prior written notice as aforesaid. Such notice also shall
specify the date as of which it is expected that holders of Units of record
shall be entitled to exchange their Units for equity securities or other
securities or property or cash deliverable upon such reclassification,
consolidation, merger, sale, conveyance, dissolution, liquidation or winding up.
7.11 Reservation of Units. The Company shall at all times reserve
and keep available for issuance upon the conversion of the Notes, such number of
its authorized but unissued Units as will from time to time be sufficient to
permit the conversion of all the then outstanding principal amount of the Notes
and shall take all action required to increase the authorized number of Units if
at any time there shall be insufficient authorized but unissued Units to permit
such reservation or to permit the conversion of all the then outstanding
principal amount of the Notes.
<PAGE> 14
14
7.12 Issue Taxes. The issuance or delivery of certificates for
Units upon the conversion of Notes shall be made without charge to the
converting holder of Notes for such certificates or for any tax in respect of
the issuance or delivery of such certificates or the securities represented
thereby, and such certificates shall be issued or delivered in the respective
names of, or in such names as may be directed by, the holders of the Notes
converted; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate in a name other than that of the holder of the
Notes, and the Company shall not be required to issue or deliver such
certificate unless or until the Person or Persons requesting the issuance or
delivery thereof shall have paid to the Company the amount of such tax or shall
have established to the reasonable satisfaction of the Company that such tax has
been paid.
Section 8. Indenture.
8.1 Execution and Delivery of Indenture. On or after July 1,
1998, at the request of the holders of a majority of the then outstanding
principal amount of the Notes at such time (the "Requesting Holders"), the
Company, at its expense and only if a filing under the Trust Indenture Act of
1939 is required, will, as soon as practicable, notify all other holders of
Notes of such request and execute and deliver to a bank or trust company having
a combined capital and surplus in excess of $100,000,000 that shall be
designated by the Company as trustee and shall be reasonably acceptable to the
holders of a majority of the then outstanding principal amount of the Notes, an
indenture (the "Indenture"), providing for the issuance thereunder of debentures
("Debentures") in an aggregate principal amount at least equal to the aggregate
outstanding principal amount of the Notes and having substantially all the
rights, benefits and privileges carried by the Notes. The Indenture and the
Debentures to be issued thereunder shall embody the substance of all covenants,
provisions and terms, including subordination provisions, contained in the Note
Purchase Agreement and in the Notes, and the Indenture and the Debentures shall,
so far as appropriate, contain such other terms of the Notes and such terms of
the Note Purchase Agreement as shall be approved by the Company and the holders
of a majority of the then outstanding principal amount of the Notes, and such
other terms as are customary or appropriate in corporate indentures and
debentures, or required by the Trust Indenture Act of 1939, as amended, as the
case may be, and shall otherwise, subject to the foregoing, be satisfactory in
substance and form to the Company, its counsel, the Requesting Holders and such
counsel as may be selected by the Requesting Holders. The Indenture and all
Debentures delivered thereunder shall, in the opinion of counsel to the Company
reasonably satisfactory to the Requesting Holders, be duly authorized, executed
and delivered by or on behalf of the Company, valid and binding obligations of
the Company enforceable in accordance with their terms, and in the case of the
Debentures, entitled to the benefits of the Indenture.
<PAGE> 15
15
8.2 Exchange of Notes for Debentures. Upon the execution and
delivery of the Indenture, each Note shall be deemed to be amended to contain
the terms of the Debentures. Within five days of such execution and delivery the
Company, at its expense, will give written notice thereof to each holder of the
Notes at the time outstanding and, at any time or from time to time thereafter,
upon surrender of any Notes to the Company in exchange therefor, the Company
will issue and deliver Debentures in not less than the same aggregate principal
amount as the then unpaid principal amount of the Notes surrendered, in fully
registered form and in such denominations (not less than $1,000) as any holder
may request and bearing interest from the date to which interest shall have been
paid on the Note or Notes so surrendered. The Company will pay all expenses in
connection with the indenturization and issuance of the Debentures.
Section 9. Subordination.
9.1 Agreement of Subordination. The Company covenants and agrees,
and the holder of this Note (whether upon original issue or upon transfer,
assignment or exchange thereof), by his acceptance hereof, likewise covenants
and agrees, that the payment of the principal of, premium, if any, and interest
on this Note, together with any other payments payable in respect of this Note,
including, without limitation, any amount payable in connection with the
redemption or repurchase of this Note ("Subordinated Amounts") shall, to the
extent and in the manner hereinafter set forth, be subordinated and subject in
right of payment to the prior payment in full of all Senior Indebtedness,
whether outstanding at the date of this Note or hereafter incurred.
The term "Senior Indebtedness" shall mean the principal of,
premium, if any, and interest on, and any other payment due pursuant to any of
the following, whether outstanding at the date hereof or hereafter incurred or
created:
(a) all Indebtedness of the Company for money borrowed
arising under or in connection with any of the Credit Agreements, as amended and
as any of them may be further amended or modified from time to time, and all
renewals, extensions, refundings or refinancings of such Indebtedness incurred
with financial institutions, insurance companies or other institutional lenders
(any such Indebtedness and renewals, extensions, refundings or refinancings
thereof, "Senior Institutional Indebtedness");
(b) all Indebtedness of the Company for money borrowed other
than Senior Institutional Indebtedness (including, without limitation, any
Indebtedness secured by a mortgage, conditional sales contract or other lien
which is (i) given to secure all or part of the purchase price of property
subject thereto, whether given to the vendor of such property or to another, or
(ii) existing on property at the time of acquisition thereof);
<PAGE> 16
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(c) all Indebtedness of the Company evidenced by notes,
debentures, bonds or other securities sold by the Company for money;
(d) all lease obligations of the Company which are
capitalized on the books of the Company in accordance with generally accepted
accounting principles;
(e) all Indebtedness of others of the kinds described in
either of the preceding clauses (b) or (c) and all lease obligations of others
of the kind described in the preceding clause (d) assumed by or guaranteed in
any manner by the Company or in effect guaranteed by the Company through an
agreement to purchase, contingent or otherwise;
(f) all Indebtedness of any subsidiary of the Company or of
National Health Investors, Inc., for which the Company is liable as a guarantor;
(g) all renewals, extensions, refundings or refinancings of
Indebtedness of the kinds described in any of the preceding clauses (b), (c),
(e) and (f) and all renewals or extensions of lease obligations of the kinds
described in either of the preceding clauses (d) and (e);
(h) interest accruing subsequent to the filing of a petition
initiating any bankruptcy, insolvency or similar proceeding with respect to any
Indebtedness or lease obligation of the Company;
(i) all obligations of the Company in respect of any rate
hedging agreement entered into with any holder of any Senior Indebtedness; and
(j) all fees, expenses, reimbursements and other amounts
payable to holders of Senior Indebtedness under the terms of the instrument or
lease creating or evidencing the same,
unless, in the case of any particular Indebtedness, lease, renewal, extension,
refunding or refinancing, the instrument or lease creating or evidencing the
same or the assumption or guarantee of the same expressly provides that such
Indebtedness, lease, renewal, extension, refunding or refinancing is not senior
in right of payment to the Notes or is expressly subordinate by its terms in
right of payment to all other Indebtedness of the Company.
This Section 9 shall constitute a continuing offer to all
persons who, in reliance upon such provisions, become holders of, or continue to
hold, Senior Indebtedness, and such provisions are made for the benefit of the
holders of Senior Indebtedness, and such holders are made obligees hereunder and
they and/or each of them may enforce such provisions in accordance with the
provisions of this Note.
<PAGE> 17
17
No provision of this Section 9 shall prevent the occurrence of
any default or Event of Default hereunder.
9.2 Payments to Note Holders. No payment shall be made by the
Company of any Subordinated Amounts: (a) in the event and during the
continuation of any default in the payment (a "Payment Default") of principal,
premium, if any, interest or any other payment due on any Senior Indebtedness
under or in connection with the instrument, agreement or lease evidencing such
Senior Indebtedness and the holders of the requisite principal amounts of such
Senior Indebtedness or their agents shall not have delivered to the holder of
this Note a notice of waiver of the benefits of this clause (a) and a consent to
the making of scheduled payments on or on account of this Note or taking any
other prohibited action until further notice from such holders or such agents;
or (b) in the event of receipt of written notice by the holder of this Note from
the holders of any Senior Institutional Indebtedness or their representatives of
a default (other than a Payment Default) permitting acceleration of any Senior
Institutional Indebtedness for a period (the "Blockage Period") terminating on
the earlier to occur of (i) the cure, waiver or cessation of such default or
(ii) 180 days from the date of receipt of written notice thereof by the holder
of this Note. At the expiration of such Blockage Period, and so long as there
does not exist a Payment Default, the Company shall promptly pay to the holder
of this Note all sums not paid during such Blockage Period as a result of this
paragraph. For all purposes of this paragraph, no event of default which existed
or was continuing with respect to the Senior Institutional Indebtedness to which
the Blockage Period relates on the date such Blockage Period commenced shall be
or be made the basis for the commencement of any subsequent Blockage Period by
the holder or holders of such Senior Institutional Indebtedness (or their
respective agents) unless such event of default is cured or waived for a period
of not less than 90 consecutive days. There shall be no more than one Blockage
Period initiated in any 360 day period.
Upon any payment by the Company, or distribution of assets of
the Company of any kind or character, whether in cash, property or securities,
to creditors upon any dissolution or winding-up or liquidation or reorganization
of the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due upon all
Senior Indebtedness shall first be paid in full, or payment thereof provided for
in money in accordance with its terms, before any payment (other than equity
securities or other securities of the Company or any other entity, the payment
of which is subordinated at least to the extent provided in this Section 9 to
the payment of all Senior Indebtedness that may at the time be outstanding) is
made on account of the principal, premium, if any, or interest on, or other
amounts payable in respect of, this Note including, without limitation, any
amount payable in connection with the redemption of this Note; and upon any such
dissolution, winding-up or liquidation or reorganization any payment by the
Company, or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to which the holder of this Note would
be entitled, except for the provisions of this Section 9, shall be
<PAGE> 18
18
paid by the Company or by any receiver, trustee in bankruptcy, liquidating
trustee, agent or other Person making such payment or distribution, or by the
holder of this Note if received by them or it, directly to the holders of Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders) or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any Senior Indebtedness may have been issued,
as their respective interests may appear, to the extent necessary to pay all
Senior Indebtedness in full, in money or money's worth, after giving effect to
any concurrent payment or distribution to or for the holders of Senior
Indebtedness, before any payment or distribution is made to the holder of this
Note.
In the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities, prohibited by the foregoing, shall be received by
the holder of this Note before all Senior Indebtedness is paid in full, or
provision is made for such payment in money in accordance with its terms, such
payment or distribution shall be held in trust for the benefit of and shall be
paid over or delivered to the holders of Senior Indebtedness or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instrument evidencing any Senior Indebtedness
may have been issued, as their respective interests may appear, for application
to the payment of all Senior Indebtedness remaining unpaid to the extent
necessary to pay all Senior Indebtedness in full in money in accordance with its
terms, after giving effect to any concurrent payment or distribution to or for
the holders of such Senior Indebtedness.
9.3 Subrogation of Note. Subject to the payment in full of all
Senior Indebtedness, the rights of the holder of this Note shall be subrogated
to the rights of the holders of Senior Indebtedness to receive payments or
distributions of cash, property or securities of the Company applicable to the
Senior Indebtedness until the principal of (and premium, if any) and interest on
this Note shall be paid in full; and, for the purposes of such subrogation, no
payments or distributions to the holders of the Senior Indebtedness of any cash,
property or securities to which the holder of this Note would be entitled except
for the provisions of this Section 9, and no payment over pursuant to the
provisions of this Section 9, to or for the benefit of the holders of Senior
Indebtedness by the holder of this Note, shall, as between the Company, its
creditors other than holders of Senior Indebtedness, and the holder of this
Note, be deemed to be a payment by the Company to or on account of the Senior
Indebtedness. It is understood that the provisions of this Section 9 are and are
intended solely for the purpose of defining the relative rights of the holder of
this Note, on the one hand, and the holders of the Senior Indebtedness, on the
other hand.
If any payment or distribution to which the holder of this
Note would otherwise have been entitled but for the provisions of this Section 9
shall have been applied, pursuant to the provisions of this Section 9 to the
payment of amounts
<PAGE> 19
19
payable under Senior Indebtedness of the Company, then, and in such case, the
holder of this Note shall be entitled to receive from the holders of Senior
Indebtedness the full amount of any such payments or distributions received by
holders of Senior Indebtedness in excess of the amount sufficient to pay in full
all amounts payable under or in respect of, the Senior Indebtedness of the
Company.
Nothing contained in this Section 9 or elsewhere in this Note
is intended to or shall impair or affect, as between the Company, its creditors
other than the holders of Senior Indebtedness, and the holder of this Note, the
obligation of the Company, which is absolute and unconditional, to pay to the
holder of this Note the principal of (and premium, if any) and interest on this
Note as and when the same shall become due and payable in accordance with its
terms, or is intended to or shall affect the relative rights of the holder of
this Note and creditors of the Company other than the holders of the Senior
Indebtedness, nor shall anything herein or therein prevent the holder of this
Note from exercising all remedies otherwise permitted by applicable law upon
default under this Note, subject to the rights, if any, under this Section 9 of
the holders of Senior Indebtedness in respect of cash, property or secu rities
of the Company received upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Company
referred to in this Section 9, the holder of this Note shall be entitled to rely
upon any order or decree made by any court of competent jurisdiction in which
such dissolution, winding-up, liquidation or reorganization proceedings are
pending, or a certificate of the receiver, trustee in bankruptcy, liquidation
trustee, agent or other Person making such payment or distribution, delivered to
the holder of this Note, for the purpose of ascertaining the Persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other Indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto and to this Section 9.
9.4 Notice to Note Holders. The Company shall give prompt
written notice to the holder of this Note of any fact known to the Company which
would prohibit the making of any payment to the holder of this Note.
9.5 Note Holder's Relation to Senior Indebtedness. The holder
of this Note shall be entitled to all the rights set forth in this Section 9 in
respect of any Senior Indebtedness at any time held by it, to the extent as any
other holder of Senior Indebtedness, and nothing in this Note shall deprive the
holder of this Note of any of its rights as such holder.
With respect to the holders of Senior Indebtedness, the holder
of this Note undertakes to perform or to observe only such of its covenants and
obligations as are specifically set forth in this Note, and no implied covenants
or obligations with respect to the holders of Senior Indebtedness shall be read
into this Note against the holder of this Note. The holder of this Note shall
not be deemed to owe any
<PAGE> 20
20
fiduciary duty to the holders of Senior Indebtedness and the holder of this Note
shall not be liable to any holder of Senior Indebtedness if it shall mistakenly
pay over or deliver to the Company or any other Person money or assets to which
any holder of Senior Indebtedness shall be entitled by virtue of this Section 9
or otherwise.
9.6 No Impairment of Subordination. No right of any present or
future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Note regardless of any knowledge thereof
which any such holder may have or otherwise be charged with.
Section 10. Additional Indebtedness.
The Company hereby covenants and agrees that, so long as any
amount is outstanding on any of the Notes, the Company will not, without the
consent of a majority in outstanding principal amount of the Notes, create,
assume, incur or in any manner become or remain liable in respect of any
Indebtedness (as defined in the Note Purchase Agreement), other than Senior
Indebtedness, that by its terms is expressly subordinate in right of payment to
the Senior Indebtedness unless by its terms such Indebtedness is expressly
junior to, or pari passu with, this Note in right of payment.
Section 11. Defaults and Remedies.
11.1 Event of Default. An "Event of Default" shall occur if:
(a) the Company defaults in the payment of interest on this
Note when the same becomes due and payable and such default continues for a
period of 15 Business Days, whether or not such payment shall be prohibited by
the provisions of Section 9 hereof;
(b) the Company defaults in the payment of principal of the
Note when the same becomes due and payable at maturity, upon redemption or
otherwise, whether or not such payment shall be prohibited by the provisions of
Section 9 hereof;
(c) the Company fails to comply with Section 10 hereof or
with Section 8.16 or Article 9 of the Note Purchase Agreement, and if such
failure is capable of being cured, as determined in good faith by the Purchaser,
such failure continues uncured for 30 days (or if, despite the Company's good
faith efforts to
<PAGE> 21
21
remedy such failure, such failure is not remedied within such 30 day period,
then such failure continues uncured for an additional 30 days);
(d) the Company fails to comply with any agreements (other
than those referred to in clauses (a), (b) or (c) above) in the Note Purchase
Agreement, this Note or the Registration Rights Agreement and, if such failure
is capable of being remedied, such failure continues unremedied for 30 days
(or if, despite the Company's good faith efforts to remedy such failure, such
failure is not remedied within such 30-day period, then if such failure
continues unremedied for an additional 60 days) after notice thereof by the
holders of a majority of the then outstanding principal amount of the Notes;
(e) the Company or any of its Subsidiaries pursuant to or
within the meaning of any United States bankruptcy laws or any applicable
bankruptcy, insolvency or similar laws of any other country (a "Bankruptcy
Law"):
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief
against it in an involuntary case,
(iii) consents to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or other similar
official (a "Custodian") of it or for all or substantially all of its
property, or
(iv) makes a general assignment for the benefit of
its creditors;
(f) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company or any of its
Subsidiaries in an involuntary case,
(ii) appoints a Custodian of the Company or any of
its Subsidiaries or for all or substantially all of its property, or
(iii) orders the winding up or liquidation of the
Company or any of its Subsidiaries and the order or decree remains unstayed
and in effect for 60 days;
(g) the Company or any of its Subsidiaries defaults in the
payment of Indebtedness aggregating in excess of $10,000,000 when due, after any
grace periods with respect thereto shall have expired and upon non-waiver by the
holders of any such Indebtedness and such default continues unremedied for 30
days,
<PAGE> 22
22
or there has been an acceleration of in excess of $10,000,000 aggregate
principal amount of Indebtedness of the Company by the holder thereof following
an event of default as defined in any mortgage, indenture, agreement or
instrument under which there may be issued or by which there may be secured or
evidenced such Indebtedness of the Company, whether such Indebtedness now exists
or shall hereafter be created; or
(h) a judgment for the payment of money the uninsured
portion of which exceeds $10,000,000 shall be rendered against the Company or
any of its Subsidiaries and shall remain undischarged for a period (during which
execution shall not be effectively stayed) of 60 days after the date on which
the judgement has been rendered, unless (i) no proceeding for execution of such
judgment has been commenced or (ii) any such proceeding has been stayed.
11.2 Acceleration. If an Event of Default occurs under clauses
(e) or (f) of Section 11.1, then the principal of and the accrued interest on
all Notes shall become due and payable immediately, whether or not notice of
such Event of Default shall have been given by any holder of Notes. If any other
Event of Default occurs and is continuing, holders holding a majority of the
then outstanding principal amount of the Notes by notice to the Company may
declare the principal of and accrued interest on all the Notes to be due and
payable immediately. Upon such declaration such principal and interest shall be
due and payable immediately. The holders of a majority of the then outstanding
principal amount of the Notes may rescind an acceleration and its consequences
if all existing Events of Default (other than nonpayment of principal or
interest that has become due solely because of the acceleration), have been
cured or waived and if the rescission would not conflict with any judgment or
decree. Nothing in this Section 11.2 shall limit or modify the provisions of
Section 9.
11.3 Other Remedies. If an Event of Default occurs and is
continuing, the holder of this Note may pursue any available remedy by
proceeding at law or in equity to collect the payment of principal of or
interest on this Note or to enforce the performance of any provision of this
Note, the Note Purchase Agreement or the Registration Rights Agreement.
The holder of this Note may maintain a proceeding even if it
does not possess the Note or does not produce it in the proceeding. Except as
otherwise provided by law, a delay or omission by this holder of this Note in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of or acquiescence in the
Event of Default. No remedy is exclusive of any other remedy. All available
remedies are cumulative.
11.4 Waiver of Defaults. Holders of a majority of the then
outstanding principal amount of the Notes may waive in writing a default and its
consequences (other than a default in the payment of principal of or interest on
this Note). When a default is
<PAGE> 23
23
waived, it is deemed cured, but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any consequent right.
11.5 Control by Majority. Holders of a majority in outstanding
principal amount of the Notes may direct the time, method and place of
conducting any proceeding for any legal remedy available to the holders;
provided, however, that if an "Event of Default" occurs under clause (a) or (b)
of Section 11.1, the holder of this Note, if it exercises its right to
accelerate the maturity of this Note, may proceed, subject to the next to last
sentence of Section 11.2, to enforce its remedies with or without the holders of
any other Notes at the time and place and in the manner determined by such
holder in its sole discretion.
Section 12. Definitions.
For the purposes of this Note, the following terms shall have
the meanings indicated:
"Affiliate" shall have the meaning ascribed to such term in
Rule 12b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended.
"Business Day" shall mean any day other than a Saturday,
Sunday or other day on which commercial banks in the City of New York are
authorized or required by law or executive order to close.
"Company" shall mean National HealthCare L.P., a Delaware
limited partnership and any permitted successors and assigns; provided that upon
the occurrence of the Special Reorganization the term "Company" shall refer to
NHC and any permitted successors and assigns.
"Contemplated Change of Control" shall mean such time as there
is a public announcement or filing of any document with the Securities and
Exchange Commission by the Company or any other Person which discloses an
actual, proposed or contemplated Change of Control of the Company (other than
the Special Reorganization).
"Credit Agreement" shall mean the Loan Agreements, Indentures
of Trust, Guarantees and other documents relating to Company Indebtedness with
or to State Street Bank and Trust Company of Connecticut, Third National Bank in
Nashville and/or the Toronto Dominion Bank (including the $50 million Credit
Revolving Loan, dated December 31, 1996, as amended May 15, 1997, among the
Company, SunTrust Bank, Nashville, N.A., as agent, and the lenders named
therein), as any of such documents may be amended, modified or replaced from
time to time.
"Current Market Price" per Unit shall mean, on any date
specified herein for the determination thereof, (a) the average daily Market
Price of the Units for the
<PAGE> 24
24
twenty trading days immediately preceding such date (if no Market Price is
available for any given trading day, such trading day shall not be included in
the determination of the Current Market Price), and (b) if the Units are not
then listed or admitted to trading on any national securities exchange or quoted
in the over-counter market, a market price per share determined at the Company's
expense by an appraiser chosen by the holders of a majority of the Notes with
the consent of the Company, which consent shall not be unreasonably withheld or,
if no such appraiser is so chosen more than twenty business days after notice of
the necessity of such calculation shall have been delivered by the Company to
the holders of the Notes, then by an appraiser chosen by the Company.
"Managing General Partner" has the meaning assigned to that
term in the Amended and Restated Agreement of Limited Partnership of the
Company, and, as of the date hereof, is NHC, Inc.; provided, that after National
HealthCare L.P. becomes NHC and NHR in the Special Reorganization all references
to the Managing General Partner in this Note shall become references to the
Company.
"Market Price" shall mean, per Unit, on any date specified
herein: (a) the closing price per share of the Units on such date published in
the Wall Street Journal or, if no such closing price on such date is published
in the Wall Street Journal, the closing price on such date, as officially
reported on the principal national securities exchange on which the Units are
then listed or admitted to trading; or (b) if the Units are not then listed or
admitted to trading on any national securities exchange but are designated as a
national market system security by the National Association of Securities
Dealers, Inc., the last trading price (the closing sale price) of the Units on
such date; or (c) if there shall have been no trading on such date or if the
Units are not so designated, the average of the reported closing bid and asked
prices of the Units, on such date as shown by the National Market System of the
National Association of Securities Dealers, Inc. Automated Quotations System
(NASDAQ) and reported by any member firm of the American Stock Exchange, Inc.
selected by the Company.
"NHC" shall mean National HealthCare Corporation, a Delaware
corporation, and its successors and assigns, NHC being one of two entities to be
formed in the restructuring of the Company from a limited partnership in the
Special Reorganization.
"NHR" shall mean National Health Realty, Inc., a Maryland
corporation, and one of two entities to be formed upon the restructuring of the
Company in the Special Reorganization, NHR being formed to hold substantially
all of the Company's real estate assets and certain related Indebtedness.
"Person" shall mean any individual, firm, corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, government (or an agency or political subdivision thereof)
or other entity of any kind, and shall include any successor (by merger or
otherwise) of such entity.
<PAGE> 25
25
"Special Reorganization" means the restructuring of National
HealthCare L.P. into NHC and NHR.
"Subsidiary" shall mean, with respect to any Person, a
corporation or other entity of which 50% or more of the voting power of the
voting equity securities or equity interest is owned, directly or indirectly, by
such Person.
"Units" shall mean the limited partnership units of the
Company or the securities of a Person which are issued in respect of, or in
exchange for, the limited partnership units of the Company if such Person is the
successor to the business or assets of the Company as the result of a merger,
consolidation, combination, reclassification, recapitalization or otherwise
(including, without limitation, any shares of capital stock of NHC issued in
connection with the conversion of the Company from a limited partnership to a
corporation in connection with the Special Reorganization), provided, that,
subject to Section 7.1, Units will not include any interests of NHR distributed
to holders of Units in connection with the Special Reorganization.
Section 13. Miscellaneous.
13.1 Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of New York without regard to
principles of conflicts of law.
13.2 Waiver of Notice. The Company, to the extent permitted by
law, hereby waives presentment, demand, notice, protest and all other demands
and notices in connection with delivery, acceptance, performance and enforcement
of this Note, except as specifically otherwise provided herein or in the Note
Purchase Agreement.
13.3 Amendment. The terms of this Note other than the
principal amount, the maturity date and the interest rate, may be amended only
by the written agreement of the holders of the majority of the then outstanding
principal amount of the Notes, and then only if identical amendments are made
simultaneously to all other then outstanding Notes. The principal amount,
maturity date and interest rate of this Note may be amended only by the written
agreement of the holder of this Note.
13.4 Reacquired Notes. Any Note converted, redeemed, purchased
or otherwise acquired by the Company or any of its Subsidiaries in any manner
whatsoever, shall be deemed canceled immediately upon such conversion,
redemption, purchase or other acquisition. None of the outstanding principal
amounts of any Notes held by the Company or any of its Subsidiaries or
Affiliates shall be deemed at
<PAGE> 26
26
any time to be outstanding for purposes of determining whether the holders of
any percentage of the outstanding principal amount of the Notes have taken or
desire to take any action as holders of the Notes.
13.5 Assignment. This Note shall not be assigned by the
Company or purchaser or holder of this Note except in accordance with the terms
and provisions of the Note Purchase Agreement.
NATIONAL HEALTHCARE L.P.
By: NHC, Inc.,
Managing General Partner
By: /s/ RICHARD F. LAROCHE, JR.
-------------------------------
Name: Richard F. LaRoche, Jr.
Title: Secretary and Vice
President
<PAGE> 1
EXHIBIT 21
Subsidiaries of National HealthCare Corporation
(DE)
1. City Corporation (TN)
2. Tennessee Management Services Corporation (TN)
3. Nutritional Support Services, L.P. (TN)
4. Knoxville Health Care Center, L.P. (TN)
5. National Healthcare Center of Fort Oglethorpe, L.P. (TN)
6. NHC Insurance Company (TN)
7. NHC/Delaware, Inc. (DE)
8. NHC/OP, L.P.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on National HealthCare L.P. dated February 3, 1997 and to all references
to our firm included in or made a part of this Form S-4 Registration Statement.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
November 18, 1997
