<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 33-85398
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 20, 1994)
$100,000,000
[LOGO NATIONAL HEALTH INVESTORS, INC.]
NATIONAL HEALTH INVESTORS, INC.
7.30% NOTES DUE 2007
------------------
National Health Investors, Inc. (the "Company") is hereby offering (the
"Offering") $100,000,000 aggregate principal amount of its 7.30% Notes due 2007
(the "Notes"). Interest on the Notes will be payable semi-annually in arrears on
January 15 and July 15, commencing on January 15, 1998. The Notes will mature on
July 16, 2007. The Notes have no sinking fund provisions.
The Notes will be represented by a single fully registered Note in
book-entry form (the "Global Security") registered in the name of the nominee of
The Depository Trust Company ("DTC"). Beneficial interests in the Global
Security will be shown on, and transfers thereof will be effected only through,
records maintained by DTC and, with respect to the beneficial owners' interests,
by DTC's Participants (as defined below). Except as described in this Prospectus
Supplement, Notes in definitive form will not be issued. See "Description of the
Notes -- Book-Entry System." Settlement for the Notes will be in same-day funds.
See "Description of the Notes -- Same-Day Settlement and Payment."
The Notes will be general unsecured obligations of the Company and will
rank equal with the Company's other unsecured and unsubordinated indebtedness.
See "Description of the Notes." The Notes will not be listed on any securities
exchange, and there can be no assurance that there will be a secondary market
for the Notes.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS (THE
"PROSPECTUS") FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSION(2) COMPANY(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note 99.651% .65% 99.001%
- -------------------------------------------------------------------------------------------------------------
Total $99,651,000 $650,000 $99,001,000
=============================================================================================================
</TABLE>
(1) Plus accrued interest, if any, on the Notes from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended ("Securities Act"). See "Underwriting."
(3) Before deducting estimated expenses of $250,000 payable by the Company.
------------------
The Notes are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that the Notes will be available for delivery on or
about June 30, 1997 through the facilities of the DTC.
------------------
SMITH BARNEY INC.
The date of this Prospectus Supplement is June 27, 1997
<PAGE> 2
[US MAP]
[PIE CHARTS]
National Health Investors, Inc.
[Geographic Diversification Map]
[Portfolio by Facility Type Pie Chart] [Portfolio by Operator Type Pie Chart]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE NOTES,
INCLUDING OVERALLOTMENT OR ENTERING STABILIZING BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information included or incorporated by
reference in this Prospectus Supplement and in the Appendices included as a part
hereof. Unless the context indicates otherwise, references herein to the Company
include all of the Company's subsidiaries.
THE COMPANY
The Company is a real estate investment trust ("REIT") which invests in
income producing health care properties primarily in the long-term care
industry. As of March 31, 1997, the Company had interests in mortgage
investments and net real estate owned by it totaling approximately $755.0
million. The Company's strategy is to provide current income for distribution to
stockholders through investments in health care related facilities, including
long-term care facilities, acute care hospitals and medical office buildings.
The Company intends to implement this strategy by acquiring additional
properties and making additional mortgage loans nationwide, predominately in the
long-term care industry.
As of March 31, 1997, the Company had approximately $755.0 million in
investments in 251 health care facilities (collectively, the "Health Care
Facilities") located in 26 states consisting of 206 long-term care facilities, 8
assisted living facilities, 8 retirement centers, 17 residential projects for
the developmentally disabled, 9 medical office buildings and 3 acute care
hospitals. These investments consisted of approximately $536.2 million aggregate
principal amount of loans to 47 borrowers, $182.4 million of purchase leaseback
agreements with 5 lessees and $36.4 million invested in real estate mortgage
investment conduit ("REMIC") mortgage pass-through certificates. Of the 251
facilities, 43 are leased by National HealthCare L.P. ("NHC") and an additional
9 facilities are managed by NHC. Consistent with its strategy of
diversification, the Company has reduced the portion of its portfolio operated
by NHC from 100% of total real estate assets on October 17, 1991 (the date of
inception of the Company), to 19% of total real estate assets on March 31, 1997.
In addition to NHC, other publicly traded owners, lessees or managers of the
Health Care Facilities include Beverly Enterprises, Inc., Columbia/HCA
Healthcare Corporation ("Columbia/HCA"), Genesis Health Ventures, Inc., Horizon
Healthcare Corporation, IATROS Health Network, Inc., Integrated Health Services,
Inc. ("IHS"), Integrated Living Communities, Inc., Living Centers of America,
Inc., Marriott Senior Living Services, Res-Care, Incorporated, Sun Healthcare
Group, Inc., Tenet Healthcare Corporation, Unison HealthCare Corporation or
their subsidiaries. At March 31, 1997, 71% of the total real estate assets of
the Health Care Facilities were operated by publicly traded operators.
As of April 30, 1997, the Company had commitments to invest $124.7 million
in certain facilities, including 12 long-term care facilities, 3 medical office
buildings, 13 assisted living centers and 1 retirement center. See
"Business -- Commitments." Included in such $124.7 million, the Company has
committed to loan up to an additional $22.3 million to Litchfield Asset
Management Corp. secured by 43 long-term care facilities, which are leased by a
wholly-owned subsidiary of IHS. The requirement to fund this amount is subject
to certain conditions and is limited to $3.7 million per year.
The Company commenced operations on October 17, 1991 with approximately
$121.8 million in net assets obtained when it acquired 40 skilled long-term care
facilities, three retirement centers and four first mortgage notes from NHC in
exchange for 7,306,570 shares of common stock of the Company (the "Common
Stock"). Concurrently, the Company assumed mortgage indebtedness and certain
other obligations of NHC related to the acquired properties. These 43 properties
were then leased to NHC. NHC is a publicly traded master limited partnership
which as of March 31, 1997 operated 107 long-term care facilities with a total
of 13,559 beds, 4 independent living units with 387 apartments, 10 assisted
living centers with 377 beds, and 33 home health care programs, generating
approximately 750,000 visits annually in the southeastern United States.
Since the Company commenced operations, NHC has provided advisory services
to the Company pursuant to an Advisory, Administrative Services and Facilities
Agreement. See "Business -- Advisory Agreement."
S-3
<PAGE> 4
The Company was incorporated in Maryland in 1991. The principal executive
offices of the Company are located at 100 Vine Street, Suite 1202, Murfreesboro,
Tennessee 37130; telephone number (615) 890-9100.
THE NOTES
The following summary of certain terms of the Notes is not complete and is
qualified by all of the terms contained in the Notes and in the related
Indenture. For a more detailed description of the terms of the Notes, see
"Description of the Notes."
Issue...................... $100,000,000 of 7.30% Notes due 2007.
Interest Payment Dates..... 7.30% per annum, payable semi-annually on January
15 and July 15 beginning January 15, 1998.
Maturity................... Ten years from original issuance.
Use of Proceeds............ To repay outstanding indebtedness of the Company
and for general corporate purposes, including
acquisition of mortgages and healthcare real
estate assets. See "Use of Proceeds."
Optional Redemption........ The Notes are redeemable at any time at the option
of the Company, in whole or from time to time in
part, at a redemption price equal to the sum of
(i) the principal amount of the Notes being
redeemed plus accrued interest thereon to the
redemption date and (ii) the Make-Whole Amount,
if any. See "Description of the Notes -- Optional
Redemption by the Company."
Mandatory Redemption....... The Company is not required to make any mandatory
redemption or annual sinking fund payments.
Ranking.................... The Notes will be general unsecured obligations of
the Company and will rank equally with the
Company's other unsecured and unsubordinated
indebtedness.
Covenants.................. The Company will not pledge or otherwise subject to
any lien any assets of the Company or its
subsidiaries unless the Notes are secured by such
pledge or lien equally and ratably with all other
obligations secured thereby so long as such
obligations shall be so secured; provided,
however, that such limitation will not apply to
liens securing obligations which do not in the
aggregate at any one time outstanding exceed 10%
of Consolidated Net Tangible Assets of the
Company and its consolidated subsidiaries and
will also not apply to certain other liens
specified in the Indenture. The Company will not
incur any (a) Senior Debt unless the aggregate
outstanding principal amount of Senior Debt will
not, at the time of such incurrence, exceed the
greater of (i) 150% of Capital Base or (ii) 225%
of Tangible Net Worth and (b) Non-Recourse Debt
unless the aggregate outstanding principal amount
of Senior Debt and Non-Recourse Debt will not, at
the time of such incurrence, exceed 225% of
Capital Base. For a more complete description of
the terms of and definitions used in the
foregoing limitations, see "Description of the
Notes -- Covenants."
S-4
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information of the Company
for the years ended December 31, 1994, 1995 and 1996 has been derived from the
Company's audited Consolidated Financial Statements, which have been audited by
Arthur Andersen LLP, independent accountants. The selected financial information
of the Company for the three months ended March 31, 1996 and 1997 is derived
from unaudited Consolidated Financial Statements of the Company and the related
notes thereto included and incorporated by reference herein. The unaudited
periods below, in the opinion of management, include all adjustments which are
necessary to fairly present the financial position and results of operations of
the Company. Results for the three months ended March 31, 1997 are not
necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIO, SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Mortgage interest income................................. $ 41,889 $ 53,919 $ 62,508 $ 14,656 $ 16,142
Rental income............................................ 27,345 32,061 34,579 8,075 9,796
Other interest income and other income................... 1,616 1,944 2,342 613 507
---------- ---------- ---------- ---------- ----------
Total revenues..................................... 70,850 87,924 99,429 23,344 26,445
---------- ---------- ---------- ---------- ----------
Expenses:
Interest................................................. 22,053 27,205 20,633 5,038 5,430
Depreciation and amortization............................ 6,617 7,657 7,947 1,809 2,128
General and administrative............................... 3,300 3,370 3,685 859 945
---------- ---------- ---------- ---------- ----------
Total expenses..................................... 31,970 38,232 32,265 7,706 8,503
---------- ---------- ---------- ---------- ----------
Net income................................................. $ 38,880 $ 49,692 $ 67,164 $ 15,638 $ 17,942
========== ========== ========== ========== ==========
Net income applicable to common stock...................... $ 31,151 $ 43,079 $ 64,046 $ 14,658 $ 17,418
PER SHARE:
Net income per common share, primary(1).................... $ 2.35 $ 2.63 $ 2.92 $ 0.70 $ 0.73
Net income per common share, fully diluted(2).............. $ 2.28 $ 2.49 $ 2.80 $ 0.67 $ 0.71
Dividends declared per common share........................ $ 2.38 $ 2.61 $ 2.84 $ 0.70 $ 0.74
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate properties, net................................ $ 118,152 $ 123,195 $ 184,255 $ 122,079 $ 182,429
Mortgage and other notes receivable........................ 475,253 469,628 519,229 468,890 536,235
Investment in REMIC........................................ 32,882 38,140 36,562 38,033 36,378
Total assets............................................... 635,423 641,916 751,097 670,848 767,533
Total debt................................................. 386,994 255,169 309,743 274,686 303,145
Stockholders' equity....................................... 223,879 356,981 409,683 359,703 431,731
OTHER DATA:
Funds from operations, fully diluted(3).................... $ 52,761 $ 62,769 $ 83,180 $ 19,636 $ 22,083
Ratio of earnings to fixed charges(4)...................... 2.8x 2.8x 4.3x 4.1x 4.3x
Ratio of earnings to the sum of Fixed Charges and Preferred
Stock Dividends(4)....................................... 2.0x 2.3x 3.7x 3.4x 3.9x
Weighted average common shares outstanding, primary........ 13,245,521 16,396,403 21,938,631 20,852,460 24,009,830
Weighted average common shares outstanding, fully
diluted.................................................. 20,839,196 22,822,642 27,235,652 26,931,633 28,492,973
</TABLE>
- ---------------
(1) Calculated by dividing net income applicable to common stock by weighted
average common shares outstanding, primary.
(2) Fully diluted per share computations assume the conversion of convertible
debentures, the conversion of cumulative convertible preferred stock and the
exercise of all stock options using the treasury stock method.
(3) Funds from operations, fully diluted means net income plus depreciation and
interest expense on convertible debentures less any capital gains or plus
any capital losses. Funds from operations does not represent cash generated
from operating facilities in accordance with generally accepted accounting
principles, and is not necessarily indicative of cash available to fund cash
needs. Funds from operations should not be considered as an alternative to
net income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
(4) For purposes of calculating the ratio of earnings to fixed charges of the
Company, "earnings" equal the sum of net income and Fixed Charges. "Fixed
Charges" consists of interest on all indebtedness. To calculate the ratio of
earnings to the sum of Fixed Charges and Preferred Stock Dividends, net
income applicable to common stock has been added to interest and Preferred
Stock Dividends and that sum has been divided by the sum of Interest
Expenses and Preferred Stock Dividends. For years ended December 31, 1992
and 1993 the ratio of earnings to fixed charges was 1.7 and 2.4,
respectively.
S-5
<PAGE> 6
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company (i) as of March 31, 1997 and (ii) as adjusted to reflect the Offering
hereby and the application of the net proceeds therefrom as described under "Use
of Proceeds."
The capitalization table should be read in conjunction with the Company's
consolidated financial statements and the related notes thereto incorporated
herein.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
---------------------------
ACTUAL (1) AS ADJUSTED(1)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Indebtedness and other liabilities:
Bank Revolving Line of Credit............................. $ 14,500 $ -0-
Bank Term Loan............................................ 100,000 15,749
Notes payable, net........................................ 59,587 59,587
7.30% Senior Notes, net, due 2007......................... -0- 100,000
Convertible Debentures:
10.00% Senior convertible debentures, net, due 2006(2).... 230 230
7.000% Convertible debentures, net, due 2004(3)........... 60,000 60,000
7.000% Convertible debentures, net, due 2006(4)........... 6,406 6,406
7.375% Convertible debentures, net, due 1998(5)........... 8,635 8,635
7.750% Convertible debentures, net, due 2001(6)........... 53,787 53,787
-------- --------
Total Debt........................................ $303,145 $304,394
======== ========
Shareholders' Equity:
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; 943,297 shares of cumulative convertible
preferred stock issued and outstanding; stated at
liquidation preference of $25 per share................ 23,582 23,582
Common Stock, $.01 par value; 40,000,000 shares
authorized; 24,295,420 shares issued and outstanding... 243 243
Capital in excess of par value............................ 420,475 420,475
Cumulative net income..................................... 213,456 213,456
Cumulative dividends...................................... (226,025) (226,025)
-------- --------
Total stockholders' equity........................ 431,731 431,731
-------- --------
Total capitalization.............................. $734,876 $736,125
======== ========
</TABLE>
- ---------------
(1) All indebtedness is shown net of underwriting fees and other costs of
issuance.
(2) $20.00 per share conversion price.
(3) $37.50 per share conversion price.
(4) Conversion price equal to $110% of market price on the dates of issuance
ranging from $29.625 - $35.375.
(5) $27.25 per share conversion price.
(6) $31.625 per share conversion price.
USE OF PROCEEDS
The net proceeds from the sale of the Notes offered hereby are estimated to
be $98,751,000 (the "Offering") after deducting the underwriting discount and
estimated offering expenses payable by the Company. The Company anticipates
using the net proceeds for the full repayment of the Company's revolving line of
credit which at March 31, 1997 totaled $14,500,000 and at June 10, 1997 totaled
$35,000,000. The Company intends to use the balance to partially prepay the
Company's term loan which totaled $100 million at June 10, 1997. However, the
Company continually reviews the possibility of making real estate investments
and may choose to use a portion of the proceeds for such uses reducing the
amount of the term loan to be prepaid. The proceeds of both loans were used to
finance acquisition of mortgage receivables, real estate assets, repayment of
debt and general corporate purposes. Both loans bear interest at the lender's
respective prime rate or LIBOR plus 1% per annum, mature on or before August 15,
2001 and can be prepaid without premium.
S-6
<PAGE> 7
BUSINESS
The Company is a REIT which invests in income producing health care
properties primarily in the long-term care industry. As of March 31, 1997, the
Company had interests in net real estate owned by it, mortgage investments and
REMIC investments totaling approximately $755 million. The Company's strategy is
to provide current income for distribution to stockholders through investments
in health care related facilities, including long-term care facilities, acute
care hospitals, medical office buildings, retirement centers and assisted living
facilities. The Company intends to implement this strategy by acquiring
additional properties and making additional mortgage loans nationwide,
predominately in the long-term care industry.
As of March 31, 1997, the Company had approximately $755 million in
investments in 251 health care facilities located in 26 states consisting of 206
long-term care facilities, 3 acute care hospitals, 9 medical office buildings, 8
assisted living facilities, 8 retirement centers and 17 residential projects for
the developmentally disabled. These investments consist of approximately $536.2
million aggregate principal amount of loans to 47 borrowers and $182.4 million
of purchase leaseback agreements with 5 lessees and $36.4 million invested in
REMIC pass through certificates. Of these 251 facilities, 43 are leased to NHC
and 9 additional facilities are managed by NHC. Consistent with its strategy of
diversification, the Company has reduced the portion of its portfolio operated
by NHC from 100.0% of total assets on October 17, 1991 (the date of inception of
the Company), to 19% of total assets on March 31, 1997.
The investments as of March 31, 1997, are summarized in the following
tables by facility type, location and type of investment:
<TABLE>
<CAPTION>
INVESTMENTS
-------------------------------------------------------------------
NUMBER OF MORTGAGE PERCENT OF
FACILITIES LOANS OWNED TOTAL TOTAL
---------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Long-term care facilities:
Alabama.................. 3 $ 2,929,403 $ 4,146,526 $ 7,075,929 0.94%
Arizona.................. 4 9,293,769 4,933,846 14,227,615 1.88%
Colorado................. 8 31,883,131 0 31,883,131 4.22%
Florida.................. 32 122,157,093 25,583,371 147,740,464 19.57%
Georgia.................. 9 33,907,266 558,315 34,465,581 4.56%
Idaho.................... 3 7,326,013 7,072,846 14,398,859 1.91%
Kansas................... 8 22,361,385 0 22,361,385 2.96%
Kentucky................. 4 4,008,762 1,905,155 5,913,917 0.78%
Louisiana................ 19 43,721,232 0 43,721,232 5.79%
Massachusetts............ 2 10,000,000 0 10,000,000 1.32%
Maryland................. 1 1,475,000 0 1,475,000 0.20%
Missouri................. 16 24,200,379 18,301,963 42,502,342 5.63%
New Hampshire............ 5 37,042,563 0 37,042,563 4.91%
North Carolina........... 1 6,010,387 0 6,010,387 0.80%
Ohio..................... 2 4,000,000 0 4,000,000 0.53%
Pennsylvania............. 3 7,250,721 0 7,250,721 0.96%
South Carolina........... 5 5,620,397 7,620,976 13,241,373 1.75%
Tennessee................ 28 21,170,804 23,664,055 44,834,859 5.94%
Texas.................... 14 27,518,365 0 27,518,365 3.64%
Virginia................. 7 22,895,580 2,112,426 25,008,006 3.31%
West Virginia............ 7 19,221,834 0 19,221,834 2.55%
REMIC(1)................. 25 36,378,179 0 36,378,179 4.82%
--- ------------ ----------- ------------ ------
Long-term care........... 206 $500,372,263 $95,899,479 $596,271,742 78.97%
--- ------------ ----------- ------------ ------
Acute care hospitals:
Kentucky................. 1 $ 0 $ 6,552,335 $ 6,552,335 0.87%
Louisiana................ 2 18,870,020 0 18,870,020 2.50%
--- ------------ ----------- ------------ ------
Acute care hospitals..... 3 $ 18,870,020 $ 6,552,335 $ 25,422,355 3.37%
--- ------------ ----------- ------------ ------
</TABLE>
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<PAGE> 8
<TABLE>
<CAPTION>
INVESTMENTS
-------------------------------------------------------------------
NUMBER OF MORTGAGE PERCENT OF
FACILITIES LOANS OWNED TOTAL TOTAL
---------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Medical Office Buildings:
Arizona.................. 1 $ 8,571,098 $ 0 $ 8,571,098 1.14%
Florida.................. 1 0 3,053,702 3,053,702 0.40%
Kentucky................. 1 0 3,211,035 3,211,035 0.43%
Louisiana................ 1 0 2,729,076 2,729,076 0.36%
Tennessee................ 1 312,875 0 312,875 0.04%
Texas.................... 2 6,585,291 6,370,314 12,955,605 1.72%
Utah..................... 1 0 5,898,948 5,898,948 0.78%
Washington............... 1 6,207,203 0 6,207,203 0.82%
--- ------------ ----------- ------------ ------
Medical Office
Buildings............. 9 $ 21,676,467 $21,263,075 $ 42,939,542 5.69%
--- ------------ ----------- ------------ ------
Retirement centers:
Colorado................. 1 $ 3,332,284 $ 0 $ 3,332,284 0.44%
Florida.................. 1 8,695,005 0 8,695,005 1.15%
Missouri................. 1 0 2,886,990 2,886,990 0.38%
New Hampshire............ 2 4,860,810 0 4,860,810 0.64%
Tennessee................ 2 0 2,467,901 2,467,901 0.33%
Texas.................... 1 3,599,022 0 3,599,022 0.48%
--- ------------ ----------- ------------ ------
Retirement centers....... 8 $ 20,487,121 $ 5,354,891 $ 25,842,012 3.42%
--- ------------ ----------- ------------ ------
Assisted living:
Florida.................. 3 $ 1,711,727 $25,380,950 $ 27,092,677 3.59%
New Hampshire............ 2 3,351,367 0 3,351,367 0.44%
New Jersey............... 1 0 16,977,868 16,977,868 2.25%
Texas.................... 1 0 10,999,892 10,999,892 1.46%
Virginia................. 1 1,084,000 0 1,084,000 0.14%
--- ------------ ----------- ------------ ------
Assisted living.......... 8 $ 6,147,094 $53,358,710 $ 59,505,804 7.88%
--- ------------ ----------- ------------ ------
Developmentally disabled:
Florida.................. 14 $ 3,909,883 $ 0 $ 3,909,883 0.52%
Tennessee................ 3 1,149,894 0 1,149,894 0.15%
--- ------------ ----------- ------------ ------
Developmentally
disabled.............. 17 $ 5,059,777 $ 0 $ 5,059,777 0.67%
--- ------------ ----------- ------------ ------
Total Investments.......... 251 $572,612,742 $182,428,490 $755,041,232 100.00%
=== ============ =========== ============ ======
</TABLE>
- ---------------
(1) Includes number of operations in 1993 REMIC Investments only. The 1995 REMIC
investments have been excluded due to immaterial ownership in total 1995
REMIC portfolio. See " Business -- Investment in REMIC Certificates."
TYPES OF HEALTH CARE FACILITIES
Long-term care facilities. As of March 31, 1997, the Company owned and
leased 43 licensed long-term care facilities, 40 of which were operated by NHC.
It also had outstanding first mortgage loans on 138 additional licensed
long-term care facilities. All of these facilities provide some combination of
skilled and intermediate nursing and rehabilitative care, including speech,
physical and occupational therapy. The operators of the long-term care
facilities receive payment from a combination of private pay sources and
government programs such as Medicaid and Medicare. Long-term care facilities are
required to obtain state licenses and are highly regulated at the federal, state
and local level. Most long-term care facilities must obtain certificates of need
from the state before opening or expanding such facilities.
Acute and long-term care hospitals. As of March 31, 1997, the Company
owned and leased one acute care hospital and had outstanding first mortgage
loans on one additional operating acute care hospital and one
S-8
<PAGE> 9
long-term care hospital. Acute care hospitals provide a wide range of inpatient
and outpatient services and are subject to extensive federal, state and local
legislation and regulation. Long-term care hospitals provide specialty care
services for chronic care patients, whose average length of stay must exceed
twenty-five days. Acute and long-term care hospitals undergo periodic
inspections regarding standards of medical care, equipment and hygiene as a
condition of licensure. Services provided by acute and long-term care hospitals
are generally paid for by a combination of private pay sources and governmental
programs.
Medical office buildings. As of March 31, 1997, the Company owned and
leased four medical office buildings and has a ground sublease for and further
subleases one medical office building. In addition, the Company had first
mortgage loans on four medical office buildings, one of which is undergoing a
significant expansion. Medical office buildings are specifically configured
office buildings whose tenants are primarily physicians and other medical
practitioners. Medical office buildings differ from conventional office
buildings due to the special requirements of the tenants and their patients. The
lessee of the Company leases individual office space to the physicians or other
medical practitioners. The lessee is responsible to the Company for the lease
obligations of the entire building, regardless of its ability to lease the
individual office space.
Assisted Living Facilities. As of March 31, 1997, the Company owned four
assisted living facilities leased to a subsidiary of Marriott International and
has first mortgages on four additional assisted living projects. Assisted living
unit facilities are free standing or are attached to long-term care facilities
or retirement facilities and provide basic room and board functions for the
elderly. Some assisted living projects include licensed long-term care (nursing
home) beds. On-site staff are normally available to assist in minor medical
needs on an as needed basis. Certificates of need are normally not necessary to
build these projects.
Retirement Centers. As of March 31, 1997, the Company owned three
retirement centers, all of which are leased to NHC, and has first mortgages on
five others. Retirement centers offer specially designed residential units for
the active and ambulatory elderly and provide various ancillary services for
their residents including restaurants, activity rooms and social areas. Charges
for services are paid from private sources without assistance from government
programs. Retirement centers may be licensed and regulated in some states but do
not require the issuance of a certificate of need such as is normally required
for long-term care facilities.
Residences for the developmentally disabled. As of March 31, 1997, the
Company had outstanding first mortgage notes on 17 residences for the
developmentally disabled. In general, residences for the developmentally
disabled provide custodial care which includes food, lodging, education and
transportation services in small home-like environments which accommodate six
mentally and developmentally disabled persons. These community based services
are replacing the large state institutions which have historically provided care
to the developmentally disabled. Services to the developmentally disabled are
primarily paid for by state Medicaid programs.
NATURE OF INVESTMENTS
The Company's investments are typically structured as either purchase
leaseback transactions or mortgage loans. The Company also provides construction
loans for facilities for which it has already committed to provide long-term
financing or which agree to enter into a lease with the Company upon completion
of the construction. The capitalization rates of the Company's leases and the
interest rates on the mortgage loans and construction loans have generally
ranged between 10% and 12% per annum. For transactions closed in 1996 and the
first quarter of 1997, rates were slightly lower than 1995 and generally ranged
from 10% to 11%. Generally, the Company charges a commitment fee of 1% based on
the purchase price of the property of a purchase leaseback or the total
principal loan amount of a mortgage loan. In instances where construction
financing has also been supplied, there is generally an additional 1% commitment
fee for the construction financing. The Company believes its lease terms,
mortgage loan and construction loan terms are competitive in the market place.
All of the Health Care Facilities are current in their payments of principal and
interest or rent. Typical characteristics of these transactions are as follows:
Mortgage Loans. In general, the term of the Company's mortgage loans is 10
years with the principal amortized over 20 to 25 years and a balloon payment due
at the end of the 10 year term. Certain mortgage
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loans have an additional interest component which is based on the greater of
3-5% of the escalation of gross revenues at the project level or the Consumer
Price Index ("CPI") or fixed rate increases. Generally, medical office buildings
have an increase in their rent or mortgage payments tied to a percentage of the
increase in CPI, a fixed percentage or a fixed basis point increase. Amounts
received by the Company with respect to the escalators, while not currently
material to net income, are expected to increase in future periods. Certain of
the Company's mortgages require that the interest rate on mortgage loans be
reset five years from the date of the original loan at the greater of the then
10-year U.S. Treasury Notes yield plus 450 to 500 basis points or the then
current interest rate provided for in the mortgage. In certain of its mortgage
loans, the Company has received an equity participation which allows the Company
to share in a portion of any appreciation of the equity value of the underlying
property. The Company does not expect these equity participations to constitute
a significant or frequent source of income. Most of the Company's mortgage loans
with certain exceptions have prepayment penalties starting at 10% during the
first year and decreasing by 1% each year thereafter with certain exceptions. In
certain cases, the owner of the property has committed to make minimum annual
capital improvements for the purpose of maintenance or upgrading the facility
and to indemnify the Company against environmental risks.
In most circumstances, the Company requires some additional form of
security and/or collateral beyond that provided by the lien of a mortgage. This
additional security or collateral may consist of some or all of the following:
(a) a guaranty by the borrowers' parent, if any, affiliates or individual
principals; (b) an assignment of the leases and rents relating to the mortgaged
property; (c) cross collateralization among loans; (d) security interest in
other real property; (e) an assignment of personal property including accounts
receivable; (f) letters of credit or certificates of deposit, and (g) other
intangibles.
Leases. The Company's leases generally have an initial leasehold term of
10 to 14 years with one or more five year renewal options. The leases are
"triple net leases" under which the tenant is responsible to pay all taxes,
utilities, insurance premium costs, repairs and other charges relating to the
ownership and operation of the Health Care Facilities. The tenant is generally
obligated at its expense to keep all improvements and fixtures and other
components of the Health Care Facilities covered by "all risk" insurance in an
amount equal to at least the full replacement costs thereof and to maintain
specified minimal personal injury and property damage insurance, protecting the
Company as well as the tenant at such Health Care Facility. Certain of the
leases also require the tenant to indemnify and hold harmless the Company from
all claims resulting from the use and occupancy of each Health Care Facility by
the tenant and related activities, as well as to indemnify the Company against
all costs related to any release, discovery, clean-up and removal of hazardous
substances or materials on, or other environmental responsibility with respect
to, each Health Care Facility, however the assisted living facility leases are
nonrecourse as to the tenants except in certain specified circumstances so that
the sole remedy of the Company as to such matters is to terminate the leases.
All of the Company's leases contain annual escalators in rent payments.
Generally, leases have an increase in their rent tied to the greater of 3-5% of
the increase in revenue or a percentage of the increase in CPI or increase by a
fixed percentage or fixed basis point per year. Generally, the
purchase/leaseback and loan agreements the Company enters into with the acute
care hospital and medical office building properties give the lessee or a third
party an option to purchase the underlying property at the greater of i) the
then fair market value as established by independent appraisers or ii) the sum
of the land costs, construction costs and any additional capital improvements
made to the property by the Company. None of the Company's other leases have
options to purchase. In addition, most of the leases contain a right of first
refusal for the lessee if the Company receives and intends to accept an offer to
buy or lease the underlying leased property.
Some of the leases are guaranteed by a parent corporation, if any, of the
lessee or affiliates of the lessee. In some leases, the third party operator or
a third party guarantees some portion of the lease obligations, usually for a
fixed period such as six months or one year. Some leases are further backed by a
security interest in other collateral such as machinery, equipment, furnishings
and other personal property of the lessee.
Construction loans. The Company also provides construction loans that by
their terms convert either into purchase leaseback transactions or mortgage
loans upon the completion of the construction of the facility. Generally, the
interest rates on the construction loans range from 10% to 12%. The term of such
construction
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loans are for a period which commences upon the closing of such loan and
terminates upon the earlier of (a) the completion of the construction of the
applicable facility or (b) a specific date. During the term of the construction
loan, funds are usually advanced pursuant to draw requests made by the borrower
in accordance with the terms and conditions of the loan. In addition to the
security of the lien against the property, the Company will generally require
additional security and collateral in the form of either payment and performance
completion bonds or completion guarantees by the borrower's parent, affiliates
of the borrower or one or more of the individuals who control the borrower.
OPERATORS
The majority (by total assets) of the Health Care Facilities are operated
by third party management companies on behalf of the owner or lessee. The
balance of the Health Care Facilities are operated by the owner or lessee. As of
March 31, 1997, the Health Care Facilities were primarily operated by
publicly-owned companies (71% of total investment) or multistate private chain
health care entities (20% of total investments). Generally, a third party
operator of a facility is not liable to the Company under the mortgage or lease;
however, the Company considers the operator to be an important factor in
determining the creditworthiness of the investment and the Company generally has
the right to approve any changes in operators. On some investments, the third
party operator of a facility guarantees at least a portion of the lease or
mortgage. As of March 31, 1997, operators of the Health Care Facilities included
NHC, Beverly Enterprises, Inc., Columbia/HCA, Genesis Health Ventures, Inc.,
Horizon Healthcare Corporation, IATROS Health Network, Inc., IHS, Integrated
Living Communities, Inc., Living Centers of America, Inc., Marriott Senior
Living Services, Res-Care, Incorporated, Sun Healthcare Group, Inc., Tenet
Healthcare Corporation, Unison HealthCare Corporation.
INVESTMENT IN REMIC CERTIFICATES
In 1993, the Company purchased $34.2 million principal amount of SC
Commercial Mortgage Pass-Through Certificates, Series 1993-1 (the "1993
Certificates"), which qualify as a REMIC. The 1993 Certificates consist of nine
classes issued in the aggregate principal amount of $172.9 million. The 1993
Certificates represent the entire beneficial ownership interest in a trust fund
consisting of a pool of 33 mortgage loans generally secured by a first lien on a
single property that provides long-term care and/or assisted living care. All
loans bear a fixed rate of interest, the weighted average of which is 9.308%.
The Company's investment in the 1993 Certificates includes Class D and Class E
1993 Certificates which bear interest and Class I 1993 Certificates which have
no principal amount and are not entitled to distributions of principal but are
entitled to certain priority interest distributions. On December 28, 1995, the
Company purchased $7,305,000 face amount (purchase price was $6,158,000) of SC
Commercial Mortgage Pass Through Certificates, Series 1995-1 (the "1995
Certificates") which qualify as a REMIC. The 1995 Certificates consist of ten
classes issued in the aggregate principal amount of $140,258,000. The 1993 and
1995 Certificates were purchased in a private placement offering and are not
readily marketable or freely tradable. See "-- Investment in REMIC Certificates"
in the Prospectus.
NHC MASTER AGREEMENT TO LEASE
The Master Agreement to Lease (the "Master Agreement") with NHC covering 40
nursing homes and three retirement centers, sets forth certain terms and
conditions applicable to all leases entered into by and between NHC and the
Company (each a "Lease", and together, the "Leases"). The Leases are for an
initial term expiring on December 31, 2001 with two five year renewal options at
the election of NHC which allow for the renewal of the leases on an omnibus
basis only unless otherwise specifically agreed in writing by the Company.
During the initial term and the first renewal term (if applicable), NHC is
obligated to pay annual base rent for the respective Health Care Facilities
aggregating $15.2 million plus additional rent described below on the properties
initially sold to the Company. Additionally, there is $1.4 million in base rent
per year as a result of expansion of three of the facilities. During the second
renewal term, NHC is required to pay annual base rent based on the then fair
market rental of the property as negotiated at that time between NHC and the
Company. The Master Agreement also obligates NHC to pay as additional rent under
each Lease
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(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
the Company 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 Lease.
In addition, each year after 1992 (the first full calendar year of the term of
the Master Agreement), NHC is obligated to pay percentage rent to the Company
equal to 3% of the amount by which gross revenues of each NHC-leased Health Care
Facility in such later year exceeds the gross revenues of such Health Care
Facility in 1992. NHC paid $1.7 million as percentage rent for 1996.
The Master Agreement is a "triple net lease", under which NHC is
responsible to pay all taxes, utilities, insurance premium costs, repairs
(including structural portions of the buildings, constituting a part of the
Health Care Facilities) and other charges relating to the ownership and
operation of the Health Care Facilities. NHC is obligated at its expense to keep
all improvements and fixtures and other components of the Health Care Facilities
covered by "all risk" insurance in an amount equal to the full replacement costs
thereof, insurance against boiler explosion and similar insurance, flood
insurance if the land constituting the Health Care Facility is located within a
designated flood plain area and to maintain specified minimal personal injury
and property damage insurance, protecting the Company as well as NHC at such
Health Care Facility. NHC is also obligated to indemnify and hold harmless the
Company from all claims resulting from the use and occupancy of each Health Care
Facility by NHC or persons claiming under NHC and related activities, as well as
to indemnify the Company against, all costs related to any release, discovery,
cleanup and removal of hazardous substances or materials on, or other
environmental responsibility with respect to, each Health Care Facility leased
by NHC.
COMMITMENTS
At April 30, 1997, the Company committed to make loans and to fund
construction in progress to third parties for $124.7 million. Commitments
include construction financings which have closed but which have not been fully
funded as of April 30, 1997 as well as investment amounts for which the Company
has received a commitment fee but which have not been funded as of such date.
The following table sets forth certain information regarding the Company's
commitments as of April 30, 1997.
<TABLE>
<CAPTION>
COMMITMENTS
NUMBER OF ----------------------------
FACILITY TYPE FACILITIES CURRENT FUTURE TOTAL
------------- ---------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term care......................................... 12 $30,073 $18,600 $ 48,673
Retirement Centers..................................... 1 551 0 551
Medical office buildings............................... 3 9,998 0 9,998
Assisted Living........................................ 13 40,464 25,000 65,464
-- ------- ------- --------
Total Commitments.................................... 29 $81,086 $43,600 $124,686
== ======= ======= ========
</TABLE>
ADVISORY AGREEMENT
The Company entered into the Advisory Agreement on October 15, 1991 with
NHC as "Advisor" under which NHC provides management and advisory services to
the Company during the term of the Advisory Agreement. The Company believes the
Advisory Agreement benefits the Company by providing it access to NHC's
experience in the ownership and management of long-term care facilities and
retirement centers. Under the Advisory Agreement, the Company engaged NHC to use
its best efforts (a) to present to the Company a continuing and suitable
investment program consistent with the investment policies of the Company
adopted by the Company's Board of Directors from time to time; (b) to manage the
day-to-day affairs and operations of the Company; and (c) to provide
administrative services and facilities appropriate for such management. In
performing its obligations under the Advisory Agreement, NHC is subject to the
supervision of and policies established by the Company's Board of Directors.
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The Advisory Agreement was initially for a stated term which expired
December 31, 1996. The Advisory Agreement is now on a year to year term. Either
party may terminate the Advisory Agreement at any time on 90 days notice, and
the Company may terminate the Advisory Agreement for cause at any time. For its
services under the Advisory Agreement, NHC is entitled to annual compensation in
a base amount of $1.625 million. Under the Advisory Agreement, the Company
reimburses NHC for certain out of pocket expenses including those incurred in
connection with borrowed money, taxes, fees to independent contractors, legal
and accounting services and stockholder distributions and communications. For
1993 and later years the annual compensation is calculated on a formula which is
related to the increase in fully diluted Funds from Operations per common share
(as defined in the Advisory Agreement). In 1996, the annual compensation under
the Advisory Agreement was $3.1 million.
Pursuant to the Advisory Agreement, NHC manages all of the day-to-day
affairs of the Company and provides all such services through NHC personnel. The
Advisory Agreement provides that without regard to the amount of compensation
received by NHC under the Advisory Agreement, NHC shall pay all expenses in
performing its obligations including the employment expenses of the officers and
directors and NHC personnel providing services to the Company. The Advisory
Agreement further provides that the Company shall pay the expenses incurred with
respect to and allocable to the prudent operation and business of the Company
including any fees, salaries, and other employment costs, taxes and expenses
paid to directors, officers and employees of the Company who are not also
employees of NHC. Currently, other than the directors who are not employees of
NHC, the Company does not have any officers or employees who are not also
employees of NHC. The Company's two executive officers, Mr. Adams and Mr.
LaRoche, are employees of NHC and all of their fees, salaries and employment
costs are paid by NHC.
GOVERNMENT REGULATION AND HEALTH CARE
Although President Clinton's Health Security Act failed to be enacted into
law, it served as a catalyst for change in the U.S. health care industry,
resulting in an increased emphasis on managed care and consolidation as a method
of reducing health care costs in both the public and private sectors.
The Clinton administration and Congress have indicated that reduction of
U.S. health care costs continues to be a priority. On August 21, 1996, President
Clinton signed into law a modified version of the Kassebaum-Kennedy health
insurance reform bill, named the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA"). In addition to giving increased assurance of the
continued availability of health insurance regardless of medical condition,
HIPAA also expands the government's programs for detecting and combating fraud
and abuse in health care delivery, including the imposition of fines and
recoupment of overpayments to providers. It is not possible to predict what
additional actions Congress might take to reduce health care costs. Although
cost-cutting measures enacted thus far have not had a material adverse effect on
the Company that the Company is aware of, future significant reductions in
reimbursement for long-term care facilities or hospitals could adversely affect
the ability of the Company's tenants to pay amounts due under their leases or
debt instruments, as could actions against the Company's lessees or borrowers
for health care fraud and abuse or their failure to meet health care quality
standards. Failure of the lessees or borrowers to make their lease or debt
payments would have a direct and material adverse impact on the Company.
MANAGEMENT
The following table sets forth the directors and executive officers of the
Company as of the date of this Prospectus Supplement. Each executive officer of
the Company is elected by the directors, serves at the pleasure of the Board of
Directors and holds office until a successor is elected or until the earliest of
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resignation or removal. Directors hold office until the annual meeting for the
year in which their term expires and until their successor is elected and
qualified. A director may be removed from office for cause only.
<TABLE>
<CAPTION>
DIRECTOR
TERM
NAME AGE POSITION WITH THE COMPANY EXPIRES
- ---- --- ------------------------- --------
<S> <C> <C> <C>
W. Andrew Adams............................. 51 Director and President 1999
Richard F. LaRoche, Jr...................... 51 Director and Secretary 1998
Jack Tyrrell................................ 50 Director 1999
Robert T. Webb.............................. 52 Director 2000
Ted H. Welch................................ 63 Director 1998
</TABLE>
W. ANDREW ADAMS has been President and a director of the Company since its
inception in 1991. Mr. Adams has also been President of NHC since 1974. He has
served on the Multi-Facility Committee of the American Health Care Association,
the trade association for long-term health care center companies. He has an
M.B.A. from Middle Tennessee State University. Mr. Adams serves on the Board of
Directors of David Lipscomb University in Nashville, Tennessee and on the Board
of Directors of SunTrust Bank, Nashville, N.A., in Nashville, Tennessee.
RICHARD F. LAROCHE, JR. has served as Vice President, Secretary and a
director of the Company since its inception in 1991. Mr. LaRoche has also been
General Counsel of NHC since 1971, Secretary of NHC since 1974 and Senior Vice
President of NHC since 1986. He received a J.D. from Vanderbilt University and
an A.B. from Dartmouth College. Mr. LaRoche is responsible for legal affairs,
acquisitions and finance for both companies.
JACK TYRRELL has served as a director of the Company since its inception in
1991. Mr. Tyrrell is a partner of Richland Ventures, L.P. and Richland Ventures,
L.P. II, venture capital firms based in Nashville, Tennessee which were founded
in May 1994 and September 1996. He also currently serves as a general partner of
Lawrence, Tyrrell, Ortale & Smith and Lawrence, Tyrrell, Ortale & Smith, II,
L.P., venture capital partnerships based in Nashville, Tennessee and New York,
New York. Mr. Tyrrell serves as a director of Regal Cinemas, and Premier Parks,
both of which are publicly held entities.
ROBERT T. WEBB has served as a director of the Company since its inception
in 1991. Mr. Webb is the owner of commercial buildings and rental properties in
the Middle Tennessee area, a subdivision developer, and a partner in commercial
properties located in Rosslyn, Virginia and Phoenix, Arizona. Mr. Webb has been
President and the sole owner of Webb's Refreshments, Inc. which has been in
operation serving the Middle Tennessee area since 1976. Mr. Webb attended David
Lipscomb College and received a B.A. in business marketing from Middle Tennessee
State University in 1969.
TED H. WELCH has served as a director of the Company since its inception in
1991. Mr. Welch has owned and operated income producing real estate (primarily
office buildings) in the southeastern United States since 1976. From 1953 until
1971, Mr. Welch worked for the Southwestern Company where he became Executive
Vice President. From 1971 to 1974, he served as the Commissioner of Finance and
Administration for the State of Tennessee, in which capacity he was responsible
for all construction and maintenance of State of Tennessee real property, along
with being chief operating officer. Mr. Welch received a B.S. from the
University of Tennessee at Martin and attended the Graduate School of Management
at Indiana University. Mr. Welch is President and Chief Executive Officer of
Eagle Communications. Mr. Welch serves on the Board of Directors of American
Constructors, Inc.; First American National Bank, Nashville, Tennessee; Logan's
Roadhouse, Inc.; and Southeast Service Corporation.
The following employees of NHC have material involvement with the Company:
DONALD K. DANIEL (Vice President and Controller) joined NHC in 1977 as
Controller. He received a B.A. degree from Harding University and an M.B.A. from
the University of Texas. He is a certified public accountant.
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KENNETH D. DENBESTEN (Vice President/Finance) has served as Vice
President/Finance since 1992. From 1987 to 1992, he was employed by Physicians
Health Care, most recently as Chief Operating Officer. From 1984 to 1986, he was
employed by Health America Corporation as Treasurer, Vice President of Finance
and Chief Financial Officer. Mr. DenBesten received a B.S. in business
administration and an M.S. in Finance from the University of Arizona.
DAVID H. JONES (Assistant Vice President/Development) has been associated
with NHI since 1991. He is responsible for initial investment review and
presentation. Prior to that, he was employed by USAA for 14 years in positions
ranging from programmer/analyst to acquisitions analyst in the real estate
investments company during which time over 30 properties were closed totaling in
excess of $200 million for various limited partnerships which were created. He
has a B.S. in mathematics from Middle Tennessee State University and an M.B.A.
from the University of Texas at San Antonio.
CHARLOTTE A. SWAFFORD (Treasurer) has been Treasurer of NHC since 1985. She
joined the Company in 1973 and has served as Staff Accountant, Accounting
Supervisor and Assistant Treasurer. She has a B.S. degree from Tennessee
Technological University.
DESCRIPTION OF THE NOTES
The Notes constitute a separate series of securities (which are more fully
described in the accompanying Prospectus) to be issued pursuant to an indenture,
dated as of December 13, 1995 (as supplemented, the "Indenture") between the
Company and SunTrust Bank, Nashville, N.A., as trustee (the "Trustee"), a copy
of which Indenture and supplements thereto have been filed as exhibits to the
registration statement to which this Prospectus Supplement and the accompanying
Prospectus relate and the documents incorporated by reference therein. The
following summary of the Notes is qualified in its entirety by reference to the
Indenture. The terms of the Notes include those provisions contained in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
description of the particular terms of the Notes offered hereby (referred to
herein as the "Notes" and in the Prospectus as the "Debt Securities")
supplements, and to the extent inconsistent therewith, replaces, the description
of the general terms and provisions of the Debt Securities set forth in the
Prospectus, to which description reference is hereby made. Capitalized terms
used but not defined herein shall have the meanings ascribed to them in the
Prospectus or the Indenture, as the case may be.
GENERAL
The Notes will be limited to $100,000,000 in aggregate principal amount.
The Notes will be issued in denominations of $1,000 and integral multiples of
$1,000, will bear interest from the date of issuance at the annual rate set
forth on the cover page of this Prospectus Supplement, and will mature on July
16, 2007 (the "Maturity Date"). Interest will be payable semi-annually in
arrears on January 15 and July 15, commencing January 15, 1998 (each, an
"Interest Payment Date"), to the persons in whose names the Notes are registered
at the close of business on the preceding December 31 or June 30, respectively,
regardless of whether such day is a Business Day. If any Interest Payment Date
or the Maturity Date falls on a day that is not a Business Day, the required
payment shall be made on the next Business Day as if it were made on the date
such payment was due and no interest shall accrue on the amount so payable for
the period from and after such Interest Payment Date or the Maturity Date, as
the case may be. "Business Day" means any day, other than a Saturday or Sunday,
on which banking institutions in the city of Nashville, Tennessee and New York
City are open for business.
The Notes will be direct, unsecured obligations of the Company and will
rank equally with all other unsecured and unsubordinated indebtedness of the
Company from time to time. Subject to certain limitations set forth in the
Indenture, the Indenture will permit the Company to incur additional secured and
unsecured indebtedness. See "-- Covenants" below.
The Notes will be issued only in fully registered, book-entry form. See
"-- Book-Entry System" below.
The Notes will not be subject to a sinking fund.
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Reference is made to the section entitled "-- Covenants" herein for a
description of the covenants applicable to the Notes. Compliance with such
covenants with respect to the Notes generally may not be waived by the Trustee
unless the Holders of at least a majority in principal amount of all outstanding
Notes consent to such waiver.
Except as described herein under "-- Covenants" and under "Consolidation,
Merger, Sale or Conveyance" in the accompanying Prospectus, the Indenture does
not contain any other provisions that would limit the ability of the Company to
incur indebtedness or that would afford Holders of the Notes protection in the
event of (i) a highly leveraged or similar transaction involving the Company,
(ii) a change of control, or (iii) a reorganization, restructuring, merger or
similar transaction involving the Company that may adversely affect the Holders
of the Notes. In addition, subject to the limitations set forth under
"Consolidation, Merger, Sale or Conveyance" in the accompanying Prospectus, the
Company may, in the future, enter into certain transactions such as the sale of
all or substantially all of its assets or the merger or consolidation of the
Company that would increase the amount of the Company's indebtedness or
substantially reduce or eliminate the Company's assets, which may have an
adverse effect on the Company's ability to service its indebtedness, including
the Notes.
The Company and its management have no present intention of engaging in a
highly leveraged or similar transaction involving the Company.
OPTIONAL REDEMPTION BY THE COMPANY
The Company may redeem the Notes, at any time, in whole or from time to
time in part, at the election of the Company, at a redemption price equal to the
sum of (i) the principal amount of the Notes being redeemed plus accrued
interest thereon to the redemption date and (ii) the Make-Whole Amount (as
defined below), if any, with respect to such Notes (the "Redemption Price").
From and after notice has been given as provided in the Indenture, if funds
for the redemption of any Notes called for redemption shall have been made
available on such redemption date, such Notes will cease to bear interest on the
date fixed for such redemption specified in such notice and the only right of
the Holders of the Notes will be to receive payment of the Redemption Price.
Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the Note register, not more than 60 nor less than
30 days prior to the date fixed for redemption. The notice of redemption will
specify, among other items, the Redemption Price and the principal amount of the
Notes held by such Holder to be redeemed.
The Company will notify the Trustee at least 45 days prior to the
redemption date (or such shorter period as satisfactory to the Trustee) of the
aggregate principal amount of Notes to be redeemed and the redemption date. If
less then all the Notes are to be redeemed at the option of the Company, the
Trustee shall select, pro rata or by lot or by any other method that the Trustee
considers fair and appropriate under the circumstances, Notes of such series to
be redeemed in whole or in part. Notes may be redeemed in part in the minimum
authorized denomination for Notes or in any integral multiple thereof.
As used herein,
"Make-Whole Amount" means, in connection with any optional redemption of
any Note, the excess, if any of (i) the aggregate present value as of the date
of such redemption of each dollar of principal being redeemed and the amount of
interest (exclusive of any interest accrued to the date of redemption) that
would have been payable in respect of such dollar if such redemption had not
been made, determined by discounting, on a semi-annual basis, such principal and
interest at the Reinvestment Rate (as defined below) (determined on the third
Business Day preceding the date such notice of redemption is given) from the
respective dates on which such principal and interest would have been payable if
such redemption had not been made, over (ii) the aggregate principal amount of
the Notes being redeemed.
"Reinvestment Rate" means 0.25% plus the arithmetic mean of the yields
under the respective headings "This Week" and "Last Week" published in the most
recent Statistical Release (as defined below) under the
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caption "Treasury Constant Maturities" for the maturity (rounded to the nearest
month) corresponding to the remaining life to maturity, as of the payment date
of the principal being redeemed or paid. If no maturity exactly corresponds to
such maturity, yields for the two published maturities most closely
corresponding to such maturity shall be calculated pursuant to the immediately
preceding sentence and the Reinvestment Rate shall be interpolated or
extrapolated from such yields on a straight-line basis, rounding in each of such
relevant periods to the nearest month. For the purposes of calculating the
Reinvestment Rate, the most recent Statistical Release published prior to the
date of determination of the Make-Whole Amount shall be used.
"Statistical Release" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded United States government
securities adjusted to constant maturities, or, if such statistical release is
not published at the time of any determination under the Indenture, then such
other reasonably comparable index which shall be designated by the Company.
COVENANTS
Limitations on Liens
The Notes will not be secured by mortgage, pledge or other lien. The
Company will covenant in the Indenture not to pledge or otherwise subject to any
lien any property or assets of the Company or its subsidiaries unless the Notes
are secured by such pledge or lien equally and ratably with all other
obligations secured thereby so long as such obligations shall be so secured;
provided, however, that such covenant will not apply to liens securing
obligations which do not in the aggregate at any one time outstanding exceed 10%
of Consolidated Net Tangible Assets (as defined below) of the Company and its
consolidated subsidiaries and in addition will not apply to:
(1) Any lien or charge on any property, tangible or intangible, real
or personal, existing at the time of acquisition or construction of such
property (including acquisition through merger or consolidation) or given
to secure the payment of all or any part of the purchase or construction
price thereof or to secure any indebtedness incurred prior to, at the time
of, or within one year after, the acquisition or completion of construction
thereof for the purpose of financing all or any part of the purchase or
construction price thereof;
(2) Any liens, deposits or pledges to secure the performance of any
bids, tenders, contracts (other than contracts for the borrowing of money),
capitalized leases, other leases permitted under the terms of the
Indenture, public or statutory obligations, stay, appeal, indemnity,
performance or other similar bonds or other similar obligations arising in
the ordinary course of business;
(3) Any lien in favor of the United States or any state thereof or the
District of Columbia or any foreign country or any province or similar
territory thereof, or any agency, department or other instrumentality
thereof, to secure progress, advance or other payments pursuant to any
contract or provision of any statute;
(4) Mechanics', materialmen's, carriers', or other like liens arising
in the ordinary course of business (including construction of facilities)
in respect of obligations which are not due or which are being contested in
good faith;
(5) Any lien arising by reason of deposits with, or the giving of any
form of security to, any governmental agency by any body created or
approved by law or governmental regulations, which is required by law or
governmental regulation as a condition to the transaction of any business,
or the exercise of any privilege, franchise or license;
(6) Any liens for taxes, assessments or governmental charges or levies
not yet delinquent, or liens for taxes, assessments or governmental charges
or levies already delinquent but the validity of which is being contested
in good faith or delinquent but is due to be paid by a Person other than
the Company for which the Company has reserves from such other Person
sufficient to pay such taxes;
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(7) Liens (including judgment liens) arising in connection with legal
proceedings so long as such proceedings are being contested in good faith
and in the case of judgment liens, execution thereof is stayed;
(8) Liens relating to secured indebtedness of the Company outstanding
as of March 31, 1997;
(9) Any extension, renewal or replacement (or successive extensions,
renewals or replacements), as a whole or in part, of any lien referred to
in the foregoing clauses (1) to (8) inclusive, provided, however, that the
amount of any and all obligations and indebtedness secured thereby shall
not exceed the amount thereof so secured immediately prior to the time of
such extension, renewal or replacement and that such extension, renewal or
replacement shall be limited to all or a part of the property which secured
the charge or lien so extended, renewed or replaced (plus improvements on
such property);
(10) Easements, rights of way, restrictions, minor defects or
irregularities of title and other similar charges or encumbrances not
interfering in the aggregate in any material respect with the ordinary
course of business of the Company or materially impairing the value of the
property subject thereto;
(11) Liens related to any interest or title of a lessor under any
lease in which the Company is a lessee;
(12) Any attachment or judgment lien not constituting an event of
default under the Indenture; and
(13) Liens relating to bankers rights of setoff.
"Consolidated Net Tangible Assets" means the aggregate amount of assets
(less applicable reserves and other properly deductible items) less (i) all
current liabilities and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expenses and other like intangibles of the Company
and its consolidated subsidiaries, all as set forth on the most recent balance
sheet of the Company and its consolidated subsidiaries prepared in accordance
with generally accepted accounting principles.
Limitations on Incurrence of Certain Debt
The Company also covenants in the Indenture that it will not create,
assume, incur or otherwise become liable in respect of, any
(a) Senior Debt (as defined below) unless the aggregate principal
amount of Senior Debt outstanding of the Company will not, at the time of
such creation, assumption or incurrence and after giving effect thereto and
to any concurrent transactions, exceed the greater of (1) 150% of Capital
Base (as defined below), or (ii) 225% of Tangible Net Worth (as defined
below); and
(b) Non-Recourse Debt (as defined below) unless the aggregate
principal amount of Senior Debt and Non-Recourse Debt outstanding of the
Company will not, at the time of such creation, assumption or incurrence
and after giving effect thereto and to any concurrent transactions, exceed
225% of Capital Base.
For the purposes of this limitation as to borrowing money, "Senior Debt"
(which as of March 31, 1997 was $174,087,000) means all Debt other than
Non-Recourse Debt and Subordinated Debt; "Debt", with respect to any Person
shall mean (i) its indebtedness, secured or unsecured, for borrowed money
exclusive of trade credit; (ii) Liabilities secured by an existing lien on
property owned by such Person; (iii) Capital Lease Obligations, and the present
value of all payments due under any arrangement for retention of title
(discounted at the implicit rate if known and at 9% otherwise) if such
arrangement is in substance an installment purchase or an arrangement for the
retention of title for security purposes; and (iv) guarantees of obligations of
the character specified in the foregoing clauses (i), (ii) and (iii), to the
full extent of the liability of the guarantor (discounted to present value, as
provided in the foregoing clause (iii), in the case of guarantees of title
retention arrangements); "Capital Lease" shall mean at any time any lease of
Property, which, in accordance with generally accepted accounting principles,
would at such time be required to be capitalized on a balance sheet of the
lessee; "Capital Lease Obligation" shall mean at any time the amount of the
liability in respect of a Capital Lease which, in accordance with generally
accepted accounting principles,
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would at such time be so required to be capitalized on a balance sheet of the
lessee; "Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible; "Person" shall mean
an individual, partnership, corporation, joint venture, association, joint stock
company, trust, limited liability company, unincorporated organization, or a
government or agency or political subdivision thereof; "Non-Recourse Debt" with
respect to any Person, shall mean any Debt secured by, and only by, property on
or with respect to which such Debt is incurred where the rights and remedies of
the holder of such Debt in the event of default do not extend to assets other
than the property constituting security therefor; "Subordinated Debt" shall mean
any unsecured Debt of the Company which is issued or assumed pursuant to, or
evidenced by, an indenture or other instrument which contains provisions for the
subordination of such other Debt (to which appropriate reference shall be made
in the instruments evidencing such other Debt if not contained therein) to the
Notes (and, at the option of the Company, if so provided, to other Debt of the
Company, either generally or as specifically designated); "Capital Base" shall
mean, at any date, the sum of Tangible Net Worth and Subordinated Debt;
"Tangible Net Worth" shall mean, at any date, the net book value (after
deducting related depreciation and amortization) of the Tangible Assets of the
Company at such date, minus the amount of its Liabilities at such date;
"Tangible Assets" shall mean all assets of the Company (including assets held
subject to Capital Leases and other arrangements pursuant to which title to the
Property has been retained by or vested in some other Person for security
purposes) except: (i) deferred assets other than prepaid insurance, prepaid
taxes and deposits; (ii) patents, copyrights, trademarks, tradenames,
franchises, goodwill, experimental expenses and other similar intangibles; and
(iii) unamortized debt discount and expense; and "Liabilities" shall mean at any
date the items shown as liabilities on the balance sheet of the Company, except
any items of deferred income, including capital gains.
DEFEASANCE
The Indenture provides that the Company will be discharged from any and all
obligations with respect to the Notes (except for the obligations to register
the transfer or exchange of the Notes, to replace temporary or mutilated,
destroyed, lost or stolen Notes, to maintain an office or agency in respect of
the Notes and to hold moneys for payment in trust) upon the irrevocable deposit
by the Company with the Trustees, in trust, of an amount, in cash or U.S.
Government Obligations (as defined below), or both, which through the scheduled
payment of principal and interest in accordance with their terms will provide
money in an amount sufficient without reinvestment to pay the principal of and
premium (if any) and interest on the Notes on the scheduled due dates therefor.
"U.S. Government Obligations" means direct, non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
timely payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture with respect to the
Notes: (i) default in the payment of interest on the Notes of such series when
due and payable, which continues for 30 days; (ii) default in the payment of
principal of (and premium, if any) on the Notes when due and payable, at
maturity, upon redemption or otherwise, which continues for five Business Days;
(iii) failure to perform any other covenant of the Company contained in the
Indenture or the Notes which continues for 60 days after written notice as
provided in the Indenture; (iv) default under any bond, debenture or other
Indebtedness (as defined in the Indenture) of the Company or any subsidiary if
(a) either (x) such event of default results from the failure to pay any such
Indebtedness at maturity or (y) as a result of such event of default, the
maturity of such Indebtedness has been accelerated prior to its expressed
maturity and such acceleration shall not be rescinded or annulled or the
accelerated amount paid within 10 days after notice to the Company of such
acceleration, or such Indebtedness having been discharged, and (b) the principal
amount of such Indebtedness, together with the principal amount of any other
such Indebtedness in default for failure to pay principal or interest thereon,
or the maturity of which has been so accelerated, aggregates $10,000,000 or
more; and (v) certain events of bankruptcy, insolvency or reorganization
relating to the Company.
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GOVERNING LAW
The Notes and the Indenture will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to its conflicts
of law rules.
BOOK-ENTRY SYSTEM
The following are summaries of certain rules and operating procedures of
the DTC that affect the payment of principal and interest and transfers of
interests in the Notes issued in book-entry form. Upon issuance, the Notes will
be issued only in the form of a global security (a "Global Security") which will
be deposited with, or on behalf of, DTC and registered in the name of Cede &
Co., as nominee of DTC. Unless and until it is exchanged in whole or in part for
Notes in definitive form under the limited circumstances described below, the
Global Security may not be transferred except as a whole (i) by DTC to a nominee
of DTC, (ii) by a nominee of DTC to DTC or another nominee of DTC, or (iii) by
DTC or any such nominee to a successor of DTC or a nominee of such successor.
Ownership of beneficial interests in the Global Security will be limited to
persons that have accounts with DTC for the Global Security ("Participants") or
persons that may hold interests through Participants. Upon the issuance of the
Global Security, DTC will credit, on its book-entry registration and transfer
system, the Participants' accounts with the respective principal amounts of the
Notes represented by the Global Security beneficially owned by such
Participants. Ownership of beneficial interests in the Global Security will be
shown on, and the transfer of such ownership interests will be effected only
through, records maintained by DTC (with respect to interests of Participants)
and on the records of Participants (with respect to interests of persons holding
through Participants). The laws of some states may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and such laws may impair the ability to own, transfer, or
pledge beneficial interests in the Global Security.
So long as DTC or its nominee is the registered owner of the Global
Security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by the Global Security for all purposes
under the Indenture. Except as set forth below, owners of beneficial interests
in the Global Security will not be entitled to have the interests represented by
the Global Security registered in their names, will not receive or be entitled
to receive physical delivery of the Notes in definitive form, and will not be
considered the owners or Holders thereof under the Indenture. Accordingly, each
person owning a beneficial interest in the Global Security must rely on the
procedures of DTC and, if such person is not a Participant, on the procedures of
the Participant through which such person owns its interest, to exercise any
rights of a Holder under the Indenture. The Company understands that under
existing industry practices, if the Company requests any action of Holders or if
an owner of a beneficial interest in the Global Security desires to give or take
any action that a Holder is entitled to give or take under the Indenture, DTC
would authorize the Participants holding the relevant beneficial interests to
give or take such action, and such Participants would authorize beneficial
owners owning through such Participants to give or take such action or would
otherwise act upon the instructions of beneficial owners holding through them.
Principal and interest payments on interests represented by the Global
Security will be made to DTC or its nominee, as the case may be, as the
registered owner of the Global Security. None of the Company, the Trustee, or
any other agent of the Company or agent of the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Security or for maintaining, supervising, or reviewing any records relating to
such beneficial ownership interests.
The Company expects that DTC, upon receipt or any payment of principal or
interest in respect of the Global Security, will immediately credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the Global Security as shown on the records
of DTC. The Company also expects that payments by Participants to owners of
beneficial interests in the Global Security held through such Participants will
be governed by standing customer instructions and customary practices, as is now
the case with the securities held for the accounts of customers in bearer form
or registered in "street name," and will be the responsibility of such
Participants.
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If DTC is at any time unwilling or unable to continue as depository for the
Notes and the Company fails to appoint a successor depository registered as a
clearing agency under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), within 90 days, the Company will issue the Notes in definitive
form in exchange for the Global Security. Any Notes issued in definitive form in
exchange for the Global Security will be registered in such name or names, and
will be issued in denominations of $1,000 and such integral multiples thereof,
as DTC shall instruct the Trustee. It is expected that such instructions will be
based upon directions received by DTC from Participants with respect to
ownership of beneficial interests in the Global Security.
DTC has advised the Company of the following information regarding DTC. DTC
is a limited-purpose trust company organized under the Banking Law of the State
of New York, a "banking organization" within the meaning of the Banking Law of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities of its Participants and to
facilitate the clearance and settlement of transactions among its Participants
in such securities through electronic book-entry changes in accounts of the
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC's Participants include securities brokers and dealers, banks,
trust companies, clearing corporations, and certain other organizations, some of
which (and/or their representatives) own DTC. Access to DTC book-entry system is
also available to others, such as banks, brokers, dealers, and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriter in immediately
available funds. All payments of principal and interest in respect of Notes
represented by a Global Security will be made by the Company in immediately
available funds. The Notes will trade in DTC's Same-Day Funds Settlement System
until maturity or until the Notes are issued in certificated form, and secondary
market trading activity in the Notes will therefore be required by DTC to settle
in immediately available funds. No assurance can be given as to the effect, if
any, of settlement in immediately available funds on trading activity in the
Notes.
INFORMATION REGARDING THE TRUSTEE
The Trustee under the Indenture is SunTrust Bank, Nashville, N.A. The
Trustee is a lender under one of the Company's credit facilities and the trustee
with respect to substantially all of the Company's publicly issued debt
securities.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus Supplement may obtain a copy of the
Indenture without charge by writing to National Health Investors, Inc., 100 Vine
Street, Suite 1202, Murfreesboro, Tennessee 37130, Attention: Mr. Richard F.
LaRoche, Jr., Secretary & Vice President.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF CERTAIN MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS REGARDING THE NOTES, AND IS BASED ON CURRENT LAW, IS FOR GENERAL
INFORMATION ONLY AND IS NOT TAX ADVICE. THIS DISCUSSION DOES NOT PURPORT TO DEAL
WITH ALL ASPECTS OF TAXATION THAT MAY BE RELEVANT TO PARTICULAR HOLDERS OF NOTES
IN LIGHT OF THEIR PERSONAL INVESTMENT OR TAX CIRCUMSTANCES, OR TO CERTAIN TYPES
OF HOLDERS OF NOTES INCLUDING INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS,
FINANCIAL INSTITUTIONS OR BROKER-DEALERS.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNER-
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SHIP, CONVERSION AND SALE OF THE NOTES INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, CONVERSION AND
SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF HOLDERS OF NOTES
Stated Interest
Holders of Notes will be required to include stated interest on the Notes
in gross income for federal income tax purposes in accordance with their methods
of accounting for tax purposes. The Notes will not be issued with original issue
discount.
Market Discount
Purchasers of Notes should be aware that the holding and disposition of
Notes may be affected by the market discount provisions of the Internal Revenue
Code of 1986, as amended (the "Code"). These rules generally provide that,
subject to a statutorily-defined de minimis exception, if a holder of a debt
instrument purchases it at a market discount and thereafter recognizes gain on a
disposition of the debt instrument (including a gift or payment on maturity),
the lesser of such gain (or appreciation, in the case of a gift) or the portion
of the market discount that accrued while the debt instrument was held by such
holder will be treated as ordinary interest income at the time of the
disposition. For this purpose, a purchase at a market discount includes a
purchase after original issuance at a price below the debt instrument's stated
principal amount. The market discount rules also provide that a holder who
acquires a debt instrument at a market discount (and who does not elect, as
described below, to include such market discount in income on a current basis)
may be required to defer a portion of any interest expense that may otherwise be
deductible on any indebtedness incurred or maintained to purchase or carry such
debt instrument until the holder disposes of the debt instrument in a taxable
transaction.
A Holder of a debt instrument acquired at a market discount may elect to
include the market discount in income as the discount thereon accrues, either on
a straight line basis or, if elected, on a constant interest rate basis. The
current inclusion election, once made, applies to all market discount
obligations acquired by such holder on or after the first day of the first
taxable year to which the election applies, and may not be revoked without the
consent of the Internal Revenue Service ("IRS"). If a holder of a Note elects to
include market discount in income in accordance with the preceding sentence, the
foregoing rules with respect to the recognition of ordinary income on a sale or
certain other dispositions of such Note and the deferral of interest deductions
on indebtedness related to such Note would not apply.
Amortizable Bond Premium
Generally, if the tax basis of an obligation held as a capital asset
exceeds the amount payable at maturity of the obligation, such excess may
constitute amortizable bond premium that the holder may elect to amortize under
the constant interest rate method and deduct over the period from his
acquisition date to the obligation's maturity date. A holder who elects to
amortize bond premium must reduce his tax basis in the related obligation by the
amount of the aggregate deductions allowable for amortizable bond premium.
The amortizable bond premium deduction is treated as an offset to interest
income on the related security for federal income tax purposes. Each prospective
purchaser is urged to consult his tax advisor as to the consequences of the
treatment of such premium as an offset to interest income for federal income tax
purposes.
Disposition
In general, a holder of a Note will recognize gain or loss upon the sale,
exchange, redemption, payment upon maturity or other taxable disposition of the
Note measured by the difference between (i) the amount of cash and the fair
market value of property received (except to the extent that such cash or other
property is attributable to the payment of accrued interest not previously
included in income, which amount will be
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taxable as ordinary income) and (ii) the holder's tax basis in the Note (as
increased by any market discount previously included in income by the holder and
decreased by any amortizable bond premium deducted over the term of the Note).
Subject to the market discount and amortizable bond premium rules above, any
such gain or loss will generally be long-term capital gain or loss, provided the
Note was a capital asset in the hands of the holder and had been held for more
than one year.
Backup Withholding
Under the backup withholding rules, a domestic holder of Notes may be
subject to backup withholding at the rate of 31% with respect to interest or
dividends paid on, and gross proceeds from the sale of, the Notes unless such
holder (a) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of Notes who does not provide the Company with his
current taxpayer identification number may be subject to penalties imposed by
the IRS. Any amount paid as backup withholding will be creditable against the
holder's income tax liability.
The Company will report to Holders of Notes and the IRS the amount of any
"reportable payments" (including any interest or dividends paid) and any amount
withheld with respect to the Notes during the calendar year.
The backup withholding and information reporting rules are under review by
the United States Treasury, and their applications to the Notes could be changed
prospectively by future Treasury regulations.
For a discussion regarding taxation of the Company, Holders should consult
the "Federal Income Tax Considerations" section in the accompanying Prospectus.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to prospective investors. This discussion does not purport to deal
with all aspects of ERISA or the Code that may be relevant to particular
investors in light of their particular circumstances. A PROSPECTIVE INVESTOR
THAT IS (OR IS USING THE ASSETS OF) AN EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A
TAX-QUALIFIED RETIREMENT PLAN, AN INDIVIDUAL RETIREMENT ACCOUNT, OR A
GOVERNMENTAL, CHURCH, OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO
CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING
UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE, AND STATE LAW WITH RESPECT TO
THE PURCHASE, OWNERSHIP, OR SALE OF THE NOTES BY SUCH PLAN OR IRA.
A fiduciary of a pension, profit-sharing, or other employee benefit plan
(or entity whose assets constitute assets of any such plan) subject to ERISA (an
"Employee Plan") should consider fiduciary standards under ERISA in the context
of the Employee Plan's particular circumstances before authorizing an investment
of all or any portion of such Employee Plan's assets in the Notes. Among other
factors, such fiduciary should consider (i) whether the investment satisfies the
prudence requirements of Section 404(a)(1)(B) of ERISA, (ii) whether the
investment satisfies the diversification requirements of Section 404(a)(1)(C) of
ERISA and (iii) whether the investment is in accordance with the documents and
instruments governing the plan as required by Section 404(a)(1)(D) of ERISA. In
addition, persons who control the investments of individual retirement accounts
("IRAs") should consider that IRAs may only make investments that are authorized
by the appropriate governing documents and under applicable state law.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit a wide range of transactions involving the assets of an Employee
Plan or IRA (a "Benefit Plan") and persons who have certain specified
relationships to the Benefit Plan ("parties in interest" within the meaning of
ERISA or "disqualified persons" within the
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meaning of the Code). Such transactions are treated as "prohibited transactions"
under Section 406 of ERISA and Section 408(e)(2) of the Code and excise taxes
are imposed upon such persons by Section 4975 of the Code. Thus, a fiduciary of
a Benefit Plan should consider whether the acquisition or the continued holding
of the Notes might constitute or give rise to a direct or indirect non-exempt
prohibited transaction, including a prohibited loan. Certain exemptions from the
prohibited transaction rules could be applicable to the purchase and holding of
Notes by a Benefit Plan depending on the type and circumstances of the plan
fiduciary making the decision to acquire such Notes. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
certain transactions entered into by insurance company pooled separate accounts;
PTCE 95-60, regarding certain transactions entered into by insurance company
general accounts; PTCE 96-23, regarding certain transactions effected by
"in-house asset managers"; PTCE 91-38 regarding certain transactions entered
into by bank collective investment funds; and PTCE 84-14, regarding certain
transactions effected by "qualified professional asset managers".
Certain transactions involving the Company might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Notes if assets of the Company were deemed to be assets of the
Benefit Plan. The Department of Labor (the "DOL") has issued regulations (the
"DOL Regulations") as to what constitutes assets of an employee benefit plan
under ERISA. Under the DOL Regulations, if a Benefit Plan acquires an equity
interest in an entity, which interest is neither a publicly offered security nor
a security issued by an investment company registered under the Investment
Company Act of 1940, as amended, the Benefit Plan's assets will include, for
purposes of the fiduciary responsibility provisions of ERISA, both the equity
interest and an undivided interest in each of the entity's underlying assets
unless certain specified exceptions apply. Under the DOL Regulations, the term
"equity interest" is to include any interest in an entity other than "an
instrument that is treated as indebtedness under applicable local law and which
has no substantial equity features." Although there is little guidance on the
subject, the Company believes that, at the time of their issuance, the Notes
will be treated as indebtedness without substantial equity features for purposes
on the Plan Assets Regulation and that the assets of the Company will not be
deemed to be plan assets of any Benefit Plan that invests in the Notes.
Benefit Plans and their fiduciaries are strongly urged to consult with
their advisors, before acquiring Notes, as to the application of ERISA to the
acquisition, holding and sale of such Notes.
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement, Smith Barney Inc. (the "Underwriter") has agreed to purchase, and the
Company has agreed to sell to such Underwriter, the entire aggregate principal
amount of Notes.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Notes offered hereby are subject to
approval of certain legal matters by its counsel and to certain other
conditions. The Underwriter is obligated to take and pay for the entire
aggregate principal amount of Notes offered hereby if any of such Notes are
taken.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer part of the Notes purchased by it to the public at the public
offering price set forth on the cover of this Prospectus Supplement and part of
such Notes to certain dealers at such price, less a concession not in excess of
.40% of the principal amount of the Notes under the price to the public. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of .25% of the principal amount of such Notes to certain other dealers. After
the initial offering of the Notes to the public, the offering price and other
selling terms may be changed by the Underwriter.
The Underwriting Agreement contains covenants of indemnity between the
Underwriter and the Company against certain civil liabilities, including
liabilities under the Securities Act.
In connection with this offering and in compliance with applicable law and
industry practice, the Underwriter may overallot or effect transactions which
stabilize, maintain or otherwise affect the market price of the Notes at levels
above those which might otherwise prevail in the open market, including by
entering
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stabilizing bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. Such transactions may be effected in the over-the-counter
market, or otherwise. The Underwriter is not required to engage in any of these
activities. Any such activities, if commenced, may be discontinued at any time.
Prior to the Offering, there has been no public market for the Notes. The
Notes will not be listed on securities exchange. The Underwriter may, from time
to time, purchase and sell Notes in a secondary market, but the Underwriter is
not obligated to do so, and there can be no assurance that there will be a
secondary market for the Notes or liquidity in the secondary market if one
develops. There can be no assurance that an active trading market will develop
or be sustained following the Offering or that purchasers of the Notes in the
Offering will be able to liquidate their investments or to resell such Notes at
or above the initial offering price.
The Underwriter has provided and may in the future provide investment
banking services to the Company.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Harwell Howard Hyne Gabbert & Manner, P.C., Nashville, Tennessee, and
for the Underwriter by Dewey Ballantine, New York, New York. In addition,
Goodwin, Procter & Hoar LLP will pass upon certain Federal income tax matters
relating to the Company.
S-25
<PAGE> 26
PROSPECTUS
NATIONAL HEALTH INVESTORS, INC.
SECURITIES
------------------------------------------
National Health Investors, Inc. (the "Company") is a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the "Code"), which
may offer from time to time, in one or more series, its debt securities (the
"Debt Securities"), shares of its Preferred Stock, $.01 par value per share (the
"Preferred Stock"), and shares of Common Stock, $.01 par value per share (the
"Common Stock"). The Debt Securities, Preferred Stock and Common Stock are
collectively referred to herein as the "Securities." The Securities will have an
aggregate offering price of up to $300,000,000 and will be offered on terms to
be determined at the time of the offering.
In the case of Debt Securities, the specific title, the aggregate principal
amount, the ranking, the purchase price, the maturity, the rate and time of
payment of any interest, any redemption or sinking fund provisions, any
conversion provisions and any other specific term of the Debt Securities will be
set forth in an accompanying supplement to this Prospectus (the "Prospectus
Supplement"). In the case of Preferred Stock, the specific number of shares,
designation, stated value per share, liquidation preference per share, issuance
price, dividend rate (or method of calculation), dividend payment dates, any
redemption or sinking fund provisions, any conversion rights and other specific
terms of the series of Preferred Stock will be set forth in an accompanying
Prospectus Supplement. In the case of Common Stock, the specific number of
shares and issuance price per share will be set forth in an accompanying
Prospectus Supplement. The Prospectus Supplement will also disclose whether the
Securities will be listed on a national securities exchange and if they are not
to be listed, the possible effects thereof on their marketability.
The Securities may be sold: (i) directly by the Company; (ii) through
underwriting syndicates represented by one or more managing underwriters, or by
one or more underwriters without a syndicate; and (iii) through agents
designated from time to time. The names of any underwriters or agents of the
Company involved in the sale of the Securities in respect of which this
Prospectus is being delivered and any applicable commissions or discounts will
be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." The net proceeds to the Company from such sale will be set forth
in the Prospectus Supplement.
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "NHI." On October 17, 1994, the closing sale price of
the Common Stock on the NYSE was $27.5 per share.
---------------------
SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------------
This prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
---------------------
The date of this Prospectus is October 20, 1994.
<PAGE> 27
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, reports, proxy material and other information concerning the
Company may be inspected at the offices of The New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
The Company furnishes its stockholders with annual reports containing
audited financial statements for each fiscal year and quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities offered hereby. The Prospectus and any accompanying
Prospectus Supplement do not contain all of the information included in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Securities, reference is hereby made to the
Registration Statement including the exhibits and schedules thereto. Statements
contained in this Prospectus and any accompanying Prospectus Supplement
concerning the provisions or contents of any contract, agreement or any other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement or document filed as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matters involved, and each such statement shall be deemed qualified in its
entirety by such reference to the copy of the applicable document filed with the
Commission. The Registration Statement including the exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office at
450 Fifth Street, N.W., Washington, D.C. and copies of it or any part thereof
may be obtained from such office, upon payment of the fees prescribed by the
Commission.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated herein by reference:
(1) The Annual Report of the Company on Form 10-K for its fiscal year
ended December 31, 1993;
(2) The Quarterly Reports of the Company on Form 10-Q for fiscal
quarters ended March 31, 1994, June 30, 1994 and September 30, 1994;
(3) Current Report of the Company on Form 8-K dated September 6, 1994.
(4) Description of the Company's Common Stock contained in Form 10 as
amended by Form 8 effective with the Commission in October 1991; and
(5) All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date hereof and prior to the termination of the offering of the Securities
offered hereby shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document that also is
or is deemed to be incorporated by reference herein,
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<PAGE> 28
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents which have been incorporated by reference
herein, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference therein). Requests for such copies should
be directed to the Company's principal executive offices, Attention: Mr. Richard
F. LaRoche, Jr., Secretary & Vice President, National Health Investors, Inc.,
100 Vine Street, Suite 1202, Murfreesboro, Tennessee 37130, telephone number
(615) 890-9100.
THE COMPANY
The Company is a real estate investment trust ("REIT") which invests
primarily in income producing health care properties. As of September 30, 1994,
the Company had interests in net real estate owned by it and mortgage
investments totalling approximately $631 million. The Company's strategy is to
provide current income for distribution to stockholders through investments in
health care related facilities, including long-term care facilities, acute care
hospitals and medical office buildings. The Company intends to implement this
strategy by acquiring additional properties and making additional mortgage loans
nationwide predominantly in the long-term care industry.
The Company commenced operations on October 17, 1991 with approximately
$121,779,000 in net assets obtained when it acquired 40 skilled long-term care
facilities and three retirement centers and four first mortgage notes from
National HealthCorp, L.P. ("NHC") in exchange for 7,306,570 shares of the
Company's Common Stock. Concurrently, the Company assumed mortgage indebtedness
and certain other obligations of NHC related to the acquired properties. The 43
properties were then leased to NHC. NHC is a publicly traded master limited
partnership which operates 96 long-term care facilities with a total of 12,303
licensed beds, four retirement centers with a total of 413 units, four assisted
living facilities with a total of 127 beds and 29 home health care programs
generating approximately 650,000 visits annually in the southeastern United
States.
As of September 30, 1994, the Company had investments in 229 health care
facilities (the "Health Care Facilities") located in 25 states consisting of 197
long-term care facilities, four acute care hospitals, nine medical office
buildings, residential projects for the developmentally disabled. These
investments consist of approximately $478 million aggregate principal amount of
loans to 35 borrowers, $119 million of purchase leaseback agreements with seven
lessees and $33.8 million invested in REMIC mortgage -- pass through
certificates. Of these 229 facilities, 43 are leased to NHC and an additional 14
facilities are managed by NHC. Consistent with its strategy of diversification,
the Company has reduced the portion of its portfolio operated by NHC from 100%
of total assets on October 17, 1991, to 26% of total assets on September 30,
1994.
NHC and the Company have entered into an Advisory, Administrative Services
and Facilities Agreement (the "Advisory Agreement") pursuant to which NHC
provides management and advisory services to the Company. In addition, the
Company and NHC have certain other relationships. See "Risk Factors -- Reliance
on NHC" and "-- Conflicts of Interest."
The Company was incorporated in Maryland in 1991. The principal executive
offices of the Company are located at 100 Vine Street, Suite 1202, Murfreesboro,
Tennessee 37130; telephone number (615) 890-9100. Unless the context indicates
otherwise, references herein to the Company include all of the Company's
subsidiaries.
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<PAGE> 29
RISK FACTORS
In evaluating the Company and its business, prospective investors should
carefully consider the following factors in addition to those discussed
elsewhere in this Prospectus and in an accompanying Prospectus Supplement.
RELIANCE ON NHC
Forty-three of the Company's 229 properties (the leases on the 43
properties represent 26% of the Company's total assets as of September 30, 1994)
consist of skilled long term care facilities and retirement centers leased to
NHC, and in addition, 14 long-term facilities are managed by NHC. Thus, the
financial returns to the Company's stockholders and the condition of the Company
are to a large extent dependent upon the successful operation of such facilities
by NHC. In connection with the formation of the Company in 1991, these
facilities were transferred to the Company subject to existing debt. A portion
of such indebtedness is cross-collateralized with other NHC debt. Thus, a
default by NHC under its debt instruments, which is not cured by the Company,
could cause the Company to lose a significant amount of its assets through
foreclosure or other means.
The Company is advised by NHC, under the supervision of the Company's Board
of Directors, which is ultimately responsible for the management of the Company.
With the exception of investment decisions of the Company, substantially all of
the Company's operations are conducted by NHC. Therefore, the Company is
dependent upon the services of a few key personnel who are employees of NHC. If
any of these key personnel were to leave NHC and NHC were unable to locate
suitable replacements, the Company could be adversely affected. All investment
decisions of the Company (excluding transactions with NHC) must be approved by a
majority of the directors. All transactions with NHC must be approved by a
majority of unaffiliated directors.
NHC has agreed to indemnify the Company for certain liabilities which may
be incurred by the Company in connection with the Health Care Facilities and
certain notes, mortgage debt and guaranteed debt of NHC which the Company agreed
to assume in connection with the formation of the Company. The aggregate amount
outstanding under such notes, mortgage debt and guaranteed debt was $44,781,000
at September 30, 1994. 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 Company may seek any such indemnity,
NHC will be financially able to meet its indemnity obligations, which
obligations are unsecured.
CONFLICTS OF INTEREST
Two of the five directors and all of the officers of the Company occupy
positions with NHC, and therefore there may be conflicts of interest in their
duties to the NHC unitholders and Company stockholders. Although the directors
of the Company believe the terms of the NHC leases and the Advisory Agreement
are fair and reasonable, not all of the terms of the leases or the Advisory
Agreement were negotiated on an arm's-length basis. The Company may purchase
additional equity interests in real estate from, or make additional mortgage
loans to, NHC. Since NHC is the Company's investment advisor, it will have a
conflict of interest in determining the price to be paid by the Company for
additional assets which may be purchased from NHC and the terms of any leases to
be entered into between the Company and NHC.
There may from time to time be disputes between the Company as landlord and
NHC as tenant with respect to maintenance, repairs, defaults, and similar items.
These disputes will be settled by binding arbitration.
Counsel to NHC also represents the Company on certain matters. In the
course of such representation circumstances may arise in which NHC and the
Company have conflicting interests, in which event separate counsel will be
retained to represent one or both of the parties.
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<PAGE> 30
GOVERNMENT REGULATION
Health Care Reform. Rising health care costs in the United States have
provided a strong impetus for health care reform. On October 27, 1993, President
Clinton delivered to Congress his administration's health care reform plan,
known as the Health Security Act. This bill seeks to restructure the U.S. health
care system and to guarantee medical coverage to all Americans, with a
concomitant goal of reducing health care costs. The cornerstone of the plan is
that it would guarantee all Americans a uniform, comprehensive package of health
benefits by requiring all employers to pay most of their workers' insurance
premiums while offering government subsidies to the poor and to small, low-wage
businesses.
An important emphasis of the Clinton plan is the concept of "managed care."
The plan would group patients into large regional insurance buying pools, known
as "health alliances," which would negotiate with various health plans. Another
emphasis of the plan is the capping of Medicare and Medicaid expenditures. It is
anticipated that the Clinton plan would result in the consolidation of health
care providers into provider alliances.
The plan also would create a National Health Board responsible for
regulating implementation of the national budget for health care spending and
would establish baseline budgets for the various health care alliances by
allocating national spending among alliances.
President Clinton has urged Congress to act on his proposed bill by the end
of 1994, but it now appears increasingly unlikely that his plan will be enacted.
In addition to President Clinton's proposed legislation, a number of other bills
regarding health care reform are being circulated. At present, it is difficult
to predict whether any significant health care reform legislation will be
enacted this year, or what effect any federal or state health care reform
legislation ultimately adopted in the area of health care reform would have on
the operations of facilities subject to leases or mortgages with the Company.
Any changes in existing law that would have an adverse effect upon the Company's
lessees or borrowers could, in turn, have an adverse effect upon the Company's
revenues. In response to indications that health care reform legislation might
be enacted, the market place has voluntarily placed an increasing emphasis on
cost containment and managed health care, which has tended to lead toward
increased consolidation of health care providers into integrated health care
delivery systems.
Potential Operator Loss of Licensure or Certification. The health care
industry is highly regulated by federal, state and local law, and is directly
affected by state and local licensing requirements, facility inspections, state
and federal reimbursement policies, regulations concerning capital and other
expenditures, certification requirements, and other such laws regulations and
rules. Sanctions for failure to comply with these regulations and laws include
(but are not limited to) loss of licensure, fines, and loss of certification to
participate in the Medicare and Medicaid programs, as well as potential criminal
penalties. The failure of any lessee or borrower to comply with such laws,
requirements and regulations could affect its ability to operate the facility or
facilities and could adversely affect such lessee's or borrower's ability to
make lease or debt payments to the Company.
In the past several years, due to rising health care costs, there has been
an increased emphasis on detecting and eliminating fraud and abuse in the
Medicare and Medicaid programs. Payment of any consideration in exchange for
referral of Medicare and Medicaid patients is generally prohibited by federal
statute, which subjects violators to severe penalties, including exclusion from
the Medicare and Medicaid programs, fines, and even prison sentences. In recent
years, both federal and state governments have significantly increased
investigation and enforcement activity to detect and punish wrongdoers. In
addition, legislation has been adopted at both state and federal levels which
severely restricts the ability of physicians to refer patients to entities in
which they have a financial interest.
It is anticipated that the trend toward increased investigation and
enforcement activity in the area of fraud and abuse, as well as self-referral,
will continue in future years. Certain of the Company's investments are with
lessees or borrowers which are partially or wholly owned by physicians. In the
event that any lessee or borrower were to be found in violation of laws
regarding fraud and abuse or self-referral, that lessee's or borrower's ability
to operate the facility as a health care facility could be jeopardized, which
could adversely
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<PAGE> 31
affect the lessee's or borrower's ability to make lease or debt payment to the
Company and thereby adversely affect the Company.
Reliance on Government Reimbursement. A significant portion of the revenue
of the Company's lessees and borrowers is derived from governmentally-funded
reimbursement programs, such as Medicare and Medicaid. These programs are highly
regulated and subject to frequent and substantial changes resulting from
legislation, adoption of rules and regulations, and administrative and judicial
interpretations of existing law. In recent years, there have been fundamental
changes in the Medicare program which have resulted in reduced levels of payment
for a substantial portion of health care services. Moreover, health care
facilities have experienced increasing pressures from private payors attempting
to control health care costs, and reimbursement from private payors has in many
cases effectively been reduced to levels approaching those of government payors.
In many instances, revenues from Medicaid programs are already insufficient
to cover the actual costs incurred in providing care to those patients.
Governmental and popular concerns regarding health care costs may result in
significant reductions in payments to health care facilities, and there can be
no assurance that future payment rates for either governmental or private health
care plans will be sufficient to cover cost increases in providing services to
patients. Any changes in reimbursement policies which reduce reimbursement to
levels that are insufficient to cover the cost of providing patient care could
adversely affect revenues of the Company's health-related lessees and borrowers
and thereby adversely affect those lessees' and borrowers' abilities to make
their lease or debt payments to the Company. Failure of the lessees or borrowers
to make their lease or debt payments would have a direct and material adverse
impact on the Company.
COMPETITION FOR FINANCING OF HEALTH CARE FACILITIES
The Company competes with other REITs, real estate partnerships, health
care providers and other investors, including but not limited to banks and
insurance companies, in the acquisition, leasing and financing of health care
facilities. The Company is currently seeking to expand its business by acquiring
and financing additional properties. In making such acquisitions and financings,
the Company competes with these other entities, some of which have greater
financial resources than the Company. There can be no assurance that suitable
investments will be identified or that investments can be consummated on
commercially reasonable terms.
The ability of the Company to acquire additional properties will depend,
among other things, upon its ability to obtain financing and 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.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property or a secured lender (such as the Company)
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 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 Company's revenues and
ability to make distributions.
Although some of the leases pertaining to the Company's properties require
the lessee to indemnify the Company for certain environmental liabilities, the
scope of such obligations may be limited and there can be no assurances that any
such seller or lessee will be able to fulfill its indemnification obligations.
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HEALTH CARE REAL ESTATE INVESTMENT RISKS
The Company's Health Care Facilities and any subsequently acquired
properties will be subject to various real estate related risks.
Volatility of Value of Real Estate. Real property investments in the
health care industry are subject to varying degrees of risk. The economic
performance and values of health care real estate can be affected by many
factors including governmental regulation, economic conditions, and demand for
health care services. There can be no assurance that the value of any property
acquired by the Company will appreciate or that the value of property securing
any of the Company's mortgage loans will not depreciate.
Volatility of Income and Returns. Additional risks of investing in health
care related real estate are the possibilities that the Health Care Facilities
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 investments 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.
Illiquidity of Real Estate Investments. Real estate investments are
relatively illiquid and, therefore, tend to limit the ability of the Company to
vary its portfolio promptly in response to changes in economic or other
conditions. All of the Company's properties are in the same line of business and
the Company has no present intention of varying the types of real estate in its
portfolio. In addition, certain significant expenditures associated with real
estate investments (such as mortgage payments, real estate taxes and maintenance
costs) are generally not reduced when circumstances cause a reduction in income
from the investment. Should such events occur, the Company's income and funds
for distribution would be adversely affected.
Uninsured Loss. The Company currently requires and it is the intention of
the Company to continue to require NHC and all other lessees to secure adequate
comprehensive property and liability insurance that covers the Company as well
as the lessee. Certain risks may, however, be uninsurable or not economically
insurable and there can be no assurance that the Company or a lessee will have
adequate funds to cover all contingencies itself. Should such an uninsured loss
occur, the Company could lose both its invested capital, including its equity
interests, and its anticipated profits relating to such property.
Dependence on Lease Income and Mortgage Payments from Real Property. Since
a substantial portion of the Company's income is derived from lease and mortgage
income from real property, the Company's income would be adversely affected if a
significant number of the Company's lessees or borrowers were unable to meet
their obligations to the Company or if the Company were unable to lease its
properties or grant mortgages on economically favorable terms. The initial term
of the Master Lease Agreement with NHC expires on December 31, 2001. There can
be no assurance that NHC or any other lessee will exercise their options to
renew their leases upon the expiration of the initial terms or that if such
failure to renew were to occur, the Company could lease the property to others
on favorable terms. In such an instance, the Company would continue to be
responsible for payment of any indebtedness it had incurred with respect to such
property.
CERTAIN RESTRICTIONS ON TRANSFER OF SHARES; BUSINESS COMBINATIONS
Provisions of the Company's charter (the "Charter"), primarily intended to
enable the Company to maintain its status as a REIT, authorize the Company (i)
to refuse to transfer capital stock to, or prohibit exercise of stockholder
rights by, any person who as a result would beneficially own, directly or
indirectly by attribution, Common Stock (which includes shares convertible into
Common Stock) in excess of 4.0% (which percentage can increase to up to 9.9%
upon the determination of the Board of Directors) of the outstanding Common
Stock or in excess of 9.9% of the outstanding stock of any other class of stock
(the shares held in excess of the applicable limit, "Excess Shares") or any
person whose accumulation of stock would, in the
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<PAGE> 33
opinion of the Board of Directors, jeopardize the status of the Company as a
REIT and (ii) to redeem Excess Shares. In addition, the Charter prevents a
stockholder from owning at any time, directly or indirectly by attribution, more
than 4.0% (potentially increasing to 9.9%) of the outstanding Common Stock or in
excess of 9.9% of the outstanding stock of any other class of stock. Pursuant to
powers granted by the Charter, the Company's Board of Directors has exempted
members of the family of Dr. Carl Adams and NHC, the Company's two largest
stockholders, from these provisions. If these transfer or ownership restrictions
are violated by any person, stock acquired in excess of these limits shall be
deemed to have been acquired by and to be held on behalf of the Company and, as
the equivalent of treasury shares for such purpose, shall not be considered to
be outstanding for quorum or voting purposes and shall not be entitled to
receive dividends.
For the Company to qualify as a REIT in any taxable year, no more than 50%
in value of its outstanding stock of all classes may be owned directly or
indirectly by attribution by five or fewer individuals at any time during the
second half of the Company's taxable year. Also in order to qualify as a REIT in
any taxable year, the capital stock of the Company must be owned by 100 or more
persons during at least 335 days of a taxable year consisting 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 Company's
rental income must be derived from lessees in which the Company does not own,
directly or indirectly by attribution, a 10% or greater interest. The Company
would be deemed to own that percentage interest in a lessee (including NHC)
owned by a stockholder of the Company who owned, directly or indirectly by
attribution, 10% or more of the Common Stock. See "Federal Income Tax
Considerations -- Requirements for Qualifications as a REIT -- Stock Ownership
Rules" and "-- Source of Income Tests".
The limitations on ownership of Common Stock and other classes of stock set
forth in the Charter are intended to reduce the possibility of the Company's
failing to meet the common stock ownership requirements for REIT qualification.
However, such provisions may inhibit market activity with respect to the
securities and the resulting opportunity for stockholders to receive a premium
for the Common Stock (or other class of stock) that might otherwise exist if an
individual were attempting to assemble a block of such stock in excess of the
applicable percentage limitation. Also, there can be no assurance that such
provisions will in fact prevent the Company from failing to meet such ownership
requirements.
Such provisions would also make the Company an unsuitable investment for
any person seeking to obtain ownership of more than 4.0% (potentially increasing
to 9.9%) of the outstanding capital stock of the Company. Although the Company
does not anticipate that it will redeem or otherwise reduce the number of shares
of outstanding stock except for Excess Shares, if such number were reduced, the
percentage limitation might be exceeded by a stockholder without any action on
his part.
In addition, certain provisions of Maryland law regarding Business
Combinations (as defined) require approval of the holders of 80% of the
outstanding voting shares of Common Stock of the Company. The Company's Charter
and Bylaws contain certain provisions that could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for the
Common Stock. These provisions include a staggered board of directors, blank
check preferred stock, and the application of Maryland corporate law provisions
on business combinations and control shares. See "Descriptions of The Company's
Capital Stock."
TAX RISKS REGARDING TAXATION OF COMPANY AND ITS STOCKHOLDERS
The Company was organized and believes that it has conducted and intends to
conduct its operations so as to qualify for taxation as a REIT under Sections
856 through 860 of the Code. See "Federal Income Tax Considerations." The
Company has not sought, nor will it seek, a ruling from the Internal Revenue
Service ("IRS") with respect to its qualification as a REIT. No assurances can
be given that the Company will at all times satisfy these rules and tests. Under
certain circumstances, the failure of the Company to meet the qualification
rules and tests could cause the Company to be taxed as a regular corporation in
which case dividends paid to the stockholders would not be deductible by the
Company in computing its taxable income. Furthermore, the Company would not be
eligible to elect to be taxed as a REIT for five taxable years
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<PAGE> 34
(including the year of disqualification). Under certain other circumstances, if
the Company failed to meet the qualification rules and tests, the Company would
continue to qualify as a REIT, but the Company could be required to pay
interest, taxes and/or certain nondeductible penalties. The payment of any tax,
interest or penalties by the Company would reduce the funds available for
distribution to stockholders or for investment, and could necessitate that the
Company borrow additional funds or liquidate certain of its investments.
In order to minimize the chances that the Company will violate certain
stock ownership rules (see "Federal Income Tax Considerations -- Requirements
for Qualification as a REIT"), the Directors of the Company are given the power
to redeem or prohibit the transfer of any class of capital stock if such
transfer would cause the Company to violate any stock ownership rule.
Stockholders are cautioned, however, that because broad attribution rules are
used in determining stock ownership and a large percentage of capital stock may
be held by nominees in "street name", the Company may be unaware of a violation
of these stock ownership rules and therefore the qualification of the Company as
a REIT may be inadvertently lost. See also "Description of the Company's Capital
Stock" for a further discussion of additional requirements by the Board of
Directors of the Company as a result of such attribution rules.
RATIO OF EARNINGS TO FIXED CHARGES
Set forth below is the ratio of earnings to fixed charges for the Company
for the periods indicated:
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1991 1992 1993 1993 1994
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to Fixed Charges.................... 1.39x 1.55x 2.04x 2.04x 2.44x
Ratio of earnings to Combined Fixed Charges and
Preferred Stock Dividends........................... 1.39x 1.55x 2.04x 2.04x 1.88x
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges, net
income has been added to fixed charges and that sum has been divided by such
fixed charges. Fixed charges consist of interest expense, capitalized interest
and amortization and depreciation expense.
USE OF PROCEEDS
Unless otherwise specified in the Prospectus Supplement which accompanies
this Prospectus, the net proceeds from the sale of the Securities offered from
time to time hereby, will be used for general business purposes, including the
repayment of outstanding amounts on the Company's $116 million revolving credit
agreement (the "Amended Credit Agreement"), repayment of any other indebtedness,
the acquisition of additional property, and the funding of additional mortgage
loans and construction projects. The Prospectus Supplement which accompanies
this Prospectus contains additional information concerning the use of proceeds.
The Amended Credit Agreement includes a $76 million Tranche A and a $40
million Tranche B and provides for advances with interest at various rates as
selected by the Company based on various indices. All outstanding amounts under
Tranche A are due on June 9, 1997 and all outstanding amounts under Tranche B
are due on June 6, 1995. As of September 30, 1994, the principal amount
outstanding under the Credit Agreement was $94.5 million. The amount outstanding
under the Credit Agreement as of such date was used by the Company for the
purchase of real estate assets and the funding of mortgage loans.
Pending such uses, the net proceeds will be invested in short-term,
interest-bearing, direct obligations issued or guaranteed by the United States,
certificates of deposit or accounts, or investment grade commercial paper,
consistent with the Company's qualification as a REIT, the Charter, and the
Company's agreements with its lenders.
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<PAGE> 35
RECENT DEVELOPMENTS
LITCHFIELD ASSET MANAGEMENT CORP.
On August 31, 1994, the Company committed to fund a loan of $176 million
for permanent financing by Litchfield Asset Management Corp. for 43 long term
care facilities located in twelve states leased by a wholly owned subsidiary of
Integrated Health Services, Inc. ("IHS") (the "Litchfield Facilities"). The
Litchfield Facilities include 43 long-term care facilities with approximately
5,430 beds. As of September 30, 1994, the Company had funded $150 million of the
loan which was used for the payment of existing debt and the buyout of certain
limited partnership interests in the Litchfield Facilities. The remaining amount
is available for subsequent advances in annual amounts equal to the smaller of
three times the increase in the Contribution Margin (as defined in the Loan
Agreement) or $3.7 million. The loan bears interest at the rate of 10.75% on the
initial draw and the greater of 10.75% or the 10-year Treasury Notes rate plus
500 basis points per annum on each subsequent draw. The term of the loan is the
earlier of twelve months prior to the lease termination date or ten years and
the loan is amortized over 25 years. The loan provides an annual payment
escalator equal to the greater of a 3% increase in gross revenue, or the
increase in the Consumer Price Index, with the period ended August 31, 1996 as
the base year. The escalator will commence with the quarter beginning September
1, 1996. The loan may not be prepaid for the first three years and has a
prepayment penalty of 4% until the second year prior to maturity at which time
the prepayment penalty is reduced to 2% until the last year of the lease term at
which time the prepayment penalty is eliminated.
The leases on all 43 facilities are guaranteed by IHS. The Lessee is
required to make an initial capital improvement which must be funded by December
31, 1995 and has committed on an ongoing basis to expand at least $300 per bed
per year on capital improvements. In addition to the first mortgage lien on all
43 facilities, the loan is further secured by a letter of credit representing
six months principal and interest. The Company has the right to approve any
lessee, sublessee or management company for any of the Litchfield Facilities.
AMENDED CREDIT AGREEMENT
On June 8, 1994, the Company entered into an Amended and Restated Credit
Agreement (the "Amended Credit Agreement") with certain lenders. Pursuant to the
Amended Credit Agreement, the Company has a revolving line of credit and letter
of credit of up to a maximum of $116 million. The actual amount which the
Company may borrow under the Amended Credit Agreement is limited by a borrowing
base calculation. As of September 30, 1994, the maximum amount which the Company
could borrow under the Amended Credit Agreement was $100 million and the total
principal amount outstanding was $94.5 million. Under the Amended Credit
Agreement, the Company is obligated to reduce the amount outstanding to $40
million or less for 30 days in each calendar year of which 15 days must be
consecutive. The Company has met this obligation for 1994.
The Amended Credit Agreement includes a $76 million Tranche A and a $40
million Tranche B and provides for advances with interest at various rates as
selected by the Company based on various indices. All unpaid outstanding amounts
advanced under Tranche A are due on June 9, 1997 and all unpaid outstanding
amounts advanced under Tranche B are due on June 6, 1995. All loans pursuant to
the Amended Credit Agreement are unsecured; however, in certain events the
Company has agreed to grant the lenders a first lien security interest in the
Company's mortgages, leaseholds and REMIC Certificates.
The Amended Credit Agreement restricts the Company from entering into
mortgages and leases with any one entity (other than NHC) which exceed 25% of
its assets. It further limits the Company's "Exposure" (as defined in the
Amended Credit Agreement) to NHC to 35%, and its "Exposure" to HealthTrust,
Inc. -- The Hospital Company to approximately 30%.
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<PAGE> 36
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 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 Common Stock are entitled to receive, pro rata, dividends
declared by the Board of Directors out of funds legally available therefore. In
the event of any liquidation, dissolution or winding up of the Company, holders
of Common Stock 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 Common Stock.
Each share of Common Stock 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 shares of Common Stock issued and sold
hereunder will be, when issued, fully paid and nonassessable.
The Company'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 Company 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 Common Stock. 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 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
Company, the Board could act in a manner which would discourage or prevent a
transaction some stockholders might believe is in the Company's best interests
or in which stockholders could or would receive a premium for their shares of
Common Stock over the market price.
The Company'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 Charter contains certain limitations on the number of shares of the
Company's stock that any one stockholder may own, which limitations are designed
to ensure that the Company maintains its status as a REIT.
Upon demand of the Company, each stockholder must disclose to the Company
such information with respect to direct and indirect ownership of stock owned
(or deemed to be owned after applying the rules applicable to REITs under the
Code) as the Board of Directors deems reasonably necessary in order that the
Company may fully comply with the REIT provisions of the Code. Proposed
transferees of stock must also satisfy the Board, upon demand, that such
transferees will not cause the Company to fall out of compliance with such
provisions.
The Code prevents a company from qualifying as a REIT if more than 50% in
value of its stock is owned by attribution by five or fewer individuals which
includes certain entities treated as individuals (the "Closely-held Rule"). The
Charter prohibits a stockholder (other than the Company's two largest
stockholders who, after applying ownership attribution rules set forth in the
Code, own approximately 22.86% of the outstanding shares of Common Stock of the
Company) from owning more than 4.0% of the total number of outstanding shares of
the Common Stock (which includes shares convertible into Common Stock) or such
other number which is more than one-third of the difference between 49.5% and
the percentage owned by such two largest stockholders or from owning 9.9% of any
other class of capital stock of the Company. The limit on the
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<PAGE> 37
percentage ownership of Common Stock may be increased by the Board of Directors
up to a maximum of 9.9% provided that in so doing the Company will not violate
the Closely-held Rule. The Company intends to set forth any change in the
applicable percentage limitation in its periodic reports filed under the
Exchange Act. Any shares of Common Stock in excess of such limit are deemed to
be "Excess Shares". Excess Shares shall be deemed automatically to have been
converted into a class separate and distinct from the class from which converted
and from any other class of Excess Shares, each such class being designated
"Excess Shares of [stockholder's name]" or in the event of excess preferred
stock, "Excess Preferred Stock of [stockholder's name]". No Excess Shares may be
voted, nor considered outstanding for the purpose of determining a quorum at any
meeting of stockholders. Any dividends or other distributions payable upon the
Excess Shares may, in the discretion of the Company, be paid into a non-interest
bearing account and released to the stockholder only at such time as he or she
ceases to be the holder of Excess Shares. The Company, upon authorization of the
Board of Directors, may redeem any or all Excess Shares, and from the date of
the giving of notice of redemption such shares shall cease to be outstanding and
the stockholder shall cease to be entitled to dividends, voting rights and other
benefits with respect to such shares. The redemption price will be based on the
trading prices of the class of stock from which the Excess Shares being redeemed
were converted, and is payable, without interest, only upon the liquidation of
the Company. However, the Charter contains provisions under which the holder of
Excess Shares may cause the Company to rescind such redemption by selling (and
notifying the Company of such sale), within 30 days after notice of the
redemption, a number of the shares held by such holder equal to the number of
Excess Shares. In addition, Excess Shares held by any holder may be converted
back into shares of the original class and series of stock if the holder sells
such shares prior to their being called for redemption.
BUSINESS COMBINATIONS
Under the Maryland General Corporation Law, 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 Company's outstanding voting stock (an "Interested
Stockholder") must be: (a) recommended by the Company's Board of Directors; and
(b) approved by the affirmative vote of at least (i) 80% of the Company's
outstanding shares entitled to vote and (ii) two-thirds of the outstanding
shares entitled to vote which are not held by the Interested Stockholder with
whom the business combination is to be effected, unless, among other things, the
Company'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 Company for a period of five years following the
date he becomes an Interested Stockholder. These provisions of Maryland General
Corporation Law 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.
CONTROL SHARE ACQUISITIONS
The Maryland General Corporation Law 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 Company. "Control shares" are shares which,
if aggregated with all other shares previously acquired which 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 Company's Board of Directors to call a special
meeting of
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<PAGE> 38
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 Company may itself
present the question at any stockholders' meeting.
Subject to certain conditions and limitations, the Company 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 Charter or
Bylaws of the Company prior to a control share acquisition.
The limitation on ownership of stock set forth in the Charter, as well as
Maryland Business Combination and control share acquisition statutes could have
the effect of discouraging offers to acquire the Company and of increasing the
difficulty of consummating any such offer.
TRANSFER AGENT AND REGISTRAR
Third National Bank in Nashville acts as transfer agent and registrar for
the Common Stock.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued in one or more series under an
Indenture (the "Indenture") to be executed by the Company and Third National
Bank in Nashville, as trustee (the "Trustee"), a form of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part. The
terms of the Debt Securities include those stated in the Indenture and those
made a part of the Indenture (before any supplements) by reference to the Trust
Indenture Act of 1939, as amended.
The following is a summary of certain provisions of the Indenture and does
not purport to be complete and is qualified in its entirety by reference to the
detailed provisions of the Indenture, including the definitions of certain terms
therein to which reference is hereby made, for a complete statement of such
provisions. Wherever particular provisions or sections of the Indenture or terms
defined therein are referred to herein, such provisions or definitions are
incorporated herein by reference.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that may be issued thereunder and provides that Debt Securities may
be issued from time to time in one or more series. The Prospectus Supplement
will describe certain terms of any Debt Securities offered thereby, including
(i) the title of such Debt Securities; (ii) any limit on the aggregate principal
amount of such Debt Securities and their purchase price; (iii) the date or dates
on which such Debt Securities will mature; (iv) the rate or rates per annum (or
manner in which interest is to be determined) at which such Debt Securities will
bear interest, if any, and the date from which such interest, if any, will
accrue; (v) the dates on which such interest, if any, on such Debt Securities
will be payable and the regular record dates for such interest payment dates;
(vi) any mandatory or optional sinking fund or analogous provisions; (vii)
additional provisions, if any, for the defeasance of such Debt Securities;
(viii) the date, if any, after which and the price or prices at which such Debt
Securities may, pursuant to any optional or mandatory redemption or repayment
provisions, be redeemed and the other detailed terms and provisions of any such
optional or mandatory redemption or repayment provisions; (ix) whether such Debt
Securities are to be issued in whole or in part in registered form represented
by one or more registered global securities (a "Registered Global Security")
and, if so, the identity of the depository for such Registered Global Security
or Securities; (x) certain applicable United
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<PAGE> 39
States Federal income tax consequences; (xi) any provisions relating to security
for payments due under such Debt Securities; (xii) any provisions relating to
the conversion or exchange of such Debt Securities into or for shares of Common
Stock or Debt Securities of another series; (xiii) any provisions relating to
the ranking of such Debt Securities in right of payment as compared to other
obligations of the Company; (xiv) the denominations in which such Debt
Securities are authorized to be issued; (xv) the place or places where principal
of, premium, if any, and interest, if any, on such Debt Securities will be
payable; and (xvi) any other specific term of such Debt Securities, including
any additional events of default or covenants provided for with respect to such
Debt Securities, and any terms that may be required by or advisable under
applicable laws or regulations.
CONVERSION RIGHTS
The terms, if any, on which Debt Securities of any series may be exchanged
for or converted into shares of Common Stock or Debt Securities of another
series will be set forth in the Prospectus Supplement relating thereto. To
protect the Company's status as a REIT, a holder of the Debt Securities of any
series (the "Holder") may not convert any Debt Security, and such Debt Security
shall not be convertible by any Holder, if as a result of such conversion, any
person would then be deemed to beneficially own, directly or indirectly, 4%
(potentially increasing up to 9.9% as determined by the Board of Directors) or
more of the then outstanding shares of Common Stock.
The conversion price will be subject to adjustment under certain
conditions, including (i) the payment of dividends (and other distributions) in
shares of Common Stock on any class of capital stock of the Company; (ii)
subdivisions, combinations and reclassifications of the Common Stock; (iii) the
issuance to all or substantially all holders of Common Stock of rights or
warrants entitling them to subscribe for or purchase shares of Common Stock at a
price per share (or having a conversion price per share) less than the then
current market price; and (iv) distributions to all or substantially all holders
of shares of Common Stock or shares of any other class, or evidences of
indebtedness or assets (including securities, but excluding those rights,
warrants, dividends and distributions referred to above and dividends and
distributions not prohibited under the terms of the Indenture) of the Company,
subject to the limitation that all adjustments by reason of any of the foregoing
would not be made until they result in a cumulative change in the conversion
price of at least 1%. No adjustments in the conversion price of the Debt
Securities will be made for regular quarterly or other periodic or recurring
cash dividends or distributions or for cash dividends or distributions to the
extent paid from stockholder's equity. In the event the Company shall effect any
capital reorganization or reclassification of its shares of Common Stock or
shall consolidate or merge with or into any trust or corporation (other than a
consolidation or merger in which the Company is the surviving entity) or shall
sell or transfer substantially all of its assets to any other trust or
corporation, the Holders of the Debt Securities of any series shall, if entitled
to convert such Debt Securities at any time after such transaction, receive upon
conversion thereof, in lieu of each share of Common Stock into which the Debt
Securities of such series would have been convertible prior to such transaction,
the same kind and amount of stock and other securities, cash or property as
shall have been issuable or distributable in connection with such transaction
with respect to each share of Common Stock.
A conversion price adjustment made according to the provisions of the Debt
Securities of any series (or the absence of provision for such an adjustment)
might result in a constructive distribution to the Holders of Debt Securities of
such series or holders of shares of Common Stock that would be subject to
taxation as a dividend. The Company may, at its option, make such reductions in
the conversion price, in addition to those set forth above, as the Board of
Directors of the Company deems advisable to avoid or diminish any income tax to
holders of shares of Common Stock resulting from any dividend or distribution of
shares of Common Stock (or rights to acquire shares of Common Stock) or from any
event treated as such for income tax purposes or for any other reason. The Board
of Directors will also have the power to resolve any ambiguity or correct any
error in the adjustments made pursuant to these provisions and its actions in so
doing shall be final and conclusive.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon market price.
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<PAGE> 40
The Holders of Debt Securities of any series at the close of business on an
interest payment record date shall be entitled to receive the interest payable
on such Debt Securities on the corresponding interest payment date
notwithstanding the conversion thereof. However, Debt Securities surrendered for
conversion during the period from the close of business on any record date for
the payment of interest to the opening of business on the corresponding interest
payment date must be accompanied by payment of an amount equal to the interest
payable on such interest payment date. Holders of Debt Securities of any series
who convert Debt Securities of such series on an interest payment date will
receive the interest payable by the Company on such date and need not include
payment in the amount of such interest upon surrender of such Debt Securities
for conversion. Except as aforesaid, no payment or adjustment is to be made on
conversion for interest accrued on the Debt Securities of any series or for
dividends on shares of Common Stock.
OPTIONAL REDEMPTION
The Debt Securities of any series will be subject to redemption, in whole
or from time to time in part, at any time for certain reasons intended to
protect the Company's status as a REIT at the option of the Company on at least
30 days' prior notice by mail at a redemption price equal to 100% of the
principal amount, plus interest accrued to the date of redemption. Except as
otherwise set forth in the accompanying Prospectus Supplement, the Company may
exercise its redemption powers solely with respect to the securities of the
security holder or holders which pose a threat to the Company's REIT status and
only to the extent deemed necessary by the Company's Board of Directors to
preserve such status. The Indenture does not contain any provision requiring the
Company to repurchase the Debt Securities of any series at the option of the
Holders thereof in the event of a leveraged buyout, recapitalization or similar
restructuring of the Company, even though the Company's creditworthiness and the
market value of the Debt Securities may decline significantly as a result of
such transaction. The Indenture does not protect Holders of the Debt Securities
of any series against any decline in credit quality, whether resulting from any
such transaction or from any other cause.
ADDITIONAL COVENANTS
Any additional covenants of the Company with respect to a series of the
Debt Securities will be set forth in the Prospectus Supplement relating thereto.
MODIFICATION OF THE INDENTURE
Under the Indenture, with certain exceptions, the rights and obligations of
the Company with respect to any series of Debt Securities and the rights of
Holders of such series may only be modified by the Company and the Trustee with
the consent of the Holders of at least a majority in principal amount of the
outstanding Debt Securities of such series. However, without the consent of each
Holder of any Debt Securities affected, an amendment, waiver or supplement may
not (i) reduce the principal of, or rate of interest on, any Debt Securities;
(ii) change the stated maturity date of the principal of, or any installment of
interest on, any Debt Securities; (iii) waive a default in the payment of the
principal amount of, or the interest on, or any premium payable on redemption
of, any Debt Securities; (iv) change the currency for payment of the principal
of, or premium or interest on, any Debt Securities; (v) impair the right to
institute suit for the enforcement of any such payment when due; (vi) adversely
affect any right to convert any Debt Securities; (vii) reduce the amount of
outstanding Debt Securities necessary to consent to an amendment, supplement or
waiver provided for in the Indenture; or (viii) modify any provisions of the
Indenture relating to the modification and amendment of the Indenture or waivers
of past defaults, except as otherwise specified.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Except as otherwise set forth in the accompanying Prospectus Supplement,
the following is a summary of certain provisions of the Indenture relating to
events of default, notice and waiver.
The following are Events of Default under the Indenture with respect to any
series of Debt Securities: (i) default in the payment of interest on the Debt
Securities of such series when due and payable, which continues for 30 days;
(ii) default in the payment of principal of (and premium, if any) on the Debt
Securities
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<PAGE> 41
when due and payable, at maturity, upon redemption or otherwise, which continues
for five Business Days; (iii) failure to perform any other covenant of the
Company contained in the Indenture or the Debt Securities of such series which
continues for 60 days after written notice as provided in the Indenture; (iv)
default under any bond, debenture or other Indebtedness (as defined in the
Indenture) of the Company or any subsidiary if (a) either (x) such event of
default results from the failure to pay any such Indebtedness at maturity or (y)
as a result of such event of default, the maturity of such Indebtedness has been
accelerated prior to its expressed maturity and such acceleration shall not be
rescinded or annulled or the accelerated amount paid within 10 days after notice
to the Company of such acceleration, or such Indebtedness having been
discharged, and (b) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to pay
principal or interest thereon, or the maturity of which has been so accelerated,
aggregates $5,000,000 or more; (v) certain events of bankruptcy, insolvency or
reorganization relating to the Company and (vi) any other Event of Default
provided with respect to the Debt Securities of the series.
If an Event of Default occurs and is continuing with respect to the Debt
Securities of any series, either the Trustee or the Holders of a majority in
aggregate principal amount of the outstanding Debt Securities of such series may
declare the Debt Securities due and payable immediately.
The Company will not declare or pay any dividends or make any distribution
to holders of its capital stock (other than dividends or distributions payable
in capital stock of the Company) if at the time of any of the aforementioned
actions an Event of Default has occurred and is continuing or would exist
immediately after giving effect to such action, except for (i) the payment of
any dividend within 60 days after the date of declaration when the payment would
have complied with the foregoing provisions on the date of declaration; (ii) the
retirement of any share of the Company's capital stock by exchange for, or out
of the proceeds of the substantially concurrent sale (other than to a
subsidiary) of, other shares of its capital stock; or (iii) the payment of a
dividend or distribution in such amount as may be necessary to maintain the
Company's status as a REIT, provided that the Company has furnished an opinion
of counsel with the Trustee specifying the amount of the dividend or
distribution required to maintain such status.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of any Default or Event of Default with respect to the Debt
Securities of any series, give to the Holders of Debt Securities notice of all
uncured Defaults and Events of Default known to it, but the Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of such Holders, except in the
case of a default in the payment of the principal of (or premium, if any) or
interest on any of the Debt Securities of such series.
The Indenture provides that the Holders of a majority in aggregate
principal amount of the Debt Securities of any series then outstanding may
direct the time, method and place of conducting any proceedings for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Debt Securities of such series. The right of a
Holder to institute a proceeding with respect to the Indenture is subject to
certain conditions precedent including notice and indemnity to the Trustee, but
the Holder has an absolute right to receipt of principal of (and premium, if
any) and interest on such Holder's Debt Securities on or after the respective
due dates expressed in the Debt Securities, and to institute suit for the
enforcement of any such payments.
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series then outstanding may on behalf of the Holders of all
Debt Securities of such series waive certain past defaults, except a default in
payment of the principal of (or premium, if any) or interest on any Debt
Securities of such series or in respect of certain provisions of the Indenture
which cannot be modified or amended without the consent of the Holder of each
outstanding Debt Securities of such series affected thereby.
The Company will be required to furnish to the Trustee annually a statement
of certain officers of the Company stating whether or not they know of any
Default or Events of Default (as defined in the Indenture) and, if they have
knowledge of a Default or Event of Default, a description of the efforts to
remedy the same.
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CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Indenture provides that the Company may merge or consolidate with, or
sell or convey all or substantially all of its assets to, any other trust or
corporation, provided that (i) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) shall be any entity
organized and existing under the laws of the United States or a state thereof or
the District of Columbia (although it may, in turn, be owned by a foreign
entity) and such entity shall expressly assume by supplemental indenture all of
the obligations of the Company under the Debt Securities of any series and the
Indenture; (ii) immediately after giving effect to such transactions no Default
or Event of Default shall have occurred and be continuing, and (iii) the Company
shall have delivered to the Trustee an Officers' Certificate and opinion of
counsel, stating that the transaction and supplemental indenture comply with the
Indenture.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in global
form (the "Global Securities"). The Global Securities will be deposited with a
depository (the "Depository"), or with a nominee for a Depository, identified in
the Prospectus Supplement. In such case, one or more Global Securities will be
issued in a denomination or aggregate denominations equal to the portion of the
aggregate principal amount of outstanding Debt Securities of the series to be
represented by such Global Security or Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in definitive form, a Global
Security may not be transferred except as a whole by the Depository for such
Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by such
Depository or any such nominee to a successor for such Depository or a nominee
of such successor.
The specific material terms of the depository arrangement with respect to
any portion of a series of Debt Securities to be represented by a Global
Security will be described in the Prospectus Supplement. The Company anticipates
that the following provisions will apply to all depository arrangements.
Upon the issuance of a Global Security, the Depository for such Global
Security will credit, on its book entry registration and transfer system, the
respective principal amounts of the Debt Securities represented by such Global
Security to the accounts of persons that have accounts with such Depository
("participants"). The accounts to be credited shall be designated by any
underwriters or agents participating in the distribution of such Debt
Securities. Ownership of beneficial interests in a Global Security will be
limited to participants or persons that may hold interests through participants.
Ownership of beneficial interests in such Global Security will be shown on, and
the transfer of that ownership will be effected only through records maintained
by the Depository for such Global Security (with respect to interests of
participants) or by participants or persons that hold through participants (with
respect to interests of persons other than participants). So long as the
Depository for a Global Security, or its nominee, is the registered owner of
such Global Security, such Depository or such nominee as the case may be, will
be considered the sole owner or Holder of the Debt Securities represented by
such Global Security for all purposes under the Indenture; provided, however,
that for purposes of obtaining any consents or directions required to be given
by the Holders of the Debt Securities, the Company, the Trustee and its agents
will treat a person as the holder of such principal amount of Debt Securities as
specified in a written statement of the Depository.
Principal, premium, if any, and interest payments, if any, on Debt
Securities represented by a Global Security registered in the name of a
Depository or its nominee will be made to such Depository or its nominee, as the
case may be, as the registered owner of such Global Security. None of the
Company, the Trustee or any Paying Agent for such Debt Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in such Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that the depository for any Debt Securities represented
by a Global Security, upon receipt of any payment of principal premium, if any,
or interest will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security as shown on the records of such Depository. The
Company also expects that payments by participants will be governed by standing
instructions and customary practices, as is now the case with the
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securities held for the accounts of customers registered in "street names," and
will be the responsibility of such participants.
If the Depository for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depository and a successor
Depository is not appointed by the Company within 90 days, the Company will
issue each Debt Security in definitive form to the beneficial owners thereof in
exchange for such Global Security. In addition, the Company may at any time and
in its sole discretion determine not to have any of the Debt Securities of a
series represented by one or more Global Securities and, in such event, will
issue Debt Securities of such series in definitive form in exchange for all of
the Global Security or Securities representing such Debt Securities.
The laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such laws may impair
the ability to transfer beneficial interest in Debt Securities represented by
Global Securities.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York.
DESCRIPTION OF PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Charter and the Board of Directors' resolution or articles supplementary (the
"Articles Supplementary") relating to each series of the Preferred Stock which
will be filed with the Commission and incorporated by reference to the
Registration Statement of which this Prospectus is a part at or prior to the
time of the issuance of such series of Preferred Stock.
GENERAL
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $0.01 par value per share. See "Description of the Company's Capital
Stock."
Under the Charter, the Board of Directors of the Company is authorized
without further stockholder action to establish and issue, from time to time, up
to 10,000,000 shares of Preferred Stock, in one or more series, with such
designations, preferences, powers and relative participating, optional or other
special rights, and the qualifications, limitations or restrictions thereon,
including, but not limited to dividend rights, dividend rate or rates,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preferences as shall be stated in the resolution providing for the issue of a
series of such stock, adopted, at any time or from time to time, by the Board of
Directors of the Company.
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock will be issued; (iv)
the dividend rate (or method of calculation), the dates on which dividends shall
be payable and the dates from which dividends shall commence to cumulate, if
any; (v) any redemption or sinking fund provisions; (vi) any conversion rights;
and
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(vii) any additional voting, dividend, liquidation, redemption, sinking fund and
other rights, preferences, privileges, limitations and restrictions.
The Preferred Stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights. Unless otherwise stated in a Prospectus
Supplement relating to a particular series of the Preferred Stock, each series
of the Preferred Stock will rank on a parity as to dividends and distributions
of assets with each other series of the Preferred Stock. The rights of the
holders of each series of the Preferred Stock will be subordinate to those of
the Company's general creditors.
CERTAIN PROVISIONS OF THE CHARTER
See "Description of the Company's Capital Stock" for a description of
certain provisions of the Charter, including provisions which may have certain
anti-takeover effects.
DIVIDEND RIGHTS
Holders of shares of the Preferred Stock of each series will be entitled to
receive, when, as and if declared by the Board of Directors of the Company, out
of funds of the Company legally available therefor, cash dividends on such dates
and at such rates as will be set forth in, or as are determined by the method
described in, the Prospectus Supplement relating to such series of the Preferred
Stock. Such rate may be fixed or variable or both. Each such dividend will be
payable to the holders of record as they appear on the stock books of the
Company on such record dates, fixed by the Board of Directors of the Company, as
specified in the Prospectus Supplement relating to such series of Preferred
Stock.
Such dividends may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating to such series of Preferred Stock. If the Board
of Directors of the Company fails to declare a dividend payable on a dividend
payment date on any series of Preferred Stock for which dividends are
noncumulative, then the holders of such series of Preferred Stock will have no
right to receive a dividend in respect of the dividend period ending on such
dividend payment date, and the Company shall have no obligation to pay the
dividend accrued for such period, whether or not dividends on such series are
declared payable on any future dividend payment dates. Dividends on the shares
of each series of Preferred Stock for which dividends are cumulative will accrue
from the date on which the Company initially issues shares of such series.
So long as the shares of any series of the Preferred Stock shall be
outstanding, unless (i) full dividends (including if such Preferred Stock is
cumulative, dividends for prior dividend periods) shall have been paid or
declared and set apart for payment on all outstanding shares of the Preferred
Stock of such series and all other classes and series of Preferred Stock (other
than Junior Stock, as defined below) and (ii) the Company is not in default or
in arrears with respect to the mandatory or optional redemption or mandatory
repurchase or other mandatory retirement of, or with respect to any sinking or
other analogous fund for, any shares of Preferred Stock of such series or any
shares of any other Preferred Stock of any class or series (other than Junior
Stock), the Company may not declare any dividends on any shares of Common Stock
or any other stock of the Company ranking as to dividends or distributions of
assets junior to such series of Preferred Stock (the Common Stock and any such
other stock being herein referred to as "Junior Stock"), or make any payment on
account of, or set apart money for, the purchase, redemption or other retirement
of, or for a sinking or other analogous fund for, any shares of Junior Stock or
make any distribution in respect thereof, whether in cash or property or in
obligations or stock of the Company, other than Junior Stock which is neither
convertible into, nor exchangeable or exercisable for, any securities of the
Company other than Junior Stock.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
voluntary or involuntary, the holders of each series of the Preferred Stock will
be entitled to receive out of the assets of the Company available for
distribution to stockholders, before any distribution of assets or payment it
made to the holders of Common Stock or any other shares of stock of the Company
ranking junior as to such distribution or payment to such series of Preferred
Stock, the amount set forth in the Prospectus Supplement relating to such series
of the Preferred Stock. If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the
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Company, the amounts payable with respect to the Preferred Stock of any series
and any other shares of Preferred Stock ranking as to any such distribution on a
parity with such series of the Preferred Stock are not paid in full, the holders
of the Preferred Stock of such series and of such other shares of Preferred
Stock will share ratably in any such distribution of assets of the Company in
proportion to the full respective preferential amounts to which they are
entitled. After payment to the holders of the Preferred Stock of each series of
the full preferential amounts of the liquidating distribution to which they are
entitled, the holders of each such series of the Preferred Stock will be
entitled to no further participation in any distribution of assets by the
Company.
If such payment shall have been made in full to all holders of shares of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes of stock ranking junior to the Preferred Stock
upon liquidation, dissolution or winding up, according to their respective
rights and preferences and in each case according to their respective number of
shares. For such purposes, the consolidation or merger of the Company with or
into any other corporation, or the sale, lease or conveyance of all or
substantially all of the property or business of the Company, shall not be
deemed to constitute a liquidation, dissolution or winding up of the Company.
REDEMPTION
A series of the Preferred Stock may be redeemable, in whole or from time to
time in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon terms, at
the times and at the redemption prices set forth in the Prospectus Supplement
relating to such series. Shares of the Preferred Stock redeemed by the Company
will be restored to the status of authorized but unissued shares of preferred
stock of the Company.
In the event that fewer than all of the outstanding shares of a series of
the Preferred Stock are to be redeemed, whether by mandatory or optional
redemption, the number of shares to be redeemed will be determined by lot or pro
rata (subject to rounding to avoid fractional shares) as may be determined by
the Company or by any other method as may be determined by the Company in its
sole discretion to be equitable. From and after the redemption date (unless
default shall be made by the Company in providing for the payment of the
redemption price plus accumulated and unpaid dividends, if any), dividends shall
cease to accumulate on the shares of the Preferred Stock called for redemption
and all rights of the holders thereof (except the right to receive the
redemption price plus accumulated and unpaid dividends, if any) shall cease.
So long as any dividends on shares of any series of the Preferred Stock or
any other series of preferred stock of the Company ranking on a parity as to
dividends and distributions of assets with such series of the Preferred Stock
are in arrears, no shares of any such series of the Preferred Stock or such
other series of preferred stock of the Company will be redeemed (whether by
mandatory or optional redemption) unless all such shares are simultaneously
redeemed, and the Company will not purchase or otherwise acquire any such
shares; provided, however, that the foregoing will not prevent the purchase or
acquisition of such shares of Preferred Stock of such series or of shares of
such other series of preferred stock pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding shares of Preferred Stock
of such series and, unless the full cumulative dividends on all outstanding
shares of any cumulative Preferred Stock of such series and any other stock of
the Company ranking on a parity with such series as to dividends and upon
liquidation shall have been paid or contemporaneously are declared and paid for
all past dividend periods, the Company shall not purchase or otherwise acquire
directly or indirectly any shares of Preferred Stock of such series (except by
conversion into or exchange for stock of the Company ranking junior to the
Preferred Stock of such series as to dividends and upon liquidation).
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of shares of Preferred
Stock to be redeemed at the address shown on the stock transfer books of the
Company. After the redemption date, dividends will cease to accrue on the shares
of Preferred Stock called for redemption and all rights of the holders of such
shares will terminate, except the right to receive the redemption price without
interest.
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CONVERSION RIGHTS
The terms, if any, on which shares of Preferred Stock of any series may be
exchanged for or converted (mandatorily or otherwise) into shares of Common
Stock or another series of Preferred Stock will be set forth in the Prospectus
Supplement relating thereto.
VOTING RIGHTS
Except as indicated below or in a Prospectus Supplement relating to a
particular series of the Preferred Stock, or except as required by applicable
law, the holders of the Preferred Stock will not be entitled to vote for any
purpose.
So long as any shares of Preferred Stock remain outstanding, the Company
shall not, without the consent or the affirmative vote of the holders of a
majority of the shares of each series of Preferred Stock outstanding at the time
given in person or by proxy, either in writing or at a meeting (such series
voting separately as a class) (i) authorize, create or issue, or increase the
authorized or issued amount of, any class or series of stock ranking prior to
such series of Preferred Stock with respect to payment of dividends, or the
distribution of assets on liquidation, dissolution or winding up or
reclassifying any authorized stock of the Company into any such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares and (ii) to repeal, amend or
otherwise change any of the provisions applicable to the Preferred Stock of such
series in any manner which materially and adversely affects the powers,
preferences, voting power or other rights or privileges of such series of the
Preferred Stock or the holders thereof; provided, however, that any increase in
the amount of the authorized Preferred Stock or the creation or issuance of
other series of Preferred Stock, or any increase in the amount of authorized
shares of such series or of any other series of Preferred Stock, in each case
ranking on a parity with or junior to the Preferred Stock of such series, shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of the Preferred Stock shall have been
redeemed or called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
TRANSFER AGENT AND REGISTRAR
The transfer agent, dividend and redemption price disbursement agent and
registrar for shares of each series of the Preferred Stock will be set forth in
the Prospectus Supplement relating thereto.
FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX CONSIDERATIONS SHOULD BE
READ IN ITS ENTIRETY BY ALL PROSPECTIVE INVESTORS. THIS DISCUSSION IS A SUMMARY
ONLY, AND IS NOT INTENDED TO ADDRESS THE SPECIFIC TAX SITUATION OF EACH
INVESTOR. EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE TAXATION OF THE COMPANY AS A
REAL ESTATE INVESTMENT TRUST AND THE OWNERSHIP OF ITS CAPITAL STOCK. NO RULING
FROM THE IRS, OR FROM ANY OTHER TAXING AUTHORITY, HAS BEEN SOUGHT OR OBTAINED,
NOR WILL ONE BE REQUESTED, AS TO ANY OF THE FOLLOWING TAX CONSIDERATIONS.
MOREOVER, THE IRS IS NOT BOUND BY THE DISCUSSION OR THE OPINIONS OF TAX COUNSEL
SET FORTH BELOW.
INTRODUCTION
General Summary Only. The following is a general summary of material
federal income tax consequences of the taxation of the Company as a REIT and the
ownership of Common Stock. The discussion is based upon current interpretations
of the Code, applicable regulations, and case law, and administrative
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interpretations thereunder, any of which could change at any time, even on a
retroactive basis. Because of the complexity of tax laws, and the varying tax
situation of different taxpayers, each prospective investor should consult his
own tax advisor.
Opinions of Tax Counsel. This explanation of federal income tax
consequences has been reviewed by Goodwin, Procter & Hoar (a partnership
including professional corporations), Boston, Massachusetts, special counsel to
the Company ("Tax Counsel").
This discussion addresses complex areas of the tax law where, in certain
instances, the relevant legal principles have not been clearly developed. When
possible, Tax Counsel has expressed its opinion as to the matters discussed
below, or referred to its opinion to be rendered to the Company. When unable to
opine, Tax Counsel has addressed the factors and uncertainties precluding its
opinion.
Prospective investors must recognize that an opinion of counsel merely
reflects the best legal judgment of counsel, and is not binding. Prospective
investors must also recognize that qualification as a REIT will depend upon the
Company's ability to meet, based on actual operations, various requirements. In
particular, a REIT must satisfy certain stock ownership, income and asset tests.
See "-- Requirements for Qualification as a REIT" below. In applying these
tests, as more fully described below, broad attribution rules are used to
attribute stock owned by one party to another. As described below, Tax Counsel
will render only a limited opinion as to the Company's ability to satisfy these
tests.
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
Prospectus. In the absence of any such rulings, no assurances can be given that
the IRS will agree with this discussion. Tax Counsel can offer no assurance that
the law will not change adversely, that the assumptions underlying the following
discussion and opinions will prove to be accurate, or that the courts will agree
with the conclusions of Tax Counsel in the event of a challenge by the IRS.
TAXATION OF THE COMPANY AS A REIT
General Principles. Since its formation, the Company has filed its federal
income tax returns as a REIT. The Company believes that it has been qualified
and intends to continue to qualify as a REIT under Sections 856 through 860 of
the Code, but no assurances can be given that it will qualify at all times. The
Code provides special tax treatment for organizations that qualify and elect to
be taxed as REITs. If certain conditions are met (see "-- Requirements for
Qualification as a REIT" below), entities that primarily invest in real estate
or mortgages secured by real estate and would otherwise be taxed as regular
corporations may elect REIT 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 stockholders. This treatment
substantially eliminates the "double taxation" (at the corporate and stockholder
levels) that typically results from the use of corporate investment vehicles.
The Company has used and is required to use the calendar year as its tax year
under Code Section 859(a).
The rules governing REITs are highly technical and require continuous
compliance with a variety of tests that, among other things, restrict the nature
of the Company's income and assets and mandate specified levels of
distributions. As a result, while the Company anticipates that it has been and
will continue to be able to satisfy the applicable tests and will use its best
efforts to do so, no assurance can be given that the Company will so qualify for
any particular year or that applicable law and regulations will not change and
adversely affect the Company and its Stockholders.
95% Distribution Requirement. Even if the Company continues to qualify as
a REIT, it will be taxed on all of its income (whether distributed or retained)
as a regular corporation unless it distributes to its stockholders an amount
equal to (a) 95% of (i) its "REIT taxable income" before deduction of dividends
paid (and excluding any net capital gain) plus (ii) the excess of net income
from "foreclosure property" (as defined below) over the tax on such income,
minus (b) the REITs "excess noncash income." This requirement is referred to as
the "95% Distribution Requirement." "REIT taxable income" is defined as the
taxable income of the Company computed as if it were a regular corporation,
subject to certain adjustments.
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The Company would have "excess noncash income" if its "noncash income" in any
year exceeded 5% of the Company's REIT taxable income (before deduction for
dividends paid and excluding any net capital gain). The Company's Board of
Directors has made and intends to continue to make distributions to stockholders
that will be sufficient to meet the 95% Distribution Requirement.
It is possible that the Company, from time to time, may not have sufficient
cash or liquid assets to meet the 95% Distribution Requirement. To date, this
has not occurred. This could arise, for example, due to timing differences
between the actual receipt of cash and the recognition of income or gain for
federal income tax purposes. For example, any recapture income incurred on
account of the sale of one of the Health Care Facilities would be recognized in
the year of sale, regardless of when cash payments were actually received.
A REIT can, under certain circumstances, declare and pay a dividend with
respect to the preceding year in order to satisfy the 95% Distribution
Requirement for that year. To encourage REITs to make distributions during the
year to which the distribution relates, the Code imposes a 4% excise tax on the
amount by which the REITs "required distribution" for any calendar year exceeds
the REITs "distributed amount" for the calendar year. To date, no such penalty
has been imposed on the Company.
The Company will attempt to monitor closely the relationship between its
REIT taxable income and its cash flow and attempt to avoid problems meeting the
95% Distribution Requirement. However, in the event that timing differences
occur, it might be necessary for the Company to borrow, to liquidate some or all
of its investments, or to issue new securities in order to meet the 95%
Distribution Requirement. To date, the Company has not engaged in any such
activity to meet the 95% Distribution Requirement.
The failure of the Company to meet the 95% Distribution Requirement in any
taxable year, while preventing the Company from being taxed as a REIT in that
year (and likely subjecting the Company to the 4% excise tax described above),
would not by itself disqualify the Company from qualifying as a REIT in any
subsequent year. Additionally, if the Company failed to meet the 95%
Distribution Requirement as a result of an adjustment to the Company's tax
return by the IRS, the Company could generally pay a "deficiency dividend" (plus
interest and a penalty) within a specified period which would be permitted as a
deduction in the year to which the adjustment was made. To date, the Company
believes it has met the 95% Distribution Requirement.
REIT Taxes. For a taxable year in which the Company qualifies as a REIT,
it generally will be taxed only on the undistributed portion of its taxable
income because the Company will be entitled to a deduction for dividends paid to
stockholders during the taxable year. The Code does not require, though it does
permit, the Company to distribute its net capital gain; however, undistributed
capital gains will be taxable to the Company. While in some circumstances
dividends paid after the close of a taxable year may be deducted with respect to
the prior year (e.g., to meet the 95% Distribution Requirement retroactively), a
nondeductible 4% excise tax is imposed on deferred distributions. The Company
also will be subject to the alternative minimum tax on items of tax preference,
which could include, for example, the excess amount of depreciation allowed for
regular tax purposes over that allowed for alternative minimum tax purposes. See
"-- Taxation of REIT Stockholders -- Minimum Tax" below.
In addition, a REIT is subject to tax on net income from foreclosure
property at the highest corporate rate (currently 35%). A confiscatory 100% tax
applies to any net income from certain transactions that REIT's are generally
prohibited to enter. In addition, if the Company fails to meet either the 75% or
95% source of income tests described below, but still qualifies for REIT status
under the reasonable cause exception to those tests, a 100% tax is imposed equal
to the amount obtained by multiplying (i) the greater of the amounts, if any, by
which it failed the tests, times (ii) the fraction that its REIT taxable income
represents of the Company's gross income (excluding capital gain and certain
other items).
Failure to Qualify. If the Company fails to qualify as a REIT in any year,
and the relief provisions described below do not apply (see "-- Requirements for
Qualification as a REIT -- Relief Provisions"), the Company would be subject to
federal income tax as if it were a regular corporation. In that case,
distributions to its stockholders (of which none would be required) would not be
deductible by the Company, and its stockholders would be taxed in the same
manner as stockholders of regular corporations. The Company could
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also be subject to significant tax liabilities (including penalties and
interest), and the amount of cash available for distribution to its stockholders
would be reduced. The Company could be forced to borrow funds or to liquidate
certain of its investments in order to meet these liabilities. If the Company
loses its REIT status, it would not be eligible to elect REIT status again until
the fifth taxable year after the year for which the Company's election was
terminated.
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 Company's taxable income may
vary from its net income for financial reporting purposes. For tax purposes, the
Company has used and will continue to use the accrual method of accounting.
REQUIREMENTS FOR QUALIFICATION AS A REIT
The Company has received an opinion from Tax Counsel, based on certain
factual representations by the Company, to the effect that the Company has
qualified as a REIT for the taxable years ended December 31, 1991, 1992 and 1993
and that the form of organization of the Company and its operations are such so
as to enable the Company to qualify as a REIT for 1994 and later years provided
that the Company meets the requirements for such treatment as summarized below.
Such opinion is subject to the discussion set forth below with respect to Tax
Counsel's inability to render an opinion with respect to whether certain rents
qualify as "rents from real property" as a result of the uncertainty of the
application of certain attribution rules. Furthermore, Tax Counsel has advised
the Company that, as with all REITs, it is not possible for counsel to render an
opinion as to whether the Company will, in fact, qualify as a REIT for any
future taxable year due to the fact that such qualification depends upon the
continued satisfaction of several conditions, the occurrence of which cannot be
assured.
In order to qualify as a REIT, the Company generally must meet, among
others, the following requirements:
Stock Ownership Rules. Except for the first year for which the Company
elected to be taxed as a REIT, beneficial ownership of the Company's Common
Stock must be held by 100 or more persons for at least 335 days of each taxable
year of 12 months (or during a proportionate part of a shorter taxable year).
Additionally, except for the first year for which the Company elected to be
taxed as a REIT, at all times during the second half of each taxable year of the
Company, no more than 50% in value of the Company's stock may be owned, directly
or indirectly, actually or constructively, by five or fewer individuals. In
determining whether the stock ownership requirement is met, for taxable years
beginning on or after January 1, 1994, any stock held by a pension fund trust
shall be treated as held directly by its beneficiaries in proportion to their
actuarial interests in such trust rather than being treated as held by the trust
itself. This "look through treatment" is available provided "disqualified
persons" (as defined under the Prohibited Transactions rules of Code Section
4975, with certain modifications) together do not own 5% or more of the
Company's stock value and the Company has no accumulated earnings and profits
attributable to any period the Company did not qualify for REIT status. In order
to minimize the chances that the Company will violate the Closely-held Rule or
any other stock ownership test (collectively, the "Stock Ownership Tests"), the
Company's Charter authorizes the Company to prohibit the transfer of, to
prohibit the exercise of stockholder rights as to, or to redeem, stock held by
stockholders that might violate the Stock Ownership Tests. See "Certain
Restrictions on Transfer of Shares; Business Combinations" above.
The Company must maintain records which disclose the actual and
constructive ownership of all stock. To fulfill this obligation, the Company
must demand each year written statements from the record holders of certain
designated percentages of stock disclosing the actual owners of such stock.
As previously noted, the Code requires the use of broad attribution rules
to determine certain direct and indirect stock ownership. Because of the breadth
of these rules, it may not be possible for the Company to maintain complete
ownership records, as described above, or to know whether a violation of the
Closely-held Rule has occurred. For example, a stockholder of the Company would
be deemed to own stock owned by his or her parents, children, spouse, siblings
and his or her proportionate interest of shares owned by another corporation,
partnership, estate or trust in which the stockholder has an interest.
Accordingly, no assurances
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<PAGE> 50
can be given that the Company will be able to satisfy the Closely-held Rule or
any other Stock Ownership Test and at all times qualify as a REIT.
Source of Income Tests. The Company must meet three separate income tests
each year:
(a) The 75% Income Test. At least 75% of the Company's gross income for
each taxable year must be derived from the following sources: (i) "rents from
real property" (as limited below); (ii) interest on obligations secured by
mortgages on real property (other than interest based in whole or in part on the
income or profits of any person); (iii) gains from the sale or other disposition
of interests in real property and real estate mortgages (other than gains from
property held primarily for sale to customers in the ordinary course of the
Company's business ("dealer property")); (iv) abatements and refunds of real
property taxes; (v) dividends or other distributions on shares in other REITs as
well as gain from the sale of such shares; (vi) certain commitment fees received
for agreeing to make mortgage loans or to purchase or lease real property; and
(vii) certain income from the operation, and gain from the sale, of property
acquired at or in lieu of foreclosure on the mortgage secured by such property
or after a default, or in anticipation of an imminent default on a lease of such
property ("foreclosure property").
From the Company's perspective, the most important permitted categories are
rents from real property, interest secured by mortgages on real property and
gain from the sale or other disposition of real property (excluding dealer
property). "Rents from real property" exclude, generally, (a) rents based on the
income or profits derived by any person from property; (b) rents paid by a
person or entity in which the Company owns, directly or indirectly through
attribution, a 10% or greater interest; and (c) amounts received with respect to
property if the Company provides services to the tenants of such property, or
manages or operates the property, other than through an "independent contractor"
from whom the Company does not derive any income.
The determination of whether the Company owns 10% or more of any tenant,
including NHC, is made after the application of extensive attribution rules
under which the Company will be treated as owning interests in the tenant that
are owned by the Company's 10% stockholders. In determining which stockholders
of the Company own more than 10% of its Common Stock, each actual stockholder
will be treated as owning Common Stock held by entities and individuals related
to the stockholder. These attribution rules can have broad and unpredictable
consequences in the case of a tenant, such as NHC, that is a publicly owned
entity. For example, if two unrelated Company stockholders who own in the
aggregate more than 10% of the interests in the tenant are partners in an
unrelated partnership, the Company will be treated as owning the interests in
the tenant that are owned by such Company stockholders. In rendering its opinion
relative to qualification of the Company as a REIT, Tax Counsel has noted that
the uncertainty of the application of the attribution rules at any point in time
makes uncertain the determination that all or the requisite percentages of rents
received by the Corporation from tenants that are publicly owned entities, such
as NHC, are "rents from real property" within the meaning of the Code; and, in
rendering such opinion, Tax Counsel has relied upon the belief of management
that the Company has not owned directly or by attribution at any time 10% or
more of the outstanding ownership interests in any tenant. If the rents received
do not so qualify, the Company might not qualify as a REIT unless the relief
provisions described below are determined to be available. Management of the
Company has carefully reviewed the ownership of NHC and of each other tenant and
of the Company's Common Stock with the foregoing attribution rules in mind and,
to the best of its knowledge, the Company does not own directly or by
attribution 10% or more of the outstanding ownership interests in any tenant,
including NHC.
Inasmuch as the Company's leases are triple-net leases, it is not
anticipated that the Company will be required to provide any services to NHC or
other lessees, as tenant of the Health Care Facilities, or to manage or operate
the Health Care Facilities.
"Rents from real property" also generally exclude rents derived from the
rental of personal property. Accordingly, rents arising from a lease of both
real and personal property must generally be apportioned, and only the amount
allocable to real property qualifies. However, "rents from real property"
includes amounts attributable to personal property incidental to the rental of
real property if the amount allocable to personal property is less than 15% of
the total rent under a lease per year. The Company does not believe that the
rent
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<PAGE> 51
received from property leased to NHC or other lessees at any of the Health Care
Facilities that is allocable to personal property has or will equal or exceed
15% of the total rent payable thereunder.
Income from "dealer property" generally is not includable under the 75%
income test. "Dealer property" is stock in trade, inventory, and property held
primarily for sale to customers in the ordinary course of a trade or business.
The Company does not expect to realize significant amounts of income from
"dealer property" and intends to operate in a manner so as to minimize the risk
that it would be classified as a "dealer" for federal income tax purposes.
However, a determination of "dealer" status is necessarily dependent upon facts
which will occur in the future.
Although no assurances can be given, subject to the limitation discussed
herein, it is anticipated that the rents derived by the Company under its leases
will qualify as "rents from real property". However, in the event (i) the rental
structure under any lease is altered such that rent is based on income or
profits, (ii) the Company is deemed at any time to own, directly or indirectly
by attribution, 10% or more of NHC or any other tenant of the Health Care
Facilities, or (iii) the Company itself furnishes impermissible services under
any lease, the rents derived from the lease might not qualify as "rents from
real property", which might, in turn, result in the disqualification of the
Company as a REIT unless the relief provisions described below are determined to
be available.
Interest received with respect to mortgage loans generally qualifies for
the 75% and 95% income tests unless the amount of such interest depends, in
whole or in part, upon the income or profits of any person. Special rules apply
to mortgages with "shared appreciation" features. None of the interest currently
receivable by the Company under its mortgage loans depends, in whole or in part,
upon the income or profits of any person except that certain of such mortgage
loans contain "shared appreciation" features. The Company does not believe that
its ability to qualify as a REIT will be adversely affected by the "shared
appreciation" features of its mortgage loans.
(b) The 95% Income Test. At least 95% of the Company's gross income for
the year must be derived from those sources generally described in the 75%
income test, or from dividends, interest or gains from the sale or disposition
of stock or other securities that do not constitute "dealer property". To the
extent the Company derives income from rendering services or from other sources,
the income would not qualify for this income test. If nonqualifying income
exceeds 5% of the Company's gross income, the Company could lose its REIT
status.
(c) The 30% Income Test. Less than 30% of the Company's gross income in
any year may be derived from the sale or other disposition of (i) real property
held less than four years, other than foreclosure property involuntarily or
compulsorily converted through destruction, condemnation or similar events, (ii)
short-term gains on stock or securities, and (iii) generally, "dealer property".
Although no assurances can be given, the Company does not intend to hold any
"dealer property" or any other investments with a view to deriving short-term
profits. However, the Company could violate the 30% Income Test if it sells a
sufficient number of Health Care Facilities within four years.
Asset Tests. At the end of each calendar quarter, at least 75% of the
value of the Company's assets must be "real estate assets", cash and cash items
(including receivables) and government securities. For this purpose, "real
estate assets" include interests in real property, interests in mortgages on
real property, and shares in other REITs. Not more than 25% of the value of the
Company's total assets may be invested in nongovernmental securities. In
addition, the Company's securities holdings must not exceed 5% of the value of
the Company's assets as to any one issuer or 10% of the outstanding voting
securities of any issuer. Again, the Company monitors its holdings in order to
comply with these "Asset Tests". However, no assurances can be given that
transactions in a given quarter could not result in a violation of the Asset
Tests and the resulting disqualification of the Company as a REIT.
Disqualification as a REIT. Except where the relief provisions described
below are applicable, the Company's election to be treated as a REIT will be
terminated automatically if the Company fails to meet any of the above-described
rules or tests. If a disqualification occurred, with certain limited exceptions,
the
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<PAGE> 52
Company would not be eligible to elect REIT status again for five years
(including the year of disqualification).
Relief Provisions. The Code provides that under certain circumstances the
failure of a REIT to satisfy certain of the above-mentioned rules or tests will
not automatically cause the REIT to be taxed as a regular corporation. For
example, the Company's failure to satisfy the Asset Test would not result in
disqualification if the assets which caused the violation were disposed of
within 30 days after the end of the quarter. Similarly, should the Company fail
to satisfy either or both of the 75% or 95% Income Tests for any year, it would
not be disqualified as a REIT if: (i) its failure to comply was due to
reasonable cause and not through willful neglect; (ii) the Company reported the
nature and amount of each item of its income on a schedule attached to its tax
return; and (iii) any incorrect information was not due to fraud with intent to
evade tax. The Company, however, would be subject to 100% tax on, generally, the
net income attributable to the greater of the amount by which the Company failed
to meet either the 75% or 95% Income Test. There is no relief provision upon the
failure to satisfy the 30% Income Test.
TAXATION OF REIT STOCKHOLDERS
For any year in which the Company qualifies as a REIT for tax purposes,
amounts distributed by the Company to its stockholders will be taxed as follows:
Distributions in General. Distributions by REITs that are not designated
as capital gain dividends generally are subject to the regular corporate
dividend rules, and as such they constitute portfolio income which cannot be
sheltered by "passive losses". A stockholder treats such distributions as
ordinary income to the extent of the REIT's current and accumulated earnings and
profits. With limited exceptions, distributions in excess of current and
accumulated earnings and profits constitute a return of capital until the
stockholder has recovered his cost basis, and distributions in excess of both
earnings and profits and the Stockholder's cost basis are treated as gain from
the sale of the shares. If the Company fails to meet the 95% Distribution
Requirement as a result of certain adjustments to the Company's tax return by
the IRS, the Company may pay a "deficiency dividend" (plus a penalty and
interest) within 90 days of the determination, and thereby avoid
disqualification for failure to meet the distribution requirements. "Deficiency
dividends" are treated as dividends by the stockholders even if such dividends
exceed the REIT's earnings and profits.
Dividends received from a REIT do not qualify for the dividends received
deduction for corporations under Code Section 243. A capital gain dividend is
treated as a long-term capital gain to the stockholder, regardless of how long
the shares of the REIT may have been held. If a stockholder receives a capital
gain dividend on shares held for less than six months, thereafter any loss on
the sale of the shares must generally be treated as a long-term capital loss to
the extent of the long-term capital gain dividend.
Dividends declared in October, November or December, payable to
stockholders of record in those months, will be deemed paid by the REIT and
received by the stockholders on December 31 even if the checks are mailed by the
REIT and received by the stockholders after the end of the year, provided that
they are received before February 1 of the following year. In all other cases,
stockholders report dividends in the year in which they are received, even
though reference may be made to the REIT's earnings and profits of the prior
year. These rules apply regardless of whether the stockholder is on the cash
method or the accrual method of accounting.
Minimum Tax. The Company's operations could generate items of tax
preference under the alternative minimum tax. For example, the Company's minimum
taxable income may be adjusted to take into account the difference between
depreciation allowable for regular tax purposes and depreciation allowable for
purposes of the alternative minimum tax. The Company's stockholders are also
subject to the alterative minimum tax rules.
Tax-Exempt Stockholders. Tax-exempt stockholders are reminded of the
complexity and many conditions and requirements associated with their status as
tax-exempt entities. They are also reminded that this discussion of federal
income tax considerations is a general summary only, and does not attempt to
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<PAGE> 53
address the specific tax consequences of owning shares of stock to every
stockholder. Accordingly, tax-exempt stockholders are particularly urged to
consult their own tax advisors.
For tax years beginning after December 31, 1993, pension fund trusts that
hold more than 10% (by value) of the interests in a "Pension-held REIT" at any
time during a taxable year must treat a percentage of dividends from the REIT as
Unrelated Business Taxable Income ("UBTI"). The percentage treated as UBTI is
determined by dividing the gross income of the REIT derived from an unrelated
trade or business for the year by the gross income of the REIT for the year in
which the dividends are paid; provided, however, if this percentage is less than
5%, the dividends will not be treated as UBTI. A REIT is a Pension-held REIT
only if (i) the REIT would not have qualified as a REIT but for the "look
through treatment" provisions discussed above and (ii) the REIT is
"predominately held" by pension fund trusts. A REIT is "predominately held" if
at least one pension fund trust holds in excess of 25% (by value) of the
interests in the REIT or one or more such trusts hold more than 50% (by value)
of the interests in the REIT. The Company does not believe that it could become
a Pension-held REIT absent a waiver by the Company's Board of Directors of the
limitation on ownership in the Company's Charter.
For pension fund trusts not holding more than 10% of the interests in a
REIT, the IRS has previously ruled that a distribution out of earnings and
profits by a REIT to a tax-exempt employee's pension fund trust did not
constitute UBTI. Rev. Rul. 66-106, 1966-1 C.B. 151. Revenue Rulings are
interpretive in nature and subject to revocation or modifications; however,
based on this ruling, it would appear that distributions by the Company to
tax-exempt entities that do not own at least a 10% interest in the Company would
not constitute UBTI.
If the Company makes distributions to stockholders in excess of the
Company's current or accumulated earnings and profits, those distributions will
be considered first a tax-free return of capital, reducing a stockholders' tax
basis in its shares until the tax basis is zero. Any further distributions of
this kind will be treated as gain realized from the sale or exchange of the
shares. Distributions made in complete liquidation of the Company will be
treated as if they were payments realized upon the sale of the shares. Any gain
or loss realized upon the disposition of the stock will not be taxable as UBTI
to exempt stockholders subject to the tax, provided that the shares were not
inventory or held primarily for sale to customers in the ordinary course of a
trade or business and were not subject to acquisition indebtedness.
Withholding on Dividends and Sale Proceeds. The Company will be required
generally to withhold 31% of all distributions to those stockholders who do not
complete a Form W-9 and those stockholders who are otherwise subject to backup
withholding. Stockholders should consult their tax advisors as to their
qualification for exemption from withholding and the procedure for obtaining
such an exemption. In addition, proceeds from the sale of stock could be subject
to backup withholding if the broker through whom the sale is made does not have
certain certifications from the selling stockholder.
Foreign Investors. The preceding discussion does not address all the
federal income tax consequences to foreign investors of owning securities. These
consequences depend not only on United States federal and state income, gift and
estate tax principles, but also on treaties, if any, between the United States
and the country of the nonresident investor.
Foreign investors should consult their own tax advisors concerning those
provisions of the Code which deal with the taxation of foreign taxpayers. In
particular, foreign investors should note those provisions of the Code referred
to as the Foreign Investors Real Property Tax Act of 1980, as amended by the
1986 Act, which affect the federal income tax treatment of an investment in
REITs by foreign investors. Foreign investors should also note that under
certain circumstances the Company may be required to withhold tax from certain
distributions made by the Company to foreign stockholders.
TAXATION OF THE LEASES
The availability to the Company of, among other things, depreciation on the
Health Care Facilities will depend upon the treatment of the Company as the
owner of the Health Care Facilities and the classification of its leases as true
leases, rather than, for example, financing transactions for federal income tax
purposes. Based
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on a number of recent court decisions, whether the Company will be treated as
the owner of the Health Care Facilities and whether each lease will constitute a
true lease for federal income tax purposes will be determined by reference to
the facts and circumstances.
No assurances can be given that the IRS will not successfully challenge the
status of the Company as the owner of the Health Care Facilities and the status
of each lease as a true lease. For example, the IRS could take the position that
NHC's original contribution of the real property in 1991 and leaseback of the
Health Care Facilities by NHC constituted a financing transaction in which NHC
is the owner and the Company merely a secured creditor. In such event, the
Company would not be entitled to claim depreciation with respect to any facility
subject to the lease. As a consequence, the Company might lack sufficient cash
or liquid assets to meet the 95% Distribution Requirement, or if the requirement
were met, a larger percentage of distributions from the Company in a particular
year would constitute ordinary dividend income instead of a partial return of
capital to the Company's stockholders.
STATE AND LOCAL TAXES
The Company and its stockholders 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 REITs as corporations and permit them to substantially eliminate
corporate-level taxation via deductible distributions, other states may not.
Each prospective investor should therefore consult with his own tax advisor as
to the actual or potential impact of federal, state and local taxation on
holding Common Stock.
TAX CONSEQUENCES TO HOLDERS OF DEBT SECURITIES
Some of the Debt Securities which may be issued pursuant to the applicable
Prospectus Supplement may be convertible into stock of the Company. The
conversion of any such convertible Debt Securities solely into stock is treated
as a nontaxable event (except as to cash received in lieu of fractional shares),
even though the value of the stock received may exceed the basis of the
convertible Debt Securities surrendered. Neither the holder nor the Company
recognizes gain or loss on the exchange. As generally is the case in other
nonrecognition transactions, the holder's basis and holding period in the
convertible Debt Securities carry over and become the holder's basis and holding
period in the stock. Therefore, after conversion of the convertible Debt
Securities, the Debt Security holder would become a stockholder, and the federal
income tax consequences described above would generally apply. A holder of such
convertible Debt Securities will generally recognize taxable gain or loss on
cash received in lieu of a fractional share of stock, generally in an amount
equal to the difference between the amount of cash received and the holder's
basis in such fractional share. Such gain or loss will generally be capital gain
or loss if the fractional share is a capital asset in the hands of the holder.
A holder of Debt Securities will be required to report as income for
federal income tax purposes interest earned on such Debt Securities in
accordance with the holder's method of tax accounting. A holder of Debt
Securities using the accrual method of accounting for tax purposes is, as a
general rule, required to include interest in ordinary income as such interest
accrues, while a cash basis holder must include interest in ordinary income when
interest payments are received (or made available for receipt) by such holder.
In addition, adjustment to any convertible Debt Securities' conversion
price could in certain circumstances result in constructive distributions that
could be taxable as dividends under the Code to holders of such convertible Debt
Securities or stock of the Company.
INVESTORS SHOULD SEEK THEIR OWN TAX ADVICE
The preceding is a brief summary of the tax considerations potentially
affecting the Company and its stockholders. This discussion is based on the
current state of the law, which is subject to legislative, administrative or
judicial actions. Moreover, the discussion does not fully address consideration
that may adversely affect the treatment of certain prospective investors (such
as corporations, foreign and tax-exempt investors). In these circumstances, and
particularly because the ultimate tax impact may vary depending upon
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<PAGE> 55
the personal circumstances of each investor. ALL PROSPECTIVE INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX ASPECTS OF OWNING AND
DISPOSING OF COMMON STOCK, PREFERRED STOCK OR DEBT SECURITIES OF THE COMPANY.
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 Company does not contemplate providing
stockholders with an annual appraisal of its properties. However, it is
anticipated that the public trading market for the Company's Common Stock
provides sufficient data to value the 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 Company is prudent
because of possible limitations on the marketability of the Securities, (ii) an
investment in the Company satisfies ERISA's diversification requirements and
(iii) such fiduciaries have authority to hold Securities 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 prohibitions on
improper delegation of control over or responsibility for "plan assets".
Qualified Plans 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 plan make equity
investments will not be treated as plan assets if interests in the entity are
(i) freely transferable, (ii) widely held and (iii) registered pursuant to the
Exchange Act or sold to the plan in a public offering pursuant to a registration
statement under the Securities Act. It is anticipated that the Securities will
satisfy these requirements.
If the Company does not satisfy the above-described conditions, the assets
of the Company 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 Company
(which could materially impact the operations of the Company; (ii) the persons
who have investment discretion over the assets of Qualified Plans which hold
Securities could be liable under Part 4 of Title I for investments made by the
Company which do not conform to such ERISA standards; and (iii) certain
transactions that the Company 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 Company constituted a prohibited transaction under Section 408(e)(2) of the
Code by reason of the Company engaging in a prohibited transaction with the
individual who established the IRA or his beneficiary.
Qualified Plans and IRAs contemplating the purchase of Securities are urged
to consult their tax advisors.
PLAN OF DISTRIBUTION
The Company may sell Securities in any of three ways: (i) through
underwriting syndicates represented by one or more managing underwriters, or by
one or more underwriters without a syndicate; (ii) through agents designated
from time to time; and (iii) directly to institutional investors. It is
anticipated that indications of interest for the Securities will be solicited
from Smith Barney, Inc. The names of any underwriters or agents of the Company
involved in the sale of the Securities in respect of which this
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<PAGE> 56
Prospectus is being delivered and any applicable commissions or discounts will
be set forth in the Prospectus Supplement. The net proceeds to the Company from
each such sale will also be set forth in the Prospectus Supplement.
Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may engage in transactions with or perform
services for the Company in the ordinary course of business.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Harwell Howard Hyne Gabbert & Manner, P.C., 1800 First American
Center, Nashville, Tennessee 37238. In addition, Goodwin, Procter & Hoar (a
partnership including professional corporations), Exchange Place, Boston,
Massachusetts 02109 will pass upon certain Federal income tax matters relating
to the Company.
EXPERTS
The consolidated financial statements and schedules of the Company as of
and for the periods ended December 31, 1993, December 31, 1992 and December 31,
1991, incorporated by reference herein, from the Company's Annual Report on Form
10-K for the year ended December 31, 1993, 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.
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======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary......... S-3
Selected Consolidated Financial
Information......................... S-5
Capitalization........................ S-6
Use of Proceeds....................... S-6
Business.............................. S-7
Description of the Notes.............. S-15
Certain Federal Income Tax
Considerations...................... S-21
ERISA Considerations.................. S-23
Underwriting.......................... S-24
Legal Matters......................... S-25
PROSPECTUS
Available Information................. 2
Documents Incorporated by Reference... 2
The Company........................... 3
Risk Factors.......................... 4
Ratio of Earnings to Fixed Charges.... 9
Use of Proceeds....................... 9
Recent Developments................... 10
Description of the Company's Capital
Stock............................... 11
Description of Debt Securities........ 13
Description of Preferred Stock........ 18
Federal Income Tax Considerations..... 21
ERISA Considerations.................. 30
Plan of Distribution.................. 30
Legal Matters......................... 31
Experts............................... 31
</TABLE>
======================================================
======================================================
$100,000,000
[LOGO NATIONAL HEALTH INVESTORS, INC.]
NATIONAL HEALTH
INVESTORS, INC.
7.30% NOTES DUE 2007
Interest payable January 15 and July 15
------------
PROSPECTUS SUPPLEMENT
JUNE 25, 1997
------------
SMITH BARNEY INC.
======================================================
