FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended September 30, 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
8,866,822 shares were outstanding as of October 31, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NATIONAL HEALTHCARE CORPORATION
<TABLE>
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Net patient revenues $ 99,931 $ 99,400 $ 307,563 $ 288,640
Other revenues 8,523 12,589 25,974 35,403
Net revenues 108,454 111,989 333,537 324,043
COSTS AND EXPENSES:
Salaries, wages and
benefits 58,724 59,910 183,855 177,539
Other operating 30,807 28,799 92,745 83,109
Rent 11,174 6,240 32,269 18,270
Depreciation & amort. 2,864 4,349 8,702 12,061
Interest 234 3,314 2,852 9,387
Total costs & expenses 103,803 102,612 320,423 300,366
Income Before Income Taxes 4,651 9,377 13,114 23,677
Income Tax Provision (1,750) -- (4,897) --
NET INCOME $ 2,901 $ 9,377 $ 8,217 $ 23,677
EARNINGS PER SHARE:
Basic $ .26 $ 1.06 $ .74 $ 2.68
Diluted $ .26 $ .91 $ .74 $ 2.33
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,308,282 8,860,413 11,050,177 8,836,992
Diluted 11,365,571 10,756,650 11,368,753 10,737,859
</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
September 30 December 31
1998 1997
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,989 $ 17,205
Cash held by trustees 7,211 3,834
Marketable securities 18,784 19,579
Accounts receivable, less allowance for
doubtful accounts of $6,761 and $5,116 49,615 71,564
Notes receivable 3,924 6,992
Inventory at lower of cost (first-in,
first-out method) or market 4,201 3,948
Deferred income taxes 2,416 1,618
Prepaid expenses and other assets 1,088 553
Total current assets 90,228 125,293
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 126,700 104,597
Less accumulated depreciation and
amortization (47,618) (41,171)
Assets under arrangement with other parties 4,413 4,853
Net property, equipment and assets under
arrangement with other parties 83,495 68,279
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 654 506
Unamortized financing costs 795 1,278
Notes receivable 25,447 11,044
Notes receivable from National 12,059 12,028
Deferred income taxes 3,048 2,922
Minority equity investments and other 8,875 8,831
Total other assets 50,878 36,609
$224,601 $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
September 30 December 31
1998 1997
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,613 $ 2,682
Trade accounts payable 13,427 12,810
Accrued payroll 22,842 38,123
Distributions payable --- 5,388
Amount due to third-party payors 11,847 6,789
Accrued interest 265 596
Other current liabilities 19,472 14,407
Total current liabilities 71,466 80,795
LONG-TERM DEBT, less current portion 56,660 60,227
DEBT SERVICED BY OTHER PARTIES, LESS
CURRENT PORTION 16,464 16,676
MINORITY INTERESTS IN CON-
SOLIDATED SUBSIDIARIES 715 763
SUBORDINATED CONVERTIBLE NOTES 714 19,152
DEFERRED INCOME 14,548 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;
11,316,898 shares issued and
outstanding 113 101
Capital in excess of par value,
less notes receivable 51,859 33,248
Retained earnings 8,217 ---
Unrealized gains on securities 3,845 4,387
Total shareowners' equity 64,034 37,736
$224,601 $ 230,181
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
NATIONAL HEALTHCARE CORPORATION
<TABLE>
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
1998 1997
(in thousands)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 8,217 $ 23,677
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,131 11,469
Provision for doubtful accounts receivable 2,335 1,946
Amortization of intangibles and deferred charges 822 642
Amortization of deferred income (427) (1,344)
Equity in earnings of unconsolidated investments (776) (110)
Distributions from unconsolidated investments 149 161
Deferred income taxes (924) ---
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 19,614 (14,218)
Increase in inventory (253) (686)
Increase in prepaid expenses and other assets (535) (98)
Increase (decrease) in trade accounts payable 617 (3,133)
Decrease in accrued payroll (15,281) (1,823)
Increase in amounts due to third party payors 5,058 9,816
Increase (decrease) in accrued interest (331) 39
Increase in other current liabilities 5,065 4,688
Net cash provided by operating activities 31,481 31,026
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (23,268) (31,263)
Investment in long-term notes receivable and loan
participation agreements (24,881) (23,494)
Collection of long-term notes receivable and loan
participation agreements 13,515 21,550
(Increase) decrease in minority equity investments
and other 169 (753)
Decrease in marketable securities 253 605
Net cash used in investing activities (34,212) (33,355)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 46 22,948
Increase in cash held by trustee (3,377) (1,727)
Decrease in minority interests in subsidiaries (48) (5)
Increase in bond reserve funds, mortgage
replacement reserves and other deposits (148) (256)
Issuance of partnership units 40 505
Collection of receivables 66 5,131
Payments on debt (2,985) (6,954)
Cash distributions to partners (5,388) (15,703)
Decrease (increase) in financing costs 309 (221)
Net cash provided by (used in)
financing activities (11,485) 3,718
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,216) 1,389
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,205 1,881
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,989 $ 3,270
Supplemental Information:
Cash payments for interest expense $ 3,183 $ 9,348
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
NATIONAL HEALTHCARE CORPORATION
<TABLE>
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
1998 1997
(in thousands)
<S> <C> <C>
During the nine months ended September 30, 1998 and
September 30, 1997, $18,438,000 and $169,000, respectively,
of convertible subordinated debentures were converted
into 1,212,504 shares of common stock and 4,534 units
of NHC's partnership units:
Convertible subordinated debentures $(18,438) $ (169)
Financing costs 10 1
Accrued interest (89) (2)
Partner's capital --- 170
Common stock 12 ---
Capital in excess of par value 18,505 ---
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
NATIONAL HEALTHCARE CORPORATION
<TABLE>
Interim Condensed Consolidated Statements of Shareowners' Equity and Partners' Capital
(in thousands, except share and unit amounts)
<CAPTION>
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 --- --- --- --- 8,217 --- --- --- 8,217
Unrealized gains on
securities --- --- --- --- --- (542) --- --- (542)
Total Comprehensive Income 7,675
Shares sold 4,222 --- --- 115 --- --- --- --- 115
Collection of receivables --- --- 66 --- --- --- --- --- 66
Units purchased (3,000) --- --- (75) --- --- --- --- (75)
Shares issued in conversion of
convertible debentures to
common shares 1,212,504 12 --- 18,505 --- --- --- --- 18,517
Balance at 9/30/98 11,316,898 113 (16,809) 68,668 8,217 3,845 --- --- 64,034
Balance at 12/31/96 8,467,959 --- (22,674) --- --- 2,171 1,408 147,632 128,537
Net income --- --- --- --- --- --- 237 23,440 23,677
Unrealized losses on
securities --- --- --- --- --- 1,767 --- --- 1,767
Total Comprehensive Income 13,992
Collection of receivables --- --- 5,131 --- --- --- --- --- 5,131
Units sold 387,753 --- (11,576) --- --- --- --- 12,081 505
Units issued in conversion of
convertible debentures to
partnership units 11,110 --- --- --- --- --- --- 170 170
Cash distributions declared
($1.80 per unit) --- --- --- --- --- --- (155) (15,548) (15,703)
Balance at 9/30/97 8,866,822 $ --- $(29,119) $ --- $ --- $3,938 $ 1,490 $167,775 $144,084
</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
September 30, 1998
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements of National HealthCare Corporation
("NHC") for the nine months ended September 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 nine months ended September 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
September 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 Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenue from managed centers $ 5,701 $ 8,785 $17,036 $25,780
Guarantee fees 144 157 436 469
Advisory fee from NHI 828 775 2,483 2,326
Advisory fee from NHR 110 --- 331 ---
Earnings on securities 379 467 1,118 1,358
Equity in earnings of
unconsolidated investments 2 71 165 95
Interest income 765 1,150 2,705 3,099
Other 594 1,184 1,700 2,276
$ 8,523 $12,589 $25,974 $35,403
</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
September 30, 1998
(Unaudited)
Proceeds from the sale of investments in debt and equity
securities during the period ended September 30, 1998 and 1997 were
$220,000 and $854,000, respectively. Gross investment losses of
$13,000 were realized on these sales during the period ended
September 30, 1998. Gross investment gains of $249,000 were
realized on these sales during the period ended September 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 $69,057,000 (net of available debt
service reserves) at variable and fixed interest rates with a
weighted average rate of 5.1% at September 30, 1998.
NOTE 7 - INCOME TAXES:
The provision (benefit) for income taxes for the nine months
ended September 30, 1998 is comprised of the following components:
<TABLE>
<CAPTION>
Nine Months Ended
(in thousands) September 30, 1998
<S> <C>
Current
Federal $ 4,776
State 683
Current Income Tax Provision 5,459
Deferred Tax Benefit
Federal (492)
State (70)
Deferred Income Tax Benefit (562)
Total Income Tax Provision $ 4,897
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 September 30, 1998 are as
follows:
10
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
(in thousands) September 30, 1998
<S> <C>
Current deferred tax asset:
Accounts receivable $ 2,159
Accrued liabilities 1,805
3,964
Current deferred tax liability:
Unrealized gains on marketable
securities (1,394)
Other (154)
(1,548)
Net current deferred tax asset $ 2,416
Noncurrent deferred tax asset:
Deferred gain on sale of assets $ 5,529
Deferred guaranty fees 1,146
Other 429
7,104
Noncurrent deferred tax liability:
Tax depreciation in excess of fin-
ancial reporting depreciation (4,129)
Other 73
(4,056)
Net noncurrent deferred tax asset $ 3,048
</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>
Nine Months Ended
September 30, 1998
<S> <C>
Tax expense at statutory rates $ 5,774
Tax benefit of timing differences (562)
Reversal of current income tax accruals (315)
Total Income Tax Provision $ 4,897
</TABLE>
11
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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
September 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 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 that 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
September 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. As discussed further in Note 10, after
the jury was impaneled, but before opening arguments, the parties
settled the litigation as follows:
Under the terms of the settlement, NHC will purchase, subject
to regulatory approval, two of the 16 long-term health care centers
it currently manages for FCC and certain accounts receivable in
exchange for all of NHC's rights in deferred contingency fees
receivable from FCC and for the assumption of approximately $15
million of debt. Additionally, NHC will pay a one-time cash
settlement of $15 million. FCC has the right to cancel the
management contracts for the remaining 14 centers which
cancellation may occur no earlier than June 30, 1999.
Additionally, NHC has agreed to accept any adjustment to previously
filed Medicare and routine cost limit exceptions related to these
16 centers.
As previously disclosed, the loss of the management contract
and related revenues from these 14 facilities will have a material
negative impact on NHC's earnings, even after taking into
consideration the purchase of two of the 16 long-term health care
centers.
14
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
The centers NHC purchased are Palm Garden of Pensacola,
Florida with 180 beds and Palm Garden of Lake City, Florida with
120 beds.
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 "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, and discovery has commenced.
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
15
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
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. Under the terms of NHC's
settlement discussed previously, NHC has agreed to accept any
adjustments to previously filed Medicare and routine cost limit
exceptions related to the 16 FCC centers. 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.
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.
16
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
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.
Note 10 - EVENT SUBSEQUENT TO THE BALANCE SHEET DATE
On October 30, 1998, NHC announced the terms of its settlement
of litigation with Florida Convalescent Centers, Inc., as more
fully described in Note 9.
In connection with the settlement, NHC will report a one-time
nonrecurring charge of $15.0 million during its fourth quarter to
record its cash settlement with FCC. The reduction of earnings
after taxes will be approximately $9.0 million or 79 cents per
diluted share.
As previously disclosed, the loss of management contracts from
14 FCC facilities, which will occur no earlier than June 30, 1999,
will have a material negative impact on NHC's earnings, even after
taking into consideration NHC's purchase of two of FCC's 16 long-term
care facilities.
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 14,291 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.
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.
17
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
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 believed 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.
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,
18
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
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 September 30, 1998 Compared to Three Months
Ended September 30, 1997.
Results for the three month period ended September 30, 1998
include a 3.2% decrease compared to the same period in 1997 in net
revenues and a 69.1% decrease in net income.
The decreased revenues for the quarter reflect the decreased
levels of service and changes in payment systems for rehabilitative
services and homecare services.
The decreased revenues for the quarter were partially offset
by 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 487 beds from 7,028 beds to 7,515 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.
Revenues from managed centers, which are included in the
Statements of Income in Other Revenues, decreased 35.1% in 1998
from $8.8 million in 1997 to $5.7 million in 1998 due primarily to
decreased interest income on notes receivable of $94,439,000 which
were transferred to NHR on December 31, 1997.
Total costs and expenses for the 1998 third quarter increased
$1.2 million or 1.1% to $103.8 million from $102.6 million.
Salaries, wages and benefits, the largest operating costs of this
service company, decreased $1.2 million or 2.0% to $58.7 million
from $59.9 million. Other operating expenses increased $2.0 million
or 7.0% to $30.8 million for the 1998 second quarter compared to
$28.8 million in the 1997 period. Rent increased $4.9 million or
79.1% to $11.2 million from $6.2 million. Depreciation and
amortization decreased 34.1% to $2.9 million. Interest costs
decreased $3.1 million or 92.9% to $0.2 million from $3.3 million
for last year.
19
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
Decreases in salaries, wages and benefits are attributable to
decreased staffing levels in therapy and home care services and
reductions in bonus and benefit programs for the quarter offset in
part by 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.
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. Rent 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 to the transfer of debt to
NHR and due to the capitalization of interest for assets under
construction.
The income tax provision for the quarter was $1.8 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 91.3% compared to an average of 92.1% 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 93.0%.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997.
Results for the nine month period ended September 30, 1998
include a 2.9% increase over the same period in 1997 in net
revenues and a 65.3% decrease in net income.
The increased revenues for the nine months reflect the
continued growth of operations. Compared to the nine month period
a year ago, NHC has increased the number of owned, leased and
managed long-term care beds by 365 beds from 13,926 beds to 14,291
beds. In addition, the number of owned or leased assisted living
units has increased by 145 units from 629 units in 1997 to 774
units in 1998. Also contributing to increased revenues are
improvements in both private pay and third party payor rates.
20
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
The increased revenues for the nine 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 33.9% in 1998
from $25.8 million in 1997 to $17.0 million in 1998 due primarily
to decreased interest income on $94,439,000 notes receivable which
were transferred to NHR on December 31, 1997.
Total costs and expenses for the 1998 nine months increased
$20.1 million or 6.7% to $320.4 million from $300.4 million.
Salaries, wages and benefits, the largest operating costs of this
service company, increased $6.3 million or 3.6% to $183.6 million
from $177.5 million. Other operating expenses increased $9.6
million or 11.6% to $92.7 million for the 1998 nine months compared
to $83.1 million in the 1997 period. Rent increased $14.0 million
or 76.6% to $32.3 million from $18.3 million. Depreciation and
amortization decreased 27.9% to $3.4 million. Interest costs
decreased $6.5 million or 69.6% to $2.9 million from $9.4 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. Increased salaries, wages and benefits were offset in
part by deceased staffing levels in the therapy and homecare
services.
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. Rent increased due
to rent expense on the assets transferred to NHR and leased back
to NHC beginning January 1, 1998.
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 nine months a year ago due primarily to the
transfer of debt to NHR and due to the capitalization of interest
for assets under construction.
The income tax provision for the nine months was $4.9 million
compared to no provision for the previous nine months. The change
is due to the restructure from a limited partnership to a
corporation.
21
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
The total census at owned and leased centers for the nine
months averaged 90.1% compared to an average of 92.8% for the same
nine months a year ago. When newly opened centers are excluded, the
total census of owned and leased centers for the quarter averaged
92.7%.
Liquidity and Capital Resources
During the first nine months of 1998, the Company generated
net cash of $31.5 million from operating activities, $13.5 million
from the collection of long-term notes receivable, $0.3 million
from the increase in financing costs, and $0.2 million from the
decrease in marketable securities. Of these funds, $23.3 million
was used for additions to and acquisitions of property and
equipment, $24.9 million for investment in long-term notes
receivable and loan participation agreements, $3.4 million to
increase cash held by trustees, $0.1 million to increase bond
reserve funds and mortgage replacement reserves, $3.0 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 $14.2 million during the period.
At September 30, 1998, the Company's ratio of long-term
obligations to convertible debt and capital is 1.1 to 1.
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 nine months of 1998, the Company added a net
total of 220 licensed long-term care beds, 133 beds of which are
owned or leased and 87 beds of which are managed for other owners.
During the same period, NHC added 45 assisted living apartments.
22
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
Currently, NHC has 509 long-term care beds under development
at 11 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 help 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.
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
23
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
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
statements, NHC settled 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 terms
of the settlement, NHC will purchase, subject to regulatory
approval, two of the 16 long-term health care centers it currently
manages for FCC and certain accounts receivable in exchange for all
of NHC's rights in deferred contingency fees receivable from FCC
and for the assumption of approximately $15 million of debt.
Additionally, NHC will pay a one-time cash settlement of $15
million. FCC has the right to cancel the management contracts for
the remaining 14 centers which cancellation may occur no earlier
than June 30, 1999. Additionally, NHC has agreed to accept any
adjustment to previously filed Medicare and routine cost limit
exceptions related to these 16 centers.
As previously disclosed, the loss of the management contract
and related revenues from these 14 facilities will have a material
negative impact on NHC's earnings, even after taking into
consideration the purchase of two of the 16 long-term health care
centers.
Year 2000 Compliance
NHC has evaluated its information technology systems and
embedded technology with respect to potential Year 2000 problems.
Although management believes that the majority of NHC's information
technology systems and embedded technology is already Year 2000
compliant, NHC will
24
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
complete the testing of its information technology systems and
embedded technology in the third quarter of 1999. In addition, NHC
has developed corrective plans for any technology assessed to be
non-compliant.
Costs incurred to date for NHC's internal Year 2000
remediation efforts have not been material, and NHC does not expect
that the cost of future internal actions 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 also depends upon the proper functioning of information
technology systems and embedded technology operated by certain
other third parties. These third parties include third party
payors such as the Medicare and Medicaid programs, commercial banks
and other lenders, and vendors such as providers of food supplies
and services, telecommunications and utilities. NHC currently is
gathering information concerning the Year 2000 compliance status of
these third parties. If third parties with whom NHC interacts have
Year 2000 problems that are not remedied, the following problems
could result (I) in the case of third party payors, in delayed
collection of accounts receivable potentially resulting in liquidity
stress; (ii) in the case of banks and other lenders, in the disruption
of capital flows potentially resulting in liquidity stress; or
(iii) in the case of vendors, in disruption of important services
upon which NHC depends, such as food services and supplies, tele-
communications and electrical power.
Based upon current information, NHC anticipates successful
completion and testing of its Year 2000 remediation efforts during
1999. However, there can be no guarantee that the Year 2000 will
not have a material adverse effect on NHC's operations, financial
position or liquidity if NHC's remediation efforts are not
successful or completed in a timely manner. NHC is currently
developing a contingency plan in the event that it is not able to
achieve Year 2000 compliance. This contingency plan is expected to
include establishing sources of liquidity that could be drawn upon
in the event of systems disruption and identifying alternative
vendors and back-up processes that do not rely on computers,
whenever possible. The contingency plan is expected to be
completed in the third quarter of 1999.
25
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
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 that 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.
26
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
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 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. As discussed further in Note 10, after
the jury was impaneled, but before opening arguments, the
parties settled the litigation as follows:
27
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
Under the terms of the settlement, NHC will
purchase, subject to regulatory approval, two of the 16
long-term health care centers it currently manages for
FCC and certain accounts receivable in exchange for all
of NHC's rights in deferred contingency fees receivable
from FCC and for the assumption of approximately $15
million of debt. Additionally, NHC will pay a one-time
cash settlement of $15 million. FCC has the right to
cancel the management contracts for the remaining 14
centers which cancellation may occur no earlier than June
30, 1999. Additionally, NHC has agreed to accept any
adjustment to previously filed Medicare and routine cost
limit exceptions related to these 16 centers.
As previously disclosed, the loss of the management
contract and related revenues from these 14 facilities
will have a material negative impact on NHC's earnings,
even after taking into consideration the purchase of two
of the 16 long-term health care centers.
The centers NHC purchased are Palm Garden of
Pensacola, Florida with 180 beds and Palm Garden of Lake
City, Florida with 120 beds.
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
28
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
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.
29
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
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. Under the terms of NHC's settlement discussed
previously, NHC has agreed to accept any adjustments to
previously filed Medicare and routine cost limit
exceptions related to the 16 FCC centers. 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.
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.
30
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 1998
(Unaudited)
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 - Filed October 30, 1998
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 November 16, 1998 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date November 16, 1998 /s/ Donald K. Daniel
Donald K. Daniel
Vice President and Controller
Principal Accounting Officer
31
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