FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended September 30, 1997 Commission file number 33-9881
NATIONAL HEALTHCARE L.P.
(Exact name of registrant as specified in its Charter)
Delaware 62-1292855
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-2020
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d), of
the Securities Exchange Act of 1934 during the preceding 12 months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
8,866,822 units were outstanding as of October 31, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
NATIONAL HEALTHCARE L.P.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Net patient revenues $ 99,400 $ 84,388 $288,640 $ 246,073
Other revenues 12,589 11,430 35,403 33,529
Net revenues 111,989 95,818 324,043 279,602
COSTS AND EXPENSES:
Salaries, wages and benefits 59,910 52,930 177,539 154,936
Other operating 35,039 28,888 101,379 86,855
Depreciation and amortization 4,349 3,625 12,061 9,795
Interest 3,314 2,305 9,387 8,474
Total costs and expenses 102,612 87,748 300,366 260,060
NET INCOME $ 9,377 $ 8,070 $ 23,677 $ 19,542
EARNINGS PER UNIT:
Primary $ 1.06 $ .94 $ 2.68 $ 2.28
Fully diluted $ .91 $ .81 $ 2.33 $ 1.98
WEIGHTED AVERAGE UNITS OUTSTANDING:
Primary 8,860,413 8,583,911 8,836,992 8,585,875
Fully diluted 10,756,650 10,515,701 10,737,859 10,520,240
CASH DISTRIBUTIONS PAID PER UNIT $ .60 $ .52 $ 1.80 $ 1.56
NET INCOME ALLOCABLE TO PARTNERS:
General Partners $ 94 $ 81 $ 237 $ 195
Limited Partners 9,283 7,989 23,440 19,347
$ 9,377 $ 8,070 $ 23,677 $ 19,542
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these statements.
2
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<CAPTION>
Sept. 30 December 31
1997 1996
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,270 $ 1,881
Cash held by trustees 4,001 2,274
Marketable securities 19,130 17,968
Accounts receivable, less allowance for
doubtful accounts of $5,925 and $4,079 63,174 50,902
Notes receivable 5,940 2,515
Inventory at lower of cost (first-in,
first-out method) or market 4,258 3,572
Prepaid expenses and other assets 1,080 982
Total current assets 100,853 80,094
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 265,040 234,934
Less accumulated depreciation and
amortization (56,892) (48,171)
Assets under arrangement with other parties 20,948 22,538
Net property, equipment and assets under
arrangement with other parties 229,096 209,301
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 397 141
Unamortized financing costs 1,636 1,601
Notes receivable 95,776 95,206
Notes receivable from National 10,102 12,153
Minority equity investments and other 6,595 6,244
Total other assets 114,506 115,345
$444,455 $404,740
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
3
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
LIABILITIES AND CAPITAL
<CAPTION>
Sept. 30 December 31
1997 1996
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 8,025 $ 8,574
Trade accounts payable 8,702 11,835
Accrued payroll 27,140 28,963
Amount due to third-party payors 22,951 13,135
Accrued interest 540 501
Other current liabilities 14,483 9,795
Total current liabilities 81,841 72,803
LONG-TERM DEBT, less current portion 142,372 124,678
DEBT SERVICED BY OTHER PARTIES, LESS
CURRENT PORTION 31,811 32,857
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 786 791
COMMITMENTS, CONTINGENCIES AND GUARANTEES
SUBORDINATED CONVERTIBLE NOTES 28,739 28,908
DEFERRED INCOME 14,822 16,166
PARTNERS' CAPITAL:
General partners 1,490 1,408
Limited partners 142,594 127,129
Total partners' capital 144,084 128,537
$444,455 $404,740
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
4
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
1997 1996
(in thousands)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $23,677 $ 19,542
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 11,469 9,048
Provision for doubtful accounts 1,946 5,214
Amortization of intangibles and deferred charges 642 858
Amortization of deferred income (1,344) (227)
Equity in earnings of unconsolidated investments (110) (279)
Distributions from unconsolidated investments 161 195
Changes in assets and liabilities:
Increase in accounts receivable (14,218) (4,888)
Increase in inventory (686) (705)
(Increase) Decrease in prepaid expenses
and other assets (98) 94
Increase (Decrease) in trade accounts payable (3,133) 3,155
Increase (Decrease) in accrued payroll (1,823) 1,517
Increase (Decrease) in amounts due to third
party payors 9,816 (484)
Increase (Decrease) in accrued interest payable 39 (716)
Increase in other current liabilities 4,688 1,000
31,026 33,324
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (31,263) (44,581)
Investment in long-term notes receivable and loan
participation agreements (23,494) (14,370)
Collection of long-term notes receivable and loan
participation agreements 21,550 32,230
Increase (Decrease) in minority equity investments
and other (753) 2,431
(Increase) Decrease in debt and equity securities 605 (15,555)
(33,355) (39,845)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 22,948 22,266
Increase in cash held by trustees (1,727) (324)
(Increase) Decrease in minority interest in
subsidiaries (5) 5
Increase (Decrease) in bond reserve funds, mortgage
replacement reserves and other deposits (256) 1,660
Issuance of partnership units 505 558
Collection of receivables 5,131 3,428
Payments on debt (6,954) (9,245)
Cash distributions to partners (15,703) (13,087)
Increase in financing costs (221) (93)
3,718 5,168
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,389 (1,353)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,881 4,835
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,270 $ 3,482
Supplemental Information:
Cash payments for interest expense $ 9,348 $ 9,180
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
5
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
1997 1996
(in thousands)
<S> <C> <C>
During the nine months ended September 30, 1996, NHC
was released from its liability on debt serviced
by others by the respective lenders
Debt serviced by other parties $ -0- $(3,841)
Assets under arrangement with other parties -0- 3,841
During the nine months ended September 30, 1997 and
September 30, 1996, respectively $169,000 and $686,000
of convertible subordinated debentures were converted
into 4,534 and 45,112 units of NHC's partnership units:
Convertible subordinated debentures (169) (686)
Financing costs 1 1
Accrued interest (2) (5)
Partner's capital 170 690
</TABLE>
6
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE Nine MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(dollars in thousands)
<CAPTION>
Receivables Unrealized Total
Number of From Sale of Gains(Losses) General Limited Partners'
Units Units on Securities Partners Partners Capital
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT 12/31/96 8,467,959 $(22,674) $2,171 $1,408 $147,632 $128,537
Net income -- -- -- 237 23,440 23,677
Collection of
receivables -- 5,131 -- -- -- 5,131
Units sold 387,753 (11,576) -- -- 12,081 505
Units in conversion of
convertible debentures
to partnership units 11,110 -- -- -- 170 170
Unrealized gains on
securities -- -- 1,767 -- -- 1,767
Cash distributions
($1.80 per unit) -- -- -- (155) (15,548) (15,703)
BALANCE AT 9/30/97 8,866,822 $(29,119) $3,938 $1,490 $167,775 $144,084
BALANCE AT 12/31/95 8,353,114 $(26,196) $ 345 $1,290 $133,460 $108,899
Net income -- -- -- 195 19,347 19,542
Collection of
receivables -- 3,428 -- -- -- 3,428
Units sold 22,870 -- -- -- 558 558
Units in conversion of
convertible debentures
to partnership units 45,112 -- -- -- 690 690
Unrealized gains on
securities -- -- 927 -- -- 927
Cash distributions
($1.56 per unit) -- -- -- (131) (12,956) (13,087)
BALANCE AT 9/30/96 8,421,096 $(22,768) $1,272 $1,354 $141,099 $120,957
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
7
<PAGE>
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements for the nine months ended September 30, 1997
and 1996, which have not been examined by independent public accountants,
reflect, in the opinion of management, all adjustments necessary to present
fairly the data for such periods. The results of the operations for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the entire fiscal year ended December 31, 1997. The
interim condensed balance sheet at December 31, 1996 is taken from the audited
financial statements at that date. The interim condensed financial statements
should be read in conjunction with the consolidated financial statements,
including the notes thereto, for the periods ended December 31, 1996, December
31, 1995, and December 31, 1994.
Note 2 - OTHER REVENUES:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenue from managed centers $ 8,785 $ 7,988 $25,780 $24,272
Guarantee fees 157 165 469 530
Advisory fee from NHI 775 796 2,326 2,390
Earnings on securities 467 430 1,358 555
Equity in earnings of
unconsolidated investments 71 184 95 285
Interest income 1,150 859 3,099 3,581
Other 1,184 1,008 2,276 1,916
$12,589 $11,430 $35,403 $33,529
</TABLE>
Revenues from managed centers include management fees and interest income
on notes receivable from the managed centers. "Other" revenues include
non-health care related earnings.
8
<PAGE>
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Note 3 - INVESTMENT 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 for
the period ended September 30, 1997 was $854,000. Gross investment gains of
$249,000 were realized on these sales during the period ended September 30,
1997. Realized gains and losses from securities sales are determined on the
specific identification of the securities.
Note 4 - GUARANTEES:
In order to obtain management agreements and to facilitate the
construction or acquisition of certain health care centers which NHC manages
for others, NHC has guaranteed some or all of the debt (principal and
interest) on those centers. 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 amounts outstanding under
the guarantees is approximately $69,163,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average of 4.8%
at September 30, 1997.
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 $15,500,000 and the weighted average rate of both debts is 6.4% at
September 30, 1997. 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 September 30, 1997, NHC expects to have no additional
liability as a result of this interest rate cap arrangement.
9
<PAGE>
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure", ("SFAS
129"). SFAS 129 establishes standards for disclosing information about an
entity's capital structure. NHC will be required to adopt SFAS 129 in the
fourth quarter of 1997. Management does not expect the adoption to have a
material impact on NHC's financial position results of operations or cash
flows.
Statement of Financial Accounting Standards No.128,"Earnings per Share",
("SFAS 129") has been issued effective for fiscal periods ending after
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share. NHC is required to adopt the provisions of
SFAS No. 128 in the fourth quarter of 1997. Under the standards established
by SFAS 128, earnings per share is measured at two levels: basic earnings per
share and diluted earnings per share. Basic earnings per share is computed by
dividing net income by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares after
considering the additional dilution related to preferred stock, convertible
debt, options and warrants. Management does not expect the adoption to have a
material impact on NHC's financial position, results of operation or cash
flows.
Note 6 - LEGAL PROCEEDINGS
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 a management
contract at one of the centers. 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 (the "deferred compensation fee, or DCF"). FCC
responded on March 26, 1996,
10
<PAGE>
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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. Since
that time, FCC has amended the suit to allege, among other items, that NHC has
"self-dealt" with or mismanaged the centers, that the deferred compensation
creates a usurious rate of interest, and that the recorded mortgages securing
FCC's debt to NHC do not secure the payment of the DCF. NHC has denied all
allegations and conclusions. Although on November 5, 1997, the trial court
ruled on FCC's partial Motion for Summary Judgement that the mortgages do
secure the DCF and that the DCF is due upon termination of a management
contract, the suit is still in the preliminary stages and no trial date has
been scheduled.
In January, 1997, NHC was notified that FCC did not intend to renew an
additional four contracts which matured in 1997, but FCC agreed that NHC will
remain as manager until a final decision is reached by the Sarasota Court.
The remainder of the FCC contracts may be terminated in the years 2001-2003.
The company is also a defendant in a lawsuit styled Braeuning et al vs.
National HealthCare L.P. et al filed "under seal" in the U. S. District Court
of the Northern district of Florida on April 9, 1996. The court removed the
seal from the complaint - but not the file itself - on March 20, 1997 and
service of process occurred on July 8, 1997 with the government participating
as an intervening plaintiff. By agreement, and with court approval, the suit
has been moved from the Pensacola District Court to the Tampa, Florida
District Court and NHC's time for filing its Answer has been extended through
year end 1997. The suit alleges that NHC has submitted cost reports and
routine cost limit exception requests containing "fraudulent allocation of
routine nursing services to ancillary service cost centers" and improper
allocation of skilled nursing service hours in four managed centers, all in
the state of Florida. The suit was filed under the Qui Tam provisions of the
Federal False Claims Act, commonly referred to as the "Whistleblower Act".
11
<PAGE>
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
In regard to the allegations contained in the lawsuit, NHC believes that
the cost report information of its centers have been either appropriately
filed or, upon appropriate amendment, will reflect adjustments only for the
correction of unintentional misallocations. Prior to the filing of the suit,
the Company had commenced an in-depth review of the nursing time allocation
process at its owned, leased and managed centers. A significant number of
amended cost reports have been filed and the Company continues to schedule and
prepare revised cost reports and exception requests. It is anticipated that
all years in question will be reviewed prior to there being further action in
this matter at the judicial level. The Company is fully cooperating with the
government in an attempt to determine dollar amounts involved, and intends to
aggressively pursue an amicable settlement of this matter. The cost report
periods under review include periods from 1991 through 1995.
NHC would be responsible for any settlement related to its owned
facilities and to the extent that managed centers have settlements, NHC's 6%
management fee would be impacted. NHC's revenue policy is to not reflect
routine cost limit exception requests as income until the process, including
cost report audits, is completed. NHC cannot predict at this time the
ultimate outcome of the suit but will strongly defend its actions in this
matter.
As reported in NHC's 1996 10-K, in October 1996 two managed centers in
Florida were audited by representatives of the regional office of the Office
of the 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 suppliers of outside services. At one center the OIG indicated
during an exit conference that it had no further questions but has not yet
issued a final report. At the second facility - which is one of four named in
the Braeuning lawsuit - the OIG determined that certain records were
insufficient and NHC supplied the additional requested information. These
audits have been incorporated into the lawsuit.
12
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
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
(and has now opened a Tennessee office) as part of Operation Restore Trust.
NHC will continue to review and monitor the cost reporting process and its
compliance with all government reimbursement standards, but cannot predict
whether the OIG or other government officials will take further action or
request additional information as a result of the Braeuning suit or any other
audit that may be conducted in the future.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National HealthCare L.P. (NHC, or the Company) operates and manages 110
long-term health care centers with 13,926 beds in ten states. NHC provides
nursing care as well as ancillary therapy services to patients in a variety of
settings including long-term care 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
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
Results for the three month period ended September 30, 1997 include a
16.2% increase over the same period in 1996 in net income, a 12.3% increase in
fully diluted earnings per unit, and an 16.9% increase in net revenues.
13
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
The increased revenues for the quarter reflect the continued growth of
operations. Compared to the quarter a year ago, NHC has increased the number
of owned or leased long-term care beds by 379 beds from 6,649 beds to 7,028
beds. The number of long-term care beds managed for others has increased by
737 beds from 6,161 beds to 6,898 beds. The number of assisted living beds
increased by 168 beds from 461 beds from 629 beds. The number of homecare
locations has increased from 32 locations to 33 locations. Also contributing
to increased revenues are improvements in both private pay and third party
payor rates.
Revenues improved during 1997 also due to increased emphasis on
rehabilitation and managed care services. The Company has extended its
rehabilitative services into additional geographic areas and to additional
customers.
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, increased 10.0% in 1997 from $8.0 million to $8.8
million due to the increased number of beds being managed for others,
increased principle amounts of notes receivable and due to increased
management fees. 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.
Total costs and expenses for the 1997 third quarter increased $14.9
million or 16.9% to $102.6 million from $87.7 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $7.0
million or 13.2% to $59.9 million from $52.9 million. Other operating expenses
increased $6.1 million or 21.3% to $35.0 million for the 1997 third quarter
compared to $28.9 million in the 1996 period. Depreciation and amortization
increased $0.7 million or 20.0% to $4.3 million from $3.6 million for the
third quarter last year. Interest costs increased $1.0 million or 43.8% to
$3.3 million from $2.3 million for last year.
Increases in salaries, wages and benefits are attributable to the
increase in staffing levels due to long-term care bed additions, assisted
living expansions, homecare expansions, and the increased emphasis on
rehabilitative services. Also contributing to higher costs of labor are
inflationary increases for salaries and the associated benefits.
14
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
Operating costs have increased due to the increased number of beds in
operation, the growth in assisted living beds, the expansion of homecare
services, the expansion of rehabilitative and managed care services, the
growth in management services provided to others and due to increased costs of
workers' compensation insurance.
Depreciation and amortization increased as a result of the Company'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 purchased or constructed long-term care beds
and assisted living beds.
The total census at owned and leased centers for the quarter averaged
92.1% compared to an average of 93.4% for the same quarter a year ago.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996.
Results for the nine month period ended September 30, 1997 include a
21.2% increase over the same period in 1996 in net income, a 17.7% increase in
fully diluted earnings per unit, and a 15.9% increase in net revenues.
The increased revenues for the nine months this year reflect the
continued growth of operations. Compared to the nine month period a year ago,
NHC has increased the number of owned, leased, and managed long-term care beds
by 1,116 beds from 12,810 beds to 13,926 beds. The number of assisted living
locations has increased from 11 locations to 13 locations. The number of
homecare locations has increased from 32 locations to 33 locations. Also
contributing to increased revenues are improvements in both private pay and
third party payor rates.
Revenues improved during 1997 also due to increased emphasis on
rehabilitative and managed care services. The Company has extended its
rehabilitative services into additional geographic areas and to additional
customers.
15
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
Revenues from management services, which are included in the Statements
of Income in Other Revenues, increased 6.2% for the nine month period in 1997
compared to the same period in 1996 from $24.3 million to $25.8 million due to
the increased number of beds being managed for others, increased principle
amount of notes receivable and due to increased management fees. 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.
Total costs and expenses for the 1997 nine month period increased $40.3
million or 15.5% to $300.4 million from $260.1 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $22.6
million or 14.6% to $177.5 million from $154.9 million. Other operating
expenses increased $14.5 million or 16.7% to $101.4 million for the 1997 third
quarter compared to $86.9 million in the 1996 period. Depreciation and
amortization increased 23.1% to $12.1 million from $9.8 million last year.
Interest costs increased $0.9 million or 10.8% to $9.4 million from $8.5
million for last year.
Increases in salaries, wages and benefits are attributable to the
increase in staffing levels due to long-term care bed additions, assisted
living expansions, homecare expansions, and the increased emphasis on
rehabilitative services. Also contributing to higher costs of labor are
inflationary increases for salaries and the associated benefits.
Operating costs have increased due to the increased number of beds in
operation, the opening of three new assisted living projects, the expansion of
homecare services, the expansion of rehabilitative and managed care services,
the growth in management services provided to others and due to increased
costs of workers' compensation insurance.
Depreciation and amortization increased as a result of the Company's
placing of newly constructed or purchased assets in service and due to capital
improvements at existing properties. Interest expense increased due to
increased borrowing for newly purchased or constructed long-term care beds and
assisted living beds.
The total census at owned and leased centers for the nine months
averaged 92.8% compared to an average of 93.3% for the same nine months a year
ago.
16
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
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. Amounts earned under
the Medicare and Medicaid programs are subject to review by the third party
payors and as disclosed in the notes to the financial statements, by the
Office of the Inspector General. In the opinion of management, adequate
provision has been made for any adjustments that may result from such reviews.
(See Part II, Item 1: Legal Proceedings) However, substantial cash payments
may be required at the time of finalization if material adjustments are made
by auditors. 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.
17
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
Liquidity and Capital Resources
During the first nine months of 1997, the Company generated net cash of
$31.0 million from operating activities, $21.6 million from the collection of
long-term notes receivable, $22.9 million debt proceeds, $0.5 million from the
issuance of partnership units, and $5.0 million from the collection of
receivables. Of these funds, $31.3 million was used for additions to and
acquisitions of property and equipment; $23.5 million for investment in long-
term notes receivable and loan participation agreements; $1.7 million to
increase cash held by trustees; $7.0 million for payments on debt; and $15.7
million for cash distributions to partners. Cash and cash equivalents
increased $1.4 million during the nine months.
NHC has guaranteed approximately $69.2 million of debt of certain health
care centers which NHC manages for others. At September 30, 1997, NHC expects
to have no additional liability as a result of its debt guarantees.
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 and the Corporation'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 1.2:1 at September 30, 1997 and working capital is $19,000,000. 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
0.9:1.0 at September 30, 1997.
For all financial instruments expect the subordinated convertible notes,
NHC believes that he financial statement carrying amounts approximate fair
value at September 30, 1997 and at December 31, 1996. The fair value of the
subordinated convertible notes were estimated based on quoted market prices.
18
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
Development
During the first nine months of 1997, the Company added a net total of
1,044 licensed long-term care beds, of which 367 are owned or leased and 677
of which are managed for other parties. Additionally, 252 assisted living
units in three newly constructed projects were opened.
Currently, NHC has 881 long-term care beds under development at 12 owned
or leased centers and seven managed health care centers in various locations.
These beds are either under construction or a Certificate of Need has been
received from the appropriate state agency authorizing the construction of
additional centers or beds.
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 and with on-staff
availability to assist in minor medical and living needs on an as needed
basis. NHC currently operates 13 assisted living projects, eight of which are
located within the physical structure of a long-term care center or retirement
center and five of which are freestanding. Two freestanding projects opened
in 1996 and three in 1997. At September 30, 1997 NHC has 266 assisted living
beds under development at five locations. Furthermore, 211 retirement
apartments are under development at two locations. Certificates of need are
not required to build assisted living or retirement projects.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS 128") has been issued effective for years ending after December 15,
1997. This statement establishes standards for computing and presenting
earnings per share. NHC is required to adopt the provisions of SFAS 128 in
the fourth quarter of 1997 and does not expect adoption thereof to have a
material effect on NHC's financial position or results of operations.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information About Capital Structure" ("SFAS 129") has been issued effective
for years ending after December 15, 1997. This statement establishes
standards for disclosing information about an entity's capital structure. NHC
will be required to adopt the provisions of SFAS
19
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
129 in the fourth quarter of 1997 and does not expect adoption thereof to have
a material impact on NHC's financial position 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.
Plan to Restructure
During the third quarter, and as a result of congressional action
terminating partnership taxation for public partnerships beginning in 1998,
NHC announced a restructuring plan which will be voted on by NHC partners in
December. The plan calls for the limited partnership to form two new publicly
traded corporations effective at 11:59 p.m. on December 31, 1997. One company
named National HealthCare Corporation will contain all the operations that
National HealthCare L.P. has now except for the real estate. The real estate
will transfer to a second company named National Health Realty, Inc. which is
not expected to grow except through National HealthCare Corporation. National
HealthCare Corporation is expected to grow as National HealthCare L.P. would
have grown in the future.
20
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
Preliminary estimates indicate that the REIT will have sufficient funds
to pay an initial 1998 annualized dividend of $1.33 per share, of which $1.10
is anticipated to be taxable and 23 cents is return of capital. This compares
with NHC's 1997 estimated cash distribution of $2.40 per unit and up to $4.00
in taxable income per unit. National HealthCare Corporation is expected to
focus on growth and initially not pay a dividend.
Forward Looking Statements
Management's Discussion and Analysis of Financial Condition and Results
of Operations includes certain statements (other than statements of historical
fact) that constitute forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities exchange
Act of 1934. When used herein, the words "anticipates," "expects,"
"believes," "intends" or "projects" and similar expressions are intended to
identify forward-looking statements. It is important to note that actual
results could differ materially from those projected by such forward-looking
statements. Although it is believed that the expectations reflected in such
forward-looking statements are reasonable and such forward-looking statements
are based upon the best data available at the time this report is filed with
the Securities and Exchange Commission, no assurance can be given that such
expectations will prove correct. All such forward-looking statements in this
document are expressly qualified in their entirety by the cautionary
statements in this paragraph.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is subject to claims and suits in the ordinary
course of business. While there are several worker's compen-
sation and personal liability claims and other suits 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.
21
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
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 a management contract at one of the
centers. 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 (the "deferred
compensation fee, or DCF"). 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. Since that time, FCC has amended the
suit to allege, among other items, that NHC has "self-dealt" with
or mismanaged the centers, that the deferred compensation creates
a usurious rate of interest, and that the recorded mortgages
securing FCC's debt to NHC do not secure the payment of the DCF.
NHC has denied all allegations and conclusions. Although on
November 5, 1997, the trial court ruled on FCC's Partial Motion
for Summary Judgement that the mortgages do secure the DCF and
that the DCF is due upon termination of a management contract,
the suit is still in the preliminary stages and no trial date
has been scheduled.
In January, 1997, NHC was notified that FCC did not intend
to renew an additional four contracts which matured in 1997, but
FCC agreed that NHC will remain as manager until a final decision
is reached by the Sarasota Court. The remainder of the FCC
contracts may be terminated in the years 2001-2003.
22
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
The company is also a defendant in a lawsuit styled
Braeuning et al vs. National HealthCare L.P. et al filed "under
seal" in the U. S. District Court of the Northern district of
Florida on April 9, 1996. The court removed the seal from the
complaint - but not the file itself - on March 20, 1997 and
service of process occurred on July 8, 1997 with the government
participating as an intervening plaintiff. By agreement, and
with court approval, the suit has been moved from the Pensacola
District Court to the Tampa, Florida, District Court and NHC's
time for filing its Answer has been extended through year end
1997. The suit alleges that NHC has submitted cost reports and
routine cost limit exception requests containing "fraudulent
allocation of routine nursing services to ancillary service cost
centers" and improper allocation of skilled nursing service hours
in four managed centers, all in the state of Florida. The suit
was filed under the Qui Tam provisions of the Federal False
Claims Act, commonly referred to as the "Whistleblower Act".
In regard to the allegations contained in the lawsuit, NHC
believes that the cost report information of its centers have
been either appropriately filed or, upon appropriate amendment,
will reflect adjustments only for the correction of unintentional
misallocations. Prior to the filing of the suit, the Company had
commenced an in-depth review of the nursing time allocation
process at its owned, leased and managed centers. A significant
number of amended cost reports have been filed and the Company
continues to schedule and prepare revised cost reports and
exception requests. It is anticipated that all years in question
will be reviewed prior to there being further action in this
matter at the judicial level. The Company is fully cooperating
with the government in an attempt to determine dollar amounts
involved, and intends to aggressively pursue an amicable
settlement of this matter. The cost report periods under review
include periods from 1991 through 1995.
23
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
NHC would be responsible for any settlement related to its
owned facilities and to the extent that managed centers have
settlements, NHC's 6% management fee would be impacted. NHC's
revenue policy is to not reflect routine cost limit exception
requests as income until the process, including cost report
audits, is completed. NHC cannot predict at this time the
ultimate outcome of the suit but will strongly defend its
actions in this matter.
As reported in NHC's 1996 10-K, in October 1996 two managed
centers in Florida were audited by representatives of the
regional office of the Office of the 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 suppliers of outside services. At one center the OIG
indicated during an exit conference that it had no further
questions but has not yet issued a final report. At the second
facility - which is one of four named in the Braeuning lawsuit -
the OIG determined that certain records were insufficient and
NHC supplied the additional requested information. These audits
have been incorporated into the lawsuit.
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 (and has now opened a Tennessee
office) as part of Operation Restore Trust. NHC will continue to
review and monitor the cost reporting process and its compliance
with all government reimbursement standards, but cannot predict
whether the OIG or other government officials will take further
action or request additional information as a result of the
Braeuning suit or any other audit that may be conducted in the
future.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
24
<PAGE>
NATIONAL HEALTHCARE L.P.
September 30, 1997
(Unaudited)
Item 4. Submission of Matters to Vote of Security Holders. None
Item 5. Other Information. See Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Plan to
Restructure which is hereby incorporated by reference into this
Item 5.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule
(for SEC purposes only)
(b) Reports on Form 8-K - none required
SIGNATURES
Pursuant to the requirements of the Security 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.
(Registrant)
Date November 14, 1997 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date November 14, 1997 /s/ Donald K. Daniel
Donald K. Daniel
Vice President and Controller
Principal Accounting Officer
25
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