Note 2 - Relationship with National Health Corporation

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

Note

2

– Relationship

with National Health Corporation

National Health Corporation ("National"), which is wholly–owned by the National Health Corporation Leveraged Employee Stock Ownership Plan ("ESOP"), was formed in

1986

and is our administrative services affiliate and contractor. As discussed below, all of the personnel conducting our business, including our executive management team, are employees of National and

may

have ownership interests in National only through their participation as employees in the ESOP.

Management Contracts

We currently manage

five

skilled nursing facilities for National under a management contract. The management contract has been extended until

January

1,

2018.

See Note

3

for additional information regarding management services fees recognized from National.

Financing Activities

During

1991,

we borrowed

$10,000,000

from National. The term note payable currently requires quarterly interest payments at the prime rate minus

0.85

percent. The entire principal is due at maturity in

2018.

In conjunction with our management contract, we have entered into a line of credit arrangement whereby we

may

have amounts due from National from time to time. The maximum loan commitment under the line of credit is

$2,000,000.

At

December

31,

2016,

National did

not

have an outstanding balance on the line of credit.

The maximum line of credit commitment amount of

$2,000,000

is also the amount of a deferred gain that has been outstanding since NHC sold certain assets to National in

1988.

The amount of the deferred gain is expected to remain deferred until the management contract with National expires, currently scheduled in

January

2018.

The deferred gain is included in deferred revenue in the consolidated balance sheets.

Payroll and Related Services

The personnel conducting our business, including our executive management team, are employees of National and

may

have ownership interests in National only through their participation in the ESOP. National provides payroll services to NHC, provides employee fringe benefits, and maintains certain liability insurance. We pay to National all the costs of personnel employed for our benefit, as well as an administrative fee equal to

1%

of payroll costs. The administrative fee paid to National for the years ended

December

31,

2016,

2015,

and

2014

was

$4,701,000,

$4,542,000,

and

$4,395,000,

respectively. At

December

31,

2016,

the Company has recorded

$1,775,000

in accounts receivable and

$3,312,000

in accounts payable in the consolidated balance sheets as a result of the timing differences between interim payments for payroll and employee benefits services costs.

National

’

s Ownership of Our Stock

At

December

31,

2016,

National owns

1,084,763

shares (or approximately

7.2%)

of our outstanding common stock.

Consolidation Considerations

Because of the contractual and management relationships between NHC and National as described in this note above, we have considered whether National should be consolidated by NHC under the guidance provided in ASC Topic

810,

Consolidation

. We do not consolidate National because

(1)

NHC does not have any obligation or rights (current or future) to absorb losses or to receive benefits from National. The ESOP participants bear the current and future financial gain or burden of National,

(2)

National’s equity at risk is sufficient to finance its activities without past or future subordinated support from NHC or other parties, and

(3)

the equity holders of National (that is collectively the ESOP, its trustees, and the ESOP participants) possess the characteristics of a controlling financial interest, including voting rights that are proportional to their economic interests. Supporting the assertions above is the following:

(1)

substantive independent trustees are appointed for the benefit of the ESOP participants when decisions must be made that

may

create the appearance of a conflict of interest between NHC and the ESOP, and

(2)

National was designed, formed and is operated for the purpose of creating variability and passing that variability along to the ESOP participants—that is, to provide retirement benefits and value to the employees of NHC and NHC’s affiliates. The contractual and management relationships between NHC and National are with the skilled nursing facilities that are substantially less than

50%

of the fair value of the total assets of National. NHC does not have a variable interest in National as a whole.