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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission File No.
December 31, 1996 33-9881
_______
NATIONAL HEALTHCARE L.P.
(Exact name of registrant as specified in its Partnership
Agreement)
Delaware 62-1293855
(State of Formation) (I.R.S. Employer I.D. No.)
100 Vine Street
Murfreesboro, Tennessee 37130
(Address of principal executive offices)
Telephone Number: 615-890-2020
Securities registered pursuant to Section 12(b) of the Act.
Name of Each Exchange on
Title of Each Class which Registered
_________________________________________________________________
Units of Limited Partnership Interest American Stock Exchange
Senior Subordinated Convertible Debentures
Due 2000 (6%) American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Same
Indicate by check mark whether the registrant (a) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes x No___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market of voting units held by nonaffiliates
of the registrant was $237,492,456 as of January 31, 1997.
Number of Units outstanding as of February 28, 1997:
8,860,203
Page 1 of 70 Pages
Exhibit Index Page 46
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<PAGE>
PART 1
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ITEM 1
BUSINESS
GENERAL
National HealthCare L.P. (NHC or the Company) is a limited
partnership organized under the laws of the State of Delaware
which principally operates long-term health care centers and home
health care programs in the southeastern United States. The
Company's health care centers provide subacute, skilled and
intermediate nursing and rehabilitative care. At December 31,
1996, the Company operated 100 long-term health care centers with
a total of 12,882 licensed beds. Of the 100 centers operated, 12
are owned, 40 are leased from National Health Investors, Inc.
(NHI) and 48 are managed for other owners. The Company's
homecare programs provide rehabilitative care at a patient's
residence. During 1996, the Company operated 33 homecare
programs and provided 754,000 homecare patient visits. NHC also
operates 387 retirement apartments located in one managed and
three leased retirement centers. Additionally, the Company
operates 377 assisted living units at eight owned or leased
centers and two managed centers.
In 1996 NHC opened or acquired 190 new beds, 130 in
owned/leased centers and 60 in managed centers. Bed growth in
owned/leased centers was primarily due to opening a new center
and purchasing another. Managed center bed growth was realized
with the expansion of an existing operation by 60 beds. During
the year, construction started on five new owned centers totaling
520 beds, one 54 bed expansion on an owned center and three
leased centers are being expanded by a total of 100 beds.
Regarding construction starts for managed centers, two expansion
projects, each with 60 beds were begun in 1996. Finally, NHC has
obtained certificates of need for the construction of 332 beds at
nine owned, leased or managed locations, all of which are
expected to start construction in 1997.
As of December 31, 1996, the Company operated specialized
care units such as Alzheimer's Disease care units (10), sub-acute
nursing units (8) and a number of in house pharmacies. Similar
specialty units are under development or consideration at a
number of the Company's centers, as well as free standing
projects.
Additional Services. The Company plans to continue to
expand its continuum of care for the elderly by offering a
comprehensive and increasing range of services through related or
separately structured health care centers, homecare programs,
specialized care units, pharmacy operations, rehabilitative
services, assisted living centers and retirement centers.
Highlights of these activities during 1996 were as follows:
A. Homecare Programs. The Company's policy has been to
affiliate each of its licensed and certified homecare
programs with a Company operated health care center.
Although the existing programs have increased their
total number of visits from 94,000 in 1989 to 754,184
in 1996, NHC has applied for and received Certificates
of Need to expand the program services in both Florida
and South Carolina, as well as pursuing a number of
acquisition opportunities. Such acquired or new
programs are not presently planned to be operated out
of a health care center. Additional certificate of
need applications will be filed during 1997.
B. Rehabilitative Services. The Company has long operated
an intensive offering of physical, speech, and
occupational therapy provided by center specific
therapists. NHC increased its staff of professionally
licensed therapists from nearly 800 last year to over
1,000 in 1996. Starting in October, 1993, the Company
redirected its focus from center-based therapists to a
wider operational format and has created a separate
rehabilitation subsidiary known as National Health
Rehab (NHR). Because of the Company's extensive
network of health care centers in the Southeastern
United States, the Company is better able to attract,
employ, and retain therapists. It is also greatly
expanding its customer service base by providing
contract services to 585 health care centers owned by
third parties. Provision of these services is not
covered under the Company's contracts to manage health
care centers and must be renegotiated annually with the
center owner. The Company's rates for these services
are competitive with other market rates.
C. Medical Specialty Units. The Company has required all
of its centers to participate in the Medicare program
since 1973, and has continually expanded its range of
offerings by the creation of center-specific medical
specialty units such as the Company's eight Alzheimer's
disease care units and seven subacute nursing units.
The services are provided not only at each NHC operated
center, but also at existing specialized care units.
D. Pharmacy Operations. The Company's policy has been to
have an in-house pharmacy located in each health care
center in those states where licensure permits the
operation of an in-house pharmacy. In other states,
pharmaceutical services have been provided by third
party contracts. NHC continues to review opportunities
for regional pharmacy operations and now operates
three, one in east Tennessee and two in central
Florida. These pharmacy operations will operate out of
a central office and supply (on a separate contractual
basis) pharmaceutical services and supplies which were
formerly purchased by each center from local vendors.
The regional pharmacy operations now have 4,946 nursing
home beds under contract.
E. Assisted Living Projects. The Company presently owns
or manages ten assisted living projects, eight of the
ten are located within the physical structure of a
long-term health care center or retirement complex.
The Company has identified the assisted living market
as an expanding area for the delivery of health care
and hospitality services and has embarked upon a market
review in its states of operation for the construction
of free-standing assisted living centers. Two owned
freestanding assisted living projects opened in 1996
with a total of 152 units. Three additional free
standing assisted living projects were under
construction in 1996, all of which will open in 1997.
It is anticipated that the Company will start
construction on four additional free-standing assisted
living apartments during 1997. Assisted living units
provide basic room and board functions for the elderly
with the on-staff availability to assist in minor
medical needs on an as needed basis.
F. Managed Care Contracts. During 1995 the Company opened
several regional contract management offices, staffed
by experienced case managers who contract with managed
care organizations (MCO's) and insurance carriers for
the provision of subacute and other medical specialty
services within a regional cluster of centers.
Florida, Middle and East Tennessee, and South Carolina
are currently being serviced by NHC's seven case
managers. Additional case management areas are planned
for 1997.
In fiscal year 1996, 96% of the Company's net revenues were
derived from health care services and 4% from other sources.
Long-Term Health Care Centers
The health care centers operated by the Company provide
in-patient skilled and intermediate nursing care services and
in-patient and out-patient rehabilitation services. Skilled
nursing care consists of 24-hour nursing service by registered or
licensed practical nurses and related medical services prescribed
by the patient's physician. Intermediate nursing care consists
of similar services on a less intensive basis principally
provided by non-licensed personnel. These distinctions are
generally found in the long-term health care industry although
for Medicaid reimbursement purposes, some states in which the
Company operates have additional classifications, while in other
states the Medicaid rate is the same regardless of patient
classification. Rehabilitative services consist of physical,
speech, and occupational therapies, which are designed to aid the
patient's recovery and enable the patient to resume normal
activities.
Each health care center has a licensed administrator
responsible for supervising daily activities, and larger centers
have assistant administrators. All have medical directors, a
director of nurses and full-time registered nurse coverage. All
centers provide physical therapy and most have other
rehabilitative programs, such as occupational or speech therapy.
Each facility is located near at least one hospital and is
qualified to accept patients discharged from such hospitals.
Each center has a full dining room, kitchen, treatment and
examining room, emergency lighting system, and sprinkler system
where required. Management believes that all centers are in
compliance with the existing fire and life safety codes.
The Company has developed a quality assurance program which
it utilizes in each of its health care centers to verify that
high standards of care are maintained. An integral part of the
program is a computerized patient assessment system which aids in
placing the patient in the appropriate section of each center
(skilled or intermediate) and monitors the health care needs of
the patient, number and frequency of medications and other
essential medical information. The data derived
from this system is used not only to assure that appropriate care
is given to each individual patient, but also to ascertain the
appropriate amount of staffing of each section of the center.
Additionally, the Company requires a patient care survey to be
performed at least quarterly by the regional and home office
nursing support team, and a "consumer view" survey by senior
management at least twice a year. The Company developed and
promotes a "customer satisfaction" rating system, using 1993 as a
bench mark, and requires significant improvement in the ratings
by each center as a condition of participation in the Company's
overall "Excellence Program".
The Company's managing general partner provides centralized
management and support services to the Company's health care
nursing centers. The management and support services include
operational support through the use of regional vice presidents
and regional nurses, accounting and financial services, cash
management, data processing, legal, consulting and services in
the area of rehabilitative care. All personnel are employed by
the Company's administrative general partner, which is also
responsible for overall services in the area of personnel, loss
control, insurance, education and training. The Company
reimburses the administrative general partner by paying all the
costs of personnel employed for the benefit of the Company as
well as a fee. All general partners are located in Murfreesboro,
Tennessee.
The Company provides the same management services to centers
operated under management contracts as it provides to centers
owned or leased by the Company. The term of each contract and
the amount of the management fee are determined on a case-by-case
basis. Typically, the Company charges a minimum of 6% of net
revenues. The term of the contracts range from five years to
twenty years. The Company maintains a right of first refusal
should any owner desire to sell a managed center and, in certain
situations, special termination payments have been negotiated
should an owner sell to a third party or terminate or non-renew a
management contract.
All health care centers operated by the Company are licensed
by the appropriate state and local agencies. All except one are
certified as providers for Medicaid patients, and all are
certified as Medicare providers. All of the Company's centers
are subject to state and federal licensure and certification
surveys. These surveys, from time to time, may produce
statements of deficiencies. In response to such a statement, if
any, the staff at each center would file a plan of correction
after consultation with the Regional Vice President and any
alleged deficiencies would be corrected. Presently, none of the
Company's facilities are operating under material statements of
deficiencies. The Company has a significant monetary bonus to
employees attached to passing these surveys with few or no
deficiencies.
Health Care Centers Under Construction
The following table sets forth the long-term health care
centers or additions to existing centers currently under
construction which the Company owns, leases or manages:
Number Owned/Leased/ Projected
Location of Beds Managed Opening Date
------------ ------- ------------ -------------
Orlando, FL 120 O January, 1997
Columbia, SC 120 O March, 1997
Murfreesboro, TN 40 O March, 1997
Ocala, FL 60* M March, 1997
Mauldin, SC 120 O June, 1997
Pulaski, TN 9* L June, 1997
Palatka, FL 60* M July, 1997
Coconut Creek, FL 120 O July, 1997
Ft. Oglethorpe, GA 54* O July, 1997
Smithville, TN 31* L July, 1997
Merritt Island, FL 60* L December, 1997
---
Total 794
*Expansion of existing center
Construction Starts in 1997
The following table sets forth the new beds authorized by
governmental certificates of need which are anticipated to start
construction in 1997.
Number Number of Number of
of Beds New Centers Existing Centers
------- ----------- ----------------
Owned 56 0 2
Leased 95 0 2
Managed 181 2 3
--- - -
Total 332 2 7
Occupancy Rates
The following table shows certain information relating to
occupancy rates for the Company's continuing owned and leased
long-term health care centers:
Year Ended December 31
1996 1995 1994
---- ----- -----
Overall census 93.6% 93.0% 92.8%
Census excluding acquisitions
and new openings 93.8% 93.0% 94.5%
Occupancy rates are calculated by dividing the total number
of days of patient care provided by the number of patient days
available (which is determined by multiplying the number of
licensed beds by 365 or 366).
Homecare Programs
The Company's home health programs (called "homecare" by the
Company) provide nursing and rehabilitative services to
individuals in their residences and are licensed by the
Tennessee, South Carolina and Florida state governments and
certified by the federal government for participation in the
Medicare program. Each of the Company's 32 Medicare certified
homecare programs and its one private duty program is managed by
a registered nurse, with speech, occupational and physical
therapists either employed by the program or on a contract basis.
Homecare visits increased from 717,000 visits in 1995 to 754,000
visits in 1996.
The Company has homecare programs in Tennessee, Florida,
and South Carolina. It opened two new program offices in South
Carolina and two in Florida in 1996. The Company's Tennessee
homecare programs are associated with its long-term health care
centers and, historically, are based within the health care
center. The Company's new homecare programs in Florida are
separately based in an effort to continually expand NHC's market
leadership in these services. The Company's experience in this
field indicates that homecare is not a substitute for
institutional care in a hospital or health care center. Instead,
the Company's homecare programs provide an additional level of
health care because its centers can provide services to patients
after they have been discharged from the center or prior to their
admission.
Assisted Living Units
The Company presently owns or manages ten assisted living
units, eight of which are located within the physical structure
of a long-term health care center or retirement center and two of
which are freestanding and were opened in 1996. The Company
plans to add at least four free standing assisted living projects
each year with the first priority being to serve markets in which
the Company already operates health care centers. Assisted
living units provide basic room and board functions for the
elderly with the on-staff availability to assist in minor medical
needs on an as needed basis. Certificates of Need are not
necessary to build these projects. The Company will open three
and expects to start construction on four free standing projects
in 1997. The projects opening will add 252 assisted living
units. Additionally, the Company will start construction in 1997
on the expansion of an existing nursing home/assisted living
complex in Naples, Florida.
Retirement Centers
NHC's retirement centers offer specially designed
residential units for the active and ambulatory elderly and
provide various ancillary services for their residents, including
restaurants, activity rooms and social areas. In most cases,
retirement centers also include long-term health care facilities,
either in contiguous or adjacent licensed health care centers.
Charges for services are paid from private sources without
assistance from governmental programs. Retirement centers may be
licensed and regulated in some states, but do not require the
issuance of a Certificate of Need such as is required for health
care centers. Although NHC has developed retirement centers
adjacent to its health care properties with an initial
construction of 15 to 40 units and which are rented by the month,
these centers offer only the expansion of the Company's continuum
of care, rather than a separate profit center. The projects are
designed, however, to be expandable if the demand justifies.
Thus, these retirement units offer a positive marketing aspect of
the Company's health care centers.
One retirement area which the Company is now entering is
that of "continuing care communities", where the resident pays a
substantial endowment fee and a monthly maintenance fee. The
resident then receives a full range of services - including
nursing home care - without additional charge.
One such continuing care community, the 137 unit Richland
Place Retirement Center, was opened in January, 1993 and is fully
occupied. The Company is currently marketing an additional
continuing care retirement community in Murfreesboro, Tennessee.
The Company has land under contract for similar communities in
Knoxville, Tennessee and Charleston, South Carolina.
Sources of Revenue
The Company's revenues are primarily derived from its health
care centers. The source and amount of the revenues are
determined by (i) the licensed bed capacity of its health care
centers, (ii) the occupancy rate of those centers, (iii) the
extent to which the rehabilitative and other skilled ancillary
services provided at each center are utilized by the patients in
the centers, (iv) the mix of private pay, Medicare and Medicaid
patients, and (v) the rates paid by private paying patients and
by the Medicare and Medicaid programs.
The following table sets forth sources of patient revenues
from health care centers and homecare services for the periods
indicated:
Year Ended Dec 31
Source 1996 1995 1994
------ ---- ---- ----
Private 28% 28% 28%
Medicare 38% 38% 35%
Medicaid/Skilled 9% 9% 11%
Medicaid/Intermediate 24% 24% 25%
VA and Other 1% 1% 1%
---- ---- ----
Total 100% 100% 100%
Government Health Care Reimbursement Programs
The federal health insurance program for the aged is
Medicare, which is administered by the Department of Health and
Human Services. State programs for medical assistance to the
indigent are known as Medicaid in states which the Company
operates. All health care centers operated by the Company are
certified to participate in Medicare and all but one participate
in Medicaid. Eligibility for participation in these programs
depends upon a variety of factors, including, among others,
accommodations, services, equipment, patient care, safety,
physical environment and the implementation and maintenance of
cost controls and accounting procedures. In addition, some of
the Company's centers have entered into separate contracts with
the United States Veterans Administration which provides
reimbursement for care to veterans transferred from Veterans
Administration hospitals.
Generally, government health care reimbursement programs
make payments under a cost based reimbursement system. Although
general similarities exist due to federal mandates, each state
operates under its own specific system. Medicare, however, is
uniform nationwide and pays, as defined by the program, the
reasonable direct and indirect cost of services furnished to
Medicare patients, including depreciation, interest and overhead.
Medicare payments have previously been limited by ceilings which,
pursuant to the 1993 Tax Reform Act, were frozen at their 1993
level for 1994, 1995 and the first nine months of 1996. During
1996 the Company had 48 owned or leased centers which operated at
Medicare costs higher than the ceiling. The Company has filed
"exception requests" with the fiscal intermediary for
substantially all of these centers. Revenues therefrom will not
be booked until paid and audited by the appropriate payors.
Private paying patients, private insurance carriers and the
Veterans Administration generally pay on the basis of the
center's charges or specifically negotiated contracts. Average
per capita daily room and board revenue from private paying
patients is higher than from Medicare and Medicaid patients,
while the average per capita daily revenue from Medicare patients
is higher than from Medicaid patients. The Company attempts to
attract an increased percentage of private and Medicare patients
by providing rehabilitative services and increasing its marketing
of those services through market areas and "Managed Care
Offices", of which four were open by year end. These services
are designed to speed the patient's recovery and allow the
patient to return home as soon as is practical. In addition to
educating physicians and patients to the advantages of the
rehabilitative services, the Company also has implemented
incentive programs which provide for the payment of bonuses to
its regional and center personnel if they are able to obtain
private and Medicare goals at their centers.
Items eligible for payment under the Medicare program
consist of nursing care, room and board, social services,
physical and speech therapy, drugs and other supplies, and other
necessary services of the type provided by skilled nursing
facilities. Routine service costs for extended care facilities
are subject to certain per diem costs limits. Medicare patients
are entitled to have payment made on their behalf to a skilled
nursing facility for up to 100 days during each calendar year and
a prior 3-day hospital stay is required. A patient must be
certified for entitlement under the Medicare program before the
skilled nursing facility is entitled to receive Medicare payments
and patients are required to pay approximately $95.00 per day
after the first 20 days of the covered stay. Under the Medicare
program, the federal government pays directly to the skilled
nursing facility the reasonable direct and indirect costs of the
services furnished. The Medicare program only reimburses for
skilled nursing services, which generally afford a more intensive
level of care.
Medicaid programs provide funds for payment of medical
services obtained by "medically indigent persons". These
programs are operated by state agencies which adopt their own
medical reimbursement formulas and standards, but which are
entitled to receive supplemental funds from the federal
government if their programs comply with certain federal
government regulations. In all states in which the Company
operates, the Medicaid programs authorize reimbursement at a
fixed rate per day of service. The fixed rate is established on
the basis of a predetermined average cost of operating nursing
centers in the state in which the facility is located or based
upon the center's actual cost. The rate is adjusted annually
based upon changes in historical costs and/or actual costs and a
projected cost of living factor.
During the fiscal year, each facility receives payments
under the applicable government reimbursement program. Medicaid
payments are generally "prospective" in that the payment is based
upon the prior years actual costs. Medicare payments are
"retrospective" in that current year payments are designed to
reasonably approximate the facility's reimbursable costs during
that year. Payments under Medicare are adjusted to actual
allowable costs each year. The actual costs incurred and
reported by the facility under the Medicare program are subject
to audit with respect to proper application of the various
payment formulas. These audits can result in retroactive
adjustments of interim payments received from the program. If,
as a result of such audits, it is determined that overpayment of
benefits were made, the excess amount must be repaid to the
government. If, on the other hand, it is determined that an
underpayment was made, the government agency makes an additional
payment to the operator. The Company books as receivables the
amounts which it expects to receive under the Medicare and
Medicaid programs and books into profit or loss any differences
in amounts actually received. To date, adjustments have not had
a material adverse effect on the Company. The Company believes
that its payment formulas have been properly applied and that any
future adjustments will not be materially adverse.
In October 1996, two NHC managed facilities in Florida were
audited by representatives of the regional office of the Office
of Inspector General ("OIG"). As part of these audits, the OIG
reviewed various records of the facilities relating to allocation
of nursing hours and contracts with outside suppliers of
services. The OIG completed its audit of one facility, and
indicated during an exit conference that it had no further
questions. At the second facility, the OIG determined certain
records were insufficient and NHC is in the process of supplying
additional information. The OIG has agreed to review these
additional documents when received. Florida is one of the states
in which governmental officials are conducting Operation Restore
Trust, a federal-state program aimed at detecting and eliminating
fraud and abuse by providers in the Medicare and Medicaid
Programs. The OIG has increased its investigative actions in
Florida as a part of Operation Restore Trust. NHC will continue
to monitor the progress of this audit and cannot predict whether
the OIG will take further action or request additional
information as a result of either of these audits.
Regulation
Health care centers are subject to extensive federal, state
and in some cases, local regulatory, licensing, and inspection
requirements. These requirements relate, among other things, to
the adequacy of physical buildings and equipment, qualifications
of administrative personnel and nursing staff, quality of nursing
provided and continued compliance with laws and regulations
relating to the operation of the centers. In all states in which
the Company operates, before the facility can make a capital
expenditure exceeding certain specified amounts or construct any
new long-term health care beds, approval of the state health care
regulatory agency or agencies must be obtained and a Certificate
of Need issued. Tennessee and Alabama exempt from this review
process any bed additions which are less than 10% of the total
existing licensed beds or 10 beds, whichever is lesser. The
appropriate state health planning agency must determine that a
need for the new beds or expenditure exists before a Certificate
of Need can be issued. A Certificate of Need is generally issued
for a specific maximum amount of expenditure and the project must
be completed within a specific time period. There is no advance
assurance that the Company will be able to obtain a certificate
of need in any particular instance. In some states, approval is
also necessary in order to purchase existing health care beds,
although the purchaser is normally permitted to avoid a full
scale certificate of need application procedure by giving advance
written notice of the acquisition and giving written assurance to
the state regulatory agency that the change of ownership will not
result in a change in the number of beds or the services offered
at the facility.
While there are currently no significant legislative
proposals to eliminate certificates of need pending in the states
in which the Company does business, deregulation in the
certificate of need area would likely result in increased
competition among nursing home companies and could adversely
affect occupancy rates and the supply of licensed and certified
personnel.
Health Care Reform
Governmental Funding of Medicare and Medicaid. 1996 saw a
number of legislative proposals introduced and debated but never
passed in the area of governmental funding of Medicare and
Medicaid. Although the proposals submitted by the majority party
in Congress and the Administration were substantially different,
they did contain a fundamental agreement that governmental health
care funding should be restrained as a component of both
political parties expressed desire to "balance the budget".
Generally speaking, the Administration's proposals in 1996
involved a smaller dollar amount of cuts or curtailments to
future spending than the Congressional proposed legislation.
Four key areas appear to have greater potential for
implementation as follows:
(1) A change to a prospective payment system (PPS) by
October 1997. A PPS could eliminate the differential
between the hospital based skilled nursing facilities
(SNFs) and freestanding SNFs. Because of inherently
lower costs, freestanding SNFs should be able to
continue to attract higher acuity patients in this
environment with a potential loss of those patients
from the acute care side.
(2) Limitations on ancillary reimbursement will be facility
specific which will be based upon 1994 "reasonable"
costs standard and will be indexed by 1997. Efficient
operators that can improve outcomes for higher acuity
Medicare patients should be able to recover
substantially all of their costs.
(3) A freeze on routine cost payments and a reduction in
capital payments will place a premium on cost controls
and efficient delivery of services. For Medicare
purposes, both the President's bill and the
Congressional Budget Reconciliation Bill propose
shifting the actual administration of Medicaid and
other Welfare programs from the Federal government to
the 50 states. Although both bills contain language
endeavoring to protect existing Medicaid programs, each
state government will be assessing their citizens'
needs and allocating their limited resources
accordingly. Again, efficient operators and operators
with a significant market share within states will
probably be less effected with these changes than
single facility providers.
(4) Homecare providers may well be reimbursed on an
"episodic" charge system rather than the current cost
reimbursement approach. The Company believes this to
be a positive change since it generates the opportunity
for profit, a feature not found in the present system.
Although it is likely that there will be a substantial
reduction in the growth of governmental revenues for Medicare and
Medicaid, NHC believes that loss of governmental revenues can be
offset by increased private paying revenues and the continued
expansion of its service component income.
Other Business and Properties
A. Nutritional Support Services. The Company owns a
medical support services business, which primarily
provides nutritional enteral, parenteral feeding
materials, urological and medical supplies to patients
in the Company's facilities as well as in other
long-term care or home settings. This company is
headquartered in Knoxville, Tennessee and is known as
Nutritional Support Services (NSS). Revenues from this
subsidiary accounted for from 4% to 6% of the Company's
net revenues in 1996, 1995 and 1994.
B. Medical Specialty Units. The Company has required all
of its centers to participate in the Medicare program
since 1973, and has continually expanded its range of
offerings by the creation of center-specific medical
specialty units such as the Company's ten Alzheimer's
disease care units and eight subacute nursing units.
The services are actually provided not only at each NHC
operated center, but also at existing specialized care
units.
C. Pharmacy Operations. The Company's policy has been to
have an in-house pharmacy located in each health care
center in those states where licensure permits the
operation of an in-house pharmacy. In other states,
pharmaceutical services have been provided by third
party contracts. NHC is now creating wholly owned
regional pharmacy operations and currently operates one
in east Tennessee and two in central Florida. These
pharmacy operations operate out of a central office and
supply (on a separate contractual basis) pharmaceutical
services and supplies which were formerly purchased by
each center from local vendors. The Regional pharmacy
operations had 4,946 nursing home beds under contract
by December 31, 1996.
D. Advisory Services to National Health Investors, Inc.
In 1991 the Company formed National Health Investors,
Inc., as a wholly-owned subsidiary. It then
transferred to NHI certain healthcare facilities then
owned by NHC and then distributed the shares of NHI to
NHC's unitholders. The distribution had the effect of
separating NHC and NHI into two independent public
companies. As a result of the distribution, all of the
outstanding shares of NHI were distributed to the then
NHC unitholders.
NHI entered into an Advisory, Administrative Services
and Facilities Agreement (the "Advisory Agreement")
with NHC pursuant to which NHC provides NHI, for a fee,
with investment advice, office space, personnel and
other services. For its services under the Advisory
Agreement, the Advisor is entitled to a base annual
compensation of $1,625,000. Compensation paid to
executive officers of NHI is credited against this
Advisory Fee. NHC executive officers W. Andrew Adams
and Richard F. LaRoche, Jr. serve as executive officers
of NHI. For 1993 and later years in which per share
Funds From Operations of NHI exceed per share Funds
From Operations during 1992, the $1,625,000 annual
compensation increased by the same percentage that per
share Funds From Operations in such later year exceed
those in 1992. NHC earned approximately $3,100,000 in
1996.
The Advisory Agreement provides that the Advisor shall
pay all expenses incurred in performing its obligations
thereunder, without regard to the amount of
compensation received under the Agreement. Expenses
specifically listed as expenses to be borne by the
Advisor without reimbursement include: the cost of
accounting, statistical or bookkeeping equipment
necessary for the maintenance of NHI's books and
records; employment expenses of the officers and
directors and personnel of the Advisor and all
expenses.
E. Managed Care Contracts. The Company has identified a
number of potential regional offices, which will be
staffed by experienced case managers contracting with
health maintenance organizations (HMO's) and insurance
carriers for the provision of subacute and other
medical specialty services within its regional cluster
of centers. Seven case managers were in place by year
end 1996 and several more are planned to be added in
1997.
F. Principal Office. The Company maintains its home
office staff in Murfreesboro, Tennessee in a building
owned by a limited partnership, which is 69.7% owned by
NHC. The Company also owns land adjacent to many of
its health care centers for the purpose of long-range
expansion.
Competition
In most of the communities in which the Company's health
care centers are located, there are other health care centers
with which the Company competes. In competing for patients and
staff with these centers, the Company relies upon referrals from
acute care hospitals, physicians, residential care facilities,
church groups and other community service organizations. The
reputation in the community and the physical appearance of the
Company's health care centers are also important in obtaining
patients, since members of the patient's family generally
participate to a greater extent in selecting health care centers
than in selecting an acute care hospital. The Company believes
that by providing and emphasizing rehabilitative as well as
skilled care services at its centers, it has been able to broaden
its patient base and to differentiate its centers from competing
health care centers.
The Company experiences competition in employing and
retaining nurses, technicians, aides and other high quality
professional and non-professional employees. In order to enhance
its competitive position, the Company has an educational tuition
loan program, an American Dietary Association approved internship
program, a specially designed nurse's aide training class, and
makes financial scholarship aid available to physical therapy
vocational programs and The Foundation for
Geriatric Education. The Company also maintains an
"Administrator in Training" course, 24 months in duration, for
the professional training of administrators. Presently, the
Company has 17 full-time individuals in this program. Four of its
eight regional vice presidents and 47 of its 100 health care
center administrators have graduated therefrom.
NHC's employee benefit package offers a tuition
reimbursement program. The goal of the program is to insure a
well trained qualified work force to meet future demands. While
the program is offered to all disciplines, special emphasis has
been placed on supporting students in nursing and physical
therapy programs. Students are reimbursed at the end of each
semester after presenting tuition receipts and grades to
management. The program has been successful in providing a means
for many bright students to pursue a formal education.
Employees
As of December 31, 1996, the administrative general partner
of the Company and the Company's managed centers had
approximately 14,173 full and part time employees, who are called
"Partners" by the Company. No employees are presently
represented by a bargaining unit. The Company believes its
current relations with its employees are good.
<PAGE>
<TABLE>
ITEM 2
PROPERTIES
LONG-TERM HEALTH CARE CENTERS
<CAPTION>
Total Beds under Development Joined
State City Center Affiliation Beds and Special Care Units NHC
- ----- ---- ------ ----------- ----- ---------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Alabama
Anniston NHC HealthCare, Anniston Leased 151 55 bed Alzheimer's unit 1973
Moulton NHC HealthCare, Moulton Leased 136 1973
Florida
Brooksville Brooksville Nursing Manor Managed 180 1993
Hudson Bear Creek Nursing Center Managed 120 1993
Crystal River Cypress Cove Care Center Managed 120 1993
Daytona Beach NHC HealthCare, Daytona Beach Owned 60 1996
Trenton Medic-Ayers Nursing Center Managed 120 1993
Ft. Lauderdale NHC of Ft. Lauderdale Managed 253 1984
New Port Richey Heather Hill Nursing Home Managed 120 1993
Hudson NHC HealthCare, Hudson Leased 180 50 bed subacute care unit 1986
Merritt Island NHC HealthCare, Merritt Island Leased 120 22 bed Alzheimer's unit
60 beds under development 1990
Panama City NHC of Panama City Managed 120 1986
Port Charlotte NHC HealthCare, Port Charlotte Owned 180 60 bed subacute care unit
30 bed Alzheimer's unit 1994
Naples NHC HealthCare, Naples Owned 60 1996
Naples NHC HealthCare, Imperial Owned 60 30 beds under development 1994
St. Petersburg NHC HealthCare, St. Petersburg Managed 159 1984
Stuart NHC HealthCare, Stuart Leased 118 24 bed Alzheimer's unit 1989
35 beds under development
Ocoee Ocoee Health Care Center Managed 120 1990
St. Cloud Osceola Health Care Center Managed 120 1991
Palatka Palatka Health Care Center Managed 120 60 beds under development 1989
Clearwater Palm Garden of Clearwater Managed 120 1987
Gainesville Palm Garden of Gainesville Managed 120 1987
Jacksonville Palm Garden of Jacksonville Managed 120 1990
Largo Palm Garden of Largo Managed 140 1987
N. Miami Beach Palm Garden of N. Miami Beach Managed 120 1988
Ocala Palm Garden of Ocala Managed 120 60 beds under development 1987
Orlando Palm Garden of Orlando Managed 120 1987
Pensacola Palm Garden of Pensacola Managed 180 1987
Lake City Palm Garden of Lake City Managed 120 28 bed Alzheimer's unit 1992
Largo Palm Garden of Pinellas Managed 120 20 bed subacute care unit 1991
Port St. Lucie Palm Garden of Port St. Lucie Managed 120 1988
Tampa Palm Garden of Tampa Managed 120 1987
Vero Beach Palm Garden of Vero Beach Managed 173 7 beds under development 1987
West Palm Beach Palm Garden of West Palm Beach Managed 162 1988
Winter Haven Palm Garden of Winter Haven Managed 120 1987
Plant City NHC HealthCare, Plant City Leased 171 1985
Dade City Royal Oak Nursing Center Managed 120 1993
Sarasota Sarasota Health Care Center Managed 120 1990
Sun City Palm Garden of Sun City Managed 120 1991
Niceville The Manor at Blue Water Bay Managed 60 1993
Madison Lake Park of Madison Managed 79 20 beds under development 1995
Miami The Nursing Center at Mercy Managed 120 1995
Georgia
Fort Oglethorpe NHC HealthCare, Ft Oglethorpe Owned 81 54 beds under development 1989
Rossville NHC HealthCare, Rossville Leased 112 1971
Indiana
Brownsburg Brownsburg Health Care Center Managed 178 20 bed Alzheimer's unit 1990
Castleton Castleton Health Care Center Managed 120 18 bed Alzheimer's unit 1990
Ladoga Ladoga Health Care Center Managed 95 1990
Plainfield Plainfield Health Care Center Managed 199 22 bed Alzheimer's unit 1990
Kentucky
Dawson Springs NHC HealthCare, Dawson Springs Leased 80 1973
Glasgow NHC HealthCare, Glasgow Leased 206 1971
Madisonville NHC HealthCare, Madisonville Leased 94 1973
Missouri
Desloge NHC HealthCare, Desloge Leased 120 1982
Joplin NHC HealthCare, Joplin Leased 126 1982
Kennett NHC HealthCare, Kennett Leased 160 1982
Macon Macon Health Care Center Managed 120 1982
St. Louis NHC HealthCare, Maryland Hghts Leased 220 1987
Osage Beach Osage Beach Health Care Center Managed 120 1982
Springfield Springfield Health Care Center Managed 120 1982
St. Charles NHC HealthCare, St. Charles Leased 120 1982
West Plains West Plains Health Care Center Owned 120 1982
South Carolina
Anderson NHC HealthCare, Anderson Leased 290 1973
Greenwood NHC HealthCare, Greenwood Leased 152 1973
Sumter NHC HealthCare, Hopewell Managed 96 1985
Laurens NHC HealthCare, Laurens Leased 176 1973
Aiken Mattie C. Hall
Health Care Center Managed 176 44 bed Alzheimer's unit 1982
Clinton NHC HealthCare, Clinton Owned 131 1993
Murrells Inlet NHC HealthCare, Garden City Owned 88 1992
Greenville NHC HealthCare, Greenville Owned 176 1992
Lexington NHC HealthCare, Lexington Owned 88 12 bed subacute care unit 1994
23 beds under development
North Augusta NHC HealthCare, North Augusta Owned 132 1991
Sumter NHC HealthCare, Sumter Managed 120 3 beds under development 1985
Tennessee
Athens NHC HealthCare, Athens Leased 98 1971
Johnson City NHC HealthCare, Johnson City Leased 179 18 bed Alzheimer's unit 1971
Columbia NHC HealthCare, Columbia Leased 120 12 bed subacute care unit 1973
Cookeville NHC HealthCare, Cookeville Managed 96 1975
Franklin NHC HealthCare, Franklin Leased 84 1979
Dickson NHC HealthCare, Dickson Leased 197 1971
Columbia NHC HealthCare, Hillview Leased 98 1971
Knoxville NHC HealthCare, Knoxville Leased 152 1971
Knoxville NHC HealthCare, Fort Sanders Owned 180 12 bed subacute unit 1977
McMinnville NHC HealthCare, McMinnville Leased 150 1971
Lewisburg NHC HealthCare, Lewisburg Leased 95 1971
Murfreesboro NHC HealthCare, Murfreesboro Managed 190 69 bed subacute care unit 1974
Nashville NHC HealthCare, Nashville Leased 133 1975
Hendersonville NHC HealthCare, Hendersonville Leased 117 1987
Lawrenceburg NHC HealthCare, Lawrenceburg Managed 97 1985
Oak Ridge NHC HealthCare, Oak Ridge Managed 130 1977
Lewisburg NHC HealthCare, Oakwood Leased 62 1973
Chattanooga NHC HealthCare, Chattanooga Leased 212 20 bed sub-acute care 1971
Pulaski NHC HealthCare, Pulaski Leased 95 9 beds under development 1971
Milan NHC HealthCare, Milan Leased 129 1971
Lawrenceburg NHC HealthCare, Scott Leased 62 1971
Dunlap NHC HealthCare, Sequatchie Leased 60 60 beds under development 1976
Somerville NHC HealthCare, Somerville Leased 72 1976
Sparta NHC HealthCare, Sparta Leased 150 1975
Springfield NHC HealthCare, Springfield Leased 112 1973
Smithville NHC HealthCare, Smithville Leased 76 31 beds under development 1971
Nashville The Health Center of
Richland Place Managed 98 1992
Nashville West Meade Place Managed 120 1993
Virginia
Bristol NHC HealthCare, Bristol Leased 120 1973
ASSISTED LIVING UNITS
<CAPTION>
State City Center Assisted Living Units
<S> <C> <C> <C>
Alabama Anniston NHC Place/Anniston (free-standing) 68 bed assisted living unit
Florida Naples NHC HealthCare, Imperial 60 bed assisted living unit
Naples NHC HealthCare, Naples 36 bed assisted living unit
Vero Beach NHC Place/Vero Beach (free-standing) 84 bed assisted living unit
West Palm Beach Palm Garden of West Palm Beach 25 bed assisted living unit
Missouri St. Charles Lake St. Charles Retirement Center 25 bed assisted living unit
Tennessee Dickson NHC HealthCare, Dickson 20 bed assisted living unit
Johnson City NHC HealthCare, Johnson City 15 bed assisted living unit
Nashville Richland Place 32 bed assisted living unit
Somerville NHC HealthCare, Somerville 12 bed assisted living unit
RETIREMENT APARTMENTS
<CAPTION>
State City Retirement Apartments Affiliation Units Established
<S> <C> <C> <C> <C> <C>
Missouri St. Charles Lake St. Charles Retirement Apartments Leased 155 1984
Tennessee Johnson City Colonial Hill Retirement Apartments Leased 63 1987
Chattanooga Parkwood Retirement Apartments Leased 32 1986
Nashville Richland Place Retirement Apartments Managed 137 1993
HOMECARE PROGRAMS
<CAPTION>
State City Homecare Programs Affiliation Established
<S> <C> <C> <C> <C>
Florida Blountstown NHC HomeCare of Blountstown Owned 1994
Carrabelle NHC HomeCare of Carrabelle Owned 1994
Chipley NHC HomeCare of Chipley Owned 1994
Crawfordville NHC HomeCare of Crawfordville Owned 1994
Madison NHC HomeCare of Madison Owned 1994
Marianna NHC HomeCare of Marianna Owned 1994
Ocala NHC HomeCare of Ocala Owned 1996
Panama City NHC HomeCare of Panama City Owned 1994
Panama City NHC Private Nursing Owned 1994
Perry NHC HomeCare of Perry Owned 1994
Port St. Joe NHC HomeCare of Port St. Joe Owned 1994
Quincy NHC HomeCare of Quincy Owned 1994
Stuart NHC HomeCare of Stuart Owned 1996
Tallahassee NHC HomeCare of Tallahassee Owned 1994
South Carolina Aiken NHC HomeCare of Aiken Owned 1996
Greenwood NHC HomeCare of Greenwood Owned 1996
Laurens NHC HomeCare of Laurens Owned 1996
Tennessee Athens NHC HomeCare of Athens Owned 1984
Johnson City NHC HomeCare of Johnson City Owned 1978
Columbia NHC HomeCare of Columbia Owned 1977
Cookeville NHC HomeCare of Cookeville Owned 1976
Dickson NHC HomeCare of Dickson Owned 1977
Lawrenceburg NHC HomeCare of Lawrenceburg Owned 1977
Lewisburg NHC HomeCare of Lewisburg Owned 1977
McMinnville NHC HomeCare of McMinnville Owned 1976
Murfreesboro NHC HomeCare of Murfreesboro Owned 1976
Knoxville NHC HomeCare of Knoxville Owned 1977
Chattanooga NHC HomeCare of Chattanooga Owned 1985
Pulaski NHC HomeCare of Pulaski Owned 1985
Milan NHC HomeCare of Milan Owned 1977
Somerville NHC HomeCare of Somerville Owned 1983
Sparta NHC HomeCare of Sparta Owned 1984
Springfield NHC HomeCare of Springfield Owned 1984
</TABLE>
<PAGE>
ITEM 3
LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary
course of business. While there are several worker's
compensation and personal liability claims presently in the court
system, management believes that the ultimate resolution of all
pending proceedings will not have any material adverse effect on
the Company or its operations.
In March 1996, Florida Convalescent Centers, Inc. (FCC), an
independent Florida corporation for whom the company manages
sixteen licensed nursing centers in Florida, gave NHC notice of
its intent not to renew one management contract. Pursuant to
written agreements between the parties, NHC valued the center,
offering to either purchase the center at the price so valued or
require FCC to pay to NHC certain deferred compensation based
upon that value. FCC responded on March 26, 1996, by filing a
Declaratory Judgment suit in the Circuit Court of the Twelfth
Judicial Circuit in and for Sarasota County, Florida, requesting
the court to interpret the parties' rights under their
contractual arrangements. FCC next sued on April 18, 1996 in the
Circuit Court for Columbia County, Florida removed on May 1, 1996
to the United States District Court, Middle District, Florida,
Jacksonville Division to obtain possession of the center for
which it alleged the management contract had been terminated.
This suit has now been dismissed, and the issue of possession
will be decided by the Sarasota County Court. This suit is still
in the preliminary stages and no hearing date has been scheduled.
In January, 1997, FCC notified NHC that it currently does
not intend to renew an additional four contracts which mature in
1997, but has agreed that NHC will remain as manager until a
final decision is reached by the Sarasota Court. The balance of
the FCC contracts may be terminated in the years 1998-2002.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
-------
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED UNITHOLDER MATTERS
The partnership units of National HealthCare L.P. are traded
on the American Stock Exchange under the symbol NHC. The closing
price for the NHC units on Friday, February 28, 1997 was $46.75.
On December 31, 1996, NHC had approximately 4,168 unitholders,
comprised of 1,982 unitholders of record and an additional 2,186
unitholders indicated by security position listings. The
following table sets out the quarterly high and low sales prices
of NHC's units of partnership interest. The cash distributions
per unit during each quarter are also shown.
Unit Prices Cash Distributions
High Low Declared Per Unit
1995
1st Quarter $26.000 $22.875 $ .42
2nd Quarter 28.500 24.375 .52
3rd Quarter 31.500 28.000 .52
4th Quarter 39.375 29.500 .52
1996
1st Quarter $41.125 $37.125 $ .52
2nd Quarter 41.375 34.875 .52
3rd Quarter 39.875 37.000 .52
4th Quarter 45.000 37.500 .60
NHC paid cash distributions on its outstanding partnership
units related to reporting years as follows: 1992, $.54 per
unit; 1993, $.88 per unit; 1994, $1.35 per unit; 1995, $1.98 per
unit; and 1996, $2.16 per unit. Additionally, there was a
special cash distribution of $1.10 per unit paid in 1993 to help
defray taxes on the sale of an investment.
NHC is a publicly traded limited partnership and, under
current law, must be taxed as a corporation for federal income
tax purposes beginning in 1998. At that time, NHC will review
its cash distribution/dividend paying policy. Investors should
anticipate that cash dividends will be diminished when NHC begins
paying federal income taxes in 1998, it being NHC's intent to
retain cash for growth.
ITEM 6
SELECTED FINANCIAL DATA
The following table represents selected financial
information with respect to the Company for the five years ended
December 31, 1996. This financial information has been derived
from financial statements included elsewhere in this Form 10-K
and should be read in conjunction with those financial statements
and accompanying footnotes.
Year Ended December 31,
1996 1995 1994 1993 1992
(in thousands, except unit and per unit data)
Operating Data:
Revenue $388,660 $350,957 $298,901 $245,085 $216,378
Gain on sale of
investments -- -- -- 24,773 --
Expenses 359,374 329,842 283,048 232,296 206,877
Net income 29,286 21,115 15,853 37,562 9,501
Earnings per unit:
Primary $ 3.44 $ 2.65 $ 2.02 $ 4.85 $ 1.28
Fully diluted 2.98 2.31 1.80 4.05 1.23
Balance Sheet Data:
Total assets $404,740 $355,491 $396,133 $344,680 $304,074
Long-term debt 124,678 100,871 104,243 54,625 49,299
Debt serviced by
other parties 32,857 40,771 89,764 112,116 115,031
Partners' capital 128,537 108,899 101,006 92,526 67,922
Cash distributions
declared per unit:
Quarterly and
year end $ 2.16 $ 1.98 $ 1.35 $ .88 $ .54
Special -- -- -- 1.10 --
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview--
National HealthCare L.P. (NHC) is a leading provider of
long-term health care services. NHC operates or manages 100
long-term health care centers with 12,882 beds in nine states.
NHC provides nursing care as well as ancillary therapy services
to patients in a variety of settings including long-term nursing
centers, managed care specialty units, subacute care units,
Alzheimer's care units, homecare programs, and facilities for
assisted living. NHC also operates retirement centers.
Results of Operations--
The following table and discussion sets forth items from the
consolidated statements of income as a percentage of net revenues
for the audited years ended December 31, 1996, 1995 and 1994.
Percentage of Net Revenues
Year Ended December 31 1996 1995 1994
----- ----- -----
Revenues:
Net patient revenues 87.9% 87.8% 90.2%
Other revenues 12.1 12.2 9.8
Net revenues 100.0 100.0 100.0
Costs and expenses:
Salaries, wages and benefits 53.9 53.8 52.7
Other operating 32.2 31.2 33.0
Depreciation and amortization 3.6 4.2 4.6
Interest 2.8 4.8 4.4
Total costs and expenses 92.5 94.0 94.7
Net Income 7.5% 6.0% 5.3%
The following table sets forth the increase in certain items
from the consolidated statements of income as compared to the
prior period.
Period to Period Increase (Decrease)
1996 vs. 1995 1995 vs. 1994
(dollars in thousands) Amount Percent Amount Percent
Revenues:
Net patient revenues $33,849 11.0% $38,247 14.2%
Other revenues 3,854 9.0 13,809 47.3
Net revenues 37,703 10.7 52,056 17.4
Costs and expenses:
Salaries, wages & benefits 20,660 10.9 31,322 19.9
Other operating 15,925 14.6 10,664 10.8
Depreciation & amortization (915) (6.3) 967 7.1
Interest (6,138) (36.3) 3,841 29.4
Total costs and expenses 29,532 9.0 46,794 16.5
Net income $ 8,171 38.7% $ 5,262 33.2%
NHC's owned or leased long-term health care centers and
contract therapy services provided 78% of net revenues in 1996,
76% in 1995, and 76% in 1994. Homecare programs provided 13% of
net revenues in 1996, 15% in 1995 and 16% in 1994.
The overall census in owned or leased centers for 1996 was
93.6% compared to 93.0% in 1995 and 92.8% in 1994. The census
excluding acquisitions and new openings was 93.8%, 93.0% and
94.5%, respectively, for the same periods. NHC opened a net of
190 new owned, leased or managed beds in 1996.
Approximately 60% of NHC's net revenues are derived from
Medicare, Medicaid, and other government programs. In the
opinion of management, adequate provision has been made for any
adjustments that may result from such reviews. NHC generally
expects final determinations to occur two to three years
subsequent to the year in which amounts are earned. Any
differences between estimated settlements and final
determinations are reflected in operations in the year finalized.
NHC has submitted various requests for exceptions to Medicare
routine cost limitations for reimbursement. NHC has received
approval on certain requests and others are pending approval.
NHC will record revenues associated with the approved requests
when such approvals, including cost report audits, are assured.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
1996 Compared to 1995--
In 1996, NHC achieved record earnings while growing in the
variety and quality of services offered. Results for 1996
included a 39% increase in net income, a 29% increase in primary
earnings per unit, and a 11% increase in net revenues.
The growth in revenues in 1996 occurred in long-term care,
in rehabilitative and managed care and in management services.
Improved revenues in long-term care were due in part to
increased numbers of owned beds having been placed in service.
In 1996, 130 beds were opened or acquired in owned and leased
centers. Furthermore, 111 long-term care beds which had been
added in 1995 had improved occupancy rates in 1996. Also
contributing to improved revenues in long-term care were
increases in types and levels of services being offered and in
private pay and third party payor rates. Increases in third
party payor rates were held down in part by the negative impact
of routine cost limits for Medicare certified nursing homes.
During 1996 and 1995, NHC had 48 and 44, respectively, owned or
leased centers which operated at Medicare costs higher than the
ceiling.
Homecare revenues improved due to increased payor rates and
number of visits at NHC's 16 additional Tennessee locations. At
all locations, there were 754,000 visits in 1996 compared to
717,000 visits in 1995.
Revenues also improved during 1996 as a result of NHC's
increased emphasis on rehabilitative and managed care services.
To boost the ability to offer physical, speech and occupational
therapy to greater numbers of patients, NHC increased its staff
of professionally licensed therapists from nearly 800 last year
to over 1,000 in 1996. Over 585 companies, including school
systems, hospitals, home care companies and outpatient clinics
contracted for NHC's rehabilitative services in 1996, which
number is up from 420 companies in 1995.
Revenues from management services, which are included in the
Statements of Income in Other Revenues, increased 13% in 1996
from $28,719,000 to $32,363,000 due to increased management fees
and increased interest income from higher principal amounts on
loans to managed centers. In 1996, 60 additional long-term care
beds came under management contract. Management fees are
generally based upon a percentage of net revenues of the managed
center and therefore tend to increase as a facility matures and
as prices rise in general.
Increases in salaries, wages and benefits in 1996 were
attributable to the increase in staffing levels due to long-term
care bed additions and the increased emphasis on rehabilitative
services. Also contributing to higher costs of labor were
inflationary increases for salaries and the associated benefits.
Operating costs increased due to the increased numbers of
beds in operation, the expansion of rehabilitative and managed
care services, the growth in management services provided to
others, and due to the increase in rent expense as explained
below.
Depreciation expense and interest expense both decreased
compared to last year due primarily to capital transactions which
occurred in 1995. During December 1995, National Health
Investors, Inc. (NHI) prepaid debt on which NHC had also been
obligated in the amount of $20,544,000. In addition, NHC was
released from its obligation on approximately $25,324,000 of debt
which had been transferred to NHI in 1991. Since NHC is no longer
obligated on transferred debt in the amount of $45,868,000, debt
serviced by other parties and assets under arrangement with other
parties was reduced by $45,868,000.
The leases with NHI provide that NHC shall continue to make
non-obligated debt service rent payments equal to the debt
service including principal and interest on the obligated debt
which was prepaid and from which NHC has been released as a
direct obligor. As a result, other operating expenses are
increased by the amount of the rent payments, depreciation is
decreased by the amount of depreciation formerly charged on
assets under arrangement with other parties and interest expense
is decreased by the amount of interest expense formerly
associated with the debt serviced by other parties.
1995 Compared to 1994--
In 1995, NHC achieved rapid annual growth in earnings,
earnings per unit, and revenues. Net income totaled $21,115,000,
a 33% increase over the comparable prior year amount. Fully
diluted earnings per unit totaled $2.31, a 28% increase. Net
revenues totaled $350,957,000, a 17% increase. NHC's net margin
ratio, which is defined as net income divided by net revenues,
increased to 6.0% from 5.3% in 1994 illustrating that in 1995 NHC
grew its revenues at a faster rate than its expenses.
The growth in net patient revenues in 1995 occurred in long-
term care, homecare, and rehabilitative and managed care.
Improved revenues in long-term care were due primarily to
increased types and levels of services being offered and to
increases in private pay and third party billing rates. Also,
the total number of owned or leased beds increased from 6,295
beds at the end of 1994 to 6,406 beds at the end of 1995. During
1995 and 1994, NHC had 44 and 41, respectively, owned or leased
centers which operated at Medicare costs higher than the routine
cost limits, which were frozen at 1993 levels by the 1993 Tax
Reform Act.
Homecare revenues improved due to increased payor rates and
increased numbers of visits at NHC's 28 Florida and Tennessee
homecare locations. There were 717,000 homecare visits in 1995
compared to 674,000 visits in 1994.
Revenues also improved during 1995 due to continued emphasis
on rehabilitative and managed care services. To boost the
ability to offer physical, speech and occupational therapy to
greater numbers of patients, NHC increased its staff of
professionally licensed therapists by 19% in 1995 and by 40% in
1994. NHC has also determined to provide high acuity medical
services and has signed managed care contracts with 34 private
insurance companies to provide subacute care to their insurees,
offering a less expensive alternative to acute care and
rehabilitative hospitals. NHC also is expanding its network of
regional contract offices which are staffed by experienced case
managers and which assure appropriate placement and payment for
subacute patients in the NHC system.
The growth in other revenues in 1995 occurred primarily in
the areas of revenues from management services, advisory fees
from NHI, and interest income. Other revenues are more fully
detailed in Note 5 to the financial statements.
Revenues from management services of $28,719,000, which are
included in the Statements of Income in Other Revenues, increased
51% in 1995 due to the increased number of beds being managed for
others, increased amounts and types of management and other
support services being offered, and increased interest income
from higher principal amounts on loans to managed centers. In
1995, two long-term care centers and 273 long-term care beds came
under new management contracts. Management fees are generally
based upon a percentage of net revenues of the managed center and
therefore tend to increase as a facility matures and as prices
rise in general. NHC's management contracts are generally long-
term (up to ten years) and include equity participation
agreements and the right of first refusal upon the sale of the
property.
Revenues from advisory fees received from NHI of $3,265,000
represent a 52% increase over 1994 and are based upon a formula
which measures the increase in NHI's funds from operations over a
base year.
Revenues from interest income totaled $6,462,000 and
represent a 33% increase over 1994 and are in part from NHC's
investment in loan participation agreements. Loan participation
agreements may generally be sold in the market should NHC require
additional capital.
Increases in salaries, wages and benefits in 1995 are
attributable to the increase in staffing levels due to the
increased emphasis on rehabilitative services, homecare
expansions and long-term care bed additions. Also contributing
to higher costs of labor are inflationary increases for salaries
and the associated benefits. Labor costs are the most
significant costs of NHC.
Operating costs have increased due to the expansion of
rehabilitative and managed care services, the expansion of
homecare services, the growth in managed services and the
increased numbers of beds in operation.
Depreciation and amortization increased as a result of NHC's
placing of newly constructed or purchased assets in service and
due to capital improvements at existing properties.
Interest expense increased due to additional borrowing for
newly constructed long-term care beds and due to increased
interest rates on floating rate debt. Approximately 35% of NHC's
long-term debt was at floating rates at the end of 1995.
Growth and Development--
NHC plans to continue to expand its continuum of care to the
elderly by offering a comprehensive range of services through
related or separately structured health care centers, homecare
programs, specialized care units, pharmacy operations,
rehabilitative services, assisted living centers and retirement
centers.
During 1996, NHC grew its long-term health care business by
acquiring or constructing additions totaling 130 licensed beds at
owned or leased health care centers and totaling 60 licensed beds
at managed health care centers, all located in Florida. All in
all, 190 owned, leased or managed beds were added in 1996. These
additions increased the total number of owned, leased or managed
centers to 100 and the total number of licensed beds to 12,882.
At December 31, 1996, NHC had under construction 674 long-
term care beds at nine new or existing owned or leased centers
and 120 long-term care beds at two managed centers. All of these
794 beds are expected to open during 1997. NHC also has been
granted governmental certificates of need to permit construction
of 151 beds at four owned or leased locations and 181 beds at
five managed locations which are expected to start construction
during 1997.
NHC has identified the assisted living market as an
expanding area for the delivery of health care and hospitality
services. Assisted living centers provide basic room and board
functions for the elderly with on-staff availability to assist in
minor medical and living needs on an as needed basis. NHC
currently operates ten assisted living projects, eight of which
are located within the physical structure of a long-term care
center or retirement center and two of which are freestanding.
The two freestanding projects opened in 1996. It is expected
that NHC will start construction of four additional assisted
living projects in 1997. Certificates of need are not required
to build assisted living projects.
Liquidity, Capital Resources and Financial Condition--
During 1996 NHC spent approximately $69,970,000 on
construction, acquisitions and routine capital expenditures,
$17,466,000 on cash distributions to partners, $8,161,000 as
principal payments and financing costs on debt, and $34,798,000
to invest in notes receivable and marketable securities. These
and other cash needs were financed through cash on hand; cash
flow from operations of $51,961,000; the collection of long-term
notes receivable, loan participation agreements, investments and
receivables related to stock options of $44,284,000; the issuance
of $29,183,000 of debt and the issuance of partnership units for
$1,378,000.
NHC is committed to spend approximately $25,217,000 for
ongoing construction contracts and to provide financing to
managed facilities in the amount of $3,423,000 in 1996. NHC has
also guaranteed approximately $72,919,000 of debt of certain
health care centers which NHC manages for others. At December
31, 1996, NHC expects to have no additional liability as a result
of its debt guarantees.
In December, 1996 NHC completed arrangements for a new
$35,000,000 credit revolver. Approximately $7,000,000 was
available for borrowing under the credit revolver at December 31,
1996.
NHC's current cash on hand, marketable securities, short-
term notes receivable, operating cash flows and, as needed, its
borrowing capacity are expected to be adequate to finance NHC's
operating requirements and growth and development plans for 1997
and into 1998. If additional capital is necessary, NHC's balance
sheet ratios are at commercially reasonable levels to obtain
additional capital. The current ratio is 1.1:1 at December 31,
1996 and working capital is $7,291,000. The ratio of long-term
debt to equity, as defined in our banking relationships to
include both deferred income and subordinated convertible notes
as equity, is 0.9:1 at the end of 1996.
For all financial instruments except the subordinated
convertible notes, NHC believes that the financial statement
carrying amounts approximate fair value at December 31, 1996.
The fair value of the subordinated convertible notes were
estimated based on quoted market prices.
New Accounting Pronouncements--
In 1996, NHC adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation". The adoption of the provisions of these
accounting pronouncements did not have a material impact on NHC's
financial condition or results of operations.
Cash Distributions--
NHC management intends to distribute approximately 60% of
ordinary taxable income to unitholders during 1997. Management
expects that NHC's cash distribution will never be lower than the
maximum federal tax rate to individuals unless there is a
material change in our present tax rate system.
Impact of Inflation--
Reimbursement rates under the Medicare and Medicaid programs
generally reflect the underlying increases in costs and expenses
resulting from inflation. For this reason, the impact of
inflation on profitability has not been significant.
Partnership Legislation--
On December 22, 1987, legislation passed which requires that
most publicly traded limited partnerships, including NHC, be
taxed as corporations for federal income tax purposes. A
"grandfather" clause in that legislation allows NHC to avoid
corporate taxation through 1997. It does not appear probable
that Congress will extend this clause, thus resulting in the
Company paying corporate taxes and its investors paying ordinary
income tax on cash dividends received by them, all commencing on
January 1, 1998. Investors can anticipate their after tax cash
return to be diminished, it being NHC's intent to retain
substantially similar cash to that which it presently retains as
a partnership. Management is currently reviewing its options
under current tax and regulatory laws to determine what avenues
are available that will be most beneficial to unitholders.
Health Care Legislation--
Federal budget and reform plans are being considered by the
U. S. Congress that would, if adopted, reduce or slow the growth
of payments to facilities for services provided to patients under
the Medicare and Medicaid programs. At this time, it is not
possible to determine the impact on NHC of any health care
legislation which might be enacted. However, any reductions in
government spending for long-term health care would likely have
an adverse effect on the operating results and cash flows of NHC.
Should such spending reductions be enacted, NHC believes that the
loss of governmental revenues can be offset by increased revenues
from nongovernmental sources and the continued expansion of its
service component income.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following table sets forth selected quarterly financial
data for the two most recent fiscal years.
Selected Quarterly Financial Data
(unaudited, in thousands, except per unit amounts)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter(A)
1996
Net Revenues $92,632 $91,999 $96,920 $107,109
Net Income 5,465 6,007 8,070 9,744
Fully Diluted
Earnings Per Share .560 .620 .810 .990
1995
Net Revenues $83,756 $85,283 $90,542 $ 91,376
Net Income 4,172 4,586 5,604 6,753
Fully Diluted
Earnings Per Share .470 .510 .620 .710
Note A: In the fourth quarters of 1995, and 1996 net
revenues and income were increased by approximately $1,500,000
($.18 per unit, primary) and $2,400,000 ($.28 per unit, primary),
respectively, due to enhanced retroactive Medicare and Medicaid
reimbursement which, if known, would have been reported
periodically throughout the year.
The financial statements are included as Exhibit 13 and are
incorporated in this Item 8 by reference.
ITEM 9
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial
disclosure.
PART III
--------
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
General Partners: The Company has three general partners
identified in the Amended and Restated Agreement of Limited
Partnerships:
1. Managing General Partner: NHC, Inc., a Tennessee
corporation. The authorized, issued and outstanding
stock of NHC, Inc. is owned by its board of directors
and senior management, a total of 14 individuals. W.
Andrew Adams, the Company's President, owns
approximately 42% of the voting securities of NHC, Inc.
No other person owns in excess of 11.5%
2. Administrative General Partner: National Health
Corporation, a Tennessee corporation ("National").
National's Board of Directors is identical to that of
NHC, Inc. All of the authorized, issued and
outstanding stock of National Health Corporation is
owned by the National Health Corporation Leveraged
Employee Stock Ownership Plan and Trust. Trustees are
Olin O. Williams, a director of both NHC, Inc. and
National and Richard F. LaRoche, Jr., the Company's
Senior Vice President and General Counsel.
3. Individual General Partner: W. Andrew Adams. Mr.
Adams is the Chairman of the Board and President of the
Company.
Pursuant to the Amended and Restated Agreement of Limited
Partnership, the three general partners are collectively referred
to as "General Partners". The General Partners own, in
aggregate, a general partnership interest in the Company
representing a 1% interest in the profits, losses and
distributions of NHC.
Directors and Executive Officers: As a limited partnership,
the Company is managed by the managing general partner, NHC, Inc.
NHC, Inc.'s Board of Directors is divided into three classes.
The Directors hold office until the annual meeting for the year
in which their term expires and until their successor is elected
and qualified. As each of their terms expire, the successor
shall be elected to a three-year term. A director may be removed
from office for cause only. Officers serve at the pleasure of
the Board of Directors for a term of one year. The following
table sets forth the directors of both the managing and
administrative general partners of the Company, as well as the
executive officers and vice presidents of the Company:
<TABLE>
<CAPTION>
Director of
Position Managing Officer of
with the General Managing
Company Partner or Current General
or Managing Company's Term as Partner or
General Predecessor Director Predecessor
Name Age Partner Since Expires Since
- ---- --- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
W. Andrew Adams 51 Chairman of Since
the Board/ 1994(CEO) 1999 1973
President 1974(Pres.)
J.K. Twilla 70 Director 1972 1998 ---
Olin O. Williams 67 Director 1971 1997 ---
Ernest G. Burgess, III 57 Director 1992 1999 1975
Robert G. Adams 50 S. Vice
President/
Director 1993 1997 1985
Richard F. LaRoche, Jr. 51 Sr. Vice President/
Secretary and
General Counsel -- -- 1974
Steven A. Strawn 39 Vice President/
Operations -- -- 1995
Donald K. Daniel 50 Vice President/
Controller -- -- 1977
David L. Lassiter 42 Vice President/
Corporate
Affairs -- -- 1995
Charlotte Swafford 48 Treasurer -- -- 1985
Julia W. Powell 47 Vice President/
Patient Svcs. -- -- 1985
Joanne G. Batey 52 Vice President/
HomeCare -- -- 1989
D. Gerald Coggin 45 Vice President/
Government and
Rehabilitative -- -- 1994
Kenneth D. DenBesten 44 Vice President/
Finance -- -- 1992
</TABLE>
Drs. Twilla and Williams were physicians in private practice
in Tennessee for more than 30 years each.
Mr. W. Andrew Adams has been President since 1974 and
Chairman of the Board since 1994. He was president from 1981
until 1983 of the National Council of Health Centers, the trade
association for multi-facility long-term health care center
companies, and served as Chairman of the Multi-facility Committee
of the American Health Care Association from 1992 through 1994.
He has an M.B.A. degree from Middle Tennessee State University.
Mr. Adams serves on the Board of Trust of David Lipscomb
University, Nashville, Tennessee, is President and Chairman of
the Board of Directors of National Health Investors, Inc. and
serves on the Board of SunTrust Bank in Nashville, Tennessee.
Mr. Robert Adams (Senior Vice President, Chief Operating
Officer and Director) has served both as Administrator and as
Regional Administrator, holding the last position from 1977 to
1985. He has a B.S. degree from Middle Tennessee State
University. He serves as Chief Operations Officer for the
Company. Mr. Robert Adams and Mr. W. Andrew Adams are brothers.
Mr. Burgess (Director) served as the Company's Senior Vice
President for Operations from 1975 through 1994. He has an M.S.
degree from the University of Tennessee.
Mr. LaRoche (Senior Vice President) has been Senior Vice
President since 1985, Secretary since 1974 and General Counsel
since 1971. He has a law degree from Vanderbilt University and
an A.B. degree from Dartmouth College. His responsibilities
include acquisitions and finance. Mr. LaRoche also serves on the
Board of National Health Investors, Inc.
Mr. Strawn (Vice President/Operations) has been with the
Company since 1979. He trained in NHC's A.I.T. program and then
served both as administrator and Regional Vice President before
being appointed to the present position in 1995. He has a B.S.
degree from Middle Tennessee State University.
Mr. Daniel (Vice President and Controller) joined the
Company in 1977 as Controller. He received a B.A. degree from
Harding University and an M.B.A. from the University of Texas.
He is a certified public accountant.
Mr. Lassiter (Vice President/Corporate Affairs) joined the
Company in 1995. From 1988 to 1995, he was Executive Vice
President, Human Resources and Administration for Vendell
Healthcare. From 1980-1988, he was in human resources positions
with Hospital Corporation of America and HealthTrust Corporation.
Mr. Lassiter has a B.S. and an M.B.A. from the University of
Tennessee.
Ms. Swafford (Treasurer) has been Treasurer of the Company
since 1985. She joined the Company in 1973 and has served as
Staff Accountant, Accounting Supervisor and Assistant Treasurer.
She has a B.S. degree from Tennessee Technological University.
Ms. Powell (Vice President/Patient Services) has been with
the company since 1974. She has served as a nurse consultant and
director of patient assessment computerized services for NHC.
Ms. Powell has a bachelor of science in nursing from the
University of Alabama, Birmingham, and a master's of art in
sociology with an emphasis in gerontology from Middle Tennessee
State University. She co-authored Patient Assessment
Computerized in 1980 with Dr. Carl Adams, the Company's founder.
Ms. Batey (Vice President/Homecare) has been with the
company since 1976. She served as homecare coordinator for five
years before being named Vice President in 1989. Prior to that
she was director of communication disorders services. Ms. Batey
received her bachelor's and master's degrees in speech pathology
from Purdue University.
Mr. Coggin (Vice President/Governmental and Rehabilitative
Services) has been employed by NHC since 1973. He has served as
both Administrator and Regional Vice President before being
appointed to the present position. He received a B.A. degree
from David Lipscomb University and a M.P.H. degree from the
University of Tennessee. He is responsible for the Company's
rehabilitation, managed care and legislative activities.
Mr. DenBesten (Vice President/Finance) has served as Vice
President of Finance since 1992. From 1987 to 1992, he was
employed by Physicians Health Care, most recently as Chief
Operating Officer. From 1984-1986, he was employed by Health
America Corporation as Treasurer, Vice President of Finance and
Chief Financial Officer. Mr. DenBesten received a B.S. in
business administration and an M.S. in Finance from the
University of Arizona.
The above officers serve in identical capacities for the
Company and its two corporate general partners: NHC, Inc., and
National Health Corporation.
ITEM 11
EXECUTIVE COMPENSATION
Introduction:
Pursuant to Article V of the Amended and Restated Agreement
of Limited Partnership of National HealthCare L.P., the General
Partners are given the full, exclusive and complete discretion in
the management and control of the business of the Company.
Pursuant to Article 5.7 the General Partners do not receive
compensation for serving as general partners. In compliance with
the Partnership Agreement the General Partners hire and
compensate all of the officers of the Partnership and of the
corporate general partners. The General Partners' goals in
executive compensation and compensation at all levels within the
Company are derived from the following priorities: First, to
encourage the achievement of the highest levels of quality in its
fields of endeavor; and second, to provide the strongest
incentive possible in order to average, over a five year period,
a 20% return on partners equity. With these goals in mind, the
General Partners' executive compensation program is based on
employee performance rewarded as follows: (1) the achievement of
a return on investment for limited partners; (2) returns
generated from unit performance based incentive plans; and (3)
from base salary. The following text and tables describe the
various components of this plan as were attained and applied
during 1996.
Total Compensation:
Table I sets forth certain information concerning the total
compensation paid by the administrative general partner and
reimbursed to it by the Company for the year ended December 31,
1996 to the three executive officers of the Company.
The non-employee Directors of NHC, Inc. (the Managing
General Partner of the Company) are paid $2,500 per meeting
attended. There were five Board meetings during 1996 and no
Board member missed a meeting.
Option Plans:
At the 1994 Annual Meeting of the Partners, the 1994 Unit
Option Plan was adopted and approved by the unitholders. A total
of 1,200,000 units were reserved for issuance upon exercise of
options to be granted by the Board of Directors of the Managing
General Partner.
No options were granted to key employees during 1996,
however, pursuant to the Plan, non employee directors each
receive an option to purchase 5,000 units on the date of the
annual partnership meeting and for the closing unit price that
day. 15,000 units were granted to the three non-employee
Directors at $38.625 per unit on March 21, 1996.
At December 31, 1996, options to purchase 2,500 units at
$11.25 per unit are outstanding, an option to purchase 5,000
units at $24.88 per unit is outstanding to one director, options
to purchase 6,500 units at $25.12 per unit are outstanding to six
employees, options to purchase 15,000 units are outstanding at
$38.625 per unit to three directors and options to purchase
361,000 units at $31.00 per unit are outstanding to 31 key
employees.
Table II shows as to the three executive officers: (i) the
number of units as to which options have been granted from
January 1, 1996 through December 31, 1996 under the Unit Option
Plans; (ii) the percentage of all units granted represented by
these individuals (iii) the option exercise price per unit and
the expiration date; and (iv) the potential realizable value of
these options assuming both a five percent and ten percent unit
price appreciation over the next four years.
Table III identifies for the same three person group all
options exercised during 1996, the value realized upon exercise,
and the unrealized value of the balance of options outstanding.
The Company maintains several non-qualified deferred
compensation plans for its key employees, one of which provides a
matching contribution (15%) for all deferred compensation used to
purchase units of limited partnership interest held by an
independent trustee. The matching contribution is forfeited to
the company unless the employee achieves eight years of vesting
service before withdrawing funds from the Trustee account. Mr.
LaRoche participated in this plan during 1996. Other than as
described herein or as identified in Tables I, II and III, the
Company has no other long-term incentive plans for its executive
officers.
<PAGE>
<TABLE>
TABLE I
NATIONAL HEALTHCARE L.P.
SUMMARY COMPENSATION TABLE
1996-1994
<CAPTION>
Long Term Compensation
------------------------------
Annual Compensation<F1> Awards Payouts
- ----------------------------------------------------------- ---------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Annual Restricted Options/ LTIP All Other
Name and Principal Bonus($) Compensation Stock Awards SARs Payouts Compensation
Position Year Salary($) <F2> ($)<F3> ($) (#)<F4> ($) ($)
- ------------------ ---- --------- ------- -------- ------------ ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Andrew Adams 1996 129,757 451,693 8,147 -0- -0- -0- -0-
President & CEO 1995 129,964 579,200 121,350 -0- 40,000 -0- -0-
1994 132,349 359,920 78,789 -0- 40,000 -0- -0-
Robert G. Adams 1996 140,279 225,846 8,269 -0- -0- -0- -0-
Senior Vice 1995 145,647 646,227 6,452 -0- 30,000 -0- -0-
President & COO 1994 216,384 383,430 26,828 -0- 25,000 -0- -0-
Richard F. LaRoche, 1996 135,784 225,846 18,823 -0- -0- -0- -0-
Jr., Sr. VP & 1995 142,639 380,365 8,453 -0- 30,000 -0- -0-
Secretary 1994 134,150 190,467 15,637 -0- 25,000 -0- -0-
<F1>Compensation deferred at the election of an executive has been included in
salary column (d).
<F2>1996 Performance Bonus has not yet been determined and is not included in
this table.
<F3>Includes (a) life insurance benefit, (b) 401-K matching contribution,
(c) nonqualified deferred compensation matching contribution, (d) ESOP
contribution.
<F4>The 1995 awards are NHC Unit Options issued at $31.00 per unit. These
officers also received stock options from National Health Investors, Inc.
in 1993 and 1995, which are disclosed in that Company's Form 10-K.
</TABLE>
<PAGE>
<TABLE>
TABLE II
NATIONAL HEALTHCARE L.P.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
December 31, 1996
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Unit
Price Appreciation for Option
Individual Grants Term <F2>
- ---------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
Granted to Exercise or Expiration
Options/SARs Employees in Base Price Date
Executive Officers Granted(#)<F1> Fiscal Year ($/Sh) 5%($) 10%($)
- ------------------ -------------- ------------ ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
W. Andrew Adams,
President & CEO -0- -0- -0- -0- -0- -0-
Robert G. Adams,
Sr. VP -0- -0- -0- -0- -0- -0-
Richard F. LaRoche, Jr.
Sr. VP -0- -0- -0- -0- -0- -0-
<F1> No options were awarded during 1996 to Executive Officers
<F2> Based on remaining option term (if any) and annual compounding.
</TABLE>
<TABLE>
TABLE III
NATIONAL HEALTHCARE L.P.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
December 31, 1996
<CAPTION>
Number of Unexercised Value of Unexercised
Options/SARs at FY-End In-the-Money Options/
(#) SARs at FY-End ($)
Shares acquired Value Exercisable/ Exercisable/
Executive Offiers on Exercise (#) Realized($)<F1> Unexercisable Unexercisable
- ----------------- --------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
W. Andrew Adams,
President & CEO -0- -0- 40,000/0 $500,000/0
Robert G. Adams,
Sr. VP -0- -0- 30,000/0 375,000/0
Richard F. LaRoche,
Jr., Sr.VP -0- -0- 30,000/0 375,000/0
<F1> Market value of underlying securities at exercise date, minus the exercise
or base price.
</TABLE>
Employee Stock Ownership Plan:
In 1986 the Administrative General Partner adopted as its
Employee Stock Ownership Plan and Trust ("ESOP") the ESOP
previously sponsored by the Company's corporate predecessor. The
ESOP is a qualified pension plan under Section 401(a) of the
Internal Revenue Code. The Administrative General Partner makes
contributions to the ESOP for all employees and is reimbursed for
same by the Company. Employees make no contributions. All
contributions are used by the ESOP to purchase "qualifying
employer securities" which is the Common Stock of the
Administrative General Partner. These securities are allocated
among participating employees of the Administrative General
Partner who participate in the ESOP in the ratio of the
employee's wages to the total wages of all participating
employees during that fiscal year. Participating employees are
all employees, including officers, who have earned one year of
service by working more than 1,000 hours during the fiscal year.
On January 20, 1988, the Administrative General Partner of
the Company formed a Leveraged Employee Stock Purchase Plan
(Leveraged ESOP). During 1988, the Leveraged ESOP borrowed, in
two separate transactions, $88.5 million from four commercial
banks, the proceeds of which were used to purchase additional
stock in the Administrative General Partner. The Administrative
General Partner, in turn, purchased eight (8) health care centers
from the Company and contracted with the Company to manage these
centers for a 20-year period. The Administrative General Partner
also loaned $8.5 million to City Center, Ltd. to construct a
15-story office building in Murfreesboro, Tennessee,
approximately 60% of which is occupied by the Company. In late
1988, the Administrative General Partner entered into a Loan
Agreement with the Company and advanced $50,000,000 to the
Company to be used by the Company to pay off its existing
$30,000,000 revolving line of credit, with the balance to be used
for acquisition, development and general working capital needs.
In September of 1988, the original ESOP was merged into the
Leveraged ESOP so that as of December 31, 1995, the employees
still participated in only one qualified plan. On December 28,
1990, the Leveraged ESOP borrowed $50,000,000 from three
commercial lenders, the proceeds of which were used as an equity
contribution to the Administrative General Partner, which in turn
loaned said proceeds to the Company at 8.48% fixed rate of
interest. The proceeds were used for acquisition and new
construction.
The Leveraged ESOP is administered by an Administrative
Committee, currently consisting of Ernest G. Burgess, III
(Director), Donald K. Daniel and Charlotte Swafford (officers of
the Company), which is appointed by the Board of Directors of the
administrative general partner. The Trustees of the Leveraged
ESOP are Dr. Olin O. Williams, a director, and Richard F.
LaRoche, Jr., the Company's Senior Vice President and General
Counsel.
The amounts contributed to the ESOP in 1996 and allocated to
the Company's executive officers are included in Table I, and
total $19,458.
Employee Unit Purchase Plan:
The Company has established its Employee Unit Purchase Plan
for employees. Pursuant to the Plan, eligible employees may
purchase units through payroll deductions at the lesser of the
closing asked price of the units as reported on the American
Stock Exchange on the first trading or the last trading day of
each year. At the end of each year, funds accumulated in the
employee's account will be used to purchase the maximum number of
units at the above price. The Company makes no contribution to
the purchase price. 21,665 units were issued pursuant to the
Plan in January, 1997, with all payroll deductions being made in
1996.
All employees (including officers and directors) may elect
to participate in the Plan if they meet minimum employment
requirements. The maximum payroll deduction is the employee's
normal monthly pay. Participating employee's rights under the
plan are nontransferable. Prior to the end of a year, a
participant may elect to withdraw from the Plan and the amount
accumulated as a result of his payroll deductions shall be
returned to him without interest. Any terminated employee
immediately ceases to be a participant and also receives his or
her prior contributions.
In no event may a participant in the Plan purchase
thereunder during a calendar year, units having a fair market
value more than $25,000.
The units purchased pursuant to the Plan are freely
tradeable, except for any shares held by an "affiliate" of the
Company, which would be subject to the limitations of Rule 144.
Only Mr. LaRoche and Mr. Robert Adams of the Company's
executive officers participated in this Plan during 1996 and the
positive spread between the purchase price and the then fair
market price for these individuals is included in Table I.
1975 Performance Bonus Plan:
In 1975 the Company implemented a Performance Bonus Plan
which was reaffirmed and readopted by the unitholders in 1994.
This plan provides for the Chairman of the Board to allocate,
with the approval of the non-employee directors, the bonus at the
end of each fiscal year. The total amount available for bonuses
under the plan is 20% of the Company's net income (without regard
to NHI lease payments or Advisory fee income) after a 20% return
on partners' equity as determined at the beginning of that fiscal
year. Bonuses of $3,093,901 were paid under this plan to a total
of 125 employees for fiscal year 1995.
401(K) Plan:
The Company and its affiliates offer a 401(K) Plan for all
employees who are over 18 years of age. The Board of Directors
has authorized a matching contribution to be made for 50% of
contributions with contributions being matched up to 2.5% of
quarterly gross wages. No employee may contribute more than 15%
of wages to the Plan, and employees who earn more than $66,000
were limited to a contribution of no more than $3,500. These
matching funds will be used to purchase Units on the open market,
which Units will vest in the employees account only after the
employee has achieved five years of vesting service. Forfeited
units are allocated among remaining participants. A total of
$1,170,000 was contributed to the Plan as matching contributions
for 1996.
Employee Loan and Bonus Programs:
On December 31, 1986, the Company's unitholders adopted an
Employee Stock Financing Plan (the "Financing Plan"). The Plan
was designed to enable key employees of the Corporation to
finance the exercise of unit options granted to them by the Board
of Directors and only if authorized by the Board. Under the
Plan, the Company may finance the exercise of any unit options by
the acceptance of the employees' full recourse promissory note
bearing interest at a fixed rate equal to 2.5% below New York
prime on the date of the note, with interest payable quarterly
and principal due and payable on ninety days notice, but no
longer than 60 months. The notes are secured by Units having a
fair market value equal to twice the note amount.
The following tables shows, as to each executive officer
whose indebtedness exceeded $60,000, the largest aggregate amount
of such indebtedness since December 31, 1994 and the present
outstanding balance.
<TABLE>
<CAPTION>
Financing Plan
Largest Balance out-
Aggregate standing as of
Indebtedness 12/31/96
------------ --------------
<S> <C> <C> <C>
W. Andrew Adams Pres. & CEO $3,312,824 $2,861,131
Robert G. Adams Sr. VP & Dir. 1,722,155 1,496,309
Richard F. LaRoche, Jr. Sr. VP & Sec. 1,713,922 1,488,076
Ernest G. Burgess Director 1,477,935 1,116,243
J. K. Twilla Director 134,375 134,375
Olin O. Williams Director 486,378 486,378
All Executive Officers
& Directors as a Group (6) $8,847,589 $7,582,512
</TABLE>
Obligations to repay the Financing Plan loans are an asset of the
Company, but are not reflected as increasing Partnership Equity
until paid. From time to time the Board has declared a special
key employee bonus, directing that the proceeds of same be used
to retire some or all of these financing plan notes. These
bonuses are included in Table I.
Unitholder Return:
Table IV is a line graph comparing the yearly percentage
change in the cumulative unitholder return on the Company's units
against the cumulative total return of the S & P composite S & P
500 and the Health Care-Miscellaneous Index for the five-year
period ended on December 31, 1996.
<PAGE>
<TABLE>
TABLE IV
NATIONAL HEALTHCARE L.P.
Comparison of Cumulative Total Return
<CAPTION>
[GRAPH]
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
National HealthCare LP 145.0 247.7 264.8 423.0 500.4
S & P 500 107.7 118.5 120.1 164.9 202.7
S & P Health Care Divers 98.9 72.2 61.9 97.8 94.6
</TABLE>
Assumes $100 Invested January 1, 1992 in NHC, S&P 500 and S&P Health Care
Diversified
<PAGE>
ITEM 12
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the
number of limited partnership units of the Company beneficially
owned as of December 31, 1996 (a) by each person (including any
"group" as that term is used in Section 13(d)(3) of the Exchange
Act) who is known to the Company to own beneficially 5% or more
of the outstanding units (8,467,959 as of December 31, 1996), (b)
by each director of the managing or administrative general
partner, and (c) by all executive officers and directors of the
Company, managing general partner and the administrative general
partner as a group. Members of management of the Company listed
below are all members of management and/or the Board of Directors
of the Managing and Administrative General Partners, but they
disclaim that they are acting as a "group" and the table below is
not reflective of them acting as a group:
Names and Addresses Number of Units(1) Percentage of
of Beneficial Owner Beneficially Owned Total Units
W. Andrew Adams, President and
Individual General Partner 1,062,173 12.50%
1927 Memorial Blvd.
Murfreesboro, TN 37129
Dr. J.K. Twilla, Director 73,155 .90%
525 Golf Club Lane
Smithville, TN 37166
Dr. Olin O. Williams, Director 99,340 1.20%
2007 Riverview Drive
Murfreesboro, TN 37129
Robert G. Adams, Director & Sr. V.P. 438,073 5.20%
2217 Tomahawk Trace
Murfreesboro, TN 37129
Ernest G. Burgess, Director 178,592 2.10%
2239 Shannon Drive
Murfreesboro, TN 37129
Richard F. LaRoche, Jr., Sr. V.P. 374,685 4.40%
2103 Shannon Drive
Murfreesboro, TN 37130
National Health Corporation,
Admin. General Partner 1,271,058 15.00%
P.O. Box 1398
Murfreesboro, TN 37133
NHC, Inc., Managing General Partner 82,912 .99%
P. O. Box 1398
Murfreesboro, TN 37133
Albert O. Nicholas 439,000 5.20%
6002 North Highway 83
Hartland, WI 53029
All Executive Officers,
Directors of the 3,579,988 42.30%
Corporate General
Partners and the
Corporate General Partners
as a Group
(1) Assumes exercise of unit options and convertible subordinated
debentures outstanding. See "Option Plans".
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
NHC has successfully developed a continuing care retirement
community in Nashville, Tennessee (Richland Place) and is
pursuing similar projects in Tennessee and Florida. Having
identified Murfreesboro, Rutherford County, Tennessee as a viable
market, the Company invited a number of potential residents to
serve as a focus group to assist in the location and design of
the project. After reviewing a number of potential locations,
management and the focus group chose a twenty-two acre tract with
extensive frontage on US Highway 231 as the optimum location.
This site was owned and occupied by Mr. and Mrs. W. Andrew Adams,
NHC's chief executive officer. After negotiations and appraisal,
the Company acquired in 1993 and 1994 (by exchange of like kind
property and cash) the site from Mr. and Mrs. Adams for a total
valuation of $1,500,000, which the Company believes to be equal
to or even less than comparable property in the market. Mr. and
Mrs. Adams are currently renting the residence on the site on a
month to month basis and for a fair market value.
PART IV
-------
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
a) (i) Financial Statements:
The Financial Statements are included as Exhibit 13 and are
filed as part of this report.
(ii) Exhibits:
Reference is made to the Exhibit Index, which is found on
page 46 of this Form 10-K Annual Report.
b) Reports on Form 8-K: None.
For the purposes of complying with the amendments to the
rules governing Form S-8 (effective July 13, 1990) under the
Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by
reference into registrant's Registration Statement on Form S-8
File No. 33-9881 (filed December 28, 1987):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To: National HealthCare L.P.:
We have audited, in accordance with generally accepted
auditing standards, the financial statements included in this
Form 10-K of National HealthCare L.P., and have issued our report
thereon dated February 3, 1997. Our audits were made for the
purpose of forming an opinion on the basic financial statements
taken as a whole. The financial statement schedule listed in the
accompanying index is the responsibility of the Company's
management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and regulations under
the Securities and Exchange Act of 1934 and is not otherwise a
required part of the basic financial statements. The financial
statement schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements, and in
our opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 3, 1997
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(in thousands)
<CAPTION>
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
--------------------
Balance- Charged to Charged Balance
Beginning Costs and to other -End of
Description of Period Expenses Accounts Deductions<F1> Period
- ----------- --------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31,
1994 - Allowance
for doubtful
accounts $2,612 $2,118 $ --- $1,363 $3,367
For the year ended
December 31,
1995 - Allowance
for doubtful
accounts $3,367 $2,182 $ --- $1,108 $4,441
For the year ended
December 31,
1996 - Allowance
for doubtful
accounts $4,441 $1,654 $ --- $1,356 $4,739
__________
<F1> (1) Amounts written off, net of recoveries.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL HEALTHCARE L.P.
BY:/s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date: March 17, 1997
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on March 17, 1997, by
the following persons on behalf of the registrant in the
capacities indicated. Each director of the registrant whose
signature appears below hereby appoints W. Andrew Adams and
Richard F. LaRoche, Jr., and each of them severally, as his
Attorney in Fact to sign in his name on his behalf as a director
of the registrant and to file with the Commission any and all
amendments of this report on Form 10-K.
/s/ W. Andrew Adams /s/ Olin O. Williams
W. Andrew Adams, President Olin O. Williams, M.D., Director
Executive and Financial NHC, Inc., and National Health
Officer, and Individual Corporation, Corporate General
General Partner Partners
/s/ Robert G. Adams /s/ J. K. Twilla
Robert G. Adams, Senior Vice J.K. Twilla, M.D., Director
President, Director NHC, Inc. and NHC, Inc. and National Health
National Health Corporation Corporation, Corporate General
Partners
/s/ Ernest G. Burgess /s/ Donald K. Daniel
Ernest G. Burgess, Director NHC, Donald K. Daniel, Vice President
Inc. & National Health Corporation and Principal Accounting Officer
Corporate General Partners NHC, Inc. and National Health
Corporation, Corporate General
Partners
<PAGE>
NATIONAL HEALTHCARE L.P. AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1996
EXHIBIT INDEX
Exhibit No. Description Page No. or Location
3.1 Amended and Restated Articles of Specifically incorporated
Limited Partnership Agreement by reference to Exhibit A
attached to Form S-4,
(Proxy Statement-Prospectus),
amended, Registration
No.33-9881(December 9, 1986)
3.2 By-laws (as amended) None
4.1 Form of Common Stock/ Incorporated by reference
Unit Certificate from Exhibit 41 attached
to Form S-4, (Proxy State-
ment-Prospectus), as amended
Registration No. 33-9881
(December 9, 1986)
10 Material Contracts Incorporated by reference
from Exhibits 10.1 thru
10.9 attached to Form
S-4, (Proxy Statement-
Prospectus), as amended,
Registration No. 33-9881
(December 9, 1986)
10.11 Employee Stock/Unit Purchase Plan Incorporated by reference
from Form S-8, Registra-
tion No. 33-9881
(December 28, 1987)
10.12 1994 Unit Option Plan Incorporated by reference
from 1994 Proxy Statement
filed on February 18, 1994
12 Statements Re:Computation
of Ratios Page 47
13 Report of Independent Public
Accountants Exhibit 13 beginning
Consolidated Statements of Income on Page 48
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Partners'
Capital
Notes to Consolidated Financial
Statements
22 Subsidiaries of Registrant Incorporated by reference
to Exhibit 22 of Form S-4,
(Proxy Statement/Prospectus),
as amended, Registration No.
33-9881 (December 11, 1986)
23 Consent of Independent Page 70
Public Accountants
27 Financial Data Schedule (for SEC purposes only)
<PAGE>
<TABLE>
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIOS
AS REQUIRED BY ITEM 601(b)(12) OF REGULATION S-K
NATIONAL HEALTHCARE L.P.
<CAPTION>
December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current Assets $ 80,094 $ 89,440 $ 97,506 $109,291 $ 64,115
Current Liabilities $ 72,803 $ 59,047 $ 55,038 $ 39,798 $ 26,132
Current Ratio 1.10 1.51 1.78 2.75 2.45
Long-Term Debt and Debt
Serviced by Other
Parties $157,535 $141,642 $194,007 $166,741 $164,330
Equity $128,537 $108,899 $101,006 $ 92,526 $ 67,922
Long-Term Debt and Debt
Serviced by Other
Parties to Equity 1.23 1.30 1.92 1.80 2.42
Net Income $ 29,286 $ 21,115 $ 15,853 $ 37,562 $ 9,501
Average Equity $118,718 $104,953 $ 96,766 $ 80,224 $ 64,873
Return on Average Equity 24.7% 20.1% 16.4% 46.8% 14.6%
Total Liabilities $260,037 $231,501 $279,847 $237,306 $221,166
Partners' Capital and
Deferred Income $144,703 $123,990 $116,286 $107,374 $ 82,908
Total Liabilities to
Partners' Capital
and Deferred Income 1.8 1.9 2.4 2.2 2.7
</TABLE>
<PAGE>
EXHIBIT 13
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants 49
Consolidated Statements of Income 50
Consolidated Balance Sheets 51
Consolidated Statements of Cash Flows 52-53
Consolidated Statements of Partners' Capital 54
Notes to Consolidated Financial Statements 55-69
<PAGE>
To the Partners of National HealthCare L.P.:
We have audited the accompanying consolidated balance sheets
of National HealthCare L.P. (a Delaware partnership) and
subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, partners' capital and cash
flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements are the
responsibility of National HealthCare L.P.'s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of National HealthCare L.P. and subsidiaries
as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 3, 1997
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
Consolidated Statements of Income
(in thousands, except unit amounts)
<CAPTION>
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Revenues:
Net patient revenues $ 341,818 $ 307,969 $ 269,722
Other revenues 46,842 42,988 29,179
Net revenues 388,660 350,957 298,901
Costs and Expenses:
Salaries, wages and benefits 209,645 188,985 157,663
Other operating 125,342 109,417 98,753
Depreciation and amortization 13,634 14,549 13,582
Interest 10,753 16,891 13,050
Total costs and expenses 359,374 329,842 283,048
Net Income $ 29,286 $ 21,115 $ 15,853
Earnings Per Unit:
Primary $ 3.44 $ 2.65 $ 2.02
Fully diluted 2.98 2.31 1.80
Weighted Average Units Outstanding:
Primary 8,496,299 7,953,651 7,834,375
Fully diluted 10,455,706 9,971,867 9,807,241
Net Income Allocable to Partners:
General Partners $ 293 $ 211 $ 159
Limited Partners 28,993 20,904 15,694
$ 29,286 $ 21,115 $ 15,853
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
Consolidated Balance Sheets
(in thousands)
<CAPTION>
December 31 1996 1995
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,881 $ 4,835
Cash held by trustees 2,274 1,721
Marketable securities 17,968 1,514
Accounts receivable, less allowance for
doubtful accounts of $4,739 and
$4,441, respectively 50,902 47,285
Notes receivable 2,515 2,538
Loan participation agreements --- 27,579
Inventory, at lower of cost (first-in,
first-out method) or market 3,572 3,075
Prepaid expenses and other assets 982 893
Total current assets 80,094 89,440
Property, Equipment and Assets Under Arrangement
With Other Parties:
Property and equipment, at cost 234,934 165,265
Accumulated depreciation and amortization (48,171) (38,265)
Assets under arrangement with other parties, net 22,538 29,921
Net property, equipment and assets
under arrangement with other parties 209,301 156,921
Other Assets:
Bond reserve funds, mortgage replacement
reserves and other deposits 141 1,789
Unamortized financing costs 1,601 1,937
Notes receivable 95,206 86,178
Notes receivable from National 12,153 12,271
Minority equity investments and other 6,244 6,955
Total other assets 115,345 109,130
$404,740 $355,491
Liabilities and Partners' Capital
Current Liabilities:
Current portion of long-term debt $ 8,574 $ 8,558
Trade accounts payable 11,835 6,142
Accrued payroll 28,963 23,876
Amount due to third party payors 13,135 9,800
Accrued interest 501 1,822
Other current liabilities 9,795 8,849
Total current liabilities 72,803 59,047
Long-term Debt, Less Current Portion 124,678 100,871
Debt Serviced by Other Parties, Less Current Portion 32,857 40,771
Minority Interests in Consolidated Subsidiaries 791 812
Commitments, Contingencies and Guarantees
Subordinated Convertible Notes 28,908 30,000
Deferred Income 16,166 15,091
Partners' Capital:
General partners 1,408 1,290
Limited partners, less notes receivable
and cumulative unrealized gains and
losses on securities 127,129 107,609
Total partners' capital 128,537 108,899
------- -------
$404,740 $355,491
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 29,286 $ 21,115 $ 15,853
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 12,453 14,081 13,147
Provision for doubtful accounts receivable 1,654 2,182 2,118
Amortization of intangibles & deferred charges 1,083 1,845 848
Amortization of deferred income (295) (497) (403)
Equity in earnings of unconsolidated investments (313) (347) (450)
Distributions from unconsolidated investments
and other 210 236 333
Changes in assets and liabilities:
Increase in accounts receivable (5,271) (1,095) (20,095)
Increase in inventory (497) (123) (19)
(Increase) decrease in prepaid expenses and
other assets (89) 680 (1,012)
Increase (decrease) in trade accounts payable 5,693 (10,910) 12,331
Increase in accrued payroll 5,087 5,232 4,663
Increase in amounts due to
third party payors 3,335 5,404 769
Increase (decrease) in accrued interest (1,321) (401) 1,235
Increase in other current liabilities 946 2,456 2,057
Net cash provided by operating activities 51,961 39,858 31,375
Cash Flows From Investing Activities:
Additions to and acquisitions of property and
equipment, net (69,970) (29,435) (9,599)
Investments in notes receivable and loan
participation agreements (20,170) (30,694)(112,069)
Collections of long-term notes receivable and loan
participation agreements 38,862 39,157 80,199
Increase (decrease) in minority equity investments
and other (441) 210 (3,984)
(Increase) decrease in marketable securities, net (14,628) 2,361 2,140
Sales of investments 1,900 --- 136
Net cash used in investing activities (64,447) (18,401) (43,177)
Cash Flows From Financing Activities:
Proceeds from debt issuance 29,183 2,368 34,225
Increase in cash held by trustees (553) (117) (315)
(Increase) decrease in minority interests
in subsidiaries (21) 10 35
Issuance of partnership units 1,378 820 773
Collections of receivables from exercise
of options 3,522 795 437
(Increase) decrease in bond reserve funds, mortgage
replacement reserves and other deposits 1,648 (69) (57)
Payments on debt (8,138) (6,767) (4,360)
Cash distributions to partners (17,466) (14,702) (17,639)
Increase in financing costs (21) (402) ---
Net cash provided by (used in) financing
activities 9,532 (18,064) 13,099
Net Increase (Decrease) In Cash and Cash Equivalents (2,954) 3,393 1,297
Cash and Cash Equivalents, Beginning of Period 4,835 1,442 145
Cash and Cash Equivalents, End of Period $ 1,881 $ 4,835 $ 1,442
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Supplemental Information:
Cash payments for interest expense $ 12,074 $ 17,292 $ 11,815
During 1996 and 1995, NHC was released from its
liability on debt serviced by others by the
respective lenders.
Debt serviced by other parties $ (5,136) $(45,868)$ ---
Assets under arrangement with other parties $ 5,136 $ 45 868 $ ---
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
Consolidated Statements of Partners' Capital
(in thousands, except unit amounts)
<CAPTION>
Unrealized
Receivables Gains Total
Number from Sale (Losses) on General Limited Partners'
of Units of Units Securities Partners Partners Capital
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 7,796,433 $(15,134) $ --- $1,027 $106,633 $ 92,526
Net income --- --- --- 159 15,694 15,853
Collection of receivables --- 437 --- --- --- 437
Units sold 29,732 --- --- --- 773 773
Unrealized gains on securities --- --- 480 --- --- 480
Cash distributions declared
($1.17 per unit) --- --- --- (91) (8,972) (9,063)
Balance at December 31, 1994 7,826,165 (14,697) 480 1,095 114,128 101,006
Net income --- --- --- 211 20,904 21,115
Collection of receivables --- 795 --- --- --- 795
Units sold 526,949 (12,294) --- 131 12,983 820
Unrealized losses on securities --- --- (135) --- --- (135)
Cash distributions declared
($1.88 per unit) --- --- --- (147) (14,555) (14,702)
Balance at December 31, 1995 8,353,114 (26,196) 345 1,290 133,460 108,899
Net income --- --- --- 293 28,993 29,286
Collection of receivables --- 3,522 --- --- --- 3,522
Units sold 43,035 --- --- --- 1,378 1,378
Units issued in conversion of
convertible debentures to
partnership units 71,810 --- --- --- 1,092 1,092
Unrealized gains on securities --- --- 1,826 --- --- 1,826
Cash distributions declared
($2.08 per unit) --- --- --- (175) (17,291) (17,466)
Balance at December 31, 1996 8,467,959 $(22,674) $2,171 $1,408 $147,632 $128,537
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies:
Presentation--
The consolidated financial statements include the accounts
of National HealthCare L.P. and its subsidiaries (NHC).
Investments are accounted for on either the cost or equity
method. All material intercompany balances, profits, and
transactions have been eliminated in consolidation, and minority
interests are reflected in consolidation. Certain
reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.
Use of Estimates--
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Health Care Revenues--
NHC's principal business is operating and managing long-term
health care centers, including the provision of routine and
ancillary services. Approximately 60% of NHC's net revenues in
1996 and 1995 and 61% in 1994 are from participation in Medicare
and Medicaid programs. Amounts paid under these programs are
generally based on a facility's allowable costs or a fixed rate
subject to program cost ceilings. Revenues are recorded at
standard billing rates less allowances and discounts principally
for patients covered by Medicare, Medicaid and other contractual
programs. These allowances and discounts were $110,795,000,
$103,186,000 and $82,443,000 for 1996, 1995 and 1994,
respectively. Amounts earned under the Medicare and Medicaid
programs are subject to review by the third party payors. In the
opinion of management, adequate provision has been made for any
adjustments that may result from such reviews. NHC generally
expects final determinations to occur two to three years
subsequent to the year in which amounts are earned. Any
differences between estimated settlements and final
determinations are reflected in operations in the year finalized.
NHC has submitted various requests for exceptions to Medicare
routine cost limitations for reimbursement. NHC has received
approval on certain requests, and others are pending approval.
NHC will record revenues associated with the approved requests
when such approvals, including cost report audits, are assured.
Provision for Doubtful Accounts--
Provisions for estimated uncollectible accounts and notes
receivable are included in other operating expenses.
Property, Equipment and Assets Under Arrangement with Other
Parties--
NHC uses the straight-line method of depreciation over the
expected useful lives of property and equipment estimated as
follows: buildings and improvements, 20-40 years; equipment and
furniture, 3-15 years; and properties under arrangement with
other parties, 10-20 years. The provision for depreciation
includes the amortization of properties under capital leases and
properties under arrangement with National Health Investors, Inc.
(NHI) (See Note 3).
Expenditures for repairs and maintenance are charged against
income as incurred. Betterments are capitalized. NHC removes
the costs and related allowances from the accounts for properties
sold or retired, and any resulting gains or losses are included
in income. NHC includes interest costs incurred during
construction periods in the cost of buildings ($1,428,000 in 1996
and $1,057,000 in 1995).
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
To Be Disposed Of" (SFAS 121). NHC adopted the provisions of
SFAS 121 effective January 1, 1996. The effect of adoption of
SFAS 121 is not material to NHC's financial statements. In
accordance with SFAS 121, NHC evaluates the recoverability of the
carrying values of its properties on a property by property
basis.
Investments in Marketable Securities--
NHC considers its investments in marketable securities as
available for sale securities and unrealized gains and losses are
recorded in partners' capital in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115).
Intangible Assets--
Any excess of cost over net assets of companies purchased is
amortized generally over 40 years using the straight-line method.
Deferred financing costs are amortized principally by the
interest method over the terms of the related loans.
Income Taxes--
NHC is not a taxable entity. Accordingly, no provision for
income taxes has been made in the Consolidated Statements of
Income.
The earnings of NHC are taxable to the individual partners.
Partners are required to report their distributive share of the
income, gain, loss, deductions and credits of the partnership on
their individual income tax returns.
The Revenue Act of 1987 contains provisions which cause some
publicly traded partnerships to be taxed as corporations.
Because NHC was in existence and publicly traded on December 17,
1987, it will continue to be treated as a partnership for the
1987 through 1997 taxable years.
NHC adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109) effective January
1, 1993. SFAS 109 generally requires NHC to record any income
tax provisions or income taxes payable based on the liability
method. NHC management believes, based on current information,
that the initial recognition of any income tax assets or
liabilities that would be recorded in 1998, the year that master
limited partnerships become taxable as a corporation, would not
be material to NHC's financial condition or results of
operations.
Concentration of Credit Risks--
NHC's credit risks primarily relate to cash and cash
equivalents, cash held by trustees, accounts receivable,
marketable securities, notes receivable and loan participation
agreements. Cash and cash equivalents are primarily held in bank
accounts and overnight investments. Cash held by trustees is
primarily invested in commercial paper and certificates of
deposit with financial institutions. Accounts receivable consist
primarily of amounts due from patients (funded approximately 80%
through Medicare, Medicaid, and other contractual programs and
approximately 20% through private payors) in the states of
Alabama, Florida, Georgia, Kentucky, Missouri, South Carolina,
Tennessee, and Virginia and from other health care companies for
management services. NHC performs continual credit evaluations
of its clients and maintains allowances for doubtful accounts on
these accounts receivable. Marketable securities are held
primarily in two accounts with brokerage institutions. Notes
receivable relate primarily to secured loans with health care
facilities and to secured notes receivable from officers,
directors and supervisory employees as discussed in Notes 13 and
14. NHC also has notes receivable from National Health
Corporation as discussed in Note 4.
NHC's financial instruments, principally its notes
receivable (which are predominantly with Florida Convalescent
Centers, Inc.) are subject to the possibility of loss of the
carrying values as a result of either the failure of other
parties to perform according to their contractual obligations or
changes in market prices which may make the instruments less
valuable. NHC obtains various collateral and other protective
rights, and continually monitors these rights, in order to reduce
such possibilities of loss. NHC evaluates the need to provide
for reserves for potential losses on its financial instruments
based on management's periodic review of its portfolio on an
instrument by instrument basis. See Notes 13 and 14 for
additional information on the notes receivable.
Cash and Cash Equivalents--
Cash equivalents include highly liquid investments with an
original maturity of less than three months.
Note 2 - Organization of the Partnership:
The general partners of NHC are as follows: (1) NHC, Inc.
(the "Managing General Partner"), a Tennessee corporation , which
is owned by its board of directors and senior management of NHC;
(2) National Health Corporation ("National" and "Administrative
General Partner"), a Tennessee corporation, which is owned by the
National Health Corporation Leveraged Employee Stock Ownership
Plan and Trust (the "ESOP"); and (3) W. Andrew Adams, NHC Inc.'s
President (the "Individual General Partner"). The Managing
General Partner, the Administrative General Partner and the
Individual General Partner are collectively called "the General
Partners". The General Partners own a general partnership
interest in NHC representing a 1% interest in the profits, losses
and distributions of NHC.
Note 3 - Relationship with National Health Investors, Inc.:
Leases--
On October 17, 1991, concurrent with NHC's conveyance of
real property to NHI, NHC leased from NHI the real property of 40
long-term care centers and three retirement centers. Each lease
is for an initial term expiring December 31, 2001, with two
additional five-year renewal terms at the option of NHC, assuming
no defaults. NHC accounts for the leases as operating leases.
During the initial term and first renewal term of the
leases, NHC is obligated to pay NHI annual base rent on all 43
facilities of $15,238,000. If NHC exercises its option to extend
the leases for the second renewal term, the base rent will be the
then fair rental value as negotiated by NHC and NHI.
The leases also obligate NHC to pay as debt service rent all
payments of interest and principal due under each mortgage to
which the conveyance of the facilities was subject. The payments
are required over the remaining life of the mortgages as of the
conveyance date, but only during the term of the lease. Payments
for debt service rent are being treated by NHC as payments of
principal and interest if NHC remains obligated on the debt
("obligated debt service rent") and as operating expense payments
if NHC has been relieved of the debt obligation by the lender
("non-obligated debt service rent"). See "Accounting Treatment
of the Transfer" for further discussion.
In addition to base rent and debt service rent, in each year
after 1992, NHC must pay percentage rent to NHI equal to 3% of
the amount by which gross revenues of each facility in such later
year exceed the gross revenues of such facility in 1992.
Percentage rent for 1996 and 1995 was approximately $1,817,000
and $1,237,000, respectively.
Each lease with NHI is a "triple net lease" under which NHC
is responsible for paying all taxes, utilities, insurance premium
costs, repairs and other charges relating to the ownership of the
facilities. NHC is obligated at its expense to maintain adequate
insurance on the facilities' assets.
NHC has a right of first refusal with NHI to purchase any of
the properties transferred from NHC should NHI receive an offer
from an unrelated party during the term of the lease or up to 180
days after termination of the related lease.
Base rent expense to NHI was $15,238,000 in 1996, 1995 and
1994 and non-obligated debt service rent to NHI was $5,048,000 in
1996. At December 31, 1996, the approximate future minimum base
rent and non-obligated debt service rent commitments to be paid
by NHC on non-cancelable operating leases with NHI during the
initial term are as follows:
1997 20,298,000
1998 20,354,000
1999 20,372,000
2000 20,409,000
2001 20,486,000
Thereafter ---
Advisory Agreement--
NHC has entered into an Advisory Agreement with NHI whereby
services related to investment activities and day-to-day
management and operations are provided to NHI by NHC as Advisor.
The Advisor is subject to the supervision and policies
established by NHI's Board of Directors.
Either party may terminate the Advisory Agreement on 90 days
notice at any time. NHI may terminate the Advisory Agreement for
cause at any time.
For its services under the Advisory Agreement, NHC's annual
compensation is calculated to be $3,100,000, $2,827,000, and
$2,570,000 in 1996, 1995 and 1994, respectively. However, the
payment of such annual compensation is conditional upon NHI
having sufficient funds from operations to pay annual dividends
of $2.00 per share and upon NHI paying such dividends. NHI met
this condition in 1996, 1995 and 1994.
Accounting Treatment of the Transfer--
NHC has accounted for the conveyance in 1991 of assets (and
related debt) to NHI and the subsequent leasing of the real
estate assets as a "financing/leasing" arrangement. Since NHC
remains obligated on certain of the transferred debt, the
obligated debt and applicable asset balances have been reflected
on the Consolidated Balance Sheets as "assets under arrangement
with other parties" and "debt serviced by other parties". The
net book value equity of the assets transferred has been
transferred from NHC to NHI. As NHC utilizes the applicable real
estate over the lease term, its Consolidated Statements of Income
will reflect the continued depreciation of the applicable assets
over the lease term, the continued interest expenses on the
obligated debt balances and the additional base and non-obligated
debt service rents (as an operating expense) payable to NHI each
year. NHC has recovery provisions from NHI if NHC is required to
service the debt through a default by NHI.
Release from Debt Serviced by Other Parties--
In 1996 and 1995, NHI prepaid debt on which NHC had also
been obligated in the amounts of $5,136,000 and $20,544,000,
respectively. In addition, in 1995, NHC was released from its
obligation on approximately $25,324,000 of the transferred debt.
Since NHC is no longer obligated on this transferred debt, debt
serviced by other parties and assets under arrangement with other
parties have been reduced by $5,136,000 and $45,868,000 in 1996
and 1995, respectively. The leases with NHI provide that NHC
shall continue to make non-obligated debt service rent payments
equal to the debt service including principal and interest on the
obligated debt which was prepaid and from which NHC has been
released.
Note 4 - Relationship With National Health Corporation:
Sale of Health Care Centers--
On January 20, 1988, NHC sold the assets (inventory,
property and equipment) of eight health care centers (1,121
licensed beds) to National, the administrative general partner of
NHC, for a total consideration of $40,000,000. The consideration
consisted of $30,000,000 in cash and a $10,000,000 note
receivable due December 31, 2007. The note receivable earns
interest at 8.5%. NHC has agreed to manage the centers under a
20-year management contract for management fees comparable to
those in the industry. NHC has a receivable from National for
management fees of approximately $3,184,000 and $1,864,000 at
December 31, 1996 and 1995, respectively.
NHC's basis in the assets sold was approximately
$24,255,000. The resulting profit of $15,745,000 was deferred
and will be amortized into income beginning with the collection
of the note receivable (up to $12,000,000) with the balance
($3,745,000) of the profit being amortized into income on a
straight-line basis over the management contract period.
As of December 31, 1996, National had borrowed $2,153,000
from NHC to finance the construction of additions at two health
care centers. The notes require monthly principal and interest
payments. The interest rate is equal to the prime rate, and the
notes mature in 1998.
Financing Activities--
On January 20, 1988, NHC obtained long-term financing of
$8,500,000 for its new headquarters building from National
through the National Health Corporation Leveraged Employee Stock
Ownership Plan and Trust. The note requires quarterly principal
and interest payments with interest at 9%. At December 31, 1996
and 1995, the outstanding balance on the note was approximately
$5,520,000 and $5,961,000, respectively. The building is owned
by a separate partnership of which NHC is the general partner and
building tenants are limited partners. NHC has guaranteed the
debt service of the building partnership.
In addition, NHC's bank credit facility and the senior
secured notes described in Note 10 were financed through National
and National's ESOP. NHC's interest costs, financing expenses
and principal payments are equal to those incurred by National.
In October 1991, NHC borrowed $10,000,000 from National. The
term note payable requires quarterly interest payments at 8.5%.
The entire principal is due at maturity in 1998.
Duties as Administrative General Partner--
The personnel conducting the business of NHC are employees
of National, which provides payroll services, provides employee
fringe benefits, and maintains certain liability insurance. NHC
pays to National all the costs of personnel employed for the
benefit of NHC, as well as an administrative fee ($1,820,000 in
1996) equal to 1% of payroll costs.
National maintains and makes contributions to its ESOP for
the benefit of eligible employees.
Note 5 - Other Revenues:
Revenues from management services include management fees,
interest income on notes receivable, and revenues from other
services provided to managed long-term care centers. "Other"
revenues include non-health care related earnings.
(in thousands)
Year Ended December 31 1996 1995 1994
---- ---- ----
Revenues from managed services $32,363 $28,719 $19,035
Guarantee fees 693 814 936
Advisory fees from NHI 3,100 3,265 2,138
Dividends and other realized
gains (losses) on securities 932 450 (47)
Equity in earnings of unconsolidated
investments 313 347 450
Interest income 4,386 6,457 4,817
Other 5,055 2,936 1,850
------ ------ ------
$46,842 $42,988 $29,179
Note 6 - Earnings Per Unit:
Primary earnings per unit is based on the weighted average number
of common and common equivalent units outstanding. Common equivalent
units result from dilutive unit options computed using the treasury
stock method.
Fully diluted earnings per unit assumes, in addition to the
above, that the 6% subordinated convertible notes were converted at
the date issued with earnings being increased for interest expense
thereon.
The following table summarizes the earnings and the average
number of common units and common equivalent units used in the
calculation of primary and fully diluted earnings per unit.
(dollars in thousands, except per unit amounts)
Year Ended December 31 1996 1995 1994
---- ---- ----
Primary:
Weighted average common units 8,421,523 7,920,795 7,796,508
Stock options 74,776 32,856 37,867
Average common units outstanding 8,496,299 7,953,651 7,834,375
Earnings $ 29,286 $ 21,115 $ 15,853
Earnings per unit, primary $ 3.44 $ 2.65 $ 2.02
Fully Diluted:
Weighted average common units 8,421,523 7,920,795 7,796,508
Stock options 108,045 78,206 37,867
Convertible subordinated notes 1,926,138 1,972,866 1,972,866
Assumed average common units
outstanding 10,455,706 9,971,867 9,807,241
Earnings $ 31,136 $ 23,007 $ 17,653
Earnings per unit, fully diluted $ 2.98 $ 2.31 $ 1.80
Note 7 - Property, Equipment and Assets Under Arrangement with Other
Parties:
Property and equipment, at cost, consist of the following:
(in thousands)
December 31 1996 1995
- ----------- ---- ----
Land $ 20,607 $ 21,117
Buildings and improvements 99,564 67,576
Furniture and equipment 70,947 58,772
Construction in progress 43,816 17,800
$234,934 $165,265
Assets under arrangement with other parties, net of accumulated
depreciation, consist of the following:
(in thousands)
December 31 1996 1995
- ----------- ---- ----
Land $ 2,313 $ 2,612
Buildings and improvements 15,885 22,625
Fixed equipment 1,664 2,008
Mortgage notes receivable 2,676 2,676
$22,538 $ 29,921
Note 8 - Acquisitions and Dispositions:
In July 1996, NHC purchased, for total consideration of
approximately $4,680,000, a 120 bed long-term health care center
located in West Plains, Missouri. NHC had managed the health
care center since its opening in 1982. Also in July 1996, NHC
purchased, for total consideration of approximately $6,500,000, a
long-term health care center with assisted living apartments
located in Naples, Florida. There are 60 long-term health care
beds and 36 assisted living apartments.
The purchase prices for the acquisitions above were
allocated to the underlying assets based on their relative fair
market values. The Consolidated Statement of Income for 1996
includes the results of operations from the respective dates of
acquisition.
Note 9 - Investments in Marketable Securities:
NHC considers its investments in marketable securities as
available for sale securities and unrealized gains and losses are
recorded in partners' capital in accordance with SFAS 115.
The adoption of SFAS 115 did not have a material effect on
NHC's financial position or results of operations.
Proceeds from the sale of investments in debt and equity
securities during the years ended December 31, 1996 and 1995 were
$1,669,000 and $2,696,000 respectively. Gross investment gains
of $92,000 and $335,000 were realized on these sales during the
years ended December 31, 1996 and 1995. Gross investment losses
of $41,000 were realized on these sales during the year ended
December 31, 1996. Realized gains and losses from securities
sales are determined on the specific identification of the
securities.
Note 10 - Debt and Lease Commitments:
Long-Term Debt--
Long-term debt and debt serviced by other parties consist of
the following:
<TABLE>
<CAPTION>
Weighted Average Final Debt Serviced by Long-Term
Interest Rate Maturities Other Parties Debt
---------------- ---------- ---------------- ---------
(in thousands)
December 31 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Bank revolving credit facility,
interest payable periodically, variable,
principal due at maturity 6.7% 1999 $ --- $ --- $ 28,000 $ ---
Bank credit facility, principal
and interest payable variable,
quarterly 6.0 2009 --- --- 14,831 15,518
Senior secured notes, principal
and interest payable semiannually 8.4 2005 17,567 19,462 24,397 27,860
First mortgage notes, principal variable,
and interest payable quarterly 6.8 2002 --- --- 22,106 22,612
Notes and other obligations,
principal and interest payable
in periodic installments 6.4 1997-2019 4,443 9,822 30,679 30,065
First mortgage revenue bonds, prin-
cipal payable in periodic install- variable,
ments, interest payable monthly 4.5 2000-2010 14,086 14,861 --- ---
Unsecured term note payable to
National, interest payable quarterly,
principal payable at maturity 8.5 1998 --- --- 10,000 10,000
------ ------- ------- -------
36,096 44,145 130,013 106,055
Less current portion (3,239) (3,374) (5,335) (5,184)
------ ------- ------ -------
$32,857 $ 40,771 $124,678 $100,871
====== ======= ======= =======
</TABLE>
The bank credit facility and the senior secured notes were
borrowed through NHC's administrative partner, National. NHC
granted certain credits and interest rate concessions related to
its management fees from National in obtaining these loans.
The debt identified above as senior secured notes is cross-
defaulted with other NHC and NHI liabilities and is cross-
collateralized to the extent of approximately $24,397,000 of
other debt.
To obtain the consent of various lenders to the transfer of
assets, NHI guaranteed certain NHC debt which was not transferred
to NHI. A default by NHI under its obligations would default the
debt or guarantees of NHC.
The aggregate maturities of long-term debt and debt serviced
by others for the five years subsequent to December 31, 1996 are
as follows:
Long-term Debt Serviced
Debt By Others Total
---------- ---------- -----------
1997 $5,335,000 $3,239,000 $ 8,574,000
1998 6,450,000 2,496,000 8,946,000
1999 32,931,000 3,995,000 36,926,000
2000 34,414,000 3,895,000 38,309,000
2001 6,293,000 3,284,000 9,577,000
Certain property and equipment of NHC and NHI are pledged as
collateral on long-term debt or capital lease obligations. Other
property and assets are available for use as collateral as
needed.
Certain loan agreements require maintenance of specified
operating ratios as well as specified levels of cash held in
escrow, working capital and partners' capital by NHC and NHI.
All such covenants have been met by NHC, and management believes
that NHI is in compliance with the loan covenants.
Lease Commitments--
Operating expenses for the years ended December 31, 1996,
1995, and 1994 include expenses for leased premises and equipment
under operating leases of $25,036,000, $18,820,000, and
$16,692,000, respectively. See Note 3 for the approximate future
minimum base rent and non-obligated debt service rent commitments
on non-cancelable operating leases with NHI.
Construction and Financing Commitments--
NHC is committed to spend approximately $25,217,000 for
ongoing construction contracts and to provide financing to
managed facilities in the amount of $3,423,000 for ongoing
construction contracts in 1997. NHC's cash on hand, marketable
securities, short-term notes receivable, operating cash flow and,
as needed, its borrowing capacity are expected to be adequate to
fund these commitments.
Note 11 - Subordinated Convertible Notes:
At December 31, 1996, $28,908,000 of 6% subordinated
convertible notes ("the notes") remain outstanding. The notes
mature July 1, 2000. Interest is payable quarterly. The notes
are convertible at the option of the holder at any time into
units of NHC at a price of $15.2063 per unit, subject to
adjustment for certain changes in the number of units
outstanding. The notes may be redeemed at the option of NHC, but
only if NHC has elected to be taxed as a corporation and only if
the market price of NHC's units is such as to guarantee certain
specified returns to the holders of the notes. During 1996,
$1,092,000 of the notes were converted into 71,810 units. NHC
has reserved an additional 1,901,057 units for conversion of the
notes.
Note 12 - Contingencies and Guarantees:
Litigation--
There is certain litigation incidental to NHC's business,
none of which, in management's opinion, would be material to the
financial position or results of operations of NHC.
In March 1996, Florida Convalescent Centers, Inc. (FCC), an
independent Florida corporation for whom NHC manages sixteen
licensed nursing centers in Florida, gave NHC notice of its
intent not to renew one management contract. Pursuant to written
agreements between the parties, NHC valued the center, offering
to either purchase the center at the price so valued or require
FCC to pay to NHC certain deferred compensation based upon that
value. FCC responded by requesting the court to interpret the
parties' rights under their contractual arrangements. FCC also
sued to obtain possession of the center for which it alleged the
management contract had been terminated. This suit has now been
dismissed, and the issue of possession will be decided in
connection with the original suit. The remaining suit is still
in the preliminary stages and no hearing date has been scheduled.
In January 1997, FCC notified NHC that it will not renew the
four contracts which mature in 1997 but has agreed that NHC will
remain as manager until a final decision is reached in the
remaining suit. The balance of the contracts may be terminated
in the years 1998-2002.
Third Party Reviews--
Amounts earned under Medicare, Medicaid and other
governmental programs are subject to review by third party
payors. NHC has recently been notified that audits or reviews by
the Office of the Inspector General have commenced at certain
long-term care centers. NHC intends to continually monitor the
progress of these audits and reviews.
Professional Liability and Other Insurance--
NHC carries a professional liability insurance policy
($1,000,000 per claim with additional umbrella coverage in the
amount of $5,000,000 in the aggregate per annum) for coverage
from liability claims and losses incurred in its health care
business. The policy is a fixed premium and occurrence form
policy and has no provisions for a retrospective refund or
assessment due to actual loss experience. In the opinion of
management, NHC's insurance coverage is adequate to cover
settlement of outstanding claims against NHC.
NHC has assumed certain risks related to health insurance
and workers compensation insurance claims of the employees of
National and the managed facilities. The liability for reported
claims and estimates for incurred but unreported claims of the
managed facilities is $5,078,000 and $4,433,000 at December 31,
1996 and December 31, 1995, respectively. The liability is
included in other current liabilities in the Consolidated Balance
Sheets. NHC remits for the claims with regards to National's
employees utilized by NHC on a monthly basis. The amounts are
subject to adjustment for actual claims incurred.
Guarantees and Related Events--
In order to obtain management agreements and to facilitate
construction or acquisition of certain health care centers which
NHC manages for others, NHC has guaranteed some or all of the
centers' first mortgage bond debt (principal and interest). For
this service, NHC charges an annual guarantee fee of 1% to 2% of
the outstanding principal balance guaranteed, which fee is in
addition to NHC's management fee. The principal amount
outstanding under the guarantees is approximately $72,919,000
(net of available debt service reserves) at variable and fixed
interest rates with a weighted average rate of 5.1% at December
31, 1996.
In management's opinion, these guarantee fees approximate
fees that NHC would currently charge to enter into similar
guarantees.
All of the guaranteed indebtedness is secured by first
mortgages, pledges of personal property, accounts receivable and,
in certain instances, by the personal guarantees of the owners of
the facilities. The borrower has granted second mortgages over
the relevant properties in favor of NHC. Such rights may be
enforced if NHC is required to pay under its guarantees.
NHI has guaranteed certain of the debts of NHC. NHC has
agreed to indemnify and hold harmless NHI against any and all
loss, liability or harm incurred by NHI as a result of having to
perform under its guarantee of any or all of the guaranteed debt.
NHC has entered into an interest rate cap arrangement with a
managed entity under which NHC has guaranteed that the entity's
weighted average interest rate on its first and second mortgage
debt will not exceed 9.0%. The entity's first mortgage debt is
tax-exempt, floating-rate bonds and its second mortgage debt is
owed to NHC. The bond debt outstanding under the arrangement is
$16,100,000 and the weighted average rate of both debts is 6.7%
at December 31, 1996. NHC is obligated under the agreement only
for the term of its management contract, as extended, and only so
long as the tax-exempt bonds are outstanding. At December 31,
1996, NHC expects to have no additional liability as a result of
this interest rate cap arrangement.
Note 13 - Notes Receivable:
Notes receivable generally consist of loans and accrued
interest to managed health care centers (predominantly FCC) and
retirement centers for construction costs, development costs
incurred during construction and working capital during initial
operating periods. The notes generally require monthly payments
with maturities ranging from five to twenty-five years. The
majority of the notes mature in 2004. Interest on the notes is
generally at prime plus 2% or at a fixed rate of 10.25%, payable
monthly. The collateral for the notes consists of first and
second mortgages, certificates of need, personal guarantees and
stock pledges.
Note 14 - Partners' Capital:
NHC has Incentive Option Plans which provide for the
granting of options to key employees and directors to purchase
units at no less than market value on the date of grant. The
options may be exercised immediately, but NHC may purchase the
units at the grant price if employment is terminated prior to six
years from the date of grant. The maximum term of the options is
five years. The following table summarizes option activity:
Number of Weighted Average
Units Exercise Price
Options outstanding December 31, 1993 5,000 $11.25
Options granted 485,500 25.15
Options exercised --- ---
Options outstanding December 31, 1994 490,500 25.00
Options granted 376,000 30.76
Options exercised 489,000 25.14
Options outstanding December 31, 1995 377,500 30.56
Options granted 15,000 38.63
Options exercised 2,500 11.25
Options outstanding December 31, 1996 390,000 $30.99
At December 31, 1996, all options outstanding are
exercisable. Exercise prices on the exercisable options range
from $11.25 to $38.63. The weighted average remaining
contractual life of options outstanding at December 31, 1996 is
2.9 years.
Additionally, NHC has an employee unit purchase plan which
allows employees to purchase ownership units of NHC through
payroll deductions. The plan allows employees to terminate
participation at any time.
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
establishes new financial accounting and reporting standards for
stock-based compensation plans. NHC has adopted the disclosure-
only provisions of SFAS 123. As a result, no compensation cost
has been recognized for NHC's stock-based compensation plans.
Management believes that any compensation cost attributable to
stock-based compensation plans is immaterial.
In connection with the exercise of certain stock options,
NHC has received interest-bearing (ranging from 3.5% to 6.25%),
full recourse notes in the amount of $22,674,000 at December 31,
1996. The notes are secured by units of NHC or shares of NHI
having a fair market value of not less than 150% of the amount of
the note. The principal balances of the notes are reflected as a
reduction of partners' capital in the consolidated financial
statements.
Note 15 - Disclosures about Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which
it is practical to estimate that value:
Cash and cash equivalents; Cash held by trustees; Bond reserve
funds, mortgage replacement reserves and other deposits; Loan
participation agreements; and Accrued interest--
The fair value approximates the carrying amount because of
the short maturity or the nature of these instruments.
Marketable securities--
The fair value is estimated based on quoted market prices
and is the same as the carrying amount.
Notes receivable--
The fair value of NHC's notes receivable is estimated based
on the current rates offered by NHC or comparable parties for the
same or similar type of notes receivable of the same or similar
maturities and is approximately the same as the carrying amount.
Long-term debt and Debt serviced by other parties--
The fair value is estimated based on the current rates
offered to NHC for similar debt of the same maturities and is
approximately the same as the carrying amounts.
Subordinated convertible notes--
The fair values are estimated based on quoted market prices
and approximate $82,995,000 and $76,942,000 at December 31, 1996
and December 31, 1995, respectively, as compared to carrying
values of $28,908,000 and $30,000,000 at December 31, 1996 and
December 31, 1995, respectively.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our reports on National HealthCare,
L.P. dated February 3, 1997, included in this Form 10-K for the
year ended December 31, 1996, into the Partnership's previously
filed Post-effective Amendment No. 1 to Form S-4 on Form S-8
Registration Statement No. 33-9881. It should be noted that we
have not audited any financial statements of the Company
subsequent to December 31, 1996 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
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<NAME>NATIONAL HEALTHCARE L.P.
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