FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended March 31, 1999 Commission file number 333-37173
NATIONAL HEALTH REALTY, INC.
(Exact name of registrant as specified in its Charter)
Maryland 52-2059888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-2020
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d),
of the Securities Exchange Act of 1934 during the preceding 12
months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
9,588,823 shares of common stock were outstanding as of April 30, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTION>
March 31 Dec. 31
1999 1998
<S> <C> <C>
ASSETS (unaudited)
Real estate properties:
Land $ 19,531 $ 19,531
Buildings and improvements 144,769 144,769
Construction in progress 1,189 1,189
165,489 165,489
Less accumulated depreciation (8,343) (6,579)
Real estate properties, net 157,146 158,910
Mortgage and other notes receivable 92,459 93,099
Interest and rent receivable 336 367
Cash and cash equivalents 4,351 2,897
Deferred costs and other assets 161 171
Total Assets $254,453 $255,444
LIABILITIES
Long-term debt $103,628 $103,628
Minority interest in consolidated
subsidiaries 16,574 20,351
Accounts payable and other accrued expenses 105 110
Accrued interest 308 325
Dividends payable 3,188 3,141
Distributions payable to partners 404 436
Total Liabilities 124,207 127,991
Commitments, contingencies and guarantees
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock,
$.01 par value; 5,000,000 shares
authorized; none issued and
outstanding --- ---
Common stock, $.01 par value:
75,000,000 shares authorized;
9,588,823 and 9,477,693 shares,
respectively, issued and outstanding 96 94
Capital in excess of par value of common stock 135,270 131,604
Cumulative net income 10,580 8,267
Cumulative dividends (15,700) (12,512)
Total Stockholders' Equity 130,246 127,453
Total Liabilities and Stockholders' Equity $254,453 $255,444
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
The interim condensed balance sheet at December 31, 1998 is derived
from the audited financial statements at that date.
2
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
(in thousands,
except share amounts)
<S> <C> <C>
REVENUES:
Rental income $ 3,871 $ 3,104
Mortgage interest income 2,348 2,416
Investment interest and other income 30 63
6,249 5,583
EXPENSES:
Interest 1,706 1,617
Depreciation of real estate 1,764 1,574
Amortization of loan and organi-
zation costs 10 10
General and administrative 163 157
3,643 3,358
INCOME BEFORE MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES 2,606 2,225
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 293 278
NET INCOME $ 2,313 $ 1,947
NET INCOME PER COMMON SHARE:
Basic $ .24 $ .22
Diluted $ .24 $ .20
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 9,512,885 8,721,796
Diluted 9,543,225 9,511,882
Common dividends per share
declared $ .3325 $ .3325
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
3
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,313 $ 1,947
Depreciation of real estate 1,764 1,574
Amortization of loan and organization costs 10 10
Minority interests in consolidated subsidiaries 293 279
(Increase) decrease in interest & rent receivable 31 (427)
Increase in other assets --- 1
Increase (decrease)in accounts payable and
accrued liabilities (22) 157
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,389 3,541
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in mortgage notes receivable - net 640 (6)
NET CASH USED IN INVESTING ACTIVITIES 640 (6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to stockholders (3,141) ---
Distribution paid to partners (434) ---
NET CASH PROVIDED BY FINANCING ACTIVITIES (3,575) ---
INCREASE IN CASH AND CASH EQUIVALENTS 1,454 3,535
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,897 3,229
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,351 $ 6,764
Supplemental Information:
Cash payments for interest expense $ 1,724 $ 1,539
During the three months ended
March 31, 1999 and March 31, 1998,
$710,000 and $16,948,000, respectively,
of Senior Subordinated Convertible
Notes were converted into 46,690 shares and
1,114,519 shares of NHC common stock. NHR is
obligated to issue NHR common stock upon the
conversion of the Notes:
Common stock $ 1 $ 12
Capital in excess of par $(2,379) $ (12)
Minority interest in consolidated subsidiaries $ 2,378 $ ---
During the three months ended March 31, 1999,
94,440 units of NHR/OP, L.P. units were
exchanged for 94,440 shares of NHR common
stock
Common stock $ 1 $ ---
Capital in excess of par $(1,287) $ ---
Minority interest in consolidated subsidiaries $ 1,286 $ ---
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
4
<PAGE>
<TABLE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED March 31, 1999
(dollars in thousands)
<CAPTION>
Cumulative Convertible Capital in Total
Preferred Stock Common Stock Excess of Cumulative Cumulative Stockholders'
Shares Amount Shares Amount Par Value Net Income Dividends Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/98 -- $ -- 9,447,693 $ 94 $131,604 $ 8,267 $ (12,512) $127,453
Net income -- -- -- -- -- 2,313 -- 2,313
Shares issued in con-
version of con-
vertible debentures
to common stock -- -- 46,690 1 2,379 -- -- 2,380
Shares issued in exchange
for NHR/OP, L.P. Units -- -- 94,440 1 1,287 -- -- 1,288
Dividends to common
shareholders ($.3325
per share) -- -- -- -- -- -- (3,188) (3,188)
BALANCE AT 3/31/99 -- $ -- 9,588,823 $ 96 $135,270 $ 10,580 $ (15,700) $130,246
BALANCE AT 12/31/97 -- $ -- 8,237,423 $ 82 $131,616 $ -- $ -- $131,698
Net income -- -- -- -- -- 1,947 -- 1,947
Shares issued in con-
version of con-
vertible debentures
to common stock -- -- 1,114,519 12 (16) -- -- (4)
Dividends to common
shareholders ($.3325
per share) -- -- -- -- -- -- (3,100) (3,110)
BALANCE AT 3/31/98 -- $ -- 9,351,942 $ 94 $131,600 $ 1,947 $ (3,100) $130,531
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these financial statements.
5
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
The unaudited financial statements furnished herein in the opinion of
the management include all adjustments which are necessary to fairly present
the financial position, results of operations and cash flows of National
Health Realty, Inc. ("NHR" or the "Company") and its majority owned
subsidiaries. NHR assumes that users of the interim financial statements
herein have read or have access to the audited financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the preceding fiscal year ended December 31, 1998, and that the
adequacy of additional disclosure needed for a fair presentation, except in
regard to material contingencies, may be determined in that context.
Accordingly, footnotes and other disclosures which would substantially
duplicate the disclosure contained in the Company's most recent annual report
to stockholders have been omitted. The interim financial information
contained herein is not necessarily indicative of the results that may be
expected for a full year because of various reasons including changes in
interest rates, rents and the timing of debt and equity financings.
NOTE 2. EARNINGS PER SHARE:
Basic earnings per share is based on the weighted average number of
common shares outstanding during the year.
Diluted earnings per share assumes the conversion of convertible
subordinated debentures and the exercise of all stock options using the
treasury stock method.
The following table summarizes the earnings and the average number of
common shares and common equivalent shares used in the calculation of basic
and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
<S> <C> <C>
BASIC:
Weighted average common shares 9,512,885 8,721,796
Net income available to common shareholders $ 2,313,000 $ 1,947,000
Net income per common share $ .24 $ .22
DILUTED:
Weighted average common shares 9,512,885 8,721,796
Stock options 15,000 15,000
Shares issuable upon conversion of NHC
subordinated convertible notes 15,339 775,086
Average common shares outstanding 9,543,224 9,511,882
Net income available to common shareholders $ 2,313,000 $ 1,947,000
Net income per common share $ .24 $ .20
</TABLE>
6
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
NOTE 3. COMMITMENTS, CONTINGENCIES AND GUARANTEES:
At March 31, 1999, NHR is obligated to issue at the election of the
holders 15,000 shares of its common stock related to stock options originally
issued by National HealthCare Corporation ("NHC") and 263 shares of its common
stock related to the conversion of certain 6% subordinated convertible notes
(the Notes) issued by NHC. The Notes are the obligation of NHC and mature
July 1, 2000. The stock options are exercisable and the Notes are convertible
at the election of the holders into an equal number of shares of the common
stock of NHC and NHR. Thus, NHR is obligated to issue NHR common stock upon
the exercise of the stock options and conversion of the Notes. NHR will
receive no proceeds from the exercise of the stock options and the conversion
of the Notes. NHR has reserved an additional 15,263 shares of common stock
for the exercise of the stock options and the conversion of the Notes.
NOTE 4. MORTGAGE PREPAYMENT CONTINGENCY:
On October 30, 1998, NHC, NHR's investment advisor and primary lessee,
announced terms of its settlement of litigation with Florida Convalescent
Centers, Inc. of Sarasota, Florida (FCC).
FCC is NHR's primary mortgagee. Under the terms of NHC's settlement
with FCC, NHR may receive prepayment of up to approximately $71 million in
notes receivable. NHR will make every effort to reinvest any amounts prepaid.
However, if NHR were to use the cash received to pay down existing debt, it
would result in a reduction of cash flow which could cause the cash dividend
paid by NHR to remain flat for the near future. Under the terms of the
settlement, prepayment may be made at any time and is currently expected to
occur by August 1, 1999.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National Health Realty, Inc. (NHR) is a real estate investment trust
that began operations on January 1, 1998. NHR, through its subsidiary
NHR/OP, L.P. (the Operating Partnership) acquired ownership of 23 health care
facilities including 16 licensed skilled nursing facilities, six assisted
living facilities and one independent living center (the Healthcare
Facilities), plus 51 first and second mortgage secured promissory notes with
an initial principal balance of $94.4 million (the Notes) from its then sole
owner National HealthCare L.P. NHR then leased (the Leases) the Healthcare
Facilities to National HealthCare Corporation (NHC) a successor by merger to
National HealthCare L.P. NHR also assumed certain debt, initially in the
amount of $86.4 million. The Leases covering the Healthcare Facilities are
"triple net" leases.
7
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
Competitive Restrictions
NHR entered into an advisory services agreement with NHC pursuant to
which NHC will provide NHR with investment advice, office space and personnel.
This agreement also provides that prior to the earlier to occur of (i) the
termination of the advisory agreement for any reason and (ii) NHC ceasing to
be actively engaged as the investment advisor for National Health Investors,
Inc. (NHI), NHR will not (without the prior approval of NHI) transact business
with any party, person, company or firm other than NHC. It is the intent of
the foregoing restriction that NHR will not be actively or passively engaged
in the pursuit of additional investment opportunities, but rather will focus
upon its capacities as landlord and note holder of those certain assets
conveyed to it by National HealthCare L.P.
Capital Resources and Liquidity
The assets of NHR as of March 31, 1999 include mortgage and other notes
receivable (book value of $92,459,000) and the real estate of 23 properties,
including 16 long-term care centers, six assisted living facilities and one
independent living center (total book value of $157,146,000). Long-term debt
of $103,628,000 includes a term loan with a principal amount of $90,500,000
which matures in 2002.
Sources and Uses of Funds
Approximately $73,044,000 of the mortgage and other notes reeivable is
due from Florida Convalescent Centers, Inc. (FCC) of Sarasota, Florida. FCC
operates 16 licensed nursing centers that are managed by NHC. NHR is the
primary lender to FCC. On October 30, 1998, NHC announced terms of its
settlement of litigation with FCC. Under the terms of NHC's settlement with
FCC, NHR may receive prepayments without penalty of up to $62,385,000 from FCC
and an additional $10,659,000 from NHC in notes receivable. NHR will attempt
to reinvest any amounts prepaid. Although NHR's existing line of credit
requires a portion of the prepayments to be used to reduce bank debt, NHR may
seek to obtain a waiver of this requirement. In the event that NHR uses the
money to pay down existing debt, it will result in a reduction of cash flow.
This could result in dividends per share remaining constant. However, no
dividend reductions are expected in the near future. Under the terms of the
settlement, prepayments may be made at any time.
FCC may also elect to terminate its management contract with NHC prior
to repaying its notes owed to NHR. In this event, NHR's assets will no longer
be solely managed by NHC.
NHR's leasing and mortgage services generated net cash from operating
activities during the three months ended March 31, 1999 in the amount of $4.4
million compared to $3.5 million in the prior period.
8
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
Net cash from operating activities generally includes net income plus
non-cash expenses, such as depreciation and amortization and provision for
loan losses, if any, and working capital charges. The funds from operating
activities were used along with $0.6 million from collections of mortgage
notes receivable to pay dividends to stockholders of $3.1 million and to pay
cash distributions to partners of $0.4 million.
NHR is leasing each of the 23 facilities to NHC. Each lease is for an
initial term expiring December 31, 2007, with two additional five year renewal
terms at the option of NHC, assuming no defaults. NHR accounts for its leases
as operating leases.
During the initial term and each renewal term, NHC is obligated to pay
NHR annual base rent (commencing for each center when construction is
complete) on the 23 facilities of $15,449,000. In addition to base rent, in
each year after 1999, NHC must pay percentage rent to NHR equal to 3% of the
amount by which gross revenues of each facility in such later year exceed the
gross revenues of such facility in 1999. Each lease is a "triple net lease"
under which NHC is responsible for paying all taxes, utilities, insurance
premium costs, repairs and other charges relating to the operation of the
facilities.
NHR has entered into an advisory services agreement with NHC whereby the
services related to investment activities and day-to-day management and
operations are provided to NHR by NHC. Because of the competitive
restrictions contained in the advisory services agreement, NHR does not intend
to seek further health care-related investment opportunities or to provide
lease or mortgage financing for such investments with operations other than
NHC but expects to continue to engage in the existing transactions with NHC
and potentially new investments.
Commitments
NHR intends to pay quarterly distributions to its stockholders in an
amount at least sufficient to satisfy the distribution requirements of a real
estate investment trust. Such requirements necessitate that at least 95% of
NHR's taxable income be distributed annually. The primary source for
distributions will be rental and interest income NHR earns on the real
property and mortgage notes receivable transferred to it by NHC. It is
estimated that cash distributions in the amount of $1.33 per share will be
declared for payment for 1999.
Certain of the real properties transferred by NHC to NHR were under
construction at March 31, 1999. NHR anticipates that NHC will complete the
construction of these properties and, upon completion of the construction, NHR
will purchase the additional constructed assets from NHC. NHR's cash on hand,
its operating and investing cash flows, and, as necessary, its borrowing
capacity are expected to be adequate to fund the purchase of the constructed
assets.
9
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Net income for the three months ended March 31, 1999 is $2,313,000
versus $1,947,000 for the same period in 1998, an increase of 18.8%. Diluted
earnings per common share increased 4 cents or 20.0% to 24 cents in the 1999
period from 20 cents in the 1998 period.
Total revenues for the three months ended March 31, 1999 increased
$666,000 or 11.9% to $6,249,000 from $5,583,000 for the three months ended
March 31, 1998. Revenues from rental income increased $767,000 or 24.7% when
compared to the same period in 1998. Revenues from mortgage interest
decreased $65,000 or 0.9% in 1999 as compared to the same period in 1998.
The increase in rental income is due to additions to and acquisitions of
property and equipment of $20,874,000 during the last fifteen months.
The decrease in mortgage interest income resulted primarily from
decreased mortgage notes receivable due to the receipt of monthly payments.
Total expenses for the 1999 three month period increased $285,000 or
$8.5% to $3,643,000 from $3,358,000 for the 1998 three month period. Interest
expense increased $89,000 or 5.5% in the 1999 three month period as compared
to the 1998 period. Depreciation of real estate increased $190,000 or 12.1%.
General and administrative costs increased 38%.
Interest expense increased due to increased debt of $13,773,000 compared
to a year ago. Depreciation increased as a result of the Company placing
newly constructed assets in service and property acquisitions.
The rental income revenues are believed by management to be secure.
However, all of the rental income is from NHC, NHR's sole lessee.
Approximately 60% of NHC's revenues are from participation in the Medicare and
Medicaid programs. During 1997, the federal government enacted the Balanced
Budget Act of 1997 (BBA) which contains numerous Medicare and Medicaid
cost-saving measures. As part of these cost saving measures, the BBA
requires that nursing homes transition to a prospective payment system over a
three year transition period. The BBA also contains certain measures which
have or will lead to reductions in Medicare payments for home health agency
services and therapy services. Furthermore, NHC has stated in its financial
statements that it is a defendant in a lawsuit filed under the Qui Tam
provisions of the Federal False Claims Act. NHC is unable to predict the
ultimate effect the enactment of the BBA or the pending lawsuit will have
on NHC's ability to make its lease payments to NHR.
10
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
Excluding the possibility of mortgage prepayments as previously
discussed, mortgage interest income revenues are also believed by management
to be secure. However, the mortgages are with five different owners and are
secured with the property of 23 long-term health care centers located in two
states, all of which are currently managed by NHC. The revenues of the 23
health care centers are subject to the cost-saving measures of the BBA. NHR
is unable to predict the ultimate effect the enactment of the BBA will have on
the ability of the 23 health care centers to make their debt service payments
to NHR.
Impact of Inflation--
Inflation may affect NHR in the future by changing the underlying value
of NHR's real estate or by impacting NHR's cost of financing its operations.
Revenues of NHR are primarily from long-term investments. NHR's leases
with NHC require increases in rent income based on increases in the revenues
of the leased facilities.
Year 2000 Compliance
The Year 2000 issue generally relates to computer programs that were
written using two digits rather than four to define the applicable year. In
those programs, the year 2000 may be incorrectly identified as the year 1900,
which can result in a system failure or miscalculations causing a disruption
of operations, including a temporary inability to process transactions,
prepare financial statements or engage in other normal business activities.
The following discussion identifies the actions taken by NHR to assess and
address its Year 2000 issues.
State of Readiness--
NHR has developed a plan to address its Year 2000 issues, and is
utilizing its internal resources to assess, remediate and test its systems.
As a result of its advisory agreement with NHC, NHR is completely reliant upon
NHC for its information technology systems and embedded technology. NHC is
also NHR's sole lessee. NHC is currently performing an evaluation of its
information technology and embedded technology that are utilized in the
operations of NHR. The Year 2000 readiness plan developed by NHR and NHR
includes an inventory and review of all core application systems, networks,
desktop systems, infrastructure and critical supply chains. NHR's Year 2000
readiness plan is focused on addressing Year 2000 readiness in the following
four categories: (1) mainframe computer operations, critical applications and
related networks, (2) personal computer hardware and software, (3) third party
mortgagees and lessees, and (4) other third party vendors that provide such
services a telecommunications and electrical power.
For each of the above categories, NHR, through its advisor (NHC), will
perform or has performed the phases of assessment, remediation and testing of
the applicable hardware, software or equipment, as applicable. The assessment
11
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
phase has been completed for category 1. The remediation phase is underway and
modifications of non-compliant application programs have begun. NHR has
historically developed the majority of its application programs internally.
All internally developed systems have been assessed and inventoried and plans
have been made to modify or replace them, if necessary, in order to make them
Year 2000 compliant. Purchased applications are either being modified,
replaced or upgraded. Most critical applications, whether internally
developed or purchased externally, have been tested and are already Year 2000
compliant. All server hardware, dumb terminals and printers have also been
assessed, repaired as necessary and tested and are now Year 2000 compliant.
It is expected that the remediation and testing phases related to category 1
will be completed by October 1,1999.
NHR is currently in the assessment phase for categories 2, 3 and 4. For
personal computer software vendors, NHR is aware of the packages that will not
be Year 2000 compliant and is currently in the process of assessing the types
of packages utilized by each personal computer. This assessment is expected
to be completed by October 1, 1999 with remediation and testing to be
completed by December 31, 1999. NHR has also requested all mortgagees,
lessees and other third party vendors (financial institutions, electrical
providers, etc.) to disclose their current Year 2000 readiness and their plan
for achieving Year 2000 readiness. Responses have been received from most
vendors and third parties. For those vendors and third parties that have not
yet responded, NHR is in the process of sending out additional requests.
Although most third party vendors have indicated that they are currently Year
2000 compliant or expect to be compliant prior to January 1, 2000, there can
be no assurance that such third parties will achieve Year 2000 compliance by
January 1, 2000.
NHR's sole lessee, NHC, is currently in the process of evaluating its
Year 2000 issues. NHC has formed an internal task force and is utilizing its
internal resources to assess, remediate and test its systems. NHC's Year 2000
readiness plan is focused on addressing Year 2000 readiness in the following
five categories: (1) mainframe computer operations, critical applications and
related networks, (2) personal computer hardware and software, (3) other
internal equipment such as infusion pumps, phone systems, monitoring devices
and smoke/fire alarms which rely on embedded technology (microchips) or
telecommunications, (4) third party payors, and (5) other third party vendors
utilized by NHC's healthcare centers such as financial institutions,
electrical providers, and food services suppliers. NHC has completed the
assessment phase related to its mainframe computer operations and related
networks. Although the majority of NHC's information technology applications
are already Year 2000 compliant, NHC is currently modifying or replacing
applications and hardware necessary. NHC is expected to complete the
remediation and testing of any non-compliant applications and hardware by
October 1, 1999. NHC is currently in the assessment phase of its plan for
personal computer applications and hardware, internal equipment utilizing
embedded technology, third party payors and other third party vendors. NHC is
expected to complete the assessment phase for its personal computer
applications and hardware and for its internal equipment by October 1, 1999
and to complete remediation and testing by December 31, 1999. It is expected
that the assessments of third party payors and third party vendors will be an
ongoing process that will continue through December 31, 1999.
12
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
NHR's mortgagees and NHC participate in the Medicare and Medicaid
programs. NHC and the mortgagees are reimbursed under these programs through
fiscal intermediaries. The Health Care Financing Administration ("HCFA"), the
government agency that administers the Medicare program, had previously
publicly stated that it would be Year 2000 compliant by December 31, 1998.
HCFA announced that it required all fiscal intermediaries to be Year 2000
compliant by December 31, 1998 and that it expected state Medicaid agencies to
be Year 2000 compliant by March 31, 1999. While HCFA has made no public
announcement as to whether the fiscal intermediaries and state Medicaid
agencies have met this schedule, recent reports by the General Accounting
Office report that the various states may not currently be in compliance.
With respect to itself, HCFA recently issued a Provider Correspondence Letter
dated January 12, 1999 indicating that they have not met their schedule. This
letter states that HCFA's systems will function on January 1, 2000 and will be
able to process "acceptable" claims.
NHC and the mortgagees have little or no control over the Year 2000
compliance of governmental payors and fiscal intermediaries and it is expected
that this assessment phase will be an ongoing process throughout 1999. NHR
will continue to request and seek information through all sources available
related to the Year 2000 readiness of NHC, the mortgagees, governmental payors
and fiscal intermediaries.
Year 2000 Costs--
As a result of its advisory agreement with NHC, costs related to NHR's
Year 2000 readiness plan have not been material and are not expected to be
material in future periods. No additional advisory fees have been charged to
NHR related to the assessment, remediation or testing of NHR's Year 2000
compliance.
Year 2000 Risks--
The failure of NHR or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in
interruptions of normal business operations. Based on all available
information as of March 31, 1999, management's estimate of NHR's most
reasonably likely worst case scenario includes: (i) delayed collection of rent
mortgage principal payments and interest payments, (ii) the disruption of
capital flows from banks or other lenders resulting in liquidity stress, and
(iii) the disruption of important services upon which NHR depends, such as
telecommunications and electrical power. Each of these events could have a
material adverse impact on NHR's business, results of operations and financial
condition.
Contingency Plans--
Contingency plans for NHR's Year 2000 issues continue to be developed
and include, but are not limited to, the identification of alternate
suppliers, alternate technologies and alternate manual systems and processes.
NHR's contingency plans are expected to be completed by October 1, 1999.
13
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
NHR's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve as new information becomes available. The
costs of NHR's Year 2000 compliance plan and the date on which NHR expects to
complete it are based on current estimates, which reflect numerous assumptions
about future events, including the continued availability of certain
resources, the timing and effectiveness of third party remediation plans and
other factors. NHR can given no assurance that these estimates will be
achieved, and actual results could differ materially from NHR's plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct relevant computer source codes and embedded
technology, the results of internal assessment, remediation and testing and
the timeliness and effectiveness of remediation efforts of third parties. In
addition, NHR's analysis of its Year 2000 issues is based in part on
information from third parties. There can be no assurance that such
information is accurate or complete.
Item 3. Quantitative and Qualitative Information About Market Risk
INTEREST RATE RISK
The Company's cash and cash equivalent consist of highly liquid
investments with a maturity of less than three months. All of the Company's
mortgage and other notes receivable bear interest at fixed interest rates. As
a result of the short-term nature of the Company's cash instruments and
because the interest rates on the Company's investments in notes receivable
are fixed, a hypothetical 10% change in interest rates would have no impact on
the Company's future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates would also have an immaterial impact
on the fair values of these instruments.
As of March 31, 1999, $93,700,000 of the Company's long-term debt bears
interest at floating interest rates. Because the interest rates of these
instruments are variable, a hypothetical 10% increase in interest rates would
result in additional interest expense of approximately $660,000 and likewise,
a reduction in interest rates would result in interest expense declining by
approximately $660,000. A hypothetical 10% change in interest rates would not
have a material impact on the fair values of these instruments.
The remaining $9,928,000 of the Company's long-term debt bears interest
at fixed rates. Because the interest rates of these instruments are fixed, a
hypothetical 10% change in interest rates would have no impact on the
Company's future earnings and cash flows related to these instruments. A
hypothetical 10% change in interest rates would not have a material impact on
the fair values of these instruments.
The Company currently does not use any derivative instruments to hedge
its interest rate expense or for trading purposes. The use of such instruments
would be subject to strict approvals by the Company's senior officers.
Therefore, the Company's exposure related to such derivative instruments is
not material to the Company's financial position, results of operations or
cash flows.
14
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the shareholders was held on April 26, 1999.
(b) Matters voted upon at the meeting are as follows:
PROPOSAL NO. 1: Election of Ernest G. Burgess, III and W. Andrew Adams to
serve as directors for terms of three years or until their successors have
been fully elected and qualified. Other directors whose terms of office
continue are Mr. Robert G. Adams, Mr. Richard F. LaRoche, Jr., Dr. J. K.
Twilla and Dr. Olin O. Williams.
Voting For Withholding Percent For
Authority
Ernest G. Burgess, III 7,546,812 52,203 99.3%
W. Andrew Adams 7,544,602 54,413 99.3%
PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as the Company's
independent accountants for the fiscal year 1999.
Voting For Voting Against Abstaining Percent For
7,577,289 7,589 14,137 99.7%
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule
(for SEC purposes only)
(b) Reports on Form 8-K - none required
15
<PAGE>
NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES
March 31, 1999
(Unaudited)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTH REALTY, INC.
(Registrant)
Date May 15, 1999 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date May 15, 1999 /s/ Donald K. Daniel
Donald K. Daniel
Principal Accounting Officer
16
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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