========================================================================= 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, 2000 333-37185 _______ NATIONAL HEALTHCARE CORPORATION (Exact name of registrant as specified in its Corporate Charter) Delaware 52-2057472 (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 _________________________________________________________________________ Shares of Common Stock 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 shares held by nonaffiliates of the registrant was $9,594,260 as of February 28, 2001. Number of Shares outstanding as of February 28, 2001: 11,276,928 Page 1 of 91 Pages Exhibit Index Page 56 =====================================================================
PART 1 ------ ITEM 1 BUSINESS General National HealthCare Corporation (NHC or the Company) is a Delaware corporation. The reference to NHC includes all subsidiaries and partnerships in which it has an interest. It principally operates long-term health care centers and home health care programs primarily in the southeastern United States. The Company's health care centers provide subacute, skilled and intermediate nursing and rehabilitative care. At December 31, 2000, the Company operated or managed 74 long-term health care centers with a total of 9,747 licensed beds. Of the 74 centers, 25 are managed for other owners. Of the 49 remaining centers, 36 are leased from National Health Investors, Inc. (NHI) and 13 are leased from National Health Realty, Inc. (NHR). The Company serves as a compensated Investment Advisor to both NHI and NHR. The Company's homecare programs provide rehabilitative care at a patient's residence. During 2000, the Company operated 33 homecare programs and provided 331,756 homecare patient visits. NHC also operates 473 retirement apartments located in three retirement centers leased from NHI, one retirement center leased from NHR and two managed retirement centers. Additionally, the Company operates 622 assisted living units at 13 centers (the Company leases five from NHI, three from NHR and one from another party)and four managed centers. During the year, NHC commenced managing three health care centers in Washington State. During 2000, NHC terminated operational responsibilities at 3,873 beds in 28 health care enters and 252 units at three assisted living centers, all in Florida. As of December 31, 2000, the Company operated specialized care units such as Alzheimer's Disease care units (10), 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. Health Care Services Revenues. Health care services provided by the Company include a comprehensive range of services through related or separately structured long-term health care centers, homecare programs, specialized care units, pharmacy operations, rehabilitative services, assisted living centers and retirement centers. In fiscal 2000, 89.9% of the Company's net revenues were derived from such health care services. Highlights of health care services activities during 2000 were as follows: A. Long-Term Health Care Centers. As described in more detail throughout this document, the Company operates 49 long-term health care centers as of December 31, 2000. Average occupancy in the Company's long-term health care centers was 94.2% during the year ended December 31, 2000. B. Homecare Programs. The Company's original policy had been to affiliate each of its licensed and certified homecare programs with a Company operated health care center; however, the newer homecare programs are separately based in an effort to continually expand NHC's market leadership in these services. The existing programs have decreased their total number of visits from 338,817 in 1999 to 331,756 in 2000. The decrease in number of visits during 2000 was the result of a focused effort by the Company to manage the number of visits in order to stay within specified visit limits that existed during 2000. The reimbursement for homecare services under the Medicare program provides for a prospective pay system. Under the homecare prospective payment system, the Company will receive a fixed amount per patient per episode as defined by Medicare guidelines. The homecare prospective payment system commenced October 1, 2000. The Company is evaluating the impact of the new homecare prospective payment system, but believes it will be able to operate effectively under the system. C. Rehabilitative Services. The Company has long offered physical, speech, and occupational therapy provided by center specific therapists. NHC maintained a rehabilitation staff of over 800 highly trained, professional therapists in 2000, some of which were employed by a separate rehabilitation subsidiary known as NHC Rehabilitation. In addition to serving NHC operated centers, it provides contract services to 135 health care providers owned by third parties (total revenues of $6.9 million during 2000). The Company's rates for these services are competitive with other market rates. Major Medicare reimbursement changes occurred for therapy services in 1999 and will continue to have a significant effect during 2001. In 1999 skilled nursing centers Medicare per diems became prospective and included no separate payment for therapy services. Substantially all therapists are now center based employees. The Company also operates six free standing outpatient rehabilitation clinics in Tennessee and is the designated sports medicine provider for Middle Tennessee State University. D. Medical Specialty Units. The Company requires all centers to participate in the Medicare program, and has expanded its range of offerings by the creation of center-specific medical specialty units such as the Company's 21 Alzheimer's disease care units and 14 subacute nursing units. The services are provided not only at each NHC operated center, but also at existing specialized care units. E. Pharmacy Operations. At year end NHC operated three regional pharmacy operations (one in east Tennessee, one in central Tennessee, one in South Carolina), but closed a fourth regional operation in Florida during the year. These pharmacy operations 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. Pharmacy reimbursement under Medicare has also been shifted from direct billing by the pharmacy, to a negotiated rate structure between skilled nursing centers and the pharmacy, with the skilled nursing centers Medicare reimbursement being based upon a prospective rate not related to actual patient pharmaceutical usage. The Company anticipates stable revenues for its pharmacy subsidiary in 2001. F. Assisted Living Projects. The Company presently owns, leases or manages thirteen assisted living projects, eight of which are located within the physical structure of a long-term health care center or retirement complex. 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. Development of new units has been discontinued due to existing market conditions. G. Managed Care Contracts. The Company operates four 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. Managed care days have increased from 29,430 in 1998 and 30,008 in 1999 to 37,302 in 2000. Other Non-Health Care Sources of Revenues. The Company generates revenues from other non-health care sources, including advisory services to NHI, advisory services to NHR, management services, accounting and financial services, insurance services, dividends and other realized gains on securities and interest income. In fiscal 2000, 10.1% of the Company's net revenues were derived from such other non-health care sources. The significant non-health- care sources of revenues are described as follows: A. 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 investors. NHI 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, Robert G. Adams and Richard F. LaRoche, Jr. serve as executive officers of NHI. NHC earned approximately $2.6 million in 2000 under the terms of the advisory agreement. The NHI 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. B. Advisory Services to National Health Realty, Inc. In 1997, the Company formed National Health Realty, Inc., as a wholly-owned subsidiary. It then transferred to NHR certain healthcare facilities then owned by NHC and then distributed the shares of NHR to NHC's shareholders. The distribution had the effect of separating NHC and NHR into two independent public companies. As a result of the distribution, all of the outstanding shares of NHR were distributed to the then NHC investors. NHC entered into an Advisory Agreement with NHR whereby services related to investment activities and day-to-day management and operations are provided to NHR by NHC as Advisor. The Advisor is subject to the supervision of and policies established by NHR's Board of Directors. Either party may terminate the Advisory Agreement on 90 days notice at any time. For its services under the Advisory Agreement, NHC is entitled to annual compensation of the greater of 2% of NHR's gross consolidated revenues or the actual expenses incurred by NHC. During 2000, NHC's compensation under the advisory agreement was $503,000. The Advisory Agreement provides that prior to the earlier to occur of (i) termination, for any reason, of the Advisory Agreement or (ii) NHC ceasing to be actively engaged as the investment advisor for NHI, NHR will not (without the prior approval of NHI) transact business with any party, person, company or firm other than NHC. It is the intent of the foregoing restriction that NHR will not be actively or passively engaged in the pursuit of additional investment opportunities, but rather will focus upon its capacities as landlord and note holder of those certain assets conveyed to it. C. Management Services. The Company provides management services to centers operated under management contracts. The Company generally charges 6% of net revenues for its management services. As of December 31, 2000, the Company performs management services for 25 centers. D. Accounting and Financial Services. As indicated previously, a large number of facilities have been or are in the process of being transferred from bankrupt organizations or from entities operating in states with economically unreasonable liability insurance premiums into the hands of small operators or not-for-profit entities. In order to broaden its business base, the Company provides off-site accounting and financial service functions for these entities for separate charges. Since no management of the entity is involved, the Company is referring to this service as its "Accounting and Financial Service Business". E. Insurance Services. NHC owns a licensed Tennessee workers compensation insurance company which either directly or in conjunction with other workers compensation carriers provides such coverage at the majority of NHC operated centers. Additionally, the Company self insures its partners' health insurance benefit package at a cost it believes is less than a commercially obtained policy. Finally, the Company operates a long-term care insurance division, which is licensed to sell commercially underwritten long- term care policies. 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. 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 certification program which it utilizes in each of its operated health care centers. An integral part of the program is a computerized patient assessment system which aids in placing the patient in the appropriate section of each center (skilled or intermediate) and monitors the health care needs of the patient, number and frequency of medications and other essential medical information. The data derived from this system is used not only to assure that appropriate care is given to each individual patient, but also to ascertain the appropriate amount of staffing of each section of the center. Additionally, 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 benchmark, and requires improvement in the ratings by each center as a condition of participation in the Company's overall "Excellence Program". The Company provides centralized management and support services to Company operated 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. Many personnel are employed by the Company's administrative services affiliate, National Health Corporation, which is also responsible for overall services in the area of personnel, loss control, insurance, education and training. The Company reimburses the administrative services contractor by paying all the costs of personnel employed for the benefit of the Company as well as a fee. National Health Corporation (National) is wholly owned by the National Health Corporation Employee Stock Ownership Plan and provides its services only to the Company. The Company provides management services to centers operated under management contracts and offsite accounting and financial services to other owners, all pursuant to separate contracts. The term of each contract and the amount of the management fee or accounting and financial services fee is determined on a case-by-case basis. Typically, the Company charges 6% of net revenues for its management contracts and specific item fees for its accounting and financial service agreements. The initial term of the contracts range from two years to ten years. In certain contracts, the Company maintains a right of first refusal should the owner desire to sell a managed center. As many of the long term care companies emerge from bankruptcy, the Company anticipates a large number of facilities being transferred into the hands of small operators or not-for-profit entities. In order to broaden its business base, the Company is aggressively seeking to provide off-site accounting and financial services for these entities for separate charges. Since no management of the entity is involved, the Company refers to this service as its "Accounting and Financial Service Business". A number of such contracts were entered into in 2000. All health care centers operated by the Company are licensed by the appropriate state and local agencies. All except two are certified as providers for Medicaid patients, and all are certified as Medicare providers. Certification of advised centers is the prerogative of the Provider/Owner. All licensed nursing homes, assisted living and homecare offices 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 and any alleged deficiencies would be corrected. Presently, none of the Company's leased and managed facilities are operating under material statements of deficiencies. The Company has a significant monetary bonus program for employees attached to passing these surveys with few or no deficiencies. Health Care Centers Under Construction The Company presently has no ongoing material construction, although it has a 160 bed certificate of need in Tennessee. The ability to commence construction on this in 2001 is dependent upon an extension of time being granted and the obtaining of a financing source to fund the construction. 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 2000 1999 1998 Overall census 94.2% 93.5% 90.8% Census excluding new openings 94.2% 93.5% 92.9% 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). Termination of Florida Health Care Center Operations On June 28, 2000, NHC received notice that its insurance carrier was terminating insurance on all of the Company's operations effective September 30, 2000. Unable to replace this insurance in the state of Florida, the Company elected to discontinue its Florida long-term health care center operations, which at the time consisted of the ownership and operation of two owned skilled nursing facilities, thirteen leased facilities of which three were freestanding assisted living facilities, and nine third party management contracts. NHC's Vice President of Operations for the state of Florida resigned in August 2000, as did the entire staff of NHC's two regional offices in Florida. These individuals, plus additional Florida based outside investors, formed new entities and entered into a series of new leases on the thirteen leased properties and the two NHC owned properties, which leases are for a five-year term. NHC sold the current assets and current liabilities and leased its furniture, fixtures and leasehold improvements of its owned and leased Florida facilities to the same group of entities. Additionally, and with the consent of the third party owners, the Florida management contracts were assigned to another entity primarily owned and controlled by NHC's former Vice President of Florida Operations. These transactions closed on September 30,2000, with an effective date of October 1, 2000. New licenses have been issued for the respective operators as of that day. Although NHC's obligations for rent payments owed on leased centers remains in effect due to a master lease, NHC is receiving a credit for lease payments made by the new providers, which were current as of year end. Through the master lease agreement, NHC still maintains a right of first refusal with NHI and NHR to purchase any of the Florida facilities should NHI or NHR receive an offer from an unrelated party. NHC successfully replaced its liability insurance on the balance of all its operations in states other than Florida effective October 1, 2000. 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, South Carolina and Florida state governments and certified by the federal government for participation in the Medicare program. Each of the Company's 33 Medicare certified homecare programs is managed by a registered nurse, with speech, occupational and physical therapists either employed by the program or on a contract basis. Homecare visits decreased from 338,817 visits in 1999 to 331,756 visits in 2000. During the first three quarters of 2000, reimbursement for homecare services under the Medicare program provided for reimbursement of allowable costs up to specified limits for both visits and patients. Thus the Company focused on growing its homecare patient census and managing the number of visits to stay within those limits. NHC Homecare had 7,398 patients in 2000. Effective October 1, 2000, homecare reimbursement under the Medicare program was totally changed by the implementations of a prospective payment system. Under this prospective payment system, the Company receives a fixed amount per patient per episode as defined by Medicare guidelines. The Company's experience with the new homecare prospective payment system in the last quarter of 2000 leads it to believe it can operate effectively under the system. The Company has homecare programs in Tennessee, Florida, and South Carolina. 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 newer homecare programs 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 leases and/or manages thirteen assisted living units, eight of which are located within the physical structure of a long-term health care center or retirement center and five of which are freestanding. During the year NHC's assisted living units decreased by three centers and 252 units, all in Florida. This termination was brought about by the inability of the Company to obtain liability insurance at a reasonable cost in that state. Due to the overbuilding in most markets, the Company has elected not to start construction on free standing projects during 2001. 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 and the Company believes that overbuilding has occurred in some of its markets. In 2001, the Company may start construction on thirty assisted living units as a component of a new 160 bed nursing center, but only if outside financing is available, and an extension of time to construct and open the health care center is obtained. 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. NHC has, in several cases, developed retirement centers adjacent to its health care properties with an initial construction of 40 to 80 units and which units are rented by the month; thus these centers offer an expansion of the Company's continuum of care. The Company believes these retirement units offer a positive marketing aspect of the Company's health care centers. Another type of retirement center which the Company offers 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 opened the 58 unit AdamsPlace in Murfreesboro, Tennessee during 1998. 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. 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. 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 December 31 Source 2000 1999 1998 Private 30% 29% 31% Medicare 29% 29% 32% Medicaid/Skilled 10% 11% 10% Medicaid/Intermediate 31% 30% 26% VA and Other 0% 1% 1% Total 100% 100% 100% Private Revenue Sources Private paying patients, private insurance carriers and the Veterans Administration generally pay on the basis of the center's charges or specifically negotiated contracts. The Company attempts to 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 seven were open at 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. 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 owned, leased or managed by the Company are certified to participate in Medicare and all but two participate in Medicaid. Eligibility for participation in these programs depends upon a variety of factors, including, among others, accommodations, services, equipment, patient care, safety, physical environment and the implementation and maintenance of cost controls and accounting procedures. In addition, some of the 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. Historically, 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 reimbursed (subject to certain ceilings on operating costs) through December 1998, the reasonable direct and indirect cost of services furnished to Medicare patients, including depreciation, interest and overhead. Commencing January 1, 1999 (and as mandated by the 1997 Balanced Budget Act), Medicare changed its former cost reimbursement system to a "Prospective Payment System" (PPS). Under PPS, the center receives a fixed payment which covers all but a few services provided to Medicare patients. Thus the center must not only cover its fixed and normal operating expenses out of this payment, but also physical and speech therapy, drugs and other supplies, and other necessary services of the type provided by skilled nursing facilities. The Company experienced a material decrease in Medicare revenues in 1999 due to PPS, but was able to also substantially reduce operating expenses. Material reductions were negotiated in therapy, pharmaceutical and other ancillary services. Some legislative changes were made to PPS in late 1999 and again in December 2000, both of which provided some relief form the drastic revenue reductions occasioned by the 1997 BBA. 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 $97 per day after the first 20 days of the covered stay. For details see the section "Medicare Financial Changes". 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. The 1997 Balanced Budget Act eliminated a federally mandated requirement that Medicaid rates paid by the states must be sufficient to reimburse in full the costs of an "efficiently and reasonably operated" nursing home (the "Boron Amendment"). The Company and the nursing home industry in general are concerned about this deletion and are monitoring the activities in state legislature budgetary processes. 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 were "retrospective" thru 1998 in that current year payments were designed to reasonably approximate the facility's reimbursable costs during that year. Payments under Medicare for years thru 1998 were adjusted to actual allowable costs each year. The actual costs incurred and reported by the facility under the Medicare program were and 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 records as receivables the amounts which it expects to receive under the Medicare and Medicaid programs and records into profit or loss any differences in amounts actually received at the time of interim and final settlements. To date, adjustments have not had a material adverse effect on the Company. For further information, see "Item 3: Legal Proceedings" which describe the settlement of certain litigations concerning Medicare cost reports for 1991-1996. The Company believes that its payment formulas have been properly applied and that any future adjustments will not be materially adverse. Effective January 1, 1999, and as discussed above, the Medicare program has become prospective in nature. For additional discussion see "Medicare Financial Changes". Changes in certification and participation requirements of the Medicare and Medicaid programs have restricted, and are likely to continue to restrict further, eligibility for reimbursement under those programs. Failure to obtain and maintain Medicare and Medicaid certification at the Company's facilities will result in denial of Medicare and Medicaid payments which could result in a significant loss of revenue to the Company. In addition, private payors, including managed care payors, increasingly are demanding that providers accept discounted fees or assume all or a portion of the financial risk for the delivery of health care services. Such measures may include capitated payments whereby the Company is responsible for providing, for a fixed fee, all services needed by certain patients. Capitated payments can result in significant losses if patients require expensive treatment not adequately covered by the capitated rate. Efforts to impose reduced payments, greater discounts and more stringent cost controls by government and other payors are expected to continue. For the fiscal year ended December 31, 2000, NHC derived 29% and 41% of its net patient revenues from the Medicare and Medicaid programs, respectively. Any reforms that significantly limit rates of reimbursement under the Medicare and Medicaid programs, therefore, could have a material adverse effect on the Company's profitability. The Company is unable to predict what reform proposals or reimbursement limitations will be adopted in the future or the effect such changes will have on its operations. No assurance can be given that such reforms will not have a material adverse effect on the Company. Medicare Financial Changes Government at both the federal and state levels has continued in its efforts to reduce, or at least limit the growth of, spending for health care services, including the type of services provided by NHC. On August 5, 1997, President Clinton signed into law the Balanced Budget Act of 1997 ("BBA"), which contains numerous Medicare and Medicaid cost-saving measures, as well as new anti-fraud provisions. The BBA was projected to save $115 billion in Medicare spending over the next five years, and $13 billion in the Medicaid program. Section 4711 of BBA, entitled "Flexibility in Payment Methods for Hospital, Nursing Facility, ICF/MR, and Home Health Services", repealed the Boren Amendment, which has required that state Medicaid programs pay to nursing home providers amounts adequate to enable them to meet government quality and safety standards; the Boren Amendment was previously the foundation of litigation by nursing homes seeking rate increases. In place of the Boren Amendment, the BBA requires only that, for services and items furnished on or after October 1, 1997, a state Medicaid program must provide for a public process for determination of Medicaid rates of payment for nursing facility services, under which proposed rates, the methodologies underlying the establishment of such rates, and justifications for the proposed rates are published, and which give providers, beneficiaries and other concerned state residents a reasonable opportunity for review and comment on the proposed rates, methodologies and justifications. Several of the states in which NHC operates are actively seeking ways to reduce Medicaid spending for nursing home care by such methods as capitated payments and substantial reductions in reimbursement rates. The BBA also requires that nursing homes transition to a prospective payment system under the Medicare program during a three-year "transition period" commencing with the first cost reporting period beginning on or after July 1, 1998. Substantially all the companies operating skilled nursing centers commenced receiving Medicare payments under this new program on January 1, 1999. As described in the following sections, BBA produced a crisis in long term care funding throughout the country. Congress addressed this financial distress in late 1999, and more recently in the Medicare Benefit Improvement Protection Act of 2000. Both enactments appear positive to the financial health of NHC, although the latter will not commence implementation until April 1, 2001. Industry Distress With the full implementation of BBA 1997, the long-term health care industry experienced not only material reductions in Medicare revenue and precipitous declines in public companies' market capitalization but also a wave of unanticipated bankruptcies. During 1999 and 2000, five of the nation's largest publicly held companies filed for bankruptcy protection. At least four private chains of over 100 facilities each also filed for bankruptcy protection. Currently, it appears that only NHC, Beverly Enterprises and HCR ManorCare, among the largest publicly traded long term care companies, avoided substantial operating losses during 2000. Although one might expect that this industry collapse would have produced acquisition opportunities for NHC or other surviving companies, this has not been the case. In the bankruptcy process, the public companies are discarding ownership in or leases with poorly performing centers, while clinging tenaciously to their best performers. These poorer performers are the target market for NHC's new offsite Accounting and Financial Service contract. Additionally, NHC's advisory agreement with National Health Investors, Inc. ("NHI") and National Health Realty, Inc. ("NHR") have allowed its subsidiaries to enter into short-term management agreements on eight centers during 1999 and four additional centers during 2000. Amendments to the BBA 1997 The United States Congress and the Administration - in recognition of the collapse of a significant portion of America's long-term care industry - proposed and enacted certain amendments to the Balanced Budget Act of 1997. Among the changes enacted in 1999 was the Balanced Budget Reform Act of 1999 (BBRA). This law allowed providers to identify certain of their facilities to be placed immediately on the federal reimbursement rate, rather than a three- year transition rate. For facilities in which it is financially advisable to make this change, the Company is so doing. Additionally, (and effective between April 1 and October 31, 2000) approximately fifteen of the highest acuity Medicare reimbursement payment classifications experienced a 20% increase in payment; furthermore, the balance of the Medicare payment categories underwent an additional 4% increase. These changes were effective April 1, 2000. Certain relief was also granted to the Company's home health care operations and a $1,500 per patient annual ceiling was lifted for a two- year period on reimbursement for expenditures in connection with the provision of physical, speech, and occupational therapy to the Company's patients. On December 15, 2000, the President signed the Medicare Benefit Improvement and Protection Act of 2000 (BIPA) which increased overall Medicare PPS rates by market basket plus 1% versus the previous market basket minus 1% and extended the moratorium on homecare PPS rate reduction to 2003. Although the refinements occasioned by BBRA 99 and BIPA 2000 have been well received by the industry, it is the Company's belief that the resulting revenue enhancements are insufficient compared to the losses sustained by the industry due to BBA 1997. Competition In most of the communities in which the health care centers are operated by the Company, there are other health care centers with which the Company competes. The Company leases or operates 74 long-term health care facilities, all but ten of which are located in the states of Alabama, Georgia, Indiana, Kentucky, Missouri, South Carolina, Tennessee and Virginia. During 2000 the Company discontinued operating twenty-four long term care centers in Florida. Each of these states are certificate of need states which generally requires the state to approve the opening of any new long-term health care facilities. There are hundreds of operators of long-term health care facilities in each of these states and no single operator, including the Company, dominates any of these state's long-term health care markets, except for some small rural markets which might have only one long-term health care facility. In competing for patients and staff with these centers, the Company depends 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 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 will be able to broaden is patient base and to differentiate its centers from competing health care centers. As the Company expanded into the assisted living market, it constantly monitored proposed or existing competing assisted living centers. The Company's development goal is to link its health care centers with its assisted living centers, thereby obtaining a competitive advantage for both. In all but one market where the Company operates health care centers, the Company believes the assisted living centers in the area to be sufficient or over sufficient for current population, and does not plan entry in those markets in 2001. 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 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 seven full-time individuals in this program. Three of its eight regional vice presidents and 41 of its 74 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, 2000, the Company's Administrative Services Contractor plus the Company's managed centers had approximately 11,700 full and part time employees, who are called "Partners" by the Company. This nomenclature continues even though the Company is now in corporate rather than partnership form, a transition which occurred effective January 1, 1998. No employees are presently represented by a bargaining unit. The Company believes its current relations with its employees are good. <TABLE> ITEM 2 PROPERTIES <CAPTION> LONG-TERM HEALTH CARE CENTERS Total Beds under Development Joined State City Center Affiliation Beds and Special Care Units NHC <S> <C> <C> <C> <C> <C> <C> Alabama Anniston NHC HealthCare, Anniston Leased(1) 151 50 bed Alzheimer's unit 1973 10 bed subacute care unit Moulton NHC HealthCare, Moulton Leased(1) 136 1973 Georgia Ft Oglethorpe NHC HealthCare, Fort Oglethorpe Owned(2) 135 1989 Rossville NHC HealthCare, Rossville Leased(1) 112 1971 Indiana Brownsburg Brownsburg Health Care Center Managed 178 20 bed Alzheimer's unit 1990 Castleton Castleton Health Care Center Managed 120 16 bed Alzheimer's unit 1990 Plainfield Plainfield Health Care Center Managed 199 57 bed Alzheimer's unit 1990 Kentucky Dawson SpringsNHC HealthCare, Dawson Springs Leased(1) 80 1973 Glasgow NHC HealthCare, Glasgow Leased(1) 206 1971 Madisonville NHC HealthCare, Madisonville Leased(1) 94 1973 Massachusetts Greenfield Buckley Nursing Home Managed 120 1999 Holyoke Buckley Center for Nursing & Rehab. Managed 102 1999 Quincy John Adams Continuing Care Center Managed 71 1999 Taunton Longmeadow of Taunton Managed 100 1999 Missouri Desloge NHC HealthCare, Desloge Leased(1) 120 1982 Joplin NHC HealthCare, Joplin Leased(1) 126 1982 Kennett NHC HealthCare, Kennett Leased(1) 170 1982 Macon Macon Health Care Center Managed 120 24 bed Alzheimer's unit 1982 Osage Beach Osage Beach Health Care Center Managed 120 24 bed Alzheimer's unit 1982 St. Charles NHC HealthCare, St. Charles Leased(1) 120 1982 St. Louis NHC HealthCare, Maryland Heights Leased(1) 220 30 bed Alzheimer's unit 1987 Springfield Springfield Rehabilitation and Health Care Center Managed 120 1982 West Plains West Plains Health Care Center Leased(1) 120 1982 New Hampshire Epsom Epsom Manor Managed 108 1999 Manchester Maple Leaf Health Care Center Managed 114 1999 Manchester Villa Crest Health Care Center Managed 123 1999
LONG-TERM HEALTH CARE CENTERS (continued) <CAPTION> Total Beds under Development Joined State City Center Affiliation Beds and Special Care Units NHC <S> <C> <C> <C> <C> <C> <C> South Carolina Aiken Mattie C. Hall Health Care Center Managed 176 44 bed Alzheimer's unit 1982 Anderson NHC HealthCare, Anderson Leased(1) 290 44 bed subacute care unit 1973 Clinton NHC HealthCare, Clinton Leased(1) 131 1993 Columbia NHC HealthCare, Parklane Leased(1) 120 30 bed Alzheimer's unit 1997 17 bed subacute care unit Greenwood NHC HealthCare, Greenwood Leased(1) 152 1973 Greenville NHC HealthCare, Greenville Leased(1) 176 1992 Laurens NHC HealthCare, Laurens Leased(1) 176 1973 Lexington NHC HealthCare, Lexington Leased(1) 120 12 bed subacute care unit 1994 Mauldin NHC HealthCare, Mauldin Leased(1) 120 30 bed Alzheimer's unit 1997 Murrells Inlet NHC HealthCare, Garden City Leased(1) 88 1992 North Augusta NHC HealthCare, North Augusta Leased(1) 132 1991 Sumter NHC HealthCare, Sumter Managed 138 1985 Tennessee Athens NHC HealthCare, Athens Leased(1) 98 1971 Chattanooga NHC HealthCare, Chattanooga Leased(1) 207 20 bed subacute care unit 1971 Chattanooga NHC HealthCare, Hamilton County Managed 520 1999 Columbia NHC HealthCare, Columbia Leased(1) 106 12 bed subacute care unit 1973 Columbia NHC HealthCare, Hillview Leased(1) 92 1971 Cookeville NHC HealthCare, Cookeville Managed 94 1975 Dickson NHC HealthCare, Dickson Leased(1) 191 1971 Dunlap NHC HealthCare, Sequatchie Leased(1) 120 1976 Farragut NHC HealthCare, Farragut Leased(1) 60 1998 Franklin Franklin Manor Leased(1) 47 1997 Franklin NHC HealthCare, Franklin Leased(1) 80 1979 HendersonvilleNHC HealthCare, Hendersonville Leased(1) 117 1987 Johnson City NHC HealthCare, Johnson City Leased(1) 160 16 bed subacute care unit 1971 Knoxville NHC HealthCare, Fort Sanders Owned(2) 172 12 bed subacute care unit 1977 Knoxville NHC HealthCare, Knoxville Leased(1) 139 1971 Lawrenceburg NHC HealthCare, Lawrenceburg Managed 96 1985 Lawrenceburg NHC HealthCare, Scott Leased(1) 62 1971 Lewisburg NHC HealthCare, Lewisburg Leased(1) 102 1971 Lewisburg NHC HealthCare, Oakwood Leased(1) 60 1973 McMinnville NHC HealthCare, McMinnville Leased(1) 150 1971 Milan NHC HealthCare, Milan Leased(1) 123 1971
LONG-TERM HEALTH CARE CENTERS (continued) <S> <C> <C> <C> <C> <C> <C> Total Beds under Development Joined State City Center Affiliation Beds and Special Care Units NHC Tennessee (con't) Murfreesboro AdamsPlace Leased(1) 60 1997 Murfreesboro NHC HealthCare, Murfreesboro Managed 181 69 bed subacute care unit 1974 Nashville The Health Center of Richland Place Managed 107 8 beds under development 1992 Nashville NHC HealthCare, Nashville Leased(1) 124 1975 Nashville West Meade Place Managed 120 1993 Oak Ridge NHC HealthCare, Oak Ridge Managed 128 1977 Pulaski NHC HealthCare, Pulaski Leased(1) 102 1971 Smithville NHC HealthCare, Smithville Leased(1) 107 7 beds under development 1971 Somerville NHC HealthCare, Somerville Leased(1) 72 1976 Sparta NHC HealthCare, Sparta Leased(1) 150 1975 Springfield NHC HealthCare, Springfield Leased(1) 107 1973 Virginia Bristol NHC HealthCare, Bristol Leased(1) 120 1973 Washington Bellingham Sehome Managed 115 2000 Seattle Park Ridge Managed 115 2000 Seattle Park West Managed 139 2000 <CAPTION> ASSISTED LIVING UNITS State City Center Assisted Living Units <S> <C> <C> <C> <C> Alabama Anniston NHC Place/Anniston (free-standing) Leased(1) 68 bed assisted living unit Missouri St. Charles Lake St. Charles Retire. Center Leased(1) 25 bed assisted living unit St. Peters NHC Place (free-standing) Leased 100 bed assisted living unit New Hampshire Epsom Heartland Place Managed 78 bed assisted living unit Manchester Villa Crest Assisted Living Managed 42 bed assisted living unit Tennessee Chattanooga NHC HealthCare, Hamilton County Managed 66 bed assisted living unit (free-standing) Dickson NHC HealthCare, Dickson Leased(1) 20 bed assisted living unit Farragut NHC Place, Farragut (free-standing) Leased(1) 84 bed assisted living unit Johnson City NHC HealthCare, Johnson City Leased(1) 11 bed assisted living unit Murfreesboro AdamsPlace (free-standing) Leased(1) 84 bed assisted living unit Nashville Richland Place Managed 25 bed assisted living unit Smithville NHC HealthCare, Smithville Leased(1) 7 bed assisted living unit Somerville NHC HealthCare, Somerville Leased(1) 12 bed assisted living unit
<CAPTION> RETIREMENT APARTMENTS State City Retirement Apartments Affiliation Units Established <S> <C> <C> <C> <C> <C> Missouri St. Charles Lake St. Charles Retirement Apartments Leased(1) 155 1984 Tennessee Chattanooga Hamilton County Managed 28 Chattanooga Parkwood Retirement Apartments Leased(1) 32 1986 Johnson City Colonial Hill Retirement Apartments Leased(1) 63 1987 Murfreesboro AdamsPlace Leased(1) 58 1997 Nashville Richland Place Retirement Apartments Managed 137 1993 <CAPTION> HOMECARE PROGRAMS State City Homecare Programs Affiliation Established <S> <C> <C> <C> <C> Florida Carrabelle NHC HomeCare of Carrabelle Owned 1994 Chipley NHC HomeCare of Chipley Owned 1994 Crawfordville NHC HomeCare of Crawfordville Owned 1994 Marianna NHC HomeCare of Marianna Owned 1994 Merritt Island NHC HomeCare of Merritt Island Owned Ocala NHC HomeCare of Ocala Owned 1996 Panama City NHC HomeCare of Panama City Owned 1994 Perry NHC HomeCare of Perry Owned 1994 Port St. Joe NHC HomeCare of Port St. Joe Owned 1994 Quincy NHC HomeCare of Quincy Owned 1994 Stuart NHC HomeCare of Stuart Owned 1996 Tallahassee NHC HomeCare of Tallahassee Owned 1994 Vero Beach NHC HomeCare of Vero Beach Owned 1997 South Carolina Aiken NHC HomeCare of Aiken Owned 1996 Greenwood NHC HomeCare of Greenwood Owned 1996 Laurens NHC HomeCare of Laurens Owned 1996 Tennessee Athens NHC HomeCare of Athens Owned 1984 Chattanooga NHC HomeCare of Chattanooga Owned 1985 Columbia NHC HomeCare of Columbia Owned 1977 Cookeville NHC HomeCare of Cookeville Owned 1976 Dickson NHC HomeCare of Dickson Owned 1977 Johnson City NHC HomeCare of Johnson City Owned 1978 Knoxville NHC HomeCare of Knoxville Owned 1977
<CAPTION> HOMECARE PROGRAMS State City Homecare Programs Affiliation Established <S> <C> <C> <C> <C> Tennessee (con't) Lawrenceburg NHC HomeCare of Lawrenceburg Owned 1977 Lebanon NHC HomeCare of Lebanon Owned 1997 Lewisburg NHC HomeCare of Lewisburg Owned 1977 McMinnville NHC HomeCare of McMinnville Owned 1976 Milan NHC HomeCare of Milan Owned 1977 Murfreesboro NHC HomeCare of Murfreesboro Owned 1976 Pulaski NHC HomeCare of Pulaski Owned 1985 Somerville NHC HomeCare of Somerville Owned 1983 Sparta NHC HomeCare of Sparta Owned 1984 Springfield NHC HomeCare of Springfield Owned 1984 </TABLE> (1) Leased from NHR or NHI (2) NHC HealthCare/Fort Oglethorpe and NHC HealthCare/Fort Sanders are owned by separate limited partnerships. The Company owns approximately 80% of the partnership interest in Fort Oglethorpe and 25% of the partnership interest in Fort Sanders.
ITEM 3 LEGAL PROCEEDINGS National HealthCare Corporation ("NHC") was a defendant in a lawsuit styled Braeuning, et al. vs. National HealthCare L.P., et al. filed on April 9, 1996. The Federal government was participating in the lawsuit as an intervening plaintiff. The suit alleged that NHC submitted cost reports and routine cost limit exception requests containing "fraudulent allocation of routine nursing services to ancillary service cost centers" and also alleged that NHC improperly allocated skilled nursing service hours in four managed centers, all in the state of Florida. In its defense of the matter, NHC asserted that the cost report information of the centers was either appropriately filed or, upon self-audit amendment, reflects adjustments for, among other items, i)correction of unintentional misallocations; ii) instances in which the self-audit process has had to use different source documents due to loss or misplacement of the original source documents; and iii) recalculation of certain nursing time based upon indirect allocation percentages rather than time studies, as were originally used. The cost report periods covered by the suit included 1991 through 1996. A number of amended cost reports were filed and NHC finalized the self-audit process for the years 1995 and 1996. NHC and the Department of Justice and the Health care Financing Administration agreed on the use of certain audit ratios used to calculate the amount of Medicare overpayment or underpayments for years 1991 through 1994. The parties have settled the suit by written agreement approved by the Court on December 15, 2000. Pursuant to that Agreement, and based upon the self-audit adjustments as further negotiated by the parties, NHC has agreed to a repayment totaling $17,623,072 payable over five years at 6% interest, with no interest for the initial six months. The government has also agreed to credit all 1997 and 1998 Routine Cost Limit exception cost report settlements owed by it to NHC and/or its managed centers against the settlement amount upon finalization of those cost reports. The settlement amount includes amounts owed by a number of centers managed by NHC, and NHC anticipates that these centers will repay amounts owed by them; however, NHC is liable to the government for those amounts in the event that the amounts are not paid by the managed centers. General Liability Lawsuits The entire long term care industry has seen a dramatic increase in personal injury/wrongful death claims based on alleged negligence by nursing homes and their employees in providing care to residents. This is especially prevalent in Florida. As of December 31, 2000, the Company and/or its managed centers are defendants in 81 such claims in Florida, compared to 36 in all other states combined. On March 31, 1999, after the close of business, the insurance carrier covering both NHC and the Florida based six facility nursing home chain managed by NHC (York Hannover) contacted NHC's Florida counsel to advise them that the jury had returned a verdict in excess of policy limits in compensatory damages, and the jury indicated that it wanted to assess punitive damages. The insurance carrier then entered into a settlement of the compensatory and punitive claim against the defendants in an amount materially greater than policy limits and the initial jury verdict. The settlement was far in excess of what the insurance carrier could have settled the claim prior to or during the trial. Unsure as to whether the carrier would assert a claim against NHC and/or the owner or, alternatively, that the carrier would claim that the coverage be divided between the umbrella policy issued for separate calendar years, NHC filed for declaratory judgment in the Chancery Court of Rutherford County, Tennessee. This action requested the court to find that the settlement was made in bad faith and that the insurance carrier should be responsible for the entire amount of the judgment. The insurance carrier transferred the case into the federal district court in Nashville, Tennessee and the York Hannover bankruptcy Trustee filed an identical suit in Tampa, Florida against the carrier. The parties have now reached a settlement - which was approved by the York Hannover Bankruptcy Court - which removes any possible claim by the carrier against NHC and/or York Hannover. In addition, the settlement requires the insurance carrier to fund a $2,000,000 escrow account to be used to pay any claims that exceed the primary insurance coverage for the 1996 policy year. Customer Bankruptcies On November 5, 1999, NHC was informed that a substantial debtor of its rehabilitation division had filed for Chapter 11 protection in the United States Bankruptcy/District Court in Wilmington, Delaware. The debtor is an affiliate of Lenox Healthcare, Inc. of Pittsfield, Massachusetts. The Company has provided full reserves for these amounts in years prior to 1999 based on its assessments of the loss exposure to the Company. The debt to the Company was discharged by the Bankruptcy Court in late December 2000, which discharge had no financial impact due to the previous reserves created. Guarantees and Related Third Party Exposure NHI and NHR Leases: As previously reviewed (see "Termination of Florida Health Care Center Operations", page 6), NHC terminated operations at thirteen leased long-term care centers in the state of Florida effective September 30, 2000. NHC, however, remains obligated on the lease payments to NHI and NHR, the landlords of these properties. NHC, however, receives credit for any rents paid by the new lessees of the projects, all of which are current as of year end. The inability of the new providers to sustain their lease payments could have an adverse effect on the Company's results of operations and cash flows. CFA Notes: Care Foundation of America, Inc. ("CFA") purchased from NHI six facilities through the issue of a mortgage note. NHC is a limited ($3,000,000) guarantor of the outstanding mortgage note to NHI plus the guarantor on a $2,000,000 working capital note to NHR, all collateralized by the pledge of certain marketable securities in the approximate amount of $5,000,000. NHC does not manage the facilities but does provide financial and accounting services. The failure of these facilities to make their payments on the first mortgage notes could result in the acceleration of that indebtedness and an attempt by the first mortgage holder and/or working capital lender to collect their total of $5,000,000 in guarantees from NHC or the collateral now held by the first mortgage lender. NHI Short Term Liquidity Demand: NHI's $83,000,000 senior secured bank credit facility requires NHI to repay the outstanding balance during 2001 and 2002. NHI also has additional letters of credit of $11,600,000 that mature during 2001. NHI has relied upon NHC to provide $23,200,000 of cash during 2000 through the purchase by NHC from NHI of certain notes receivable. NHI management has reported to the investing public that it believes that NHI will be successful in generating the necessary capital to repay its future debt requirements. However, the failure by NHI to meet its liquidity demands would negatively impact NHC as a result of cross-default provisions contained in a substantial portion of NHI's and NHC's debt agreements. With regard to certain other debt financed through the ESOP and National (total outstanding balance of $30,500,000 at December 31, 2000, of which $11,400,000 is the primary obligation of NHC), the lending institutions have the right to put the entire outstanding balance of the debt to NHI and NHC effective December 16, 2001. Upon exercise of the put option by the lending institutions, NHC would be obligated to purchase 38% of the then outstanding balance and NHI would be obligated to purchase 62% of the then outstanding balance. NHC and NHI are in the process of discussing this December 16, 2001 put option with the lending institutions. Management believes that the lending institutions will agree to not exercise the put option provided that NHC, NHI and National make additional principal repayments on the debt during 2001. However, if the lending institutions exercise the put option, NHC and NHI would be required to purchase the entire outstanding balance of the debt, which would have a material adverse effect on NHC's financial position and cash flows. As a result of the put option, NHC's primary obligation under this debt instrument ($11,400,000) has been classified as a current liability in NHC's consolidated balance sheet as of December 31, 2000. National Short Term Liquidity Demand: National also has certain additional debt obligations financed through the ESOP (total balance of $15,700,000 at December 31, 2000). None of this debt is the primary obligation of NHC. However, this debt is cross-defaulted with NHC's obligations. Under the terms of these debt agreements, the lending institutions have the right to put the entire outstanding balance of the debt to National at any time after January 20, 2001. The lending institutions have committed to not exercise the put option prior to September 30, 2001. However, if the lending institutions do exercise that put option and National is unable to refinance or purchase the entire outstanding balance of the debt, National's debt along with a substantial portion of NHC's debt would be in default, which would have a material adverse effect on NHC's financial position and cash flows. General There is certain additional 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. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of the Shareholders was held on May 24, 2000. (b) Matters voted upon at the meeting are as follows: PROPOSAL NO. 1: Election of Olin O. Williams and Robert G. Adams to serve as directors for a term of three years or until their successors have been fully elected and qualified. Other directors whose terms of office continue are W. Andrew Adams, Ernest G. Burgess, III, Richard F. LaRoche, Jr., Lawrence C. Tucker, and J. K. Twilla. Withholding Voting For Authority Percent For Olin O. Williams 8,816,147 10,180 76.4% Robert G. Adams 8,816,147 205,588 76.4% PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as the Company's independent accountants for the fiscal year 2000. Voting For Voting Against Abstaining Percent For 9,013,098 1,933 1,592 78.1% PART II ------- ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY MATTERS The shares of common stock of National HealthCare Corporation are traded on the American Stock Exchange under the symbol NHC. The closing price for the NHC shares on Friday, December 29, 2000 was $7.688. On December 31, 2000, NHC had approximately 4,476 shareholders, comprised of 2,476 shareholders of record and an additional 2,000 shareholders indicated by security position listings. The following table sets out the quarterly high and low sales prices of NHC's shares. As a corporation, NHC paid no dividends during 1999 or 2000. <TABLE> <CAPTION> Stock Prices High Low _____________________________________________________________________________ 1999 <S> <C> <C> 1st Quarter $17.250 $ 7.625 2nd Quarter 9.750 5.250 3rd Quarter 10.688 5.938 4th Quarter 7.000 3.375 _____________________________________________________________________________ 2000 1st Quarter $ 5.875 $ 4.125 2nd Quarter 5.500 4.188 3rd Quarter 6.000 3.250 4th Quarter 10.500 2.250 _____________________________________________________________________________ </TABLE> The Company does not currently declare or pay dividends.
ITEM 6 SELECTED FINANCIAL DATA The following table represents selected financial information with respect to the Company for the five years ended December 31, 2000. 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. NHC was a partnership through 1997, and consequently had no significant income taxes imposed upon it. <TABLE> <CAPTION> Year Ended December 31, 2000 1999 1998 1997 1996 (in thousands, except unit/share and per unit/share data) Operating Data: <S> <C> <C> <C> <C> <C> Net Revenues $462,415 $440,145 $441,214 $463,477 $386,266 Expenses 445,255 426,110 451,298 426,260 356,980 Income (Loss) before income taxes 17,160 14,035 (10,084) 37,217 29,286 Income tax provision (benefit) 6,942 5,652 (3,685) 209 --- Net income (loss) 10,218 8,383 (6,399) 37,008 29,286 Earnings (Loss) per unit/share: Basic .89 .73 (.58) $ 4.17 $ 3.48 Diluted .89 .73 (.58) 3.58 2.97 Balance Sheet Data: Total assets $273,047 $240,319 $249,688 $239.061 $404,740 Long-term debt 55,379 45,736 56,311 60,227 124,678 Debt serviced by other parties 2,384 14,911 15,891 16,676 32,857 Partners' capital --- --- --- --- 128,537 Shareowners' equity 69,534 53,636 50,315 37,736 --- </TABLE> ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview-- National HealthCare Corporation ("NHC" or the "Company") is a leading provider of long-term health care services. NHC operates or manages 74 long-term health care centers with 9,747 beds in 11 states. NHC provides long-term health care services to patients in a variety of settings including long-term nursing centers, managed care specialty units, sub-acute care units, Alzheimer's care units, homecare programs, assisted living centers and independent living centers. In addition, NHC provides management and accounting services to owners of long-term health care centers and advisory services to National Health Investors, Inc. ("NHI") and National Health Realty, Inc., ("NHR"). 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, 2000, 1999 and 1998. <TABLE> Percentage of Net Revenues <CAPTION> Year Ended December 31, 2000 1999 1998 <S> <C> <C> <C> Revenues: Net patient revenues 89.8% 92.3% 91.6% Other revenues 10.1 7.7 8.4 Net revenues 100.0 100.0 100.0 Costs and Expenses: Salaries, wages and benefits 55.9 55.0 55.2 Other operating 25.6 27.1 26.6 Litigation settlement and other charges 0.0 0.0 6.4 Rent 9.9 10.6 10.4 Depreciation and amortization 3.4 2.9 2.7 Interest 1.5 1.2 1.0 Total costs and expenses 96.3 96.8 102.3 Income (Loss) Before Income Taxes 3.7% 3.2% (2.3)% </TABLE> The following table sets forth the increase in certain items from the consolidated statements of income as compared to the prior period. <TABLE> Period to Period Increase (Decrease) <CAPTION> 2000 vs. 1999 1999 vs. 1998 (dollars in thousands) Amount Percent Amount Percent <S> <C> <C> <C> <C> Revenues: Net patient revenues $ 9,619 2.4% $ 2,002 0.5% Other revenues 12,651 37.3 (3,071) (8.3) Net revenues 22,270 5.1 (1,069) (0.2) Costs and Expenses: Salaries, wages and benefits 16,187 6.7 (1,082) (0.4) Other operating (764) (0.6) 1,463 1.2 Litigation settlement and other charges --- --- (28,084) (100.0) Rent (864) (1.8) 705 1.5 Depreciation & amortization 3,059 24.2 858 7.3 Interest 1,527 28.5 952 21.6 Total costs and expenses 19,145 4.5 (25,188) 5.6 Income Before Income Taxes $ 3,125 22.3% $ 24,119 239.2% </TABLE> NHC's long-term health care services, including therapy and pharmacy services, provided 95% of net patient revenues in 2000, 94% in 1999 and 94% in 1998. Homecare programs, which are included in the long-term health care services, provided 5% of net patient revenues in 2000, 4% in 1999 and 5% in 1998. The overall census in owned or leased health care centers for 2000 was 94.2% compared to 93.5% in 1999 and 90.8% in 1998. The census excluding acquisitions of new beds and new openings was 94.2%, 93.5% and 92.9%, respectively, for the same periods. NHC opened no new owned or leased long-term care beds in 2000. Approximately 62% (2000), 62% (1999) and 60% (1998) of NHC's net revenues are derived from Medicare, Medicaid, and other government programs. Amounts earned under these 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. For the cost report years 1997 and 1998, NHC has submitted various requests for exceptions to Medicare routine cost limitations for reimbursement. NHC has received preliminary approval on certain of these requests and others are pending approval. NHC will record revenues associated with the approved requests when such approvals, including the final cost report audits, are assured. Pursuant to NHC's settlement of outstanding litigation styled Braeuning, et al vs. National HealthCare L.P., et al as discussed further in Note 13 of the consolidated financial statements, NHC has entered into a note payable to the Federal government. Any 1997 or 1998 routine cost limitation exception amounts ultimately approved by third party intermediaries will be reflected by the Federal government as a direct reduction of the outstanding note payable. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Divestiture of Florida Operations - Prior to October 1, 2000, NHC owned two long-term health care centers and leased a total of ten long-term health care centers and three assisted living centers in Florida. NHC also provided health care management services to an additional ten long-term health care centers in the state. Effective October 1, 2000, NHC leased its two owned long-term health care centers directly to a group of non-NHC affiliated companies. Furthermore, the individual NHR and NHI leases were terminated effective October 1, 2000, and the centers were leased to new tenants unrelated to NHC; however, NHC is still the primary obligor because the properties were originally leased to it pursuant to a master lease. Lease payments received by NHI and NHR from the new lessees offset NHC's lease obligations pursuant to the master operating lease. NHC sold the current assets and current liabilities of its owned and leased Florida facilities to the non-NHC affiliated group of companies in exchange for total notes receivable of approximately $4,480,000. The notes receivable approximate the book value of the net assets transferred. NHC also leased the furniture, fixtures and leasehold improvements of these Florida properties to the same group of companies. Finally, NHC entered into agreements to provide certain working capital loans to the non-NHC affiliated group of companies up to a maximum of $4,000 per bed per center. No draws had been made on the working capital loans as of the date of these financial statements. Beginning October 1, 2000 NHC will not provide any health care related management services for the two owned centers or for the thirteen leased centers. NHC will provide only financial and accounting services for the two owned centers and for the thirteen leased centers in Florida. Management estimates that patient revenues and total expenses were both reduced by approximately $23,000,000 in the fourth quarter of 2000 due to the divestiture of the long-term health care and assisted living centers. Also, other revenues and related expenses were both reduced by approximately $700,000 in the fourth quarter of 2000 because of the discontinuation of health care management services to the ten long-term health care centers. Management believes that the divestiture of its Florida operations will not have a material impact on NHC's earnings in future periods except to reduce the substantial risks of operating in the state of Florida without professional liability insurance. 2000 Compared to 1999 Results for 2000 include a 5.1% increase compared to 1999 in net revenues and a 22.3% increase in net income before income taxes. As shown in the above tables, patient revenues for NHC increased 2.4% in 2000 compared to 1999. The increase in revenues reflect improved PPS rates, improved census mix and improved occupancy rates (increased from 93.5% in 1999 to 94.2% in 2000) at long-term health care centers, assisted living centers and independent living centers. The improved PPS rates were driven by the Balance Budget Reform Act of 1999 that provided, among other benefits, a 20% increase in the fifteen highest acuity Medicare payment classifications and a 4% increase in all Medicare payment classifications. The increase in revenues was offset in part by the October 1, 2000 divestiture of 12 long-term health care and three assisted living centers in Florida, as described above. Net revenues for the Florida centers totaled $67.9 million for the nine months ended September 30, 2000 compared to $81.2 million for the year ended December 31, 1999. Compared to 1999, NHC has decreased the number of owned or leased long-term health care beds by 1,753 beds from 7,976 beds to 6,223 beds. Revenues from management or accounting and financial services, which are included in the consolidated statements of income in other revenues, increased $10.9 million or 52.6% in 2000 from $20.9 million in 1999 to $31.8 million in 2000. The increase is due primarily to the receipt of $15.1 million of previously unaccrued management fee revenue from National Health Corporation partially offset by the loss of management contracts for 14 centers owned by Florida Convalescent Centers, Inc. ("FCC") and the October 1, 2000 discontinuation of management services for ten centers as described above. The FCC management agreements were terminated effective July 31, 1999. Total costs and expenses for 2000 increased $19.1 million or 4.5% to $445.3 million from $426.1 million. Salaries, wages and benefits, the largest operating costs of this service company, increased $16.2 million or 6.7% to $258.5 million from $242.3 million. Other operating expenses decreased $0.8 million or 0.6% to $118.3 million for 2000 compared to $119.1 million in 1999. Rent decreased $0.9 million or 1.8% to $45.9 million from $46.8 million. Depreciation and amortization increased 24.2% to $15.7 million. Interest costs increased 28.5% to $6.9 million. Increases in salaries, wages and benefits are due in part to the one-time forgiveness of approximately $6.7 million of employee notes receivable and the payment of approximately $2.7 million to reimburse the related employees for the tax impact of the loans forgiven. Increases in salaries, wages and benefits are also due to increases in staffing levels due to long- term health care bed additions and assisted living occupancy improvements and expansions. Further contributing to higher costs of labor are inflationary increases for salaries and the associated benefits (increased approximately 5% in 2000). Labor cost increases were offset in part due to the October 1 divestiture of Florida centers described above. The decrease in other operating costs is due to the October 1, 2000 divestiture of Florida centers described above. The decrease was offset in part by increases in operating costs due to the increased number of beds in operation and the higher occupancies in assisted living and independent living services. The decrease in rent is due to the divestiture of Florida centers, offset in part by rent increases for additions at existing rental properties. Depreciation and amortization increased primarily as a result of placing newly purchased assets in service. Interest expense increased due to increased borrowing and increased interest rates on variable rate debt. The weighted average interest rate increased from 7.7% in 1999 to 8.7% in 2000. 1999 Compared to 1998 Excluding a $28.1 million non-recurring charge occurring in 1998, operating results in 1999 include a 0.2% decrease compared to the same period in 1998 in net revenues and a 22.0% decrease in income before taxes. As shown in the above tables, patient revenues for NHC increased 0.5% in 1999 compared to 1998. The increase in patient revenues were partially the result of continued growth of operations. In 1999, NHC increased the number of owned or leased long-term health care beds by 452 beds from 7,524 beds to 7,976 beds. In addition, the number of owned or leased assisted living units has increased by a net of 139 units from 633 units to 772 units. The increased revenues were partially offset by declines resulting from NHC's first year under the federal government's new Prospective Payment System ("PPS"), and decreased levels of service and changes in payment systems for rehabilitative services, homecare services and nursing home operations. Other revenues declined 8.3% in 1999. Revenues from managed centers, which are included in the consolidated statements of income in other revenues, decreased 14.9% in 1999 from $24.5 million in 1998 to $20.9 million in 1999 due primarily to the discontinuation of management services to 14 FCC centers as discussed below. Decreases in salaries, wages and benefits are attributable to decreased staffing levels in therapy and homecare services and reductions in bonus and benefit programs for the year. The reductions were offset in part by the increase in staffing levels due to bed additions and expansions. Also contributing to higher costs of labor are inflationary increases for salaries and the associated benefits. Operating costs have increased in part due to the increased number of beds in operation and the expansion of assisted living services. These increased beds and expansions are expected to provide increased revenues in future periods. Rent increased due primarily to additions to existing rental properties. These operating costs increases were offset in part by supplier rate reductions as a result of renegotiations of supplier contracts for inhalation therapy, pharmacy, x-ray and medical supplies. These cuts were made in response to the lower rates of reimbursement being received under the phase-in of PPS, which began for substantially all of NHC centers on January 1, 1999. Depreciation and amortization increased as a result of the placing of newly constructed or purchased assets in service. Interest expense increased in 1999 compared to 1998 due to capitalization of interest for assets under construction and due to increased rates of interest on debt. Liquidity, Capital Resources and Financial Condition-- Net cash provided by operating activities was $52.2 million for the year ended December 31, 2000, as compared to $33.5 million provided by operating activities for the comparable period in 1999. Cash provided by operating activities for the year ended December 31, 2000 increased from the comparable period in 1999 primarily as a result of the increase in net earnings, decreases in accounts receivable and increases in trade accounts payable, accrued payroll, and amounts due to third party payors. Net cash used in investing activities was $50.9 million for the year ended December 31, 2000, as compared to $32.9 million for the year ended December 31, 1999. Cash used for the purchase of property and equipment was $6.7 million for the year ended December 31, 2000 and $22.0 million in the comparable period in 1999. Cash invested in notes receivable, net of collections of notes receivable, was $37.1 million in 2000 compared to net cash collections of notes receivable in 1999 of $7.4 million. Cash used for the purchase of marketable securities was $7.3 million in 2000 compared to $18.0 million in 1999. Net cash provided by financing activities was $4.6 million for the year ended December 31, 2000 as compared to $9.2 million net cash used in financing activities in 1999. In the 2000 period, the Company received proceeds from debt issuance of $17.1 million compared to $13.8 million in the prior year. Payments on debt were $8.8 million in 2000 compared to $22.7 million in 1999. 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 growth and development plans for 2001 and into 2002. For all financial instruments, NHC believes that the financial statement carrying amounts approximate fair value at December 31, 2000. NHC has guaranteed approximately $32.2 million of the debt of certain health care centers which NHC manages for others. As a result of the health care industry's generally weak financial position, NHC's negative income as reported in 1998, the cancellation of NHC's liability policy in the state of Florida, and the uncertainty engendered by the increasing number of medical liability claims in the state of Florida, NHC has experienced and is experiencing the potential for significant defaults in financial obligations which it has undertaken. A summary of the potential defaults are as follows: CFA Notes: Care Foundation of America, Inc. ("CFA") purchased from NHI six facilities through the issue of a mortgage note. NHC is a limited ($3,000,000) guarantor of the outstanding mortgage note to NHI plus the guarantor on a $2,000,000 working capital note to NHR, all collateralized by the pledge of certain marketable securities in the approximate amount of $5,000,000. NHC does not manage the facilities but does provide financial and accounting services. The failure of these facilities to make their payments on the first mortgage notes could result in the acceleration of that indebtedness and an attempt by the first mortgage holder and/or working capital lender to collect their total of $5,000,000 in guarantees from NHC or the collateral now held by the first mortgage lender. NHI Short Term Liquidity Demand: NHI's $83,000,000 senior secured bank credit facility requires NHI to repay the outstanding balance during 2001 and 2002. NHI also has additional letters of credit of $11,600,000 that mature during 2001. NHI has relied upon NHC to provide $23,200,000 of cash during 2000 through the purchase by NHC from NHI of certain notes receivable. NHI management has reported to the investing public that it believes that NHI will be successful in generating the necessary capital to repay its future debt requirements. However, the failure by NHI to meet its liquidity demands would negatively impact NHC as a result of cross-default provisions contained in a substantial portion of NHI's and NHC's debt agreements. With regard to certain other debt financed through the ESOP and National (total outstanding balance of $30,500,000 at December 31, 2000, of which $11,400,000 is the primary obligation of NHC), the lending institutions have the right to put the entire outstanding balance of the debt to NHI and NHC effective December 16, 2001. Upon exercise of the put option by the lending institutions, NHC would be obligated to purchase 38% of the then outstanding balance and NHI would be obligated to purchase 62% of the then outstanding balance. NHC and NHI are in the process of discussing this December 16, 2001 put option with the lending institutions. Management believes that the lending institutions will agree to not exercise the put option provided that NHC, NHI and National make additional principal repayments on the debt during 2001. However, if the lending institutions exercise the put option, NHC and NHI would be required to purchase the entire outstanding balance of the debt, which would have a material adverse effect on NHC's financial position and cash flows. As a result of the put option, NHC's primary obligation under this debt instrument ($11,400,000) has been classified as a current liability in NHC's consolidated balance sheet as of December 31, 2000. National Short Term Liquidity Demand: National also has certain additional debt obligations financed through the ESOP (total balance of $15,700,000 at December 31, 2000). None of this debt is the primary obligation of NHC. However, this debt is cross-defaulted with NHC's obligations. Under the terms of these debt agreements, the lending institutions have the right to put the entire outstanding balance of the debt to National at any time after January 20, 2001. The lending institutions have committed to not exercise the put option prior to September 30, 2001. However, if the lending institutions do exercise that put option and National is unable to refinance or purchase the entire outstanding balance of the debt, National's debt along with a substantial portion of NHC's debt would be in default, which would have a material adverse effect on NHC's financial position and cash flows. Cash Dividends-- NHC may pay dividends at the discretion of the Board of Directors; however, at present, NHC does not anticipate paying dividends. New Accounting Pronouncements-- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") regarding revenue recognition in financial statements. SAB 101 was effective January 1, 2000 but implementation was delayed until the fourth quarter of 2000. NHC's implementation of SAB 101 in the fourth quarter did not have a material impact on its financial position, results of operations or cash flows on a quarterly or annual basis. From June 1998 through June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and various amendments and interpretations. SFAS 133, as amended, establishes accounting and reporting standards requiring that any derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. NHC will adopt SFAS 133, as amended, effective January 1, 2001. NHC's investments in marketable securities include an investment in NHI debt securities convertible into NHI common stock. SFAS 133 will require that NHC account for the NHI debt securities as two separate instruments: a purchased call option on the issuer's stock and a nonconvertible interest- bearing debt security. Because NHC will not be using the purchased call options as hedging instruments, SFAS 133 will require that NHC report changes in the fair value of the separated call options currently in earnings. In addition, NHC will be required to accrete the resulting discount on the nonconvertible debt security into income over the remaining term of the nonconvertible debt security. Based on the convertible debt security held as of December 31, 2000, upon adoption of SFAS 133, NHC will bifurcate its $2,853,000 investment in a convertible security into a $299,000 investment in purchased call options and a $2,554,000 investment in a nonconvertible interest-bearing security. Any prospective changes in the fair value of the purchased call options could introduce volatility into NHC's results of operations in subsequent periods. Impact of Inflation-- Inflation has remained relatively low during the past three years. In addition, historical reimbursement rates under the Medicare and Medicaid programs generally have reflected the underlying increases in health care costs and expenses resulting from inflation. For these reasons, the impact of inflation on profitability has historically not been significant. However, NHC's health care centers began the three-year phase-in of the new Prospective Payment System under the Medicare program effective during 1999. Although rates paid during the phase-in are based on a blend of historical costs for each center and average historical costs for all U.S. skilled nursing facilities, as adjusted for inflation, the rates to be paid are generally expected to be less than the rates paid under the former retrospective payment system. Therefore, there can be no assurance that future rate increases will be sufficient to offset future inflation increases in NHC's labor and other health care service costs. Health Care Legislation-- During 1997, the federal government enacted the Balanced Budget Act of 1997 ("BBA"), which requires that skilled nursing facilities transition to a Prospective Payment System ("PPS") under the Medicare program commencing with the first cost reporting period beginning on or after July 1, 1998. Although PPS went into effect for a small portion of NHC's long-term health care centers during 1998, PPS was implemented for the vast majority of NHC's centers effective January 1, 1999. PPS has significantly changed the manner in which NHC's centers are paid for inpatient services provided to Medicare beneficiaries. Under PPS, Medicare pays NHC's centers a fixed fee per Medicare patient per day, based on the acuity level of the patient, to cover all post-hospital extended care routine service costs, ancillary costs and capital related costs. PPS is being phased in over a three-year period. During the phase-in, payments are based on a blend of each center's specific historical costs and federally-established per diem rates that are based on an average of all U.S. skilled nursing facilities' historical costs. The United States Congress and the Administration - in recognition of the collapse of a significant portion of America's long-term care industry - proposed and enacted certain amendments to the Balanced Budget Act of 1997, the law which most observers believe is primarily responsible for the industry decline. Among the changes enacted in 1999 is a process whereby providers can identify certain of their facilities to be placed immediately on the federal reimbursement rate rather than a three-year transition rate. For facilities in which it is financially advisable to make this change, the Company is so doing. Additionally, (and effective between April 1 and October 31, 2000) approximately fifteen of the highest acuity Medicare reimbursement payment classifications experienced a 20% increase in payment; additionally, all Medicare payment categories underwent an additional 4% increase. These changes were effective April 1, 2000. Certain relief was also granted to the Company's home health care operations and a $1,500 per patient annual ceiling was lifted for a two-year period on reimbursement for expenditures in connection with the provision of physical, speech, and occupational therapy to the Company's patients. Additional relief was afforded by the enactment of the Medicare Benefit Improvement Protection Act in late 2000, which takes effect April 1, 2001. Although these refinements have been well received by the industry, it is the Company's belief that the revenue increases are insufficient compared to the losses sustained by the industry due to 1997 BBA. Nursing homes and home health agencies have recently been the target of health care reform, from both fraud and reimbursement perspectives. Operation Restore Trust, a demonstration project which has been conducted by the Department of Health and Human Services in five states, is expanding to a dozen more states. "ORT Plus" will continue its focus on fraud in the areas of home health, nursing home and DME suppliers, as well as adding new anti- fraud and abuse targets. The Company will operate nursing homes and home health agencies in five ORT Plus states and could be subject to increased scrutiny. Although NHC's management believes that its home care and nursing home operations are in compliance with applicable laws and regulations, there can be no assurance that the Company and its home care and nursing home operations will not be the subject of an investigation nor that they will be found to be in compliance if investigated. See "Item 3-Legal Proceedings". Litigation-- As discussed in more detail in Note 13 to the financial statements, NHC was a defendant in a lawsuit filed under the Qui Tam provisions of the Federal False Claims Act, commonly referred to as the "Whistleblower Act", with the government participating as an intervening plaintiff. The suit alleged that NHC has submitted cost reports and routine cost limit exception requests containing "fraudulent allocation of routine nursing services to ancillary cost centers" and improper allocation of skilled nursing service hours in four managed centers. The parties have settled the suit by written agreement approved by the Court on December 15, 2000. Pursuant to that Agreement, and based upon the self-audit adjustments as further negotiated by the parties, NHC has agreed to a repayment totaling $17,623,072 payable over five years at 6% interest, with no interest for the initial six months. The government has also agreed to credit all 1997 and 1998 Routine Cost Limit exception cost report settlements owed by it to NHC and/or its managed centers against the settlement amount upon finalization of those cost reports. The settlement amount includes amounts owed by a number of centers managed by NHC, and NHC anticipates that these centers will repay amounts owed by them; however, NHC is liable to the government for those amounts in the amount they are not paid by the managed centers. As the repayment has previously been reserved, the Company does not anticipate any material accounting adjustments as a result of the settlement. NHC settled, during 1998, a lawsuit filed by Florida Convalescent Centers, Inc. ("FCC"), an independent Florida corporation for whom NHC managed 16 licensed nursing centers in Florida. Under the terms of the settlement, NHC purchased two of the 16 FCC long-term health care centers. Additionally, NHC paid a one-time cash settlement of $15.0 million and agreed to pay for any adjustments to previously filed Medicare cost reports and routine cost limit exceptions related to all 16 centers and indemnify FCC for any noninsurance covered liability claims. Finally, FCC had the right to cancel the management contracts for the remaining 14 centers. The management contracts were canceled on July 31, 1999. The loss of the management contract and related revenues from these 14 facilities had a material negative impact on NHC's 1999 revenues, even after taking into consideration the purchase of two of the 16 long-term health care centers. The entire long-term care industry has seen a dramatic increase in personal injury/wrongful death claims based on alleged negligence by nursing homes and their employees in providing care to residents. This is especially prevalent in Florida. As of December 31, 2000, the Company and/or its managed centers are defendants in 81 such lawsuits in Florida, compared to 36 in all other states combined. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company's cash and cash equivalents consist of highly liquid investments with a maturity of less than three months. As a result of the short-term nature of the Company's cash instruments, a hypothetical 10% change in interest rates would have no impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates would also have an immaterial impact on the fair values of these instruments. Approximately $32.5 million of the Company's notes receivable bear interest at fixed interest rates. As the interest rates on these notes receivable are fixed, a hypothetical 10% change in interest rates would have no impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates would also have an immaterial impact on the fair values of these instruments. Approximately $20.8 million of the Company's notes receivable bear interest at variable rates (generally at prime plus 2%). Because the interest rates of these instruments are variable, a hypothetical 10% change in interest rates would result in a related increase or decrease in interest income of approximately $211,000. However, a hypothetical 10% change in interest rates would have an immaterial impact on the fair values of these instruments. As of December 31, 2000, $44.3 million of the Company's long-term debt and debt serviced by other parties bear interest at fixed interest rates. Because the interest rates of these instruments are fixed, a hypothetical 10% change in interest rates would have no impact on the Company's future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates would have an immaterial impact on the fair values of these instruments. The remaining $35.9 million of the Company's long-term debt and debt serviced by other parties bear interest at variable rates. Because the interest rates of these instruments are variable, a hypothetical 10% change in interest rates would result in a related increase or decrease in interest expense of approximately $260,000. However, a hypothetical 10% change in interest rates would have an immaterial impact on the fair values of these instruments. The Company does not currently use any derivative instruments to hedge its interest rate exposure. The Company has not used derivative instruments for trading purposes and the use of such instruments in the future would be subject to strict approvals by the Company's senior officers. Therefore, the Company's exposure related to such derivative instruments is not material to the Company's financial position, results of operations or cash flows. EQUITY PRICE RISK The Company considers the majority of its investments in marketable securities as available for sale securities and unrealized gains and losses are recorded in stockholders' equity in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The investments in marketable securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. Hypothetically, a 10% change in quoted market prices would result in a related 10% change in the fair value of the Company's investments in marketable securities. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following table sets forth selected quarterly financial data for the two most recent fiscal years. <TABLE> Selected Quarterly Financial Data (unaudited, in thousands, except per share amounts) <CAPTION> 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter 2000 <S> <C> <C> <C> <C> Net Revenues $115,401 $116,208 $130,149 $100,657 Net Income 2,379 2,481 2,513 2,845 Basic Earnings Per Share .210 .210 .220 .250 Diluted Earnings Per Share .210 .210 .220 .250 1999 Net Revenues $107,929 $107,722 $105,677 $118,817 Net Income 2,237 2,250 1,846 2,050 Basic Earnings Per Share .200 .200 .160 .180 Diluted Earnings Per Share .200 .200 .160 .180 </TABLE> 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 Directors and Executive Officers: The Company is managed by its Board of Directors. The Board of Directors is divided into three classes. The Directors hold office until the annual meeting for the year in which their term expires and until their successor is elected and qualified. As each of their terms expire, the successor shall be elected to a three-year term. A director may be removed from office for cause only. Officers serve at the pleasure of the Board of Directors for a term of one year. The following table sets forth the directors and the executive officers and vice presidents of the Company: <TABLE> <CAPTION> Director of Position Managing Officer of with the General Managing Company Partner or Current General or Managing Company's Term as Partner or General Predecessor Director Predecessor Name Age Partner Since Expires Since <S> <C> <C> <C> <C> <C> W. Andrew Adams 55 Chairman of the Board/ 1994(CEO) 2002 1973 President 1974(Pres.) J. K. Twilla 74 Director 1972 2001 --- Olin O. Williams 70 Director 1971 2003 --- Ernest G. Burgess, III 60 Director 1992 2002 --- Robert G. Adams 54 S. Vice President/ Director 1993 2003 1985 Lawrence C. Tucker 58 Director 1998 2001 --- Richard F. LaRoche, Jr. 55 Sr. Vice President/ Secretary and General Counsel -- -- 1974 Charlotte Swafford 52 Treasurer -- -- 1985 Donald K. Daniel 54 Vice President/ Controller -- -- 1977 Julia W. Powell 51 Vice President/ Patient Services -- -- 1985 Joanne G. Batey 56 Vice President/ HomeCare -- -- 1989 D. Gerald Coggin 49 Vice President/ Government and Rehabilitative -- -- 1994 David L. Lassiter 46 Vice President/ Corporate Affairs -- -- 1995 Kenneth D. DenBesten 48 Vice President/ Finance -- -- 1992 </TABLE> Drs. Twilla and Williams were physicians in private practice in Tennessee for more than 35 years each and are now retired. Dr. Williams serves as Chairman of the Board of the Bank of Murfreesboro, Murfreesboro, Tennessee and both are Directors of National Health Realty, Inc. Mr. W. Andrew Adams has been President since 1974 and Chairman of the Board since 1994. He served as president of the National Council of Health Centers, the trade association for multi-facility long-term health care companies. He has an M.B.A. degree from Middle Tennessee State University. Mr. Adams serves on the Board of Directors of Lipscomb University, Nashville, Tennessee, is President and Chairman of the Board of Directors of National Health Investors, Inc., and National Health Realty, Inc. and serves on the Board of SunTrust Bank in Nashville, Tennessee and Boy Scouts of America. Mr. Robert Adams (Senior Vice President, Chief Operating Officer and Director) has served both as an Administrator and a Regional Vice President 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. He is on the Board of Directors of National Health Realty, Inc. Mr. Robert Adams and Mr. W. Andrew Adams are brothers. Mr. Burgess (Director) is a retired Senior Vice President of NHC. He has an M.S. degree from the University of Tennessee. He is on the Board of Directors of National Health Realty, Inc. Mr. Tucker (Director) has been with Brown Brothers Harriman & Co. ("BBH&Co."), private bankers, for 34 years and became a General Partner of the firm in January 1979. He serves on the firm's steering committee as well as being responsible for the corporate finance activities, which include management of the 1818 Funds, private equity investing partnerships with originally committed capital exceeding $1.5 billion. He is a director of Riverwood International Corporation, VAALCO Energy Inc., World Access, Inc., National Equipment Services, US Unwired, Inc., Network Telephone, Inc., Z-Tel Technologies and WorldCom Ventures and is an Advisory Director of WorldCom, Inc. Mr. Tucker has a B.S. degree from Georgia Institute of Technology and an MBA from the Wharton School of the University of Pennsylvania. 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 legal affairs, acquisitions and finance. Mr. LaRoche also serves as a director, Vice President and Secretary of National Health Investors, Inc. and as Vice President and Secretary of National Health Realty, Inc. 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. 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. 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. 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. 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. The above officers serve in identical capacities for the Company and its administrative services contractor, National Health Corporation. Outside directors receive $2,500 per meeting attended. In addition, outside directors receive a stock option to purchase 10,000 shares of NHC common stock at a purchase price equal to the closing price of the Corporation Shares at the closing price on the date of the Corporation's annual meeting. There were five Board meetings during 2000.
ITEM 11 EXECUTIVE COMPENSATION Introduction: The Board of Directors have elected to continue the Company's prior compensation and bonus plans. Their 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 15% return on shareholder's equity. With these goals in mind, the Company's executive compensation program is based on employee performance rewarded as follows: (1) the achievement of a return on investment for shareholders; (2) returns generated from stock 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 2000. 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, 2000 to the three executive officers of the Company. Option Plans: The Company's Board of Directors and the then sole shareholder of the Company have adopted the 1997 Stock Option and Stock Appreciation Rights Plan (the "1997 Stock Option Plan"), under which options to purchase shares of the Company's common stock are available for grant to consultants, advisors, directors and employees of the Company, providing an equity interest in the Company and additional compensation based on appreciation of the value of such stock. The 1997 Stock Option Plan allows for options to purchase in the aggregate up to 1,000,000 shares of NHC common stock to be granted by the Board of Directors. The Board of Directors may, in its discretion grant incentive stock options ("ISO's"), non-qualified stock options or stock appreciation rights ("SAR's"). In addition, the 1997 Stock Option Plan provides that the non-employee directors will receive a non-qualified stock option to purchase 10,000 shares of common stock at a purchase price equal to the closing price of the Shares on the initial date of trading and will be automatically granted an option to purchase 10,000 shares of common stock annually on the date of the Company's annual meeting with an exercise price equal to the closing price on the date of such annual meeting. Pursuant to the automatic grant provisions of the Plan, the four non- employee (or outside) directors have each received options to purchase shares at $30.75 in 1997, $39.88 in 1998, $9.375 in 1999 and $4.75 in 2000. The outside directors have exercised none of the 1997, 1998, 1999 or 2000 grants. Each grant expires five years from the date of the grant, if not otherwise exercised. The 1997 Stock Option Plan provides that the exercise price of an ISO option must not be less than the fair market value of the common stock on the trading day next preceding the date of the grant. Payment for shares of common stock to be issued upon exercise of an option may be made either in cash, Company common stock or any combination thereof, at the discretion of the option holder. Options are nontransferable, other than by will, the laws of descent and distribution; assignable to family partnerships, trusts or immediate family members; or pursuant to certain domestic relations orders. Common stock subject to options granted under the 1997 Stock Option Plan that expire, terminate or are canceled without having been exercised in full become available again for option grants. The 1997 Stock Option Plan is administered by the Board of Directors, or, at the discretion of the Board of Directors, a committee of directors. Subject to certain limitations, the Board and its committee have the authority to determine the recipients, as well as the exercise prices, exercise periods, length and other terms of stock options granted pursuant to the 1997 Stock Option Plan and Company repurchase options upon termination of a recipients employment. In making such determinations, the Board may take into account the nature of the services rendered or to be rendered by option recipients, and their past, present or potential contributions to the Company. The number of shares of common stock that may be granted under the 1997 Stock Option Plan or under any outstanding options granted thereunder will be proportionately adjusted, to the nearest whole share, in the event of any stock dividend, stock split, share combination or similar recapitalization involving the common stock or any spin-off, spin-out or other significant distribution of the Company's assets to its stockholders for which the Company receives no consideration. Generally, in the event an option holder is terminated as an employee by reason of disability or death, the holder or his or her representative may exercise the option for a period of 12 months following such termination unless the Board of Directors elects, in its sole discretion, to extend the exercise period. If the employment of an option holder is terminated for "cause," as defined in the 1997 Stock Option Plan, the unexercised options expire. In the event the option holder is terminated as an employee for any reason other than disability, death or cause, the holder may not exercise his or her option unless authorized by agreement of the Company. In the event of a dissolution or liquidation of the Company or a merger or consolidation or acquisition in which the Company is not the surviving corporation, each outstanding option will become fully exercisable and each holder will have the right, within 60 days prior to such dissolution, liquidation, merger, consolidation or acquisition, to exercise his or her options, in whole or in part. Either non-qualified or incentive stock options may be granted under the 1997 Stock Option Plan. No federal income tax consequences occur to either the Company or the optionee upon the Company's grant or issuance of a non- qualified stock option. Upon an optionee's exercise of a non-qualified stock option, the optionee will recognize ordinary income in an amount equal to the difference between the fair market value of the common stock purchased pursuant to the exercise of the option and the exercise price of the option. However, if the common stock purchased upon exercise of the option is not transferable or is subject to a substantial risk of forfeiture, then the optionee will not recognize income until the stock becomes transferable or is no longer subject to such a risk of forfeiture (unless the optionee makes an election under Internal Revenue Code Section 83(b) to recognize the income in the year of exercise, which election must be made within 30 days of the option exercise). The Company will be entitled to a deduction in an amount equal to the ordinary income recognized by the optionee in the year in which such income is recognized by the optionee. Upon a subsequent disposition of the shares of common stock, the optionee will recognize a capital gain to the extent the sales proceeds exceed the optionee's cost of the shares plus the previously recognized ordinary income. Incentive stock options granted under the 1997 Stock Option Plan are intended to qualify for a favorable tax treatment under Internal Revenue Code Section 422. No individual may be granted incentive stock options under the Corporation Stock Option Plan exercisable for the first time during any calendar year and having an aggregate fair market value in excess of $100,000. If the recipient of an incentive stock option disposes of the underlying shares before the end of certain holding periods (essentially the later of one year after the exercise date or two years after the grant date), he or she will generally recognize ordinary income in the year of disposition in an amount equal to the difference between his or her purchase price and the fair market value of the Corporation common stock on the exercise date. If a disposition does not occur until after the expiration of the holding periods, the recipient will generally recognize a capital gain equal to the excess of the disposition price over the price paid by the recipient on the exercise date. The Company generally will not be entitled to a tax deduction for compensation expense on account of the original sales to employees, but may be entitled to deduction if a participant disposes of stock received upon exercise of an incentive stock option under the 1997 Stock Option Plan prior to the expiration of the holding periods. The Company has also established several non-qualified deferred compensation plans for its key employees similar to the plans offered by NHC, one of which provides a matching contribution (15%) for all deferred compensation used to purchase shares of common stock held by an independent trustee. The matching contribution is forfeited to the Company unless the employee achieves eight years of vesting service before withdrawing funds from the Trustee account. The Company grants credit to employees for years of service with the prior partnership. Table II shows as to the three executive officers: (i) the number of shares as to which options have been granted from January 1, 1998 through December 31, 2000 under the 1994 Option Plan; (ii) the percentage of all shares granted represented by these individuals (iii) the option exercise price per share and the expiration date; and (iv) the potential realizable value of these options assuming both a five percent and ten percent share price appreciation over the next four years. Table III identifies for the same three person group all options exercised during 2000, the value realized upon exercise, and the unrealized value of the balance of options outstanding. 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 shares interest held by an independent trustee. The matching contribution is forfeited to the company unless the employee achieves eight years of vesting service before withdrawing funds from the Trustee account. 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.
<TABLE> TABLE I NATIONAL HEALTHCARE CORPORATION SUMMARY COMPENSATION TABLE 1998-2000 <CAPTION> Long Term Compensation ------------------------------------------- Awards Payouts --------------------------- ------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other annual Restricted All Other Compensation Stock Awards Options/SARs LTIP Payouts Compensation Name and Principal Position Year Salary($) Bonus($)(4) ($)(2) ($) (#)(3) ($) ($) <S> <C> <C> <C> <C> <C> <C> <C> <C> W. Andrew Adams 2000 24,954 (5) 2,584 -0- 55,000 -0- -0- President & CEO 1999 113,313 500,000 2,932 -0- -0- -0- -0- 1998 109,478 155,225 4,714 -0- -0- -0- -0- Robert G. Adams 2000 141,111 (5) 5,554 -0- 40,000 -0- -0- Senior VP & COO 1999 140,940 426,534 6,607 -0- -0- -0- -0- 1998 140,779 102,000 9,889 -0- -0- -0- -0- Richard F. LaRoche, Jr. 2000 127,248 (5) 3,442 -0- 40,000 -0- -0- Sr. VP & Secretary 1999 127,802 426,851 2,782 -0- -0- -0- -0- 1998 126,588 102,975 18,034 -0- -0- -0- -0- </TABLE> 1 Compensation deferred at the election of an executive has been included in salary columns (c) and (d). 2 Includes (a) life insurance benefit, (b) 401-K matching contribution, (c) nonqualified deferred compensation matching contribution, (d) ESOP contribution. 3 These officers also received stock options from National Health Investors, Inc. in 1995 , 1997, and 1999 which are disclosed in that Company's Form 10-K. No other Restricted Stock Awards, Options/SARs, or LTIP Payouts were given in 1997, 1998, or 1999. 4 These officers also received bonuses from National Health Investors, Inc. and National Health Realty, Inc. which are disclosed in those Company's Form 10-K or proxy statements. 5 No bonus has been declared or paid for 2000. <TABLE> TABLE II NATIONAL HEALTHCARE CORPORATION OPTION/SAR GRANTS IN LAST FISCAL YEAR December 31, 2000 <CAPTION> Potential Realizable Value at Assumed Annual Rates of Share Price Appreciation for Option Term (1) - -------------------------------------------------------------------------------------------- ------------------------------------ (a) (b) (c) (d) (e) (f) (g) % of Total Options/SARs Granted to Options/SARs Employees in Fiscal Exercise or Base Expiration Executive Officers Granted Year Price($/Sh) Date 5% 10% - ------------------ ------------- ------------------- ----------------- ---------- --- ---- <S> <C> <C> <C> <C> <C> <C> W. Andrew Adams, President & CEO 55,000 11.6% $3.00 10/25/06 $45,650 $100,650 Robert G. Adams, Sr. VP 40,000 8.5% $3.00 10/25/06 $33,200 $ 73,200 Richard F. LaRoche, Jr. Sr. VP 40,000 8.5% $3.00 10/25/06 $33,200 $ 73,200 </TABLE> (1) Based on remaining option term (if any) and annual compounding.
<TABLE> TABLE III NATIONAL HEALTHCARE CORPORATION AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES December 31, 2000 <CAPTION> Value of Unexercised Number of Unexercised In-the-Money Ooptions/ Options/SARs at FY-End(#) SARs at FY-End ------------------------- ---------------------- Shares acquired Value Exercisable/ Exercisable/ Executive Officers on Exercise(#) Realized($)(1) Unexercisable Unexercisable <S> <C> <C> <C> <C> W. Andrew Adams President & CEO -0- -0- 55,000 $257,950 Robert G. Adams Sr. VP -0- -0- 40,000 $187,600 Richard F. LaRoche, Jr. Sr. VP -0- -0- 40,000 $187,600 </TABLE> 1Market value of underlying securities at exercise date, minus the exercise or base price.
Employee Stock Ownership Plan: In 1986 National Health Corporation ("National"), the former partnership's 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. National 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 National. These securities are allocated among National's employees 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, National 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 from National. National, in turn, purchased eight (8) health care centers from the Company and contracted with the Company to manage these centers for a 20-year period. National also loaned $8.5 million to City Center, Ltd. to construct a 15-story office building in Murfreesboro, Tennessee, approximately 67% of which is occupied by the Company. In late 1988, National entered into a Loan Agreement with the Company and advanced $50,000,000 to the Company to be used by the Company 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, 1988, 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 National, 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 National's Board of Directors. 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 2000 and allocated to the Company's executive officers are included in Table I, and total less than $10,000 in the aggregate. Employee Stock Purchase Plan: The Company has established its Employee Stock Purchase Plan for employees. Pursuant to the Plan, eligible employees may purchase Company common stock through payroll deductions at the lesser of the closing asked price of the common stock 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 shares at the above price. The Company makes no contribution to the purchase price. 75,589 shares were issued pursuant to the Plan in January, 2001, with all payroll deductions being made in 2000. 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, common stock having a fair market value more than $25,000. The stock 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. None of the Company's executive officers participated in this Plan during 2000 but if there had been a positive spread between the purchase price and the then fair market price for purchases by any of them, it would have been included in Table I. 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% of wages to the Plan, and employees who earn more than $66,000 were limited to a contribution of no more than $3,500. These matching funds will be used to purchase Company stock on the open market, which shares will vest in the employees account only after the employee has achieved five years of vesting service. A total of $915,000 was contributed to the Plan as matching contributions for 2000. Employee Loan and Bonus Programs: The Company has for many years participated in an Employee Stock Financing Plan (the "Financing Plan"). The Plan was designed to enable key employees of the Company to finance the exercise of stock options granted to them by the Board of Directors and only if authorized by the Board. Under the Plan, the Company may (but is not required)finance the exercise of any stock options by the acceptance of the employees' full recourse promissory note bearing interest at a fixed rate equal to 2.5% below New York prime on the date of the note, with interest payable quarterly and principal due and payable on ninety days notice, but no longer than 60 months. The notes are secured by company common stock having a fair market value equal to twice the note amount. The following tables show, as to each executive officer whose indebtedness exceeded $60,000, the largest aggregate amount of such indebtedness since December 31, 1997 and the present outstanding balance. <TABLE> <CAPTION> Financing Plan Largest Balance out- Aggregate standing as of Indebtedness 12/31/00 <S> <C> <C> <C> W. Andrew Adams Pres. & CEO $ 4,101,131 $ 693,120 Robert G. Adams Sr. VP & Dir. 2,426,309 495,350 Richard F. LaRoche, Jr. Sr. VP & Sec. 2,418,076 469,600 Ernest G. Burgess Director 1,309,368 660,555 J. K. Twilla Director 169,750 --- Lawrence C. Tucker Director --- --- Olin O. Williams Director 679,462 227,525 All Executive Officers & Directors as a Group (7) $11,104,096 $2,546,150 </TABLE> Obligations to repay the Financing Plan loans are an asset of the Company, but are not reflected as increasing shareholder equity until paid. The plan provides that the Company can finance the exercise of any Options by the acceptance of the Optionholder's 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 Shares having a fair market value of 200% of the amount of the principal of the note as established on the date of the loan. Additionally, the notes required the pledge of additional shares or for reduction in the principal of the note at any time that the value of the collateral drops below 150% of the base amount of the outstanding balance of the note. Pursuant to the above-described share option financing plan, a number of NHC employees utilized the plan to exercise options on January 14, 1997. At that time, the market value of the NHC securities was $41.00 and the purchase price was $31.00 per share. Pursuant to the plan, the Company financed the exercise by accepting a promissory note at the $31.00 purchase price, which was due and payable on October 13, 2001. Eleven months after the issuance of this note, NHC issued to all shareholders, in a tax free exchange, one share of the common stock of National Health Realty, Inc. for each share of stock that the employee had in NHC. Since that time, the combined value of the NHC and NHR shares had decreased to approximately $13.00, although Key Employees were paying interest to the Company on their $31.00 promissory note. Additionally, pursuant to the terms of the note, the collateral margin value was required to be maintained. The Board of Directors believed that the situation, as it had developed, was contrary to the intent to the Company in issuing the original stock options, and offered to the employees the right to surrender the shares of stock in NHC and NHR, which they had obtained when they exercised their stock option, in return for which the Company would cancel the $31.00 per share promissory note. This, however, produced adverse tax consequences to the employees since the forgiveness of the $31.00 note measured against the then fair market value of the two stocks is taxable as ordinary income. Because of the immediate negative financial implication to employees with this action, the Company offered to finance the employee's tax liability resulting from this transaction. The Company's three executive officers' three promissory notes are as follows: W. Andrew Adams, $291,200; Robert G. Adams, $218,400; and Richard F. LaRoche, Jr., $218,400. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as to the number of shares of the Company beneficially owned as of December 31, 2000 (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 shares (11,245,735 as of December 31, 2000), (b) by each director, and (c) by all executive officers and directors of the Company as a group. Members of management of the Company listed below are all members of management and/or the Board of Directors, but they disclaim that they are acting as a "group" and the table below is not reflective of them acting as a group: <TABLE> <CAPTION> Names and Addresses Number of Shares(1) Percentage of of Beneficial Owner Beneficially Owned Total Shares <S> <C> <C> W. Andrew Adams, President & Chief Executive Officer 1,082,064 9.60% 801 Mooreland Lane Murfreesboro, TN 37128 Dr. J. K. Twilla, Director 98,392(3) 0.87% 525 Golf Club Lane Smithville, TN 37166 Dr. Olin O. Williams, Director 165,842(3) 1.50% 2007 Riverview Drive Murfreesboro, TN 37129 Robert G. Adams, Director, Sr. V.P. 451,532 4.00% and Chief Operating Officer 2217 Battleground Murfreesboro, TN 37129 Ernest G. Burgess, Director 204,320(3) 1.80% 2239 Shannon Drive Murfreesboro, TN 37129 Richard F. LaRoche, Jr., Sr. V.P. 403,340 3.60% 2103 Shannon Drive Murfreesboro, TN 37130 National Health Corporation 1,271,147 11.30% P.O. Box 1398 Murfreesboro, TN 37133 Lawrence C. Tucker, Director 720,155(2)(3) 6.40% 1818 Fund, II 59 Wall Street New York NY 10005 FMR Corp. 883,400 7.8% 82 Devonshire Street Boston, MA 02109 Gintel Asset Management, Inc. 1,172,977 10.4% 6 Greenwich Office Park Greenwich, CT 06831 All Executive Officers, Directors 3,125,645 27.80% as a Group </TABLE> (1) Assumes exercise of stock options outstanding. See "Option Plans". (2) Mr. Tucker, as a general partner of the 1818 Fund II, is attributed the ownership of the 1818 Fund II shares, but does not claim beneficial ownership thereof. Otherwise, all shares are owned beneficially with sole voting and investment power. (3) Included in the amounts above are 35,000 shares to Mr. Burgess, 30,000 shares to Mr. Tucker, 35,000 shares to Dr. Twilla, and 35,000 shares to Dr. Williams, of which all may be acquired upon exercise of stock options granted under the Company's 1994 Stock Option Plan and 1997 Stock Option Plan. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Transactions National Health Corporation ("National") In January, 1988, NHC sold the assets of eight health care centers (1,121 licensed beds) to National for a total consideration of $40,000,000. The consideration consisted of $30,000,000 in cash and a $10,000,000 note receivable due December 31, 2007. The note receivable earns interest at 8.5% per annum. NHC manages the centers under a 20-year management contract for management fees comparable to those in the industry. NHC has no receivables from National for management fees at December 31, 2000, but is owed $1,968,000 from National for physical plant improvement loans. These notes are unsecured, mature in 2008 and require monthly principal and interest payments, with interest at the prime rate. In January, 1988, NHC obtained long-term financing of $8.5 million from National for its new headquarters building. The note requires quarterly principal and interest payments with interest at 9%. At December 31, 2000, the outstanding balance was approximately $3.6 million. The building is owned by a separate partnership of which NHC is the general partner and the other building tenants are limited partners. NHC owns 69.7% of the partnership. NHC has guaranteed the debt service of the building partnership. In addition, NHC's bank credit facility and the senior secured notes were financed through National and National's ESOP. NHC's interest costs, financing expenses and principal payments are equal to those incurred by National. In October 1991, NHC borrowed $10.0 million from National. This term note requires quarterly interest payments at 8.5% with the entire principal due at maturity in 2008. Contemporaneous with the December 31, 1997 merger of National HealthCare L.P. into NHC, the Company and National have entered into an Employee Services Agreement (the "Services Agreement") whereby NHC leases all of its employees from National. Pursuant to the Service Agreement, NHC will reimburse National for the gross payroll of employees provided to the Company plus a monthly fee equal to two percent of such month's gross payroll, but in no event shall such fee be less than the actual cost of administering the payroll and personnel department. The Services Agreement may be terminated by either party at anytime with or without notice. National is responsible for: the employment of all persons necessary to conduct the business of the Corporation and set all wages and salaries; the provision of all fringe benefits; the utilization of any qualified leveraged employee stock ownership plan; the payment of pensions, and establishment or continue and carry out pension, profit sharing, bonus, purchase, option, savings, thrift and other incentive and employee benefit plans; the purchase and payment of insurance; the indemnification and purchase of insurance on behalf of any fiduciary of any employee benefit plans and health insurance on behalf of any fiduciary of such plans. In the Services Agreement, the Company agrees to indemnify, defend and hold harmless National from any damages caused by a misrepresentation by the Company, litigation arising from the acts or failure to act of the Company or its agents in accordance with law or the Services Agreement, any employment matters relating to the employees as a result of gross negligence or intentional misconduct by the Company or the failure of the Company to obtain and/or follow specific advice and direction from National in matters of employee separation and/or discipline. In addition, National agrees to indemnify and defend and hold harmless the Company from any damages caused by reason of or resulting from or relating to employee separation and/or discipline of National employees. NHI Short Term Liquidity Demand: NHI's $83,000,000 senior secured bank credit facility requires NHI to repay the outstanding balance during 2001 and 2002. NHI also has additional letters of credit of $11,600,000 that mature during 2001. NHI has relied upon NHC to provide $23,200,000 of cash during 2000 through the purchase by NHC from NHI of certain notes receivable. NHI management has reported to the investing public that it believes that NHI will be successful in generating the necessary capital to repay its future debt requirements. However, the failure by NHI to meet its liquidity demands would negatively impact NHC as a result of cross-default provisions contained in a substantial portion of NHI's and NHC's debt agreements. With regard to certain other debt financed through the ESOP (total outstanding balance of $30,500,000 at December 31, 2000, of which $11,400,000 is the primary obligation of NHC), the lending institutions have the right to put the entire outstanding balance of the debt to NHI and NHC effective December 16, 2001. Upon exercise of the put option by the lending institutions, NHC would be obligated to purchase 38% of the then outstanding balance and NHI would be obligated to purchase 62% of the then outstanding balance. NHC and NHI are in the process of discussing this December 16, 2001 put option with the lending institutions. Management believes that the lending institutions will agree to not exercise the put option provided that NHC, NHI and National make additional principal repayments on the debt during 2001. However, if the lending institutions exercise the put option, NHC and NHI would be required to purchase the entire outstanding balance of the debt, which would have a material adverse effect on NHC's financial position and cash flows. As a result of the put option, NHC's primary obligation under this debt instrument ($11,400,000) has been classified as a current liability in NHC's consolidated balance sheet as of December 31, 2000. National also has certain additional debt obligations financed through the ESOP (total balance of $15,700,000 at December 31, 2000). None of this debt is the primary obligation of NHC. However, this debt is cross-defaulted with NHC's obligations. Under the terms of these debt agreements, the lending institutions have the right to put the entire outstanding balance of the debt to National at any time after January 20, 2001. The lending institutions have committed to not exercise the put option prior to September 30, 2001. The lending institutions have not exercised their put option. However, if the lending institutions do exercise that put option and National is unable to purchase the entire outstanding balance of the debt, National's debt along with a substantial portion of NHC's debt would be in default, which would have a material adverse effect on NHC's financial position and cash flows. 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. PART IV ------- ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE, 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 56 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): 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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To National HealthCare Corporation: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of National HealthCare Corporation included in Item 14 of this Form 10-K, and have issued our report thereon dated February 19, 2001. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedule included in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not otherwise a required part of the basic consolidated financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated 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 consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Nashville, Tennessee February 19, 2001
<TABLE> NATIONAL HEALTHCARE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (in thousands) <CAPTION> 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 <S> <C> <C> <C> <C> <C> For the year ended December 31, 1998 - Allowance for doubtful accounts $ 5,478 $4,619 $ --- $2,137 $ 7,960 For the year ended December 31, 1999 - Allowance for doubtful accounts $ 7,960 $5,540 $ --- $3,222 $10,278 For the year ended December 31, 2000 - Allowance for doubtful accounts $10,278 $ 977 $ --- $2,059 $ 9,196 </TABLE> __________ (1) Amounts written off, net of recoveries.
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 CORPORATION BY:/s/ Richard F. LaRoche, Jr. Richard F. LaRoche, Jr. Secretary Date: March 19, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 19, 2001, 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 Officer /s/ Robert G. Adams /s/ J. K. Twilla Robert G. Adams, Senior Vice J. K. Twilla, M.D., Director President, Director /s/ Ernest G. Burgess /s/ Donald K. Daniel Ernest G. Burgess, Director Donald K. Daniel, Vice President and Principal Accounting Officer /s/ Lawrence C. Tucker Lawrence C. Tucker, Director
NATIONAL HEALTHCARE CORPORATION AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 2000 EXHIBIT INDEX Exhibit No. Description Page No. or Location 3.1 Charter Specifically incorporated by reference to Exhibit A attached to Form S-4, (Proxy Statement-Prospectus), amended, Registration No. 333-37185, (December 5, 1997) 3.2 By-laws Specifically incorporated by reference to Exhibit A attached to Form S-4, (Proxy Statement-Prospectus), amended, Registration No. 333-37185, (December 5, 1997) 4.1 Form of Common Stock Specifically incorporated by reference to Exhibit A attached to Form S-4, (Proxy Statement-Prospectus), amended, Registration No. 333-37185, (December 5, 1997) 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. 333-37185 (December 5, 1997) 10.11 Employee Stock Purchase Plan Specifically incorporated by reference to Exhibit A attached to Form S-4, )Proxy Statement-Prospectus), amended, Registration No. 333-37185, (December 5, 1997) 10.12 1997 Stock Option Plan Incorporated by reference from 1997 Proxy Statement/ Prospectus filed on December 5, 1997 12 Statements Re: Computation of Ratios Page 58 13 Report of Independent Public Accountants Exhibit 13 beginning on page 59 Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Shareowners' Equity Notes to Consolidated Financial Statements 22 Subsidiaries of Registrant Specifically incorporated by reference to Exhibit A attached to Form S-4, (Proxy Statement-Prospectus), amended, Registration No. 333-37185, (December 5, 1997) 23 Consent of Independent Page 91 Public Accountants
<TABLE> EXHIBIT 12 STATEMENT RE: COMPUTATION OF RATIOS AS REQUIRED BY ITEM 601(b)(12) OF REGULATION S-K NATIONAL HEALTHCARE CORPORATION <CAPTION> December 31 2000 1999 1998 1997 1996 <S> <C> <C> <C> <C> <C> Current Assets $116,575 $107,496 $119,811 $125,293 $ 80,094 Current Liabilities $103,621 $ 92,659 $ 92,784 $ 80,795 $ 72,803 Current Ratio 1.13 1.16 1.29 1.55 1.10 Long-Term Debt and Debt Serviced by Other Parties $ 57,763 $ 60,647 $ 72,202 $ 76,903 $157,535 Equity $ 69,534 $ 53,636 $ 50,315 $ 37,736 $128,537 Long-Term Debt and Debt Serviced by Other Parties to Equity .83 1.13 1.43 2.04 1.23 Net Income (Loss) $ 10,218 $ 8,383 $ (6,399) $ 37,008 $ 29,286 Average Equity $ 61,585 $ 51,976 $ 44,026 $159,457 $118,718 Return on Average Equity 16.6% 16.1% (14.6)% 23.2% 24.7% Total Liabilities $173,257 $165,540 $177,575 $183,627 $260,037 Partners' Capital/ Shareowners' Equity and Deferred Income $ 99,790 $ 74,779 $ 72,113 $ 55,434 $144,703 Total Liabilities to Partners' Capital/Share- owners' Equity and and Deferred Income 1.73 2.21 2.46 3.31 1.8 </TABLE>
EXHIBIT 13 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants 60 Consolidated Statements of Income 61 Consolidated Balance Sheets 62-63 Consolidated Statements of Cash Flows 64-65 Consolidated Statements of Shareowners' Equity 66 Notes to Consolidated Financial Statements 67-90
To National HealthCare Corporation: We have audited the accompanying consolidated balance sheets of National HealthCare Corporation (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareowners' equity, and cash flows for the years ended December 31, 2000, 1999 and 1998. These financial statements are the responsibility of National HealthCare Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National HealthCare Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000, 1999 and 1998 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Nashville, Tennessee February 19, 2001
<TABLE> NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Income (in thousands, except share amounts) <CAPTION> Year Ended December 31 2000 1999 1998 <S> <C> <C> <C> Revenues: Net patient revenues $415,880 $406,261 $404,259 Other revenues 46,535 33,884 36,955 Net revenues 462,415 440,145 441,214 Costs and Expenses: Salaries, wages and benefits 258,453 242,266 243,348 Other operating 118,326 119,090 117,627 Litigation settlement and other charges --- --- 28,084 Rent45,893 46,757 46,052 Depreciation and amortization 15,703 12,644 11,786 Interest 6,880 5,353 4,401 Total costs and expenses 445,255 426,110 451,298 Income (Loss) Before Income Taxes 17,160 14,035 (10,084) Income Tax Provision (Benefit) 6,942 5,652 (3,685) Net Income (Loss) $ 10,218 $ 8,383 $ (6,399) Earnings (Loss) Per Share: Basic $ .89 $ .73 $ (.58) Diluted .89 .73 (.58) Weighted Average Shares Outstanding: Basic 11,447,255 11,421,700 11,117,402 Diluted 11,465,755 11,421,700 11,117,402 </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
<TABLE> NATIONAL HEALTHCARE CORPORATION Consolidated Balance Sheets (in thousands, except share amounts) <CAPTION> December 31 2000 1999 Assets <S> <C> <C> Current Assets: Cash and cash equivalents $ 10,011 $ 4,054 Cash held by trustees 6,358 4,672 Marketable securities 33,167 30,459 Accounts receivable, less allowance for doubtful accounts of $9,196 and $10,278, respectively 44,738 52,337 Notes receivable 5,763 602 Inventory, at lower of cost (first-in, first-out method) or market 4,292 5,010 Deferred income taxes 9,917 7,932 Prepaid expenses and other assets 2,329 2,430 Total current assets 116,575 107,496 Property, Equipment and Assets Under Arrangement With Other Parties: Property and equipment, at cost 163,784 157,558 Accumulated depreciation and amortization (73,602) (61,107) Assets under arrangement with other parties, net --- 3,475 Net property, equipment and assets under arrangement with other parties 90,182 99,926 Other Assets: Bond reserve funds, mortgage replacement reserves and other deposits 112 757 Unamortized financing costs, net 874 837 Notes receivable 14,364 3,381 Notes receivable from National 12,644 12,198 Notes receivable from ESOP 20,535 --- Deferred income taxes 9,619 7,826 Minority equity investments and other 5,142 7,898 Investment in NHI preferred stock 3,000 --- Total other assets 66,290 32,897 Total assets $273,047 $240,319 </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
<TABLE> NATIONAL HEALTHCARE CORPORATION Consolidated Balance Sheets (in thousands, except share amounts) <CAPTION> December 31 2000 1999 Liabilities and Shareowners' Equity <S> <C> <C> Current Liabilities: Current portion of long-term debt $ 22,451 $ 6,487 Trade accounts payable 16,399 13,285 Accrued payroll 28,226 25,951 Amount due to third party payors 14,769 26,923 Accrued interest 313 276 Other current liabilities 21,463 19,737 Total current liabilities 103,621 92,659 Long-Term Debt, Less Current Portion 55,379 45,736 Debt Serviced by Other Parties, Less Current Portion 2,384 14,911 Other Noncurrent Liabilities 11,204 11,536 Deferred Lease Credit 8,776 --- Minority Interests in Consolidated Subsidiaries 669 698 Deferred Income 21,480 21,143 Commitments, Contingencies and Guarantees Shareowners' Equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued or outstanding --- --- Common stock, $.01 par value; 30,000,000 shares authorized; 11,245,735 and 11,553,496 shares, respectively, issued and outstanding 112 115 Capital in excess of par value, less notes receivable 64,477 54,250 Retained earnings 12,202 1,984 Unrealized gains (losses) on marketable securities (7,257) (2,713) Total shareowners' equity 69,534 53,636 Total liabilities and shareowners' equity $273,047 $240,319 </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
<TABLE> NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Cash Flows (in thousands) <CAPTION> Year Ended December 31 2000 1999 1998 <S> <C> <C> <C> Cash Flows From Operating Activities: Net income (loss) $ 10,218 $ 8,383 $ (6,399) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 12,813 11,902 11,328 Forgiveness of employee notes receivable 6,737 --- --- Provision (credit) for doubtful accounts receivable (1,082) 2,318 3,642 Amortization of intangibles and deferred charges 2,890 897 1,232 Amortization of deferred income (1,434) (2,414) (413) Amortization of bond discount 174 --- --- Equity in earnings of unconsolidated investments (231) (230) (197) Deferred income taxes (712) 3,531 (10,478) Changes in assets and liabilities: (Increase) decrease in accounts receivable 8,681 (458) 4,127 Increase (decrease) in inventory 718 (803) (259) (Increase) decrease in prepaid expenses and other assets 101 (1,557) (320) Increase (decrease) in trade accounts payable 3,114 (3,032) 3,507 Increase (decrease) in accrued payroll 2,275 2,105 (14,277) Increase in amounts due to third party payors 4,771 5,981 26,810 Increase (decrease) in accrued interest 37 41 (272) Increase in other current liabilities 1,726 4,772 5,792 Increase in entrance fee deposits 1,771 1,759 4,513 Increase (decrease) in other noncurrent liabilities (332) 288 --- Net cash provided by operating activities 52,235 33,483 28,336 Cash Flows From Investing Activities: Additions to and acquisitions of property and equipment, net (6,724) (22,004) (24,038) Investments in notes receivable (21,942) (4,234) (31,639) Investment in ESOP notes receivable (20,535) --- --- Collections of notes receivable 5,352 11,655 35,042 (Increase) decrease in minority equity investments and other --- (380) 18 Increase in marketable securities, net (7,253) (17,997) (4,253) Distributions from unconsolidated investments and other 249 109 157 Net cash used in investing activities (50,853) (32,851) (24,713) Cash Flows From Financing Activities: Proceeds from debt issuance 17,174 13,830 922 Payments on debt (8,761) (22,724) (4,526) Increase in cash held by trustees (1,686) (801) (37) Decrease in minority interests in consolidated subsidiaries (31) (10) (93) Purchase of NHI preferred stock (3,000) --- --- Purchase of common shares (314) --- --- Issuance of common shares 395 734 1,018 Collections of receivables from exercise of options 341 8 68 (Increase) decrease in bond reserve funds, mortgage replacement reserves and other deposits 645 (89) (162) Cash distributions to partners --- --- (5,388) Increase in financing costs (188) (156) --- Net cash provided by (used in) financing activities 4,575 (9,208) (8,198) Net Increase (Decrease) In Cash and Cash Equivalents 5,957 (8,576) (4,575) Cash and Cash Equivalents, Beginning of Period 4,054 12,630 17,205 Cash and Cash Equivalents, End of Period $ 10,011 $ 4,054 $ 12,630 </TABLE>
<TABLE> NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Cash Flows (Continued) <CAPTION> Year Ended December 31 2000 1999 1998 (in thousands, except share amounts) <S> <C> <C> <C> Supplemental Information: Cash payments for interest expense $ 6,669 $ 5,312 $ 4,673 Cash payments (refunds) for income taxes $ 7,246 $ (4,743) $ 4,929 During 1999 and 1998, $710 and $18,438, respectively, of subordinated con- vertible notes were converted into 46,690 and 1,212,504 of NHC's common stock Subordinated convertible notes $ --- $ (710) $(18,438) Financing costs --- 47 10 Accrued interest --- (8) (89) Common stock --- --- 12 Partners' capital and shareowners' equity --- 671 18,505 During 1998, NHC invested in a note receivable in exchange for NHC's rights to accounts receivable Accounts receivable $ --- $ --- $ 9,598 Notes receivable --- --- (9,598) During 2000, NHC was released from its liability on debt serviced by other parties by the respective lenders Debt serviced by other parties $(12,431) $ --- $ --- Assets under arrangement with other parties 2,857 --- --- Deferred lease credit 9,574 --- --- During the year ended December 31, 2000, NHC forgave employee notes receivable in exchange for marketable securities (NHR common stock) and the return of 366,000 shares of NHC common stock Marketable securities $ 3,065 $ --- $ --- Common stock 4 --- --- Capital in excess of par value 1,616 --- --- Notes receivable (4,685) --- --- During the year ended December 31, 2000, NHC settled outstanding litigation that resulted in the acceptance of a note payable in exchange for amounts due to third party payors Note payable $ 17,435 $ --- $ --- Discount on note payable (510) --- --- Amounts due third party payors (16,925) --- --- </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
<TABLE> NATIONAL HEALTHCARE CORPORATION Consolidated Statements of Shareowners' Equity (in thousands, except share amounts) <CAPTION> Unrealized Receivables Capital in Gains Common Stock from Sale Excess of Retained (Losses) on Total Share- Shares Amount of Shares Par Value Earnings Securities owners' Equity <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1997 10,103,172 $ 101 $(16,875) $50,123 $ --- $ 4,387 $ 37,736 Net loss --- --- --- --- (6,399) --- (6,399) Unrealized losses on securities (net of tax of $418) --- --- --- --- --- (625) (625) Total comprehensive loss (7,024) Collection of receivables --- --- 68 --- --- --- 68 Shares sold 62,882 1 --- 1,017 --- --- 1,018 Shares issued in conversion of convertible notes to common shares 1,212,504 12 --- 18,505 --- --- 18,517 Balance at December 31, 1998 11,378,558 114 (16,807) 69,645 (6,399) 3,762 50,315 Net income --- --- --- --- 8,383 --- 8,383 Unrealized losses on securities(net of tax of $4,272) --- --- --- --- --- (6,475) (6,475) Total comprehensive income 1,908 Collection of receivables --- --- 8 --- --- --- 8 Shares sold 128,248 1 --- 733 --- --- 734 Shares issued in conversion of convertible notes to common shares 46,690 --- --- 671 --- --- 671 Balance at December 31, 1999 11,553,496 115 (16,799) 71,049 1,984 (2,713) 53,636 Net income --- --- --- --- 10,218 --- 10,218 Unrealized losses on securities (net of tax of $3,066) --- --- --- --- --- (4,544) (4,544) Total comprehensive income 5,674 Collection and for- giveness of receivables --- --- 11,763 --- --- --- 11,763 Shares sold 76,739 1 --- 394 --- --- 395 Shares repurchased (384,500) (4) --- (1,930) --- --- (1,934) Balance at December 31, 2000 11,245,735 $ 112 $ (5,036) $69,513 $ 12,202 $(7,257) $ 69,534 </TABLE> The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.
Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies: Presentation-- The consolidated financial statements include the accounts of National HealthCare Corporation and its subsidiaries ("NHC" or the "Company"). All material intercompany balances, profits, and transactions have been eliminated in consolidation, and minority interests are reflected in consolidation. Investments in entities in which NHC lacks control but has the ability to exercise significant influence over operating and financial policies are accounted for on the equity method. Investments in entities in which NHC lacks the ability to exercise significant influence are included in the consolidated financial statements at the cost of NHC's investment or, if applicable, at fair value. Generally, NHC manages or operates long-term health care centers and home health care programs located in Southeastern, Midwest and Western states in the United States. Most recently, the long-term health care environment has undergone substantial change with regards to reimbursement and other payor sources, compliance regulations, competition among other health care providers and relevant patient liability issues. NHC continually monitors these industry developments, as well as other factors that affect its business. Use of Estimates-- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Health Care Revenues-- NHC's principal business is operating and managing long-term health care centers, including the provision of routine and ancillary services. Approximately 62% of NHC's net revenues in 2000 and 1999 and 60% in 1998 are from participation in Medicare and Medicaid programs. Amounts paid under these programs are generally based on fixed rates subject to program cost ceilings. Prior to January 1, 1999, amounts paid under the Medicare program were based on the Company's allowable costs subject to program cost ceilings. However, effective January 1, 1999, the Company was required to transition to a prospective payment system ("PPS") under the Medicare program. PPS has significantly changed the manner in which the Company is paid for inpatient services provided to Medicare beneficiaries. Under PPS, Medicare pays the Company's centers a fixed fee per Medicare patient per day, based on the acuity level of the patient, to cover all post-hospital extended care routine service costs, ancillary costs and capital related costs. PPS is being phased in over a three-year period. During the phase-in, payments are based on a blend of each center's specific historical costs and federally established per diem rates that are based on an average of all U.S. skilled nursing facilities' historical costs. During November, 1999, the Congress passed and the President signed the Medicare Refinement Act of 1999 ("MRA-99"). The MRA-99 allows providers to elect to skip the three year phase-in period. Where advantageous, NHC has so elected commencing January 1, 2000. Amounts earned under the Medicare, Medicaid and other governmental 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. During the years ended December 31, 2000, 1999 and 1998, NHC recorded $5,800,000, $3,600,000 and $4,000,000 of net unfavorable estimated settlements from Medicare and Medicaid cost reports for periods prior to the beginning of fiscal 2000, 1999 and 1998, respectively. For the cost report years 1997 and 1998, NHC has submitted various requests for exceptions to Medicare routine cost limitations for reimbursement. NHC has received preliminary approval on certain of these requests and others are pending approval. NHC will record revenues associated with the approved requests when such approvals, including the final cost report audits, are assured. Pursuant to NHC's settlement of outstanding litigation styled Braeuning, et al vs. National HealthCare L.P., et al as discussed further in Note 13, NHC has entered into a note payable to the Federal government. Any 1997 or 1998 routine cost limitation exception amounts ultimately approved by third party intermediaries will be reflected by the Federal government as a direct reduction of the outstanding note payable. Provision for Doubtful Accounts-- Provisions for estimated uncollectible accounts and notes receivable are included in other operating expenses. Property, Equipment and Assets Under Arrangement with Other Parties-- NHC uses the straight-line method of depreciation over the expected useful lives of property and equipment estimated as follows: buildings and improvements, 20-40 years; equipment and furniture, 3-15 years; and properties under arrangement with other parties, 10-20 years. The provision for depreciation includes the amortization of properties under capital leases and properties under arrangement with National Health Investors, Inc. ("NHI"). 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 ($72,000 in 2000 and $160,000 in 1999). In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" ("SFAS 121"), NHC evaluates the recoverability of the carrying values of its properties on a property by property basis. NHC reviews its properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment is based on estimated future cash flows from a property compared to the carrying value of that property. If recognition of an impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property. Investments in Marketable Securities-- NHC's investments in marketable securities include available for sale securities and held to maturity securities. Unrealized gains and losses on available for sale securities are recorded in shareowners' equity 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 20 years using the straight-line method. Deferred financing costs are amortized principally by the interest method over the terms of the related loans. Unamortized excess cost over net assets of companies purchased at December 31, 2000 and 1999 were $3,446,000 and $3,827,000, respectively. Income Taxes-- NHC utilizes Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires an asset and liability approach for financial accounting and reporting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse. See Note 11 for further discussion of the Company's accounting for income taxes. Concentration of Credit Risks-- NHC's credit risks primarily relate to cash and cash equivalents, cash held by trustees, accounts receivable, marketable securities and notes receivable. 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 88% through Medicare, Medicaid, and other contractual programs and approximately 12% 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 accounts with brokerage institutions. Notes receivable relate primarily to secured loans with health care facilities and to secured notes receivable from officers, directors and supervisory employees as discussed in Notes 9 and 12. NHC also has notes receivable from National Health Corporation and the ESOP as discussed in Note 4. NHC's financial instruments, principally its notes receivable, are subject to the possibility of loss of the carrying values as a result of either the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instruments less valuable. NHC obtains various collateral and other protective rights, and continually monitors these rights, in order to reduce such possibilities of loss. NHC evaluates the need to provide for reserves for potential losses on its financial instruments based on management's periodic review of its portfolio on an instrument by instrument basis. See Notes 9 and 12 for additional information on the notes receivable. Cash and Cash Equivalents-- Cash equivalents include highly liquid investments with an original maturity of less than three months. Cash held by trustees -- Cash held by trustees primarily represents cash that is held by trustees for the purpose of NHC's workers' compensation and professional liability insurance. Inventories-- Inventories consist generally of food and supplies and are valued at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. Stock-Based Compensation-- NHC accounts for stock-based compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. NHC has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As a result, no compensation cost has been recognized in the consolidated statements of income for NHC's stock option plan. See Note 12 for additional disclosures about NHC's stock option plan. Deferred lease credit -- Deferred lease credits include amounts being amortized to reduce depreciation expense under the terms of the Company's existing lease agreements. Comprehensive Income-- NHC adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") effective January 1, 1998. SFAS 130 requires that changes in the amounts of certain items, including gains and losses on certain securities, be shown in the consolidated financial statements as comprehensive income (loss). NHC reports its comprehensive income in the consolidated statements of shareowner's equity. Segment Disclosures-- NHC adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131") effective January 1, 1998. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial reports issued to stockholders. Management bases its operating decisions on the operations of each individual facility and/or operating location. NHC management believes that substantially all of NHC's operations are part of the long-term health care industry segment. NHC's operations outside of the long-term health care industry segment are not material. New Accounting Pronouncements-- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") regarding revenue recognition in financial statements. SAB 101 was effective January 1, 2000 but implementation was delayed until the fourth quarter of 2000. NHC's implementation of SAB 101 in the fourth quarter did not have a material impact on its financial position, results of operations or cash flows on a quarterly or annual basis. From June 1998 through June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and various amendments and interpretations. SFAS 133, as amended, establishes accounting and reporting standards requiring that any derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. NHC will adopt SFAS 133, as amended, effective January 1, 2001. NHC's investments in marketable securities include a debt security convertible into common stock of the issuing company. SFAS 133 will require that NHC account for such debt security as two separate instruments: a purchased call option on the issuer's stock and a nonconvertible interest- bearing debt security. Because NHC will not be using the purchased call options as hedging instruments, SFAS 133 will require that NHC report changes in the fair value of the separated call options currently in earnings. In addition, NHC will be required to accrete the resulting discount on the nonconvertible debt security into income over the remaining term of the nonconvertible debt security. Based on the convertible debt security held as of December 31, 2000, upon adoption of SFAS 133, NHC will bifurcate its $2,853,000 investment in a convertible security into a $299,000 investment in purchased call options and a $2,554,000 investment in a nonconvertible interest-bearing security. Any prospective changes in the fair value of the purchased call options could introduce volatility into NHC's results of operations in subsequent periods. Note 2 - Relationship with National Health Realty, Inc.: Transfer of Assets-- On December 31, 1997, NHC transferred certain assets including mortgage notes receivable (total net book value of $94,439,000), the real property of 16 long-term health care centers, six assisted living facilities and one retirement center (total net book value of $144,615,000) and related liabilities (total net book value of $86,414,000) to National Health Realty, Inc. ("NHR"), a publicly traded Maryland corporation qualified as a real estate investment trust ("REIT") under federal laws, and NHR/OP, L.P. (the "Operating Partnership"). NHR/OP, L.P. is a Delaware limited partnership which is the operating entity of NHR. In exchange for the assets transferred, NHC received 8,237,423 shares of common stock of NHR, which was all of the then outstanding common stock of NHR. NHC distributed the common stock of NHR to NHC's unitholders at the rate of one share for each unit outstanding on the record date of December 31, 1997. In order to protect the REIT status of NHR, certain NHC unitholders received 1,310,194 units of the Operating Partnership rather than NHR shares. Leases-- Concurrent with NHC's conveyance of the real property to NHR, NHC leased from NHR each of the 23 facilities. Each lease is for an initial term expiring December 31, 2007, 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 each renewal term, NHC is obligated to pay NHR annual base rent on all 23 facilities of $16,474,000. In addition to base rent, in each year after 1999, NHC must pay percentage rent to NHR equal to 3% of the increase in the gross revenues of each facility. The percentage rent is based on a quarterly calculation of revenue increases and is payable on a quarterly basis. Percentage rent for 2000 was approximately $310,000. Each lease with NHR 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 NHR to purchase any of the properties transferred from NHC should NHR receive an offer from an unrelated party during the term of the lease or up to 180 days after termination of the related lease. On October 1, 2000, NHC terminated its individual leases on nine Florida health care facilities owned by NHR. However, NHC remains obligated under its master lease agreement with NHR and continues to remain obligated to make the lease payments to NHR. Subsequently, the facilities were leased by NHR for a five year term to nine separate corporations, none of which are owned by NHC. Lease payments received by NHR from the new lessees offset NHC's lease obligations pursuant to the master operating lease. Through December 31, 2000, all such lease payments have been received by NHR and offset against NHC's obligations. NHC believes that all such lease payments will continue to be received by NHR and offset against required future lease payments. At December 31, 2000, the approximate future minimum base rent commitments to be paid by NHC on non-cancelable operating leases with NHR are as follows: 2001 $16,474,000 2002 16,474,000 2003 16,474,000 2004 16,474,000 2005 16,474,000 Thereafter 32,948,000 Advisory Agreement-- NHC has entered into an Advisory Agreement with NHR whereby services related to investment activities and day-to-day management and operations are provided to NHR by NHC as Advisor. The Advisor is subject to the supervision of and policies established by NHR's Board of Directors. Either party may terminate the NHR Advisory Agreement on 90 days notice at any time. For its services under the NHR Advisory Agreement, NHC is entitled to annual compensation of the greater of 2% of NHR's gross consolidated revenues or the actual expenses incurred by NHC. During 2000, 1999, and 1998, NHC's compensation under the NHR Advisory Agreement was $503,000, $506,000 and $471,000, respectively. Pursuant to the NHR Advisory Agreement, NHR has agreed that as long as both the NHR Advisory Agreement and the NHI Advisory Agreement are obligations of NHC, NHR will only do business with NHC and will not compete with NHI. As a result, NHR is severely limited in its ability to grow and expand its business. Furthermore, NHC will not seek additional investments to expand NHR's investment portfolio. 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 health 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. During 2000, NHC exercised its option to extend the lease term for the first five-year renewal term under the same terms and conditions as the initial term. 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, NHC must pay percentage rent to NHI equal to 3% of the increase in the gross revenues of each facility. The percentage rent is based on a quarterly calculation of revenue increases and is payable on a quarterly basis. Percentage rent for 2000, 1999 and 1998 was approximately $2,474,000, $1,189,000, and $2,521,000, 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. On October 1, 2000, NHC terminated its individual leases with NHI on four Florida long-term health care facilities. However, NHC remains obligated to NHI under its master lease agreement and continues to remain obligated to make the lease payments to NHI. Subsequently, the facilities were immediately leased by NHI for a five year term to four separate corporations, none of which are owned by NHC. Lease payments received by NHI from the new lessees offset NHC's lease obligations pursuant to the master operating lease. Through December 31, 2000, all such lease payments have been received by NHI and offset against NHC's obligations. NHC believes that all such lease payments will continue to be received by NHI and offset against required future lease payments. Base rent expense to NHI was $15,238,000 in 2000, 1999 and 1998. Non- obligated debt service rent to NHI was $6,027,000 in 2000, $5,491,000 in 1999 and $5,338,000 in 1998. At December 31, 2000, the approximate future minimum base rent, non-obligated debt service rent, and obligated debt service rent commitments to be paid by NHC on non-cancelable operating leases with NHI during the initial term are as follows: 2001 29,679,000 2002 29,664,000 2003 29,624,000 2004 29,672,000 2005 29,627,000 Thereafter 27,706,000 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 of and policies established by NHI's Board of Directors. Either party may terminate the NHI Advisory Agreement on 90 days notice at any time. For its services under the NHI Advisory Agreement, NHC is entitled to annual compensation of $1,600,000, a reimbursement of certain out of pocket expenses and an additional amount that is calculated on a formula which is related to the increase in NHI's funds from operations per common share (as defined in the NHI Advisory Agreement). During 2000, 1999 and 1998, NHC's compensation under the NHI Advisory Agreement was $2,609,000, $2,779,000 and $3,310,000, respectively. 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-- During 2000, NHC was released from its obligation on $12,431,000 of transferred debt. Since NHC is no longer obligated on this transferred debt, debt serviced by other parties and assets under arrangement with other parties were reduced by the amount of the debt serviced by other parties from which NHC was removed. The resulting deferred lease credit is being amortized into income over the remaining lease term. The leases with NHI provide that NHC shall continue to make non-obligated debt service rent payments equal to the debt service including principal and interest on the obligated debt which was prepaid and from which NHC has been released. As of December 31, 2000, NHC remains obligated on $2,502,000 of debt serviced by other parties. Investment in NHI Preferred Stock-- On March 31, 2000, NHC acquired $3,000,000 of NHI Preferred Stock, convertible at the lesser of $12.00 per share or the then trading value per share into NHI common stock after December 31, 2000. The shares pay dividends at the rate of 8% through June 30, 2000, at the rate of 10% from July 1, 2000 through September 30, 2000, and at the rate of 12% thereafter. The NHI Preferred Stock, which is not listed on a stock exchange, is considered a non-marketable security and is recorded at cost. Investment in NHI Convertible Debt Securities-- As of December 31, 2000, NHC holds an investment in NHI convertible debt securities. The investment in NHI convertible debt securities was purchased by NHC during 2000 for $2,853,000, bears interest at prime plus one percent, matures on January 1, 2006 and is convertible into NHI common stock on or after July 1, 2001. The investment in NHI convertible debt securities is included in marketable securities in the consolidated balance sheet. Note 4 - Relationship With National Health Corporation: Sale of Long-Term Health Care Centers-- During 1988, NHC sold the assets (inventory, property and equipment) of eight long-term health care centers (1,121 licensed beds) to National Health Corporation ("National"), the administrative general partner of NHC at the time of the sale, 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. With the prior consent of NHC, National sold one center to an unrelated third party in 1997 and two centers to an unrelated third party in 1999. Thus, NHC now manages five centers for National. NHC's basis in the assets sold was approximately $24,255,000. The resulting profit of $15,745,000 was deferred and will be amortized into income beginning with the collection of the note receivable (up to $12,000,000) with the balance ($3,745,000) of the profit being amortized into income on a straight-line basis over the management contract period. As of December 31, 2000, National had borrowed $1,968,000 from NHC to finance the construction of additions at two long-term 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 2008. Financing Activities-- During 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 "ESOP"). The note requires quarterly principal and interest payments with interest at 9%. At December 31, 2000 and 1999, the outstanding balance on the note was approximately $3,588,000 and $4,085,000, respectively. The building is owned by a separate partnership of which NHC is the general partner and building tenants are limited partners. NHC owns 69.7% of the partnership and consolidates the financial statements of the partnership in the NHC consolidated financial statements. The cumulative equity in earnings of the partnership related to the limited partners' ownership is reflected in minority equity investments and other. NHC has guaranteed the debt service of the building partnership. In addition, NHC's $11,430,000 bank credit facility and the $5,339,000 senior secured notes described in Note 10 were financed through National and the ESOP. NHC's interest costs, financing expenses and principal payments are equal to those incurred by National. During 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 2008. Payroll and Related Services-- 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 equal to 1% of payroll costs. The administrative fee paid to National for 2000, 1999 and 1998 was $2,100,000, $2,131,000 and $2,121,000, respectively. National maintains and makes contributions to its ESOP for the benefit of eligible employees. Notes Receivable From the ESOP-- On November 10, 2000, NHC purchased $23,200,000 of notes receivable from NHI. NHI had purchased the note receivable from the previous holders as a result of a debt covenant violation by NHI. The total outstanding balance of the notes receivable as of December 31, 2000 is $20,535,000, all of which is owed directly to NHC by the ESOP. The notes receivable represent funds that were originally obtained by the ESOP from outside lenders and loaned to National and subsequently loaned by National to NHI, NHR and NHC. In addition to the entire $20,535,000 being owed to NHC by the ESOP, NHI is the ultimate obligor on $8,625,000 of the notes receivable to the ESOP, NHR is the ultimate obligor on $6,571,000 of the notes receivable to the ESOP and NHC is the ultimate obligor on $5,339,000 of the notes receivable to the ESOP. The notes receivable bear interest at 8.4%. Principal and interest on the notes receivable are payable semi-annually with a final maturity date in 2005. Note 5 - Other Revenues: Revenues from management services include management fees, interest income on notes receivable due from managed long-term health care centers, and revenues from other services provided to managed long-term health care centers. "Other" revenues include non-health care related earnings. <TABLE> (in thousands) <CAPTION> Year Ended December 31, 2000 1999 1998 <S> <C> <C> <C> Revenues from management and accounting services $31,837 $20,866 $24,522 Guarantee fees 331 534 581 Advisory fees from NHI and NHR 3,129 3,295 3,781 Dividends and other realized gains on securities 3,563 2,287 1,498 Equity in earnings of unconsolidated investments 233 230 197 Interest income 3,730 4,255 3,900 Other 3,712 2,417 2,476 $46,535 $33,884 $36,955 </TABLE> During the year ended December 31, 2000, National paid $19,031,000 to NHC for outstanding management fees and interest on management fees. Of this amount, $3,881,000 had been recognized by NHC prior to 2000. The remaining $15,150,000 was recognized as income during 2000 and is included in other revenues in the consolidated statements of income. Note 6 - Earnings Per Share: Basic earnings per share is based on the weighted average number of common shares/units outstanding during the year. Diluted earnings per share assumes the exercise of options using the treasury stock method. The following table summarizes the earnings and the average number of common shares used in the calculation of basic and diluted earnings per share: (dollars in thousands, except per share amounts) <TABLE> <CAPTION> Year Ended December 31, 2000 1999 1998 <S> <C> <C> <C> Basic: Weighted average common shares 11,447,255 11,421,700 11,117,402 Net income (loss) $ 10,218 $ 8,383 $ (6,399) Earnings (loss) per common share, basic $ .89 $ .73 $ (.58)
Diluted: Weighted average common shares 11,447,255 11,421,700 11,117,402 Options 18,500 --- --- Assumed average common shares outstanding 11,465,755 11,421,700 11,117,402 Net income (loss) $ 10,218 $ 8,383 $ (6,399) Earnings (loss) per common share, diluted $ .89 $ .73 $ (.58) </TABLE> Note 7 - Investments in Marketable Securities: NHC's investments in marketable securities include available for sale securities and held to maturity securities. Unrealized gains and losses on available for sale securities are recorded in shareowners' equity in accordance with SFAS 115. Realized gains and losses from securities sales are determined on the specific identification of the securities. Marketable securities consist of the following: <TABLE> <CAPTION> (in thousands) December 31, 2000 1999 Amortized Fair Amortized Fair Cost Value Cost Value <S> <C> <C> <C> <C> Available for Sale: Marketable equity securities $37,554 $22,606 $29,735 $22,608 U.S. government securities 2,056 2,084 1,555 1,536 Corporate bonds 5,480 5,389 6,570 6,315 $45,090 $30,079 $37,860 $30,459 Held to Maturity: Corporate bonds $ 3,088 $ 3,088 $ --- $ --- </TABLE> Included in available for sale marketable equity securities are 1,049,300 and 736,500 shares of NHI common stock as of December 31, 2000 and 1999, respectively. The fair value of the NHI common stock was $7,739,000 and $10,955,000 as of December 31, 2000 and 1999, respectively. The cost value of the NHI common stock was $18,066,000 and $13,312,000 as of December 31, 2000 and 1999, respectively. Also included in available for sale marketable equity securities are 373,200 and 7,200 shares of NHR common stock as of December 31, 2000 and 1999, respectively. The fair value of the NHR common stock was $2,916,000 and $59,000 as of December 31, 2000 and 1999, respectively. The cost value of the NHR common stock was $3,125,000 and $60,000 as of December 31, 2000 and 1999, respectively. Held to maturity marketable securities consist primarily of an investment in NHI convertible debt securities as discussed in Note 3. The amortized cost and estimated fair value of marketable securities classified as available for sale, by contractual maturity, are as follows:
<TABLE> <CAPTION> (in thousands) December 31, 2000 1999 Fair Fair Cost Value Cost Value <S> <C> <C> <C> <C> Maturities: Within 1 year $ 1,579 $ 1,568 $ 1,454 $ 1,447 1 to 5 years 5,045 5,011 4,942 4,789 6 to 10 years 912 894 1,728 1,615 Other securities without stated maturity 37,554 22,606 29,736 22,608 $45,090 $30,079 $37,860 $30,459 </TABLE> Proceeds from the sale of investments in debt and equity securities during the years ended December 31, 2000 and 1999 were $2,324,000 and $41,000, respectively. Gross investment gains of $18,000 and $10,000 were realized on these sales during the years ended December 31, 2000 and 1999, respectively. Note 8 - Property, Equipment and Assets Under Arrangement with Other Parties: Property and equipment, at cost, consist of the following: <TABLE> <CAPTION> (in thousands) December 31, 2000 1999 <S> <C> <C> Land $ 11,525 $ 11,525 Buildings and improvements 62,750 59,479 Furniture and equipment 85,032 81,389 Construction in progress 4,477 5,165 $163,784 $157,558 </TABLE> Included in land is $7,773,000 of land held for future development. Assets under arrangement with other parties, net of accumulated depreciation, consist of the following: <TABLE> <CAPTION> (in thousands) December 31, 2000 1999 <S> <C> <C> Land $ --- $ 477 Buildings and improvements --- 2,833 Fixed equipment --- 165 $ --- $ 3,475 </TABLE> Note 9 - Notes Receivable: NHC's notes receivable generally consist of loans and accrued interest to managed long-term 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 beginning in 2001 through 2007. Interest on the notes is generally at prime plus 2%. The collateral for the notes consists of first and second mortgages, certificates of need, personal guarantees and stock pledges. Note 10 - Long-Term Debt, Debt Serviced by Other Parties and Lease Commitments: Long-Term Debt and Debt Serviced by Other Parties-- Long-term debt and debt serviced by other parties consist of the following: <TABLE> <CAPTION> Weighted Average Final Debt Serviced by Long-Term Interest Rate Maturities Other Parties Debt (in thousands) December 31, 2000 1999 2000 1999 <S> <C> <C> <C> <C> <C> <C> Bank credit facility, interest payable periodically, principal variable, due at maturity 7.6% 2002 $ --- $ --- $ 16,321 $ 2,000 Bank credit facility, principal variable, and interest payable quarterly 6.6 2009 --- --- 11,430 12,390 Senior secured notes, principal and interest payable semiannually 8.4 2005 --- --- 5,339 6,119 Notes and other obligations, principal and interest payable variable periodically 7.3 2001-2019 580 4,136 6,235 6,956 Note payable to United States government, principal only through July, 2001. Effective August, 2001 principal and interest payable quarterly 6.0 2005 --- --- 17,100 --- First mortgage revenue bonds, principal payable periodically, variable, interest payable monthly 7.7 2001-2010 1,921 11,770 --- --- Unsecured term note payable to National, interest payable quarterly, principal payable at maturity 8.5 2008 --- --- 10,000 10,000 Mortgage notes, principal and interest payable monthly 10.3 2006 --- --- 11,288 13,763 2,501 15,906 77,713 51,228 Less current portion (117) (995) (22,334) (5,492) $ 2,384 $ 14,911 $ 55,379 $ 45,736 </TABLE> The $11,430,000 bank credit facility and the $5,339,000 senior secured notes were borrowed through National and the ESOP. NHC granted certain credits and interest rate concessions related to its management fees from National in obtaining these loans. As NHC is a direct obligor on the debt financed through National and the ESOP, the debt has been reflected in the table above as liabilities owed by NHC to the holders of the debt instruments rather than as liabilities owed to National and the ESOP. 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. See Note 13 for further discussion. The lending institutions for the $11,430,000 bank credit facility have the right to put the $11,430,000 debt to NHC effective December 16, 2001. As a result of the put option, the $11,430,000 debt has been classified as a current liability in NHC's consolidated balance sheet as of December 31, 2000. See Note 13 for further discussion of this put option. The aggregate maturities of long-term debt and debt serviced by other parties for the five years subsequent to December 31, 2000 (excluding the effect of the potential acceleration of the $11,430,000 bank credit facility) are as follows: <TABLE> <CAPTION> Long-Term Debt Serviced Debt By Other Parties Total <S> <C> <C> <C> 2001 $11,151,000 $ 117,000 $11,268,000 2002 17,102,000 125,000 17,227,000 2003 5,698,000 134,000 5,832,000 2004 9,967,000 148,000 10,115,000 2005 5,289,000 159,000 5,448,000 </TABLE> Substantially all of the assets of NHC and NHI are pledged as collateral on long-term debt or capital lease obligations. Certain of NHC's debt obligations have cross-default provisions with other debt of NHI and National. Certain loan agreements require maintenance of specified operating ratios as well as specified levels of working capital and shareowners' equity by NHC, NHI and National. All such covenants have either been met by NHC or waivers have been obtained, and NHC believes that NHI and National were in compliance with, subsequently cured, or have obtained waivers or amendments to remedy all events of non-compliance with the covenants as of December 31, 2000. The failure of NHC, NHI or National to meet their required covenants would have a material adverse effect on NHC's financial position and cash flows. Lease Commitments-- Operating expenses for the years ended December 31, 2000, 1999, and 1998 include expenses for leased premises and equipment under operating leases of $45,893,000, $46,757,000, and $46,052,000, respectively. See Notes 2 and 3 for the approximate future minimum rent commitments on non-cancelable operating leases with NHR and NHI. Note 11 - Income Taxes: The provision (benefit) for income taxes is comprised of the following components: <TABLE> <CAPTION> (in thousands) Year Ended December 31, 2000 1999 1998 <S> <C> <C> <C> Taxes Payable Federal $ 6,814 $ 2,061 $ 5,996 State 840 60 797 7,654 2,121 6,793 Deferred Tax Provision (Benefit) Federal (646) 3,084 (9,220) State (66) 447 (1,258) (712) 3,531 (10,478) Income Tax Provision (Benefit) $ 6,942 $ 5,652 $ (3,685) </TABLE> The deferred tax assets and liabilities, at the respective income tax rates, are as follows: <TABLE> <CAPTION> (in thousands) December 31, 2000 1999 <S> <C> <C> Current deferred tax asset: Allowance for doubtful accounts receivable $ 2,683 $ 3,322 Accrued liabilities 1,624 1,974 Unrealized losses on marketable securities 5,999 2,935 10,306 8,231 Current deferred tax liability: Other (389) (299) (389) (299) Net current deferred tax asset $ 9,917 $ 7,932 Noncurrent deferred tax asset: Financial reporting depreciation in excess of tax depreciation $ 2,858 $ 1,578 Deferred gain on sale of assets 5,352 5,431 Deferred guarantee fees --- 336 Other 1,409 481 Net noncurrent deferred tax asset $ 9,619 $ 7,826 </TABLE> The provision for income taxes is different than the amount computed using the applicable statutory federal and state income tax rate as follows: <TABLE> <CAPTION> (in thousands) Year Ended December 31, 2000 1999 1998 <S> <C> <C> <C> Tax expense at statutory rates $ 6,814 $ 5,474 $(4,034) Amortization of goodwill 53 49 135 Other permanent differences 75 129 214 Effective tax expense $ 6,942 $ 5,652 $(3,685) </TABLE> Note 12 - Stock Option Plan: NHC has incentive option plans which provide for the granting of options to key employees and directors to purchase shares of common stock at no less than market value on the date of grant. The options may be exercised immediately, but NHC may purchase the shares of stock at the grant price if employment is terminated prior to six years from the date of grant. The maximum term of the options is six years. The following table summarizes option activity: <TABLE> <CAPTION> Number of Weighted Average Shares Exercise Price <S> <C> <C> Options outstanding at December 31, 1997 25,000 $40.05 Options granted 40,000 39.88 Options exercised 5,000 38.63 Options outstanding at December 31, 1998 60,000 36.34 Options granted 40,000 9.38 Options outstanding at December 31, 1999 100,000 25.56 Options granted 512,500 3.14 Options outstanding at December 31, 2000 612,500 $ 6.80 </TABLE> <TABLE> <CAPTION> Weighted Average Weighted Remaining Options Exercise Average Contractual Outstanding Prices Exercise Price Life in Years <S> <C> <C> <C> $24.88 to 60,000 $39.88 $36.34 1.8 $3.00 to 552,500 $9.38 $ 3.59 5.5 ------- 612,500 </TABLE> At December 31, 2000, all options outstanding are exercisable. The weighted average remaining contractual life of options outstanding at December 31, 2000 is 5.2 years. Additionally, NHC has an employee stock purchase plan which allows employees to purchase shares of stock of NHC through payroll deductions. The plan allows employees to terminate participation at any time. NHC has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As a result, no compensation cost has been recognized in the consolidated statements of income for NHC's stock-based compensation plans. Had compensation cost for NHC's stock option plans been determined based on the fair value at the grant date of awards in 2000, 1999, and 1998 consistent with the provisions of SFAS 123, the Company's net income (loss) and earnings (loss) per share would have been as follows: <TABLE> (dollars in thousands, except per share amounts) <CAPTION> December 31, 2000 1999 1998 <S> <C> <C> <C> Net income (loss) - as reported $10,218 $8,383 $(6,399) Net income (loss) - pro forma 10,040 8,260 (6,475) Net earnings (loss) per share - as reported Basic .89 .73 (.58) Diluted .89 .73 (.58) Net earnings (loss) per share - pro forma Basic .88 .72 (.58) Diluted .88 .72 (.58) </TABLE> The weighted average fair value of options granted were $2.27, $4.08 and $12.69 for 2000, 1999 and 1998, respectively. For purposes of pro forma disclosures of net income (loss) and earnings (loss) per share as required by SFAS 123, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2000, 1999 and 1998: <TABLE> <CAPTION> December 31, 2000 1999 1998 <S> <C> <C> <C> Dividend yield 0% 0% 0% Expected volatility 82% 40% 20% Expected lives 5.75 years 4.75 years 4.75 years Risk-free interest rate 5.75% 6.00% 6.50% </TABLE> In connection with the exercise of certain stock options, NHC has received 6.25% interest-bearing, full recourse notes in the amount of $5,036,000 at December 31, 2000. The notes are secured by shares of NHC, shares of NHR, or shares of NHI having a fair market value of not less than 150% of the amount of the note. The principal balances of the notes are reflected as a reduction of shareowners' equity in the consolidated financial statements. During the year ended December 31, 2000, NHC forgave $11,422,000 of these notes in exchange for marketable securities (NHR common stock) valued at $3,065,000 and the return of 366,000 shares of NHC stock valued at $1,620,000. The forgiveness of the employee notes receivable resulted, for financial reporting purposes, in the recognition of compensation expense for the amount by which the notes receivable forgiven exceeded the then fair market value of the NHR marketable securities and NHC stock received. NHC recorded, for financial reporting purposes, compensation expense of $6,737,000 for the forgiveness of the notes receivable, which is included in salaries, wages and benefits in the consolidated statements of income. In conjunction with the forgiveness of the employee notes receivable, NHC also paid approximately $2,695,000 to reimburse the related employees for the tax impact of the notes forgiven, all of which is included in salaries, wages and benefits in the consolidated statements of income. Note 13 - Contingencies and Guarantees: FCC Litigation-- In October 1998, NHC and Florida Convalescent Centers, Inc. ("FCC") settled certain litigation which had been ongoing since 1996 regarding NHC's management of 16 facilities for FCC. Under the terms of the settlement, NHC purchased two of the 16 FCC long-term health care centers and related assets through the assumption of approximately $15,900,000 of debt on those two centers. The centers NHC purchased are Palm Garden of Pensacola, Florida with 180 beds and Palm Garden of Lake City, Florida with 120 beds. The purchase was consummated effective May 1, 1999. The purchase price for the two centers was allocated to the underlying assets based on their relative fair market values. The consolidated statement of income for 1999 includes the results of operations of the centers since May 1, 1999. Also under the terms of the settlement, NHC paid a one-time cash settlement of $15,000,000 and further agreed to accept any adjustment to previously filed Medicare cost reports and routine cost limit exception requests related to all 16 FCC centers and indemnify FCC for any noninsurance covered liability claims. In return, FCC transferred all of its rights to Medicare receivables to NHC. Finally, FCC had the right to cancel the management contracts for the remaining 14 centers. The management contracts were terminated July 31, 1999. As disclosed at the time of settlement, the loss of the management contracts and related revenues from these 14 facilities has had a material negative impact on NHC's earnings even after taking into consideration the purchase of two of the 16 long-term health care centers. Costs associated with the aforementioned litigation have been included in the "litigation settlement and other charges" caption of the 1998 consolidated statement of income. The $28,084,000 includes the $15,000,000 one-time cash settlement related to the FCC lawsuit and an additional $13,084,000 charge for the assumption of liabilities, expected litigation charges and other liabilities. Braeuning Litigation-- National HealthCare Corporation ("NHC") was a defendant in a lawsuit styled Braeuning, et al vs. National HealthCare L.P., et al filed on April 9, 1996 in the U.S. District Court of the Northern District of Florida. The Federal government was participating in the lawsuit as an intervening plaintiff. The suit alleged that NHC submitted cost reports and routine cost limit exception requests containing "fraudulent allocation of routine nursing services to ancillary service cost centers" and also alleged that NHC improperly allocated skilled nursing service hours in four managed centers, all in the state of Florida. In its defense of the matter, NHC asserted that the cost report information of the centers was either appropriately filed or, upon self-audit amendment, reflects adjustments for, among other items i) correction of unintentional misallocations; ii) instances in which the self- audit process has had to use different source documents due to loss or misplacement of the original source documents; and iii) recalculation of certain nursing time based upon indirect allocation percentages rather than time studies, as were originally used. The cost report periods covered by the suit included 1991 through 1996. A number of amended cost reports were filed and NHC finalized the self-audit process for the years 1995 and 1996. NHC and the Department of Justice and the Health Care Financing Administration agreed on the use of certain audit ratios used to calculate the amount of Medicare overpayment or underpayments for years 1991 through 1994. The parties have settled the suit by written agreement approved by the Court on December 15, 2000. Pursuant to that Agreement and based upon the self-audit adjustments as further negotiated by the parties, NHC has agreed to a repayment totaling $17,623,072 payable over five years at 6% interest, with no interest for the initial six months. The government has also agreed to credit all 1997 and 1998 routine cost limit exception cost report settlements owed by it to NHC and/or its managed centers against the settlement amount upon finalization of those cost reports. The settlement amount includes amounts owed by a number of centers managed by NHC, and NHC anticipates that these centers will repay amounts owed by them. However, NHC is liable to the government for those amounts in the event that the amounts are not paid by the managed centers. Professional Liability and Other Insurance-- NHC carries a professional liability insurance policy 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. The entire long-term care industry has seen a dramatic increase in personal injury/wrongful death claims based on alleged negligence by nursing homes and their employees in providing care to residents. This is especially prevalent in Florida. As of December 31, 2000, the Company and/or its managed centers are defendants in 81 such lawsuits in Florida, compared to 36 such lawsuits in all other states combined. During 1999, the insurance carrier covering both NHC and a Florida based six facility nursing home chain managed by NHC entered into a settlement of a compensatory and punitive claim against NHC resulting from an incident that occurred during 1996. The settlement was far in excess of what the insurance carrier could have settled the claim prior to or during the ongoing trial. NHC and the managed nursing home chain filed litigation against the insurance carrier asking the court to find that the settlement was made in bad faith and that the insurance carrier should be responsible for the entire amount of the judgment. During 2000, NHC, representatives of the managed nursing home chain and the insurance carrier reached a settlement that removes any possible claim by the insurance carrier against NHC and/or the managed nursing home chain. In addition, the settlement requires the insurance carrier to fund a $2,000,000 escrow account to be used to pay any claims that exceed the primary insurance coverage for the 1996 policy year. Due to unusual statutory provisions in the state of Florida as well as an active and specialized plaintiff's bar, the entire long-term care industry in that state has experienced a drastic increase in liability claims, reserves, settlements, and judgments over the last several years. As a result, the Company's professional liability insurance premium for its owned and managed centers in Florida has increased from $1,995,000 in 1998 to $3,200,000 in 1999 and $6,700,000 in 2000. Prior to 1999, coverage was secured on a first dollar basis (no deductible). For policy years 1999 and 2000, all owned centers have a significant per claim deductible which is capped in the aggregate at $1,225,000 for policy year 1999 and $2,000,000 for the first nine months of policy year 2000. On June 28, 2000, Caliber One, the Company's former malpractice carrier, gave NHC 90 days notice of the cancellation of its professional liability policy in all states in which NHC does business. NHC was able to obtain insurance effective October 1, 2000 for all of its operations except for its long-term care properties in the state of Florida. Accordingly, and since the prospect of doing business in Florida without insurance was not acceptable to the Company, NHC terminated its operations in that state effective as of the close of business September 30, 2000. This was accomplished by assigning its management agreements in Florida (10 properties) to unrelated entities, by terminating its leases on 13 Florida properties and leasing the two Florida properties owned by NHC to third parties. Given the current legal environment, NHC's replacement professional liability policy obtained effective October 1, 2000 (for all states but Florida) has required significant additional premiums, and the self insured retention amount of $100,000 per occurrence is now unlimited in the aggregate. Based on its assessment of claims currently outstanding against the Company, management believes that there exists sufficient primary and umbrella insurance to cover any judgments or settlements of existing claims. However, any future judgments or settlements above the Company's specific center and umbrella coverage could have a material adverse impact on NHC's financial position, cash flow and results of operations. NHC has assumed certain risks related to health insurance and workers' compensation insurance claims of the employees of National and its managed facilities. The liability for reported claims and estimates for incurred but unreported claims is $13,870,000 and $13,327,000 at December 31, 2000 and 1999, respectively. The liability is included in other current liabilities in the consolidated balance sheets. NHC remits for the claims with regards to National's employees utilized by NHC on a monthly basis. The amounts are subject to adjustment for actual claims incurred. Guarantees and Related Events-- In order to obtain management agreements and to facilitate construction or acquisition of certain long-term 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 $32,210,000 (net of available debt service reserves) at variable and fixed interest rates with a weighted average rate of 7.1% at December 31, 2000. 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. As a result of the health care industry's generally weak financial position, the uncertainty engendered by the increasing number of medical liability claims in the state of Florida, the cancellation of NHC's liability policy in that state, and the liquidity demands being faced by NHC, NHC has experienced and is experiencing the potential for significant defaults in financial obligations which it has undertaken. A summary of the potential defaults are as follows: CFA Notes: Care Foundation of America, Inc. ("CFA") purchased from NHI six facilities through the issuance of a mortgage note. NHC is a limited ($3,000,000) guarantor of the outstanding mortgage note to NHI plus the guarantor on a $2,000,000 working capital note to NHR, all collateralized by the pledge of certain marketable securities in the approximate amount of $5,000,000. NHC does not manage the facilities but does provide financial and accounting services. The failure of these facilities to make their payments on the first mortgage notes could result in the acceleration of that indebtedness and an attempt by the first mortgage holder and/or working capital lender to collect their total of $5,000,000 in guarantees from NHC or the collateral now held by the first mortgage lender. NHI Short Term Liquidity Demand: NHI's $83,000,000 senior secured bank credit facility requires NHI to repay the outstanding balance during 2001 and 2002. NHI also has additional letters of credit of $11,600,000 that mature during 2001. NHI has relied upon NHC to provide $23,200,000 of cash during 2000 through the purchase by NHC from NHI of certain notes receivable. NHI management has reported to the investing public that it believes that NHI will be successful in generating the necessary capital to repay its future debt requirements. However, the failure by NHI to meet its liquidity demands would negatively impact NHC as a result of cross-default provisions contained in a substantial portion of NHI's and NHC's debt agreements. With regard to certain other debt financed through the ESOP and National (total outstanding balance of $30,500,000 at December 31, 2000, of which $11,400,000 is the primary obligation of NHC), the lending institutions have the right to put the entire outstanding balance of the debt to NHI and NHC effective December 16, 2001. Upon exercise of the put option by the lending institutions, NHC would be obligated to purchase 38% of the then outstanding balance and NHI would be obligated to purchase 62% of the then outstanding balance. NHC and NHI are in the process of discussing this December 16, 2001 put option with the lending institutions. Management believes that the lending institutions will agree to not exercise the put option provided that NHC, NHI and National make additional principal repayments on the debt during 2001. However, if the lending institutions exercise the put option, NHC and NHI would be required to purchase the entire outstanding balance of the debt, which would have a material adverse effect on NHC's financial position and cash flows. As a result of the put option, NHC's primary obligation under this debt instrument ($11,400,000) has been classified as a current liability in NHC's consolidated balance sheet as of December 31, 2000. National Short Term Liquidity Demand: National also has certain additional debt obligations financed through the ESOP (total balance of $15,700,000 at December 31, 2000). None of this debt is the primary obligation of NHC. However, this debt is cross-defaulted with NHC's obligations. Under the terms of these debt agreements, the lending institutions have the right to put the entire outstanding balance of the debt to National at any time after January 20, 2001. The lending institutions have committed to not exercise the put option prior to September 30, 2001. However, if the lending institutions do exercise that put option and National is unable to purchase or refinance the entire outstanding balance of the debt, National's debt along with a substantial portion of NHC's debt would be in default, which would have a material adverse effect on NHC's financial position and cash flows. 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. Note 14 - 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; Accounts receivable; Bond reserve funds, mortgage replacement reserves and other deposits; Accounts payable and Accrued liabilities-- The fair value approximates the carrying amount because of the short maturity or the nature of these instruments. Marketable securities-- The fair value is estimated based on quoted market prices and is the same as the carrying amount. Notes receivable-- The fair value of NHC's notes receivable is estimated based on the current rates offered by NHC or comparable parties for the same or similar types 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. Note 15. Divestiture of Florida Operations Because professional liability insurance in the state of Florida is not available, effective October 1, 2000, NHC has ceased all long-term health care operations in Florida. Prior to October 1, 2000, NHC has owned and operated two long-term health care centers in Florida. In addition, NHC had leased from NHI and NHR ten long-term health care centers and three assisted living centers in Florida. Effective October 1, 2000, NHC leased its two owned long-term health care centers directly to a group of non-NHC affiliated companies. Furthermore, the individual NHR and NHI leases were terminated effective October 1, 2000, and the centers were leased to new tenants unrelated to NHC; however, NHC is still the primary obligor because the properties were originally leased to it pursuant to a master lease. Lease payments received by NHI and NHR from the new lesses offset NHC's lease obligations pursuant to the master operating lease. NHC sold the current assets and current liabilities of its owned and leased Florida facilities to the non-NHC affiliated group of companies in exchange for total notes receivable of approximately $4,480,000. The notes receivable approximate the book value of the net assets transferred. NHC also leased the furniture, fixtures and leasehold improvements of these Florida properties to the same group of companies. In addition, NHC entered into agreements to provide certain working capital loans to the non-NHC affiliated group of companies up to a maximum of $4,000 per bed per center. No draws had been made on the working capital loans as of the date of these financial statements. Beginning October 1, 2000, NHC does not provide any health care related management services for the two owned centers or for the thirteen leased centers. NHC is providing financial and accounting services for the two owned centers and for the thirteen leased centers in Florida. The state of Florida approved the change of ownership and licensing of the 12 long-term health care centers effective October 1, 2000. NHC intends to report rent income on its leased property and equipment only when cash is received. NHC intends to report interest income on the notes receivable only after 25% of the initial principal balance of the notes receivable has been received. Effective October 1, 2000, NHC has also ceased all health care management services to an additional ten long-term health care centers located in the state of Florida. Effective October 1, 2000, NHC will provide only financial and accounting services for the ten formerly managed centers. During the nine months ended September 30, 2000, the Florida long-term health care centers and assisted living centers generated net patient revenues of approximately $67,900,000. Management believes that the divestiture of its Florida operations will not have a material impact on NHC's earnings in future periods except to reduce both revenues and expenses and to reduce the substantial risks of operating in the state of Florida without professional liability insurance.
EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports, included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-61451 and No. 333-61459 filed post-effective Amendment No. 1 to Form S-4 on Form S-8 Registration Statement No. 33-9881. ARTHUR ANDERSEN LLP Nashville, Tennessee March 23, 2001