1
EXHIBIT 13
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants 46
Consolidated Statements of Income 47
Consolidated Balance Sheets 48
Consolidated Statements of Cash Flows 49
Consolidated Statements of Partners' Capital 50
Notes to Consolidated Financial Statements 51-64
45
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of National HealthCare L.P.:
We have audited the accompanying consolidated balance sheets of
National HealthCare L.P. (a Delaware partnership and formerly National
HealthCorp L.P.) as of December 31, 1994 and 1993, and the related consolidated
statements of income, partners' capital and cash flows for each of the three
years in the period ended December 31, 1994. These consolidated financial
statements are the responsibility of National HealthCare L.P.'s management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
National HealthCare L.P. as of December 31, 1994 and 1993, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 1, 1995
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NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except unit amounts)
Year Ended December 31 1994 1993 1992
---------- ---------- ----------
Revenues:
Net patient revenues $ 269,722 $ 223,089 $ 194,830
Gain on sale of investment --- 24,773 ---
Other revenues 29,179 21,996 21,548
---------- ---------- ----------
Net revenues 298,901 269,858 216,378
---------- ---------- ----------
Costs and Expenses:
Salaries, wages and benefits 157,663 128,462 110,952
Other operating 98,753 80,326 72,718
Depreciation and amortization 13,582 11,879 10,594
Interest 13,050 11,629 12,613
---------- ---------- ----------
Total costs and expenses 283,048 232,296 206,877
---------- ---------- ----------
Net Income $ 15,853 $ 37,562 $ 9,501
========== ========== ==========
Earnings Per Unit:
Primary $ 2.02 $ 4.85 $ 1.28
Fully diluted 1.80 4.05 1.23
Weighted Average Units Outstanding:
Primary 7,834,375 7,752,622 7,405,322
Fully diluted 9,807,241 9,726,254 8,669,283
Net Income Allocable to Partners:
General Partners $ 159 $ 376 $ 95
Limited Partners 15,694 37,186 9,406
---------- ---------- ----------
$ 15,853 $ 37,562 $ 9,501
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31 1994 1993
- ----------- -------- --------
Assets
Current Assets:
Cash and cash equivalents $ 1,442 $ 145
Cash held by trustees 1,604 1,289
Marketable securities 4,010 5,670
Accounts receivable, less allowance for
doubtful accounts of $3,367 and
$2,612, respectively 48,372 30,395
Notes receivable 4,922 4,219
Note receivable from NHI 22,847 26,700
Loan participation agreements 9,784 37,379
Inventory, at lower of cost (first-in,
first-out method) or market 2,952 2,933
Prepaid expenses and other assets 1,573 561
-------- --------
Total current assets 97,506 109,291
-------- --------
Property, Equipment and Assets Under Arrangement
With Other Parties:
Property and equipment, at cost 136,757 108,663
Accumulated depreciation and amortization (31,094) (24,216)
Assets under arrangement with other parties, net 81,746 106,488
-------- --------
Net property, equipment and assets
under arrangement with other parties 187,409 190,935
-------- --------
Other Assets:
Bond reserve funds, mortgage replacement
reserves and other deposits 1,720 1,663
Unamortized financing costs 2,811 3,085
Notes receivable 87,180 25,000
Notes receivable from National 12,296 11,861
Minority equity investments and other 7,211 2,845
-------- --------
Total other assets 111,218 44,454
-------- --------
$396,133 $344,680
======== ========
Liabilities and Partners' Capital
Current Liabilities:
Current portion of long-term debt $ 6,330 $ 3,569
-------- --------
Trade accounts payable 17,688 5,357
Accrued payroll 18,644 13,981
Accrued interest 2,223 988
Distributions payable --- 8,576
Other current liabilities 10,153 7,327
-------- --------
Total current liabilities 55,038 39,798
-------- --------
Long-term Debt, Less Current Portion 104,243 54,625
Debt Serviced by Other Parties, Less Current Portion 89,764 112,116
Minority Interests in Consolidated Subsidiaries 802 767
Commitments, Contingencies and Guarantees
Subordinated Convertible Notes 30,000 30,000
Deferred Income 15,280 14,848
Partners' Capital:
General partners 1,095 1,027
Limited partners, less notes receivable 99,911 91,499
-------- --------
Total partners' capital 101,006 92,526
-------- --------
$396,133 $344,680
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31 1994 1993 1992
-------- -------- --------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 15,853 $ 37,562 $ 9,501
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 13,147 11,651 10,368
Provision for doubtful accounts receivable 2,118 1,116 1,180
Amortization of intangibles and deferred charges 848 602 593
Amortization of deferred income (403) (239) (209)
Equity in earnings of unconsolidated investments (450) (2,740) (4,343)
Distributions from unconsolidated investments 213 2,435 2,422
(Gain) loss on sale of investment 120 (24,773) ---
Changes in assets and liabilities:
Increase in accounts receivable (20,095) (2,689) (6,212)
Increase in inventory (19) (56) (86)
(Increase) decrease in prepaid expenses and
other assets (1,012) 1,724 (1,773)
Increase (decrease) in trade accounts payable 12,331 (1,064) 1,387
Increase in accrued payroll 4,663 3,126 1,243
Increase (decrease) in accrued interest 1,235 (259) (330)
Increase in other current liabilities 2,826 3,126 1,348
-------- -------- --------
Net cash provided by operating activities 31,375 29,522 15,089
-------- -------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (9,599) (30,569) (14,715)
Increase in notes receivable and loan
participation agreements, net of receipts (31,870) (45,722) (20,557)
Increase in minority equity investments
and other (3,984) (22) (149)
(Increase) decrease in debt and equity securities 2,140 3,159 (4,257)
Sale of investment 136 32,991 ---
-------- -------- --------
Net cash used in investing activities (43,177) (40,163) (39,678)
-------- -------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 34,225 6,446 29,590
(Increase) decrease in cash held by trustees (315) (12) 13,797
Increase in minority interests in subsidiaries 35 63 77
Issuance of partnership units 773 690 470
Collection of receivables from exercise of options 437 1,040 ---
Increase in bond reserve funds, mortgage
replacement reserves and other deposits (57) (151) (159)
Payments on debt (4,360) (4,023) (8,102)
Cash distributions to partners (17,639) (6,194) (3,872)
Increase in financing costs --- (85) (98)
-------- -------- --------
Net cash provided by (used in) financing
activities 13,099 (2,226) 31,703
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,297 (12,867) 7,114
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 145 13,012 5,898
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,442 $ 145 $ 13,012
======== ======== ========
Supplemental information:
Cash payments for interest expense $ 11,815 $ 11,888 $ 12,943
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands except unit amounts)
Receivables Unrealized Total
Number from Sale Gains on General Limited Partners'
of Units of Units Securities Partners Partners Capital
-------- ----------- ---------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1991 7,306,570 $(11,641) $--- $ 735 $ 72,729 $ 61,823
Net income --- --- --- 95 9,406 9,501
Units sold 442,022 (4,533) --- --- 5,003 470
Cash distributions
declared ($.53 per unit) --- --- --- (39) (3,833) (3,872)
--------- -------- ---- ------ -------- --------
BALANCE AT DECEMBER 31, 1992 7,748,592 (16,174) --- 791 83,305 67,922
--------- -------- ---- ------ -------- --------
Net income --- --- --- 376 37,186 37,562
Collection of receivables --- 1,040 --- --- --- 1,040
Units sold 47,841 --- --- 7 684 691
Other --- --- --- 1 80 81
Cash distributions
declared ($1.90 per unit) --- --- --- (148) (14,622) (14,770)
--------- -------- ---- ------ -------- --------
BALANCE AT DECEMBER 31, 1993 7,796,433 (15,134) --- 1,027 106,633 92,526
--------- ------- --- ----- ------- -------
Net income --- --- --- 159 15,694 15,853
Collection of receivables --- 437 --- --- --- 437
Units sold 29,732 --- --- --- 773 773
Unrealized gains on securities --- --- 480 --- --- 480
Cash distributions declared
($1.17 per unit) --- --- --- (91) (8,972) (9,063)
--------- -------- ---- ------ -------- --------
BALANCE AT DECEMBER 31, 1994 7,826,165 $(14,697) $480 $1,095 $114,128 $101,006
========= ======== ==== ====== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
Presentation--
The consolidated financial statements include the accounts of National
HealthCare L.P. and its subsidiaries (NHC). (Prior to January 1, 1995, the
name of NHC was National HealthCorp L.P.) Investments are accounted for on
either the cost or equity method. All material intercompany balances, profits,
and transactions have been eliminated in consolidation, and minority interests
are reflected in consolidation. Certain reclassifications have been made to
the 1992 and 1993 financial statements to conform to the 1994 presentation.
Health Care Revenues--
NHC's principal business is operating long-term health care centers.
Approximately 61% of NHC's net revenues in 1994, 1993 and 1992 are from
participation in Medicare and Medicaid programs (excluding in 1993 the
nonrecurring gain of $24,773,000). Amounts paid under these programs are
generally based on a facility's allowable costs or a fixed rate. Revenues are
recorded at standard billing rates less allowances and discounts principally
for patients covered by Medicare, Medicaid and other contractual programs.
These allowances and discounts were $82,443,000, $54,348,000 and $43,513,000
for 1994, 1993 and 1992, respectively. Amounts earned under the Medicare and
Medicaid programs are subject to review by the third party payors. In the
opinion of management, adequate provision has been made for any adjustments
that may result from such reviews. Any differences between estimated
settlements and final determinations are reflected in operations in the year
finalized.
Provision for Doubtful Accounts--
Provisions for estimated uncollectible accounts and notes receivable are
included in other operating expenses.
Property, Equipment and Assets Under Arrangement with Other Parties--
NHC uses the straight-line method of depreciation over the expected useful
lives of property and equipment estimated as follows: buildings and
improvements, 20-40 years; equipment and furniture, 3-15 years; and properties
under arrangements with other parties, 10-20 years. The provision for
depreciation includes the amortization of properties under capital leases and
properties under arrangement with National Health Investors, Inc. (See Note 3).
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 ($766,000 in 1994 and
$811,000 in 1993).
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Investments in Marketable Securities--
NHC considers its investments in marketable securities as available for
sale securities and unrealized gains and losses are recorded in partners'
capital in accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
Intangible Assets--
Any excess of cost over net assets of companies purchased is amortized
generally over 40 years using the straight-line method. Deferred financing
costs are amortized principally by the interest method over the terms of the
related loans.
Income Taxes--
NHC is not a taxable entity. Accordingly, no provision for income taxes
has been made in the Consolidated Statements of Income.
The earnings of NHC are taxable to the individual partners. Partners are
required to report their distributive share of the income, gain, loss,
deductions and credits of the partnership on their individual income tax
returns.
The Revenue Act of 1987 contains provisions which cause some publicly
traded partnerships to be taxed as corporations. Because NHC was in existence
and publicly traded on December 17, 1987, it will continue to be treated as a
partnership for the 1987 through 1997 taxable years.
NHC adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," effective January 1, 1993. The Statement
generally requires NHC to record any income tax provisions or income taxes
payable based on the liability method. NHC management believes, based on
current information, that the effect of any income tax assets or liabilities
that would be recorded in 1998, the effective date that master limited
partnerships become taxable, would not be material to NHC's financial condition
or results of operations.
Concentration of Credit Risks--
NHC's credit risks primarily relate to cash and cash equivalents, cash
held by trustees, accounts receivable, marketable securities, notes receivable
and loan participation agreements. Cash and cash equivalents are primarily
held in bank accounts and overnight investments. Cash held by trustees is
primarily invested in commercial paper and certificates of deposit with
financial institutions. Accounts receivable consists primarily of amounts due
from patients (funded through Medicare, Medicaid, other contractual programs
and private payors) in the states of Alabama, Florida, Georgia, Kentucky,
Missouri, South Carolina, Tennessee, and Virginia and from other health care
companies for management services. NHC performs continual credit evaluations
of its clients and maintains allowances for doubtful accounts on these accounts
receivable. Marketable securities are held primarily in two accounts with
brokerage institutions. Notes receivable relate primarily to
52
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secured loans with health care facilities and to secured notes receivable from
officers, directors and supervisory employees as discussed in Note 14. NHC has
$31,999,000 of notes receivable from National Health Investors, Inc. (NHI) as
discussed in Note 14. NHC also has notes receivable from National HealthCare
Corporation of $12,296,000 as discussed in Note 4. NHC has loan participation
agreements with a bank as discussed in Note 14.
NHC's financial instruments, principally its notes receivable and loan
participation agreements, are subject to the possibility of loss of the
carrying values as a result of either the failure of other parties to perform
according to their contractual obligations or changes in market prices which
may make the instruments less valuable. NHC obtains various collateral and
other protective rights, and continually monitors these rights, in order to
reduce such possibilities of loss. See Note 14 for additional information on
the notes receivable and loan participation agreements.
Cash and Cash Equivalents--
Cash equivalents include highly liquid investments with a maturity of
less than three months.
NOTE 2 - ORGANIZATION OF THE PARTNERSHIP:
The general partners of NHC are as follows: (1) NHC, Inc., a Tennessee
corporation (the "Managing General Partner"), which is owned by its board of
directors and senior management of NHC; (2) National HealthCare Corporation
("National" and "Administrative General Partner" and formerly, National Health
Corporation), a Tennessee corporation which is owned by the National HealthCare
Corporation Leveraged Employee Stock Ownership Plan and Trust (the "ESOP"); and
(3) W. Andrew Adams, NHC Inc.'s President (the "Individual General Partner").
The Managing General Partner, the Administrative General Partner and the
Individual General Partner are collectively called "the General Partners". The
General Partners own a general partnership interest in NHC representing a 1%
interest in the profit, losses and distributions of NHC.
NOTE 3 - RELATIONSHIP WITH NATIONAL HEALTH INVESTORS, INC.:
Leases--
On October 17, 1991, concurrent with NHC's conveyance of real property to
NHI, NHC leased from NHI the real property of 40 long-term care centers and
three retirement centers. Each lease is for an initial term expiring December
31, 2001, with two additional five-year renewal terms at the option of NHC,
assuming no defaults. NHC accounts for the leases as operating leases.
During the initial term and first renewal term of the leases, NHC is
obligated to pay NHI annual base rent on all 43 facilities of $15,238,000. If
NHC exercises its option to extend the leases for the second renewal term, the
base rent will be the then fair rental value as negotiated by NHC and NHI.
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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. See "Accounting Treatment of the Transfer" for further
discussion.
In addition to base rent and debt service rent, in each year after 1992,
NHC must pay percentage rent to NHI equal to 3% of the amount by which gross
revenues of each facility in such later year exceeds the gross revenues of such
facility in 1992. Percentage rent for 1994 and 1993 was approximately $718,000
and $358,000, respectively.
Each lease with NHI is a "triple net lease" under which NHC is responsible
for paying all taxes, utilities, insurance premium costs, repairs and other
charges relating to the ownership of the facilities. NHC is obligated at its
expense to maintain adequate insurance on the facilities' assets.
NHC has a right of first refusal with NHI to purchase any of the
properties transferred from NHC should NHI receive an offer from an unrelated
party during the term of the lease or up to 180 days after termination of the
related lease.
Base rent expense to NHI was $15,238,000 in 1994, 1993 and 1992 and is
included in other operating expenses. At December 31, 1994, the approximate
future minimum base rent commitments to be paid by NHC on non-cancelable
operating leases with NHI are as follows:
1995 $15,238,000
1996 15,238,000
1997 15,238,000
1998 15,238,000
1999 15,238,000
Thereafter 30,476,000
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
and policies established by NHI's Board of Directors.
Either party may terminate the Advisory Agreement on 90 days notice at any
time. NHI may terminate the Advisory Agreement for cause at any time.
For its services under the Advisory Agreement, NHC received annual
compensation of $2,138,000, $1,828,000 and $1,625,000 in 1994, 1993 and 1992,
respectively. However, the payment of such annual compensation is conditional
upon NHI having sufficient funds from operations to pay annual dividends of
$2.00 per share and upon NHI paying such dividends. NHI met this condition in
1994, 1993 and 1992.
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Purchase of Mortgage Notes--
During 1994, NHC purchased $37,978,000 of mortgage notes receivable from
NHI in exchange for cash and the assumption of certain liabilities. All
properties secured by the mortgage notes are managed by NHC, and four of the
notes had been transferred to NHI upon its capitalization by NHC in 1991.
Accounting Treatment of the Transfer--
NHC has accounted for the conveyance of assets (and related debt) to NHI
and the subsequent leasing of the real estate assets as a "financing/leasing"
arrangement. Since NHC remains liable on the transferred debt, the 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 real estate over the lease
term, its Consolidated Statements of Income will reflect the continued
depreciation of the assets over the lease term, the continued interest expenses
on the debt balances and the additional base rent (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.
Tax Treatment of the Transfer--
The conveyance of assets to NHI was treated as a nontaxable exchange of
assets for the stock of NHI under Section 351 of the Internal Revenue Code of
1986, as amended. For federal income tax purposes, no gain or loss was
recognized by NHC or by its unitholders upon the conveyance of assets to NHI or
upon the distribution of the stock of NHI.
NOTE 4 - RELATIONSHIP WITH NATIONAL HEALTHCARE CORPORATION:
Sale of Health Care Centers--
On January 20, 1988, NHC sold the assets (inventory, property and
equipment) of eight health care centers (1,121 licensed beds) to National, the
administrative general partner of NHC, for a total consideration of
$40,000,000. The consideration consisted of $30,000,000 in cash and a
$10,000,000 note receivable due December 31, 2007. The note receivable earns
interest at 8.5%. NHC has advanced $2,291,000 to National to fund working
capital requirements at December 31, 1994. The working capital advance earns
interest at 85% of prime. NHC has agreed to manage the centers under a 20-year
management contract for management fees comparable to those in the industry.
NHC has a receivable from National for management fees of approximately
$3,804,000 and $3,764,000 at December 31, 1994 and 1993, respectively.
NHC's basis in the assets sold was approximately $24,300,000. The
resulting profit of $15,745,000 was deferred and will be amortized into income
beginning with the collection of the note receivable (up to $12,000,000) with
the balance ($3,745,000) of the profit being amortized into income on a
straight-line basis over the management contract period.
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Financing Activities--
On January 20, 1988, NHC obtained long-term financing of $8,500,000 for
its new headquarters building from National through the National HealthCare
Corporation Leveraged Employee Stock Ownership Plan and Trust. The note
requires quarterly principal and interest payments with interest at 9%. At
December 31, 1994 and 1993, the outstanding balance on the note was
approximately $6,403,000 and $6,844,000, respectively. The building is owned
by a separate partnership of which NHC is the general partner and building
tenants are limited partners. NHC has guaranteed the debt service of the
building partnership.
In addition, NHC's $50,000,000 credit facility, the $20,000,000 Series A
Loan, and the $30,000,000 Series B Loan described in Note 11 were financed
through National and National's ESOP. NHC's interest costs, financing expenses
and principal payments are equal to those incurred by National. In October,
1991, NHC borrowed $10,000,000 from National. The term note payable requires
quarterly interest payments at 8.5%. The entire principal is due at maturity
in 2007.
As of December 31, 1994, National had borrowed $2,296,000 from NHC to
finance the construction of additions at two health care centers. The notes
require monthly principal and interest payments. The interest rate is equal to
the prime rate, and the notes mature in 1998.
Duties as Administrative General Partner--
The personnel conducting the business of NHC are employees of National
which provides payroll services, provides employee fringe benefits, and
maintains certain liability insurance. NHC pays to National all the costs of
personnel employed for the benefit of NHC, as well as an administrative fee
($1,388,000 in 1994) equal to 1% of payroll costs.
National maintains and makes contributions to its ESOP for the benefit of
eligible employees.
NOTE 5 - GAIN ON SALE OF INVESTMENT:
In August, 1993, NHC sold its investment in VHA Long Term Care (VHA LTC)
for approximately $32,987,000 of cash which resulted in a gain to NHC of
$24,773,000. The gain on sale of investment was approximately $3.20 per
primary unit outstanding and $2.55 per fully diluted unit outstanding. For
federal tax purposes, the sale generated a capital gain to NHC partners of
approximately $25,000,000 which equates to a capital gain per unit of
approximately $3.24. NHC's Board of Directors approved a one-time special cash
distribution of $1.10 per unit in 1993 to help defray tax liability from this
gain.
A summary of financial information of the combined affiliated companies
(VHA LTC and other unconsolidated investments) is set forth below for 1992, the
only period in which the investments are significant in amount:
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(in thousands)
Year Ended December 31 1992
---------------------- ----
Operations
Net sales $38,979
Expenses 29,817
-------
Net Income $ 9,162
=======
NHC equity in earnings of
unconsolidated investments $ 2,974
=======
Distribution to NHC from
unconsolidated investments $ 2,422
=======
Capital contributions (cumu-
lative) in unconsolidated
investments $ 2,356
=======
NOTE 6 - OTHER REVENUES:
Revenues from managed centers include management fees and interest income
on notes receivable from managed centers. "Other" revenues include non-health
care related earnings.
(in thousands)
Year Ended December 31 1994 1993 1992
- ---------------------- ---- ---- ----
Revenues from managed centers $18,022 $12,446 $10,629
Guarantee fees 936 790 585
Advisory fees from NHI 2,138 1,828 1,625
Earnings (losses)on securities (47) 1,116 1,384
Equity in earnings of unconsolidated
investments 423 1,174 2,974
Interest income 4,844 3,010 3,094
Other 2,863 1,632 $1,257
------ ------ ------
$29,179 $21,996 $21,548
======= ======= =======
NOTE 7 - EARNINGS PER UNIT:
Primary earnings per unit is based on the weighted average number of
common and common equivalent units outstanding. Common equivalent units result
from dilutive unit options computed using the treasury stock method.
Fully diluted earnings per unit assumes, in addition to the above, that
the 6% subordinated convertible notes were converted at the date issued with
earnings being increased for interest expense thereon.
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The following table summarizes the earnings and the average number of
common units and common equivalent units used in the calculation of primary and
fully diluted earnings per unit.
(dollars in thousands)
Year Ended December 31 1994 1993 1992
- ---------------------- ---- ---- ----
Primary:
Weighted average common units 7,796,508 7,750,531 7,404,979
Stock options 37,867 2,091 343
---------- ---------- ----------
Average common units outstanding 7,834,375 7,752,622 7,405,322
========== ========== ==========
Earnings $ 15,853 $ 37,562 $ 9,501
========== ========== ==========
Fully Diluted:
Weighted average common units 7,796,508 7,750,531 7,404,979
Stock options 37,867 2,857 8,354
Convertible subordinated notes 1,972,866 1,972,866 1,255,950
---------- ---------- ----------
Assumed average common units
outstanding 9,807,241 9,726,254 8,669,283
========== ========== ==========
Earnings $ 17,653 $ 39,362 $ 10,703
========== ========== ==========
NOTE 8 - PROPERTY, EQUIPMENT AND ASSETS UNDER ARRANGEMENT WITH OTHER PARTIES:
Property and equipment, at cost, consist of the following:
(in thousands)
December 31 1994 1993
- ----------- ---- ----
Land $ 10,463 $ 7,594
Buildings and improvements 63,172 40,512
Furniture and equipment 52,548 43,886
Capitalized equipment leases 33 88
Construction in progress 10,541 16,583
-------- --------
$136,757 $108,663
======== ========
Assets under arrangement with other parties, net of accumulated
depreciation, consist of the following:
December 31 1994 1993
- ----------- ------- --------
Land $ 5,203 $ 5,518
Buildings and improvements 70,690 75,844
Fixed equipment 4,442 5,040
Mortgage notes receivable 1,411 20,086
------- --------
$81,746 $106,488
======= ========
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NOTE 9 - ACQUISITIONS AND DISPOSITIONS:
In February, 1994, NHC acquired Spectrum Enterprises, Inc. and Spectrum
Private Nursing Services, Inc. for a total consideration of approximately
$4,253,000. Properties acquired include thirteen homecare programs located in
Florida. Two of the homecare programs provide services to private payors
exclusively. Former shareholders have signed a covenant not to compete. NHC
is amortizing the cost of the covenant not to compete over its term.
In February, 1994, NHC purchased for approximately $6,000,000 a 120-bed
long-term health care center located in Naples, Florida.
In May, 1993, NHC purchased for total consideration of approximately
$5,067,000 a 131-bed long-term health care center located in Clinton, South
Carolina.
The purchase prices for the acquisitions above were allocated to the
underlying assets based on their relative fair market values. The Consolidated
Statements of Income for 1994 and 1993 include the results of operations from
the respective dates of acquisition.
NOTE 10 - INVESTMENT IN MARKETABLE SECURITIES:
Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115) was issued by the
Financial Accounting Standards Board effective for fiscal years beginning after
December 15, 1993. As required by SFAS 115, securities are classified as
trading, held-to-maturity or available for sale. Securities are classified as
trading securities when they are bought and held principally for the purpose
of selling them in the near term. Securities are classified as
held-to-maturity when the company has both the positive intent and ability to
hold them to maturity. All other securities are classified as available for
sale. NHC considers its investments in marketable securities as available for
sale securities and unrealized gains and losses are recorded in partners'
capital in accordance with SFAS 115.
The ending balance of partners' capital as of December 31, 1994 was
increased by approximately $480,000 to reflect the net unrealized investment
gain on marketable securities without stated maturities classified as
available for sale which were previously carried at amortized cost or lower of
cost or market. Application of SFAS 115 to prior periods is not permitted and,
accordingly, prior financial statements have not been restated to reflect the
change in accounting principle. The adoption of SFAS 115 did not have a
material effect on NHC's financial position or results of operations.
Proceeds from the sale of investments in debt and equity securities during
the year ended December 31, 1994 were $6,726,000. Gross investment gains of
$493,000 and gross investment losses of $1,055,000 were realized on these
sales. Realized gains and losses from securities sales are determined on the
specific identification of the securities.
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NOTE 11 - DEBT AND LEASE COMMITMENTS:
Short-Term Borrowings--
During 1994 and 1993, there were no short-term borrowings.
Long-Term Debt--
Long-term debt and debt serviced by other parties consists of the
following:
Weighted Average Final Debt Serviced by Long-Term
Interest Rate Maturities Other Parties Debt
---------------- ---------- ------------------ -----------------
(in thousands)
December 31 1994 1993 1994 1993
- ----------- -------- -------- -------- -------
Bank credit facility, principal
and interest payable in variable,
quarterly installments 5.2% 2009 $26,353 $ 27,300 $ 16,148 $16,728
Senior secured notes, interest
payable semiannually,
principal payable in semi-
annual payments beginning
November, 1995 8.3 2003 20,000 20,000 --- ---
Senior secured notes, interest
payable semiannually,
principal payable in semi-
annual payments beginning
November, 1995 8.4 2005 564 19,238 29,436 10,762
First mortgage revenue bonds,
principal and interest payable
quarterly 10.0 2005 12,514 12,544 2,807 2,815
First mortgage notes payable in
periodic installments, interest
payable monthly 9.7 1996-2019 7,415 7,869 29,250 6,844
First mortgage revenue bonds,
payable in periodic installments,
interest payable monthly 9.3 2001-2011 11,404 11,919 --- ---
First mortgage revenue bonds,
payable in periodic installments, variable,
interest payable monthly 4.4 2000-2010 15,490 16,055 --- ---
Unsecured term note payable to
National. Interest payable quarterly,
principal payable at maturity 8.5 1998 --- --- 10,000 10,000
Other notes payable generally
in monthly installments 8.75 1995-1996 --- --- 18,956 8,236
------- -------- -------- -------
93,740 114,925 106,597 55,385
Less current portion (3,976) (2,809) (2,354) (760)
------- -------- -------- -------
$89,764 $112,116 $104,243 $54,625
======== ======== ======== =======
The 8.3% and 8.4% secured notes due in 2003 and 2005 were borrowed
through NHC's administrative partner, National. NHC granted certain credits
and interest rate concessions related to its management fees from National in
obtaining these loans.
The 10% first mortgage bonds (Bonds) due in 2005 are redeemable at the
option of NHC, in whole or in part, at a redemption price of 105% of the
principal amount thereof, plus accrued interest, with such redemption price
declining 1% per year on or after January 15, 1993 to 100% of the principal
amount on or after January 15, 1998. The Bonds are redeemable
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by holders at 100% of the principal amount thereof, plus accrued interest.
The majority of the mortgage debt is cross-defaulted with other NHC
and NHI liabilities and is cross-collateralized with NHC and NHI assets to the
extent of approximately $22,287,000 of debt.
To obtain the consent of various lenders to the transfer of assets,
NHI guaranteed certain NHC debt and NHC-guaranteed debt (see Note 13) which
were not transferred to NHI. A default by NHI under its obligations would
default the debt or guarantees of NHC.
The aggregate maturities of long-term debt and capital lease obligations
for the five years subsequent to December 31, 1994 are as follows:
Long-term Debt Serviced
Debt By Others Total
--------- ------------- ----------
1995 $2,355,000 $3,975,000 $ 6,330,000
1996 4,283,000 5,219,000 9,502,000
1997 4,423,000 5,270,000 9,693,000
1998 4,515,000 6,084,000 10,599,000
1999 4,327,000 5,345,000 9,672,000
Certain property and equipment of NHC and NHI are pledged as collateral
on long-term debt or capital lease obligations. Other property and assets are
available for use as collateral as needed.
Certain loan agreements require maintenance of specified operating ratios
as well as specified levels of cash held in escrow, working capital and
partners' capital by NHC and NHI. All such covenants have been met by NHC, and
management believes that NHI is in compliance with the loan covenants.
Lease Commitments--
Operating expenses for the years ended December 31, 1994, 1993, and 1992
include expense for leased premises and equipment under operating leases of
$16,692,000, $16,223,000 and $15,783,000, respectively. See Note 3 for the
approximate future minimum base rent commitments on non-cancelable operating
leases with NHI.
Construction and Financing Commitments--
NHC is committed to spend approximately $7,511,000 for ongoing
construction contracts and to provide financing to managed facilities in the
amount of $3,047,000 in 1995. NHC is also committed to loan up to $30,848,000
to NHI under a line of credit agreement. NHC's cash on hand, marketable
securities, short-term notes receivable, loan participation agreements,
operating cash flow and, as needed, its borrowing capacity are expected to be
adequate to fund these commitments.
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NOTE 12 - SUBORDINATED CONVERTIBLE NOTES:
On May 12, 1992, NHC issued $30,000,000 of 6% subordinated convertible
notes ("the notes") due July 1, 2000. Interest is payable quarterly.
The notes are convertible at the option of the holder at any time into
units of NHC at a price of $15.2063 per unit, subject to adjustment for certain
changes in the number of units outstanding. The notes may be redeemed at the
option of NHC after May 12, 1996, but only if NHC has elected to be taxed as a
corporation and only if the market price of NHC's units is such as to guarantee
certain specified returns to the holder of the notes. NHC has reserved
1,972,867 units for conversion of the notes.
NOTE 13 - CONTINGENCIES AND GUARANTEES:
Litigation--
There is certain litigation incidental to NHC's business, none of
which, in management's opinion, would be material to the financial position or
results of operations of NHC.
Professional Liability and Other Insurance--
In 1994, NHC carried a professional liability insurance policy
($1,000,000 per claim and $3,000,000 in the aggregate per location per annum)
for coverage from liability claims and losses incurred in its healthcare
business. In 1995, professional liability coverage was increased to $1,000,000
per claim and in the aggregate per location with additional umbrella coverage
in the amount of $5,000,000 in the aggregate per occurrence per annum. The
policy is a fixed premium and occurrence form policy and has no provisions for
a retrospective refund or assessment due to actual loss experience. In the
opinion of management, NHC's insurance coverage is adequate to cover settlement
of outstanding claims against NHC.
NHC self-insures certain expenses related to health insurance and workers
compensation insurance claims of its employees. Provision has been made by
NHC for reported claims and estimates for incurred but unreported claims.
Guarantees and Related Events--
In order to obtain management agreements and to facilitate construction
or acquisition of certain health care centers which NHC manages for others,
NHC has guaranteed some or all of the centers' first mortgage bond debt
(principal and interest). For this service, NHC charges an annual guarantee
fee of 1% to 2% of the outstanding principal balance guaranteed, which fee is
in addition to NHC's management fee. The principal amount outstanding under
the guarantees is approximately $71,869,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average of 5.3%
at December 31, 1994. In addition, NHC has guaranteed a letter of credit in
the amount of approximately $8,200,000 for which an annual fee of 2% is charged.
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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 personalty, 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, and NHC has assigned
its rights in certain of such mortgages to NHI. Such rights may be enforced
if either NHC or NHI is required to pay under their respective guarantees.
NHC has agreed to indemnify and hold harmless NHI against any and all loss,
liability or harm incurred by NHI as a result of having to perform under its
guarantee of any or all of the guaranteed debt.
NOTE 14 - NOTES RECEIVABLE AND LOAN PARTICIPATION AGREEMENTS:
NHC has receivables from certain line of credit agreements with NHI under
which there is a balance outstanding of $31,999,000.
Other notes receivable generally consist of loans and accrued interest
to managed health care centers and retirement centers for construction costs,
development costs incurred during construction and working capital during
initial operating periods. The notes generally require monthly payments with
maturities ranging from five to twenty-five years. The majority of the notes
mature in 2004. Interest on the notes is generally at prime plus 2% or at a
fixed rate of 10.25%, payable monthly. The collateral for the notes consists
of first and second mortgages, certificates of need, personal guarantees and
stock pledges.
Under the terms of a collateralized management loan program, NHC has
loaned approximately $425,000 at December 31, 1994 to officers, directors and
supervisory employees. The notes are secured by the pledge of NHI common stock
having a fair market value equal to the amount loaned. In addition, the
borrower must provide written evidence of the existence of a financial
institution line of credit in an amount equal to the loan amount. Principal
and interest are payable on demand, but if no demand is made for interest, then
interest shall be paid quarterly.
NHC has entered into loan participation agreements with SouthTrust Bank
of Alabama acquiring an interest in two mortgage notes totaling approximately
$9,784,000. The participation interests are 75% and 100% and the interest
rates are variable. At December 31, 1994, the rates are 9.625% and 10.515%.
The mortgages mature in 2002. However, NHC has the right under the
participation agreement to exchange its investment for cash at any time.
NOTE 15 - PARTNERS' CAPITAL:
NHC has Incentive Option Plans which provide for the granting of options
to key employees and directors to purchase units at no less than market value
on the date of grant. On April 22, 1994, options to purchase 495,000 units
were granted at $25.12 per unit. On October 2, 1992, options to purchase
402,000 units (which had been granted on July 23, 1992 at $11.25 per unit) were
exercised and the units were issued. At December 31, 1994, options to purchase
5,000 units and 495,000 units at $11.25 and $25.12, respectively, remain
outstanding.
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Additionally, NHC has an employee unit purchase plan which allows
employees to purchase ownership units of NHC through payroll deductions. The
plan allows employees to terminate participation at any time.
In connection with the exercise of certain stock options, NHC has
received interest-bearing (ranging from 3.5% to 6.5%), full recourse notes in
the amount of $14,697,000 at December 31, 1994. The notes are secured by units
of NHC or shares of NHI having a fair market value of not less than 150% of the
amount of the note. The notes were received in accordance with the terms of
the Key Employee Stock Financing Plan as approved at NHC's Special Meeting of
the unitholders on December 31, 1986. The principal balances of the notes are
reflected as a reduction of partners' capital in the consolidated financial
statements.
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical to
estimate that value:
Cash and cash equivalents; Cash held by trustees; Bond reserve funds, mortgage
replacement reserves and other deposits; Loan Participation Agreements; and
Accrued interest--
The carrying amount approximates fair value because of the short
maturity or the nature of these instruments.
Notes receivable--
The fair value of NHC's notes receivable is estimated based on the
current rates offered by NHC or comparable parties for the same or similar type
of notes receivable of the same or similar maturities.
Long-term debt; Debt serviced by other parties; and Subordinated convertible
notes--
The fair value is estimated based on the current rates offered to NHC
for similar debt of the same maturities.
The estimated fair values of NHC's financial instruments are as
follows:
December 31, 1994
-----------------
Carrying Amount Fair Value
--------------- ------------
Cash and cash equivalents $ 1,442,000 $ 1,442,000
Cash held by trustees 1,604,000 1,604,000
Notes receivable 127,245,000 127,245,000
Loan participation agreements 9,784,000 9,784,000
Bond reserve funds,
mortgage replacement
reserves and other
deposits 1,720,000 1,720,000
Accrued interest (2,223,000) (2,223,000)
Long-term debt,
including current
portion (106,597,000) (106,597,000)
Debt serviced by other
parties, including
current portion (93,740,000) (93,740,000)
Subordinated convertible
notes (30,000,000) (30,000,000)
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