=========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission File No.
December 31, 1999 333-37185
_______
NATIONAL HEALTHCARE CORPORATION
(Exact name of registrant as specified in its Corporate Charter)
Delaware 52-2057472
(State of Formation) (I.R.S. Employer I.D. No.)
100 Vine Street
Murfreesboro, Tennessee 37130
(Address of principal executive offices)
Telephone Number: 615-890-2020
Securities registered pursuant to Section 12(b) of the Act.
Name of Each Exchange on
Title of Each Class which Registered
_________________________________________________________________________
Shares of Common Stock American Stock Exchange
Senior Subordinated Convertible Debentures
Due 2000 (6%) American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Same
Indicate by check mark whether the registrant (a) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes x No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market of voting shares held by nonaffiliates of the
registrant was $30,011,000 as of February 29, 2000.
Number of Shares outstanding as of February 29, 2000: 11,421,700
Page 1 of 91 Pages
Exhibit Index Page 60
=============================================================================
PART 1
------
ITEM 1
BUSINESS
General
National HealthCare Corporation (NHC or the Company) is a Delaware
corporation. The reference to NHC shall include all subsidiaries and
partnerships in which it has an interest. It principally operates long-term
health care centers and home health care programs in the southeastern United
States. The Company's health care centers provide subacute, skilled and
intermediate nursing and rehabilitative care. At December 31, 1999, the
Company operated or managed 101 long-term health care centers with a total of
13,501 licensed beds. Of the 101 centers, 40 are leased from National Health
Investors, Inc. (NHI), 16 are leased from National Health Realty, Inc. (NHR),
40 are managed for other owners and 5 are owned or leased from other parties.
The Company serves as a compensated Investment Advisor to both NHI and NHR.
The Company's homecare programs provide rehabilitative care at a patient's
residence. During 1999, the Company operated 34 homecare programs and
provided 338,817 homecare patient visits. NHC also operates 473 retirement
apartments located in four retirement centers leased from NHI, one retirement
center leased from NHR and one managed retirement center. Additionally, the
Company operates 906 assisted living units at 13 leased centers (six from NHI
and six from NHR)and four managed centers.
During 1999, NHC purchased 300 beds in two centers which it had
previously managed and opened 152 new health care beds spread among five
owned/leased centers and one managed center. During 1999, NHC terminated
management responsibilities at 1,862 beds in 14 centers but acquired a
Tennessee management contract on one complex with 550 beds, 66 assisted living
units and 28 independent apartments and eight New England managed centers with
738 beds and 102 assisted living units. During the year, construction started
on expansions of one leased assisted living center (40 units) and a total of
23 managed nursing home beds in two locations. A total of 31 beds were under
construction at year end. Finally, NHC has obtained a certificate of need for
the construction of 160 beds at one Tennessee owned location.
As of December 31, 1999, the Company operated specialized care units
such as Alzheimer's Disease care units (21), sub-acute nursing units (14) and
a number of in house pharmacies. Similar specialty units are under
development or consideration at a number of the Company's centers, as well as
free standing projects.
Additional Services. The Company plans to continue to expand its
continuum of care for the elderly by offering a comprehensive and increasing
range of services through related or separately structured health care
centers, homecare programs, specialized care units, pharmacy operations,
rehabilitative services, assisted living centers and retirement centers.
Highlights of these activities during 1999 were as follows:
A. Homecare Programs. The Company's policy has been to affiliate
each of its licensed and certified homecare programs with a
Company operated health care center. The newer homecare programs
are separately based in an effort to continually expand NHC's
market leadership in these services. The existing programs have
increased their total number of visits from 328,638 in 1998 to
338,817 in 1999. The current reimbursement for homecare services
under the Medicare program provides for reimbursement of allowable
costs up to specified limits for both visits and patients. Thus
the Company is now focusing on growing its homecare patient census
and managing the number of visits to stay within those limits. NHC
homecare had 6,502 patients in 1999. Effective October 1, 2000,
the Company will receive reimbursement for homecare services under
the Medicare program through a prospective payment system. Under
the homecare prospective payment system the Company will receive a
fixed amount per patient per episode as defined by Medicare
guidelines. The Company is currently evaluating the impact of the
new homecare prospective payment system, but believes it will be
able to operate effectively under the system.
B. Rehabilitative Services. The Company has long operated an
intensive offering of physical, speech, and occupational therapy
provided by center specific therapists. NHC maintained a
rehabilitation staff of over 900 highly trained, professional
therapists in 1999, some of which were employed by a separate
rehabilitation subsidiary known as NHC Rehabilitation. In addition
to serving NHC operated centers, it provides contract services to
175 health care providers owned by third parties. The Company's
rates for these services are competitive with other market rates.
Major Medicare reimbursement changes occurred for therapy services
in 1999 and will continue to have a significant effect during
2000. In 1999 skilled nursing centers Medicare per diems became
prospective and included no separate payment for therapy services.
This system is being phased in over a four year period. The
Company terminated substantially all of its therapists in 1999,
but rehired most as center based employees. Because of these
changes, the Company experienced a substantial decrease in third
party contracts in 1999, but also a substantial decrease in center
based expenses.
C. Medical Specialty Units. The Company requires all centers to
participate in the Medicare program, and has continually expanded
its range of offerings by the creation of center-specific medical
specialty units such as the Company's 21 Alzheimer's disease care
units and 14 subacute nursing units. The services are provided
not only at each NHC operated center, but also at existing
specialized care units.
D. Pharmacy Operations. NHC operates four regional pharmacy
operations (one in east Tennessee, one in central Tennessee, one
in South Carolina, and one in central Florida), but has contracted
to sell the Florida operation. These pharmacy operations operate
out of a central office and supply (on a separate contractual
basis) pharmaceutical services and supplies which were formerly
purchased by each center from local vendors. The regional
pharmacy operations now have 8,054 skilled nursing home beds under
contract. Pharmacy reimbursement under Medicare has also been
shifted from direct billing by the pharmacy, to a negotiated rate
structure between skilled nursing centers and the pharmacy, with
the skilled nursing centers Medicare reimbursement being based
upon a prospective rate not related to actual patient
pharmaceutical usage. The Company anticipates stable revenues for
its pharmacy subsidiary in 2000.
E. Assisted Living Projects. The Company presently owns, leases or
manages seventeen assisted living projects, eight of which are
located within the physical structure of a long-term health care
center or retirement complex. The Company may start construction
on no more than thirty assisted living units as a component of a
new 160 bed nursing home but only if sufficient third party
funding is arranged. Assisted living units provide basic room and
board functions for the elderly with the on-staff availability to
assist in minor medical needs on an as needed basis.
F. Managed Care Contracts. The Company operates four regional
contract management offices, staffed by experienced case managers
who contract with managed care organizations (MCO's) and insurance
carriers for the provision of subacute and other medical specialty
services within a regional cluster of centers. Managed care days
have decreased from 71,606 in 1997 and 81,099 in 1998 to 54,757 in
1999.
In fiscal year 1999, 92.3% of the Company's net revenues were derived
from health care services and 7.7% from other sources.
Long-Term Health Care Centers
The health care centers operated or advised by the Company provide
in-patient skilled and intermediate nursing care services and in-patient and
out-patient rehabilitation services. Skilled nursing care consists of 24-hour
nursing service by registered or licensed practical nurses and related medical
services prescribed by the patient's physician. Intermediate nursing care
consists of similar services on a less intensive basis principally provided by
non-licensed personnel. These distinctions are generally found in the
long-term health care industry although for Medicaid reimbursement purposes,
some states in which the Company operates have additional classifications,
while in other states the Medicaid rate is the same regardless of patient
classification. Rehabilitative services consist of physical, speech, and
occupational therapies, which are designed to aid the patient's recovery and
enable the patient to resume normal activities.
Each health care center has a licensed administrator responsible for
supervising daily activities, and larger centers have assistant
administrators. All have medical directors, a director of nurses and
full-time registered nurse coverage. All centers provide physical therapy and
most have other rehabilitative programs, such as occupational or speech
therapy. Each facility is located near at least one hospital and is qualified
to accept patients discharged from such hospitals. Each center has a full
dining room, kitchen, treatment and examining room, emergency lighting system,
and sprinkler system where required. Management believes that all centers are
in compliance with the existing fire and life safety codes.
The Company has developed a quality certification program which it
utilizes in each of its operated health care centers. An integral part of the
program is a computerized patient assessment system which aids in placing the
patient in the appropriate section of each center (skilled or intermediate)
and monitors the health care needs of the patient, number and frequency of
medications and other essential medical information. The data derived from
this system is used not only to assure that appropriate care is given to each
individual patient, but also to ascertain the appropriate amount of staffing
of each section of the center. Additionally, the Company requires a patient
care survey to be performed at least quarterly by the regional and home office
nursing support team, and a "consumer view" survey by senior management at
least twice a year. The Company developed and promotes a "customer
satisfaction" rating system, using 1993 as a benchmark, and requires
significant improvement in the ratings by each center as a condition of
participation in the Company's overall "Excellence Program".
The Company provides centralized management and support services to
Company health care nursing centers. The management and support services
include operational support through the use of regional vice presidents and
regional nurses, accounting and financial services, cash management, data
processing, legal, consulting and services in the area of rehabilitative care.
Many personnel are employed by the Company's administrative services
affiliate, National Health Corporation, which is also responsible for overall
services in the area of personnel, loss control, insurance, education and
training. The Company reimburses the administrative services contractor by
paying all the costs of personnel employed for the benefit of the Company as
well as a fee. National Health Corporation (National) is wholly owned by the
National Health Corporation Employee Stock Ownership Plan and provides its
services only to the Company.
The Company provides management services to centers operated under
management contracts and certain accounting and financial advisory services to
other owners, pursuant to separate contracts. The term of each contract and
the amount of the management fee or advisory fee is determined on a
case-by-case basis. Typically, the Company charges 6% of net revenues for its
management contracts and specific item fees for its advisory agreements. The
initial term of the contracts range from two years to ten years. In certain
contracts, the Company maintains a right of first refusal should the owner
desire to sell a managed center.
The Company predicts that a large number of facilities will be
transferred from bankrupt organizations into the hands of small operators or
not-for-profit entities. In order to broaden its business base, the Company
is aggressively seeking to provide discreet and off-site functions for these
entities for separate charges. Since no management of the entity is involved,
the Company is calling this line of business its "Consulting Service
Business". The Company will be experimenting with this approach during 2000
to determine whether it is a long-term revenue enhancer.
All health care centers operated by the Company are licensed by the
appropriate state and local agencies. All except two are certified as
providers for Medicaid patients, and all are certified as Medicare providers.
Certification of advised centers is the prerogative of the Provider/Owner.
All licensed nursing homes, assisted living and homecare offices are subject
to state and federal licensure and certification surveys. These surveys, from
time to time, may produce statements of deficiencies. In response to such a
statement, if any, the staff at each center would file a plan of correction
and any alleged deficiencies would be corrected. Presently, none of the
Company's leased and managed facilities are operating under material
statements of deficiencies. The Company has a significant monetary bonus to
employees attached to passing these surveys with few or no deficiencies.
Health Care Centers Under Construction
The following table sets forth the long-term health care centers or
additions to existing centers currently under construction which the Company
owns, leases or manages:
Number Owned/Leased/ Projected
Location of Beds Managed Opening Date
------------------------------------------------------------
Smithville, TN 7* Managed May 2000
Nashville, TN 8* Managed January 2000
Madison, FL 1* Managed February 2000
Sumter, SC 15* Managed February 2000
---
Total 31
*Expansion of existing center
Construction Starts in 2000
The following table identifies new beds authorized by governmental
certificates of need which are anticipated to start construction in 2000.
Number Number of Number of
of Beds New Centers Existing Centers
--------------------------------------------------------------
Owned 160 1 0
Leased 7 0 1
Managed 24 0 3
Total 191 1 4
Occupancy Rates
The following table shows certain information relating to occupancy
rates for the Company's continuing owned and leased long-term health care
centers:
Year Ended December 31
-----------------------------
1999 1998 1997
-----------------------------
Overall census 93.5% 90.8% 92.2%
Census excluding
new openings 93.5% 92.9% 94.6%
Occupancy rates are calculated by dividing the total number of days of
patient care provided by the number of patient days available (which is
determined by multiplying the number of licensed beds by 365 or 366).
Homecare Programs
The Company's home health programs (called "Homecare" by the Company)
provide nursing and rehabilitative services to individuals in their residences
and are licensed by the Tennessee, South Carolina and Florida state
governments and certified by the federal government for participation in the
Medicare program. Each of the Company's 34 Medicare certified homecare
programs is managed by a registered nurse, with speech, occupational and
physical therapists either employed by the program or on a contract basis.
Homecare visits increased from 328,638 visits in 1998 to 338,817 visits in
1999. The current reimbursement for homecare services under the Medicare
program provides for reimbursement of allowable costs up to specified limits
for both visits and patients. Thus the Company is now focusing on growing its
homecare patient census and managing the number of visits to stay within those
limits. NHC Homecare had 6,502 patients in 1999. Programs that are not
profitable due to census constraints will be terminated. Effective October 1,
2000, the Company will receive reimbursement for homecare services under the
Medicare program through a prospective payment system. Under the homecare
prospective payment system the Company will receive a fixed amount per patient
per episode as defined by Medicare guidelines. The Company is currently
evaluating the impact of the new homecare prospective payment system, but
believes it will be able to operate effectively under the system.
The Company has homecare programs in Tennessee, Florida, and South
Carolina. The Company's Tennessee homecare programs are associated with its
long-term health care centers and, historically, are based within the health
care center. The Company's newer homecare programs are separately based in an
effort to continually expand NHC's market leadership in these services. The
Company's experience in this field indicates that homecare is not a substitute
for institutional care in a hospital or health care center. Instead, the
Company's homecare programs provide an additional level of health care because
its centers can provide services to patients after they have been discharged
from the center or prior to their admission.
Assisted Living Units
The Company presently leases and/or manages seventeen assisted living
units, nine of which are located within the physical structure of a long-term
health care center or retirement center and eight of which are freestanding.
During the year NHC's assisted living units increased from 774 in 1998 to 906
in 1999. Due to the overbuilding in most markets, the Company has elected not
to start construction on free standing projects during 2000. Assisted living
units provide basic room and board functions for the elderly with the on-staff
availability to assist in minor medical needs on an as needed basis.
Certificates of Need are not necessary to build these projects and the Company
believes that overbuilding has occurred in some of its markets. In 2000, the
Company expects to start construction on thirty assisted living units as a
component of a new 160 bed nursing center, but only if outside financing is
available.
Retirement Centers
NHC's retirement centers offer specially designed residential units for
the active and ambulatory elderly and provide various ancillary services for
their residents, including restaurants, activity rooms and social areas. In
most cases, retirement centers also include long-term health care facilities,
either in contiguous or adjacent licensed health care centers. Charges for
services are paid from private sources without assistance from governmental
programs. Retirement centers may be licensed and regulated in some states,
but do not require the issuance of a Certificate of Need such as is required
for health care centers. NHC has, in most cases, developed retirement centers
adjacent to its health care properties with an initial construction of 15 to
40 units and which units are rented by the month; thus these centers offer an
expansion of the Company's continuum of care. The projects are designed,
however, to be expandable if the demand justifies. The Company believes these
retirement units offer a positive marketing aspect of the Company's health
care centers.
Another type of retirement center which the Company offers is that of
"continuing care communities", where the resident pays a substantial endowment
fee and a monthly maintenance fee. The resident then receives a full range of
services - including nursing home care - without additional charge.
One such continuing care community, the 137 unit Richland Place
Retirement Center, was opened in January, 1993 and is fully occupied. The
Company opened the 58 unit AdamsPlace in Murfreesboro, Tennessee during 1998
and will market 90 units for an independent third party in Brentwood,
Williamson County, Tennessee, commencing in Summer, 2000.
Sources of Revenue
The Company's revenues are primarily derived from its health care
centers. The source and amount of the revenues are determined by (i) the
licensed bed capacity of its health care centers, (ii) the occupancy rate of
those centers, (iii) the extent to which the rehabilitative and other skilled
ancillary services provided at each center are utilized by the patients in the
centers, (iv) the mix of private pay, Medicare and Medicaid patients, and (v)
the rates paid by private paying patients and by the Medicare and Medicaid
programs.
The following table sets forth sources of patient revenues from health
care centers and homecare services for the periods indicated:
Year Ended Dec 31
-----------------------------
Source 1999 1998 1997
Private 29% 31% 28%
Medicare 29% 32% 38%
Medicaid/Skilled 11% 10% 9%
Medicaid/Intermediate 30% 26% 24%
VA and Other 1% 1% 1%
------------------------------
Total 100% 100% 100%
Government Health Care Reimbursement Programs
The federal health insurance program for the aged is Medicare, which is
administered by the Department of Health and Human Services. State programs
for medical assistance to the indigent are known as Medicaid in states which
the Company operates. All health care centers owned, leased or managed by the
Company are certified to participate in Medicare and all but two participate
in Medicaid. Eligibility for participation in these programs depends upon a
variety of factors, including, among others, accommodations, services,
equipment, patient care, safety, physical environment and the implementation
and maintenance of cost controls and accounting procedures. In addition, some
of the Company's centers have entered into separate contracts with the United
States Veterans Administration which provides reimbursement for care to
veterans transferred from Veterans Administration hospitals.
Historically, government health care reimbursement programs make
payments under a cost based reimbursement system. Although general
similarities exist due to federal mandates, each state operates under its own
specific system. Medicare, however, is uniform nationwide and payed, through
December 1998, the reasonable direct and indirect cost of services furnished
to Medicare patients, including depreciation, interest and overhead. Medicare
payments have previously been limited by ceilings which, pursuant to the 1993
Tax Reform Act, were frozen at their 1993 level for 1994, and 1995. When
appropriate, the Company files "exception requests" with the fiscal
intermediary for the appropriate center. Revenues therefrom are not recorded
until paid and audited by the appropriate payors. Private paying patients,
private insurance carriers and the Veterans Administration generally pay on
the basis of the center's charges or specifically negotiated contracts. The
Company attempts to attract an increased percentage of private and Medicare
patients by providing rehabilitative services and increasing its marketing of
those services through market areas and "Managed Care Offices", of which seven
were open at year end. These services are designed to speed the patient's
recovery and allow the patient to return home as soon as is practical. In
addition to educating physicians and patients to the advantages of the
rehabilitative services, the Company also has implemented incentive programs
which provide for the payment of bonuses to its regional and center personnel
if they are able to obtain private and Medicare goals at their centers.
Commencing January 1, 1999, Medicare changed its former cost
reimbursement system to a "Prospective Payment System" (PPS). Under PPS, the
center receives a fixed payment which covers all but a few services provided
to Medicare patients. Thus the center must not only cover its fixed and
normal operating expenses out of this payment, but also physical and speech
therapy, drugs and other supplies, and other necessary services of the type
provided by skilled nursing facilities. The Company experienced a material
decrease in Medicare revenues in 1999 due to PPS, but was able to also
substantially reduce operating expenses. Material reductions were negotiated
in therapy, pharmaceutical and other ancillary services. Medicare patients
are entitled to have payment made on their behalf to a skilled nursing
facility for up to 100 days during each calendar year and a prior 3-day
hospital stay is required. A patient must be certified for entitlement under
the Medicare program before the skilled nursing facility is entitled to
receive Medicare payments and patients are required to pay approximately $97
per day after the first 20 days of the covered stay. For details see the
section "Health Care Reform".
Medicaid programs provide funds for payment of medical services obtained
by "medically indigent persons". These programs are operated by state
agencies which adopt their own medical reimbursement formulas and standards,
but which are entitled to receive supplemental funds from the federal
government if their programs comply with certain federal government
regulations. In all states in which the Company operates, the Medicaid
programs authorize reimbursement at a fixed rate per day of service. The
fixed rate is established on the basis of a predetermined average cost of
operating nursing centers in the state in which the facility is located or
based upon the center's actual cost. The rate is adjusted annually based upon
changes in historical costs and/or actual costs and a projected cost of living
factor. The 1997 Balanced Budget Act eliminated a federally mandated
requirement that Medicaid rates paid by the states must be sufficient to
reimburse in full the costs of an "efficiently and reasonably operated"
nursing home (the "Boron Amendment"). The Company and the nursing home
industry in general are concerned about this deletion and are monitoring the
activities in state legislature budgetary processes.
During the fiscal year, each facility receives payments under the
applicable government reimbursement program. Medicaid payments are generally
"prospective" in that the payment is based upon the prior years actual costs.
Medicare payments were "retrospective" thru 1998 in that current year payments
were designed to reasonably approximate the facility's reimbursable costs
during that year. Payments under Medicare for years thru 1998 were adjusted
to actual allowable costs each year. The actual costs incurred and reported
by the facility under the Medicare program were and are subject to audit with
respect to proper application of the various payment formulas. These audits
can result in retroactive adjustments of interim payments received from the
program. If, as a result of such audits, it is determined that overpayment of
benefits were made, the excess amount must be repaid to the government. If,
on the other hand, it is determined that an underpayment was made, the
government agency makes an additional payment to the operator. The Company
records as receivables the amounts which it expects to receive under the
Medicare and Medicaid programs and records into profit or loss any differences
in amounts actually received at the time of interim and final settlements.
For further information, see "Item 3: Legal Proceedings". To date,
adjustments have not had a material adverse effect on the Company. The
Company believes that its payment formulas have been properly applied and that
any future adjustments will not be materially adverse. Effective January 1,
1999, and as discussed above, the Medicare program has become prospective in
nature. For additional discussion see "Health Care Reform".
In November 1996, two NHC managed facilities in Florida were audited by
representatives of the regional office of the Office of 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 outside
suppliers of services. The OIG completed its audit of one facility, and
indicated during an exit conference that it had no further questions. At the
second facility, the OIG determined certain records were insufficient and NHC
is in the process of supplying additional information. The OIG has agreed to
review these additional documents when received. 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 as a part of Operation Restore Trust. NHC
will continue to monitor the progress of this audit and cannot predict whether
the OIG will take further action or request additional information as a result
of either of these audits. A so-called "whistleblower" lawsuit is also
outstanding against the Company. For further information, see "Item 3: Legal
Proceedings".
Regulation
Health care centers are subject to extensive federal, state and in some
cases, local regulatory, licensing, and inspection requirements. These
requirements relate, among other things, to the adequacy of physical buildings
and equipment, qualifications of administrative personnel and nursing staff,
quality of nursing provided and continued compliance with laws and regulations
relating to the operation of the centers. In all states in which the Company
operates, before the facility can make a capital expenditure exceeding certain
specified amounts or construct any new long-term health care beds, approval of
the state health care regulatory agency or agencies must be obtained and a
Certificate of Need issued. The appropriate state health planning agency must
determine that a need for the new beds or expenditure exists before a
Certificate of Need can be issued. A Certificate of Need is generally issued
for a specific maximum amount of expenditure and the project must be completed
within a specific time period. There is no advance assurance that the Company
will be able to obtain a certificate of need in any particular instance. In
some states, approval is also necessary in order to purchase existing health
care beds, although the purchaser is normally permitted to avoid a full scale
certificate of need application procedure by giving advance written notice of
the acquisition and giving written assurance to the state regulatory agency
that the change of ownership will not result in a change in the number of beds
or the services offered at the facility.
While there are currently no significant legislative proposals to
eliminate certificates of need pending in the states in which the Company does
business, deregulation in the certificate of need area would likely result in
increased competition among nursing home companies and could adversely affect
occupancy rates and the supply of licensed and certified personnel.
Medicare Financial Changes
Government at both the federal and state levels has continued in its
efforts to reduce, or at least limit the growth of, spending for health care
services, including the type of services provided by NHC. On August 5, 1997,
President Clinton signed into law the Balanced Budget Act of 1997 ("BBA"),
which contains numerous Medicare and Medicaid cost-saving measures, as well as
new anti-fraud provisions. The BBA was projected to save $115 billion in
Medicare spending over the next five years, and $13 billion in the Medicaid
program. Section 4711 of BBA, entitled "Flexibility in Payment Methods for
Hospital, Nursing Facility, ICF/MR, and Home Health Services", repealed the
Boren Amendment, which has required that state Medicaid programs pay to
nursing home providers amounts adequate to enable them to met government
quality and safety standards; the Boren Amendment was previously the
foundation of litigation by nursing homes seeking rate increases. In place of
the Boren Amendment, the BBA requires only that, for services and items
furnished on or after October 1, 1997, a state Medicaid program must provide
for a public process for determination of Medicaid rates of payment for
nursing facility services, under which proposed rates, the methodologies
underlying the establishment of such rates, and justifications for the
proposed rates are published, and which give providers, beneficiaries and
other concerned state residents a reasonable opportunity for review and
comment on the proposed rates, methodologies and justifications. Several of
the states in which NHC operates are actively seeking ways to reduce Medicaid
spending for nursing home care by such methods as capitated payments and
substantial reductions in reimbursement rates.
The BBA also requires that nursing homes transition to a prospective
payment system under the Medicare program during a three-year "transition
period" commencing with the first cost reporting period beginning on or after
July 1, 1998. Substantially all the companies operating skilled nursing
centers commenced receiving Medicare payments under this new program on
January 1, 1999. In addition, the BBA creates a managed care Medicare Program
called "Medicare + Choice", which allows Medicare beneficiaries to participate
in either the original Medicare fee-for-service program or to enroll in
coordinated care plans such as health maintenance organizations ("HMOs").
Such coordinated care plans would allow HMOs to enter into risk-based
contracts with the Medicare program, and the HMO's would then contract with
providers such as the Company. No assurances can be given that the facilities
to be operated by the Company will be successful in negotiating favorable
contracts with Medicare + Choice managed care organizations. The BBA also
contains several new antifraud provisions. Given the recent enactment of the
BBA, the Company is unable to predict the impact of the BBA and potential
changes in state Medicaid reimbursement methodologies on its operations;
however, any significant reduction in either Medicare or Medicaid payments
could adversely affect the Company.
Industry Distress
With the full implementation of BBA 97, the long-term health care
industry experienced not only material drops in Medicare revenue and
precipitous declines in public companies' market capitalization but also
experienced a waive of unanticipated bankruptcies. During 1999, two of the
nation's largest publicly held companies filed for bankruptcy protection. At
least three private chains of over 100 facilities each also filed for
bankruptcy protection. In the first month of 2000, two additional publicly
traded companies, both in the top four in terms of size, sought the protection
of the bankruptcy act. Currently, it appears that only NHC, Beverly
Enterprises and HCR ManorCare, among the publicly traded long term care
companies, avoided substantial operating losses during 1999. Although one
might expect that this industry collapse would have produced opportunities for
NHC or other surviving companies to find acquisition opportunities, this has
not been the case. In the bankruptcy process, the public companies are
discarding ownership in or leases with poorly performing centers, while
clinging tenaciously to their best performers. These poorer performers are
the target market for NHC's new offsite Consulting Agreement service contract.
NHC's advisory agreement with National Health Investors, Inc. ("NHI") and
National Health Realty, Inc. ("NHR") have allowed it to enter into short-term
management agreements on eight centers during 1999 and four additional centers
in early 2000, effectively replacing (at least in the short term) the beds
lost with the August 1, 1999 termination of the 14 FCC management contracts.
Changes in certification and participation requirements of the Medicare
and Medicaid programs have restricted, and are likely to continue to restrict
further, eligibility for reimbursement under those programs. Failure to
obtain and maintain Medicare and Medicaid certification at the Company's
facilities will result in denial of Medicare and Medicaid payments which could
result in a significant loss of revenue to the Company. In addition, private
payors, including managed care payors, increasingly are demanding that
providers accept discounted fees or assume all or a portion of the financial
risk for the delivery of health care services. Such measures may include
capitated payments whereby the Company is responsible for providing, for a
fixed fee, all services needed by certain patients. Capitated payments can
result in significant losses if patients require expensive treatment not
adequately covered by the capitated rate. Efforts to impose reduced payments,
greater discounts and more stringent cost controls by government and other
payors are expected to continue. For the fiscal year ended December 31, 1999,
NHC derived 29% and 41% of its net patient revenues from the Medicare and
Medicaid programs, respectively. Any reforms that significantly limit rates
of reimbursement under the Medicare and Medicaid programs, therefore, could
have a material adverse effect on the Company's profitability. The Company is
unable to predict what reform proposals or reimbursement limitations will be
adopted in the future or the effect such changes will have on its operations.
No assurance can be given that such reforms will not have a material adverse
effect on the Company, although the Company has the goal of reducing its
Medicare operating expenses to at least cover the expected 1999 Medicare
revenue reductions.
Balanced Budget Reform Act of 1999 (BBRA)
The United States Congress and the Administration - in recognition of
the collapse of a significant portion of America's long-term care industry -
proposed and enacted certain amendments to the Balanced Budget Act of 1997,
the law which most observers believe is primarily responsible for the industry
decline. Among the changes enacted in 1999 is a process whereby providers can
identify certain of their facilities to be placed immediately on the federal
reimbursement rate rather than a three-year transition rate. For facilities
in which it is financially advisable to make this change, the Company is so
doing. Additionally, (and effective between April 1 and October 31, 2000)
approximately fifteen of the highest acuity Medicare reimbursement payment
classifications will experience a 20% increase in payment; additionally, all
of the Medicare payment categories will undergo an additional 4% increase.
These changes will be effective April 1, 2000. Certain relief was also
granted to the Company's home health care operations and a $1,500 per patient
annual ceiling was lifted for a two-year period on reimbursement for
expenditures in connection with the provision of physical, speech, and
occupational therapy to the Company's patients. Although these refinements
have been well received by the industry, it is the Company's belief that the
refinements are insufficient compared to the losses sustained by the industry
during 1999.
Nursing homes and home health agencies have recently been the target of
health care reform, from both fraud and reimbursement perspectives. Operation
Restore Trust, a demonstration project which has been conducted by the
Department of Health and Human Services in five states, is expanding to a
dozen more states. "ORT Plus" will continue its focus on fraud in the areas
of home health, nursing home and DME suppliers, as well as adding new anti-
fraud and abuse targets. The Company will operate nursing homes and home
health agencies in five ORT Plus states and could be subject to increased
scrutiny. Although NHC's management believes that its home care and nursing
home operations are in compliance with applicable laws and regulations, there
can be no assurance that the Company and its home care and nursing home
operations will not be the subject of an investigation nor that they will be
found to be in compliance if investigated. See "Item 3-Legal Proceedings".
Other Business and Properties
A. Nutritional Support Services. The Company owns a medical support
services business, which primarily provides nutritional enteral,
parenteral feeding materials, urological and medical supplies to
patients in the Company's facilities as well as in other long-term
care or home settings. This company is headquartered in
Knoxville, Tennessee and is known as Nutritional Support Services
(NSS). Revenues from this subsidiary accounted for from 5.1% to
7.1% of the Company's net revenues in 1999, 1998 and 1997.
B. Medical Specialty Units. The Company has required all of its
centers to participate in the Medicare program since 1973, and has
continually expanded its range of offerings by the creation of
center-specific medical specialty units such as the Company's 21
Alzheimer's disease care units and 14 subacute nursing units. The
services are actually provided not only at each NHC operated
center, but also at existing specialized care units.
C. Pharmacy Operations. NHC operates four regional pharmacy
operations (one in east Tennessee, one in central Tennessee, one
in South Carolina, and one in central Florida), but has contracted
to sell the Florida operation. These pharmacy operations operate
out of a central office and supply (on a separate contractual
basis) pharmaceutical services and supplies which were formerly
purchased by each center from local vendors. The regional
pharmacy operations now have 8,054 skilled nursing home beds under
contract. Pharmacy reimbursement under Medicare has also been
shifted from direct billing by the pharmacy, to a negotiated rate
structure between skilled nursing centers and the pharmacy, with
the skilled nursing centers Medicare reimbursement being based
upon a prospective rate not related to actual patient
pharmaceutical usage. The Company anticipates stable revenues for
its pharmacy subsidiary in 2000.
D. Advisory Services to National Health Investors, Inc. In 1991, the
Company formed National Health Investors, Inc., as a wholly-owned
subsidiary. It then transferred to NHI certain healthcare
facilities then owned by NHC and then distributed the shares of
NHI to NHC's unitholders. The distribution had the effect of
separating NHC and NHI into two independent public companies. As
a result of the distribution, all of the outstanding shares of NHI
were distributed to the then NHC investors.
NHI entered into an Advisory, Administrative Services and
Facilities Agreement (the "Advisory Agreement") with NHC pursuant
to which NHC provides NHI, for a fee, with investment advice,
office space, personnel and other services. For its services
under the Advisory Agreement, the Advisor is entitled to a base
annual compensation of $1,625,000. Compensation paid to executive
officers of NHI is credited against this Advisory Fee. NHC
executive officers W. Andrew Adams, Robert G. Adams and Richard F.
LaRoche, Jr. serve as executive officers of NHI. For 1993 and
later years in which per share Funds From Operations of NHI exceed
per share Funds From Operations during 1992, the $1,625,000 annual
compensation increased by the same percentage that per share Funds
From Operations in such later year exceed those in 1992. NHC
earned approximately $2,985,000 in 1999.
The Advisory Agreement provides that the Advisor shall pay all
expenses incurred in performing its obligations thereunder,
without regard to the amount of compensation received under the
Agreement. Expenses specifically listed as expenses to be borne
by the Advisor without reimbursement include: the cost of
accounting, statistical or bookkeeping equipment necessary for the
maintenance of NHI's books and records; employment expenses of the
officers and directors and personnel of the Advisor and all
expenses.
E. Advisory Services to National Health Realty, Inc. In 1997, the
Company formed National Health Realty, Inc., as a wholly-owned
subsidiary. It then transferred to NHR certain healthcare
facilities then owned by NHC and then distributed the shares of
NHR to NHC's shareholders. The distribution had the effect of
separating NHC and NHR into two independent public companies. As
a result of the distribution, all of the outstanding shares of NHR
were distributed to the then NHC investors.
NHC has entered into an Advisory Agreement with NHR whereby
services related to investment activities and day-to-day
management and operations are provided to NHR by NHC as Advisor.
The Advisor is subject to the supervision of and policies
established by NHR's Board of Directors.
Either party may terminate the Advisory Agreement on 90 days
notice at any time after January 1, 2000. NHR may terminate the
Advisory Agreement for cause at any time.
For its services under the Advisory Agreement, NHC is entitled to
annual compensation of the greater of 2% of NHR's gross
consolidated revenues or the actual expenses incurred by NHC. NHC
received $506,000 for its services to NHR in 1999.
The Advisory Agreement provides that prior to the earlier to occur
of (i) termination, for any reason, of the Advisory Agreement or
(ii) NHC ceasing to be actively engaged as the investment advisor
for NHI, NHR will not (without the prior approval of NHI) transact
business with any party, person, company or firm other than NHC.
It is the intent of the foregoing restriction that NHR will not be
actively or passively engaged in the pursuit of additional
investment opportunities, but rather will focus upon its
capacities as landlord and note holder of those certain assets
conveyed to it.
F. Managed Care Contracts. The Company operates seven managed care
regional offices, staffed by case managers experienced in
contracting with health maintenance organizations (HMO's) and
insurance carriers for the provision of subacute and other medical
specialty services within its regional cluster of centers.
Managed care days have decreased from 71,606 in 1997 and 81,099 in
1998 to 54,757 in 1999.
G. Advisory Services. As indicated in previous discussions, a large
number of facilities have been or are in the process of being
transferred from bankrupt organizations into the hands of small
operators or not-for-profit entities. In order to broaden its
business base, the Company is aggressively seeking to provide
discreet and off-site functions for these entities for separate
charges. Since no management of the entity is involved, the
Company is calling this line of business its "Consulting Service
Business". The Company will be experimenting with this approach
during 2000 to determine whether it is a long-term revenue
enhancer.
H. Principal Office. The Company maintains its home office staff in
Murfreesboro, Tennessee in a building owned by a limited
partnership, which is 69.7% owned by NHC.
Competition
In most of the communities in which the health care centers are operated
by the Company, there are other health care centers with which the Company
competes. The Company leases or operates 101 long-term health care
facilities, all but eight of which are located in the states of Alabama,
Florida, Georgia, Indiana, Kentucky, Missouri, South Carolina, Tennessee and
Virginia. Each of these states are certificate of need states which
generally requires the state to approve the opening of any new long-term
health care facilities. There are hundreds of operators of long-term health
care facilities in each of these states and no single operator, including the
Company, dominates any of these state's long-term health care markets, except
for some small rural markets which might have only one long-term health care
facility. In competing for patients and staff with these centers, the Company
depends upon referrals from acute care hospitals, physicians, residential care
facilities, church groups and other community service organizations. The
reputation in the community and the physical appearance of the Company's
health care centers are important in obtaining patients, since members of the
patient's family generally participate to a greater extent in selecting health
care centers than in selecting an acute care hospital. The Company believes
that by providing and emphasizing rehabilitative as well as skilled care
services at its centers, it will be able to broaden is patient base and to
differentiate its centers from competing health care centers.
As the Company expanded into the assisted living market, it constantly
monitored proposed or existing competing assisted living centers. The
Company's development goal is to link its health care centers with its
assisted living centers, thereby obtaining a competitive advantage for both.
In all but one market where the Company operates health care centers, the
Company believes the assisted living centers in the area to be sufficient or
over sufficient for current population, and does not plan entry in those
markets in 2000.
The Company experiences competition in employing and retaining nurses,
technicians, aides and other high quality professional and non-professional
employees. In order to enhance its competitive position, the Company has an
educational tuition loan program, an American Dietary Association approved
internship program, a specially designed nurse's aide training class, and
makes financial scholarship aid available to physical therapy vocational
programs and The Foundation for Geriatric Education. The Company also
maintains an "Administrator in Training" course, 24 months in duration, for
the professional training of administrators. Presently, the Company has 10
full-time individuals in this program. Three of its eight regional vice
presidents and 54 of its 102 health care center administrators have graduated
therefrom.
NHC's employee benefit package offers a tuition reimbursement program.
The goal of the program is to insure a well trained qualified work force to
meet future demands. While the program is offered to all disciplines, special
emphasis has been placed on supporting students in nursing and physical
therapy programs. Students are reimbursed at the end of each semester after
presenting tuition receipts and grades to management. The program has been
successful in providing a means for many bright students to pursue a formal
education.
Employees
As of December 31, 1999, the Company's Administrative Services
Contractor plus the Company's managed centers had approximately 13,000 full
and part time employees, who are called "Partners" by the Company. This
nomenclature continues even though the Company is now in corporate rather than
partnership form. No employees are presently represented by a bargaining
unit. The Company believes its current relations with its employees are good.
ITEM 2
<TABLE>
PROPERTIES
LONG-TERM HEALTH CARE CENTERS
<CAPTION>
Total Beds under Development Joined
State City Center Affiliation Beds and Special Care Units NHC
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alabama Anniston NHC HealthCare, Anniston Leased(1) 151 50 bed Alzheimer's unit 1973
10 bed subacute care unit
Moulton NHC HealthCare, Moulton Leased(1) 136 1973
Florida Brooksville Brooksville Nursing Manor Managed(2) 180 30 bed Alzheimer's unit 1993
Coconut Creek NHC HealthCare, Coconut Creek Leased(1) 120 1997
Crystal River Cypress Cove Care Center Managed(2) 120 1993
Dade City Royal Oak Nursing Center Managed(2) 120 1993
Daytona Beach NHC HealthCare, Daytona Beach Leased(1) 60 10 bed subacute care unit 1996
Ft. Lauderdale NHC of Ft. Lauderdale Managed 169 1984
Hudson Bear Creek Nursing Center Managed(2) 120 1993
Hudson NHC HealthCare, Hudson Leased(1) 180 50 bed subacute care unit 1986
Lake City NHC HealthCare, Lake City Leased 120 28 bed Alzheimer's unit 1992
Madison Lake Park of Madison Managed 119 One bed under development 1995
Merritt Island NHC HealthCare, Merritt Island Leased(1) 180 31 bed Alzheimer's unit 1990
17 bed subacute care unit
Miami The Nursing Center at Mercy Managed 120 1995
Naples NHC HealthCare, Imperial Leased(1) 113 1994
Naples NHC HealthCare, Naples Leased(1) 60 1996
New Pt. Richey Heather Hill Nursing Home Managed(2) 120 1993
Niceville The Manor at Blue Water Bay Managed 120 20 bed Alzheimer's unit 1993
Ocoee Ocoee Health Care Center Managed 120 1990
Orlando NHC HealthCare, Orlando Leased(1) 120 30 bed Alzheimer's unit 1997
Palatka Palatka Health Care Center Managed 180 20 bed Alzheimer's unit 1989
Panama City NHC of Panama City Managed 120 1986
Pensacola NHC HealthCare, Pensacola Leased 180 22 bed Alzheimer's unit 1987
14 bed subacute care unit
Plant City NHC HealthCare, Plant City Leased(1) 180 1985
Port Charlotte NHC HealthCare, Port Charlotte Leased(1) 180 60 bed subacute care unit 1994
30 bed Alzheimer's unit
St. Cloud Osceola Health Care Center Managed 120 1991
St. Petersburg NHC HealthCare, St. Petersburg Managed 159 60 bed Alzheimer's unit 1984
Sarasota Sarasota Health Care Center Managed 120 1990
Stuart NHC HealthCare, Stuart Leased(1) 153 57 bed Alzheimer's unit 1989
Trenton Ayers Health and Rehabilitation Managed(2) 120 30 bed Alzheimer's unit 1993
Georgia Ft. Oglethorpe NHC HealthCare, Fort Oglethorpe Owned(3) 135 1989
Rossville NHC HealthCare, Rossville Leased(1) 112 1971
Indiana Brownsburg Brownsburg Health Care Center Managed 178 20 bed Alzheimer's unit 1990
Castleton Castleton Health Care Center Managed 120 16 bed Alzheimer's unit 1990
Ladoga Ladoga Health Care Center Managed 95 1990
Plainfield Plainfield Health Care Center Managed 199 57 bed Alzheimer's unit 1990
Kentucky Dawson Springs NHC HealthCare, Dawson Springs Leased(1) 80 1973
Glasgow NHC HealthCare, Glasgow Leased(1) 206 1971
Madisonville NHC HealthCare, Madisonville Leased(1) 94 1973
Massachusetts Greenfield Buckley Nursing Home Managed 120 1999
Holyoke Buckley Center for Nursing & Rehab. Managed 102 1999
Quincy John Adams Continuing Care Center Managed 71 1999
Taunton Longmeadow of Taunton Managed 100 1999
Missouri Desloge NHC HealthCare, Desloge Leased(1) 120 1982
Joplin NHC HealthCare, Joplin Leased(1) 126 1982
Kennett NHC HealthCare, Kennett Leased(1) 170 1982
Macon Macon Health Care Center Managed 120 24 bed Alzheimer's unit 1982
Osage Beach Osage Beach Health Care Center Managed 120 24 bed Alzheimer's unit 1982
St. Charles NHC HealthCare, St. Charles Leased(1) 120 1982
St. Louis NHC HealthCare, Maryland Heights Leased(1) 220 30 bed Alzheimer's unit 1987
Springfield Springfield Rehabilitation and
Health Care Center Managed 120 1982
West Plains West Plains Health Care Center Leased(1) 120 1982
New Hampshire Epsom Epsom Manor Managed 108 1999
Manchester Maple Leaf Health Care Center Managed 114 1999
Manchester Villa Crest Health Care Center Managed 123 1999
South Carolina Aiken Mattie C. Hall Health Care Center Managed 176 44 bed Alzheimer's unit 1982
Anderson NHC HealthCare, Anderson Leased(1) 290 44 bed subacute care unit 1973
Clinton NHC HealthCare, Clinton Leased(1) 131 1993
Columbia NHC HealthCare, Parklane Leased(1) 120 30 bed Alzheimer's unit 1997
17 bed subacute care unit
Greenwood NHC HealthCare, Greenwood Leased(1) 152 1973
Greenville NHC HealthCare, Greenville Leased(1) 176 1992
Laurens NHC HealthCare, Laurens Leased(1) 176 1973
Lexington NHC HealthCare, Lexington Leased(1) 120 12 bed subacute care unit 1994
Mauldin NHC HealthCare, Mauldin Leased(1) 120 30 bed Alzheimer's unit 1997
Murrells Inlet NHC HealthCare, Garden City Leased(1) 88 1992
North Augusta NHC HealthCare, North Augusta Leased(1) 132 1991
Sumter NHC HealthCare, Sumter Managed 123 15 beds under development 1985
Tennessee Athens NHC HealthCare, Athens Leased(1) 98 1971
Carthage Smith County Health Care Center Managed 128 1997
Chattanooga NHC HealthCare, Chattanooga Leased(1) 218 20 bed subacute care unit 1971
Chattanooga NHC HealthCare, Hamilton County Managed 550 1999
Columbia NHC HealthCare, Columbia Leased(1) 120 12 bed subacute care unit 1973
Columbia NHC HealthCare, Hillview Leased(1) 98 1971
Cookeville NHC HealthCare, Cookeville Managed 96 1975
Dickson NHC HealthCare, Dickson Leased(1) 197 1971
Dunlap NHC HealthCare, Sequatchie Leased(1) 120 1976
Farragut NHC HealthCare, Farragut Leased(1) 60 1998
Franklin Franklin Manor Leased(1) 47 1997
Franklin NHC HealthCare, Franklin Leased(1) 84 1979
Hendersonville NHC HealthCare, Hendersonville Leased(1) 117 1987
Johnson City NHC HealthCare, Johnson City Leased(1) 179 16 bed subacute care unit 1971
Knoxville NHC HealthCare, Fort Sanders Owned(3) 180 12 bed subacute care unit 1977
Knoxville NHC HealthCare, Knoxville Leased(1) 152 1971
Lawrenceburg NHC HealthCare, Lawrenceburg Managed 97 1985
Lawrenceburg NHC HealthCare, Scott Leased(1) 62 1971
Lewisburg NHC HealthCare, Lewisburg Leased(1) 104 1971
Lewisburg NHC HealthCare, Oakwood Leased(1) 62 1973
McMinnville NHC HealthCare, McMinnville Leased(1) 150 1971
Milan NHC HealthCare, Milan Leased(1) 129 1971
Murfreesboro AdamsPlace Leased(1) 60 1997
Murfreesboro NHC HealthCare, Murfreesboro Managed 190 69 bed subacute care unit 1974
Nashville The Health Center of Richland Place Managed 98 Eight beds under development 1992
Nashville NHC HealthCare, Nashville Leased(1) 133 1975
Nashville West Meade Place Managed 120 1993
Oak Ridge NHC HealthCare, Oak Ridge Managed 130 1977
Pulaski NHC HealthCare, Pulaski Leased(1) 104 1971
Smithville NHC HealthCare, Smithville Leased(1) 107 Seven beds under development 1971
Somerville NHC HealthCare, Somerville Leased(1) 72 1976
Sparta NHC HealthCare, Sparta Leased(1) 150 1975
Springfield NHC HealthCare, Springfield Leased(1) 112 1973
Virginia Bristol NHC HealthCare, Bristol Leased(1) 120 1973
</TABLE>
<TABLE>
ASSISTED LIVING UNITS
<CAPTION>
State City Center Assisted Living Units
- ------- --------- -------------------------------- -------- ---------------------------
<S> <C> <C> <C> <C>
Alabama Anniston NHC Place/Anniston (free-standing) Leased(1) 68 bed assisted living unit
Florida Merritt Island NHC Place/Merritt Island
(free-standing) Leased(1) 84 bed assisted living unit
Naples NHC HealthCare, Naples Leased(1) 36 bed assisted living unit
Stuart NHC Place/Stuart (free-standing) Leased(1) 84 bed assisted living unit
Vero Beach NHC Place/Vero Beach (free-standing) Leased(1) 84 bed assisted living unit
Missouri St. Charles Lake St. Charles Retirement Center Leased(1) 25 bed assisted living unit
St. Peters NHC Place (free-standing) Leased 100 bed assisted living unit
New Hampshire Epsom Heartland Place Managed 60 bed assisted living unit
Manchester Villa Crest Assisted Living Managed 42 bed assisted living unit
Tennessee Chattanooga NHC HealthCare, Hamilton County Managed 66 bed assisted living unit
(free-standing)
Dickson NHC HealthCare, Dickson Leased(1) 20 bed assisted living unit
Farragut NHC Place, Farragut (free-standing) Leased(1) 84 bed assisted living unit
Johnson City NHC HealthCare, Johnson City Leased(1) 15 bed assisted living unit
Murfreesboro AdamsPlace (free-standing) Leased(1) 84 bed assisted living unit
Nashville Richland Place Managed 32 bed assisted living unit
Smithville NHC HealthCare, Smithville Leased(1) 10 bed assisted living unit
Somerville NHC HealthCare, Somerville Leased(1) 12 bed assisted living unit
</TABLE>
<TABLE>
RETIREMENT APARTMENTS
<CAPTION
State City Retirement Apartments Affiliation Units Estab-
lished
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Missouri St. Charles Lake St. Charles Retirement Apartments Leased(1) 155 1984
Tennessee Chattanooga Hamilton County Managed 28
Chattanooga Parkwood Retirement Apartments Leased(1) 32 1986
Johnson City Colonial Hill Retirement Apartments Leased(1) 63 1987
Murfreesboro AdamsPlace Leased(1) 58 1997
Nashville Richland Place Retirement Apartments Managed 137 1993
</TABLE>
<TABLE>
HOMECARE PROGRAMS
<CAPTION>
State City Homecare Programs Affiliation Established
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Florida Blountstown NHC HomeCare of Blountstown Owned 1994
Carrabelle NHC HomeCare of Carrabelle Owned 1994
Chipley NHC HomeCare of Chipley Owned 1994
Crawfordville NHC HomeCare of Crawfordville Owned 1994
Marianna NHC HomeCare of Marianna Owned 1994
Merritt Island NHC HomeCare of Merritt Island Owned
Ocala NHC HomeCare of Ocala Owned 1996
Panama City NHC HomeCare of Panama City Owned 1994
Perry NHC HomeCare of Perry Owned 1994
Port St. Joe NHC HomeCare of Port St. Joe Owned 1994
Quincy NHC HomeCare of Quincy Owned 1994
Stuart NHC HomeCare of Stuart Owned 1996
Tallahassee NHC HomeCare of Tallahassee Owned 1994
Vero Beach NHC HomeCare of Vero Beach Owned 1997
South Carolina Aiken NHC HomeCare of Aiken Owned 1996
Greenwood NHC HomeCare of Greenwood Owned 1996
Laurens NHC HomeCare of Laurens Owned 1996
Tennessee Athens NHC HomeCare of Athens Owned 1984
Chattanooga NHC HomeCare of Chattanooga Owned 1985
Columbia NHC HomeCare of Columbia Owned 1977
Cookeville NHC HomeCare of Cookeville Owned 1976
Dickson NHC HomeCare of Dickson Owned 1977
Johnson City NHC HomeCare of Johnson City Owned 1978
Knoxville NHC HomeCare of Knoxville Owned 1977
Lawrenceburg NHC HomeCare of Lawrenceburg Owned 1977
Lebanon NHC HomeCare of Lebanon Owned 1997
Lewisburg NHC HomeCare of Lewisburg Owned 1977
McMinnville NHC HomeCare of McMinnville Owned 1976
Milan NHC HomeCare of Milan Owned 1977
Murfreesboro NHC HomeCare of Murfreesboro Owned 1976
Pulaski NHC HomeCare of Pulaski Owned 1985
Somerville NHC HomeCare of Somerville Owned 1983
Sparta NHC HomeCare of Sparta Owned 1984
Springfield NHC HomeCare of Springfield Owned 1984
</TABLE>
(1) Leased from NHR or NHI
(2) The centers were leased to a third party operator effective January 1,
2000 and the company's management contract terminated. NHC does
provide, by short term contract,
off-site accounting and similar services to the new provider.
(3) NHC HealthCare/Fort Oglethorpe and NHC HealthCare/Fort Sanders are owned
by separate limited partnerships. The Company owns approximately 80% of
the partnership interest in Fort Oglethorpe and 25% of the partnership
interest in Fort Sanders.
ITEM 3
LEGAL PROCEEDINGS
FCC vs. NHC
In late October, 1998, NHC and Florida Convalescent Centers, Inc.
(FCC) settled previously disclosed litigation which had been ongoing since
1996.
Under the terms of the settlement, NHC purchased two of the 16 FCC long-
term health care centers and related assets for the assumption of approxi-
mately $14.9 million of debt on those two centers. The centers NHC purchased
are Palm Garden of Pensacola, Florida with 180 beds and Palm Garden of
Lake City, Florida with 120 beds. The purchase was consummated effective May
1, 1999. Additionally, NHC paid a one-time cash settlement of $15.0 million
and further 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. In return, FCC transferred all of
its rights to Medicare receivables to NHC. Finally, FCC terminated the
management contracts for the remaining 14 centers, effective July 31, 1999.
As disclosed at the time of settlement, the loss of the management
contract and related revenues from these 14 facilities has had 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.
Braeuning vs. NHC
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 in retaliation for the filing of
the suit. In a March 13, 1998 order 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 signifi-
cant doubt on Mr. Braeuning's likelihood of success on the merits."
In regard to the initial 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 has been approved by the plaintiffs and
NHC has retained a nationally recognized accounting firm to review the self
audit process. The cost report periods under review include periods from
1991 through 1996. The Company is currently in discussions 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 thru 1994. There can be
no assurance that the Company will be able to enter into a settlement that
will not have a material adverse impact on the Company.
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 settlement with FCC discussed
previously, NHC has agreed to be responsible for any adjustments to
previously filed Medicare and routine cost limit exceptions related to the 16
FCC centers. Adjustments made to the six centers owned 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 will
continue to fully cooperate with the government in an attempt to determine
dollar amounts involved, and is aggressively pursuing an amicable settlement.
NHC cannot predict at this time the ultimate outcome of the settlement
discussions or the lawsuit. An adverse determination in the lawsuit or an
agreed upon settlement could include repayments, fines and/or penalties
which will have a material negative impact on the financial position, cash
flow and 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.
General Liability Lawsuits
The entire 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 December 31, 1999, the Company and/or its managed centers
are defendants in 79 such lawsuits in Florida, compared to 29 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 compen-
satory damages, and the jury indicated that punitive damages would be
assessed against NHC. Prior to the verdict, 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, who had already
been substantially damaged by the carrier's failure to settle the case within
policy limits. 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 asking 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 has moved the
case into the federal district court in Nashville, Tennessee. The York Hannover
bankruptcy Trustee has filed in identical suit in Tampa, Florida against the
carrier. 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 will have a material impact on NHC's earnings and cash flow.
Due to 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
(28 of which are in Florida currently, plus 14 FCC centers from prior years)
has increased from $1,995,000 in 1998 to $3,200,000 in 1999. Additional
increases in premiums and deductible amounts will also occur for policy year
2000. Additionally, each center now has a significant per claim deductible,
with the deductible being capped in the aggregate for all owned and managed
centers at a total of $3,180,000 for the policy year ended December 31, 1999.
Given the current legal environment in the State of Florida, plus the
unapproved and bad faith settlement entered into by the Company's
carrier in the previously discussed York Hannover case, the Company believes
there is a potential of uninsured liability in excess of insurance coverage
for the years 1995 and 1996, 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.
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 receivables, and the assignment of a number
of limited partnership and corporate shareholder interests.
NHC also manages nine other nursing homes owned in part by Mr. Tom
Clarke, the owner of Lenox Healthcare, Inc. Six of these properties (the
York-Hannover centers) were sold by the bankruptcy court to the first mortgage
lender on December 30, 1999. NHC's management contract on these six centers
was terminated on January 1, 2000, but the new owner has contracted with NHC
for off site financial and accounting services. Two of the nine facilities
are not in bankruptcy and are in compliance with all the terms and conditions
of the Management Agreement. The third managed facility is located in
Carthage, Tennessee and may be impacted by the bankruptcy.
NHC is currently an 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 is evaluating the probability of recovering
and collecting from these entities, but believes that a substantial portion
will not be collectable. 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 will continue to evaluate the carrying value of these
investments.
Guarantees and Related Events
As a result of the health care industry's generally weak financial
position, NHC's negative income as reported in 1998, the bankruptcy of
Integrated Health Services Corporation (the lessee for fourteen facilities
formerly managed by NHC) in 1999 and the uncertainty engendered by the
pendency of the Whistleblower lawsuits discussed above, 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:
FCC Guarantees: Although NHC transferred to NHR approximately $60 million
of first and second mortgage notes made by Florida Convalescent Centers, Inc.
on fourteen facilities managed by NHC, NHC remained as a guarantor on two
Letters of Credit securing in the aggregate approximately $23 million of
first mortgage tax-exempt debt on eight of the fourteen centers. Toronto
Dominion Bank has approximately $14 million in a Letter of Credit securing
tax-exempt notes on six FCC notes. This Letter of Credit matures on March
31, 2000. As a result of negotiations between Toronto Dominion Bank, FCC and
NHC, the bank has extended the maturity date of this Letter of Credit for up
to six months. To a large extent, NHC is dependent on FCC's
successful refinancing of this tax-exempt debt in order to remove its
liabilities as a guarantor to the Toronto Dominion Bank. While NHC believes
that the asset value of the six facilities securing the Letter of Credit is
sufficient to cover NHC's exposure, the failure of FCC to timely refinance
the debt could result in an acceleration of the underlying debt, litigation
against NHC and a significant demand on NHC's ability to provide short-term
replacement financing via its guarantees.
The Bank of Tokyo/Mitsubishi (BOTM) has an approximate $9 million Letter
of Credit on two FCC centers, which are also guaranteed by NHC. Although this
Letter of Credit does not mature until March 31, 2001, both NHC and FCC have
the obligation to provide substantial collateral in addition to the existing
first mortgages to BOTM by April 1, 2000. The failure of either FCC or NHC,
or both, to provide this additional collateral could result in substantial
litigation against the Company, with results similar to those in the Toronto
Dominion Letter of Credit.
York Hannover Bankruptcy: NHC has guaranteed $5 million of that certain
first mortgage debt made by York Hannover to NHI in December 1993. York
Hannover sought bankruptcy protection in June 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
($5 million) guarantor of the outstanding debt, which was collateralized by the
pledge of certain marketable securities in the approximate amount of $5
million on June 30, 1999. 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 to collect its $5 million guarantee from NHC or the
collateral now held by the first mortgage lender.
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 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Shareholders was held on April 26, 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 a term of three years or until their successors have
been fully elected and qualified. Other directors whose terms of office
continue are Robert G. Adams, Richard F. LaRoche, Jr., Lawrence C. Tucker,
J. K. Twilla and Olin O. Williams.
Withholding
Voting For Authority Percent For
-------------------------------------------------------------------
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%
PART II
-------
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED UNITHOLDER MATTERS
The shares of common stock of National HealthCare Corporation are
traded on the American Stock Exchange under the symbol NHC. The closing price
for the NHC shares on Friday, December 31, 1999 was $5.250 and the price
opened at $15.000 on January 4, 1999. On December 31, 1999, NHC had approxi-
mately 4,767 shareholders, comprised of 2,567 shareholders of record and an
additional 2,200 shareholders indicated by security position listings. The
following table sets out the quarterly high and low sales prices of NHC's
units of partnership interest/share. As a corporation, NHC paid no dividends
during 1998 or 1999.
Stock Prices
High Low
_____________________________________________________________________________
1998
1st Quarter $41.500 $32.000
2nd Quarter 38.500 25.250
3rd Quarter 31.500 19.875
4th Quarter 30.000 14.000
_____________________________________________________________________________
1999
1st Quarter $17.250 $ 7.625
2nd Quarter 9.750 5.250
3rd Quarter 10.688 5.938
4th Quarter 7.000 3.375
_____________________________________________________________________________
The Company does not currently declare or pay dividends.
ITEM 6
SELECTED FINANCIAL DATA
The following table represents selected financial information with respect
to the Company for the five years ended December 31, 1999. This financial
information has been derived from financial statements included elsewhere in
this Form 10-K and should be read in conjunction with those financial
statements and accompanying footnotes. NHC was a partnership through 1997,
and consequently had no significant income taxes imposed upon it.
Year Ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
(in thousands, except unit/share and per unit/share data)
Operating Data:
Revenue $440,145 $441,214 $463,477 $386,266 $349,398
Expenses 426,110 451,298 426,260 356,980 328,283
Income (Loss) before
income taxes 14,035 (10,084) 37,217 29,286 21,115
Income tax provision
(benefit) 5,652 (3,685) 209 --- ---
Net income (loss) 8,383 (6,399) 37,008 29,286 21,115
Earnings (Loss) per unit/share:
Basic .73 (.58) 4.17 $ 3.48 $ 2.67
Diluted .73 (.58) 3.58 2.97 2.32
Balance Sheet Data:
Total assets $240,319 $249,688 $239,061 $404,740 $355,491
Long-term debt 45,736 56,311 60,227 124,678 100,871
Debt serviced by
other parties 14,911 15,891 16,676 32,857 40,771
Partners' capital --- --- --- 128,537 108,899
Shareowners' equity 53,636 50,315 37,736 --- ---
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview--
National HealthCare Corporation ("NHC" or the "Company" and formerly
National HealthCare L.P.) is a leading provider of long-term health care
services. NHC operates or manages 101 long-term healthcare centers with
13,501 beds in ten states. NHC provides long-term health care services to
patients in a variety of settings including long-term nursing centers,
managed care specialty units, sub-acute care units, Alzheimer's care units,
homecare programs, assisted living centers and independent living centers.
Results of Operations--
The following table and discussion sets forth items from the consolidated
statements of income as a percentage of net revenues for the audited years
ended December 31, 1999, 1998 and 1997.
Percentage of Net Revenues
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Revenues:
Net patient revenues 92.3% 91.6% 88.7%
Other revenues 7.7 8.4 11.3
Net revenues 100.0 100.0 100.0
Costs and Expenses:
Salaries, wages and benefits 55.0 55.2 55.8
Other operating 27.1 26.7 24.1
Litigation settlement and other
charges 0.0 6.4 0.0
Rent 10.6 10.4 5.7
Depreciation and amortization 2.9 2.7 3.6
Interest 1.2 1.0 2.8
Total costs and expenses 96.8 102.3 92.0
Income (Loss) Before Income Taxes 3.2% (2.3)% 8.0%
The following table sets forth the increase in certain items from the
consolidated statements of income as compared to the prior period.
Period to Period Increase (Decrease)
1999 vs. 1998 1998 vs. 1997
------------- ----------------
(dollars in thousands) Amount Percent Amount Percent
Revenues:
Net patient revenues $ 2,002 0.5% $ (6,704) (1.6)%
Other revenues (3,071) (8.3) (15,559) (29.6)
Net revenues (1,069) (0.2) (22,263) (4.8)
Costs and Expenses:
Salaries, wages and benefits (1,082) (0.4) (14,977) (5.8)
Other operating 1,463 1.2 5,920 5.3
Litigation settlement and
other charges (28,084) (100.0) 28,084 --
Rent 705 1.5 19,656 74.5
Depreciation & amortization 858 7.3 (5,033) (29.9)
Interest 952 21.6 (8,612) (66.2)
Total costs and expenses (25,188) 5.6 25,038 5.9
Income (Loss) Before
Income Taxes $ 24,119 239.2% $(47,301) (127.1)%
------ ----- ------- ------
NHC's long-term health care services, including therapy and pharmacy
services, provided 94% of net revenues in 1999, 94% in 1998 and 92% in 1997.
Homecare programs, which are included in the long-term care services,
provided 4% of net revenues in 1999, 5% in 1998 and 8% in 1997.
The overall census in owned or leased health care centers for 1999 was 93.5%
compared to 90.8% in 1998 and 92.2% in 1997. The census excluding
acquisitions of new beds and new openings was 93.5%, 92.9% and 94.4%,
respectively, for the same periods. NHC opened no new owned or leased
long-term care beds in 1999. In addition, NHC acquired two existing long-
term health care centers with 300 beds.
Approximately 62% (1999), 60% (1998) and 56% (1997) of NHC's net revenues
are derived from Medicare, Medicaid, and other government programs. Amounts
earned under these programs are subject to review by the third party payors.
In the opinion of management, adequate provision has been made for any
adjustments that may result from such reviews. Any differences between
estimated settlements and final determinations are reflected in operations in
the year finalized. NHC has submitted various requests for exceptions to
Medicare routine cost limitations for reimbursement. NHC has received
approval on certain requests and others are pending approval. NHC will record
revenues associated with the approved requests when such approvals, including
cost report audits, are assured.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
1999 Compared to 1998
Excluding a $28.1 million non-recurring charge occurring in 1998, operating
results in 1999 include a 0.2% decrease compared to the same period in 1998
in net revenues and a 22.0% decrease in income before taxes.
As shown in the above tables, patient revenues for NHC increased 0.5% in
1999 compared to 1998. The increase in patient revenues were partially the
result of continued growth of operations. In 1999, NHC increased the number
of owned or leased long-term health care beds by 452 beds from 7,524
beds to 7,976 beds. In addition, the number of owned or leased assisted
living units has increased by a net of 139 units from 633 units to 772 units.
The increased revenues were partially offset by declines resulting from
NHC's first year under the federal government's new Prospective Payment System
("PPS"), and decreased levels of service and changes in payment systems for
rehabilitative services, homecare services and nursing home operations.
Other revenues declined 8.3% in 1999. Revenues from managed centers, which
are included in the consolidated statements of income in other revenues,
decreased 14.9% in 1999 from $24.5 million in 1998 to $20.9 million in 1999
due primarily to the discontinuation of management services to 14 FCC centers
as discussed below.
Decreases in salaries, wages and benefits are attributable to decreased
staffing levels in therapy and homecare services and reductions in bonus and
benefit programs for the year. The reductions were offset in part by the
increase in staffing levels due to bed additions and expansions. Also
contributing to higher costs of labor are inflationary increases for salaries
and the associated benefits.
Operating costs have increased in part due to the increased number of beds
in operation and the expansion of assisted living services. These increased
beds and expansions are expected to provide increased revenues in future
periods. Rent increased due primarily to additions to existing rental
properties. These operating costs increases were offset in part by supplier
rate reductions as a result of renegotiations 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 PPS, which began for substantially all of NHC centers on
January 1, 1999.
Depreciation and amortization increased as a result of the placing of newly
constructed or purchased assets in service. Interest expense increased in
1999 compared to 1998 due to capitalization of interest for assets under
construction and due to increased rates of interest on debt.
1998 Compared to 1997
In 1998, NHC incurred non-recurring charges to income of $28.1 million and
as a result reported a loss for the year of $10.1 million before taxes.
Except for the non-recurring charges, the Company would have earned $18.0
million pre-tax net income.
The non-recurring charge includes the previously announced $15.0 million
pre-tax charge attributable to the settlement of the lawsuit with Florida
Convalescent Centers, Inc. ("FCC"). The Company has charged earnings by an
additional $13.1 million pre-tax for the assumption of liabilities, expected
litigation charges and other liabilities. Year-end results for 1998 are not
comparable to the prior year's results because NHC converted from a limited
partnership to a corporation and spun off its real estate assets into a new
company, National Health Realty, Inc. ("NHR").
Excluding the $28.1 non-recurring charge, operating results in 1998 include
a 4.8% decrease compared to the same period in 1997 in net revenues and a
51.6% decrease in income before taxes.
As shown in the above tables, patient revenues for NHC declined 1.6% in
1998 compared to 1997. The decline in revenues is due in part to declines in
both volume of and price for rehabilitative services. Salary equivalency
limits on Medicare payments for occupational and speech therapy were
implemented on April 10, 1998. Also contributing to the decline in patient
revenues was the implementation of Medicare's interim payment system for
home health services as a result of the Balanced Budget Act of 1997. There
were 329,000 homecare visits in 1998 compared to 731,000 visits in 1997.
The decreased patient revenues were partially offset by the continued
growth of operations. In 1998, NHC increased the number of owned or leased
long-term health care beds by 142 beds from 7,382 beds to 7,524 beds. In
addition, the number of owned or leased assisted living units has increased
by a net of 45 units from 729 units to 774 units. Also contributing to
increased revenues in 1998 were improvements in both private pay and third
party payor rates. However, with the implementation of the Medicare
Prospective Payment System in 1999, payor rates are expected to decline.
Other revenues declined 29.6% in 1998. Revenues from managed centers,
which are included in the consolidated statements of income in other
revenues, decreased 36.0% in 1998 from $38.3 million in 1997 to $24.5 million
in 1998 due primarily to decreased interest income on notes receivable of
$94.4 million which were transferred to NHR on December 31, 1997. (See
"Litigation" below for factors that may reduce future revenues
from management services.)
Decreases in salaries, wages and benefits are attributable to decreased
staffing levels in therapy and homecare services and reductions in bonus and
benefit programs for the year. The Company drastically reduced its bonus
programs for 1998, which are based largely on profit performance. The
reductions were offset in part by the increase in staffing levels due to bed
additions and expansions. Also contributing to higher costs of labor are
inflationary increases for salaries and the associated benefits.
Operating costs have increased in part due to the increased number of beds in
operation and the expansion of assisted living services. These increased beds
and expansions are expected to provide increased revenues in future periods.
Rent increased due primarily to rent expense on the assets transferred to NHR
and leased back to NHC at the end of the previous year.
Depreciation and amortization decreased as a result of the transfer of real
property to NHR, offset in part by the placing of newly constructed or
purchased assets in service. Interest expense decreased in 1998 compared to
1997 due to the transfer of debt to NHR and due to the capitalization of
interest for assets under construction.
The income tax benefit for 1998 was $3.7 million compared to $0.2 million
expense in 1997. The change is due to NHC's restructure from a limited
partnership to a corporation and the generation of a net operating loss
carryforward in 1998.
Growth and Development--
During 1999, NHC grew its long-term health care business by acquiring or
constructing additions totaling 452 licensed beds at 7 owned or leased health
care centers and totaling 570 licensed beds at 3 managed health care centers.
The growth in managed health care centers was more than offset by the discon-
tinuance of management of 2,162 beds at 16 centers as discussed below. The
total number of owned, leased or managed centers operated by NHC at the end
of 1999 was 101 centers and the total number of licensed beds was 13,501.
During 2000, NHC expects to finish construction on 120 beds at two owned or
leased centers and 24 beds at three managed centers.
As part of its overall long-term health care continuum, NHC has also
continued to expand its assisted living services. Assisted living centers
provide basic room and board functions for the elderly with on-staff availa-
bility to assist in minor medical and living needs on an as needed basis.
NHC currently operates 17 assisted living projects, eight of which are
located within the physical structure of a long-term care center or retirement
center and eight of which are freestanding.
Liquidity, Capital Resources and Financial Condition--
Net cash provided by operating activities was $33.6 million for the year ended
December 31, 1999, as compared to $28.5 million provided by operating
activities for the comparable period in 1998. Cash provided by operating
activities for the year ended December 31, 1999 increased from the comparable
period in 1998 primarily as a result of the increase in net earnings.
Net cash used by investing activities was $33.0 million for the year ended
December 31, 1999, as compared to $24.9 million for the year ended December
31, 1998. Cash used for the purchase of property and equipment was $22.0
million for the year ended December 31, 1999 and $24.0 million in the
comparable period in 1998. Cash collected on notes receivable, net of invest-
ments in notes receivable, was $7.4 million in 1999 compared to net cash
invested for notes receivable in 1998 of $3.4 million. Cash used for the
purchase of marketable securities was $18 million in 1999 compared to $4.2
million in 1998.
Net cash used in financing activities was $9.2 million for the year ended
December 31, 1999 as compared to $8.2 million net cash provided by financing
activities in 1998. In the 1999 period, the Company received proceeds from
debt issuance of $13.8 million. Payments on debt were $22.7 million in 1999
compared to $4.5 million in 1998. In addition, in 1998 NHC made cash distri-
butions to partners of $5.4 million. These cash distributions were
discontinued in 1998 with the new "corporate" versus "partnership" structure.
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 2000 and into 2001.
For all financial instruments, NHC believes that the financial statement
carrying amounts approximate fair value at December 31, 1999.
NHC has guaranteed approximately $66.1 million of the debt of certain
health care centers which NHC manages for others. As a result of the health
care industry's generally weak financial position, NHC's negative income as
reported in 1998, the bankruptcy of Integrated Health Services Corporation
(the lessee for fourteen facilities formerly managed by NHC) in 1999 and the
uncertainty engendered by the pendency of the Whistleblower lawsuits
discussed above, 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:
FCC Guarantees: Although NHC transferred to National Health Realty, Inc.
(NHR) approximately $60 million of first and second mortgage notes made by
Florida Convalescent Centers, Inc. on fourteen facilities managed by NHC, NHC
remained as a guarantor on two Letters of Credit securing in the aggregate
approximately $23 million of first mortgage tax-exempt debt on eight of the
fourteen centers. Toronto Dominion Bank has approximately $14 million in a
Letter of Credit securing tax-exempt notes on six FCC notes. This Letter of
Credit matures on March 31, 2000. As a result of negotiations between
Toronto Dominion Bank, FCC and NHC, the bank has extended the maturity date
of this Letter of Credit for up to six months. To a large extent, NHC is
dependent on FCC's successful refinancing of this tax-exempt debt in
order to remove its liabilities as a guarantor to the Toronto Dominion Bank.
While NHC believes that the asset value of the six facilities securing the
Letter of Credit is sufficient to cover NHC's exposure, the failure of FCC to
timely refinance the debt could result in an acceleration of the underlying
debt, litigation against NHC and a significant demand on NHC's ability to
provide short-term replacement financing via its guarantees.
The Bank of Tokyo/Mitsubishi (BOTM) has an approximate $9 million Letter of
Credit on two FCC centers, which are also guaranteed by NHC. Although this
Letter of Credit does not mature until March 31, 2001, both NHC and FCC have
the obligation to provide substantial collateral in addition to the existing
first mortgages to BOTM by April 1, 2000. The failure of either FCC or NHC,
or both, to provide this additional collateral could result in substantial
litigation against the Company, with results similar to those in the Toronto
Dominion Letter of Credit.
York Hannover Bankruptcy: NHC has guaranteed $5 million of that certain first
mortgage debt made by York Hannover Nursing Centers, Inc. ("York Hannover") to
National Health Investors, Inc. ("NHI") in December 1993. York Hannover sought
bankruptcy protection in June 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 ($5 million)
guarantor of the outstanding debt, which was collateralized by the pledge of
certain marketable securities in the approximate amount of $5 million on June
30, 1999. NHC is no longer managing those 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 to collect its $5 million guarantee from NHC or the collateral now held
by the first mortgage lender.
Cash Dividends--
NHC may pay dividends at the discretion of the Board of Directors; however, at
present, NHC does not anticipate paying dividends.
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 nongovern-
mental 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, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended by Statement of
Financial Accounting Standards No. 137, "Deferral of the Effective Date of
SFAS 133", is effective for fiscal quarters beginning after June 15, 2000. The
impact of the adoption of SFAS 133 is not expected to have a material impact on
NHC's results of operations or financial position.
Impact of Inflation--
Inflation has remained relatively low during the past three years. In
addition, historical reimbursement rates under the Medicare and Medicaid
programs generally have reflected the underlying increases in health care costs
and expenses resulting from inflation. For these reasons, the impact of
inflation on profitability has historically not been significant. However,
NHC's healthcare centers began the three-year phase-in of the new Prospective
Payment System under the Medicare program effective during 1999. Although
rates paid during the phase-in are based on a blend of historical costs for each
center and average historical costs for all U.S. skilled nursing facilities, as
adjusted for inflation, the rates to be paid are generally expected to be less
than the rates paid under the former retrospective payment system. Therefore,
there can be no assurance that future rate increases will be sufficient to
offset future inflation increases in NHC's labor and other health care
service costs.
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 healthcare
centers during 1998, PPS was implemented for the vast majority of NHC's
centers effective 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. 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
an average of all U.S. skilled nursing facilities' historical costs.
The United States Congress and the Administration - in recognition of the
collapse of a significant portion of America's long-term care industry -
proposed and enacted certain amendments to the Balanced Budget Act of 1997,
the law which most observers believe is primarily responsible for the industry
decline. Among the changes enacted in 1999 is a process whereby providers can
identify certain of their facilities to be placed immediately on the federal
reimbursement rate rather than a three-year transition rate. For facilities
in which it is financially advisable to make this change, the Company is so
doing. Additionally, (and effective between April 1 and October 31, 2000)
approximately fifteen of the highest acuity Medicare reimbursement payment
classifications will experience a 20% increase in payment; additionally, all
of the Medicare payment categories will undergo an additional 4% increase.
These changes will be effective April 1, 2000. Certain relief was also
granted to the Company's home health care operations and a $1,500 per patient
annual ceiling was lifted for a two-year period on reimbursement for
expenditures in connection with the provision of physical, speech, and
occupational therapy to the Company's patients. Although these refinements
have been well received by the industry, it is the Company's belief that the
refinements are insufficient compared to the losses sustained by the industry
during 1999.
Nursing homes and home health agencies have recently been the target of
health care reform, from both fraud and reimbursement perspectives. Operation
Restore Trust, a demonstration project which has been conducted by the
Department of Health and Human Services in five states, is expanding to a dozen
more states. "ORT Plus" will continue its focus on fraud in the areas of
home health, nursing home and DME suppliers, as well as adding new anti-fraud
and abuse targets. The Company will operate nursing homes and home
health agencies in five ORT Plus states and could be subject to increased
scrutiny. Although NHC's management believes that its home care and nursing
home operations are in compliance with applicable laws and regulations, there
can be no assurance that the Company and its home care and nursing home
operations will not be the subject of an investigation nor that they will be
found to be in compliance if investigated. See "Item 3-Legal Proceedings".
Litigation--
As discussed in more detail in Note 15 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 pay for any
adjustments to previously filed Medicare and routine cost limit exceptions
related to the 16 FCC centers. Negative adjustments to other 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 relationship. Adjustments to owned or leased centers would
directly impact the Company's financial statements. An adverse determination
in the lawsuit could subject NHC to repayments, fines and/or penalties which
will have a material negative impact on the financial position or results of
operations of NHC.
NHC settled, during 1998, a lawsuit filed by Florida Convalescent Centers,
Inc. ("FCC"), an independent Florida corporation for whom NHC managed 16
licensed nursing centers in Florida. Under the terms of the settlement, NHC
purchased two of the 16 FCC long-term health care centers. Additionally, NHC
paid a one-time cash settlement of $15.0 million and agreed to pay for 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 had the right to cancel the
management contracts for the remaining 14 centers. The management contracts
were canceled on July 31, 1999.
The loss of the management contract and related revenues from these 14
facilities had a material negative impact on NHC's 1999 revenues, even after
taking into consideration the purchase of two of the 16 long-term health care
centers.
During 1999, the Company became an unsecured creditor in two bankruptcies
which involve approximately $20,000,000 in account receivables and notes owed
to NHC by the bankrupt estates. NHC is evaluating the probability of
recovering and collecting from these entities, but believes that a substantial
portion will not be collectable. 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 will continue to evaluate the carrying value of these
investments.
The entire 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 December 31, 1999, the Company and/or its managed centers
are defendants in 79 such lawsuits in Florida, compared to 29 in all other
states combined.
The Company is currently engaged in litigation, discussed more fully in Item
3, with an insurance carrier based on the Company's claims that the insurance
carrier acted in bad faith in failing to settle certain litigation within
policy limits when it had the opportunity to do so. Although the Company
believes that it has meritorious claims in this regard, the outcome of this
litigation cannot be predicted with certainty. If the lawsuit against the
insurance company is not resolved in NHC's favor, this could have a material
negative impact on the financial position or results of operations of the
Company due to the loss of umbrella insurance coverage for 1995 and 1996.
Year 2000 Compliance--
NHC developed a plan to address, remediate and test its systems. NHC's
Year 2000 plan focused on Year 2000 readiness and risks in the following areas:
(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 health care centers such
as financial institutions, electrical providers, and food services suppliers.
Based on the results of NHC's Year 2000 assessment remediation and testing and
based onexperience since January 1, 2000, NHC does not believe that any
significant Year 2000 issues continue to exist related to these areas.
NHC participates in the Medicare and Medicaid programs. NHC is reimbursed
under these programs through fiscal intermediaries. NHC has little or no
control over the Year 2000 compliance of governmental payors and fiscal
intermediaries. NHC will continue to evaluate the Year 2000 readiness of
governmental payors and fiscal intermediaries.
Costs related to NHC's Year 2000 readiness plan have not been material and
are not expected to be material in future periods.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 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 $6.1 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 approxi-
mately $260,000. However, a hypothetical 10% change in interest rates would
have an immaterial impact on the fair values of these instruments.
As of December 31, 1999, $27.2 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 $39.9 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 $230,000. However, a hypothetical 10%
change in interest rates would have an immaterial impact on the fair values
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 stock-
holders' 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 prices. 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.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following table sets forth selected quarterly financial data for the
two most recent fiscal years.
Selected Quarterly Financial Data
(unaudited, in thousands, except per unit amounts)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1999
Net Revenues $107,929 $107,722 $105,677 $118,817
Net Income 2,237 2,250 1,846 2,050
Basic Earnings Per Unit .200 .200 .160 .180
Diluted Earnings Per Unit .200 .200 .160 .180
1998
Net Revenues $114,097 $110,986 $108,454 $107,677
Net Income 2,534 2,782 2,901 (14,616)
Basic Earnings Per Unit .240 .250 .260 (1.330)
Diluted Earnings Per Unit .240 .250 .260 (1.330)
The financial statements are included as Exhibit 13 and are incorporated in
this Item 8 by reference.
ITEM 9
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure.
PART III
--------
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Directors and Executive Officers: The Company is managed by its Board of
Directors, all but one of which were on the Board of Directors of the
Company's Managing General Partner when the Company was organized as a public
partnership (1986-1997). The Board of Directors is divided into three classes.
The Directors hold office until the annual meeting for the year in which
their term expires and until their successor is elected and qualified. As
each of their terms expire, the successor shall be elected to a three-year
term. A director may be removed from office for cause only. Officers serve
at the pleasure of the Board of Directors for a term of one year. The
following table sets forth the directors and the executive officers and vice
presidents of the Company:
Director of
Position Managing Officer of
with the General Managing
Company Partner or Current General
or Managing Company's Term as Partner or
General Predecessor Director Predecessor
Name Age Partner Since Expires Since
- ------------------------------------------------------------------------------
W. Andrew Adams 54 Chairman of
the Board/ 1994(CEO) 2002 1973
President 1974(Pres.)
J. K. Twilla 73 Director 1972 2001 ---
Olin O. Williams 69 Director 1971 2000 ---
Ernest G. Burgess,
III 59 Director 1992 2002 1975
Robert G. Adams 53 S. Vice
President/
Director 1993 2000 1985
Lawrence C. Tucker 57 Director 1998 2001 ---
Richard F. LaRoche,
Jr. 54 Sr. Vice President/
Secretary and
General Counsel -- -- 1974
Charlotte Swafford 51 Treasurer -- -- 1985
Donald K. Daniel 53 Vice President/
Controller -- -- 1977
Julia W. Powell 50 Vice President/
Patient Service -- -- 1985
Joanne G. Batey 55 Vice President/
HomeCare -- -- 1989
D. Gerald Coggin 48 Vice President/
Government and
Rehabilitative -- -- 1994
David L. Lassiter 45 Vice President/
Corporate
Affairs -- -- 1995
Steven A. Strawn 42 Vice President/
Operations -- -- 1995
Kenneth D. DenBesten 47 Vice President/
Finance -- -- 1992
Drs. Twilla and Williams were physicians in private practice in Tennessee
for more than 25 years each and are now retired. Dr. Williams serves as
Chairman of the Board of the Bank of Murfreesboro, Murfreesboro, Tennessee and
both are Directors of National Health Realty, Inc.
Mr. W. Andrew Adams has been President since 1974 and Chairman of the
Board since 1994. He served as president of the National Council of Health
Centers, the trade association for multi-facility long-term health
care companies. He has an M.B.A. degree from Middle Tennessee State
University. Mr. Adams serves on the Board of Directors of David Lipscomb
University, Nashville, Tennessee, is President and Chairman of the Board of
Directors of National Health Investors, Inc., and National Health Realty, Inc.
and serves on the Board of SunTrust Bank in Nashville, Tennessee.
Mr. Robert Adams (Senior Vice President, Chief Operating Officer and
Director) has served both as an Administrator and a Regional Vice President
holding the last position from 1977 to 1985. He has a B.S. degree from
Middle Tennessee State University. He serves as Chief Operations Officer for
the Company. He is on the Board of Directors of National Health Realty, Inc.
Mr. Robert Adams and Mr. W. Andrew Adams are brothers.
Mr. Burgess (Director) is retired Senior Vice President of NHC. He has
an M.S. degree from the University of Tennessee. He is on the Board of
Directors of National Health Realty, Inc.
Mr. Tucker (Director) has been with Brown Brothers Harriman & Co.
("BBH&Co."), a private banking company, for 33 years and became a General
Partner in January 1979. Mr. Tucker currently serves as a member of the
Steering Committee of BBH&Co. He is responsible for the corporate finance
activities of BBH&Co., including management of the 1818 Funds, private equity
investing partnerships with committed capital exceeding $1.5 billion. Mr.
Tucker is a director of MCI WorldCom, Inc., Riverwood International
Corporation, VAALCO Energy, Inc., World Access, Inc., National Equipment
Services, US Unwired, Inc. and the MCI WorldCom Investment Fund. Mr. Tucker
has a B.S. degree from Georgia Institute of Technology and an MBA from the
Wharton School of the University of Pennsylvania.
Mr. LaRoche (Senior Vice President) has been Senior Vice President since
1985, Secretary since 1974 and General Counsel since 1971. He has a law
degree from Vanderbilt University and an A.B. degree from Dartmouth College.
His responsibilities include legal affairs, acquisitions and finance. Mr.
LaRoche also serves as a director, Vice President and Secretary of National
Health Investors, Inc. and as Vice President and Secretary of National Health
Realty, Inc.
Mr. Strawn (Vice President/Operations) has been with the Company since
1979. He trained in NHC's A.I.T. program and then served both as admini-
strator and Regional Vice President before being appointed to the present
position in 1995. He has a B.S. degree from Middle Tennessee State
University.
Mr. Daniel (Vice President and Controller) joined the Company in 1977 as
Controller. He received a B.A. degree from Harding University and an M.B.A.
from the University of Texas. He is a certified public accountant.
Mr. Lassiter (Vice President/Corporate Affairs) joined the Company in
1995. From 1988 to 1995, he was Executive Vice President, Human Resources
and Administration for Vendell Healthcare. From 1980-1988, he was in human
resources positions with Hospital Corporation of America and HealthTrust
Corporation. Mr. Lassiter has a B.S. and an M.B.A. from the University of
Tennessee.
Ms. Swafford (Treasurer) has been Treasurer of the Company since 1985.
She joined the Company in 1973 and has served as Staff Accountant, Accounting
Supervisor and Assistant Treasurer. She has a B.S. degree from Tennessee
Technological University.
Ms. Powell (Vice President/Patient Services) has been with the company
since 1974. She has served as a nurse consultant and director of patient
assessment computerized services for NHC. Ms. Powell has a bachelor of
science in nursing from the University of Alabama, Birmingham, and a master's
of art in sociology with an emphasis in gerontology from Middle Tennessee
State University. She co-authored Patient Assessment Computerized in 1980
with Dr. Carl Adams, the Company's founder.
Ms. Batey (Vice President/Homecare) has been with the company since
1976. She served as homecare coordinator for five years before being named
Vice President in 1989. Prior to that she was director of communication
disorders services. Ms. Batey received her bachelor's and master's
degrees in speech pathology from Purdue University.
Mr. Coggin (Vice President/Governmental and Rehabilitative Services) has
been employed by NHC since 1973. He has served as both Administrator and
Regional Vice President before being appointed to the present position.
He received a B.A. degree from David Lipscomb University and a M.P.H. degree
from the University of Tennessee. He is responsible for the Company's
rehabilitation, managed care and legislative activities.
Mr. DenBesten (Vice President/Finance) has served as Vice President of
Finance since 1992. From 1987 to 1992, he was employed by Physicians Health
Care, most recently as Chief Operating Officer. From 1984-1986, he was
employed by Health America Corporation as Treasurer, Vice President
of Finance and Chief Financial Officer. Mr. DenBesten received a B.S. in
business administration and an M.S. in Finance from the University of Arizona.
The above officers serve in identical capacities for the Company and
its administrative services contractor, National Health Corporation.
Outside directors receive $2,500 per meeting attended. In addition,
outside directors receive a stock option to purchase 10,000 shares of NHC
common stock at a purchase price equal to the closing price of the Corporation
Shares at the closing price on the date of the Corporation's annual
meeting. There were five Board meetings during 1999.
ITEM 11
EXECUTIVE COMPENSATION
Introduction:
The Board of Directors have elected to continue unchanged the Company's
prior compensation and bonus plans. Their goals in executive compensation
and compensation at all levels within the Company are derived from the follow-
ing priorities: First, to encourage the achievement of the highest levels of
quality in its fields of endeavor; and second, to provide the strongest
incentive possible in order to average, over a five year period, a 15% return
on shareholder's equity. With these goals in mind, the Company's executive
compensation program is based on employee performance rewarded as follows:
(1) the achievement of a return on investment for shareholders; (2) returns
generated from stock performance based incentive plans; and (3) from base
salary. The following text and tables describe the various components of
this plan as were attained and applied during 1998.
Total Compensation:
Table I sets forth certain information concerning the total compensation
paid by the administrative general partner and reimbursed to it by the Company
for the year ended December 31, 1999 to the three executive officers of the
Company.
Option Plans:
The Company's Board of Directors and the then sole shareholder of the
Company have adopted the 1997 Stock Option and Stock Appreciation Rights Plan
(the "1997 Stock Option Plan"), under which options to purchase shares of the
Company's common stock are available for grant to consultants, advisors,
directors and employees of the Company, providing an equity interest in the
Company and additional compensation based on appreciation of the value of
such stock.
The 1997 Stock Option Plan allows for options to purchase in the
aggregate up to 1,000,000 shares of NHC common stock to be granted by the
Board of Directors. The Board of Directors may, in its discretion grant
incentive stock options ("ISO's"), non-qualified stock options or stock
appreciation rights ("SAR's").
In addition, the 1997 Stock Option Plan provides that the non-employee
directors will receive a non-qualified stock option to purchase 10,000 shares
of common stock at a purchase price equal to the closing price of the Shares
on the initial date of trading and will be automatically granted an option
to purchase 10,000 shares of common stock annually on the date of the
Company's annual meeting with an exercise price equal to the closing price on
the date of such annual meeting.
No options were granted to key employees during 1999, however, pursuant
to the Plan, non employee directors each receive an option to purchase 10,000
shares on the date of the Annual Meeting and for the closing share price that
day. 40,000 units were granted to the four non-employee Directors at $9.375
per share on April 26, 1999.
At December 31, 1999, an option to purchase 5,000 units at $24.88 per
share is outstanding to one director, options to purchase 15,000 shares are
outstanding at $30.750 per share to three directors and options to purchase
30,000 shares are outstanding at $39.88 per share to three directors.
The 1997 Stock Option Plan provides that the exercise price of an ISO
option must not be less than the fair market value of the common stock on the
trading day next preceding the date of the grant. Payment for shares of
common stock to be issued upon exercise of an option may be made
either in cash, Company common stock or any combination thereof, at the
discretion of the option holder. Options are nontransferable, other than by
will, the laws of descent and distribution; assignable to family
partnerships, trusts or immediate family members; or pursuant to certain
domestic relations orders. Common stock subject to options granted under the
1997 Stock Option Plan that expire, terminate or are canceled without having
been exercised in full become available again for option grants.
The 1997 Stock Option Plan is administered by the Board of Directors,
or, at the discretion of the Board of Directors, a committee of directors.
Subject to certain limitations, the Board and its committee have the
authority to determine the recipients, as well as the exercise prices, exercise
periods, length and other terms of stock options granted pursuant to the 1997
Stock Option Plan and Company repurchase options upon termination of a
recipients employment. In making such determinations, the Board may take into
account the nature of the services rendered or to be rendered by option
recipients, and their past, present or potential contributions to the Company.
The number of shares of common stock that may be granted under the 1997
Stock Option Plan or under any outstanding options granted thereunder will be
proportionately adjusted, to the nearest whole share, in the event of any
stock dividend, stock split, share combination or similar
recapitalization involving the common stock or any spin-off, spin-out or other
significant distribution of the Company's assets to its stockholders for
which the Company receives no consideration.
Generally, in the event an option holder is terminated as an employee by
reason of disability or death, the holder or his or her representative may
exercise the option for a period of 12 months following such termination
unless the Board of Directors elects, in its sole discretion, to extend
the exercise period. If the employment of an option holder is terminated for
"cause," as defined in the 1997 Stock Option Plan, the unexercised options
expire. In the event the option holder is terminated as an employee for any
reason other than disability, death or cause, the holder may not
exercise his or her option unless authorized by agreement of the Company.
In the event of a dissolution or liquidation of the Company or a merger
or consolidation or acquisition in which the Company is not the surviving
corporation, each outstanding option will become fully exercisable and each
holder will have the right, within 60 days prior to such dissolution,
liquidation, merger, consolidation or acquisition, to exercise his or her
options, in whole or in part.
Either non-qualified or incentive stock options may be granted under the
1997 Stock Option Plan. No federal income tax consequences occur to either
the Company or the optionee upon the Company's grant or issuance of a non-
qualified stock option. Upon an optionee's exercise of a non-qualified stock
option, the optionee will recognize ordinary income in an amount equal to the
difference between the fair market value of the common stock purchased
pursuant to the exercise of the option and the exercise price of the option.
However, if the common stock purchased upon exercise of the option is not
transferable or is subject to a substantial risk of forfeiture, then
the optionee will not recognize income until the stock becomes transferable
or is no longer subject to such a risk of forfeiture (unless the optionee makes
an election under Internal Revenue Code Section 83(b) to recognize the income
in the year of exercise, which election must be made within 30
days of the option exercise). The Company will be entitled to a deduction in
an amount equal to the ordinary income recognized by the optionee in the year
in which such income is recognized by the optionee. Upon a subsequent
disposition of the shares of common stock, the optionee will recognize
a capital gain to the extent the sales proceeds exceed the optionee's cost of
the shares plus the previously recognized ordinary income.
Incentive stock options granted under the 1997 Stock Option Plan are
intended to qualify for a favorable tax treatment under Internal Revenue Code
Section 422. No individual may be granted incentive stock options under the
Corporation Stock Option Plan exercisable for the first time during any
calendar year and having an aggregate fair market value in excess of
$100,000. If the recipient of an incentive stock option disposes of the
underlying shares before the end of certain holding periods (essentially the
later of one year after the exercise date or two years after the
grant date), he or she will generally recognize ordinary income in the year
of disposition in an amount equal to the difference between his or her
purchase price and the fair market value of the Corporation common stock on
the exercise date. If a disposition does not occur until after the expira-
tion of the holding periods, the recipient will generally recognize a capital
gain equal to the excess of the disposition price over the price paid by the
recipient on the exercise date. The Company generally will not be entitled
to a tax deduction for compensation expense on account of the original sales
to employees, but may be entitled to deduction if a participant disposes of
stock received upon exercise of an incentive stock option under the 1997
Stock Option Plan prior to the expiration of the holding periods.
The Company has also established several non-qualified deferred
compensation plans for its key employees similar to the plans offered by NHC,
one of which provides a matching contribution (15%) for all deferred
compensation used to purchase shares of common stock held by an independent
trustee. The matching contribution is forfeited to the Company unless the
employee achieves eight years of vesting service before withdrawing funds from
the Trustee account. The Company grants credit to employees for years of
service with the prior partnership.
Table II shows as to the three executive officers: (i) the number of
shares as to which options have been granted from January 1, 1997 through
December 31, 1999 under the 1994 Option Plan; (ii) the percentage of all
shares granted represented by these individuals (iii) the option exercise
price per share and the expiration date; and (iv) the potential realizable
value of these options assuming both a five percent and ten percent share
price appreciation over the next four years.
Table III identifies for the same three person group all options
exercised during 1999, the value realized upon exercise, and the unrealized
value of the balance of options outstanding.
The Company maintains several non-qualified deferred compensation plans
for its key employees, one of which provides a matching contribution (15%) for
all deferred compensation used to purchase shares interest held by an
independent trustee. The matching contribution is forfeited to the company
unless the employee achieves eight years of vesting service before withdrawing
funds from the Trustee account. Other than as described herein or as
identified in Tables I, II and III, the Company has no other long-term
incentive plans for its executive officers.
<TABLE>
TABLE I
NATIONAL HEALTHCARE CORPORATION
SUMMARY COMPENSATION TABLE
1997-1999
<CAPTION>
Annual Compensation <F1> Long Term Compensation
------------------------------------
Awards Payouts
-------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other annual Restricted LTIP All Other
Name and Principal Compensation Stock Options Payouts Compensa-
Position Year Salary ($) Bonus($)<F4> ($)<F2> Awards ($) SARs (#)<F3) ($) tion ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Andrew Adams 1999 113,313 <F5> 2,932 -0- -0- -0- -0-
President & CEO 1998 109,478 -0- 4,714 -0- -0- -0- -0-
1997 126,806 1,786,842 26,115 -0- -0- -0- -0-
Robert G. Adams 1999 140,940 <F5> 6,607 -0- -0- -0- -0-
Senior VP & COO 1998 140,779 -0- 9,889 -0- -0- -0- -0-
1997 140,553 883,626 3,817 -0- -0- -0- -0-
Richard F. LaRoche, Jr. 1999 127,802 <F5> 2,782 -0- -0- -0- -0-
Sr. VP & Secretary 1998 126,588 -0- 18,034 -0- -0- -0- -0-
1997 135,159 1,086,355 14,904 -0- -0- -0- -0-
<FN>
<F1> Compensation deferred at the election of an executive has been included in
salary columns (c) and (d).
<F2> Includes (a) life insurance benefit, (b) 401-K matching contribution, (c)
nonqualified deferred compensation matching contribution, (d) ESOP contribution.
<F3> These officers also received stock options from National Health Investors,
Inc. in 1993 , 1995, and 1997 which are disclosed in that Company's Form 10-K.
No other Restricted Stock Awards, Options/SARs, or LTIP Payouts were given in
1996, 1997, or 1998.
<F4> These officers also received bonuses from National Health Investors, Inc.
and National Health Realty, Inc. which are disclosed in those Company's Form
10-K or proxy statements.
<F5> No bonus has been declared or paid for 1999.
</TABLE>
<TABLE>
TABLE II
NATIONAL HEALTHCARE CORPORATION
OPTION/SAR GRANTS IN LAST FISCAL YEAR
December 31, 1999
Potential Realizable
Value at Assumed
Annual Rates of Unit
Price Appreciation
for Option Term <F2>
Individual Grants --------------------
<CAPTION>
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Granted(#)<F1> Fiscal Year Price ($/Sh) Date 5%($) 10%($)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
W. Andrew Adams -0- -0- -0- -0- -0- -0-
President & CEO
Robert G. Adams -0- -0- -0- -0- -0- -0-
Sr. VP
Richard F. LaRoche, Jr. -0- -0- -0- -0- -0- -0-
<FN>
<F1> No options were awarded during 1998 to Executive Officers
<F2> Based on remaining option term (if any) and annual compounding.
</TABLE>
<TABLE>
TABLE III
NATIONAL HEALTHCARE CORPORATION
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
December 31, 1999
<CAPTION>
Number of Value of
Unexercised Unexercised
Options/SARs in-the-Money
at FY-End (# Options/SARs
at FY-End ($)
------------------------------
Shares Value Exercisable/ Exercisable/
Executive acquired Realized Unexercisable Unexercisable
Officers on Exercise (#) ($)<F1>
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
W. Andrew Adams, -0- -0- -0- -0-
President & CEO
Robert G. Adams, -0- -0- -0- -0-
Sr. VP
Richard F. LaRoche, -0- -0- -0- -0-
Jr., Sr. VP
<FN>
<F1> Market value of underlying securities at exercise date, minus the exercise
or base price.
</TABLE>
Employee Stock Ownership Plan:
In 1986 National Health Corporation ("National"), the former partnership's
Administrative General Partner adopted as its Employee Stock Ownership Plan
and Trust ("ESOP") the ESOP previously sponsored by the Company's corporate
predecessor. The ESOP is a qualified pension plan under Section 401(a) of the
Internal Revenue Code. National makes contributions to the ESOP for all
employees and is reimbursed for same by the Company. Employees make no contri-
butions. All contributions are used by the ESOP to purchase "qualifying
employer securities" which is the Common Stock of National. These
securities are allocated among National's employees who participate in the
ESOP in the ratio of the employee's wages to the total wages of all partici-
pating employees during that fiscal year. Participating employees are all
employees, including officers, who have earned one year of service by working
more than 1,000 hours during the fiscal year.
On January 20, 1988, National formed a Leveraged Employee Stock Purchase
Plan (Leveraged ESOP). During 1988, the Leveraged ESOP borrowed, in two
separate transactions, $88.5 million from four commercial banks, the proceeds
of which were used to purchase additional stock from National. National, in
turn, purchased eight (8) health care centers from the Company and contracted
with the Company to manage these centers for a 20-year period. National also
loaned $8.5 million to City Center, Ltd. to construct a 15-story office
building in Murfreesboro, Tennessee, approximately 67% of which is occupied
by the Company. In late 1988, National entered into a Loan Agreement with the
Company and advanced $50,000,000 to the Company to be used by the Company to
pay off its existing $30,000,000 revolving line of credit, with the balance to
be used for acquisition, development and general working capital needs. In
September of 1988, the original ESOP was merged into the Leveraged ESOP so
that as of December 31, 1998, the employees still participated in only one
qualified plan. On December 28, 1990, the Leveraged ESOP borrowed
$50,000,000 from three commercial lenders, the proceeds of which were used as
an equity contribution to National, which in turn loaned said proceeds to the
Company at 8.48% fixed rate of interest. The proceeds were used for acquisi-
tion and new construction.
The Leveraged ESOP is administered by an Administrative Committee,
currently consisting of Ernest G. Burgess, III (Director), Donald K. Daniel and
Charlotte Swafford (officers of the Company), which is appointed by National's
Board of Directors. The Trustees of the Leveraged ESOP are Dr. Olin O.
Williams, a director, and Richard F. LaRoche, Jr., the Company's Senior Vice
President and General Counsel.
The amounts contributed to the ESOP in 1999 and allocated to the
Company's executive officers are included in Table I, and total $7,128.
Employee Stock Purchase Plan:
The Company has established its Employee Stock Purchase Plan for
employees. Pursuant to the Plan, eligible employees may purchase Company
common stock through payroll deductions at the lesser of the closing asked
price of the common stock as reported on the American Stock Exchange on the
first trading or the last trading day of each year. At the end of each year,
funds accumulated in the employee's account will be used to purchase the
maximum number of shares at the above price. The Company makes no contri-
bution to the purchase price. 116,081 shares were issued pursuant to the
Plan in January, 2000, with all payroll deductions being made in 1999.
All employees (including officers and directors) may elect to parti-
cipate in the Plan if they meet minimum employment requirements. The maximum
payroll deduction is the employee's normal monthly pay. Participating
employee's rights under the plan are nontransferable. Prior to the end of a
year, a participant may elect to withdraw from the Plan and the amount
accumulated as a result of his payroll deductions shall be returned to
him without interest. Any terminated employee immediately ceases to be a
participant and also receives his or her prior contributions.
In no event may a participant in the Plan purchase thereunder during a
calendar year, common stock having a fair market value more than $25,000.
The stock purchased pursuant to the Plan are freely tradeable, except for
any shares held by an "affiliate" of the Company, which would be subject to
the limitations of Rule 144.
Only Mr. LaRoche of the Company's executive officers participated in this
Plan during 1999 and if there had been a positive spread between the purchase
price and the then fair market price for this individual, it would have been
included in Table I.
401(K) Plan:
The Company and its affiliates offer a 401(K) Plan for all employees who
are over 18 years of age. The Board of Directors has authorized a matching
contribution to be made for 50% of contributions with contributions being
matched up to 2.5% of quarterly gross wages. No employee may contribute more
than 15% of wages to the Plan, and employees who earn more than $66,000 were
limited to a contribution of no more than $3,500. These matching funds will
be used to purchase Company stock on the open market, which shares
will vest in the employees account only after the employee has achieved five
years of vesting service. A total of $1,176,366 was contributed to the Plan
as matching contributions for 1999.
Employee Loan and Bonus Programs:
The Company has for many years participated in an Employee Stock Financing
Plan (the "Financing Plan"). The Plan was designed to enable key employees of
the Company to finance the exercise of stock options granted to them by the
Board of Directors and only if authorized by the Board. Under the Plan, the
Company may (but is not required)finance the exercise of any stock options by
the acceptance of the employees' full recourse promissory note bearing
interest at a fixed rate equal to 2.5% below New York prime on the date of
the note, with interest payable quarterly and principal due and payable on
ninety days notice, but no longer than 60 months. The notes are secured by
company common stock having a fair market value equal to twice the note amount.
The following tables show, as to each executive officer whose indebted-
ness exceeded $60,000, the largest aggregate amount of such indebtedness
since December 31, 1997 and the present outstanding balance.
Financing Plan
------------------------------
Largest Balance out-
Aggregate standing as of
Indebtedness 12/31/99
W. Andrew Adams Pres. & CEO $ 4,101,131 $1,641,920
Robert G. Adams Sr. VP & Dir. 2,426,309 1,206,950
Richard F. LaRoche, Jr. Sr. VP & Sec. 2,418,076 1,181,200
Ernest G. Burgess Director 1,309,368 802,030
J. K. Twilla Director 169,750 ---
Lawrence C. Tucker Director --- ---
Olin O. Williams Director 679,462 369,000
All Executive Officers
& Directors as a Group (7) $11,104,096 $5,201,100
Obligations to repay the Financing Plan loans are an asset of the Company,
but are not reflected as increasing shareholder equity until paid.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the number of
shares of the Company beneficially owned as of December 31, 1999 (a) by each
person (including any "group" as that term is used in Section 13(d)(3) of the
Exchange Act) who is known to the Company to own beneficially 5% or more of
the outstanding shares (1,421,700 as of December 31, 1999), (b) by each
director, and (c) by all executive officers and directors of the Company as a
group. Members of management of the Company listed below are all members of
management and/or the Board of Directors, but they disclaim that they are
acting as a "group" and the table below is not reflective of them acting as a
group:
Names and Addresses Number of Shares(1) Percentage of
of Beneficial Owner Beneficially Owned Total Shares
- --------------------------------------------------------------------------
W. Andrew Adams, President &
Chief Executive Officer 1,122,064 9.80%
801 Mooreland Lane
Murfreesboro, TN 37128
Dr. J.K. Twilla, Director 93,392 .87%
525 Golf Club Lane
Smithville, TN 37166
Dr. Olin O. Williams, Director 152,345 1.30%
2007 Riverview Drive
Murfreesboro, TN 37129
Robert G. Adams, Director, Sr. V.P. 481,432 4.20%
and Chief Operating Officer
2217 Tomahawk Trace
Murfreesboro, TN 37129
Ernest G. Burgess, Director 199,320 1.70%
2239 Shannon Drive
Murfreesboro, TN 37129
Richard F. LaRoche, Jr., Sr. V.P. 430,440 3.80%
2103 Shannon Drive
Murfreesboro, TN 37130
National Health Corporation 1,271,147 11.10%
P.O. Box 1398
Murfreesboro, TN 37133
Lawrence C. Tucker, Director 710,155(2) 6.20%
1818 Fund, II
59 Wall Street
New York NY 10005
Nicholas Fund, Inc., 2,652,504 23.20%
Nicholas Company, Inc., and
Albert O. Nicholas
700 North Water Street
Milwaukee, WI 53202
All Executive Officers,
Directors 3,036,803 26.60%
as a Group
(1) Assumes exercise of stock options and convertible subordinated
debentures outstanding. See "Option Plans".
(2) Mr. Tucker, as a general partner of the 1818 Fund II, is attributed the
ownership of the 1818 Fund II shares, but does not claim beneficial
ownership thereof. Otherwise, all shares are owned beneficially with
sole voting and investment power. Included in the amounts above are
25,000 shares to Mr. Burgess, 20,000 shares to Mr. Tucker,
30,000 shares to Dr. Twilla, and 25,000 shares to Dr. Williams, of which
all may be acquired upon exercise of stock options granted under the
Company's 1994 Stock Option Plan and 1997 Stock Option Plan.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
National Health Corporation ("National")
In January, 1988, NHC sold the assets of eight health care centers (1,121
licensed beds) to National for a total consideration of $40,000,000. The
consideration consisted of $30,000,000 in cash and a $10,000,000 note
receivable due December 31, 2007. The note receivable earns interest at 8.5%
per annum. NHC has agreed to manage the centers under a 20-year management
contract for management fees comparable to those in the industry. NHC has a
receivable from National for management fees of approximately $3.9 million at
December 31, 1999. As of December 31, 1999, National had borrowed $1,947,000
from NHC to finance the construction of additions at two health care centers.
These notes are unsecured, mature in 2008 and require monthly principal and
interest payments, with interest at the prime rate.
In January, 1988, NHC obtained long-term financing of $8.5 million from
National for its new headquarters building. The note requires quarterly
principal and interest payments with interest at 9%. At December 31, 1999,
the outstanding balance was approximately $4.1 million. The building is owned
by a separate partnership of which NHC is the general partner and the other
building tenants are limited partners. NHC has guaranteed the debt service
of the building partnership. In addition, NHC's bank credit facility and the
senior secured notes were financed through National and National's ESOP.
NHC's interest costs, financing expenses and principal payments are equal to
those incurred by National. In October 1991, NHC borrowed $10.0 million from
National. This term note requires quarterly interest payments at 8.5% with
the entire principal due at maturity in 2008.
Contemporaneous with the merger of National HealthCare L.P. into NHC,
the Company and National have entered into an Employee Services Agreement (the
"Services Agreement") whereby NHC leases all of its employees from National.
Pursuant to the Service Agreement, NHC will reimburse National for the gross
payroll of employees provided to the Company plus a monthly fee equal to two
percent of such month's gross payroll, but in no event shall such fee be less
than the actual cost of administering the payroll and personnel department.
The Services Agreement may be terminated by either at anytime with or without
notice.
National is responsible for: the employment of all persons necessary to
conduct the business of the Corporation and set all wages and salaries; the
provision of all fringe benefits; the utilization of any qualified leveraged
employee stock ownership plan; the payment of pensions, and establishment or
continue and carry out pension, profit sharing, bonus, purchase, option,
savings, thrift and other incentive and employee benefit plans; the purchase
and payment of insurance; the indemnification and purchase of insurance on
behalf of any fiduciary of any employee benefit plans and health insurance on
behalf of any fiduciary of such plans.
In the Services Agreement, the Company agrees to indemnify, defend and
hold harmless National from any damages caused by a misrepresentation by the
Company, litigation arising from the acts or failure to act of the Company or
its agents in accordance with law or the Services Agreement, any employment
matters relating to the employees as a result of gross negligence or
intentional misconduct by the Company or the failure of the Company to obtain
and/or follow specific advice and direction from National in matters of
employee separation and/or discipline. In addition, National agrees to
indemnify and defend and hold harmless the Company from any damages caused by
reason of or resulting from or relating to employee separation and/or
discipline of National employees.
PART IV
-------
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
a) (I) Financial Statements:
The Financial Statements are included as Exhibit 13 and are filed as
part of this report.
(ii) Exhibits:
Reference is made to the Exhibit Index, which is found on page 59 of
this Form 10-K Annual Report.
b) Reports on Form 8-K: Filed November 8, 1999.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into registrant's Registration Statement on Form
S-8 File No. 33-9881 (filed December 28, 1987):
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To National HealthCare Corporation:
We have audited, in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of
National HealthCare Corporation (formerly National HealthCare L.P.) included
in Item 14 of this Form 10-K, and have issued our report thereon dated March
15, 2000. Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The financial
statement schedule included in Item 14 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not otherwise a required part of the basic
consolidated financial statements. The financial statement schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements, and in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 15, 2000
NATIONAL HEALTHCARE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(in thousands)
Column A Column B Column C Column D Column E
Additions -------- --------
--------------------
Balance- Charged to Charged Balance
Beginning Costs and to other Deduct- -End of
Description of Period Expenses Accounts ions(1) Period
- ----------- --------- --------- -------- --------- --------
For the year ended
December 31,
1997 - Allowance
for doubtful
accounts $4,739 $1,688 $ --- $ 949 $ 5,478
For the year ended
December 31,
1998 - Allowance
for doubtful
accounts $5,478 $4,619 $ --- $2,137 $ 7,960
For the year ended
December 31,
1999 - Allowance
for doubtful
accounts $7,960 $5,540 $ --- $3,222 $10,278
__________
(1) Amounts written off, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATIONAL HEALTHCARE CORPORATION
BY:/s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 30, 2000, by the following persons
on behalf of the registrant in the capacities indicated. Each director of
the registrant whose signature appears below hereby appoints W. Andrew Adams
and Richard F. LaRoche, Jr., and each of them severally, as his Attorney in
Fact to sign in his name on his behalf as a director of the registrant and to
file with the Commission any and all amendments of this report on Form 10-K.
/s/ W. Andrew Adams /s/ Olin O. Williams
- ------------------------------- ----------------------------------
W. Andrew Adams, President Olin O. Williams, M.D., Director
Executive and Financial Officer
/s/ Robert G. Adams /s/ J. K. Twilla
- ------------------------------- ---------------------------------
Robert G. Adams, Senior Vice J.K. Twilla, M.D., Director
President, Director
/s/ Ernest G. Burgess /s/ Donald K. Daniel
- ------------------------------- ---------------------------------
Ernest G. Burgess, Director Donald K. Daniel, Vice President
and Principal Accounting Officer
/s/ Lawrence C. Tucker
- -------------------------------
Lawrence C. Tucker, Director
NATIONAL HEALTHCARE CORPORATION AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999
EXHIBIT INDEX
Exhibit
No. Description Page No. or Location
- --------- --------------- --------------------------------
3.1 Charter Specifically incorporated
by reference to Exhibit A
attached to Form S-4, (Proxy
Statement-Prospectus), amended,
Registration No. 333-37185,
(December 5, 1997)
3.2 By-laws Specifically incorporated
by reference to Exhibit A
attached to Form S-4, (Proxy
Statement-Prospectus), amended,
Registration No. 333-37185,
(December 5, 1997)
4.1 Form of Common Stock Specifically incorporated
by reference to Exhibit A
attached to Form S-4, (Proxy
Statement-Prospectus), amended,
Registration No. 333-37185,
(December 5, 1997)
10 Material Contracts Incorporated by reference
from Exhibits 10.1 thru
10.9 attached to Form
S-4, (Proxy Statement-
Prospectus), as amended,
Registration No. 333-37185
(December 5, 1997)
10.11 Employee Stock Purchase Specifically incorporated
Plan by reference to Exhibit A
attached to Form S-4, )Proxy
Statement-Prospectus), amended,
Registration No. 333-37185,
(December 5, 1997)
10.12 1997 Stock Option Plan Incorporated by reference
from 1997 Proxy Statement/
Prospectus filed on
December 5, 1997
12 Statements Re: Computation
of Ratios Page 61
13 Report of Independent
Public Accountants Exhibit 13 beginning
Consolidated Statements on Page 62
of Income Consolidated
Balance Sheets Consolidated
Statements of Cash Flows
Consolidated Statements of
Partners' Capital
Notes to Consolidated Financial
Statements
22 Subsidiaries of Specifically incorporated
Registrant by reference to Exhibit A
attached to Form S-4, (Proxy
Statement-Prospectus), amended,
Registration No. 333-37185,
(December 5, 1997)
23 Consent of Independent Page 91
Public Accountants
27 Financial Data Schedule (for SEC purposes only)
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIOS
AS REQUIRED BY ITEM 601(b)(12) OF REGULATION S-K
NATIONAL HEALTHCARE CORPORATION
December 31
1999 1998 1997 1996 1995
Current Assets $107,496 $119,811 $125,293 $ 80,094 $ 89,440
Current Liabilities $ 92,659 $ 92,784 $ 80,795 $ 72,803 $ 59,047
Current Ratio 1.16 1.29 1.55 1.10 1.51
Long-Term Debt and Debt
Serviced by Other
Parties $ 60,647 $ 72,202 $ 76,903 $157,535 $141,642
Equity $ 53,636 $ 50,315 $ 37,736 $128,537 $108,899
Long-Term Debt and Debt
Serviced by Other
Parties to Equity 1.13 1.43 2.04 1.23 1.30
Net Income (Loss) $ 8,383 $ (6,399) $ 37,008 $ 29,286 $ 21,115
Average Equity $ 51,976 $ 44,026 $159,457 $118,718 $104,953
Return on Average
Equity 16.1% (14.6%) 23.2% 24.7% 20.1%
Total Liabilities $165,540 $177,575 $183,627 $260,037 $231,501
Partners' Capital/
Shareowners' Equity
and Deferred Income $74,779 $ 72,113 $ 55,434 $144,703 $123,990
Total Liabilities to
Partners' Capital/Share-
owners' Equity and
and Deferred Income 2.21 2.46 3.31 1.8 1.9
EXHIBIT 13
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants 64
Consolidated Statements of Income 65
Consolidated Balance Sheets 66-67
Consolidated Statements of Cash Flows 68-69
Consolidated Statements of Shareowners' Equity
and Partners' Capital 70
Notes to Consolidated Financial Statements 71-90
To National HealthCare Corporation:
We have audited the accompanying consolidated balance sheets of National
HealthCare Corporation (a Delaware corporation and formerly National HealthCare
L.P.) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareowners' equity and partners' capital,
and cash flows for the years ended December 31, 1999, 1998 and 1997. These
consolidated financial statements are the responsibility of National HealthCare
Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consoli-
dated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
HealthCare Corporation and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for the years ended
December 31, 1999, 1998 and 1997 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 15, 2000
NATIONAL HEALTHCARE CORPORATION
Consolidated Statements of Income
(in thousands, except share and unit amounts)
Year Ended December 31 1999 1998 1997
- ------------------------- -------- -------- --------
Revenues:
Net patient revenues $406,261 $404,259 $410,963
Other revenues 33,884 36,955 52,514
Net revenues 440,145 441,214 463,477
Costs and Expenses:
Salaries, wages and benefits 242,266 243,348 258,325
Other operating 119,090 117,627 111,707
Litigation settlement and
other charges --- 28,084 ---
Rent 46,757 46,052 26,396
Depreciation and amortization 12,644 11,786 16,819
Interest 5,353 4,401 13,013
Total costs and expenses 426,110 451,298 426,260
Income (Loss) Before Income Taxes 14,035 (10,084) 37,217
Income Tax Provision (Benefit) 5,652 (3,685) 209
Net Income (Loss) $ 8,383 $ (6,399) $ 37,008
Earnings (Loss) Per Share/Unit:
Basic$ .73 $ (.58) $ 4.17
Diluted.73 (.58) 3.58
Weighted Average Shares/Units Outstanding:
Basic 11,421,700 11,117,402 8,874,627
Diluted 11,421,700 11,117,402 10,838,567
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
NATIONAL HEALTHCARE CORPORATION
Consolidated Balance Sheets
(in thousands, except share amounts)
December 31 1999 1998
- -------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 4,054 $ 12,630
Cash held by trustees 4,672 3,871
Marketable securities 30,459 23,207
Accounts receivable, less allowance for
doubtful accounts of $10,278 and
$7,960, respectively 52,337 54,197
Notes receivable 602 18,182
Inventory, at lower of cost (first-in,
first-out method) or market 5,010 4,207
Deferred income taxes 7,932 2,644
Prepaid expenses and other assets 2,430 873
------- -------
Total current assets 107,496 119,811
Property, Equipment and Assets Under Arrangement
With Other Parties:
Property and equipment, at cost 157,558 136,247
Accumulated depreciation and amortization (61,107) (50,498)
Assets under arrangement with other parties, net 3,475 4,120
Net property, equipment and assets ------- -------
under arrangement with other parties 99,926 89,869
Other Assets:
Bond reserve funds, mortgage replacement
reserves and other deposits 757 668
Unamortized financing costs, net 837 777
Notes receivable 3,381 5,999
Notes receivable from National 12,198 12,078
Deferred income taxes 7,826 12,374
Minority equity investments and other 7,898 8,112
------- ------
Total other assets 32,897 40,008
------- ------
Total assets $240,319 $249,688
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
NATIONAL HEALTHCARE CORPORATION
Consolidated Balance Sheets
(in thousands, except share amounts)
December 31 1999 1998
- ------------------------------------------------------------------------------
Liabilities and Shareowners' Equity
Current Liabilities:
Current portion of long-term debt $ 6,487 $ 3,779
Trade accounts payable 13,285 16,317
Accrued payroll 25,951 23,846
Amount due to third party payors 26,923 33,599
Accrued interest 276 235
Other current liabilities 19,737 14,965
------ ------
Total current liabilities 92,659 92,741
Long-Term Debt, Less Current Portion 45,736 56,311
Debt Serviced by Other Parties, Less Current Portion 14,911 15,891
Other Noncurrent Liabilities 11,536 11,248
Minority Interests in Consolidated Subsidiaries 698 670
Subordinated Convertible Notes --- 714
Deferred Income 21,143 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;
11,553,496 and 11,378,558 shares,
respectively, issued and outstanding 115 114
Capital in excess of par value, less notes
receivable 54,250 52,838
Retained earnings 1,984 (6,399)
Unrealized gains (losses) on marketable
securities (2,713) 3,762
------ -----
Total shareowners' equity 53,636 50,315
------ ------
Total liabilities and shareowners' equity $240,319 $249,688
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
<TABLE>
NATIONAL HEALTHCARE CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Year Ended December 31 1999 1998 1997
-------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 8,383 $(6,399) $37,008
Adjustments to reconcile net income (loss) to
Net cash provided by operating activities:
Depreciation 11,902 11,328 15,665
Provision for doubtful accounts receivable 2,318 3,642 1,688
Amortization of intangibles and deferred
charges 897 1,232 598
Amortization of deferred income (2,414) (413) (1,334)
Equity in earnings of unconsolidated
investments (230) (197) (201)
Distributions from unconsolidated
investments and other 109 157 160
Deferred income taxes 3,531 (10,478) (4,540)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (458) 4,127 (22,350)
Increase in inventory (803) (259) (376)
(Increase) decrease in prepaid expenses
and other assets (1,557) (320) 389
Increase (decrease) in trade accounts
payable (3,032) 3,507 975
Increase (decrease) in accrued payroll 2,105 (14,277) 9,160
Increase (decrease) in amounts due to
third party payors 5,981 26,810 (6,346)
Increase (decrease) in accrued interest 41 (272) 116
Increase in other current liabilities 4,772 5,792 10,626
Increase in entrance fee deposits 1,759 4,513 ---
Increase in other noncurrent liabilities 288 --- ---
Net cash provided by operating activities 33,592 28,493 41,238
Cash Flows From Investing Activities:
Additions to and acquisitions of property
and equipment, net (22,004) (24,038) (43,707)
Investments in notes receivable (4,234) (31,639) (38,436)
Collections of notes receivable 11,655 35,042 23,807
(Increase) decrease in minority equity
investments and other (380) 18 (2,827)
(Increase) decrease in marketable securities,
net (17,997) (4,253) 605
Net cash used in investing activities (32,960) (24,870) (60,558)
Cash Flows From Financing
Activities:
Proceeds from debt issuance 13,830 922 45,319
Payments on debt (22,724) (4,526) (27,141)
Proceeds from issuance of subordinated
convertible notes --- --- 20,000
Increase in cash held by trustees (801) (37) (1,560)
Decrease in minority interests in
consolidated subsidiaries (10) (93) (28)
Issuance of common shares/partnership units 734 1,018 2,344
Collections of receivables from exercise of
options 8 68 17,375
Increase in bond reserve funds, mortgage
replacement reserves and other deposits (89) (162) (365)
Cash distributions to partners --- (5,388) (21,021)
Increase in financing costs (156) --- (279)
Net cash provided by (used in)
financing activities (9,208) (8,198) 34,644
Net Increase (Decrease) In Cash and
Cash Equivalents (8,576) (4,575) 15,324
Cash and Cash Equivalents, Beginning of Period 12,630 17,205 1,881
------ ------ ------
Cash and Cash Equivalents, End of Period $ 4,054 $12,630 $17,205
</TABLE>
<TABLE>
NATIONAL HEALTHCARE CORPORATION
Consolidated Statements of Cash Flows
(Continued)
<CAPTION>
Year Ended December 31 1999 1998 1997
- ---------------------- ----------------------------
(in thousands, except share and unit amounts)
<S> <C> <C> <C>
Supplemental Information:
Cash payments for interest expense $ 5,312 $ 4,673 $ 12,918
During 1999, 1998 and 1997, $710, $18,438
and $29,756, respectively, of subordinated con-
vertible notes were converted into 46,690,
1,212,504 and 1,197,119 of NHC's partnership
units and common stock
Subordinated convertible notes $ (710) $(18,438) $(29,756)
Financing costs 47 10 131
Accrued interest (8) (89) 320
Common stock --- 12 ---
Partners' capital and shareowners' equity 671 18,505 29,305
During 1998, NHC invested in a note receivable
in exchange for NHC's rights to accounts
receivable
Accounts receivable $ --- $ 9,598 $ ---
Notes receivable --- (9,598) ---
During 1997 and 1996, NHC was released from
its liability on debt serviced by other parties
by the respective lenders
Debt serviced by other parties $ --- $ --- $(15,569)
Assets under arrangement with other parties --- --- 15,569
At December 31, 1997, NHC transferred certain assets,
related liabilities and equity to National Health
Realty, Inc., a real estate investment trust
Net book value of assets transferred $ --- $ --- $239,054
Mortgage notes payable transferred --- --- (86,414)
Equity transferred --- --- (152,640)
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
<TABLE>
NATIONAL HEALTHCARE CORPORATION
Consolidated Statements of Shareowners' Equity and Partners' Capital
(in thousands, except share and unit amounts)
<CAPTION>
Unrealized Total Share-
Receivables Capital in Gains owners'Equity
Common Stock/Units from Sale Excess of Retained (Losses) on General Limited & Partners'
Shares/Units Amount of Units Par Value Earnings Securities Partners Partners Capital
------------ ------ ---------- ---------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 8,467,959 $ --- $ (22,674) $ --- $ --- $ 2,171 $ 1,408 $147,632 $128,537
Net income --- --- --- --- --- --- 370 36,638 37,008
Unrealized gains on
securities --- --- --- --- --- 2,216 --- --- 2,216
------
Total comprehensive
income 39,224
Collection of
receivables --- --- 17,375 --- --- --- --- --- 17,375
Units sold 438,094 --- (11,576) --- --- --- --- 13,920 2,344
Units issued in
conversion of
convertible notes
to partnership
units 1,197,119 --- --- --- --- --- --- 29,305 29,305
Equity transferred to
National Health
Realty --- --- --- --- --- --- (1,514) (151,126) (152,640)
Cash distributions
declared
($3.00 per unit) --- --- --- --- --- --- (264) (26,145) (26,409)
10,103,172 --- (16,875) --- --- 4,387 --- 50,224 37,736
Effect of reorgan-
ization from
limited partnership
to corporation --- 101 --- 50,123 --- --- --- (50,224) ---
----------- ---- ------- ------ --- ----- ---- ------- -----
Balance at December
31, 1997 10,103,172 101 (16,875) 50,123 --- 4,387 --- --- 37,736
Net loss --- --- --- --- (6,399) --- --- --- (6,399)
Unrealized losses
on securities (net of
tax of $418) --- --- --- --- --- (625) --- --- (625)
Total comprehensive
loss (7,024)
Collection of
receivables --- --- 68 --- --- --- --- --- 68
Shares sold 62,882 1 --- 1,017 --- --- --- --- 1,018
Shares issued in
conversion of
convertible notes
to common shares 1,212,504 12 --- 18,505 --- --- --- --- 18,517
Balance at December
31, 1998 11,378,558 11 (16,807) 69,645 (6,399) 3,762 --- --- 50,315
Net income --- --- --- --- 8,383 --- --- --- 8,383
Unrealized losses on
securities(net of
tax of $4,272) --- --- --- --- --- (6,475) --- --- (6,475)
------
Total comprehensive
income 1,908
Collection of
receivables --- --- 8 --- --- --- --- --- 8
Shares sold 128,248 1 --- 733 --- --- --- --- 734
Shares issued in
conversion of
convertible notes
to common shares 46,690 --- --- 671 --- --- --- --- 671
---------- ----- -------- ------- ------- ------ ----- ----- ------
Balance at December
31, 1999 11,553,496 $ 115 $(16,799) $71,049 $ 1,984 $(2,713) $ --- $ --- $53,636
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies:
Presentation--
The consolidated financial statements include the accounts of
National HealthCare Corporation and its subsidiaries ("NHC" or the "Company"
and formerly National HealthCare L.P.). All material intercompany
balances, profits, and transactions have been eliminated in consolidation,
and minority interests are reflected in consolidation. Investments in entities
in which NHC lacks control but has the ability to exercise significant
influence over operating and financial policies are accounted for on the equity
method. Investments in entities in which NHC lacks the ability to exercise
significant influence are included in the consolidated financial statements
at the cost of NHC's investment or, if applicable, at fair value.
Generally, NHC manages or operates health care centers located in
Southeastern, Midwest and Western states in the United States. Most
recently, the long-term health care environment has undergone substantial
change with regards to reimbursement and other payor sources, compliance regula-
tions, competition among other health care providers and relevant patient
liability issues. NHC continually monitors these industry developments, as
well as other factors that affect its business.
Use of Estimates--
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Health Care Revenues--
NHC's principal business is operating and managing long-term health
care centers, including the provision of routine and ancillary services.
Approximately 62% of NHC's net revenues in 1999, 60% in 1998 and 56% in 1997
are from participation in Medicare and Medicaid programs. Amounts paid under
these programs are generally based on fixed rates subject to program cost
ceilings. Prior to January 1, 1999, amounts paid under the Medicare program
were based on the Company's allowable costs subject to program cost ceilings.
However, effective January 1, 1999, the Company was required to transition to
a prospective payment system ("PPS") under the Medicare program. PPS has
significantly changed the manner in which the Company is paid for inpatient
services provided to Medicare beneficiaries. Under PPS, Medicare pays the
Company'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. 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 an average of all U.S. skilled nursing
facilities' historical costs. During November, 1999, the Congress passed and
the President signed 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.
Revenues are recorded at standard billing rates less allowances and
discounts principally for patients covered by Medicare, Medicaid and other
contractual programs. These allowances and discounts were $84,667,000,
$114,275,000 and $99,273,000 for 1999, 1998 and 1997, respectively. Amounts
earned under the Medicare, Medicaid and other governmental programs are
subject to review by the third party payors. In the opinion of management,
adequate provision has been made for any adjustments that may result from such
reviews. Any differences between estimated settlements and final determi-
nations are reflected in operations in the year finalized. For certain
years prior to 1999, NHC has submitted various requests for exceptions to
Medicare routine cost limitations for reimbursement. NHC has received
approval on certain requests, and others are pending approval. NHC will
record revenues associated with the approved requests when such approvals,
including cost report audits, are assured.
Provision for Doubtful Accounts--
Provisions for estimated uncollectible accounts and notes receivable
are included in other operating expenses.
Property, Equipment and Assets Under Arrangement with Other Parties--
NHC uses the straight-line method of depreciation over the expected
useful lives of property and equipment estimated as follows: buildings and
improvements, 20-40 years; equipment and furniture, 3-15 years; and
properties under arrangement with other parties, 10-20 years. The provision
for depreciation includes the amortization of properties under capital leases
and properties under arrangement with National Health Investors, Inc. ("NHI").
Expenditures for repairs and maintenance are charged against income
as incurred. Betterments are capitalized. NHC removes the costs and related
allowances from the accounts for properties sold or retired, and any
resulting gains or losses are included in income. NHC includes interest
costs incurred during construction periods in the cost of buildings ($160,000
in 1999 and $1,344,000 in 1998).
In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of" ("SFAS 121"), NHC evaluates the recoverability of
the carrying values of its properties on a property by property basis. NHC
reviews its properties for recoverability when events or circumstances,
including significant physical changes in the property, significant adverse
changes in general economic conditions, and significant deteriorations of the
underlying cash flows of the property, indicate that the carrying amount of
the property may not be recoverable. The need to recognize an impairment is
based on estimated future cash flows from a property compared to the carrying
value of that property. If recognition of an impairment is necessary, it is
measured as the amount by which the carrying amount of the property exceeds
the fair value of the property.
Investments in Marketable Securities--
NHC considers its investments in marketable securities as available
for sale securities and unrealized gains and losses are recorded in share-
owners' equity in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115").
Intangible Assets--
Any excess of cost over net assets of companies purchased is
amortized generally over 20 years using the straight-line method. Deferred
financing costs are amortized principally by the interest method over
the terms of the related loans. Unamortized excess cost over net assets of
companies purchased at December 31, 1999 and 1998 were $3,827,000 and
$3,987,000, respectively.
Income Taxes--
During 1997, NHC was a publicly traded limited partnership.
Accordingly, NHC was not a taxable entity and the earnings of NHC were
taxable to the individual partners. Effective December 31, 1997, NHC became a
taxable corporate entity. In accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), effective
December 31, 1997, NHC began recognizing deferred income taxes for the
consequences of temporary differences by applying enacted statutory tax rates
for differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
Concentration of Credit Risks--
NHC's credit risks primarily relate to cash and cash equivalents,
cash held by trustees, accounts receivable, marketable securities and notes
receivable. Cash and cash equivalents are primarily held in bank accounts
and overnight investments. Cash held by trustees is primarily invested in
commercial paper and certificates of deposit with financial institutions.
Accounts receivable consist primarily of amounts due from patients (funded
approximately 81% through Medicare, Medicaid, and other contractual programs
and approximately 19% through private payors) in the states of Alabama,
Florida, Georgia, Kentucky, Missouri, South Carolina, Tennessee, and Virginia
and from other health care companies for management services. NHC
performs continual credit evaluations of its clients and maintains allowances
for doubtful accounts on these accounts receivable. Marketable securities
are held primarily in accounts with brokerage institutions. Notes receivable
relate primarily to secured loans with health care facilities and to secured
notes receivable from officers, directors and supervisory employees as
discussed in Notes 10 and 14. NHC also has notes receivable from National
Health Corporation as discussed in Note 5.
NHC's financial instruments, principally its notes receivable, are
subject to the possibility of loss of the carrying values as a result of
either the failure of other parties to perform according to their contractual
obligations or changes in market prices which may make the instruments less
valuable. NHC obtains various collateral and other protective rights, and
continually monitors these rights, in order to reduce such possibilities of
loss. NHC evaluates the need to provide for reserves for potential losses on
its financial instruments based on management's periodic review of its
portfolio on an instrument by instrument basis. See Notes 10 and 14 for
additional information on the notes receivable.
Cash and Cash Equivalents--
Cash equivalents include highly liquid investments with an original
maturity of less than three months.
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 nongovern-
mental 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, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended by Statement of
Financial Accounting Standards No. 137, "Deferral of the Effective Date of
SFAS 133", is effective for fiscal quarters beginning after June 15,
2000. The impact of the adoption of SFAS 133 is not expected to have a
material impact on NHC's results of operations, financial position or cash
flows.
Note 2 - Restructure from Limited Partnership to Corporation:
Under the Revenue Act of 1987, NHC and certain other similar
publicly traded partnerships were permitted to be taxed as partnerships and
not as corporations through December 31, 1997. However, NHC became subject
to federal income taxes for taxable income generated subsequent to December
31, 1997. In response to the governmentally mandated loss of partnership tax
status, the holders of NHC general and limited partnership units approved a
plan of restructure whereby, on December 31, 1997, NHC converted from a
limited partnership to a corporation. All partnership units outstanding on
December 31, 1997 were effectively converted into shares of common stock.
The restructure from a limited partnership to a corporation had no effect on
the liquidity or financial condition of NHC.
Note 3 - Relationship with National Health Realty, Inc.:
Transfer of Assets--
On December 31, 1997, NHC transferred certain assets including
mortgage notes receivable (total book value of $94,439,000), the real
property of 16 long-term health care centers, six assisted living facilities
and one retirement center (total book value of $144,615,000) and related
liabilities (total book value of $86,414,000) to National Health Realty, Inc.
("NHR"), a publicly traded Maryland corporation qualified as a real estate
investment trust ("REIT") under federal laws, and NHR/OP, L.P. (the "Operating
Partnership"). NHR/OP, L.P. is a Delaware limited partnership which is the
operating entity of NHR. In exchange for the assets transferred, NHC
received 8,237,423 shares of common stock of NHR, which was all of the then
outstanding common stock of NHR. NHC distributed the common stock of NHR to
NHC's unitholders at the rate of one share for each unit outstanding on the
record date of December 31, 1997. In order to protect the REIT status of
NHR, certain NHC unitholders received 1,310,194 units of the Operating
Partnership rather than NHR shares.
NHR was incorporated on September 26, 1997 as a wholly-owned
subsidiary of NHC for the purpose of consummating the transactions described
herein. The distribution of NHR's common stock to NHC unitholders
effectively separated NHC and NHR into two independent public companies,
although the Boards of Directors are identical except for one additional
member on NHC's Board.
Leases--
Concurrent with NHC's conveyance of the real property to NHR, NHC
leased from NHR each of the 23 facilities. Each lease is for an initial term
expiring December 31, 2007, with two additional five year renewal terms at
the option of NHC, assuming no defaults. NHC accounts for the leases as
operating leases.
During the initial term and each renewal term, NHC is obligated to
pay NHR annual base rent on all 23 facilities of $15,485,000. In addition to
base rent, in each year after 1999, NHC must pay percentage rent to NHR equal
to 3% of the amount by which gross revenues of each facility in such later
year exceed the gross revenues of such facility in 1999. Each lease with NHR
is a "triple net lease" under which NHC is responsible for paying all taxes,
utilities, insurance premium costs, repairs and other charges relating to
the ownership of the facilities. NHC is obligated at its expense to maintain
adequate insurance on the facilities' assets.
NHC has a right of first refusal with NHR to purchase any of the
properties transferred from NHC should NHR receive an offer from an unrelated
party during the term of the lease or up to 180 days after termination of
the related lease.
At December 31, 1999, the approximate future minimum base rent
commitments to be paid by NHC on non-cancelable operating leases with NHR are
as follows:
2000 $15,485,000
2001 15,485,000
2002 15,485,000
2003 15,485,000
2004 15,485,000
Thereafter 46,455,000
Advisory Agreement--
Effective December 31, 1997, NHC entered into an Advisory Agreement
with NHR whereby services related to investment activities and day-to-day
management and operations are provided to NHR by NHC as Advisor. The Advisor
is subject to the supervision of and policies established by NHR's Board of
Directors.
Either party may terminate the Advisory Agreement on 90 days notice
at any time. NHR may terminate the Advisory Agreement for cause at any time.
For its services under the Advisory Agreement, NHC is entitled to
annual compensation of the greater of 2% of NHR's gross consolidated revenues
or the actual expenses incurred by NHC. During 1999 and 1998, NHC's
compensation under the Advisory Agreement was $506,000 and $471,000,
respectively.
Pursuant to the Advisory Agreement, NHR has agreed that as long as
both the NHR Advisory Agreement and the NHI Advisory Agreement are
obligations of NHC, NHR will only do business with NHC and will not compete
with NHI. As a result, NHR is severely limited in its ability to grow and
expand its business. Furthermore, NHC will not seek additional investments
to expand NHR's investment portfolio.
Tax Treatment of the Transfer--
The transfer of assets was treated as a nontaxable exchange under
Section 351 of the Internal Revenue Code of 1986, as amended. For federal
income tax purposes, no gain or loss was recognized by NHC or by its
unitholders upon the transfer of assets to NHR or upon the distribution of
the shares of NHR. The tax basis of shares of NHR received by NHC unitholders
in the distribution was $16.54 per share before a number of special tax
adjustments related to the price paid for NHC units and the length of time
such units were held. The tax basis in each share of NHR could not exceed
the overall basis in NHC units.
Note 4 - Relationship with National Health Investors, Inc.:
Leases--
On October 17, 1991, concurrent with NHC's conveyance of real
property to NHI, NHC leased from NHI the real property of 40 long-term care
centers and three retirement centers. Each lease is for an initial term
expiring December 31, 2001, with two additional five-year renewal terms at
the option of NHC, assuming no defaults. NHC accounts for the leases as
operating leases.
During the initial term and first renewal term of the leases, NHC
is obligated to pay NHI annual base rent on all 43 facilities of $15,238,000.
If NHC exercises its option to extend the leases for the second renewal term,
the base rent will be the then fair rental value as negotiated by NHC and NHI.
The leases also obligate NHC to pay as debt service rent all
payments of interest and principal due under each mortgage to which the
conveyance of the facilities was subject. The payments are required over
the remaining life of the mortgages as of the conveyance date, but only
during the term of the lease. Payments for debt service rent are being
treated by NHC as payments of principal and interest if NHC remains
obligated on the debt ("obligated debt service rent") and as operating
expense payments if NHC has been relieved of the debt obligation by the
lender ("non-obligated debt service rent"). See "Accounting Treatment of the
Transfer" for further discussion.
In addition to base rent and debt service rent, NHC must pay
percentage rent to NHI equal to 3% of the amount by which gross revenues of
each facility exceed the gross revenues of such facility in 1992.
Percentage rent for 1999 and 1998 was approximately $1,189,000 and $2,521,000,
respectively.
Each lease with NHI is a "triple net lease" under which NHC is
responsible for paying all taxes, utilities, insurance premium costs, repairs
and other charges relating to the ownership of the facilities. NHC is
obligated at its expense to maintain adequate insurance on the facilities'
assets.
NHC has a right of first refusal with NHI to purchase any of the
properties transferred from NHC should NHI receive an offer from an unrelated
party during the term of the lease or up to 180 days after termination of the
related lease.
Base rent expense to NHI was $15,238,000 in 1999, 1998 and 1997.
Non-obligated debt service rent to NHI was $5,491,000 in 1999 and $5,338,000
in 1998. At December 31, 1999, the approximate future minimum base rent,
non-obligated debt service rent, and obligated debt service rent commitments
to be paid by NHC on non-cancelable operating leases with NHI during the
initial term are as follows:
2000 29,290,000
2001 29,313,000
Thereafter ---
Advisory Agreement--
NHC has entered into an Advisory Agreement with NHI whereby services
related to investment activities and day-to-day management and operations are
provided to NHI by NHC as Advisor. The Advisor is subject to the supervision
of and policies established by NHI's Board of Directors.
Either party may terminate the Advisory Agreement on 90 days notice at
any time. NHI may terminate the Advisory Agreement for cause at any time.
For its services under the Advisory Agreement, NHC has recorded annual
compensation of $2,789,000, $3,310,000, and $3,101,000 in 1999, 1998 and 1997,
respectively. However, the payment of such annual compensation is conditional
upon NHI having sufficient funds from operations to pay annual dividends of
$2.00 per share and upon NHI paying such dividends. NHI met this condition
in 1999, 1998 and 1997.
Accounting Treatment of the Transfer--
NHC has accounted for the conveyance in 1991 of assets (and related
debt) to NHI and the subsequent leasing of the real estate assets as a
"financing/leasing" arrangement. Since NHC remains obligated on certain of
the transferred debt, the obligated debt and applicable asset balances have
been reflected on the consolidated balance sheets as "assets under arrangement
with other parties" and "debt serviced by other parties". The net book value
equity of the assets transferred has been transferred from NHC to NHI. As NHC
utilizes the applicable real estate over the lease term, its consolidated
statements of income will reflect the continued depreciation of the applicable
assets over the lease term, the continued interest expenses on the obligated
debt balances and the additional base and non-obligated debt service rents
(as an operating expense) payable to NHI each year. NHC has recovery
provisions from NHI if NHC is required to service the debt through a default
by NHI.
Release from Debt Serviced by Other Parties--
In 1997, NHI prepaid or NHC was released from its obligation on trans-
ferred debt in the amount of $15,569,000. Since NHC is no longer obligated
on this transferred debt, debt serviced by other parties and assets under
arrangement with other parties were reduced by $15,569,000 in 1997. The
leases with NHI provide that NHC shall continue to make non-obligated debt
service rent payments equal to the debt service including principal and
interest on the obligated debt which was prepaid and from which NHC has been
released.
Note 5 - Relationship With National Health Corporation:
Sale of Health Care Centers--
During 1988, NHC sold the assets (inventory, property and equipment) of
eight health care centers (1,121 licensed beds) to National Health Corporation
("National"), the administrative general partner of NHC at the time of the
sale, for a total consideration of $40,000,000. The consideration consisted of
$30,000,000 in cash and a $10,000,000 note receivable due December 31, 2007.
The note receivable earns interest at 8.5%. NHC has agreed to manage the
centers under a 20-year management contract for management fees comparable to
those in the industry. With the prior consent of NHC, National sold one
center to an unrelated third party in 1997 and two centers to an unrelated
third party in 1999; thus, NHC now manages five centers for National. NHC
has a receivable from National for management fees of approximately
$3,881,000 and $3,255,000 at December 31, 1999 and 1998, respectively.
NHC's basis in the assets sold was approximately $24,255,000. The
resulting profit of $15,745,000 was deferred and will be amortized into
income beginning with the collection of the note receivable (up to
$12,000,000) with the balance ($3,745,000) of the profit being amortized into
income on a straight-line basis over the management contract period.
As of December 31, 1999, National had borrowed $1,947,000 from NHC to
finance the construction of additions at two health care centers. The notes
require monthly principal and interest payments. The interest rate is equal
to the prime rate, and the notes mature in 2008.
Financing Activities--
During 1988, NHC obtained long-term financing of $8,500,000 for its
new headquarters building from National through the National Health
Corporation Leveraged Employee Stock Ownership Plan and Trust (the "ESOP").
The note requires quarterly principal and interest payments with interest at
9%. At December 31, 1999 and 1998, the outstanding balance on the note was
approximately $4,085,000 and $4,581,000, respectively. The building is owned
by a separate partnership of which NHC is the general partner and
building tenants are limited partners. NHC has guaranteed the debt service of
the building partnership.
In addition, NHC's $12,390,000 bank credit facility and the
$6,119,000 senior secured notes described in Note 11 were financed through
National and the ESOP. NHC's interest costs, financing expenses and
principal payments are equal to those incurred by National. During 1991, NHC
borrowed $10,000,000 from National. The term note payable requires quarterly
interest payments at 8.5%. The entire principal is due at maturity in 2008.
Payroll and Related Services--
The personnel conducting the business of NHC are employees of National,
which provides payroll services, provides employee fringe benefits, and
maintains certain liability insurance. NHC pays to National all the costs of
personnel employed for the benefit of NHC, as well as an administrative fee
($2,131,000 in 1999) equal to 1% of payroll costs. National maintains and
makes contributions to its ESOP for the benefit of eligible employees.
Note 6 - Other Revenues:
Revenues from management services include management fees, interest
income on notes receivable due from managed long-term care centers, and
revenues from other services provided to managed long-term care centers.
"Other" revenues include non-health care related earnings.
(in thousands)
Year Ended December 31 1999 1998 1997
- ---------------------- ---------------------------
Revenues from management services $20,866 $24,522 $38,339
Guarantee fees 534 581 628
Advisory fees from NHI and NHR 3,295 3,781 3,101
Dividends and other realized
gains on securities 2,287 1,498 1,728
Equity in earnings of unconsolidated
investments 230 197 201
Interest income 4,255 3,900 4,333
Other 2,417 2,476 4,184
$33,884 $36,955 $52,514
Note 7 - Earnings Per Share/Unit:
Basic earnings per share/unit is based on the weighted average
number of common shares/units outstanding during the year.
Diluted earnings per share/unit assumes the conversion of the subordi-
nated convertible notes and the exercise of options using the treasury stock
method. Net income is increased for interest expense on the subordinated
convertible notes.
The following table summarizes the earnings and the average number of
common shares/units used in the calculation of basic and diluted earnings per
share/unit:
(dollars in thousands, except per share/unit amounts)
Year Ended December 31 1999 1998 1997
- ----------------------- --------------------------------------
Basic:
Weighted average common shares/units 11,421,700 11,117,402 8,874,627
Net income (loss) $ 8,383 $ (6,399) $ 37,008
Earnings (loss) per common
share/unit, basic $ .73 $ (.58) $ 4.17
Diluted:
Weighted average common shares/units 11,421,700 11,117,402 8,874,627
Options --- --- 5,565
Subordinated convertible notes --- --- 1,958,375
Assumed average common shares/units
outstanding 11,421,700 11,117,402 10,838,567
Net income (loss) $ 8,383 $ (6,399) $ 37,008
Interest expense on subordinated
convertible notes --- --- 1,809
Net income (loss) assuming con-
version of subordinated con-
vertible notes $ 8,383 $ (6,399) $ 38,817
Earnings (loss) per common
share/unit, diluted $ .73 $ (.58) $ 3.58
For the years ended December 31, 1999 and 1998, the effect of options and
subordinated convertible notes have been excluded from the diluted earnings
per share as their effect was anti-dilutive.
Note 8 - 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:
(in thousands)
December 31 1999 1998
-------------------------------------
Fair Fair
Cost Value Cost Value
------- ------- ------- -------
Marketable equity securities $29,735 $22,608 $15,300 $18,644
U.S. government securities 1,555 1,536 1,109 1,109
Corporate bonds 6,570 6,315 3,454 3,454
$37,860 $30,459 $19,863 $23,207
The amortized cost and estimated fair value of marketable securities
classified as available for sale, by contractual maturity, are as follows:
(in thousands)
December 31 1999 1998
-----------------------------------
Fair Fair
Cost Value Cost Value
---------------- ---------------
Maturities:
Within 1 year $ 1,454 $ 1,447 $ --- $ ---
1 to 5 years 4,942 4,789 3,689 3,689
6 to 10 years 1,728 1,615 874 874
Other securities without
stated maturity 29,736 22,608 15,300 18,644
$37,860 $30,459 $19,863 $23,207
Proceeds from the sale of investments in debt and equity securities
during the years ended December 31, 1999 and 1998 were $41,000 and $220,000,
respectively. Gross investment gains of $10,000 were realized on these sales
during the year ended December 31, 1999. Gross investment losses of $13,000
were realized on these sales during the year ended December 31, 1998.
Realized gains and losses from securities sales are determined on the
specific identification of the securities.
Note 9 - Property, Equipment and Assets Under Arrangement with Other Parties:
Property and equipment, at cost, consist of the following:
(in thousands)
December 31 1999 1998
- -------------------------- ---------- ----------
Land $ 11,525 $ 9,697
Buildings and improvements 59,479 43,437
Furniture and equipment 81,389 74,655
Construction in progress 5,165 8,458
-------- --------
$157,558 $136,247
Assets under arrangement with other parties, net of accumulated
depreciation, consist of the following:
(in thousands)
December 31 1999 1998
- --------------------- -------- ----------
Land $ 477 $ 517
Buildings and improvements 2,833 3,385
Fixed equipment 165 218
------- --------
$ 3,475 $ 4,120
Note 10 - Notes Receivable:
Notes receivable generally consist of loans and accrued interest to
managed health care centers and retirement centers for construction costs,
development costs incurred during construction and working capital during
initial operating periods. The notes generally require monthly payments with
maturities beginning in 2000 through 2007. Interest on the notes is generally
at prime plus 2%. The collateral for the notes consists of first and second
mortgages, certificates of need, personal guarantees and stock pledges.
Note 11 - Long-Term Debt, Debt Serviced by Other Parties and Lease Commitments:
Long-Term Debt and Debt Serviced by Other Parties--
Long-term debt and debt serviced by other parties consist of the
following:
<TABLE>
<CAPTION>
Final
Weighted Average Matur- Debt Serviced by Long-Term
Interest Rate ities Other Parties Debt
(in thousands) ------------- ----- ---------------- ---------------
December 31 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bank credit facility,
interest payable
periodically, principal variable,
due at maturity 6.3% 2000 $ --- $ --- $ 2,000 $20,000
Bank credit facility,
principal variable,
and interest payable
quarterly 5.5 2009 --- --- 12,390 13,273
Senior secured notes,
principal and interest
payable semiannually 8.4 2005 --- --- 6,119 7,751
Notes and other obligations,
principal and interest
payable periodically 7.4 2000-2019 4,136 4,238 6,956 8,261
First mortgage revenue
bonds, principal payable
periodically, variable,
interest payable monthly 5.1 2000-2010 11,770 12,458 --- ---
Unsecured term note payable
to National, interest
payable quarterly,
principal payable
at maturity 8.5 2008 --- --- 10,000 10,000
Mortgage notes, principal &
interest payable monthly 10.8 2004 --- --- 13,763 ---
15,906 16,696 51,228 59,285
Less current portion (995) (805) (5,492) (2,974)
$14,911 $15,891 $45,736 $56,311
</TABLE>
The $12,390,000 bank credit facility and the $6,119,000 senior secured
notes were borrowed through National. NHC granted certain credits and
interest rate concessions related to its management fees from National in
obtaining these loans.
To obtain the consent of various lenders to the transfer of assets, NHI
guaranteed certain NHC debt which was not transferred to NHI. A default by
NHI under its obligations would default the debt or guarantees of NHC.
The aggregate maturities of long-term debt and debt serviced by other
parties for the five years subsequent to December 31, 1999 are as follows:
Long-Term Debt Serviced
Debt By Other Parties Total
2000 $ 5,492,000 $ 995,000 $ 6,487,000
2001 2,812,000 853,000 3,665,000
2002 2,874,000 900,000 3,774,000
2003 2,234,000 993,000 3,227,000
2004 13,705,000 1,161,000 14,866,000
Certain property and equipment of NHC and NHI are pledged as collateral
on long-term debt or capital lease obligations. Other property and assets
are available for use as collateral as needed.
Certain loan agreements require maintenance of specified operating
ratios as well as specified levels of cash held in escrow, working capital
and shareowners' equity by NHC and NHI. All such covenants have been met by
NHC, and management believes that NHI is in compliance with the loan covenants.
Lease Commitments--
Operating expenses for the years ended December 31, 1999, 1998, and 1997
include expenses for leased premises and equipment under operating leases of
$46,757,000, $46,052,000, and $26,396,000, respectively. See Notes 3 and 4
for the approximate future minimum rent commitments on non-cancelable
operating leases with NHR and NHI.
Note 12 - Subordinated Convertible Notes:
Notes--
At December 31, 1999, none of the 6% subordinated convertible notes (the
"notes") remain outstanding. The notes were convertible into NHC shares and
also into an equal number of NHR shares. During 1999, $710,000 of the notes
were converted into 46,690 shares and $4,000 of the notes were paid.
1997 Debentures--
On October 15, 1997 NHC issued $20,000,000 of 5.75% senior convertible
subordinated debentures (the "1997 debentures") due June 30, 2004. At
December 31, 1997, all of the 1997 debentures were converted into common
shares of NHC at a conversion price of $36.00 per share. NHC issued 555,555
shares of common stock for the 1997 debenture conversions.
Note 13 - Income Taxes:
The provision (benefit) for income taxes is comprised of the following
components:
(in thousands)
Year Ended December 31 1999 1998
- ------------------------- -------------------------------------
Taxes Payable
Federal $ 2,061 $ 5,578
State 60 797
------- ------
2,121 6,375
Deferred Tax
Provision (Benefit)
Federal 3,084 (8,802)
State 447 (1,258)
------- ------
3,531 (10,060)
Income Tax Provision ------- -------
(Benefit) $ 5,652 $(3,685)
The deferred tax assets and liabilities, at the respective
income tax rates, are as follows:
(in thousands)
December 31 1999 1998
----------------------------
Current deferred
tax asset:
Allowance for doubtful
accounts receivable $ 3,322 $ 2,552
Accrued liabilities 1,974 1,583
Unrealized losses on
marketable securities 2,935 ---
------ ------
8,231 4,135
Current deferred tax liability:
Unrealized gains on marketable
securities --- (1,337)
Other (299) (154)
------ ------
(299) (1,491)
Net current deferred tax asset $ 7,932 $ 2,644
Noncurrent deferred tax asset:
Financial reporting
depreciation in excess
of tax depreciation $ 1,578 $ 870
Deferred gain on sale of
assets 5,431 5,510
Deferred guarantee fees 336 1,146
Net operating loss carryforwards --- 4,095
Other 481 753
Net noncurrent deferred ------ ------
tax asset $ 7,826 $12,374
The provision for income taxes is different than the amount computed
using the applicable statutory federal and state income tax rate as follows:
(in thousands)
Year Ended December 31 1999 1998
- ------------------------- ------------------------
Tax expense (benefit) at
statutory rates $ 5,474 $(4,034)
Amortization of goodwill 49 135
Other permanent differences 129 214
Effective tax expense (benefit) $ 5,652 $(3,685)
Note 14 - Stock Option Plan:
NHC has incentive option plans which provide for the granting of options
to key employees and directors to purchase shares of common stock at no less
than market value on the date of grant. The options may be exercised immedi-
ately, but NHC may purchase the shares of stock at the grant price if
employment is terminated prior to six years from the date of grant. The
maximum term of the options is five years. The following table summarizes
option activity:
Number of Weighted Average
Shares/Units Exercise Price
Options outstanding at
December 31, 1996 390,000 $30.99
Options granted 20,000 46.25
Options exercised 376,000 31.13
Options expired 9,000 21.67
Options outstanding at
December 31, 1997 25,000 40.05
Options granted 40,000 39.88
Options exercised 5,000 38.63
Options outstanding at
December 31, 1998 60,000 29.70
Options granted 40,000 9.38
Options outstanding at
December 31, 1999 100,000 $25.56
At December 31, 1999, all options outstanding are exercisable. Exercise
prices on the exercisable options range from $9.38 to $39.88. The weighted
average remaining contractual life of options outstanding at December 31,
1999 is 3.5 years.
Additionally, NHC has an employee stock purchase plan which allows
employees to purchase shares of stock of NHC through payroll deductions.
The plan allows employees to terminate participation at any time.
NHC has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). As a result, no compensation cost has been recognized in the
consolidated statements of income for NHC's stock-based compensation plans.
Based on the number of options granted and the historical and expected future
trends of factors affecting valuation of those options, management believes
that the additional compensation cost, as calculated in accordance with
SFAS 123, has no effect on NHC's earnings per share.
In connection with the exercise of certain stock options, NHC has received
interest-bearing (ranging from 5% to 6.25%), full recourse notes in the
amount of $16,799,000 at December 31, 1999. The notes are secured by shares
of NHC, shares of NHR, or shares of NHI having a fair market value of not
less than 150% of the amount of the note. The principal balances of the
notes are reflected as a reduction of shareowners' equity in the
consolidated financial statements.
Note 15 - Contingencies and Guarantees:
FCC Litigation--
In October 1998, NHC and Florida Convalescent Centers, Inc. ("FCC")
settled certain litigation which had been ongoing since 1996.
Under the terms of the settlement, NHC purchased two of the 16 FCC
long-term health care centers and related assets through the assumption of
approximately $15.9 million of debt on those two centers. The centers NHC
purchased are Palm Garden of Pensacola, Florida with 180 beds and Palm Garden
of Lake City, Florida with 120 beds. The purchase was consummated effective
May 1, 1999. The purchase price for the two centers was allocated to the
underlying assets based on their relative fair market values. The
consolidated statement of income for 1999 includes the results of operations
of the centers since May 1, 1999.
Also under the terms of the settlement, NHC paid a one-time cash
settlement of $15.0 million and further agreed to accept any adjustment to
previously filed Medicare cost reports and routine cost limit exception
requests related to all 16 FCC centers and indemnify FCC for any noninsurance
covered liability claims. In return, FCC transferred all of its rights to
Medicare receivables to NHC. Finally, FCC had the right to cancel the
management contracts for the remaining 14 centers. The management contracts
were terminated July 31, 1999.
As disclosed at the time of settlement, the loss of the management
contract and related revenues from these 14 facilities has had 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.
Braeuning Litigation--
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 Medicare 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 "retaliatorily discharged" from his position due to the
filing of the suit. In a March 13, 1998 order 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
that casts significant doubt on Mr. Braeuning's likelihood of success on the
merits." The individual plaintiff and defendant have currently agreed to stay
any proceedings on this allegation while NHC finalizes an internal review of
nursing time allocations.
In October 1996, two managed centers in Florida were audited by represen-
tatives 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 Braeuning 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 other states in which NHC operates) as part of Operation Restore
Trust.
In regard to the initial allegations contained in the lawsuit, NHC
believes that the cost report information of its centers has been either
appropriately filed or, upon amendment, will reflect adjustments only for the
correction of unintentional misallocations. Prior to the filing of the suit,
NHC had commenced an in-depth review of the nursing time allocation process
at its owned, leased and managed centers. 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. All cost report years in
question will be reviewed prior to there being further action in this matter
at the judicial level. The cost report periods under review include periods
from 1991 through 1996, plus the 1997 reports as they were initially filed.
The self audit of years 1994 through 1996 has been finalized, and the parties
are discussing audit ratio methodologies which could be applied to years 1991
through 1993.
Adjustments to the reimbursable costs claimed will be the responsibility
of the center where costs were incurred, whether owned, leased or managed by
NHC. Under the terms of NHC's settlement with FCC as discussed previously,
NHC has agreed to accept any adjustments to previously filed Medicare cost
reports and routine cost limit exception requests related to the 16 FCC centers.
Negative adjustments to other managed centers would reduce NHC's management fee
(6% of net revenue), while adjustments to owned or leased centers would
directly impact NHC's consolidated 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 Braeuning lawsuit. An adverse determination in the
Braeuning lawsuit could subject NHC to settlements which could have a
material negative impact on the financial position, results of operations
and cash flows of NHC.
Costs associated with the aforementioned litigation have been included
in the "litigation settlement and other charges" caption of the 1998
consolidated statement of income. The $28,084,000 includes the $15,000,000
one-time cash settlement related to the FCC lawsuit and an additional
$13,084,000 charge for the assumption of liabilities, expected litigation
charges and other liabilities.
Professional Liability and Other Insurance--
NHC carries a professional liability insurance policy for coverage from
liability claims and losses incurred in its health care business. The policy
is a fixed premium and occurrence form policy and has no provisions for a
retrospective refund or assessment due to actual loss experience.
The entire 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 December 31, 1999, the Company and/or its managed centers
are defendants in 79 such lawsuits in Florida, compared to 29 such lawsuits
in all other states combined.
On March 31, 1999, after the close of business, the insurance carrier
covering both NHC and a Florida based six facility nursing home chain managed
by NHC contacted NHC's Florida counsel to advise them that a jury in a
patient care lawsuit had returned a verdict in excess of professional
liability policy limits in compensatory damages, and the jury indicated that
punitive damages would be assessed against NHC. Prior to the verdict, 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, who had already been substantially damaged by the carrier's failure
to settle the case within policy limits. 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 NHC's umbrella policy issued for separate
calendar years, NHC has filed for declaratory judgment in the Chancery Court
of Rutherford County, Tennessee asking 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 has moved the
case into the federal district court in Nashville, Tennessee. In the
interim, York Hannover filed for bankruptcy protection. The court appointed
trustee for York Hannover has filed a similar lawsuit against the insurance
carrier in the Florida bankruptcy court. When the issue is decided, if the
insurance carrier asserts a claim against NHC and is successful in requiring
NHC to pay any excess over the covered amount, the resulting payment would
have a material impact on NHC's earnings and cash flows.
Due to 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
(28 of which are in Florida currently, plus 14 FCC centers from prior years)
has increased from $1,995,000 in 1998 to $3,200,000 in 1999. Additional
increases in premiums and deductible amounts will also occur for policy year
2000. Additionally, each center now has a significant per claim deductible,
with the deductible being capped in the aggregate for all owned and managed
centers at a total of $3,180,000 for the policy year ended December 31, 1999.
Given the current legal environment in the State of Florida, plus the
unapproved and bad faith settlement entered into by NHC's carrier in the
previously discussed York Hannover case, NHC believes there is a potential of
uninsured liability in excess of insurance coverage for the years 1995 and
1996, 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 flows.
NHC has assumed certain risks related to health insurance and workers'
compensation insurance claims of the employees of National and its managed
facilities. The liability for reported claims and estimates for incurred but
unreported claims of the managed facilities is $13,327,000 and $9,066,000 at
December 31, 1999 and December 31, 1998, respectively. The liability is
included in other current liabilities in the consolidated balance sheets.
NHC remits for the claims with regards to National's employees utilized
by NHC on a monthly basis. The amounts are subject to adjustment for actual
claims incurred.
Guarantees and Related Events--
In order to obtain management agreements and to facilitate construction or
acquisition of certain health care centers which NHC manages for others, NHC
has guaranteed some or all of the centers' first mortgage bond debt
(principal and interest). 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 amount outstanding under
the guarantees is approximately $66,090,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average rate
of 7.3% at December 31, 1999. In management's opinion, these guarantee fees
approximate fees that NHC would currently charge to enter into similar
guarantees.
All of the guaranteed indebtedness is secured by first mortgages,
pledges of personal property, accounts receivable and, in certain instances,
by the personal guarantees of the owners of the facilities. The borrower has
granted second mortgages over the relevant properties in favor of NHC. Such
rights may be enforced if NHC is required to pay under
its guarantees.
On October 15, 1999, The Bank of Tokyo-Mitsubishi gave NHC written notice
of default on NHC's guarantee of approximately $9,800,000 of tax exempt bonds
secured by The Bank of Tokyo-Mitsubishi's letter of credit and demanded
payment. NHC has offered to collateralize its guarantee by pledging approxi-
mately $4,000,000 of marketable securities with The Bank of Tokyo-Mitsubishi
to leave its letter of credit outstanding through April 1, 2001. The Bank
has not accepted this offer. The bonds are also secured by first mortgages
on two licensed nursing homes owned by FCC and leased to Integrated Health
Services, Inc. Although NHC does not believe it will ultimately have to
sustain a loss on this guarantee, it could experience some negative arbitrage
which would adversely impact its cash flows.
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 $5,000,000. The centers are owned by Stockbridge Investment
Partners, Inc. and its subsidiary York Hannover Nursing Centers, Inc.
(collectively "York Hannover"). Events leading to the foreclosure included
the violation of the financial covenants contained in the first mortgage loan
agreement and the failure to make timely payments of principal and interest.
On June 6, 1999, the owners placed these companies into a voluntary Chapter
11 Bankruptcy proceeding, and a Trustee for the estate was appointed in August
1999.
NHC was called upon by the first mortgage lender to either make payment
in full under NHC's guarantee, or collateralize the same. The guarantee was
collateralized at June 30, 1999 with marketable securities in the approximate
amount of the guarantee. On December 30, 1999, the first mortgage lender
purchased from York Hannover for approximately $25,900,000 (the then current
first mortgage balance) all of the real estate, property and equipment of the
six long-term health care centers. However, NHC could still be required to
make payment under the guarantee. If the guarantee is ultimately called, the
amount of NHC's payment depends upon the underlying value of the properties.
Any such payments by NHC could have a material adverse impact on NHC's
earnings, financial position and cash flows.
NHI has guaranteed certain of the debts of NHC. NHC has agreed to
indemnify and hold harmless NHI against any and all loss, liability or harm
incurred by NHI as a result of having to perform under its guarantee of any
or all of the guaranteed debt.
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. NHC has
been advised by the debtor that the revenue reductions imposed by the
Balanced Budget Act of 1997 have resulted in Lenox's inability to reimburse
its rehabilitation service providers such as NHC. The debt is collateralized
by second mortgages on certain licensed nursing facilities, a first lien on
certain accounts receivables, and the assignment of a number of limited
partnership and corporate shareholder interests.
NHC also manages nine other nursing homes owned in part by Mr. Tom Clarke,
the owner of Lenox Healthcare, Inc. Six of these properties (the York
Hannover centers) are currently in bankruptcy and have been purchased,
effective December 30, 1999, by the first mortgage holder as discussed above.
Two of the nine facilities are not in bankruptcy and are in compliance with
all the terms and conditions of the applicable management agreements. The
third facility is located in Carthage, Tennessee and may be impacted by the
bankruptcy.
NHC is currently an 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 is evaluating the probability of recovering and
collecting from these entities, but believes that a substantial portion will
not be collectable. 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 will continue to evaluate the carrying value of these investments.
Note 16 - Disclosures about Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical to
estimate that value:
Cash and cash equivalents; Cash held by trustees; Accounts receivable;
Bond reserve funds, mortgage replacement reserves and other deposits;
Accounts payable and Accrued liabilities--
The fair value approximates the carrying amount because of the short
maturity or the nature of these instruments.
Marketable securities--
The fair value is estimated based on quoted market prices and is the
same as the carrying amount.
Notes receivable--
The fair value of NHC's notes receivable is estimated based on the
current rate offered by NHC or comparable parties for the same or similar
types of notes receivable of the same or similar maturities and is approxi-
mately the same as the carrying amount.
Long-term debt and debt serviced by other parties--
The fair value is estimated based on the current rates offered to NHC
for similar debt of the same maturities and is approximately the same as the
carrying amounts.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports, included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 333-61451 and No. 333-61459
filed post-effective Amendment No. 1 to Form S-4 on Form S-8 Registration
Statement No. 33-9881.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,726,000
<SECURITIES> 30,459,000
<RECEIVABLES> 52,337,000
<ALLOWANCES> (10,278,000)
<INVENTORY> 5,010,000
<CURRENT-ASSETS> 107,496,000
<PP&E> 157,558,000
<DEPRECIATION> (61,107,000)
<TOTAL-ASSETS> 240,319,000
<CURRENT-LIABILITIES> 92,659,000
<BONDS> 0
0
0
<COMMON> 115,000
<OTHER-SE> 53,521,000
<TOTAL-LIABILITY-AND-EQUITY> 240,319,000
<SALES> 0
<TOTAL-REVENUES> 440,145,000
<CGS> 0
<TOTAL-COSTS> 426,110,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,353,000
<INCOME-PRETAX> 14,035,000
<INCOME-TAX> 5,652,000
<INCOME-CONTINUING> 8,383,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,383,000
<EPS-BASIC> .73
<EPS-DILUTED> .73
</TABLE>
