FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended June 30, 2000 Commission file number 333-37185
NATIONAL HEALTHCARE CORPORATION
(Exact name of registrant as specified in its Charter)
Delaware 52-2057472
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-2020
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d), of
the Securities Exchange Act of 1934 during the preceding 12 months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
11,536,096 shares were outstanding as of July 31, 2000.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(in thousands) (in thousands)
REVENUES:
Net patient revenues $ 108,343 $ 98,189 $ 217,126 $ 197,436
Other revenues 7,865 9,533 14,483 18,215
Net revenues 116,208 107,722 231,609 215,651
COSTS AND EXPENSES:
Salaries, wages and
benefits 65,300 59,779 129,432 121,340
Other operating 29,660 27,912 60,130 55,160
Rent 12,080 11,986 23,969 22,954
Depreciation and amorti-
zation 3,347 2,912 6,675 5,719
Interest 1,617 1,330 3,309 2,916
Total costs and expenses 112,004 103,919 223,515 208,089
Income Before Income Taxes 4,204 3,803 8,094 7,562
Income Tax Provision (1,723 ) (1,553) (3,234) (3,075)
NET INCOME $ 2,481 $ 2,250 $ 4,860 $ 4,487
EARNINGS PER SHARE:
Basic $ .21 $ .20 $ .42 $ .39
Diluted $ .21 $ .20 $ .42 $ .39
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,545,392 11,429,787 11,549,817 11,413,390
Diluted 11,545,782 11,430,050 11,550,012 11,421,191
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these statements.
2
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
June 30 December 31
2000 1999
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 7,098 $ 4,054
Cash held by trustees 3,553 4,672
Marketable securities 33,413 30,459
Accounts receivable, less allowance for
doubtful accounts of $11,512 and $10,278 51,531 52,337
Notes receivable 602 602
Inventory at lower of cost (first-in,
first-out method) or market 4,923 5,010
Deferred income taxes 9,582 7,932
Prepaid expenses and other assets 4,739 2,430
Total current assets 115,441 107,496
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 163,814 157,558
Less accumulated depreciation and
amortization (67,007) (61,107)
Assets under arrangement with other parties 3,169 3,475
Net property, equipment and assets under
arrangement with other parties 99,976 99,926
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 785 757
Unamortized financing costs 784 837
Notes receivable 14,689 3,381
Notes receivable from National 12,255 12,198
Deferred income taxes 8,467 7,826
Minority equity investments and other 10,512 7,898
Total other assets 47,492 32,897
$262,909 $240,319
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated balance sheets.
3
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
LIABILITIES AND SHAREOWNERS' EQUITY
June 30 December 31
2000 1999
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,256 $ 4,487
Short-term borrowings 20,000 2,000
Trade accounts payable 10,773 13,285
Accrued payroll 25,964 25,951
Amount due to third-party payors 28,415 26,923
Accrued interest 272 276
Other current liabilities 23,608 19,737
Total current liabilities 113,288 92,659
Long-term debt, less current portion 43,996 45,736
Debt serviced by other parties, less
current portion 14,828 14,911
Other noncurrent liabilities 11,536 11,536
Minority interests in consolidated subsidiaries 707 698
Deferred income 22,169 21,143
Commitments, contingencies And guarantees
SHAREOWNERS' EQUITY:
Preferred stock, $.01 par value;
10,000,000 shares authorized;
none issued or outstanding --- ---
Common stock, $.01 par value;
30,000,000 shares authorized;
11,548,996 and 11,553,496 shares,
respectively, issued and outstanding 115 115
Capital in excess of par value,
less notes receivable 54,287 54,250
Retained earnings 6,844 1,984
Unrealized losses on securities (4,861) (2,713)
Total shareowners' equity 56,385 53,636
$262,909 $ 240,319
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated balance sheets.
4
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
2000 1999
(in thousands)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 4,860 $ 4,487
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,280 5,331
Provision for doubtful accounts receivable 1,234 846
Amortization of intangibles and deferred charges 419 496
Amortization of deferred income (236) (335)
Equity in earnings of unconsolidated investments (112) (115)
Distributions from unconsolidated investments 144 95
Deferred income taxes (837) 975
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (428) 1,372
(Increase) decrease in inventory 87 (397)
Increase in prepaid expenses and other assets (2,309) (2,192)
Increase (decrease) in trade accounts payable (2,512) 1,503
Increase (decrease) in accrued payroll 13 (2,025)
Increase (decrease) in amounts due to third
party payors 1,492 (1,944)
Increase (decrease) in accrued interest (4) 257
Increase in other current liabilities 3,871 5,096
Increase in entrance fee deposits 1,262 1,358
Net cash provided by operating activities 13,224 14,808
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (6,330) (15,991)
Investment in notes receivable (13,560) (1,235)
Collection of notes receivable 2,195 9,185
Increase in minority equity investments and other --- (110)
Increase in marketable securities (6,556) (7,212)
Net cash used in investing activities (24,251) (15,363)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 18,000 14,095
Decrease in cash held by trustee 1,119 1,741
Decrease in minority interests in subsidiaries (2,991) (28)
Increase in bond reserve funds, mortgage
replacement reserves and other deposits (28) (84)
Issuance of common shares 6 84
Collection of receivables 345 1
Purchase of common shares (314) ---
Payments on debt (2,053) (22,420)
Increase in financing costs (13) (217)
Net cash provided by (used in) financing activities 14,071 (6,828)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,044 (7,383)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,054 12,630
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,098 $ 5,247
Supplemental Information:
Cash payments for interest expense $ 3,313 $ 2,659
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
5
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
2000 1999
(in thousands)
During the six months ended June 30, 1999,
$710,000, of convertible subordinated
debentures were converted into 46,690
shares of common stock:
Convertible subordinated debentures $ --- $ (710)
Financing costs --- 47
Accrued interest --- (8)
Common stock --- ---
Capital in excess of par value --- 671
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
6
NATIONAL HEALTHCARE CORPORATION
Interim Condensed Consolidated Statements of Shareowners' Equity
(in thousands, except share and unit amounts)
Unrealized Total
Receivables Gains Share-
Common Stock from Sale Paid in Retained (Losses)on Owners'
Shares Amount of Shares Capital Earnings Securities Equity
Balance at 12/31/99 11,553,496 $ 115 $(16,799) $71,049 $ 1,984 $(2,713) $ 53,636
Net income --- --- --- --- 4,860 --- 4,860
Unrealized losses on
securities --- --- --- --- --- (2,148) (2,148)
Total Comprehensive Income 2,712
Shares sold 1,100 --- --- 6 --- --- 6
Collection of receivables --- --- 345 --- --- --- 345
Shares repurchased (18,500) --- --- (314) --- --- (314)
Balance at 6/30/00 11,536,096 $ 115 $(16,454) $70,741 $ 6,844 $(4,861) $ 56,385
Balance at 12/31/98 11,378,558 $ 114 $(16,807) $69,645 $ (6,399) $ 3,762 $ 50,315
Net income --- --- --- --- 4,487 --- 4,487
Unrealized losses on
securities --- --- --- --- --- (1,569) (1,569)
Total Comprehensive Income 2,918
Shares sold 4,546 --- --- 84 --- --- 84
Shares issued in conversion
of convertible debentures
to common shares 46,690 --- --- 671 --- --- 671
Balance at 6/30/99 11,429,794 $ 114 $(16,806) $70,400 $ (1,912) $ 2,193 $ 53,989
The accompanying notes to interim condensed consolidated financial
statements are an integral part of these consolidated statements.
7
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements of National HealthCare Corporation ("NHC") for
the six months ended June 30, 2000 and 1999, which have not been examined by
independent public accountants, reflect, in the opinion of management, all
adjustments necessary to present fairly the data for such periods. The
results of the operations for the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ended December 31, 2000. The interim condensed balance sheet at
December 31, 1999 is taken from the audited financial statements at that date.
The interim condensed financial statements should be read in conjunction with
the consolidated financial statements, including the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in NHC's Form 10-K for the year ended December 31, 1999.
Note 2 - OTHER REVENUES:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(in thousands)
Revenue from managed centers $ 4,205 $ 5,647 $ 7,272 $11,569
Guarantee fees 87 123 208 255
Advisory fee from NHI 722 704 1,441 1,407
Advisory fee from NHR 125 118 244 236
Earnings on securities 1,172 387 2,280 785
Equity in earnings of
unconsolidated investments 51 56 112 115
Interest income 739 1,077 1,413 1,834
Other 764 1,421 1,513 2,014
$ 7,865 $ 9,533 $14,483 $18,215
Revenues from managed centers include management fees and interest
income on notes receivable from the managed centers. "Other" revenues include
non-health care related earnings.
Note 3 - INVESTMENTS IN MARKETABLE SECURITIES AND PREFERRED STOCK:
NHC considers its investments in marketable securities as available for
sale securities and unrealized gains and losses are recorded in shareowners'
equity in accordance with Statement of Financial Accountant Standards No. 115.
8
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
On March 31, 2000, NHC acquired $3,000,000 of National Health Investors,
Inc. ("NHI") Preferred Stock, convertible at the lesser of $12.00 per share or
the then trading value per share into NHI common stock after December 31,
2000. The shares pay dividends at the rate of 8% through June 30, 2000, at
the rate of 10% from July 1, 2000 through September 30, 2000, and at the rate
of 12% thereafter. The Preferred Stock, which is not listed on a stock
exchange, is considered a non-marketable security and is recorded at cost.
Realized gains and losses from securities sales are determined on the
specific identification of the securities.
Note 4 - GUARANTEES AND CONTINGENCIES:
Guarantees and Related Events
In order to obtain management agreements and to facilitate the
construction or acquisition of certain health care centers which NHC manages
for others, NHC has guaranteed some or all of the debt (principal and
interest) on those centers. For this service, NHC charges an annual guarantee
fee of 1% to 2% of the outstanding principal balance guaranteed, which fee is
in addition to NHC's management fee. The principal amounts outstanding under
the guarantees is approximately $42,122,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average rate of
6.9% at June 30, 2000.
As a result of the health care industry's generally weak financial
position, the bankruptcy of Integrated Health Services Corporation (the lessee
for fourteen facilities formerly managed by NHC) in 1999, the uncertainty
engendered by the pendency of the Whistleblower lawsuit discussed in Note 5,
and the cancellation of NHC's inability policy as discussed below, 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. ("FCC") on fourteen
facilities formerly 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.
9
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Toronto Dominion Bank had approximately $14 million in a Letter of
Credit securing tax-exempt notes on six FCC notes. On April 25, 2000,
FCC replaced the Toronto Dominion Bank Letter of Credit with one issued
by Norwest Bank Minnesota N.A. As a result, NHC was released from this
guarantee in April, 2000, except for $3,350,000 which is a secured lien
on NHC's owned 180 bed nursing home in Pensacola, Florida.
The Bank of Tokyo/Mitsubishi ("BOTM") had an approximate $9 million
Letter of Credit on two FCC centers, which are also guaranteed by NHC.
On April 25, 2000, FCC replaced the BOTM Letter of Credit with one
issued by Norwest Bank Minnesota N.A. NHC was released from its
guarantee on this indebtedness.
York Hannover Bankruptcy: NHC had originally guaranteed $5 million of
that certain first mortgage debt made by York Hannover Nursing Centers,
Inc. ("York Hannover") to NHI in December 1993. York Hannover sought
bankruptcy protection in April 1999 and on December 30, 1999, the six
Florida nursing facilities, which secured the NHI note, were acquired by
a subsidiary of the first mortgage lender. NHC has remained as a
limited ($3 million) guarantor of the outstanding debt plus the
guarantor on a $2,000,000 working capital note, all collateralized by
the pledge of certain marketable securities in the approximate amount of
$5 million. NHC is no longer managing these facilities. The failure of
these facilities to make their payments on the first mortgage notes
could result in the acceleration of that indebtedness and an attempt by
the first mortgage holder and/or working capital lender to collect their
total of $5 million in guarantees from NHC or the collateral now held by
the first mortgage lender.
Customer Bankruptcies
On November 5, 1999, NHC was informed that a substantial debtor of its
rehabilitation division had filed for Chapter 11 protection in the United
States Bankruptcy/District Court in Wilmington, Delaware. The debtor is an
affiliate of Lenox Healthcare, Inc. of Pittsfield, Massachusetts. The debt is
collateralized by second mortgages on certain licensed nursing facilities, a
first lien on certain accounts receivable, and the assignment of a number of
limited partnership and corporate shareholder interests. NHC does not
currently believe there is any chance of significant recovery in this bankrupt
estate and has previously reserved 100% of the accounts receivable.
10
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
NHC also manages three other nursing homes owned in part by Mr. Tom
Clarke, the owner of Lenox Healthcare, Inc. Two of the three facilities are
not in bankruptcy and are in compliance with all the terms and conditions of
the Management Agreement. The third managed facility is located in Carthage,
Tennessee and although this management agreement has been rejected by the
debtor in possession, the property is still being managed by NHC on a month
to month basis.
Professional Liability Claims
Due to unusual statutory provisions in the State of Florida as well as
an active and specialized plaintiff's bar, the entire long-term care industry
in that state has seen a drastic increase in liability claims, reserves,
settlements, and judgments over the last several years. As a result, the
Company's professional liability insurance premium for its owned and managed
centers (22 of which are in Florida currently) has increased from $1,995,000
in 1998 to $3,200,000 in 1999 and $6,700,000 in 2000. Prior to 1999, coverage
was secured on a first dollar basis (no deductible). For policy
years 1999 and 2000, all owned centers have a significant per claim deductible
which is capped in the aggregate at $1,225,000 for policy year 1999 and
$2,000,000 for policy year 2000.
On June 28, 2000, Caliber One, the Company's malpractice carrier, gave
NHC 90 days notice of the cancellation of its professional liability policy in
all states in which NHC does business. NHC believes that commercially
reasonable coverage will be obtained by September 28, 2000, for all states
except Florida. Consequently, the Company has announced that it is
reviewing several alternatives, the most likely being a withdrawal from the
operational management of Florida properties, two of which are owned, 10 of
which are managed for third parties, and 10 of which are leased from either
NHI or NHR. Given the current legal environment, significant additional
premiums and self insured retentions going forward in the balance of states in
which NHC operates may be expected. Given the current legal environment in
the State of Florida, the Company believes there is a potential of uninsured
liability in excess of insurance coverage for the years 1994 through 2000,
which amount is not quantifiable at the present time. Any
judgments or settlements above the Company's specific center and umbrella
coverage may have a material adverse impact on NHC's financial position, cash
flow and results of operations.
11
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 5 - LEGAL PROCEEDINGS:
Braeuning vs. NHC
NHC was a defendant in a lawsuit styled Braeuning, et al vs.
National HealthCare L.P., et al filed "under seal" in the U.S. District Court
of the Northern District of Florida on April 9, 1996. The government
participated as an intervening plaintiff. By agreement,
the suit was moved from the Pensacola District Court to the Tampa,
Florida, District Court and has now been dismissed, subject to court approval
of a settlement agreement. The suit alleged that NHC submitted cost reports
and routine cost limit exception requests containing "fraudulent allocation of
routine nursing services to ancillary service cost centers" and also alleged
that NHC improperly allocated skilled nursing service hours in four managed
centers, all in the state of Florida. The suit was filed under the Qui Tam
provisions of the Federal False Claims Act, commonly referred to as the
"Whistleblower Act". NHC denied all allegations.
In regard to the allegations contained in the Braeuning lawsuit, NHC
believes that the cost report information of the centers has been either
appropriately filed or, upon amendment, will reflect adjustments for, among
other items, i) the correction of unintentional misallocations; ii) instances
in which the self audit process has had to use different source documents due
to loss or misplacement of the original source documents and iii)
recalculation of Director of Nursing/Assistant Director of Nursing time based
upon indirect allocation percentages rather than time studies, as were
originally used. Prior to the filing of the suit, NHC had commenced an
in-depth review of the nursing time allocation process at its owned, leased and
managed centers. A number of amended cost reports have been filed and NHC has
finalized the self-audit process for years 1995 and 1996. NHC's self audit
process was approved by the plaintiffs and NHC retained a nationally
recognized accounting firm to review the self audit process. The cost report
periods reviewed include 1991 through 1996. The Company has reached a
tentative agreement with the Department of Justice and the Health Care
Financing Administration on the use of certain audit ratios to be used to
calculate the amount of Medicare overpayment or underpayment for years 1991
through 1994; thus avoiding a continuation of the costly self audit process.
12
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Adjustments to the reimbursable costs claimed will be the responsibility
of the center where costs were incurred, whether owned, leased or managed by
the Company; however, under the terms of NHC's 1998 settlement of litigation
with FCC, NHC has agreed to be responsible for any adjustments to previously
filed Medicare and routine cost limit exceptions related to the 16 FCC
centers. In return, any receivables owed to FCC thru 1998 are the property of
NHC. Adjustments made to the six centers owned during those years by York
Hannover may also be borne by NHC. Negative adjustments to managed centers
would reduce NHC's management fee (6% of net revenue)and could result in claims
against NHC as manager by the owners including damages and termination of the
management relationships. Adjustments to owned or leased centers would directly
impact the Company's financial statements. NHC intends to continue its revenue
policy of not reflecting routine cost limit exception requests as income until
the process, including cost report audits, is completed. NHC and the
government are aggressively pursuing an amicable settlement. Although no
written agreement has been reached, the Company believes the self-audit
numbers and ratios plus projected unrecorded receivables from the government
will enable it to finalize the litigation without a material profit or loss
effect. Of course, until a written settlement is reached and approved by the
Court, an adverse determination in the lawsuit or an agreed upon settlement
could include repayments, fines and/or penalties which would have a material
negative impact on the financial position, cash flow and results of operations
of NHC.
General Liability Lawsuits
The long term care industry has seen a dramatic increase in
personal injury/wrongful death claims based on alleged negligence by nursing
homes and their employees in providing care to residents. This is especially
prevalent in Florida. As of June 30, 2000, the Company and/or its managed
centers are defendants in 72 such lawsuits in Florida, compared to 33 in all
other states combined.
On March 31, 1999, after the close of business, the insurance carrier
covering both NHC and the Florida based six facility nursing home chain
managed by NHC (York Hannover) contacted NHC's Florida counsel to advise them
that the jury had returned a verdict in excess of policy limits in
compensatory damages, and the jury indicated that it wanted to assess punitive
damages. The insurance carrier then entered into a settlement of the
compensatory and punitive claim against the defendants in an amount materially
greater than policy limits and the initial jury verdict. The settlement was
far in excess of what the insurance carrier could have settled the claim prior
to or during the trial.
13
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Unsure as to whether the carrier would assert a claim against NHC
and/or the owner or, alternatively, that the carrier would claim that
the coverage be divided between the umbrella policy issued for separate
calendar years, NHC filed for declaratory judgment in the Chancery Court
of Rutherford County, Tennessee. This action asks the court to find that
the settlement was made in bad faith and that the insurance carrier should be
responsible for the entire amount of the judgment. The insurance carrier
transferred the case into the federal district court in Nashville, Tennessee
and the York Hannover bankruptcy Trustee filed an identical suit in Tampa,
Florida against the carrier. The parties have now reached a settlement - which
must receive approval from the York-Hannover Bankruptcy Court - which removes
any possible claim by the carrier against NHC and/or York Hannover for
contribution, and which also results in the reestablishment of a five million
dollar umbrella policy covering all of NHC's owned, leased or managed centers
for 1996.
Note 6 - LONG-TERM DEBT:
As of June 30, 2000, NHC and NHI were in violation of certain financial
covenants included in a debt instrument originally financed through the
National Health Corporation Leveraged Employee Stock Ownership Plan and Trust.
NHC and NHI have obtained waivers of these defaults for the quarters ended
March 31, 2000 and June 30, 2000. As of June 30, 2000, the total debt balance
on the loan was $23,214,000, of which $5,303,000 is the primary obligation of
NHC. NHC is not obligated on nor has NHC guaranteed the remaining balance of
the loan. As a result of NHI not being rated investment grade, NHI was
delivered a tender notice from the note holders to purchase, between June 10,
2000 and June 16, 2000, the $23,214,000 in outstanding notes. The note
holders have since rescinded their tender notice effective as of the date such
tender notice was given. Subsequent to June 30, 2000, NHC purchased the
outstanding notes. NHC currently negotiating for the resale of the notes.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National HealthCare Corporation ("NHC", or the "Company") operates or
manages 106 long-term health care centers with 13,977 beds in 12 states. NHC
provides nursing care as well as ancillary therapy services to patients in a
variety of settings including long-term care nursing centers, managed care
specialty units, subacute care units, Alzheimer's care units, homecare
programs, assisted living centers and independent living centers.
14
NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999.
Results for the three month period ended June 30, 2000 include a 7.9%
increase compared to the same period in 1999 in net revenues and a 10.3%
increase in net income.
The increase in revenues reflect improved PPS rates, improved census
mix, and increases in the number of beds operated in long-term nursing care
operations.
Compared to the quarter a year ago, NHC has increased the number of
owned or leased long-term care beds by 89 beds from 7,887 beds to 7,976 beds.
Also contributing to increased revenues are improved occupancy rates at
assisted living centers and at independent living centers.
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, decreased $1.4 million or 25.5% in 2000 from $5.6
million in 1999 to $4.2 million in 2000. The decline is due primarily to the
loss of management contracts for 14 centers owned by Florida Convalescent
Centers, Inc. ("FCC"). The FCC management agreements were terminated
effective July 31, 1999.
Total costs and expenses for the 2000 second quarter increased $8.1
million or 7.8% to $112.0 million from $103.9 million. Salaries, wages and
benefits, the largest operating costs of this service company, increased $5.5
million or 9.2% to $65.3 million from $59.8 million. Other operating expenses
increased $1.7 million or 6.3% to $29.6 million for the 2000 period compared
to $27.9 million in the 1999 period. Rent increased $.1 million or 0.8% to
$12.1 million from $12.0 million. Depreciation and amortization increased
14.9% to $3.3 million. Interest costs increased 21.6% to $1.6 million.
Increases in salaries, wages and benefits are due to increases in
staffing levels due to long-term care bed additions and assisted living
occupancy improvements and expansions. Further contributing to higher costs
of labor are inflationary increases for salaries and the associated benefits.
Increases in operating costs are due primarily to the increased number
of beds in operation and the higher occupancies in assisted living and
independent living services. Rent increases are due primarily to additions at
existing rental properties.
The total census at owned and leased centers for the quarter averaged
94.1% compared to an average of 93.4% for the same quarter a year ago.
15
NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999.
Results for the six month period ended June 30, 2000 include a 7.4%
increase compared to the same period in 1999 in net revenues and a 8.3%
increase in net income.
The increase in revenues reflect improved PPS rates, improved census
mix, and increases in the number of beds operated in long-term nursing care
operations.
Compared to the six months a year ago, NHC has increased the number of
owned or leased long-term care beds by 89 beds from 7,887 beds to 7,976 beds.
Also contributing to increased revenues are improved occupancy rates at
assisted living centers and at independent living centers.
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, decreased $4.3 million or 37.1% in 2000 from $11.6
million in 1999 to $7.3 million in 2000. The decline is due primarily to the
loss of management contracts for 14 centers owned by Florida Convalescent
Centers, Inc. ("FCC"). The FCC management agreements were terminated
effective July 31, 1999.
Total costs and expenses for the 2000 six months increased $15.4 million
or 7.4% to $223.5 million from $208.1 million. Salaries, wages and benefits,
the largest operating costs of this service company, increased $8.1 million or
6.7% to $129.4 million from $121.3 million. Other operating expenses increased
$5.0 million or 9.0% to $60.1 million for the 2000 period compared to $55.2
million in the 1999 period. Rent increased $1.0 million or 4.4% to $24.0
million from $23.0 million. Depreciation and amortization increased 16.7% to
$6.7 million. Interest costs increased 13.4% to $3.3 million.
Increases in salaries, wages and benefits are due to increases in
staffing levels due to long-term care bed additions and assisted living
occupancy improvements and expansions. Further contributing to higher costs
of labor are inflationary increases for salaries and the associated benefits.
Bonus and benefit programs have also been increased compared to the 1999
period.
Increases in operating costs are due primarily to the increased number
of beds in operation and the higher occupancies in assisted living and
independent living services. Rent increases are due primarily to additions at
existing rental properties.
The total census at owned and leased centers for the six months averaged
94.0% compared to an average of 93.4% for the same six months a year ago.
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NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
Liquidity and Capital Resources
NHC generated net cash from operating activities during the first six
months of 2000 totaling $13.2 million compared to $14.8 million in the prior
year period. The decrease in cash generated from operating activities is due
primarily to an increase in accounts receivable and a decrease in trade
accounts payable as compared to the prior period for the same items, offset in
part by greater increases in depreciation and in the provision for doubtful
accounts receivable than in the previous period.
Cash flows used in investing activities during the first six months of
2000 totaled $24.3 million compared to $15.4 million used in the same period
in 1999. Cash used for investments in property, notes receivable, and
marketable securities totaled $26.4 million in 2000 compared to $24.4 million
in 1999. Collections of notes receivable generated $2.2 million in 2000
compared to $9.2 million in 1999.
Cash provided by financing activities totaled $14.1 million in the first
six months of 2000 compared to cash used of $6.8 million for the same period
in 1999. Payments on debt of $2.1 million and decreases in minority interests
in subsidiaries of $3.0 million in 2000 were offset by proceeds from new debt
issuance of $18.0 million and decreases in cash held by trustees of $1.1
million. In the prior year, cash flows used included $22.4 million for
payments on debt and $1.7 million for increases in cash held by trustees.
At June 30, 2000, the Company's ratio of long-term obligations and
deferred income to capital is 1.1 to 1.
NHC has also guaranteed approximately $42.1 million of the debt of
certain health care centers which NHC manages for others. See Note 4 for
discussion of the possibility of additional liabilities as a result of its
debt guarantees.
As of June 30, 2000, NHC and NHI were in violation of certain financial
covenants included in a debt instrument originally financed through the
National Health Corporation Leveraged Employee Stock Ownership Plan and Trust.
NHC and NHI have obtained waivers of these defaults for the quarters ended
March 31, 2000 and June 30, 2000. As of June 30, 2000, the total debt balance
on the loan was $23,214,000, of which $5,303,000 is the primary obligation of
NHC. NHC is not obligated on nor has NHC guaranteed the remaining balance of
the loan. As a result of NHI not being rated investment grade, NHI was
delivered a tender notice from the note holders to purchase, between June 10,
2000 and June 16, 2000, the $23,214,000 in outstanding notes. The note
holders have since rescinded their tender notice effective as of the date such
tender notice was given. Subsequent to June 30, 2000, NHC purchased the
outstanding notes. NHC is currently negotiating for the resale of the notes.
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NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
Cash Dividends
NHC may pay dividends at the discretion of the Board of Directors. NHC
does not anticipate paying dividends.
Impact of Inflation
Reimbursement rates under the Medicare and Medicaid programs generally
reflect the underlying increases in costs and expenses resulting from
inflation. For this reason, the impact of inflation on profitability has not
been significant.
Health Care Legislation
During 1997, the Federal government enacted the Balanced Budget Act of
1997 ("BBA"), which requires that skilled nursing facilities transition to a
Prospective Payment System ("PPS") under the Medicare program commencing with
the first cost reporting period beginning on or after July 1, 1998. Although
PPS went into effect for a small portion of NHC's long-term health care
centers during 1998, PPS was implemented for the vast majority of NHC's
centers beginning January 1, 1999. PPS has significantly changed the manner
in which NHC's centers are paid for inpatient services provided to Medicare
beneficiaries. Under PPS, Medicare pays NHC's centers a fixed fee per
Medicare patient per day, based on the acuity level of the patient, to cover
all post-hospital extended care routine service costs, ancillary costs and
capital related costs. PPS is being phased in over a three-year period.
During the phase-in, payments are based on a blend of each center's specific
historical costs and federally-established per diem rates that are based on
the average costs of all U.S. skilled nursing facilities. In response to the
Medicare PPS legislative changes, NHC has implemented strategies that have
included a significant reduction in the number of therapy staff positions and
renegotiation at lower rates of supplier contracts for inhalation therapy,
pharmacy, x-ray and medical supplies. In addition, during November, 1999,
Congress passed the Medicare Refinement Act of 1999 ("MRA-99"). The MRA-99
allows providers to elect to skip the three year phase-in period. Where
advantageous, NHC has so elected commencing January 1, 2000.
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NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
Litigation
Braeuning vs. NHC
NHC was a defendant in a lawsuit styled Braeuning, et al vs.
National HealthCare L.P., et al filed "under seal" in the U.S. District Court
of the Northern District of Florida on April 9, 1996. The government
participated as an intervening plaintiff. By agreement,
the suit was moved from the Pensacola District Court to the Tampa,
Florida, District Court and has now been dismissed, subject to court approval
of a settlement agreement. The suit alleged that NHC submitted cost reports
and routine cost limit exception requests containing "fraudulent allocation of
routine nursing services to ancillary service cost centers" and also alleged
that NHC improperly allocated skilled nursing service hours in four managed
centers, all in the state of Florida. The suit was filed under the Qui Tam
provisions of the Federal False Claims Act, commonly referred to as the
"Whistleblower Act". NHC denied all allegations.
In regard to the allegations contained in the Braeuning lawsuit, NHC
believes that the cost report information of the centers has been either
appropriately filed or, upon amendment, will reflect adjustments for, among
other items, i) the correction of unintentional misallocations; ii) instances
in which the self audit process has had to use different source documents due
to loss or misplacement of the original source documents and iii)
recalculation of Director of Nursing/Assistant Director of Nursing time based
upon indirect allocation percentages rather than time studies, as were
originally used. Prior to the filing of the suit, NHC had commenced an
in-depth review of the nursing time allocation process at its owned, leased and
managed centers. A number of amended cost reports have been filed and NHC has
finalized the self-audit process for years 1995 and 1996. NHC's self audit
process was approved by the plaintiffs and NHC retained a nationally
recognized accounting firm to review the self audit process. The cost report
periods reviewed include 1991 through 1996. The Company has reached a
tentative agreement with the Department of Justice and the Health Care
Financing Administration on the use of certain audit ratios to be used to
calculate the amount of Medicare overpayment or underpayment for years 1991
through 1994; thus avoiding a continuation of the costly self audit process.
Adjustments to the reimbursable costs claimed will be the responsibility
of the center where costs were incurred, whether owned, leased or managed by
the Company; however, under the terms of NHC's 1998 settlement of litigation
with FCC, NHC has agreed to be responsible for any adjustments to previously
filed Medicare and routine cost limit exceptions related to the 16 FCC
centers.
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NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
In return, any receivables owed to FCC thru 1998 are the property of NHC.
Adjustments made to the six centers owned during those years by York Hannover
Nursing Centers, Inc. ("York Hannover") may also be borne by NHC. Negative
adjustments to managed centers would reduce NHC's management fee (6% of net
revenue)and could result in claims against NHC as manager by the owners in-
cluding damages and termination of the management relationships. Adjustments
to owned or leased centers would directly impact the Company's financial
statements. NHC intends to continue its revenue policy of not reflecting
routine cost limit exception requests as income until the process, including
cost report audits, is completed. NHC and the government are aggressively
pursuing an amicable settlement. Although no written agreement has been
reached, the Company believes the self-audit numbers and ratios plus projected
unrecorded receivables from the government will enable it to finalize the
litigation without a material profit or loss effect. Of course, until a
written settlement is reached and approved by the Court, an adverse
determination in the lawsuit or an agreed upon settlement could include re-
payments, fines and/or penalties which would have a material negative impact
on the financial position, cash flow and results of operations of NHC.
General Liability Lawsuits
The long term care industry has seen a dramatic increase in
personal injury/wrongful death claims based on alleged negligence by nursing
homes and their employees in providing care to residents. This is especially
prevalent in Florida. As of June 30, 2000, the Company and/or its managed
centers are defendants in 72 such lawsuits in Florida, compared to 33 in all
other states combined.
On March 31, 1999, after the close of business, the insurance carrier
covering both NHC and the Florida based six facility nursing home chain
managed by NHC (York Hannover) contacted NHC's Florida counsel to advise them
that the jury had returned a verdict in excess of policy limits in
compensatory damages, and the jury indicated that it wanted to assess punitive
damages. The insurance carrier then entered into a settlement of the
compensatory and punitive claim against the defendants in an amount materially
greater than policy limits and the initial jury verdict. The settlement was
far in excess of what the insurance carrier could have settled the claim prior
to or during the trial.
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NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
Unsure as to whether the carrier would assert a claim against NHC
and/or the owner or, alternatively, that the carrier would claim that
the coverage be divided between the umbrella policy issued for separate
calendar years, NHC filed for declaratory judgment in the Chancery Court
of Rutherford County, Tennessee. This action asks the court to find that the
settlement was made in bad faith and that the insurance carrier should be
responsible for the entire amount of the judgment. The insurance carrier
transferred the case into the federal district court in Nashville, Tennessee
and the York Hannover bankruptcy Trustee filed an identical suit in Tampa,
Florida against the carrier. The parties have now reached a settlement -
which must receive approval from the York-Hannover Bankruptcy Court - which
removes any possible claim by the carrier against NHC and/or York Hannover for
contribution, and which also results in the reestablishment of a five million
dollar umbrella policy covering all of NHC's owned, leased or managed centers
for 1996.
Customer Bankruptcies
On November 5, 1999, NHC was informed that a substantial debtor of its
rehabilitation division had filed for Chapter 11 protection in the United
States Bankruptcy/District Court in Wilmington, Delaware. The debtor is an
affiliate of Lenox Healthcare, Inc. of Pittsfield, Massachusetts. The debt is
collateralized by second mortgages on certain licensed nursing facilities, a
first lien on certain accounts receivable, and the assignment of a number of
limited partnership and corporate shareholder interests.
NHC also manages three other nursing homes owned in part by Mr. Tom
Clarke, the owner of Lenox Healthcare, Inc. Two of the three facilities are
not in bankruptcy and are in compliance with all the terms and conditions of
the Management Agreement. The third managed facility is located in Carthage,
Tennessee and although the debtor in possession has rejected the management
agreement, is being managed on a month to month basis by NHC.
NHC is currently a secured and unsecured creditor in the above
bankruptcies, which involve approximately $20,000,000 in account receivables
and notes owed to NHC by the bankrupt estates. NHC believes that recovering
and collecting from these entities is not possible. The Company has
historically provided full reserves for these amounts based on its assessments
of the loss exposure to the Company. The Company is not required to fund
additional amounts to these parties. The Company expects no additional
charges or expenses.
21
NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
Guarantees and Related Events
York Hannover Bankruptcy: NHC had originally guaranteed $5 million of
that certain first mortgage debt made by York Hannover to NHI in December
1993. York Hannover sought bankruptcy protection in April 1999 and on
December 30, 1999, the six Florida nursing facilities, which secured the NHI
note, were acquired by a subsidiary of the first mortgage lender. NHC has
remained as a limited ($3 million) guarantor of the outstanding debt plus the
guarantor on a $2,000,000 working capital note, all collateralized by the
pledge of certain marketable securities in the approximate amount of $5
million. NHC is no longer managing these facilities. The failure of these
facilities to make their payments on the first mortgage notes could result in
the acceleration of that indebtedness and an attempt by the first mortgage
holder and/or working capital lender to collect their total of $5 million in
guarantees from NHC or the collateral now held by the first mortgage lender.
General
There is certain additional litigation incidental to NHC's business,
none of which, in management's opinion, would be material to the financial
position or results of operations of NHC.
Item 3. Quantitative and Qualitative Information About Market Risk
Interest Rate Risk--
The Company's cash and cash equivalents consist of highly liquid
investments with a maturity of less than three months. As a result of the
short-term nature of the Company's cash instruments, a hypothetical 10% change
in interest rates would have no impact on the Company's future earnings and
cash flows related to these instruments. A hypothetical 10% change in
interest rates would also have an immaterial impact on the fair values of
these instruments. Approximately $10.6 million of the Company's notes
receivable bear interest at fixed interest rates. As the interest rates on
these notes receivable are fixed, a hypothetical 10% change in interest rates
would have no impact on the Company's future earnings and cash flows related
to these instruments. A hypothetical 10% change in interest rates would also
have an immaterial impact on the fair values of these instruments.
Approximately $16.9 million of the Company's notes receivable bear interest at
variable rates (generally at prime plus 2%). Because the interest rates of
these instruments
22
NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
are variable, a hypothetical 10% change in interest rates would result in a
related increase or decrease in interest income of approximately $161,000.
However, a hypothetical 10% change in interest rates would have an immaterial
impact on the fair values of these instruments. As of June 30, 2000, $36.3
million of the Company's long-term debt and debt serviced by other parties
bear interest at fixed interest rates. Because the interest rates of these
instruments are fixed, a hypothetical 10% change in interest rates would have
no impact on the Company's future earnings and cash flows related to these
instruments. A hypothetical 10% change in interest rates would have an
immaterial impact on the fair values of these instruments. The remaining
$46.8 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
$313,000. However, a hypothetical 10% change in interest rates would have an
immaterial impact on the fair value of these instruments. The Company does
not currently use any derivative instruments to hedge its interest rate
exposure. The Company has not used derivative instruments for trading
purposes and the use of such instruments in the future would be subject to
strict approvals by the Company's senior officers. Therefore, the Company's
exposure related to such derivative instruments is not material to the
Company's financial position, results of operations or cash flows.
Equity Price Risk--
The Company considers its investments in marketable securities as
available for sale securities and unrealized gains and losses are recorded in
stockholders' equity in accordance with Statement of Financial Accounting
Standards No. 115. The investments in marketable securities are recorded at
their fair market value based on quoted market prices. Thus, there is
exposure to equity price risk, which is the potential change in fair value due
to a change in quoted market price. Hypothetically, a 10% change in quoted
market prices would result in a related 10% change in the fair value of the
Company's investments in marketable securities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For a discussion of prior, current and pending litigation of
material significance to NHC, please see Note 5, page 12, of this
Form 10-Q.
23
NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to Vote of Security Holders.
(a) The annual meeting of the shareholders was held on May 24,
2000.
(b) Matters voted upon at the meeting are as follows:
PROPOSAL NO. 1: Election of Olin O. Williams and Robert G. Adams
to serve as directors for terms of three years or until their
successors have been fully elected and qualified. Other directors
whose terms of office continue are Mr. Lawrence C. Tucker, Ernest
G. Burgess, III, W. Andrew Adams, Dr. J. K. Twilla and Mr. Richard
F. LaRoche, Jr.
Voting For Withholding Percent For
Authority
Olin O. Williams 8,816,147 10,180 76.4%
Robert G. Adams 8,816,147 205,588 76.4%
PROPOSAL NO. 2: Ratify the appointment of Arthur Andersen LLP as
the Company's independent accountants for the fiscal year 2000.
Voting For Voting Against Abstaining Percent For
9,013,098 1,933 1,592 78.1%
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule (for
SEC purposes only)
(b) Reports on Form 8-K. None
24
NATIONAL HEALTHCARE CORPORATION
June 30, 2000
(Unaudited)
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTHCARE CORPORATION
(Registrant)
Date August 11, 2000 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date August 11, 2000 /s/ Donald K. Daniel
Donald K. Daniel
Vice President and Controller
Principal Accounting Officer
25