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EX-32 - NATIONAL HEALTHCARE CORPexhibit32nhc.htm
EX-31 - NATIONAL HEALTHCARE CORPexhibit311adams.htm
EX-31 - NATIONAL HEALTHCARE CORPexhibit312daniel.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

 

S  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

OR

£   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ____________

 

 

Commission file number    001–13489       

[nhcmarch2011form10q001.jpg]

(Exact name of registrant as specified in its Charter)

 

 

Delaware

52–2057472

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization

Identification No.)

 

 

100 E. Vine Street

Murfreesboro, TN

37130

(Address of principal executive offices)

(Zip Code)

 

 

(615) 890–2020

Registrant's telephone number, including area code

 

 

Indicate by check mark whether the registrant: (1) Has filed all reports required to be filed by Section 13 or 15(d), of the Securities Exchange Act of 1934 during the preceding 12 months (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  S No. £


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files).

Yes £      No  £


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of "large accelerated file," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):  

Large Accelerated filer  £

Accelerated filer  S

 

 

Non-accelerated filer (Do not check if a smaller reporting company)  £

Smaller reporting company  £

 

Indicate by check mark whether the registrant is a shell company (as is defined in Rule 12b–2 of the Exchange

Act).  Yes  £   No S

 

13,831,605 shares of common stock of the registrant were outstanding as of May 9, 2011



PART I.  FINANCIAL INFORMATION


Item 1.  Financial Statements.


NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Income

(Unaudited)

(in thousands, except share and per share amounts)



 

 

 

 

 

Three Months Ended

March 31

 

 

 

 

 

2011

 

 

2010

REVENUES:

 

 

 

 

 

 

 

Net patient revenues

 

$

177,553 

 

$

157,961 

 

Other revenues

 

 

15,395 

 

 

14,076 

 

 

Net revenues

 

 

192,948 

 

 

172,037 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

108,762 

 

 

96,076 

 

Other operating

 

 

41,389 

 

 

49,003 

 

Rent

 

 

9,865 

 

 

8,178 

 

Depreciation and amortization

 

 

6,962 

 

 

6,427 

 

Interest

 

 

89 

 

 

114 

 

 

Total costs and expenses

 

 

167,067 

 

 

159,798 

 

 

 

 

 

 

 

 

 

Income Before Non-Operating Income

 

 

25,881 

 

 

12,239 

Non-Operating Income

 

 

4,561 

 

 

4,575 

 

 

 

 

 

 

 

Income Before Income Taxes

 

 

30,442 

 

 

16,814 

Income Tax Provision

 

 

(11,718)

 

 

(6,407)

Net Income

 

 

18,724 

 

 

10,407 

 

 

 

 

 

 

 

 

 

Dividends to preferred stockholders

 

 

(2,168)

 

 

(2,168)

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

16,556 

 

$

8,239 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share:

 

 

 

 

 

 

 

Basic

 

$

1.21 

 

$

.60 

 

Diluted

 

$

1.15 

 

$

.60 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

Basic

 

 

13,680,135 

 

 

13,721,570 

 

Diluted

 

 

16,327,236 

 

 

13,725,201 




The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.



2




NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

 (in thousands)



 

 

March 31, 2011

 

December 31,

2010

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,504 

 

$

28,478 

 

 

Restricted cash and cash equivalents

 

 

59,619 

 

 

51,992 

 

 

Marketable securities

 

 

90,881 

 

 

85,116 

 

 

Restricted marketable securities

 

 

69,504 

 

 

70,877 

 

 

Accounts receivable, less allowance for doubtful accounts of $3,724 and $3,942, respectively

 

 

68,242 

 

 

76,559 

 

 

Inventories

 

 

7,699 

 

 

7,853 

 

 

Prepaid expenses and other assets

 

 

2,970 

 

 

1,251 

 

 

 

Total current assets

 

 

332,419 

 

 

322,126 

 

 

 

 

 

 

 

 

 

 

 

Property and Equipment:

 

 

 

 

 

 

 

 

Property and equipment, at cost

 

 

646,312 

 

 

640,150 

 

 

Accumulated depreciation and amortization

 

 

(211,025)

 

 

(203,758)

 

 

 

Net property and equipment

 

 

435,287 

 

 

436,392 

 

 

 

 

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

 

 

 

Deposits

 

 

455 

 

 

302 

 

 

Goodwill

 

 

20,320 

 

 

20,320 

 

 

Notes receivable

 

 

23,319 

 

 

23,671 

 

 

Deferred income taxes

 

 

12,478 

 

 

12,000 

 

 

Investments in limited liability companies

 

 

15,462 

 

 

14,204 

 

 

 

Total other assets

 

 

72,034 

 

 

70,497 

 

 

 

Total assets

 

$

839,740 

 

$

829,015 














The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.


The interim condensed consolidated balance sheet at December 31, 2010 is taken from the audited consolidated financial statements at that date.



3



NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)



 

 

 

March 31, 2011

 

 

December 31,

2010

 

 

 

(unaudited)

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

11,099

 

$

10,947

 

 

Accrued payroll

 

 

35,375

 

 

52,055

 

 

Amounts due to third party payors

 

 

16,921

 

 

17,667

 

 

Accrued risk reserves

 

 

98,913

 

 

105,059

 

 

Deferred income taxes

 

 

16,704

 

 

14,186

 

 

Other current liabilities

 

 

23,231

 

 

17,895

 

 

Dividends payable

 

 

6,058

 

 

5,997

 

 

 

Total current liabilities

 

 

208,301

 

 

223,806

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

 

10,000

 

 

10,000

 

Other Noncurrent Liabilities

 

 

18,896

 

 

18,861

 

Deferred Lease Credits

 

 

909

 

 

1,212

 

Deferred Revenue

 

 

17,116

 

 

13,990

 

 

 

 

 

 

 

 

 

 

 

Commitments, Contingencies and Guarantees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock; $.01 par value; 25,000,000 shares authorized; 10,840,140 and 10,840,608 shares, respectively, issued and outstanding; stated at liquidation of $15.75 per share

 

 

170,541

 

 

170,548

 

 

Common stock, $.01 par value; 30,000,000 shares authorized; 13,804,505 and 13,637,258 shares, respectively, issued and outstanding

 

 

138

 

 

136

 

 

Capital in excess of par value

 

 

135,308

 

 

128,061

 

 

Retained earnings

 

 

238,805

 

 

226,114

 

 

Unrealized gains on marketable securities, net of taxes

 

 

39,726

 

 

36,287

 

 

 

Total stockholders’ equity

 

 

584,518

 

 

561,146

 

 

 

Total liabilities and stockholders’ equity

 

$

839,740

 

$

829,015








The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.


The interim condensed consolidated balance sheet at December 31, 2010 is taken from the audited consolidated financial statements at that date.




4



NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(Unaudited)


 

 

 

Three Months Ended

March 31

 

 

 

2011

 

 

2010

Cash Flows From Operating Activities:

 

 

(in thousands)

 

Net income

 

$

18,724 

 

$

10,407 

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,962 

 

 

6,427 

 

 

Provision for doubtful accounts receivable

 

 

503 

 

 

507 

 

 

Equity in earnings of unconsolidated investments

 

 

(2,081)

 

 

(2,258)

 

 

Distributions from unconsolidated investments

 

 

823 

 

 

1,024 

 

 

Gains on sale of restricted marketable securities

 

 

(98)

 

 

– 

 

 

Deferred income taxes

 

 

(165)

 

 

(950)

 

 

Stock-based compensation

 

 

984 

 

 

24 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Restricted cash and cash equivalents

 

 

(5,584)

 

 

(5,407)

 

 

 

Accounts receivable

 

 

7,814 

 

 

(6,293)

 

 

 

Income tax receivable

 

 

– 

 

 

3,470 

 

 

 

Inventories

 

 

154 

 

 

(248)

 

 

 

Prepaid expenses and other assets

 

 

(1,719)

 

 

(1,605)

 

 

 

Trade accounts payable

 

 

152 

 

 

1,077 

 

 

 

Accrued payroll

 

 

(16,680)

 

 

(15,626)

 

 

 

Amounts due to third party payors

 

 

(746)

 

 

903 

 

 

 

Other current liabilities and accrued risk reserves

 

 

(810)

 

 

3,331 

 

 

 

Entrance fee deposits

 

 

(102)

 

 

(201)

 

 

 

Other noncurrent liabilities

 

 

35 

 

 

506 

 

 

 

Deferred income

 

 

3,228 

 

 

3,299 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

11,394 

 

 

(1,613)

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Additions to and acquisitions of property and equipment

 

 

(6,160)

 

 

(5,001)

 

 

Collections of notes receivable

 

 

352 

 

 

548 

 

 

Change in restricted cash and cash equivalents

 

 

(2,043)

 

 

46,826 

 

 

Purchase of restricted marketable securities

 

 

(12,220)

 

 

(52,699)

 

 

Sale of restricted marketable securities

 

 

13,570 

 

 

5,875 

 

 

 

 

Net cash used in investing activities

 

 

(6,501)

 

 

(4,451)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Tax benefit from stock-based compensation

 

 

305 

 

 

13 

 

 

Dividends paid to preferred stockholders

 

 

(2,168)

 

 

(2,168)

 

 

Dividends paid to common stockholders

 

 

(3,804)

 

 

(3,561)

 

 

Issuance of common shares

 

 

5,953 

 

 

662 

 

 

Change in deposits

 

 

(153)

 

 

(92)

 

 

Other

 

 

– 

 

 

(23)

 

 

 

 

Net cash provided by (used in) financing activities

 

 

133 

 

 

(5,169)

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

5,026 

 

 

(11,233)

Cash and Cash Equivalents, Beginning of Period

 

 

28,478 

 

 

39,022 

Cash and Cash Equivalents, End of Period

 

$

33,504 

 

$

27,789 


 The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.





5



NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

 

Preferred Stock

 

Common Stock

 

Capital in

Excess of

Par Value

 

Retained

Earnings

 

Unrealized

Gains on

Marketable

Securities

 

Total

Stockholders’

Equity

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

Balance at December 31, 2009

10,841,062 

$

170,555 

 

13,717,701 

$

137 

$

130,867 

$

197,140 

$

27,080 

$

525,779 

 

Net income

– 

 

– 

 

– 

 

– 

 

– 

 

10,407 

 

– 

 

10,407 

 

Unrealized gains on securities (net of tax of $1,319)

– 

 

– 

 

– 

 

– 

 

– 

 

– 

 

2,099 

 

2,099 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,506 

 

Stock option compensation

– 

 

– 

 

– 

 

– 

 

24 

 

– 

 

– 

 

24 

 

Tax benefit from exercise of stock options

– 

 

– 

 

– 

 

– 

 

13 

 

– 

 

– 

 

13 

 

Shares sold - options exercised

– 

 

– 

 

19,978 

 

– 

 

662 

 

– 

 

– 

 

662 

 

Dividends declared to preferred stockholders ($0.20 per share)

– 

 

– 

 

– 

 

– 

 

– 

 

(2,168)

 

– 

 

(2,168)

 

Dividends declared to common stockholders ($0.26 per share)

– 

 

– 

 

– 

 

– 

 

– 

 

(3,572)

 

– 

 

(3,572)

Balance at March 31, 2010

10,841,062 

$

170,555 

 

13,737,679 

$

137 

$

131,566 

$

201,807 

$

29,179 

$

533,244 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

10,840,608 

$

170,548 

 

13,637,258 

$

136 

$

128,061 

$

226,114 

$

36,287 

$

561,146 

 

Net income

– 

 

– 

 

– 

 

– 

 

– 

 

18,724 

 

– 

 

18,724 

 

Unrealized gains on securities (net of tax of $2,205)

– 

 

– 

 

– 

 

– 

 

– 

 

– 

 

3,439

 

3,439 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,163 

 

Stock option compensation

– 

 

– 

 

– 

 

– 

 

984

 

– 

 

– 

 

984 

 

Tax benefit from exercise of stock options

– 

 

– 

 

– 

 

– 

 

305

 

– 

 

– 

 

305 

 

Shares sold – options exercised

– 

 

– 

 

167,134

 

2

 

5,951

 

– 

 

– 

 

5,953 

 

Shares issued in conversion of preferred stock to common stock

(468)

 

(7)

 

113

 

– 

 

7

 

– 

 

– 

 

– 

 

Dividends declared to preferred stockholders ($0.20 per share)

– 

 

– 

 

– 

 

– 

 

– 

 

(2,168)

 

– 

 

(2,168)

 

Dividends declared to common stockholders ($0.28 per share)

– 

 

– 

 

– 

 

– 

 

– 

 

(3,865)

 

– 

 

(3,865)

Balance at March 31, 2011

10,840,140

$

170,541

 

13,804,505

$

138

$

135,308

$

238,805

$

 39,726

$

584,518 


The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.




6



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Note 1 – Consolidated Financial Statements


The unaudited condensed consolidated financial statements to which these notes are attached include all normal, recurring adjustments which are necessary to fairly present the financial position, results of operations and cash flows of National HealthCare Corporation ("NHC" or the "Company").  We assume that users of these interim financial statements have read or have access to the audited December 31, 2010 consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted.  This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons.  Our audited December 31, 2010 consolidated financial statements are available at our web site: www.nhccare.com.



Note 2 – Other Revenues


Other revenues are outlined in the table below.  Revenues from insurance services include premiums for workers’ compensation, health insurance, and professional liability insurance policies that our wholly-owned limited purpose insurance subsidiaries have written for certain long-term health care centers to which we provide management or accounting services. Revenues from management and accounting services include management and accounting fees provided to managed and other long-term health care centers. Revenues from rental income include health care real estate properties owned by use and leased to third party operators.  "Other" revenues include miscellaneous health care related earnings.


Other revenues include the following:


 

 

 

Three Months Ended

March 31

(in thousands)

 

 

2011

 

 

2010

Insurance services

 

$

4,084

 

$

4,389

Management and accounting services fees

 

 

5,892

 

 

6,207

Rental income

 

 

4,859

 

 

3,049

Other

 

 

560

 

 

431

 

 

$

15,395

 

$

14,076


Management Fees from National


Certain of our affiliates manage five long-term care centers owned by National Health Corporation ("National").  During the three months ended March 31, 2011 and 2010, we recognized management fees and interest on management fees of $906,000 and $1,446,000, respectively, from these centers.  


The unpaid fees from the five centers owned by National, because the amount collectable could not be reasonably determined when the management services were provided, and because we cannot estimate the timing or amount of expected future collections, will be recognized as revenues only when fixed or determinable and collectibility of these fees can be reasonably assured.  Under the terms of our management agreement with National, the payment of these fees to us may be subordinated to other expenditures of the five long-term care centers.  We continue to manage these centers so that we may be able to collect our fees in the future and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit.  We may receive payment for the unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the five centers or the proceeds from the sale of the centers are sufficient to pay the fees.  There can be no assurance that such future improved cash flows will occur.  




7



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)




Management Fees from Other Nursing Centers


We continue to manage eight long-term care centers (excluding the five National centers) for third-party owners where the management fees are recognized only when realized.  During the three months ended March 31, 2011 and 2010, we recognized $400,000 and $505,000, respectively, of management fees and interest from these eight long-term care centers.  


The unpaid fees from these eight centers, because of insufficient historical collections and the lack of expected future collections, are recognized only when realized.  Under the terms of the management agreements, the payment of these fees to us may be subordinated to other expenditures of each of the long-term care centers.  Our affiliates continue to manage these centers so that we may be able to collect our fees in the future and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit.  We may receive payment for the unrecognized management fees in whole or in part in the future only if cash flows from operating and investing activities of the centers or the proceeds from the sale of the centers are sufficient to pay the fees.  There can be no assurance that such future improved cash flows will occur.  


Rental Income


The health care properties currently owned and leased to third party operators include nine skilled nursing facilities and four assisted living communities.  Effective January 1, 2011, we renewed the rental agreements with the third party operators.  The rental agreements continue for a five year period ending on December 31, 2015.



Note 3 - Non-Operating Income


Non-operating income is outlined in the table below.  Non-operating income includes equity in earnings of unconsolidated investments, dividends and other realized gains and losses on securities, and interest income.  Our most significant equity method investment is a 57.4% non-controlling ownership interest in Caris HealthCare L.P., a business that specializes in hospice care services.    




 

 

Three Months Ended March 31

(in thousands)

 

 

2011

 

 

2010

Equity in earnings of unconsolidated investments

 

$

2,081

 

$

2,258

Dividends and other net realized gains and losses on sales of securities

 

 

1,270

 

 

1,140

Interest income

 

 

1,210

 

 

1,177

 

 

$

4,561

 

$

4,575



Note 4 – Other Operating Expenses


Other operating expenses include the costs of care and services that we provide to the residents of our facilities and the costs of maintaining our facilities.  Our primary patient care costs include drugs, medical supplies, purchased professional services, food, professional insurance and licensing fees.  The primary facility costs include utilities and property insurance.  For the three months ended March 31, 2011, the decrease in other operating expense is primarily due to the favorable results within our accrued risk reserves of approximately $9,236,000 compared to the quarter a year ago.






8



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Note 5 – Earnings per Share



Basic net income per share is computed based on the weighted average number of common shares outstanding for each period presented.  Diluted net income per share reflects the potential dilution that would have occurred if securities to issue common stock were exercised, converted, or resulted in the issuance of common stock that would have then shared in our earnings.  


The following table summarizes the earnings and the weighted average number of common shares used in the calculation of basic and diluted earnings per share.


 

Three Months Ended March 31

(in thousands, except for share and per share amounts)

2011

 

 

2010

Basic:

 

 

 

 

 

 

     Weighted average common shares outstanding

 

 

13,680,135

 

 

13,721,570

     Net income

 

$

18,724

 

$

10,407

     Dividends to preferred stockholders

 

 

2,168

 

 

2,168

     Net income available to common stockholders

 

 

16,556

 

 

8,239

     Earnings per common share, basic

 

$

1.21

 

$

.60

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

     Weighted average common shares outstanding

 

 

13,680,135

 

 

13,721,570

     Dilutive effect of stock options

 

 

14,559

 

 

3,631

     Dilutive effect of restricted stock

 

 

8,769

 

 

– 

     Convertible preferred stock

 

 

2,623,773

 

 

– 

     Assumed average common shares outstanding

 

 

16,327,236

 

 

13,725,201

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

16,556

 

$

8,239

Add dilutive preferred stock dividends for effect of assumed conversion of preferred stock

 

 

2,168

 

 

– 

 

 

 

 

 

 

 

Net income for diluted earnings per common share

 

 

18,724

 

 

8,239

Earnings per common share, diluted

 

$

1.15

 

$

.60


In the above table, 1,394,251 and 356,791 options to purchase our common stock have been excluded for 2011 and 2010, respectively, and 2,623,971 of potential common shares issuable upon the conversion of the preferred stock have been excluded for 2010 due to their anti-dilutive impact.



Note 6 - Investments in Marketable Securities


Our investments in marketable securities include available for sale securities.  Realized gains and losses from securities sales are determined on the specific identification of the securities.





9



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Marketable securities and restricted marketable securities consist of the following:


 

 

 

March 31, 2011

 

 

December 31, 2010

(in thousands)

 

 

Amortized

Cost

 

 

Fair

Value

 

 

Amortized

  Cost

 

 

Fair

Value

Investments available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

$

29,604

 

$

90,881

 

$

29,604

 

$

85,116

Restricted investments available for sale:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

29,084

 

 

29,439

 

 

28,683

 

 

29,182

 

Commercial mortgage-backed securities

 

 

28,473

 

 

29,068

 

 

26,282

 

 

26,866

 

U.S. Treasury securities

 

 

4,392

 

 

4,302

 

 

8,192

 

 

8,030

 

U.S. government sponsored enterprise securities

 

 

 

 

 

 

2,340

 

 

2,423

 

State and municipal securities

 

 

6,647

 

 

6,695

 

 

4,348

 

 

4,376

 

 

 

$

98,200

 

$

160,385

 

$

99,449

 

$

155,993


Included in the available for sale marketable equity securities are the following:


(in thousands, except share amounts)

 

 

March 31, 2011

 

December 31, 2010

 

 

Shares

 

 

Cost

 

 

Fair

Value

 

Shares

 

 

Cost

 

 

Fair

Value

NHI Common Stock

 

1,630,642

 

$

24,734

 

$

78,140

 

1,630,642

 

$

24,734

 

$

73,412


The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows:


 

 

 

March 31, 2011

 

 

December 31, 2010

(in thousands)

 

 

  Cost  

 

 

Fair Value

 

 

  Cost  

 

 

Fair

Value

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

$

3,921

 

$

3,929

 

$

3,551

 

$

3,562

1 to 5 years

 

 

47,705

 

 

48,591

 

 

46,461

 

 

47,340

6 to 10 years

 

 

16,045

 

 

16,057

 

 

18,313

 

 

18,454

Over 10 years

 

 

925

 

 

927

 

 

1,520

 

 

1,521

 

 

$

68,596

 

$

69,504

 

$

69,845

 

$

70,877


Gross unrealized gains related to available for sale securities are $62,490,000 and $56,911,000 as of March 31, 2011 and December 31, 2010, respectively.  Gross unrealized losses related to available for sale securities were $306,000 and $367,000 as of March 31, 2011 and December 31, 2010, respectively.


Proceeds from the sale of investments in marketable securities during the three months ended March 31, 2011 and March 31, 2010 were $13,570,000 and $5,875,000, respectively.  Gross investment gains of $98,000 and $38,000 were realized on these sales during the three months ended March 31, 2011 and March 31, 2010, respectively.






10



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Note 7 - Fair Value Measurements


The carrying amounts of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature.  The estimated fair value of notes receivable approximates the carrying value based principally on their underlying interest rates and terms, maturities, collateral and credit status of the receivables.  Our long-term debt approximates fair value due to variable interest rates.  At March 31, 2011 and December 31, 2010, there were no material differences between the carrying amounts and fair values of NHC’s financial instruments stated above.    


The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements.  Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.  This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available.  The following summarizes the three levels of inputs that may be used to measure fair value:


Level 1 – The valuation is based on quoted prices in active markets for identical instruments.

Level 2 – The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.  

Level 3 – The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument.  Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.


A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  


The Company determines fair value for marketable securities with Level 1 inputs through quoted market prices.  The Company determines fair value for marketable securities with Level 2 inputs through broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency.  Our Level 2 marketable securities have been initially valued at the transaction price and subsequently valued, at the end of each month, typically utilizing third party pricing services or other market observable data.  The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value.  These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events.  We did not have any significant transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the three months ended March 31, 2011.  





11



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



The following table summarizes fair value measurements by level at March 31, 2011 and December 31, 2010 for assets and liabilities measured at fair value on a recurring basis (in thousands):


 

 

Fair Value Measurements Using

March 31, 2011

 

Fair

Value

 

Quoted Prices in Active Markets

For Identical Assets

(Level 1)

 

Significant Other Observable Inputs (Level 2)

 

Significant Unobservable Inputs

(Level 3)

Cash and cash equivalents

$

33,504

$

33,504

$

$

Restricted cash and cash equivalents

 

59,619

 

59,619

 

 

– 

Marketable equity securities

 

90,881

 

90,881

 

 

– 

Corporate debt securities

 

29,439

 

 

29,439

 

– 

Commercial mortgage-backed securities

 

29,068

 

 

29,068

 

– 

U.S. Treasury securities

 

4,302

 

4,302

 

– 

 

– 

State and municipal securities

 

6,695

 

 

6,695

 

– 

Total financial assets

$

253,508

$

188,306

$

65,202

$

– 



 

 

Fair Value Measurements Using

December 31, 2010

 

Fair

Value

 

Quoted Prices in Active Markets

For Identical Assets

(Level 1)

 

Significant Other Observable Inputs (Level 2)

 

Significant Unobservable Inputs

(Level 3)

Cash and cash equivalents

$

28,478

$

28,478

$

– 

$

– 

Restricted cash and cash equivalents

 

51,992

 

51,992

 

– 

 

– 

Marketable equity securities

 

85,116

 

85,116

 

– 

 

– 

Corporate debt securities

 

29,182

 

– 

 

29,182

 

– 

Commercial mortgage-backed securities

 

26,866

 

– 

 

26,866

 

– 

U.S. Treasury securities

 

8,030

 

8,030

 

– 

 

– 

U.S. government sponsored enterprise securities

 

2,423

 

 

2,423

 

State and municipal securities

 

4,376

 

 

4,376

 

Total financial assets

$

236,463

$

173,616

$

62,847

$

– 






12



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Note 8 - Long-Term Debt and Commitments


Long-term debt consists of the following:


 

 

Weighted

Average

Interest Rate

 

Maturities

 

 

Long-Term Debt

(dollars in thousands)

 

 

 

 

 

 

3/31/11

 

 

12/31/10

Revolving Credit Facility, interest payable monthly

 

Variable,

1.25%

 

2011

 

$

– 

 

$

– 

 

 

 

 

 

 

 

 

 

 

 

Unsecured term note payable to National, interest payable quarterly, principal payable at maturity

 

Variable,

2.8%

 

2018

 

 

10,000 

 

 

10,000 

 

 

 

 

 

 

 

10,000 

 

 

10,000 

Less current portion

 

 

 

 

 

 

– 

 

 

– 

 

 

 

 

 

 

$

10,000 

 

$

10,000 



Note 9 - $75,000,000 Revolving Credit Facility


 Effective October 26, 2010, we extended the maturity of our Credit Agreement (the "Credit Agreement") with Bank of America, N.A., as lender (the "Lender").  The Credit Agreement provides for a $75,000,000 revolving credit facility (the "Credit Facility"), of which up to $5,000,000 may be utilized for letters of credit.  


Borrowings bear interest at either (i) the Eurodollar rate plus 1.00% or (ii) the prime rate.  Letter of credit fees are equal to 1.00% times the maximum amount available to be drawn under outstanding letters of credit.  The rates and fees are unchanged from those in effect prior to the extension.


Commitment fees are payable on the daily unused portion of the Credit Facility at a rate of twenty (20) basis points per annum.  NHC is permitted to prepay the loans outstanding under the Credit Facility at any time, without penalty.  


The Credit Facility matures on October 25, 2011.  Between 90 and 120 days prior to the maturity date, NHC may request the extension of the maturity date.  If the Lender elects to consent to such extension, subject to certain conditions, the maturity date will be extended to the date which is 364 days after the then maturity date.


 NHC’s obligations under the Credit Agreement are guaranteed by certain NHC subsidiaries and are secured by pledges by NHC and the guarantors of (i) 100% of the equity interests of domestic subsidiaries and (ii) up to 65% of the voting equity interests and 100% of the non-voting equity interests of foreign subsidiaries, in each case, held by NHC or the guarantors.


The Credit Agreement contains customary representations and warranties, and covenants, including covenants that restrict, among other things, asset dispositions, mergers and acquisitions, dividends, restricted payments, debt, liens, investments and affiliate transactions.  The Credit Agreement contains customary events of default.


The Credit Facility is available for general corporate purposes, including working capital and acquisitions.






13



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Note 10 – Stock-Based Compensation


NHC recognizes stock-based compensation for all stock options and restricted stock granted over the requisite service period using the fair value for these grants as estimated at the date of grant either using the Black-Scholes pricing model for stock options or the quoted market price for restricted stock.


The 2005 and 2010 Stock-Based Compensation Plans


The Compensation Committee of the Board of Directors (“the Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non–qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding.  The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted and the term of an ISO may not be any more than ten years.  The exercise price of any non–qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.


In May 2005, our stockholders approved the 2005 Stock Option, Employee Stock Purchase, Physician Stock Purchase and Stock Appreciation Rights Plan (“the 2005 Plan”) pursuant to which 1,200,000 shares of our common stock were available to grant as stock-based payments to key employees, directors, and non-employee consultants.  In March 2011, the Company granted stock options to purchase 756,585 shares of our common stock in accordance with the 2005 Plan.  These particular stock options become vested and exercisable thirty days prior to the expiration date of the options, which is five years after the date of grant.  At March 31, 2011, no shares were available for future grants under the 2005 Plan.


In May 2010, our stockholders approved the 2010 Omnibus Equity Incentive Plan (“the 2010 Plan”) pursuant to which 1,200,000 shares of our common stock were available to grant as stock-based payments to key employees, directors, and non-employee consultants.  In March 2011, the Company granted stock options to purchase 443,417 shares of our common stock in accordance with the 2010 Plan.  These particular stock options become vested and exercisable thirty days prior to the expiration date of the options, which is five years after the date of the grant. At March 31, 2011, 579,952 shares were available for future grants under the 2010 Plan.


Compensation expense is recognized only for the awards that ultimately vest.  Stock-based compensation totaled $984,000 and $24,000 for the three months ended March 31, 2011 and 2010, respectively.  The expense for the 2011 period increased $771,000 due to the Company choosing to accelerate the vesting date of options to purchase 158,000 shares of stock that were granted in June 2010.  The options had an original vesting date in June 2015.  At March 31, 2011, we had $9,472,000 of unrecognized compensation cost related to unvested stock-based compensation awards, which consisted of $8,624,000 for stock options and $848,000 for restricted stock.  This expense will be recognized over the remaining weighted average vesting period, which is approximately 4.9 years for stock options and 2.5 years for restricted stock.  Stock-based compensation is included in “Salaries, wages and benefits” in the Consolidated Statements of Income.





14



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Stock Options


The following table summarizes the assumptions used to value the options granted in the periods shows.


 

 

2011

 

2010

Risk-free interest rate

 

2.07%

 

1.88%

Expected volatility

 

23.59%

 

25.30%

Expected life, in years

 

4.9 years

 

4.5 years

Expected dividend yield

 

3.65%

 

3.55%

Expected forfeiture rate

 

0.00%

 

0.00%



The following table summarizes our outstanding stock options for the three months ended March 31, 2011 and for the year ended December 31, 2010.  



 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

Aggregate

Intrinsic

Value

Options outstanding at December 31, 2009

 

385,305 

 

$

44.78

 

 

 

Options granted

 

180,485 

 

 

35.55

 

 

 

Options exercised

 

(72,149)

 

 

36.69

 

 

 

Options cancelled or expired

 

(21,314)

 

 

32.01

 

 

 

Options outstanding at December 31, 2010

 

472,327 

 

 

43.07

 

 

 

Options granted

 

1,218,615 

 

 

46.69

 

 

 

Options exercised

 

(167,134)

 

 

35.62

 

 

 

Options cancelled or expired

 

− 

 

 

 

 

 

Options outstanding at March 31, 2011

 

1,523,808 

 

$

46.78

 

$

765,000

 

 

 

 

 

 

 

 

 

Options exercisable at March 31, 2011

 

305,177 

 

$

47.15

 

$

765,000



Options

Outstanding

March 31, 2011

 

Exercise Prices

 

Weighted Average

Exercise Price

 

Weighted Average

Remaining Contractual

Life in Years

129,557

 

$37.70 – $44.25

 

$40.58

 

1.8

1,394,251

 

$46.44 - $52.50

 

  47.35

 

4.4

1,523,808

 

 

 

$46.78

 

4.2






15



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Restricted Stock


The following table summarizes our restricted stock activity for the three months ended March 31, 2011 and for the year ended December 31, 2010.



 

Number of

Shares

 

 

Weighted

Average Grant Date Fair Value

 


Aggregate Intrinsic Value

Unvested restricted shares at December 31, 2009

 

 

$

 

 

Award shares granted

 

30,000

 

 

34.46

 

 

Award shares vested

 

 

 

 

 

Unvested restricted shares at December 31, 2010

 

30,000

 

 

34.46

 

 

Award shares granted

 

 

 

 

 

Award shares vested

 

 

 

 

 

Unvested restricted shares at March 31, 2011

 

30,000

 

$

34.46

$

361,000


The weighted average remaining contractual life of restricted stock at March 31, 2011 is 2.1 years.



Note 11 – Accounting for Uncertainty in Income Taxes


NHC continually evaluates for uncertain tax positions.  Uncertain tax positions may arise where tax laws may allow for alternative interpretations or where the timing of recognition of income is subject to judgment.  We believe we have made adequate provision for unrecognized tax benefits related to uncertain tax positions.  However, because of uncertainty of interpretation by various tax authorities and the possibility that there are issues that have not been recognized by management, we cannot guarantee we have accurately estimated our tax liabilities.  We believe that our liabilities reflect the anticipated outcome of known uncertain tax positions in conformity with ASC Topic 740, Income Taxes.  Our liabilities for unrecognized tax benefits are presented in the consolidated balance sheets within Other Noncurrent Liabilities.


At March 31, 2011, we had $14,633,000 of unrecognized tax benefits, composed of $9,170,000 of deferred tax assets, $-0- of deferred tax liabilities, and $5,463,000 of permanent differences.  Accrued interest and penalties of $4,263,000 relate to unrecognized tax benefits at March 31, 2011.  Unrecognized tax benefits of $5,463,000, net of federal benefit, at March 31, 2011, attributable to permanent differences, would favorably impact our effective tax rate if recognized.  Accrued interest and penalties of $2,050,000 relate to these permanent differences at March 31, 2011.  We do not expect to recognize significant increases or decreases in unrecognized tax benefits within twelve months beginning March 31, 2011, except for the effect of decreases related to the lapse of statute of limitations estimated at $2,450,000, composed of temporary differences of $-0-, and permanent tax differences of $2,450,000.  Interest and penalties of $836,000 relate to these permanent difference changes within 12 months beginning March 31, 2011.  


Interest and penalties expense related to U.S. federal and state income tax returns are included within income tax expense.  


The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2007 (with certain state exceptions). Currently, there are no U.S. federal or state returns under examination.  






16



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Note 12 – Guarantees and Contingencies


Accrued Risk Reserves


 

We are self insured for risks related to health insurance and have wholly-owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned or leased entities and certain of the entities to which we provide management or accounting services.  The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $98,913,000   and $105,059,000 at March 31, 2011 and December 31, 2010, respectively.  This liability is classified as a current liability based on the uncertainty regarding the timing of potential payments.  The liability is included in accrued risk reserves in the consolidated balance sheets and is subject to adjustment for actual claims incurred.  It is possible that these claims plus unasserted claims could exceed our insurance coverages and our reserves, which could have a material adverse effect on our financial position, results of operations and cash flows.


As a result of the terms of our insurance policies and our use of wholly-owned limited purpose insurance companies, we have retained significant insurance risk with respect to workers’ compensation and general and professional liability.  We use independent actuaries to estimate our exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits, and we maintain reserves for these obligations.  Such estimates are based on many variables including historical and statistical information and other factors.  


Workers’ Compensation


For workers’ compensation, we utilize a wholly-owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third-party customers.  Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses.  All customers are companies which operate in the long-term care industry.  Business is written on a direct basis.  Direct business coverage is written for statutory limits and the insurance company’s losses in excess of $1,000,000 per claim are covered by reinsurance.  


For these workers’ compensation insurance operations, the premium revenues reflected in the consolidated financial statements within "Other Revenues" for the three months ended March 31, 2011 and 2010, respectively, are $1,302,000 and $1,299,000.  Associated losses and expenses are reflected in the consolidated financial statements as "Other operating costs and expenses".


General and Professional Liability Lawsuits and Insurance


The long term care industry has experienced significant increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by nursing facilities and their employees in providing care to residents.  As of March 31, 2011, we and/or our managed centers are currently defendants in 25 such claims covering the years 2002 through March 31, 2011.


In 2002, we established and capitalized a wholly-owned licensed liability insurance company.  Thus, since 2002, insurance coverage for incidents occurring at all NHC owned providers, and most providers managed by us is provided through this wholly-owned insurance company.  


Our coverages for all years include primary policies and excess policies.  In 2002, deductibles were eliminated and first dollar coverage was provided through the wholly-owned insurance company, while the excess coverage was provided by a third party insuror.  


For 2003-2011, both primary professional liability insurance coverage and excess coverage is provided through our wholly-owned liability insurance company.  The primary coverage is in the amount of $1 million per incident, $3




17



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



million per location with an annual primary policy aggregate limit of $19.0 million for 2011, $17.0 million for 2009 and 2010, $16.0 million for 2008, $14.0 million for 2006 and 2007, and $12.0 million for 2003-2005.  The excess coverage is $7.5 million annual excess in the aggregate applicable to years 2003-2007 and subsequently for $9.0 million annual excess in the aggregate for years 2008-2011.  


For these professional liability insurance operations, the premium revenues reflected in the financials as "Other Revenues" for the three months ended March 31, 2011 and 2010, respectively, are $1,096,000 and $1,111,000.  Associated losses and expenses including those for self-insurance are included in the consolidated financial statements as "Other operating costs and expenses".  


Other Matters


On July 24, 2009, the Company received a civil investigative demand from the Tennessee Attorney General’s Office, requesting production of documents related to NHC’s business relationships with non-profit entities.  The Company has responded to the demand and complied as required with the terms of the demand.



Note 13 – New Accounting Pronouncements


In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, which is included in the Codification under ASC 805, “Business Combinations.” This update provides guidance on the disclosure of supplemental pro forma information for business combinations. This guidance became effective for our interim and annual reporting periods beginning January 1, 2011. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Also in December 2010, the FASB issued ASU No. 2010-28, which is included in the Codification under ASC 350, “Intangibles – Goodwill and Other.” This update provides guidance on applying the goodwill impairment test for reporting units with zero or negative carrying amounts. This guidance became effective for our interim and annual reporting periods beginning January 1, 2011. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In August 2010, the FASB issued ASU No. 2010-24, which is included in the Codification under ASC 954, “Health Care Entities”.  This update provides clarification to companies in the healthcare industry on the accounting for professional liability and workers’ compensation insurance.  This update states that receivables related to insurance recoveries should not be netted against the related claim liability and such claim liabilities should be determined without considering insurance recoveries.  This guidance became effective for our interim and annual reporting periods beginning January 1, 2011.  The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.



Item 2.

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.  We operate or manage, through certain affiliates, 76 long-term health care centers with 9,548 beds in 10 states and provide other services in one additional state.  These operations are provided by separately funded and maintained subsidiaries.  We provide 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, hospice programs, homecare programs, assisted living centers and independent living centers.  In addition, we provide insurance services, management and accounting services, and lease properties to owners of long-term health care centers.




18



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)





Summary of Goals and Areas of Focus


Earnings – To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues.  Inflationary increases in our costs may cause net earnings from patient services to decline.  Further, our patient revenues, approximately 70% of which are paid by government entities, may be reduced because of the efforts by government entities to contain their costs.


Development and Growth – We are undertaking to expand our long-term care operations while protecting our existing operations and markets.  The following table lists our recent or expected construction and purchase activities.


Type of Operation

 

Description

 

Size

 

Location

 

Placed in Service

Skilled Nursing

 

New Facility

 

120 Beds

 

Bluffton, SC

 

January 2010

Assisted Living

 

New Facility

 

45 Units

 

Mauldin, SC

 

March 2010

Homecare

 

Acquisition

 

353 ADC

 

Columbia, Rock Hill, and Summerville, SC

 

May, 2010

Skilled Nursing

 

Acquisition

 

120 Beds

 

Macon, MO

 

December, 2010

Skilled Nursing

 

Acquisition

 

120 Beds

 

Osage Beach, MO

 

December, 2010

Skilled Nursing

 

Acquisition

 

120 Beds

 

Springfield, MO

 

December, 2010


In the second quarter of 2011, we expect to open a 75-unit assisted living community in Columbia, South Carolina, as well as a 46-unit assisted living addition in Franklin, Tennessee.  Also, in 2011, we expect to begin construction on a 90-bed skilled nursing facility in Tullahoma, Tennessee and a 92-bed skilled nursing facility in Hendersonville, Tennessee.  


During 2011, we will apply for Certificates of Need for additional beds in our markets and also evaluate the feasibility of expansion into new markets by building private pay health care centers or by the purchase of existing health care centers.  We will also evaluate the feasibility of construction of new assisted living facilities in select markets.


Accrued Risk Reserves – Our accrued professional liability reserves, workers’ compensation reserves and health insurance reserves totaled $98,913,000 at March 31, 2011, a 10.7% reduction since March 31, 2010, and are a primary area of management focus.  We have set aside restricted cash and cash equivalents and marketable securities to fund substantially all of our professional liability and workers’ compensation liabilities.  


As to exposure for professional liability claims, we have developed for our centers performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents.  Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction.  



Application of Critical Accounting Policies


The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us 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 and cause our reported net income to vary significantly from period to period.





19



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Our critical accounting policies that are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments are as follows:  


Revenue Recognition – Third Party Payors – Approximately 70% of our net patient revenues are derived from Medicare, Medicaid, and other government programs.  Amounts earned under these programs are subject to review by the Medicare and Medicaid intermediaries or their agents.  In our opinion, adequate provision has been made for any adjustments that may result from these reviews.  Any differences between our original estimates of reimbursements and subsequent revisions are reflected in operations in the period in which the revisions are made often due to final determination or the period of payment no longer being subject to audit or review.  We have made provisions of approximately $16,921,000 as of March 31, 2011 for various Medicare and Medicaid current and prior year cost reports and claims reviews.  


Revenue Recognition - Private Pay - For private pay patients in skilled nursing or assisted living facilities, we bill room and board in advance for the current month with payment being due upon receipt of the statement in the month the services are performed.  Charges for ancillary, pharmacy, therapy and other services to private patients are billed in the month following the performance of services; however, all billings are recognized as revenue when the services are performed.  


Revenue Recognition - Subordination of Fees and Uncertain Collections - We provide management services to certain long-term care facilities and to others we provide accounting and financial services.  We generally charge 6% to 7% of net revenues for our management services and a predetermined fixed rate per bed for the accounting and financial services.  Our policy is to recognize revenues associated with both management services and accounting and financial services on an accrual basis as the services are provided.  However, under the terms of our management contracts, payments for our management services are subject to subordination to other expenditures of the long-term care center being managed.  Furthermore, for certain of the third parties with whom we have contracted to provide services and which we have determined, based on insufficient historical collections and the lack of expected future collections, that collection is not reasonably assured, our policy is to recognize income only in the period in which the amounts are realized.  We may receive payment for the unpaid and unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the centers or proceeds from the sale of the centers are sufficient to pay the fees.  There can be no assurance that such future cash flows will occur.  The realization of such previously unrecognized revenue could cause our reported net income to vary significantly from period to period.


We agree to subordinate our fees to the other expenses of a managed center because we believe we know how to improve the quality of patient services and finances of a long-term care center and because subordinating our fees demonstrates to the owner and employees of the managed center how confident we are of the impact we can have in making the center operations successful.  We may continue to provide services to certain managed centers despite not being fully paid currently so that we may be able to collect unpaid fees in the future from improved operating results and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit.  Also, we may benefit from providing other ancillary services to the managed center.  


Accrued Risk Reserves - We are principally self-insured for risks related to employee health insurance, workers’ compensation and professional and general liability claims.  Our accrued risk reserves primarily represent the accrual for self-insured risks associated with employee health insurance, workers’ compensation and professional and general liability claims.  The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims.  Our policy with respect to a significant portion of our workers’ compensation and professional and general liability claims is to use an actuary to estimate our exposure for claims obligations (for both asserted and unasserted claims).  Our health insurance reserve is based on our known claims incurred and an estimate of incurred but unreported claims determined by our analysis of historical claims paid.  We reassess our accrued risk reserves on a quarterly basis.





20



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Professional liability remains an area of particular concern to us.  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.  As of March 31, 2011, we and/or our managed centers are defendants in 25 such claims inclusive of years 2002 through 2011.  It remains possible that those pending matters plus potential unasserted claims could exceed our reserves, which could have a material adverse effect on our financial position, results of operations and cash flows.  It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.  


We maintain insurance coverage for incidents occurring in all providers owned or leased by us, and most providers managed by us.  The coverages include both primary policies and excess policies.  In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.


Credit Losses - Certain of our accounts receivable from private paying patients and certain of our notes receivable are subject to credit losses.  We have attempted to reserve for expected accounts receivable credit losses based on our past experience with similar accounts receivable and believe our reserves to be adequate.  


We continually monitor and evaluate the carrying amount of our notes receivable in accordance with ASC Topic 310, Receivables.  It is possible, however, that the accuracy of our estimation process could be materially impacted as the composition of the receivables changes over time.  We continually review and refine our estimation process to make it as reactive to these changes as possible.  However, we cannot guarantee that we will be able to accurately estimate credit losses on these balances.  It is possible that future events could cause us to make significant adjustments or revisions to these estimates and cause our reported net income to vary significantly from period to period.   


Uncertain Tax Positions - We continually evaluate for uncertain tax positions.  These uncertain positions may arise where tax laws may allow for alternative interpretations or where the timing of recognition of income is subject to judgment.  We believe we have adequate provisions for our uncertain tax positions including related penalties and interest.  However, because of uncertainty of interpretation by various tax authorities and the possibility that there are issues that have not been recognized by management, we cannot guarantee we have accurately estimated our tax liabilities.  


The above listing is not intended to be a comprehensive list of all of our accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with limited need for management’s judgment in their application.  There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  See our audited consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles.  



Government Program Financial Changes


Cost containment will continue to be a priority for Federal and State governments for health care services, including the types of services we provide.  Government reimbursement programs such as Medicare and Medicaid prescribe, by law, the billing methods and amounts that health care providers may charge and be reimbursed to care for patients covered by these programs. Congress has passed a number of laws that have effected major changes in the Medicare and Medicaid programs. The Balanced Budget Act of 1997 sought to achieve a balanced federal budget by, among other things, reducing federal spending on Medicare and Medicaid to various providers.  The Balanced Budget Act of 1997 defined the Medicare Prospective Payment System ("PPS") and this System has subsequently been refined in 1999, 2000, 2005, 2006 and 2010.


Health Care Reform  – In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act ("PPACA") and the Health Care and Education Reconciliation Act of 2010 ("HCERA"), which represents




21



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



significant changes to the current U.S. health care system (collectively the "Acts"). The Acts affect aging services providers, our partners (employees) and our patients and residents in a multitude of ways.  We are evaluating the provisions of the Acts and do not expect material effects on our results of operations, liquidity and cash flows in 2011.  We anticipate many of the provisions of the Acts may be subject to further clarification and modification through the rule-making process.  It is uncertain at this time the effect the modifications will have on our future results of operations or cash flows.  


In December 2010, President Obama signed into law the Medicare and Medicaid Extenders Act (“MMEA”).  This legislation affects numerous health care providers and makes several important technical corrections to the health reform laws enacted earlier in 2010.  An important item provided for in the MMEA legislation is for an immediate and retroactive updated methodology (Resource Utilization Group – Version Four, “RUG-IV”) for determining Medicare payment rates to skilled nursing centers.  The retroactive date goes back to October 1, 2010.  Under the health reform law passed in March 2010, Congress imposed a moratorium on implementing the updated methodology until October 1, 2011.  The MMEA repeals that provision, and ends the delay in implementing RUG-IV, allowing skilled nursing center rates determined by RUG-IV to be applied as of October 1, 2010.  


Medicare—Effective October 1, 2010, the federal RUG rates had a market basket increase of 2.3%.  There was also a negative .6 percentage point forecasting error adjustment, generating a net market basket increase of 1.7%.  According to CMS, the transition from RUG-III to RUG-IV would be on a budget neutral basis.  CMS states RUG-IV was needed to recalibrate the case-mix system after changes in fiscal year 2006 caused payments to skilled nursing centers to exceed budget neutrality estimates. The effect of the RUG-IV rate changes on our revenues is dependent upon our census and the mix of our patients at the PPS pay rates.  The PPS rates had a net market basket decrease of 1.1% in 2009.   


For the first three months of 2011, our average Medicare per diem rate increased 18.8% compared to the same period in 2010.  


On April 28, 2011, CMS released its fiscal year 2012 proposed notice of rulemaking which discusses two options the agency is considering for purposes of setting the 2012 Medicare payment rates for skilled nursing facilities (SNF's).  The first option CMS is proposing is a 2.7% market basket increase that will be reduced by a 1.2% productivity adjustment as a result of the Affordable Care Act, which results in a net increase of 1.5% over fiscal year 2011 payments. The second option CMS is considering would adjust for the unanticipated impact of the change to the new RUG-IV payment system in fiscal year 2011.  The proposed second option states that to make the RUG-IV payment system revenue neutral, it would reduce reimbursement rates by approximately 12.8%.  After considering the 1.5% market basket increase, the net impact would be an 11.3% rate reduction effective October 1, 2011.  The proposed notice has not been finalized and is still in the public comment period.  We cannot predict the ultimate impact the proposal will have on our results of operations, liquidity or cash flows in the future.


Effective October 1, 2010, hospice agencies received Medicare payments which represented a 1.8% increase.  We estimate the effect of the revenue increase for NHC hospice programs to be approximately $200,000 annually, or $50,000 per quarter.  


Effective January 2011, home health agencies received Medicare payments which represented a 5.2% decrease.  We estimate the effect of the revenue decrease for NHC homecare programs to be approximately $3,400,000 annually, or $850,000 per quarter.  


Medicaid—Tennessee annual Medicaid rate increases were implemented effective July 1, 2010.  Tennessee Medicaid fully funded the ceiling rate increases for all skilled and intermediate providers.  We estimate the resulting increase in revenue from this payment source is approximately $592,000 per quarter.  





22



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



On April 18, 2011, effectively immediately, South Carolina implemented a three percent Medicaid rate reduction.  We estimate the resulting decrease in revenue will be approximately $370,000 per quarter.  


For the first three months of 2011, our average Medicaid per diem overall increased by 2.2% compared to the same period in 2010.  We face challenges with respect to states’ Medicaid payments because many states currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures but also look for adequate funding sources, including provider assessments.  Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities. There is no assurance that the funding for our services will increase or decrease in the future.



Results of Operations


The following table and discussion sets forth items from the interim condensed consolidated statements of income as a percentage of net revenues for the three months ended March 31, 2011 and 2010.


Percentage of Net Revenues


Three Months Ended March 31,

 

2011

 

2010

 

 

 

 

 

Revenues:

 

 

 

 

 

Net patient revenues

 

92.0%

 

91.8%

 

Other revenues

 

8.0 

 

8.2 

 

 

Net operating revenues

 

100.0 

 

100.0 

Costs and Expenses:

 

 

 

 

 

Salaries, wages and benefits

 

56.4 

 

55.8 

 

Other operating

 

21.5 

 

28.5 

 

Rent

 

5.1 

 

4.8 

 

Depreciation and amortization

 

3.6 

 

3.7 

 

Interest

 

 

0.1 

 

 

Total costs and expenses

 

86.6 

 

92.9 

Income before non-operating income

 

13.4 

 

7.1 

Non-operating income

 

2.4 

 

2.7 

Income before income taxes

 

15.8 

 

9.8 

Income tax provision

 

(6.1)

 

(3.7)

Net Income

 

9.7 

 

6.1 

Dividends to preferred stockholders

 

(1.1)

 

(1.3)

Net income available to common stockholders

 

8.6%

 

4.8%


Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010


The total census at owned and leased centers for the quarter averaged 91.1% compared to an average of 92.4% for the same quarter a year ago.


Results for the three month period ended March 31, 2011 include a 12.2% increase in net revenues and an 81.1% increase in income before taxes compared to the same period in 2010.  


Net patient revenues increased $19,592,000 or 12.4% compared to the same period last year. Medicare, Medicaid and private per diem rates increased 18.8%, 2.2% and 6.0%, respectively, compared to the quarter a year ago.  The combination of increased Medicare per diems and a favorable patient mix helped increase Medicare revenues 29.0%




23



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



compared to the quarter a year ago.  Our Medicare patient mix increased approximately 70 basis points compared to the quarter a year ago.  The newly constructed or acquired businesses (three skilled nursing facilities, one assisted living community, and three homecare programs) helped increase net patient revenues approximately $6,488,000.


Other revenues increased $1,319,000 or 9.4% in the three-month 2011 period to $15,395,000 from $14,076,000 in the 2010 three-month period.  The increase in other revenues is primarily due to an increase in rental income of $1,810,000.  Effective January 1, 2011, we renewed the rental agreements of thirteen of our properties with third party operators.  The rental agreements incurred inflationary increases in the base rent amount and continue for a five year period ending on December 31, 2015.


Non-operating income decreased $14,000 to $4,561,000 in the three-month 2011 period in comparison to the three-month 2010 period.  


Total costs and expenses for the 2011 first quarter compared to the 2010 first quarter increased $7,269,000 or 4.5% to $167,067,000 from $159,798,000.  Salaries, wages and benefits, the largest operating costs of this service company, increased $12,686,000 or 13.2% to $108,762,000 from $96,076,000.  Other operating expenses decreased $7,614,000 or 15.5% to $41,389,000 for the 2011 period compared to $49,003,000 for the 2010 period.  Rent expense increased $1,687,000 or 20.6% to $9,865,000.  Depreciation and amortization increased to 8.3% to $6,962,000.  


Salaries, wages and benefits as a percentage of net operating revenue was 56.4% and 55.8% for the three months ended March 31, 2011 and 2010, respectively.  The increase in salaries, wages and benefits is primarily due to the increased staffing from the opening or acquisition of three skilled nursing facilities, one assisted living community, and three homecare programs ($3,638,000).  We also had increased costs in our existing skilled nursing facilities ($3,872,000), increased costs for therapist services ($1,407,000), an increased provision for health insurance claims ($2,535,000), and inflationary wage increases.


Other operating expense as a percentage of net operating revenue was 21.5% and 28.5% for the three months ended March 31, 2011 and 2010, respectively.  The decrease in other operating expenses is primarily due to the favorable results within our accrued risk reserves of approximately $9,236,000 compared to the quarter a year ago.  The decrease in expense in 2011 is offset by the opening or acquisition of the new operations in the amount of $2,760,000.


Rent expense for the three months ended March 31, 2011 increased by approximately $1,687,000 compared to the quarter a year ago.  The increase is due to the increased percentage rent paid to National Health Investors, Inc. (“NHI”) in the amount of $1,666,000.  Percentage rent to NHI is equal to 4% of the increase in facility revenues over the 2007 revenues, the base year of the lease agreement.


Depreciation expense increased primarily due to the acquisition and construction of depreciable assets in the last year.  The increase in depreciation for the three months ended March 31, 2011 was $535,000.  


The income tax provision for the three months ended March 31, 2011 is $11,718,000 (an effective income tax rate of 38.5% which is in line with management's expectations).  The income tax provision and effective tax rate for the three months ended March 31, 2011 were unfavorably impacted by permanent differences including non-deductible expenses.  The income tax provision for the three months ended March 31, 2010 was $6,407,000 (an effective tax rate of 38.1%).   The income tax provision and effective tax rate for the three months ended March 31, 2010 were favorably impacted by permanent differences.  






24



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Liquidity, Capital Resources, and Financial Condition


Sources and Uses of Funds - Our primary sources of cash include revenues from the healthcare and senior living facilities we operate, insurance services, management services and accounting services.  Our primary uses of cash include salaries, wages and other operating costs of our home office and the facilities we operate, the cost of additions to and acquisitions of real property, rent expenses, and dividend distributions.  These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below.  The following is a summary of our sources and uses of cash flows (dollars in thousands):


 

 

 

Three Months Ended

March 31

 

 

Three Month Change

 

 

 

2011

 

 

2010

 

 

$

 

%

Cash and cash equivalents at beginning of period

 

$

28,478 

 

$

39,022 

 

$

(10,544)

 

(27)

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided from (used in) operating activities

 

 

11,394 

 

 

(1,613)

 

 

13,007 

 

806 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used in investing activities

 

 

(6,501)

 

 

(4,451)

 

 

(2,050)

 

(46)

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided from (used in) financing activities

 

 

133 

 

 

(5,169)

 

 

5,302 

 

103 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

33,504 

 

$

27,789 

 

$

5,715 

 

21 


Operating Activities - Net cash provided by operating activities for the three months ended March 31, 2011 was $11,394,000 as compared to $1,613,000 used in operating activities in the same period last year.  Cash provided by operating activities consisted of net income of $18,724,000, adjustments for non-cash items of $6,928,000, and $14,258,000 used for working capital and other activities.  Working capital and other activities primarily consisted of an increase in restricted cash and cash equivalents of $5,584,000, a decrease in accounts receivable of $7,814,000, a decrease in accrued payroll of $16,680,000, and an increase in deferred income of $3,228,000.  


The increase in restricted cash and cash equivalents is from NHC healthcare entities paying insurance premiums into NHC insurance companies, which restrict the cash payment.  The decrease in accounts receivable is primarily from National paying balances related to interim payroll and benefit services outstanding at December 31, 2010.  The decrease in accrued payroll is due to the timing of payroll payments related to incentive compensation.  The increase in deferred income is due from the premiums received in our professional liability insurance company which have not yet been earned.  


Investing Activities - Cash used in investing activities totaled $6,501,000 and $4,451,000 for the three months ended March 31, 2011 and 2010, respectively.  Cash used for property and equipment additions was $6,160,000 for the three months ended March 31, 2011 and $5,001,000 in the comparable period in 2010.  Cash provided by net collections of notes receivable was $352,000 in 2011 compared to $548,000 in 2010. Purchases and sales of restricted marketable securities resulted in a net use of cash of $693,000 for the 2011 period.


Costs included in property and equipment additions include $2,042,000 for the construction-in-progress of the 75-unit assisted living community in Columbia, South Carolina and $1,113,000 for the 46-unit assisted living addition to our Franklin, Tennessee community.  Both of the projects will be completed in the second quarter of 2011.





25



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Financing Activities - Net cash provided by financing activities totaled $133,000 in the three months ended March 31, 2011 compared to $5,169,000 net cash used in financing activities in the same period in 2010.  Cash used for dividend payments to common and preferred stockholders totaled $5,972,000.  In the prior period, cash used for dividend payments to common and preferred stockholders totaled $5,729,000.    In the current period, $5,953,000 of cash was provided by the issuance of common stock.  Cash of $662,000 was provided by the issuance of common stock in the same period last year.  Tax benefits from exercise of stock options provided cash of $305,000 in 2011 and $13,000 for the same period in 2010.



Table of Contractual Cash Obligations


Our contractual cash obligations for periods subsequent to March 31, 2011 are as follows (in thousands):



 

Total

 

1 year

 

1-3

Years

 

3-5

Years

 

After

5 Years

Long-term debt – principal

$

10,000

$

− 

$

− 

$

− 

$

10,000

Long-term debt – interest

 

1,865

 

276

 

553

 

553

 

483

Obligations to complete construction

 

1,695

 

1,695

 

− 

 

− 

 

− 

Operating leases

 

362,275

 

33,700

 

67,400

 

67,400

 

193,775

Total Contractual Cash Obligations

$

375,835

$

35,671

$

67,953

$

67,953

$

204,258


Other noncurrent liabilities for uncertain tax positions of $5,463,000, attributable to permanent differences, at March 31, 2011 has not been included in the above table because of the inability to estimate the period in which the tax payment is expected to occur.  See Note 11 of the Interim Condensed Consolidated Financial Statements for a discussion on income taxes.


We started paying quarterly dividends on our common shares outstanding in 2004 and our preferred shares outstanding in 2007.  We anticipate the continuation of both the common and preferred dividend payments as approved quarterly by the Board of Directors.


Short-term liquidity


Effective October 26, 2010, we extended the maturity of our $75,000,000 revolving credit agreement to October 25, 2011.  We currently do not have any funds drawn against the credit agreement and the amount of $75,000,000 is available to be drawn for general corporate purposes, including working capital and acquisitions.


As to short-term liquidity commitments, we have entered into an agreement to complete construction of a 75-unit assisted living community in Columbia, South Carolina and a 46-unit assisted living addition to our Franklin, Tennessee community.  At March 31, 2011, we are obligated on construction contracts in the amount of approximately $1,695,000, all of which is expected to require funding within the next twelve months.


We expect to meet our short-term liquidity requirements primarily from our cash flows from operating activities. In addition to cash flows from operations, our current cash on hand of $33,504,000 at March 31, 2011, marketable securities of $90,881,000 at March 31, 2011 and as needed, our borrowing capacity, are expected to be adequate to meet our contractual obligations and to finance our operating requirements and our growth and development plans in the next twelve months.


Long-term liquidity


Our $75,000,000 revolving credit agreement matures on October 25, 2011.  We currently anticipate renewing the credit agreement at that time and while we have had no indication from the lender that there is any question about




26



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



renewal, there has been no commitment at this time.  We entered into this loan originally on October 30, 2007, and have renewed the loan three times with one year maturities.  At the inception and at each renewal, the lender offered longer maturities, but the Company chose a one-year maturity because of the terms.  If we are not able to refinance our debt as it matures, we will be required to use our cash and marketable securities to meet our debt and contractual obligations and will be limited in our ability to fund future growth opportunities.


Our ability to refinance the credit agreement, to meet our long-term contractual obligations and to finance our operating requirements, and growth and development plans will depend upon our future performance, which will be affected by business, economic, financial and other factors, including potential changes in state and federal government payment rates for healthcare, customer demand, success of our marketing efforts, pressures from competitors, and the state of the economy, including the state of financial and credit markets.



Guarantees and Contingencies


Debt Guarantees—


At March 31, 2011, we have no guaranteed debt obligations.  


Governmental Regulations –


Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation.  Management believes that it is in compliance with all applicable laws and regulations in all material respects.  However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid and other federal healthcare programs.  We are not aware of any material regulatory proceeding or investigation underway or threatened involving allegations of potential wrongdoing.


On July 24, 2009, the Company received a civil investigative demand from the Tennessee Attorney General’s Office, requesting production of documents related to NHC’s business relationships with non-profit entities.  The Company has responded to the demand and complied as required with the terms of the demand.


Acquisitions –


We have acquired and will continue to acquire businesses with prior operating histories.  Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, anti-kickback and physician self-referral laws. Although we institute policies designed to conform practices to our standards following completion of acquisitions and attempts to structure our acquisitions as asset acquisitions in which we do not assume liability for seller wrongful actions, there can be no assurance that we will not become liable for past activities that may later be alleged to be improper by private plaintiffs or government agencies.  Although we obtain general indemnifications from sellers covering such matters, there can be no assurance that any specific matter will be covered by such indemnifications, or if covered, that such indemnifications will be adequate to cover potential losses and fines.  



New Accounting Pronouncements


See Note 13 to the Interim Condensed Consolidated Financial Statements for the impact of new accounting standards.  






27



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Forward–Looking Statements


References throughout this document to the Company include National HealthCare Corporation and its wholly–owned subsidiaries.  In accordance with the Securities and Exchange Commissions “Plain English” guidelines, this Quarterly Report on Form 10–Q has been written in the first person.  In this document, the words “we”, “our”, “ours” and “us” refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.


This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain “forward–looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995.  All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans”, and other similar expressions are forward–looking statements.


Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:


C

national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;


C

the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;


C

changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;


C

liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 12:  Guarantees and Contingencies);


C

the ability of third parties for whom we have guaranteed debt, if any, to refinance certain short term debt obligations;


C

the ability to attract and retain qualified personnel;


C

the availability and terms of capital to fund acquisitions and capital improvements;


C

the ability to refinance existing debt on favorable terms;


C

the competitive environment in which we operate;


C

the ability to maintain and increase census levels; and


C

demographic changes.


See the notes to the quarterly financial statements, and “Item 1.  Business” as is found in our 2010 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them.  This may be found on our web side at www.nhccare.com.  You should carefully consider these risks before making any investment in the Company.  These risks and uncertainties are not




28



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



the only ones facing us.  There may be additional risks that we do not presently know of or that we currently deem immaterial.  If any of the risks actually occur, our business, financial condition or results of operations could be materially adversely affected.  In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment.  Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.



Item 3.

Quantitative and Qualitative Disclosures About Market Risk.


Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments.  Currently, our exposure to market risk relates primarily to our fixed-income and equity portfolios.  These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk.  We also have exposure to market risk that includes our cash and cash equivalents, notes receivable, revolving credit facility, and long-term debt.  The Company's senior management has established comprehensive risk management policies and procedures to manage these market risks.  


Interest Rate Risk –


The fair values of our fixed-income investments fluctuate in response to changes in market interest rates.  Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments.  Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions.  At March 31, 2011, we have available for sale debt securities in the amount of $69,504,000.  The fixed maturity portfolio is comprised of investments with primarily short-term and intermediate-term maturities.  The portfolio composition allows flexibility in reacting to fluctuations of interest rates.  The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet obligations.  


As of March 31, 2011, both our long-term debt and revolving credit facility bear interest at variable interest rates.  Currently, we have long-term debt outstanding of $10.0 million and the revolving credit facility is zero.  However, we do intend to borrow funds on our credit facility in the future.  Based on a hypothetical credit facility borrowing of $75 million and our outstanding long-term debt, a 1% change in interest rates would change our annual interest cost by approximately $850,000.


Approximately $5.6 million of our notes receivable bear interest at variable rates (generally at the prime rate plus 2%).  Because the interest rates of these instruments are variable, a hypothetical 1% change in interest rates would result in a related increase or decrease in interest income of approximately $56,000.  


Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased.  As a result of the short-term nature of our cash instruments, a hypothetical 1% change in interest rates would have minimal impact on our future earnings and cash flows related to these instruments.


We do not currently use any derivative instruments to hedge our interest rate exposure.  We have not used derivative instruments for trading purposes and the use of such instruments in the future would be subject to approvals by the Investment Committee of the Board.


Credit Risk –


Credit risk is managed by diversifying the fixed maturity portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings.    





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NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Equity Price and Concentration Risk –


Our available for sale equity 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.  At March 31, 2011, the fair value of our equity marketable securities is approximately $90,881,000.  Of the $90.8 million equity securities portfolio, our investment in National Health Investors, Inc. (“NHI”) comprises approximately $78,140,000, or 86.0%, of the total fair value.  We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company.  Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $9,088,000.  At March 31, 2011, our equity securities had unrealized gains of $61,277,000 and no unrealized losses.  Of the $61,277,000 unrealized gains, $53,406,000 is related to NHI.



Item 4.  Controls and Procedures.


As of March 31, 2011, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Principal Accounting Officer (“PAO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’s management, including the CEO and PAO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011.  There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  



PART II.  OTHER INFORMATION


Item 1.  Legal Proceedings.


For a discussion of prior, current and pending litigation of material significance to NHC, please see Note 12 of this Form 10–Q.



Item 1A.  Risk Factors.


During the three months ended March 31, 2011, there were no material changes to the risk factors that were disclosed in Item 1A of National HealthCare Corporation’s Annual Report on Form 10–K for the year ended December 31, 2010.



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.  Not applicable



Item 3.  Defaults Upon Senior Securities.  None



Item 5.  Other Information.  None






30



NATIONAL HEALTHCARE CORPORATION


March 31, 2011

(unaudited)



Item 6.  Exhibits.


(a)

List of exhibits

       

Exhibit No.

Description

 

 

31.1

Rule 13a–14(a)/15d–14(a) Certification of Chief Executive Officer

 

 

31.2

Rule 13a–14(a)/15d–14(a) Certification of Principal Financial Officer

 

 

32

Certification pursuant to 18 U.S.C. Section 906 by Chief Executive

 

Officer and Principal Financial Officer




SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 

NATIONAL HEALTHCARE CORPORATION

 

(Registrant)

 

 

Date: May 9, 2011

/s/ Robert G. Adams                                               

 

Robert G. Adams

 

Chief Executive Officer

 

 

 

 

Date:  May 9, 2011

/s/ Donald K. Daniel                                              

 

Donald K. Daniel

 

Senior Vice President and Controller

 

(Principal Financial Officer)





31