NATIONAL HEALTHCARE CORP - Quarter Report: 2009 June (Form 10-Q)

UNITED STATES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

S QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____________

Commission file number 001–13489

(Exact name of registrant as specified in its Charter)

Delaware		52–2057472
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization		Identification No.)

100 E. Vine Street
Murfreesboro, TN 37130
(Address of principal executive offices)
(Zip Code)

(615) 890–2020
Registrant=s telephone number, including area code

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No. £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files). Yes £ No £ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated file,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer £	Accelerated filer S

Non-accelerated filer (Do not check if a smaller reporting company) £	Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as is defined in Rule 12b–2 of the Exchange
Act). Yes £ No S

13,663,372 shares of common stock of the registrant were outstanding as of August 5, 2009.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Income

(Unaudited)

(in thousands, except share and per share amounts)

				Three Months Ended June 30				Six Months Ended June 30
				2009		2008		2009		2008
				(in thousands, except share and per share amounts)
REVENUES:
	Net patient revenues		$	155,849	$	143,163	$	308,916	$	287,128
	Other revenues			16,187		17,399		31,789		33,575
		Net revenues		172,036		160,562		340,705		320,703

COSTS AND EXPENSES:
	Salaries, wages and benefits			91,875		86,312		182,601		173,853
	Other operating			47,421		44,639		95,389		89,953
	Rent			8,064		7,876		16,032		15,794
	Depreciation			6,287		6,024		12,530		12,021
	Interest			188		170		395		389
		Total costs and expenses		153,835		145,021		306,947		292,010

Income Before Income Taxes				18,201		15,541		33,758		28,693
Income Tax Provision				(6,834)		(6,055)		(13,207)		(11,035)
Net Income				11,367		9,486		20,551		17,658

Dividends to Preferred Shareholders				2,168		2,168		4,336		4,336

Net income available to common shareholders			$	9,199	$	7,318	$	16,215	$	13,322

Earnings Per Common Share:
	Basic		$	.67	$	.57	$	1.21	$	1.04
	Diluted		$	.67	$	.56	$	1.20	$	1.02

Weighted Average Common Shares Outstanding:
	Basic			13,658,141		12,779,582		13,444,679		12,773,639
	Diluted			13,675,285		13,125,402		13,466,047		13,121,810

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands)

				June 30 2009		December 31 2008
				(unaudited)
Assets
	Current Assets:
		Cash and cash equivalents		$	64,536	$	49,033
		Restricted cash			118,930		119,407
		Marketable securities			51,952		54,682
		Restricted marketable securities			1,513		1,537
		Investment in cash fund in liquidation			5,111		7,804
		Accounts receivable, less allowance for doubtful accounts of $5,364 and $5,017, respectively			71,316		70,728
		Notes receivable			189		189
		Inventories			6,685		7,142
		Prepaid expenses and other assets			2,263		1,246
		Deferred income taxes			2,810		984
			Total current assets		325,305		312,752

	Property and Equipment:
		Property and equipment, at cost			588,921		571,960
		Accumulated depreciation and amortization			(171,159)		(158,478)
			Net property and equipment		417,762		413,482

	Other Assets:
		Deposits			186		529
		Goodwill			5,978		3,033
		Notes receivable			20,172		20,389
		Notes receivable from National			1		2,918
		Deferred income taxes			12,419		13,672
		Investments in limited liability companies and other			11,449		10,521
			Total other assets		50,205		51,062
			Total assets	$	793,272	$	777,296

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

The interim condensed consolidated balance sheet at December 31, 2008 is taken from the audited consolidated financial statements at that date.

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

					June 30 2009		December 31 2008
					(unaudited)
Liabilities and Stockholders’ Equity

	Current Liabilities:
		Current portion of long-term debt		$	50,501	$	50,502
		Trade accounts payable			12,938		13,809
		Accrued payroll			37,481		48,480
		Amounts due to third party payors			17,168		15,594
		Accrued risk reserves			105,754		106,000
		Other current liabilities			12,744		12,139
		Dividends payable			5,721		5,291
		Accrued interest			75		104
			Total current liabilities		242,382		251,919

	Long-Term Debt, less Current Portion				10,000		10,000
	Other Noncurrent Liabilities				15,959		15,807
	Deferred Lease Credits				3,029		3,635
	Deferred Revenue				17,157		15,118

	Commitments, Contingencies and Guarantees

	Stockholders’ Equity:
		Series A Convertible Preferred Stock; $.01 par value; 25,000,000 shares authorized; 10,841,062 shares, issued and outstanding; stated at liquidation of $15.75 per share			170,555		170,555
		Common stock, $.01 par value; 30,000,000 shares authorized; 13,663,372 and 13,031,696 shares, respectively, issued and outstanding			136		130
		Capital in excess of par value			129,768		113,580
		Retained earnings			189,097		179,710
		Unrealized gains on marketable securities, net of taxes			15,189		16,842
			Total stockholders’ equity		504,745		480,817
			Total liabilities and stockholders’ equity	$	793,272	$	777,296

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(Unaudited)

						Six Months Ended June 30
						2009		2008
Cash Flows From Operating Activities:						(in thousands)
	Net income				$	20,551	$	17,658
	Adjustments to reconcile net income to net cash
		provided by operating activities:
		Depreciation				12,530		12,021
		Provision for doubtful accounts receivable				347		822
		Amortization of deferred income				-		(127)
		Equity in earnings of unconsolidated investments				(4,342)		(3,493)
		Deferred income taxes				(1,482)		(924)
		Stock-based compensation				1,087		1,460
		Changes in operating assets and liabilities:
			Restricted cash			477		(14,254)
			Accounts (and other) receivables			(935)		1,922
			Inventories			457		(183)
			Prepaid expenses and other assets			(1,017)		(266)
			Trade accounts payable			(871)		(718)
			Accrued payroll			(10,999)		(819)
			Amounts due to third party payors			1,574		588
			Accrued interest			(29)		572
			Other current liabilities and accrued risk reserves			359		11,440
			Entrance fee deposits			(400)		(139)
			Other noncurrent liabilities			152		383
			Deferred income			2,439		2,084
				Net cash provided by operating activities		19,898		28,027
Cash Flows From Investing Activities:
		Additions to and acquisitions of property and equipment				(19,961)		(14,612)
		Decrease in deposits reserved for land acquisition				-		941
		Investments in notes receivable				(278)		(2,746)
		Collections of notes receivable				3,412		4,450
		Changes in cash fund in liquidation				2,693		17,258
		Distributions from unconsolidated investments				3,462		2,677
				Net cash provided by (used in) investing activities		(10,672)		7,968
Cash Flows From Financing Activities:
		Proceeds from debt				-		7,500
		Payments on debt				(1)		(7,432)
		Tax benefit from exercise of stock options				3,582		314
		Dividends paid to preferred shareholders				(4,336)		(3,999)
		Dividends paid to common shareholders				(6,398)		(5,356)
		Issuance of common shares				13,534		492
		Decrease (increase) in deposits				343		(83)
		Other				(447)		(19)
				Net cash provided by (used in) financing activities		6,277		(8,583)
Net Increase in Cash and Cash Equivalents						15,503		27,412
Cash and Cash Equivalents, Beginning of Period						49,033		2,379
Cash and Cash Equivalents, End of Period					$	64,536	$	29,791

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Cash Flows

(continued)

				Six Months Ended June 30
				2009		2008
(in thousands)
Supplemental Information:

	Effective January 7, 2008, cash proceeds that were being held by a facilitator pending the completion of an IRC §1031 exchange were disbursed to acquire property and equipment
		Acquisitions of property and equipment	$	–	$	(11,420)
		Deposits reserved for land acquisition		–		11,420

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

NATIONAL HEALTHCARE CORPORATION

Interim Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share and per share amounts)

(unaudited)

		Preferred Stock			Common Stock				Capital in Excess of Par Value		Retained Earnings		Unrealized Gains (Losses) on Marketable Securities		Total Shareholders’ Equity
		Shares		Amount	Shares		Amount
Balance at December 31, 2007		10,841,062	$	170,555	12,757,907	$	127	$	103,221	$	164,003	$	17,802	$	455,708
	Net income	–		–	–		–		–		17,658		–		17,658
	Unrealized gains on securities (net of tax of $401)	–		–	–		–		–		–		603		603
	Total comprehensive income														18,261
	Stock-based compensation	–		–	–		–		1,460		–		–		1,460
	Tax benefit from exercise of stock options	–		–	–		–		314		–		–		314
	Shares sold - options exercised	–		–	24,998		–		492		–		–		492
	Dividends declared to preferred stockholders ($0.40 per share)	–		–	–		–		–		(4,336)		–		(4,336)
	Dividends declared to common stockholders ($0.45 per share)	–		–	–		–		–		(5,749)		–		(5,749)
Balance at June 30, 2008		10,841,062	$	170,555	12,782,905	$	127	$	105,487	$	171,576	$	18,405	$	466,150

Balance at December 31, 2008		10,841,062	$	170,555	13,031,696	$	130	$	113,580	$	179,710	$	16,842	$	480,817
	Net income	–		–	–		–		–		20,551		–		20,551
	Unrealized losses on securities (net of tax benefit of $1,101)	–		–	–		–		–		–		(1,653)		(1,653)
	Total comprehensive income														18,898
	Stock-based compensation	–		–	–		–		1,087		–		–		1,087
	Tax benefit from exercise of stock options	–		–	–		–		1,573		–		–		1,573
	Shares sold – options exercised	–		–	631,676		6		13,528		–		–		13,534
	Dividends declared to preferred stockholders ($0.40 per share)	–		–	–		–		–		(4,336)		–		(4,336)
	Dividends declared to common stockholders ($0.50 per share)	–		–	–		–		–		(6,828)		–		(6,828)
Balance at June 30, 2009		10,841,062	$	170,555	13,663,372	$	136	$	129,768	$	189,097	$	15,189	$	504,745

The accompanying notes to interim condensed consolidated financial statements are an integral part of these consolidated statements.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Note 1 – Consolidated Financial Statements

The unaudited financial statements to which these notes are attached include, in our opinion, all normal, recurring adjustments which are necessary to fairly present the financial position, results of operations and cash flows of National HealthCare Corporation (ANHC@ or the ACompany@). We assume that users of these interim financial statements have read or have access to the audited December 31, 2008 consolidated financial statements and Management=s Discussion and Analysis of Financial Condition and Results of Operations and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons. Our audited December 31, 2008 consolidated financial statements are available at our web site: www.nhccare.com.

Note 2 – Other Revenues

Other revenues are outlined in the table below. Revenues from insurance services include premiums for workers’ compensation and professional liability insurance policies that our wholly-owned limited purpose insurance subsidiaries have written for certain long-term health care centers to which we provide management or accounting services. Revenues from management and accounting services include management and accounting fees and revenues from other services provided to managed and other long-term health care centers. “Other” revenues include non-health care related earnings.

Other revenues include the following:

		Three Months Ended June 30				Six Months Ended June 30
		2009		2008		2009		2008
		(in thousands)
Insurance services	$	4,337	$	4,184	$	8,612	$	8,232
Management and accounting services fees		3,837		5,306		7,633		9,376
Dividends and other realized gains on securities		1,062		1,062		2,123		2,250
Equity in earnings of unconsolidated investments		2,340		1,954		4,342		3,493
Interest income		1,040		1,403		2,023		2,641
Rental income		3,207		3,061		6,303		6,730
Other		364		429		753		853
	$	16,187	$	17,399	$	31,789	$	33,575

Certain of our affiliates manage five long-term care centers owned by National Health Corporation (“National”). During the six months ended June 30, 2009 and 2008, National paid and we recognized no management fees or interest on management fees.

The unpaid fees from the five centers owned by National, because the amount collectable could not be reasonably determined when the management services were provided, and because we cannot estimate the timing or amount of expected future collections, will be recognized as revenues only when fixed or determinable and collectibility of these fees can be reasonably assured. Under the terms of our management agreement with National, the payment of these fees to us may be subordinated to other expenditures of the five long-term care centers. We continue to manage these centers so that we may be able to collect our fees in the future and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit. We may receive payment for the unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the five centers are sufficient to pay the fees. There can be no assurance that such future improved cash flows will occur.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Certain of our affiliates manage 15 long-term care centers that were previously owned by National Health Investors, Inc. (“NHI”). During the six months ended June 30, 2009 and 2008, we recognized $1,488,040 and $1,506,000, respectively, of management fees and interest from these 15 long-term care centers.

Of the total 15 centers managed, the management fee revenues from seven centers were currently paid and recognized on the accrual method in 2009 and 2008. The fees from the remaining eight centers, because of insufficient historical collections and the lack of expected future collections, are recognized only when realized. Under the terms of the management agreements, the payment of these fees to us may be subordinated to other expenditures of each of the long-term care providers. Our affiliates continue to manage these centers so that we may be able to collect our fees in the future and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit. We may receive payment for the unrecognized management fees in whole or in part in the future only if cash flows from operating and investing activities of the centers are sufficient to pay the fees. There can be no assurance that such future improved cash flows will occur.

Note 3 – Accounting for Uncertainty in Income Taxes

We believe that our liabilities reflect the anticipated outcome of known uncertain tax positions in conformity with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). Our liabilities for unrecognized tax benefits are presented in the consolidated balance sheet within Other Noncurrent Liabilities.

NHC continually evaluates for uncertain tax positions. Uncertain tax positions may arise where tax laws may allow for alternative interpretations or where the timing of recognition of income is subject to judgment. We believe we have made adequate provision for unrecognized tax benefits related to uncertain tax positions. However, because of uncertainty of interpretation by various tax authorities and the possibility that there are issues that have not been recognized by management, we cannot guarantee we have accurately estimated our tax liabilities.

At June 30, 2009, we had $11,427,000 of unrecognized tax benefits, composed of $7,694,000 of deferred tax assets, $-0- of deferred tax liabilities, and $3,733,000 of permanent differences. Accrued interest and penalties of $4,532,000 relate to unrecognized tax benefits at June 30, 2009. Unrecognized tax benefits of $3,733,000 at June 30, 2009, attributable to permanent differences, would favorably impact our effective tax rate if recognized. Accrued interest and penalties of $1,609,000 relate to these permanent differences at June 30, 2009. We do not expect to recognize significant increases or decreases in unrecognized tax benefits within twelve months of June 30, 2009, except for the effect of decreases related to statute of limitations lapse estimated at $1,045,000, composed of temporary differences of $-0-, and permanent tax differences of $1,045,000. Interest and penalties of $561,000 relate to these permanent difference changes within 12 months of June 30, 2009.

Interest and penalties expense related to U.S. federal and state income tax returns are included within income tax expense.

The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2005 (except for certain state exceptions). Currently, there are no U.S. federal or state returns under examination.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Note 4 – Earnings per Share

Basic earnings per share is based on the weighted average number of common shares outstanding during the period.

Diluted earnings per share assumes the exercise of options using the treasury stock method and the conversion of the Series A Convertible Preferred Stock using the if converted method, to the extent dilutive.

The following table summarizes the earnings and the weighted average number of common shares used in the calculation of basic and diluted earnings per share.

		Three Months Ended June 30				Six Months Ended June 30
(in thousands, except for share and per share amounts)		2009		2008		2009		2008
Basic:
Weighted average common shares outstanding		13,658,141		12,779,582		13,444,679		12,773,639
Net income	$	11,367	$	9,486	$	20,551	$	17,658
Dividends to preferred stockholders		2,168		2,168		4,336		4,336
Net income available to common stockholders		9,199		7,318		16,215		13,322
Earnings per common share, basic	$	.67	$	.57	$	1.21	$	1.04

Diluted:
Weighted average common shares outstanding		13,658,141		12,779,582		13,444,679		12,773,639
Dilutive effect of stock options		17,144		345,820		21,368		348,171
Assumed average common shares outstanding		13,675,285		13,125,402		13,466,047		13,121,810

Net income available to common stockholders	$	9,199	$	7,318	$	16,215	$	13,322

Net income for diluted earnings per common share	$	9,199	$	7,318	$	16,215	$	13,322
Earnings per common share, diluted	$	.67	$	.56	$	1.20	$	1.02

In the above table, 269,245 shares and 244,043 shares of stock options have been excluded for 2009 and 2008, respectively and 2,623,971 of preferred stock potential common shares issuable upon the conversion of the preferred stock have been excluded for 2009 and 2008, due to their anti-dilutive impact.

Note 5 – Acquisition of South Carolina Hospice Business

Effective January 1, 2009, we purchased for $3,100,000 in cash certain assets and assumed certain liabilities of five hospice locations in the state of South Carolina. We accounted for the acquisition in accordance with SFAS No. 141(R), in which the purchase price was allocated based upon the fair value of the identifiable assets acquired and liabilities assumed with the excess of the fair value of the consideration provided over the fair value of the identifiable assets and liabilities recorded as goodwill. As a result of the acquisition, we recorded $2,900,000 as goodwill, all of which is expected to be fully deductible for income tax purposes. The results of the five hospice locations have been included in the consolidated financial statements since January 1, 2009, the acquisition date. The unaudited pro forma results are not disclosed due to the results being immaterial to the consolidated financial statements.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Note 6 - Long-Term Debt and Commitments

Long-Term Debt—

Long-term debt consists of the following:

	Weighted Average Interest Rate	Maturities		Long-Term Debt
(dollars in thousands)				6/30/09		12/31/08

Revolving Credit Facility interest payable monthly	Variable, 0.7%	2009	$	50,500	$	50,500

Notes and other obligations, principal and interest payable periodically	Variable, 5.43%	2009		1		2

Unsecured term note payable to National, interest payable quarterly, principal payable at maturity	Variable, 2.8%	2018		10,000		10,000
				60,501		60,502
Less current portion				(50,501)		(50,502)
			$	10,000	$	10,000

Note 7 - $75,000,000 Revolving Credit Facility

Effective October 28, 2008, we extended the maturity of our Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as lender (the “Lender”). The Credit Agreement provides for a $75,000,000 revolving credit facility (the “Credit Facility”), of which up to $5,000,000 may be utilized for letters of credit.

Borrowings bear interest at either (i) the Eurodollar rate plus 0.375% or (ii) the prime rate. Letter of credit fees are equal to 0.25% times the maximum amount available to be drawn under outstanding letters of credit.

Beginning October 28, 2008, commitment fees are payable on the daily unused portion of the Credit Facility at a rate of five (5) basis points per annum for each day when utilization is less than $37,500,000 and two (2) basis points per annum when utilization is equal to or more than $37,500,000.

The Credit Facility matures on October 27, 2009. Between 90 and 120 days prior to the maturity date, NHC may request the extension of the maturity date. If the Lender elects to consent to such extension, subject to certain conditions, the maturity date will be extended to the date which is 364 days after the then maturity date.

NHC is permitted to prepay the loans outstanding under the Credit Facility at any time, without penalty.

NHC’s obligations under the Credit Agreement are guaranteed by certain NHC subsidiaries and are secured by pledges by NHC and the guarantors of (i) 100% of the equity interests of domestic subsidiaries and (ii) up to 65% of the voting equity interests and 100% of the non-voting equity interests of foreign subsidiaries, in each case, held by NHC or the guarantors.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

The Credit Agreement contains customary representations and warranties, and covenants, including covenants that restrict, among other things, asset dispositions, mergers and acquisitions, dividends, restricted payments, debt, liens, investments and affiliate transactions. The Credit Agreement contains customary events of default.

The Credit Facility is available for general corporate purposes, including working capital and acquisitions at June 30, 2009.

We have held recent discussions with financial institutions regarding a new revolving credit facility. No assurances can be made that we will enter into a new credit facility. We believe that the lack of a credit facility does not impair our ability to meet our current expected liquidity needs.

Note 8 – Stock Option Plans

Our shareholders approved the 2005 Stock Option, Employee Stock Purchase, Physician Stock Purchase and Stock Appreciation Rights Plan (the APlan@) which provides for the grant of stock options to key employees, directors and non–employee consultants. Under the Plan, the Compensation Committee of the Board of Directors (Athe Committee@) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (AISO@), a non–qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO=s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted and the term of an ISO may not be any more than ten years. The exercise price of any non–qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.

Under the Plan, options issued to non–employee directors are granted automatically on the date of our annual shareholder meeting, vest immediately upon grant and have a maximum five year term. Options issued to employees in 2000 vested over a six year period and had a maximum six year term. Options issued to employees in 2004 vested over a five year period and had a maximum five year term. Options issued to employees in 2007 vested over a 2.1 year period and have a maximum 2.1 year term.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), AShare–Based Payment@ (ASFAS 123(R)@), using the modified prospective application transition method. Under this method, compensation cost is recognized, beginning January 1, 2006, based on the requirements of SFAS 123(R) for all share–based payments granted after the effective date, and based on Statement of Financial Accounting Standards No. 123, AAccounting for Stock–Based Compensation (ASFAS 123@), for all awards granted to employees prior to January 1, 2006 that remain unvested on the effective date. Prior to January 1, 2006, we applied Accounting Principles Board Opinion No. 25, AAccounting for Stock Issued to Employees@ (AAPB 25@) and related interpretations in accounting for our employee stock benefit plans. Accordingly, no compensation cost was recognized for stock options granted under the plans because the exercise prices for options granted were equal to the quoted market prices on the option grant dates and all option grants were to employees or directors. Results for prior periods have not been restated.

The fair value of each option award is estimated on the grant date, using the Black–Scholes option valuation model with the weighted average assumptions indicated in the following table. Generally, awards are subject to cliff vesting. Each grant is valued as a single award with an expected term based upon expected employment and termination behavior. Compensation cost is recognized over the requisite service period in a manner consistent with the option vesting provisions. The straight–line attribution method requires that compensation expense is recognized at least equal to the portion of the grant–date fair value that is vested at that date. The expected volatility is derived using weekly historical data for periods immediately preceding the date of grant. The risk–free interest rate is the approximate yield on the United States Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised. The following table summarizes the assumptions used to value the options granted in the periods shown.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

	Six Months Ended June 30
	2009	2008
Risk-free interest rate	0.96%	2.60%
Expected volatility	29.19%	25.5%
Expected life, in years	2.0 years	2.0 years
Expected dividend yield	2.98%	2.36%
Expected forfeiture rate	0.00%	0.00%

The following table summarizes option activity:

	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value

Options outstanding at December 31, 2007	1,166,650	$	27.06		−
Options granted	112,586		51.86		−
Options exercised	(273,589)		24.34		−
Options forfeited	(3,451)		50.94		−
Options cancelled	(10,000)		20.90		−
Options outstanding at December 31, 2008	992,196		30.55		−
Options granted	108,625		39.91		−
Options exercised	(631,576)		21.41		−
Options forfeited	(35,000)		55.00		−
Options outstanding at June 30, 2009	434,245		44.18	$	(2,710,000)

Options exercisable at June 30, 2009	415,620	$	43.89	$	(2,473,000)

Options Outstanding June 30, 2009	Exercise Prices	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life in Years

240,000	$32.01-$44.25	$37.97	2.9
194,245	$50.60-$52.50	$51.85	3.3
434,245

At June 30, 2009, 415,620 options outstanding are exercisable. Exercise prices on the options range from $32.01 to $52.50. The weighted average remaining contractual life of options outstanding at June 30, 2009 is 3.1 years. The weighted average fair value of options granted during the six months ended June 30, 2009 and 2008 were $6.67 ($835,000 in total) and $7.36 ($829,000 in total) per share, respectively. The total intrinsic value of shares exercised during the six months ended June 30, 2009 and 2008 was $10,438,000 and $653,000, respectively.

Additionally, the Plan allows employees to purchase our shares of stock through payroll deductions. Employees may terminate participation at any time.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Our policy is to issue new shares to satisfy share option exercises. In addition to the stock options issued and outstanding under the Plan, we have reserved an additional 811,652 shares of common stock for issuance under these plans.

NHC recognized $1,087,000 and $1,460,000 of share-based compensation expense for the six month periods ended June 30, 2009 and 2008, respectively. SFAS 123(R) requires that the benefits of tax deductions in excess of amounts recognized as compensation cost be reported as a financing cash flow, rather than an operating cash flow, as required under prior accounting guidance. Tax deductions in excess of amounts recognized as compensation costs totaled $8,954,000 and $314,000 for the six months ended June 30, 2009 and 2008, respectively. No share based compensation cost was capitalized during the current periods. The total compensation cost related to non–vested awards not yet recognized at June 30, 2009 is $58,000 and the weighted average period over which it is to be recognized is .5 years.

Note 9 – Guarantees and Contingencies

Accrued Risk Reserves

We are self insured for risks related to health insurance and have wholly-owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned or leased entities and certain of the entities to which we provide management or accounting services. The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $105,754,000 and $106,000,000 at June 30, 2009 and December 31, 2008, respectively. This liability is classified as a current liability based on the uncertainty regarding the timing of potential payments. The liability is included in accrued risk reserves in the consolidated balance sheets and is subject to adjustment for actual claims incurred. It is possible that these claims plus unasserted claims could exceed our insurance coverages and our reserves, which would have a material adverse effect on our financial position, results of operations and cash flows.

As a result of the terms of our insurance policies and our use of wholly-owned limited purpose insurance companies, we have retained significant insurance risk with respect to workers’ compensation and general and professional liability. We use independent actuaries to estimate our exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits, and we maintain reserves for these obligations. Such estimates are based on many variables including historical and statistical information and other factors. It is possible that claims against us could exceed our coverage limits and our reserves, which would have a material adverse effect on our financial position, results of operations and cash flows.

Workers’ Compensation

For workers’ compensation, we utilize a wholly-owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third-party customers. Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses. All customers are companies which operate in the long-term care industry. Business is written on a direct basis. Direct business coverage is written for statutory limits and the insurance company’s losses in excess of $1,000,000 per claim are covered by reinsurance.

For these workers’ compensation insurance operations, the premium revenues reflected in the consolidated financials within “Other Revenues” for the six months ended June 30, 2009 and 2008, respectively, are $2,666,000 and $3,062,000. Associated losses and expenses are reflected in the consolidated financial statements as “Other operating costs and expenses”.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

General and Professional Liability Lawsuits and Insurance

Across the nation, the entire long term care industry has experienced significant amounts of personal injury/wrongful death claims and awards based on alleged negligence by nursing facilities and their employees in providing care to residents. As of June 30, 2009, we and/or our managed centers are currently defendants in 42 such claims covering the years 1999 through June 30, 2009. Five of the 42 suits are in Florida, where we have not operated or managed long-term care providers since September 30, 2000. Of the five Florida suits, three suits relate to events before and two suits relate to events after our cessation of business in Florida. These latter two suits assert allegations of continued exposure even after we ceased operations.

When bids were solicited for third party professional liability insurance coverage for 2002, only two companies would quote coverage. Both quotations were so onerous and expensive that we elected to pay the premiums into a wholly-owned licensed captive insurance company, incorporated in the Cayman Islands, for the purpose of managing the Company’s losses related to these risks. Thus, for years 2002-2009, insurance coverage for incidents occurring at all providers owned or leased, and most providers managed by us, is provided through this wholly-owned insurance company. Policies are written for a duration of twelve months.

Our coverages for all years include both primary policies and excess policies. Commencing with 2002, deductibles were eliminated with first dollar coverage being provided through the wholly-owned insurance company.

For the period 2003-2009, both primary and excess professional liability insurance coverage is provided through our wholly-owned liability insurance company. Primary coverage is in the amount of $1 million per incident, $3 million per location subject to an annual primary aggregate limit. That limit was $16 million for 2008 and $17 million for 2009. Excess coverage under a $7.5 million annual excess aggregate policy is applicable to years 2003-2007. The 2008 and 2009 years are subject to annual excess aggregate policies in the total amount of $9 million.

For these professional liability insurance operations, the premium revenues reflected in the financials within “Other revenues” for the six months ended June 30, 2009 and 2008, respectively, are $2,323,000 and $2,008,000. Associated losses and expenses including those for self-insurance are included in the consolidated financial statements as “Other operating costs and expenses”.

Other Matters

On July 24, 2009, the Company received a civil investigative demand from the Tennessee Attorney General’s Office, requesting production of documents related to NHC’s business relationships with non-profit entities. The Company is in the process of responding to the demand and will comply as required with the terms of the demand.

Note 10 - Fair Value Measurements

The carrying amounts of cash and cash equivalents, accounts receivable, notes receivable, and accounts payable approximate fair value due to their short-term nature. Our long-term debt approximates fair value due to variable interest rates and the short term maturity of the Revolving Credit Facility. At June 30, 2009 and 2008, there were no material differences between the carrying amounts and fair values of NHC’s financial instruments.

Effective January 1, 2009, we fully adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), as it relates to both financial and nonfinancial assets and liabilities. Prior to January 1, 2009, and in accordance with FASB Staff Position No. 157-2, SFAS 157 only applied to our financial assets and financial liabilities. SFAS 157 is a technical standard which defines fair value, establishes a consistent framework for measuring fair value, and expands disclosures for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

should be determined based on assumptions that market participants would use in pricing an asset or liability. Valuation techniques are the market, cost or income approach. The Company’s adoption of SFAS 157 or FASB Staff Position No. 157-2 did not have an impact on our financial position, results of operations or cash flows.

As a basis for considering such assumptions, SFAS 157 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: Level 1 – quoted prices for identical assets or liabilities in active markets, Level 2 – quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and model-based valuations in which significant inputs are corroborated by observable market data and Level 3 – valuation techniques in which significant inputs are unobservable.

We adopted the provisions of SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS 159”) as of January 1, 2008. SFAS 159 provides companies the option to measure many financial instruments and certain other items at fair value. Companies that choose the fair value option will recognize unrealized gains and losses on items for which the fair value option was elected in earnings at each subsequent reporting date. The Company has chosen not to elect the fair value option for any items that are not already required to be measured at fair value. The adoption of SFAS 159 did not have an impact on our financial position, results of operations or cash flows.

The following table summarizes fair value measurements by level at June 30, 2009 for assets and liabilities measured at fair value on a recurring basis (in thousands):

		Fair Value At June 30, 2009		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities	$	51,952	$	51,952	$	–	$	–
Restricted marketable securities		1,513		1,513		–		–
Investment in cash fund in liquidation		5,111		–		–		5,111

Marketable securities and restricted marketable securities –

The fair value of our investments in marketable securities and restricted marketable securities is derived using quoted market prices of identical securities or other observable inputs such as trading prices of identical securities in active markets.

Marketable securities consist of the following:

			June 30, 2009				December 31, 2008
(in thousands)			Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale:
	Marketable equity securities	$	29,604	$	51,952	$	29,604	$	54,682
	U.S. government securities		1,475		1,513		1,474		1,537
		$	31,079	$	53,465	$	31,078	$	56,219

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Included in the available for sale marketable equity securities are the following:

(in thousands, except share amounts)
	June 30, 2009					December 31, 2008
	Shares		Cost		Fair Value	Shares		Cost		Fair Value
NHI Common Stock	1,630,642	$	24,734	$	43,554	1,630,642	$	24,734	$	44,729

The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows:

		June 30, 2009				December 31, 2008
(in thousands)		Cost		Fair Value		Cost		Fair Value
Maturities:
Within 1 year	$	1,250	$	1,282	$	−	$	−
1 to 5 years		225		231		1,474		1,537
	$	1,475	$	1,513	$	1,474	$	1,537

Gross unrealized gains related to available for sale securities are $22,386,000 and $25,141,000 as of June 30, 2009 and December 31, 2008, respectively. There were no gross unrealized losses related to available for sale securities as of June 30, 2009 and December 31, 2008, respectively.

Proceeds from the sale of investments in marketable securities during the six months ended June 30, 2009 and 2008 were -0- and $225,000, respectively. No gross investment gains or losses were realized on these sales for the six months ended June 30, 2008.

Investment in Cash Fund in Liquidation –

At June 30, 2009, we reported in current assets in our Consolidated Balance Sheets an investment of $5,111,000 ($7,804,000 at December 31, 2008) in the Columbia Strategic Cash Portfolio Fund (the “Fund”). The Fund invests in obligations denominated in U.S. dollars consisting of asset-backed and mortgage-backed securities, structured investment vehicles, corporate bonds and notes, certificates of deposit, short-term corporate debt obligations, commercial paper, extendible commercial notes and municipal bonds. A portion of the securities in the Fund have their fair values determined through readily available market data; however, some of the securities in the Fund have limited market activity such that the determination of fair value requires significant judgment or estimation. Given current market conditions, as these securities are not actively traded, certain significant inputs (e.g. spreads, yield curves, prepayments and volatilities) are unobservable. These securities are valued primarily using broker pricing models that incorporate transaction details such as contractual terms, maturity, timing and amount of future cash inflows, as well as assumptions about liquidity. As a result, the Company has categorized its investments in the Fund as Level 3 within the fair value hierarchy at June 30, 2009.

The following table presents a reconciliation of Level 3 assets measured at fair value on a recurring basis at June 30, 2009. Considering the continuing deterioration in market conditions during the fourth quarter of 2008 and the lack of current observable market activity, our investment in the Fund was transferred from Level 2 to Level 3 as of October 1, 2008.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Three Months Ended				Six Months Ended
		June 30				June 30
(in thousands)		2009		2008		2009		2008
Balance at beginning of the period	$	5,618	$	23,116	$	7,804	$	35,492
Total gains or losses (realized/unrealized):
Included in earnings		247		12		298		(420)
Included in other comprehensive income		−		−		−		−
Purchases, issuances and settlements		(754)		(4,894)		(2,991)		(16,838)
Transfers in/out or out of Level 3		−		−		−		−
Balance at end of the period	$	5,111	$	18,234	$	5,111	$	18,234

Gains and losses (realized and unrealized) included in earnings for the periods ended above are reported in interest income as follows:

		Three Months Ended				Six Months Ended
		June 30				June 30
(in thousands)		2009		2008		2009		2008
Total realized gains or losses	$	247	$	12	$	298	$	(161)

Change in unrealized gains or losses relating to assets still held at reporting date	$	−	$	−	$	−	$	(259)

The Company has adopted an accounting policy for Level 3 fair value measurements that provides for transfer of the asset or liability into/out of Level 3 as of the beginning of the quarter in which the change is determined.

Historical Information Related to the Investment in Cash Fund in Liquidation - We received notice on December 6, 2007, at a time when our carrying value in the Fund was $39,500,000, that the Fund cash redemptions were suspended and that the Fund would begin an orderly liquidation and dissolution of its assets for distribution to the Fund holders, including to NHC. Activity in the Fund for the periods indicated is summarized as follows:

(in thousands)		25 Days Ended December 31, 2007		Year Ended December 31, 2008		Six Months Ended June 30, 2009
Fund balance, beginning of period	$	39,500	$	35,492	$	7,804
Realized gains (losses)		(42)		(817)		298
Reduction to adjust the Fund balance to its net asset value, charged to earnings		(453)		(1,343)		−
Cash distributed to NHC		(3,513)		(25,528)		(2,991)
Fund balance, end of period	$	35,492	$	7,804	$	5,111

Interest earned, in addition to the cash distributed above	$	156	$	654	$	27

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

The Fund’s valuation fluctuates based on changes in the market value of the securities held by the Fund. In addition to the transaction gains or losses reported by the Fund to us, since December, 2007, we have adjusted our carrying value to the Fund’s net asset value, which adjustments have required us to charge earnings and reduce our carrying value in the Fund. Because the Fund is invested in financial instruments with exposure to the current turmoil in the credit markets in the United States and because the Fund currently intends to substantially liquidate the investments in the Fund within the next twelve months, we consider the write-down amount to be an other-than-temporary impairment. It is difficult to predict the timing or magnitude of these other-than-temporary impairments and additional impairments may occur. Under such circumstances, our earnings will be negatively affected.

As to balance sheet classification, prior to December 6, 2007, we classified the investment as a cash equivalent in the Consolidated Balance Sheets because the funds were immediately available for distribution. Since the suspension by the Fund manager of Fund redemptions, we no longer consider the investment in the Fund to be a cash equivalent and classify it instead as Investments in Cash Fund in Liquidation. We have classified the Fund as a current asset because we believe that the Fund will be substantially liquidated during the next twelve months.

Note 11 – New Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, (“SFAS 168”), which is effective for interim and annual periods ending after September 15, 2009. SFAS 168 does not alter current U.S. GAAP, but rather integrates existing accounting standards with other authoritative guidance. Under SFAS 168 there will be a single source of authoritative U.S. GAAP for nongovernmental entities and will supersede all other previously issued non-SEC accounting and reporting guidance. The adoption of SFAS 168 will not have any impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued three related FASB Staff Positions: (1) FSP FAS No. 115-2 and FAS No. 124-2, Recognition of Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”), (2) FSP FAS No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), and (3) FSP FAS No. 157-4, Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), which are effective for interim and annual reporting periods ending after June 15, 2009. FSP FAS 115-2 and FAS 124-2 modifies the requirement for recognizing other-than-temporary impairments, changes the existing impairment model, and modifies the presentation and frequency of related disclosures. FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements. The adoption of these FASB Staff Positions did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, (“SFAS 165”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. FAS 165 is effective for interim and annual periods ending after June 15, 2009. Accordingly, the Company has adopted the provisions of FAS 165 and has evaluated events through August 5, 2009; the issuance date of the Company’s consolidated financial statements, and notes that no subsequent event disclosure is needed.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted this Statement effective January 1, 2009. The adoption of SFAS 141(R) did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. This Statement requires all entities to report noncontrolling interests in subsidiaries as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company adopted this Statement effective January 1, 2009. The adoption of SFAS No. 160 did not have a material impact on the Company’s consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“FSP 03-6-1”). FSP 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company’s adoption of FSP 03-6-1 as of January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

National HealthCare Corporation (ANHC@ or the ACompany@) is a leading provider of long–term health care services. We operate or manage, through certain affiliates, 76 long–term health care centers with 9,772 beds in 10 states and provide other services in two additional states. These operations are provided by separately funded and maintained subsidiaries. We provide long–term health care services to patients in a variety of settings including long–term nursing centers, managed care specialty units, sub–acute care units, Alzheimer's care units, hospice programs, homecare programs, assisted living centers and independent living centers. In addition, we provide management and accounting services to owners of long–term health care centers.

Summary of Goals and Areas of Focus

Earnings – To monitor our earnings, we have developed budgets and management reports to monitor labor, census, and the composition of revenues. Inflationary increases in our costs may cause net earnings from patient services to decline.

Development and Growth - In July, 2008 we opened a 60 bed addition to an existing facility located in North Augusta, South Carolina. We broke ground in September, 2008 for construction of a new 120 bed health care center in Bluffton, South Carolina (expected cost $22,645,000), and in 2009 we broke ground on a new assisted living facility in Mauldin, South Carolina (expected cost of $6,600,000).

In January, 2008, we purchased a 109-bed skilled nursing rehabilitation facility located in Knoxville, Tennessee for $6,347,000 in cash.

Also in January 2008, we purchased for $5,073,000 in cash, two tracts of land located in the state of South Carolina and one tract of land located in the state of Tennessee. The tracts are undeveloped and are held for future development.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Effective February 1, 2008, we were selected by McKendree Village, Inc. to manage under a five-year contract McKendree Village, a continuing care retirement community located on 42 acres in the Nashville, Tennessee suburb of Hermitage. McKendree Village offers nursing care in the 300-bed McKendree Health Center, assisted living services in the 85-unit McKendree Manor, and independent senior care living in a 234-unit residential tower and in 39 individually designed cottages.

In August 2008, we purchased for $13,250,000 in cash, a 132-bed skilled nursing and rehabilitation facility and a 60-bed assisted living facility located in Charleston, South Carolina.

In 2009, we are continuing to develop an active hospice program in South Carolina independently of our partnership with Caris Healthcare and are also exploring opportunities to expand our home health care services. Effective January 1, 2009, we purchased five hospice locations in South Carolina for approximately $3,100,000. During 2009, we will apply for Certificates of Need for additional beds in select markets and new NHC construction opportunities for skilled nursing and assisted living facilities. NHC will also continue to seek prudent acquisition opportunities in each of our lines of business.

Accrued Risk Reserves – Our accrued professional liability reserves, workers= compensation reserves and health insurance reserves totaled $105,754,000 at June 30, 2009 and are a primary area of management focus. We have set aside restricted cash to fund substantially all of our professional liability and workers= compensation reserves.

As to exposure for professional liability claims, we have developed for our centers performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure, including in–house acquired pressure ulcers, significant weight loss and numbers of falls. These programs for certification, which we regularly modify and improve, have produced measurable improvements in reducing these incidents. Our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction. Furthermore, we are continuing efforts to identify and restructure the ownership or management of our higher risk operations and locations to eliminate NHC liability exposure.

Application of Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us 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 and cause our reported net income to vary significantly from period to period.

Our critical accounting policies that are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments are as follows:

Revenue Recognition – Third Party Payors – Approximately 61% (2008), 60% (2007), and 63% (2006) of our net revenues are derived from Medicare, Medicaid, and other government programs. Amounts earned under these programs are subject to review by the Medicare and Medicaid intermediaries. In our opinion, adequate provision has been made for any adjustments that may result from these reviews. Any differences between our estimates of settlements and final determinations are reflected in operations in the year finalized. At June 30, 2009, we have made provisions for amounts due third party payors of approximately $17,168,000. Revenues and results of operations in the six months ended June 30, 2009 and 2008 were not materially impacted by changes in estimates of settlements and final determinations.

Revenue Recognition – Private Pay – For private pay patients in skilled nursing or assisted living facilities, we bill room and board in advance for the current month with payment being due upon receipt of the statement in the month the services are performed. Charges for ancillary, pharmacy, therapy and other services to private patients are billed in the month following the performance of services. All billings are recognized as revenue when the services are performed.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Valuations and Impairments to our Investment in Cash Fund in Liquidation – At June 30, 2009, we reported an aggregate investment of $5,111,000 in the Columbia Strategic Cash Portfolio Fund (the “Fund”) which invests principally in corporate debt, mortgage-backed securities and asset-backed securities. During December, 2007 the Fund’s manager notified us that due to turmoil in credit markets in the United States (1) Fund cash redemptions to investors were suspended, (2) the Fund’s valuation will be based on the market value of the underlying securities instead of amortized cost, (3) interest would continue to accrue and be paid and (4) the Fund would begin an orderly liquidation and dissolution of its assets for distribution to the Fund holders that is expected to be completed in 2009. As the Fund is liquidated, we expect to receive our pro rata share of the Fund in cash distributions.

Our investment in the Fund totaled $35,900,000 on December 7, 2007. Since that date, we have received cash distributions of $32,032,000, reported realized losses of $562,000, and reported losses of $1,796,000 to reduce the Fund balance to its net asset value. Our investment in the Fund totaled $5,111,000 at June 30, 2009.

The Fund’s valuation fluctuates based on changes in the market values of the securities held by the Fund. Considering the continuing deterioration in market conditions during the fourth quarter of 2008 and the lack of current observable market activity, our investment in the Fund was transferred from Level 2 to Level 3 as of October 1, 2008 under the three-tier value hierarchy of SFAS 157.

It is possible that future events could require us to make significant adjustments or revisions to our estimates of the Fund value. Because the Fund is invested in financial instruments with exposure to the current turmoil in the credit markets in the United States, we consider the write-down amounts to be other-than-temporary impairments. It is difficult to predict the timing or magnitude of these other-than-temporary impairments and additional impairments may occur. Management does not expect that the current illiquidity of the Fund will prevent us from meeting our obligations as they come due or from making new investments when and as opportunities arise.

Accrued Risk Reserves – We are principally self–insured for risks related to employee health insurance, workers= compensation and professional and general liability claims. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy with respect to a significant portion of our workers= compensation and professional and general liability claims is to use an actuary to support the estimates recorded for incurred but unreported claims. Our health insurance reserve is based on our known claims incurred and an estimate of incurred but unreported claims determined by our analysis of historical claims paid. We reassess our accrued risk reserves on a quarterly basis.

Professional liability remains an area of particular concern to us. The entire long term care industry has seen personal injury/wrongful death claims based on alleged negligence by nursing homes and their employees in providing care to residents. As of June 30, 2009, we and/or our managed centers are defendants in 42 such claims inclusive of years 1999 through 2009. It remains possible that these pending matters plus potential unasserted claims could exceed our reserves, which would have a material adverse effect on our financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.

We maintain insurance coverage for incidents occurring in all provider locations owned, leased or managed by us. The coverages include both primary policies and umbrella policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.

Revenue Recognition – Subordination of Fees and Uncertain Collections – We provide management services to certain long–term care facilities and to others we provide accounting and financial services. We generally charge 6% of net revenues for our management services and a predetermined fixed rate per bed for the accounting and financial services. Our policy is to recognize revenues associated with both management services and accounting and financial services on an accrual basis as the services are provided. However, under the terms of our management contracts, payments for our management services are subject to subordination to other expenditures of the long–term care center being managed.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Furthermore, there are certain of the third parties with whom we have contracted to provide services and which we have determined, based on insufficient historical collections and the lack of expected future collections, that collection is not reasonably assured and our policy is to recognize income only in the period in which the amounts are realized. We recognize the expenses related to the provision of those services in the period in which they are incurred. We may receive payment for the unpaid and unrecognized management fees in whole or in part in the future only if cash flows from the operating and investing activities of the centers are sufficient to pay the fees. There can be no assurance that such future cash flows will occur. The realization of such previously unrecognized revenue could cause our reported net income to vary significantly from period to period.

We agree to subordinate our fees to the other expenses of a managed center because we believe we know how to improve the quality of patient services and finances of a long–term care center and because subordinating our fees demonstrates to the owner and employees of the managed center how confident we are of the impact we can have in making the center operations successful. We may continue to provide services to certain managed centers despite not being fully paid currently so that we may be able to collect unpaid fees in the future from improved operating results and because the incremental savings from discontinuing services to a center may be small compared to the potential benefit. Also, we may benefit from providing other ancillary services to the managed center.

Certain of our accounts receivable from private paying patients and certain of our notes receivable are subject to credit losses. We have attempted to reserve for expected accounts receivable credit losses based on our past experience with similar accounts receivable and believe our reserves to be adequate.

We continually monitor and evaluate the carrying amount of our notes receivable in accordance with Statement of Financial Accounting Standards No. 114, AAccounting by Creditors for Impairment of a Loan – An Amendment of FASB Statements No. 5 and 15.@ It is possible, however, that the accuracy of our estimation process could be materially impacted as the composition of the receivables changes over time. We continually review and refine our estimation process to make it as reactive to these changes as possible. However, we cannot guarantee that we will be able to accurately estimate credit losses on these balances. It is possible that future events could cause us to make significant adjustments or revisions to these estimates and cause our reported net income to vary significantly from period to period.

Potential Recognition of Deferred Income - During 1988, we sold the assets of eight long-term health care centers to National Health Corporation (ANational@), our administrative general partner at the time of the sale. The resulting profit of $15,745,000 was deferred. $10,000,000 of the deferred gain and related deferred income taxes of $4,000,000 were recognized as income in December 2007 with the collection of the $10,000,000 note from National. $3,745,000 of the deferred gain has been amortized into income on a straight-line basis over the 20-year management contract period. Additional deferred income of $2,000,000 will be recognized when the Company no longer has an obligation to advance the $2,000,000 working capital loan which obligation was extended until January 20, 2018 with the extension of the management agreement with National to that date.

Guarantees – At June 30, 2009, no agreements to guarantee debt of other parties are outstanding.

Uncertain Tax Positions – NHC continually evaluates for uncertain tax positions. These uncertain positions may arise where tax laws may allow for alternative interpretations or where the timing of recognition of income is subject to judgment. We believe we have adequate provisions for our uncertain tax positions including related penalties and interest. However, because of uncertainty of interpretation by various tax authorities and the possibility that there are issues that have not been recognized by management, we cannot guarantee we have accurately estimated our tax liabilities.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management=s judgment in their application. There are also areas in which management=s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Government Program Financial Changes

Cost containment will continue to be a priority for Federal and State governments for health care services, including the types of services we provide. Government reimbursement programs such as Medicare and Medicaid prescribe, by law, the billing methods and amounts that health care providers may charge and be reimbursed to care for patients covered by these programs. Congress has passed a number of laws that have effected major changes in the Medicare and Medicaid programs. The Balanced Budget Act of 1997 sought to achieve a balanced federal budget by, among other things, reducing federal spending on Medicare and Medicaid to various providers. In February 2006, Congress enacted the Deficit Reduction Act, or DRA, which reduced net Medicare and Medicaid spending, and in December 2006, Congress passed the Tax Relief and Health Care Act of 2006, which also affects payments under the Medicare and Medicaid programs. In the Tax Relief and Health Care Act of 2006, Congress reduced the limit on Medicaid provider taxes for the period January 1, 2008 through September 30, 2011 from the 6 percent set by CMS regulations to a 5.5 percent limit set by statute.

Medicare—

Effective October 1, 2008, our PPS rates were increased by 3.4% due to an inflation update. Our annual 2008 Medicare revenues increased by 6.5% over our annual 2007 Medicare revenues. The inflation update (or market basket increase) was 3.1% in 2006 and 3.3% in 2007.

For the first six months of 2009 our average Medicare per diem increased by 5.04% over the same period of 2008. No assurances can be given as to whether Congress will increase or decrease reimbursement in the future, the timing of any action or the form of relief, if any, that may be enacted.

CMS released the final Medicare SNF PPS rule on July 31, 2009. In this rule, payment system changes for fiscal years 2010 and 2011 are made including:

Fiscal Year 2010 – Effective October 1, 2009

The federal rates will be updated by a market basket increase of 2.2%.

A recalibration of the nursing weights will be implemented, resulting in a reduction of 3.3%.

The net impact of these adjustments is a reduction of 1.1%.

Fiscal Year 2011 – Effective October 1, 2010

The MDS 3.0 and RUG-IV payment system will be implemented on October 1, 2010.

Services rendered prior to the admission of the individual to the SNF will no longer be counted for classification to a RUG category. Only services rendered in the SNF will be reported on the MDS 3.0, and recognized for reimbursement purposes.

Concurrent therapy cannot be provided to more than 2 individuals. The MDS 3.0 will capture individual and concurrent therapy separately.

The changes effective October 1, 2010 (fiscal year 2011) have now been finalized.

Medicaid—

South Carolina Medicaid fully funded their normal October 1, 2008 rate increases and a retroactive settlement was received and recognized in June, 2009. The per diem rate increases have resulted in additional revenues of approximately $321,000 per quarter.

Tennessee annual Medicaid rate increases were implemented effective July 1, 2008. The increase in revenue was approximately $514,000 per quarter.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Missouri Medicaid funded a global rate increase for all providers of $6.00 per day effective after July 1, 2008. The first six months of 2009 effect was approximately $660,000.

For the first six months of 2009, our average Medicaid per diem increased by 3.40% over the same period in 2008. We face challenges with respect to states’ Medicaid payments, because many currently do not cover the total costs incurred in providing care to those patients. States will continue to control Medicaid expenditures but also look for adequate funding sources, including provider assessments. The DRA includes several provisions designed to reduce Medicaid spending. These provisions include, among others, provisions strengthening the Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, which could, due to the timing of the penalty period, increase facilities’ exposure to uncompensated care. Other provisions could increase state funding for home and community-based services, potentially having an impact on funding for nursing facilities. There is no assurance that the funding for our services will increase or decrease in the future.

Results of Operations

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008.

Results for the three month period ended June 30, 2009 include a 7.1% increase in net revenues and a 19.8% increase in net income compared to the same period in 2008.

Net patient revenues increased $12,686,000 or 8.9% compared to the same period last year. Medicare, Medicaid and private pay per diem rates increased 5.2%, 4.3%, and 4.5%, respectively, compared to the quarter a year ago. Additionally, the January 1, 2009 acquisition of five hospice locations in South Carolina and acquisition of a 132-bed skilled nursing and rehabilitation facility and a 60-bed assisted living facility located in Charleston, South Carolina, effective August 1, 2008 added approximately $4,796,000 in net patient revenues.

The total census at owned and leased centers for the quarter averaged 92.1% (92.5% if operations owned less than one year are removed) compared to an average of 92.8% for the same quarter a year ago.

Other revenues decreased $1,212,000 or 7.0% in the three month 2009 period to $16,187,000 from $17,399,000 in the 2008 three month period. Decreases in other revenues include decreased management and accounting services fees ($1,223,000) and decreased dividends and other realized gains on securities due to lower dividend rates ($363,000).

Decreases in other revenues in the 2009 period over the 2008 period were offset in part due to greater earnings from our equity in unconsolidated investments (primarily from Caris HealthCare L.P. ($386,000) and increased insurance revenues ($153,000).

Total costs and expenses for the 2009 second quarter compared to the 2008 second quarter increased $8,814,000 or 6.1% to $153,835,000 from $145,021,000. Salaries, wages and benefits, the largest operating costs of this service company, increased $5,563,000 or 6.4% to $91,875,000 from $86,312,000. Other operating expenses increased $2,782,000 or 6.2% to $47,421,000 for the 2009 period compared to $44,639,000 in the 2008 period. Rent expense increased $188,000 to $8,064,000 compared to $7,876,000 in the 2008 period. Depreciation and amortization increased $263,000 or 4.4% to $6,287,000 from $6,024,000. Interest costs increased $18,000 to $188,000.

Increases in salaries, wages and benefits are due to increased staffing due to the acquisition of a skilled health care facility (132 long-term beds), a 60-bed assisted living facility and five hospice locations and due to inflationary wage increases. Increases in other operating costs are due to costs associated with the acquisition of a health care facility (132 long-term beds), a 60-bed assisted living facility, five hospice locations and inflationary increases offset in part due to decreases in professional liability expenses ($500,000).

Depreciation expense increased primarily due to the acquisition of certain depreciable assets during the last year, including a 132-bed skilled health facility and a 60-bed assisted living facility.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

The income tax provision for the three months ended June 30, 2009 is $6,834,000 (an effective income tax rate of 37.5%), which is in line with management’s expectations. The income tax provision for the three months ended June 30, 2008 was $6,055,000 (an effective tax rate of 39.0%). The 1.5% decrease in the effective tax rate in 2009 is due to the effect of permanent differences.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008.

Results for the six month period ended June 30, 2009 include a 6.2% increase in net revenues and a 16.4% increase in net income compared to the same period in 2008.

Net patient revenues increased $21,788,000 or 7.6% compared to the same period last year. Medicare, Medicaid and private pay per diem rates increased 5.0%, 3.4%, and 4.9%, respectively, compared to the six months a year ago. Additionally, the January 1, 2009 acquisition of five hospice locations in South Carolina and acquisition of a 132-bed skilled nursing and rehabilitation facility and a 60-bed assisted living facility located in Charleston, South Carolina, effective August 1, 2008 added approximately $9,293,000 in net patient revenues.

The total census at owned and leased centers for the six month period averaged 91.9% (92.3% if operations owned less than one year are removed) compared to an average of 92.9% for the same six month period a year ago.

Other revenues decreased $1,786,000 or 5.3% in the six month 2009 period to $31,789,000 from $33,575,000 in the 2008 six month period. Decreases in other revenues include decreased management and accounting services fees ($1,601,000), decreased dividends and other realized gains on securities due to lower dividend rates ($618,000), and decreased rental income ($621,000).

Decreases in other revenues in the 2009 period over the 2008 period were offset in part due to greater earnings from our equity in unconsolidated investments (primarily from Caris HealthCare L.P. ($850,000) and increased insurance revenues ($380,000).

Total costs and expenses for the 2009 six months compared to the 2008 six months increased $14,937,000 or 5.1% to $306,947,000 from $292,010,000. Salaries, wages and benefits, the largest operating costs of this service company, increased $8,748,000 or 5.0% to $182,601,000 from $173,853,000. Other operating expenses increased $5,436,000 or 6.0% to $95,389,000 for the 2009 period compared to $89,953,000 in the 2008 period. Rent expense increased $238,000 to $16,032,000 compared to $15,794,000 in the 2008 period. Depreciation and amortization increased $509,000 or 4.2% to $12,530,000 from $12,021,000. Interest costs increased $6,000 to $395,000.

Depreciation expense increased primarily due to the acquisition of certain depreciable assets during the last year, including a 132-bed skilled health facility and a 60-bed assisted living facility.

The income tax provision for the six months ended June 30, 2009 is $13,207,000 (an effective income tax rate of 39.1%), which is in line with management’s expectations. The income tax provision for the six months ended June 30, 2008 was $11,035,000 (an effective tax rate of 38.5%). The 0.6% increase in the effective tax rate in 2009 is due to the effect of permanent differences.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Liquidity, Capital Resources, and Financial Condition

Sources and Uses of Funds - Our primary sources of cash include revenues from the healthcare and senior living facilities we operate, insurance services, management services and accounting services. Our primary uses of cash include salaries, wages and other operating costs of our home office and the facilities we operate, the cost of additions to and acquisitions of real property, rent expenses, debt service payments (including principal and interest) and dividend distributions. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below. The following is a summary of our sources and uses of cash flows (dollars in thousands):

		Three Months Ended June 30				Three Month Change
		2009		2008		$	%
Cash and Cash equivalents at beginning of period	$	60,618	$	17,288	$	43,330	250.6%

Cash provided from (used in) operating activities		15,487		19,553		(4,066)	(20.8)%

Cash provided from (used in) investing activities		(6,624)		(2,804)		(3,820)	(136.2)%

Cash provided from (used in) financing activities		(4,945)		(4,246)		(699)	(16.5)%

Cash and cash equivalents at end of period	$	64,536	$	29,791	$	34,745	116.6%

		Six Months Ended June 30				Six Month Change
		2009		2008		$	%
Cash and Cash equivalents at beginning of period	$	49,033	$	2,379	$	46,654	1,961.1%

Cash provided from (used in) operating activities		19,898		28,027		(8,129)	(29.0)%

Cash provided from (used in) investing activities		(10,672)		7,968		(18,640)	(233.9)%

Cash provided from (used in) financing activities		6,277		(8,583)		14,860	173.1%

Cash and cash equivalents at end of period	$	64,536	$	29,791	$	34,745	116.6%

Operating Activities - Net cash provided by operating activities for the six months ended June 30, 2009, was $19,898,000 as compared to $28,027,000 provided in the same period last year. Cash provided by operating activities for the current period benefited from increases in other current liabilities and accrued risk reserves, deferred income, amounts due to third party payors, and decreases in inventory and restricted cash. The increases to operating activities were offset by increases in the equity in earnings of unconsolidated investments, accounts receivable, prepaid expenses and other assets and decreases in accrued payroll, accounts payable and entrance fee deposits. The decrease in accrued payroll is due to the timing of pay periods.

Investing Activities - Cash used in investing activities totaled $10,672,000 for the six months ended June 30, 2009, as compared to $7,968,000 provided from investing activities for the six months ended June 30, 2008. Cash used for property and equipment additions was $19,961,000 for the six months ended June 30, 2009 and $14,612,000 in the comparable period in 2008. Investments in notes receivable totaled $278,000 in 2009 compared to $2,746,000 in 2008. Cash provided by net collections of notes receivable was $3,412,000 in 2009 compared to $4,450,000 in 2008. Collections of our investment in the cash fund in liquidation balance totaled $2,693,000 in the first six months of 2009 compared to $17,258,000 in 2008.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Costs included in property and equipment additions include $9,200,000 for a new 120-bed long-term health care center under construction in Bluffton, South Carolina and $1,200,000 for a 60-bed assisted living facility in Mauldin, South Carolina.

Financing Activities - Net cash provided by financing activities totaled $6,277,000 in the six months ended June 30, 2009 compared to $8,583,000 net cash used for the same period in 2008. Cash used for payments of debt totaled $1,000 and dividend payments to common and preferred shareholders totaled $10,734.000. In the prior year, cash used for payments of debt totaled $7,432,000, and dividend payments to common and preferred shareholders totaled $9,355,000. Tax benefits from exercise of stock options provided cash of $3,582,000 in 2009 and $314,000 in 2008. In the current period, $13,534,000 of cash was provided by the issuance of common stock compared to $492,000 in the same period last year.

At June 30, 2009, our ratio of long–term debt to total capitalization (total debt plus deferred income plus shareholders equity) is 10.4%.

Table of Contractual Cash Obligations

Our contractual cash obligations for periods subsequent to June 30, 2009 are as follows (in thousands):

		Total		Less than 1 year		1-3 Years		3-5 Years		After 5 Years
Long-term debt principal	$	60,501	$	50,501	$	−	$	−	$	10,000
Long-term debt – interest		2,468		395		553		553		967
Obligations to complete construction		12,995		12,995		−		−		−
Operating leases		414,122		28,948		65,024		67,400		252,750
Total Contractual Cash Obligations	$	490,086	$	92,839	$	65,577	$	67,953	$	263,717

Income taxes payable for uncertain tax positions under FIN 48 of $3,733,000, attributable to permanent differences, at June 30, 2009 has not been included in the above table because of the inability to estimate the period in which the tax payment is expected to occur. See Note 3 of the Interim Condensed Consolidated Financial Statements for a discussion on income taxes.

Our current cash on hand, marketable securities, short–term notes receivable, operating cash flows, and as needed, our borrowing capacity are expected to be adequate to meet these contractual obligations and to finance our operating requirements, growth and development plans.

We started paying quarterly dividends in the second quarter of 2004 and anticipate the continuation of dividend payments as approved quarterly by the Board of Directors.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

Guarantees and Contingencies

Debt Guarantees—

At June 30, 2009, we have no guaranteed debt obligations. All prior guaranteed debt obligations have been repaid by the direct obligor on the debt.

New Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, (“SFAS168”), which is effective for interim and annual periods ending after September 15, 2009. SFAS 168 does not alter current U.S. GAAP, but rather integrates existing accounting standards with other authoritative guidance. Under SFAS 168 there will be a single source of authoritative U.S. GAAP for nongovernmental entities and will supersede all other previously issued non-SEC accounting and reporting guidance. The adoption of SFAS 168 will not have any impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, (“SFAS 165”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. FAS 165 is effective for interim and annual periods ending after June 15, 2009. Accordingly, the Company has adopted the provisions of FAS 165 and the adoption has not had a material impact on the Company’s consolidated financial statements

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combinations. This Statement establishes principles and requirements for how the acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted this Statement effective January 1, 2009. The adoption of SFAS 141(R) did not have a material impact on the Company’s consolidated financial statements.

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

effective January 1, 2009. The adoption of SFAS No. 160 did not have a material impact on the Company’s consolidated financial statements.

Forward–Looking Statements

References throughout this document to the Company include National HealthCare Corporation and its wholly–owned subsidiaries. In accordance with the Securities and Exchange Commission=s APlain English@ guidelines, this Quarterly Report on Form 10–Q has been written in the first person. In this document, the words Awe@, Aour@, Aours@ and Aus@ refer only to National HealthCare Corporation and its wholly–owned subsidiaries and not any other person.

This Quarterly Report on Form 10–Q and other information we provide from time to time, contains certain Aforward–looking@ statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations or cash flows, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three–year strategic plan, and similar statements including, without limitations, those containing words such as Abelieves@, Aanticipates@, Aexpects@, Aintends@, Aestimates@, Aplans@, and other similar expressions are forward–looking statements.

Forward–looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward–looking statements as a result of, but not limited to, the following factors:

national and local economic conditions, including their effect on the availability and cost of labor, utilities and materials;

the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations;

changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries;

liabilities and other claims asserted against us, including patient care liabilities, as well as the resolution of current litigation (see Note 9: Guarantees and Contingencies);

the ability of third parties for whom we have guaranteed debt, if any, to refinance certain short term debt obligations;

the ability to attract and retain qualified personnel;

the availability and terms of capital to fund acquisitions and capital improvements;

the ability to refinance existing debt on favorable terms;

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

the competitive environment in which we operate;

the ability to maintain and increase census levels; and

demographic changes.

See the notes to the quarterly financial statements, and AItem 1. Business@ as is found in our 2008 Annual Report on Form 10–K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. This may be found on our web side at www.nhccare.com. You should carefully consider these risks before making any investment in the Company. These risks and uncertainties are not the only ones facing us. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our shares of stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward–looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Our cash and cash equivalents consist of highly liquid investments with an original maturity of less than three months. As a result of the short–term nature of our cash instruments, a hypothetical 10% change in interest rates would have no material impact on our future earnings and cash flows related to these instruments. Approximately $12.5 million of our notes receivable bear interest at fixed interest rates. As the interest rates on these notes receivable are fixed, a hypothetical 10% change in interest rates would have no impact on our future earnings and cash flows related to these instruments. Approximately $7.9 million of our notes receivable bear interest at variable rates (generally at prime plus 2%). Because the interest rates of these instruments are variable, a hypothetical 10% change in interest rates would result in a related increase or decrease in annual interest income of approximately $40,000. As of June 30, 2009 all of our long–term debt bears interest at variable interest rates. Because the interest rates of these instruments are variable, a hypothetical 10% change in interest rates would result in a related increase or decrease in annual interest expense of approximately $63,000.

Equity Price Risk

We consider our investments in marketable securities as Aavailable for sale@ securities and unrealized gains and losses, net of applicable income taxes, are recorded in stockholders= equity in accordance with Statement of Financial Accounting Standards No. 115. The investments in marketable securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market price. Hypothetically, a 10% change in quoted market prices would result in a related 10% change in the fair value of our investments in marketable securities.

Investment in Cash Fund in Liquidation

Please see Note 10 - Fair Value Measurements regarding market risk related to our investment in a cash fund in liquidation.

Item 4. Controls and Procedures.

As of June 30, 2009, an evaluation was performed under the supervision and with the participation of the Company=s management, including the Chief Executive Officer (ACEO@) and Principal Accounting Officer (APAO@), of the

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

effectiveness of the design and operation of the Company=s disclosure controls and procedures. Based on that evaluation, the Company=s management, including the CEO and PAO, concluded that the Company=s disclosure controls and procedures were effective as of June 30, 2009. There have been no changes in the Company=s internal control over financial reporting during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company=s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

For a discussion of prior, current and pending litigation of material significance to NHC, please see Note 9 of this Form 10–Q.

Item 1A.

Risk Factors.

During the six months ended June 30, 2009, there were no material changes to the risk factors that were disclosed in Item 1A of National HealthCare Corporation=s Annual Report on Form 10–K for the year ended December 31, 2008.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable

Item 3.

Defaults Upon Senior Securities. None

Item 4.

Submission of Matters to Vote of Security Holders.

(a)

The Annual Meeting of Shareholders was held on May 5, 2009.

(b)

Matters voted upon at the meeting and the results were as follows:

PROPOSAL NO. 1: Re-election of J. Paul Abernathy and Robert G. Adams to serve as directors for terms of three years or until their successors have been fully elected and qualified.

Nominee	Voting For	Withholding Authority	Percent For
J. Paul Abernathy	13,252,928	576,323	95.8%
Robert G. Adams	13,295,437	533,814	96.1%

Item 5.

Other Information. None

Item 6.

Exhibits.

(a)

List of exhibits

Exhibit No.	Description

31.1	Rule 13a–14(a)/15d–14(a) Certification of Chief Executive Officer

31.2	Rule 13a–14(a)/15d–14(a) Certification of Principal Financial Officer

32	Certification pursuant to 18 U.S.C. Section 906 by Chief Executive
	Officer and Principal Financial Officer

NATIONAL HEALTHCARE CORPORATION

June 30, 2009

(unaudited)

SIGNATURES

Pursuant to the requirements of the Securities 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 CORPORATION
	(Registrant)


Date: August 6, 2009	/s/ Robert G. Adams
	Robert G. Adams
	Chief Executive Officer


Date: August 6, 2009	/s/ Donald K. Daniel
	Donald K. Daniel
	Senior Vice President and Controller
	(Principal Accounting Officer)