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, 1996 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 8,423,996 units were outstanding as of July 31, 1996. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. NATIONAL HEALTHCARE L.P. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 (in thousands) (in thousands) REVENUES: Net patient revenues $ 81,078 $ 75,489 $161,685 $ 148,811 Other revenues 10,921 9,794 22,946 20,228 Net revenues 91,999 85,283 184,631 169,039 COSTS AND EXPENSES: Salaries, wages and benefits 50,137 46,652 102,006 91,418 Other operating 30,023 26,413 58,814 53,246 Depreciation and amortization 3,135 3,679 6,170 7,313 Interest 2,697 3,953 6,169 8,304 Total costs and expenses 85,992 80,697 173,159 160,281 NET INCOME $ 6,007 $ 4,586 $ 11,472 $ 8,758 EARNINGS PER UNIT: Primary $ .70 $ .58 $ 1.34 $ 1.12 Fully diluted $ .62 $ .51 $ 1.18 $ .98 WEIGHTED AVERAGE UNITS OUTSTANDING: Primary 8,586,893 7,853,833 8,578,654 7,836,131 Fully diluted 10,518,688 9,852,988 10,527,339 9,853,724 CASH DISTRIBUTIONS PAID PER UNIT $ .52 $ .42 $ 1.04 $ .84 NET INCOME ALLOCABLE TO PARTNERS: General Partners $ 60 $ 46 $ 115 $ 88 Limited Partners 5,947 4,540 11,357 8,670 $ 6,007 $ 4,586 $ 11,472 $ 8,758 The accompanying notes to interim condensed consolidated financial statements are an integral part of these statements. NATIONAL HEALTHCARE L.P. CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS June 30 December 31 1996 1995 (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,671 $ 4,835 Cash held by trustees 3,079 1,721 Marketable securities 16,718 1,514 Accounts receivable, less allowance for doubtful accounts of $4,889 and $4,079 44,783 47,285 Notes receivable 2,699 2,538 Loan participation agreements 5,167 27,579 Inventory at lower of cost (first-in, first-out method) or market 3,579 3,075 Prepaid expenses and other assets 977 893 Total current assets 78,673 89,440 PROPERTY AND EQUIPMENT AND ASSETS UNDER ARRANGEMENT WITH OTHER PARTIES: Property and equipment at cost 176,776 165,265 Less accumulated depreciation and amortization (42,809) (38,265) Assets under arrangement with other parties 24,921 29,921 Net property, equipment and assets under arrangement with other parties 158,888 156,921 OTHER ASSETS: Bond reserve funds, mortgage replacement reserves and other deposits 708 1,789 Unamortized financing costs 1,796 1,937 Notes receivable 99,256 86,178 Notes receivable from National 11,922 12,271 Minority equity investments and other 9,863 6,955 Total other assets 123,545 109,130 $ 361,106 $355,491 The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. NATIONAL HEALTHCARE L.P. CONSOLIDATED BALANCE SHEETS (in thousands) LIABILITIES AND CAPITAL June 30 December 31 1996 1995 (Unaudited) CURRENT LIABILITIES: Current portion of long-term debt $ 8,652 $ 8,558 Trade accounts payable 9,497 6,142 Accrued payroll 20,123 23,876 Amount due to third-party payors 3,670 9,800 Accrued interest 1,071 1,822 Other current liabilities 9,021 8,849 Total current liabilities 52,034 59,047 LONG-TERM DEBT, less current portion 111,291 100,871 DEBT SERVICED BY OTHER PARTIES, LESS CURRENT PORTION 36,260 40,771 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 809 812 COMMITMENTS, CONTINGENCIES AND GUARANTEES SUBORDINATED CONVERTIBLE NOTES 29,314 30,000 DEFERRED INCOME 15,325 15,091 PARTNERS' CAPITAL: General partners 1,318 1,290 Limited partners 114,755 107,609 Total partners' capital 116,073 108,899 $361,106 $355,491 The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. NATIONAL HEALTHCARE L.P. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 1996 1995 (in thousands) CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $11,472 $ 8,758 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 5,785 7,075 Provision for doubtful accounts 1,140 1,320 Amortization of intangibles and deferred charges 638 435 Amortization of deferred income (130) (255) Equity in earnings of unconsolidated investments (107) (154) Distributions from unconsolidated investments 180 205 Changes in assets and liabilities: (Increase) Decrease in accounts receivable 1,362 (2,948) Increase in inventory (504) (149) (Increase) Decrease in prepaid expenses and other assets (84) 808 Increase (Decrease) in trade accounts payable 3,355 (13,087) Decrease in accrued payroll (3,753) (1,619) Increase (Decrease) in amounts due to third party payors (6,130) 1,188 Decrease in accrued interest payable (746) (502) Increase in other current liabilities 172 4,029 12,650 5,104 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Additions to and acquisitions of property and equipment, net (11,592) (10,772) Investment in long-term notes receivable and loan participation agreements (15,132) (22,331) Collection of long-term notes receivable and loan participation agreements 24,654 34,651 (Increase) Decrease in minority equity investments and other (2,850) 1,405 (Increase) Decrease in debt and equity securities (15,395) 2,361 (20,315) 5,314 CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from debt issuance 13,311 5,699 Decrease (Increase) in cash held by trustee (1,358) 75 Increase (Decrease) in minority interest in subsidiaries (3) 11 Increase (Decrease) in bond reserve funds, mortgage replacement reserves and other deposits 1,081 (33) Issuance of partnership units 571 -- Collection of receivables 3,340 753 Payments on debt (3,639) (1,888) Cash distributions to partners (8,708) (6,562) Increase in financing costs (94) (355) 4,501 (2,300) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,164) 8,118 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,835 1,442 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,671 $ 9,560 Supplemental Information: Cash payments for interest expense $ 6,920 $ 8,805 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. NATIONAL HEALTHCARE L.P. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 1996 1995 (in thousands) 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) $ -- Assets under arrangement with other parties 3,841 -- During the six months ended June 30, 1996, $686,000 of convertible subordinated debentures were converted into 45,112 units of NHC's partnership units: Convertible subordinated debentures (686) -- Financing costs 1 -- Accrued interest (5) -- Partner's capital 690 -- NATIONAL HEALTHCARE L.P. CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (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 12/31/95 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 BALANCE AT 12/31/94 7,826,165 $(14,697) $ 480 $1,095 $114,128 $101,006 Net income -- -- -- 88 8,670 8,758 Collection of receivables -- 753 -- -- -- 753 Units sold 736 -- -- -- -- -- Unrealized losses on securities -- -- (167) -- -- (167) Cash distributions ($.84 per unit) -- -- -- (65) (6,497) (6,562) BALANCE AT 6/30/95 7,826,901 $(13,944) $ 313 $1,118 $116,301 $103,788 The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. Note 1 - CONSOLIDATED FINANCIAL STATEMENTS: The financial statements for the six months ended June 30, 1996 and 1995, 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, 1996 are not necessarily indicative of the results that may be expected for the entire fiscal year ended December 31, 1996. The interim condensed balance sheet at December 31, 1995 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, 1995, December 31, 1994, and December 31, 1993. Note 2 - OTHER REVENUES: Three Months Ended Six Months Ended June 30 June 30 1996 1995 1996 1995 (in thousands) (in thousands) Revenue from managed centers $ 7,943 $ 6,257 $16,284 $12,890 Guarantee fees 185 212 365 447 Advisory fee from NHI 797 797 1,594 1,594 Earnings on securities 64 28 125 394 Equity in earnings of unconsolidated investments (59) 61 101 151 Interest income 1,133 1,889 2,722 3,414 Other 858 550 1,755 1,338 $10,921 $ 9,794 $22,946 $20,228 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. Partners' capital for the periods ended June 30, 1996 and 1995 was decreased by approximately $191,000 and $167,000, respectively, 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 June 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 $76,605,000 (net of available debt service reserves) at variable and fixed interest rates with a weighted average of 4.4% at June 30, 1996. 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 99 long-term health care centers with 12,750 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, 1996 Compared to Three Months Ended June 30, 1995. Results for the three month period ended June 30, 1996 include a 31% increase over the same period in 1995 in net income, a 22% increase in fully diluted earnings per unit, and an 8% 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 6,406 beds to 6,469 beds. The number of long-term care beds managed for others has increased from 6,044 beds to 6,281 beds. The number of homecare locations has increased from 28 locations to 31 locations. Also contributing to increased revenues are improvements in both private pay and third party payor rates. Revenues also improved during 1996 due to increased emphasis on managed care services. The Company has 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 26.9% in 1996 from $6.3 million to $7.9 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 1996 second quarter increased $5.3 million or 6.6% to $86.0 million from $80.7 million. Salaries, wages and benefits, the largest operating costs of this service company, increased $3.5 million or 7.5% to $50.1 million from $46.7 million. Other operating expenses increased $3.6 million or 13.7% to $30.0 million for the 1996 second quarter compared to $26.4 million in the 1995 period. Depreciation and amortization decreased 14.8% to $3.1 million. Interest costs decreased $1.3 million or 31.8% to $2.7 million from $4.0 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, the growth in management services provided to others, and due to the increase in rent expense as explained below. Depreciation expense and interest expense both decreased compared to the quarter a year ago due primarily to capital transactions which occurred in late 1995. During December 1995, National Health Investors ("NHI") prepaid debt on which NHC had also been obligated in the amount of $20,544,000. In addition, NHC was released from its obligation on approximately $25,324,000 of debt which had been transferred to NHI in 1991. Since NHC is no longer obligated on transferred debt in the amount of $45,868,000, debt serviced by other parties and assets under arrangement with other parties were both reduced by $45,868,000. The leases with NHI provide that NHC shall continue to make non-obligated debt service rent payments equal to the debt service including principal and interest on the obligated debt which was prepaid and from which NHC has been released as a direct obligor. As a result, other operating expenses are increased by the amount of the rent payments, depreciation is decreased by the amount of depreciation formerly charged on assets under arrangement with other parties and interest expense is decreased by the amount of interest expense formerly associated with the debt serviced by other parties. The total census at owned and leased centers for the quarter averaged 92.9% compared to an average of 93.0% for the same quarter a year ago. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995. Results for the six month period ended June 30, 1996 include a 31% increase over the same period in 1995 in net income, a 20% increase in fully diluted earnings per unit, and a 9% 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 300 beds from 12,450 beds to 12,750 beds. The number of homecare locations has increased from 28 locations to 31 locations and includes for the first time the offering of services in the state of South Carolina. Also contributing to increased revenues are improvements in both private pay and third party payor rates. Revenues also improved during 1996 due to increased emphasis on rehabilitative and managed care services. The Company has 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 26.3% for the six month period in 1996 compared to the same period in 1995 from $12.9 million to $16.3 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 1996 six month period increased $12.9 million or 8.0% to $173.2 million from $160.3 million. Salaries, wages and benefits, the largest operating costs of this service company, increased $10.6 million or 11.6% to $102.0 million from $91.4 million. Other operating expenses increased $5.6 million or 10.5% to $58.8 million for the 1996 second quarter compared to $53.2 million in the 1995 period. Depreciation and amortization decreased 15.6% to $6.2 million. Interest costs decreased $2.1 million or 25.7% to $6.2 million from $8.3 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, 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 two 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 the increase in rent expense as explained below. Depreciation expense and interest expense both decreased compared to the six months a year ago due primarily to capital transactions which occurred in 1995. During December 1995, National Health Investors, ("NHI") prepaid debt on which NHC had also been obligated in the amount of $20,544,000. In addition, NHC was released from its obligation on approximately $25,324,000 of debt which had been transferred to NHI in 1991. Since NHC is no longer obligated on transferred debt in the amount of $45,868,000, debt serviced by other parties and assets under arrangement with other parties was reduced by $45,868,000. The leases with NHI provide that NHC shall continue to make non-obligated debt service rent payments equal to the debt service including principal and interest on the obligated debt which was prepaid and from which NHC has been released as a direct obligor. As a result, other operating expenses are increased by the amount of the rent payments, depreciation is decreased by the amount of depreciation formerly charged on assets under arrangement with other parties and interest expense is decreased by the amount of interest expense formerly associated with the debt serviced by other parties. The total census at owned and leased centers for the six months averaged 93.2% compared to an average of 93.0% for the same six months a year ago. Liquidity and Capital Resources During the first six months of 1996, the Company generated net cash of $12.7 million from operating activities, $24.7 million from the collection of long-term notes receivable, $13.3 million debt proceeds, $0.6 million from the issuance of partnership units, and $3.3 million from the collection of receivables. Of these funds, $11.6 million was used for additions to and acquisitions of property and equipment; $15.1 million for investment in long-term notes receivable and loan participation agreements; $3.6 million for payments on debt; and $8.7 million for cash distributions to partners. Cash and cash equivalents decreased $3.2 million during the quarter. At June 30, 1996, 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 $37.625 per unit on the American Stock Exchange the last trading day of this quarter. The ratio of current assets to current liabilities is 1.5 to 1. Working capital is $26.6 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 1996, the Company added a net total of 58 licensed long-term care beds, all of which are owned or leased. Additionally, 152 assisted living units in two newly constructed projects were opened, 68 units of which are owned by the Company and 84 units of which are owned by a joint venture in which the Company is a owner and for which the Company acts as manager. Currently, NHC has 1,136 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. 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 August 12, 1996 S/Richard F. LaRoche, Jr. Richard F. LaRoche, Jr. Secretary Date August 12, 1996 S/Donald K. Daniel Donald K. Daniel Vice President and Controller Principal Accounting Officer