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, 2000 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
11,170,146 shares were outstanding as of October 31, 2000.
<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
2000 1999 2000 1999
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Net patient revenues $ 109,651 $ 97,648 $ 326,777 $ 295,084
Other revenues 20,498 8,029 34,981 26,244
Net revenues 130,149 105,677 361,758 321,328
COSTS AND EXPENSES:
Salaries, wages and
benefits 74,029 59,410 203,461 180,750
Other operating 32,515 26,496 92,645 81,656
Rent 12,381 12,034 36,350 34,988
Depreciation and amorti-
zation 5,207 3,238 11,882 8,957
Interest 1,722 1,380 5,031 4,296
Total costs and expenses 125,854 102,558 349,369 310,647
Income Before Income Taxes 4,295 3,119 12,389 10,681
Income Tax Provision (1,782) (1,273) (5,016) (4,348)
NET INCOME $ 2,513 $ 1,846 $ 7,373 $ 6,333
EARNINGS PER SHARE:
Basic $ .22 $ .16 $ .64 $ .55
Diluted $ .22 $ .16 $ .64 $ .55
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,532,105 11,429,811 11,541,073 11,418,955
Diluted 11,532,105 11,430,074 11,541,203 11,424,243
</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)
ASSETS
<CAPTION>
Sept. 30 December 31
2000 1999
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 31,978 $ 4,054
Cash held by trustees 3,896 4,672
Marketable securities 33,081 30,459
Accounts receivable, less allowance for
doubtful accounts of $10,745 and $10,278 48,737 52,337
Notes receivable 602 602
Inventory at lower of cost (first-in,
first-out method) or market 5,053 5,010
Deferred income taxes 10,464 7,932
Prepaid expenses and other assets 3,324 2,430
Total current assets 137,135 107,496
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 163,121 157,558
Less accumulated depreciation and
amortization (69,705) (61,107)
Assets under arrangement with other parties 3,014 3,475
Net property, equipment and assets under
arrangement with other parties 96,430 99,926
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 809 757
Unamortized financing costs 755 837
Notes receivable 15,447 3,381
Notes receivable from National 12,126 12,198
Deferred income taxes 8,746 7,826
Minority equity investments and other 8,415 7,898
Total other assets 46,298 32,897
$279,863 $240,319
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
NATIONAL HEALTHCARE CORPORATION
</TABLE>
<TABLE>
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
LIABILITIES AND SHAREOWNERS' EQUITY
<CAPTION>
Sept. 30 December 31
2000 1999
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 9,648 $ 6,487
Trade accounts payable 10,854 13,285
Accrued payroll 26,971 25,951
Amount due to third-party payors 31,216 26,923
Accrued interest 325 276
Other current liabilities 26,153 19,737
Total current liabilities 105,165 92,659
Long-term debt, less current portion 59,253 45,736
Debt serviced by other parties, less
current portion 14,513 14,911
Other noncurrent liabilities 11,204 11,536
Minority interests in consolidated subsidiaries 731 698
Deferred income 22,338 21,143
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;
11,170,146 and 11,553,496 shares,
respectively, issued and outstanding 111 115
Capital in excess of par value,
less notes receivable 64,085 54,250
Retained earnings 9,357 1,984
Unrealized losses on securities (6,894) (2,713)
Total shareowners' equity 66,659 53,636
$279,863 $ 240,319
</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>
Nine Months Ended
September 30
2000 1999
(in thousands)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 7,373 $ 6,333
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,396 8,396
Forgiveness of employee notes receivable 6,737 ---
Provision for doubtful accounts receivable 467 798
Amortization of intangibles and deferred charges 2,541 694
Amortization of deferred income (259) (403)
Equity in earnings of unconsolidated investments (203) (170)
Distributions from unconsolidated investments 241 102
Deferred income taxes (633) 808
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 3,133 (474)
Increase in inventory (43) (1,052)
Increase in prepaid expenses and other assets (894) (1,671)
Decrease in trade accounts payable (2,431) (2,486)
Increase (decrease) in accrued payroll 978 (5,155)
Increase (decrease) in amounts due to third
party payors 4,335 (3,276)
Increase accrued interest 49 155
Increase in other current liabilities 6,416 6,281
Increase in entrance fee deposits 1,454 1,500
Decrease in other non current liabilities (332) ---
Net cash provided by operating activities 38,325 10,380
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (5,900) (18,845)
Investment in notes receivable (14,987) (1,495)
Collection of notes receivable 2,993 21,802
Increase in minority equity investments and other --- (151)
Increase in marketable securities (6,557) (6,031)
Net cash used in investing activities (24,451) (4,720)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 18,000 13,890
Decrease in cash held by trustee 776 147
Decrease in minority interests in subsidiaries (2,969) (15)
Increase in bond reserve funds, mortgage
replacement reserves and other deposits (52) (103)
Issuance of common shares 7 86
Collection of receivables 336 5
Purchase of common shares (314) ---
Payments on debt (1,721) (23,013)
Increase in financing costs (13) (105)
Net cash provided by (used in) financing activities 14,050 (9,108)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,924 (3,448)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,054 12,630
CASH AND CASH EQUIVALENTS, END OF PERIOD $31,978 $ 9,182
</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>
Nine Months Ended
September 30
2000 1999
(in thousands)
<S> <C> <C>
During the nine months ended September 30, 1999,
$710,000, of convertible subordinated
debentures were converted into 46,690
shares of common stock:
Convertible subordinated debentures $ --- $ (710)
Financing costs --- 47
Accrued interest --- (8)
Common stock --- ---
Capital in excess of par value --- 671
During the nine months ended September 30, 2000,
NHC accepted and canceled 366,000 shares of
NHC common stock in exchange for marketable
securities and the forgiveness of employee
notes receivable:
Marketable securities $ 3,065 $ ---
Common stock 4 ---
Paid-in capital 1,616 ---
Notes receivable (4,685) ---
</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 Total
Receivables Gains Share-
Common Stock from Sale Paid in Retained (Losses)on Owners'
Shares Amount of Shares Capital Earnings Securities Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at 12/31/99 11,553,496 $ 115 $(16,799) $71,049 $ 1,984 $(2,713) $ 53,636
Net income --- --- --- --- 7,373 --- 7,373
Unrealized losses on
securities --- --- --- --- --- (4,181) (4,181)
Total Comprehensive Income 3,192
Shares sold 1,150 --- --- 7 --- --- 7
Collection and forgiveness
of receivables --- --- 11,758 --- --- --- 11,758
Shares repurchased (384,500) (4) --- (1,930) --- --- (1,934)
Balance at 9/30/00 11,170,146 $ 111 $ (5,041) $69,126 $ 9,357 $(6,894) $ 66,659
Balance at 12/31/98 11,378,558 $ 114 $(16,807) $69,645 $ (6,399) $ 3,762 $ 50,315
Net income --- --- --- --- 6,333 --- 6,333
Unrealized losses on
securities --- --- --- --- --- (3,790) (3,790)
Total Comprehensive Income 2,543
Shares sold 4,546 --- --- 86 --- --- 86
Collection of receivables --- --- 5 --- --- --- 5
Shares issued in conversion
of convertible debentures
to common shares 46,690 --- --- 671 --- --- 671
Balance at 9/30/99 11,429,794 $ 114 $(16,802) $70,402 $ (66) $ (28) $ 53,620
</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, 2000
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of National HealthCare Corporation
("NHC") for the nine months ended September 30, 2000 and 1999, 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, 2000 are not necessarily indicative of the results that may be expected
for the entire fiscal year ended December 31, 2000. The interim condensed
consolidated balance sheet at December 31, 1999 is taken from the audited
consolidated financial statements at that date. The interim condensed
consolidated 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, 1999.
Note 2 - OTHER REVENUES:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
(in thousands)
Revenue from managed centers $16,757 $ 5,071 $24,029 $16,641
Guarantee fees 62 140 269 395
Advisory fee from NHI 722 694 2,163 2,100
Advisory fee from NHR 125 118 369 353
Earnings on securities 636 390 2,916 1,175
Equity in earnings of
unconsolidated investments 93 55 205 170
Interest income 990 802 2,402 2,636
Other 1,113 759 2,628 2,774
$20,498 $ 8,029 $34,981 $26,244
Revenue from managed centers include management fees and interest income
on notes receivable from the managed centers. Revenue from managed centers,
in the three months ended September 30, 2000 includes $12,727,000 of
management fees received from National Health Corporation that were previously
unaccrued. "Other" revenues include non-health care related earnings.
8
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 3 - INVESTMENTS IN MARKETABLE SECURITIES AND PREFERRED STOCK:
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 Statement of Financial Accounting Standards No. 115.
On March 31, 2000, NHC acquired $3,000,000 of National Health Investors,
Inc. ("NHI") Preferred Stock, convertible at the lesser of $12.00 per share or
the then trading value per share into NHI common stock after December 31,
2000. The shares pay dividends at the rate of 8% through June 30, 2000, at
the rate of 10% from July 1, 2000 through September 30, 2000, and at the rate
of 12% thereafter. The Preferred Stock, which is not listed on a stock
exchange, is considered a non-marketable security and is recorded at cost.
Realized gains and losses from securities sales are determined on the
specific identification of the securities.
Note 4 - GUARANTEES AND CONTINGENCIES:
Guarantees and Related Events
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 $40,960,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average rate of
6.7% at September 30, 2000.
As a result of the health care industry's generally weak financial
position, the uncertainty engendered by the increasing number of medical
liability claims in the state of Florida, and the cancellation of NHC's
liability policy in that state, the liquidity demands being faced by National
Health Investors, Inc., NHC has experienced and is experiencing the potential
for significant defaults in financial obligations which it has undertaken. A
summary of the potential defaults are as follows:
9
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
York Hannover Bankruptcy: NHC had originally guaranteed $5 million of
that certain first mortgage debt made by York Hannover Nursing Centers,
Inc. ("York Hannover") to NHI in December 1993. York Hannover sought
bankruptcy protection in April 1999 and on December 30, 1999, the six
Florida nursing facilities, which secured the NHI note, were acquired by
a subsidiary of the first mortgage lender. NHC has remained as a
limited ($3 million) guarantor of the outstanding debt plus the
guarantor on a $2,000,000 working capital note, all collateralized by
the pledge of certain marketable securities in the approximate amount of
$5 million. NHC is no longer managing these facilities. The failure of
these facilities to make their payments on the first mortgage notes
could result in the acceleration of that indebtedness and an attempt by
the first mortgage holder and/or working capital lender to collect their
total of $5 million in guarantees from NHC or the collateral now held by
the first mortgage lender.
NHI Short Term Liquidity Demand: NHI is a publicly traded real estate
investment trust for whom NHC serves as Investment Advisor. NHI's $102
million revolving credit facility matured on October 10, 2000 and NHI
has reported that effective November 10, 2000 the credit facility has
been extended for approximately 14 months. However, during that period,
the entire facility must be paid in full. Additionally, NHI has
reported that it has $38 million in subordinated convertible debentures
maturing on January 2, 2001. NHI has notified the investing public that
it intends to meet these liquidity demands by the issuance of
convertible debt, sale of assets, and refinancing of existing assets.
NHI has relied upon NHC to supply some immediate cash needs. This was
accomplished by the purchase by NHC from NHI of certain mortgage backed
securities having an outstanding principal amount on November 10, 2000
of $23,200,000. Failure by NHI to meet its liquidity demands would
negatively impact NHC in its capacity as a guarantor of 38% of that
certain mortgage backed ESOP indebtedness in the principal amount of
$28,800,000 and an additional guarantee equal to 26% of a $23,200,000
mortgage backed ESOP notes it purchased from NHI on November 10, 2000.
10
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Customer Bankruptcies
On November 5, 1999, NHC was informed that a substantial debtor of its
rehabilitation division had filed for Chapter 11 protection in the United
States Bankruptcy/District Court in Wilmington, Delaware. The debtor is an
affiliate of Lenox Healthcare, Inc. of Pittsfield, Massachusetts. The debt is
collateralized by second mortgages on certain licensed nursing facilities, a
first lien on certain accounts receivable, and the assignment of a number of
limited partnership and corporate shareholder interests. NHC does not
currently believe there is any chance of significant recovery in this bankrupt
estate and has previously reserved 100% of the accounts receivable.
NHC also manages three other nursing homes owned in part by Mr. Tom
Clarke, the owner of Lenox Healthcare, Inc. Two of the three facilities are
not in bankruptcy and are in compliance with all the terms and conditions of
the management agreements. Both of these management agreements were assigned
to new third party managers effective October 1, 2000. The third managed
facility is located in Carthage, Tennessee and although this management
agreement has been rejected by the debtor in possession, the property will be
managed by NHC through December 31, 2000.
Professional Liability Claims
Due to unusual statutory provisions in the State of Florida as well as
an active and specialized plaintiff's bar, the entire long-term care industry
in that state 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 in Florida has increased from $1,995,000 in 1998 to $3,200,000 in 1999
and $6,700,000 in 2000. Prior to 1999, coverage was secured on a first dollar
basis (no deductible). For policy years 1999 and 2000, all owned centers have
a significant per claim deductible which is capped in the aggregate at
$1,225,000 for policy year 1999 and $2,000,000 for the first nine months of
policy year 2000.
11
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
On June 28, 2000, Caliber One, the Company's malpractice carrier, gave
NHC 90 days notice of the cancellation of its professional liability policy in
all states in which NHC does business. NHC was able to obtain insurance
effective October 1, 2000 for all of its operations except for its long term
care properties in the state of Florida. Accordingly, and since the prospect
of doing business in Florida without insurance was not acceptable to the
Company, NHC terminated its operations in that state effective the close of
business September 30, 2000. This was accomplished by assigning its
management agreements in Florida (10 properties) to unrelated entities, by
terminating its leases on 10 Florida properties and leasing the two Florida
properties owned by NHC subsidiaries to third parties. Given the current
legal environment, NHC's replacement professional liability policy obtained
effective October 1, 2000 (for all states but Florida) has required
significant additional premiums, and the self insured retention amount of
$100,000 per occurrence is now unlimited in the aggregate. Given the current
legal environment in the State of Florida, the Company believes there is a
potential of uninsured liability in excess of insurance coverage for the years
1994 through 2000, 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 financial position, cash
flow and results of operations.
Note 5 - LEGAL PROCEEDINGS:
Braeuning vs. NHC
NHC was 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 government participated as
an intervening plaintiff. By agreement, the suit was moved from the Pensacola
District Court to the Tampa, Florida, District Court and has now been
dismissed, subject to court approval of a settlement agreement. The suit
alleged 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 alleged 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 denied all
allegations.
12
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
In regard to the allegations contained in the Braeuning lawsuit, NHC
believes that the cost report information of the centers has been either
appropriately filed or, upon amendment, will reflect adjustments for, among
other items, i) the correction of unintentional misallocations; ii) instances
in which the self audit process has had to use different source documents due
to loss or misplacement of the original source documents and iii)
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 has
finalized the self-audit process for years 1995 and 1996. NHC's self audit
process was approved by the plaintiffs and NHC retained a nationally
recognized accounting firm to review the self audit process. The cost report
periods reviewed include 1991 through 1996. The Company has reached a
tentative agreement with the Department of Justice and the Health Care
Financing Administration on the use of certain audit ratios to be used to
calculate the amount of Medicare overpayment or underpayment for years 1991
through 1994; thus avoiding a continuation of the costly self audit process.
Adjustments to the reimbursable costs claimed will be the responsibility
of the center where costs were incurred, whether owned, leased or managed by
the Company; however, under the terms of NHC's 1998 settlement of litigation
with Florida Convalescent Centers, Inc. ("FCC"), NHC has agreed to be
responsible for any adjustments to previously filed Medicare and routine cost
limit exceptions related to the 16 FCC centers. In return, any receivables
owed to FCC thru 1998 are the property of NHC. Adjustments made to the six
centers owned during those years by York Hannover may also be borne by NHC.
Negative adjustments to managed centers would reduce NHC's management fee (6%
of net revenue)and could result in claims against NHC as manager by the owners
including damages and termination of the management relationships. Adjustments
to owned or leased centers would directly impact the Company's financial
statements. NHC intends to continue its revenue policy of not reflecting
routine cost limit exception requests as income until the process, including
cost report audits, is completed. NHC and the government are aggressively
pursuing an amicable settlement. Although no written agreement has been
reached, the Company believes the self-audit numbers and ratios plus projected
unrecorded receivables from the government will enable it to finalize the
litigation without a material profit or loss effect. Of course, until a
written settlement is reached, an adverse determination in the lawsuit or an
agreed upon settlement could include repayments, fines and/or penalties which
would have a material negative impact on the financial position, cash flow and
results of operations of NHC.
13
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
General Liability Lawsuits
The long term care industry has seen a dramatic increase in personal
injury/wrongful death claims based on alleged negligence by nursing homes and
their employees in providing care to residents. This is especially prevalent
in Florida. As of September 30, 2000, the Company and/or its managed centers
are defendants in 74 such lawsuits in Florida, compared to 37 in all other
states combined.
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 the jury indicated that it wanted to assess punitive
damages. The insurance carrier then entered into a settlement of the
compensatory and punitive claim against the defendants 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 would assert a claim against NHC and/or
the owner or, alternatively, that the carrier would claim that the coverage be
divided between the umbrella policy issued for separate calendar years, NHC
filed for declaratory judgment in the Chancery Court of Rutherford County,
Tennessee. This action asks the court to find that the settlement was made in
bad faith and that the insurance carrier should be responsible for the entire
amount of the judgment. The insurance carrier transferred the case into the
federal district court in Nashville, Tennessee and the York Hannover
bankruptcy Trustee filed an identical suit in Tampa, Florida against the
carrier. The parties have now reached a settlement - which must receive
approval from the York Hannover Bankruptcy Court - which removes any possible
claim by the carrier against NHC and/or York Hannover, and which also results
in the reestablishment of a five million dollar umbrella policy covering NHC's
owned, leased or managed centers for 1996.
14
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Note 6 - LONG-TERM DEBT:
NHC and NHI both are guarantors of a debt instrument originally financed
through the National Health Corporation Leveraged Employee Stock Ownership
Plan and Trust. As of September 30, 2000, the total debt balance on the loan
was $23,214,000, of which $5,303,000 is the primary obligation of NHC. On
July 7, 2000, under the terms of the debt agreement, NHC, as NHI's investment
advisor, purchased the $23,214,000 debt instrument from the previous holders
to protect NHC's interest. On September 30, 2000, NHI purchased the
$23,214,000 debt instrument from NHC. As discussed in Note 4, subsequent to
the quarter end and as required by NHI's amended Revolving Credit Facility on
November 10, 2000, NHC repurchased the outstanding notes from NHI.
NHC has had for several years a $20,000,000 revolving credit facility
funded by AmSouth and SunTrust Bank N.A. This facility matured on July 10,
2000 and was placed on a "demand note" basis. On November 10, 2000, NHC
entered into an extension agreement which resulted in the reduction in the
facility amount to $19,000,000. NHC is required to make scheduled principal
amortization on a semi-annual basis in the amount of $2,679,000 on December 1
and June 1 of each year until the facility is equal to $5,000,000 at which
time further principal reductions are eligible to be reborrowed by the
Company. The facility itself will mature on November 9, 2002. The facility
continues to be collateralized with certain accounts receivable and a pledge
of certain other assets of the Company.
Note 7 - Events Subsequent to September 30, 2000:
As a result of the prohibitive cost of professional liability insurance
in the state of Florida, effective October 1, 2000, NHC has ceased all long
term health care operations in Florida. Prior to October 1, 2000, NHC had
owned and operated two long-term health care centers in Florida. NHC had also
leased from NHI and NHR ten long-term health care centers and three assisted
living centers in Florida.
15
<PAGE>
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
Effective October 1, 2000, NHC leased its two owned long-term health
care centers directly to a group of non-NHC affiliated companies. The
individual NHR and NHI leases have been terminated effective October 1, 2000,
and the centers were leased to new unrelated tenants; however, NHC retains
contingent liability because the properties were originally leased to it
pursuant to a Master Lease.
NHC has transferred the current assets, current liabilities, furniture
and equipment and leasehold improvements of its owned and leased Florida
facilities to the non-NHC affiliated group of companies in exchange for total
notes receivable of approximately $15,000,000. The notes receivable
approximate the book value of the net assets transferred. NHC has also
entered into agreements to provide certain working capital loans to the
non-NHC affiliated group of companies up to a maximum of $4,000 per bed per
center. In future periods, NHC will also not provide any health care related
management services for the two owned centers or for the thirteen leased
centers. Effective October 1, 2000, NHC will provide only financial and
accounting services for the two owned centers and for the thirteen leased
centers in Florida.
The change of ownership is pending approval from the State of Florida.
Newspaper accounts in Florida report some type of litigation has been or will
be filed by a traditional plaintiffs' attorney to prohibit NHC from divesting
itself of the operation of these facilities; however, NHC has not been served
with any such suit at this time. If it is so served, NHC will vigorously
defend its actions.
NHC is in the process of determining how the transactions will be
accounted for in the consolidated financial statements and the how the
transactions will impact the future operations of NHC. However, management
does not believe that the transactions will have a material impact on NHC's
earnings in future periods.
Effective October 1, 2000, NHC has also ceased all health care
management services to an additional ten long-term health care centers located
in the state of Florida. Effective October 1, 2000, NHC will provide only
financial and accounting services for the ten formerly managed centers.
16
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
As of September 30, 2000, National HealthCare Corporation ("NHC", or the
"Company") operates or manages 106 long-term health care centers with 13,977
beds in 12 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, assisted living centers and independent living
centers.
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999.
Results for the three month period ended September 30, 2000 include a
23.1% increase compared to the same period in 1999 in net revenues and a 36.1%
increase in net income.
The increase in revenues reflect improved PPS rates, improved census
mix, and increases in the number of beds operated in long-term nursing care
operations.
Compared to the quarter a year ago, NHC has increased the number of
owned or leased long-term care beds by 89 beds from 7,887 beds to 7,976 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 $11.7 million or 229.4% in 2000 from $5.1
million in 1999 to $16.8 million in 2000. The increase is due primarily to
the receipt of $12.7 million of previously unaccrued management fee revenue
from National Health Corporation partially offset by the loss of management
contracts for 14 centers owned by Florida Convalescent Centers, Inc. ("FCC").
The FCC management agreements were terminated effective July 31, 1999.
17
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
Total costs and expenses for the 2000 third quarter increased $23.2
million or 22.6% to $125.8 million from $102.6 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $14.6
million or 24.6% to $74.0 million from $59.4 million. Other operating expenses
increased $6.0 million or 22.6% to $32.5 million for the 2000 period compared
to $26.5 million in the 1999 period. Rent increased $.4 million or 0.3% to
$12.4 million from $12.0 million. Depreciation and amortization increased
60.8% to $5.2 million. Interest costs increased 24.8% to $1.7 million.
Increases in salaries, wages and benefits are due in part to the
forgiveness of approximately $6.7 million of employee notes receivable and the
payment of approximately $2.7 million to reimburse the related employees for
the tax impact of the loans forgiven. Increases in salaries, wages and
benefits are also due to increases in staffing levels due to long-term care
bed additions and assisted living occupancy improvements and expansions.
Further contributing to higher costs of labor are inflationary increases for
salaries and the associated benefits.
Increases in operating costs are due primarily 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
93.7% compared to an average of 94.3% for the same quarter a year ago.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999.
Results for the nine month period ended September 30, 2000 include a
12.6% increase compared to the same period in 1999 in net revenues and a 16.4%
increase in net income.
The increase in revenues reflect improved PPS rates, improved census
mix, and increases in the number of beds operated in long-term nursing care
operations.
Compared to the nine months a year ago, NHC has increased the number of
owned or leased long-term care beds by 89 beds from 7,887 beds to 7,976 beds.
Also contributing to increased revenues are improved occupancy rates at
assisted living centers and at independent living centers.
18
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, increased $7.4 million or 44.4% in 2000 from $16.6
million in 1999 to $24.0 million in 2000. The increase is due primarily to
the receipt of $12.7 million of previously unaccrued management fee revenue
from National Health Corporation partially offset by the loss of management
contracts for 14 centers owned by FCC. The FCC management agreements were
terminated effective July 31, 1999.
Total costs and expenses for the 2000 nine months increased $38.7
million or 12.5% to $349.3 million from $310.6 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $22.6
million or 12.5% to $203.4 million from $180.8 million. Other operating
expenses increased $10.9 million or 13.3% to $92.6 million for the 2000 period
compared to $81.7 million in the 1999 period. Rent increased $1.4 million or
3.7% to $36.3 million from $35.0 million. Depreciation and amortization
increased 32.7% to $11.9 million. Interest costs increased 17.1% to $5.0
million.
Increases in salaries, wages and benefits are due in part to the
forgiveness of approximately $6.7 million of employee notes receivable and the
payment of approximately $2.7 million to reimburse the related employees for
the tax impact of the loans forgiven. Increases in salaries, wages and
benefits are due to increases in staffing levels due to long-term care bed
additions and assisted living occupancy improvements and expansions. Further
contributing to higher costs of labor are inflationary increases for salaries
and the associated benefits. Bonus and benefit programs have also been
increased compared to the 1999 period.
Increases in operating costs are due primarily 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 nine months
averaged 94.2% compared to an average of 93.7% for the same nine months a year
ago.
Liquidity and Capital Resources
NHC generated net cash from operating activities during the first nine
months of 2000 totaling $38.3 million compared to $10.4 million in the prior
year period. The increase in cash generated from operating activities is due
primarily to increases in net income, depreciation, amortization of
intangibles and deferred charges, accrued payroll and amounts due to third
party payor and a decrease in accounts receivable.
19
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
Cash flows used in investing activities during the first nine months of
2000 totaled $24.4 million compared to $4.7 million used in the same period in
1999. Cash used for investments in property, notes receivable, and marketable
securities totaled $27.4 million in 2000 compared to $26.4 million in 1999.
Collections of notes receivable generated $3.0 million in 2000 compared to
$21.8 million in 1999.
Cash provided by financing activities totaled $14.0 million in the first
nine months of 2000 compared to cash used of $9.1 million for the same period
in 1999. Payments on debt of $1.7 million and decreases in minority interests
in subsidiaries of $3.0 million in 2000 were offset by proceeds from new debt
issuance of $18.0 million. In the prior year, cash flows used included $23.0
million for payments on debt, offset in part by new debt issuance of $13.9
million.
At September 30, 2000, the Company's ratio of long-term obligations and
deferred income to capital is 1.3 to 1.
NHC has also guaranteed approximately $41.0 million of the debt of
certain health care centers which NHC manages for others. See Note 4 for
discussion of the possibility of additional liabilities as a result of its
debt guarantees.
NHC and NHI both are guarantors of a debt instrument originally financed
through the National Health Corporation Leveraged Employee Stock Ownership
Plan and Trust. As of September 30, 2000, the total debt balance on the loan
was $23.2 million, of which $5.3 million is the primary obligation of NHC. On
July 7, 2000, under the terms of the debt agreement, NHC, as NHI's investment
advisor, purchased the $23.2 million debt instrument from the previous holders
to protect NHC's interest. On September 30, 2000, NHI purchased the $23.2
million debt instrument from NHC. As discussed in Note 4, subsequent to the
quarter end and as required by NHI's amended Revolving Credit Facility on
November 10, 2000, NHC repurchased the outstanding notes from NHI.
20
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
NHC has had for several years a $20 million revolving credit facility
funded by AmSouth and SunTrust Bank N.A. This facility matured on July 10,
2000 and was placed on a "demand note" basis. On November 10, 2000, NHC
entered into an extension agreement which resulted in the reduction in the
facility amount to $19 million. NHC is required to make scheduled principal
amortization on a semi-annual basis in the amount of $2.7 million on December
1 and June 1 of each year until the facility is equal to $5.0 million at which
time further principal reductions are eligible to be reborrowed by the
Company. The facility itself will mature on November 9, 2002. The facility
continues to be collateralized with certain accounts receivable and a pledge
of certain other assets of the Company.
Cash Dividends
NHC may pay dividends at the discretion of the Board of Directors. NHC
does not anticipate 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
21
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
costs. 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 diem rates that are based on the average costs of
all U.S. skilled nursing facilities. In response to the Medicare PPS
legislative changes, NHC has implemented strategies that have included 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. In addition, during November, 1999,
Congress passed the Medicare Refinement Act of 1999 ("MRA-99"). The MRA-99
allows providers to elect to skip the three year phase-in period. Where
advantageous, NHC has so elected commencing January 1, 2000.
Litigation
Braeuning vs. NHC
NHC was 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 government participated as
an intervening plaintiff. By agreement, the suit was moved from the Pensacola
District Court to the Tampa, Florida, District Court and has now been
dismissed, subject to court approval of a settlement agreement. The suit
alleged 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 alleged 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 denied all
allegations.
In regard to the allegations contained in the Braeuning lawsuit, NHC
believes that the cost report information of the centers has been either
appropriately filed or, upon amendment, will reflect adjustments for, among
other items, i) the correction of unintentional misallocations; ii) instances
in which the self audit process has had to use different source documents due
to loss or misplacement of the original source documents and iii)
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
22
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
at its owned, leased and managed centers. A number of amended cost reports
have been filed and NHC has finalized the self-audit process for years 1995
and 1996. NHC's self audit process was approved by the plaintiffs and NHC
retained a nationally recognized accounting firm to review the self audit
process. The cost report periods reviewed include 1991 through 1996. The
Company has reached a tentative agreement with the Department of Justice and
the Health Care Financing Administration on the use of certain audit ratios to
be used to calculate the amount of Medicare overpayment or underpayment for
years 1991 through 1994; thus avoiding a continuation of the costly self
audit process.
Adjustments to the reimbursable costs claimed will be the responsibility
of the center where costs were incurred, whether owned, leased or managed by
the Company; however, under the terms of NHC's 1998 settlement of litigation
with Florida Convalescent Centers, Inc. ("FCC"), NHC has agreed to be
responsible for any adjustments to previously filed Medicare and routine cost
limit exceptions related to the 16 FCC centers. In return, any receivables
owed to FCC thru 1998 are the property of NHC. Adjustments made to the six
centers owned during those years by York Hannover Nursing Centers, Inc. ("York
Hannover") may also be borne by NHC. Negative adjustments to managed centers
would reduce NHC's management fee (6% of net revenue)and could result in
claims against NHC as manager by the owners including damages and termination
of the management relationships. Adjustments to owned or leased centers would
directly impact the Company's financial statements. NHC intends to continue
its revenue policy of not reflecting routine cost limit exception requests as
income until the process, including cost report audits, is completed. NHC and
the government are aggressively pursuing an amicable settlement. Although no
written agreement has been reached, the Company believes the self-audit
numbers and ratios plus projected unrecorded receivables from the government
will enable it to finalize the litigation without a material profit or loss
effect. Of course, until a written settlement is reached, an adverse
determination in the lawsuit or an agreed upon settlement could include
repayments, fines and/or penalties which would have a material negative impact
on the financial position, cash flow and results of operations of NHC.
General Liability Lawsuits
The long term care industry has seen a dramatic increase in personal
injury/wrongful death claims based on alleged negligence by nursing homes and
their employees in providing care to residents. This is especially prevalent
in Florida. As of September 30, 2000, the Company and/or its managed centers
are defendants in 74 such lawsuits in Florida, compared to 37 in all other
states combined.
23
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(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) contacted NHC's Florida counsel to advise them
that the jury had returned a verdict in excess of policy limits in
compensatory damages, and the jury indicated that it wanted to assess punitive
damages. The insurance carrier then entered into a settlement of the
compensatory and punitive claim against the defendants 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 would assert a claim against NHC and/or
the owner or, alternatively, that the carrier would claim that the coverage be
divided between the umbrella policy issued for separate calendar years, NHC
filed for declaratory judgment in the Chancery Court of Rutherford County,
Tennessee. This action asks the court to find that the settlement was made in
bad faith and that the insurance carrier should be responsible for the entire
amount of the judgment. The insurance carrier transferred the case into the
federal district court in Nashville, Tennessee and the York Hannover
bankruptcy Trustee filed an identical suit in Tampa, Florida against the
carrier. The parties have now reached a settlement - which must receive
approval from the York Hannover Bankruptcy Court - which removes any possible
claim by the carrier against NHC and/or York Hannover, and which also results
in the reestablishment of a five million dollar umbrella policy covering all
of NHC's owned, leased or managed centers for 1996.
Customer Bankruptcies
On November 5, 1999, NHC was informed that a substantial debtor of its
rehabilitation division had filed for Chapter 11 protection in the United
States Bankruptcy/District Court in Wilmington, Delaware. The debtor is an
affiliate of Lenox Healthcare, Inc. of Pittsfield, Massachusetts. The debt is
collateralized by second mortgages on certain licensed nursing facilities, a
first lien on certain accounts receivable, and the assignment of a number of
limited partnership and corporate shareholder interests.
NHC also manages three other nursing homes owned in part by Mr. Tom
Clarke, the owner of Lenox Healthcare, Inc. Two of the three facilities are
not in bankruptcy and are in compliance with all the terms and conditions of
the management agreements. As both are in Florida, these management contracts
were assigned to third party guarantors effective October 1, 2000. The third
managed facility is located in Carthage, Tennessee and although the debtor in
possession has rejected the management agreement, it will be managed by NHC
through December 31, 2000.
24
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
NHC is currently a secured and unsecured creditor in the above
bankruptcies, which involve approximately $20,000,000 in account receivables
and notes owed to NHC by the bankrupt estates. NHC believes that recovering
and collecting from these entities is not possible. The Company has
historically provided full reserves for these amounts based on its assessments
of the loss exposure to the Company. The Company is not required to fund
additional amounts to these parties. The Company expects no additional
charges or expenses.
Guarantees and Related Events
York Hannover Bankruptcy: NHC had originally guaranteed $5 million of
that certain first mortgage debt made by York Hannover to NHI in December
1993. York Hannover sought bankruptcy protection in April 1999 and on
December 30, 1999, the six Florida nursing facilities, which secured the NHI
note, were acquired by a subsidiary of the first mortgage lender. NHC has
remained as a limited ($3 million) guarantor of the outstanding debt plus the
guarantor on a $2,000,000 working capital note, all collateralized by the
pledge of certain marketable securities in the approximate amount of $5
million. NHC is no longer managing these facilities. The failure of these
facilities to make their payments on the first mortgage notes could result in
the acceleration of that indebtedness and an attempt by the first mortgage
holder and/or working capital lender to collect their total of $5 million in
guarantees from NHC or the collateral now held by the first mortgage lender.
NHI Short Term Liquidity Demand: National Health Investors, Inc.
("NHI") is a publicly traded real estate investment trust for whom NHC serves
as Investment Advisor. NHI's $102 million revolving credit facility matured
on October 10, 2000 and that company has reported that effective November 10,
2000 the credit facility had been extended for approximately 14 months.
However, during that period, the entire facility must be paid in full.
Additionally, NHI has reported that it has $38 million in subordinated
convertible debentures maturing on January 2, 2001. NHI has notified the
investing public that it is meeting these liquidity demands by the issuance of
convertible debt, sale of assets, and refinancing of existing assets. NHI has
relied upon NHC to supply some immediate cash needs. This was accomplished by
the purchase by NHC from NHI of certain mortgage backed securities having an
outstanding principal amount on November 10, 2000 of $23,200,000. Failure by
NHI to meet its liquidity demands would negatively impact NHC in its capacity
as a guarantor of 38% of that certain mortgage backed ESOP indebtedness in the
principal amount of $28.8 million and an additional guarantee equal to 2.6% of
a $23.2 million mortgage backed ESOP notes it purchased from NHI on November
10, 2000.
25
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
General
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 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 $11.7 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 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 $16.5 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 $174,000. However, a hypothetical 10% change in interest rates
would have an immaterial impact on the fair values of these instruments. As
of September 30, 2000, $37.1 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 $46.2 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
26
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
related increase or decrease in interest expense of approximately $336,000.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For a discussion of prior, current and pending litigation of
material significance to NHC, please see Note 5, page 12, of this
Form 10-Q.
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
27
<PAGE>
NATIONAL HEALTHCARE CORPORATION
September 30, 2000
(Unaudited)
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
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 14, 2000 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date November 14, 2000 /s/ Donald K. Daniel
Donald K. Daniel
Vice President and Controller
Principal Accounting Officer
28
