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, 1995 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 7,827,051 units were outstanding as of October 31, 1995. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. NATIONAL HEALTHCARE L.P. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 1995 1994 1995 1994 (in thousands) (in thousands) REVENUES: Net patient revenues $ 80,637 $ 69,051 $229,448 $ 195,535 Other revenues 9,905 6,513 30,133 19,755 Net revenues 90,542 75,564 259,581 215,290 COSTS AND EXPENSES: Salaries, wages and benefits 49,832 40,465 141,250 117,157 Other operating 27,545 24,432 80,791 68,447 Depreciation and amortization 3,708 3,549 11,021 10,262 Interest 3,853 3,054 12,157 8,687 Total costs and expense 84,938 71,500 245,219 204,553 NET INCOME $ 5,604 $ 4,064 $ 14,362 $ 10,737 EARNINGS PER UNIT: Primary $ .71 $ .52 $ 1.83 $ 1.37 Fully diluted $ .62 $ .46 $ 1.60 $ 1.23 WEIGHTED AVERAGE UNITS OUTSTANDING: Primary 7,907,042 7,822,962 7,862,842 7,834,197 Fully diluted 9,879,908 9,813,174 9,879,294 9,813,110 CASH DISTRIBUTIONS PAID PER UNIT: Regular $ .52 $ .31 $ 1.36 $ .86 Special $ .00 $ .00 $ .00 $ 1.10 NET INCOME ALLOCABLE TO PARTNERS: General Partners $ 56 $ 41 $ 144 $ 107 Limited Partners 5,548 4,023 14,218 10,630 $ 5,604 $ 4,064 $ 14,362 $ 10,737 The accompanying notes to interim condensed consolidated financial statements are an integral part of these statements. 2 NATIONAL HEALTHCARE L.P. CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS Sept. 30 December 31 1995 1994 (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 24,122 $ 1,442 Cash held by trustees 2,326 1,604 Marketable securities 1,504 4,010 Accounts receivable, less allowance for doubtful accounts of $4,626 and $3,367 42,650 42,953 Notes receivable 32,042 4,922 Note receivable from NHI -- 22,847 Loan participation agreements -- 9,784 Inventory at lower of cost (first-in, first-out method) or market 3,001 2,952 Amounts receivable from third-party payors - 5,419 Prepaid expenses and other assets 1,327 1,573 Total current assets 106,972 97,506 PROPERTY AND EQUIPMENT AND ASSETS UNDER ARRANGEMENT WITH OTHER PARTIES: Property and equipment at cost 147,426 136,757 Less accumulated depreciation and amortization (36,729) (31,094) Assets under arrangement with other parties. 77,276 81,746 Net property, equipment and assets under arrangement with other parties 187,973 187,409 OTHER ASSETS: Bond reserve funds, mortgage replacement reserves and other deposits 1,771 1,720 Unamortized financing costs 2,934 2,811 Notes receivable 80,854 87,180 Notes receivable from National 12,298 12,296 Minority equity investments and other 6,898 7,211 Total other assets 104,755 111,218 $ 399,700 $396,133 The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 3 NATIONAL HEALTHCARE L.P. CONSOLIDATED BALANCE SHEETS (in thousands) LIABILITIES AND CAPITAL Sept. 30 December 31 1995 1994 (Unaudited) CURRENT LIABILITIES: Current portion of long-term debt $ 9,616 $ 6,330 Trade accounts payable 4,982 17,052 Accrued payroll 22,542 18,644 Amounts due to third-party payors 4,348 4,396 Accrued interest 1,624 2,223 Other current liabilities 11,984 6,393 Total current liabilities 55,096 55,038 LONG-TERM DEBT, less current portion 106,272 104,243 DEBT SERVICED BY OTHER PARTIES, LESS CURRENT PORTION 86,375 89,764 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 809 802 COMMITMENTS, CONTINGENCIES AND GUARANTEES SUBORDINATED CONVERTIBLE NOTES 30,000 30,000 DEFERRED INCOME 15,769 15,280 PARTNERS' CAPITAL: General partners 1,133 1,095 Limited partners 104,246 99,911 Total partners' capital 105,379 101,006 $399,700 $396,133 The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 4 NATIONAL HEALTHCARE L.P. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30 1995 1994 (in thousands) CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income $14,362 $ 10,737 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 10,668 9,947 Provision for doubtful accounts 2,036 1,655 Amortization of intangibles and deferred charges 671 634 Amortization of deferred income (391) (271) Equity in earnings of unconsolidated investments (211) (222) Distributions from unconsolidated investments 221 180 Changes in assets and liabilities: Increase in accounts receivable (1,733) (6,682) (Increase) Decrease in inventory (49) 62 (Increase) Decrease in prepaid expenses and other assets 246 (804) Decrease in trade accounts payable (12,070) (684) Increase in accrued payroll 3,898 3,289 Increase (Decrease) in amounts due to third-party payors 5,371 (1,533) Increase (Decrease) in accrued interest payable (599) 765 Increase in other current liabilities 5,591 2,046 28,011 19,119 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Additions to and acquisitions of property and equipment, net (11,213) (20,018) Investment in long-term notes receivable (24,585) (18,966) Collection of long-term notes receivable 36,420 47,492 (Increase) Decrease in minority equity investments and other 831 (4,757) (Increase) Decrease in debt and equity securities 2,360 (8,279) 3,813 (4,528) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from debt issuance 4,609 3,535 Increase in cash held by trustee (722) (124) Increase in minority interest in subsidiaries 7 19 Issuance of partnership units 1 0 Increase in bond reserve funds, mortgage replacement reserves and other deposits (51) (40) Collection of receivables 788 422 Payments on debt (2,771) (2,788) Cash distributions to partners (10,632) (15,222) Increase in financing costs (373) 0 (9,144) (14,198) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,680 393 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,442 145 CASH AND CASH EQUIVALENTS, END OF PERIOD $24,122 $ 538 Supplemental Information: Cash payments for interest expense $12,755 $ 7,922 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 5 NATIONAL HEALTHCARE L.P. CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (dollars in thousands) Receivables Unrealized Total Number of From Sale of Gains(Losses) General Limited Partners' Units Units on Securities Partners Partners Capital BALANCE AT 12/31/94 7,826,165 $(14,697) $ 480 $1,095 $114,128 $101,006 Net income -- -- -- 144 14,218 14,362 Collection of receivables -- 788 -- -- 788 Units issued 886 -- -- -- 1 1 Unrealized losses on securities -- -- (146) -- -- (146) Cash distributions ($1.36 per unit) -- -- -- (106) (10,526) (10,632) BALANCE AT 9/30/95 7,827,051 $(13,909) $ 334 $1,133 $117,821 $105,379 BALANCE AT 12/31/93 7,796,433 $(15,134) $ -- $1,027 $106,633 $ 92,526 Net income -- -- -- 107 10,630 10,737 Collection of receivables -- 422 -- -- -- 422 Other 150 -- -- 1 3 4 Unrealized losses on securities -- -- 564 -- -- 564 Cash distributions ($.55 per unit) -- -- -- (66) (6,580) (6,646) BALANCE AT 9/30/94 7,796,583 $(14,712) $ 564 $1,069 $110,686 $ 97,607 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 6 NATIONAL HEALTHCARE L.P. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) Note 1 - CONSOLIDATED FINANCIAL STATEMENTS: The financial statements for the nine months ended September 30, 1995 and 1994, 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, 1995 are not necessarily indicative of the results that may be expected for the entire fiscal year ended December 31, 1995. The interim condensed balance sheet at December 31, 1994 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, 1994, December 31, 1993, and December 31, 1992. Certain reclassifications have been made to the December 31, 1994 financial statements to conform to the September 30, 1995 presentation. Note 2 - OTHER REVENUES: Three Months Ended Nine Months Ended September 30 September 30 1995 1994 1995 1994 (in thousands) (in thousands) Revenue from managed centers $ 5,983 $ 4,494 $18,020 $12,579 Guarantee fees 183 218 630 710 Advisory fee from NHI 797 458 2,391 1,370 Earnings on securities 28 (208) 422 191 Equity in earnings of unconsolidated investments 55 95 206 212 Interest income 1,383 1,152 4,697 3,791 Other 1,476 304 3,767 902 $ 9,905 $ 6,513 $30,133 $19,755 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. Note 3 - INVESTMENT IN MARKETABLE SECURITIES: Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities" was issued by the Financial Accounting Standards Board effective for fiscal years beginning after December 15, 1993. As required by SFAS 115, securities are classified as trading, held-to-maturity or available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term. Securities are classified as held-to-maturity when the Company has both the positive intent and ability to hold them to maturity. All other securities are classified as available for sale. 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. 7 Partners' capital for the period ended September 30, 1995 was decreased by approximately $146,000 to reflect the net unrealized investment loss on marketable securities without stated maturities classified as available for sale. Proceeds from the sale of investments in debt and equity securities for the period ended September 30, 1995 were $2,696,000, resulting in gross investment gains of $336,000 realized on these sales. Realized gains and losses from securities sales are determined on the specific identification of the securities. The adoption of SFAS 115 did not have a material effect on NHC's financial position or results of operations. 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 $79,867,000 (net of available debt service reserves) at variable and fixed interest rates with a weighted average of 5.1% at September 30, 1995. In addition, NHC has guaranteed a letter of credit in the amount of approximately $8,200,000 for which an annual fee of 2% is charged. 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 96 long-term health care centers with 12,493 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. (Prior to January 1, 1995, the name of NHC was National HealthCorp L.P.) Results of Operations Three Months Ended September 30, 1995 Compared to Three Months Ended September 30, 1994. Results for the three month period ended September 30, 1995 include a 38% increase over the same period in 1994 in net income, a 35% increase in fully diluted earnings per unit, and a 20% 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 from 6,290 beds to 6,406 beds. The number of long-term care beds managed for others has increased from 6,013 beds to 6,087 beds. Also contributing to increased revenues are improvements in both private pay and third party payor rates. 8 Revenues also improved during 1995 due to increased emphasis on rehabilitative and managed care services. To boost the ability to offer physical, speech and occupational therapy to greater numbers of patients, the Company is continuing to increase the size of its staff of professionally licensed therapists. The Company has also signed managed care contracts with private insurance companies to provide subacute care to their insurees, offering a less expensive alternative to acute care and rehabilitative hospitals. NHC also now has a network of case managers to assure appropriate placement and payment for subacute patients in the NHC system. Revenues from management services, which are included in the Statements of Income in Other Revenues, increased 29% in 1995 from $4.5 million to $5.8 million due to the increased number of beds being managed for others, increased management fees, and increased interest income from higher principal amounts and interest rates on floating rate and fixed rate loans to managed centers. 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 1995 quarter increased $13.4 million or 19% to $84.9 million from $71.5 million. Salaries, wages and benefits, the largest operating costs of this service company, increased $9.3 million or 23% to $49.8 million from $40.5 million. Other operating expenses increased $3.1 million or 13% to $27.5 million for the 1995 third quarter compared to $24.4 million in the 1994 period. Depreciation and amortization increased 4% to $3.7 million. Interest costs increased $0.8 million or 26% to $3.9 million from $3.1 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, 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 as well as adjustments in benefit programs for the quarter. Operating costs have increased due to the increased number of beds in operation, the expansion of homecare services, the expansion of rehabilitative and managed care services, and due to 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 and due to increased interest rates of floating rate debt. Approximately 40% of the Company's long-term debt is at floating rates. The total census at owned and leased centers for the quarter averaged 92.9% compared to an average of 92.3% for the same quarter a year ago. Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30, 1994. Results for the nine month period ended September 30, 1995 include a 34% increase over the same period in 1994 in net income, a 30% increase in fully diluted earnings per unit, and a 21% increase in net revenues. 9 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 190 beds from 12,303 beds to 12,493 beds. Also contributing to increased revenues are improvements in both private pay and third party payor rates. Revenues also improved during 1995 due to increased emphasis on rehabilitative and managed care services. To boost the ability to offer physical, speech and occupational therapy to greater numbers of patients, the Company is continuing to increase the size of its staff of professionally licensed therapists. The Company has also signed managed care contracts with private insurance companies to provide subacute care to their insurees, offering a less expensive alternative to acute care and rehabilitative hospitals. NHC also now has a network of case managers to assure appropriate placement and payment for subacute patients in the NHC system. Revenues from management services, which are included in the Statements of Income in Other Revenues, increased 41% in 1995 from $12.6 million to $17.7 million due to the increased number of beds being managed for others, increased management fees, and increased interest income from higher principal amounts and interest rates on floating rate and fixed rate loans to managed centers. 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 1995 nine month period increased $40.7 million or 20% to $245.2 million from $204.6 million. Salaries, wages and benefits, the largest operating costs of this service company, increased $24.1 million or 21% to $141.3 million from $117.2 million. Other operating expenses increased $12.3 million or 18% to $80.8 million for the 1995 second quarter compared to $68.4 million in the 1994 period. Depreciation and amortization increased 7% to $11.0 million. Interest costs increased $3.5 million or 40% to $12.2 million from $8.7 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, 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 expansion of homecare services, the expansion of rehabilitative and managed care services, and due to 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 and due to increased interest rates of floating rate debt. Approximately 40% of the Company's long-term debt is at floating rates. The total census at owned and leased centers for the nine months averaged 92.9% compared to an average of 91.1% for the same nine months a year ago. 10 Liquidity and Capital Resources During the first nine months of 1995, the Company generated net cash of $28.0 million from operating activities, $36.4 million from the collection of long-term notes receivable, $2.4 million from the decrease in debt or equity securities, $0.8 million from the decrease in minority equity investments and $4.6 million in debt proceeds. Of these funds, $11.2 million was used for additions to and acquisitions of property and equipment, $24.6 million for investments in long-term notes receivable, $2.7 million for payments on debt, and $10.6million for cash distributions to partners. Cash and cash equivalents increased $22.7 million during the quarter. At September 30, 1995, the Company's ratio of long-term obligations to convertible debt and capital is 1.4 to 1. The ratio of current assets to current liabilities is 1.9 to 1. Working capital is $51.9 million. 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 nine months of 1995, the Company added a net total of 185 licensed long-term care beds, of which 111 beds are owned or leased at two centers and 74 beds are managed at three centers. Currently, NHC has 1,196 beds under development at 22 owned, leased or 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. Legislative Outlook Federal budget and reform plans are being considered by both the House and Senate that would, if adopted, reduce payments to skilled nursing facilities for services provided to patients under the Medicare and Medicaid programs. Proposals being considered include the reduction of payments for capital costs, the extension of the current freeze on increases in routine cost limits, and the application of new limits for non-routine therapy services. It is management's belief, however, that the provision of quality health care services in the lowest cost environment will be rewarded by consumers and the government. 11 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 compensation 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. Item 2. Changes in Securities. Not applicable Item 3. Defaults Upon Senior Securities. None 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 November 9, 1995 S/Richard F. LaRoche, Jr. Richard F. LaRoche, Jr. Secretary Date November 9, 1995 S/Donald K. Daniel Donald K. Daniel Vice President and Controller Principal Accounting Officer 12