FORM 10-Q/A
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 March 31, 1999 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
11,429,694 shares were outstanding as of April 30, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
March 31
1999 1998
(in thousands)
<S> <C> <C>
REVENUES:
Net patient revenues $ 99,247 $ 105,120
Other revenues 8,682 8,977
Net revenues 107,929 114,097
COSTS AND EXPENSES:
Salaries, wages and benefits 61,561 64,488
Other operating 27,248 30,607
Rent 10,968 10,207
Depreciation and amortization 2,807 3,091
Interest 1,586 1,590
Total costs and expenses 104,170 109,983
Income Before Income Taxes 3,759 4,114
Income Tax Provision (1,522) (1,580)
NET INCOME $ 2,237 $ 2,534
EARNINGS PER SHARE:
Basic $ .20 $ .24
Diluted $ .20 $ .24
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,412,987 10,585,967
Diluted 11,428,327 10,921,379
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these statements.
2
<PAGE>
<TABLE>
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<CAPTION>
March 31 December 31
1999 1998
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,249 $ 12,630
Cash held by trustees 4,829 3,871
Marketable securities 20,013 23,207
Accounts receivable, less allowance for
doubtful accounts of $8,288 and $7,960 50,150 54,197
Notes receivable 19,241 18,182
Inventory at lower of cost (first-in,
first-out method) or market 4,341 4,207
Deferred income taxes 4,739 2,644
Prepaid expenses and other assets 2,986 873
Total current assets 117,548 119,811
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 140,929 136,247
Less accumulated depreciation and
amortization (52,969) (50,498)
Assets under arrangement with other parties 3,977 4,120
Net property, equipment and assets under
arrangement with other parties 91,937 89,869
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 739 668
Unamortized financing costs 801 777
Notes receivable 1,377 5,999
Notes receivable from National 12,050 12,078
Deferred income taxes 10,455 12,374
Minority equity investments and other 8,012 8,112
Total other assets 33,434 40,008
$242,919 $249,688
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
<TABLE>
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
LIABILITIES AND CAPITAL
<CAPTION>
March 31 December 31
1999 1998
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,340 $ 3,779
Trade accounts payable 7,732 16,317
Accrued payroll 16,202 23,846
Amount due to third-party payors 40,186 33,599
Accrued interest 229 235
Other current liabilities 17,757 14,965
Total current liabilities 87,446 92,741
Long-term Debt, less current portion 54,757 56,311
Debt Serviced by Other Parties, less
Current Portion 15,460 15,891
Other Noncurrent Liabilities 10,861 11,248
Minority Interests in Consolidated Subsidiaries 675 670
Subordinated Convertible Notes 4 714
Deferred Income 22,322 21,798
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;
11,429,694 shares issued and
outstanding 114 114
Capital in excess of par value,
less notes receivable 53,581 52,838
Retained earnings (4,162) (6,399)
Unrealized gains on securities 1,861 3,762
Total shareowners' equity 51,394 50,315
$242,919 $ 249,688
</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>
Three Months Ended
March 31
1999 1998
(in thousands)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 2,237 $ 2,534
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,605 2,520
Provision for doubtful accounts receivable 569 647
Amortization of intangibles and deferred charges 220 358
Amortization of deferred income (134) (122)
Equity in earnings of unconsolidated investments (59) (61)
Distributions from unconsolidated investments 8 ---
Deferred income taxes (176) (397)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 3,478 439
Increase in inventory (134) (250)
Increase in prepaid expenses and other assets (2,113) (992)
Increase (decrease) in trade accounts payable (8,585) (31)
Decrease in accrued payroll (7,644) (4,638)
Increase in amounts due to third party payors 6,587 7,338
Decrease in accrued interest (6) (224)
Increase in other current liabilities 2,405 1,339
Increase in entrance fee deposits 779 ---
Net cash provided by operating activities 37 8,460
CASH FLOWS (USED IN) INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (4,712) (11,127)
Investment in notes receivable (764) (1,409)
Collection of notes receivable 4,355 8,042
(Increase) decrease in minority equity investments
and other (127) 89
Decrease in marketable securities 1,293 171
Net cash provided by (used) in investing activities 45 (4,234)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Increase in cash held by trustee (958) (764)
Decrease in minority interests in subsidiaries (35) 8
Increase in bond reserve funds, mortgage
replacement reserves and other deposits (71) (100)
Issuance of partnership units 72 (50)
Collection of receivables --- 31
Payments on debt (471) (460)
Cash distributions to partners --- (5,388)
Decrease (increase) in financing costs --- 309
Net cash provided by (used in) financing activities (1,463) (6,414)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,381) (2,188)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,630 17,205
CASH AND CASH EQUIVALENTS, END OF PERIOD $11,249 $ 15,017
Supplemental Information:
Cash payments for interest expense $ 1,592 $ 1,814
</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>
Three Months Ended
March 31
1999 1998
(in thousands)
<S> <C> <C>
During the three months ended March 31, 1999 and
March 31, 1998, $700,000 and $16,948,000, respectively,
of convertible subordinated debentures were converted
into 46,690 and 1,114,519 shares of common stock:
Convertible subordinated debentures $ (710) $(16,948)
Financing costs 47 10
Accrued interest (8) (90)
Common stock --- 11
Capital in excess of par value 671 17,017
</TABLE>
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
<TABLE>
NATIONAL HEALTHCARE CORPORATION
Interim Condensed Consolidated Statements of Shareowners' Equity
(in thousands, except share and unit amounts)
<CAPTION>
Unrealized
Receivables Gains
Common Stock from Sale Paid in Retained (Losses) on Total Share-
Shares Amount of Shares Capital Earnings Securities Owners' Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at 12/31/98 11,378,558 $ 114 $(16,807) $69,645 $ (6,399) $3,762 $ 50,315
Net income --- --- --- --- 2,237 --- 2,237
Unrealized gains on
securities --- --- --- --- --- (1,901) (1,901)
Total Comprehensive Income 336
Shares sold 4,446 --- (12) 84 --- --- 72
Shares issued in conversion of
convertible debentures to
common shares 46,690 --- --- 671 --- --- 671
Balance at 3/31/99 11,429,694 114 (16,819) 70,400 (4,162) 1,861 51,394
Balance at 12/31/97 10,103,172 101 (16,875) 50,123 --- 4,387 37,736
Net income --- --- --- --- 2,534 --- 2,534
Unrealized losses on
securities --- --- --- --- --- (256) (256)
Total Comprehensive Income 2,278
Collection of receivables --- --- 31 --- --- --- 31
Shares purchased (2,000) --- --- (50) --- --- (50)
Units issued in conversion of
convertible debentures to
common shares 1,114,519 11 --- 17,017 --- --- 17,028
Balance at 3/31/98 11,215,691 $ 112 $(16,844) $67,090 $ 2,534 $4,131 $ 57,023
</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
March 31, 1999
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements of National HealthCare Corporation ("NHC") for
the three months ended March 31, 1999 and 1998, 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 three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ended December 31, 1999. The interim condensed balance sheet at
December 31, 1998 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, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in NHC's Form 10-K for the year ended December 31, 1998.
Note 2 - OTHER REVENUES:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
(in thousands)
<S> <C> <C>
Revenue from managed centers $ 5,922 $ 5,714
Guarantee fees 132 148
Advisory fee from NHI 703 828
Advisory fee from NHR 118 111
Earnings on securities 398 374
Equity in earnings of
unconsolidated investments 59 37
Interest income 757 1,082
Other 593 683
$ 8,682 $ 8,977
</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 3 - 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.
Marketable securities consist of the following as of March 31, 1999:
8
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Fair
Cost Value
(in thousands)
<S> <C> <C>
Marketable equity securities $15,274 $15,501
U.S. government securities 1,108 1,105
Corporate bonds 3,448 3,407
$19,830 $20,013
The amortized cost and estimated fair value of marketable securities
classified as available for sale, by contractual maturity are as follows as of
March 31, 1999:
</TABLE>
<TABLE>
<CAPTION>
Fair
Cost Value
<S> <C> <C>
Maturities: (in thousands)
Within 1 year $ 101 $ 101
1 to 5 years 3,892 3,856
6 to 10 years 563 555
Other securities without
stated maturity 15,274 15,501
$19,830 $20,013
Proceeds from the sale of investments in debt and equity securities
during the three months ended March 31, 1999 were $41,000. Gross investment
gains of $10,000 were realized on these sales during the three months ended
March 31, 1999. Realized gains and losses from securities sales are
determined on the specific identification of the securities.
Note 4 - GUARANTEES AND CONTINGENCIES:
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 $62,008,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average rate of
4.9% at March 31, 1999.
9
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
In April 1999, foreclosure proceedings by a first mortgage lender were
commenced against six long-term health care centers in Florida which are
managed by NHC and for which NHC has extended its corporate guaranty in the
amount of $5.0 million. The centers are owned by Stockbridge Investment
Partners, Inc. and its subsidiary York Hannover Nursing Centers, Inc. (York
Hannover). Events leading to the foreclosure included the violation of the
financial covenants contained in the loan first mortgage agreement and the
failure to make timely payments of principal and interest.
NHC has extended working capital loans to York Hannover in the amount of
approximately $2.0 million which are secured by a lien on $2.0 million of the
accounts receivable of York Hannover. The first mortgage lender who is owed
approximately $26.7 million under its loan agreements is collateralized by
first mortgages on the six long-term health care centers, the personal
guarantee of certain of the owners, accounts receivable above $2.0 million,
and by NHC's $5.0 million guaranty.
Whether NHC will be called upon to make payments under its guaranty, for
which NHC has no collateral, depends upon the underlying value of the
properties. Depending on the outcome of that valuation which is not currently
known, payments by NHC under the guarantee may have a material adverse impact
on NHC's earnings and cash flows.
Note 5 - NEW ACCOUNTING PRONOUNCEMENT:
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 has adopted the provisions of SOP 98-5 effective
January 1, 1999. The adoption did not have a material impact on NHC's
financial position or cash flows.
Note 6 - LEGAL PROCEEDINGS:
In late October, 1998, NHC and Florida Convalescent Centers, Inc.
(FCC)settled previously disclosed litigation which had been ongoing since
1996.
10
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Under the terms of the settlement, NHC will purchase, subject to
regulatory approval, two of the 16 FCC long-term health care centers for the
assumption of approximately $14.3 million of debt on those two centers. The
centers NHC will purchase are Palm Garden of Pensacola, Florida with 180 beds
and Palm Garden of Lake City, Florida with 120 beds. Additionally, NHC agreed
to pay a one-time cash settlement of $15.0 million ($11.0 million of which has
been paid as of March 31, 1999) and agreed to accept any adjustment to
previously filed Medicare and routine cost limit exceptions related to all 16
centers and indemnify FCC for any noninsurance covered liability claims.
Finally, FCC has the right to cancel the management contracts for the
remaining 14 centers, which cancellation may occur no earlier than June 30,
1999. NHC has been requested to continue to manage the centers, however,
through July 30, 1999.
As of March 31, 1999, the purchase of these two centers was still
awaiting regulatory approval. Consequently, the assets to be purchased, and
the liabilities to be assumed, and the results of operations of these two
centers are not yet included in NHC's consolidated financial statements.
As disclosed at the time of settlement, 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.
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
11
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
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."
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 i)
the correction of unintentional misallocations; ii) adjustments where the self
audit process has had to use different source documents due to loss or
misplacement of the originals and iii) adjustments due to recalculation of
Director of Nursing/Assistant Director of Nursing time based upon indirect
allocation percentages rather than time studies, as were originally used.
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.
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
12
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
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 repayments, fines and/or penalties which could
have a material negative impact on the financial position, cash flow 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.
On March 31, 1999, after the close of business, the insurance carrier
covering both NHC and the Florida based six facility nursing home chain
managed by NHC (York Hannover) contacted NHC's Florida counsel to advise
them that the jury had returned a verdict in excess of policy limits in
compensatory damages, and indicated that punitive damages should be assessed
against NHC. Prior to that time, the plaintiff's attorney had indicated a
willingness to settle this claim within NHC's available policy limits, but
the insurance carrier refused to settle. On the evening of March 31, 1999,
the insurance carrier asked what, if any, contribution NHC would be willing to
make to a settlement to avoid the jury's determination as to the amount of
punitive damages to be assessed. NHC's Florida counsel, unable to reach NHC
management after the close of business, advised the insurance carrier's vice
president that the insurance carrier should do whatever it deemed appropriate
to protect the interests of its insured. The insurance carrier then entered
into a settlement of the compensatory and punitive claim against NHC in an
amount materially greater than policy limits and the initial jury verdict.
The settlement was far in excess of what the insurance carrier could have
settled the claim prior to or during the trial. Unsure as to whether the
carrier will seek to assert a claim against NHC and/or the owner or,
alternatively, that the carrier might seek to claim that the coverage be
divided between the umbrella policy issued for separate calendar years, NHC
has filed for declaratory judgment in the Chancery Court of Rutherford
County, Tennessee. If the insurance carrier asserts a claim against NHC and
is successful in requiring NHC to pay any excess over the covered amount,
then such payment may have an adverse impact on NHC's earnings and cash flow.
13
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Due to extremely liberal statutory provisions in the State of Florida as
well as an active and specialized plaintiff's bar, the entire long-term care
industry has seen a drastic increase in liability claims, reserves,
settlements, and judgments over the last several years. As a result, the
Company's professional liability insurance premium for its owned and managed
centers (45 of which are in Florida) has increased from $1,995,000 in 1998 to
$3,200,000 in 1999. Additionally, each center now has a significant per claim
deductible, with the deductible being capped in the aggregate for all centers
at a total of $2.7 million. Currently the Company, and/or centers and owners
for which it manages, is the named defendant for approximately 50 liability
actions in the State of Florida. Given the current legal environment in the
State of Florida, plus the unapproved and bad faith settlement entered into by
the Company's carrier for a case covering claim years 1996 and 1997, the
Company believes there is a potential of uninsured liability in excess of
insurance coverage, which amount is not quantifiable at the present time. Any
judgments or settlements above the Company's specific center and umbrella
coverage may have a material adverse impact on NHC's earnings and cash flow.
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 7 - EVENT SUBSEQUENT TO THE BALANCE SHEET DATE
On April 23, 1999, NHC received approval from the State of Florida to
complete the purchase of the two centers being conveyed by FCC to 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 108 long-term health care centers with 14,018 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.
14
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998.
Results for the three month period ended March 31, 1999 include a 5.4%
decrease compared to the same period in 1998 in net revenues and a 11.7%
decrease in net income.
The decline in revenues for the quarter, which occurred in NHC's first
quarter under the federal government's new prospective payment system,
reflects the decreased levels of service and changes in payment systems for
rehabilitative services, homecare services and nursing home operations.
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 35 beds from
7,524 beds to 7,559 beds. Also contributing to increased revenues are
improved occupancy rates at assisted living centers and at independent living
centers.
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, increased 3.6% in 1999 from $5.7 million in 1998 to
$5.9 million in 1999. However, these revenues and earnings will decline with
the loss of management contracts for the 14 FCC centers as discussed below.
Total costs and expenses for the 1999 first quarter decreased $5.8
million or 5.3% to $104.2 million from $110.0 million. Salaries, wages and
benefits, the largest operating costs of this service company, decreased $2.9
million or 4.5% to $61.6 million from $64.5 million. Other operating expenses
decreased $3.4 million or 11.0% to $27.2 million for the 1999 period compared
to $30.6 million in the 1998 period. Rent increased $.8 million or 7.5% to
$11.0 million from $10.2 million. Depreciation and amortization decreased
9.2% to $2.8 million. Interest costs remained unchanged at $1.6 million.
Decreases in salaries, wages and benefits are attributable to decreased
staffing levels in therapy and home care services. Also, bonus and benefit
programs have been reduced compared to the quarter a year ago. These
decreases in costs were offset in part by the increase in staffing levels due
to long-term care bed additions and assisted living occupancy improvements and
expansions. Also contributing to higher costs of labor are inflationary
increases for salaries and the associated benefits.
15
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Decreases in operating costs are due primarily to the renegotiation at
lower rates of supplier contracts for inhalation therapy, pharmacy, x-ray and
medical supplies. These cuts were made in response to the lower rates of
reimbursement being received under the phase-in of the Medicare Prospective
Payment System ("PPS"), which began for the majority of NHC centers on January
1, 1999. Operating cost reductions were offset in part due to the increased
number of beds in operation and the higher occupancies in assisted living and
independent living services. Rent increases are due primarily to additions at
existing rental properties.
The total census at owned and leased centers for the quarter averaged
93.5% compared to an average of 89.1% for the same quarter a year ago.
Liquidity and Capital Resources
During the first three months of 1999, the Company generated a net
$37,000 from operating activities compared to $8.5 million from operating
activities in the same period of the prior year. The decrease in cash
generated from operating activities is due primarily to the use of cash to
reduce accounts payable and accrued payroll during the first quarter of 1999.
NHC generated during the first quarter $4.4 million from the collection of
long-term notes receivable and $1.3 million from the decrease in marketable
securities. During the quarter, $4.7 million was used for additions to and
acquisitions of property and equipment, $0.8 million for investment in
long-term notes receivable and loan participation agreements, $1.0 million
to increase cash held by trustees, and $0.5 million for payments on debt.
Cash and cash equivalents decreased $1.4 million during the period.
At March 31, 1999, the Company's ratio of long-term obligations to
convertible debt and capital is 1.4 to 1.
NHC has also guaranteed approximately $62.0 million of the debt of
certain health care centers which NHC manages for others. See Note 4 for
discussion of the possibility of up to $5.0 million additional liability as a
result of its debt guarantees.
NHC's current cash on hand, marketable securities, short-term notes
receivable, operating cash flows and, as needed, its borrowing capacity are
expected to be adequate to finance NHC's operating requirements and growth and
development plans for 1999 and into 2000.
16
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
New Accounting Pronouncements
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 has adopted the provisions of SOP 98-5 effective
January 1, 1999. The adoption does not have a material impact on NHC's
financial position, results of operations or cash flows.
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.
Health Care Legislation
During 1997, the Federal government enacted the Balanced Budget Act of
1997 ("BBA"), which requires that skilled nursing facilities transition to a
Prospective Payment System ("PPS") under the Medicare program commencing with
the first cost reporting period beginning on or after July 1, 1998. Although
PPS went into effect for a small portion of NHC's long-term health care
centers during 1998, PPS was implemented for the vast majority of NHC's
centers beginning January 1, 1999. PPS has significantly changed the manner
in which NHC's centers are paid for inpatient services provided to Medicare
beneficiaries. Under PPS, Medicare pays NHC's centers a fixed fee per
Medicare patient per day, based on the acuity level of the patient, to cover
all post-hospital extended care routine service costs, ancillary costs and
capital related costs. The per diem rate also covers substantially all items
and services furnished during a covered stay for which reimbursement was
previously made separately under Medicare. PPS is being phased in over a
three-year period. During the phase-in, payments are based on a blend of each
center's specific historical costs and federally-established per
17
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
diem rates that are based on the average costs of all U.S. skilled nursing
facilities. NHC has analyzed its center-specific historical costs, reviewed
the expected federally-determined rates, and analyzed the current acuity level
of Medicare patients in its centers. Based on such review and analyses, NHC
has developed plans for each center to deliver care to Medicare patients at a
lower cost and in a manner consistent with PPS requirements. These plans
include a significant reduction in the number of therapy staff positions and
renegotiation at lower rates of supplier contracts for inhalation therapy,
pharmacy, x-ray and medical supplies.
Although NHC believes that it is positioned to operate effectively under
PPS, if NHC is unable to execute the center-specific plans to reduce the cost
of care to Medicare patients, PPS could have a material adverse effect on
NHC's financial position, results of operations and cash flows.
Litigation
As discussed in more detail in Note 6 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. Under the
terms of NHC's settlement discussed below, 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. An adverse
determination in the lawsuit could subject NHC to repayments, fines and/or
penalties which could have a material negative impact on the financial
position or results of operations of NHC.
18
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
Also as discussed in more detail in Note 6 to the financial statements,
NHC settled, during 1998, 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 FCC long-term
health care centers. Additionally, NHC agreed to pay a one-time cash
settlement of $15.0 million, $11.0 million of which has been paid as of March
31, 1999, and agreed to accept any adjustments to previously filed Medicare
cost reports and routine cost limit exceptions related to all 16 centers and
indemnify FCC for any noninsurance covered liability claims. Finally, FCC has
the right to cancel the management contracts for the remaining 14 centers
which cancellation may occur no earlier than June 30, 1999. NHC has been
requested to continue to manage the centers, however, through July 30, 1999.
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 and Related Risks
The Year 2000 issue generally relates to computer programs that were
written using two digits rather than four to define the applicable year. In
those programs, the year 2000 may be incorrectly identified as the year 1900,
which can result in a system failure or miscalculations causing a disruption
of operations, including a temporary inability to process transactions,
prepare financial statements or engage in other normal business activities.
The following discussion identifies the actions taken by NHC to assess and
address its Year 2000 issues.
State of Readiness--
NHC has formed an internal task force and developed a detailed plan to
address its Year 2000 issues, and is utilizing its internal resources to
assess, remediate and test its systems. NHC's plan includes an inventory and
review of all core applications systems, networks, desktop systems,
infrastructure and critical supply chains. NHC's Year 2000 readiness plan is
focused on addressing Year 2000 readiness in the following five categories:
(1) mainframe computer operations, critical applications and related networks,
(2) personal computer hardware and software, (3) other internal equipment such
as infusion pumps, phone systems, monitoring devices and smoke/fire alarms
which rely on microchips or telecommunications, (4) third party payors, and
(5) other third party vendors utilized by NHC's healthcare centers such as
financial institutions, electrical providers, and food services suppliers.
19
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
For each of the above categories, NHC will perform or has performed the
phases of assessment, remediation and testing of the applicable hardware,
software or equipment, as applicable. NHC has completed the assessment phase
for category 1 and is currently in the remediation phase of making applicable
modifications to the application programs found to be non-compliant. NHC has
historically developed the majority of its application programs internally.
All internally developed systems have been assessed and inventoried and plans
have been made to modify or replace them if necessary, in order to make them
Year 2000 compliant. Purchased applications are either being modified,
replaced or upgraded. Most critical applications, whether internally
developed or purchased externally, have been tested and are already Year 2000
compliant. All server hardware, dumb terminals and printers have been
assessed, repaired as necessary and tested and are now Year 2000 compliant.
It is expected that the remediation and testing phases related to category 1
will be completed by October 1, 1999.
NHC is currently in the assessment phase for categories 2 through 5.
For personal computer software vendors, NHC is aware of the packages that will
not be Year 2000 compliant and is currently in the process of assessing the
types of packages utilized by each NHC personal computer. NHC has also
requested all personal computer software vendors, medical equipment
manufacturers, third party governmental payors, fiscal intermediaries and
other third party vendors (financial institutions, electrical providers, etc.)
utilized by its healthcare centers to disclose their current Year 2000
readiness and their plan for achieving Year 2000 readiness. Responses have
been received from most vendors and third parties. For those vendors and
third parties that have not yet responded, NHC is in the process of sending
out additional requests. Although most third party vendors have indicated
that they are currently Year 2000 compliant or expect to be compliant prior to
January 1, 2000, there can be no assurance that such third parties will
achieve Year 2000 compliance by January 1, 2000. NHC is also in the process
of conducting an examination of the embedded chip technology utilized in the
various medical devices, telecommunications equipment, heating and air
conditioning systems, smoke/fire alarms and lighting systems at each of its
healthcare centers. It is expected that the assessment of categories 2, 3,
and 5 will be completed by October 1, 1999 with remediation and testing to be
completed by December 31, 1999.
With respect to category 4 (third party payors), the largest sources of
NHC's revenues are state and federal governments through the Medicaid and
Medicare programs. NHC is reimbursed under these programs through fiscal
intermediaries. The Health Care Financing Administration ("HCFA"), the
government agency that administers the Medicare program, had previously
publicly stated that it would be Year 2000 compliant by
20
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
December 31, 1998. HCFA announced that it required all fiscal intermediaries
to be Year 200 compliant by December 31, 1998 and that it expected state
Medicaid agencies to be Year 2000 compliant by March 31, 1999. While HCFA has
made no public announcement as to whether the fiscal intermediaries and state
Medicaid agencies have met this schedule, recent reports by the General
Accounting Office report that the various states may not currently be in
compliance. With respect to itself, HCFA recently issued a Provider
Correspondence Letter dated January 12, 1999 indicating that they have not met
their schedule. This letter states that HCFA's systems will function on
January 1, 2000 and will be able to process "acceptable" claims. NHC has
little or no control over the Year 2000 compliance of its third party
governmental payors and fiscal intermediaries and it is expected that the
assessment phase for third party payors will be an ongoing process throughout
1999. NHC will continue to request and seek information through all sources
available related to the Year 2000 readiness of these third parties.
Year 2000 Costs--
NHC currently estimates that its aggregate costs directly related to
Year 2000 compliance efforts will be approximately $250,000, of which
approximately $150,000 has been spent through March 31, 1999. The costs
primarily relate to the use of internal information systems personnel in
NHC's assessment of Year 2000 issues and modification of software applications
as discussed above. The Year 2000 costs have been and will be paid through
funds provided by NHC's ongoing operations. Approximately 25% of the
information systems department budget has been utilized in performing
functions related to Year 2000 preparedness. Management of NHC believes that
there will be no material impact on NHC's financial condition or results of
operations resulting from other information technology projects being delayed
due to Year 2000 efforts.
Year 2000 Risks--
The failure of NHC or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in
interruptions of normal business operations. Based on all available
information as of March 31, 1999, management's estimate of NHC's most
reasonably likely worst case scenario includes: (1) the inability to deliver
patient care related services in its healthcare centers, (ii) the delayed
receipt of reimbursement from the federal or state governments, private payors
or intermediaries, (iii) the failure of security systems, heating systems,
lighting systems or other operational systems and equipment of the healthcare
centers, and (iv) the inability to receive critical equipment and supplies
from vendors. Each of these events could have a material adverse impact on
NHC's business, results of operations and financial condition.
21
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
Contingency Plans--
Contingency plans for NHC's Year 2000 issues continue to be developed
and include, but are not limited to, the identification of alternate
suppliers, alternate technologies and alternate manual systems and processes.
In the event that medical devices and other operational equipment containing
non-compliant embedded chip technology cannot be corrected prior to January 1,
2000, the equipment will be removed from service. NHC's contingency plans are
expected to be completed by October 1, 1999.
NHC's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve as new information becomes available. The
costs of NHC's Year 2000 compliance plan and the date on which NHC expects to
complete it are based on current estimates, which reflect numerous assumptions
about future events, including the continued availability of certain
resources, the timing and effectiveness of third party remediation plans and
other factors. NHC can give no assurance that these estimates will be
achieved, and actual results could differ materially from NHC's plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct relevant computer source codes and embedded
technology, the results of internal assessment, remediation and testing and
the timeliness and effectiveness of remediation efforts of third parties. In
addition, NHC's analysis of its Year 2000 issues is based in part on
information from third parties. There can be no assurance that such
information is accurate or complete.
Item 3. Quantitative and Qualitative Information About Market Risk
Interest Rate Risk--
The Company's cash and cash equivalents consist of highly liquid
investments with a maturity of less than three months. As a result of the
short-term nature of the Company's cash instruments, a hypothetical 10% change
in interest rates would have no impact on the Company's future earnings and
cash flows related to these instruments. A hypothetical 10% change in
interest rates would also have an immaterial impact on the fair values of
these instruments. Approximately $10 million of the Company's notes
receivable bear interest at fixed interest rates. As the interest rates on
these notes receivable are fixed, a hypothetical 10% change in interest rates
would have no impact on the Company's future earnings and
22
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
cash flows related to these instruments. A hypothetical 10% change in
interest rates would also have an immaterial impact on the fair values of
these instruments. Approximately $22.6 million of the Company's notes
receivable bear interest at variable rates (generally at prime plus 2%).
Because the interest rates of these instruments are variable, a hypothetical
10% change in interest rates would result in a related increase or decrease in
interest income of approximately $220,000. However, a hypothetical 10% change
in interest rates would have an immaterial impact on the fair values of these
instruments. As of March 31, 1999, $30.2 million of the Company's long-term
debt and debt serviced by other parties bear interest at fixed interest rates.
Because the interest rates of these instruments are fixed, a hypothetical 10%
change in interest rates would have no impact on the Company's future earnings
and cash flows related to these instruments. A hypothetical 10% change in
interest rates would have an immaterial impact on the fair values of these
instruments. The remaining $45.3 million of the Company's long-term debt and
debt serviced by other parties bear interest at variable rates. Because the
interest rates of these instruments are variable, a hypothetical 10% change in
interest rates would result in a related increase or decrease in interest
expense of approximately $275,000. However, a hypothetical 10% change in
interest rates would have an immaterial impact on the fair value of these
instruments. The Company does not currently use any derivative instruments to
hedge its interest rate exposure. The Company has not used derivative
instruments for trading purposes and the use of such instruments in the future
would be subject to strict approvals by the Company's senior officers.
Therefore, the Company's exposure related to such derivative instruments is
not material to the Company's financial position, results of operations or
cash flows.
Equity Price Risk--
The Company considers its investments in marketable securities as
available for sale securities and unrealized gains and losses are recorded in
stockholders' equity in accordance with Statement of Financial Accounting
Standards No. 115. The investments in marketable securities are recorded at
their fair market value based on quoted market prices. Thus, there is
exposure to equity price risk, which is the potential change in fair value due
to a change in quoted market price. Hypothetically, a 10% change in quoted
market prices would result in a related 10% change in the fair value of the
Company's investments in marketable securities.
23
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In late October, 1998, NHC and Florida Convalescent Centers,
Inc. (FCC)settled previously disclosed litigation which had been
on-going since 1996.
Under the terms of the settlement, NHC will purchase,
subject to regulatory approval, two of the 16 FCC long-term health
care centers for the assumption of approximately $14.3 million of
debt on those two centers. The centers NHC will purchase are Palm
Garden of Pensacola, Florida with 180 beds and Palm Garden of Lake
City, Florida with 120 beds. Additionally, NHC agreed to pay a
one-time cash settlement of $15.0 million ($11.0 million of which
has been paid as of March 31, 1999) and agreed to accept any
adjustment to previously filed Medicare and routine cost limit
exceptions related to all 16 centers and indemnify FCC for any
noninsurance covered liability claims. Finally, FCC has the right
to cancel the management contracts for the remaining 14 centers,
which cancellation may occur no earlier than June 30, 1999. NHC
has been requested to manage, however, through July 30, 1999.
As of March 31, 1999, the purchase of these two centers was
still awaiting regulatory approval. Consequently, the assets to
be purchased, and the liabilities to be assumed, and the results
of operations of these two centers are not yet included in NHC's
consolidated financial statements.
As disclosed at the time of settlement, 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.
24
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
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."
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 i) the correction of
unintentional misallocations; ii) adjustments where the self audit
process has had to use different source documents due to loss or
misplacement of the originals and iii) adjustments due to
recalculation of Director of Nursing/Assistant Director of Nursing
time based upon indirect allocation percentages rather than time
studies, as were originally used. 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
25
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
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.
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 repayments, fines and/or penalties which could have
a material negative impact on the financial position, cash flow 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.
26
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(Unaudited)
On March 31, 1999, after the close of business, the
insurance carrier covering both NHC and the Florida-based six
facility nursing home chain managed by NHC (York Hannover) con-
tacted NHC's Florida counsel to advise them that the jury had
returned a verdict in excess of policy limits in compensatory
damages, and indicated that punitive damages should be assessed
against NHC. Prior to that time, the plaintiff's attorney had
indicated a willingness to settle this claim within NHC's avail-
able policy limits, but the insurance carrier refused to settle.
On the evening of March 31, 1999, the insurance carrier asked what,
if any, contribution NHC would be willing to make to a settlement
to avoid the jury's determination as to the amount of punitive
damages to be assessed. NHC's Florida counsel, unable to reach
NHC management after the close of business, advised the insurance
carrier's vice president that the insurance carrier should do what-
ever it deemed appropriate to protect the interests of its insured.
The insurance carrier then entered into a settlement of the comp-
ensatory and punitive claim against NHC in an amount materially
greater than policy limits and the initial jury verdict. The
settlement was far in excess of what the insurance carrier could
have settled the claim prior to or during the trial. Unsure as to
whether the carrier will seek to assert a claim against NHC and/or
the owner or, alternatively, that the carrier might seek to claim
that the coverage be divided between the umbrella policy issued
for separate calendar years, NHC has filed for declaratory
judgment in the Chancery Court of Rutherford County, Tennessee.
If the insurance carrier asserts a claim against NHC and is
successful in requiring NHC to pay any excess over the covered
amount, then such payment may have an adverse impact on NHC's
earnings and cash flow.
Due to extremely liberal statutory provisions in the State
of Florida as well as an active and specialized plaintiff's bar,
the entire long-term care industry has seen a drastic increase in
liability claims, reserves, settlements, and judgments over the
last several years. As a result, the Company's professional
liability insurance premium for its owned and managed centers (45
of which are in Florida) has increased from $1,995,000 in 1998 to
$3,200,000 in 1999. Additionally, each center now has a
significant per claim deductible, with the deductible being capped
in the aggregate for all centers at a total of $2.7 million.
Currently the Company, and/or centers and owners for which it
manages, is the named defendant for approximately 50 liability
actions in the State of Florida. Given the current legal
environment in the State of Florida, plus the unapproved and bad
faith settlement entered into by the Company's carrier for a case
covering claim years 1996 and 1997, the Company believes there is
a potential of uninsured liability in excess of insurance
coverage, which amount is not quantifiable at the present time.
Any judgments or settlements above the Company's specific center
and umbrella coverage may have an adverse impact on NHC's earnings
and cash flow.
27
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(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.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to Vote of Security Holders.
(a) The annual meeting of the shareholders was held on April 2, 1999.
(b) Matters voted upon at the meeting are as follows:
PROPOSAL NO. 1: Election of Ernest G. Burgess, III and W. Andrew Adams to
serve as directors for terms of three years or until their successors have
been fully elected and qualified. Other directors whose terms of office
continue are Mr. Lawrence C. Tucker, Mr. Robert G. Adams, Dr. J. K. Twilla,
Dr. Olin O. Williams, and Mr. Richard F. LaRoche, Jr.
Voting For Withholding Percent for
Authority
Ernest G. Burgess, III 8,235,464 15,772 99.8%
W. Andrew Adams 8,235,853 15,383 99.8%
PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as the Company's
independent accountants for the fiscal year 1999.
Voting For Voting Against Abstaining Percent For
8,244,575 3,669 2,992 99.9%
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
28
<PAGE>
NATIONAL HEALTHCARE CORPORATION
March 31, 1999
(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 June 15, 1999 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date June 15, 1999 /s/ Donald K. Daniel
Donald K. Daniel
Vice President and Controller
Principal Accounting Officer
29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 16,079,000
<SECURITIES> 20,013,000
<RECEIVABLES> 77,679,000
<ALLOWANCES> (8,288,000)
<INVENTORY> 4,341,000
<CURRENT-ASSETS> 117,548,000
<PP&E> 157,789,000
<DEPRECIATION> (65,852,000)
<TOTAL-ASSETS> 242,919,000
<CURRENT-LIABILITIES> 87,446,000
<BONDS> 0
0
0
<COMMON> 114,000
<OTHER-SE> 51,280,000
<TOTAL-LIABILITY-AND-EQUITY> 242,919,000
<SALES> 0
<TOTAL-REVENUES> 107,929,000
<CGS> 0
<TOTAL-COSTS> 104,170,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 569,000
<INTEREST-EXPENSE> 1,586,000
<INCOME-PRETAX> 3,759,000
<INCOME-TAX> 1,522,000
<INCOME-CONTINUING> 2,237,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,237,000
<EPS-BASIC> .20
<EPS-DILUTED> .20
</TABLE>
