FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended September 30, 1999 Commission file number 33-41863
NATIONAL HEALTH INVESTORS, INC.
(Exact name of registrant as specified in its Charter)
Maryland 62-1470956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-9100
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d),
of the Securities Exchange Act of 1934 during the preceding 12
months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
24,364,888 shares of common stock were outstanding as of October 31, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
Sept. 30 Dec. 31
1999 1998
<S> <C> <C>
ASSETS (unaudited)
Real estate properties:
Land $ 31,019 $ 22,649
Buildings and improvements 320,697 267,962
Construction in progress 1,379 798
353,095 291,409
Less accumulated depreciation (54,331) (45,871)
Real estate properties, net 298,764 245,538
Mortgage and other notes receivable, net 349,104 394,174
Investment in preferred stock 38,132 38,132
Investment in real estate mortgage
investment conduits 37,437 36,861
Cash and cash equivalents 12,652 20,407
Marketable securities 54,944 26,797
Accounts receivable 12,174 4,542
Deferred costs and other assets 3,265 2,747
Total Assets $806,472 $769,198
LIABILITIES AND DEFERRED INCOME
Long-term debt $174,610 $151,559
Credit facilities 88,000 58,500
Convertible subordinated debentures 97,286 100,096
Accounts payable and other accrued expenses 5,625 1,696
Accrued interest 3,305 6,463
Dividends payable 18,030 18,030
Deferred income 8,432 8,194
Total Liabilities and Deferred Income 395,288 344,538
Commitments, contingencies and guarantees
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock,
$.01 par value; 10,000,000 shares
authorized; 768,694 and 768,894
shares, respectively, issued and
outstanding; stated at liquidation
preference of $25 per share 19,217 19,222
Common stock, $.01 par value:
40,000,000 shares authorized;
24,364,888 and 24,364,391 shares,
respectively, issued and outstanding 244 244
Capital in excess of par value of common stock 425,463 425,449
Cumulative net income 388,528 340,547
Cumulative dividends (412,841) (357,518)
Unrealized gains (losses) on securities (9,427) (3,284)
Total Stockholders' Equity 411,184 424,660
Total Liabilities and Stockholders' Equity $806,472 $769,198
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
The interim condensed balance sheet at December 31, 1998 is taken from the
audited financial statements at that date.
2
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
(in thousands,
except share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Mortgage interest income $ 11,497 $ 13,706 $ 34,989 $ 41,747
Rental income 11,506 10,610 34,109 31,524
Facility operating revenue 5,613 --- 11,885 ---
Investment interest, dividends
and other income 2,996 1,518 8,120 4,500
31,612 25,834 89,103 77,771
EXPENSES:
Interest 6,634 4,677 18,853 14,185
Depreciation of real estate 3,074 2,205 8,428 6,584
Amortization of loan costs 195 167 543 521
Facility operating expenses 5,170 --- 10,793 ---
General and administrative 754 1,017 2,505 2,978
15,827 8,066 41,122 24,268
NET INCOME 15,785 17,768 47,981 53,503
DIVIDENDS TO PREFERRED STOCKHOLDERS 408 415 1,225 1,267
NET INCOME APPLICABLE TO
COMMON STOCK $ 15,377 $ 17,353 $ 46,756 $ 52,236
NET INCOME PER COMMON SHARE:
Basic $ .63 $ .69 $ 1.92 $ 2.08
Diluted $ .63 $ .68 $ 1.91 $ 2.05
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 24,364,888 25,067,264 24,364,827 25,121,758
Diluted 27,851,294 28,662,842 27,896,724 28,897,379
Common dividends per share
declared $ .74 $ .74 $ 2.22 $ 2.22
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
3
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Nine Months Ended
September 30
1999 1998
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47,981 $ 53,503
Depreciation of real estate 8,428 6,584
Provision for loan losses 2,980 974
Amortization of loan costs 543 521
Interest on debenture conversion --- 320
Deferred income 1,075 1,485
Amortization of bond discount (1,117) ---
Amortization of deferred income (837) (1,716)
Increase in accounts receivable (8,652) (122)
Increase in other assets (1,061) (97)
Increase (decrease) in accounts payable
and accrued liabilities 770 (1,945)
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,110 59,507
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in mortgage notes receivable (20,883) (49,722)
Collection of mortgage notes receivable 14,667 3,013
Prepayment of mortgage notes receivable --- 74,893
Acquisition of property and equipment, net (14,904) (5,737)
Investment in preferred stock --- (38,500)
Investment in marketable securities (33,173) (21,647)
NET CASH USED IN INVESTING ACTIVITIES (54,293) (37,700)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facilities 29,500 ---
Proceeds from long-term debt 25,701 242
Principal payments on long-term debt (2,650) (2,466)
Payments of subordinated convertible debentures (800) (40)
Dividends paid to shareholders (55,323) (57,128)
Sale of stock and exercise of options --- 1,074
Repurchase of common stock --- (23,665)
NET CASH USED IN FINANCING ACTIVITIES (3,572) (81,983)
DECREASE IN CASH AND CASH EQUIVALENTS (7,755) (60,176)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,407 64,915
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,652 $ 4,739
</TABLE>
4
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Nine Months Ended
September 30
1999 1998
(in thousands)
<S> <C> <C>
Supplemental Information:
Cash payments for interest expense $ 18,786 $ 15,552
During the nine months ended September 30, 1999
and September 30, 1998, $10,000 and $18,827,000
respectively, of Senior Subordinated Convertible
Debentures were converted into 316 shares
and 604,497 shares, respectively, of NHI's
common stock:
Senior subordinated convertible debentures $ (10) $(18,827)
Financing costs $ --- $ 234
Accrued interest $ (1) $ (320)
Common stock $ --- $ 6
Capital in excess of par $ 9 $ 18,907
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these financial statements.
5
<PAGE>
<TABLE>
NATIONAL HEALTH INVESTORS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<CAPTION>
Cumulative Convertible Capital in Unrealized Total
Preferred Stock Common Stock Excess of Cumulative Cumulative Gains(Losses) Stock.
(dollars in thousands) Shares Amount Shares Amount Par Value Net Income Dividends on Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/98 768,894 $ 19,222 24,364,391 $244 $425,449 $340,547 $(357,518) $ (3,284) $424,660
Net income --- --- --- --- --- 47,981 --- --- 47,981
Unrealized gains (losses)
on securities --- --- --- --- --- --- --- (6,143) (6,143)
Total Comprehensive Income 41,838
Shares issued in con-
version of converti-
ble debentures to
common stock --- --- 316 --- 9 --- --- --- 9
Shares issued in con-
version of preferred
stock to common stock (200) (5) 181 --- 5 --- --- --- ---
Dividends to common
shareholders ($2.22
per share) --- --- --- --- --- --- (54,098) --- (54,098)
Dividends to preferred
shareholders ($1.594
per share) --- --- --- --- --- --- (1,225) --- (1,225)
BALANCE AT 9/30/99 768,694 $ 19,217 24,364,888$ 244 $425,463 $388,528 $(412,841) $ (9,427) $411,184
BALANCE AT 12/31/97 833,664 $ 20,842 24,753,570$ 248 $434,135 $270,902 $(282,047) $ --- $444,080
Net income --- --- --- --- --- 53,503 --- --- 53,503
Unrealized gains (losses)
on securities --- --- --- --- --- --- --- (2,085) (2,085)
Total Comprehensive Income 51,418
Shares sold --- --- 32,973 --- 1,074 --- --- --- 1,074
Common shares repurchased --- --- (846,575) (8) (23,657) --- --- --- (23,665)
Shares issued in conver-
sion of convertible deben-
tures to common stock --- --- 604,496 6 18,907 --- --- --- 18,913
Shares issued in con-
version of preferred
stock to common stock (54,570) (1,365) 49,369 --- 1,365 --- --- --- ---
Dividends to common
shareholders ($2.22
per share) --- --- --- --- --- --- (55,741) --- (55,741)
Dividends to preferred
shareholders ($1.594
per share) --- --- --- --- --- --- (1,267) --- (1,267)
BALANCE AT 9/30/98 779,094 $ 19,477 24,593,833$ 246 $431,824 $324,405 $(339,055) $ (2,085) $434,812
</TABLE>
6
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
Note 1. SIGNIFICANT ACCOUNTING POLICIES:
The unaudited financial statements furnished herein in the opinion of
management include all adjustments which are necessary to fairly present the
financial position, results of operations and cash flows of National Health
Investors, Inc. ("NHI" or the "Company"). NHI assumes that users of the
interim financial statements herein have read or have access to the audited
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in NHI's Form 10-K for the year
ended December 31, 1998 and that the adequacy of additional disclosure needed
for a fair presentation, except in regard to material contingencies, may be
determined in that context. Accordingly, footnotes and other disclosures
which would substantially duplicate the disclosure contained in the Company's
most recent annual report to stockholders have been omitted. The interim
financial information contained herein is not necessarily indicative of the
results that may be expected for a full year because of various reasons
including changes in interest rates, rents and the timing of debt and equity
financings.
Note 2. NET INCOME PER COMMON SHARE:
Basic earnings per share is based on the weighted average number of
common and common equivalent shares outstanding. Net income is reduced by
dividends to holders of cumulative convertible preferred stock.
Diluted earnings per common share assumes the conversion of convertible
subordinated debentures, the conversion of cumulative convertible preferred
stock and the exercise of stock options using the treasury stock method. Net
income is increased for interest expense on the convertible subordinated
debentures.
The following table summarizes the earnings and the average number of
common shares and common equivalent shares used in the calculation of basic
and diluted earnings per share.
7
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
BASIC:
Weighted average common
shares 24,364,888 25,067,264 24,364,827 25,121,758
Net income $15,785,000 $17,768,000 $47,981,000 $53,503,000
Dividends paid to pre-
ferred shareholders (408,000) (415,000) (1,225,000) (1,267,000)
Net income available to
common stockholders $15,377,000 $17,353,000 $46,756,000 $52,236,000
Net income per
common share $ .63 $ .69 $ 1.92 $ 2.08
DILUTED:
Weighted average common
shares 24,364,888 25,067,264 24,364,827 25,121,758
Stock options --- 4,220 --- 17,608
Convertible subordinated
debentures 2,790,755 2,880,086 2,836,230 3,029,707
Cumulative convertible pre-
ferred stock 695,651 711,272 695,667 728,306
Average common shares
outstanding 27,851,294 28,662,842 27,896,724 28,897,379
Net income $15,785,000 $17,768,000 $47,981,000 $53,503,000
Interest expense on
convertible sub-
ordinated debentures 1,784,000 1,829,000 5,425,000 5,766,000
Net income assuming con-
version of subordinated
convertible debentures
to common stock $17,569,000 $19,597,000 $53,406,000 $59,269,000
Net income per common
share $ .63 $ .68 $ 1.92 $ 2.05
</TABLE>
8
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
Note 3. INVESTMENTS IN MARKETABLE SECURITIES:
NHI's investments in marketable securities include available for sale
securities and held to maturity securities. Unrealized gains and losses on
available for sale securities are recorded in stockholders' equity in
accordance with SFAS 115. Realized gains and losses from securities sales
are determined on the specific identification of the securities.
Proceeds from the sale of investments in available for sale securities
during the nine months ended September, 1999 were $804,000. Gross investment
gains of $83,000 were realized on these sales during the nine months ended
September 30, 1999.
Note 4. COMMITMENTS AND GUARANTEES:
At September 30, 1999, NHI was committed, subject to due diligence and
financial performance goals, to fund approximately $10,216,000 in health care
real estate projects of which approximately $8,216,000 is eligible to be
funded within the next 12 months. The commitments include mortgage loans or
purchase leaseback agreements for two long-term care centers, one medical
office building, and three assisted living facilities, all at rates ranging
from 9% to 11.5%. NHI has recorded deferred income for commitment fees
related to these loans where applicable.
In order to obtain the consent of appropriate lenders to National
HealthCare Corporation's ("NHC"'s) transfer of assets to NHI, NHI guaranteed
certain debt ($15,999,000 at September 30, 1999) of NHC. The debt is at fixed
rates with a weighted average interest rate of 8.3% at September 30, 1999.
NHI receives from NHC compensation of approximately $80,000 per annum for the
guarantees which is credited against NHC's base rent requirements.
In management's opinion, these guarantee fees approximate the guarantee
fees that NHI would currently charge to enter into similar guarantees.
All of the guaranteed indebtedness discussed above is secured by first
mortgages and rights which may be enforced if either party is required to pay
under their respective guarantees. NHC has agreed to indemnify and hold
harmless NHI against any and all loss, liability or harm incurred by NHI as a
result of having to perform under its guarantee of any or all of the
guaranteed debt.
Additionally, NHI has also guaranteed bank loans in the amount of
$1,448,250 to key employees and directors which amount was utilized for the
exercise of NHI stock options. Shares of NHI stock are held as security by
NHI and the loans are limited to $100,000 per individual per year.
One of NHI's credit facilities (outstanding balance $20,956,000 at
September 30, 1999) was financed through National HealthCare Corporation,
National Health Corporation ("National") and through National Health
Corporation Leveraged Employee Stock Ownership Plan and Trust before being
transferred to NHI with the creation of NHI in 1991.
9
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
On July 30, 1999, National was notified by SunTrust Bank of Nashville,
N.A., the Agent for itself and certain other lenders for the above-referenced
loan, that as Agent it disputes the allocation of certain collateral between
itself and another lending institution.
National is actively negotiating for resolution of this dispute. In the
event the dispute is not resolved, the Agent may call the loan into default.
If the loan is called into default, payments by NHI to repay the loan may have
a material adverse impact upon NHI's cash flows and liquidity.
Note 5. CONVERTIBLE SUBORDINATED DEBENTURES:
At September 30, 1999, $56,286,000 of 7% convertible subordinated
debentures (the "1997 debentures"), due on February 1, 2004, remain
outstanding. The 1997 debentures are convertible at the option of the holder
into common stock at a conversion price of $37.50, subject to adjustment.
During the nine months ended September 30, 1999, none of the 1997 debentures
were converted into common stock. NHI has reserved 1,500,960 shares of common
stock for conversions of 1997 debentures.
At September 30, 1999, $38,060,000 of 7.75% convertible subordinated
debentures (the "1995 debentures"), due on January 1, 2001, remain
outstanding. The 1995 debentures are convertible at the option of the holder
into the common stock of NHI at a conversion price of $31.625, subject to
adjustment. During the nine months ended September 30, 1999, $10,000 of the
1995 debentures have been converted into 316 shares of common stock. NHI has
reserved 1,203,478 shares of common stock for conversions of 1995 debentures.
At September 30, 1999, $2,735,000 of 7% convertible subordinated
debentures due on January 1, 2006, remain outstanding related to "1995 debt
service debentures" issued to mortgagees or lessees to satisfy debt service
escrow requirements. The debentures are convertible at the option of the
holder into common stock of the Company at a conversion price of 110% of the
market price on the date of issuance of the debentures, subject to adjustment.
During the nine months ended September 30, 1999, $2,800,000 of the debentures
were redeemed and none of the debentures were converted into common stock.
NHI has reserved 72,444 shares of common stock for conversion of 1995 debt
service debentures.
At September 30, 1999, $205,000 of the 10% senior convertible
subordinated debentures (the "senior debentures"), due 2006 remain
outstanding. The senior debentures are convertible into the common stock of
the Company at $20 per share. During the nine months ended September 30,
1999, none of the senior debentures were converted. The Company has reserved
10,250 shares of common stock for conversion of the senior debentures.
10
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
Note 6. CUMULATIVE CONVERTIBLE PREFERRED STOCK:
In February and March 1994, NHI issued $109,558,000 of 8.5% Cumulative
Convertible Preferred Stock ("Preferred Stock") with a liquidation preference
of $25 per share. Dividends at an annual rate of $2.125 are cumulative from
the date of issuance and are paid quarterly. At September 30, 1999,
$19,217,350 of the preferred stock remains outstanding.
The Preferred Stock is convertible into NHI common stock at the option
of the holder at any time at a conversion price of $27.625 per share of common
stock, which is equivalent to a conversion rate of 0.905 per share of common
stock for each share of Preferred Stock, subject to adjustment in certain
circumstances.
The Preferred Stock is redeemable by NHI for common stock only if the
trading price of the Common Stock on the New York Stock Exchange (NYSE)
exceeds $27.625 per share for 20 trading days within a period of 30 trading
days prior to the exercise. NHI has reserved 695,651 shares of common stock
for Preferred Stock conversions.
The Preferred Stock is listed on the NYSE under the symbol "NHIPr."
Note 7. NEW ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended by SFAS 137,
"Deferral of the Effective Date of SFAS 133", is effective for fiscal quarters
beginning after June 15, 2000. The impact of the adoption of SFAS 133 is not
expected to have a material impact on NHI's results of operations or financial
position.
Note 8. FORECLOSURE ON MORTGAGES RECEIVABLE:
Stockbridge Investment Partners, Inc.
In 1993, NHI funded a mortgage loan for Stockbridge Investment Partners,
Inc. and its subsidiary York Hannover Nursing Centers, Inc. in the original
principal amount of $29,500,000. Collateral for the loan includes first
mortgages on six long-term healthcare centers located in the state of Florida,
11
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
the personal guarantee of certain of the owners, certain accounts receivable
balances above another creditor's $2,000,000 loan, and the corporate guarantee
of NHC for up to $5,000,000 of principal and interest. On June 30, 1999, NHC
collateralized its guarantee with marketable securities having a then fair
market value of approximately $4.8 million.
On March 22, 1999 and April 1, 1999, NHI declared the borrowers in
default under the terms of the loan agreements. The events of default
included the violation of the financial covenants contained in the loan
agreement and the failure to make timely payments of principal and interest.
After expiration of the applicable grace period, NHI filed a foreclosure
action against the borrowers, and also joined with two other creditors to
place the borrowers in involuntary bankruptcy. The debtors converted this
into a voluntary bankruptcy on June 10, 1999, and the court, after a July,
1999 hearing appointed a trustee for the debtor.
The carrying value of the principal and accrued interest on the loan at
September 30, 1999 (after the application of certain debt service reserves)
is approximately $25,839,000. NHI is currently evaluating the healthcare
center portion of the collateral given the recent changes in reimbursement by
Medicare and other circumstances affecting the centers. However, NHI does
believe that all of the combined collateral (including the personal and
corporate guarantees as collateralized) will be sufficient to recover its loan
balance and accrued interest.
NHI's policy is to continue to accrue interest on foreclosed or non-
performing loans up to a maximum total carrying value equal to the fair
value of the respective collateral.
Iatros Health Network
In 1996, NHI funded mortgage loans for Heartland Healthcare Corporation
in the original principal amount of $25,805,500. In 1997, NHI funded mortgage
loans for Buckley Nursing Home, Inc. and Greenfield Associates Real Estate
Trust in the original principal amount of $10,000,000, and to OHI Realty
Limited Partnership I and OHI Corporation d/b/a/ Oasis Healthcare in the
original principal amount of $8,300,000. Phoenix Healthcare Corp. (formerly
Iatros Health Network) and its subsidiary, OHI Corporation, which did business
as Oasis Healthcare, was the manager and guarantor of all facilities securing
these loans. Collateral for the loans included first mortgages on seven
long-term healthcare facilities and one retirement center located in the
states of Massachusetts and New Hampshire, the corporate guarantee of
Phoenix Healthcare Corp., and certain accounts receivable.
In May 1999, NHI declared the borrowers in default under the terms of
the loan agreements. The events of default include the violation of the
financial covenants contained in the loan agreement and the failure to make
timely payments of principal and interest.
12
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
The carrying value of the principal and accrued interest on these loans
was approximately $44,106,000. NHI is currently evaluating the healthcare
center portion of the collateral given the changes in reimbursement by
Medicare and other circumstances affecting the centers. Effective August 10,
1999, NHI's subsidiary designee was deeded or otherwise transferred all of the
various debtor's rights in the collateral. As such, at September 30, 1999,
the carrying value has been appropriately classified as real estate
properties. New Hampshire has licensed NHI's subsidiary as the provider
effective August 11, 1999, and Massachusetts' approval occurred August 12,
1999. At this time, NHI is not certain that all of the combined collateral
will be sufficient to recover its asset carrying value or that it will find a
long-term operator which can purchase, lease, or otherwise operate the
facilities at the debt service levels paid by the prior owner. In the event
that the value of the collateral is determined to be less than the carrying
value, NHI will record a write-down in future periods. NHC is currently
managing the facilities on a month to month basis and its management fees are
subordinated to NHI's debt service.
Note 9. CUSTOMER RESTRUCTURING ANNOUNCED SUBSEQUENT TO THE BALANCE SHEET DATE
Lenox Healthcare, Inc.
NHI was informed on Thursday, November 4, 1999, that Lenox Healthcare,
Inc. and its affiliates ("Lenox") have filed for Chapter 11 Bankruptcy
protection in the United States Bankruptcy/District Court in Wilmington,
Delaware. The court filing indicates that two NHI loans may be impacted, as
follows:
a. Zurich North America Capital Corporation - In 1996, NHI funded a
mortgage loan for Zurich North America Capital Corporation in the original
principal amount of $26,000,000. Collateral for the loan includes first
mortgages on the ten facilities, the corporate guarantees of Lenox and
Greylock Health Corporation, and certain personal guarantees. Lenox is the
manager of the ten long-term healthcare facilities located in the states of
Kansas and Missouri.
The carrying value of the loan is approximately $25,399,000, which earns
11% interest. This loan is in full compliance with its financial covenants,
and all principal and interest payments have been made according to the terms
of the debt agreements. NHI is currently evaluating the healthcare center
portion of the collateral given the bankruptcy status of the manager and other
circumstances affecting the centers. NHI believes that the combined
collateral supports the carrying value of the mortgage.
13
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
b. Pinellas HealthCare Investors, Inc. - In 1995, NHI funded a
mortgage loan for Pinellas HealthCare Investors, Inc. in the original
principal amount of $4,500,000. Lenox is the manager of the long-term
healthcare facility located in the state of Florida. An affiliate of Lenox is
the operator and lessee of the facility. Collateral for the loan includes a
first mortgage on the facility, the corporate guarantee of Stockbridge
Investment Partners, certain personal guarantees, and certain accounts
receivable. Lenox notified NHI that its affiliate does not intend to honor
its lease commitment effective November 4, 1999. NHI is in the process of
negotiating a management contract with National HealthCare Corporation to
manage the facility.
The carrying value of the loan is approximately $4,450,000, which earns
12.45% interest. NHI is currently evaluating the healthcare center portion of
the collateral given the bankruptcy status of the operator, disavowment of the
lease, the condition of the physical plant, and other circumstances affecting
the center. At this time, NHI is not certain whether the collateral will be
sufficient to recover its asset carrying value. In the event that value of
the collateral is determined to be less than the carrying value of the loan,
NHI will record a write-down of the carrying value in future periods.
Other Entities Owned by Principals of Lenox - Not Affected by Lenox Bankruptcy
Although not impacted by the bankruptcy filing, Mr. Tom Clarke, the
owner of Lenox Healthcare, Inc., is involved as a principal in other entities
financed by NHI. The carrying value of NHI's investments in these other
entities is $35,482,000 at September 30, 1999. At the present time, NHI knows
of no reason to assume that these entities will be negatively impacted by the
Lenox filing or that any loss of income or asset value will occur.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National Health Investors, Inc. ("NHI" or the "Company") is a real
estate investment trust which invests primarily in income producing health
care properties with emphasis on the long-term care sector. As of September
30, 1999, NHI had interests in net real estate owned, and investments in
mortgages, REMICs, preferred stock and marketable securities resulting in
total invested assets of $778.4 million. NHI's strategy is to invest in
health care real estate which generates current income which will be
distributed to stockholders. NHI intends to implement this strategy by making
mortgage loans and acquiring properties to lease to operators on a nationwide
basis with an emphasis on primarily the long-term health care industry.
14
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
As of September 30, 1999, the Company was diversified with investments
in 204 health care facilities located in 26 states consisting of 149 long-
term care facilities, two acute care hospitals, eight medical office
buildings, 22 assisted living facilities, six retirement centers and 17
residential projects for the developmentally disabled. These investments
consisted of approximately $359.9 million aggregate principal amount of
loans to 30 borrowers, $60.9 million of owned assets temporarily being
operated by NHI, $237.9 million of purchase leaseback transactions with seven
lessees and $37.4 million invested in REMIC pass through certificates backed by
first mortgage loans to 11 operators. Of these 204 facilities, 43 are leased
to National HealthCare Corporation ("NHC") and 17 additional facilities are
managed by NHC. NHC is the Company's investment advisor. Consistent with its
strategy of diversification, the Company has reduced the portion of its
portfolio operated or managed by NHC from 100.0% of total invested assets on
October 17, 1991 to 25.7% of total invested assets on September 30, 1999.
At September 30, 1999, 59.2% of the total invested assets of the health
care facilities were operated by public operators, 24.3% by regional
operators, and 16.5% by small operators.
Liquidity and Capital Resources
Sources and Uses of Funds
NHI has generated net cash from operating activities during the first
nine months of 1999 totaling $50.1 million compared to $59.5 million in the
prior period. The primary reason for this year to year decline was a
reduction in net income and an increase in accounts receivable. Net cash from
operating activities generally includes net income plus non-cash expenses,
such as depreciation and amortization and provision for loan losses, and
working capital changes.
Cash flows from investing activities during the first nine months of
1999 included collection on mortgage notes receivable of $14.7 million
compared to $3.0 million for the prior period, along with prepayment of $74.9
million of mortgage notes receivable in the prior period.
Cash flows used in investing activities during the first nine months of
1999 included investment in mortgage notes receivable of $20.9 million, real
estate properties of $14.9 million, and marketable securities of $33.2
million. Cash flows used in investing activities of the prior period included
investment in mortgage notes receivable of $49.7 million and real estate
properties of $5.7 million, and marketable securities of $21.6 million.
Cash flows from financing activities for the first nine months of 1999
included $29.5 million from credit facility proceeds and $25.7 from long term
debt, compared to proceeds from long term debt for the prior period of $.2
million.
15
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
Cash flows used in financing activities for the first nine months of
1999 included principal payments on long-term debt of $2.7 million and
dividends paid to shareholders of $55.3 million. This compares to principal
payments on long term debt of $2.5 million and dividends paid to shareholders
of $57.1 million in the prior period.
NHI expects to maintain the current quarterly dividend of 74 cents per
common share in 1999, assuming continued success in the Company's investment
program.
The amount available to be drawn on NHI's $100 million revolving line of
credit was $12.0 million at September 30, 1999.
Commitments
At September 30, 1999, the Company was committed, subject to due
diligence and financial performance goals, to fund approximately $10.2 million
in health care real estate projects, of which approximately $8.2 million is
expected to be funded within the next 12 months. The commitments include
mortgage loans or purchase leaseback agreements for two long-term health care
centers, one medical office building, and three assisted living facilities all
at rates ranging from 9% to 11.5%.
Financing for current commitments and future commitments to others may
be provided by cash balances, by borrowings under the Company's bank credit
facilities, new lines of credit, private placements or public offerings of
debt or equity, the assumption of secured or unsecured indebtedness, or by the
sale of all or a portion of certain currently held investments.
The Company believes it has sufficient liquidity and financing
capability to finance future investments as well as to repay borrowings at or
prior to their maturity.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net income for the three months ended September 30, 1999 is $15.8
million versus $17.8 million for the same period in 1998, a decrease of 11.2%.
Diluted earnings per common share decreased 5 cents or 7.4%, to $.63 in the
1999 period from $.68 in the 1998 period.
Earnings for the prior year three months ended September 30, 1998
included $1.3 million or $.05 per share basic or $.04 per share diluted of
nonrecurring net income. This nonrecurring income is primarily from the
receipt of commitment fees and prepayment penalties from early loan repayments
in the three months ended September 30, 1998.
16
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
Total revenues for the three months ended September 30, 1999 decreased
$5.8 million to $31.6 million from $25.8 million for the three months ended
September 30, 1998. Revenues from mortgage interest income decreased $2.2
million, or 16.1%, when compared to the same period in 1998. Revenues from
rental income increased $.9 million, or 8.4% in 1999 as compared to the same
period in 1998. Facility operating revenue was $5.6 million in 1999 compared
to $0.0 million in 1998. Revenues from investment interest and other income
increased $1.5 million or 97.4% compared to the 1998 period.
The decrease in mortgage interest income is due to a decline in the
average amount of mortgage investments outstanding. Furthermore, mortgage
interest income included no prepayment penalties and unamortized commitment
fees applicable to early loan repayments in the three months ended September
30, 1999 as compared to $1.3 million in the 1998 period.
The increase in rental income resulted primarily from the increase in
investments in real estate properties of $49.9 million during the last 12
months. The increase in investment interest and other income is due to the
investment in September, 1998 of $38.1 million in the preferred stock of LTC
Properties, Inc. and $41.6 million in marketable securities during the last 12
months.
The increase in facility operating revenue is due to the purchase, in
lieu of foreclosure, of four long-term health care centers previously owned by
All Seasons Living Centers in October, 1998, and seven long-term health care
centers and one retirement center previously managed and guaranteed by Phoenix
Healthcare Corp. (formerly Iatros Health Network) in August, 1999.
Total expenses for the 1999 three month period increased $7.8 million or
96.2% to $15.8 million from $8.1 million for the 1998 three month period.
Interest expense increased $2.0 million or 41.8% in the 1999 three month
period as compared to the 1998 period. Depreciation of real estate increased
$.9 million or 39.4%. Facility operating expense increased to $5.2 million in
1999 compared to $0.0 million in 1998. General and administrative costs
decreased 25.9%.
Interest expense increased due to increased borrowing on credit
facilities and long-term debt compared to the quarter a year ago.
Depreciation increased as a result of the Company placing newly constructed
assets in service, property acquisitions, and the purchase, in lieu of
foreclosure, of four long-term health care centers previously owned by All
Seasons Living Centers, and seven long term health care centers and one
retirement center previously managed and guaranteed by Phoenix Healthcare
Corporation (formerly Iatros Health Network) discussed above.
Facility operating expense increased due to the purchase, in lieu of
foreclosure, of four long-term health care centers previously owned by All
Seasons Living Centers in October, 1998 and seven long-term health care
centers and one retirement center previously managed and guaranteed by Phoenix
Healthcare Corporation (formerly Iatros Health Network), in August, 1999.
17
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
The 1998 repurchase of 1,122,000 shares of common stock for $31.3
million resulted in a reduction of weighted average basic and diluted common
shares outstanding in the three months ended September 30, 1999 of 1,122,000.
The repurchase resulted in an increase in the 1999 period net income per share
of 3 cents basic and 2 cents diluted.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Net income for the nine months ended September 30, 1999 is $48.0 million
versus $53.5 million for the same period in 1998, a decrease of 10.3%.
Diluted earnings per common share decreased $.14 or 6.8%, to $1.91 in the 1999
period from $2.05 in the 1998 period.
Earnings for the prior year nine months ended September 30, 1998
included $5.1 million or $.20 per share basic or $.17 per share diluted of
nonrecurring net income. This nonrecurring income is primarily from the
receipt of commitment fees and prepayment penalties from early loan repayments
in the nine months ended September 30, 1998.
Total revenues for the nine months ended September 30, 1999 increased
$11.3 million to $89.1 million from $77.8 million for the nine months ended
September 30, 1998, an increase of 14.6%. Revenues from mortgage interest
income decreased $6.8 million, or 16.2%, when compared to the same period in
1998. Revenues from rental income increased $2.6 million, or 8.2% in 1999 as
compared to the same period in 1998. Facility operating revenue was $11.9
million in 1999 compared to $0.0 million in 1998. Revenues from investment
interest and other income increased $3.6 million or 80.4% compared to the 1998
period.
The decrease in mortgage interest income is due to a decline in the
average amount of mortgage investments outstanding. Furthermore, mortgage
interest income included no prepayment penalties and unamortized commitment
fees applicable to early loan repayments in the nine months ended September
30, 1999 as compared to $5.1 million in the 1998 period.
The increase in rental income resulted primarily from the increase in
investments in real estate properties of $49.9 million during the last 12
months. The increase in investment interest and other income is due to the
investment in September, 1998 of $38.1 million in the preferred stock of LTC
Properties, Inc. and $41.6 million in marketable securities during the last 12
months.
The increase in facility operating revenue is due to the purchase, in
lieu of foreclosure, of four long-term health care centers previously owned by
All Seasons Living Centers in October, 1998 and seven long-term health care
centers and one retirement center previously managed and guaranteed and by
Phoenix Healthcare Corporation (formerly Iatros Health Network) in August,
1999.
18
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
Total expenses for the 1999 nine month period increased $16.9 million or
69.5% to $41.1 million from $24.3 million for the 1998 nine month period.
Interest expense increased $4.7 million or 32.9% in the 1999 nine month period
as compared to the 1998 period. Depreciation of real estate increased $1.8
million or 28.0%. Facility operating expense increased to $10.8 million in
1999 compared to $0.0 million in 1998. General and administrative costs
decreased 15.9%.
Interest expense increased due to increased borrowings on credit
facilities and long-term debt compared to a year ago. Depreciation increased
as a result of the Company placing newly constructed assets in service,
property acquisitions, and the purchase, in lieu of foreclosure, of four
long-term health care center previously owned by All Seasons Living Centers,
and seven long term health care centers and one retirement center previously
managed and guaranteed by Phoenix Healthcare Corporation (formerly Iatros
Health Network) discussed above.
Facility operating expense increased due to the purchase, in lieu of
foreclosure, of four long-term health care centers previously owned by All
Seasons Living Centers in October, 1998 and seven long-term health care
centers and one retirement center previously managed and guaranteed by Phoenix
Healthcare Corporation (formerly Iatros Health Network), in August, 1999.
The 1998 repurchase of 1,122,000 shares of common stock for $31.3
million resulted in a reduction of weighted average basic and diluted common
shares outstanding in the nine months ended September 30, 1999 of 1,122,000.
The repurchase resulted in an increase in the 1999 period net income per share
of 8 cents basic and 7 cents diluted.
Future Growth
If capital is available, the Company expects to make new investments in
health care facilities or marketable securities that would increase interest,
dividends and rental revenues as well as interest and depreciation expense.
Increases in revenues are expected to more than offset increases in associated
expenses.
Impact of Inflation
Inflation may affect the Company in the future by changing the
underlying value of the Company's real estate or by impacting the Company's
cost of financing its operations.
Revenues of the Company are primarily from long-term investments.
Certain of the Company's leases require increases in rental income based upon
increases in the revenues of the tenants. The Company has negotiated similar
provisions in many of its mortgage notes receivable.
19
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
Health Care Legislation
Rental income revenues are believed by management to be secure.
Excluding the possibility of mortgage prepayments or defaults as described in
Note 8 of the financial statements, interest income revenues are also believed
by management to be secure. However, a significant portion of NHI's rental
income and interest income are derived from lessees and mortgagees that
participate in the Medicare and Medicaid programs. During 1997, the federal
government enacted the Balanced Budget Act of 1997 (BBA) which was signed by
the President on August 5,1997 and which contains numerous Medicare and
Medicaid cost-saving measures. As part of these cost savings measures, the
BBA requires that nursing homes transition to a prospective payment system
over a three year transition period, which system substantially reduces
Medicare payments for long-term care services. The BBA also contains certain
measures which have or will lead to substantial reductions in Medicare
payments for home health agency services and therapy services. NHI is unable
to predict the ultimate effect the enactment of the BBA will have on the
mortgagees' ability to make their lease and debt service payments to NHI.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either as asset or liability measured at its fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
133, as amended by SFAS 137, "Deferral of the Effective Date of SFAS 133", is
effective for fiscal quarters beginning after June 15, 2000. The impact of
the adoption of SFAS 133 is not expected to have a material impact on NHI's
results of operations or financial position.
Year 2000 Compliance and Related Risks
The Year 2000 issue generally relates to computer programs that were
written using two digits rather than four to define the applicable year. In
those programs, the year 2000 may be incorrectly identified as the year 1900,
which can result in a system failure or miscalculations causing a disruption
of operations, including a temporary inability to process transactions,
prepare financial statements or engage in other normal business activities.
The following discussion identifies the actions taken by NHI to assess and
address its Year 2000 issues.
20
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
State of Readiness--
NHI has developed a plan to address its Year 2000 issues, and is
utilizing its internal resources to assess, remediate and test its systems.
As a result of its advisory agreement with NHC, NHI is reliant upon NHC for
much of its information technology systems and embedded technology. NHC is
currently performing an evaluation of its information technology and embedded
technology that are utilized in the operations of NHI. The Year 2000
readiness plan developed by NHI and NHC includes an inventory and review of
all core application systems, networks, desktop systems, infrastructure and
critical supply chains. NHI's Year 2000 readiness plan is focused on addressing
Year 2000 readiness in the following four categories: (1) mainframe computer
operations, critical applications and related networks, (2) personal computer
hardware and software, (3) third party mortgagees and lessees, and (4) other
third party vendors that provide such services as telecommunications and
electrical power.
For each of the above categories, NHI, through its advisor (NHC), will
perform or has performed the phases of assessment, remediation and testing of
the applicable hardware, software or equipment, as applicable. The assessment
phase has been completed for category 1. The remediation phase is underway
and modifications of noncompliant application programs have begun. NHI has
historically developed the majority of its application programs internally.
All internally developed systems have been assessed and inventoried and plans
have been made to modify or replace them, if necessary, in order to make them
Year 2000 compliant. Purchased applications are either being modified,
replaced or upgraded. Most critical applications, whether internally
developed or purchased externally, have been tested and are already Year 2000
compliant. All server hardware, dumb terminals and printers have also been
assessed, repaired as necessary and tested and are now Year 2000 compliant.
It is expected that the remediation and testing phases related to category 1
will be completed by December 31, 1999.
NHI is currently in the assessment phase for categories 2, 3 and 4. For
personal computer software vendors, NHI is aware of the packages that will not
be Year 2000 compliant and is currently in the process of assessing the types
of packages utilized by each personal computer. This assessment was completed
by October 1, 1999 with remediation and testing to be completed by December
31, 1999. NHI has also requested all mortgages, lessees and other third party
vendors (financial institutions, electrical providers, etc.) to disclose their
current Year 2000 readiness and their plan for achieving Year 2000 readiness.
Responses have been received from most vendors and third parties. For those
vendors and third parties that have not yet responded, NHI is in the process
of sending out additional requests. Although most third party vendors have
indicated that they are currently Year 2000 compliant or expect to be
compliant prior to January 1, 2000, there can be no assurance that such third
parties will achieve Year 2000 compliance by January 1, 2000.
21
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
NHI's largest lessee, NHC, is currently in the process of evaluating its
Year 2000 issues. NHC has developed a detailed plan to assess, remediate and
test its Year 2000 compliance. NHC has formed an internal task force and is
utilizing its internal resources to assess, remediate and test its systems.
NHC's Year 2000 readiness plan is focused on addressing Year 2000 readiness in
the following five categories: (1) mainframe computer operations, critical
application and related networks, (2) personal computer hardware and software,
(3) other internal equipment such as infusion pumps, phone systems, monitoring
devices and smoke/fire alarms which rely on embedded technology (microchips)
or telecommunications, (4) third party payors, and (5) other third party
vendors utilized by NHC's healthcare centers such as financial institutions,
electrical providers, and food services suppliers. NHC has completed the
assessment phase related to its mainframe computer operations and related
networks. Although the majority of NHC's information technology applications
are already Year 2000 compliant, NHC is currently modifying or replacing
applications and hardware as necessary. NHC is expected to complete the
remediation and testing of any noncompliant applications and hardware by
December 31, 1999. NHC is currently in the assessment phase of its plan for
personal computer applications and hardware, internal equipment utilizing
embedded technology, third party payors and other third party vendors. NHC has
completed the assessment phase for its personal computer applications and
hardware and for its internal equipment and will complete remediation and
testing by December 31, 1999. It is expected that the assessments of third
party payors and third party vendors will be an ongoing process that will
continue through December 31, 1999.
The majority of NHI's mortgagees and lessees participate in the Medicare
and Medicaid programs. The lessees and mortgagees are reimbursed under these
programs through fiscal intermediaries. The Health Care Financing
Administration ("HCFA"), the government agency that administers the Medicare
program, had previously publicly stated that it would be Year 2000 compliant
by December 31, 1998. HCFA announced that it required all fiscal
intermediaries to be Year 2000 compliant by December 31, 1998 and that it
expected state Medicaid agencies to be Year 2000 compliant by March 31, 1999.
While HCFA has made no public announcement as to whether the fiscal
intermediaries and state Medicaid agencies have met this schedule, recent
reports by the General Accounting Office report that the various states may
not currently be in compliance. With respect to itself, HCFA issued a
Provider Correspondence Letter dated January 12, 1999 indicating that they
have not met their schedule. This letter states that HCFA's systems will
function on January 1, 2000 and will be able to process "acceptable" claims.
The mortgagees and lessees have little or no control over the Year 2000
compliance of governmental payors and fiscal intermediaries and it is expected
that NHI's assessment of the third party payors will be an ongoing process
throughout 1999. NHI will continue to request and seek information through
all sources available related to the Year 2000 readiness of the mortgagees,
lessees, governmental payors and fiscal intermediaries.
22
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
Year 2000 Costs--
As a result of its advisory agreement with NHC, costs related to NHI's
Year 2000 readiness plan have not been material and are not expected to be
material in future periods. No additional advisory fees have been charged to
NHI related to the assessment, remediation or testing of NHI's Year 2000
compliance.
Year 2000 Risks--
The failure of NHI or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in
interruptions of normal business operations. Based on all available
information as of September 30, 1999, management's estimate of NHI's most
reasonably likely worst case scenario includes: (i) delayed collection of
rent, mortgage principal payments and interest payments, (ii) the disruption
of capital flows from banks or other lenders resulting in liquidity stress,
and (iii) the disruption of important services upon which NHI depends, such as
telecommunications and electrical power. Each of these events could have a
material adverse impact on NHI's business, results of operations and financial
condition.
Contingency Plans--
Contingency plans for NHI's Year 2000 issues continue to be developed
and include, but are not limited to, the identification of alternate
suppliers, alternate technologies and alternate manual systems and processes.
NHI's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve as new information becomes available. The
costs of NHI's Year 2000 compliance plan and the date on which NHI expects to
complete it are based on current estimates, which reflect numerous assumptions
about future events, including the continued availability of certain
resources, the timing and effectiveness of third party remediation plans and
other factors. NHI can give no assurance that these estimates will be
achieved, and actual results could differ materially from NHI's plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct relevant computer source codes and embedded
technology, the results of internal assessments, remediation and testing and
the timeliness and effectiveness of remediation efforts of third parties. In
addition, NHI's analysis of its Year 2000 issues is based in part on
information from third parties. There can be no assurance that such
information is accurate or complete.
23
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
Item 3. Quantitative and Qualitative Information About Market Risk
INTEREST RATE RISK
The Company's cash and cash equivalents consist of highly liquid
investments with a maturity of less than three months. All of the Company's
mortgage and other notes receivable bear interest at fixed interest rates.
The Company's investments in preferred stock and corporate bonds also bear
interest at fixed rates. The underlying mortgages included in the Company's
investments in real estate mortgage investment conduits (REMIC's) also bear
interest at fixed rates. As a result of the short-term nature of the
Company's cash instruments and because the interest rates on the Company's
investments in notes receivable, preferred stock, corporate bonds and REMIC's
are fixed, a hypothetical 10% change in interest rates would have no impact on
the Company's future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates would also have an immaterial impact
on the fair values of these instruments.
As of September 30, 1999, $113,987,000 of the Company's long-term debt
bears interest at fixed interest rates. All of the Company's convertible
subordinated debentures bear interest at fixed rates. Because the interest
rates on these instruments are fixed, a hypothetical 10% change in interest
rates would have no impact on the Company's future earnings and cash flows
related to these instruments. A hypothetical 10% change in interest rates
would also have an immaterial impact on the fair values of these instruments.
The remaining $60,623,000 of the Company's long-term debt and $88,000,000 line
of credit bear interest at variable rates. However, in order to mitigate the
impact of fluctuations in interest rates on its variable rate debt, the
Company has entered into interest rate swap agreements whereby the Company has
exchanged certain variable interest rates on a $50,000,000 notional principal
amount for a fixed rate of interest. Therefore, after including the
mitigating impact of the interest rate swaps, a hypothetical 10% change in
interest rates would have an immaterial impact on the Company's future
earnings and cash flows related to these instruments. A hypothetical 10%
change in interest rates would also have an immaterial impact on the fair
values of these instruments.
The Company's use of derivative instruments is limited to the interest
rate swaps discussed above. The Company does use derivative instruments for
trading purposes and the use of such instruments is subject to strict
approvals by the Company's senior officers. The Company's exposure related to
such derivative instruments is not material to the Company's financial
position, results of operations or cash flows.
24
<PAGE>
NATIONAL HEALTH INVESTORS, INC.
September 30, 1999
(Unaudited)
EQUITY PRICE RISK
The Company's investments in marketable securities include available for
sale securities and held to maturity securities. Unrealized gains and losses
on available for sale securities are recorded in stockholders' equity in
accordance with Statement of Financial Accounting Standards No. 115. The
investments in marketable securities classified as available for sale are
recorded at their fair market value based on quoted market prices. Thus,
there is exposure to equity price risk, which is the potential change in fair
value due to a change in quoted market prices. Hypothetically, a 10% change
in quoted market prices would result in a related 10% change in the fair value
of the Company's investments in marketable securities classified as available
for sale.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None, other than as disclosed in Note 8.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - none required
(b) Reports on Form 8-K - Filed November 9, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTH INVESTORS, INC.
(Registrant)
Date November 12, 1999 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date November 12, 1999 /s/ Donald K. Daniel
Donald K. Daniel
Principal Accounting Officer
25
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<PERIOD-END> SEP-30-1999
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<SECURITIES> 54,944,000
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19,217,000
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