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 June 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
8,862,187 units were outstanding as of July 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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Net patient revenues $ 94,657 $ 81,078 $189,240 $ 161,685
Other revenues 11,534 10,551 22,814 22,099
Net revenues 106,191 91,629 212,054 183,784
COSTS AND EXPENSES:
Salaries, wages and benefits 58,414 50,137 117,629 102,006
Other operating 33,214 29,653 66,340 57,967
Depreciation and amortization 3,977 3,135 7,712 6,170
Interest 3,244 2,697 6,073 6,169
Total costs and expenses 98,849 85,622 197,754 172,312
NET INCOME $ 7,342 $ 6,007 $ 14,300 $ 11,472
EARNINGS PER UNIT:
Primary $ .83 $ .70 $ 1.62 $ 1.34
Fully diluted $ .72 $ .62 $ 1.41 $ 1.18
WEIGHTED AVERAGE UNITS OUTSTANDING:
Primary 8,861,960 8,586,893 8,829,472 8,578,654
Fully diluted 10,759,346 10,518,688 10,727,760 10,527,339
CASH DISTRIBUTIONS PAID PER UNIT $ .60 $ .52 $ 1.20 $ 1.04
NET INCOME ALLOCABLE TO PARTNERS:
General Partners $ 73 $ 60 $ 143 $ 115
Limited Partners 7,269 5,947 14,157 11,357
$ 7,342 $ 6,007 $ 14,300 $ 11,472
</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>
June 30 December 31
1997 1996
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,193 $ 1,881
Cash held by trustees 3,752 2,274
Marketable securities 17,298 17,968
Accounts receivable, less allowance for
doubtful accounts of $5,472 and $4,079 78,586 50,902
Notes receivable 9,189 2,515
Inventory at lower of cost (first-in,
first-out method) or market 4,077 3,572
Prepaid expenses and other assets 1,184 982
Total current assets 126,279 80,094
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 256,345 234,934
Less accumulated depreciation and
amortization (54,479) (48,171)
Assets under arrangement with other parties 21,472 22,538
Net property, equipment and assets under
arrangement with other parties 223,338 209,301
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 282 141
Unamortized financing costs 1,505 1,601
Notes receivable 93,980 95,206
Notes receivable from National 10,647 12,153
Minority equity investments and other 6,474 6,244
Total other assets 112,888 115,345
$ 462,505 $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>
June 30 December 31
1997 1996
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,865 $ 8,574
Trade accounts payable 29,361 11,835
Accrued payroll 30,259 28,963
Amount due to third-party payors 21,725 13,135
Accrued interest 1,067 501
Other current liabilities 12,002 9,795
Total current liabilities 102,279 72,803
LONG-TERM DEBT, less current portion 144,867 124,678
DEBT SERVICED BY OTHER PARTIES, LESS
CURRENT PORTION 32,024 32,857
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 784 791
COMMITMENTS, CONTINGENCIES AND GUARANTEES
SUBORDINATED CONVERTIBLE NOTES 28,839 28,908
DEFERRED INCOME 15,945 16,166
PARTNERS' CAPITAL:
General partners 1,447 1,408
Limited partners 136,320 127,129
Total partners' capital 137,767 128,537
$462,505 $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>
Six Months Ended
June 30
1997 1996
(in thousands)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $14,300 $ 11,472
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 7,342 5,785
Provision for doubtful accounts 1,253 1,140
Amortization of intangibles and deferred charges 418 638
Amortization of deferred income (221) (130)
Equity in earnings of unconsolidated investments (40) (107)
Distributions from unconsolidated investments 154 180
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (28,937) 1,362
Increase in inventory (505) (504)
Increase in prepaid expenses
and other assets (202) (84)
Increase in trade accounts payable 17,527 3,355
Increase (Decrease) in accrued payroll 1,296 (3,753)
Increase (Decrease) in amounts due to third
party payors 8,590 (6,130)
Increase (Decrease) in accrued interest payable 566 (746)
Increase in other current liabilities 2,206 172
23,747 12,650
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (21,379) (11,592)
Investment in long-term notes receivable and loan
participation agreements (18,022) (15,132)
Collection of long-term notes receivable and loan
participation agreements 14,080 24,654
Increase in minority equity investments
and other (574) (2,850)
(Increase) Decrease in debt and equity securities 362 (15,395)
(25,533) (20,315)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 23,166 13,311
Increase in cash held by trustee (1,478) (1,358)
Decrease in minority interest in subsidiaries (7) (3)
Increase (Decrease) in bond reserve funds, mortgage
replacement reserves and other deposits (141) 1,081
Issuance of partnership units 539 571
Collection of receivables 5,014 3,340
Payments on debt (4,601) (3,639)
Cash distributions to partners (10,384) (8,708)
Increase in financing costs (10) (94)
12,098 4,501
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,312 (3,164)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,881 4,835
CASH AND CASH EQUIVALENTS, END OF PERIOD $12,193 $ 1,671
Supplemental Information:
Cash payments for interest expense $ 6,920 $ 6,920
</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>
Six Months Ended
June 30
1997 1996
(in thousands)
<S> <C> <C>
During the six months ended June 30, 1996, NHC
was released from its liability on debt serviced
by others by the respective lenders
Debt serviced by other parties $(3,841) $(3,841)
Assets under arrangement with other parties 3,841 3,841
During the six months ended June 30, 1997 and
June 30, 1996, respectively $69,000 and $686,000
of convertible subordinated debentures were converted
into 4,534 and 45,112 units of NHC's partnership units:
Convertible subordinated debentures (69) (686)
Financing costs 1 1
Accrued interest (1) (5)
Partner's capital 69 690
</TABLE>
6
<PAGE>
<TABLE>
NATIONAL HEALTHCARE L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 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 -- -- -- 143 14,157 14,300
Collection of
receivables -- 5,014 -- -- -- 5,014
Units sold 389,694 (11,577) -- -- 12,116 539
Units in conversion of
convertible debentures
to partnership units 4,534 -- -- -- 69 69
Unrealized losses on
securities -- -- (308) -- -- (308)
Cash distributions
($1.20 per unit) -- -- -- (104) (10,280) (10,384)
BALANCE AT 6/30/97 8,862,187 $(29,237) $1,863 $1,447 $163,694 $137,767
BALANCE AT 12/31/95 8,353,114 $(26,196) $ 345 $1,290 $133,460 $108,899
Net income -- -- -- 115 11,357 11,472
Collection of
receivables -- 3,340 -- -- -- 3,340
Units sold 24,270 -- -- -- 571 571
Units in conversion of
convertible debentures
to partnership units 45,112 -- -- -- 690 690
Unrealized losses on
securities -- -- (191) -- -- (191)
Cash distributions
($1.04 per unit) -- -- -- (87) (8,621) (8,708)
BALANCE AT 6/30/96 8,422,496 $(22,856) $ 154 $1,318 $137,457 $116,073
</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
June 30, 1997
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements for the six months ended June 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 six months ended
June 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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenue from managed centers $ 8,713 $ 7,943 $16,995 $16,284
Guarantee fees 150 185 312 365
Advisory fee from NHI 776 797 1,551 1,594
Earnings on securities 370 64 891 125
Equity in earnings of
unconsolidated investments 24 (59) 24 101
Interest income 968 1,133 1,949 2,722
Other 533 488 1,092 908
$11,534 $10,551 $22,814 $22,099
</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
June 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 June 30, 1996 was $511,000. Gross investment gains of
$149,000 were realized on these sales during the period ended June 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 $69,362,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average of 4.7%
at June 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 $15,600,000 and the weighted average rate of both debts is 6.9% at June 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 June 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
June 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 options 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. 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 deferred compensation. NHC has
denied all allegations and conclusions. The suit is still in the preliminary
stages and no trial date has been scheduled.
In January, 1997, NHC was notified that FCC currently does not intend to
renew an additional four contracts which mature in 1997, but FCC 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
2001-2003.
10
<PAGE>
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 participation
as an intervening plaintiff. 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 any 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 agovernment 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.
11
<PAGE>
NATIONAL HEALTHCARE L.P.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
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.
12
<PAGE>
NATIONAL HEALTHCARE L.P.
June 30, 1997
(Unaudited)
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 13,775 beds in nine 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 June 30, 1997 Compared to Three Months Ended June 30, 1996.
Results for the three month period ended June 30, 1997 include a 22%
increase over the same period in 1996 in net income, a 16% increase in fully
diluted earnings per unit, and an 16% increase in net revenues.
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 528 beds from 6,469 beds to 6,997
beds. The number of long-term care beds managed for others has increased by
497 beds from 6,281 beds to 6,778 beds. The number of assisted living beds
increased by 288 beds to 629 beds from 341 beds. The number of homecare
locations has increased from 31 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.
13
<PAGE>
NATIONAL HEALTHCARE L.P.
June 30, 1997
(Unaudited)
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, increased 9.7% in 1997 from $7.9 million to $8.7
million due to the increased number of beds being managed for others 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. The increases
were offset in part by decreased interest income from lower principal amounts
on loans to managed centers.
Total costs and expenses for the 1997 second quarter increased $13.2
million or 15.4% to $98.8 million from $85.6 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $8.3
million or 16.5% to $58.4 million from $50.1 million. Other operating expenses
increased $3.5 million or 12.0% to $33.2 million for the 1997 second quarter
compared to $29.7 million in the 1996 period. Depreciation and amortization
increased $0.8 million or 26.9% to $4.0 million. Interest costs increased
$0.5 million or 20.3% to $3.2 million from $2.7 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 growth in assisted living beds, the expansion of homecare
services, the expansion of rehabilitative and managed care services, and the
growth in management services provided to others.
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.
The total census at owned and leased centers for the quarter averaged
92.0% compared to an average of 92.9% for the same quarter a year ago.
14
<PAGE>
NATIONAL HEALTHCARE L.P.
June 30, 1997
(Unaudited)
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Results for the six month period ended June 30, 1997 include a 25%
increase over the same period in 1996 in net income, a 19% increase in fully
diluted earnings per unit, and a 15% increase in net revenues.
The increased revenues for the six months this year reflect the
continued growth of operations. Compared to the six month period a year ago,
NHC has increased the number of owned, leased, and managed long-term care beds
by 1,025 beds from 12,750 beds to 13,775 beds. The number of homecare
locations has increased from 31 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.
Revenues from management services, which are included in the Statements
of Income in Other Revenues, increased 4.4% for the six month period in 1997
compared to the same period in 1996 from $16.3 million to $17.0 million due to
the increased number of beds being managed for others 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 six month period increased $25.4
million or 14.8% to $197.8 million from $173.2 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $15.6
million or 15.3% to $117.6 million from $102.0 million. Other operating
expenses increased $8.4 million or 14.4% to $66.3 million for the 1997 second
quarter compared to $58.0 million in the 1996 period. Depreciation and
amortization increased 25.0% to $7.7 million. Interest costs decreased $0.1
million or 1.6% to $6.1 million from $6.2 million for last year.
15
<PAGE>
NATIONAL HEALTHCARE L.P.
June 30, 1997
(Unaudited)
Increases in salaries, wages and benefits are attributable to the
increase in staffing levels due to long-term care bed additions, assisted
living expenses, 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,
and the growth in management services provided to others.
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.
The total census at owned and leased centers for the six months averaged
93.2% compared to an average of 93.2% for the same six months a year ago.
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.
Liquidity and Capital Resources
During the first six months of 1997, the Company generated net cash of
$23.7 million from operating activities, $14.1 million from the collection of
long-term notes receivable, $23.2 million debt proceeds, $0.5 million from the
issuance of partnership units, and $5.0 million from the collection of
receivables. Of these funds, $21.4 million was used for additions to and
acquisitions of property and equipment; $18.0 million for investment in
long-term notes receivable and loan participation agreements; $4.6 million for
payments on debt; and $10.4 million for cash distributions to partners. Cash
and cash equivalents increased $10.3 million during the quarter.
16
<PAGE>
NATIONAL HEALTHCARE L.P.
June 30, 1997
(Unaudited)
At June 30, 1997, the Company's ratio of long-term obligations to
convertible debt and capital is 1.0 to 1. NHC's convertible debt converts
into units of limited partnership interest at $15.21 per unit - the units
closed at $44.625 per unit on the American Stock Exchange the last trading day
of this quarter.
The ratio of current assets to current liabilities is 1.2 to 1. Working
capital is $24.0 million. The Company is currently considering long-term and
short term financing options. These financial resources with anticipated
funds from future operations are expected to be adequate to enable the
Partnership to meet its working capital requirements and expansion goals.
Development
During the first six months of 1997, the Company added a net total of
893 licensed long-term care beds, of which 336 are owned or leased and 577 of
which are managed for other parties. Additionally, 252 assisted living units
in three newly constructed projects were opened.
Currently, NHC has 871 beds under development at 12 owned or leased
centers and six 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.
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.
17
<PAGE>
NATIONAL HEALTHCARE L.P.
June 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. 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 deferred compensation. NHC has denied all allegations and
conclusions. The suit is still in the preliminary stages and no
trial date has been scheduled.
In January, 1997, NHC was notified that FCC currently does
not intend to renew an additional four contracts which mature in
1997, but FCC 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 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 govern-
ment participating as an intervening plaintiff. 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 additional
revised cost reports and excpetion requests. It is
anticipated that any 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.
18
<PAGE>
NATIONAL HEALTH CARE L.P.
June 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
19
<PAGE>
NATIONAL HEALTHCARE L.P.
June 30, 1997
(Unaudited)
Item 4. Submission of Matters to Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule
(for SEC purposes only)
(b) Reports on Form 8-K - none required
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 August 14, 1997 S/Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date August 14, 1997 S/Donald K. Daniel
Donald K. Daniel
Vice President and Controller
Principal Accounting Officer
20
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