FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended June 30, 1998 Commission file number 333-37185
NATIONAL HEALTHCARE CORPORATION
(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 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-2020
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d), of
the Securities Exchange Act of 1934 during the preceding 12 months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
11,317,848 shares were outstanding as of July 31, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Net patient revenues $ 102,512 $ 94,657 $ 207,632 $ 189,240
Other revenues 8,474 11,534 17,451 22,814
Net revenues 110,986 106,191 225,083 212,054
COSTS AND EXPENSES:
Salaries, wages and benefits 60,643 58,414 125,131 117,629
Other operating 42,219 33,214 83,033 66,340
Depreciation and amortization 2,747 3,977 5,838 7,712
Interest 1,028 3,244 2,618 6,073
Total costs and expenses 106,637 98,849 216,620 197,754
Income Before Income Taxes 4,349 7,342 8,463 14,300
Income Tax Provision (1,567) -- (3,147) --
NET INCOME $ 2,782 $ 7,342 $ 5,316 $ 14,300
EARNINGS PER SHARE:
Basic $ .25 $ .83 $ .49 $ 1.62
Diluted $ .25 $ .72 $ .49 $ 1.43
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,274,107 8,861,433 10,919,023 8,828,846
Diluted 11,364,290 10,762,811 11,367,627 10,732,312
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these statements.
2
<PAGE>
NATIONAL HEALTHCARE CORPORATION
<TABLE>
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
ASSETS
June 30 December 31
1998 1997
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,180 $ 17,205
Cash held by trustees 4,317 3,834
Marketable securities 17,570 19,579
Accounts receivable, less allowance for
doubtful accounts of $6,373 and $5,116 54,998 71,564
Notes receivable 6,787 6,992
Inventory at lower of cost (first-in,
first-out method) or market 4,142 3,948
Deferred income taxes 2,825 1,618
Prepaid expenses and other assets 1,476 553
Total current assets 97,295 125,293
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 126,944 104,597
Less accumulated depreciation and
amortization (45,982) (41,171)
Assets under arrangement with other parties 4,607 4,853
Net property, equipment and assets under
arrangement with other parties 85,569 68,279
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 654 506
Unamortized financing costs 829 1,278
Notes receivable 15,333 11,044
Notes receivable from National 12,049 12,028
Deferred income taxes 2,884 2,922
Minority equity investments and other 8,705 8,831
Total other assets 40,454 36,609
$223,318 $230,181
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
NATIONAL HEALTHCARE CORPORATION
<TABLE>
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
LIABILITIES AND CAPITAL
June 30 December 31
1998 1997
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,735 $ 2,682
Trade accounts payable 14,200 12,810
Accrued payroll 26,879 38,123
Distributions payable --- 5,388
Amount due to third-party payors 10,609 6,789
Accrued interest 119 596
Other current liabilities 16,948 14,407
Total current liabilities 72,490 80,795
LONG-TERM DEBT, less current portion 57,736 60,227
DEBT SERVICED BY OTHER PARTIES, LESS
CURRENT PORTION 16,449 16,676
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 746 763
SUBORDINATED CONVERTIBLE NOTES 1,714 19,152
DEFERRED INCOME 14,687 14,832
COMMITMENTS, CONTINGENCIES AND GUARANTEES
SHAREOWNERS' EQUITY:
Preferred stock, $.01 par value;
10,000,000 shares authorized;
none issued or outstanding --- ---
Common stock, $.01 par value;
30,000,000 shares authorized;
11,252,086 shares issued and
outstanding 113 101
Capital in excess of par value,
less notes receivable 50,745 33,248
Retained earnings 5,316 ---
Unrealized gains on securities 3,322 4,387
Total shareowners' equity 59,496 37,736
$223,318 $ 230,181
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
<TABLE>
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
June 30
1998 1997
(in thousands)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 5,316 $ 14,300
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,297 7,342
Provision for doubtful accounts receivable 1,461 1,253
Amortization of intangibles and deferred charges 579 418
Amortization of deferred income (284) (221)
Equity in earnings of unconsolidated investments (271) (40)
Distributions from unconsolidated investments 142 154
Deferred income taxes (1,169) ---
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 12,788 (28,937)
Increase in inventory (194) (505)
Increase in prepaid expenses and other assets (923) (202)
Increase in trade accounts payable 1,390 17,527
Increase (decrease) in accrued payroll (11,244) 1,296
Increase in amounts due to third party payors 3,820 8,590
Increase (decrease) in accrued interest (477) 566
Increase in other current liabilities 2,541 2,206
Net cash provided by operating activities 18,772 23,747
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (22,509) (21,379)
Investment in long-term notes receivable and loan
participation agreements (12,448) (18,022)
Collection of long-term notes receivable and loan
participation agreements 10,660 14,080
(Increase) decrease in minority equity investments
and other 26 (574)
Decrease in marketable securities 944 362
Net cash used in investing activities (23,327) (25,533)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance --- 23,166
Increase in cash held by trustee (483) (1,478)
Decrease in minority interests in subsidiaries (17) (7)
Increase in bond reserve funds, mortgage
replacement reserves and other deposits (148) (141)
Issuance of partnership units (37) 539
Collection of receivables 30 5,014
Payments on debt (1,736) (4,601)
Cash distributions to partners (5,388) (10,384)
Decrease (increase) in financing costs 309 (10)
Net cash provided by (used in) financing activities (7,470) 12,098
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,025) 10,312
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,205 1,881
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,180 $ 12,193
Supplemental Information:
Cash payments for interest expense $ 3,095 $ 6,920
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
<TABLE>
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
June 30
1998 1997
(in thousands)
<S> <C> <C>
During the six months ended June 30, 1998 and
June 30, 1997, $17,438,000 and $69,000, respectively,
of convertible subordinated debentures were converted
into 1,146,742 shares of common stock and 4,534 units
of NHC's partnership units:
Convertible subordinated debentures $(17,438) $(3,841)
Financing costs 10 3,841
Accrued interest (88) (69)
Partner's capital --- 1
Common stock 12 (1)
Capital in excess of par value 17,504 69
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
<TABLE>
NATIONAL HEALTHCARE CORPORATION
<CAPTION>
Interim Condensed Consolidated Statements of Shareowners' Equity
and Partners' Capital
(in thousands, except share and unit amounts)
Unrealized Total Share-
Receivables Gains owners' Equity
Common Stock/ Units from Sale Paid in Retained (Losses) on General Limited Partners'
Shares/Units Amount of Units Capital Earnings Securities Partners Partners Capital
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 12/31/97 10,103,172 $ 101 $(16,875) $50,123 $ --- $4,387 $ --- $ --- $ 37,736
Net income --- --- --- --- 5,316 --- --- --- 5,316
Unrealized gains on
securities --- --- --- --- --- (1,065) --- --- (1,065)
Total Comprehensive Income 4,251
Shares sold 4,172 --- --- 13 --- --- --- --- 13
Collection of receivables --- --- 30 --- --- --- --- --- 30
Units purchased (2,000) --- --- (50) --- --- --- --- (50)
Shares issued in conversion of
convertible debentures to
common shares 1,146,742 12 --- 17,504 --- --- --- --- 17,516
Balance at 6/30/98 11,252,086 113 (16,845) 67,590 5,316 3,322 --- --- 59,496
Balance at 12/31/96 8,467,959 --- (22,674) --- --- 2,171 1,408 147,632 128,537
Net income --- --- --- --- --- --- 143 14,157 14,300
Unrealized losses on
securities --- --- --- --- --- (308) --- --- (308)
Total Comprehensive Income 13,992
Collection of receivables --- --- 5,014 --- --- --- --- --- 5,014
Units sold 389,694 --- (11,577) --- --- --- --- 12,116 539
Units issued in conversion of
convertible debentures to
partnership units 4,534 --- --- --- --- --- --- 69 69
Cash distributions declared
($1.20 per unit) --- --- --- --- --- --- (104) (10,280) (10,384)
Balance at 6/30/97 8,862,187 $ --- $(29,237) $ --- $ --- $1,863 $ 1,447 $163,694 $137,767
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements of National HealthCare Corporation ("NHC") for
the six months ended June 30, 1998 and 1997, which have not been examined by
independent public accountants, reflect, in the opinion of management, all
adjustments necessary to present fairly the data for such periods. The
results of the operations for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ended December 31, 1998. The interim condensed balance sheet at
December 31, 1997 is taken from the audited financial statements at that date.
The interim condensed financial statements should be read in conjunction with
the consolidated financial statements, including the notes thereto, for the
periods ended December 31, 1997, December 31, 1996, and December 31, 1995.
Note 2 - MANDATED LOSS OF PARTNERSHIP TAX STATUS:
Under the Revenue Act of 1987, NHC and certain other similar publicly
traded partnerships were permitted to be taxed as partnerships and not as
corporations through the 1997 tax year. Effective with the 1998 tax year,
however, NHC is subject to federal income taxes. In response to the
governmentally mandated loss of partnership status, the holders of NHC general
and limited partnership units approved a plan of restructure whereby, on
December 31, 1997, NHC converted from a limited partnership to a corporation.
All partnership units outstanding on December 31, 1997 were effectively
converted into shares of common stock. The restructure from a limited
partnership to a corporation had no effect on the liquidity or financial
condition of NHC.
Note 3 - TRANSFER OF ASSETS AND LIABILITIES TO NHR:
On December 31, 1997, NHC transferred certain assets including mortgage
notes receivable (total book value of $94,439,000), the real property of 17
long-term health care centers, six assisted living facilities and one
retirement center (total book value of $144,615,000) and related liabilities
(total book value of $86,414,000) to National Health Realty, Inc. (NHR), a
publicly traded real estate investment trust. NHC received in exchange all of
the common stock or other equity interests of NHR, which was transferred to
NHC's unitholders.
8
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Concurrent with NHC's conveyance of the real property to NHR, NHC leased
from NHR each of the 24 facilities under leases accounted for as operating
leases. Pursuant to the terms of the leases, NHC is obligated to pay NHR
annual base rent of $12,417,000 on the 24 facilities. In addition to base
rent, in each year after 1999, NHC must pay percentage rent to NHR equal to 3%
of the amount by which revenues of each facility in such later year exceeds
revenues of such facility in 1999.
NHC has also entered into an advisory agreement with NHR whereby
services related to investment activities and day-to-day management and
operations are provided to NHR by NHC as advisor. For its services under the
advisory agreement, NHC is entitled to annual compensation of the greater of
2% of NHR's gross consolidated revenues or the actual expenses incurred by
NHC.
Note 4 - OTHER REVENUES:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenue from managed centers $ 5,621 $ 8,713 $11,335 $16,995
Guarantee fees 144 150 292 312
Advisory fee from NHI 827 776 1,655 1,551
Advisory fee from NHR 110 --- 221 ---
Earnings on securities 365 370 739 891
Equity in earnings of
unconsolidated investments 126 24 163 24
Interest income 858 968 1,940 1,949
Other 423 533 1,106 1,092
$ 8,474 $11,534 $17,451 $22,814
</TABLE>
Revenues from managed centers include management fees and interest
income on notes receivable from the managed centers. "Other" revenues include
non-health care related earnings.
Note 5 - INVESTMENTS IN MARKETABLE SECURITIES:
NHC considers its investments in marketable securities as available for
sale securities and unrealized gains and losses are recorded in shareowners'
equity in accordance with SFAS 115.
9
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Proceeds from the sale of investments in debt and equity securities
during the period ended June 30, 1998 and 1997 were $220,000 and $511,000,
respectively. Gross investment losses of $13,000 were realized on these sales
during the period ended June 30, 1998. Gross investment gains of $149,000
were realized on these sales during the period ended June 30, 1997. Realized
gains and losses from securities sales are determined on the specific
identification of the securities.
Note 6 - GUARANTEES:
In order to obtain management agreements and to facilitate the
construction or acquisition of certain health care centers which NHC manages
for others, NHC has guaranteed some or all of the debt (principal and
interest) on those centers. For this service, NHC charges an annual guarantee
fee of 1% to 2% of the outstanding principal balance guaranteed, which fee is
in addition to NHC's management fee. The principal amounts outstanding under
the guarantees is approximately $69,160,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average rate of
5.2% at June 30, 1998.
NOTE 7 - INCOME TAXES:
The provision (benefit) for income taxes for the six months ended June
30, 1998 is comprised of the following components:
<TABLE>
<CAPTION>
Six Months Ended
(in thousands) June 30, 1998
<S> <C>
Current
Federal $ 3,154
State 451
Current Income Tax Provision 3,605
Deferred Tax Benefit
Federal (401)
State (57)
Deferred Income Tax Benefit (458)
Total Income Tax Provision $ 3,147
</TABLE>
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The deferred tax assets
and liabilities, at the respective income tax rates, as of June 30, 1998 are
as follows:
10
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
(in thousands) June 30, 1998
<S> <C>
Current deferred tax asset:
Accounts receivable $ 2,023
Accrued liabilities 1,875
3,898
Current deferred tax liability:
Unrealized gains on marketable
securities $ (1,045)
Other (28)
(1,073)
Net current deferred tax asset $ 2,825
Noncurrent deferred tax asset:
Deferred gain on sale of assets 5,549
Deferred guaranty fees 1,146
Other 384
7,079
Noncurrent deferred tax liability:
Tax depreciation in excess of fin-
ancial reporting depreciation (4,143)
Other (52)
(4,195)
Net noncurrent deferred tax asset $ 2,884
</TABLE>
The provision for income taxes is different than the amount computed using the
applicable statutory federal and state income tax rate as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
<S> <C>
Tax expense at statutory rates $ 3,797
Tax benefit of timing differences (458)
Reversal of current income tax accruals (146)
Other (46)
Total Income Tax Provision $ 3,147
</TABLE>
11
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 8 - NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") effective for fiscal years beginning after December 15,
1997. SFAS 130 requires that changes in the amounts of certain items,
including gains and losses on certain securities, be shown in the financial
statements. NHC has adopted the provisions of SFAS 130 effective January 1,
1998. NHC has elected to disclose comprehensive income, which includes net
income and unrealized gains and losses on securities, in the Consolidated
Statements of Shareowners' Equity and Partners' Capital. Prior periods have
been restated to conform to the SFAS 130 requirements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131") effective for fiscal years beginning after December
15, 1997. This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. NHC will be required to adopt SFAS 131
in the fourth quarter of 1998 and is currently determining the impact that
SFAS 131 will have on its financial statements. If appropriate, NHC will
begin disclosing the required information accordingly.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5 ("SOP 98-5") effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires that all
nongovernmental entities expense the costs of start-up activities as those
costs are incurred. The statement also requires nongovernmental entities to
write off any unamortized start-up costs that remain on the balance sheet at
the date of adoption. NHC will adopt the provisions of SOP 98-5 effective
January 1, 1999. Management does not expect the adoption to have a material
impact on NHC's financial position or cash flows.
12
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 9- LEGAL PROCEEDINGS:
In March 1996, Florida Convalescent Centers, Inc. (FCC), an independent
Florida corporation for whom NHC manages sixteen licensed nursing centers in
Florida, gave NHC notice of its intent not to renew a management contract at
one of the centers. Pursuant to written agreements between the parties (the
"Valuation Process"), NHC first valued the center, then game FCC the option to
either i) sell the center to NHC at that value (minus certain deferred
contingency fees owed NHC based on that value) or ii) elect to pay NHC a
certain deferred contingency fee based upon that value and retain ownership.
FCC responded on March 26, 1996, by filing a Declaratory Judgment suit in the
Circuit Court of the Twelfth Judicial Circuit in and for Sarasota County,
Florida, requesting the court interpret the parties' rights under their
contractual arrangements, and naming NHC and its then general partners as
defendants.
In January 1997, FCC notified NHC that it intends to terminate its
management contracts with NHC as they become eligible for termination. Four
such contracts matured in 1997 and the expiration date of a fifth center is in
dispute; however, the parties have stipulated that NHC will remain as manager
of all centers and the Valuation Process will be deferred until a final
decision is reached by the Sarasota Court. The balance of the FCC contracts
may be terminated in the years 2001-2003, although some of those dates are in
dispute.
Since the suit was filed, FCC has amended its complaint four times, the
most recent amendment occurring in January 1998. These amendments assert
numerous claims against NHC including claims for breach of all management
agreements between the parties; for a declaration that FCC does not owe any
deferred compensation to NHC or, if so, a declaration that such deferred
compensation constitute usurious interest; that the recorded mortgages
securing FCC's debt to NHC do not secure payment of the deferred compensation;
for breach of a 1994 loan agreement between FCC and defendants related to the
construction of a facility in Orlando; for business libel; for breach of
fiduciary duty arising from defendants' alleged obstruction of FCC's right to
audit; from defendants' alleged failure to properly manage FCC's facilities;
from defendants' alleged self dealing by causing FCC and defendants or their
affiliates to enter
13
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
into contracts that are not customary or usual in the industry; and in
January, 1998 a breach resulting from NHC's conversion from a publicly traded
partnership into a publicly traded corporation effective December 31, 1997.
In addition to declaratory relief, FCC asserts that it is entitled to
unspecified damages and has the right to terminate all of the management
agreements between the parties for cause. The defendants have answered,
denying all of FCC's claims and asserting counterclaims against FCC.
On November 5, 1997, the trial court ruled against FCC's Partial Motion
for Summary Judgment in which FCC asked the Court to order that the mortgages
securing NHC's loans and guarantees to FCC did not secure the deferred
compensation due upon termination of the contract. The Court stated as
follows: "Defendants (NHC) are not required to release the encumbered
properties from the mortgage liens until all secured amounts, including
deferred contingency fees, are paid". In January, 1998, FCC filed with the
Sarasota Court a Motion for Summary Judgment alleging all FCC management
contracts were breached upon NHC's conversion into a corporation. NHC
responded to this motion with numerous affidavits; the Court heard arguments
on this issue on May 7 and has denied FCC's motion. The Court also set a
trial date for the Fifth Amended Complaint commencing October 26, 1998. Trial
preparation is currently under way.
The loss of management contract revenue from an individual FCC center
would not have a material impact on NHC, but the loss of the revenues from all
sixteen centers would have a material impact. This impact could be offset,
however, by the receipt by NHC of the deferred contingency fee and/or the fact
that NHC might purchase some or all of the facilities, thus allowing the
revenues of the purchased centers to be operating income for NHC; provided
such fees or rights are not disallowed by the lawsuit.
NHC is also a defendant in a lawsuit styled Braeuning, et al vs.
National HealthCare L.P., et al filed "under seal" in the U.S. District Court
of the Northern District of Florida on April 9, 1996. The court removed the
seal from the complaint - but not the file itself - on March 20, 1997, and
service of process occurred on July 8, 1997, with the government participating
as an intervening plaintiff. By agreement, and with court approval, the suit
has been moved from the Pensacola District
14
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Court to the Tampa, Florida, District Court. NHC has filed its answer denying
the allegations. The suit alleges that NHC submitted cost reports and routine
cost limit exception requests containing "fraudulent allocation of routine
nursing services to ancillary service cost centers" and also alleges that NHC
improperly allocated skilled nursing service hours in four managed centers,
all in the state of Florida. The suit was filed under the Qui Tam provisions
of the Federal False Claims Act, commonly referred to as the "Whistleblower
Act". NHC has denied all allegations and believes the facts will vindicate
its position. The individual plaintiff Braeuning has amended the suit to
allege that he was "retaliatory discharged" from his position due to the
filing of the suit. In an order (March 13, 1998) denying Braeuning's Motion
for Summary Judgment on this issue, the court stated, "That the defendants
have submitted a legitimate non-retaliatory reason for firing Mr. Braeuning
casts significant doubt on Mr. Braeuning's likelihood of success on the
merits." The Court has now ordered that Mr. Braeuning can proceed to prepare
for an evidentiary hearing limited to this issue.
In regard to the initial allegations contained in the lawsuit, NHC
believes that the cost report information of its centers has been either
appropriately filed or, upon amendment, will reflect adjustments only for the
correction of unintentional misallocations. Prior to the filing of the suit,
NHC had commenced an in-depth review of the nursing time allocation process
at its owned, leased and managed centers. A number of amended cost reports
have been filed and NHC will continue to schedule and prepare revised cost
reports and exception requests. NHC's self audit process has been approved
by the plaintiffs and NHC has retained a nationally recognized accounting
firm to review the self audit process. It is anticipated that all cost
report years in question will be reviewed prior to there being further
action in this matter at the judicial level. The cost report periods
under review include periods from 1991 through 1996, plus the
1997 reports as they are initially filed.
Adjustments to the reimbursable cost claimed will be the responsibility
of the center where costs were incurred, whether owned, leased or managed by
the Company. Negative adjustments to managed centers would reduce NHC's
management fee (6% of net revenue), while adjustments to owned or leased
centers would impact the Company's financial statements. NHC intends to
continue it's revenue policy of not
15
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
reflecting routine cost limit exception requests as income until the process,
including cost report audits, is completed. NHC will continue to fully
cooperate with the government in an attempt to determine dollar amounts
involved, and will and is aggressively pursuing an amicable settlement. NHC
cannot predict at this time the ultimate outcome of the suit. An adverse
determination in the lawsuit could subject NHC to settlements which could have
a material negative impact on the financial position or results of operations
of NHC.
In October 1996, two managed centers in Florida were audited by
representatives of the regional office of the Office of the Inspector General
("OIG"). As part of these audits, the OIG reviewed various records of the
facilities relating to allocation of nursing hours and contracts with
suppliers of outside services. At one center, the OIG indicated during an
exit conference that it had no further questions but has not yet issued a
final report. At the second facility, which is one of four named in the
Braeuning lawsuit, the OIG determined that certain records were insufficient
and NHC supplied the additional requested information. These audits have been
incorporated into the lawsuit. Florida is one of the states in which
governmental officials are conducting "Operation Restore Trust", a
federal/state program aimed at detecting and eliminating fraud and abuse by
providers in the Medicare and Medicaid programs. The OIG has increased its
investigative actions in Florida (and has now opened a Tennessee office) as
part of Operation Restore Trust.
There is certain additional litigation incidental to NHC's business,
none of which, in management's opinion, would be material to the financial
position or results of operations of NHC.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National HealthCare Corporation (NHC, or the Company) operates or
manages 112 long-term health care centers with 14,259 beds in nine states.
NHC provides nursing care as well as ancillary therapy services to patients in
a variety of settings including long-term care nursing centers, managed care
specialty units, subacute care units, Alzheimer's care units, homecare
programs, and facilities for assisted living. NHC also operates retirement
centers. 16
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
Two significant events occurred on December 31, 1997 which will have a
permanent impact on NHC's results of operations and financial condition - the
transfers to National Health Realty, Inc. and the governmentally mandated loss
of partnership tax status.
Transfers to National Health Realty-
As more fully described in Note 3 to the financial statements and in
NHC's prior year annual report, at December 31, 1997, NHC transferred certain
assets, liabilities and equity to National Health Realty, Inc. (NHR), a real
estate investment trust. NHC received in exchange all of the common stock or
other equity interests of NHR, which was transferred to NHC's unitholders.
NHC management believes that, compared to other alternatives then available,
the transfer will enhance unitholders' value. Concurrent with the transfers
to NHR, NHC leased from NHR the real property which had been transferred.
Effect of the Transfers on Results of Operations-
The effect of the transfer of assets and liabilities to NHR on results
of operations is as follows. "Other revenues" are reduced for the interest
income on notes receivable transferred and operating expenses are increased by
the rent expense on the property transferred. These reductions in net income
are offset in part by the reduction of interest expense on debt transferred,
by the reduction of depreciation expense on assets transferred, and by the
receipt of an advisory fee from NHR under an advisory agreement. The net
effect of these transactions is to reduce pretax net income when compared to
periods prior to the transfer.
Effect of the Transfer on Liquidity and Financial Condition-
Assets transferred to NHR include mortgage notes receivable (total book
value of $94,439,000), as well as the real property of 17 long-term health
care centers, six assisted living facilities and one retirement center (total
book value of $144,615,000) and related liabilities (total book value of
$86,414,000). Equity transferred to NHR totaled $152,640,000. Although these
physical assets were transferred, the operational revenues and expenses
remain, as before, with NHC.
17
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
Mandated Loss of Partnership Tax Status-
Under the Revenue Act of 1987, NHC and certain other similar publicly
traded partnerships were permitted to be taxed as partnerships and not as
corporations through the 1997 tax year. Effective with the 1998 tax year,
however, NHC is subject to federal income taxes. In response to the
governmentally mandated loss of partnership tax status,
the holders of NHC general and limited partnership units approved a plan of
restructure whereby, on December 31, 1997, NHC converted by merger from a
limited partnership to a corporation. All partnership units (or rights to
obtain same) outstanding on December 31, 1997 were effectively converted into
shares of common stock. The restructure from a limited partnership to a
corporation had no effect on the liquidity or financial condition of NHC.
Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997.
Results for the three month period ended June 30, 1998 include a 4.5%
increase over the same period in 1997 in net revenues and a 62.1% decrease in
net income.
The increased revenues for the quarter reflect the continued growth of
operations. Compared to the quarter a year ago, NHC has increased the number
of owned or leased long-term care beds by 486 beds from 6,997 beds to 7,483
beds. In addition, the number of owned or leased assisted living units has
increased by 145 units from 629 units to 774 units. Also contributing to
increased revenues are improvements in both private pay and third party payor
rates.
The increased revenues for the quarter were partially offset by
decreased levels of service and changes in payment systems for rehabilitative
services and homecare services.
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, decreased 35.5% in 1998 from $8.7 million in 1997 to
$5.6 million in 1998 due primarily to decreased interest income on $94,439,000
notes receivable which were transferred to NHR on December 31, 1997.
18
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
Total costs and expenses for the 1998 quarter increased $7.8 million or
7.9% to $106.6 million from $98.8 million. Salaries, wages and benefits, the
largest operating costs of this service company, increased $2.2 million or
3.8% to $60.6 million from $58.4 million. Other operating expenses increased
$9.0 million or 27.1% to $42.2 million for the 1998 second quarter compared to
$33.2 million in the 1997 period. Depreciation and amortization decreased
30.9% to $2.7 million. Interest costs decreased $2.2 million or 68.3% to $1.0
million from $3.2 million for last year.
Increases in salaries, wages and benefits are attributable to the
increase in staffing levels due to long-term care bed additions and assisted
living expansions. Also contributing to higher costs of labor are
inflationary increases for salaries and the associated benefits as well as
adjustments in bonus and benefit programs for the quarter.
Operating costs have increased in part due to the increased number of
beds in operation and the expansion of assisted living services. These
increased beds and expansions are expected to provide increased revenues in
future periods. Operating costs have also increased due to rent expense on
the assets transferred to NHR and leased back to NHC.
Depreciation and amortization decreased as a result of the transfer of
real property to NHR, offset in part by the placing of newly purchased
personalty in service. Interest expense decreased compared to the quarter a
year ago due primarily to the transfer of debt to NHR.
The income tax provision for the quarter was $1.6 million compared to no
provision for the previous quarter. The change is due to the restructure from
a limited partnership to a corporation.
The total census at owned and leased centers for the quarter averaged
90.0% compared to an average of 92.0% for the same quarter a year ago. When
newly opened centers are excluded, the total census of owned and leased
centers for the quarter averaged 92.7%.
19
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.
Results for the six month period ended June 30, 1998 include a 6.1%
increase over the same period in 1997 in net revenues and a 62.8% decrease in
net income.
The increased revenues for the six months reflect the continued growth
of operations. Compared to the six month period a year ago, NHC has increased
the number of owned, leased and managed long-term care beds by 484 beds from
13,775 beds to 14,259 beds. In addition, the number of owned or leased
assisted living units has increased by 145 units from 629 units to 774 units.
Also contributing to increased revenues are improvements in both private pay
and third party payor rates.
The increased revenues for the six months were partially offset by
decreased levels of service and changes in payment systems for rehabilitative
services and homecare services.
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, decreased 33.3% in 1998 from $17.0 million in 1997
to $11.3 million in 1998 due primarily to decreased interest income on
$94,439,000 notes receivable which were transferred to NHR.
Total costs and expenses for the 1998 six months increased $18.9 million
or 9.5% to $216.6 million from $197.8 million. Salaries, wages and benefits,
the largest operating costs of this service company, increased $7.5 million or
6.4% to 125.1 million from $117.6 million. Other operating expenses increased
$16.7 million or 25.2% to $83.0 million for the 1998 six months compared to
$66.3 million in the 1997 period. Depreciation and amortization decreased
24.3% to $5.8 million. Interest costs decreased $3.5 million or 56.9% to $2.6
million from $6.1 million for last year.
Increases in salaries, wages and benefits are attributable to the
increase in staffing levels due to long-term care bed additions and assisted
living expansions. Also contributing to higher costs of labor are
inflationary increases for salaries and the associated benefits as well as
adjustments in bonus and benefit programs for the six months.
20
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
Operating costs have increased in part due to the increased number of
beds in operation and the expansion of assisted living services. These
increased beds and expansions are expected to provide increased revenues in
future periods. Operating costs have also increased due to rent expense on
the assets transferred to NHR and leased back to NHC.
Depreciation and amortization decreased as a result of the transfer of
real property to NHR, offset in part by the placing of newly purchased
personalty in service. Interest expense decreased compared to the six months
a year ago due primarily to the transfer of debt to NHR.
The income tax provision for the six months was $3.1 million compared to
no provision for the previous six months. The change is due to the
restructure from a limited partnership to a corporation.
The total census at owned and leased centers for the six months averaged
89.5% compared to an average of 93.2% for the same six months a year ago.
When newly opened centers are excluded, the total census of owned and leased
centers for the quarter averaged 92.5%.
Liquidity and Capital Resources
During the first six months of 1998, the Company generated net cash of
$18.8 million from operating activities, $10.7 million from the collection of
long-term notes receivable, $0.3 million from the increase in financing costs,
and $0.9 million from the decrease in marketable securities. Of these funds,
$22.5 million was used for additions to and acquisitions of property and
equipment, $12.4 million for investment in long-term notes receivable and loan
participation agreements, $0.5 million to increase cash held by trustees, $0.1
million to increase bond reserve funds and mortgage replacement reserves, $1.7
million for payments on debt, and $5.4 million for cash distributions to
partners for the last quarter of 1997. NHC does not currently plan to declare
or pay dividends in 1998 or beyond. Cash and cash equivalents decreased $12.0
million during the period.
At June 30, 1998, the Company's ratio of long-term obligations to
convertible debt and capital is 1.2 to 1.
21
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
Cash Dividends
NHC may pay dividends at the discretion of the Board of Directors. NHC,
as a corporation, does not anticipate initially paying dividends.
Impact of Inflation
Reimbursement rates under the Medicare and Medicaid programs generally
reflect the underlying increases in costs and expenses resulting from
inflation. For this reason, the impact of inflation on profitability has not
been significant.
Development
During the first six months of 1998, the Company added a net total of
188 licensed long-term care beds, 101 beds of which are owned or leased and 87
beds of which are managed for other owners.
Currently, NHC has 450 long-term care beds under development at 12
owned, leased or managed health care centers in various locations. These beds
are either under construction or a Certificate of Need has been received from
the appropriate state agency authorizing the construction of additional
centers or beds. In addition, NHC has 211 retirement apartments at two
independent living centers under development, all of which are owned.
Health Care Legislation--
During 1997, the Federal government enacted the Balanced Budget Act of
1997 ("BBA"), which contains numerous Medicare and Medicaid cost-saving
measures. The BBA requires that nursing homes transition to a prospective
payment system under the Medicare program during a three year "transition
period" commencing with the first cost reporting period beginning on or after
July 1, 1998. Home health agencies must also transition from a cost-based
reimbursement system to a prospective payment system beginning in 1999. The
BBA also contains certain measures that could lead to future reductions in
Medicare therapy cost reimbursement and Medicaid payment rates. Given the
recent enactment of the BBA, NHC is unable to predict the ultimate impact of
the BBA on its future operations. However, any reductions in government
spending for long-term health care would likely have an adverse effect on the
operating results and cash flows of NHC. NHC will attempt to increase
nongovernmental revenues and continue the expansion of its service component
income in order to offset any loss of governmental revenues as a result of the
enactment of the BBA. The President's 1998-99 budget proposal also calls for
the imposition of new provider paid service fees.
22
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
Litigation--
As discussed in more detail in Note 9 to the financial statements, NHC
is a defendant in a lawsuit filed under the Qui Tam provisions of the Federal
False Claims Act, commonly referred to as the "Whistleblower Act", with the
government participating as an intervening plaintiff. The suit alleges that
NHC has submitted cost reports and routine cost limit exception requests
containing "fraudulent allocation of routine nursing services to ancillary
cost centers" and improper allocation of skilled nursing service hours in four
managed centers. NHC is cooperating fully with the government and will
aggressively pursue an amicable settlement, if such appears necessary at
the conclusion of the in-house audit currently underway. Adjustments to
the reimbursable cost claimed will be the responsibility of the center where
costs were incurred, whether owned, leased or managed by the Company.
Negative adjustments to managed centers would reduce NHC's management fee
(6% of net revenue), while adjustments to owned or leased centers would
impact the Company's financial statement. An adverse determination in the
lawsuit could subject NHC to repayments which could have a material negative
impact on the financial position or results of operations of NHC.
Also as discussed in more detail in Note 9 to the financial statement,
NHC is a defendant in a lawsuit filed by Florida Convalescent Centers, Inc.
("FCC"), an independent Florida corporation for whom NHC manages 16 licensed
nursing centers in Florida. Under the suit, FCC seeks to terminate all of its
management agreements with NHC. NHC has filed an answer denying all of FCC's
claims and asserting a counterclaim against FCC. The case is set for trial in
late October, 1998.
The loss of management contract revenue on an individual FCC center
would not have a material impact on NHC, but the loss of the revenues from all
sixteen centers would have a material impact. This impact could be offset,
however, by the receipt by NHC of the deferred contingency fee and/or the fact
that NHC might purchase some or all of the facilities, thus allowing the
revenues to be maintained by NHC; provided such fees or rights are not
disallowed by the law suit.
23
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
Year 2000 Compliance
NHC is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. NHC does not expect that the cost to
modify its information technology infrastructure to be Year 2000 compliant
will be material to its financial condition or results of operations. NHC
does not anticipate any material disruption in its operations as a result of
any failure by NHC to be in compliance. NHC does not currently have any
information concerning the Year 2000 compliance status of its suppliers,
customers and third party payors. In the event that any of NHC's significant
suppliers, customers or third party payors do not successfully and timely
achieve Year 2000 compliance, NHC's business or operations could be adversely
affected.
Item 3. Quantitative and Qualitative Information About Market Risk
Not Applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In March 1996, Florida Convalescent Centers, Inc. (FCC), an
independent Florida corporation for whom NHC manages sixteen
licensed nursing centers in Florida, gave NHC notice of its intent
not to renew a management contract at one of the centers. Pursuant
to written agreements between the parties (the "Valuation
Process"), NHC first valued the center, then gave FCC the option
to either i) sell the center to NHC at that value (minus certain
deferred contingency fees owed NHC based on that value) or ii)
elect to pay NHC a certain deferred contingency fee based upon
that value and retain ownership. FCC responded on March 26, 1996,
by filing a Declaratory Judgment suit in the Circuit Court of the
Twelfth Judicial Circuit in and for Sarasota County, Florida,
requesting the court interpret the parties' rights under their
contractual arrangements, and naming NHC and its then general
partners as defendants.
24
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
In January 1997, FCC notified NHC that it intends to
terminate its management contracts with NHC as they become
eligible for termination. Four such contracts matured in 1997 and
the expiration date of a fifth center is in dispute; however, the
parties have stipulated that NHC will remain as manager of all
centers and the Valuation Process will be deferred until a final
decision is reached by the Sarasota Court. The balance of the FCC
contracts may be terminated in the years 2001-2003, although some
of those dates are in dispute.
Since the suit was filed, FCC has amended its complaint four
times, the most recent amendment occurring in January 1998. These
amendments assert numerous claims against NHC including claims for
breach of all management agreements between the parties; for a
declaration that FCC does not owe any deferred compensation to NHC
or, if so, a declaration that such deferred compensation
constitutes usurious interest; that the recorded mortgages
securing FCC's debt to NHC do not secure payment of the deferred
compensation fees; for breach of a 1994 loan agreement between FCC
and defendants related to the construction of a facility in
Orlando; for business libel; for breach of fiduciary duty arising
from defendants' alleged obstruction of FCC's right to audit; from
defendants' alleged failure to properly manage FCC's facilities;
from defendants' alleged self dealing by causing FCC and
defendants or their affiliates to enter into contracts that are
not customary or usual in the industry; and in January, 1998 a
breach resulting from NHC's conversion from a publicly traded
partnership into a publicly traded corporation effective December
31, 1997. In addition to declaratory relief, FCC asserts that it
is entitled to unspecified damages and has the right to terminate
all of the management agreements between the parties for cause.
The defendants have answered, denying all of FCC's claims and
asserting counterclaims against FCC.
On November 5, 1997, the trial court ruled against FCC's
Partial Motion for Summary Judgment in which FCC asked the Court
to order that the mortgages securing NHC's loans and guarantees to
FCC did not secure the deferred compensation due
25
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
upon termination of the contract. The Court stated as follows:
"Defendants (NHC) are not required to release the encumbered
properties from the mortgage liens until all secured amounts,
including deferred contingency fees, are paid". In January, 1998,
FCC filed with the Sarasota Court a Motion for Summary Judgment
alleging all FCC management contracts were breached upon NHC's
conversion into a corporation. NHC responded to this motion with
numerous affidavits; the Court heard arguments on this issue on
May 7 and has denied FCC's motion. The Court also set a trial
date for the Fifth Amended Complaint commencing October 26, 1998.
Trial preparation is currently under way.
The loss of management contract revenue from an individual
FCC center would not have a material impact on NHC, but the loss
of the revenues from all sixteen centers would have a material
impact. This impact could be offset, however, by the receipt by
NHC of the deferred contingency fee and/or the fact that NHC might
purchase some or all of the facilities, thus allowing the revenues
of the purchased centers to be operating income for NHC; provided
such fees or rights are not disallowed by the lawsuit.
NHC is also a defendant in a lawsuit styled Braeuning, et al
vs. National HealthCare L.P., et al filed "under seal" in the U.S.
District Court of the Northern District of Florida on April 9,
1996. The court removed the seal from the complaint - but not the
file itself - on March 20, 1997, and service of process occurred
on July 8, 1997, with the government participating as an
intervening plaintiff. By agreement, and with court approval, the
suit has been moved from the Pensacola District Court to the
Tampa, Florida, District Court. NHC has filed its answer denying
the allegations. The suit alleges that NHC submitted cost reports
and routine cost limit exception requests containing "fraudulent
allocation of routine nursing services to ancillary service cost
centers" and also alleges that NHC improperly allocated skilled
nursing service hours in four managed centers, all in the state of
Florida. The suit was filed under the Qui Tam provisions of the
Federal False Claims Act, commonly referred to as the "Whistle-
blower Act". NHC has denied all allegations and believes the
facts will vindicate its position. The individual plaintiff
Braeuning has amended the suit to allege that he was "retaliatory
discharged" from
26
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
his position due to the filing of the suit. In an order (March
13, 1998) denying Braeuning's Motion for Summary Judgment on this
issue, the court stated, "That the defendants have submitted a
legitimate non-retaliatory reason for firing Mr. Braeuning casts
significant doubt on Mr. Braeuning's likelihood of success on the
merits." The Court has now ordered that Mr. Braeuning can proceed
to prepare for an evidentiary hearing limited to this issue.
In regard to the initial allegations contained in the
lawsuit, NHC believes that the cost report information of its
centers has been either appropriately filed or, upon amendment,
will reflect adjustments only for the correction of unintentional
misallocations. Prior to the filing of the suit, NHC had
commenced an in-depth review of the nursing time allocation
process at its owned, leased and managed centers. A number of
amended cost reports have been filed and NHC will continue to
schedule and prepare revised cost reports and exception requests.
NHC's self audit process has been approved by the plaintiffs and
NHC has retained a nationally recognized accounting firm to review
the self audit process. It is anticipated that all cost report
years in question will be reviewed prior to there being further
action in this matter at the judicial level. The cost report
periods under review include periods from 1991 through 1996, plus
the 1997 reports as they are initially filed.
Adjustments to the reimbursable cost claimed will be the
responsibility of the center where costs were incurred, whether
owned, leased or managed by the Company. Negative adjustments to
managed centers would reduce NHC's management fee (6% of net
revenue), while adjustments to owned or leased centers would
impact the Company's financial statements. NHC intends to
continue it's revenue policy of not reflecting routine cost limit
exception requests as income until the process, including cost
report audits, is completed. NHC will continue to fully
cooperate with the government in an attempt to determine dollar
amounts involved, and will and is aggressively pursuing an
amicable settlement. NHC cannot predict at this time the ultimate
outcome of the suit. An adverse determination in the lawsuit
could subject NHC to settlements which could have a material
negative impact on the financial position or results of operations
of NHC.
27
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
In October 1996, two managed centers in Florida were audited
by representatives of the regional office of the Office of the
Inspector General ("OIG"). As part of these audits, the OIG
reviewed various records of the facilities relating to allocation
of nursing hours and contracts with suppliers of outside services.
At one center, the OIG indicated during an exit conference that it
had no further questions but has not yet issued a final report.
At the second facility, which is one of four named in the
Braeuning lawsuit, the OIG determined that certain records were
insufficient and NHC supplied the additional requested
information. These audits have been incorporated into the
lawsuit. Florida is one of the states in which governmental
officials are conducting "Operation Restore Trust", a
federal/state program aimed at detecting and eliminating fraud and
abuse by providers in the Medicare and Medicaid programs. The OIG
has increased its investigative actions in Florida (and has now
opened a Tennessee office) as part of Operation Restore Trust.
There is certain additional litigation incidental to NHC's
business, none of which, in management's opinion, would be
material to the financial position or results of operations of
NHC.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule (for
SEC purposes only)
(b) Reports on Form 8-K - none required
28
<PAGE>
NATIONAL HEALTHCARE CORPORATION
June 30, 1998
(Unaudited)
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTHCARE CORPORATION
(Registrant)
Date August 14, 1998 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date August 14, 1998 /s/ Donald K. Daniel
Donald K. Daniel
Vice President and Controller
Principal Accounting Officer
29
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