-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DfuI8o+CpLu7l7CNryJE1PeYAAHGHfhlFhA4I9FRnuO6GN+Ic4woZhFXH0x3fc7/ T42DeP2Ica5nb38x2HgTHw== 0000805274-96-000002.txt : 19960305 0000805274-96-000002.hdr.sgml : 19960305 ACCESSION NUMBER: 0000805274-96-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960304 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL HEALTHCARE L P CENTRAL INDEX KEY: 0000805274 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621293855 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09382 FILM NUMBER: 96530954 BUSINESS ADDRESS: STREET 1: 100 E VINE ST CITY: MURFREESBORO STATE: TN ZIP: 37130 BUSINESS PHONE: 6158902020 MAIL ADDRESS: STREET 1: P.O. BOX 1398 CITY: MURFREESBORO STATE: TN ZIP: 37130 10-K405 1 ================================================================= SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______ FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended Commission File No. December 31, 1995 33-9881 _______ NATIONAL HEALTHCARE L.P. (Exact name of registrant as specified in its Partnership Agreement) Delaware 62-1293855 (State of Formation) (I.R.S. Employer I.D. No.) 100 Vine Street Murfreesboro, Tennessee 37130 (Address of principal executive offices) Telephone Number: 615-890-2020 Securities registered pursuant to Section 12(b) of the Act. Name of Each Exchange on Title of Each Class which Registered _________________________________________________________________________ Units of Limited Partnership Interest American Stock Exchange Senior Subordinated Convertible Debentures Due 2000 (6%) American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Same Indicate by check mark whether the registrant (a) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market of voting units held by nonaffiliates of the registrant was $186,616,400 as of January 31, 1996. Number of Units outstanding as of January 31, 1996: 8,353,114 Page 1 of 68 Pages Exhibit Index Page 46 ====================================================================== PART 1 ------ ITEM 1 BUSINESS GENERAL National HealthCare L.P. (NHC or the Company) is a limited partnership organized under the laws of the State of Delaware which principally operates long-term health care centers and home health care programs in the southeastern United States. The Company's health care centers provide subacute, skilled and intermediate nursing and rehabilitative care. At December 31, 1995, the Company operated 98 long-term health care centers with a total of 12,692 licensed beds. Of the 98 centers operated, nine are owned, 40 are leased from National Health Investors, Inc. (NHI) and 49 are managed for other owners. The Company's homecare programs provide rehabilitative care at a patient's residence. During 1995, the Company operated 29 homecare programs (28 at year end) and provided 716,542 homecare patient visits. NHC also operates 387 retirement apartments located in one managed and three leased retirement centers. Additionally, the Company operates assisted living units at six owned or leased centers and two managed centers. In 1995 NHC opened 384 new beds, 111 in owned/leased centers and 273 in managed centers. Bed growth in owned/leased centers was due to two expansion projects. Managed center bed growth was realized with the addition of two new centers with a total of 199 beds and expansions of existing operations by 74 beds. During the year, construction started on four new owned centers totaling 340 beds and two leased centers are being expanded by a total of 37 beds. Regarding construction starts for managed centers, two expansion projects, each with 60 beds were begun in 1995. Finally, NHC has obtained certificates of need for the construction of 731 beds at 13 owned, leased or managed locations of which are expected to start construction in 1996. As of December 31, 1995, the Company operated specialized care units such as Alzheimer's Disease care units (4), sub-acute nursing units (9) and a number of in house pharmacies. Similar specialty units are under development or consideration at a number of the Company's centers, as well as free standing projects. ADDITIONAL SERVICES. The Company plans to continue to expand its continuum of care for the elderly by offering a comprehensive and increasing range of services through related or separately structured health care centers, homecare programs, specialized care units, pharmacy operations, rehabilitative services, assisted living centers and retirement centers. Highlights of these activities during 1995 were as follows: A. HOMECARE PROGRAMS. The Company's policy has been to affiliate each of its licensed and certified homecare programs with a company operated health care center. Although the existing 29 programs (28 at year end) have increased their total number of visits from 94,000 in 1989 to 717,000 in 1995, NHC has applied for and received Certificates of Need to expand the program services in both Florida and South Carolina, as well as pursuing a number of acquisition opportunities. Such acquired 2 or new programs are not presently planned to be operated out of a health care center. Additional certificate of need applications will be filed during 1996. B. REHABILITATIVE SERVICES. The Company has long operated an intensive offering of physical, speech, and occupational therapy provided by center specific therapists. During 1995, the Company's rehabilitation division known as National Health Rehab had a net increase of 121 for a total of 774 licensed therapists at year end and seven case managers. Starting in October, 1993, the Company redirected its focus from center-based therapists to a wider operational format and has created a separate home office and accountability system for its National Health Rehability (NHR) division. Because of the Company's extensive network of health care centers in the Southeastern United States, the Company is better able to attract, employ, and retain therapists. It is also greatly expanding its customer service base by providing contract services to health care centers owned by third parties. Provision of these services is not covered under the Company's contracts to manage health care centers and must be renegotiated annually with the managed center owner. The Company's rates for these services are competitive with other market rates. C. MEDICAL SPECIALTY UNITS. The Company has required all of its centers to participate in the Medicare program since 1973, and has continually expanded its range of offerings by the creation of center-specific medical specialty units such as the Company's eight Alzheimer's disease care units and seven subacute nursing units. During 1995 the Company opened several regional contract management offices, staffed by experienced case managers who contract with managed care organizations (MCO's) and insurance carriers for the provision of subacute and other medical specialty services within a regional cluster of centers. Florida, Middle and East Tennessee, and South Carolina are currently being serviced by NHC's seven case managers. At least two additional case management areas are planned for 1996. The services are provided not only at each NHC operated center, but also at existing specialized care units. D. PHARMACY OPERATIONS. The Company's policy has been to have an in-house pharmacy located in each health care center in those states where licensure permits the operation of an in- house pharmacy. In other states, pharmaceutical services have been provided by third party contracts. NHC continues to review opportunities for regional pharmacy operations and now operates three, one in east Tennessee and two in central Florida. These pharmacy operations will operate out of a central office and supply (on a separate contractual basis) pharmaceutical services and supplies which were formerly purchased by each center from local vendors. The regional pharmacy operations now have 4,399 nursing home beds under contract. 3 E. ASSISTED LIVING PROJECTS. Although the Company presently owns or manages eight assisted living projects, all eight are located within the physical structure of a long-term health care center or retirement complex. The Company has identified the assisted living market as an expanding area for the delivery of health care and hospitality services and has embarked upon a market review in its states of operation for the construction of free-standing assisted living centers. Construction started on three free standing assisted living projects in 1995, all of which will open in 1996. It is anticipated that the Company will start construction on approximately four additional free-standing assisted living apartments during 1996. Assisted living units provide basic room and board functions for the elderly with the on-staff availability to assist in minor medical needs on an as needed basis. In fiscal year 1995, 96% of the Company's net revenues were derived from health care services and 4% from other sources. LONG-TERM HEALTH CARE CENTERS The health care centers operated by the Company provide in-patient skilled and intermediate nursing care services and in-patient and out-patient rehabilitation services. Skilled nursing care consists of 24-hour nursing service by registered or licensed practical nurses and related medical services prescribed by the patient's physician. Intermediate nursing care consists of similar services on a less intensive basis principally provided by non-licensed personnel. These distinctions are generally found in the long-term health care industry although for Medicaid reimbursement purposes, some states in which the Company operates have additional classifications, while in other states the Medicaid rate is the same regardless of patient classification. Rehabilitative services consist of physical, speech, and occupational therapies, which are designed to aid the patient's recovery and enable the patient to resume normal activities. Each health care center has a licensed administrator responsible for supervising daily activities, and larger centers have assistant administrators. All have medical directors, a director of nurses and full-time registered nurse coverage. All centers provide physical therapy and most have other rehabilitative programs, such as occupational or speech therapy. Each facility is located near at least one hospital and is qualified to accept patients discharged from such hospitals. Each center has a full dining room, kitchen, treatment and examining room, emergency lighting system, and sprinkler system where required. Management believes that all centers are in compliance with the existing fire and life safety codes. The Company has developed a quality assurance program which it utilizes in each of its health care centers to verify that high standards of care are maintained. An integral part of the program is a computerized patient assessment system which aids in placing the patient in the appropriate section of each center (skilled or intermediate) and monitors the health care needs of the patient, number and frequency of medications and other essential medical information. The data derived 4 from this system is used not only to assure that appropriate care is given to each individual patient, but also to ascertain the appropriate amount of staffing of each section of the center. Additionally, the Company requires a patient care survey to be performed at least quarterly by the regional and home office nursing support team, and a "consumer view" survey by senior management at least twice a year. The Company developed and promotes a "customer satisfaction" rating system, using 1993 as a bench mark, and requires significant improvement in the ratings by each center as a condition of participation in the Company's overall "Excellence Program". The Company's managing general partner provides centralized management and support services to the Company's health care nursing centers. The management and support services include operational support through the use of regional vice presidents and regional nurses, accounting and financial services, cash management, data processing, legal, consulting and services in the area of rehabilitative care. All personnel are employed by the Company's administrative general partner, which is also responsible for overall services in the area of personnel, loss control, insurance, education and training. The Company reimburses the administrative general partner by paying all the costs of personnel employed for the benefit of the Company as well as a fee. All general partners are located in Murfreesboro, Tennessee. The Company provides the same management services to centers operated under management contracts as it provides to centers owned by the Company. The term of each contract and the amount of the management fee are determined on a case-by-case basis. Typically, the Company charges a minimum of 6% of net revenues. The term of the contracts range from five years to twenty years. The Company maintains a right of first refusal should any owner desire to sell a managed center and, in certain situations, special termination payments have been negotiated should an owner sell to a third party. All health care centers operated by the Company are licensed by the appropriate state and local agencies. All except one are certified as providers for Medicaid patients, and all are certified as Medicare providers. Nine of the 27 Medicaid certified centers in Tennessee have discontinued participation in the Medicaid program, but must allow present Medicaid patients to continue to stay until the patients choose to leave. All of the Company's centers are subject to state and federal licensure and certification surveys. These surveys, from time to time, may produce statements of deficiencies. In response to such a statement, if any, the staff at each center would file a plan of correction after consultation with the regional vice president and any alleged deficiencies would be corrected. Presently, none of the Company's facilities are operating under material statements of deficiencies. The Company has a significant monetary bonus to employees attached to passing these surveys with few or no deficiencies. HEALTH CARE CENTERS UNDER CONSTRUCTION The following table sets forth the long-term health care centers or additions to existing centers currently under construction which the Company owns, leases or manages: 5 Number Owned/Leased/ Projected Location of Beds Managed Opening Date =========== ======= ============= ============== Daytona, FL 60 O March, 1996 Anniston, AL 27* L May, 1996 Pensacola, FL 60* M August, 1996 Columbia, SC 120 O December, 1996 Hendersonville, TN 10* L December, 1996 Murfreesboro, TN 40 O December, 1996 Orlando, FL 120 O December, 1996 Palatka, FL 60 M December, 1996 Total 497 *Expansion of existing center CONSTRUCTION STARTS IN 1996 The following table sets forth the new beds authorized by governmental certificates of need which are anticipated to start construction in 1996. Number Number of Number of of Beds New Centers Existing Centers Owned 255 2 1 Leased 176 0 5 Managed 300 4 1 Total 731 6 7 OCCUPANCY RATES The following table shows certain information relating to occupancy rates for the Company's continuing owned and leased long-term health care centers: Year Ended December 31 1995 1994 1993 Overall census 93.0% 92.8% 94.0% Census excluding acquisitions and new openings 93.0% 94.5% 94.2% Occupancy rates are calculated by dividing the total number of days of patient care provided by the number of patient days available (which is determined by multiplying the number of licensed beds by 365 or 366). HOMECARE PROGRAMS The Company's home health programs (called "homecare" by the Company) provide nursing and rehabilitative services to individuals in their residences and are licensed by the Tennessee and Florida state governments and certified by the federal government for participation in the Medicare program. Each of the Company's 29 homecare programs is managed by a registered nurse, with speech, occupational and physical therapists either employed by the program or on a contract basis. During 1995, homecare visits increased from 674,000 visits to 717,000 visits. 6 The Company has homecare programs in both Tennessee and Florida, and will open at least three in South Carolina in 1996. The Company's Tennessee homecare programs are associated with its long-term health care centers and, historically, are based within the health care center. The Company's new homecare programs in Florida are separately based in an effort to continually expand NHC's market leadership in these services. The Company's experience in this field indicates that homecare is not a substitute for institutional care in a hospital or health care center. Instead, the Company's homecare programs provide an additional level of health care because its centers can provide services to patients after they have been discharged from the center or prior to their admission. ASSISTED LIVING UNITS The Company presently owns or manages eight assisted living units, all eight of which are located within the physical structure of a long-term health care center or retirement center. The Company plans to add at least four free standing assisted living projects each year with the first priority being to serve markets in which the Company already operates health care centers. Assisted living units provide basic room and board functions for the elderly with the on- staff availability to assist in minor medical needs on an as needed basis. Certificates of Need are not necessary to build these projects. The Company will open three and start construction on four free standing projects in 1996, containing 556 units in the aggregate. RETIREMENT CENTERS NHC's 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. In most cases, retirement centers also include long-term health care facilities, either in contiguous or adjacent licensed health care centers. Charges for services are paid from private sources without assistance from governmental programs. Retirement centers may be licensed and regulated in some states, but do not require the issuance of a Certificate of Need such as is required for health care centers. Although NHC has developed retirement centers adjacent to its health care properties with an initial construction of 15 to 40 units and which are rented by the month, these centers offer only the expansion of the Company's continuum of care, rather than a separate profit center. The projects are designed, however, to be expandable if the demand justifies. Thus, these retirement units offer a positive marketing aspect of the Company's health care centers. One retirement area which the Company is now entering is that of "continuing care communities", where the resident pays a substantial endowment fee and a monthly maintenance fee. The resident then receives a full range of services - including nursing home care - without additional charge. One such continuing care community, the 137 unit Richland Place Retirement Center, was opened in January, 1993 and is fully occupied. The Company is currently marketing an additional continuing care retirement community in Murfreesboro, Tennessee and has land under contract for similar communities in Knoxville, Tennessee and Sarasota, Florida. 7 SOURCES OF REVENUE The Company's revenues are primarily derived from its health care centers. The source and amount of the revenues are determined by (i) the licensed bed capacity of its health care centers, (ii) the occupancy rate of those centers, (iii) the extent to which the rehabilitative and other skilled ancillary services provided at each center are utilized by the patients in the centers, (iv) the mix of private pay, Medicare and Medicaid patients, and (v) the rates paid by private paying patients and by the Medicare and Medicaid programs. The following table sets forth sources of patient revenues from health care centers and homecare services for the periods indicated: Year Ended Dec 31 Source 1995 1994 1993 Private 28% 28% 29% Medicare 38% 35% 29% Medicaid/Skilled 9% 11% 13% Medicaid/Intermediate 24% 25% 28% VA and Other 1% 1% 1% Total 100% 100% 100% GOVERNMENT HEALTH CARE REIMBURSEMENT PROGRAMS The federal health insurance program for the aged is Medicare, which is administered by the Department of Health and Human Services. State programs for medical assistance to the indigent are known as Medicaid in states which the Company operates. All health care centers operated by the Company are certified to participate in Medicare and all but 11 participate in Medicaid. Eligibility for participation in these programs depends upon a variety of factors, including, among others, accommodations, services, equipment, patient care, safety, physical environment and the implementation and maintenance of cost controls and accounting procedures. In addition, some of the Company's centers have entered into separate contracts with the United States Veterans Administration which provides reimbursement for care to veterans transferred from Veterans Administration hospitals. Generally, government health care reimbursement programs make payments under a cost based reimbursement system. Although general similarities exist due to federal mandates, each state operates under its own specific system. Medicare, however, is uniform nationwide and pays, as defined by the program, the reasonable direct and indirect cost of services furnished to Medicare patients, including depreciation, interest and overhead. Medicare payments are limited by ceilings which, pursuant to the 1993 Tax Reform Act, are frozen at their 1993 level for 1994 and 1995. During 1995 the Company had 44 owned or leased centers which operated at Medicare costs higher than the ceiling. Private paying patients, private insurance carriers and the Veterans Administration generally pay on the basis of the center's charges or specifically negotiated contracts. Average per capita daily room and board revenue from private paying patients is higher than from Medicare and Medicaid patients, while the average per capita daily revenue from Medicare patients is higher than from Medicaid patients. The Company attempts to 8 attract an increased percentage of private and Medicare patients by providing rehabilitative services and increasing its marketing of those services through market areas and "Managed Care Offices", of which four were open by year end. These services are designed to speed the patient's recovery and allow the patient to return home as soon as is practical. In addition to educating physicians and patients to the advantages of the rehabilitative services, the Company also has implemented incentive programs which provide for the payment of bonuses to its regional and center personnel if they are able to obtain private and Medicare goals at their centers. Items eligible for payment under the Medicare program consist of nursing care, room and board, social services, physical and speech therapy, drugs and other supplies, and other necessary services of the type provided by skilled nursing facilities. Routine service costs for extended care facilities are subject to certain per diem costs limits. Medicare patients are entitled to have payment made on their behalf to a skilled nursing facility for up to 100 days during each calendar year and a prior 3-day hospital stay is required. A patient must be certified for entitlement under the Medicare program before the skilled nursing facility is entitled to receive Medicare payments and patients are required to pay approximately $89.50 per day after the first 20 days of the covered stay. Under the Medicare program, the federal government pays directly to the skilled nursing facility the reasonable direct and indirect costs of the services furnished. The Medicare program only reimburses for skilled nursing services, which generally afford a more intensive level of care. Medicaid programs provide funds for payment of medical services obtained by "medically indigent persons". These programs are operated by state agencies which adopt their own medical reimbursement formulas and standards, but which are entitled to receive supplemental funds from the federal government if their programs comply with certain federal government regulations. In all states in which the Company operates, the Medicaid programs authorize reimbursement at a fixed rate per day of service. The fixed rate is established on the basis of a predetermined average cost of operating nursing centers in the state in which the facility is located or based upon the center's actual cost. The rate is adjusted annually based upon changes in historical costs and/or actual costs and a projected cost of living factor. During the fiscal year, each facility receives payments under the applicable government reimbursement program. Medicaid payments are generally "prospective" in that the payment is based upon the prior years actual costs. Medicare payments are "retrospective" in that current year payments are designed to reasonably approximate the facility's reimbursable costs during that year. Payments under Medicare are adjusted to actual allowable costs each year. The actual costs incurred and reported by the facility under the Medicare program are subject to audit with respect to proper application of the various payment formulas. These audits can result in retroactive adjustments of interim payments received from the program. If, as a result of such audits, it is determined that overpayment of benefits were made, the excess amount must be repaid to the government. If, on the other hand, it is determined that an underpayment was made, the government agency makes an additional payment to the operator. The Company books as receivables the amounts which it expects to receive under the Medicare and Medicaid programs and 9 books into profit or loss any differences in amounts actually received. To date, adjustments have not had a material adverse effect on the Company. The Company believes that its payment formulas have been properly applied and that any future adjustments will not be materially adverse. REGULATION Health care centers are subject to extensive federal, state and in some cases, local regulatory, licensing, and inspection requirements. These requirements relate, among other things, to the adequacy of physical buildings and equipment, qualifications of administrative personnel and nursing staff, quality of nursing provided and continued compliance with laws and regulations relating to the operation of the centers. In all states in which the Company operates, before the facility can make a capital expenditure exceeding certain specified amounts or construct any new long-term health care beds, approval of the state health care regulatory agency or agencies must be obtained and a Certificate of Need issued. Tennessee and Alabama exempt from this review process any bed additions which are less than 10% of the total existing licensed beds or 10 beds, whichever is lesser. The appropriate state health planning agency must determine that a need for the new beds or expenditure exists before a Certificate of Need can be issued. A Certificate of Need is generally issued for a specific maximum amount of expenditure and the project must be completed within a specific time period. There is no advance assurance that the Company will be able to obtain a certificate of need in any particular instance. In some states, approval is also necessary in order to purchase existing health care beds, although the purchaser is normally permitted to avoid a full scale certificate of need application procedure by giving advance written notice of the acquisition and giving written assurance to the state regulatory agency that the change of ownership will not result in a change in the number of beds or the services offered at the facility. While there are currently no significant legislative proposals to eliminate certificates of need pending in the states in which the Company does business, deregulation in the certificate of need area would likely result in increased competition among nursing home companies and could adversely affect occupancy rates and the supply of licensed and certified personnel. HEALTH CARE REFORM Governmental Funding of Medicare and Medicaid. At the time that this is written, the United States Congress has passed and the President has vetoed a budget reconciliation bill. The President then submitted his own budget bill which also proposes cuts in Medicare and Medicaid. The President's bill involves a smaller dollar amount of cuts or curtailments to future spending but is non-specific as to the actual sources of those cuts or curtailments to future spending. As it currently stands, the Congressional Budget Reconciliation Bill contains several important changes to the Medicare payment system. 10 (1) A change to a prospective payment system (PPS) by October 1997. A PPS could eliminate the differential between the hospital based skilled nursing facilities (SNFs) and freestanding SNFs. Because of inherently lower costs, freestanding SNFs should be able to continue to attract higher acuity patients in this environment with a potential loss of those patients from the acute care side. (2) Limitations on ancillary reimbursement will be facility specific which will be based upon 1994 "reasonable" costs standard and will be indexed by 1997. Efficient operators that can improve outcomes for higher acuity Medicare patients should be able to recover substantially all of their costs. (3) A freeze on routine cost payments and a reduction in capital payments will place a premium on cost controls and efficient delivery of services. For Medicare purposes, both the President's bill and the Congressional Budget Reconciliation Bill propose shifting the actual administration of Medicaid and other Welfare programs from the Federal government to the 50 states. Although both bills contain language endeavoring to protect existing Medicaid programs, each state government will be assessing their citizens' needs and allocating their limited resources accordingly. Again, efficient operators and operators with a significant market share within states will probably be less effected with these changes than single facility providers. Although it is likely that there will be a substantial reduction in the growth of governmental revenues for Medicare and Medicaid, NHC believes that loss of governmental revenues can be offset by increased private paying revenues and the continued expansion of its service component income. OTHER BUSINESS AND PROPERTIES A. Nutritional Support Services. The Company owns a medical support services business, which primarily provides nutritional enteral, parenteral feeding materials, urological and medical supplies to patients in the Company's facilities as well as in other long-term care or home settings. This company is headquartered in Knoxville, Tennessee and is known as Nutritional Support Services (NSS). Revenues from this subsidiary accounted for from 6% to 7% of the Company's net revenues in 1995, 1994 and 1993. B. Rehabilitative Services. The Company has long operated an intensive offering of physical, speech, and occupational therapy provided by center specific therapists. During 1993, the Company created a new rehabilitation division entitled National Health Rehab (NHR) and commenced acquiring private patient rehabilitation companies. Additionally, the Company 11 has redirected its focus from center-based therapists to a wider operational format and has created a separate home office and accountability system for NHR. Because of the Company's extensive network of health care centers in the Southeastern United States, the Company is better able to attract, employ, and retain therapists. It is also greatly expanding its customer service base by providing contract services to health care centers owned by third parties. Provision of these services is not covered under the Company's contracts to manage health care centers and must be renegotiated annually with the managed center owner. The Company's rates for these services are competitive with other market rates. C. Medical Specialty Units. The Company has required all of its centers to participate in the Medicare program since 1973, and has continually expanded its range of offerings by the creation of center-specific medical specialty units such as the Company's eight Alzheimer's disease care units and seven subacute nursing units. The Company has identified a number of potential regional offices, which will be staffed by experienced case managers contracting with health maintenance organizations (HMO's) and insurance carriers for the provision of subacute and other medical specialty services within its regional cluster of centers. Seven case managers were in place by year end 1995 and two more are planned to be added in 1996. The services are actually provided not only at each NHC operated center, but also at existing specialized care units. D. Pharmacy Operations. The Company's policy has been to have an in-house pharmacy located in each health care center in those states where licensure permits the operation of an in- house pharmacy. In other states, pharmaceutical services have been provided by third party contracts. NHC is now creating wholly owned regional pharmacy operations and currently operates one in east Tennessee and two in central Florida. These pharmacy operations operate out of a central office and supply (on a separate contractual basis) pharmaceutical services and supplies which were formally purchased by each center from local vendors. The Regional pharmacy operations had almost 4,400 nursing home beds under contract by December 31, 1995. E. Advisory Services to National Health Investors, Inc. In 1991 the Company formed National Health Investors, Inc., as a wholly-owned subsidiary. It then transferred to NHI certain healthcare facilities then owned by NHC and then distributed the shares of NHI to NHC's unitholders. The distribution had the effect of separating NHC and NHI into two independent public companies. As a result of the distribution, all of the outstanding shares of NHI were distributed to the then NHC unitholders. NHI's initial assets consisted of the following: (i) 40 skilled nursing centers and three retirement centers and (ii) certain promissory notes secured by mortgages on four additional nursing homes managed by NHC. Each of the healthcare facilities was leased to NHC. 12 NHI also has entered into an Advisory, Administrative Services and Facilities Agreement (the "Advisory Agreement") with NHC pursuant to which NHC provides NHI, for a fee, with investment advice, office space, personnel and other services. For its services under the Advisory Agreement, the Advisor is entitled to a base annual compensation of $1,625,000. Compensation paid to executive officers of NHI is credited against this Advisory Fee. NHC executive officers W. Andrew Adams and Richard F. LaRoche, Jr. serve as executive officers of NHI. For 1993 and later years in which per share Funds From Operations of NHI exceed per share Funds From Operations during 1992, the $1,625,000 annual compensation increased by the same percentage that per share Funds From Operations in such later year exceed those in 1992. NHC earned approximately $2,827,000 in 1995. The Advisory Agreement provides that the Advisor shall pay all expenses incurred in performing its obligations thereunder, without regard to the amount of compensation received under the Agreement. Expenses specifically listed as expenses to be borne by the Advisor without reimbursement include: the cost of accounting, statistical or bookkeeping equipment necessary for the maintenance of NHI's books and records; employment expenses of the officers and directors and personnel of the Advisor and all expenses. F. Principal Office. The Company maintains its home office staff in Murfreesboro, Tennessee in a building owned by a limited partnership, which is 69.7% owned by NHC. The Company also owns land adjacent to many of its health care centers for the purpose of long-range expansion. COMPETITION In most of the communities in which the Company's health care centers are located, there are other health care centers with which the Company competes. In competing for patients and staff with these centers, the Company relies upon referrals from acute care hospitals, physicians, residential care facilities, church groups and other community service organizations. The reputation in the community and the physical appearance of the Company's health care centers are also important in obtaining patients, since members of the patient's family generally participate to a greater extent in selecting health care centers than in selecting an acute care hospital. The Company believes that by providing and emphasizing rehabilitative as well as skilled care services at its centers, it has been able to broaden its patient base and to differentiate its centers from competing health care centers. The Company experiences competition in employing and retaining nurses, technicians, aides and other high quality professional and non-professional employees. In order to enhance its competitive position, the Company has an educational tuition loan program, an American Dietary Association approved internship program, a specially designed nurse's aide training class, and makes financial scholarship aid available to physical therapy vocational programs and The Foundation for 13 Geriatric Education. The Company also maintains an "Administrator in Training" course, 24 months in duration, for the professional training of administrators. Presently, the Company has 20 full-time individuals in this program. Four of its eight regional vice presidents and 52 of its 98 health care center administrators have graduated therefrom. NHC's employee benefit package offers a tuition reimbursement program. The goal of the program is to insure a well trained qualified work force to meet future demands. While the program is offered to all disciplines, special emphasis has been placed on supporting students in nursing and physical therapy programs. Students are reimbursed at the end of each semester after presenting tuition receipts and grades to management. The program has been successful in providing a means for many bright students to pursue a formal education. EMPLOYEES As of December 31, 1995, the administrative general partner of the Company and the Company's managed centers had approximately 13,500 full and part time employees, who are called "Partners" by the Company. No employees are presently represented by a bargaining unit. The Company believes its current relations with its employees are good. (The Balance of This Page Intentionally Left Blank) 14 ITEM 2 PROPERTIES LONG-TERM HEALTH CARE CENTERS
Total Beds under Development Joined State City Center Affiliation Beds and Special Care Units NHC Alabama Anniston NHC HealthCare, Anniston Leased 124 27 beds under development 1973 Moulton NHC HealthCare, Moulton Leased 136 1973 Florida Brooksville Brooksville Nursing Manor Managed 180 1993 Hudson Bear Creek Nursing Center Managed 120 1993 Crystal River Cypress Cove Care Center Managed 120 1993 Trenton Medic-Ayers Nursing Center Managed 120 1993 Ft. Lauderdale NHC of Ft. Lauderdale Managed 253 1984 New Port Richey Heather Hill Nursing Home Managed 120 1993 Hudson NHC HealthCare, Hudson Leased 180 1986 Merritt Island NHC HealthCare Leased 120 22 bed Alzheimer's unit 60 beds under development 1990 Panama City NHC of Panama City Managed 120 1986 Port Charlotte NHC HealthCare Owned 180 60 bed subacute care unit 30 bed Alzheimer's unit 1994 Naples NHC HealthCare, Naples Owned 60 26 beds under development 1994 St. Petersburg NHC HealthCare Managed 159 1984 Stuart NHC HealthCare, Stuart Leased 118 24 bed Alzheimer's unit 1989 Ocoee Ocoee Health Care Center Managed 120 1990 St. Cloud Osceola Health Care Center Managed 120 1991 Palatka Palatka Health Care Center Managed 120 60 beds under development 1989 Clearwater Palm Garden of Clearwater Managed 120 1987 Gainesville Palm Garden of Gainesville Managed 120 1987 Jacksonville Palm Garden of Jacksonville Managed 120 1990 Largo Palm Garden of Largo Managed 140 1987 N. Miami Beach Palm Garden of N.Miami Beach Managed 120 1988 Ocala Palm Garden of Ocala Managed 120 60 beds under development 1987 Orlando Palm Garden of Orlando Managed 120 1987 Pensacola Palm Garden of Pensacola Managed 120 60 beds under development 1987 Lake City Palm Garden of Lake City Managed 120 1992 Largo Palm Garden of Pinellas Managed 120 20 bed subacute care unit 1991 Port St. Lucie Palm Garden of Pt St. Lucie Managed 120 1988 Tampa Palm Garden of Tampa Managed 120 1987 Vero Beach Palm Garden of Vero Beach Managed 173 1987 West Palm Beach Palm Garden of W. Palm Beach Managed 159 3 beds under development 1988 Winter Haven Palm Garden of Winter Haven Managed 120 1987 Plant City NHC HealthCare, Plant City Leased 171 1985 Dade City Royal Oak Nursing Center Managed 120 1993 Sarasota Sarasota Health Care Center Managed 120 60 beds under development 1990 Sun City Palm Garden of Sun City Managed 120 1991 Niceville The Manor at Blue Water Bay Managed 60 1993 Madison Lake Park of Madison Managed 79 1995 Miami The Nursing Center at Mercy Managed 120 1995 15 LONG-TERM HEALTH CARE CENTERS (continued) Total Beds under Development Joined State City Center Affiliation Beds and Special Care Units NHC Georgia Ft. Oglethorpe NHC HealthCare Owned 81 54 beds under development 1989 Rossville NHC HealthCare, Rossville Leased 112 1971 Indiana Brownsburg Brownsburg Hlth Care Ctr. Managed 178 20 bed Alzheimer's unit 1990 Castleton Castleton Hlth Care Ctr. Managed 120 18 bed Alzheimer's unit 1990 Ladoga Ladoga Health Care Center Managed 95 1990 Plainfield Plainfield Hlth Care Ctr. Managed 199 22 bed Alzheimer's unit 1990 Kentucky Dawson Springs NHC HealthCare Leased 80 1973 Glasgow NHC HealthCare, Glasgow Leased 206 10 bed Alzheimer's unit 1971 Madisonville NHC HealthCare Leased 94 1973 Missouri Desloge NHC HealthCare, Desloge Leased 120 1982 Joplin NHC HealthCare, Joplin Leased 126 1982 Kennett NHC HealthCare, Kennett Leased 160 20 beds under development 1982 Macon Macon Health Care Center Managed 120 1982 St. Louis NHC HealthCare, Maryland Heights Leased 220 1987 Osage Beach Osage Beach Hlth Care Ctr Managed 120 1982 Springfield Springfield Hlth Care Ctr Managed 120 1982 St. Charles NHC HealthCare Leased 120 1982 West Plains West Plains Hlth Care Ctr Managed 120 1982 South Anderson NHC HealthCare, Anderson Leased 290 1973 Carolina Greenwood NHC HealthCare, Greenwood Leased 152 1973 Sumter NHC HealthCare, Hopewell Managed 96 1985 Laurens NHC HealthCare, Laurens Leased 176 1973 Aiken Mattie C. Hall Health Care Center Managed 176 44 bed Alzheimer's unit 1982 Clinton NHC HealthCare, Clinton Owned 131 1993 Murrells Inlet NHC HealthCare, Garden City Owned 88 1992 Greenville NHC HealthCare, Greenville Owned 176 1992 Lexington NHC HealthCare, Lexington Owned 88 12 bed subacute care unit 1994 North Augusta NHC HealthCare, North Augusta Owned 132 1991 Sumter NHC HealthCare, Sumter Managed 120 1985 Tennessee Athens NHC HealthCare, Athens Leased 96 1971 Johnson City NHC HealthCare, Johnson City Leased 179 18 bed Alzheimer's unit 1971 Columbia NHC HealthCare, Columbia Leased 120 12 bed subacute care unit 1973 Cookeville NHC HealthCare, Cookeville Managed 96 1975 Franklin NHC HealthCare, Franklin Leased 84 1979 Dickson NHC HealthCare, Dickson Leased 217 1971 Columbia NHC HealthCare, Hillview Leased 98 1971 Knoxville NHC HealthCare, Knoxville Leased 152 1971 Knoxville NHC HealthCare, Fort Sanders Owned 180 12 bed subacute unit 1977 McMinnville NHC HealthCare, McMinnville Leased 142 1971 Lewisburg NHC HealthCare, Lewisburg Leased 95 1971 16 LONG-TERM HEALTH CARE CENTERS (continued) Total Beds under Development Joined State City Center Affiliation Beds and Special Care Units NHC Tennessee Murfreesboro NHC HealthCare, Murfreesboro Managed 190 69 bed subacute care unit 1974 Nashville NHC HealthCare, Nashville Leased 133 1975 Hendersonville NHC HealthCare, Hendersonville Leased 107 10 beds under development 1987 Lawrenceburg NHC HealthCare, Lawrenceburg Managed 97 1985 Oak Ridge NHC HealthCare, Oak Ridge Managed 130 1977 Lewisburg NHC HealthCare, Oakwood Leased 62 1973 Chattanooga NHC HealthCare, Chattanooga Leased 212 20 bed sub-acute care 1971 Pulaski NHC HealthCare, Pulaski Leased 95 1971 Milan NHC HealthCare, Milan Leased 129 1971 Lawrenceburg NHC HealthCare, Scott Leased 62 15 beds under development 1971 Dunlap NHC HealthCare, Sequatchie Leased 60 60 beds under development 1976 Somerville NHC HealthCare, Somerville Leased 84 1976 Sparta NHC HealthCare, Sparta Leased 150 1975 Springfield NHC HealthCare, Springfield Leased 112 1973 Smithville NHC HealthCare, Smithville Leased 76 1971 Nashville The Health Center of Richland Place Managed 106 1992 Nashville West Meade Place Managed 120 1993 Virginia Bristol NHC HealthCare, Bristol Leased 120 1973 ASSISTED LIVING UNITS State City Center Assisted Living Units Alabama Anniston NHC HealthCare, Anniston 20 bed assisted living unit Florida Naples NHC HealthCare, Naples 60 bed assisted living unit West Palm Beach Palm Garden of West Palm Beach 25 bed assisted living unit Missouri St. Charles Lake St. Charles Retirement Center 25 bed assisted living unit Tennessee Dickson NHC HealthCare, Dickson 20 bed assisted living unit Johnson City NHC HealthCare, Johnson City 15 bed assisted living unit Nashville Richland Place 32 bed assisted living unit Somerville NHC HealthCare, Somerville 12 bed assisted living unit 17 RETIREMENT APARTMENTS State City Retirement Apartments Affiliation Units Est. Missouri St. Charles Lake St. Charles Retirement Apts. Leased 155 1984 Tennessee Johnson City Colonial Hill Retirement Apts. Leased 63 1987 Chattanooga Parkwood Retirement Apartments Leased 32 1986 Nashville Richland Place Continuing Care Community Managed 137 1993 HOMECARE PROGRAMS State City Homecare Programs Affiliation Est. Florida Blountstown NHC HomeCare of Blountstown Owned 1994 Carrabelle NHC HomeCare of Carrabelle Owned 1994 Chipley NHC HomeCare of Chipley Owned 1994 Crawfordville NHC HomeCare of Crawfordville Owned 1994 Madison NHC HomeCare of Madison Owned 1994 Marianna NHC HomeCare of Marianna Owned 1994 Panama City NHC HomeCare of Panama City Owned 1994 Panama City NHC Private Nursing Owned 1994 Perry NHC HomeCare of Perry Owned 1994 Port St. Joe NHC HomeCare of Port St. Joe Owned 1994 Quincy NHC HomeCare of Quincy Owned 1994 Tallahassee NHC HomeCare of Tallahassee Owned 1994 S.Carolina Greenwood NHC HomeCare of Greenwood Owned 1995 Tennessee Athens NHC HomeCare of Athens Owned 1984 Johnson City NHC HomeCare of Johnson City Owned 1978 Columbia NHC HomeCare of Columbia Owned 1977 Cookeville NHC HomeCare of Cookeville Owned 1976 Dickson NHC HomeCare of Dickson Owned 1977 Lawrenceburg NHC HomeCare of Lawrenceburg Owned 1977 Lewisburg NHC HomeCare of Lewisburg Owned 1977 McMinnville NHC HomeCare of McMinnville Owned 1976 Murfreesboro NHC HomeCare of Murfreesboro Owned 1976 Knoxville NHC HomeCare of Knoxville Owned 1977 Chattanooga NHC HomeCare of Chattanooga Owned 1985 Pulaski NHC HomeCare of Pulaski Owned 1985 Milan NHC HomeCare of Milan Owned 1977 Somerville NHC HomeCare of Somerville Owned 1983 Sparta NHC HomeCare of Sparta Owned 1984 Springfield NHC HomeCare of Springfield Owned 1984
18 ITEM 3 LEGAL PROCEEDINGS The Company is subject to claims and suits in the ordinary course of business. While there are several worker's compensation and personal liability claims presently in the court system, management believes that the ultimate resolution of all pending proceedings will not have any material adverse effect on the Company or its operations. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ------- ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS The partnership units of National HealthCare L.P. are traded on the American Stock Exchange under the symbol NHC. The closing price for the NHC units on Friday, December 29, 1995 was $39.00. On December 31, 1995, NHC had approximately 3,700 unitholders, comprised of 1,826 unitholders of record and an additional 1,874 unitholders indicated by security position listings. The following table sets out the quarterly high and low sales prices of NHC's units of partnership interest. The cash distributions per unit during each quarter are also shown. Unit Prices Cash Distributions High Low Declared Per Unit 1993 1st Quarter $17.875 $13.500 $ .20 2nd Quarter 18.375 16.375 .20 3rd Quarter 22.000 16.875 .24 4th Quarter 26.375 21.625 1.34 1994 1st Quarter $30.000 $25.500 $ .31 2nd Quarter 29.750 24.875 .31 3rd Quarter 28.875 25.375 .31 4th Quarter 28.750 25.500 .42 1995 1st Quarter $26.000 $22.875 $ .42 2nd Quarter 28.500 24.375 .52 3rd Quarter 31.500 28.000 .52 4th Quarter 39.375 29.500 .52 NHC paid cash distributions on its outstanding partnership units related to reporting years as follows: 1991, $1.20 per unit; 1992, $.54 per unit; 1993, $.88 per unit; 1994, $1.35 per unit; and 1995, $1.98 per unit. Additionally, there were special cash distributions of $.13 per unit and $1.10 per unit paid in 1991 and 1993, respectively. The 1993 special distribution was paid to help defray taxes on the sale of an investment. The 1991 special distribution was paid to help defray taxes on net Section 1231 and capital gains reported by NHC. 19 ITEM 6 SELECTED FINANCIAL DATA The following table represents selected financial information with respect to the Company for the five years ended December 31, 1995. This financial information has been derived from financial statements included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and accompanying footnotes. Year Ended December 31, 1995 1994 1993 1992 1991 (in thousands, except unit and per unit data) Operating Data: Revenue $350,957 $298,901 $245,085 $216,378 $184,612 Gain on sale of investments -- -- 24,773 -- -- Expenses 329,842 283,048 232,296 206,877 166,945 Net income 21,115 15,853 37,562 9,501 17,667 Earnings per unit: Primary $ 2.65 $ 2.02 $ 4.85 $ 1.28 $ 2.45 Fully diluted 2.31 1.80 4.05 1.23 2.45 Balance Sheet Data: Total assets $355,491 $396,133 $344,680 $304,074 $273,015 Long-term debt 100,871 104,243 54,625 49,299 51,947 Debt serviced by other parties 40,771 89,764 112,116 115,031 117,960 Partners' capital 108,899 101,006 92,526 67,922 61,823 Cash distributions declared per unit: Quarterly and year end $ 1.98 $ 1.35 $ .88 $ .54 $ 1.20 Special -- -- 1.10 -- .13 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview-- National HealthCare L.P. (NHC) is a leading provider of long-term health care services. NHC operates or manages 98 long-term health care centers with 12,692 beds in nine states. NHC provides nursing care as well as ancillary therapy services to patients in a variety of settings including long-term nursing centers, managed care specialty units, subacute care units, Alzheimer's care units, homecare programs, and facilities for assisted living. NHC also operates retirement centers. Results of Operations-- The following table and discussion sets forth items from the consolidated statements of income as a percentage of net revenues for the audited years ended December 31, 1995, 1994 and 1993, excluding in 1993 the nonrecurring gain on sale of investment. 20 Percentage of Net Revenues Year Ended December 31 1995 1994 1993 Revenues: Net patient revenues 87.8% 90.2% 91.0% Other revenues 12.2 9.8 9.0 Net revenues 100.0 100.0 100.0 Costs and expenses: Salaries, wages and benefits 53.8 52.7 52.4 Other operating 31.2 33.0 32.8 Depreciation and amortization 4.2 4.6 4.8 Interest 4.8 4.4 4.8 Total costs and expenses 94.0 94.7 94.8 Net Income 6.0% 5.3% 5.2% The following table sets forth the increase in certain items from the consolidated statements of income as compared to the prior period excluding in 1993 the nonrecurring gain on sale of investment. Period to Period Increase (Decrease) 1995 vs. 1994 1994 vs. 1993 (dollars in thousands) Amount Percent Amount Percent Revenues: Net patient revenues $38,247 14.2 $46,633 20.9 Other revenues 13,809 47.3 7,183 32.7 Net revenues 52,056 17.4 53,816 22.0 Costs and expenses: Salaries, wages and benefits 31,322 19.9 29,201 22.7 Other operating 10,664 10.8 18,427 22.9 Depreciation & amortization 967 7.1 1,703 14.3 Interest 3,841 29.4 1,421 12.2 Total costs and expenses 46,794 16.5 50,752 21.8 Net income $ 5,262 33.2 $ 3,064 24.0 NHC's owned or leased long-term health care centers and contract therapy services provided 76% of net revenues in 1995, 76% in 1994, and 80% in 1993. Homecare programs provided 15% of net revenues in 1995, 16% in 1994 and 13% in 1993. The overall census in owned or leased centers for 1995 was 93.0% compared to 92.8% in 1994 and 94.0% in 1993. The census excluding acquisitions and new openings was 93.0%, 94.5% and 94.2%, respectively, for the same periods. NHC opened 111 new owned or leased beds in 1995 and 273 beds in managed centers for a total of 384 licensed beds. Approximately 60% of NHC's net revenues are derived from Medicare, Medicaid, and other government programs. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. 21 1995 Compared to 1994 In 1995, NHC has achieved rapid annual growth in earnings, earnings per unit, and revenues. Net income totaled $21,115,000, a 33% increase over the comparable prior year amount. Fully diluted earnings per unit totaled $2.31, a 28% increase. Net revenues totaled $350,957,000, a 17% increase. NHC's net margin ratio, which is defined as net income divided by net revenues, increased to 6.0% from 5.3% in 1994 illustrating that in 1995 NHC grew its revenues at a faster rate than its expenses. The growth in net patient revenues in 1995 occurred in long-term care, homecare, and rehabilitative and managed care. Improved revenues in long-term care are due primarily to increased types and levels of services being offered and to increases in private pay and third party billing rates. Also, the total number of owned or leased beds increased from 6,295 beds at the end of 1994 to 6,406 beds at the end of 1995. During 1995 and 1994, NHC had 44 and 41, respectively, owned or leased centers which operated at Medicare costs higher than the routine cost limits, which were frozen at 1993 levels by the 1993 Tax Reform Act. Homecare revenues improved due to increased payor rates and increased numbers of visits at NHC's 28 Florida and Tennessee homecare locations. There were 717,000 homecare visits in 1995 compared to 674,000 visits in 1994. Revenues also improved during 1995 due to continued emphasis on rehabilitative and managed care services. To boost the ability to offer physical, speech and occupational therapy to greater numbers of patients, NHC increased its staff of professionally licensed therapists by 19% in 1995 and by 40% in 1994. NHC has also determined to provide high acuity medical services and has signed managed care contracts with 34 private insurance companies to provide subacute care to their insurees, offering a less expensive alternative to acute care and rehabilitative hospitals. NHC also is expanding its network of regional contract offices which are staffed by experienced case managers and which assure appropriate placement and payment for subacute patients in the NHC system. The growth in other revenues in 1995 occurred primarily in the areas of revenues from management services, advisory fees from NHI, and interest income. Other revenues are more fully detailed in Note 6 to the financial statements. Revenues from management services of $28,719,000, which are included in the Statements of Income in Other Revenues, increased 51% in 1995 due to the increased number of beds being managed for others, increased amounts and types of management and other support services being offered, and increased interest income from higher principal amounts on loans to managed centers. In 1995, two long-term care centers and 273 long-term care beds came under new management contracts. Management fees are generally based upon a percentage of net revenues of the managed center and therefore tend to increase as a facility matures and as prices rise in general. NHC's management contracts are generally long-term (up to ten years) and include equity participation agreements and the right of first refusal upon the sale of the property. Revenues from advisory fees received from NHI of $3,265,000 represent a 52% increase over 1994 and are based upon a formula which measures the increase in NHI's funds from operations over a base year. 22 Revenues from interest income totaled $6,462,0000 and represent a 33% increase over 1994 and are in part from NHC's investment in loan participation agreements. Loan participation agreements may generally be sold in the market should NHC require additional capital. Increases in salaries, wages and benefits in 1995 are attributable to the increase in staffing levels due to the increased emphasis on rehabilitative services, homecare expansions and long-term care bed additions. Also contributing to higher costs of labor are inflationary increases for salaries and the associated benefits. Labor costs are the most significant costs of NHC. Operating costs have increased due to the expansion of rehabilitative and managed care services, the expansion of homecare services, the growth in managed services and the increased numbers of beds in operation. Depreciation and amortization increased as a result of NHC's placing of newly constructed or purchased assets in service and due to capital improvements at existing properties. Interest expense increased due to additional borrowing for newly constructed long-term care beds and due to increased interest rates on floating rate debt. Approximately 35% of NHC's long-term debt is at floating rates. 1994 Compared to 1993-- Included in NHC's net income and revenues for the year ended December 31, 1993 is a $24.8 million gain ($3.20 per primary unit, $2.55 per fully diluted unit) from the sale for $33.0 million in cash of NHC's interest in VHA Long Term Care to ServiceMaster. VHA Long Term Care provides management services primarily to not-for-profit long-term care facilities. For purposes of comparison, the gain from this sale is excluded from the discussion of results of operations below. In 1994, NHC achieved outstanding earnings and revenues growth while maintaining a strong financial position. Results for 1994 included a 24% increase in net income, a 20% increase in fully diluted earnings per unit, and a 22% increase in net revenues. These improvements were made despite the negative impact of regulatory changes, which took effect in the latter part of 1993 but which were fully effective for all of 1994. The growth in revenues in 1994 occurred in long-term care, homecare, rehabilitative care, managed care and management services. Improved revenues in long-term care were due in part to increased numbers of owned beds having been placed in service. In 1994, 382 beds in three new owned long-term care centers and two existing centers were added to operations. During 1994, 80 new owned or leased assisted living units were added and fully occupied in two centers. Furthermore, 147 long-term care beds which had been added in 1993 had improved occupancy rates in 1994. Also contributing to improved revenues in long-term care were increases in private pay and third party payor rates. Increases in third party payor rates were offset in part by the negative impact of the 1993 Tax Reform Act, which terminated the payment of a return on equity for Medicare certified nursing homes effective October 1, 1993 and froze routine cost limits for such homes at 1993 levels for both 1994 and 1995. During 1994 and 1993, NHC had 41 and 37, respectively, owned or leased centers which operated at Medicare costs higher than the ceiling.23 23 Improved revenues in homecare were due in part to the addition of 13 homecare service locations. This expansion was accomplished through the purchase of a Florida homecare provider in February, 1994. Homecare revenues also improved due to increased payor rates and number of visits at NHC's 16 additional Tennessee locations. At all locations, there were 674,000 visits in 1994 compared to 319,000 in 1993. Revenues also improved during 1994 due to increased emphasis on rehabilitative and managed care services. To boost the ability to offer physical, speech and occupational therapy to greater numbers of patients, NHC increased its staff of professionally licensed therapists by 40% in 1994. NHC also signed managed care contracts with 25 private insurance companies to provide subacute care to their insurees, offering a less expensive alternative to acute care and rehabilitative hospitals. NHC also developed a network of case managers to assure appropriate placement and payment for subacute patients in the NHC system. Revenues from management services, which are included in the Statements of Income in Other Revenues, increased 45% in 1994 due to the increased number of beds being managed for others, increased management fees, and increased interest income from higher principal amounts and interest rates on floating rate loans to managed centers. In 1994 and late December of 1993, a net of five long-term care centers and 839 long-term care beds came under management contract. An additional two centers and 315 beds had been added throughout 1993. Management fees are generally based upon a percentage of net revenues of the managed center and therefore tend to increase as a facility matures and as prices rise in general. Increases in salaries, wages and benefits in 1994 were attributable to the increase in staffing levels due to long-term care bed additions, homecare expansions, and the increased emphasis on rehabilitative services. Also contributing to higher costs of labor were inflationary increases for salaries and the associated benefits. Operating costs increased due to the increased numbers of beds in operation, the expansion of homecare services, the expansion of rehabilitative and managed care services, and the growth in managed services. Depreciation and amortization increased as a result of NHC's placing of newly constructed or purchased assets in service and due to capital improvements at existing properties. Interest expense increased due to additional borrowing for newly purchased or constructed long-term care beds and due to increased interest rates on floating rate debt. Approximately 29% of NHC's long-term debt was at floating rates at the end of 1994. Growth and Development-- NHC plans to continue to expand its continuum of care to the elderly by offering a comprehensive range of services through related or separately structured health care centers, homecare programs, specialized care units, pharmacy operations, rehabilitative services, assisted living centers and retirement centers. 24 During 1995, NHC grew its long-term health care business by constructing additions totaling 111 licensed beds at two owned or leased health care centers and totaling 74 licensed beds at three managed health care centers, all located in Florida. Additionally during 1995, NHC commenced management of two additional long-term health care centers with 199 licensed beds, also located in Florida. All in all, 384 owned, leased or managed beds were added in 1995. These additions increased the total number of owned, leased or managed centers to 98 and the total number of licensed beds to 12,692. At December 31, 1995, NHC had under construction 377 beds at six new or existing owned or leased centers and 120 beds at two managed centers. All of these 497 beds are expected to open during 1996. NHC also has been granted governmental certificates of need to permit construction of 431 beds at eight owned or leased locations and 300 beds at five managed locations which are expected to start construction during 1996. NHC has 28 homecare programs located in Florida and Tennessee and in 1996 expects to open additional programs in South Carolina and Florida. NHC has identified the assisted living market as an expanding area for the delivery of health care and hospitality services and has embarked upon a market review to determine favorable locations for development of assisted living centers. Assisted living centers provide basic room and board functions for the elderly with on-staff availability to assist in minor medical and living needs on an as needed basis. NHC currently operates eight assisted living projects, all eight of which are located within the physical structure of a long-term care center or retirement center. Construction started on three free-standing assisted living projects in 1995, all of which are expected to open in 1996. It is expected that NHC will start construction of four additional assisted living projects in 1996. Liquidity, Capital Resources and Financial Condition-- During 1995 NHC spent approximately $29,435,000 on construction and routine capital expenditures, $14,702,000 on cash distributions to partners, $7,169,000 as principal payments and financing costs on debt, and $30,694,000 to invest in loan participation agreements and notes receivable. These and other cash needs were financed through cash on hand; cash flow from operations of $39,858,000; the collection of long-term notes receivable, loan participation agreements and marketable securities of $42,313,000; the issuance of $2,368,000 of debt and the issuance of partnership units for $820,000. NHC is committed to spend approximately $28,359,000 for ongoing construction contracts and to provide financing to managed facilities in the amount of $5,316,000 in 1996. NHC has also guaranteed approximately $81,555,000 of debt of certain health care centers which NHC manages for others. At December 31, 1995, NHC expects to have no additional liability as a result of its debt guarantees. NHC's current cash on hand, marketable securities, short-term notes receivable, operating cash flows and, as needed, its borrowing capacity are expected to be adequate to finance NHC's operating requirements and 25 growth and development plans for 1996 and into 1997. If additional capital is necessary, NHC's balance sheet ratios are at commercially reasonable levels to obtain additional capital. The current ratio is 1.5:1 at December 31, 1995, and working capital is $30,393,000. The ratio of long- term debt to equity, as defined in our banking relationships to include both deferred income and subordinated convertible notes as equity, is 0.9:1 at the end of 1995. For all financial instruments except the marketable securities and subordinated convertible notes, NHC believes that the financial statement carrying amounts approximate fair value at December 31, 1995. The fair value of the marketable securities were estimated based on quoted market prices. During 1995, National Health Investors ("NHI") prepaid debt on which NHC had also been obligated in the amount of $20,544,000. In addition, NHC was released from its obligation on approximately $25,324,000 of debt which had been transferred to NHI in 1991. Since NHC is no longer obligated on transferred debt in the amount of $45,868,000, debt serviced by other parties and assets under arrangement with other parties have been reduced by $45,868,000. The leases with NHI provide that NHC shall continue to make non-obligated debt service rent payments equal to the debt service including principal and interest on the obligated debt which was prepaid and from which NHC has been released. New Accounting Pronouncements-- In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of". Adoption of SFAS 121 is required for fiscal years beginning after December 15, 1995. Although NHC did not adopt SFAS 121 in 1995, it has determined that the adoption of the pronouncement will not have a material impact on its financial statements in 1996. Also in 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". The disclosure requirements of SFAS 123 are required for fiscal years beginning after December 15, 1995. In 1996, NHC plans to adopt only the disclosure requirements of SFAS 123. Management believes that the provisions of SFAS 123 will not have a material impact on NHC's financial condition or results of operations. Cash Distributions-- NHC management intends to distribute approximately 60% of ordinary taxable income to unitholders during 1996. Management expects that NHC's cash distribution will never be lower than the maximum federal tax rate to individuals unless there is a material change in our present tax rate system. Impact of Inflation-- Reimbursement rates under the Medicare and Medicaid programs generally reflect the underlying increases in costs and expenses resulting from inflation. For this reason, the impact of inflation on profitability has not been significant. 26 Partnership Legislation-- On December 22, 1987, legislation passed which requires that publicly traded limited partnerships be taxed as corporations for federal income tax purposes. A "grandfather" clause in that legislation allows NHC to avoid corporate taxation through 1997. In the meantime, management will periodically review the tax laws to determine what avenues will be most beneficial to unitholders. Health Care Legislation-- Federal budget and reform plans are being considered by the U. S. Congress that would, if adopted, reduce or slow the growth of payments to facilities for services provided to patients under the Medicare and Medicaid programs. Proposals being considered include the implementation of a prospective payment system by October of 1997, the reduction of payments for capital costs, the extension of the current freeze on increases in routine cost limits, the application of new limits for non- routine therapy services and the adoption of block grants to the states for Medicaid expenditures. At this time, it is not possible to determine the impact on NHC of any health care legislation which might be enacted. However, any reductions in government spending for long-term health care would likely have an adverse effect on the operating results and cash flows of NHC. Should such spending reductions be enacted, NHC believes that the loss of governmental revenues can be offset by increased revenues from nongovernmental sources and the continued expansion of its service component income. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following table sets forth selected quarterly financial data for the three most recent fiscal years. Selected Quarterly Financial Data (unaudited, in thousands, except per unit amounts) 1st 2nd 3rd 4th Quarter Quarter Quarter(B) Quarter(A) 1995 =============================================================== Net Revenues $83,756 $85,283 $90,542 $91,376 Net Income 4,172 4,586 5,604 6,753 Fully Diluted Earnings Per Share .470 .510 .620 .710 1994 =============================================================== Net Revenues $68,598 $71,128 $75,564 $83,611 Net Income 3,226 3,447 4,064 5,116 Fully Diluted Earnings Per Share .370 .400 .460 .570 1993 =============================================================== Net Revenues $57,410 $58,918 $87,011 $66,519 Net Income 2,527 2,724 28,020 4,291 Fully Diluted Earnings Per Share .310 .330 2.930 .480 27 Note A: In the fourth quarters of 1993, 1994, and 1995 net revenues and income were increased by approximately $1,000,000 ($.13 per unit, primary) $1,450,000 ($.19 per unit, primary), and $1,200,000 ($.15 per unit, primary), respectively, due to enhanced retroactive Medicare and Medicaid reimbursement which, if known, would have been reported periodically throughout the year. Note B: In the third quarter of 1993 NHC sold its interest in VHA LTC resulting in a one-time gain of approximately $24,773,000 ($3.20 per primary unit, $2.55 per fully diluted unit). The financial statements are included as Exhibit 13 and are incorporated in this Item 8 by reference. ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on accounting and financial disclosure. PART III -------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT General Partners: The Company has three general partners identified in the Amended and Restated Agreement of Limited Partnerships: 1. Managing General Partner: NHC, Inc., a Tennessee corporation. The authorized, issued and outstanding stock of NHC, Inc. is owned by its board of directors and senior management, a total of 14 individuals. W. Andrew Adams, the Company's President, owns approximately 42% of the voting securities of NHC, Inc. No other person owns in excess of 11.5% 2. Administrative General Partner: National Health Corporation, a Tennessee corporation ("National"). National's Board of Directors is identical to that of NHC, Inc. All of the authorized, issued and outstanding stock of National Health Corporation is owned by the National Health Corporation Leveraged Employee Stock Ownership Plan and Trust. Trustees are Olin O. Williams, a director of both NHC, Inc. and National and Richard F. LaRoche, Jr., the Company's Senior Vice President and General Counsel. 3. Individual General Partner: W. Andrew Adams. Mr. Adams is the Chairman of the Board and President of the Company. Pursuant to the Amended and Restated Agreement of Limited Partnership, the three general partners are collectively referred to as "General Partners". The General Partners own, in aggregate, a general partnership interest in the Company representing a 1% interest in the profits, losses and distribution of the partnership. Directors and Executive Officers: As a limited partnership, the Company is managed by the managing general partner, NHC, Inc. NHC, Inc.'s Board of Directors is divided into three classes. The Directors 28 hold office until the annual meeting for the year in which their term expires and until their successor is elected and qualified. As each of their terms expire, the successor shall be elected to a three-year term. A director may be removed from office for cause only. Officers serve at the pleasure of the Board of Directors for a term of one year. The following table sets forth the directors of both the managing and administrative general partners of the Company, as well as the executive officers and vice presidents of the Company: Position Director of Officer of with the Managing Managing Company General Current General or Manag. Partner or Term as Partner or General Company's Director Predecessor Name Age Partner Predecessor Expires Since W. Andrew Adams 50 Chairman of Since the Board/ 1994(CEO) 1996 1973 President 1976(Pres.) J.K. Twilla 69 Director 1972 1998 --- Olin O. Williams 66 Director 1971 1997 --- Ernest G. Burgess, III 56 Director 1992 1996 1975 Robert G. Adams 49 Sr. Vice President/ Director 1993 1997 1985 Richard F. LaRoche, Jr. 50 Sr. Vice President/ Secretary and General Counsel -- -- 1974 Steven A. Strawn 38 Vice President/ Operations -- -- 1995 Donald K. Daniel 49 Vice President/ Controller -- -- 1977 James O. Keathley 57 Vice President/ Corporate Affairs -- -- 1975 David L. Lassiter 41 Vice President/ Corporate Affairs -- -- 1995 Charlotte Swafford 47 Treasurer -- -- 1985 Julia W. Powell 46 Vice President/ Patient Svcs. -- -- 1985 Joanne G. Batey 51 Vice President/ HomeCare -- -- 1989 D. Gerald Coggin 44 Vice President/ Government and Rehabilitative -- -- 1994 Kenneth D. DenBesten 43 Vice President/ Finance -- -- 1992 Drs. Twilla and Williams were physicians in private practice in Tennessee for more than 30 years each. Dr. Williams has served as Chairman of the Board of First City BankCorp, a publicly owned banking institution headquartered in Murfreesboro, Tennessee, and is presently a member of that board. 29 Mr. W. Andrew Adams has been President since 1974 and Chairman of the Board since 1994. He was president from 1981 until 1983 of the National Council of Health Centers, the trade association for multi-facility long-term health care center companies, and served as Chairman of the Multi-facility Committee of the American Health Care Association from 1992 through 1994. He has an M.B.A. degree from Middle Tennessee State University. Mr. Adams serves on the Board of Trust of David Lipscomb University, Nashville, Tennessee, is President and Chairman of the Board of Directors of National Health Investors, Inc. and serves on the Board of SunTrust Bank in Nashville, Tennessee. Mr. Robert Adams (Senior Vice President, Chief Operating Officer and Director) has served both as Administrator and as Regional Administrator, holding the last position from 1977 to 1985. He has a B.S. degree from Middle Tennessee State University. He serves as Chief Operations Officer for the Company. Mr. Robert Adams and Mr. W. Andrew Adams are brothers. Mr. Burgess (Director) served as the Company's Senior Vice President for Operations from 1975 through 1994. He has an M.S. degree from the University of Tennessee. Mr. LaRoche (Senior Vice President) has been Senior Vice President since 1985, Secretary since 1974 and General Counsel since 1971. He has a law degree from Vanderbilt University and an A.B. degree from Dartmouth College. His responsibilities include acquisitions and finance. Mr. LaRoche also serves on the Board of National Health Investors, Inc. Mr. Strawn (Vice President/Operation) has been with the company since 1979. He trained in NHC's A.I.T. program and then served both as administrator and Regional Vice President before being appointed to the present position in 1995. He has a B.S. degree from Middle Tennessee State University. Mr. Daniel (Vice President and Controller) joined the Company in 1977 as Controller. He received a B.A. degree from Harding University and an M.B.A. from the University of Texas. He is a certified public accountant. Mr. Keathley (Vice President/Corporate Affairs) holds a Masters degree in Industrial Psychology and a B.S. degree in Education from Middle Tennessee State University. Prior to joining the Company in 1977, he was a director of personnel of First American National Bank, Nashville, Tennessee. Mr. Keathley retired effective January 1, 1996, as a full time officer. Mr. Lassiter (Vice President/Corporate Affairs) joined the Company in 1995. From 1988 to 1995, he was Executive Vice President, Human Resources and Administration for Vendell Healthcare. From 1980-1988, he was in human resources positions with Hospital Corporation of America and HealthTrust Corporation. Mr. Lassiter has a B.S. and an M.B.A. from the University of Tennessee. Ms. Swafford (Treasurer) has been Treasurer of the Company 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. 30 Ms. Powell (Vice President/Patient Services) has been with the company since 1974. She has served as a nurse consultant and director of patient assessment computerized services for NHC. Ms. Powell has a bachelor of science in nursing from the University of Alabama, Birmingham, and a master's of art in sociology with an emphasis in gerontology from Middle Tennessee State University. She co-authored Patient Assessment Computerized in 1980 with Dr. Carl Adams, the Company's founder. Ms. Batey (Vice President/Homecare) has been with the company since 1976. She served as homecare coordinator for five years before being named Vice President in 1989. Prior to that she was director of communication disorders services. Ms. Batey received her bachelor's and master's degrees in speech pathology from Purdue University. Mr. Coggin (Vice President/Governmental and Rehabilitative Services) has been employed by NHC since 1973. He has served as both Administrator and Regional Vice President before being appointed to the present position. He received a B.A. degree from David Lipscomb University and a M.P.H. degree from the University of Tennessee. He is responsible for the company's rehabilitation, managed care and legislative activities. Mr. DenBesten (Vice President/Finance) has served as Vice President of Finance since 1992. From 1987 to 1992, he was employed by Physicians Health Care, most recently as Chief Operating Officer. From 1984-1986, he was employed by Health America Corporation as Treasurer, Vice President of Finance and Chief Financial Officer. Mr. DenBesten received a B.S. in business administration and an M.S. in Finance from the University of Arizona. The above officers serve in identical capacities for the Company and its two corporate general partners: NHC, Inc., and National Health Corporation. ITEM 11 EXECUTIVE COMPENSATION Introduction: Pursuant to Article V of the Amended and Restated Agreement of Limited Partnership of National HealthCare L.P., the General Partners are given the full, exclusive and complete discretion in the management and control of the business of the Company. Pursuant to Article 5.7 the General Partners do not receive compensation for serving as general partners. In compliance with the Partnership Agreement the General Partners hire and compensate all of the officers of the Partnership and of the corporate general partners. The General Partners' goals in executive compensation and compensation at all levels within the Company are derived from the following priorities: First, to encourage the achievement of the highest levels of quality in its fields of endeavor; and second, to provide the strongest incentive possible in order to average, over a five year period, a 20% return on partners equity. With these goals in mind, the General Partners' executive compensation program is based on employee performance rewarded as follows: (1) the achievement of a return on investment for limited partners; (2) returns generated from unit performance based incentive plans; and (3) from base salary. The following text and tables describe the various components of this plan as were attained and applied during 1995. 31 Total Compensation: Table I sets forth certain information concerning the total compensation paid by the administrative general partner and reimbursed to it by the Company for the year ended December 31, 1995 to the three executive officers of the Company. The non-employee Directors of NHC, Inc. (the Managing General Partner of the Company) are paid $2,500 per meeting attended. There were five Board meetings during 1995 and no Board member missed a meeting. Option Plans: At the 1994 Annual Meeting of the Partners, the 1994 Unit Option Plan was adopted and approved by the unitholders. A total of 1,200,000 units were reserved for issuance upon exercise of options to be granted by the Board of Directors of the Managing General Partner. At December 31, 1995, options to purchase 5,000 units at $11.25 per unit are outstanding to two employees, an option to purchase 5,000 units at $24.88 per unit is outstanding to one director, options to purchase 6,500 units at $25.12 per unit are outstanding to six employees, and options to purchase 361,000 units at $31.00 per unit are outstanding to 31 key employees. Table II shows as to the three executive officers: (i) the number of units as to which options have been granted from January 1, 1995 through December 31, 1995 under the Unit Option Plans; (ii) the percentage of all units granted represented by these individuals (iii) the option exercise price per unit and the expiration date; and (iv) the potential realizable value of these options assuming both a five percent and ten percent unit price appreciation over the next four years. Table III identifies for the same three person group all options exercised during 1995, the value realized upon exercise, and the unrealized value of the balance of options outstanding. (Options to purchase 498,000 units in total were exercised by all key employees.) Each non-employee Director of NHC, Inc., the Managing General Partner, receives a Unit Option Grant of 5,000 units per year with the exercise price and grant date being the date and closing unit price of the Annual Partnership Meeting. 15,000 units were granted to the three non-employee Directors at $24.88 per unit on March 16, 1995. The Company maintains several non-qualified deferred compensation plans for its key employees, one of which provides a matching contribution (15%) for all deferred compensation used to purchase units of limited partnership interest held by an independent trustee. The matching contribution is forfeited to the company unless held by the Trustee for eight years. Mr. W. Andrew Adams and Mr. LaRoche participated in this plan during 1995. Other than as described herein or as identified in Tables I, II and III, the Company has no other long-term incentive plans for its executive officers. 32 TABLE I NATIONAL HEALTHCARE L.P. SUMMARY COMPENSATION TABLE 1995-1993
(a) (b) (c) (d) (e) (f) (g) (h) (i) Other annual Restricted Options/ LTIP All Other Name and Principal Compensation Stock Awards SARs Payouts Compensation Position Year Salary($) Bonus($) ($) ($) (#) ($) ($) =============================================================================================================================== W. Andrew Adams 1995 129,964 179,200 121,350 -0- 40,000 -0- -0- President & CEO 1994 132,349 359,920 78,789 -0- 40,000 -0- -0- 1993 134,295 537,513 9,987 -0- -0- -0- -0- =============================================================================================================================== Robert G. Adams 1995 145,647 122,325 6,452 -0- 30,000 -0- -0- Sr. Vice President 1994 216,384 383,430 26,828 -0- 25,000 -0- -0- 1993 215,743 375,641 5,409 -0- -0- -0- -0- =============================================================================================================================== Richard F. LaRoche, 1995 142,639 112,000 8,453 -0- 30,000 -0- -0- Jr. 1994 134,150 190,467 15,637 -0- 25,000 -0- -0- Sr. VP & Secretary 1993 111,425 266,877 11,116 -0- -0- -0- -0- =============================================================================================================================== Compensation deferred at the election of an executive has been included in salary column (d). 1995 Performance Bonus has not yet been determined and is not included in this table. Includes (a) life insurance benefit, (b) 401-K matching contribution, (c) nonqualified deferred compensation matching contribution, (d) ESOP contribution. The 1995 awards are NHC Unit Options issued at $31.00 per unit. These officers also received stock options from National Health Investors, Inc. in 1993 and 1995, which are disclosed in that Company's Form 10-K.
33 TABLE II NATIONAL HEALTHCARE L.P. OPTION/SAR GRANTS IN LAST FISCAL YEAR December 31, 1995
=============================================================================================================================== Potential Realizable Value at Assumed Annual Rates of Unit Price Appreciation Individual Grants for Option Term =============================================================================================================================== (a) (b) (c) (d) (e) (f) (g) % of Total Options/SARs Granted to Exercise Options/SARs Employees in or Base Expiration Executive Officers Granted (#) Fiscal Year Price ($/Sh) Date 5%($) 10%($) =============================================================================================================================== W. Andrew Adams, President and CEO 40,000 11.1% 31.000 10/12/2000 342,600 757,000 Robert G. Adams, Sr. VP 30,000 8.3% 31.000 10/12/2000 257,000 568,000 Richard F. LaRoche, Jr., Sr. VP 30,000 8.3% 31.000 10/12/2000 257,000 568,000 Each option was awarded October 13, 1995 and is exercisable at $31.00 per share. NHC retains the right to reacquire any units exercised if the key employee terminates employment prior to 10/12/2001. NHC closing price on the AMEX on December 29, 1995 was $39.00. Based on remaining option term (5 years) and annual compounding.
TABLE III NATIONAL HEALTHCARE L.P. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES December 31, 1995
Value of Unexer- Number of Un- cised In-the- exercised Options/ Money Options/ SARs at FY-End (#) SARs at FY-End ($) ============================================================================================================================== Shares acquired Value Realized Exercisable/ Exercisable/ Executive Officers on Exercise ($) Unexercisable Unexercisable ============================================================================================================================== W. Andrew Adams President & CEO 40,000 320,000 40,000/0 $320,000/0 Robert G. Adams, Sr. VP 27,500 220,000 30,000/0 240,000/0 Richard F. LaRoche, Jr. Senior Vice President 25,000 200,000 30,000/0 240,000/0 ============================================================================================================================== Market value of underlying securities at exercise date, minus the exercise or base price. NHC retains the right to reacquire any units exercised if the key employee terminates employment prior to 4/21/2000.
Employee Stock Ownership Plan: In 1986 the Administrative General Partner adopted as its Employee Stock Ownership Plan and Trust ("ESOP") the ESOP previously sponsored by the Company's corporate predecessor. The ESOP is a qualified pension plan under Section 401(a) of the Internal Revenue Code. The Administrative General Partner makes contributions to the ESOP for all employees and is reimbursed for same by the Company. Employees make no contributions. All contributions are used by the ESOP to purchase "qualifying employer securities" which is the Common Stock of the Administrative General Partner. These securities are allocated among participating employees of the Administrative General Partner who participate in the ESOP in the ratio of the employee's wages to the total wages of all participating employees during that fiscal year. Participating employees are all employees, including officers, who have earned one year of service by working more than 1,000 hours during the fiscal year. On January 20, 1988, the Administrative General Partner of the partnership formed a Leveraged Employee Stock Purchase Plan (Leveraged ESOP). During 1988, the Leveraged ESOP borrowed, in two separate transactions, $88.5 million from four commercial banks, the proceeds of which were used to purchase additional stock in the Administrative General Partner. The Administrative General Partner, in turn, purchased eight (8) health care centers from the partnership and contracted with the partnership to manage these centers for a 20-year period. The Administrative General Partner also loaned $8.5 million to City Center, Ltd. to construct a 15-story office building in Murfreesboro, Tennessee, approximately 60% of which is occupied by the Company. In late 1988, the Administrative General Partner entered into a Loan Agreement with the partnership and advanced $50,000,000 to the partnership to be used by the partnership to pay off its existing $30,000,000 revolving line of credit, with the balance to be used for acquisition, development and general working capital needs. In September of 1988, the original ESOP was merged into the Leveraged ESOP so that as of December 31, 1995, the employees still participated in only one qualified plan. On December 28, 1990, the Leveraged ESOP borrowed $50,000,000 from three commercial lenders, the proceeds of which were used as an equity contribution to the Administrative General Partner, which in turn loaned said proceeds to the Company at 8.48% fixed rate of interest. The proceeds were used for acquisition and new construction. The Leveraged ESOP is administered by an Administrative Committee, currently consisting of Ernest G. Burgess, III (Director), Donald K. Daniel and Charlotte Swafford (officers of the Company), which is appointed by the Board of Directors of the administrative general partner. The Trustees of the Leveraged ESOP are Dr. Olin O. Williams, a director, and Richard F. LaRoche, Jr., the Company's Senior Vice President and General Counsel. The amounts contributed to the ESOP in 1995 and allocated to the Company's executive officers are included in Table I, and total $13,987.32. 35 Employee Unit Purchase Plan: The Company has established its Employee Unit Purchase Plan for employees. Pursuant to the Plan, eligible employees may purchase units through payroll deductions at the lesser of the closing asked price of the units as reported on the American Stock Exchange on the first trading or the last trading day of each year. At the end of each year, funds accumulated in the employee's account will be used to purchase the maximum number of units at the above price. The Company makes no contribution to the purchase price. 31,575 units were issued pursuant to the Plan in January, 1996, with all payroll deductions being made in 1995. All employees (including officers and directors) may elect to participate in the Plan if they meet minimum employment requirements. The maximum payroll deduction is the employee's normal monthly pay. Participating employee's rights under the plan are nontransferable. Prior to the end of a year, a participant may elect to withdraw from the Plan and the amount accumulated as a result of his payroll deductions shall be returned to him without interest. Any terminated employee immediately ceases to be a participant and also receives his or her prior contributions. In no event may a participant in the Plan purchase thereunder during a calendar year, units having a fair market value more than $25,000. The units purchased pursuant to the Plan are freely tradeable, except for any shares held by an "affiliate" of the Company, which would be subject to the limitations of Rule 144. Only Mr. LaRoche and Mr. Robert Adams of the Company's executive officers participated in this Plan during 1995 and the positive spread between the purchase price and in the then fair market price for these individuals is included in Table I. 1975 Performance Bonus Plan: In 1975 the Company implemented a Performance Bonus Plan which was reaffirmed and readopted by the unitholders in 1994. This plan provides for the Chairman of the Board to allocate, with the approval of the non-employee directors, the bonus at the end of each fiscal year. The total amount available for bonuses under the plan is 20% of the Company's net income (without regard to NHI lease payments or Advisory fee income) after a 20% return on partners' equity as determined at the beginning of that fiscal year. Bonuses of $3,577,000 were paid under this plan to a total of 103 employees for fiscal year 1994. No bonus pursuant to this plan has yet been declared or paid for fiscal year 1995. 401(K) Plan: The Company and its affiliates offer a 401(K) Plan for all employees who are over 18 years of age. The Board of Directors has authorized a matching contribution to be made for 50% of contributions with contributions being matched up to 2.5% of quarterly gross wages. No employee may contribute more than 15% to the Plan, and employees who earn 36 more than $66,000 were limited to a contribution of no more than $3,500. These matching funds will be used to purchase Units on the open market, which Units will vest in the employees account in 5 years. Forfeited units are allocated among remaining participants. A total of $1,048,000 was contributed to the Plan as matching contributions for 1995. Employee Loan Programs: On December 31, 1986, the Company's unitholders adopted an Employee Stock Financing Plan (the "Financing Plan"). The Plan was designed to enable key employees of the Corporation to finance the exercise of unit options granted to them by the Board of Directors. Under the Plan, the Company financed the exercise of any unit options exercised by the acceptance of the employees' full recourse promissory note bearing interest at a fixed rate equal to 2.5% below New York prime on the date of the note, with interest payable quarterly and principal due and payable in 60 months. The notes are secured by Units having a fair market value equal to twice the note amount. On October 31, 1991, the Board of Directors created the "Collateralized Management Loan" Program (hereinafter CML), designed to provide the Company with a short-term liquid investment source generating a return on the Company's funds equal to the prime rate of interest. The program is available to all officers, directors, and supervising employees, and has the following terms and conditions: (a) $100,000 minimum CML amount, due and payable on demand (b) Borrower must have written evidence of a line of credit with a financial institution with an undrawn balance at least equal to the CML, and valid for at least 60 days. (c) The CML must be collateralized with a pledge of National Health Investors, Inc. common stock having a fair market value at least equal to the CML. The following tables shows, as to each executive officer whose indebtedness exceeded $60,000, the largest aggregate amount of such indebtedness since December 31, 1989 and the present outstanding balance. Financing Plan CML Plan Largest Balance out- Largest Balance out- Aggregate standing as of Aggregate standing as of Indebtedness 12/31/95 Indebtedness 12/31/95 W. Andrew Adams $3,312,824 $3,312,824 $ --- $ --- Robert G. Adams 1,722,155 1,722,155 500,000 --- Richard F. LaRoche, Jr. 1,713,922 1,713,922 1,000,000 --- All Executive Officers as a Group (3) $6,748,901 $6,748,901 $1,500,000 $ --- Obligations to repay the Financing Plan loans are an asset of the Company, but are not reflected as increasing Partnership Equity until paid. 37 Unitholder Return: Table IV is a line graph comparing the yearly percentage change in the cumulative unitholder return on the Company's units against the cumulative total return of the S & P composite S & P 500 and the Health Care-Miscellaneous Index for the five-year period ended on December 31, 1995. 38 TABLE IV NATIONAL HEALTHCARE L.P. Comparison of Cumulative Total Return [GRAPH] 1991 1992 1993 1994 1995 National HealthCare LP 100 139.8 230.4 230.2 347.9 S & P 500 100 107.7 118.5 120.1 161.1 S & P Health Care Divers 100 83.4 85.8 91.3 131.9 Assumes $100 Invested January 1, 1992 in NHC, S&P 500 and S&P Health Care Diversified 39 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as to the number of limited partnership units of the Company beneficially owned as of December 31, 1995 (a) by each person (including any "group" as that term is used in Section 13(d)(3) of the Exchange Act) who is known to the Company to own beneficially 5% or more of the outstanding units (8,321,539 as of December 31, 1995), (b) by each director of the managing or administrative general partner, and (c) by all executive officers and directors of the Company, managing general partner and the administrative general partner as a group. Members of management of the Company listed below are all members of management and/or the Board of Directors of the Managing and Administrative General Partners, but they disclaim that they are acting as a "group" and the table below is not reflective of them acting as a group: Names and Addresses Number of Units(1) Percentage of of Beneficial Owner Beneficially Owned Total Units W. Andrew Adams, President and Individual General Partner 1,059,866 12.70% 1927 Memorial Blvd. Murfreesboro, TN 37129 Dr. J.K. Twilla, Director 68,155 .80% 525 Golf Club Lane Smithville, TN 37166 Dr. Olin O. Williams, Director 94,340 1.10% 2007 Riverview Drive Murfreesboro, TN 37129 Robert G. Adams, Director & Sr. Vice President 429,606 5.20% 2217 Tomahawk Trace Murfreesboro, TN 37129 Ernest G. Burgess, Director 168,592 2.00% 1005 Cason Lane Murfreesboro, TN 37130 Richard F. LaRoche, Jr., Sr. V.P. 378,163 4.50% 2103 Shannon Drive Murfreesboro, TN 37130 National Health Corporation, Admin. General Partner 1,271,058 15.30% P.O. Box 1398 Murfreesboro, TN 37133 NHC, Inc., Managing General Partner 82,912 .99% P. O. Box 1398 Murfreesboro, TN 37133 Albert O. Nicholas 428,700 5.20% 6002 North Highway 83 Hartland, WI 53029 40 All Executive Officers, Directors of the 3,552,692 42.70% Corporate General Partners and the Corporate General Partners as a Group (1) Assumes exercise of unit options and convertible subordinated debentures outstanding. See "Option Plans". ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Transactions NHC has successfully developed a continuing care retirement community in Nashville, Tennessee (Richland Place) and is pursuing similar projects in Tennessee and Florida. Having identified Murfreesboro, Rutherford County, Tennessee as a viable market, the Company invited a number of potential residents to serve as a focus group to assist in the location and design of the project. After reviewing a number of potential locations, management and the focus group chose a twenty-two acre tract with extensive frontage on US Highway 231 as the optimum location. This site was owned and occupied by Mr. and Mrs. W. Andrew Adams, NHC's chief executive officer. After negotiations and appraisal, the Company has acquired (by exchange of like kind property and cash) the site from Mr. and Mrs. Adams for a total valuation of $1,500,000, which the Company believes to be equal to or even less than comparable property in the market. Mr. and Mrs. Adams are currently renting the residence on the site on a quarter to quarter basis and for a fair market value. PART IV ------- ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a) (i) Financial Statements: The Financial Statements are included as Exhibit 13 and are filed as part of this report. (ii) Exhibits: Reference is made to the Exhibit Index, which is found on page 46 of this Form 10-K Annual Report. b) Reports on Form 8-K: None. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 File No. 33-9881 (filed December 28, 1987): 41 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 42 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To: National HealthCare L.P.: We have audited, in accordance with generally accepted auditing standards, the financial statements included in this Form 10-K of National HealthCare L.P., and have issued our report thereon dated February 1, 1996. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations under the Securities and Exchange Act of 1934 and is not otherwise a required part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements, and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Nashville, Tennessee February 1, 1996 43 NATIONAL HEALTHCARE L.P. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 (in thousands) Column A Column B Column C Column D Column E Additions Balance- Charged to Charged Balance Beginning Costs and to other -End of Description of Period Expenses Accounts Deductions(1) Period For the year ended December 31, 1993 - Allowance for doubtful accounts $2,803 $ 925 $ --- $1,116 $2,612 For the year ended December 31, 1994 - Allowance for doubtful accounts $2,612 $2,118 $ --- $1,363 $3,367 For the year ended December 31, 1995 - Allowance for doubtful accounts $3,367 $2,182 $ --- $1,108 $4,441 __________ (1) Amounts written off, net of recoveries. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 HEALTHCARE L.P. BY:s\Richard F. LaRoche, Jr. Richard F. LaRoche, Jr. Secretary Date: March 4, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 4, 1996, by the following persons on behalf of the registrant in the capacities indicated. Each director of the registrant whose signature appears below hereby appoints W. Andrew Adams and Richard F. LaRoche, Jr., and each of them severally, as his Attorney in Fact to sign in his name on his behalf as a director of the registrant and to file with the Commission any and all amendments of this report on Form 10-K. s\W. Andrew Adams s\Olin O. Williams W. Andrew Adams, President Olin O. Williams, M.D., Director Executive and Financial NHC, Inc., and National HealthCare Officer, and Individual Corporation, Corporate General General Partner Partners s\Robert S. Adams s\J. K. Twilla Robert G. Adams, Senior Vice J.K. Twilla, M.D., Director President, Director NHC, Inc. and NHC, Inc. and National HealthCare National HealthCare Corporation Corporation, Corporate General Partners s\Ernest G. Burgess s\Donald K. Daniel Ernest G. Burgess, Director NHC, Inc. Donald K. Daniel, Vice President and National HealthCare Corporation and Principal Accounting Officer Corporate General Partners NHC, Inc. and National Health Corporation, Corporate General Partners 45 NATIONAL HEALTHCARE L.P. AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994 EXHIBIT INDEX Exhibit No. Description Page No. or Location 3.1 Amended and Restated Articles of Specifically incorporated Limited Partnership Agreement by reference to Exhibit A attached to Form S-4, (Proxy Statement-Prospectus), amended, Registration No.33-9881(December 9, 1986) 3.2 By-laws (as amended) None 4.1 Form of Common Stock/ Incorporated by reference Unit Certificate from Exhibit 41 attached to Form S-4, (Proxy State- ment-Prospectus), as amended Registration No. 33-9881 (December 9, 1986) 10 Material Contracts Incorporated by reference from Exhibits 10.1 thru 10.9 attached to Form S-4, (Proxy Statement- Prospectus), as amended, Registration No. 33-9881 (December 9, 1986) 10.11 Employee Stock/Unit Purchase Plan Incorporated by reference from Form S-8, Registra- tion No. 33-9881 (December 28, 1987) 10.12 1994 Unit Option Plan Incorporated by reference from 1994 Proxy Statement filed on February 18, 1994 12 Statements Re:Computation of Ratios Page 47 13 Report of Independent Public Accountants Exhibit 13 beginning Consolidated Statements of Income on Page 48 Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Partners' Capital Notes to Consolidated Financial Statements 22 Subsidiaries of Registrant Incorporated by reference to Exhibit 22 of Form S-4, (Proxy Statement/Prospectus), as amended, Registration No. 33-9881 (December 11, 1986) 23 Consent of Independent Page 68 Public Accountants 27 Financial Data Schedule (for SEC purposes only) 46 EXHIBIT 12 STATEMENT RE: COMPUTATION OF RATIOS AS REQUIRED BY ITEM 601(b)(12) OF REGULATION S-K NATIONAL HEALTHCARE L.P. December 31 1995 1994 1993 1992 1991 Current Assets $ 89,440 $ 97,506 $109,291 $ 64,115 $ 53,320 Current Liabilities $ 59,047 $ 55,038 $ 39,798 $ 26,132 $ 25,324 Current Ratio 1.51 1.78 2.75 2.45 2.11 Long-Term Debt and Debt Serviced by Other Parties $141,642 $194,007 $166,741 $164,330 $169,907 Equity $108,899 $101,006 $ 92,526 $ 67,922 $ 61,824 Long-Term Debt and Debt Serviced by Other Parties to Equity 1.30 1.92 1.80 2.42 2.75 Net Income $ 21,115 $ 15,853 $ 37,562 $ 9,501 $ 17,667 Average Equity $104,953 $ 96,766 $ 80,224 $ 64,873 $ 58,632 Return on Average Equity 20.1% 16.4% 46.8% 14.6% 30.1% Total Liabilities $231,501 $279,847 $237,306 $221,166 $195,231 Partners' Capital and Deferred Income $123,990 $116,286 $107,374 $ 82,908 $ 76,981 Total Liabilities to Partners' Capital and Deferred Income 1.9 2.4 2.2 2.7 2.5 47 EXHIBIT 13 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants 49 Consolidated Statements of Income 50 Consolidated Balance Sheets 51 Consolidated Statements of Cash Flows 52 Consolidated Statements of Partners' Capital 53 Notes to Consolidated Financial Statements 54-67 48 Report of Independent Public Accountants To the Partners of National HealthCare L.P.: We have audited the accompanying consolidated balance sheets of National HealthCare L.P. (a Delaware partnership and formerly National HealthCorp L.P.) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of National HealthCare L.P.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National HealthCare L.P. and subsidiaries as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Nashville, Tennessee February 1, 1996 49 NATIONAL HEALTHCARE L.P. Consolidated Statements of Income (in thousands, except unit amounts) Year Ended December 31 1995 1994 1993 Revenues: Net patient revenues $ 307,969 $ 269,722 $ 223,089 Gain on sale of investment --- --- 24,773 Other revenues 42,988 29,179 21,996 Net revenues 350,957 298,901 269,858 Costs and Expenses: Salaries, wages and benefits 188,985 157,663 128,462 Other operating 109,417 98,753 80,326 Depreciation and amortization 14,549 13,582 11,879 Interest 16,891 13,050 11,629 Total costs and expenses 329,842 283,048 232,296 Net Income $ 21,115 $ 15,853 $ 37,562 Earnings Per Unit: Primary $ 2.65 $ 2.02 $ 4.85 Fully diluted 2.31 1.80 4.05 Weighted Average Units Outstanding: Primary 7,953,651 7,834,375 7,752,622 Fully diluted 9,971,867 9,807,241 9,726,254 Net Income Allocable to Partners: General Partners $ 211 $ 159 $ 376 Limited Partners 20,904 15,694 37,186 $ 21,115 $ 15,853 $ 37,562 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 50 NATIONAL HEALTHCARE L.P. Consolidated Balance Sheets (in thousands) December 31 1995 1994 Assets Current Assets: Cash and cash equivalents $ 4,835 $ 1,442 Cash held by trustees 1,721 1,604 Marketable securities 1,514 4,010 Accounts receivable, less allowance for doubtful accounts of $4,441 and $3,367, respectively 47,285 48,372 Notes receivable 2,538 4,922 Note receivable from NHI --- 22,847 Loan participation agreements 27,579 9,784 Inventory, at lower of cost (first-in, first-out method) or market 3,075 2,952 Prepaid expenses and other assets 893 1,573 Total current assets 89,440 97,506 Property, Equipment and Assets Under Arrangement With Other Parties: Property and equipment, at cost 165,265 136,757 Accumulated depreciation and amortization (38,265) (31,094) Assets under arrangement with other parties, net 29,921 81,746 Net property, equipment and assets under arrangement with other parties 156,921 187,409 Other Assets: Bond reserve funds, mortgage replacement reserves and other deposits 1,789 1,720 Unamortized financing costs 1,937 2,811 Notes receivable 86,178 87,180 Notes receivable from National 12,271 12,296 Minority equity investments and other 6,955 7,211 Total other assets 109,130 111,218 $355,491 $396,133 Liabilities and Partners' Capital Current Liabilities: Current portion of long-term debt $ 8,558 $ 6,330 Trade accounts payable 6,142 17,052 Accrued payroll 23,876 18,644 Amount due to third-party payors 9,800 4,396 Accrued interest 1,822 2,223 Other current liabilities 8,849 6,393 Total current liabilities 59,047 55,038 Long-term Debt, Less Current Portion 100,871 104,243 Debt Serviced by Other Parties, Less Current Portion 40,771 89,764 Minority Interests in Consolidated Subsidiaries 812 802 Commitments, Contingencies and Guarantees Subordinated Convertible Notes 30,000 30,000 Deferred Income 15,091 15,280 Partners' Capital: General partners 1,290 1,095 Limited partners, less notes receivable 107,609 99,911 Total partners' capital 108,899 101,006 $355,491 $396,133 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 51 NATIONAL HEALTHCARE L.P. Consolidated Statements of Cash Flows (in thousands)
Year Ended December 31 1995 1994 1993 Cash Flows Provided By (Used In) Operating Activities: Net income $ 21,115 $ 15,853 $ 37,562 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 14,081 13,147 11,651 Provision for doubtful accounts receivable 2,182 2,118 1,116 Amortization of intangibles and deferred charges 1,845 848 602 Amortization of deferred income (497) (403) (239) Equity in earnings of unconsolidated investments (347) (450) (2,740) Distributions from unconsolidated investments 236 213 2,435 (Gain) loss on sale of investment --- 120 (24,773) Changes in assets and liabilities: Increase in accounts receivable (1,095) (20,095) (2,689) Increase in inventory (123) (19) (56) (Increase) decrease in prepaid expenses and other assets 680 (1,012) 1,724 Increase (decrease) in trade accounts payable (10,910) 12,331 (1,064) Increase in accrued payroll 5,232 4,663 3,126 Increase in amounts due to third-party payors 5,404 769 3,171 Increase (decrease) in accrued interest (401) 1,235 (259) Increase (decrease) in other current liabilities 2,456 2,057 (45) Net cash provided by operating activities 39,858 31,375 29,522 Cash Flows Provided By (Used In) Investing Activities: Additions to and acquisitions of property and equipment, net (29,435) (9,599) (30,569) Investment in notes receivable and loan participation agreements (30,694) (112,069) (87,029) Collection of long-term notes receivable and loan participation agreements 39,157 80,199 41,307 Increase (decrease) in minority equity investments and other 210 (3,984) (22) Decrease in marketable securities, net 2,361 2,140 3,159 Sale of investments --- 136 32,991 Net cash used in investing activities (18,401) (43,177) (40,163) Cash Flows Provided By (Used In) Financing Activities: Proceeds from debt issuance 2,368 34,225 6,446 Increase in cash held by trustees (117) (315) (12) Increase in minority interests in subsidiaries 10 35 63 Issuance of partnership units 820 773 690 Collection of receivables from exercise of options 795 437 1,040 Increase in bond reserve funds, mortgage replacement reserves and other deposits (69) (57) (151) Payments on debt (6,767) (4,360) (4,023) Cash distributions to partners (14,702) (17,639) (6,194) Increase in financing costs (402) --- (85) Net cash provided by (used in) financing activities (18,064) 13,099 (2,226) Net Increase (Decrease) In Cash and Cash Equivalents 3,393 1,297 (12,867) Cash and Cash Equivalents, Beginning of Period 1,442 145 13,012 Cash and Cash Equivalents, End of Period $ 4,835 $ 1,442 $ 145 Supplemental Information: Cash payments for interest expense $ 17,292 $ 11,815 $ 11,888 During 1995, NHC was released from its liability on debt serviced by others by the respective lendors. Debt serviced by other parties $(45,868) $ --- $ --- Assets under arrangement with other parties $ 45,868 $ --- $ ---
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 52 NATIONAL HEALTHCARE L.P. Consolidated Statements of Partners' Capital (in thousands except unit amounts)
Unrealized Receivables Gains Total Number from Sale (Losses) on General Limited Partners' of Units of Units Securities Partners Partners Capital Balance at 12/31/92 7,748,592 $(16,174) $--- $ 791 $83,305 $ 67,922 Net income --- --- --- 376 37,186 37,562 Collection of receivables --- 1,040 --- --- --- 1,040 Units sold 47,841 --- --- 7 684 691 Other --- --- --- 1 80 81 Cash distributions declared ($1.90 per unit) --- --- --- (148) (14,622) (14,770) Balance at 12/31/93 7,796,433 (15,134) --- 1,027 106,633 92,526 Net income --- --- --- 159 15,694 15,853 Collection of receivables --- 437 --- --- --- 437 Units sold 29,732 --- --- --- 773 773 Unrealized gains on securities --- --- 480 --- --- 480 Cash distributions declared ($1.17 per unit) --- --- --- (91) (8,972) (9,063) Balance at 12/31/94 7,826,165 (14,697) 480 1,095 114,128 101,006 Net income --- --- --- 211 20,904 21,115 Collection of receivables --- 795 --- --- --- 795 Units sold 526,949 (12,294) --- 131 12,983 820 Unrealized losses on securities --- --- (135) --- --- (135) Cash distributions declared ($1.88 per unit) --- --- --- (147) (14,555) (14,702) Balance at 12/31/95 8,353,114 $(26,196) $345 $1,290 $133,460 $108,899
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 53 Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies: Presentation-- The consolidated financial statements include the accounts of National HealthCare L.P. and its subsidiaries (NHC). Investments are accounted for on either the cost or equity method. All material intercompany balances, profits, and transactions have been eliminated in consolidation, and minority interests are reflected in consolidation. Certain reclassifications have been made to the 1993 and 1994 financial statements to conform to the 1995 presentation. Use of Estimates-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Health Care Revenues-- NHC's principal business is operating and managing long-term health care centers which generally provide routine and ancillary services. Approximately 60% of NHC's net revenues in 1995 and 61% in 1994 and 1993 are from participation in Medicare and Medicaid programs (excluding in 1993 the nonrecurring gain of $24,773,000). Amounts paid under these programs are generally based on a facility's allowable costs or a fixed rate subject to program cost ceilings. Revenues are recorded at standard billing rates less allowances and discounts principally for patients covered by Medicare, Medicaid and other contractual programs. These allowances and discounts were $103,186,000, $82,443,000 and $54,348,000 for 1995, 1994 and 1993, respectively. Amounts earned under the Medicare and Medicaid programs are subject to review by the third party payors. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews. Any differences between estimated settlements and final determinations are reflected in operations in the year finalized. Provision for Doubtful Accounts-- Provisions for estimated uncollectible accounts and notes receivable are included in other operating expenses. Property, Equipment and Assets Under Arrangement with Other Parties-- NHC uses the straight-line method of depreciation over the expected useful lives of property and equipment estimated as follows: buildings and improvements, 20-40 years; equipment and furniture, 3-15 years; and properties under arrangement with other parties, 10-20 years. The provision for depreciation includes the amortization of properties under capital leases and properties under arrangement with National Health Investors, Inc. (See Note 3). 54 Expenditures for repairs and maintenance are charged against income as incurred. Betterments are capitalized. NHC removes the costs and related allowances from the accounts for properties sold or retired, and any resulting gains or losses are included in income. NHC includes interest costs incurred during construction periods in the cost of buildings ($1,057,000 in 1995 and $766,000 in 1994). In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets To Be Disposed Of". Adoption of SFAS 121 is required for fiscal years beginning after December 15, 1995. Although NHC did not adopt SFAS 121 in 1995, it has determined that the adoption of the pronouncement will not have a material impact on its financial statements in 1996. Investments in Marketable Securities-- NHC considers its investments in marketable securities as available for sale securities and unrealized gains and losses are recorded in partners' capital in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). Intangible Assets-- Any excess of cost over net assets of companies purchased is amortized generally over 40 years using the straight-line method. Deferred financing costs are amortized principally by the interest method over the terms of the related loans. Income Taxes-- NHC is not a taxable entity. Accordingly, no provision for income taxes has been made in the Consolidated Statements of Income. The earnings of NHC are taxable to the individual partners. Partners are required to report their distributive share of the income, gain, loss, deductions and credits of the partnership on their individual income tax returns. The Revenue Act of 1987 contains provisions which cause some publicly traded partnerships to be taxed as corporations. Because NHC was in existence and publicly traded on December 17, 1987, it will continue to be treated as a partnership for the 1987 through 1997 taxable years. NHC adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," effective January 1, 1993. The Statement generally requires NHC to record any income tax provisions or income taxes payable based on the liability method. NHC management believes, based on current information, that the effect of any income tax assets or liabilities that would be recorded in 1998, the year that master limited partnerships become taxable, would not be material to NHC's financial condition or results of operations. 55 Concentration of Credit Risks-- NHC's credit risks primarily relate to cash and cash equivalents, cash held by trustees, accounts receivable, marketable securities, notes receivable and loan participation agreements. Cash and cash equivalents are primarily held in bank accounts and overnight investments. Cash held by trustees is primarily invested in commercial paper and certificates of deposit with financial institutions. Accounts receivable consist primarily of amounts due from patients (funded approximately 81% through Medicare, Medicaid, other contractual programs and approximately 19% through private payors) in the states of Alabama, Florida, Georgia, Kentucky, Missouri, South Carolina, Tennessee, and Virginia and from other health care companies for management services. NHC performs continual credit evaluations of its clients and maintains allowances for doubtful accounts on these accounts receivable. Marketable securities are held primarily in two accounts with brokerage institutions. Notes receivable relate primarily to secured loans with health care facilities and to secured notes receivable from officers, directors and supervisory employees as discussed in Note 14. NHC also has notes receivable from National Health Corporation as discussed in Note 4. NHC has loan participation agreements with a bank as discussed in Note 14. NHC's financial instruments, principally its notes receivable and loan participation agreements, are subject to the possibility of loss of the carrying values as a result of either the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instruments less valuable. NHC obtains various collateral and other protective rights, and continually monitors these rights, in order to reduce such possibilities of loss. See Note 14 for additional information on the notes receivable and loan participation agreements. Cash and Cash Equivalents-- Cash equivalents include highly liquid investments with an original maturity of less than three months. Note 2 - Organization of the Partnership: The general partners of NHC are as follows: (1) NHC, Inc., a Tennessee corporation (the "Managing General Partner"), which is owned by its board of directors and senior management of NHC; (2) National Health Corporation ("National" and "Administrative General Partner"), a Tennessee corporation which is owned by the National Health Corporation Leveraged Employee Stock Ownership Plan and Trust (the "ESOP"); and (3) W. Andrew Adams, NHC Inc.'s President (the "Individual General Partner"). The Managing General Partner, the Administrative General Partner and the Individual General Partner are collectively called "the General Partners". The General Partners own a general partnership interest in NHC representing a 1% interest in the profits, losses and distributions of NHC. 56 Note 3 - Relationship with National Health Investors, Inc.: Leases-- On October 17, 1991, concurrent with NHC's conveyance of real property to NHI, NHC leased from NHI the real property of 40 long-term care centers and three retirement centers. Each lease is for an initial term expiring December 31, 2001, with two additional five-year renewal terms at the option of NHC, assuming no defaults. NHC accounts for the leases as operating leases. During the initial term and first renewal term of the leases, NHC is obligated to pay NHI annual base rent on all 43 facilities of $15,238,000. If NHC exercises its option to extend the leases for the second renewal term, the base rent will be the then fair rental value as negotiated by NHC and NHI. The leases also obligate NHC to pay as debt service rent all payments of interest and principal due under each mortgage to which the conveyance of the facilities was subject. The payments are required over the remaining life of the mortgages as of the conveyance date, but only during the term of the lease. Payments for debt service rent are being treated by NHC as payments of principal and interest if NHC remains obligated on the debt ("obligated debt service rent") and as operating expense payments if NHC has been relieved of the debt obligation by the lender ("non-obligated debt service rent"). See "Accounting Treatment of the Transfer" for further discussion. In addition to base rent and debt service rent, in each year after 1992, NHC must pay percentage rent to NHI equal to 3% of the amount by which gross revenues of each facility in such later year exceeds the gross revenues of such facility in 1992. Percentage rent for 1995 and 1994 was approximately $1,237,000 and $718,000, respectively. Each lease with NHI is a "triple net lease" under which NHC is responsible for paying all taxes, utilities, insurance premium costs, repairs and other charges relating to the ownership of the facilities. NHC is obligated at its expense to maintain adequate insurance on the facilities' assets. NHC has a right of first refusal with NHI to purchase any of the properties transferred from NHC should NHI receive an offer from an unrelated party during the term of the lease or up to 180 days after termination of the related lease. Base rent expense to NHI was $15,238,000 in 1995, 1994 and 1993 and non-obligated debt service rent to NHI was zero dollars in 1995 and is included in other operating expenses. At December 31, 1995, the approximate future minimum base rent and non- obligated debt service rent commitments to be paid by NHC on non- cancelable operating leases with NHI are as follows: 1996 $20,267,000 1997 20,298,000 1998 20,324,000 1999 30,351,000 2000 20,396,000 Thereafter 20,417,000 57 Advisory Agreement-- NHC has entered into an Advisory Agreement with NHI whereby services related to investment activities and day-to-day management and operations are provided to NHI by NHC as Advisor. The Advisor is subject to the supervision and policies established by NHI's Board of Directors. Either party may terminate the Advisory Agreement on 90 days notice at any time. NHI may terminate the Advisory Agreement for cause at any time. For its services under the Advisory Agreement, NHC's annual compensation is calculated to be $2,827,000, $2,570,000 and $1,828,000 in 1995, 1994 and 1993, respectively. However, the payment of such annual compensation is conditional upon NHI having sufficient funds from operations to pay annual dividends of $2.00 per share and upon NHI paying such dividends. NHI met this condition in 1995, 1994 and 1993. Purchase of Mortgage Notes-- During 1994, NHC purchased $37,978,000 of mortgage notes receivable from NHI in exchange for cash and the assumption of certain liabilities. All properties secured by the mortgage notes are managed by NHC, and four of the notes had been transferred to NHI upon its capitalization by NHC in 1991. Accounting Treatment of the Transfer-- NHC has accounted for the conveyance in 1991 of assets (and related debt) to NHI and the subsequent leasing of the real estate assets as a "financing/leasing" arrangement. Since NHC remains obligated on certain of the transferred debt, the obligated debt and applicable asset balances have been reflected on the Consolidated Balance Sheets as "assets under arrangement with other parties" and "debt serviced by other parties". The net book value equity of the assets transferred has been transferred from NHC to NHI. As NHC utilizes the applicable real estate over the lease term, its Consolidated Statements of Income will reflect the continued depreciation of the applicable assets over the lease term, the continued interest expenses on the obligated debt balances and the additional base and non-obligated debt service rents (as an operating expense) payable to NHI each year. NHC has recovery provisions from NHI if NHC is required to service the debt through a default by NHI. Release from Debt Serviced by Other Parties-- In December, 1995, NHI prepaid debt on which NHC had also been obligated in the amount of $20,544,000. In addition, NHC was released from its obligation on approximately $25,324,000 of the transferred debt. Since NHC is no longer obligated on transferred debt in the amount of $45,868,000, debt serviced by other parties and assets under arrangement with other parties have been reduced by $45,868,000. The leases with NHI provide that NHC shall continue to make non-obligated debt service rent payments equal to the debt service including principal and interest on the obligated debt which was prepaid and from which NHC has been released. 58 Note 4 - Relationship With National Health Corporation: Sale of Health Care Centers-- On January 20, 1988, NHC sold the assets (inventory, property and equipment) of eight health care centers (1,121 licensed beds) to National, the administrative general partner of NHC, for a total consideration of $40,000,000. The consideration consisted of $30,000,000 in cash and a $10,000,000 note receivable due December 31, 2007. The note receivable earns interest at 8.5%. NHC has agreed to manage the centers under a 20-year management contract for management fees comparable to those in the industry. NHC has a receivable from National for management fees of approximately $1,864,000 and $3,804,000 at December 31, 1995 and 1994, respectively. NHC's basis in the assets sold was approximately $24,300,000. The resulting profit of $15,745,000 was deferred and will be amortized into income beginning with the collection of the note receivable (up to $12,000,000) with the balance ($3,745,000) of the profit being amortized into income on a straight-line basis over the management contract period. Financing Activities-- On January 20, 1988, NHC obtained long-term financing of $8,500,000 for its new headquarters building from National through the National Health Corporation Leveraged Employee Stock Ownership Plan and Trust. The note requires quarterly principal and interest payments with interest at 9%. At December 31, 1995 and 1994, the outstanding balance on the note was approximately $5,961,000 and $6,403,000, respectively. The building is owned by a separate partnership of which NHC is the general partner and building tenants are limited partners. NHC has guaranteed the debt service of the building partnership. In addition, NHC's $50,000,000 credit facility, the $20,000,000 Series A Loan, and the $30,000,000 Series B Loan described in Note 11 were financed through National and National's ESOP. NHC's interest costs, financing expenses and principal payments are equal to those incurred by National. In October, 1991, NHC borrowed $10,000,000 from National. The term note payable requires quarterly interest payments at 8.5%. The entire principal is due at maturity in 2007. As of December 31, 1995, National had borrowed $2,271,000 from NHC to finance the construction of additions at two health care centers. The notes require monthly principal and interest payments. The interest rate is equal to the prime rate, and the notes mature in 1998. Duties as Administrative General Partner-- The personnel conducting the business of NHC are employees of National which provides payroll services, provides employee fringe benefits, and maintains certain liability insurance. NHC pays to National all the costs of personnel employed for the benefit of NHC, as well as an administrative fee ($1,683,000 in 1995) equal to 1% of payroll costs. National maintains and makes contributions to its ESOP for the benefit of eligible employees. 59 Note 5 - Gain on Sale of Investment: In August, 1993, NHC sold its investment in VHA Long Term Care (VHA LTC) for approximately $32,987,000 of cash which resulted in a gain to NHC of $24,773,000. The gain on sale of investment was approximately $3.20 per primary unit outstanding and $2.55 per fully diluted unit outstanding. For federal tax purposes, the sale generated a capital gain to NHC partners of approximately $25,000,000 which equates to a capital gain per unit of approximately $3.24. NHC's Board of Directors approved a one-time special cash distribution of $1.10 per unit in 1993 to help defray tax liability from this gain. Note 6 - Other Revenues: Revenues from management services include management fees, interest income on notes receivable, and revenues from other services provided to managed long-term care centers. "Other" revenues include non-health care related earnings. (in thousands) Year Ended December 31 1995 1994 1993 Revenues from managed services $28,719 $19,035 $12,446 Guarantee fees 814 936 790 Advisory fees from NHI 3,265 2,138 1,828 Earnings (losses)on securities 450 (47) 1,116 Equity in earnings of unconsolidated investments 342 423 1,174 Interest income 6,462 4,844 3,010 Other 2,936 1,850 1,632 $42,988 $29,179 $21,996 Note 7 - Earnings Per Unit: Primary earnings per unit is based on the weighted average number of common and common equivalent units outstanding. Common equivalent units result from dilutive unit options computed using the treasury stock method. Fully diluted earnings per unit assumes in addition to the above, that the 6% subordinated convertible notes were converted at the date issued with earnings being increased for interest expense thereon. The following table summarizes the earnings and the average number of common units and common equivalent units used in the calculation of primary and fully diluted earnings per unit. 60 (dollars in thousands, except per unit amounts) Year Ended December 31 1995 1994 1993 Primary: Weighted average common units 7,920,795 7,796,508 7,750,531 Stock options 32,856 37,867 2,091 Average common units outstanding 7,953,651 7,834,375 7,752,622 Earnings $ 21,115 $ 15,853 $ 37,562 Earnings per unit, primary $ 2.65 $ 2.02 $ 4.85 Fully Diluted: Weighted average common units 7,920,795 7,796,508 7,750,531 Stock options 78,206 37,867 2,857 Convertible subordinated notes 1,972,866 1,972,866 1,972,866 Assumed average common units outstanding 9,971,867 9,807,241 9,726,254 Earnings $ 23,007 $ 17,653 $ 39,362 Earnings per unit, fully diluted $ 2.31 $ 1.80 $ 4.05 Note 8 - Property, Equipment and Assets Under Arrangement with Other Parties: Property and equipment, at cost, consist of the following: (in thousands) December 31 1995 1994 Land $ 21,117 $ 10,463 Buildings and improvements 67,576 63,172 Furniture and equipment 58,607 52,548 Capitalized equipment leases 165 33 Construction in progress 17,800 10,541 $165,265 $136,757 Assets under arrangement with other parties, net of accumulated depreciation, consist of the following: (in thousands) December 31 1995 1994 Land $ 2,612 $ 5,203 Buildings and improvements 23,890 70,690 Fixed equipment 2,008 4,442 Mortgage notes receivable 1,411 1,411 $29,921 $ 81,746 61 Note 9 - Acquisitions and Dispositions: In February, 1994, NHC acquired Spectrum Enterprises, Inc. and Spectrum Private Nursing Services, Inc. for a total consideration of approximately $4,253,000. Properties acquired include thirteen homecare programs located in Florida. Two of the homecare programs provide services to private payors exclusively. Former shareholders have signed a covenant not to compete. NHC is amortizing the cost of the covenant not to compete over its term. In February, 1994, NHC purchased a 120-bed long-term health care center located in Naples, Florida for approximately $6,000,000. The purchase prices for the acquisitions above were allocated to the underlying assets based on their relative fair market values. The Consolidated Statements of Income for 1995 and 1994 include the results of operations from the respective dates of acquisition. Note 10 - Investment in Marketable Securities: Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) was issued by the Financial Accounting Standards Board effective for fiscal years beginning after December 15, 1993. As required by SFAS 115, securities are classified as trading, held-to-maturity or available for sale. Securities are classified as trading securities when they are bought and held principally for the purpose of selling them in the near term. Securities are classified as held-to-maturity when the company has both the positive intent and ability to hold them to maturity. All other securities are classified as available for sale. NHC considers its investments in marketable securities as available for sale securities and unrealized gains and losses are recorded in partners' capital in accordance with SFAS 115. Application of SFAS 115 to prior periods is not permitted and, accordingly, prior financial statements have not been restated to reflect the change in accounting principle. The adoption of SFAS 115 did not have a material effect on NHC's financial position or results of operations. Proceeds from the sale of investments in debt and equity securities during the year ended December 31, 1995 and 1994 were $2,696,000 and $6,726,000 respectively. Gross investment gains of $335,000 were realized on these sales during the year ended December 31, 1995. Gross investment gains of $493,000 and gross investment losses of $1,055,000 were realized on these sales during the year ended December 31, 1994. Realized gains and losses from securities sales are determined on the specific identification of the securities. 62 Note 11 - Debt and Lease Commitments: Long-Term Debt-- Long-term debt and debt serviced by other parties consist of the following:
Weighted Average Final Debt Serviced by Long-Term Interest Rate Maturities Other Parties Debt (in thousands) December 31 1995 1994 1995 1994 Bank credit facility, principal and interest payable in variable, quarterly installments 6.4% 2009 $ --- $ 26,353 $ 15,518 $ 16,148 Senior secured notes, interest payable semiannually, principal payable in semi- annual payments beginning November, 1995 8.3 2003 18,928 20,000 --- --- Senior secured notes, interest payable semiannually, principal payable in semi- annual payments beginning November, 1995 8.4 2005 534 564 27,860 29,436 First mortgage revenue bonds, repaid in 1995 --- --- --- 12,514 --- 2,807 First mortgage notes payable in periodic installments, interest payable quarterly 7.5 1996-2019 7,062 7,415 31,371 29,250 First mortgage revenue bonds, payable in periodic installments, interest payable monthly 9.3 2001-2003 2,760 11,404 --- --- First mortgage revenue bonds, payable in periodic installments, variable, interest payable monthly 4.7 2000-2010 14,861 15,490 --- --- Unsecured term note payable to National. Interest payable quarterly, principal payable at maturity 8.5 1998 --- --- 10,000 10,000 Other notes payable generally in monthly installments 8.0 1996-2001 --- --- 21,306 18,956 44,145 93,740 106,055 106,597 Less current portion (3,374) (3,976) (5,184) (2,354) $40,771 $ 89,764 $100,871 $104,243
The bank credit facility and the 8.3% and 8.4% secured notes due in 2003 and 2005 were borrowed through NHC's administrative partner, National. NHC granted certain credits and interest rate concessions related to its management fees from National in obtaining these loans. The debt identified above as senior secured notes is cross-defaulted with other NHC and NHI liabilities and is cross-collateralized to the extent of approximately $27,860,000 of other debt. To obtain the consent of various lenders to the transfer of assets, NHI guaranteed certain NHC debt which was not transferred to NHI. A default by NHI under its obligations would default the debt or guarantees of NHC. The aggregate maturities of long-term debt and debt serviced by others for the five years subsequent to December 31, 1995 are as follows: 63 Long-term Debt Serviced Debt By Others Total 1996 $5,184,000 $3,374,000 $ 8,558,000 1997 5,728,000 3,489,000 9,217,000 1998 4,748,000 3,631,000 8,379,000 1999 5,491,000 3,465,000 8,956,000 2000 35,693,000 3,733,000 39,426,000 Certain property and equipment of NHC and NHI are pledged as collateral on long-term debt or capital lease obligations. Other property and assets are available for use as collateral as needed. Certain loan agreements require maintenance of specified operating ratios as well as specified levels of cash held in escrow, working capital and partners' capital by NHC and NHI. All such covenants have been met by NHC, and management believes that NHI is in compliance with the loan covenants. Lease Commitments-- Operating expenses for the years ended December 31, 1995, 1994, and 1993 include expense for leased premises and equipment under operating leases of $18,820,000, $16,692,000 and $16,223,000, respectively. See Note 3 for the approximate future minimum base rent and non-obligated debt service rent commitments on non-cancelable operating leases with NHI. Construction and Financing Commitments-- NHC is committed to spend approximately $28,359,000 for ongoing construction contracts and to provide financing to managed facilities in the amount of $5,316,000 for ongoing construction contracts in 1996. NHC's cash on hand, marketable securities, short-term notes receivable, loan participation agreements, operating cash flow and, as needed, its borrowing capacity are expected to be adequate to fund these commitments. Note 12 - Subordinated Convertible Notes: On May 12, 1992, NHC issued $30,000,000 of 6% subordinated convertible notes ("the notes") due July 1, 2000. Interest is payable quarterly. The notes are convertible at the option of the holder at any time into units of NHC at a price of $15.2063 per unit, subject to adjustment for certain changes in the number of units outstanding. The notes may be redeemed at the option of NHC after May 12, 1996, but only if NHC has elected to be taxed as a corporation and only if the market price of NHC's units is such as to guarantee certain specified returns to the holder of the notes. NHC has reserved 1,972,867 units for conversion of the notes. 64 Note 13 - Contingencies and Guarantees: Litigation-- There is certain litigation incidental to NHC's business, none of which, in management's opinion, would be material to the financial position or results of operations of NHC. Professional Liability and Other Insurance-- NHC carries a professional liability insurance policy ($1,000,000 per claim with additional umbrella coverage in the amount of $5,000,000 in the aggregate per annum) for coverage from liability claims and losses incurred in its health care business. The policy is a fixed premium and occurrence form policy and has no provisions for a retrospective refund or assessment due to actual loss experience. In the opinion of management, NHC's insurance coverage is adequate to cover settlement of outstanding claims against NHC. NHC has assumed certain risks related to health insurance and workers compensation insurance claims of its employees. The liability for reported claims and estimates for incurred but unreported claims is $4,433,000 and $2,616,000 at December 31, 1995 and December 31, 1994, respectively. The liability is included in other current liabilities in the consolidated balance sheets. Guarantees and Related Events-- In order to obtain management agreements and to facilitate construction or acquisition of certain health care centers which NHC manages for others, NHC has guaranteed some or all of the centers' first mortgage bond debt (principal and interest). For this service, NHC charges an annual guarantee fee of 1% to 2% of the outstanding principal balance guaranteed, which fee is in addition to NHC's management fee. The principal amount outstanding under the guarantees is approximately $81,555,000 (net of available debt service reserves) at variable and fixed interest rates with a weighted average of 5.4% at December 31, 1995. In management's opinion, these guarantee fees approximate fees that NHC would currently charge to enter into similar guarantees. All of the guaranteed indebtedness is secured by first mortgages, pledges of personal property, accounts receivable and, in certain instances, by the personal guarantees of the owners of the facilities. The borrower has granted second mortgages over the relevant properties in favor of NHC. Such rights may be enforced if NHC is required to pay under its guarantees. NHI has guaranteed certain of the debts of NHC. NHC has agreed to indemnify and hold harmless NHI against any and all loss, liability or harm incurred by NHI as a result of having to perform under its guarantee of any or all of the guaranteed debt. 65 NHC has entered into an interest rate cap arrangement with a managed entity under which NHC has guaranteed that the entity's weighted average interest rate on its first and second mortgage debt will not exceed 9.0%. The entity's first mortgage debt is tax-exempt, floating-rate bonds and its second mortgage debt is owed to NHC. The bond debt outstanding under the arrangement is $16,800,000 and the weighted average rate of both debts is 7.3% at December 31, 1995. NHC is obligated under the agreement only for the term of its management contract, as extended, and only so long as the tax-exempt bonds are outstanding. At December 31, 1995, NHC expects to have no additional liability as a result of this interest rate cap arrangement. Note 14 - Notes Receivable and Loan Participation Agreements: Notes receivable generally consist of loans and accrued interest to managed health care centers and retirement centers for construction costs, development costs incurred during construction and working capital during initial operating periods. The notes generally require monthly payments with maturities ranging from five to twenty-five years. The majority of the notes mature in 2004. Interest on the notes is generally at prime plus 2% or at a fixed rate of 10.25%, payable monthly. The collateral for the notes consists of first and second mortgages, certificates of need, personal guarantees and stock pledges. NHC has entered into loan participation agreements with SouthTrust Bank of Alabama acquiring an interest in four mortgage notes totaling approximately $27,579,000. The participation interests range from 75% to 100% and the interest rates are variable. At December 31, 1995, the rates range from 9.625% to 10.515%. The mortgages mature on various dates ranging from 1999 to 2002. However, NHC has the right under the participation agreements to exchange its investment for cash at any time. Note 15 - Partners' Capital: NHC has Incentive Option Plans which provide for the granting of options to key employees and directors to purchase units at no less than market value on the date of grant. The following table summarizes option activity: Number of Options Outstanding Shares Price Outstanding December 31, 1992 5,000 $ 11.25 Options granted --- --- Options exercised --- --- Outstanding December 31, 1993 5,000 11.25 Options granted 485,500 25.12-25.75 Options exercised --- --- Outstanding December 31, 1994 490,500 11.25-25.75 Options granted 376,000 24.88-31.00 Options exercised 489,000 25.12-25.75 Outstanding December 31, 1995 377,500 $11.25-31.00 66 Additionally, NHC has an employee unit purchase plan which allows employees to purchase ownership units of NHC through payroll deductions. The plan allows employees to terminate participation at any time. In connection with the exercise of certain stock options, NHC has received interest-bearing (ranging from 3.5% to 6.5%), full recourse notes in the amount of $26,196,000 at December 31, 1995. The notes are secured by units of NHC or shares of NHI having a fair market value of not less than 150% of the amount of the note. The notes were received in accordance with the terms of the Key Employee Stock Financing Plan as approved at NHC's Special Meeting of the unitholders on December 31, 1986. The principal balances of the notes are reflected as a reduction of partners' capital in the consolidated financial statements. Note 16 - Disclosures about Fair Value of Financial Instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value: Cash and cash equivalents; Cash held by trustees; Bond reserve funds, mortgage replacement reserves and other deposits; Loan Participation Agreements; and Accrued interest-- The fair value approximates the carrying amount because of the short maturity or the nature of these instruments. Notes receivable-- The fair value of NHC's notes receivable is estimated based on the current rates offered by NHC or comparable parties for the same or similar type of notes receivable of the same or similar maturities and is approximately the same as the carrying amount. Long-term debt and Debt serviced by other parties-- The fair value is estimated based on the current rates offered to NHC for similar debt of the same maturities and is approximately the same as the carrying amounts. Subordinated Convertible Notes-- The fair value is estimated based on the quoted market price and approximates $76,942,000 as compared to a carrying value of $30,000,000 at December 31, 1995. 67 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports on National HealthCare, L.P. dated February 1, 1996, included in this Form 10-K for the year ended December 31, 1995, into the Partnership's previously filed Post-effective Amendment No. 1 to Form S-4 on Form S-8 Registration Statement No. 33-9881. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1995 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Nashville, Tennessee February 20, 1996 68 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME AND THE CONSOLIDATED BALANCE SHEETS OF NATIONAL HEALTHCARE L.P. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 DEC-31-1995 6,556,000 1,514,000 81,843,000 (4,441,000) 3,075,000 89,440,000 218,386,000 (61,465,000) 355,491,000 59,047,000 171,642,000 0 0 0 108,899,000 355,491,000 0 350,957,000 0 296,220,000 0 2,182,000 16,891,000 21,115,000 0 0 0 0 0 21,115,000 2.65 2.31
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